Tata Consultancy Services Limited analyst Q&A

Thank you very much. We will take our first question from the line of Yogesh Agarwal from HSBC Securities & Capital Markets (India) Pvt Ltd. Please go ahead.

Hi. Thank you. First of all, Happy New Year to you all. Two questions. Pretty good to see deal wins improving but I was just curious, even in FY ’24, deal wins were very strong, but FY’25 growth, has not lived up to expectations. So, do you think this time around the color of deal wins are different, and hence the conversion could be a lot more favorable?

So, Yogesh, we had strong deal wins in FY’24 also. But what happened during FY’25 was also the deferral of some projects going slow based on the ROI expectation which saw reprioritization. And seeing the revival in discretionary : spend, as I said, when I say revival, early signs of revival, I don't want to say that it's recovered. Seeing the early sign of revival and the strong TCV win gives us more confidence in CY’25 and FY’26.

Okay. Just on a separate kind of related note, Krithi, so the headcount declined again, and you sound positive for this year, and this is despite the BSNL headwinds. So, why is the headcount declining? Do you think the growth is more back-end-loaded, and then during the year you'll be able to hire people?

No, as Milind has been calling out, while on a long -term basis, there will be some correlation between the headcount and growth. On a quarter-on-quarter basis, it will be difficult to have that correlation. Also, if you look at Q1 and Q2, we added significant headcount. In Q3, we knew even beforehand there will be some seasonality. So, we had to optimize wherever we could. So, that's one reason why the headcount went down. But overall, this is not a reflection of the demand environment.

Got it. Okay. Thank you so much.

Thank you. We will take our next question from the line of Ravi Menon from Macquarie. Please go ahead.

Happy New Year to the management. This the best quarter for deal wins in the third quarter, ever since you started disclosing this number. So, did we benefit a bit from any slippage of the deals, I mean, deals that were waiting to be on that we saw a bunch of them get decided maybe up to November or December?

Every quarter, we'll always have, some deal that could have been closed before the end of the quarter, slip in the next quarter. So, there is no specific bunching that happened in the beginning or end of the quarter. I would say this is more organic. There is no timing mismatch. There is no specific deal that should have closed in Q2 that closed in Q3 to give us this bump.

There are always a few mega deals we are working on. But we are also happy with the quantum of large deal wins. The number of large deals we have won, also showed an improvement this quarter.

All right. And BFSI in North America, could you talk a bit about how that is Q - o-Q on a constant currency basis?

We do not disclose the sequential growth number, but to give you some color, BFSI North America has grown positively. And again, for us, what is equally comforting is the large accounts in BFSI North America, all of them are contributing to growth.

We will take our next question from the line of Sandeep Shah from Equirus Securities.

Krithi, just wanted to understand that the 3Q growth when you entered versus final results, was it as per our initial expectation because all the verticals outside emerging markets or growth markets and to some extent, except consumer, all other verticals have declined in a constant currency Q-on-Q?

See, when we started the quarter, also, we knew it's going to be a seasonally weak quarter. I would say see always like if I had 1% more growth, we have been happier than this past year. But within this band is what we are expecting when we started the quarter also.

Okay. And Krit hi, if I look at last 4 quarters growth in international markets, outside India has been really sluggish. With deal wins picking up, do you believe fourth quarter international market may help us to compensate the impact of BSNL gap, which may come in the fourth quarter?

That is our aspiration. We believe as BSNL ramps down, not only international business, but we are also quite bullish on what's happening in the regional markets, plus the growth returning in global market s and furloughs also to some extent, recovering collectively should help us in the growth for Q4.

Okay. And just coming to margins, just wanted to understand, last time we said we have an aspiration to reach to 26% by Q4. And now furloughs won't be : there, rupee depreciation may help. In that scenario, do you believe this aspiration could be realistic or is it still an aspiration to reach by Q4?

So, Sandeep, margin aspiration remains 26% to 28%. I had not committed that we will reach 26% by Q4, wha t I said is we will be happy if we can exit Q4 at 26%. We have seen a sequential margin improvement in Q3. Going forward, we will strive to get as close to our guiding band as possible. But given the seasonality, getting a 40-basis points improvement in Q3 on a flattish growth, was significant. We'll push further to get an improvement over and above that in Q4.

Just last follow-up on this. Just wanted to understand with the likely decline in BSNL, that could be also a big margin lever for the fourth quarter?

We have been calling out the increase in third-party costs having an impact on margins. On a like-to-like basis, there would be margin tailwind depending on how much is the decline. We have completed 70% of the BSNL contract, which we had committed, so that in itself is a lever. And going into FY '26, our product mix does become a lever.

We will take our next question from the line of Ankur Rudra from JPMorgan.

You mentioned there are early signs of revival in some of the verticals you highlighted. Could you maybe elaborate what is the nature of these signs, at least basically the nature of the deals you've signed this quarter or the nature of pipeline, client conversation intent. Just some more color would help.

From a vertical perspective, as I said, deal wins have been good in BFSI, CBG. And in fact, in almost all verticals, there is an increase in deal wins compared to previous quarter. From a geography perspective, Europe has one of the best deal wins. So, it has been all-round better deal win from a geography as well as industry perspective. The type of deals, apart from seeing regular optimization deal s, there is an increased proportion of deals on the application modernization, cloud. And our customers are gearing up to leverage AI, towards that there are more data projects being commissioned. : So, it's a good mix of projects on optimization with the improvement on the discretionary spend, compared to the past. And another interesting data point we observed is, for the first time, there is a good decrease in the deal cycle, by few weeks. We looked at deals that are more than $20 million and above, there is a deal cycle reduction also, which also shows that the decision -making is also improving largely. That's broadly the color on deal wins, Ankur.

I think last quarter, you had said, Krit hi, that the deal cycles were extending. And in the following 3 months, it is already recovered. Is that how we should take this?

Yes. Compared to the previous quarter, there has been an improvement in deal cycle this quarter.

Okay. I appreciate it. I just want to probe a bit more on the AI wor k. You mentioned a lot of Agentic AI work coming your way. What is the impact of this on effort needed for projects of different types? So, for example, does this mean that there will be more work on software engineering, but some volume pressures on legacy modernization and ops? In addition to that, if you can highlight if there has been any loss of volume due to Agentic AI or SLMs on any of your large projects or customers?

Currently, our customers are leveraging AI to do new projects. I talked about drug discovery. Without AI, they would not have approached this particular project at all. So many of them tend to be new projects that lever age this technology. And there are also customers who are leveraging this technology towards technology modernization. One of the large modernizations out of mainframe, we are attempting to use Gen AI to ensure that the transfer technology modernization is more fail safe. So, there are opportunities we find towards software engineering where there's a productivity improvement as well. But net -net, if you look at the overall : demand environment, we think AI demand will be net positive rather than being negative. That is at least what we are seeing as of today.

Okay. Appreciate the color. Thank you so much and wish you best of luck.

Thank you. We have our next question from the line of Nitin Padmanabhan from Investec. Please go ahead.

Good evening and wishing you a Happy New Year. Just a couple from my end. So, one is you mentioned that BSNL purchase is complete by 70%. So how should we think about it? Do you think the net reduction in revenue there should happen in the following quarter, or it will happen in the next fiscal year? So that is the first one. The second one is that considering we had very strong deal wins this quarter and there is no mega deal and decision cycles are also improving, does that mean that the revenue conversion will also be much quicker, considering these are relatively smaller and more discretionary in nature and that should aid near- term performance? And finally, I think you also mentioned that you were looking at projects that could refill the gap from BSNL? Just your thoughts on if there's anything specific out there that sort of fills that in, that will be helpful.

Like Samir mentioned , Nitin, for BSNL we have completed 70%, which naturally means slowly it will tap er down. It should start tapering off either in Q4 or Q1, but I would expect some tapering off starting Q4 itself. And I will just answer the other question on BSNL. So, as it tapers off, we are trying to look at multiple opportunities, both within India. BSNL itself is the new capability we have acquired. We want to see whether using that capability itself new projects could be won globally. And, of course, the new deal wins that we spoke about, that also will help us in replacing this revenue. So, we are looking at all options. And we are quite confident that we will be able to manage the impact. On the deal wins, yes, there are no mega deals because the deal tenure with what you won could be marginally lower than what it was before. : And there is a confidence that the revenue realization could improve compared to the past. And I would say, realization will improve, more because of the certainty as customers are embarking on more discretionary work. That gives us more confidence on the faster revenue realization than necessarily on the deal tenure itself.

Sure. That's helpful. Just one clarification. I think on the press conference, you made a comment that the BSNL could come off slowly or sharply, I was just wondering what you mean by that?

No, it would start tapering down is what we said. The current contract could taper off across Q4, Q1 and maybe it might extend to max Q2.

Got it. Fair enough. Thank you so much and all the very best.

Thank you. We have a next question from the line of Sudheer Guntupalli from Kotak Mahindra AMC. Please go ahead.

Krithi thanks for the opportunity and H appy New Y ear. You seem to be sounding much more confident on the broader demand environment than what we had noticed in the last two quarters. And you are seeing CY'25 should be better than CY'24. So given that BSNL deal will ramp down over CY'25, which is a big headwind, and despite that, we are expecting a better year in CY'25 over CY'24. So, if we reverse engineer the math, are you sort of alluding to a double -digit kind of revenue growth expectation in the core markets in CY'25?

No, we are not guiding to a double-digit growth, but we are expecting a stronger growth. And we are also hoping that we'll be able to compensate the BSNL revenue in multiple other ways both internationally as well as domestically. So, we are at this time confident, when I said that CY’25 will be a better year than CY'24, it's more broadly on the international business. Net business we have to see, BSNL revenue replacement could definitely be a headwind, but we know that we'll be able to replace most of it. :

Okay. So, what I was trying to understand is I think India business, we had seen close to $1 billion incremental revenue in CY’24 over CY’23 and that should taper off or unwind in CY'25, which means the core market should at least do the heavy lifting of going up to double digit. And that is when you can be better than...

Sudheer I don’t want to put a double -digit target, but the core markets should do heavy lifting and even, the regional markets other than BSNL also, they are growing quite nicely. So, it could be that some part of the load could be taken up by the regional markets as well.

Thank you so much sir. All the best.

Thank you. We have a next question from the line of Vibhor Singhal from Nuvama Equities. Please go ahead.

Thanks for taking my question. So, Krithi, again, just to dwell a bit on the discretionary part, the comment that you mentioned. Now one of the things that has been plaguing us and the industry over the past 2 years was the discretionary part of many of the existing deals have been put on hold from the client side. So, are we basically seeing some recovery in that as well in terms of clients that were looking to put that back on the anvil along with, of course, the normal recovery that you mentioned in your comment and explanation thereafter?

That is what I said. There are some early signs of discretionary spend. So that is what is giving us that confidence also to say CY'25 could be better than 24.

Got it. And specifically, in the BFSI segment, if I could just dwell a bit, this is a segment which has historically been one of the biggest adopters of technology. You mentioned that they are also the ones which are also looking at wide-scale GenAI adoption. So, any progress that you believe that we are also making in terms of the legacy code modernization, the opportunity that we showcased in our Analyst Day as well? Any POCs or projects which have gone towards an incremental advanced stage on that front about which we can talk? :

See, on the BFSI thing, as I said, GenAI adoption is very strong ., From a n overall technology modernization, code modernization, we are talking to some of our customers on large scale transformation as well. So, we do see a reasonable kind of either advanced discussion s with our customers or early discussion, but technology modernization discussion is very strong.

Got it. Great. Just one last question on the BSNL part. In some of our earlier remarks, we had mentioned that there might be some extension to the BSNL deal from the magnitude that it is at this point of time. So does the TCV for this quarter include any amount of contribution on account of extension of the project or is this completely non-BSNL TCV?

No. Current TCV does not include any BSNL contribution.

Are we expecting any extensions, in the next fiscal year or too early to call? Or is it a chance?

BSNL has floated an RFP for 5G upgrade. We qualify for that, given that we have successfully executed on the 4G opportunity. We will be participating on the new RFP.

Got it. Great, sir. Thank you so much for taking my questions and I wish you all the best.

Thank you. We have a next question from the line of Rishi Jhunjhunwala from IIFL Institutional Equities. Please go ahead.

Yes. Thank you for the opportunity. Just a couple of quick questions. Firstly, on this BSNL thing, right? So , over the course of the entire project, which I guess is going to go on for in total 6 to 8 quarters, -or-so. Just wanted to understand the overall project, what the end profitability would eventually be that you would have envisaged if at all there is, I understand that was strategic in nature and it was giving you an entry into network services management and all that. But just from a project profitability perspective, just wanted to get some color on that.

Okay, no problem. The other question is on capital allocation method. So, you have announced a special dividend this quarter. So , given the change in the tax regime on buybacks, is it fair to assume that going forward, dividends would be the more efficient way for you to return capital?

It's a Board decision to announce the special dividend this quarter or decide on the capital allocation policy . Both the alternatives are still available. The point you mentioned is also right, but the Board considers various preferences from various classes of shareholders and arrives at the decision. Regulation changes or tax changes will also be factored in when that decision is taken.

So, assuming no regulation or tax change, we will continue to give dividend certainty?

Both the options are still available –in terms of buyback and dividends.

Okay. All right. Thank you so much, sir. All the best.

We have our next question from the line of Manik Taneja from Axis Capital. Please go ahead.

Hi. Thank you for the opportunity. My question on BSNL has been answered. I just wanted to understand, in the past, you remarked about an elongation in terms of deal tenures. Are we seeing some normalcy return there? That was the data-keeping question. And the second question was, we've been hearing from some of the industry folks about GenAI giving the managed services players the option to essentially move to a software pricing model. It would be great to understand your viewpoint on this.

I did mention there is a shortening of deal cycle. Deal tenure, I won't say there is a big difference. The deal tenures have more or less remained same. But deal cycles are shortening. In terms of pricing because of GenAI, while there are discussions that happen on what could be alternate options , there has not been a significant change because of AI, GenAI in our pricing model at this time. :

But do you envisage such a scenario playing out over the next few years?

Too early to call out, Manik. At this time, most of the deals are all in the traditional models only, while people are discussing what options could exist. So, I would say it's a little early to call out on how it will evolve.

Sure. Thank you, Krithi. All the best for the future.

Thank you. The next question is from the line of Abhishek Kumar from JM Financial. Please go ahead.

Hi. Good evening. Thanks for taking my question . Krithi, I just wanted to pick up one remark you made earlier that furloughs could recover to some extent in next quarter. I was just wondering if you believe there could be some spillover of furloughs into Q1 like what we saw last year.

Yes. Like the reason I said that is I see in some geographies, furloughs do spill over into until first couple of weeks of January, but it's a small proportion of overall furlough. So that's the reason I said some furlough recovery, not complete. There will be some spill over in some geographies.

Sure. But nothing unusual, a similar trend as what we have seen in previous years.

Yes, similar to last year.

Okay. And second question is, you said client budgets are likely to be flat with some positive bias. At the same time, we are hopeful of discretionary spending picking up, j ust trying to reconcile the two. Do you think there is still reprioritization of budgets where these dis cretionary spends will be funded by efficiency gains somewhere else or you think budgets could be revised as we go through the year? Thank you.

Abhishek, reprioritization will keep happening all the time . But the expectation of ROI or how soon the ROI should be , what is the period by which they must get the return, that bar could change, because clients are interested in doing more, and also, there is a greater interest and focus on discretionary projects. : All put together, we find that there will be a positive momentum, and there is a positive bias in the overall budget, but reprioritization will not stop completely. That would be an ongoing process to ensure that they get value out of the project they started.

Sure, thank you and good luck.

Thank you. We have our next question from the line of Sumeet Jain from CLSA. Please go ahead.

Happy New Year to entire management. Krithi, I think you mentioned that you are seeing early signs of revival and discretionary spend across various verticals due to political uncertainty being behind in US. But if you look, there is still a lot of uncertainty around potential increase in inflation due to trade tariffs or uncertain government policies or increase in the US interest rates, which we are seeing in the current US bond yields. So how stable is this revival in the discretionary spend you're expecting probably over the next 1 quarter to 2 quarters and the entire CY '25?

Sumeet, what we commented on is based on what our discussions with our customers tell us and what we are seeing in terms of the opportunity and the pipeline. Yes, if the macro change s for the negative in a big way, that will impact. So, I don't think –the discretionary spend will be visibly resistant to macro change. The comment I made is based on what we are seeing today, based on the discussions we are having and the pipeline that we are seeing in front of us.

Got it. That's helpful. And maybe can you also comment around health care, Life Sciences and manufacturing verticals. I was not very clear, are you saying that they have already bottomed out and they will start seeing growth from next quarter onwards or are you still waiting for some clarity there?

From a manufacturing perspective, I feel we'll bottom out in Q4, and growth should revive subsequently. In Life Sciences and Healthcare, that’s one industry waiting for more policy clarity in the US . So once clarity emerges, discretionary spend could return there. :

Got it. That's very helpful. Thanks for the opportunity again, and all the best.

Thank you. We have a next question from the line of Gaurav Rateria from Morgan Stanley.

Wishing everyone a very Happy New Year . I have 2 questions. First, where are we in our journey of infusing AI into various statement of work that we do with the clients? I'm sure we run thousands of different projects with the clients, and there will be an initiative to infuse AI. So where are we in that journey? And my second question is that, Krithi, you made a comment that discretionary work comes then automatically, the revenue realization is faster would that also mean better revenue productivity, and could that also be a lever for margins?

On infusing AI, it's a continuous process. We are looking to infuse AI in every program, be it AMS program or application development. We are looking to infuse AI; one is from a productivity perspective; two is also the way of bringing technology resilience for our customers and keeping th eir technology infrastructure future ready. So, it's an ongoing process, almost every large RFP we work with, there is a component of AI infusion and AI gets discussed in almost all of them. In terms of revenue productivity because of discretionary projects, it's a fair assumption to make that discretionary projects should yield a better productivity. But sometimes factors like competition can play out and the overall environment could play out. Generally, better discretionary spend environment should give us a better revenue productivity.

Thank you very much.

Thank you. We have a next question from the line of Abhishek Pathak from Motilal Oswal. Please go ahead.

Krithi, just a question on your point earlier around retail is about seeing some recovery. I just wanted to know the drivers behind that and the outlook for that, let's say, for CY'25? And the other thing, likewise on technology and hi-tech, what's your view on the hi-tech vertical? : Do you think a lot of the capex spend around GenAI and GPUs is all behind then, can we expect the US big tech companies to maybe shift their focus on services spends for the next year?

On the retail, definitely we are seeing a better outlook and particularly the growth that we are seeing in the essential, fashion apparel kind of sub - segments, we are seeing some sort of early signs of revival of discretionary spending. Again, hi-tech, we are positive overall on the industry. We work with semiconductor players. We work with hyperscalers. Most of them are planning to increase their spend in the coming year. And so, our participation with them will also be improving. So, excepting the professional services side of that industry, the overall hi-tech industry, we are quite positive.

Great, thank you so much, all the best.

Thank you. We'll take our next question from the line of Sandeep Shah from Equirus Securities. Please go ahead.

Just to get clarity on BSNL and sorry to harp on the same. The first phase, which largely involved 4G, the belief is the TCV is close to $1 billion. And now you see that tapering extend till 1Q or 2Q of FY '26. So, is it fair to assume the deal TCV is higher than $1 billion in the First Phase?

We had said that the overall deal TCV was over $1 billion deal. We didn't disclose exactly what the amount was and in line with tradition, we don't disclose client specific deal TCV. G iven so much of overall inquisitiveness around BSNL, we have been sharing progress in terms of % completion, and that is the basis of what has been in the public domain. But further client specific details, either in terms of TCV, revenue or margins , it is unlikely that we'll be able to provide further color on it.

Okay. Fair enough. And just last thing, Krit hi, is it fair to assume you are expecting recovery in CY'25 in most of the verticals, but auto and aero may lag : of the recovery or how do you like to see, which verticals there would be a lag in terms of recovery in discretionary spend?

I won't be able to call back which vertical will lag because, as I said, we don't have full clarity on Life Sciences & Healthcare. Auto and aerospace industry should grow, because of kind of order book they have. See, the challenges they have been having are more transient in terms of labor market or supply chain unrest. And as they stabilize, I think that demand for the environment should improve in the aerospace industry. And we are seeing some revival slowly happening in North America. And as I said, Life Sciences and Health Care, I would like to wait and watch. And most other industries look positive at this time.

Thanks, and all the best.

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

Thank you, operator. To summarize: • Revenue grew by 4.5% year -on-year in constant currency with an operating margin of 24.5% and a net margin of 19.4%. • We are very pleased with the strong TCV of $10.2 billion, with a sharp uptick seen across markets and industries. • Our campus hiring for the year is going according to plan and preparations are underway to onboard a higher number of campus hires next year. • I would like to thank all TCS ers' for the ir efforts and unwavering dedication to realizing their own and the company's potential. : We look forward with cautious optimism to the promising opportunities that 2025 will bring for us. With that, we wrap up our call today. Thank you all for joining us.

Thank you, members of the management. On behalf of TCS, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines. ----------------------------------------------------------------------------------------------------------------------------- ----------

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