Late last week TCS reported a solid start to its fiscal year. Good demand from the company's core markets such as North America, Financial Services, Retail, and Life Sciences helped drive healthy bookings and constant currency revenue growth. As a result, our outlook for the year remains unchanged and we reiterate our Rs 2,645 fair value estimate and narrow economic moat rating.
TCS' recent results continue to reinforce our view of the digital era (or what we have previously termed as
Outsourcing 2.0). We believe the proliferation of digital technologies will require the offshore Indian IT service vendors to provide more operationally differentiated services instead of just traditional cost-cutting.
Notably, during the quarter, TCS announced the launch of a new AI-based automation platform called Ignio. Ignio aims to automate most of the tasks that currently make up IT maintenance and has the ability to pre-emptively fix system failures before they happen. We foresee these types of technology platforms to help drive digital-related revenue streams in the next era of IT outsourcing.
To that end, TCS also broke out its digital revenue for the first time. Digital, which is spread across numerous service lines, contributed to 12.5% of group revenue for the quarter and grew double-digits on a sequential basis.
Management is adamant that over the midterm most of TCS' services will be predominantly digitally focused, and we agree. In order to meet this new operating paradigm and future demand environment, the firm plans to re-skill its work force via its Digital Learning Platform, which will train roughly 100,000 employees to be more digital savvy across all industry verticals. We think these strategic moves will help TCS defend its narrow moat position and keep competitive and technology risks at bay for the foreseeable future. Still, we see the firm fairly valued at these levels and would recommend a larger margin of
safety before investing.
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