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Mint highlights five things to watch for in TCS’ third quarter (Q3) results. (Mint)
Mint highlights five things to watch for in TCS’ third quarter (Q3) results. (Mint)

TCS’ Q3 earnings: Five things to watch out for

  • Over the past few days, the TCS stock has rallied significantly surpassing its buy back price of 3,000 apiece and nearly touching the $12-trillion market capitalization mark.

BENGALURU : Tata Consultancy Services Ltd (TCS), India’s largest IT exporter by revenue, will be leading the pack in announcing the third quarter earnings on Friday. Analysts expect the revenue momentum of major IT companies to continue in Q3 which is considered a seasonally weak quarter due to year-end holidays and furloughs in the US and Europe, key markets for these firms.

Over the past few days, the TCS stock has rallied significantly surpassing its buy back price of 3,000 apiece and nearly touching the $12-trillion market capitalization mark. TCS’s 16,000 crore share buyback programme closed on 1 January.

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For the second quarter ended September, TCS reported a revenue growth of 3% y-o-y to 40,135 crore compared to 38,977 crore in the year-ago period. The net profit for the second quarter declined 7.05% y-o-y to 7,475 crore.

Mint highlights five things to watch for in TCS’ third quarter (Q3) results:

Revenue growth

TCS had earlier indicated that revenue would recover to near pre-pandemic levels by the third quarter in rupee terms and would be flat on constant currency basis by Q4. Edelweiss Securities expects TCS to report dollar revenue growth of 4.5% q-o-q and 4% q-o-q in constant currency as it expects the IT major to be a key beneficiary of core transformation and higher adoption of cloud and digital. “Moreover, it is a direct beneficiary of the persistent market share loss of key players such as Capgemini and Cognizant," Edelweiss said.

Deal momentum

TCS has witnessed strong deal wins in the recent past and has the balance sheet strength to carve out complex large deals. The recent Transamerica and Postbank deals are a few examples. “Further, considering TCS’s digital prowess and ability to offer end-to-end solution makes it a key beneficiary of robust growth in digital technologies leading to double-digit revenue growth over a sustainable period," ICICI Securities said in a note. The company has also shown its ability to mine clients effectively as it has doubled its list of $100-million clients over FY14-20.

Impact on margins

Overall the sector is expected to gain on the margin front due to decrease in travel and subcontracting costs. With regards to TCS, analysts will monitor the impact on margins due to the acquisitions of Post Bank systems from Deutsche Bank and Pramerica’s Ireland IT operations. “Margins are also expected to be hit q-o-q by wage increases in Q3FY21," Nirmal Bang Equities said. TCS had indicated during the second quarter that wage hikes for the entire workforce would be executed effective 1 October. In addition to this, analysts expect the possibility of another salary hike in the coming months.

Demand from key verticals

For TCS, banking, financial services & insurance (BFSI) is the largest vertical which grew 6.2% sequentially during the second quarter ended September and contributed 31.3% to the company’s total revenues. Krithi Krithivasan, head of BFSI, said in a recent interview with Mint that the sector is witnessing strong from Europe as banks are undergoing digital transformation and renewing their existing partnerships. Analysts will closely monitor growth in this segment as well as other key verticals. “The BFSI space seems to be recovering quite nicely. Need to see if large banks in the US have embarked on core transformation projects," Nirmal Bang Equities said.

Management commentary on outlook

The pace of digital acceleration has increased after the covid-19 pandemic and analysts will closely monitor management commentary on how much of this demand will sustain in 2021 and thereafter when the situation comes back to normalcy. Analysts believe enterprises are currently building a cloud-based foundation and will subsequently look at deploying emerging technologies like artificial intelligence, augmented reality, virtual reality, data analytics and internet of things. A section of analysts are maintaining a cautious stance given the disproportionate expectations and life-time high valuations of the sector. “We expect 2021 to present an acid test for the lofty expectations around covid-led acceleration in cloud/digital adoption and cost savings," ICICI Securities said.

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