All eyes are on Tata Consultancy Services Ltd (TCS) today, as the company is set to announce its June quarter results after market trading hours and kick-start the Q1 earnings season.
According to CNBC TV18, TCS is expected to report highest revenue growth among its tier-I peers, with a constant currency growth of 3% over the previous quarter aided by robust deal wins. Though, the US dollar growth may be 40 basis points lower at 2.6% due to the adverse cross-currency impact this quarter.
IT firms generally struggle with margins in the June quarter as most companies roll out wage hikes during the April-June period and then there is the additional burden of visa fee hikes. However, the margin pressure could be more pronounced in Q1 of FY20 as the rupee was comparatively stronger versus the dollar. The rupee had averaged 70.4 per dollar in the March quarter, while it has been trading around the 69 per dollar mark in the June quarter.
According to a CNBC-TV18 poll, TCS’ earnings before interest and tax (EBIT) margins are seen lower at 24.2% in the June quarter against 25.1% in the previous quarter ended March. On an adjusted basis, margins could be down as much as 150 basis points sequentially, since previous quarter’s 25.7% margin was depressed due to the investment of Rs 220 crore in electoral bonds.
Reported profits are seen down 3.7% at Rs 7,820 crore in the June quarter against Rs 8,126 crore in the previous quarter, mainly due to lower operating profit.
TCS does not explicitly give an annual guidance, but the Street would be expecting an upbeat outlook from the firm given the strong deal wins and broad-based performance. It would be interesting to see whether the company still aims for double-digit revenue growth in FY20 despite a strong base. TCS posted constant currency revenue growth of 11.4% in FY19.
Also, the company’s aspirational margin guidance of 26-28% will be under the lens. TCS has missed the margin guidance for the last three years and, considering the currency pressure currently, it's unlikely it will meet this target even in FY20.