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Tata Consultancy Services Limited
All in favour: ‘Presence, Technology & Time’
Investment rationale
TCS, the largest Indian software services company, provides full breadth of
services across banking, insurance, manufacturing, telecom, retail and
transportation industries. Our belief that TCS will do well in coming quarters is
based on the fact it is well placed in the fastest growing domestic IT services
market and has strong technological capabilities (products - "Banc" and services)
coupled with agile resource management mechanism (lowest attrition).
Domestic presence
TCS has been increasingly deriving significant revenues (~8-10%) from India.
Based on Indian Government's latest IT plan (estimating IT services revenues
to go up from current USD12bn to USD24bn by FY14e), we believe IT spend
to increase from current USD10 to USD20 per capita in the next two years
with majority of revenues coming from government undertakings in the banking,
panchayats, municipal corporations, schools and hospitals.
"BANCS" deal worth over USD100m
We believe that developing a CBS with robustness to handle/execute huge
volume of transactions entails a specific and specialised skill set and from
technology point of view it is a very significant achievement as it places TCS
directly in the league of Oracle , HP, IBM. The financial impact of these type
of projects is high as the margins from such projects can be as high as 70-
75%, with a good predictable tail.
Cloud computing
We strongly believe that TCS is best positioned to derive maximum benefit
from the Cloud space combined with significant growth in the domestic market.
We opine that countries like India where committing huge upfront cost is a
Valuation and outlook
At the CMP of INR1,140, TCS is trading at 20.3x discounting its FY12e EPS.
We reiterate our BUY recommendation with a strong belief in company's
fundamental and domestic presence. We reiterate a BUY on the stock with a
target price of INR1,288 based on 23x FY12e EPS estimate of INR56.
Investment rationale
Presence in fastest growing IT services market
TCS has been increasingly deriving significant revenues (~8-10%) from India. Based on
Indian Government's latest IT plan (estimating IT services revenues to go up from current
USD12bn to USD24bn by FY14e), we believe IT spend to increase from current USD10 to
USD20 per capita in the next two years with majority of revenues coming from government
undertakings in the banking, panchayats, municipal corporations, schools and hospitals.
Primary reason to computerise the whole state infrastructure will be to reduce human
interface and reduce corruption at the grass root level so that the good work done reaches
the most deserving candidates. For instance, when a question was asked to Mr. Nitish
Kumar post Bihar elections on one thing which he will do to curtail corruption - his answer
was to implement IT in all sectors and departments and curtail human interface.
We believe that keeping all the above factors in mind, both TCS and CMC are very
well poised to get maximum benefit from the domestic IT revolution which has been
triggered with launch of UID.
Since UID will provide the much needed back-end database architecture, the chance
of Indian departments going live looks very feasible.
"Products" Deal from one of the largest banks
"BANCS" deal worth over USD100m: Although the deal is worth only USD100m,
not amounting to much in the overall revenue bucket of TCS, what makes it significant
is the fact it heralds an Indian IT company into the league of players capable of
developing a Core Banking Solution for one of the largest banks in the world. We
believe that developing a CBS with robustness to handle/execute huge volume of
transactions entails a specific and specialised skill set and from technology point of
view it is a very significant achievement as it places TCS directly in the league of
Oracle, HP, IBM. The financial impact of these type of projects is high as the margins
from such projects can be as high as 70-75%, with a good predictable tail.
Cloud computing
We strongly believe that TCS is best positioned to derive maximum benefit from the
Cloud space combined with significant growth in the domestic market. We opine that
countries like India where committing huge upfront cost is a issue is the best market for
pay and use business model. Since Cloud offers everything on pay and use model it
finds lot of customers in fast growing Indian market.
Lowest attrition, high utilisation, improving margins
TCS has grabbed the No. 1 slot in ‘Best Employer Survey’. This provided the company
an edge in an era where talent acquisition would be the key differentiating factor
both on growth as well as profitability front. This clearly explains why TCS has the
lowest attrition (~13%) vs. even Infosys (~17.5%) and would not only enhance utilisation
rates but also have a cascading effect on the employee cost and margins. Generally,
in IT companies, post resignation notice period varies from 1-2 months, during which
the resource becomes a non-utilisable bench. There is also a minimum training/induction
of 24-26 weeks, conveying impact on recruitment, training, utilisation, etc., for each
attrition. Thus, a company by giving a slightly higher salary hike of 15-20% or an
opportunity to go onsite (which TCS does invariably) can retain the talent.
Order flow to Indian companies and Indian operations of MNCs is now increasingly
becoming large sized. USD100m execution per annum does not raise any toast
anymore. In the recent past even deals worth more than USD250mn had been awarded
to Indian IT vendors.
Also integrated solutions and offerings are enabling Indian companies to now be a
port of call for large organizations in BFSI space, who are now increasingly looking
forward to reduce their vendor base and at the same time reduce costing. Indian
vendors with their global and distributed delivery mechanism are poised correctly at
the time point and delivery point. All the top IT vendors can not only do deliveries from
multiple locations within India but also from multiple locations abroad, which gives
client the comfort of time and delivery.
Valuation and outlook
TCS derives a significant amount of revenue from the Asia Pacific region (~16%) of
which a major portion (~9%) is from India. We believe TCS being a Tata Group
company will have a significant edge over other IT players in this market. Also, lack of
capital with many of regional and rural institutions (for instance banks) throws a
significant opportunity for TCS which can provide reasonably priced solutions for the
institutions on the back of its technological expertise. At the CMP of INR1,140, TCS is
trading at 20.3x discounting its FY12e EPS. We reiterate our BUY recommendation
with a strong belief in company's fundamental and domestic presence with a target
price of INR1,288 based on 23x FY12e EPS estimate of INR56.
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