(Source: icicidirect.com and tcs.com)
Recommendation: (Buy for Long Term Investment)
Sector: Computers - Software
Home Country: India
Listed On: National Stock Exchange of India, Ltd & The Stock Exchange, Mumbai
Expected Total Revenue 2006: Rs. 142 bn
Expected Net Income 2006: Rs. 32
Debt/Equity Ratio 2005: 0.45
Share Price February 23th 2006: Rs. 1670.55
Expected Earnings per share 2005, 2006, 2007: Rs. 53.45, Rs. 64.14, Rs. 76.96
Expected Price/Earnings Ratio: 2005, 2006, 2007: 31.24, 26.04, 21.70 (for actual share price with expected EPS)
Dividend yield 2005: 0.9%
Target Share Price 2007: Rs. 2308
Target P/E Ratio 2007: 30
Exchange rate as of Feb. 23rd 2006: 1 US$=Rs. 44.37
General
Tata Consultancy Services Limited. The Group's principal activity is to provide information technology and business process outsourcing services. The Group provides services to industries such as banking, financial services, insurance, manufacturing, telecommunications, retail and transportation. The Group operates mainly in America, Europe and India. On 20-Oct-2005, the Group acquired Financial Network Services and on 08-Nov-2005, Comicrom.
Analysis
India invented the modern offshore outsourcing industry, and it currently exports about US$ 9.875 Billion a year in software and IT Services, with growth rates of over 28%. Indian software companies initially concentrated their efforts by providing low level design, coding, testing, maintenance and support services for the export market. It is estimated that U.S. companies outsourcing development to Indian software companies can see projected savings of 50% to 70%, compared to similar priced projects in the U.S.
At A1GLOBALINVESTOR.com we believe that this combination of large supply of top notch low cost labor, high quality software processes, and the scale to handle all types of work has allowed the Indian software industry to become a global software powerhouse. The Indian firms are now concentrating on providing IT and business consulting services to their global clients, going head to head against global giants such as Accenture and EDS. The Indian software companies will have to make a large investment in hiring, training and retraining their employees to compete in a global market. They will also have to expand overseas and establish subsidiaries in the US and Europe.
TCS had sales volume growth of 10% in Quarter2 results. Offshore revenue growth by 8.7%(quarter to quarter). The top line growth of about 8.9% sequentially and 21.4% year-to-year. PAT rose 8.8 per cent sequentially and 22 per cent y-o-y. In the final quarter TCS has acquired about 83 new clients. TCS net profit is expected to increase by 6.3% in the coming quarter. TCS ranks 1,167 in Forbes 2000 List.
Moody has issued A3 issuer rating and Baa1 as foreign currency debt ratings.
Company’s Main strength’s
(1) Dominant domestic market position and major global presence;
(2) A favorable long-term IT industry trend, which involves off-shoring and business-process outsourcing;
(3) Good growth prospects, including proven ability to win and handle large-scale projects globally; and
(4) The support provided to its business growth by healthy recurrent cash flow and a strong balance sheet.
Its major investors are Reliance Equity Opportunities, UTI Master Share, HDFC Top 200 fund, UTI Master Plus, DSP Merrill Lynch Opportunities Fund. UTI Software Fund and many other major mutual fund companies in India.
Some Recent News about the Company
- Computer Associates International Inc (CA) enters into a strategic partnership with Tata Consultancy Services Ltd (TCS) to secure the latter's operations covering 55 centres globally by deploying CA's eTrust end-to-end security solutions.
- Tata Consultancy Services (TCS) becomes India's first IT company to cross the $2 billion mark as it closed fiscal 2005 with Rs. 118 bl in total revenues. At Rs. 26 bl in net profit, it is also the first software giant to cross $500 million in net profit.
Bottom Line
The Company is growing both in revenues as well as establishing its presence globally. Its technical analysis shows a steady long-term growth in the share prices from 2004, however there are short-term ups and downs in the prices. The company has acquired huge client base with long-term projects. The ROE and RONW has a steady increase. We consider a P/E ratio of about 30 for 2007 to be conservative for a company that is growing profitably at more than 20% annually. Therefore we arrive at our target price of Rs. 2308 for 2007 with our projected earnings as given above.