To be disciplined in bidding, aiming 26-28% margin: TCS

Tata Consultancy Services (TCS) will continue to 'maintain discipline' while bidding for orders, the company's chief executive N Chandrasekaran said in an interview to CNBC-TV-18's Menaka Doshi. What he could be hinting is that TCS will not compromise on price for driving volume growth.

Chandrasekaran said the order pipeline continued to grow at healthy rate and he was confident of it sustaining.

He said pricing remained stable at this point and that his company was targeting an operating profit margin of 26-28 percent. He denied there was pressure on pricing though realizations dropped for the second successive quarter in July-September.

"It has nothing to do with pricing. It is largely to do with the mix and the number of working days otherwise we won't be able to have the kind of margins that have been delivered," he said.

"If you look at the growth and the margins realisations, it will always vary. It is not the parameter to determine," he said.

Also read: TCS to hire 25000 campus grads in FY15; ups FY14 target

Below is the edited transcript of his interview to CNBC-TV18.

Q: Congratulations on the sponsorship win for the New York marathon. What an audacious branding exercise. Are you going to be running for it?

A: Yes. In 2014. It is usually in November first week.

Q: Will you run with the Tata Consultancy Services (TCS) branding on your chest?

A: Of course yes.

Q: This reminds me of 2006 in Davos at the World Economic Forum, Infosys did something fairly audacious. At the Belvedere Hotel, where all the heads of states stay they threw out an Infosys flag from one of the room balcony’s and made sure that everybody who passed by that hotel saw the Infosys’ branding. Those were the heady days of Infosys. Are these the heady days of TCS?

A: I was not there in Davos 2006.

Q: Price realisations have dropped in the last quarter. This is the second straight quarterly drop. Seven out of the last ten quarters have seen a decline in these. Why?

A: The best way to look at it is first to correct the term. I would call it realisation not pricing realisation. Realisation is a combination of multiple factors; a mix geography and services perspective. It can happen. One quarter it can go up. Sometimes, it can decline by small amounts or it can increase by larger amounts.

Q: It is around 94 bps (basis points) in the previous quarter. Could this be an outcome of increased competitive pressure from your Indian peers and global ones?

A: It has nothing to do with pricing. It is largely to do with the mix and the number of working days otherwise we won't be able to have the kind of margins that have been delivered. If you look at the growth and the margins realisations, it will always vary. It is not the parameter to determine.

Q: Should we be prepared for further realisation drops in the quarters to come?

A: I wouldn’t know; it can go up. It will always oscillate within a narrow 1-2 percent.

Q: Doesn’t it impact your margins?

A: It doesn’t. If we show a 150 bps (bps) impact the other way, at that time too there should not be a situation where people go overboard saying that pricing is really starting to pick up. This is not pricing pressure; it has been stable.

Q: So it is not Infosys or Wipro or Cognizant snapping at your heels?

A: No. We continue to maintain discipline in the way we have been. There always will be deal-wise pressures.

Q: Given the developments in the last few quarters, does it seem that Infosys is on some sort of a come back trail? Are you seeing increased competitive pressures? Is that impacting your pricing power in any fashion at all?

A: There will always be competitive pressures in one deal or the other. We have to deal with that, but we are not seeing a pattern.

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Q: You have exceeded 30 percent on EBIT margins, but a large bulk of that has come through because of currency gains. Yet you are within your band of 26-28 percent, if I strip off the currency gains. Is this where you expect margins to be sustained over the next many quarters? Do you see potential upside as demand strengthens?

A: Our target margin level is 26-28 percent and we expect to sustain it over the remaining quarters.

Q: Should we not expect any big upside moves in the coming quarters? This one was because of currency.

A: Yes you should not.

Q: And yet there is no pricing pressure?

A: There is no pricing pressure. We are very comfortable to be able to maintain the margins at the 26-28 percent band. We would like to operate at this margin, given the kind of investments and other decisions that we need to make. We base that as our target margin gain.

Q: So, we are not just talking FY14 here; we are also talking for FY15 we should maintain this band?

A: Currently this is our margin band and if we change our stand tomorrow we will tell you. Our stand is to operate at the 26-28 percent band.

Q: So, you have seen the highest volume growth in the last quarter that you have seen in nine quarters, but we expect that Q3 and Q4 are seasonally weaker for you given the holiday shutdowns, fewer working days etc. To that you need to add the US shutdown and it is having some impact on regular business as well. Give me a sense of what Q3 and Q4 will throw up in terms of volume growth?

A: I think Q3 will primarily show, any impact will show a furlough loss. Even the shutdowns the impact of that will show as furlough loss. We have not been able to estimate. What I have cautioned is that typically in December we see furlough loss and largely from manufacturing, high-tech industries, and those kinds of companies. This year the impact could be more, we don't know yet.

Q: Would it be fair to assume that this volume growth in Q2 is the peak for this financial year at least?

A: Absolutely, because the holiday season is high in Q3.

Q: So, we are going to go downwards from here on for the next two quarter. Give me a sense of how much in terms of downwards?

A: I don't have a number and even if I had, we don't give guidance. In terms of Q3, it is largely furlough loss. In Q4, since it is the beginning of the financial year for all our clients, the discretionary spend will take two-four weeks the projects to kick of so that will be a dampener. So these are the two reasons why I believe that the volume growth thins in Q3 and Q4.

Q: So there is nothing unusual in this, you are not expecting a bigger downside to this because of what we have seen in terms of the government shutdown in the US or anything like that?

A: The quantum of furlough loss is something we have not been able to quantify whether it will be more or less.

Q: It will be more given what has gone on in the last fortnight.

A: Given what is happening today, I don’t know.

Q: Well it has lifted today in terms of a potential deal, but it is still going to take a few days for the government to come back to work.

A: At this point in time, I don't have additional data to project there will be more shutdowns, more furlough loss.

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Q: Geographically, the US has done very well for you. Continental Europe has grown substantially and is attributable to what you have done with Alti. You have seen a 19-20 percent growth in continental Europe?

A: Even excluding Alti, we have done well in continental Europe.

Q: This is a sign that Europe is finally coming back because all the macro economic data is showing that Europe is back on the recovery path. Are we to expect that Europe’s contribution to your revenue and growth will now only increase from here onwards? Will that reflect in the deal pipeline and in volume growth as well?

A: Definitely, Europe’s contribution to our growth will continue to increase because of a couple of reasons. The model is well accepted now and companies are engaging lot more. So we are seeing it in the calls we make, in the pipeline, the deals we chase etc.

If you look at Europe as multiple markets, Germany, France, Nordics, different markets, our own size and critical mass in these markets has grown. So we have got some critical size now so that gives us the ability to be able to do more and bid on larger engagements and so on and so forth. Given that Europe’s contribution to our revenues over the next two-three years will continue to increase.

Q: How do you make India less lumpy because you have seen a decline in the last quarter?

A: No this quarter we have not seen any decline. We have seen a growth equal to the company average but it is always a worry.

Q: How do you try and neutralize this lumpiness of volatility in India revenues or is it too small a contributor to revenue for you to worry too much?

A: No we have to worry about it because it does make the difference in the incremental revenues so we need to worry.

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Q: Macquarie says that ‘the deal win momentum and the commentary around the Banking, Financial services and Insurance (BFSI) verdict in Europe gives us confidence to raise dollar revenue growth forecast to 20 percent from 17 percent for FY15.’ Is this doable?

A: This is a forward looking statement and I don't even know the budgetary spent for next year.

Q: But is it doable?

A: I can't answer this.

Q: Big deal wins, that momentum is going to continue?

A: I think so. The pipeline, order book and the decision cycles are good. I remain very positive except for the cautionary note I gave on Q3 because of the furlough loss. Overall, the sentiment is good from our industry point of view and I believe clients are spending, clients are increasingly adopting digital technologies lot more than I saw six months ago.

The engagement size is becoming larger in digital so I really believe that it is going to be a positive momentum going forward.

Q: So what is the realistic revenue opportunity for TCS in digital or SMAC as you call it, you have just opened the Silicon Valley unit a few months ago, you have started with 3000 people. In the next few quarters, may be FY15 can you give us a sense of what we should start factoring in in terms of contribution from that business area.

A: I cannot give you specific numbers on any technology.