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Krishnan Thiagarajan

AS the software services industry continues its march towards "scale", TCS with its numerous strengths is well-positioned to capitalise on the offshoring wave. As it has grown in size and scale, TCS has broadbased its software operations from India by setting up software development centres in other low-cost geographies such as China, Brazil and Uruguay.

Some of key strengths of TCS gleaned from the offer document and compared with its listed peers Infosys and Wipro are:

Strong vertical presence: TCS derived nearly 60 per cent of its revenues in 2003-04 from BFSI (banking, financial services and insurance) and manufacturing. These two sectors — BFSI and manufacturing — together account for 50 per cent of the global IT spend.

In telecom also, the company's presence is quite strong. In each of these sectors, TCS is bigger than its largest domestic competitor. In revenue terms, the BFSI practice of TCS is about 35 per cent higher than that of Infosys; in manufacturing, at least 40 per cent higher than Satyam; and, in the telecom vertical, it is comparable to Wipro. Even in newer verticals — life sciences, for instance — it has ramped up quite sharply.

Good spread of service offerings: In service offerings, TCS has its presence across the gamut, ranging from bread-and-butter application development and maintenance to testing, engineering services and infrastructure management.

In terms of revenues in 2003-04, the package implementation segment took the lion's share, as it is almost 1.5 times bigger than those of Infosys, Wipro and Satyam. Over the next year or so, it will increasingly compete in large deals with multinational vendors in the area of systems integration, infrastructure management and consulting.

Client count and profile: The success of TCS in scaling up its clients is evident from its $20-million and $50-million clients which, at 16 and 4 respectively, number more than its billion-dollar peers. However, Infosys and Wipro have been adding $1-million and $5-million clients faster than TCS over the past year.

TCS has had a string of enduring relationships with clients. Names such as GE, P&O Nedlloyd and SegaIntersettle fall in the 10-20 year bracket, while clients such as AIG, HP, Prudential, Standard Chartered and Target fall in the 5-10-year bracket.

As a consortium bidder, TCS recently bagged a nine-year contract from National Health Service of the UK to provide clinical application implementation and data migration services.

Fixed-price projects: The contribution of TCS from fixed price projects at 55 per cent is considerably higher than its peers. The higher contribution from fixed price projects represents both an opportunity and risk.

A higher proportion of fixed price projects show that TCS has good project management expertise and better systems maturity to undertake these projects. In turn, this can also translate into higher gross margins. On the downside, however, any delay in project execution will have to be borne by vendors.

Market cap and acquisition currency: Through this listing, TCS is expected straightaway to be propelled to the top of the market capitalisation charts in the IT sector. The listing will also help TCS leverage stock as an acquisition currency to enhance its vertical capabilities or address gaps in industry, technical or service profile.

For a large player such as TCS, selective acquisitions through this route may be beneficial, especially given its strong presence in the domestic market. At the same time, TCS will remain exposed to all the cultural, integration and employee retention challenges associated with acquisitions.

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