Tata Consultancy Services (TCS) is set to announce its results for the fourth quarter ended March 2017 (Q4FY17), and full financial year 2016-17 (FY17) numbers on Tuesday. The numbers will be the first after Rajesh Gopinathan took over as the chief executive officer (CEO) and managing director (MD) on February 21, 2017 from N Chandrasekaran.
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Last week, Infosys kick-started the Q4FY17 earnings season for IT companies and disappointed the Street with its guidance. Infosys gave an operating profit margin guidance of 23-25 per cent for FY18 compared with 24-25 per cent in FY17, triggering earnings estimate for FY18 across a number of brokerages.
Besides the Q4FY17 and FY17 numbers, the guidance for the next financial year and changes (if any) to its capital allocation policy will be equally important factor for the stock’s performance going ahead, analysts say. Here is what leading brokerages and research houses expect from TCS
MOTILAL OSWAL RESEARCH
Watch out for guidance / outlook from TCS. At TCS, while the commentary has remained very positive, it remains to be seen what the company guides for revenue growth. Our estimate of 9.5 per cent constant currency (CC) growth in FY18 implies a CC CQGR of 2.5 per cent in FY18.
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We expect EBIT margins to be flattish for TCS, led by currency headwind offset by operational efficiency. We would be monitoring how IT companies manage margins in the wake of increased US local hiring amid maintaining utilisation.
US dollar revenues may grow 1.2 per cent q-o-q to $4,439.6 million, led by BSFI and some uptick in retail vertical. Constant currency may grow around 1.5 per cent q-o-q while rupee revenues may decline 0.1 per cent to Rs 29,701 crore. EBIT margins may remain unchanged q-o-q to 26 per cent owing to operational efficiency offset by currency headwind. FY18E outlook and margin guidance, IT budget spend pattern, traction in digital business and attrition are among the key things to watch out for.
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KOTAK INSTITUTIONAL EQUITIES
We expect Indian IT companies to increase payout ratios (dividend + buybacks) and detail their capital allocation strategies. TCS has already taken the initiative on announcing a large buyback and may follow it up with detailing payout ratio in future.
We expect constant currency (c/c) revenue growth of 1.6 per cent and cross-currency tailwind of 25 bps. We expect EBIT margin to expand 30 bps led by operational improvements despite marginal headwind from rupee appreciation. We expect the company to formalise capital allocation and establish payout ratio at minimum of 55 per cent.
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We expect investor focus on: (1) demand environment across verticals, sales decision cycle and its implications for FY2018 outlook and impact of in-sourcing to captives, if any, in key clients (2) TCS' positioning in the evolving digital landscape and growth outlook for digital practice, (3) risk mitigation from any potential increase in minimum wages for H-1B workers and (4) margin outlook.
EBITDA margin expected to expand 30 bps on account of better realisations. Commentary on client budgets, spends by BFSI clients, investments in digital technologies and H1B visa issues key monitorables.
FY18 outlook will be keenly watched especially due to absence of NASSCOM's guidance. Consensus expects growth acceleration due to improved macro-economic environment but we are sceptical because of poor exit-rate in the March 2017 quarter, and continued pressure on both volume (automation, cloud) and pricing. TCS has already announced a buyback, but we await clarity on the cash return policy. Expect 2.2 per cent quarter-on-quarter (Q-o-Q) revenue growth in CC terms.
ANTIQUE STOCK BROKING
USD revenue growth to be 2.2 per cent q-o-q in reported terms (1.8 per cent in CC) with cross currency benefit of 40 basis points (bps). EBITDA margin at 27.5 per cent, down 20bps q-o-q, largely owing to rupee appreciation against the US dollar, partially offset by operational efficiencies.
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Key things to watch out will be commentary on budget cycles, demand in key verticals and outlook for FY18. Investments in digital and measures to reduce risks surrounding H-1B dependence will be the key monitorable points. Company could formalise its capital allocation policy and higher payout ratio could be in the offering.