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Growth Investing in India: Why You Should Like Tata Consultancy Services

India is the world’s fastest-growing large economy. According to the World Bank, “India is in a period of unprecedented opportunity, challenge and ambition in its development”. The bank has also reaffirmed its growth outlook for FY19-20 to 7.5%.

As a value investor with a long-time horizon (say over 10 years), I focus on investments that are resilient to systemic risks and are bound to grow irrespective of the short-term economic outlook. One of the best companies in India to take advantage of the country’s phenomenal growth is Tata Consultancy Services Limited (NSE:TCS).

What does TCS do?

Tata Consultancy Services is a global IT services, consulting and business solutions organisation that offers a consulting-led, cognitive powered, integrated portfolio of IT, business & technology services, and engineering solutions.

It is a subsidiary of the Tata Group (one of the oldest and largest conglomerates in the world with an annual revenue exceeding US$110 billion and employing over 700,000 people).

Operating in all major continents, TCS has expertise in the following sectors to name a few: Banking, Financial Services, Retail, Communication & Media, Manufacturing, Life Sciences & Healthcare, Energy, Utilities, Travel & Hospitality, and Technology.

Why invest in TCS?

I will explore TCS using Warren Buffett’s methodology to determine if it is a sound investment. TCS has experienced phenomenal revenue growth year-over-year with a revenue compound annual growth rate (CAGR) of 17% since its IPO in 2004.

As of FY2018, its revenue stood at a whopping US$19 billion. Earnings per share (EPS) saw a similar trend, exceeding 20% CAGR. The return on equity (ROE), which measures the rate of return that shareholders earn on their assets, is 35% as of FY18. The company’s debt-to-equity ratio is at a healthy 60%.

One factor that new investors might be concerned with, for a resource-heavy company such as TCS, is the high number of human resources and the attrition rate. Currently, this number stands at 400,000 employees of 151 nationalities with an attrition rate of 11%.

However, the point worth noting is that the company provides consultancy services across multiple geographies in diverse sectors and that Net Income Per Capita (a key metric in resource-focused companies) has grown over 30% since FY 2013. Furthermore, the attrition rate is one of the lowest among peer companies – for which the management deserves due credit.

Retraining the workforce

In the last decade, TCS has made considerable investments in re-skilling its workforce for the digital age. This has led to renewed focus in areas such as cloud computing, Internet of Things (IoT), Cyber Security, Mobile Technologies and Analytics. In fact, 25% of the revenue for FY18 came from prior investments made in the digital space.

Despite competition from both domestic and international players, TCS has been consistently increasing its market share using a multi-pronged strategy targeting both mid- and large-sized enterprises. Some of the big names it works with include Google, Amazon, Cisco, Oracle, and Microsoft. These partnerships offer revenue resilience irrespective of local economic shocks.

The cherry on top, as countries such as India enter the digital age, is that companies like TCS provide the backbone infrastructure to manage the digital economy. In fact, TCS is a major partner in the Indian Prime Minister Narendra Modi’s “Digital India” programme.

A diversified company

By virtue of its work and competency in various sectors, TCS offers a well-diversified portfolio for investors. The company has consistently exhibited strong growth in earnings while investing in new age technologies such as analytics, cloud computing and artificial intelligence.

In addition to competent management, the value that the Tata name brings in terms of added confidence to customers and investors alike is priceless. Granted, the stock is trading near an all-time high but the long-term outlook for TCS is extremely bullish. If that is not enough to convince you, the company offers a generous dividend yield of 3.3% in addition to an ROE that exceeds 30%.

As a value investor, I personally would continue to accumulate shares of TCS in my portfolio in expectation of a larger future payout.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Saptarshi Datta doesn’t own shares in any companies mentioned.