TCS Management on COVID trigger, a multi-year transformation

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Excerpts of an interview with Mr. Rajesh Gopinathan, CEO & MD, and Mr. NG Subramaniam, COO, TCS with ET now dated 8th October 2020:
● They fundamentally believe that technology will be a solution and therefore there will be even more relevance to their services to their customers.
● They were confident about their ability to switch to the new operating model and that was what was underlying the commentary that they had given earlier on that in about six months’ time or the end of Q3, they should be looking at coming back to parity and from a cost structure and margin perspective, by the end of Q4 they should be looking at parity.
● What has changed during the course of the last six months is that they have been able to execute on the operational resiliency program that NGS laid out; second, they have been able to participate significantly in this technology-led transformation that is at the heart of their customer’s response to the COVID crisis.
● First-quarter was about their internal resiliency. The second quarter has been about participating in the customer side. Now they are a lot more confident because both legs have been executed and it is with that confidence that they are giving their comments.
● What they are seeing is an urgency to accelerate the digital transformation on all fronts. Three priorities – the first one is the resiliency of your IT landscape. The second is their own internal employee experience, can they continue to operate remotely and safely and then contribute even more productively? The third being customer experience, how can they continue to be wherever their customers want to do business and how their experience can be touchless, contactless while providing all the accessibility options for different segments if possible.
● If you put these three things together, then the migration to the cloud becomes very important. The intent is to move to a hyper-scale platform with agility, resilience, adaptability, flexibility, and all those things.
● In the current context, they provide significant value and there is clearly an urgency to say that look I am going to move to that kind of an architecture which is much more modern, much more futuristic, which means that when you go an invest in this and it is not going to be a simple hop on and hop off once you move in there.
● It is going to be irreversible and you have to continue with that journey for three to five years where you will pretty much become a native and will embed your businesses into that technology by which you will extend your organizational capabilities with the ecosystem concept and bring in a lot more credibility to the business you do business with your customers. That is the multi-year transformation that they are seeing.
● In a technology, anything more than three to five is very difficult to call out but they are very confident about three years because it is something they have visibility to.
● Within those three to five years, there are going to be a lot more new ways of doing business, of reaching out to customers who are going to emerge.
● COVID has provided a business trigger and they are not sure whether in the absence of COVID, this adoption would have been at the same speed. It is unfortunate that the trigger happened in such a negative way but the trigger for the shift has kicked in. That is the way to understand what is going on.
● In the last three months, they have upped their quotient on delivery guidelines for delivering through secured, borderless workspaces.
● We are seeing that people love the flexibility that they have. While talking to one of the employees the other day, he was saying that this conference room crap has completely gone away and the collaboration meetings are a lot more democratic and they are able to decide and deliver things faster.
● They are able to incrementally innovate, multiple elements, and levers of productivity which is there. They are completely focussed on making sure that it is working superbly and people are able to deliver productivity with a lot of pride.
● Their operating philosophy has been to maintain stable margins. They are very systemic about trying to manage within that range which they think is beneficial to all stakeholders; customers, their employees, and their investors.
● Short-term volatility will have its own impact and it is more of a philosophical thing. There is no right margin to operate at, it is relative competitiveness and the aspiration that you have. It is a fair and achievable and sustainable band and that continues to be their guiding principle.

Consensus Estimate: (Source: market screener and investing.com websites)
● The closing price of TCS was ₹ 2,811/- as of 9th October 2020. It traded at 33x/ 28x/ 25x the consensus earnings estimate of ₹ 85.1/ 101.0/ 113.0 for FY21E/22E/23E respectively.
● The consensus price target of TCS is ₹ 2,802/- which trades at 25x the earnings estimate for FY23E of ₹ 113/-.

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