TCS expected to report decent revenue growth despite Chennai floods

Good growth in BFSI segment, favourable currency to aid the company in Dec quarter

As Tata Consultancy Services (TCS) kickstarts the earning season on Tuesday for the December 2015 quarter, its financial numbers are expected to be keenly watched for. The Mumbai-headquartered firm, India’s largest information technology (IT) services company, had earlier hinted its revenue growth might be impacted because of the disruption of works due to the Chennai floods.

In December last year, the company had said it was expecting ‘material impact’ on the company’s revenues as the torrential rains and subsequent floods in Chennai affected the normal functioning of its offices. Industry analysts, however, don’t expect much pressure on the company’s growth in the October-December period of FY16. The market is also expected to look for any management commentary about its reported talks to acquire an IT services unit from Dell, apart from any guiding statement about the overall demand environment in the March quarter and in FY17.

THINGS TO WATCH OUT FOR

• TCS revenue drop alert vs actual revenue drop from Chennai ops halt
• Digital revenue growth
• Growth in problem areas like LatAm, Japan, Telecom and E&U segments
• Currency exchange gains
• Any comments on reported plans to buy out Dell unit
• Outlook for Q4 business growth

Despite revenue warnings, most analysts tracking TCS say the company is likely to report decent revenue growth in the December 2015 quarter as they expect the support from currency gain would recoup revenue loss anticipated from the shutdown of Chennai offices for a few days. The company is also expected to be backed by strong growth in its key banking, financial services and insurance (BFSI) vertical.

During the quarter, the company is expected to report a net profit of Rs 6,023 crore on a revenue of Rs 27,643 crore, a year-on-year growth of 13.1 per cent and 12.8 per cent, respectively, according to consensus estimates by Bloomberg.

“The rupee has depreciated against the dollar by 90 basis points (bps) during the quarter, but this gain is partly negated by cross-currency appreciation of Euro/GBP in the range of 0.5-0.7 per cent. The combined net impact on reported terms would be a favourable 50-70 bps across vendors on revenue,” said Rahul Jain, vice-president (research) of Systematix Shares & Stocks in a note previewing IT sector results. Besides, the BFSI segment where TCS leads among its peers, is expected to report rise in volume, bringing room for revenue rise for TCS, he added.

Recently, some media reports said TCS is in talks to buy out Perot Systems, an IT-services company, which is now part of Dell. The management is expected to clear some air around this, during the earnings call.

TCS is also expected to talk about positive outlook for the January-March quarter as the fourth quarter is traditionally a revenue-earning period for IT outsourcing firms after holidays and furloughs in the December 2015 quarter.

“Budgets for CY16 (calendar year 2016) will be decided by the clients and hence that will remain a key thing to watch out for on how the IT budget look for CY16 and what would be the outlook for discretionary spending. TCS, which does an annual survey will give an idea on the budget spending on discretionary and non- discretionary space,” brokerage firm Karvy said in a note last week.