Podcast | TCS joins the 100-billion dollar club

On our Story of the Day, the only one that we can talk about is the big one heard across the country. Tata Consultancy Services (TCS) has joined the coveted hundred billion dollar club, or more to the local context, the 680912 crore club (as on Monday), thus becoming only the second Indian company ever to do so after Reliance Industries.

Terming the digital era as a huge opportunity for TCS, chief N Chandrasekaran said, "The company has been able to create value consistently by making the right investments". So all you need to know about the recent valuation of TCS and what may have resulted in becoming a market leader, right here on Story of the Day, on Moneycontrol.

At the time of my telling you this though, the valuation has come down to about USD 98 billion, but it certainly did cross a hundred billion dollars yesterday on the back of very strong quarter earnings. Just to put it in context, there are only 63 other companies with a market cap of more than $100 billion.

Facebook, Amazon, Apple, IBM, Microsoft, Google's Alphabet, Alibaba are among the companies who are in the hundred billion dollar club and they are essentially the Who Is Who of global giants. Just to put more things in perspective, TCS's market cap now is more than the Gross Domestic Product or GDP of more than 120 countries - countries like Ecuador, Slovakia, Kenya, Costa Rica, Belarus, Bulgaria, Sri Lanka, Luxembourg - all of these countries, full, proper countries! - have a GDP less than the hundred billion dollar mark, and TCS's market cap alone is more than the GDP of all of these countries.

For yet more perspective, the market valuation of all the listed firms listed on the Pakistan Stock Exchange is USD 80 billion, and TCS - just one company - has well over that number in market capitalisation.

It is a huge moment for the Indian IT services sector. TCS, in a lot of ways, was one of the companies that put India on the map as an IT hub. This also marks the first time in a decade that India has made an entry into this club. The last time we saw it was in 2008, when Mukesh Ambani-owned Reliance Industries had breached the threshold.

At this point, TCS's market cap is almost two and a half times that of its nearest competitor Infosys. Infosys's market cap as of the 20th of April was 2.57 lakh crore. The bronze medalist on this list is Wipro with 1.35 lakh crore rupees in market cap. TCS's billion dollar valuation has obviously been on the back of better than expected earnings for the January-March 2018 quarter, which was announced on the 19th of April.

The company's Q4 net profit rose 5.7% to 6904 crore while revenue increased 3.8% to 32,075 crore. In addition, the company also announced a 1:1 bonus share issue, lifting investor sentiments. But this did not happen overnight. And TCS's rise is certainly not a recent phenomenon. TCS's shares have gained over 25% since January compared to the around 14% rise seen for its nearest rival, that is Infosys. And even as late as 2016, if someone had suggested that this milestone was going to be achieved in the next two years, the expression on your face would have been one of incredulity. But then the stock has given a 65% return from the loss of 2016.

How is it that TCS is doing this when Infosys is not? Is it because TCS is doing something with regards technology that Infosys is not? Analysts think that TCS just has a bigger scale at which it is implementing things that Infosys is not. It's important to bear in mind that a lot of software exporters from India have struggled in the recent past simply because of a climate of changing client requirements and of course, the America First protectionist policies that we see in the US. But what is it that has TCS apart even in this climate? The answer according to most analysts and observers in this space? Well, leadership. The consistency in leadership and smooth transitions between CEOs have been among the reasons why some people believe that TCS has overtaken Infosys, which was only until a few years ago, considered the IT Sector bellwether.

Sudin Apte, telling Business Today on the 21st of April, went on to say, "Both the companies TCS and Infosys have seen leadership changes but the results show that TCS is a little bit ahead of the curve and has not seen the kind of disruptions that Infosys has seen over the last few years. TCS has been able to stay focused in terms of strategy and identify its niche with the clients."

We will of course be doing a deep dive on this very subject of what sets Infosys and TCS apart, but suffice to say that in the seven years that N Chandrasekaran was the head of TCS before being promoted as Chairman of Tata Sons in January 2017 - in that seven year period alone, Infosys has seen three different CEOs.

From 2007 to 2011, it was Senapathy Gopalakrishnan; 2011 to 2014, Shibulal; 2014 to 2017, Vishal Sikka. And while Chandrasekaran's transition from TCS to Tata Sons at-large was smooth, at least two of the three exits when it came to Infosys were acrimonious. Shibulal retired from Infosys due to non-performance, and Sikka left following differences with co-founders - as we all recall, the spat with Narayana Murthy.

On its way to join the echelons of the world's 100 largest corporations, TCS has now overtaken Goldman Sachs. It is by no means a small feat. It was after all TCS along with similar firms like Infosys which pioneered modern IT outsourcing, by taking over many of the back-office support functions for the Who's Who of global corporations like GM, Citigroup, among others. The models that were built by TCS and its peers have in fact been adopted by much of the rest the world, and have in the process made Silicon Valley teem with Indians.

The IT Services industry which today generates about USD 167 billion annually is now at a crossroads. There is the rise of automation, artificial intelligence, there is cloud computing... all of these trends in the industry are pushing away the rather labour-intensive back office programming operations that TCS specialises in. But analysts also believe that Tata may be in the best position to make that leap from the old ways into the New World, so to speak.

This isn't to say that TCS does not have immediate problems to grapple with. Rising hiring costs, is a huge problem, especially for a company which has almost four lakh employees representing 131 nationalities across 46 different countries.

Immigration curbs by way of America's protectionist policies may also hamper its ability to move cheaper, skilled Indian labour into its largest market, the United States. And even after hiring the workforce, to get them up-to-speed with all the changes that are happening so rapidly within this space, there needs to be expensive trading. All of that costs money, and a fair lot too.

But TCS is showing that it has the spunk to do what it takes. IBM, of course, remains the number one in the IT services market cap pecking order, but its market cap is only about 33% higher than that of TCS, though its revenue is more than 300% higher.

But there is also a unique position where TCS has placed itself. It has built a position as the low-cost value player at scale backed by the execution ability to maintain low costs while still delivering quality work. But, like I said, that ability to maintain low costs might be threatened in the wake of the new technology sweep that is being seen across the sector.

But as it stands, according to veteran industry watchers, the industry positioning by TCS supports good revenue growth and this low cost execution supports distinctive margins. "Good growth plus distinctive margins over many years produces a huge market cap," went on to say Rod Bourgeois, Head of Research in the US-based Deepdive Equity Research.

Phil Fersht, who is the CEO of IT research firm HfS went on to say, "TCS has stayed very focused on relentless execution and less obsessed with marketing messages and trying to sound like everyone else the phone has created its own individual identity which many of the other service providers are still struggling to do. I sometimes call TCS the 'Indian IBM' because of the longevity of its staff and its unique culture".

Of course, there is another time and another podcast, to discuss all the challenges that TCS might be facing, but today it is time to celebrate. Let's stop to take a quick look at what may have contributed to TCS's success and its unique culture.

TCS is India's largest IT outsourcing company. At a time when most IT companies are feeling the heat, TCS beat Street expectations! Rajesh Gopinathan, the company's CEO said, "TCS is uniquely positioned to offer a combination of services - from core-tech transformation all the way to front-end digital technologies. The full spectrum of services is what is positioning us beautifully in this space"

Another feather in the cap, and it has been so for a while, TCS is the flagship company of the Tata Group. Now the Tata Group is a huge conglomerate of many successful companies but even there, TCS has proven to be the most profitable, accounting for about 85% of the group's profit. And clearly TCS also played an extremely crucial role in helping the Tata Group enter the elite league of 10 trillion rupee market capitalisation.

And like I said earlier, TCS is also the largest private sector employer in India. With almost 400,000 employees who represent 131 nationalities spread across 46 countries, TCS is India's largest private sector employer. And more importantly, it's woke! 35.3% of TCS's employees are women! And that is a sort of gender ratio that is enviable in the IT space.

And finally, what may also have contributed significantly to the success of TCS is the fact that the waters in TCS seem to not be choppy. Founded in 1969, the company is on the cusp of celebrating is golden jubilee year, but take a guess as to how many CEOs it has had. Well, I didn't know this either, but, just four!

TCS has certainly had a stable run as far as the head honchos of the company go. Since the time of its founding in 1969 all the way up to 1996, the company was under the stewardship of FC Kohli. Then there was S Ramadorai, after whom N Chandrasekaran took over. Chandrasekaran of course went on to be promoted as the Chairman of Tata Sons in 2017, and currently it is the tenure of Rajesh Gopinathan.

So all in all, TCS is a home-grown success story that we can all be proud of. And in the coming days, we will also take a deeper dive into a comparison between two home group success stories - Infosys and TCS. How the two of them stack up against each other? What may be the differences in the way things have turned out for those two companies?

All of those on another Moneycontrol podcast. Until then, here's congratulating everyone at TCS, and indeed the larger Tata Group, and hoping that in the near future many more Indian companies will join the elite club of hundred billion dollars. Until the next time I see you, this is me Rakesh saying thank you for joining us on behalf of everyone here at Moneycontrol.