TCS Q4 Preview: Reversal of furloughs to aid sales growth; FY25 outlook on radar

TCS’ consolidated revenue is seen rising 1.4% sequentially to Rs 61,428.4 crore, and profit is expected to grow by 2.7% to Rs 12,050 crore, according to the average of estimates given by 10 brokerage firms.

On a year-on-year (YoY) basis, the software major’s topline and bottomline may rise 3.8% and 5.8%, respectively.

Further, most analysts see a sequential improvement in the profitability for TCS on the back
of operational efficiencies.

Analysts’ estimates of operating margin for the March quarter, calculated as earnings before interest and taxes (EBIT), are in the range of 25.2-27.2%, compared to 25% in the December quarter.

In the December quarter, TCS booked deals worth $8.1 billion, after seeing strong $10 billion worth of deal wins in the preceding three quarters. However, this remained within the company’s guided range of $7-9 billion, and Nirmal Bang Institutional Equities expects deal wins in the March quarter as well to be within this range.

The key monitorables for Dalal Street investors would be an outlook for FY25 for key verticals like BFSI, Hi-Tech, and telecommunications and for its key markets such as the US and Europe, especially after a bleak outlook from peer Accenture Plc last month.

“Commentary around BFSI, Retail, Telecom and Technology will be keenly watched as TCS has the highest exposure in the Tier-1 set with deep relationships in both US as well as Europe, and it has been indicating weakness in these verticals. But was calling out for green shoots in BFSI during the Q3 analysts’ interaction,” Nirmal Bang Equities said.

Here’s summarising the broad expectations of major brokerage firms for the March quarter.

Axis Securities

We expect TCS to report 2.3% revenue growth due to reversal of furloughs and ramp up of the deals. Moderation of subcontracting costs is likely to expand margins by 72 bps. We expect deal wins to be in the range of $7-9 billion in the quarter.

The management commentary on new deal ramp-up, visibility going ahead, and vertical outlook on BFSI, Hi-tech, and Manufacturing are key things to watch out.

BNP Paribas

We expect USD revenue growth of +1.3% q-q (+1.1% q-q in CC) on reversal of furloughs and incremental contribution from the BSNL and other deals. We model a 24 bps sequential increase in EBIT margin on account of operating efficiencies.

Look out for: BFSI vertical performance; medium-term industry demand trends and impact of macro headwinds on demand; commentary on the US and Europe markets and client budgets, deal wins and deal pipeline; revenue growth and margin outlook for FY25; hiring plans; investments in GenAI partnerships.

ICICI Securities

We build in 1.8% USD/1.7% CC QoQ revenue growth, driven by traction in BFSI, retail (consumer business group) and hi-tech from the deals announced in Q4, and contribution from BSNL pass throughs.

We expect EBIT margin to expand by a minimal 30 bps due to absence of furloughs and pyramid optimisation.

We await management commentary on: 1) Enterprise discretionary spending, 2) BFSI traction post many deal signings in Q4FY24, 3) campus hiring and 4) large deals.

Nirmal Bang Institutional Equities

We expect TCS to report 1.0% revenue growth QoQ in CC terms, backed by strong order inflow of the last 12 months. The headwind will likely be continued compression in the existing book of business (albeit much less than in earlier quarters).

It is likely to face a cross-currency tailwind of 50 bps on a QoQ basis. We think that EBIT margin will expand by 60 bps QoQ to 25.6%. With subcontracting costs already at multi-quarter lows and in line with pre-pandemic times (6.8-7.0%), margins will improve on the back of furlough impact reversal from Q3, pyramid restructuring, higher offshoring, higher utilization and driving efficiencies in discretionary expenses.

Things to watch out for: (1) Demand commentary for FY25. While it has stated that FY25 is going to be better than FY24, it has not indicated by how much. (2) Commentary around discretionary spending (3) Update on Generative AI projects, and by when it can reach the aspirational margin range of 26-28%.

Kotak Institutional Equities

Our estimates include $150 million ($60 million or 0.9% incremental contribution QoQ)
from the BSNL deal.

Revenue growth would be driven by ramp-up of large deals, including JLR won in the recent past.

We expect 30 bps increase in adjusted EBIT margin, aided by improvement in employee utilization and employee pyramid management.

The focus will be on TCS' ability to leverage its strengths in 'Run' spends and outperform on revenue growth in FY25.

TCS also has won quite a few mega deals, which can contribute ~2.5% growth in
FY25.

We expect investor focus on—(1) outlook in financial services vertical and any loss of share to insourcing at large clients, (2) state of spending in the impacted North America market and financial services, hi-tech & telecom verticals, (3) pipeline of deals, (4) state of discretionary spending and what would it take to revive the same, (5) impact of GCC ramp-up on growth of companies and (6) levers to defend and increase margins.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)