Tata Consultancy Services (TCS) on Friday reported a 0.2 percent year-on-year (YoY) rise in consolidated net profit at Rs 8,118 crore for the third quarter ended December 31. Its revenue for the quarter grew 6.7 percent to Rs 39,854 crore in the December 2019 quarter as compared to Rs 37,338 crore in the year-ago period.

In an interview with CNBC-TV18, Rajesh Gopinathan, CEO & MD, TCS discussed the third quarter performance and the outlook in detail. He is hopeful of sustaining margins at around 25 percent going forward on back of their strong delivery model.

Below is the transcript of the interview

Q: It has been a beat on the margin front. Is 25 percent margin sustainable?

A: Absolutely, because it is very important as to where it is coming from. We have been investing continuously in our own organic talent building capability and over time, our investment into the group of 5-12 year old people has been significant because this has been going on for the last five-six years. So we believe that that pool now is very strong and there is an opportunity for us to expand the base.

On the other side, we have also invested in significantly increasing our capability to on-board trainees, using a TCS National Qualifier Test Platform. This combination of a strong middle and the ability to recruit across a wide spectrum and to recruit at will, at that age group is something that we believe gives us a strategic advantage. A lot of the margin expansion expectation that we have comes from this delivery model.

Q: Your aspirational number is 26 plus, are you getting there shortly like in a quarter or two?

A: We have said that there is a combination of operational elements and there is the need for the currency to be supportive. Both came together in this quarter and if we see continued support from both sides - the operational side we are quite confident about. Many of these levers have a lot of headroom to go. The currency will continue to be volatile. However, we believe that the way things are moving, probably that will also be supportive of the medium-term.

Q: I wanted to get to the revenue part, single-digits, probably 8 percent, how does Q4 look to you at all, is it looking better than Q3?

A: It is difficult to say. It is always difficult to call Q4 because we get to hear about it only towards the middle of the quarter but I am not necessarily banking on Q4.

We believe that as we see the medium-term to long-term trends – so essentially the story is BFSI retail because the rest of the verticals are firing on all cylinders and they are all well into the double digit space. So these two areas, we are seeing very diverse performance across geographies and sub-segments. We think that there is an opportunity. Actually the weakness can be isolated down to the large banks and the large retailers in US and UK. So it is a fairly limited sub-segment. Just that the sub-segment forms a fairly large part of our base. And as we have explained, we are not losing wallet share there, we are not losing market share, we are participating in their transformational agenda and this transformational agenda has a finite end and if you stay with them, we should participate in the upcycle also.

Q: You think that double digit is around the corner, is it just an aberration?

A: Every time that we have spoken about it, we have had to eat our words. We were very optimistic at the start of this year and then were caught by surprise in Q2. So I don’t want to comment.

Q: Should we be pessimistic because even your headcount is lower?

A: Let me address that. If you look at our headcount on three quarter basis, typically we used to bring in trainees in Q2, Q3 and bring them in training because we were able to roll out the TCS National Qualifier and I explained that in Q1, we on-boarded them earlier. So if you take the full Q3 view, our headcount is comparable to last year just that it is frontloaded in the early part of it and which is not a sign of pessimism, it is a sign of optimism because we have brought them earlier than usual and because we believe that the medium-term is stronger and we want to get them on to projects or get them trained.

Q: I shouldn’t read too much into the headcount.

A: No. Look at it as – it is 23,500 this year and last year, both are equal numbers. It is just that it is frontloaded this year.

Q: You use a lot of big words when you speak about these large banks in the US which are a big pressure points, optimisation, staying through transformation, is it simply a question of pricing pressure?

A: For one of the large capital market operators in US, we executed a programme called March to Zero. We took a team of 200 people who are doing trade support and we worked with them on what we call a digital twin strategy to create a digital twin of the trade, so that it will monitor the trade in process and intervene before the data loss happens, so that the actual problem that this team was solving is eliminated upfront. We worked with them to reduce this team to zero. So that was the name of the programme, March to Zero. This is the nature of the opportunity and it is a full scale innovation that you are not just automating, you are bringing in principles from other industries, integrating that with operations, working out the domain knowledge of how to intervene in trade settlement of that nature and then creating the productivity gain.

These in the short-term is revenue deflating but the goodwill that it gains and the positioning that it gains us in the client, we believe will stand us in good stead in the medium-term to long-term.

Q: What is this medium-term to long-term? Very briefly does it mean a year or two or could it be longer than that?

A: My expectation is shorter than that but definitely that is the kind of timeframe that we are talking about.

Q: It is just that American capital markets are doing well and it is actually the European banks who are shedding, but you are giving us a very different feedback.

A: You have to look at where it is coming from, a lot of it is coming from trading gains. Trading gains – the leverage is very high. So, if trade volume goes up, they do very well. That doesn’t necessarily result in increased investment. The increased investment comes when a business model change has to be done. If you want to get into the wealth management, that involves investment.

Q: Retail – you are not the only person the numbers you were at close to 10-15 percent then it comes to 8 and 9 and now retail is zero, middling 4 and 5 percent and Infosys also complained about retail not picking up, is this a structural move that we shouldn’t place so much faith in retail anymore?

A: I don’t think so. In fact, if you look at anything, retailers – the more traditional retailers seem to be finding their groove, so if you look at US, the Best Buy, Walmart, all these guys are doing significantly better and standing up to the pure online players very well. So unlike banking, it is a transformation and it seems to be a successful transformation that is going on.

Q: You can revert to a double-digit growth.

A: We believe so. We believe that that transformation is when their early success will only give them more confidence and the more impetus to keep on transforming and we are well positioned to participate in that. The uncertainty in retail, in that financial stress is an unknown aspect and part of it is also financial transformation because Chapter 11 Protection is being used as a tool to aide transformation part. So we just need to roll with it, and stay in the game - you should have the staying power to be part of this, you cannot just cherry-pick the one that you want.

Q: We are at the start of 2020, you must have spoken to a lot of clients, are you getting a sense that budgets can be better in 2020?

A: That is a tough one because if you look at the conversations leading up to the budgeting cycle, they were all pessimistic. We were in the midst of the peak of the trade war tensions etc. The optimism has only come in the last few weeks. Will this translate into a different view or will the pessimism of the months of the last year reflect, we will get to see it only when we get the money hitting the ground. Which is why we will have to wait for a few months to see whether the money flow comes in before we can call it – the lead up to it was bad, we are starting up the year positively. What it does in terms of budgeting, very difficult to say.

First Published:Jan 20, 2020 5:21 PM IST