Tata Consultancy Services Ltd. - Growth & Valuation update.

It's been about 18 months since I had previously written about Tata Consultancy Services Ltd. (TCS). [Click here for that post.] At that time the TCS stock was trading around Rs.2600/-, enjoying a P/E ratio of about 24, but the company's financial numbers were just starting to show some initial signs of slowing growth. Hence I had shared my opinion that the company's valuation could cool down a bit with the stock either trading within a range for extended period or even experience some correction. It's been 18 months since that post and I am happy to have been proven right (Luckily!!). During this period, the TCS' stock has spent most of it's time within the Rs.2200 to 2700 range and is currently around the Rs.2400 level. This is a very healthy correction in Valuation, which is more time-based correction rather than a price-based one.

Now let's quickly look at the way the company's Financial performance has progressed over the last 3 years. The chart alongside shows the progress made by TCS' T-T-M Total Income numbers over the last 3 years and the corresponding Y-o-Y Growth rates. First let's look at the T-T-M Total Income numbers. Between June'13 to Dec'14, TCS' T-T-M Total Income figure kept increasing by about Rs.4500 crores Q-o-Q on an average, whereas the Average incremental Q-o-Q increase between Dec'14 and Jun'16 has dropped to about Rs.3500 crores. Larger incremental increase on a smaller base during the earlier period meant faster growth rate and Smaller incremental increase on a larger base during the latter period meant a much slower growth rate. This is clearly reflected in the Y-o-Y Total Income Growth % Chart above. The Growth rate peaked at just above 30% in June'14, then collapsed over the next few quarters and has now stabilised around the 14% level. For a company the size of TCS, with employee base of over 3,50,000 and Annual Revenues in excess of Rs.1,15,000 crores now, managing a consistent double-digit growth in Revenues, itself is a pretty good achievement. Hence I would be happy if TCS continues to post Y-o-Y Growth of somewhere around 15% even in the future. Anything more & it will be considered a bonus.

Coming to Profitability, TCS had seen a sharp dip in profit margins during the March'15 quarter, primarily due to provisioning made towards expenses incurred during Chennai Floods. TCS not just a took some hit due to damage to it's own property and loss of several working hours, but also helped it's employees financially to relocate/repair their homes. The extra expense of around Rs.2000 to 2200 crores during the March'15 quarter, clearly reflects in the drop in T-T-M EBITDA and T-T-M EPS of the company in the charts alongside. But both the parameters are back on growth path after a couple of dull quarters. The T-T-M EBITDA of TCS is about to cross the Rs.35,000 crores mark and the T-T-M Net Profit is about to cross the Rs.25,000 crores mark during the current quarter (most probably). Currently TCS is the 2nd largest Indian company in terms of Annual Net Profit, but is expected to take back the crown by the end of this fiscal as the current No.1, Reliance Industries Ltd., is expected to take some hit on it's Consolidated Net Profit due to the launch of it's Telecom venture.

Valuations: The T-T-M EPS for Tata Consultancy Services Ltd. currently stands at Rs.126/-. That means at the current price of about Rs.2400/-, the share trades at about 19 times it's EPS. I am expecting TCS to post growth rates in the region of 12 to 15% for the next few quarters. Hence I would expect it's Fair Value to lie between 15 to 18 times it's EPS. That means at 19 times it's T-T-M EPS, the stock isn't much above it's Fair Value and seems to have completed most of it's correction. Going forward I would expect TCS' share price to move in tandem with it's growth in Total Income & Net Profit. If the company's growth remains more-or-less within my expected range, then I don't expect the stock to get re-rated upwards or downwards anymore. I would put a 1-year price target of around Rs.2700-2750 on TCS. Let's see if the growth numbers do spring a positive or negative surprise in the next few quarters.