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TCS Q1FY23 results preview: Profit, revenue may rise on-year, EBIT margin likely to fall; here’s what to watch

India’s largest IT company Tata Consultancy Services (TCS) will kick-off earnings season with its first-quarter FY23 results scheduled on Friday, 8 July 2022. Research and brokerage firms believe that in the first quarter of the current fiscal sectoral revenues might grow at 3.6-4% sequentially CC in 1QFY23, driven by continued demand momentum, strong order book win in the earlier quarter but impacted by a 200bps cross-currency hit. EBIT margins may contract sequentially due to wage hikes, visa costs and supply side pressures, partially offset by INR depreciation. Hiring and attrition may start to cool off, while travel and sales and marketing costs may rise.

Profit growth: Motilal Oswal Financial Services expect Tata Consultancy Services to deliver a 11.2 per cent on-year PAT growth in adjusted net profit at Rs 10,050 crore. Prabhudas Lilladher expects adjusted profit to rise 10.7 per cent on-year to Rs 9,968 crore

Revenue growth: JM Financial Services is building in a 3.7% quarter-on-quarter c/c growth with 150 bps cross currency headwinds. Prabhudas Lilladher expects healthy revenue growth of 4% sequentially CC (constant currency) given the ramp up of strong order book won in the earlier quarter. It expected lower growth of 2% sequentially in USD terms due to cross currency headwinds of 200bps. Analysts at Motilal Oswal Financial Services expect that in CC terms, growth should continue to remain in a narrow band, but reported growth will be impacted by cross-currency movements. IIFL Securities forecasts revenue growth of 3.6% cc sequentially in the first quarter, led by the record high order book and continued demand momentum for core transformation. PhilipCapital expects CC revenue growth of 3.7% qoq (2.3% qoq in USD) on strong momentum in digital transformation programmes. Expect growth to be broad based across verticals.

EBIT margins: JM Financial Services expects EBIT margins to decline QoQ to 23.4% impacted by wage increments and resumption of travel/facility expenses. Analysts at Prabhudas Lilladher sees 90-100bps quarter-on-quarter decline in EBIT margin due to wage hikes, higher retention costs and increase in travel costs. Motilal Oswal sees margin in 1QFY23 to be impacted by the wage hike and continued supply-side pressures. IIFL Securities expects margins to decline by 170bps sequentially, due to the impact of wage hikes, visa costs and increasing travel costs. Those at PhilipCapital expect margins to decline by 140bps qoq due to wage hikes, travel costs, supply side pressures, to be offset by USD/INR depreciation.

What to watch out for?

JM Financial noted that key things to watch out for would be outlook on client spending trends in BFSI and Retail, margin performance and outlook especially given the likely resumption in travel and supply side pressures and outlook on pricing. Prabhudas Lilladher expects investors to focus on whether there is any change in nature of demand, for example more cost focus, due to weak macro environment; presence of large and mega in deal pipeline; hiring, attrition and onsite wage inflation trends and its impact on margins ahead. Motilal Oswal said that deal wins and impact of macro weakness on growth will be key things to monitor. Analysts at IIFL Securities say that key comments to watch out for would be deal win momentum and nature of deals; any early signs of current macro environment impacting the demand environment or decision-making; supply-side challenges; and FY23 outlook on growth and margins.

The stock recommendations in this story are by the respective research analysts and brokerage firms. Financial Express Online does not bear any responsibility for their investment advice. Capital markets investments are subject to rules and regulations. Please consult your investment advisor before investing.

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