IT major TCS managed to beat street estimates and declared good set of fourth quarter earnings on Wednesday. The company remains confident to clock better growth in FY14 than FY13 and aims to exceed upper end of industry body Nasscom’s guidance in FY14.
Speaking to CNBC-TV18 MD & CEO N Chandrasekaran said, TCS continued to see strong momentum, deal closures were happening and it is positive on all sectors including financial services.
“Our deal wins have been broadbased, across BFSI, pharma, and retail. Also, our deal pipeline in US and Europe remains healthy."
The company is expecting attrition rate to rise, but it is taking all efforts to retain the talented pool. TCS will hire around 45,000 employees in FY14 and says wage hike in FY14 is likely to be similar to FY13," he added.
TCS reported sector leading revenue growth. Its dollar revenues came in 3% higher at USD 3040 million and profits were boosted by higher other income. However, a decline in EBIT margins by 73 bps was on expected lines.
Rajesh Gopinathan, chief financial officer; Ajoy Mukherjee, EVP & global head- HR and Phiroz Vandrewala, director also shared their views on the future outlook of the company.
Below is the edited transcript of the interview.
Q: It was good to hear you say that you are top National Association of Software and Services Companies (NASSCOM) estimates for the year because the market was a little confused after hearing one of your peers earlier which put out very tepid guidance. Take us through first, what leads to this optimism about FY14? Why are you confident of doing better than what NASSCOM is putting out?
Chandrasekaran: There are couple of ways I look at it. From a customer perspective, I think there is lot more clarity in where they want to spend and they are going about it in a systematic fashion. There’s a lot more clarity in terms of simplification initiative, investments in digital. This is irrespective of whether it’s a customer who is increasing the IT spend or a customer who is not so much not increasing but trying to get more value of the money they spend. As compared to last year, there’s a far more clarity
From our internal perspective, we believe that the pipeline is strong. The number of deals that we are closing in a new area like digital, are continuously increasing. For example, this quarter alone, we closed more than 100 deals. They are small deals but still large in number. So, both these things give me confidence that we are going to come out well this year.
Q: Let’s talk a little bit about macro headwinds that the global economy has been seeing. We have seen some downgrades in terms of growth expectations. We are now finally seeing weaker data come in from the US because of all the Budget cuts that was factored in February and March. Are you building in a downside to your otherwise confident expectations?
Chandrasekaran: My perspective is based on what I hear from clients. The last two to three years have taught me that there is really not a definitive correlation between the macro data and the technology spend primarily because tech is being used to do a lot of recovery as well. Companies are going on simplification drives.
That again involves technology and companies who want to seek growth whether in their current businesses, new markets or in new products and services are adopting technology. So, we believe that there is a significant opportunity as long as we can partner with clients in whatever they want to accomplish. So, the data points indicate that while we are very watchful about the macro, we have got to be more focused on what happens on the ground.
Q: I know you don’t give guidance, I know you said you will exceed the industry targets set out by NASSCOM. Some brokerages are expecting FY14, 16 percent dollar revenue growth, when you look at earnings, 20 percent earning, CAGR between FY13 and FY15. Are these numbers doable?
Chandrasekaran: We don’t give guidance but in general, we are confident that we will do well in FY14 compared to FY13. FY13 has been a good year. We certainly will come at the higher end of NASSCOM and exceed the NASSCOM estimates which were at 10-14 percent. Our constant currency growth was 16.2 percent, volume was 16.8 percent. I cannot specifically comment on numbers but I am quite positive that it is going to be a better year.
Q: In the quarter gone by, which is the fourth quarter, there were some one-off disproportionate contributors to your growth performance. For instance, some analysts pointed to a jump in sales of equipment and licenses. If I was to look at it from a geography point of view, India did very well; about 19 percent growth. Can you talk about the sustainability of these specific one-off contributors and therefore what impact the next quarter will see?
Chandrasekaran: India has always been a volatile market. So, there will be a quarter in which it will give me a little bit extra incremental revenue while another quarter will pull us down. That is the nature of the mix that we have in India and most of the engagements we do in India, especially in the government sector are all system integration engagements. So, that does not bother me at all. I think it is sustainable. It should be a well-rounded performance for us if you look at it across markets.
Q: Both India and Latin America have contributed far better than some of the other markets in terms of just the growth percentage numbers. Do you expect that if these two markets are volatile and lumpy in the numbers, then we might see some change?
Chandrasekaran: I would like to reinforce that we are pretty confident about our pipeline across markets.
Q: You have picked up 11 big deals. Can you talk a little bit about them in terms of pricing, in terms of margins and what the prospects are for further big deals in the quarter to come?
Chandrasekaran: We do not announce the actual order book, but if you really look at the deals that we have won, they have come across sectors. We have won quite a few deals in Banking and Financial Services (BFS). We have won deals in utilities and pharma. We have won deals in retail and these have come from US and Europe and one or two from other markets. So, the deal pipeline is pretty healthy in the US and Europe even though we have delivered excellent growth in the emerging markets.
Q: So, are there a larger number of small deals? Or do you continue to see double digit large deals coming in?
Chandrasekaran: Simplification and transformation kind of deals are large and discretionary deals are small in size. The customers don’t want to make a big commitment upfront, they like to do it in terms of incremental commitments so the discretionary deals are smaller in nature.
Q: What about your margin impacts, something like that?
Chandrasekaran: I think the pricing has been pretty stable and I don’t see a negative impact on margins.
Q: You added 52 new clients in the quarter that’s completed?
Q: That was a much better pace than in many of the previous quarters going back almost six-eight quarters. I am just wondering whether you can maintain that pace of client addition.
Chandrasekaran: If you look at the client matrix, over the last 12 quarters or 6 quarters, it has been evolving very beautifully. We have not only been able to add new clients, our clients in each of the revenue bands, whether it’s a million, five million or 10 million, it is very consistently moving up and I think that will continue to be so.
Q: In keeping with trend, the client additions in the USD 1-10 million range has been far higher than in the larger size range. I am just wondering whether that is going to change at all in the quarters to come given that you sound so confident of growth picking up even further?
Chandrasekaran: We do not have as many clients in the larger banks as compared to USD 1-10 million range. It will consistently migrate and it is just not about how many clients we add. It is the quality of relationship that we are able to develop with those clients. So, right from the client addition to migration across banks, it is going to be pretty smooth and consistent. It is not going to be in one particular band. We are going to see a spike and then it is going to taper off. I think the model has now matured and we are able to consistently move clients.
Q: Give me a sense of the vertical-wise growth that you are seeing. Banking, Financial Services and Insurance (BFSI) has done far better than expected. Even though you said the macro headwinds are not necessarily directly correlated to tech spends do you think that sector will survive some of the macro headwinds that we might see in the coming quarters and the non-BFSI vertical mix. Do you expect that to change with maybe some recovery in telecom, because some of the other sectors such as travel or life sciences have not done as well in the last quarter?
Chandrasekaran: Based on where we are, I would feel that retail manufacturing licenses are looking up for us and are doing very well. The Telco sector has been a drag in the last couple of years. It is coming off the cliff and it is going to ramp up this year. So, telecom will do well. It may not be the highest growth sector, but it will definitely do much better compared to the last 12-24 months and pharma retail manufacturing will do extremely well.
Q: What does extremely well mean?
Chandrasekaran: They will be the top three sectors in our portfolio.
Q: What will be the key risks or key downsides that you are building in over the next few quarters? What we have seen happen to Infosys over the last several quarters, what are the chances or the possibility of that happening to TCS as well?
Chandrasekaran: I think when you run a business of this scale, you just have to pay attention on a daily basis. You have got to remain confident. I do not know what else to do. While there are opportunities and you have got to keep your eye on the opportunity and go about it.
Q: Do you see competitive pressure coming in as some of the erstwhile leaders try to reclaim their positions?
Chandrasekaran: There will always be competitive pressures.
Q: Is the margin hurting competitive pressures?
Chandrasekaran: Margin is sustainable from where we are. I am more worried about any untoward thing happening in the macro. Say suddenly we are not able to cope with it and then the regulatory pressures that come. We have, so far been dealing with it and we have to see what kind of regulatory pressures will come.
Q: When you say regulatory pressure you mean..?
Chandrasekaran: They could be in terms of visas, in terms of anything of that kind. Those are the things that we have to watch out for. I will not say that there are no risks. The risks are always there, but you have got to focus on growth equally if not more.
Q: There have been some one off disproportionate contributors to the growth this year. Chandrasekaran spoke about India and 19 percent growth and how that’s typically lumpy sort of growth coming in but there was also some talk within the analyst community regarding a bump up in sale of equipment and licensing. Can you take us through what impact that has had on the fourth quarter and whether those numbers are sustainable into the next quarter given that you are expecting to exceed growth?
Gopinathan: In the quarter, cyclically, India does deliver higher growth in Q4. That’s the nature of the market and we have seen that. We have delivered about 15 percent plus growth in India and lot of the work that we do here is system integration work which includes bundled offerings of both - software licenses and hardware. That’s normal, typical cyclical behaviour, but the more important metric is the full year figures. If one looks at the full year, geographies like United Kingdom and Latin America have delivered very good growth. The other markets have come in on a very tight band around the company average. So, one needs to look at growth from that perspective and we are fairly broad based.
Q: What are the chances that you will see an improvement in pricing over the next quarter?
Gopinathan: I do neither expect too much improvement in pricing, nor a deterioration, because we are looking at a fairly stable environment. The pricing is in that range.
Q: Would margins improve? Next quarter could we see you exceed that 27 percent somewhat?
Gopinathan: This quarter, we have had two major headwinds; one was a 64 bps hit due to the currency and another was about a 98 bps hit due to one-off cost that we incurred in the US. How the first headwind pans out, we do not know. But the second headwind won’t be there.
Q: So, we will see an improvement in margins?
Gopinathan: We are talking of a revenue base of about Rs 16,500 crore. These are not individual items that if you take one out, the rest of it will go. The way we run our business is that we look at it as a portfolio. So, when we look at pressure coming on one side, we try to compensate for that in some other form. We did about rate and productivity improvement of close to about 90 bps plus in the rest of the business. In the next quarter we will have wage hikes coming in. So, that will bring in its own headwinds and we will need to see how we manage that. It is a moving target and we have got multiple levers.
Q: What is the headwind that is going to come on wages?
Gopinathan: We are giving wage hikes similar to do what we did last year and that range of about 200 bps is likely to be the impact coming from that specific item.
Q: You have laid out the hiring picture for next year and 45,000 is the number that you have put out. Give us a word on that number and what will be its impact on the broader financials as well?
Mukherjee: Last year we did close to 69,700 odd and as far as next year is concerned, we will be hiring 45,000. Out of that, 25,000 trainee offers have already been done in the engineering campuses in India. Usually that happens from September till January and so that is over. The rest will be the number of laterals that we would hire in India.
We will be hiring trainees and laterals overseas. So, all put together it will come to about 45,000. The reason for it being slightly less than what we did last year is, in this quarter we have about 11,000 trainees who joined starting from January to March and as a result they are undergoing training now. They would be available from June or May onwards for deploying into projects. Given all that, we have sufficient number of people.
Secondly, from the point of view of retention level, we are at all-time high, highest in the last 26 quarters, that also has been factored in our manpower planning. Also from the business pipeline and the business mix point of view plus the non-linearity that goes in. If you take all that into account, 45,000 seems good enough to start with.
Q: Will 45 (45,000 employees) versus 69 (69,928 employees) impact financials in a big way? It is reflecting in big difference in costs because of the lower additional hiring.
Gopinathan: If you at the combination of where the growth is and where the overall one is, remember that it’s a long cycle time. You put in your trainees and they have become predictive 6-18 months down the line. So, you have got to see this as a multiyear phenomenon and we are fairly comfortable.
We look at how much we have on the pipe and where it is coming from and where we see the profile of it playing out. We are seeing stable utilisation on a slightly improving base. This is a jointly discussed number that will give us the kind of volume that we want and we are fairly confident about that.
Q: Your utilisation has gone up from 81.7 to a little over 82 or around. How do you plan to improve that in the quarter to come?
Mukherjee: We would definitely like to take it upwards. We have already operated 3.8, which is the highest that we have achieved so far.
Q: How much time does it take to get back to that level?
Mukherjee: It takes time and will not happen immediately. It depends upon the kind of deals that are coming in, the kind of requirements and the kind of confidence that you have. It’s a bit complex.
Q: Is it doable in this financial year?
Mukherjee: Our goal is to improve it beyond 82 percent but to reach 84 percent within one quarter would be a difficult task.
Q: Your attrition has declined consistently over several quarters, you are at an industry beating number. Is that sustainable or do you expect that around these levels, is where you will able to maintain it?
Mukherjee: Attrition is cyclical. For example in Q1, the attrition will go up because number of people, decide to go for higher studies once we complete our performance appraisal and a few others would decide to switch jobs. But at the same time we are making efforts. There are multiple initiatives in place so that our employees remain engaged and we are able to retain the talent and that effort will go on. At this time, it will be very difficult to tell you what the overall attrition would be.
We are comfortable with where we are and would definitely like to improve it further. It also depends on the quality of attrition. There are people that you are losing vis-à-vis the actual overall number. So, we are keeping a constant watch on where we are. We are happy with the results that we have delivered so far and our goal will be to ensure that we do retain the talent needed.
Q: What do you make of some of the headwinds we see in Europe on a macro level and how could that impact the business going out especially in UK where you operate?
Vandrewala: We had an exceptional year right through even when there were double dips, we did extremely well. We obviously have to keep the macro in view.
Q: Can you continue to sustain the good growth?
Vandrewala: We get our optimism from service offerings and our client base. Every discussion that we are having with our clients seems to indicate that we are on track for the growth that we are used to.