Companies
At $2.5 billion, this is TCS’s biggest deal ever
Summary
- The IT major announced it has won a contract renewal from British insurance group Aviva that runs till 2039
A 15-year outsourcing deal disclosed by Tata Consultancy Services Ltd (TCS) on Tuesday is worth at least $2.5 billion in value, an executive aware of the contract said.
That would make it possibly TCS’s largest outsourcing deal. The company’s biggest deal before this was a $2.25 billion contract signed with Nielsen in December 2017.
Mumbai-based TCS announced it has won a contract renewal from British insurance group Aviva that runs till 2039. The deal renews TCS’s current engagement, under which Friends Life had initially awarded a $2.2 billion, 15-year contract to the company in 2012. Aviva acquired Friends Life in 2014.
Under the ongoing partnership, which began on 1 March 2012, TCS is overseeing administration responsibility for 3.2 million policies offered by Aviva until 2027, and was assured of $146 million in revenue every year.
The new deal expands the coverage to have TCS oversee 5.5 million life and pension policies offered by Aviva. A $2.5 billion deal for 15 years implies the company would earn at least $165 million in revenue every year.
The renewal of the deal marks the third such mega deal (IT contracts valued at over $1 billion) won by TCS under K. Krithivasan, who took over as chief executive officer (CEO) last June after his predecessor Rajesh Gopinathan resigned abruptly in March.
In June, TCS bagged a $1.1 billion contract for 10 years from the National Employment Savings Trust, one of the UK’s largest workplace pension schemes. And in September, Jaguar Land Rover, owned by Tata Motors, awarded $1 billion work over five years to TCS.
Mega deals have come to play a central role in large technology services companies like TCS, which ended with $27.9 billion in revenue in the year to March 2023. It can expect to grow in double digits in the current fiscal only if it has a few new clients that each bring over $150 million in incremental business.
“Overlay of mega-deal-driven revenues can lead to elevated growth in quarters of strong mega-deal ramp-up," Kotak Institutional Equities analysts Kawaljeet Saluja, Sathishkumar S. and Vamshi Krishna in a note dated 16 October last year, writing that large deals could provide 2-3% to revenues of large IT firms likes TCS, Infosys Ltd and HCL Technologies Ltd next fiscal.
TCS, which does not give quarterly or yearly guidance, could end with $29.25 billion in the year ended March 2024, if it reports 4.7% dollar revenue growth—its current growth rate in the first nine months of the current fiscal year.
At its current size, the country’s largest IT services company needs $146 million in incremental revenue to better its FY23 growth by 50 basis points. A basis point is a hundredth of a percentage point.
Mega deals, including renewals, also help TCS, which runs the risk of losing some business because of its other large partnerships coming to an end.
The company stares at a potential loss of $450 million in annual revenue from 2025 on account of less business from a Deutsche Bank subsidiary and from Nielsen, and no business from Transamerica Life Insurance Co. after the American arm of Dutch insurer Aegon NV scrapped a $2 billion, 10-year partnership in June last year, five-and-a-half years after it awarded the contract.
Still, TCS maintains that it is winning more business and the leaking bucket theory, under which a company loses more business than it wins, does not hold water.
“[A]re we losing more business now than we are winning? The answer to that is no. We are continuing to add more business because of our strong TCV (total contract value) and that is why there is reason to be optimistic about FY25," Krithivasan said in an interview earlier this month.
On Tuesday, a TCS spokesperson declined to offer a comment beyond the press release shared with the exchanges.
“Our long-standing relationship with Aviva over the last 20 years is a testament to our joint efforts to consistently and continuously transform customer experience," said R. Vivekanand, president, BFSI products and platforms, in the statement.
BFSI stands for banking, financial services and insurance.
“Extending this strategic partnership will improve how we serve our customers, further simplify our operations and support our growth ambitions," Doug Brown, CEO, insurance, wealth and retirement, Aviva, said in the statement, even as the insurance giant declined to share the financials of the contract.
