Though there were concerns stemming from the energy crisis in Europe and inflation in the United States, Tata Consultancy Services (TCS) is hoping its $8 billion portfolio of deals will act as a buffer against any crisis in the coming quarters, said chief operating officer N Ganpathy Subramaniam.
In an interview to ET’s Romita Majumdar, Sai Ishwarbharath and Aashish Aryan, Subramaniam said the IT industry could fall apart due to moonlighting – which he termed “unethical” – and that it could hurt client confidentiality and trust. Edited excerpts.
Your performance in the second quarter has been better than estimated. Are global inflationary and recessionary trends impacting you?
Europe is trying to overcome the energy crisis and resolve its dependencies around it. The US is fine and so is France because they are producing their own nuclear energy. But inflation is an important threat. Economic indicators are different, but people are still spending.
Most customers have told us that they don’t want to pass on costs to customers. Clients are telling us that they will not cut down spending on any existing project. Short-term projects (3-6 months) that give some savings or improve customer experience are fine, but multi-year transformation programmes etc will go through a vetting cycle.
Are clients bracing up for any likely crisis over the next few quarters?
Our thinking is this. We’ve got a good $8 billion order book for the last several quarters. So, if a crisis hits, we’ll always have at least about a quarter or two before we can react and then see how we want to adjust. We also have a diversified portfolio and cater to different markets.
Nobody thought that the UK would do well for us, but it did. So, even in the tough situation that the businesses have to run, they will require a certain amount of optimization. Whether we will need to tighten our belts is something that we have to wait and watch.
But we don’t see any of these things in the North American market where customers are a lot more bullish. That’s quite the opposite of the recessionary trend. Corporations, airlines, hospitality, and industries are doing well. You have to see it in the backdrop of a pandemic, where people didn’t get the chance to spend or go out.
We listen to our customers and most of them have told us that the programmes that they are executing currently are going to continue, that they are not going to be cancelled.
Your margins have improved. What can you do to take it to the aspirational 26-28% band?
There are multiple things. One is this whole attrition and the backfilling costs (replacing employees who have quit with new ones and training them) that I think will come down significantly.
First, attrition is tapering off. I believe that the high backfilling costs that we have had for the last 2-3 quarters will come down significantly. Then, we hired a lot of people last year and, this year they’re all coming productive. So, utilisation is down right now, but I think we have got bench strength… (and) that should improve.
Even with trainees, we used to operate with 90%. Right now, it’s about 83%. Currency support is an integral part to this whole thing. I hope the currency stabilises somewhere. (Business) growth is certainly important and it will have to fund some of the margin uptick that we are looking at.
Lastly, our typical operational excellence and productivity improvements that we run. These are all broad elements we count on to optimise the margins.
Fresher salaries have remained stagnant for a decade. Isn’t there a case for increasing salaries in sync with inflation?
People come in with a basic skill and within a matter of 18 months they have the opportunity to double their salary through training, and meaningful contribution. That’s the way that we have structured it. They should have some skin in the game.
We also want to observe them, how committed they are to learning. Salaries are a combination of many things. We believe that we are giving them a package which is more than adequate for the cost of living in India. You will join us as a fresher and go through that training perhaps, pass successfully, then we tell you ‘look, if you take these programs and become more relevant to the customers, you will get an increment’.
Then there’s an opportunity for you to go overseas and stay even more relevant to you as well as the company. So, I think we pay well.
What do you think about industry concerns over moonlighting? How is TCS dealing with this issue?
It is unethical and unacceptable from an employer perspective. Unacceptable for my clients as well. The whole industry could fall apart due to this. Businesses are built based on integrity and certain values. You can’t do such a thing just to earn more money. You need to build a career.
That is also why it is also important to come to the office. Being there, watching how your peers work, comparing your work with them, it is all a learning process. They can choose their role models and mentors and learn how to conduct themselves – especially the people who have joined over the past two years. That is how organizational cultures are built.
How are macroeconomic concerns impacting the deal pipeline?
Out of the $8.1 billion deal Total Contract Value reported this quarter, I think the largest one by value is about $350 million. We have seen deals across sizes. I wouldn’t say they are very large – they are in the $50 million, $100 million, $150 million range.
It is fairly well diversified across Europe, UK, as well as North America. And across the geographies…it is really broad based. So, there’s nothing to call out as an exception, except that the gap between the qualified and non-qualified pipeline is slightly elongated.
At least, 70% of the deals now have a timeline of 6-12 months; typically, they have a one-year duration. About 30% will be less than six months. These are small projects, consulting engagements and change requests.
Infosys has just announced a share buyback. Will TCS also follow suit?
As per regulatory requirements, we cannot announce a buyback as we have already completed one last year. We have consistently rewarded shareholders and chosen to disburse 100% of our free cash flow through every instrument available to us.
Secondly, we don’t operate based on share prices. It is more important for us to focus on whether our customer base is increasing, deals are increasing and that we are not losing more employees than we would like to.