TCS share price soars 7.5 pct on Buyback news; will results beat analysts’ estimates? Check preview ahead of Q2 FY21 earnings

With its buyback under the spotlight and its quarterly results looming, IT major Tata Consultancy Services Limited has received  some attention from Macquarie, BOFA and Antique Stock Broking. Providing a close look, here is all that investors need to know. Notably, TCS board will meet this week to mull a share buyback proposal. "...The board of directors will consider a proposal for buyback of equity shares of the company, at its meeting to be held on October 7, 2020," TCS had said on Sunday in a regulatory filing.     

Macquarie Analyst expectation

Expect revenue growth of 5.1% (QoQ) to $5,316 mn in Q2 FY21 vs $5059 mn Q1 FY21 vs -3.6% (YoY) of $5517 mn in Q2 FY20. Revenue in rupee terms will improve 4% (QoQ) to Rs 39,870 cr from Rs 38,322 cr vs 2.3% (YoY) at Rs 38,977 cr. In CC (Constant Currency) terms, this would translate to 2.9% (QoQ) and 5.3% (YoY) improvement. TCS EBIT margin will see sequential improvement of 90bps to 24.5% from 23.6% (QoQ) vs 50bps (YoY) of 24%. Profit is expected to improve 15.2% (QoQ) to Rs 8122.8 cr from Rs 7049 cr vs 1% (YoY) at Rs 8042 cr.

Key highlights

Revenue growth to recover across the board following the normalisation of supply side constraints and the opening up of economies, Macquarie expects revenue growth to pick-up across our coverage universe.

Key things to watch out for in TCS Results would be:

1)     Deal booking and pipeline

2)     Commentary on demand by verticals, in particular BFSI and retail

3)     Medium-term demand outlook including vendor consolidation

4)     Outlook on higher outsourcing and offshoring potential post the pandemic

5)     Pricing outlook

BOFA Securities

Believes TCS could stand-out on account on bigger sequential margin expansion.

Expect revenue growth of 5.9% (QoQ) to $5356 mn in Q2 FY21 Vs -2.9% (YoY).  Revenue in rupee terms will improve 3.4% (QoQ) to Rs 39,638 cr Vs 1.7% (YoY). In CC terms, this would translate to 2.3% improvement. EBIT margin will see sequential improvement of 92bps to 24.5% vs 50bps (YoY) of 24%. Profit is expected to improve 12% (QoQ) to Rs 7856 cr vs -2% (YoY).

Key things to watch for by company:

Pace of conversion of company’s deal bookings to revenue

TCS remains a key beneficiary of the ongoing IT vendor consolidation program for large corporates. Upside risks to price objectives are faster than expected demand uptick in financial services vertical. Downside risks to price objectives are large scale changes to the H-1B visa program in the U.S. and appreciation of the INR vs. USD.

Antique Stock Broking

Forecast constant currency growth of 2.5% (QoQ) in Q2 FY21. Expect USD revenue growth to be 4.3% (QoQ) with cross currency tailwind of 180bps.

Expect revenue growth of 4.3% (QoQ) to $5,277 mn in Q2 FY21 vs $5059 mn Q1 FY21 vs -4.4% (YoY) of $5517 mn in Q2 FY20. Revenue in rupee terms will improve 2.4% (QoQ) to Rs 39,257 cr from Rs 38,322 cr vs 0.7% (YoY) at Rs 38,977 cr. EBIT will improve 8.4% (QoQ) to Rs 9,809 cr vs Rs 9,048 cr vs 4.8% (YoY) at Rs 9,361 cr.  TCS EBIT margin will see sequential improvement of 140bps to 25% from 23.6% (QoQ) vs 100bps (YoY) of 24%. Profit is expected to improve 13.4% (QoQ) to Rs 7993 cr from Rs 7049 cr vs -0.8% (YoY) at Rs 8042 cr.

Expect BFSI to gradually recover after the past two quarters of sharp decline. Life Sciences and Healthcare continue to witness strong growth; while Retail vertical continues to remain under pressure on weak consumer sentiment and record store closures by brick-and-mortar retailers. Expect margins to improve by 140bps, helped by strong revenue growth, increase in utilization, offshoring, lower subcon cost and cross currency tailwind.

Key investors focus areas:

Commentary on demand trends, large deals win and outlook for rest of the quarters in FY21

Remain constructive on TCS from medium to long term with its ability to engage with large clients for their large transformation programs.

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Near term challenges remains in Banking and Retail verticals; however, we expect tech spending in medium to long term to improve materially.

by Rahul Kamdar