Investment highlights ! Building global competency
TCS is India's largest IT company, with global ambitions to be among the top 10 global IT players by 2010. The company has a three-pronged strategy to achieve the same – strong delivery capability through Global Network Delivery Model (GNDM), changing business mix (full services play) and inorganic growth through strategic acquisitions.
Ability to win and address large engagements
The strong business model has helped the company win and address large complex global engagements. The company won 12 USD 50 million plus deals in FY07 alone, which supports the large volume player strategy of TCS. Some of the large ongoing projects include Bank of China (USD 100 million, 5-years) and Bank of Pichincha (USD 140million, 7-years). Recently, TCS won a USD 140 million deal (2 year development, 7-8 years maintenance) from BSNL, India's largest state owned telecom service provider and a USD 35 million multi year outsourcing contract from healthcare major Roche.
Increasing focus on products division
Product services division – TCS Financial Solutions has shown considerable growth (>50% YoY) in the last 2-years driven by strong customer addition across geographies. Management expects a revenue contribution in high single digits within next 3-years driven by growing business traction enhanced by inorganic growth momentum.
Strong demand environment with growth across geographies
TCS has witnessed robust growth across geographies especially established markets (US and Europe – 46% YoY FY07) and emerging markets Middle East Asia (MEA), Latin America and Asia Pacific – 79% YoY FY07). This continued growth has been propelled by leveraging global support capability, changing business mix and acquisition leading to significant customer additions and deal wins
Balance sheet analysis
" Cash and cash equivalents stood at healthy Rs.8,021m which we believe could be further used for acquisitions. " TCS has consistently maintained a strong Return on Net Worth (RoNW) of greater than 50% in the last 3-years. The RoNW stood at 51% as on 30 June, 2007.
Valuation
TCS currently trades at 18.6x and 15.3x FY08E and FY09E earnings which is lower than its closest competitor Infosys. We expect TCS to trade at a premium to its close peers bolstered by strong revenue growth, GNDM, full services play and continued acquisitions. Furthermore, there is strong IT demand environment with IT exports expected to cross US$ 60bn by 2010 and TCS's global ambitions, we believe a revenue growth of 25%+ is achievable on a long term basis.
This is further supported by healthy pipeline, strong employee metrics, recent large deal wins and a strong domestic presence, which adds value to our recommendation. We assume 26% revenue and 21% EPS CAGR through FY10. Moreover possible inorganic growth and continued large deal wins, add to protracted revenue growth over a long period with sustainable margins. We argue that the stock should trade 20-25% higher than the current level at Rs.1,248/share within 12-months.
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