The objective of this blog is to analyze TCS fundamentals and estimate a fair value per share. Please note that this valuation was done on 4/29/2019.
Just as a manufacturing company invests in building new products/plants, a service company such as TCS invests in up-skilling (learning and development) its existing employees and recruiting new talent. Point being CapEx in service companies is primarily done on learning and development / recruiting employees. It is important to keep a track on such expenses because of two reasons –
A. <Quantitative> Expected growth is a function of re-investments back into the firm (how much the firm re-invests) and return on capital (quality of investment).
B. <Qualitative> Spend on L&D denotes that the firm is serious about remaining relevant in the dynamic technology landscape and a comparison of such spends across different firms could be done to evaluate competitive advantage / future growth potential (which ties in with (a.))
We will estimate expected growth later in this blog post.
You may want to further scratch the surface on L&D spend to see how much of it is going towards upskilling vis-a-vis compliance etc. You may also want to look at the number of patents (IP) or any products developed and use it a a proxy for additional growth
Based on last year’s re-investments and the quality of those re-investments, fundamentally TCS could grow at 10.34%. We could also take the average of the past expected growth rates to smooth the perceived slight outlier effect of last year. (the average expected growth rate over the last 4 years is lower)
The voice over the above slide snapshots is present in the video embedded below
Disclaimer – Any opinion expressed in this blog post is solely my own and does not represent views of my employer. Moreover, this stock valuation should not be misconstrued as a buy / sell recommendation