While in many regards there’s an uncanny resemblance between Tata and its India IT services’ competitors-Wipro and Infosys–such as in its offerings, offshore leverage mix (near 75%) or attrition rates (near 15%)-Tata stands out in regards to its scale. The company’s revenue is 1.6 times and 2.6 times greater than Infosys and Wipro, respectively, and this has its benefits.
While TCS’ best-in-industry attrition rate of 11.9% did not give the company, the extra boost needed to expand margins over this quarter as it is expected to lower in subsequent quarters and pay off in the future. It confirms that TCS is the best-of-breed Indian IT services firm. TCS’ status allows the company to attract and maintain India’s top talent, even amid fair competitors, such as moaty Infosys and Wipro.
It is estimated that TCS will grow at the compounded annual growth rate of 11%. This growth will be majorly driven by overall increased spend on IT services by enterprises as the IT landscape becomes more complex than ever and enterprises increasingly realize competitive edge in their products or services is distinguished foremost by their technological abilities.
Financial Strength:
Tata’s financial health is in very good shape. Tata had INR 356 billion in cash and cash equivalents as of March 2020 with zero debt, which has allowed Tata to feed significant payout to its shareholder base. Over fiscal 2014 through fiscal 2018, Tata’s average payout of its free cash flow to shareholders was 64%.
It is forecasted Tata’s dividend to grow to at least INR 53 per share in 2025 from INR 33 per share in 2020, which maintains the company’s 38% dividend payout ratio. It is expected that acquisitions over the next five years will continue to be moderate, at INR 350 million each year.
Analysts expect that Tata will fare in 2022 assuming revenue growth of nearly 18% as a result of a strong recovery from effects of COVID-19, followed by top-line growth of 11% in fiscal 2023 and long-term midcycle growth near 9% per year thereafter.
Bulls Say:
- Tata should benefit from greater margin expansion than expected in our base case as more automated tech solutions decrease the variable costs associated with each incremental sale.
- Tata should profit from a wave of demand for more flexible IT infrastructures following the COVID-19 pandemic, as more companies seek to be prepared with the onset of similar events.
- As the European market becomes more comfortable with outsourcing their IT workloads offshore, Tata should expand their market share in the growing geo.
Company Profile:
Tata Consultancy Services is a leading global IT services provider, with nearly 450,000 employees. Based in Mumbai, the India IT services firm leverages its offshore outsourcing model to derive half of its revenue from North America. The company offers traditional IT services offerings: consulting, managed services, and cloud infrastructure services as well as business process outsourcing as a service, or BPaaS.
(Source: Morningstar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
As of fiscal 2021, ADP has successfully migrated most of its small and midsize clients to its strategic platforms and will be migrating enterprise clients to its new HCM platform over the coming decade, as well rolling out its new underlying payroll and tax engines. While we expect platform migrations to ultimately result in higher retention and profitability, the forced migrations will likely create a catalyst for enterprise clients to reassess providers, temporarily hindering both metrics.
ADP faces fierce competitive pressure from nimble upstarts, legacy peers, accounting software and ERP providers. We expect new solutions will allow ADP to compete more aggressively on functionality, reduce software maintenance costs and provide scope for greater operating leverage, supporting margin uplift. However, we anticipate increasing competitive pressure will result in greater pricing pressure and force ADP to sustain high levels of investment to ensure the functionality of its product offering remains competitive. This investment is in addition to the continued investment in sales and implementation required to roll out new solutions and migrate clients. As such, we expect ADP’s price increases will be limited to about 0.5% a year, in line with recent growth but below long-term averages, limiting margin expansion to about two percentage points over the next five years.
We expect increased regulatory complexity, tight labor markets and growing adoption of hybrid work will underpin strong demand for ADP’s solutions supporting greater share of wallet and modest market share gains in the small and midsize market. This includes greater penetration of the outsourced payroll and HR model. However, we expect forced platform migrations to hamper ADP’s enterprise market share over the next decade before gradually recovering as the new platform is adopted in the market. In aggregate, we expect ADP’s overall market share to remain broadly flat for the five years to fiscal 2026 before gradual growth as platform migrations complete.
Financial Strength
ADP is in a strong financial position. At the end of fiscal 2021, ADP’s balance sheet was modestly geared with net debt/EBITDA of 0.1. During fiscal 2021, ADP almost tripled long-term debt to USD 3 billion to fund share repurchases and optimise its capital structure with low cost debt. We expect ADP’s annual operating income can comfortably cover annual interest expense on its debt at least 60 times over our forecast period. ADP also has access to short term funding facilities to meet client’s obligations rather than liquidating available for sale securities. ADP has returned over USD 18 billion of capital to shareholders during the eight years to fiscal 2021 through dividends and share repurchases. We expect ADP’s strong free cash flow generation will support a dividend payout ratio of about 60% over our forecast period. The balance sheet is robust, and ADP has ample scope to increase leverage to execute on bolt on acquisitions.
Bulls Say
- ADP benefits from high client switching costs, a scale based cost advantage, intangible brand assets and a powerful referral network.
- Despite facing fierce competitive pressures and undergoing forced platform migrations, ADP has retained high revenue retention and improved operating margins over the past decade.
- ADP has a strong track record of returning capital to shareholders through dividends and share repurchases.
Company Profile
Automatic Data Processing, or ADP, is a provider of payroll and human capital management, or HCM, solutions servicing the full scope of businesses from micro to global enterprises. ADP was established in 1949 and serves over 920,000 clients primarily in the United States. ADP’s employer services segment offers payroll, HCM solutions, HR outsourcing, insurance and retirement services. The smaller but faster-growing PEO segment provides HR outsourcing solutions to small and midsize businesses through a co-employment model.
(Source: Morningstar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
It then extended the brand to the Priceline Pharmacy franchise network as Australia prevents community pharmacies having corporate ownership. Priceline contributes around one quarter of API’s revenue but over 40% of gross profit. While the conversion of stores to include a pharmacy is beneficial for distribution volumes, these stores dilute margin due to more PBS sales, and consequently have contributed to a decline in operating margin since fiscal 2017. Offsetting this is often higher foot traffic and sales. Nonetheless, as guided by management, this conversion process has played out and we expect no margin drag going forward.
Priceline’s key growth strategies are increasing its contribution from online sales and leveraging its loyalty scheme, the Sister Club. However, we have concerns regarding these endeavours. Market statistics suggest the Australian health and beauty retail market is growing at a mid-single-digit pace, which provides an attractive opportunity for API at first blush.
Company’s Future Outlook
API is in a strong financial position with net debt/adjusted EBITDA of 0.2 times at fiscal 2020. We forecast the company to hold a net cash position through fiscal 2025 and comfortably afford a 70% dividend payout ratio and continue to expand its retail footprint. We project API to open roughly 10 net new Priceline stores and five net Clear Skincare clinics per year. We forecast a total of AUD 225 million in capital expenditures over the next five years, including AUD 50 million for a new distribution centre in New South Wales, and also factor in the final AUD 32.9 million payment for Clear Skincare still outstanding. Working capital management has improved over a number of years, effectively having the net investment in working capital to 4.4% of sales over the five years to fiscal 2020. We forecast investment to be roughly maintained at an average of 4.7% of sales.
Bulls Say’s
- The Priceline and Clear Skincare offerings are relatively high-margin segments and pitched in the beauty and personal-care market which is growing at a mid-single-digit pace.
- API’s Corporate Priceline stores offers higher margin and more product opportunity than the purely franchise business model of peers Sigma and EBOS.
- Management has demonstrated that it is opportunistic and having deleveraged the balance sheet, is looking to invest for growth. Value-additive acquisitions could present upside to our fair value estimate.
Company Profile
Australian Pharmaceutical Industries, or API, is a major Australian pharmaceutical wholesaler and distributor. In addition, it is the franchisor of the Priceline Pharmacy network and directly owns and operates stand-alone Priceline stores which sell personal care and beauty products. In an effort to diversify away from the highly regulated low growth and low margin pharma distribution business which contributes 74% of revenue, API is actively growing a consumer brands portfolio and also acquired Clear Skincare, a skin treatment chain. These two emerging businesses each contribute approximately 1% of revenue but are higher margin than the core distribution segment.
Source: (Morningstar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
