Hoping for better 2016; US likely to be growth driver: TCS CEO

TCS Chief Executive N Chandrasekaran says that there have been no negative indications in the busines environment for 2016, and expects US to be the main growth of engine for his company.In an interview to CNBC-TV18, he says the company is still in the process of collecting inputs from clients on their IT spending budgets.TCS's December quarter earnings announced post market hours Tuesday fell short of market expectations. Chandrasekaran tells CNBC-TV18 that the quarter gone by was the worst December quarter since the global financial crisis of 2008-09.Traditionally December quarter has always been weak for IT companies because of the holiday season which leads to fewer billing days. This time, the weakness was further aggravated by troubles in the Indian market, which included the Chennai floods.Chandrasekaran the base effect also contributed to the weak performance during the quarter, adding that volume growth was similar to that seen in the year ago quarter.Japan and India were the two problem areas for TCS pulling down overall quarterly performance.He says Japan was impacted by integration issues and delay in deals getting finalised. He expects it will be at least another couple of quarters before the business there stabilises.The Indian business has not been consistent and consists of many small orders. Chandrasekaran says TCS has reduced exposure to the Indian market because of a steeper than exepcted drop in revenues.He says the energy business should bottom out this quarter, and that the insurance business has stabilised.He says pricing has been stable and even when it has been lower, the company is not giving up on deals.He says the impact of higher visa costs could be anywhere between USD 25-50 million.Below is the verbatim transcript of N Chandrasekaran’s interview with Menaka Doshi on CNBC-TV18.Q: What is the year looking like, is it looking any better or worse than 2015; I am talking about the calendar year, not the fiscal year because I know you are going to tell wait for one more quarter before give you any sense of the next fiscal?Chandrasekaran: I think the New Year has begun okay and usually it takes few weeks in the New Year to get all inputs because people are just coming in after vacations, but, the initial indications are quite good and nothing negative so far. Q: So is it better than 2015, worse than 2015? Chandrasekaran: We are not able to yet assess that primarily because the indications we are getting are more in terms of budgets. We are going to be spending money but they have not said that how much it will be and what areas, etc. We are still collecting inputs from the field. Q: I do want to ask for the precise impact of the Chennai situation on your topline. You have not shared any numbers though I think when in December you cautioned investors about the impact. At that time the estimate was that it could be 1 percent of topline. Can you give us some more detail on this, any kind of breakup to give us a sense of really what your actual numbers were and how Chennai and then I will come to some of the other impacts like India hurt it?Chandrasekaran: If you look at the quarter we have had, multiple headwinds. We have had the usual furloughs, we have had our trembled markets – couple of situations, we have explained and then we also had an additional headwind in the India domestic business which was much higher than what we thought. So, all of that put together, we had a headwind and that is why the consequent growth was only 0.5 percent. So, there is no point in breaking out in each one of these because it is a one-off. Q: Chennai, what was the impact? Chandrasekaran: We don’t want to breakout.Q: Why, I think you had cautioned that there would be a 1 percent impact.Chandrasekaran: We never gave a number, we basically said that it is going to have an impact and it did have an impact and I don’t want to quantify because it is not a trend, it is just a one-off. We don’t think that is going to happen again.Q: But, it will help put the real topline in perspective.Chandrasekaran: It does not matter, because there are four or five factors that have costed and we would like to say that it has been a muted quarter of half a percent and we would rather say that the next quarter we see we are going to beat. Q: There is no escaping that it has been a tough quarter. I think you partly warned us that it is going to be a tough quarter right at the beginning or rather the end of last quarter, but I think it has turned out tougher than most people anticipated as well. And I was trying to look at some of the historical data on how Q3s have fared for TCS. Is this probably one of your worst quarters since FY09?Chandrasekaran: Q3, traditionally is a weak quarter, but this time is worse than ever before.Q: So, is this the worst Q3 since FY09?Chandrasekaran: Volume-wise, Q3 was similar to last year. It is only 0.4 percent, about 40 basis points. But, one should say that, especially from a dollar perspective, this is the worst ever quarter.Q: Since FY09 and FY09 was the global financial crisis. Chandrasekaran: Yes.Q: So, the worst quarter in that many years. Seasonally weak quarter but even despite that, the worst quarter in all these years?Chandrasekaran: Yes._PAGEBREAK_Q: You brought up volume and I am glad you did because I want to ask you a question on that. Last quarter, you sounded very confident. You said we are in our best ever order book position. This quarter, in fact last night, when you were speaking with analysts, you characterised in your opening remarks, demand looking as very good and you were talking about the acceptance of several platforms including digital platforms, yet volume growth seems to be petering off considerably. Some of it is base effect of course as you grow larger but I was looking at Q3’s and I am only looking at Q3’s to keep the seasonality in mind, you have gone from something like 5-6 percent now to 0.5 percent.Chandrasekaran: No, 5-6 percent not in Q3. If you look at the Q3 volumes, Q3 volumes have been traditionally lower than any other quarter. Second one is even when I talked about the order book, an order book reflects the volume that we will get over multi years. When we say an order, an order is usually a contract which will play out. The second thing is Q3 will have the impact of furloughs.Q: I am only looking at Q3, so, Q3 FY10 – correct if I have got these numbers wrong, 6 percent and more, FY11 5.7 percent and more, the next year you did 3.2 percent then you did about 1.25 percent, now we are down to about 0.5 percent. Somewhere it attributes to base?Chandrasekaran: But that trend will continue even if you look at the Q1. In those years, the Q1 volume would have been much higher. So, that is the base effect.Q: All of it is base effect from 5 percent to 0.5 percent?Chandrasekaran: Some of it is base effect, some of it is furloughs, some of it is one-offs. We have had one-offs; we have pointed out five one-offs this quarter.Q: In the beginning of the year, you pointed out some weak spots for instance energy, Japan, Diligenta and Latin America and you said that it could take till the end of the fiscal to fix many of these. Latin America has turned around for you this quarter so that is definitely good news, what about Diligenta, what about Japan, what about energy and then I will come to India which has now become a weak spot again?Chandrasekaran: Diligenta, I said in the call yesterday that we have one more quarter to go.Q: After which things will stabilise or will turn up?Chandrasekaran: It will at least stabilise. Will turn up or not I don’t know. At this point I am looking at steady revenues in Diligenta post Q4. With respect to Latin America, it has turned the corner.Q: What about Japan, is it just integration issues there that are playing out right now, why is it still a weak spot for you?Chandrasekaran: It is not only integration but also the deal closers are taking much longer. We are calling on clients.Q: But the acquisition was supposed to in fact embolden and strengthen your presence in Japan.Chandrasekaran: It will but Japan works on a different time scale so it is not going to be very rapid ramp up but I expect that we are able to make a positive growth soon in that market but I will want to wait at least one or two more quarters.Q: So another couple of quarters of weakness in Japan for sure?Chandrasekaran: Whether it is weakness or whether it is flattish, I don’t know but you will see that; I am not giving any commentary on Japan yet.Q: I want to talk about energy. Crude prices are still falling every single day and I am sure that is a contributing factor to spends in that sector.Chandrasekaran: Energy is a very small exposure for us.Q: But all of this is adding up because even India is a small exposure.Chandrasekaran: India is a larger exposure than energy so energy I think will bottom out because our exposure to that sector is so small.Q: Bottom out by the end of this fiscal?Chandrasekaran: By end of this fiscal. I would not say India is a headwind or anything, India has been volatile and we have been trying to fix that. Our India business has also come down from 13 percent of the revenues to 6 percent but this quarter the extent of drop is more than we anticipated because it is not a single client or anything like that. We don’t have any big ticket clients ramping down in India. It is very distributed, a lot of small projects but didn’t happen. Q: I do not want to focus too much on India, because over these last several quarters that I have been talking to you, some quarters India does well, then there are quarters that it does very poorly and you keep putting it down to the fact that it is by nature of volatile market, in that sense. But, I still do want to ask you, is it going to continue to depress your numbers over the next few quarters. Is there any way to tell because it has pulled down your numbers considerably?Chandrasekaran: My answer to that is that we will not see that impact on a sequential basis, but suddenly, the volatility can come back. If you see, it is not that consistently has a de-growth, suddenly it has volatility.Q: So no way to tell whether India will continue to depress numbers in the next quarter or the quarter after?Chandrasekaran: I think it will be okay next quarter, from what we see.Q: What has gone wrong with India? Is it that some orders did not work out?Chandrasekaran: Yes, some orders did not work out, some orders did not get closed. Q: You got asked this question in the analyst call several times last night in many different ways and I will put it to you again today, right now. It is a seasonally weak quarter, Q3 and Q4 always are that for you, especially Q3, but has this been weaker than otherwise and if yes, which is suspect you will say yes, can you talk us through the reasons? Is there any way to extrapolate some of the reasons to maybe what demand will look like for the rest of the year?Chandrasekaran: As I said, apart from the known things which I had already communicated, one single lump thing that came out was India domestic business.Q: No, that is fine. I am talking about the furloughs, I am talking about the US and Europe.Chandrasekaran: But, if you look at the international business, 1.1 percent constant currency growth which is quite good considering the fact that all the furloughs and all the other headwinds did affect international business, and US has done well at 1.4 percent which is not bad.Q: So, there is nothing that you are seeing in Q3 that can be extrapolated to the rest of 2016 saying this is what the rest of the year is going to look like, obviously, not on the same numbers, but relatively?Chandrasekaran: Especially, in the core markets. We cannot find anything in the core markets which is giving us a caution._PAGEBREAK_Q: What about competitive pressures, especially pricing pressures? The chatter on this has only built up over the last several quarters and when people look at your numbers and look at six straight quarters of below street estimate performance, it does get linked to the fact that your competitors are a lot more aggressive out there.Chandrasekaran: We have two ways to look at it. One way to look at it is whether we are seeing pricing decline. Our pricing has been stable for a number of quarters, a number of years. If you look at it on an annual basis, we have shown that for the past several years, it has been consistent, it has been stable and we maintain that. Second thing is, whether on a particular deal or a particular sector, somebody is getting aggressive, that always happens.The third question people keep asking is that are you inflexible so much and so much fixated on margin.Q: Which is not itself a bad thing. A business by itself means nothing if it is not a profitable business.Chandrasekaran: It is not about good or bad, but we think that both growth and margins, both are important. We do not like to be fixated on one versus the other.Q: Are you giving up on deals because of undercutting, because of pricing pressures. Does that explain the volume slowness to some extent?Chandrasekaran: There will always be deals you give up, not only because of pricing but, also because you feel it is badly structured, you cannot execute, there are a lot of things because of which you will give up deals.Q: Okay, I will re-phrase my question. Are you giving up on more deals in the recent past because of pricing pressure?Chandrasekaran: Not really.Q: How close are you to any kind of big acquisition? I know you are still settling Japan in but that too was not as large as maybe some of the rumoured acquisitions that you are supposed to be in the line for.Chandrasekaran: There are always rumours.Q: You identified, US, Europe, healthcare and platforms as areas that you want to look at inorganic growth in? That is what you said yesterday, in the press conference, in the analyst call. How close are you to an acquisition?Chandrasekaran: Two things. One is that we firmly believe that there is still a strong organic growth opportunity and we will continue to stay very focused on organic growth. Second one, we keep looking, but nothing turns on yet.Q: Are you in the fray for Dell’s Perot business?Chandrasekaran: We cannot comment on speculations.Q: There is no speculation. I am asking you a direct question. Are you in the fray for Dell’s Perot business?Chandrasekaran: I cannot answer anything about any acquisitions. If we do any acquisition, we will tell you.Q: Let me put it to you this way. Are you looking at an acquisition that is probably small in size, but gives you strength in a specialty or are you looking at an acquisition that will catapult your topline by a substantial amount?Chandrasekaran: We do not do any acquisitions for adding revenues. That is our strategy. Our focus for acquisitions remains the same. We will look at certain sectors like healthcare. If there is an opportunity, we will do.Q: But, Perot I am told, specialises in healthcare, in US. So, it ticks two of your boxes.Chandrasekaran: But there are many other companies in healthcare. There are platforms we are interested in, so we keep looking at these opportunities. But, we have looked at many, we have passed many, but it does not mean that we will do one acquisition or the other. We will see. We are not under pressure to do any acquisition.Q: Nobody is putting any pressure. I am just saying, FY17, likely to see any big deal, transformational deal?Chandrasekaran: Cannot say.Q: Cannot say or will not say?Chandrasekaran: Cannot say.Q: Anything new to report on digital? I know that we have seen an inch-up in the contribution to revenue to now 13.7, almost 14 percent. At this pace, will you be doing roughly about 20 percent of revenue by the end of the next fiscal?Chandrasekaran: We should, I think._PAGEBREAK_Q: So, a fifth of your business will come from digital by the end of next year.Chandrasekaran: It is picking up momentum, so definitely. I have maintained that every business will become digital over a period of time. So, then we have got to start to think about what is the right way to express the composition because everything will move over to some form of digital.Q: Any colour that you can add to the digital business at this point in time, deal sizes, volatility, is it getting impacted in some sense by some of the pricing pressures?Chandrasekaran: Our digital business has multiple components. One is based on the four or five core areas like big data analytics, insights, digital marketing, cloud, internet of things. So, these are different areas of offerings and services which is picking up a lot of momentum with a lot of clients. The second one is the number of platforms which we have invested over a period of time and we have launched almost all of them recently and they are all picking up momentum, whether it is iON, whether it is, I mentioned a lot of them, intelligent urban exchange and many of those platforms have been launched and we have got many clients showing interest. Some clients have signed up and so on.However, the key thing is all these platforms need to scale up. So, we need to have many clients come on board. So, I do not know the rate at which it will scale, so we have got to watch this over the next few quarters.Q: But by the end of the next fiscal, a fifth of your revenue will come from digital?Chandrasekaran: It should.Q: Any colour you can add on Ignio, how that artificial intelligence (AI) platform is doing?Chandrasekaran: We have signed a few deals last quarter. We have implemented them this quarter, we have signed a few more deals this quarter.Q: Small, medium sized, large-ish?Chandrsekaran: Small deals.Q: So not yet a significant contributor to revenue?Chandrasekaran: When it becomes a significant contributor, we will spill it out.Q: Headwinds for this continuing quarter of this fiscal that is Q4, what would you identify as the big challenges as you sort of finish this fiscal which has been a really tough one? Chandrasekaran: We need to get settled the de-growth from Diligenta and our insurance business services side has stabilised but we need to see growth because it is pulling down the overall BFSI revenues. However, BFSI is doing quite well. We need to see uptick in Japan and we need to look out for anything else and as I said in the call yesterday, I am not overly concerned about the macro. Q: Really not, you look at what is going on in China, what it is doing to financial markets across the world, it has been a difficult start to the year right?Chandrasekaran: Yes, absolutely. First three or four days have been horrendous actually, but, having said that, we need to watch. So, that is why if I am already overly concerned then it is a different story. We need to see how it plays out, the macro how it plays out and what kind of an impact it can have. That is something we have to closely watch. Q: What is the impact of the increase in costs of US visa’s going to be? Chandrasekaran: It will be upwards of USD 25 million for us. It could be USD 30-40 million or so. Q: South of USD 50 million?Chandrasekaran: Yes, south of USD 50 million. Q: It will be spread out through the year, how will it work, where will we start seeing the impact? Chandrasekaran: It also depends on the fulfillment and the delivery model. We are looking at it, how much will be visa based people.Q: There will be shifts in that to try in some ways mitigate this increased cost? Chandrasekaran: We need to look at this. We need to mitigate that.Q: But you are capping the sort of impact at about USD 50 million at this point in time? Chandrasekaran: Yes, USD 25-50 million at this point of time.Q: We have over the last three quarters or two quarters now and this is the third quarter of this year and all through the previous fiscal spoken of how the company is missing street estimates time and again. I know you say 10 million here and a 10 million there, it is really tough on a quarterly basis to be held accountable for those sort of slightly minor numbers but I am still going to ask you this question. Where is the gap, this time after the warning on the account of Chennai estimates were revised downwards? You have still come in below estimates, where is the gap, why is this happening? Chandrasekaran: Estimates are estimates and the fact is that whatever is the median estimate, consensus median estimate, we have missed it for the past several quarters. Q: Why is this happening? Chandrasekaran: It is not that one wants to miss estimates. However, estimates are estimates. I think for me, I have to look at how the core business is doing, I have got to see any one-offs and I have got to make sure that those one-offs don’t repeat.Q: But every quarter there is a different combination of one-off’s? We started the year, there was energy and Latin America, Japan was anyways an integration issue, Diligenta built up, this quarter India has gotten added to the mix. Chandrasekaran: That is why there is no point into getting into individual items but the fact of the matter is that we missed estimates from analysts; that is pretty that way. We will work on it. That is a much better way to handle it rather than – it is not an issue of blaming this or blaming that but we have had an incredible run. For the past few quarters – we are still within the lower band and the higher band but the point is that we used to come above the consensus or sometimes above the high end of the estimates. However, for the past several quarters it has been at the lower end so that is fine, we will deal with it. _PAGEBREAK_Q: When will this underperformance bottom out?Chandrasekaran: We will see. Q: I am sure you can give us some indication. Chandrasekaran: We will see. I think as I said, the business demand is robust, I feel that we have got a strong team and we have got all the capabilities. I think we need to see where is the lapse in execution. We just need to fix that, that is okay. Q: Let me ask the question again, when will the six quarters of underperformance bottom out? Chandrasekaran: Maybe you should look at a fortuneteller. I am not going to say that. Q: None whatsoever? Chandrasekaran: I am not going to say that. I think we are confident and we have got a great engine and our numbers overall, if you look at it, from absolute point of view I think we have very credible numbers and our margin is good, our cash flow is good and our sales are fine. Q: What are you most excited about this 2016, which opportunity has you most peaked, most interested?Chandrasekaran: I think there are many excellent opportunities.Q: Pick the top most one for me.Chandrasekaran: The world will be more moving towards insights driven economy. So, how we can bring that whole insights concept and everything, that will be the most exciting thing.