Tata Consultancy Services (TCS) expects 20-50 bps decline in its margins owing to its Japanese integration. Speaking to CNBC-TV18 post Q2 earnings, CFO and VP Rajesh Gopinathan said the next four-six quarter will be margin dilutive for the company. The top IT services exporter is comfortable with the 28 percent margin.
However, TCS is structurally confident of higher margins going ahead.
The EBITDA margins of the company grew by 55 basis points to 26.85 percent, for the quarter to September, even as it faced a 50 basis point headwind from its Japan unit.
The IT bellwether is hopeful of achieving its attrition target for the current year. The company said it had already hired 36,000 out of its 55,000 target for the year. TCS’ EVP and Head-Global HR Ajoyendra Mukherjee said the company is confident of hiring 30,000 to 35,000 more people by the end of this year.
Below is verbatim transcript of the interview:
Q: Can you elaborate on your margins? Gopinathan: A year back when we were running at about 30 percent margins and a lot of that was coming in due to the moderation on the currency side. We had said that we will calibrate our investments based on the headroom that the currency provides us and we have done that.
We have sequentially invested into consolidating presence in France, Japan, new service lines, investing into digital and we are fairly comfortably placed in the midpoint of our target margin band.
Q: On the margins front in the midpoint of your band Japan has added 2.8 percent to your top line but hurt your margins by about 48 bps. Are you estimating that this pressure on margins will continue or persist thanks to Japan or do you expect Japan margins to come close to your global average margins any time soon, can you give us some sense of what your outlook on that is?
Gopinathan: We were expecting a lot worse and it will be because we were expecting close to 70 bps impact due to Japan consolidation.
The entity that we have taken operates in the mid-5 percent kind of net margin level because of the technicalities of the integration this quarter we are coming in at 9 percent. But that is just a technicality of the integration which means I still have another 4 percent impact that will come for me as I go forward.
The way to look at it is that structurally we are very confident that we will be able to take the margin up but we are talking about two-three year kind of horizon.
The next four-six quarters, our experience in all other integrations are that it is typically margin dilutive. So you go in and further dilute margins because you are investing ahead of the business so that is likely to happen and that will give headwinds on it.
Q: Are we expecting another 20 to 50 bps decline in margins thanks to Japan?
Gopinathan: Yes that would be fair.
Q: What is your expectation from the Japan business and its overall contribution to your revenue in the next few quarters to come?
Gopinathan: Next few quarters will be little more volatile but if you were to take a two-year horizon that market should see decent, above 20-25 percent kind of growth on a year-on-year basis.
Q: Therefore, contribution to revenue from this Japan business will grow by how much?
Gopinathan: It is about including our existing business in Japan, we are at about USD 135-140 million kind of range and unless things go wrong we should be looking at a revenue contribution anywhere between USD 8-10 million quarter-on-quarter after it stabilises.
Let aside next two-three quarters, but if you take a one to three year kind of perspective, all things being equal we should be looking at that kind of incremental revenue coming in from Japan.
Q: Realisations have been declining over the last several quarters now. Is that a cause for concern, is that a mixed issue, what is the reason why we are seeing lower realisations or is it just pricing pressure?
Gopinathan: No pricing is on a fairly stable band, it is a mixed issue. If you look at where your growth is coming from a geographical perspective, as a percentage of revenue US, UK, Europe are all declining and the growth is becoming more broad based. So the realisation is actually a local market headline number.
Structurally, our employee cost as a percentage of revenue has actually come off this quarter which is better in terms of the value which is why our overall margin has actually improved even after the Japan integration. Setting off the depreciation benefit we got going into this quarter we still have a margin expansion.
Q: Hiring guidance 35,000 fresher’s is what you have put out yesterday, what is your hiring guidance for the year based on this next quarter assessment?
Mukherjee: As far as current fiscal is concerned we have said 55000 would be the total hiring and I am on track with that because in the first two quarters we have done 36000 and are fairly confident of doing 55000.
We will overshoot that but by how much that is something that is difficult to calibrate at this point in time. As far as next fiscal is concerned, the campus season has started, we have visited a number of campuses and have already given out offers.
The total we are targeting is about 35000 fresh offers that we will give for the candidates to join in the next fiscal.
Now the total hiring target for next fiscal we will announce somewhere around Q4 by the time we complete our business planning and things like that which will be somewhere around February and March.
Q: Do you expect to do the same kind of hiring or more as you put out for FY15?
Mukherjee: We have not done that number yet but from trainee point of view we have definitely done the 35,000 that we announced.
Q: I noticed a slight shift towards local delivery so the numbers are at 48.9 percent versus in the previous quarter you did 47.1 in the comparable quarter year-on-year, you did 46.5 percent versus remote delivery. Why are we seeing this shift? I am sure that also has an impact on your margins in some fashion or the other. Are we going to continue to see this shift towards local delivery?
Mukherjee: As you have more and more local delivery the cost of that will increase and that will have an impact on margin. But as far as this quarter is concerned this is primarily because of the Japanese integration, the entity that we have taken over.
Most of it is onsite delivery is what has caused this particular shift. But that is not something that we are seeing as a trend that more and more of onsite delivery is not the trend, trend is more and more of offshore so that is a balanced view.
Q: Are we going to see these numbers shift more and more towards local delivery?
Gopinathan: It will again depend on how the geographical mix turns out because when you see differential growth in Europe or Japan, it will tend to come with higher onsite component because these are markets where we are still at the market development mode and the market is still not stabilised.
Whereas from the service mix perspective service lines like remote infrastructure delivery tends to be much more remote location optimised. So it is essentially a portfolio call.
The one time jump that we saw was due to Japan business and so, on a quarter-on-quarter basis you will not again see it next quarter the big jump.
Mukherjee: For example, BPO if you look at majority of it gets delivered from offshore but at the same time a lot of growth in the Latin American market will happen from an onsite location and so, it all depends upon the market.
Q: I was asking Chandra why you all chose to do the CMC merger now, whether there was any time trigger to it. He said no but he did say that there are synergies for coming teams, cutting down overheads. Can you put a number to what those synergies will be?
Gopinathan: At an EPS level based on the trailing 12-month perspective there is a marginal uptick on the EPS. Otherwise the numbers are such that it will not have any material impact.
From a corporate structure perspective these are two listed entities operating in the same market which is always from a positioning perspective it is not a very desirable one.
It also introduces overheads in terms of record keeping, in terms of arms length transactions, ensuring that governance. Difficult to quantify from a cost perspective but from a sheer management drag perspective it is much better to consolidate the structure.
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