Business

TCS May Have Achieved Escape Velocity From Traditional Indian IT Services Business Model

Tata Consultancy Services office
Snapshot
  • TCS seems likely to be the first Indian IT services company to become one of the global powerhouses of software services in areas beyond manpower services.

The recent performance of Tata Consultancy Services (TCS), India’s biggest software services company with revenues that could top $20 billion this fiscal, suggests that it has broken out of the straitjacket of a pure labour-arbitrage-based business model.

In April-June 2018, TCS has put behind memories of the slowdown in growth over the last few quarters with double-digit (10 per cent) revenue increases, breaching the $5 billion consolidated turnover mark, netting a billion dollars in income ($1.081 billion), and a mouth-watering 25 per cent share for digital revenues in the overall business mix. The fact that operating margins were still a healthy 25 per cent shows that TCS has managed to balance its legacy manpower-based businesses with new value-added businesses. TCS also hit the four-lakh figure in terms of employee strength.

With automation and SMAC (social, mobile, analytics, and cloud) technologies taking centre-stage, many Indian information technology (IT) companies were seen to have been too slow to jump on the bandwagon; but TCS seems to have corrected this shortcoming quickly, and digital revenues zoomed 45 per cent in the recent quarter.

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The double-digit revenue growth was partly the result of a revival in the bread-and-butter business segment of BFSI (banking, financial services, and insurance), but this has been counter-balanced by SMAC, with managing director and chief executive Rajesh Gopinathan emphasising the same: “Customers across verticals and markets are embracing our Business 4.0 thought leadership framework and accelerating their digital transformation journeys.” Chief operating officer and executive director Ganapathy Subramaniam amplified on this: “It has been an excellent quarter, with broad-based growth across all segments and good client additions. We are seeing strong demand in areas like cloud transformation, cyber-security and data privacy, and automation.”

The first quarter may thus be a significant turning point for TCS, as many analysts have noted (read here and here).

Around mid-morning on Thursday (12 July 2018), TCS had managed a market valuation of Rs 7.55 lakh crore, or around $110 billion. This kind of valuation is comparable to the likes of IBM ($133 billion) and Accenture (112 billion).

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As any market maven knows, market capitalisation is essentially currency – currency that can be used to acquire companies at the cutting edge of technology and for inorganic growth.

Assuming the Tatas would always want majority control, given a promoter holding of around 72 per cent, the current market valuation gives the group the scope to dilute up to 20 per cent of the outstanding equity for an acquisition or mega merger. That’s a $22 billion war chest.

Given its recent performance and market valuation, TCS seems likely to be the first Indian IT services company to become one of the global powerhouses of software services in areas beyond manpower services, enough to rival the likes of IBM and Accenture at some point. It is achieving escape velocity from the old Indian IT business model.

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