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    There’s no structural problem, we will recover our margins: Rajesh Gopinathan, TCS

    Synopsis

    We are committed to getting to the old margin range of 26-28%, says the TCS CEO

    ET Now

    Talking to Nikunj Dalmia of ET Now, Rajesh Gopinathan, CEO, and NG Subramaniam, COO, TCS, say in a challenging environment, it is a very steady and impressive growth for TCS on the volume side and 2% constant currency revenue growth is also very good.

    Edited excerpts:


    What is the right way of looking at numbers for the quarter gone by, a quarter where volume growth was impressive at about 3.5% or a quarter where margins have dipped and profit has dipped and EBITDA has come down? I frankly do not remember when was the last time there was a sequential drop of 5% or 6% in EBIT and about 8-9% in your PAT.

    Rajesh Gopinathan: The way to look at it, as you rightly characterised it, is in a challenging environment, it is a very steady and impressive growth on the volume side and 2% constant currency revenue growth is also very good. If you look at it across our vertical industries in major markets, actually other than BFSI and retail all other verticals have grown at more than 3.5%. Even BFSI and retail have clocked in more than 2%. I would say from growth perspective, it is a very encouraging quarter, definitely weaker than typical Q1 but in the overall scheme of things, very encouraging quarter.

    As for margin, I would characterise it as steady margins because there are two elements that are impacting margins this quarter. One of
    them is cyclical and which happens every Q1 and that is be typically the wage hikes and the impact of wage hikes is usually in the range of about 200 bps. As a company, we had announced it last time also and we have reiterated, we decided to go with wage hikes with effect from Q1 so our Q1 number bakes in the full impact of wage hikes.

    But given the overall environment, we moderated our wage hikes from 8% average last year to about 5% to 6% average this year. So instead of 200 bps impact, the wage hike has impacted us by about 150 bps or 450 crore impact on the margin range. The other one is an 80 bps impact on the currency which is really something that we cannot predict on. So if you take these two one off factors aside, 25.7 we are fairly constant on it. Usually Q1 is characterised by us trying to get back from a productivity perspective 20, 30, 40 bps in so we try to kind of moderate the impact of the wage hikes. This quarter we have been as a quarter where we are focussed on transition, we are focussed on stabilising our operations.

    We have gone through a fair, I would say incremental but important changes on our service practices on our industries, so I am very happy with the way the transition is going. We have also been travelling extensively, meeting with customers, reassuring them about the leadership position.

    Our management team is very stable but really the focus is on stable transition and positioning us for the future growth. Within that context, incremental productivity is not the focus one and maintaining stable margins less the wage hike impact and the currency impact, I am quite happy with where we are and that is the best way to think about it and end of the day the other element to look it is cash conversion. Cash conversion at 103.9% of net profit continues to be strong. We generated about Rs 6300 crore or Rs 6100 crore in this quarter. Paid out quarterly dividend of Q4 dividend of another Rs 6100 crore and another 16,000 crores of the buyback impact. So overall from revenue margin cash perspective, I would characterise it as satisfactory quarter and stable one.

    You are still maintaining that old margin range of 26-28%. There is no reboot?

    Rajesh Gopinathan: Yes, absolutely we are committed to getting to that and...

    Is that an inspirational number or that is an official guidance?

    Rajesh Gopinathan: It is not an official guidance but it is a range that we are committed to working towards and wherever we are, we need to find a path to it. We are quite focussed on it and structurally our ability to hold margin in the midst of significant organisational changes, gives us confidence. We are continuously repositioning ourselves to-- our digital business now is $3.5 billion. We have set up new businesses. Our cognitive business operations practices are growing at 5%. We have moved very senior management teams to head our analytics group, to head our automation group. With all those changes being able to deliver steady margins, I am very happy with the overall position and we continue to stay focussed on driving profitable revenue growth.

    What was your travel number for the quarter by?

    NG Subramaniam: 120 flights.

    This should be some kind of record, right?

    NG Subramaniam: I hope not.

    A couple of quarters ago, Rajesh told us that the billing environment is stable and a lot has changed and a lot will change. A quarter ago when we met you, there was this question mark on the new Trump administration and the impact on outsourcing. Have you got any sense from your clients that billing could be under pressure?

    NG Subramaniam: We have not had any such experience.

    No cancellations?

    NG Subramaniam: No cancellations, no demand for reducing our billing rates or any such things. Customers are wholeheartedly adopting Agile and the Agile way of working. That essentially means there are smaller deal sizes but a number of them are coming from the same clients. Four or five small deals put together is one large deal.

    Secondly the whole digital transformation services integration, the service restructuring that we have done allows us to participate in much larger deals in the digital world.

    The third thing is out of that 2,15,000 people that we have trained, we believe that we have made the right investments and we are able to do more and more digital participation.The number of deals that we have signed this quarter also is a phenomenal achievement for us. It is one of the bright spots in our performance -- both in terms of large deals, digital deals as well as the transformation type of deals. We announced a deal for Diligenta, we announced a large customer servicing and policy administration systems including digital capability in Australia. All this, combined with the 3.4% volume growth means that we have a better mindshare for our services with our clients. It should give us in good stead for the quarters to come.

     


    So markets and analysts should not confuse the current environment. They should not think TCS is getting volume growth but that is coming at the cost of margins. That is not the story, that is not the reality?

    Rajesh Gopinathan: No.

    But for TCS and for margins to normalise as per your historical band, you have to really work hard and that means the ask rate could be about 150-200 bps margin expansion in Q2, Q3 and Q4, Q1 is a good quarter, Q2 is a good quarter but then the lumpiness would kick in the Q3 and Q4. How will you reach your aspirational margin band?

    Rajesh Gopinathan: As I said. the numbers are out there and we are focussed on that journey. It is primarily going to be a factor of how the churn in the revenue side comes about as we keep on increasing our digital revenues and digital revenues are characterised by revenue coming from a very diverse set. As each employee individually starts scaling up, is when we will start seeing margin support kicking in. We are very focussed on accelerating that and trying to move that.

    The new organisation structure is also a move towards actually coalescing things that were happening across the organisation into more focussed ones. But right now, we are focussed on growth and participation in the new demand environment. We believe that a good presence in that will position us well for pulling the operational levers in these new areas. Typically, you got to gain market share at that achieve scale and then we are fairly good as a management team in extracting productivity once we have scale.

    The forecast from Gartner or other IT companies which give IT outsourcing forecast, says contraction is imminent. But you are growing. Let us be real. The numbers are out here in terms of market share. There would a hurdle event beyond which you would say look it will be difficult for me to get the incremental market share.

    NG Subramaniam: From what we see, the overall pie in which banks outsource either locally or to an offshore provider like us, what is getting outsourced to an offshore provider like us. That particular pie keeps increasing because the institutions or most corporations, global companies have adopted the globally distributed workforce paradigm. It may be work done in US or in Europe or in Singapore so that pie is something that we see it increasing.

    However, the discretionary spend is something that they are cautiously spending, more in an agile way especially the large institutions. It challenges to clearly participate in those digital transformation projects, the integration that I talked about earlier of the digital capabilities whether it is agile, automation, cloud, digital, interactive, automation, some of those competencies that we have put together, these are leaders who have built businesses from scratch.

    If you take some of them, they have built from scratch multi-billion dollar businesses and we are seeing results already in the first quarter. These respective businesses have already grown by 5% or more in quarter on quarter. There is a good set of pipeline deals that we see. So all this should augur well for us in terms of the future growth.

    The manamgent last time spoke about a spilt of 60% and 40%. 60 is doing well, 40 is under pressure. Let us revisit that ratio.

    Rajesh Gopinathan: The discussion was whether BFSI is a stressed segment and what is we going to do and we had said that BFSI has broken below 40% as a total share. We are seeing very good participation. Lower down the chain in smaller banks, newer companies are coming into it. We are seeing businesses getting hived off and completely new entrants coming in and we are seeing strong participation in those market players. Whereas some of the larger institutions are obviously stressed and have their own operating challenges.

    So big BFSI clients are still a problem?

    Rajesh Gopinathan: Even that I would not say across the board. There are both types. There are people who are doing well, there are people who are not doing so well. And there’s a fairly dynamic set of players at the bottom and who are even more technologically leveraged than traditional ones and who value the Agile services that we give and the nimbleness that we provide. In fact, it is a very interesting market and we are fully, I mean we are very deeply entrenched in it and fully committed to it.

    For the longest time we have tracked IT sector, our understanding here really as outsiders and market commentators is that US economic should translate into better stronger and firmer business for Indian IT sector and TCS and large companies would benefit because you are the leaders and you have path breaking processes. How come this time the US economic recovery is not really translating into a gangbuster economic recovery? Earlier conversations that we have had with Chandra and Mr Ramadurai, showed the benchmark was US economic recovery. Look at US GDP data, you know what Indian IT companies would do. This time it is different?

    NG Subramaniam: Probably the economists may be able to answer it better but let me give you my colour. Number one is, more manufacturing make in US. What does it mean? If you are going to take the same thing that has been done right now in elsewhere if you are going to do the same thing in US, that is not going to be good for us. An automation led manufacturing that is needed to be invested in and work is still under planning stages. The second is the overall regulatory easing that people are expecting. It is a work in progress and people are waiting for cues.

    Are you still getting a sense that there is confusion about what the new Trump administration would do and some clients are anxious and they are not committing?

    NG Subramaniam: I would not say that. While there are a lot of political uncertainties related to governments in US as well as in some other parts of the world, most customers we met, have expressed confidence about the macroeconomic outlook and they are spending clearly but not as much as in terms of large deals. The discretionary spend is a little bit cautious and purely in terms of digital and a few other things.

     


    Some of these digital technologies are also getting proven, if you take for example, Block Chain or even automation etc, the art of possible gets changed almost every week. From that perspective, they are also saying that are we getting into this fairly ahead of the time or should we wait for who else is playing and what is coming up so that kind of a doubt is probably there in their mind. There are some early takers, some they want to see that look let us do the proof of concept first before we get there and then they have also done a lot of partnerships with Fintech companies how they are playing it out. I think the Fintech angst which they had has considerable eased is that something that I can tell you.

    Big guys have not lost market share. So just to clear the air and it is an important question purely from a messaging point of view, you are indicating that your visibility is robust, there are no deal cancellations and business is not getting hit because of the environment and because of technology? It is business as usual with decent visibility for FY18?

    Rajesh Gopinathan: Yes, that is fair characterisation but is a challenged environment so...

    Challenges will always remain even when you are growing at 30% so managers have to deal with challenges?

    Rajesh Gopinathan: Absolutely.

    But how many of these challenges are structural in nature what I want to understand from you, what happens to rupee, what happens to wage hike, that is one quarter phenomenon but is there anything which we need to know which could be disruptive and structural?

    Rajesh Gopinathan: I do not think so. We do not see anything either on the volume of the demand or in the nature of the demand. Do we think it is disruptive, in fact we think it is constructive because as you have said these technology changes are lifeblood of our industry. The reason we remain valuable for our clients is because we are better positioned to train and re-skill ourselves to deal with the newer areas. We are quite excited about the change so there is no direct threat coming from those kind of areas.

    Is it an asprational dream for the Indian IT sector to start thinking about double digit growth?

    Rajesh Gopinathan: I do not know how to characterise that.

    You know you cannot achieve it for two years, I mean it is like saying that, everybody wants to go in double digit but as of now to talk about double digit growth is very-very-very tough.

    Rajesh Gopinathan: Think about this way that there is no reason to have any negative expectation for even next year because there is nothing structural that points to negative sentiments.

    That is what I was looking at, nothing structural is going down. The messaging from your numbers is that your profits are lagging the growth, the profits are trailing the growth.

    NG Subramaniam: We are sailing a ship in a storm right now. We are stabilising it and steadily sailing it, I will put it this way and the opportunity is there for us to improve our margins. As Rajesh explained earlier, the deal pipeline looks good. The deals that we have signed and announced during this quarter is a combination of digital large transformation deals so that gives us the confidence for progressing with our typical let us say productivity levers in the coming quarters, having stabilised let us say all the organisational changes that we have done.

    And you will recover your margins, yes or no?

    Rajesh Gopinathan: Absolutely.




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    (What's moving Sensex and Nifty Track latest market news, stock tips, Budget 2024 and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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