Towards value creation
The Financial Express — December 31, 2004

IT has been an epoch-making year for Asia's largest IT services company, Tata Consultancy Services (TCS). After years of speculation, the much-awaited initial public offer (IPO) of the company finally happened in 2004. The company, which till recently was a division of the Tata group holding company Tata Sons, tapped the capital markets through what proved to be the largest IPO raising of around Rs 5,420 crore.

The IPO was followed by a maiden interim dividend of 300%, resulting in around Rs 144 crore in the hands of shareholders. Further, TCS which became the first Indian IT company to touch the $1 billion revenue mark has crossed the figure in the first six months of the current year. The company's consolidated revenues under Indian GAAP, stood at Rs 4,630.43 crore for the first six months of current fiscal.

TCS managing director S Ramadorai said, "Strong market conditions, demand for high-end products, cost-efficiency as well as improved productivity have been the key to improved performance." Soon after the IPO, TCS also came out with a stock scheme under which select employees would get shares of the company at the face value of Re 1. The last few years have seen the Tata group in acquisition mode as far as the IT business is concerned.

First it acquired CMC Ltd under the government's disinvestment programme. This gives the company a strong footprint in the domestic market. The company had also acquired stakes in BPO firms. Post-IPO, it has integrated the sales function of its three BPO units which consisted of Airline Financial Support Services (AFS), WTI Advanced Technology (WTI) and Phoenix Global Solutions. It has also sold its stake in Intelenet (another BPO which was a 50% JV with Housing Development Finance Corporation.)

The TCS's publicly-stated ambition is to be among the top 10 IT companies globally by 2010. Sometime back(in its earlier incarnation as a division of Tata Sons), the company had projected revenues of $7-8 billion by 2010 with an employee strength of 60,000. The biggest challenge for the company as it embarks upon becoming a top 10 player is that it will face stiff competition from the global IT majors like IBM, Accenture and EDS.

To win this game, the company will have to compete on more than just price, which has been the biggest competitive advantage for Indian IT companies and powered the Indian software technology revolution. Mr Ramadorai is clear that the company will have to focus on value creation. As he said in his early interviews with fE: "If you spend your time worrying about what your competition is doing, without doing something, it will get worse.

Focusing on our core strengths and keeping leadership position in force will be fundamental. Another challenge for the software powerhouse is the outcry against outsourcing in the US. The company's revenues are critically dependent on that country. In fiscal 2003 and 2004, about 59.2% and 62.3% of the company's total revenues came from the US. The bulk of the company's revenues will come from the US for the next few years at least. In November 2003, the state of Indiana cancelled a contract with TCS.

The good news, however, is that most industry analysts feel that the cry against outsourcing will die down substantially, post the US presidential elections. Further, most US companies are in favour of outsourcing as it helps them cut down costs substantially. In the long run, industry observers feel that economics will prevail over emotions and politics and thus give a leg-up to TCS's ambitions.