Tata Consultancy Services Ltd (TCS) was the biggest gainer among information technology (IT) stocks on Friday, which is intriguing to say the least, coming on the back of news reports in The Wall Street Journal that Citigroup Inc. would either sell portions of its business or even sell out.
Either outcome is very bad news for TCS, which is expected to derive annual revenues of as much as about $400 million (Rs2,000 crore) from the bank, after its purchase of the captive business process outsourcing (BPO) unit, Citigroup Global Services. This amounts to about 6% of the company’s annual revenues.
It’s still not clear what Citigroup’s future will be, but the bank’s commitment to provide BPO services worth $2.5 billion to TCS over the next nine-and-a-half years now comes under a cloud. If large parts of its business are sold out, the new owners may not be obliged to provide BPO services to TCS just because of Citi’s earlier agreement.
Given this possibility, it’s strange that investors chose to push up TCS’ share price by about 8% on Friday.
True, TCS’ share price has already fallen considerably since the financial crisis worsened and valuations are already low at less than 10 times trailing earnings. But the company’s high dependence on the financial sector—thanks to the Citi BPO buy, it’ll increase further from the already high level of 42%—implies that TCS could also be among the worst-hit among large IT firms.
Some analysts have a buy rating on TCS thanks to its relatively low valuation, but with the financial crisis worsening, they may need to do a rethink.
Write to us at marktomarket@ livemint.com