January 19, 2023

Factors to consider before investing in TCS shares

Tata Consultancy Services,or TCS,is India’s biggest information technology services company. A part of the $120 billion Tata Group, TCS has over 600,000 employees in over 55 countries who help corporations and governments develop and manage their IT assets.TCS is also the second most valuable company in India, following Reliance Industries, thanks to its stable business model and strong growth in recent decades, primarily theadoption of technology has increased at a rapid pace. 

Technology is likely to seep deeper into our lives, and thus the relevance of TCS for corporations and businesses will increase further. This makes TCS an attractive investment for a long-term view. Only the question is when you should buy the TCS share. Following are the factors that you should consider before adding the stock to your portfolio:

Revenue growth: This should be the first criterion to determine if you should buy the TCS share price, not just for TCS but for any company. The good news is that despite concerns over a slowdown in Europe, TCS has managed to beat the revenue growth expectations of ICICIdirect analysts. During the September quarter (Q2FY23),the IT behemoth TCS saw an uptick in demand in travel transportation and hospitality sub-segments in the Retail vertical. 

The demand is driven by investments in 5G and providing personalised offerings to end consumers. 

Margins: This is another essential criterion. Margins tell you how much the difference between costs and income is for a company; hence the higher it is, the better. The excellent news is TCS’ margins,which had hit bottom in the June quarter, have started expanding again. 

Order book: Continuous deal wins are necessary for companies like TCS to have revenue visibility for years. Growing revenue visibility is a good sign for any business. Lately, though deal wins have moderated, many economies are entering a recessionary period, resulting in cost-cutting. The company’s management is confident it can achieve deal wins of $7-9 billion per quarter.

Forex: This particular factor impacts companies involved in export or import. As of now, TCS, an export-focused company, benefits from any depreciation in rupee against the US dollar. One dollar was priced at Rs. 83 compared to around Rs. 73 a year ago. Thanks to this, analysts have already projected higher earnings for TCS share price NSE in the coming quarters.

A downside is thatthe dollar is also rising against European currencies, which will negate some of the positive impacts due to the rupee depreciation. 

Attrition rate: This refers to the percentage of employees resigning from a company of their own volition. This suggests the company will likely have to pay more to fill those positions, meaning higher employee costs. TCS’s current attrition rate is at record levels, which is not good news for the company’s business. However, the management believes the attrition rate has peaked and will moderate. 

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