TCS: $100 billion and counting

Tata Consultancy Services (TCS), the software services arm of the $103 billion-Tata group, created history on Monday by becoming the first Indian company to achieve a market capitalisation of $100 billion, beating Mukesh Ambani-led Reliance Industries Ltd (RIL) to the milestone.

TCS, the largest cash generator and most profitable company of the salt-to-software conglomerate, has witnessed a stellar run on the bourses since it announced its better-than-expected fourth quarter earnings on April 19. The company reported a turnover of Rs 32,075 crore in the January-March quarter, up 8% from  the year-ago period and almost 4% sequentially. Net profit in the same period rose 4.6% year-on-year and 5.8% quarter-on-quarter to touch Rs 6,909 crore.

The market was pleasantly surprised by a robust earnings reported by TCS at a time when Indian IT companies have been operating in a challenging environment, owing to major global clients in sectors such as banking and financial services cutting back on IT spending, and new-age digital technologies rapidly disrupting the traditional enterprise application support business, which Indian IT companies have traditionally offered.

Since it announced its fourth quarter results after market hours, TCS’s stock price has increased some 7% over two trading sessions–on Friday and Monday –and closed at Rs 3,415.20 on the BSE on Monday. The bourse’s benchmark S&P BSE Sensex gained 0.10% in the same period to end at 34,450.77 points.

“We are indeed delighted and thankful to our employees and customers who have been instrumental in achieving this milestone–what is exciting for us is the whole business 4.0 journey and the great opportunity to be a digital partner of choice to our customers in their growth and transformation journey,” Rajesh Gopinathan, TCS managing director and CEO, said in a statement on Monday.

Tata Sons chairman N. Chandrasekaran, also former TCS managing director, told a television channel earlier on Monday that double digit volume growth was a distinct possibility for the company in the future, and this may lead to a greater  appetite for TCS shares among investors.

The software company's earnings also came as a ray of hope for investors in the Indian IT sector. Its nearest rival Infosys, which has been besieged by its own internal leadership challenges, gave a conservative guidance for operating margins going forward.

“With its consistently superior financial performance, it is no surprise that the stock has been rewarded by the Street, particularly for its sheer consistency,” said Harit Shah, senior analyst, IT at Reliance Securities in a note. “Over the past five-odd years, TCS' average forward PE multiple stands at 19.3x versus 16x for Infosys, implying an average PE premium of over 20% for TCS. For such a large firm in a maturing industry to be able to maintain and even enhance profitability over so many years, and to be able to deliver well above industry revenue growth is no mean feat. We expect the IT major's strong processes, execution engine and operational efficiency to drive its performances going forward as well, given that these factors are structural and give it a competitive advantage vs peers.”

Interestingly, in 2009, Infosys’ market capitalisation was  one-and-a-half times that of TCS. The tables have turned since then and TCS’s market value is two-and-a-half times that of the Tata group company. TCS, especially under Chandrasekaran’s leadership was always perceived to have ridden the digital wave better than Infosys, which was once the bellwether of the IT industry, and the market appears to have rewarded the company for this.

Around September 2010, the market value of both companies was hovering quite close, but since then the gap  has widened after TCS’s market capitalisation soared. The value of Rs 1,000 invested in TCS in August 2004, post its listing, is equal to Rs 9,681 at present (based on the firm’s average share price in April 2018).

Also, in August 2004, oil-to-yarn and retail conglomerate RIL was valued at $14.33 billion, compared to a $10.19 billion-valuation enjoyed by TCS. Based on the average share price of the two companies in April 2018, RIL is presently valued at $89 billion, versus TCS’s $98.7 billion. While TCS’s market value graph has consistently inched upwards, RIL’s graph, in comparison, exhibits relatively higher volatility with several crests and troughs.

While the Mukesh Ambani-led company has always made big money  from its crude refining and petrochemicals operations, the turnaround of its retail business and the massive scale of Jio’s launch have led to a massive rally in its shares. Can RIL’s market value also breach the $100 billion-mark and surpass TCS, once Jio’s operations stabilise? Or will TCS continue to build on the current momentum and keep its nose ahead? Investors are keenly watching for an answer.