TCS sees environment being positive for renewals, deal wins

The deal closures have picked up, pricing is stable and the environment is improving, said N Chandrasekaran, CEO and MD. "The margins have come in lower due to the change in the mix," he told CNBC-TV18 adding, India business continues to be discretionary-driven.

Chandrasekaran said the volume growth is not an issue and assured of doing better than the industry.

During the period, while the operating margin fell 36 basis points to 26.8 percent, the net profit margin grew 151 basis points to 22.5 percent. S Mahalingam, CFO and Executive Director, said, "During the quarter, TCS has posted a credible margin performance at the operating level, and we have also expanded our net margins by managing the ongoing currency volatility." He said the company expected margins to remain stable for the rest of the year.

The volumes, which rose 5%, were driven by new service offerings and a repeat business growth of around 99%, Chandrasekaran said.

Ajoy Mukherjee, Executive Vice-President, and Global Head, HR, said there was a total gross addition of 18,654 people and net addition of 10,531 during the quarter. TCS’ employee strength at the end of the quarter was 254,076. The attrition rate fell to 11.4 percent overall.

TCS bagged 41 new clients and 11 large deals in the quarter. Utilisation rate averaged 81.6% for the quarter, including trainees. "The environment remains positive for renewals and new deal wins," Chandrasekaran reiterated.

Below is the edited transcript of the interview with CNBC-TV18.

Q: There has been a strong 5 percent volume growth for the quarter. Can you tell us if you experienced any improvement since we spoke last quarter in terms of any pick up in discretionary spend or any kind of confidence exuded by your clients?

Chandrasekaran: We are quite happy with the 5 percent volume growth. We have seen a good traction all through the quarter. Definitely, the discretionary spend is picking up and we are seeing projects getting closed and ramp up happening as per plan, so the momentum is better now than three months ago.

Q: Do you expect any improvement in pricing at all given that the environment has improved because the one complaint one might have on your numbers otherwise good this quarter is that margins eased off a little bit, do you see pricing getting any stronger as the deal momentum improves and you have more visibility?

Chandrasekaran: The way to look at the numbers is that it is a volume driven quarter and as I always said, in the current macro it is going to be largely volume driven. Pricing has to be looked at from the point of view of the mix of the revenues coming from the different markets. We have seen lot of growth in the emerging markets. They operate at a different price and cost points.

Overall we have not seen any dip in pricing and explained why the dip in the margin is, it is to do with the couple of factors, and one is the fact that the mix is different. The second is that there are some transformational deals in which we have to make upfront investment. That is why there is dip in margins but we are not concerned about that.

Q: BFSI seemed like a bit of a problem a couple of quarters back. Do you think that the problems in BFSI have bottomed up because this quarter has been good at about a 4 percent growth?

Chandrasekaran: We are particularly very happy with BFSI this quarter. Not only we have delivered 4.6 percent growth in rupee terms in BFSI, but also we have closed a number of deals. We have closed four deals in BFSI out of which one is from insurance, three is from BFS. I believe that BFSI is beginning to pick up momentum.

Q: India has been a bit lumpy so in the last quarter you saw India revenues falling by about 14 percent, this quarter they have gone up by about 10.5 percent. Is Q3 and Q4 going to be stable with respect to India or is it likely to be lumpy?

Chandrasekaran: India is largely discretionary driven. We have a lot of SI (Systems Integration) projects coming in India, so India will always be volatile. It is a matter of what deals get closed at what time and how the ramp ups happen. Until we see a mix change in India, India will continue to be volatile.

Specifically, I cannot answer whether Q3 and Q4 will be lumpy. We have taken a number of steps. I believe that India will continue to grow probably not at the same scale. I don’t think there will be a dip, but having said that we need to watch things can change during the quarter.

Q: Many of your peers have highlighted how the October to December quarter is a big one in terms of deal wins particularly from the renewal side. How is TCS positioned entering into this Q3 quarter and what is on the pipeline with respect to deal wins?

Chandrasekaran: We see the environment to be very positive. We are not only seeing traditional deals coming up for renewals and happening on time, we are also seeing an uptick in the discretionary spend. So the momentum from our point of view is very good.

Q: You have always maintained that you will be maintaining EBIT margins at close to about 27 percent, with the rupee appreciation or the volatility in the rupee, if you need to cut back on the investments that you have made because you have got the benefit of rupee depreciation, you invested it back in the business, if you need to cut back on that to protect your margins, will that impact growth going forward?

Chandrasekaran: As long as there is not significant volatility in the rupee, we are comfortable in protecting margins.