In the last three-quarters, the constant currency growth of TCS has stayed at 2.2%, which means positive growth is coming from the last three quarters. Is that the direction which we should now look forward to?
K Krithivasan: The good news for us is all the industry verticals have grown and almost all industry verticals and all geographies have grown, that is the first positive sign we want to look at. We are also seeing that from the growth perspective, it is both kinds of projects. We are seeing good growth in discretionary projects as well. When I say growth, cost optimization, definitely has seen growth. Discretionary projects have maintained the status quo. Overall, we are in a happy situation with the results that we have got. We have never called out on the guidance or how things are going to be, but we have said that FY25 will be a better year than FY24, and we stick to that statement.
I understand that. But I am trying to put a pattern in place here. AI is all about pattern recognition, so I am doing manual pattern recognition. Sequentially, in three quarters, the direction seems to be changing. Has the direction pivoted?
K Krithivasan: It will be very difficult to call honestly because our customer sentiment has not drastically changed. What it was before, the sentiments are the same. The focus is still on cost optimisation. Discretionary projects are being validated for the return on investment. So, those things have not changed. We are increasing our focus and going to our customers with opportunities for cost optimisation. So, we continue to win in the marketplace. But I do not want to call out that the pattern has changed for good and it will continue to be increasing trajectory. It will be a difficult call to make.
But what is stopping TCS from calling it out because everybody perhaps wants to know that? This time the environment is such that everybody wants to know that, okay, there was growth after COVID, then came the crunch, then came the impact and now normalisation. So, what is the harm in calling it out I am trying to understand. Are you being extra conservative?
Samir Seksaria: We believe giving a view in terms of how we see it and what we see and the colour on that is more important than calling out a number. Historically, we have not given a number….
No, I am just talking about the direction. I am being slightly persistent with this question…
K Krithivasan: We are not confident enough to call that or say that the market sentiment has changed for good.
Is this largely because of what is happening in the US market and there is also an election? So is it a mix of both which is in a sense pushing you back?
Samir Seksaria: If you look at the sentiments, which started six quarters back in terms of post-one of the regional bank crisis and the big tech layoff, the sentiments have remained similar. And we are not seeing a significant change to call that out. And customers are also waiting for a trigger. And what that trigger is, is still not known.The headline that we got in the previous interaction was that there was a net decline in the headcount addition. Now the headline is different. In between quarters, why is there a divergence?
Milind Lakkad: As I said earlier, it is not a quarterly phenomenon. It is a yearly phenomenon. When we hire on the campus, it starts in the middle of Q1 to go forward, so that is one aspect. The second aspect is anyway we always hire, invest in hiring, and then do the talent development for these people. So that would be the reason I would say it is a positive headcount. With all the investments that we made in the past, we took care of it and we invested and deployed those people last year and we thought there would be additional need this time and we did that.What about the emerging market business there is a deep swell there. I would imagine this is largely because of India and the BSNL business. How should one look at it if I subtract the India part out, the numbers would look very different. If I add the India numbers to the top line, it looks very different. What is the best way to look at India’s business for the quarter gone by?
K Krithivasan: There are two components to the India business: the BSNL work, which is where we are increasing the number of installations. And of course, then there is a core India business, which we have been deeply involved in. Both are doing quite well. And if you look outside of India, APAC, which is part of the regional market – all are doing quite okay. Today, the regional market has become a very substantial business, which is growing at a good pace.
That is how it is.
K Krithivasan: Yes.
The traditional definition for any IT company and especially TCS over the years, was to look at the US business and look at the BFSI vertical. Look at that and look at BFSI. On both accounts, there seems to be a numbness. Why is that?
K Krithivasan: You are saying numbness?
If I look at historical numbers and add it up with what you have reported for the quarter gone by, historical numbers are different. So, while it is growing, it is not growing in historical averages, the US market, and the BFSI vertical.
K Krithivasan: Both are interrelated also because we have a very high exposure for BFSI in North America. And in North America, we are present in almost all the large banks. So, if BFSI grows, North America will also grow. Either way, it is true. But what we find is that decision-making cycles are longer and customers continue to evaluate new investments, and new projects more in the US. So that too, particularly in the US we have the situation of interest rate, whether it is going to change, elections, what results it is going to throw out. So, customers would want to wait and watch before they make major decisions which is also causing the delay.
Could elections have a very large impact in the second half of this year?
K Krithivasan: By January, the new administration will come in, but by November, people would know where it is going, so that should give them some certainty and having one certainty one way or the other will improve the sentiments in the market.
Some of your peers with their quarterly numbers have given what is called the AI order book. Are you prepared to share something along those lines? I remember a couple of years ago, TCS officially started giving the colour of the digital book that okay we are in a position to give size of a digital book.
Samir Seksaria: We have been giving out two matrices, which we gave out last time also. One was the pipeline and it has grown quite well from $900 million to $1.5 billion.
This is the AI book?
Samir Seksaria: This is the AI pipeline. And second is the engagements, which we have been doing,They have increased to about 270 engagements.
An attrition rate, that was threatening to go to 19-20% a couple of quarters ago, is now inching towards 12%. What does that mean for TCS in terms of the most important raw material which is wage cost?
Milind Lakkad: That is a very good situation for us. I am very happy that we have come to the levels where we are normally, in the 11% to 13% range. Last quarter, we came down by 30 basis points, we came down by 40 basis points. Now I will see a stabilisation of this number going forward and it is a good thing. It is a good thing for the business. It is overall stability for the people and also basically creating a healthy organisation in the process.
2021 was all about factors like moonlighting, it was a great business, there was a sugar rush and there was high inflation, so talent retention was a challenge, and wage hikes were above normal. Do you see a normalization happening there because you are, in a sense, going to be calling out the most important aspect, the raw material cost. Manpower cost is the raw material cost.
Milind Lakkad: So, it is lower than what it was in 2021, but it is not significantly lower than normally what we have been seeing. As far as I am concerned, it is back to where it was.
Which is?
Milind Lakkad: Which was what, during normal days, pre-pandemic times.
No, I am just talking about the sense of the wage inflation, 4% to 6%, 6% to 8%.
Milind Lakkad: Wage inflation we manage through the pyramid. It allows us to manage all financial parameters very well. So, I do not think we will worry about that aspect so much as long as we manage our operations very well.
One standout feature for TCS in the last three quarters irrespective of what the world has been doing, has been the order book. While your other parameters are looking up, for the first time I have seen a decline in order book. Is this largely because of delay in decision making?
K Krithivasan: Mostly it is a timing issue. Like, if you look at the pipeline, both our overall pipeline and qualified pipeline are at a very healthy level, more or less near the historical peak. We announced a $12-billion plus order book last year. Even after that, we have been able to replenish all of them. We also said our comfort range is 7-9%, when you take out all those mega deals. This time, there is no mega deal. So, it is within the range, and it is a timing issue.
There are a few large projects we are working on, which could have been signed this quarter, but might have slipped by a few weeks to this quarter, come Q2. So, we do not see any issue there, like the order book pipeline is healthy, what we see coming or closing in Q2 is healthy.
So, there was a time when TCS decisively came and said, look, we are very proud to say that we are negotiating multiple mega deals. How many mega billion-dollar-plus deals are you negotiating right now?
K Krithivasan: There are a few large deals that we are discussing. There we are never going to be many mega deals by nature will be few. But I do not think we ever called out a number in the past also.
You have said that you negotiate, you are…
K Krithivasan: We are in the process of negotiating some of our market-making deals.
So, last quarter, the headline that I went back to was that FY25 would be better than FY24. The first quarter seems to be mathematically endorsing that. What else should we expect in the next three quarters, directionally or in terms of the tone and the tonality of the numbers?
Samir Seksaria: I think we are happy with what we have achieved in Q1 and as Krithi mentioned, we are confident that FY25 will work out better than FY24 and hope the journey which we have seen in Q1 continues.
Where do you think things will settle eventually? There is more and more realization and adaptation of AI. When I speak to some of your peers, they tell me the following look, orders are coming, but delays are also starting, which is what you also mentioned. If delay is happening in terms of implementation, it could hit you.
K Krithivasan: Leave AI aside for a moment. Because this question keeps coming up every quarter, we did analysis of what is the order book we booked in the last five quarters and how much of realization of revenue has been happening. It is quite healthy. There is nothing to worry. And as we have been saying in the past, some of those programs that we started during the peak of the pandemic were and those programmes are coming up for evaluation and some of them are getting passed.
I do not think there is any stress or pressure in the recent order book that we closed. We have been able to realise the revenue. So, even if technology is changing, like particularly if you take AI, except in a few cases, most of them are smaller projects, they are not huge projects. For them to materially impact the order book or realisation of the order book, it does not impact materially.
How big has the India business been for you, in terms of size, if you can quantify for us?
K Krithivasan: You know the numbers, I mean, India business?
Samir Seksaria: Around 6-7% of our revenues is India business. In our segments, we report India’s geography separately.
Everybody is excited about the India business. For the quarter gone by that big bulge up is coming in India. Is this the high-growth business that markets are not anticipating? We are accustomed to looking at Indian IT with the lens of global growth. Could this be the differentiated part that could be a surprise factor for shareholders and for your investors?
Samir Seksaria: I think the opportunities in India are huge and we are tapping into those opportunities. And for us, irrespective of which geography the customer is, once we know there is an opportunity, it is for us to go and double down.
Could it move the needle for you, for a company of the size of TCS?
K Krithivasan: For some time, it should move. India has immense potential and is still under-invested in technology. We believe there is immense potential.
No, because when I look at MNCs, I mean, India is becoming the mainstay for a lot of companies now and something which we just wanted to bring out in the course of the conversation, that look growth is also happening here and other things also.
K Krithivasan: It is happening a lot here for us. It is happening a lot and it is becoming a very material geography for us.
With each passing five-year period, TCS has done something that has moved the needle whether it is on the margin front, employee front, technology front, or the adaptation front. For the next two to three years, what could be that big needle-moving change for TCS? When I say needle-moving move, I mean a couple of billion dollars.
K Krithivasan: What we did now for BSNL is something big. We are looking at programmes of that sort where we can within India we can do programmes of national importance. Similarly, we are looking at opportunities outside of India. We will call them out once we have, but we are looking at quite a few new initiatives that can make a change for us.
So, if I say that the decline has been arrested, will that be a fair statement?
K Krithivasan: As I said, like, I do not want to call that whether decline has been arrested. We are quite happy where we are, but too early to call that it has been arrested. I do not want to make that call.
By next quarter, which is the next time when we meet, would you be in a position to tell me the direction? Are you waiting for some triggers?
Samir Seksaria: We will give you colour as we see it.
K Krithivasan: We can give you the colour as we see it, because it is fairly volatile. The fact that we told you FY25 will be better than FY24 itself is a fairly bold statement from us and we do not want to get into a quarterly….
I understand that. I am not putting words in your mouth, pardon me, but my idea is to perhaps get the right commentary out also. So, let me summarise it again. FY25 will be better than FY24. Directionally, it is too early to say the level of elevation, but you feel reasonably confident that things are getting better and the market is too volatile to call it out very clearly.
K Krithivasan: To me, it is too volatile to call out too clearly. I do not think we are in a position to say that we are on a growth path again.
