TCS Q3 results: Supply side pressure could easily push up margins. key factors here

Ahead of Q3 earnings, TCS stock closed on 3,212 on the BSE on Friday, down 2.97%. TCS is the second largest Indian firm with high valuation 11.75 lakh crore by January 6, 2023 after RIL.

TCS has already announced that the board will consider a third interim Dividend on 9 January for FY23. The company has fixed January 17 as the record date for determining the shareholders eligible for the third interim dividend.

In the first half of FY23, TCS paid 1600% total dividend 16 per share. the company announced 8 per share as its first interim dividend to be paid in July 2022 and so on 8 per share as second interim dividend to be paid in October 2022 for the current financial year. In FY22, the company paid an equity dividend of 4,300%, which is huge 43 per share to its shareholders.

What to expect from TCS Q3 results?

In its Q3FY23 In a preview report, ICICI Direct on TCS said the quarter is expected to be hit by furloughs, with furloughs expected to be higher than in the past few years. Margins, however, are expected to improve QoQ due to easing supply side pressure.

Further, the brokerage’s note said, “We expect TCS to report CC QoQ growth of 1.5% for the quarter, aided by continued deal execution, though growth was driven by a stronger H1 on fewer working days.” The quarter could see weakness due to macro concerns in some pockets of BFSI, high-tech, and manufacturing as well as energy crunch in the Europe region. We expect a 30 bps cross-currency headwind of 1.2 %QoQ expect accounting dollar revenue to rise. Rupee revenue expected to grow by 3.5% QoQ aided by rupee depreciation. We expect margins to improve 20 bps QoQ, which Reduction in supply side pressure, reduction in friction and depreciation of rupee will help.”

Furthermore, ICICI Direct expects the TCS deal momentum to continue, while the deal mix will be tilted towards cost-cutting programmes.

Meanwhile, Emkay Global, in its Q3 preview report, projected 0.7% QoQ USD revenue growth for TCS in the third quarter, including a 50 bps cross-currency headwind. Also, the brokerage expects the company’s EBIT margin to expand by ~70 bps QoQ due to increased operating efficiencies, employee pyramid rationalization, and rupee depreciation.

According to MK the key factors to watch in TCS Earnings are:

– CY23 IT budget

– Demand trends across key verticals like BFSI, Retail, Manufacturing and Communication

– Deal intake in Q3

– Pricing environment in view of high inflation

– Margin Outlook

– Regional Market Outlook

Management comment on any impact on technology spending from higher energy prices and macro uncertainties/recession

– Any delay/postponement/cancellation of projects due to macro uncertainties, high inflation, and supply-chain disruptions

Overall, ICICI Direct has factored in revenue 57,221.2 crore for TCS in Q3FY23 up 17.1% yoy and 3.5% qoq. EBITDA witnessed a growth of 12% yoy and 3.7% qoq 15,049.2 crores. While PAT is estimated 10,723.4 crore by 9.8% yoy and 2.8% qoq.

ICICI Direct sets target price of ‘Buy’ recommendation on TCS shares 3,630. While MK has advised ‘Hold’ on TCS 3,200.

During the second quarter of FY23, TCS earned a net profit attributable to shareholders 10,431 crore in Q1FY23 up 8.4% yoy and 10.5% qoq. consolidated revenue from operations 55,309 crore growing 18.01% yoy and 4.84% qoq. During the quarter, TCS registered growth across industry verticals and key markets. Also, its order book remains strong. The company’s IT services offtake was up 21.5% on a trailing twelve months basis. TCS expects attrition rate to come down in the second half of FY23.

Disclaimer: The views and recommendations given above are of individual analysts or broking companies and not of Mint. We advise investors to do due diligence with certified experts before making any investment decision.