Saturday, August 31, 2013

CLSA Outlook on TCS Stock Price Misleading

CLSA recent report on TCS stock price target of Rs 2200 in medium term and it's potential to attain a market value of $100 billion over next few years is very misleading for investors in general as they might get into the stock at current levels which is exorbitantly high in our view. 

We believe all the good news in terms of currency depreciation and U.S recovery are largely discounted in the stock prices of all the IT companies in general as they have outperformed Nifty by as high as 50% since the start of this year. 

TCS Stock price chart

CLSA is recommending a stock which has gone up 20% in 7 trading session from 22nd Aug 2013 to 30 Aug and around 50% in 2 months from June end to August end. 20% and 50% upmove might not be very high for a small or mid sized company but for a company of size around 3,96,000 crores it is huge. In two months since the end of June this year it has added more than 1.2 Lakh crores of market value equivalent to entire Wipro.

HCL Tech
Tech Mahindra#
Market Value


Net Profit

Here are some numbers and charts regarding TCS Valuations:

  • TCS market value is more than 6.0% of the entire market value of Indian Stock Markets comprising of around 7000 companies.As on 30th August at closing price of 2030 it had a market value of Rs. 3,96,000 crores.
  • TCS Market Value is approximately equal to the entire market value of Infosys, Wipro, HCL Tech and Tech Mahinda put together. This essentially means you can buy 1 share each of the next top 4 IT companies at the price of share of TCS.
  • TCS revenue is almost half of the revenues of Infosys, Wipro, HCL Tech and Tech Mahinda put together.
  • Cumulative Net Income of Infosys, Wipro, HCL Tech and Tech Mahinda is 1.55 times the net profit of TCS.
  • The average price to sales valuation of IT companies in 2nd to 5th spot is around 3.4 times while TCS trading at 6.3 times based on FY 13 Revenue
  • The average price to earnings (PE) valuation of IT companies in 2nd to 5th spot is around 18.5 times while TCS trading at 28.5 times based on FY 13 Net Profits, a 54% premium.
  • Accenture which has twice the size has a market value 20% lesser than TCS.

Also Read: TCS Leaves Accenture, HP behind

TCS market share in revenue, profits and market value
Top 5 IT companies

Investors who get into TCS at current levels will take some very high risks as the risk-reward ratio is very unfavorable now:

1. TCS net margins could contract to industry average in coming years due to higher competition from next 4 big players and higher tax outgo.

2. Pricing pressure inevitable due to competition and client asking better rate because of sharp depreciation of INR vs USD, EURO and GBP.

3. U.S immigration bill could bring in some unwanted clauses by year end which could impact the costs of IT companies in India in general and TCS in particular.

4. TCS PEG ratio based on FY-13 number is around 2 which is very high for a company of size $60 billion and growth rate of 14%.

5. Technically also the stock has gone up by 20% in July and 12% in August (closing basis) on below average volumes of 28 and 30 million shares respectively which doesn't suggest high conviction buying. Ideally when very large cap stocks move up 20% or 30% in a month or two on genuine buying interest it happens on above average volumes.

Note: There is no doubt that TCS is a very strong company but it does not qualify as a strong investment at this point of time purely on the back of over valuation and over ownership. Investors should take informed decision and not jump on any stock based on recommendation from some high profile brokers as those brokers might have vested interest in it. In short term, due to technical factors, TCS might touch 2200 but any wise investor should stay out of the stock and only consider the stock after immigration bill is finally passed and is available at least 20% cheaper from current levels. Existing investors are strongly advised to book profits and get out.

Recommended reading on Analysis: Avoid Maruti Suzuki above Rs. 1300

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