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We think TCS will post industry-leading revenue growth and benefit from a narrow economic moat.

Morningstar's Take | 10/07/2018
by Andrew Lange

Investment Thesis

Tata Consultancy Services is India’s first and largest software exporter. Its long-term success comes from a disciplined approach to project execution and a concerted emphasis on customer satisfaction. TCS’ extensive global delivery network and full suite of IT services allows the firm to support the world’s largest enterprises, which sets it apart from smaller rivals. The firm’s operations are concentrated in North America, application development and maintenance, and banking, financial services, and insurance. However, TCS is looking to diversify its exposure. We expect it to expand its presence in underpenetrated geographies while developing its expertise in industries outside BFSI and in services associated with social, mobile, analytics, and cloud-based technologies (also known as digital transformation services). To achieve this, organic growth will be supplemented with acquisitions.

As TCS expands its client base and develops meaningful relationships within those clients, it can cross-sell services and gain an intimate knowledge of customers’ IT processes. This client-vendor relationship takes years to cultivate, and once established, it typically leads to significant vendor switching costs. Given such switching costs, we forecast reasonably steady financial performance from TCS over the long term. As a result, we think the firm will continue to post industry-leading revenue growth and benefit from a narrow economic moat.

We expect TCS to push further into Asia-Pacific, Latin America, and the Middle East and Africa, given the infancy of these markets. In fact, the contribution to group revenue (roughly 17%-18%) from these new growth markets has more than doubled in the past decade. In addition, we think continental Europe’s increasing willingness to adopt offshore IT services will provide a tailwind for the firm. We think the acquisition of leading French systems integrator Alti will strengthen TCS’ footprint and signifies its intent to grow in the European region. Strong demand for digital services is also expected to drive TCS’ growth. The firm’s investment in North American collaboration centers demonstrates the future importance of these services.


TCS’ primary risk is the highly competitive IT services industry. The firm must continually reinvest in new intellectual property and deliver differentiated services, or face commodification and competitive displacement. Furthermore, potentially restrictive immigration reform could reduce TCS’ ability to use offshore leverage for onshore work, which would increase staff costs. With TCS generating the majority of its revenue from offshore markets, fluctuations in the rupee can have a noticeable impact on financial results. Macroeconomic weakness in the North American market (roughly 53%-55% of group revenue) or the banking, financial services, and insurance industry (approximately 40%-41% of group revenue) will have a substantial impact on the company’s overall results.

Company Profile

Tata Consultancy Services is India’s largest IT services provider. The company was founded in 1968 and has its headquarters in Mumbai. The firm provides end-to-end IT and consulting services across the globe and has 224 offices in 46 countries and 149 solution centers in 25 countries. The company employs over 380,000 staff, which makes it one of the largest IT employers in the world. TCS derives a significant portion of its revenue from the North American market and the banking, financial services, and insurance industry.

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Bulls Say

  • The growing adoption of IT services in continental Europe and emerging markets provides a long-term growth avenue for TCS. We expect the firm to supplement its organic growth in these markets with acquisitions.

  • TCS is poised to benefit from spending related to emerging SMAC technologies. The firm’s early investments in a Silicon Valley customer collaboration center and its digital enterprise offerings should help drive its future service relevance.

  • The company boasts one of the lowest attrition rates in the industry, which helps with operating stability.

Bears Say

  • TCS derives a significant portion of its revenue from banking, financial services, and insurance, North America, and application development and maintenance. Any notable pullback in these businesses will have a magnified effect on the firm’s operating performance.

  • TCS has to quell ongoing wage inflation, which has the potential to eat into operating margins.

  • The company lacks a strong consulting practice and is exposed to commodification. Therefore, it needs to continually innovate in order to remain relevant in the marketplace.

Other reports in TechnologySector

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