Tata Consultancy Services Ltd (NSE:TCS) Q1 2023 Earnings Concall dated Jul. 08, 2022
Corporate Participants:
Kedar Shirali — Head, Global Investor Relations
Rajesh Gopinathan — Chief Executive Officer & Managing Director
N. Ganapathy Subramaniam — Chief Operating Officer & Executive Director
Samir Seksaria — Chief Financial Officer
Analysts:
Ankur Rudra — JPMorgan — Analyst
Sandip Agarwal — Edelweiss — Analyst
Kumar Rakesh — BNP Paribas — Analyst
Gaurav Rateria — Morgan Stanley — Analyst
Ravi Menon — Macquarie — Analyst
Sandeep Shah — Equirus Securities — Analyst
Debashish Mazumdar — B&K Securities — Analyst
Dipesh Mehta — Emkay — Analyst
Manik Taneja — JM Financial — Analyst
Apurva Prasad — HDFC Securities — Analyst
Presentation:
Operator
Ladies and gentlemen, good day, and welcome to the TCS earnings conference call. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Mr. Kedar Shirali, Global Head, Investor Relations at TCS. Thank you, and over to you, sir.
Kedar Shirali — Head, Global Investor Relations
Thank you, Stephen. Good evening, and welcome, everyone.
Thank you for joining us today to discuss TCS’ financial results for the first quarter of fiscal year 2023 that ended June 30, 2022. This call is being webcast through our website, and an archive, including the transcript, will be available on the site for the duration of this quarter. The financial statements, quarterly fact sheet and press releases are also available on our website.
Our leadership team is present on this call to discuss our results. We have with us today Mr. Rajesh Gopinathan, Chief Executive Officer and Managing Director.
Rajesh Gopinathan — Chief Executive Officer & Managing Director
Good evening, everyone.
Kedar Shirali — Head, Global Investor Relations
Mr. Ganapathy Subramaniam, Chief Operating Officer and Executive Director.
N. Ganapathy Subramaniam — Chief Operating Officer & Executive Director
Good evening, everyone.
Kedar Shirali — Head, Global Investor Relations
Mr. Samir Seksaria, Chief Financial Officer.
Samir Seksaria — Chief Financial Officer
Hello, everyone.
Kedar Shirali — Head, Global Investor Relations
Unfortunately, Mr. Milind Lakkad, our Chief HR Officer, could not join us today due to a bereavement in his family. Our management team will give a brief overview of the company’s performance, followed by a Q&A session.
As you are aware, we do not provide specific revenue or earnings guidance, and anything said on this call, which reflects our outlook for the future or which could be construed as a forward-looking statement must be reviewed in conjunction with the risks that the company faces. We have outlined these risks in the second slide of the quarterly fact sheet available on our website and mailed out to those who have subscribed to our mailing list.
With that, I’d like to turn the call over to Rajesh.
Rajesh Gopinathan — Chief Executive Officer & Managing Director
Thank you, Kedar, and good morning, good afternoon and good evening to all of you.
Starting out in FY ’23 on a strong note, growing 16.2% in rupee terms, 15.5% in constant currency terms and 10.2% in dollar terms. We announced our salary increases with effect from April 1, reflecting that and other employee costs we incurred in Q1. Our operating margin for the quarter was at 23.1%, a contraction of 1.9% sequentially and 2.4% year-on-year. Net margin was at 18%.
I’ll now invite Samir and NGS to go over different aspects of our performance during the quarter. I’ll step in again later to provide some more color on the demand trends that we are seeing. Over to you, Samir.
Samir Seksaria — Chief Financial Officer
Thank you, Rajesh.
Let me first walk you through the headline numbers. In the first quarter of FY ’23, our revenues grew 15.5% Y-o-Y on a constant currency basis. Reported revenue was INR527.58 billion, a year-on-year growth of 16.2%. In dollar terms, revenue was INR6.78 billion, year-on-year growth of 10.2%.
Let me now go over the financials. As Rajesh mentioned, we announced salary increases of 5% to 8% and much higher for top performers with effect from April 1. This had a 1.5% impact on operating margins, continued supply side challenges entailed additional expenses such as backfilling expenses and higher subcontractor usage. This and normalizing travel expenses, negated various operational efficiencies, resulting in an operating margin of 23.1%, a sequential contraction of 1.9%.
Net income margin was at 18%. Our effective tax rate for the quarter was 25.5%. And our accounts receivable was at 63 days sales outstanding in dollar terms, down 1 day compared to Q4. Net cash from operations was INR108.1 billion, which is a cash conversion of 114%. Free cash flows were INR100.68 billion. Invested funds as of 30th June stood at INR527.6 billion. And the Board has recommended an interim dividend of INR8 per share.
Since Milind is not here today, I take you through the HR numbers now. On the people front, our workflow spent crossed the 600,000 mark this quarter, ending this quarter with 606,331 employees. We continue to hire talent from across the world with a net addition of 14,136. It is a very diverse workforce with 153 nationalities represented and with women making up 35.5% of the base. We remain committed to investing in organic talent development towards building the next-generation GNT workforce. In Q1, TCS clocked 12 million learning hours resulting in the acquisition of 1.7 million competencies. LTM attrition in IT services was at 19.7%, and we think it will rise further in Q2, after which it should start tapering.
Now over to you, NGS for some color on our segments and production platforms.
N. Ganapathy Subramaniam — Chief Operating Officer & Executive Director
Thank you, Samir.
Let me walk you through our segmental performance details third quarter. All the growth numbers are year-on-year constant currency basis. All our verticals showed good growth in Q1. Growth was led by retail and CPG, which grew 25.1% after similar strong growth last quarter. Communications and Media grew 19.6%, while the manufacturing as well as technology and services verticals, both grew 16.4%. BFSI, our largest vertical, grew 13.9%, while Life Sciences and Healthcare grew by 11.9%. By geography, growth was led by North America, which grew 19.1%; UK grew 12.6%; while Continental Europe grew 12.1%.
In emerging markets, India grew by 20.8%; Asia Pacific grew 6.2%; Latin America by 21.6%; and Middle East and Africa grew by 3.2%. Our portfolio of products and platforms continue to do well. ignio, our cognitive automation software suite signed up 28 new customers and had 5 new clients go live — went live during the quarter. In addition, 15 existing clients acquired new licenses of the suite during the quarter. TCS filed 3 patents around ignio during the quarter and was granted one. The market demand for ignio-trained professionals continue to grow. The number of ignio-trained professionals stands at 14,134, while a number of ignio-certified professionals is 4,294 to date.
The global luxury hotel brand has deployed in AI ops to manage digital assets, including hotel content and promotional offers published globally for thousands of properties across many brands. The solution detects anomalies in web properties across all brands, eliminates noise and avert outages in reservation and offers, thereby enhancing customer experience and averting lots of business. TCS BaNCS, our flagship product suite in the financial services domain had 3 new wins and 4 go-lives during the quarter. I’m very pleased to share that recently published IBS Intelligence sales lead table 2022, TCS BaNCS was ranked number 1 in investment and fund management and in fraud management and number 2 worldwide in the areas of insured tech, Islamic banking, wholesale banking, treasury and capital markets.
Our banking service bureau in Israel, which powers the country’s past traditionally bank has won a second client. TCS Insurance platform powered by TCS BaNCS, one of UK’s leading insurance organization has expanded its partnership with TCS Diligenta to launch innovative new products to deliver improved customer experience and drive competitive differentiation using our platform.
Our Quartz Blockchain platform had 2 go-lives in quarter 1. The Quartz smart solutions for bond issuance is now live as one of the leading central securities deposits in India. It facilitates real-time exchange of information among multiple stakeholders issue like issuers, trustees, credit rating agencies, depositories and stock exchanges on a private permissioned blockchain platform. The solution helps eliminate potential double counting of underlying assets and ensures greater transparency and governance the bond issuance life cycle.
In Life Sciences, our award-winning advanced drug development suite had 1 new win, our first client for this suite in Japan. Our hubs suite of solutions for communication service providers had 1 new win and 4 go-lives in Q1. We also launched a new release of Corps Business Assurance, which enables clients to deploy faster and more easily, integrate with real-time data sources, visualize revenue leakages and take corrective actions in near real time.
TCS TwinX, our AI-based digital twin solution had 1 win during this quarter and 1 went live. TCS Optumera, our AI-powered retail merchandising suite had 1 significant win and 3 go-lives. TCS iON continues to expand its presence in the vocational education domain, entering into partnerships with 3 academic institutions, CRISP, Apollo Medical skills and MIT World Peace for Learning Programs. Its TCS National Qualifier Test, which is gaining traction as the preferred entry-level hiring platform for Corporate India has made significant progress over the last one year with over 900 corporate partners at the end of Q1.
Let me now cover our client metrics. Movement of clients up the revenue bands is a clear demonstration of our customer-centric strategy at work. By providing a great experience and building transformational solutions that deliver high-impact outcomes. We gained goodwill and trust, which translates into a steady broadening and deepening of our relationships with our clients. In Q1, we had robust client additions in every revenue bucket compared to the year ago period. We added 9 more clients in the $100 million-plus band, bringing the total to 59. We added 19 more clients in the $50 million-plus band, bringing the total to 124. We added 31 more clients to the $20 million plus brand, bringing the total to 272. We added 41 more clients in the $10 million-plus band, bringing the total to 446. We added 64 more clients in the $5 million-plus band, bringing the total to 650. We added 78 more clients in the $1 million-plus band, bringing the total to 1,196.
Over to you, Rajesh, to give your insights on demand drivers during the quarter.
Rajesh Gopinathan — Chief Executive Officer & Managing Director
Thank you, NGS.
All the demand drivers we have been speaking about for the last 2 years continue to be very much in play. In Q1, we saw plenty of deals in each of these categories, whether it be cloud adoption, operating model transformation, vendor consolidations or G&T engagements. Cloud adoption continues to be a powerful growth driver. We have plenty of deals this quarter once again and more in the pipeline.
Our strong partnerships with the hyperscalers, deep expertise on their platform and our industry-specific solutions and domain knowledge have helped us gain share in this space. As you might have seen already, we won 4 Global Partner awards and 2 Regional Partner awards from Microsoft this quarter. Prior to that, we won 2 Partner of the Year awards from Google Cloud. The full list is published in our earnings press release available on our website.
Let me now spend a little bit of time on the operations transformation opportunity, which is a big contributor to our revenue growth, order book and pipeline. We see 3 distinct trends here. There are more and more clients looking to leverage next-generation technologies to create leaner, agile, resilient and efficient operations with an intent to plow back the savings into the business transformation initiatives. We have been big beneficiaries of this trend. A game changer has been TCS CogniX, our AI-driven human machine collaboration suite, which we launched in 2020. It features a large number of prebuilt, configurable and reusable digital solutions covering a wide range of industries and business functions.
Today, the suite consists of 530 value builders, covering an extensive set of business and technology use cases. Over 267 customers have leveraged CogniX across business and IT operations to drive business outcomes. In Q1, we had 6 new wins featuring CogniX. The second trend is the growing incidence of multiservices integrated deals. By bringing multiple elements of the operation stack such as applications, databases, operating systems and underlying infrastructure, all within the scope of a single service provider. Clients are not only able to drive greater accountability, but also take up transformation programs that are more holistic in nature.
This trend plays to our strength in terms of our structure as well as our ability to bring together different capabilities from across TCS to create a seamless service delivery team. We had 6 new multiservice integrated deals in Q1 versus 2 to 3 deals per quarter in FY ’22. And urgent to these 2 trends is that clients are looking to reduce complexity by bringing down the number of service providers they work with, to few select partners who possess the right innovation capabilities and can scale. We won several large deals in Q1, which we have under consolidation basis.
Let me switch gears and talk about the airline industry, which is no stranger to consolidation. There is an industry level transformation taking place there, designed to make airlines much more competitive and customer-centric. And TCS is playing a big role in helping industry players transform. The airline industry is heavily dependent on ticketing platforms whose legacy proprietary model restrict the airline’s ability to offer new products and services in a direct-to-consumer or D2C model. This is preventing them from establishing competitive differentiation and resulting in an opportunity loss.
To address this problem, the International Air Transportation Association, or IATA, has come out with a new open standard called new distribution capabilities or NDC, which airlines can use to dynamically create first-line offers for customers. This enables the customer-specific bundling of preferences such as number of pieces of chicken, back seat choices, in-flight amenities, refreshments or even in-flight shopping and priced uniquely for sales through their own channels or through third-party aggregators and travel agents. TCS is currently engaged with 3 airlines in implementing NDC and in discussion with a couple more.
For a leading UK-based carrier, which is an early adopter of this initiative, TCS built the end-to-end business process redesign and solution development for NDC adoption. Since deployment, the airlines NDC channel daily bookings have grown 500% contributing to more than 20% of the overall indirect bookings and helping the airline become a digital retailer and personalize the customer’s experience and drive new revenues.
Moving on to the next theme of how TCS is helping clients adopt innovative technology-enabled business models that drive new revenue streams. Let me share 2 examples. TCS has partnered with a senior care arm of a leading US-based provider of long-term care insurance in launching a new line of business and assisted-living marketplace. The platform will allow seekers of long-term care to find the closest assisted living care providers and also offer subscription-based consultation. Using design-thinking approach, TCS help define the product road map and carve the playbook for product positioning and targeting customer base in a competitive market. The new marketplace will be formally launched this month and is targeting 1 million customers over the next 3 years. In addition to driving new subscription-based revenues, the platform will allow the parent company to embed its insurance product in every transaction in the marketplace.
Similarly, a large Fortune 500 electric gas utility has launched a new business model to generate a new revenue stream based on home energy services that is providing warranty, repair, refurbishment and replacement services of home appliances such as air conditioners, washing machines and refrigerators. It partnered with TCS to build the platform needed to enable the service delivery that is central to this new business. We built a new cloud-based field service automation solution based on a third-party platform to provide advanced capabilities in intelligent scheduling, dispatching and mobile workforce management to transform field operations. The new solution has helped significantly improve the predictability of services, enhancing customer experience. It is also highly scalable.
The utility now plans to expand to more states in the next 6 months and achieve $0.5 billion in revenue over the next 24 months. In earlier calls, I’ve given many examples of enterprises partnering with us to achieve their sustainability goals. There are a couple of stories where sustainability is directly linked to revenue growth. TCS is the strategic partner for a global alliance that is focused on decarbonizing the full value chain by helping to transform farming practices globally, promote regenerative farming and generate reliable farm carbon credit on certified climate smart crops.
We have helped them conceptualize the business model and build the enabling digital platform for farmer enablement and adoption. It provides a simple and quick way to onboard farmers and other stakeholders, validates carbon smart practices through analytics, enables the carbon credit declaration by farmers and provides personalized recommendations of best practices. The platform drives revenue for the Alliance of Carbon Credit Trading improves farmer incomes and reduces scope emissions and help the private sector decarbonize.
While in Massachusetts, we partnered with a leading utility to build a platform that would help them roll out the solar Massachusetts renewable target or smart incentive system to accelerate solar power adoption in the state. Consumers who install solar panels and storage on the property and come to the utility grid — utilities grid, qualify to receive a monthly incentive payment directly from the state government.
The TCS Bill solution includes onboarding of new generators, a customer application that helps keep track of the units generated and a pricing engine and a billing system. Using the utility was able to achieve regulatory targets on renewable capacity onboarding on the grid. It was able to enroll more than 10,000 residential customers in the last 12 months and is now expanding the program to other states.
M&A remains the preferred growth strategy for many enterprises. And over the last few years, we have built up a significant business catering to our clients’ need to integrate new entities that they have acquired or divest businesses that are no longer strategic. This quarter 2, we have a few wins in that space. Our global leader in health, Nutrition & Biosciences is building its nutrition portfolio through acquisitions. In 2020, after executing its largest and most complex acquisition in 2 decades, it engaged TCS to help integrate the new entity. Our team helped admission changes to the enterprise model to allow for a seamless integration.
The first phase of integration was completed in Q1 and helped bring on board the new entities, provide common ways of working and delivering synergies. We commonly think of G&T as front-end customer-facing work. But we have plenty of examples of operations transformation that we imagine processes at the back end using digital technologies like AI, resulting in much faster turnaround times, much higher throughput and therefore, more revenue. Let me give you a couple of examples of these.
For a leading global HR services firm, our TCS partner to transform their core recruitment process, leveraging next-generation technologies. Their existing process entail the recruiters spending 60% to 70% of their effort on profile sourcing and screening of which 50% of devoted to candidate outreach. Over half the outreach efforts was wasted due to lack of response and declines.
TCS redesigned the end-to-end equipment process taking a machine first approach. We build bots to automate the background check initiations across clients and deployed a third-party AI-powered candidate outreach platform to significantly bring down recruiter effort and completely streamline the candidate screening process. This resulted in a 300% increase in number of shortlist candidates and a 15% to 20% reduction in turnaround time and most importantly, a 42% increase in hiring throughput, which is directly linked to revenue growth for this company.
Similarly, a large US insurer has engaged TCS to transform its personalized business. The vision is to simplify business processes, modernize the technology side, enable faster launch of new products and product enhancements for greater competitiveness, enhance customer experience and drive profitable growth. TCS helped reimagine and implement significant improvements in pricing, risk assessment, acquisition and servicing of customers using the third-party platform. On completion, the new solution will enable insurance — issuance of a new policy in 8 minutes versus the current 24 hours. It will significantly improve the quality, granularity and timeliness of data and analytics to support better targeting and personalization. The solutions other features are expected to help improve business agility, enhance customer experience and drive growth.
Coming to the Q1 order book. As you know, we had an all-time high order book PCV last quarter. On the back of that, we again had a strong set of deal wins in Q1 amounting to a TCV of $8.2 billion. The deal mix is very heterogeneous with the largest 2 deals being just over $400 million in size. By vertical, BFSI had a TCV of $2.6 billion, while retail order book stood at $1.2 billion. The TCV of deals signed in North America stood at $4.5 billion.
Looking ahead, the strong order book and our pipeline gives a good visibility for the next few months. We have not seen any budget cuts from project deferments so far. In conversations with clients, we see continuing investments in technology. Some clients, particularly in Europe, have expressed concerns about the macroeconomic fallout of the ongoing conflict there. But the predominant sense is that technology spending will be resilient. That said, given the macro level uncertainties, we remain very watchful.
With that, we will open the line for questions. Over to you, Kedar.
Questions and Answers:
Operator
[Operator Instructions] The first question is from the line of Ankur Rudra from JPMorgan.
Ankur Rudra — JPMorgan — Analyst
A few questions for me today. Perhaps Rajesh, could you maybe elaborate on the tone of conversations you had with clients on perhaps new growth in transformation contracts, how has that evolved this quarter? And in addition to that, how do you think the pipeline formation has been? And finally, how do you read the fact or how should we interpret the fact that deal signing that is the growth on a year-over-year basis seems to be sort of flatten out and the book-to-bill ratio seems to be lower than the last couple of years?
Rajesh Gopinathan — Chief Executive Officer & Managing Director
Ankur, as you can imagine, we have been staying very close to our customers, given the overall news flow that we see all around us. We have been at all levels personally reaching out meeting with as many customers as we can. And the generic sense that we’re getting is that at the operating level, the demand scenario continues to be very strong and unabated. There is high visibility to project funding. There is ongoing appetite for continuing investments and in fact, for acceleration. So the demand environment on the immediate basis continues to be very strong. Some conversations at senior executive level CEO, COO level, et cetera.
Obviously, the conversation is more about what we see, what they see overall and whether on the whole macro environment that you spoke about. But that elevated conversation does not seem to be reflecting in the actual budget and the spend. We have not seen any project cancellations, pullbacks, nothing of that sort. And this is across both transformation projects as well as on the optimization projects. So overall — but we are, as you can imagine, staying very vigilant, maximizing contact with customers and taking it on a case-to-case basis and reacting to what we have on hand and maintaining that stance.
Ankur Rudra — JPMorgan — Analyst
Just the second part, if you could run on Rajesh, should investors read anything to the fact that the book-to-bill ratios have dropped a bit this year versus the last 2 years at this time?
Rajesh Gopinathan — Chief Executive Officer & Managing Director
TCV is a forward-looking number. So it is what it is. As I said, I gave you the commentary on what we’re seeing on the field. The actual closures that number is there. I don’t — when we look at our pipeline and the overall trend, I don’t think there’s anything that is alarming for us at $1.2 billion, it is a 1 time, 2 times book to bill, it’s still quite strong. So nothing more in that from our perspective, but we are also seeing very — I think the world is vigilant.
Ankur Rudra — JPMorgan — Analyst
Appreciate good color. Just one question again. Of course, nobody knows the future, but — and I know you’ve always said it like you see it. If we do hit the recession, what are the key points you would look for? And how do you feel about TCS’ position in the market now versus the previous down cycle over the last 2 decades?
Rajesh Gopinathan — Chief Executive Officer & Managing Director
Ankur, we have been continuously investing in improving our strength on both sides of the equation. And that is what we call the twin-engine strategy of cost and optimization and growth and transformation. And the growth in — the transformation part of the agenda is equally applicable on either side of that economic scenario. So from a positioning perspective, we are quite happy with where we are both in terms of capabilities as well as our positioning in the market and our client engagement. And that’s an area that we have been continuously investing in. From an operating perspective, we have built up the capacity. We are well positioned to be able to move rapidly on either direction if things change in any way. So I’m quite confident that our agility is going to be our biggest strength. And also our reputation and our client relationships will come through significantly if there is some uncertainty or any volatility.
Ankur Rudra — JPMorgan — Analyst
And Rajesh, last question on margins, if I can. Were there more headwinds in 1Q than you previously thought and do you think the range of outcomes now for the year looks maybe softer than what you thought a quarter ago?
Rajesh Gopinathan — Chief Executive Officer & Managing Director
Could you repeat that, Ankur? You are saying as far as margin goes?
Ankur Rudra — JPMorgan — Analyst
As far as margins do you think you saw more headwinds in June quarter versus what you thought at the beginning of the quarter in terms of the puts and takes? And how do you think about the rest of the year?
Rajesh Gopinathan — Chief Executive Officer & Managing Director
Nothing different from what we saw in the beginning of the quarter. I think the 2 things that are playing out there, one is the wage increases, which is fairly well understood one. The other is the continuing demand environment and the attrition environment that is leading to the increased operating costs, especially on the employee side. So that on the attrition side, not totally unanticipated but it is continuing. And we think that probably it will take another few more months before it will start to come down. So till then, the margin pressures will continue, but we hope to sequentially improve from where we are given that we have taken that and will hit completely.
Operator
The next question is from the line of Sandip Agarwal from Edelweiss.
Sandip Agarwal — Edelweiss — Analyst
So Rajesh, I have only one question that when you are talking to the senior executives in your client side, do you see that there is an increased recognition in last few quarters that technology is much more core to their business and for their growth and profitability, then it being something which could be contracted or expanded based on the overall environment or based on the company’s performance? The thing I’m trying to understand here is if you see some of the US retailers, they have sounded caution in terms of revenue growth and entire growth. But at the same time, I think that they have to spend in technology to be relevant in the omnichannel mode.
And also, secondly, I think outsourcing is always the most efficient or cost-efficient way of managing things in tough times. So what is your sense on that? Is it really like 2 decades back or 1 decade back when you could contract or expand based on your profit and loss account? Or it is more core to business and you need to achieve the top line numbers you need to spend there. So it is not at all discretionary, what is your sense when you speak to your top line?
Rajesh Gopinathan — Chief Executive Officer & Managing Director
So we’ve been — industry after industry, the primacy of the technology spend continues to increase, and that’s reflected in our conversations with clients at the senior levels also. So there is much greater understanding, much greater appreciation of what the technology agenda is. And more importantly, even the most senior person is fully clued on as to what the technology strategy or the technology-enabled strategy for their companies, respectively. So that awareness and that centrality of that strategy to their overall plans is very high. Having said that, definitely, there is a economy-wide slowdown. It is likely to have some ripple effect across all lines of spend. But resiliency of technology in the overall mix is unlikely to get diluted from where it has been in the last 2 years.
Sandip Agarwal — Edelweiss — Analyst
And one final question on the subcons, we are still seeing significant jumps on a quarter-on-quarter basis. And what I understand is that it may be partly due to attrition numbers going up. So is it purely because of attrition going up? Or it is also related to some restrictions, which were there still in travel side and not been able to replace — not been able to spend the process on time? Or what it is already a sudden demand, sudden start-up projects, what is causing that continuous shift in platform?
Rajesh Gopinathan — Chief Executive Officer & Managing Director
So it’s a combination of all of it. Definitely, attrition has a role and supply constraints into some of the local markets has a role. As also the fact that it is a variable cost. And therefore, it has strategic value to us in an uncertain environment. So all aspects of it play out. And we are keeping a close watch on it. And we will be reacting to it depending on how the demand supply situation plays out.
Operator
The next question is from the line of Kumar Rakesh from BNP Paribas.
Kumar Rakesh — BNP Paribas — Analyst
My first question was again on the margin side. So on the subcon side, practically speaking, suppose we enter into a weak demand scenario. And that is one of the levers, which we potentially have to improve our cost structure. In such a scenario, how much of the subcon benefit we can potentially drive? What I’m trying to understand is how much of our cost or cost impact is coming from subcon currently given the supply constraint, which we are facing.
Samir Seksaria — Chief Financial Officer
Sure. So our subcontractor expenses currently are at 9.7% of our revenues, and they have moved up from about 7,000 levels to where we are currently. And as Rajesh pointed out, we have proactively and strategically invested into creating a bench, and our current priorities are to stay focused on capturing the demand. And we have known how to balance on the subcontractor side. And as the need arises, we’ll be able to realign it or balance that when it’s needed.
Kumar Rakesh — BNP Paribas — Analyst
So what I understand is that we can stabilize it at 7% if the need arises, okay?
Rajesh Gopinathan — Chief Executive Officer & Managing Director
You want to have that, 11?
Samir Seksaria — Chief Financial Officer
Yes.
Kumar Rakesh — BNP Paribas — Analyst
My second question was around the pressure hiring target we had set about 40,000. How we are progressing on that? And has that changed that target?
Rajesh Gopinathan — Chief Executive Officer & Managing Director
No, we are on track for that. And so we are progressing well on it. This quarter, reflecting what we already had in the system. We have been a bit lighter on the one, which typically has been our long-term trend, but Q1 is a lighter quarter for trainee absorption Q2, Q3 as the primary quarters. Last year, we had gone very aggressive and hired through the year to build up more than 100,000 training bench. This year is more normal. So we are progressing well on that 40,000 mark.
Operator
The next question is from the line of Gaurav Rateria from Morgan Stanley.
Gaurav Rateria — Morgan Stanley — Analyst
So first question is with respect to the UK market. If you look at the Y-o-Y growth, it has been actually slowing down, and it’s a clear divergence compared to the North America market, which is continuing to remain very, very strong. So what’s really going on there? Are the trends or the discussions actually fructifying in the form of a little bit of a slowdown in the velocity of the deal closures or the ramp-ups? Any trend there that you can highlight would be helpful.
N. Ganapathy Subramaniam — Chief Operating Officer & Executive Director
Gaurav, NGS here, both in the UK and North American market, we don’t see any anomalies or abnormalities in terms of customer behavior or the deal closure trends and all of this remains normal and in line with typically what we experience. Specifically, in the UK, there have been some concerns about increase in the cost of living the people experience, et cetera. But then it’s all in the macro discussions that we have. But overall, as Rajesh pointed out, customers across our verticals, both in the manufacturing or retail or financial services have not expressed anything, which is something that will cause a concern for us at this moment.
Gaurav Rateria — Morgan Stanley — Analyst
Second question is on the margins. So getting back to 25% looks like an immediate priority. But should one think that from a full year perspective, the margins could remain a tad lower than 25% as it will take some bit of progression to come to 25% over the coming quarters?
Samir Seksaria — Chief Financial Officer
So Gaurav, it has always been the case. Our Q1 margins are subdued when we gave out the full cycle of increments. And we do look forward to flying back during the period. And our target would be to reach and cross 25% as far as possible.
Gaurav Rateria — Morgan Stanley — Analyst
Got it. Lastly, any change in your expectations with respect to price improvements that you were expecting, realization improvement that you were expecting as part of your client conversations a couple of months back that you had highlighted?
Rajesh Gopinathan — Chief Executive Officer & Managing Director
No, it continues to be positive. Rather than large-scale contract level changes, we are seeing more pointed ones on existing contracts and the newer contracts getting some uplift. So we are seeing smaller increases in existing ones and newer contracts coming in at better terms, also existing renewals, certain terms like Olander are much better being able to push through. But the aggregate impact of it is still not positive. So overall realization numbers reflecting that excess capacity and what we have are still negative on a sequential basis.
Operator
The next question is from the line of Ravi Menon from Macquarie.
Ravi Menon — Macquarie — Analyst
Are there any soft spots that you see within the verticals, any verticals that we are seeing in like plan shift towards more efficiency-oriented programs?
Rajesh Gopinathan — Chief Executive Officer & Managing Director
Ravi, nothing at this stage, you can call out at a vertical level.
Ravi Menon — Macquarie — Analyst
We — how do your comments on the press conference, you were talking about how the US will likely be the main driver of growth near term. But I thought that you in your — [Technical Issues]
Rajesh Gopinathan — Chief Executive Officer & Managing Director
What we’re hearing from customers, you’re right that Europe, traditionally when Europe has done badly, we’ve still done much better reflecting that lower market share and our continuous consolidation in that market. What I was mentioning was that when we look at the kind of commentary that we’re hearing from customers in US, the expectation is that is, a, they don’t know when — if there is a recession going to be, when is it going to be and even if it comes, it will be a shallow one, whereas the expectation in Europe is more that it is more a question of time, and it might be much deeper than what the US customers feel. So that change in perception is what we were commenting about that US is the one where the confidence levels are high, the demand environment is likely to stay very robust. How it plays out for us? That will depend on how well we are able to capitalize on both sides of that equation.
Ravi Menon — Macquarie — Analyst
And one follow-up on — I think we’ve talked about the bench quite a bit. We’ve seen strong hiring well ahead of revenue growth for quite some time now but we’ve also seen subcontracting keep going up. So while you’ve been building up capacity and pension. So why is this not really showing up and lower subcontracting? And when should we start seeing revenue growth and headcount growth start converging?
Rajesh Gopinathan — Chief Executive Officer & Managing Director
We think to keep on — see, the subcontractor is not based on — the subcontractor is also based on supply disruptions at a local market level. So that definitely has a role to play as travel opens up, as more normal talent movement opens up, our opportunity to optimize that will also improve. The aggregate bench versus the one will also play out depending on what our long-term view or the medium-term view on demand is. So there are both drivers at play. One is immediate structure of demand and the other is the supply disruption in local markets.
Ravi Menon — Macquarie — Analyst
Right. Sorry, one last thing, and when you said that you should see this normalized, should there also be linked to attrition when we see attritional start coming off? Should we think about the utilization moving up?
Rajesh Gopinathan — Chief Executive Officer & Managing Director
What?
N. Ganapathy Subramaniam — Chief Operating Officer & Executive Director
Traction and utilization moving up?
Rajesh Gopinathan — Chief Executive Officer & Managing Director
Yes. You are saying that as attrition comes down, will utilization move up?
Ravi Menon — Macquarie — Analyst
Right.
Rajesh Gopinathan — Chief Executive Officer & Managing Director
Yes, that’s a reasonable assumption. That’s our technical operating model also when in a high-demand scenario, we first prioritize demand. And attrition is also linked into that. So we’ll see.
Operator
The next question is from the line of Sandeep Shah from Equirus Securities.
Sandeep Shah — Equirus Securities — Analyst
Most of the questions have been answered. Just on Europe, you have discussed about UK. Can you also discuss about Continental Europe because even in last 4 to 5 quarters, the growth in Continental Europe on a sequential basis is a bit lower and softish versus company average. So one can read with the macro concerns or this is more specific to TCS as of —
Rajesh Gopinathan — Chief Executive Officer & Managing Director
Let you to look across, but we are not seeing any significant change to the demand environment in Europe across the board. So 12% is still a decent number. As I said, the commentary that we’re hearing from clients is a bit more mixed in Europe compared to North America. But at an immediate demand basis, we are not seeing anything that is significant.
Sandeep Shah — Equirus Securities — Analyst
Okay. And just a second question with the increasing macro concerns. Some of your global peers are saying clients have also some increasing discussion on outsourcing-led deals, which you also highlighted, Rajesh, in your comments where the multi-tower outsourcing deals are increasing in first quarter versus the last 4 quarters. So is it fair to say that outsourcing that deals can increase and large caps, including you could be a fair beneficiary of this going forward?
Rajesh Gopinathan — Chief Executive Officer & Managing Director
I mean, our twin-engine strategy is essentially predicated on that, that we have relevance in both scenarios. Both consolidation scenario as well as in a growth scenario. So we do believe that our continuous investment in a broad-based set of services and a holistic structure positions us very well to be a single source provider, a single source strategic provider to the client who can actually use that opportunity to drive the transformation and set themselves up for the growth rate also. And that value is what is driving some of those deals that we have described in this quarter.
Sandeep Shah — Equirus Securities — Analyst
Okay. And just a last question, if I can squeeze. Last year, because of attrition and supply side issues, our margin pull off from the first quarter seasonal decline was lower in the second to fourth quarter. One can say we are largely behind. And from 2Q to 4Q of FY ’23, our normal seasonality may start where margin pull off on the upward side could be higher versus what we have seen in FY ’22.
Samir Seksaria — Chief Financial Officer
Yes, that is reasonable to expect. We should see an upward trajectory. That’s our target. Last quarter — I mean, last year, we saw the full impact of supply side playing out, and that’s what played out on the margins as well.
Operator
The next question is from the line of Debashish Mazumdar from B&K Securities.
Debashish Mazumdar — B&K Securities — Analyst
Congrats on a good delivery as —
Operator
Sir, if you can speak closer to the handset, please. Your audio is not audible.
Debashish Mazumdar — B&K Securities — Analyst
Just one small question I need to understand. As far as the margin trajectory is concerned, in a normal year, we see the entry margins are lower than exit margins where are normally higher which was not the case last year. Last year, we started with 25.5%. We ended with 25%. So this year, we are starting with 23.1%. So how confident we are that this 23.1% trajectory will move up from year 1 here on and it is kind of bottoming up?
Samir Seksaria — Chief Financial Officer
So I just responded the same thing to the previous question as well. Our target is we expect that it would be on an increasing trajectory, and that has been the usual trend, except for last year. And our target is that it should improve and we should get closer to what we exited in Q4.
Debashish Mazumdar — B&K Securities — Analyst
Okay. And one more question, if I may. If we see the competition statements around attrition, the quarterly annualized attrition for other competition has kind of coming down — started coming down from Q4 onwards. Whereas for us, the commentary that is steadily currently. So just wanted to get some sense and from the salary hikes, it seems to be the salary hikes are almost similar to the effect that we have given last year, whereas some of our competitions were extremely aggressive in giving salary hike. So just wanted to get some sense that in terms of controlling attrition, I’m not asking about the overall numbers because it is much lower than peers. But in terms of trajectory of controlling attrition, are we think like we are a little behind the curve as compared to others?
Rajesh Gopinathan — Chief Executive Officer & Managing Director
Our employee rewards program is much more holistic than period-to-period, one. And I believe that our employee retention numbers also reflects this holistic employee engagement and total rewards program. So we are quite confident about where we are. You will recall that even at the height of the pandemic, we were the ones who first spoke about the fact that we will not be laying off anybody. We honored all offers. We were the first to announce the salary hikes into the October of that 2020. So our program is not entirely based on what the short-term impacts are, and we’re quite confident and comfortable with what we’re executing. We believe that these numbers will reflect that. So as I said, our expectation is that attrition will start tapering off in the next few months. Next few months being next 3 — 3 months, 4 months, whatever is that time.
Operator
The next question is from the line of Dipesh from Emkay.
Dipesh Mehta — Emkay — Analyst
A couple of questions. Starting with regional market. If I look, our regional market performance remain muted for some time. And even that if one due to calculus in BFSI also remains softer. So if you can provide some sense about how we look at regional market? Second question is about the pressure hiring. And how we look, ’23, we are indicating about 40,000. But considering one year advance, we plan for ’24 also, how we are thinking on that line? What kind of plan we have for next year offer to be made? And last question is about deal pipeline. Any softness or any uptick we are seeing in deal pipeline buildup, if you can comment on that.
N. Ganapathy Subramaniam — Chief Operating Officer & Executive Director
Dipesh, NGS here. Regional markets by definition, it’s volatile and hence, we grouped some of our emerging businesses and emerging market businesses into that bucket, right? But overall, the — if you look at it, how the Asia Pacific markets are functions of the Middle East, Africa market functions. These markets do not provide big opportunities for an annuity-based revenue. They’re all typically project-based revenues. So unless there is always a volatility that is there.
And your second question was with respect to the pressure hiring of 40,000. As Rajesh mentioned, we are —
Dipesh Mehta — Emkay — Analyst
Hiring for FY’24.
N. Ganapathy Subramaniam — Chief Operating Officer & Executive Director
Hiring for FY ’24, yes. So I think we typically start the base at about, let’s say, 40,000 in this year, it’s 40,000 next year is likely to be the demand situation continues. I think we on average, we always start with 40,000, right, as given our size and shape of our business. But then really look at it the last year as well, when we said 40,000. But then when we wanted to hire up to 100,000, our hiring engine was able to do that. So we have that ability and agility to hire people, hire talent. And fortunately, we are able to attract the right talent given our brand, given the opportunities that we offer to our employees.
Dipesh Mehta — Emkay — Analyst
And last question was about deal pipeline build up. Any changes we are seeing there?
N. Ganapathy Subramaniam — Chief Operating Officer & Executive Director
No, we are not seeing any major deviation or abnormalities in that on a book-to-bill ratio of 1.2. We are looking good. And the combination of the pipeline that we are pursuing today across the markets is quite similar to what we have experienced in the previous years. And the type of opportunities are also in line with the demand that we see for the type of technology and it’s a good combination of the both cost and optimization as well as growth and transformation. It also has several large medium as well as smaller deals, good broad-based pipeline that we have. And it’s — now we are happy with what we have been able to put it in the pipeline and then pursuing those opportunities.
Dipesh Mehta — Emkay — Analyst
Understood. And last question, if I can squeeze about on-site salary. Can you quantify what kind of hike we gave for on-site employee this quarter?
N. Ganapathy Subramaniam — Chief Operating Officer & Executive Director
It’s about — on average, it’s about between 4% and 5% is the on-site salary hike that we have seen. But given relevance to the fact that some of the top performers, the increments have been for them and the potential earnout has been quite high based on their performance.
Operator
The next question is from the line of Manik Taneja from JM Financial.
Manik Taneja — JM Financial — Analyst
I had a couple of questions. Number 1 is that you mentioned that some of your senior client executive conversations are suggesting some concerns on the macroeconomic environment. Is that also translating in terms of any potential impact on pricing discussions? That’s question number one. The second thing is that you suggested in the press conference that you would want to stay vigilant through the course of this year. Does this — in the 40,000-odd hiring target for dealer and even if you value —
Operator
Mr. Taneja, sorry, sir, we lost you for the last 10 seconds. If you can just repeat that.
Manik Taneja — JM Financial — Analyst
Sure. I’ll repeat the question. I hope first —
Operator
Sir, your audio is breaking up, may we request you to move to a better reception area, please? No, it’s still breaking up.
Rajesh Gopinathan — Chief Executive Officer & Managing Director
Let me answer the first question. As I said earlier, the macro or the discussions on macro are not getting reflected in any of the actual project contract or deal pipeline currently. And I just gave you that color in terms of the nature of the compensation and how that is different market to market. But we are not seeing any reflection of that at the actual operating and being able.
Manik Taneja — JM Financial — Analyst
Sure. I’ll take another second question, if my voice is audible. So I wanted to understand if you would be looking to revisit the onboarding timelines for the 40,000-odd offers that we made for FY ’23 in — deteriorate?
Rajesh Gopinathan — Chief Executive Officer & Managing Director
No, we do not do that. We honor all offers that we make. We do not defer joining or do any form of such management. Any offer that we make, we honor it based on whatever has been the timeline committed on it. And that’s not part of our philosophy.
Operator
The next question is from the line of Apurva Prasad from HDFC Securities.
Apurva Prasad — HDFC Securities — Analyst
Rajesh, just a couple of quick ones. Most of the others have been covered. So first one is on pricing. Are you seeing any incremental challenges in getting price increase even though that being selective, say, versus the previous quarter. And the second question is on retail and CPG. Are there some early signs of some softness there, and I’m referencing to the TCV number, which has been significantly — the book-to-bill has been significantly higher in the past 3 years, and this is slowing down a lot more?
Rajesh Gopinathan — Chief Executive Officer & Managing Director
No, the pricing, actually, the conversations are picking up momentum rather than losing momentum. So absolutely no reflection there. On retail, those TCV numbers are not there walked by the normal nature of TCV rather than anything else. We are seeing very strong transformation agendas across many retailers, especially grocery and essential retailers where significant transformation programs are getting executed and we see continuing demand. So the TCV is — I mean, the overall, the pipeline is quite strong, and the demand environment also in retail is very strong.
Operator
Ladies and gentlemen, that was the last question for today. I now hand the conference over to the management for the closing comments.
Rajesh Gopinathan — Chief Executive Officer & Managing Director
Thank you.
It has been a good start to the year with 15.5% growth in constant currency. And with all our industry verticals showing good growth, our order book and pipeline is also very strong, giving us good visibility for the next few months. Our margin dipped this quarter due to salary increase and other supply side related costs, but we stay confident in our ability to bring it back to our preferred range over time. On the people front, we continue to hire across all our markets and added over 14,000 employees on a net basis in Q1. Our attrition continues to be elevated at 19.7% in IT services on an LTM basis. This will probably peak next quarter and then start tapering off.
With that, we’ll wrap up our call. Thank you all for joining us on this call today. Enjoy the rest of your evening or day and stay safe.
Operator
[Operator Closing Remarks]