TCS Preview: Wage hikes to erode margin in Q1FY24; PAT may drop 3.3% QoQ

TCS Q1 result preview: The weakness comes on account of a worsening demand environment, which is leading to cancellation and delay in projects, a longer sales cycle and slower revenue conversion

A usually strong quarter of April-June (Q1FY24) will be soft for IT major Tata Consultancy Services (TCS), which is likely to report flat revenue sequentially in constant currency (cc) terms for the period, analysts said. 

The likely weakness comes on account of a worsening demand environment, which is leading to cancellation and delay in projects, a longer sales cycle and slower revenue conversion, they add.  

For the reporting quarter, TCS may report revenue of Rs 59,493 crore, as per an average of eight brokerage estimates, which will be nearly 13 per cent higher on a yearly basis (YoY), and just 0.6 per cent up on a QoQ basis. SEE ESTIMATES TABLE

Profit could rise 16 per cent YoY to Rs 11,017 crore but sequentially it will likely drop 3.3 per cent, estimates show. 

Six of the eight brokerages expect earnings before interest and tax (EBIT) margins to also decline sequentially in the range of 90-150 basis points (bps) due to wage hikes. The firm's EBIT margin was 24.5 per cent in the March quarter.  

Key monitorables: Investors will watch out for any announcement on a buyback. The focus will also be on the timing of demand recovery in the US especially in the BFSI segment, deal TCVs and pipeline, margins outlook, attrition and pricing comments. 

Here’s what brokerages expect: 

Jefferies: The brokerage expects flat cc revenue impacted by project ramp-downs, delayed ramp-ups and slower sales cycles. It projects a decline of 150 bps QoQ in EBIT margin. Deal bookings, however, will be strong due to large/mega deals announced recently. The company could also announce a buyback this quarter, it said. 

HSBC: HSBC expects a cross-currency tailwind of 50 bps for TCS in Q1 assuming an average dollar-rupee rate of Rs 82.20. It sees cc revenue growth moderating to 7 per cent on a YoY basis. As opposed to other brokerages, HSBC sees ebit margins to improve by 30 bps. Though declining attrition, reduced sub-contracting costs and operational efficiencies will be partially offset by soft revenues, it said.  

PhillipCapital: The brokerage estimates cc revenue growth of 0.5 per cent on a QoQ basis. The modest growth is expected due to weakness in discretionary spending and cautious sentiment across major verticals. It sees margins declining by 110 bps QoQ due to wage hikes and a lack of strong growth leverage. 

Motilal Oswal Financial Services: Discretionary spending continues to remain under pressure and we expect EBIT margin to decline 140 bps QoQ. The deal pipeline though, should remain resilient.  

IDBI Capital: The brokerage sees a cross-currency tailwind of 60 bps. But an increase in wages and a soft demand environment will impact the margins. EBIT margin is expected to taper by 106 bps QoQ to 23.4 per cent.