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TCS (TCS)
Technology
US$2.2 bn deal with Friends Life – good indicator on several counts. TCS has
announced a US$2.2 bn TCV 15-year closed life policy administration contract with
Friends Life, a leading UK-based insurance provider. Even as the ACV of the deal at
US$150 mn per annum does not warrant a revision in our estimates, it does provide
additional comfort to our forecasts. More importantly, the deal validates the increasing
participation of large Indian providers in general (and TCS in particular) in large, nonlinear,
complex, multi-year outsourcing contracts. Retain BUY on TCS.
Deal contours – non-linear, multi-year, platform-based; no upfront payment involved
We highlight the key contours of the deal below
15-year closed book policy administration contract signed with Friends Life. The deal has a total
contract value (TCV) of US$2.2 bn and involves migration of policy administration to TCS’
proprietary insurance platform.
The deal is non-linear in nature; pricing would be on per policy per annum basis. The deal
involves 3.2 mn closed book policies. We note that TCS had been managing 5 mn such policies
on its platform before this deal.
TCS would take over 1,900 people from Friends Life on its rolls as a part of the deal.
TCS would administer these policies on Friends Life’s current platform till migration to its
platform is complete. TCS indicated that complete migration would take around two years.
No upfront payment to the client for the deal.
Revenues from this deal will have a gradually declining trajectory as it involves closed book
policy administration. Revenues will go down as some of these policies mature over time.
Margins would improve over time as TCS transitions policies to its proprietary platform. We
expect the deal to reach steady-state profitability levels in the 3rd or the 4th year.
By our estimates, Diligenta has an annualized revenue run rate of US$200 mn with the 5 mn
policies that it is managing currently. This deal would take the run rate up nearly 75%. Also,
the per-policy pricing per annum appears to be at some premium to the company’s existing
business. This likely builds in the additional cost of rebadging 1,900 people and may also mean
that the overall deal profitability is slightly better than the current Diligenta profitability.
Implications – we find the read-through positive for TCS as well as other Tier-I
players
From a TCS perspective, this deal marks the second large win for TCS on its insurance
platform since they launched the same last year. We note that the company had made
substantial investments in this platform for nearly four years since they bought it in a
transaction with the Pearl group. This also reflects the domain strength TCS has built in the
BFSI vertical.
From a sector perspective, this deal should allay a couple of concerns of the Street
Limited addressable market for Indian IT names – these companies, especially the Tier-I
names, have time and again expanded their addressable market successfully. Indian
offshore names quite likely would not have been invited for such platform-based, nonlinear-
pricing, multi-year, large-sized contracts a few years back. It’s an evolution that
often goes unnoticed – we had discussed this in detail in our sector piece released earlier
this year (The growth imperative dated March 30, 2011).
Long-term margin sustainability – such non-linear opportunities will aid margin protection
by de-linking revenues and headcount even as some of the traditional linear service lines
like ADM face increasing competition.
Also, that a company has taken a large outsourcing decision in the current uncertain
macro environment suggests decision making may not have slowed or at least not
slowed to the extent the sector pessimists have been indicating in recent months.
We remain positive on the sector and reiterate our BUY on TCS.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
TCS (TCS)
Technology
US$2.2 bn deal with Friends Life – good indicator on several counts. TCS has
announced a US$2.2 bn TCV 15-year closed life policy administration contract with
Friends Life, a leading UK-based insurance provider. Even as the ACV of the deal at
US$150 mn per annum does not warrant a revision in our estimates, it does provide
additional comfort to our forecasts. More importantly, the deal validates the increasing
participation of large Indian providers in general (and TCS in particular) in large, nonlinear,
complex, multi-year outsourcing contracts. Retain BUY on TCS.
Deal contours – non-linear, multi-year, platform-based; no upfront payment involved
We highlight the key contours of the deal below
15-year closed book policy administration contract signed with Friends Life. The deal has a total
contract value (TCV) of US$2.2 bn and involves migration of policy administration to TCS’
proprietary insurance platform.
The deal is non-linear in nature; pricing would be on per policy per annum basis. The deal
involves 3.2 mn closed book policies. We note that TCS had been managing 5 mn such policies
on its platform before this deal.
TCS would take over 1,900 people from Friends Life on its rolls as a part of the deal.
TCS would administer these policies on Friends Life’s current platform till migration to its
platform is complete. TCS indicated that complete migration would take around two years.
No upfront payment to the client for the deal.
Revenues from this deal will have a gradually declining trajectory as it involves closed book
policy administration. Revenues will go down as some of these policies mature over time.
Margins would improve over time as TCS transitions policies to its proprietary platform. We
expect the deal to reach steady-state profitability levels in the 3rd or the 4th year.
By our estimates, Diligenta has an annualized revenue run rate of US$200 mn with the 5 mn
policies that it is managing currently. This deal would take the run rate up nearly 75%. Also,
the per-policy pricing per annum appears to be at some premium to the company’s existing
business. This likely builds in the additional cost of rebadging 1,900 people and may also mean
that the overall deal profitability is slightly better than the current Diligenta profitability.
Implications – we find the read-through positive for TCS as well as other Tier-I
players
From a TCS perspective, this deal marks the second large win for TCS on its insurance
platform since they launched the same last year. We note that the company had made
substantial investments in this platform for nearly four years since they bought it in a
transaction with the Pearl group. This also reflects the domain strength TCS has built in the
BFSI vertical.
From a sector perspective, this deal should allay a couple of concerns of the Street
Limited addressable market for Indian IT names – these companies, especially the Tier-I
names, have time and again expanded their addressable market successfully. Indian
offshore names quite likely would not have been invited for such platform-based, nonlinear-
pricing, multi-year, large-sized contracts a few years back. It’s an evolution that
often goes unnoticed – we had discussed this in detail in our sector piece released earlier
this year (The growth imperative dated March 30, 2011).
Long-term margin sustainability – such non-linear opportunities will aid margin protection
by de-linking revenues and headcount even as some of the traditional linear service lines
like ADM face increasing competition.
Also, that a company has taken a large outsourcing decision in the current uncertain
macro environment suggests decision making may not have slowed or at least not
slowed to the extent the sector pessimists have been indicating in recent months.
We remain positive on the sector and reiterate our BUY on TCS.
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