TCS Q2 margin may expand sequentially; revenue seen rising up to 9% YoY

TCS Q2 preview: The company's EBIT margins are likely to improve by 40-118 basis points on a quarterly basis due to improved pricing, operating leverage, and absorption of wage hikes

IT giant Tata Consultancy Services (TCS) is slated to release its July-September quarter (Q2FY23) results on Monday, October 10, 2022. 

Analysts expect the company to post a sequential revenue growth of 3-4.6 per cent in constant currency terms, while its net profit may rise in the range of 6-10.7 per cent from the last quarter. 

As per an average of five estimates compiled by Business Standard, the IT giant is expected to post a net profit of Rs 10,149 crore on a topline of Rs 53,552 crore in the September quarter.

On a yearly basis, the revenue could rise by 17-18 per cent and net profit by 4.4-9 per cent. 

The company’s EBIT margins, on the other hand, are likely to improve by 40-118 basis points on a quarterly basis due to improved pricing, operating leverage and absorption of earlier wage hikes. (see table below for estimates)

Key monitorables: Investors will closely track management commentary on potential spending caution and pullback by clients, demand outlook, deal win momentum, segments or verticals exhibiting weak spending pattern, attrition trends and supply side pressures. 

Here’a compilation of top brokerage expectations: 

IDBI Capital: The brokerage expects CC revenue growth of 4 per cent partially offset by 140 bps cross currency impact. Improved utilization and absence of wage hike will aid margin expansion. It has estimated a 117.8 bps margin improvement to 24.28 per cent.  

Jefferies: The global brokerage expects largest margin improvement of up to 50 bps for TCS to be driven by pyramiding, operating leverage and pricing benefit, amid continued pickup in travel/discretionary expenses and supply side pressures. It estimates robust quarterly revenue growth of 3.5 per cent (CC) driven by deal ramp ups and a seasonally strong quarter. 

Kotak Institutional Equities: It forecasts a sequential CC revenue growth of 3.1 per cent to be led by seasonal strength and growth in digital services, especially cloud servives. It sees extremely high cross-currency headwinds of 220 bps QoQ and 540 bps YoY.

EBIT margin will increase from lows of June 2022 quarter, led by the absorption of wage revision rolled out in the earlier quarter. However, multiple margin headwinds do exist with high attrition and an increase in travel and discretionary expenses. The brokerage expects moderate growth in total contract value (TCV) on a YoY basis in the range of $8-8.5 billion. 

Philip Capital: It expects CC revenue growth of 4.6 per cent qoq on the back of a strong momentum in digital transformation programmes. It estimated growth to be broad based across all verticals. The brokerage has estimated margins to expand by 70bps QoQ on absorption of wage hikes, and rupee depreciation. 

TCS Q2 estimates