Home / Markets / Mark To Market /  TCS sees cloud opportunities, but valuations leave no room for error

Tata Consultancy Services Ltd (TCS) is training its lens on cloud adoption increasingly driving IT spends across global spends, which shows where the IT industry’s growth is going to come from.

Even so, the TCS stock has been seeing a good run in 2020 and is pricing in new opportunities for now. The TCS stock has risen over 25% compared to pre-covid highs in February.

The management talked of greater traction from cloud adoption across all industries, in a meeting with analysts last week. Some segments such as manufacturing and financial services still have lower adoption rates compared to other industries.

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Besides, more than 90% of the clients TCS surveyed are showing an acceleration in spending on technology and digital.

But note the increase in spends is not likely to happen at the same time and could be more gradual compared to the sharp increase after the 2009 financial crisis. This also includes the adoption of native cloud technologies. That said, some of the growth challenges the IT industry faced some time back has reduced.

“The sense before the pandemic that the technology industry has reached a maturity stage has disappeared. TCS sees the start of the first phase of a multi-year technology transformation cycle," said analysts at Axis Securities in a note to clients.

Earlier too, TCS had adapted to technology challenges ahead of its peers, point out analysts. Hence, cloud migration technologies may not be that difficult.

“We expect the company to remain relatively better positioned (vs the peer group) over the medium to long-term and benefit from the uptick in digital investments," said analysts at Motilal Oswal Financial Services in a note to clients.

TCS also sees a broad-based recovery across different segments. In the second quarter, the company bagged $8.6 billion in new deals, which is among its highest in recent times. TCS has a good deal pipeline in the works.

Of course, it must be noted here that rival Infosys Ltd has been better placed in the post-covid recovery phase, in terms of revenue growth, and its shares have risen 46% compared to pre-covid highs.

Also, remote working trends could now shift to hybrid working conditions. Hence, this could see an increase in travel and office-related costs. Wages are also rising from October.

In addition, after the recent run-up in stock price, TCS’ valuations are rich at around 27 times forward earnings. Earnings growth is expected to be in the mid-teens over the next two years.

“The stock is currently trading upwards of twice its standard deviation of its historical median, which suggests that the stock is fully factoring in the multi-year growth opportunity and has limited room for error," said analysts at Motilal Oswal.

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