India’s largest software exporter Tata Consultancy Services (TCS) reported a mixed bag of numbers for the third quarter. Chief executive officer and managing director K Krithivasan, however, painted an optimistic picture for the year ahead, driven by improving discretionary spending, shorter deal closure cycles and more transformative projects in the pipeline.
Krithivasan spoke to Moneycontrol after the company shared it Q3 report card, talking about the incoming Trump administration, H-1B visas, replacing Bharat Sanchar Nigam Limited (BSNL) revenue and more. Edited excerpts of the interview:
On the face of it, Q3 was an underwhelming quarter but you have given other indicators, whether it's TCV of over $10 billion or robust campus hiring plans, that CY25 will be better than CY24. Give us a sense of what you're seeing in terms of the demand? Your overriding message seems to be to “ignore Q3, look at our outlook”.
That's precisely the point. Our TCV (total contract value) is very strong. Even if you split the TCV further — almost all geographies, almost all industry verticals, our order booking has been good. The overall pipeline continues to be robust. In fact, in places like Europe, the TCV is probably the all-time high, what we achieved in this quarter.
The other indicator is type of projects or engagements we want and as well as there in the pipeline. We are seeing more transformative engagements compared to the past. It's not that there are no optimisation engagements. (Cost) Optimisation engagements continue to be the mainstay but there is an increasing percentage of discretionary project in our pipeline.
We also found that this is the first time in a while that the deal cycle also decreased by a few weeks, which also we look at as a positive indicator. So all these things broadly give us the confidence that there are early signs of revival of discretionary spend, and that could be some positive bias in terms of technology spend in next year.
How worried are you about what's going to happen once Donald Trump takes charge in the US? Not just the H-1B visa part but also the hike in tariffs that could lead to an inflationary environment in the US, which could affect interest rates and impact corporate spending. What are clients telling you?
Most of us and most of our customers believe that the policies would be towards accelerating the US economy, giving it a positive boost. So given that is a more likely scenario, our customers are positive at this time. I don't think they believe that the result of the policies, or at least the objectives of the policies, would not be to grind it further down.
Given that broad sentiment, one or two industry verticals, particularly life sciences and healthcare, are waiting to see what kind of policies come in, in terms of insurance, and medicare. But industries like banking and retail are seeing a better consumer confidence at this time. And so their current position is to enhance the discretionary spend.
Currently, the going in position is, it's going to be net positive.
The whole discussion around H-1B visas has gained momentum in the past few weeks. The good news is Elon Musk is a votary of skilled talent coming to the US but how worried are you?
We are not very worried. We have been less and less dependent on H-1 visas over the years. If you look at our US workforce, it's more than 50 percent local. On any given year, we get about between 3,000 to 4,000 H-1B visas. In our overall scheme of things, it's a small number. If there is a decrease in H-1B, we can compensate with other means, or we can move the work to India. So our dependence on H-1B is not very high.
A JM Financial report had said that the trajectory of the BSNL deal has run past its peak revenue contribution phase. How much of the project work is done? How do you plan to replace that deal? Did it have some impact on lower revenue growth this quarter?
From overall status of the project, almost 70,000 sites have been installed, and 60,000 of them are carrying commercial traffic. And we hope to complete it by Q4 or Q1FY26. So most of the revenue will also run down. Q4, Q1, maybe some amount in Q2. By then, the revenue should run down. Between Q2 and Q3, there was not a substantial difference in our BSNL revenue. We should see the BSNL revenue tapering down, going forward. And as I was explaining before, we seek to replace that revenue either through other international new projects, the new entry series that we have won, or increasing the revenue through regional markets. We continue to look at opportunities through which we can replace this revenue.
You mentioned seasonality driving India market growth this quarter and the growth was non-BSNL. What’s the outlook on expanding India region growth? Is this sustainable in the long run?
Definitely. See, we've seen that India business is growing quarter after quarter. We have also enhanced our focus. Traditionally, our India business has been BFSI focused on the services side. And now we are reaching out to other industries. We are bringing our global talent to India so that we can bring in the global value here.
Similarly, we are expanding our sales operations in Middle East Africa (MEA), Latin America (LATAM), Asia Pacific (APAC), ASEAN countries. We are broadening our regional market sales as well as delivery capability. So our belief is all in all, not only India, regional markets put together as a group will be able to help us in substantially replacing the BSNL revenue. But the rest of it, we have to depend on global revenue.
A follow up on BSNL. How easy or difficult is it going to be to replace $1 billion of revenue that you got from this project? Will it come from your core markets like North America or Europe, where you're seeing a recovery?
It has to be replaced by every lever we have. It's not going to be only India. That's the reason I'm saying some bit of it must be done by the core markets. Some will be by the regional markets. Some in India specifically. See, I'm not saying it's easy or I'm not being flippant about it but we are confident that this revenue could be replaced over a period of time.
Your commentary on hiring for next year was very positive that TCS is on track to onboard 40,000 trainees. But if I look at the Q3 headcount, it's shrunk by 5,370, reversing two quarters of growth. You had said that it's no longer apple to apple, headcount growth and revenue growth comparison. Why is that? Are we seeing more automation?
What Milind (CHRO Milind Lakkad) was explaining is there is no immediate linearity between revenue and headcount. There'll be long-term linearity, and may not be in the same slope. There'll be some long-term linearity, like over a period of time, revenue has to go, headcount has to go, may not be in the same speed.
If you take quarter to quarter, for instance, we hired more employees in Q1 and Q2, expecting a faster growth revival. We also knew that Q3 is going to be a seasonally weaker quarter. So we try to employ mechanisms towards optimization resulting in not hiring at the same speed or you stop hiring for a quarter, and you let the attrition run its course. Your headcount comes down because you also want to ensure that your utilization goes up, to control your margin.
This will be in action continuously. You look at the outstanding demand, outstanding pipeline of employees that are ready to join, and what kind of projects that you have to start in a given quarter. You balance it. That's the reason we say, don't look at quarter to quarter hiring to make a guesswork on the demand engine.
Overall it's been a pretty bleak year for IT services. Your peers are either deferring hikes or giving very low single digit hikes. Do you think next year will be better, not just for TCS but IT sector broadly because this is ultimately the biggest employer for engineers passing out in India.
I can talk definitely for TCS at this time. We believe that next year should be a better year. And, as I said, we said we'll be hiring more. So that's what I can comment on at this time.
Can we expect you to swing back to double digit growth?
We aspire to double digit (growth), it will continue to be our aspiration.
How is deal mix shaping up as discretionary spending has started reviving?
If the trend continues to hold, you will definitely see the mix in more transformation, less cost optimisation deals. But we have to wait. And we hope the trend continues as the year goes on.
In terms of Gen AI, are you seeing bigger quantum of deals coming into the market? Has it moved way beyond proof of concept (PoC)? Will we see more of this in the next fiscal?
Gen AI deals are definitely moving beyond POC. We find more and more programs going into production. There are multiple kinds of deals. I think there will be some small deals. Over a period of time, what you are likely to see are large deals where AI plays an important component. That may not be an AI project by itself, but there could be a large project where AI plays a very important component. So that's where I think it will directionally go. But I am finding it's becoming more and more mainstream.
The one reason we stopped publishing the AI-specific numbers is it's becoming more pervasive. You find it everywhere.
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