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Edited Transcript of TCS.NSE earnings conference call or presentation 9-Jul-19 1:30pm GMT

Q1 2020 Tata Consultancy Services Ltd Earnings Call

Mumbai Jul 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Tata Consultancy Services Ltd earnings conference call or presentation Tuesday, July 9, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Kedar Shirali

Tata Consultancy Services Limited - Head of Global IR

* Milind Lakkad

Tata Consultancy Services Limited - Executive VP & Global Head of HR

* N. Ganapathy Subramaniam

Tata Consultancy Services Limited - COO & Executive Director

* Rajesh Gopinathan

Tata Consultancy Services Limited - CEO, MD & Executive Director

* Venkataraman Ramakrishnan

Tata Consultancy Services Limited - CFO

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Conference Call Participants

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* Ankur Rudra

CLSA Limited, Research Division - Research Analyst

* Apurva Prasad

HDFC Securities Limited, Research Division - Research Analyst

* Dipesh Mehta

SBICAP Securities Ltd., Research Division - Information Technology Analyst

* Diviya Nagarajan

UBS Investment Bank, Research Division - Executive Director and Research Analyst

* Manik Taneja

Emkay Global Financial Services Ltd., Research Division - Former Research Analyst

* Pankaj Kapoor

JM Financial Institutional Securities Limited, Research Division - Director of India IT Services and Software Equity Research

* Ravi Menon

Elara Securities (India) Private Limited, Research Division - VP of IT Services & Internet and Analyst

* Sandeep Shah

CIMB Research - VP

* Shashi Bhusan

Axis Capital Limited, Research Division - Executive Director of IT and Telecom

* Sudheer Guntupalli

AMBIT Capital Private Limited, Research Division - Associate of Technology

* Sumeet Jain

Goldman Sachs Group Inc., Research Division - Equity Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, good day, and welcome to the TCS earnings conference call. (Operator Instructions) Please note that this conference is being recorded. I now hand the conference over to Mr. Kedar Shirali. Thank you and over to you, sir.

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Kedar Shirali, Tata Consultancy Services Limited - Head of Global IR [2]

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Thank you, Karuna. Good evening, and welcome, everyone. Thank you for joining us today to discuss TCS' financial results for the first quarter of fiscal year 2020 ending June 30, 2019. 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.

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Rajesh Gopinathan, Tata Consultancy Services Limited - CEO, MD & Executive Director [3]

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Good evening, everyone.

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Kedar Shirali, Tata Consultancy Services Limited - Head of Global IR [4]

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Mr. N. G. Subramaniam, Chief Operating Officer.

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N. Ganapathy Subramaniam, Tata Consultancy Services Limited - COO & Executive Director [5]

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Good evening.

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Kedar Shirali, Tata Consultancy Services Limited - Head of Global IR [6]

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Mr. V. Ramakrishnan, Chief Financial Officer.

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Venkataraman Ramakrishnan, Tata Consultancy Services Limited - CFO [7]

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Hello, everyone.

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Kedar Shirali, Tata Consultancy Services Limited - Head of Global IR [8]

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And Mr. Milind Lakkad, Global Head, Human Resources.

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Milind Lakkad, Tata Consultancy Services Limited - Executive VP & Global Head of HR [9]

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Yes, hi, everyone.

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Kedar Shirali, Tata Consultancy Services Limited - Head of Global IR [10]

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Rajesh and Ramki 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 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've 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.

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Rajesh Gopinathan, Tata Consultancy Services Limited - CEO, MD & Executive Director [11]

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Thank you, Kedar. And once again, good evening to all of you. We've had a good start to the new fiscal year with Q1 revenues growing at 10.6% year-on-year in constant currency and 11.4% in rupee terms, which is 8.6% in dollar terms. Our operating margin of 24.2% fully reflects the salary increments we rolled out across the board with effect from 1st April and the currency headwinds that we experienced during the quarter. Despite that, our net margin for the year was at 21.3%, which is about the same as Q1 of last year. I'll now ask Ramki to go over the headline numbers, financial and segmental performance, and I will step in again later to talk about the demand trends that we are seeing.

Over to you, Ramki.

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Venkataraman Ramakrishnan, Tata Consultancy Services Limited - CFO [12]

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Thank you, Rajesh. Let me go through the headline numbers. In the first quarter of FY '20, our revenues grew 10.6% year-on-year on a constant-currency basis, reported revenue in INR was INR 381.72 billion, which is a Y-on-Y growth of 11.4%. In USD terms, revenue was $5.485 billion, which is a year-on-year growth of 8.6%.

The demand for our services continues to be driven by the large-scale deployment of digital technologies as part of our customers' growth and transformation initiatives. Revenue from digital engagements made up 32.2% of our revenues in Q1, a growth of 42% Y-on-Y. We have recast the way we report the revenue breakup by industry vertical to reflect recent changes to our organization structure, including reclassification of some customer accounts to help you discern trends and make comparisons, we have provided the restated data for the last 4 quarters in our quarterly fact sheet.

Let me now go over some of the different segments, how they performed during the quarter. As a reminder, all the growth numbers are year-on-year and in constant-currency terms. Growth was led by Life Sciences & Healthcare, which grew 18.1%, most of our other major verticals reported industry-leading growth rates. Banking, Financial Services and Insurance grew 9.2%, Retail & CPG grew 7.9%, Communications & Media grew 8.4% and Technology & Services grew 7.8%.

Geography wise, U.K. and Europe continued to outperform growing 16% and 15% year-on-year respectively. Other markets also continued to grow well. North America grew 7.7%, Asia Pacific 9.5%, and India at 15.9%. Middle East and Africa as well as Latin America grew 6.4%.

Our portfolio of products and performs -- platforms performed well in Q1. Ignio, our cognitive automation software, continues to gain share in the market. Last month, ignio celebrated its fourth birthday, doubling its revenue as well as the number of customers year-on-year. In Q1, ignio had 16 new events taking the total number of customers past the 100 mark. In addition to gaining scale, ignio has also grown immensely in scope. At the time of its launch, ignio's original focus was transformation of IT operations using artificial intelligence. It may be IT infrastructure/self-healing by preempting a lot of problems before they arose and autonomously resolving a lot of the incidents that did occur. It has since expanded in scope to cover bad jobs management and ERP application support in their IT domain. Now largely driven by customer demand for deploying its cognitive capabilities and new business-centric used cases, ignio has expanded into intelligently transforming business operations. For a large retailer in North America, ignio carries out the reconciliation of supplier incentives, streamlining their cash flows and freeing up their working capital.

TCS BaNCS, our flagship product suite in the financial services domain, continues to great traction. We had 7 new wins and 5 go-lives in Q1 covering core banking, insurance, anti-money laundering and securities trading. The BaNCS' core banking Software-as-a-Service version is gaining popularity across the world with smaller banks and credit unions looking to leapfrog into the digital era, gain agility, launch innovative products and deliver a superior customer experience.

Our Quartz Blockchain Solution was named the Best Blockchain Breakthrough of the Year at the Financial Technology Forum Innovation Awards for the pioneering work we did for 2 financial institutions in Africa. This pilot project lays the foundation for an innovative pan-African financial ecosystem for cross-border information exchange and transaction settlement. Quartz had 2 wins in Q1, one for a leading energy operator for trading of renewable energy certificate and another for setting up a cryptocurrency bank. We also had 1 go live for a blockchain-based cross-border remittance system using the Quartz gateway at a Saudi Bank.

In the Retail space, Optumera, our AI-powered merchandise optimization platform, had 2 new wins in Q1, while OmniStore had 1 win. In Life Sciences, our advanced drug development platform, which is a comprehensive suite for digital transformation of drug development had 3 new wins, including 1 on a new platform we launched to digitize and streamline the site selection and activation activities in the study design phase of clinical trials.

Coming now to client metrics, by focusing on transformational solutions that address our customers' growth and transformation imperatives and by developing a full set of services catering to their needs of a broader set of stakeholders within their customer organization, we have been able to deepen our relationship, embedding our teams deep within their businesses. As an outcome, you can see strong movement of customers up the revenue buckets in our client metrics.

In Q1, we added 4 more clients in the $100 million-plus band bringing the total to 44, 3 more clients in the $50 million band bringing the total to 100, 13 clients in the $20 million band bringing the total to 219, 29 clients in the $10 million band bringing the total to 384, 43 clients in the $5 million band bringing the total to 551 and 36 clients in the $1 million band taking the total to 1,014.

Let me now go over the financials. The annual salary increments we had effected across the board from April 1 and the cross-currency movements in Q1 resulted in a margin headwind of 2.3%. We were able to mitigate this to some extent through a concerted drive for rigor in operations, our operating margin for the quarter was 24.2%. Higher other income and our lower effective tax rate this quarter helped boost the net income margin to nearly the same as the year ago at 21.3%. Effective tax rate for the year was slightly lower at 23.4%. Our accounts receivable was at 70 days DSO in dollar terms. Net cash flow from operations was INR 84.46 billion, which is 103.9% of net income. Free cash flow was INR 75.54 billion and invested funds as of June 30 stood at INR 489.03 billion. The Board has recommended an interim dividend of INR 5 per share.

On the people front, we continue to invest in workforce transformation. As of June 30, we have trained over 315,000 employees on digital technologies and over 365,000 employees on Agile methods. To support our growth, we continue to tap into talent pools across the world and add to our ranks. During the quarter, we added 12,356 employees on a net basis, the highest that we have added in the last 5 years, bringing the total head count to 436,641.

Moreover, we issued joining letters to over 30,000 fresh graduates in Q1 and completed the on-boarding of almost 40% of them within the quarter. We expect to onboard the rest by Q2 itself. This is in contrast to the year-long onboarding process of the past.

Our accelerated localization initiatives and focus on diversity and inclusiveness continued to yield good results. The proportion of women in the workforce rose further to 36.1%. The number of nationalities represented in our workforce is now 149. All of this is resulting in a very vibrant and engaging workplace that attracts and retains talent. We continue to enjoy the lowest attrition rate in the sector globally. LTM attrition in IT Services in Q1 was at 11.5%.

I hand it over now to Rajesh for the demand drivers and trends.

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Rajesh Gopinathan, Tata Consultancy Services Limited - CEO, MD & Executive Director [13]

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Thank you, Ramki. The digital part of our business is now almost $7 billion and growing at over 40% year-on-year. This momentum is on account of the mainstreaming of digital technologies and the central role that they are playing in our customers' growth and transformation initiatives. Given the large amount of data available about each and every individual, every interaction can be heavily personalized today. I have spoken about it in the past, our mass personalization is a key pillar of our Business 4.0 framework.

Consequently, marketing is far more precise today, and its impact can be more accurately measured. Marketeers are investing in targeted creative performance-based demand generation campaign using the latest digital engagement technologies. Their objective is to create and deliver relevant content through the right channel at the right time to help consumer to sell and the biggest challenge for CMOs is to do this with speed and at scale in an industry competing for talent and skill.

This is where our scaled end-to-end capabilities covering creative design as well as technologies and contextual knowledge positions us well to partner our customers in their end-to-end transformation journeys. Our award-winning creative design teams at TCS Interactive are working closely with customers to design the user interfaces of the front-end systems, while seamlessly integrating it with our technology teams to make them and do -- and delivered as executed.

We have helped international container shipping companies become a industry benchmark for customer experience via building them a new user interface that provided online quotes and instant booking and helped them realize their bold vision of making the experience of booking of containers as easy as booking a seat on an airline. We'll appreciate that container has given the fact that it moves through a complex supply chain, the -- providing this kind of an experience in an industry of this nature is a second order, third order problem compared to a more point-to-point solution that airline uses.

Similarly, a GDS kind of an equivalent does not exist in the container shipping industry. So there is no common platform where these kind of transactions can be put together. So being able to take an experience from an industry and use that as a benchmark and deploy that in a totally different industry is areas that customers see us as enablers or catalysts for their innovation and being able to bring this cross-industry knowledge to bear and being able to provide that with a full end-to-end customer experience to a technology execution solution.

Similarly, there is another example that we wanted to share is work that we're doing for Deutsche Bank out of Spain where they've partnered with us to reimagine their portfolio performance analysis sharing that they do with their high-value customers so that their customers can understand their investment portfolios better. We applied decision-thinking concepts -- design-thinking concepts and used Agile methods to collaboratively come up with new designs that enable easier and more intuitive understanding of the portfolio performance.

The new reports have resulted in approximately 20% increase in advisor satisfaction rating across private banking. We have -- for this project, Deutsche Bank, Spain received Celent's 2019 Model Wealth Manager Award for client experience for the new investment reporting experience designed and implemented by us. And this whole space of wealth management and customer experience in that area is significantly transforming the way banking and banks are going towards their more value-adding segments or more profitable segments. We have spoken in the past about the work that we have done for a leading wealth manager in the U.S., where we have been able to put analytics on their core platform, where BaNCS is an integral part and then expose that to a robo advisory kind of a front end so that we can significantly increase the personalized attention that they're able to provide even for lower value portfolios across their customer chain.

So we're seeing multiple places where customer experience goes far beyond just virtualized marketing campaigns or an engaging well-designed user interface because the aggregate outcome of all these organizational processes, systems, the underlying infrastructure, all of them being made to act in tandem to make the interaction frictionless and pleasant that leaves their customer feeling valued, and this is the space that TCS has very strongly started to occupy and, in fact, in many industries dominate.

The customer journey begins with digital marketing, progresses to the point of sale, continues long after the sale in some industries such as financial services, their relationship with the customer lasts for years after the sale has been first consummated. And in today's hypercompetitive world, these relationships cannot be taken for granted. We are helping enterprises look at that customer journey in its entirety and regrind the processes and supporting systems for speed and simplicity, incorporating greater intelligence for more personalization and responsiveness. Very often the manner in which the enterprises interact with the customers gets hamstrung by the complexity and inflexibility of the systems and processes, which is the same theme that we have spoken in the past that we need to look at it end-to-end as businesses grow often by acquiring other businesses, their estate becomes more complex with multiple systems doing the same functionality.

Customer data becomes siloed. And so even fairly simplistic front-end design becomes complex to deploy, and we need to think about it holistically before we just turn around and design a full front end. So we're partnering with many such organizations to carry out core transformation, holistically reimagining their operations by applying our Machine First approach across the entire stat, automating business processes and IT operations, and simplifying legacy application stats, eliminating redundancies and re-architecting with modern cloud-native structure.

In our press release, we have shared a quote from the CEO of Nielsen, David Kenny, where he spoke about how MFDM is a core part of the transformation that they themselves are going through. There are multiple instances where whether it is a Machine First philosophy that we are processing or ignio as a transformation platform is being used far beyond automation and productivity to really increase quality and customer experience. So it's a very integral set of tools and capabilities that we're able to bring today in it.

Yesterday, we have put out -- we've shared with you some details of the work that we're doing for Scottish Widows. This is one of the platforms that we have spoken about. For them, we consolidated their customer data from multiple systems onto our life and pension policy administration platform. And drastically simplified their operating environment and eliminated 80% of the operating processes. Customer service representatives are now empowered to respond to queries by readily pulling data from the government, helping them achieve 80% first contact resolution rate. So whether it is platforms, whether it is transformation thing or it is design, the ability to participate and across this entire chain is what we are seeing as the new competitive edge and which we are trying to bring more and more to it.

So we wanted to talk about what we're seeing in Machine First and to contextualize that in terms of beyond automation, how it is a strategic lever that we're seeing.

Let me conclude by saying that we have had fairly strong deal closet this quarter, and our total value of contracts signed this quarter in Q1 of FY '20 is $5.7 billion. This compares to $4.9 billion in Q1 of FY '19. And of this $2.8 billion was in North America, BFSI contributed to $2 billion and Retail was a shade over $1 billion. So the deal pipeline continues to be very healthy and well distributed across verticals and geographies. And that is what is giving us the confidence that we're participating in these growth and transformation initiatives of our customers and staying relevant to customers as we continue to gain market share across most of the theaters that we operate in.

With that, I want to open the line to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from the line of Vidya Nagarajan (sic) [Diviya Nagarajan] from UBS.

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Diviya Nagarajan, UBS Investment Bank, Research Division - Executive Director and Research Analyst [2]

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Two questions here. And firstly, I'm trying to reconcile the accelerated hiring to the slight moderation that you have in your revenue outlook that you now try to maintain double-digit versus expecting a slight acceleration earlier? That's my first question. Once you've done that I'll go to my second, please.

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Rajesh Gopinathan, Tata Consultancy Services Limited - CEO, MD & Executive Director [3]

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Diviya, it's a reflection of the medium-term demand outlook that we see. And again, as I said, the fact that we are participating in transformation journeys of our customers, staying relevant, gaining market share. So we are very excited about bringing onboard the talent, which is in line with our philosophy that we want to continuously emphasize homegrown talent, and we want to make sure that we have the capacity up and trained and ready as we see the demand unfolding. In fact, to put it in perspective, the entire 30,000 offers that we made, we'll have to wait and see what the joining ratios come out to be but we expect to bring them onboard in the first 2 quarters itself. So that will allow us and we're going through a fairly reimagined process both on the hiring as well as on the initial training program, significantly leveraging our digital infrastructure to reimagine, as I said, both the onboarding as well as the initial training. Overall, it's a much larger strategic shift that we are doing in the way we go about acquiring talent and in the way we start to integrate that different side of our business units. I don't think we should read too much into the quarterly elements of it. It is the more -- the strategic nature of it that is of greater interest to us.

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Diviya Nagarajan, UBS Investment Bank, Research Division - Executive Director and Research Analyst [4]

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Got that. And my second question is a follow-up to the first part of the first question really. Typically, the first quarter tends to be sequentially the strongest quarter for you as we've seen in the last few years and year-over-year comps also start getting tougher as the year progresses because we had a nice ramp up as the year progressed in fiscal '19. So what criteria are we really looking at to maintain this double-digit growth rate? And assuming that some of the softness that you're seeing in the sectors that you've already called out continues, is there a risk in the double-digit number that it doesn't really materialize this year?

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Rajesh Gopinathan, Tata Consultancy Services Limited - CEO, MD & Executive Director [5]

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We'll have to really wait and see how Q2 plans -- pans out. If you were to ask me from a short- to medium-term perspective, we don't necessarily see anything new out there, but the weakness that we have spoken about in the beginning of this quarter, the last call, that has actually materialized. And whether it gains momentum or whether we are able to write it out, we'll have to wait and see. Q2 is a big -- it's going to be an important quarter to be able to answer that question. Today, we don't have anything incremental to add to what we have already shared.

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Diviya Nagarajan, UBS Investment Bank, Research Division - Executive Director and Research Analyst [6]

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So are you saying that Q2 could see a different seasonality this year than we've seen in the past? Is that how we should expect things to play out or --?

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Rajesh Gopinathan, Tata Consultancy Services Limited - CEO, MD & Executive Director [7]

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No, Diviya, I'm saying that we are -- we would -- if Q2 comes in strong as typically Q2 does, then we would be well set for the double-digit trajectory. Otherwise, we are pushing it forward into H2, which is never a comfortable space. So we'll have to wait and see how Q2 pans out.

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Operator [8]

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The next question is from the line of Sandeep Shah from CGS-CIMB.

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Sandeep Shah, CIMB Research - VP [9]

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Yes. Just wanted to ask the growth which has come in this quarter and when you were discussing at last time, during Q4 result and at the start of the quarter, any change versus the growth, which has panned out? I just wanted to know that.

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Rajesh Gopinathan, Tata Consultancy Services Limited - CEO, MD & Executive Director [10]

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It was softer than what we had expected at the start of the quarter, but the areas of strength mostly are similar. We were expecting Europe and U.K. to continue to do well, Life Sciences to do well. The weakness in the BFS sector has been more pronounced, though we've had called it out at that time, it has been a bit more pronounced. In Retail, we have seen a bit of a slowdown, which we think we should be able to recover or that it is more a quarter issue and therefore we think that, that'll recover next quarter. But it goes back to what I've commented on the earlier question that Q2 is an important quarter, and we'll have to wait to see how that pans out before we make any further comments.

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Sandeep Shah, CIMB Research - VP [11]

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Okay. Okay. And Rajesh, I think in the television interview, we said, earlier we were mentioning U.S.-centric capital markets, but we are now also seeing Europe-based banking. Is it something new headwind? Or this was already being expected earlier?

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Rajesh Gopinathan, Tata Consultancy Services Limited - CEO, MD & Executive Director [12]

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No, no, we said European Bank and capital markets -- in U.S., we said capital banks in the capital market side. And Europe, we said generally banks. No change to what we -- in fact, that is the same thing that we said in the beginning of last quarter also or rather beginning of this quarter.

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Sandeep Shah, CIMB Research - VP [13]

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Okay. Okay. And just some of your global peers are now able to command a pricing power because of these scaled digital offerings. So do you believe that time has come for all the large players like you and the other global peers where pricing power will go more on a positive side because of the scaling up of the digital and that could be a tailwind to the margin, which is available going forward?

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Rajesh Gopinathan, Tata Consultancy Services Limited - CEO, MD & Executive Director [14]

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I don't want to comment about other players. We are focused on maintaining industry-leading profitability and growth. And on both those metrics, we still have a fairly decent position. I think that is the final competitive metric that we want to look at. Rest of it, we don't want to comment on.

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Sandeep Shah, CIMB Research - VP [15]

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Okay. Okay. And just last, bookkeeping, can you share some color in terms of the lease accounting impact at the EBIT level as well as on the balance sheet? And what could be the reason for the subcontracting cost going up and that could be a new normal going forward?

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Rajesh Gopinathan, Tata Consultancy Services Limited - CEO, MD & Executive Director [16]

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Lease accounting, Ramki shared earlier in the interview that it's about INR 100 crores is the -- in fact, slightly below that. And on the subcontracting cost, it has been on that trajectory for quite some time. It's a reflection of the increasingly tight supply situation in our core market. And as I had mentioned in the past, our decision to participate aggressively in capturing demand and to sort out the delivery model as more and more clarity emerges around it.

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Operator [17]

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The next question is from the line of Ankur Rudra from CLSA.

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Ankur Rudra, CLSA Limited, Research Division - Research Analyst [18]

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First question, Rajesh, your effort to tough comps for the first quarter on a Y-o-Y basis perhaps some of it was the large platform deals, which are now anniversarying. How do you feel about that as you go further into the year, particularly in the context of, I think, relatively good, very strong TCV that continues in this quarter, the customer conversations you've had so far and in the context of your focus on defending double-digit growth?

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Rajesh Gopinathan, Tata Consultancy Services Limited - CEO, MD & Executive Director [19]

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Ankur, demand outlook and overall competitiveness is very, very strong. So I'm confident today as we were even 2, 3 quarters back when we were speaking about revival that we were talking about. So confidence from medium- to long-term perspective is high. Short-term volatility, as I said, I would rather reserve my comments till Q2 end before making any commentary. But back to the first question that was asked, we are gearing ourselves for the demand that we see out there and we're setting up our capacity and setting our strategy on that basis. No change to that.

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Ankur Rudra, CLSA Limited, Research Division - Research Analyst [20]

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Okay. And maybe on a somewhat related -- you highlighted lot of examples of how you're winning more larger digital scale projects. What's been the progress on another dimension you've referred to in the past, where your interest is to expand your addressable market beyond just the IT spend as a result of greater digital pervasiveness and technology. May be if you can comment in terms of projects, verticals or geographies?

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Rajesh Gopinathan, Tata Consultancy Services Limited - CEO, MD & Executive Director [21]

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Absolutely. That has now become an integral part of our KPI across our entire sales team, and we are systematically building out on that. I don't have offline numbers to share with you, but we will start probably breaking that out for you. Let's -- we'll work on it and then break it out. Let me, undoubtedly, tell you that we're making very strong progress in this space. And if you take areas like banking, we're moving more and more into both the CFO space as well as the CRO space, the Chief Risk Officer space, compliance is also a big component of our CRO team.

In other industries, the CMO space, the marketing side of it is nicely building up. Marketing, our approach to it is two-fold. On one side, we want to capture the front-end design business, leveraging the investment that we've made into is useful and the build-out that we did on TCS Interactive, but we also see a huge opportunity to bring a more engineering-oriented thinking to the entire marketing operation space where there is significant amount of leverage that we believe that technology can play in cleaning up this space. So think about it that to densify the creative to one end of the spectrum and to more platformize and technology-enabled the middle and the downstream aspect of marketing operations that we see a huge benefit.

In life sciences and pharma, we are systematically growing into the R&D space. Whole -- so we were in the pharmacovigilance and the compliance and reporting part. Now we're going into the R&D and the discovery part of it. Our ADD platform is acting as a door opener and then peer services in that space is also opening up. We have invested in creating capabilities on wet labs and moving more and more into a space, which is very, very heterogeneous and very inefficient.

So we see huge opportunities to clean up and transform those kind of businesses. So pretty much across the board, we are seeing steady expansion away from the CIO effect and moving across different opportunities, but we'll have to -- what -- we will start organizing the data and start sharing maybe initially individual data points like we did and then later on a more systematic way.

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Ankur Rudra, CLSA Limited, Research Division - Research Analyst [22]

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Appreciate the color. Just one last quick follow-up, if I can. Today, obviously as the business rotates into digital significantly quickly and these new initiatives. Would there be any upward or downward bias in margins as a result of this?

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Rajesh Gopinathan, Tata Consultancy Services Limited - CEO, MD & Executive Director [23]

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Difficult to say. Our focus is to try and maintain the margins by ensuring that our product portfolio reflects what the cutting edge of solutions had set our customers' demand and appropriately have a good mix of it. So both pricing and margin defense is our strategy rather than margin expansion. The volatility that we see coming out of the currency, that is something that we are keeping a watch on. But as I said that our business model assumes a certain amount of depreciation to offset the differential inflation, but that's something that we're keeping track of. We are slowly converging our cost structures to better reflect inflation in the markets that we operate in. So that also kind of negates some of it over a medium term, but those are initiatives that will take time to play out.

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Operator [24]

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The next question is from the line of Apurva Prasad from HDFC Securities.

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Apurva Prasad, HDFC Securities Limited, Research Division - Research Analyst [25]

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My question is on the digital piece, I mean that's been scaling pretty impressively, substantially over the past few years. So I mean do you think that scale can be a deterrent here? I mean just the size of it reaching $7 billion, do you think this kind of growth rates may not be sustainable, despite the fact that we're getting a lot more into end-to-end transformation?

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Rajesh Gopinathan, Tata Consultancy Services Limited - CEO, MD & Executive Director [26]

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This is a question that we have addressed multiple times in the past. It's a question of how do we design solutions that actually leverage the scale as a strategic asset rather than organize ourself in a dysfunctional manner where scale becomes a liability. So it's -- we have been very, very focused on this dimension. And what you said about end-to-end, that is a classic way of how the scale across and the scope of capabilities becomes significantly a differentiator for us and a great value add for our customers. More and more our customers are looking to us as innovation catalyst.

And there the scale becomes a huge strategic benefit because what they see in us is a full spectrum of capabilities that they are interested in today and things that they might not be interested in, but they want to get early visibility on so that they can think about it and maybe make small point experimentation on it. We are, in fact, further doubling down on it by significantly integrating this with our client partner ecosystem so that we act as a gateway for our customers that once we are onboarded on to the TCS ecosystem, they have seamless access to both the innovations that were happening inside TCS in our CTO labs, in our industry labs, and also the innovation that is happening in our partner ecosystem. So we see this as a network effect and an ecosystem effect, where incremental scale and incremental participation becomes actually more valuable for all participants inside the network.

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Apurva Prasad, HDFC Securities Limited, Research Division - Research Analyst [27]

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Right. And just a follow-up on the margins where you talked about, I mean how should we look at it more on a constant-currency basis? I mean there are obviously the currency headwinds there with the tech supply crunch on-site and subcontracting actually going up. How should that aspect be seen?

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Rajesh Gopinathan, Tata Consultancy Services Limited - CEO, MD & Executive Director [28]

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Good challenge from an analytical perspective because when you think about constant currency, the currency should be held constant both on the revenue side as well as on the cost side. The cost bakes in the inflation impact and if we were to remove that inflation and look at it, that would be a good way. But I don't think anybody has that kind of level of data, neither are we hair splitting to figure that out. So when we give salary hikes, the salary hike is a reflection of inflation in different markets and that differential inflation is reflected in the currency movements or the expected currency movements in the various economic models that we look at. So I think constant currency margin is an artificial construct and something that we should have abandoned long back, but high time that we move away from it.

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Operator [29]

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The next question is from the line of Ravi Menon from Elara Securities.

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Ravi Menon, Elara Securities (India) Private Limited, Research Division - VP of IT Services & Internet and Analyst [30]

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One of the things that you mentioned is that the hiring of freshers this year pulled in a little bit in due to one, your ability to train them in a different (technical difficulty)

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Operator [31]

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Excuse me. This is the operator. Sir, we're unable to hear you clearly and it's -- voice is breaking up a bit. Can you please check?

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Ravi Menon, Elara Securities (India) Private Limited, Research Division - VP of IT Services & Internet and Analyst [32]

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Hello? Any better now?

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Operator [33]

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Yes, better, sir.

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Ravi Menon, Elara Securities (India) Private Limited, Research Division - VP of IT Services & Internet and Analyst [34]

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Okay. So just wanted to check on you've mentioned that the fresher hiring has pulled in a little bit, one, you mentioned is due to the ability to hire and train each differently using the scale you brought in for training. And secondly, you said that it's also due to the same (technical difficulty) or the demand pattern, how can you prepare for that. Could you just elaborate a little bit on those?

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Rajesh Gopinathan, Tata Consultancy Services Limited - CEO, MD & Executive Director [35]

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Ravi, let me kind of make a guess on what you were asking because it was not very clear. You were asking us as to elaborate the training strategy because of which we are accelerating our hiring. Is that what it was?

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Ravi Menon, Elara Securities (India) Private Limited, Research Division - VP of IT Services & Internet and Analyst [36]

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Right.

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Rajesh Gopinathan, Tata Consultancy Services Limited - CEO, MD & Executive Director [37]

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It's really not about -- where we are coming from is that we believe that our ability to absorb a much larger trainee inflow is significantly enhanced because of our shift from physical training facilities to digitized training facility and being able to provide this training as a series of nano coaches so that it can be integrated with people through their work cycle instance. So we have significantly invested in reimagining our training infrastructure and we have completely digitized it. So now that we can pay -- we can absorb a larger capacity, we are actually stressing the system and seeing what we can do. Once it is done, we'll be able to -- in combination with the TNQT infrastructure that we have set up, we will be able to move even fresher hiring into an on-demand basis and we'll be able to seamlessly integrate it. So it is part of a larger transformation that we are going through, and we are really putting it to test by accelerating the trainee onboarding.

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Ravi Menon, Elara Securities (India) Private Limited, Research Division - VP of IT Services & Internet and Analyst [38]

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Great. And does this also give you, I'd say, greater capacity, say, in the medium term, is that what you are building towards? Is this because of better visibility in the medium term that you're pulling in the trainee hiring?

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Rajesh Gopinathan, Tata Consultancy Services Limited - CEO, MD & Executive Director [39]

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Absolutely. So as I've said that our participation in the inflow and our medium-term outlook is very positive, and therefore we believe that this talent we will definitely be able to continue a few quarters here or there, tiny mismatching. We think that we have the cushion in our profitability to be able to strategically invest in creating this capacity as well as in the transformation that we are attempting.

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Ravi Menon, Elara Securities (India) Private Limited, Research Division - VP of IT Services & Internet and Analyst [40]

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Great. And one last question, if I may. (technical difficulty)

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Operator [41]

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Excuse me, this is the operator. Mr. Menon, your line is again unclear. Can you please check?

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Ravi Menon, Elara Securities (India) Private Limited, Research Division - VP of IT Services & Internet and Analyst [42]

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So sorry. My phone seems to be having an issue. I'll try to speak up a little bit and hopefully that's audible. Just checking if anything on the deals that you won, is there anything that ramp a little slower or got pushed out that compared to what you're expecting at the beginning of the quarter?

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Rajesh Gopinathan, Tata Consultancy Services Limited - CEO, MD & Executive Director [43]

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No, Ravi. There is nothing that in terms of existing deals that we need to that -- I would say that has been pushed out or slower. So nothing specific to comment on.

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Operator [44]

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The next question is from the line of Pankaj Kapoor from JM Financial.

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Pankaj Kapoor, JM Financial Institutional Securities Limited, Research Division - Director of India IT Services and Software Equity Research [45]

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I had a couple of questions on the platform business of yours, which appears to be doing very well. So first, if you can give me some sense of the scale of the business currently? And maybe how this would have grown in the last year? And second, any color if you can give in terms of how much of our order booking or the deal pipeline would be constituted by such platform-led deals?

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Rajesh Gopinathan, Tata Consultancy Services Limited - CEO, MD & Executive Director [46]

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Let me answer the second part, I didn't -- the order booking in the last 4 quarters from platforms has not been there. The -- actually, we didn't declare our order booking in Q4, but it was Q4 of last year that large platform deals came in. So the TCV that we have reported through this quarter is pretty much more BAU business rather than one-off deal. What was the first question that you had?

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Pankaj Kapoor, JM Financial Institutional Securities Limited, Research Division - Director of India IT Services and Software Equity Research [47]

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Yes. So my first question was in terms of the current scale of the business since it's part of the regional market, I guess. So if you can give some sense in terms of what could be the revenue contribution from the platform business currently is? And how this would have probably scaled up in the last year or couple of years?

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Rajesh Gopinathan, Tata Consultancy Services Limited - CEO, MD & Executive Director [48]

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No, we are not breaking that out.

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Pankaj Kapoor, JM Financial Institutional Securities Limited, Research Division - Director of India IT Services and Software Equity Research [49]

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Okay. Okay. And I mean obviously it seems to be considered largely on the insurance vertical as of now. So any thoughts or any investment that you are making in terms of expanding into other verticals may be retail or any other parts of the banking?

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Rajesh Gopinathan, Tata Consultancy Services Limited - CEO, MD & Executive Director [50]

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In terms of banking with...

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N. Ganapathy Subramaniam, Tata Consultancy Services Limited - COO & Executive Director [51]

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Hi, Pankaj, this is NGS here. So in addition to the insurance platform, our foray into the banking cloud covering the retail and wealth management part is doing well, and we are on track to have launched it in the United States. And the first customer has already been onboarded and has gone live with it. And we see a good pipeline to expand that U.S. banking cloud. And we have already launched about 18 months ago the same platform, the banking cloud in the U.K., and we are looking at other opportunities in the banking space. The third platform that we are actively promoting to set up -- set it up as a utility is the capital market side. Securities, back office is an area of focus for us and that includes asset servicing. And that's something that when we have a very huge customer base, all of them are implemented the platform on that on-premise model. We're actively working with them to see how we can move them into a platform model as they come up for the next phase of renewal, the next phase of innovation.

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Rajesh Gopinathan, Tata Consultancy Services Limited - CEO, MD & Executive Director [52]

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Also important to note that platforms doesn't automatically mean very large scale projects only. So platform is more -- such broader strategy for us and the work that we are doing in life sciences and the work that is going on in telecom, each of these are platform offerings which are steadily gaining traction but there the ticket size of individual transactions is much smaller and we are also seeing similar opportunities in security and in other spaces. So the platform strategy for TCS is not concentrated only on large ticket transactions, but it's a much wider strategy.

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Operator [53]

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The next question is from the line of Manik Taneja from Emkay Global.

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Manik Taneja, Emkay Global Financial Services Ltd., Research Division - Former Research Analyst [54]

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I had a couple of questions around our performance in Europe. So you've been quite positive on the business -- from the traction that you're seeing in that geography for quite some time. There have been a couple of acquisitions amongst the local European players' consolidation in that geography in the last month or so. So just wanted to get your sense as to how you are reading that? And the second question was around the possibility of pricing increases about 3 to -- about a quarter or 2 back, there was an expectation in the industry that there is a possibility of getting price increments from the customers. How do you see that going forward?

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Rajesh Gopinathan, Tata Consultancy Services Limited - CEO, MD & Executive Director [55]

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European market, we don't know the comment about competitor moves. So we continue to see traction, and I think our market position is strengthening and we'll continue to increase market share in almost all the countries that we are operating in this theater. On pricing increase, like-to-like pricing increase in line with general inflation, slowly in some select pockets we are seeing, and we are focused on trying to achieve it. But in our industry, productivity is a significant component of the value proposition. So our focus is to make trend, the portfolio realization level, that like-to-like realization level. Whereas -- so it's a complex scenario. Our ability to cycle into newer service lines, which have a good price defense and to ensure portfolio level realizations remain strong. We're quite happy with -- on the progress that we're making in that space.

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Manik Taneja, Emkay Global Financial Services Ltd., Research Division - Former Research Analyst [56]

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Sure. Just to prod you a little bit further on the pricing increase, are there -- is this a geography-related phenomena wherein certain -- you're seeing some pockets of improvements? Or is it more broad-based improvement that you're seeing?

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Rajesh Gopinathan, Tata Consultancy Services Limited - CEO, MD & Executive Director [57]

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It's really client specific and relationship specific.

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Operator [58]

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The next question is from the line of Sudheer Guntupalli from AMBIT Capital.

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Sudheer Guntupalli, AMBIT Capital Private Limited, Research Division - Associate of Technology [59]

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So among the top U.S. banks, there seem to be an increasing talk about in-sourcing trends now, almost all of them now want to position themselves as technology companies like, let's say, Fangs, which do most of the technology work in-house. Even some of the retail companies like Home Depot, et cetera, have recently ramped up their technology head count by almost as high as 40%-or-so in some cases. So we understand that in-sourcing trends also move in cycles. What is your take on this risk playing out at this point in time?

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Rajesh Gopinathan, Tata Consultancy Services Limited - CEO, MD & Executive Director [60]

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I addressed this multiple times in the past. Our stance on in-sourcing does not change. We believe that there is a role for location strategy for technology capabilities of clients as well as there is a space for partnership strategy, for technology supply chain for customers. These are 2 independent elements. Sometimes when certain shifts happen, there might be short-term optimization, but this is a cycle that we've seen multiple times in the past. So the optimal cycle is that these are 2 independent decisions and will work in parallel. I wouldn't say independent, but parallel decisions. And as a competitive threat, we don't think this is a competitive threat.

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Sudheer Guntupalli, AMBIT Capital Private Limited, Research Division - Associate of Technology [61]

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Sure, sir. And regional markets witnessed a very strong growth during the quarter. So this part of the portfolio may be more volatile than the rest. When we're talking about double-digit growth for the full year, what are our base case expectations on this piece?

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Rajesh Gopinathan, Tata Consultancy Services Limited - CEO, MD & Executive Director [62]

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The reason we broke that line item out separately was because of its nature of being much more volatile than the rest of the business. So 85% of our business has certain revenue characteristics, this 15% has a different characteristic. Beyond that, we're not going to give color in terms of giving you line item based forecast of what growth looks like.

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Operator [63]

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The next question is from the line of Shashi Bhusan from Axis Capital.

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Shashi Bhusan, Axis Capital Limited, Research Division - Executive Director of IT and Telecom [64]

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Did the quarter play out much weaker than we expected both in terms of revenue growth and deal win?

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Rajesh Gopinathan, Tata Consultancy Services Limited - CEO, MD & Executive Director [65]

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As I said in the beginning, it definitely was softer than we expected on the revenue growth. On the deal wins, it has not been. Our actual deal wins have continued at pace.

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Shashi Bhusan, Axis Capital Limited, Research Division - Executive Director of IT and Telecom [66]

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And do you think we need to accelerate on deal win in order to achieve double-digit growth?

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Rajesh Gopinathan, Tata Consultancy Services Limited - CEO, MD & Executive Director [67]

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We'll need to wait to see end of the year so that we see couple of years of that data before we can comment on what would be ideal. But it is unlikely that we would actually provide an answer to that question even in the future.

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Operator [68]

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The next question is from the line of Dipesh Mehta from SBICAP Securities.

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Dipesh Mehta, SBICAP Securities Ltd., Research Division - Information Technology Analyst [69]

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Just on 2 vertical communication and manufacturing, we are seeing some revival in terms of growth trajectory. So can you provide some more detail about what is the outlook and what is driving it? Second question is about macroeconomic factor. Whether any weakness or some kind of blurring in terms of visibility about near-term projects and because client indecisiveness or some kind of delay which you are seeing? Or you don't think any macro factor so far impacted your visibility about near-term future?

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Rajesh Gopinathan, Tata Consultancy Services Limited - CEO, MD & Executive Director [70]

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On the communication side, we see strong growth in the media and information services space. And also this is actually one industry where Europe and U.K. are doing relatively stronger for us than North America, but it's pretty much driven by strength coming out of the media and information services space and the participation that we're seeing there. On manufacturing, it is the other way around. U.S. manufacturing is very strong for some time and it continues to be strong for us, whereas Europe and U.K. are relatively softer. From a macro perspective, beyond what I shared earlier about banking, we don't have anything further to add to that.

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Dipesh Mehta, SBICAP Securities Ltd., Research Division - Information Technology Analyst [71]

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Just on manufacturing, if you can provide some more detail about which area is doing -- or showing more traction and where you are seeing some weakness?

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Rajesh Gopinathan, Tata Consultancy Services Limited - CEO, MD & Executive Director [72]

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Manufacturing, especially in U.S. is strong across the board both auto and nonauto process resources, all of it is doing very well. So really there is not much to call out between it. Whereas, European auto obviously is much weaker and so it is more a regional split rather than subvertical split.

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Operator [73]

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The next question is from the line of Sumeet Jain from Goldman Sachs.

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Sumeet Jain, Goldman Sachs Group Inc., Research Division - Equity Analyst [74]

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So firstly I wanted to understand about your platform business growth. I think you called out a pretty strong growth for each of your major platforms, but when I look at your regional market and other performance this quarter, it has been a bit soft. So wanted to understand like which geographies within that is leading to that softness?

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Rajesh Gopinathan, Tata Consultancy Services Limited - CEO, MD & Executive Director [75]

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The reason -- again, as I said we've defined that as a separate line so that we don't get into a Q-on-Q commentary on growth trajectory in that. That line is volatile, and we will only talk about it from a longer-term trend lines rather than short-term ups and downs. And it's a composition -- it's composite both platforms as well as more regional markets. All of them have characteristics of volatility in them.

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Sumeet Jain, Goldman Sachs Group Inc., Research Division - Equity Analyst [76]

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Okay. Got it. And secondly, I think, in your order book details, you called out within $5.7 billion, around $2 billion is in BFSI. So do you include the platform-related orders get into BFSI within this order book?

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Rajesh Gopinathan, Tata Consultancy Services Limited - CEO, MD & Executive Director [77]

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No. This order book is like-to-like revenue line that we report as BFSI. It is coming from that same segment.

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Sumeet Jain, Goldman Sachs Group Inc., Research Division - Equity Analyst [78]

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So which implies that your book-to-bill ratio is pretty strong in BFSI. Am I correct in that -- reading that?

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Rajesh Gopinathan, Tata Consultancy Services Limited - CEO, MD & Executive Director [79]

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Yes, but trend lines on that are yet to be in, but our -- yes, you can say that.

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Operator [80]

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Ladies and gentlemen, that was the last question of today. I now hand the conference over to the management for their closing comments. Over to you, sir.

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Rajesh Gopinathan, Tata Consultancy Services Limited - CEO, MD & Executive Director [81]

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Thank you, operator. To sum up, we had a good start for FY '20, growing at 10.6% in constant currency and then all major industry verticals showing good growth. Digital is nearly 1/3 of revenues now and continues to grow strongly at 42% year-on-year. The strong momentum is on account of the heavy focus on transforming the customer experience, and our participation in these trends on account of our end-to-end capability here. On the margins, despite the impact of salary increments and currency volatility, our net margin stayed stable at 21.3% and we had an EPS growth of 13%.

Our net hiring in Q1 was the highest in the last 5 years, and our employee retention continues to be the best in the industry. Demand for our services has been strong, driven by increasing investments in transforming customer experience. We signed contracts totaling $5.7 billion in Q1 and the deal pipeline continues to be healthy. Thank you all for joining us in this call today, and have a great evening ahead.

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Operator [82]

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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.