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Tata Consultancy Services (TCS) is likely to march ahead of its peers in sequential dollar revenue growth in the June 2015 quarter. Its dollar revenues are likely to grow four per cent sequentially to $4,057 million versus 1-3 per cent growth estimated for peers such as Infosys, Wipro and HCL Technologies. This assumes importance because TCS’ dollar revenue growth has been falling short of expectations in the recent quarters and it was the key reason for the stock’s fall on the day after the March 2015 quarter results were announced. According to Bloomberg consensus, TCS would post revenues of Rs 25,328 crore, up 4.6 per cent sequentially and Ebitda margin of 27.2 per cent, a decline of 198 basis points over the March quarter.
Healthy traction in revenues from manufacturing, retail, and banking and financial services verticals will be a key catalyst for revenue growth in the quarter. Favourable cross-currency and good ramp-up in the digital segment can also aid top-line. However, telecom and insurance business are likely to remain under pressure in this quarter as well, say analysts. Impact of salary hikes and higher visa costs will be partly offset by weak rupee and higher utilisation and restrict Ebitda margin contraction to 198 basis points.
Despite expectations of foreign exchange gain of Rs 250 crore, earnings are likely to fall in the quarter on the back of weak margins. Net profit is estimated to decline 8.2 per cent sequentially to Rs 5,421 crore. To give a comparable picture of recurring profits, the one-time employee rewards paid by the company in the previous quarter to mark its 10th year of listing, has been excluded. Apart from the numbers, the Street will be keenly watching management commentary around overall demand environment, given the weak commentary by some mid- and large-cap companies. Any positive statements around Diligenta and telecom vertical growth will rub-off favourably on the stock. Investors would also be seeking details on the measures TCS is taking to tackle attrition (which has been rising for the past seven quarters) besides details on the future growth driver - the digital business. Given that IT companies typically post stronger growth in the first half of a financial year, the June 2015 quarter performance is important for the company.
Even though the CNX IT index has underperformed the S&P BSE Sensex in the June quarter, TCS has out-performed its peers. The stock trades at 21 times FY16 estimated earnings, a tad higher than its historical average one-year forward price/earnings ratio of 20 times. This premium, however, is justified given TCS’ consistent financial performance, strong execution skills and well-diversified revenue mix.
