Chandra runs miles, and TCS, with passion

Despite taking charge only a year ago, the MD & CEO has reaped rich dividends from his operational restructuring strategy.

N Chandrasekaran’s latest passion is to run — his short-term target is to cover at least 40 km a week. And the 47-year-old managing director and CEO of India’s largest IT services firm, Tata Consultancy Services (TCS), is determined not to let his busy schedule come in the way of reaching that milestone.

Chandra, as he is fondly called by his colleagues, took the top job at TCS from mentor S Ramadorai just a year ago. But in that short time, he has ensured the company’s financials grew at a fast pace. Consider the second-quarter results. While TCS continues to widen the revenue gap with Infosys, to 33.6 per cent now, and the net profit gap to 21 per cent, it is closing in on its competitor in operating margins as well.

The TCS operating margin of 28 per cent, one of the best for the firm, is a shade below Infosys’ 30.2 per cent. This, analysts say, will help close the valuation gap between the two companies — TCS trades at a 5 per cent discount to Infosys.

There’s more. For the first time, in the second quarter, TCS clocked $2 billion in revenues on a volume growth of 11.2 per cent — the highest in the industry. The company’s ebitda (or, earnings before interest, taxes, depreciation and amortisation) for the quarter improved by 72 basis points.

This was backed by a productivity gain of 95 basis points, exchange gain of 2 per cent and SG&A (selling, general and administrative) cost efficiencies of 54 basis points. These gains negated the 1.66-per cent negative impact on margins due to additional payroll expenses.

But this is not the story of one quarter. Analysts say TCS has been narrowing its gap with Infosys for a few quarters now and the latest results are only a reflection of that.(Click for graph)

So, how has Chandrasekaran managed this? Analysts attribute it to the company’s operational restructuring, under which TCS is now an amalgamation of multiple firms that manage their respective profits and losses and have operational heads. A brainchild of Chandra, it has helped a large firm like TCS remain agile and bring in a sense of ownership among senior managers.

The new model divided the operation into five key groups: industry solutions, major markets, new growth markets, strategic initiatives, and organisational infrastructure. The impact was visible in the latest quarter results. Under new growth markets, India is a focus area and registered a growth of 25 per cent, despite a relatively high base.

What have also helped the company beat its peers were its full-services play and the large-deal segment. In the first half of 2010-11, TCS signed almost 20 large deals, whereas Infosys signed only nine.

TCS has also been able to grab emerging opportunities better, as the industry started to see a turnaround in the global economy and, more importantly, in the US. “All the verticals have reported double-digit sequential growth. This is the second quarter in a row when all the verticals have reported growth over the previous quarter. They key point to note is that even manufacturing has shown a strong growth, of 11.7 per cent over last quarter in dollar terms,” stated Kunal Sangoi and Ganesh Duvvuri of Edelweiss Securities in a report.

People management is one area where TCS scores best. Despite an additional payroll expense, which hit margins by 1.66 per cent, the company improved its margin. TCS managed this with higher utilisation — with an employee base of 174,417, the firm’s utilisation touched a high of 83.8 per cent (excluding trainees).

“We have been able to respond to this growth in an appropriate manner. For instance, we recruited a lot of people in 2009, but since we were worried about margins, we postponed their joining dates. But we had built-up capacity. Now, we have high utilisation and we have also hired contract employees,” Chief Financial Officer S Mahalingam explained.

While the picture looks perfect, many feel that delivering such growth consistently will be a challenge, especially with an uncertain macroeconomic environment and a highly volatile currency. On the currency front, the company is going in for shorter-duration hedges.

There is no doubt that in the September quarter, the IT industry benefited from the rise of European currencies against the rupee and the dollar, and the rupee’s depreciation against the dollar. Since then, however, the rupee has appreciated sharply against the dollar.

Mahalingam says exchange rates had an additional positive impact of 205 basis points, while pricing had a negative impact of 26 basis points, resulting in a total sequential revenue growth of 13 per cent.

Mahalingam admits “the biggest issue is how much my margins have come from exchange gains and will I be able to sustain it? Currency movement is out of my control. We have taken some covers. If the rupee is at 44 (against the greenback), it is a concern. At the start of the financial year, we had said our target will be to keep margins at 27 per cent. Even if we have a reasonable growth and have a constrained exchange environment, we should not have a huge dip in margins, going ahead. But if growth comes, it’s manageable,” says Mahalingam.

Chandrasekaran, as is his wont, thinks a lot is left to be done. “I have not changed anything, but tried to add to what we have. It’s a journey and we have lot of work to do. If there is a feeling that we are doing something right, then it’s good,” he says. By all accounts, like Chandrasekaran’s personal passion, TCS will undertake that journey on the trot.