TCS: Banking on BPO

The acquisition gives TCS domain expertise which it can leverage with other clients.

At a price to trailing sales multiple of around 2.3 times, the acquisition of Citigroup’s BPO services outfit by Tata Consultancy Services, may seem slightly expensive especially since such businesses are typically less profitable than IT services businesses. But the accompanying $2.5 billion order from Citigroup, to be executed in about 9 years, is a sweetener because it means assured revenues.

The company should not find it difficult to pay for the deal---it has cash and liquid investments of close to Rs 3,800 crore. CGSL ‘s sales have grown at 25 per cent plus in the last few years and its ebit (earnings before interest and tax) profit margins are in the at 20 per cent. So at that level, the payback could take around 8-9 years. The deal, though earnings-neutral currently, will become earnings accretive in a couple of years.

TCS has taken time to build its BPO business which comprised just 6 per cent of its revenues of Rs 6,410 crore in the June 2008 quarter. The acquisition of CitiGlobal Services Ltd (CGSL), which brings to the table processing capabilities in the banking and financial services space, will help TCS improve its product portfolio.

CGSL has expertise in the areas of cash, trade, consumer loans and mortgages and has created proprietary applications. TCS will obviously leverage the basic platform with other banks, big and small. The management is confident it should be able to start selling to clients early next year and analysts estimate that CGSL should contribute around 3 per cent to TCS’s revenues in FY10.

Moreover, TCS will now have a total of 22,500 employees compared with 10,000 currently and Citigroup becomes a top five client for the tech major. Wipro, which took over Spectramind in 2002, had BPO revenues of about Rs 386 crore –just under 9 per cent of total sales-- in the June quarter. Infosys’ BPO revenues were about Rs 306 crore in the June quarter, comprising 6.3 per cent of total revenues. Satyam is among the smallest players in the space with revenues of just around Rs 50 crore in the June quarter.