TCS maintains status-quo for third quarter

Cross currency movement to impact US dollar revenue growth

Tata Consultancy Services expects its revenue for the financial year’s third quarter ending December 31 to be in line with seasonal trends. Traditionally, the third and fourth quarters are weak for information technology companies in terms of growth, due to holidays and furloughs. “Telecom and smaller verticals will grow better than the company average,” said Rajesh Gopinathan, chief financial officer, updating analysts about the business for the third quarter.

According to the company, retail, manufacturing and hi-tech will see the impact of holidays and furloughs during the quarter. Banking, financial services and insurance (BFSI) will continue to see weakness due to insurance and products.

Gopinathan also added that Europe will grow better than average, while UK will remain weak due to seasonality and impact of insurance. Whereas, North America demand environment is in-line expect for the seasonal weakness that this quarter has.

He also added that during the quarter cross currency impact will have a negative impact of 20 basis points (bps) on constant currency to rupee revenue, whereas the impact on US dollar revenue will be a negative of 220 bps. "The currency movement will have marginal benefit on EBIT," said Gopinathan. He also reiterated that the company will manage to maintain the target margin band. TCS has stated that it will manage to keeps its margin in the 26 per cent to 28 per cent range.

"This quarter GBP and Euro have depreciated; hence the impact will be seen not only on TCS but all the players who have significant exposure to Europe. In case of TCS, I think the fundamentals are in place. On a reported basis we expect US dollar revenue growth of 1.5 per cent. On constant currency basis we see it growing by 3.5-4 per cent," said Ankita Somani, research analyst, MSFL Research.

The company for the last two quarters has been reporting weakness in its biggest vertical BFSI. The management post the second quarter had stated that the BFSI segment is weak primarily due to softness in insurance that too only in UK. We see this softness for a couple of quarters.