Home / Markets / Stock Markets /  TCS suggests multi-year tailwinds from Cloud, says Motilal Oswal

The IT Services industry is seeing significant traction from Cloud adoption across all industries. This echoed the outlook shared by industry peers (INFO, WPRO, LTI, etc.) over the last one month, believes Tata Consultancy Services. Motilal Oswal, in a report briefs the points of meeting with TCS’ senior leadership during a sell side event on December 11, during which the IT major shared their perspective on the multi-year opportunity on account of a broader Cloud adoption.

According to TCS, the shift to the Cloud has accelerated due to the impact on businesses from the COVID-19 lockdown, which has convinced clients on the need and security associated with Cloud. A recent survey undertaken by TCS indicates that less than 30% of corporates are prepared in areas like Cloud, which should drive meaningful investment.

"They see the current Cloud adoption wave as similar to the ERP adoption in early 2000s, which helped Indian IT Services industry scale up and drove enterprise spend for over a decade. Hence, they have created individual units to collaborate with key hyperscalers, similar to ERP vendors in the last cycle," says the Motial Oswal Report.

Initial Cloud deployment will be spread over a few years

The report says, "In their view, the first stage of Cloud transformation work will focus on Cloud migration, which should be spread over the next two to three years. They are not anticipating an increase in spends from different industries to happen at the same time, and expect business pickup to be more gradual compared to the sharp increase seen after the 2009 financial crisis."

Underlying business practices unlikely to change

TCS's recent discussion with clients suggest a limited impact on business practices as many clients still prefer physical interactions, which implies a resumption of travel cost as soon as travel resumes, says the report.

Despite remote work and TCS stated model of 25x25 (only 25% of employees working from the office), the management believes in the continued need for existing delivery practices and does not foresee the emergence of new trends, including crowd sourcing, as a cost-efficient method.

The report further adds that WFH will continue to act as a useful tool for talent management, given the flexibility it has provided to both employees and employers. The company will continue to provide skill initiatives for workforce to better adjust to it.

ER&D a significant opportunity

TCS's management sees the ER&D industry as still fairly untapped and believes that a lot can be done in this space. While they see the industry moving away from point solutions to end-to-end work, those instances are still few and hence will take time to develop, says the Motilal Oswal Report.

"While clients have accepted the location advantage offered by Indian vendors, they still need to take advantage of the service delivery model."

Valuations already factoring in long-term demand

TCS has a historical track record of adapting to multiple business challenges and technology change cycles ahead of its peers. It has consistently maintained its market leadership, best-in-class operational metrics, and high return ratios. "We expect the company to remain relatively better positioned (v/s the peer group) over the medium to long term and to benefit from the uptick in Digital investments," says the report.

The brokerage continues to be positive on the TCS's long-term outlook. They remain Neutral as the stock is currently trading upwards of 2STDev its historical median, which suggest that the stock is fully factoring in the multi-year growth opportunity and has limited room for error. The brokerage expects a target price of 2,900.

TCS is currently trading at 2,783.

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