TCS — earnings call

The transcript as filed. Every paragraph is addressable: its link names the page and the position it sits at in the call.

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 ‘*’ 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 fourth quarter and full year FY 2023 that ended March 31, 2023.

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. K.

Krithivasan -- CEO Designate and President, Mr. N G Subramaniam -- Chief Operating Officer and Executive Director, Mr. Samir Seksaria -- Chief Financial Officer and Mr. Milind Lakkad -- Chief HR Officer.

They will give a brief overview of the company's performance followed by a Q&A session.

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

And 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 would like to turn the call over to Rajesh.

Moderator · Conference Operator

Thank you.

We have a next question from the line of Sudheer Guntupalli from Kotak Mahindra Asset Management.

Please go ahead.

Sudheer Guntupalli

Yes.

Krithi, firstly congratulations and all the best in your new innings.

Couple of questions from my side.

The prevailing industry perception seems to be that because of macro uncertainty, deal mix is shifting towards cost optimization, which are typically large deals that may take longer time lines for revenue conversion.

But your prepared remarks suggest the contrary about the order book that got built during FY 23.

So how do we read this contradiction?

K Krithivasan

Sudheer, cost and optimization deals need not be large.

Very often, customers look at immediate operations because in times of uncertainty, they want to control cost and so something quick.

So the deals are cooked in a way that they can also get benefits immediately.

Like we discussed before, our order book is actually very less lumpy, with just one mega deal and a number of medium to small-sized deals.

So that gives us the confidence that there will be faster revenue conversion.

I don't know whether we can say that all cost and optimization deals will be larger.

Some of them may be larger, many of them need not be.

Sudheer Guntupalli

Got it.

And you made an interesting point in the press meet that many of your clients, which are the large US banks are benefiting because of recent banking issues and the consequent deposit flight.

So if the banking situation doesn't materially escalate from here on and as and when the negative sentiments received, could this be a net positive outcome for TCS over the next 12 to 18 months, given some of the key clients are actually becoming stronger with a further possibility of M&A integration related spend?

Moderator · Conference Operator

Thank you.

We have our next question from the line of Sandeep Shah from Equirus Securities.

Please go ahead.

Sandeep Shah

Thank you for the opportunity.

Thank you Rajesh, and all the best for your future endeavors and congratulations, Krithi, for your new role.

The first question is just an extension to what Ankur has asked.

So looking at your commentary, it seems that there could be a near-term pressure or caution from clients’ side in terms of the IT spend.

So FY 24 could be slightly different where growth could be back-ended versus front-ended, which is seasonally the trend in most of the normal years?

Or do you believe FY '24 may have a soft growth across all the four quarters?

K Krithivasan

Sandeep, I don't want to comment on the overall FY 24.

As we called out, Q4 has been soft because of the uncertainties.

And those uncertainties are not fully resolved.

At the same time, we are comfortable with the order book we see.

And we also commented on the tenure of the order book in terms of the short duration of the project.

So that gives us the confidence that many of these projects will get done in a short period of time and we'll be able to realize the revenue.

But we cannot take away the fact that there could be some transformation project or discretionary project that could get cancelled if there is a further deterioration of the sentiment.

So, these are all the facts that we are working with.

But we'll continue to be close to our customers.

We don't want to comment on how Q1 or Q2 is going to be or how FY 24 is going to be.

Sandeep Shah

Okay, fair enough.

Just a question in terms of margin.

Can you explain what was the nature of the on-site cost pressure during 4Q?

And also question about FY 24 margin, because FY 23 margin has been impacted by supply-side issue.

With supply-side issues abating, whether it is fair to say the margin management could be better in FY '24 versus FY '23, or it is hard to say

Moderator · Conference Operator

Thank you.

We have our next question from the line of Abhishek Kumar from JM Financial.

Please go ahead.

Abhishek Kumar

Good evening.

I just wanted to understand what is driving the growth in the UK market?

Rajesh, you had mentioned in the last quarter that unlike continental Europe and the US, in UK there is some clarity.

They had moved decisively towards the cost takeout project.

I’m just trying to tie it up with Krithi’s comment that cost takeout projects may not be longer gestation period projects.

And is that something, the clarity in terms of what they need to do reflecting in better growth in UK?

And if that is the case, would that be a template that US also can follow once there is some sort of clarity either way, either on the discretionary side or on the cost takeout side, things could quickly come back and the growth can resume?

Rajesh Gopinathan

Abhishek, UK is exactly what you described and what we said in the past.

The market is reconciled to the operating environment and knows that it needs to do something because externally nothing is going to change.

And it is not just cost takeout, transformation projects are also ongoing.

Last quarter, we had spoken about a very large telecom deal.

That was a combination of cost takeout as well as a massive movement onto the cloud to be able to make their whole enterprise stack agile, so that they can introduce new products faster and respond to market conditions differently.

Similarly, in the utility sector, we have spoken about how the market regulator is moving to introduce greater competition and greater agility there.

We worked

Moderator · Conference Operator

Thank you.

We have our next question from the line of Pankaj Kapoor from CLSA.

Please go ahead.

Pankaj Kapoor

Thanks for the opportunity.

Rajesh, wish you the best and Krithi, congratulations.

Can you give some color on how the deal velocity panned out within the quarter?

Did you see clients delaying decisions on deals that would have otherwise closed by, say, March end in the last, say, 15-odd days?

And if possible, can you quantify the impact of that?

Moderator · Conference Operator

Thank you.

We have our next question from the line of Gaurav Rateria from Morgan Stanley.

Please go ahead.

Gaurav Rateria

Hi, thank you for taking my questions.

So, first question, just going back to the conversion of the order book to revenue, just to get it a little better, is it fair to say that last year you ended the order book on TCV basis, a particular growth, your ACV growth would have been slower than that?

And this year in FY '23, your ACV growth would have been better than the TCV growth, which gives you more confidence on your faster conversion of order book to revenue for next year.

Just trying to understand, is that the correct understanding?

Rajesh Gopinathan

Gaurav, we do not comment on ACV.

I do not want to get dragged into it.

But from the perspective of the composition of the order book this year, it is more weighted towards the medium-sized deals than mega deals.

So, you know, the $50 - $100 million range has been a larger constituent rather than the $500 million plus book.

Gaurav Rateria

Got it.

Secondly, Rajesh, you mentioned that the sentiment in Europe has kind of improved and that has reflected in better velocity of the deal flows.

Is it fair to say that at least for the next two quarters, the growth drivers for overall revenue will be more led by Europe than the US?

Moderator · Conference Operator

Thank you.

We have our next question from the line of Ravi Menon from Macquarie.

Please go ahead.

Ravi Menon

Thank you.

This is similar to what Pankaj asked that the way the deals have come through, you know, it shows that the demand environment has not really changed, but the quarters of early growth, it has become pretty negative.

So, are you seeing this change in pipeline or delays in decision making that this negativity is not just temporary caution?

Or should we think about this as something similar to furloughs and we will see this come back in a quarter or two?

Rajesh Gopinathan

Ravi, as of now, no. But we'll have to wait and see if it persists, and how it turns out.

As of now, we have not seen any significant change in the deal pipeline.

And the actual pipeline replenishment continues to be quite strong.

But we'll have to carefully watch how the decision-making plays out in the next quarter or so.

Ravi Menon

And you had talked last quarter of a more normalized annual gross hiring of around 125,000 to 150,000 people as attrition normalizes.

Is that still the range you're working with?

Milind Lakkad

See, we don't call out on gross hiring for the year.

In general, for the campus hires, I talked about 40,000 campus hires.

Number of lateral hires will be dependent on the demand from the business every quarter.

Ravi Menon

Thanks.

And one last follow-up, if I may.

It looks like you could have taken up the utilization, but you opt to I mean let the natural attrition, you chose to still

Moderator · Conference Operator

Thank you.

We have a next question from the line of Vibhor Singhal from Nuvama Equities.

Please go ahead.

Vibhor Singhal

Thanks for taking my question.

So, just a couple of questions from my side.

Last quarter, we mentioned that the growth in the retail vertical last quarter was primarily driven by the travel vertical.

Does that continue to be the case this quarter as well?

And how is the core non-travel part of the retail function, say the FMCG and the CPG part of the business faring on an overall company basis.

My second question was on the overall scenario at this point of time.

I mean I'm sure the TCS management has been through similar kinds of downturn before and come out of that challenge as well.

So typically, in these kind of economic slowdowns or downturns, do clients end up asking for pricing discounts or do competitors resort to some pricing under cuts, which basically forces us also to maybe follow them, which would impact the profitability or the growth or both in this kind of a scenario?

Rajesh Gopinathan

Sorry, I was on mute.

On the Retail side, TTH [Travel Transportation and Hospitality] continues to do well.

But our performance is not purely driven by that.

Especially in this quarter, most segments have done well.

Essential retail has done well.

Some parts of discretionary retail and fashion have been challenged.

North America retail has been quite weak, whereas North America travel continues to do well.

Moderator · Conference Operator

Thank you.

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

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

Rajesh Gopinathan

Thank you.

We are pleased with our FY 23 performance, growing at 17.6% in rupee terms and 13.7% in constant currency terms.

The steadily deteriorating macro environment has meant decelerating second half.

Our Q4 revenue growth was 16.9 in rupee terms and 10.7 in constant currency.

However, we have had a very strong order book with an all-time high number of large deals.

Our operating margin in Q4 was flat sequentially at 24.5%, and our net margin was at 19.3%.

On the people front, LTM attrition in IT services further fell to 20.1%.

Lastly, I want to thank all of you for all the positive sentiment that you’ve shown.

It's been an absolute pleasure interacting with all of you and anticipating and reacting to your questions.

So, thank you for that goodwill and that attention that you've given us.

With that, we wrap up our call.

Thank you all for joining us today and enjoy the rest of your evening, day and stay safe.

Thank you.

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

Thank you very much.

We will now begin the question-and-answer session.

Participants who wish to ask a question may press “*” and 1 on their touchtone phone.

If you are using a speakerphone, please pick up your handset while asking a question.

This is required to ensure optimum audio quality on the call.

Should your line have any disturbance, you may be asked to return to the question queue if you do not have a clear connection.

Ladies and gentlemen, we will wait for a moment, while the question queue assembles.

We have our first question from the line of Ankur Rudra from JP Morgan.

Please go ahead.

Ankur Rudra

Thank you, Rajesh.

Thank you so much for your leadership and insight for over the last 40 plus quarters.

We will miss you.

Krithi, congratulations on the innovation and best wishes for the period ahead.

In terms of questions, I think the first one is on demand.

There appears to be a sharp change in demand commentary.

This quarter, besides the print disappointment, could you elaborate how much of the slowdown and change in sentiment came after the event of the last three or four weeks of March versus what was already in motion?

And on a related note, you obviously have the highest exposure to the banking industry.

You have seen several cycles.

Where is the visibility on