 "Our digital revenues will surpass $3-5-billion target ahead of time: N Chandrasekaran")
Tata Consultancy Services (TCS) shares fell 2.6 per cent to Rs 2,455 on Friday as it missed Street expectation on dollar revenue and higher attrition. But chief executive and managing director N Chandrasekaran says the first quarter numbers indicate a strong start for FY16. In an interview with Shivani Shinde Nadhe & Sheetal Agarwal, he talks about the positive outlook, despite analysts talking about a slow-down in budgets, and surpassing the $3-5 billion target in digital revenue ahead of time. Excerpts:
You are sounding much more positive than in the same period last year. But you also indicated that this quarter had a miss of $20 million due to softness in Japan and Latin American markets. Do you think this will have a drag on other quarters like last time?
Firstly, I am happy because all the indicators are good. Our volume growth was 4.8 per cent and verticals have grown five per cent and above. Telecom grew nine per cent, life science grew seven per cent and the banking, financial services and insurance segment grew, too, this quarter. North America is looking good. Cash flow is good and our operating margins (OPM) are solid. So, we start the first quarter on a strong footing. In Q1, after the wage hike, you do not want to be under too much pressure on OPM, which puts a lot of pressure not only on margins but also on investments. This gives a leeway to us to work comfortably.
On the impact of the $20-million miss, I do not want to give any guidance. I think our indicators are strong; all the benchmarks are positive, digital is kicking in. It's that time when we just go ahead and execute. We do see volatility in Japan and Latin America. Time will tell how much of this $20 million would translate into revenue or otherwise.
With 12.5 per cent of revenue coming from digital business, is TCS well poised to surpass the $3-5 billion target in the next three to five years?
I have been saying that by sharing these numbers one can raise expectations. Two things I want to clarify. Digital will occupy most of the service lines. I have been saying digital is default. Secondly, we wanted to see the momentum to pick up. That is why we were not sharing numbers. And even this 12.5 per cent is on the conservative side. Digital revenues will surpass the $3-5 billion target in the time frame we had spoken about.
How do you see digital vis-à-vis traditional deals? Are you being selective as you move to digital or are selective in moving from traditional business to digital as the pie grows? And since the digital pie is growing, does this bring change in pricing or impact on the numbers?
It will be a combination. Customers are also doing a lot of legacy transformation because they have to simplify the
technology footprint. Cost takeout is one objective but they have to develop their information technology (IT) infrastructure so that they can gain from deploying digital. If your current IT landscape is too fragmented or complex, it is not amenable to digital. There is some amount of rationalisation happening in sectors like retail. On the other side, we have seen a huge traction in digital, where customers are going to hybrid-cloud, use analytics and big data for decision making.
Traditional deals will transform themselves into digital. The business will change its texture.
I am growing in infrastructure. At present, I am managing a lot of data centres and servers. In future, we will be managing cloud platforms. In the long run, I do not see pricing as a differentiator across digital deals.
Every quarter seems to have some softness. Last quarter it was telecom, energy and utilities and insurance. This quarter it seems to be Japan and Latin America. How long do you see this volatility?
I do not see a pattern. It’s just the nature of things.
After the acquisition, we have to build our portfolio into these clients that requires huge integration between the Indian and Japanese teams. We have to translate our offerings into Japanese businesses. That process takes time.
Latin America is much more like India and needs to scale to a certain level before it becomes stable. We are saying they will be volatile.
With dollar revenue of 3.5 per cent, which has been a tad slow, do you think TCS will beat Nasscom guidance of 12-14 per cent revenue growth in 2015-16?
I am not giving any guidance. But if you look at our constant currency growth, it has been 15-15.8 per cent growth on a year-on-year basis.
You are sounding much more positive than in the same period last year. But you also indicated that this quarter had a miss of $20 million due to softness in Japan and Latin American markets. Do you think this will have a drag on other quarters like last time?
Firstly, I am happy because all the indicators are good. Our volume growth was 4.8 per cent and verticals have grown five per cent and above. Telecom grew nine per cent, life science grew seven per cent and the banking, financial services and insurance segment grew, too, this quarter. North America is looking good. Cash flow is good and our operating margins (OPM) are solid. So, we start the first quarter on a strong footing. In Q1, after the wage hike, you do not want to be under too much pressure on OPM, which puts a lot of pressure not only on margins but also on investments. This gives a leeway to us to work comfortably.
On the impact of the $20-million miss, I do not want to give any guidance. I think our indicators are strong; all the benchmarks are positive, digital is kicking in. It's that time when we just go ahead and execute. We do see volatility in Japan and Latin America. Time will tell how much of this $20 million would translate into revenue or otherwise.
With 12.5 per cent of revenue coming from digital business, is TCS well poised to surpass the $3-5 billion target in the next three to five years?
I have been saying that by sharing these numbers one can raise expectations. Two things I want to clarify. Digital will occupy most of the service lines. I have been saying digital is default. Secondly, we wanted to see the momentum to pick up. That is why we were not sharing numbers. And even this 12.5 per cent is on the conservative side. Digital revenues will surpass the $3-5 billion target in the time frame we had spoken about.
How do you see digital vis-à-vis traditional deals? Are you being selective as you move to digital or are selective in moving from traditional business to digital as the pie grows? And since the digital pie is growing, does this bring change in pricing or impact on the numbers?
It will be a combination. Customers are also doing a lot of legacy transformation because they have to simplify the
technology footprint. Cost takeout is one objective but they have to develop their information technology (IT) infrastructure so that they can gain from deploying digital. If your current IT landscape is too fragmented or complex, it is not amenable to digital. There is some amount of rationalisation happening in sectors like retail. On the other side, we have seen a huge traction in digital, where customers are going to hybrid-cloud, use analytics and big data for decision making.
Traditional deals will transform themselves into digital. The business will change its texture.
I am growing in infrastructure. At present, I am managing a lot of data centres and servers. In future, we will be managing cloud platforms. In the long run, I do not see pricing as a differentiator across digital deals.
Every quarter seems to have some softness. Last quarter it was telecom, energy and utilities and insurance. This quarter it seems to be Japan and Latin America. How long do you see this volatility?
I do not see a pattern. It’s just the nature of things.
After the acquisition, we have to build our portfolio into these clients that requires huge integration between the Indian and Japanese teams. We have to translate our offerings into Japanese businesses. That process takes time.
Latin America is much more like India and needs to scale to a certain level before it becomes stable. We are saying they will be volatile.
With dollar revenue of 3.5 per cent, which has been a tad slow, do you think TCS will beat Nasscom guidance of 12-14 per cent revenue growth in 2015-16?
I am not giving any guidance. But if you look at our constant currency growth, it has been 15-15.8 per cent growth on a year-on-year basis.