With a strong business model, a clean balance sheet and its customer-centric approach, Tata Consultancy Services (TCS) is resilient enough to weather many a storm, despite the short-term downturns. While a slowdown in the US market in the fourth quarter came in as a surprise, deal flows and contract signings are quite high. In an interview with FE’s Rajesh Kurup, the IT bellwether’s outgoing MD & CEO Rajesh Gopinathan, who steps down from his role of six years and moves out of Tata group after a 27-year-tenure, says he enjoyed the run completely. K Krithivasan, who will succeed Gopinathan from June 1, says he would make whatever tweaking is required. Excerpts:
TCS’ Q4 net profit and revenues were below street estimates. Was this mostly impacted by the weak US market?
Rajesh Gopinathan: The US market turned out to be weaker than our expectations. Last quarter, we had said that the US had slowed down but we expected it to bounce back in the first quarter of the current year. That did not come about. We didn’t expect a negative shift in banking, financial services and insurance (BFSI). Retail and manufacturing were impacted, which had all started slowing in the last quarter itself. But we were expecting that it was more cautionary and the sentiment will change positively.
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K Krithivasan: Like BFSI, the capital markets had slowed down. We had some slowdown in mortgage, and Property & Casualty (P&C) had also slowed down. The banking crisis intensified the slowdown in the retail banking side. But during the quarter insurance did better. There has been some uptick, particular in the P&C side. But banking has been an issue, which we did not expect.
For TCS, North America is the largest market. But a slowdown wasn’t factored in?
Rajesh Gopinathan: Economists have been saying we have not yet gone into a recession, but it is a weak economy. We had not taken it seriously because we were reacting to what we were seeing on the ground.
K Krithivasan: While there was uncertainty and slowdown towards the end of Q3, we are hoping that things will turn positive. Until January, we thought that things were all going to get better. I think the speed at which this happened was a surprise to us.
The pain in the BFSI sector is still lingering. By when do you expect it to settle down?
K Krithivasan: I don’t look at it as a very long-term problem. The issues or the pain is primarily US-centric. In the US, the unemployment rate is still low, and the issue is about the overheated economy and not the underperforming economy. This is causing more stress. I don’t know whether it has a soft landing or a hard landing. But there is no reason for a prolonged recession. The mid- to long-term view is positive.
There are also deferment of contracts happening?
Rajesh Gopinathan: For the last couple of quarters, the Europe pipeline has been strong, but the decision making was getting delayed and we were not seeing deal flows. But Europe has changed for the better, and we closed more deals in Q4 than that in the first three quarters of the year. In the US also deal flows and contract signings are happening and it’s the discretionary projects that are getting deferred. But the deal flow per se, contract signings and all are still quite high.
TCS has promised to honour all offer letters it provided, despite the recession looming large in most of the geographies you operate?
Rajesh Gopinathan: This is very core to our philosophy. When we hire from campuses, we expect that person to be with us for 35-40 years. One or two quarters is not going to change whether we want the person or not. We have done that during the global financial crisis, in the pandemic, even in times of extreme stress. Even when medium term visibility was totally unknown, we have always said we are going to honour every offer that is made and we’ll continue to hire from campuses as it is critical to our pyramid.
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How is TCS looking at newer technologies such as ChatGPT and other generative Artificial Intelligence (AI) technologies?
Rajesh Gopinathan: Cloud is continuing to be a big demand driver for us across the board and we still think that we are at the early stage and we are in the 30s in terms of workload migration. And this will be the year where focus will be more on execution and actually getting workloads moved.
K Krithivasan: We have multiple examples where we have been able to deploy Cloud, what we call Cloud 2.0. One is just moving the workload and it’s essentially an infrastructure replacement. About 30% of workload migration is done, but there’s so much more to do. On ChatGPT, our view is like any other new technology; eventually it will create more value and more opportunities. 5G is another technology we are talking about, while Metaverse also looks interesting.
Going forward, how resilient is TCS to weather the storms such as slowdowns or recessions?
Rajesh Gopinathan: Our growth and our business model are very regenerative. We are organic, we invest continuously, we build capabilities, we build relationships with customers, and from a resilience perspective, these are the things that matter. We are quite self-contained and very regenerative. We maintain long-term, strong and trusted relationships with our customers. So, ups and downs might come, but our ability to navigate the ups and downs in a relationship is very high.
When the customer is in trouble, we run towards the customer, not away from the customer. We might have short-term downturns, but when the upside comes, we participate massively because of this. Also our balance sheet is very clean, absolutely nothing there that will make us sit awake in the night saying interest rate has gone up, do I have an impairment challenge?
Looking back, how was your tenure with TCS?
Rajesh Gopinathan: I enjoyed the run completely. We have really grown with the company. When I joined, the general perception was that Y2K was over and now the Indian IT will roll. From there to where we are today, Krithi (Krithivasan) and I have worked together and we have had a team that has pretty much stayed constant.
We have seen a lot in this journey, so we are very proud of what we have achieved together, what we have learned together, and it’s been fun. We have had our share of ups and downs, but mostly it has been up. TCS is a collective organisation, so whatever success has been there, it’s also been a collective success, and we have always been careful of maintaining continuity and making sure that it goes in a systematic way.
As the new CEO, what are the new changes you intend to make at TCS?
This is a continuous process. We’ll continue to talk to our customers and associates, and whatever tweaking is required based on the current market situation, we will do that.