TCS Q4 preview: Here is what top brokerages expect from IT services bellwether

TCS Q4 preview: Shares of Tata Consultancy Services (TCS) ended 1.5 per cent lower at Rs 3,214.25 apiece on the BSE on April 11. The IT services major is slated to announce its fourth quarter result (Q42023) on Wednesday (April 12).

The IT services companies are expected to post a muted performance for the March quarter due to increased macro uncertainty. Analysts at Nirmal Bang Securities, in a sector preview note, wrote, "We are  building in very modest revenue growth in constant currency terms due to the decent total contract value (TCS) clocked by many in previous quarters and the narrative of ‘delayed/no landing’ that had been building up on the US macro in late CY22 and early CY23  (before banking problems arose in both US/Europe in March 2023)."

In the 'No Landing' scenario, the economy continues its upward trajectory, but inflation refuses to be tamed.

While the further deterioration of the banking problems has been stemmed, "we need to watch out for any collateral damage to the economies affected by the crisis and impact on customer health, " wrote Girish Pai, Head of Research at Nirmal Bang Securities, in a report issued on April 4. Catch TCS Q4 results LIVE updates here

Let's take a look at what brokerages expect from TCS' Q4 numbers - 

Zee Business Research

The research house expects the company to report a 1.7 per cent rise in its revenue in rupee terms on a sequential basis to Rs  59,200 crore while the revenue in dollar terms is estimated to rise 1.8 per cent to $720.2. Consolidated Ebit is expected to come in at Rs 14,700 crore, up 2.9 per cent while the margin is projected to drop marginally to 24.8 per cent against 24.5 per cent registered in the previous quarter. PAT is expected to rise 6.9 per cent to Rs 11,600 crore against Rs 10,846 crore reported in Q3FY23.

The research house says that rupee depreciation and receding attrition will help the company's margin. Client budget, deal wins, Outlook on BFSI, margin outlook, and pricing comments will be keenly tracked.

Motilal Oswal Financial Services

The brokerage expects the IT services major to post a 1.8 per cent sequential increase in revenue in US dollar terms at $7,202. On a year-on-year (YoY) basis, it will see an increase of 7.6 per cent. Revenue in rupee terms is set to increase 17 per cent YoY and 1.7 per cent QoQ to Rs 59,200 crore. EBIT margin is likely to increase 30 basis points (bps) QoQ to 24.8 per cent while on a YoY basis, it will decline 10 bps. Adjusted profit after tax (PAT) will likely rise 7 per cent QoQ and 16.9 per cent YoY to Rs 11,640 crore.

HDFC Securities

The brokerage sees the company's revenue (sales) at $7,241, up 2.4 per cent QoQ and 8.1 per cent YoY. Sales in rupee terms are expected to see an increase of 17.8 per cent YoY to Rs 59,596 crore. On a sequential basis, the growth will be 2.3 per cent. Ebit margin is expected to rise 57 bps (QoQ) and 14 bps (YoY) to 25.1 per cent. Adjusted profit after tax (PAT) is pegged at Rs 11,227 crore, up 13.1 per cent YoY and 3.5 per cent QoQ.

Nirmal Bang Securities 

It expects TCS to report revenue growth of ~0.9% QoQ on a CC basis, backed by strong order inflow of the last 12 months (consisting of large and mid-sized deals). It is likely to face a cross-currency tailwind of ~175bps on a QoQ basis. EBIT margin will expand by 40bps QoQ, driven largely by very controlled hiring, higher utilisation,  pyramid rationalisation and lower Subcon costs. This will be offset somewhat by aggressively normalising travel and S&M expenses.

Subcontracting, as per Investopedia, refers to bringing in an outside company or individual to perform specific parts of a contract or project.

Pyramid rationalisation means onboarding a larger number of employees with less than four years of experience and fewer employees with progressively more experience, and as a result, a reduced salary bill.

"While the new CEO, K Krithivasan, has not indicated any radical change in strategy, we would wait to see if there are any minor tweaks to it (especially around the new corporate structure of addressing different sets of clients which were instituted a year back and were indicated to be ex-CEO, Rajesh Gopinathan’s idea)," the brokerage notes.

Commentary around BFSI will be keenly watched as TCS has likely got the highest exposure in the Tier-1 set with large relationships developed over the decades in both the US as well as Europe, analysts say.

IDBI Capital

Analysts at the brokerage expect QoQ revenue growth of 1 per cent in CC terms and a cross-currency tailwind of 98 bps.

"Easing of supply-side challenges to aid margin expansion. We forecast 73 bps improvement in margins to 25.3 per cent," the brokerage wrote.

Key things to watch: 1) commentary on clients' tech budgets; 2) strategy of new CEO; 3) TCV of deal wins; 4) timeline of deal closures and deal pipeline; 5) hiring & offshoring, 6) outlook on EBIT margin and its sustainability; 7) commentary on long term digital trends; 8) commentary on Europe; 9) Impact on verticals due to the macro situation (BFSI in particular); 10) attrition trend and 11) FY24 growth & margin outlook.