What to expect from TCS Q3 results? Apurva Prasad answers

"Now as we are looking at profitability and how that can pan out, we do expect that for FY24 while growth is going to slowdown, say sector growth from a constant currency basis of 13-13.5% come down closer to 8-8.5%, we are looking at profit growth which will go back to double digit," says Apurva Prasad, HDFC Securities.


What is your expectation with respect to the commentary coming in from TCS this time around, do you expect them to talk about clients’ budgets really being cut down and if yes, do you see further downside for this sector?
I do not think we are going to be getting specific comments of clients’ budgets because that continues to be an ongoing cycle. In a month from now there is going to be a lot more clarity that the vendors will provide.

I think most of the forward-looking indicators are things which would be very important. So investors would be looking at the deal booking numbers and the kind of hiring intensity. I think these are couple of lead indicators that one should be looking at.


Let us look at the entire IT stack, TCS has outperformed the fall last year, so did Infosys but Wipro and Tech Mahindra are at the lower end of the barrel. What to your mind is in the price for some of the top names?
Let us look at what has driven the factors. If you look at this underperformance by Wipro and Tech Mahindra and if you look at what earnings downgrade has happened during the course of last year it was a lot more sharper in case of Wipro and Tech Mahindra.

They had over close to mid-teens kind of earnings cut from what was estimated at the beginning of the year whereas Infosys and TCS had earnings cut in the range of 3% to 5% during the course of the year.

So I think that was certainly one factor which led to that. And the interesting thing out here is while the anticipation of PE re-rating was in the basis of growth slowing down, the earnings cut that happened was really a function of the operational factors. So it was a margin miss by some of these companies that led to a sharper earnings cut.

Now as we are looking at profitability and how that can pan out, we do expect that for FY24 while growth is going to slowdown, say sector growth from a constant currency basis of 13-13.5% come down closer to 8-8.5%, we are looking at profit growth which will go back to double digit. So profit growth which had come closer to mid-single digit that is going to go back so that is the margin or the operational factor normalising that is going to be supportive. So I think that is the one positive clearly which is expecting to play out over the next few quarters.


With respect to how midcap versus largecap is expected to fare, do you believe that midcaps will continue to lead from the front when it comes to the revenue growth and what happens to valuations then?
Again if you look at midcaps and if you see the sort of draw down that they had last year interestingly there was earnings upgrade that happened in most of the mid-tiers. I mean what it tells you is that the extent of PE re-rating is the sharpest in mid-tier companies and the earnings performance is relatively stronger. So we do expect the earnings outperformance to continue for mid-tier as a pack. So while the earnings growth was 700-800 basis points ahead of tier I, we do expect that to be in the range of 350 to 400 basis points over the tier I IT companies. Also, we expect growth premium to continue in case of mid-tiers which is why the multiples may hold out to where they are and on a peg basis which is adjusting for the earnings growth, they still continue to be fairly attractive.

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