Day: January 7, 2025

Tata Consultancy Services (TCS), the largest Indian information technology firm, is slated to release its third quarter (Q3FY25) earnings on Thursday, January 9, 2025.  

Brokerages tracked by Business Standard estimate the revenue of TCS to grow by 6.3 per cent year-on-year (Y-o-Y), on an average, to Rs 6,445.63 crore as compared to Rs 6,060 crore a year ago. On a quarter-on-quarter (Q-o-Q) basis, revenue is forecasted to grow marginally by 0.24 per cent. The revenue is likely to be impacted by furloughs and the decline of revenue contribution from the BSNL deal which peaked out in Q2.

Further, they expect TCS’ adjusted profit after tax (PAT) for the quarter ended December 31, 2024, at an average of Rs 1,241.96 crore, an increase of 5.2 per cent as compared to Rs 1,180 crore a year ago. On a quarterly basis, the ajusted PAT is expected to grow at an average of 3.4 per cent. 

Analysts say investors should focus on the management’s commentary on near-term demand and pricing environment, BFSI, and deal wins.

Here’s how analysts of various brokerages expect TCS to fare in Q3: 

PL Capital: Analysts at PL Capital expect TCS to report 0.4 per cent Q-o-Q constant currency (CC) growth while in the US dollar terms, the revenue is initiated to a decline of 0.4 per cent Q-o-Q with a currency headwind of 80 basis points (bps). 

Meanwhile, Q3 revenue will be impacted by furloughs and a decline in revenue contribution from the BSNL deal which peaked out in Q2.  

The brokerage expects the revenue at Rs 6,446 crore as compared to Rs 6,058 crore a year ago, a growth of 6.4 per cent Y-o-Y and Rs 6,426 crore a quarter ago. 

Earnings before interest and tax (Ebit) margins are expected to improve by 70 bps Q-o-Q despite the headwinds of furloughs, as Rupee depreciation and lower contribution from BSNL would support margins. They expect deal wins to remain steady in the band of $7-9 billion.

The brokerage expects Ebit margins at 24.8 per cent for Q3 as compared to 24.1 per cent in Q2FY25.  

Motilal Oswal: The brokerage expects growth to be subdued at 0.4 per cent Q-o-Q CC and revenue to be impacted by furloughs; however, client-specific challenges are likely to normalise in 3Q.  

As per analysts at Motilal Oswal, EBIT margins are likely to improve by 40 bps, driven by talent development, training, and operational efficiency.  

Motilal Oswal anticipates Ebit margins at 24.5 per cent as compared to 24.1 per cent Q-o-Q.  

Further, the deal pipeline should remain healthy and there is some good momentum in Banking, Financial Services, and Insurance (BFSI), but weakness in UK/Europe and manufacturing needs to be monitored. 

HDFC Securities: As per the brokerage, TCS’ growth will continue to be led by the regional markets segment, evident in recent large deal wins. However, the analysts at HDFC Securities have lowered earnings per share (EPS) estimates due to the absence of a mega deal. 

EPS for FY25E is at 30.8x as compared to 32.8x in FY24. 

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The gross domestic product (GDP) estimates for financial year 2024-25 (FY25) have been maintained at 6.4 per cent, the Ministry of Statistics said on Tuesday. Despite a dull first half (H1) of FY25, the ministry expects an uptick in agricultural and industrial activity, along with resilient rural demand in the H2 will keep India on a growth path towards achieving 6.4-6.8 per cent expansion by the end of the financial year. 

“Real GDP has been estimated to grow by 6.4 per cent in FY 2024-25 as compared to the growth rate of 8.2 per cent in Provisional Estimate (PE) of GDP for FY 2023-24. Nominal GDP has witnessed a growth rate of 9.7 per cent in FY 2024-25 over the growth rate of 9.6 per cent in FY 2023-24,” Ministry of Statistics & Programme Implementation said in its official release.  

Improvement in agriculture

The agriculture and allied sector has shown a significant improvement, with Real GVA growth estimated at 3.8 per cent in FY25, a marked increase from the previous year’s 1.4 per cent. 

This suggests that the agricultural sector has experienced stronger growth, potentially due to favourable monsoons, improved crop yields, or policy measures aimed at boosting rural incomes and agricultural productivity.  

Construction and service sectors

The construction sector and the financial, real estate & professional services sector are also expected to experience strong growth. The construction sector’s Real GVA is projected to rise by 8.6 per cent, reflecting the ongoing infrastructure development, housing demand, and urbanisation trends.  

Similarly, the financial, real estate & professional services sector is expected to grow by 7.3 per cent, indicating a strong performance in finance, real estate development, and business services, driven by both domestic and global demand.

Growth in private consumption

Turning to expenditure patterns, Private Final Consumption Expenditure (PFCE) at constant prices has experienced a growth of 7.3 per cent in FY25, a significant increase compared to the 4 per cent growth in the previous year.  

PFCE is a key indicator of domestic consumption, reflecting the spending behavior of households, and this growth highlights an improvement in consumer confidence, spending power, and overall economic recovery.  

Govt expenditure up

Similarly, government final consumption expenditure (GFCE), which refers to government spending on goods and services, has rebounded strongly with a growth rate of 4.1 per cent in FY25, up from 2.5 per cent in the previous financial year. 

This uptick in government expenditure could be attributed to increased public investments in infrastructure, social programs, and welfare schemes aimed at stimulating economic activity.  

Previous FY25 growth projections

The actual GDP growth rate for the last financial year, FY24, was 8.2 per cent. The Economic Survey report, released in July 2024, projected a growth of 6.5 to 7 per cent for the financial year ending March 2025. In its November review, the finance ministry revised its GDP projections to around 6.5 per cent, flagging the Reserve Bank of India’s (RBI) monetary policy stance among the reasons for the slowdown in H1 of FY25.

RBI revises GDP projections

In its last monetary policy committee meeting, the Reserve Bank significantly lowered its growth projection for FY25 to 6.6 per cent from an earlier estimate of 7.2 per cent. The new estimates came after India’s GDP for the second quarter (Q2) fell to a seven-quarter low of 5.4 per cent against its own projection of 7 per cent. It also marked the third consecutive quarter of slower growth in India. Furthermore, at 5.8 per cent, inflation in November 2024 was over the RBI’s target of 4 per cent. 

The central bank, however, contended that rural consumption, government expenditure, investment, and strong services exports would lead to a pickup in GDP in the third and fourth quarters of this financial year.

Quarter-wise GDP projections of the RBI were: 

Q1 FY25: 6.9 per cent

Q2 FY25: 7.3 per cent

Q3 FY25: 6.8 per cent (estimates)

Q4 FY25: 7.2 per cent (estimates) 

This announcement comes three weeks ahead of the central government’s release of the Union Budget for 2025-26.

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PVR Inox shares hit a 44-month low of Rs 1,154, declining 8 per cent on the BSE in Tuesday’s intra-day trade in an otherwise firm market on growth concerns. The stock price of India’s largest multiplex chain operator has slipped 23 per cent from its previous month high of Rs 1,620, touched on December 5, 2024. It has fallen below its previous low of Rs 1,203.70, touched on June 4, 2024. The stock is trading at its lowest level since May 2021. 

This comes in the backdrop of India reporting at least five cases of Human Metapneumovirus (hMPV) on Monday. The virus  causes respiratory illness and was recently identified in China and Malaysia as well. Two cases were detected in Karnataka, two in Tamil Nadu, and one in Gujarat. All five confirmed cases have been found in children, the Business Standard reported.

PVR Inox is the market leader in multiplex space in India. Currently, it operates 1,747 screens in 111 cities across India and Sri Lanka. PVR Inox derives its revenue mainly from box office ticket sales, supplemented by high-margin food and beverage sales, on-screen advertising and convenience fees from online bookings. 

In one year, PVR Inox has underperformed the market by falling 24 per cent, as compared to the 9 per cent rise in the BSE Sensex. 

PVR Inox has long been synonymous with premium movie experiences and innovation in the cinema industry. However, in recent years, the company has encountered several challenges including the COVID-19 pandemic, a weak content pipeline, competition from streaming platforms, rising costs and debt and financial stress that have disrupted its growth trajectory.

The COVID-19 pandemic caused prolonged closures of cinemas, leading to a significant loss in revenues for the company. Even after reopening, audience footfalls remained low due to lingering health concerns and the preference for at-home entertainment. Recovery post-COVID has been slower than anticipated, with the cinema-going habit of many consumers disrupted permanently. 

The growing popularity of streaming services like Netflix and Disney+ Hotstar poses a challenge, potentially reducing cinema attendance as viewers shift to at-home streaming options. While PVR’s merger with Inox aimed to create scale benefits and operational synergies, integrating two large entities like PVR and Inox has been complex, with challenges in aligning operations, cultures, and management practices. These have delayed the realisation of anticipated benefits.

Independent and regional single-screen cinemas offering cheaper tickets and concessions have captured a portion of the market, particularly in Tier II and Tier III cities. The high price point of tickets and food and beverage items has also led to criticism by movie-goers, and deterred middle-class consumers, particularly for non-peak screenings, according to analysts. 

In the first half (April to September) of the financial year 2024-25 (FY25), PVR Inox had reported a consolidated loss of Rs 114 crore, due to lower operating income. The company had posted profit after tax of Rs 163.3 crore in the same period last fiscal. Total income declined 14.76 per cent year-on-year (Y-o-Y) to Rs 2,850.50 crore from Rs 3,340 crore in H1FY24. Earnings before interest, taxes, depreciation, and amortisation (Ebitda) was down 53 per cent Y-o-Y at Rs 206.90 crore and margin contracted to 12.6 per cent from 22.1 per cent.

The management has reposed confidence that Q3 will be the best quarter of FY25, led by a strong content pipeline as there is significant room for growth in occupancy levels in CY25. The company’s Ebitda margins are expected to improve further, with increased occupancy levels and operating leverage. The management continues to take proactive measures to control its fixed costs, particularly rentals. Additionally, it is also renegotiating rental agreements with developers of poor performing malls. 

After undertaking the restructuring exercise, the current screen count for the company stands at around 1,700. Ventura Securities expects the screen count to gain traction and reach around 1,900 by FY27E (total capex of Rs 400-450 crore). The brokerage firm believes that content creators are responding by catering to the changing taste of the audiences and the recent successes of films like Stree-2, Pushpa-2, etc., are suggestive of green shoots with regards to occupancies. In the brokerage’s opinion, the worst is over for the sector. It initiated coverage on the stock with a contranium Buy-call on PVR.

Ventura Securities has conservatively estimated lowest occupancies of 26 per cent, merger average ticket price (ATP) upward revisions of 2-3 per cent compound annual growth rate (CAGR), and food & beverages (F&B) spend per head growth of 6-7 per cent CAGR. Even with these conservative estimates, the company’s revenue is expected to grow at a CAGR of 10.5 per cent to Rs 4,850 crore by FY27E, driven by sales of movie tickets, food & beverages, advertisement Income and convenience fees, the brokerage firm said. 

Over the same period, the brokerage firm anticipates PVR Inox’s Ebitda/net earnings to grow at a CAGR of 13.2 per cent/25.4 per cent to Rs 1,200 crore/ Rs 750 crore, respectively. Ebitda and net margins are set to expand by 40 bps to 24.7 per cent and 75 bps to 15.5 per cent, driven by expanded reach and operational efficiencies. 

There is a clear management intent to use the free cash flows (FCF) generated to retire the entire debt by FY29E. Consequently, FY27E return ratios ROE/ROIC are expected to improve to 1.8 per cent/27.2 per cent respectively. “Given the recent disappointing performance, our estimates model very conservative assumptions and hence any significant traction can lead to significant upside risk to our estimates. Premium offerings, and faster traction in occupancies coupled with higher than estimated ATP pricing are the primary drivers,” Ventura Securities had said in its initiate coverage report dated December 19, 2024.

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