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Home / Markets / Mark To Market /  RIL versus TCS: Which blue chip fared better over last 15 years?

In the past five years, Reliance Industries Ltd (RIL) has been the large-cap stock to own. It has delivered annual average returns of nearly 35% in this period, according to data collated by research firm Morningstar. This is largely due to the success of the Reliance Jio and Reliance Retail ventures. Returns of Tata Consultancy Services Ltd (TCS), in comparison, have been far lower at 23%. RIL now also has a market capitalization that is about 9% higher than that of TCS.

Yet, for its supernormal returns in the past few years and its leadership in market cap, RIL has lagged TCS in terms of long-term returns for shareholders. In the past 15 years, TCS has generated annual average returns of 20.7%, according to Morningstar. In RIL’s case, returns stood at 15.2%. The research firm’s data is the so-called total return for the stock, which includes dividends. Even keeping dividends out of the picture, TCS shares have generated relatively higher returns since its listing in August 2004. In other words, slow and steady has won the race.

A tale of two business models
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A tale of two business models

“Consistency and visibility of earnings are key drivers of stock valuations, so they are among key factors that drive investor interest in any stock. Due to the cyclical nature of the oil and gas business, RIL’s earnings growth and visibility have been erratic, which may have prompted some investors to adopt a wait-and-watch mode," says Vinay Khattar, head of research, Edelweiss Wealth.

The RIL stock was stuck in the 400-600 range for eight years until early 2017. But after Reliance Jio began to show promise, the stock made up for some of the past underperformance.

The consistency aspect is also visible in the respective return ratios of the two firms. TCS ended FY21 with a return on capital employed (RoCE) of about 35%, according to data collated by Jefferies India Pvt. Ltd. For RIL, on a consolidated basis, RoCE stood at 7.5% in FY21.

A file photo of a TCS office. Data for the past 15 years shows the TCS model of returning cash to investors has delivered better returns.
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A file photo of a TCS office. Data for the past 15 years shows the TCS model of returning cash to investors has delivered better returns. (Photo: Mint)

Of course, the movement in these ratios is due to the different business models. “RIL has a capex-heavy business model; they would never be able to match TCS in terms of return ratios but when these investment bets fructify, the stock starts reacting—as we have seen in recent years," says Nitin Bhasin, head of research at Ambit Capital India Pvt. Ltd.

“Given the vast difference in business models, comparing their return ratios would not be an apple-to-apple comparison. Yet, investors tend to prefer taking exposure in stocks faring well on return ratios and debt metrics," adds Khattar.

RIL’s strategy to use cash flows from its core oil and gas business and diversify into new industries has kept not only return ratios, but also cash flows under pressure. Indeed, the firm has generated positive free cash flow in only one of the past seven years. The firm’s announcements of new investments in green energy have raised concerns about cash generation all over again.

On the other hand, IT services exporter TCS has neither diversified into other businesses nor made any large acquisitions, and its payouts to shareholders are far greater.

The differences in TCS and RIL stocks highlight the starkly different ways in which the Tata and Reliance groups have structured their businesses. These differences also have implications for future return prospects.

While TCS itself may not have made acquisitions or diversified, the Tata group largely relies on dividends received from TCS to invest in other businesses and make large acquisitions. In RIL’s case, all such activity happens within its flagship listed firm.

In other words, what TCS offers to shareholders is this: “We’ll run the IT services business well, and we’ll return cash to our shareholders. They can then decide for themselves what the next best thing is they want to invest their returns in." RIL comes along and says, “We’ll run our current business well and generate cash. And we’ll also decide for our shareholders what the next best thing is, in which these excess returns should be invested."

The data for the past 15 years shows the TCS model of returning cash to shareholders has delivered better returns. But who knows, if growth rates taper in the IT services business, and if RIL’s new bets keep striking gold, the returns data for the next 15 years could look very different.

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