Preview: Will TCS sustain its outperformance?

Tata Consultancy Services (TCS) is likely to report a 3.1 percent on quarter increase in net profit and a compression in its margins when it announces its July-September earnings today.

According to a CNBC-TV18 poll, net profit is seen Rs 3,382.7 crore versus Rs 3280.5 crore in the previous quarter.

The dollar revenue is seen rising 4-4.5%, higher than its peers.

Volume growth during the quarter is seen declining from 5.3 percent in the first quarter. International volume growth in the previous quarter was even higher at 5.9%.

In comparison, HCL Technologies witnessed a volume growth of 4.5% and Infosys 3.8%.

Like its peers, TCS’s margins on earnings before interest and tax (EBIT) are also likely to be under pressure.

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[caption id=“attachment_495965” align=“alignleft” width=“380”] 
Like its peers, TCS’s margins on earnings before interest and tax (EBIT) are also likely to be under pressure. Reuters[/caption]

“We have built in 60bps decline in EBIT margin for TCS largely due to 1) capacity build-up, 2) high sub-contracting cost due to onsite project ramp-ups, 3) high growth in emerging markets (APAC and Africa) which fetches lower margins and 4) investment in new type of deals which requires in-sourcing and/or upfront payment (such as Friends Life deal),” IDBI Capital said in a pre-earnings note.

The management has already indicated that at constant currency, EBIT margins could come in a bit weaker than the 27.5 percent witnessed in the previous quarter.

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“Realisation at TCS should be down on a weaker mix (more emerging market led growth) and the ramp up of some structurally lower pricing/margin deals (where currency was used as a pricing lever and included some people transfer as well),” ICICI Securities said.

TCS should see the currency benefit being offset by a weaker mix and ramp-up of lower margin deals, it added.

The company is likely to have incurred lower forex losses in the quarter.

What to watch for:

According to ICICI Securities, the key factors to look for in the earnings are i) Performance in BFSI segment and in Europe, where TCS has a higher exposure than peers, ii) commentary on discretionary spends and iii) pricing commentary.

IDBI Capital Markets also expects the company to revise its hiring target for FY13 and campus offers for FY14. In an earlier interview to NDTV Profit, CEO N Chandrasekaran had however ruled out any such possibility. He said TCS is looking at hiring 50,000 in FY13.

Edelweiss expects the management’s commentary on retail, insurance, manufacturing and hitech to be robust, but those on telecom to be cautious.