| Recommended Price | Rs. 3,820 |
|---|---|
| Target (Rs) | Rs. 4,460 |
| Stop - Loss | Rs. 4,460 |
| Upside | 16.75% |
| Holding period | 1 Year |
Company Overview
Tata Consultancy Services (TCS), based in Mumbai, is a global IT service and consulting leader with a market value of over USD 168 billion and more than 600,000 employees. Founded in 1968, TCS was one of India’s first IT companies, starting with national banks and becoming an expert in financial services. Since going public in 2004 and as a Tata Sons subsidiary, TCS now operates in 46 countries and is one of the “Big 4” most valuable IT services brands worldwide. TCS excels in areas like e-governance, banking, telecom, education, and healthcare, offering a wide range of business and tech services. Known for rewarding shareholders, TCS has paid out 70-80% of its cash flows as dividends. The company applied for around 5,200 patents in FY20, with 1,350 granted. TCS serves major companies like Google, Amazon, and IBM, with about 50 clients paying over USD 100 million annually and around 100 clients paying over USD 50 million annually.
Key Investment Thesis
Best-in-class strategic cost optimization and a focus on efficiency
TCS has focused on cutting costs and improving efficiency, which has boosted its financial performance and market position. In FY24, TCS achieved an impressive EBIT margin of 26.7% by lowering subcontracting costs to about 4.6% of revenue and improving productivity and resource utilisation. The company plans to continue leveraging efficiency strategies like optimising its workforce structure, better pricing deals, and enhancing utilisation rates to maintain strong margins. Additionally, decreasing employee turnover and stabilising wages have further improved margins. These factors, along with strategic cost management, position TCS for steady growth. TCS’s diverse range of services, which includes both discretionary and cost-saving solutions, and its strong relationships with Fortune 500 clients, ensure continued robust growth.
Leveraging AI and a robust order book to ensure a strong growth trajectory
TCS’s strong order book and strategic investments in AI and Generative AI projects highlight its competitive edge and growth potential. In Q4FY24, TCS reported its highest-ever deal total contract value (TCV) at USD 13.2 billion, a 63% increase from the previous quarter and 32% year-over-year. This strong deal flow gives TCS solid business visibility for the medium to long term, positioning it well to take advantage of industry growth trends. TCS is also expanding its AI and Generative AI capabilities, with AI-related revenues reaching a USD 900 million run-rate in Q4FY24. Although Generative AI is still in its early stages, TCS is seeing significant client interest and growing AI-related projects. Key areas of AI application include autonomous driving, retail, pharma, and life sciences. As these AI projects move from proof-of-concept to larger contracts, TCS is set to benefit from increased AI adoption across various industries.
Outlook
TCS is well-positioned to maintain its market leadership and achieve sustained growth through strategic cost optimization, strong deal wins, and technological innovation. By focusing on efficiency improvements, such as reducing subcontracting costs and enhancing utilisation, TCS has achieved a top-tier EBIT margin of 26.7%. Its robust order book, including the highest-ever deal total contract value (TCV), provides strong business visibility for the medium to long term. This outlook is further supported by benefits expected from the large BSNL deal, positive trends in the insurance and retail sectors, and growing interest in Generative AI projects. AI-related revenues have already hit aUSD 900 million run-rate, and TCS is poised to capitalise on increasing AI engagements across various industries. Looking ahead, TCS is expected to lead in revenue growth in FY25, driven by contributions from the BSNL deal and other major deals. Strategic investments in AI, data science, and machine learning, along with diversified services and strong client relationships, position TCS to gain market share against smaller peers. As clients focus on cost-saving initiatives, TCS’s strengths in cost optimization and comprehensive services will enable it to deliver superior performance and maintain industry-leading margins and returns.
