An Interview With Tata Consultancy Services

When I wrote about the possibility of India’s largest IT company, Tata Consultancy Services (TCS) listing on the NYSE, little did I realize that I would be contacted by TCS regarding a correction to my article. While providing me information about the number of acquisitions done by TCS in 2006, the company also offered me an opportunity to interview their senior executives. Having featured competitors Wipro (WIT) and Infosys (INFY) on InsideArbitrage in the past, I used this opportunity to ask Surya Kant, Vice President and Head, TCS America, a number of questions that are probably on the minds of most investors in the Indian IT sector.

1. TCS is the leading Indian consulting company with $4.3 billion in annual revenue and almost a billion dollars in net income. Despite this leadership position, TCS does not have the same visibility in North America that Infosys and Wipro enjoy. Beyond raising capital for acquisitions, would TCS consider an NYSE IPO as a means to improve the visibility of TCS amongst US businesses?A US listing is not a part of our immediate primary agenda for TCS.

   Nonetheless, North America continues to remain an important market for us. The US accounts for more than 50% of the TCS’ $4.3 billion annual revenues from our last fiscal year, ended March 31, 2007, making TCS the 11th largest player globally. In terms of market capitalization, TCS is ranked 4th globally, behind IBM, HP and Accenture.

2. Over the last 5 years, the US dollar has lost more than 30% of its value against the Euro. Since the rupee was pegged to the US dollar much like the Chinese yuan, Indian outsourcing firms benefited from this positive currency exchange trend. The Indian rupee has recently gained strength against the US dollar rising from an exchange rate of  44.61 rupees per dollar to 40.59 rupees per dollar over the last six months. Do you think the rupee is likely to continue gaining strength against the dollar?

   The rupee’s appreciation vis-à-vis the dollar is definitely of concern to the industry and TCS. To what extent the government will succeed in the short term in addressing inflation will determine how the rupee’s rise will play out.

   In the past two months, we had a 7% increase in the value of the rupee against the dollar. But even with that challenge, TCS has been able to maintain strong margins because of the value that we provide. About 40% of our business comes from fixed-priced bids, so as we continually improve our business processes and leverage our own intellectual property as part of the solution, our margins can get better.

3. If yes (to question 2), how will this impact earnings? Have you hedged your currency risk through futures or other financial instruments?

   We’ve hedged fairly well in the last quarter. But because of the mechanism and costs involved, we can only go to a certain point. So anything below 43 rupees vs. the dollar will continue to worry us.

   TCS has taken currency hedges worth about $1 billion, up 30% from an earlier level of $750 million from a year ago. Also, our revenues are already partly hedged as our costs are also in dollars in many contracts — so it’s not that this appreciation hits your full turnover.

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