Blazing All Guns | Value Research Tata Consultancy Services has maintained a full-services model, which has enabled it to beat its peers…
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Blazing All Guns

Tata Consultancy Services has maintained a full-services model, which has enabled it to beat its peers…

Tata Consultancy Services (TCS) has been on a roll for quite some now. Between 2008-12 (YTD), TCS gained cumulative returns of 130 per cent. Erstwhile bellwether Infosys actually lost 32 per cent in the same period. It is no wonder then that the market is betting on TCS as the next Infosys.

Why you should buy TCS?
Beating peers with full-services model: Rather than focusing on select verticals or premium services (a la Infy) TCS has maintained a full-services model - upstream or downstream, premium or "bread-and-butter" services, consulting or even application development and maintenance. Why "bread-butter" services are delivering more for TCS? Volumes. These services are estimated to account for a whopping 70 per cent of all IT spends and such non-discretionary spends are essential for smooth running of client operations. In an environment that is yet to open up its purses to discretionary spending, these services then become essential to maintain growth. That is where TCS has kept its eye on and Infy has looked away. These "acquired" clients will be open to bring more services to TCS rather than trying out a fresh vendor.

Strong execution drives topline: TCS' strategy certainly seems to be paying off. Revenue growth came in at a robust 4.6 per cent (q-o-q) in Q2FY13 – much higher than Infy's 2.6 per cent growth. It saw volumes grow 4.9 per cent (q-o-q). Key verticals reported better than industry numbers. BFSI was up four per cent (q-o-q), manufacturing up nine per cent, retail up six per cent while energy and media were both up five per cent. TCS' management expects a good demand environment with deals being finalised and on-schedule ramp-ups ahead. It sees discretionary spend improvements going well into FY14.

Envious cash flow position: The September 2012 quarter saw operating cash flows up 70 per cent (y-o-y) in dollar terms and 100 per cent up in rupee terms. On a trailing twelve month basis, TCS' operating cash flows have improved around 24 per cent (y-o-y) while free cash flows are up 96 per cent.

Best-in-class employee retention: Attrition levels at 10.2 per cent (ttm) are the lowest in the industry. Quarterly annualised attrition rate in Q2FY13 stood at 13.3 per cent – 7.4 per cent points lower than Infy. Total headcount has improved 18 per cent (y-o-y). Net hires stood at 10,500. TCS is looking to hire 25,000 fresh engineers this year.
TCS' valuations are not cheap. The stock trades at 19.63 times its ttm earnings. The market is giving a premium to TCS' full-services model and its superior volume growth and by all counts TCS appears still on a roll.

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