Mumbai: In the December quarter, IT major Tata Consultancy Services (TCS) reported the strongest growth in 9 years and this was despite Q3 being a seasonally weak quarter. October-December quarter (Q3 FY21) was a beat on almost all counts with strong deal momentum, operating margins at 5 years high and cash conversion rate at all-time high.
Operating margins expanded by 40bps QOQ to 26.6% this is the highest operating margin in five years and most importantly the margins expanded despite salary hikes being rolled out since October 2020.
“TCS already has the highest margin in the industry” said V Ramakrishnan, CFO, TCS in an exclusive interview with Nikunj Dalmia, Managing Editor, ET NOW. He added, margin expanded led by growth across verticals & currency stability, fungible talent pool, improved utilisation and also disciplined deal execution. TCS has not reached the peak of growth contributors and management is conscious of market opportunities and will invest in it in order to drive efficiencies.
Having said that Ramakrishnan added, customer relationships are top priority for TCS and margin realisation, pricing is part of the overall equation. He said, “Can’t be opportunistic on margins just because growth has come back, this is not a very price inelastic industry”, we need to realise true pricing for value and this is an active pursuit depending on opportunity & deals. Ability to execute well has been a big driver for margins. Technology, training, methods that we use, the benefit of our own research & innovation come into play on margins.
“Believe What We are witnessing is a fairly long cycle technology upgrade opportunity, the most important aspect it is at multiple levels” said Rajesh Gopinathan, CEO & MD, TCS. He added, “There is absolutely no doubt that TCS is going for double-digit growth (even beyond FY22), stakeholders will have to take their bets, you can bet on us or bet against us but we are going for it.”
2020 was an incredible year where the HR team was able to adapt, collaborate and create magic in terms of work from home (WFH) environment. With an employee base of over 4 lakh, TCS is one of the largest private-sector employers in India. Margins expanded in Q3 despite wage hikes that were rolled out from October 2020.
Speaking about operational efficiencies, Milind Lakkad, EVP and Global Head, HR said, “Talent fungibility is playing a big role in terms of optimization…I would not completely rule out that visa will not be an issue for us any more.” He added that talent development is one of the top 3 strategies for TCS and the management will continue to invest in talent and strengthen it. TCS has significantly re-imagined HR supply chain in this pandemic, the overall talent ecosystem has strengthened in the last 18 months and we have a strong talent pool readily available across geographies, Lakkad said. He added, for instance, the number of trainees hired in the last 3quarters in the US is equal to the number of trainees hired in the last full year.
Lakkad said, “Don’t see HR talent supply as a challenge in meeting demand” as TCS has become more efficient. While automation is playing a significant role in the industry but at the same time demand is going up. TCS will be hiring a similar number of trainees as they did last year. Lateral hiring is also contributing to Artificial Intelligence, machine learning, and other new skill sets. We have been giving benchmark increments in the industry & don’t expect significant changes to happen and in case they happen TCS will align towards it. As long as growth is there it all works out well for all of us.
One of the key highlights of Q3 results was that cash conversion rate has come in at an all time high. While TCS already announced a buyback worth Rs 16000 cr in its last quarter results, treasury contribution is still very large.
Ramakrishnan said, “For us in terms of Surplus fund investment first priority is safety, second liquidity and third is return. Goal is if we can’t use surplus funds to maximize shareholder return then we give a maximum of the free cash flow generated back to shareholders unless there is a large opportunity to invest in.” He added that while the management could chase certain instruments where there is higher return they would not go there and as such the overall composition of the treasury portfolio is unlikely to change significantly, however, the management will still be open to taking tactical decisions