Davos 2024: Budgets are no more sacrosanct, customers are recalibrating, says TCS CEO K Krithivasan

K Krithivasan, CEO & MD, Tata Consultancy Services at WEF, Davos

Tata Consultancy Services (TCS) CEO and MD K Krithivasan said getting clarity on customers’ technology budgets for 2024 will take time. Budgets are no longer sacrosanct as customers are ready to re-calibrate depending on opportunities, he told Moneycontrol at the World Economic Forum (WEF) in Davos on January 17.

This comes less than a week after the country’s largest IT services company announced its earnings for the third quarter ended December 31. Despite a seasonally weak quarter, the IT services giant was able to beat Moneycontrol’s estimates on all the parameters of profit, revenue growth and especially margin which was up 50 bps sequentially.

“In terms of budget, it will take some time (to get clarity). We need maybe another couple of weeks or till the middle of the quarter…to get a handle on the budget,” Krithivasan said in an exclusive interview.

“But more importantly, the budget is no longer that sacrosanct as well. As the customers see more opportunities, they are willing to recalibrate the budget units more or even dial down. I don't have a sense for the budget, but I would think it's probably more or less the same as last year,” he added.

Regarding recovery of discretionary spending, Krithivasan believes "sometimes when when you're not having a bad news It is good news."

"The amount of discretion or proportion of discretionary projects we had in our second quarter is something same as in the third quarter. So the situation has not worsened. Maybe in a couple of quarters down the line, things should improve. But otherwise, it has not worsened," he said.

For the January-March quarter, Krithivasan said he expects that Q4 would be better than Q3, in response to a question on why revenue from the banking, financial and services, and insurance (BFSI) vertical declined in Q3.

BFSI, which accounts for nearly 35-40 percent of the company’s revenue, declined by 3 percent YoY in CC terms.

He said Q3 had a couple of headwinds in the form of some of the large programs coming to an end. He explained that once a large program ends such as merger and integrations, clients take some time to start a new project. “So that's the reason you find that the replacement programs don't start,” he said.

The other headwind came in the form of seasonal furloughs, Krithivasan said.

Furloughs involve the situation where clients in areas like the US and Europe refrain from compensating outsourced employees from Indian IT firms for specific days when their operations are suspended, typically during Christmas and New Year.

On overall demand coming back, Krithivasan said, “I don't know whether you can call it bottomed-out, but it should be better.” He further said the company is more optimistic about FY2024-25 compared to FY 2023-24.

When asked how client conversations are shaping up at WEF, Krithivasan shared that the mood overall has been “cautiously optimistic.”

“It’s a trace of optimism, and people are wanting to do more,” he said.

Generative AI, however, has been the single biggest theme that got a lot of attention. Krithivasan said that people increasingly want to discuss and understand what they can do with generative AI.

He was also not worried about rivals like Accenture reporting big numbers around generative AI adoption. In December, Accenture had shared that it had an industry-leading Gen AI deal pipeline of $450 million in new bookings in a single quarter. At WEF, CEO Julie Sweet even said that the company is investing $1 billion annually in generative AI training.

Krithivasan shared that TCS has close to 250 different initiatives and proposal programmes around generative AI in the pipeline. The company has heavily invested in  training more than 150,000 associates in AI capabilities. TCS is also setting up an AI arena to train more employees.

“We are engaged with our customers in almost all verticals across multiple geographies. I don't think we are behind there. As more and more proof points emerge and business cases are able to be worked out, you will see more of them coming into production,” he said.

TCS reported its Q3 earnings on January 11. Net profit stood at Rs 11,058 crore, up 2 percent YoY. Consolidated revenue rose 4 percent YoY to Rs 60,583 crore.

The EBIT margin or the operating margin was up to 25 percent, an expansion from 24.3 percent in the previous quarter.

TCS’ deal total contract value stood at $8.1 billion, reflecting a good pipeline despite not winning a single large or mega deal in the quarter.