News Hour: TCS Q2 results: Five things to watch out for

Tata Consultancy Services BSE 1.85 % is set to announce its second-quarter results on Friday. The results of India's largest software services firm will be watched keenly for pointers to the outlook for the whole IT industry.

Its performance will be a key indicator to how some conflicting trends and commentary emerging from the sector should be read Mindtree recently cut its growth forecast, even as technology researcher Gartner said the Indian IT industry could well outperform the 11%-14% growth target set by industry body Nasscom.

Here are five things to watch out for:

Growth and management commentary on demand

Since TCSBSE 1.85 % does not give guidance, management commentary on the demand environment will be a key pointer to how the company will perform in the second half of the fiscal.

With the financial services industry in the US and Europe under stress, TCS needs to grow business from clients in other industries such as retail and healthcare to maintain its industry-leading growth rate in the coming quarters.

In the previous quarter, all the industry segments had shown sequential growth with retail, telecom and BFSI (banking financial services and insurance) showing significant growth. ETIG estimates sales to grow 4.5% sequentially to Rs 15,538 crore.

Profit margins

TCS has consistently delivered an operating profit margin of more than 27% in the last four quarters. If it maintains the same performance, it is likely that it will beat second-ranked Infosys, which saw its operating profit margin fall to 26.3% on the back of salary increments and higher sub-contracting costs.

However, TCS is also expected to feel the heat of higher sub-contracting costs because visa rejection is forcing Indian IT firms to hire more sub-contractors in the US. ETIG estimates TCS net profit at Rs 3419.2 crore, representing a 4.2% rise over the previous quarter.

New client and deal wins

Could be an area of concern for investors if Infosys' second-quarter performance is an indicator. InfosysBSE 0.34 % saw one of the lowest client additions in the second quarter at 39 and reduction of clients contributing over $300 million, $100 million and $90 million annually.

With large technology outsourcing deals worth billions of dollars coming up, management commentary on TCS's deal pipeline would be keenly watched.
(Sou