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Morningstar | Tata Consultancy Services Is India’s First and Largest Software Exporter

Tata Consultancy Services is India’s first and largest software exporter. Its long-term success comes from a disciplined approach to project execution and a concerted emphasis on customer satisfaction. TCS’ extensive global delivery network and full suite of IT services allows the firm to support the world’s largest enterprises, which sets it apart from smaller rivals. The firm’s operations are concentrated in North America, application development and maintenance, and banking, financial services, and insurance. However, TCS is looking to diversify its exposure. We expect it to expand its presence in underpenetrated geographies while developing its expertise in industries outside BFSI and in services associated with social, mobile, analytics, and cloud-based technologies (also known as digital transformation services). To achieve this, organic growth will be supplemented with acquisitions.As TCS expands its client base and develops meaningful relationships within those clients, it can cross-sell services and gain an intimate knowledge of customers’ IT processes. This client-vendor relationship takes years to cultivate, and once established, it typically leads to significant vendor switching costs. Given such switching costs, we forecast reasonably steady financial performance from TCS over the long term. As a result, we think the firm will continue to post industry-leading revenue growth and benefit from a narrow economic moat.We expect TCS to push further into Asia-Pacific, Latin America, and the Middle East and Africa, given the infancy of these markets. In fact, the contribution to group revenue (roughly 17%-18%) from these new growth markets has more than doubled in the past decade. In addition, we think continental Europe’s increasing willingness to adopt offshore IT services will provide a tailwind for the firm. We think the acquisition of leading French systems integrator Alti will strengthen TCS’ footprint and signifies its intent to grow in the European region. Strong demand for digital services is also expected to drive TCS’ growth. The firm’s investment in North American collaboration centers demonstrates the future importance of these services.