TCS: Revenue growth to accelerate in 1st quarter

However, margins might decline due to wage hike, Rs appreciation

The rising rupee has been a cause of concern for Tier-I software services companies. For, it restricts investments, margins and pricing power of software exporters. The impact of a stronger rupee is expected to be felt from the first quarter itself. Tata Consultancy Services (TCS) is likely to report a decline in margins in the June quarter. TCS has told analysts that while revenue growth would accelerate in the first half of FY15, thanks to improved penetration in Europe and stable demand conditions in the Americas, margins might decline on adverse currency movement and wage hikes.

Analysts expect three key factors to impact TCS’ margins negatively in the first quarter. A wage hike of 10 per cent that TCS announced for FY15 will impact margins by 150-200 basis points (bps). Adverse currency movement might impact Ebit margins by 100 bps. Finally, its new depreciation policy, in line with the New Companies Act, will impact margins by 100 bps during the quarter. However, this would be a one-off. Antique Stock Broking has tweaked its rupee estimates, which has resulted in a two per cent decline in its EPS estimates for TCS in FY15 and FY16.

According to Kotak Institutional Equities, the fall in margins will be offset partially by operational efficiencies and calibration of investments. However, a structurally-stable rupee is not margin-accretive. A weak rupee not only expands margins but also aids investments and gives pricing flexibility to companies. JPMorgan says: "Unless the industry takes a margin reset, we see somewhat of an inverse relationship between rupee-US dollar levels and secular growth rate of the industry contrary to the belief of some."

While a stable rupee may lead to lower growth for software exporters over the long-term, TCS does not face any growth pang just yet. For FY15, the company intends to maintain an Ebit margin band of 26-28 per cent and according to Bloomberg’s consensus estimates, TCS would report a sequential revenue growth of 7.25 per cent (in US dollars) in the June quarter. In rupee terms, the firm is expected to report a sequential revenue growth of 4.3 per cent. The company expects the large verticals to grow in line with the firm’s average rate and the smaller verticals at a faster pace.