Tata Consultancy Services Ltd (TCS) Q3 FY22 Earnings Concall Transcript

Tata Consultancy Services Ltd (NSE:TCS) Q3 FY22 Earnings Concall dated Jan. 12, 2022

Corporate Participants:

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

Rajesh Gopinathan — 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:

Sandip Agarwal — Edelweiss — Analyst

Diviya Nagarajan — UBS — Analyst

Sandeep Shah — Equirus Securities — Analyst

Gaurav Rateria — Morgan Stanley — Analyst

Manik Taneja — JM Financial — 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 and Analyst Relations

Thank you, Aman. Good evening and welcome everyone. Thank you for joining us today to discuss TCS’ financial results for the third quarter of fiscal year 2022 that ended December 31, 2021. 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 statement, quarterly fact sheet and press releases are also available on our website.

Our leadership team is present on this call to discuss our results. We have with us today, Mr. Rajesh Gopinathan, Chief Executive Officer and Managing Director.

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Good evening, everyone.

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

Mr. N. G. Subramaniam, Chief Operating Officer.

N. Ganapathy Subramaniam — Chief Operating Officer and Executive Director

Hello, everyone.

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

Mr. Samir Seksaria, Chief Financial Officer.

Samir Seksaria — Chief Financial Officer

Hello, everyone.

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

And Mr. Milind Lakkad, Chief Human Resources Officer. Milind, are you there?

Operator

Sir, request to unmute your line.

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

We’ll come back to Milind. Our leadership 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 fact sheet available on our website and which has been e-mailed out to those who have subscribed to our mailing list.

With that, I’ll turn the call over to Rajesh.

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Thank you, Kedar. And once again, welcome, everyone, and wishing you all a very Happy New Year. We had a very strong performance in a seasonally weak quarter. We grew 15.4% year-on-year in constant currency terms, and 16.3% in rupee terms and 14.4% on U.S. dollar terms. Our operating margin was at 25% and net margin was at 20%. The sustained growth over the last six quarters helped us cross an important milestone in our journey this quarter hitting $25 billion revenue in the calendar year 2021. The 25-fold revenue growth over the last 19 years is a testimony to the strength of our business model and our ability to reinvent ourselves in an ever-evolving technology landscape to stay relevant to our customers, while remaining focused on creating value for all our stakeholders.

Another important milestone is that the number of women in our workforce crossed 200,000. Beyond that headline number, there is also an occasion to celebrate the progress we’re making in creating a more diverse and inclusive workplace. As an outcome of various leadership development initiatives focused on women employees, the number of senior women executives in the organization has grown by 68% between 2016 and 2021.

I’ll now invite Samir, Milind and NGS. to go over on different aspects of our performance during the quarter. I’ll step in again later to provide some more color on the demand trends we’re seeing. Over to you, Samir.

Samir Seksaria — Chief Financial Officer

Thank you, Rajesh. Let me first walk you through the headline numbers. In the third quarter of FY 2022, our revenues grew 15.4% year-on-year on constant currency basis. Reported revenue in INR was INR488.85 billion, which is a year-on-year growth of 16.3%. In USD terms, revenue was $6.524 billion, a year-on-year growth of 14.4%.

Let me walk you through our financial performance in Q3. In earlier calls, I had spoken about how the industry-wide churn is having an inflationary headwind on the people cost. Our operating margin in Q3 was 25%, a sequential contraction of 60 basis points. In terms of headwinds, we had a 70 basis points impact from backfilling costs, targeted increments and subcontractor expenses. There was a 60 basis points impact due to discretionary non-manpower expenses like travel, marketing, recruitment and training, and facility expenses going up. This was offset by operational efficiencies from pyramid balancing, improved utilization and a slight uptake in realization. Currency also helped by 10 basis points.

Net income margin was at 20% and our EPS grew 13.9% year-on-year. Our effective tax rate for the quarter was 25.7%. Our accounts receivable was at 67 DSO in dollar terms, same as Q2. Net cash from operations was at INR108.53 billion, which is 111% of net income. Free cash flow was at INR99.43 billion and invested funds at the end of December 31 stood at INR669.85 billion.

The Board has recommended an interim dividend of INR7 per share and also a buyback to the tune of INR18,000 crores for INR4,500 per share. This represents our shareholder payout of INR24,782 crores between the buybacks, dividends and taxes and adding to the INR10,785 crores paid out year till date.

Milind will now talk about our HR performance this quarter. Over to you, Milind.

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

Thank you, Samir. On the people front, we had a net addition of 28,238 in Q3, bringing the total headcount to 556,986. It continues to be a very diverse workforce with 156 nationalities represented and with women making up to 36% of the base. As Rajesh mentioned earlier, the number of women in the workforce crossed 200,000 this quarter.

In the face of industry-wide supply side challenges, we have doubled down on our investment in organic talent development. Over 100,000 market relevant deep skills were gained by TCS in Q3. The number of Contextual Masters, that is individuals who are demonstrated deep contextual knowledge of their customers, business and IT landscapes, has now crossed 38,000.

The sustained strength of demand, particularly in new technologies, has necessitated large scale hiring of fresh talent. As you know, we had on-boarded 43,000 freshers in the first half of the year, all trained on the latest technologies. And in our last call, we had indicated plans of hiring another 34,000 in the second half. I’m happy to inform you that we achieved the figure in Q3 itself and are now planning to hire some more in Q4. Fresher hiring continues to be through our National Qualifier Test. However, we’re increasing its frequency to cater to our unprecedented volumes of hiring.

Let me now spend a minute on the elevated employee churn we have seen across the industry for the last few months. Our progressive people policies, empowering culture, investments in our people, fast track careers linked to learning and, I think, very differentiated ample opportunities for global deployment continue to be a huge differentiator for us that have enabled industry-leading talent retention for us

In addition, we have been tactically responding to the increasing attrition by benchmarking our compensation levels with the market and promoted over 110,000 employees this year so far. All this has helped us contain the number of departures and retain the best of our talent. On a LTM basis, our attrition in IT services was at 15.3% in Q3. The arithmetic of LTM calculation means that this metric might rise further in Q4, but we believe that the churn is stabilizing for now. Nevertheless, we will continue to closely monitor this metric.

In our last call, I had mentioned that we are preparing for a return to office for most of our employees by the start of this New Year. As you all know, because of the current situation, pandemic situations, we have temporarily put that plan on hold and we will recalibrate our timelines. We will be closely monitoring the evolving situation in the ground across our different locations before announcing our new return to work plans.

Now, over to NGS. for segmental commentary and demand drivers. Over to you, NGS.

N. Ganapathy Subramaniam — Chief Operating Officer and Executive Director

Thank you, Milind. At the outset, let me wish all of you a great start to the New Year. Let me begin by providing the segmental performance details for the quarter. All growth numbers are in year-on-year constant currency terms. We saw strong double-digit growth across all our verticals. Growth was led by Retail and CPG which grew 20.4%, BFSI grew by 17.9%, and Manufacturing grew by 18.3%. Other verticals also showed good growth, Technology and Services 17.7%, Life Sciences and Healthcare 16.3%, and Communications and Media 14.4%.

Among major markets, growth was led by North America, which grew by about 18% and Continental Europe by 17.5%, while U.K. grew 12.7%. Among the emerging markets, growth was led by Latin America which grew 21.1% and India by 15.2%, Middle East and Africa 6.9% and Asia-Pacific grew by 4.3%.

Our portfolio of products and platforms continue to show good growth. We had a fantastic quarter for the products and platform business. ignio, our cognitive automation software, signed up 10 new customers and five went live. With a growing installed base and expanding channel network, demand for ignio skills is very strong. The Digital Academy has trained over 10,000 professionals till date and have certified more than 3,500 professionals on ignio. ignio continues to transform operations across domains using artificial intelligence and automation to enhance resilience and delivering superior business outcomes.

Here is one example. A North America-based global hospitality major has gone live with ignio across their enterprise data warehouse, hotel booking information system, inventory and availability, loyalty points rewards, customer feedback and commission settlements. ignio is being used to predict anomalies, identify the SLA violations and notify relevant stakeholders to take necessary actions, enabling resilient operations and near-real-time visibility to business for over 20 business critical measures covering 7,000-plus batch jobs.

TCS BaNCS, our flagship product suite for financial services domain, had nine new wins and five go-lives in Q3. TCS BaNCS has been selected by a leading global financial services player in North America to transform their asset servicing operations spanning 65 direct custody and clearing markets and 100-plus global custody markets. This is a landmark one-of-a-kind global rollout, unmatched in scale and spread, further affirming the market-leading position of TCS BaNCS in this particular domain.

Quartz Blockchain platform had three new wins in quarter three. It’s being leveraged across a variety of use cases, mobile payments, issuance of bank guarantees, solar energy tracking, interbank borrowing and so on. An American multi-national big tech company has made big inroads into India with their online payment and digital wallet app, has selected Quartz Blockchain for handling the compliance and anti-money laundering operations. The firm will also use Quartz compliance for transaction monitoring and workflow management.

TCS HOBS suite of products for communication services had two go-lives in quarter three. Another milestone, HOBS has been adopted for its new age subscription management capabilities in a completely different industry. They are state-owned electrical utility in India. This distribution company intends to use it to enhance the overall quality of service and customer experience.

TwinX, our AI-based digital twin solution, had four wins and three go-lives in Q3. Interestingly, the new wins addressed different use cases across different verticals. The steel manufacturer using it to model their shop floor safety. The publisher plans to use it to run simulations to help decide what marketing campaigns will deliver the most return on investment and therefore deserve to be funded. The telco is going to be using it to stimulate the customer order journey for their broadband product.

TCS OmniStore, our AI-powered commerce suite, had two new wins in this quarter. TCS ADD, advanced drug development platform, is now live at Amgen, one of world’s leading biotechnology companies. And this is supporting the initiatives on new ways of working and digital transformation journeys focusing on pharmacovigilance excellence. The platform leverages machine learning and natural language processing to deliver productivity and improved quality of adverse event case data.

Lastly, TCS MasterCraft, our suite of intelligent automation products for enterprise application development, modernization and delivery, had 24 new wins in this quarter.

Moving on to our client metrics, the robust addition of clients across every revenue bucket in the clearest validation of our customer centric strategy and our focus on continually expanding and deepening our client relationships. In Q3, we added 10 more clients over the last 12 months in the $100 million-plus band, bringing the total to 58. We added 21 more clients in the $50 million band, bringing the total to 118. We added 26 more clients in $20 million-plus band, bringing the total to 255. We added 40 more clients in $10 million band, bringing the total to 426. We added 54 more clients in $5 million band, bringing the total to 619, and we added 98 more clients in the $1 million-plus band, bringing the total to 1,175.

Let me now cover some of the demand trends we are seeing in the market. Our growth continues to be driven by the same three broad trends that Rajesh has spoken about in prior calls, that is increased investments in building a digital core, tech and operations after optimization and growth and transformation. While we had plenty of deals across all of these three buckets in Q3, we’ll take up two distinct demand themes in today’s call and share some examples of the deals we won and the work we are doing in those areas.

Cloud continues to be a big driver of growth. Our early investments in building deep capabilities across all the cloud technologies and creating dedicated business units around three hyperscalers has made us the preferred partner for customers looking to accelerate their cloud transformation journeys. We are among the top partners to each of the hyperscalers. Microsoft has recognized us as the number one partner contributing to the maximum Azure revenue. That is, we helped move the maximum number of enterprise workloads with Azure cloud. Similarly, we have received Partner of the Year Awards from both AWS and Google Cloud. We have been sharing examples of cloud transformation engagements every quarter to give you a flavor of the nature of the demand out there.

Once again, this quarter, we had several new wins around Horizon 1 initiatives such as infrastructure modernization or building of a new digital core for enhanced business agility. TCS helped a leading European retailer migrate their ERP to a hyperscaler cloud. We evaluated several cloud platforms and designed best fit solution, leveraging our contextual knowledge of their business processes. The solution has been implemented initially for one country and will eventually be rolled out to other markets. From the first go-live, the customer is already seeing improved agility, accelerated financial processes, advanced pricing and operational efficiency through real-time supply chain insights.

TCS is helping a large specialty retailer in ANZ transform a complex ERP estate of more than 50 different ERP systems and complex business processes to consolidate them on to a hyperscaler platform to implement enterprise grade cloud capable, mission-critical workloads on the cloud. We also helped a leading Canadian bank unlock significant organizational agility by migrating a complex ecosystem of 70-plus business applications on to a hyperscaler cloud. In addition, we deployed a new cloud-based call center solution with IVR and phone payment capabilities, drastically improving call center response time and customer experience.

What we have observed is that movement to the cloud is also triggering tremendous innovation within the enterprise, with teams exploring the art of possible using the native capabilities of the cloud to try out new ways of working or new business models, build new capabilities into existing products, or offer new services to customers, we call these Horizon 2 initiatives.

We helped Maersk, the world’s leading ocean carrier, build an industry first cloud-based solution to remotely monitor the ambient conditions of refrigerated containers or reefers, which are used to ship temperature-sensitive cargo like fruit, vegetables, meat, pharmaceuticals and so on. The traditional manual approach was inefficient and resulted in spoilage of the cargo. The cloud-based IoT solution that TCS helped build uses real-time data from reefers to enable quick decision-making on conditions and gives visibility of the ambient conditions to the end customers, that is the shippers.

Other capabilities include automated alarm detection, corrections and closure, a workflow system, a vessel-based solution to onboard reefer technicians, integration of predictive algorithms to help detect issues before they turn into problems and support the implementation of a mobility solution for Maersk equipment maintenance and repair vendors. The solution monitors a fleet of over 385,000 reefers and provides monitoring capabilities for over 450 vessels. This innovative use of technology has enabled Maersk to carry cargo in the exact ambient conditions inside the container as desired by their customers, reduce the risk of spoilage and resulted in improving customer satisfaction.

A global leader in medical devices has partnered with TCS for their IoT-based fleet management initiative for connected health to enable healthcare providers to monitor key patient vitals across various care units. The fleet of sensors and devices will be remotely provisioned to monitor the key parameters and control software updates. The next-generation medical device connectivity solution leverages a cloud-based IoT stack that will be the foundation on which these new features will be enabled.

Another key theme we have been speaking about for a while and which continue to drive growth in Q3 is sustainability. Today, I wanted to share a story of how we are helping manufacturers manage the downstream environmental footprint of their products by strengthening the end of life recycling and recovery of non-biodegradable components of their products and become better environmental stewards. This is known as extended producer responsibility and is a legal obligation under the polluter pays principle in many parts of the world.

TCS is helping a multi-national furniture retail chain meet their extended producer responsibility around plastic usage in their products and enable better recovery and recycling. TCS solution leverages advanced PLM and CAD to help the chain move away from guesstimation and accurately calculate the plastic usage in each of their products using product 3D models. This enables more accurate tracking and end of life recycling or recovery of the plastics and synthetic textile fibers used in their products. This ensures the right amount of complaints and enhancing the brand’s image as a responsible business.

Of course, reduction of carbon footprint continues to be a major concern across boardrooms and executive suites. We have several ongoing engagements and new wins in this area. Let me share a few examples. TCS is a trusted partner and advisor for a multi-national food and drink processing conglomerate, a multi-year global program to build a robust digital data governance system that can reliably measure and analyze greenhouse gas emissions and track the progress in emission reductions versus corporate targets.

TCS’ consulting-led approach started with the use of its data maturity framework for storing and selecting the right emission factors based on a variety of input drivers. The solution leverages its DAEzMo toolset to create a platform that integrates data from across the entire supply chain that calculates emission footprints based on standardized carbon accounting protocols that drill downs into departmental impacts and generates carbon accounting disclosures with complete traceability and sums up the performance and progress in an executive dashboard. Beyond just tracking the carbon footprint, TCS teams used to their manufacturing process knowledge to analyze the data and recommend alternates for reducing emissions. The recommendations were accepted and downstream plans for a global rollout are currently underway.

We had a high profile win for our TCS Clever Energy product, our award winning enterprise level energy and emission management solution. It uses IoT for data acquisition and as an inbuilt digital twin for energy usage modeling and machine learning and augments intelligence to provide an integrated energy view. It’s a comprehensive platform covering multiple energy functions, including heating and cooling, process energy optimizations, demand response, intelligent tariff and carbon management. In Q3, a leading multi-national consumer goods company signed up to implement a platform at 10 of their plants to make them energy efficient, reduce emissions and meet their sustainability cum financial goals.

With that, let me hand it over back to Rajesh for some color on industry level transformations and other order books. Thank you.

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Thank you, NGS. In addition to helping our customers in their growth and transformation journeys, we are also participating in larger industry level changes. I want to give an example from a couple of industries.

I’ll take the utilities industry first. There is a growing focus, as you know, in utilities on sustainability energy efficiency and demand for carbon free. Clean energy is driving a significant transformation in the utility industry and TCS is participating fully in this transition. The big theme that is currently at the heart of this transformation is the shift to what is known as distributed energy resources, like solar and wind farms, and we are participating with many of our customers in this space.

As an example for one of the largest fully regulated utilities in North America, they are going through this similar kind of a transition where they will be retiring aged and expensive coal-fired facilities and will replace them with DER, or the Distributed Energy Resources, in the portfolio. What we have done is to help them build renewable energy performance center that will help track the performance and asset health of the renewable assets. The platform is already connected to 171 wind turbines and three large solar farms and which will gradually be rolled out across all their assets as part of ongoing multi-year initiative, which will not only help our client meet regulatory requirements, but will also help build a sustainable energy ecosystem in the country.

The growing reliance on DER also poses new challenges in grid management, given the intrinsic variability in generation when you shift to this distributed energy and distributed generation kind of a methodology, that along with growing incidence of extreme natural events, precipitated by climate change, has necessitated grid modernization for greater resilience and enhanced customer experience.

We are helping a Fortune 500 utility customer on the West Coast of U.S. to manage their grid performance better using analytics and data from various field sensors. As we are aware that post U.S. suffers [Phonetics] from wildfires and we’ve helped the utility build a predictive data model that can identify customers with vulnerable assets to potential wildfires and cuts off power before the event. Overtime, the model’s accuracy has gone up to 99%, significantly boosting the utility’s goodwill in the communities.

Similarly, coming to another industry in the midst of transformation, healthcare is another one that’s going through a sectoral transformation. It’s a multi-dimensional transformation that is playing out there. The industry structure itself is undergoing a change and so our patient engagement models and backend operations. At the heart of it is that we are moving from very two-tier structure of individual care providers to integrated hospitals to a much more distributed scenario in between where more specialized hospitals and chains are coming up for individual aspects and trying to upend the industry.

You have people like pharmacy chains trying to get into this spectrum. So, to give an example of couple of large specialty healthcare provider in North America that you’re working with and we are developing and implementing a next-generation cloud-based patient care platform, which connects an ecosystem of physicians, labs, dietitians and pharmacies, it provides these stakeholders an integrated patient-centric view across the entire chain of 3,000-plus outpatient centers that makes the patient experience very location agnostic. Regardless of which center the patient visit, the local physicians and care providers will have a seamless view of his or her integrated health record, significantly enhancing the patient experience, care delivery, clinician productivity, etc. The simplified user interface also reduces training effort for care providers and the risk of data entry errors.

Another trend that took off during the pandemic is telemedicine and remote care. Well, this has been adopted in peripheral care areas at the moment. We expect this to find broader adoption across all non-critical care, once again boosting accessibility and clinician productivity while reducing costs. An example of our participation is, early in the pandemic, we partnered with Align Technology, a leading global medical device company, to build a remote care solution to support thousands of orthodontists across the world who are challenged with ensuring continuity in patient care.

TCS liberates its contextual knowledge and location independent agile delivery model and expertise in creating a superior user experience to accelerate the development of virtual tools for the cutting-edge mobile app. The app enables remote consultations, treatment progress assessment and communication for doctors and their patients to discuss assessments or concerns during the company’s product in misaligned treatments. And the tool enhances doctors to easily schedule and boost HIPAA-compliant video appointments with patients when needed.

So, overall, across the examples given by NGS and a couple of that I shared, the main message that we wanted to give is that we are seeing significant amount of transformation both at company level as well as industry level and we’re participating strongly in that.

Coming to the overall order book in Q3, our total TCV was $7.6 billion, and it’s a good mix of large, mid-sized and small deals. By vertical, BFSI had a very strong TCV of $2.9 billion, while Retail posted order book of $1 billion. The TCV of deals signed in North America stood at $4.5 billion.

With that, we’ll open the line for questions. Back to you, Kedar.

Questions and Answers:

Operator

Thank you very much. [Operator Instructions] First question is from the line of Sandip Agarwal from Edelweiss. Please go ahead.

Sandip Agarwal — Edelweiss — Analyst

Yeah, hi. Good evening. Thanks for taking my question. Wish everyone a Happy New Year and a very good set of numbers, very good execution. So, Rajesh, I have one simple question. On the demand environment, we are continuing to see a very robust demand on the non-traditional piece side, particularly on the digital side and cloud adoption side. What is your sense that what will be the second portion of this growth once this cloud adoption and transformation journey starts and reaches to some extent, then when this hyperscalers start adding capabilities on their offering additional add-ons, will that contribute more revenue? Or you think the transition towards cloud and adoption of cloud will be a big revenue driver for the next two, three years, and then probably that option value will emerge? So what is your sense on how the demand will shape on the technology front on those two areas? If you can give some idea on that will be very helpful. Thank you.

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Thank you, Sandip. The cloud adoption will continue to drive significant amount of demand in the short-term. We call this Horizon 1, which essentially involves moving workloads on to the cloud and using the Infrastructure-as-a-Service as the primary value proposition there. And that, as you have pointed out, is a time-bound phenomenon, because once majority of the workloads have moved, the demand for that will taper off. But what we are really excited about on the cloud is what opens up on Horizon 2 and Horizon 3. NGS had laid out a couple of examples that we have seen in the shipping industry and in medical devices kind of industry. But across industry, we are seeing Horizon 2 opportunities opening up.

Horizon 2 is when the native capabilities of the cloud are being leveraged to generate significant transformation at the company level, these native capabilities could be a seamless fabric of the cloud so that security and ability to handshake with partners is significantly enhanced. Analytics is another native capability that we’re seeing a lot of [Indecipherable] and also other areas. So, between the three hyperscalers, we are tracking more than 250 native capabilities that we are now seeing greater and increasing adoption among multiple customers that we have.

And the last but not the least by any events is the Horizon 3 opportunities, where the ecosystem play becomes a very important driver for what we see as the industry structure of the future. So the example that I gave of — in the healthcare space of our specialty healthcare, there the approach is to actually to act as an anchor to an ecosystem of doctors so that, whether it’s care delivery or dietitians and the entire chain of people involved in not just the diagnosis, the treatment and the ongoing maintenance of the person, including bringing in the labs into it, bringing in the pharmacies into it and providing an end-to-end ecosystem. The cloud significantly increases the ability to adopt this kind of an ecosystem play. And we believe that these are all unbounded opportunities, unlike Horizon 1, which is still bounded one. So overall, we are quite excited about the cloud journey.

Sandip Agarwal — Edelweiss — Analyst

Thanks for that detail. And sir, just if I can squeeze one more small portion. When do you see this attrition scenario pulling off, like we are already seeing some signs that [Technical Issues] and other things are helping, so when do you think it will be completely rationalizing to pre-COVID level? Is there any view on that or you will abstain from giving any view right now?

Rajesh Gopinathan — Chief Executive Officer and Managing Director

I’ll let Milind take that. Milind, if you could?

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

Yeah, yeah. Thanks, Rajesh. I think, like I said, no, we actually are — the churn for this quarter may be a little less than what we had in the last quarter. Okay? But our LTM percentage may still go up based on the way it is calculated. So, I see more flattening off of this and eventually slowly coming down. That is the way I’m seeing it right now, but that is how it’s going to be. Churn will be less and less as we go forward. LTM percentage will eventually straighten out over a few quarters.

Sandip Agarwal — Edelweiss — Analyst

Yeah. Thanks a lot. And best of luck for the current quarter. Thank you.

Operator

Thank you. The next question is from the line of Diviya Nagarajan from UBS. Please go ahead.

Diviya Nagarajan — UBS — Analyst

Thanks for taking my question and congrats on the strong quarter. Just a couple of things from my side. Firstly, I’m trying to understand your margins. I think, you will continue to see, while I do appreciate that additions gone up in line with the sector, it still seems to be pretty much in line that’s [Indecipherable] of the headline numbers touching the floor. So I’m trying to understand why then you’re not seeing the kind of margin performance that you should normally see in a quarter like this. That’s my first question.

Samir Seksaria — Chief Financial Officer

I’ll take that question, Diviya. So, as we said on our margins, we had headwinds from the supply side churn as you called out, linked to the backfilling cost, retention like increments and our subcontract costs going up. This is a one-off from our usual trend. Also, from a historical savings perspective, there has been the 60 basis points impact on the discretionary and non-manpower expenses going up, like we had called out at the beginning of the year itself that we would expect, as normalcy continues, we would expect this cost to come up. Offsetting this were the operational efficiencies, which we either have it during the period. So — but specifically so, with the increased trainee hiring, we had a pyramid balancing coming up. And also, we were able to improve our utilization and had a slight uptick in realization. So that’s the maths around it, Diviya.

Diviya Nagarajan — UBS — Analyst

Okay. My second question is on pricing. I think this is something that I’ve been checking with this year as well. You expect that the demand kind of being another lease of life and something like a constraints kind of continuing, you should see it through — push through some price increases in the next few quarters?

Samir Seksaria — Chief Financial Officer

Yeah, Diviya. We are seeing a slight uptick in pricing in the current quarter. And I think we should be able to get some of it, but it will be balanced by the fact that in long-term existing customer relationships, we would need to be more nuanced about it. But overall, there is definitely an expectation of a rising pricing environment.

Diviya Nagarajan — UBS — Analyst

Got it. Thanks for taking my questions. And I’ll come to follow-up if there’s time. Thank you.

Operator

Thank you. The next question is from the line of Sandeep Shah from Equirus Securities. Please go ahead.

Sandeep Shah — Equirus Securities — Analyst

Yeah. Thanks for the opportunity. Just the question in terms of entering into CY ’22 for the industry as a whole rather than TCS, do you believe industry may see some moderation in a pent-up demand or you believe, no, the demand pipeline — the IT spend transformational need and the urgency of the client is well enough to compensate any tapering off the pent-up demand, which we may have seen in CY ’21?

Rajesh Gopinathan — Chief Executive Officer and Managing Director

NGS, will you take that?

N. Ganapathy Subramaniam — Chief Operating Officer and Executive Director

Yeah. As you see, Sandeep, we called out that we are seeing a multi-year cycle of investments sometime back. And everything that we’re seeing from a demand perspective is in line with that. I think, our interactions with clients during the last quarter end also indicates that there is no reduction in budgets. They — some of them may have increased, but just they would like to keep investing in specific initiatives across safety, resilience and growth, along with innovation, right? So from that perspective, at least for the foreseeable future, right, we believe that the demand environment will continue to be there. And — but I think, the industry per se has been on an accelerated hiring, number one. Number two is that the demand for such skill sets is increasing for sure, right? So from what I would say is that the demand will continue for at least the next two, three quarters. And barring any unforeseen events in the world, the trend is likely to continue.

Sandeep Shah — Equirus Securities — Analyst

Okay. Okay. Okay. And just a follow-up question, which is a bookkeeping. We have two large deals in the BFSI, which may have a contractual ramp downs which may be coming in the fourth quarter. So, is it fair to say fourth quarter may be seasonally softer than the earlier year or we believe there are enough number of new deals which will mitigate the same as a whole? And just on margins, whether most of the supply side intervention which we consciously took in Q3 are largely over or may continue in the next 4Q or 1Q as well?

N. Ganapathy Subramaniam — Chief Operating Officer and Executive Director

[Technical Issues] deals in BFSI will not have a ramp down, but the base effect will kick-in in the fourth quarter as you rightly pointed out. But overall, the demand environment is fairly strong. So, it will be our endeavor to maintain the demand momentum, but next quarter we will see a base effect kicking-in in BFSI specifically.

Sandeep Shah — Equirus Securities — Analyst

Okay. Okay. And this question on the supply side intervention?

N. Ganapathy Subramaniam — Chief Operating Officer and Executive Director

Yeah. So, I’ll try to pick up — so we would expect some more interventions coming in — going into Q4 and Q1. As far as the churn remains at an elevated level, we’ll do all the things which would be required to sustain the requirements and capture the growth, Sandeep.

Sandeep Shah — Equirus Securities — Analyst

Okay. Okay. Thanks and all the best.

Operator

Thank you. The next question is from the line of Gaurav Rateria from Morgan Stanley. Please go ahead.

Gaurav Rateria — Morgan Stanley — Analyst

Hi. Thank you for taking my questions. So, firstly, Rajesh, has there been any difference in the trend from a ACV versus TCV perspective because of the change in the tenure of the deal? Just trying to understand that is TCV a fair reflection of how revenue growth is going to pan out or the ACV trends are looking a little different?

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Gaurav, the last few quarters, TCV is primarily constituted off relatively smaller deals, if I take two quarters back kind of a perspective. So, those are not smaller, but it’s small. I’m saying that, billion dollar deals and all inside this TCV, these are more regular size deals with regular sized tenure. So to that extent, these are greater short-term drawdown values. So, ACV should be better. But when we look at the pipeline, the pipeline has an equal distribution of very large and mid-sized deals. So, overall, there is no shift towards one or the other. It is just that the period to period, the TCV will have different constituents.

Gaurav Rateria — Morgan Stanley — Analyst

Got it. Second question is around the Continental Europe. I think you had talked about some large program ramp down and some impact of that. Is that totally behind us or it will take some more time after which this issue will be kind of behind and the drag from that will be away from a growth perspective?

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Technically another quarter could also be aggressive [Phonetic]. You might recall that last time I said that, we should see recovery into Q3, Q4. Q3 surprised us pleasantly, but there will be some amount of the base effect impact coming into Q4. But overall, Europe is very strong trajectory. And touchwood [Phonetic], unless something goes wrong in the current situation, Europe visibility is very high.

Gaurav Rateria — Morgan Stanley — Analyst

Got it. Lastly, on the realization at the portfolio level, you did talk about some positive impact. From a flow-through perspective, is it fair to believe that this impact comes in the financials with some lag not necessarily in the same quarter when the realization impact comes in?

Rajesh Gopinathan — Chief Executive Officer and Managing Director

No, we report realization not pricing. So, realization impact is the net impact in the quarter after everything has happened. So, there is no lag to that. But overall pricing trend, our expectation is that it has an upward bias. And that should show through in future realizations.

Gaurav Rateria — Morgan Stanley — Analyst

Perfect. Thank you. Thanks a lot.

Operator

Thank you. The next question is from the line of Manik Taneja from JM Financial. Please go ahead.

Manik Taneja — JM Financial — Analyst

Hi. Thank you for the opportunity. I had a question related to the step up that one has seen in terms of subcontracting charges across the industry as well as for TCS. And some of it has been driven by the employee turnover as well as the limitations in terms of employee count. When do you think this starts normalizing and would this create margins as the situation normalizes?

Samir Seksaria — Chief Financial Officer

So, Manik, so our usual subcontractor expenses used to be around 7.5% and are currently at 9%. So that’s — and that’s the direct impact of what we see across in the industry. Our view is that this would continue till the churn remains to be elevated. And once it settles down, this would be one of the primary levers to double-down upon from an operational efficiency perspective.

Manik Taneja — JM Financial — Analyst

Sure. I had an additional question that across the industry, one has seen a significant offshore shift. However, when one looks at the revenue productivity metrics, one is still seeing a significant increase in over the last few quarters, despite such a significant offshore shift. So if you could sell-out, what do you think has been driving that and shouldn’t that be seen as an indicator of pricing strength for you as well as the industry?

Rajesh Gopinathan — Chief Executive Officer and Managing Director

So, offshore leverage shift was particularly prominent in the last financial year. Towards — and it settled down towards the end of the financial year. We would expect the offshore to leverage to remain around the same and slightly that travels and etc. are opening up, we would expect a shift towards on-site to begin with.

To your question on being visible on the pricing part, they have been — it has been, if you look at our efficiency, it has been balanced, Manik.

Manik Taneja — JM Financial — Analyst

Sure. Thank you. All the best for the future.

Operator

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

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Thank you. So to sum up, we had a strong broad-based growth across all our industry verticals that helped us overcome normal seasonality and post 15.4% year-on-year growth. The order book continues to be very robust and well distributed. Our strong customer focus and continual expansion and deepening of client relationship showed up yet again in a very strong client metrics with strong additions across all revenue buckets. Our margins continue to be industry-leading. We have responded to the strong demand by hiring large numbers of fresh engineers.

In addition to the 43,000 freshers we onboarded in H1, we brought an another 34,000 in Q3 and plan to bring onboard some more in the fourth quarter. We have also taken tactical measures to retain our best talent, including instituting promotions for over 110,000 employees this year. Our attritions went up to — went up this quarter but continues to be the lowest in the industry. We will continue to watch this closely. Now actually, the Board announcement of a buyback as well as the dividend is a reiteration of our shareholder-friendly policy of returning cash to shareholders.

Thank you all for joining us on this call today. Enjoy the rest of the evening and/or day and do stay safe. Thank you.

Operator

[Operator Closing Remarks]