Rajesh Gopinathan, chief financial officer and vice-president of Tata Consultancy Services (TCS), India’s largest information technology services provider, has big shoes to fill. Gopinathan, who took over from S Mahalingam two months ago, says he is comfortable with his new responsibility. In an interview with Shivani Shinde, he talks about his role and the constant demand by investors and analysts to maintain high margins. Excerpts:
You took over from S Mahalingam, who had created TCS’ finance department. Is there a lot of apprehension and pressure?
Maha is like an institution. He is on a different level and, therefore, there is no question of comparing myself. That, in itself, gives me a lot of space. Surprisingly, very few people asked me about my role, especially among investors. But I have to admit it’s an unbelievable and indescribable feeling. The transition into this role has been taking place through a few months; it started with meeting analysts during various road shows.
On a day-to-day basis, work is pretty well-oiled. We have a very tight team of about 400 people, including shared services.
One of the challenges for TCS, as well as the industry, is maintaining high margins. Considering the new visa regulation (that might be implemented), the strengthening rupee and the constant wage rises, how feasible is this for TCS?
Let’s keep the immigration bill aside; let it crystallise. Besides, it has a lot of implementations. As long as the rupee is Rs 48-55/dollar, we are comfortable. We said any excess gain from the rupee’s movement was being invested back into the business. These calls are taken over multiple quarters --- going into new service lines or picking certain deals that have a certain margin trajectory.
But once we take the deal, there is no turning back. So, if the rupee moves fast, we might go slowly on such deals. From a business-model perspective, the scenario in which the rupee strengthens would probably, be one by which developed markets would recover. If that happens, if these are our high-margin markets and if there is demand, I can calibrate.
What would your key challenges be?
Opportunities, challenges and success are integrated. The reason why we are doing well right now is we have a diversified portfolio. We have been fairly entrepreneurial, to the extent that people in TCS are given enough headroom to do what they do. This has resulted in the conglomeration of various units. We then work towards integrating these tightly.
That is why our model is robust and we have done well in this environment. We have the right mix of multiple businesses that fire at different points. I think that’s the only way we will grow.
The challenge is it’s an ongoing process and you cannot take your eyes off it. Growth will come from multiple sources. There are many opportunities in the world and you would have to go in multiple directions, not be afraid of it. Some would come with low margins, some high; we would have to figure how to balance these.
For TCS, managing its cost structure is crucial for healthy margins. But attrition is down and the joining ratio is rising. Assuming the macro economy doesn’t change much, would your cost structure be impacted?
I think low attrition is essential for our business. The majority of attrition is always seen in the case of billable jobs. When a person on a billable job leaves, you lose two to three weeks of productivity. Irrespective of that, there is a notice period. When you reduce attrition, you reduce the overlap of time lost due to knowledge transfer.
You can manage your utilisation better. If your attrition is high, you have to maintain a stronger bench. If your attrition is low, your ability to move the person above on the billable rank is faster. Along with this, you need a system that weeds absolutely low-performing people at the lower side of the pyramid. Low attrition, with lack of growth, is a concern.
Do you think TCS’ hedging strategy has to change?
I think we are stable with our strategy --- about a quarter to a quarter-and-a-half rolling basis; receivables are fully hedged. As of now, we have hedged about $1.5 billion on the revenue side and an equal amount is hedged on the receivables side.
Acquisitions seem to be on the company’s radar. How significant are these for TCS?
We are fairly comfortable in terms of cash. That is one of the reasons why we continue to carry cash on our books. But we are fairly conservative about acquisitions --- these should either give us incremental capability such as the Citi acquisition, or market access, as was the case in Latin America and now in France. Within that space, we look for conservatively managed companies and management teams that have a history of operating in a manner similar to ours --- a steady focus on metrics.
If you look at the current acquisition, in the context of the market in which it operates, it is conservatively managed and has beautiful financials --- high and steady single-digit operating margins over a period, even in a scenario of low growth. It also hires from campuses and has good retention metrics.
We are inundated with such opportunities. But since we have these criteria, the right candidates are hard to come by.
With focus on non-linear growth, how are the company’s research and development (R&D) spends increasing?
So far, we would only report spends in labs, declared R&D labs according to the DSIR certification, as research and development spends. But in last year’s annual report, we expanded the definition of R&D. This is because all the work going on in the non-linear segment does not happen in labs, but is embedded into business units. So far, we didn’t pull this out and report it.
To understand the expenditure better, we must pull this out and report it separately; we will start sharing this number. Though there is a lot of activity going on in the nature of R&D, many do not fall within the government’s definition. A lot of patent-filing is happening within our business unit, etc. None of this investment is captured in R&D. So, we have to look into this.