Tata Consultancy Services : Q2 FY2023

Tata Consultancy Services Limited

Q2 FY23 Earnings Conference Call.

October 10, 2022 , 19:00 hrs IST (09:30 hrs ET)

Moderator:Ladies and gentlemen, good day and welcome to the TCS Earnings Conference Call. As a reminder, all participant lines will be in the listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing '*' then '0' on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Kedar Shirali - Global Head, Investor Relations at TCS. Thank you, and over to you, sir.

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 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 e-mailed out to those who have subscribed to our mailing lists.

With that, I would like to turn the call over to Rajesh.

Rajesh Gopinathan: Thank you, Kedar. Good morning, good afternoon 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 continued strength of demand for our services.

:	Page 1 of 21

Tata Consultancy Services Q2 FY23 Earnings Conference 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 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 the quarter. I will step in again later to provide some more color on the demand trends we are seeing. Over to you, Samir.

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 year.

Net margins were at 18.9%. Effective tax rate for the quarter was 25.7%. Our accounts receivable was at 62 days' sales outstanding in dollar term, down 1 day compared to Q1.

Net cash from operations was at `106.75 billion which is 102.3% of net income. Free cash flow was `100.62 billion.

Invested funds as on 30th September stood at `592.9 billion.

The Board has recommended an interim dividend of `8 per share.

Over to you, Milind.

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.

:	Page 2 of 21

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 talent across the world. We launched the TCS National Qualifier Test for FY 24 on August 15th and received an overwhelming response with half a million registrants, an all-time high.

Industry-wide churn continue to be high in Q2. Our LTM attrition in IT services inched up further to 21.5%. That said, the technology job market which had overheated in the last few quarters has begun to cool off, and compensation expectations of new hires are also becoming more realistic. With supply catching up across the industry, the pressure to poach experienced talent is easing. So, we should start seeing the churn settle in the coming months. Based on the monthly trends, we believe our quarterly annualized attrition figure has peaked in Q2 and should start moderating in the second half.

Lastly, we continue to be benchmarked with the best employers globally for our workplace practices, and policies. In Q2, we won more than 50 awards globally across various aspects of HR value chain, including our work towards gender equity.

Over to you, NGS for some color on our segments and products and platforms.

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.

:	Page 3 of 21

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 largest vertical grew 13.1%, powered by strong spending on cloud, data analytics and customer experience.

Let me now walk you through the growth figures by geography.

Among major markets, North America led with 17.6% growth, UK grew 14.8% while Continental Europe grew 14.1%.

In emerging markets, India grew 16.7%, Middle East & Africa grew 8.2% and Asia Pacific grew 7%.

It is befitting that Latin America led with 19% growth in Q2. During the quarter, we celebrated the completion of 20 years of TCS' presence in the region. In these two decades, our business across the region has grown significantly, catering to the local market, as well as serving as a near shore center for North American clients.

Moving on to our Products and Platforms, they did really well in Q2.

Ignio™, our cognitive automation software suite signed up four new customers and three clients went live during the quarter. TCS filed two patents around ignio during the quarter and was granted one. The market demand for ignio-trained professionals continue to grow. The number of ignio trained professionals now stands at 16,398. The number of ignio certified professionals is at 6,984 to-date.

A large American technology company specializing in consumer electronics, software, online services, and mobile phone manufacturing extended ignio AIOps' event management capabilities to their supply chain. This eliminated duplicate alerts and processed genuine alerts, giving SMEs more time to focus on real issues, thereby reducing overall resolution time. The tool has handled over 25,000 alerts since implementation. 33% of these were suppressed and 66% were triaged to operations as legitimate alerts.

TCS BaNCS™, our flagship product suite in the financial services domain had four new wins during the quarter. One of the world's largest investment management companies based in the US, offering a broad selection of investment advice, retirement services and insights to individual investors, institutions and financial professionals, has selected TCS BaNCS Wealth Management for their retail business.

:	Page 4 of 21

Tata Consultancy Services Q2 FY23 Earnings Conference Call

October 10, 2022, 19:00 pm IST (09:30 hrs US ET)

One of the UK's leading insurance organizations went live with the TCS Insurance platform, migrating 2.3 million policies onto TCS BaNCS this quarter. This is the largest ever policy migration in the UK life and pensions industry, and a major milestone in the customer's simplification journey towards eliminating aging legacy systems.

Our Quartz™ blockchain platform had two new wins and one go live in Q2. Quartz has been selected by a large electricity provider in North America to establish a private permission blockchain to track and manage energy consumption and renewable energy certificates allocation among multiple smaller entities. The initial pilot will demonstrate the ability of blockchain to bring different entities together on a shared ledger and track the actual energy consumption vis-à-vis the contracted quantity, automate the issuance of renewable energy certificates using smart contracts and enable real-time tracking of the certificates issued.

In life sciences, our award winning Advanced Drug Development suite had one new win. We onboarded a top five pharma major on our Supply Management Platform, part of the CCT suite, to deliver real-time insights into patient medication adherence.

TCS TwinX™, our AI-based digital twin solution, continue to gain ground in various industries, helping clients carry out complex what-if analysis and take informed business decisions. In Q2, we had two wins and three go lives for the TwinX platform.

TCS Optumera™, our AI-powered retail merchandising suite went live with two of our clients.

TCS iON™ had eight wins in this quarter and is seeing increasing demand and familiarity among educators for the ability to author question papers and auto or manually mark responses. In Q2, we served 150 assessment customers and administered 300 exams to around 6.6 million candidates.

Over 1,170 corporates now leverage the TCS National Qualifier Test as their entry level recruitment platform and over 3,150 candidates have gotten placed till date.

TCS' MasterCraft had 23 new wins this quarter, including 10 new clients and 13 renewals.

In terms of client metrics, these metrics are an important validation of our customer- centric business model. The customary practice has been to report these figures based on US dollar translated revenues.

:	Page 5 of 21