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Future of TCS PADA Deal Remains Uncertain

|Includes:ACN, CAI, INFY, Raytheon Company (RTN)

By: Audrey B.

TCS (NSE:TCS) CEO N. Chandrasekaran sounded optimistic when he said during an interview that TCS had not seen an impact from the Europe debt crisis among its clients. Particularly since the company’s multi-million dollar UK outsourcing contract with PADA appears to have been in jeopardy for quite some time.

On the second of July, N. Chandrasekaran was quoted saying that, “Overall, from an economy overview, we have not seen any impact of the current European situation on any of our clients.” A report late last week from Ovum however, indicated that budget cuts by the current UK government will likely see a number of IT outsourcing contracts renegotiated, including the 600 million pound contract for pension administration between TCS and the Pensions Administration and Delivery Agency (PADA). This is after the UK government made a move to cancel the 750 million pound e-borders contract with a consortium led by Raytheon (NYSE:RTN) and included companies Serco (LON:SRP), Accenture (NYSE:ACN), Detica, QinetiQ, Capgemini (EURONEXT:CAP) and Groupe Steria (EPA:RIA).

If you’ll recall in a previous article, the contract, which had been announced March of this year, is for the low-cost pension scheme, NEST or the National Employees Savings Trust, administration services. Under the terms, the contract is divided into two stages for ten years with the possibility of an extension, and covers services like employer participation, member enrollment, collection and reconciliation, cash management, accessing pension savings and administration of accounts.

The contract had already received criticism before as the deal had been signed just before the UK general elections, and even after the previous government had promised that no long term contracts would be signed before the next administration comes into office. Following the general elections, there had also been some talk of some government contracts that would potentially face scrutiny over the coming months, which had included the TCS-PADA deal.

Since then, there has not been an official word from the UK government yet on the fate of the deal but odds are, considering the $235 billion budget deficit that the government faces, many large contracts will be evaluated to determine where the government can scrimp on the dollars.

This news comes after the company had reported stellar results a little over a week ago, in a better than expected quarterly results report. The company posted that its net income gained 21 percent to $394 million, in the quarter, beating analysts’ estimates and rival Infosys (NASDAQ:INFY), becoming the top Indian software service exporter. The company had only recently stated that they are expecting business from Europe to account for 30-35 percent of its revenue in the next 3-5 years. From the results, the company increased business in Europe by 2 almost percent.

Ultimately, it may be a daunting task for TCS to accomplish the PADA deal as it had been meant to. It’s likely that, if the government does not outright cancel the contract to look for a cheaper alternative, then they may try to renegotiate the deal to save cost. At least TCS can find comfort in the fact that, while the fate of the deal remains uncertain, they still managed to beat rival Infosys and for that they can be optimistic.

Disclosure: No position