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TCS to grow 5.1% qoq in Apr-Jun – Kotak Securities

Tata Consultancy Services Ltd, which has been disappointing analysts for the last three quarters with sequential growth of 2.0-2.5%, is likely to see a break-out in its upcoming results with a 5.1% jump in revenue, Kotak Institutional Equities said.

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It also projected a 2.3% jump for Infosys, which had seen its revenue fall by 0.4% last quarter.

For TCS, growth will be 4.6% in constant currency terms, while it will be 1.8% for Infosys.

“Revenue growth for Indian IT was modest in 4QFY14 due to pockets of weakness in key markets like North America. We expect acceleration in revenue growth in 1QFY15 as clients’ IT spending picks up seasonally along expected lines. Further, markets like North America, retail, manufacturing, etc., which were a drag in the previous quarter, have recovered too,” it said.

“Pick-up in discretionary spending as evidenced by Accenture’s results and market share gains in Europe are encouraging signs. These will help drive solid growth and sustain mid-to-peak cycle multiples for the sector. While concerns of rupee appreciation and its impact on margins/earnings are valid, we do not see a case for sustained structural appreciation,” it added.

Kotak expects profit margins to decline 110-210 bps due to impact from rupee appreciation, wage hikes and higher visa costs.

It may be noted that Infosys has been reporting a rise in its margins for several quarters, despite poor revenue growth. This will be Infosys’ first results announcement since its announced that Vishal Sikka of SAP would lead the company. Kotak does not expect Infosys to raise its growth guidance for the full year from the current projection of 7-9%, and it expects a big dip in margins.

“Infosys will benefit from the seasonal improvement in business as well, but spillover of some of the challenges it faced in 4QFY14 will mean it will trail peers in terms of growth. We expect margins to decline 210 bps on account of rupee appreciation, wage hikes and visa costs. We expect the company to grow at the lower end of the range in FY2015,” it said.

A similar decline in margin is projected for TCS as well. “We build in 210 bps decline in operating margins due to wage hikes and rupee appreciation. Operational efficiencies and calibrated investments will help partly offset some of the margin decline.”

Kotak also expects TCS to report a one-time exceptional charge of Rs 2 bn related to depreciation. TCS is moving to a uniform straight-line method of accounting for depreciation across the company and its subsidiaries and is also adjusting its assumptions on useful life of assets.

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