TCS' premium valuation will persist, amid high growth visibility: Analysts

Recovery in BFSI, faster traction of digital revenue seen boosting firm's prospects

With a sharp 40 per cent rally in its share price in 2018, Tata Consultancy Services (TCS) currently trades at 20 times its FY20 estimated earnings, which is valued at over 25 per cent premium to peer and another IT major – Infosys. 

In fact, TCS’ stock outperformed the NIFTY IT index that rose 24 per cent in 2018. However, analysts believe the TCS’ premium valuation will persist for now, amid high growth visibility.

According to Sharekhan, TCS’ management is confident of achieving double-digit revenue growth, in constant currency (CC) terms, over the medium term. This is way higher than the 6-8 per cent revenue growth guidance of Infosys for FY19, in CC terms. 

TCS had clocked 9-12 per cent rise in revenue, in CC terms, in each of the past two quarters. 

Large deal wins of $9.8 billion during April-September 2018 will keep it on track to achieve its guidance. 

Higher spends from banking clients, amid a pick-up in new technology investments, analytics, and cyber security should help grow the financial services segment, which accounts for over 30 per cent of TCS’ revenues.

In addition, digital revenue is expected to continue rising at a healthy pace. The management believes TCS’ digital capabilities and higher adoption of digital technologies by clients will continue to propel the company’s digital revenue.

Analysts at Sharekhan believe that the company is well-placed among IT outsourcing companies to capture large scale digital transformation deals, and will be able to maintain the acceleration of its digital revenue growth.

In the September quarter, too, TCS’ digital revenue surged about 60 per cent year-on-year in CC terms. Further, revenue share of its digital business grew to 28.1 per cent in the September-2018 quarter, from 25 per cent and 19.7 per cent in the June 2018 and September 2017 quarters, respectively.

However, the management seems cautious of retail (around 16 per cent revenue contribution) and automotive segments. 

Nonetheless, operating profit (earnings before interest and tax) margin is expected to be around its targeted levels of 26-28 per cent, higher than the 22-24 per cent guided by Infosys.