TCS Reputation On The Line After $940 Million Fine: Analysts

Tata Consultancy Services on Monday beat quarterly profit forecasts, snapping a six-quarter streak of earnings miss. But, investors were more concerned about the $940 million (over Rs 6,000 crore) penalty that a US jury imposed on TCS for allegedly “stealing” trade secrets from Epic Systems, a US healthcare software company. TCS has denied any wrongdoing and said the verdict is “unexpected” and “unsupported by evidence presented”. The $940 million penalty is around one fourth of TCS’ 2015-16 annual net profit.

Here are five must-know points about the case:

1) Epic System’s charges against TCS: According to Kotak Institutional Equities, “TCS was selected by Kaiser Permanente (one of America’s leading health care providers) to test Epic Systems’ electronic health records product in its IT environment. TCS was given userweb portal access to documentation so far as it pertained to testing of the product. A few TCS employees made unauthorized user-web portal access and downloaded (6,477) documents of Epic Systems. Epic Systems alleged that TCS’ unauthorized access of user-web portal could have been used to develop its own product Med Mantra.”

2) Judge, Jury Differ on Penalty: The jury ruled that TCS and its subsidiary Tata America International Corp. must pay $240 million to Epic Systems for “ripping off” its software. Tatas have also been asked to pay another $700 million in punitive damages. But, the judge differed from the jury as far as quantum of damages ($940 million) is concerned. The judge is likely to reduce the damages award, when the judgment is announced in 6-8 weeks.

3) TCS to appeal against the verdict: TCS can file an appeal within 30 days after the judgment is filed, but analysts say the case will likely be long-drawn because Epic Systems has deep pockets. TCS will have to provide bank guarantee (for the penalty) even if it goes for an appeal. TCS is unlikely to make a provision for the penalty and will treat it as a contingent liability in its books of accounts, according to analysts.

4) Reputation loss for TCS: According to Kotak Institutional Equities’ Kawaljeet Saluja, TCS’ competitors will surely highlight the case before TCS customers. Ambit Capital analyst Sagar Rastogi said, “Irrespective of the final decision, this event would hurt TCS’s reputation and take away valuable management bandwidth.”

5) Takeaway for investors: For now, analysts don’t seem to be too worried about the huge penalty imposed on TCS. Kotak retained its “add” rating on TCS, saying the company has the bandwidth to deal with such cases. Ambit Capital also maintained its “buy” rating on TCS, citing reasonable valuations and attractive digital business.

TCS shares fell over 3 per cent on Monday morning, but the stock recovered to close down 0.3 per cent at Rs 2,519.75. TCS however underperformed the broader IT sub-index on the National Stock Exchange, which gained over 2 per cent.