The $450 mn void staring at TCS

Earlier this week, Deutsche Bank announced that it will shut almost half of the 550 branches of Postbank over the next two years as Germany’s biggest bank sees more customers prefer online banking than walking into a branch.

It was only in November 2020 that Tata Consultancy Services (TCS) bought Postbank Systems AG, the IT firm of Postbank, as the Mumbai-based technology services firm looked at doing more business with its German client.

The 1,500 engineers of Postbank Systems, which joined TCS, manage its entire technology needs, from writing code to developing and maintaining apps.

Postbank Services, rebranded as TCS Technology Solutions AG, ended with $220 million in revenue in 2022, according to the unit’s financials. As much as 80% of this revenue, or $180 million, came from Postbank.

The closure of 250 Postbank Branches and the subsequent tech work implies that TCS stares at annual business dropping to $130 million by 2025, according to an executive privy to the development. That is a $60 million loss.

An email sent to spokespeople for TCS and Deutsche Bank on Wednesday seeking comment went unanswered.

Business from Nielsen, an audience rating company, will be the lowest in two years, as per the commercial terms of agreement reviewed by Mint. In 2017, TCS renewed its partnership with Nielsen, under which the company was assured of $2.25 billion in business over eight years. But in 2025, TCS stands to get $139 million in business from Nielsen. This is $180.5 million less in business than the $320 million TCS gets every year. Finally, in June, Transamerica Life Insurance Co., the American arm of Dutch insurer Aegon NV, scrapped a $2 billion, 10-year partnership five-and-a-half years after it awarded the contract to TCS.

Up until now, TCS got $200 million every year from Transamerica. Beginning in 2025, business from the insurance firm will end.

This $440 million loss in business underscores the new challenges Krithivasan faces.

“It is certainly not TCS’s fault that the company stares at this loss in business,” said a TCS executive on the condition of anonymity. “Nielsen account was known (fall in business), but Transamerica and Deutsche were a surprise. So, it is one of the rare times when we will be hit by three large clients, all of them at the same time. (But) then that is the construct of running a large business.”

Here, the role of Fortune 1000 companies’ tech centres or Global Capability Centres on two of these large deals cannot be overlooked.

Transamerica scrapping a contract as it expects to do the tech work itself is arguably the first instance of a company midway pulling the plug. Deutsche has increased its technical workforce in the country more than threefold in the last three years: From 5,000 in 2020 to 16,000 last year.

For now, TCS remains confident. In the April-September period, TCS has clocked a 5.7% dollar revenue growth from the year-ago period, the fastest, as HCL Technologies Ltd and Infosys Ltd have grown 5.2% and 3.7%, respectively.

Still, this loss in business, about 1.6% of $27.93 billion of TCS’s current revenue, hurts the company’s growth. Say, if TCS adds $2 billion in incremental revenue, this would have translated to a 7.2% dollar revenue growth. But as the firm now needs to backfill nearly $450 million in business, TCS’s new growth would be 5.5%.

For now, many analysts continue to question why companies such as TCS are struggling to grow faster despite claiming to win record deals.

“Deal TCV has been at or above $10 billion in the past three quarters; yet, revenue growth has been muted,” Kotak Institutional Equities analysts Kawaljeet Saluja, Sathishkumar S. and Vamshi Krishna wrote in a 12 October note. “The reason is twofold—(1) leakages in existing business due to reprioritization of spending (for example, certain covid-era engagements could have been dialled down or scrapped) and lower discretionary spending leading to delay or pause in the backfill of projects. Further, many projects with no clear RoI (return on investment) or payout are also being scrapped, and (2) strong TCV growth is not resulting in similar ACV growth due to higher deal tenures in large and mega deals, which also have slower revenue conversion compared to short-cycle programmes.”

TCV, or total contract value, measures the total revenue a company expects to generate from a customer over the lifetime of a contract. ACV stands for annual contract value.