Q3 results: Will TCS be the best performing Sensex stock in 2019?3 min read . Updated: 09 Jan 2019, 10:32 PM IST
Five things to watch out for in Tata Consultancy Services's (TCS) December quarter earnings announcement on Thursday
New Delhi:Tata Consultancy Services Ltd has been an outlier in the first-half of 2018-19: the Mumbai-based information technology (IT) outsourcing company added $936 million in incremental revenue in the six months ended 30 September. This was about $151 million less than the $1.08 billion in new business posted by Infosys Ltd and Wipro Ltd put together for 2017-18.
Employee attrition of 10.9% at the end of the September quarter also implies that India’s largest IT services firm has managed to be the most successful among its peers in retaining employees. It has managed to retain almost all senior leaders, despite the company seeing a change of guard at the top, with Rajesh Gopinathan taking over as the chief executive officer in February 2017.
Besides, TCS’s deal wins of $9.8 billion in the April-September period is the highest among all home-grown IT firms.
Unsurprisingly, all these factors helped TCS shares post impressive gains: company shareholders saw 40% returns in the last calendar year, far higher than the 6% and 25% returns from investing in the benchmark BSE Sensex and BSE IT index, respectively.
Can TCS improve on its performance in 2019? On Thursday, the Mumbai-based IT firm will kick off its earnings calendar by declaring its earnings for the October-December period.
TCS will need $1.9 billion in incremental revenue to clock dollar revenue growth of 10%. Simply put, this means that despite reporting 10% year-on-year dollar revenue growth in both the June and September quarters, it still needs to do $972 million in new business during October-March to end the current financial year with a double-digit revenue growth in dollar terms. This should not be daunting for TCS as the management continues to be buoyant and the company continues to edge past its rivals in winning orders. Unsurprisingly, TCS should report a third consecutive good quarter on Thursday.
Here are 5 things to watch out for in TCS Q3 results to be declared on 10 January:
1. Revenue growth and management commentary for the financial year: TCS is estimated to post sequential dollar revenue growth of 1.4% in the October-December period, according to an analyst at brokerage JM Financial Institutional Securities Ltd. This is less than the 3.2% sequential growth recorded in the second quarter, but then October-December is a weak season for IT firms on account of fewer working days (translating into lower billing hours for engineers deployed by IT vendors). Management commentary on the demand outlook for the fourth quarter and for the next financial year will be crucial.
2. Performance in key industry segments: The first half of the financial year saw TCS, along with its rivals, post modest growth in business from the banking and financial services industry, or BFSI, which accounted for 31% of the company’s total revenue. TCS reported 3.5% sequential constant currency growth in BFSI in the July-September quarter. Management commentary on demand from its banking clients will indicate whether the sector has finally turned the corner.
3. Growth in digital: TCS’s digital business grew 60% year-on-year in the second quarter, after reporting an impressive 45% y-o-y growth in the first. The business now accounts for 28% of the company’s revenue. Accenture still continues to see double-digit growth in its digital business, which constitutes about 60% of its revenue. For this reason, TCS’s growth in the fast-growing digital business will be watched by analysts to see how the company is making itself future-proof.
4. Will TCS share business from individual digital components? Chief operating officer N.G. Subramaniam said in October that the company was considering outlining businesses from some individual components of the digital business. Any such move will be helpful, reckon analysts, as it will help them gauge how TCS is positioning itself against its global peers, including International Business Machines Corp. (IBM) and Accenture Plc, which have started sharing business from artificial intelligence areas and cloud computing. More clarity on how the firm is faring in these growth areas will further reaffirm faith of its shareholders.
5. How resilient is the business model? Concerns over a slowdown in the US economy poses the biggest risk to TCS and its peers. For this reason, last month saw a few analysts quiz the management of Accenture on the resilience of its business model. Accenture shrugged off any such concerns, claiming its heft should allow it to benefit from clients looking to cut on outsourcing spending, should economic growth slows. TCS comments will help analysts gauge the strength of the home-grown IT industry.