BackTCS a $100 bn market cap firm in the making
TCS’s market capitalization at $53.72 bn on Tuesday makes it the most valuable IT services firm today, says a JPM report
Premium(Priyanka Parashar/Mint)
Mumbai: India’s largest software services provider, Tata Consultancy Services Ltd’s market capitalization at just under $60 billion ($53.72 billion at the end of trading hours on BSE on Tuesday), “makes it the most valuable IT services and system integration pure plays today", according to a 20 August JPMorgan report. But when will it touch the $100 billion market cap figure?
While “it is arithmetically possible, even simplistic, to paint a scenario of a $100 billion market cap (for TCS)...," said the report, it added, “...it’s probably too simplistic; walking down that path may be misguiding. For example, we can say that the $100 billion market cap threshold would be hit if TCS grows revenues at a CAGR (compounded annual growth rate) of 15% over four to five years, holding margins/ROE (return on equity) constant at current multiples."
But this may not hold true since, according to the report, given the disruptive technological changes (the cloud being just one) threatening to disrupt the status quo of tech companies.
TCS, said the report, has to preserve its core that gets eaten away by ongoing commoditization at the low end (for example, application, development and maintenance, or ADM work), the report noted, while extending the core to less penetrated or new arenas, such as new industries (for example, healthcare, public services) and geographies (such as Continental Europe), “which TCS does very well, in our view".
TCS will also have to face the dilemma imposed by its scale and the uncertainty of market potential inherent in new-generation solutions, noted the report, adding that making large acquisitions alone may not suffice to reach the $100 billion market cap figure. Scale is a double-edged sword since it also brings complexity, the report said. Scale helps companies to take advantage of fixed costs and investments, lowers unit costs and allows shared services but there are costs of coordination/integration. “Whether TCS will experience such a scale bump when it has 350,000 employees (approximately 70,000 more than today) or 500,000 or 1 million is unknowable", the report said.
The report added that to the management’s credit, “it is cognizant of this challenge and is continually thinking of ways of dealing with this".
The journey toward a sustainable market cap of $100+ billion demands vision, strategy and execution, said the report. The company will likely have to contend with the cannibalizing effects of the cloud on IT services spending two to three years down the road. “Based on the management’s track record in the offshore IT Services industry, if there’s one company that can successfully negotiate these curves and bends (some of them sharp) on the winding $100 billion market cap journey, we believe it is TCS," concluded the report.
On Tuesday, the TCS stock closed down 2.4% at ₹ 1,735.35 per share on BSE even as the IT index fell 1.4% to close at 7,362.05. The benchmark Sensex dropped 0.34% to close at 18.264.04 points.
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