TCS set to kick off IT results season tomorrow

Brexit comments eagerly awaited; currency volatility and pay rise to impact margins in the first quarter

Britain’s vote (Brexit) to exit the European Union, currency volatility, visa costs and pay rises will impact the financial results at Indian information technology (IT) services companies in the April-June quarter, the first one (Q1) of the new financial year, traditionally a strong one for revenue growth.

Tata Consultancy Services (TCS), the largest IT services provider, usually begins the results season by announcing it on July 14. It is better placed than last year, having begun this one with resolved portfolio issues. It had, over recent quarters, stated that Latin America had turned over and issues in the insurance segment were resolved with the bottoming out at Diligenta, its subsidiary in Britain.

Analysts expect revenue growth of 3.5 to four per cent (constant currency) on a sequential basis. TCS does not give revenue expectations and management commentary will be needed to gauge demand trends. The latter will also be important on the Brexit impact. TCS' largest exposure is to Europe, with 26 per cent of its revenue from there.

“Our industry growth forecast implies high single-digit revenue growth from the UK. Clearly, these estimates are (now) a tall order, given a high likelihood of the UK moving into recession in 2017. We believe a realistic growth forecast in the near term will be low single-digit. When rolled up to the organisation level, this will impact c/c (constant currency) revenue growth by 40-90 basis points (bps) across IT companies, with the highest impact on TCS, HCL and Tech Mahindra, and the least on Infosys,” says a Kotak Institutional Equities report.

Margins for the quarter will be under pressure for both TCS and Infosys, due to pay rises and visa costs. For TCS, the earnings before interest and taxes are expected to be down by 140-150 bps.

TCS has been seeing strong growth in its digital segment and the Street will look for more on this. It has been among the few that shared its revenue break-up from this segment. At the end of the March quarter, digital revenue was 15.5 per cent, at $2.3 billion. This was up 52 per cent over a year, on a constant currency basis.

Infosys announces its Q1 results on Friday. The Street will keenly await the management's forecast. Its earlier one was for a constant currency growth rate of 11.5-13.5 per cent for the year. Infosys remains top of the chart among analysts, with revenue growth expectation of 4-4.2 per cent in constant currency. Margins are expected to decline by 150 bps.

Other than that, the Street would like to hear the management talk about the impact of Brexit. The Europe exposure of Infosys is 23.4 per cent.