S&P upgrades outlook on TCS to positive on improvement in business position

Rating agency Standard and Poor's (S&P) has revised its outlook on Tata Consultancy Services Ltd. (TCS) from "stable" to "positive" on improvement in business position.

S&P also affirmed 'A' long-term issuer credit rating on the Indian software services company.

S&P in a statement said TCS' business position is strengthening following its recent large orders and robust profitability. The company's increasing penetration into digital services should result in double-digit revenue growth over the next 24 months.

TCS is likely to maintain its growth and profit leadership in the global software services business. The company's revenue rose 10 per cent in the second quarter of financial year 2019 (March 31, 2019), exceeding expectations. 

TCS' increasing penetration into digital services highlights its capability to service large and complex deals with a global presence. The company's digital services sub-segment grew 59.8 per cent in the second quarter of financial year 2019 and accounted for 28 per cent of its revenues, it added.

TCS has trained the majority of its workforce on its new age digital services, positioning it well for growth. TCS' strategy under its "Business 4.0" framework is bearing fruit, S&P said. 

Customers seem to see benefits in the company's "Location Independent Agile" model and believe TCS would continue to provide uninterrupted services despite issues related to protectionism. 

"We expect the company to continue to win contracts and gain market share. TCS has signed about $4.9 billion worth of contracts during the second quarter of financial year 2019. We expect TCS' business diversity to improve over the years", it said.. 

The company's business compares well with its peers (albeit, with a smaller scale than Accenture) in terms of the diversity of industries it serves as well as the geographical location of its customers.

The rating gency said it may revisit the outlook revision to stable if TCS fails to sustain faster growth or above-average profitability. This could happen if a sudden downturn in global IT spending results in customer losses and a significant pricing pressure, such that the company's Ebitda margin slips below 25 per cent over the next 12-24 months. 

The outlook may be downgraded to stable also if TCS makes large debt-fueled acquisitions or shareholder distributions which threaten its net cash position.

Another rating upgrade too could happen if the company maintains its growth leadership and above-average profitability over the next 24 months, such that annual Ebitda is $7.0 billion. The upgrade would also require the company to maintain its sizable net cash position.