The Hindu Business Line : TCS: Buy

AS THE demand environment for offshoring continues to be buoyant, we remain bullish on the growth prospects of Tata Consultancy Services in the second half of FY2006. The company's success in bagging two $250-million clients and adding 74 new customers in the latest quarter clearly reflect this trend. Investors could use any weakness to buy into the stock. This is predicated on two factors.

One, TCS' revenue inflow may slacken in the next two quarters as that in the latest quarter was powered by the sequential growth of 26 per cent from the largest client. Excluding this, the top five and top ten clients recorded negative growth.

Two, since TCS' dependence on application development and maintenance remains quite high and it is yet to broadbase its basket of relatively higher margin new service offerings, its bottomline growth may be lower than that of the topline. Even in the latest quarter, though billing rates perked up by over 2 per cent, its operating margins remained flat.

While TCS is still working on broadbasing its service offerings, its strengths lie in three key areas:

Global footprint: TCS has established a wider global footprint than its peers. Its centres in Hungary, Latin America and China have positioned it ahead of competition in bagging large deals such as the recent one from the Dutch financial powerhouse, ABN Amro. And this deal opens up greater opportunities for TCS in the European region.

Domestic presence: TCS, apart from its group companies CMC and Tata Infotech (which is to be merged with TCS), has an established presence in the domestic market. The experience gained by these entities in handling large systems integration projects is likely to be leveraged by TCS effectively in the global and domestic markets. The recent $250-million order bagged by TCS from Tata Teleservices is a pointer in this direction.

Offshore mix: The offshore mix of TCS stands at 37.1 per cent of the total revenues in the latest quarter. Since this is considerably lower than that of its peers, TCS' ability to improve steadily its offshore mix, especially for its long-standing relationships in different revenue brackets, can be a key driver of its margins in the medium term.

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