‘Not sac­ri­fic­ing mar­gins for growth’

Mint ST - - CORPORATE - Am­rit Raj am­[email protected] MUM­BAI mint TCS’ chief fi­nan­cial of­fi­cer

In­dia’s largest IT firm Tata Con­sul­tancy Ser­vicesltd(tcs) says it will not sur­ren­der mar­gins for rev­enue, even as its op­er­at­ing mar­gin failed to meet its es­ti­mates of 26-28% dur­ing a com­men­tary at the be­gin­ning of the fi­nan­cial year. V. Ra­makr­ish­nan, the com­pany’s chief fi­nan­cial of­fi­cer, said in an in­ter­view that mar­gins came un­der pres­sure largely due to cur­rency fluc­tu­a­tion and rise in em­ployee costs. He agreed that TCS is short of its mar­gin guid­ance, but it does not mean that the tar­get is not achiev­able. Edited ex­cerpts:

Is it cor­rect that the mar­gin de­clined be­cause TCS is buy­ing rev­enues as it ag­gres­sively looks to sign deals, which have a higher com­po­nent of TCS tak­ing over em­ploy­ees from clients (what is called as re-badg­ing)?

No, that’s not the case. First of all, in the deals that we have signed, peo­ple have al­ready come on board in the last few quar­ters. Se­condly, that does not change the cost pa­ram­e­ters. All the large deals that we have taken, the mar­gin pro­file of those cus­tomers will not be dif­fi­cult from what we had. Since they are all long-term largescale projects, scale gives us an op­por­tu­nity to al­ways use our levers and op­ti­mise more... It is more of tac­ti­cal, flex hir­ing in terms of sub-con­trac­tors, etc.

So, it is not re-badg­ing ei­ther?

No, it is not re-badg­ing. Re-badg­ing we have done in some quar­ters. That is al­ready pro­gress­ing and that has noth­ing to do with these costs. This has to do with peo­ple whom we have ac­tu­ally hired and, also those, whom we have taken on a short-term ba­sis.

The thing to watch out is that there has been a healthy im­prove­ment in our rev­enues. Last year, we were at 7.5% growth, this year we have grown 12.1% y-o-y. We are see­ing growth across the seg­ments, across mar­kets.

Our deal pipe­line is good, the to­tal con­tract value that we have signed this quar­ter is $5.9 bil­lion, which is higher than the pre­vi­ous two quar­ters.

We nor­mally track clients who give us more than $100 mil­lion and, in the last 12 months (we have tracked clients), more than $50 mil­lion, $20 mil­lion and $10 mil­lion, and we re­ported that. Q-O-Q, they have been steadily grow­ing. Even in this quar­ter, there is im­prove­ment in al­most ev­ery band, ex­cept one.

If you look at all these pa­ram­e­ters, there are clear signs of growth, so this is an el­e­ment where there is more ac­cel­er­a­tion in cost. We be­lieve it is more tac­ti­cal. There is noth­ing struc­turally wrong in the cost struc­tures.

Sec­ond, de­spite all this, we have 25.75% mar­gin in the last nine months, which is the high­est in the in­dus­try. This is some­thing which we will con­tinue to work on. Your em­ployee costs jumped more than 20% year-on-year dur­ing the third quar­ter. How is that go­ing to re­flect on mar­gins?

If you take a look at our rev­enues on an y-o-y ba­sis, take the topline in­crease and look at how our op­er­at­ing mar­gins, net mar­gins have im­proved. Op­er­at­ing mar­gins have im­proved by 24% or so, and net mar­gins have im­proved by 22%.

Rev­enue in the nine months have in­creased by 20.8%. On a ful­lyear ba­sis, it is higher than your rev­enue growth. So, all your mar­gin pa­ram­e­ters is higher than your rev­enue growth. Be­cause I am grow­ing, have I given away mar­gins? It is not true! On a 9 to 12 month frame, my mar­gin im­prove­ment is higher than my rev­enue im­prove­ment, which means I am not sac­ri­fic­ing one for the other. Tac­ti­cally, in a cer­tain sit­u­a­tion, we may do it. But, it is not an on­go­ing struc­tural de­ci­sion, say­ing that we will chase rev­enue so we will give away mar­gins. Or, we will be so fo­cused on mar­gins that we will not grow. Our goal is to do both—to have in­dus­try lead­ing growth with mar­gin lead­er­ship. How is the cost guid­ance? Cost is a dif­fer­ent man­age­ment. Typ­i­cally, in our first quar­ter, we have the salary in­creases. So, in

V. RA­MAKR­ISH­NAN April-june quar­ter, we will ex­pect some in­crease in cost. That has tra­di­tion­ally been the case. Other than that, if the em­ployee costs are go­ing up, it could be be­cause of some ac­cel­er­a­tion in hir­ing. We have hired more num­ber of peo­ple in the cur­rent year, in the first nine months, much more than what we had hired in the full last year. First nine months, we have hired 23,000 peo­ple as com­pared to 27,000 peo­ple hired in 2017-19. So, when you hire peo­ple, you ex­pand busi­ness.

All that we can as­sure our in­vestors is that there is no struc­tural rea­son to be­lieve that your cost will go up.

With three months left in the cur­rent fi­nan­cial year, what hap­pens to the com­pany’s stated guid­ance of main­tain­ing op­er­at­ing mar­gin of 26-28%? At 25.6%, you are not even close to the lower end of your stated guid­ance?

We do not give any guid­ance ei­ther on the rev­enue side or on the mar­gin side. What we give is a com­men­tary on the over­all sit­u­a­tion. We have said that our pre­ferred mar­gin range is 26-28%, which means that we would like to op­er­ate within that. That can­not be con­strued as guid­ance. Yes, we are a lit­tle short. That does not mean it is not achiev­able. If it is not achiev­able, we will come back and say that.

But, only two and half months are left in this fis­cal...

That’s why one should not just look at it from a short-term ba­sis. We are at 25.7% for the nine months. So, I do not want to spec­u­late or give guid­ance to­day but these are the pos­i­tives which we very much see, which very clearly is de­mand en­vi­ron­ment, driven by tech­nol­ogy and the way we are ap­proach­ing the mar­ket. The growth that you are see­ing in var­i­ous seg­ments and var­i­ous ge­ogra­phies—25% in the UK and 16-17% in the over­all Euro­pean mar­ket, and some of the other seg­ments, we have been grow­ing in teens, and the or­der book that we have closed, we are say­ing that the pipe­line is healthy. It is bet­ter than what it is.

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