TCS' market cap could touch $100 bn: Analysts

Company's stock price today touched new high at Rs 2,002.95 per share in intraday trading

The stock price of Tata Consultancy Services (TCS), India’s largest information technology (IT) services provider, touched a new high on Friday at Rs 2,019 a share, taking its total market value to $60 billion, making it one of the most valuable companies in the segment. According to analysts, a stable management and a consistent pace of growth can take the IT firm to $100-billion market value in a few years.

“A young, stable management team suggests the company is unlikely to face uncertainty due to leadership transition any time soon. The absence of any structural constraints on growth and margins implies that for now, TCS might not be afflicted by the valuation problems most large companies suffer from. All in all, stage seems set for TCS’ market cap to jump to a new, higher absolute level and grace the $100-billion mark in the next few years,” said Nimish Joshi of CLSA in his report.

STEEP GROWTH TRAJECTORY

• The stock price of Tata Consultancy Services (TCS), India’s largest IT services provider, touched a new high on Friday at Rs 2,019 a share, taking its total market value to $60 billion
• Analysts say a stable management and a consistent pace of growth can take the IT firm to the $100-billion market value in a few years
• TCS is on track for mid-teens revenue growth — faster than the industry average

Analyst also point out that TCS cannot reach this stage only on the strength of its core business — application development and maintenance — but will have to keep investing in new businesses.

What also goes in TCS’ favour is that it is on track for mid-teens revenue growth — faster than the industry average, maintaining its margin at 27 per cent. Margins will be positively impacted with the rupee depreciating, further aiding the company. More important, the firm has managed to balance focus on its core business and yet invest in innovation and new platforms.

“Companies have undermined their core in reaching for the future (Infosys / Wipro). That said, preserving and extending the core will not, by itself, help TCS cross the ‘$100-billion market cap’ threshold. Indeed, it may well cause some multiple erosion unless the market sees further evidence that TCS is developing ‘proprietary’ revenue streams that show the potential to scale up (go beyond the core),” said Viju George of JP Morgan in his report.

Even then, the ride for TCS is not going to be easy. There are several curves and bends that TCS will likely have to negotiate in its journey. While TCS’ traditional core and extension of the core gives it an advantage in traditional IT Services, investing to preserve the advantage of the core alone cannot get TCS to this milestone. “The company will likely have to contend with the cannibalising effects of the cloud on IT services, spending two to three years down the road. Seeing the cloud as a friend, rather than a foe, would enable TCS to open up new markets/segments and create new, noncompetitive demand brought upon by the cloud and more generally, the SMAC,” said George.

Analyst also point out that although the company has been investing in cloud and have introduced offering for newer segments such as the small-and-medium business, TCS is yet to share any growth numbers of these. For instance, TCS launched special cloud-based services for SME almost five years ago, but yet does not provide any metrics on that.

It is also a fact that TCS’ market cap has been stuck in the $45-55 billion range for over two-and-a-half years now. “We believe that this range-bound behaviour is more a function of the cyclical downturn that has impacted the IT industry since 2011, rather than a structural peaking of the company’s earnings power. An up-cycle could potentially cause an upward discontinuity, driving its market cap higher. Note that its market cap was similarly range-bound around the $20-25 billion mark from 2006 to 2008 before breaking out to a new level in the 2009-11 upturn,” said the CLSA note.

The only hurdle to reach this goal is any significant changes in the regulatory environment in the US that might lead to structural changes.