Tata Consultancy Services Limited (TCS.NS)

Equity
India
Technology

RISK

RETURN

Key risk factors

Negligible price volatility

Strong & resilient to price shocks

Fair trading liquidity

Key return factors

Very strong margins and returns

Overvalued vs peers

Good growth

Company profileTata Consultancy Services Limited provides information technology (IT) and IT enabled services worldwide. The company operates through Banking, Financial Services and Insurance; Manufacturing; Retail and Consumer Business; Communication, Media and Technology; Life Sciences and Healthcare; and Others segments. It offers CHROMA, a cloud-based talent management solution; ignio, a cognitive automation software; TCS iON, an assessment platform; TAP, a procurement offering; TCS MasterCraft, a platform to automate and manage IT processes; Quartz, a blockchain solution; and TCS OmniStore, a commerce platform. The company also provides customer intelligence and insight solutions; Intelligent Urban Exchange, a smart city solution; OPTUMERA, a merchandise optimization platform; TwinX, an AI powered system of actionable intelligence for business leaders to simulate and optimize enterprise decisions; TCS BaNCS, a financial platform; and Jile, an agile DevOps platform. In addition, it offers drug development and connected intelligent platforms; ERP on cloud, an enterprise solution; and HOBS, a platform for subscription based digital business. Further, the company provides cognitive business, consulting, analytics and insights, automation and artificial intelligence, Internet of Things, cloud, blockchain, cyber security, interactive, digital and quality engineering, sustainability, and enterprise application services. It serves banking, financial, and public services; capital market; consumer goods and distribution; education; insurance; life sciences and healthcare; manufacturing, retail; hi-tech; travel, transportation, and hospitality industries; communications, media, and technology industries; and energy, resource, and utility industries. The company was founded in 1968 and is headquartered in Mumbai, India. Tata Consultancy Services Limited is a subsidiary of Tata Sons Private Limited.

Valuation: Overvalued

Multiple

TTM

NTM

P/E

30.30

PEG

2.60

P/B

15.40

10.10

P/S

5.80

P/FCF

32.40

28.00

EV/EBITDA

20.50

22.40

From both historical and forecast perspectives, the stock is overpriced compared to similar stocks. In particular, the stock is reasonably priced on P/E, 'expensive' on EV/EBITDA, and trading at neutral levels on P/FCF.

Performance: Mixed

Over the last six months, the stock performance has varied, with an increase following a drop. The stock's price trend wasn't definitive when matched against its global counterparts from the same sector and industry (as depicted above). Over the past six months the stock has exceeded the performance of this peer group by 8ppts and its growth accelerated by 0ppts in the past month. This is equally valid for peers from the same country and industry. Given the stock's valuation versus its peers, its total price movement is neither favourable nor unfavourable.

Analyst view: Somewhat favourable

The average target price is 4330 and suggests 12% upside potential. Usually, this means a HOLD recommendation among investment firms. This neutral recommendation suggests no significant price movement, up or down, in the next 12 months. The most optimistic analyst has a target price of 4787.0. This translates into 24% upside potential in the best case. On the other hand, the most pessimistic analyst has a target price of 3040.0. This is equivalent to 21% downside potential in the worst case.

Profitability: Very strong

RoE

Tata Consultancy Services Limited reported a return on equity (RoE) of 51.4% in the last 12 months, up from 46.2% in FY23. The market consensus projects an RoE of 54.3% in FY24, again ahead of its peers.

RoA

Another important profitability metric, return on assets (RoA), amounted to 31.8% in the last 12 months, an increase from 29.8% in FY23. The market analysts predict that RoA will be 35.0% in FY24, again stronger than its peers.

RoCE

In the last 12 months, the return on capital employed (RoCE) grew to 46.4%, above the peers. The consensus estimate for FY24 for RoCE is 68.5%, again ahead of the peers.

Net margin

EBITDA margin

Historically, TCS.NS has reported very strong net margins compared to its global peers. Specifically, in the last 12 months, this metric equalled 19.1%, a growth from 18.8% in FY23. The company has reported good EBITDA margins compared to its global peers in recent years. EBITDA margin amounted to 28.0% in the last 12 months, a decline from 28.2% in FY23.

RoIC / WACC = 8.2(excellent value creation)

The ratio of return on invested capital (RoIC) to the weighted average cost of capital (WACC) has been 8.2 in the past several years. This ratio implies a excellent shareholder value creation.

Growth: Good

Revenue

EBITDA

EPS

Free cash flow

TCS.NS reported revenue of INR 2 408 930mn in the last 12 months, up 1% from FY23. At the same time, the dynamics of cash flow, as measured by free cash flow (FCF), were drastically different. EPS grew 3% from FY23 to INR 125.92. Market expects EPS to reach INR 125.88392 in FY24.Revenue growth has been constrained in the past several years (negative-to-neutral), while EBITDA growth has been weak. This all contributed to continued EPS growth (positive-to-neutral). The FCF trend is in line with EBITDA. On the positive side, we note very stable dynamics of all key metrics. This is a very positive factor.

Dividends: Decent

Dividend paid

Dividend yield

The company has a track record of regular dividend payments. It has paid dividends in each of the past ten years. Dividend per share (DPS) has grown yearly, but the dynamics are somewhat mixed. In the past 12 months, the dividend yield has been good and slightly above its peers. On average, the company pays dividends quarterly, which may appeal to investors valuing a regular income stream.

Default risk: Moderate

The risk of default is moderate. We note robust profitability, solid return on capital, strong debt servicing capacity, adequate interest coverage, solid cash flow generation, and an favourable capital structure, among the positive credit factors. Among the negative credit factors, we point to slow historical revenue growth, excessive margin volatility, and poor working capital management.

Volatility: Negligible

In normal market circumstances, TCS.NS is not volatile. Put differently, without outstanding market volatility or shocking company news, the stock's price will stay within a narrow range. The stock's losses on its worst days (less than 1-5% of the time) will range from very low to negligible.

Stress-test: Negligible

In highly turbulent market conditions, TCS.NS is not volatile. In other words, the stock will fall far less than the index in times of extreme market volatility or shocking company news. Standalone, the worst-day losses (less than 1% of the time) will likely be very low.

Selling difficulty: Small

TCS.NS has above average trading liquidity. The average private investor can sell his common position in the stock immediately. Liquidity is usually very stable and becomes extremely unfavourable on the days with the lowest activity. The trading volume mostly stays the same even under highly turbulent market conditions.

Country risk: Low

The institutional, legal, and compliance risks associated with the company's country are close to minimal. In combination with rigorous business standards, shareholder rights are well protected.

Other risks: Negligible

No other major risks have been identified.