TCS Q3 Results Today- Expect tepid growth in revenue, PAT on weak demand, high furloughs; deal wins, demand outlook eyed

TCS Q3 Results Today: Expect tepid growth in revenue, PAT on weak demand, high furloughs; deal wins, demand outlook eyed

TCS Q3 preview: Tata Consultancy Services Ltd (TCS) is all set to report its third quarter earnings for FY24 today, on January 11. The IT major, according to brokerage firms, is likely to post a tepid growth in revenue and profit after tax on account of the prevailing weakness in discretionary spending in key markets in the West. TCS will report a modest expansion in earnings before interest and taxes (EBIT) margin. “TCS is expected to report muted revenue growth at 0.3 per cent in CC terms due to furloughs offset by the contributions from the BSNL deal. EBIT margins are likely to improve by ~25 bps QoQ, aided by operating efficiencies partially offset by muted revenue growth,” said Sharekhan by BNP Paribas.

According to brokerage firms, TCS will post Q3 profit in the range of Rs 11,317- Rs 11,737 crore, growing by around 6.06 per cent on-year. Revenue for the quarter is expected to grow by 2.46 per cent YoY to around Rs 59,662 crore.

IT spending in key verticals BFSI, Retail, Hi-tech and Telecom still remains challenged for TCS. Aditi Patil, Equity Research Associate, ICICI Securities, said, “We expect margins to be flat QoQ, as headwinds from furloughs and ramp up of the low margin BSNL deal could be offset by improvement in utilisation, reduction in sub-con and other productivity benefits. BSNL deal (Rs 15,000mn/USD 1.81bn) started ramping up in Q3FY24 and the roll-out of 4G network across India is expected to be completed over 1.5-2 years. We believe that TCS is better placed to win large cost optimization deals and vendor consolidation deals which are more prevalent in current environment.” The brokerage firm has also cut FY24-26 USD revenue estimates by 1.5-3 per cent on expectation of slow recovery in discretionary IT spends for the overall industry.

HDFC Securities said, “We expect TCS to clock deal bookings of USD 9bn+ TCV in Q3.” TCS had reported a total contract value of $11.2 billion, after clocking TCV of $10.2 billion in Q1FY24, which was above the guided range of $7-9 billion. Meanwhille, Aditi Patil from ICICI Securities, said, “We expect order book to be soft sequentially as company has not announced any mega deals in Q3FY34. We expect TCV to be around ~$9-10 bn. Deal pipeline is strong driven by cost optimisation and vendor consolidation deals.”

Dhruv Mudaraddi, Research Analyst, Stoxbox, said, “We expect TCS’ Q3FY24 revenue to be flat sequentially as growth was tepid due to ongoing weaknesses in discretionary spending and furloughs during the quarter. However, this downturn is expected to be partially mitigated by the positive impact of previously secured deals that are now ramping up. Margins, on the other hand, are anticipated to witness a slight expansion QoQ, driven by the easing of supply-side constraints, operating leverage, and currency exchange benefits.”

Shareholders will look out for comments on the demand outlook in the US (BFSI sector), UK, and Europe, any signs of recovery in discretionary projects, and margin outlook. Ruchi Burde Mukhija from Elara Capital, said, “Key metrics to monitor are: a) growth visibility in ER&D and product business, b) large deal wins around cost optimization, c) pain points in BFSI and communication verticals, d) deal closure and ramp-up in deal wins, e) updates on collaboration with AWS on genAl.”

The December quarter is seasonally a weak quarter for not just TCS but the entire IT sector amidst the holiday season in key markets like the North America and Europe, coupled with uncertainty in discretionary spending and restrained technology budgets of clients, also resulting in higher furloughs.

Here are estimates from brokerage firms on TCS numbers:

Sharekhan by BNP ParibasSales: Rs 60,104 croreNet profit: Rs 11,737 crore

Elara CapitalEBIT: Rs 14,596.80 croreAdjusted PAT: Rs 11,451.00 croreNet profit: Rs 11,413.00 crore

HDFC SecuritiesNet sales: Rs 60,288.00 croreEBIT: Rs 14,593.00 croreAPAT: Rs 11,317.00 crore

ICICI SecuritiesRevenue: Rs 59,732.40 croreEBIT: Rs 14,488.40 crore