Will India See a Sell-Off of Its Captives?


Last week, Citigroup announced it wouldsell its captive operations in India to Tata Consultancy Services for $505 million in cash. This followed nearly a year-and-a-half of rumors that such a sale was planned. When I last wrote about it in June, IBM and Capgemini were also reportedly potential buyers, and the price tag was thought to be $800 million.


This acquisition, along with other pending deals such as HCL Technologies' purchase of Europe's Axon Group (which I referenced in yesterday's post), indicate that Indian outsourcing specialists are buying revenues to help offset the slowdown in global IT spending, write Manas Chakravarty and Mobis Philipose on livemint.com.


For Citi, the sale offers a way to unload a non-core asset, a strategy that looks pretty compelling following its writedown of $61 billion in bad debt. TCS will gain 12,000 employees, a valuable asset at a time when Indian companies are having trouble finding enough qualified workers, and perhaps more important, a $2.5 billion, nine-and-a-half-year contract to provide outsourcing services to Citi and its affiliates.


While the valuation (eight times estimated earnings before interest and tax for 2008) is reasonable, write Chakravarty and Philipose, the deal does expose TCS even more to the troubled financial services sector, an issue that concerns financial analysts and shareholders alike. Also, because the operation has "surprisingly high" operating margins of 20 percent, TCS may have difficulty wringing more efficiency out of it.


Some more numbers from a Hindu Business Line story: $280 million (expected 2008 revenues for Citigroup Global Services), 20,000 (total number of BPO workers employed by TCS following the acquisition) and one (Genpact, the only company that now has more BPO employees in India than TCS).


Though observers have predicted mass sell-offs of captives before (and largely been wrong), this time could be different, according to the Business Standard. Like livemint.com, it cites Indian companies' desire to protect revenues as some of their clients delay or scale back outsourcing initiatives. And smaller sales have been occurring all along. The article mentions that TCS earlier had purchased two smaller captives. There are still more than 100 captives in India, it says.