The bill discourages mainly manufacturing companies from outsourcing overseas by providing a 20 per cent tax credit on eligible costs to companies that move outsourced activities back to the US.
In a note on Tata Consultancy Services Services, Dhruv said that the short-term impact could be limited on TCS which got 51 per cent of its revenue from the US in 2011-12.
“TCS’s A3 issuer rating and stable outlook are unaffected by the proposal due to the company's established brand, competitive positioning and strong operating performance,” Dhruv said in a report.
At the same time, Moody's believes that TCS could partially mitigate the negative effects of the legislation over the long term. The company has high EBITDA (earnings before interest, taxes, depreciation and amortisastion) margins of approximately 29.5 per cent which allow it some flexibility to accommodate discounts to its US customers as compensation for the tax credit.
TCS has also demonstrated customer stickiness, as evidenced by its high customer retention rates of above 95%, over the past two years, the report said.
At the end of June, 2012, the company reported cash and cash equivalents of about $ 534 million and total debt of about $ 56 million, reflecting its strong balance sheet position and high recurrent cash flows which allow it to maintain a net cash position, the Moody’s note said.
Moody’s remains cautious about challenges that TCS faces along with other Indian IT outsourcing companies. These could be in the form of slowing demand as economic uncertainties fester, coupled with political and policy initiatives that incentivize insourcing in key markets like the US.
TCS is also the largest Indian IT services company by revenue ($9.9 billion) and operating profit ($2.8 billion) for the financial year ended March 2012.
Infosys, India’s second largest IT firm, has no debt on its balance sheet for credit rating agencies to rate. However, the stock market has punished Infosys – shares fell sharply after the company lowered profit outlook for the year ending March 2013.