Dismissing any talks of a poor execution that resulted in dull Q4 earnings, N Chandrasekaran chief executive officer, Tata Consultancy Services (TCS) says the company faced slight disappointment in Q2 and couldn’t make up for it soon enough.
In an interview to CNBC-TV18, Chandrasekaran says the company’s execution has infact been solid and the dismal Q4 earnings come on the back of poor macroeconomic and demand conditions.
However, Chandrasekaran is positive on the company’s digital business for the upcoming quarters and expects it to grow steadily both in terms of size and numbers.
While the optimism isn’t lost on him, as he believes the best of the company is yet to come, Chandrasekaran says the company’s insurance business Diligenta is likely to see further growth in the days to some.
Below is the edited transcript of N Chandrasekaran's interview with Menaka Doshi on CNBC-TV18.
Q: Last year the same time when we were sitting and talking about what FY15 will look like, you did sound very optimistic, you said that it would be much better than FY14 or better, I am not picking words there but it has been a difficult year in comparison to what you had laid out. Would you put most of that difficulty down to macroeconomic forces or would you say that there have been some execution slips as well?
A: If you see the slip has been a slight disappointment when Q2 started and then it is kind of carried through, we couldn’t make up for that.
I would not be able to just say whether it is execution or macro but to some extent -- because the misses were very slight, small and maybe sometimes it is a volatility in a particular segment. Telecom has been volatile and now we feel energy is going to be tough this year because of the oil etc but I wouldn’t entirely be able to put it on macro. It is just that expectation and our performances.
Q: If you are not entirely able to put it around macro then it would be fair to say whether it is telecom or even the problems in your insurance business, on the Diligenta front has been difficult to fix at least intrayear, maybe you will be now be able to fix them hereon you have indicated that they will bottom out but does that indicate that somewhere execution has maybe slowed down -- just to understand what the year was like?
A: No, it is not execution, it is the nature of certain parts of the business. Diligenta deal cycles are pretty long and we don’t have solid pipeline in Diligenta. So that is hurting us.
Q: That solid pipeline is an execution miss?
A: That is not an execution miss, it is more a demand.
Q: So you say 80 percent macro, 20 percent execution or 100 percent macro?
A: Macro and demand.
Q: Demand is macro?
A: 80 percent is macro and 20 percent is demand. Execution has been solid.
Q: As we sit here for FY16 what is your outlook? Will FY16 be better than FY15?
A: I am not going to get into that.
Q: But you have admitted that FY15 has been a difficult year, so are you saying that FY16 is that difficult?
A: The way I would put it is that the environment is good barring the three headwinds which I outlined in the call yesterday which is volatility in the telecom sector, energy and Diligenta. Diligenta will still go through a certain amount of degrowth barring that the environment is quite solid. India has done well compared to where we started but we have to see whether it is going to takeoff or it is going to be still a slow growth. I cannot tell as yet.
Q: Given that you have just laid 80 percent last year’s blame on macro. When you say that the environment looks good that means FY16 is going to be better than FY15 at least on the macro front – that’s your expectation as we stand here today?
A: You learn every year, every time what not to do.
Q: What not to do or what not to say?
A: What not to say, what not to do, so I am not going to make a statement.
Q: You have had an incredible 5 years at TCS. I know you celebrated 10 years with a special give away to both your shareholders as well as your employees and congratulations on that. But I am looking at half of that, 5 years, FY10 your revenue was 6.3 billion approximately that. You had about 160,000 employees, this year you have closed with above 15 billions you have gone from 6 to 15 billion in FY15. 310,000 employees approximately you have done really hard and fast in the last 5 years. Is it realistic for us to expect that you continue running at that pace in the years to come? Thus base effect, size starts becoming a bit of a drag just so that you can tell us what to expect from this mega size TCS as opposed to what the last five years brought out?
A: Some analysts have also written about base effect but I don’t quite subscribe to that view. The reason for that is in the overall technology business and IT services industry we are still very small. Our market share is very small. Secondly, the effect of technology is only getting deeper and stronger in every business so the opportunity and addressable space that we have is enormous.
Thirdly, TCS today in terms of capability, in terms of people, talent, intellectual property and market positioning is in a much better position to capture many of the opportunities that we couldn’t have done several years ago. So, given all this there is no reason why TCS should continue to perform exceedingly well.
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Q: So on constant currency terms, on your full revenue figures, in FY12 you grew 23 percent, FY13 you grew 16 percent, FY14 you grew 17 percent and FY15 you grew 17 percent. The last three years you have maintained it but in the last three years, have we seen some coming off the peak growth rate, I am just asking.
A: 17 percent is a pretty good constant currency growth, I will take that and any market will take that.
Q: I think my question is this -- is the best in terms of absolute growth rate figures behind us now and you are saying no that is not the case?
A: Yes, that is not the case.
Q: So the best is yet to come for TCS is your assertion at this point in time?
A: Always.
Q: How are you going to fix insurance, the Diligenta problem, what are you going to do about telecom, energy is not in your control in that sense given where crude prices are but how is all of this going to change in the quarters to come?
A: Both energy and telecom are to some extent the nature of the industry today where they are in their own evaluation -- energy, the oil where it is but telecom industry itself especially the communication product segment -- when I say telecom, I mean the communication service product segment is going through a major transformation. They are trying to define their own future in terms of their business. So I think that will play a lot while it will present a lot of opportunity, at the same time it will also go through volatility. You are not going to have uniform growth across the client segment, across the market and so on and so forth.
Q: So have you bottomed out on insurance and telecom or is there still some bad news in the pipeline?
A: Telecom I am not going to be able to say that because what I am saying is that suddenly you will see a growth, suddenly you will see a dip, volatility there. That is the point I am making in telecom.
Insurance -- on the services side, excluding Diligenta, we have bottomed out. We will continue to do that. It did reasonably well, it did about 11 percent last year, I kind of separated it out so that the market could see where we are excluding Diligenta.
Q: How do you fix the Diligenta problem?
A: It is a long cycle business, it will do very well because it is a very solid platform, very unique platform, has a very modern technology but it will take time because the deal cycles are sometimes two years also, sometimes 18 months.
Q: So it could take all of FY16 to fix that problem?
A: It could.
Q: Are you talking us down because last year when you spoke, talked us up, you had to revise the outlook two-three times in the year so to speak and therefore you sound very muted right now about what the year is going to look like and I cannot make out of that because you feel not very confident about the year or you are just compressing our expectations?
A: I have given you enough qualitative comments, I am just not getting to your number.
Q: What is the outlook on big deals, clients additions for FY16, you have got a quarter in terms of client addition in that sense?
A: Normally good quarter and a good year.
Q: And discretionary spends, are companies looking as if they are going to reach to their wallets, so a little bit more in FY16?
A: I think the client additions have been spectacular. If you see the metrics across the revenue bands, it has been satisfactory and I hope that we can continue that momentum. That is core to TCS strategy to be very close and relevant and bring out full services capability. So there I am happy. The discretionary spend, my take is that based on the meetings I have had with clients -- the discretionary spend on digital will increase almost in every customer that we work with. Some will have funding for that, some will be trying to take cost out from their current portfolio of IT spend and then reinvest in digital. It is not that money is locked up for every engagement but the engagements are random. So they will have to find the money, somewhere they are getting funding, somewhere they have to internally fund it.
However, overall discretionary spend on digital will be on the up this year.
Q: But digital is still a very small fraction of your business or in terms of total revenues, so talking about non-digital revenues, you are expecting discretionary spending to go up?
A: Every discretionary spend in every business will be predominantly digital and in some businesses it will be some transformation because they have not done the transformation. So those kind of initiatives will come in but everything is going to be towards moving to digital. So most of the discretionary spend will go towards digital. However having said that, whatever will be the size of the digital, it is all incremental and it will be on the up for the years to come.
Q: It is not your core business.
A: Digital is core, it will turn everybody’s core.
Q: But as we stand here today, it isn’t your core business therefore I am trying to understand, in your core business is demand looking good, are spends looking incrementally better, substantially better?
A: Most of the traditional business is where you find a lot of rebids coming up. So there we continue to win. So from our point of view, we are going to define demand as both traditional, as well as digital.
Q: Traditional demand is looking good, better, substantially good?
A: Very good. I walked through sector by sector and barring these three I have said demand pipeline orderbook is solid.
Q: Big deals, is this going to be a year of big deals?
A: There will always be few big deals and there will always be many small deals. It is going to be mix bag, you are never going to do a year full of big deals or a year full of small deals.
Q: A better year in terms of big deals?
A: I said enough Menaka.
Q: You spoke of digital, earlier on a couple of port as ago you had said that digital will eventually become a business of USD 3-5 billion of revenue let say in the next 2-4 years. At this point in time would you want to revise that estimate in any fashion downwards, upwards?
A: No
Q: How will FY16 be different from FY15 in terms of digital? Are you seeing bigger sort of contracts sizes, a better margins, can you give us some colour on that?
A: As I said digital business will continue to grow steadily for the next several years and both in terms of numbers of deals, size of the deals, contribution or incremental revenue every year will get better than the previous year. So FY16 digital contribution will be higher than FY15.
Q: In terms of a year of investments, and I know you have been sort of calibrating investments to keep within your margin band, the stated margin band and so to speak but is this going to be a year of enhanced investments if you expect digital to become the core of your business in a year or two are you pumping in more money on that front? Can you again talk us through skilled test? For instance in the analyst call you spoke about official linked intelligence platforms, so if you can talk us through some of the new skills that you are developing in this space?
A: Our investments go in multiple categories one is cloud platforms, we have invested in number of platforms and for the first time we shared that the 7 platforms under that category grew 55 percent to deliver USD 125 million of revenue this fiscal.
Q: That is not your total digital revenue that just a fraction?
A: It is just a cloud platform. Then we announced yesterday that we have been working on artificial intelligence linked platform which we call it has services software. The could platforms are software of service.
Q: You are saying System Application & Products (SAP)?
A: No that is software as service. This is could platform, this is services of software because they automate the services and we will be launching that pretty soon. The pilots have gone off exceedingly well. These our initiatives in anything to do in this area of digital re-imagination, cloud platforms, services as software platforms or designed studios where we have invested big time in our Santa Clara lab those are areas in which will just not cut investments. In general our investments will continue.
Q: At what pace?
A: We will continue as the pace is required. We will find the money; money is not the problem so that is not the issue. The issue is that we just have to make the right investments and we should be able to manage that investment because that is also a bandwidth.
Q: How are you seeing change in the kind of digital projects that are coming your way? Are they getting bigger in size, is it a volatile business, you don’t see the steadiness in these businesses as you would have seen in your traditional business earlier. Can you give us some commentary on that?
A: The way the companies are looking at digital, they look at end to end view, beginning to take a point of arrival view. What does it mean for me to adopt these technologies to be able to change my process end to end whether it is customer facing process or a backend process etc and then the number of projects are kicked off, so typically you do not sign a very large deal, sometimes you sign a deal as you are the digital partner for the customer and many of those we do then execute a number of projects, so each project will be small, a few million dollars or less than a million dollar sometimes but then you are the partner for the customer in digital journey so you end up doing a large volume of work but the pricing may be also higher but the investment is also higher because we are significantly investing in training. Our aim is to train at least 100,000 people in different digital technologies.
Q: On the margin front should we expect that the stated band is maintained over FY16?
A: Yes.
Q: Why is attrition so high has that becomes a cause of worry. Wasn’t it a bad enough year for you on the macro front, on the demand front as you are pointing out, on the currency front. It has been a tough year from an employment and attrition front as well.
A: Attrition has gone up about 0.81 percent quarter on quarter for the
Q: 14.9 percent – this is your highest ever?
A: I think it has been like that in 2011-12. Ajay pointed out the whole year of ’11-12 was like that, so sometimes when after a lull in demand and the demand picks up across the industry then you see this kind of spike in attrition but we are focused on bringing it down and I am sure we will get it under control where we want it to be.
Q: Competitive pressure in the market place today. Are you seeing any big changes there?
A: It’s as usual.
Q: You are leaving us with a clear point of view that FY16 is looking better?
A: Yes, it’s looking good.
Q: And you said the demand environment is better than last year given how horrible last year turned out to be?
A: I am not giving any comparisons. All I am saying is that FY16 is looking good.
Q: Looking good typically for TCS means that you outperform the industry growth expectations as set out by NASSCOM?
A: I am not giving any comparative statement.
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