'TCS can double m-cap to $100 bn in 4 years'

Tata Consultancy Services, country's largest information technology company, is well on course to doubling its market cap to $100 billion in another four years.

The company's stock, a report by CLSA says, is well-positioned to achieve a 17 per cent compounded annual growth rate, overcoming the challenges faced by other large companies and remaining a good investment prospect.

As a comparison, the current m-cap of Reliance Industries, termed India's most highly valued company, is $74.6 billion.

Motilal Oswal, chairman and managing director, Motilal Oswal Securities, says, "comparing TCS with RIL is like comparing apples and oranges", but adds on a standalone basis, TCS valuations can go up by 20-30 per cent.

"Going ahead, innovation will be key for firms. In that case, TCS has much more going for it. RIL is an old business model firm with majority focus on refineries, gas etc.

"Besides 15-20 per cent growth in services and products firms is possible, however in a manufacturing sector it is a tad difficult," he said.

Large-cap plus

The CLSA report says what goes in TCS' favour is that it is a large-cap firm. After the recession, when clients looking at a multi-vendor environment, large-cap firms will always have a better opportunity.

"Invites for large-deal RFPs (request-for-proposals), propensity to invest in new service lines/solution development and ability to attract and retain talent: all come with scale.

Thus, IT services is a space skewed towards larger players. Over the years, the top vendors in Indian IT steadily gained share, moving from 29 per cent of India's total IT service exports in 2000 to 38 per cent by 2006 and about 45 per cent by 2010.

Such a skew precludes the possibility of some smaller services companies grabbing market share away from the larger players," said the report.

The other aspect favouring large-cap firms and TCS is the offshoring presence. Low cost delivery has been the key disruptive phenomenon in IT services and is likely to continue.

An important reflection of this disruption (and often repeated by us) is the convergence of market capitalisation between Indian techs like TCS/Infosys and Accenture.

When TCS listed, Accenture's market cap was 2.5 times TCS'.

However, now TCS' market cap is 35 per cent higher than that of Accenture.

This change in market cap dynamics captures the structural shift in the IT services market towards offshore and low-cost

locations.

The urgency with which Accenture has expanded its low-cost delivery is reflective of this shift and despite its aggressive expansion, an offshore-focused provider like TCS remains better positioned to capture this shift, said the report, prepared by Nimish Joshi and Arati Mishra of CLSA.

Outlook

"Over the next five to six years," says a market analyst on condition of anonymity, "TCS can touch a $100-billion market-cap. But you need to also factor in the cyclical nature of the sector.

"After a growth phase of two to three years, the sector does have a downtrend. But compared to Infosys, I think it will surely go ahead. Not only in terms of profitability but also market-cap."

The sector, he added, was expected to have a CAGR of 14-15 per cent over the next four years. "Generally the large-caps do better than the sector, so TCS can grow 16-17 per cent over that time," he explained.

Also, large-cap companies are already ahead in investing in new services. TCS has already taken a big bet with its iON service product that would tap into the small and medium enterprises segment.

It is also banking on platform-based business process outsourcing offerings, as well as gearing its banking product, Bancs, to gain market share.

Shifts in the global technology landscape are expected to open a $51-billion opportunity for IT-service providers in 2011, which should rapidly grow to a $84-billion one by 2013.

Historically, big and well-known technology stocks have delivered little or no secular returns to investors over several years.

Globally, too, companies such as Accenture, Sony, Cisco, Intel, Microsoft and Google have all struggled to regain a secular growth theme, and have gyrated around a particular price band for years after reaching a particular scale of market capitalisation.

However, TCS faces no growth issues yet. At $8.2-billion revenue, it constitutes just  about one per cent of global spending on IT services.

The latter grew six per cent over 2000-10, yet Indian IT services' exports have expanded at an annual rate of 30 per cent.