TCS Q1 Results: Top things to watch out for

Analysts expect

to report revenue growth driven by an acceleration in digital transformation demand and deal ramp-ups from clients onboarded in previous quarters. Among the deal wins reported in Q4 FY22 were Sun Life Financial, Payments Canada, NXP Semiconductor, Ministry of External Affairs at the Government of India, etc.

Further, margin growth could be constricted by wage hikes rolled out during the quarter as well as significant hiring pressure. Analysts have factored 90-110 basis points sequential decline in operating margins to about 24% for Q1.

Deal Momentum
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expects reported total contract value (TCV) to contract on a sequential basis at $8.5 – $9.5 billion in Q1FY2023 ($11.3 billion in Q4FY2022).

However, it is expected to grow by 5-18% on a YoY basis, given rising focus on cost takeout initiatives. Nature of deals will be closely monitored for any shift in customer preference for run-the-business initiatives over long term Horizon 3 type of initiatives. Overall analysts expect strong demand.

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Attrition
During the last quarter, the company reported a peak attrition of 17.4%. However, it had stated that attrition had moderated and was expected to peak in the June quarter followed by stabilization over the next two-three quarters. Being the largest recruiter among IT service companies, TCS’ outlook on hiring will be closely watched by the industry.

Further, the company which hired over 103,000 freshers in FY22 has guided for 45,000 fresher hires in FY23 with the scope to expand that requirement as required. The industry has been recruiting freshers to balance overall talent demand and hence, it is an indicator of any change in client outlook a couple of quarters ahead.

Commentary is also expected on the long-term work from home model.

Outlook
Top software services firms are expected to gain from a cost optimization-led increase in outsourcing work to India, as inflation concerns loom large in the United States and Europe, the Indian IT industry’s largest market. It is expected that a lot of the digital transformation work can shift to India, where talent is still more affordable than in the home markets.

Brokerages expect long-term transformation projects of 3-5 years duration, to hit a slowdown. TCS has a diversified presence across verticals, geographies and service lines and is likely to be the beneficiary of large cost-takeout deals and vendor consolidation deals.