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Tata Consultancy Services Limited
Transcript of the Q1 FY10 Earnings Conference Call July 17, 2009 20:00 hrs IST (10:30 hrs US ET)
Moderator: Ladies and gentlemen good morning, good afternoon and good
evening. This is Melissa, the moderator for your conference. Welcome
to the TCS Earnings Conference Call.
Please note that for the duration of this presentation, all participants will
be in the listen-only mode. And this conference is being recorded. After
the presentation, there will be an opportunity for you to ask questions.
Should anyone need assistance during the conference call, they may
signal an operator by pressing * and then 0 on your touchtone phone.
At this time I would like to turn the conference over to Mr. Kedar Shirali,
Director of Investor Relations. Thank you and over to Mr. Shirali.
Kedar Shirali: Thank you, Melissa. Good evening and welcome everyone. Thank you
for joining us today to discuss TCS’ Financial Results for the First
Quarter of Fiscal Year 2010 that ended June 30th 2009.
This call is being webcast through our website and an archive
including the transcript will be available on the site for the duration of
this quarter. The financial statements, results, presentation and press
releases are also available on our website. Our leadership team is
present on this call to discuss our results.
We have with us, Mr. S. Ramadorai, Chief Executive Officer and
Managing Director.
S. Ramadorai: Good evening, everyone.
Kedar Shirali: Mr. S. Mahalingam, Chief Financial Officer and Executive Director.
S. Mahalingam: Good evening and good morning.
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Kedar Shirali: Mr. N. Chandrasekaran, Chief Operating Officer and Executive
Director.
N. Chandrasekaran: Good morning, good afternoon and good evening.
Kedar Shirali: Mr. Phiroz A Vandrevala, Head of Global Corporate Affairs and
Executive Director.
Phiroz Vandrevala: Hello everybody.
Kedar Shirali: Mr. Ajoy Mukherjee, Head of Global Human Resources.
Ajoy Mukherjee: Hi everyone.
Kedar Shirali: Ram, Chandra and Maha will give us a brief overview of the
company’s performance followed by a Q&A session. As you are aware
we do not provide specific revenue and earnings guidance. Let me
also remind you that anything said on this call, which reflects our
outlook for the future, or which can be construed as a forward-looking
statement, must be reviewed in conjunction with the risks that the
company faces. We have outlined these risks in the second slide of
the results presentation available on our website.
With that, I would like to turn the call over to Mr. S. Ramadorai.
S. Ramadorai: Thank you Kedar. I am happy to share that TCS has delivered a
stellar quarter, made possible by very strong operational execution.
The net profit for this quarter stands at Rs 1,520 Crores, an increase
of 16% quarter-on-quarter and up 22% year-on-year. Driven by good
execution on the ground, the operating profit at Rs 1,789 Crores for
this quarter, shows an increase of 5% quarter-on-quarter and up 26%
year-on-year. Our earnings per share is Rs 7.77, an increase of 16%
quarter-on-quarter.
Revenues for this quarter are at Rs 7,207 Crores, an increase of 50
basis points quarter on quarter and up 12% year on year. Net margin
at 21.1% is up 278 basis points quarter on quarter and up 172 basis
points year on year.
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The global economy across countries continues to be weak, with job
losses in various industries. We are watchful of the situation and we
do not rule out the fact that more surprises can be expected.
In times like this, I believe we have managed operations exceptionally
well. Our full-services play global delivery capabilities, range of
offerings and the resulting value proposition have played out very well.
It indicates our alignment to strategic intent and clearly demonstrates
our single-minded focus on our customers.
The overall growth has been broad-based, across major and emerging
markets and our investments in people and capabilities in these
markets are yielding results. We have increased our wallet-share with
our top ten clients as well.
Apart from the traditional sectors such as banking, financial services
and telecom, our ongoing investments in verticals like energy, utilities,
pharma and healthcare are beginning to show results. This is evident
from the current wins listed for this quarter and we are optimistic about
these sectors spurring growth in the future as well.
Looking ahead we shall continue to excel operationally and work
closely with customers and stakeholders and help them experience
certainty.
I request Chandra to add a few words before Mahalingam, our CFO,
speaks. Thank you.
N. Chandrasekaran: Thank you, Ram. Overall, it has been a very happy quarter because we
have delivered growth and a good volume growth at 3.56%. The BFS
sector, in particular, and the US geography have shown signs of
stability and have given us growth.
We are extremely happy with the execution. The offshore revenue has
increased by 270 basis points. The gross margin is up by 20 basis
points and the operating margin is up by 113 basis points.
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We had good deal-closures; the eight deals we closed are well spread
out. From a market point of view, five of them came from the US and
from the sector point of view, two came from manufacturing, and the
remaining six, each came from each of six different verticals.
So I think we could not be happier, because when we started the
quarter, we were not thinking in terms of this level of volume growth in
the quarter.
Over to you, Maha.
S. Mahalingam: Thanks Chandra. As has been emphasized both by Ram and Chandra,
this has been a quarter of growth in revenue and a bigger growth in
margins at every level. We had lower costs in both the COR and
SG&A, a lower forex loss, and an increase interest dividend income.
So overall, we have delivered growth in revenue, EBITDA, operating
margin and net margin.
Let me start with the top line. The impact of each of the drivers is as
follows: Volume up by 3.54%, pricing down by 25 basis points,
exchange movement down by 24 basis points, effort mix down by
2.56%, so totally it is 0.49%.
As you know, even the negative ones are not all that negative.
Offshore shift, certainly of this magnitude, is a huge plus from the
margin perspective.
On the operating margin side, the breakup of 113 basis point
improvement is as follows: Currency minus 41 basis points, offshore
shift positive 95 basis points, rate productivity change negative 34
basis points, SG&A efficiencies positive 93 basis points, totaling 1.13%
improvement.
We tweaked the cost parameters using the levers that we have always
talked to you about. Through offshore shift and headcount
management we brought down the overall employee costs by another
65 basis points this quarter. Continued scrutiny of every expense item
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helped us bring down the non-employee SG&A costs by 101 basis
points.
Let me move on to currency, a topic which has an impact on our results
whether we hedge or do not hedge. There was currency volatility in Q1,
but our policy of full receivables hedging continues to protect us.
We did not take any new revenue hedges in Q1 and continue to wind
down those old hedges with limited upside participation of up to Rs. 41.
Out of the total $349 Million we had for FY10, $123 Million of hedges
matured in Q1 and $112 Million are maturing in Q2.
Forex loss for the quarter was Rs 841 Million, 57% lower than the last
quarter. Interest income was up 45% Q-on-Q with a yield of 7% and we
also have an income of Rs 471 Million from Mutual Fund redemption.
All this has resulted in the other income of positive Rs 194 Million this
quarter, compared to negative Rs 1.3 billion last quarter, expanding the
net income margin significantly by 278 basis points Q-on-Q to 21.11%.
EPS growth this quarter was 15.7%.
Lastly, we brought down our DSO by another two days this quarter.
Cash and liquid investments stood at Rs 61,249 Million.
In closing, our performance this quarter is a vindication of our approach
during the downturn, of continuing to invest in our business while
maintaining pricing discipline and improving internal efficiencies.
Customer proximity also helped us to benefit from the increase interest
in offshore outsourcing, while our cost management initiatives
delivered margin expansion all round.
And the resultant cost discipline is a sustainable one that should stand
us in good stead going forward, regardless of whether those now
famous “green shoots” are the real thing or just weeds. Thank you.
Kedar Shirali: Thank you, Maha. Melissa, we can open the lines for Q&A now.
Moderator: Thank you sir. Ladies and gentlemen, we will now begin with the
question and answer session. Anyone who wishes to ask a question
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may press * and 1 on their touchtone telephone. If you wish to remove
yourself from the question queue you may press * and 2. Participants
are requested to use only handsets while asking a question. Anyone
who has a question may press * and 1 at this time. The first question is
from the line of Moshe Katri from Cowen & Company. Please go
ahead.
Moshe Katri: Yeah, thanks, and congratulations on a very well executed quarter.
Can we get some additional details on volume growth, pricing trends,
maybe by vertical, some deeper details on that? And then deal
pipeline, deal funding – has that improved? And then it seems that the
BFSI vertical is resurging, maybe we can talk a bit about the nature of
the work and the pipeline? Thanks.
N. Chandrasekaran: Volume growth in terms of industries – primarily, the BFS sector has
shown some signs of stability and growth. We have seen that this
quarter and we hope that it will continue and hopefully there are no
shocks. And the other sectors which are doing well for us – Retail is
continuing to do well; Pharma, we are seeing growth opportunities and
volumes; as well as Utilities.
Then the three sectors which continue to worry us: Manufacturing,
Telecom, and Hi-tech. There can be surprises here. We are still
watching them carefully at this point in time. We are not confident with
any degree of certainty that they will grow or not grow.
In terms of spending, the discretionary spending is still not up. It is
more offshoring related. There are some discretionary projects
happening in some clients, so we have to still be watchful. We were not
hopeful of this kind of volume growth, 3.6% at the beginning of the
quarter and it got better. We were able to execute very well and
capture those opportunities. So we are watching it carefully, but very
difficult to say with any degree of certainty.
In terms of the deal pipeline it is good. We have closed eight deals and
we are happy about it because it is well spread out, we got a deal each
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in Retail, Hi-Tech, Media, Utilities, Pharma and couple of deals in
Manufacturing, so they have been good, all round wins.
Going forward, we are pursuing atleast 20 important large deals and
again the deal closures have to be carefully watched. They are well
spread out. There are deals in the US, there are deals in Europe, and
in the emerging markets.
As for pricing we have been saying that pricing pressure is still going to
be there. We maintained during the last analyst call, as well as at
meetings during the quarter, that pricing is going to be affecting growth
this year in lower single digits. We still stick to that statement.
Moshe Katri: And then, some more details on the nature of the work in financial
services – maybe break it down by Banking, Financial Services and
Insurance?
N. Chandrasekaran: Most of the work so far, has been in the Banking side and in the
Financial Services side. Insurance, I think, is still affected. Recovery
and stability in Insurance is yet to come.
In Banking and Financial Services, the nature of work is: offshoring
work, integration work and some BPO opportunities.
Moshe Katri: Thanks and nice quarter.
Moderator: Thank you, Mr. Katri. The next question is from the line of Julio
Quinteros from Goldman Sachs. Please go ahead.
Vincent Lin: Hi, thanks. This is actually Vincent Lin sitting for Julio. Just wanted to
get a sense on the volume growth. The 3% you posted this quarter
turned out to be better than your original expectations. Just wondering
– I know you do not provide official guidance - but looking out into the
September quarter and in the second half of 2009, should we expect
positive volume growth to continue, given that it seems like pricing
stability is better at least versus last quarter. Just in terms of the
volume growth, whether you can provide some more color in terms of
expectations into the second half this year?
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N. Chandrasekaran: As I said with regard to volume, we see the Banking sector stabilize
and there maybe some opportunities there. Retail sector and Pharma,
Utilities – those sectors are giving us comfort.
But as I said, three sectors – Manufacturing, Telecom and Hi-tech –
including our large telecom client, are showing declines. We do not
know how they will perform in Q2. These sectors are to be watched
very carefully. So at this point in time we cannot give any degree of
certainty in terms of volume growth as far as the second quarter is
concerned.
I think the best way to look at Q3 and Q4 would be to watch Q2 for
some kind of stability to return to these sectors, and then we will be
able to give a reasonable degree of comments on Q3 and Q4.
Vincent Lin: Got it. That is helpful. And then from a client perspective, it seems like
the contributions from top clients increased pretty meaningfully over the
last quarter especially the top account. Just wondering if you can
provide some specific commentary in terms of what actually drove the
increase and whether that is sustainable in the next couple of quarters?
N. Chandrasekaran: The top one client, top five and top ten have grown this quarter. The
top one client, in fact, has changed and that is what we expected. And
we think that, except for the top telecom client where we have some
issues, we have done reasonably well.
Vincent Lin: Any specific reasons, just in terms of kind of work that actually drove
the increase?
N. Chandrasekaran: I think the negative surprises that we had in the previous quarters have
been arrested. That is the only way I would put it. We started to see ramp ups in these clients. Albeit small, but we started to see ramp ups.
And previously, in last two quarters, when we had a lot of shocks and
surprises and decline in volumes, cancellation of projects, we had said
that we are going to watch out for those carefully for three months in a
row. And nothing happened to these clients. That was good news.
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Vincent Lin: Got it. And just lastly, coming back to the revenue growth, I think you
provided lot of details in terms of component on quarter over quarter
basis. I was just wondering if you can give us the data in terms of year
over year, what the constant currency organic growth would look like
for the June quarter? Thanks.
N. Chandrasekaran: Probably, Kedar can send you a mail on that. He is taking an action
item. We can give you those figures offline, but basically I think
business performance wise even year on year even if you exclude
[TCS eServe numbers] I think the performance has been satisfactory.
But he will give you the numbers.
Vincent Lin: Okay, great, thanks.
Moderator: Thank you, Mr. Lin. The next question is from the line of Diviya
Nagarajan from JM Financial. Please go ahead.
Diviya Nagarajan: Hi, congrats on a good quarter. Chandra, you spoke about volume
having surprised you somewhat, from what you had thought of it at the
beginning of the quarter. Can you throw some color on where exactly
the surprise came from: was it a specific set of clients or the specific
vertical that you saw the volumes surprise come from?
N. Chandrasekaran: Diviya, I want to correct you. I did not say I was surprised. I said that
we were not certain about committing a volume growth at the beginning
of the quarter because of the uncertainties that prevailed in the market
and whatever shocks could come.
We said we would have to watch for three months in a row to make
sure that we do not get a negative surprise from any client. And, we did
not get any unanticipated surprises.
The BFS sector started to show some [positive] signs and we started to
get some ramp-ups and bag some projects and that has been good.
I basically want to clarify it has not been achieved because of some
one-off positive surprise. There is no one, one-off positive surprise that
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has brought growth. It has been a good all-round performance,
incremental growth happening in several accounts across verticals.
Diviya Nagarajan: Right. That is helpful. And secondly I think somebody earlier also
asked about this – given that we did not have any positive surprises, is
it reasonable to assume that this is a definite return to positive growth
rates and the volume decline that we saw the last quarter is behind us
now?
N. Chandrasekaran: Ram has emphasized it in his opening speech. I want to reemphasize it
now: at this point in time, we still have to be cautious because as I said,
we would like to see some stability in Manufacturing, Telecom and Hi-
tech sectors. Until then, we will have to be very cautious.
Diviya Nagarajan: Right. I just have some book-keeping questions and will probably come
to that later. Thanks.
N. Chandrasekaran: I am optimistic but we are cautious.
Moderator: Thank you, Ms. Nagarajan. The next question is from the line of Ed
Caso from Wells Fargo Securities. Please go ahead.
Ed Caso: Good morning, good evening. My question is around your hiring trends
and expectations and how all the protectionist chatter in the US is
impacting all those moves. I know you are very successful in moving
work offshore and improving margins, but has that slowed some of
your efforts to hire local US employees?
Ajoy Mukherjee: As far as hiring is concerned, in this year what we have said is that we
had given offers to the campuses totaling about 24,885 and we will be
honouring our commitments that we have made and they would be
joining us during this particular year, in a staggered manner starting
from Q2 onwards.
Now as far as the US team is concerned, we had also said that for our
Cincinnati delivery center we would be hiring 250 from various
campuses within US. We have already given offers to about 111 and
close to 99 people have already accepted that offer. 38 of those have
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already joined us in Q1 itself. So we are on track and we are going as
per our plan. As far as the lateral hiring is concerned, that would go on
based on very customer-specific requirements only.
Ed Caso: Great. Thank you.
Moderator: Thank you, Mr. Caso. The next question is from the line of Rishi
Maheshwari of Enam Asset Management. Please go ahead.
Rishi Maheshwari: Hi, congratulations on a very nice quarter. For the last three quarters,
you have been maintaining that cautious approach towards macro
environment, you expressed your concerns with client-specific issues
and you still turned out a quarter which has been, by far, your best
quarter in your listed history. My question is, are we therefore looking
at similar caution ahead while the macro environment still looks not so
good and are we still racing ahead with similar growth rates?
N. Chandrasekaran: See, again, you are asking the same question in a different way. It is
very, very difficult to say.
The environment is still volatile and I have specifically mentioned
sectors where we still would like to see a lot of stability to come. There
are surprises possible and we have met with clients across
geographies, a good number of clients across geographies, of varying
sizes and it is a mixed bag.
So we have to be very, very watchful. With regard to our performance, I
think we are on a path of continuing to improve the operational
execution of a number of initiatives, which will continue to progress with
a lot of rigor.
Rishi Maheshwari: Chandra, do you notice this trend wherein during the time of crisis BFSI
was the first to hit and then following with a lag, there was
Manufacturing and Retail and others. So is it also a possibility that
BFSI is the first to recover and then with a lag, Manufacturing, Retail
and other verticals also recover?
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N. Chandrasekaran: I would also hope like you, but then there are theories like U, W, UUU,
L, about which I am not able to say anything. So at this point in time, I
think we are just going to be cautious. We are not going to say that a
particular pattern is going to emerge. It will be difficult, no one has
predicted it, so it is going to be very difficult.
Rishi Maheshwari: What would you comment on Google, IBM and Intel last week, all of
them reversing the trend towards a positive outlook for the future. In
light of that, can’t we benchmark for a better next nine months, every
quarter?
N. Chandrasekaran: We do not give guidance and our stand would be to be cautious and
you have seen what we have delivered this quarter. We have told you
that we had a good deal closures, we have told you the deal pipeline is
good.
Whether the ramp-ups will happen as per plan, will there be any
shocks etc, is still, at this point in time, unpredictable. So we have to be
still cautious in our view, and it is difficult to say anything more than
that.
Rishi Maheshwari: Sure. Thanks so much and all the best.
Moderator: Thank you, Mr. Maheshwari. The next question is from the line of Priya
Rohira from Enam Securities. Please go ahead.
Priya Rohira: Hi, good evening to the management and congratulations on very good
set of numbers. My first question relates to the comment on the fact
that discretionary spend at offshore location has seen an improvement.
Would it be possible for Chandra to highlight this more in the BFSI
space? Second, if you could share your experience in the decision-
making cycle which you are seeing currently in the large deals?
N. Chandrasekaran: I do not think I said that discretionary spend in the offshoring space has
increased. All I said was, the discretionary spend is still under
pressure, the discretionary projects are sporadic, that is exactly the
word we used ‘sporadic’ – we are seeing projects happening here and
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there. There is still not a very systematic pattern, where all customers
have started to open their tap in terms of discretionary spending.
BFSI space, as I said, the opportunities are more to do with more
offshoring, BPO, as well as a lot of integration work. Some of the
customers are spending money on integration work and we are well
placed to capture some of that and we are capturing those. I think
those are all the areas we are getting business.
Priya Rohira: And just on the decision-making cycle in the large deals, how has it
changed from the last quarter?
N. Chandrasekaran: I think we have articulated it in the last quarter, the same thing is
continuing. The difference between now and six months ago is that six
months ago, a lot of things happened and people were in a state of
shock, management teams were getting changed, customers were
thinking how to react.
But now everyone knows what the status is, they have all baselined,
they all have money to spend on whatever they have to spend and they
have cut whatever they had to cut, so the decision-making cycles are
more structured and more or less similar to the times before the crisis.
It is just that there are not too many projects on which decisions are to
be made.
Priya Rohira: Sure. And just a small question from my side: how do you see the
enterprise solutions space shaping up more towards H2? Do you think
that from the improvement in certain accounts, this would see an
uptrend from here?
N. Chandrasekaran: I think there will be opportunities in terms of upgrades and
opportunities in terms of consolidation into single instance - those are
the areas we are seeing opportunities in the enterprise solutions
[space].
Priya Rohira: Sure. Thanks very much and wish you all the best.
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Moderator: Thank you, Ms. Rohira. The next question is from the line of Anthony
Miller from TechMarketView. Please go ahead.
Anthony Miller: Hello, gentlemen, my question is on Europe, which just happens to be
in two parts. The first part is on Diligenta – if you can just bring us up to
speed as to when you hope the new consolidated Life and Pensions
platform will be complete and therefore you can start marketing it?
And secondly, a broader view on Continental Europe in particular. I
think you said you had eight new big deals, five in the US I was just
wondering whether any of the other big deals were in Europe and more
specifically with your new clients, I think you had 26 new client adds,
were any of those in Continental Europe? Are you seeing any increase
in ability to open new businesses in Continental Europe? Thanks a lot.
N. Chandrasekaran: In terms of the Diligenta platform, version one of the platform has
already gone live and is operational and a portion of the policies have
been migrated to the new platform and that platform is ready and we
are already starting to take that platform to the market.
But the second phase, which is a very critical phase, we expect it to be
fully live by the end of this fiscal year, where we will have a complete
set of functionality and rich set of functionalities and efficiencies going
live. But as I said, we are ready to take it to the market and in fact we
have started doing that.
In terms of the Continental Europe, yes, definitely one of the large
deals this quarter was in Continental Europe. We do see opportunities
in Continental Europe and it has grown even this quarter because of
the client wins we had in the earlier quarters, it is a very focused
market for us.
Anthony Miller: And so some of the new clients or some of those 26 are in continental
Europe?
N. Chandrasekaran: Some of those clients are also from Europe, yes.
Anthony Miller: Okay thanks very much.
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Moderator: Thank you Mr. Miller. The next question is from the line of Sandeep
Shah from ICICI Securities. Please go ahead.
Sandeep Shah: Yeah, congrats on the solid quarter. At this time, in terms of constant
currency, can you give us the pricing decline for this quarter?
S. Mahalingam: The pricing decline that we give is in constant currency because we
remove the exchange effect first and thereafter workout.
Sandeep Shah: So the 25 bps decline is the constant currency?
S. Mahalingam: That is right.
Sandeep Shah: Okay. And in terms of renegotiations on the pricing, you believe most
of the renegotiations are behind?
N. Chandrasekaran: That is something that will continue to happen so a good number has
been behind but we would not rule out further renegotiations. The
pricing pressure will continue we just have to carefully deal with it.
Sandeep Shah: Okay. And just last thing in term of the campus recruitment the
balance campus recruitment would be spread evenly across balance
three quarters or it maybe backended to the second half?
Ajoy Mukherjee: It will be staggered over the next three quarters that is the way we will
be doing that and yeah some of them will join definitely in Q2 but
majority will be in Q3 and Q4.
Sandeep Shah: Okay, thanks and all the best.
Moderator: Thank you Mr. Shah. The next question is from the line of Joseph
Foresi from Janney Montgomery Scott. Please go ahead.
Jeff Rosati: Hi this is Jeff Rosati for Joe Foresi. Most of my questions have been
answered, I just want to see if you can comment on the demand that
you saw in the emerging markets, specifically China and how is that
progressing?
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N. Chandrasekaran: Our presence in China is a very important one strategically but in
terms of the difference it makes in the numbers in short term, it is
pretty small. We continue to focus on this market, but I think it will be a
few more quarters before we can talk about substantial incremental
revenues from this market making a difference.
At this point in time, we delivered a very very complex project called
the CFETS which is the foreign exchange trading system with 18 to 20
different instruments, a very complex system in Shanghai, a very
prestigious project in China that went live during the quarter.
So we are building credibility, we are establishing our delivery
capability to be able to do complex projects in China. That is going
well, but in terms of material difference in numbers it is going to be
some time.
Jeff Rosati: Okay. Thank you very much and congratulations on the quarter.
N. Chandrasekaran: Thank you.
Moderator: Thank you Mr. Rosati. The next question is from the line of George
Price from Stifel Nicolaus. Please go ahead.
George Price: Thanks very much. What was the Citi revenue impact in the quarter,
do you have a revenue number from Citi?
N. Chandrasekaran: We do not give specific client numbers but basically, the Citi BPO was
there last quarter also, so last quarter to this quarter there is no
substantial increase because of the BPO addition.
George Price: But it still has an added effect year over year right?
N. Chandrasekaran: Yes.
George Price: Okay and I will follow up on that. Second question is in terms of I want
to get your thoughts I guess on investing in the current downturn. I
mean what do you see as the key areas, the key things to invest in
now to position TCS to capture growth when the macro environment
rebounds? You talked about investing in the business but SG&A was
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down a little bit at least on Dollar basis quarter-over-quarter, what
areas are you investing and how should we expect to kind of see that
flow through the numbers?
N. Chandrasekaran: I think we have talked about it and that is something that we have
done quite well. If you really look at the investments that we have
made in the emerging markets, it is not that it is just this month – the
last few quarters, last few years, we have created an excellent
footprint in emerging markets from a geography perspective whether it
is Latin America, parts of Eastern Europe, Middle East and Africa and
China. These are markets in which we have invested heavily in the
last few years.
When I say invested, we have done the ground work in terms of
setting up the local offices, setting up the local delivery capability,
recruiting local people, training them, and getting the key clients. I
think we have done all the hard work I think that is something that we
have to leverage and we will continue to invest.
In terms of domain, we are investing in Healthcare and Pharma
definitely, we are looking at the Government sector, and we are also
creating lot of frameworks and reusable components and products in
multiple domains.
We have invested in platform BPO and the platform BPO offering is
gaining a lot of traction. Today, we are still in investment mode but we
have four to five pilot customers who have signed up. We expect that
as the economy picks up, whether it is our platform in the HRO or in
the F&A or in some of the other areas that we are investing now, will
all play out very very well.
And then from the Indian market point of view we have also invested
in small and medium business. We have been doing it for the last four
quarters, those investments will pay off as we complete the pilots and
we are working with a set of pilot customers and it is going very well.
So I think there are a number of initiatives where we investing and we
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are continuing to invest which are going to keep us in good stead
when the economy returns.
George Price: Last thing if I could, US versus Europe, from a discretionary demand
perspective in particular, as granular as you can get, where do you
think Europe is, in relation to the US in the cycle and how much longer
do you think it will take European spending particularly on the
discretionary side to recover?
N. Chandrasekaran: Actually I will answer your question in part, I cannot answer it in full.
Definitely, the discretionary spend is sporadic. It has still not opened
up across the board. Definitely, US is ahead of the curve and Europe
will definitely be behind and I cannot answer how long it will take.
George Price: Alright, fair enough. Thank you.
Moderator: Thank you Mr. Price. The next question is from the line of Pankaj
Kapoor of RBS. Please go ahead.
Pankaj Kapoor: Yeah hi sir, just want to understand on the volume growth that we
reported in this quarter, was there any impact because of the increase
in the billing cycle?
N. Chandrasekaran: No absolutely none.
Pankaj Kapoor: Okay. So this was primarily led by whatever billing you have done?
N. Chandrasekaran: It is all like to like, absolutely like-to-like. There is no, let me say it
clearly, there is no one-off kind of effect of any kind, not only on the
revenue lines but also on any other margin lines.
Pankaj Kapoor: Sure sir, thank you.
Moderator: Thank you Mr. Kapoor. The next question is from the line of David
Naughton from Nevsky Capital. Please go ahead.
David Naughton: Hi there, just had a question about the tax rate. Tax was a little bit low
than expected for this quarter. I was wondering, is that representative
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of the remainder of the year? Is there anything particular about this
quarter that drove out lower tax rate? Thanks.
S. Mahalingam: No, tax rate actually has gone up in this quarter, but the last quarter
we had an additional tax debit coming from one of the overseas
jurisdictions and that is why you know our tax rate last quarter was
14.68% and whereas actually it was 12.40% if I remove that
extraordinary item. So from 12.40%, it has moved to 14.68% this
quarter.
David Naughton: And is 14.68% representative of the fiscal 2010 year or not?
S. Mahalingam: Earlier we had said that it is going to be much more than that, but
given the limited number of STPI that have gone out, we think that it is
probably going to be somewhere around the 17% mark, not much
more than that.
David Naughton: Okay thank you.
Moderator: Thank you Mr. Naughton. The next question is from the line of Yogesh
Agarwal from HSBC Securities. Please go ahead.
Yogesh Agarwal: Yeah hi, I just have a couple of questions, if I may. Firstly, I reckon the
next year probably will be a big upgrade cycle for the PC market after
2004-05. Will that really impact your hi-tech clients and as well as
overall spending on IT? And secondly, in the telecom market also, I
understand the next big upgrade cycle will probably be after 2012
whether it is 4G in US or the next generation access in Europe. So in
the mean time for the next couple of years, do you think the spending
by the telecom market will remain muted?
N. Chandrasekaran: I think on the hi-tech one, we need to wait and see. Overall, the
economy should show some recovery first for the hi-tech industry to
pick up. Until then, the hi-tech industry is going to be fluctuating a little
bit is my assessment at this point, but we cannot say with any
certainty.
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With regard to the telco segment I think you know there are
opportunities in the telco segment more in the System Integration and
Outsourcing kind of opportunities in the developing markets. In the
near term, it maybe fair to say that the opportunities in the established
market telcos can be muted.
Yogesh Agarwal: Just another one, at the risk of sounding naïve, how different is the
continental European market compared to the Japanese market,
because I believe the culture and the language issues are almost the
same. How would the traction in continental Europe be much better
than in Japan? Thanks.
N. Chandrasekaran: Continental Europe is much more ahead in the maturity curve on
offshoring than Japan, much more ahead. And we have a lot of proof
points. We have many clients, a good number of clients doing work in
India, doing work with us. There are multiple scales of clients, different
service offerings and so they are not comparable. Definitely,
continental Europe is much ahead. It is just that the some of the labor
laws and restructuring make it a little difficult for clients to pursue
offshoring with more vigor in continental Europe.
Yogesh Agarwal: Perfect. Thank you, gentlemen.
Moderator: Thank you Mr. Agarwal. The next question is from the line of Ashwin
Mehta of Motilal Oswal Securities Limited. Please go ahead.
Ashwin Mehta: Congratulations on a good set of numbers. I had one question on our
domestic business which seems to have grown pretty well this quarter,
contributing almost 35% of our incremental growth. In what verticals
would our growth have come from?
N. Chandrasekaran: See the domestic business growth comes from Government as well as
Banking.
Ashwin Mehta: Okay. And another thing in terms of margins, we have seen almost a
Rs 160 Crore decline over the last two quarters in our employee costs.
Do we see further possibilities of either cost rationalization there or
actually employee rationalizations there?
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N. Chandrasekaran: Neither. The primary reduction you see in that expense is due to a
significant push in the offshoring drive. Considering that we have
achieved in the last three quarter a significant movement, to expect
that [same] level of movement is unrealistic. So you have to give us
some relief there.
Ashwin Mehta: Just one more thing: in terms of our involuntary attrition what was the
number this quarter?
N. Chandrasekaran: Involuntary attrition is something that goes on throughout the year
based on the performance and it is not something that happens on a
quarterly basis. As we said last time, it is close to about 1000 to 1100
in a year so that is a very insignificant number.
S. Ramadorai: …on a base of 143000…..
Vihang Naik: Okay. This is Vihang I just had another question, I heard you mention
that your top client has changed in the current quarter, did I get it
right?
N. Chandrasekaran: Yes, you got it right.
Vihang Naik: Could you, just for the sake of comparison, give us the contribution
from this particular client in 4Q?
N. Chandrasekaran: It is very marginal. I think I would say that 4Q to now will be, a few
single digit basis point difference. This quarter will be higher.
Vihang Naik: So you are saying that there would not be much of a difference in 4Q
and 1Q.
N. Chandrasekaran: Absolutely, it is a growth, but it is growth in terms of a few basis
points.
Vihang Naik: Okay, thanks.
N. Chandrasekaran: Few basis points increase this quarter.
Vihang Naik: Okay thanks.
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Moderator: Thank you. The next question is from the line of Tarun Sisodia from
Anand Rathi Financial Services. Please go ahead.
Tarun Sisodia: Yeah, my first question is regarding the actual performance versus
internal estimation. How would you rate this performance versus your
expectation?
S. Ramadorai: I have already said that we could not have been happier.
Tarun Sisodia: And secondly related to the clients, you have a lot of clients who were
affected by a lot of this economic downturn conditions both in
Transportation as well as in BFSI segment. Are you seeing some
better traction in those set of clients to which you had exposure?
N. Chandrasekaran: Yeah in the BFSI sector, some of the clients are showing better
recovery - some sort of a stability, still not recovery. In terms of
Manufacturing and other sectors, yet there were concerns we still
cannot say with any degree of certainty.
Tarun Sisodia: And with regards to the new client involvement and within the existing
clients when you are going for new projects, what kind of reactions are
there? Are they more inclined now, compared to say four months
back, receptive or whichever way you want to look at it?
N. Chandrasekaran: Especially if there is an opportunity, yes, they are more receptive.
Tarun Sisodia: So you would think, in the last four months things have turned a little
bit more positive?
N. Chandrasekaran: [Laughs] Maybe in specific situations. Overall, we cannot give a very
comforting, confident answer on that question.
S. Ramadorai: Some times its positive and other times it is negative, it varies.
Tarun Sisodia: Thank you very much.
Moderator: Thank you Mr. Sisodia. The next question is from the line of Dipen
Shah from Kotak Securities. Please go ahead.
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Dipen Shah: Yeah, congrats to the team on a very good set of numbers. Most of
the questions have been answered. Just one thing on a book keeping
question, can we have some breakup in terms of utilization of onsite
and offshore employees?
Ajoy Mukherjee: The overall utilization excluding trainees is 79.2% and the utilization
including trainees is at 71.3%. So these are the two utilization
numbers that we have been giving all along and these are the
numbers as of this quarter.
Dipen Shah: Okay, fair enough, thank you very much and all the best.
Moderator: Thank you Mr. Shah. The next question is from the line of Pinku
Pappan from Nomura. Please go ahead.
Pinku Pappan: Yeah, thanks for taking my question. Just two follow-up questions: on
the India business, do you expect the growth to continue strongly in
the next three quarters?
N. Chandrasekaran: See our India business, we have always said will be volatile, because
we do not have annuity contracts of any substantial size in India
market or APAC market or emerging markets. We still have a
significant amount of project work, so the India business in general will
be volatile and we should be prepared for that.
Pinku Pappan: Okay. Could you tell me the constant currency growth in US, quarter-
on-quarter?
S. Mahalingam: Constant currency growth, no we are not releasing that number, so I
cannot give you right now.
Pinku Pappan: Alright. And just a last question on compensation – have you changed
anything, I mean for the rest of the year about promotions and pay
hikes, could you just elaborate?
Ajoy Mukherjee: See as far as compensation is concerned now, there will be no
increments, and we are sticking to that, as far as this year is
concerned. Promotions are something we will be going ahead with.
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That is what we have announced for this year, we will be going ahead
with the promotions.
Pinku Pappan: Okay.
Ajoy Mukherjee: And the variable pay that we are paying in full for this particular
quarter. These are the announcements that we made today.
Pinku Pappan: Alright.
S. Mahalingam: And just to answer your previous question, it was a 1.5% increase in
constant currency.
Pinku Pappan: 1.5%, right okay. One final question, so were you saying earlier that
you have reached a limit on the offshore revenue mix at 50.4%?
N. Chandrasekaran: I was not saying any limit or anything, all I was saying is that: do not
factor in such a pace, because the pace with which we have increased
the offshore movement over the last three quarters has been pretty
high. So that is a pace that we cannot sustain.
As a principle that is a core to our business model, we will continue to
focus on offshore movement, continue to leverage our global delivery
capability to ensure that the clients get the best value and we execute
extremely well.
But you should not anticipate that because we moved 270 basis
points, it is going to be repeated. I was just setting the expectation for
you.
Pinku Pappan: And lastly one housekeeping question, equipment and software
licenses, is it a one-off thing this quarter.
N. Chandrasekaran: Again, it is also connected with some of the System Integration
projects and the India business that we do. That will be volatile. Yes it
has gone up slightly this quarter.
Pinku Pappan: Alright, yeah thanks a lot and congrats for a great quarter.
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Moderator: Thank you Mr. Pappan. The next question is from the line of Diviya
Nagarajan from JM Financial. Please go ahead.
Diviya Nagarajan: Maha, I heard you talk about tax rates. Am I correct in saying that 17%
is the tax rate you are looking at for the rest of the year?
S. Mahalingam: Yes, that is the rate we looking at for this year.
Diviya Nagarajan: And why would this increase in tax rate come about in specific?
S. Mahalingam: You know it is really in terms of expansion in some of these STPI units
which have come out, nothing else.
Diviya Nagarajan: And what is your outlook for FY2011?
S. Mahalingam: FY2011 does not change.
Diviya Nagarajan: You are looking at 20%.
S. Mahalingam: No, as I said it will be about 17%.
Diviya Nagarajan: And Ajoy, just one question: you mentioned that fresher addition
would probably come in bunched up in the second half, so could you
give us a sense of what kind of gross additions you are looking at in
Q2 from the fresher aspect?
Ajoy Mukherjee: As far as Q2 is concerned, what I said was some of the freshers that
we had offered they would be joining in this particular quarter. The
lateral hiring that we would be doing would be very much controlled
and would be customer specific as far as the this quarter is
concerned. The remaining freshers would join in Q3 and Q4 staggered
over those two quarters.
Diviya Nagarajan: Right. Any numbers if you give us on the fresher additions plan next
quarter?
Ajoy Mukherjee: In this particular quarter?
Diviya Nagarajan: Yeah.
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Ajoy Mukherjee: At this stage, I would say somewhere around 800 to 1000 is the
number that we are looking at as far as Q2 is concerned.
Diviya Nagarajan: Right. And lastly, on the variable salary, when you said this quarter we
are paying out the full variable, it means for 2Q right? Not for 1Q?
Ajoy Mukherjee: No, it is for 1Q performance. As you know we give the variable in two
components, one is monthly and the other one is based on overall
complete performance that is the quarterly component. So what I
mean is the quarterly component is being paid out.
N. Chandrasekaran: So the 1Q numbers that you see, it already includes the variable pay
that we have paid to the employees.
Diviya Nagarajan: Alright, thank you so much.
Moderator: Thank you Ms. Nagarajan. The next question is from the line of
Sandeep Shah from ICICI Securities. Please go ahead.
Sandeep Shah: Yeah sir in terms of some of the troubled verticals which you have
mentioned, these three verticals like Telecom, Manufacturing, and the
Hi-tech over the last three quarters has been declining sequentially.
So what you are indicating is whether the bottom has been reached or
no, the bottom may not be reached and there is a possibility of further
decline?
N. Chandrasekaran: Yes. You are interpreting me correctly.
Sandeep Shah: So in the sense the bottom has reached?
N. Chandrasekaran: No, I cannot say whether bottom has reached or not.
Sandeep Shah: There could be an expectation of a further negative surprise going
forward?
N. Chandrasekaran: Yeah, at this point we are uncertain, we cannot say, we are watching it
carefully.
Sandeep Shah: Okay.
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S. Ramodorai: I made it is my opening remarks saying that the environment has to be
watched closely and there can be surprises.
Sandeep Shah: Okay, thanks.
Moderator: Thank you Mr. Shah. The next question is from the line of Anurag
Purohit of Religare. Please go ahead.
Anurag Purohit: Good evening gentleman, and congratulation on good numbers. If you
look at the number of active clients, it has declined quarter-on-quarter
in this quarter despite 26 new clients adding into the company. And
also the revenue growth from your rest of the top 10 clients has been
muted in the quarter if you combine these two, could you elaborate
more on that?
N. Chandrasekaran: There is nothing much to read into the decline in the number of active
clients, primarily because some of the clients we have are clients for
single projects. When those projects are over, then they cease to be
clients because there won’t be any revenues from them.
What typically happens is that when companies spend discretionary
funding in terms of projects, even if some clients go, some new clients
come. So, one-off project clients there can be a decline. So it is a
phase and I do not think that there’s anything to be read in that. We
have not lost any of our annuity clients, we have not lost any of the
clients who give us a considerable business, so nothing to read there.
In terms of the top clients, I think the metric is pretty good. Top one
client, the group of top five, the group of top ten, all have grown, it is a
very good indication in this market, because that is where you see
surprises and that is where we can sense stability. So we see stability
in most of those clients, and that is good news, actually.
Anurag Purohit: Okay. And also would it be fair enough to assume that the utilization
including trainees would further go down in coming quarters as
trainees come into the system?
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N. Chandrasekaran: It depends on the volume growth, but we will factor in a slight decline,
yes.
Anurag Purohit: Right. Thank you and all the best.
Moderator: Thank you Mr. Purohit. Ladies and gentleman, we will be taking one
last question from the line of Shraddha Agarwal from B&K Securities.
Please go ahead.
Shraddha Agarwal: Hello sir, good evening. In the previous two to three months the TCS
management has sounded confident of maintaining organic revenue
for FY2010, so does that confidence still hold or do you see some
positive or negative surprises coming over in the remaining quarters of
the year?
N. Chandrasekaran: We do not give guidance first of all, but we have been saying that we
are looking to see a flat year organically and that is what we are
looking at, at this point in time. But nothing more qualifying comments
can be added.
Shraddha Agarwal: Sure sir. That was helpful, sir thank you.
Modertor: Thank you Ms. Agarwal. I would now like to hand the floor back to Mr.
Shirali for closing comments. Please go ahead sir.
Kedar Shirali: Thanks Melissa, I request Mr. Ramadorai to make some closing
remarks for the night.
S. Ramadorai: Thank you every one, for participating in this call. Like I said in the
beginning, it has been an exceptionally good quarter in terms of
performance across all parameters. And it has come out of operation
excellence and efficiencies that have been brought out, focus on the
customers and the caution which I expressed with regard to [being]
watchful of the situation and the fact that one would not rule out some
surprises.
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But overall, I think the investments we have made for the future and
the kind of the domain competencies we are building should play out
well in the long run. Thank you.
Moderator: Thank you gentleman of the management. Ladies and gentlemen
thank you for choosing the Chorus Call Conferencing Facility. Thank
you for your participation and you may now disconnect your lines.
Thank you.
Note: This transcript has been edited to improve readability