As the markets scale new highs, India's largest software company, Tata Consultancy Services (TCS) has also achieved a milestone. The market capitalisation of TCS has crossed Rs 5 trillion or Rs 5 lakh crore mark! This is remarkable for many reasons. Its size is greater than the combined market cap of the next four largest Indian IT firms: Infosys, Wipro, HCL Tech and Tech Mahindra. What's more, TCS is bigger than the combined size of all other Tata group firms too. How has TCS reached this exalted position? And can the stock sustain such a premium?
The first question is easily answered. TCS has sustained a high growth rate over the years. This has come along with excellent profitability, margins, return ratios and cash-flow generation. The dividend payout has been good too. While its peers like Infosys and Wipro have struggled with growth and management issues, TCS has gone from strength to strength. This is evident from the fact that all its business divisions are aiding its growth. But what about the second question? Currently the stock trades at about 24 times its TTM earnings. Can such valuations be sustained? We believe the answer lies in the continuity of the company's growth momentum. TCS has not surprised on the downside in its quarterly results. The market has given the stock these valuations based on the assumption of sustained good performance. However, TCS could lose its premium billing if it delivers negative surprises for a few consecutive quarters.
The first question is easily answered. TCS has sustained a high growth rate over the years. This has come along with excellent profitability, margins, return ratios and cash-flow generation. The dividend payout has been good too. While its peers like Infosys and Wipro have struggled with growth and management issues, TCS has gone from strength to strength. This is evident from the fact that all its business divisions are aiding its growth. But what about the second question? Currently the stock trades at about 24 times its TTM earnings. Can such valuations be sustained? We believe the answer lies in the continuity of the company's growth momentum. TCS has not surprised on the downside in its quarterly results. The market has given the stock these valuations based on the assumption of sustained good performance. However, TCS could lose its premium billing if it delivers negative surprises for a few consecutive quarters.