Why TCS boss Krithivasan is unafraid of GenAI, but unwilling to say the worst is past

New Delhi: Tata Consultancy Services Ltd (TCS) is not confident that the worst of the slowdown is past, chief executive officer K. Krithivasan said, as India's largest information technology services company tries to determine client spending in its biggest markets—the US, Western Europe and the UK.

In a wide-ranging interview on Friday, Krithivasan also dismissed fears about Generative AI, expressed confidence that technology will create more jobs, and stressed that TCS wants to bring differentiation to clients rather than ride hype cycles.

“We don’t give guidance. We have a good order book ($42.7 billion). And that is why we will do better in FY25 than in FY24. But we are cautious because we continue to see uncertainty in our markets,” Krithivasan said.

“Clients are reprioritizing programmes and calibrating at short notice. Taking all this, it would not be appropriate on our part to say that the worst is behind us. I don't think we are in that situation. Once we feel that we have that confidence, we will do so. But at this time, we do not have that comfort or confidence to say that the worst is behind us.”

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Krithivasan's comments came after the Mumbai-headquartered company reported a 1.93% sequential dollar revenue growth in the April-June period on Thursday, crossing analysts' expectations. Hearteningly, headcount rose by 5,452 from the preceding quarter, following a sequential drop in workforce in each of the four quarters last year. All this prompted a scramble for TCS shares, which ended up nearly 7% on Friday.

TCS ended FY24 with revenue of $29.1 billion, marking a 4.1% growth, the second-slowest full-year growth since it went public in August 2004. Its slowest growth was 0.7% in FY21, a year when the covid-19 pandemic upended businesses globally.

Also read: Is TCS’ stellar revenue performance a one-quarter wonder?

At the heart of the slow growth witnessed by the country's $254 billion IT services industry is the conflict in the Middle East and Ukraine, and the uncertainty about whether central banks will agree to cut borrowing rates.All of this has made many of the Fortune 500 companies hold back from spending more on technology.

"We note that TCS management stated that demand remains muted and has not improved thus far through CY24, and that client conversations remain the same," Keith Bachman, an analyst with BMO Capital Markets, wrote in a note dated 11 July.

"The company indicated it is too early to call an improved environment though reiterated the view that FY25 growth should be better than FY24, which is supported by sequential growth this quarter," Bachman added. "Hence, though we think IT services estimates are generally bottoming (not going lower), we do not yet have enough conviction that CY25 growth will improve, which would enable us to move to a more positive stance on the sector".

Krithivasan said he was pleased with the company's all-around growth. However, analysts at Kotak Securities estimate that about $70 million of the incremental business in the first quarter came from the BSNL contract.

TCS had won a mega deal (valued at more than $1 billion) from the state telecom firm in the summer of last year). This means 49.2% of the $142 million in sequential incremental revenue added by TCS in the June quarter came from only the BSNL contract.

Worry over GenAI

Another worry is the rise of GenAI: Since the debut of ChatGPT in November 2022, doomsayers have argued that Generative AI will ring a death knell for the industry as it makes much of the work redundant.

Krithivasan dismissed these fears.

Also read: With one mega hit on home ground, TCS kicks off first quarter on the front foot

"As Roy Amara mentioned, we tend to overestimate the effect of a technology in the short run and underestimate the impact in the long run. Because of this, we typically go through the hype cycle," said Krithivasan. “ChatGPT created a lot of early interest. But people are slowly realizing that it is most useful for a class of problems. People are realizing that it will not take away all the jobs—humans would be required.”

Amara was an influential American scientist and futurist who worked at the Stanford Research Institute.

“At the same time, we realize that unlike some of the technologies in the past like Blockchain, GenAI has a much larger impact. We believe many areas (In the IT services space) will gradually change. 30-35 years ago, when I started as a young engineer, almost all of the coding was in the mainframe. Today, 10% is in mainframe while 90% is in new technologies. Even the 10% coding we do in the mainframe differs from what we used to 30 years ago,” the TCS chief said.

"Now, every time you code, you get help from IDEs (integrated development environment or IDE is a software application that helps programmers develop software code efficiently). Ten years from now, the way we do coding now will be different. So, the question is, if we have 1,000 people now, will we have fewer people because of the rise of these traditional GenAI technologies? Our belief is not so, and we will have more people. This is because technology will play a greater role in the creation of more products and services."

Last month, Accenture Plc, the world's largest technology services firm, reported winning $2 billion in GenAI deals for the first nine months of the company's September-August fiscal year. Accenture's early success in GenAI contrasts with homegrown technology services majors such as TCS, Infosys Ltd and HCL Technologies Ltd, which are still navigating their AI strategies and none of them are quantifying the business from the GenAI or AI tools.

“It is not correct to say TCS is a laggard. More than reporting pure-play AI revenue, the important thing is to see how we are helping or bringing differentiation for our clients. We are leveraging AI in almost all areas of our work, and that, to us, is the key,” said Krithivasan. 

“Going forward, AI technologies will be deeply embedded in almost everything we do. So, we should resist riding on a particular hype cycle and focus on how we can help our clients.”

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