TCS
Brief history and company intro: Founded in 1968, Tata Consultancy Services (TCS) is the flagship company and a part of Tata group. TCS provides IT services, consulting and business solutions and has been partnering with many of the world’s largest businesses in their transformation journeys. The company offers a consulting-led, cognitive powered, integrated portfolio of IT, business and engineering services and solutions. TCS works with leading corporations across the world, departments of the Government of India and various state governments, systemically important entities and the private sector. The company has pan India presence and 50+ countries globally with major presence in countries across Europe, the UK, the Middle East, North America, Latin America, and South-East Asia.
Market Cap: ₹11,62,039 Cr.
Stock P/E: 23.5
Book Value: ₹ 262 (P/B: 12.5)
ROCE: 64.6 %
ROE: 52.4 %
Sales growth over past years (10,7,5,3,1 years) :
15.69%, 4.36%, 7.16%, 16.8%, 6.85%
Compounded Sales Growth
(10,5,7,3,1 years) : 10%, 9% 10%, 10%, 8%
OPM(10,7,5,3,1 year in %): 26, 26, 27, 28,27
Net Profit : Improving YoY and have improved from 28060 to 46099 crore over past 10 years
EPS : Improving YoY and have improved from 50.68 to 134.20
ROCE (10,7,5,3,1 year in %):
50, 39, 47, 54, 64
Debt: No long term borrowings
Net Cash flow over years (10,7,5,3,1 in crores): +394, +1286, +1422, +5630, +1893
Promoter holding: ~70-73%
Any known corporate issues: none (jobs for cash issue which has been resolved as per management commentary)
Client breakup: USD 1M+ clients: 44%
USD 5M+ clients: 23.5%
USD 10M+ clients: 16.3%
USD 20M+ clients: 9.87%
USD 50M+ clients: 4.31%
USD 100M+ clients: 2.04%
Total project in pipeline: 9.2B USD
2 Replies
[Disclosure and investment thesis: It was single statement investment theory back in 2021 for me and also kinda understood later why one shouldn't invest based on just screener results.
Sales growth was consistent (15-20% for 1,3,5,7 year), future orders were high, high ROCE (again in 15-20% across 1,3,5,7 year), P/E was just in investable range (20-25), no long term debt since ages, no corporate governance issue (after buying it job for cash case came out 3 years later in 2023), cash flows were good.
Biggest mistake was not knowing this company (and Accenture) is just like middleman between another company and group of engineers [Know about what you're investing in very simplified manner - failed]. Second was not thinking disruption could happen easily in this space as new tech comes in (like AI) [not seeing future of the company after n years - failed]. Finally, this company is running on just salary arbitrage between USA and South East Asian countries. If someone does same job somewhere else for cheap then orders go towards those countries [Due deligence on core income source and replicability - failed]. Also invested at top at peak valuation (sector was trending and valuation was just below peak) [don't invest in peak valuation in disruptable industry and sector]
So, to start the discussion and give some feedback, we should start by classifying TCS as a consulting company, not a tech company. Big difference between the two. Tech companies have products (big Tech like Google, Apple, MSFT, Amazon, NVidia) and allied services (like Apple Appstore, Google Playstore, MSFT third party licensing) as revenue streams, and the workforce is there to sustain the revenue streams.
In consulting companies, the workforce is the revenue stream. Even if there is a service provided, it is without an accompanying product. No matter how well the service is packaged, if the nature of service is dependent on the workforce providing skills that need learning and upskilling from time to time, the service is still workforce dependent. Companies that are heavily dependent on the workforce to sustain the revenue stream have much lower multiples. So, it brings us to what multiples are important
Revenue multiple, to start with. This usually ranges from 1x - 5x. 5x is usually an outlier. Consultancy companies do not enjoy 10x or above revenue multiples, because revenue longevity isnt there. The nature of the contracts signed by such companies with clients, and the nature of competition within the industry prevents higher revenue multiples.
A higher revenue multiple requires the company to have a moat with regard to customer and employee exclusivity. Customers are always looking for a better deal and would switch to a cheaper competitor if they can. Employees are also looking for a better deal, because pay-wise these companies are not competing with the tech companies, while there is a fair amount of skill adjacency.
If you look at the P/S of TCS, it was already expensive (above 5x multiple) in 2021. Since then, its been seeing a price correction to ensure the multiple comes down to its historical level of around 5x. Its always commanded around 5x before, because of deal pipeline. But as I've started above, 5x is an outlier across such firms. The moment there is any indication of deal volume reduction, the market will react.
There are other metrics that are important to valuing this company. Will need to get them out, before I can continue the discussion. One would be average deal size, and the other would be client concentration.