TCS Q2 FY24 preview: Details on BSNL deal, demand commentary for 2H and buyback announcement eyed

TCS share price, Q2FY24 earnings: The earnings season (Q2FY24) is all set to begin, and investors and other key stakeholders are surrounded by a deluge of predictions, conjectures, and analysis on how different stocks and sectors will fare in the July–September quarter. While some sectors may come out with flying colours, one industry that remains elusive of a full-fledged recovery is crucial information technology (IT) services.

The growth of the IT services industry is expected to remain weak in 2QFY24 as macroeconomic uncertainty continues to weigh on discretionary spending. According to Motilal Oswal Financial Services, IT services companies are expected to report a median revenue growth of 1.5 per cent QoQ / 5.7 per cent YoY in 2QFY24. This growth rate is among the slowest observed over the last decade, despite a marginal impact from FX fluctuations, it notes.

However, a focus on cost-control measures should lead to margin improvement in 2Q. Deal total contract values (TCVs) should look attractive with recent mega-deal wins for selective names, the brokerage said in its report released on October 3.

That said, let’s take a look at how IT bellwether Tata Consultancy Services (TCS) is expected to perform in the second quarter of the current fiscal. The K Krithivasan-led company is slated to release its financial results for the quarter ended September 30, 2023, on Wednesday, October 11. The company will also consider the proposal for the buyback of its equity shares on the same day. 

Nirmal Bang Securities expects TCS' revenue to come in at Rs 60,859.1 crore, up 10 per cent year-on-year (YoY) and 2.5 per cent on a sequential basis. In US dollar terms, revenue is seen at $7,346 million, up 1.7 per cent QoQ. In constant currency (CC) terms, revenue is seen rising by 1 per cent. Earnings before interest, and tax (EBIT) is expected to rise 10.9 per cent YoY and 7.1 per cent QoQ at Rs 14,726.9 crore. On a sequential basis, the figure will rise 7.1 per cent. EBIT margin is pegged at 24.2 per cent against 23.2 per cent in the previous quarter and 24 per cent in the corresponding quarter of the previous fiscal. Profit after tax (PAT) or net profit is expected to rise 10.1 per cent YoY and 3.7 per cent QoQ to Rs 11,481.8 crore.

IDBI Capital expects revenue to come in at Rs 60,081.2 crore, up 1.2 per cent QoQ and 8.6 per cent YoY. Net profit is seen at Rs 11,936.3 crore, up 7.8 per cent QoQ and 14.8 per cent YoY. "Higher revenue growth and absence of wage hike prompt us to increase our EBIT margin estimates by 156 basis points (bps)," it said.

Key things to watch out for

• What kind of margins and working capital cycle will be seen in the BSNL deal, and how is it planning to piggyback on the BSNL deal to create traction in the Open RAN* space abroad? 
• Demand commentary for 2HFY24;
• Conversion of TCV to revenue; 
• Commentary around BFSI demand; 
• Usage of Gen AI to improve productivity

*An Open Radio Access Network (ORAN) is a nonproprietary version of the Radio Access Network (RAN) system that allows interoperation between cellular network equipment provided by different vendors, explains Cisco.

Buyback price

According to Zee Business Research, the buyback price could be fixed at around Rs 4,500, which will be nearly a 24 per cent premium to Friday's (October 6) closing price. The research desk estimates that the company will buy back between 1.2 per cent and 1.3 per cent of its equity share capital. The buyback size is estimated to be between Rs 19,500 crore and Rs 21,500 crore.

As of June 30, 2023, the company has around Rs 61,000 crore in cash, bank, and investments. 

If approved, this will be the fifth buyback by the IT giant. Before this, the company announced share buybacks in 2017, 2018, 2020, and 2022. The exact dates are as below:

Source: Zee Business Research

TCS share price performance 

During the September 2023 quarter, the stock of the company rose nearly 7 per cent. The Nifty IT index gained 7.5 per cent during the window while the NSE's Nifty increased by 2.3 per cent.