The Hindu Business Line : `Pricing uptick, key growth driver'

A day after Tata Consultancy Services announced a robust performance for the third quarter, with a 8.4 per cent sequential rise in revenues and 9.5 per cent growth in post-tax earnings, Business Line spoke to Mr S. Mahalingam, CFO of the company about the key drivers of this growth. Excerpts from the conversation:

Compared to the second quarter when offshore leverage helped improve your operating margins, pricing uptick has contributed in the latest quarter. How do you see the effect of margin levers working for you in the fourth quarter?

If you look at our last quarter (second quarter) performance, it was more a result of a combination of factors. One was volume growth, the other was onsite offshore shift in a significant way. We don't have to follow same trend every quarter. Basically, the levers (for margin growth) we have are: how do I grow my profitable business through pricing, another is onsite offshore mix and the third is SG&A (selling, general and administrative) cost and what I do with that. I can use all of them.

How much more of cushion is there for these three levers to operate simultaneously?

Even in pricing, there is still some room to grow. Basically, what we have done is effected renegotiation in many of the contracts. If I start something in November middle, for instance, then I get a three-month effect as far as the next quarter is concerned for the same contract. It will definitely not be 4.5 per cent (pricing increase seen in the last couple of quarters). It would be less than that and so on. But some uptick from that would come.

You have a bad debt reversal in the latest quarter. What explains this in the context of the provision of Rs 6-10 crore that you have been making in the last five to six quarters?

In the last analyst conference call, we had indicated that we are managing our receivables better. It's a culmination of a process we had begun. Earlier, we had some of the contracts, some bad ones, largely in India. We were cleaning up and taking action. We have come to the stage where we are around the Rs 0-5 crore mark in a quarter. But we are getting into an efficient stage where we are going to be around the zero mark. What has given us the uptick this time is Rs 6.5 crore, which was Rs 1.1 crore last time.

So, it's a process of cleaning up books. What percentage would you be comfortable with?

The process is this: Any receivable which crosses nine months, we provide 50 per cent and what crosses 12 months we provide for 100 per cent. Now, I have passed on word that anything that crosses three months, for instance, because even if I have generous credit terms with someone, collect it within 90 days.

Your SG&A stands at 19.5 per cent compared with 14-15 per cent for your closest peer. What accounts for this?

We have done a fair amount of comparison with several of our national/international competitors. The issue is where you put in the bench cost. In our case, we might put it in SG&A. To that extent, there is a slight increase in percentage terms. We feel that if we reach 19 per cent or thereabouts, that would be a good intermediate point for us. That is one parking slot for us.

You said that you are shooting for 45 per cent offshore contribution in the next three to four quarters. What impact are you seeing on the revenues front, as a result of offshore shift, though the margins expand as a result?

Last quarter, we had over 3 per cent increase in terms of offshore shift. This quarter, we have over one per cent. It is going in the right direction. Periodically, you have a big swing in one quarter because some of the big projects have moved quite well, with smaller swings in other quarters. That's how it works. Impact on margins as a result of offshoring is slightly lower in this quarter — which is 28 bps (basis points) and last quarter, I had close to 67 bps.

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`Pricing uptick, key growth driver'

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