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.

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

After today’s presentation, there will be an opportunity to ask questions.

To ask a question, you may press ‘*’ then ‘1’ on your telephone keypad.

To withdraw your question, please press ‘*’ then ‘2’.

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, operator.

Good evening and welcome everyone.

Thank you for joining us today to discuss TCS’ Financial Results for the Third Quarter of Fiscal Year 2023 that ended December 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 Release 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 & Executive Director; Mr. Samir Seksaria -- Chief Financial Officer; Mr. Milind Lakkad -- Chief HR Officer.

The management team will give a brief overview of the company's performance followed by Q&A.

As you're aware, we don't provide specific revenue or earnings guidance.

And anything said on this call which reflects our outlook on 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

Moderator · Conference Operator

Our next question is from the line of Vibhor Singhal from Nuvama Equities.

Please go ahead.

Vibhor Singhal

Rajesh, I just wanted to basically pick your brain on the performance of the retail segment in this quarter.

This segment has outperformed the company average growth rate and also doing really very well.

Globally, we are hearing about a lot of these retail chains, calling out weakness, especially in Europe in parts as well.

So, any color on that would be helpful as to what drove this strong performance in this quarter, do you expect this to sustain in the coming quarters also?

And also, is there some color to it in terms of let's say, US retail maybe doing slightly better than Europe retail, as you just called out that in Europe, the decision making is slow on an overall basis?

Moderator · Conference Operator

Our next question is from the line of Sudheer Guntupalli from Kotak Mahindra Asset Management.

Please go ahead.

Sudheer Guntupalli

Rajesh, it has been almost 10 to 13 months since the inflation, macro, and geopolitical concerns surfaced, and some of the upstream segments of the tech ecosystem, like internet or software started flagging off on demand concerns.

But so far if we look at your reported revenue growth, some of the forward-looking metrics or even your commentary, the situation for us seem to be reasonably strong, fairly resilient.

If we take cues from the lag times between impact on upstream and downstream tech players historically, if something could have gone wrong massively, it should have gone wrong by now.

What do you think is happening differently now.

Is it the case that IT services business has become less correlated with macro in the cycle, or you think time lag for the impact will be little longer this time around?

Rajesh Gopinathan

I think as I've always said, the best way to think about IT is to think of it as an industrial perennial.

The tech needs of an enterprise will evolve over a cycle, but it is not totally discretionary.

So, that's one aspect of it.

Moderator · Conference Operator

Our next question is from the line of Pankaj Kapoor from CLSA.

Please go ahead.

Pankaj Kapoor

I have two questions.

First, Rajesh, you mentioned that there is a higher share of cost take out deals which are now coming in the pipeline.

So, just wanted to

Moderator · Conference Operator

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

Please go ahead.

Next question is from the line of Ravi Menon from Macquarie.

Please go ahead.

Ravi Menon

So, Regional Markets and Others segment had an acceleration year-on-year growth versus the last quarter despite muted growth in India.

Should we think that this comes from improved traction in the insurance BPaaS area?

I think NGS mentioned six new go lives in the quarter for BaNCS.

Any large deals here that you'd like to call out or maybe you also share some comments on the deal pipeline in this segment?

N G Subramaniam

I'm sorry, I didn't hear you properly.

Could you repeat the question?

Ravi Menon

NGS, you talked about the six new go lives this quarter for BaNCS.

Just wondering if there are any large deals in the BPaaS segment in insurance, and how the pipeline is shaping up there?

N G Subramaniam

One of the areas where we are seeing opportunities and significant pipeline is the various digital core, whether it is banking or capital markets or insurance, all of them are looking at putting together a new digital core.

And it's going through a lull period in the last about two years or so.

But now, people are thinking about a new core banking system, or a new security settlement system, which are really architected for the future, which are cloud-native, which are inherently micro services or inherently comes with that capability of marketplace with significant amount of APIs and micro services that will enable them to integrate into the ecosystem.

Moderator · Conference Operator

Our next question is from the line of Abhishek Kumar from JM Financial.

Please go ahead.

Abhishek Kumar

I have a question on budgets.

Rajesh, you mentioned in the US there is a wait and watch mode and therefore budget could take some time.

Is there any possibility because of that there was probably a little bit of budget flush in 4Q which could have supported the growth?

Rajesh Gopinathan

Sorry, budget flush due to what?

Abhishek Kumar

See, there's possibly an indecision or wait and watch mode for CY'23 budget.

So, to exhaust CY'22 budgets, any possibility that there is a budget flush to exhaust the previous year's budget?

Moderator · Conference Operator

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

Please go ahead.

Gaurav Rateria

So, firstly, Rajesh, is it fair to believe that the ACV growth could be lower than TCV growth as mix of the deals are changing, and should that be even considered as a lead indicator for growth going forward or you think the deal win trajectory could actually shift upwards over the coming quarters?

Rajesh Gopinathan

Gaurav, I don't have a direct answer to that, but there is not much of change in terms of the mix of deal structures between large or small or long dated or small dated.

So, nothing that we can call out over the last two, three quarters that we can say that we're seeing.

There is an elongation in decision making, which we had spoken about last quarter also and which has also played out this quarter.

So, that the pipeline growth and the qualified pipeline growth is ahead of the actual TCV growth that we're seeing…in fact, we have seen a sequential decline in TCV while our qualified pipeline still continues to grow in absolute terms.

So, beyond that, the specific mix of deals is not materially changing.

Gaurav Rateria

Secondly, on the margins, as headwinds on attrition subside, would our immediate priority be to take margins back to our aspirational band of 26%, 28% or would we prefer to prioritize some investments, keeping margin stable after recovering it to 25%?

Samir Seksaria

Gaurav, our margins or our industry-leading margins are on the back of the investments which we make, and most of our investments, whether it is in terms of talent, in terms of research and innovation, or branding, all are

Moderator · Conference Operator

Our next question is from the line of Ashwin Mehta from Ambit Capital.

Please go ahead.

Ashwin Mehta

Rajesh, we've seen pretty strong growth in regional market and others over the last two quarters; it's of the order of almost 6% sequentially.

So, what is the nature of demand here and how sustainable is this going forward?

Rajesh Gopinathan

The reason of calling the segment out is because it's volatile and difficult to predict.

So, its sustainability is difficult to answer.

From a nature perspective it's come both from the market side – India has done very well, in fact, APAC ex-Australia also have done well.

So, markets have done well, as also the product side of the business that NGS spoke about on the FS and platform side also has done well.

So, it's come from both sides, markets as well as from the products side.

Ashwin Mehta

Second question was you mentioned in the press conference as well that manufacturing has been more resilient compared to your expectations.

So, any trends that we can take from manufacturing given the fact that if we look at client financials, manufacturing growth over the next two years is expected to be actually better than what it was before?

Rajesh Gopinathan

I didn't know that, but that correlates to what we are also seeing.

But I'm still wary, because of all the global supply chain disruption and energy price disruption.

Industries like process manufacturing are much more globally integrated, and not as isolated as, let's say, Retail.

So, we are still cautious.

Our operating approach is always the same; stay close to the customer, deal with the customer on an individual opportunity-to-opportunity basis and we will continue to participate on that basis.

But on a zoomed-out way, talking to customers, it is an industry that's not completely out of the woods.

Moderator · Conference Operator

Our next question is from the line of Rahul Jain from Dolat Capital.

Please go ahead.

Rahul Jain

Basically, my question is related to TCV signing which is $7.8 billion is slightly lower by our recent average win.

Despite the fact that we have been favorable situation on the vendor consolidation exercise.

What explains this mismatch?

Moderator · Conference Operator

Ladies and gentlemen, that was the last question.

I now hand the floor back to the management for closing comments.

Over to you, sir.

Rajesh Gopinathan

Thank you, operator.

We are pleased with our performance in a seasonally weak December quarter, growing at 19.1% in INR terms and 13.5% in constant currency.

Our order book was good, but softer than in the prior quarters, reflecting the cautious stance that many of our clients have taken.

Our operating margin expanded sequentially to 24.5% and our net margin was at 18.6%.

On the people front, LTM attrition in IT services fell slightly to 21.3% and should continue to taper down in the quarters ahead.

With that, we wrap up our call.

Thank you all for joining us on this call today.

And I must say that you're a very mature and knowledgeable group for having resisted asking about the impact of Chat GPT on our industry.

Enjoy the rest of your evening or day and stay safe.

Moderator · Conference Operator

Thank you members of the management.

On behalf of TCS, that concludes this conference.

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

Ladies and gentlemen, we will now begin the question-and-answer session.

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

Please go ahead.

Kumar Rakesh

My first question was to better understand the headcount moderation during the quarter.

During the press conference, Rajesh, you talked about the focus on headcount efficiency to continue in the fourth quarter as well.

Assuming the headcount stay steady in 4Q, you will be exiting the year with a headcount growth of about 4% YoY.

My question was, is that an indication of growth visibility that you have today and hence the rationalization or you are confident of driving similar or higher productivity gains, and hence revenue growth could be significantly higher than that?

Rajesh Gopinathan

I think the best way to think about it is that on a year-on-year basis, our net headcount is higher.

So, we have significantly invested in building up capacity from 2021, tried as much as possible to bypass the industry's hire-from-each- other attrition cycle, and focus on hiring at entry level, and invested in training and cross training our resources.

That investment has hit our productive capacity and stood us in good stead.

The incremental hiring for this year should be seen in context of what we've done in the last year also.

Overall, we are very comfortable with where we are with our net headcount.

We hired significantly ahead of revenue growth in '21 and balanced it with a more prudent hiring in calendar '22.

Going forward, we should be back to a more normal kind of hiring trend.

While specific numbers will keep evolving, we should expect hiring in the range of 125,000 to 150,000 for the year, offset by more normalized attrition levels closer to our long-term averages, which will give us sufficient capacity to take