TCS Q1 Preview: Flat Revenue Growth Expected, Margins Seen Falling on Wage Hikes

Tata Consultancy Services (TCS) is expected to report largely flat revenue growth for the June quarter of FY27, with margins likely to decline due to the annual wage hike, according to separate preview reports by Nuvama Institutional Equities and Motilal Oswal Financial Services (MOFSL).

According to Nuvama, TCS is likely to deliver 0.1% constant currency (CC) quarter-on-quarter revenue growth, with the outlook affected by macro headwinds and revenue cannibalisation, as the BSNL extension deal is yet to begin. Nuvama pegged the company's revenue at $7,606 million for the quarter, marginally lower than $7,621 million in the previous quarter.

MOFSL, in its report, said it expects TCS to report flat CC revenue growth, with steady execution in the BFSI and consumer segments likely to be offset by continued softness in communications and cautious discretionary spending in manufacturing and North America. MOFSL estimated TCS's IT services revenue at $7,579 million for the quarter, a decline of 0.6% quarter-on-quarter.

Margins Expected to Decline on Wage Hikes

Both brokerages attributed the anticipated margin decline to the company's annual wage hike. Nuvama expects TCS' EBIT margin to fall 160 basis points quarter-on-quarter to 23.7%, citing the impact of the full quarter wage hike, partly offset by currency tailwinds. MOFSL projected a sharper decline of 140 basis points, estimating the margin at 23.9% and said the fall would largely be due to the wage hike effective April, partly cushioned by productivity improvements, operational efficiencies and favourable currency movement.

Nuvama added that TCS is expected to maintain its FY27 margin aspiration band of 24-26%.

According to Nuvama, TCS has continued to report strong deal-win momentum in recent months, with announcements including a renewed strategic partnership with Marks and Spencer, an AI-led business transformation contract with SKF, an expanded partnership with the Euroclear group, and deals with Nokian Tyre, Canada Life, Tottenham Hotspur Football Club, and Elopak ASA.

MOFSL said TCS's momentum in artificial intelligence-led services, along with recent acquisitions such as Coastal Cloud and ListEngage, is expected to support the company's medium-term growth.

Nuvama said it would watch management commentary on the outlook for the US macro environment and growth in the BFSI segment. MOFSL said it would track commentary on the overall demand environment, integration synergies from recent acquisitions, traction in AI-related revenue and the scalability of deals.

Stock Rating and Target Price

MOFSL has a "Buy" rating on TCS, with a target price of ₹2,350, implying an upside of 16% from the current market price of ₹2,032. The brokerage revised its earnings per share (EPS) estimates for TCS downward by 1.3% for FY27 and 2.9% for FY28.

MOFSL also noted that TCS stock is currently trading close to one standard deviation below its historical price-to-earnings level, and around 46% below its 10-year average valuation.

Both brokerages are part of a broader set of previews for the June quarter results of Indian information technology companies, with the earnings season for the sector expected to begin in the coming weeks.