Company Profile:

Established in 1968 as a division of Tata Sons, Tata Consultancy Services Limited is currently the largest Indian IT services company. The company pioneered the concept of offshore IT services in 1974 and emerged as an integrated full-service provider with a global footprint. TCS is a part of the  Tata Group, with Tata Sons holding a 72.16% equity share (as of September  30, 2021) in the company. TCS added 19,690 employees on a net basis in Q2,  taking the total employee base to 528,748 as of September 30, 2021. It continues to be a very diverse workforce, comprising 157 nationalities and with women making up 36.2% of the base. TCS’ proactive stance on climate change and award-winning work with communities across the world have earned it a place in leading sustainability indices such as the MSCI  Global Sustainability Index and the FTSE4Good Emerging Index. The company serves some of the biggest conglomerates in the world like Google, Amazon, Azure, Adobe, Intel, Bosch, IBM, Apple, Oracle, etc.  


Services: Company has a wide range of platforms for numerous services in the IT field. Some of its major platforms are mentioned below. 

1. TCS BaNCS – dedicated platform for BFSI services. 

2. TCS iON – Virtual learning platform available for educational institutions. 

 3. Ignio – leading cognitive automation software for enterprise IT and business solutions. 

4. TCS ADD – the platform for the digital transformation of drug development and clinics trials.

 5. Jile – DevOps platform to accelerate software development and delivery  and integrate DevOps tools 

Current Stock Holding:

 Key Rationale:

 Strong demand outlook – Strong demand has been driven by (1)  increased outsourcing, (2) higher spend on digital technologies, and (3) G&T  (Growth & Transformation) agenda. The management cited that the company’s growth in Q2FY2022 was primarily driven by the above three themes. As organizations have been focusing on optimizing operations to support their transformation program, it has resulted in the rising outsourcing of IT services. This was intensified because of the lack of availability of digital talent and execution capability. During  Q2FY2022, the company had won six deals to transform customers’  operating model. Secondly, the company won a large number of deal wins around Horizon 1 initiatives during Q2FY2022, where it would primarily focus on cloud migration and application modernization. Thirdly, the company is being considered as a  preferred partner for customers’ G&T agenda through technology-enabled business transformation and business model innovations. Client metrics improved across bands – The company had a strong addition of clients in every revenue bucket, both YoY and QoQ. The number of ‘$100-million’ clients increased by 5 and 4 on YoY and QoQ basis, taking the total count of such clients to 54. The number of ‘$50 million clients increased by 9 on a QoQ basis (up 17 YoY), taking the total count of such clients to 114.  The number of clients under the ‘$20 million bucket increased by 6 QoQ (up  19 YoY). The number of clients under the ‘$10 million rose by 12 QoQ (up 31  YoY). The number of ‘$5 million clients increased by 23/44 QoQ/ YoY basis,  taking the total count of such clients to 609. Strong headcount addition continued – The company’s headcount stood at 5,28,748, a net addition of 19,690 employees QoQ. The company’s net employee additions remained strong for the fourth consecutive quarter. The company added 75,208 net employees in the past four quarters, which was 16.6% of the Q2FY2021 total headcount. Management highlighted that TCS recruited 43,000 freshers during H1FY2022.  The attrition rate at 11.9% remained the lowest in the industry, but it increased significantly by 330 bps QoQ. However, the company’s robust talent retention model is expected to help TCS to overcome supply-side concerns. The company intends to maintain the hiring pace as it wants to keep supply ready to meet the ongoing strong demand environment and anticipated higher attrition.  Financial Performance – The company’s financial profile remains robust as reflected in its high operating profitability at 28% in FY21, High RoE &  RoCE of 38% & 47%, strong capital structure, Zero Debt to Equity, recurring operating cash flows, and robust liquidity position in the form of strong cash and investment balance of Rs.49,283crs as on Sept 30, 2021. 

 Growth Drivers :

 In Budget 2021, the government has allocated Rs.53,108crs (US$ 7.31 billion) to the IT and telecom sectors. In order to establish an enabling environment for the IT industry, in April 2021,  the Development of Advanced Computing (C-DAC) launched three innovative technologies Automatic Parallelizing Compiler (CAPC), Cyber  Security Operation Centre (CSoC) as a Service, and C-DAC’s indigenous  High-performance Computing software solutions—Parallel Development  Environment (ParaDE). The computer software and hardware sector in India attracted cumulative foreign direct investment (FDI) inflows worth US$ 71.05 billion between April  2000 and March 2021. The sector ranked 2nd in FDI inflows as per the data released by the Department for Promotion of Industry and Internal Trade (DPIIT). 

Peer Analysis: 

Competitors Infosys, Wipro, HCL tech., etc. TCS is the largest IT company in India has the robust and best return ratios when compared to its peers. Though the P/E is trading slightly more premium than the industry P/E and quite high among its peers, the fundamentals of the stock are extremely great backed by a strong balance sheet.   


Valuation & Conclusion:

 We believe TCS is well-positioned to capture growth and transformation opportunities given its competencies across technologies and verticals,  strong contextual knowledge, excellent product, and platform portfolio, and solid execution capabilities. The management remains confident in sustaining margins in FY2022 despite supply-side challenges led by strong revenue growth, higher hiring of freshers, and availability of a large talent pool. Hence, we recommend a BUY rating in the stock with the target price (TP) of  Rs.4140, 42x FY22E EPS . Time Frame: 6 Months to 1 Year

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