TCS mcap share in Tata group falls below 50%, a first in more than a decade

The rally in the Tata stocks has been by smaller companies while Tata Consultancy Services (TCS) - the biggest company in the group by market capitalisation- has been a laggard

Tata Consultancy Services’ (TCS’) contribution to the overall market capitalisation (mcap) of listed Tata group companies has slipped below 50 per cent for the first time in over a decade. This has happened amid a rally in other Tata stocks, led by smaller companies, even as TCS, the group’s largest company by mcap, has lagged.

In recent quarters, Tata’s listed firms have emerged as leading performers on the bourses, with the group’s combined mcap  crossing Rs 30 trillion early last week — a first for a private sector conglomerate. The milestone signifies a near doubling of the Tata group’s mcap in the past three years, from Rs 15.6 trillion at the end of December 2020. 

In comparison, the benchmark BSE Sensex has risen 50 per cent during the same period.

Since the end of December 2022, TCS’ share in group market capitalisation has declined by 740 basis points, thanks to a sharp rally in other group companies, such as Tata Motors, Trent, Tata Consumer, Titan Company, and Indian Hotels, as well as the initial public offering and listing of Tata Technologies. At its peak in March 2020, TCS accounted for 74 per cent of the combined market capitalisation of all listed Tata group companies.

Collectively, Tata companies have added around Rs 10 trillion to their combined market capitalisation since December 2022, with only 31.6 per cent of this increase coming from TCS and the rest from other group companies. For comparison, TCS accounted for 56.7 per cent of the group’s market capitalisation at the end of the 2022 calendar year.

Since December 2022, the mcap of TCS has risen by 33.5 per cent. However, this growth pales in comparison to that of Trent, another Tata company, which has seen its mcap skyrocket by 178 per cent during the same period. This surge has made Trent the top-performing Tata company on the bourses.

Other companies in the Tata group have also seen significant growth, with Tata Motors, Indian Hotels Company, Tata Consumer, and Titan Company experiencing increases in their mcap of 140 per cent, 68 per cent, 51 per cent, and 38 per cent, respectively. TCS has outperformed Tata Steel, whose market value has risen by 27 per cent since the end of 2022.

The relatively poor TCS’s performance on the bourses and its declining contribution to the group’s mcap can be attributed to slower earnings growth reported by the company in recent quarters, in line with a slowdown in the IT services industry. In contrast, sectors, such as automotive, retail, and hospitality, have seen a sharp recovery in earnings, benefiting group companies, such as Tata Motors, Titan Company, Trent, and Indian Hotels.

TCS’ share in the combined net profit of Tata group listed companies declined to a five-quarter low of 55.7 per cent in the December 2023 quarter, down from 61.1 per cent a year ago. At its peak, TCS' earnings were 180 per cent of the group’s net profit in the September 2020 quarter.

The IT major reported a net profit (adjusted for exceptional gains & losses) of Rs 45,583 crore during the trailing 12 months ended December 2023, up 12 per cent from Rs 40,681 crore a year ago. During the same period, the combined net profit of group companies rose by 22.8 per cent to Rs 81,793 crore, up from Rs 66,605 crore a year ago. Non-TCS companies’ combined net profit on a trailing 12-month basis was up 39.7 per cent year-on-year to Rs 36,210 crore in the December 2023 quarter.

The equity market and investors anticipate a further decline in TCS’ contribution to the group’s mcap and earnings. “IT services is now a slow-growing industry compared to Tata’s other businesses, such as automotive, retail, and consumer products. As such, TCS earnings are likely to lag other group companies,” said an analyst.

This shift is also evident in the valuation of TCS and other Tata group companies. Unlike in the past, TCS now trades at a valuation discount to the rest of the group. TCS is currently trading at a trailing price-to-earnings multiple of 33.2 times, nearly a 23 per cent discount to non-TCS companies’ current trailing P/E of 43 times. Analysts suggest that a higher valuation indicates that the market expects faster earnings growth from these non-TCS companies in the forthcoming quarters.