Thursday, July 15, 2010

>TATA CONSULTANCY SERVICES: UK May Renegotiate Large IT Deals with Vendors

Quick Comment: As per media reports, UK officials have started meeting with large technology vendors to renegotiate contracts. We believe IT services vendors could also be asked by the UK authorities to renegotiate key government contracts. TCS, Accenture, BT, Cap Gemini, and Fujitsu are some of the key IT vendors for UK government.

TCS PADA deal may be over US$500mn: TCS recently won a 10-year deal (estimate ~US$500mn) with the UK‘s Personal Accounts Delivery Authority (PADA) to provide administration services for PADA’s pension scheme. We believe TCS emerged as the most competitive vendor for the deal. Although the critical elements of the deal would be based onsite, TCS is likely to also use offshore delivery for development work on the deal.

Implications for TCS: There has been a lot of speculation recently on the fate of a 10-year UK
government deal recently won by TCS. We believe the UK government is likely to pursue aggressive cost cutting to contain its deficit. There is a risk that large IT suppliers to the government may be asked to lower prices and give up some profitability on government deals as a result of renegotiations, in our view. To us, it appears that TCS might retain the deal as it was already the lowest bidder. However, it is not clear if the UK will push TCS to further reduce the overall cost to the government on the deal – which remains a key risk.

TCS F1Q Preview: We expect TCS to report revenue of US$1,775mn (+5.3% QoQ, +19.9% YoY). EBIT margin is likely to decline by 100-150bp to ~26-26.5% due to wage hikes, currency, and pricing during the quarter. Higher FX loss of Rs800-1,000mn (vs. FX gain of Rs420mn in 4Q10) could lead to net profit declining to Rs18bn (-7% QoQ, +18% YoY). TCS reports on July15,
2010. Call is at 8pm IST; dial in no. +91 22 6629 5827.

To read the full report: TCS