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Published: July 12, 2023
Updated: July 12, 2023

TCS Q1FY24 Earnings Preview: Revenue Growth Expected to Be Muted as Project Delays Impact, EBIT Margin May Contract

Tata Consultancy Services (TCS), India's largest software services exporter, is set to announce its earnings for the first quarter of FY24 on July 12. Analysts anticipate a challenging quarter for the company, in line with the overall weak performance of the IT sector. TCS has been affected by a slower conversion of the deal pipeline, leading to a decline in volumes during a traditionally strong quarter.

Revenue Growth and Cross-Currency Tailwinds:

Despite the challenging market conditions, TCS is expected to see a modest 1.3% quarter- on-quarter (QoQ) growth in USD revenue, factoring in a 30 basis points cross-currency tailwind. The revenue growth is likely to be impacted by project cancellations and delays, contributing to a muted performance.

Margin Contraction and Wage Hike Impact:

The full quarter impact of wage hikes and lower utilisation due to project cancellations and delays are expected to weigh on TCS's margins for Q1FY24. Analysts predict a 100 basis points QoQ decline in EBIT margin, partially offset by operating efficiencies, employee pyramid rationalisation, and cross-currency tailwinds.

Demand Uncertainty and Regional Performance:

The uncertainty in demand observed in March has persisted into the June 2023 quarter for TCS, resulting in project cancellations and postponements. While projects in certain regions have experienced delays, some right-shifted projects have started ramping up in June. Analysts note that Europe and the UK are exhibiting strong growth, while North America is facing more significant weakness.

Analysts' Expectations:

Emkay Global Financial Services projects a 1.3% QoQ USD revenue growth for TCS, considering the cross-currency tailwinds. The brokerage firm also anticipates a 100 basis points QoQ decline in EBIT margin due to wage hikes and weak revenue growth. Motilal Oswal expects muted revenue growth for TCS, with a 140 basis points decline in EBIT margin.

Key Factors to Watch Out For:

Investors will closely monitor several key factors during TCS's Q1FY24 earnings announcement. These include the company's margin outlook, management commentary on the demand environment across geographies, and updates on project delays or cancellations due to macro uncertainties. Additionally, the IT budget for CY23, potential H2 uptick, and demand trends in key verticals like BFSI, Retail, Manufacturing, and Communications will be important to watch.

TCS is expected to face challenges in the first quarter of FY24, reflecting the broader performance of the IT sector. Project delays and cancellations, along with wage hikes, are likely to impact revenue growth and margin contraction. The company's ability to navigate the uncertain demand environment and its strategic response to macro uncertainties will play a crucial role in shaping its performance moving forward.