TCS Kicks Off Q1 Earnings With Demand, Deal Wins In Focus | Preview

Information technology companies are set to report their earnings for the three months to June, with Tata Consultancy Services Ltd. kicking off the season on July 11. The discretionary demand from clients of such firms is under the focus.

Yet, there may be a breather as Accenture Plc did not cut its guidance in its third quarter results. The Dublin-headquartered tech firm—whose earnings often serve as a weather vane for Indian IT—reported its highest bookings in the 'Managed Services' segment, indicating stable demand if not an uptick.

Factors to watch out for the Indian IT firms include clients' budget outlook, trends in discretionary demand and traction in deal wins' conversion to revenue. Here's what brokerages expect in the first-quarter earnings of India's software services firms.

Although IT companies have guided for weak discretionary demand, Accenture's earnings offer a ray of hope. CLSA said discretionary demand is expected to stabilise while clients would await a trigger to increase such spends.

Most brokerages expect Infosys Ltd. and HCL Technologies Ltd. to maintain their FY25 revenue and margin guidance. JPMorgan, however, sees an uptick in HCLTech's FY25 revenue growth. Wipro Ltd. is expected to guide anywhere between (-)1.5 to 2% for Q2 FY25 revenue growth over a quarter ago in constant currency terms.

TCS, according to the consensus of six brokerage estimates, will report a revenue growth of 1.3% and operating margin of 23.9%. Margin is expected to be subdued amid employee wage hikes. Deal wins are projected at $9 billion.

What to look out for:

• Progress in ramp-up of deal with state-run telecom service provider Bharat Sanchar Nigam Ltd.

• Trends in banking and financial services and retail verticals.

Follow the link for the latest updates on Tata Consultancy Services Q1 results: TCS Q1 Results Live Updates

Infosys will report constant currency revenue growth of 2.4% in the first quarter and a margin of 21.4%, as it leads growth in this quarter, the consensus of brokerages said.

The brokerages attributed it to the reversal of a one-time impact from last quarter and incremental benefit from Project Maximus, an initiative to boost margin across five segments of the Bengaluru-headquartered firm.

Jefferies expect large deal wins to be in the range of $2.5-3 billion. Lower travel and visa costs and higher utilisation could support margins.

What to look out for:

• FY25 constant currency revenue growth and margin guidance.

• Traction in BFSI vertical.

HCLTech's first-quarter revenue, in constant currency terms, is expected to contract by 1.9%, amid seasonal headwinds and offshoring of a large deal. Margins, expected to come in at 17.1%, may benefit from the absence of wage hikes.

What to look out for:

• FY25 constant currency revenue growth and margin guidance.

• Traction in the engineering, research and development (ER&D) and in products and platforms segments.

Wipro is expected to report a constant currency revenue growth of 0.1% in the IT services segment and margin of 16.4%

Its quarterly performance is expected to remain stable amid higher utilisation and no seasonal headwinds. Ramp-up of recent large deal wins of $500 million in the telecommunications vertical will boost revenue.

CLSA foresees a buy-back announcement by the company and initial signs of success under the new chief executive officer Srinivas Pallia. While Morgan Stanley remains positive on Wipro's consulting business Capco, it believes that the stock run up in the past few sessions leave limited room for upside.

What to watch out for:

• Constant currency revenue growth guidance for the second quarter of FY25.

• Senior leadership churn.

• Outlook under the new CEO.

Tech Mahindra Ltd. is expected to report constant currency revenue growth of 0.3% and margin of 8%. Revenue are expected to remain weak due to seasonal headwinds from the subsidiary Comviva, while margins are expected to improve.

Faster expansion under the new management is expected, and the company aims to bring subcontracting costs as a percentage of revenue down to single digits. Strength in the non-telecom business is expected to offset weakness in the telecom segment. Jefferies expects deal wins to be in the range of $500-600 million.

What to look out for:

• Updates on three-year margin expansion plan.

• Growth under the communications business.

• Subcontracting costs as a percentage of revenue.

LTIMindtree is expected to report constant currency revenue growth of 2% in the quarter ended June based on average of six brokerages and margin of 15.1%. The company hinted at an uptick in discretionary spends by clients recently. Jefferies and Kotak Institutional Equities expect the company to lead growth along with Infosys.

What to watch out for:

• Commentary on path to double digit growth and levers to achieve 17% margin.

• Management churn at the senior level.

• Succession plan after CEO term ends in December 2025.

• Factors behind uptick in discretionary spends.

Infosys and LTIMindtree are expected to lead in sequential revenue growth in constant currency at 2.5% and 2%, respectively. While the metric is expected to contract for HCLTech, Wipro's IT services and Tech Mahindra are expected to report flat growth.

TCS may report the biggest sequential margin dip of 145 basis points, owing to wage hikes. HCLTech is also expected to report a sequential dip in margin by 52 basis points amid seasonality and increased visa costs. The metric at Infosys and Tech Mahindra is projected to improve by 130 and 55 basis points, respectively, due to a lower base in the last quarter.

The target price for TCS by the six brokerages indicates an upside of 3.3%.

Most brokerages are bullish on Infosys with an average target price of Rs1,656 and a flat upside. Though HCL Tech is expected to report weak numbers, none of the six brokerages have a 'sell' rating. The average target price indicates an upside of 0.8%

The target price for Wipro and Tech Mahindra imply a downside of 13.2% and 10.9%, respectively. For LTIMindtree, the downside is 17%.

TCS kicks off the earnings season by announcing its numbers on July 11, With HCLTech following on July 12. First-quarter earnings of LTIMindtree, Infosys and Wipro are scheduled for the next week.