TCS to churn $2.4 bn new revenue by FY20 via Japan subsidiary: Goldman Sachs

JV with local player provides the needed skills to penetrate Japanese market

Tata Consultancy Services, India's largest IT services company, through its subsidiary TCS Japan, is well-positioned to tap the long-term opportunity in the country's $110 billion IT services market, global investment banking Goldman Sachs said.

"TCS, by gaining scale in Japan through its JV with Mitsubishi Corp, may benefit from first-mover advantage and partnership with a local firm, which we see will translate into new revenues of $2.4 billion by FY20 for the company and Rs 100 per share implied incremental valuation upside," said Goldman Sachs in a report.

Today, shares of TCS, India's largest IT services company, ended at Rs 2,584, down 0.66 percent on BSE.

The Japanese IT market is second largest in the world after the US (at $363 billion) as of 2013.

"We believe TCS JV with Mitsubishi may provide it with the requisite scale, front-end

knowledge, language skills and deep client relationships as it looks to penetrate Japan," said Goldman.

In the past, Indian IT vendors in Japan have been underwhelming due to lack of relationships and front-end expertise.

Alongside, increasing cost pressures, focus on profitability, global expansion plans of Japanese firms and emergence of newer technologies like analytics, cloud services etc may drive Indian vendors penetration in Japan.

The penetration of Indian outsourcing companies is minimal in Japan at present, less than

1 percent, providing ample room for growth, the report said.

With Japanese corporates increasingly focusing on reducing IT service costs, we believe that there is an opportunity for Indian IT vendors to exploit and attempt to gain market share, the report said.

On the vertical front, banking and financial services (BFSI) and manufacturing are the most important verticals, contributing nearly half of the IT services spend in Japan. Operating margins of Japanese IT vendors typically range in the mid to high-single digits due to a higher proportion of onsite work.

Though there are several positives for Indian vendors in this market, in the past, global vendors have faced difficulties owing to language or cultural barriers, local vendors' long and deep relationships with customers, strict regulations around labor, and alternative offshoring destinations to India for Japan such as China and Vietnam.

"Strong labor unions in Japan make it difficult to layoff employees,"said the report.