3 min read.Updated: 30 May 2019, 11:18 AM ISTVarun Sood
Peers say tech spending tied to global growth and any talk of re-rating sector is premature
TCS maintains that its tech solutions are essential to companies across industries
NEW DELHI :
Should information technology (IT) services companies be re-rated?
Tata Consultancy Services Ltd believes that it is time money managers re-look at how they have valued the company, which in the year ended March 2019 overtook DXC Technology Co., to become the world’s third largest IT services firm.
Mumbai-based TCS maintains that its technology solutions are essential to companies across industries, helping its clients from Citigroup Inc. to Walmart Inc. to do their business more efficiently. For this reason, TCS claims its current valuation of trading at 23 times forward price-earnings (PE) is not fair, compared to how money managers value recession-proof companies in the fast-moving consumer goods (FMCG) space such as Hindustan Unilever Ltd and Dabur Ltd, which trade at 63 and 48 times earnings, respectively.
The price-to-earnings ratio is arrived at after dividing the current value of a stock by its annual earnings and is one of the many metrics to measure how expensive a stock is.
“Rajesh (TCS CEO Rajesh Gopinathan) said sometime back that the IT industry is like the FMCG industry. There is stickiness among clients to services we provide. We have a responsibility to many of the mission-critical applications for our customers. There is a greater affinity for our offerings compared to the FMCG offering and so, the multiples that FMCG sector gets should be comparable to a leader like us," said TCS chief operating officer, N. Ganapathy Subramaniam.
At the heart of what many experts believe is one of the most audacious debates in the two-decade IT services industry is the narrative that over the years, global technology spending has decoupled from economic growth. Experts at TCS and Capgemini SE argue that global retailers, carmakers and banks are spending more time and money on digital technologies, like data analytics, artificial intelligence platforms, to ensure that they don’t face annihilation because of disruptive innovation.
Still, most of TCS’s peers, including Infosys Ltd and Wipro Ltd, and industry lobby group Nasscom maintain that tech spending is still tied to global growth and so any talk of the re-rating of the sector is premature.
For now, TCS’s aggressive approach finds support from only a few analysts like BNP Paribas analyst Abhiram Eleswarapu, who first introduced the term technology staples for describing some of the largest IT services firm in 2015.
“Indian players will continue to gain share within services—the largest tech segment—thanks to their three-pronged advantages of scale, relationships (>95% repeat business for large players) and capabilities/superior training. Over time, we believe they will be increasingly treated as “technology staples" companies even as revenue growth could slow due to a high base effect, because of the sustainability of their businesses, high quality managements and strong cash flow/ return profiles," Eleswarapu wrote in a note, titled, India Strategy 2025: A Stock Odyssey, dated 27 April. Many, however, disagree with TCS and HUL trading at same multiples. “
“Only tech firms that can be compared with FMCG are firms like Microsoft, Alphabet (Google), Amazon and others which have moved aggressively into future looking tech for the economy as a whole by making large capital investment in cloud data centres and the like," said technology consultant Siddharth Pai, who has personally led over $20 billion in complex, first-of-a-kind outsourcing deals.
TCS claims this will change.
“It is always good to have critics as they make you work harder," said Subramaniam.
“It is only a question of time before we get there (becoming recession-proof)."
“Achieving a staple-like positioning is difficult as it requires three foundational elements to fall in place," JP Morgan Chase and Co. analyst Viju George wrote in a note dated 8 April.