TCSNSEQ1 FY 2023July 13, 2022

Tata Consultancy Services Limited

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Management on call

Rajesh Gopinathan

- Chief Executive Officer and Managing Director; Mr. N

Samir Seksaria

- Chief Financial Officer.

Milind Lakkad

our Chief HR Officer could not join us today due to

Key numbers — 40 extracted

16.2%

afternoon and good evening to all of you. We are starting out in FY 23 on a strong note, growing 16.2% in rupee terms, 15.5% in constant currency terms and 10.2% in dollar terms. : Tata C

15.5%

ening to all of you. We are starting out in FY 23 on a strong note, growing 16.2% in rupee terms, 15.5% in constant currency terms and 10.2% in dollar terms. : Tata Consultancy Services Q1

10.2%

out in FY 23 on a strong note, growing 16.2% in rupee terms, 15.5% in constant currency terms and 10.2% in dollar terms. : Tata Consultancy Services Q1 & FY23 Earnings Conference Call July

23.1%

ting that and other employee costs we incurred in Q1, our operating margin for the quarter was at 23.1%, a contraction of 1.9% sequentially and 2.4% year-on-year. Net margin was at 18%. I will now in

1.9%

oyee costs we incurred in Q1, our operating margin for the quarter was at 23.1%, a contraction of 1.9% sequentially and 2.4% year-on-year. Net margin was at 18%. I will now invite Samir and NGS to go

2.4%

in Q1, our operating margin for the quarter was at 23.1%, a contraction of 1.9% sequentially and 2.4% year-on-year. Net margin was at 18%. I will now invite Samir and NGS to go over different aspects

18%

quarter was at 23.1%, a contraction of 1.9% sequentially and 2.4% year-on-year. Net margin was at 18%. I will now invite Samir and NGS to go over different aspects of our performance during the qua

527.58 billion

er of FY 23 our revenue grew 15.5% YoY on a constant currency basis. Reported revenue in INR was `527.58 billion, a year-on-year growth of 16.2%. In dollar terms, revenue was $6.78 billion, a year-on-year growt

6.78 billion

revenue in INR was `527.58 billion, a year-on-year growth of 16.2%. In dollar terms, revenue was $6.78 billion, a year-on-year growth of 10.2%. Let me now go over the financials. As Rajesh mentioned, we annou

10.2%. Let me now go over the financials. As Rajesh mentioned, we announced salary increases of 5% to 8% and much higher for top performers with effect from April 1. This had a 1.5% impact on oper

Let me now go over the financials. As Rajesh mentioned, we announced salary increases of 5% to 8% and much higher for top performers with effect from April 1. This had a 1.5% impact on operating

1.5%

y increases of 5% to 8% and much higher for top performers with effect from April 1. This had a 1.5% impact on operating margins. Continued supply side challenges entailed additional expenses, such

Guidance — 20 items

Kedar Shirali

opening

“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.”

Kedar Shirali

opening

“As you are aware, we do not provide specific revenue or earnings guidance.”

N G Subramaniam

opening

“The new marketplace will be formally launched this month and is targeting million customers over the next three years.”

N G Subramaniam

opening

“• Similarly, in Massachusetts, we partnered with a leading utility to build a platform that would help them roll out the Solar Massachusetts Renewable Target or SMART incentive system to accelerate solar power adoption in the state.”

Let me give you a couple of examples of these

opening

“But the predominant sense is that technology spending will be resilient.”

Ankur Rudra

“There is high visibility of project funding; there is appetite for continuing investments and in fact, for acceleration.”

Ankur Rudra

“We have not seen any project cancellations, pull backs, nothing of that sort.”

Ankur Rudra

“So, till then the margin pressures will continue but we hope to sequentially improve from where we are, given that we have taken a hit on that completely.”

Sandip Agarwal

“So, is it purely because of attrition going up or it is also related to some restrictions, which were there still in travel side and not been able to spend resources on time or what it is or it is sudden demand, sudden startup project, what is causing that continuous shift in subcon?”

Sandip Agarwal

“We are keeping a close watch on it and we will be reacting to it depending on how the demand/supply situation plays out.”

Risks & concerns — 10 flagged

TCS helped reimagine and implement significant improvements in pricing, risk assessment, acquisition and servicing of customers using a third-party platform.

— Let me give you a couple of examples of these

Having said that, definitely, if there is an economy wide slowdown, it is likely to have some ripple effect across all lines of spend, but resiliency of technology in the overall mix is unlikely to get diluted from where it has been in the last two years.

— Sandip Agarwal

Also the fact that it is a variable cost and therefore it has strategic value to us in an uncertain environment.

— Sandip Agarwal

So, on the subcon side, hypothetically speaking, suppose we enter into a weak demand scenario, and that is one of the levers which we potentially have to improve our cost structure.

— Kumar Rakesh

So, what's really going on there, are the trends or the discussions actually fructifying in the form of a little bit of a slowdown in the velocity of the deal closures, or the ramp ups, any trend that you can highlight will be helpful.

— Gaurav Rateria

But overall, as Rajesh pointed out, customers across our verticals, Manufacturing or Retail or Financial services, have not expressed anything, which is something that that will cause a concern for us at this moment.

— N G Subramaniam

But the aggregate impact of it is still not positive.

— Gaurav Rateria

Last year because of attrition and supply side issue, our margin pull off from the first quarter seasonal decline was lower in the second to fourth quarter.

— Sandeep Shah

Last year, we saw the full impact of supply side playing out and that's what played out on the margins as well.

— Samir Seksaria

Regional markets, by definition, is volatile.

— N G Subramaniam

Q&A — 11 exchanges

A few questions from me today. First, Rajesh, could you maybe elaborate on the tone of conversations you had with clients on perhaps new growth and transformation contracts. How has that evolved this quarter? And in addition to that, how do you think the pipeline formation has been? And finally, how should we interpret the fact that deal signing to the growth on a year-over-year basis seems to be sort of flattening out and the book-to-bill ratio seem to be lower than the last couple of years? Rajesh Gopinathan: Hi Ankur. As you can imagine, we have been staying very close to our customers give

Ankur Rudra

Second part, Rajesh, should investors read anything into the fact that the book-to-bill ratios have dropped a bit this year versus the last years at this time? Rajesh Gopinathan: TCV is a forward-looking number. It is what it is. I gave you the commentary on what we're seeing on the field. The actual closures, that number is there. When we look at our pipeline and overall trend, I don't think there's anything that is alarming for us. A 1.2 times book-to-bill is still quite strong. So, nothing more than that from our perspective, but we're also being very vigilant. : Tata Consultancy Services Q

Rajesh, I have only one question that, when you're talking to the senior executives in your client side, do you see that there is increased recognition in last few quarters that technology is much more core to their business for their growth and profitability than it being something which could be contracted or expanded based on the overall environment or based on the company's performance? The thing I'm trying to understand here is if you see some of the US retailers, they have sounded caution in terms of revenue growth and PAT growth. But at the same time, I think that they have to spend in

Sandip Agarwal

On this subcon expense, we are still seeing a significant jump on a quarter-on-quarter basis and what I understand is that it may be partly due to attrition numbers going up. So, is it purely because of attrition going up or it is also related to some restrictions, which were there still in travel side and not been able to spend resources on time or what it is or it is sudden demand, sudden startup project, what is causing that continuous shift in subcon? Rajesh Gopinathan: Sandip, it's a combination of all of it. Definitely, attrition has a role and supply constraints in some of the local mar

My first question was again on the margin side. So, on the subcon side, hypothetically speaking, suppose we enter into a weak demand scenario, and that is one of the levers which we potentially have to improve our cost structure. In such a scenario, how much of this subcon benefit we can potentially drive? What I'm trying to understand is how much of our cost impact is coming from subcon currently given the supply constraint which we are facing?

Samir Seksaria

So, our subcontractor expenses currently are at 9.7% of our revenues, and have moved up from about 7% levels to where we are currently. And as Rajesh pointed out, we have proactively and strategically invested in creating a bench. Our current priorities are to stay focused on capturing the demand. And we have known how to balance on the subcontractor side. And as the need arises, we'll be able to realign it or balance it. So, what I understand is that we can stabilize it at 7% if the need arises, right? Yes. My second question was around the fresher hiring target we had set about 40,000. How w

So, first question is with respect to the UK market. If you look at the YoY growth, it has been actually slowing down and it's a clear divergence compared to the North America market, which is continuing to remain very, very strong. So, what's really going on there, are the trends or the discussions actually fructifying in the form of a little bit of a slowdown in the velocity of the deal closures, or the ramp ups, any trend that you can highlight will be helpful.

N G Subramaniam

NGS here. Both in the UK and North American market, we don't see any anomalies or abnormalities in terms of customer behavior or the deal closure trends. All of this : Tata Consultancy Services Q1 & FY23 Earnings Conference Call July 08, 2022, 19:00 pm IST (09:30 hrs US ET) remains normal and in line with typically what we experience. Specifically in the UK, there have been some concerns about the increased cost of living that people experience, etc., But then, it's all in the macro level discussions that we have. But overall, as Rajesh pointed out, customers across our verticals, Manufacturin

Rajesh, are there any soft spots that you see in any vertical you're seeing in the pipeline shift towards more efficiency or programs? Rajesh Gopinathan: No, Ravi, we're not seeing much from a vertical perspective. It seems to be fairly balanced across. Nothing at this stage that you can call out at a vertical level.

Ravi Menon

We had heard your comments in the press conference, you were talking about how the US will likely be the main driver of growth during the near term. But I thought in Europe, our market share is still fairly small. So, we should have a lot of these gen-two outsourcing contracts come out. So, shouldn't that also be a driver at least medium term once uncertainty settles a bit? : Tata Consultancy Services Q1 & FY23 Earnings Conference Call July 08, 2022, 19:00 pm IST (09:30 hrs US ET) Rajesh Gopinathan: The context of the comment is more in terms of what we're hearing from customers. You're right

Most of the questions have been answered. Just on Europe, you have discussed about UK. Can you also discuss about continental Europe because in the last four to five quarters, the growth in continental Europe on a sequential basis is a bit lower and softish versus company average. So, one can believe with the macro concerns or this is more specific to TCS as a whole? Rajesh Gopinathan: That we'll have to look across, but we are not seeing any significant change to the demand environment in Europe across the board. 12% is still a decent growth number. As I said, the commentary that we're hearin

Sandeep Shah

And just a second question that with increasing macro concerns, some of your global peers are saying clients have also started discussion on outsourcing led deals, which you also highlighted, Rajesh, in your comments where the multi-tower outsourcing deals are increasing in first quarter versus the last four quarters. So, is it fair to say that outsourcing led deals can increase and large caps including you could be a fair beneficiary of this going forward? Rajesh Gopinathan: Our twin engine strategy is essentially predicated on that we have relevance in both scenarios, both consolidation scen

Just one small question. I need to understand as far as the margin trajectory is concerned, in a normal year, we see the entry margins are lower and exit margins are normally higher, which was not the case last year; last year, we started with 25.5%, we : Tata Consultancy Services Q1 & FY23 Earnings Conference Call July 08, 2022, 19:00 pm IST (09:30 hrs US ET) ended with 25%. So, this year, we are starting with 23.1%. So, how confident we are that this 23.1% trajectory when you move out from hereon and it is kind of bottomed- out?

Samir Seksaria

I just responded the same thing to the previous question as well. Our target is we expect that it would be on an increasing trajectory. And that has been the usual trend except for last year. Our target is that it should improve and we should get closer to what we exited in Q4. If we see the competition statements around attrition, the quarterly annualized attrition for other competition has started coming down from Q4 onwards, whereas for us the commentary that is stabling currently. So, just wanted to get some sense and from the salary hikes it seems to be the salary hikes are almost similar

A couple of questions. Starting with regional market, if I look at our regional market performance remain muted for some time and even though BFSI also remains softer, so if you can provide some sense about how we should look at regional market? Second question is about the fresher hiring. We are indicating about 40,000 for FY 23. But considering that we plan one year advance, how many offers are we planning for : Tata Consultancy Services Q1 & FY23 Earnings Conference Call July 08, 2022, 19:00 pm IST (09:30 hrs US ET) FY 24? And last question is about deal pipeline. Any softness or any uptick

N G Subramaniam

Regional markets, by definition, is volatile. We group some of our emerging businesses and emerging market businesses into that bucket. But overall, if you look at it, how the Asia Pacific market or functions of the Middle East, Africa market functions, these markets do not provide big opportunities for an annuity-based revenue, there are typically project-based revenues. So, there is always a volatility that is there. The second question was with respect to the fresher hiring of 40,000. As Rajesh mentioned, we are – No, question was for '24. I think, on average, we always started with 40,000

I had a couple of questions. Number one is that you mentioned that some of your senior client executive conversations are suggesting some concerns on the macro economic : Tata Consultancy Services Q1 & FY23 Earnings Conference Call July 08, 2022, 19:00 pm IST (09:30 hrs US ET) environment. Is that also translating in terms of any potential impact on pricing discussions? Rajesh Gopinathan: As I said earlier, the discussions on macro are not getting reflected in any of the actual project contract or deal pipeline currently. And I just gave you that color in terms of the nature of the competition

Manik Taneja

I wanted to understand if you would be looking to revisit the onboarding timelines for the 40,000-odd freshers offers that we made for FY'23 if the situation deteriorates. Rajesh Gopinathan: We do not do that. We honor all offers that we make. We do not defer joining or do any form of such management. That's not part of our philosophy. Any offer that we make, we honor it based on whatever is the timeline committed on it.

Rajesh, just a couple of quick ones. Most of the others have been covered. So, first one is on pricing. Are you seeing any incremental challenges in getting price increase even though that being selective say versus the previous quarter? And the second question is on Retail and CPG. Are there some early signs of some softness there, and I'm referencing to the book-to-bill has been significantly higher than the past three years, this looks excellent down a lot more. Rajesh Gopinathan: No, on pricing, actually, the conversations are picking up momentum rather than losing momentum. So, absolutely

Management

This transcript has been edited for readability and does not purport to be a verbatim record of the proceedings. :

Management

Speaking time

Moderator

Samir Seksaria

N G Subramaniam

Ankur Rudra

Ravi Menon

Dipesh Mehta

Kumar Rakesh

Gaurav Rateria

Sandeep Shah

Sandip Agarwal

Opening remarks

Kedar Shirali

Thank you, Steven. Good evening and welcome, everyone. Thank you for joining us today to discuss TCS' financial results for the first quarter of fiscal year 2023 that ended June 30, 2022. 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; Mr. N G Subramaniam -- Chief Operating Officer and Executive Director; Mr. Samir Seksaria -- Chief Financial Officer. Unfortunately, Mr. Milind Lakkad – our Chief HR Officer could not join us today due to a bereavement in his family. Our management team will give a brief overview of the company’s performance, followed by a Q&A session. As you are aware, we do not provide specific revenue or e

Samir Seksaria

Thank you, Rajesh. Let me first walk you through the headline number. In the first quarter of FY 23 our revenue grew 15.5% YoY on a constant currency basis. Reported revenue in INR was `527.58 billion, a year-on-year growth of 16.2%. In dollar terms, revenue was $6.78 billion, a year-on-year growth of 10.2%. Let me now go over the financials. As Rajesh mentioned, we announced salary increases of 5% to 8% and much higher for top performers with effect from April 1. This had a 1.5% impact on operating margins. Continued supply side challenges entailed additional expenses, such as backfilling expenses and higher subcontractor usage. This and normalizing travel expenses negated various operational efficiencies, resulting in an operating margin of 23.1%, a sequential contraction of 1.9%. Net income margin was at 18%. Our effective tax rate for the quarter was 25.5% and our accounts receivable was at 63 day sales outstanding in dollar terms, down one day compared to Q4. Net cash from operati

N G Subramaniam

Thank you, Samir. Let me walk you through our segmental performance details for the quarter. All the growth numbers are on year-on-year constant currency basis. : Tata Consultancy Services Q1 & FY23 Earnings Conference Call July 08, 2022, 19:00 pm IST (09:30 hrs US ET) All our verticals showed good growth in Q1. Growth was led by Retail and CPG which grew 25.1% after a similar strong growth last quarter, Communications and Media grew 19.6%, while the Manufacturing as well as Technology & Services verticals both grew 16.4%. BFSI, our largest vertical, grew 13.9% while Life Sciences and healthcare grew by 11.9%. By geography, growth was led by North America which grew 19.1%. UK grew 12.6%, while continental Europe grew 12.1%. In emerging markets, India grew by 20.8%, Asia Pacific grew 6.2%, Latin America by 21.6% and Middle East and Africa grew by 3.2%. Our portfolio of products and platforms continue to do well. ignio™, our cognitive automation software suite signed up 28 new customers

Let me give you a couple of examples of these

: Tata Consultancy Services Q1 & FY23 Earnings Conference Call July 08, 2022, 19:00 pm IST (09:30 hrs US ET) • For a leading global HR services firm, TCS partnered to transform their core recruitment process leveraging next-generation technologies. Their existing processes entailed recruiters spending 60% to 70% of their effort on profile sourcing and screening, of which 50% was devoted to candidate outreach. Over half the outreach efforts was wasted due to lack of response or declines. TCS redesigned the end-to-end recruitment process, taking a Machine First™ approach. We built bots to automate the background check initiations across clients and deployed a third-party AI-powered candidate outreach platform to significantly bring down recruiter effort and completely streamline the candidate screening process. This resulted in a 300% increase in number of shortlist candidates, a 15-20% reduction in turnaround time, and most importantly, a 42% increase in hiring throughput, which is dire

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