Softness in margins shouldn’t last beyond Q3: Rajesh Gopinathan

We had spoken about the weakness in the BFSI space and that is also playing out.

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It is more important to ensure the relevance of the technologies for solving real business products.
Rajesh Gopinathan, CEO & MD, TCS, says the most important thing from the company's strategy perspective is are we gaining market share or are we losing market share, and are we relevant to the space or are we losing relevance? And on those two accounts we are doing very well. Edited excerpts from his interview with ET NOW:

Nikunj Dalmia: The wow factor this time was missing. How many quarters more will it take for me to say the wow factor is back?

Rajesh Gopinathan: The wow factor is there in the margins. Two quarters back, we ended the year at 11.5%, we started the year fairly strongly and then into Q2, in line with the overall market, we said there is unexpected softness in demand and that we think that the near term is going to be challenging, and so Q3 has kind of played out along the same lines.


We had spoken about the weakness in the BFSI space and that is also playing out. We think that the strength is likely to continue for a quarter or so but in the medium term, the indications are that there will be a recovery on way unless something else comes and completely derails it.

The most important thing from the company's strategy perspective is are we gaining market share or are we losing market share, and are we relevant to the space or are we losing relevance? And on those two accounts we are doing very well.

So, even if you take the most stressed vertical -- BFSI and if you take over the seven quarter period from Q1 2019 to now, we have gained market share across all the top six players. That is the measure, because the rest of it, you have to roll with the changes as they come. If you are gaining market share that means you are staying relevant and if your new deal wins are good that means you are participating in what is new and what is current for the customer. That is what the focus is and the rest is if you have the ability to stay invested, you have the ability to stay focussed on the future, the growth will come.
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Nikunj Dalmia: When you say that softness will remain for a quarter or so, let us be specific here; what is your definition of quarter and so?

Rajesh Gopinathan: Let me be very very honest, I have no looking glass to say that. There is a logical reason why softness in margins should not exist. We are very well positioned and are well entrenched. This softness is an unexpected softness. A lot of it has come externally. It is very difficult for us to call where this uncertainty is today. I do not think we are in a position to say whether it is one or two quarters but I would think not more than the third quarter. So calendar year 2020 should be better than the trend that we are seeing.

Nikunj Dalmia: In 2017, I remember when we spoke about double digit growth the answer I got from the top management was that the ambition is to get back to double digit growth. You have achieved that already. Can I say that for 2020 it is a possibility or it will be an ambition and it will be a lot of hard work to come back to double digit growth?

N Ganapathy Subramaniam: I think the opportunity is there…

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Nikunj Dalmia: It is not impossible.

N Ganapathy Subramaniam: It is not impossible. As a management team we are laser focussed in achieving the double digit and staying there. There are certain market developments, and the softness which is quite unexpected and which let us to where we are today. But as Rajesh articulated the kind of relevance that we have, the kind of relationships that we have, the most complete offering set that we have, all that means we are doing the right level of strategy. Our strategy is extremely relevant; our executions are on track; so I do not see any reason why we should not get back into the double-digit growth.

Nikunj Dalmia: Rajesh, I will take a leaf from that very strong remark which is that you expect that the coming year will be better than the current year. It is a very strong comment and that I think is only guidance which we will get in the course of this conversation?

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Rajesh Gopinathan: But do not overread it. Let me put it, let me go further from where NG has said as a team now we are focussed on getting back to double digit in BFSI and retail.

Nikunj Dalmia: Even in BFSI you can go back to double digit...

Rajesh Gopinathan: We absolutely believe so and we are focussed on getting back to double digits in BFSI and Retail.

Nikunj Dalmia: Do you expect the quality of earnings will improve across the board?

Rajesh Gopinathan: So we are very confident about the margin trajectory and I will tell you that it might have some fluctuations. We spoke in the press conference also that there is a significant efficiency push. It is also being accompanied by the use of innovation to change, which in the long term will be a win win for both us and for the customer. Therefore, we believe that the profitability will be higher once we have executed it.

Our instruction to our account teams is where there is a possibility to lead with the machine first model or location independent agile model or product centric operating model, all such opportunities should be grabbed and we should be the leaders in executing it. So we believe that that is the path and we are going to occupy that centre stage and that will give us the profitability that we aspire for.

I have always said this profitability is a measure of relative competitiveness that is nothing else so it is important that you take the leadership on the new age operating model. Once you have established that profitability will come. Profitability cannot be achieved by anything other than increasing relative competitiveness. Relative competitiveness will come from digital capabilities, automation and the machine first model. Those are the spaces where we are investing and you look at our commentary throughout these are the foundational pillars that we are investing in.

Nikunj Dalmia: Global markets are telling you you got Apple at a trillion dollar, you got Microsoft at a trillion dollar, Google at a trillion dollar, Visa has become $200 billion ever since they become a platform company, Mastercard is also reaching there. Market is telling you that the future belongs to platform companies. Will there be any threat to the business model of services in this decade?

Rajesh Gopinathan: Think of an ERP company you form, what is important is that are you an integral part of the value chain of that industry and of that customer. You have essentially achieved a position from which you can constantly transform. I think these are the positions of increasing value rather than the old lock-in kind of platforms because you have seen that many of these platforms have got disrupted by new entrants and then they react to it by putting a lot of equity capital and actually buying them out and internalising it. So if you are actually part of the fabric you are part of the ecosystem, you have earned yourself the right to continuously innovate and if you continuously keep on innovating you will be valuable. It does not matter whether you are services led or product led.

Nikunj Dalmia: North America is the biggest market for the Indian IT sector. But, if projections are anything to go by American economy and American BFSI space could see a base effect. Is that something which you see as a challenge in the next couple of years?

N Ganapathy Subramaniam: I do not think so. That is the market where the economy is doing well. The aggregated budget of our client portfolio in North America is not shrinking and they are holistically adopting innovation. I think for the first time I am seeing that innovation is surpassing productivity. So, with the result that more and more of our customers are adopting innovation, integrating fintechs, insurtech, etc.

In fact, a lot of our customers look at as they are extended enterprise today so in that context I think I believe that we have a role to play, we have the responsibility to continuously innovate, continuously disrupt ourselves so that we are staying relevant and increase our market share right. We are disrupting ourselves to be even more relevant to them.

Nikunj Dalmia: For the first half of the last decade, IT companies were conserving cash. Last three years a lot of cash has been given out in the form of buyback and dividend. For this decade what would be the stated policy for rewarding shareholders?

Rajesh Gopinathan: If you go back to commentary and I do not know whether pertinent interviews and all I always said that we need to get to a certain level of absolute cash and after that we will start increasing it. So, we had said even when you are distributing less than 50 per cent we had said our intention is to get to about a $3 billion $4 billion kind of a cash reserve.

We have looked at the literature around it. There is no fundamental basis to say this is right or that is right so we have picked a number that we think we are comfortable with beyond that we said we will keep on distributing. So, as we reached closer to that threshold, we kept on increasing our distribution.

Nikunj Dalmia: So assuming that the comfort number is there the payout policy will remain strong?

Rajesh Gopinathan: We have been very very strong about it as I said we will distribute 80 to 100 per cent of our free cash flow. The only situation is if we were to see an acquisition opportunity that merits it so this is free cash flow post acquisition. The mechanism of distribution will be the most efficient across the full spectrum of stakeholders that we have because we have retail stakeholders, we have institutional ones—some prefer dividends, some prefer buybacks—we will look at whatever is the most efficient one.

Nikunj Dalmia: TCS has always migrated to new technology in the past, last the move to digital. With technology change, margin has only gone higher. Is there something which could play out in the next couple of years?

N Ganapathy Subramaniam: There are multiple answers to this I think…one is that the whole digital transformation services that we have launched the last three years they are seeing great traction in the marketplace. Pricing is better, margins are better, execution and scale is something that we are achieving in each one of those transactions.

The second thing is new products and services identification, development, and deploying those is something a lot more systematic today in TCS. We are able to track the market and stay relevant and bring back you know our capabilities holistically to launch those things.

Third, I think the products and platforms and patents are something that is kicking up very well for us and we have just crossed about 5000 patents that we have applied for and more than 1,000 of them are already granted so the products and platforms are huge things. Our research and innovation always works on the frontier areas of technology that could be relevant to us and they have never disappointed me. Whenever I am in a client conversation if the client is asking something, I quickly call Pune at our research facility and they always have an answer for me, they have never disappointed me in these 35 years of my experience.

The next thing that I can see is edge computing, which is something that is going to takeoff and quantum computing is another one which we are very closely watching but the important thing is to be aware of that technology. It is more important to ensure the relevance of the technologies for solving real business products.

Nikunj Dalmia: Can TCS be a $100 billion company?

Rajesh Gopinathan: Why should it not be? Why should we be afraid of aspiring for that? Just because we happen to come from an emerging market, there is absolutely no reason why we should not aspire to be larger than anybody else who has been there. I think the opportunity is there. If you see a market if you think that you have a solution for it, can you stay disciplined, can you be the disruptor, can you gain that share and can you execute at scale that is the question. As long as you can do that there should not be any constraints to wealth opportunity sizes. But it is a tough market, otherwise everybody will be a $100 billion company. So, the only question is can we make the most out of the opportunities there?

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