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Five things to watch in TCS' September quarter earnings

Country's largest software services firm TCS is expected to log 2.2 per cent sequential decline in its net profit despite Q2 being the seasonally strongest quarter for the Industry.

Aprajita Sharma  New Delhi     Last Updated: October 13, 2016  | 08:00 IST
Five things to watch in TCS' September quarter earnings
Photo: Reuters

Country's largest software services firm Tata Consultancy Services (TCS) is all set to kick off the September quarter earnings season on Thursday, but on a tepid note. The IT firm is expected to log 2.2 per cent sequential decline in its net profit despite Q2 being the seasonally strongest quarter for the Industry.

Brokerage Kotak Institutional Equities, in fact, believes Q2FY17 will be the weakest September quarter for Indian IT firms in the past eight years.

TCS, in a mid-quarter review, issued a profit warning last month saying it expects a "sequential loss of momentum" as clients, especially in the banking, financial services and insurance (BFSI) segment, are putting discretionary spends on hold.

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"Based on the data at the end of August 2016, the company has characterised customer outlook as one marked by 'abundant caution', with some holding back of discretionary spending -particularly BFSI vertical in the US - resulting in sequential loss of momentum." the company said in a filing to BSE.

In this backdrop, below are five things that investors will watch out when TCS details its Q2 numbers on October 13:

1) Revenue growth

Brokerage Edelweiss Securities expects TCS' dollar revenue growth to rise 1.6 per cent on a sequential basis and 2.5 per cent in constant currency terms. This implies the cross-currency headwind of 90 bps led by 8 per cent depreciation of British pound, offset by 5 per cent appreciation of Japanese yen versus US dollar. The company had reported 3.1 per cent QoQ revenue growth in CC terms in Q1FY17.

"Discretionary weakness at BFSI clients in the US is the key contributor to slowing revenue momentum for TCS in what is otherwise the seasonally strongest quarter for the company," said ICICI Securities in a research note.

2) Margins

Brokerage Motilal Oswal Securities believes the pullback in discretionary spending will weigh on margins, derailing the company at least for FY17, from its targeted margin band of 26-28 per cent. The brokerage expects EBIT margin to come in at 25.4 per cent QoQ (+40bp QoQ), below the lower end of the guided range.

Edelweiss Securities also said that margin commentary will not be optimistic due to lack of substantial margin levers.

3) Outlook on BFSI vertical

Given TCS itself took down near-term growth expectations on account of getting less business from BFSI clients, investors would like to know how the entire Brexit issue will pan out. Now that UK Prime Minister Theresa May is all set to kick off Brexit process by March 2017, it is only logical that the management comes out with commentary on medium-term impact of Brexit in coming quarters.

"Changed economic conditions due to Brexit could impact TCS the most on account of the 14 per cent exposure to British pound and weakness in some of its BFS accounts," said Edelweiss Securities.    

4) Digital and automation drive

Software industry body Nasscom believes by 2025, 60 per cent of overall technology and business services enterprise spend will be on digital technologies, translating to CAGR of 22 per cent on digital and -4 per cent on traditional IT spend over 2014-25. It will be interesting to watch how much traction the new digital initiatives (automation/solutions) have gained in the September quarter. Digital revenues had grown 6.4 per cent QoQ in the June quarter.

"We believe significant traction from new technologies like digital and IoT (Internet of Things) will drive large part of incremental growth, while annuity-based maintenance and implementation works will complement overall growth in FY17," said Edelweiss Securities for the entire IT sector.

5) Growth in troubled segments

Investors will also track how the troubled segments such as energy, telecom and insurance have performed in Q2. Among the geographies, outlook on revenues from Europe, UK and especially Japan will be watched out.   

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