TCS has announced its FY09 and fourth quarter results. The company's FY09 Indian GAAP consolidated net profit was up 4.5% at Rs 5256.4 crore versus Rs 5026 crore and its Indian GAAP consolidated net sales were up 21.6% at Rs 27812.9 crore versus Rs 22863.4 crore.
The TCS management, including CEO and MD S Ramadorai; ED and CFO S Mahalingam; Head of APAC Girija Pande; ED and COO N Chandrasekaran; Global Corp Affairs ED Head Phiroz Vandrewala and VP and Head of Global HR Ajoy Mukherjee; in an exclusive interview with CNBC-TV18 said it expects Q1 FY10 to be under pressure due to global factors. It sees the economic slowdown to last a while longer but not throughout the fiscal year. It also sees some amount of improvement in the second quarter.
The management said the company has been able to meet it intermediate target of 45% for offshore projects, adding that it would maintain their current target for offshore-onsite mix.
On Monday, at a press conference the management had announced that the TCS board had approved a 1:1 bonus issue, the management said this was a way of returning cash back to shareholders. The company has recruited 48,000 people in FY09 including from the Citi acquisition.
S Ramadorai, the CEO and MD, said TCS would manage employee costs through an increase in the variable component of the pay. He added that it was unlikely that the company would increase salaries this year.
The company is factoring in low single digit decline in pricing, the management said. “Manufacturing and telecom verticals will continue to be under pressure. We have 20 deals in the pipeline but unforeseen shocks from the existing client base are always a cause for worry.”
Here is a verbatim transcript of the exclusive interview with the TCS management on CNBC-TV18. Also watch the accompanying video.
Q: The market was disappointed with the organic growth particularly in dollar terms on the revenue front. Just to halfback to the commentary from TCS a couple of months back you did intricate that you see revenue problem or the volume problem troughing out with this quarter and picking up from Q1, do you still see that happening?
Ramadorai: I think even on volume front if you look at the whole year, the volume grew by 18% which is an indicator of the health of the business and the focus we are putting on. The second parameter which we track our business is on the operating margin improvements and the cost effective measures has been addressed effectively, it’s not a one quarter phenomena but it’s a journey which we want to sustain.
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Focusing on the customers, improving our operation efficiencies and then looking at the volume growth is the key mantra for the organisation going forward. We definitely see some signs of recovery hopefully by the Q2; there might be some optimism coming in from the gloom and doom, which was an unprecedented economic situation.
Q: By the Q1 which is the quarter underway currently, you would not expect to see a significant improvement from the situation that we had in the past?
Ramadorai: I definitely see certain pressures in Q1. We need to plan for that, focus on the cost part of it a lot more. To me pricing pressure, right value proposition, offshore leverage, cost management and focusing on the customers will be the key priorities for Q1.
Q: On the margin performance this time because it’s improved sequentially but some of it has been offshore shift for you, what is it that you are pricing in right now both in terms of an offshore mix and how much pricing depreciation or how much of a fall in pricing are you estimating right now from your clients?
Mahalingam: If you take the offshore shift, we had an intermediate target of 45% and which is what over this period we have crossed that and we would continue with that. It was an intermediate target so we are not putting another target right now, it’s going to go to this level. We feel there is still room as far as that is concerned.
If you break down the cost i.e. employee cost and other cost and so on and offshore shift helps in terms of pushing the employee cost down because you are brining people back here and we are not stopping at this, we are going to other areas as well. Pricing is pressurising, but we are still factoring in only low single digit.
Q: In the midst of all this gloom and doom for the sector, you come out with a 1-for-1 bonus. What are you trying to signal because things are tough out there, why the bonus in the midst of this environment?
Ramadorai: We have cash reserves and good distribution of cash. Our cash generation in this quarter amounts to about 4,300 crore, including the acquisition of Citi, for which we spent almost 2,500 crore during the course of this year. When you look at all that, it is to reward the retail investors and show off hopeful signs of optimism as you look at beyond Q2. So it is the cash which has been distributed in a different form.
Q: I know you don’t give out guidance but many of your peers have been coming out and saying that they expect a decline in revenues and profits in 2010; is that a fair estimate from what you can see and give in your Q4 numbers, that without any kind of a number outlook there could be a slippage in revenues and profits for the full year for TCS as well?
Ramadorai: Since I do not give any guidance, I still maintain that from the gloom and doom there are definitely signs of recovery but the more important thing is we as a company are diversified across geographies and across verticals and focusing on the fundamentals to build the business or newer business models. So to me the opportunities in terms of this cannot be looked at from the past. Are we capable of creating those new opportunities and new models and new ways of doing business, businesses are going to be completely different from what they are today and are we positioned for that? That is the way we look at the business going forward.
Q: How has Q1 started off? Is it looking like a sticky quarter - one should not expect any major recovery in this quarter at least, if it happens it will be only later in the year?
Ramadorai: I would say Q1 will be under pressure. The effect of the economic situation in the past is going to play out a little longer but then it is not like we would write off that in 2009-2010. That is the way I will put it if I have to give an answer today.
Q: For the Asia Pacific Pte Ltd (APAC) region what kind of contribution has come in to the revenues this time and what kind of pipeline are you looking at for the next couple of quarters?
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Pande: Asia Pacific or our investments in Latin America, Middle East and Africa - the whole new growth markets as we call it - have been growing steadily. This is the business where we don’t have annuity businesses; these are businesses where we are doing new kinds of businesses; they are not the standard businesses that we do so, growth continues. We have built businesses in the last five years in all these places. Today, if you look at India, APAC, Latin America, we have crossed a billion dollars in revenue. The more important thing is the kind of projects we are doing for large local companies and that’s the new businesses that we are going into. We are doing a large business for a large Pension Fund provider in Australia, a Ministry of Finance in one of the Latin American countries, the complete budgetary system, a complete trading platform for a Chinese government financial institution, so these are the kind of businesses that we do and they take time but they are growing and there is a large pipeline in all these geographies.
Q: Just on 0that point about pricing and bring in peer comparisons again some of your peers have indicated that the pricing fall could be as much as 6%, we understand that clients are demanding anywhere between 4-15%. At this point are you confident of holding the pricing cuts at the lower single digits that you have indicated?
Mahalingam: You have to look at it in terms of what you have negotiated, who are the customers and what has happened etc and that could be a recurring aspect and that is not going to be frequent or common place etc. So we need to take into account that there are customers who have demanded and for whom we have arrived at a certain pricing point at this time. Essentially, as we have been saying earlier that it is budget discussion rather than a pricing discussion because the customer has to see lower cost and you deliver that. So there is a track record and there are negotiations that have already been completed.
Q: But if the markets are bit surprised with the kind of employee addition you have had striped of BPO etc 500 employees in Q4 that seems to be indicating that you expect to see business quieting down a little bit?
Mahalingam: No, in our case we will tell you upfront how many offers we have made, what we have done etc. In the beginning of the year we said that we made over 22,000 offers as far as trainees are concerned. We also said last quarter that there is a freeze in recruitment unless there is a special need etc. If you take that we had people joining in this quarter exactly as planned, which has led 3,500 but we have met the overall year number.
Ramadorai: I would just like to add we have always made it known that we are going to be looking at the talent management and it is going to real time talent management. To look at the overall perspective for the year we have recruited at a gross level of about 48,000, including the people we have got from the acquisition of Citi. By any stretch of imagination one of the largest number of employees coming into any organization, probably in the whole world and the net addition of more than 33,000 is what we have targeted, what we have said we will get it and we have exceeded that. So whether it is one quarter or whatever it is - it is just an addition rather than saying that things are slowing down. We have made an offer of 28,000 for the year going forward, which is the campus recruitment and they will be taken in as the situation demands in Q1 and Q2, Q3 or Q4. So those are the fundamentals and we have to look at it in the total context.
Q: In terms of employee costs what can you do in 2010 in terms of any kind of salary increments? What is the thought at TCS - will there be complete freeze, will you also look at cutting variable salaries. How are you approaching this year in terms of employee costs?
Ramadorai: The variable salary is a variable salary, so there is nothing like cutting variable salary. Variable salary is based on the performance of the company against agreed targets by businesses, by the company as a whole and or individual performance, so to that extent whatever has to be paid that’s what we pay to the employees with full transparency and they are completely aware of it.
With regards to the way going forward, we will definitely look at ways to give incentive to people, we may increase the variable payout as compared to the fixed and that’s one option which we have depending upon the level the person is within the company or the function he or she is performing followed that we will certainly look at promotions during the middle of the year instead of immediately. So those are some decisions which we have taken and it’s with a full concurrence and the engagement of the employees.
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Q: Can you paint the margin picture – not in terms of what margins you expect in 2010 but how much you expect to be taken away from the margin because of pricing declines and how much of that you can compensate by lowering cost lines like SG&A (Selling, General and Administrative Expenses) and even employee expenses?
Mahalingam: Let’s keep the pricing in low single digit which in my definition will be somewhere between 2-3%, so that would be the effect then you have got the list of costs. One thing Ram just mentioned about this variable and so on; variability allows us to fix it in relation to the profit generation and therefore that would go along with that against the target.
There are a number of things that we have taken whether it’s in terms of infrastructure – how we are occupying and what we are doing in various places, what kind of cost improvement we can make. The second thing we are doing is, in term of project execution itself - how we are able to deliver project; if it’s fixed price and how efficiently we are able to do that and so on. The third factor is in terms of a lot of other things including travel, communication, so the whole issue is getting into a taskforce and making sure that the targets in each of these as far as reduction, as far as baseline is met.
Q: To reiterate though TCS has not taken any decision yet on whether or not to put a freeze on salary increments for this year?
Mahalingam: We have not talked about salary increases at all.
Q: But have you put a freeze on it?
Mahalingam: I do not think there is going to be an increase; I think Ram can supplement it.
Ramadorai: We have taken a decision not to increase salaries for the time being and any payouts would be on the basis of variable pay and the component of the variable pay is going to be different; at the higher level it will higher amount of variable payouts and at the middle level its slightly lower and at the entry level it will be the lowest that’s way we have structured. But we have raised the performance bar and the performance management so that employees know in times of this we need to get the best out of people and help them to get the best out by investing in training and education.
Q: There is a resolution now on the Satyam episode but there are also no restrictions anymore on engaging with clients that Satyam has been dealing with. Is TCS open to doing that and engaging with clients who maybe looking for a switch?
Ramadorai: Even when the Satyam situation arose, there were a number of their clients who approached TCS and other companies. We have clearly said that so long as there is no legal binding with the company, we would certainly talk to them but we would also not hire any of the Satyam employees. Those are the fundamentals on which we work. So we look at customers from the point of view of does it make sense for us to relate to them, create the value for them and then the opportunities for them to grow in their businesses. Secondly, we told all those customers that we are not going to get into a price war and then deplete the margins and we would only service at an economic sense when it makes sense to us. We do have some clients who have given us some work which they were doing with them or in a certain form in terms of reduced work from them and a little more to us. That is how it has happened.
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Q: Mr Mahalingam is speaking of low single digit pricing declines, is that the experience that you are getting from your clients or do you fear that as the year progresses you maybe forced to give bigger pricing concessions?
Pande: In our part of the world - in the new growth markets - there are existing clients, local clients and the new ones. Given the kind of deals that we do — we are doing turnkey businesses, build architecting solutions — it is very difficult to say whether we will see a pricing pressure. But yes in some of the existing clients there will be some pricing pressures even in the new growth markets of what Mr Mahalingam talked about but it depends on the kind of engagements that we do and I think that is where our ingenuity will be.
Q: Mr Ramadorai made the point that perhaps Q1 will be a little sticky but things are looking a little better from there, are you feeling like that as well? This is going to be one of those backended years in terms of growth?
Chandrasekaran: All I will say is that the financial services markets were the first ones to get hit. We are seeing some signs of a recovery but not enough proof points to say that we are out of it but definitely there are some sense of recovery, we seeing volumes increasing but we would like to weigh it for one or two more months to see that pick-up happening. We think that the manufacturing in the hi-tech sector has got affected and telecom in Q3-Q4 timeline we will continue to be under pressure for Q1. That is the context.
Q: One of the concerns for TCS is not so much about new clients, it is what is happening with the existing clients, the mature clients as it is seen? Are you seeing the finish off the ramp down that we saw through FY09, are you seeing incremental business coming in from existing clients?
Chandrasekaran: Incremental businesses are coming from existing clients. If you see the client metrics, there are impressive client metrics even in FY09. Across the revenue banks whether it is 1-10 million-20-30 million or 50 million, we have increased the number of clients giving those kind of volumes and that is happening because we are getting incremental revenues from those clients. What is affecting us in the quarter is a surprise; suddenly an auto sector client faces problems and then they cancel about a chunk of work or a semiconductor company comes and says that they are having huge issues and huge inventory problems, want to shut down the factories for three-two weeks. So these are things that have happened during FY09, so any such surprises for many existing clients - if 3-4 clients do that in a quarter then your quarterly incremental numbers go for a toss. That has been the problem. Having said that - if you ask me in March if anything like that has happened, the answer is no, if you ask me is it going to happen in April, so far no and for April and May I want to observe before we can comment on it.
Q: We were speaking about salary increments for the year and Ram did tell us that so far you are not talking of any kind of increments at all and maybe restructuring of the variable pay structure. Could you just outline for us exactly what your plan is for compensation for 2010?
Mukherjee: As far as our plan for the next financial year is concerned, we are not planning for any increment at this point in time. Salaries will be on whatever we have been giving in FY09 so the same salary level continues. When it comes to the variables, the variables depends on the total profit that the organisation makes, so the percentage of the variable is based on our EVA (Economic Value-Added) kind of a formula. So the restructuring is the portion that you get in advance on a monthly basis vis-à-vis the component that’s get paid at the end of the quarter and that percentage of the two there will be some sort of redistribution of that.
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Q: What’s the big deal landscape looking like. We haven’t spoken about too many big deals which have been signed over the last couple of quarters, more than USD 100 million. Is that pipeline still on or has it dried up completely?
Vandrewala: We announced, a total of seven large deals in Q4 itself and if you look at the pipeline it is reasonably healthy and we are at least looking at another 20 odd deals in the pipeline. The pipeline is healthy and on the large deals, we have a certain degree of confidence. The good news is that all the deals that we did whether they were in Q3 or Q4, all of those ramp-ups, all of those pricing discussions are all holding and there is no issue. As Chandra mentioned earlier, issue is at the existing client base and the surprises that you get on a sort of monthly basis.
Q: Talk a bit about budget spends because as you have indicated in the past that they are becoming a bit irrelevant situation, the situation that it’s more dependent on discretionary spends, its probably down to a monthly allocation right now. Is there any clarity on what kind of budgets spend is been laid out even for the first two quarters of this financial year?
Chandrasekaran: Customers who have finalised their budget are sticking to the budgets because this year unlike last year when the customers finalised their budget they knew the environment. Last year when the customers finalised the budget they didn’t know the environment that they were going to face, so they themselves faced lot of surprises during the year – that’s not the situation this year. So the good news is that those who have finalised the budget, are sticking to the budget, those projects are ongoing. But many have not finalised their budget and they are taking very tactical approach on QonQ basis or on project basis and I think that will be the case this year for most part especially in some of the sectors like manufacturing and even in telecom in some cases.
On large deals actually we did announced USD 100 million deal and USD 250 million in Q3. We announced seven deals which are sizeable this quarter as well. So the deal pipeline is quite healthy, the only thing that we worry about is what could be the surprise that we will face next month.
Q: When you engage with clients, how prickly an issue is pricing becoming because for many of the top clients you are probably speaking with their own earnings are under significant pressure and it is difficult to take a call on holding prices or even accepting a low single digit pricing cut, is that becoming a prickly issue?
Vandrewala: I think you also look at the pricing discussion from a value point of view. The advantage that we have is that with number of years of experience of working with the same customer, the domain knowledge, the geographical spread on the basis of which you can service them and the productivity levels that we bring in becomes an important part of the whole discussion. So it is not like going out and buying a commodity where you would say this is the price and this is the way it works. So it is an involved discussion which goes to a value discussion. There are different ways of looking at pricing and the onsite offshore mix is an important element of that which we have leveraged and that works to the client’s benefit and also works to our benefit. So it is not a simple discussion that this is it. It is a more involved discussion and I think we have a fair degree of confidence that customers understand the value that we bring and we are able to articulate that and negotiate and discuss that but they are under pressure and if we work in a spirit of partnership we have to recognize that. So it is not simply a price discount. So there are different ways that you deal with.
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