No pricing pressure seen in tradition, new technologies: TCS CFO

In a Q&A, V Ramakrishnan says firm is confident of growing business, as it works to boost efficiency

While Tata Consultancy Services (TCS) showed muted growth in the first quarter, the company says it has enough leverage to grow its business from clients, even as it improves efficiencies. The disruption in the retail and banking businesses, due to online commerce and the emergence of financial technology firms is an opportunity, says V Ramakrishnan, chief financial officer at TCS in an interview with Romita Majumdar and Raghu Krishnan. Edited Excerpts:

Can you maintain the guided margins (26-28%) in the coming quarters?

During the quarter, salary hikes and currency appreciation had an impact on margins. Salary hikes are always introduced in April. However, this year it was 1.5 per cent of revenue, as against 2 per cent last year. As far as exchange is concerned, we cannot have much indication on that and it is quite dynamic. Last quarter, the margin was 25.7 per cent and without the salary hike it stands at 24.2 per cent. In the subsequent quarters, we will recover from the salary hike. So in reality, the margins are very much on track. How we take it from here to the rest of the year is something that has to be factored in. For instance, we have been very disciplined in terms of our operational expenses that are managed very tightly. There is always some room for improvement, especially for an organisation as vast as ours. This is certainly not the growth we are comfortable with and we can certainly do more. We'll continue to work towards the reachable targets.

BFSI and retail have not performed well.  What is the way forward?

The large discretionary spending from big banks, especially in the US, has been missing. It could be due to the impact of rate increases or infrastructure spending or just regulatory controls. But at the same time, banks are definitely spending in the digital space to improve customer experience and back-end operations. We have a lot of these opportunities. BFSI and retail grew 2 per cent each in this quarter. There are a number of banks here whose businesses have grown and few others that have seen de-growth. A turnaround in banking will depend on when the discretionary spending changes. Insurance-wise we have got a couple of deals in this quarter that are doing very well and will be closed by the end of the second quarter this year. Retail-wise, big box retailers are facing challenges of their own like reorganising business for the digital space or while competing with e-commerce firms. They are spending on analytics, customer insights and internet of things (IoT). CPG is doing better than retail. Goods companies are spending. Retailers are going through financial issues, management change and ownership changes. Some of the volatility will remain in case of big box retailers.

Are captive businesses cutting into your revenues in retail?

I don't think it is happening in any appreciable manner. Our own digital innovation centre has a number of offerings for retailers. Retail is the sector where maximum digital opportunities are happening. Our own platforms are definitely gaining traction here. We are not seeing any impact on our business due to captives.

Is automation one of the reasons for consolidation across your offices?

Automation and consolidation are unrelated. Consolidation helps to bring together all infrastructure and facilities in one place and for the associates to get maximum exposure and improve efficiency. We have successfully run it in large centres. We have been in Noida for a number of years and this idea (that automation is causing consolidation) has been going on in the media. Automation from a customer perspective makes sense. We are very much engaged in improving efficiency through automation. There is a lot of scope to use automation to improve delivery to customers.

Deal sizes are getting smaller by the day.

It is not that large banks are not spending and our traditional services are definitely continuing. It's just that discretionary spend has turned more digital in nature with an increasing focus on digital enablement, cloud adoption, analytics, insights and so on. Those projects are obviously smaller in size. Once they cross the proof of concept stage there will definitely be more spending there. Apart from that, the financial services companies are also investing well. Our strength with large clients has always been in the fact that we start with a major project and then once we have established our credentials we start with engagements that lead to further opportunities that are both proactive and customer-led.

With the consolidation of offices in Thane and Noida, what could be the capital expenditure?

Thane infrastructure is a capital work in progress. The capitalisation will happen as it becomes ready for use this year. This is not something unique. This will not affect overall capital expenditure. We have typically been spending around Rs 2,000 crore a year and we will definitely keep investing in digital and cloud infrastructure as and when it is required. Instead of one large office in every city, we are looking at fewer offices in a larger number of cities. In Mumbai, we have always been spread across multiple offices and we will continue to do so across other cities. Congestion, convenience, and risk dispersion, among other issues, are various reasons to have a number of offices in the same city. We are in Tier-2 cities as well. There has been no change in this approach.

Are you seeing pressure on traditional IT business margins or clients pushing for lower prices?

We are close to $18 billion dollars currently and digital technologies are about 19 per cent of that. Which means at least 80 per cent revenue is coming from traditional services. The existing application development and maintenance is involved in traditional services. This is also growth and it won't just stop. Industrial segments are growing due to services that are certainly not all digital. As far as pricing is concerned, we look at it as composite realisation and don't see any major change in that. We look at multiple ways to approach it in terms of a composite mix of services. We have not seen any significant pricing pressure in traditional or new technology enough to call it out. However, there will be sporadic instances.