Friday, June 9, 2023

Exclusive | Long-term trend positive, no threats in sight: TCS CEO Rajesh Gopinathan

Tata Consultancy Services (TCS) is on track to double its revenue to $50 billion by 2030, but India’s largest software services firm has been hit by interest rate tightening by the US Federal Reserve and a volatile geopolitical scenario in 2023. The effect of the combination is expected. , said its CEO and MD Rajesh Gopinathan. In an interview to ET’s Romita Majumdar, Sai Ishwarbharat and Surbhi Agarwal, he said the long-term growth story remains intact and 2023 will be a balanced year after two years of strong growth. He added that the recession in the US is more than a tech recession and the company is not worried about the tech stock crash as it is focused on long-term value creation. Edited excerpts:

Q 1: The last two years have been blockbusters for IT services firms, but as we enter 2023, there are dark clouds on the horizon. How do you see the coming year from a broader perspective?

The best way to think about it is that 2023 is a balanced year. 2021 was a gung-ho year, 2022 was a strong year and 2023 is going to be a more balanced year. I don’t think worry is the right word for 2023.

US economy in great shape

The central banks did the right thing by intervening… you need to take a break from the very aggressive support that has been given. But the situation is also complicated by geopolitical issues. Both of these are going to have an impact on 2023. On the positive side, if you take America as the engine of growth, the US economy is in very good shape. The recession is more like a technological recession rather than a major economic downturn. So, that economic engine is doing great. Whatever tech recession America is going through, it’s more of a short-term fix than a major issue. Everyone is an expert on inflation. Europe, structurally, would have been in a better position, but not for war. How the war ends, we will have to wait and see. It is definitely negative in 2023 but there will be some positive changes. The rest of the world is somewhere between these two.

Q2. The entire industry including TCS faced huge challenges of talent and job attrition this year. Do you see them getting comfortable in 2023?

The hiring surge in 2021 is now affecting the system in terms of productive capacity. The supply side outlook is also likely to be quite favorable in 2023. You are just watching it. The attraction was also motivated by this lack of supply. People were in a negative cycle of hiring and leaving each other. As soon as the supply side eases, that kind of (talent) demand goes off the table. Struggle will be moderate in 2023; It is at its peak. Presumably, it will start to return to pre-pandemic levels in the second half of the year.

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Q3. Are you expecting operating margin relief as talent pressure eased?

Calendar year 2023 will be the year of margin improvement. Given the volatility, we had to invest in it. It will keep improving but not by leaps and bounds. So, as attrition peaks from a one-year perspective, we should see an improvement in margins. The year 2023 is going to be a consolidation year of sorts in terms of demand side, supply side and overall financial performance.

Q4. Accenture and HCL Tech have revised their guidance commentary based on the type of macroeconomic issues they see. What does TCS expect?

There are companies that give quarterly guidance and there are companies that give long-term guidance, like us. Therefore, our observations are indexed by the long-term trend line. His remarks have to be seen in the light of short-term concerns. Our overall long-term trend line is very positive, and we do not see any threats.

Q5. In the last one year, most IT stocks, including TCS, have fallen by about 20 per cent. Does it concern you?

No. I focus on the performance of the company and the stock depends on many other things that are completely outside of our control. We firmly believe that as long as we remain focused on our performance, value grows over time. This has been our history. And that’s complete focus. I don’t worry about it at all.

Q6. Are you planning to make any changes in your buyback strategy because of the stock crash?

Our capital allocation strategy has been about returning 100% of free cash flow back to shareholders. The way it gives back is driven by the regulatory environment, which is evenly balanced between buybacks and dividends. Different shareholder groups have different preferences. So, if you look at what we’ve done over the years, we’ve been trying to balance both ways. But until the regulatory environment changes, we are likely to remain balanced. And I don’t think the regulators are going to make each other more attractive. The other thing to remember is that our buybacks are very unique. Hence, our buyback does not directly impact the price as it takes the tender route executed through exchanges.

Q7. What do you think about the massive cost cuts and layoffs at Big Tech companies? How does this translate to your business?

Philosophically, we are different types of companies. Their operating environment, they’re very aggressive, both up and down. When they see an opportunity, they move very quickly to capture the opportunity and they tend to outperform the index on the upside from a risk perspective. Naturally, when they see the bottom circle, they also cut sharply. So, we’re slow on that front. And so we look for longer-term trendlines, and instead of being indexed on where the volatility is, we’re indexed on the trendline.

Q8. What’s your advice to startups chasing valuation on sustainable businesses?

Don’t focus on your investors because if you take care of your customers and take care of your people, everything else will follow. Be clear on what you are doing. What is your value proposition? Why would someone work for you? Why would a customer want to come to you? That clarity and that honesty should be key and as long as you stay focused on that, capital will find you. Whether you will get rich quick or not, which cannot be guaranteed, you will enjoy whatever you do. I think whether you get recognized or not is a big part of the long-term value. The most important thing is that you do what you believe in and enjoy what you do. Then the rest of it will sort itself out sooner or later.

Q9. How does the new structure position TCS in the current macroeconomic environment?

Under the new framework, our focus on large, global enterprises remains the same. But within that, our relationships are young with some and well developed with others, and we have different organization structures to deal with that. The level of customer centricity that we are able to provide is absolutely unparalleled. This has never been done in our industry or any other industry.

Therefore, we have increased leadership opportunities throughout the organization. We’ve eaten our own medicine and told customers that we’ve executed enterprise-wide transformation at a $25 billion company, and we’ve done it at full speed. About 90-95% of the leadership is intact. It has been very well received internally and by customers.

Q10. You said that TCS will double its revenue by 2030. How is it progressing and when will TCS become the world’s largest IT firm?

We are well on track overall. We’ll take it one step at a time but first let’s get to this benchmark. We are very different companies. Our operating models have been different and we have been setting our own agenda. It is built on core values. One of its strong values ​​is our focus on people. Because unlike more traditional firms in our industry, we are not an aggressive hire-and-fire firm. We are focusing a lot on organic talent development.

Today, (in) the company’s top 200,000 people – more than 70% – have been with the company for more than 10 years. So, they are the ones who have grown with the company. I’m referring to the top one-third of the company that has been with us for that period. That’s why we don’t want to compromise on it. We also do not want to compromise on customer centricity because, ultimately, our success comes from being very much customer centric.

Question 11. Do you see any delays or changes to the 2023 client budget?

You only get an idea of ​​what’s going through a client’s mind in the January-February time frame when you actually start a more specific conversation. But the broad themes that the budget process has gone through, we get to hear in December. In the US, it’s a balanced one where people don’t want to rush into it because they want to see how it works. But it has a neutral to positive stance in the US, while in Europe it has a negative to very negative stance, with neutral being the best-case scenario.

Q12. Do you have any sector-specific concerns?

Not much, because Europe is where it is, as is America. It’s been a tough year for financial services. In the last 12 months, he was in negative expectation mode. The rest of the industry is in a pretty decent spot. Financial markets are always more volatile. But they are in very good shape and sitting on a substantial profit. This is more a politically correct tone than a structural caution. Interestingly, this year has turned out to be a bang for the airline customers. While capacity stands at 80%, profits are at an all-time high. They don’t want to get too excited about it and are taking precautions. We respect that. Our own plan assumes that this is a passing phase. We see a year of consolidation that will swing from neutral to positive (growth).

Q13. Will 2023 Margin Growth Be Driven By Operational Improvements Or Business Growth?

It’s going to be a combination of both, but you’ll see it when you look at it in different numbers like revenue per capita and profit per capita. This is the nature of the game. But it will be both driven out because, as the industry recovers from our support, we expect to see the benefit in renewal deals that we’re already seeing. A lot of operational improvements will also flow through revenue and cost levers. There will be headwinds and other operational elements. Travel is on the rise. It is likely to remain common for a long time, which increases the cost. But we believe the operating profit will far exceed the cost increase.

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