The country’s biggest software exporter Tata Consultancy Services has widened its lead over Sensex peers RIL, the market leader for many years, and Infosys after it became the first company to cross the 3 lakh-crore market cap in almost two years on March 5. TCS’s market cap stood at 3.07 lakh crore on Thursday. That was 29,000 crore more than the value of Reliance Industries’ shares, and 1.38 lakh crore more than that of rival Infosys’. Moreover, the current value of TCS shares exceeds the combined m-cap of the 27 listed companies belonging to the Tata Group by 94,000 crore. Though the company trades at a P/E multiple of 29.54 to its one-year forward estimated earnings, most analysts prefer TCS over other IT companies. The valuations of the company have risen over the past two years due to consistent purchases of its shares by foreign investors who found few other stock investment options, rebalancing of global indices having Indian shares as their underliers and optimism among market analysts on prospects of the IT sector because of stronger offshore demand in FY14 from that in the current fiscal year (FY13).
“We recommend TCS as the best way to play offense in the sector for those who believe that the offshore industry will do better in FY14 than in FY13,” said foreign brokerage JP Morgan in a note to its clients. TCS was the major beneficiary of a reshuffle or rebalancing of foreign indices over the past year. Foreign equity-traded funds (ETFs) use these indices as benchmark for their funds. The recent changes in FTSE Global indices alone will see nearly $82 million fresh inflow into TCS. FII holding in TCS has risen to 14.96% of the 26.04% of non-promoters stake at the end of December 2012, compared with 13.41% in December 2011. Tata Sons, the holding company of the Tata Group, holds 73.75% stake in the company. TCS’ m-cap has risen 29% in the last one year, while RIL’s gain was just 2%. On January 14, 2008, just before the global recession, RIL’s m-cap was 4.67 lakh crore. Since then RIL has lost nearly 2 lakh crore in market value while TCS has gained over 2 lakh crore.
The company’s brand value also crossed the $5-billion mark recently with a growth rate of 28.9% annually over the past few years. Over the past year, TCS added nearly $1.18 billion in brand value.
On revenues, TCS clocked a sequential improvement of 50 basis points in operating margins during the December quarter while Infosys reported its fourth consecutive fall in operating margin. TCS has also been able to widen the gap in revenue and net profit with Infosys over the past few quarters. Based on the dollar-denominated revenue During the trailing 12 months in each of the five quarters to December 2012, the revenue of TCS is now $3.9 billion in excess of Infosys’ topline. The gap was smaller at $2.9 billion a year ago. Also, the gap in net profit has widened to $740 million from $499 million a year ago. TCS’ new client additions have been impressive and consistent over the past several quarters; also a 26% increase in average revenue per client over the past eight quarters points to the quality of new customers and strong account mining, according to JP Morgan.
Since 2004, TCS has traded in a range of 6-27x one-year-forward EPS. Over the last few years, it has traded in the range of 15-22x one year forward earnings. “While TCS’s valuations remain rich, we believe it will continue to execute well and we prefer TCS from a risk-return perspective,” Credit Suisse said in a recent report. “We continue to expect TCS to grow faster than Infosys in FY14. While the difference in growth may not be as high as in FY13, we believe there will still be a gap and that will make TCS worthy of a premium.”
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