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UBS Investment Research
Tata Consultancy Services Ltd.
Retail & CPG—conference call highlights
„ We hosted a call with Mr. Pratik Pal, TCS VP & Head, Retail
We hosted a call with Mr. Pratik Pal, who heads the Retail and Consumer
Packaged Goods (CPG) unit at Tata Consultancy Services (TCS). Retail/CPG is
one of the fastest growing verticals for TCS, with strong growth even during the
recent downturn. Retail/CPG contributes to 11% of revenue (H1 FY10), with over
15,000 employees at present.
„ Full-services model key to driving growth in the Retail segment
The retail sector has invested consistently in IT during the recession, and
discretionary spending has picked up in the past one to two quarters. The key IT
demand drivers are: 1) multi-channel integration (kiosks, mobiles, online and
physical stores); and 2) customer experience enhancement (product placement,
assortment). Mr. Pal believes that TCS’s strategy of a full-services model
(applications, infrastructure, BPO) will help drive growth in this segment over the
next three to five years.
„ CPG companies represent a larger growth opportunity for TCS
Mr. Pal believes that the CPG vertical has higher growth potential than Retail
given the much larger IT budgets for CPG companies. SAP is the dominant IT
platform used by this segment at present, so TCS hopes to leverage its global
delivery model and SAP expertise to target clients in this segment.
„ Valuation: growth momentum in Retail to continue; maintain Neutral
While there are concerns on a potential slowdown in growth for the banking and
financial services vertical, we believe the retail segment is in a relatively early
stage of offshore adoption, and is likely to continue to grow faster than the
company average for TCS. We retain our Neutral rating on TCS with a DCF-based
price target of Rs1,150.
Full-services model key to driving growth in Retail
The Retail segment is currently a smaller exposure for most Indian IT services
vendors (high-single-digit to low-double-digit contribution to revenue for Top3
vendors) given that the retail segment spends roughly about 1% of revenue on
IT (versus 10%-plus for Banking and Telecommunications). Therefore, Mr. Pal
believes that the standard applications-based go-to-market strategy will be
inadequate to target meaningful revenue increases in this segment. TCS has
adopted a full-services model that includes applications, infrastructure, and
Business Process Outsourcing (BPO) in order to target larger revenue
penetration with its Retail clients.
IT needs similar across multiple retail formats
Mr. Pal believes that retailers (food & grocery, general and speciality) are
looking to ramp up points of presence across physical, online, and mobile
formats, in order to be closer to their customers. While most retailers such as
Marks & Spencer and Target have hitherto used Amazon’s platforms for online
sales, the sector has stepped up investments in building its own online stores.
The key drivers for such investments include: (a) multi-channel integration—
integration of multiple sales points such as physical stores, kiosks, mobile, and
online stores; and (b) enhancing customer experience—this includes various
store management activities such as product placement and customised product
assortments.
SAP-led offerings to drive growth in CPG
Unlike Retail, where IT budgets are a smaller proportion of revenue, the CPG
sector has access to larger IT budgets. Mr. Pal observes that this vertical has a
high penetration of Enterprise Resource Planning (ERP) systems, with SAP
being the most commonly used platform. Most CPG companies such as Procter
& Gamble and Coca Cola also have country-specific platforms, which are now
being consolidated globally. TCS believes that it can add value to this exercise
through its global delivery network and SAP expertise, which could result in
much higher growth in the CPG segment as opposed to the Retail segment.
UBS view: view Retail as a nascent market opportunity
UBS’s global technology strategists have been concerned about a potential
slowdown in the banking and financial services sector in 2011, post the strong
IT spending recovery in 2010. Post the robust recovery seen in this segment in
2010 for Indian IT vendors, including TCS, we are also concerned that growth
rates in 2011 could be lower in this segment. However, we expect Retail/CPG to
continue its growth momentum given our view that this is a nascent market .
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