TCS may retain its lead in gaining new business this fiscal given its reach and scalability, but a further upside looks limited for its stock
TATA Consultancy Services (TCS), the country''s largest IT player, has been closely following the strong bounce back in the global IT demand for the past six quarters. The company has garnered the largest share of the incremental revenue among its peers during the period. TCS is expected to sustain its momentum in the current fiscal given its strong grip on the fast-growing verticals such as banking and finance and its wide reach across geographies.
FINANCIALS AND OUTLOOK:
TCS was among the few top-tier IT players that reported a faster recovery after the global financial crisis in late 2008. Its four-year compounded annual growth rate (CAGR) is in line with its peers, In ew at a two-year CAGR of 10.2% compared with 8% for Infosys and 6.5% for Wipro. Operating profit growth for TCS during this period was 16%, much faster than 8% for Infosys and 10% for Wipro.
The financial performance of TCS in FY11 was better than its peers, which are publicly listed in India. The company reported a double-digit growth in sales and profits during the year. What also separated the country''s largest IT player from its toptier peers was the fact that it could also improve profitability of its business.
In the March 2011 quarter, the company''s volume growth, measured in terms of billed manhours, rose sequentially by 2.9%, a tad lower than expectations. Its revenue grew by 5.1% and net profit by 10.7%. TCS plans for a strong headcount addition of more than 40,000 in FY12. The company has also cited increasing proportion of larger projects. This should ensure an uptick in volumes in the coming quarters.
TCS has performed well on the bourses when compared with the returns earned by IT sector indices. In the past six months, the stock has gained 7% whereas the ET Infotech index fell marginally by 2.5%. The stock''s better show reflects the Street''s expectations that TCS would be able to grow at a faster rate than the average sector growth.
At the current price level, the stock trades at 25.6 times its trailing 12-month earnings. On the basis of trailing P/E, it is the most expensive among the stocks of the top four IT players.
For FY 12, the IT sector is expected to record a revenue growth of 16-18%. Given its strong presence in the IT outsourcing segment, TCS is likely to report better sales growth of above 20%. Assuming that the company retains its current margin levels, its net profit would grow at a similar pace. This makes its forward P/E to be 21.4, which is at the lower end of its historical P/E range.
While the company would be able to retain its current valuation, a further upside looks limited in the absence of a fresh trigger. While this discourages fresh buying, existing investors with a multi-year horizon may stay invested.
Superior scalability in terms of deliverables and manpower
Active yet cautious approach towards inorganic route to growth
Streamlined operations with profitability that is at par with the sector benchmark
Increasing competition in IT offshoring from bigger overseas players
Lack of depth in consultancy practices when compared to global peers
Challenges related to employee attrition and retention