TCS To Begin With Divergent Earnings Season For IT Sector

TCS shares are trading 2.3% lower prior to its June quarter results announcement. The company has scheduled the announcement of financial results for the June quarter after market hours on Tuesday.

The softness in the company’s shares isn’t surprising, given investors’ concerns on the margins front. With the rupee hardly providing any buffer, and with rising wage costs, margins are expected to fall for nearly all IT services companies.

TCS, however, is projected to report a relatively better financial performance among the top tier IT companies. Revenues in constant currency terms are projected to rise 3% sequentially; i.e. compared to the March quarter.

Given the headwinds to the global economy, the focus will undoubtedly be on management commentary on the business environment and sustainability of the double digit revenue growth momentum. “While TCS does not give an explicit growth guidance, management has been optimistic about continuing double-digit growth in FY20 despite some macro headwinds – our estimate implies 12% YoY constant currency growth in 1Q. Deal TCV (total contract value) has been averaging $6 billion over the last 2 quarters and will be the other key metric to look out for,” Jefferies India Pvt Ltd said in a results preview note.

Analysts at Jefferies and Kotak Institutional Equities expect TCS’s profitability margins to drop 60-70 basis points from March quarter. This will be true for most IT companies. “While the reasons for decline (in margins) will vary across companies, the broad factors are localization and increase in cost structure in the US, investments in digital and large deal-transition costs,” analysts at Kotak said in a note.

Companies are facing a talent crunch at a time when utilisation levels are already at optimal levels. Costs related to visas and increased onsite hiring are not helping either. The depreciation in rupee used to offset the impact of wage hikes to some extent. But companies have no such benefit this time. The rupee has appreciated 1.2% against the US dollar last quarter.

Analysts say cost pressures will be more pronounced for some other companies who are lagging behind in digital investments and developing new business capabilities. “We expect divergent growth performance across top tier IT cos in 1QFY20E with TCS & Infosys leading at 3% QoQ constant currency and Tech Mahindra & Wipro the laggards. EBIT margins are likely to decline 14-230 basis points QoQ due to wage hikes (seasonal), rupee appreciation, higher visa costs and company-specific factors,” Jefferies adds.