TCS — earnings call

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Prepared remarks

Moderator · Conference Operator

Ladies and gentlemen, good day and welcome to the TCS Earnings Conference Call.

As a reminder, all participant lines will be in the listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes.

Should you need assistance during the conference call, please signal an operator by pressing ‘*’ then ‘0’ on your touchtone phone.

Please note that this conference is being recorded.

I now hand the conference over to Mr. Kedar Shirali, Global Head, Investor Relations at TCS.

Thank you, and over to you, sir.

Kedar Shirali

Thank you, Steven.

Good evening and welcome, everyone.

Thank you for joining us today to discuss TCS' financial results for the fourth quarter and full year fiscal year 2022 that ended March 31, 2022.

This call is being webcast through our website and an archive, including the transcript, will be available on the site for the duration of this quarter.

The financial statements, quarterly fact sheet and press releases are also available on our website.

Our leadership team is present on this call to discuss our results.

We have with us today, Mr. Rajesh Gopinathan -- Chief Executive Officer and Managing Director; Mr. N.G.

Subramaniam -- Chief Operating Officer and Executive Director; Mr. Samir Seksaria -- Chief Financial Officer.

Our Chief HR Officer -- Mr. Milind Lakkad, could not join us today due to a personal emergency, but Samir will be speaking on behalf of Milind.

Our leadership team will give a brief overview of the company’s performance, followed by a Q&A Session.

As you are aware, we do not provide specific revenue or earnings guidance.

Anything said on this call, which reflects our outlook for the future or which could be construed as a forward-looking statement, must be reviewed in conjunction with the risks that the company faces.

We have outlined these risks in the second slide of the quarterly fact sheet available on our website and e- mailed out to those who have subscribed to our mailing list.

With that, I’d like to turn the call over to Rajesh.

Moderator · Conference Operator

The next question is from the line of Diviya Nagarajan from UBS.

Please go ahead.

Diviya Nagarajan

Couple of questions from my side.

NGS, earlier on the press conference you had talked about some of your customers stepping back and you kind of described that as backing up.

Could you kind of explain what that means in terms of the budget expectation or spending trends that you're seeing with some of those customers?

That’s question number one.

Question two, from an overall perspective, if you were to look at your demand outlook and the confidence that you have on the outlook versus last year, how would you kind of rate that -- is it the same, are you seeing more risk, or how would you characterize that?

N.G. Subramaniam

Thank you, Diviya.

I think I answered that in the context of the Europe performance in the current quarter compared to the previous quarters.

What we see in Europe typically across verticals is that they are the ones which were most impacted by COVID, because different countries were affected by COVID at different times, and they are a fairly integrated economy, number one.

Number two is that they are just about to also manage the Brexit which happened during the last 18 months or so, and now the war situation.

All of that put together, there is some thinking about what should be the investment areas.

At the same time, there is enormous focus on sustainability across verticals.

Everybody in Europe is looking at putting sustainability on the agenda.

Looking at all of this, there is a kind of stepping back and see where are the investors, what should be the priorities for technology investments and so on, so on.

In that context, some readjustment and re-orientation of budgets are taking place.

But, as we explained in the press conference as well, that technology is the solution for the majority of the issues that they are facing.

In that context, the technology spend continues to happen, but there are some reallocation in terms of where they actually go and they spend on technology.

Moderator · Conference Operator

The next question is from the line of Sandip Agarwal from Edelweiss.

Please go ahead.

Sandip Agarwal

I have only one question on the manpower side.

So, just wanted to understand that the situation we are going through is led by high demand and the supply is not matching it.

So, basically, there is kind of poaching from one another.

So, the real solution probably is the supply increasing.

So, how will supply increase in next two quarters – will it be completely through this fresher hiring which has happened in past and the way we are hiring right now or you think that there are other ways to increase the supply, like cutting down the training time through accelerated training programs, are there some other options by which we can increase the supply because I think that is where we are right now most hurt and probably demand environment remains robust, so what is your sense on supply issues cooling off, by when you think it will happen?

Rajesh Gopinathan

Sandip, Rajesh here.

As you rightly pointed out, what we’re seeing is a demand-supply mismatch in our industry.

Fresher hiring and productive use of freshers is a long-cycle activity.

But you have seen the industry step-up hiring over the last four quarters.

We expect that as that supply hits productive use, that will ease up a lot of what was going on over the last few quarters.

So, that’s why when we say that as we look forward two quarters ahead, we think that attrition will flat line and then start tapering.

The expectation is that the bulk of this hiring that has gone on across the industry in the last calendar year will start coming in and playing a role.

So, it’s very similar to what you are saying; just that there is a little bit of a lag and by middle of the year we should see it.

Moderator · Conference Operator

The next question is from the line of Apurva Prasad from HDFC Securities.

Please go ahead.

Apurva Prasad

Rajesh, a couple of quick ones.

So, the changes in the operating structure that you mentioned and the participation across a wider spectrum now, how does that intersect with the hyperscaler deals?

And as a result of this, likely to reflect

Moderator · Conference Operator

Thank you.

The next question is from the line of Mukul Garg from Motilal Oswal Financial Services.

Please go ahead.

The next question is from the line of Sandeep Shah from Equirus Securities.

Please go ahead.

Sandeep Shah

Rajesh, just the first question is in terms of this new operating model.

TCS is always best known in terms of client mining efforts.

So, whether this new operating model will take into consideration in acceleration of a client mining efforts and whether the variable incentives of the sales and the delivery and the other subject matter experts will have a laser-sharp focus in terms of mining

Moderator · Conference Operator

The next question is from the line of Ravi Menon from Macquarie.

Please go ahead.

Ravi Menon

Typically in Q3 you have furloughs and lower number of working days with a lot of holidays and Q4 you really get the benefit of that despite fewer days in the quarter.

At this time, that absolute incremental revenue has declined compared to what we had in Q3. So, what were the headwinds?

And did we not have any furloughs in Q3, usual seasonality, the focus on it like?

Samir Seksaria

One thing to look at in Q3 is that Christmas was on a Sunday.

So, technically there was one more working day than usual.

Furloughs did continue in Q3. But if you look at it from a working days perspective, Q3 had one more day because of the global holiday being on a weekend.

Ravi Menon

And then in Europe, we had a slight revenue decline in absolute terms.

So, I think you mentioned in your press comment about the deal answer at Postbank?

Is there anything else, do you have any programs put on pause by clients because of the war situation in Ukraine or anything else that you see as temporary or is there anything specific that you’re concerned about?

Moderator · Conference Operator

The next question is from the line of Gaurav Rateria from Morgan Stanley.

Please go ahead.

Gaurav Rateria

The first one is, just your comment around Europe.

You talked about some re- allocation and reorientation of technology budgets.

Just trying to understand how did this manifest in client behavior in terms of timing of deal closures or decision-making cycle?

N.G. Subramaniam

I think the re-allocation of budgets comment was made in the context of again, Europe, right, where there are multiple scenarios are emerging there.

In certain verticals, sustainability is important, pretty much in across the client base that we see.

Most of them have made some very strong commitments on the sustainability front and the goal front.

From that perspective, one of the things that happened is, every program that they are doing, there is a very strong alignment to the sustainability goals and how the technology that they are implementing is going to be contributing to their sustainability goals.

To that extent, some amount of reallocation takes place.

Moderator · Conference Operator

Ladies and gentlemen, that was the last question for today.

I now hand the conference over to the management for the closing comments.

Rajesh Gopinathan

Perfect.

Thank you.

As I said, we had a strong well-rounded growth in Q4, which helped us close FY 22 on a strong note, growing 16.8% in rupee terms and 15.4% in constant currency terms and 15.9% in dollar terms.

Our margins continue to be industry leading.

The strong growth came from our customer-centric model, which visibly shows in our clients metrics where we have had strong addition across all revenue band buckets.

We are now doubling down on that customer-centricity by rolling out a new organization structure that will enable curated experiences for our customers depending on what stage their relationship with TCS.

The strength of demand for our services showed through in an all-time high order book during the quarter, even after excluding the two mega deals we won in Q4.

Moderator · Conference Operator

Thank you, members of the management.

On behalf of TCS, that concludes this conference call.

Thank you for joining us and you may now disconnect your lines. _________________________________________________________________________________

Note

This transcript has been edited for readability and does not purport to be a verbatim record of the proceedings.

Questions and answers

Moderator · Conference Operator

The first question is from the line of Kumar Rakesh from BNP Paribas.

Please go ahead.

Kumar Rakesh

My first question was around the margins.

So, we had set our aspiration band above 26%.

In the current context of the supply side constraint and especially for FY'23, how do you see that aspirational band panning out and what are the headwinds and tailwinds we are looking at immediately in the next few quarters?

Samir Seksaria

Hi, Kumar.

So, the 26% to 28% remains our guiding base, and our long-term cost structures are very well placed and we firmly believe that we can operate in the 26% to 28% band based on our long-term cost structures.

If you look at the near term, we will double down on our operational levers to help us get closer to this band.

From a short and near-term perspective, given what we are seeing in terms of the churn, until it goes back to our normal levels, we will see some volatility on margins.

So, that’s our view.

And if I look at FY 23, at least initially we would be seeing some churn and pressure on margins.

Kumar Rakesh

Given that now we’d be ramping up the onsite as well with the travel resuming, how would be the wage hikes on the onsite side?

And how are we looking to mitigate that impact?

Rajesh Gopinathan

Rakesh, this is Rajesh here.

Overall, we think that salary hikes will be similar from a medium perspective to what was there last year with a slightly upward bias.

While there will be pressures in individual markets or individual capability side, the hiring and the pyramid rebalancing that has happened will also give a significant support.

And we think that, as travel opens up more and more, our optimization levers will also increase.

So, there is no one specific answer to it.

If you take a given variable, of course, those variables have their own unidirectional impact.

But in aggregate, we believe that the portfolio can lend itself for some optimization, but short-term volatility is to be expected.