After a better-than-expected results, the management of Tata Consultancy Services remained optimistic of the future IT environment. In an exclusive interview to CNBC-TV18, CEO & MD of the company, N Chandrasekaran said clients appear decisive about IT budgets. He harped on the need to stay efficient as any improvment in IT spend will be driven by efficiency. For now, a pick-up in discretionary spend is visible, he said.
The TCS management also believes that pricing will remain stable throughout 2013 and expects volume growth to continue. TCS exceeded market expectations in the third quarter with a net profit of Rs 3,551 crore, up 1 percent (up 23 percent from a year ago), helped by new deal wins. Revenues of the country's largest software services exporter grew 3 percent sequentially (22 percent year-on-year) to Rs 16,070 crore.
The company is looking to hire 60,000 new employees in fiscal year 2013.
Below is the edited transcript of the interview.
Q: What exactly do you mean by your statement that 2013 will be better than previous year?
Chandrasekaran: I repeated the statement I made earlier this quarter. The important point is that the macro environment continues to recover slowly; from technology perspective it continues to be good.
Our clients depend on technology for the whole recovery process. Now, clients are clearer in their minds as to where they want to spend on and decisions are being taken and there is no specific thing that is dragging. So, I think 2013 will be a much better year.
Q: How the IT spends will be going ahead?
Chandrasekaran: It will remain the same. In some cases it may come down but still the addressable space in that spends for companies like TCS will be larger. In some cases the spending is increasing.
There are three trends and everyone is following couple of trends. First is efficiency, whether it is service management, optimization or single company. There are different themes that touch applications, infrastructure, services and everything. This broad themse are seen in some form everywhere.
Second, the digital theme is across the board for both consumer and industrial companies. Some may focus more on mobility, analytics, front office transformation and customer experience. These are the terms that one hears.
Third -- regulatory compliance. Apart from this there will always be ERP transformation and similar engagements that keep coming and somebody may do supply chain transformation, finance transformation etc. So there are lots of opportunities.
Q: You also used the phrase that there is more clarity on the minds of clients, they are clearer about what they want. What do you mean specifically by that?
Chandrasekaran: They have a clear agenda as to what is their requirement and what they expect from the technology and at what cost. They have clear objectives about product cycle, market, and timings of product, whether to take product to cloud or having a uniform access from iPad for example. They have clear objective and they are moving in a systematic manner and there is no delay.
Q: Does it have any implications for pricing this year because you have seen a bit of an uptick, some of your peers have too or would you still be conservative and say don’t?
Chandrasekaran: Pricing will be stable. I have said this for the last two years. Out of eight quarters, pricing has jumped in at least three quarters. Every time it has jumped up it has been fairly substantial and it has come down for five quarters. But net-net, it has been more or less at the same level. There will be some productive gains in up quarter and it will get moderated in another quarter but basically it has been stable.
Q: You also mentioned that you see a better year for Europe as well. Is 2013, showing much better initial momentum in Europe? Can you elaborate?
Chandrasekaran: European companies are driving optimization and efficiency and that's opening up opportunities and we are working with a large number of European clients.
Now, we are signing larger deal sizes in Europe then earlier and we are engaging on a transformation kind of play and service management is a key so the deal sizes are larger.
Q: Are you now beginning to see signs that companies are a bit more relaxed about discretionary spend, they are also going up the consulting pipeline and you being to see more traction there?
Chandrasekaran: I made a point in the last quarter as well that discretionary spend is happening and the momentum continues. We are now seeing discretionary spend happening and most spend is happens in analytics and digital and enterprise transformation in terms of supply chain transformation etc. These types of engagements come from the discretionary bucket. Our growth in the new markets like Latin America, India etc, predominantly comes from discretionary kitty.
So discretionary budget is looking up and it will vary, one cannot be specific about an industry, this industry is more company dependent. It depends on where they are and everyone wants to get the investments that they have made in their technology to get optimised first then they will spend on discretionary.
Q: In the current quarter you bagged seven big deals, how is that landscape looking and where are the big deals coming from, which verticals primarily?
Chandrasekaran: It is fairly distributed. We have bagged couple of deals in Banking and Financial Services (BFS), retail, healthcare, government and communication. It comes in a significant number from United States (US), Latin America and Asia. Pipeline looks strong and our order book is very healthy as of December. So, I think there is a good momentum.
Q: So if say that this year is starting at a better note you would expect to achieve better volume growth than you have seen in 2012, The year 2012 started with a note of confusion, but you ended up achieving quite a bit of volume growth even in the year that's closed out?
Chandrasekaran: We have done well and we don't give guidance. I am very positive and the momentum is good. So, I think we should do well.
Q: What is the biggest risk factor for this year for you, aside of macro?
Chandrasekaran: I think we had to execute. One thing we have shown is that we can execute well and we need to execute. Execution is a key. I think we should be relevant and because it is just not something that you do for everybody. One needs to understand and put himself in customer shoes, you need to engage and one must learn what makes sense for particular customer and what can we offer and that’s will be a key theme.
It is not that I have an offering; I can optimise something and then try to sell it as many customers as possible. There will be some replicability, but by and large to capture the demand from a discretionary bucket one need to relevant to customers and our teams must get used to that fact and we have been driving this theme and we need to make right investments and bring right teams.
TCS has lot of skills sets, but we are a large organisation and we need to bring the best of TCS in front of client every time, every time we do that clicks and we don't do that and we don’t execute it's a problem and as it becomes larger it’s something that you got to keep in mind and you got to execute everyday.
Q: You mention that margins will be held at these levels, they have done very well in the quarter but the bigger debate is whether you can hold on to this kind of margin performance without the currency tailwind that you have had over the last four quarters. Will you be able to manage that?
Mahalingam: We need to evaluate total new portfolio to manage currency fluctuations. I mean that when the rupee is in a benign environment you do take projects which may not deliver margins upfront but over a period of time they will go ahead and deliver or you work in markets which are delivering less margins. We have done similar things and have built up a great foundation for TCS to grow. We need to be extremely careful on some of them as we go along. It is more of managing the portfolio.
Q: This business mix kicked in this quarter as well we hear that you have had margin performance because the business mix was slightly skewed in terms of higher margin projects. Can you elaborate what you expect going forward?
Vandrevala: Going forward if you look at our pipeline, nature of our business, geographies, investments that we made, loan strategy, everything kicks in. The point that S Mahalingam made that we had four quarters of reasonably benign environment on the exchange front so that gives the company an opportunity to make those bets, investments whether it is in platforms, new markets, emerging technologies. So if continue to get that environment we will just go on increasing the base from which we can continue to take off the way we have been traditionally doing.
Q: Are you seeing better traction on some of the traditionally higher margin or higher priced things like consulting?
Vandrevala: As discretionary spend goes up the opportunity to do higher value, higher margin deals becomes better. Having said that the bread and butter business still continues to pump have great market and continues to be a great margin play. Nothing has been carried away. It is good to keep your eye on that but the basic bread and butter is still pretty much alive as far as the industry and TCS is concerned.
Q: You will end FY13 hiring much more than you set out to hire in the first place. Are you going to carry that momentum into FY14?
Mukherjee: We mentioned that we will hire 50,000 in FY13 and now we are already at 49600. Our final number can be above 60,000.
As far as FY14 is concerned, we are still in the planning process and we don’t have exact number yet. But we have only finalized the number of trainees that we would be hiring and we are already doing campus interviews. Our target was 25,000 recruits and we have already given offers to 24,000. By end-January we should complete that process so that is one end of the spectrum.
Q: No delays at all on taking people on from campuses?
Mukherjee: For this year we have already given 43,000 offers. People will start joining from Q1 lesser than Q2, Q3 as sufficient number of trainees has come in. We expect 10,000 people to join in Q4. They will be in the training process during this quarter and they are available for deployment from next year onwards.
Considering all these factors we have arrived at the number of trainee offers that we plan to give for the next fiscal. Productivity improvement and nonlinear side would determine the total volume that we would have next year. It should get finalized around February end or beginning of March.
Q: What do you think happens next year if wages do go up more than they did last year? Do you expect that to be margin dilutive or will TCS be able to manage that?
Mahalingam: One is that wages are a factor of demand and supply. The stand we have taken is that most of it will come through variable and therefore the new factor, because it goes with the performance of the organization. The additional performance stays for itself that’s the overall goal. Unless it really goes out of hand because if the overall demand turns out to be very high then you can not do it only in variable, it will also get into the fixed, in a substantial fashion.
Just to answer that question from a management point of view if we are able to keep the employee cost and by that I mean not just the Indian wages but also overseas wages, allowances plus business associates, somewhere around 56 percent of our revenue then we will be in a position to handle it. There you have to really look at the pyramid as to how you have build the base of the pyramid. So it is not just a question of increase in increments but also the overall pyramid that we construct.
Q: How is Diligenta doing? Can you give us some details?
Vandrevala: Very well. We set out with a platform objective that has now been achieved. We did a major transaction. The traction that we have is excellent; the deal pipeline is very good. We are now beginning to see the first interests in Europe and US for the platform and a similar service. So, we are absolutely bang on plan and margins have also started to look reasonably healthy. So, overall very positive.
Q: You spoke about the bread and butter business and there has been some debate among investors that what worked as bread and butter earlier may not work as bread and butter going forward and companies like yours will have to relook at how you are approaching business. Is there any truth in that?
Vandrevala: The way we do traditional application development and maintenance (ADM), the way we did them 10 years ago is very different to the way we do them today. So when I was talking about bread and butter I was not talking about how you execute it that obviously changes. Technology changes, delivery mechanism changes. However the fact that application development and maintenance is still an important part of the business is the point that I was making. How you execute that, how you price that are all the issues that change as time goes on.
Q: As demand picks up what kind of utilization levels are you targeting going forward?
Mukherjee: At this stage we are operating at about 81.7 percent which is excluding trainees and including trainees we are at 72.1 percent. So we have said that we would be comfortable as far as excluding trainee component of utilization is concerned to be between 80 to 83 percent. So there is sufficient scope for improvement.
The second point is given our size today, with 260,000 people, if I look at the absolute number that is the 19 percent which is not utilized that means so many people are not on customer driven projects. That means they are employed in our internal research, they are doing internal projects, they are doing management and all sorts of things. Given this size that 19 percent also becomes a sufficiently large number. Basically, the point is that you can control that number and utilization could have a further uptake beyond 83 percent as well. So we have sufficient headroom to grow.
Also the trainees, as and when they get trained, how efficiently you are able to deploy them would determine whether it is 72 percent or can you take it up to 75-76 percent. We have operated at 75-76 percent as well.
Q: What do you see as the CFOs biggest lever in 2013 calendar, in terms of maintaining EBIT margins where they are aside of the business mix issue that you spoke about? What do you think will be the biggest support for the CFO? Is it pricing, is it something else, is it utilization?
Mahalingam: First is going to be the productivity improvement; utilization, and that journey has been on for sometime. So, when you say that utilization can go up to 83 percent that gives you that capability to improve the productivity. That is going to be a very big lever that we will address.
The second thing is some of the platforms and some of the initiatives that we have taken; whether it is in new market like Latin America or also Japan and so on, they will start delivering. That is a margin lever that we can really look at. Ultimately if the quality of revenue; if the growth is there then the margin problems are all taken care of, whatever the exchange rate.