TCS Q2 results preview: Will EBIT margin improve from wage hike that impacted Q1? Key things to watch

Ahead of Q2 earnings, TCS shares closed at ₹3,064.95 apiece on Friday down by ₹39.75 or 1.28% on BSE. The company’s market cap is around ₹11,21,480.95 crore.

In the October 10 meeting, TCS board of directors will also consider declaration of second interim dividend to the equity shareholders.

The second 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 on Tuesday, October 18, 2022, which is the Record Date fixed for this purpose, as per TCS filing.

In Q1FY23, TCS paid the first interim dividend of ₹8 per Equity Share for the current financial year. The total equity dividend percentage stood at 800% for the June 2022 quarter.

During the first quarter of FY23, TCS consolidated PAT jumped to ₹9,478 crore from ₹9,008 crore in Q1FY22, however, declined from ₹9,959 crore in Q4FY22. Consolidated revenue rose to ₹52,758 crore compared to ₹45,411 crore in Q1FY22 and ₹50,591 crore in Q4FY22.

Moreover, in Q1FY23, TCS’ net margin stood at 18%. While its operating margin dipped 2.4% yoy to 23.1% in the quarter — reflecting the impact of its annual salary hike from April 1, 2022. However, TCS’ order book continued to be robust at $8.2 billion. While its IT services attrition was high at 19.7% on the last twelve months basis.

What to expect from TCS in Q2FY23?

In their IT Q2 preview report, for TCS, Sameer Pardikar and Sujay Chavan analysts at ICICI Direct said, “Revenue growth momentum is expected to continue on strong deal execution while margins are expected to improve sequentially as wage hike is behind now. TCS is expected to register 3% QoQ growth in constant currency led by continued improvement in demand from BFSI, healthcare, and retail, acceleration in digital technologies, and ramp-up of deals. Further, cross-currency headwinds of 150 bps would lead to revenue growth of 1.5% QoQ in dollar terms.”

In rupee terms, ICICI Direct analysts note said, “revenue is expected to increase 4.1% QoQ aided by rupee depreciation. EBIT margins are expected to improve by only 50 bps QoQ to 23.6% despite the wage hike impact already factored in Q1 on continued in high attrition pushing higher backfilling expenses as well as higher subcontractors costs. PAT is expected to improve by 6.2% QoQ.”

According to ICICI Direct, demand outlook in key verticals like BFSI, Retail CPG, and margin outlook for FY23 to be key things to watch in the earnings.

Meanwhile, in the Q2 preview report, Sharekhan expects TCS to report strong 3.1% q-o-q revenue growth in c/c due to robust growth in digital services; however, a likely 220 bps cross currency impact to result in lower reported USD revenue growth of 0.9% q-o-q.

Further, Sharekhan expects EBIT margins likely to improve by 53 bps q-o-q supported by better absorption of wage revision and higher utilization but rising travel cost, higher SGA, and back-to-office cost concern to continue in Q2FY23.

Also, in its Q2 preview report, Mukul Garg and Raj Prakash Bhanushali research analysts at Motilal Oswal expect TCS growth to remain strong in terms of constant currency, but reported growth will have some impact from cross-currency movements.

Analysts at Motilal in their note said, “Margin in 2QFY23 should see some recovery from wage hikes that impacted 1QFY23 margin.”

Further, Motilal expects strong demand commentary to continue. Also, deal wins and the impact of the macro weakness on growth will be among key monitorables.

ICICI Direct analysts expect TCS revenue to be at ₹54,916 crore in Q2FY23 up by 17.2% yoy and 4.1% qoq. While EBITDA is expected to come at ₹14,223.2 crore higher by 8.5% yoy and 6% qoq. PAT is seen at ₹10,062.3 crore up by 4.6% yoy and 6.2% qoq.

In terms of valuation, the above brokerages have set a ‘buy’ recommendation on TCS. ICICI Direct sets a target of ₹3,785 apiece on TCS, while Motilal has a target price of ₹3,530 apiece. Sharekhan sets a target price of ₹3,650 apiece on TCS ahead.