Demand environment good; Expect decent growth in FY12: TCS

From the top management at TCS, S Mahalingam, CFO & ED; N Chandrasekaran, CEO & MD; Ajoy Mukherjee, Head-Global HR and Phiroz Vandrewala, Executive Vice President, in an interview with CNBC-TV18’s Udayan Mukherjee spoke about the company’s performance and how they saw the road mapping out going forward.

Below is a verbatim transcript of their interview. For complete details watch the accompanying videos.

Q: You have had a terrific FY11, but do you think that you have done so much of good work in the last fiscal that to better that in FY12 in a significant manner would be a bit of a challenge?

Chandrasekaran: Tthe recovery has been pretty good. After two years of FY09-FY10, we have had an excellent show both in terms of volume growth and pricing. We had a volume growth of 29.6% and the pricing for the first time has been flat more or less on a YoY basis.

Yes, we have had currency issues but apart from both from volume and pricing perspective, we have had a terrific year. The demand environment is good. If I look at where things stand today, compared to a year before or two years before, the deal pipeline or the momentum, everything is positive. I think it is going to be a good FY12.

Q: A 29% volume growth was significant outperformance relative to the industry. Do you think you can do an encore in FY12 relative to the industry?
 
Chandrasekaran: The NASSCOM has projected 16% to 18% growth. So, definitely, we will do much better than that.

Q: The last time you did 10% better than the industry. Do you think that is possible this time again?

Chandrasekaran: We don’t give guidance.

Q: In terms of margin improvement, you were at a significant discount to some of the other industry peers but you have almost closed that gap through FY11. Do you think there are more levers to work on to improve that or do you think you are now going to top out in terms of margins?

Chandrasekaran: Margin improvement from here will be very difficult primarily because we have made a significant improvement. The margin where we are today is pretty healthy. We are also making investments. So we will continue to maintain margins. That will be the goal.

Q: Do you think you have to give up some margins because your utilization levels have surprised everyone consistently more than 80%? Does it need to come back a bit and in that case, could there be some pressure on margins?

Chandrasekaran: I don’t think so. The utilization has been above 82% all through the four quarters. The scale is playing up; we are now almost 200,000 employees. I think we are comfortable at the 82% range and the utilization. I don’t think we will give up the utilization as long as the volumes pickup but excluding trainees okay but including trainees definitely there will be volatility in utilization.

Q: In April 2010, when you were sitting and looking at the year, were you more confident about volumes coming through or are you more confident today looking into next year?

Chandrasekaran: I am as confident as April 2010 definitely. In fact, the momentum is better now, it is just that the size is of a different scale. That time we were a little over 6 billion while now we are over 8 billion. The scale is of a different magnitude but we remain pretty confident about the volume.

Q: What is giving you that confidence - is it what you have heard on the budgets or is it some verticals which are picking up, which did not fire in 2011?

Chandrasekaran: There are multiple factors. First of all if you look at all our top customers – all the customers are doing well and there is generally a propensity of increase in the budget that we target with these customers. That is the first metric. The second one if you look at our core market, North America and the core vertical BFSI, both continue to do well.

While the dependency of these units is not increasing, definitely, we are by no means at a saturation level. There is a lot of growth in these two units. But if you look at other verticals, a number of verticals are firing - if you take retail, if you take life sciences, if you take energy and utilities, pharmaceutical. If you take any one of these verticals, all of them are doing well. Given that all of them are doing well, I am pretty confident that there is good momentum.

Q: You alluded to pricing. Do you see any improvement during the course of FY12 at all?

Chandrasekaran: Sure. If you look at the last three years, a couple of years we had a serious decline and this year FY11 we have been flat. And FY12, I do think there will be an improvement in pricing. Because of 2 factors; 1) because of the fact that the demand environment is continuing to get better and there is demand on talent. 2) Our own capability has increased to lot more and there is a lot of value focus in the way we approach the market and not only the cost focus. The combination should really aid in increase in pricing.

Q: Significant improvement in pricing?

Chandrasekaran: No, I don’t think there will be a significant improvement but definitely it should be better.

Q: Are you saying 1%-2% kind of increase?

Chandrasekaran: I am not giving a number but there should definitely be some pricing improvement this year. We should get a little bit of growth due to pricing.

Q: Is there any significant change in the market place relative to your peers right now because it is a well advertised fact that they are going through a period of management transition. Are you seeing any change in the way you are winning the deals versus them or any change in the comparative landscape as such?

Chandrasekaran: Not really. I don’t think there is any change in the way we approach the market or we compete with the deals with a particular player. We are continuing to focus on each of these deals. I am not particularly seeing any trend.

Q: Any players which have become more aggressive over the last few quarters because we also map a few of the multinational players, they have been giving very robust guidance and not doing too badly?

Chandrasekaran: Number of players are aggressive. It is a tough market out there.

Q: But anything that has caught your eye over the last couple of quarters which makes you wary?

Chandrasekaran: We have to compete and we have to compete very strongly and we have to focus on where our strengths are. Those are the basics. I would just stick to the basics. There is nothing I would allude to as to a specific pattern that I am seeing. So whether it is infrastructure deals, whether it is full services deal, whether it is enterprise solutions deal - we are trying to get the momentum going in the enterprise solution space.

For the first time we saw a significant uptick - we almost grew 17% on a QoQ basis on the enterprise solution space which is also as a result of the spend that we are seeing in the discretionary bucket. Those are the type of deals that we will be going after. In each one of these deals we compete with different players. When you go for enterprise solutions, it is a different set of players, if you go for infrastructure it is a different set of players. So you just cannot approach it generally.

Q: What is the big deal landscape looking like for FY12? Is that where you expect most of your incremental volume growth to come from or just steady ramp up from your top clients?

Chandrasekaran: It is a mix of three things. One is definitely the existing client. We have put a lot of focus on increasing our footprint in the existing customer base, deepening the relationship. You can see that revenue per customer has been going up consistently over the last several quarters. The second is we are looking at a few large deals and the third one is usual bag of deals whether it is full services deals or deals in the infrastructure space or intellectual properties which are a very important area for us.

In FY12, a key focus area for us is the non-linear model and the non-linear model has multidimensional strategy from our point of view. We look at the products, we look at the BPO clout and we look at the SMB which is the iON launch which we made so we have to fire on all three. I don’t expect significant revenues and volume from those deals but definitely I expect significant contribution to incremental revenues and proof for each of those platforms in FY12.

Q: What about the supply side in FY12 - do you expect it to be as challenging as FY11 in terms of attrition, wage hikes etc?

Chandrasekaran: We have already made a significant wage hike and we have given 12-14% wage hike. My hope is we will be able to bring down the attrition in FY12 compared to FY11. We are addressing the wage issue and we are addressing a number of other aspects of employee engagement. I would like to see a decline in the attrition in FY12.

Q: You have done remarkably well with margins in FY11. Now the challenge is to hold or better that in FY12. Is it doable?

Mahalingam: We have talked about ideal margin structure. We have been around 28% right through this year almost. Therefore, this is something we have an orientation to keep at. When you look at beyond the quarter, there are many levers that that we would be exercising to make sure that we can manage that.

Employee cost will go up in Q1, that’s a very big increase but after that we will rationalize, we will improve the allocation process, the utilization, etc. Hopefully, the base of the pyramid will also improve. So, yes, we should be in a position to handle it.

Q: Some will depend on utilization levels which have been running at exceptionally high levels. What do you expect to see over the next couple of quarters there?

Mukherjee: On utilization, if you look at last year we used to be between 80%-82%, a year prior to that between 78% to 80% and this time in FY11 we have done between 82% and 84%. We have been at around 83% on an average. Going forward, we would like to maintain it between 82% and 84%, averaging around at 83% is what we are looking at.

For us, that is one of the significant levers that we have to exercise in order to control costs because if we have more people on billable kind of engagements that would help and that’s the plan that we have going forward.

Q: The wage hike is also significant 12-14%. Do you think you can absorb that and still be more than 28% margin?

Mahalingam: We have done a detailed plan. The first is the quality of revenue that you get. That is very critical so that the marginal profit that I have on additional revenue is somewhat higher than the margin that I have because I can keep the selling and general expenses around the absolute level etc.

While the wage hike is one factor, the addition is going to be largely at the basis of the pyramid. Last year we started with a projection of 30,000 people and ended up recruiting close to about 70,000 people and then you operate in that kind of environment, you will recruit more experienced people so the cost goes up and so on. This year we have already made an offer, we have some other direct recruitment process and so on and therefore that pyramid also should help us in that process.

What I don’t want to lose sight of is the other expenses. If you take this quarter which has concluded, our other expenses if you remove employee cost, depreciation is something which accrues to us because of plans that we have made, the other product cost because of system integration assignments on bad debts, our absolute number in terms of cost growth was only Rs 34 crore on a base of nearly Rs 7,500 crore of cost that we have in a quarter.

That is another area that you continue to focus on as to how we can keep that at the same absolute level. This Rs 34 crore is an interesting one because that includes the issue that I have had as far as the exchange is concerned. Exchange has been beneficial but the expenses have gone up in some way. The revenue went up because the rupee depreciated but also the expenses went up. Even after that, our actual increase in other cost has only been Rs 34 crore.

Vandrewala: That ideal margin that we have always said is 27%, you are pushing it to 28%.

Q: Mr Mahalingam said 28%.

Vandrewala: I know, as a company we have always said that is the ideal margin that we would like to see. We have done exceptionally well, we have pushed the envelope, and we have had 28%. It is just that 27% is what our ideal number is. Obviously people will try and improve that ideal number but I don’t want that to change in perception.