Where Will TCS Stock be in 3 Years?

When you think of the best companies in India, then Tata Consultancy Services (TCS) would be among the first that comes to mind.

It's rightly considered to be among the best stocks to own by most investors. Almost every fund manager and many retail investors have the stock in their portfolios.

TCS is not just the gold standard of India's IT industry. It's perhaps the bluest of all the bluechips in the Indian stock market. The company has a great reputation for management quality, growth, profitability, and strong fundamentals.

The crown jewel of the Tata group has also been one of the biggest wealth creators in the Indian stock market. It's one of the few stocks that has rewarded investors seeking both capital gains and dividends in equal measure over the long term.

While the stock is up about 2.5 times since the covid lows of 2020, the company has also paid a cumulative dividend of Rs 342 per share from FY20 to FY24. No wonder it's one of the best largecap dividend yield stocks in India.

This is a remarkable rate of return for a giant marketcap stock like TCS. Large companies are expected to deliver only a modest return over the long term. TCS is a step ahead of most largecaps.

In terms of capital gains, TCS has delivered a little over 15% CAGR in the last five years. Over the same period, TCS has also delivered a CAGR of 15% in the per share dividend paid out to shareholders.

And all this is in addition to the cash it returns to shareholders via buybacks of shares worth tens of thousands of crores of rupees.

Such stability in returns, both in terms of capital gains and income, via dividends and buybacks, is much better than what most companies in the stock market, big or small, can offer investors.

Considering the stellar past track record of the TCS share price, what can investors expect from the stock over the next three years?

To get an idea about that, we must understand what has got TCS to the position it is now.

How TCS Dominates the IT Services Business

The first thing to understand about TCS is that its core IT services business is rock solid. It has deeply established itself as the partner of choice for Fortune 500 companies around the world.

It offers a wide range of end-to-end software services. Developing business apps, creating and maintaining digital assets, managing huge databases, providing real time actionable business analysis...it's all done very efficiently.

Its clients love the fact that TCS is willing to take on more and more of their 'non-core' work and get the job done properly and on time. The company has a worldwide reputation of taking on big IT projects and completing it to the satisfaction of customers.

So winning deals has never been a problem for TCS. In fact, its client metrics have steadily improved over the years with a greater share of large customers.

By winning bigger projects it makes more revenues. This makes it easier for the company to spread out its employee costs in large projects compared to small ones. This in turn, leads to higher profits.

In a small project, it may be difficult to reduce the number of employees by 10%, say from 10 to 9. But reducing the employees from 100 to 90 on a large project is possible.

The managers at TCS are always trying to find the optimal number of employees per project, so as to maximise profits at the project level itself.

But an increasing share of big contracts is only one part of the picture. The company also has to ensure it has the right number of capable employees at all times. This is not an easy task. Every IT company struggles with the problem of balancing the needs of employees with that of its customers.

TCS seems to have solved this problem. At least it does a much better on this front than other IT firms.

The voluntary employee attrition rate at TCS has consistently been between 10-15%. It was 12.5% in FY24. In fact, the market considers 15% to be a high attrition rate for TCS. For other IT companies, a 20%+ attrition rate is considered normal.

TCS doesn't have to replace its workforce anywhere as fast as its competitors. This is a big cost advantage when it comes to winning large deals. This allows the company to keep more workers 'on the bench' who are ready to be deployed when they're needed.

It's not just about quantity. It's about the quality of the workforce too. The large bench at TCS does not sit idle. They are given training on various new technologies. They regularly participate in many skill upgradation plans.

TCS focuses on leveraging internal talent through upskilling and cross skilling. In FY24, 33% of job requirements were fulfilled through grooming internal talent.

The company has a well-oiled rapid training program if it were to foresee a skill shortage. This is why the company has been able to pre-empt any technological disruption. The management proactively looks ahead at the needs of its clients in the future and trains its staff ahead of time.

TCS also has an internal system of moving employees around if they want to. Staff can move to a different department if they think their current job will lead to a dead end. This helps to increase productivity and retain talent.

All these measures ensure TCS has the right talent available at the right time to win large projects from around the world. This has come to the fore during the recent AI boom.

How TCS has Prepared for the Future

TCS has been at the forefront of every technology adoption cycle over the past several decades.

The company has correctly anticipated every technological change over its history. It has responded by investing in innovation, talent, intellectual property, and partnerships well in advance.

TCS was early to identify that decision making in enterprises would increase in complexity and would require novel uses of digital technologies.

From 2013, TCS conducted 10 years of research into these new 'digital technologies'. It has 40 publications in top-tier journals to its credit in this domain.

This extensive research enabled it to launch an Enterprise Digital Twin product offering called TCS TwinX^TM. Enterprise Digital Twin a digital replica of a company's entire operational system, including its processes, workflows, assets, and human resources.

The multiple award-winning product today simulates enterprise decision making for several TCS customers in hi-fidelity and uses AI for decision making.

Quick to recognise the potential of cloud, the company made investments ahead of time in launching new platform-based business models as far back as in 2009.

It reskilled the workforce, invested in research and innovation, built collaborative workspaces and innovation centers, developed intellectual property, and forged alliances and partnerships.

TCS created a separate research group focused on 'Deep Learning and AI' in 2017 and identified 'AI' as a critical skill that every researcher should acquire.

The company has doubled down on partnerships in areas such as AI, Quantum Computing and Cybersecurity. These early investments have given TCS a head-start in being a partner in its customers' technology adoption lifecycles.

The company is once again at the forefront of technology adoption this year with the focus being on innovative uses of GenAI. As on 31st March 2024, TCS had one of the world's largest AI/ML and GenAI trained workforce.

TCS has built an Indigenous, multi-platform AI playground called AI Experience Zone, to develop employees with higher competencies in GenAI through industry specific use cases integrated into programs and hackathons.

It has also invested in building key partnerships with other major cloud and AI ecosystem partners, to bring best of GenAI offerings.

The company's intellectual property (IP) portfolio has grown by a CAGR of over 13% over the past decade. TCS is the largest patent filer in the industry category in India.

The Main Challenge for TCS

Can TCS maintain double digit revenue growth as it did in the past?

Well, this will not be easy...but not because the company is too big. In fact, there is still a huge growth runway ahead of TCS.

The global IT services industry is highly fragmented, with even the largest provider having a mid-single digit market share. TCS is among the largest IT services providers globally, with a market share of 2.1%.

The company has outperformed significantly over the last decade by gaining market share. This should continue in the future as well.

However, the revenue growth is being affected due to another reason.

The company's conversion of newly won deals into revenue is as per expectations. But this revenue inflows gets neutralised by a reduction in the existing revenue base. This is because some projects get completed or downsized during the year.

This is the reason for the muted annual revenue growth of 6.1% in FY24.

The company will have to overcome this challenge if the growth momentum is to pick up.

If it's successful, the stock price will get a major boost. If not, then the stock would likely deliver a lower return than the 15% CAGR seen over the last 5 years.

Thus, for investors who have this stock on their watchlist, revenue growth momentum, on a quarterly basis, should be the key metric to watch. The company seems to have everything else under control.

Conclusion

TCS is an IT services, consulting and business solutions organization partnering many of the world's largest businesses in their transformational journeys for the last 56 years.

It has a global presence, deep domain expertise in multiple industry verticals and a complete portfolio of offerings - grouped under consulting and service integration, application services, digital transformation services, AI and cloud services, engineering services, cognitive business operations, and products and platforms - targeting every C-suite stakeholder.

The company leverages all these capabilities and its contextual knowledge of its customers' businesses to create bespoke, high quality, high impact solutions, designed to deliver differentiated business outcomes and delivered in a highly distributed, location-independent agile method.

TCS geographic footprint covers North America, Latin America, the UK, Europe, Asia Pacific, India, the Middle-East, and Africa.

The company's five key vertical clusters are: Banking, Financial Services and Insurance (BFSI), Communication, Media and Technology (CMT), Consumer Business, Life Sciences and Healthcare, Manufacturing, and Others such as Energy, Resources and Utilities, Public Services, and Products.

For more details, see the TCS company fact sheet and quarterly results.

Happy investing.

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