TCS’s Acquisitions

India’s information technology exports will rise by 2.5 times to $80 billion by 2011 declares India’s communications and IT minister. A company that has been one of the single largest beneficiaries of this trend is Tata Consultancy Services (TCS.NS).

TCS has rapidly set up centers in nearly every continent. With more than 90% of revenue from repeat customers, the TCS strength is its Global Network Delivery Model that delivers based on the same standards, methodologies, excellence and expectations globally. The recent 10-year, $1.2 billion contract with Nielson Company reflects this approach. The geographical coverage strategy is no different from competitors Infosys or Satyam.

To support growth TCS is also taking costs offshore to limit expenses, similar to competitors. The TCS expense mix is currently 43% offshore versus 53.3% onshore and 3.7% other, a 2% increase from Q1 and YoY. And like its competitors, TCS seems also to be stuck with the body-shopping business model.

Revenue mix in Q2 ended Sept. 30 is 52.5% North America, 4.2% other America, 19.9% UK, 8.4% Europe, 8.2% India, 5.2% Asia-Pacific, and 1.9% from other geographies.

In terms of types of business, IT solutions/services makes up 74.9% of the revenue. Software application development/maintenance supported 48.6% of the above figure. The other components worth 25.1% are Engineering, Infrastructure, Global Consulting, Asset Leverage Solutions, and Business Process Outsourcing.

Q2 revenue totaled $1.42 billion, which was an increase of 45.2% YoY and 10.8% versus Q1. The new revenue came from banking and financial services, telecom, and manufacturing. Net income posted at $313 million, again a 45.1% YoY increase and 7.5% more versus Q1. 50% of Q2 revenue also came from new services, but not necessarily new clients. Revenue from repeat business totaled 97.8% versus 2.2% from new customers, being only a slight decrease from Q1’s 99.2% existing base. The Top 10 TCS clients produce 27.6% of revenue, with 334 clients out of 814 producing $1 million or more.
Previously TCS had only $266 million in cash and short-term investments. An international listing helped TCS go after bigger acquisitions as organic growth slowed down. With 2006-2007 annual revenues of $4.3 billion and net income of $950 million, a NYSE listing for TCS was likely to generate interest and the current share price of $1,088/share (versus $140 in 2002) proves the case.

The Tata group as a whole has been on an acquisition binge since 2001 including some gigantic ones like Tata Steel’s acquisition of Corus. Similarly, TCS has pushed on with its own acquisitions:

• Feb 2006: TCS acquired Tata Infotech (TIL) Limited and merged TIL into TCS Limited. TIL was a software services company like TCS with operations in the UK, U.S, and Australia among others. The merger gave TCS a broader customer base and deeper penetration into key geographies. The acquisition was touted as providing TCS more ability to provide full-service to customers in affected markets.
• March 2006: TCS, through its subsidiary, Diligenta, acquired a basis in part of UK’s Pearl Group. Pearl is the 2nd largest player in the UK’s life insurance and pension BPO industry, giving TCS a new stake in BPO work for the UK market.
• Right after Pearl, TCS picked up Comicron in Latin America to offer banking solutions in both IT and BPO services in that market, and now Spanish language capability. Experience gained here will again allow TCS to expand further into new markets with BPO offerings, especially in the rather large and under-addressed Spanish-speaking world.
• Oct. 31, 2006: Similar to the financial stakes made above, TCS again expanded its banking products and consolidated its European operations after acquiring a 75% equity stake in its Switzerland-based partner, TKS-Teknosoft. TKS was the marketing agent for TCS in Europe.
• TCS acquired Australian-based TCS Management for AUS $15 million, enhancing the TCS’ consulting footprint and providing business/technology benefits in Australia. This was after the company had already acquired other Australian companies in 2005 to bolster its onshore service delivery and banking solutions portfolio.

General risks associated may be sidetracked on rupee value issues or rising wages in India. But the real risk is whether TCS can maintain its lofty share price. The real answer to this question may lie in TCS’ ability to make a different kind of acquisitions work in its favor. As in the case of Infosys, TCS also needs to start acquiring product and SaaS companies. Cognos, for example, is currently looking for a suitor following SAP’s acquisition of Business Objects, as is BEA Systems. There are numerous other smaller players as well, and depending on where TCS wants to focus its product / SaaS portfolio building initiatives, there are many different options.

So far, however, there have been no indications from the company that it is considering this path. I don’t like that.