The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
By Ujjaini Dutta
BENGALURU, Sept 1 (Reuters Breakingviews) - The disruption from artificial intelligence across India's $315 billion IT services sector is forcing companies to get creative. Case in point: Tata Consultancy Services' recent tie-up with luxury carmaker Porsche. Financial gains are limited for the $91 billion giant, but the alliance gives it a foothold in Europe's auto sector.
As part of the deal unveiled last week, TCS will buy Porsche's automotive and consulting unit MHP at a €320 million enterprise value, equal to 0.4 times the target's 2025 sales. At the same time, the high-end German manufacturer will commit €1.3 billion to the Indian group to "embed AI" across its operations in a five-year strategic partnership.
That works out to an extra $300 million for TCS's annual top line, or just 1% of revenue for the year to the end of March. Strategically, though, TCS gains expertise that rivals may struggle to replicate: MHP boasts roughly 4,500 employees and a client roster including Porsche and other car brands, as well as industrial groups spanning aerospace to energy. But the bigger prize may be direct access to the $45 billion Volkswagen group that also owns, in addition to Porsche, Audi, Lamborghini and other brands.
TCS has stepped up acquisitions of late, including two U.S. deals last year; expanding its footprint in Europe, which accounts for roughly a third of revenue, looks sensible. This year, it bagged an $800 million AI contract with Swedish manufacturer SKF and launched a sovereign cloud computing service for European governments, public sector enterprises and regulated industries. Deepening ties with the region's industrial groups should help ease reliance on its biggest market by sales, North America. Revenue there grew just 2% last quarter from the same period last year, compared to the 4.3% increase in Continental Europe.
TCS's latest move echoes rival Wipro's strategic tie-up, announced in May, with Singapore-based food and agricultural conglomerate Olam, which also offloaded its IT and digital services to the Indian firm. Both deals underscore the need to find new growth in specialised areas as AI upends the industry's once-booming outsourcing business model. TCS's stock currently trades on less than 15 times forward 12-month earnings, per LSEG, far below its five-year average of over 25 times. Carving out industry niches is a promising strategy that will require some unusual dealmaking.
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