TCS closes in on IBM as the world's most valued IT services company

Currently, IBM is about 20% bigger than TCS in terms of market capitalisation

Tata Consultancy Services (TCS) is closing in on IBM as the world's most valuable information technology (IT) services company. 

Currently, IBM is about 20 per cent bigger than TCS in terms of market capitalisation, compared to nearly twice the latter’s size a year ago. India’s top technology company is valued at $110.5 billion, against IBM’s current market capitalisation of $131.9 billion.   

Earlier this year, TCS went past Accenture to become the world's largest IT services company after IBM. TCS’ market cap is up 36 per cent in the year so far (in dollar terms) against a 6.2 per cent decline in IBM’s market cap.

The Indian technology major earns the highest profit (in dollar terms) in the industry after IBM. Despite relatively low revenue, it is ahead of Accenture. TCS reported a net profit of $4.2 billion during the 12 months ended June. This was ahead of Accenture's net income or profits of $3.9 billion during the period, but behind IBM’s net earnings worth 

$5.8 billion. Analysts attribute this to TCS’ superior operating margins than its North American peers. The Indian player reported an operating margin of 24.8 per cent in FY18, which is nearly twice the margins of IBM and Accenture, at 13.6 per cent and at 12.6 per cent, respectively.

This translates into bigger profits for tech companies and gives them higher stock market valuation, compared to their peers in developed markets.

At its current stock price, TCS is valued at nearly 28 times its trailing 12-months earnings against IBM’s price to earnings multiple of 10.3 times. Accenture is currently trading at 24 times its trailing 12-months earnings.

According to analysts, IBM’s valuation has been depressed by a steady rise in its borrowings to fund the company's aggressive stock buyback programme. Its total debt is up 22 per cent in the last three years to $39.1 billion, nearly twice the company's equity or net worth, at the end of June this year. TCS and Accenture are debt-free.

Analysts say it is only a matter of time before either TCS or Accenture snatches pole position from IBM as the latter's revenues and profits are stagnant. "It is a tough time to be an IT services company with sub-par growth in IT spending. This provides companies such as TCS with its low-cost employee base in India a competitive advantage over its North American and European peers," said G Chokkalingam, founder and managing director at Equinomics Research & Advisory Services.

TCS is currently the world's fourth-largest IT services company in terms of revenue. It is behind IBM, Accenture and DXC Technology. 

TCS reported revenues of $19.7 billion during the trailing 12 months ended June this year, compared to IBM's revenues of $80.8 billion, Accenture's $40.6 billion, and DXC's $24.6 billion. 

In the past three years, TCS’ revenue (in dollar terms) has grown at a compound annual growth rate of 7.2 per cent, while its profits have expanded at annualised rate of 7.6 per cent. In the same period, IBM’s revenue reduced at an annualised rate of 5.2 per cent from $96 billion in FY15 to $79.1 billion in FY18. 

According to technology research and consultancy firm Gartner, global IT spending is expected to grow by 4.5 per cent year-on-year (y-o-y) in 2018 and 2.7 per cent y-o-y in 2019. Out of this, the IT services segment is estimated to grow by 5.5 per cent this year and 4.6 per cent the next year, thus providing ample growth opportunity to low-cost companies such as TCS. 

"Global IT spending growth began to turn around in 2017, with continued growth expected over the next few years. However, uncertainty looms as organisations consider the potential impacts of Brexit, currency fluctuations, and a possible global recession," wrote analysts at Gartner.