Can’t say how much of the Q2 gap will be made up in Q3, Q4: N Chandrasekaran, TCS

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There is good news and there is bad news and the first line of your statement in the press kit is Q2 was an unusual quarter for us and the environment has been challenging and client business is slowing down. What was so unusual for TCS in the quarter gone by?

N Chandrasekaran: Usually Q2 is our strongest quarter. Our Q1 is typically better than Q4 and then Q2 gets even better and at times we do 4-5-6% on sequential basis in Q2. In short, we expect a lot of growth in Q2. It is on that count that Q2 has been an unusual very disappointing quarter with a very subdued growth performance.

But at the same time, the margin performance for a quarter with so many headwinds and such a low growth has been exceptionally good. To deliver 26% in EBDIT line in such a quarter and to deliver 4.4% sequential net profit is a very strong performance. Most of the improvements have come at the gross margin level. Coming to growth, we had sensed a softness in the BFSI segment and we had also called it saying that it is primarily global banks and we gave a cautionary note during the quarter and that played out.

In the final footprint, a couple of other things have gone worse than BFSI but BFSI is 40% of the revenue and we always deliver a significant growth in BFSI even in Q2. Even today, our footprint in BFSI is very strong. Our client traction is very strong but the softness persists and I cannot be happy with the 1.2% growth in BFSI.

The second issue was a one off delay in India to the extent of Rs 180 crore and that is something that we will come back next quarter. It was not anticipated. It happened later in the quarter and we could not have predicted it. I am not too much worried about it because it will come in next quarter.

The third aspect is retail. We are significantly engaged with many retailers globally on digital transformation whether it is in channels, customer experience, supply chain transformation, big data, looking at their inventory from a digital point of view etc. What does retail mean in the new world? There was multiple softness and we did not anticipate it. That was bit of a surprise.

But I have done what I could do under the circumstances. I can go back and look at each one of these situations. I can say that there is no structural problem. It is a story of misses in multiple places and all of it will come back. All of these rumples will happen but only thing is that retail sector is always tight on Q3. So frankly I feel that what I hear from my team is that most of it will come back in Q3 but I feel that some will come in Q3, some in Q4. It is the nature of the business.

The disappointment for me is that a strong Q2 will involve growth in all these segments and I am not too much concerned about India because it will come back. But the positive news is that all of this will come back. None of this is structural problem which is going to carry on and I should get worried about it.

But now you have a higher watermark to beat for the rest of the year because the second half is always slow. Q2 exit is not great, some of the business may come back. You also said in the past that business loss is difficult to cope up iwith n coming quarters. So FY17 may not be great?

N Chandrasekaran: Yes. Absolutely. If you ask me how much of the gap will be made up in Q3-Q4, it very difficult to say, so I am not going to be able to answer that question to you in a very strong way. But having said that, these delays will act as some tailwind which we should take advantage of and then see what is the best thing.

Currently, my focus will be to try and see what best we can do to exit FY17 on a good note because fundamentally I am focussed on growth with a disciplined margin. I do not sacrifice margin for growth in a non-strategic way. I will sacrifice if there is a strategic opportunity but otherwise I am always focussed on growth as well as margin and disciplined execution. So we will continue to focus on disciplined execution. We will continue to capture growth so that we exit FY17 at a good rate and position ourselves better, that is the way I look at it.

Now the horse TCS has been riding is the digital horse and that business is growing. Billion dollar plus, growing at 50%. For the quarter gone by as well, the digital business is growing but the historical run rate has slowed down. So what would be that growth lever which you would be now focussing on to surprise us?

N Chandrasekaran: Digital will be the significant driver of growth and there is no let up in the digital growth. Digital momentum is very high. The extent of digital penetration, both from technology point of view and from the business point of view with customers across sectors in BFSI, retail, utilities, manufacturing or travel across sectors, is pretty significant. We are tightly embedded with clients in transformation of their enterprises into a digital firm, real time enterprise or enterprise which deliver superior experience whichever way you call it and all of this is positioning us in extremely good place in order to deliver growth. We are very strong in digital and I do not see any issues at all.

So the slowdown what we have seen in the digital business, I am comparing Q4 and Q1 versus Q2, do you think that is in line with the overall business problem you had for the quarter gone by?

N Chandrasekaran: Yes because it is 1% growth, what do you expect, the problem is that.

So BFSI and digital is connected?

N Chandrasekaran: Connected. BFSI, digital, retail, everything is connected. So is retail. If you get delays in the ramp ups, that shows up.

Last quarter, you had raised two red flags. One was Diligenta and the second was Japan. Now looks like the environment is changing. There is something which we do not understand or there is something going on which you need to perhaps explain better.

N Chandrasekaran: Not really. I think if you really go back the last five-six quarters, I had pointed out three one-off structural issues. If you go FY15 Q1 or FY16 Q1 whenever we had the problem, then I would have said that it will take next four quarters, it will take six quarters. I do not have such issues. So whether it is retail, whether it is India or whether it is BFSI, I do not see any one of this as structural slow down. I think the ramp ups are getting delayed. It is not that we are having an issue with an account or having an issue with an engagement of, having an issue with the market at this point in time.

Just to clear the air and for the benefit of our viewers and your shareholders, there are no deals cancelations and the slowdown in cyclical in nature?

N Chandrasekaran: Yes. We can call it cyclical because for want of a better term.

I want to focus also on this entire US election rhetoric. It is not that for the first time US elections are taking place. Every time close to the election, IT companies tend to get extra careful. Are you extra careful, are you smelling something is different this time or is this the usual election cycle?

N Chandrasekaran: My answer has been the same. Election time, economic slowdown, the joblessness issue — these are the times in which this topic comes up. So how it will play out, what kind of regulatory changes will come, I do not know. But fundamentally, I believe in our ecosystem. We are as much a global company as anyone else and we have a strong presence in the US — not only in terms of our customers base but also in terms of employee base. And we believe that we are tightly integrated with the technology adoption in that market. I fundamentally believe that from a business model point of view, we are integrated and I am not cautious about that.

For a company which always had market leading growth, does it bother that this time you will miss that number?

N Chandrasekaran: No, at the end of the day, these are not things that one should go by. I believe that we are running a long race and we have run quite well so far and sometimes you do not meet your timing. So you just need to make sure that you attempt and you get well prepared so that you run the race stronger. I am neither negative nor concerned.

We are extremely well positioned. We have very good traction with customers. Our investments are very solid both for short term, medium term and long term and we have gotten into markets. We have spent significant amount of investments we have made whether it is in building out Japan for tomorrow or Latin America for tomorrow and these are calls that we have to make in a business that we want to grow with these customers in the next ten years, five years,

Sometimes those in short term may pose a headwind but that is fine but the benefits are there for us because we have built deeper relationships. We have gotten to know them. They have gotten to know us. So they will all come back. There is no issue. But also in terms of digital, I think we are making every investments that we need to make. We are not shying away. We are not cutting investments.

If I look at the trajectory for Indian IT sector, the growth is contracting, that is largely because of the base effect. Late teens have become early teens and now it could be in single digit. But there would be a curve where the growth contraction will stop and real growth will start picking up that is a cyclical aspect and a structural aspect which will kick in. So how far are we away from expansion?

N Chandrasekaran: I cannot give you a definite day.

But you are working towards that.

N Chandrasekaran: I am working towards that. I am very much working towards that. These are things that people will disagree with me when I say that so I do not really want to get into big arguments with anybody. We are in a business which is very technology intensive and I said it earlier – if technology used to support business 15 years ago, during pre internet time, technology got embedded in business, we are moving to an era in digital whether business is getting embedded in technology.

So the role of technology is pretty significant. Tech spend is going to continue and we are making all the investments. We are in a great position from a talent point of view, from a credibility point of view, customer relationships point of view, from the financial strength point of view, we are making all the investments that we need to make. We are here to serve customers and make an impact and there is a lot of growth in this industry and we will get back to the growth path.

So a shareholder should think look the quarter gone by was just an aberration and that is not the real picture?

N Chandrasekaran: Yes absolutely. There is no doubt about that.

You mentioned that Brexit is important but so far it has not impacted your business directly.

N Chandrasekaran: Yes because my BFSI growth in UK is significant…

But the currency, I am sure it is going to give…

N Chandrasekaran: Constant currency wise, it is significant.

It is significant. Do you think market should pay focus on a very important data which is your attrition has come down and your employee addition has gone up. Now if you are not confident, you will not be hiring that much.

N Chandrasekaran: Yes. I cannot tell. Market knows more always than anyone of us so one should not tell the market what…

So that is the data…

N Chandrasekaran: The important message is that we have seen some softness and we have dealt with it and it is important we deal with it. At that time, you just have to make sure that the execution is flawless and I think our execution has been more than flawless. I would give a lot of credit to all my teams.

They have done a stupendous job of execution to be able to deliver the kind of margin performance they have given which is also equally important from a shareholder point of view.

What happened for the quarter gone by was really a nightmare. You will not give me an absolute number, you do not give a guidance but you got to give me something to really munch on this time. Give me something how soon you will be able to recovery that loss.

N Chandrasekaran: Cannot tell you.

But you are working towards it?

N Chandrasekaran: Yes.

It may happen in one quarter, it may happen in two quarters but that is all?

N Chandrasekaran: I cannot really but we are working towards that.