TCS: Hold



The IT sector has clearly struck the growth path, going by the consistent show by top-tier IT players. In this context, market leader TCS has clearly been on a mission as it continues to report superior growth over peers on a regular basis.

Growth across its key verticals, steady increase in large customer additions and robust performance in parameters such as volumes and utilisation, favour TCS.

In April this year, the company acquired a French IT services company Alti. This should expand its footprint in Europe and in the enterprise solutions space.

The TCS stock has appreciated by over 37 per cent from the previous recommendation (at Rs 1,540) made in March this year.

This has been on the back of strong growth and the rising premium for quality stocks in choppy markets.

At Rs 2,120 the share trades at 21 times its likely per share earnings for FY14. At this level, the TCS stock is not cheap compared with the broader markets or the 15-18 times that its peers such as Infosys, HCL Technologies and Wipro trade at.

Large-cap stocks and companies with a stable earnings outlook appear to be an apt choice in the current market scenario.

But given the rich valuations it trades at, while investments already made in the TCS stock, can be retained, fresh exposure should be considered only on corrections linked to the broader market. Investors need to have a horizon of at least two years for significant capital appreciation.

In the first half of FY14, the company’s revenues rose 27.8 per cent over the same period in the previous fiscal to Rs 38,964 crore, while net profit increased 25.5 per cent to Rs 8,473 crore. TCS’ growth in revenues and volumes over the past 8-12 quarters has been much ahead of the industry and higher than peers such as Infosys, Wipro and even consistent performers such as HCL Technologies.

Its net margin, at 21.7 per cent, is among the highest in the industry.

As a large software services provider, TCS has been increasingly focused on being a full services provider rather than taking up deals that requires it to deliver only a part of its offerings.

Big deals

This strategy has led to larger deal wins and helped it ramp up revenues from existing clients significantly.

In the last one year, the number of clients in the $100-million category increased by eight to 22 currently, while those in the $50-million bucket too improved by a count of eight to 53.

Nielsen, with which TCS had signed a $1-billion deal a few years back, increased the size to $2.5 billion and enhanced the tenure of the deal. This is testimony to the company’s ability to mine its existing clients well.

All-round growth

All key verticals of the company such as BFSI, Manufacturing, and Retail and Distribution have been growing at or faster than the company’s overall revenue rate.

Even the troubled telecom vertical has been delivering over the past few quarters.

The demand is strong across its offerings — application development and maintenance, engineering services, testing, enterprise solutions and business process outsourcing.

Key geographies such as the Americas and the UK continue to grow.

Thus, the company’s growth has been broad-based and there has not been any specific weak link that could pull it down, at least for the foreseeable future.

TCS’ acquisition of Alti would help it derive greater traction in Europe.

As this region is a tad conservative towards outsourcing and, more so, to offshoring compared to the US, TCS would be looking to tap Alti’s local presence in France, Belgium and Switzerland and gain from IT spends.

It would also increase its presence in the enterprise solutions space, where it is not such a large player as Infosys.

TCS’ utilisation rate, at 83.4 per cent, is among the highest compared with large-sized peers.

This indicates that the company has sufficient visibility on volumes and revenues. Attrition, at 10.9 per cent, is the lowest among peers.

Any pricing pressure in large deals can threaten margins. TCS’ realisations do slip every now and then, but the company has indicated that pricing will continue to be stable.



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