Don’t see cloud migration, SaaS model as just flash in the pan: V Ramakrishnan, Chief Financial Officer, TCS

Tata Consultancy Services (TCS) put up a good show in Q2FY21 with all-round growth in financials and operations of the company. However, the market remains competitive when it comes to pricing. V Ramakrishnan, chief financial officer, TCS, tells Shubhra Tandon that no one has a commanding ability over pricing, and speaks more on the business. Excerpts:

Is there pressure on pricing, are clients asking for renegotiations of contracts, or are you able to command strong pricing power?

It has been a very stable environment. In the first few months of the year, obviously there were some customers who were definitely seeking some help and we worked it out because of the strong relationships that we have. But there are not too many and not across the board. At the same time, pricing power in the industry is also very subtle. It is not a price driven market because customers see the value you are delivering and how relevant it is and whether you are a trusted partner. Also, it is a competitive situation, so I do not think anyone has that commanding ability for pricing.

Strong margins in Q2 also had the impact of salary hikes not being given in the first half of the year. Now that you have announced salary hikes, what will be the impact on margins in Q3 and Q4?

Yes, it is right that some part of our margins came in because we did not have [the impact of] salary hikes in this quarter, and when we roll it out in October there will be some impact. But that is part of the business model. Typically, when we announce salary hikes, historically there has been between 1 and 2% impact on the margins. At the most it has been around 2%, sometimes between 1.5 and 2%. So that will be there, it is intrinsic, but subsequently it will be pulled back.

On the revenue front, was there an impact of some of the deal wins from Q1 getting closed in Q2, and is the revenue growth sustainable?

We do not give specific guidance, but we see the momentum continuing and I don’t think there is an appreciable shift of deals. Definitely, we saw that in Q1 customers were hesitant or going slow on adoption of cloud migration and especially into the SaaS model. But we are seeing [much] more activity in that area across sectors. These are not short-term measures, these are also fundamentally altering their ways of managing the supply chain [and] their own production environment, so investments are going in that direction. So, this is definitely more broad-based and more structured. We do not see this as something which is just a flash in the pan. However, we are not out of the woods yet either on the health situation or on the economies.

What is the demand outlook like for the rest of the year? Is it sustainable?

It is clearly established that technology is [not only], helping companies tide over the situation, but is also becoming intrinsic to their recovery and their revival. So, from that perspective I do not see any reason why demand should not sustain. For instance, enterprise-wide cloud adoption or AI (Artificial Intelligence) is becoming more mainstream. Areas like cyber security, analytics, data harnessing are getting accelerated. So, technology is here to stay. This has been a period where we have seen growth across sectors with the exception of travel, hospitality and non-essential retail and some parts of media. So, it has been broad-based and we do hope this will continue.

Will the deal momentum continue across small, mid-sized and large wins for the rest of the year?

One feature to note about the deal wins this quarter is the one large deal win which we had announced in December 2019. It is a multi-year deal, so the contract got signed this quarter so that is why it is included in the numbers now. However, a large part of [them are] smaller and mid-sized. But when we see our pipeline, we have a good mix of both large deals as well as a lot of small and mid-sized [ones], so it is a healthy pipeline.

What does the multi-year technology transformation mean in terms of convertibility into revenues and profitability?

When we participate strongly in the multi-year technology upgrade, we bring together three things: our knowledge and expertise in technologies, deep contextual knowledge of the customers, and the deep domain knowledge of that specific industry. This brings in a lot of compelling value proposition to the customers. So obviously, it will translate into business, and if we are able to run that engine more efficiently, it will also help in the margin sustainability and growth.

What kind of spends from companies do you foresee as they embark on this multi-year tech transformation?

It is very segmented and it is across many markets and many industry domains. The point that is being made is that technology has the ability to do this on a continuous basis for foreseeable time. One has to look at the possibilities which are there rather than being fixated upon when and how much. Possibilities are immense and we are still scratching the surface. So many industries and organisations, including those in the government sector, are still working on legacy systems and technologies. There is an opportunity to re-imagine and re-engineer some of their processes. So, this is a continuous journey. That is what is meant by this statement.