TCS to benefit from structural spending uptick in tech budget: Motilal Oswal

Tata Consultancy Services Ltd (TCS) is among the best positioned companies to benefit from the structural spending uptick in tech budget, according to a Motilal Oswal report, which has upgraded the stock to ‘Buy’ rating.  

Covid-19 has structurally accelerated the growth profile of the IT services industry as corporates are embarking on a multi-year, cloud-led technology upgrade cycle.    

“We expect TCS to benefit from the sustained growth given its strong organic capabilities, diverse vertical and geographic presence, deal win momentum, and strong headcount additions,” the brokerage firm said.  

With the industry seeing supply-side challenges, TCS has been the industry bellwether in managing these challenges over multiple business cycles. “We see this as a key factor for TCS to be able to post sustainable growth,” Motilal Oswal said.  

The report states that while TCS has delivered good returns in the last year (up 30%, in line with the Nifty), it has underperformed its tier-1 peers (by 30%, on average) as well as its tier-2 IT services peers (20% valuation discount for the first time in history). “We expect this underperformance to reverse as peer growth starts to normalize owing to the base effect as well as the impact of increased aggression from TCS to increase its market share,” Motilal Oswal said.  

The brokerage firm expects TCS to benefit from demand tailwinds and deliver a 14% revenue CAGR over FY21-24, about 650 basis points higher than that seen over FY15-20. “Growth could improve further as a greater acceptance of offshoring and inorganic opportunities from captive monetization could trigger incremental market share gains,” it said.