SAMCO Research has suggested Long Term BUY Call for technology major TCS. TCS stock has been trading strong over the last few weeks due to sustained buying. The whole IT sector has witnessed re-rating after COVID-19 pandemic and many stocks have touched 52-week highs.

The research report and investment rationale from SAMCO Research follows.....

Leader with a strong profile - With a market cap of over Rs. 8 lakh Cr, TCS is the leader in the IT pack with business presence across the world. To put its size into perspective, TCS has a customer base of 2390 clients as of FY20 compared to the 2nd largest IT player who has 1458 clients. The edge that TCS has enables it to serve clients with long lasting relationships and hence a pricing advantage in deals.

Power of Brand & Agility - In Q1FY21, the company was able to ink deals worth USD 6.9 billion, with USD 2.1 billion coming from the BFSI sector, despite a difficult environment due to COVID-19. This shows the resilience, brand image and strong operational execution TCS possesses to win such deals. Moreover, it has been very agile with operations and adaptability which was visible when the company enabled work from home for over 90% of its employees and enabled full scale operations over a short period, given its size and scale. TCS is further expected to reduce costs of travel and office rental with adoption of work from home, thereby boosting profit margins.

It's Biggest Asset - Manpower is an asset for any technology company and with a headcount of over 4 lakh, TCS has seen stable attrition rates which currently stands at 11.1%, the lowest in the industry. These levels are maintained over the long term which indicates that it saves time and costs towards training employees each time and enjoys good productivity.

Riding the Covid wave - A strong Balance sheet with no debt and strong operating cashflows growing at CAGR 16% since the past 10 years, has helped it deliver a robust OCF/EBITDA of 68% (FY20). Returns in terms of ROE and ROCE has also been at 37% and 47% respectively which is higher than the IT industry average. Superior operational performance translates to its bottomline and inturn provides a higher return to shareholders. This is expected to continue be it a crisis or no crisis!

Risks

Vertical Risk - It derives about 39% of its revenue from the BFSI segment. While the industry has been lucrative, banking is very sensitive to economic cycles and during down cycles banks tend to focus on reducing discretionary spending.

COVID-19 Related Risk - While TCS has successfully implemented a swift transition to work from home, there are multiple risks and costs such as execution of certain projects due to lack of collaboration among employees, additional costs to set up fast internet connections, infrastructure and equipment, greater cybersecurity risk as employees will not be using a centralized system at offices.

Currency & Policy Risk - TCS derives majority of its revenues from North America and only 5.7% is from India. Therefore, if the rupee appreciates against other currencies, its revenue will decline. While there are derivative contracts as precautions, a sharp appreciation in rupee may affect its top & bottomline. Another factor to consider is protectionist policies undertaken by foreign countries which may put the company's operations under stress and impact the business. Examples could include additional taxes, restrictions on H-1B visas (US-specific risk) and other competitive restrictions.