TCS - An IT Company or an Employment Agency?

Well I have not been a big fan of IT companies in India whether it's about working for them or investing in their stocks for long term. The recent run up in stock prices of TCS, HCL Tech, Tech Mahindra and other IT staffing companies has only increased my worries as they are being perceived as technology companies and getting valuations accordingly.

TCS is now valued at around $90 billion in market value and is trading at a PE of 21 times FY-16 EPS. If one believes that TCS is an innovative technology company like Apple, Oracle or Google then the valuations are justified but what PE would you apply to an employment agency who has just grown at the rate of growth in number of employees in the company. With employee billing arbitrage gradually getting narrowed due to very high wage inflation in India and less than 2% wage inflation in western world the margins will gradually decrease over next 10 years on this business model. 

Indian IT companies Result and Valuation comparison

Stocks of software service companies in India has been on tear away rally since the beginning of this year and top 5 biggies (TCS, Infosys, Wipro, HCL Tech, Tech Mahindra) are up anywhere between 50% to 75% YTD. 

The run up in IT stocks in India happened on the back of two primary reasons - better demand outlook in US & Europe and massive depreciation of Indian currency vis-a-vis USD-GBP-EUR. CNX IT index is up more than 50% since January 2013.

CNX IT Index 3 year Chart

CLSA Outlook on TCS Stock Price Misleading

CLSA recent report on TCS stock price target of Rs 2200 in medium term and it's potential to attain a market value of $100 billion over next few years is very misleading for investors in general as they might get into the stock at current levels which is exorbitantly high in our view. 

We believe all the good news in terms of currency depreciation and U.S recovery are largely discounted in the stock prices of all the IT companies in general as they have outperformed Nifty by as high as 50% since the start of this year. 

CLSA is recommending a stock which has gone up 20% in 7 trading session from 22nd Aug 2013 to 30 Aug and around 50% in 2 months from June end to August end. 20% and 50% upmove might not be very high for a small or mid sized company but for a company of size around 3,96,000 crores it is huge. In two months since the end of June this year it has added more than 1.2 Lakh crores of market value equivalent to entire Wipro.

	TCS	Infosys	Wipro(IT)	HCL Tech	Tech Mahindra#
Market Value	396000	178000	119200	72400	32000
Revenue	62989	40350	37688	25734	14500
Net Profit	13941	9421	6105	4099	1950

CLSA view on TCS

A better than expected result from India's largest software exporter, Tata Consultancy Services Ltd, have cheered the street but failed to impress one of the world's largest rating agency CLSA. 

TCS Q3 2011 - 2012 Result and Valuation Analysis

Tata Consultancy Services (TCS), has reported a consolidated net profit of Rs 2,803 crores in Q3 of current fiscal vs. 2301 crores of Q2.

Revenue came in at Rs 13,204 crores for the third quarter ended Dec 31, 2011 vs. 11,633 crores for the second quarter ended 30th September 2011.

TCS wins $2.2 billion BPO deal from Friends Life

Tata Consultancy Services (TCS), India's largest software services exporter, has won a $2.2 billion deal from UK based Insurance provider 'Friends Life'.

The 15-year contract from Friends Life for TCS unit Diligenta comes as the Indian IT sector looks to overcome stiff competition and a gloomy economic outlook. Europe is the second largest market for the software firms, and the euro zone debt crisis is a worry for the sector that has been looking to increase its sales to the region to hedge against their excessive exposure to the United States.

TCS Annual Report FY 2010 - 2011: PDF

Tata Consultancy Services (TCS) Annual Report for the fiscal year 2011 and 2010.

Download from the following links: 

Sell TCS - Recommends InvestorZclub

Goldman Sachs Downgrades Top Indian IT Companies

Goldman Sachs has cut the price target for India's top tier IT companies after the announcement of dissmal jobs data from US on 2nd Sep 2011 which has triggred the fear of US falling into recession again. 

TCS Q1 FY 2011-2012 result analysis

Tata Consultancy Services (TCS), reported 26.7% rise in its consolidated net profit at Rs 2,415 crore and revenue growth of 31.4% to Rs 10,797 crore for the first quarter ended June 30, 2011. Sequentially the profit has declined as the company had posted Rs 2,623 crore profit in Q4 of fiscal year 2011.

TCS pays Rs 240 Crore advance tax in Q1 FY-12

India's largest software exporter TCS saw its tax bill nearly doubling to Rs 240 crore in the reporting period from Rs 128 crore in the year-ago quarter. This could partly be because of end of STPI tax holiday which became effective from 1st April 2011 and partly because of superior performance expected in the current quarter.