TCS looks at inorganic growth to beef up European presence

India's top software services exporter reported a 38% rise in its fiscal first-quarter profit, beating market expectations, helped by a weaker rupee and increase in demand for outsourcing.

Chandrasekaran says the company is also considering platform-based opportunities. "We are keen on acquisitions in energy, front office space and healthcare," he told CNBC-TV18.

TCS could look at a deal size of USD 50 million to USD 500 million if the target is a strategic fit, says Chandrasekaran. "Money is not an issue for the right acquisition," he explains.  

In contrast to Infosys, which is suffering from issues like huge liquidity, troubles from the mainstay BFSI vertical etc, TCS is seeing growth across all industry segments led by retail, telecom and BFSI.

In fact, Chandrasekaran thinks the concerns on pricing, budget cuts are "overstated". "We do not see pricing decline and expect it to remain stable," he says adding, concerns over the BFSI space are "overdone".

The company also reported balanced growth across IT and other service lines led by BPO, enterprise solutions and infrastructure services. Besides major markets like the UK, the US and Europe, TCS also saw increased traction from emerging growth market -- Latin America.

Chandrasekaran expects BFSI space to grow going forward. "We expect to grow business in Europe this year," he assures.

"We are positive about closing big deals in USD 50 million plus range...the deal pipeline is strong," Chandrasekaran says. Overall, he expects this year to be better than last year for the IT bellwether.

TCS and Infosys are mainstays of India's USD 100 billion-a-year information technology and back-office services sector that earns about three-quarters of its revenue from exports to the United States and Europe.

Below is the edited transcript of his interview to CNBC-TV18.

Q: The former Central Board of Direct Taxes (CBDT) Chairman has been appointed to look at tax related issues that has been troubling the IT sector. How big a positive is this, and by when through NASSCOM will the IT companies be representing and presenting their recommendations?

A: I think it is a fantastic move. I welcome this move. There have been a number of issues that have been brought up from time to time faced by both Indian IT companies as well as multinational companies. But the IT sector has done very well and the contribution of the IT sector towards exports is pretty significant. So it is important that we look at the sector in a holistic manner and address each issue. It’s not about getting favours; it’s more about getting clarity, and of-late, there have been a number of interpretation issues.

Q: Everybody has been talking about GAAR and the retrospective amendment with relation to Vodafone? So the tax related issues with regard to the IT sector, in a sense, has been underplayed or not clearly understood. How big an issue has this been for the sector?  

A: It is a big issue definitely in the recent times but we have had many big issues in India so probably it did not make the headlines. There are issues on transfer pricing, onsite income, subsidiary income etc. I think it is an important initiative by the Prime Minister’s Office and we are very glad that this has been appointed.

Q: The new finance minister P Chidambaram has come back to the North Block for the third time. Will this make a big difference as far as the Indian economy is concerned?

A: I think the way to look at it is finance is a big portfolio; it is one of the most important portfolios, and you need a fulltime finance minister. All of us know the background of the Prime Minister but still he will not be able to spend fulltime on the finance ministry. So it’s a great move that P Chidambaram has taken over as the finance minister, he knows the staff and has been there, he has done many things. So, expectations will be very high. Definitely, he can do it. But he will require lot of support from the broader government. I think it is a positive move, at least sentimentally, it will send a positive signal.

Q: The last 24 hours have been particularly troubling. We have seen the worst power outages that India has faced over a decade. Were you getting calls from your clients, were they worried about what is going on in India?

A: Of course, it has received a lot of attention outside and I have got a number of calls whether we are affected, whether our people are safe, whether we are able to work, whether we are able to deliver.

Q: Did it impact business for you because all of us are on power backup?

A: We are all on power backup, so it didn’t affect the business. But I think it is a major worry and it has cost damage.

Q: Has it further hit the India image?

A: I think we have been having one problem or the other in the last few months. I hope we turn the curve pretty soon.

Q: Were they convinced with your response that it’s business as usual?

A: Yes, I think we were able to explain but at the same time, a power outage affecting 600 million people. I think people are going to take notice of it.

Q: How does the business environment look like; there are two very distinct camps now as far as the IT sector is concerned, there is Infosys, Wipro camp, and there is TCS and HCL camp. How can the client mix be so different that one management gives you a commentary that the world is looking okay while the other management states that the world continues to look extremely uncertain. What is the big difference there?

A: First, let me say that I am not in any camp; I am in the customer camp. What is important is to look at what is happening on the ground; you can take either view and you can put data points to substantiate it. On the macro level, there continues to be issues and no one is going to deny that. Globally, there are macro issues, whether it is in Europe, US, India or China.

But I have just finished a hectic trip covering companies, customers in all markets; Europe, US, Latin America, Asia, every part of the world and there is a uniform recognition or acknowledgement wherever I go that technology will be a fundamental enabler in companies performing in this environment.  

Q: In that context, is the story of pricing pressure overdone, is that concern exaggerated, the fact that IT budgets are going to be pruned even further?

A: In general, I feel that there is a lot of money that’s been spent on technology but that doesn’t mean that companies are not cutting on IT budgets. Some may be cutting while others may be spending. In general, there is also a theme to make the back office to feed the front office; that is how you become more efficient in your traditional back office systems and how you invest in your front office systems. So, there is investment happening in one place and there will be efficiency driven in the other place. 

Fundamentally, I believe that IT budgets are intact; customers are spending money wherever they want to spend money. In fact, some companies are spending more money this year than last year. While you will not get an increase in pricing for normal work, I do not think there is pressure in terms of having to drop prices.

Q: This is a concern that most brokerages have as well. Given the kind of valuations that a company like TCS is working with, there may not be an upside as far as pricing is concerned, and perhaps, there may be a further decline and more pressure on pricing. What is the picture as far as pricing is concerned?

A: I have said in the analyst calls many times we do not see a reduction in pricing; but if you are asking me whether I can get increase in pricing. The answer is no. But if you are doing some specialized work then you can get increase in pricing. We have assumed that pricing will be flat and that is what we have communicated. I also read the analyst reports, with due respect to all the analysts, they can swing both ways.