TCS Q1FY18: Margins, cross-currency revenue growth likely to be under pressure

Key Highlights: 

• TCS net profit stood at Rs 6,622 crore in FY17

• Cash flow of TCS at Rs 26,992 crore

• 33,380 employees added in FY17 by TCS

Tata Consultancy Services (TCS) is set to announce its first quarter ended June 30, 2017 result on July 13, 2017.

Analysts believe that the IT sector will see their earnings impacted by sharp rise in INR, wage hikes, limited onsite talent, visa costs pressure arising from global factors. 

In case of TCS, anaysts at Motilal Oswal said, “Full-quarter impact of wage hikes and visa expenses is expected to be the major drag for profitability, apart from INR appreciation.”

ICICI Securities, Phillip Capital, Motilal Oswal and Elara Capital, believe that TCS EBIT (operating profit) margins will suffer contraction in the range of 150 basis points - 160 basis points in Q1. By end of FY17, operating margins of TCS were at 25.7%. 

Vibhor Singhal and Shyamal Dhruve, analysts at Phillip Capital said, "CC revenue growth of 2% on quarter-on-quarter and positive cross-currency impact of 80bps – resulting in reported revenue growth of 2.8%."

HDFC Securities estimates CC revenue at $4,575 million -  2.8% QoQ and 4.9% YoY and more than 80 basis points cross currency tailwind. 

However, Sanjeev Prasad, Sunita Baldawa and Anindya Bhowmik, analysts at Kotak Institional Equities said, "This impact can be offset to some extent through lower variable compensation payout."

As on March, 2017, cross-currency growth of TCS stood ar 8.3% along with volume growth of 8.5%. 

In the FY17 audit report, Rajesh Gopinathan, CEO and MD of TCS said, “FY17 was a year of broad-based growth amidst economic and political turbulence in our key markets. We added $ 1.4 billion dollars in constant currency revenues during the year end and increased our digital revenues sharply as we helped our customers leverage the digital economy.”

Motilal Oswal said, “With continued weakness in Retail, and lower-than-anticipated pickup in BFSI, we expect 2.4% QoQ CC growth in 1QFY18.” 

The trio at Kotak said, "We expect close focus of the Street on interim dividend payout. TCS had indicated its intention to pay out at least 80% of free cash flow (FCF), an increase from earlier years."

Top-line growth in INR terms, is expected at Rs 29,631.4 crore muted in qoq basis but just a gradual rise of 1% on yoy basis. While bottom-line is seen at Rs 6,146.2 crore, declining by 7% qoq and 2.7% yoy, according to Kotak.