TCS Q2FY23 Preview: Will the wage hike improve EBIT margins that impacted Q1?

Q2 ahead of earnings, TCS shares closed 3,064.95 less every Friday 39.75 or 1.28% on BSE. The market cap of the company is approx. 11,21,480.95 crores.

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

second interim DividendIf declared, will be paid to the equity shareholders of the company whose names appear in 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, as per the TCS filing As per the prescribed record date for this purpose.

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

During Q1 FY23, TCS consolidated PAT jumped 9,478 crore from 9,008 crore in Q1FY22, however, declined from 9,959 crore in Q4FY22. consolidated revenue increased 52,758 crore as compared to 45,411 crore in Q1FY22 and 50,591 crore in Q4FY22.

Further, in Q1FY23, TCS had a net margin of 18%. While its operating margin fell 2.4% in the quarter to 23.1% — reflecting the impact of its annual wage increase from April 1, 2022. However, TCS’ order book remained strong at $8.2 billion. While its IT services attrition was higher by 19.7% based on the previous twelve months.

What to expect from TCS in Q2FY23?

In their IT Q2 Preview report for TCS, ICICI Direct’s Sameer Pardikar and Sujay Chavan said, “Revenue growth momentum is expected to continue on strong deal execution, while margins are expected to improve sequentially as wage growth is yet to come.” TCS is expected to register 3% QoQ growth in constant currency, led by continued improvement in BFSI, healthcare and retail demand, acceleration in digital technologies, and ramp-up of deals. In addition, 150 The cross-currency headwind of bps will increase revenue by 1.5% QoQ in dollar terms.”

In rupee terms, analysts at ICICI Direct said, “Revenue is expected to grow by 4.1% QoQ from rupee depreciation. EBIT margin is expected to improve by only 50 bps QoQ to 23.6%, though in Q1 The wage increase effect is already continuing. Higher attrition drives higher backfilling expenses as well as higher sub-contractors’ costs. PAT is expected to improve to 6.2% QoQ.”

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

Meanwhile, in the second quarter preview report, Sharekhan expects TCS c/c to post 3.1% qoq revenue growth on the back of strong growth in digital services; However, potentially a 220 bps cross currency impact will result in lower reported USD revenue growth of 0.9% qoq.

Further, Sharekhan expects EBIT margins to improve by 53 bps quarter-on-quarter, supported by better absorption and higher utilization of pay revisions, but rising travel costs, higher SGAs, and back-to-office cost concerns. Will continue in Q2FY23.

Furthermore, in their Q2 preview report, research analysts Mukul Garg and Raj Prakash Bhanushali of Motilal Oswal expect TCS’ growth to remain strong in constant currency terms, but the reported growth will be offset by cross-currency movements. There will be some effect.

“Margins in 2QFY23 should see some improvement from the wage hike which impacted 1QFY23 margins,” Motilal analysts said in their note.

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

ICICI Direct analysts expect TCS to hold on to revenue 54,916 crore in Q2FY23 grew 17.2% year-on-year and 4.1% quarter-on-quarter. While EBITDA is expected to come 14,223.2 crore is up 8.5 per cent annually and 6% on a quarter-on-quarter basis. PAT is seen 10,062.3 crore grew 4.6% year-on-year and 6.2% quarter-on-quarter.

In terms of valuation, the above brokerage has a ‘buy’ recommendation on TCS. ICICI Direct sets target 3,785 each on TCS, while Motilal’s target price is 3,530 each. Sharekhan sets target price of 3,650 each forward on TCS.