In the wake of recent news on layoffs at TCS, I started looking into TCS Annual reports. As I sifted through the Annual Reports of TCS from last 10 years, something did not seem to be quite right around the employee strength reported in Annual Report in 2014.
Usually, for an IT Services Company the revenue growth is directly proportional to the growth in employee strength, it seemed odd that the Y-O-Y growth rate of Operating Profit was the highest in 2014 whereas the employee growth was the lowest in the history of TCS. So, I started looking into the details of the data based on TCS Annual Reports since 2005.
All the Charts are reproduced courtesy of www.StatsPanda.com
TCS Y-O-Y Key Growth Data (Revenue, Op Margin, Productivity, Avg Salary, Employee Growth)
In 2014, Operating Profit Growth(39.43%) and Productivity Gain(19.57%) were the highest while Employee Growth (8.62%) was the lowest in the history of TCS. That surely raises some eyebrows.
So, I decided to regenerate the same chart by tweaking the Employee Strength from 300,000 (as reported in AR 2014) to 320,000. Now, take a look at the chart below. The numbers look much more realistic - Productivity Gain(12.1%) & Employee Growth (15.86%).
TCS Y-O-Y Data (with Employee Strength as 320,000 as on Mar'2014)
Next, I looked into the Average Salary Increase data and the productivity gain data and tried to see the impact if we change the Employee Strength from 300 K to 320 K at the end of Mar'2014. Check out the generated charts and the analysis below.
TCS Avg Productivity vs Avg Salary when Employee Strength is 300K as on Mar'2014
As per the chart above, TCS Employees received an average salary increase of 14.35% in 2014 vis-a-vis 11.81% in 2013. But little bit of poking with the TCS employees revealed the Average Salary Increase was better in 2012 - 2013 than in 2013 - 2014. Then why do we see a different trend here? Now, take a look at the same chart but regenerated with employee strength as 320 K. You can see the Average Salary increase matches with the data heard from TCS Employees and consistent with the past trend - Average Salary increase changed from 14.35% to 7.21%.
Similar observations can be made with respect to Productivity Gain as well. 19.57% Productivity gain in one financial year is near impossible unless there is fundamental shift in Business Model and Revenue Pattern. With correction of employee strength from 300 K to 320K, even that's get corrected from 19.57% to 12.1%, a much more grounded and realistic number.
TCS Avg Productivity vs Avg Salary when Employee Strength is 320K as on Mar'2014
These two are important factors when it comes to valuation. Above par growth in Productivity numbers does indicate superior & improving asset quality, better strategy and execution and that commands higher premium. Higher Average Salary Growth gets reflected in lower attrition as well as increase in ability to attract talent. These factors help de-risk current and future revenue stream. Overall, these numbers are very critical and any change in their values will have impact on the valuation as well. The under reporting does mean that TCS was planning to lay off people in subsequent period. However, this seems to be a reactive step and does indicate the discomfort of TCS Management with the increase in employee strength in higher salary band.
Usually, for an IT Services Company the revenue growth is directly proportional to the growth in employee strength, it seemed odd that the Y-O-Y growth rate of Operating Profit was the highest in 2014 whereas the employee growth was the lowest in the history of TCS. So, I started looking into the details of the data based on TCS Annual Reports since 2005.
All the Charts are reproduced courtesy of www.StatsPanda.com
TCS Y-O-Y Key Growth Data (Revenue, Op Margin, Productivity, Avg Salary, Employee Growth)
In 2014, Operating Profit Growth(39.43%) and Productivity Gain(19.57%) were the highest while Employee Growth (8.62%) was the lowest in the history of TCS. That surely raises some eyebrows.
So, I decided to regenerate the same chart by tweaking the Employee Strength from 300,000 (as reported in AR 2014) to 320,000. Now, take a look at the chart below. The numbers look much more realistic - Productivity Gain(12.1%) & Employee Growth (15.86%).
TCS Y-O-Y Data (with Employee Strength as 320,000 as on Mar'2014)
Next, I looked into the Average Salary Increase data and the productivity gain data and tried to see the impact if we change the Employee Strength from 300 K to 320 K at the end of Mar'2014. Check out the generated charts and the analysis below.
TCS Avg Productivity vs Avg Salary when Employee Strength is 300K as on Mar'2014
As per the chart above, TCS Employees received an average salary increase of 14.35% in 2014 vis-a-vis 11.81% in 2013. But little bit of poking with the TCS employees revealed the Average Salary Increase was better in 2012 - 2013 than in 2013 - 2014. Then why do we see a different trend here? Now, take a look at the same chart but regenerated with employee strength as 320 K. You can see the Average Salary increase matches with the data heard from TCS Employees and consistent with the past trend - Average Salary increase changed from 14.35% to 7.21%.
Similar observations can be made with respect to Productivity Gain as well. 19.57% Productivity gain in one financial year is near impossible unless there is fundamental shift in Business Model and Revenue Pattern. With correction of employee strength from 300 K to 320K, even that's get corrected from 19.57% to 12.1%, a much more grounded and realistic number.
TCS Avg Productivity vs Avg Salary when Employee Strength is 320K as on Mar'2014
Last take a look at the Utilization Ratio in the chart below. It has remained range bound over the years and no significant upside can be seen in 2014 w.r.t 2013. So, when there is no significant change in Utilization Ratio & there is a dip in Employee Growth Y-O-Y, how one would explain such a steep growth in Revenue as well Operating Profit level and gain in Productivity gain in 2014?
TCS Key Metrics along with Utilization Ratio
Based on the data and analysis above, it appears TCS did under report their total employee strength at the end on Mar 2014. This observation actually seems to be consistent with the news around layoffs as that's the only way to get rid of off-the-book-employees. So, why did TCS do this?
TCS Key Metrics along with Utilization Ratio
Based on the data and analysis above, it appears TCS did under report their total employee strength at the end on Mar 2014. This observation actually seems to be consistent with the news around layoffs as that's the only way to get rid of off-the-book-employees. So, why did TCS do this?
To show (at least on paper) -
1. Superior growth in productivity number.
2. Higher Average Salary Growth.
2. Higher Average Salary Growth.
These two are important factors when it comes to valuation. Above par growth in Productivity numbers does indicate superior & improving asset quality, better strategy and execution and that commands higher premium. Higher Average Salary Growth gets reflected in lower attrition as well as increase in ability to attract talent. These factors help de-risk current and future revenue stream. Overall, these numbers are very critical and any change in their values will have impact on the valuation as well. The under reporting does mean that TCS was planning to lay off people in subsequent period. However, this seems to be a reactive step and does indicate the discomfort of TCS Management with the increase in employee strength in higher salary band.
This problem is not going to disappear any time soon. You can expect to see similar waves of employees-in-higher-salary-band continue to keep bothering TCS Management for next few years (basically the hires from 2006 and earlier). The organisation will go through a period of turbulence and may force the management to re-engineer the business model leading to a period of uncertainty for TCS for next few years.
As for the ongoing lay offs this year, there seems to be a sense of urgency and an accelerated pace of reducing the employees at higher salary band. In fact, it's getting uglier now. This could be related to the fact that TCS under reported the employee strength at the end of Mar 2014 and as a result they have to do a catch up job now. So, while superior productivity numbers & better average salary increase made the investors happy & the valuation sky rocketed, it also created a challenge for TCS to handle now. It brought in unnecessary instability to the organisation and increased the risk. TCS needs to handle the employee layoffs more gracefully and better manage the investors' expectations to make the growth story sustainable. Hopefully they report more grounded numbers but closer to reality.
The valuation at current level does seem to be very high and I will not be surprised if we see a correction of 20% in next one to two years time (Rs 1900 - 2100 range).
This article is speculative in nature and a work of subjective interpretation of data available in public domain. I am not a TCS employee and never I was. I don't have any professional relationship with TCS whatsoever and have no share holding of TCS.
You can follow me at @satya_paul
