After the recent rally in its stock price, Tata Consultancy Services (TCS) is now the second most valuable IT services company in the world behind IBM but ahead of Accenture and HP.
TCS is currently valued at around $60 billion against Accenture's current market valuation of $50.5 billion and HP's $43 billion.
IBM remains the leader with market value of $202.6 billion at the end of trading on Monday. (See table)
The company is however miles ahead of its Indian peers, accounting for nearly 47% of industry market capitalisation and nearly four-fifth of the combined net profit of listed IT companies in BSE500 index last fiscal.
Analysts attribute this to the TCS' superior valuation on the bourses.
“Investors are willing to pay a premium to TCS as it has consistently been one the fastest growing companies in its sector. Besides, it has been able to maintain its profitability ratios despite the macro-economic challenges," says Shashi Bhushan, senior research analyst-Institutional Equities at Prabhudas Lilladher.
This has made TCS one of the most expensive technology companies in the world right now, giving it higher market valuation relative to its revenue and profitability. TCS currently trades at around 26 times its net profits in the last twelve months. In comparison, Accenture, TCS closest global competitors currently trades at around 16x its latest earnings per share while IBM is trading at 14x.
In the last three years, TCS' revenue has expanded at a compounded annual rate (CAGR) of 28.4% while it profits has grown at 26% per annum during the period. In comparison both Accenture (9%) and IBM (3%) have grown in single digits.
A higher valuation doesn't directly benefit the company but experts say that it has indirect benefits such as a bigger global profile and greater attention from large global institutional investors that look for bigger and safer companies for their long-term investments.
"This will help TCS attract top notch global investors and thus provide stability to the stock in times of volatility,” Indirectly, this may also improve TCS' profile among its target clients consiting of world’s leading companies and business leaders and may help it grow faster.
Analysts expect TCS to maintain the growth momentum and thus close the gap with its bigger global rival.
“TCS is one of the fastest growing IT services companies globally and we expect it to maintain the current growth momentum,” says Ankita Somani, research analyst at Angel Broking, who has a buy rating on the stock. She attributes the success of TCS to its execution capability and its widespread presence in all key geographies.
“The company was one the first to recognize the importance of having a global footprint and scaled-up its geographical presence pretty rapidly. It is now reaping the benefits,” she says.
It allowed TCS to spread to diversify its revenue streams and grow faster when key markets in North America and Europe slipped into recession after the 2008 global financial crisis. North America, the traditional market for India IT exporters accounted for 52% of TCS revenues in FY13 and fifth of the revenues came from fast growing emerging markets in Latin America, Asia Pacific including India and Middle East and Africa. The rest came were accounted for by UK --its second largest market --and continental Europe. This makes TCS one of the most diversified tech companies in India geographically.
TCS already is one the world’s largest employer in its segment with nearly 2.8 lakh employees at the end of June this year against Accenture's employee strength of 2.66 lakh. TCS headcount however trails that of IBM, which remains the largest IT company employing over 4.3 lakh people at the end of last calendar year.
TCS' global peers however earn more revenue per employee compared to Indian IT companies. With similar headcount, Accenture revenues were nearly twice that of TCS last year while IBM is nearly 9 times bigger than TCS in terms of revenue. The next challenge for TCS would be to close this productivity gap with its global peers by moving-up the industry value chain.