IT can see acquisitions in $50-400m range in 2012: TCS

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IT can see acquisitions in $50-400m range in 2012: TCS

N Chandrasekaran of TCS, Noshir F Kaka of McKinsey & Company, Pramod Bhasin of Genpact and Som Mittalof NASSCOM discuss and debate what the outlook for the Indian IT sector looks like right now.

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At the 20th NASSCOM India Leadership Forum,  N Chandrasekaran, MD & CEO of TCS, Noshir F Kaka, Director of McKinsey & Company, Pramod Bhasin, Non-Executive Vice Chairman of Genpact and Som Mittal, Chairman of NASSCOM discuss and debate what the outlook for the Indian IT sector and what the global headwinds look like.

Below is an edited transcript of their interview. Watch the accompanying video for more.

Q: You made a statement saying that the NASSCOM forecast is on the conservative side. When everybody is talking about headwinds and everybody is talking about uncertainty to hear you say that gives people a lot of hope?

Chandrasekaran: NASSCOM usually gives an estimate based on what they hear from member companies. The good thing is NASSCOM has got a terrific track record because every time, whatever they have projected they have beaten that, some times by better margins, some times by slender margins. To that extent, the 11-14% guidance is good.

I hope that we come out at least at the top end of that estimate. Personally, I feel that it's an environment which is rather difficult for people to predict. So companies are making their projections based on their own assumptions. But what I see on the ground and what I believe will happen, is I think technology has a huge role to play in this whole recovery process.

Q: Which is what is giving you this optimism and confidence?

Chandrasekaran: That's what I see on the ground. It's quite difficult to be negative when you don't have any data points to be so negative on the ground but on the macro side there is enough things for you to be negative. 
 
Q: Do you also believe 11-14% is perhaps tad to conservative? If you look at the big four technology companies, they are all guiding for higher growth than that?

Kaka: We have had a history of this industry where the big four or big five, the top tier have always consistently outperformed the industry average. That's nothing unusual. I agree with Chandra. What we are seeing is a very customer to customer game or client to client game.

But in general, you will find that the mood at a macro level is far gloomier than what we are currently seeing in terms of what is coming through in order books and client demand. The picture on the ground today would currently point to what NASSCOM has said or perhaps slightly even more than that. As long as we don't have a cataclysmic event happening globally, we will probably hit that.    

Q: Greece at this point in time seems to be off the catastrophe radar for now but unless there is another catastrophic event, do you believe NASSCOM is going to be forced to revise its guidance upwards?

Bhasin: Uncertainty drives caution and that is what is happening. There are a lot of uncertainties in the macro world - Greece and the impact of Japan's tsunami, is the US recovery real, is it unreal, is it going to happen and how fast will it happen. That is driving a sense of caution. On the ground what is interesting is, offsetting all these macro things, are huge changes that technology that driving people to embrace it more and more and huge changes and thinking about outsourcing and processes and capabilities which is driving companies to think very differently by the way they would run and manage their companies.

So the benefit of this added pressure that we have seen over the last few years is companies are now changing the way they think; they are changing the way they think about speed to market, customisation versus standardisation. That is where Chandra coming from in terms of being able to drive more demand I don't know that anybody in this environment is willing to stick their neck out and put a out a bigger number there.

Q: You are being cautious at this point in time perhaps if things were to improve as far as global macro economic sentiment was concerned, there would be an upward revision. For TCS, Infosys and Cognizant it maybe the exception, But is it very different for the smaller and mid-tier companies?

Mittal: The fundamentals of this industry remain strong. Customers are doing well, they have cash balances, most of them are transforming and their transformation is led based on process changes they are making, the technology adoption they are doing. But there are all these factors that are there. I don't think ever before you have had a situation where you have a US election, French election, uncertainty in the EU, while we don't do work in Russia but the change or the elections there, our own elections. All that is creating caution not only at our end.

Q: So politics is a big factor this time around?

Mittal: I would say so but you mentioned a word 'forced to', we would be very pleased to revise it upwards. We do think there are times when there is so much uncertainty that we are trying to see a whole year ahead, when we have tried to do that, that if these uncertainties continue, maybe the forecast that we have given, we have never given as a wide a range of 11-14%.

There is one more impact that we should be cognizant of that earlier we all used to ride the wave the same way but you are going to find differentiated performances across companies, across sectors, across ownership patterns. So the multinationals, the captives, the commercial third party service providers, you would find differentiated. Earlier we were probably all on the same vector it may not be so this time.

Q: As far as IT budgets are concerned, if I talk to you, you say that IT budgets are going to move up or at least stay where they are. If you talk to somebody else within the IT space in the top five companies, they believe that IT budgets are definitely going to move higher. If you talk to a third company within the top five in the IT space, they believe that IT budgets will remain flat, perhaps go a bit lower. Where is the story as far as IT budgets are concerned?

Chandrasekaran: It depends on whether you see the glass full or half empty. I read a poll of a good number of clients, about 120 clients we took and then we went through it in a systematic fashion. We have shared those numbers but the interesting point is - in a normal year also, you will always have 'X' number of clients increasing their budget, a certain number of clients staying flat, certain number of clients slightly declining their budgets and the pattern is no different.

In fact, two-third of the clients we spoke to have either said that they will maintain the budget or increase the budget. We have granular data. The whole reason I kind of cited that example and cited that data point is not because that I wanted to create a very positive synergy or anything but to establish the fact that there is no need for panic and it is not any different. But if you want to panic, you can panic.

Q: But is it very different for mid-tier and smaller IT companies in India? Chandrasekaran and Infosys and Cognizant maybe the exception, but is it very different for the smaller and mid-tier companies?

Mittal: The fundamental of this industry remains strong, customers are doing well, they have cash balances, most of them are transforming and their transformation is led based on process changes they are making and the technology adoption they are doing. But there are all these factors that are there. I don't think ever before you have had a situation where you have a US election, French election, uncertainty in EU and while we don't do work in Russia but the elections there, our own elections are all factors.

Q: People are saying that global IT players have expressed interest, global private equity players have expressed interest. You are sitting with a lost of cash on your books. There has been a lot of talk about possible consolidation. There has been a lot of talk about acquisition, the search for newer markets plugging the kind of gaps that you still continue to have in your portfolios. Is 2012 going to be a big year in terms of consolidation and going shopping?