What has the Covid crisis done to IT services that things have taken a complete 180-degree turn?
Rajesh Gopinathan: In many ways things have not changed compared to the commentary that we gave at the end of March, early April or even what we reiterated in July.
In March, you were cautiously optimistic but now you are bullish. There is growth across all sectors, all markets are growing, everything is firing on full cylinders!
Rajesh Gopinathan: When we spoke at the beginning of April, we believed that technology would be a solution to businesses facing the crisis that was unfolding all around us. But our immediate imperative was to ensure the security and well being of our own employees and to ensure that our operating model was quickly reconfigured to enable us to scale securely in this new SBWS (secure borderless workplace) environment.
We fundamentally believe that technology will be a solution and therefore there will be even more relevance of our services to our customers. And we were confident about our ability to switch to the new operating model and that was what was underlying the commentary that we had given earlier on that in about six months time or end of Q3, we should be looking at coming back to parity and from a cost structure and margin perspective, by end of Q4 we should be looking at parity. What has changed during the course of the last six months is that we have been able to execute on the operational resiliency programme that NGS laid out; secondly, we have been able to participate significantly in this technology-led transformation that is at the heart of our customers response to the Covid crisis.
So the first quarter was about our internal resiliency. the second quarter has been about participating in the customer side. Both of these were underlying our original commentary on how we saw the way forward. Today we are a lot more confident because both legs have been executed and it is with that confidence that we are giving you our comments.
Would you like to describe the word confidence in any numeric numbers apart from sharing the order book number?
Rajesh Gopinathan: No. I will stay away from putting any new numbers compared to what we have already shared yesterday in our earnings release. But I will be happy to discuss qualitatively anything around those numbers and drill down a bit.
When a company the size of TCS uses words like a multi-year cycle has got unleashed and the architecture is moving towards cloud, that is a very powerful statement. What are you trying to communicate here?
NG Subramaniam: What we are seeing is an urgency to accelerate the digital transformation on all fronts. Three priorities – first one is resiliency of your IT landscape; the second one is their own internal employee experience, can they continue to operate remotely and safely and then contribute even more productively? The third one is customer experience, how can we continue to be wherever our customers want to do business and how their experience can be touchless, contactless while providing all the accessibility options for different segments if possible.
If you put these three things together, then the migration to the cloud becomes very important. The intent is to move to a hyperscale platform with agility, resilience, adaptability, flexibility and all those things. There was no value assigned to all these attributes in the overall business case in the earlier situations. In the current context, they provide significant value and there is clearly an urgency to say that look I am going to move to that kind of an architecture which is much more modern, much more futuristic, which means that when you go an invest in this and it is not going to be a simple hop on and hop off once you move in there.
“It is not the metric by itself that we are chasing. We have always said that our confidence on margin comes from the business model and our approach to it.”
It is going to be irreversible and you got to continue with that journey for three to five years where you will pretty much become a native and will embed your businesses into that technology by which you will extend your organisational capabilities with the ecosystem concept and bring in a lot more credibility to the business you do business with your customers. That is the multi-year transformation that we are seeing.
What you are telling us is that you are confident that the trend that you have reported, observed and shared is here for the next five to seven years?
NG Subramaniam: Absolutely. In a technology, anything more than three to five is very difficult to call out but we are very confident about three years because it is something we have visibility to. But in digital technology, the speed with which innovation comes, the speed with which newer possibilities and newer products come, is incredible. It is nothing compared to what we have seen in the earlier days where you had stability for a few years. Given that, I think 3-5 years is a reasonable bet to make. But within that three to five years, there are going to be a lot more newer ways of doing business, of reaching out to customers which is going to emerge.
Will I be right in saying that FY21 minus the Covid crisis could have been a double digit growth year for Indian IT sector?
Rajesh Gopinathan: Not necessarily. As we have discussed in the past, that technology has existed and there is widespread belief that is the right technology stack to go to. The customer balance sheets were also in a good place and so there was the technology imperative as well as the investible capacity. What was missing was a business trigger and I had shared that it is very difficult to know what that business trigger would be. Maybe a few of the leading companies will adopt it and then the competitive pressure will push others to do so.
Covid has provided a business trigger and I am not sure whether in the absence of Covid, this adoption would have been at the same speed. It is unfortunate that the trigger happened in such a negative way but the trigger for the shift has kicked in. That is the way to understand what is going on.
You are considering a buyback at a premium to market price when the stock is at an all-time high and PE multiple is at a five-year high. What has prompted you to do that?
Rajesh Gopinathan: The route that we have taken is proportionate distribution using a tender mechanism. The pricing per se is not a very big determinant because it is unlike an open market transaction. This is a proportionate distribution. There are emotional elements associated with it and we have been maintaining a fairly stable premium that we are giving to the undisturbed price before the announcement. If you look at it, this premium compared to the undisturbed price before we made the stock exchange notice is in the same range that we have provided in the past two instances when we have done buybacks. The price per se should be neutral like a price of a rights issue.
Work at home for IT companies is the new normal. Are these one-time cost benefits which have kicked in permanent in nature? Is this going to add up to your bottom line and margins now?
We are not even looking at some of those parameters. What we are looking at is employees’ safety and how do we continue to make sure that they are able to deliver securely and in a robust manner so that things are managed well and our delivery excellence portion does not drop when we really work in a remote way. So our focus on location independence, our focus is on collaboration. In the last three months,we have upped our quotient on delivery guidelines for delivering through secured, borderless workspaces. Then how do we enable a delivery centre stage so that at any point in time, delivery managers can come together instantly and help each other out if there is a contingency that needs to be resolved or a new design that needs to be validated. There are multiple things that we have done to make sure that this particular thing is loved by everyone.
We are seeing that people love the flexibility that they have. I was talking to one of the employees the other day and he was saying that this conference room crap has completely gone away and the collaboration meetings are a lot more democratic and they are able to decide and deliver things faster. They are able to incrementally innovate, multiple elements and levers of productivity which is there. We are completely focussed on making sure that it is working superbly and people are able to deliver productivity with a lot of pride.
Since this is a big reboot in the technology space. will there be a reboot in your margin band as well?
Rajesh Gopinathan: Our operating philosophy has been to maintain stable margins. We are very systemic about trying to manage within that range which I think is beneficial to all stakeholders; customers, our employees and our investors. I do not think our target margin band changes based on what we are seeing.
What is stopping? The commentary is much more bullish than I have heard in a long time. Is it not time to execute something different there?
Rajesh Gopinathan: It is not the metric by itself that we are chasing. We have always said that our confidence on margin comes from the business model and our approach to it. Short term volatility will have its own impact and it is more of a philosophical thing. There is no right margin to operate at, it is relative competitiveness and the aspiration that you have. It is a fair and achievable and sustainable band and that continues to be our guiding principle.