Tata Consultancy Services Ltd (NSE:TCS) Q3 2023 Earnings Concall dated Jan. 09, 2023
Corporate Participants:
Kedar Shirali — Global Head, Investor Relations
Rajesh Gopinathan — Chief Executive Officer and Managing Director
N. Ganapathy Subramaniam — Chief Operating Officer Director and Executive
Samir Seksaria — Chief Financial Officer
Milind Lakkad — Executive Vice President and Chief Human Resources Officer
Analysts:
Kumar Rakesh — BNP Paribas — Analyst
Vibhor Singhal — Nuvama Equities — Analyst
Sudheer Guntupalli — Kotak Mahindra Asset Management — Analyst
Pankaj Kapoor — CLSA — Analyst
Sandeep Shah — Equirus Securities — Analyst
Ravi Menon — Macquarie — Analyst
Abhishek Kumar — JM Financial — Analyst
Gaurav Rateria — Morgan Stanley — Analyst
Ashwin Mehta — Ambit Capital — Analyst
Rahul Jain — Dolat Capital — Analyst
Presentation:
Operator
Ladies and gentlemen, good day and welcome to the TCS Earnings Conference Call. As a reminder, all participant lines will be in the listen-only mode. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Mr. Kedar Shirali, Global Head, Investor Relations for TCS. Thank you and over to you sir.
Kedar Shirali — Global Head, Investor Relations
Thank you, operator. Good evening and welcome, everyone. Thank you for joining us today to discuss TCS’ financial results for the third quarter of fiscal year 2023 that ended December 31st, 2022. This call is being webcast through our website and an archive, including the transcript will be available on the site for the duration of this quarter. The financial statements, quarterly fact sheet and press releases are also available on our website.
Our leadership team is present on this call to discuss our results. We have with us today Mr. Rajesh Gopinathan, Chief Executive Officer and Managing Director.
Rajesh Gopinathan — Chief Executive Officer and Managing Director
Hi. Good evening, everyone.
Kedar Shirali — Global Head, Investor Relations
Mr. N. G. Subramaniam, Chief Operating Officer and Executive Director.
N. Ganapathy Subramaniam — Chief Operating Officer Director and Executive
Hello. Good evening, everyone. Happy New Year.
Kedar Shirali — Global Head, Investor Relations
Mr. Samir Seksaria, Chief Financial Officer.
Samir Seksaria — Chief Financial Officer
Hello, everyone.
Kedar Shirali — Global Head, Investor Relations
Mr. Milind Lakkad, Chief HR Officer.
Milind Lakkad — Executive Vice President and Chief Human Resources Officer
Hi, everyone. Happy New Year.
Kedar Shirali — Global Head, Investor Relations
Our management team will give a brief overview of the company’s performance followed by a Q&A session. As you are aware, we don’t provide specific revenue or earnings guidance. And anything said on this call, which reflects our outlook on 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 emailed out to those who have subscribed to our mailing list.
With that, I’d like to turn the call over to Rajesh.
Rajesh Gopinathan — Chief Executive Officer and Managing Director
Thank you, Kedar. Good morning, good afternoon and good evening to all of you. We had a very good growth for a seasonally weak quarter. Our US dollar revenue crossed the $7 billion mark in Q3, and revenues grew 19.1% in rupee terms and 13.5% in constant currency terms, and 8.4% in dollar terms. Our operating margin for the quarter was 24.5%, an expansion of 0.5% sequentially. Our net margin came in at 18.6%.
I’m very happy to share that the Board has announced a dividend of INR75 per share, including a special dividend of INR67 per share. Including the interim dividends paid out in the first half of the year, this translates into shareholder payout of INR33,297 crores for year till date.
I will now invite Samir, Milind and NGS to go over different aspects of our performance during the quarter. I will step in again later to provide some more color on the demand trends that we’re seeing. Over to you, Samir.
Samir Seksaria — Chief Financial Officer
Thank you, Rajesh. Let me first walk through the headline number. In the third quarter of FY ’23, our revenues grew 13.5% year-on-year on a constant currency basis. Reported revenue in INR582.9 million on year-on-year growth of 19.1%. In dollar terms, our revenue was $7.075 billion and year-on-year growth of 8.4%.
Moving to the operating margin, we had a 70 basis-points benefit from the currency movement. Operations [Technical Issues]. Overall, our operating margin expanded 50 basis points sequentially to 24.8%.
Net income margin was 18.6%, impacted by foreign exchange fluctuations. Effective rate for the quarter was 25.7% — effective tax rate. Our accounts receivable was at 66 days DSO, in dollar terms, up four days sequentially. Net cash from operations was INR111.54 billion, which is a cash conversion of 102.8%. Free cash flows were at INR102.15 billion/ Invested funds as — at the end of September stood at INR669.24 billion.
Lastly, as Rajesh mentioned, the Board has announced an interim dividend of INR75 per share, which includes a special dividend of INR67 per share. Total shareholder payout till date amount to 110% of free-cash flows.
Over to you, Milind.
Milind Lakkad — Executive Vice President and Chief Human Resources Officer
Thank you, Samir. You might recall that our approach to overcoming the supply side challenges faced by the industry was to bring in fresh talent at scale and then train them on new technologies. In the prior few quarters, we onboarded 135,000 fresh engineers. In Q3 alone we brought on about another 7,000 plus engineers in Q3, and bringing in a total quarter of 42,000 freshers year-to-date. These are unprecedented numbers. Our biggest since has been the nearly 125,000 TCSs at middle and senior levels, who have been with the company for over 10 years on average. They have been central to our ability to culturally and operationally integrate all the freshers that we brought onboard and ensuring that the project work outcomes and customer experience has continued to be the best-in-class.
Last year, our net hiring was significantly ahead of our revenue growth. Our focus this year has been on utilizing all that excess capacity and looking our newest employee is productive. Between that and elevated attrition, we had a net reduction of headcount and our workforce strength as of December 31st, stood at 613,974.
We continue to have a very diverse workforce with 153 nationalities represented and with women making up 35.7% of the base. On the learning front, TCS has clocked 11.4 million learning hours in Q3, resulting in an acquisition of 1.3 million competencies. LTM attrition in IT services was at 21.3%. It’s slightly down quarter-on-quarter, but still very elevated as it reflects the high levels of churn in the prior quarters. Our quarterly annualized attrition on the other hand, fell by nearly 6% in Q3, as we expected to steadily trend down over the coming quarters.
Over to you NGS for some color on segments and production numbers.
N. Ganapathy Subramaniam — Chief Operating Officer Director and Executive
Thank you, Milind. Let me walk you through our segmental performance retake in third quarter. All growth numbers are on year-on-year constant constant currency update. Growth was led by Retail and CPG, which grew 18.7%, led by strong demand in the Travel and Hospitality segment for retailers have production figures during the holiday season. Lifesciences and Healthcare grew 14.4%, Technology and Services grew 13.6%, Communications and Media grew by 13.5%. Manufacturing 12.5%, while BFSI, our largest vertical grew 11.1%.
Let me now walk you through the growth figures by geography. On the major markets, North America as well UK grew 15.4%, while Continental Europe grew by 9.7%. Moving onto emerging markets. Latin-America grew by 14.6%; India by 9.1%; Asia-Pacific by 9.5%, and Middle-East and Africa by 8.6%.
Moving on, our industry-leading portfolio of products and platforms continued to perform well. ignio, our cognitive automation software suite signed up 10 new customers and seven clients went live during the quarter. The business helped monitoring solution from ignio is gaining traction. The customers went live in over 2,000 stores for a major American auto retailer in Q3.
Enterprises are increasing their investment in the AIOps and automation technologies to improve employee productivity and resilience. ignio is neatly position to ride on this particular opportunity with an end-to-end platforms that offers self-healing and machine-learning ability across customer life cycle to help them in their journey of being an autonomous enterprise. TCS BaNCS, our flagship product suite for the financial services domain, had six new wins and seven go-lives during the quarter. We continued to gain share in the market infrastructure institutions segment with the new win in Q3. The subsidy of a leading European CSD selected TCS BaNCS market infrastructure implementing an unique system operate settlement and correspondent banking services to their customers. One of the largest asset managers in the USA is over $7 trillion in global assets, migrated its personnel advisory services and digital advise offerings to the crowd base TCS BaNCS wealth management platform enhancing the advisory experiences, improving accuracy and low-latency response for performances consideration analytics of millions of customer portfolio the record numbers.
Our Quartz blockchain platform had two new wins and one go-live in Q3. Their multinational pharma major has increased their adoption of Quartz further building on the successful initial pilot we executed using blockchain, smart contracts and digital payments. Quartz Smart Solutions for contract performance monitoring and Quartz Gateway are going to be used to eliminate inefficiency in cross-functional manual processes entailing procurement, finance and [Indecipherable].
In Life Sciences, TCS ADD our advanced drug development platform enabled by Artificial Intelligence was implemented for two leading pharma companies for automation of adverse events intake and processing. With this, TCS ADD has successfully completed automated processing of 0.5 million adverse even cases. Our offerings in this platform continue to address patient centricity, smart clinical analytics, interoperability and AI-enabled automation that are emerging trends in the life sciences industry.
TCS Optumera, our Artificial Intelligence Powered Retail Merchandising suite went live for four clients. TCS OmniStore, our AI Powered Universal Commerce suite had two go-lives. TCS HOBS, our suite of products of communication services had one new win and four go-lives in Q3. TCS iON had seven wins in the quarter ending December. During this period, we served over 35 assessment customers and administered exams for 8.8 million candidates. We reached a new industry partnership milestone in Q3, engaging with 1,580 corporates that leverage the TCS National Qualifier Test at their entry-level recruitment platform over 3,000 — and over 3,700 candidates have gotten placed till date. Lastly, MasterCraft and Giant 10 new clients in Q3 and 21 renewals.
Let me now go over our client metrics. These metrics are an important validation of our customer-centric business model. In Q3, we added one more plant year-on-year in the $100 million-plus band, bringing the total to 59. Twelve more clients in the $50 million-plus band, bringing the total to 130, 35 more clients in the $20 million-plus band, bringing the total to 290, 30 more clients in the $10 million-plus band, bringing the total to 456, 39 more clients in the $5 million-plus band, bringing the total to 658, 42 more clients in the $1 million-plus band, bringing the total to 1,217.
Let me now request Rajesh to speak on the demand drivers during the quarter.
Rajesh Gopinathan — Chief Executive Officer and Managing Director
Thank you, NGS. As mentioned by NGS, the seasonality led to some moderation in growth in verticals like BFSI, retail and technology and services and across all our key markets. While the seasonal aspect should reverse in the next quarter, the macroeconomic uncertainties are likely to result in a more balanced year in 2023, after two years of strong growth. For now, we see a client caution translating into greater focus on cost optimization. We are seeing an increase in the number of large operating model transformation engagement in the first three quarters of FY ’23. We won 20 such deals versus 16 in the prior year same period. Our innovative approach to redesigning the operations and building AI and indigent automation into individual processes and using TCS CogniX has been delivering superior outcomes for our clients and a differentiated positioning for TCS.
We are also seeing an uptick in vendor consolidation. Our scale, full services capability and track record of delivering outsized savings through operating model transformation is helping us with such deals. We have won quite a few such deals across BFSI, healthcare, manufacturing and telecom, and we see many more in the pipeline.
Here is a good illustration. The BT Group, UK’s leading provider of fixed and mobile telecommunications, announced a new partnership with TCS for its digital unit to boost its modernization plan. TCS will manage and ramp down over 70% of digital legacy technology estate and boost capacity to accelerate the build of its new strategic technology architecture supporting the group’s growth.
Coming to cloud transformation continues to be a strong area of growth. As I had mentioned last quarter, clients are much more focused on execution of the cloud journeys and the increased intensity is translating into an expanded opportunity for us. Our strategic industry-specific solution fabric built on market-leading hyperscaler platforms and covers enterprise digital transformation and drives exponential business value through industry innovations. We won several new cloud transformation deals in Q3. Here are a few examples. We were selected by Boston Scientific Corporation, a global medical devices company, as a strategic partner for purpose-led enterprise-wide multi-cloud acceleration program. TCS’ decade-long transformative partnership will help deliver cloud-native resilient and futuristic operations that will fuel Boston Scientific’s global business growth and the information of transforming lives through innovative medical solutions. TCS expanded its partnership with the UK-headquartered international savings and investment firm to help and later transform into a cloud-only organization by 2025 through a series of technology and business transformation initiatives.
Leveraging its deep contextual knowledge of the client’s IT and business landscape, TCS will help modernize and transform the replication estate using cloud-native architecture and seamlessly migrate them to a public cloud using TCS Cloud Council and TCS migration factory. This will also simplify the legacy infrastructure estate and facilitate their exit from on-premise data centers. We have been engaged by the largest online travel company to build a unified, modernized, enterprise data platform, which entails creating a data lake, abstracting data from transitional systems and other data sources and building intelligent self-learning engines, leveraging AML models and rendering seamless experience to customers and associates. The marketing meta analytics we deploy will enable greater personalization and tailored recommendations on their portal.
Moving on to growth and transformation, we usually talk about GMT engagements focused on the front end, helping clients launch innovative new products and services or new technology-enabled business models or channel improvements and personalization that enhances customer experience.
I’ll come to those in a bit, but before that, I also wanted to share some examples of how technology-led innovations at the back end can also result in revenue growth and improve customer satisfaction, predictive analytics, machine learning and AI of fueling such innovation. Let me illustrate with three examples. PostNord, a European-based communications and logistics solution provider, has partnered with TCS to achieve their win and parcel key strategic priority and to be the market leader. Our key objective is to transport more parcels per truck in each trip made between the terminals and their regional hubs. TCS developed a touchless AI-based solution using machine vision and importantly, existing security CCTV cameras to accurately measure the truck fill rate in real time and leverage the TCS proprietary algorithm to optimize the linehaul planning and truck departures. This has helped improve the revenue yield per truck, reducing the number of trips and associated costs and even the carbon footprint.
TCS partnered a US-headquartered multinational biopharmaceutical company in co-creating and implementing an industry-first AI-based solution to transform the handling of patient complaints about drug device combination products such as prefilled injections and auto injectors. The solution triages complaints and automatically separates out product-related complaints from drug-related adverse events, resulting in faster processing of complaints, timely feedback to patients and internal design and the production teams for remediation. This has helped improve product quality, enhance patient experience and contributed to improved sales of such combination products.
Toyota material handling in North America engaged TCS to transform its field service team’s ability to diagnose and repair. TCS solution enables guided troubleshooting, self-service and cognitive search of technical products support content using AI ML and NLP, which help reduce downtime associated with unplanned maintenance by 10% to 15%. The transformation has improved first time by right fix, reduced the dealer overheads and resulted in service stickiness leading to increased service part sales for dealers and to Toyota material handling.
M&A continues to be a recurring team in our customers GMT agenda. They have been interesting us with these integration or divestiture mandates on account of our contextual knowledge of the business and IT landscapes. Our highly collaborative inside-out approach to transformation, and proprietary accelerators such as TCS Crystallus, a set of preconfigured industry and business solution available on all-leading enterprise application platforms. Here are three examples of it. Philips Domestic Appliances, a carveout from Royal Philips and a global leader in kitchen, coffee, garment care and home care appliances, engaged TCS as a sole source primary partner to support PDS transition to an independent entity and its business transformation to become a digital first and consumer-centric organization.
TCS established a digital core for the new business, designed lean business processes and successfully rolled out the pilot in seven countries. We are now working towards a big bank go live for the rest of the world. This is expected to be the foundation for a 10x growth in sales for expansion into new markets and channels with 20 million highly engaged customers. Similarly, we are helping a leading North American bank with the seamless merger of our US bank. TCS’ deep contraction knowledge and platform expertise was critical for success in this large and complex M&A program, involving online banking channels, treasury and payment services, auto and equipment financing among others. TCS did an end-to-end mapping of the products and processes of the acquired bank and carried out a parity uplift to ensure consistent experience for incoming acquired bank customers. At the back-end, we integrated new lending and leasing products into the acquired bank’s portfolio and migrated the acquired bank’s products, customers and users to the acquirers’ platforms. With the successful integration, the acquirer bank expanded into a large complementary contiguous market in the US, doubling its branch footprint and onboarded over 1.5 million new customers and inherited a strong commercial business with a high-quality loan portfolio.
Finally, in Q3, we were chosen by European life and material sciences company to lead the global integration of one of the largest acquisitions. TCS is responsible for end-to-end integration of warehouses and factories. It will set up a transformation management office to enable faster realization of synergies and serve as the foundation for future M&A.
Let me now provide a few examples of TCS partnering with clients to use digital technologies to help launch innovative new products or services that drive new revenue streams. A leading US headquartered media and technology multinational partnered with TCS for building a single digital ecosystem platform spanning home entertainment and mobility. As the sole strategic partner, TCS was responsible for the full life cycle of the new technology platform for this new business line. TCS designed and implemented the solution through an API grid for the entire ecosystem, leveraging AIML for agile operations, proactive care, proactive service management and preventive product management. The new business model helped deliver truly personalized and unique customer experiences to end-customers of the client. It recently crossed five million customer connections and witnessed high NPS scores, and customer satisfaction ratings.
TCS held leading US money transfer service provider transform its technology estate into a modern cloud powered platform, enabling it to launch new products faster, expand into new markets and strengthen its customer relationships. Leveraging the new integrated next-generation multicurrency digital wallet and digital banking platform, our clients has forayed into digital banking in Europe, offering customers access to a variety of differentiated multicurrency payment services in a single app. The new platform has also helped the client successfully integrate with cross-industry ecosystem partners to offer millions of customers greater ease, reliability and access to money movement and payment service capabilities.
Overall, the transformation has resulted in increased customer loyalty, reduced customer journey barriers and created new revenue streams.
Similarly, in Q3, an APAC-based automotive electronics manufacturer chose TCS as their co-innovation partner in developing Next-Gen instrument panel cluster. TCS services will expand product development, HMI or Human-Machine Interface, functional safety, cyber security and other cockpit-related products. In prior calls I have given — have been giving examples of how TCS is participating in large industry transformation initiatives. Again, in the utility sector, we have had several examples of TCS helping utilities empower producers navigate energy transition. Our domain expertise and track-record in executing successful transformation is firmly enabling us as the preferred — establishing us as the preferred G&T partner in this sector.
Here is one more example of the same. Western Power, a leading Australian power generator and distributor selected TCS for our credentials in this space to design, deliver and support a distribution system operator platform solution. Our solution enables the client to orchestrate distributed energy resources or DER such as rooftop solar, batteries and large appliances across homes and businesses into a virtual power plant, aggregating the excess electricity generated by their assets and then dispatching it into what will become new energy markets and services. The TCS solution also addresses the critical issues like low-voltage network visibility and optimization. With over 650 participating customer energy assets still date, the platform has demonstrated the safety and reliability of aggregated DER and help the client model — help the client model the complexity of bidirectional energy flows. This will open doors for return power to participate in the future district energy market and build new revenue streams, while safely operating within the technical limits of the distribution grid. Likewise, we are participating in longer-term transformation trends in the transportation sector. Last year I had spoken about the work we are doing for transport for London to transform the administration of taxies and private hire vehicles in London to prepare it for an electric and autonomous future.
In Q3, we won a deal that will transform the railway sector in the UK. TCS was chosen by the Rail Delivery Group, UK’s leading rail industry membership body, for the creation of a rail data marketplace. TCS will leverage data syndication, monetization and marketplace features of its Dexam platform and the cloud-native platform of a leading hyperscaler to combine fragmented sources of rail data into one digital service. This will optimize the sharing of data and real-time information to passengers and operational bodies, improving the transparency and enable a UK-wide railway innovation ecosystem.
Let me now come to the Q3 order book. Our deal closures in Q3 amounted to a TCV of $7.8 billion. By vertical, BFSI had a TCV of $2.5 billion, while retail order book stood at $1.2 billion. The TCV of deals signed in North America stood at $4.2 billion.
With that, we’ll open the line for questions.
Questions and Answers:
Operator
Thank you very much. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] The first question comes from the line of Kumar Rakesh from BNP Paribas. Please go ahead.
Kumar Rakesh — BNP Paribas — Analyst
Hi. Thank you for taking my question. Wishing the team a very Happy New Year. Hope 2023 will be a great year for you. My first question was to better understand the headcount moderation during the quarter. During the press conference, Rajesh, you talked about the focus on headcount efficiency to continue in fourth quarter as well. And I think the headcount stays steady in 4Q, you will be exiting the year with a headcount growth of about 4% Y-o-Y. My question was, is that an indication of growth visibility that you have today? Or — and hence, the rationalization? Or you are confident of driving similar or higher productivity gains? And hence, revenue growth could be significantly higher than that?
Rajesh Gopinathan — Chief Executive Officer and Managing Director
Rakesh, a very happy new year to you too. I think the best way to think about it is that on a year-on-year basis, our net headcount is comparable is somewhere about 55,000 or so. So we have significantly invested in building up capacity in 2021, tried as much as possible to bypass the industry’s hire from each other attrition cycle and focus on hiring at entry-level and invested in training and cross-training our resources. That investment has hit our productive capacity and stood us in the street. So, the incremental hiring that we saw this year should be seen in context of what we’ve done in the last year also. And overall, we are very comfortable with where we are with our net headcount. We hired significantly ahead of revenue growth in ’21, and balanced it with a more prudent hiring in ’22 or ’23 FY calendar ’22. Going forward, we should be back to a more normal kind of hiring trend. While specific numbers will keep evolving, we should be expecting hiring in the range of close — gross hiring in the range of probably in the 125,000 to 150,000 for the year, and offsetting it with a more expected normalization of attrition levels to our long-term averages, which will give us sufficient capacity to take care of growth and then we can keep bringing in shorter-term hiring to take care of demand as it unfolds. So that would be the best way to think about and model it.
Kumar Rakesh — BNP Paribas — Analyst
Got it. Thanks. That’s very helpful. My second question was on the deal side. So you talked about that cost optimization deals have already started picking up meaningfully. In the past, during recessions, we have noticed that first, there’s a sharp cut to IT budget before cost optimization deal starts picking up. I understand that visibility on client budget is still a couple of months away. But do you think this time the transition from discretionary IT spending to cost optimization deal could be far smoother than what we have seen in earlier recession periods?
Rajesh Gopinathan — Chief Executive Officer and Managing Director
It’s also a factor of how it is playing out in different markets. So as I said, if you take a market like UK that is well and truly into much more strategic long-term cost base restructuring kind of deals. And we are seeing multiple such ones play out, and you are participating very strongly in that. Market like US is more — we need to wait and watch how that will play in the next couple of quarters, but we are fairly constructive. And our conversations with customers, it’s a much more balanced on where they are equally positive as well as cautious, and we should see a mix of both cost and transformation deals. Europe decision making is slow. So it’s very difficult to call it one way or the other. So this is not — is not some major single event that has happened globally. All three markets are moving to three different beats. And each of them are indexed to their own specific outlooks.
Kumar Rakesh — BNP Paribas — Analyst
Got it. Thanks a lot.
Operator
Thank you. Our next question is from the line of Vibhor Singhal from Nuvama Equities. Please go ahead.
Vibhor Singhal — Nuvama Equities — Analyst
Yeah. Hi. Thanks for taking my question. I hope I am audible. Congrats, Rajesh, for a great performance in a seasonally weak quarter. So, Rajesh I just wanted to basically pick your vein on the performance of the retail segment in this quarter. I think the company — the segment has also found the company average growth rate also doing daily really well, while globally we are hearing about a lot of these retail chains are calling out business especially in European parts as well. So any color on that would be helpful as to what drove this strong performance in this quarter? Is there some basically, do you expect this to sustain in the coming quarters also? And also, is there some color to it in terms of, let’s say, US retail may be doing slightly better than Europe retail, as you just called out that in Europe, the decision making is slow on an overall basis.
Rajesh Gopinathan — Chief Executive Officer and Managing Director
Okay. Let me answer as much questions as I can. First of all, the numbers that we show in retail is a combination of Retail, CPG, Travel & Hospitality. So that’s the industry group that we report on. Within that, if you look at it, Travel & Hospitality is enjoying a very strong rebound after a very, very challenging couple of years. And we are one of the largest, if not the largest service provider in that industry. And we were significantly impacted in the last couple of years. And also, we are now participating in the also quite handsomely. The CPG sector continues to — it’s going through multiple forms of transformation, mostly led in various forms on a direct-to-customer channel strategy transformation and significant investments going into that. And there also analytics, sustainability, direct-to-customer. Each of these themes are continuing to find a lot of attraction and continued investment and we are participating in all three quite well. Retail itself is more regional and different markets have different focus. Plus within retail, grocery as a segment continues to do well. More of discretionary retail is, as I said, market-specific. Going to the last part of your question, US retail sales adjusted for inflation itself, still have come in stronger than last year, and last year was a very strong year. So overall, from a volume perspective, retail in the US has done well. However, profitability has been challenged both by customers working down the product line in terms of preferring a slightly cheaper product on a relative basis as well as the fact that cost structures have been up. So profitability for many retailers has been under challenge. And we need to wait and see how this will translate it. But some of those costs are transient, some of them will require more structural cost transformation deals. So it’s a fairly complex set of drivers in there. It goes back to what we have always said. We stay close to the customer and we play each customer and each scenario on a one-on-one basis. And overall, we believe that the industry continues to be very attractive. And we have the full suite of capabilities to be participating across this broad spectrum and to make sure that we stay relevant to customers on a very individualized basis.
Vibhor Singhal — Nuvama Equities — Analyst
Sure. Thanks for the very detailed and comprehensive answer. If I could just maybe drill down a bit more since you touched upon the Travel & Hospitality segment, as you mentioned, that we bore the brunt of it while COVID start kind of segment was down, and now we’re seeing a strong rebound in the segment. I think globally also as we are seeing very strong bookings increase in Spain and baggage and data also come up. So do you expect this momentum to maybe continue in the travel segment in the coming quarters as well? Of course, this is such a privacy of giving no more waves and no more lockdowns and everything. But do you think — do you expect this momentum to continue in this segment in the next couple of quarters, given that these slides would now probably start spending more on it?
Rajesh Gopinathan — Chief Executive Officer and Managing Director
I think so. Of course, this is caveated, and of course that there is no major event that happens, but if things continue as they are. We expect that the sector will continue to do well. One of — there is the demand side. In fact, the sector is supply-constrained. And as more capacity comes on board, they should continue to do very well. More importantly, while they did a great job dealing with the pandemic, many structural changes that need to be done have been identified and those are longer-term programs that will need to be put in place. So we expect a lot more of proprietary investments on the more forward-looking customers and very high profitability during the course of this year. We’ll give them that watches that is required to make sure that they make the investments for increasing the resilience of their network and resilience of their operation in any future potential senators.
Vibhor Singhal — Nuvama Equities — Analyst
Sure. Glad to hear that. Thanks a lot Rajesh for clearing my questions and wish you all the best.
Operator
Thank you. And our next question is from the line of Sudheer Guntupalli from Kotak Mahindra Asset Management. Please go ahead.
Sudheer Guntupalli — Kotak Mahindra Asset Management — Analyst
Yeah. Good evening gentlemen. Thanks for the opportunity and congratulations on better [Technical Issues]
Rajesh Gopinathan — Chief Executive Officer and Managing Director
[Technical Issues] technology adoption cycle. And when the focus in terms of actual enterprise investments to execute on those transformation will continue. So that’s the number of platforms, greater focus on larger programs, much more commer technology environment. It’s typical for the sake — this stage of technology adoption cycle. So probably that also kind of reflects the difference between the products space and services space. But beyond that, I don’t think we have any greater visibility.
Sudheer Guntupalli — Kotak Mahindra Asset Management — Analyst
And my second question, the broad agreement by now is that growth for the industry in FY ’21 — ’24 will revert to pre-COVID levels impacted by macro issues and the unwind of COVID pull forward impact, et cetera. Keeping aside the negativity around the near term, how do you think of the medium-term growth prospects for TCS? I’m not asking for a hard guidance, but do you continue to believe that once this near-term noise around macro, et cetera, is in the base and behind us, growth rates can again accelerate back to double digits, which has been our medium-term aspiration?
Rajesh Gopinathan — Chief Executive Officer and Managing Director
We believe so. We believe that our stance is quite positive. And as I said, if we take market-by-market, US, we definitely think that’s the scenario. In UK, we are participating very well. Market itself is challenged. Europe, once the geopolitical situation calms down, we believe that we have the full suite of capabilities to be able to participate. And one decision-making starts, we should be participating with it. So overall, we’re quite confident about, again, as I said, having the full suite of services to be able to be relevant to customers across a wide spectrum of actual scenarios. And therefore, we are quite confident about the medium- to long-term outlook.
Sudheer Guntupalli — Kotak Mahindra Asset Management — Analyst
Thanks Rajesh. All the best for the future.
Rajesh Gopinathan — Chief Executive Officer and Managing Director
Thank you.
Operator
Thank you. Our next question is from the line of Pankaj Kapoor from CLSA. Please go ahead.
Pankaj Kapoor — CLSA — Analyst
Yeah. Hi. Thanks for the opportunity. I have two questions. First, Rajesh, you mentioned that the higher share of cost takeout deals, which are now coming in the pipeline. So just wanted to understand if such deals are also moving faster in terms of decision-making? And any color if you can give on the competitive intensity for such deals? I mean is it normal? Or are you seeing such deals getting more competitively bid now by other lenders?
Rajesh Gopinathan — Chief Executive Officer and Managing Director
Speed is varying by market. I could say that UK decision making is quite fast. Customers are very clear, and there is a lot of action happening there. US is normal. It continues to be doing well, but that does not account for the short-term kind of aspect of that market. Everybody is a bit cautious for the time being, but we don’t think that will last into next year, but we’ll see. In three months’ time, we should be able to know better. Europe decision making has significantly slowed down. So that’s the full spectrum there. But in terms of competitive intensity, many of the deal structures are quite complex, and that kind of narrows down the field to a much more limited set of competitors. Within that, obviously, people are aggressive and everybody is hungry, but at least the competition set is a much narrower set than even a few years ago when deals were smaller, and there was a lot more focus on immediacy of response on the supply side challenge.
Pankaj Kapoor — CLSA — Analyst
Understood. And my second question is on the special dividend. With this, you would have almost paid out the entire of the amount that we paid last year, which included a buyback. So does this mean there is a rethink in terms of the mode of capital return in favor of dividend versus buyback?
Rajesh Gopinathan — Chief Executive Officer and Managing Director
No. I think — you should, rather than look at it in absolute terms, on INR terms, we are growing at 15% plus kind of basis. So if you consider that growth, we are still benchmarked that 80% to 100% of net profit are free cash flow kind of a trajectory, not much of difference to that.
Pankaj Kapoor — CLSA — Analyst
Okay. So a buyback remains to something which a Board can consider whenever the window opens up.
Rajesh Gopinathan — Chief Executive Officer and Managing Director
As you know, the current regulations require a 12-month gap between the two buyback announcements. So there will be no — so that’s not — buyback will be considered when it becomes, what should I say, possible from the regulatory perspective. Right now, we are in a period where we couldn’t consider a buyback anyway.
Pankaj Kapoor — CLSA — Analyst
Understand that. Thank you so much and wish you all the best for FY ’24.
Rajesh Gopinathan — Chief Executive Officer and Managing Director
Thank you.
Operator
Thank you. Our next question is from the line of Sandeep Shah from Equirus Securities. Please go ahead.
Sandeep Shah — Equirus Securities — Analyst
Yeah. Thanks. Thanks for the opportunity. Rajesh, one broader question for — at an industry level. Where are we in terms of the cloud transformational journey or adoption by the enterprise client? And do you believe the pace of the adoption can change starting from CY ’23 onwards irrespective of the macro issues?
Rajesh Gopinathan — Chief Executive Officer and Managing Director
Cloud reduction journey is, I would say, 1/3 of the way in. Different customers have different challenges there. Some of them have who gone very rapidly to the cloud, mostly lift and shift, are realizing that unless it is architected right, cloud costs are actually quite difficult to manage. And it’s a fairly large bill that can come, if you do not architect and if you do not actively manage the cloud environment. So some of the transformation activities and stages that we are doing is to actually help them execute that transformation agenda, so that their application stack is architected in a manner in that — in which it can fully leverage the variability that the cloud model offers. Unless you’re able to actually switch off and release the resource, you will not participate in the variability. And to be able to do that, you need to be able to architect our application properly, so that resource dependency can be switched off on a variablized manner depending on what the requirements are. So that’s one kind of work that is going on. The other kind of work that’s going on is actually the migration is still of complex workloads require a lot more heavy-lifting. And that is the other kind of an area that there’s a lot of work going. So these are — neither of them are easy to execute. So you should not expect much acceleration. It is more, as I said, next couple of years is going to be about execution, bigger operational capabilities. But it will be a steady move. It will not — neither is it likely to accelerate significantly, neither is it likely to decelerate or fallow up if the movement is committed. The direction is very clear. The investments are in place. The deals are in place. Now the execution and the operation has to happen. And that’s likely to be the story for the next year or two.
Sandeep Shah — Equirus Securities — Analyst
Okay. This is helpful. Just a question in terms of CY ’23 IT budgets. So do you believe the spend of the IT budgets could be conservative in the first half of the calendar year versus the second half? Or do you expect spend to be — remain normal like any other year, though the budgets may be slightly lower versus the earlier last two years because of the macro slowdown?
Rajesh Gopinathan — Chief Executive Officer and Managing Director
Again, going by market-by-market, in UK, unlikely that it is any different than last year because there is no incremental shift to the overall environment in UK. US, we’ll have to wait and see how the next couple of months plays out. We are positive or rather we are hopeful that we’ll have to actually wait for actual confirmation to come. We think that the immediate caution that is there, probably will dissipate a few months into the year. Europe, we’ll have to wait for some major events to happen for change. Europe will be incrementally cautionary this year compared to last year.
Sandeep Shah — Equirus Securities — Analyst
Okay. Okay. And just a last bookkeeping question. I think this third-party pass-through cost increase — this time, does not relate to the domestic revenue, if I’m not wrong. It relates to the international revenue. Will it be growth headwind in the fourth quarter, if it doesn’t repeat?
Samir Seksaria — Chief Financial Officer
So third-party cost, actually you can link it to the domestic revenue. There has been a sequential increase in domestic revenue and typically Q3 has some bit of it coming in. That said, on a year-on year basis, we don’t see that big jump.
Sandeep Shah — Equirus Securities — Analyst
Okay. Thank you. And all the best.
Operator
Thank you. Our next question is from the line of Ravi Menon from Macquarie. Please go ahead.
Ravi Menon — Macquarie — Analyst
Thank you. Congratulation gentlemen on a good quarter. I saw regional markets and other segments have seen an acceleration year-on-year growth versus last quarter despite relatively built-in growth in India. Should we think that this comes from a growth traction in the insurance BPaaS area? I think NGS has mentioned 16 go-lives in the contact for banks. Any large deals here that you’d like to call out or maybe also share some comments on the deal pipeline in the segment?
N. Ganapathy Subramaniam — Chief Operating Officer Director and Executive
Sorry. I didn’t hear you properly. Could you repeat the question?
Ravi Menon — Macquarie — Analyst
NGS, you talked about six new go-lives this quarter for banks. Just wondering if there are any large deals in the bank segment and insurance. And how the pipeline is shaping up there?
N. Ganapathy Subramaniam — Chief Operating Officer Director and Executive
Yes. So one of the areas where we are seeing opportunities on the significant pipeline is various digital core, whether it is funding or capital markets or insurance. And all of them are looking at putting together a new digital core. And going through a well period in the last about two years or so, then clearly, now people are thinking about new core banking system or a new security settlement system, which are really architected for the future, which are cloud-native, which are inherently micro services or inherently content capability of the marketplace with a significant amount of the APIs and microservices that will enable them to integrate into [Indecipherable]. So as you may recall you see now we — during this quarter, we announced that large deal win with the China Trust Banking Corporation. It is really the future core, right? In terms of architecture in a fashion that it is augmented and it is truly providing open banking APIs and so on and so on. We see opportunities are opening up. And as you see, at this moment, we are working on three cores, such opportunities there from the larger brands and looking at modernizing their core in favor of something which is completely a open banking, opening API. And so some of the market infrastructure institutions planning to create an open payment system. And some of them typically say that whatever you guys have implemented in India, when you offer this whole instant payments, digital payment infrastructure in our geography. So these are opportunities that are coming out of it. And there are a decent number of opportunities and pipelines that we see in banking of the large capital market size.
Ravi Menon — Macquarie — Analyst
Thank you. And SG&A travel costs have increased sharply. How close to normal — some of you do think we are in business travel. And I think we are still about 30 bps below what we used to clock pre-COVID. So should we think of travel is a continued headwind that you think will stabilize at this level?
N. Ganapathy Subramaniam — Chief Operating Officer Director and Executive
Yes. As normalcy continues to get true we would expect travel costs to continue to increase. If you look at it more on the direct revenue side or the direct cost side, a lot of it is coming in. But on SG&A, as things open up, more on sales related costs as well as team building expires and all the team meetings happening. That cost is increasing. We would see it going back towards the pre-pandemic levels.
Ravi Menon — Macquarie — Analyst
Great. Thank you and best of luck for FY ’24.
Operator
Thank you. Our next question is from the line of Abhishek Kumar from JM Financial. Please go ahead.
Abhishek Kumar — JM Financial — Analyst
Yes. Hi. Thanks for taking my question. I have a question on budget. Rajesh, you mentioned US regulating watch more than therefore budget could take some time. Is there any possibility that because of that there was probably a little bit of budget flush in 4Q, which could have supported the growth?
Rajesh Gopinathan — Chief Executive Officer and Managing Director
Sorry, budget flush due to a —
Abhishek Kumar — JM Financial — Analyst
See, I mean there is possibly an indecision or wait and watch mode for CY ’23 budgets. So to exhaust CY ’22 budgets, was there, I mean, any possibility that the budget flush to exhaust the previous year’s budget?
Rajesh Gopinathan — Chief Executive Officer and Managing Director
No. I don’t think so. It’s more of — as FY ’23 will be slightly delayed in its initial couple of months till people clarify. But again, it’s entirely level of speculation. So we’ll have to just wait and see how it plays out in the next few months.
Abhishek Kumar — JM Financial — Analyst
Okay. Another related question to this is, given this little bit of indecision in US, do you think the cost takeout projects in US probably would be low compared to other geographies? At the same time, spending on discretionary would be would be cautious. And that would probably keep with the budgets a little low?
Rajesh Gopinathan — Chief Executive Officer and Managing Director
Yes. Fair assumption. Even if you look at our US TCV, that is down both sequentially and on a year-on-year basis. So that TCV still reflects that — that decision making lag in this quarter.
Abhishek Kumar — JM Financial — Analyst
Okay. Yeah. That’s fair. Thank you, so much.
Operator
Thank you. Our 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, is it fair to believe that the ACV growth could be lower than TCV growth as a mix of the deals are changing? And should that be even considered as a lead indicator for growth going forward? Or you think the deal win trajectory could actually shift upwards over the coming quarters?
Rajesh Gopinathan — Chief Executive Officer and Managing Director
Gaurav, I don’t have a direct answer to that. But there is not much of change in terms of the mix of deal structures between large or small or long-dated or small-dated. So nothing that we can call out of that last two, three quarters that we can say that we’re seeing — there is an elongation in decision-making, which we have spoken about last quarter also and which has also played out this quarter. So that the pipeline growth and the qualified pipeline growth is ahead of the actual TCV growth that we’re seeing. In fact, we have seen a sequential decline in TCV, while our qualified pipeline still continues to grow in absolute terms. So beyond that, the specific mix of deals is not materially changed.
Gaurav Rateria — Morgan Stanley — Analyst
Got it. Secondly, on the margins as headwinds on attrition subside, would our immediate priority be to take margins back to our aspirational band of policy to coordinate — or would we prefer to prioritize some investments, keeping margins stable after recovering fair to 25%?
Rajesh Gopinathan — Chief Executive Officer and Managing Director
So, Gaurav, our margins or our industry leading margins are on the back of the investments which we hit and most of our investments, whether it is in terms of valent, in terms of research and innovation, the branding, all factored it into the P&L. And our aspirations for the margins are taking into account all these investments.
Gaurav Rateria — Morgan Stanley — Analyst
Got it. Thank you.
Operator
Thank you. Our next question is from the line of Ashwin Mehta from Ambit Capital. Please go ahead.
Ashwin Mehta — Ambit Capital — Analyst
Hi. Thanks for the opportunity. Rajesh, one question. We’ve seen pretty strong growth in regional market and others over the last two quarters, it’s of the order of almost 6% sequential. So what is the nature of demand here? And how sustainable is this going forward?
Rajesh Gopinathan — Chief Executive Officer and Managing Director
The reason of calling the segment out is because it’s volatile and difficult to predict. So the sustainability is a difficult answer. From a nature perspective, it’s come both from the market side. India has done very well. In fact, APAC, ex-Australia and also have done well. So markets have done well. As also the product side of the business that NGS spoke about and assets and platform side also has done well. So it’s come from both sides, both markets as well as from the products side.
Ashwin Mehta — Ambit Capital — Analyst
Okay. Okay. Fair enough. And the second question was that you mentioned in the press conference as well that manufacturing has been more resilient compared to your expectations. So any trends that we can take from manufacturing, given the fact that, if you look at client financials manufacturing growth over the next two years, we expect it to be actually better than what it was before?
Rajesh Gopinathan — Chief Executive Officer and Managing Director
Yes. So, well, that I didn’t know that, but that correlates to what we are also seeing. But I’m still worried because all the global supply chain disruption, energy price disruption, industries like process manufacturing are much more globally integrated. So they’re not as sector-by-sector isolated as, let’s say, retail. So we are still cautious. But our operating approach is always the same, stay close to the customer, deal with the customer on a dual opportunity-to-opportunity basis. And we will continue to participate on that basis. But on a zoomed out way, talking to customers, there on — it is an industry that has — that’s not completely out of the woods.
Ashwin Mehta — Ambit Capital — Analyst
Okay. Fair enough. Thanks, Rajesh, and all the best.
Rajesh Gopinathan — Chief Executive Officer and Managing Director
Thank you.
Operator
Thank you. Our next question is from the line of Rahul Jain from Dolat Capital. Please go ahead.
Rahul Jain — Dolat Capital — Analyst
Yes. Hi. Thanks for the opportunity. Basically, my question is related to TCV signing, which is $7.8 billion is slightly lower by our recent average win despite the fact that we have been favorable situation on the vendor consolidation exercise. So what explains this mission at? Is this because such deals are about to do more for the same? Or it reflects weak demand in Europe as articulated earlier?
Rajesh Gopinathan — Chief Executive Officer and Managing Director
I think it’s a combination of everything. It’s a delayed decision making. But the TCV will not be as linear as revenue, which is why we have given a band of saying $7 billion to $9 billion is what we think the TCV will remain on during the course of this year. And it has stayed well within that band throughout for the last three quarters.
Rahul Jain — Dolat Capital — Analyst
Right. And just a clarification on this retail deal that we announced separately. Is it also reflecting the entire retail CPG or it is only retail-specific?
Unidentified Speaker —
One second. We’ve repaid TCV. Does it include CPG?
Rajesh Gopinathan — Chief Executive Officer and Managing Director
Oh, yes, it does. It does. [Indecipherable]
Rahul Jain — Dolat Capital — Analyst
Okay. Okay. Thank you so much.
Operator
Thank you. Ladies and gentlemen, that was the last question. I now hand the floor back to the management for closing comments. Over to you, sir.
Rajesh Gopinathan — Chief Executive Officer and Managing Director
Thank you, operator. We are pleased with our performance in a seasonally weak December quarter, growing at 19.1% in INR terms and 13.5% in constant currency. Our order book was good, but softer than in prior quarters, reflecting the cautious stance that many of our clients have taken. Our operating margin extended sequentially to 24.5%, and our net margin was at 18.6%. On the people front, LTM attrition and IT services fell slightly to 21.3%, and should continue to taper down in the quarters ahead.
With that, we will wrap up our call. Thank you all for joining us on this call today. And I must say that you are a very mature and knowledgeable group for not having –or for having resisted asking us about the impact of ChatGPT on our industry. Enjoy the rest of your evening or day, and stay safe.
Operator
[Operator Closing Remarks]