TCS to outshine Infosys once again

India's top IT company likely to lead its peers for another quarter on both revenue and profit growth

Tata Consultancy Services (TCS) is set to report its results for the September 2013 quarter on Tuesday. As per consensus Bloomberg estimates, the company is set to report sequential sales growth of 15.5% to Rs 2,077 crore and net profit growth of 18.3% to Rs 4,533 crore.

The good news though seems to be well factored in as the stock made a new 52-week high of Rs 2,183.5 per share on 14th October – breaking the new high it made on October 11th after Infosys raced ahead of street expectations. Valuations of 24 times FY14 estimated estimates appear to be full, believe analysts.

TCS’ revenue growth is likely to be driven by a healthy sequential volume growth of 6.5% – its highest over the past five-six quarters. While organic revenue growth is pegged at 5% in constant currency terms, the Alti buy-out could add another 1%, believe analysts. While pick-up in US and Europe markets could drive revenue momentum, TCS’ well-diversified presence across all verticals and services is a key positive.

“TCS’ growth should be consistent across service lines and geographies. Telecom continues to be a challenging industry segment”, says Anantha Narayan, IT analyst at Credit Suisse.

While wage hikes, integration of lower margin Alti and adverse cross-currency movements could put some pressure on its margins; the sharp rupee depreciation versus the US Dollar is likely to more than offset these headwinds. Most analysts expect TCS’ EBITDA margin to expand 240-250 basis points sequentially to about 31%. While net profit growth though strong, is likely to be restricted by forex losses on account of sharp and unprecedented rupee fall against the Dollar.

“TCS has indicated that margins are likely to be up 250-300 basis points; however, its forex losses should be about Rs 300-400 crore”, says Vipin Khare, IT analyst at Morgan Stanley.

The management has maintained its revenue growth outlook of beating Nasscom growth projection of 12-14% for this fiscal. Management commentary on demand environment, deal pipeline and discretionary spends will be watched closely. The company’s strategy on stricter Visa norms in US, re-investment of currency gains and outlook on margins will also be significant, believe analysts.