Business Today

TCS makes the big deal

Just when most analysts were speculating about the end of the IT industry’s honeymoon with the stock markets, India’s largest IT services company came out with good numbers for the Septemberended quarter.

T.V. Mahalingam and Anusha Subramanian         Print Edition: Nov 18, 2007

Just when most analysts were speculating about the end of the IT industry’s honeymoon with the stock markets, India’s largest IT services company came out with good numbers for the Septemberended quarter (earnings were up 22.8 per cent over the previous year’s corresponding quarter, and 6.3 per cent sequentially).

And when that was followed up with an announcement that TCS had bagged the largest ever contract in the history of the Indian IT services industry, things suddenly didn’t look so bad for the sector.

Last fortnight, TCS announced that it had signed a $1.2-billion (Rs 4,800-crore) deal with international consumer and media information services giant Nielsen, for outsourcing a part of its IT and operations functions. Under the 10-year agreement, TCS will assume responsibility for certain finance and human resource business processes, which will be executed on new BPO platforms built by TCS.

Says TCS CEO & MD S. Ramadorai: “This deal is a milestone for the industry as well as for TCS. The $1.2-billion deal is very strategic for us as well as a benchmark for the industry itself. It illustrates our credibility and level of involvement with the client”. The TCS-Nielsen deal is bigger than the billion-dollar deal struck by Tech Mahindra and BT Group last year. That deal, however, is over a period of five years.

Market watchers believe that the deal could have a rub-off effect, and help TCS bag similar contracts. Partha Iyengar, VP and Regional Research Director at Gartner, a global IT research and advisory firm, believes that the contract is an indicator of the fact that Indian companies and TCS are “ratcheting up their ability to move to the next step, in terms of the scale of deals they can win and deliver effectively.”

He, however, believes that balancing such large deals along with profit margins might require some work. “This is new ground for the Indian providers and they will need to work hard to ensure that they do not lose their current core competence in managing the costs of their engagement.

If they are unable to do so—and the biggest risk in this is that they are unable to adequately understand some of the hidden risks of these large deals as well as the very different deal dynamics— then they will suffer some level of margin erosion from the stratospheric levels they are at today,” adds Iyengar.

TCS, for its part, maintains that the profit margins on the Nielsen deal will be in line with its outsourcing business. “We have completely protected our margins in the deal,” says N. Chandrasekaran, COO, TCS. “Inflationary needs have (also) been taken care of,” he adds. Revenues from the contract will start accruing from the current quarter.

An appreciating rupee not withstanding, TCS doesn’t see a reversal of fortunes in the near future, although Ramadorai does hint that the days of heady growth may be over.

“We may not be having revenue growth of 40 per cent-plus any more but have settled down to a revenue growth of 25 per cent-plus as an industry year on year. Margins will grow around 20 per cent-plus. How many other industries offer such growth consistently?” questions Ramadorai, pooh-poohing talk of the IT industry’s waning love affair with the bourses.

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