By Nikunj Dalmia
Manufacturing, travel, logistics, hospitality are some of the sectors re-inventing themselves to be future ready and we are helping our clients to cope with the post Covid world., says CP Gurnani, CEO, Tech Mahindra.
What is the way forward for IT companies? Things have normalised a lot and are not looking as scary as they were say a couple of months ago. How would you define the new normal and the new reboot for the Indian IT sector?
Most of us have remained safe and healthy. But this is a pandemic which has impacted a few lives and a few locations as well. I can only say that the command and control centre of the company is constantly monitoring the wellbeing of the employees.
Things have normalised now for the financial and telecom sectors. Indian IT companies in a sense have been associated with these sectors. There have been no large bankruptcies or casualties. On the medical front also, things are looking better now. What is your understanding of the in the month of March versus now?
Last time, I told you that I believe there will be two quarters of stress and if the second wave is not that strong — and we will live in suspense till a vaccine is discovered — overall global IT spend will come up.
If I put everything on a balance, technology will drive the economic recovery, technology will drive the way consumption is done. So I remain optimistic but at the same time I am conscious that manufacturing sector, travel, logistics, hospitality are some of the sectors which are re-inventing themselves to be future ready and we are helping our clients to cope with the post Covid world.
Let us talk about IT budgets, client engagement, what is the update on that front?
We are all seeing increased demand from sectors like telecom, healthcare, pharmaceuticals, media and entertainment and e-education. So that is the positive side. The second positive side is the growth of the digital economy. The need for digitalisation has become equally important for the corner shops or the grocery shops.
People now want to participate in the digital economy, even the retail sector. The stress is only for offline, the online retail sector is doing well. So I can only say is technology and online services are playing a critical role during the lockdown and in a lot of ways, the feeling of optimism is relative and the relative part is that we continue to see demand.
The hi-tech area is a very differentiated vertical. It accounts for nearly 50% of your total business. What is the update there?
What we are noticing is that in sectors that were always digital, there is no new wave of digitalisation as such. In these sectors, the focus is on keeping the lights on because this sector is right now probably seeing their revenue uptick in data by almost 400% but at the same time, some of their business users are not doing so well. So in a lot of ways, if I were to fast forward and look at the next few quarters also, I think technology, media & entertainment and telecom sectors will do well.
If I were to fast forward and look at the next few quarters also, I think technology, media & entertainment and telecom sectors will do well.
-C.P. Gurnani, Tech Mahindra
The telecom vertical has been very volatile. Do you think what was a volatile vertical for you is now going to be the driving vertical for you because globally spend in telecom and data is only going to intensify. Are you in a position to capitalise on it? Where do you see the telecom business moving for Tech Mahindra?
Actually a lot will depend on the next quarter results because all of us understand that the new age technologies like 5G, AI, machine learning, data analytics, Cloud, automation will be the drivers for change in growth for the telecom businesses. How we translate it into revenue will depend upon how these organisations respond to economic development or in certain cases, a little bit of a slowdown in the economy.
Please remember at this stage the stimulus money has kicked in. The US is about 17-18% deficit, India would be about 7-8% deficit. If you follow the money and if you look at the digital requirements, there is business to be had but a lot depends on how the world responds over the next two quarters.
Now Tech Mahindra comes from the Mahindra Group of companies yet whichever way I cut and dissect the current valuations, the markets are not rewarding you with the best PE multiple and your margins also are not the best in the industry. Why is that?
It is a very valid question and my board has also asked for a plan which addresses three parts to what Tech Mahindra will do. Number one is the industry mix. Number two is geography mix. One of our biggest challenges, which is an advantage as well as a disadvantage is that US business is only 45-48%, the rest of the world is 55%. That has effectively meant the energies which have gone into operating in Latin America or operating in Africa could have been better used.
We are now working on a plan focusing on: a) geographic reach, b)service offerings and c)some of our big bets like 5G have been relatively slow but I committed to my board that we do understand the challenges. We are going to follow the path of differentiated connected solutions strategy at the same time, we need to do a better job of choosing a few of the geographies particularly where because of the local labour policies, it becomes very difficult to operate profitably. So we are conscious of the need for turnaround or transformation. We are very clear we know the direction, now I need to bring in the speed.
Whatever you are sharing is going to music to the ears of shareholders but what shareholders would also ask is that has the Covid crisis pushed your plans forward by 6 or 12 months?
I promised myself that I would normally do my financial analysts meet in November. God willing, we will do it physically but if not, when we do it virtually, I would give more definitive answers. Till that time, because of the uncertainty called Covid I want to reserve my comment but I did share with you that strategy, direction and speed — all three are high on my radar.
What is your view on work from home because different companies are sharing different things and when I say different companies I am comparing with your peers. TCS is saying by 2025, 75% of the workforce will work from home. We have not got a similar indication from Wipro or Infosys. They are saying that whatever transition has happened is largely because of compulsion and it may not be the new normal. What about Tech Mahindra?
Today, 93% people are working from home. About 6% to 7% go to work which is also because there are clients in Australia, Philippines, some in the US, who have restrictive and more stringent policies. So till December, the ratios are not going to dramatically change. Most of the clients have accepted that work from home is the reality. The positive outcome to all of this is that most of us are now becoming a lot more conscious about data security, cyber security and making sure that we use tools and equipment which are part of the Tech Mahindra ecosystem. The last thing you want is risks off too much of distributed processing.
So 25% to 30% work from home is a given in the future. People like me would still go to office because we like to interact with people, we like to have some cooler talk. We like to go to the canteen and ask people for feedbacks and listen to them. Similarly, I like to visit my customers. So, I think about 25% to 30% at any given point of time will be work form home. About two days in a week, people would like to come back to work. The structured interactions, the whole human machine technology refresh will happen in those two days a week. It is interesting times, but the new normal is here to stay.
Because of the wall of work from home which IT companies are now trying to adopt, could there be a big reboot on SG&A cost, visa cost, the onsite offshore model which in a sense is a model which also depends on travel, working from site for clients? Will there be a significant reduction there?
You know in a lot of ways if you notice that most of Indian IT companies despite being a $181 billion business had stopped investing a lot on campuses. The reason was very simple: most of the growth was coming which was non-linear growth. Number two, it is also evident that if 25% of the workforce is common for everybody, then we do not need commercial space for a long time.
The third part is it is not that the employee cost or the infrastructure cost will come down dramatically. You will have to start providing some level of allowances which compensate because people are not spending their time and energy from coming to the workplace. In balance, it is a good thing for the industry. It is a great thing for the gig economy, it is almost a wonderful thing for a flexible workforce and it is a wonderful thing for adoption of AI and machine learning.
What is your outlook on India specific business for IT companies? No Indian IT company gets even 10% of the business from India but what is your outlook there?
Most of us are hesitant about India business. Nasscom has been trying to persuade various government departments on the payment terms. Unfortunately, what has happened is that IT buying is almost like they used to buy hardware where the manpower cost was probably 6% or 7%. Today the manpower cost in any IT project is 60% to 70%. So, in payment terms and the way acceptance of the solution is addressed, the Indian government has not adopted itself to the new normal. We have seen it in the last two-three years that the Indian IT spending may have gone up, but the players which are participating, have only got very limited.
India Inc has to spend more on IT needs. It has to realise the need for cloud, need for cyber security is very high and at the same time it has to take into account that whether we like it or not, employee payroll has to be delivered every month and you cannot have a situation where I work for a project and get paid after a year.
Indian IT companies are now struggling to come back into double digit growth. Some big companies were confident of going back to double digit growth but do you think Covid has really pushed back all hopes of a double digit growth for next two to three years?
In a stable and mature economy, we should be very happy about the 7-8% growth that Indian IT industry has shown. I do not know how the expectation emerged that the Indian IT industry will continue to grow at the same rate. A $181-$182 billion Indian IT industry shows that industry is doing well. If there is any push back to anything, it is for a quarter or two. The demand has not gone up dramatically. However, the need for technology digitalisation is on a high and so it is still advantage Indian IT industry.