TCS doesn’t believe in sacrificing profitability to drive growth

Mumbai/Bengaluru: Tata Consultancy Services Ltd (TCS) believes that its half-a-century experience has made the management realize that sacrificing profitability is not enough to drive growth and contrary to popular belief, following this model can be counterproductive, as both margins and growth are intertwined.

Rather, India’s largest information technology (IT) services firm believes superior growth and profitability can be managed by having a stable senior management team, and managing operating costs deftly, which should more than offset expenses to build intellectual property (IP) software and tools needed by an IT firm’s customers.

“From our mentors, from Kohli (Faqir Chand Kohli) to Ramadorai (Subramaniam Ramadorai) and to Chandra (Natarajan Chandrasekaran), we have learnt that if we compromise margin to funnel growth, neither will happen,” chief operating officer, N. Ganapathy Subramaniam said in an interview last week.

TCS’s comment is significant because it brings back to focus the current conundrum of balancing growth and profitability faced by India’s $167 billion information technology outsourcing industry, especially after the country’s second largest IT firm, Infosys Ltd, lowered its profitability outlook in the current financial year, as it hopes to improve growth.

“If you say, we drop margins because we want to invest in growth, our experience is that growth does not happen. Our experience is that you don’t compromise on either (margins or growth). We have a remarkable senior management team, and our ability to reskill our people on the agile framework, makes us confident that our Business 4.0 approach will help us set for the right growth and profitability,” said Subramaniam.

Earlier this month, Infosys said it expects operating margin to be between 22% and 24% and expects to grow its dollar revenue between 7-9% in 2018-19.

Infosys reported a 7.2% growth and an operating margin of 24.3% to end last year with $10.94 billion in revenue. TCS reported an 8.6% dollar revenue growth at an operating margin of 24.8% to end with $19.1 billion in revenue.

Infosys said the reason behind lowering of profitability is to plough back the savings to invest in digital technologies, the fuzzy umbrella term which each company uses to classify revenue generated from areas generally classified as social, mobile, analytics, cloud computing and Internet of Things. Further, Infosys also expects savings to cover expenses related to hiring more locals in the US and to pay more to hire the brightest engineers.

TCS, which saw its operating margin narrow 90 basis points over the last year to 24.8%, remains confident that it will be able to retain its aspirational target of managing 26-28% operating margin in the current financial year.

“Are visa costs and other staffing costs increasing? Of course they are increasing for us (like for other IT firms) but our ability to balance these costs, like how to manage the staff costs, and at the same time, how we can increase our price points for digital services, is going to determine our margins overall,” said Subramaniam.

“Remember, every single transaction or deal or project we undertake has to be in the right value,” said Subramaniam.

Some analysts, for now, are not certain on the approach followed by either of the two companies.

“This shows that Infosys until now has not kept pace with investing in digital, say compared to TCS and other large companies, and now realises it needs to invest. But no easy answers for now and it remains to be seen who eventually succeeds,” said the head of research at domestic brokerage, on the condition of anonymity.livemint