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Jan 12, 2018 04:35 PM IST | Source: CNBC-TV18

Digital deals will help improve margin: TCS

In an interview with CNBC-TV18, V Ramakrishnan, CFO, Ajoyendra Mukherjee, EVP & Head of Global Human Resources, Rajesh Gopinathan, Managing Director and CEO, and N Ganapathy Subramaniam Executive Director and Chief Operating Officer at Tata Consultancy Services (TCS) spoke about the results and their outlook for the company.

CNBC TV18 @moneycontrolcom

In an interview with CNBC-TV18, V Ramakrishnan, CFO, Ajoyendra Mukherjee, EVP & Head of Global Human Resources, Rajesh Gopinathan, MD & CEO and N Ganapathy Subramaniam ED & Chief Operating Officer at Tata Consultancy Services (TCS) spoke about the results and their outlook for the company.

Below is the verbatim transcript of the interview:

Q: Talking about margins, you said yesterday that we fixate on 26-28 percent band. The fact is that that you have that aspiration. The fact again is that next quarter is going to be a seasonally weak quarter, so can we say that it is only by FY19 mid that you will be able to perhaps come towards the target range?

Ramakrishnan: I think rather than looking at it quarter-on-quarter (QoQ), look at things which are happening. For instance, to talk of client matrix; consistently across the bands there has been significant movement. What it does is, if you do that deep client mining, it gives you economies of scale. Look at attrition for instance, consistently it has been either trending down or at a very steady level. So typically if you have a lot of churn, it adds to cost. So there are so many areas on which we work on to make sure that we have the most optimum results. So rather than looking at it on QoQ basis - that is what I meant that while we are very focused on margin and especially with all our business teams across the organisation, there is a clear focus on this area and look at all elements, right from what you realise as well as from what you spent. So that is what has to be understood.

Q: The market wants to get a sense of what levers you have right now. For instance, I was reading a report just a few hours ago, one of the reports says that other than the improvement in the revenue mix aided by digital, we see limited margin levers ahead, how would you respond to that?

Ramakrishnan: All the investments, which we have made in the training etc, all these margins – we have to see it also on the back of the investments, which we have been steadily making.

Mukherjee: If I may add to that, if you look at the kind of digital deals that we are doing – that is one that will help on the overall margin side and also the automation story that is playing out, we talked about the Ignio deals, the number of large transformation deals where Ignio is also embedded into these deals and once that scales up, that is one of the good levers for margins. So there is sufficient lever available.

Q: But digital is the biggest?

Ramakrishnan: Digital, automation and as the sizes of the deals go up as has already we have demonstrated.

Q: But the concern is that while yes I agree it has started coming in, you have shown numbers directly, you have just signed the deal with Transamerica for USD 2 billion, I agree with that, but the fact is that it is still just about one or two deals that are coming in, to actually flow into numbers how much longer would it take?

Ramakrishnan: We should look at, if you take the different sectors, we have seen the steady growth in each of the sectors. I mean energy resources which is growing at on year-on-year (YoY) basis close to about 30 percent or travel transport or healthcare, lifesciences.

Q: But they are smaller comparatively, right?

Ramakrishnan: Each one of them are becoming of significant size. So, on a quarterly run rate itself, they are all becoming of good size. So, they are no longer small. So, one has to look at the portfolio of what we have and are we able to make that difference across segments. So, yes, there has been, in the banking sector everybody knows and especially in the US market there has been a slowdown in the last 15-18 months. So, that has shown up. Retail will now show up.

So I think the way to look at it is digital is across these segments and that is where we have been growing significantly and that is on the back of very significant partnerships which we have, the amount of understanding of the customers environment, technology as well as training, retooling which is happening. So, that will be one of the levers. So it is difficult to break it down but I am just giving you some examples to say that we have been continuous working on that and I think we need to be appreciative of that.

Q: I am going to ask about re-training bit because that is significant but in this quarter we were not expecting much by way of margin expansion. It was supposed to be a seasonally weakfish quarter but is operationally speaking has Banking and Financial Services (BFS) been the biggest pressure point? If not then what are the other Rest-of-the-World (RoW) for instance, North America for instance has also been muted?

Ramakrishnan: ROW has actually, we have always said that that is to basically, and it is also the non-typical revenue profile. So, it is always little bit of a yo-yo would be there in that. BFS yes we have said that.

Q: Operationally speaking that is the biggest pressure point this time to margins?

Ramakrishnan: Pressure point I don't know whether we can define that there was a specific pressure point, because we did of course obviously with a growth of just over 1.3 percent. So you can only drive so much; fortunately there was no exchange impact this quarter.

Q: Since Q4 is also going to be a seasonally weak quarter, what is the outlook, is Q4 also expected to be towards a similar range as far as margin is concerned or are you seeing some more upside to expanding in Q4 itself?

Ramakrishnan: I don’t want to give any specific guidance but two things, across other segments we are seeing momentum very clearly. Retail I think we will see the uptick. BFS, probably couple of more quarters or so we will see some growth in that area. However, other levers, other aspects of the organisation, we do not see any specific headwind from an operational perspective.

Q: But in next quarter given the fact that the seasonal weakness will continue, will it be on a similar range as it was this quarter?

Ramakrishnan: I would believe we should be aiming for higher and we will work for that.

Q: The other point which has been impacting margins and numbers is the onsite-offsite mix. You have significantly started increasing your local hiring. I don’t know if I got the numbers right, you have hired almost 9,000 in this fiscal till date from outside India. With this, the cost pressure has of course increased. What is the target that you are looking at for closing the fiscal and how are you managing the cost increase right now? We have spoken about this at length earlier, but if you can give us specifics on what is the plan as you end the fiscal?

Mukherjee: You are right as far as this nine months is concerned. In this fiscal we have hired about 39,000, close to 40,000 and out of that 9,000 odd are in overseas market. However, overseas market also if you look at, there are different characteristics of it. So all of them are not high cost.

Q: It is largely US, what about Australia?

Mukherjee: No there is US, there will be a lot of hiring if you look at it from Asia-Pacific (Apac) point of view, China we have a large delivery center. For example, Latin America, more than 90 percent of our workforce there is local. However, at the same time you are right, we have been hiring higher in US itself and that has been a stated strategy over a period of time that yes this is the way we are going and the cost impact of that is built-in in our overall business plan itself.

The way the whole business is transforming, I think we do need that local talent and we have created our delivery centers locally, we have been hiring from the universities and we have been doing that. Growing talent locally is something that we have been after and some of the programs that we are running in terms of our CSR activities which is goIT which is the whole of Ignite My Future which is getting into kids in the school itself so that they are prepared towards IT. So all that is in the same direction.

Q: Interesting set of numbers, yes. Most of your pain points, as you were pointing out yesterday have gone, be it Japan, be it Diligenta over the last one year. And now, retail as well. The biggest pain point that is left is BFSI. Even then, is that enough for you to still remain cautious? You do not seem as confident about the demand outlook as you would have hoped, given the fact that most of your pain points are gone.

Gopinathan: One of the reasons we got a bit delayed was we stopped to pick up USD 2 billion, entire year's insurance sector. So, quite frankly, we are very excited about that new partnership we have announced with TransAmerica. In many ways, it is transformative for the customer because we will be actually aiding them in a complete growth and transformation agenda. We will be moving them into the next level from a digital transformational journey and we are very excited and thankful to them for partnering with us in that. It is transformative for TCS also. This will expand our total policies under administration on the TCS banks, life and pensions platform by 60 percent. So, even more importantly, this will be the largest bill that TCS has every signed. So beating Neilsen by a good margin and it lands our life and pension platform into our most important segment, the US market.

Q: Any uncertainty towards insurance with this would be gone?

Gopinathan: I think so. This combined with the one that we had spoken about with Scottish Widows completely redefines the next wave of transformation in insurance. And even more importantly, what it showcases is the ability to take digital and combine that with deep intellectual knowledge, the intellectual property that we have built with banks. Combine that with our domain expertise, combine that with the contextual knowledge that we have developed over time and then stitch it together into a very unique proposition so that we are creating deals that are way ahead of where the industry is.

Q: Second USD 2 billion plus deal signed. Is this the return of large deals? Are we going to see this in the next few quarters as well?

Swaminathan: We always said that there is a strong pipeline of large deals that we are working on.

Q: There is, even now, within digital?

Swaminathan: Absolutely. Not only digital because if you take deals such as TransAmerica, the entire capabilities of TCS will come into play. It is just not only the backend of policy administration. All the client servicing, self-servicing, all that will be through the digital capability. So we have invested heavily on the TCS platform, building a number of digital capabilities for the front and a solid straight through and intelligence led straight through processing in the back end. That is clearly the differentiator which convinced TransAmerica to do this, not only the closed book, but also the new books which are going to come. So large deals are in the offing.

Q: The fact is Q4 is going to be seasonally weak. Will FY19 be the year, keeping BFSI in mind, where the growth accelerator will be back?

Gopinathan: If you look at individual segments, we are seeing significant acceleration across many of our segments. Most importantly, retail which has been an underperformer in FY18 has strongly rebounded and not just rebounded on a single bounce, but we think that it is now on a trajectory that will delivery double digit growth in FY19. And once again, on retail, it is showcasing our ability to actually make digital work for large customers. Some of our key clients like Home Depot and Best Buy have ended that holiday season very high. Similar, if you look at life sciences, that is on a very strong path.

Our energy and resources practices, and we have always spoken about it over the last 2-3 years as there was weakness in that industry, saying that that is actually an opportunity for TCS to leverage its unique capabilities. And that investment and patience in building that is now showing through in that whole segment getting to a run rate of UD 1 billion and growing at more than 25 percent. Similarly, travel and hospitality space, that is again growing. So if you look at it segment by segment, we are seeing strong growth return.

Regional markets also, even the smaller ones like Japan which was on a declining trajectory has now moved into an increasing trajectory, single digit growth rates yet, but with increasing momentum. We are seeing France deliver at close to double digit and probably will exceed double digit. So we are very optimistic about being the portfolio that we have and the way we are looking at it. So the way I would put it is that our median is tracking way above our average. So we have isolated problems to fix which we are systematically going after and this move in the platform space in the US BFSI industry is a phenomenally important one for us because that has been an untapped segment for us. Landing the platform in US actually positions us to participate and to redefine where that industry is and to generate demand which is outside of the normal stream that we see.

Q: Based on all these points, is it safe to say that the demand environment seems to be better this year than it was when we started 2017?

Gopinathan: The demand environment, in terms of the positivity in the outlook of our customers, definitely is there. How that translates into the actual spending, that we will have to wait and see.
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