TCSNSEQ2 FY23October 14, 2022

Tata Consultancy Services Limited

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Management on call

Kedar Shirali

Global Head, Investor Relations at TCS. Thank

Rajesh Gopinathan

- Chief Executive Officer and Managing Director; Mr. N G

Samir Seksaria

- Chief Financial Officer;

Key numbers — 40 extracted

18%

and good evening to all of you. We are very pleased with our performance in Q2. Our revenue grew 18% in rupee terms and 15.4% in constant currency terms and 8.6% in dollar terms, reflecting the cont

15.4%

of you. We are very pleased with our performance in Q2. Our revenue grew 18% in rupee terms and 15.4% in constant currency terms and 8.6% in dollar terms, reflecting the continued strength of demand

8.6%

r performance in Q2. Our revenue grew 18% in rupee terms and 15.4% in constant currency terms and 8.6% in dollar terms, reflecting the continued strength of demand for our services. : Tata

24%

e Call October 10, 2022, 19:00 pm IST (09:30 hrs US ET) Our operating margin for the quarter was 24%, an expansion of 0.9% sequentially and a contraction of 1.6% on a year-on-year basis. Our net pro

0.9%

022, 19:00 pm IST (09:30 hrs US ET) Our operating margin for the quarter was 24%, an expansion of 0.9% sequentially and a contraction of 1.6% on a year-on-year basis. Our net profit crossed the `10,00

1.6%

operating margin for the quarter was 24%, an expansion of 0.9% sequentially and a contraction of 1.6% on a year-on-year basis. Our net profit crossed the `10,000 crore mark this quarter and our net m

10,000 crore

0.9% sequentially and a contraction of 1.6% on a year-on-year basis. Our net profit crossed the `10,000 crore mark this quarter and our net margin was at 18.9%. I will now invite Samir, Milind and NGS to g

18.9%

-year basis. Our net profit crossed the `10,000 crore mark this quarter and our net margin was at 18.9%. I will now invite Samir, Milind and NGS to go over different aspects of our performance during

553.09 billion

of FY 23, our revenues grew 15.4% YoY on a constant currency basis. Reported revenue in INR was `553.09 billion, a year-on-year growth of 18%. In USD terms, the sharp fall of all currencies in our basket versu

6.88 billion

all currencies in our basket versus the dollar in Q2, resulted in a deflated reported revenue of $6.88 billion, a YoY growth of 8.6%. While the rupee depreciated by 3.4% against the dollar sequentially, it ap

3.4%

deflated reported revenue of $6.88 billion, a YoY growth of 8.6%. While the rupee depreciated by 3.4% against the dollar sequentially, it appreciated 4.4% against GBP and 3% against euro, eroding the

4.4%

owth of 8.6%. While the rupee depreciated by 3.4% against the dollar sequentially, it appreciated 4.4% against GBP and 3% against euro, eroding the benefit at the operating margin level. This curren

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

“Project ramp-ups proceeded as scheduled, and we're not seeing any delays or cancellations.”

N G Subramaniam

opening

“Many of our clients are also working on plans for various economic scenarios for next year.”

N G Subramaniam

opening

“Those apart, clients have been telling us that even if their business outlook changes over the next few months for the worst, technology will be one of the last areas to be impacted.”

Let me illustrate this with three examples

opening

“TCS led the discussions with the bank to define the target state business architecture, solution architecture and implementation roadmap.”

Let me illustrate this with three examples

opening

“The target reference architecture is expected to bring down the time-to-market by 10% to 15%.”

Kumar Rakesh

“We need to remain vigilant to see whether that will translate into the budgeting and planning cycle for next year, and what that implies for overall demand.”

Kumar Rakesh

“In interacting with clients, how are they looking at their next year budget?”

Kumar Rakesh

“And client interactions on next year's budget planning?”

Risks & concerns — 15 flagged

This currency benefit along with a flatter workforce pyramid and improved productivity of fresh hires helped mitigate the impact of normalizing travel and facility expenses and continued headwind from backfilling and retention expenses.

— Samir Seksaria

With supply catching up across the industry, the pressure to poach experienced talent is easing.

— Milind Lakkad

Despite that headwind, we have good additions in every revenue bucket in Q2 compared to the year ago.

— N G Subramaniam

Despite growing news flow around a possible economic slowdown across the world and client concerns over how that might affect their businesses, we haven't seen any change in their spending on us so far.

— N G Subramaniam

Clients have become more cautious when committing to longer-term investments.

— N G Subramaniam

: Tata Consultancy Services Q2 FY23 Earnings Conference Call October 10, 2022, 19:00 pm IST (09:30 hrs US ET) To support the business expansion and to effectively prepare them for a transition from a category-IV to a category-II bank, which was as required by regulators given their significantly fast growth, TCS helped them conduct a detail risk and regulatory assessment and prepare a roadmap to meet the regulatory requirements related to liquidity, market and credit risk.

— Let me illustrate this with three examples

We have developed an advanced AI and model-based adaptive risk monitoring solution with a predictive engine to predict risk mitigation insights for clinical risk management.

— Let me illustrate this with three examples

It’s very difficult for us to zoom out and comment on the macro situation.

— Kumar Rakesh

My second question was around heading into December quarter, which is usually seasonally weak, are we getting any sense how the seasonality this time around?

— Kumar Rakesh

: Tata Consultancy Services Q2 FY23 Earnings Conference Call October 10, 2022, 19:00 pm IST (09:30 hrs US ET) Rajesh Gopinathan: Leaving aside the fact that Europe is in a fairly volatile situation, and this winter is going to be critical in Europe, our conversations with clients indicate regular seasonality.

— Kumar Rakesh

Although, you know it is very hard to comment on how things will pan out, but, Rajesh, is there any kind of caution which you're seeing in your discussions with the client, particularly from the US geography, because individuals in UK and Europe, traditionally we have seen the economic pressure generally results into some help for outsourcing because it is more cost effective in the past, but that correlation doesn't show up immediately in the US.

— Sandip Agarwal

I know we did make organizational change, but I guess it's too soon to see the impact of that.

— Ravi Menon

Rajesh Gopinathan: No, Ravi, this is just a bit of the impact of the currency volatility that you are seeing.

— Ravi Menon

Now, these numbers are volatile because it can change depending on how the environment changes, but that's where we are.

— Gaurav Rateria

Rajesh Gopinathan: Apurva, difficult to say.

— Apurva Prasad

Q&A — 11 exchanges

My first question was specifically around European geography and UK. In this quarter on a CC YoY basis also, we saw a pretty robust growth of 14% to 15%, which is a higher growth compared to how we reported last quarter. One of our larger peers who recently reported also saw pretty strong growth in Europe and talked about double-digit growth in their November quarter as well. Given the fear around macro economy being pretty severe in that geography, what is driving this much stronger growth in Europe despite those fears? Is there some structural growth drivers which we are now seeing in the Eu

Kumar Rakesh

My second question was around heading into December quarter, which is usually seasonally weak, are we getting any sense how the seasonality this time around? Could there be higher than usual seasonality or could it be the usual seasonality? In interacting with clients, how are they looking at their next year budget? Any sense on that could be very helpful. : Tata Consultancy Services Q2 FY23 Earnings Conference Call October 10, 2022, 19:00 pm IST (09:30 hrs US ET) Rajesh Gopinathan: Leaving aside the fact that Europe is in a fairly volatile situation, and this winter is going to be critical in

Rajesh Gopinathan

In US we've not picked up any threats in terms of caution, I mean extra caution than what is normally expected. So, US is not showing anything particularly concerning. People are overall continuing to invest and normal seasonality should apply. Otherwise, we are seeing a fairly strong environment in US.

Rajesh, last time in this 1Q conference call, you said that the trend of multi-tower outsourcing deals or multi-service transformational deals are going up, and you started signing more number of such deals. Is that trend continuing in this quarter as well? And also, with macro being concerning, do you witness this trend being higher in Europe as a geography, versus that of US? : Tata Consultancy Services Q2 FY23 Earnings Conference Call October 10, 2022, 19:00 pm IST (09:30 hrs US ET)

Rajesh Gopinathan

I'm sorry, I don't specifically remember exactly what I had said, but let me abstract and answer this. Operating model transformation as a demand driver has very strong trend and we are seeing multiple opportunities across all markets on operating model transformation. Operating model transformation is being characterized by a few very distinct points. One is the shift to what we call a vertical operating model, or a product-centric operating model, where tech and ops is being aligned very closely to business units and to business outcomes. The other big one is, of course, the adoption of agil

Wanted to check about the strong additions in the 1 million and 5 million. I know we did make organizational change, but I guess it's too soon to see the impact of that. So, should we think of this as change in your go-to-market and trying to close a lot more of the smaller deals and is there more demand for digital transformation from the smaller firms because there might be laggards in this transformation? Rajesh Gopinathan: No, Ravi, this is just a bit of the impact of the currency volatility that you are seeing. Our client metric in non-US markets, APAC, LATAM, parts of Europe, etc., are m

Ravi Menon

And how should we think about the lateral hiring, being a little lower than the revenue growth, is just a reflection of expectation that the worst of the supply side challenges are behind us, and we can now improve utilization or should we think of this as linked to slightly softer demand visibility, or maybe a combination of both? Rajesh Gopinathan: Ravi, your question was about the headcount growth, right? Yes, that's a little lower than the revenue growth, I mean, we have seen that – Rajesh Gopinathan: Ravi, we have been significantly investing into headcount addition through last year. As

Two questions. Firstly, is it fair to assume that the book-to-bill in Europe would have improved on a quarter-on-quarter basis, basis the commentary that you made and how the pipeline replenishment has happened in Europe after the deal wins concluded? Rajesh Gopinathan: We typically desist from giving you incremental metrics, because that sets a precedent. But when you take Europe and UK together, yes, the book-to-bill has improved. But the actual growth of the pipeline is more than the growth of our qualified pipeline. So, you are seeing some amount of elongation of the deal pipeline between

Gaurav Rateria

Secondly, in last quarter, you talked about revenue productivity getting impacted as you created capacity. So, has that got sort of sorted out and you saw some improvement in revenue productivity, which also had margins and should this be seen as one of the levers for second half in terms of margin performance on revenue productivity side? Rajesh Gopinathan: The way to think about is it is not in terms of a short-term margin lever, but as a strategic call we have taken to significantly expand our employee onboarding, especially on the entry-level employees. We had hired close to 120,000 freshe

Just wanted to pick your brains about the aspect that historically what we've seen is that we've improved our margins through periods of slow growth. Do you envisage something similar playing out going forward as well? And if you could also help us with the margin levers that you think will play out in the near-term given the fact that you've suggested that pricing increases is not universal and is still happening only in certain parts of the book.

Rajesh Gopinathan

If we have strong visibility of low revenue growth, and we become much more careful and optimize it, but I think at this stage, I don't think we are at that point for us to be able to make a comment on that. So, margin optimization comes in more when there is good visibility on stable demand environments, and we use those periods to clean up on the margin side. Right now, whether we are at an inflection point or not, we'll know only in a : Tata Consultancy Services Q2 FY23 Earnings Conference Call October 10, 2022, 19:00 pm IST (09:30 hrs US ET) few quarters’ time. Otherwise, we'll continue to

Rajesh, while H1 bookings has held up above the 7 billion to 9 billion midpoint, how should we be thinking bookings trajectory for H2, more around the replenishment of the funnel of the qualified deal pipeline, any progression around that? Rajesh Gopinathan: Apurva, difficult to say. We are running at 1.2 times book-to-bill which is a fairly healthy rate to run at. And we can take a bit of volatility on that on a quarter-on-quarter basis. So, to take a near-term call on what will happen next quarter or the quarter after that, difficult for us to do. And more importantly, it does not have a sig

Apurva Prasad

Just to follow up on that, Rajesh, so this 1.2 book-to-bill from a medium-term perspective, is that the number to build? Rajesh Gopinathan: Apurva, I don't want to get drawn out on that. On the supply side, Rajesh, any comments on the learning hours which had a decline YoY for Q2? And if you could also help us with the hyperscaler certification numbers, the number that was 71,000 last quarter? Rajesh Gopinathan: Learning hours to some extent is impacted by the volume of freshers coming in. As you know, we had a very large volume of freshers coming in over the last couple of quarters which has

Rajesh, can you give a little bit more color on products and platforms, which I understand is contributing around mid-teen kind of total revenue and since we are moving towards more on migrating to SaaS business, is the revenue recognition a bit slow and when do we expect that to catch up, and what could be the margin lever in this business? N G Subramaniam: Overall, the products and platforms business is quite stable. The number of opportunities that come our way across verticals and across the solutions that we have is looking good. The business model has certainly transformed itself into a

Bharat Sheth

And what are the margin levers you have in this business? : Tata Consultancy Services Q2 FY23 Earnings Conference Call October 10, 2022, 19:00 pm IST (09:30 hrs US ET) N G Subramaniam: Margins essentially depend on the business volume of transactions that they are going to put in. It varies. Efficiency is going to come from the fact that we're not going to be doing too much customization. People are going to be using the products and platforms more as a COTS model. So, you don't have to maintain too many customer-specific customizations at any point in time. That is going to be run efficiently

Just on the subcon side and on the global hiring side, subcon cost has been going up, of course, for the supply side factors. But given the expectation of a relatively better supply environment in the global market, is that going to change the subcon cost as well as direct hiring outside India?

Samir Seksaria

I'll answer first on the subcontractor cost. So, as you would have seen, subcontractor cost has started trending downwards. Most of the subcontractor cost increase was on account of two factors. With borders opening up and visa availability in most countries improving, we would expect subcontractor costs to start trending down. Also, as the headwinds from attrition eases, we would expect the use of subcontractors also to trend downwards. Will we be incrementally using it as a metric given the macro remains uncertain?

So, is it safe to assume that subcon cost may not go down substantially in near future even if supply side eases out, because it may be a good margin lever to have in case the macro weakens? This could be a good alternative to manage the demand and supply situation better, or it should ease out irrespective of it?

Samir Seksaria

We will try to balance it and it would be a dynamic thing. If demand continues to be strong, we would try to capture the demand first, rather than optimizing the subcontractor cost. That's the lever which we know how to use and will optimize as and when need arises.

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

Management

Speaking time

Moderator

Rajesh Gopinathan

Samir Seksaria

Sandeep Shah

Apurva Prasad

Milind Lakkad

Kumar Rakesh

Ravi Menon

Rahul Jain

Gaurav Rateria

Opening remarks

Kedar Shirali

Thank you, operator. Good evening and welcome, everyone. Thank you for joining us today to discuss TCS' financial results for the second quarter of fiscal year 2023 that ended September 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; Mr. Samir Seksaria -- Chief Financial Officer; and Mr. Milind Lakkad, Chief HR Officer. 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 earnings guidance. And anything said on this call, which reflects our outlook for the futur

Samir Seksaria

Thank you, Rajesh. Let me first walk youthrough the headline numbers. In the second quarter of FY 23, our revenues grew 15.4% YoY on a constant currency basis. Reported revenue in INR was `553.09 billion, a year-on-year growth of 18%. In USD terms, the sharp fall of all currencies in our basket versus the dollar in Q2, resulted in a deflated reported revenue of $6.88 billion, a YoY growth of 8.6%. While the rupee depreciated by 3.4% against the dollar sequentially, it appreciated 4.4% against GBP and 3% against euro, eroding the benefit at the operating margin level. This currency benefit along with a flatter workforce pyramid and improved productivity of fresh hires helped mitigate the impact of normalizing travel and facility expenses and continued headwind from backfilling and retention expenses. Overall, our operating margin expanded by 0.9% sequentially and was at 24%. Looking ahead, we believe the supply side issues have peaked and should start easing in the second half of the ye

Milind Lakkad

Thank you, Samir. On the people front, our investments in capacity building and organic talent development allowed us to achieve our strong business growth with relatively modest net headcount addition. : Tata Consultancy Services Q2 FY23 Earnings Conference Call October 10, 2022, 19:00 pm IST (09:30 hrs US ET) In Q2, we added 9,840 employees on a net basis, bringing our workforce strength to 616,171 as on September 30th. It continues to be a very diverse workforce with 157 nationalities represented and with women making 35.7% of its base. On the learning front, TCS clocked 11.7 million learning hours in Q2, resulting in the acquisition of 1.5 million competencies. Our FY 23 fresher onboarding is proceeding as per plan. In keeping with our culture of being committed to our employees, we have honored all offers we had made and have onboarded 35,000 freshers in H1 and with 20,000 brought onboard in Q2 alone. The TCS employer brand continues to shine strongly helping us attract the best t

N G Subramaniam

Thank you, Milind. Let me walk you through our segments and performance details for the quarter. All growth numbers are on year-on-year basis and constant currency terms. All our industry verticals grew strongly in Q2. Growth was led by Retail and CPG which grew 22.9% after a similar strong double digit growth last quarter. Growth is being driven by ongoing spending by retailers towards making their supply chains more agile and resilient, and improving the shopping experience for their customers. We've also seen an uptick in the travel, transportation and hospitality sector, driven by increased investment in resilient operations. Communications and Media grew 18.7% driven by investments around 5G and delivering personalized offerings to consumers. : Tata Consultancy Services Q2 FY23 Earnings Conference Call October 10, 2022, 19:00 pm IST (09:30 hrs US ET) Technology and Services vertical grew 15.9% while Manufacturing as well as Life Sciences and Healthcare both grew 14.5%. BFSI, our l

Let me illustrate this with three examples

We have been working closely for over a decade with a leading bank in North America that services the startup and innovation industry. Our deep contextual knowledge of the business gained over these years has made TCS a trusted advisor to their growth journey towards becoming a large financial institution. : Tata Consultancy Services Q2 FY23 Earnings Conference Call October 10, 2022, 19:00 pm IST (09:30 hrs US ET) To support the business expansion and to effectively prepare them for a transition from a category-IV to a category-II bank, which was as required by regulators given their significantly fast growth, TCS helped them conduct a detail risk and regulatory assessment and prepare a roadmap to meet the regulatory requirements related to liquidity, market and credit risk. This entailed reimagination of the overall business framework for the treasury and capital markets swap dealer business for the bank. TCS led the discussions with the bank to define the target state business archit

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