A three-dimensional approach to 5G -TCS

A three-dimensional approach to 5G -TCS

Update on the Indian Equity Market:

On Monday, NIFTY closed in the green at 16,661 (+1.9%), led by M&M (+5.0%), TITAN (+4.9%), and INFY (+4.6%). KOTAKBANK (-2.0%), JSWSTEEL (-1.9%), and SUNPHARMA (-1.7%) were few of the laggards. Among the sectoral indices, CONSUMER DURABLES (+4.2%), REALTY (+4.1%), and IT (+3.9%) led the gainers, and there were no losers for the day.

Excerpts of an interview with Mr. N Ganapathy Subramanium, Chief Operating Officer, TCS published in Business Standard on 30th May 2022:

  • The annual report outlines the company’s ambition to reach USD 50bn revenue. Currently, TCS has 600,000 employees with revenues of USD 25bn. It doesn’t want to double the employees to double its revenues, so there is an element of nonlinearity there. The company doesn’t just want to work with clients, it wants a play in the ecosystem.
  • TCS wants to create systems that give real-time information.
  • Metaverse is currently a hype cycle. If it succeeds, the COO would like TCS to be present in that segment as well.
  • TCS will continue to enter unchartered territories. Currently, it is not present in B2B businesses, it may get into consumer businesses in the future.
  • BFSI, being one of the early adopters of technology consumes the largest amount of technology talent and resources. Almost every aspect of banking is changing and demand for transformative solutions in the banking space is at an all-time high.
  • TCS is the largest provider of technology services and has a solid play in the BFSI segment. About 30-35 percent of the world’s population uses the company’s product. In insurance as well, it has built a solid platform, with about 20-25mn policies administered across major markets.
  • Many Indian insurance companies use the TCS platform for processing policies and claims, in both life and non-life.
  • Discussions with clients don’t seem to suggest the peak is over for the IT sector.
  • For FY22, the total contract value (TCV) stood at USD 11.3bn. The quarterly run rate is USD 8-9bn. A year back, it was USD 6-7bn. The company’s focus is on getting the deals, irrespective of the size.
  • TCS is supporting several customers in rolling out the 5G network. Its approach to 5G is three-dimensional. First act as a systems integrator to integrate, deploy the network, and operate it for telco customers. Second how to help enterprises build a private 5G network within their facilities. Third, leverage the two network layers to build vertical applications on top of it. The company’s strength is in software, and with more networks getting softwarised TCS will have a bigger role to play beyond applications.

Asset Multiplier Comments

  • Post FY22 earnings, the management alluded that tech spending continues to remain strong and believes it would be the last to be cut despite an economic downturn. The company is focusing on tech integration led hyperscaler deals in its Industry 4.0 initaitive helping it win more transformational deals.
  • Deal wins across segments, reduction in subcontractor costs and better realisation would likely drive revenue growth in the medium term, while employee costs and attrition are likely to be a drag.

Consensus Estimates: (Source: market screener and investing.com website)

  • The closing price of TCS was ₹ 3,380/- as of 30-May-2022.  It traded at 29x/ 25x/ 23x the consensus earnings estimate of ₹ 118/ 133/ 146/- for FY23E/FY24E/FY25E respectively.
  • The consensus target price of ₹ 3,939/- implies a P/E Multiple of 27x on the FY25E EPS estimate of ₹ 146/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

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