TCS CEO Non-Committal on Volume Growth and Pricing Power in an Uncertain World
Tata Consultancy Service’s N Chandrasekaran speaks to BloombergQuint about the road ahead for the company.
N Chandrasekaran, chief executive officer of Tata Consultancy Services, did not want to commit to higher volume growth or more pricing power in an interview with BloombergQuint, despite improved earnings in the first quarter results.
TCS reported a better than expected net profit of Rs 6,318 crore for the first quarter (Apr -Jun) of this financial year. That represents a 0.4 percent growth quarter-on-quarter and a 9.9 percent growth against the same quarter last year. It also beat street estimates of Rs 6,063 crore. But revenue in constant currency grew at 3.1 percent versus 3.5 percent last year and volume growth came in at 3.4 percent compared to 4.8 percent last year. Analysts usually prefer to compare I.T earnings with the preceding quarter, but TCS labels the third and fourth quarter in a fiscal as seasonally slow quarters and hence the comparison here is with the same quarter last year.
In an interaction with the media on Thursday evening, the TCS CEO suggested that pricing power could improve on the back of a pick up in digital, consulting and automation businesses. In a subsequent interview to BloombergQuint he elaborated,
Generally we have been able to translate volume into growth. We have not seen an uptick which we used to see before. But I think the kind of technology and engagements and skill sets we deploy, I feel that we should be able to secure pricing.N Chandrasekaran, CEO and MD, Tata Consultancy Services
When asked to quantify the expected improvement in pricing Chandrasekaran said, “Any uptick I get is in the right direction”.
Japan - Any Sign of Improvement?
TCS has seen little or no growth in its Japan business after it partnered with Mitsubishi in 2014. On Wednesday, Japan’s government scaled down its 2016 GDP forecast from an earlier 1.7 percent to 0.9 percent. But Chandrasekaran said he’s remains hopeful.
We are going to look for flattish growth, not de-growth. I think that some time this year, because of the extent of de-growth we have seen for the last so many quarters, I do expect that sometime later this year we should see some kind of stability if not growth.N Chandrasekaran, CEO and MD, Tata Consultancy Services
Impact of the Brexit Vote
TCS’ U.K. business grew 3.8 percent this past quarter on a constant currency basis and the continental Europe business did better at 4.6 percent. Together the two contribute over a quarter of TCS’ revenue. Chandrasekaran was repeatedly asked to detail the business impact of U.K.’s decision to leave the EU, and he said it was tough to understand or estimate.
When we say Brexit we don’t understand the impact - one way to look at it is what will be the challenges because of Brexit, but also what will be the opportunities? When we say challenges, the challenges can be two kinds - one is, what happens because of the uncertainty? Are customers going to switch to wait and watch mode? The second portion is what happens because of the rule changes, which is, do we have to separate systems etc... so that can translate into an opportunity.N Chandrasekaran, CEO and MD, Tata Consultancy Services
Profit Margin Slips
Though the TCS management has often said it would like to maintain the operating profit margin at between 26 to 28 percent, financial results for the first quarter showed a margin of just over 25 percent. But Chief Financial Officer Rajesh Gopinathan said the number was in line with their expectations.
When we exited Q4, I said that we are exiting at the lowest end of our band and we are going to face pressures. During the analyst’s call I said, ‘It’s going to be a year where we’ll have to earn our salaries.’Rajesh Gopinathan, CFO, Tata Consultancy Services
Growth Drivers
TCS’ digital business now contributes 15.9 percent to total revenue, up from 15.5 percent in the preceding quarter, and the management commentary remains confident about deal wins and improving margins. Chandrasekaran said digital “will grow faster than everybody expects”.
In the April - June quarter the India business also did rather well, growing at 8.5 percent. India contributes just over 6 percent to revenue, but the return to health has come on the back of increased corporate spending, and that gives the management confidence that it could be sustainable.