Our view on the US demand side continues to remain positive: Rajesh Gopinathan


“Europe of course is going through a major geopolitical struggle and that has its impact on business decision making,” says Rajesh Gopinathan, CEO & MD, TCS.

Let us talk about the big picture first. We will get into specifics as you look into 2023 the year gone by from your standpoint would you say it is glass half full or glass half empty?

Rajesh Gopinathan: 2022 has been a very good year so if you look at it in the context of where we have been in the last few years, 2022 started very strongly. Considering that we are back to kind of a pre-pandemic operating model, it has ended also quite strongly. So both the 4% in the Q4 of last financial year or calendar year first quarter and this quarter 2.2 growth revenue side has been very strong and that is always an indicator of where the demand is and your relevance to your customer base.

Of course the year has also been of enhanced cost and that has been the factor across economy and that has also played out on our side. So regarding profitability, we wanted it to be slightly higher but on the revenue side absolutely we have no complaints. It is definitely a glass that is very full.

So as we look into 2023 and if we have to talk about FY24 what are the feelers you would like to share with our viewers and with your investors the idea is to perhaps understand, discuss and debate the macro concerns which everybody is talking about? Historical precedence has indicated that every time when world has slowed down it has impacted IT outsourcing immensely?

Rajesh Gopinathan: The way to think about it is that the world is in a very diverse situation. Each market is going on a very different path driven by very market specific issues though from a zoomed out basis it looks to be similar. So if you go sequentially, Europe of course is going through a major geopolitical struggle and that has its impact on business decision making.

If you go to the other side and if you look at US our discussions with our clients indicate that at a case by case basis most companies are doing well, they are in a good place and business outlook is strong.

In the near term, I would say that the decision making is on a bit of a wait and watch mode as to how does this whole thing comes about and I think some of that concern is imported from the financial markets rather than the real economy being a bigger concern as the market and the financial market is about asset repricing. It is not really about business outlook changing as much as the underlying cost of that asset being repriced because of the changes happening on the interest rate regime.

So our view on the US demand side continues to remain positive though in the near term given that the talk is about the impact of the inflation we believe that the actual outlook and the actual decision making will reflect the underlying business strength rather than the financial aspect of the whole numbers that you see out there.

When you say that in near term you expect a delay in decision making and then the things will pick up, so for this calendar year do you expect a tail of two halves, little bit of slowdown in the first half which could get captured in this quarterly number may be in the next quarter but eventually as the year progresses things would pick up?

Rajesh Gopinathan: I think that will be a good way to describe especially the US side of the business and I am hopeful that it is only in fact a few months into the first quarter and by the time we get to February-March we should have a much better visibility and we are quite hopeful for what the rest of the year is likely to be. But it is prudent to wait and watch and that is the posture with which we have gone in. We have been leaning forward but staying very committed, as I said we are staying very engaged with the customers but waiting and watching to see how it develops.

I was looking at margins and margins have exactly gone back to where they were pre-COVID 25%-25%, FY19 25%, last quarter 25% there was a uptick which happened in margins because of the business and the cloud migration now it has come back it is just a coincidence?

Samir Seksaria: So let me first point out we are at 24.5% right now. Our aspiration is to get to 25% as we exit this year. As you rightly pointed out through the COVID there was certain discretionary expenses which did not take up and we had margin uptick and then that was followed by a year where we had significant headwinds coming in.

We stayed focussed on our execution and insured that we get our trails back as we moved towards it. I think that has played out very well through the year and yes we are at where we should be getting towards the pre-pandemic level.

What is stopping you from getting there because it is easy to imagine that attrition will slow down, it is easy to imagine that wage hikes will come under control, rupee is a tailwind so what is stopping you from going to 25%?

Samir Seksaria: We have progressed. We called out when we had our results in Q1 after the impact of increments in Q1 we were at 23.4, we have structurally moved towards 24.5.

You have gone on press I think in December and to the Economic Times and he said that 2023 will be a year of margin repair and we do not expect margins to improve by leaps and bounds but directionally we are working on it. So when Rajesh is calling out for repair in margins what is he indicating to?

Samir Seksaria: So repair what you see is ongoing and what we have seen is through the last year we invested significantly into building capacity rather than the entire industry hiring from each other. We invested into talent pool and invested into our development of talent, training etc and that productive capacity is getting into the available pool now and that is reflecting on to it. And we will continue to focus on our execution rigour and that is what we mean by repair of margins.

You have indicated that a business like TCS even at this level in five years can actually double?

Rajesh Gopinathan: I kept myself the range of 2030 for that.

But I am talking about the long term. But for that to reach from where you are right now I am looking at about six to seven years, the growth rate has to be between 9 to 11% for you to even double by 2030?

Rajesh Gopinathan: I think from where we said so if you go at about 7-8-9% you will get to that in 2030. I believe definitely it is doable and we have the demand visibility. If you look at our client universe today there are about 60 customers from whom we make let us say annual revenues of more than 100 million. If you look at our client universe these are typically large global corporations, their tech budgets will be upwards of a billion plus so even in customers where we are their strategic vendor our market share of their total tech spending is 10% of lower and definitely there is a path towards consolidation. Even more so if you take the top 5000 customers globally each of them will be of that size and whereas we are only at about 60 so there is that market share gain to be had.

Are you growing because of market share gain or the absolute pie is expanding?

Rajesh Gopinathan: We are growing significantly on both sides of it. There is an absolute pie increase so the overall tech budget and the tech spending universe in a good year grows by about 5-6%, in a bad year it grows by 2-3%.

So there is definitely a market share gain. If you look at individual markets for example in UK market now we are the single largest tech provider and that clearly indicates our increasing market share. Similarly, in Europe we have been systematically going up the charts. In US, the numbers are a bit more wider, we estimate that we are probably the number two on a like to like basis in the US market. So definitely there is market share gain and definitely the overall market is expanding and we are participating on both legs of that in growth journey.

Now it is very easy for us to correlate macro and talk about IT spending but if I look at the last decade, there have been good macro points and there have been bad macro points but IT outsourcing in India has grown. Should we dismiss this entire myth which everybody has that macros and IT outsourcing for a company like TCS are directly correlated?

Rajesh Gopinathan: There are two things that are worth looking at. First of all I agree with you and there are two things to be kept in mind. One is that we need to think about IT spending and not IT outsourcing because today if you are a large global enterprise and you think about an IT project, you will think of a company like TCS as an integral part of it. You are not going to think that okay out of this budget I will outsource X and I will do Y so it is not based on outsourcing. It is about IT budget versus what your overall other cost side of it. So as long as there is an IT budget we are participating and to your earlier question we are increasing market share of the IT budget so that is the one driver.

Second is that the way to think about IT is that IT is an industrial perennial, absolute amount of spend might go up and down depending on the economic cycle but it is inconceivable that IT will be actually deprioritised in any part of the cycle. There might be short term decision making, a large project is kept on hold or it is delayed but overall IT spending is such a perennial element that the specifics of what gets bought will change, it is very similar to on the consumer side FMCG goods are perennial in their demand, the specific item that gets sold whether high value product or medium value product gets sold or the absolute incremental volume might change but on an ongoing basis there is perenniality in demand.

The same perenniality in technology demand exists on the industrial side and which is very different than what it was let us say 10-20 years back.

20 years back the combination of perenniality in demand and a much better business model allowed us to increase market share.

In a bad year tech budget goes down to very low single digit, we still do mid or high single digit growth. In a very good year tech budget goes to 5-6%, we do 15%.

Last year the choice of words was agility, exciting, transformation, deal size becoming bigger. I am looking at your interaction based on yesterday’s press conference and right now with us, wait and watch, things are slowing down, decision making is getting delayed. There is a different usage of vocabulary. Am I reading too much into it.

Rajesh Gopinathan: That reflects the CFO sitting next to me. I used to play that 10 years back.

It is not a profit warning but the choice of words is different.

Rajesh Gopinathan: The better analogy is that it is perfect test pitch. There is something in it for everyone, you got to play it session by session.

Is this a turning pitch? Is this year will be a turning pitch in cricket terminology?Rajesh Gopinathan: It is a good test pitch where there will be bounce in the day, there will be turn in the day but it is not going to break down and that is the prospective with which we are playing.

Is the CFO confident of TCS scoring a double century?

Samir Seksaria: Well last time when the CHRO was sitting with me you made me speak all is well, we are aspirational that all is well.

Is all is well?

Samir Seksaria: Yes aspirational all is well.

You can look at endlessly about what has been a miss and what really has gone wrong but the way I look at Rajesh and Samir is that look the relevance what markets thought that it is going to get subdued because of macro headwinds at least that myth in a sense is getting challenged so double digit growth yes or no for next year?

Rajesh Gopinathan: We will not get drawn into that but it is a good outlook out there.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)



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