Result Preview: TCS' Q1FY14 net profit growth seen at 3.5%

The company's strong financial performance is likely to continue, though rich valuations could cap upsides

India’s top IT services company Tata Consultancy Services (TCS) is slated to announce its results for the June 2013 quarter later today. As per consensus brokerage expectations, TCS’ revenues are pegged at Rs 17,575 crore translating into 6.97 per cent sequential growth. Its net profit is seen at Rs 3722 crore, up 3.48 per cent over the March 2013 quarter. This is in contrast to the net profit de-growth posted by Infosys.

The company is likely to post volume growth of 4 per cent with 1 per cent dip in realisations. Thanks to the wage hikes and visa related costs, TCS’ EBITDA margins are likely to be under pressure. However, rupee depreciation, higher utilisation rates  and low base of the March 2013 quarter (due to one-time litigation related  expenses) will restrict the sequential EBITDA margin contraction to about 50-80 basis points.  The company is expected to post forex losses of Rs 85-100 crore during the quarter.

Post results, one of the key things to be watched will be TCS management strategy on US Visa Bill. Notably, last week, post its results, Infosys management indicated that they are keen on buying out US-based IT companies to limit the impact of stricter visa norms in the country.  

“Investors are likely to focus more on the Immigration bill – impact/mitigation strategies than earnings (barring big surprises). We do not expect any significant moves in the sector till there is clarity on the “Outplacement “clause, which can impact the offshore business model”, states Surendra Goyal of Citigroup in a preview report for the sector.

Company’s deal pipeline and clarity on how the IT budgets are shaping up will also be crucial.  “TCS management commentary on deal momentum and discretionary spending will be key. Outlook on the BFSI segment and decision-making cycle of major clients in this vertical will be keenly watched”, says Yogesh Aggarwal, IT analyst at HSBC Global Research.

Notwithstanding the weakening global demand for IT services, TCS has managed to post consistent financial growth for the past two fiscals. The company’s diversified business model (across various verticals and geographies) and quick response to its clients’ changing needs has enabled this strong growth.

Consequently, despite high valuations (18 times FY14 estimated earnings); most analysts remain bullish on the stock and treat it as a safe investment. The recent rupee depreciation will also aid TCS’ profit growth going forward.

“We have increased our EPS estimates by 8 per cent for FY14 and 3 per cent for FY15, as we expect a portion of the currency-led margin tailwinds to be reinvested in lower-margin deals and expansions into newer geographies”, says Ankur Rudra, IT analyst at Ambit Capital.