TCS Q1 Preview: Mixed Quarter! Wage Hikes May Impact EBIT Margins; Interim Dividend Ahead, Record Date Fixed

Tata Group's flagship and India's largest IT player, Tata Consultancy Services (TCS) will be announcing its first quarterly results for FY25 on July 11. This Tata IT stock will also reward investors with an interim dividend for FY25, for which a record date has been fixed to determine eligible shareholders. TCS is expected to report a mixed quarter with revenue getting a push from strong orders, however, EBIT margins have seen to decline due to wage hikes.

Axis Securities expects TCS to report revenue growth of 1.6% QoQ, aided by deal ramp up, and longer working days. However, the brokerage expects wage hikes during the quarter to likely result in margin contraction to the tune of 107bps.

Meanwhile, JM Financial expects TCS constant currency revenue growth to be around 1.4%, with 30bps cross
currency headwind translating into 1.1% QoQ USD rev growth.

JM also said, "Wage hike is the major margin headwind for TCS. We however expect its impact to be partially offset by operational efficiencies - utilisation, pyramid etc."

Also, the brokerage believes that a one-time penalty (up to USD 194mn), due to an adverse judgement by a US district court, could impact reported earnings. However, the quantum of impact is not yet built though.

Moreover, Kotak Institutional Equities estimates include US$150 mn from the BSNL deal, marginal growth compared to the Mar-24 quarter for TCS earnings in Q1.

Kotak said, " Revenue growth would be driven by the ramp-up of strong order signings in the earlier quarters. We expect weak revenues in financial services and telecom. We forecast a 140 bps qoq decline in EBIT margins due to wage revision and likely a decline in utilization rates. We forecast a 140 bps yoy increase in EBIT margins."

Kotak also expects TCS to record US$11-12 bn of deal wins, driven by the high rate of closures of cost take-out deals. The renewal component in deals will be higher, in its view.

Furthermore, as per Kotak, the focus will be on TCS' ability to leverage its strengths in 'Run' spending and outperform on revenue growth in FY2025E. TCS also has won quite a few mega deals which can contribute ~2.5% growth in FY2025E.

To investors, Kotak advised to focus on -- (1) the outlook in the financial services vertical and any loss of share to insourcing at large clients, (2) the 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.

Ahead of Q1, TCS's share price on July 1oth traded at Rs 3988.60 apiece, marginally down on BSE with a market cap of Rs 14,41,934.51 crore. The stock's 52-week high and low is at Rs 4,254.45 apiece and Rs 3,250 respectively.

Apart from Q1 results on July 11, TCS' board of directors will also consider interim dividend for FY25. The company also fixed the record date.

TCS said, "The interim dividend if declared, shall be paid to the equity shareholders of the Company whose names appear on the Register of Members of the Company or in the records of the Depositories as beneficial owners of the shares as of Saturday, July 20, 2024, which is the Record Date fixed for the purpose."

During Q4FY24, TCS TCS posted a consolidated PAT of Rs 12,434 crore, attributable to owners of the company, registering a growth of 9.1% YoY. Sequentially, the growth in the bottom line came in at 12.44%. Consolidated revenue from operations stood at Rs 61,237 crore in Q4FY24, rising by 3.51% from Rs 59,162 crore in the same quarter a year ago. While revenue was up by 1.08% from Rs 60,583 crore in Q3FY24.

In constant current, revenue growth was at 2.2% year-on-year in Q4FY24. The growth was led by Indian business which registered an upside of 37.9%. In segment-wise, TCS recorded healthy growth in manufacturing at a staggering 9.7% YoY, followed by 7.3% growth in Energy, Resources and Utilities, and 1.7% growth in the Life Sciences & Healthcare business.