India’s largest information technology services provider, Tata Consultancy Services (TCS), beat market expectations with its third quarter (October-December 2009) results. The growth drivers were North America and BFSI (banking financial services and insurance), signalling a recovery in the sector. N Chandrasekaran, Chief Executive Officer and Managing Director, believes growth will get better, but one should not expect a similar volume growth (especially in BFSI) in January-March 2010 (fourth quarter). In a chat with Shivani Shinde, he spoke on clients, growth prospects and the company’s hiring plans. Edited excerpts:
What do you attribute your good numbers to?
We did not score merely on the selling general and administrative (SG&A) front by cutting costs. Our gross margins have been improving, too, and they have now become a benchmark. This means we have delivered to customers in all our markets. Our utilisation, too, improved 81.1 per cent (excluding trainees) and including trainees, it was 77.2 per cent. On the net profit side, we did not have much hedging losses. We will incur hedging losses in Q4 due to currency fluctuations but I am hoping the situation will improve thereafter.
What are you doing to sustain this growth?
Any gross margin improvement happens because of a process. We have put a lot of stress on cost management initiatives. Even if costs like travel increase, they will move in a narrow band. Simultaneously, we want to invest in marketing. Between sales and marketing, we have more spending towards sales. So, that will be an area of focus.
What about utilisation? Can you maintain these figures, as you add close to 11,000 employees in the fourth quarter?
I agree these are high numbers. But if demand picks up, I think we can sustain these. In the immediate term, probably this will remain so or might go a percentage down. I say this as we will be adding a lot more people in the fourth quarter. All the growth will not come in this quarter and some of it will be in the first quarter of fiscal 2011. If we have to maintain these numbers, we can push it up a little. We are recruiting as we are positive about the growth.
What about pricing?
Pricing will also take some time to go up, say a couple of quarters. It’s not yet time to talk about an increase in pricing. You have to first get customer confidence, spending should increase and then pricing should go up. It is a natural cycle. There are many companies who have dropped their pricing dramatically, but once the demand picks up and wages kick in, they will be under pressure.
But, do you see a recovery?
Large deals in the range of $100-300 million are back on the table. And yes, while there is vendor consolidation, that is not the only reason driving growth. I have always maintained that technology and our business model is such that we provide solutions to grow. Hence, we will be seeing the lead indicators for recovery. If they have to become efficient, they will have to use us. So, in the case of BFSI, there are a couple of things happening. First, there is work related to mergers and acquisitions. Two, they want to be much more efficient and third, they want to do more risk and compliance work. The growth we are seeing is general and not just because of heldover projects getting kicked off. Customers want to be more efficient, adopting more offshoring models and are preparing for future spending.
But manufacturing, in a general sense, is still under pressure.
That has been under pressure. One of the reasons why I maintained in the last quarter that manufacturing, telecom and hi-tech will dip is because growth is slow. From here onwards, it will grow but in low single digits. Even if I get 1 per cent volume growth from this sector, it is good.
How are the non-linear initiatives you started taking shape?
Non-linear (not headcount related) growth will not show in the profit and loss (P&L) sheet for at least the next 18 months or so. We have now sown the seeds, so you are talking about calendar year 2011-2012. Till then, as long as volume is there, we will continue to hire. Both the platform-based BPO and IT as a service (ITaas), are working well but then again, they are all in the initial stage. Unfortunately, the market only understands numbers and they are not ready to deliver on numbers. But, they are focusing on building capacity and putting in place all the systems. Volume growth in the BPO business has done very well. But, most of the BPO work caters to US clients and hence suffered a huge hit on the rupee front.
India grew 8 per cent sequentially. Can you tell us how the other geographies are doing?
India did see a good quarter but I want to have a series of growth quarters for India. So, when you see that happening, it means our strategy has worked. One of the strategies is to pick deals carefully. That means looking at sectors like energy, banking, insurance and also doing outsourcing. Latin America is also growing well. The second quarter was exceptional and this quarter has been good, and we will grow in the fourth quarter as well. China will be a slow growth story. It is a tough market. We are building a sales team there. So, in terms of geography the growth is coming from North America, India, Latin America and Asia.
