TCS saw one of its worst quarters in several years in terms of dip in profitability, which dragged down the margins to 23.4 per cent, way below the company’s stated target band of 26-28 per cent.

In an interview with BusinessLine , TCS COO NGSubramaniam acknowledged changing market dynamics wherein traditional deals are getting smaller in size and digital deals are coming in smaller packets. However, he maintained that with the help of internal productivity improvements, margins should get back into the target band soon enough. Edited excerpts:

How would you rate your Q1 performance?

We had a decent run given the transitionary stage we are in. The overall IT services market is also undergoing a lot of change. From that perspective, I think we’ve done well with 3.1 per cent constant (revenue) growth. Volume growth is important for us because that sets the pace and we’ve done well there. It was a tough market.

We had one $100 million client this quarter. $100-million clients don’t come overnight. They are always reported based on the last 12-month revenues. Actually, our client portfolio is doing really well. If you look at the client pyramid, in every segment we have migrated clients, which is a very good thing.

TCS has maintained that there are no structural challenges. Then why is there pressure on revenues?

There are no structural weaknesses that we see in any verticals. Retail is the one which is going through some stress and that’ll continue to be the same for the next couple of quarters.

If you take all the other verticals, in BFSI we have gained marketshare of over 25 per cent over the last two years in all our major markets. We’ve taken business from competition. Even in this quarter BFSI has grown 2.3 per cent. Clients want to spend but the way they are spending is quite different.

There are typically what we call ‘run the business’ long-term contracts which are annuity revenues. And they have been renewing it and we are also bringing in productivity. So, if we are doing $100 total value contract this year, next year typically there will be a reduction in the overall contract.

We also have to bring in automation and other efficiency levers into it. So, the business models around it are changing. Year-on-year earlier there used to be 4-5 per cent productivity but that is a little bit more now because of automation.

The other part is ‘change the business’, which is all discretionary spend. Until recently, digital experience was only about putting up a mobile app. Now, it is moving beyond that and looking at how to get a better experience. Which means integrating a lot more automation and analytics.

Larger projects, which we would’ve typically signed for 18 months, are getting split into several smaller projects. There are many customers with whom we are engaging but then instead of signing a larger contract, we are doing multiple small projects.

How long do you think this sluggishness in digital demand will continue?

Unless and until there is a scale of resources and expertise that is available across the industry. It is not just whether we have it (resources and expertise), the clients should also have it.

We are all in the mode of building the skillsets. We can deliver but if they (customers) have to maintain it, they must have the people with knowledge and expertise to maintain it as well.

We went into developing skills two years ago and now have over two lakh people trained. But I can’t say I’ve trained enough people in all the skills that I need. We’ll have to keep training people and ensure enough skills are available.

How do you justify the dip in margins, which is way below your target band?

Yes, there was a dip in margins. Typically, there is a wage increase that happens this quarter and there was currency volatility. These were the two factors impacting margin. Normally, wage hikes used to be 200 basis points where we used to give about 7-8 per cent average hike. This year we have settled to about 5-6 per cent increase.

Normally, during this quarter, productivity gains of about 30-40 basis points are also there. That used to be the trend. But in this quarter, we consciously didn’t apply any productivity elements because we went through an organisational change. We put in place new teams for all the digital services.

We felt that it was important to complete the transition and then make sure the team settles in before we start productivity elements etc. We believe that aspect will help us moving forward.

You’ve maintained the target margin band at 26-28 per cent. But in the last few quarters, you haven’t been able to achieve that target. In the current quarter, even if you remove the dip due to wage hikes and currency headwinds, you would still be behind target. Is there a need to reduce the target to more realistic levels?

Every year, in Q1 our margin goes down due to wage increase. Then we keep climbing in the next 2-3 quarters. What are we thinking about the margins? One is the productivity element that needs to kick in. Secondly, we have growth lever. We need to win more projects, we need to win more revenues.

There are investments we’ve already made. As the scale effect brings in, if you take digital, we have trained about 215,000 employees. Our digital revenue is at about 19 per cent, growing at a healthy 7 per cent plus rate. There is a fixed cost in training, frameworks that we create, etc. As it scales up, margins will go up.

Some of our large deals are for products and platforms, which typically come with higher margins.

As the deals mature, because of the integrated digital transformation services that we have put in place, we are able to better participate in some of those deals which we were not able to participate in earlier.

These are things that we hope will position us well for the future.

Do you expect to get back to 26-28 per cent margin band this year?

In this business, the kind of opportunities that we see, the kind of cost structures that we have, we believe it is possible to operate in that margin. We believe there is potential to do it.

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