TCS head upbeat amid challenging market

N. Chandrasekaran is in an upbeat mood as he relaxes on a leather sofa in his office overlooking the lush, monsoon-soaked grass of the Azad Maidan in south Mumbai. The head of Tata Consultancy Services, India’s largest IT outsourcing group by market capitalisation, has just delivered a forecast-beating set of quarterly results.

Just days after rival Infosys warned the volatile global economy could slow client spending, TCS last week announced a 31 per cent jump in first-quarter net profit to $532m on revenue of $2.4bn. The IT outsourcer said it expected to see steady demand for its services by being “agile” and “entrepreneurial”.

Mr Chandrasekaran says constant talk of the state of the global economy misses the point. Coming out of the financial crisis, customers are increasingly demanding a more tailor-made service. “Customers have a plan . . . if we don’t align to that plan there is no business,” he says.

TCS – whose clients span a wide range of sectors and include companies such as British Airways and Sony – recorded growth of 6-15 per cent across all regions. Expansion has been broad based, and “all the major markets are in double-digit growth,” says Mr Chandrasekaran.

Part of TCS’s recent strategy has involved expanding into fast-growing emerging economies. By establishing a presence in countries such as Brazil and Mexico, TCS can service existing international clients as well as local companies going global. It aims to increase emerging markets revenue to 30 per cent in the next five years, from 17 per cent now.

Growth could also come through acquisitions. TCS has a war chest of about $2bn earmarked for buying rivals in markets such as Europe and Japan, says Mr Chandrasekaran, though attractive targets are scarce. “The problem is not the price but whether it’s a strategic fit,” he says.

N. Chandrasekaran

Yet as TCS looks positively ahead, analysts remain unsure about the outlook for the sector at a time when growth is slowing at Infosys, India’s second-largest outsourcer.

Nasscom, the Indian IT outsourcing industry body, predicts revenue from the sector will rise at least 15 per cent to about $70bn in the year to March 2012.

But analysts point to key areas of concern. TCS, Infosys and number three Wipro face stiff competition from companies such as Accenture, IBM and Capgemini and analysts say above-inflation increases in wages could eventually erode the cost benefits of outsourcing to India.

Mr Chandrasekaran insists Indian IT outsourcers remain competitive. This financial year TCS aims to take on about 60,000 people, on a par with last year. And while Mr Chandrasekaran admits staff turnover is high across the industry, he says TCS is having no problem hiring.

Deploying those staff overseas has, however, become an issue of increasingly hot debate after the US last year raised the cost of applying for business visas from $320 to $2,000. The move came amid pressure on the Obama administration to protect jobs at home.

CLSA recently downgraded the Indian IT outsourcing sector to “underweight”, citing the visa issue as a factor. With rejection rates in the US currently running at almost 40 per cent, up from 5 per cent 18 months ago, CLSA sees “the visa issue fundamentally altering the business model for Indian techs”.

Mr Chandrasekaran admits that any time a company has to spend money, “it hurts”. But, he says, the visa issue is “a single factor in the whole value chain” and the key is to “work the business model around it”.

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