TCS bags $1B contract from UK's Telefonica, shares jump
What's the story
Tata Consultancy Services (TCS) has bagged a long-term contract worth over $1 billion from Telefonica UK. This is the first major deal for India's top IT services company in nearly two years. Following the news, the shares of the IT giant gained 0.5% to trade at ₹3,221. The 10-year agreement is expected to generate over $100 million in annual revenue, providing much-needed relief to TCS after a long dry spell of large contracts.
Contract details
TCS to provide application management and infrastructure services
Under the deal, TCS will provide application management and infrastructure services. A large part of this work is new for the company, sources familiar with the matter told Mint. The official announcement of this major contract is expected in the coming weeks. This contract marks a significant milestone as it is the fourth billion-dollar deal signed under K Krithivasan's leadership as MD and CEO since June 2023.
Market presence
TCS's UK operations and previous billion-dollar deals
The UK is a key market for TCS, contributing some 17% to its $30.18 billion revenue in the last fiscal year. This makes it the company's second-largest market after the US. Before this deal with Telefonica UK, TCS had signed several other billion-dollar contracts under Krithivasan's leadership. These include a $1.1 billion deal with UK's National Employment Savings Trust and a $1 billion digital transformation mandate from Jaguar Land Rover.
Strategy change
TCS's strategic shift and profitability concerns
The Telefonica UK deal is said to be less profitable than TCS's overall operating margin of 24.2%. This indicates a strategic shift for the company, which has mostly stayed away from contracts that could dilute margins. The move comes after a similar telecom-related deal with state-run BSNL for deploying 4G network solutions. However, an executive told Mint that the margin profile of this UK deal is expected to be better than that of BSNL engagement.
Contract impact
Long-term contracts and future profitability
A $1 billion contract over 10 years adds some $100 million in annual revenue, which is about a 0.3% uptick if existing business remains intact. Analysts say such long-term contracts often become more profitable as transformation efficiencies kick in. Phil Fersht, CEO of HFS Research, told Mint that TCS is prioritizing predictable growth and strategic account control over near-term margin optimization with this deal.
Performance review
TCS's recent performance and future outlook
Under Krithivasan, TCS has lagged behind peers in bagging large deals. Its revenue growth slowed to 4.1% in FY24 and 3.78% in FY25. This is in contrast to competitors who have continued to win big contracts. Analysts are concerned over the lack of large wins, with Kotak Institutional Equities predicting a revenue decline of over 2.5% for TCS in FY26 and Motilal Oswal Financial Services forecasting a 0.5% drop.