Tata Consultancy Services Ltd

NSE:TCS

Earnings Call Transcript 2019-Q1

[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. Thank you, and over to you, sir.

[Kedar Shirali, Head of Global Investor Relations]

Thank you, Kirna. Good evening, and welcome, everyone. Thank you for joining us today to discuss TCS' financial results for the first quarter of fiscal year 2019 ending June 30, 2018. 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, CEO, MD & Executive Director]

Hi. Good evening, everyone.

[Kedar Shirali, Head of Global Investor Relations]

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

[N. Ganapathy Subramaniam, COO & Executive Director]

Hello. Good evening.

[Kedar Shirali, Head of Global Investor Relations]

Mr. V. Ramakrishnan, Chief Financial Officer.

[Venkataraman Ramakrishnan, Chief Financial Officer]

Hello, everyone.

[Kedar Shirali, Head of Global Investor Relations]

Mr. Ajoy Mukherjee, EVP and Head of Global Human Resources.

[Ajoyendra Mukherjee]

Hi, everyone.

[Kedar Shirali, Head of Global Investor Relations]

Additionally, given how much Banking and Financial Services have been in the news recently, we have asked Mr. K. Krithivasan, President and Head of our BFSI business, to join us this evening as well.

[K. Krithivasan, Head of Banking & Financial Services]

Hi. Good evening, everyone.

[Kedar Shirali, Head of Global Investor Relations]

Rajesh and Ramki will give a brief overview of the company's performance, followed by a Q&A session. As you're aware, we do not provide specific revenue and 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 outline 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 would like to turn the call over to Rajesh.

[Rajesh Gopinathan, CEO, MD & Executive Director]

Thank you, Kedar. And once again, good evening to all of you. We have begun the new fiscal on a very strong note with our growth engine firing on all cylinders. Strong sequential acceleration gave us Q1 revenue growth of 15.8% year-on-year on rupee terms and 10% in dollar and 9.3% in constant currency terms. On the margin front, as you know, we have a fairly steep margin headwind in the first quarter of every fiscal from the annual salary increases and promotions. This year was no different. Despite that, our operating margin for the quarter declined sequentially by just 0.4% to 25% compared to the 23.4% margin we had for the same period of last year. Our net margin for the quarter came in at 21.4%. Let me spend some time on the demand drivers and what is driving the strong growth. In earlier calls, I had spoken about Business 4.0 thought leadership framework and how that is resonating well with our customers. From a technology perspective, successful enterprises are investing in agility, intelligence, automation and the cloud. Each of these technology pillars is a big business opportunity for us, and I will walk through at length on each. However, one of the risks of simplification and directive representation is that we lose a lot of nuance and color, and then the risk of misunderstanding the nature of the demand. We saw this happen at the start of the digital wave when people believed that we were [ actually in for ] 4 or 5 new technologies and effectively marked the far more [ performance transformative ] nature of the phenomenon. So today, I just want to focus on one element, automation. When we talk about automation, there are multiple dimensions to it. And most of this one is the use of automation tools either in the form of robotic process automation or cognitive software to execute works that until now are being done by human workers. This simply is a fairly large opportunity where we enjoy a strong, differentiated positioning on account of historical embrace of such automation. The launch of ignio, our cognitive automation software, 3 years ago is just the latest initiative in a long tradition of research and innovation in this area, which has delivered industry-leading tool sets, which, in turn, gave TCS an advanced track record for delivery excellence. While that kind of automation results in superior outcomes as well, the primary driver for decision making is still the quest for greater efficiency. There is another kind of automation where customers are turning to us to build systems that carry out incredible amounts of computations on large datasets and deliver insights at speeds that human beings will never be able to match. A good example for that is in the retail industry, where pricing of a certain item of merchandise are still now a relatively straightforward matter of applying a certain markup for the cost of that item. Today, in the far more algorithmic retailing, as represented by our Optumera suite, we now use more than 500 factors like social media trends, demographics, competitor pricing, categories, also variables including the interplay of these factors on each other that will determine the optimal pricing for an item, which enables dynamic pricing changes multiple times during that day. A third form of automation is the use of blockchains. This is attracting a lot of interest among our customers. While there are a lot of initiatives that are still in the PoC or pilot phase, some of our customers are now going to the next phase.We had spoken in the past about Bank of Paribas Securities (sic) [ BNP Paribas Securities Services ], which has implemented our Quartz blockchain solution to streamline the sharing of corporate events across their various cross-border affiliates. We now have other use cases. The first is a stock exchange in North America will be using blockchain for OTC settlement of high-value, low-volume assets; banks in MEA forming a network for cross-border settlement; and now in India, we are in advanced discussions with an auto major for a blockchain solution to automate their bill discounting process. As you can see, an individual element such as automation has multiple dimensions from a technology perspective. Even the buyout of these different dimensions tend to be fairly diverse within the kind of migration. While automation of IT operations may be of interest only to the CIO, a robotic process automation of a certain process may be of interest to somebody from ops. The customer who bought our dynamic pricing software is often the chief merchandising officer. Our cyber security and data privacy offerings are being consumed by chief risk officers. Blockchain solutions are sold to [indiscernible] who head that line of business. Looking past these point solutions of the larger integrated engagements which use multiple services and solutions, execute these for [indiscernible] core transformations which we offer to the COO or the CEO. Our deep domain expertise, contextual knowledge and strong solutioning capabilities built up over the last many years positions us well to sit around the table with each of these diverse buyers and articulate very compelling value propositions. Our success at winning those large core transformation opportunities, which leverage our full-spectrum capabilities and is showing up in our numbers every quarter. Revenue from the digital engagement crossed an important milestone, making up 25% of our revenues. Our growth in digital further accelerated in Q1 to 44.8% year-on-year. Needless to mention, it's resulted in robust contract signings quarter-on-quarter, giving us a good visibility into the medium term. Starting this quarter, we will start sharing this visibility with you. The total value of contracts signed in Q1 is $4.9 billion. This translates into a book-to-bill ratio just under 1, which is in line with our historical conversion rates.Coming to segments. We will go how the various segments performed during the quarter. As a reminder, all the growth numbers that I will mention from this pie chart are year-on-year and in constant currency terms. You might recall from our last call that I had expressed some optimism on BFSI demand in North America. We are happy to inform you that the optimism has been vindicated and our BFSI verticals grew very nicely this quarter, reporting strong sequential growth and a year-on-year value of 4.1%.The growth has been very well-rounded, cutting across all sub-verticals and across geographies. Let me also clarify that this does not include any of the revenues from our recent insurance platform deals, which we report separately under our regional market and others category.What has changed is that within the North America BFSI segment, some of our more progressive banking customers who were looking to leverage technology for growth and transformation have begun engaging very strongly with us because of our early investments in cloud, AI, automation and Location Independent Agile as well as our Business 4.0 thought leadership framework, which differentiates us from other providers as well as their own captives. Overall, they have a strong deal wins this quarter in BFSI given their confidence in our ability to sustain this growth in the medium term. I'm happy to report that the overall TCV signed -- that we signed up in Q1, BFSI alone accounts for $1.6 billion. Moving on to other verticals. Our second-largest vertical, Retail & CPG, and, of course, a little bit larger within our portfolio because we have integrated the Travel & Hospitality unit into this cluster. Our Retail cluster continues to perform well, growing at 12.7% in Q1. Here, too, we saw our customers accelerate their digital investments; convinced of the value of their technology-leveraged strategy, has taken contraction against their online-only competitors. As with BFSI, our Retail business is also punching its full weight in terms of deal signings, recording a TCV of $759 million for the quarter, giving us confidence that momentum will sustain. Other verticals continued to grow well with Energy & Utilities leading the pack with 30.9% growth. Life Sciences & Healthcare, which grew 12.1%, and CMI, which grew 9.5%, also added to the growth.Geography-wise, the growth came during the quarter -- geography-wise, the growth during the quarter was led by U.K. which grew at 18.7%; and Continental Europe, which grew at 18.6%; and Asia Pac, which grew at 10.8%. Growth in North America continues to accelerate, currently clocking at 7% year-on-year for the quarter supported by BFSI and Retail story. North America accounts for more than a fair share of the total volume of contracts we signed in Q1 with a TCV of $2.7 billion out of the $4.9 billion. Client metrics. Our client metrics continue to reflect the soft participation we have in their incremental spends, particularly in the new technology areas. During the quarter, we added 2 more clients in the $100 million-plus revenue, bringing the total to 40; 5 more clients at $10 million-plus band and 13 more clients in the $5 million-plus band and 15 more clients in the $1 million-plus band gives us greater confidence in the broad basing of our client portfolio and the foundation for future growth. Coming from -- to products and platforms. TCS BaNCS, our flagship product suite in the financial services domain, had a very good year with 8 new wins and 4 go-lives in Q1. TCS' Advanced Drug Development Platform, which is transforming the clinical trial process for our life sciences customers by harnessing cognitive technologies to reduce human intervention, enjoyed 2 new wins. Coming on to TCS, iON TCS, give me a -- actually, let me take a minute on ignio. ignio, our cognitive automation software and a core component of our Machine First Delivery Model, celebrated its third birthday with 7 new clients this quarter. During the course of this quarter, we will be sharing a lot more with you as we celebrate this big milestone for us. On the people side, we passed a big threshold this year -- this quarter, crossing the 400,000 mark in Q1. The workforce continues to become more and more diverse. The proportion of women grows further to 35.6% in Q1, and we now have 143 nationalities that are represented in our workforce. In Q1, self-motivated learners logged in 11 million learning hours. And as of June 30, we have trained over 262,000 employees on the [ 3 ] technologies and more than 240,000 employees on Agile. By building these capabilities organically, we are able to better integrate them in the solutions we've built for our customers and also leverage the specific contextual knowledge that individuals possess in designing and deploying solutions that are better tailored for each customer. Our focus on talent development and organic talent development and giving opportunity to our people is driving industry-leading retention with attrition this year reducing by a further 0.1% Q-on-Q to 10.9%. Finally, coming to the brand that we enjoy with all our stakeholders who are employed and prospective employees. Our customers, our investors and local communities that we work with across the world all go towards building up the TCS brand. This is amplified by our various initiatives such as our sponsorships for high-profile events like the New York Marathon or our #DigitalEmpowers campaign and our partnership with the World Economic Forum. Earlier this year, our brand [indiscernible] was assessed at over $10 billion with TCS ranked as the fastest-growing brand in IT services. I'm happy to inform you that we've now been named among the top 16 brands in the United States by brand value on an overall basis, which is not just limited to the IT services sector [indiscernible], as I mentioned, on the 50th anniversary of our process. To sum up, we had a very strong quarter and start to the new fiscal with good growth acceleration in BFSI as well as North America. Our growth this quarter has been very holistic, driven by our strong participation in our customers' digital spending across industry verticals and geographies. Our accelerating digital business is an indicator of the strong traction we are experiencing on account of our early investments, our differentiated capabilities and our Business 4.0 thought leadership framework. We expect this to sustain in the medium term as more customers take up core transformation initiatives and scale up their digital investments. In the medium term, our visibility is significantly and as well the strong deal wins that we have had, which we were happy to share with you. With that, I'll turn it over to Ramki.

[Venkataraman Ramakrishnan, Chief Financial Officer]

Thank you, Rajesh. Let me go through the headline numbers. In the first quarter of FY 2019, our revenues grew 4.1% Q-on-Q and 9.3% Y-on-Y on a constant currency basis. The very sharp cross-currency movements during the quarter resulted in a top line benefit of positive 2.7% in INR terms and a -- but a significant minus 2.5% impact in USD terms. Reported revenue in INR was INR 342.6 billion, which is a Q-on-Q growth of 6.8% and Y-on-Y growth of 15.8%. In USD terms, revenue was $5.05 billion, which is a milestone and also which is a Q-on-Q growth of 1.6% and a Y-on-Y growth of 10%. Moving on to operating margin. We had the usual seasonal impact from the wage increases that went into effect from April 1. This time around, the impact was minus 1.8%. Our disciplined execution helped us generate efficiencies to the tune of 0.7%. The sharp depreciation of the rupee against the USD gave us a further margin benefit of 70 basis points, resulting in an operating margin of 25%, a Q-on-Q decline of 0.4% but a significant improvement from the 23.4% margin we had for the same period in last year. Higher other income mitigated some of the operating margin decline. So the net income margin was 21.4%, a mere 0.1% lower than the prior quarter. The effective tax rate for the quarter was 24.8%. Our accounts receivable DSO was at 75 in dollar terms, which was up 1 day Q-on-Q. The net cash flow from operations was INR 76.1 billion, which is 22.2% of revenue and 103.7% of net income. Free cash flow was INR 71.8 billion. Invested funds as at 30th June stood at INR 474.5 billion. The board has recommended an interim dividend of INR 4 per share. With that, we can open the line for questions.

[Operator]

[Operator Instructions] The first question is from the line of Ankur Rudra from CLSA.

[Ankur Rudra, Research Analyst]

Very good to see continued growth and margin recovery. Starting with growth, could you maybe elaborate? Have you seen an overall improvement in enterprise technology spending? Or have your participation rates gone up, which indicates there's overall better growth here across multiple verticals?

[Rajesh Gopinathan, CEO, MD & Executive Director]

Ankur, I think difficult one to answer directly, but let me put it this way, that a lot of the deals that we're talking of, actually we are uniquely positioned in them. These are not the regular RFP-driven deals. It's a leverage of the full portfolio of capabilities that we have built. But definitely, there is an uptick in enterprise spend, and there is a greater propensity to spend, as we've seen, across many of the geographies. So combination of both.

[Ankur Rudra, Research Analyst]

Okay. And if you could just maybe elaborate on the recovery in BFSI that you've called out. Would you say all parts of BFSI, maybe U.S. large banks, mid-market banks, European banks, capital markets, insurance, are they all fighting? Or do you still have relative pockets of weakness which can improve over the course of the year? So maybe you can highlight what you've seen in the last 2 quarters and what gives you confidence for the rest of the year.

[Rajesh Gopinathan, CEO, MD & Executive Director]

Look, let me start by saying that BFSI in the European market had continued to be strong through last year also. So -- but the recovery really is coming out of the North American geographical market, if you will, and the U.K. So -- but to give more color, I'll have Krithi speak about that.

[K. Krithivasan, Head of Banking & Financial Services]

Thanks, Rajesh. One, we had growth across all segments and all geographies. Like Rajesh said, we've always been having a strong growth in European -- in Europe and U.K. And this quarter, you've seen a good recovery coming from North American geography. And if you look at the segment through size, again it's -- there is no specific variance between the size -- based on size of the banks. Almost all banks have -- all banks and financial institutions have grown. And we also represented a similar, consistent version where -- across insurance and banking assets, like we don't see a big difference between the segments. As we said, Europe and U.K. continues to grow strongly and the U.S. is recovering well.

[Ankur Rudra, Research Analyst]

And just on that, how much of this has come from lesser of a headwind perhaps from work going to captives versus incremental, absolutely new work that you are participating in?

[K. Krithivasan, Head of Banking & Financial Services]

See, like last quarter also, we mentioned that [indiscernible] banks are spending towards their internal workforce and workplace re-imagination is tapering off, and what we see now is banks are trying to launch new programs. And like Rajesh mentioned just now, our investment in Business 4.0 is paying off, and we are very well positioned to attract such investment and -- because banks see us as a -- the capabilities we bring in through Business 4.0. That's a big differentiator for them or their own captives as well as for their [indiscernible]. So it is -- I won't say it's coming because of one single program, but we think that the internal workforce re-imagination and the -- or workforce planning has stabilized. And so the banks have started spending on newer transformation programs and revenue feeding through that.

[Ankur Rudra, Research Analyst]

Understand. Just one quick question on margins to end it. I know deals -- there's a lot of large deals which are coming through this quarter, maybe previous quarter and coming quarter as well. Is it a component of the large deals, which may have some transformation business, which have margins which can offset potential headwinds from on-site staff onboarding?

[Venkataraman Ramakrishnan, Chief Financial Officer]

Ramki here. I think we have added in the past couple of quarters as well. So with all these large deals, we do not structurally believe that they very too different from any of the other programs which we have. And these programs have started out well and the implementations are as planned. And the overall number is what -- is the proof of the -- proof what is happening. So anything more?

[Rajesh Gopinathan, CEO, MD & Executive Director]

And the large deals by nature will have a slightly more distributed margin profile. But nothing to call out.

[Venkataraman Ramakrishnan, Chief Financial Officer]

Yes, that's right.

[Operator]

The next question is from the line of Anantha Narayan from Crédit Suisse.

[Anantha Narayan, Director of Equity Research for India]

So Rajesh, you provided the order booking numbers, so thank you for that. I think that's a useful metric to keep track of. But one number by itself doesn't really mean much to us. So a couple of questions here. One is, you mentioned that the book-to-bill ratio has been broadly similar historically as well. Can you just give us a bit of color on typically what tends to be the peak and the trough of these ratios over the past 3 years? Secondly, how much of this is typically renewals versus new business? And finally, just going forward, I just want us to understand this metric better. Should we expect any significant seasonality across the 4 quarters?

[Rajesh Gopinathan, CEO, MD & Executive Director]

Anantha, first of all, it's taking us some time to get to sharing [indiscernible]. Put it this way that we often are getting to grips with this number. And one of the reasons we're sharing it is coming from our greater confidence in that metric. So caveat here that into the course of the next few quarters, expect some volatility in it. And combine this with the commentary that we're giving and the color that we're giving in our commentary around the metric itself. I have always in the past been skeptical about sharing it because this number tends to be lumpy and volatile. You had asked on once a year. We're not going to share the historical trends with you. But over time, this will build up and we will be able to look at it over time. What we're sharing with you is across some of the big segments like North America, BFSI, Retail. But it has been lumpy in the past, which is one of the reasons why we have not been sharing it. But in our ongoing convergence with the global reporting trends, sunsetting some metrics and introducing some new metrics. So work with us as we go through those.

[Anantha Narayan, Director of Equity Research for India]

Okay. And obviously, [ another key part ], again, is that also unpredictable or are there some clear seasonality in that number?

[Rajesh Gopinathan, CEO, MD & Executive Director]

Actually, seasonality is not very dramatic. The -- obviously, the end of the year -- the Q3, which is calendar year, number is always a bit on the weaker side of it. And -- but otherwise, especially in our recent past, the large deal actual closure has sometimes delayed the seasonality. So if you look at even what we announced, it is in the most unexpected quarter that the largest of the deals closed. So there is a typical seasonality to deal flow, but the OBV number, the TCV number, the contract signings sometimes actually do not reflect that. So we had -- I mean, we've not announced Q4, but Q4 was our all-time high, whereas somewhat traditional seasonality plus the Q -- Q4 is not a very strong quarter. Problems of -- when we share, there's a problem; if we don't share, there's a problem. So we are now confident. We have the number and then we'll fell out how it goes.

[Operator]

The next question is from the line of the Diviya Nagarajan from UBS.

[Diviya Nagarajan, Executive Director and Research Analyst]

Just a follow-up to an earlier question on whether you're taking share or is it something that you're seeing in the market. Specific to BFS, is this recovery that you're seeing more a function of, as you pointed out, the imported trends really dying down and the reengineering work really picking up? Or is there also an element of share gains that you're seeing here? Could you run us through that. That's one. And secondly, I think you spoke about your aspirational margins still being at 26% to 28%. Ex currency, you're still well below that range. How do you think about margins going forward? And under what conditions do you think we'll get to that -- get back to the 26%, 28% in constant currency terms?

[Rajesh Gopinathan, CEO, MD & Executive Director]

Diviya, let me address the margin one and then I'll leave it to Krithi to address the BFSI part of it. This -- I think we have spoken about it in the past also on this call and other places. The idea of thinking of margins ex currency is artificial and it's a wrong constant because the reason we have constant question on our margin is because of differential inflation between our talent pool and where our delivery location is and the inflation that you see on the pricing side. So this differential inflation will always be reflected in the currency movements. So currency movements tend to be lumpy by nature. But the differential inflation, it's a reflection in the currency movement, is a core component of our business model and our economic model. So it is wrong to think about margin where I'm giving an 8% salary hike on one hand and, on the other hand, say that we'll give it without currency, it would not be. If the currency was not as it is, I wouldn't give a person 2%, which is where the developed market is benchmarked there. So we need to keep this in mind. I feel that we have discussed it multiple times, but we always keep coming back to it. The fact is currency markets tend to be lumpy. So you will find the current correction interesting. But long-term trends actually reflect the differential inflation and it's a component that we are pretty much banking on when we talk about our confidence in maintaining stable margins.

[K. Krithivasan, Head of Banking & Financial Services]

Yes, there were 2 questions. One is on in-sourcing and where we're gaining growth from. On in-sourcing, we would like to point out that the headwind to that -- on that has always been exaggerated. Our view is that in-sourcing was isolated to few banks and it was not a very common phenomenon. And actually, the delay was stabilized. And on that, we are getting growth from -- it's again a combination of factors and depends on the geography. In geographies like Europe, you will find good growth from transformation as well as some new-generation outsourcing happening in places like it has happened before and the market share gain. But if you look at more mature geographies, you would find that it's happening primarily through transformation. Transformation plays a big role in our overall growth.

[Rajesh Gopinathan, CEO, MD & Executive Director]

So is that -- is there any other question in here? Operator?

[Operator]

Diviya Nagarajan?

[Diviya Nagarajan, Executive Director and Research Analyst]

Sorry, sorry. Just to kind of clarify and extend that question on both margins. And I think that on the banking side, could you just kind of help us understand, is it something that you think is a broad-based phenomenon across the banking sector? Or do you think, in a sense, that you will see this reflected across multiple participants, therefore, with the banking sector? Or do you think this was specific to TCS? So that's one. And Rajesh, going back to the margin question. So under what kind of growth rates and conditions do we get back to 26% to 28% on the margin side?

[K. Krithivasan, Head of Banking & Financial Services]

See -- On the BFSI, Rajesh mentioned at the beginning as well. See, we have got a differentiated position today because of our Business 4.0 framework. We got a big set of tools and framework to help our customers to leverage the benefits coming out of these technologies. So to say that -- or to say somehow that because TCS is growing, everyone will grow is something not for me to say, okay. We believe that our customers are seeing us as a differentiated player, and we get a lot of benefit through really those things.

[Rajesh Gopinathan, CEO, MD & Executive Director]

One thing that we have spoken in the past, that our business model is actually tuned for double-digit or even a mid-teens kind of a growth rate. And the other part of the [indiscernible], we are not wedded to it. We have always been investing, and we always retain investment over it. Currently, we already anticipate the growth in digital and digital continues to suck in a lot [on investment ]. Our focus on investment has been we run it through the P&L. We don't run it through the balance sheet. And for the -- we have talent development and our organic growth focus. So we have been supporting steadily about our talent development program. And that keeps on pulling in a lot of the investment side of it. So the 26% to 28% is our target range. We're quite confident of going back to it in a more stable environment. And that growth rate continues to pick up. And what you saw this quarter is again a validation of that, that as we saw good growth coming in into the quarter, we were able to offset more than half of our salary increases through efficiency gains that we're making through the scale element of it. So those dynamics will continue to play, but it's very difficult for us to give an upfront call as to when the -- where this range will be actually.

[Operator]

The next question is from the line of Ravi Menon from Elara Securities.

[Ravi Menon]

So I just wanted to check on the SG&A leverage that we see in this quarter, I think that is somewhat one of the best Q-on-Q improvements that we've seen. So the first, unless you get a cross currency, or should we actually think of this as something that entered from the last Q?

[Rajesh Gopinathan, CEO, MD & Executive Director]

SG&A leverage is not coming from cross currency. If you look at our -- the dip in the gross margin is significantly higher than our business operating profit margin FX. So efficiency gains are really coming from SG&A leverage. You will see currency impacting both sides of it. But the benefit is losing, if I remember correctly, almost 90 basis point at the gross margin level, whereas we are able to bring it down to less than 40 basis point at the operating margin level. So the remaining 50 bps came at the SG&A leverage.

[Ravi Menon]

And to just add a follow-on there. So if the rupee do stay relative, should we actually see the sales and marketing investments go up within the due...

[Kedar Shirali, Head of Global Investor Relations]

Ravi, can you speak into the telephone?

[Ravi Menon]

Hello? Yes. Can you hear me better now?

[Kedar Shirali, Head of Global Investor Relations]

Yes, much better.

[Ravi Menon]

Yes. So I was just asking if the rupee stays relative, do you think that you will increase the sales and marketing investments.

[Rajesh Gopinathan, CEO, MD & Executive Director]

Again, we have shared in the past that our investment strategy is not directly linked -- or especially investment in sales and marketing is not linked to where is the rupee. Some of our inorganic growth in the past and our investment in areas like France and Japan were calibrated based on where we found the opportunities, some fast depreciating to be. And that kind of a tactical call we will make, but we are far away from that. This is -- the rupee depreciation that you have seen has to be seen in perspective of what has happened over the last 2, 3 years. We had naturally strong rupee, and which is where the margin pressure was coming from. So we are far away from correction on the other side. If it were to happen, like the last time when it happened, we went to 29%, 30%, and we said we will make investment part of the gains in expanding in more challenging markets. And our investment into Europe during that period are showing rich gains for us right now. And similarly, our investment in France and Japan, which were calibrated at that time, are steadily adding to our growth currently.

[Operator]

The next question is from the line of Ashish Chopra from Motilal Oswal.

[Ashish Chopra, Research Analyst]

Rajesh, thanks for sharing the TCV number. It's very helpful. And sorry, I'm just going to probe on that a little bit more. Just for the betterment of our understanding, if you could share, on an average, what are the durations like for this kind of a deal number? And also, if you could give the trend, over the past 3 years, would it have actually meaningfully come down? Or would it have remained within a tight range?

[Rajesh Gopinathan, CEO, MD & Executive Director]

From a trend perspective, it has been steadily increasing over the past few years. But beyond that, again, as I said, I don't want to comment about the historical trends because it's not a March number that we were reporting. As a build-up, the history of this metric over time and learn from the trends as we go along.

[Ashish Chopra, Research Analyst]

Fair enough. And just one follow-up on the previous question. Maybe, Ramki, if you could explain better. I think as far as the leverage in the SG&A is concerned, if I look at it both on a Y-o-Y basis and Q-o-Q, it seems to be in the SG&A employee cost. So why that has come down as a percentage of revenue significantly? Whereas in the employee cost, in the cost of goods has gone up, would there or could there also be an element of reclassification from there? Or if not, then just some more clarity on that would be helpful.

[Venkataraman Ramakrishnan, Chief Financial Officer]

There is no reclassification. In fact, Rajesh mentioned that it's a combination of various things, which also an increase in our productivity across the board, be it from our delivery systems as well as from the sales and other supporting enablers. So that you're seeing, it's also reflected in these savings and the SG&A.

[Rajesh Gopinathan, CEO, MD & Executive Director]

Goods cost constitute 70% of our SG&A, so the leverage will come primarily out of that. There is no other -- I mean that is a business.

[Operator]

The next question is from the line of Sandeep Shah from CGS-CIMB.

[Sandeep Shah, Vice President]

Just the -- question is in terms of the deal pipeline. So I think, FY '18, you had a solid year in terms of a many large deals, which are even the megadeals, which you have announced. So entering FY '19, if one has to compare your pipeline versus what you had in FY '18, do you believe such kind nature of the deals are still there and your confidence is still there that this is now a trend rather than a one-off year of FY '18 and this can continue going forward, especially for TCS? As we are seeing, you are winning more of a transformation non-RFP type of deals?

[Rajesh Gopinathan, CEO, MD & Executive Director]

Sir, transformation non-RFP deals are definitely something that we are quite confident of participating, and the deal pipeline is fairly strong in that. The platform deals, as we have always shared in the past, are much more lumpy and difficult to call, as to whether the platform deal will happen this year or not. It's a fairly long decision deal. But the good news is that the pipeline is good, but the decision-making seems to be unpredictable. So platform, difficult to say. Transformation deals, absolutely. We're quite confident this year also.

[Sandeep Shah, Vice President]

Okay. Okay. Okay. Just on -- I think, last year, we commented about BFSI and retail, which has not grown in line with the company, and even that has impacted the whole year growth. With both of this segments are now registering a good growth, and we are confident of a growth momentum in BFSI to continue even in future quarters. Is it fair to say that you -- if everything goes wrong -- correct in terms of what you plan, then the FY '19, you could be easily setting a double-digit kind of a growth? I'm not asking for a guidance, but directionally, is it a right assumption to look at, where BFSI and retail are the tailwinds to give you more confidence?[Technical Difficulty]

[Operator]

Ladies and gentlemen, there seems to be a disconnection from the management's line. We request you to please stay connected while we reconnect them. Thank you.Ladies and gentlemen, thank you for being on hold. We have the management reconnected. Over to you, sir. Sir, and we have Sandeep Shah in the question queue. Sandeep Shah, you are unmuted.

[Sandeep Shah, Vice President]

Yes. Yes. Just a question was on BFSI retail. So last year, we said that these 2 were not going in line with the company average. And it looks like that we are -- actually, there is a strong recovery in both of this. So is it fair to say that FY '19 could be, on organic basis, for you to achieve a double-digit growth may not be a very tough task? I'm not asking for a specific guidance or a number, but just in terms of directionally, if these assumptions are correct, where these 2 verticals will make a lot of difference in terms of overall growth rate in FY '19.

[Rajesh Gopinathan, CEO, MD & Executive Director]

Directionally, Sandeep, we have -- then this 9.3% Q-on-Q this quarter. And as I said, in both these verticals, our medium-term visibility is quite high. So I think beyond that, I don't want to comment about where it is. But as a management team, we have always said that our immediate-term focus is to get back to double-digit growth, and -- which it seems that the visibility on that is steadily increasing.

[Sandeep Shah, Vice President]

Okay. Okay. Helpful. Just last 2 questions. Ramki. I think, in the notes to accounts, transition to IAS 15 (sic) [ IAS 115 ], you have said there is no material impact. But even in terms of a Q-on-Q growth delta, is it some amount of materiality has come through this transition?

[Venkataraman Ramakrishnan, Chief Financial Officer]

No. We don't believe it is having any impact as such right now and also going forward. It is more a question of a significant more disclosures. But otherwise, the overall core principles of IAS 115 we have been following, so we don't see any significant impact.

[Sandeep Shah, Vice President]

Okay. Okay. And Rajesh, last thing around AGM time, you said that if there are no major investments, the 100% of free cash flow, as a payout ratio, can continue going forward. So one can consider this in modeling?

[Rajesh Gopinathan, CEO, MD & Executive Director]

Absolutely. We have said 80% to 100%. You should consider that as a ongoing one we're committed to.

[Operator]

The next question is from the line of Pankaj Kapoor from JM Financial.

[Pankaj Kapoor]

Rajesh, just one clarification. This order book number that you mentioned, is it on the new order wins? Or does it also include renewables? If you can just clarify that please.

[Rajesh Gopinathan, CEO, MD & Executive Director]

It includes everything. So it includes contract signed, both existing as well as the renewables.

[Pankaj Kapoor]

Sure. So the other point which you mentioned was about multiple of non-RFP deals that we have been able to successfully win in the last few quarters. So just wanted to understand that a bit. How is the commercial construct and the sales cycle time on these non-RFP-pursued deals different versus the traditional RFP deals? Are they -- since you'll probably be proactively constructing them, how is a digital playing a role in that? That will be helpful.

[Rajesh Gopinathan, CEO, MD & Executive Director]

If it's some time perspective, they are all over the map because some of them are very large, which takes its own -- it takes time to mature. And always a question of when do you account it because many of these are socialized early on, but then start gaining traction and momentum later on in the cycle. So what is a start point is a bit of a question. But many of them are very small ones also, which have a fairly fast closure time. So time is -- I wouldn't characterize it from that perspective. Commercials also, it depends. Transformative deals, we have been quite open to taking on market-making, investment-centric more deals. That are some of the newer service lines, like digital pieces, interactive, et cetera. Their commercials are very, very attractive and much more simpler, direct-services deals.

[Pankaj Kapoor]

Okay. Great. And the second question is on the hiring. Given the visibility that you have, and you also spoke of very healthy pipeline, is there any change of view in terms of your hiring plan? And although I understand you don't disclose the utilization number, and probably that may not be relevant also, but do you think that you have enough capacity to fulfill the requirements going forward?

[Venkataraman Ramakrishnan, Chief Financial Officer]

Yes. From a requirement point of view, for fulfilling our requirements, yes, we do have capacity to fulfill the requirements. And it is -- there are different ways. One is through the headcounts, and then also the kind of optimization that is driving our efficiency and productivity. From a hiring side, yes, we have been hiring. And going forward, our hiring will be higher than what we have been doing. But overall, gross numbers, we have not been giving out. But that is visible from our net addition that you see in Q1 itself with the most 5,800. So that is much higher than what it was in the same time last year. So this is all going towards the kind of demand outlook that we have.

[Pankaj Kapoor]

So is it possible to get a sense how much of that 5,800 we added was organic? And how much came through some of these deals that we took over?

[Venkataraman Ramakrishnan, Chief Financial Officer]

We have not given that breakup. So there were some questions even during the press conference time, and what we have said is, yes, it includes both. And as far as this quarter is concerned, there is a certain amount of -- that number, from an in-sourcing point of view, is slightly higher than what our average number is because of some of the large platform big deals that we got the people, in-sourced into TCS, integrated them into TCS. But overall, it's been both. It's both our organic hiring, both in terms of fresh entry-level talent as well as lateral hiring and in-sourcing. All 3 put together is a more 5,800 net hiring in this quarter.

[Pankaj Kapoor]

Sure. And Ramki, I think you mentioned in the press conference that some of the operational efficiency that typically kicks in from the second quarter onwards came in -- you are able to realize from first quarter itself. So does it mean that is there some change in the way the -- because of the growth and all, we have been able to realize something incremental? Or you think that it is something getting preponed to the quarter? So overall, for the full year, the margin leverage from the efficiency gain will be comparable to what we typically get in the earlier as appears as well.

[Venkataraman Ramakrishnan, Chief Financial Officer]

I think that is a slight understanding issue with what I said. What I said was in the previous quarters, not just the last year but also in past years, the -- in the first quarter when we have the increases, then over the next few quarters, we recover most of it or all of it through various levers. And in this year, in the first quarter itself, we have been able to get almost 70 basis points to the operational efficiencies. It does not mean that it is something which would have otherwise come in the later quarter and which has come here. We continuously look at opportunities where we can drive these efficiencies and continue to drive on a disciplined manner. So we do believe that, that trends will continue.

[Operator]

The next question is from the line of Sandip Agarwal from Edelweiss.

[Sandip Kumar Agarwal, Vice President]

Congrats to the management team for a excellent execution and robust numbers. On the lighter side, it looks that deal flows have started following Mumbai rains, and they are coming very heavily. So one question, Rajesh, on the digital side. We continue to see a very robust growth. I just wanted a kind of flavor, is it more with the same client increasing its budget on the digital side? Or it is more widespread, like you -- it is a mix of new client coming in and the older ones scaling up on the digital side? And second question which I have is that on the BFSI front particularly, it's a strong revival as it looks like, and you already mentioned that in medium term, you have good visibility. But will it be fair to assign some credibility to the recovery in the U.S. economy, the interest-rate hikes, and also some bit of more openness towards outsourcing on the European and U.K. geography? How much will you like to credit this revival to? And finally, on the margin front, again, it is a -- what I'm trying to understand here is that you have given a guidance range on a constant currency basis, so at least the currency movement which has happened, can we adjust that in our model?

[Venkataraman Ramakrishnan, Chief Financial Officer]

Let me take the margin one. The margin range is not on a constant currency basis. It's on an absolute reported basis. Now the extended lift, extreme movements on currency will be reflected in the -- government will give you visibility to it. But as I explained to Diviya's question, the currency is a core part of this margin difference this quarter -- strategy. And therefore, it's not on a constant currency basis. Let me take the digital one, and then I'll hand it to Krithi for the BFSI. Digital is -- definitely it has a role in terms of new client acquisition. But by and large, a lot of the discreet earnings that we see is coming from our existing customers and our participation in the digital investments, rather than this revenue coming from a new set of customers. But there is some element of new customer acquisitions, primarily led by digital, but bulk of it is coming from our existing customer base.

[K. Krithivasan, Head of Banking & Financial Services]

On BFSI growth in North America, our position is that -- see, the clients are seeing the opportunity to leverage these technologies and to gain more growth and transformation leveraging this technology. So many of the investment is coming from direct this year. And -- we've been able to participate in making a much bigger way gaining traction. But that could be a increase in spend or that could be a element of optimism, based on the macroeconomic conditions in U.S., which cannot be ruled out. But our position is that, overall, the results are greater there. Two, we [ come out ] to achieve growth and transformation, which is driving this growth.

[Operator]

The next question is from the line of Srinivas Rao from Deutsche Bank.

[Srinivas Rao, Research Analyst]

I have 2 questions. One on the digital side. Your commentary indicates a double-digit growth on cloud. Could you throw some light as to -- I know I might be asking for a lot, but what is the share of -- broad share of cloud migration part within your digital revenue side? That would be my first question. Second question is on your -- as you said investments which you have focused a lot more on internal talent development rather than, at least for now, not making any visible acquisitions. So any light on, are you -- I mean, do you think the acquisitions at this stage are more difficult to add value? Or any perspective on that would be helpful.

[N. Ganapathy Subramaniam, COO & Executive Director]

This is NGS here. On the cloud aspect, I think there are multiple offerings that we have on cloud, and each one of them we are winning opportunities and winning this. And we see earlier good traction in terms of enterprise systems being transformed into cloud. It's actually a combination of infrastructure applications and then Software-as-a-Service -- Platform-as-a-Service in all of those things that happen. And coupled with the digital core being actually moved into the cloud, we have the API application and all the other things also kick in, right? So overall, it's very difficult to say how much of it is from what areas of cloud, but the growth that we have provided is truly a combination of infrastructure, application as well as SaaS and PaaS, as I explained earlier.

[Srinivas Rao, Research Analyst]

Understood. On the acquisitions?

[Unknown Executive]

Acquisitions.

[N. Ganapathy Subramaniam, COO & Executive Director]

On the acquisitions, in the -- we have a -- we keep on looking at opportunities. And that is, as we explained in the previous quarter, I think we have one of best track records of acquiring companies, integrating and leveraging a better value of the acquisition. But our key focus at this point in time is to clearly grow organically. We are extremely focused on upskilling, reskilling through our digital training initiative and capture the demand that is -- we see out there for the digital skills.

[Srinivas Rao, Research Analyst]

I mean, is it fair to say, I mean, this strategy which -- a little bit of contrast on the -- let's talk the -- your investment view, as which you'll agree. And that's the reason to ask, is that you see bigger risk or you don't see growing the scale which can move the needle for you?

[N. Ganapathy Subramaniam, COO & Executive Director]

I -- we must be clearly not that look bad in skepticism about our strategy of growing this particular business organically. But I think we were very clear that the contextual knowledge is very important. And the contextual knowledge -- people having the contextual knowledge can be trained on digital, will be the best way forward to deliver greater business value to our clients. I think that, combined with the digital offerings and the Business 4.0 thought leadership framework, all have resulted in benefits to this -- to us in terms of growth and better participation in the transformation progress. I think we feel that we are vindicated by growing this as a organic strategy. But having said that, we are open to keep looking at niche players, niche skill sets or niche competencies if that's available. And if it makes sense, that we will go for it.

[Operator]

The next question is from the line of Sudheer Guntupalli from AMBIT Capital.

[Sudheer Guntupalli, Associate of Technology]

Especially in retail and communication, if you look at these 2 verticals, they've done quite well in this quarter. So just want to understand what is driving growth in these 2 verticals? And I think one of your global competitor has also reported a growth acquisition in -- especially in communications vertical. So is there some vertical related tailwind over here or what exactly has happened?

[Rajesh Gopinathan, CEO, MD & Executive Director]

Communication vertical continues to penetrate a lot of fresh investment, most it's consolidation phase. As for most of these markets, the CSP universe, which is also significant segment for our -- of our customer base, has gone through a series of consolidation exercises, and now has switched into market-making and investment mode. And we're participating in their investment side, both from a engineering perspective, where they are trying to essentially up their infrastructure to provide smart infrastructure play as well as on the digital marketplace and digital ecosystem driver kind of a part, where we are working a lot with them in enabling a much more holistic product suite to their customer set. So the communication vertical, we're quite positive on. And we think that it should continue across most of the developed markets. Retail similarly I've shared with you, that this is coming from brick-and-mortar retailers, integrating digital technologies a lot more with their existing assets and providing a much more holistic experience to their customers and going beyond just lowest-price offer, or category selection offer that is the hallmark of our life. This one is a more difficult one to say how it goes because the industry is still significantly challenged. I think so, we will see both participation and some large transformation agendas as well as there will be the constant risk of bankruptcy or any such corporate action, derailing some part of the revenue streams and different parts of the industry.

[Operator]

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

[Rajesh Gopinathan, CEO, MD & Executive Director]

Thank you. So to sum up the call, our Q1 revenues grew by 4.1% sequentially and 9.3% year-on-year. It's been a very holistic growth across all segment...[Technical Difficulty]

[Operator]

Ladies and gentlemen, there seems to be a disconnection from the management line. We request you to please stay connected while we reconnect them. Thank you.Ladies and gentlemen, thank you for being on hold. We have the management reconnected. Sir, over to you for closing comments.

[Rajesh Gopinathan, CEO, MD & Executive Director]

Thanks again. So let me just go back. As I said, Q1 revenues grew by 4.1% sequentially and 9.3% year-on-year. And it's been a very holistic growth across segments, marked by strong recovery in BFSI and North America. Growth was led by Energy & Utilities, which grew at 30.9%; Retail and CPG, which grew 12.7%; Life Sciences & Healthcare growing at 12.1%; and CMI, which grew at 9.5%.So a fundamental driver of our growth has been our strong participation in our customers' digital transformation journeys, which we discussed at length today, and there embrace of our Business 4.0 thought leadership framework. Our digital revenues touched the 25% mark in Q1 and grew 44.8% year-on-year. The digital traction is resulting in strong client metrics and global contract signings, which we are happy to share with you.The growth acceleration, disciplined execution and currency support, all gave us good margin support in Q1, positioning us well to reach our preferred range of 26% to 28%. Our investment in organic talent development is helping us better integrate new technologies with our contextual knowledge in the solutions we design for our customers. It's also resulting in industry-leading retention rates. So once again, thank you all for joining us on this call today, and have a great evening.

[Operator]

Thank you, members of the management. Ladies and gentlemen, on behalf of TCS, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.