TCS

TCS Management on COVID trigger, a multi-year transformation

Update on the Indian Equity Market:
On Friday, NIFTY closed flat at 11,914 (+0.7%). Top gainers in NIFTY50 were Wipro (+4.4%), ICICI bank (+4.1%), and Axis bank (+3.7%). The top losers were Grasim (-2.6%), Hindalco (-2.5%), and UPL (-2.3%). Top sectoral gainers were PSU BANK (+3.1%), BANK (+2.8%), and PVT BANK (+2.6%) and sectoral losers were REALTY (-1.6%), PHARMA (-1.3%), and MEDIA (-0.9%).

Excerpts of an interview with Mr. Rajesh Gopinathan, CEO & MD, and Mr. NG Subramaniam, COO, TCS with ET now dated 8th October 2020:
● They fundamentally believe that technology will be a solution and therefore there will be even more relevance to their services to their customers.
● They were confident about their ability to switch to the new operating model and that was what was underlying the commentary that they had given earlier on that in about six months’ time or the end of Q3, they should be looking at coming back to parity and from a cost structure and margin perspective, by the end of Q4 they should be looking at parity.
● What has changed during the course of the last six months is that they have been able to execute on the operational resiliency program that NGS laid out; second, they have been able to participate significantly in this technology-led transformation that is at the heart of their customer’s response to the COVID crisis.
● First-quarter was about their internal resiliency. The second quarter has been about participating in the customer side. Now they are a lot more confident because both legs have been executed and it is with that confidence that they are giving their comments.
● What they are seeing is an urgency to accelerate the digital transformation on all fronts. Three priorities – the first one is the resiliency of your IT landscape. The second is their own internal employee experience, can they continue to operate remotely and safely and then contribute even more productively? The third being customer experience, how can they continue to be wherever their customers want to do business and how their experience can be touchless, contactless while providing all the accessibility options for different segments if possible.
● If you put these three things together, then the migration to the cloud becomes very important. The intent is to move to a hyper-scale platform with agility, resilience, adaptability, flexibility, and all those things.
● In the current context, they provide significant value and there is clearly an urgency to say that look I am going to move to that kind of an architecture which is much more modern, much more futuristic, which means that when you go an invest in this and it is not going to be a simple hop on and hop off once you move in there.
● It is going to be irreversible and you have to continue with that journey for three to five years where you will pretty much become a native and will embed your businesses into that technology by which you will extend your organizational capabilities with the ecosystem concept and bring in a lot more credibility to the business you do business with your customers. That is the multi-year transformation that they are seeing.
● In a technology, anything more than three to five is very difficult to call out but they are very confident about three years because it is something they have visibility to.
● Within those three to five years, there are going to be a lot more new ways of doing business, of reaching out to customers who are going to emerge.
● COVID has provided a business trigger and they are not sure whether in the absence of COVID, this adoption would have been at the same speed. It is unfortunate that the trigger happened in such a negative way but the trigger for the shift has kicked in. That is the way to understand what is going on.
● In the last three months, they have upped their quotient on delivery guidelines for delivering through secured, borderless workspaces.
● We are seeing that people love the flexibility that they have. While talking to one of the employees the other day, he was saying that this conference room crap has completely gone away and the collaboration meetings are a lot more democratic and they are able to decide and deliver things faster.
● They are able to incrementally innovate, multiple elements, and levers of productivity which is there. They are completely focussed on making sure that it is working superbly and people are able to deliver productivity with a lot of pride.
● Their operating philosophy has been to maintain stable margins. They are very systemic about trying to manage within that range which they think is beneficial to all stakeholders; customers, their employees, and their investors.
● Short-term volatility will have its own impact and it is more of a philosophical thing. There is no right margin to operate at, it is relative competitiveness and the aspiration that you have. It is a fair and achievable and sustainable band and that continues to be their guiding principle.

Consensus Estimate: (Source: market screener and investing.com websites)
● The closing price of TCS was ₹ 2,811/- as of 9th October 2020. It traded at 33x/ 28x/ 25x the consensus earnings estimate of ₹ 85.1/ 101.0/ 113.0 for FY21E/22E/23E respectively.
● The consensus price target of TCS is ₹ 2,802/- which trades at 25x the earnings estimate for FY23E of ₹ 113/-.

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.”

With growth, margins will also improve – TCS

Update on the Indian Equity Market:

On Monday, NIFTY closed at 10,815 (+0.4%). Top gainers in NIFTY50 were Tech M (+5.5%), Hindalco (+3.8%), and HCLT (+3.7%). The top losers were Power grid (-2.2%), Bajaj Finance (-2.1%), and HDFC Bank (-1.9%). Top sectoral gainers were IT (+1.7%), METAL (+1.5%), and FMCG (+1.3%) and sectoral losers were REALTY (-1.6%), PSU BANK (-1.6%), and FIN SERVICES (-1.3%).

Excerpts of an interview with V Ramakrishnan, CFO, TCS and Milind Lakkad, CHRO, TCS with ET now dated 10th July 2020:

  • 95% of our people are working from home and only 1% come to work for various reasons. It has been a change for everybody. It hasn’t been an easy cakewalk but they have done very different things.
  • Associate health and well being has been a paramount thing for them and has been a key factor in decision making.
  • They do everything while continuing to take care of associates’ health and ensure that they continue to be a happy organisation.
  • The aspiration of 26-28% margin is very much intact. Of course this pandemic has changed certain dynamics. So, the timing of when they will get back, is dependent on the recovery. They are confident of recovery in the coming quarters.
  • Recovery will be very segment and specific country driven, but they expect that to happen across many of the sectors.
  • Along with growth, obviously the margins will also be improving because in the current quarter, the reduction in the margins is directly related to the contraction in the demand and in the revenue.
  • While they were able to get back almost 300 bps outside of anything to do with employee cost but still they had a dip of about5% that is directly related to the drop in revenue so with improvement in the recovery, they will also see the improvement in margins.
  • The investment is driven by what is required to make sure that they are abreast of what is happening on the technology front to make sure that TCS people are equipped and in terms of what they can showcase to their So the investments have been going on and the balance sheet is strong.
  • They will continue to invest in research and innovation, in building capabilities at scale among the employees and also in labs and customer experience areas.
  • Going forward, they will continue to get all 40,000 offers they made in the campuses in India and that will go through from this mid-July though the year. The engagement with the fresher recruits and everything else is on very actively for the last three months and they will honour all of those offers.
  • They have to be conscious that some of the sectors have been badly affected and there is an expectation from some of the customers and some of the sectors for support. They have been very supportive and we have looked at it in the contextually and depending on the relationship, it is a very mutually beneficial relationship.
  • Their dividend or return policy has been 80% to 100% of free cash flow. So, there is no departure from that policy. In the last couple of years, they have been very close to 100% or even slightly higher. They will stay within that range.
  • Customers’ ability and willingness to adapt to the Work from home model and to be able to connect people from wherever they are. So, the location independence of this model will change the dynamics for everybody.
  • They always thought that the most important meetings have to happen in person and that is not the case anymore. They just come together, discuss and have a chat and then the two CEOs connect in a jiffy. Those are big things that will help establish a deeper relationship with customers going forward.

Consensus Estimate: (Source: market screener and investing.com websites)

  • The closing price of TCS was ₹ 2,222/- as of 13-July-2020.  It traded at 27x/ 23x the consensus earnings estimate of ₹ 82.6/ 95.6 for FY21E/22E respectively.
  • The consensus price target of TCS is ₹ 2,088/- which trades at 22x the earnings estimate for FY22E of ₹6/-

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.”

 

Post pandemic, recovery to be V-shaped – Mr N Ganapathy Subramaniam, COO – TCS

Update on the Indian Equity Market:

 

On Monday, Nifty closed unchangedat 9,262. Within NIFTY50, TATAMOTORS (+4.2%), SUNPHARMA (+3.9%) and HDFCBANK (+3.6%) were the top gainers, while HINDALCO (-5.6%), JSWSTEEL (-5.6%) and AXISBANK (-5.4%) were the top losers. Among the sectoral indices,PSU BANK (+4.2%), IT (+1.6%) and REALTY (+0.6%) gained the most. METAL (-3.3%), FMCG (-2.1%) and AUTO (-1.4%) were the top losers.

 

Post pandemic, recovery to be V-shaped – Mr N Ganapathy Subramaniam, COO – TCS

 

Excerpts of an interview with Mr N Ganapathy Subramaniam, COO- TCS published in Business Standard dated 20th April 2020:

  • Back in December, TCS dealt quickly in China. That led to none of their employees getting affected by covid-19.
  • TCS has formed a committee that meets every day and coordinates operations globally. More than 90% of the workforce is working from home (WFH). As long as the work is getting done, TCS is not in a hurry to get employees back in the office space.
  • In March, 2/3rd of the business impact was due to supply side issues. This was due to employees having to WFH and approvals had to be obtained from clients for the same.
  • In 1QFY21E, 80% of the business impact will come from demand side. There are various discussions happening with clients. Some clients are asking how TCS can help them in their business in current stressed situation, some clients are asking for pricing discounts, while some are asking to halt projects. On the other hand there are also situations where clients are asking to accelerate projects and finish ahead of time. TCS has also got certain additional work from clients where their other vendors could not do it, and also in cases to help moving operations to WFH.
  • TCS has seen some suspension of projects in certain pockets, but there have been no cancellations.
  • It is difficult to assess the current situation. But when the pandemic is contained and economic activity resumes, all sectors will rebound simultaneously. Once the pandemic is over, the recovery will be swift and V-shaped. Given the deal pipeline and demand scenario, management is optimistic of reaching the 3QFY20 revenue level of ₹ 390 bn in 3QFY21E.
  • TCS has various levers that it will implement to undertake cost optimization. First and the biggest available lever is how a project can be executed within budget and time. Second is reduction in employee costs on account of no salary hikes and reduction in travel costs due to WFH. Third, marketing costs will come down with more digital marketing. The other cost efficiencies can be achieved by controlling utility costs and contracting costs.
  • TCS is open to look at M&A opportunities in these times as according to the management, these are good times to buy. TCS had its biggest acquisition (captive BPO of Citigroup) during the Global financial crisis.

Consensus Estimate: (Source: market screener website)

  • The closing price of TCS was ₹ 1,819/- as of 20-April- It traded at 20.9x/ 21.3x/ 19.1x the consensus EPS estimate of ₹ 86.9/ 85.5/ 95.4 for FY20E/ FY21E/ FY22E respectively.
  • Consensus target price of ₹ 1,829/- implies a PE multiple of 19.2x on FY22E EPS of ₹ 95.4.

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.”

BFSI and retail will drive growth in the medium and long term: TCS

Update on the Indian Equity Market:

The markets continued the downward trajectory on Tuesday with the Nifty falling 55 points to close at 12,170. Monday’s fall was on the back of a combination of selling pressure from the DII and muted participation by FIIs. Within the index, some of the stock movements were a reaction to the quarterly results declared by the company. Within the sectoral indices, only Media (2.2%) closed the day in green while REALTY (-1.5%), AUTO (-1.4%) and METAL (-1.4%) led the laggards. Within the index stocks, INFRATEL (8.6%), ZEEL (4.5%) and BPCL (1.4%) were the top gainers whereas TATASTEEL (-3.3%), M&M (-2.9%) and TATAMOTORS (-2.4%) were the top stocks that ended in the negative.

Excerpts from an interview with Mr Rajesh Gopinathan, CEO – TCS. The interview aired on CNBC-TV18 on 20th January 2020.

  • TCS declared 3QFY20 results with a YoY increase of 0.2% in consolidated net profit at ₹ 81,180 mn. In this interview, he discussed the third quarter performance and the outlook in detail.
  • He is hopeful of sustaining margins at around 25 percent going forward on back of their strong delivery model. The company has been investing continuously in the organic talent building capability and over time, the investment into the group of 5-12 year old people has been significant. This has been going for on for last five- six years. He believes that the pool is now very strong and there is an opportunity to expand the base.
  • The company is aspiring to achieve margins of 26%. To achieve the target, the combination of operational elements and the currency needs to be supportive. Both the things came together in the 3QFY20. The currency will remain volatile. However, he believes that the way things are moving, probably that will also be supportive of the medium-term.
  • He said that the medium to long term growth trends will be based on BFSI and retail because the rest of the verticals are firing all cylinders. They are all well into the double digit space. In BFSI & retail, the company is observing very diverse performance across geographies and sub-segments. The weakness can be isolated down to the large banks and the large retailers in US and UK. The company is not losing wallet share in these geographies but it is the sub-segment that forms large part of the base business.
  • In terms of addition to headcount, he said that it is 23,500 this year, same as last year. The hiring was front-loaded during the current year.
  • In the retail space, more traditional retailers seem to be finding their groove. In the US, the players like Best Buy and Walmart are doing significantly better and standing up to the pure online players very well. He believes that the company will revert back to double digit growth in the retail segment.

Consensus Estimate (Source: market screener website)

  • The closing price of TCS ₹ 2,170/- as of 21-January-2020. It traded at 25x / 23x / 21x the consensus EPS for FY20E / 21E / 22E of ₹ 88.0/ 96.1/ 104.0 respectively.
  • Consensus target price of TCS ₹ 2,108/- implies a PE multiple of 20x on FY22E EPS of ₹ 104.0.

TCS: Focus on getting double-digit growth in retail and BFSI

Update on the Indian Equity Market:

Following the global peers, the markets traded higher on Friday with the Nifty closing 0.6% up at 11,305. The September quarter result season started on a negative note with TCS and IndusInd bank declaring the results lower than street estimates. Among the sectoral indices, 9 out of 11 major indices were up with Metal (2.3%), IT (1.5%) and FMCG (1.0%) leading the gains while Media (-0.3%) and Pvt Banks (-0.03%) were the only sectors that closed in the red. Within the stocks, Cipla (4.7%), Infosys (4.1%) and Vedanta (3.9%) led the index higher while Indian Oil (-3.3%), Yes bank (-2.9%) and GAIL (-1.8) brought the gains down.

TCS: Focus on getting double-digit growth in retail and BFSI

Key takeaways from the interview of Mr Rajesh Gopinathan, MD & CEO and Mr Ganapathy Subramaniam, COO, Tata Consultancy Services Ltd. (TCS); dated 11th October 2019 with CNBC TV18:

  • Mr Gopinathan mentioned that the March quarter is a very crucial quarter for the company as December is the weakest quarter for the company.
  • The focus of the company is to get back to double-digit growth. The company believes that the opportunity for growth is present in the markets. Irrespective of volatility, the company has a full list of services to achieve the growth in both weak as well as strong markets scenario.
  • On the possibility of a global slowdown, Mr Gopinathan mentioned that North America till a quarter back was growing in double digits and BSFI was back in double-digit. In Europe and the UK, the company has experienced high double-digit growth for a long period of time. It is just an adjustment phase and the company is confident about future growth.
  • About future prospects, Mr. Subramaniyam said that the net customer additions, as well as customer band movements, have been great. The employee addition during the quarter was at an all-time high. All this will help the company to grow. The order book including in BFSI (Banking, Financial Services, and Insurance) that the company has signed during the quarter was also impressive according to him.
  • The focus in the future is to get double-digit growth in the retail and BFSI segment for the company.
  • About the margins for the quarter, Mr. Subramaniyam said that they had planned for much higher growth and the intake of employees was also high during the quarter. So when the company has additional hiring related cost and the revenue do not commensurate with that, that puts pressure on the margins.
  • About the employee structure, they mentioned that the company has front-ended the entire human resource thing this year and 30,000 people are already in the system which has never happened before. All these employees are going through rigorous talent development and they will be deployed in the 3rd and 4th quarters. The entire learning infrastructure has been significantly strengthened so that the employees will be at certain competencies.

Consensus Estimate (Source: market screener website)

  • The closing price of TCS was ₹ 1,989/- as of 11-October-19. It traded at 23x/ 21x/ 19x the consensus EPS for FY 20E/ FY 21E/ FY 22E of ₹ 87.4/ 96.5/ 105.0 respectively.
  • Consensus target price of ₹ 2,118/- implies a PE multiple of 20x on FY22E EPS of ₹ 105/-.