How should TCS investors interpret FY22 given that the denominator and the base effect would be at play? What is the real normal for the industry now?
Rajesh Gopinathan: The way to think about FY22 is to see it in the context of FY21. Definitely, the low base of FY21 provides support for FY22. However, what is more encouraging is the strong exit that we have seen. As you know we are coming off the trajectory of 4% plus QoQ growth for the last three quarters, so the exit gives a very strong confidence. But most importantly, it is also about the nature of demand that is shaping up and the move into what we call the growth and transformation agenda that is causing us a lot of excitement as we look forward beyond FY22 into the new opportunities that we are participating in.
You have specifically mentioned that a new IT architecture is getting created, centred around solutioning and cloud. Do you feel that this factor would be at play for three to five years?
Rajesh Gopinathan: That’s difficult to say. Let me give it to you from the context of TCS. We believe that there are two demand drivers at play here. One is on the technology side, where we have spoken about the shift to cloud and large scale technology re-architecture that is in progress. It is a medium-term opportunity and will provide demand visibility and sustenance for the next few years. But we are also very excited about the second leg of this demand which is the culmination of lot of investments that we have been making and the journey that we have started off now into what we call the growth and transformation agenda of our clients. We are at very early stages of it and we are taking on fairly well-established incumbency there. As we steadily increase our presence, it will provide a multi-year road map on transformation for us also as a company.
What are the challenges in FY22?
NG Subramaniam: The traditional services, whether it is outsourcing or large deals, are at play and TCS has mastered them. Our market share continues to grow. But then everybody is working on traditional opportunities. There is an opportunity to participate in the upstream work that our customers are looking for as they try to expand their portfolio or penetrate new market opportunities. In such upstream engagements, it is required to anticipate such needs, bring everything to the fore and then lead the journey for our customers. Our contextual mastership, domain knowledge, cloud expertise, artificial intelligence, etc are very crucial. Being a software engineer at heart, it is like starting my career all over again.
What is the reason behind the jump in margins?
V Ramakrishnan: I think it is a combination of several things. When you have growth, you have more levers to operate as far as margins are concerned. When we had muted growth, margins were under pressure. Some expenses which are perhaps not there now will come back when things become normal. But that is a smaller percentage of our overall cost structure. The third reason is that our utilisation and leveraging has been on a good curve.
Last year was a tough one for global growth and TCS managed to grow. You were able to reboot your business, this year global growth would be much better, especially in Europe and US. How will that translate back into real growth?
Rajesh Gopinathan: I think that would definitely provide us support and demand visibility. As you look at our deal pipeline, you will find that there is a steady increase in the North America slice of business and we are seeing growth coming across multiple geographies and multiple verticals. So there is a broad based growth momentum which will provide support in the short to medium term.
Who currently has the pricing power: TCS or your customers?
NG Subramaniam: In traditional opportunities, pricing pressure is always going to be there. Optimisation is going to be at play and it is going to be compounded by the fact that there are a lot of automation and artificial intelligence based self healing things. But on the newer opportunities side, pricing power is with players like TCS and that is going to be price resilient at least for the medium term.
TCS has been rewarding shareholders with buybacks and dividends. Now that growth has made a comeback, do you expect any change in that policy? Will shareholders get slightly higher rewards?
V Ramakrishnan: We have been consistent in our policy of distributing 80-100% of our free cash flow unless there is some specific requirement like an acquisition, for example. The mode of distribution will be a combination of dividends and buybacks. If something is on the horizon, we may have a different strategy. We have been consistent with this policy over the years and I do not see us moving away from that. I do not think increasing it at this point of time is advisable, but that it is the board’s decision.
Will you stick to buybacks and dividends to reward shareholders even though they are not the most tax efficient instruments?
V Ramakrishnan: You cannot satisfy all stakeholders in every decision. So you will have to optimise. Dividends are now taxed in the hands of the shareholders. On buyback, different classes of shareholders have different views. So have to optimise this and make sure that we are able to do what is best possible under the circumstances. You will have to take into account the current situation not just from a taxation perspective but from other aspects as well. I think the differences which you are alluding to are very marginal. It is not a huge difference.
