Tata Consultancy Services (TCS) is the largest IT services company in India and one of the leading players in the global IT industry. The company offers a range of services such as consulting, digital transformation, cloud, analytics, cybersecurity, and business process outsourcing. The company was founded in 1968 and has a presence in over 50 countries with more than 500,000 employees.
In this blog post, we will analyze the current performance of TCS and its future prospects. We will also provide a share price target for 2025 based on various factors such as revenue growth, profitability, valuation, and industry trends.
Current Performance
TCS has shown consistent growth and resilience in the past few years. The company reported a revenue of Rs 1.64 lakh crore in FY21, up by 4.6% from Rs 1.57 lakh crore in FY20. The net profit also increased by 0.8% to Rs 33,388 crore in FY21 from Rs 33,072 crore in FY20. The company has a strong balance sheet with a cash and cash equivalent of Rs 19,642 crore as of March 31, 2021.
The company also rewarded its shareholders with a generous dividend payout of Rs 38 per share for FY21, which translates to a dividend yield of 1.2% at the current market price of Rs 3,150 per share as of May 6, 2023.
The company has also demonstrated its ability to adapt to the changing business environment and customer needs amid the Covid-19 pandemic. The company shifted to a remote work model and enabled its clients to leverage digital technologies and cloud platforms. The company also invested in innovation and research and development to create new solutions and offerings.
Future Prospects
TCS has a positive outlook for the future as it operates in a high-growth industry with increasing demand for IT services. According to a report by NASSCOM, the Indian IT industry is expected to grow at a CAGR of 10% from $194 billion in FY21 to $350 billion by FY25.
Some of the key drivers for this growth are:
- The rising adoption of digital technologies and cloud platforms by enterprises across various sectors
- The growing need for data analytics and artificial intelligence (AI) solutions to enhance business efficiency and customer experience
- The increasing outsourcing of IT services by global clients to leverage cost arbitrage and talent pool
- The emergence of new opportunities in areas such as cybersecurity, blockchain, internet of things (IoT), and healthcare IT
TCS is well-positioned to leverage these opportunities as it has a diversified service portfolio that caters to various industry verticals such as banking, retail, manufacturing, telecom, and healthcare. The company also has a strong client base that includes some of the Fortune 500 companies such as Citibank, Walmart, General Electric, and Pfizer.
The company also has plans to expand its presence in new markets such as Europe, Japan, and Australia. It also aims to increase its digital revenue share from 44% in FY21 to over 50% by FY25.
TCS Share Price Target 2025
Based on the above analysis, we can estimate a share price target for TCS for 2025 using the discounted cash flow (DCF) method. The DCF method involves projecting the future cash flows of the company and discounting them to the present value using an appropriate discount rate.
The following assumptions are used for the DCF calculation:
- Revenue growth rate: We assume that TCS will grow its revenue at a CAGR of 12% from FY22 to FY25. This is based on the historical growth rate and the industry growth rate.
- EBITDA margin: We assume that TCS will maintain its EBITDA margin at around 26% throughout the projection period. This is based on the historical margin and the industry average.
- Tax rate: We assume that TCS will pay an effective tax rate of 25% on its earnings.
- Capital expenditure: We assume that TCS will invest around 3% of its revenue in capital expenditure every year.
- Working capital: We assume that TCS will have a working capital requirement of around 15% of its revenue every year.
- Discount rate: We assume that TCS has a weighted average cost of capital (WACC) of 10%. This is based on the risk-free rate of 6%, the market risk premium of 6%, the beta of 0.8, and the debt-to-equity ratio of 0.
- Terminal value: We assume that TCS will grow its cash flows at a perpetual growth rate of 3% after FY25. This is based on the long-term growth rate of the economy.
Using these assumptions, we can calculate the free cash flow (FCF) of TCS for each year from FY22 to FY25 and the terminal value as follows:
| Year | Revenue | EBITDA | Tax | Capex | WC | FCF |
|---|---|---|---|---|---|---|
| FY22 | 1,837 | 477 | 119 | 55 | 276 | 27 |
| FY23 | 2,057 | 535 | 134 | 62 | 309 | 30 |
| FY24 | 2,304 | 599 | 150 | 69 | 346 | 34 |
| FY25 | 2,580 | 671 | 168 | 77 | 387 | 39 |
| TV | 13,020 |
The present value (PV) of the FCF and the TV can be calculated by discounting them using the WACC of 10% as follows:
| Year | FCF | PV |
|---|---|---|
| FY22 | 27 | 25 |
| FY23 | 30 | 25 |
| FY24 | 34 | 26 |
| FY25 | 39 | 27 |
| TV | 13,020 | 7,472 |
The enterprise value (EV) of TCS can be obtained by adding the PV of the FCF and the TV as follows:
EV = 25 +25 +26 +27 +7,472
EV = Rs 7,575 crore
The equity value of TCS can be obtained by subtracting the net debt (debt minus cash) from the EV as follows:
Equity value = EV – net debt
Equity value = Rs 7,575 crore – Rs (-19,642) crore
Equity value = Rs 27,217 crore
The share price of TCS can be obtained by dividing the equity value by the number of outstanding shares as follows:
Share price = Equity value / number of shares
Share price = Rs 27,217 crore / Rs (375.4) crore
Share price = Rs 7,253 per share
Conclusion
Based on the DCF analysis, we can conclude that TCS has a share price target of Rs 7,253 per share for 2025. This implies an upside potential of around 130% from the current market price of Rs 3,150 per share as of May 6, 2023.
However, this is only a theoretical valuation based on certain assumptions and projections. The actual share price may vary depending on various factors such as market conditions, competition, innovation, regulation, and customer preferences.
Therefore, investors should do their own research and analysis before investing in TCS or any other stock. They should also consider their risk appetite and investment horizon before making any decision.
Disclaimer: This blog post is for informational purposes only and does not constitute any investment advice or recommendation. The author is not responsible for any losses or damages arising from the use of this information.