On July 6, 2009, International Business Machines (IBM) announced its agreement for a 10-year strategic outsourcing deal worth over Rs. 80 crores with Gujarat Cooperative Milk Marketing Federation (GCMMF), better known as Amul – India ‘s largest dairy products marketing organization.
IBM engages in the development and manufacturing of the advanced information technology. Under the deal, IBM through its SAP Enterprise Resource Planning (ERP) platform will manage and operate Amul’s IT environment.
The project would start with the implementation of the SAP (ERP) application along with the roll out of necessary modules and systems for Amul. This will help improve Amul’s operations including its supply-chain, and process efficiencies besides strengthening consumer base and accomplishing growth.
We view this deal as very positive for both the companies. This win will enable IBM to focus on its investments on differentiating technologies with high-growth potential and high-value segments of the IT industry.
Furthermore, this deal will bolster IBM’s presence in the emerging markets (BRIC countries -Brazil, Russia, India, and China grew 18.0% and 15.0% adjusted for currency in 2008). According to Springboard Research, IBM retained its leadership in the Indian domestic IT services market with a market share of 10.8% for calendar year 2008.
Under the deal, IBM will also build a state-of-the-art Data Center backed by a Disaster Recovery Center, plan security policy and manage the entire IT and application landscape for Amul. With an investment of $300 million in 2008, IBM built 13 Business Resilience service delivery centers in 10 countries, increasing its ability to address surging demand from businesses and governments from around the world seeking to keep their operations disruption-safe.
Although, IBM’s IT support operations enable customers to reduce cost, optimize processes, increase productivity and scalability which have helped it to win a number of IT deals in the past, the IT services business is becoming increasingly competitive. In particular, IBM is facing pricing pressure from Hewlett-Packard (HPQ), Sun Microsystems (JAVA), Intel Corporation (INTC) and Dell (DELL).
With continuous innovative solutions, increased customer wins, and a strong portfolio of products and solutions, the company has announced a road map to deliver earnings per share (EPS) in the range of $10 to $11 during 2010, or 14% to 16% compound growth rate from 2006 levels. Thus, we maintain our Buy rating on IBM shares with $120 price target.
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