Analysts expect TCS to post stable numbers in Q3

Demand driven by smaller deals in the US, larger ones in Europe

India’s largest information technology (IT) services provider, Tata Consultancy Services (TCS), maintained FY14 would be a year of growth compared to last financial year.

“Budgeting cycle is happening in a more positive environment this year, and demand environment continues to be positive. TCS will comment on how FY15 will look like in January/February when they get better information from clients. Demand uptick is being driven by smaller deals in the US; in Europe it’s large deal driven,” said Ashwin Mehta and Pinku Pappan of Nomura Equity Research in their report.

Analysts also believe the third quarter (October-December) for the company will be usual, which means it will be a seasonally weak one.

FLAT FORECAST

• Q3 a seasonally weak quarter — furloughs in key verticals; holidays and leave; dip in India business
• Margins to be stable; rupee could drag margins by 25-30 basis points
• Forex gain could be Rs 150-200 cr vs a loss of Rs 377 crore in Q2
• Tax rate in the range of 24-24.5%

Business normal
“The overall key message from the meeting was that the business environment remains normal and the order book continues to grow. However, seasonal factors could lead to muted revenue growth in the third quarter with flat to lower margins on a constant currency basis,” said Vipin Khare and Gaurav Rateria of Morgan Stanley Research Asia Pacific.

The quarter will be impacted due to furloughs in its large verticals like retail and banking, financial services & insurance.

The third quarter has lesser working days due to holidays and leaves.

Domestic business
The report also added the near-term domestic business revenues could be affected by the drop in business activity due to an expected general elections in India in 2014.

The  dollar revenue of the company will be positively impacted due to cross currency benefits. Dollar revenue could be positively impacted by 100 basis points.

The management of the company also indicated that EBIT (earnings before income tax) margins will remain stable on a quarter-on-quarter basis (Q2 it was 30.2 per cent), though some impact will be seen due to rupee appreciation.

“The management reiterated their intent to re-invest rupee benefits back in the business but only after assessing its stability over two-three quarters. It indicated for hedging gain of Rs 1,500-2,000 crore (vs a loss of Rs 3,700 crore in the second quarter) as rupee swung back to 62 a dollar. Tax rates to remain in a tight range of around 24 per cent going forward,” said a note frpm Glodman Sachs Equity Research.