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Tata Consultancy Services (TCS) is set to kick-start the IT sector earnings season for the second quarter of fiscal year 2024 on October 11.
This was a crucial quarter for the IT services bellwether, given the internal restructuring of its verticals and new vertical head appointments -– the first major leadership rejig under new CEO K Krithivasan.
While there were strong deal wins, especially among the top three IT companies --- TCS, Infosys and HCL Tech -- analysts expect the quarter that ended in September 30, 2023, to remain muted amidst the uncertainty in demand and continued caution on discretionary spending.
Analysts expect EBIT margins for most IT companies, including TCS, to improve this quarter as its wage hike cycle impact was taken in Q1. TCS is likely to see an improvement of 50-60 bps, touching an estimated 23.6 percent, according to CNBC-TV18’s poll.
Here are the five themes to watch out for in TCS’ Q2 performance:
Revenue growth
According to CNBC-TV18’s estimate poll, rupee revenue growth on a QoQ basis is expected to come in at 1.3 percent at Rs 60,160 crore, compared to Rs 59,381 crore in Q1.
Profit after tax (PAT) is estimated to be up by 0.8 percent QoQ at Rs 11,162 crore. Like the previous couple of quarters, this quarter, too, will remain subdued. All eyes will be on the management commentary on whether the worst is behind.
Demand outlook
TCS reported some of the largest new deals in 2023 as well as multi-year renewals with existing clients. Some of the major deals from the last quarter include the $1 billion deal from Jaguar Land Rover (JLR) and a $1.1 billion deal from the UK’s workplace pension scheme NEST. Driven by these numbers, analysts estimate TCS’ order book for Q2 to come in the range of $11-13 billion, up from the company’s guidance of $7-9 billion.
According to analysts at Kotak Institutional Equities, the management’s commentary on the revival of discretionary spending, outlook on macroeconomic challenges, cost takeout and vendor consolidation deal pipeline, geographic trends, especially in North America, and the impact of GCC ramp-ups will be looked into.
Sectoral trends
According to analysts at ICICI Securities, TCS gets nearly 53 percent of its overall revenue from sectors like BFSI, retail and telecom, which “continue to see macro pressures and have consequently slashed their discretionary spends while putting older projects under greater scrutiny.”
While deal flows have steadied, analysts believe growth will not be very democratic and will depend on a mix of verticals, services and the company’s ability to win large deals amidst exposure to affected customers.
A lot of the deals this quarter have also seen customers increasingly looking for embedded artificial intelligence (AI) and generative AI elements into it. Hence, IT companies, too, are aggressively betting on these features to win deals. For instance, TCS started a unit called TCS AI Cloud, combining all its public cloud units and Al initiatives.
Return to offices
Last month, TCS sparked off an industry-wide debate after it decided to end work from home, making it compulsory for certain teams to be in offices for five days a week. The IT sector major employs over 600,000 people, signalling an end to the work-from-home era for the IT industry in India.
This could lead to an increase in overhead costs on the campuses, and a fear of near-term increase in attrition as angry employees may consider resigning. The management’s views on this and how it is assessing the situation will be important.
Earlier, under former CEO Rajesh Gopinathan, TCS had announced its 25X25 vision. As per the model, by 2025, only 25 percent of its associates will need to work out of facilities at any point of time. Also, employees will not need to spend more than 25 percent of their time at work.
Hiring slowdown
A direct reflection of slowing demand in the sector was the significant reduction in quarterly net headcount addition. In Q1, TCS was the only company to have a positive net addition of 523 people. Four out of the five IT majors in India, Infosys, HCLTech, Wipro, and LTIMindtree, reported a fall in headcount in Q1FY24, with the total numbers plunging by over 20,000 as compared to the same quarter last fiscal year.
TCS was also the only IT company to share its fresher hiring target of 40,000 for FY24. Any change or update in these plans will be closely monitored. TCS, however, had delayed onboarding of lateral hires by three months due to project commencement delays. CHRO Milind Lakkad had said last quarter that all of these offers will be honoured.