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 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, ma'am.

Nehal Shah

Thank operator.

Good evening and welcome, everyone.

Thank you for joining us today to discuss TCS's financial results for the first quarter of FY 2025 that ended June 30, 2024.

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 all 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 evening, good morning, 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, which reflects

Moderator · Conference Operator

Thank you.

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

Please go ahead.

Sudheer Guntupalli

Hi, Kriti.

Congrats on a good set of numbers.

In March, you indicated that the demand visibility has certainly improved over December quarter.

Now you delivered growth better than expectations.

In that backdrop, just trying to get a context of your comments in the press that you don’t want to yet call out the sustainability of current growth number given the volatile environment.

Is it just a philosophical stance you are taking not to indulge in near-term guesswork or quarterly guidance given the uncertainty or is this by any chance led by a relative weakening of demand visibility versus March quarter for whatsoever reasons?

What I am trying to understand is that directionally are we seeing a steady improvement or stability in demand over time or is demand moving more like a sinusoidal curve over quarters?

K Krithivasan

Sudheer when we announced last quarter, I do know that we said that there is an improving demand environment.

What we said is we believe we are confident that FY25 will be better than FY24. And that is based on how FY24 panned out and how we started seeing the early quarter of FY25. But it does not mean that the uncertainty has gone away.

We still see situations where clients are ramping down programs or re-evaluating programs at very short notice.

And that is the reason we believe that it is too early to call a sustained growth momentum or a demand stability.

It depends a lot on the economic outlook of our customers.

It is certainly not philosophical, but it is quite practical Sudheer.

Sudheer Guntupalli

And the second question is on your other statement that clients are neither going for large-scale technology initiatives nor going for deep spending cuts.

Moderator · Conference Operator

Thank you.

Next question is from the line of Kumar Rakesh from BNP Paribas.

Please go ahead.

Kumar Rakesh

Hi, good evening.

Thank you for taking my question.

My first question is more of a request, Krithi.

If you could consider starting to give guidance on a full year basis that would be helpful because I really don’t understand why a large company and successful one like TCS should not have a guidance when almost every other peer of yours have.

And the challenge which at least I face is the operating metrics which you share are not enough to give us a full picture of how the trends are panning out.

The deal TCV has a very poor correlation with the revenue trend and the other operating matrices also are relatively lesser than what the peers have been giving.

Now demand appears to have started stabilizing.

You have settled in your office for a few quarters now.

So now may be a good time to relook at this strategy whether you want to start giving a guidance.

I understand TCS has not in the past, but may be a good start to give and if you take a feedback and if you still conclude that you should not give a guidance then at least maybe start giving some more operating metrics such as order backlog or ACV numbers, which can help us in modelling and come to a sense that what direction the growth potentially could be?

Moderator · Conference Operator

Thank you.

We have our next question from the line of Abhishek Pathak from Motilal Oswal.

Please go ahead.

Abhishek Pathak

Hi.

Thank you for the opportunity.

My first question was on the communications vertical.

Sir, what near-term catalysts do you see in this vertical which could meaningfully alter client behavior and what could bring it back to growth?

We've seen almost five quarters of a decline now.

So, when do you expect the historic capex that the operators have done to trickle down to services?

That's one.

And secondly, on the FY '24, another strong quarter.

So, do you think client behavior here is any different to, let's say, BFSI where cost takeout is the main theme?

Do you see more adventurous projects here or is the theme pretty much similar?

Thank you.

K Krithivasan

Abhishek, first on CMI, there are a couple of factors playing out here.

Many of the telcos invested heavily for 5G rollout and they have not seen the expected return so far.

For them to invest more, we believe, they're looking for a lower interest rate environment before they can embark on new transformative programs.

From that perspective, lowering interest rate would be a good trigger for us to see.

It is our expectation for us to see project of more investment and hence more IT projects to be kicked off.

Life Sciences like you said, has been bucking the trend.

That is also more to do with the non-cyclical nature of the industry.

People tend to consume more of those services in good times and bad times.

And which also because of that, creates more opportunity for drug discovery, research.

To that extent, it's behaving in a very secular way.

Abhishek Pathak

Got it.

Thanks.

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.

You spoke about how we've finally seen America and North America come back to sequential growth.

I don't think even during the financial crisis we've had a situation where we have five quarters of sequential decline.

So this was an unusual time, but do you think that we finally bottomed out here and should we see sequential growth from here in North America?

Moderator · Conference Operator

Thank you.

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

Please go ahead.

Nitin Padmanabhan

Hi.

Good evening.

I had three questions.

The first one is on the press conference you had mentioned that you look at three indicators broadly when you look to assess the recovery.

So I think it was the evaluation of ongoing projects, how much people want to spend on cost optimization and how much people want to invest.

Could you please expand on that, at least from a BFSI and retail CPG perspective?

So that's the first one on how you're seeing trends across those three buckets.

The second is on margin levers.

I think last year, after the first quarter, we saw almost 100 basis points margin expansion each quarter.

But since then, I think we have sort of brought down subcontracting fairly well.

We have also improved utilization fairly.

So just wanted your thoughts on the puts and takes on margins, on how we should think about it on a going-forward basis?

And lastly, ISG basically spoke about some 30% cost savings in ADM and infra due to GenAI.

I just wanted to understand your experience on that and how you're seeing that pan out.

Thank you.

K Krithivasan

Nitin, while I did talk about re-evaluation of projects and then also focus on cost optimization and discretionary, the point I also keep mentioning is we don't see a material change between the customer sentiment between last quarter and this quarter.

They continue to validate projects and cost optimization projects get a priority over new discretionary project if they are not able to see a short- term ROI.

And this will change only when there is a long-term certainty on the economic outlook.

Till that happens, the pattern of whatever is happening, whatever happened in the previous quarters will continue.

That's the reason also why we

Moderator · Conference Operator

Thank you.

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

Please go ahead.

Thank you.

Next question is from the line of Vibhor Singhal from Nuvama Equities.

Please go ahead.

Vibhor Singhal

Yes.

Hi.

Thanks for taking my question.

So, two questions from my side.

One, Krithi, just wanted to understand on the retail segment.

I mean, this is a quarter in which we kind of believe we've turned the corner.

But for us to be able to report growth on a sustainable basis in this, what exactly are the clients' worries in the sector at this point of time?

So, like in BFSI, we know that I think the US macro improves.

I think that should lead to some, let's say, incremental spending or a revival of tech spending that they have put on hold.

Interest rate cuts could be possible, triggers and all.

But what is that is keeping these retail clients their spend on hold?

And what could possibly change in the coming quarters for us to start reporting growth in this segment on a sustainable basis?

K Krithivasan

Vibhor, like there could be a couple of points.

One is the overall consumer confidence.

The second is also inflation.

Because what we see is a varying trend like even in the last few quarters.

We have seen some quarters where the essential segment does well, some quarters the essential doesn't do well, speciality does well.

So it's a fairly complex situation on which segment does well.

But I would say broadly, it should depend on the interest rates and the consumer confidence in the market.

We have seen growth in the last two quarters.

But we need, as I said if the confidence on consumer confidence or outlook is poor in the coming quarters it may take a hit again.

Vibhor Singhal

Got it.

But then improving macro situation in which maybe inflation is coming down with the CPI data today or let's say there's some possibility of let's say,

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, thanks for taking my question.

The first question is around the nature of deal pipeline.

If you could just a little bit elaborate more on what kind of deals you're seeing in the pipeline and has there been any shift in the mix of the deals towards more smaller deals that get consumed into revenue faster or it continues to remain the way it was in the last few quarters?

K Krithivasan

Yes.

Gaurav, the type of work the deals, are led by cost optimization and discretionary spending.

Within that you can have programs like vendor consolidation, operating model transformation, application modernization.

I would say there is not a major shift, okay, but we do hear more about application modernization compared to the past.

And on the discretionary spend side, you also look at a supply chain modernization, customer experience transformation, those kinds of programs we keep seeing.

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.

K Krithivasan

Thank you, operator. • We are very pleased with our first quarter performance, growing at 4.4% Year- on-Year in Constant Currency, amidst the cautious outlook prevailing in the major markets. • Deal momentum continued to be very strong in Q1, with our order book at $8.3 billion for the quarter. • Operating margins were at 24.7%, declining 130 bps sequentially following our annual wage hikes with effect from April 1. • Our net margin is at 19.2%. • We will be honouring all the job offers we have made but remain focused on utilizing the capacity we have already built up.

Our LTM attrition in IT services fell further to 12.1%. • We plan to build the largest AI-ready workforce in the world, by organically reskilling our employees. • We continue to deliver industry leading metrics, winning market share and creating value for all our stakeholders.

We have an experienced and stable leadership team, and an extremely dedicated workforce.

It has been the hard work of 600,000+ TCSers which is helping us achieve excellence every day and I would like to thank each one of them for their contribution to our shared success.

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.

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

Please go ahead.

Ankur Rudra

We've seen an element of pickup in overall growth momentum this quarter.

However, if I peel out the growth from India, the growth in the international business is about 1.5% both sequentially and year-over-year on constant currency terms.

So, in this context and the fact that deal wins are sort of weaker than the last four quarter average, the question is, what gives you the confidence that fiscal '25 will truly be better than fiscal '24?

K Krithivasan

Thanks, Ankur.

We have said that FY'25 will be better than FY'24 overall.

If you compare current quarter’s performance with Q4 (last quarter), we see sequential growth.

Even leaving India out, almost all our verticals and all our geographies have grown.

So, while India growth has been substantial, compared to previous quarter, the other sectors have also really done well.

Going by the fact that growth has been broad-based, is what is giving us the confidence that this year will be better than last year.

As we explained before, on the TCV side, we find it's more a timing issue because the pipeline is quite strong.

We are not too worried about the TCV being lower than last quarter.

Ankur Rudra

Okay.

Appreciate it.

The following question for me would be on Generative AI.

You did highlight that your overall AI pipeline has strengthened.

But if you just stay with Generative AI, how's that impacting your business?

If you can give us some color in terms of how it's impacting specific projects and customer perception.

A related question is, do you feel that Generative AI in client conversations and client thinking is potentially creating a headwind for spending on IT services?

K Krithivasan

There is always a discussion in almost any new program we do, even if it's an AMS (Application Management Services) program or AD (Application Development) program we do.

There is a discussion on can we leverage Generative AI, can we bring in more productivity that discussion always happens.

We also look for opportunities to bring in productivity or other value efficiencies through Generative AI.

Clients do want us to look at Generative AI as one of the levers to better deliver in terms of cycle time or in terms of cost or quality.

That discussion always happens, but we have not seen Gen AI as a headwind so far.