TCS market cap exceeds combined value of Accenture and Cognizant as well

Tata Consultancy Services Ltd’s (TCS) Rs.5 trillion market capitalization isn’t a merely milestone. It sends some other important signals as well. TCS’s market cap is now greater than the combined market capitalization of the next four biggest Indian information technology (IT) companies—Infosys Ltd, Wipro Ltd, HCL Technologies Ltd and Tech Mahindra Ltd.

Some of these companies have ceased to be the real competition for TCS and this is reflected in the value investors have assigned to these companies on a relative basis. But what about firms such as Accenture Plc and Cognizant Technology Solutions Corp., which are closer to home in terms of size of operations and growth respectively?

As it turns out, when TCS’s market cap reached $85 billion this week, it also overtook the combined market capitalization of Accenture and Cognizant. Analysts at JP Morgan India Pvt. Ltd, who point out to this in a note to clients, say the two companies are the two largest pure-play IT services and system integration plays by market cap listed overseas.

In other words, even if one were to dismiss as immaterial the fact that TCS has eclipsed the combined market cap of other large Indian IT firms, exceeding the combined market value of Accenture and Cognizant is no mean task by any stretch of the imagination.

One reason TCS has done well is that it has handled challenges related to size and scale very well. There have always been concerns about how Indian IT firms will handle growth on a scale of over a 100,000 employees. TCS now has over 300,000 employees and this hasn’t caused it to take a pause in terms of growth rates.

Incremental revenues have been rising year after year; although as pointed out earlier in this column, percentage growth rates have come off because of the high base effect. The analysts say in the note, “We often say that scale is a great advantage in the IT services business leading to the larger firms outgrowing the industry/smaller firms. But that presupposes that firms can capitalize on scale and exploit it. (Because) scale is a double-edged sword. What TCS does particularly well is identify and execute on opportunities that draw on its scale (infra management, BPO, testing are volume-oriented, offshore-centric opportunities).”

In the past two years, TCS has beaten Accenture in terms of incremental revenues added even though its scale of operations is lower. And it has closed in on the growth gap with Cognizant in percentage terms. The US-based firm’s growth rates are now expected to be just 1-2 percentage points higher this year compared with a difference of about 10 percentage points or more in earlier years.

Of course, as far as valuations go, TCS has also benefited from a lack of options for India-focused investors. Among India-listed firms, the No.2 and No. 3 firms have faced challenges for years now, which has caused increased allocation to TCS for those who want a play on the IT sector.

If and when any of the laggards bounce back, TCS may lose some of the valuation premium it now enjoys. Even so, just the fact that it’s been managing its operations well and is still growing in the mid-teens with a high level of profitability means that it shouldn’t be long before it reaches the next milestone of a $100 billion market capitalization.