Rajesh Gopinathan's Surprise Exit From TCS May Not Hurt. Here's Why

The transition of CEO in TCS is seen to be smooth especially because the new leader Krithivasan has played key roles in the company, especially heading the largest industry vertical, BFSI.

Although Krithivasan's new role as CEO at TCS has come into effect from March 16, Gopinathan will be part of the same position in the company for about six months. Gopinathan's resignation will come into effect from September 15, 2023.

On BSE, TCS share price closed at ₹3,178.95 apiece marginally down from the previous closing of ₹3,184.75 apiece. The stock ranged from an intraday high and low of ₹3,220 to ₹3,145 apiece on Friday.

TCS is the flagship company of Tata Group and is also the second largest company in India in terms of market share. By end of March 17th, TCS' market value is over ₹11.63 lakh crore.

In a research note, analysts at ICICI Securities explained that "the announcement of change in CEO was unexpected, particularly as Rajesh Gopinathan was re-appointed as CEO in 2022 after having completed 5 years in the role since Feb 2017. However, we expect CEO transition to be smooth, since Krithivasan has been with the company for 34 years, serving various customer-facing leadership roles and heading the largest industry vertical, BFSI."

Currently, Krithi is the President and Global Head of the BFSI vertical (~32% of revenue) at TCS. He joined TCS in 1989 and has been part of the IT services industry for over 34 years now. During his long tenure at TCS, he has held various leadership roles in delivery, customer relationship management, large programme management, and sales. He holds a bachelor’s degree in Mechanical Engineering from the University of Madras and a master’s degree in Industrial and Management Engineering from IIT Kanpur.

The brokerage's note added, "this appointment is in line with TCS’ strategy of succession planning well in advance and grooming internal employees to take on leadership positions. Additionally, Rajesh Gopinathan will also be available to support this transition over the next six months.

Along similar lines, Motilal Oswal in its note said, "Given Krithi’s long tenure at TCS (34 years), we expect the company to maintain its operational performance intact. He oversees the largest industry unit at the company (32% of FY22 revenues) and has experience across roles, including delivery, CRM, program management, and sales, which should help TCS maintain its track record of seamless transition. We do not expect meaningful leadership attrition due to this change."

However, Motilal's note also pointed out that tenure as CEO of Krithi will be limited.

It said, unlike previous transitions, where incoming CEOs had a long runway in front of them till retirement at 65 years – S Ramadorai (CEO at 51 years), N Chandrasekaran (CEO at 45 years), and Gopinathan (CEO at 46 years), Krithi is 58 years old and will be CEO for the next 6-7 years only.

While this limits the flexibility for Krithi, however, Motilal expects TCS to continue to benefit from the recent changes in its operating model (in 2022) as well as the significant recent intake of freshers in the system."

Both Motilal and ICICI Securities have given a buy rating on TCS ahead.

ICICI Securities note said, "we continue to value TCS at 25x FY26E EPS of Rs172 (discounted back 1-year with WACC of 12%) to arrive at our 12-month target price of Rs3,834, implying ~20% upside. Our estimates of 10% US$ revenue CAGR and 14% EPS CAGR over FY23-26E remain unchanged. We upgrade the stock to BUY (earlier: ADD) on the recent correction (-9% in last one month) in the share price. TCS is currently trading at 21x/18.5x on FY25E/26E EPS."

Further, TCS continues to be among the top picks of Motilal in IT sector. This brokerage's note said, "we continue to see TCS as the best play in the IT services space in the current environment. It is focused on cost optimization and vendor consolidation, both of which are its strong areas. TCS is also poised to gain from a favourable pyramid mix change to improve margins in FY24, ahead of its peer group."

Lastly, Motilal's note said, "We expect a USD revenue CAGR of ~11% and an INR EPS CAGR of ~16% over FY23-25. Our TP of INR3,810 implies 24x FY25E EPS, with a 20% upside potential. We have a BUY rating on the stock and would recommend adding to the name on any near-term weakness due to this news."

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.