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TCS confident of achieving 26% margin this year, says CEO

TCS confident of achieving 26% margin this year, says CEO
IT giant TCS' first quarter turned out to be the best among the last 15 quarters, said CEO  Rajesh Gopinathan, and added that the strategic choices made by the company played out positively.
The company reported a 24 percent rise in first-quarter net profit, boosted by strong demand in areas like cloud transformation, cyber-security and data privacy and automation.
Net profit for the period rose to Rs 7,362 crore for the quarter ended June 30, up from Rs 5,950 crore last year.
TCS also declared an operating margin of 25 percent and net cash from operations at 103.7 percent of net profit. Earnings per share also rose about 26.1 percent to Rs 19.17 percent on a year-on-year basis.
Edited Excerpt:
Q: Let’s start with growth, in Q3 it was 6.2 percent constant currency growth year-on-year, in Q4 7.2 and now in Q1 of FY19 9.3. Next stop double-digit?
Ramakrishnan: We are well poised to get to that from various aspects. Definitely banks, financial services & insurance (BFSI) and retail where we were seeing quite a bit of muted growth in the last couple of years, we are seeing that coming back and also all the other verticals are doing well. Our business 4.0 framework is resonating very well with clients and with significant digital opportunities which throw up, I think we are well poised for that.
Q: The key positive is the turnaround in the BFSI vertical; a) is it sustainable and b) if you could tell us what has changed in the environment?
Krithivasan: We have been messaging since last quarter that our European banks and European insurance organizations are doing very well and we have been having a softness only in North America. Even in North America what we saw is many other banks are focused more internally on their work force and work place re-imagination and transformation, we believe that has sort of ended and banks are launching new programmes.
Our business 4.0 initiative is resonating very well with our customers. They see this as a differentiator for them in launching their transformation programme. We believe that is a primary change that is driving this growth for us.
Q: So particularly for the North American banks, which were the problem area for TCS, is there an industry wide demand uptick. Have clients started spending more or is it specific to TCS and TCS has won some market share?
Krithivasan: We are definitely gaining market share. I don’t know whether to say that it is industry specific so everyone is going to gain, that is too early and as we have said yesterday, it is not for us to comment on whether everybody is gaining market share. Our investments are bearing fruits.
Q: On margins, despite the wage hike you are at 25 percent. Your preferred margin range, as you call it, is 26-28 percent. Are you likely to achieve it in FY19?
Ramakrishnan: Indications are there that we can do that and we have been always focused on that aspect. As I explained earlier, we have been able to get better bit from the operational deficiencies, so 70 bps and generally the 1.8 percent impact from the wage hike etc. we will be able to recover it over the next two-three quarters. So barring any unforeseen developments, we should be able to do that and we continue to stay focused on disciplined execution and with growth as well as with digital engagements and the large transformation deals going on track, I think we have opportunities to be there.
Q: On operational efficiency – selling, general and administrative expenses (SG&A) as percentage of your revenue at 16.5 percent is close to your record lows – can you squeeze out more by way of employee costs and also give us the number of the H1B applications, how much lower it is compared to last year and if that can be a margin tailwind?
Mukherjee: From SG&A cost point of view we mentioned yesterday as well that the manpower cost takes the primary chunk of that and it depends on how efficiently we manage our overall manpower cost.
From H1B point of view, our total number of applications that we have been doing this year is same as what we did last year and last year what we did was almost one-third of what we did the prior year. So, we have been reducing our H1B applications and there are many ways of how we are still delivering to our customers. One is we are utilizing our visas properly, we are planning upfront as to how many visas do we need, we are hiring locally we are having more and more offshore. Also our location-independent agile methodology that is working very well with our customers. These are various factors.
Q: Coming back to the banking vertical. Would you say this is only the start of the turnaround for the BFSI vertical and despite it showing good growth in Q1, on the YoY basis it’s still a growth of 4.1 percent which is much lower than the company average? For the full year do you expect BFSI to grow in line with the company average?
Krithivasan: We are seeing strong momentum in multiple geographies and banks are spending on digital transformation a lot and looking at the demand environment that we have with us and the type of projects we do, we believe it has quite sustainability.
Q: But can it grow in line with the company average for the full year. Is it just the start of a pickup?
Krithivasan: It could be quite inline with the company average.
Q: Because last year I think BFSI just had a growth of 3 percent for the full year…
Krithivasan: We are quite optimistic about this year.
Q: Coming back to margin bit and you are saying that the company has the opportunity to get back to 26-28 percent band for this year as well. Does the rupee need to depreciate from hereon for you to get that or if the rupee stays where it is you can still achieve it?
Ramakrishnan: As of now it has run up quite significantly. Our 5 percent depreciation against the dollar, so one probably should not wish for too much of depreciation which is also not very good for the Indian economy. So from where it is, the rupee depreciation gives us little bit more room for doing few more things but leaving aside currency; currency is a factor but leaving aside currency through our own growth as well as on the larger sizes of the digital engagements and more and more transformational type of projects which happen, not necessarily big ticket but across the board. We have the necessary levers to work towards that and all our teams are very much focused on that.
Q: So to move the margins from the current 25 percent to 26 percent plus, you do not need the rupee to depreciate – that is not the tailwind which…
Ramakrishnan: Rupee helps.
Q: It helps but you can do it even with growth and your digital engagement etc.
Ramakrishnan: We can.
Q: Are clients asking you to pass on the benefit of rupee depreciation to them?
Ramakrishnan: Clients understand that because exchange is always yoyo and over the years what they really look for is the value which we deliver and whether we deliver to what we have committed and what it does to their own business operations from their growth and transformation objectives. So currency is always something which we handle; the pluses and minuses, we take care of whatever happens in that and as CEO also explained yesterday currency is one factor because the resilience for your pricing to move up in tandem with your cost increase is not there. So exchange plays a very critical part in bridging that gap between what you can actually get as increase in realizations versus what your cost in your delivery environment. So that is something which is known in the industry and that is how it works.
Q: Give us some colour on your deal wins. This is the first time the company has disclosed the total contract value of deal won – that’s USD 4.9 billion in Q1. How would it compare with historical growth wins?
Ramakrishnan: I think we are not getting into historical numbers right now. I think we have made a start with an idea of more transparency and to give much more visibility to what is happening and as we go over the next one or two years, I think analysts and investors would get a view on how this pans out rather than comparing with a past data etc.
Q: But purely on BFSI, USD 1.6 billion is the deal won in your vertical in Q1. Since BFSI growth is seven quarter high, would you say that the deal wins too are perhaps close to being seven-eight quarter high or two year high?
Krithivasan: It is actually ticking up. We are seeing strong deal wins, both BFSI and the platform deals together we are actually seeing the highest we have ever been.
Q: How much higher it is compared to a year ago when you say deal wins are ticking up?
Krithivasan: We do not want to get into what we did not announced before. We are at the highest and we are positive on where it is going.
Q: All verticals should grow in line with the company average. The last time when we spoke you indicated that BFSI could be a bit softer but now we are learning that BFSI is also poised to grow in line with company average. So are there any red flags, any sector or any dark spots that you like to call out?
Ramakrishna: Some groups are moving much faster than the others so that mix will be always there. It is difficult to say that every segment would move in tandem and have that sort of a growth. So you will have a mixed bag but we definitely see opportunities in the market and in each segment the drivers are quite different.
Q: Any weak spot as you see it?
Ramakrishnan: We wouldn’t want to call out anything as such but we need to watch out for what happens during the year.
Q: But watch for what?
Ramakrishnan: I think as I said, across the segments, you will have different growth patterns. So some will be growing much faster than the other. So relatively speaking, we need to see where the growth is slightly lower to see how it picks up more.
Q: The company seems to be firing on all cylinders, would you say it is at an inflection point to achieving double-digit growth from hereon?
Gopinathan: Certainly, as we had been talking about through the last few quarters, we have been focused on trying to get back to double-digit trajectory, still a tad short of that but we have the momentum and most importantly the broad-based growth coming across all segments especially the turnaround that we are seeing in both BFSI as well as North America is giving us a lot of confidence that we should be able to get there.
Q: The last time we spoke, you said that on BFSI, you would want some more evidence on the ground to know whether this turnaround is real. Now the company has delivered in Q1, do you believe we are at the start of a turnaround for BFSI, it is sustainable from hereon, what is your outlook?
Subramaniam: I think so. I think the BSFI has grown by about 3.7 percent excluding the platforms things and if we include the platforms, the overall BFSI has turned around and we are growing at about 5.6 percent. The deal pipeline is good and the bookings that we have made during this quarter is very nice and it is very broad-based and specifically more than about a billion plus of deal booking has happened in the BFSI segment. So overall, I am quite positive.
Q: You don’t need one more quarter of evidence on the ground, you are confident about this recovery in BFSI?
Subramaniam: Looks good but I think one more quarter would cement it completely.
Q: You have sounded optimistic in the past, now you are sounding increasingly very confident as well, is this the most confident you felt as you start off a new financial year in the last four years?
Gopinathan: At 4.1, this is the best quarter in 15 quarters.
Q: That is why I am saying, are you the most confident in last four years?
Gopinathan: We are very happy and as Subramaniam has said that from a pragmatic basis we need to step back a bit and make sure that this continues for the next few quarters before we can call it but all indications are good. So we are quite happy where we see ourselves and I think most of the strategic choices that we have taken have all played out and that is the other area that we are quite confident about.
Q: Let us talk about margins then. I am quoting what you said, “The strong start gives us a greater ability to get to our preferred margin range of 26-28 percent.” It is going to happen in FY19, are you confident about that, ex of rupee?
Gopinathan: First of all it is not ex of rupee, it is including rupee. We don’t want to put a timeline on that. I think the important levers are that are we getting the growth back into across segments. Is there a broad-basing of the digital revenue? All of those are kicking in but I wouldn’t want to put a timeline on where we want to get back there. It is the target band and we are quite confident about getting there.
Q: Digital is now USD 5 billion of annualised revenues, 25 percent for very large book that is TCS. The pace of growth has picked up. A year ago, it was growing at 30-35 percent, now it is growing at 45 percent, is it sustainable and are the contract sizes getting larger and longer tenure?
Gopinathan: The contract sizes are definitely getting larger.
Q: What is the average size or range now?
Gopinathan: We have said this in the past. For us more and more digital is now becoming integrated into more complex contracts. So the breakout of it is more in terms of the services that we deliver but at a contract level, it is not as if it is a digital contract versus a non-digital contract.
The scope of work is significantly increasing and it is becoming more core of what we are doing. So given that, will the growth momentum at 45 percent will it accelerate further at all? It is difficult to say but last year we grew at 30 percent plus, definitely this year also in digital we should be well on our way to achieve better than 30 percent. So beyond that, it is at a level that it is very difficult to call.
Q: FY19 digital growth should be better than FY18 digital growth.
Gopinathan: Definitely in the 30s.
Q: What about FY20, considering the momentum that you have had? You achieve 10 percent growth which is what the street is expecting, do you have the visibility given the momentum and the acceleration that you have seen across your verticals that FY20 growth will only get better than FY19 without putting numbers?
Gopinathan: No, I think realistically it will be better to take a call on that in the October-November timeframe rather than early now. We are seeing a big rebound in some of the large segments. How that rebound sustains or builds on itself will determine how FY20 looks like.
Q: The big rebound is coming in BFSI. You have put a number, USD 1.6 billion of deals won in BFSI. Can you tell us in particular how North America shaped in terms of growth as well as in terms of deal-wins because that was the problem area?
Subramaniam: North America did well for us. 3.7 percent overall growth and significantly powered by banking financial services as well as synergy and resources and retail. We see the deal bookings have been pretty broad based and just to quantify, we have said that BFSI we have USD 1.6 billion of bookings in this quarter, that should set ourselves nicely for the coming quarters, in Q2, Q3 and so on.
I believe that in North America we see very strong deal pipeline, strong demand environment overall and more so the investments that we have made in the digital and the way business 4.0 thought leadership framework is playing out, we are able to participate in programmes of transformation and drive business outcomes for the customers.
The multi-stakeholder play, we are able to now look at the COOs and the HR officers and the marketing officers, some of these digital offerings, they are all coming together and then firing cylinders for us.
Q: Your manufacturing and hi-tech grew lower than the company average, any particular issues there?
Subramaniam: There are clearly – if you take the automotive side of it, they are all focused on the autonomous vehicle programmes than they are figuring out how they should play out the electric vehicle initiatives and some of these things have resulted in slowdowns in some of the car manufacturers whereas we see a corresponding investments that is happening in the OEM providers. So I think it is only a question of time before they turnaround.
Q: Automotive manufacturing could remain slow for some time?
Subramaniam: Maybe in another quarter or so, we should have a better visibility for that.
Q: You have sounded very bullish, what can go wrong from hereon? Is there anything that you would like to highlight as a risk?
Gopinathan: I think overall any economic disturbances definitely would have a follow through effect onto us. Otherwise, currently from a company specific perspective, I think no immediate concerned points per se. As I said, most of what we are seeing are the net outcome of strategic choices that we made early on.

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