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Betting on the Future

Tata Consultancy Services is one of the most consistent tech companies, which has closed the gap between Infosys and it in the last 3 years

Betting on the Future Tata Consultancy Services

TCS is one of the most consistent tech companies you can find in terms of profitability. It has played a long catch-up game with arch nemesis Infosys in the profitability game. Infy, in the last decade, had at least a 6 percentage-point lead over TCS in margins. TCS has managed to close that gap considerably in the last three years. Today, both TCS and Infosys have nearly the same margin levels.

Profitability. In the latest quarter, the EBITDA margins improved slightly by 20 basis points (q-o-q) to 28.8 per cent. This was on account of a 40 basis points benefit of rupee depreciation. The company has guided operating margins of 26-28 per cent next year.

Outlook. The TCS management is optimistic about the revenue growth in FY16. With the US economy looking up, increased opportunities are expected in the banking sector and capital markets. UK, EU, India and Latin America are also looking better this year and the retail vertical too is looking up with deals and closures this year. The management is also confident that FY16 will see a stronger deal pipeline. The company has signed seven large deals across five sectors.

Valuations. TCS trades at a P/E of 24. At current valuations, it trades at about 17 per cent premium to Infosys. That's a large climb-down from the premium of 35-40 per cent that TCS used to trade against Infy between May and September last year. There are two reasons for this gap narrowing. First, TCS' last two-quarter results were below par and second, under Sikka, Infosys has shown marked improvement. If Infy continues to outperform, this gap could be further reduced. TCS' superior track record, consistent margin levels and better visibility, and the lowest attrition level in the industry favour the company. Hold.

Betting on the Future Tata Consultancy Services