A generic menu card wont work any more

Written by Shobhana Subramanian | Rachana Khanzode | Updated: Feb 10 2011, 05:08am hrs
Natarajan Chandrasekaran is confident the Indian IT industry will gather momentum this year, to clock a compounded 20% growth over the next five years. The signs of revival, the MD and CEO of TCS says, are evident in the fact that customers have once again started looking at discretionary spends, something that has been missing in the last couple of years. Among the things that the industry needs to watch out for, Chandrasekaran tells Rachana Khanzode and Shobhana Subramanian, are changes in immigration and labour laws and protectionism.

Youve been saying that 2011 will be a better year for the IT industry than 2010...

According to Nasscom data, growth in 2010-11 is estimated to be about 19%. In 2011-12, growth will definitely be upwards of 20%, perhaps closer to 25%. What will drive this is that budgets have been finalised and are coming; this was not the case last year. Moreover, there is no decrease in budgets; they are either flat or higher. Second, we have seen discretionary spending coming, even if not at the levels we saw 2-3 years ago. Till last year, we were not talking about discretionary spending; we were worrying about whether non-discretionary spends would remain. As an industry, we will exit this fiscal year with a better momentum than that with which we exited March 2010. In fact, we are already running.

What does the Indian IT industry need to be ready with so as to be able to cash in on the growth

Lets look at multiple dimensions. From customers point of view, we have to be specific about what we offer them. A generic menu card wont work because some customers are on the growth track while others are on the efficiency track. Next, we need to focus on recruitment, training and retentiona big challenge. And we have to continue investing in new technologies because, together with market recovery, you are going to see opportunities to leverage new technologies like cloud and mobility.

Do you see the industry getting polarised

Going by recruitment trends and media reports on initiatives, I think the industrys readiness is upwards of 7. Those who do well on the parameters that we spoke of will go ahead but those who dont will fall behind. So there could be some polarisation going ahead as not everyone is going to make it. It is difficult to say if this is a good thing for the industry because everyone is thinking about what they want to do over the next 3 or 6 months. Last year was a tough year so one shouldnt extrapolate the trend. The IT industry will do phenomenally well, reporting a CAGR upwards of 20% in the next 5 years barring unforeseen circumstances. And there will be winners and losers. Would it become polarised towards very few companies, 2, 3 or 5 companies Thats hard to say. But if you get left behind in this industry, then its very hard to come back, especially if youre left behind for a few years.

How do read profitability going ahead

Barring currency movements, I feel it is possible to sustain the margins, to build the industry at these margin levels despite wage inflation. If there is a wage inflation that happens consistently, there will be a price increase. Its not that the wage increase will be equal to the price increase; thats not the way it works. There will be an improvement in productivity, new offerings, value addition and so on.

Will inflation have a major impact on the Indian IT industry

Not for some time perhaps but inflation will have an impact eventually. Because if inflation keeps on going up, the ability of people to spend will come down, demand will reduce and our customer companies will not have money to spend on discretionary projects. So its a cycle but it takes a while.

What should the industry watch out for

Primarily immigration, protectionism and retention of employees. The unemployment situation in the US and other markets is going to continue from all indications. As long as it continues, we cant rule out protectionist measures. Such developments will require some kind of model change. There should be free movement of labour; we should be able to get visas and send people. My business model depends on free movement of labour and if you are going to come out with labour laws and restrictive measures, it will impact our ability to do projects.

The plethora of new regulations should mean more business for tech firms...

Yes, new regulations are giving us opportunities in verticals like BFSI, pharma and healthcare. Every time there is a regulatory change, that also requires technology work and the business is material and gives us high margins because it requires domain knowledge. Consultancy today is material for us because only when you do that are you able to drive down-stream revenues. The fundamental point is that from a positioning point of view, there is a gap; we need to be seen as a reliable consulting partner and that gap will soon be bridged.

What kind of wage inflation are you anticipating

Take a look at the last 10 years, weve not had consistent wage inflation year after year; typically after a couple of years of highs, it tapers off. If the Indian economy is going to grow at 10% for the next 5 years, you are going to see tremendous wage increases, which is fine because you will get price increases. Its true there is some scarcity of skilled labour. In the IT industry, I think wage increases will be more pronounced for certain categories like programme managers, good consulting people and people with architectural skills. It cannot be a mass increase of 10-12% year after year across the company; thats just not sustainable. And there will be lot of options to restructure the pyramid when you have volume growth. So, while I would keep a watch, I wouldnt really sound a red alert.

TCS is launching its SMB initiative next week...

Yes, for small and medium businesses, typically those that have a turnover of between Rs 50-100 crore. Weve done 100 pilots over the last 2 years. The solution is superior because it will require nothing from customers side; they get the hardware, network, all the software and services whether it is a mail system or a payroll system or a financial and accounting system or a point of sales system or a billing system. They pay a monthly rental and so there is no capex involved; they dont need to hire and retain people. They get a total IT service; customers dont worry about the hardware or the software version or the IT systems or about upgrades. They get the best of technology, which is scalable and state of the art.

How big would you say is the addressable market

The addressable market is in billions of dollars and could become sizeable in 5 years time. How much we are able to earn would depend on which other markets we would be launching in. If we do enter other markets, after India, we could earn in billions. We havent decided which markets to go to, we want to first focus on the India market. We need to decide the pecking order. In India itself, the business will become sizeable in the next 5 years but we will not wait for 5 years to go outside. At the end of 12 months, we will definitely go elsewhere but we have to choose specific markets. In established markets, we will have to make the product compliant to regulatory aspects while that aspect should be simpler in emerging markets. To begin with, we will cater to the retail, manufacturing, education and wellness verticals. In fact, we have some MNC clients who want to start working in India. Theyre saying they will put up this model in India first and then scale up.