Is TCS Disproportionately Contributing to Tata’s Growth?

The growth of Tata Sons arises from its eminence as a wealth creator. As one of the largest business conglomerates in India and the world, its presence is noticeable in many major sectors of the economy. But if we look in terms of business consolidation and profit generation, the IT-specialisation wing of the company leaves other Tata Sons subsidiaries a great deal behind.

Since 2019, the reliance of Tata Sons on Tata Consultancy Services (TCS) has been riding higher than ever — with the value of TCS comparing almost twice the value of the combined market capitalisation of the remaining 27 subsidiaries of the company.

In January 2021, after a stellar performance in Q3FY21, TCS raced up to unseat Accenture as the world’s largest IT firm by market capitalisation.

Not only that but the brand value of TCS has also risen immensely (by $1.4bn) in 2020, a year which witnessed a troubled economic output for most companies albeit mostly for the ones operating in non-tech sectors.

So does this mean Tata, the salt-to-software giant is now categorically adapting itself for a software-fuelled makeover? Let’s see about this raging financial dependency of Tata Sons on TCS.

TCS — The Profit Machine

Ever since the pandemic began, the IT industry has exhibited a sort of resilience and adaptation to the work-from-home strategy that is truly remarkable. TCS, being the largest IT company in the country with an employee base close to 469,000, was the industry leader in enforcing this adapted business model. Although its growth momentum seemed to thaw in the first two quarters, it bounced back in the third quarter to post a revenue rise of 4.7% QoQ and 7.3% in net profit YoY.

In similar fashion, in FY20, the almost doubling of Tata Sons’ profit was driven largely by higher dividend contribution from TCS. In FY19, TCS’s contribution to the conglomerate’s revenue had sharply increased to 90% from 77% the year before.

In comparison, for the same period, the share of non-TCS companies to revenue had shrunk by 23%. As a matter of fact, this clusterification of Tata Sons’ revenue and profit from a single subsidiary had drawn heightened concern and criticism from Tata Trusts, the controlling shareholders. The over-reliance on TCS and a subsequent uptick in Tata Sons’ risk profile appears to be fairly clear.

Holistic Performance

The profit-churning consistency and enterprising initiative of TCS also put it among the top three most valued IT brands in 2021, a prestigious feat shared by only two other companies in the bracket — Accenture and IBM — with an annual growth of 10%.

Brand value is a distinction that is conferred not just for the value of all brand earnings at any given time but also for the monetary growth in brand reputation of a company. This was likely a result of a long-standing practice of technological spending of TCS in foreign markets and gradual increase in overseas investments, particularly in Europe and US. For instance, in December 2020, the company expanded its presence to Austin, Texas with a planned investment of $100m over the next seven years. It also extended its partnership with Star Alliance to service it with business analytics information and accelerate digital transformation.

The Theory of Singularity of Reliance on TCS

Well, that’s a bit dramatic, really! Out of the ₹8.6Lcr ($118.7bn) market capitalisation that Tata Sons has added over the last four years, 85% has rolled from four major entities — TCS, Tata Motors, Tata Steel and Titan.

Let’s consider Tata Steel first. One of the most remarkable decisions of N. Chandrasekaran (who took charge of Tata Sons in 2017) was to reduce the subsidiary count of Tata Steel in an effort to minimise its debt levels. However, the efforts have been diluted in sight of the bleeding European operations of the entity.

Tata Motors, however, has been a turnaround story. Its revival plan has shown fruition and with new product strategy, investment and brand propositions, business has improved. But there still remain a lot of challenges when it comes to controlling capex and preserving cash for the company. Plus, with the advent of Tesla and EV-chatter in India, some major remodel may be warranted in the entity’s business plans further. However, market grapevine around a potential Tesla-Tata Motors JV might add another spin around the overall narrative.

Titan is another story altogether. It symbolised Tata Sons’ entry into the lifestyle segment in 1984. The initial days were troubled, owing to some glaring holes in balance sheets and brand errors (like Tanishq). But with major amendments in designs, manufacturing, promotion in consumerism etc., the brand has survived a revival.

However, none of the above either have as enormous an expanse or as glorious a report card as TCS does. With a ₹11.4Lcr ($152.3bn) market cap, its presence stands tall among the rest. Earlier this month, it also overtook RIL to become India’s most valuable company, after a gap of 11 months.

Reasons for Holistic Growth

Since N. Chandrasekaran’s arrival at the helm, Tata Sons has focused on the sound “One Tata’’ strategy that aims to drive operating performances by integrating the flailing pieces of the conglomerate and relocate them into profit-yielding vehicles. TCS has also mirrored the same strategy, albeit in a slightly different light.

The entity has been solely responsible for the consolidation of all digital businesses of the conglomerate, playing in tandem with the waves of digitisation that have touched the country’s landscape in the past decade. IT expenditure of the Tata group of companies has been reportedly scaled up and TCS’s role as the techno-bridge of internal collaboration between other Tata entities has been promoted.

Another reason floated for this phenomenal and consistent cash cow operation of TCS is perhaps, the decision of Mr. Ratan Tata to not list the company publicly during the 2001 IT boom. He saw the boom for what it was — a bubble — and his idea to preserve long-term shareholders’ interests by not capitalising on a short-term market anomaly is what confers the trusted brand value upon the company.

The Catch In the Cash Cow

Over the last one week, seven companies (including TCS) have witnessed a value erosion of ₹1.23Lcr ($17bn) from the market owing to an ongoing bearing market trend.

It has also resulted in TCS losing its top place to RIL in terms of market capitalisation with a delta now of just over ₹2Lcr ($27.6bn). The market is also abuzz with tales of saturation of the tech industry. Keeping that in mind, like other peers, TCS has also reportedly embarked on a multi-year technological transformation cycle, most important among them being the adaptation and serviceability of its cloud migration technology.

In any case, with a rise of almost 25% compared to pre-COVID levels, it seems as if the chains of Tata Sons’ growth have been single-handedly pursued by this one company in a lukewarm economic climate. It remains to be seen how tensile and firm these chains of growth continue to stay.

(Originally published February 23rd 2021 in transfin.in)