is tcs worth $65 billion

TCS market value crossed $65 billion (about Rs.4,000 billion). This is probably the highest market cap for an Indian company so far with some exceptions. 

I am just wondering whether this company, after so much of run-up on the stock market, is really worth that much. We know markets react in extreme ways and thus, display irrational exuberance on occasions. Let's try to see if this is really the case for TCS.

The company has superior fundamentals is given: As of 30 June 2013, it had operating capital of about Rs.315 b, negligible debt and cash of about Rs.100 b. Its last four quarters net income was about Rs.145 b. It is yet to report its September quarter results; so we have to live with what we have for now.

Now, if TCS had to be worth what it is, it must have the fundamentals in terms of cash flows and growth. Since, growth does not come free, the company has to reinvest part of its earnings. Reinvestment is required for its human capital, working capital and research needs. We can consider a simplistic case of perpetuity, and try to see the implied indicators to arrive at the value of Rs.4,000 b. 

We assume that its current net income will not only be sustained, but will grow until perpetuity. If perpetuity model is used, the value of TCS becomes a function of its estimated cost of equity, return on equity and growth rate. It is important to note that superior return on equity and growth rates cannot be sustained forever. 

The following shows current market value of TCS at various levels of return on equity:

It is clear that for TCS to get market value of Rs.4,000 b today, the gap between the company's cost of equity and growth rate has to narrow and come very close. As you reduce return on equity, the gap has to get closer. Even at 45% return on equity, the gap is only 3.15%. 

You can try any cost of equity; but, to deliver the required market value you need a growth rate that is closer to cost of equity. The implication is that we need a very low rate to discount the free cash flows to equity which grows until perpetuity. 

Is this realistic? Of course, not. TCS appears to be way overvalued at this stage. I find it quite funny.