Tata Consultancy Services Ltd (TCS) Q4 FY23 Earnings Concall Transcript

Tata Consultancy Services Ltd (NSE:TCS) Q4 FY23 Earnings Concall dated Apr. 12, 2023.

 

Corporate Participants:

Kedar Shirali — Head, Global Investor Relations

Rajesh Gopinathan — Chief Executive Officer and Managing Director

K. Krithivasan — President and Global Head, Banking, Financial Services and Insurance Business Unit

N. Ganapathy Subramaniam — Chief Operating Officer

Samir Seksaria — Chief Financial Officer

Milind Lakkad — Executive Vice President and Chief Human Resources Officer

Analysts:

Ankur Rudra — JPMorgan — Analyst

Sudheer Guntupalli — Kotak Mahindra Asset Management — Analyst

Sandeep Shah — Equirus Securities — Analyst

Abhishek Kumar — JM Financial — Analyst

Pankaj Kapoor — CLSA — Analyst

Gaurav Rateria — Morgan Stanley — Analyst

Ravi Menon — Macquarie — Analyst

Vibhor Singhal — Nuvama Equities — Analyst

Presentation:

 

Operator

Ladies and gentlemen, good day, and welcome to the TCS Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Kedar Shirali, Global Head, Investor Relations at TCS. Thank you, and over to you, sir.

Kedar Shirali — Head, Global Investor Relations

Thank you, operator. Good evening, and welcome, everyone. Thank you for joining us today to discuss TCS’s financial results for the fourth quarter and full year FY 2023 that ended March 31, 2023.

This call is being webcast through our website and an archive, including the transcript, will be available on the site for the duration of this quarter. The financial statements, quarterly 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 day, everyone.

Kedar Shirali — Head, Global Investor Relations

Mr. K. Krithivasan, CEO Designate and President.

K. Krithivasan — President and Global Head, Banking, Financial Services and Insurance Business Unit

Hi, good day.

Kedar Shirali — Head, Global Investor Relations

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

N. Ganapathy Subramaniam — Chief Operating Officer

Hello, everyone.

Kedar Shirali — Head, Global Investor Relations

Mr. Samir Seksaria, Chief Financial Officer.

Samir Seksaria — Chief Financial Officer

Hi, everyone.

Kedar Shirali — Head, Global Investor Relations

And Mr. Milind Lakkad Chief HR Officer.

Milind Lakkad — Executive Vice President and Chief Human Resources Officer

Hi, everyone.

Kedar Shirali — Head, Global Investor Relations

They 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 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 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.

In FY 2023, our full year revenue grew 17.6% in rupee terms and 13.7% in constant currency terms and 8.6% in dollar terms. Our operating margin for the year came in at 24.1% and net margin was at 18.7%.

As you are aware, four weeks ago, we announced a leadership transition at TCS. I will be stepping down from TCS, stepping away from TCS in September 15. The Board has identified Krithi, who has led our largest segment BFSI, over the last many years, as the CEO Designate. Today, the Board has also announced that Krithi will be taking over the role of CEO and MD as of June 1. We are currently going through a structure transition plan and, for the purpose of this call, I will speak about the year gone by and he will cover the forward-looking topics.

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

Over to you, Samir.

Samir Seksaria — Chief Financial Officer

Thank you, Rajesh. In the fourth quarter of financial year 2023, our revenue was INR59,162 crores, which is a year-on-year growth of 16.9%. In dollar terms, revenue was $7.195 billion, a year-on-year growth of 7.4%. In constant currency, our revenue growth in Q4 was 10.7%. For the full year, our revenue was INR225,458 crores, which is a growth of 17.6% over the prior year. In dollar terms, the reported revenue was $27.927 billion, a growth of 8.6%. Constant currency revenue growth for the full year was 13.7%.

Let me go over our financial performance. Our operating margin in Q4 stayed flat sequentially at 24.5%. With supply-side challenges abating, we are able to further bring down our use of subcontractors in Q4. The benefit of that, other efficiencies and some currency gains was canceled out by higher on-site costs. Our full year operating margin was at 24.1%, a contraction of 1.2% over the prior year. In terms of headwinds, our annual wage increase set us back by 1.6%. The supply-side challenges during the year cost us another 1.4% and travel expenses went up by 0.3%. This was mitigated by 0.5% of realization improvement, 0.5% of flatter employee pyramid and 1.1% of currency benefit.

Net income margin in Q4 was 19.3% and for the full year was 18.7%. Our EPS grew 11.2% during the year. Effective tax rate for the year was 25.7%. It’s worth noting that this has risen steadily from about 24% in FY ’19, as more of our facilities come out of SEZ tax benefits. Our accounts receivable was at 65 DSO in dollar terms, down one day sequentially.

Net cash from operations was INR118.64 billion, which is 104% of net income. Free cash flows were at INR110.95 billion and invested funds for March stood at INR498.23 billion. The Board has recommended a final dividend of INR24 per share, bringing the total dividend for the year to INR115 per share. For the full year, including the buyback tax paid out at the beginning of April, the company’s shareholder payout was INR45,602 crores.

Over to you, Milind.

Milind Lakkad — Executive Vice President and Chief Human Resources Officer

Thank you, Samir. We are honoring all the job offers and had a net addition of 821 employees in Q4 and 22,600 employees for the full year, resulting in a closing headcount of 614,795. These numbers mark the full extent to which we had ramped up our current acquisition during the years to cope up with the unprecedented churn in the first half of the year. We onboarded over 44,000 freshers and our highest ever number of experienced professionals during the year. We continue to have a very diverse workforce with 150 nationalities represented and with women making up 35.7% [Indecipherable].

Our investments in organic talent development continue to deliver exceptional outcomes. In FY ’23, TCS has logged 48.3 million learning hours and acquired [Technical Issues] competencies. The increased rigor and focus on external certifications has resulted in 53,000 TCSers acquiring certifications on hyperscaler cloud skills during the year, bringing the total number of such certifications over 100K and making TCS one of the top two partners of the largest cloud providers.

Our cohort of contextual masters continued to expand and is currently over 62,000 strong. We are investing in grooming them into the future transformational leaders by collaborating with Ivy League B Schools to create tailored leadership development programs for them. We are also helping our mid-level employees gain market-relevant skills so that they can grow faster in TCS. The curated programs we have designed for them have seen massive participation of over 90% of that cohort, with about 60% receiving certifications. As more and more employees have been returning to work in the course of the year, we have been ramping up digital training to enhance learning outcomes. Over 80,000 employees have been benefited from such in-person training in Q4.

Accelerate, our industry-recognized talent transformation platform, has seen nearly 400,000 TCSers record their career aspirations, of which 100,000 are focusing towards their aspired role. Similarly, our award-winning Elevate program, which links learning to career growth, has over 407,000 employees participating in it. Our LTM attrition in IT Services was at 20.1%, down 1.2% sequentially, but still very high, because it reflects the unprecedented levels of churn in prior quarters. Our quarterly annualized attrition on the other hand fell by over 4% [Technical Issues] and by close to 10% from the peak level in Q2.

Over to you, NGS, for some color on segments and production platforms. Over to you.

N. Ganapathy Subramaniam — Chief Operating Officer

Thank you, Milind. Let me walk you through our segmental performance details for the quarter. All growth numbers are on year-on-year constant currency basis. From an industry vertical perspective, growth in FY ’23 was led by Retail and CPG, 19.7%; and Communications and Media, 14%. All other verticals showed growth in a narrow band around the company average. Technology and Services grew 13.7%, Life Sciences and Healthcare grew by 13.3%, Manufacturing grew by 13%, and BFSI by 11.8%.

In Q4, customer sentiment across BFSI, Retail and Technology Services verticals, particularly in Europe and US, is one of caution. We saw clients deferring newer initiatives which were not critical and, in some cases, completely halt discretionary projects. Anxiety around the stability of the banking sector in March also added to the uncertainty. Consequently, growth decelerated across all verticals. Q4 growth was led by Retail and CPG, which grew by 13%, and Life Sciences and Healthcare grew by 12.3%. Other verticals grew in single digits, Technology and Services by 9.2%, BFSI by 9.1%, Manufacturing by 9.1%, Communication and Media by 5.3%.

In terms of geography, full year growth was led by North America, 15.3%; UK, 15%; and Continental Europe, 11%. In emerging markets, Latin America grew 17.3%, India by 14.6%, Middle East and Africa by 7.8%, while Asia-Pacific grew by 7.6%. The increased caution in Q4 resulted in a deceleration in many markets, but not in the United Kingdom. Q4 growth was also led by United Kingdom where growth accelerated to 17%. North America grew by 9.6%, while Continental Europe grew by 8.4%. In emerging markets, Latin America grew 15.1%, India grew by 13.4%, Middle East Africa by 11.3% and Asia-Pacific by 7.5%.

Our industry-leading portfolio of products and platforms had a very good quarter. ignio, our cognitive automation software, signed up five new customers and 12 clients went live in Q4. Economic uncertainty is further driving customers to accelerate efficiency through automation and resulting in increased investment in AIOps and AI/ML technologies. ignio continues to be well positioned with an end-to-end platform and point solutions for monitoring, AI/ML analytics, cloud hybrid infrastructure coverage and so on.

TCS BaNCS, our flagship product suite for financial services, had two new wins and six go-lives during the quarter. For a leading savings and investment company in UK, we successfully completed the migration of annuity book sold by the customer to a specialist insurer onto TCS BaNCS and also completed the first phase of migration from a heritage landscape to a public cloud. Our Quartz blockchain platform has partnered with bitcoinSwitch [Phonetic] to build a next-generation crypto financial technology platform, supporting the latest journey of becoming a leading global crypto financial services provider.

In Life Sciences, we launched a new solution in TCS ADD, our Advanced Drug Development platform. TCS ADD medical writing is a one-stop AI-assisted solution for fast intelligent offering and review of regulatory and scientific documents for drugs and devices. TCS OmniStore, our AI-powered universal commerce suite, had one go-live this quarter. TCS HOBS, our suite of products for communication service providers, had one new win and four go-lives.

TCS TwinX, our digital twin solution, had three wins and one go-live. TCS iOn had 23 new wins and three renewals in quarter four. During this period, it served over 54 assessment customers and administered assessments of 18 million candidates. Over 1,900-plus corporates leverage the TCS National Qualifier Test now as their entry level recruitment platform. Lastly, MasterCraft and Jile won 26 new clients in Q4.

Let me now go over our client metrics. As you are aware, our customer-centric business model rests on our ability to continually expand and deepen our client relationships. These metrics provides a measure of our progress in the journey and validation of the strategy. In Q4, we added two more clients year-on-year in $100 million plus band, bringing the total to 60; 13 more clients in the $50 million band, bringing the total to 133; 23 more clients in the $20 million-plus band, bringing the total to 291; 22 more clients in the $10 million-plus band, bringing the total to 461; 27 more clients in the $5 million-plus band, totaling to 665; 59 more clients in the $1 million-plus band to a total of 1,241.

Over to Rajesh to speak on demand drivers during the quarter.

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Thank you, NGS. In the segmental commentary, NGS spoke of the cautious stance that many of our clients have taken, particularly in North America and Europe. This has resulted in the dichotomy of clients hitting the pause button on ongoing discretionary projects and deferring new non-critical projects, affecting our revenue growth during the quarter across most industry verticals in North America and Europe. At the same time, we saw clients launch more new initiatives oriented towards cost optimization or strategically important projects resulting in a very strong deal flow and pipeline replenishment.

In terms of demand trends, we saw a spike in operating model transformation deals. In FY ’23, we signed 29 large operating model transformation deal business as well as IT operations compared to 18 in the prior year. We also continue to see vendor consolidation and multiservice deals. TCS Cognix, our suite of over 600 prebuilt automation components, is gaining traction because it significantly accelerates the operations transformation and helps clients realize their ROI much earlier, all the more relevant in the current environment. In FY ’23, Cognix helped win over $1.6 billion of TCV.

Let me share two examples of operations transformation executed using Cognix. A US-based multinational oilfield services company engaged TCS to a build a future-ready finance organization. We deployed TCS Cognix to leverage intelligent automation and solve the problem of intercompany mismatch of financial entries arising from disparate and siloed operations across 450-plus business entities and 80 countries. The program helps substantially bring down incenses of unreconciled entries into key metrics stability and speeded up key processes.

Similarly, a UK-based telco chose TCS as its strategic partner to revamp its IT infrastructure backbone for resilient always-on communication service. TCS leveraged its deep contextual knowledge, TCS Cognix and MFDM, to deliver the transformation. This resulted in a robust operating model that delivered higher levels of certainty with uninterrupted and enhanced services for its customers. The superior quality of service contributed to industry-leading customer satisfaction, improved NPS and lowered churn.

In Q4, we won an all-time high number of large operations transformation deals. Here are the couple of examples. TCS was selected by IHG Hotels & Resorts, one of the worlds leading hotel companies, to drive enterprise process automation across several IHG businesses and business verticals, including finance, travel agent commission, revenue compliance and audit, revenue services, sales and HR. The program aims to digitize and automate business processes to drive efficiencies and cost optimization across the enterprise. To better enable enterprise resiliency and reliability, similarly, Delta Airlines has partnered with TCS on solutions around cognitive business operations and cloud management.

The other driver is cloud transformation, which remains very strong focus area for our clients and key growth driver for us. During the year, clients engaged us to take up this more complex bigger workloads and accelerate the modernization and migration to the cloud. This trend continued in Q4 and we won several new deals around this deal.

Let me share a few examples of recent cloud transformation engagement. A leading global software company has partnered TCS to enable in SAS business model and GTM strategy. TCS is helping modernize products across four lines of business and make them hyperscaler-ready, leveraging its thought leadership, contextual knowledge and IPs, like TCS Cloud Exponence, TCS Cloud Assurance, etc. The ecosystem of hyperscaler partners, TCS have helped migrate to 32 SAS solutions to the cloud. This migration is helping the client to make their product suite cloud vendor agnostic, thereby more attractive to their end customers.

A large US commercial property and casualty insurance company selected TCS for its multi-year application modernization and cloud migration journey to gain competitive advantage and business resiliency. TCS successfully modernized their critical applications and seamlessly migrated them to the cloud. This has rendered the client’s applications future-ready and ready to support new business models for product rollouts. The modernization has also improved business resiliency with 99% improvement in application availability and enhanced security.

Flight Center Travel Group’s 30-plus travel companies across the world faced varying pace of travel recovery, creating a need for flexibility and ability to scale fast. TCS thought leadership and advisory helped Flight Center harness the power of cloud with a unified global approach. Leveraging its contextual knowledge, TCS transformed critical business functions on the new multi-cloud platform and implemented TCS Cloud Exponence to provide orchestration and 24/7 management. Flight Center’s new technology backbone has enhanced the resilience, improved its time to market and gives it the ability to drive business transformation and capitalize on new opportunities.

And then, moving on to growth and transformation. Clients continue to invest in new initiatives designed to support their business growth strategy either through innovative business models, new services or by targeting new market segments using techniques. A large food retailer in the UK partnered with TCS to implement a technology initiative critical to its asset-light growth strategy of expanding through franchise stores. TCS leveraged its domain expertise and contextual knowledge of the client’s application and IT landscape to design a new platform that brings franchise stores on par with owned stores to advanced automated multilevel forecast and [Indecipherable] to streamline inventory across the supply chain.

It provides greater visibility of sales and stock movements, agility in introducing new products and even flexibility to convert owned stores to franchise stores. The new platform enables rapid on-boarding of new or existing franchise stores and enabling the client to accelerate expansion of its franchise network and drive growth.

In Q4, we won a new deal from Bridgestone Americas, a leading US-based tire manufacturer of an existing client. They have engaged us to transform and expand their subscription-based mobility offerings globally. TCS will help define a global template for the subscription business and catering to the different lines of business and enable new business models across different markets, driving the company’s global expansion.

I’ll now invite Krithi to talk about demand trends in BFSI sector and our order book. Over to you, Krithi.

K. Krithivasan — President and Global Head, Banking, Financial Services and Insurance Business Unit

Thank you, Rajesh. The banking and financial services industry is the largest spender on technology, and that reflection is [Indecipherable]. While we saw some softness in BFSI in North America due to discretionary spending being put on hold, all of the demand trends that Rajesh spoke about are very visible in BFSI as well. Clients continue to push ahead with cloud migration, operations transformation and other strategic G&T initiatives. As the largest provider of IT services in the banking and financial services domain, with deep domain expertise across the end-to-end financial services value chain, TCS is deeply entrenched in the sector’s G&T initiatives.

Let me begin with a couple of examples of product innovation. A global information services company partnered with TCS to launch a new commercial fraud solution for banks and other financial services firms and drive new revenues for the client. TCS leveraged it’s deep domain knowledge in this area to design a comprehensive commercial fraud solution that blends consumer and business data sets who provide ML-powered predictive insights on the legitimacy of businesses, their ability to repay and the likelihood of data abuse. The solution offers a much more comprehensive set of capabilities compared to competing products, resulting in good offtake of the solution.

Within the first few months since its launch, the new solution has been adapted by the top 10 banks in the US, and customers have reported a 62% improvement in fraud detection. A US headquartered global bank partnered with TCS to transform its new card launch process to gain market share in [Indecipherable]. Leveraging our expertise in human-centered design thinking, we designed the solution with an interactive UI and automated workflows that make it easier for the bank’s credit card business to create and launch new products in the market. This has enabled the bank to launch new products 70% faster. Moreover, the reimagined product design work bench is resulting in better more competitive product and has driven a 10% increase in new-to-bank customers.

A large European bank partnered with TCS to transform its enterprise-based credit risk management. It was using multiple risk models across its different portfolios, resulting in greater complexity towards decision making and higher compliances. TCS Contextual Master has collaborated with the bank’s teams to conceptualize a new centralized cloud-based risk management platform that deploys the most appropriate risk model for each portfolio, ingest data from across enterprise and determines the creditworthiness of the borrower. The simplified landscape and centralized risk control framework has enhanced regulatory compliance. Processing time for consumer credit checklist is down from 10 days to two, enhancing customer satisfaction and driving growth. Instant provisioning of verified risk parameters is also helping improve certainty in credit originations.

Enhancing customer experience on digital channels continues to be a key thing. Here is one example of that. TD Bank Group is working with TCS to continue to transform the bank’s public-facing digital assets. TCS will leverage its deep contextual knowledge and co-innovation model to assist TD to launch new capabilities designed to help deepen the bank’s relationship with its customers, enhance the bank’s self-service features and empower its customers and advisors with easy access to insights and improve growth. This is expected to help TD enhance its agility, deliver richest customer experience and drive greater digital adoption among these customers.

And lastly, an illustration of how large banks are embedding ESG criteria into their businesses. A Europe headquartered global bank engaged TCS its strategic partner to develop an ESG data distribution platform to support its regulatory reporting and its own sustainable finance framework. Leveraging our deep domain knowledge in the area of ESG and sustainable finance, the TCS team designed a new cloud-based solution that makes high quality ESG data available to internal stakeholders for more accurate insights on sustainability and ESG performance of the deals and products. Its sophisticated taxonomy management capability accommodated taxonomies of different jurisdictions, simplifying regulatory compliance and reporting.

Moving on to deal wins. We had a strong order book in Q4 with a TCV of $10 billion, a book-to-bill ratio of 1.4. This includes one mega deal we signed in February with the Phoenix Group. Our Q4 order book contains an all-time high number of deals with TCV above $50 million. It is a well distributed set of deals across all verticals and geographies. The BFSI TCV was at $3.1 billion, while the retail order book was at $1.3 billion. The TCV of deals signed in North America stood at $5 billion.

For the full year, the order book was at $34.1 billion. While this is similar to the order book at the end of FY ’22, our FY ’23 order book is less lumpy and has more deals in the $50 million to $100 million TCV range. In other words, we have been able to build up an equally large order book without as many mega deals in the mix. This implies faster revenue conversion compared to last year’s order book and gives us better visibility into growth next year.

With that, we can open the lines for questions.

Questions and Answers:

 

Operator

Thank you very much. [Operator Instructions] We have our first question from the line of Ankur Rudra from JPMorgan. Please go ahead.

Ankur Rudra — JPMorgan — Analyst

Thank you, Rajesh. Thank you so much for your leadership and insights over the last 40-plus quarters. We will miss you. Krithi, congratulations on the innovation, and best wishes for the period ahead.

In terms of questions, I think the first one probably on demand. There appears to be a sharp change in demand commentary this quarter, beside the print disappointment. Could you elaborate how much of the slowdown and change in sentiment came after the events of the last three or four weeks of March versus what was already in motion? And on a related note, you obviously have the highest exposure to the banking industry and have seen several cycles, where is the visibility on demand and revenues now for maybe the first quarter in F ’24? And if this uncertainty gets prolonged, how do you expect client priorities and behavior to change?

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Thanks, Ankur. Let me take the first part, and then I’ll have Krithi answer both BFSI and the demand forward. So, if you look at where the impact has come from, I would say that we shared with you in the last year — last quarter’s comment beginning of this year that while there has been softness in US in Q3 — our Q3, calendar Q4, we expected that it will significantly pickup in the New Year. And there’s no adequate caution on the client’s part, which was resulting in the softness in Q3.

What has happened is that, that expectation has not borne out, and it has in fact turned incrementally even more negative. That sentiment trigger obviously was, to a large extent, what happened on the banking side in US, but it has also been across the board. So, if you look at areas like manufacturing, especially on the process and industrial side, that is reflecting the weakness from a more global perspective, whereas areas like retail in US, that’s reflecting the sentiment of the local market and especially on the expectations on what’s going on, on the credit terms.

So, going back to your question, the change is more in terms of the US market. We expected it to come back strongly in the New Year, that has not happened. And that’s the scenario that we are in. And the weakness is not just coming out of BFSI, it is coming across sectors in North America.

With that, Krithi, you want to talk about BFSI and expectation forward?

K. Krithivasan — President and Global Head, Banking, Financial Services and Insurance Business Unit

Ankur, like Rajesh mentioned, there has been a weakness in BFSI because of the market uncertainty in last quarter. But as we mentioned, order book has been quite strong, and in fact, one of the highest order books that we have in the recent times. And like we also commented, the order book is less lumpy and it has more smaller deals or short duration deals, which made our revenue recognition could be earned fast.

But having said that, like we are not going to give a guidance for immediate quarters, because uncertainty is still there and clients are still looking at their priorities and when they want to spend, but we are comfortable with the medium to long-term spend looking at our order book. So, the demand is quite — demand still is strong, and order book quality is good. So that gives us the confidence that medium to long-term, things will be stronger and better.

Ankur Rudra — JPMorgan — Analyst

I think, one sort of question within — also the question was, do you think if the uncertainty gets prolonged, client priorities and behavior might change?

K. Krithivasan — President and Global Head, Banking, Financial Services and Insurance Business Unit

It’s obvious. If the uncertainty continues, clients would also continue to weigh their priorities.

Ankur Rudra — JPMorgan — Analyst

Okay. As a follow-up, maybe on the strategy, TCS changes of guard have been very rare and very smooth historically. Could you comment on any change in strategy both because of the change in guard and the change in demand sentiment at the moment?

K. Krithivasan — President and Global Head, Banking, Financial Services and Insurance Business Unit

I actually spoke in the previous press conference also, leadership change doesn’t mean a strategy change. Like all of us have been working with this organization for so many years, and all of us have a good understand. Whatever strategy Rajesh put in place was also a collective leadership decision on how we want to go forward. So, I don’t expect a drastic strategy change. We will be tweaking what we do based on the market situation, but our strategy is anyway based on client-centricity and employee empathy. So, those two are the basic pillars. We will continue to drive home our strategy based on that.

Ankur Rudra — JPMorgan — Analyst

Thank you. Maybe the last question on technology. Curious to hear your thoughts as a leadership group on how generative AI changes the nature of technology consumption, and if it impacts the bargaining power for clients or for TCS over the medium term?

K. Krithivasan — President and Global Head, Banking, Financial Services and Insurance Business Unit

I’ll turn this over to our ChatGPT guru, Mr. NGS.

N. Ganapathy Subramaniam — Chief Operating Officer

Hi, Ankur, NGS here. I think, generative AI as a technology is very interesting. We have been working on it for some time, and we have done some pilots internally. And I think it has the potential to live up to the expectation that every area that can be technology-driven can be technology-driven, number one. Number two is that, I think it can further accelerate the adoption of technology, including those which are being at the frontier areas of innovation. We are quite excited about it, and we believe that many quarters ago, I think, in one of this analyst calls, I mentioned that AI/ML has the potential to fundamentally change the way that we deliver software to our clients.

And a significant part of what we are doing today can get automated, can get generated. Fundamentally, we are essentially a tools-driven organization. We have developed MasterCraft decades ago, which is a software that generates software. I think we are quite excited at the opportunity of delivering proven code, there you can call it a low code, no code, zero code, but — or a generative AI kind of a software, but the result is, the software that generate software. I think we’ll build certain expertise around that capability around the tool set and stay relevant to our clients’ expectations.

Ankur Rudra — JPMorgan — Analyst

Understood. Thank you so much for the color. And Rajesh, best of luck for future endeavors. Thank you.

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Thanks, Ankur.

Operator

Thank you. We have our next question from the line of Sudheer Guntupalli from Kotak Mahindra Asset Management. Please go ahead.

Sudheer Guntupalli — Kotak Mahindra Asset Management — Analyst

Yeah. Krithi, firstly, congratulations and all the best in your new innings. Couple from my side. Prevailing industry perception seem to be that because of macro uncertainty, deal mix is shifting towards cost optimization, which are typically large deals that may take longer timelines for revenue conversion. But your prepared remarks do suggest the contrary about the order book that got billed during FY ’23. So, how do we read this contradiction?

K. Krithivasan — President and Global Head, Banking, Financial Services and Insurance Business Unit

I didn’t get. Sudheer, I think, cost on optimization deals need not be large and — very often because customers look at immediate opportunities. Because in terms of uncertainty when they want to control costs, they also want to have something quick. So, the deals are cooked in a way that they can also get benefits immediately. So, it’s like we discussed before, our order book is actually very less lumpy, like excepting for that one large deal, ours is a very — number of medium to small sized deals. So, that gives us the confidence that there will be a greater revenue recognition faster. I don’t know whether like we can say that always cost on optimization deals will be larger. There will be some of them will be larger, many of them need not be larger.

Sudheer Guntupalli — Kotak Mahindra Asset Management — Analyst

Got it. And you made an interesting point in the press meet that many of your clients which are the large US banks are benefiting because of the recent banking issues and the consequent deposit flight. So, if the banking situation doesn’t materially escalate from here on and as and when the negative sentiments recede, could this be a net positive outcome for TCS over the next 12 to 18 months, given some of the key clients are actually becoming stronger with a further possibility of M&A integration-related spend?

K. Krithivasan — President and Global Head, Banking, Financial Services and Insurance Business Unit

That should be a fair assumption, Sudheer. Like, if the banking sector improves and we have a very strong presence in the banking sector, and we would continue to work with our clients closely to bring in solutions by which they can leverage the market conditions and leverage the extra deposits they get. So, I would say, it’s a fair assumption.

Sudheer Guntupalli — Kotak Mahindra Asset Management — Analyst

Thanks, Krithi. And Rajesh, all the best for your future endeavors.

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Thank you.

Operator

Thank you. We have our next question from the line of Sandeep Shah from Equirus Securities. Please go ahead.

Sandeep Shah — Equirus Securities — Analyst

Yeah. Thank you. Thank you for the opportunity. And thank you, Rajesh, and all the best for your future endeavors. And congratulations, Krithi, for your new role. The first question is, just the extension to what Ankur has asked. So, looking at your commentary, it seems that there could be a near-term pressure or the caution from the client side in terms of the IT spend. So in FY ’24, could be slightly different where growth could be back-ended versus front-ended, which is seasonally the trend in most of the normal years or you believe FY ’24 may have a soft growth across all the four quarters?

K. Krithivasan — President and Global Head, Banking, Financial Services and Insurance Business Unit

Sandeep, I don’t want to comment on the overall FY ’24. As we called out, Q4 has been soft because of the uncertainties, and uncertainties are not fully resolved. At the same time, we are comfortable with the order book we see and we also commented on the tenure of the order book in terms of the short duration of the projects. So that gives us the confidence that many of these projects will get done in short period of time and we’ll be able to realize revenue. But we cannot take away the fact that there could be some transformation projects or discretionary projects that could get cancelled if there is further deterioration of the sentiment. So, these are all the facts that we are working with, but we’ll continue to be close to our customers. We don’t want to comment on how Q1 or Q2 is going to be or how FY ’24 is going to be.

Sandeep Shah — Equirus Securities — Analyst

Okay. Fair enough. Just a question in terms of margin. Can you explain what was the nature of the on-site cost pressure during 4Q? And also, question about FY ’24 margin, because FY ’23 margin has been impacted by supply-side issues. With supply-side issues abating, whether it is fair to say the margin management could be better in FY ’24 versus FY ’23 or it is hard to say because of the global pressure especially on the inflation side, which can impact the on-site wage hikes?

K. Krithivasan — President and Global Head, Banking, Financial Services and Insurance Business Unit

So, on the current quarter, the on-site increase is mainly on the manpower side. Some part of it coming on account of replacement of the higher cost BAs [Phonetic] into our employee pool. And so, that’s practically on it, and some part of it on increased hiring thing. Coming to FY ’24, as you rightly called out, we have a set of headwinds and we’ll have to look at overall set of levers which can help us suppress or address those headwinds. And given the current uncertainty, it’s difficult to give a timeline, but, yes, the way we are exiting on the BA cost side of it, that should be helpful. And we should be able to further double down on some of the higher cost labor arbitrages kind of things out there.

Sandeep Shah — Equirus Securities — Analyst

Thank you. Thank you, and all the best.

Operator

Thank you. We have our next question from the line of Abhishek Kumar from JM Financial. Please go ahead.

Abhishek Kumar — JM Financial — Analyst

Yes, hi. Good evening. I just wanted to understand what is driving the growth in the UK market. I think, Rajesh, you had mentioned in the last quarter that unlike Continental Europe and US, UK, there is some clarity. They had moved decisively towards the cost takeout projects. And just trying to tie with Krithi’s comment that cost takeout projects may not be longer gestation period projects, and is that something the clarity in terms of what they need to do reflecting in better growth in UK? And if that is the case, could that be the template that US market also can follow once there is some sort of clarity either way, either on the discretionary side or on the cost takeout side, things could quickly come back and the growth can resume?

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Yeah. Abhishek, UK, it’s exactly what you described and what we have said in the past that the market is reconciled to the operating environment and knows that it needs to do something, because externally is [Phonetic] going to change. And it’s not just cost takeout, transformation projects are also ongoing. Last quarter, we had spoken about a very large telecom deal. That is a combination of cost takeout as well as a massive movement onto the cloud to be able to completely make their whole enterprise stack agile so that they can introduce new products faster and respond to market conditions differently.

Similarly, in the utilities sector, we have spoken about how the market regulator is moving to introduce greater competition and introducing greater agility there. We have worked with the Rail Delivery Group, which is another regulator on the transportation side, which is also moving massively to leverage data and introduce greater agility and in the way data is used to be able to actually improve overall efficiency of the system and to allow for newer entrants to come in and to offer services. So, it would be wrong to characterize UK market as a purely cost takeout market.

UK market is a market where both cost takeout, structural cost more basis have been reset, but significantly new competitive forces are also at play as industry structures are being actively worked on. And we are participating very strongly across the board. As you know, we are the largest services provider in the UK market by a margin, and that is playing to our advantage, because our ability to shape that and to participate is very, very significant. And interestingly, it is happening not just on the private side, but on the public sector and the semi-public sector side also, where also our participation is very high. So, UK is a great story about technology being part of a solution for any such scenario.

Now, will that play out in US? That depends on the nature of the — US always has been at the forefront of leveraging technology. US companies as an overall ecosystem are also much more dynamic, much more decisive in moving and much more risk taking. So, the base — starting base is very different. So, does UK provide a playbook? Not on a like-to-like basis, but conceptually we our entire business model is predicated on the fact that exactly what we’re seeing in UK is likely to play out in market after market, where technology leverage will only keep on increasing rather than decreasing in any scenario, both challenging scenario or a growth scenario. And what we need to do is to make sure that our service portfolio is fully able to participate on both sides of the spectrum simultaneously.

Abhishek Kumar — JM Financial — Analyst

That’s very insightful. Thank you, and all the best.

Operator

Thank you. We have our next question from the line of Pankaj Kapoor from CLSA. Please go ahead.

Pankaj Kapoor — CLSA — Analyst

Yeah, hi. Thanks for the opportunity. Rajesh, wish you the best and, Krithi, congratulations. Can you give some color on how the deal velocity panned out within the quarter? Did you see clients delaying decisions on deals that would have otherwise closed by, say, March end, in the last, say, 15-odd days? And if possible, can you quantify the impact of that?

K. Krithivasan — President and Global Head, Banking, Financial Services and Insurance Business Unit

Actually deal velocity has not reduced. In fact, if anything, it has accelerated especially in Europe as I pointed out. We have seen significant acceleration in decision making on deals in Europe. We had called out delays earlier. In fact, in this quarter, we have seen an acceleration. And if we look at deals greater than $50 million, we have closed more deals in this quarter in Europe than what we did in the first three quarters of the year. Is that just a catch-up to things that have got delayed during the year? We’ll have to wait and see. But the pipeline — and that also we had shared with you in the past that in Europe though the decision making is slow, the pipeline buildup has been very steady and very encouraging. So, we’ll have to wait and see how it translates in next two quarters.

But this quarter, decision making in Europe has increased. And it’s very encouraging because initially we told you about how the sentiment has turned incrementally positive in Europe both on their overall economic side coming out of — having dealt with the winter positively, receding fears on an energy crisis and also increasing optimism on the China scenario. So, that positive sentiment has resulted into the deal closure, or rather we are seeing now deal closures increase. We’ll have to wait and see how it turns out in the rest of it.

US also, our TCV has been very strong, and it has been strong through the quarter. So, even March has been coming in very strong, and it is coming across both existing customers as well as new customers. In fact, in this year US new customer TCV has been record high. So, there is nothing that shows that deal flow has actually slowed down, in fact [Indecipherable] market Europe, it is actually accelerating.

Pankaj Kapoor — CLSA — Analyst

So, is it fair to assume that events of last few weeks, that actually had an impact more in terms of client just pausing the ongoing projects, etc., which is the reason why we saw the impact on the reported revenues, but the deal decision making has not been impacted?

K. Krithivasan — President and Global Head, Banking, Financial Services and Insurance Business Unit

Absolutely, Pankaj. So, let me — narrowly answering the question, that’s exactly right. The revenue impact is discretionary projects being deferred and — or project — expected startups getting delayed. We had seen large scale project cancellations. We have not seen deal flow slowdown. It’s a very immediate short-term kind of impact that we’ve seen play out over the last couple of months. But it requires close watching to see how it develops through the course of next quarter.

Pankaj Kapoor — CLSA — Analyst

Of course. Thank you. Samir, my question was on the — again, on the higher on-site cost. You mentioned subcontractor replacement was the reason. But I’m just wondering, wouldn’t that be already baked in when you spoke of that 25% exit margin in the previous call and the currency tailwind that we saw was not anticipated? So, if you can just help understand what was the math here.

Samir Seksaria — Chief Financial Officer

So, the on-site cost replacement, it was an answer in terms of what the on-site cost replacement was. It not just the BA part, it was additional hiring also. Second, in terms of from the 25%, why we ended up here is not just the cost structure part of it, it’s more about the macro environment and customer sentiments getting increasingly negative, more so from where we started off at the beginning of the calendar year to what we saw into February and into March. And when that happens, the discretionary projects getting paused has an immediate impact on the revenues, remain sticky in the short-term. And that’s where we couldn’t exit at where we targeted for.

Pankaj Kapoor — CLSA — Analyst

Understood. Thank you, and wish you all the best.

Samir Seksaria — Chief Financial Officer

Thank you.

Operator

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

Gaurav Rateria — Morgan Stanley — Analyst

Hi. Thank you for taking my question. So, first question, just going back to the conversion of the order book to revenue, just to get it a little better, is it fair to say that last year, you ended the order book on TCV basis particular growth, your ACV growth would have been slower than that, and this year in FY ’23, your ACV growth would have been better than the TCV growth, which gives you more confidence on your faster conversion of order book revenue for next year? Just trying to understand, is that a correct understanding?

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Gaurav, we don’t comment on ACV. I don’t want to drag into it — get dragged into it. But from the perspective of the composition of the order book this year, it is more weighed towards the medium-sized deals than the mega deals. So, the $50 million, $100 million that range has been a larger constituent rather than the $500 million-plus.

Gaurav Rateria — Morgan Stanley — Analyst

Got it. Secondly, Rajesh, you mentioned that the sentiment in Europe has kind of improved, and that has reflected in better velocity of the deal flows. Is it fair to say that at least for the next two quarters, the growth driver for overall revenue will be more led by Europe than the US?

Rajesh Gopinathan — Chief Executive Officer and Managing Director

They stretch, because — I don’t know, we’ll have to wait and see how it — Europe is also complex, especially BFSI, do you want to comment on BFSI for Gaurav?

K. Krithivasan — President and Global Head, Banking, Financial Services and Insurance Business Unit

Gaurav, if you look at Europe, different regions behave differently. [Indecipherable] BFSI if you take, we are seeing good traction, good this quarter, also we had a good ramp in the Nordics and Benelux. We are — of course, Continental — Central Europe is slightly complex and difficult. So, to make a one generic statement that Europe would turn out to be more positive will not be appropriate, like each vertical and each region is going to play out differently. And overall, like — we have to understand, it’s coming from a — sentiment is improving, like we are not saying that it’s become strong overnight to say that that will drive our growth, it’s improving is what statement I can make.

Gaurav Rateria — Morgan Stanley — Analyst

Got it. Last question. So, Rajesh mentioned about the kind of reorienting the operating model to adjust in line with the changed macro conditions from a cost structure perspective. So, typically it takes about a quarter or two to kind of adjust that or make that adjustment within the operating model, and is that a fair assessment from a margin perspective, in the sense that it takes about a quarter or two to reflect that the cost structure and better margins from overall company standpoint? Thank you.

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Gaurav, actually let me explain what I meant, when I kind of carried over from the discussion in the press conference. As you know, our reliance on contingent labor had significantly increased, mainly because of the various travel restrictions and supply-side challenges in the local market. Combination of high demand, significant dislocation on the supply side had resulted in a significantly increasing our dependence on contingent labor. We are structurally and systematically moving to go back to our more preferred operating model, which is about 5% to 8% of our workforce being from a contingent labor perspective. And this is also very important for us to ensure quality of delivery and manage the overall experience at the customer level.

So, we are in that process, and we have been systematically executing that. We are about 25% lower than our peak contingent labor reliance in the North America geography. And we have quite a distance to go to bring it back to our desired operating range, and we will continue to do that. And we will rely on improvement on the travel side of it to bring back to a common one [Phonetic]. Once we have that, we will again have a greater ability to flex up and down depending on where the demand is. So, that’s where I was coming from. This is a multi-quarter journey. And it is not purely driven from a cost perspective, it is as much also driven from a stability and resilience of our overall operating model. So we are executing on that, which positions us well. If the demand spikes, we anyway have the baseload there and we can go back to a more immediate supply sources. And if the way — if it reduces, we will keep on systematically bringing this down, which typically is incrementally more costly than our long-term employee base.

Gaurav Rateria — Morgan Stanley — Analyst

Got it. Thanks for the explanation, Rajesh. And all the best for your future endeavors, and congratulations to Krithi. Thank you.

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Thank you, Gaurav. Thank you.

Operator

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

Ravi Menon — Macquarie — Analyst

Thank you. Just similar to what Pankaj asked, the way the deal awards have come through, it shows that demand environment has not really changed, but quarter’s revenue growth has — it has become pretty negative. So, are you seeing change in pipeline or delays in decision making that says that this negativity is not just temporary caution? Should we think about this as something similar to furloughs, and we will see this come back in a quarter or two?

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Ravi, as I said, as of now, no, but we’ll have to wait and see if it persists, how it will turn, we’ll have to wait and see. As of now, we have not seen any significant change on the deal pipeline side of it. And the actual pipeline continues — the pipeline replenishment continues to be quite strong, but we’ll have to carefully watch how the decision making plays out in the next quarter or so.

Ravi Menon — Macquarie — Analyst

Right. And you had talked last quarter of a more normalized annual gross hiring of around 125,000 to 150,000 people as the attrition normalizes. Is that still the range you’re working with?

Rajesh Gopinathan — Chief Executive Officer and Managing Director

See, we don’t call out on gross hiring for the year. But, I think, in general for the campus hires, I talked about 40,000 campus hires, and demand for the lateral hires will be dependent on the demand from the business every quarter.

Ravi Menon — Macquarie — Analyst

Thanks. And one last follow-up for me. It looks like you could have taken up the utilization, but you didn’t opt to let the natural attrition, you chose to still replace that. Why would you do that when you don’t clearly have much visibility into the demand?

Rajesh Gopinathan — Chief Executive Officer and Managing Director

I think it’s a mixture of both. We are trying — we are doing both. We are actually developing — doing a rigorous talent development of our people coming in from the campus. At the same time, we need people from the market, and that is how it is playing out, we need both.

And Ravi, the BA side of it, which I explained earlier, it’s also part of that. We are not just replacing the attrition, we are also replacing on the BA side.

Ravi Menon — Macquarie — Analyst

Thanks, gentlemen. Best of luck. And thanks, Rajesh, it’s been great having you. Krithi, welcome aboard, and hopefully this should be a busier time than what Rajesh had.

K. Krithivasan — President and Global Head, Banking, Financial Services and Insurance Business Unit

Thank you. Thank you, Ravi.

Operator

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

Vibhor Singhal — Nuvama Equities — Analyst

Yeah, hi. Thanks for taking my question. So, just a couple of questions from my side. Last quarter, we mentioned that the growth in the retail vertical last quarter was primarily driven by the travels vertical. Does that continue to be the case this quarter as well? And how is the core non-travel part of the retail functions, lets say, the FMCG and the CPG part of the business fairing on an overall Company basis?

My second question was on the overall scenario at this point of time. I mean, I’m sure the TCS management has been through these similar kind of downturn before, we’ve had many of them before, and has been through them and come out of that churning as well. So, typically in these kind of economic or, let’s say, slow down or downturns, do clients end up asking for pricing discounts or, on the contrary, do competitors resort to some pricing undercuts which basically force also to maybe follow them which could impact the profitability or the growth or both in this kind of a scenario?

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Sorry, it was on mute. On the retail side, we were — TTH continues to do well, but our performance is not purely driven by that. Especially in this quarter, most segments have done well, essential retail has done well, some part of the discretionary and fashion has been challenged, but North America retail has been quite weak, whereas North America travel continues to do well. So, overall, most segments doing well. Travel and hospitality outperforming within that, and North America retail underperforming. That’s the way to understand this quarter’s retail side of it.

And on the pricing side, earlier also we have had this discussion that in our industry, unlike a product industry, discounting and price undercutting is not as easy, because incremental deal is one thing, but once you offer a price, it’s also very visible across your entire customer universe. So, the ability to do that in a very systematic manner is quite restricted. So, it’s a much more disciplined industry in terms of pricing. So, we’ll have to — and that’s what’s playing out. We’ll have to keep watching it. But we will say, stay tactically responsive in the market, and we’ll deal with it as it comes.

Vibhor Singhal — Nuvama Equities — Analyst

Got it. Got it. Thank you so much, sir. Thanks for taking my questions, and wish you all the best.

Operator

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

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Thank you. So, we are pleased with our FY ’23 performance growing at 17.6% in rupee terms and 13.7% in constant currency terms. The steadily deteriorating macro environment has meant decelerating second half. Our Q4 revenue growth was 16.9% in rupee terms and 10.7% in constant currency. However, we have had a very strong order book with all-time high number of large deals. Our operating margin in Q4 was flat sequentially at 24.5% and our net margin was at 19.3%. On the people front, LTM attrition in IT Services further fell to 20.1%.

I want to thank all of you for all the positive sentiment that is in. It’s been an absolute pleasure interacting with all of you and anticipating and reacting to your questions. So, thank you for that goodwill and attention that you’ve given us.

With that, we wrap up our call. Thank you all for joining us today and enjoy the rest of your evening, day and stay safe. Thank you.

Operator

[Operator Closing Remarks]