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 star then zero on your touchtone telephone. 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.
Thank you, Karuna. Good evening, and welcome everyone. Thank you for joining us today to discuss TCS's financial results for the second quarter of fiscal year 2020, ending September 30th, 2019. 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.
Hi. Good evening.
Mr. N. G. Subramaniam, Chief Operating Officer.
Good evening to all of you.
Mr. V. Ramakrishnan, Chief Financial Officer.
Hello, everyone.
Mr. Milind Lakkad, Global Head, Human Resources.
Hi, everyone.
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 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 emailed out to those who have subscribed to our mailing list. With that, I would like to hand the call over to Rajesh.
Thank you, Kedar, and good evening once again to all of you. It's been a volatile quarter, but we have had a steady growth in Q2, growing 8.4% year-on-year in constant currency terms, and 5.8% in INR terms and in USD terms as the cross-currency variations kicked in. Our operating margin was 24%, reflecting our continued investment in our people, and our net margin was at 20.6%. Ramki will go over the headline numbers and financial and segmental performance, and I will later follow on and talk a bit more about the demand trends that we're seeing. Over to you, Ramki.
Thank you, Rajesh. Let me go through the headline numbers. In the second quarter of FY 2020, our revenues grew 8.4% year-over-year on a constant currency basis. Reported revenue in INR was INR 389.77 billion, which is a year-over-year growth of 5.8%. In USD terms, revenue was $5.517 billion, which is a year-over-year growth of 5.8% again. Let me go over how the different segments have performed during the quarter. As a reminder, all the growth numbers are year-over-year and in constant currency terms. In BFSI, the insurance sub-vertical continues to grow well. However, there was continued volatility, particularly in Europe, mitigated to some extent by new business ramping up during the quarter. Overall growth in BFSI was 8%.
In retail, at a sectoral level, customers continued to invest strongly in new technology initiatives, but we were surprised by the continued weakness in pockets, which brought down the overall growth to 4.8% in retail. Growth was led by life sciences and healthcare, which grew 16%, driven by our strong presence in the drug development value chain of large pharma companies. We had good growth in communications and media, which grew 11.8%, driven by increasing investments in product innovation, particularly in 5G and IoT solutions. Other verticals continued to grow well. Manufacturing grew 7.8%, while technology and services grew 5.6%. Revenue from digital engagements made up 33.2% of our revenues in Q2, a growth of 27.9%. Geography-wise, U.K. and Europe continued to outperform, growing 13.3% and 16% respectively.
North America decelerated further, growing 5.3%, while Asia Pacific grew 6.5%. Emerging markets largely underperformed, with India growing 7.7%, Middle East and Africa growing 7.3%, and Latin America growing 7.3%. Our portfolio of products and platforms performed well in Q2. Ignio, our cognitive automation software, had 10 new wins and eight go- lives. It is increasingly viewed as a critical component of any core transformation to build in greater resilience and self-healing capability to the technology stack and thereby reduce business risk from outages. Ignio's channel partner program is progressing well with four new partners onboarded this quarter. TCS BaNCS, our flagship product suite in the financial services domain, has become the preferred digital core for financial institutions looking to harness the power of digital technologies to accelerate their product innovation and enhance the customer experience.
We had 6 new wins and 6 go lives in Q2 covering core banking, payments, insurance, securities trading, and corporate actions processing. Our Quartz blockchain solution continues to gain traction. One of the more exciting engagements in Q2 was with a Swiss bank to build a platform that will enable trading of cryptocurrencies alongside wallet management services. In the retail space, we had 1 win each for Optumera, OmniStore, and [Sapry AI]. In life sciences, our Advanced Drug Development platform, which is a comprehensive suite of cloud-based platforms for drug development, had 2 new wins. Additionally, our Connected Clinical Trials platform won the 2019 European Innovations Award from Clinical Research News. Lastly, our HOBS SaaS platform for communication service providers had 3 new wins and 2 go lives.
Coming to our client metrics, they continue to reflect the ever-increasing levels of trust we are able to engender and how we are getting even more embedded into their businesses. Quarter after quarter, you see customers moving up the revenue buckets as we expand our engagement to cover newer stakeholders within their organizations and participate in newer areas of their spend. In Q2, we added three more clients in the $100 million-plus band, bringing the total to 47. Three more clients again in the $50 million-plus band, bringing the total to 101. 12 clients in the $20 million band bringing the total to 225. 33 clients in the $10 million band, bringing the total up to 398. 41 clients in the $5 million band, bringing the total to 554, and 33 clients in the $1 million-plus band, taking the total to 1,032.
Let me go over the other financials. We have been focused on demand capture and on building up capacity to fulfill the strong order book that we have won over the last couple of quarters. Our operating margin of 24% in Q2 reflects these investments. Net income margin was 20.6%. Effective tax rate for the quarter was 23.5%. Our DSO was 66 days in dollar terms. Net cash flow from operations was INR 86.86 billion, which is 108% of our net income. Free cash flow was INR 79.48 billion. Invested funds as at September 30th stood at INR 546.39 billion. We remain committed to returning most of our free cash flow to shareholders. This quarter, the board has recommended an interim dividend of INR 5 per share and a special dividend of INR 40 per share, amounting to over INR 22,000 crores being returned to shareholders so far.
On the people front, as I mentioned earlier, we have been building capacity and gearing up for growth. Our net addition in Q2 was 14,097 employees, which is the highest ever number of employees that we have onboarded in a quarter. Our total headcount now stands at 450,738. It's a young, vibrant, and diverse workforce with representation of 146 nationalities and with women making up 36.3% of the base. Our investments in organic talent development continue to help us build up unmatched scale and depth in new technologies. As of September 30th, we have trained over 322,000 employees on emerging technologies and over 391,000 employees on agile methodologies. We continue to enjoy the lowest attrition rate in the sector globally. LTM attrition in IT services in Q2 was at 11.6%. I now turn it over to Rajesh for the demand drivers and trends.
Thank you, Ramki. I'll take a few minutes to walk through and give some color on the nature of demand that we're seeing. Let me start by reiterating that despite the negative news flow and resultant volatility, the structural aspects of demand for our services are very much in place, and customer spending has not slowed down. We held our customer summits in U.S. and Europe last month. While there's some amount of caution about the economy and geopolitical developments, it was immensely energizing to interact with our customers and discover that their transformation initiatives are pretty much on track. This is reflected in deal closures also, particularly in areas like core transformation, it continues to be quite strong. Our order book in Q2 was $6.4 billion, the largest that we have signed in the last six quarters.
Very encouragingly, North America accounted for INR 3.4 billion of that. The BFSI order book has also been very strong, growing from last quarter, and it is INR 2.2 billion, while retail was at INR 830 million. Let me give some more color on that. I've spoken in the past about how our participation in our customer growth and transformation initiatives is embedding us deeply into our customers' business. In my view, nothing is more core than product innovation, and that's the area where we are seeing significant traction across multiple industries. Actually, in many industries, this is not new. For example, we have been providing product engineering services at scale to leading software vendors and high-tech equipment vendors for many years. Likewise, we have been providing engineering R&D services as a separate service offering to leading OEMs, including GM and other auto majors for the last many years.
What is happening today is that this trend is very visible in many more industries, and our services are being viewed through a strategic lens. Many customers see plugging into the TCS innovation ecosystem as a means to strategically scale up their own innovation initiatives and to significantly raise the probability of success and therefore gaining competitive differentiation and strengthening future sustainability. Let me give a couple of examples of that. For example, in the auto sector, embedded software, AI, and connectedness have blurred the divide between IT and core engineering services. With our scale and depth in advanced engineering services and in emerging digital technologies, we have been big beneficiaries of the convergence and are partnering with leading OEMs across the world in designing new models for specific markets and building intelligence into their next-generation vehicles.
Last month, we entered into a strategic partnership with General Motors to support their global vehicles program with engineering design services in areas like vehicle exterior styling, interior design, battery and motor drives, electrification controls, advanced simulations, validation for multiple vehicles, platforms, et cetera. We are also working with multiple telcos in their product innovation efforts as they launch new products around 5G, fiber, and intelligent networks. We are helping out in areas like building an elastic network provisioning systems or network design and radio densification. On the business side, one of the big challenges for telco is to justify the 5G investments for their clients, and it has been the absence of a compelling enterprise use case for 5G usage beyond just the speed paradigm.
Many of the telcos are now partnering us to help create new business-centric solutions that leverage our domain knowledge and depth in digital technologies, and use this to create use cases that can increase enterprise demand for their 5G offerings. Interestingly, our cross-industry presence and domain depth is helping us carry our innovative solutions built for one industry into a completely different industry for a totally different use case. For example, our TCS HOBS cloud platform, which was used by many telcos as a core platform to streamline their business and technology operations, has come in with a very robust configuration management capabilities to address the needs of our telco customers. As it turned out, these were precisely the capabilities that one of the largest aircraft engine manufacturers in the world was looking for to help them actively monitor and manage product configurations of their engines in the field using IoT.
Similarly, the TCS HOBS cloud platform is actually getting used in many areas where subscription management is becoming a core business requirement, and that is becoming like a horizontal capability across multiple industries. In life sciences domain, our Advanced Drug Development platform has deeply embedded us into the drug development value chain of large pharma companies. TCS has partnered with a large North American pharmaceutical company to introduce passive adherence tracking technology into clinical trials, thereby increasing the probability of completion of the trial and therefore reducing the time of field trials. TCS Connected Clinical Trials platform will use smart inhalers to ensure that patients participating in the trials take the right dose at the right time, thereby transforming the adherence tracking process and ensuring greater reliability in the trust results. TCS has also partnered with a global biopharmaceutical company to significantly transform the long and arduous pharmaceutical technology transfer process.
Our Digital Transfer Solution will streamline recipe development and transfer and increase the visibility and collaboration across the tech transfer process. It is expected to improve manufacturing efficiency by 40% and reduce paperwork by 30%. If you were to step back a bit, many of these things actually feed into what we have been speaking of earlier. If our Business 4.0 framework that we've spoken extensively in the past, leveraging ecosystems has been one of the core business levers that we said characterized the business transformation of digital champions. In many ways, partnering with TCS itself is a form of leveraging an ecosystem. More importantly, more and more industries are realizing that to be able to give a holistic value proposition to their customers, they need to cut across horizontal boundaries. Let me give you an example.
For example, an airline may get a vacationer to a destination, which used to be the primary product that an airline offers. Once the person steps out of the airplane, the interaction ends and the rest of the vacation experience is out of the airline's scope. The customer per se is not looking at purely travel for travel's sake. The customer is going for a holiday. Therefore, by anchoring or participating in an ecosystem that includes hotels and resorts, ground transport operators, local tour operators, the airline can curate a more complete experience and provide a vacation versus just air transport. This is not new. Airlines have been trying to do this for a long period of time. What is new is that digital technologies are now making collaboration across multiple industry participants a lot more dynamic and a reality that can be exploited.
It requires companies to switch from a product mindset to a more customer-focused mindset, and to switch from a firm-centric approach to a value-centric approach. TCS' presence, both from a technology capability perspective as well as our presence at the intersection of industries, positions us very well to help enterprises work their ecosystem strategies and collaboration across multiple industries. This collective innovation initiatives getting curated by TCS as an anchor is a core part of how we are helping customers in these transformation journeys, and hence resulting in much more complex solution setups. For now, let me conclude by saying that we are participating very well in the here and now demand. Our order book and deal pipeline is very well distributed across verticals and geographies, which gives us confidence from a medium to long-term perspective.
With that, we want to open the line for questions.
Thank you very much, sir. Ladies and gentlemen, we will now begin with the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Thank you. The first question is from the line of Sandip Agarwal from Edelweiss. Please go ahead.
Hello. Thanks for taking my question. Just two questions, one on the digital side. This quarter, we saw that digital growth has come off from higher range to lower. Is it primarily driven by weakness in retail? Secondly, is the weakness in retail a broad-based industry phenomenon, or you are seeing some pockets of weakness? How it is?
Digital definitely does get impacted by retail. Retail has been a big adopter of digital, but I wouldn't ascribe more than that to it. Digital weakness is broad-based. It's coming across most markets. We have seen some amount of slowdown on order decision-making, which is what caught us by surprise, especially in some of the more innovation-led, product-led kind of deal structures, we have seen some amount of delays. We'll have to wait and see how this plays out. Also the holiday season that is coming up will be a crucial determinant of where retail confidence is. The next few months will be critical for the industry as we from a more longer-term perspective, or at least for medium-term growth.
If I can squeeze one more question, just wanted to know that in BFSI, we have seen a decent growth of 8%, although it is maybe slightly below the company average or the overall growth. Is it also a little broad-based, or you think that it is also some client-specific pockets of weakness?
BFSI is broad-based. It is similar to what we had spoken earlier. It is just a strengthening of that trend. We had spoken that large banks in Europe and capital markets in U.S. are where the primary weakness is coming from, and that does not change across both Europe, U.K., and Wall Street. The weakness trend is there. There is significant strength, especially in insurance and then in regional banks and smaller banks in North America. In those segments, our demand flow and participation continues strong. In BFSI, there is no change in trend or no new things that are emerging. It is just the strengthening of the trend that we saw earlier.
Okay, thank you. That's all from my side. Thanks a lot for taking my question.
Thank you. The next question is from the line of Nitin Padmanabhan from Investec. Please go ahead.
Hey, hi. Thanks for taking my question. Just a follow-up on the earlier ones. On BFSI, specifically on BFS, do you think from a headwind standpoint from the capital markets and European banks, those headwinds are stronger going forward, or those are largely going to dissipate, or is it already over? That's on BFS. The second question was on retail. Retail, typically what we have seen in the past is you have typical strength before the holiday season, and then there is weakness in Q3. Do you see that trend changing? The second bit there was within retail, I think for the past two quarters, we have been negatively surprised ourselves. What, to your mind, is driving this trend of negative surprises? Thank you.
Being able to predict BFSI is beyond our capability. We are calling it as we see it. The fact is that we are participating very strongly. 8% growth on a portfolio of $7 billion is no joke. We are seeing very strong positive momentum. We're just talking about incrementally Q1 Q variation. We are very focused on participating in new opportunities. Our retail order closure this quarter at $2.2 billion is all-time high. I don't see any slackness in that space. It is just the trends are weaker than what it was one or two quarters back from a very high base. That's the BFSI side. Incrementally, where the industry is headed, actually, you guys are much better positioned to comment about it than we are. We are, as I've always said, kind of downstream players. We get to see it later.
On the retail side, what you said has been historically true, but if you look at it last few years, actually, Q3 has turned out to be a positive quarter. Last year, in fact, our turnaround really came in Q3. We had, if I remember correctly, about 11% year-on-year growth in Q3. There is hope that this is not necessarily there. Like we had said at the beginning of this quarter, we had hoped Q2 would be the strong quarter. That has not turned out. Deals have got delayed. Whether they'll close in Q3 or not, we will have to wait and see. We are strongly positioned, and then we'll see how it turns out from our demand side, as well as also from an industry perspective when the holiday season plays out.
Sure. One more if I may, just as a clarification of what you've already mentioned. So far, the deal wins have been pretty solid. Weakness is driven by delays in customers going ahead with ramp-ups, or is it just the existing book of business that we've had with earlier clients that is coming off? Is that how one should understand it?
Sorry. In any across
Yeah. What I was suggesting was, we have had a very good deal closures overall. It seems that the headwind is coming from the existing book. There are two inferences here. One is either despite the deal closures, the ramps are taking time and customers actually delaying the ramps. Two, the existing book of business, there's some cuts there. How should one infer this on both counts, retail and BFS?
Started sharing the deal wins, we had always cautioned that the trend lines of it has to build up for the correlations to be established well. We have been typically in the range of between 1% to 1.2% of revenues.
1.2 times.
Yeah, one to 1.2 times of quarterly or period-to-period revenues. This needs to be seen in perspective. If you step back and look at it, there are no discernible trends in terms of significant collapse of our existing book of business being replaced by new or any such thing. Obviously, there is, as I said, large client base, especially in BFSI and all, there is some weakness which we have spoken about. There is good participation in newer wins. If you look at our client profile and the client metrics, you will see steady growth in the number of customers across all revenue bands. The number of 100 million customers is up by three. It is not that the existing book of business is collapsing and we are only adding at the bottom of it.
We are seeing customer migration right across every band, which should address that aspect of it.
Sure. Thank you and all the best.
Thank you. The next question is from the line of Sandeep Shah from CGS-CIMB. Please go ahead.
Yeah. Thanks for the opportunity. Just to follow up on the order book. Rajesh, if I look at last 12 months, the book-to-bill ratio has been 1.12, which at your size, it's really impressive. Just further to what been asked earlier, it's not actually translating into a revenue growth. Is it fair to say that the ACV, which is the annual contract value, the improvement has not been as good versus the TCV improvement, which we are seeing as a whole?
Sandeep, in the last six quarters that we reported, we have delivered double digit last year. It was double digit last quarter also. We have been translating that order book into real business and delivering on it. It is this quarter that it has dipped below. I don't think it is right to characterize that the order book is not converting. The order book is what is resulting in that industry-leading growth that you saw. We're now seeing a bit of headwind, which we had spoken about and which is strengthening. We'll wait and see how that turns around. Closure of this quarter is pretty much deals that were in the pipe and getting worked on through the past. We'll see how it plays itself out.
Okay. Any different trends on ACV where tenure is actually been much higher or you believe there is no major trend to call out on that side?
Actually, as I was mentioning in the interview, contra to market commentary, our experience has been that both deal sizes as well as tenure has actually been expanding. That is why our deal volumes have been increasing and we are signing more and more larger deals. Which is counterintuitive to what the general commentary was. We have also said that probably it is because of our ability to stitch it across multiple service lines and our unique positioning in various industries. We are seeing large deals and we are seeing deals where customers are ready to commit over a longer period of time because these are multi-year transformation programs that they're committing themselves to.
Okay. Fair enough. Just in terms of the growth across markets, if you look at last few quarters, the incremental growth has been driven through U.K. and Europe. Looking at the macro headwind where Brexit deadline is approaching, looking at Germany, the GDP growth rate is challenging. Rajesh, it gives you a slight concern that incremental growth which is being driven through Europe may not be the case going forward?
You are right. It definitely gives a concern. Brexit has been with us for 3 years. Our participation in the U.K. market has been very good across these 3 years. As I said, we did more than 20% last year. The first half of this year, we have done almost 15% in Q1 and Q2 together. Our approach on this has always been the same. While we are cognizant of the environment that we operate in, we are very focused on the individual opportunities. We think that stressed environments provide unique opportunities. It requires a more holistic full portfolio capability to be able to address it, which we uniquely have. Europe has been weak for quite some time, and our European growth story has been very consistent over the last 5 years or more.
That is not to say that we are not concerned about what is going on, but what is happening around us, we don't have control over. What we have control over is where we are focusing on. Even in European BFSI, actually, we have had good participation. We announced the transformation deal that we did with OP Bank, and that's a one-of-a-kind, market-making kind of a deal. Very complex and very unique transformation that we are attempting there. Similarly, we have concluded some in Central Europe where, again, a significant transformation deal, which will change the delivery model of a very large bank, and they have committed to it. There are opportunities, and we are very focused on closing those up, which is showing through in the order book.
Okay. Just last two questions. Is it fair to say that most of the headwind on the Europe capital market may be now bottoming out? Or you still believe that in the next couple of quarters, we may have more headwinds to come? The last on capital allocation. Now, there is no different treatment about the buyback as well as the dividend. With dividend, actually, the process completion is much faster than the buyback. Is it fair to say that dividend may be a preferred route which TCS may want to opt in terms of the capital allocation going forward?
European capital markets as a segment is not a very large exposure area for us. I don't think it's a very large segment currently in itself, but that's not our point. We are not very exposed to European capital markets. Large European banks, yes, and that's where our commentary comes from. I don't have any insight on European capital market participants. The question on dividend. The buyback or rather, dividends are now economically, the tax load on dividend is lower than buyback by a few percentage points. There is definitely an economic rationale of doing it. The specific mechanism, that is a decision for the board to decide considering both economics as well as multi-stakeholder alignment.
Okay. Thanks and all the best.
Thank you. The next question is from the line of Shashi Bhushan from Axis Capital. Please go ahead.
Yeah, thanks for taking my question. Sir, do you think there is a heightened competitive intensity as peers are giving away their margin to win deals, and this is also reflected in our financial performance, both in terms of revenue growth and margin?
Actually, if you go back many years, this question was pertinent and been asked every year, practically for the last 10 years. Nothing changes in that. Competitors will always be ready. The weaker competitor will always be ready to try and use price as a lever. Our ability to defend our margin will depend on our relative competitiveness. Our relative competitiveness continues to be very strong. On the margin front, we have said that from a pure economics perspective, our salary structure and our business model presumes that there will be a certain depreciation on the currency to offset the inflation differential, which is embedded into our salary hike decisions. We have been very disciplined about giving salary hikes and promotions and rewarding our employees on a consistent, predictable way.
The volatility that you see is really a reflection on the lot coming in from the currency market side of it, which is flowing through.
How is the variable payout during the quarter, sir?
We have not tweaked the variable payout. Variable payout, the model is exactly the same. We will do full variable payout.
Do we have margin lever if the revenue momentum would abate or stay at the similar level, apart from currency depreciation?
Margin levers are similar. We have spoken in the past that we were focused on demand capture. While the growth rate was high, our focus was demand capture. As both, we have had greater time, as well as based on where the growth is, optimization levers will come into play. Employee pyramid is a big part of that optimization play. We've spoken about gearing ourselves up from a training perspective. First, we were focusing on our existing employees. We spoke to you about how we are transforming the incoming employee training experience and our approach towards evaluation of incoming training. We spoke about acceleration of trainee joining, and which we have executed. These first two quarters, we have brought on all 30,000 in.
The rationalization of the employee pyramid is a medium to long-term exercise that is steadily progressing, and we are in its early stages, which will continue to run. We had also spoken about bringing the BA cost under control, the external consultants cost under control. That is also an exercise that is steadily progressing. None of these are short-term exercises. These are structural exercises which we are executing on. All of them will be margin accretive.
Thanks, sir. All the best for the year.
Thank you.
Thank you. The next question is from the line of Divya Nagarajan from UBS. Please go ahead.
Hi. Thanks for taking my question. Rajesh, I think as the year progresses, how should we think about the trajectory for growth? We have seen in the last six months, the 12% number come down to about 8.5%. If the status quo persists, we're also fighting last year's high base effect. Could you give us a sense on the trajectory here for the rest of the year? That's question number one. Two, as a follow-up to what you just said, could you explain what you mean by the pyramid rationalization? What kind of measures that would really entail?
Divya, pragmatically speaking, to get to the same growth that we were at last year, we would need a very high number on H2. Right now, H2 visibility is not very strong. That's where we are. Having said that, from a competitive perspective, I don't think we are any less competitive than what we were. We will differentially participate in whatever opportunity exists and make sure that we capture it and stay ahead of the curve. Where the number will finally land up with, it is difficult to say today. Growth, you'll have to make your own assumptions based on where that is.
Employee pyramid, if you look at our employee cost structure, there was a very steady growth in our onsite contingent labor hiring component, which we are steadily trying to attack by increasing our entry-level hiring in various local geographies so that we can offset temporary lateral hires with more strategic entry-level hiring. That program is being executed and it is, as I said, a medium to long-term program which will bear fruit. Similarly, in the India side also, if you look at our trainee recruitment and onboarding over the last three, four years, you will see a very steady increase with a significant ramp-up last year and this year.
As we increase our trainee onboarding and increase our digital training capacity to be able to satisfy demand requirements internally, we'll be able to rationalize our pyramid further and fill out the employee pyramid base, which we believe is ripe for correction.
If I look at your margin performance this quarter, there seems to have been essentially what is a revenue cost mismatch. Typically, what kind of a timeframe are we looking at for those mismatches to kind of get realigned to a more equilibrium kind of a status?
The program that we're executing is a multi-year program. Those kind of things will take 2 to 4 quarters for that kind of mismatch to be realigned. We have onboarded more. Ramki also mentioned in the interview that we are geared for growth and the growth that did not materialize. The next 2 quarters, we have onboarded the trainees that we wanted. Next 2 quarters, we can be a bit more rational about or more strategic about who we want to hire or how much we want to hire laterally during the next 2 quarters. Some amount of levers exists, but the large trainee additions are more longer term.
Sorry, if I may just slip in one more. I think people have asked this question in different ways, but, I think we were hoping that the exposure of digital going up gives the model a little bit more resilience to this kind of a slowdown. Essentially what seems to be happening is that even that digital spend is coming under pressure because of the macro factors. Therefore, the assumption is incorrect. Is that a fair statement to make?
I wouldn't say that. Volatility impacts everything, and volatility impacts transformation programs first. The importance of digital is it gives us greater staying power and greater relevance to our customers over a longer period of time. Volatility impacts everything. Weakness impacts legacy much more than digital. If the volatility translates into large-scale weakness, our digital portfolio will give us a lot more resilience than our more legacy portfolio.
Fair enough. Thank you so much, and have a good rest of the year.
Thank you.
Thank you. The next question is from the line of Apurva Prasad from HDFC Securities. Please go ahead.
Thanks for taking my question. On the retail and CPG and the regional market.
Excuse me. This is the operator. Mr. Prasad, may we request you to speak closer to the phone, please?
Am I audible now?
Now, sir. Yes, thank you.
Yeah, thanks for taking my question. On the retail and CPG and the regional market segment, while it seems to have turned incrementally negative, any pockets that are really causing that? Any near-term outlook in terms of trends that can probably sustain or change? What would you attribute that to? Maybe the near-term outlook in these two pockets, which have incrementally turned negative.
Retail, as I said, we were ourselves, compared to our commentary at the beginning of the quarter, surprised by some of the deals that didn't close, especially around a few products that we were expecting, and which we were strongly positioned in. Those deals have got pushed out. That is what from a commentary perspective where the surprise came from. Incrementally negative, both U.K. and U.S. retail have significantly turned negative and/or it has weakened further. That's why this coming holiday season is going to be an important data point to see how this industry reacts. The regional markets, that line contains two parts, the regional market and the others. Among the regional markets, actually, they are volatile by nature, but there is a synchronized slowdown. India is down, Japan is down, Middle East is down, and APAC is also weak.
To some extent, that is one of the reasons why we clubbed them into that. It's volatile. All of them have turned negative. Will anything change in these markets soon? I don't know. You know the reason for weakness in all of these markets are fairly well known. We'll have to see how those underlying demand drivers in those markets change. The other half of the regional markets and others is a much more positive story, which is our products and platforms story. The products led by both Ignio as well as by our financial products business has had, again, a very good quarter. Ignio had 10 wins, and it continues to grow very strongly. Financial products also, the banks product line has also had a very strong growth with good client addition.
On the platform side, the U.K. part of our platforms business is doing very well, growing strongly. Our transformation programs, we have had some very good go lives. Last weekend, one of the large programs that we had announced, we took live a big transformation on what's called the Salus platform. This is something that people have struggled with for the last 12 years. Multiple attempts have been made, and people have failed at it. Whereas we were able to take it live seamlessly with 1 million policies cutting over last weekend. We have another big drop coming up. The U.K. one continues to grow very well. It is our more mature part of the platform business. The U.S. platform business, the revenue profile is flat, which is in the nature of it because we have got one customer, but that transformation program is also going well.
It's on schedule. We have a big launch there or a big milestone in January next year, and we are well on target for that. The platform product side is doing very well. The regional market side is reflecting the volatility that we see in these markets.
Also on the digital portfolio piece. If I'm trying to reconcile the fact that we are participating more with clients, same time.
Could you speak up a bit?
Yeah. Am I audible now?
Yep.
Yeah, Rajesh. I was talking on the digital portfolio piece. I'm trying to reconcile the fact that there seems to be more broad-based weakness there, which is what you mentioned. If I reconcile this with the fact that we are participating a lot more with clients.
I think that was a mistake. I meant retail when I said digital in the answer to the first question, I think. Digital is not a broad-based weakness. I said retail is a broad-based. I said it wrong at that time.
Sure. On the deceleration of digital which was clocking a much higher number, should we look at this number as more of a new normal and more in sync with some of the large peers at which they're operating?
I don't know. At least you need two points to drive a trend.
Got it. Thanks. All the best.
Thank you. The next question is from the line of Vibhor Singhal from PhillipCapital. Please go ahead.
Good evening, sir. Thanks for taking my question. Sir, my question was on the manufacturing side. In manufacturing, we've heard a lot of commentary from a couple of players and ISG as well about weakness in probably the European markets, especially in the auto markets. Are we seeing any trend on that? Because we seem to be doing really well in Europe over the past many quarters. Any kind of impact that we are seeing either in terms of current numbers or maybe in terms of inquiry from clients, specifically from the manufacturing segment in Europe?
Europe manufacturing has been weak, but we have been participating differentially very strongly there. If you look at the deal that we had announced in or the work that we do for Peugeot, these are all very non-standard and market-making kind of deals that we have done. Those relationships are going very strong and doing well. European auto, Europe manufacturing in general, continues to be weak. Earlier also, we have said that manufacturing strength in North America is strong. Our participation is also very good. Our recent announcement with General Motors is a further reaffirmation of our strengths in that space and the trust that our customers are placing on us.
Do you basically feel that this overall broad slowdown in European auto markets could catch up with us also at some point of time in next few quarters and lead us to a slowdown in the European growth that we're reporting? Or do you believe we are well placed and differentiated enough to be able to withstand that kind of a broad-based weakness?
We are not particularly over-dependent on European manufacturing.
Okay.
It will have some impact, but it's not a big dependency.
Sure, sir. Lastly, my question on the margin front. We've been maintained that our aspirational range is, of course, 26%-28%, but I think we're kind of far from it for the last multiple quarters. Do you actually see a possible roadmap for us to, I know you mentioned about those long-term pyramid rationalization that you're looking at. Is that target still valid in terms of where we are? Or do you believe there's probably a reset required for that target that we're looking at?
The target is still valid, but we will need some helpful wins from the currency side.
Right.
Combination of execution and some helpful currency definitely can get us back. Remember that it is just four quarters back that we were at 26.5. It's not out of the realm or nothing has significantly distinct. It is about staying focused. Before we got to 26.5, there was still skepticism. Executed on it, growth trajectory was right. The economics of the currency side of it was right. All came together, we were in the band. Right now, both of those levers are in the opposite direction. We believe structurally it is possible. When we will get there, how we will get there, that we have to keep on tweaking it somewhere here.
Sure, sir. Lastly, sir, did we provide the margin band for this quarter as to margin bridge for this quarter as to how the margins felt in terms of the Y on Y impact?
What's that?
Yeah.
Oh, the break-up.
Yes, sir. The break-up of the-
See, there's not much of currency impact Q on Q, per se. For the full year, you can see it's about 8.5% of CC growth and 5.5% of dollar growth and INR growth. You can work it out yourself. It's that same range.
On Q and Q, I believe last quarter we would have the visa cost impact and everything. In this quarter, that was undone by some exceptional in the SG&A? Was it just because of lower growth than we were expecting?
You see it on the employee cost per se.
Yes, of course. Sure.
See, Ram here. Of course, as you mentioned, the lower growth is definitely one factor. The second is also that we have added people both last quarter and this quarter, a significant addition, almost among the highest in any previous quarters. Those investments, the conversion is yet to happen. That is reflected in the margins. Despite a lot of optimization in many of the other line items. This reduced growth is clearly the factor.
Sure, sir. Thanks for taking my questions. Wish you all the best.
Thank you. The next question is from the line of Girish Pai from Nirmal Bang. Please go ahead.
Yeah, thanks for the opportunity. I just had a couple of questions on the margin front. In response to a question in the press conference, you mentioned that you would make some tactical adjustments to push up margins in the second half. While you did mention about the structural changes you're making, what exactly do you mean by tactical adjustments? Where do you have these levers?
I'm saying that primarily on the hiring part of it, that we have hired with a certain assumption, and we will see whether we can tweak our hiring to bring our utilization closer back in line. Those are the kind of tactical changes that we were referring to.
One more question on the margin front. I recall that last quarter, you didn't pay out the full variable part, I think, to some senior employees. Has it been paid out in this quarter, or has it been pushed back into second half?
No, this quarter we have done full variable payout.
Okay. Just one last question. Rajesh, you keep mentioning about this word participation. Are we referring to win rate here, or are you saying that the addressing of the opportunity, what exactly do you mean by participation?
When I call it out, I talk about actually win rate.
Okay
is no use. On a more serious basis, the first step is being there in the competitive set and making sure that both we see we have deal visibility and deal participation. Second, from there comes the actual conversion and the win. I don't necessarily differentiate between the two. For me, both are critical.
Can you quantify what the participation rate currently is vis-a-vis, say, a year back or two years back, and what have you done internally to improve that?
We can't quantify it, but qualitatively, we have been sharing a lot of color on that. We've spoken in length about our digital capabilities, about the Business 4.0 framework, about our cross CXO coverage, and our ability to address a diverse stakeholder suite, and also our unique capability to stitch together transformation deals, which are incumbent upon the full service portfolio that we have, as well as the domain capability that we have. All of these aspects increase the coverage universe that we have and the differentiated positioning that we have.
Okay, thank you.
Thank you. The next question is from the line of Manik Taneja from JM Financial. Please go ahead.
Hi. Thank you for the opportunity. Rajesh, you mentioned that the visibility on H2 is not as great to essentially expect an uptake. Do you also see any possibility of extended furloughs in second half? I had another one on Europe. Your performance and commentary on Europe essentially has generally been positive through the last several quarters. While when you've been speaking of financial services from a recent performance perspective, you've spoken of some pressure with your European client base there. Could you just elaborate as to what verticals or what segments are you seeing growth in Europe?
Europe, I don't think there's much of a vertical color beyond what we've already spoken about banking and manufacturing and retail that we spoke about. It's not that I don't think we have anything incremental to add.
Q3, I think typical trends of Q3, I don't see any respite from that. Whether it'll be more than that, we'll have to wait and see. Typical Q3 fluctuations should be there.
Sure. All the best for the future.
Thank you. The next question is from the line of Ashwin Mehta from IDFC Securities. Please go ahead.
Yeah, I had one question in terms of your segmental margins. If I look at your retail CPG or others' segmental margins, they seem to have gone down by more than 300 basis points Y-o-Y. Is the sluggishness in retail also coming with pricing pressure, or is it just a mix issue that some of the digital engagements getting pushed out means the portfolio is more skewed towards the legacy, which is driving these margin declines?
Period-to-period volatility always exists. Nothing beyond that to talk about. Retail, structurally, has been under pressure, and you're seeing that reflected across both the revenue as well as the margin line.
Okay. Just one follow-up. In the cost of revenue line, the other costs have been rationalized by almost 40 bps this quarter. Just want to get a sense in terms of what are these costs, and is it sustainable going forward?
Some amount of it, you need to look at that together on the both core and the G&A side. When you put it together, there's not that much of a variation. It's lower on the core side, but higher on the G&A side. Most of them reflect our customer summit kind of events that I spoke about, which are annual events that happen. Others are one-off in nature. That's why they're called others. Club the two together. It is better to consider it as a single line item than the accounting way of looking at it as a core and a G&A.
Okay. Thanks a lot, and all the best.
Thank you.
Thank you. Ladies and gentlemen, this was the last question for today. I now hand the conference over to the management for the closing comments. Over to you, sir.
Yes, thank you, Pratha. To sum up, despite continued volatility in the financial services and retail verticals, we had a steady growth of 8.4% with continued strength in U.K. and Europe. Importantly, while customers in affected pockets may be cutting trends, the structural aspects of demand for our services remains very strong. Overall industry spending trends also remain robust. Our order book in Q2 was $6.4 billion, the highest in the last six quarters. Rather, TCV in Q2 was $6.4 billion. In North America and BFSI, accounted for $3.4 billion and $2.2 billion respectively. The strong order closure and deal pipeline is an indicator of our growing traction within our customer innovation spend. Our investments in research and innovation and our large portfolio of intellectual property is positioning us well to help customers scale up their innovation efforts.
We had the highest ever net hiring in Q2, and our employer retention continues to be the best in industry. We have been gearing up for growth and our operating margin reflects our continued investment in people and headcount addition. Our Q2 margins reflect that, and we'll now also focus on optimization with some help from currency and get back to a better level that we've been speaking about. Thank you all for joining us on this call today, and have a great evening ahead.
Thank you, members of the management. Ladies and gentlemen, on behalf of TCS, that concludes this conference call. Thank you for joining us and you may now disconnect your lines.