Investors with a one/two-year perspective can consider taking exposure in the Tata Consultancy Services (TCS) stock. At the current market price, the stock trades at a price-earnings multiple of 29 times its likely 2006-07 earnings.
The robust demand environment for offshoring, the sustained focus on large deals, the encouraging contribution from new service offerings such as infrastructure management and the broad-based geographic exposure, play to the company's strengths in these areas.
On the flip side, however, the US slowdown and its impact on discretionary spending on IT development services, managing supply-side pressures such as attrition and wage inflation, handling margin dilution in large deals and appreciation of the rupee vis-à-vis the dollar remain key areas of concern.
In a highly volatile milieu, if the broad markets slip over the next few weeks, investors can capitalise on dips to step up exposure in the stock.
The introduction of minimum alternate tax and the fringe benefit tax on employee stock options (ESOPs), announced in the Budget, are unlikely to materially impact the company's financials.
Core strengths
Four key variables working in favour of TCS, as spelt out by the top management and lending greater thrust to its financials, are:
Focus on large deals: The company has consistently maintained the view that it will focus on large deals. And there is a distinct acceleration in the number of such deals that the company is participating in.
To reinforce this view, TCS has stated that in the first half of 2006-07, it participated in twice as many deals of $50 million or more, than in the four quarters of 2005-06.
As of the third quarter ended December 31, 2006, it also indicated that it is pursuing 10 deals that are greater than $50 million-plus, though without defining any timeline on when they will be closed.
Global Delivery Network: As India 's largest IT services player, TCS is ahead of its peers in building its global delivery network beyond India. Its global delivery network spans Latin America, Eastern Europe and China.
The total employee strength in global delivery centres has more than doubled to 2,665 since the first quarter of 2005-06. And the company has also stated that 31 of its top 100 customers are being serviced from one of these global delivery centres outside India.
Strategic acquisitions: The acquisitions made by TCS over the past few years are beginning to pay dividends slowly.
For instance, Bank of China and Banco Pichincha are key clients being serviced directly through FNS, TCS' Australian banking product acquisition, or in combination with its Chilean acquisition, Comicron.
Similar acquisitions by TCS in the airline space of ASDC and AFS have improved its capabilities in the hospitality and travel industry practice.
Geography/Service offerings: The contribution from the UK, Continental Europe and Asia-Pacific has been increasing for TCS.
This enhanced geographic footprint is encouraging as itderisks the company, to some extent, from the prospects of a sharp slowdown in the US. The contribution of new services such as BPO, infrastructure management and assurance, has been growing over the past year.
Apart from generating higher revenues, these new service offerings are also likely to drive the offshore shift for TCS.
This will continue to be an important lever in improving the operating margins of TCS in the coming quarters.