Bad news on Citi side may hit TCS too

22 Nov 2008, 0143 hrs IST, Ranjit Shinde & Jessica Mehroin Irani, ET Bureau

MUMBAI: TCS, the country’s biggest IT exporter, may see trouble ahead if one of its biggest clients Citigroup sells its business, as cited by media reports.

This could also put a question mark on TCS’s decision to acquire Citi’s subsidiary Citigroup Global Services (CGSL) last month along with a long-term contract of assured revenue of $2.5 billion from Citigroup.

TCS had acquired CGSL, a captive BPO subsidiary of Citigroup, in the second week of October for $505 million. The Indian firm’s management had cited that the deal would help the company to be the financial giant’s top IT vendor.
However, the talks of Citigroup’s possible sellout would steal the colour off this deal on several counts.

CGSL is a captive outsourcing unit, with Citigroup as the only client. If Citigroup’s businesses are sold in parts to several suitors, TCS may find it difficult to retain the current business volume of CGSL, as the new owners would rethink about existing outsourcing arrangements of Citigroup.

While the cash transaction has not been completed, sources said this would allow TCS to terminate the deal, if needed. But TCS denied this.

“The transaction, including the payment to Citigroup, will be completed once the various regulatory approvals have been obtained as per the terms of the agreement,” said a TCS spokesperson. Also, the company is not planning to renegotiate or cancel the deal and is in touch with Citigroup on a constant basis, said the spokesperson in an email reply to ET.

Another point of concern is that if Citi’s business splits, TCS may find it difficult to ensure the fulfilment of the agreement, wherein Citi would give assured revenue to TCS over the next nine-and-a-half years.

Though TCS had acknowledged the possible risks during the media interaction and mentioned that it had taken due care to ensure the deal fulfilment, details on the same were not available. “Our agreement with Citigroup adequately addresses these concerns,” said the spokesperson.

Analysts feel that the news of Citi’s possible sellout may have substantial bearing on TCS’s future growth in the banking, financial services and insurance (BFSI) space. “There is an incremental risk to TCS, as additional business which was supposed to come due to CGSL acquisition may get hampered,” said Viju George, IT analyst, Edelweiss Capital.

He also cited that the possibility might aggravate the situation for TCS given that General Electric (GE), its other top client, is also facing crisis. Citi and GE together contribute nearly 10% to the total revenue of TCS.
Mr George also expressed the need for re-rating the TCS stock given the latest development.

“We need to evaluate the situation as outsourcing calls will be affected due to this development,” he said. Some analysts, however, feel that the impact of the possible sale by Citi on TCS’s bottomline would be limited. “TCS has been a profit-making company. It has a strong business model. Given this, I do not see any major shakeout for the company under the current circumstances,” said SBI Cap Securites research head Anil Advani.