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#TCS banks on record dealmaking for growth amid macro hangover.


CEO K Krithivasan discusses the results and outlook for FY25, in conversation with Niraj Shah on 'Earnings Edge'. #Q4WithNDTVProfit


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00:00 TCS reported the first quarter numbers on Friday post market hours. You were with us when we were
00:04 dissecting those numbers and the revenue may have missed the mark ever so slightly, but on that base,
00:09 you would argue that that's largely in line. Very strong performance in EBITDA beat, a lot of cost
00:14 optimization, I believe, would have gone into that. But the call at the end of FY24 is how does Mr.
00:20 Kritivasan see what's going to happen over the course of the next 12 to 24 months, if in the
00:25 current scenario, it is possible to crystal ball gaze that. Thanks so much for speaking to us, Mr.
00:31 Kritivasan. Let's talk about maybe not just the last quarter, but the last three or four quarters
00:37 as well. I'm just trying to understand if it is possible to predict, your industry has been known
00:45 for being able to predict things so well in a situation in such a state of flux, is it even
00:50 possible to kind of crystal ball gaze? At least from our perspective, Neeraj, we don't want to
00:58 hazard a guess at this time. There is a lot of volatility. As we keep saying, on one hand,
01:05 there's a lot of new technology coming in. Our customers do want to invest in those technologies,
01:12 use them for transformative purposes. At the same time, no one understands the
01:18 macroeconomic economics where it is going and they also want to be ready for a rainy day.
01:24 So, that is ensure making them also pull back on some of the committed expenses,
01:30 previously committed expenses or investments. So, these two things are at play. And there
01:37 are instances where they also take very, very short term decisions. That is the reason that
01:42 we are not wanting to call out anything on a immediate term. We have been saying, looking at
01:48 our, you talked about the whole year, like whole year I think we had a strong order book win upwards
01:55 of 40 billion. So, looking at the sustained order book win and customer conversations,
02:01 we believe medium to long term, we are quite optimistic and positive. And we kept saying that
02:08 FY25 would be better than FY24. But difficult to predict on the short term. I don't think it's
02:14 meaningful. Can imagine. It's difficult to sit in the chair that you are sitting on for sure,
02:18 in the current circumstance. But for the quarter, I mean, the revenue, I wouldn't call it a miss,
02:25 but for lack of a better argument, let's call it a miss relative to what was estimated on the
02:29 Bloomberg estimates. Is that because of this reason that you cited the macro being what it
02:34 is and client decision being slow? Yeah, when we started the quarter, we were expecting another
02:41 50 to 70, 100 basis point more on the revenue side. That is primarily coming from the major
02:49 markets. We were expecting more growth to come from North America and Europe, which did not
02:55 happen. But we are able to compensate quite a bit by focusing more on the regional markets as much
03:01 as we can. So you could see that our diversification playing though. But that's primarily
03:08 the reason like, in US there are enough uncertainties like elections are coming up, people
03:14 don't know which way the elections would go and what would be the policy changes because of the
03:19 elections. That's also causing an issue. So when I was looking at macro indicators
03:27 in the last one month, of course, independent of whether rate cuts happen or not, there's
03:32 some bit of PMI uptick coming in and one would want to believe that that might lead clients to
03:37 be more confident. But I hear you say that in the US, the election is also as big a factor.
03:42 What's the sense? You may not be right at the end of it because no one knows as you said,
03:48 but what's the sense? Could this economic tailwinds or green shoots result in better
03:56 spends or would any be impacted by these uncertainty around elections until November?
04:02 So see, if you disregard the election for a moment, like you said, and we also been seeing
04:09 the fundamentals have been good for not this quarter, like for a couple of quarters and
04:13 somehow I feel some people are waiting for a recession to happen, which is not happening.
04:19 But everyone in the back of the mind think that consumer spending should reduce over a
04:25 period of time, and which is causing that worry. And, but like you said, even in the current
04:33 quarter, if you look at all the macro indicators, they're all looking positive. So my view is
04:37 disregarding the election, there should be a peak in the medium term. But elections like and the
04:44 outcome of that could go anywhere. Okay, so your optimism around FY25 results from not what happens
04:52 in North America or Europe, but the other geographies because you have said that FY25 is
04:56 better. Like our optimism comes primarily from our strong order book. Our customers have been willing
05:04 to sign large deals. There would be like, yes, there are pullbacks, there are some old programs
05:10 that get paused or cancelled. But it is fine, but we believe that considering the size of the order
05:17 book, it should eventually drive our growth. Maybe not this quarter, maybe but sooner than later that
05:25 growth should come in. And based on the conversations we have been having, see for a
05:29 large part, though we talk a lot about macroeconomics on why customers are spending, we believe that
05:34 whether it is a economy that is up or down, there are enough opportunities for organizations like
05:39 if the customers are focused on conserving or cash, we have to go to them with solutions around
05:45 cost optimization. And if they are interested in transformation, we will go to them with more
05:49 transformation opportunities. So, by and large, we have a strong suite of offering, portfolio
05:55 of offering which will go to the customer and my optimism comes primarily from our TCV. I do not
06:00 want to use the macro excuse for growth or lack of it. Okay, fair call. May I play the devil's
06:08 advocate though, sir? And the question is this that your TCV, yes, has done remarkably well. I
06:13 mean, these that you won are spectacular. But it is not that that was too much under question even
06:18 in the last 12 months. You had an order book which was decent and yet the numbers relative to what
06:24 history has shown, recent history has shown, were slightly below. So, what is to say that despite
06:28 this TCV, the growth will be better than FY24? Yeah. So, two things. What we see is some of the
06:39 old programs have been reprioritized. I believe like last four quarters, as much of reprioritization
06:46 has happened and what is still being executed. I am assuming these are all the programs that
06:53 really make the threshold, mark the threshold and customers want to continue. Okay. And so,
06:59 over a period of time, if some programs are not that have to be canned, I am assuming most of
07:04 them would have been canned by now. The second factor is how much of the conversion we are seeing
07:10 from the recently won order book. The conversion from the recently won order book is quite healthy.
07:17 It is not much less compared to previous years. Like we are seeing the recently won projects,
07:23 most of them are yielding revenue based on the same historical level. So, these two factors
07:30 coupled with we believe the growth should return. Like the drag from the old programs
07:36 getting cancelled should reduce, which is great. You, did I, I read in one of the notes,
07:45 and maybe they quoted you from whichever way that you are hopeful of BFSI, which was maybe a bit of
07:52 a drag this quarter, pent up demand from BFSI to come back in FY25? Definitely. They see like,
08:00 BFSI is a, first it is huge too. It is a giant.
08:04 And it is one of the earliest adopters of technology, even in the old days, even today.
08:08 So, there is technology debt and BFSI is humongous. Like particularly if you take
08:14 sectors like consumer banking or insurance, there is a huge amount of technology debt. So,
08:19 there is a technology debt that has to be resolved. And then they have to invest on
08:25 new technology. So, there is a lot of pent up demand. And it would return, like when it returns
08:30 to growth, it will really come back strongly. So, I am confident, but again, it is a question
08:35 of time, but it will come back. But you reckon it is difficult to time these things,
08:40 right? It is a question of time, but whether it happens quarter two, quarter three.
08:43 It depends a lot on market sentiments also, confidence our clients have on whether they
08:48 are ready to spend or how much they have to spend on new transformative programs.
08:54 And that can happen independent of the elections as well, you reckon?
08:56 It has to happen. Elections can delay things by a quarter or two, but it will happen. See,
09:04 I was talking to our UK head, like our UK head, certainly UK also has very similar macroeconomic
09:12 uncertainties, but there people have come to a conclusion that this is how life is going to be,
09:18 let us take decisions and move on. In US also at some point of time, people will get used to
09:23 the overall macroeconomic uncertainty and take those decisions.
09:26 I have one more question. You have now lived with geopolitical uncertainty, the world for the last
09:33 18 months at the very least, it is only getting exacerbated in some fashion. How are client
09:40 conversations with regards to what geopolitics can do to business decision making? Is that coming
09:45 in a large way in conversations? There is coming as a not direct
09:51 impact for our technology services, but more as a indirect, like what could happen to the
09:56 supply chain, what can happen to the manufacturing, what can happen to retail, other industries and
10:01 because of the impact that they would have, how it would impact the IT spending.
10:05 That conversation, there is uncertainty and nervousness among people, because like you said,
10:12 we have been living with this for 18 months, like when it started, you did not expect them
10:16 to live with these things for 18 months. That is true. That is true. Okay, just one
10:20 more thing on the deal, I mean, on deals, I mean, the deal wins have been spectacular.
10:25 I mean, just for namesake, Aviva is a landmark deal of sorts. But just 12 months ago,
10:31 I was listening to conversations about how large multi-year deals are becoming fewer and fewer,
10:37 and people are doing 12 month, less than a year deals, smaller deals, run the business kind of
10:42 deals. So would deals like this Aviva deal be few and far in between? Or do you sense that
10:47 this will pick up? Yeah, what the size of Aviva, those deals will not be, you would not expect,
10:53 we did never say, the one day will be lumpy, there will not be any cadence, like they happen
10:59 once or twice a year, they do not happen that often. But deals that span few million,
11:05 few hundreds of millions, that keep happening like almost, see this is really big, but the
11:11 other large deals keep happening. They keep on happening.
11:13 Keep happening. And we have been seeing our deal tenure also has not drastically changed. Yes,
11:18 there are, there is a great percentage of short term deals, which are really good, like because
11:22 we like them, like your small deals, you convert them into cash revenue very quickly, we do like
11:27 them. But I do not see there is a drastic change, but we are never expecting mega deals to keep
11:33 happening every quarter anyway. Got it. Okay. Now, I am just again,
11:37 reference back to what has happened over the last three years, 2022, people could not get enough of
11:42 what tech sector is doing, the world is digitizing, you will have employee problems and business will
11:47 never go out of fashion to suddenly fast forward to 2024 and suddenly people are raising question
11:53 marks around the whole business. So my, not really large question marks about the pace of growth,
11:57 let me put it that way. Would you view this as a cyclical turn, which will at some point of time
12:04 turn? Because I suddenly hear people talk about two things. One, the unpredictability of IT
12:10 services because of what AI could do. And of course, there are counter arguments saying that
12:15 IT services will adopt AI to improve. And two, that attrition, which used to be a big problem
12:20 during this post COVID period, will not be a problem anymore, because efficiency and AI will
12:25 ensure that IT services will not have the attrition problem at the very least. Your thoughts on both of
12:30 these. See, our thoughts on generative AI has always been that this is a great technology that,
12:38 and great tool in our hands. And it will enable two things, like introduce new products and
12:44 services, create new products and services, which we have not thought of so far. And
12:48 second side is also bringing more productivity. So coupled with this, we believe the overall pie
12:56 will increase, like though productivity will also increase, but the addressable space or the pie of,
13:03 or pie will increase in size. Net-net, we believe that we are going to still need more people,
13:08 maybe the capabilities, the training that we need to provide could change. But we do not see a
13:14 shrinkage in the amount of volume of work that needs to be done. Net-net, it is going to be
13:19 positive. And I do not think generative AI by itself is going to have a major role on increase
13:28 or decreasing the attrition. It is cyclical by nature, it is more to do with the overall demand
13:36 in the market. If overall demand in the market does not change, that is my theory. So, attrition
13:42 also should not, yes, there will always be, what you saw in FY22 was anomalous. But other than that,
13:51 if you look at, if you disregard FY22, maybe the same situation happened maybe 5, 6 years ago,
13:56 like there was again uptick in attrition that might probably keep happening once in 5, 6 years.
14:01 And non-attrition, AI and what it could do to the IT services business, any thoughts here?
14:10 How capable is Indian IT? I mean, not just TCS, wear the hat of the captain of Indian
14:14 IT space and tell me about it. No, no, but look at that world over, like
14:18 take the AI space or the tech sector. Indians are very, very prominent. Like nowadays,
14:25 we go for any meetings on either side, you find lot of Indians. So, the talent in available in
14:32 India is very, very deep and broad. So, India will play a phenomenal role and great opportunity. And
14:39 within India also with the Indian economy growing at a great speed.
14:44 There is currently like if I look at, generative is only deployed in some sectors in India and also
14:53 given the diversity of our population, we are only addressing a very, very small subsegment.
15:00 If you are able to first of all go into all languages, go into tier 2, tier 1, tier 3 cities,
15:06 what are the applicability of generative AI, opportunities are enormous.
15:09 Okay, and you reckon, I mean, again, I do not know whether you can call it right or wrong,
15:17 but let us assume that Indian IT service companies may not have optically had a stranglehold on AI
15:27 capabilities, optically I am saying, and I may be wrong here, I am just trying to understand from
15:31 you. You reckon that AI will not be disruptive, but more enable you to gain more business for
15:37 you to be able to serve your customers better? See, traditionally we have not been,
15:42 maybe it is a question of how technology capabilities or each country evolves.
15:49 We have not been a great product country, like we have been a services organization. So,
15:54 but it is increasing, more and more enterprises are coming up that create more products and
16:01 so our adoption of while we may not have created the LLMs on our own.
16:06 Sure. But the ability to use the LLMs and create
16:10 new services out of that, I think there are enough companies doing it like large companies like TCS
16:16 do, there are many startups that do the same thing. So, I am not too worried whether the LLMs
16:21 are created in this country or not. Okay, but there will be enough
16:24 business for companies who are not creating the product, but driving the usage of the product as
16:31 well. That has been traditionally our strength and we would continue to ride that wave.
16:36 Got it. Last couple of questions. One is on the strong point for the quarter,
16:41 which is the EBITDA margins that you had and how do you reckon, I mean, cost optimization,
16:47 so on so forth, do you reckon this will be the new normal of sorts or is it difficult to call that?
16:51 No, for us actually, if you look at for TCS, it is always been a very important
16:57 driving factor. Like we always believed that we have to grow and we should be able to grow
17:04 with strong margin. And for us the strength has been execution on the ground. We continue to look
17:11 at, look for opportunities for improving the efficiency. We will continue to do that and
17:16 I do not believe that we have to stop at 26 or we have to, see we started this year with around,
17:24 when we Q1 was somewhere around 23.2. So, we have been able to improve almost 100 bps every quarter.
17:32 I am not saying that we will be able to do 100 bps every quarter going forward, but definitely
17:37 there are headroom, there is headroom left and we will continue to target the headroom.
17:43 Great. Well, I personally wish you all the best for that and more.
17:46 Thanks so much for speaking to us today and have a superb FY25.
17:50 Thank you. Thank you, Neeraj.
17:52 A pleasure. Pleasure was ours and yours. Thanks for tuning in.

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