Tata Consultancy Services (TCS), a leading IT services, consulting and business solutions firm, has signed definitive agreements with Mitsubishi Corporation (MC), one of Japan's largest integrated business enterprises to merge TCS Japan, ITF and NTSC. TCS will hold 51% in the merged entity, MC to hold 49%. The merged entities to be operational from July 2014.
Commenting on the deal, Ashish Chopra, IT analyst, Motilal Oswal Securities said, "The deal, if closed by June 2014, will add USD 375 million incremental revenues in FY15 (3 quarter revenues from ITF). It lends TCS an edge in the Japanese market with local manpower, client references.
Japan is the second largest market for IT services, and Indian players have struggled to gain a foothold in the region. In that regard, TCS' move opens up the region favorably for the company an additional source of revenue over the long term."
Madhu Babu, HDFC Securities said, "With rapidly expanding scale (TCS revenues at USD 13.4 billion for FY14), we see strong intent from TCS to expand its footprint into underpenetrated geographies. Hence, the merger which enables creation of scale in Japan and is a step in the right direction. As per the management, the transaction is likely to consolidate from July 2014 and hence would contribute to 9months revenue for FY15E. Hence, this merger will add USD 350-375 million incremental revenues for FY15E (2.4% of FY15E USD revenues). As per our view, the closure of this deal can enable the company to deliver 18.2% USD revenue growth for FY15E (vs. 15.4% modeled currently). For FY16, the deal would boost USD revenues by 2.8% and is marginally EPS accretive."
Rumit Dugar, Religare Institutional Research said, "The deal is positive for TCS as it will increase its presence in the tough but large Japanese IT market. We believe the deal will give TCS’s portfolio an additional growth lever. While the stock is not cheap at 20x one-year forward PE, we think superior growth will support the premium. We maintain our estimates pending closure of the deal and continue to view TCS as the best execution plays in India's large-cap IT space. We maintain buy with a March 2015 target price of Rs 2,450."
