The $27.92 billion Indian IT company expects the demand environment to be muted. Customers are reassessing technology spends and postponing non-critical engagements, he told Romita Majumdar and Surabhi Agarwal in an interview. The Mumbai-headquartered Tata firm, which announced a 17% rise in first-quarter profit on Wednesday, saw a $2 billion deal cancellation even as it won two large projects in the quarter totalling over $2.5 billion. TCS is hopeful that clients will continue to invest in technology projects for efficiency in the short term and for growth in the long term. Edited excerpts:
The start of your tenure as CEO has been rocky with the recruitment scandal and a $2 billion deal cancellation. How are you trying to turn the tide?
The positive side was the speed with which we took action (in the recruitment matter) because these are not systemic failures. There are systems in place which are being reviewed by multiple people. A code of conduct violation happened. A code of conduct violation in a 600,000-people organisation is very difficult (to detect). Even if I look at all the data in my system, I will not be able to capture it. And because we took action, it came into the public domain, it’s not the other way around. Yes, it should not happen. Our core values are very important to us.
But I don’t think it has left any negative impression on the associates themselves. They’re happy that we took action, we changed the head of the function. We have a completely new person looking at the whole thing. So, we have sent the right message across the organisation that we don’t tolerate this.
Are clients worried?
In fact, to be honest, not many clients even bothered to ask us what happened because we’ve been very transparent. Our chairman was very transparent about this at the AGM. The clients are happy that we took action. If we had not taken action, then the clients would be unhappy.
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There have been deal cancellations, delays in conversions, and also large deals wins. Can you explain the mixed signals?
There’s a certain amount of macro uncertainty towards which customers are trying to reassess the spending they had committed to already. They are checking if they are getting the correct RoI, and if it is business critical, because there’s an interest to bring in more efficiency. But at the same time, it has not stopped them from looking at new investments–so both are happening. Ongoing programmes are getting reassessed and reprioritised.
Some of them operate on a (lower) capacity, so that is causing immediate revenue shrink. But at the same time, you have new programmes starting right… so both are happening at the same time.
Any early signs of demand pickup? Will that flow into hiring as well?
It’s too early to consider that from our perspective. At this time, we look at honoring all the offers we made. We have a substantial number of outstanding offers both in terms of laterals and freshers. We’ll calibrate new offers as we go along in Q2, Q3.
How does the long term look to you?
On a short term or immediate term, the focus is on efficiency. In the long term, the focus is on investment. During Covid, a number of technology programmes started because there was more budget available. Now, as the uncertainty is looming, clients are looking at whether these programmes are yielding results and if they should continue with each one of them.
Large programmes are very well vetted so those don’t get disturbed. And the second aspect is that early adopters of cloud are now finding the consumption and cost of consumption increasing. They’re really looking at how they (can) rein in the cost of consumption. So, this is causing short-term depression.
How are clients across top geographies looking at tech spends?
In the UK, we are doing very well in all sectors–banking, financial services and insurance (BFSI), retail, manufacturing, all of them. We find the pressure on efficiencies less because maybe they have been on uncertainty for a longer period of time, so they know what they’re going to spend and which programmes will continue compared to other markets where the uncertainty has been there for a quarter or two only. In the US, the primary growth has come from manufacturing and life sciences. Other verticals have been very, very soft.
How do you read the economic signals from various markets?
In the US, the primary signal that we should look for is interest rates and inflation and interest rates coming down. That would be a major boost to economic activity, that would give us confidence. That probably applies to Europe as well. In the UK, I think there is a belief that there may not be a recession at least but there could be a slowdown. Europe has multiple concerns. The (Ukraine) war had a bigger impact in Europe in terms of sentiment. Of course, the energy crisis is behind us. Inflation is still an issue. We have done well in Benelux (Belgium, Netherlands, Luxembourg) and in the Nordics, it has been a telco issue and if the telcos do well, then Nordics will turn around. And for us, the Germany, France, Switzerland area is more client specific.
How do you plan to improve margins in the near term?
Reducing subcontracting is definitely important if the demand continues to be subdued. Then we will try to move more work offshore, though it may have an impact on the top line, but it will be a good margin lever. And we also try to look at improving our utilisation, reduce the number of people unallocated etc.
Does a deal cancellation like the $2 billion Transamerica one make you more cautious about approaching large long-term deals?
Even after this happened, we signed two more (large) deals. So, it doesn’t change your position. Obviously, we will be careful–in terms of how the contracts are designed and how benefits accrue over a period of time to both the parties. In this case, the customers wanted to explore the market in a different way, so we need to understand those things better as we get into these situations. But there is nothing that we are holding somebody (responsible) internally or externally for this. These client situations happen all the time.
Both Infosys and HCLTech have made acquisitions recently. Is this a good time to pick up companies at a low valuation in this environment?
For TCS, we always had a very clear strategy on M&A. We’d never go for an M&A just for the top line. When we acquire, it has to bring in a capability that we don’t have. By acquiring, we should be able to create a multiplier effect. If these two things don’t happen, we don’t go for acquisition. In that sense, for instance, when we did this deal with Deutsche Bank about two years ago, it created more German capability for us. We can go to more German customers, using those associates. We keep constantly looking at opportunities across new technology companies and traditional ones. It may come cheaper (at such times) but it is not the only criteria.