Tata Consultancy Services Limited - Financial and Strategic Analysis Review

Transcription

1 Tata Consultancy Services Limited - Financial and Strategic Analysis Publication Date: Nov-2015 Company Snapshot Key Information Tata Consultancy Services Limited, Key Information Web Address Financial year-end March Number of Employees 319,656 NSE TCS Key Ratios Tata Consultancy Services Limited, Key Ratios Company Overview Tata Consultancy Services Limited (TCS) is an information technology (IT) company, which offers IT infrastructure services, engineering and industrial services, business intelligence, business process outsourcing and consulting services, cloud services, assurance services, enterprise solutions and asset-leveraged solutions. SWOT Analysis Tata Consultancy Services Limited, SWOT Analysis Strengths Weaknesses P/E EV/EBITDA Return on Equity (%) Debt/Equity Operating profit margin (%) Dividend Yield 0.02 Note: Above ratios are based on share price as of 18-Nov-2015 Share Data Tata Consultancy Services Limited, Share Data Price (INR) as on 18-Nov , EPS (INR) Support from Parent Company Global Market Presence Research and Development Activities Opportunities Strategic Agreements Growing Demand for Cloud Computing Launch of New Products Operational Issues Declining Liquidity Threats Intense Competition Employee Attrition Increasing IT complexity Book value per share (INR) Shares Outstanding (in million) 1, Performance Chart Tata Consultancy Services Limited, Performance Chart ( ) Financial Performance The company reported revenues of (Rupee) INR946,484.1 million for the fiscal year ended March 2015 (FY2015), an increase of 15.7% over FY2014. In FY2015, the company s operating margin was 24.5%, compared to an operating margin of 29.1% in FY2014. In FY2015, the company recorded a net margin of 21%, compared to a net margin of 23.4% in FY2014. The company reported revenues of INR271,654.8 million for the second quarter ended September 2015, an increase of 5.8% over the previous quarter. Page 1

2 Key Information Tata Consultancy Services Limited, Key Information Corporate Address TCS House, Raveline Street, Ticker Symbol, Stock TCS [National Stock Exchange of Fort, Mumbai, Maharashtra, Exchange India] , India Telephone No. of Employees 319,656 Fax Fiscal Year End March URL Revenue (in USD Million) 15,553.3 Industry Technology Revenue (in INR Million) 946,484.1 Locations Argentina, Australia, Austria, Bahrain, Belgium, Bolivia, Brazil, Canada, Chile, China, Colombia, Denmark, Dominican Republic, Ecuador, Finland, France, Germany, Greece, Hong Kong, Hungary, Iceland, India, Indonesia, Ireland, Israel, Italy, Japan, Kuwait, Luxembourg, Malaysia, Malta, Mexico, Morocco, Netherlands, New Zealand, Norway, Paraguay, Philippines, Poland, Portugal, Qatar, Saudi Arabia, Singapore, South Africa, South Korea, Spain, Sweden, Switzerland, Taiwan, Thailand, United Arab Emirates, United Kingdom, United States, Uruguay, Venezuela Company Overview Tata Consultancy Services Limited (TCS) is an information technology (IT) company, which offers IT infrastructure services, engineering and industrial services, business intelligence, business process outsourcing and consulting services, cloud services, assurance services, enterprise solutions and asset-leveraged solutions. The company offers business solutions to various industries including banking, financial services, telecom, insurance, medical and information services, retail and consumer packaged goods, manufacturing, construction, metals and mining, energy and utilities, life sciences, healthcare, travel, transportation and hospitality, and others. Its software products comprise TCS BaNCS, TCS MasterCraft, and Technology products. Together with its subsidiaries and regional offices, it operates in South America, North America, Europe, India, Asia Pacific, Middle East and Africa. TCS is headquartered in Mumbai, India. Page 2

3 Tata Consultancy Services Limited - SWOT Analysis SWOT Analysis - Overview Tata Consultancy Services Limited (TCS) is one of the leading global information technology providers. It offers a comprehensive suite of services including IT and ITES, IT infrastructure services, enterprise solutions, consulting, business process outsourcing (BPO), business intelligence and performance management, engineering and industrial and management. The company s vast global presence and R&D capabilities provide an edge over its peers. However, operational issues and declining liquidity are the causes for concern. Nevertheless, the company has growth opportunities through new products and strategic agreements. However, increasing employee attrition and intense competition could hamper the growth prospects of the company. Tata Consultancy Services Limited - Strengths Strength - Support from Parent Company As a subsidiary of Tata Group, the company could capitalize on its parent company s operational network, financial capabilities, industry experience, brand value, global partnerships, government relations and other factors. Tata Group is one the biggest business conglomerates in India and across the world. It is into diverse sectors such as steel, automobiles, information technology, chemicals, power, beverages, telecom, communications, hospitality, construction and others. It is the world's second largest manufacturer of packaged tea and tea products. It is also one the largest information technology service provider in the world. In FY2015, Tata Group reported revenue of approximately INR7,125 billion. With more than 30 public companies, the company has market capitalization of over INR 7,386 billion. The company also involves in a range of social activities contributing to its brand value. Strength - Global Market Presence By spreading the business across the world, TCS has an advantage in minimizing the risk arising out of a specific region. The growing presence of the company in multiple markets is important to ensure diversification of its revenue base and sustain growth. TCS established a Global Network Delivery Model (GNDM), which enables it to provide services to customers across multiple locations in India, China, North America, Europe and Latin America. As of March 31, 2015, the company operates in 132 locations including 31 in Europe, 29 in North America, 24 in APAC, 25 in the UK and Ireland, 14 in Latin America, and 9 in the Middle East and Africa. Additionally, it has delivery and training centers in countries including China, Brazil, Hungary, Chile and Uruguay. The company also has delivery centers in over 20 countries outside India. The worldwide delivery centers enabled TCS to leverage skills and local business knowledge to deliver high quality solutions. TCS strategy to focus on Asia-Pacific, Latin America and the Middle East and Africa enabled it to de-risk geographical concentration and create a significant presence in the new growth markets. The contribution of new growth markets to the total revenue of the company doubled in the last decade. In FY2015, the new growth markets reported revenue of INR12, million, which accounted for 13.4% of the company s total revenue. Strength - Research and Development Activities TCS carries out regular research and development activities to develop new products. It performs research and innovation in three primary areas, namely, software, applications and systems. In the software area, the company focuses on mining operational process models to facilitate training and transformation and also modeling human behavior in the workplace. In application area, the company emphasizes on enterprise contextual intelligence, digital health and digital manufacturing. It also worked on analytics as a service, human sensing, and performance prediction and optimization projects. Its energy carbon view tool and data acquisition and management system projects have moved from research to business. The company also enters into partnerships with other organizations and companies in the areas of data analysis, customer experience and advanced technologies. As of March 2015, TCS filed 2,277 patents and published over 300 papers till date. In FY2015, the company filed 509 patents and obtained 206 patents. In FY2015, TCS invested INR 2.25 billion on its R&D activities. Tata Consultancy Services Limited - Weaknesses Weakness - Operational Issues As part of regular operations, the company is subject several litigations and claims that could affect its market reputation, business operations and financial performance in the event of adverse outcomes. In April 2015, a former TCS employee in the US filed a lawsuit against the company alleging violation of federal civil rights law. The plaintiff reported that the company discriminated American workers by favoring South Asians in hiring, promotion and termination. The plaintiff also claimed that over 95% of TCS s 14,000 US workforce is from South Asia, primarily India. Though TCS refuted the plaintiff's claims and is strongly defending its case claiming fair employment practices, any adverse decision could lead to penalties and stringent legal actions against the company. Page 3

4 Weakness - Declining Liquidity TCS reported declined liquidity position in the last fiscal year. In FY2015, the company reported current assets of INR488.13billion, as compared to INR billion, an increase of 13.78% over that in However, its current liabilities were INR billion in 2014, as compared to INR billion, an increase of 29.66% over that in Its current ratio was 2.40 in 2015, as compared to 2.73 in It s quick and cash ratios also decreased to 2.39 and 0.97 in 2015, from 2.73 and 0.99 in 2014 respectively. A declining current ratio indicates that the company is in a weak financial position. The performance of the company depends largely on the cash reserves and its ability to generate cash from operations. Lack of sufficient cash or cash equivalents could hamper the operations of the company. Tata Consultancy Services Limited - Opportunities Opportunity - Strategic Agreements The company entered into certain strategic agreements that are aimed at enhancing its business operations and existing product line. This could help the company in maintaining its competitive position in the industry. In October 2015, the company partnered with Symantec Corporation, a provider of information protection and security software, to provide analytics driven security services. Through this partnership, the company intends to offer security industry expertise along with Symantec s security technologies which would enable customers to reduce costs and improve productivity. During the same month, the company entered into a global alliance partnership with Tableau Software, a provider of business analytics software. Through this partnership, the company plans to develop large scale delivery capabilities, using Tableau s new features that address the need of agility and flexibility. It also enables the customers to quickly and cost-effectively implement and integrate rapid analytics and visualize multi-structured data in forms of patterns, trends and visual insights. In July 2015, the company also partnered with Adobe, one of the major players in digital marketing and digital media solutions, for digital marketing solutions and services. Opportunity - Growing Demand for Cloud Computing TCS stands to benefit from the growing demand for cloud computing. According to industry estimates, the global market for cloud computing is expected to reach approximately US$500 billion by FY2020. Dependence on hard-to-deploy physical servers results in slow response to organizational needs, which drives organizations and government agencies worldwide to use cloud computing. Cloud computing provides easy and cost effective solutions to organizations, enabling them to address their need for data storage. It offers reliable and easy storage to the telecom and related companies for developing mobile apps. At the same time, it is expected to reduce the IT companies spending on data analytics. Positive outlook for cloud computing may increase the demand for the company s offerings, which may result in improved financial performance. Opportunity - Launch of New Products The company focuses n developing technologically advanced products that meet the emerging industry challenges. In September 2015, the company, through Digital Software & Solutions (DS&S) group, launched the Intelligent Urban Exchange (IUX), a powerful analytics-based software solution for intelligent city operations. The IUX solution is a highly scalable, modular software that integrated big data with domain specific advanced analytics to provide cities with real-time, actionable insights. It helps in addressing expectations of digitally connected, urban citizens. The company also launched Customer Insights & Intelligence (CI&I) software solution for retail banks. The new solution is a pre-integrated and modular software that accelerates the transition from a product-focused organization to a customer-centric enterprise. In June 2015, the company unveiled TCS BaNCS Digital (TCS BaNCS), a novel solution for financial institutions in North America. TCS BaNCS delivers an intuitive, interactive and insightful customer experience. It also allows seamless integration of various stakeholders in the financial supply chain and its ecosystem. Tata Consultancy Services Limited - Threats Threat - Intense Competition As a leading IT services company, TCS is subject to intense competition in almost every market. Its presence in nearly 50 countries exposed it to other international, national, and regional IT & ITES companies. Such intense competition could hamper the overall growth prospects of the company. The company s major competitors include global IT services, systems consulting and integration companies. It may also face competition from emerging IT sector in China and the Philippines. Many of its competitors command significantly greater financial, technical and marketing resources and generate greater revenue than the company does. Its competitors include Accenture Plc, Wipro Limited, Infosys Technologies, Tech Mahindra, Birlasoft, Cognizant Technology Solutions, Computer Associates, Capgemini, and others. The company also competes with local companies in different countries that are more likely to receive government and defense projects. Threat - Employee Attrition In the information technology sector, success of any company depends on the management of intellectual properties and quality professionals. TCS depends heavily on its skilled personnel and management team. The company operates through Page 4

5 a team of highly qualified and well experienced employees, who have rendered successful domestic projects and overseas projects. Sustainable workforce is one of the major challenges for any IT companies. The high attrition level or failure to retain the qualified professionals can affect the performance of the company. Its ability to execute project engagements and obtain new clients depends in large part on its ability to attract, train, motivate and retain highly skilled professionals, especially project managers, software engineers and other senior technical personnel. If the company is unable to hire and retain qualified personnel, its project portfolio and profit margins may decline drastically. Threat - Increasing IT complexity The company is prone to risks arising out of IT complexity. TCS offers complex IT and process services to its customers. At times, in spite of testing and best quality control, it is not certain that it may avoid errors in present version or advanced versions of products. It may face challenges in case of solutions containing undetected errors or if it fails to meet the customer expectations. Some of the challenges the company faces include technical problems, deployment of products across a wide range of platforms, and integration of software with third party software applications and databases. Such challenges may result in loss of customers and revenue. NOTE: The above strategic analysis is based on in-house research and reflects the publishers opinion only Page 5