In an interview to CNBC-TV18, Rajesh Gopinathan, CEO & MD, NG Subramaniam, COO, V Ramakrishnan, CFO and Ajoyendra Mukerjee, Executive VP & Head-Global HR of Tata Consultancy Services (TCS) spoke about the results and their outlook for the company.
We are finding that the customers are much more specific about the projects that they are speaking about and they are working towards a strategy, a plan, said Gopinathan.
Diligenta will start growing here onwards, the pipeline still continues to be good for Diligenta, he added.
It is difficult to call the timeframe but directionally we definitely see optimism returning, he further mentioned.
NG Subramaniam said demand environment remains stable. The way we have structured ourselves now, we are able to more positively participate in some of the digital initiatives and our digital services growth is a direct result of some of those initiatives that we have taken.
Below is the verbatim transcript of the interview.
Q: You said yesterday that there is "measured optimism returning around clients", is the measured aspect expected to go away anytime soon, are you saying that with Q2, the upward trajectory of growth has now returned and the tempered growth that we have seen over the last two quarters is at least now behind you?
Gopinathan: What we want to share is that as we have been speaking to customers and some of these verticals that have gone through tough times, we are finding that they are much more specific about the projects that they are speaking about and more importantly rather than just have multiple projects to test out, they are working towards a strategy, working to a plan. We had shared with you aspects that we are seeing in retail where there is an emergence of strategy on how to counter the e-commerce play and early success from the leading ones and that is probably something that we expect more and more investment to collate around. So that is one of the reasons why we feel there is optimism around.
Q: Is the upward growth trajectory that you have been seeing, which has stopped by Q4, is that back?
Gopinathan: Think about it this way, if you take line item by line item of the weaknesses that were there. We used to call out Diligenta as a weakness and we had shared a few quarters back that we are seeing the pipeline build up and we have started seeing the pipeline conversion. So, Diligenta will flatline and start growing from here onwards. The pipeline still continues to be good for Diligenta.
Japan we had called out as a weakness and there also we have seen return to growth. We had spoken about Banking, Financial services and Insurance (BFSI) in retail, insurance as an overall sector but the fact of the matter is that these are large percentages of our overall pipe and therefore we need to see substantial improvement for it to start making an immediate impact.
So it is difficult to call the timeframe but directionally we definitely see optimism returning.
Q: If you compare to Q4 of last fiscal, are there early signs of a demand revival very clearly now at least starting to show?
Subramaniam: Demand environment remains stable. The demand for IT services certainly looking alright.
Q: Since Q4 of last fiscal, has there been any change or marginal uptick that you are seeing in the deal pipeline?
Subramaniam: It is about six months since we took over and within 30 days Rajesh Gopinathan put together a strategy and initiatives in terms of being more relevant to our clients whether it is location-independent agile, our new service lines and all. Because of all that, the way we have structured ourselves now, we are able to more positively participate in some of the digital initiatives and our digital services growth 5.7 percent quarter-on-quarter (QoQ) is a direct result of some of those initiatives that we have taken.
Overall I would say we are in a position to participate a lot more in digital services and that should do well for us.
Q: Given the fact that Q2 is steep, typically a seasonally weakish quarter for attrition and utilisation. There is a sense that there is a case for utilisation uptick. By how much can you increase that and what is the impact thereby on margins which V Ramakrishnan can answer.
Mukerjee: Let's address the attrition question first, during Q1 and Q2 time attrition generally is high and Q3 and Q4 attrition tends to come down. The reasons are multiple. One, we end our appraisal cycle at the end of the year, so that causes certain amount of churn and at the same time when you look at people who are going for higher studies and things like that, those are the factors that causes attrition to go up during Q1 and Q2 timeframe and slowly it starts coming down.
As far as for us this particular quarter is concerned, we are happy with the kind of retention that we have been able to achieve and there are multiple factors which are helping us retain our employees. One is the kind of growth that we are having overall within the industry itself then the kind of opportunity that people get to work on various technologies and the whole training for that we have taken and rescaling our employees so that they are ready for the digital world. From an utilisation point of view, if you look at, it has been more of how well we are able to, how tightly we are able to manage our operations and we are hiring as per our requirements and it is not that we are not hiring in advance; we are also hiring in advance, for example the whole campus hiring etc, is going on but more and more focus is on rescaling, retraining our people, so that we are able to minimise that between one project to the other project, what is the timeframe that one spends without getting into other engagements. So those things, we are able to minimise. So attrition is down, utilisation is continuously improving and that is one of the factors that are helping the margin as well.
Q: Is there a case for a further increase in utilisation by next two quarters?
Mukerjee: We have always maintained that utilisation is something for a large organisation when your base becomes very large like what we are today. At that point in time let's not talk about percentages, it is more of the total number of people that you need on various investments that you want to make. So if margins go up, as we have said, in that case we will look at what is the kind of investments that we have to take for our future and that will go up. So there is a case for utilisation to definitely improve where we are and then ask me whether that is going to help me improve the margins beyond a certain range that we talked about.
Q: Would that improve margins. If there is a case for utilisation increase and typically Q3, Q4 you do see 1-2 percent of increase. In that case will that increase your margin trajectory?
Ramakrishnan: Utilisation theoretically has direct relationship to margins but utilisations; we are at fairly high levels, so this will be marginal improvement in utilisation because there is also a construct around how the projects have been delivered etc. It will have an effect but that is not the only reason. Of course, areas like automation etc will bring in some -- the more important is from a margin perspective growth is one; to get to higher growth in some of the sectors which have been muted over the last one year or so both in BFSI and retail. Second, as we continue to increase on our digital technologies and the offerings and that business has got quite significant opportunities across the segments and the third more important is to unlock the value which we have created in some of the platforms and where we have been seeing traction whether it is in our cognitive learning or in the retail space, in the telecom space. So some of these are in the analytics or internet of things (IoT), so all these platforms which we have created and where we are getting the referenceability, where we are getting more and more used cases. So these are investments which have been made. So all this will add to that. Utilisation yes, that is always a factor which aids margins.For entire interview, watch accompanying videos.