The difference is that the valuation of Citigroup Global Services seems more reasonable. Adjusted for the cash on its books, Citigroup’s captive BPO (business process outsourcing) firm is valued at a little more than eight times estimated earnings before interest and tax for 2008. That’s slightly lower than TCS’ own battered-down valuation of about 8.5 times estimated 12-month earnings till December. In Axon’s case, however, HCL Technologies has valued the target firm higher than its current valuation.

For a captive BPO firm, Citigroup Global Services has surprisingly high operating margins of 20%. Normally, when a third party runs back-office operations, it’s able to extract higher margins. But it remains to be seen if TCS is able to improve margins, given the troubles faced by the whole banking industry currently.

But the greater risk is the increased exposure to the financial services sector and one client within the sector. According to an analyst, TCS would now generate revenue worth $400 million from Citigroup Inc., or about 5.5-6% of its annual revenue. Its exposure to the financial services sector is already rather high at 42.5%. The underperformance of TCS’ shares vis-a-vis Infosys in the recent past shows that the markets aren’t happy with this high level of exposure.