Tata Consultancy Services (TCS) , India's largest software-services exporter, missed analysts estimates on revenue for the fourth straight quarter. But Rajesh Gopinathan, CFO and Vice-President of the company is not too perturbed by it and says the core market business - both in the US and North America - started on a good note this fiscal.
Going ahead, he expects the momentum to build. He adds that typically the first and the second quarter are better than the third and fourth.
TCS's Q1 dollar revenue rose 3.5 percent sequentially to USD 4036 million - lower than analyst forecasts. In rupee terms, revenues grew 6 percent to Rs 25,668.1 crore during the quarter. On the profit front, though, TCS came out ahead of expectations even as profits fell 3.3 percent to Rs 5,709 crore. Analysts were pencilling in a net profit of Rs 5,466 crore.
While agreeing to the reality of heightened competitiveness, Gopinathan is confident of achieving growth better than industry. He also adds that the company saw a currency tailwind of 70 basis points on margins.
On the attrition front, Ajoyendra Mukherjee, EVP and head-global HR, TCS, says, seasonality aspect is at play here.
Reiterating CEO and MD N Chandrasekaran's point that a lot of people in Q1 leave for higher studies, Mukherjee adds that typically attrition in Q1 is a little high considering the company also completes its annual appraisal process.
However, Mukherjee feels that TCS can provide far better opportunity than others. Going forward, he expects a fall in the attrition rate.
Below is the verbatim transcript of Rajesh Gopinathan and Ajoyendra Mukherjee's interview with Menaka Doshi on CNBC-TV18.
Q: Are you looking a little bit more relaxed this quarter than you were last quarter? Are you feeling a little bit more confident about the year?
Gopinathan: Q1 is off to a good start in our core markets. So, to that extent, it is a good one because both North American and banking and Financial Services (BFS), momentum seems to be back. And, that is always a good thing because growth in the core markets is the best form of growth that you can actually get.
Q: When are we going to see the expected pick-up in revenue in that sense? You have been underperforming expectations. Yes, this a good number, I am not saying that at all. Given the size of TCS, given its leadership, it is a good number, I am just wondering when you are going to start meeting expectations again.
Gopinathan: That is a dicey one in terms of where the expectations and what understanding is. As we said, this number, I mean rather this quarter, we are seeing growth in our core markets which is fairly strong. And there is some amount of negative press that we got, or rather the negative numbers that we have from some other peripheral markets which coincidentally happened to come together in this period. As they sort it out because they are volatile markets, we expect that we should see this momentum build during the course of the year. And should keep us in a good position.
Q: So, Q2 revenue growth will be better than Q1 revenue growth?
Gopinathan: That we will have to wait and see.
Q: Qualitatively though, I am not asking for an estimate, I am just saying qualitatively do you expect it to be better than Q1?
Gopinathan: Q1 and Q2 are typically better than Q3 and Q4.
Q: December quarters, yes, therefore I am asking.
Gopinathan: Beyond that I would not like to say anything.
Q: Talk us through your margin performance, that has been a positive beat, a positive surprise, as they say, so what has contributed to that, both in terms of the tailwinds as well as the headwinds and whether these are likely to persist in the quarters to come?
Gopinathan: The headwind is fairly straightforward which is the wage hike. So, that is in and digested.
Q: And despite that you have done a better than margin expectation?
Gopinathan: That is right. So, that is pretty much in the numbers now, 190 basis point negative. We got a tailwind of the currency of about 70 basis points, which is always volatile, which can be anywhere. We have about 30 basis points of productivity gains and mostly it is coming as growth in the better markets like North American market picks up and they come in at a margin profile that is much better than growth in some of the more marginal areas. So, that is what is contributing to the margin side of it. And if North America continues to do well... (Interrupted)
Q: Which you expect, as of now, it looks as it will persist in that?
Gopinathan: So, that will be the tailwind per se.
Q: What explains the drop in realisation?
Gopinathan: Realisation, as we have always discussed, this is the in the third quarter rather, we have had two quarters of uptake and this quarter it is pinned down. As I said, realisation, as a proxy for pricing is a poor measure. We do not have anything to replace it with, but realisation is going to be volatile; the reported realisation numbers.
Q: So, it does not mean pricing pressure?
Gopinathan: No.
Q: It does not mean heightened competitivity in the market place? It does not mean pricing pressure on digital deals or something like that?
Gopinathan: Let me put it this way, heightened competitive activity in the market place is a reality. Customers asking for better pricing and constant pressure on pricing is a reality. What we are saying is that on a leg-to-leg basis, are we seeing a significant deterioration in pricing? Or are we seeing a secular downtrend in pricing? Then we are not. And again, if you look at the reported realisation number, for the full year FY14 to full year FY15, it came in absolutely flat. So, this number of realisation was an important metric earlier when we had a fairly single business model kind of a business. Nowadays it is losing its relevance and probably time for us to mothball it and look at the overall constant currency revenue growth because that is a better indication of the business rather than 4.8 of volume versus minus 1.3 of realisation.
Q: There is some data you stopped giving and I also want to talk to you about, but before that I am going to go to the really important people angle of this. Attrition numbers have been moving higher and higher for almost six consecutive quarters. Do you agree with me on that? The numbers are not looking good at all this time. What has gone wrong?
Mukherjee: Two things. One is the seasonality aspect of quarter one which is people do leave for higher studies at this point in time. 80 percent being... (Interrupted)
Q: But, this is your highest ever, 15.9 percent
Mukherjee: Yes, it is. So, that is one. Second thing is that we complete our annual appraisal process, so these are the two additional factors that come in.
Q: But, this is what happens every year. What explains this number this quarter?
Mukherjee: That explains the jump. But the fact is the base attrition level itself is higher.
Q: Why is that?
Mukherjee: That is because today, if you look at the overall job market is pretty good. The market is pretty buoyant, number of opportunities, the other aspect that we are noticing, I am not giving that giving that as a theory that that is what is responsible, is today the whole generational kind of requirement debt is coming in. We have about 80 percent of our whole workforce as gen-y, and what they want is something which is immediate. So, we have meet those requirements immediately. You do not have time to wait. So, if you want, you are in the maintenance kind of an engagement, you want to get into a development project, I want it today, I want it tomorrow.
So, some of these things are taking time and the full competency development that we are, so what are we doing in order to bring that down is we are looking at rotation of people from which we allow. So, it is not something new, it is how do we strengthen that process. How are we going to build the competency which is going to give the career opportunities that people are looking at and so that they can stay and then finding these opportunities internally because we still feel that the kind of opportunities that TCS can provide is very difficult for anybody else to provide those kind of opportunities.
Q: You expect this number to decline in the current quarter?
Mukherjee: Going forward, yes.
Q: Are you at some level may be okay with this sort of tightening your workforce a little bit?
Mukherjee: It is not tightening the workforce from that angle what you are saying but from the point of view of the total number of people leaving in a quarter that definitely expect that that should come down because of the simple fact that the two additional factor that I talked about in Q1 from a seasonality point of view that will not be there in Q2. So that will definitely have an impact.
However, if you ask me about last twelve months (LTM) the problem is my last three quarters is high which is going to carry forward as far as the next quarter is concerned when I do my attrition computation I can’t wish away the previous three quarters so that will have an impact. But as far as the current quarter, Q2 is concerned I definitely expect that the numbers should come down.
Q: Given that your Q1 for this fiscal has not be as good as Q1 for the previous fiscal and the fiscal before that if you want to maintain last year’s growth rate or do better than that of 15 percent you will have to run harder in Q2. Are you going to be able to achieve that?
Gopinathan: I will have to comment about what we think that the year will be vis-à-vis the earlier year. For this year what we have said as a commentary is we expect to deliver industry leading growth and that is a factor of our competitive positioning, our relative competitive positioning and our relative win grades in the market. Where, currently we see that to be fairly strong and we are on course to deliver on what we have said vis-à-vis how it will turn out compared to last year we are not making a comment.
Q: I am sure you want to at least maintain last year’s growth rate and not actually slip from that so therefore you will have to work harder in Q2. The Q2 at this point in time because we are already in it gives you the sense that you will do better?
Gopinathan: As I said I am not commenting relative to last year. Will have to work harder in Q2 that is obviously a given.
Q: Will Q2 be better?
Gopinathan: Not commenting.
Q: Even from where we still here right now?
Gopinathan: Absolutely.
Q: You have stopped giving some data. I think you stopped reporting onsite, offshore. You have stooped reporting your contract quality in terms of fixed price, time and material pricing. Why is that? Is it because the onset of the digital business doesn’t really fit itself into this traditional measurement or metric in that sense?
Gopinathan: Yes partially and at a larger scale the business has become a lot more complex. These matrix were designed 10 years back when we were a much more uni-business model kind of idea. We needed to give certain amount of confidence to the investor base and also there were fairly good indicators of the underlying business because it was a fairly straight forward business set.
Now this matrix, incrementally don’t add that much of value. It actually leads to volatility and like the discussion we had about realisation and pricing and when we benchmark it to other global peers of our comparable size they are also not providing these kind of matrix.
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