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Q4 miss on poor macro, weak demand; bullish digital biz:TCS

Dismissing any talks of a poor execution that resulted in dull Q4 earnings, N Chandrasekaran chief executive officer, Tata Consultancy Services ( TCS ) says the company faced slight disappointment in Q2 and couldn’t make up for it soon enough.

In an interview to CNBC-TV18, Chandrasekaran says the company’s execution has infact been solid and the dismal Q4 earnings come on the back of poor macroeconomic and demand conditions.

However, Chandrasekaran is positive on the company’s digital business for the upcoming quarters and expects it to grow steadily both in terms of size and numbers.

While the optimism isn’t lost on him, as he believes the best of the company is yet to come, Chandrasekaran says the company’s insurance business Diligenta is likely to see further growth in the days to some.

Below is the edited transcript of N Chandrasekaran’s interview with Menaka Doshi on CNBC-TV18.

Q: Last year the same time when we were sitting and talking about what FY15 will look like, you did sound very optimistic, you said that it would be much better than FY14 or better, I am not picking words there but it has been a difficult year in comparison to what you had laid out. Would you put most of that difficulty down to macroeconomic forces or would you say that there have been some execution slips as well?

A: If you see the slip has been a slight disappointment when Q2 started and then it is kind of carried through, we couldn’t make up for that.

I would not be able to just say whether it is execution or macro but to some extent — because the misses were very slight, small and maybe sometimes it is a volatility in a particular segment. Telecom has been volatile and now we feel energy is going to be tough this year because of the oil etc but I wouldn’t entirely be able to put it on macro. It is just that expectation and our performances.

Q: If you are not entirely able to put it around macro then it would be fair to say whether it is telecom or even the problems in your insurance business, on the Diligenta front has been difficult to fix at least intrayear, maybe you will be now be able to fix them hereon you have indicated that they will bottom out but does that indicate that somewhere execution has maybe slowed down — just to understand what the year was like?

A: No, it is not execution, it is the nature of certain parts of the business. Diligenta deal cycles are pretty long and we don’t have solid pipeline in Diligenta. So that is hurting us.

Q: That solid pipeline is an execution miss?

A: That is not an execution miss, it is more a demand.

Q: So you say 80 percent macro, 20 percent execution or 100 percent macro?

A: Macro and demand.

Q: Demand is macro?

A: 80 percent is macro and 20 percent is demand. Execution has been solid.

Q: As we sit here for FY16 what is your outlook? Will FY16 be better than FY15?

A: I am not going to get into that.

Q: But you have admitted that FY15 has been a difficult year, so are you saying that FY16 is that difficult?

A: The way I would put it is that the environment is good barring the three headwinds which I outlined in the call yesterday which is volatility in the telecom sector, energy and Diligenta. Diligenta will still go through a certain amount of degrowth barring that the environment is quite solid. India has done well compared to where we started but we have to see whether it is going to takeoff or it is going to be still a slow growth. I cannot tell as yet.

Q: Given that you have just laid 80 percent last year’s blame on macro. When you say that the environment looks good that means FY16 is going to be better than FY15 at least on the macro front – that’s your expectation as we stand here today?

A: You learn every year, every time what not to do.

Q: What not to do or what not to say?

A: What not to say, what not to do, so I am not going to make a statement.

Q: You have had an incredible 5 years at TCS. I know you celebrated 10 years with a special give away to both your shareholders as well as your employees and congratulations on that. But I am looking at half of that, 5 years, FY10 your revenue was 6.3 billion approximately that. You had about 160,000 employees, this year you have closed with above 15 billions you have gone from 6 to 15 billion in FY15. 310,000 employees approximately you have done really hard and fast in the last 5 years. Is it realistic for us to expect that you continue running at that pace in the years to come? Thus base effect, size starts becoming a bit of a drag just so that you can tell us what to expect from this mega size TCS as opposed to what the last five years brought out?

A: Some analysts have also written about base effect but I don’t quite subscribe to that view. The reason for that is in the overall technology business and IT services industry we are still very small. Our market share is very small. Secondly, the effect of technology is only getting deeper and stronger in every business so the opportunity and addressable space that we have is enormous.

Thirdly, TCS today in terms of capability, in terms of people, talent, intellectual property and market positioning is in a much better position to capture many of the opportunities that we couldn’t have done several years ago. So, given all this there is no reason why TCS should continue to perform exceedingly well.

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