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 star, then zero on your touchtone phone.

Please note that this conference is being recorded.

I now hand the conference over to Mr. Kedar Shirali, Global Head of 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's financial results for the second quarter of fiscal year 2024 that ended September 30th, 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 statement, 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. K Krithivasan, Chief Executive Officer and Managing Director.

K Krithivasan

Hi, good day everyone.

Kedar Shirali

Mr. N G Subramaniam, Chief Operating Officer and Executive Director.

N G Subramaniam

Good evening everyone.

Kedar Shirali

Mr. Samir Seksaria, Chief Financial Officer.

Samir Seksaria

Hello, everyone.

Kedar Shirali

And Mr. Milind Lakkad, Chief HR Officer.

Milind Lakkad

Hi, everyone.

Kedar Shirali

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

As you are aware, we don't provide specific revenue or earnings guidance, and anything said on this call which

Moderator · Conference Operator

Thank you very much.

We have a first question from the line of Ravi Menon from Macquarie.

Please go ahead.

Ravi Menon

Thank you.

Good evening, gentlemen.

Just wanted to ask you about the BSNL deal.

It seems like the IP that you created is something that lets you compete with the likes of Nokia and Ericsson.

Is this understanding correct, or would most of the IP rest with your partners like Tejas?

N G Subramaniam

Hi Ravi, this is NGS here.

TCS is a system integrator in this opportunity.

For the EPC core software, the IP lies with our partner, C-DOT.

The Radio Access Network is developed and designed by Tejas Networks, and the IP rests with Tejas Networks.

There are a few other things that are required for integrating the software.

For all the network optimization, network planning, cognitive network operations, some of those are traditionally done by the SI.

We have built those platforms.

The IP of those components is with TCS.

Ravi Menon

Great.

Thank you.

We have historically been used to, as investors, perhaps unfairly comparing your with Accenture's outsourcing, that division is what we thought that TCS most compares to.

But now with your focus on growth and transformation, should we think about a larger part of TCS revenues being exposed to a segment closer to Accenture's consulting?

Moderator · Conference Operator

Thank you.

We have a next question from the line of Nitin Padmanabhan from Investec.

Please go ahead.

Nitin Padmanabhan

Good evening and thanks for the opportunity.

Just wanted some color on the demand, overall.

So if you see the last three quarters, including this one, our book-to-bill has been consistently above 1.4.

However the revenue accretion is soft.

So just want to hear your thoughts on how one should think about this?

The second is you did mention that reprioritization and cutting discretionary has been sort of driving revenue headwinds.

Do you get the feel that this is sort of at its peak and it's -- are you seeing signs of this abating in terms of the overall impact on the existing book of business, right?

So those are the two questions.

K Krithivasan

Nitin, last quarter also we explained the situation.

On the one hand, our customers continue to entrust us the building of new technology capabilities and based on that, we continue to win new deals.

But at the same time, given the overall market uncertainty, they are trying to conserve cash and optimize their current spend, particularly on projects that have been running for long.

Moderator · Conference Operator

Thank you.

We have our next question from the line of Kumar Rakesh from BNP Paribas.

Please go ahead.

Kumar Rakesh

Hi, good evening.

Thank you for taking my question.

Krithi, my question was around the revenue side.

If you see over the last three quarters, our revenue in absolute terms have largely been steady, while at the same time, our deal win has accelerated, now crossing consistently $10 billion.

So that is fair to expect that the incremental new part of the revenue within that about $7.2 billion of revenue, the new part would be more sizable now.

That implies that the underlying impact of the existing project rampdowns or reprioritization which we're talking about sequentially is increasing.

Is that inference correct?

K Krithivasan

Mathematically, what you're saying is correct.

There is an increasing reprioritization of long running projects.

There are a few places where a large program may have come to an end.

For instance, in Germany we're doing a large integration.

Once the integration of the two banks came to an end, that was a large revenue stream that stopped, and not replaced by something else.

So both are possible.

There is an increased focus on cost optimization, which is causing our revenues not to increase in line with the increase in TCV.

Moderator · Conference Operator

Thank you.

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

Please go ahead.

Sudheer Guntupalli

Yes, good evening.

Thanks for the opportunity.

NGS, sir, just one clarification on your characterization of the BSNL deal.

When you say you're looking to complete the project in 12 months to 18 months, is it the entire $1 billion TCV will be converted into revenue over the next 12 to 18 months?

Or is there any sizable part of the $1 billion TCV which is also structured as network maintenance revenue over a longer horizon?

N G Subramaniam

When I said the 12 to 18 months, the rollout of the 4G and 5G network for 100,000 network sites is what we will install, we will commission.

And afterwards, you know, we hope to win the maintenance and network operations effort, which will be for optimizing the network and continuously modernizing it.

In the payment terms with BSNL, there are certain clear milestones.

Of the $1 billion that we have put in place, a part of it will definitely mature within these 12 to 18 months.

Some part of it will be subject to warranty and acceptance by BSNL and things like that.

Overall, it's safe to assume that a good part of this $1 billion is something that we would like to bill and collect from BSNL within 12 to 18 months’ time.

Sudheer Guntupalli

Understood, sir.

So any maintenance will be probably a subsequent phases, any maintenance revenue will be subsequently...

Moderator · Conference Operator

Thank you.

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

Please go ahead.

Sandeep Shah

Yes, thanks.

Thanks for the opportunity.

So, just a question in terms of this commentary about -- there is a conservatism on discretionary spend and the cost takeout deals are increasing, outsourcing deals are increasing, vendor- consolidation deals are increasing.

This is almost happening in the sector, including for TCS for last two to three quarters.

So, is it fair to say these deals may start ramping up in the second half and which will try to actually reduce the impact of the leaking bucket, and there could be some gradual turnaround in the revenue?

Is it the right way of looking at it?

Moderator · Conference Operator

Thank you.

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

Please go ahead.

Vibhor Singhal

Yes, hi.

Thanks for taking my question.

So sir, a couple of questions from my side.

In terms of the vertical performance that we are looking at, Retail continues to be quite weak, I think, for multiple quarters.

What is the outlook on that segment?

Are we seeing any signs that spending might come back in

Moderator · Conference Operator

Thank you.

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

Please go ahead.

Abhishek Kumar

Hi, good afternoon and thanks for taking our question.

I have a question on deal wins.

I know, you mentioned that the quarterly run rate has gone up from $7 billion to $10 billion.

Just wanted to understand, given that the contribution of the deal now is more cost take out.

How should we look at ACV of the deal?

Any color Has the ACV also gone up in-line with improvement in TCV or there is any difference in ACV?

K Krithivasan

There is no specific call-out on that.

I think that ACV has remained similar to what it was before.

I don't think the deal tenure has significantly increased.

It's more or less same as before.

Abhishek Kumar

Okay.

My next question is on Gen AI.

I was just wondering about the investments that we are doing or many of our peers are doing in Gen AI.

There doesn't seem to be any margin headwind.

Essentially, it looks like we are reprioritizing our own budgets for investing in Gen AI.

Is it something that clients are also kind of creating investments in Gen AI in a similar fashion?

And therefore, it is at best kind of a net neutral from a demand perspective?

N G Subramaniam

I think it's safe to assume that it is neutral, primarily because I think we are in an investment cycle like our clients.

We as a company are also investing a lot in training our employees, in creating learning platforms and you know separate environment, like we talked about the AI Playground, which we launched, in which we are making available all the digital infrastructure tools and technology in which people can train and people can actually develop things, right?

And get used to how this particular technology works and that can be meaningfully deployed to our clients.

There's a lot of investment happening outside.

Our clients also invest in the technology to do small projects, proof-of-concepts, a proof-of-values and then structure typical use case and so on and so on.

We also invested in cataloguing

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 question.

So the first question, again, coming to revenue.

There are multiple moving parts, which is inflow of new work, project completions and reprioritization of existing book.

But if we were to just look at only the inflow of the new order wins, would it be fair to believe that inflow number should be better in the second half compared to first half based on the deals that we have already reported?

K Krithivasan

Yes, the inflow should continue to improve from the new order wins.

That’s a fair assessment.

Gaurav Rateria

Secondly are there anything to call out with respect to any unusual project completions, which are scheduled in second half which is keeping your optimism under check?

I understand the leakage part of the business, but just trying to understand any project completions, which also could be one of the reasons for keeping your optimism under check?

K Krithivasan

Gaurav, nothing material that comes to our mind.

In fact project completions will take place in the normal course, but nothing very material that comes to mind.

Gaurav Rateria

Got it.

Last question on the margin levers front, how much more room we may have on the utilization and productivity metrics.

Those would still continue to be levers in the near term in 3Q, 4Q point of view?

Thank you.

Samir Seksaria

Yes, Gaurav.

Those will continue to be levers.

We invested significantly when the supply environment was challenging.

And utilization as well as some flab sitting on the direct cost itself, are levers.

So all of it, which you mentioned, that

Moderator · Conference Operator

Thank you.

We have our next question from the line of Moshe Katri from Wedbush Securities.

Please go ahead.

Mr. Moshe Katri you may please proceed with your question.

As there is no response, we'll move to the next question from the line of Rahul Jain from Dolat Capital.

Please go ahead.

Rahul Jain

Yes, hi.

Thanks for the opportunity.

I just wanted to understand little bit on the rationale of reassigning this regional markets and others segment.

What is left out of here because it seems the same vertical, which has been losing some component into this line item has again gained back in a similar fashion.

So which region do we ascribe to and what is left now?

K Krithivasan

Rahul, we wanted to give you all a global color of what is happening in a given industry vertical rather than splitting them into regions.

So as much as possible, wherever revenue streams are stable and mature, we put them under the industry vertical.

And where there's still a lot of volatility, we continue to keep in Regional Markets and Others.

With that, we have moved our APAC and EMEA region revenues into the respective industry verticals.

We continue to keep India, Public Services, Japan and Products & Platforms in the Regional Markets and Others line.

It's to ensure that we can give you more global color at the industry level.

Rahul Jain

Okay.

So what I understood is that India, Japan and product and platform is broadly the component in this at this point?

K Krithivasan

Exactly, in the regional market.

Yes.

Rahul Jain

Yes.

And just a small extension to that, if we see over a period of time, our contribution from Asia, Middle East, Africa, the market which you called out have come off over last six years, while the contribution in this period has increased for Europe as an end market.

So does that also mean that are very large portion of P&P implied -- would it be Japan and Europe?

K Krithivasan

No, I didn't get the last part, Rahul?

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.

Over to you, sir.

K Krithivasan

Thank you, operator.

In Q2 our revenue grew 7.9% in Rupee terms and 2.8% in constant currency terms.

Our growth was affected by the holding back of discretionary spends by clients.

Improved utilization, productivity and other efficiencies helped expand our operating margin by 110 basis points sequentially to 24.3%.

Our net margin is at 19%.

Generative AI continues to drive client conversations.

We have hundreds of opportunities in the pipeline and embedding Generative AI solutions is helping us win large deals.

We continue to invest in building our capabilities.

We now have over 100,000 Generative AI-ready employees and are investing in building differentiated capabilities within Generative AI in our portfolio of award- winning products and platforms.

Deal momentum continued to be very strong in Q2, with our order book at $11.2 billion, the second highest TCV ever.

On the people front, we continue to have the right talent, but have recalibrated our grass hiring to ensure better utilization of our existing capacity.

Our LTM attrition in IT services fell further to 14.9%.

Lastly, our Board has recommended a second interim dividend of `9 per share and also a share buyback to a tune of `17,000 crore at `4,150 per share.

With that, we wrap up our call today.

Thank you all for joining us.

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

Thank you.

Moderator · Conference Operator

Thank you, members of 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