Along with growth, TCS’ margins will also improve: CFO

Nikunj Dalmia in conversation with V Ramakrishnan, CFO, TCS And Milind Lakkad, CHRO, TCS.

We spoke during the quarter and at that time, you set cat among the pigeons when you said that we would migrate 75% plus of our workforce to work from home. I have been told that for the quarter gone by, 99% of TCS workforce was working from home. How has the experience been for TCS and for your clients?
Milind Lakkad: On a lighter note, we always over-deliver. It has been a journey for the last four weeks, an amazing piece of work done by everybody. Our operations, our finance, our admin, HR teams coming together and making all of this happen. 95% of our people are working from home and only 1% come to work for various reasons. It has been a change for everybody. I will not say it has been an easy cakewalk for us. We have done very different things. Associate health and wellbeing has been a paramount thing for us and has been a key factor in our decision making.

All our business decisions are made keeping that guiding principle in the mind. I look back in four weeks as a phenomenal effort. We do everything while continuing to take care of associates’ health and ensure that we continue to be a happy organisation.

Rajesh Gopinathan just mentioned that he is confident of an all round recovery in revenue, client engagement and big deals. Can I say the aspirational band of 26-28% remains an aspiration or is it something which cannot be ruled out that you will revisit and achieve very soon?
V Ramakrishnan: No, it does not go away at all. The aspiration is very much intact. The only thing is of course this pandemic has changed certain dynamics. So, the timing of when we will get back, is dependent on the recovery. Yes, we are confident of recovery in the coming quarters. It will be very segment and specific country driven, but we expect that to happen across many of the sectors. Along with growth, obviously the margins will also be improving because in the current quarter, the reduction in the margins is directly related to the contraction in the demand and in the revenue.

While we were able to get back almost 300 bps outside of anything to do with employee cost but still we had a dip or 1.5% so that is directly related to the drop in revenue so with improvement in the recovery we will also see the improvement in margins.

TCS has always said that they want to maintain that band. , if you go below that you check on your investments, if you are working in that band on the upper limit you start investing more, now that you are below that aspiration band would you be investing less, how will you balance things because that is what you have always shared in the past. When the going is good, you start increasing investment, when the going is slightly subdued because of cyclical factors, you start checking on your investments. Would it be right to say you will be investing less to take your margins higher?
V Ramakrishnan: Actually in two parts; one is, as we have said when the going gets good, we will step up investments, but we have never said that we will reduce investments if the growth is lesser than what we expected. The investment is driven by what is required to make sure that we are abreast of what is happening on the technology front to make sure that our people are equipped and in terms of how we can showcase with our customers.

So the investments have been going on and our balance sheet is strong. We have the second highest ever invested funds and cash balances when we closed in June. So from a deployment perspective, I do not see any issues. We will continue to invest, we have been investing in our research and innovation, in building capabilities at scale among our employees and also in labs and customer experience areas so we will continue to focus and invest on that. We do not see any reason to pullback on some of those because they are very essential building blocks for our future and for remaining leaders as well as for sustainability.

Walk us through the new hiring plans. Can you quantify in granular numbers that between last quarter and now, there is a change in your guidance in terms of employee additions? What has led this? Is this a very permanent uptick or you are likely to revisit it after a quarter?
Milind Lakkad: For the last quarter, we had our regular voluntary attrition and through our operational discipline and internal talent development activities, we ensured that most of the fulfilment for the new demand happens with internal resources. The addition was obviously less than the people who left us and thereby resulted in a negative number for the current quarter. Going forward, like I said earlier, we will continue to get all our 40,000 offers we made in the campuses in India and that will go through from this mid July though the year. The engagement with the fresher recruits and everything else is on very actively for the last three months and we will honour all of those offers.

We will continue to have similar kinds of recruitment arrangements globally from the campus and from the market depending on the demand.

In your pricing, billing rates, and pricing pressure, do you see a marked improvement, a minor improvement or do you see a status quo in the second half of this year?
V Ramakrishnan: It will be stable. I do not expect pricing realisation to dramatically increase. At the same time, we have to be conscious that some of the sectors have been badly affected and there is an expectation from some of the customers and some of the sectors for support. We have been very supportive and we have looked at it in the contextually and depending on the relationship, it is a very mutually beneficial relationship so that we do not hurt ourselves.

At the same time we are conscious of the current situation. So I do not expect it to significantly improve but at the same time also not be severely impacted. We continue to see at least in the foreseeable future.

All the companies we have spoken to, are saying that they are conserving cash and keeping the balance sheet strong. TCS generates a lot of cash. Could there be a relook at the dividend policy or the cash spending? Are you likely to conserve much more cash this year?
V Ramakrishnan: Our dividend or return policy has been 80% to 100% of our free cash flow. So, there is no departure from that policy. In the last couple of years, we have been very close to 100% or even slightly higher. We will stay within that range.

You are right, even during the last two, three, four months, the cash generation has been good. We hope to continue to do that and as I said earlier, we will not be shy of making the investments. Wherever it is required, we will continue to do that and we will see how it was.

So you are confirming that there is going to be no special move to perhaps conserve cash or cut down any of the investments or dividend policy?
V Ramakrishnan: That is right. As I said, it is a range between 80% and 100%. So, with the scale that we have, within that range, there will be calibration that has a meaning. You will have to take it from that perspective.

Work from home is the new normal. Work from home is going to change the dynamics, the productivity level, the client engagement. How do you see the long term scenario for TCS and employees changing because of that and how will you start capturing that going forward?
Milind Lakkad: I would mention a few points here. There are many aspects of this but the first and foremost is talent fungibility which will improve significantly. We will not say, I need talent in Pune or in Chicago or Sao Paulo or Beijing. You would actually have talent fungibility across geographies because of whatever happened in the last three months. There is a lot of acceptance internally within TCS and a lot of acceptance with our customers of doing that, that is one of the most important aspects of this change.

The second is basically the customers’ ability and willingness to adapt to this model and to be able to connect people from wherever they are. So, the location independence of this model will change the dynamics for everybody. While we always had an onset of the model for many years, the way to look at skills and the way to work with each other in this virtual mode and acceptability of that has increased significantly across the globe. It was a crash course for all of us.

The oOther aspect is the senior management connects -- the CXO level connects that we have done. Actually, we have done a lot more connects than we ever did in the past. We always thought that the most important meetings have to happen in person and that is not the case anymore. We just come together, discuss and have a chat tomorrow and then the two CEOs connect in a jiffy. Those are big big things that will help establish a deeper relationship with our customers going forward.