Mumbai: Tata Consultancy Services Ltd (TCS) received a $2.2 billion (around Rs10,960 crore) outsourcing contract on Wednesday from the UK-based financial services provider FriendsLife—the biggest order won by the firm that doesn’t involve acquiring assets.
Diligenta, a fully owned unit of India’s largest software services provider, signed the contract, the second largest TCS has received overall. It involves servicing 3.2 million FriendsLife policies over a 15-year period starting 1 March.
TCS’ win comes at a time when analysts are worried the debt crisis in Europe and a slowdown in euro zone economies may force companies in the continent to tighten their spending on information technology (IT). Europe accounts for 20-25% of revenue for most Indian IT services providers.
TCS chief executive officer N. Chandrasekaran. (File photo)
“This is a landmark deal for the company, and will be a good reference point for future bids in the same space. It shows that despite all the macroeconomic turmoil in Europe, the company has still been able to get a big deal, which augurs well for it,” said Krupal Maniar, technology analyst at ICICI Securities Ltd.
This is the largest contract won by TCS since it received a $2.5 billion order in 2008 from Citigroup Inc. That included an agreement to buy out the US-based financial services firm’s Indian back-office unit for $505 million.
Investors cheered; TCS shares climbed as much as 3.7%, the biggest intraday gain since 28 October, before ending the day 1.8% higher at Rs1,123; the Sensex fell 1.18%.
The order will be serviced over TCS’ BaNCS insurance platform, which validates its decision to invest between £40-50 million (Rs320-400 crore today) on the software since 2005, said N. Chandrasekaran, chief executive officer and managing director.
The deal will ensure that the total number of policies serviced by Diligenta will rise to just under 8 million, adding to the existing client base that consists of Phoenix Group, Sun Life Financial Inc. and Old Mutual Plc.
TCS will now look to take the insurance platform to other markets in Europe and North America, Chandrasekaran said.
“There is opportunity in the UK for additional books (insurance policies). We are in preliminary discussions with a few other clients, but it will be too premature to give either a time frame or a revenue target,” he added.
Chandrasekaran indicated that TCS will initially be paid both a migration fee (to shift the policies to its technology platform) as well as a transaction fee, but admitted that profit margins would initially be on the lower side before catching up with the overall average for the company in the longer run.
He also said that while $2.2 billion was assured in terms of revenue, there could be additional discretionary spending over the course of the 15-year period. Revenue from the order will begin to appear on the company’s books in the current quarter ending December, but will only kick in significantly from the next fiscal year.
“Diligenta’s insurance processing platform revenues are non-linear in nature (additional employees not required to drive revenue) and this deal will boost TCS’ non-linear initiatives,” said Harit Shah, a technology analyst at Nirmal Bang Securities Pvt. Ltd. “We believe the focus on non-linear growth is a necessity for IT firms, including TCS, to drive sustainable revenue growth and protect margins.”
Shah raised revenue and earnings per share estimates for TCS by 1.2% and 1.3%, respectively, for the next fiscal year, factoring in the new order, but maintained his “sell” rating on the stock while hiking the price target to Rs1,008 from Rs995.
As part of the agreement, about 1,900 employees in the UK from FriendsLife will be transferred to Diligenta on existing terms and conditions for benefits. TCS will also assume a role of IT infrastructure services provider for the contract.
TCS and its two closest local competitors, Infosys Ltd and Wipro Ltd, have more than doubled profit in the past five years as firms globally increased spending on outsourcing.
Worldwide spending on IT goods and services by businesses and governments, which includes computer equipment and outsourcing, is forecast to grow 11% this year to $2.04 trillion, according to Forrester Research. Spending by Western and Central European businesses and governments will rise 13% this year to an estimated $532 billion, from a growth of 0.3% last year, the researcher said in a report in September.
TCS, which provides computer services and back-office support to clients, including Singapore Airlines, had 1,010 active customers as of 30 September. The company derived 54% of its revenue from firms in North America, 15.5% from the UK, and 9.3% from continental Europe in the year ended 31 March.
Bloomberg contributed to this story.
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