Will go for acquisitions to gain momentum

Written by Shruti Ambavat | Updated: Oct 17 2013, 07:59am hrs
After delivering a better-than-expected set of earnings in the second quarter of the current fiscal, Tata Consultancy Services maintains that the demand environment remains positive for the IT sector with growth being seen across key areas. In a conversation with Shruti Ambavat and Ira Dugal, TCS chief executive and MD N Chandrasekaran says that all verticals and geographies are growing well and adds that the company will continue to look at acquisition opportunities. Edited excerpts:

Give us a flavor of the demand environment Is the environment more positive than what you had expected at the start of the year

I see the environment to be positive. A few factors simplification as a theme is being driven across the board. Thats an opportunity. At the same time, adoption of digital is slowing getting into main gear because people are seeing lots of possibilities. Europe is picking up as well. European companies are comfortable adopting new models. Frankly, we are also at a stage that we have built scale in different markets. Its not just the US. Other markets, too, we have reached a certain scale. All our businesses have also scaled up and deeper relationships have been established. So I think there is a lot of opportunity.

So you dont think that part of the upside is due to the pent up demand specially in markets like the US

I dont see this as a one off. I did talk about the third quarter at the time of earnings because seasonally it is a weak quarter and there will be furloughs. I have not factored in any global macro issues. Global macro issues are continuing in one form or the other and that will be the case. Those impacts will have to be gauged as and when they come. But to me, the role of technology in businesses is increasing and I am not seeing it as a one off or as pent up demand.

Business from Europe has shown strong growth this quarter. Do you expect that to continue and will the geographical business mix change

Yes, Europe will grow. Europe will grow faster because we have attained a critical mass in all the sub-segments in Europe where we are present. And wherever needed, we will do an acquisition to gain momentum. We have done it in France. If there is an opportunity elsewhere, we will do it. Japan is also important. Latin America is important. All these are gaining momentum and gaining scale. US is very important as well and we can do a lot more in the US than we do today.

Speaking of acquisitions, what regions would you want to target for inorganic growth

Europe is important. Japan is important. US is important. I think for us if we find the right in say healthcare, we will look at it. We have all our units performing and in each of these units, we have deep client relationships. Technology is changing in each one of these industries. So if we want to play our part, we have to be prepared. We will continue to grow organically and if there is an opportunity to do something inorganically, we will do that too. It is also about scale.

In terms of verticals, are all verticals performing up to expectations

BFSI is good. Media has done well. Life sciences is doing exceptionally well. Everybody has grown and grown decently on a sequential basis. I aspire for growth across segments. I dont like to compensate one with the other.

How significant is the pick up in discretionary spends

Its looking good. Customers are spending significantly on discretionary spend and every quarter its increasing. All the digital spend is coming in discretionary.

Does the weakness in rupee give you a strategic advantage or more flexibility

Our view has been that we manage the currency fluctuations and we hope that they dont become very volatile. Thats all. We dont take calls based on currency. If there is depreciation and we have an opportunity to invest, we invest. If there is an appreciation and we have to squeeze, we squeeze.

The currency weakness led to a jump in margins. What is the normalised range for margins

We have said that margins should be pegged around 27% and in a range of 26-28%. We are comfortable there. There is an upside this quarter, but we are not going to react because rupee will go up and down. We have to take a call and we have taken a call to stay course. Whatever we have to do, we have to do for the right reasons. As long as improvement in margin is shown for the right reasons, it is ok. We want to be accountable to our shareholders.

And also could you help explain the slip in realisations

They have a lot of factors built in. Sometimes you get more emerging market business and realisations go down. Sometimes you get huge established market business and realisations go up. Industry, services, so many things play a part. But pricing is stable. So I have been actually recommending that we eliminate that metric. It just creates noise. What you should be really looking at is the growth Im showing and the margins Im delivering.

So pricing remains stable

Pricing is flat and it will remain so. You know the environment. It is hard to negotiate.

So we could see upside to hiring And whats a comfortable range for utilisation levels

Probably next year. I am just waiting for the utilisation numbers to catch up. If we move up a couple of percentage points in terms of utilisation. That could give us the permission to add. We would like to see utilisation levels rise to 77-78%. Our scale is large so every percentage point is a lot of people.

Does US visa policy continue to be potential headwind

We have to see what the final law looks like. There are different scenarios that are possible. Before that it will be premature to say anything. But we remain positive and we are continuing to hire.