There is a greater opportunity to increase pricing: TCS CEO K Krithivasan

K Krithivasan, CEO and MD, TCS

K Krithivasan, CEO of Tata Consultancy Services (TCS), sounds upbeat on the outlook for the new fiscal, after a choppy year when India’s largest software firm saw its employee count decline for the first time in nearly two decades.

Despite larger macro uncertainty and clients holding back on discretionary spending, TCS clocked its highest quarterly deal pipeline of $13.2 billion for Q4 FY24, along with an improvement of over 100 bps in operating margins for the fourth quarter sequentially to 26 percent. Net profit too beat Moneycontrol’s estimates, though revenue growth has been moderate in comparison. TCS reported qoq revenue growth of 1.1% for the quarter and 3.4% in constant currency for FY2024.

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With all these factors at play, Krithivasan believes there’s still headroom for improving margins. In an interview with Moneycontrol, he discussed upcoming price hikes, FY25 expectations, generative AI opportunity, and more.

Edited excerpts:

What explains the divergence between deal wins and revenue growth outlook because you did not sound optimistic on near-term revenue growth despite strong growth in order bookings?

We are quite happy that the deal wins are converting into revenue. The revenue conversion with the recently won deals have been satisfactory and following the historical pattern.

But what is also happening at the same time is our clients reprioritising some of the old engagements. So during FY22 or prior to that, whatever engagements we started, some of them are getting reprioritised in terms of what is the capacity we put on those programs.

Let’s say a program is supposed to have delivered 20 different functionalities. The customers look at the first five functionalities that have been delivered. They have got the value. Maybe the remaining 15 functionalities are not very important, or they don’t deliver as much value. Then the client decides that they can either wait or not proceed with the rest of the program.

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So, all of those decisions are being taken which results in reduction in people deployed or the amount of work to be delivered to the customers in some of those old programmes, which net-net means that the overall revenue growth is not consistent with new project wins.

But again, as we said yesterday, we believe FY25 would be better than FY24 because that kind of reprioritisation in the old programs may also improve. This is because given the fact that it’s been happening for a year and we continue to win new programmes, we see us have a better FY25 compared to FY24.

You have delivered superior margins of 26%-- but with utilisation at record highs, sub-contracting costs at record lows, and wage hikes kicking in, how much wiggle room will you have going forward to maintain this or further take this up? There will also be pass through costs from BSNL?

See, the most important lever you forgot is pricing. We have also not improved our pricing, like we believe there is a greater opportunity to increase it.

So, the pricing is one of the most important levers we should continue to focus on. We have not had a significant increase in the last few quarters. But leave aside pricing, on utilization, we are used to operating almost close to 90 percent. So, I still believe there is some headroom left on utilisation. And similarly, we can also further tweak our employee pyramid. Even with all that, there will be some projects where we may not be operating in the most efficient way. So, we look for efficiencies where we can deploy our people better.

A combination of all these things would still help us. See, we have been giving 26 percent to 28 percent as our guiding beacon (for margin). I think that would give us the headroom for improving it further.

Where do you see these price hikes coming?

We are not talking about huge price hikes. We are talking about marginal corrections where we have not had corrections in a long while. If you look at the Indian market, our prices are probably more or less stable for a long period of time, whereas inflation has continued to go up. So, we would be looking for opportunities where we can price our services better by having a better portfolio mix. So, you need to adjust your overall project portfolio mix so that your pricing also improves.

So, how does the expected price hikes compare between the upcoming deal renewals and new customers coming in?

We may not be able to increase the price just because it's a deal renewal. The price will go up with a better product mix. So, we must be very conscious of the product mix to improve the pricing. Deal renewal by itself may not help you.

Headcount declined 0.3% QOQ or by 1,759 to 601,546, marking the third straight quarter of net headcount decline. TCS full year net headcount declines for first time in 19 years. Headcount has lagged revenue growth for the second year in FY2024. Will we see this non-linearity continue?

The headcount reduction for the whole year is about 10,000 people. It's just about 1.5 percent of our overall headcount. So, it's not as if our revenue went up for the year, like you said, maybe about 3 - 3.5%, headcount went down by about 1.5%.

It's not a great divergence, which is compensated for by the productivity gains that we have been working at. And there's always a lag between when you hire people and when they get deployed also. So, I do not read too much into the headcount reduction.

We look at the trainees we deploy, we put them through our own internal training mechanisms and maybe after a period of 6 to 8 months, they become productive and billable. So, there will always be a lag. Into FY25, we will be hiring a very similar number of freshers like we did the year before.

But based on immediate demand we will try to change the number of experienced professionals we hire. That decision we take on a quarterly basis.

And the third factor is attrition. Attrition is coming down. So, these three factors will determine whether we have a net headcount addition or reduction. I do not want to say at this time there will be an addition, but we are committed on the trainee intake. We honour the offers that we make.

Where is the $900 million Gen AI pipeline majorly coming from? Will the same pace of growth continue and how pricing different for Gen AI deals?

More and more of our customers are looking at opportunities. We are working with our customers to see in their value chain where generative AI can deliver more value to them. We go to them with new propositions to discuss how they can deploy it better. Since it’s a new technology $900 million as the pipeline, it is a small number. So, it has enough headroom to double or grow further. I do not want to say double every quarter, but enough headroom to grow very well.

The pricing again, since I talked about product mix, these are all some of the new technologies. So, the pricing will obviously be better than the traditional technologies.

Krithi, when do you see double digit growth returning to TCS?

I will let you know once I see it (laughs).

Are you feeling better about FY25 versus FY24? Will FY26 be better than FY25? I just want to know if the worst is over and the green shoots are visible now?

We believe FY25 is likely to be a better year than FY24. FY26, I do not want to call it this time. But otherwise, we are feeling better about FY25.

You have spoken at length about regional markets like Middle East, India, LATAM showing tremendous growth potential although revenue contribution is still low?

We do want to ensure these markets (regional) contribute to our revenue in a material way. Currently, it is a small number. We want to ensure that they contribute to our revenue in a material way and rightfully because these markets are growing quite well, and they are not under the same kind of growth pressure as the major markets. We have very good offerings and solutions in these markets and our success rates have also been very good. So, we want to focus more on these markets.

It was clearly an India shining story for you based on the BSNL numbers. And I think it is going to continue in the current fiscal as well. Analysts are expecting $700-800 million alone to come from that deal. How is that going to trend going forward? And secondly, as you complete your first year as CEO, how is it going? Any changes we can expect from an organization perspective?

From a BSNL perspective, I don't want to say what would be the revenue coming in every quarter. As we implement more and more towers, activate more and more of them, the revenue from the deal keeps increasing. We look at it as a nation building project. So, we don't look at primarily only the revenue, we look at how we are enabling the nation to get a new indigenous digital stack on 4G, 5G.

As far as me completing one year, it's been a great year for me, a lot of support from our customers, as well as our associates and the leadership team. We made some tweaks last year, we'll continue to make tweaks as we think that's necessary to react to the market situation. But I'm not looking at any major changes or restructuring going forward.