TCS share price analysis : Is any growth left in India's tech giant?

Last updated:
TCS share analysis

Founded in 1968, Tata Consultancy Services is a force to reckon with in the Indian IT space. The IT Industry in India has grown by leaps and bounds contributing significantly to the economic progress of the country. As a testament to that, the IT sector occupies a significant weight of over 15% in the Nifty 50 Market Index. What are the factors that affect the growth of IT sector companies, you may ask? 

Availability of technically skilled personnel, low cost of operations, rapid adoption of technology in various sectors of the economy, strong growth in export demand, and of course favorable policy support are some important drivers of growth. 

According to Gartner, IT sector spending in India is set to increase to $101.8 Bn implying a strong outlook and a huge growth potential. If you look at the client parameters of TCS, clients contributing revenues of $100 Mn+ have increased by 53% in the last 5 financial years. The pandemic had propelled companies to move towards digital adoption which augured well for companies like TCS. 

TCS : Various Business Segments

The onset of high speed mobile networks and the ubiquity of smartphones around the world have increased demand for Information Technology services. We can witness the implementation of Information Technology Enabled Services (ITeS) in almost all the sectors of the economy. Taking advantage of this wide applicability of its products TCS has adopted the various sectors as its go-to business segments. 

Segments include:

  • Banking, Financial Services and Insurance
  • Retail and Consumer Business
  • Communications, Media and Technology
  • Manufacturing
  • Life Sciences and Healthcare
  • Energy
  • Resources and Utilities
  • Public Services and Others

This is how each segment performed in the Financial Year 2021-22 in terms of revenue share. 

(All percentages rounded off)

As you can observe, the BFSI sector has taken up a bulk share followed by Retail and Consumer Business.

A Look at Segment-wise Annual Growth YoY (for FY 2022) For TCS

When you look at the segment growth rate, the Retail and Consumer Business Sector is highest followed by Manufacturing and Life Sciences.

Global Reach of TCS

TCS serves in almost every continent with a strong presence across business segments. It operates in over 46 countries and has been awarded as a Global Top Employer by the Top Employers Institute, joining a group of just 8 companies worldwide. The client base is huge with certain major firms in the various sectors including some government organisations. 

Take a look at the FY 2022 Global Growth Rate

Top Deals By TCS 

Last year, TCS signed a big deal with a Fortune 100 US Company. Payments Canada, the largest financial payments organisation of the country chose TCS to transform its payments operating system. From the Government of India to Microsoft, TCS has a huge client base. In the last quarter of FY 2022, clients with revenues worth more than $100 Mn increased by over 21%. Also, in terms of deals, TCS is leading in FY 23 among its Indian IT peers. Such is the reputation of TCS that market leaders across various industries sign multi year deals.

Let’s now look at the annual comparison of some important financial parameters of TCS. 

Increasing Revenues

Revenue has grown by 9% over the last 5 financial years. A key driver has been an increase in digital adoption across various verticals. As a matter of fact, the BFSI sector has surged by over 32% according to last quarterly reports. The pandemic had forced several traditional firms to shift operations online, TCS benefitted in the process.

The demand environment looks poised to grow led by Cloud, Cyber Security, Enterprise Application Services and IOT and Digital Engineering. TCS BaNCS (banking infrastructure services), TCS ION (digital learning and assessment platform), TCS ADDS (digitising life sciences companies), and TCS TwinX (helping business leaders make decisions) were some of the offerings that have shown great promise over the years. 

Operating Profits and Margins of TCS

While growing revenues represent demand robustness, operating margin gives a much broader picture of the financial performance.

The operating profit has been increasing by over 10% in the last 5 financial years. Operating profit indicates the core business revenues of an entity. There could be certain incomes like sale of assets, surge in interest returns from certain investments etc. which are not obtained directly by the operational activities of the business. Although, there is a catch, if a company has high debt, operating profits may not reflect the current state of financial health. TCS as of now does not have any borrowings in its balance sheet. 

Operating margins went down during the pandemic as shift towards the work from home mode increased the expenses of the company. The IT sector pins a lot on the right talent acquisition to gain more projects. TCS saw an increase in the talent acquisition costs as talent war among peers persisted during the pandemic. 

TCS : Operating Cash Flow

The operating cash flow of a business indicates whether the company is self-sufficient enough to fund its operations in the future or needs external financing. Let’s look at how TCS fared in the last 5 financial years.

The operating cash flow has only kept increasing over the past 5 years. In fact, TCS has been one of those Indian companies which has consistently given good dividends and engaged in huge buybacks over the years. Recently, the company had announced a dividend of ₹22 per share for the financial year ending 2021-22. So how does TCS manage to do it?

In plain simple words, good management. TCS has never had the problem of obtaining contracts. This is due to its well-known reputation of customer satisfaction levels. Apart from that, it has found a way to spread its employee costs across various projects. Employees “on the bench” are trained in various skill upgradation programs throughout the year. Hence, it has been able to complete the projects with an optimal number of employees. Unlike its peers, TCS has a low employee attrition rate of 15%, yes that is still low compared to more than 20% in its competitors. That’s the reason why TCS has been able to maintain a steady cash flow over the years.

Now over to cash flow to net profit ratio. 

In accounting due to the nature of entries being accrual instead of cash-basis or record-basis, certain businesses can indulge in increasing revenue recognition rather than showing actual revenue obtained through operations. Cash flow to net profit ratio shows us how much of the profits is got by operations specifically. If the ratio is high, it means that the company is following a good revenue management system. TCS has shown an increase over the years only to show a slight decline in the past year due to a decrease in the cash flow.

EPS Ratio of TCS

The Earnings Per Share is obtained by dividing the profit by the number of outstanding shares the company holds. While, you may say that taking on more debt can increase EPS, which is true, but not for TCS which doesn’t have any long term or short term borrowings. So, yes, to a certain extent you can conclude that a high EPS means more profitable the company. What about TCS? 

As you can see, the EPS is on an increasing trend. This is due to increasing net profit over the years. TCS has handsomely rewarded its shareholders and over the years it's known for its shareholder-friendly policy wherein it allocates about 82% of the earnings in share buyback or dividends programs. True to the fact that the company has given its shareholders over 3000% return since listing. And you for sure cannot and must not ignore this robust IT player in the near future. Remember, there is still room for a lot of growth in the IT space in India. Check out TCS share price today!

Analysts' Review of TCS

Nomura: Downgrades

  • Global inflation coupled with weak macroeconomic conditions and declining rupee value led the analyst to downgrade the firm.
  • Nomura expects further rise in talent acquisition costs in the Indian IT Industry which could hamper future earnings.
  • Target price reduced by 25% to ₹2950

Macquarie: Upgrades

  • According to Macquarie, demand in the BFSI sector is resilient and can positively contribute to the revenue outlook.
  • Post the global financial crisis, Indian Tier-1 IT firms are strategic partners rather than skills providers earlier. This makes them even more resilient during down times, the analyst opined.
  • Target price has been revised to ₹4420

Latest News

  • TCS COO hinted toward a plausible shift from B2B to B2C in the future.
  • Attrition rate of TCS rose to 17.4% amid a talent war due to a surge in digital adoption in enterprises post-pandemic.