Its total income from operations for the fourth quarter was Rs 13,259.3 crore, up 30.5% from a year ago and up 0.5% quarter-on-quarter.
In an interview to CNBC-TV18, the company's management including, N Chandrasekaran, chief executive officer and managing director, S Mahalingam, chief financial officer, Ajoy Mukerjee, VP and head-global HR and Phiroz Vandrevala, executive director, TCS and managing director of Diligenta, speak about the Q4 numbers and give their outlook going forward.
The management is confident to beat National Association of Software and Services Companies' (NASSCOM's) guidance of 11-14% in FY13. "We are confident to beat top-end of NASSCOM's guidance of 14% in FY13. Q1FY13 is likely to be a normal quarter," says Chandrasekaran.
The management expects broad based growth across verticals in FY13."We are more confident going into Q1FY13 than when we went into Q4FY12."
Projects and pricing
On a very positive note, the management elaborated that projects have been ramped up in the last fiscal and spends are likely to gather steam in second half of the year. The company is expecting several project to kick-start by next month. However, there are uncertain clouds overhang as global crisis is affecting its spends too. Therefore, the IT major is not hoping any significant pricing improvement this year.
Its spends in insurance sector is beginning to pick up while major deals are expected in manufacturing and media sector.
Below is the edited transcript of the interview. Also watch the accompanying videos.
Q: Do you think NASSCOM's guidance is okay 11-14% and TCS like in the past can meet that or do better?
Chandrasekaran: TCS can do better than the NASSCOM guidance, I feel confident today.
Q: There is no reason to doubt that 11-14% guidance from your perspective, right?
Chandrasekaran: The NASSCOM guidance is of 11-14%. That's a holistic view that they provide. But we always measure ourselves where we can perform better than the industry average. Where we are today, we feel confident that we will do better than that.
Q: You in the past have always done better than the top-end of the NASSCOM’s guidance, so more than 14% and without talking about number guidance?
Chandrasekaran: Sure that is what I mean.
Q: How do you feel about FY13 compared to FY12? If you were to just talk from your advantage point, is it going to be a normal year like you had in FY12, 23% volume growth during the year or is there anyway to liken it it’s slightly differently?
Chandrasekaran: I won’t put a number. But going into Q1 I feel much better than what I felt going into Q4.
Q: What has changed?
Chandrasekaran: I was feeling a lot of softness in the discretionary spend. I had commented in the January that the discretionary spend is likely to pick-up momentum only a bit later. I think it is beginning to happen. It’s eased. We are seeing the projects kicking off. We are seeing the ramp ups.
We are not seeing any particular client or set of clients or an industry or a market which is going through a specific problem. So, I think its broad based growth. We are doing very well across verticals, especially if you look at telecom, manufacturing, hi-tech retail, these are very important verticals which are nicely growing in the last couple of years.
Telecom had a tough year last couple of year. I think we have come off that. We have had very good deal signings in telecom. So, if you look at all those verticals are going to do well, in addition to financial services which I think is going to grow from where we are.
Q: What caused the cautious tone in Q4?
Chandrasekaran: It’s just a discretionary spend.
Q: Few clients which gave you negative feedback?
Chandrasekaran: Across the board, the discretionary spend, the projects were not starting on time. You were hearing that’s going to start next week, next month etc, but it was getting delayed. So, it’s better to express concern.
Q: So, Q1 is going to be a normal quarter?
Chandrasekaran: I think so.
Q: This easing off of discretionary, is it across geographies like US and Europe and across in your all of the verticals?
Q: BFSI included because that’s been a problem area for some of your peers?
Chandrasekaran: BFSI included. Infact in insurance, we are seeing some good developmental spend happening now.
Q: What is the problem with BFSI? Is it that TCS is winning market shares versus others? We are hearing very disparate things from the top companies in the space, some believe there is a problem, you are saying there is no problem.
Chandrasekaran: There is no doubt that the banks around the world are going through difficulties in their own businesses, in terms of liquidity, in terms of meeting the regulatory norms in the new world etc. All those things are true. But having said that, they are continuing to depend on technology. The spend, from a technology point of view, is happening, but happening in different areas in different companies. Some companies or banks or institution companies are going for a transformational initiative. But many of them are definitely going in for optimisation where they have to get it really optimised so that they can get more or less.
Q: What about pricing, that remains quite sluggish?
Chandrasekaran: I think in this environment you should be happy, if you are not dropping price. Last year, I said that it’s going to be more or less flattish. We had a 1.3% pricing improvement on year-on-year basis FY11 to FY12. I would put up FY12-FY13 on similar lines.
Q: So start with by predicting flat prices?
Chandrasekaran: Yes, start with predict flat pricing. And then try and see whether we can get good pricing improvement, especially in two areas; on niche high end areas, second is nonlinear. So, we got to get the pricing improvement not on basic services, but on differentiated offerings and on nonlinear services. That’s the way to get the pricing increase.
Q: Revenue market shares have changed around a bit in this year. Are you seeing a lot of churn in the new orders which are coming up from your large clients, has that been the experience in FY12?
Chandrasekaran: Whenever consolidation happens, definitely there are going to be some people who lose. But TCS matrix, if you look at it, we have done very well on traction with our portfolio customers where its million dollars. If you look at the band, I think we have done exceedingly well last year.
Q: North America has also been up and down, but you are coming with a strong 3% growth in the quarter. Are things all okay in the US?
Chandrasekaran: Yes, North America is good. I think North America and Europe and UK are going to do well for us in FY13 because of the order book that we have and because of the client penetration we have in these markets. I think they will do well. I will focus on also the other markets which have been volatile for us because of the smaller base. We need to get that momentum going in those markets so that we have a steady growth.
Q: When you talk about FY13 being a normal year, are you saying growth is evenly spread out during the course of the year across quarters and not being second half better visibility than first half and things like that?
Chandrasekaran: Yes, I don’t think that you can say that it is going to be a backended growth from atleast TCS’ point of view. We think we are going to be following the usual pattern. I think typically we have decent performance in Q1-Q2 then followed by Q3 which is a soft quarter. Q4 again depending upon where we are at the end of this calendar year, what budgets get approved, whether they get discretionary projects start on time.
I think typically December quarter, due to the holiday season and the plant shutdowns, usually sees some softness. In the March quarter, you will see softness because of the discretionary spend, unless otherwise everyone is bullish in December. Definitely, there will be softness. So, I think Q1-Q2 is likely to be better than Q3-Q4. It’s business as usual.
Q: So, there is no reason to believe FY13 despite all the global volatility in terms of news flow is any different in terms of your operating environment, right?
Chandrasekaran: We are talking less and less about the macro uncertainty because it’s been going on for three-four years now. It’s going to go on for next couple of years. See what has happened in Europe, the negative news yesterday, but we are not sitting and discussing. We are getting used to the fact that it’s going to take a while for the macro to stabilise. So, people are focused on business. People are focused on how they can optimise, how they can grow and technology is going to be an enabler. I think it’s going to be normal.
Q: How’s the big deal landscape now? What’s been the experience in the quarter? What do you see in terms of USD 50-100 million kind of deals?
Chandrasekaran: There were quite a number of deals. It’s quite good.
Q: Where does it coming from? Which kind of verticals typically?
Chandrasekaran: This quarter itself we have seen deals from banking, insurance, telecom and retail. I think these sectors and manufacturing and media are some of the sectors in which we expect deals.
Q: What’s your big worry for FY13? You are sounding confident about the year, but if there is something at the back of your mind where you are feeling slightly uncertain, what would it be?
Chandrasekaran: I think it’s usual. If something very dramatic happens, but I don’t know what it is, that can happen any year, so I am not going to put that as a major concern. I think we got to execute because our scale is pretty large. Even last year to capture volume of about 23% and fulfilling and delivering that on our base is pretty challenging, especially considering the current visa situations etc. So, detailed planning is required, a lot of rigger is required. How are we going to start projects? Those are some of the operational things that teams will definitely focus on. From my point of view, I think the big attention will be on getting some of our non-linear stuff to work.
Q: Did you internally debate a lot, the 6-8% salary growth that you have thought about for the year? One of your large peers has said no wage hike for the moment. Did you consider that? It’s the same market that you hire from?
Chandrasekaran: We always consider. Actually our hike is 8% average. So, it’s 6-10%. All the top performers will get 10% and somebody get 9%, somebody get 8% and somebody get 6%. Normally, we go through the planning cycle except that we didn’t debate much. But we were thinking between 7-8-9% and finally stopped to 8%.
Q: But it was never a zero, right?
Chandrasekaran: No, it was not in the equation at all.
Q: What inputs went into determining that you need to do an 8% average wage hike?
Mukerjee: There are different factors that we consider. One is our performance, second is what is the kind of outlook that we have from a business point of view and we can manage our margins; third is inflation that we have been having in different parts. So, taking all these into account and then the overall headcount that we want to grow, so overall from a business angle, from the inflation point of view, from a reward point of view, we have crossed ten billion. There is an achievement. So, there is an expectation. I think our people deserve that so with that these are the factors that we consider to arrive at the increment numbers.
Q: There has been some slippage in margins, are you confident looking forward with flat pricing, wage hikes kicking in that you will be able to hold this kind of EBIT margins?
Mahalingam: This year, if you take the first six months, the rupee was at an appreciated position. It started depreciating later and depreciating very fast in an accelerated fashion. Therefore, as we saw the gains coming from the rupee, we decided to invest in creating more capacity. That is the reason towards the end of the year the utilisation dropped. That is why we are entering the next year. So, I would say that if we had managed with just the orientation towards margin, we would have done better from a margin perspective.
But as we are going along and this 50,000 mark that is we have, we will have to see how that attrition plays out and so on. We think that we will be in a position to manage the margins, as far as this year is concerned. We definitely don't expect any pricing improvement. If it comes in, that will be an added one. We definitely want the selling, general and administrative (SG&A) leverage to be good because the current selling spend should result in higher revenue.
The third is that some of the initiatives that we have taken should pay off. So, all these things put together will make up for the increments and the additional cost that comes out of it.
Q: What is your biggest challenge for the margin outlook in FY13? Is it still the volatility in the currency or do you expect any other significant headwinds which can dent EBIT margins below 27%?
Mahalingam: As far as currency is concerned, it’s very difficult to predict because when we were seeing 54 and then it breached 49 and came down in the last quarter. So, I think we will have to leave out that currency. Yesterday’s, at analyst call, I said around 48 we should be in a position to handle that. If rupee depreciates more then there is an advantage. We will see what we have to do with that additional amount.
The margin issue is in terms of how well we are able to get the productivity out of people. Utilisation is one factor, but at the same time we have to ensure that the contribution that comes from each project is at the desired level. There are no leakages. Last year, we dealt with 2.89% negative impact that was coming as a result of the wage hikes and promotions. That was what had to be nullified over the course of the year and so on. So, it’s going to be less than 2.89% because the increment is lower. But even it’s going to be over 2% and that’s something that we have to essentially overcome.
Q: What’s going on with the NASSCOM guidance versus what you guys are saying because it’s 11-14% and companies are all over the place around that guidance with what they can achieve during the year and you are saying 14% plus?
Vandrevala: The NASSCOM guidance is a function of the membership of NASSCOM. It has multinational companies, it has captives, it has people like us and then the smaller and medium companies. So, it’s an average medium because if you look at things like captives and all maybe they won’t grow at that level.
You would expect that since it’s a combination of these kinds of factors, that the bigger players would grow higher than the industry estimate. That has traditionally been the result, if you look at the result over the last ten years, traditionally the bigger players have grown higher than the industry average or the guidance that’s given by NASSCOM. We don’t see that changing.
Q: That’s why I am asking you the question because the second largest player is saying they will grow 8-10%?
Vandrevala: It’s not possible for me to comment on what the second largest player is saying. But traditionally that has been the case. We see nothing in our pipeline, nothing on the horizon that should change the way that it has traditionally worked. That is why we still believe that we will come in higher than the NASSCOM guidance.
Q: Utilisation has dropped off in the current quarter. Is there any reason to believe that you will work at lower utilization levels because that has margin implications?
Mukerjee: No. This year towards the end, yes. Fourth quarter, it dropped to 80.6% excluding trainees. But if you look at my whole utilisation for the whole year, we are at 82.2%. So, we have been hiring in advance as far as Q4 is concerned.
Similarly, utilisation including trainees dipped to 71.4% because we have a number of trainees who also joined in Q4. So that’s the kind of capacity that we have created for going forward. That is one of the reasons why we have said that 50,000 is our total hiring, gross addition as far as next year is concerned because we have taken into account the capacity that we have created. Going forward, the utilisation should definitely improve.
Q: What are you building-in in terms of utilisation or therefore your margin outlook?
Mahalingam: It will be anywhere between 80-82% because as Ajoy said that when hits 82% that’s when we start looking at whether we have to get more employees in over and above this 50,000 that we talked about. It’s a matter of each quarter. In Q2, Q3 and so on, our attempt will be to take it up and so on. Thereafter, the utilisation rate will drop. So, this range of 80-82% is what we have factored in.
Q: Talk to us a little bit more about the point that Chandra was making that you had a little bit of an uncertain phase in the quarter gone where you felt that discretionary might be choking up and then again you are beginning to feel more confident. What is it? Are you saying that ramp ups have started again?
Vandrevala: That is largely in connection with discretionary spend. The way most of the traditional businesses operate is that the year ends on December 31, so the new budgets get allocated in January. What we found that even though people had budgets, because of the uncertain economic environment, especially in BFSI with all that is going on, the ability for that organisation to say and have the confidence that this budget that I have for the year let me go and now press the button and start to spend took a little longer. So, what you would have started spending in January because of the uncertainty you still sort of waited, watched. And then from February, March, especially from March onwards, we are seeing that there has been no real scale back on the budgets. What people anticipate to spend this year they are now going full on to spend it. I think that’s what made the difference in our numbers when we look at March and the optimism going forward.
Q: What’s the mood in the organisation now because when you travel to various companies you get a sense, some people are saying it’s a challenging year for all of us. You have to buckle down. But your body language all seems to be suggesting that it’s business as usual, nothing to get overwrought about.
Vandrevala: There is nothing we can do in terms of controlling the macro environment. What is happening globally like? Europe one day is good, one day is bad. America is growing, not growing. Those are issues we can’t possibly deal with. We obviously have to watch those. Our team tracks that on an ongoing basis.
But based on our own pipeline, our own business model, things look good. All we need to keep saying is that we need to be cautious about that environment, but if things are looking good for us, there is reason for the whole organisation to feel good about it.