Tata Consultancy Services well set to gain from demand recovery

The stock of Tata Consultancy Services ( TCS) has fallen nearly 11% in the past 12 months on concerns of slowing growth momentum. The ET Infotech index lost 7.8%during the period. Investors may find some solace in knowing that the country’s largest software exporter leads the top IT pack when it comes to the profitable incremental business. This is reflected in a comparison of financial data provided by IT companies.

For TCS, 2015 was not as great when it comes to incremental revenue. It earned $ 1,180 million of additional revenue over 2014’s topline. This lagged Cognizant’s incremental revenue of $ 2,153.3 million. However, TCS earned the best margin on incremental revenue among top peers including Cognizant, Infosys, Wipro and HCL Technologies. The ratio of incremental net profit and incremental revenue or net margin for TCS was 21.2% compared with 8.6% for Cognizant. This is on account of better additional profit of TCS relative to additional revenue. In 2015, TCS earned $250 million in incremental net profit, which is the difference between profit of that year and the previous year. This was not only the best among peers but also exceeded the sum of incremental profits of its peers at $103 million. What it means for investors is that even though TCS reported slower revenue growth over the past few quarters, the quality of revenue as reflected by the margin performance remained higher than that of peers.

Gartner, a technology research firm, has predicted that global IT services spending will grow by 3.1% in 2016, after falling 4.5% last year. Given its presence across technology platforms and user industries and efficient business model, TCS looks well positioned to take advantage of the demand recovery.