Prime Minister Narendra Modi had some time ago described India of the future using a simple formula — IT + IT = IT (information technology + Indian talent = India tomorrow). As if on cue, almost a year to the date of his statement, TCS became the first Indian IT company to breach the $100 billion market cap barrier.
This is a phenomenal achievement for a company listed only about 14 years ago. It has since given compound annual returns of more than 21 per cent. The market return in this period has only been around 12 per cent.
The growth of companies like TCS brings to the fore the power of compounding, which Albert Einstein is said to have called the eighth wonder of the world. The magic of compounding is visible only over a sustained period of time. On a macro level, India’s gross domestic product (GDP) has seen something similar.
We are growing at a good pace that is expected to sustain over a considerable period. Add to that our current GDP of $2.5 trillion and we have a potent mix for a strong compounding effect, which could propel India to a GDP of $5 trillion by 2025 and potentially $20 trillion by 2040.
In the case of TCS, the market cap has grown from around Rs 47,000 crore during listing to around Rs 6.8 lakh crore — a 14x growth in less than 14 years. The numbers are more impressive in a post-global financial crisis era.
In the past nine years, TCS’ market cap has gone up from Rs 52,000 crore to what it is today — an impressive 33 per cent CAGR. While this is indeed inspiring, it is even more interesting to try and analyse why some companies succeed while others don’t.
Among the companies that started in the 1970s and early 1980s, TCS, Infosys and Wipro are some examples that stand out in terms of their scale and growth trajectory over the past two decades. Some of the other companies grew very fast in their initial stages but tapered off as quickly as they had grown. In such cases, while growth existed, sustainability was lacking.
Hence, there was no compounding. The big question then really is, what gives an organisation the power of compounding? A lot of industries and businesses faces entry barriers and legacy issues. Truly harnessing the power of compounding would require an opportunity like that in the IT sector a few decades ago.
A global market was available, entry barriers were limited as it was primarily a services game (compared with other capital-intensive industries) and opportunities were still nascent. Such an opportunity affords you the ability to not only scale up rapidly but also make mistakes and recover from them. And the bellwethers of the industry have utilised the opportunity to the maximum.
The Secret Sauce
However, an opportunity is just one side of the story. What really matters is a secret sauce that really separates the wheat from the chaff – the management quality. The one attribute that has consistently separated good organisations from great ones has been quality of the management.
Being a good leader involves a lot of things — being decisive, inspirational, a good communicator, ability to create other leaders and display empathy, among others. Being a great leader requires one personality trait that can open up a world of possibilities — the ability to be aspirational.
Management that can see the larger opportunity and benchmarks itself with the best in the world will always be one step ahead.
I remember discussing with Narayana Murthy in 1996 about the market opportunity for the IT industry. For him, the whole world was his playground. The market opportunity was limitless. It was this opportunity that he had envisioned capturing. Over the course of the next decade or so, he executed his vision to perfection.
At TCS, the quality of management has set a benchmark. For a company that started in 1969, having just four bosses in its journey — with the fourth one joining only a few months ago — is an astonishing achievement in itself.
From FC Kohli to S Ramadorai to N Chandrasekaran to Rajesh Gopinathan now, not only have the previous three bosses served long enough to leave their stamp on the organisation, the transitions have been smooth, ensuring business continuity.
Consistency is key in the power of compounding. Any disruption to the growth trajectory can take you back several years. Which brings us to the other important aspect of companies that really make it big — adaptability.
Where the Most Agile Thrives
All industries go through a cycle of change every seven-eight years. This requires a refresh of the business model. In the IT industry, for instance, we saw various phases dominating the business model, starting from the body-shopping phase to a more hybrid model. Today, the focus is on the SMACI (social, media, analytics, cloud and IoT) stack. Adaptability becomes the key when such massive changes dominate the industry every few years. Recalibration is more challenging when the company is larger.
Credit is, therefore, due to TCS, which has consistently done this over several decades and at scales that are massive even by global standards. Ensuring a change in the core strategy percolates down to the lakhs of workers spread across the globe is a humongous achievement. And it is this adaptability that has brought TCS to where it is today.
The $100 billion dream
TCS is now among the 100 most valued companies in the world. To some, a $100 billion valuation might be the zenith but for a company that has dreamed big and achieved those aspirations, it might just be the beginning. A growth rate of 33 per cent CAGR could actually propel TCS to a valuation of $1 trillion in the next eight years.
This would have been unthinkable even 12 years back, when India’s own GDP was just $1 trillion. As long as TCS continues to believe in the same values it has for the past 50 years — thinking big and being aspirational, and continuing to be driven by excellent management and continuing to reinvent itself when needed — a $1 trillion Indian company might not just be a pipe dream.