Why TCS Made Big Porsche Bet

'Across the entire value chain, we will be able to industrialise AI adoption, and that is the main purpose of the deal.'

TCS has managed to grab a Euro 1.25 billion deal from Porsche AG, including a buyout of its IT consultancy unit MHP.

This follows a mega-deal signed with SKF Group.

At a time when deal sizes are getting smaller and closing large ones is taking time, this move signals a much-needed bump-up for the company.

In an in-person interview, K Krithivasan, CEO and managing director, TCS, and Michael Leiters, CEO, Porsche AG, talk about the acquisition and the carve-out with Shivani Shinde/Business Standard.

Why Porsche Sold MHP

What is the rationale behind the MHP sell-off and what does it mean for the company's long-term strategy?

Michael Leiters: There are two elements behind why we wanted to carve out MHP.

One is that, given the current transformation not only in automotive but also in the software environment, we think MHP needs another partner.

I think TCS is the best partner they can have. They have much wider and broader capabilities, and their capabilities are also deeper than what we have.

To respond to the transformation requests and requirements we have right now, I think this is a necessary move.

There is another element.

Porsche itself, under our 'Sportwagen Schmiede 2035 strategy', is focusing on the core of our business, which is automobiles.

Therefore, while MHP is an important element of Porsche, it is not the core.

We are really happy to work together with TCS.

I have to say that the discussions were really exciting because they showed us a lot of opportunities for how we can work together in the future, first through MHP, but later also on other matters, maybe directly with TCS or with the Tata Group.

AI Drives TCS Strategy

Looking at the deal, it resembles the kind of transactions TCS did several years ago. At a time when AI is the focus, how does this acquisition help TCS?

K Krithivasan: When you look at it, this is about how TCS works with Porsche on AI transformation and AI mobility transformation. That is the idea.

MHP brings deep capabilities in digital transformation, consulting and SAP HANA (High-performance Analytic Appliance) transformation.

TCS brings deep capabilities in AI, engineering and scale.

When we put this together, we are able to drive AI transformation across the mobility value chain, starting from product design, engineering and manufacturing to customer experience, enterprise and software-defined vehicles.

Across the entire value chain, we will be able to industrialise AI adoption, and that is the main purpose of the deal.

We will be establishing a CoE (centre of excellence) along with MHP.

The CoE will specialise in and drive these initiatives, particularly AI adoption across the entire value chain. It also gives us the ability to scale globally.

MHP has a very strong presence and scalability in Europe.

Now, how do we take it outside Europe and take it to TCS' global scale? That is the purpose of the deal.

Q4 Revenue Impact Ahead

Porsche is a new client for TCS. When will the deal start contributing to TCS' financials? Will we see an impact on margins?

K Krithivasan: This would most likely start in Q4.

I don't think it will be in Q3 because we have to go through the regulatory process.

I expect that to take about three to four months.

So, I would expect this to start more in Q4.

In the short term, I see a 50-60 basis point dilution of margins for TCS.

But we need to kick in other margin improvement measures so that we mitigate it over the medium term.

We are not lowering our margin targets.

We will continue to operate towards our 26-28 per cent margin target.

MHP also has around 300 clients. What is the headroom for TCS to tap into those clients? Have those discussions begun?

K Krithivasan: I look at it as an opportunity for us because while MHP has a very strong presence in Porsche and a good presence in Volkswagen.

It also has an entry into multiple other clients where I don't think it is deeply present.

Each one of them is a new opportunity for us.

Within Europe, it has a who's who of clients.

So, each one of those clients presents a deep opportunity for us.

The second opportunity is going outside Europe.

There is a huge market there as well.

So, both are opportunities.

Offshore Delivery Expands

Porsche has signed a Euro 1.25 billion deal. What are the chances of the deal size increasing over the years?

Michael Leiters: We will be very opportunistic on both sides.

If there is a good chance to do a good programme or project, we are open to more.

But we have defined this based on the services we are taking today from MHP.

We are both on the same page that the first step is to make this collaboration between MHP and TCS even better.

If there is potential for growth, we will take it.

Will some of this work be offshored to India?

K Krithivasan: The idea is that today MHP is doing almost all the services from one side.

Now, when you bring TCS into the mix, the ability to move services offshore increases.

This means MHP becomes even more cost competitive with Porsche, attracting more business.

Do you see more such opportunities emerging as multinational companies increasingly look to focus on their core businesses?

K Krithivasan: It is possible.

As organisations want to adopt at scale and, at the same time, focus on where their core value proposition lies.

It is quite likely that there could be more opportunities.

Manufacturing Vertical Gets Boost

How significant will the impact be on TCS' manufacturing vertical, which has been relatively slow?

K Krithivasan: This would definitely be a very, very important addition.

If you look at MHP's current annual revenue profile, it is about Euro 730-740 million.

So, that is a significant addition to our overall business.

It will be very important.

Feature Presentation: Ashish Narsale/Rediff