I can’t see any reason to change published Margin Aspiration for FY20: NG Subramaniam, TCS

We achieved all-round growth in all verticals in Q1FY20 expect Banking financial services, capital market and European bank situation, which softened a bit, says N. Ganapathy Subramaniam (NGS), Chief Operating Officer & Executive Director, Tata Consultancy Services (TCS). During a candid chat with Swati Khandelwal, Zee Business, NGS, “We offered 30,000 campus offers and 12,000 of them are already on-board and rest will be joining us in this quarter. Excerpts: 

Q: Tata Consultancy Services (TCS) has reported a 10.8% year-on-year jump in the next profit, which is Rs 8131 crore. But EBIT margins have declined by 90bps to 24.2%. What majorly led to this fall? Are you confident to retain the FY20 margin guidance between 26 and 28%?
A: This quarter of the financial year 2020 (FY20) has been a steady quarter for us. We achieved all-round growth in all the verticals except in the banking, financial services and insurance (BFSI) segment, capital services market and European banks situation, which softened a bit, which is something that we called out in the last quarter as well. But overall, we are very happy with the performance. When it comes to margin then we are happy that we were able to maintain it despite the softness in the revenue, which we didn’t anticipate at the beginning of the quarter. I don’t see any reason why we need to change that margin aspiration band that we have published at this point in time. 

Q: Your profit has been better than street estimates slightly, however, the other income component has been on the higher side. What led to it and going forward what is the estimate and projection that you have on the profitability?
A:  We, as a management team implemented strategies that aimed for revenue generation in terms of Business 4.0, Agile automation and all that are relevant. Getting back to the double-digit growth is very important for us and it happened. I think, as a management team we are now focused on maintaining the trajectory as well. The second thing is that this year we will focus on leveraging all the investments that are made in terms of Agile, workplace transformation, workforce transformation and continue to stay on a double-digit trajectory. If we look from the margin perspective, we didn’t expect the softness and the strengthening of the currency in this quarter which was against the people’s expectations of the currency’s position. We have made sure that the efficiencies are attended up to the mark in this quarter and like the top 10% of the management team, we should lower our expectations on the variable compensations. All of it is reflected in the margins. All, I can say that the growth trajectory, the demand environment and the contract signed for this quarter at $5.7 billion is very good. Our focus is to look maintain the double-digit trajectory as well as look at the efficiency angle and get back to our margin aspirations.

Q: Your constant currency revenue growth has been 10.6% YoY against 12.7% of the previous quarter. What has been the cross-currency headwind this quarter? What is the further impact that you see on constant currency revenue growth going forward from here?
A: The currency is an integral part of our business model. On the constant currency basis, when you say that it is a 10.7% growth versus 12.6% then it is not much of the reflection on the currency basis because we are talking about constant currency numbers. In the last quarter we called out certain softness in the capital markets and certain organisations or a certain set of customers in the European segment, but both of them have accentuated in this quarter. We hope that this situation will correct itself in the coming quarters. 

Q: How do you see the sub-contracting cost rising amid the ongoing H-1B visa restrictions? What kind of impact do you see on your margin in the future?
A:  I think the sub-contracting cause reflects the current business models and situations. It has been constantly going up as we need short-term skillsets to execute and capture the demands in the marketplace. If we begin to participate in the growth and transmission projects, especially in both the US and the European markets, then there is a need to have local market knowledge. In such a situation, we end up hiring some of the local specialists to support us in the product execution over a period of time who are typically short-term in nature. 

Q: You said that you see some stress emerging in the European banks. Can you elaborate the kind of impact that it can have on your BFSI vertical, which contributes around 39-40% to your revenues? What is your outlook on that because if you see healthcare in the life sciences vertical then it has done very well, 18%+ growth?
A: The BFSI softness is something that we called even in the last quarter, so I think that this softness has further accentuated in the capital markets space globally as well as in certain European organisations. Specifically, with respect to Europe, I think most of them felt that BREXIT would have been over, and they would see an environment where the interest rates would go up. But given that BREXIT is kind of uncertainty still prevails and then it is extending. There plans in terms of their own revenue growth among others is moderated. As a result, all of this is reflecting on their ability to part out and spend on the technology side of it. Eventually, more and more business are getting integrated into technology as a result of which they are unable to cut the digital spend yet and continue to invest in it. The similar aspect is reflected in our digital share of revenue which is now standing at 32% and growing at 46% on a year on year (YoY) basis. I don’t see any basic structural weakness except the capital markets and the European situation. In the $5.7 billion contract value that we have announced in this quarter, more than $2 billion comes from the banking financial services. Life sciences continue to be our star under that particular business. Thanks to our investments need and the platforms that will continue to grow and do well on a global basis.  

Q: How are you seeing the minimum public shareholding of 35% discussed in the budget, if approved by regulators?
A:  The Finance Minister has made this proposal and we are currently studying it as well as a bill has to come regarding it. We have to wait for the details and the promoters will consider this appropriate, in time.

Q:  What is the deal pipeline for FY20? Are the weak macros impacting large client decisions or deal closures?
A: I think the overall demand environment and the pipeline look good. The decision-making cycles especially when it comes to the question of digital payments is quite faster but at the same time, it is short term in nature while people are signing up for long term deal. The decision making is something that you will have to wait and watch. 

Q: The attrition rate is under control and stands at 11.5%. Do you think that you will be able to sustain these levels for entire FY20?
A: I think so. If you look at it then you will find that in the attrition level slightly goes up in the first quarter because people chose to go for high study and they make decisions post-performance appraisals. So, the attrition level goes up in the first quarter, but we are comfortable with that 11.5% attrition that we have right now. I think it is the industry-leading one. On the mapping front, you know that we have made 30,000 offers using the campus hiring that we did through TCS National Qualifier Test. We have already issued the join letters for all those 30,000 people of which 12,000 have joined us in the first quarter itself and the balance are supposed to join in this quarter. So, if you have a look on the net additions, the demand environment that we have and the contract that we signed then we feel confident of our abilities to stay on the double-digit growth trajectory. On the work efficiency aspect, we have adopted the Mission First strategy of TCS in a much more holistic way to be in our aspirational margin brand.