Thursday, September 11, 2014

Why TCS is betting again on Chandrasekaran

 Why TCS is betting again on Chandrasekaran


Mumbai: When N. Chandrasekaran was named chief executive officer (CEO) and managing director (MD) of Tata Consultancy Services Ltd (TCS) five years ago, analysts and insiders started talking of the firm’s acronym being short for “Take Chandra Seriously”. Chandrasekaran proved them so right that no one was surprised when India’s largest software services exporter last week appointed the marathon runner CEO and MD for a second five-year term effective 6 October. Given his track record, shareholder approval to the appointment seems to be a mere formality. In an industry where at least three big information technology (IT) firms—Infosys Ltd, Wipro Ltd, and Nasdaq-listed Cognizant Technology Solutions Corp.—have faced leadership challenges that have either affected, or threaten to affect, their fortunes, TCS’s numbers speak volumes for Chandrasekaran’s performance since he succeeded his mentor S. Ramadorai in 2009. At $13.4 billion as of 31 March, TCS’s revenue made up a little more than 11% of the $118 billion IT industry. Its 305,431-strong workforce is a little over 10% of the number directly employed by the industry. There’s more. Women composed 32.7% of its workforce as of 31 March, making it the largest employer of women among private sector companies. When the quarter ends on 30 September, the company will have easily surpassed the 100,000 women employee mark. 


On Thursday, TCS’s market capitalization, at a little over $85.55 billion, almost equalled the combined $86.37 billion market cap of the next four biggest Indian IT firms—Infosys, Wipro, HCL Technologies Ltd and Tech Mahindra Ltd. Cognizant, whose market cap is about $28 billion and is listed overseas, and US-based Accenture Plc, with a market cap of about $51.3 billion, aren’t in the list although most of their employees work out of India. Chandrasekaran, who has been with TCS for almost 28 years, never applied for any other job. He started at TCS as a software programmer in 1987, having completed his master’s in computer applications from the Regional Engineering College, Tiruchirappalli (now National Institute of Technology, Trichy), in 1986. In the final year of his master’s programme, he took up a project with TCS, and never looked back, rising to the helm of the firm where he learnt the ropes of the IT business.

 The transition was well-planned, say analysts. Chandrasekaran, they insist, was identified for the CEO’s role around 2004-05, but that became apparent only somewhere around 2007. When he eventually rose to the top at the age of 46, he became one of the youngest CEOs in the Tata group. His rise in TCS was rapid. In 1999, he started the company’s e-business unit and expanded it to an over $500 million segment in four-and-a-half years. In September 2007, he was co-opted on the TCS board and named chief operating officer (COO). photo As COO, he drove the company’s acquisition strategy—the purchase of Citigroup Global Services for $505 million in October 2008 is credited to him. Under Chandrasekaran, TCS has consistently posted results that have beaten market expectations. The company does not provide quarterly or annual revenue forecasts, but it exceeded software industry lobby Nasscom’s 12-14% revenue projection for the year ended 31 March and is expected to easily beat the 13-15% revenue forecast for the current year. Analysts expect Chandrasekaran to retain the growth momentum in his second innings. And TCS may soon become India’s first $100 billion market cap company as analysts from securities houses JPMorgan Chase and Co. and CLSA wrote in June when TCS’s market cap was about $61 billion. To be sure, that pales in comparison with the $190 billion market value of International Business Machines Corp. (IBM). “While Chandra was expected to be re-elected for a second term, in his second innings we would expect him to foray deeper into new service lines like digital technologies, including social media, mobility, analytics and cloud (SMAC), and continue to outperform the industry, maintaining the 16-17% growth rate for the year that Chandra had earlier indicated,” said Dipen Shah, head of private client group research at Kotak Securities Ltd. TCS is expected to hit $100 billion in market value soon, said an analyst from an international securities house who did not want to be named because he is not authorized to talk to the media. “We are also expecting a possible merger or acquisition of a small digital enterprise, given that peers Infosys and Wipro have made many such digital acquisitions recently, although TCS hasn’t. Besides, TCS generally makes at least one small merger or acquisition every year, and the company is expecting digital to contribute significantly to revenue going forward,” said the analyst. Rivals wane, challenges loom Chandrasekaran’s first term at the helm coincided with a steady decline in the fortunes of Infosys and Wipro, its two closest rivals.
 
 Once the bellwether of the Indian IT industry, Infosys got embroiled in leadership issues that took a toll on its profits. The firm will take time to recover under its new CEO Vishal Sikka, who took charge on 1 August. Wipro, under the leadership of T.K. Kurien, is also trying to rebuild. Even Cognizant is showing chinks in its armour. On 6 August, Jennifer Hamel, an analyst at research firm TBR, noted that for the first time since the June quarter of 2011, Cognizant had not outpaced TCS in year-on-year revenue growth in the three months ended 30 June. In response to an unexpected dip in client spending, Cognizant pared its annual revenue growth forecast from 16.5% to 14% for 2014. On 18 August, Mahesh Venkateswaran, the head of Cognizant’s $500 million SMAC business, stepped down. The 18-year veteran used to report to CEO Francisco D’Souza. To be sure, TCS—and its rivals—does face its set of challenges. Although automation has started taking over the traditional labour arbitrage lever for IT services delivery, TCS maintains a robust pace of hiring people (10% year-on-year in the quarter ended 30 June), mainly freshers, since it can keep employee costs low, said Bozhidar Hristov, an analyst with research firm TBR. “However, hiring freshers in bulk could put pressure on TCS’s ability to deploy resources in timely manner, impacting its credibility and ability to maintain a competitive edge,” added Hrsitov. And despite all the digital talk, traditional services continue to account for a major portion of the revenue of Indian IT firms, while SMAC technologies still account for less than 10% of the total revenue of IT companies. Application, development and maintenance work alone accounts for 35-40% of the revenue of most IT firms. But with increased automation and platform-based services that can be replicated across segments and non-linear initiatives, analysts agree that SMAC will allow the IT industry to offer more value to clients. Non-linear initiatives, unlike in the traditional model, are not dependent on the number of people engaged in a project for their revenues. Much will depend on the ability of companies such as TCS to offer solutions that integrate new business models such as analytics and cloud-based services—which are part of SMAC—with traditional ones. Scale is another issue TCS will have to deal with. TCS has handled challenges related to size and scale very well, but in the future it will have to balance the need for linear, or headcount-related, growth with that of reducing costs through automation and by templating solutions that can be replicated across industries without the need to add additional labour. As TCS continues to grow, it will have to hire more laterals, or professionals, too, along with freshers to feed an increase in onsite project demand and the need for SMAC professionals. This will add to wage costs since the salaries of professionals, on average, start from Rs.7-10 lakh while freshers, on average, can be recruited for Rs.3-5 lakh. Moreover, as TCS continues to expand in geographies other than the US, which include Europe, Continental Europe, Latin America, Japan, Africa and China to name a few, it will be forced to hire more local or onsite employees due to increasing pressure from those governments to hire locals. This will add to dollar costs and reduce its labour arbitrage, which it will have to compensate by more value-added work like digital, automation and templatization of solutions that can be replicated across industries—similar to what companies such as Accenture and IBM do. Last, but not the least, if a proposed US immigration Bill gets passed in its current form, it will add to the wage costs of TCS and reduce its margins, analysts warn. According to a 26 May note by research firm Offshore Insights, TCS employs about 27,000 staff in the US, of which 9,000 are US citizens and green-card holders. 
 
 
The rest are employed on H-1Bs and L-1 visas. “Should the Bill (that limits the proportion of H-1B/L-1 Visa workers to 50% to that of US employees) gets passed in 2017, TCS’s US staff size would be estimated 35,000-36,000. This means it will need 18,000 US citizens which includes 9,000-10,000 new recruits. This doesn’t stop here; TCS will have to stop issuing any H-1Bs in coming two years. Clearly a huge hit, as constraints like talent acquisition, billing rates, margin pressures and similar others are bound to affect its operations onsite,” the note said. Building for the future The TCS management is not resting on past laurels. TCS spent Rs.913.76 crore on research and development (R&D) and innovation in fiscal 2014 compared with Rs.776.58 crore in the year earlier, according to the company’s 2013-14 annual report. This is not much when compared with the billions of dollars that a company such as IBM spends on R&D, but sizeable given that TCS started out as an outsourcing firm that relied on low-cost labour in its home market to drive profits. Till date, TCS has filed for 1,746 patents and 114 patents have been granted. The company opened its first R&D lab in 1981 when the technology industry in India was just taking shape. Across industries and services, TCS has established a global network of Innovation Labs. Its Co-Innovation Network has partnerships with academic institutions, start-ups and venture funds. TCS has also invested significantly in digital technologies. It has invested in building a network of cloud data centres across the globe. The company has set up a digital enterprise unit in Silicon Valley to club its SMAC services, headed by Satya Ramaswamy, vice-president and global head of TCS Digital Enterprise, who joined TCS in 2010 after the company acquired Brightfon Inc., a mobile solutions firm he founded in July 2008.
 Investments in digital initiatives are increasingly dictating “TCS’s go-to-market strategy as the company realizes that the pace of adoption of developing digitally enabled, vertical-specific portfolio is the key to remain competitive in the fast-evolving IT services market”, Hristov of TBR wrote in a 17 July report. He added that to accelerate its portfolio and foothold expansion and offset potential margin pressure, “we expect TCS to pursue an acquisition of a Europe-centred technical consultancy with vertical-specific capabilities focus, as developing IP (intellectual property) through R&D can be more expensive and riskier than making an acquisition”. Chandrasekaran earned compensation of Rs.18.68 crore in the year ended March, compared with Rs.11.7 crore the previous year. The pay excluded his earnings from the 88,528 shares he held in the firm as of 31 March. The nearly 60% hike in Chandrasekaran’s annual salary in fiscal 2014 made him the highest-paid CEO in India’s IT industry. But in July, Infosys said it will pay Sikka $5.08 million in annual salary and stock options worth $2 million. Judging from TCS’s performance in the past five years, Chandrasekaran, it appears, has earned his pay and his second term in office. At least for now.

Rahul kumar Gupta
PGDM, 2nd Year.

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