Cross-currency movements and operational efficiencies contributed positively to the Q1FY19 operating margins for Tata Consultancy Services (TCS).
Cross-currency movements and operational efficiencies contributed positively to the Q1FY19 operating margins for Tata Consultancy Services (TCS). However, the margins still remain much below the stated band of 26%-28%. V Ramakrishnan, CFO, TCS, tells FE’s Shubhra Tandon and Bhavik Nair that although lower growth has impacted margins in the last few years, the company is on track to get double-digit growth, which will lead to a positive impact on the margins. As the business profile changes for the company, TCS also believes that volume growth metrics may not be a key indicator going forward. Excerpts:
The margins of 25% in Q1 are the lowest in four quarters. Given your stated band of 26%-28%, what will be the drivers to reach that and will it happen in FY19?
One of the drivers which we have talked about is growth. In the last couple of years, the growth was definitely much lower than what we had anticipated. We are hopeful of getting back to a double-digit growth, and it will have its own opportunities in the margin area. Secondly, many technologies are becoming part and parcel of engagements, whether they are large or medium and both across segments and markets. If that becomes mainstream, then you have the ability to bring in some of the traditional levers. Third is the large programmes. Typically you will be able to realise many of the productivity gains as you go along. If currency is benign, that’s also a good indicator. I don’t want to put a timeline.
This quarter you had a top-line benefit of 2.7% due to positive currency movements, while last year there was a loss of Rs 650 crore. Given the volatility, how do you think the currency movement will fare for TCS in FY19?
Currency is very difficult to predict, all we can do is to manage the volatility through our systematic hedging programme — protect the downside and participate in the upside. That is what we do.
What part of the margin was contributed by the cross-currency movements?
In the quarter, from a margin perspective, we got a positive impact of 70 basis points because of currency. We had an impact of negative 180 bps because of salary increases etc. But we were also able to gain 70 bps due to operational efficiencies. So, on a net basis, we had a correction of 40 bps.
It is for the first time that TCS has shared the total value of contract for the quarter, which is $4.9 billion. What propelled you to share this metric now?
It is a continuation of the process to bring more value-added information to the investors and analysts, especially from the major market which constitutes close to 50% of our business i.e. North America, plus also some of the key segments like BFSI and retail.
We hope that over a period of time it gives a sense to the investors on how things are panning out and they can relate to what we talk about in terms of the overall customer engagement, the success of our strategy, our products platform, and also the overall Business 4.0 framework.
How would this compare historically?
One should look at the data as it stands today and relate it to whatever it will be going forward. Over the next three-four quarters as we get the data, we will get a sense of what is happening rather than getting into past comparisons.
Volume growth numbers have not been shared this quarter and you mentioned that it has become irrelevant given the kind of business that you are engaged in. Could you elaborate on this?
That is one metrics we thought has lost a little relevance because there are many things happening through our offerings in different service lines. Each of the offerings have different connotations and profiles and also large transformational deals and non-linearity coming into it. One has to look at it from a business growth perspective and a constant currency growth number is a very good indicator of that.
Are you increasing your R&D spends for AI and machine learning?
These are different programmes. It’s always at the cutting edge. So whatever areas are most relevant for the future and where the developments are happening, investments are in that areas.