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[mehak1]

Tata Consultancy Services Limited (TCS Limited company) is one of the world’s largest providers of information technology, consulting, services and business-process outsourcing which commenced operations in 1968. As of 2007, it is Asia's largest and has the largest number of employees among the Indian IT companies with strength of over 100,000[1] IT consultants in 47 countries. The company generated consolidated revenues of US $4.3 billion for fiscal year ended 31 March 2007 and is listed on the National Stock Exchange and Bombay Stock Exchange in India. TCS recently(FEB 2008) sacked 500 of its employees because of their low performance and also because of companies low performance.


Business units:

1. BFS & retail slowdown anticipated
TCS management has indicated a slowdown in IT budgets of BFS and retail clients.
1. In particular, two Wall Street clients have indicated a cut back in IT spending for FY08.
2. Both clients are among TCS’ top15 clients (but not among its top10
clients).
3. Further, change in top management of BFS clients could also lead to
delay in projects.

2. The positives
1. Deal pipeline remains strong: The management has indicated a healthy pipeline, with 30 large deals (US$50m+) being pursued currently, indicating relatively healthy demand environment.
2. Qualified Pipeline Value (overall) as of December 2007 is 2.5 times December 2006 value, which gives a degree of comfort.
3. Wage inflation is expected to moderate to 10% (as against 14% historically).
4. Notwithstanding the macro environment, TCS forecasts billing rate
hikes in the region of 3% going forward.


3. New organisation structure: Organising for the future
TCS announced a new organisation and reporting structure across the entire
company.

1. The new structure will comprise customer clusters aligned to major verticals like BFSI, retail, manufacturing, etc. collectively grouped as Industry Solution Units.
2. Each cluster will have a limited size and critical mass.
3. Each cluster will have its own cluster head, HR head, accounts head and support function head, making it an independent and self contained unit.
4. Most importantly, each cluster will have complete P&L responsibility.
5. Thus, Strategic Initiatives block will focus on new initiatives like TCS Financial Services and SME business.
6.There will be an Organisational Infrastructure Unit comprising heads of support service functions. It will be thinly staffed with experts who will be involved with group wide policy making.

4. Future growth engines
1. Management expects offshoring to grow at 40% YoY, thereby
offsetting some part of slowdown on account of IT spend cuts.
2. Non US regions viz. Latam, China and Rest of Asia is expected to
witness robust growth.
3. Global Network Delivery Model – scaling up non India centres and
simultaneously focusing on local (home country) markets to drive
growth.

5.Initiatives for Non Linear growth
In order to spur non linear growth, TCS management has embarked upon the
following initiatives:
1. Platform based BPO solutions (as against traditional transaction based models)
2. Enhanced focus on products business - TCS Financial Solutions business unit to contribute to growth.
3. Formation of Small & Medium Enterprises (SME) SBU as a strategic move to tap the fast growing SME segment, which has uniquely different needs and capabilities (has signed up 11 customers).
4. Technical Centres of Excellence (Innovation Labs) to capture emerging opportunities.

The management was candid enough to acknowledge the possibility of short term pressures going forward, but appeared to be confident of managing the same. In view of the emerging challenges in the macro environment, we expect muted growth in US/BFSI revenue segments in the short to medium term. However, newer service lines and emerging markets are expected to provide some support and relief. On the other hand, we expect margins to remain flattish resting on support from lower wage inflation and SG&A leverage.

At the CMP of Rs869, TCS quotes at 12.9x FY09E earnings. We maintain Market Performer rating with a target price of Rs1,076 (16x FY09E earnings).


Report card

PE ratio            23.44         25/02/08
EPS (Rs)           38.39        Mar, 07
Sales (Rs crore)     4,834.37     Dec, 07
Face Value (Rs)          1   
Net profit margin (%)   25.00     Mar, 07
Last bonus         1:1         17/04/06
Last dividend (%)   300       08/01/08
Return on average equity 46.62   Mar, 07