BackWill TCS’s digital prowess boost valuations?
It seems best to wait and watch before jumping to conclusions whether TCS's bullish commentary will translate into materially higher growth rates
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Tata Consultancy Services Ltd’s (TCS’s) meet with analysts last week created a buzz that eventually lifted its shares by over 3% on Friday. The IT services giant flaunted its prowess in the digital space, which impressed even the sceptics among the analysts’ community.
This is significant because a section of the markets believed that TCS has been lagging lately because it hadn’t invested adequately in developing new and emerging technology solutions. Competitors such as Accenture Plc and Cognizant Technology Solutions Corp. have made a number of acquisitions to boost their digital capabilities. Their growth rate in the past four quarters has been impressive, while TCS’s performance has underwhelmed, giving further credence to the above view.
The analysts’ meet, it appears, has dispelled this notion. Analysts at JPMorgan India Pvt. Ltd said in an 18 March note to clients, “We came away with an enhanced appreciation of TCS’s digital capabilities and conclude that its lack of M&A (mergers and acquisitions) in digital does not necessarily mean lack of capability—it is strongly building the needed, differentiating digital strengths organically." At Kotak Institutional Equities, analysts have been far more sanguine about the company’s digital prowess. They wrote to clients, “We believe TCS has done hard work and the building blocks are in place to sustain/extend its leadership (in digital). It is creditable that it has made these investments without compromising on profitability."
Yet, having said all this, it’s not that investors are suddenly gung-ho about TCS’s digital capabilities and prospects. On Friday, while TCS’s shares rose 3.14%, those of Infosys Ltd jumped 2.72%.
Investors were more excited, it seems, about TCS’s comments about the general demand environment. The company told analysts that it does not see issues in the banking and financial services vertical, for instance. This has alleviated some concerns, especially after Cognizant’s relatively muted guidance for 2016. Besides, JPMorgan’s analysts write, “Some of the negative drags that held TCS back in 2015 (such as insurance/telecom) are ebbing away as we look to 2016."
But an important point to note here is that TCS sounds bullish almost always. Its commentary about the general demand environment wasn’t very different even a year ago, although its growth differential with Cognizant fell to around 10 percentage points in the middle of last year. Back then, the company blamed a few trouble sectors that pulled back overall growth. Who’s to say if 2016 isn’t a repeat of a similar trend, where some other trouble sectors impact overall growth?
As such, it seems best to wait and watch before jumping to conclusions whether TCS’s bullish commentary will translate into materially higher growth rates. And especially so given where valuations are. After all, even Kotak, which is relatively bullish about the company’s prospects, has a target price of ₹ 2,525 for TCS, merely 4% higher than current levels.
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