Tata Consultancy Services (TCS) not only touched $100 billion in market capitalization on Monday, but it also in the process overtook the market cap of Accenture, a company whose revenue is almost twice that of TCS.
Rod Bourgeois, head of research in US-based DeepDive Equity Research, said that the root driver of TCS’s success is that 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. “This 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,” he said.
Peter Bendor-Samuel, CEO of IT consulting firm Everest Group, however, wonders if TCS’s valuation premium would persist over the next few years. Accenture, he said, is further along than TCS in its move into the new digital marketplace. “We anticipate that it will be difficult for TCS to maintain its traditional margins in digital as the business model as we understand it seems likely to demand lower margins. However, if TCS is able somehow to maintain the margin premium by some combination of IP ownership, and digital labour arbitrage, then it will be able to maintain its equity premium,” he said.