700% rally in 10 years and $100-bn m-cap, but TCS still lags among IT peers

Tata Consultancy Services (TCS) hit a record high of Rs 3,557 on the NSE in intra-day deals on Monday, sending its market-capitalisation (market-cap) above the $100 billion mark. It is the first time ever that an Indian information technology (IT) company has achieved this feat. 

Despite the surge and the fact that TCS is now the most valued Indian company basis its market-cap, the stock still lags its peers in the information technology sector in terms of absolute returns in the past decade. 

With a gain of around 700 per cent since April 23, 2008 (compounded annual growth of around 26 per cent), TCS still lags behind MindTree and HCL Technologies (HCL Tech) that have gained 739 per cent and 710 per cent respectively during this 10-year period, ACE Equity data shows. 

TCS, though, managed to outperform the benchmark indices – the Nifty50 and Nifty IT – that moved up around 110 per cent and 240 per cent each, respectively. Since its listing day on August 25, 2004, the stock has gained nearly 1,300 per cent – adjusted for all bonuses, splits and dividends during this period, ACE Equity data shows.

However, it is Tata Elxi, another Tata group company that tops this table of highest decadal returns with a gain of over 1,100 per cent during this period, data suggests. The company is amongst the world’s leading providers of design and technology services for product engineering and solutions across industries including Broadcast, Communications and Automotive.

Tata Elxsi also provides technology consulting, new product design, development, testing services solutions and services for emerging technologies such as IoT (Internet of Things), Big Data Analytics, Cloud, Mobility, Virtual Reality and Artificial Intelligence. 

ANALYST VIEW

The recent near 9 per cent rally in TCS during the past two trading sessions comes on the back of TCS’ impressive show in the March 2018 quarter, which now puts the Tata group company above the likes of Reliance Industries, Maruti Suzuki, Infosys and fast moving consumer goods (FMCG) majors ITC and Hindustan Unilever (HUL).

Though most analysts remain bullish on the stock given its impressive performance, they feel the stock prices in most positives at the current levels.

"After showing green shoots in Q3FY18, TCS has turned the corner in terms of revenue growth. However, we believe that all the exuberance is priced in. The stock is trading at 20x FY20E EPS versus its historical average of 19x since listing in 2004," says Neerav Dalal, an analyst tracking the company at Maybank KimEng Securities.

Adding: "We raised our target multiple to 19x from 17x to account for a higher USD revenue growth rate of 10.1% in FY19-21E, which is in line with the five year average; we see this as the most important criteria driving P/E multiples. Maintain HOLD."

Ashwin Mehta and Rishit Parikh of Nomura, too, have maintained a cautious view on the stock with a target price of Rs 2,750.

“We retain Reduce as we find valuations expensive at around 20x FY20F and see risk to street expectations of around double-digit constant currency (CC) revenue growth and flattish margins,” they said in a note.