Buy TCS in small doses, say experts

Last week, Tata Consultancy Services (TCS) crossed the Rs 5 lakh crore market capitalisation mark. So, is this the time to buy into this technology fairy-tale story, or should one wait for a correction? Market experts seem positive on the stock. Of the last 20 expert views on the stock this month, nine have given a 'buy' rating, four say 'prefer', 'hold or 'stay invested' and three say 'accumulate'. Two others gave the stock a 'neutral' rating and one said 'reduce'. Many of these reports came out after the company announced its earnings.

TCS has been trading at a 12-month trailing price-to-earnings (PE) ratio of 24.90x as of April-June quarter end, higher than Infosys' 17.49x.

In comparison, Sensex's 12-month trailing PE stands at 18.74x. “TCS's valuation growth trajectory is only going to get steeper in one-two years,” says Vikram Dhawan, director, Equentis Capital. Hence, TCS is a top pick in the IT space. Infosys's PE is falling faster than TCS's. And going forward, this gap in PE is only going to widen, says Arun Kejriwal of Kris Research. Between two companies with similar valuations, one should choose the market leader, says Kejriwal.

Dhawan says till now only global factors played out for IT stocks. And if the India story is to be believed, there is good domestic revenue likely to come for these companies.

Given that TCS is not a cheap stock for individual investors, a July 17 research report by Motilal Oswal said, "We would treat any corrections as an entry opportunity. At 18.7 per cent dollar revenue CAGR over FY14-16E, we expect TCS to continue leading industry growth. At 19x FY15E and 17x FY16E EPS, we remain 'neutral' on the stock.”

One could also have an accumulation plan, suggests Dhawan. “Fix an amount that you would invest in TCS every month, like an SIP. Or, fix the number of shares you want to buy every month. However, invest only if you can hold the stock for more than two to three years. It won't be gratifying in the short term (up to six months),” he says.

The flip side: There is very little bargain left in IT stocks like in case of private banks like HDFC Bank and YES Bank, says Dhawan. Though TCS managed to surprise the street even when the markets were not doing well.

“IT stocks have been enjoying a good valuation for sometime. So there may not be a significant upside to the sector, including TCS. At best, TCS may go from Rs 5 lakh crore to Rs 6 lakh crore unless something very unforeseen happens to the rupee,” says Kejriwal.

The other IT company to invest could be HCL Technologies. However, it largely earns from the infrastructure business than services business. In comparison, TCS earns from all businesses.

“We believe, implicit revenue growth rate (FY17 to FY26) required to attain current market price seems too aggressive especially considering TCS huge revenue base. And hence believe there is scope for disappointment, going forward. Taking the same into account, we recommend 'reduce' on the stock with a price target of Rs 2,353 by assigning multiple of 20 times to its FY16E EPS of Rs 117.7,” said Hardik Shah of KR Choksey in a July 19 research report.