EXCLUSIVE: Here's why N Chandrasekaran is bullish about TCS and IT sector

Gopinathan — who was Chief Financial Officer and Vice President at TCS earlier — commands immense respect and understands the nature of the business well, Chandrasekaran said. Going forward, too, there will be no change in the way TCS operates, he assured.

Meanwhile echoing is commander’s views, Gopinathan said TCS is well positioned to help clients move from asset-model to services-model.

Gopinathan, toed Chandrasekaran’s line on US policy, saying that with clients pursuing a steady technology investment agenda, demand is likely to remain strong going forward.

Chandrasekaran added that he was confident of demand for IT industry. The market is good and till the new US visa policy actually comes in to effect, it would be hypothetical to quantify the problem, he said.

The USD 100,000 minimum wage for employees that new H1-B visa policy proposes won’t be a problem for the company, he said. “It will never be an easy surface to bat on. But one cannot say it’s a difficult pitch and we won’t play,” Chandrasekaran said.Below is the transcript of N Chandrasekaran and Rajesh Gopinathan's interview to Shereen Bhan on CNBC-TV18.Q: I am not going to ask you about Tata Sons. I am going to talk to you about TCS. We are here at NASSCOM which has really been your home for the last several decades now. In terms of the road ahead that you foresee for Rajesh and I will pick up on the comments that Rajesh made to me when we spoke a few weeks earlier in Davos. He said Chandra is going to be around, he is too deeply entrenched with TCS, we will try and hold on to Chandra as much as we can, so he is not letting you go.Chandrasekaran: In all honesty, TCS has been an effort of a lot of people and we have a terrific team. The team that Rajesh will be managing and leading has been a team that we have built for a long time and we have been together. So, if you look at from company's bench perspective, this is one of the strongest teams and we have people below Rajesh and each one of them managing anywhere from USD 1 billion to USD 5 billion end to end, from customers to deliver to what have you. So, the strength of the company is very solid, but for myself, yes I am going to be around. I am going to be associated with TCS.Q: How closely are you going to be watching what Rajesh does?Chandrasekaran: We have been together for a very long time. So I will provide a lot of strategic inputs, I will continue to. The way we operate and the way we have operated so far is that I bring a lot of strategic thought but it is not the final word. Rajesh has been associated with me in that strategic conversation, almost last 12 years out of the 16 years he has been with me because he started with me in 2001 and he was in the US, 2004, 2005. Afterward he came over and joined in Mumbai. Since then, he has been with me. So many things I have thought about, I have done, I have bounced off and not only with him, with a few other people in the management team and finally, once we decide, we get the entire management team on board and we make changes. So, that is the way we operate. I do not think that will change.Q: Except that now, he will have the final word and not you?Chandrasekaran: Yes, he has always had the final word even before so he had to cut the cheque. I think I will be around, I will provide all the strategic inputs and I have huge relationships I have built. I have been very fortunate to travel around the world at least I would say since 1998, I have been on the road. I typically meet 400-500 companies every year, more so in the last 10 years. So, I have built a lot of relationships, definitely I will, some of them other people have relationships, some of them I have relationships, so I will continue to help Rajesh build those relationships and help TCS to nurture those relationships. That is something that I will do. That does not mean that I will traveling ten times to the US. Probably I will be doing 2-3 times to the US, as is required.But apart from that, I am here, I am only five minutes away. Actually, literally it is six minutes if you drive from TCS house to Mumbai house, it is six minutes. We are on the phone all the time, so I am available if they need me. It is a delicate balance. Rajesh will go into the role. I do not want to embarrass him, he is very bright. He commands respect, he understands the business, he understands the strategic nature of the business. He and the team that we have together understand every industry whether it is the financial services industry, retail industry, consumer products.If you take Debashis Ghosh's team, on the media industry, Kamal, all of these people, if you take any one of those people, they are all solid in their respective industries and between them, they have this deeper understanding about what will automation do to that industry, what will big data analytics mean. Similarly, from the services side, whether it is cloud, whether it is hybrid cloud, the people who manage those businesses are solid.Q: So, are we likely to see any more changes? Of course, you need to make an announcement as to whoever takes over from Rajesh as far as the CFO position is concerned. But are we likely to see any other management changes, any new themes being set up, etc?Chandrasekaran: One part I will answer, the other part Rajesh can answer. NRC has met on the CFO, so we have an internal candidate. We will announce that candidate. We have to go through the board, so in the next board meeting that will get formalised. Apart from that, we have been debating, it is not that because of me going a structural change. We have been debating for a period of time and what is the next best thing and those incremental changes we have been doing and some changes which we want to do we will have to do that timing.Q: So, what would those changes be?Chandrasekaran: Just getting focus on some areas in a much deeper way, not necessarily management changes. We have a very stable team and altogether, the team is gung-ho, I met all of them and if at all, they are all committed to outperforming my years in a significant way.Q: The point that you just mentioned here that they would like to beef up certain specific areas, this is what you wanted to do even before this change happened and this is what we are likely to now see happen. Can you articulate for us what those areas will be and what kind of changes?Chandrasekaran: There will be a tremendous focus brought in, in cloud. We have thought about it, we have discussed and debated our business model around cloud and we have some ideas on how we want to go about cloud, so we will put enormous emphasis on cloud.Q: How will you differentiate yourself because there are large players in the market who have a significant head start?Chandrasekaran: We are present in that market. We already operate in the cloud space and it is more a validation by clients that what they would like us to do. So that we have got a very clear view of what we want to do in the cloud space. So, you will see focus in that. We have a lot of work in automation so we want to see how we can take it to the next level. So, it is all incremental. It is all around these technologies maturing and becoming mainstream or about to become mainstream, so we have got to shift the gear. So, we always invest early, but you always have to choose when you shift the gear.Q: So you are saying that you are ready to shift the gear at this point in time with respect to both cloud as well as automation?Chandrasekaran: I am not saying at this point in time, these changes will come in the coming months and Rajesh has to choose the time and it will happen.Q: Let me ask you about the timing now. On the specific issues that Chandra talked about, the big bets that you hope to make whether it is cloud or automation, when could we possibly see the company move ahead on this front and what could it eventually mean as far as business opportunity is concerned?Gopinathan: On the timing, let us put it, it will be sooner rather than later. But from a business opportunity perspective, it is amazing how these technologies are morphing. You heard at NASSCOM how an industrial company is transforming itself into a software services kind of business. So you are seeing technology do this to industry after industry. And we are very well positioned to participate in that. And to help our customers to make that transition from asset model to a services model. So the entire world is moving towards that kind of a structure.So, a huge amount of opportunities and as we start identifying areas where we can actually better partner with our customers, better align our own capabilities behind that, we will keep on carving this out and putting specific focus on it. So, it is not a one off kind of a change. It is likely to be a continuous change that keeps on happening and we will start on the journey quite early. Q: Let me ask you about a question that I am sure has been put to your notice specifically several times over and that is as far as the capital deployment policy is concerned. This is the question that is being asked of every Indian IT company that you are all sitting on large piles of cash at this point in time, what do you intend to do with it and why not the buyback option? We have just seen Cognizant announce one, there are calls on even TCS and Infosys to do the same. What is the rationale, do you believe it is the right time, is this something that you would consider?Gopinathan: We have had a very disciplined dividend policy, policy of giving back excess cash to the shareholders. We distribute in the range of 30-40 percent every year and every 2 or 3 years we flush out the excess. The last time that we did it, we took out almost close to 80-90 percent of our full year earnings. We have on an average maintained about 50-55 percent when you consider the full cycle.We will continue to be on that journey of disciplined capital distribution. What comes is what should be the cadence? Is this one special, is that the right cadence?Q: Is it?Gopinathan: It has worked well for us. In our last 10 years we have done it 3-4 times and our key investors actually know that. Any cadence works when your stake holders can anticipate and you execute on it on a consistent basis. If there is a change we will consider that. So, that is one.Second is that we have been steadily increasing it. It used to be in the 30 percent, we have moved it to the 40 percent, we have moved it to the 50 percent and that journey is there. So, that is again a part of the disciplined execution. What is the mechanism of doing it, is it dividend, is it buyback, one or the other or combination of both is more of mechanics of actual distribution and you weigh the pros and cons on it. We are not per se tied down to one or other.Q: Does it make sense because this clamour is picking up?Chandrasekaran: I think you have to see our track record. From the quarter we went public in August 2014, we have declared dividend every quarter. Every year we have followed a pattern. We will increase the quarterly dividend every year over the previous year and then we do it as equal instalments for three quarters and we will give a top-up in the fourth quarter. Every second year and once I think every third year we will always give a special dividend. What Rajesh was pointing out is that the average was 30 percent, the average was 42 percent and now it is 55 percent. Also I would say that we were building up cash, in early days we didn’t have cash. Now we have significant amount of cash.So, the call that the board needs to take is what is a good number? Always the theory has been for us that we don’t want to be in a situation that we don’t have enough cash when we are doing big acquisitions.Q: What would be enough?Chandrasekaran: At this point in time we have a number internally between me and Rajesh. We have discussed about it but we have really not discussed it with the board and everything else. So, this is a discussion that time to time we have. There will never be a number which is a standard number at any point in time.Q: You believe at this point in time you are comfortable?Chandrasekaran: We are comfortable. So, that is why every time we have felt comfortable we have increased the dividend.Q: Would that be the preferred route going forward as well?Chandrasekaran: We don’t know. I think that there are advantages, there are pros and cons of dividend and share buyback. Obviously share buyback has certain limit. How much you can give and how much you can do it in a year and so on so forth. So, we will take all that into account and there will be a discussion.We have got feedback from investors over the last year and a half. Two comments that have come which we have actually discussed in our board couple of times, one is even though you give special dividend every two years, you have a track record but there is no certainty, it is not a policy. So, one can’t take it for granted that they gave it in 2012, they gave in 2015, so will they give it in 2017, will they give it in 2018? That actually puts certain uncertainty. So, why do you want to do that? Why can’t you give in a very predictable manner, even though you are giving in a predictable manner why can’t you state it, so you think about it. They were not complaining but they made a suggestion.Some people have said why you have to give everything as dividend, why don’t you do some dividends and share buyback? These two comments have come from investors. We will discuss it in the board.Q: What could be the pillars around which your dividend and share buyback policy are put together because if I were to look at the comments that have come in from Infosys and the same sort of question has been asked of them as well. Vishal Sikka has said that when we look at capital we have got to look at what we need as far as building infrastructure is concerned, strategic growth initiatives and M&A. Would those be largely the levers?Chandrasekaran: I don’t want to get drawn into this kind of thing.Our building infrastructure and those kind of things used to be a significant part of our cash 5-10 years ago. Today because our cash has increased significantly the infrastructure investments though it is a very large and sizeable number, it is a very small portion of our cash requirements.Second thing is, primarily M&A. If there is a need for doing a large M&A…. (Interrupted)Q: Is there?Chandrasekaran: You don’t know when the opportunity presents. In our industry it is always seen as a competitive weapon. Every tech company has a large cash balance, not only Indian companies, you take every tech company internationally, they have got large pile of cash because we don’t know in this market suddenly something shows up and we want to invest in the business, that has been the story. However I would agree with those who say that we have to return back lot of cash to the shareholders. I would agree with the view to the extent that we need to decide what is the safe number we should retain and we can’t be infinitely saying I want to keep growing this. So, we need to have comfort.Q: So, by when do you believe you would be able to make a decision on this front?Chandrasekaran: This is a board question, this is not N Chandrasekaran question.Q: When will you take the matter to the board?Chandrasekaran: This has been discussed in the board couple of times and we will discuss it further. If the board and we all come together on a particular view, we will do it. It is a board matter.Q: Let me just come to you know, because you have been travelling while Chandra has been here in Bombay House - you have been travelling and meeting investors. What is the sense that you get about what they are telling you about the business climate, because if I were to pick up and the commentary that we have heard from Nasscom today - for the first time in many, many years Nasscom has finally said, "look we don't know, we don't know what President Trump is going to do, what implications it will have for the Indian IT industry and hence we are holding back on giving you a guidance just yet", what is the sense that you are getting from clients?Gopinathan: One common theme coming from all customers is that there is a very steady and ongoing technology investment agenda that almost every single client across industry is pursuing and if you look at any area in any industry - one single theme they want to invest is technology. I think you need to take what Nasscom has said in perspective they have stayed away from quantifying it, saying that it is a difficult one to quantify currently, but directionally and I don't think there is any doubt that demand side of it continues to be significant. It is strong and that demand is coming across a very wide spectrum of industries and that the same message that we have been getting, when we are meeting customers across both Europe and US. There is a very strong underlying demand.Q: But are people holding back especially on the large deals at this point in time, because they don't know what changes may or may not happen with H1B, what President Trump may or may not do at least as far as the US is concerned. Any hold back at this point?Gopinathan: It is not hold back in technology industry. We go through evolutions and life cycles, so at the early part of lifecycle of any technology adoption which we are in today with a variety of technologies - the deal sizes are typically smaller as clients are actually experimenting a lot more and as you go through the maturity cycle of that period, the deal sizes tend to become larger and more efficiency focused, so it is more a reflection of the lifecycle of the change that we are in rather than a structural shift from A to B - that's where we are rather than any other reflection. Q: So in terms of visibility that you currently have, how do you feel about this particular calendar year?Chandrasekaran: I will tell you three points; one is you have to take Nasscom in a perspective, see Nasscom has a difficult job because Nasscom collects the guidance of the companies and people really don’t give guidance, increasingly more people are not guidance -- so Nasscom has got a tougher job in articulating the guidance -- that's the plug for Nasscom and that is a genuine problem.Coming to the demand environment per se -- I feel very, very positive – Rajesh and I were there together and we travelled and met with lot of customers. We met people from different industries and I didn’t come away from any meeting that there is a concern whether it is due to technology change or due to visa regulation -- none of this, they say there is a lot of demand and we just need to obviously ensure that we have the right offerings and right solutions for the customers -- so that we are able to capture that demand. I am not in the club of gloom and doom.Q: Do you believe that this is going to be a year that is going to be more difficult than earlier anticipated?Chandrasekaran: I don’t think so. See I don’t want to set up Rajesh or something like that. We are knit together and I am going to be very supportive to the team and I have always being and I believe that market is good. Yes, if there is a visa regulation, H1B regulation will that be a problem -- yes that will be a problem - - what would be the problem I don’t know, because we don’t know what the change is and depending upon the change there will be issues -- but if there is no issues -- no one is required.Q: Let’s just take the visa issue and let me draw the various scenarios that have been presented so far at least and no order has come in, there have been several bills that have been moved.Chandrasekaran: To me there are only two problems -- all the things that you can say gets bickered into two problems; one the visa fee increases, minimum wage increases and the other one is number of H1B visas come down. Depending upon where the minimum wage increases, we have to go to see the impact.At USD 100,000 TCS already has a model, where our average cost is that range. At USD 100,000 we will not have a problem and I don’t want to give you whether it is a USD 120,000-130,000, what is the threshold point that is not the problem. The solution lies in what is the business model -- so it will not be a simple change, the availability of visas on one hand, there may be minimum wage on the other one – so that will be a combination of changes that can come – I don’t know what those changes are.Q: So how you are preparing yourself for some of these changes, if they were to in fact be realized?Chandrasekaran: I think we have worked in an environment, which the visas are very difficult to get and we have gone through that. There is a lot of learning in the company and I don’t want to elaborate some of these situations we have handled, some of these situations we have played out the scenarios, but having said that it is very hypothetical to start saying there will be a problem, there will not be a problem and how much will be quantifying that problem today without fully knowing what exactly is the change. To me as long as they are very operational in nature then we got a business model. If the changes are very strategic in nature, which I cannot foresee today then we have to go to drawing board.I was giving the example it is not an easy surface to bat, it will never be an easy surface to bat that is you can go there and hit every ball to a six – so there will be some tougher ones then you got to anticipate those and then play those at that time, but to say that, no, no it is a difficult pitch, we can’t play at all. It is unplayable, it is not just right”. Q: You said that you are feeling confident about the year ahead and in fact you are feeling better about 2017 than the previous year.Chandrasekaran: The first statement. I do not want to give any qualitative, quantitative guidance which you will ask. Go back to Rajesh tomorrow.Q: If I were to pick up on the commentary that has come in from your peers, they seem to suggest that there will be no acceleration as far as growth is concerned, pretty much status quo or flat. So is that how you view things as well at this point in time on the basis of whatever evidence you have?Gopinathan: Neither the revenue nor on the growth side, I will be commenting on. What I can comment on are some of the demand side. The demand side continues to be fairly strong and it is well distributed. How it plays our completely through the year, we will need to wait and see. But across the board, both in Europe and in US.Q: And across verticals, this softness that you saw in the healthcare services space for instance, despite what may or may not happen as far as Obama care is concerned. You believe that you do not have cause for concern today?Gopinathan: There are no individual verticals which are structurally challenged. So, some of the ones that were, like for example, energy or telecom, have come out of it, that does not rule out the fact that occasionally, you could have one or two of them being volatile and unpredictable. But structurally weakness in some of these industries that existed, we are behind that and we are seeing them also turn around. And the commentary I gave you about demand, pretty much it is coming across verticals, there are no structurally challenged verticals at this stage.Q: Since you said that you are going to inputting on strategy largely with Rajesh, you just touched upon merger and acquisition (M&A) and the M&A possibility when you keep in mind your capital deployment strategy. How important is M&A going to be? And also big ticket M&A are the days of large M&A deals over? Are we going to see this strings of pearl approach which we have seen other Indian companies deploy for a while now? What is the M&A strategy likely to be?Chandrasekaran: We do not have an M&A strategy to fill any revenue gap. I do not put it that way. Our revenue growth projections are totally based on organic growth. So, we are not saying that we have got to achieve 'x' percent growth out of which 'y' should come from M&A. We have no such call. We believe that the industry is very robust and the demand environment is so strong that organic growth is pretty good growth. Our problem over the last couple of years has been softness and the same time, in 3-4 places. It used to happen, but it used to happen in one place. We had problems in insurance vertical, we had problems in telecom, we had problems in energy, we had Diligenta, we had Japan, we had a number of places where we were having degrowth and the degrowth actually took away some of the growth that otherwise should have come. So, we do not have any of those weak spots today.Q: None of them?Chandrasekaran: None of them. All of them have come off the cliff. We do not see any place where we will degrow. The extent of growth may be a question, but at this point in time, we do not see degrowth happening in any of our core or any of our units. That is not to say that there will not be a surprise tomorrow. If there is a surprise tomorrow, we will tell you because nobody can predict the future. So, we feel pretty good about the growth opportunities. So, M&A, we are not under pressure to do it for those reasons.Q: So, what would you do it for?Chandrasekaran: If there is a strategic opportunity because of which we can catapult the growth in a particular direction in a big way.Q: So, for instance, catapulting yourself in automation or cloud, would that open yourself up for M&A.Chandrasekaran: It could be cloud in a particular industry. So, we keep looking for these opportunities and we have evaluated many.Q: Anything interesting?Chandrasekaran: Nothing that we can tell you today that we are going to do so if there is such opportunity, we will do it. But that is only because strategically it will create long-term value accretion for the company, long-term growth for the company, not because the target for us in a particular year or something like that, that has come to come from our revenue growth. We do not need that.Q: I don't expect guidance but how confident you feel about the margin picture specifically in light of what may or may not happen as far as visa costs are concerned. I know you won't give us a number in terms of your H1-B exposure, but you feel confident about 26 to 28 still?Gopinathan: The margin guidance that we had, the range that we had, we are still quite confident about it but we cannot speculate about what might or might not happen. So, as and when events unfold, if that has a material impact on it, whether short-term, medium-term or long-term, we will talk about it then.Q: But the ability to be able to meet the higher end of the band?Gopinathan: The reason to have a band is to give us a space to stay within that. So the band is what we are focused on.Q: You feel that lower end of the band is probably more realistic, more achievable?Chandrasekaran: Let me put it this way -- we want to be within that band and we shouldn't be dangerously close to the lower end all the time, but there are times in which you have to operate especially if the growth is not very strong. So you will see the margin moing to the higher end when the growth is strong.I think that is a fair way to think about it but the commitment is to stay within that band and it doesn't matter.The management team should have a flexibility to operate within that band and there is no point in saying whether it should be 26.1, should it be 26.5 and why not 27.1 -- I don't want to have that kind of dialogue. I think they should have a flexibility to operate within that band but in general the logic is that if the growth picks up in a good way then automatically the margins go up.Q: I want to pick up on the constant theme here at NASSCOM, Indian IT needs to reposition itself, Indian IT needs to reboot itself and so on and so forth, what does that realistically mean? Give me a sense of what it realistically means for TCS?Chandrasekaran: I think we are in a great shape and we believe that we have seen this many times before. I saw it personally near 2000 before the Y2K, we were about USD 400 million company, USD 350 million came from Y2K work. So on January 1, 2000, people thought that will be done, didn’t happen. We only became USD 600 million and USD 800 million and a billion dollars in the following three years. I have seen it when the internet came.Q: But it is the same sort of existential questions of the Indian IT industry that are being asked today as well, are you still relevant, will you be redundant, have you disrupted enough?Chandrasekaran: I don’t want to be tough on anyone. I don’t want to react badly to anyone but the point is that if you have an industry, which is so strong and we are world-class companies and we will have to go through change because we are in an industry where everything changes, technology changes and it is a fast changing industry and the change will only get faster. So this industry will continue to change its methods, we have to be relevant.Q: Do you see the current landscape changing significantly? Do you believe that maybe not too many will actually survive the onslaught of the kind of disruption that we are seeing?Chandrasekaran: There are so many good companies and some will change fast, some will change slow, some will make mistakes but there is a big opportunity for everyone. So I am not negative at all. I don’t understand this whole speech.I am very bullish about this industry and there is everything going for this industry, there is tremendous demand for technology in the months and years to come. Yes, we have to change because everything is changing, the core technology is changing, everything is becoming cloud, everything is to be viewed in the context of automation, machine learning, systems investment from the back office is moving to the front office.So all this means that there is a lot of thinking that needs to go and lot of investment has to be done in talent development, in tools, in partnership, you formed a partnership with SAP and all, now you also formed a partnership with GE. So the kind of companies you have to work with, everything changes.We have to be alive to those factors, if we are going to sit and say that nothing will happen and I am going to get my revenues, it is not going to happen.Q: But is collaboration going to be the big theme going forward because we are seeing it happen? Large companies who otherwise you would have never imagined collaborating are collaborating today?Chandrasekaran: Collaboration is a big theme and so I am not negative on it.Q: Let me ask you to comment on what we heard Mr Mukesh Ambani saying that data is the new national resource, data is the new oil but also saying that perhaps President Trump is a blessing in disguise but because it will force Indian IT companies to focus on the Indian market and address India’s problems, I know TCS has been doing that, you have had a great experience?Chandrasekaran: See it in context. The spend of the IT industry, the spend on technology in US and the spend on technology in India, you cannot compare. So we have to be relevant to each market like the number of companies that are there, the amount of spend they are having in technology, so that is all different. So India is a very important market. I think that there is a lot of opportunity to do more. I told Mr Mukesh Ambani last time when I met him that you are putting this beautiful pipe and network and hope we can build something on top of it so that everybody can grow. That is true. Those opportunities exist.It is not only for TCS and other companies, it is also for a lot of entrepreneurs, lot of start-ups. I do believe that the opportunities exist and healthcare, education everywhere but it is going to take time and the problem with the market and everything has to be seen in a quarter to 12 months to 18 months timeframe.I cannot, in that context, see the shift but that shift will happen.Q: When I asked you what was Chandrasekaran's handing over note to you. You said he said keep smiling. But I am sure he said a lot more beyond that. What would be the big problem areas that you would watch out for at this point in time as you start the new innings?Gopinathan: I am focused on the opportunity. As I said we are at an inflection point, amazing new stuff that is happening. I was commenting somewhere else that IT is moving away from being a cost centre to a profit centre and that is what you are seeing every industry exploit. So the space that was available to us is constantly expanding, a huge opportunity and that is where the excitement is.Q: I am not supposed to ask you any Tata Sons' questions, so let me end by asking you 21st -- nervous, excited, looking forward to this new innings?Chandrasekaran: I think it is a very big job but the canvas is large, a lot of exciting things to do and there are challenges and opportunities. I am looking forward to it and I hope I can make an impact and make a difference.