Not sacrificing margins for growth: TCS CFO V. Ramakrishnan
TCS margins came under pressure largely due to currency fluctuation and rise in employee costs, says CFO V. Ramakrishnan
Mumbai: India’s largest IT firm Tata Consultancy Services Ltd (TCS) says it will not surrender margins for revenue, even as its operating margin failed to meet its estimates of 26-28% during a commentary at the beginning of the financial year. V. Ramakrishnan, the company’s chief financial officer, said in an interview that margins came under pressure largely due to currency fluctuation and rise in employee costs. He agreed that TCS is short of its margin guidance, but it does not mean that the target is not achievable. Edited excerpts:
Is it correct that the margin declined because TCS is buying revenues as it aggressively looks to sign deals, which have a higher component of TCS taking over employees from clients (what is called as re-badging)?
No, that’s not the case. First of all, in the deals that we have signed, people have already come on board in the last few quarters. Secondly, that does not change the cost parameters. All the large deals that we have taken, the margin profile of those customers will not be difficult from what we had. Since they are all long-term large-scale projects, scale gives us an opportunity to always use our levers and optimise more... It is more of tactical, flex hiring in terms of sub-contractors, etc.
So, it is not re-badging either?
No, it is not re-badging. Re-badging we have done in some quarters. That is already progressing and that has nothing to do with these costs. This has to do with people whom we have actually hired and, also those, whom we have taken on a short-term basis.
The thing to watch out is that there has been a healthy improvement in our revenues. Last year, we were at 7.5% growth, this year we have grown 12.1% y-o-y. We are seeing growth across the segments, across markets.
Our deal pipeline is good, the total contract value that we have signed this quarter is $5.9 billion, which is higher than the previous two quarters.
We normally track clients who give us more than $100 million and, in the last 12 months (we have tracked clients), more than $50 million, $20 million and $10 million, and we reported that. Q-o-Q, they have been steadily growing. Even in this quarter, there is improvement in almost every band, except one.
If you look at all these parameters, there are clear signs of growth, so this is an element where there is more acceleration in cost. We believe it is more tactical. There is nothing structurally wrong in the cost structures.
Second, despite all this, we have 25.75% margin in the last nine months, which is the highest in the industry. This is something which we will continue to work on.
Your employee costs jumped more than 20% year-on-year during the third quarter. How is that going to reflect on margins?
If you take a look at our revenues on an y-o-y basis, take the topline increase and look at how our operating margins, net margins have improved. Operating margins have improved by 24% or so, and net margins have improved by 22%.
Revenue in the nine months have increased by 20.8%. On a full-year basis, it is higher than your revenue growth. So, all your margin parameters is higher than your revenue growth. Because I am growing, have I given away margins? It is not true! On a 9 to 12 month frame, my margin improvement is higher than my revenue improvement, which means I am not sacrificing one for the other. Tactically, in a certain situation, we may do it. But, it is not an ongoing structural decision, saying that we will chase revenue so we will give away margins. Or, we will be so focused on margins that we will not grow. Our goal is to do both—to have industry leading growth with margin leadership.
How is the cost guidance?
Cost is a different management. Typically, in our first quarter, we have the salary increases. So, in April-June quarter, we will expect some increase in cost. That has traditionally been the case. Other than that, if the employee costs are going up, it could be because of some acceleration in hiring. We have hired more number of people in the current year, in the first nine months, much more than what we had hired in the full last year. First nine months, we have hired 23,000 people as compared to 27,000 people hired in 2017-19. So, when you hire people, you expand business.
All that we can assure our investors is that there is no structural reason to believe that your cost will go up.
With three months left in the current financial year, what happens to the company’s stated guidance of maintaining operating margin of 26-28%? At 25.6%, you are not even close to the lower end of your stated guidance?
We do not give any guidance either on the revenue side or on the margin side. What we give is a commentary on the overall situation. We have said that our preferred margin range is 26-28%, which means that we would like to operate within that. That cannot be construed as guidance. Yes, we are a little short. That does not mean it is not achievable. If it is not achievable, we will come back and say that.
But, only two and half months are left in this fiscal...
That’s why one should not just look at it from a short-term basis. We are at 25.7% for the nine months. So, I do not want to speculate or give guidance today but these are the positives which we very much see, which very clearly is demand environment, driven by technology and the way we are approaching the market. The growth that you are seeing in various segments and various geographies—25% in the UK and 16-17% in the overall European market, and some of the other segments, we have been growing in teens, and the order book that we have closed, we are saying that the pipeline is healthy. It is better than what it is.
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