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Business News/ Markets / Stock Markets/  Why is TCS market cap more than the next four IT firms combined?
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Why is TCS market cap more than the next four IT firms combined?

TCS on Wednesday crossed Rs5 trillion in market capitalization on the back of Q1 results

TCS became the first Indian company to exceed `5 trillion in market capitalization in its 10th year on the stock markets. Photo: MintPremium
TCS became the first Indian company to exceed `5 trillion in market capitalization in its 10th year on the stock markets. Photo: Mint

Mumbai/Bangalore: On 20 August 2013, Viju K. George, an analyst at JPMorgan Chase and Co., wrote that India’s largest software services exporter Tata Consultancy Services Ltd (TCS) could become the first Indian company to exceed the $100 billion market capitalization mark if it “grows revenues at a CAGR (compound annual growth rate) of 15% over four to five years, holding margins/ROE (return on equity) constant at current multiples".

TCS’ market cap, then, was about $61 billion.

Brokerage CLSA came up with a similar report 10 days later.

“TCS has the potential to be India’s first firm to reach $100 billion in market cap...It may not be at the forefront of technology changes that could hurt its traditional business, but it is catching up fast," wrote Nimish Joshi and Rohit Kadam, the authors of the report.

On Wednesday, just a year from the date of those forecasts, TCS touched $85 billion in market capitalization, becoming, in the process the most valuable Indian company and the first to cross 5 trillion in market capitalization.

TCS’ success with investors, who have been rewarded by the stock manifold, over the last five years especially, also underscores how it has become the new gold standard among technology stocks, a position that nearest Indian rival Infosys Ltd used to enjoy during the last decade.

“TCS is now the de facto gold standard of the IT sector. It has well and truly taken over from Infosys as the bellwether over the last 3 years," said an analyst at a foreign brokerage who requested anonymity. “It has been more prepared for the changing trends in the sector than other rivals—the movement to fixed price, etc."

TCS’ market capitalization exceeds the combined market cap of about $82 billion of the other top four Indian IT firms—Infosys, Wipro Ltd, HCL Technologies Ltd and Tech Mahindra Ltd.

“In the Indian IT sector, we see an extremely strange state of play today, which has not been seen before (which we call 1 = 2 + 3 + 4 + 5). The no. 1 player’s market cap = Combined market cap of the next 4 players (i.e. TCS’s market cap = Market cap of Infosys + Wipro + HCLT + Tech Mahindra)," wrote Viju George and Amit Sharma of JPMorgan India in a note in June.

TCS has been consistently posting results that have beaten market expectations. TCS does not provide quarterly or annual guidance, but the company exceeded software lobby group Nasscom’s 12-14% revenue forecast for fiscal 2014 and is expected to easily beat the 13-15% revenue forecast for fiscal 2015.

In an interview on 17 July, N. Chandrasekaran, chief executive officer and managing director of TCS, said he remains bullish about the company’s prospects.

On 16 July, TCS reported sharp increases in fiscal first quarter profit and revenue, beating analysts’ estimates. Chandrasekaran said he believes growth has returned to the US and UK economies, the main markets for IT firms, even though he is still cautious about the Indian market’s growth prospects.

He attributed the company’s success to its digital drive that continues to pay dividends.

TCS’ rise was also helped by the steady decline in the fortunes of Infosys and Wipro—India’s second- and third-largest IT services providers, respectively.

Infosys, once the bellwether of the Indian IT industry, got mired in leadership issues and will take time to recover under its new CEO, Vishal Sikka, who takes charge from 1 August. Wipro, under the leadership of T.K. Kurien, is also trying to regain its drive.

Meanwhile, Cognizant, not listed in India, is more a threat to Infosys and Wipro, than to TCS. At least, for the time being.

TCS is moving gradually beyond just traditional IT services to a social, mobility, analytics and cloud (Smac) framework. It has invested in building a network of cloud data centres across the globe. It is also building a 3,000 sq. ft, UK-based data centre for private cloud computing, according to a 12 July 2013 Credit Suisse Research report.

TCS has set up a digital enterprise unit in Silicon Valley to club its Smac services. It had been working on the concept of setting up the digital business as a separate unit since January 2012. The unit is headed by Satya Ramaswamy, vice-president and global head of TCS Digital Enterprise, who joined TCS in 2010 after the company acquired Brightfon Inc., a mobile solutions firm he founded in July 2008. Chandrasekaran has built on the foundation set by predecessor S. Ramadorai and adopted a decentralized, “mini-CEO" model for TCS, dividing the company into several small units and empowering business leaders across the organization to take faster decisions.

“Over the last 5-6 years what TCS has done extremely well is that they have implemented a very focused strategy and followed it up with savvy execution," said the analyst mentioned above.

TCS is setting an example in other ways too. The company has over 300,000 employees, and will soon have more than 100,000 women on its rolls.

Still, experts tracking TCS, which recently formed a joint-venture partnership with Japan’s Mitsubishi Corp., have said that it will be a formidable challenge for the company to maintain its existing pace of growth, as it gains immense scale with each passing year.

“Admittedly, such a statistic at a point in time (June 27 2014) is subject to the tempests and temper of the market. Yet, that this is happening in IT Services today, (which being a competitive and a largely linear industry with substantially overlapping business models) begs the question—how logical is it for this equation (1 = 2 + 3 + 4 + 5) to continue? Can such lop-sidedness persist in the India IT Services space?," asked JPMorgan India.

Beryl Menezes in Mumbai contributed to this story.

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ABOUT THE AUTHOR
Leslie D'Monte
Leslie D'Monte specialises in technology and science writing. He is passionate about digital transformation and deeptech topics including artificial intelligence (AI), big data analytics, the Internet of Things (IoT), blockchain, crypto, metaverses, quantum computing, genetics, fintech, electric vehicles, solar power and autonomous vehicles. Leslie is a Massachusetts Institute of Technology (MIT) Knight Science Journalism Fellow (2010-11), author of 'AI Rising: India's Artificial Intelligence Growth Story', co-host of the 'AI Rising' podcast, and runs the 'Tech Talk' newsletter. In his other avatar, he curates tech events and moderates panels.
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Published: 23 Jul 2014, 03:40 PM IST
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