Tata Consultancy Services Have Cash, Can Carry

Major Indian software services companies have significant

amounts of cash in their balance sheets and both investors and analysts have

often wondered why these companies don't use it to fund acquisitions or

distribute it to shareholders as dividend rather than hold it in liquid form. We

believe that these companies want to acquire companies, and will do so over a

period of time but are waiting for the right moment. There is also a feeling

that the high cash reserves acting as a buffer to downturns in the sector are

now expected to be a regular feature in the technology services markets.

TCS, the largest software services company in India, has oodles

of cash lying around and the recent acquisition of an Australian financial

software company may have come as a relief to many investors who were loath to

see so much cash in the company and not being deployed in operations. After

quite a few failed acquisitions during the dotcom era, Indian companies are now

quite circumspect in acquiring companies and will take time to acquire larger

entities unlike the M&A hungry US corporations. However, at the same time,

we do believe that we should expect significantly larger acquisitions by Indian

companies in the near future and TCS is the most likely candidate for such an

acquisition. We believe that the right big ticket acquisition by the company

would go a long way in maintaining margins without sacrificing revenue growth,

which is the classic dilemma of Indian software companies, and could take it to

the $5 bn mark in the next couple of years.

Established as a part of the Tata Group, Tata Consultancy

Services (TCS) is a leading global IT services provider and a pioneer of

significant developments in the Indian IT services industry, including the

offshore delivery model for IT services. The company provides software services

and products in the areas of e-business, application development and

maintenance, engineering services, architecture, technology, infrastructure

development and management consulting and e-security. TCS performs BPO

operations for its IT services clients within its various divisions.

Set up in 1968 in Mumbai and becoming public in July 2004, the

company's current equity stands at Rs 48.01 crore, wherein the promoter Tata

group, through Tata Sons and various other Tata group companies, holds 84.8%

stake followed by institutional investors holding 9%, the Indian public holding

5.4% of the stake and the balance 0.7% is held by others. TCS has offices in 32

countries with development centers in 11 countries and a corporate training

center back home.

Consolidated revenues for the financial year ended March 2005

amounted to Rs 9,727.2 crore, registering a healthy 37% growth, as compared to

Rs 7,122.7 crore in the last fiscal. The company earned 61% of its annual

revenues form onsite business activities, amounting to Rs 5,962.8 crore as

against offshore revenues, which amounted to Rs 3,764.4 crore contributing the

balance 39%. Net profit for the same period stood at Rs 2,255.8 crore,

witnessing a 38% increase, as compared to Rs 1,636.9 crore in the previous year.

The company reported total revenues of Rs 2,982.6 crore for the

quarter ended 30th September, against Rs 2,448.2 crore for the corresponding

quarter last fiscal. Profit after tax touched Rs 693.7 crore for the quarter,

versus Rs 574.8 crore, up 21%. On a sequential basis, revenues and after tax

profits grew around 10%. Revenues from the US continued to contribute the major

portion of its revenues, at 59.7%, amounting to Rs 1,781 crore, witnessing a

marginal decline over the same period last year but a sequential growth of 10%

in value terms. While Europe saw a 1% decline in contribution, India's

geography increased its contribution by almost 1%. The banking and financial

services domain was the largest contributor of revenues providing 41.3% of sales

for the quarter ended 30th September. TCS added 72 new clients taking the tally

of active clients to 624. The quarter witnessed an addition of 5,596 employees

as a result of which total staff strength of the organization stood at 53,329.

Recently, TCS announced the acquisition of Financial Network

Services (FNS), an Australian core banking solutions vendor for approximately

$26 mn. This is aimed at strengthening TCS banking and financial services

products. Coming close to the acquisition of i-flex by Oracle, this signifies

the growing importance of banking product markets. FNS is already installed in

three major Indian banks and also has customers in Asia, Europe and South

Africa. This will help TCS to try to be a complete solutions provider for the

global banking industry. In another major announcement, the company signed a

five year contract with ABN Amro to provide applications support across the

bank, as well as the right to bid for applications development projects. This is

claimed to be the largest deal won by an Indian IT services company ever. The

deal is expected to be worth over $500 mn over the period of the contract.

In other developments, TCS announced its merger with Tata

Infotech, as well as formation of a JV in China. The company is also moving

strongly in the consulting area, whereby it hopes to improve value addition to

clients' businesses.

TCS currently trades at Rs 1,407, discounting the March 2006 EPS

by 24 times and March 2007 EPS by 20 times. Based on its strong position in the

Indian software sector and its growth plans, we continue to be positive on the

stock. BUY

Sushanto Mitra

The author is the founder of Technology Capital Partners The views reflected

here are of the author and not of this publication. No liability is accepted for

losses based on the information presented here