TCS share price jumps 3%, near 52-wk high on buyback news; Q3FY22 result this week, modest revenue growth eyed

TCS share price soared over 3 per cent to Rs 3,979.90 apiece on BSE on Monday, after the company informed that its board of directors will consider a proposal for buyback of equity shares at its meeting to be held on January 12. This will be the fourth buyback by the company in at least six years. The last buyback of the company, worth Rs 16,000 crore, had opened on December 18, 2020, and closed on January 1, 2021. Over 5.33 crore equity shares were bought back under the offer for Rs 3,000 apiece. In 2017 and 2018 too, TCS had done a similar share buyback. The stock was trading nearing its 52-week high of Rs 3,990 apiece, just 0.2 per cent away.

TCS board will release third quarter, and nine months ended 31 December 2021 results on Wednesday. The board will also consider the third interim dividend. The IT bellwether has fixed 20 January 2022, as the record date for the dividend. Analysts say that third quarter is typically a seasonally weak quarter for IT companies due to furloughs and lower working days, and they expect all companies to report robust on-quarter revenue performance, led by need for faster digital transformation, faster revenue conversion and positively biased pricing. 

TCS Q3FY22 preview: What to expect in Q3?

Nirmal Bang: Analysts at Nirmal Bang expect TCS to report 3.5% sequential CC revenue growth, backed by deals it has won in the last 12 months. They added that total contract value (TCV) needs to be closely watched as the base quarter number was the lowest among recent quarters (US$6.8bn). Accenture’s most recent TCV number at US$16.8bn was the highest ever, beating next best by US$800mn. The research and brokerage firm thinks at least a mid-teen growth should be seen here for TCS. On the margin front, TCS has been indicating short-term pressure from the supply side. While attrition is expected to rise sequentially, Nirmal Bang still thinks that it will be the industry’s best. “But, we think TCS is likely feeling the ‘Accenture’ effect on hiring and cost pressures will peak in FY22 before easing off in FY23. For 3QFY22, we think that margins will shrink sequentially on the back of backfilling costs and possibly lower utilisation,” it added. Greater color on progress in the ‘growth and transformation’ part of its business, especially considering the extremely strong growth seen in discretionary spending (consulting) part of Accenture’s business.

Kotak Institutional Equities: Analysts expect TCS to deliver modest 2.6% sequential growth and low-teens EPS growth. December is a seasonally weak quarter impacted by furloughs. The research firm forecasts broad-based growth. It expects moderation in on-year growth as the benefits of a low base fade away. “We forecast sequential and yoy decline in EBIT margin courtesy of increase in discretionary costs and high cost to backfill attrition. We expect US$7.5 bn of TCV powered by mid-sized deals. We do not expect any skew in TCV from mega-deals,” it added. The research firm expects investor focus on reasons for relative underperformance in growth rates, reasons for lack of large deal momentum and best way to read-through TCV signings, duration over which supply-side challenges will persist and measures to manage the same, levers to defend margins and timeframe when EBIT margins will hit 26-28% band, durability of growth and magnitude of opportunity from the aggressive cloud shift by clients, and indications on IT spending for CY2022E and whether it syncs with the optimism demonstrated by industry analysts. 

Edelweiss: Analysts expect TCS to report USD revenue growth of 3.5% QoQ in constant currency. TCS, being the market leader, is likely to be a key beneficiary of core transformation; accelerating cloud adoption; and digital adoption. Moreover, persistent market share loss of key players such as Capgemini and Cognizant would directly benefit TCS. “Investors may watch out for deal momentum, tenure and pricing; commentary on attrition/supply-side pressure; commentary on demand trajectory by each segment, particularly on Retail, Travel and Product Engineering Services; and hiring plans. We expect the company to provide an update on industry demand trend, client budget and risks if any, and the attrition rate,” it added.

Prabhdas Lilladher: TCS has announced a good number of 11 significant deal wins in Q3FY22 so far. Analysts expect growth of 2.5% QoQ USD growth led by broad-based growth across verticals. Growth is modest given the seasonal weak quarter impacted by furloughs, they said. TCS continued to have strong deal momentum and the research firm expects US$7.5 bn of TCV this quarter. Deal TCV is expected to comprise mid-sized and small deals. It expects slight increase in margins +40bps QoQ led by pyramid optimization benefits and cost optimization measures. “We expect investor to focus on demand trend across verticals; ramp up timeline of large deals; update on pricing; large deal pipeline and reasons for lack of mega deals; supply side issues, hiring trends, wage hikes & its impact on margins ahead; and IT spending budgets of clients for CY22E.

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