Tata Consultancy Services Ltd (TCS) Q1 FY24 Earnings Concall Transcript

Tata Consultancy Services Ltd (NSE: TCS) Q1 FY24 Earnings Concall dated Jul. 12, 2023

Corporate Participants:

Kedar Shirali — Vice President and Global Head, Investor and Analyst Relations

K. Krithivasan — Chief Executive Officer and Managing Director

N. Ganapathy Subramaniam — Chief Operating Officer and Executive Director

Samir Seksaria — Chief Financial Officer

Milind Lakkad — Executive Vice President and Global Head, Human Resources

Analysts:

Sudheer Guntupalli — Kotak Mahindra Asset Management Companies Limited — Analyst

Apurva Prasad — HDFC Securities — Analyst

Mukul Garg — Motilal Oswal Financial Services — Analyst

Kumar Rakesh — BNP Paribas — Analyst

Gaurav Rateria — Morgan Stanley — Analyst

Ravi Menon — Macquarie Group — Analyst

Rahul Jain — Dolat Capital Market Private Ltd. — Analyst

Vibhor Singhal — Nuvama Equities — Analyst

Ankur Rudra — JP Morgan — 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 — Vice President and Global Head, Investor & Analyst Relations

Thank you operator. Good evening and welcome, everyone. Thank you for joining us today to discuss TCS’ financial results for the first quarter of fiscal year 2024 that ended June 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 quarter. The financial statements, quarterly factsheet 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.

K. Krithivasan — Chief Executive Officer & Managing Director

Hi. Good evening, good morning to everyone.

Kedar Shirali — Vice President and Global Head, Investor & Analyst Relations

Mr. N. G. Subramaniam, Chief Operating Officer and Executive Director.

N. Ganapathy Subramaniam — Chief Operating Officer and Executive Director

Hello, everyone.

Kedar Shirali — Vice President and Global Head, Investor & Analyst Relations

Mr. Samir Seksaria, Chief Financial Officer.

Samir Seksaria — Chief Financial Officer

Hello, everyone.

Kedar Shirali — Vice President and Global Head, Investor & Analyst Relations

Mr. Milind Lakkad, Chief HR Officer.

Milind Lakkad — Executive Vice President and Global Head, Human Resources

Hi, everyone.

Kedar Shirali — Vice President and Global Head, Investor & Analyst Relations

Our management team will give a brief overview of the company’s performance followed by a Q&A session. As you’re 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 factsheet available on our website and emailed out to those who have subscribed to our mailing list.

With that, I’d like to turn the call over to Krithi.

K. Krithivasan — Chief Executive Officer & Managing Director

Thank you, Kedar. Once again, good morning, good afternoon, and good evening to all of you. I’ll respond to start by saying how happy I am to be interacting with all off in [Indecipherable]. And I would like to — hoping to meet you all in-person sometime in Q2. From a quarterly perspective, it is very satisfying to start the New Year, [Indecipherable] and the good performance given the current circumstances. In Q1 our revenue grew 12.6% in rupee terms, 7% in constant currency terms and 6.6% in dollar terms. Our operating margin was 23.2% and net margin was at 18.6%.

I will now invite Samir [Indecipherable] NGS to go over different aspects of our performance during the quarter. I’ll step in later to provide more color on the demand trends we are seeing. Over to you, Samir.

Samir Seksaria — Chief Financial Officer

Thank you, Krithi. In the first quarter of FY ’24 our revenue was INR59,381 crores, which is a Y-o-Y growth of 12.6%. In dollar terms, revenue was $7.226 billion a growth of 6.6%. In constant currency our revenue grew in Q1 at 7%. Let me now go over the financial performance. As in prior year, we rolled out the salary increase across the entire workforce, with effect from April 1, resulting in a margin impact of 2 percentage points. By reducing our use of subcontractors and through other efficiency, we were able to mitigate some of the — that impact and report an operating margin of 23.2%, a contraction of 1.3% sequentially, and an expansion of 10 basis points year-on-year.

Net income margin in Q1 was 18.6%. Our EPS grew 16.8% year-on-year, effective tax rate nudged up slightly to 25.8%. Our accounts receivable was at $65 DSO in dollar terms, flat sequentially. Net cash from operations was INR113 [Technical Issues]. The Board has recommended an interim dividend of INR9 per share.

Over to you, Milind.

Milind Lakkad — Executive Vice President and Global Head, Human Resources

Thank you, Samir. Our workforce at the end of the first quarter was 615,318, a net addition of 523. While we are committed to honoring all the job offers we have made our focus currently is on leveraging the capacity we had built earlier. Our workforce continues to be very diverse, with 154 nationalities represented and with women making 35.8% of the base. We remain focused on developing, retaining and rewarding the best talent of our industry and enhancing their effectiveness by bringing them back to office to pursue our culture. Our return to office initiative is picking pace and 55% of our workforce attending office [Indecipherable].

Towards driving a more performance-focused work culture, we rolled out certain increases of 8% to 10% for high performance and 12% to 15% for exceptional performance following our annual compensation review. Our investment in organic talent development continues to deliver exceptional outcomes. Year-to-date TCS has locked 12.7 million hours and acquiring 1.3 million competencies, including 180,000 higher demand competence. LTM attrition in IT services was at 17.8%, down 2.3% sequentially. Based on the current trend, we expect that in the second half of the year our LTM attrition will be back in our normal longer term range, which has historically been an industry benchmark for talent retention.

Over to you NGS for some color on our segments and product.

N. Ganapathy Subramaniam — Chief Operating Officer and Executive Director

Thank you, Milind. Let me go through some of the segmental performance details of this quarter. I would to also note that all growth numbers are on a year-on-year constant currency basis. Last quarter we had called out the growing caution among the clients resulting in deferment in process and discretionary projects particularly in North America and Europe and that has continued in this quarter. Growth among industry verticals was led by life sciences and healthcare, which grew 10.1%. Manufacturing grew by 9.4%. Other verticals showed some softness. BFSI grew 3%. Retail and CPG grew 5.3%. Tech and Services grew 4.4%. And Communications and Media grew by 50 basis points.

In terms of geography, we see maximum caution in North America and Continental Europe, which grew 4.6% and 3.4% respectively. We continue to have good momentum in the United Kingdom where we grew by 16.1%. Among emerging markets, India grew by 14%. Asia Pacific grew by 4.7%. Latin America grew by 13.5% and Middle East-Africa by 15.2%. Our industry-leading portfolio of products and platforms had a very strong quarter. Ignio, our cognitive automation software suite saw 37 new deal wins. There are about 26 go-lives in [Indecipherable]. We continue to strengthen our cloud ops offering by expanding coverage across all three major hyperscalers; launched a FinOps module to help customers analyze and optimize their cloud spending.

Digital scientists are collaborating with TCS research and innovation to leverage large language models to further enhance ignio’s predictive automation capabilities. TCS BaNCS, our flagship product suite for the financial services had seven new wins and eight go-lives during the quarter. The deal wins were well distributed across developed and emerging markets and in banking, capital markets and insurance. Among the go-lives, a high profile one was the trading platform that went live successfully for trading, clearing and settlement at MSC International Financial Services [Indecipherable] connect at International Financial Services Center in the GIFT City.

Went live during this quarter, by which the Singaporean and Indian capital markets can work seamlessly on dollar-denominated NIFTY derivative contracts. TCS BaNCS insurance platform also saw excellent traction in Q1 with three new wins and four go-lives during the quarter. We already published the details of the deals with NEST, TCS Pension Fund and Standard Life International so I won’t repeat them here. However, it is worth highlighting that the Standard Life International deal marks our entry into Continental Europe, extending our platform and services footprint to meet the needs of the German and Austrian markets to begin with and thereafter the other markets in Europe.

Quartz Blockchain Platform had one go-live this quarter. In Life Sciences, TCS had our advanced drug development platform, had two go-lives this quarter. TCS ADD Safety went live at Top 10 UK-based pharmaceutical company to read and process adverse event cases. With this, TCS ADD has successfully automated over 70,000 worst event cases, including clinical trials as well as post-marketing cases. TCS OmniStore or AI-powered Universal Commerce Suite had one new win and one go-live during the quarter. TCS HOBS, our suite of products for communication service providers, had one new win and one go-live during the quarter.

TCS TwinX, our digital twin solution had four wins and one go-live. TCS iON had 25 new wins and 23 go-lives. In Q1 our platform administered assessments for 18.2 million candidates, 72% higher year-on-year. Over 2,400 corporates now leverage TCS National Qualifier Test for their entry-level recruitment. MasterCraft and Jile won 30 new clients in Q1. Let me now go over prime metrics. The steady increase in the number of clients in every revenue bucket is the ultimate validation of our customer-centric strategy. The superior outcomes that we deliver result in a steady stream of repeat business and invitations from clients to transform newer parts of their business.

This is the secret of the long and enduring customer relationships that we have been able to build. In Q1, we added one more client year-on-year in the $100 million band, bringing the total to 60; 13 more clients in the $50 million band, bringing the total to 137; 24 more clients in the $20 million plus band, bringing the total to 296; 22 more clients in the $10 million band bringing the total to 468; 27 more clients in the $5 million plus band, bringing the total to 677; and 72 more clients in the $1 million plus band, bringing the total to 1,258.

I will now request Krithi to speak on the demand drivers during the quarter.

K. Krithivasan — Chief Executive Officer & Managing Director

Thank you, NGS. As NGS called out in his commentary, macroeconomic uncertainties have resulted in greater caution among clients. Clients were taking a month-on-month approach, resulting in very limited visibility on their future spending even within their own organizations. On the discretionary side, while larger transformation programs like cloud migration are continuing apace some of the smaller programs or sub-programs are coming under scrutiny. We continue to see re-prioritization of projects in favor of those which are considered business critical and where ROI realization is likely faster.

This is disrupting the normal flow of work in the form of an uninterrupted series of related projects executed one after the other. Long-running discretionary projects, typically CTB in nature, clients have scheduled some quarters ago under different circumstances, are now coming in with reduced scope or reduced base. This is what is resulting in some revenue softness across most of our industry verticals, even though our order book has been very strong in the last couple of quarters and there has been no problem in their conversion to revenue. At an overall level, given the uncertain macroeconomic outlook, we see strong client interest in cost optimization, vendor consolidation, and integrated operations.

That said, the flavor of the quarter was Generative AI. In every conversation I have had with the clients over the last three months, this has unfailingly come out. Gen AI promises to transform [Indecipherable] by assisting and augmenting people and improving their productivity. Over the last two quarters, we have engaged with multiple customers using our Co-Innovation Framework in exploring use cases for Generative AI across productivity improvement, content creation, and enhancing customer interactions. We are currently working on over 50 proof-of-concepts and pilots and have more than 100 opportunities in the pipeline.

Let me give you three examples. We are working with a leading European shipping and logistics company to automate their contract administration using Generative AI, significantly improving productivity and enhancing business outcomes. For an energy utility on the West Coast, TCS is engaged in transforming their services corporations using Generative AI to enhance self-service, improve the quality of service, and drive customer satisfaction. This is being enabled via conversational services chatbots augmented with Generative AI capabilities to provide precise, contextual, and personalized responses to user queries and issues based on knowledge articles.

Generative AI is also being used to automate the call quality, audit function for assessing and evaluating against interactions with the customers and providing recommendations for improvement. For a global provider of travel insurance and assistance, TCS is engaged in a pilot project to transform customer service leveraging Generative AI. This will enable the customers to get highly contextualized and precise responses to any queries that they may have on travel insurance policies, especially about the terms and conditions. The solution would manifest as a self-service multilingual chatbot to which users can post questions about a travel policy in a natural conversational style.

Unlike traditional chatbots, the Gen AI bot, can understand nuances in the question and respond with specificity and personalized to user context. Generative AI will be used to also respond to queries received or email. This is expected to result in reduced agent handling time, substantial productivity gains, and improved quality and consistency of responses. The excitement around the new technology apart our point of view is that the full potential of Generative AI is best realized through a holistic enterprise-wide initiative encompassing business, legal risk, and compliance, research and innovation as done through multiple point solutions.

We have launched an advisory offering to help customers in creating a holistic vision, strategy, and plan for enterprise-wide adoption of Generative AI. Additionally, we have started talent development at scale across multiple Gen AI Solutions fields in partnership with the Hyperscalers. We plan to create a talent pool of over 100,000 Gen AI trained Associates. On AI/ML, this will build on the tremendous depth we have in the predictive AI, predictive AI, machine learning, and advanced analytics which we have been using in the last few years to build transformational solutions that can recognize patterns across large datasets, make recommendations, and personalize customer experience.

Today, we have over 50,000 TCSers trained in AI/ML solution building skills with over 9,000 with top external certifications. We have market-leading products like ignio, Optumera, ADD and TwinX, which use AI and ML to transform their respective domains. We have filed over 710 patents for AI invention in the past five — just past five years. 282 of them have already been granted. Two examples of recent engagements will give you a flavor of the business impact that AI-powered solutions can have. A Belgian provider of connectivity and digital services leveraged TCS consulting and advisory capability to shift from cost-plus pricing to intelligent pricing within its ICT business.

TCS delivered a differentiated approach, integrating data from multiple sources to extract meaningful insights from historical data and an AI-driven dynamic pricing mechanism on an opportunity-by-opportunity basis that also incorporated anomaly detection. The solution has already uncovered significant money left on the table that runs into multi-million dollars enabling revenue growth and profitability. For [Indecipherable] incorporated in North America, TCS successfully delivered a strategic engagement to identify and reduce global warranty noncompliance. Leveraging contextual knowledge, in-depth understanding of the warranty function, and working closely with the business team, TCS has built a solution that uses pattern detection and automation through advanced analytics and AI/ML to shift the detection mechanism early in the process.

This initiative will potentially save millions of dollars per year for [Indecipherable]. A well-governed and robust data foundation is a prerequisite for enterprise adoption of AI. Consequently, as part of the horizon One Cloud transformation, many clients are also modernizing their data estates. We have extensive experience in this area and a strong portfolio of intellectual properties that has helped us to gain share in this opportunity. TCS Data is an advisory framework to help clients assess the data maturity and define a holistic data analytics and AI strategy aligned to their business goals. We also have TCS Daezmo that helps clients speed up data modernization initiatives with a host of accelerators and methodologies to improve project outcomes.

And then we have DeXAM, our data exchange and marketplace solution platform to help clients democratize, monetize, and commercialize cross-functional enterprise data through private or internal data marketplaces. Let me share a few examples of recent data modernization engagements. A global leader in water hygiene, energy technologies, and services partnered with TCS to modernize and migrate its master data landscape to the cloud. TCS uses domain and technical expertise to deliver a modern SaaS, AI/ML, and cloud-native solution that enables near real-time integration with its core ERP systems to improve performance, usability, and scalability while reducing cost of ownership and technical debt.

The solution enables seamless integration, interoperability across various business systems, empowering teams to make data-driven decisions and provide a strong foundation for future AI-based solutions. A U.S.-based provider of connected vehicle services chose TCS as its strategic partner to enable its data monetization strategy to drive growth. TCS leveraged its proprietary data and framework to build a data platform on a public cloud which served as a single source of [Indecipherable] for data on subscribers, vehicles, and other vehicle telematics. With real-time data ingestion and advanced analytical capabilities, the client now has a centralized repository of a very large dataset that can be monetized through AI/ML.

A UAE-based market infrastructure institution engaged TCS to build a centralized data warehouse to house all the data generated by the cybersecurity software and appliances in the enterprise so that they can be effectively monitored, assessed, reported, and acted upon to reduce security threats and vulnerabilities. The TCS solution stitches together technologies of multiple providers to provide on-demand scalability and traceability through a centralized framework. This has resulted in reduction of security vulnerabilities by 5% to 10% and enabled 2x faster onboarding of newer services. Most importantly, with all the cybersecurity data hosted centrally, it is now possible for the client to use AI/ML to sift through those vast amounts of data to help analysts prioritize [Indecipherable].

Moving on to cybersecurity, as we have pointed out in prior earning calls, this has been an area of fast growth for us. Let me share a few success stories in this area. Bane NOR, a Norwegian state-owned company responsible for owning, maintaining, operating, and developing the National Railway Network selected TCS to help move to a newer and more advanced identity and access management solution. TCS facilitated an organization-wide assessment of the IAM estate and leveraged its domain and technology expertise to craft a new unique solution that will help Bane NOR secure its complex and critical IAM and reduce risks. A leading supplier of rail-based transportation services engaged TCS to improve the security posture and reduce cyber risk.

The TCS solution stitched together firewalls, proxy services, endpoint protection, SOC, and vulnerability management to help the client achieve high cybersecurity standards. In addition, TCS is running the cybersecurity operation for the client in a managed services model. A European technology leader in electrification and automation engaged TCS for transforming their Privileged Access Management to protect their large server estate across hybrid cloud as part of the stringent SOX compliance mandate. TCS managed and successfully delivered the plant transformation, helping the client clear rigorous SOX audit control checks from third-party auditors with no significant deficiency for the first time in three years.

This established a robust foundation of plant and gave the clients sufficient confidence to expand it to other critical infrastructure and applications. Moving on to growth and transformation, we continue to see clients invest in business-critical transformational programs that will drive growth. A leading UK-based global beverage company partnered with TCS to accelerate growth with a B2B digital commerce platform. TCS helped design and deploy a bespoke solution that strengthens customer relationships across every touchpoint and provides world-class digital experiences for customer engagement. The new system also improves commercial execution with 360-degree views of customers and insights on customer behavior, enabling tailored content and communication for targeted customers.

Its 24×7 self-service has reduced dependency on the sales rep, increased net sales value, and significantly reduced [Indecipherable]. A U.S.-based industrial equipment rental company engaged TCS as its strategic partner to enable new services and revenue streams through equipment servitization. TCS leveraged its Bring Life to Things IoT transformation framework to build a hybrid cloud-based IoT platform as a digital spine of the company’s remote operations center. The platform collects field usage data, coordinates maintenance, and tracks availability of the assets that are rented out. This data is used to provide real-time asset performance insights that can help end customers avoid work stoppages, reduce maintenance costs, and improve asset utilization.

Our client not only gains incremental revenue for these value-added services but also a competitive edge in the market. Lastly, we continue to see strong traction in operating model transformation. We have described in prior calls how these transformations entail the redesign of all the processes, embedding next-generation technologies like machine vision, AI and machine learning to boost velocity, improve operational resilience, and drive efficiency. Another aspect of these transformations that business leaders like very much is the TCS integrated operations model with AI powered business command center, which provides them with end-to-end visibility and holistic control across backend, middle layer, and frontend operations, along with the underlying applications and data estates and the IT infrastructure layer. This enables better alignment with business KPIs, enables faster resolution of issues, and greater resilience in operations.

Faced with multiple challenges in their supply chain and IT landscape, the U.S.-based healthcare distributor engaged TCS as a strategic partner to transform their operating model. Their IT tool systems and processes were fragmented and they had multiple service providers supporting the right infrastructure and business applications. This fragmentation resulted in lack of traceability whenever there was any system failure. Any issue potentially meant some trucks somewhere in the supply chain got delayed to four to five hours, impacting the delivery of drugs. A significant portion of the ticket resolution time was spent in just identifying the stakeholder responsible for the issue.

We integrated their different IT service management tools into one modern platform, consolidated their service desk into one integrated team supporting all the business applications and the supporting infrastructure and implemented persona-based solutions for better user experience. We deployed our machine first delivery model leveraging multiple AI/ML based value builders from the TCS Cognix suite of solutions to transform the processes. All this has helped reduce supply chain disruptions, improved the drug delivery fulfillment and enhance their supply chain effectiveness. A large U.S. based information management company partnered with TCS to digitally transform their CFO operation.

Here too we deployed a new operating model that integrated the business processes and IT support operations using TCS Cognix and Process Mining to redesign the processes. By integrating the support teams and monitoring performance holistically, planning business operations, IT applications, infrastructure support, we have helped the client enhance operational resilience and velocity, helping improve free cash flow and working capital. Moving on to order book; we had a strong order book in Q1 with the TCV of $10.2 billion, a book-to-bill ratio of 1.4. In rapid succession, we won two deals in the UK public sector from Teachers Pension Fund and NEST and one from Standard Life DAC, reinforcing our leadership in the UK life and pensions market.

While the details of the NEST win are already in the public domain, including in our press release, I thought it is worth sharing an interesting detail mentioned in the standard document available in the public domain. NEST commissioned a broad market assessment from PricewaterhouseCoopers to understand whether there is competition in the market capable of meeting NEST requirement for technical experience. PwC’s expert conclusion was that apart from TCS, there was no single supplier or consortium in the market now or in the short-term assessed over the next 12 months who could meet these requirements. Coming back to our Q1 order book, [Indecipherable] was at $3 billion, while the retail order book was at $1.2 billion. The TCV of deals signed in North America stood at $5.2 billion.

With that, we can open the lines for questions.

Questions and Answers:

Operator

Thank you very much. [Operator Instructions] We have our first question from the line of Sudheer Guntupalli from Kotak Mahindra. Please go ahead.

Sudheer Guntupalli — Kotak Mahindra Asset Management Companies Limited — Analyst

Yeah, hi, Krithi, congrats and all the best once again, sir, on your new innings. Just a couple of questions. Last time when we announced the results, the banking crisis in America and Europe was just cooking. Now, is this issue still being referenced to by clients as a concern, or is this subject largely behind based on your client conversations?

K. Krithivasan — Chief Executive Officer & Managing Director

We don’t hear about this topic much. I would say that that’s largely behind us. In fact, the large banks who are our primary customers, who are net beneficiaries, we don’t hear this as a concern anymore Sudheer.

Sudheer Guntupalli — Kotak Mahindra Asset Management Companies Limited — Analyst

And we understand that predicting macro six, nine months down the line may be tricky at this point, but given that this was a major panic or stress factor in the last quarter, is it fair to assume that September quarter will see a decent growth, unlike June, which remained flattish despite the seasonal strength? I know you don’t give quarterly guidance, but directionally, is that a fair assumption?

K. Krithivasan — Chief Executive Officer & Managing Director

You said we don’t give quarterly guidance. I don’t want to say anything on Q2 Sudheer.

Sudheer Guntupalli — Kotak Mahindra Asset Management Companies Limited — Analyst

Sure, sir. Just one last question — two consecutive quarters of strong deal booking despite the weak market not even including the BSNL deal and this quarter execution also largely played out in line with your expectations. And we are seeing the market situation improve a bit, especially regarding this one panic factor. And you’re saying the pipeline is strong. So how do we reconcile it with your tone in general on the demand situation? Is there a bit of conservatism you’re baking in, in your tone as they provide buffer for any unexpected shock, especially since you have just taken charge?

K. Krithivasan — Chief Executive Officer & Managing Director

No, no, like we are not being conservative or optimistic here. We are telling what we are seeing in the market, and as we explained earlier also in the call itself, while the demand is still good, we are winning new deals, but the clients are reviewing the projects underway and wherever there is an ROI is not very strong, the next phase of the project is getting paused. So that’s the reason that where we find that revenue dropage happens for revenue side. Otherwise, we don’t see a long-term perspective we don’t see any issue with the demand for technology or investment on technology.

Sudheer Guntupalli — Kotak Mahindra Asset Management Companies Limited — Analyst

Thank you, sir. That’s it from my side. All the best.

Operator

Thank you. We have our next question from the line of Apurva Prasad from HDFC Securities. Please go ahead.

Apurva Prasad — HDFC Securities — Analyst

Thanks for taking my question. Krithi, so after two quarters of $10 million plus TCV, just wanted some more understanding on your media comment earlier when you said long-term is good, short-term cannot call. So is that based on more client-specific factors or deals deferred earlier have seen more cancellations in the near term? So essentially, what I’m asking is the softness of the project prioritization that you referred to, has that become more broad-based across clients or has that become more concentrated within the pocket?

K. Krithivasan — Chief Executive Officer & Managing Director

See, excepting one or two specific [Indecipherable], I won’t say this is concentrated. It is probably we see this trend like it could be varying from one account to another in terms of how much of the impact is. But the fact that there is a review and reassessment of the project, I would say that trend itself is broad-based, but it could be like how much per given client causes the projects or delays it versus others could be different. It could depend on the individual situation also. Like I was telling in the media interaction, for instance, if you look at the U.S. banking, large U.S. banks are still doing good, we don’t see a major problem there. So to some extent depends on the industry also, Apurva.

Apurva Prasad — HDFC Securities — Analyst

Okay. And my other question, Samir, on the operational front, what are some of the near-term levers that you have, especially when operating leverage impact is lower due to softer growth?

Samir Seksaria — Chief Financial Officer

Sure. Actually, we will continue to use levers like utilization. I’ve called out that utilization still has scope for improvement, and it continues to have productivity and realization becomes the other levers. And some of our discretionary spend is now at a critical mass where we can start looking at optimizing them as well. So these would be the primary levers.

Apurva Prasad — HDFC Securities — Analyst

Thank you.

Operator

Thank you. We have our next question from the line of Mukul Garg from Motilal Oswal Financial Services. Please go ahead.

Mukul Garg — Motilal Oswal Financial Services — Analyst

Thank you. Couple of questions from my side. Krithi, first on the nature of pauses which you guys have started seeing, what are you hearing from your clients in terms of what are the signs they are kind of looking for which can make them change their view on these pauses or kind of push-outs? Is this something which people will still have patience for — sometime before they start kind of pulling back up in terms of their tech spending, or do you think the uncertainty being where there it is, if things don’t worsen materially, the demand can come back on a short-term notice?

K. Krithivasan — Chief Executive Officer & Managing Director

So, Mukul, like you also mentioned, it is the uncertainty, near-term uncertainty, which is causing them to relook at the programs and pause them wherever they think the ROI is not strong or it’s going to take longer time. And once the uncertainty is lifted, like they have clarity on more long-term outlook in terms of where there will be growth or what they should be doing, we would see a certain class of projects, either cost and optimization or transformation projects picking up the momentum. But obviously, we cannot say when the uncertainty will be clear. So I would believe that till the uncertainty exists, there would be a cautionary approach towards investments.

Mukul Garg — Motilal Oswal Financial Services — Analyst

Sure. And, Krithi, one question on this Generative AI, obviously you have spoke a lot about it, but how should we realistically expect to see the impact of all the work that you are doing from a two- to three-year window? Is this something which will help you accelerate your revenue growth, or should we see this more as a defensive move which will help you defend your revenues because there’s a bit of a deflationary nature to the Gen AI deployment or is this something which will play out more on the talent side and structurally moderate the pace of [Indecipherable] addition?

N. Ganapathy Subramaniam — Chief Operating Officer and Executive Director

Mukul, this is NGS here. I think all of the things that you said will play out. You need to be looking at all these dimensions, right? But I think what is interesting for us is the fact that it can deliver things faster. And the whole time-to-market element would be completely redefined, right? Newer benchmarks could emerge, right, in terms of predictability of the overall software quality processes. Everything can improve, right? Will it mean that we will need less people? It’s something that we will have to evaluate, but in all the technology adoptions in the past that we have seen, it has only increased the volume of work and thereby actually, we needed more expertise and more hands to do the heavy lifting that people really look for, right?

So from that perspective, it’s a very, very interesting technology. And a lot of evaluations are going on at the enterprise level. And the other thing is that look, the whole cost model of it, how much is it going to cost me to embrace Generative AI, right? How people are going to price it, right, is a very interesting proposition that everybody is looking at. Currently, every token is getting priced, right? So how much is it going to cost me to embrace Generative AI in my overarching things that I want to accomplish across technology and operation is also something that will be taken and played out, right?

So I think there are a lot of opportunities for us in structuring our own way of delivering, our own improvement to the value propositions that we can offer embedding Generative AI. But overall, it’s going to be very interesting — interesting to see how industries are going to embrace it and given their own experience on cloud and the angst around how the cloud cost itself in terms of consumption cost is emerging.

Mukul Garg — Motilal Oswal Financial Services — Analyst

Sure. Thanks a lot for taking the question and best of luck for the remainder of the year.

Operator

Thank you. We have our next question from the line of Kumar Rakesh from BNP Paribas. Please go ahead.

Kumar Rakesh — BNP Paribas — Analyst

Hi, good evening. Thank you for taking my question. Just an extension of the Generative AI discussion we were having just now. So while you definitely talked a lot about the demand opportunity for the customers, I understand you are also running multiple projects internally as well to assess AI-augmented processes, how they are going to save costs or productivity for you. Can you share some of the details on that? And is that a possibility that our own productivity benefits within TCS could start growing much ahead of the revenue opportunity from Generative AI comes through eventually?

N. Ganapathy Subramaniam — Chief Operating Officer and Executive Director

Rakesh, NGS again, and it’s difficult to call out some of this. But suffice to say that there are multiple teams in almost every verticals that we have — pilots, their internal projects and how do we wrap the methodologies and toolkits to be meaningful to our clients using this technology. All this is going on and as we called out earlier, there are at least about 50 projects that we are executing. Some are small, some are large. And I think one of the nice things to see is that, look, this particular organization has an ability to predict one or two parameters which will create the maximum business impact for them. If that can be focused upon using this technology, I think that will create maximum impact.

I mentioned about, for example, if someone can predict, if the technology can predict let’s say the container price three quarters down the line, then it could be a boon for the shipping industry. So it’s problems such as that, and how do you improve or increase the yield per acre of agricultural commodities, right? Some of these things, and specifically mashing with climate technologies or climate parameters that one has, which will have their one predicting features they all will contribute to the interdisciplinary nature of the solutions that we need to deliver, right? So there is a lot of work going on in the industry and within the research and innovation team of TCS. I think you have a couple of quarters down the line maybe we’ll be able to give you more.

Kumar Rakesh — BNP Paribas — Analyst

Thanks a lot NGS for that. Definitely quite exciting use cases there. Samir, during media interaction, you talked about clawing back some of the margin in the coming quarters. So how do you see the trajectory of the clawback? Will it be similar to what we saw last year, or are there higher tailwinds or headwinds this year as we move in the coming quarters?

Samir Seksaria — Chief Financial Officer

So that’s typical of how it happens in the year, in a typical year for us because we take the biggest headwind, which is the agreement upfront, and what I called out is we typically clawback overall through the period. As you see the macro environment and the uncertainties around it that is where it would be difficult in terms of — to put across how exactly it will play out. But our focus would be to incrementally get closer to the aspirational bandwidth we have and improve through the quarters and through — exit at a higher rate through the year.

Kumar Rakesh — BNP Paribas — Analyst

Got it. Thank you, Samir.

Operator

Thank you. We have our next question from the line of Gaurav Rateria from Morgan Stanley. Please go ahead.

Gaurav Rateria — Morgan Stanley — Analyst

Hi, thank you for taking my question. I have a few. Firstly, let us know if the understanding is correct. You entered the last, like, 1Q with softness owing to events that played out in the month of March, especially in the U.S. on banking side. And then you built momentum through the quarter to deliver what you delivered. Is it fair to say that you are entering now this quarter, 2Q, with slightly better momentum and better visibility than you did in the last quarter?

K. Krithivasan — Chief Executive Officer & Managing Director

Gaurav, that’s very difficult to say. I don’t want to venture into saying something like we have better visibility, better momentum at this time. I would say it’s been very similar to what we saw in March, okay? I wish I can say that we are in a much better place, but I don’t want to give that optimism at this time now.

Gaurav Rateria — Morgan Stanley — Analyst

Sorry, second question around two very strong quarters of TCV. Now, based on the deal ramp schedule, does this provide you greater visibility of second half versus the first half?

K. Krithivasan — Chief Executive Officer & Managing Director

No, I said like our second half would depend on what happens in Q2 and how the momentum further builds over that. So, I don’t believe that we are ready to call that second half is going to be better than the first half. It’s too early at this time.

Gaurav Rateria — Morgan Stanley — Analyst

Got it. Last question. Any particular investments on the consulting side to leverage the demand that you are kind of seeing from Generative AI projects? As you talked about that a lot of organizations want to go to the consulting mode and not look at necessarily on a silo basis. And also investments on the delivery side, which could kind of help you to benefit from these technologies. Thank you.

K. Krithivasan — Chief Executive Officer & Managing Director

Gaurav. As we mentioned, we are approaching it from multiple angles. We are building our in-house capability. We have our R&A team that’s working on developing patents and very unique capabilities. We are leveraging our contextual masters because we want to marry the technology capability with the domain capability to deliver services. We are striking partnerships with all the hyperscalers. And then we are training. We committed to train 100,000 of our associates to be capable of leveraging this technology so all these are investments. In terms of any other investment, we also constantly look for new partnerships and other kinds of investment constantly. As something comes up, we will definitely go forward and make those investments. But at this time, our investments are more in terms of ensuring our associates and our contextual masters and domain experts work together to think of the right use cases and overall enterprise-wide solutions for our customers.

Gaurav Rateria — Morgan Stanley — Analyst

Thank you.

Operator

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

Ravi Menon — Macquarie Group — Analyst

Hi, thank you. So [Indecipherable], you spoke about an increase in on-site costs and normally that’s requested some new project starts for the current quarter revenue performance. Is that there’s not been much traction with new project starts? So, how should we think about the puts and takes in terms of new contract starts and pressure on existing business over this quarter?

Samir Seksaria — Chief Financial Officer

The current quarter. Can you repeat the question, Ravi?

Ravi Menon — Macquarie Group — Analyst

Yeah, I mean, how should we think about the puts and takes between new project starts and pressure on existing business over this quarter?

Samir Seksaria — Chief Financial Officer

No, we still didn’t get it. Maybe we’ll take it offline. Can you just — can you move to your next question?

Ravi Menon — Macquarie Group — Analyst

The next one about fresher hiring. So was there any fresher hiring this quarter or was the recruitment post [Indecipherable]?

Samir Seksaria — Chief Financial Officer

No, no, we continue to hire freshers and we will hire this quarter as well and that will continue. That will continue.

Ravi Menon — Macquarie Group — Analyst

Right. Let me try one more time the first question. So I was asking about the last quarter increase in offsite cost and whether that was due to new project starts? And have we continued to see new project starts over this quarter or has that kind of got offset by some pressure on the book of existing business? Or we didn’t really see any new project starts and that’s why we’re kind of flat quarter-on-quarter [Indecipherable] terms?

N. Ganapathy Subramaniam — Chief Operating Officer and Executive Director

So, the new project starts with the tailwinds do continue to ramp up. We also had on-site movements happening incrementally in this quarter as well. And the net impact which we see on revenue is on the uncertainty on the existing projects or customers with the pauses happening.

Ravi Menon — Macquarie Group — Analyst

Let me ask one more follow-up if I may on this deferral of contract, is this due to this whole change in model to agile versus waterfall? Is that causing people to be able to take these pause and then versus earlier, you would really have for any deliverable, there would be months probably still to go, so you couldn’t really halt anything mid-flight and now it makes it a lot easier to put these pauses?

K. Krithivasan — Chief Executive Officer & Managing Director

Not necessarily, very likely. So I don’t think — I want answer — attach it to, from a methodology. It is more the business outlook, like when they see that the one thing you can say is because in agile methodology, we are doing smaller chunks of work at a time, okay? To that extent, you can say that what we have delivered, that next phase of work, you can defer. Maybe to that extent, you can say. But I don’t think otherwise it has got much to do with the project delivery methodology, Ravi.

Ravi Menon — Macquarie Group — Analyst

Thank you so much. Thanks and best of luck.

Operator

Thank you. We have our next question from the line of Rahul Jain from Dolat Capital. Please go ahead.

Rahul Jain — Dolat Capital Market Private Ltd. — Analyst

Yeah, thanks for the opportunity. Firstly, on the regional market side, we have seen that one-third of the contribution on a [Indecipherable] basis has come from this segment where the profitability is lower by 400 bps versus company average. And some of the large deals in the India market that we know, like BSNL, GM, probably may not have higher margins. So do you think this segment growth, faster growth for further pressure on profitability in the coming period?

N. Ganapathy Subramaniam — Chief Operating Officer and Executive Director

It’s something that we like to work on but I think, in our fundamentally large programs, large system integration opportunities. And if we really look at the overall deals that we have signed one is that the $2.2 billion [Phonetic] does not include the BSNL deal, number one. Number two is that the platform deals it has the potential — as long as we execute it well and we deliver it on time and stick to the model in which we want to continue to charge with the customer on a SaaS basis, I think the opportunity is there to grow well. And it’s also based on certain things like priced based on the policy or per claim that we settled and so on and so on.

So it has the potential to create a revenue structure which will increase our margins as opposed to only diluting our margin in some of these cases. But traditionally, if you take large system integration projects where we end up delivering some amount of hardware, yes, there would be margin maybe less than the company average margin. But overall, you have to see there are all large opportunities long-term value creation is there with those customers. So it’s a combination that we’ll have to look for. But net, on a net-net basis, our approach is take some of these projects, execute them well, and see that it adds to the overall capability creation and value creation, which is consistent with our philosophy.

Samir Seksaria — Chief Financial Officer

Just one more thing to add, Rahul. We don’t publish regional market profitability separately. I think when you’re looking at segmental results they are based on industry verticals. Just a clarification. But what NGS said still remains on the regional market color.

Rahul Jain — Dolat Capital Market Private Ltd. — Analyst

Right, right. And M&A if you look at this one growth strategy that we have not leveraged much historically. Do you see now is a good time to — use it either to build capability, let’s say around Gen AI or maybe scale up opportunities from captive transaction, as many corporations are looking for resource optimizations?

K. Krithivasan — Chief Executive Officer & Managing Director

Our approach doesn’t change, right? Like always, you look at it M&A if we are to augment some capability we didn’t have and if we thought that by acquiring a company we will be able to further expand our services to a larger set of our customers. So we keep looking at it. Like, whenever we find there’s a good opportunity [Indecipherable] we would go for it. But our overall strategy doesn’t change, whether it’s G&A or [Indecipherable], whenever there is an opportunity, we go for it. It has to meet our criteria and threshold.

Rahul Jain — Dolat Capital Market Private Ltd. — Analyst

Right. Appreciated the color. Thank you.

Operator

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

Vibhor Singhal — Nuvama Equities — Analyst

Yeah, hi. Thanks for taking my question. Maybe just have one question from my side on the two segments that we have seen quite contrasting performance in the past few quarters. So manufacturing has held up quite well for us, and not just for us, I think for all the companies across the industry, it’s been quite stable in terms of growth. And even in this quarter, we almost crossed double-digit growth on Y-on-Y basis.

So what is keeping this spend up in the manufacturing segment, and are we not facing the kind of delays that we are facing in, let’s say, BFSI or other verticals in the manufacturing segment? And do you think that manufacturing might continue to remain stable in the coming quarters as well? And a similar kind of opinion about retail. So in retail, we had seen a lot of weakness in the past couple of quarters, and again, not just for us, for the entire industry. Are there any signs of that segment bottoming out if not today, maybe in a couple of quarters’ time? Just a little bit of color on both these two verticals.

K. Krithivasan — Chief Executive Officer & Managing Director

Manufacturing is doing well because of the low base and the delayed pickup in demand and growth compared to other industries. And as the supply chain situation also eases slowly, they are able to also see their growth in sales. Today you see that the demand is still high for many of the automakers, and I think that’s probably driving it. And again, I won’t be able to say how long this would last because it will eventually be a function of the overall economy. On retail, our view is, or what we see, is that essential retail is doing well. But if it is luxury or fashion or other specialty retail, we find that there is a softness in demand in such kind of subsequent or the industry. So that’s the broad color we can provide you on this.

Vibhor Singhal — Nuvama Equities — Analyst

Got it. And on the manufacturing part, just a follow-up, is the only auto part of the manufacturing segment appearing stable at this point of time and looking to continue to spend? Or are the other sub-verticals in manufacturing also kind of stable?

K. Krithivasan — Chief Executive Officer & Managing Director

No, like I don’t — we don’t provide detailed color. I think for others [Indecipherable] quite a few of the sub-verticals are doing quite well, okay? And but it may not be also available to overall industry. We do also have significant market share gain in this segment, which is also driving our growth.

Vibhor Singhal — Nuvama Equities — Analyst

Got it, got it. Great. Thanks a lot for taking my questions and wish you all the best.

Operator

Thank you. We have our next question from the line of Ankur Rudra from J.P. Morgan. Please go ahead.

Ankur Rudra — JP Morgan — Analyst

Hi, thank you for taking my questions. Just the first question, a bit on the demand, maybe one more time. Krithi, of course, you’ve seen over your — long time at TCS, several demand cycles over the last 30 plus years. Is it possible to compare the current client behavior to any of the prior periods, such as perhaps post dotcom or GFC [Phonetic] or taper tantrum or anything or is it completely normal? That’s question number one.

K. Krithivasan — Chief Executive Officer & Managing Director

Yeah, I don’t know this. I can compare with every cycle has its own nuances. I would say today, the way if you look at; one, there is uncertainty because of which they are reviewing or assessing the ongoing programs. At the same time, there is so much, they realize that they have to do because there is so much of technology [Indecipherable] with each one of those industries, and unless they carry out those [Indecipherable] programs, they will have a comparative disadvantage. So these two things are at play.

So that’s the reason, like we keep saying that while the TCV is high, we do see softness in the short-term revenue. I don’t know whether we can compare or again, I’m not sure what is the value you get in comparing also, Ankur, like today the reality is, long-term this technology spend has to happen. Short-term we are navigating the uncertainty there.

Ankur Rudra — JP Morgan — Analyst

Okay. We were just looking, I was looking for if there’s any historical path we can compare this, but fair enough. Thank you for the comment. Maybe moving to the Generative AI side of the discussion, thank you for all the color today. I’m just curious if you think Gen AI would be a needle mover for revenues either for this year or the next, and if it is showing up in contract discussions at all, maybe as a source of price aggression and cost takeout deals?

Samir Seksaria — Chief Financial Officer

I don’t know. It’s not showing that much as being a differentiated feature in our contract discussions, but everybody is curious about its value. And if really look at the investments that large enterprises are making as they move to the cloud-native architecture. Willingly there is a intelligence layer in the overall architecture. Given the power of Generative AI or its potential there have been efforts from everybody to see whether the architecture that has been put in place is consistent with the capabilities or potential offered by Generative AI, whether such architectures need to be picked, right? So that kind of discussion is what we are having.

There’s always a question around explained — how much of this Generative AI capability need to be developed at the enterprise level in-house and keep the knowledge and the learnings in-house, and how much of it can go outside for its larger public cost is a debate, and that’s consistent with the debate that people used to have earlier in terms of private cloud versus public cloud. So all these discussions, I think, will happen for the next at least a few quarters, and then there will be a, say a meaningful conditional, unconditional model that will get emerged and that will get embraced by the larger enterprises is what I see as evolving. It’s purely my personal view.

Ankur Rudra — JP Morgan — Analyst

Appreciate that. One last question on contract profitability how is that progressing? I realize that gross margins have taken a hit, probably due to rate hikes this time. But if you look at the full year in FY ’24, I know you expect margins to be clawed back, but do you think there’s any chance that margins on a full year basis might actually not expand in FY ’24 or might even decline despite the supply easing up?

Milind Lakkad — Executive Vice President and Global Head, Human Resources

Ankur, all our efforts collectively will be towards improving margins. But right now, given the current macro, it’s difficult to give a color in terms of how it would end up exactly but with all efforts going towards improvising on the margins.

Ankur Rudra — JP Morgan — Analyst

Appreciate it. Thank you and best of luck.

Milind Lakkad — Executive Vice President and Global Head, Human Resources

Thank you.

Operator

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

K. Krithivasan — Chief Executive Officer & Managing Director

Thank you, operator. Starting the fiscal year with a stream of marquee wins, a robust starter book and revenue growth of 12.6% in rupee terms and 7% in constant currency terms we see strong interest in Generative AI among clients. While we are helping them explore use cases with proof of concepts and pilots, we have also launched an advisory offering to help clients create a holistic vision, strategy, and plan for enterprise-wide adoption of Generative AI. We are also upskilling our employees at scale.

We plan to create a talent pool of over 100,000 Generative AI-trained associates. Our operating margin in Q1 was at 23.2% following our annual salary increases. Our net margin was at 18.6%. On the [Indecipherable] front, we will be honoring all the job offers we have made, but remain focused on utilizing the capacity we have already built up. Our LTM attrition in IT services fell further to 17.8% and we should be back in our normal industry-leading range in the second half of this year. With that, we wrap up our call today. Thank you all for joining us. Enjoy the rest of your evening or day and stay safe.

Operator

[Operator Closing Remarks]