Technology Services Fortnightly – TCS achieves a market capitalization of $100bn.
The Chesapeake Group | 30 April, 2018
On April 23, 2018, TCS became the first Indian IT services company to achieve a market capitalization of $100bn. The company beat its international rival Accenture to reach the $100bn mark – Accenture has a market capitalization of $98bn – and is now among the 100 most valued companies in the world. TCS’s surge to $100bn market cap was helped by its Q4 FY18 earnings results wherein it reported record quarterly profits and beat the analysts’ expectations – thereby adding $6bn to its market cap the following day. It also announced a 1:1 bonus share issue, which further boosted investors’ confidence.
Even amidst the headwinds that have affected the Indian IT services industry – increasing protectionist environment, reducing margins, and changing technology landscape – TCS has been doing well in the stock market and gaining investor confidence. The company’s market capitalization gained over 38% in the past one year, much more that its peers – Accenture (32%), Cognizant (16%), Infosys (13%), Wipro (-5%), and Capgemini (33%). The average increase in market capitalization of Indian Large Cap IT services companies for the same period was c.25%.
TCS currently trades at 18.6x LTM EBITDA – compared to the Large Cap average of 15.7x LTM EBITDA. The company reported an operating margin of 24.8% for FY 18, representing a decrease of 93bps y-o-y. The margin was impacted by unfavourable currency movements and wage inflation. The management expects to improve the margins going further and has provided an aspirational range of 26-28% for the operating margins. The margin expansion is expected to be driven by improved growth and optimization within new service lines.
The engine behind TCS’s growth is its digital business. TCS has been organically building its digital business – a strategy contrary to its peers, who have been acquiring firms to develop capabilities. While Accenture, Cognizant, Infosys, Capgemini, and Wipro have been acquiring multiple firms in the digital space – they have acquired over 25 companies since 2017 – TCS has been focusing on talent development and training. Over 245k TCS employees have been trained on digital technologies and over 200k employees on agile methodologies as of March 18.
Digital services made up over 21% ($4bn) of its $19bn revenues in FY 18, representing a growth of c.38% y-o-y. The driver behind the growing digital business lies in capturing large deals – the company won a $2.5bn deal from the US insurance company Transamerica to enhance its digital capabilities, a $2.5bn deal with Nielsen in the analytics space, a $400m deal with Marks & Spencer to transform its digital business. Analytics has been their largest contributor to digital business – contributing $2bn per year according to recent reports.
The company has also unveiled a new strategy – Business 4.0 to push its digital revenues. TCS’s strategy is to build frameworks that help its customers integrate various facets of digital technologies – cloud, mobility, analytics, automation, IoT etc. – to focus on business transformation and growth. Driven by this strategy, the company is expecting to grow its digital revenues to over $5bn for this financial year. With large deal wins and successful strategy execution, TCS has built a strong platform for providing digital services with the goal of achieving accelerated growth in the digital first world.