TCS sees environment being positive for renewals, deal wins

Tata Consultancy Services (TCS) came out on top in the IT pack yet again, posting a 5.1% sequential jump in revenue for the quarter ended September, against 2.5% growth at Infosys and 3% at HCL.

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.

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Q: The street wants to see whether FY14 will be better than FY13, to sustain the kind of premiums that the stock is already trading at, given the early indications and the client commentary that you have heard of, do you think FY14 will be a better year in terms of growth?

Chandrasekaran: The momentum is very good. This year we will definitely come ahead of the NASSCOM estimates. We have delivered more than 5 percent volumes in the first two quarters. Industry structure is such that I do not think there is any problem in delivering double digit volumes for the next few years. There is a lot of momentum and business. My hope is that FY14 will be a good year.

Q: Can you just give us a bit more colour on what you are experiencing with your large clients in the US, in the UK, do you see the complexion of deal fructification different or are you seeing equal momentum across geographies?

Chandrasekaran: There has been a very good momentum across geographies. In the last several quarters, we have been maintaining that Europe continues to do well and again we have delivered a good growth in Europe. US also has delivered a good growth though it is a little less than the company average, still a good growth.

Large clients are driving couple of things. They are driving efficiency, at the same time they are investing heavily into digital. You see those deal-wins in the digital space be it in cloud, analytics or mobility. TCS today has scale in the infrastructure business which is more than billion dollars purely services satellite model. We are well placed in terms of the cloud story. So given all these, large clients also continue to do well.

Q: The only wrinkle in the numbers this time around has been the slight slip in margins, which have missed the street expectations, you have attributed it with the increase in onsite revenues which impacted margins by about 50 bps, do you see a ramp up in these onsite projects which impacted your margins in Q2 extending on to Q3 and Q4 as well?

S Mahalingam: It has not happened because when you start many of the assignments, what we essentially refer to as far as the complex assignments were we needed to either insource people into the organisation or start off in a big way. So, I do not think that is going to be a very major issue going forward.

Talking on margins, it is a much broader issue. It should play out from a strategic perspective because when you make investment in the business, there are many areas where it gets affected. For instance, we have talked about growing in different geographies because that’s very critical for us. Therefore, if I grow in Latin America at this moment of time, the increase in revenue comes at a lower margin and therefore there is an impact that comes in.

In this quarter, India has grown substantially. There are some of these emerging markets from our perspective where the margins come in, but at a lower rate, but it is essential for us to continue to make that investment. When the rupee is in an appreciative state, we would have a different kind of strategy to follow. So, I don’t think the current margin, which is pretty close to 27 percent is something away from what we had envisaged and so on. We will continue to play that.

We are in different service offerings. For instance, infrastructure has grown substantially. It takes a little while before they come to the same margin as we have in other areas. Over a period of one year, even BPO has grown by 2 percent, not in this quarter, but over a period of one year in terms of revenue share and we will be pushing up the margin.

Some of the strategic initiatives including platform-based BPO and so on will start playing out. When we are looking at it as a portfolio, whether it is in terms of service offerings or in terms of the geographical dispersion, there are certain decisions that we have taken in keeping with what we can afford at this time. So, I don’t see fundamentally a major problem, as far as margins are concerned.

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Q: Your margins have fallen by 30 bps on a year on year basis despite a 20 percent depreciation in the rupee. How would you respond to that? If the currency reverses what would be the strategy of TCS?

Mahalingam: Looking at it from a year on year, from a quarter basis it has its own issues. Rupee has depreciated by close to about 18 percent during that period and 18 percent should really have translated into a certain amount of exchange benefit from margin perspective.

But at the same time, over this last one year we have been adding capacity, but we are working with lower growth. For instance if you have a faster growth everything flows into the bottom-line and so on. So we are getting adjusted to that.

The second one is in terms of what do we do with that extra margin that we have? Today if I were to just continue the way that I am doing, go after customers and certain areas and in certain geographies and therefore then I would be able to get a higher margin.

But that doesn’t serve the overall purpose of TCS as a long-term leading player. Therefore that is where the diversification whether it is services or geography comes in. We look at these very carefully. We do realize that the additional margin that is coming in and what do we do with that margin is what we worked out.

Q: Utilisation is close to 82 percent. How much of a margin lever is utilisation from hereon?

Mukherjee: Utilisation is at significant lever. It determines of the total workforce, what percentage is working on customer engagements. From our perspective, we would like to work at a higher utilisation level. We are comfortable even at 83 percent. We have done that before and at the moment excluding trainees we are at about 81.6 percent, so we have a room to grow and then we would continuously push the utilisation up.

Q: Do you need to revisit your FY13 hiring target keeping in step with the improvement in demand?

Mukherjee: At this stage it is playing out as per our plan. We had said at the beginning of the year that we would be hiring 50,000 gross and we are sticking to that plan. We have done about 32,000 as far as the first half is concerned and in remaining two quarters, we would be doing the rest.

Q: Any early indications about what the FY14 hiring target would be?

Mukherjee: It would be difficult to tell. The only thing that I can say at this point in time is the campus hiring that we are doing - we have announced that we will be hiring about 25,000.

 We have already started that process and done half of that. We have visited more than 100 institutes so far and 12,600 is a number that we have already done.