TCS boardroom: Management discuss Q1 performance & the way forward

Tata Consultancy Services (TCS) reported a mixed set of numbers for the quarter ended June, 2017. The profits and operational numbers were lower than expected but revenues were in line.

Profit during the quarter fell 10 percent sequentially to Rs 5,945 crore while revenue declined 0.2 percent to Rs 29,584 crore compared with previous quarter.

Dollar revenue growth was 3.1 percent QoQ at USD 4,591 million, which was in-line with 2.9 percent growth at USD 4,581 million estimated by CNBC-TV18 poll.

To discuss the quarterly performance and the outlook going forward CNBC-TV18 spoke to Ajoy Mukherjee, EVP & Head-Global HR, V Ramakrishnan, CFO, Rajesh Gopinathan, CEO & MD and NG Subramaniam, COO of TCS.

Below is an excerpt of the interview.

Reema: Let me start straightaway with margins because clearly that has been the disappointing factor. Why are you still holding on to your 26-28 percent margin guidance?

Ramakrishnan: You should look at it in context of two aspects in this particular quarter. One is on the wage hikes which we already talked about and which everybody knows. This is a normal phenomenon in the industry in the first quarter. We have given the increases right from April 1 this year and that is an impact of 150 basis points because of the increments into the margins. There is a currency impact which is about 80 basis points. Other than this, if you see across all over various cost lines, we have been much disciplined and we have worked on that. So barring the wage hike which is a one quarter issue, we do not see any reason for a structural change in where our goal is on the margins. We will continue to work on that.

Reema: On the wage hikes, every year, you give your wage hikes on April 1 for all your employees. Last year, the wage hikes were significantly higher, yet the impact on your margins was the same as this year and your net hiring is also lower. So if you could explain how should we read this? How could the impact be so high?

Ramakrishnan: Last year the impact of the wage increase was around 2 percent, but we had certain operational efficiencies which we were able to get into in that particular quarter. So the effect of the increases is about 1 percent. Last year, we also had a 30 basis point uptick in the currency. So this year, the currency factor is of course the other way round, but on the wage increases, we had 1.5 percent in this quarter, but the operational efficiencies, because it is not something which is quarter-to-quarter which can be driven. We continue to drive on various levers, there are some compensating factors, etc. so that is what explains this. So last year, it was 2 percent and this year it is 1.5 percent on the wage increases.

There were some operational increases which we were able to get last year. In the last quarter, on a sustained basis, we have been doing that and that is why I said, if you run across all the other cost lines, you do a quarter to quarter comparison on a longer term basis, we have been very disciplined on many of those.

Reema: What about net hiring? Last time we spoke to you, you said it will be lower. Net hiring has come down this quarter. Any numbers now you can give us on gross and net hiring for FY18?

Mukherjee: Unfortunately no because we do not give that total number of hiring that we used to give that earlier, in a way that our total hiring will be so much and then depending upon the volatility, every quarter has to come back and I used to say 5,000 more, like that. So then we decided that given the way the technology is shifting, given the way things are happening, the number of trainees that we give offer to in the beginning of the year, basically what the number of trainees that we had given offers to last year, who are going to join this year is what we will announce. That we had announced earlier and they are going to come in from June onwards. They have already started joining in.

And beyond that, it will be based on the lateral hiring and overseas hiring like this particular quarter we have done 3,200 plus overseas in various geographies. Of course, with Asia Pacific, with US and Latin America, these are the three major places where the hiring has happened. So it will be very difficult to give you a gross and net.

All I can say is net we will be positive. First quarter is negative, it is primarily because our trainees that come in, if you notice our trainee hires, previous year at this point in time probably we had about more than 5,000 trainees joining in Q1 itself which has now come down to about 1,500. If we had gone with the same plan, we would be positive. So that is the only difference. But overall, I have said my hiring this year is going to be lower.

Reema: First on the demand outlook. It seems to be a slower start compared to what you typically see in the June quarter. How would you classify this year?

Gopinathan: Definitely compared to typical Q1s. It is a slower start to Q1 having 2 percent constant currency, I would see that I would classify it as steady rather than strong, but the volume growth side is good, so if you look at it from a structural perspective, it is actually quite positive. As I said, we have a 3.5 percent volume growth and if you look at it from a vertical industry perspective other than banks, financial services & insurance (BFSI) and retail, all our smaller verticals or other verticals in our large markets like US, Europe, UK and Australia have grown at better than 3.5 percent. So overall I would say that it is a steady quarter characterised by growth in core market and some amount of weakness in the peripheral markets.

Reema: If you could just answer in yes or no, would you call the weakness cyclical in BFSI as you did last time around and when can that rebound take place? Is it likely in FY18?

Subramaniam: The way to put it is that I will not call it any weakness. People are spending, they have the teams to spend money on the discretionary spend and obviously to run the business on the efficiency side of it, they would like to keep optimising it, they would like to see the opportunities of more and more automation led initiatives there. But in each one of those cases where you really look at some of these digital technologies whether it is automation or analytics, it is changing by the week.

The newer capabilities are emerging in those, let us say if you take automation, the possibilities of or changing every week, the newer players who are coming and introducing, let us say a new start-up has come and there is a new product that is coming in. So are we choosing the right technology for doing that automation? Is it the right the technology to do it this way or a combination of technologies need to be chosen to put in the place? These are all the things that going on in the minds of people who are deciding on such transformation projects whether it is on the run side or on the change side.

So I believe that thinking that something like automation, they are all being put in place and the agile way of delivering is yielding results and they would like to more and more adopt agile way of executing the projects, but having said that, on the efficiency side and the innovation side, the opportunity is there once you come up with the business case.

For entire discussion, watch accompanying videos.