TCS unveiled a comprehensive IT solution stack for Small & Medium Businesses (SMBs) ahead of a formal launch tomorrow, a new segment for large Indian IT. We are impressed by the completeness of the solution set and expect this to be one more beachhead in the long term to boost non-linear revenue share.

SMBs - a large virgin market addressed for the first time by an Indian IT major
􀀟 SMBs globally are a a significant buyer segment for IT - spending up to US$1trn+ annually on IT, according to TCS.

􀀟 Management expects the annual IT spending by the SMB segment in India to scale up rapidly from US$12bn currently to US$48bn by 2015.

􀀟 While the opportunity is there to be tapped, we believe the crux of the matter is how to do it economically, keeping costs down and gaining scale so that it is not margin-dilutive.

TCS appears to have done a thorough job on market scoping and solution stack
􀀟 TCS plans to offer a holistic solution stack covering hardware, software, network, and services on an on-demand basis and a pay as you go subscription model (per user monthly price).

􀀟 Management estimtes that the solution can accelerate growth and reach for SMB clients, enhance productivity, eliminate obsolescence risk of IT assets, while offering a 35-40% lower Total Cost of Ownership.

􀀟 TCS has identified 5 SMB sub-verticals that it believes constitute the bulk of the market - Manufacturing (c40% of the market), Retail, Wellness, Education and Professional Services.

􀀟 The solution stack covers not only asic requirements (hardware, networking, and standardized office applications), but also horizontal platforms like CRM, F&A, payroll, etc and business analytics. In addition TCS has built verticalized ERP solutions for the target segments.

􀀟 Management plans to offer the solution through a cloud computing and SAAS model to drive cost efficiency - an ecosystem of providers, providing services with a thin client-end presence, leveraging centralized storage, platforms and services/support.

􀀟 TCS has signed up 100 clients and has tested its solutions with these customers, mostly over the past year. All expenses involved with research and solution development are expensed out completely.

􀀟 The company plans to recruit clients through 85 cloud partners across 21 cities in India - this should keep S&M costs relatively low, a key to achieving profitability.

􀀟 The company will charge an enablement fee equivalent to two month subscription charges for onboarding a customer.

We believe this solution offers significant growth prospects in the long term
􀀟 TCS plans to currently cater to the SMB segment within India. According to management, there is no other player that offers a comparable holistic solution for SMBs.

􀀟 We believe while the offering will have limited near-term business impact, it offers tremendous long-term growth potential if executed as per plan.

􀀟 As we outlined in our sector report (Poised for the next leap, dated 4 Feb 2011), we see several growth drivers for Indian IT in the medium term, one of which is the SMB market.

􀀟 We are Overweight on the Indian IT space, with preference for large caps, including TCS, where we see prospects for healthy growth as well as levers to sustain margins.