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TCS expects modest Q1 growth, wage hike may impact margins

Tata Consultancy Services (TCS) is likely to report a steady growth in April-June quarter driven by factors such as deal ramp-ups — including the pivotal BSNL deal — and sector-specific performance, multiple brokerage reports said.

The average of five brokerage firms expect TCS’s revenue to rise 1.5% sequentially to Rs 62,155.5 crore during the period.

Motilal Oswal Financial Services has estimated a 1.6% quarter-on-quarter (QoQ) constant currency (CC) revenue growth for TCS, largely fueled by the scale-up of deals like the BSNL project. Similarly, ICICI Securities has forecast a sequential growth of 1.8% CC, driven by strong performances in banking, financial services, and insurance (BFSI), retail, and hi-tech sectors.

Brokerage Nomura’s estimates align closely, with an expected CC growth of 1.5% QoQ, supported by the gradual ramp-up of the BSNL project. JM Financials projects a slightly lower growth rate of 1.4% CC, acknowledging a 30bps cross-currency headwind.

The BSNL deal is clearly a significant contributor to TCS’s growth in Q1 FY25 and Kotak Institutional Equities included $150 million from the BSNL deal in their estimates, noting, “Our estimates include $150 million from the BSNL deal, a marginal growth compared with the March 2024 quarter”.

Margin Contraction
Despite the positive revenue outlook, TCS’s earnings before interest and tax (Ebit) margin is expected to contract due to wage hikes implemented in Q1 FY25. “We expect TCS’ Ebit margin to contract by about 150bps QoQ, largely due to wage hikes,” Motilal Oswal said. ICICI Securities anticipates a steeper decline of 186bps QoQ, attributing it to higher employee costs and wage hikes effective from April 1, 2024.

JM Financial said while it expects wage hike to be the major margin headwind for the company it expects its impact to be partially offset by operational efficiencies. Kotak Institutional Equities also expects a 140bps QoQ decline in operating margin due to wage revisions and a likely decline in utilisation rates.

Further, the company had to pay a one-time penalty due to an adverse judgment by a US district court. “One-time penalty (up to $194 million), due to an adverse judgment by US district court, could impact reported earnings,” JM Financial said.

The case was brought by Computer Sciences Corporation, now DXC Technology Company, alleging that TCS misappropriated its trade secrets wich led to the US court ruling that TCS is liable for a total of $194.2 million.

As a result, the net profit of the company for the June quarter is seen to decline 3.5% quarter-on-quarter to Rs 11,986.9 crore.

Deal Wins and Pipeline
The deal pipeline for TCS remains healthy, with several significant wins expected to contribute positively. Kotak Institutional Equities projected $11-12 billion in deal wins, driven by a high rate of closures in cost takeout deals. “TCS has won quite a few mega deals, which can contribute to 2.5% growth in FY2025E,” the brokerage said in a report.

ICICI Securities expects the total contract value (TCV) to be slightly modest QoQ but driven by cost optimisation and vendor consolidation deals.

Vertical Performance
The performance of various verticals such as BFSI, retail, and telecom remains a key focus area. ICICI Securities expects traction in BFSI, retail (consumer business group), and hi-tech sectors. They await management commentary on several fronts, including enterprise discretionary spending and large deals.

Kotak Institutional Equities also forecasted weak revenues in financial services and telecom.

Outlook
Brokerage firms suggest the areas to watch include the outlook on client discretionary spending, the state of spending in North American markets, and the financial services, hi-tech, and telecom verticals, campus hiring, and large deals.

Kotak Institutional Equities said that investor focus will also be on the impact of GCC ramp-ups on growth. Financial Express

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