TCS beats four in $1.2 bn Nielsen deal

TCS beats four in $1.2 bn Nielsen deal

Mumbai: In the largest outsourcing deal involving an Indian tech services firm, Tata Consultancy Services Ltd or TCS, Asia’s largest software company, has been contracted for 10 years by information and audience measurement major Nielsen Co. to manage its networks, finance and human resource functions.

TCS will receive at least $1.2 billion or Rs4,740 crore, which is unevenly spread over the contract period, with a potential upside depending on performance. “This deal commits us to a certain amount of spending of $1.2 billion; in some areas, services are on fixed-price basis, in others, there are incentives," said Mitchell Habib, executive vice-president, global business, Nielsen, in a phone interview.

Nielsen, headquartered in Haarlem, the Netherlands, selected TCS from a list of five international and Indian vendors competing for the deal. The firm, known for its industry and consumer surveys across the world, has in the past worked with TCS and other Indian tech firms.

The deal, announced on Thursday by TCS in Mumbai, is bigger than a $1 billion deal announced last year between Tech Mahindra Ltd, a Pune-based tech services provider to telecom customers, and BT Group Plc. That deal was for five years.

TCS said profit margins in the Nielsen deal were in line with its outsourcing business. “We have completely protected our margin in the deal," said N. Chandrasekaran, chief operating officer and executive director, TCS. “Inflationary needs have (also) been taken care of," he added. TCS’ operating profit, or Ebitda (earnings before interest, tax, depreciation and amortization), margins is around 25%. Revenues from the contract will start from the current quarter. “The revenue will be generated in the US currency," said S. Mahalingam, chief financial officer, TCS. The scope of the deal covers IT services, business process outsourcing needs, bac-office services and tech infrastructure management. TCS plans to serve Nielsen from multiple centres including India and Latin America.

The deal involves Nielsen transferring 350 of its workers at a back-office centre in Vadodara to TCS though there is no upfront cost associated with this absorption of employees. The Nielsen centre, engaged in so-called “knowledge process outsourcing" around measurement services in the retail industry, can now be used by TCS to serve other clients too.

The decision to move from an in-house, captive model to a fully-outsourced one was partly driven by pressures of scaling up its Vadodara centre, Nielsen’s Habib said.

Another factor that swung the deal in TCS’ favour, Habib said, was a proposed “application service provider" or ASP business software component the Indian firm has agreed to build out.

The software, which will be built by TCS from scratch, will help Nielsen pay on a subscription (or pay as you use) model rather than the hefty upfront costs that typical enterprise-wide business applications entail. “The ASP component is unique in this deal; we will pay on a per-user basis," Habib said.

An analyst said the deal in itself was not big but would help TCS sustain growth in the longer term. The deal has “less than 1% impact on the annual revenue", Pankaj Kapoor, who tracks technology firms at Mumbai-based brokerage ABN Amro Asia Equities, said. “But to sustain growth, these kind of deals will be imperative." The Indian tech services industry is growing at around 30%.

TCS generated $4.3 billion revenues in fiscal 2007, expanding 40.8% over the previous year. It reported $1.42 billion in revenue in the quarter ending 30 September, registering a 25.4% growth over the year-ago period.

Shares of TCS gained 2.17% to Rs1,118 each on the Bombay Stock Exchange in a market that saw Sensex, the exchange’s benchmark index, shed 3.83%.

The sectoral index of tech stocks remained flat.