Key highlights from Tata Consultancy Services Ltd (TCS) Q1 FY24 Earnings Concall
Management Update:
- [00:05:45] TCS said its LTM attrition rate in IT services decreased by 2.3% sequentially, bringing it to 17.8%.
- [00:06:41] TCS’ life sciences and healthcare industry vertical experienced the highest growth at 10.1%, followed by manufacturing at 9.4%. Other verticals showed softness, with BFSI at 3%, Retail and CPG at 5.3%, Tech and Services at 4.4%, and Communications and Media growing by 50 bps.
- [00:12:20] TCS said that due to macroeconomic uncertainties, clients are more cautious, but they are interested in cost optimization, vendor consolidation, integrated operations, and Generative AI.
- [00:14:06] The company has over 50 proof-of-concepts and pilots underway in the area of Generative AI, and more than 100 opportunities in the pipeline.
- [00:25:43] TCS is seeing strong traction in operating model transformation, which the company expects is a trend that is likely to continue in the coming years.
Q&A Highlights:
- [00:30:51] Sudheer Guntupalli of Kotak enquired if clients are still concerned about the banking crisis in US and Europe, or if it’s no longer a concern among clients. K. Krithivasan MD said the topic of the crisis is largely behind TCS and is no longer a concern among its primary customers, the large banks.
- [00:31:58] Sudheer Guntupalli at Kotak asked that despite the improving market situation and strong pipeline, the tone of demand situation for TCS remains cautious and if it’s due to conservatism. K. Krithivasan MD clarified that TCS is just stating its observations of the market, where clients are pausing projects if ROI is not strong, causing short-term revenue drops, but there are no long-term issues with technology demand or investment.
- [00:33:34] Apurva Prasad with HDFC queried about TCS’ comment about the short-term being uncertain after two quarters of strong TCV and is the softness of project prioritization concentrated within a specific pocket of clients. K. Krithivasan MD replied that the trend of clients reviewing and reassessing projects is broad-based, but the impact varies from one account to another and depends on the individual situation and industry. For e.g, large U.S. banks are still doing well and there are no major problems there.
- [00:35:01] Apurva Prasad at HDFC asked what are some of the near-term operational levers available, mainly when the impact of operating leverage is lower due to softer growth. Samir Seksaria CFO said TCS will continue to use levers such as utilization, which still has scope for improvement. Discretionary spending has reached a critical mass where it can be optimized.
- [00:36:06] Mukul Garg from Motilal Oswal asked what are the signs that clients are looking for to project pauses or push-outs, and will demand return quickly if the situation doesn’t worsen. K. Krithivasan MD said near-term uncertainty is causing clients to pause programs where the ROI is weak. Once there’s more clarity on uncertainty, some projects such as cost optimization, may regain momentum. However, it is uncertain when the cautious approach will end due to the unclear timeline.
- [00:37:29] Mukul Garg at Motilal Oswal queried how the impact of TCS’s work on Generative AI be seen in the next 2-3 years. N. G Subramaniam COO said Generative AI has the potential to significantly improve the speed, quality, and cost of software development. However, there are still many challenges to be addressed, such as the cost of adoption and the need for specialized skills.
- [00:43:14] Kumar Rakesh of BNP Paribas asked how TCS sees the trajectory of clawing back margin in the coming quarters, and will it be similar to last year or are there higher tailwinds or headwinds this year. Samir Seksaria CFO said TCS typically sees a first-quarter headwind due to upfront agreements, but claws back throughout the year. However, the current macro environment is uncertain, so TCS is focusing on incrementally improving its bandwidth throughout the quarters.
- [00:45:23] Gaurav Rateria at Morgan Stanley asked that based on the deal ramp schedule, do the two strong quarters of TCV provide greater visibility for 2H vs. 1H. K. Krithivasan MD replied that 2H of the year will depend on what happens in 2Q and how the momentum builds. It is too early to say if 2H will be better than 1H.
- [00:46:01] Gaurav Rateria from Morgan Stanley queried if there are any specific investments being made on the consulting and delivery sides to leverage the demand for Generative AI projects. K. Krithivasan MD answered that TCS is investing in building in-house capabilities, partnering with hyperscalers, and training associates to leverage Generative AI.
- [00:48:49] Ravi Menon at Macquarie asked that did the increase in offsite costs last quarter reflect new project starts, and has that trend continued this quarter. N. G Subramaniam COO replied that new project starts are ramping up, but the net impact on revenue is being dampened by uncertainty and pauses in existing projects.