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TCS Reports Solid Revenue Growth, Margin Expansion in Q2 Helped by Strong Deal Execution, Rupee Depreciation

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  • Most analysts expect 3% constant currency sales growth for TCS in the September quarter, led by demand across all sectors.
  • TCS is expected to post the best margin improvement to 50 basis points, far ahead of industry estimates of 30 basis points, according to Jefferies.
  • Management commentary on the growth outlook, client spending and hiring plans will be monitored.

The earnings season for the July-September quarter kicks off on October 10 with the announcement of results from IT giant Tata Consultancy Services (TCS).

Most analysts are forecasting 3% quarter-on-quarter sales growth in constant currency for TCS in the September quarter, led by demand across all sectors, while margins are expected to improve.

“The momentum of revenue growth is expected to continue on strong deal execution, while margins are expected to improve sequentially as wage growth is now lagging,” said a report from ICICIdirect. TCS is expected to register 3% QoQ growth in constant currency, led by continued improvement in demand from BFSI, healthcare and retail, acceleration of digital technologies and deal start-ups, the report added.

Analysts at Edelweiss Research also predict that TCS will report revenue growth of 0.8% qoq in USD and 3% qoq in CC. “The company is expected to post margin expansion of approximately 60 basis points on a quarterly basis, led by operating leverage, FX advantage and utilization improvement, partially offset by travel costs and supply-side pressures,” they said.

On October 10, the rupee hit a new low of 82.70 against the US dollar on expectations of aggressive monetary policy tightening by central banks and rising crude oil prices.

The rising strength of the dollar against the rupee is bad news for the economy, but good news for industries that make money in dollars such as IT, pharmaceuticals and so on.

“Indian IT company revenue growth is expected to continue in the second quarter, but margin expansion is likely to be limited due to continued high turnover,” added ICICIdirect.

However, according to Jefferies, TCS is expected to post the best margin improvement to 50 basis points, far ahead of industry estimates of 30 basis points.

“We estimate that EBIT margins will improve by 50 basis points QoQ to 25.6%, driven by pyramiding, operating leverage and price advantage, amid continued increase in travel/discretionary spending and supply-side pressures,” the Jefferies said. -report. Jefferies estimates TCS revenue for the quarter will grow 3.5% in constant currency.

In addition, in today’s earnings results, investors will want to pay attention to the demand outlook in key verticals such as BFSI, retail, big deals, margin outlook for FY23, supply-side churn and pressure, and deal pipeline amid a weak macroeconomic environment.

Management comments on growth prospects, client spending and hiring plans will also be followed.

During the first quarter of FY23, TCS posted a 5% year-over-year growth in net profit, but declined 5% quarter on quarter as a result of higher costs – mostly in employee benefits. Travel costs also eat into profits. Sales in constant currency grew by 15.5% year-on-year.

Meanwhile, ahead of the results announcement, TCS shares rose 1.4%, while benchmark indices fell 0.5%.

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