Jul 19, 2013 12:59 PM IST | Source: CNBC-TV18

Deal pipeline strong; see stable Q2FY14: TCS

TCS management says it is confident that pricing will remain stable for the next 12 months and the next quarter won't see any decline in realisation.

After posting 16 percent year-on-year rise in net profit in the first quarter of 2014, India's largest software services exporter Tata Consultancy Services is all set take advantage of likely delays in immigration bill and a weaker currency.

Continuation of such financial outperformance will likely help TCS maintain its premium valuations within the sector. Speaking to CNBC-TV18, Rajesh Gopinath, CFO confirmed that the outlook for FY14 is good as the company has a fantastic pipeline of deals. N Chandrasekaran, managing director and chief financial officer; Ajoy Mukherjee, EVP & Global Head-HR, and Phiroz Vandrevala, director, too shared their views on the company's outlook.

The TCS management says it is confident that pricing will remain stable for the next 12 months and the next quarter won't see any decline in realisation. The software company witnessed a decline in the first quarter.

Below is the edited transcript of the panel's discussion to CNBC-TV18.

Q: What do you make of the return of Murthy at Infosys? The reason why I am asking is, because you have seen some pricing pressure this quarter. I know you have maintained in all your commentary since last evening that this is not going to be a continuing trend, yet I am just wondering whether the competitiveness on the field has increased and whether there is some new energy in Infosys that has contributed to it?

Chandrasekaran: With respect to Murthy, I think he is a legend. We have huge respect for him. I think that they are great company.

Q: Are you seeing new energy on the field? Is that part of the reason why you are seeing pricing pressure this quarter?

Chandrasekaran: I would not like to link many things, because it is a very large industry and each company has its segments and each company has its customers. The pricing drop that one saw is more of a realisation drop. It is not really a pricing drop and we had seen a pricing uptick two quarters before. We had cautioned everybody that it is not a pricing uptick but more of a realisation uptick.

Pricing in the last couple of years and also for the next 12 months will be more stable. Realisations will keep going little bit up and down. One of the analysts has correctly written today that we should not try to split between volume and realisations so much, because industry is changing. I would agree with that view. I do not think that one should read too much into pricing with respect to competitive pressures or anything like that.

Q: So when you agree with the analysis that the industry is changing, tell me what your assessment of these changes are that has led to this distortion in realisation?

Chandrasekaran: Realisations change because of multiple reasons.

Q: What has changed this quarter because that is what everybody is interested in knowing why have realisations dropped this quarter and why do you believe that is not going to necessarily be the trend over the next few quarters?

Chandrasekaran: It will not be a trend over the next few quarters because realisation is a phenomenon that happens not only with time. Realisations are also because of distribution of the work force that we put in different locations. So, many factors contribute to that. It cannot be just explained in two sentences. Hence, I have been cautioning that one shouldn’t  read too much into that.

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Q: Why will it not persist?

Chandrasekaran: Because the execution changes and the mix changes. So, let’s say next quarter we have more BPO, then it will look different. If we have more IT services, it will look different.

Q: Is that your expectation that next quarter we will not see a further decline in realisations?

Chandrasekaran: Yes, I don’t think there will be decline in realisations next quarter.

Q: Which is a one of?

Chandrasekaran: Yes.

Q: What do you make of the volume growth? Are you going to be able to sustain that because that has come in far ahead of expectations?

Chandrasekaran: Yes. 6.1 percent is pretty significant. I do not know whether we will sustain that or not, but I think the environment looks good from our point of view. So, we will continue to do well. Does it mean slightly below, slightly ahead, we don’t know. We will have to wait.

Q: You must have some sense based on your order book? I am not asking you for numbers.

Chandrasekaran: We feel that the pipeline or in the environment, everything looks good. So, we will have a better year this year than last year. I would like to stick to that and not say anything more.

Q: You have also said that the first half will be better than the second half, can you explain that?

Chandrasekaran: Typically, the way it works is that the first half in general is better because of many reasons. In Q3, people will get into holiday season and manufacturing companies get into furloughs. The budgeting cycle comes to an end for most of our companies. So, there are many factors that play in Q3.

Similarly, on Q4 which is Q1 for most of our customers, and that's when the new year begins. So, as the budgeting cycle just gets closed, it takes atleast February before the things start to ramp up. Hence, Q3 and Q4 in general are muted quarters compared to Q1 and Q2. It is just a nature of the cycle. I do not see anything changing.

Q: You have bagged two clients in the USD 100 million space. You have put in 10 new large deals in the last quarter. Is this sustainable based on how you are seeing the macro economy evolve?

Chandrasekaran:
Such wins are sustainable; the pipeline continues to be robust. There are two reasons; firstly, technology per se is part of the solution. People are spending a lot of money on technology. Sometimes it is to drive efficiency, sometimes to create new business models.

Secondly, today we are in a different position in terms of scale, footprint, credibility and in terms of what we can offer to the client, very different from what we were a few years ago. So, what we compete today and what we engage with clients today is very different. Both these reasons contribute to the fact that we see more deals in pipeline now than a few years ago. So, these trends in terms of deals wins are sustainable.

Q: The second half outlook for the calendar year has not improved at all, in fact it has deteriorated for several parts of the world including emerging markets (EM) which may not be a very big part of your revenue share. Nonetheless, do you see that having any kind of indirect impact on the way your company progresses?

Chandrasekaran: We will not have a direct correlation. I continue to maintain that and I do not see that changing at all.

Q: Is it not getting that bad that it might start having some bigger impact?

Chandrasekaran: The discretionary spends will always have an impact if the economy continues to do badly. But at the same time discretionary spend is also increasing for the very same reason, because the technologies that are available today are presenting new capabilities and new business models. Therefore, customers are focused on that with a view to drive growth and so, it is kind of two sides. We have to look at it from both angles.

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Q: You have consistently said that India is a volatile market, growth is lumpy, that has been a bit of a drag this last quarter, what is your outlook on the kind of strength you have seen in North America and Continental Europe? Do you see that sustaining over the next couple of quarters and your outlook on India as well?

Chandrasekaran: North America is sustainable. There were three-four data points. First is our numbers for this quarter indicates that North America is doing well. Second, the kind of deal-wins we have had, out of the 10 deals that we announced on Thursday, seven deals were from North America. Then the pipeline that we see in North America across industry segments is very solid.

Q: Are all seven large deals?

Chandrasekaran: We don’t attach particular number for a deal because some deals are signed with a specific number in the contract, some deals are signed without a specific number but we know what the potential is.

Q: Do you think Continental Europe can also sustain?

Chandrasekaran: Continental Europe is quite good. We will do well in Continental Europe and the US. India continues to be very volatile for us.

Q: Telecom has come in as a surprising area and you continue to say it is not a secular option.

Chandrasekaran: I would not yet say that it is sustainable.

Q: What about the discretionary spends, because consulting has done fairly well this quarter? It is a small percentage, but is it just to make the larger point of discretionary spends moving up?

Chandrasekaran: The whole area about discretionary spend is happening because of all the digital technologies. Also, sometimes customers want to go to a new cost space, so they are re-looking at their systems. For example, financial institutions, their trades are coming down, revenues are coming down. So there is lot of pressure in terms of margins.

They are looking at selective areas and then see how do we design new systems to a different cost base? So those kind of deals are happening. But the whole digital experience which is called as different jargons, whether it is big data, whether it is omni-channel, responsive web, there are so many different concepts coming in. This is due to the variety of devices in the marketplace and how do you leverage all these devices from a customer experience point of view. It is all about frontend systems, not the backend systems. The people are driving efficiency on the backend and investing and building frontend systems.

Q: Have you been able to put potential revenue figures to the size of the mobile market, the social media market, things that are nascent growth areas?

Chandrasekaran: We have some numbers. We will earn in billions.

Q: What kind of upside will they provide to your earnings over the next year or two?

Chandrasekaran: Nothing can be said as of now.

Q: Have you been able to quantify the impact of the Immigration Bill, because that is continuing to be an overhang?

Chandrasekaran: We have lot of scenarios, but we have not fixed yet, because we still do not know how the final version will look like.

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Q: Give me a sense of what the pricing prospects are going forward? In your view, why we might not see this decline in realisations continue over the next few quarters?

Gopinath: If you look back at last few quarters, you would find that the realisation number is a bit of a volatile number so if you go back to last quarter, it was flattish, quarter before that it was an uptick of about almost the same amount.

Q: You have done some good work on expenses this last quarter? That has helped contribute to your margins because otherwise you would have seen a decline in margins but you got saved by some reigning-in of expenses and the currency?

Gopinath: Let me not take credit there because this quarter we have had two benefits; the currency benefit is there and we have got almost 90 basis point positive impact because there were some one-off expenses in last quarter, which did not appear here.

So adjusted for currency, we are down about 50 basis points. With currency, we are up 50 basis points.

Q: Adjusted for currency, you would have actually seen margins at status-quo, right?

Gopinath: At status quo or slightly lower.

Q: So what is the outlook on margins here onwards?

Gopinath: We are comfortable in the current range that we are in so we have set ourselves at 26-28% kind of a range.

Q: And you will stay within that including in the second half of the year?

Gopinath: For the current year, we believe that that range of 26-28% is a comfortable range for us.

Q: Going back to my previous question on whether you have reigned in expenses - so you have done some work on the cost side?

Gopinath: Like to like basis yes but there was that one-off thing that did not appear.

Q: The ALTI consolidation comes in next quarter?

Gopinath: We did the transaction on June 28, and on June 30 our balance sheet reflects the consolidation. But the profit and loss (P&L) consolidation will happen from July 1 onwards.

Q: What change should we expect?

Gopinath: It was about 125 million euro kind of a business. So, approximately on that basis you should see a contribution. It will be a bit of quarterly variation and in that range. So that will be approximately in the range of about 30 million or so, for the next quarter.

Q: What do you think or see as headwinds over the next few quarters? How confident are you of being able to sustain this performance?

Gopinath: We believe that currently the trajectory that we are on is fairly defensible both from the demand side as well as from the expense side.

So, our medium term kind of a strategy is fairly stable and we are comfortable on our outlook on that; no significant headwinds nor any significant tailwinds. Which side it breaks? Does it breakout or breakdown is what we need to watch out for.

Q: Why haven’t you all quantified the potential impact of the immigration bill as yet?

Gopinath: It’s a fairly complex piece of legislation and multiple moving parts on it and multiple impact points on it. Where we are coming from is that it would not be prudent to at this stage try to fast forward, create a scenario and then try to quantify it because the quantification will depend on how you create the scenario.

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Q: But you must have done some rough working. Phiroz Vandrevala I see you are keen to respond on this.

Vandrevala: We are as privy to the information as much as you are and everybody in the rest of the world. We have no special insight into what’s going on.

Q: But you have insights as to how it will impact your business

Vandrevala: So clearly different scenarios have been planned.

Q: Can you give me some illustration of what the likely impact would be? In what range?

Vandrevala: The important thing to understand is our clients because at the end of the day, we are servicing clients that are Global Fortune 500 corporations. They are also as much aware of this issue as we are. So if there has to be a change in the business mix or the business model. It will be done in collaboration with our clients. It is not going to be unilateral.

Q: It still doesn’t help me understand really what impact the company will see if this goes through as currently considered?

Vandrevala: You don’t know what is going to happen so how do you quantify an impact.

Q: I suspect you have done some modelling on this but you are not ready to share it.

Vandrevala: It is like there is going to be an earthquake, you built a building that is earthquake proof, you take steps. If there is a tsunami warning you take steps but till it happens you don’t know what the impact will be.

Mukherjee: It is very difficult to quantify because from the point of view of what is on site, what is local. So there are a lot of definitions that are pretty much difficult at this point in time.

Q: But must have some worst case scenario.

Mukherjee: Worst case scenario or best case scenario, we can do something but if you come out with that definition - that will give you a wrong impression or a wrong idea. So at this stage it is very difficult to come up with a quantified number. We can talk subjectively - that is something that we can do but if numbers were attached… Interrupted

Q: Give me a subjective analysis of how bad it could be?

Mukherjee: How bad it could be again depends on what shape it takes. At this stage, currently what has been passed through the scenic, it is something that is going to have an impact - that I think we have problem. But that is not the final bill. Once final bill comes out, we will know what impact it has. We will definitely talk about it.

Q: Let’s talk about weaker employee additions that we have seen in the last quarter. Take us through what your thought process on that is and the subsequent quarters?

Mukherjee: When we started the year, we said we will be adding about 45,000 gross and we are maintaining that. As far as our quarterly additions are concerned, it is cyclical. Quarter one, we have most of the hiring as laterals because the trainees that start coming in from mid-June onwards because that’s the time when they are available after completing their engineering curriculum. This year, what we are doing is most of the trainees start coming in from July 1 which is from quarter two onwards. As a result, your number is less because normally your trainee percentage in a quarter is much higher than the lateral percentage.

So that is the reason why the number is 10,000. Last year probably we were about 12,000 because we had about 2,500 trainees who joined us in Q1. So that’s primarily the reason. From the net addition point of view, it is about 1,390. That is because of our quarterly attrition which is the number of people that we lose in this quarter is again cyclical which is higher. If I look at my last 12 months attrition, that is the lowest in the last 27 quarters. It is about 10.5 but the number I lose in this quarter - that is higher because people leave for higher studies, this is the time when we complete our annual appraisal so there are a few who decide that. They would like to leave. So that is what plays out in quarter one. That is the reason why net is lower. But as far as the full year is concerned, we are maintaining 45,000.

Q: I also wanted to talk about the improvement in employee utilisation despite weak additions or complementing weak additions. The last time we spoke, I think you indicated that the highest utilisation you have seen is 83.8 and in your analyst calls between last evening and this morning, you said you might actually in fact go all the way up to 85. I am just curious to know by when you intend to achieve that number? Your utilisation has grown faster than expected because you didn’t sound so confident about moving utilisation up this high this quickly.

Mukherjee: We have improved about 50 basis points. We were at 82.2; we have taken it to 82.7 at this point in time. If I look at including trainees that has again gone up by 20-30 basis points so we are at 72.5. But there is a caveat. Going forward we have trainees who come in. As a result, utilisation including trainees will be very difficult but at the same time our goal is to keep that utilisation level consistently high because otherwise it is going to have an impact… Interrupted

Q: When do you get 85?

Mukherjee: That is something that is what we are internally targeting.

Q: Couple of quarters?

Mukherjee: It’s a stretched target. We would definitely try to achieve that, maybe a couple of quarters, maybe three quarters down the road we should be excluding trainees. We are trying to see where they can go. It is about 85.

Q: I have time for quick outlook from you Phiroz Vandrevala on the areas of strength that you see from across the world in terms of geographies and North America, Continental Europe have been very good. What is your assessment of those being able to do so?

Vandrevala: Based on what we have seen in this quarter, based on the pipeline, based on our outlook, we expect every industry vertical and every geography to be robust through this fiscal.

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