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 Ms. Nehal Shah from the Investor Relations team at TCS.

Thank you, and over to you.

Nehal Shah

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 2024 that ended December 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 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, everyone.

Nehal Shah

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

N G Subramaniam

Good evening, everyone.

Nehal Shah

Mr. Samir Seksaria, Chief Financial Officer.

Samir Seksaria

Hello, everyone.

Nehal Shah

And Mr. Milind Lakkad, Chief HR Officer.

Milind Lakkad

Hi, everyone.

Nehal Shah

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 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

Moderator · Conference Operator

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

Please go ahead.

Sudheer Guntupalli

Yes.

Thanks for the opportunity and congratulations on good execution.

First question is to Samir, in general, companies start cost actions with a bit of lag from the point of demand deterioration, and there will be a further lag for those actions to translate into margin expansion.

Also, attrition and supply tightness in the market cooled off significantly from where it was 12 to 15 months ago.

So, if we see these two facts in conjunction, Samir, is it fair to say that the margin improvement cycle has just started and

Moderator · Conference Operator

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

Thank you.

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

Please go ahead.

Sandeep Shah

Krithi, I think you might have answered the question indirectly, but any of your discussions with any of your clients in any of the verticals or markets, give you any indication of any emerging green shoots in terms of the demand because of the Fed meeting where consensus now believes that the U.S. economy could have a soft landing as a base scenario versus a recessionary outlook, which people were predicting earlier.

K Krithivasan

Sandeep, you know that already some of our verticals are doing quite well.

For instance, manufacturing, we've been reporting growth.

Energy, resources and utilities have been reporting good growth.

And even Life sciences and healthcare, despite last quarter being weak, has again returned to growth.

And we've also been seeing our consumer business group (CBG) has been quite promising, and we started seeing some green shoots in consumer business, but we'll be able to say for sure next quarter, but it looks quite promising.

Sandeep Shah

That is helpful.

And any initial color in terms of CY '24 budgets?

K Krithivasan

There are two things, Sandeep.

One is we have not heard any specific color.

And two, given the overall uncertainty, we find our clients are also very agile, even though they may have some thought in terms of what they want to spend, but we find that they also keep reacting to the market sentiment.

So, there's a whole budget - on which projects started, or which ones got paused, it will be a very dynamic decision.

So, we don't want to read too much into that aspect.

Sandeep Shah

And any update in terms of how the BSNL deals ramp-up continue to remain over four to six quarters?

N G Subramaniam

We have started to deliver the equipments and services for BSNL.

And as I explained in the previous quarters, we are approaching it from zones and circles in which we have to roll it out.

We have taken up the North zone as the first milestone, and we have started to deliver equipment and services by rolling out the new radios that are stated to be delivered to BSNL in a few circles.

The data center in which the whole evolved packet core needs to be installed and operationalized that's also been progressing well.

So overall, I would say that this is the first quarter where we have delivered close to about, I would say, 2,000 sites worth of equipment, and they are in the different stages of installation and commissioning.

At the same time, the data centers

Moderator · Conference Operator

Thank you.

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

Please go ahead.

Kumar Rakesh

My First question was for Krithi.

In your prepared remarks, you talked about the pent-up demand.

So where are you seeing the signs of that?

And what do you think would be the trigger for that to materialize?

K Krithivasan

No, like I did also give out certain examples.

For instance, if you just take the consumer business is a channel modernization or store modernization.

So, we talked about a few areas where we find that investment has not kept up pace with the requirement, business demand.

So that's what is giving us that confidence, Kumar.

Kumar Rakesh

And what would be the catalyst for that to materialize when clients eventually somewhat start to spend on the pent up demand again?

K Krithivasan

Catalyst would be, I would say that when they have a confidence about the stability of the overall macros, Kumar.

Once they are confident that the environment is good, the investments will come in.

Kumar Rakesh

Got it.

My second question was you have talked about market share gain and benefiting from vendor consolidation.

So apart from your scale advantage, what is helping you to be the beneficiary of these trends?

K Krithivasan

Scale advantage is only one thing, Kumar.

The most important advantage is the domain capability, contextual knowledge we bring in into each of these solutions.

For a vendor consolidation to be successful, you should bring in the value for the customer, in terms of the contextual knowledge, the industry knowledge in terms of delivery certainty.

So, all these things matter.

And the process that you want to deploy.

Moderator · Conference Operator

Thank you.

We have a next question from the line of Manik Taneja from Axis Capital.

Please go ahead.

Manik Taneja

Congratulations once again for the strong performance on margins.

Just wanted to prod you further with regards to the subcontracting expenses, which are now below pre-COVID levels.

Is there something structural that we are doing to our delivery organization because of which these expenses have now reduced to a much lower level.

Would appreciate some commentary on that front?

Samir Seksaria

Manik, one is for subcontractors, we have been using them to meet the short- term demand-supply mismatch.

And it peaked because one there were border restrictions.

And second, there were these entire challenges, etc. which were happening in a higher demand environment.

And we have explained that in terms of why those scenarios arose.

Now as the supply side challenges of attrition cooled off, and we had invested into capacity.

That is how we can manage the demand.

And when we don't require those intermediate ones is when we are optimizing our use of subcontractors, and yes, the cost is below the pandemic levels as well.

And that has been thought through strategically, and you could see that it is reducing sequentially quarter-over-quarter for past few quarters.

Moderator · Conference Operator

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

Please go ahead.

Gaurav Rateria

Hi, Thanks for taking my question.

So, first question is with respect to, is there any difference in the TCV growth trends versus ACV growth trends because of the deal tenures changing compared to what you saw last year?

Or it's largely been similar to no material change there?

K Krithivasan

We don't see any trend, that kind of change.

The TCV trend in terms of tenure continues to be consistent with what we saw before as well.

Gaurav Rateria

Got it.

The second question is on the levers for margins that helped during the quarter, you did talk about realization and productivity.

So, the general perception is that in a tough environment, it's very difficult to use a lever of realization, but you have been able to do that.

Is there anything going on with respect to client negotiations that has been helping you to benefit on

Moderator · Conference Operator

We have our next question from the line of Apurva Prasad from HDFC Securities.

Please go ahead.

Apurva Prasad

Thanks for taking my question.

My first question is on the BFSI vertical.

Would it be fair to say that BFSI grew on a sequential basis if I adjust for the large program completion in North America, which you had referred to earlier and the furlough impact in specific Europe BFSI account?

N G Subramaniam

I would agree with your view, adjusting to the large BFSI program that we completed in North America and furlough impact we had across markets; I think BFSI actually did well.

The deal closures in BFSI vertical are also quite broad-based across markets.

I would agree that BFSI is actually a positive thing from my perspective, and it will only further improve from here.

Moderator · Conference Operator

Thank you.

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

Please go ahead.

Ravi Menon

Hi, thank you and congratulations on your margin performance.

Samir, one popular belief is that large deals come with an increase in unbilled revenue.

Can you talk us through why unbilled revenue is down Q-on-Q despite the BSNL deal ramping up this quarter?

Samir Seksaria

No, it's not always that large deals come with unbilled revenue.

Yes, some of them would have it.

But in this quarter, unbilled revenue is down because we had a focused effort concentrating on that metric.

And I think overall, the business has delivered quite well on ensuring unbilled revenues go down.

And we see a slight impact of that in terms of the DSOs going up by two days because the unbilled revenues got converted into invoicing and that's a good thing to have because it leads to better visibility on collections.

Ravi Menon

Thank you.

And if I heard NGS correctly at the press conference, you said BFSI will return to growth next quarter.

Is this due to a change in how discretionary spending decisions are being made or due to any specific deal ramp-ups?

N G Subramaniam

I think, as I said, overall, BFSI, if I look at all our clients in BFSI, many of them actually grew or stayed flat.

There has been a marginal growth in each one of them.

And the actual de-growth eventually happened because of two large programs that we completed and the furloughs.

Adjusted for that, we believe that it will be a positive momentum for us in BFSI vertical in the next quarter.

Coupled with some of the deals that we have won, I think that should also ramp up in the coming quarter in the Q4 and Q1. And all that is what makes us feel that BFSI will actually return to growth, at least in our portfolio of clients that we have.

Ravi Menon

Thank you.

And one last follow-up, if I may.

You talked about your specific advantages on contextual knowledge and how the overall value that you

Moderator · Conference Operator

Thank you.

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

Please go ahead.

Moshe Katri

Thank you and congrats on very strong execution in a pretty tough environment.

I have two questions from my side.

First, we continue to see a disparity in performance in Europe versus North America.

Can you provide some color on that?

And do you think that disparity kind of will maybe disappear down the road given your pipeline?

K Krithivasan

If you look at our pipeline, Europe has also been good.

It's improved this quarter.

And we have seen our TCV in Europe also has improved.

In fact, our Europe geography did better this quarter compared to North America, on a sequential basis.

So, it's reasonable to expect that Europe will also return to growth in the medium to long term.

We mentioned before that we are hoping growth returns in North America as well.

I don't know whether there will be parity, but there'll always be some differences, but we hope in the medium to long term, both the markets will return to growth.

Moshe Katri

Understood.

And then the follow-up, I just want to clarify given some of your commentary and looking at your pipeline, are we seeing more optimism for discretionary spending during the next few quarters, more on the digital side?

And obviously what we've seen on the TCV side, the main drivers were more on the cost takeout kind of area.

But any color on the discretionary side outlook for the next few quarters?

Thanks a lot.

K Krithivasan

Whatever the proportion between discretionary, non-discretionary existed in last quarter or last couple of quarters, we see that has not filtered or changed significantly.

It's continuing to be the same.

Moderator · Conference Operator

Thank you.

We'll take our last question from the line of Dipesh Mehta from Emkay Global.

Please go ahead.

Dipesh Mehta

Two questions.

First, on BFSI.

If I look last 3 years, BFSI deal intake remained around $10.5 billion on last 12 months basis.

So more or less flattish, if I look, let's say, 3-year basis, in a way it gets reflected in revenue growth

Moderator · Conference Operator

Thank you.

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

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

Over to you, sir.

K Krithivasan

Thank you, Operator. • In Q3, our revenue grew 4.0% in rupee terms and 1.7% in constant currency terms. • Improved productivity and other operational efficiencies, along with further optimization of subcontractor expenses, helped expand our operating margin, offsetting margin headwinds from furloughs and higher third-party expenses. • We were able to improve operating margins to 25.0%.

Our net margin is at 19.4%. • Deal momentum continued to be very strong in Q3 with our order book at $8.1 billion. • Our LTM attrition in IT services fell further to 13.3%. • Our Board has recommended a dividend of ₹27 per share, including special dividend of ₹18 per share. • We continue to invest in building our Gen AI offerings, deepening our employees' skills on Gen AI and are building differentiated capabilities, integrating Gen AI in our portfolio of products and platforms.

We continue to deliver strong and resilient growth, winning market share with industry- leading margins. • Our resilience is a result of our ongoing investment and exceptional leadership team under extremely talented and dedicated workforce.

I want to thank each of them for what has truly been an outstanding performance in a challenging environment that we should all be proud of.

With that, we wrap up our call for today.

Thank you all for joining us.

Enjoy the rest of your 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.