TCS Q3 preview: BSNL deal contribution, demand outlook and trends in Generative AI among key monitorables

TCS Q3 preview: Tata Consultancy Services (TCS), along with its peer Infosys, is set to kickstart the Q3 earnings season for the IT sector on January 11 (Thursday), and brokerages and analysts largely expect the company to report muted revenue growth for the third quarter of the current fiscal (Q3 FY24) with a modest expansion in earnings before interest and taxes (EBIT) margin.

Zee Business Research desk estimates revenue at the IT services major to increase to Rs 59,900 crore versus Rs 59,692 crore, up 0.3 per cent quarter-on-quarter. The EBIT is also seen to rise marginally to Rs 14,660 crore against Rs 14,483 crore logged in the previous quarter.

In constant currency (CC) terms, Zee Business Research estimates revenue growth to be 0.2 per cent, while in dollar terms, the company is seen to log 0.1 per cent degrowth.

“We expect only a small contribution from the BSNL deal,” notes JM Financial. Zee Business research team highlights that while the deal pipeline remains strong in the UK, the US and European markets are still weak.

The brokerage attributes the impact on revenue to higher furloughs, lower discretionary spending, and delays in ramp-up. Besides, the EBIT margin is seen declining by 50 bps QoQ given the subdued growth in revenue and furloughs.

Brokerage firm Motilal Oswal is of the view that TCS can see a marginal improvement in margins by 20 bps QoQ on the back of the absence of operating leverage. For the larger Tier-I companies in the space, the brokerage expects a margin change of -100 bps to 20 bps QoQ in 3QFY24.

The bottom line or net profit at the IT major is seen to log an improvement of 2.3 per cent QoQ, primarily due to their robust business mix, notes Motilal Oswal. Zee Business Research desk also echos a similar growth in profitability, with PAT (profit after tax) seen rising to Rs 11,600 crore (up 2.3 per cent sequentially).

On the headcount front, the brokerage mentioned that as the demand trend remained muted and there were fewer working days during the quarter under review, the net headcount addition will be lean across the board.

"Additionally, companies currently possess sufficient talent to sustain their incremental growth trajectory. The focus has now shifted to optimising the bench,” the brokerage added.

Key watch-outs

>> Demand outlook in US BFSI; demand outlook in UK and Europe; any signs of stabilisation, especially of discretionary projects/spends; 

>> Initial feedback on clients’ CY24 budget; any signs of increase in growth YoY; outlook on EBIT margin

>> Overall deal pipeline and signing; any margin pressure due to large efficiency deals; outlook on margins. The total combined value of the deal wins. 

>> CEO’s strategy to drive margin growth

>> Hiring and offshoring by the IT major

>> Commentary on long-term digital trends

>> Trends in Generative AI

>> Banking, US & Europe outlook 

>> Trend in cost-takeout deals and

>> Outlook on budget and macro