IT bellwether Tata Consultancy Services (TCS) will kick off the IT earnings season with its Q1 results to be declared on July 9. TCS is likely to report highest growth among its tier 1 peers with a constant currency growth of 3 percent (Infosys is seen at 2.8 percent) aided by robust deal wins. This will help the company report double digit year-on-year growth for the fourth consecutive quarter.
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US dollar growth will likely be 40 basis points lower at 2.6 percent QoQ due to the adverse cross currency impact this quarter.
Q1 is typically a weak quarter for IT companies' margins given most companies roll out wage hikes in April – June period and then there is the additional burden of visa fee hikes.
But this quarter the decline in margins could be more pronounced due to rupees' strength. The rupee averaged 70.4 in the march quarter for the company and this quarter it has been hovering around the 69 per dollar mark.
According to a CNBC-TV18 poll, earnings before interest and tax (EBIT) margins are seen lower at 24.2 percent against 25.1 percent QoQ. On an adjusted basis margins should be down 150 bps on QoQ basis at 24.2 percent against 25.7 percent since previous quarter's margin was depressed due to the Rs 220 crore investment in electoral bonds.
Reported profits are seen down 3.7 percent at Rs 7,820 crore against Rs 8,126 crore impacted by the lower operating profits.
While the company does not explicitly give an annual guidance, we can expect an upbeat outlook from the firm given the strong deal wins and broad based performance. Street expects double digit revenue growth to continue even in FY20 despite the strong base. FY19 CC revenue growth stood at 11.4 percent.
The question is whether the company lowers the aspirational margin guidance of 26-28 percent. The company has missed this guidance for the last three years and considering the currency pressure, it's unlikely they will meet it even in FY20.
Street will also watch closely the banking, financial services and insurance (BFSI) performance. BFSI accelerated in the prior quarter to 11.6 percent CC YoY growth from 8.6 percent in the prior quarter, but the management flagged off weak spending by a couple of large European banking clients and volatile capital markets in the Q4 conference call.
So will this slowdown BFSI spending? Deal wins have been robust, will there be any slowdown due to uncertain macros? These are some of the questions that will be answered tomorrow.
And finally, will there be any change in capital allocation policy post the 20 percent tax introduced on buyback of listed companies in the budget? Based on the FY19 numbers, TCS returned about 110 percent of free cash flow back to its shareholders: Rs 130 billion in dividends and Rs 160 billion in share buybacks.
TCS has been one of the best performing stocks in 2019 in the IT sector with a 15 percent rally against 8 percent for the Nifty IT year-to-date, but its also the most expensive at 22X FY21 PE. In fact, Morgan Stanley says it is the most expensive global IT services stock. While this does not leave much room for error, remember leadership growth and consistency have been the hallmarks of Tata Consultancy Services.