TCS' costly data centre venture raises questions over returns, fit

Tata Consultancy Services' (TCS) latest strategy to marry its legacy IT services business with a capex-heavy data centre venture could prove returns-dilutive with limited operational synergies, analysts said. However, as AI disrupts its core business, diversifying into new segments could support the company's long-term growth.

Unlike the asset-light, cash-generative IT services model that typically delivers industry-leading ROCEs (return on capital employed), the new business may yield sub-10% returns, India Ratings & Research estimates. The investment is long-term, aiming to generate a 15-20% return over its life cycle, with a steady, annuity-like income stream.

"Purely from the return ratio perspective, legacy ITES companies entering in pure-play CoLo data-centre business would be ROCE dilutive; quantification of which is dependent upon the pace and extend of the investment," said Prashant Tarwadi, director, India Ratings & Research.

He added that co-location is a passive investment and yields minimal synergistic benefit with existing offerings of the IT companies. "It is generally expected that legacy IT companies would rather invest in strengthening their own cloud offering along with AI-solutions, which would strengthen their market positioning," Tarwadi said. But as AI impacts core business, diversification in new segments could help the company sustain the disruption in the long-term even if it is margin dilutive. The company's combination of scale, ecosystem partnerships and long-term client stickiness could be a big plus, sector analysts said. In a surprising move, TCS last week announced an investment in building data centre capacity of 1GW for "sovereign AI".