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Edited Transcript of TCS.NSE earnings conference call or presentation 18-Apr-17 1:30pm GMT

Thomson Reuters StreetEvents

Q4 2017 Tata Consultancy Services Ltd Earnings Call

Mumbai Apr 20, 2017 (Thomson StreetEvents) -- Edited Transcript of Tata Consultancy Services Ltd earnings conference call or presentation Tuesday, April 18, 2017 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ajoyendra Mukherjee

Tata Consultancy Services Limited - Head of Global HR and EVP

* Kedar Shirali

* N. Ganapathy Subramaniam

Tata Consultancy Services Limited - COO and Non-Independent Executive Director

* Rajesh Gopinathan

Tata Consultancy Services Limited - CEO, MD and Non-Independent Executive Director

* Venkataraman Ramakrishnan

Tata Consultancy Services Limited - CFO

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Conference Call Participants

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* Anantha Narayan

Crédit Suisse AG, Research Division - Director of Equity Research for India

* Ankur Rudra

CLSA Limited, Research Division - Research Analyst

* Ashish Chopra

Motilal Oswal Securities Limited, Research Division - Research Analyst

* Ashwin Mehta

Nomura Securities Co. Ltd., Research Division - Executive Director of Research

* Diviya Nagarajan

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

* Pankaj Kapoor

JM Financial Institutional Securities Limited, Research Division - Director

* Ravi Menon

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

* Sandeep Shah

CIMB Research - VP

* Sandip Agarwal

Edelweiss Securities Ltd., Research Division - Research Analyst

* Vibhor Singhal

PhillipCapital (India) Pvt. Ltd., Research Division - VP of IT Services and Infrastructure

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the TCS Earnings Conference Call. My name is Margaret, and I'll be the moderator for today's conference. (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, [2]

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Thank you, Margaret. Good evening, and welcome, everyone. Thank you for joining us today to discuss TCS' financial results for the fourth quarter and full year of fiscal year 2017 ending March 31, 2017.

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 call -- for this quarter, sorry. The financial statements, quarterly fact sheet and press releases are also available on our website.

Our new leadership team is present on this call to discuss our results today. We have Mr. Rajesh Gopinathan, Chief Executive Officer and Managing Director.

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Rajesh Gopinathan, Tata Consultancy Services Limited - CEO, MD and Non-Independent Executive Director [3]

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Hi. Good evening, everyone.

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Kedar Shirali, [4]

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Mr. N G Subramanian, Chief Operating Officer.

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

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Hi. Good evening, everyone.

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Kedar Shirali, [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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Ajoyendra Mukherjee, Tata Consultancy Services Limited - Head of Global HR and EVP [8]

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And Mr. Ajoy Mukherjee, Head of Human -- Global Human Resources.

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Ajoyendra Mukherjee, Tata Consultancy Services Limited - Head of Global HR and EVP [9]

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Hi, everyone.

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Kedar Shirali, [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 any specific revenue or earnings guidance, and anything said on this call, which reflects our outlook for the future or which could be construed as a forward-looking statement, must be reviewed in conjunction with the risks that the company faces. We have outlined these risks in the second slide of the quarterly fact sheet available on our website and which has been 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 and Non-Independent Executive Director [11]

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Thank you, Kedar. Good morning and good afternoon and good evening to all of you, wherever you are. The rather turbulent year marred by political and business uncertainties had a fairly good sequential volume growth of 1.7% in a seasonally weak quarter. Our constant currency revenue growth was 1% Q-on-Q. Our operating margins during the quarter reported was 25.7% and net margin was 22.3%, the same as Q4 of the prior year. Our full year volume growth in FY '17 was 8.5% while constant currency revenue growth was 8.3%, an incremental revenue addition of $1.4 billion in constant currency terms.

In reported terms, full year revenue growth was 8.6% in INR and 6.2% in USD terms.

Full year gross margin was 43.3% and operating margin was 25.7%, a shade below our preferred range of 26% to 28%. Net margin held steady at 22.3%.

Pricing. We have been saying for a while now that our overall pricing and realization has been stable despite volatility in quarterly realizations. I'm happy to say that, in FY '17, our full year constant currency realization was flattish with a slight decline of 20 basis points compared to the prior year. This hopefully sets to rest some amount of the persistent commentary about commoditization of services and the fears of a structural pricing decline.

We have been commenting about -- that such commentary takes a very narrow view of some of the service lines and does not take the portfolio view of the aggregated business and how pricing strength comes from newer services and typical price reduction in -- also which is typically part in our industry.

I strongly believe that customers will continue to value our services as long as we invest in new capabilities and stay relevant at a time of technology change, and we've built innovative solutions and consistently deliver high-quality work. To do this, we need to stay customer-focused and keep looking for better ways to deliver superior outcomes and that can happen only when, at a fundamental individual level, we have a sense of identity and take pride in the work that we do. So overall, reiterating our commentary on stable realization regimes and the fact that participation in new services and our ability to join the portfolio is a constant source of strength in our overall realization. In fact, if you look back over the last 5 years, we have seen fairly consistent realization achieved across that period of time. So it's not just about 1 year. Even over a 5-year period, we have seen that.

In client metrics, it's been another good year and a strong proof point of the value customer fee in engaging with us and the resilient and enduring nature of the relationships we have built with them, and marked by a steady expansion of our participation in this spending year-after-year. It can be seen in our client metrics, which capture the number of customers we have in each revenue bucket.

Comparing the latest metrics with prior periods, we see a steady and strong progression of customers into higher revenue buckets on a quarterly as well as a full year basis.

During the quarter, we added 1 more client in the $100 million-plus revenue band and 4 in the $50 million-plus band and 10 in the $10 million-plus band. For the full year, we added 11 more clients in the $50 million, 17 more in the $20 million and 30 more in the $5 million-plus band, and we have 35 clients more in $100 million-plus band, down 2 from last year for reasons covered in our prior earnings calls.

Looking at it from a segment perspective, during the quarter, we saw continued volatility and underperformance in BFSI and Retail, similar to what we saw in the first half of the year. Excluding those 2, the other 6 verticals collectively grew 3.8% Q-on-Q and have led by Communications and Media, which are a strong quarter at 7.4% Q-on-Q. Hi-Tech has been up 5.2%, and this is the 12th straight quarter where there are good growth.

Travel & Hospitality was up 3.6% Q-on-Q and Licenses and Healthcare was up 3.1% Q-on-Q. Manufacturing and the area verticals also performed above company average. And as a reminder, all the growth figures I have mentioned are all in constant currency terms.

The BFSI revenue growth during the quarter was flattish, down 0.4% sequentially. It was mainly on -- due to a one-off project that we had last quarter which finished and -- in North America, resulting in a revenue gap that impacted the segments involved, BFSI and North America.

The Retail revenue declined 3% sequentially in Q4 on account of reduced spending by a few large clients, and it also reflects a sector-wide weakness in the United States and Europe. Full year revenue growth trends were along similar lines. BFSI, Retail and Hi-Tech underperformed related to the company average, while all of the verticals grew in double digits. It's worth mentioning that Communications, Media and Information vertical, which is up 10.5% in FY '17, has performed better than the company average for the first time in 6 years. Similarly, from Hi-Tech, as I said, we are seeing a strong trajectory with the last 3 quarters being positive, and we expect a fairly good momentum to continue into next year.

Geography volume growth during the quarter was led by India, which was up 9.3% Q-on-Q. Continental Europe also had a strong quarter, up 7.1% Q-on-Q and U.K. at 4.1% Q-on-Q. Middle East and APAC also grew above company average. North America declined in Q4, and I already mentioned that it was dragged down by the performance, primarily coming from the BFS segment. Latin America continues to be volatile and had a soft quarter. On a full year basis, all geography showed growth. Continental Europe, India, Latin America, and Middle East and Africa all grew in double digits while other geographies grew between 6% to 7%.

From a services perspective, we had good growth in Q4 in ADM, EIS and BPS. On a full year with the exception of ADM and Asset Leveraged Solutions, all of our service lines grew above company average with EIS and ITIS growing at 17% and 16%, respectively. I'm also happy to report that our Enterprise Solutions and Consulting business crossed $3 billion in annual revenues, while our BPS business crossed $2 billion milestone.

From the perspective of service lines, there's one aspect that I wanted to talk about. Our service line reporting conventions date back to more than 2 decades, and we are increasingly realizing that this is slightly out of sync with the way services are currently getting consumed or the way customers are engaging with us. Our -- a large part of our revenue comes from integrated solution offerings, where we orchestrate the delivery of multiple service lines [ or ] completion certain business outcome.

More so, as people move more and more towards Agile as an engagement model, the same team designs, builds, tests, deploys and then keeps repeating that cycle for the lifetime of the system, which blurs the distinction between activity-based service definitions.

So in such complex scenarios, it becomes difficult for us to try and split the revenues and attribute them to individual service lines for the sake of a historical reporting model. We are now internally working on a reporting model that's more aligned to today's digital world and its current purchasing behavior. We will share with you more in terms of how this plays out in our reporting formats during the course of the year.

Coming to Digital, strong adoption continues across industry verticals. Over 55% of our clients engage with us today on digital services, and that was [ in pages ] higher among the largest clients. In BFSI, we participated in digital spending in every one of our top 25 clients. Revenue from digital engagements made up to 17.9% of our Q4 revenues, a growth of 7.6% Q-on-Q and 22.7% Y-on-Y. For the full year, Digital revenues made up 16.7% of revenue, a growth of 28.8% over the prior year, with Digital contributing $3 billion of final revenues.

A key differentiator that has helped this year gain market share in our customers' digital spending has been our proactive investments in research and innovation. A significant part of our innovation effort this year has been focused on harnessing the power of AI and automation. AI offerings developed by our R&I teams, which formed the planning this year include conversational systems, natural language processing systems and the TCS IoT platform, including other areas like robotics, image processing capabilities, crowdsourcing, et cetera.

We have created a dedicated BFS blockchain Center of Excellence for piloting and co-trials with our customers. And yes, we'll talk later about the blockchain platform that is being integrated into our TCS BaNCS product.

Similarly, we have created a collaborative design space to explore and experiment and engage in the [ incident ] site. And our client partnership continues to grow, covering 150 partnerships, 2,000-plus partners, 27 academy of partnerships, et cetera. So we are staying very active in both digital and innovation in a more [ real placed ] sense and that is continuing to feed through in our participation in various emerging service areas.

This also has a factor from our approach to IP. Our various platforms and products that we have spoken about in the past, among them [ my own ] assessment, continues to grow. And as of March 31, more than 84 million candidates have been assessed on IR and the platform made its first foray outside India in FY '17.

Our Aadhaar platform, CHROMA, which enables next-generation employee experience, was adopted by 4 new clients this year, including 1 in Q4. Similarly, our accounts payable platform continues to gain traction, and we -- during the course of this year, the platform was used to process more than 20 million invoices.

And coming to ignio, with the world's first neural automation system for IT operations in enterprises, it continues to do well in the market using its context of our intelligence and expanding body of knowledge. ignio is easily managing the complexity of a every heterogeneous dynamic IT environment in large Fortune 500 corporations, and it's delivering on its promise of both productivity as well as experience and quality of experience.

In FY '17, ignio won 17 new clients, including 4 in Q4. We now have filed 71 patents across ignio or around ignio. Similarly, other industry-specific platforms in Optumera and the retail space, our advanced development product in licenses and ops and telecom continues to see traction among our customers.

Coming finally with last but not least, to BaNCS, our flagship product in the BFS space had a good year with 22 new customers in FY '17 and over 1.3 billion accounts processed. This is an interesting data point, 15% of the world's population are serviced using TCS BaNCS today. The TCS BaNCS insurance platform services close to 20 million life annuity and pensions policies and 125 million property policies. I want to congratulate the BaNCS team for their amazing work in the last -- they did last month in helping State Bank of India successfully pull off the integration of 5 of their associate banks and the Bharatiya Mahila Bank in one single shot.

From an IT perspective that involves -- involved the migration of product and customer data from 6 core banking platforms onto the SBI's TCS BaNCS platform. The final merger was a completion, a tight 48-hour window over the weekend after March 31 before the bank open for business in the next new fiscal year. Post-merger, the TCS BaNCS instance at SBI supports 515 million-plus customer accounts -- or rather 550 million customers and 725 million accounts with 180 million transactions per day, staggering numbers unmatched by any other core banking platform anywhere in the world.

From our people metrics perspective, our investment in reskilling, the movement to Agile/DevOps and the work done with HR teams have all resulted in a significant improvement in employee retention. Given the scale of digital work we do across different industry verticals and using different technologies holistically, it's clear that for engineers who want to be part of an exciting digital engagement which makes a difference to our customers, TCS continues to be the most preferred place to be.

Attrition on an LTM basis and IT Services came down 80 basis points Q-on-Q to 10.5%, setting an industry benchmark yet again.

We continue to focus on improving productivity through various avenues of nonlinear growth, including increased use of automation. This will result in progressively fewer numbers of employees to revenue related to the business. Compared to 90,000 growth heads we did, we added about 79,000 employees on a gross basis this year in FY '17, and on a net basis, 33,380 employees, ending the year with 387,000 employees.

Our local hiring programs in various geographies are progressing well. In FY '17, we recruited 11,500 employees outside India, including some engineering campuses and the top 10 business schools in U.S. Given the changing nature of skills needed in the world of Agile/DevOps, we are systemically using innovative, gamified ways like hackathon and contests to pick up top-notch talent in increasing numbers.

From trends and demands as we look forward, we have spoken in Jan about a certain buoyancy in customer sentiment. While it did not translate into immediate growth acceleration in Q4, I'm very happy with both our deal wins during the quarter and the deal flow in our pipeline. In Q4, we signed 9 large deals, which are well distributed across high verticals with 3 in BFSI, 2 each in Licenses and Utilities and 1 each in CPT and TTS. Similarly, from a geographical perspective, North America accounted for 9 of those -- for the 4 of those 9 deals. And on the remaining, we had 2 each in Europe, APAC, with 1 in the U.K.

Over the last 2 months, me and N G have gone around meeting with our key customers, and we have visited more than 75 key customers across the world and have had very productive conversations with them. A common theme that have emerged from those conversations is that every customer today has a transformational agenda and an increased investment in digital technologies. We are well pleased to expand our participation in these initiatives, and client connect and client respect for TCS continues to be quite high.

When you look at demand from a vertical industry perspective, the 3 verticals that underperformed this year, BFSI, Hi-Tech and Retail, of those, BFSI and Hi-Tech looked well placed to improve their performance next year. I spoke about Hi-Tech's increasing trajectory over the last 3 quarters. And similarly in BFSI, the deal pipeline is quite good. The -- we have fairly few large deals in insurance and a large number of smaller, fast-moving deals in BFS. We expect spending to continue on improving customer experience, [ AP application ], automation, simplification, cloud adoption and compliance.

Coming to Retail where we have had a muted year, the industry continues to go through subtle problems, and we expect to see weakness continue there for the next few quarters. And we need to watch that space closely. With all other verticals, we expect continued growth.

Looking at other parts of the portfolio, which had faced challenges in recent times, we expect insurance and Diligenta to bounce back this year. And Japan also, we think that it is likely to flatline and has slight growth compared to the de-growth that we experienced last year. Latin America and India, likely to be volatile, but we expect them to grow at about the company average. Though, as I said, the volatility there is part of the business.

Our production platforms are also continuing to do well, as I've spoken about earlier.

Lastly, we are happy to announce that the board has approved the final dividend policy, which states that we'll be doing in -- it states what we have been doing in practice since our initial public offering. As you know, we have been meeting our capital requirements through internal accruals and distributing surplus cash to our shareholders in a disciplined manner through the interim dividends and one final dividend every year and a special dividend every couple of years.

In the formal policy, we have reiterated our continued commitment to our shareholder-friendly capital allocation policy and stated that, after meeting internal cash requirements and maintaining reasonable balance and readiness for strategic investments, we will endeavor to continue to return a significant part of the excess to shareholders.

Interesting data point is that if we'll consider over the last 6 years, we have, on an average, distributed 80% of our free cash flow less our investment in acquisitions over that period of time, while year-on-year, the volatility -- it has been varying. And this year, we expect it to be in the range of 108% for FY '17, but the average over 6 years at 79%, 80% is probably industry-leading.

With that, I'll turn this over to Ramki to take us through the rest of the financials.

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

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Yes. Thank you, Rajesh. Let me first go over the headline numbers. In the fourth quarter, our revenues grew 1% Q-on-Q on a constant currency basis. In INR terms, we had a negative cross-currency impact of 1.3%, resulting in reported revenue of INR 296.42 billion, which is a sequential decline of 0.3% and a Y-on-Y growth of 4.2%. In USD terms, there was a cross-currency benefit of 0.5% resulting in reported revenue of $4.452 billion, which is a Q-on-Q growth of 1.5% and Y-on-Y growth of 5.8%. The constant-currency growth of 1% is made up of a volume growth of 1.7%, constant currency realization impact of minus 0.7%.

Our full year revenue for FY '17 was INR 1.180 trillion, a Y-on-Y growth of 8.6%. In U.S. dollar terms, our revenue of $17.576 billion translates into an annual growth of 6.2%. We added incremental revenue of $1.4 billion on a constant currency basis. Our constant currency revenue growth for the year is 8.3%, which is made up of a volume growth of 8.5% and constant currency realization, flattish at minus [ 02% ] year-on-year.

Coming to operating margin. Operating margin for the quarter was down 0.3% Q-on-Q to 25.7% on account of currency movements during the quarter. For the full year 2, our EBIT margin was 25.7%, down 0.8% Y-on-Y, largely driven by higher employee cost.

Net income margin in the fourth quarter as well as for the full year was at 22.3%, which is down 0.48% on a Q-on-Q basis and flat on a Y-on-Y basis. Effective tax rate for the quarter was 23.2% and for the full year, 23.6%. Our accounts receivable was at 73 days DSO in dollar terms, down 2 days Q-on-Q.

Net cash from operations during the quarter was INR 74.5 billion, which is 25% -- 25.1% of revenue or 113% of net income. For the full year, net cash from operations amounted to INR 270 billion. That is 22.9% of revenue or 103% of net income.

Free cash flow in FY 2017 was INR 250.4 billion, a growth of 17% Y-on-Y. After paying out INR 109.7 billion in dividends during the year, our invested funds as of March 31 was INR 484.3 billion.

The board has recommended a final dividend of INR 27.5 per share, bringing the total for the year to INR 47 per share, which is a payout ratio of 42.4%.

You must be aware by now that our postal ballot for the INR 160 billion share buyback program has received an overwhelming approval from the shareholders, and further steps in this regard are progressing well.

With that, we can open the line for questions, Kedar.

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Kedar Shirali, [13]

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Yes. Operator, you can open the line for 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 Anantha Narayan from Crédit Suisse.

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Anantha Narayan, Crédit Suisse AG, Research Division - Director of Equity Research for India [2]

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Rajesh, my first question was on the financial services segment. For a few months now, we've heard some fairly positive comments from the U.S. [ fellows ] from some of your peer companies, but some are not translating that into numbers yet. So my question was, what's holding it back? And do we have any visibility of turnaround anytime soon?

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Rajesh Gopinathan, Tata Consultancy Services Limited - CEO, MD and Non-Independent Executive Director [3]

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Anantha, we met many of our large BFS clients over the course of the last 2 months and the way to characterize it is that, A, there is a lot of small projects and we see a lot of small project momentum in the pipeline. We are also seeing increasing size of digital projects, where they are looking at core transformation to better position themselves for digital. And we have seen project sizes in the range of $10 million-plus, whereas earlier project sizes were smaller. But the overriding inflation that we worked out with was, while there's a sense of positivity and everyone is positioned for the growth that they are expecting. But many of the things that are expected have not yet played out, though there is an expectation that it will come through, whether it'd be the rate reductions or it'd be the regulatory stands that they are expecting or the increased spending in other factors that could lead to a further enhancement on the credit growth side. So many such things have not yet fully played out, though there is an expectation that it's only a matter of time. And probably that is what is resulting in a relative delay in the spending pattern. So almost nobody gave us any negative commentary or any step-back from that program. The program realizations are not quite materializing at the speed that we thought they would. So we continue to remain well positioned. We are participating fairly well in whatever is currently there, and all indications are that it's only a matter of time rather than a reversal in these expectations.

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Anantha Narayan, Crédit Suisse AG, Research Division - Director of Equity Research for India [4]

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And my final question was, either to you or to Ramki, your new development policy has actually fallen short of tallying out the percentage of free cash or net profit or something like that. So then is there a number that you have in mind? And if not, is there at least an expectation that the payout will be more uniformed rather than the lumpiness that we've seen in the past year?

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Rajesh Gopinathan, Tata Consultancy Services Limited - CEO, MD and Non-Independent Executive Director [5]

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From a number perspective, Anantha, as I said, if you look at the average over the last 6 years, it's close to 80% and that is at the percentage of the free cash flow net of acquisitions. And directionally, I don't think we are likely to go lower than that. The second part of the question, which is on the cadence, that is an issue that the board has been debating for some period of time and both whether that guidance needs to be changed and also whether a more formal number needs to be stated. And as and when the board decides on that, we will communicate it. But from an investor perspective, I would say that you should expect us to continue to deliver along the lines that we have done in the past, if not better, as we go forward.

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Operator [6]

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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 [7]

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First, a couple of questions related on demand in the fourth quarter, Rajesh. So your fourth quarter sequential growth appears to be lower than we've seen in the last 4 years on a year-over-year basis, also on a sequential basis. So were there any specific, unanticipated challenges that led to the softness this time? Again, related to that, you commented about BFSI and Retail. Your commentary on BFSI and Retail in the September quarter and in the December quarter was that, do you perceive both to be cyclical? But at least on Retail, you appear to be saying it's a bit more direct, it's a bit more structural. So on banking, what may lead you to reassess it for it to be more structural than cyclical?

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Rajesh Gopinathan, Tata Consultancy Services Limited - CEO, MD and Non-Independent Executive Director [8]

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As correctly said, for the last few quarters we have been commenting on both these sectors. The BFS' positive commentary is based on the feedback that we're getting from our customers and coming from the largest market. And as we said, we are also seeing that in the pipeline in terms of deal momentum. And it's only a question of how these materialize and how they coalesce into larger funds. And we're seeing that the deal size is also increasing. So on BFS, it's a widespread one, plus this current quarter's numbers were impacted by a project closure in Q3 and -- now the -- what should I say -- the impact of that into Q4 because of the backfill that happened a bit. So we are quite -- continue to remain quite confident on BFS and expect improvement coming from next quarter itself. And specifically, in the insurance sector, we are seeing a large number of -- or rather, a fair number of large deals in the pipeline coming from the life and pension and platform-based deals also, which also gives us confidence on the Diligenta side where there are 2, 3 large deals that are looking good and maturing well. So on BFSI, we continue to remain positive based on the pipeline and visibility that we have. Retail, when we had first commented about it, it was a one-off and which had caught us by surprise, but it has been systematically going down. We are seeing some amount of financial stress in some of our customers. And the ongoing structural issues in the sector is creating its own issues. So the cautionary note on Retail is more about how the sector is playing out. And we have more giving a heads-up saying that we'll see how it develops during the course of the year before we can comment about strong recovery there. So this is the listing on terms of these 2 sectors. Was there another question? Yes.

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Ankur Rudra, CLSA Limited, Research Division - Research Analyst [9]

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Okay. Just moving on to the margin guidance for the full year. Just want to clarify, is this 26% to 28% that you've maintained, is that on constant currencies? Or are they on the current currencies? If that is so, what margin levers gives you the confidence that given the challenges we face from currencies, site immigration perhaps in the U.K. -- Australia and a less visa-dependent strategy in the U.S., you will be able to take it up to that?

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Rajesh Gopinathan, Tata Consultancy Services Limited - CEO, MD and Non-Independent Executive Director [10]

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So it's on a constant year-on-year currency basis. And as we've always maintained, a very short-term or immediate currency volatility will [ bleed ] through into the margins, which has happened in this quarter also. From a lever perspective, as we see improvement in some of the performance like some of the units that we spoke about, whether it is Diligenta, Japan, et cetera, that is one of the big levers. We see continuing growth and size and critical mass in Digital that has an improving margin profile, as we add size there. And overall, it is also predicated in some amount of better demand environment and better revenue performance. So a combination of all of it and continuing productivity improvement as we see that playing through. All of these will give us the levers that we need to operate on to bring it back into our stated range.

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Ankur Rudra, CLSA Limited, Research Division - Research Analyst [11]

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Fine. And just lastly, if I can squeeze one more. Your hiring has remained quite solid at about 9.5% for the full year. And it is actually ahead for your constant currency revenue growth this year compared to the last few years despite, I'm guessing, the benefits you've been getting from automation. So are you perhaps investing ahead of future growth? And if so, where does that confidence come from?

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Rajesh Gopinathan, Tata Consultancy Services Limited - CEO, MD and Non-Independent Executive Director [12]

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Partially, as you said, we have been pushing ahead, and to some extent, we are also directionally reducing it as we go into this year. And we will be sequentially lowering our guidance till we see a better improvement on the business side.

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Operator [13]

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The next question is from the line of Diviya Nagarajan from UBS.

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Diviya Nagarajan, UBS Investment Bank, Research Division - Executive Director and Research Analyst [14]

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Just a little bit of clarity on your commentary on BFSI. From what I understand, you commented that the deal momentum in the pipeline is still predicated on an improved outlook for the rest of the year. Does that imply that, versus our earlier commentary during the quarter, there has been a change in the pace of deal close versus your earlier expectation?

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Rajesh Gopinathan, Tata Consultancy Services Limited - CEO, MD and Non-Independent Executive Director [15]

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In BFSI, no, actually, the commentary has not changed significantly, other than there is a one-off in terms of what happened in this quarter compared to last quarter. But overall our deal commentary has been similar. And we actually have better confidence right now than where we were 6 months back, both on insurance as well as on the BFS side. And its commentary is similar only, Diviya.

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Diviya Nagarajan, UBS Investment Bank, Research Division - Executive Director and Research Analyst [16]

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Got it. So, okay. So my understanding was that you were -- that the deal momentum -- more deal momentum that you've seen has been fairly consistent since the beginning of this calendar. You're not seeing any deterioration or slowdown versus your earlier expectations.

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Rajesh Gopinathan, Tata Consultancy Services Limited - CEO, MD and Non-Independent Executive Director [17]

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Yes, that's the right characterization. And again, as I said, in actual one-on-one meetings with our customers also, their overall positive attitude does not seem to have changed. Everyone is more seeing it as a timing delay rather than as a directional change.

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Diviya Nagarajan, UBS Investment Bank, Research Division - Executive Director and Research Analyst [18]

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Got that. And going back to the margin question. Could you just run us through, the currency has already moved by about 3%, 3.5% Y-o-Y. But could you just give us some color on what are the levers that you have that you can pull to get back to those 26% to 28% range in fiscal '18?

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Rajesh Gopinathan, Tata Consultancy Services Limited - CEO, MD and Non-Independent Executive Director [19]

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Diviya, as I said, it is a combination of a mix of revenues and as revenue growth continues to come from newer services and as we start scaling up those services, we expect incremental margin benefit coming from there. We have expectations from driving better productivity. As I said, we expect to be throttling back on our net additions during the course of this year as we drive that productivity over there. And then some of the underperforming segments, we expect to see them do better year-on-year. I spoke about Diligenta and some of the other geographies, which have had a muted performance during the course of last year. We expect more positive momentum there. So each of them, in their own way, we expect them to add to the margin difference. The currency per se, the current immediate volatility that we have seen, needs to be watched as to where it is. Quite frankly, this one has caught us by -- a bit by surprise because nobody expected this kind of a directional movement. We will wait and see how this plays out and what its impact are through the course of the year.

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Operator [20]

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The next question is from the line of Sandip Agarwal from Edelweiss.

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Sandip Agarwal, Edelweiss Securities Ltd., Research Division - Research Analyst [21]

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Rajesh, I have one question, which is largely for a long term managed strategy, and I'm not asking for any kind of number or outlook. But my sense is that if you see Digital is now 16%, 17%, which is growing at a very fast pace. And some other segments are also doing well. So what is your sense, given the current scenario and seeing some kind of recovery in the U.S., and you already mentioned that you're seeing some positivity on the BFSI front. What is your sense that, when will the inflection point come when the losses, which are happening in, like this time it happened in retail or some other losses, which are happening, will get compensated, and we will at least see double-digit kind of growth? Again, this is just from a long-term perspective I'm trying to understand. Or you think that you know it is very hard to set a timeline by when the traditional business, which is getting impacted, probably will be -- will bottom out or something of that sort.

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Rajesh Gopinathan, Tata Consultancy Services Limited - CEO, MD and Non-Independent Executive Director [22]

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Sandip, it's difficult to set a timeline. It has been, as you said -- we've had -- it's a 60% of the portfolio doing well, and by numbers, 40% of it either being weak or muted. And that's a reflection of where the overall economy itself has been, that we are seeing volatility and not necessarily unidirectional growth. So partially, it's going to depend on how the overall market plays out. I can only say that our participation is quite high in the growth areas. But our ability to actually call where the volatility is likely to come from is quite limited. So if you look at it purely from portfolio perspective, if you leave out our BFS and Retail, actually, even on a Q-on-Q basis, all other verticals together grew about 3.8%. So we're seeing kind of a strong outperformance in certain areas, weakness in certain areas, but very difficult to give you a timeline as to when you will see more uniform growth.

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Operator [23]

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

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Sandeep Shah, CIMB Research - VP [24]

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Rajesh, I think, one of the commentary in the media interview we had was incrementally, you're positive for FY 2018. So now, entering into FY 2018, the headwinds like Diligenta, Japan, to some extent, has been reversing, including LatAm as well. So do you believe that the 8.3% constant currency growth, which we had in FY '18, directionally could be better in FY '19? I'm not asking for any number, but does that -- your comment of incrementally positive indicates that FY '18?

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Rajesh Gopinathan, Tata Consultancy Services Limited - CEO, MD and Non-Independent Executive Director [25]

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We're dancing too close to guidance on that line. As I said, it's better to look at it segment-by-segment, and we've given you our commentary on the segments that were relatively underperforming. But on the ones that are doing well, at this stage, we don't see any sense in terms of -- that there could be weakness there. Communications, which we called out, saying that we have seen the first double-digit growth in [ a total of ] 5, 6 years. Of course, that needs watching. It might be a bit volatile, but directionally, that also seems to be good. So I want -- don't want to venture as to, at an aggregate, what will it be, but segment-by-segment, I think we've given you fair amount of visibility.

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Sandeep Shah, CIMB Research - VP [26]

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Okay, okay. And second, in terms of clients, decision-making, is there any change versus what it used to be around 3 months back in terms of positive or negative?

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Rajesh Gopinathan, Tata Consultancy Services Limited - CEO, MD and Non-Independent Executive Director [27]

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If you look over the last 6 months or so, typically, we expect actual rated deal closures during the first quarter of the year. And that has not necessarily played out. And as I said in our one-on-one meetings with them, they are not indicating that, that is a reversal in their expectations. It is more a timing issue. But Q4 anyway is not (inaudible) better. Q4 calendar, the December quarter, is anyway not a period of great decision-making. So the expectation was that the Jan, Feb, March will be the period. And that has not fully materialized. So -- and which we have tried to get into by in our one-on-one meetings, and we have, over the course of the last 2 months, we have met a fair amount of customers, more than 80 between [ me and N G ]. And we're getting almost consistent commentary from all of them that they have a strong investment agenda, and they have an equally strong productivity or an operational challenge agenda, but they're quite positive in their outlook in terms of where they want to invest. And specifically, in BFS North America, the sense of positive expectation continues. But many of the things that were expected have not yet played out, either on the regulatory side or on the capital market side. So nobody is having a negative [ listing ] on it. They're all positioned positively, but waiting for actions to happen before the investments start rolling in.

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Sandeep Shah, CIMB Research - VP [28]

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Okay. And just last question, qualitatively, for FY '17, I think, on the EBIT margin as well in constant currency, we are at the lower end of our targeted range of 26%, 28%. While entering into FY 2018, there are some headwinds largely coming through visa regulatory-related changes, which most of the companies are making, and that may ask for some investment as a whole. So directionally, with that plus the currency, which though we're giving directionally, largely in constant currency, you believe that managing margin may be slightly more difficult and we need to do some extra stuff, which we have not tried earlier? And what would be those for managing the margins in FY 2018?

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Rajesh Gopinathan, Tata Consultancy Services Limited - CEO, MD and Non-Independent Executive Director [29]

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One thing I want to reiterate, that our 26% to 28% is not a guidance, and it is more sharing with you what our internal targets are. So that is an important aspect that you need to keep in mind in all our commentary. From a target-setting perspective, we think that this is still an achievable band. And for the various levers that I spoke about, we are trying to -- we're looking at it. Some of the headwinds that you mentioned about current which are the situation that we see. We have mitigating strategies in place, which we hope to execute on to be able to take care of some of the incremental cost. Currency is always -- what should I say? A wildcard. And especially volatile currency environments would play out in whichever form that they go, it's difficult for us to call on that. But based on where we are, we are maintaining our internal target and sharing that transparently with you. This is not a guidance. This is the target that we're currently operating with internally. And of course, we have a reasonable confidence on that, which is why we're keeping that as a doable target. But it is a stretch target, and no doubt about it. But it's something that we think that we can execute on.

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Sandeep Shah, CIMB Research - VP [30]

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Okay, okay. And just a clarification, what we are seeing is, going forward, our dividend distribution, we would try to be close to around 80% of FCS after any acquisition if we plan going forward.

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Rajesh Gopinathan, Tata Consultancy Services Limited - CEO, MD and Non-Independent Executive Director [31]

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I did not say that. In fact, I'm not authorized to say that. It's a [ question and ] decision of the Board. What I shared with you is that, over the last 6 years, our average distribution has been that. And directionally, we don't see any reason to step away from it.

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Operator [32]

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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 [33]

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Rajesh, I was just wondering that if you look at your top 15 or top 20 of your accounts, in the last couple of years, have we been able to increase our wallet share of their total IT spend? Or you think we have largely been able to just maintain it and maybe companies like the global consulting firms or even boutique firms, they have been able to chip up because of the Digital spend share going up?

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Rajesh Gopinathan, Tata Consultancy Services Limited - CEO, MD and Non-Independent Executive Director [34]

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Pankaj, we believe that we are among the largest global consulting firms. So that's something that we need to be on the same page on because otherwise, I don't think a lot of the commentary makes sense. And in our large customers, we have steadily increased share. I don't think there are many places where we have lost share. Boutique firms, smaller firms, in any given new era of technology, typically have a larger participation. And as project sizes increase and as the project starts hitting the core systems, our relative competitiveness keeps on increasing. This is a natural progression in technology adoption cycle. And that plays out all the time. It has played out over the last few years and continues to play out. But our relative competitiveness, from a large player perspective, continues to increase as we look forward.

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Operator [35]

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The next question is from the line of Ashwin Mehta from Nomura Securities.

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Ashwin Mehta, Nomura Securities Co. Ltd., Research Division - Executive Director of Research [36]

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Just had one question in terms of wage hikes. Have you decided on the quantum of wage hikes for offshore and on-site? And do you think it'll be a normal cycle or there's a possibility of some spreading out of the wage hikes?

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N. Ganapathy Subramaniam, Tata Consultancy Services Limited - COO and Non-Independent Executive Director [37]

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From wage hike point of view, I think it's going to be the normal cycle. We have already said that the increments that we are planning to give at this point in time is somewhere between mid- to high-single digits. And that is -- I'm not in a position to give you exact average across the whole company because the increments are for various bands, for various skill sets and things like that. So it'll be in that range. And as far as on-site is concerned for overseas employees, they'll be similar in the range of 2% to 5% kind of an average. Again, there are various factors that come in, so -- which comes to countries and the skills, the units and the business targets and plans that they have in place.

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Operator [38]

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Next question is from the line of Ashish Chopra from Motilal Oswal Securities.

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Ashish Chopra, Motilal Oswal Securities Limited, Research Division - Research Analyst [39]

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Rajesh, you did mention about, among the better-performing segments, about communication, that while you'll be keeping a watch, it continues to do well for now. Just wanted to know your outlook also on some of the other high-performing segments, where the commentary or the underlying vertical otherwise hasn't been that great. So I think there has been pretty much cautious commentary around health care by peers. And also what do you think about manufacturing and even E&U which had quite a standout performance?

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Rajesh Gopinathan, Tata Consultancy Services Limited - CEO, MD and Non-Independent Executive Director [40]

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So on health care, we probably have the most diversified portfolio and it is that strength and diversity that is really giving us the support as we continue to participate globally across all markets and across all streams in health care, including pharma and life sciences and health care per se. And when we look at our pipeline and our participation, I think this performance is likely to continue into next year also. So we are quite confident about what we see in the life sciences and health care space. ER or energy resources and utilities. Again, while it's a small base, we are seeing strong pipeline and strong participation. But given its small base, volatility, we should not -- it's not unexpected. However, the offtake and the pipeline continues to be strong. And it has done well over the last year. It had -- year before, it was on a improving trajectory, last year it has done well. And we see the trajectory strengthening as we go into next year. Manufacturing. Again, manufacturing is more complex to call because it's a much larger spread. And as of now, we are still quite positive about it. You might have noticed from a service line perspective, engineering services actually delivered a 17% year on -- full year to full year growth, and that actually has a lot of play on new product development. So -- which is actually a good indication of what the downstream possibilities are. But it's a much -- very wide industry, so very difficult to give a more generalized kind of comment about it. But we see a decent growth in that side also. Similarly, travel, TTH, Travel and Hospitality, that also has a decent and a good pipeline, and we expect continued growth, in fact, strong growth in that segment also next year.

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Operator [41]

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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 and Internet and Analyst [42]

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I have 2 questions. First about the retail vertical. You had a decline in Q2, but recovered well in Q3, which is a seasonally weak quarter for Retail. So I was really surprised to see [ even a ] decline. Should we consider Q2 and Q4 as 2 separate client-specific issues in Retail?

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Rajesh Gopinathan, Tata Consultancy Services Limited - CEO, MD and Non-Independent Executive Director [43]

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No, it's not. I wouldn't entirely put it down to client-specific issues. As I said, I think, while of course, everything comes down to client-specific issues, but this is more structural in the industry. And we're seeing financial stress building up in some of our clients, which is likely to have impact on it as we go through the year. So if everything goes well, maybe we'll not, but we want to be cautious about it because we see this industry going through its own pains as it repositions itself. The good news is that, in all of our customers, we are strongly participating in the digital aspect. So Retail has been a forefront of adoption of Digital, and we have very strong participation in it. But aggregate spend itself is shrinking, and that is where the caution comes from.

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Ravi Menon, Elara Securities (India) Private Limited, Research Division - VP of IT Services and Internet and Analyst [44]

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Right. And second question is about your fresh graduates trainee hiring. I thought you had 45,000 campus offers for FY '17, if I recall correctly, and the overall hiring is still pretty high at 13,500. So is this due to higher conversion offers? Or did you do a lot more off-campus hiring this year? And it would be great if you could share what's the campus offer number for next year.

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N. Ganapathy Subramaniam, Tata Consultancy Services Limited - COO and Non-Independent Executive Director [45]

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Yes. From a trainee hiring point of view, we had about -- it's over 45,000 offers that we had given. And then on top of that, we had 39,000 in overall training, which is not only engineering, but it also includes our BPS services, plus the kind of hiring that we do for our Ignite program, where we have B.Scs, M.Scs basically. So all that includes this. So total we had 39,000. Our conversion rate was very similar to what we had earlier. Initially, in between towards the beginning of the year, conversion rate was pretty high, but by that time the whole year ended and everybody -- the whole batching was done, the final conversion rate was very similar to what we had in the prior year. So that's as far as the total number was concerned. And as we go forward, I think instead of focusing on one specific number, I think let's look at the overall direction that we have said, is that gross hiring as we did last year was 90, which has come down to 78. And going forward, that will -- as we have said that directionally it's going to come down. And the total net intake also will be lower than what we have done this year. Now the distribution between campus versus management versus chartered accountants versus B.Sc., M.Sc., there are too many variables at this stage, so I wouldn't like to get into that discussion in this short period. Maybe at some other point in time, we can take that up. So I think let's leave it at a point that overall net is going to be lower than what we have done this year, and that's the directionally stated kind of plan that we have at this point in time.

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Operator [46]

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The next question is from the line of Vibhor Singhal from PhillipCapital.

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Vibhor Singhal, PhillipCapital (India) Pvt. Ltd., Research Division - VP of IT Services and Infrastructure [47]

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My question was basically on the overall growth rate for FY '17. So if I look at the vertical-wise growth, excluding, let's say, Hi-Tech, which is a very small segment for us, there are only 2 verticals of significant importance, which have demonstrated a lower than company average growth. That's BFSI and Retail. So would it be correct to attribute that this lower-than-company-average growth or probably weakness to the fact that these 2 segments have more of B2C companies than B2B companies? And we were anyways expecting the adoption of digital technologies like analytics or cloud to actually start from B2C companies? So would it be correct to say that maybe because these 2 segments are actually adopting digital technologies much faster where we and other companies might not be getting that much amount of market share, that is why we're doing badly in these segments and other segments, which are more B2B will probably catch up later with a similar kind of a structural decline? Or would it be just too oversimplifying these entire numbers?

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Rajesh Gopinathan, Tata Consultancy Services Limited - CEO, MD and Non-Independent Executive Director [48]

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No, no. Not just oversimplifying, it's completely wrong also. So let me tell you -- share some data points on it. Look at BFS over the last 5 years and compare our growth during this period when BFS has gone through a significant amount of transformation both in terms of adoption of digital as well as front office transformation and dealing with regulatory changes compared to some large comparable site peers or larger peers than -- that we had. Our gap used to be in the range of, on a quarterly basis, about $1.5 billion on a Q-on-Q basis. This gap has reduced to 0. So on an incremental basis, our win rate has been far superior from any other comparable peer or peers that are much larger than us. So in an industry that are going through maximum amount of transformation, investing significantly in digital, going through front office transformation, dealing with regulatory change, we have been able to actually increase our market share significantly. Similarly, in Retail, while we publish our numbers, these larger competitors do not break out the numbers on retail side. But from what we know and in the markets that we participate in, we believe that we have probably the highest market share compared to any of the others. And in certain markets like U.K., we probably have a monopolistic status compared to the larger players. So it's very wrong characterization that you have come about.

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Vibhor Singhal, PhillipCapital (India) Pvt. Ltd., Research Division - VP of IT Services and Infrastructure [49]

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My question was not that we were losing market share to the larger players or even global MNCs, but maybe to the new technology -- new startups or boutique companies, which you have mentioned, that they do gain market share in the earliest cycle of an -- technology adoption cycle.

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Rajesh Gopinathan, Tata Consultancy Services Limited - CEO, MD and Non-Independent Executive Director [50]

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I don't think it's a question of market share per se but rather more in terms with, like I said about Retail. The aggregate spend is what is going down rather than as you think, market share. Our participation in our customer continues to be very strong.

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Vibhor Singhal, PhillipCapital (India) Pvt. Ltd., Research Division - VP of IT Services and Infrastructure [51]

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Okay. But nothing to do with the B2B or B2C nature of the business as such, right?

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Rajesh Gopinathan, Tata Consultancy Services Limited - CEO, MD and Non-Independent Executive Director [52]

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Right. (inaudible) that's all.

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Operator [53]

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Ladies and gentlemen, that was the last question. On behalf of TCS, that concludes this conference call for today. Thank you for joining us, and you may now disconnect your lines.