Mumbai based information technology services behemoth Tata Consultancy Services (TCS) will flag off the Q1 results season by announcing earnings tomorrow. The company is expected to report around 5 % dip in profits in on a quarter on quarter basis due to pressure across verticals like travel, transportation, energy, retail, and manufacturing segments where clients have faced sever loss of business.
In rupee terms, a consensus of analysts on Bloomberg expects TCS to report revenue ₹38910.5 crore down 2.6% from Q4. The company is expected to report profit of around ₹7694 crore down 5.2% sequentially.
By and large, the street will be looking for commentary on whether Q1 will be the worst hit or the impact will carry on to the next few quarters. Verticals like banking, financial services and insurance (BFSI), healthcare, life sciences and pharma are expected to provide some relief. Pricing pressure and deal conversion rates from the previously announced deals will be watched by the street.
Meanwhile, lower travel expenses, fewer overhead costs owing to Work from Home (WFH), absence of salary hikes and favourable rupee depreciation could provide EBIT margins some respite. EBIT stands for earnings before interest and taxes.
TCS had informed in Q4 that customers across certain businesses were likely to face difficulty in making payments so DSO ( Days Sales Outstanding represents the number of days it takes a company to collect its client payments) will be a key metric to watch.
“We forecast revenue to decline by 6.5% and cross-currency impact of -65 basis points (0.65%). We forecast EBIT margin to decline by 85 basis points (0.85%) sequentially with headwinds from decline in revenue offset by rupee depreciation, lower travel cost, lower variable payout and operational efficiencies," said a preview note by IIFL Securities.
In general, Tier I companies like TCS, Infosys, Wipro, HCL Technologies and Tech Mahindra are expected to post 4-6% sequential dollar revenue decline, while tier II firms may report 4.5-8.1% fall in the June quarter.
“ (For TCS) We expect a dollar revenue decline of 5.6% sequentially (-5.5% QoQ in CC terms) due to the impact of Covid-19. We expect an 80 basis points (0.8%) EBIT margin contraction to 24.3%, largely due to a decline in revenue, partly offset by favourable foreign exchange and cost measures," said an 8th July report on TCS Q1 estimates by BNP Paribas.
In addition, with companies wary of processing large deals during such times, the focus will shift to renewals of existing deals. While TCS is not expected to report a high of the $8.9 billion deal total contract value announced in Q4, the company had informed that many deals were on track. Further focus will be on hiring plans for the year, which TCS is quite vocal about. So headcount, attrition and utilisation numbers will be closely tracked. Commentary will be awaited on the impact and workaround strategies for US H1B visa restrictions as well.
The company is yet to give any clarity on their merger and acquisition plans as their biggest acquisition till date was closed at the height of the last financial crisis.