TCS Q1 expectations
- TCS, Infosys revenue decline to be lower than peers
- Management outlook and comments on speed, scale of recovery to be watched
- Lack of negatives could possibly be viewed positively: Analysts
Mumbai: Earnings season for Q1 FY21 begins with Information technology (IT) behemoth TCS announcing its results today. April-June quarter (Q1) will see full impact of lockdown /slowdown across various geographies for TCS, however, analysts believe the management commentary will be keenly watched out for by investors.
ET NOW Poll suggests, TCS to see decline in revenues due to full impact of COVID-19 lockdown. Expect constant currency revenue de-growth of 5.6% QoQ. Revenue seen at $ 5130 Mn vs $ 5444 Mn, down 5.8% QoQ due to pull back in spending among directly impacted verticals. Expect cross currency hit of 40-70bps QoQ. EBIT margin to dip 70bps QoQ to 24.4%. EBIT margin to decline led by decline in revenue.
Analysts also believe that headwinds from lower utilization, moderate pricing pressure, operating leverage hit to be slightly offset by rupee depreciation against the dollar, lower travel and lower variable pay. Net Profit seen at Rs 7680 cr vs Rs 8049 cr, down 4.6% QoQ. Deal bookings likely to slow down. Large $ 1.5+ bn deal from Phoenix group likely to be added in Q1.
Management commentary will be keenly watched out for by investors especially in terms of scale and speed of recovery. Comments on deal pipeline, pricing, rebates, extension of payment terms and timelines by which decision making would normalize will be watched. Growth in digital services and outlook amidst slowdown, demand trends across verticals especially BFSI, Retail will be watched.
For the entire IT sector including TCS results management outlook will be the key trigger. ‘’Our interactions suggest that investors expect a QoQ acceleration from Q2 FY21 itself; any commentary that supports such a recovery will be likely viewed as a positive, while commentary that suggests limited acceleration would likely be a negative catalyst. We do not expect companies to provide guidance for FY21/CY20 along with Q1 earnings”, says UBS analyst.
Analysts expectations for majority IT players indicate decline in revenue and margins for Q1.
Infosys, TCS revenue decline to be lower than peers and they will outperform peers. While HCL Tech, Tech Mahindra will see considerable impact on revenue and margins.
“We estimate the top-5 Indian IT players—Infosys, TECHM, HCLT, TCS and Wipro—to report 3.7-7.5% QoQ revenue decline in Constant Currency in Q1FY21. We expect margins of the top- 5 companies to decline 20-110bps QoQ despite the USD/INR benefit. We believe Q1FY21 is the peak pain quarter as already lockdowns have been relaxed to a certain extent in India and abroad as well. While new deal wins will be challenging until economies open up completely, we believe Q2FY21 onwards revenue growth will stabilise and Q3/Q4 will probably be quarters of recovery and that too stronger than historical averages. We will keep an eye on: i) demand commentary on new deal wins; ii) digital growth; and iii) commentary on cloud migration opportunity”, says Sandip Agarwal from Edelweiss.