TCS bags $2.2 bn deal from UK based pension firm Friends Life

MUMBAI/BANGALORE: Tata Consultancy Services won its second-biggest outsourcing contract worth $2.2 billion on Wednesday from UKbased pension firm Friends Life, providing positive forecast for India's technology sector complaining of shrinking contracts and delays in decision making by top customers.

The contract, TCS' secondbiggest deal after the company won $2.8 billion order in 2008 from Citigroup, is based on a model wherein the company will be paid for each insurance transaction and will add another 3.2 million policies to the existing Diligenta platform owned by its UK subsidiary.

"According to our records, this is the largest private sector deal in the UK at least since 2005," said Ed Thomas, an analyst with UK-based outsourcing advisory Ovum. "And that it comes from the insurance sector that has been depressed since the beginning of the slowdown in 2008 makes it even more important."

With this contract, TCS will now manage some eight million policies in UK using the same platform, increasing the company's share of revenues earned without having to hire additional staff. Around 1,900 staff of Friends Life will get transferred to TCS' payroll as part of this transaction.

Domestic brokerage Motilal Oswal, estimates that revenues of Diligenta will increase by 86% from Rs772 crore in fiscal 2011 to Rs1,444 crore in fiscal 2013. As part of the deal, Diligenta will take on board about 1,900 employees of Friends Life, taking the subsidiary's total UK headcount to about 3,700.

"The deal implies $146 million incremental revenues on an annual basis. However contribution to earnings per share could be lower as Diligenta currently operates at a profit before tax of 3%," the Motilal Oswal note said. "Profit margins for Diligenta would improve with increasing volumes on the platform but margins are unlikely to be inline with the company average."

Shares of TCS rose 1.8% on the Bombay Stock Exchange to close at Rs1,123 on Wednesday after the afternoon announcement of the UK deal.

UK-based insurer Friends Life, which awarded the contract to TCS, is the second independent client that TCS' UK subsidiary Diligenta is signing on since its inception in 2006 following TCS' acquisition of insurance back-end operations of UK's Pearl Group – now Phoenix Group – in October 2005 of that year for an undisclosed sum.

"Our strong presence in the insurance segment, track record and the early investments in building products and platforms have contributed to this win," TCS chief executive N Chandrasekaran said in a statement on Wednesday, in an apparent reference to Pearl Group transaction of 2005 and the subsequent formation of Diligenta.