TCS : Can it Sustain Leadership
TCS is the largest IT company in India and the tenth-largest
in the world. It is one of the many affiliates of India’ most respected
business conglomerate i.e. the Tata Group. It provides a large array of IT
services including business consulting, information technology, business
process outsourcing (BPO), infrastructure, and engineering. They work in
banking, financial services and insurance; manufacturing;
retail and distribution, and telecom segments.
They started their business operations back in 1968
providing management consulting services and to service their electronic data
processing requirements and have come a long way ever since. They have
pioneered the Indian IT services industry. They also happen to be the largest
software exporter in the country.
TCS is the fourth largest employer in the country and
the third-largest IT employer worldwide. In 2018 they became the first Indian
company to reach $100 billion in market capitalisation. Apart from the private
they also help the government. They were responsible for the redesign, maintenance
and support the UIDAI portal.
Not only are they big in India, but they also have a
massive global presence as well. Currently, they have offices in 286 locations
across 46 countries all over the globe. Furthermore, 92% of their workforce is
Indian which means that they employ a massive chunk of the Indian working
population. Not only are they big employers, their workforce comprises of 31%
women which isn’t a big number still, but compared to other such mammoth
organisations it is quite significant.
They are a very customer-centric organisation are
known worldwide for their customer satisfaction and their exemplary
performance. They have set the benchmark quite high for other players in the IT
services industry in India and overseas. When one thinks of TCS, they associate
innovation and reliability with the name.
TCS vs Competitors
The company’s top competitors in the world market are
IBM, HP and Accenture and in the Indian market, they have HCL, Infosys and
Wipro as their peers. Together IBM, HP, TCS and Accenture are called the ‘Big
Four’.
They are by far the fastest-growing brands out of
their competitors with the growth of 58% just in the year 2014.
TCS has a PE (price to earnings) ratio of 88.64 which
shows that the investors are expecting high growth rates in the future and this
clearly signifies that the company is doing well, compared to its competitors
pr ratios. HCL has a PE ratio of 33.5, Infosys has a PE ratio of 36.49 and
Wipro’s PE ratio is the lowest of all at 15.19.
IBM has managed to retain their market position in the
IT services sector at number one, followed by HP at number two, TCS at number
three and Accenture as the 4th most valuable company in the IT
services sector.
TCS has a market capitalisation of US$9.40Trillion,
IBM has a market capitalisation of US$110.63 Billion, HP has a market
capitalisation of US$26.66Billion and Accenture has a market capitalisation of US$152.32Billion.
In the financial year 2019, TCS posted revenue of US$ 22.031Billion, IBM
reported US$77.1 billion as their revenue for the same year, HP posted US$ 58.8
million as their revenue and Accenture reported $43.2 billion as their total
revenue for the fiscal year 19-20. It is clear that TCS has broken all records
by posting such high revenue. It comes as no surprise that investors are
willing to pay premium prices for TCS stocks.
Their revenues are going through the roof and this is
the product of keeping customers at the centre. Their reliability and
innovation are what sets them apart in the market. Customers keep coming back
to TCS due to their stellar performance and their reliable work ethic.
This compounding growth in the revenue and the profits
and a higher market capitalisation in TCS are the foremost reasons TCS has
caught the attention of a lot of institutional investors who are looking for
safer companies for long term investment purposes. Even in times of global
unrest, TCS attracts investors looking for safer investment avenues.
TCS’s boasts double-digit growth in their revenue and
net profits unlike its peers in the same industry which have only been able to
grow their revenues in single digits.
A lot of research analysts attribute TCS’s success due
to their global presence. They recognised the importance of expanding their
business globally and did so quite rapidly say many analysts. They are now
reaping the benefits of their global footprint. Diversifying into foreign
markets has allowed them to raise their revenue streams and grow as a
multinational. A major portion of their revenue comes from their North American
operations and their European market is the second-largest contributor to their
revenue stream. TCS saw an opportunity in diversifying their business to new
markets and they beautifully tapped all of these markets.
In terms of revenue earned per employee, TCS’s peers
are ahead of TCS, with IBM and Accenture being top two.
The slow growth of TCS’s competitors can also be
attributed to the popularity of newer technologies like automation software and
cloud computing, thereby making their traditional approaches redundant. This is
reflected in their declining revenues or slow growth.
Leadership
Good leadership is of great importance to a company’s
success. The leadership can either take the organisation to great heights or
result in underperformance like in the case of Dell and blackberry. It helps an
organisation actualize its organisational goals by achieving efficiency. No
organisation can work without effective leaders to help lead the path to
success. The leaders keep the employees motivated and on the right track. They
set a clear vision for the organisation to follow going ahead.
The massive growth in the recent years of the company
can also be accredited to the CEO, Mr Natarajan Chandrasekaran.
When he took over in 2009, they were almost performing close to Infosys looking
at their profit margins. During his tenure, he has not only doubled the figures
but also made them one of the leading IT services companies in the world. He
had a hands-on approach with the customers and would regularly meet with them
and make sure they were satisfied with the performance. He would keep his
employees motivated by sending messages of encouragement. I’m pretty sure had
the employees not been motivated enough, TCS wouldn’t have achieved the success
it has today.
Secondly, Mr Chandrasekaran also decentralised the
decision-making process. The IT sector is a very rapidly changing Industry due
to constant innovation and introduction of new technology frequently. He
enabled his employees to make quick decisions. He remodelled the organisational
structure of the company along vertical lines and vested the decision-making
power in them to enable them to crucial decisions fast.
Corporate Actions
Initially, when TCS decide to finally go through with
their IPO in 2004, the leaders didn’t feel the need to market the IPO
considering the company’s popularity. Investors had been waiting for an
opportunity to invest their money in TCS and the IPO was long overdue. Needless
to say, they were oversubscribed ten times over. They opened the issue on July
29th 2004 and 5,54,52,600 equity shares of the face value of Rs 1
each were put on sale. In addition to this, the greenshoe option offered
83,00,000 more shares. The price of the share was Rs 775- 900 per share.
They have indeed come a long way from their IPO.
Investors who stayed for the long term have made thrice the average annual
compounded returns from fixed deposits. An investor who had initially made an
investment of Rs 1,00,000 in TCS in 2004 would have turned it into more than Rs
23 lakhs today with a CAGR of around 18.05%. Here’s how:
An investor who invested Rs 1,00,000 in TCS would have
received 118 shares (1,00,000/850).
In April 2006 they announced a bonus issue to the tune
of 1:1 making the 118 shares 236 shares.
The next time they came out with a bonus issue was in
April 2009 again to the tune of 1:1 making the 236 shares into 472 shares.
The latest bonus issue was in 2018 with the same ratio
i.e. 1:1 turning the 472 shares into 944 equity shares.
Today the current market price of the TCS shares is Rs
2480 meaning that the value of the shares will be 944*2480 = Rs 23,41,120
This amount is excluding the dividends paid out by the
company which clearly shows how the company has grown so much since its IPO. In
contrast, had the investor invested the same amount in a bank FD he would have
been left with just a little over Rs 2 lakhs today.
Apart from their bonus issuing, they have declared
dividends 67 times since their IPO in ’04. In the past year alone, they have
declared dividend amounting to Rs 73 per share. At the current share price of
Rs 2480, this results in a dividend yield of 2.94%.
TCS had a share buyback, of Rs16,000 crores, which
were 1.99% of their total equity shares. They wanted the company’s free cash
flow to the shareholders. The promoters of the company also participated in the
share buyback offer. It went through the tender route and they accepted shares on
a proportionate basis during the buyback period. They offered Rs 2100 per equity share for the
buyback.
In February of 2017, they bought back 2.85% of their
total equity shares for Rs 16000 crore. They bought back 5,61,40,351 shares for
Rs 2,850 per share.
Conclusion
TCS’s volume growth has enabled them to grow so much
as a company. Their business momentum has been rapid and they have been taking
on a larger volume of projects than its Indian counterparts.
Apart from larger volumes, TCS also continuously been
dominating the IT services sector with better margins compared to its Indian
peers. They reported a 26.3% operating margin compared with 25.1% of Infosys.
They have been reinvesting these profits ultimately making room for higher
growth.
TCS also boasts better employee utilisation than a lot
of other Indian IT services organisations. Better employee utilization realizes
better profits. Its is no surprise their project volumes have been increasingly
looking at their employee utilization.
Apart from better employee utilization, TCS also
boasts of low attrition rates. In other words, the employees of the
organisation have been kept motivated to put in their best work. All of these
factors translate into their combined growth as an organisation. A good
environment for the employees is only better for the company in the long run.
Happy employees translate into better work from the employees. All of these
factors have helped them overtake Infosys in just 15 years.
Analysts and investors both have a positive outlook on the company. TCS has managed to excel in their field irrespective of small fluctuations and is expected to keep growing in the future considering the digitisation of businesses that have been going on and will continue for a long time in the future.
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