The June-September quarter is generally a strong quarter for the IT industry in general and for Tata Consultancy Services (TCS), India’s largest IT services provider, in particular, but low ramp-ups, sluggish growth in the largest vertical of banking and finance and a slow start to the year are expected to hamper the second quarter.
TCS said that it will announce its results first, on Thursday 13, October, and the announcement will set the tone for the industry. The company is expected to deliver US dollar revenue (constant currency) growth in the 2.5-2.8 per cent range (based on reports of four brokerage house) and margin improvement will be moderate. At these numbers, Q2 FY17 will be one of the slowest Q2 US dollar revenue runrate for the company in the last three years.
TCS reported sequential growth rate for second quarter (constant currency) of 3.9 per cent, 4.6 per cent and six per cent for Q2 FY16, Q2 FY15 and Q2 FY14, respectively.
TCS though does not provide guidance. The street will focus on management commentary on demand outlook, especially the demand environment for the second half of the year, which is generally softer than the first half.
More importantly, the street will look to get more details on the announcement made by the company last month that some clients are holding back discretionary spending, particularly in the banking, financial services and insurance vertical in the US, resulting in sequential loss of momentum. The company also characterised customer outlook as being ‘abundant caution’.
Analyst are also expecting that cross-currency will be one of the headwinds for TCS this quarter. “Cross-currency headwind from 13 per cent exposure to British Pound (depreciated 8.5 per cent versus US dollar) will be partly offset by about four per cent exposure to Japanese yen (appreciated five per cent versus US dollar). We expect margins to improve by 45 basis points quarter on quarter, largely led by normalisation of wage hike rolled out in the previous quarter and partly offset by cross currency headwind,” said a note from Kotak Institutional Equities.
The street will also keenly look at details of growth in the digital landscape, especially after Accenture attributed its recent growth numbers to the digital deals that it has been winning.