INDIA'S MOST RESPECTED COMPANIES
NUMBER 1 - TCS
Disrupt And Forge Ahead
Several months before its April 2008
rollout, Tata Consultancy Services’s then chief operating officer N.
Chandrasekaran had conceptualised the plan to restructure India’s largest IT
services firm into customer-centric business units, each focusing on one or
more industry verticals. The success or failure of the strategy would decide
whether or not Chandrasekaran — already the heir apparent — could eventually
succeed S. Ramadorai as managing director and CEO.
It was a complex exercise that was bound to bruise several egos while forcing
them into giving up their geographical CEO roles (which had limited client
servicing resposibility) to SBU (strategic business unit) heads with full
accountability for client servicing as well as the profit and loss account.
And then came the rollout of the reorganisation plan. Even as the industry was watching every move, later in the year, just 11 days after the collapse of Lehmann Brothers, TCS announced the biggest acquisition in its history. Half a billion dollars would be spent on acquiring Citibank India’s BPO arm, Citigroup Global. The message was clear: TCS was going the whole hog with the Chandrasekaran-authored strategy. The Citi acquisition provided it the leg-up it needed in the critical banking and financial services industry — the largest sector in the global IT services industry.
And then came the rollout of the reorganisation plan. Even as the industry was watching every move, later in the year, just 11 days after the collapse of Lehmann Brothers, TCS announced the biggest acquisition in its history. Half a billion dollars would be spent on acquiring Citibank India’s BPO arm, Citigroup Global. The message was clear: TCS was going the whole hog with the Chandrasekaran-authored strategy. The Citi acquisition provided it the leg-up it needed in the critical banking and financial services industry — the largest sector in the global IT services industry.
With this, Chandrasekaran stamped his authority on the organisation. The
formalities were left for October 2009, when he took charge as the CEO and
managing director. But the real impact of the strategy was to follow two years
down the line as recession gripped the global economy.
Arch-rivals Infosys ($7.39 billion) and Wipro Technologies ($6.2 billion) struggled with growth while TCS closed fiscal 2012-13 at $11.66 billion, winning the race to be India’s first $10 billion IT services company.
ICICI Securities’s IT analyst Abhishek Shindadkar believes the 2008 reorganisation as well as the platform-based BPO strategy aided by the Pearl acquisition helped TCS in non-linear initiatives. TCS’s industry SBU model is now practically an industry standard being replicated by several IT services firms, including its largest rivals. “We also separated the businesses where we are strategically making investments. It has created more agility and nimbleness and a lot more customer centricity in the company,” says Chandrasekaran.
“TCS is a price warrior. Because of its flexibility it takes on the smallest of projects which Infosys and Wipro may not be able to take up,” says Harit Shah, senior research analyst, institutional equities, Nirmal Bang Equities. All this has paid off. “We are getting validation from customers that they find TCS to be very proactive, very nimble and very responsive,” adds Chandrasekaran.
In BW ’s most respected companies (MRC) surveys over the years, TCS has often lagged behind its smaller rival Infosys, which has topped the MRC rankings since 2001. However, this time round, on the back of sustained growth, TCS has made it to the top of the overall table, beating Infosys (at No. 3) as well as India’s largest private sector company, Reliance Industries (at No. 2). This, thanks to its undisputed leadership in all the seven parameters of the survey.
While TCS took a comfortable lead in Innovativeness, Quality and Depth of Talent, Ethics and Transparency and Global Competitiveness, Reliance came closest in Financials and Returns to Shareholders.
Arch-rivals Infosys ($7.39 billion) and Wipro Technologies ($6.2 billion) struggled with growth while TCS closed fiscal 2012-13 at $11.66 billion, winning the race to be India’s first $10 billion IT services company.
ICICI Securities’s IT analyst Abhishek Shindadkar believes the 2008 reorganisation as well as the platform-based BPO strategy aided by the Pearl acquisition helped TCS in non-linear initiatives. TCS’s industry SBU model is now practically an industry standard being replicated by several IT services firms, including its largest rivals. “We also separated the businesses where we are strategically making investments. It has created more agility and nimbleness and a lot more customer centricity in the company,” says Chandrasekaran.
“TCS is a price warrior. Because of its flexibility it takes on the smallest of projects which Infosys and Wipro may not be able to take up,” says Harit Shah, senior research analyst, institutional equities, Nirmal Bang Equities. All this has paid off. “We are getting validation from customers that they find TCS to be very proactive, very nimble and very responsive,” adds Chandrasekaran.
In BW ’s most respected companies (MRC) surveys over the years, TCS has often lagged behind its smaller rival Infosys, which has topped the MRC rankings since 2001. However, this time round, on the back of sustained growth, TCS has made it to the top of the overall table, beating Infosys (at No. 3) as well as India’s largest private sector company, Reliance Industries (at No. 2). This, thanks to its undisputed leadership in all the seven parameters of the survey.
While TCS took a comfortable lead in Innovativeness, Quality and Depth of Talent, Ethics and Transparency and Global Competitiveness, Reliance came closest in Financials and Returns to Shareholders.
Incidentally, Infosys continues to top the sectoral rankings, with a slender
lead over TCS. But Infosys has taken a beating in terms of perception ever
since its growth slowed. The transition in Infosys’s top management (from N.R.
Narayana Murthy to Nandan Nilekani to S. Gopalakrishnan to S.D. Shibulal) may
have been as smooth as that in TCS (from S. Ramadorai to N. Chandrasekaran),
but the performance of the two companies is far from comparable. In a year in
which fast-growing Cognizant Technology Solutions overtook Infosys to become
the second-largest IT firm, it may not be a coincidence that the company’s
66-year-old founder, Narayana Murthy, has staged a comeback as executive
chairman, within three years of retirement.
Besides SBU-oriented restructuring, the other wheel of TCS’s growth momentum
has been its client-mining capability. Between fiscal 2009-10 and 2012-13, TCS
has added 15 per cent to its portfolio of clients, their numbers going up from
1,034 to 1,156. However, the company’s bigger achievement has been in scaling
smaller clients into bigger clients. During these years, TCS’s portfolio of
$100-million clients has grown nearly 2.5 times, from 7 to 16, million-dollar
clients have gone from 409 to 556, $5-million clients from 183 to 277 and $20-million
and $50-million clients from 63 to 115 and from 23 to 48, repectively.
“TCS’s execution continues to be
industry-leading. The revenue/client metric has grown at 15.5 per cent CAGR
during FY09-FY13,” says Shindadkar. In comparison, Infosys’s metric stands at
3.6 per cent, Wipro’s at 6.1 per cent and HCL Tech’s at 9.4 per cent. “This,
coupled with the company’s repeat business percentage (97.7 on average for
FY09-13) suggests superior win, ramp-up and mining ability,” adds Shindadkar.
Its profitability ($2.58 billion on revenues of $11.66 billion in 2012-13) springs not only from conserving marketing expenses through client mining but also from the industry’s best employee utilisation of 82 per cent vis-a-vis the industry average of 70-75 per cent. Between 2009 and 2013, the 2.77 lakh- strong TCS bench has grown at a CAGR of 21 per cent while the number of employees has grown at 25 per cent, suggesting a healthy employee utilisation.
While Nasscom predicts 12-14 per cent growth for the industry, Chandrasekaran says TCS will grow at a faster pace. He is banking on a recent surge in research and development activity at TCS. In fiscal 2012-13 alone, the company filed for 425 patents (nine granted) of the 1,280 patents filed so far. A vast majority of those are to do with technology processes.
But where are the chinks in TCS’s armour? For one, TCS has reported a drop in net realisation in the past two quarters. “Quarterly aberrations are difficult to read, given that they are a function of multiple factors, including business, effort, and service-line mix,” says Shindadkar. Second, gross margins this quarter have been low. Chandrasekaran attributes this to inflation caused by the annual wage hike in the first quarter. TCS handed out an average hike of 8 per cent to employees in India and 3 per cent to those in international markets.
Foreign Fears
However, the biggest threat to Indian IT firms in general and TCS in particular is emerging from the likely impact of the US Immigration Bill that continues to hang like a Damocles’ sword over their heads. It could potentially affect their margins. The Indian IT industry is more concerned about the harsher Senate version of the Bill than the House of Representatives version. “The provisions in the Senate version will affect the industry, both in terms of cost and business model,” says Chandrasekaran.
The Senate Bill will not only raise the number of visas, it will also hike wages and visa costs. Specifically, the strict outplacement clause will also impact the outsourcing model.
“We are engaged with all the stakeholders, both in India and the US. They are expressing our points of view and also the unintended consequences. It will also make it difficult for US customers to get the best of services,” says Chandrasekaran.
Meanwhile, at home, TCS has bagged the system integration contract from the Department of Posts (DoP). “DoP is a transformational contract. Both in terms of contract value and the impact it can have. We believe it’s an opportunity for us to make an impact,” says Chandrasekaran.
That is for sure. After all, the wildly fluctuating India revenues have been a major concern for TCS watchers. In fiscal 2012-13, it reported a fall in India revenues. “India business has always been discretion-oriented. We don’t have enough annuity contracts. The yo-yo effect is very high in India. We are trying to change the business model. It is the nature of the India market and it also shows that the level of adoption of technology across the board is still not significant. This despite the fact that we keep winning deals,” says Chandrasekaran.
As for the global IT market, TCS is among the few that believes the global market is in recovery mode. Client decision-making has got better in the past six months. There are a lot of decisions getting made, and deals are getting signed. Deals are getting ramped up. Things have steadily got better in the past six months. That is the first bit of good news from the IT industry in the past 36 months.
Its profitability ($2.58 billion on revenues of $11.66 billion in 2012-13) springs not only from conserving marketing expenses through client mining but also from the industry’s best employee utilisation of 82 per cent vis-a-vis the industry average of 70-75 per cent. Between 2009 and 2013, the 2.77 lakh- strong TCS bench has grown at a CAGR of 21 per cent while the number of employees has grown at 25 per cent, suggesting a healthy employee utilisation.
While Nasscom predicts 12-14 per cent growth for the industry, Chandrasekaran says TCS will grow at a faster pace. He is banking on a recent surge in research and development activity at TCS. In fiscal 2012-13 alone, the company filed for 425 patents (nine granted) of the 1,280 patents filed so far. A vast majority of those are to do with technology processes.
But where are the chinks in TCS’s armour? For one, TCS has reported a drop in net realisation in the past two quarters. “Quarterly aberrations are difficult to read, given that they are a function of multiple factors, including business, effort, and service-line mix,” says Shindadkar. Second, gross margins this quarter have been low. Chandrasekaran attributes this to inflation caused by the annual wage hike in the first quarter. TCS handed out an average hike of 8 per cent to employees in India and 3 per cent to those in international markets.
Foreign Fears
However, the biggest threat to Indian IT firms in general and TCS in particular is emerging from the likely impact of the US Immigration Bill that continues to hang like a Damocles’ sword over their heads. It could potentially affect their margins. The Indian IT industry is more concerned about the harsher Senate version of the Bill than the House of Representatives version. “The provisions in the Senate version will affect the industry, both in terms of cost and business model,” says Chandrasekaran.
The Senate Bill will not only raise the number of visas, it will also hike wages and visa costs. Specifically, the strict outplacement clause will also impact the outsourcing model.
“We are engaged with all the stakeholders, both in India and the US. They are expressing our points of view and also the unintended consequences. It will also make it difficult for US customers to get the best of services,” says Chandrasekaran.
Meanwhile, at home, TCS has bagged the system integration contract from the Department of Posts (DoP). “DoP is a transformational contract. Both in terms of contract value and the impact it can have. We believe it’s an opportunity for us to make an impact,” says Chandrasekaran.
That is for sure. After all, the wildly fluctuating India revenues have been a major concern for TCS watchers. In fiscal 2012-13, it reported a fall in India revenues. “India business has always been discretion-oriented. We don’t have enough annuity contracts. The yo-yo effect is very high in India. We are trying to change the business model. It is the nature of the India market and it also shows that the level of adoption of technology across the board is still not significant. This despite the fact that we keep winning deals,” says Chandrasekaran.
As for the global IT market, TCS is among the few that believes the global market is in recovery mode. Client decision-making has got better in the past six months. There are a lot of decisions getting made, and deals are getting signed. Deals are getting ramped up. Things have steadily got better in the past six months. That is the first bit of good news from the IT industry in the past 36 months.
Rajeev
Dubey BW130909- See more at: http://www.businessworld.in/news/business/corporate/disrupt-and-forge-ahead/1038548/page-1.html#sthash.8Hkw5RtG.dpuf
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