TCS Q2FY20 results on Thursday: Will the IT major deliver a surprise?

Tata Consultancy Services (TCS), the IT bellwether, is set to release its results for the July-September quarter of the financial year 2019-20 (Q2FY20) on Thursday, October 10. While most analysts are still bullish on the IT sector, those at Nirmal Bang Securities have a completely different stance. The brokerage house terms the quarter under review as 'make or break period for TCS and Infosys'.

According to the brokerage firm, there could be some modest disappointment in store on both revenue and margin fronts for IT companies, especially in the second half of FY20 (H2FY20).

Slower economic growth in the US, Europe and China; concerns over a no-deal Brexit and a German economic slowdown impacting the European BFSI and manufacturing sectors; flattening/inverted yield curve and negative yields across a large swathe of bonds, especially in Europe; and concerns due to second and third round of CY2019 revenue downgrades from big IT spenders are some of the sore points that investors need to watch, analysts at Nirmal Bang say.

At the bourses, TCS has underperformed the market by slipping nearly 6 per cent as against 2.67 per cent decline in the Nifty50 index. The Nifty IT index has shed 2.5 per cent during this period. Infosys, on the other hand, has gained 10 per cent during the three-month period, ACE Equity data show.

Here's a compilation of what leading domestic brokerages expect from the TCS' Q2 results:

Nirmal Bang Securities

The brokerage has factored in three per cent quarter-on-quarter (QoQ) constant currency (CC) growth and nearly 85 basis points (bps) cross currency headwind, which will result in a growth of 2.12 per cent in US dollar terms. In rupee terms, it sees net sales at Rs 39,378.7 crore, up 6.9 per cent year-on-year (YoY) and 3.2 per cent on sequential basis. EBIT (earnings before interest and tax) is pegged at Rs 9,678.3, marginally lower than Rs 9,771 crore recorded in the previous year quarter. EBIT margin is pegged at 24.6 per cent as against 26.5 per cent in the Q2FY19. Net profit or profit after tax (PAT) is forecast to come in at Rs 8,430.6 crore, down 6.7 per cent on YoY basis and 3.7 per cent QoQ.

Edelweiss Securities

We expect TCS to deliver 3.5 per cent cc revenue growth (2.9 per cent in US dollar owing to cross-currency headwinds). With headwinds from wage hikes behind, a weak rupee should also aid margin expansion to the tune of 90 bps. We expect softness in European BFSI space to be offset by strong growth metrics in North America. Growth in the retail vertical, commentary on the macro environment spends by retail clients, growth in digital and BFSI, and manufacturing demand in North America and Europe will be the key variables.

ICICI Securities

In US dollar terms, revenue is seen to grow 7 per cent YoY and 1.8 per cent QoQ to $5,581 million. In rupee terms, TCS is expected to post a sales growth of 6.4 per cent YoY to Rs 39,225.8 crore. On QoQ basis, the numbers are expected to rise by 2.8 per cent. EBIT is estimated at Rs 9,950.2 crore, up 1.8 per cent YoY and 7.9 per cent QoQ while net profit is seen at Rs 8,266.7 crore, up 4.6 per cent YoY and 1.7 per cent QoQ. EBIT margin, on the other hand, is expected to fall by 115 bps YoY to 25.4 per cent. On QoQ basis, it is expected to increase by 121 bps.

"Margin execution - despite recent rupee depreciation, TCS being in a better supply side situation given benign attrition and pyramid optimisation (on-boarding of 30,000 campus freshers in H1FY20), we see it unlikely for FY20 EBIT margins to get back into the aspirational range of 26-28 per cent," the brokerage says.

Centrum Broking

TCS could deliver 2.6 per cent constant currency QoQ revenue growth. In rupee terms, it sees a 6.6 per cent YoY (up 2.9 per cent QoQ) rise in sales (revenue) at Rs 39,270.8 crore while EBIT is seen at Rs 9,935.5 crore, up 7.8 per cent QoQ and 1.7 per cent YoY. EBIT margin is expected to decline by 121 bps on YoY basis at 25.3 per cent; however, on QoQ, it will increase by 115 bps. PAT is estimated at Rs 8,253 crore, up 4.5 per cent YoY and 1.5 per cent QoQ.