Tata Consultancy Services (TCS), India’s largest IT solutions and services provider, has set an ambitious milestone to achieve $50 billion in revenues by 2030.
To achieve this, the company has embarked on a reorganisation, said MD and CEO Rajesh Gopinathan.
In an exclusive interview with Network18 earlier this week, Gopinathan had exuded confidence on the plan and said, “It is a logical evolution of where we are. Typically, we have been organised around three dimensions - geography, services and verticals. Now, we are trying to introduce a fourth dimension to our organisation."
New structure
TCS is considering dividing its operational structure into four groups-- acquisition, relationship incubation, enterprise growth, and business transformation -- versus the existing three now.
The international brokerage firm, HSBC Global Research, terms TCS’s new organisational structure as futuristic.
The new operational structure is set to be based on client size broadly categorised into three cohorts: revenues less than $20 million, between $20 and $100 million and greater than $100 million.
“While ‘verticalisation’ within cohorts will remain (especially from large client cohorts and less so in less than $20 million cohort, company level vertical units and service lines (excluding cloud services) may be diluted,” said HSBC in its report.
Essentially, client requirements and delivery capabilities differ across the sizes of client relationship. Experts believe that by developing these cohorts TCS is looking to develop appropriate governance structures to improve client focus and offer customised solutions to better grow smaller clients and maintain larger client relationships.
Pros and cons of the new structure
“The new structure will help TCS provide targeted servicing across client size cohorts," said HSBC in its report. The less than $20 million client revenue cohort is branded as ‘relationship incubation’ which would develop solutions and delivery capabilities according to the client sizes.
The $100 million client cohort is branded as Business Transformation as large clients are spending more on transformation work with TCS.
Growth and transformation projects undertaken by customers would be key for the IT behemoth to achieve the $50 billion revenue target that they have set, said Gopinathan.
This will improve cross utilisation of resources across verticals within each cohort.
However, HSBC expressed concerns about the fungibility of resources across cohorts. “For instance, for a $20 million account to grow to $100 million, skills, resources and know-how may reside in the other cohort and may not be easily fungible,” the brokerage said.
Revenue contribution
It estimates that “mid-size clients ($20-100 million) – branded as ‘enterprise growth’ - and large clients ($100 million plus) - branded as ‘transformation opportunities’ - contribute to bulk of revenues for TCS, but then incremental growth for less than $20 million clients will be higher, due to the base effect and potentially lower wallet size for TCS in these accounts”.
The enterprise growth and transformation opportunities segment contributes 40 percent each to the company’s revenues while the balance 20 percent comes from relationship incubation.
Business scenario
The brokerage firm Edelweiss recently hosted the top management of TCS at the Edelweiss India e-Conference 2022 wherein the management asserted that increased outsourcing, cloud adoption and increased client spends towards digital transformation will be key growth drivers.
The company sees strong demand momentum as clients are spending more on IT to move to public cloud. “Newer technologies necessitate the use of cloud; upon migration, many opportunities with innovative capabilities arise to drive customer experience, products and services due to operational resilience and hyperscalers’ stack,” the report from Edelweiss said.
The company has the lowest attrition rate across the industry and the management believes attrition has been flattening out, which might result in easing supply side challenges.
Investment case
The company sees significant progress has been made on workload moving to cloud even though only 35-40 percent has been moved till now. In its core segments like BFSI the shift has been only 10–15 percent which implies that the company still has a big runway.
“TCS is positioned to benefit from this tech shift as many customers are embarking on multi-year, enterprise-wide transformation journeys,” added Edelweiss in its report.
Edelweiss believes that demand remains robust as growth indicators continue to be strong, including deal-wins, client additions and hiring trends. “The stock is trading at 29.1x FY23E EPS and we maintain ‘BUY’ with a target price of Rs 5,000 (40x Q1FY24E EPS)”.
HSBC, on the other hand, believes that TCS remains a leader in terms of both size and market positioning in emerging technologies. “However, considering what we view as low further upside potential on revenues and valuations, we prefer to remain on the sidelines,” it said.
HSBC values TCS at a target PE multiple of 35x FY22E, driven by the improved outlook for growth over the next 3-4 years. “The target valuation is a 50 percent premium to the past five-year average, and a 45 percent premium to the market, owing to strong operating metrics and better revenue growth visibility,” the report from HSBC said. It has maintained its target price of Rs 4,250 for the stock.
The brokerages believe that the company faces potential downside risks from double-dip recession in the US, and a prolonged slowdown in Europe; sharp cross-currency movements and appreciation in the rupee against dollar, euro, British pound sterling and pricing pressure.
Potential upsides include stronger-than-expected pick-up in the BFSI and retail segments, aggressive large deal conversion and depreciation of rupee.
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