An Interview With Tata Consultancy Services

When I wrote about the possibility of India’s largest IT company, Tata Consultancy Services (TCS) listing on the NYSE, little did I realize that I would be contacted by TCS regarding a correction to my article. While providing me information about the number of acquisitions done by TCS in 2006, the company also offered me an opportunity to interview their senior executives. Having featured competitors Wipro (WIT) and Infosys (INFY) on InsideArbitrage in the past, I used this opportunity to ask Surya Kant, Vice President and Head, TCS America, a number of questions that are probably on the minds of most investors in the Indian IT sector.

1. TCS is the leading Indian consulting company with $4.3 billion in annual revenue and almost a billion dollars in net income. Despite this leadership position, TCS does not have the same visibility in North America that Infosys and Wipro enjoy. Beyond raising capital for acquisitions, would TCS consider an NYSE IPO as a means to improve the visibility of TCS amongst US businesses?A US listing is not a part of our immediate primary agenda for TCS.

   Nonetheless, North America continues to remain an important market for us. The US accounts for more than 50% of the TCS’ $4.3 billion annual revenues from our last fiscal year, ended March 31, 2007, making TCS the 11th largest player globally. In terms of market capitalization, TCS is ranked 4th globally, behind IBM, HP and Accenture.

2. Over the last 5 years, the US dollar has lost more than 30% of its value against the Euro. Since the rupee was pegged to the US dollar much like the Chinese yuan, Indian outsourcing firms benefited from this positive currency exchange trend. The Indian rupee has recently gained strength against the US dollar rising from an exchange rate of  44.61 rupees per dollar to 40.59 rupees per dollar over the last six months. Do you think the rupee is likely to continue gaining strength against the dollar?

   The rupee’s appreciation vis-à-vis the dollar is definitely of concern to the industry and TCS. To what extent the government will succeed in the short term in addressing inflation will determine how the rupee’s rise will play out.

   In the past two months, we had a 7% increase in the value of the rupee against the dollar. But even with that challenge, TCS has been able to maintain strong margins because of the value that we provide. About 40% of our business comes from fixed-priced bids, so as we continually improve our business processes and leverage our own intellectual property as part of the solution, our margins can get better.

3. If yes (to question 2), how will this impact earnings? Have you hedged your currency risk through futures or other financial instruments?

   We’ve hedged fairly well in the last quarter. But because of the mechanism and costs involved, we can only go to a certain point. So anything below 43 rupees vs. the dollar will continue to worry us.

   TCS has taken currency hedges worth about $1 billion, up 30% from an earlier level of $750 million from a year ago. Also, our revenues are already partly hedged as our costs are also in dollars in many contracts — so it’s not that this appreciation hits your full turnover.

4. Indian IT salaries have been rising at  a rapid pace of 15% per year. If this were to continue, the competitive cost advantage that companies like TCS and Infosys offer will slowly diminish. With GDP growth in India reaching 9.2% in 2006-2007, inflation at 5.66% and a shortage of skilled labor, it would be hard to step away from salary increases? How are you handling this risk?

   The competition for talent is certainly intensifying, not only as TCS grows, but as other multinational companies open large R&D and service facilities in India. However, we believe this high wage inflation won’t last for too long before it levels out; it should settle down in two or three years.

   We expect the impact of wage increase to be very similar to the impact that it had last year because we expect the Indian salary to go up by 12-15%, and as far as overseas is concerned it, is going to be between 3% and 5%. This is the same as it was last year. So the impact is going to be more or less the same and we have worked out this kind of a detailed plan to meet that impact.

5. Employee attrition is another major problem faced by most Indian IT companies. What steps is TCS taking to reduce attrition and improve employee retention?

   TCS has the lowest attrition rate out of all IT services companies headquartered in India (11.3%, well below the industry average). It is important to continually invest in the long term growth of our people, with frequent training to upgrade their skills, by rotating assignments, and providing opportunities for travel and foreign assignments. Well planned job rotations give our employees the opportunity to work on varied technologies, varied customer and industry domains and geographic locations.

   In terms of recruiting we have a highly evolved recruitment process across the globe. For instance, the number of colleges we go to in India alone each year just crossed 300. We’ve been successful in ensuring we get invited to campuses early in the game (achieved 93% day 1 slots). We also engage students through summer projects, training and have strong ties with the faculty.

6. While the Dow Jones Industrial Average is at record levels, the US economy is beginning to slow down. GDP for the first quarter came in at a lower than expected 1.3% (before it was revised lower) when compared to 2.5% in the fourth quarter of 2006. Since TCS derives more than 50% of its revenue from the US, how much impact is a slow US economy going to have on TCS?

   We see no slowdown in U.S. spending on technology services. Our U.S. revenue recently exceeded $2 billion, slightly more than 50 percent of the total.

   We see IT spend increasing in transformation programs; the type of customer engagements are increasingly transformation programs. Both enterprise solutions and business intelligence solutions are experiencing high growth, along with the traditional IT services.

   The North American market is strong for us and all our existing clients are buying new services from us. We are also participating in larger deals, with greater frequency – In the last quarter TCS closed 3 deals of around $100 million each.

7. As you look towards the future, what will be the key drivers of growth at TCS?

   Service lines like global consulting, BPO, Infrastructure management, and assurance services fetched 18% of revenues in FY ’07 up from 10 per cent in the previous financial year. For instance, TCS’ Global Consulting Practice achieved a robust 50% year-on-year growth in Q3 2007. All of these growth engines will continue to gain momentum in the coming quarters.  At the same time the IT services including package implementation are also expected to grow well.