TCS Q1 preview: Can IT giant create more magic? Know how much profit is expected

Investors sentiment on IT-giant Tata Consultancy Services (TCS) was extremely negative over the last few trading sessions. This was to such an extent that the stock price tumbled over 3.24% in just Tuesday's trading session. This comes ahead of the company's first quarter announcement for fiscal FY20. TCS Q1 financial performance will be anytime today. On Sensex, the stock was trading at Rs 2117.95 per piece down by Rs 58.15 or 2.67% at around 1334 hours. TCS share price even touched an intraday high and low of Rs 2175 per piece and Rs 2105.55 per piece respectively. What will be keenly eyed, is whether the company can once again clock big net profit gains - this is especially so in revenue, as it was highest in 15 quarters during Q4FY19. The good thing for investors is that TCS has continued to perform better compared to its peers. Looks like investors are in wait and watch mode over TCS. 

How will TCS Q1 be?

Talking about overall IT financial performance in Q1FY20, Ruchi Burdev analyst at BoBCaps, "We expect steady sequential growth for TCS and Infosys (INFO) in Q1FY20, but a revenue decline for Tech Mahindra (TECHM) and Wipro (WPRO)."

Experts at Edelweiss Securities said, "We expect TCS to deliver 2.8% cc revenue growth (2.6% in USD terms owing to cross currency headwinds). INR appreciation and wage hikes are epected to push EBITDA margins down by 50bps QoQ. Commentary on the macro environment, spends by retail clients, growth in digital, and BFSI demand in North America and Europe will be key monitorables."

Madhu Babu, analyst at Centrum believes TCS to  report the strongest performance in IT space. He said, "TCS could deliver 3% constant currency QoQ revenue growth and remain strongest in the pack,"

Babu added, "We expect TCS’ revenues to grow by 3% QoQ in constant currency for Q1FY20. Cross currency would be a headwind of 50bps QoQ. Hence, we expect reported USD revenues to grow by 2.5% QoQ. Traction in the BFSI vertical (~30.8% of total revenues) and Retail & CPG vertical (~16.2% of total revenues) would be keenly watched. Traction in Digital business, which accounts for 31% of the company’s revenues, would also be watched. We expect EBITDA margin of 25.3% for Q1FY20E, which represents a drop of 120bps QoQ on a sequential basis. We expect EBIT margin for Q1FY20 at 24%, down 110bps QoQ. Company had one-off expenses related to electoral bond in 4QFY19. Hence, the quantum of moderation in EBIT margins would be lower despite headwinds from wage hikes and visa costs. "

Also, analysts IDBI Capital in their research note said, "We forecast CC revenue growth of 3.5% QoQ led by continuation of ramp-up of large deals and forecast cross-currency headwind of ~40bps. We forecast EBIT margin (adjusted for contribution to electoral bonds in Q4FY19) to decline by ~150bps QoQ impacted salary increase, visa cost and INR appreciation partly offset by efficiency gains."

In IDBI Capital's note, one would watch out for 1) FY20 commentary on client budgets; 2) Commentary on Financial services vertical; 3) Ramp-up of large-deals, large deal wins, commentary on deal pipeline and growth in large clients; 4) Outlook on EBIT margin amid INR appreciation; and 5) Growth in Digital services and commentary on ramp-up of recent deals during the result announcement. 

That said, IDBI Capital eyes for Rs  7,809.9 crore net profit in Q1FY20, which will be down by 3.9% on quarterly basis but higher by 6.4% on yearly basis. Meanwhile, revenue is seen at Rs 38,669 crore up by 1.7% qoq and 12.9% yoy. Constant Currency revenue will egde up by 3% qoq and 10.1% yoy to $5,559.

Q4FY19 highlights:

In this quarter, TCS posted a 17.7 per cent YoY growth in consolidated net profit at Rs 8,126 crore for the March 2019 quarter. This was against a net profit of Rs 6,904 crore in the year-ago period. 

Revenue of the software giant grew 18.5 per cent in the quarter under review to Rs 38,010 crore from Rs 32,075 crore in the corresponding period last fiscal.
For the full year (2018-19), net profit was higher by 21.9 per cent at Rs 31,472 crore, while revenue increased 19 per cent to Rs 1,46,463 crore.

In that quarter, Rajesh Gopinathan, chief executive officer and managing director at TCS, said, "This is the strongest revenue growth that we have had in the last fifteen quarters. Our order book is bigger than in the prior three quarters, and the deal pipeline is also robust. Despite macro uncertainties ahead, our strong exit positions us very well for the new fiscal."

Should you buy TCS shares?

Burde said, "We stay selective and prefer TCS (BUY, TP Rs 2,390), HCLT (ADD, TP Rs 1,260), LTI (BUY, TP Rs 2,100) and NITEC (BUY, TP Rs 1,500)."

While Babu said, "TCS is trading at 22.2x FY21E EPS and is relatively expensive among Tier 1 IT peers. We retain Add with a TP of Rs 2,300/sh. TCS could announce buyback in October 2019 as the earlier buyback was completed in September 2018. Net cash on TCS balance sheet stand at Rs496.5bn (~6% of Mcap) as on 4QFY19."

On current price level, TCS still can be a buy stock on Dalal Street.