Thursday, October 21, 2010

IT budget to be higher next fiscal: TCS

Boosted by strong September quarter results, Tata Consultancy Service (TCS) is on cloud nine. The company has seen double digit growth across verticals.

In an interview to CNBC-TV18's Managing Editor Udayan Mukherjee the management of TCS gave their perspective on the company's September quarter results and the challenges ahead.

Excerpts from Bazaar on CNBC-TV18 Watch the full show »

The management include N Chandrasekaran (CEO and MD), S Mahalingam (CFO and ED), Ajoy Mukherjee (Head-Global Human Resources) and Phiroz Vandreval (ED and Head-Global Corporate Affairs).

On a high note, the management informed that IT budgets will be higher next fiscal as the volume growth achieved in the last quarter is not an one off and quite sustainable. Hoping to have higher pricing in FY12, the management said that Europe still continues to lag behind.

What really stood out for the company was the volume growth which was up about 11.2%. TCS has seen double digit growth across verticals. Verticals like manufacturing, telecom and hi-Tech which have been under pressure since the last couple of quarters have shown double digit growth which clearly reflects a very good sign for the company going forward. Utilisation is at an all time high. Going forward, TCS expects clients to gradually increase their IT budgets. There is also a possibility that pricing could see a little bit of increase going forward.

However, one concern that stands out is attrition. Attrition is up about 1% QoQ and 14% overall. It is expected to remain in the next couple of quarters.

Attrition at 14% is worrying the management. It has hired 30,000 employees in the first half of FY11. With a gross target of 50,000, the company aims to hire another 20,000 employees in the second half of the current fiscal. On an optimistic note the company added that attrition level has been coming down from July 2010 levels.

The company\'s Q2 US GAAP consolidated net profit was up 14%(QoQ) at Rs 2,106 crore. Its consolidated net sales were up 13% (QOQ) at Rs 9,285.3 crore. Its operating profit margin was up 86 bps at 28% (QoQ). Forex loss during the quarter was at Rs 41.7 crore.

Below is a verbatim transcript of N Chandrasekaran's and Ajoy Mukherjee's exclusive interview on CNBC-TV18. Also watch the accompanying videos for more.

Q: You have seen double digit volume growth at 11%. Are the good old days back?

Chandrasekaran: We have seen a strong recovery in demand and we have been able enough to capture that demand and deliver. It's been a good run this quarter.

Q: But it's not a one-off, right?

Chandrasekaran: It's not a one-off because there is a double digit growth in all verticals. We operate in ten different industry segments. All the segments are showing a double digit growth which is fantastic. I do not think that is a one-off and a pent-up demand.

There are two things that are driving this growth. First, everyone wants to become efficient whether it is in the financial service industry or in manufacturing or in telecom. There is an efficiency drive across the board.

Secondly, everyone wants to invest in growth. In the financial services industry, you see how they can use technologies like mobility and customer insights, single customer view and customer data. So it is more customers oriented. When we go to some of the other sectors, new product introduction in manufacturing another sector is how we can become global. We all are in different teams, but everyone wants efficiency and growth.

Q: Do you think this kind of approach will spill over to the IT budgets next year?

Chandrasekaran: The budget cycle is on and we will know more by end of December. I spoke to some of our key customers recently but the indication is that it's going to be an increased budget next year compared to this fiscal.

Q: We were speaking to one of your peers a couple of days back and they highlighted that the macro headwinds are making visibility clouded. You are saying that the momentum is so strong that it should spill over to budgets next year?

A: The preliminary indications of the budgets are that it's going to increase next year. I definitely agree that the macro environment is very uncertain. That's something that we have to keep watching and its unfortunate I have to keep saying that quarter after quarter, for a foreseeable time because it's not going to be a recovery overnight.

Q: You are preparing for it, it seems. You have a record hiring in the current quarter?

Mukherjee: This is the highest ever that we have done, more than 19,000. As far as the whole fiscal is concerned we have set about 50,000 gross. We will be starting at campuses very soon which is for next year. There again we will be doing pretty high numbers as compared to what we did last year. We are preparing well for further growth.

Q: Next two quarters, how many people do you think you will hire?

Mukherjee: At this stage we have already done 30,000 so about 20,000 are what we are looking at for the next two quarters.

Q: What will utilisation levels be at with such strong hiring this quarter. This quarter was 83.8%, right?

Mukherjee: It is at 83.8% which is excluding trainees. Including trainees we are at 77.7%. There is room for improvement, its not that we cannot improve it further but it all depends on the kind of demand that we have and fulfillment of that demand. We will definitely be constantly watching the utilisation numbers.

Q: What is the big deal landscape looking like? What you said about various sectors is true, but are you also seeing much more traction on big deals?

Chandrasekaran: The demand environment is really good. The deal pipeline is strong across industries and across markets. The closures are happening and the ramp ups are happening. The big biggest difference in the last three months compared to the earlier quarters is that not only are closures and ramp ups happening well in time, it is helping accelerate things.

Q: But Europe still has to play a bit of catch-up with the US?

Chandrasekaran: Yes absolutely, Europe lags behind and it will continue to lag behind.

Q: What did Europe's volumes grow at?

Chandrasekaran: Europe we did very well this quarter. Upwards of 15% in rupee terms and in dollar terms it's even more. While the growth will be there it's on a smaller base but it's also true that the discretionary spend in Europe lags behind the US.

Q: Sectors like telecom have done well, 12% higher?

Chandrasekaran: Telecom has done 12%, banking has done 10% and utilities have done 45%. It's been a very good growth.

Q: On the supply side, is attrition still a problem and can you curb it?

Chandrasekaran: I don't like 14%, it's high. While we can say that it's one of the lowest in the industry, I think 14% on our basis is a very large number. We have added 19,293 people for a net addition of 14,000. It's still 5,000-6,000 people going in a quarter resulting about 24,000 people if you analyze it, which is a very large number. We are taking a lot of steps and I am confident that we will bring it down.

Q: Any targets there to bring down attrition? What is the comfort level for you?

Mukherjee: Comfort number would of course be a number which is smaller which is what we used to have earlier. At the same time, given the demand growth in the market, we just cannot wish attrition away. We have to manage that.

We are taking necessary steps to bring it down and we would definitely like to see it come down. July is the time when it has peaked because of the cyclical reasons and everything else and it's coming down from that point onwards.

Q: Do you think you will need to tweak salaries again from what you have done already this year?

Mukherjee: From a salaries point, my employee wage cost itself is a billion per quarter. That is a phenomenal number. We have the variable scheme which depends on how well the organization has done and based on that employees also get rewarded. This quarter we have given a 150% of our quarterly variable and we will stick to that mechanism for compensation.

Q: So no mid-year kind of increments to tame down attrition level?

Mukherjee: No, that is not what are plans are and we will be sticking to our quarterly variable mechanism to reward our employees.

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