TCS Q3 results: Ease in supply-side pressure may lift margins. Key factors to look out

Ahead of Q3 earnings, TCS shares closed at ₹3,212 apiece on BSE down by 2.97% on Friday. TCS is the second largest Indian firm with a valuation of over ₹11.75 lakh crore as of January 6, 2023, after RIL.

TCS has already announced that the board of directors will consider the third interim dividend for FY23 on January 9. The company has fixed January 17 as the record date to determine eligible shareholders for the third interim dividend.

In the first half of FY23, TCS paid a total dividend of 1600% aggregating to ₹16 per share. The company announced ₹8 per share as its first interim dividend which was paid in July 2022 and a similar ₹8 per share as the second interim dividend which was paid in October 2022 for the current fiscal. In FY22, the company paid an equity dividend of 4,300% amounting to a whopping ₹43 per share to its shareholders.

What to expect from TCS Q3 results?

In its Q3FY23 preview report, ICICI Direct on TCS said that the quarter is expected to be hit by furloughs, with furloughs expected to be higher than in the last couple of years. However, margins are expected to improve QoQ due to the easing of supply-side pressure.

Further, the brokerage’s note added, “We expect TCS to report CC QoQ growth of 1.5% for the quarter to be aided by continued deal execution albeit growth will be lower compared to strong H1 on lesser working days. A few pockets of BFSI, hi-tech, and manufacturing may witness weakness in the quarter due to macro concerns as well as energy constraints in the Europe region. We expect dollar revenue growth of 1.2% QoQ accounting for 30 bps cross-currency headwinds. Rupee revenue is expected to grow 3.5% QoQ aided by rupee depreciation. We expect margins to improve 20 bps QoQ aided by the easing of supply-side pressure, moderation of attrition, and rupee depreciation.”

Also, ICICI Direct expects TCS deal momentum to continue while a mix of deals would be skewed towards cost-take-out programs.

Meanwhile, Emkay Global in its Q3 preview report, build in a 0.7% QoQ USD revenue growth for TCS in the third quarter, factoring in 50bps cross-currency headwinds. Also, this brokerage expects the company’s EBIT margin likely to expand by ~70bps QoQ on account of operating efficiencies, employee pyramid rationalisation, and rupee depreciation.

Among key factors to watch out for in TCS earnings as per Emkay are:

– CY23 IT budget

– demand trends in key verticals like BFSI, retail, manufacturing, and communications

– deal intake in Q3

– pricing environment considering high inflation

– margin outlook

– regional markets outlook

– management commentary on any impact on tech spendings from higher energy prices and macro uncertainties/recession

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

Overall, ICICI Direct has factored in a revenue of ₹57,221.2 crore for TCS in Q3FY23 up by 17.1% yoy and 3.5% qoq. EBITDA is seen to rise by 12% yoy and 3.7% qoq to ₹15,049.2 crore. Whereas PAT has been estimated at ₹10,723.4 crore up by 9.8% yoy and 2.8% qoq.

ICICI Direct has set a ‘Buy’ recommendation at TCS shares for a target price of ₹3,630. While Emkay recommends ‘Hold’ on TCS with a target price of ₹3,200.

During the second quarter of FY23, TCS garnered a net profit attributable to shareholders at ₹10,431 crore in Q1FY23 up by 8.4% yoy and 10.5% qoq. Consolidated revenue from operations came in at ₹55,309 crore rising by 18.01% yoy and 4.84% qoq. In the quarter, TCS posted growth across industry verticals and in major markets. Also, its order book stays strong. The company’s IT services attrition was 21.5% on the last twelve months basis. TCS expects the attrition rate to taper down in the second half of FY23.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.