The third quarter of FY20 was one of the weakest quarters for Tata Consultancy Services (TCS). During this period, the company’s sequential revenue growth was not just the lowest among peers but also the slowest in the last eight quarters. However, the company is confident of bouncing back and feels that the current slowdown is not broad-based. Chief financial officer (CFO) V Ramakrishnan tells Debasis Mohapatra that there is no base effect at play and the Tata Group company is gaining market share from competitors. Edited excerpts:
From double-digit growth, TCS revenue growth has suddenly fallen in the last two quarters. What’s going wrong?
Leaving the commentary aside, the fact is that we have gained market share. These are all available from our analysis backed by data. Secondly, there are no large deals which have gone by the wayside. So, whatever is happening, it is not broad-based. There are pockets and markets in which things are playing out differently. For instance, in the European context, banking and financial services (BFS) is doing well. Insurance is doing well across all markets. For some of the large banks in the US, budgets have not come down. But what is happening is obviously, they (these banks) are expecting to get more for less. This means, we have to drive a lot of optimisation and benefits from automation. In the UK, BFS had been doing well for a number of quarters but some clients have lowered their spending in Q3. So, there are markets which are doing well and some that are doing reasonably well. In some, these (negative) factors are at play. However, when you compare with others, we clearly see an expansion in our market share.
With an annual revenue of $21 billion, is the base effect at play in TCS? Will it be unreasonable for the market to expect double digit growth every financial year on such a large base?
There are two dimensions to it. From medium to long-term, we are bullish on business opportunities that are enabled by technology. So, size doesn’t matter. There is enough headroom available (for growth), primarily because technology has the ability to transform those businesses. From governance and management perspectives, we have a number of smaller TCSs within the company. These are businesses which have end-to-end responsibilities, including their own profit and loss (P&L) accounts. From that perspective, our business is very modular. But, we have to capture this headroom and capture it faster than others.
At 25 per cent operating margin, TCS is leading the pack among the IT services firms. Do you think the current margin level is sustainable in this intensely competitive environment?
If you see our margins for the last 5-6 years, you will see that they are very resilient. What gives us confidence that this is sustainable is the overall strength of the model. The model is based on three factors. One is based on the technological adaptability. Second is, (our ability) to build it to scale. For this, people have been re-skilled. Also, when we work with a large number of customers for a fairly long time, it gives us contextual knowledge. So, these factors put us in a good stead.
How much of margin expansion in Q3 came from efficiency measures? Are you pursuing cost optimisation to improve margin?
There was an element of currency depreciation which has been beneficial. We have also taken a number of efficiency measures which are visible across the lines (spend items) in our financial statements. We don’t break it up. So far as pricing premium is concerned, we can’t say that (we are enjoying this) it is across the board. Newer technology can garner a higher premium but not all businesses.
What is TCS’s investment plan pipeline in products and the platform side of business?
Investment plan is continuous and over the years, we are doing it. We have a strong research and development framework and also a product delivery framework. Many of our products and platforms, which are part of our stable now, have gone through this framework.