Stock Fundamentals

TCS: IT’s the best - Buy

K Venkatasubramanian | Updated on December 02, 2018

The company’s robust growth prospects and solid digital services place it ahead of its peers

As the market runs into a potentially volatile and unpredictable phase with several state polls and the general elections scheduled over the next few months, investors would be better off taking conservative bets on established and solid names.

In this regard, India’s largest software services provider, TCS, with robust growth prospects and solid digital services focus appears to be the best bet from the IT top-tier pack.

Industry-leading revenue growth, healthy addition of large-sized clients, a rapidly-expanding digital pie and solid traction in key verticals are positives for the company. TCS has among the lowest attrition rates in the industry, which is an operational advantage.

In the recent market correction over the past couple of months, the stock has corrected nearly 14 per cent from its peak and presents a reasonable opportunity for investors with a two to three-year horizon.



At ₹1,970, the share trades at around 20 times its likely per share earnings for FY20.

The valuation multiples aren’t inexpensive. But given that TCS is ahead of almost all top-tier IT players in terms of revenue growth and has a margin profile that is among the highest in the industry, the price-earnings multiples appear reasonable.

In the first half of FY19, the company’s revenues grew by 18.3 per cent over the same period in 2017-18 to ₹71,115 crore, while net profits increased by 23.2 per cent to ₹15,289 crore.

TCS’s operating margin in excess of 25 per cent is much higher than top-tier peers that have margins in the range of 19-23 per cent.

In dollar terms, the company is among a select few in the industry that looks set to achieve double-digit growth in revenues in FY19.

Broad-based performance

Some of TCS’ key verticals have all expanded at a healthy rate and even ahead of the company’s revenue growth rate over the last three to four quarters.

The company’s BFSI (banking financial services and insurance) segment, that accounts for 31.2 per cent of revenues, has started increasing its contribution over the past three quarters, after tepid growth last fiscal. And this growth in the BFSI segment is only in the services portion and excludes the platform portion.



Retail (16.6 per cent of revenues) and Life Sciences (7.2 per cent) are steadily increasing contribution to revenues and growing at a faster pace than the overall company.

It is heartening to note that the regional markets and other verticals in which the company reports its platform revenues — that account for 18.4 of TCS’ revenues — has been expanding at a rapid pace, and is likely to continue at this rate for the next few quarters at least.

Thus, across services and platforms, the company has witnessed significant traction in most verticals, indicating a healthy broad-based growth picture.

Geography-wise, the UK and continental Europe are leading growth, while North America remains quite stable.

TCS has also rapidly upped its game with respect to digital service delivery. The company generates 28.1 per cent of its overall revenue from digital offerings, as of September 2018, up from 19.7 per cent in the same period last fiscal, thus registering 59.8 per cent growth Y-o-Y.

Robust client additions

Client additions have been healthy across all bands and sizes. In the last one year, the number of customers in the $100-million band has increased by seven to 44.

In the $50-million and $20-million categories, TCS has added seven and 17 clients respectively over the past four quarters. In most of these large deals, there are significant digital services that are delivered to clients.

Financially, the company has maintained a tight leash on costs.

While overall employee costs under the CoR (cost of revenue) head have been maintained at around 41 per cent of revenue, employee costs under the SG&A (sales, general and administrative) head, have reduced steadily from 13.3 per cent of overall revenue a year ago to around 11.8 per cent in the recent September quarter.

These are the largest cost heads for the company; keeping those under control has ensured that the company has been able to maintain or expand margins.

The cost containment on the SG&A front also indicates robust client mining capabilities for TCS, as it generates more incremental revenues from its existing customers.

Attrition, a key operational risk, has consistently been below 11 per cent for TCS and was at 10.9 per cent as of September 2018. This is the lowest among top-tier peers that face attrition levels ranging from 15-22 per cent.

A weak rupee should aid margins for TCS, though clients may want the benefits passed on in the form of discounts, thus negating the advantage of the fall in the currency.

Any steep appreciation of the rupee may have a mild impact on margins.

Published on December 01, 2018

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