Analysts say there are plenty of reasons to love Tata Consultancy Services Ltd (TCS), except when it comes to the attribute that should matter most to investors—valuations. TCS’s market capitalization reached the $100 billion mark on Monday, rising high above analysts’ expectations of where its valuation should be. The most bullish analyst on the Street has a 12-month target of Rs3,900 for the company’s shares, or Rs3,400 in present value terms. The company’s shares changed hands at an average price of Rs3,480 apiece on Monday, which effectively means that all analysts would have been recommending that investors sell TCS shares.

If analysts are cautioning investors, what’s behind the massive rally? One major factor is the recent fancy domestic institutional investors have taken to the IT services sector. They have been underweight IT stocks for years and have started increasing allocations, especially with flows to domestic mutual funds remaining high. A number of other IT stocks have hit all-time highs in recent trading sessions, and valuations have reached unreasonable levels for many of them too.

In TCS’s case, an added factor is its bullish commentary while announcing its March quarter results, which has led some investors to believe that the company’s growth will rise to double-digit levels this fiscal. But growth has been sluggish in the company’s largest business segments, and all investors can hang on to for now is hope that growth will pick up because of some large deal wins, and the company’s commentary that things are looking up. This is all the more surprising because TCS’s performance has fallen short vis-à-vis its commentary in the past.

Note that revenues grew by 6.7% in constant currency terms in fiscal 2017-18. The ask rate for growth to jump to double-digit levels, and that too on a larger revenue base, is by no means modest. “TCS requires incremental revenue addition of $2.1 billion in FY19 and about 11% CAGR in incremental revenues over the next 7 years to justify the price. We like the business model of TCS but struggle to justify valuations," analysts at Kotak Institutional Equities said in a note to clients last week, echoing the view among most analysts. In FY18, the company added $1.5 billion in revenues.

The rally in TCS’s shares has brought it within kissing distance of Accenture Plc.’s market capitalization, which is interesting considering that the latter is double in size in revenue terms.

Until a few years ago, it made sense to ascribe a materially higher revenue multiple to the Indian company, simply because it was growing at a much faster pace. But in the 12 months till February 2018, Accenture has grown revenues by around 8.8% in local currency terms, about 200 basis points higher than TCS’s growth rate in FY18. After adjusting for inorganic contribution to Accenture’s revenue, growth of the two companies are more or less in the same range.

Investors are also glossing over risks such as constraints on visas and a general antipathy towards outsourcing firms under the Trump administration.

Of course, there are things to like about TCS and based on the median of about 44 price targets compiled by Bloomberg, it deserves a valuation that’s at least four-fifths of the $100 billion mark.

It has been investing to tap opportunities in the digital space, an area of growth.

And while growth is unexciting, it is steady, and its operations still throw up large amounts of cash. Besides, it has increased payouts, and the leaner capital structure is resulting in better returns to shareholders.

But all told, valuations are far ahead of what the company’s growth justifies. It’s fair to say that TCS shares are riding on hope rather than substance.

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