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 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.
Thank you, operator. Good evening, and welcome, everyone. Thank you for joining us today to discuss TCS's financial results for the Q2 of fiscal year 2024, that ended September 30, 2023. 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 Q3. The financial statement, 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. K. Krithivasan, Chief Executive Officer and Managing Director.
Hi, good day, everyone.
Mr. N.G. Subramaniam, Chief Operating Officer and Executive Director.
Good evening, everyone.
Mr. Samir Seksaria, Chief Financial Officer.
Hello, everyone.
Mr. Milind Lakkad, Chief HR Officer.
Hi, everyone.
Our management team 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 subscribed for our mailing list. With that, I would like to turn the call over to Krithi.
Hi. Thank you, Kedar. Good morning, good afternoon, good evening to all of you. Our Q2 performance shows continued strength and demand for our services, particularly around cloud and cost optimization, resulting in strong deal wins, a robust order book, and a good pipeline. This was true in prior quarters as well. We initiated the past three quarters. Our order book has exceeded $10 billion TCV, compared to the average of $7 billion-$8 billion range in 2021 and 2022. The newly won deals are converting into revenue as expected, but these revenue inflows are getting neutralized by reduction in the existing revenue base as the transformation projects get completed or RTB projects get optimized, and in some cases, getting downsized. This has led to muted revenue growth.
In Q2, our revenue grew 7.9% in rupee terms, 2.8% in constant currency terms, and 4.8% in dollar terms. Our operating margin was at 24.3%, and net margin was at 19%. I now invite Samir, Milind, and NGS to go over different aspects of our performance during the quarter. I will step in later to provide more color on the demand trends we are seeing. Over to you, Samir.
Thank you, Krithi. In the Q2 of FY 2024, our revenue was INR 59,692 crore, which is a year-on-year growth of 7.9%. In dollar terms, revenue was $7.21 billion, a YOY growth of 4.8%. In constant currency terms, our revenue growth in Q2 was 2.0. Let me now go over financial performance. Our operating margin is at 24.3%, which is a 110 basis points expansion sequentially. We got 100 basis points benefit from disciplined execution, which resulted in improved utilization and productivity, and further optimization of subcontract expenses. Additionally, we gained 35 basis points from driving efficiencies in discretionary expenses, which I had referred to last quarter as gaining critical mass. On the other hand, we continued to invest in infrastructure.
Net income in Q2 was 19%. Our EPS grew 8.7% on a year-on-year basis. Effective tax rate stayed unchanged at 25.8%, and our accounts receivable was flat sequentially at 65 days sales outstanding in dollar terms. Net cash from operations was at INR 118.23 billion, which is a cash conversion of 104.2% net income. Free cash flows was at INR 113.57 billion, and invested funds as of at the end of the 30th September stood at INR 596.77 billion. The board has recommended an interim dividend of INR 9 per share.
Further, the Board has recommended a buyback to the tune of INR 17,000 crore through the tender route at INR 4,150 per share. Over to you, Milind.
Thank you, Samir. Our workforce at the end of the Q1 was 608,985. Our strategy of proactively hiring bright freshers and investing in training them with the right skill set is paying off now. With that talent coming on stream and with reduced attrition, we were able to recalibrate our gross additions, keeping it below the departures during the quarter, driving the productivity and enhancing project outcomes. Our workforce continues to be very diverse, with 152 nationalities and with women making 35% of the base. We continue to invest in organic talent development. Year to date, TCS has logged 26.4 million learning hours and acquired 2.6 million competencies, including over 350,000 high demand competencies.
We have over 100,000 GenAI-ready employees today, and we are now investing in deepening their expertise further on with exciting new technology. LTM attrition in IT services was at 14.9%, down 2.9% sequentially, close to our historical range of 11%-14%. Over to you, NGS, for some color on our segments and products and platforms.
Thank you, Milind. Before I get into the segmental performance, I wanted to highlight some change in how we report segmental performance in our fact sheet from this quarter. Historically, we reported revenues from North America, Latin America, UK, Europe, and Australia under the industry verticals, separating out the emerging market revenues, products and platforms, and a few other small businesses, or those with a typical revenue profile in a separate line item called Regional Markets and Others. In Q2, we made three changes. First, we reclassified revenues from Asia Pacific, excluding Japan, and Middle East and Africa under the respective industry verticals. Second, with our energy resources and utilities verticals gaining critical mass, we have extracted the first two of this from regional markets and others, and we'll now start reporting it as a standalone industry vertical.
With these changes, revenue contribution from regional markets and others is down from over 17% to around 11%. We have provided comparatives for the last 4 quarters in our fact sheet. The third change is the renaming of our retail cluster, consisting of retail, CPG, travel, transportation, hospitality verticals as the consumer business group or CBG. Let me walk you through our segmental performance now. As a reminder, all growth numbers are in year-on-year constant currency terms. Growth was led by the newly carved-out energy resources and utilities vertical, which grew 14.8%. Manufacturing grew by 5.8%, and life sciences and healthcare grew by 5%. Our consumer business group grew by 1%. Banking, financial services and insurance grew by -0.5%. Communications and media by -2.1%.
Technology and services by -2.2%. By geographic markets, we see maximum caution in North America and continental Europe, which grew 0.1% and 1.3% respectively. We continue to have good momentum in the United Kingdom, where the market grew by 10.7%. In emerging markets, Middle East and Africa grew 15.9%, Latin America by 13.1%, Asia Pacific 4.1%, and India by 3.9%. Let me move on to products and platforms. Our industry-leading portfolio of products and platforms had a very strong quarter. All our products and platforms are now offered on a SaaS basis only, and we have a healthy ARR as a product portfolio. ignio, our cognitive automation software suite, saw 28 new deal wins and 18 go lives.
TCS BaNCS, our flagship product for financial services, had 2 new wins and 11 go lives during the quarter. Among the go lives this quarter is JPMorgan Securities Services, where our real-time, event-driven multi-market platform is helping the bank provide clients with a standardized and streamlined process in each of the 100 markets we operate in, enhancing the customer experience around corporate actions. TCS BaNCS insurance platform continued to see strong momentum in Q2, with 4 new wins and 2 go lives during the quarter. For a global financial institution based out of South Africa, TCS has completed a massive migration from a heritage platform to TCS BaNCS for insurance. This is the largest and most complex migration of its kind in the history of the market, entailing 4 million policies. With this migration, the client's entire retail protection business is on TCS BaNCS.
Post-migration, the policies are now available to both advisors and customers through digital channels. Quartz blockchain platform had 2 go-lives this quarter. In life sciences, TCS ADD, our advanced drug development platform, had 2 new wins and 1 go-live this year. TCS ADD Safety went live for a top ten U.K.-based pharma, its latest version that uses advanced AI algorithms to process adverse event cases, the first of its kind in the industry. With this, TCS ADD Safety has successfully automated more than 1 million cases, a landmark by any technology company using AI in pharmacovigilance, delivering industry-leading efficiency and accuracy metrics. TCS HOBS, our suite of products for communication service providers, had 1 new win and 2 go-lives during the quarter. TCS iON had 44 new wins. Our platform administered assessments for 16.2 million candidates, 150% higher year-on-year.
MasterCraft and Jile won 34 new clients in Q2. In terms of client metrics, our business model is built on continually delivering tangible value to our clients, which results in them rewarding us with repeat business, consuming more of our services and solutions over time.... The deep and enduring client relationships we build give us tremendous contextual knowledge of how their business runs at a very granular level, the individual processes, and how the underlying systems support them. The various interrelationships among systems and databases and infrastructures layer beneath. All these are extremely useful, as we build out our GenAI capabilities and position our GenAI services for our large clients. This contextual knowledge and our track record of consistency and predictability in our deliverables is our competitive edge.
From the outside, the success of our customer-centric strategy is just validated through client metrics we report, which show a steady increase in the number of clients in every revenue bucket. In Q2, we added 2 more clients year-on-year in the $100 million-plus band, bringing the total to 61. Thirteen more clients in the $50 million-plus band, bringing the total to 137. Nine more clients in the $20 million-plus band, bringing the total to 292. Twenty-eight more clients in the $10 million-plus band to total to 483. Thirty-eight more clients in the $5 million-plus band, bringing the total to 688, and 52 more clients in the $1 million-plus band, bringing the total to 1,272. I will now request Kirthi to speak on the demand drivers during the quarter.
Thank you, NGS. Given client caution over the macro overhang, we continue to see reprioritization of spending from discretionary areas to cost optimization. This is driving a significant deal momentum towards large outsourcing deals, vendor consolidation, and operating model transformation. We had a very strong order book in Q2 with a TCV of $11.2 billion, our second-highest TCV ever, and a book-to-bill ratio of 1.6. BFSI TCV continued to be very robust at $3 billion, as also the consumer business order book at $1.4 billion. The TCV of deals signed in North America stood at $4.5 billion. The order book in Q2 had two mega deals, BSNL and JLR, each roughly $1 billion in TCV versus one mega deal in Q1.
We had a detailed press note on the JLR deal, so I won't spend time on that. But the BSNL win is very special and showcases our unique capabilities. So let me give you a high-level overview. BSNL selected TCS to roll out a modern 4G and 5G mobile communication infrastructure across India, covering 100,000 telecom sites. The project involves supply, planning, design, installation and commissioning, and optimization of this mobile network, satisfying a detailed set of requirements conforming to 3GPP standards. Our solution caters to needs such as trusted source of components and equipment, advanced RF planning, intelligence on the edge to support cognitive network operations, software-driven radios and pre-configurations, and so on. This is part of the government of India's efforts to build indigenous telecom technology and local manufacturing of telecom gear.
TCS and partners have integrated the EPC core, RAN and NMS, and have started the rollout of the network, which is expected to be completed in stages over the next 18 months. I'll move on to operating model transformation. Overall, deal momentum in operating model transformation continues to be very strong. A big differentiator for us is our TCS Cognix, which significantly accelerates the operations transformation. It embeds AI, machine learning, and increasingly GenAI to enable superior business outcomes with increased velocity, improved user experience, reduced turnaround time, and superior decision-making powered by rich dashboards and predictive analytics. In Q2, we won six large operating model transformation deals with TCS Cognix at their core. The other interesting trend is that we also saw several large deals featuring first-time outsourcers.
For instance, we were selected by the British Council, the UK's international organization for educational opportunities and cultural relations, to transform its professional services function that includes finance, procurement, human resources, and digital technology. TCS will leverage its deep domain expertise and proprietary platforms to help develop more innovative and user-friendly services. The partnership will also enable the British Council to focus on improving the quality and efficiency of services, ultimately leading to an enhanced customer experience. Last quarter, I had highlighted how clients have taken to TCS integrated operations model, wherein we take ownership of the entire slice of operations from back-end to front-end, along with the underlying application and data estate and the IT infrastructure layer. We call this integrated offering Business as a Service.
Our AI-powered business command center provides end-to-end visibility and holistic control across that entire stack, resulting in more resilient operations and better alignment with business KPIs. Our proactive leverage of next-gen technologies to redefine processes reduces the need for human intervention, increases process velocity, and delivers superior process outcomes. From a competitive standpoint, our holistic approach, deep contextual knowledge, and unmatched speed to value from TCS Cognix is providing a deep moat that is powering strong deal wins and market share gains. In Q2, we won a large deal from a leading media company that is currently transforming to focus on new lines of business, which will drive future growth. They are partnering us to improve customer retention by providing superior experience while reducing engagement.
In keeping with our business-as-a-service value proposition, TCS will take full ownership of the operating stack with an integrated solution across customer interactions, which includes voice, chat, email, and social, supporting the IT applications and infrastructure. Incidentally, this is also a vendor consolidation across multiple countries and vendors, and multiple business lines, and good illustration of how our IP and innovation differentiates us. Our solution uses TwinX, our digital twin solution, to model customer engagement and to reduce churn, ignio to make underlying infrastructure self-healing, and GenAI for directing voice to chat, voice to text, and for customer sentiment analysis for emotionally responsive chats and emails. The level of innovation and next-gen capabilities embedded in our solution and the business alignment of our value proposition were the key differentiators in this large win. Speaking of GenAI, it continues to dominate our conversations with IT and business leaders in every market.
There is tremendous interest in harnessing its power to drive productivity and enhance customer experience. We are co-innovating with clients across multiple industry verticals, executing proofs of concept and pilots, and helping them draw up their GenAI strategy and roadmaps. Last quarter, I shared examples of client engagements exploring the use of GenAI for contract administration and customer service automation. Many of the projects we executed this quarter are conceptually similar, focused on task automation around knowledge abstraction and content creation. We are now seeing a progressive increase in the complexity and sophistication of GenAI use cases, from simple knowledge discovery use cases and chatbots, to complex ones, such as augmentation solutions for financial advisors and wealth management strategies, automated underwriting for insurance policies, AI-led molecule discovery, as well as engineering design space exploration for automotives and gas turbines.
Slightly more mature clients are taking a broader enterprise-wide approach to GenAI deployment. For a European airline, TCS is helping reimagine its core business functions, leveraging GenAI and analytics to create a future-ready enterprise. The TCS team co-presented with the CTO to the board, and is now engaged in helping draw up a holistic GenAI strategy. A leading U.S.-based specialty retailer is partnering with TCS for multiple GenAI-led interventions to enrich customers as well as employee interactions, including customer request handling, virtual assistant for shopping, virtual assistant for shopping, knowledge management designs for creatives, marketing and sales collaterals, and code enhancements. Some other organizations are using generative AI to reimagine an entire activity. A good example is a client in the construction industry, for whom we are using GenAI to prepare the preliminary architectural plans for a new building project.
The AI-generated designs are then validated and detailed out by the human team. We see similar opportunities in product innovation, where generative AI can visualize multiple new form factors for a product in the manufacturing industry, or perhaps new types of packaging in the CPG industry, significantly enriching and accelerating the design process. While these are examples of standalone deployment of generative AI, we are also beginning to win larger transformational projects that involve multiple technologies, where generative AI is infused to address specific parts of the value chain. We believe that as the technology matures, we will see more instances of activity-level automation and eventually end-to-end value chain transformation using generative AI in combination with other technologies. That is when the mainstream adoption of this technology will really take off, and the full potential of this technology will be realized.
In the meantime, we continue to invest in building capabilities on this exciting new technology. Last quarter, I had mentioned our plans to train a large number of employees on generative AI. I'm happy to inform, we inform you that we now have 100,000-strong GenAI-ready cohort, and our focus now is on further deepening their expertise. Going beyond skilling and certification, we are launching an AI playground that will be an alternative work environment where TCSers can safely and securely access various generative AI platforms and a curated set of startup technologies from our COIN, our co-innovation network partner. This will give them the hands-on experience of experimenting with large language models, trying out new ideas, and building out solutions to real-life business problems without exposing data in our network.
Over time, we plan to hold hackathons in the playground, throwing challenges for TCS best and brightest to solve, using these opportunities to identify the most talented engineers within the organization and nurture their talent. Our various product and platform teams are working towards leveraging generative AI to create differentiating capabilities in their respective products. ignio, our flagship AIOps product, has been at the forefront of leveraging AI to drive autonomous operations. The latest enhancement to its knowledge accelerator module leverages large language models to extract information from various sources, create a comprehensive enterprise context, and gain a deeper understanding of each organization's unique environment, challenges, and objectives.
This context-aware approach allows ignio to optimize automation through situation and technology-specific actions, delivering tailored and efficient solutions that fuel enterprise agility, resiliency, and innovation. We have also launched AI Assist, an intelligent conversation engine designed to offer plain language explanation of diagnosis and resolutions, as well as insights for continuous improvements generated by ignio. AI Assist uses GenAI's ability to understand language, capture context, and learn from feedback. As a result, it presents analytics insights in a much simpler and intuitive way, guiding users through intricate processes, helping them sift through large volumes of analytics and make data-driven decisions with confidence and ease. In TCS OmniStore, we are adding GenAI plugins to augment product discovery, create personalized buying guides for customers, store management operations, automation of marketing campaigns and promotions. We are also introducing generative AI to automate our product helpdesk and support operations.
TCS Optumera, which already uses AI and ML to fine-tune product pricing, will now see the infusion of generative AI in the pricing process for workbench for merchants. We see plenty of opportunities for generative AI infusion in the drug development value chain. The TCS ADD product team, ADD product team, is working on GenAI-enabled solutions for narrative writing, pharmacovigilance, health authority submissions, and intelligent search. While cost optimization remains a dominant theme overall, clients continue to invest in projects with a clear ROI and ones that drive business growth. Here are some examples. A leading U.K. bank partnered with TCS to help renters living in shared accommodation with an app that helps with bill splitting and building their credit profile.
TCS designed and built the app, which scans through monthly payment of customers, pulls rental records, and automatically shares it with credit bureau, which helps in improving renters' credit profile. Using open banking capabilities, the app is accessible to anyone with an eligible U.K. bank account and enables the bank to cross-sell, upsell its products and services to even non-customers. TCS is now working with the bank to enhance the marketing strategy to increase adoption of the app and drive growth. The product recently won the Best Product Innovation and Jury's Choice Award at the 2023 Financial Services Forum Award. A leading Nordic insurer is pursuing a completely new business model with a subsidiary in the mobility space.
The new venture is building a mobility ecosystem that offers a wide range of services like tire replacement and used car servicing, using a TCS-built digital platform and mobile app as a direct distribution channel to acquire new customers, that is, that are car owners, to whom insurance can then be cross-sold. The app is expected to drive up new insurance sales and create new upsell opportunities with 10%-15% increase in customer realization. The app has been very well received and is expected to cross 100,000 downloads by December. In the retail domain, retailers are looking to leverage technology to meet evolving customer expectations and offer tailored experiences, reach, reach more audiences and markets, and to enable better decision-making on merchandise using and analyzing data.
We are helping a global fashion retailer in Europe to reimagine the visual merchandise to reimagine the visual merchandise planning and commercial rehang process. The collaborative intelligent digital solution enables the visual merchandisers to plan and optimize store layouts and presentation of locally relevant assortment based on integrated insight of sales and stock information and performance targets. The planning solution has enhanced the productivity of visual merchandisers in sample picking processes by 50%. The solution enables new capabilities for the stores, including digital interactive maps, article search and details integrated with the stock data in stores and warehouses. Store data is now available on a daily basis compared to the weekly data transfer.
Similarly, we are partnering with Kingfisher PLC in transforming their customer and associate experience across banners in UK and Europe, using TCS OmniStore to realize an AI-powered, unified and composable commerce platform. The platform's capabilities around flexible fulfillment, self-checkout, clienteling, and dynamic promotions is helping Kingfisher PLC drive greater associate productivity, increase revenue, faster checkout, and broader sales opportunities. Lastly, divestitures and spin-offs present enterprises with a great opportunity to start with a clean slate and build a new future-ready technology estate from scratch to support a differentiated business position. In Q2, we won a very large transformational engagement, coincidentally, in the retail vertical. We have been engaged by a large UK retailer to help build out a separate IT estate following its divestiture and digitally transform its business.
TCS will build a new greenfield digital store, digital core, by implementing cloud-based ERP platforms to streamline core business functions, including supply chain, warehouse management, and e-commerce processes. We will enhance employee experience with new digital solutions, enabling efficient and resilient business operations powered by our machine-first delivery model. We will also implement a new organization-wide IT operating model that consolidates and simplifies their vendor landscape. On the front end, TCS will help them grow their e-commerce business, starting with their grocery and apparel sites. We will leverage our experience-first commerce implementation services across functions such as shop, fulfill, and care to drive improvement in customer satisfaction and business growth.
... Lastly, cloud migrations continue apace. We can now open the lines for questions.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and 1 on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star and 2. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. We have our first question from the line of Ravi Menon from Macquarie. Please go ahead.
Thank you. Good evening, gentlemen. You know, just wanted to ask you about the BSNL deal. You know, it seems like the IP that you create is something that lets you compete with the likes of Nokia and Ericsson. Is this understanding correct, or most, most of the IP rests with your partners like Tejas?
Hi, Ravi, this is NGS here. TCS is system integrator in this opportunity. EPC core software, the IP lies with our partner, C-DOT. Radio access network and is developed and designed by Tejas Networks, IP rests with Tejas Networks. There are few other things that are required for integrating the software. Overall, network optimization, network planning, cognitive network operations, some of those, traditionally as a SI, we have built those platforms. The IP of those components are with TCS.
Great. Thank you. And then, you know, we have historically been used to, as investors, you know, perhaps fairly unfairly comparing yourself with Accenture outsourcing. You know, and that division is what we thought that is TCS most compares to. But, you know, now with your focus on growth and transformation, should we think about a larger part of TCS revenues being exposed to a segment closer to Accenture's consulting?
I don't want to compare it like that. I think, you know, we are focused on multiple engagement-type of engagements and cost and optimization, growth and transformation. It's a broad categorization. I think, consulting is typically included as a part of every growth and transformation opportunity. We have to see, you know, there are certain verticals and certain customer segments where we are really have built a lot of expertise in those engagements, I think, what you alluded to may be true.
One last follow-up on the BSNL deal. I, you know, newspaper reports were quoting this deal at INR 15,000 crore, so the number that you're putting out, you know, $1 billion, seems to be just about half of that. So is this just phase one of the program?
I think, you know, BSNL, what we have contracted so far is this, but there are things like, you know, follow-up on some of this, like, for example, annual maintenance, etc. It will come as we progress this. The overall deal size is something that, you know, there are multiple things which are there, but currently, what we have contracted is the supply, installation, commissioning, and design and optimization of the network, which is the one that we talked about, is a little over $1 billion.
Okay, thank you. Thanks a lot.
Thank you. We have our next question from the line of Nitin Padmanaban from Investec. Please go ahead.
Yeah. Hi, good evening, and thanks for the opportunity. Just wanted some color on the demand overall. So if you see the last three quarters, including this one, our book-to-bill has been consistently above 1.4. So however, from a revenue attrition perspective, it's been softish. So just wanted your thoughts on how one should think about this. The second is, you did mention that reprioritization and cutting discretionary has been sort of driving revenue headwinds. Do you get the feel that this is sort of at its peak, and it's... Are you seeing signs of this abating in terms of the overall impact on the existing book of business, right? So those are the two questions. Thank you.
Yeah. Nitin, so like we explained last quarter also, we explained the situation. On one hand, our customers continue to trust on building new technology capabilities, and so based on that, we continue to win new deals. But at the same time, given the overall market uncertainty, they are trying to conserve cash and improve- optimize their current spend, particularly on the long projects that have been running for long. So, and sometimes such projects end also, and we may not have sufficient replacement of those revenue stream. So which is causing the revenue growth to moderate, but we do, we do also, like you said, the reprioritization is also a factor into that. Like, a large project may get reprioritized into smaller chunks or maybe slowed down.
All these factors are at play, but how long this will last is not a question that we can answer at this time.
Sure. And, just one last thing, is, how do you see-
... furloughs. Are there any conversations on furloughs? Do you think- are you seeing any signs to suggest it's going to be normal or?
Our planning is to be like normal like every other year. We don't see any difference.
Fair enough. Thank you so much, and all the very best.
Thanks, NGS.
Thank you. We have our next question from the line of Kumar Rakesh from BNP Paribas. Please go ahead.
Hi, good evening. Thank you for taking my question. Krithi, my question was around the revenue side. If you see over the last three quarters, our revenue in absolute terms have largely been steady, while at the same time our deal win has accelerated, now crossing consistently $10 billion. So that is fair to expect that the incremental new part of the revenue within that, about $7.2 billion of revenue, the new part would be more sizable now. That implies that the underlying impact on the existing ramp down of the projects or the reprioritization, which you are talking about sequentially, is increasing. Is that inference correct?
That's mathematically, what you're saying is correct. Like, there is an increasing reprioritization of, long-running, projects. And also, what also happening, Kumar, there are few places where we have a large program, that, comes to an end, and that doesn't give... When I say that comes to an end, like that, say, for instance, for one of our in Germany, we're doing a large, integration. Once the integration of two banks come to an end, like that was a large revenue stream, and that stops. And, so such situations also cause a, reduce the revenue stream not getting replaced by something else. So both are possible.
I won't say like, yes, there is an increased focus on cost optimization, which is causing our revenues not to increase in line with the increase in TCV.
Got it. My second question was for Samir. So in the Q2, after the wage hike, our revenue, sorry, our margin improvement have been ahead of what historically we have done, at least in the recent past. And you did talk about that the, cutting down on the discretionary expenditures is now picking up pace and scale. Should we expect that our revenue recover, our margin recovery trajectory should be ahead of what we have seen, say, last year or in the past years?
I think, two points. First, we are happy with what we were able to deliver in Q2. 110 basis points sequential improvement. Given the current macro uncertainty is impacting top line, is fairly decent. Our focus will be to use the existing levers itself, which is in terms of productivity, utilization, or even looking at further optimizing subcontractor expenses. And try to continue the journey. And if growth helps us, it will only help us accelerate this journey.
Got it. Thanks a lot.
Thank you. We have our next question from the line of Sudheer Guntupalli from Kotak Mahindra AMC. Please go ahead.
Yeah, good evening. Thanks for the opportunity. Ajay, sir, just one clarification on your characterization of the BSNL deal. When you say you're looking to complete the project in 12-18 months, is this entire $1 billion TCV will be converted into revenue over the next 12-18 months? Or is there any sizable part of the $1 billion TCV which is also structured as network maintenance revenue over a longer horizon?
When I said 12 to 18 months, I think the rollout of the network, the 4G and 5G network for 100,000 network sites, is what we will install, we will commission. Afterwards, you know, we hope to, with the maintenance and network operations effort, which will be for optimizing the network and continuously modernizing it, right? There are the payment terms with BSNL, there are certain clear milestones. Whatever is $1 billion that we have put in place, a part of it will definitely mature within this 12 to 18 months, and some part of it will be subject to warranty and acceptance by BSNL and things like that.
But overall, I think it's safe to assume that a good part of this $1 billion is something that we will, we would like to bill and, collect from BSNL, within this, let's say, 12-18 months' time.
Understood, sir. So any maintenance will be, probably subsequent phases? Any maintenance revenue will be subsequent phases.
Absolutely. It could be subsequently or it could be even, you know, for example, at the end of the sixth month, if we have completed one zone of, consisting of a few circles, then we might go and contract the annual maintenance, et cetera, specifically for that circle.
Understood, sir. Thanks for that. And, Krithi, we know it's difficult to second-guess the macro, and sorry for persisting on this aspect. But given you have seen these clients over, let's say, multiple decades, multiple macro cycles, any specific macro events, outcomes, timelines, or variables these clients are looking forward to now, post which they may sort of bite the bullet and move forward in terms of spending and ramping up the deals?
Sudhir, like, probably they are looking for some very definitive signs of economic recovery. Okay, currently, the CY 2023 and CY and some other reports are even giving, CY 2024 also is, uncertain. So they are looking at,
... once they have a definitive signs of recovery, I think the confidence will come into the market. Till then, this will continue.
Sure, sir. And lastly, to Milind, so the headcount reduction we have seen is purely because of the fact that we have not replaced normal attrition, normal course of attrition during the quarter. Is that a fair assessment, sir?
Yes, that is a fair assessment.
Thank you, sir. All the best.
Thank you. We have our next question from the line of Sandeep Shah from Equirus Securities. Please go ahead.
Yeah, thanks. Thanks for the opportunity. So just a question in terms of this commentary about there is a conservatism on discretionary spend and the cost takeout deals are increasing, outsourcing deals are increasing, vendor consolidation deals are increasing. This is almost happening in the sector, including for TCS, for last two to three quarters. So is it fair to say these deals may start ramping up in the second half and which will try to actually reduce the impact of the leaking bucket, and there could be some gradual turnaround in the revenue? Is it the right way of looking at it?
Sandeep, I don't want to say that... See, okay, let me put it this way. All the deals are yielding the revenue as per plan. Like, we have not had the deals that we signed, we have not had, any, delays in the revenue for the way we planned the revenue, so there is no change there. Whether will Q2 be, or H2 will be stronger than H1, I cannot comment on that one.
Okay, okay. And just another question to CFO, sir. In terms of margins, how to look at second half margin? Generally, we do well on a Q-on-Q basis across from Q2 to Q4, but this year, in the second half, we will also have some headwind coming through BSNL deal, and what I believe the $1 billion deal will have a thin margin. So directionally, still one can expect despite that headwind, which would be incremental, where margin can still go up on a Q-on-Q?
So, as you rightly pointed out, usually we have been taking our biggest headwind in the Q1, and we gradually claw back. In a typical year, where it's supported by growth, we get a higher leverage from growth also, helping us on the margin front. In the first two quarters, we have seen the top line being sluggish, but at least in Q2, we have been able to deliver the 110 basis points. Collectively, we have been focused on specific initiatives which have helped us deliver this. As I said in the last question, we'll try to use the same levers and continue the journey.
Okay. This would be despite the BSNL headwind, which could be there on margins.
We take deal-specific headwinds as part of the portfolio and try to deliver margins at an overall level. But these would be headwinds on specific ones, which are part of our overall portfolio, as in-
Okay.
We don't call out each and every specific ones.
Okay. Okay, thanks and all the best.
Thank you.
Thank you. We have our next question from the line of Vibhor Singhal from Nuvama Equities. Please go ahead.
Yeah, hi. Thanks for taking my question. So, sir, a couple of questions from my side. In terms of the vertical performance that we are looking at, retail continues to be quite weak, I think, and for multiple quarters. What is the outlook on that segment? Are we seeing any signs that, okay, client spending might come back in a quarter or two? Or what are the client conversations like in the overall retail segment specifically? And then I have a follow-up question.
So on the retail segment, your observation is correct. Like, it's been a tough quarter, but, see, on a year-on-year basis, retail segment has grown marginally. But this quarter has been tough because we have seen that even the essential spending has also come. Normally, essentials is a strong sector for us. This time, even essentials has been quite weak. We need to see, like, as I was mentioning before, once the consumer spending, like, picks up, all these things will bottom out, and then we'll be able to grow. But as I said, I cannot call out when it will turn, but it's being, as I said, multiple sub verticals within retail have been weak. Like essentials normally would be strong, but this time it's been weak, which has resulted in this weak.
No signs of conversations with the clients, which could hint at some their expectations as to what are they looking at?
See, they would look at-
I'm sorry, sir, you're not audible.
Oh, sorry. As I was mentioning before, they look at one, what is the forecast for the coming quarter? If they expect, there's a certainty on the certainty on growth, or they look at what is the projection on spending. Okay, once one of these two comes, the retail sector will also start investing. Currently, while the spending is still reasonably high, but the household therefore savings in U.S. has come down, which is creating some sort of uncertainty. So but there could be a festival season optimization also. So we will, we will get to see when some of these macros in May turn positive, we will see more growth indication coming in.
Got it. Got it, sir. Also, just one follow-up question in terms of just a bookkeeping question. What did you mention was the reason for the sharp reduction in headcount in this quarter?
I think we've been investing in our fresh talent for almost 18 months. The investment is now paying off. Also, because of low attrition, we kind of recalibrated our hiring, and our hiring numbers are less than our attrition, and hence, there's a reduction.
Got it. Got it. And do we expect this thing to maybe continue? Because, I mean, attrition is, I think, easing off further. And so do we believe this headcount reduction will continue for some time, or do you think it could stabilize in the coming quarters?
We will continue to, like, look at all the other parameters, including growth, and based on that, make the calls. But, yeah, I expect the numbers to be, you know, may not be this high or very similar, or maybe a little high, more than zero, in that range, in the coming quarters.
Got it, sir. Great. Thank you so much for taking my questions, and wish you all the best.
Thank you. We have our next question from the line of Abhishek Kumar from JM Financial. Please go ahead.
Hi, good afternoon, and thanks for taking my question. I had a question on deal wins. You know, you mentioned that the quarterly run rate has gone up from $7 billion to $10 billion almost. Just wanted to understand, given that the contours of the deal now is more cost takeout, how should we look at ACV of the deals? Any color, has the ACV also gone in line with the improvement in TCV or there is any difference in ACV growth?
There is no specific call-out on that. I think that ACV has remained similar to what it was before. I don't think the deal tenure has significantly increased. So it's more or less same as before.
Okay, my next question is on GenAI. I was just wondering, you know, the investments that we are doing, or many of our peers are doing, in GenAI, there doesn't seem to be any margin headwinds. Essentially, looks like we are reprioritizing our own budgets, you know, for investing in GenAI. Is it something that clients are also, kind of, treating investments in GenAI in a similar fashion, and therefore it is at best, kind of, a net neutral, from a demand perspective?
I think it's safe to assume that it is neutral, primarily because I think we are in an investment cycle. I think, like our clients, I think we as a company, are also investing a lot in, one is training our employees, second is creating learning platforms and, you know, a separate environment like, I think we talked about AI playground, which we launched. Which, in which, you know, we are making available all the digital infrastructure, tools, and technologies in which, you know, people can train and people can actually develop things, right? And get used to, how this particular technology works, and it can be meaningfully deployed to our clients. There's a lot of investment happening on our side.
Our clients also invest in this technology to do small projects, proof of concepts or proof of values, and then structure typical use case and so on, so on. We also invested in cataloging several use cases by verticals and by technology domains to see how this particular technology can meaningfully deliver value on a sustainable basis. So I think in all that, there is demand, and the demand is, I wouldn't rate it to be very high, but I would say that, look, I think all directions indicate that this is something that will mature, and the potential for embedding it and embracing it all across our IT services value chain is huge.
Good. That's helpful. Thank you and all the best.
Thank you. We have our next question from the line of Gaurav Rateria from Morgan Stanley. Please go ahead.
Hi, thank you for taking my question. So the first question, again, coming to revenue. There are multiple moving parts, which is inflow of new work, project completions, and reprioritization of existing book. But if we were to just look at only the inflow from the new order wins, would it be fair to believe that inflow number should be better in the second half compared to first half, based on the deals that we have already reported?
Yes, the inflow should continue to improve from the new order wins, like that's a fair assessment, Gaurav.
Secondly, are there anything to call out with respect to any unusual project completions which are scheduled in second half, which is keeping your optimism under caution? I understand the leakage part of the business, but just trying to understand any project completions, which also could be one of the reasons for keeping the optimism under check.
... Yeah. Gaurav, like, nothing that's very material that comes to our mind. But, hmm?
Normal course.
It will be normal course, whatever is happening, but nothing very material that comes to my mind, Gaurav.
Got it. Last question, on the margin levers front, how much more room we may have on the utilization and productivity metrics, those would still continue to be levers in the near term in, three Q, four Q point of view? Thank you.
Yes, Gaurav, those will still continue to be levers. We invested significantly when the overall challenging supply environment was going on, and we still believe utilization as well as looking at flatt ening on the direct cost itself, are levers. So all of it which you mentioned, whether it is productivity, utilization, or in the given environment, the subcontractor costs also continue to be levers in Q3 and Q4.
Thank you.
Thank you. We have our next question from the line of Moshe Katri from BofA Securities. Please go ahead. Mr. Moshe Katri, you may please proceed with your question. As there is no response, we'll move on to the next question from the line of Rahul Jain from Dolat Capital. Please go ahead.
Yeah, hi. Thanks for the opportunity. Just wanted to understand a little bit on the rationale of you re-reassigning this regional and other segment. What is left out of here because it seems the same vertical, which has been losing some component into this line item, has again gained back in a similar fashion. Which region do it ascribe to, and what is left now?
Now, like, one is what we looked at is, we want to give an overall global color to all of you on what is happening in a given industry vertical, rather than, splitting them into regions. So as much as possible, we looked at wherever the revenue streams are stable and mature, put them under the, industry vertical. And where we still believe there's a lot of volatility, keep that in regional markets. So with that, we have moved like essentially what is happening in our APAC region and as well as in EMEA, into the, the industry vertical and kept, India Public Services, Japan and, platforms and, our products in the regional vertical. It's more to ensure that so that we can give you more color at the industry level globally.
Okay. So what I understood is that India, Japan, and product and platform is broadly the component in this at this point.
In the regional markets, yeah.
Yeah. Just a small extension to that, if we see over the period of time, our contribution from Asia, Middle East, Africa, the market which you called out, have come off over, you know, last six years, while the contribution in this period has increased for Europe as an end market. Does that also mean that a very large of P&P implied would it be Japan and Europe?
No, I didn't get the last part, Rahul.
No. Rahul, if you look at it, it's also a matter of growth coming in across various segments. The APAC region has grown significantly. In the industry vertical, when we are putting it out, P&P versus Japan is not a combination of P&P and Japan. It is a combination of various elements. We are not breaking those out into respective segments, given the volatility factor.
Yeah, understood. Probably I'll take it off then. Thank you.
Thank you. Ladies and gentlemen, that was the last question for today. I now hand the conference over to the management for the closing comments. Over to you, sir.
Thank you, operator. In Q2, our revenue grew 7.9% in rupee terms and 2.8% in constant currency terms. Our growth affected by the holding back of discretionary spends by clients. Improved utilization, productivity and other efficiencies helped expand our operating margin by 110 basis points sequentially to 24.3%. Our net margin is at 19%. Generative AI continues to drive client conversations. We have hundreds of opportunities in the pipeline, and embedding generative AI in our solutions is helping us win large deals. We continue to invest in building our capabilities. We now have over 100,000 generative AI-ready employees and are investing in building differentiated capabilities using generative AI in our portfolio of award-winning products and platforms.
Deal momentum continued to be very strong in Q2, with our order book at $11.2 billion, the second highest TCV ever. On the people front, we continue to hire the right talent, but have recalibrated our gross hiring to ensure better utilization of our existing capacity. Our LTM attrition in IT services fell further to 14.9%. Lastly, our board has recommended a second interim dividend of INR 9 per share and also a share buyback to the tune of INR 17,000 crore at INR 4,150 per share. With that, we wrap up our call today. Thank you all for joining us. Enjoy the rest of your evening and day, or day, and stay safe. Thank you.
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.