Fitch upgrades TCS' rating to 'A' from 'A-'; outlook stable

Fitch Ratings on Wednesday upgraded the long-term foreign and local-currency issuer default ratings of Tata Consultancy Services (TCS) to 'A' from 'A-', while the outlook for the company was 'stable'.
 
The ratings agency said that the upgrade reflects its reassessment of the linkages between TCS and Tata Sons Private Limited (TSOL), which holds a 72 per cent stake in TCS.
 
"We now rate TCS at the same level as its Standalone Credit Profile (SCP) of 'a' as set out in the criteria for a stronger investee of an investment holding company (IHC) such as TSOL, where we believe that the IHC will not weaken the credit quality of the investee by taking out cash or other assets," Fitch said.
 
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The ratings agency said that while TSOL has the majority of votes at TCS' general meetings, it does not believe it will take any action that would lead to a lower SCP for TCS as the company's corporate governance is strong; TSOL does not control the TCS board; there is a strong track record of maintenance of a conservative balance sheet at TCS, which only pays shareholder returns out of cash flow generated; and TCS has a lot of headroom in its 'a' SCP.
 
Fitch believes that the global IT industry has a solid long-term growth potential, and the revenue for rated global IT service companies will expand by around 10 per cent per year in the financial year ending March 2022 (FY22) and FY23.

For the ratings, it assumed that TCS' revenue will grow by 11-15 per cent annually in FY22 and FY23 while operating EBITDA margin will be at 26-27 per cent.
 
Fitch further stated that TCS has strong profitability, solid operating cash generation and the highest margins among global peers.

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"It benefits from pricing power, the high costs to customers of switching vendors, as well as the high degree of integration and flexibility offered by its location-independent agile delivery model. Its staff attrition rates are below the industry average while it has tight cost controls. These should help TCS counter price pressure and mitigate cost increases from wage hikes," the ratings agency said.
 
Besides, it said TCS will continue to return most of its pre-dividend free cash flow (FCF) to shareholders through regular and special dividends and share repurchases, and the company has no plan to raise domestic or foreign debt.

Fitch said that it expects TCS to maintain a large net cash position and for pre-dividend FCF margin to remain high at around 20 per cent.
 
It also expects the company to maintain abundant liquidity in the next few years. TCS had readily available cash of over Rs 47,000 crore at the end of September 2021, with no debt.
 
"The majority of the cash is invested in government securities and treasury bills. We expect the company to generate annual pre-dividend FCF of over Rs 30,000 crore in the next three years, which should be sufficient to fund its cash return policy," Fitch noted.

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