TCS Q3 Results Preview: CC Revenue, PAT Growth Likely In Single-Digits; To Declare Dividends

India's largest IT company in terms of market share, Tata Consultancy Services (TCS) is all set to announce its financial results for Q3 of the financial year 2023-24. Ahead of the earnings, TCS share price traded positive on exchanges despite expectations of yet another muted quarter. Prevailing macro uncertainties are likely to squeeze TCS growth. EPIC matter will have a share in curtailing PAT. Nevertheless, EBIT margin is expected to rise, while many analysts expect expansion in headcount as well.

Apart from Q3 earnings, TCS will also declare its third interim dividend for FY24.

At the time of writing, TCS share price traded at Rs 3,716 apiece, up by 0.70% on BSE with a market cap of Rs 13,59,703.49 crore on Wednesday. So far in the day, TCS stock has gained by over 1% on the exchange.

In Q2 of FY24, the Tata Group-backed flagship firm posted a consolidated net profit of Rs 11,342 crore, which is attributable to the shareholders of the company, registering single-digit growths of 2.4% QoQ and 8.7% YoY. Noteworthily, TCS' dollar revenues declined sequentially for the first time in 17 quarters. In constant currency, the revenue growth came in at 2.8% YoY.

Moreover, in Q2FY24, the company registered EBIT of Rs 14,483 crore, up by 2% sequentially, while the EBIT margin expanded by 70 bps to 24.3% in Q1FY24. Notably, margin expansion drives EPS growth of 8.7% YoY. The company's BFSI segment growth contracted by 0.5%, while Communications and media dipped by 2.1% and Technology and services declined by 2.2%.

What to expect from TCS in Q3FY24?

Firstly, TCS will declare yet another dividend for its shareholders. As per the regulatory filing, TCS' board of directors will be meeting on January 11, to consider the declaration of a third interim dividend to the equity shareholders.

For the third interim dividend, TCS fixed January 19 as the record date to determine eligible shareholders. This will also be the same day when TCS shares will trade ex-dividend. In FY24 so far, TCS has paid first and second interim dividends up to Rs 24 (2400%) and Rs 9 (900%) per share to its shareholders.

Coming to the Q3 results, analysts at Equirus Securities in their research note said, "US$ revenue is expected to grow by 0.4% qoq (CC: +0.4%) and we expect around 0.4% qoq growth to be driven by commercialisation of BSNL deal in 3QFY24."

While Equirus' note added, EBIT margins are likely to improve by 28bps qoq largely due to operating leverage, cost efficiencies and net currency benefits. The brokerage expects order intake to remain healthy.

Meanwhile, DOLAT Capital expects CC revenue growth of 1.1% QoQ led by contributions from recent deal wins. The brokerage also believes that TCS OPM to contract by 120bps QoQ due to EPIC impact ($125mn). Expect Adjusted OPM of 24.8%.

TCS has already announced that it intends to make the balance provision of approximately $125 million in its financial statements as an exceptional item, for the third quarter and nine months ending December 31, 2023, due to the EPIC Systems Corporation matter. Hence, TCS is going to bear the brunt of $125 million in its bottom line in the third quarter.

Further, KR Choksey in its report said, "We anticipate TCS Ltd to report revenue growth of 4.3% on a YoY basis and 1.8% on a sequential basis. Lower discretionary spending, slower decision making and challenges in the BFSI and retail segments have curtailed this growth."

Also, KR's note added, "We expect EBIT to surge by 4.8% on a YoY basis and 3.4% on a QoQ basis due to the rise in revenue. The EBIT margin is expected to see expansion of 12 bps YoY and 39 bps QoQ. Net profit is expected to increase by 9% on a YoY basis and 4.2% on a sequential basis."

Among key parameters to watch out for on January 11, KR said 1) Demand in cloud migration and modernization 2) Growth in Gen AI 3) TCV and ACV 4) Headcount expansion.

While DOLAT said key monitorables are -- 1) Outlook of Demand & Client Budgets for FY25, 2) Sustainability of TCV Growth (Expect TTM +16% YoY) & 3) On BFSI/CMT spending.

In Equirus' view, key things to look out for will be -- demand outlook in BFSI, retail, communication, hi-tech and other key segments, impact of macro concerns on-demand/its clients, deal pipeline esp. for large/mega size deals, client decision making and pricing trends, outlook on CY24E/FY25E IT budgets and any new strategy update under the leadership of the newly appointed CEO.

Overall, KR Choksey expects TCS' revenue in Indian rupees to be at Rs 60,740.5 crore, up by 4.3% YoY and 1.8% QoQ. EBIT is seen at Rs 14,973.3 crore, up by 4.8% YoY and 3.4% QoQ. Net Profit is factored to be at Rs 11,821.8 crore, higher by 9% YoY and 4.2% QoQ. Meanwhile, DOLAT expects CC revenue to be at $7,282 million, up 1% QoQ and 2.9%, on the other hand, Equirus expects dollar revenue to be at $7,237 million up by 0.4% QoQ and 2.3% YoY.

On TCS stock price, these analysts recommendations are mixed. KR Choksey recommends to ACCUMULATE for target price of Rs 3,888, while DOLAT suggested to REDUCE for target price of Rs 3,510.

Disclaimer: The recommendations made above are by market analysts and are not advised by either the author or Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.