Positive commentary from TCS on stable Q2 will be a huge positive: Edelweiss Financial Services

We are building a 50 bps impact on cross currency basis for TCS, says Sandip Agarwal, Lead Analyst - IT, Internet and Telecom.

What are your expectations from TCS? What would you be looking at in the management commentary?
We are expecting a 3.5% decline quarter on quarter on a constant currency basis; around 4% in dollar terms. As you rightly said, this quarter is not about how much growth they see. So even if the number is 1% worse or minus 5% than what we are anticipating, I do not think that moves anything. The key thing will be what is their commentary on the future or the outlook.

If they say that quarter two onwards we will see some stability returning, then it will be a very big positive statement because global agencies have been forecasting a 7-8% decline for the full year. So if quarter two is stabilising, then we will end up the year between 0% to 2% plus or minus and it will be a much better situation than what people are expecting. So I think that is one thing which has to be seen and will be key. Also, I would like to give some caution that we are still in the pandemic and we are not out of it. So expecting a big positive commentary will not work because it is not that everything has normalised. So it will take time but even if they say things will normalise in Q2, it is a very-very positive commentary for the whole sector and TCS itself and that is what I think.

What is your outlook when it comes to the impact of the cross currency headwinds on the financials this quarter? Of course we are going in with expectations that deal wins will likely be muted. What kind of commentary are you expecting to hear on that front?
Whoever has higher GBP exposure will have more impact. Between our coverage universe, we are saying 0 bps to 50 bps negative impact. TCS has more exposure to GBP and the rest of the world currencies which have depreciated. So obviously we are building in a 50 bps impact on cross currency for TCS. On the outlook front, I believe it is a leader in the whole space. While new deal wins will be very difficult in a situation where your salespeople are not able to go outside, I think even a stable Q2 kind of guidance will be a very-very soothing thing to do.

The EBIT margin is expected to decline and there is going to be that headwind due to lower utilisation of pricing pressure and pressure in the legacy business. Do you think it could be perhaps mitigated by the currency tailwinds and the cut in the variable compensation payouts? What are you pencilling in on that parameter?
There are few things which are going to save cost. As you rightly said, the variable cost and all those things have not been that much. Moreover, you have a very high travel cost which is generally there, which is around 270 to 340 bps and that probably will be non-existent in the current quarter. You also have currency tailwind, which is quite significant. But having said that, we are also going to have a big dip in utilisation.

If the revenue growth is going to be down by 4%, the utilisation will also be down substantially which means it will be hard for only currency and currencies are generally on a day to day billing and all that. So it will be a little hard to compensate for things fully assuming 60-70-80 bps kind of dip in margin. It is a fair assumption and I do not think it will be more than that and I think it is a fair call which will be recovered in the coming quarters when volumes come back.