TCS Q2 results preview: Revenue, margins to grow; all eyes on guidance

New Delhi: Result season is round the corner and India Inc is all set to announce earnings for the September 2022 quarter. As a tradition, IT major () will kick off the Q2 earnings from Monday, October 10.

Majority of the brokerage firms expect the largest Indian software exporter to report a 3.5-5 per cent growth in the revenue on constant currency terms, with better margins on a quarterly basis.

Analysts said that management commentary for the future guidance, new order win, total contract value (TCV), hiring and attrition and margins will be the key factors to watch out for, amid the recessionary gloom in the global economy.

Global brokerage Jefferies expects 2QFY23 revenue growth to be robust at 3.5per cent QoQ constant currency (CC) terms, driven by deal ramp ups and a seasonally strong quarter. It sees TCS still commanding a premium compared to peers.

It estimates EBIT margins to improve by 50 basis points (bps) on quarter on quarter basis (QoQ) to 25.6 per cent, driven by pyramiding, operating leverage and pricing benefit, amidst continued pickup in travel/discretionary expenses and supply side pressures.

It sees revenue rising 17.3 per cent on a year on year (YoY) basis to Rs 54,978.2 crore, with a net profit at Rs 10,085 crore. EBIT margins are likely to remain around 23.6 per cent, dropping 203 bps on a year basis.

Domestic brokerage firm expects a strong demand commentary to continue, whereas deal wins and impact of macro weakness on growth will be key monitorables.

It said that CC growth should remain trong but reported growth will have some impact from cross-currency movements. “Margin in 2QFY23 should see some recovery from wage hikes that impacted 1QFY23 margin,” it said.

The brokerage has pegged overall revenue expectations at Rs 55,100 crore, rising 4.4 per cent QoQ and 17.5 per cent on YoY basis. It has seen a 10,400 crore PAT, up by 9.4 per cent QoQ and 7.9 per cent higher on a yearly basis. It expects an EPS drop of 60 basis points and 190 basis points in FY23 and FY24, respectively.

Nifty IT index has corrected more than 50 per cent on a year to date basis, compared to a two per cent drop in Nifty50. It is the worst performing sectoral index for the year and only one in the bear grip, falling more than 20 per cent.

Nirmal Bang Institutional Equities is also expecting revenue growth backed by strong order inflow but cross-currency headwinds of 260 bps on quarterly basis is likely to dent it. However, the IT major is expected to report better margins this quarter.

“Unless we see a good spike in order inflow in the next few quarters, the total order inflow for FY23 will best be flat on a yearly basis and very likely it will be lower,” it said. “This could pose a challenge for revenue growth expectations in FY24.”

Hiring slowdown is expected to continue and attrition is expected to remain elevated in Q2FY23. Net hiring numbers will also serve as a harbinger of any growth slowdown, the brokerage added.

Majority of the brokerage firm remains underweight on the Indian IT sector citing their muted financial performance, fears of economic slowdown, depressed margins and budget cuts. They do not see any positive surprises from the sector.

believe deployment in the sector should be slow and gradual in nature as there would be unknown risks ahead that might degrade valuations. There might be further consolidation in IT stocks until clarity on CY23 IT budgets

TCS, with a current P/E of 25.4 times, is trading at a 15 per cent premium over its 10 year average P/E, just following

(22 per cent) among the largecap IT pack, said the ICICI Securities report.

Motilal Oswal has a buy rating on TCS with a target price of Rs 3,530, about 15 per cent higher than its previous close, whereas Jefferies has a hold rating on the stock with a target price of Rs 3,070.

(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times)

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