TCS results on Tuesday: Will Q1 numbers hold good news for IT?

June quarter earnings sessions kicks off on Tuesday. IT majors Tata Consultancy Services and Infosys will report their numbers on July 9 and July 12, respectively.

There are expectations that margins of top five IT players will remain under pressure this quarter due to wage hikes, high attrition rates, visa cost and a stronger rupee.

Analysts say earnings estimates have somewhat moderated across the board at current currency levels due to softness in June quarter margins. The rupee appreciated by around 0.50 per cent for the quarter ended June, 2019.


Brokerage firm Edelweiss Securities said Tata Consultancy Services (TCS), Infosys and HCL Technologies are likely to post a healthy 2.8-2.9 per cent QoQ revenue growth in constant currency term for Q1 of FY20, while Wipro and Tech Mahindra may post flattish revenue growth.

“We expect cross-currency headwinds owing to a resurgent dollar to dent dollar revenue growth rate by 20-25 basis points QoQ,” Edelweiss said in a report.

Market participants should zero in on commentary on digital growth rates, BFSI and initiatives to manage attrition in case of Infosys, while in the case of TCS, growth in the retail vertical, commentary on the macro environment, retail spends and growth in digital and BFSI demand in North America and Europe will be key monitorables.

An update on Mode-3 margin improvement and outlook on IMS and IBM IPs will be keenly monitored for HCL Technologies.

Edelweiss, which prefers IT largecaps due to their execution capabilities, ability to invest in capabilities and better valuations, said midcaps need to maintain a balance between profitability and retaining talent.

Foreign brokerage Credit Suisse expects another weak quarter for IT companies on the margin front. However, it sees TCS leading Q1 growth, followed by Infosys. The global financial services firm expects a weak quarter for Tech Mahindra and HCL Tech.

Motilal Oswal Financial Services expects the EBIT margin across the top tier to shrink by 50-160 basis points, with contraction of over 100 basis points at TCS, Infosys and Tech Mahindra.

It said the situation is no different for tier-II firms, where barring MphasiS, Hexaware and Zen Technologies, margins may contract by over 100 basis points for the remaining companies.

Considering the likelihood of a soft start to the year on the profitability front, market experts believe Infosys’ FY20 margin will likely be closer to the lower end of its 21-23 per cent guided band. TCS has been saying currency depreciation has been embedded in its business model as a factor and is budgeting for margins.