The footprint and momentum have been good in Q4: N Chandrasekaran, TCS

In a chat with Nikunj Dalmia of ET Now, N Chandrasekaran, CEO & MD, TCS, says will need to wait because exit rates have been lower this year and says everything will go digital over a period of time. Edited excerpts:
Nikunj Dalmia: The fourth quarter (Q4) was a very unusual quarter for TCS because the third quarter (Q3) was very weak. The absolute numbers obviously will look better.How much of the Q4 effect, a magic in this case is because of business momentum and how much is because of a diluted Q3?
N Chandrasekaran: I can say it with certainty that all of the Q4 is due to business momentum. There is nothing due to diluted Q3 because those revenues that went away could not be recovered. If you look at the performance this quarter, the key is always in a different matrix. You can look at the overall numbers and TCS beats the street. All those numbers are good, statements are good but for me the data points or volume growth, 3.2x coming off a very bad Q3 and the seasonally weak Q4, looks very-very good.
The BFSI was very strong with 3.2 per cent growth. North America was strong with 2.4 per cent growth. Continental Europe was strong with 3.5 per cent growth. We added three clients at the $100 million range and many more clients in the $50 million range. I think 8 or 10 clients additions in the $50 million range and 17 client additions in the $10 million range. I think it was very significant movement in terms of client migration that shows the traction we have in digital. Digital is very strong with 15.5 per cent. The headwinds I talked about, we are hoping and expecting them to bottom out and most of them have bottomed out. Some of them may not have a spike in terms of growth but at least they would not pull us down. So I think the footprint is good. Sometimes you achieve great numbers but the footprint is not good, it does not give you a good feel. To me, the sense about this quarter is the footprint is good. I feel the momentum is good and I feel very confident. But we need to wait because the exits this year is lower than the exits last year. We would watch and are going to deliver numbers for the next two quarters. Then I will be able to say where we are going but at this point in time, we are quite happy with where we are.
Nikunj Dalmia: So you have managed to grow at a run-rate which is higher than the industry average. In a year, when you have multiple issues, whether it is Diligenta, Japan, volatility in telecom; India business was choppy and unpredictable and then you had the overhang of the energy sector. Adding to that was the Q3 when the Chennai impact hit your financial performance. For FY17, you are only talking about one concern. So in terms of management messaging, the message is that if there were five concerns earlier, there is only one concern now and the highway is looking very clear.
N Chandrasekaran: I think I have said it actually. I say the exit rate is lower compared to last year's but the headwinds are out of the way. So given that we feel positive, we see a good momentum in digital where we have entered into transformation deals. We have made significant investments in talent development, digital learning platforms, design studios, executive briefing centres. We have invested in creating the intellectual property in horizontal platforms, industry related platforms, Ignio which is an automation product. We have invested in very strong alliance networks and a good startup ecosystem. We track about 1,400 startups and we work with 37 of them in one form or another in a very collaborative way. Luckily we had the opportunity to showcase some of this in our executive briefing centre as well. Given all this, I think we are well placed but you should give us some time.
Nikunj Dalmia: I would not get into the epic system case and what is your interpretation and where the case has started but I want to understand the business impact. Can your shareholders just forget this incident as a bad dream or could it have far reaching impact on the business?
N Chandrasekaran: I made two statements – one is that I would not like to comment on the case apart from what we have already said in the press statement because it is sub judice. With respect to the business impact, we do not see anything adverse. I think we see good momentum.
Nikunj Dalmia: But in a competitive environment, can competition…
N Chandrasekaran: We will deal with it.
Nikunj Dalmia: How will you deal with it?
N Chandrasekaran: We have very strong track record. We have a blemishless track record and we have demonstrated time and again the commitment that we have for higher values or ethics, integrity or in terms of the respect we have for intellectual property of our own, of third parties, of our partners and also our track record that we have built over decades. In this case, we have not violated any intellectual property. So I do not see any issue.
Nikunj Dalmia: I respect that and applaud that especially coming from the house of Tatas. Markets are also well aware the fact that TCS stock on Tuesday started down and recovered towards the second half of the day. That is the market messaging that they believe the TCS brand. I want to understand the IT sector, because if I look at the commentary we have got from Cognizant, they are painting a slightly sketchy picture. If I look at what Accenture has indicated, the messaging is very different. Infosys last Friday has indicated that things are looking up. So what is the right way to understand the commentary and the environment because each IT company now is giving a different indication?
N Chandrasekaran: It is a couple of things. One is that we also have to appreciate that the IT companies used to be bucketed in one group and all had the similar portfolios and similar markets and similar kind of exposure. The companies have grown to be large companies today and they all have different portfolios, different mixes, difficult market exposures and each of them is at a particular point in time coming from different growth cycles. So without getting into specifics, I think you got to read those commentaries in the context of those companies. There may be some common messages which you can try to take and analysts try to do that. They try to extrapolate from the messages of one company into the sector which is something that they have to do but at the same time you have to appreciate the nuances. When I say I have an exposure in Diligenta and I have de-growth and that affects me and that does not affect anybody else and that we have made a significant investment in Japan because we want to be there for the next five years, that is a bet WE have taken and it will have implications only for us. So I think you got to read these commentaries in the context of each company is and that is the only message I can give you.
Nikunj Dalmia: There is no linear trend is what I am trying to understand from you because we have been accustomed to reporting a linear trend. There is a trend when all IT companies do well. There is a time when all IT companies go through a bad patch...
N Chandrasekaran: We are friends. We go out with few people together early in life and after some point in time, each one perceives a career. So you got to respect that.
Nikunj Dalmia: Coming back to TCS, 15 per cent coming from digital and digital growing at 50 per cent. That is the J-curve which you are getting because of the digital business. The $2.5 billion business cannot grow at 50 per cent every year.
N Chandrasekaran: That is right.
Nikunj Dalmia: That is right. So you think the momentum is not sustainable?
N Chandrasekaran: I am not. I will not say anything futuristic.
Nikunj Dalmia: This is an assessment of base and mathematics...
N Chandrasekaran: Digital I think is at an inflexion point. We see tremendous opportunities and we have made the right investments. We really believe as I said in the press release, that we have the necessary capability and the capacity and the tools and intellectual property to be able to very actively participate in that market as it develops.
Nikunj Dalmia: I do not want to get this one wrong. You are indicating that even though digital is $2.5 billion business for TCS, it is still at inflexion point.
N Chandrasekaran: Yes.
Nikunj Dalmia: And we should not be in hurry to assume that 50-60 per cent growth which you have reported are realistic growth?
N Chandrasekaran: No I would just say that it is at inflexion point and the best of digital is yet to come.
Nikunj Dalmia: We all know the headwinds which were there in FY16. Some of the headwinds actually developed in the course of FY16 whether it is Chennai or what happened with Diligenta. So how much business you lost in FY16 because of these headwinds?
N Chandrasekaran: I cannot give a very specific number, at least a couple of percentage points.
Nikunj Dalmia: So you will not give me guidance.
N Chandrasekaran: At least couple of percentage points of growth.
Nikunj Dalmia: No I am just trying to access because…
N Chandrasekaran: No I think we grew on constant currency basis 11.9 per cent. So at least we lost about couple of percentage points.
Nikunj Dalmia: And these couple of percentage points which you lost in FY16 according to your commentary they will not be there? I am just putting two and two together.
N Chandrasekaran: No, no I think please make…
Nikunj Dalmia: It is not a commentary….
N Chandrasekaran: Do not make it very simplistic because the basic point is that some of them will not de-grow but they may not grow. So I am off the situation that I am getting hit by three or four headwinds which were pulling us down and that I think is behind us by and large. So there may be a moderate flattish or something not very material kind of shifts in some places but as you can see in the matrix that we have published, most of the sectors have grown even in quarter like Q4.
Nikunj Dalmia: So you expect that business momentum and deal momentum will be pretty much all around?
N Chandrasekaran: Yes.
Nikunj Dalmia: Last time you told me that digital is a high margin business, it is a business where you may start low and when the client migration happens, the margins tend to go up 15 per cent. Again, it is a sizable business and I am assuming that business will continue to grow. So is there a j-curve which will come in your company when the digital business will take over the IT business?
N Chandrasekaran: Our investment cycle on digital will be very strong so we will continue to invest because we are building capabilities, we are building new intellectual property line. It involves a lot of investments and that is why say that give us a band and do not micromanage the band with us in your questioning. We will have to make calls on investment, which we will do. We should not want be very worried about this is what the market thinks on so on so forth.
Nikunj Dalmia: So in terms of your commitment towards investment, how much has the commitment increased in last three years?
N Chandrasekaran: We have been continuously increasing investment. Look at the amount of things we have done. We have trained about 120 per cent plus people in digital. We have created one of the strongest, most modern digital learning platforms which integrates digital with physical, we have conceived a new physical environment called iQlasses in one of our digital facilities and we have invested in a huge number of platforms. We have created horizontal platforms, foundation platforms and vertical platforms.
When I say foundation platforms they are very technical in nature and when I say horizontal platforms they are functional. We have created a huge amount of vertical platforms and then we have also invested in digital studios, EBC. Although all this cost money, but more than the money it cost a lot of management times in terms of intellectual discussions and thinking. We have partenerd with clients. We have done many things in the last three-four years and that is why I feel we are at the right place but by no means we are done. We have created IOT platform so the journey will continue and I am very excited because this is throwing lots of opportunities for the future.
Nikunj Dalmia: So investing is like you are sowing seeds and one day ultimately you will reap the fruits. So have you started reaping fruits of a digital investment or you are far away from there?
N Chandrasekaran: We have started sowing seeds. But unlike a crop you invest in, where you can reap after three or six months later, here you continue to make investments. So it is a journey that we have to do and as I said digital is going to be the way of life for every industry. It is going to be the way of life of the society, for governments. So the digital transformation will continue to happen for a long time at least for the foreseeable future. What digital means the way someone articulates today is not the same way he would have articulated two or three years ago including myself. It is evolving rapidly and it is not about the technology. Digital is about what it does to the business.
Nikunj Dalmia: It is an experience. It is a solution.
N Chandrasekaran: On one hand it is an experience from moving the engagement to experience, on the other hand it is about being software driven. It is about dematerialising every asset you have so that you can drive it to software. It is about not being real time, it is being ahead of time.
Nikunj Dalmia: I understand that and…
N Chandrasekaran: I am pretty sure if you talk to me a year from now, I will have had a different spin not because I want to be a spin doctor but because I am learning more and there is a new possibility, there are new technologies that are coming in. All of this is going to help me to think the future better. So it is a very exciting transformation that is happening just in front of eyes at a tremendous pace.
Nikunj Dalmia: The US and the European businesses have staged a phenomenal growth in a quarter which is again a seasonally weak quarter. Now we know the cycles Q1 is strong, Q2 is strong and then the second half of seasonality factor kicks in. So do you expect next year FY17 will be no different than FY16 or previous years?
N Chandrasekaran: It has been so for the past several years, so let us see.
Nikunj Dalmia: So what will be different for FY17 from FY16 or FY15 or FY14?
N Chandrasekaran: No commentary for FY17 except to say that as we leave Q4, we feel very good and we expect a strong year.
Nikunj Dalmia: Has Q4 ended on a note which is slightly higher than your expectations because when you wrapped out of Q3, the momentum had dipped away. Have you been able to recover?
N Chandrasekaran: From financial point of view, I am happy because we have to deliver. From the foot print point of view, I am a lot more happier because it is just not financials. I am very happy about the foot prints. The same numbers could have come without the same foot print. I would rather take this than a slightly different or slightly higher revenue performance with the poorer footprint.
Nikunj Dalmia: A base number which we work within that has always been an indirect comment from you is that you will continue to grow at a run rate which is industry beating. Now we know the Nasscom number, that is out in the open. So has that been the base for TCS?
N Chandrasekaran: Yes but coming from where we were last year and where we are today, I would like to restrict my comments to what I said.
Nikunj Dalmia: So now it is time to really understand the importance of the base effect?
N Chandrasekaran: I do not think so because I feel that in an area like digital, the base gives you a huge strength.
Nikunj Dalmia: So are you giving me headline saying that it has been difficult for TCS to grow at industry average?
N Chandrasekaran: I am not giving any guidelines, you are being smart.
Nikunj Dalmia: No I am just trying to understand
N Chandrasekaran: No, I am not giving you any guidelines. I am just trying to stay away from making any statement that you would like me to make.
Nikunj Dalmia: No, no I am not looking for a number I am just trying to understand the…
N Chandrasekaran: You are looking for a qualitative statement.
Nikunj Dalmia: That is my job, I am here to ask you questions..
N Chandrasekaran: Yes, it is your job and it is my job not to give the statement.
I have said very clearly that I will not give guidance but I have also said very clearly that the momentum is very strong. I have given all the data points whether it is BFSI, whether it is North America, whether it is digital. I have talked about the headwinds that we had last year and where we are today.
Nikunj Dalmia: But market is fascinated with comparing companies with Nasscom guidance. Do you think that fascination should end now because what Nasscom gives and indicates is the aggregate for the entire industry which includes big and small companies?
N Chandrasekaran: I do not blame analysts because they are trying to put up model and they need to project a model so they use different techniques and I am not going to comment on that technique. I would only say that for TCS. Look at the track record that is it.
Nikunj Dalmia: We have been talking about migration towards new technologies somehow using the word IOT. I know you are there. Others are using the word Artificial Intelligence. Which way things are headed for TCS now?
N Chandrasekaran: It is all integrated. At the end of the day, it is all about data, the world is about data. We talked about the dematerialisation, we talked about software driven and it is all because it is all going to be about data and whenever you have data and you have a strong opportunity to use machine learning and using cognitive intelligence, so that you are able to not only look at the past, but you are also able to predict the future. IOT will play a part, 3D printing will play a part, some of it on the front end, some of it is on the backend and it is all about getting the derivative and the backend. So integration is key in this heterogeneous world. No longer you are going to say that everybody has to be in the same platform. We are going to say that wherever you are, whatever platform you are in as long as you have data, we will capture it, integrate it and put it there and then we will analyse it real time. You are not going to go one way, you are going to go all way.
Nikunj Dalmia: You cannot separate water and food and proteins and vitamins. Everything has to combine into one composite meal. So let me get your closing comments. you. If you have to really measure your level of confidence when you started FY16 versus FY17, if you map the tailwinds, if you look at the deal momentum where your digital positioning is, is it better in FY17 than FY16?
N Chandrasekaran: In terms of the footprint and in terms of where we are with respect to different units especially those ahead headwinds last year, I feel better now. I was doing well in BFSI but I knew that in terms of headwinds today we are out of the insurance headwinds. So I feel better about the footprint but I am also conscious that I am exiting at a lower exit rate than last year.
NikunjDalmia: You are pouring cold water down on what otherwise has been a very good commentary that okay it is great but remember my exit rate is lower? So you are bringing the market expectation to a realistic level?
N Chandrasekaran: I am trying to be as honest as I can be.
Nikunj Dalmia: So I am tempted to ask you one more question. You said that with the foot print, you are feeling much more confident but what about the digital business for FY16 versus FY15 ?
N Chandrasekaran: Absolutely it is a much stronger foot print, a stronger momentum…
Nikunj Dalmia: That is a business you should focus on.
N Chandrasekaran: Absolutely right on the back.
Nikunj Dalmia: What is the next milestone for digital?
N Chandrasekaran: Everything will grow towards digital over a period of time and how fast is this year?
Nikunj Dalmia: So it is not far when digital will start contributing to let us say 25 and 30 per cent of total revenues and we are looking for the J-curve because that means margin expansion. I am putting maths together...
N Chandrasekaran: That is not my closing comments, it is yours.