Tata Consultancy Services Ltd
NSE:TCS
| US |
|
Johnson & Johnson
NYSE:JNJ
|
Pharmaceuticals
|
| US |
|
Berkshire Hathaway Inc
NYSE:BRK.A
|
Financial Services
|
| US |
|
Bank of America Corp
NYSE:BAC
|
Banking
|
| US |
|
Mastercard Inc
NYSE:MA
|
Technology
|
| US |
|
Abbvie Inc
NYSE:ABBV
|
Biotechnology
|
| US |
|
Pfizer Inc
NYSE:PFE
|
Pharmaceuticals
|
| US |
|
Palantir Technologies Inc
NYSE:PLTR
|
Technology
|
| US |
|
Nike Inc
NYSE:NKE
|
Textiles, Apparel & Luxury Goods
|
| US |
|
Visa Inc
NYSE:V
|
Technology
|
| CN |
|
Alibaba Group Holding Ltd
NYSE:BABA
|
Retail
|
| US |
|
3M Co
NYSE:MMM
|
Industrial Conglomerates
|
| US |
|
JPMorgan Chase & Co
NYSE:JPM
|
Banking
|
| US |
|
Coca-Cola Co
NYSE:KO
|
Beverages
|
| US |
|
Realty Income Corp
NYSE:O
|
Real Estate
|
| US |
|
Walt Disney Co
NYSE:DIS
|
Media
|
| US |
|
PayPal Holdings Inc
NASDAQ:PYPL
|
Technology
|
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
3 330.65
4 553.75
|
| Price Target |
|
We'll email you a reminder when the closing price reaches INR.
Choose the stock you wish to monitor with a price alert.
|
|
Johnson & Johnson
NYSE:JNJ
|
US |
|
|
Berkshire Hathaway Inc
NYSE:BRK.A
|
US |
|
|
Bank of America Corp
NYSE:BAC
|
US |
|
|
Mastercard Inc
NYSE:MA
|
US |
|
|
Abbvie Inc
NYSE:ABBV
|
US |
|
|
Pfizer Inc
NYSE:PFE
|
US |
|
|
Palantir Technologies Inc
NYSE:PLTR
|
US |
|
|
Nike Inc
NYSE:NKE
|
US |
|
|
Visa Inc
NYSE:V
|
US |
|
|
Alibaba Group Holding Ltd
NYSE:BABA
|
CN |
|
|
3M Co
NYSE:MMM
|
US |
|
|
JPMorgan Chase & Co
NYSE:JPM
|
US |
|
|
Coca-Cola Co
NYSE:KO
|
US |
|
|
Realty Income Corp
NYSE:O
|
US |
|
|
Walt Disney Co
NYSE:DIS
|
US |
|
|
PayPal Holdings Inc
NASDAQ:PYPL
|
US |
This alert will be permanently deleted.
Tata Consultancy Services Ltd
You don't have any saved screeners yet
Good afternoon, everyone. There's plenty of seats if anyone to sit down. So welcome to our second quarter results press conference. I'm going to ask our CEO, Rajesh Gopinathan, to get up in a few minutes, but I just want to remind everyone we'll have some brief remarks from our CEO then we'll go to Q&A. Again, please keep your questions initially to 3, move on to the next and then we'll time at the end to come back to difficult questions. So with that, please take the stage, Rajesh.
Thanks, Ben. I would welcome everyone to TCS' Q2 results announcement. We've had a really, really moderate quarter ending with revenue of -- revenue growth of 8.4% in constant currency terms and a stable margin of 24% with a net profit of INR 8,042 crores, which represents 20.6% in net profitability terms. We've had strong cash conversion, converting 108% of net profit into cash from operations generating close INR 8,700 crores in cash. Our disciplined capital allocation policy continues, and we are pleased to inform that the Board has decided to give second interim dividend of INR 5 and in addition, a special dividend of INR 40 per share to shareholders. Our growth was driven once again by outperformance in Europe and U.K. With the U.K. coming in at more than 13% year-on-year growth and Europe continuing strongly at more than 16% growth with growth fairly broad-based across geographies there. North America grew at 5.3% year-on-year, and we are now at close to $2.8 billion in North America revenue. From a vertical industry perspective, once again our industry verticals like Life Sciences, Healthcare, Travel grew significantly. Life Sciences & Healthcare grew more than 16%, and we are happy to note that Communications & Media, which has been improving over the last couple of quarters have broken into double-digit growth trajectory this quarter, going at 11.8%. BFSI continue to slow down, and we have had BFSI grew at 8% year-on-year and retail volatility continues with growth at slightly more than 4% on a year-on-year basis. But when we look at it from deal flow and TCV perspective, we've had a fairly strong quarter once again. Our TCV this quarter is at $6.4 billion, which is the highest in the last 6 quarters that we have been reporting over. The growth and the deal flow also shows up in our client metrics. Our largest customers, customers from whom we've made more than $100 million a year, their number grew from -- by 3 to 47 customers from whom we made $100 million or more over the last 12 months. Digital revenues continues to be growing well ahead of company average going at more than a 28% and now we make more than 33% of our revenue from digital. We continue to add head count in anticipation of the strong growth that we -- the strong order book that we see and the opportunities in the medium to long term, and our strategy of relying on internal talent. Our net additions this quarter has been highest ever at more than 14,000 associates added during this 3 months. With that, we have crossed another big milestone in our talent journey with more than 450,000 employees now on board. Finally, I want to touch upon patents which we had started talking about last quarter. I'm happy to say that our total patents applied has now crossed 4,800. 4,874 patents applied for, which is an increase of 689 on a year-on-year basis. And on actual patents granted is at 1,121, an increase of 339 on a year-on-year basis.So overall, quite pleased with where it has finally ended up. It is definitely lower than what we had originally thought at the start of the year, but given the overall circumstances, we are quite happy with where we are. The strong deal flow and participation across deal flow and deal closure in all geographies gives us confidence of our participation in the emerging opportunities, which set us up nicely from a medium to long-term perspective. With that, I want to welcome you all once again and we'll open it up for questions.
[Operator Instructions] Okay. First, we'll turn to Kritika from CNBC.
Rajesh, last quarter you had indicated, of course, that Q2 is a defining point to see if you will be able to reach the double-digit growth. Otherwise, if there is any kind of moderacy in growth, the onus is on the second half. So keeping that in mind, would double-digit growth still be the target and would that be achievable? And the order book that you have on the deal pipe, the order book of this particular quarter $6.4 million, will we see that immediately kick in and will that help you to fast track that growth in Q3, Q4?
The order -- let me touch about the order book. The order book despite many commentaries in the rest of the industry we have seen actually both increase in deal size as well as deal duration. So overall that is good from a structural perspective, because neither are we seeing fragmentation or deal periods collapsing. The flip side of it is obviously that it'll take time for this deal pipe -- deal order book to convert. So we have been steadily clocking at more 1.1x to 1.2x, which over a longer term sets it up nicely for a double-digit growth. But I don't expect any acceleration into Q3, Q4. And as we have said that Q2 would be a defining quarter, so it has come in as where ever it is. We will need to be delivering H2 much higher than H1 to get to double digit. So we'll have to wait and see how that folds out. Today, we don't have visibility. As visibility strengthens we will top the business.
Rajesh, you also, of course, spoke about BFSI in detail. The volatility seems to be lasting longer than one had anticipated. So you were expecting or hoping for retail recovery to come in by Q2, will that be pull to Q3 or Q4? And on BFSI, last time you had said that a U.S. capital markets, European banks are seeing pressure. There seems to be some sense that European capital markets could also see some pressure. So can you throw some more color on which are the areas within BFSI that are under pressure and by when can they recover?
In BFSI, let's talk about the areas that are doing well. So insurance continues to be an area of strength and we are participating very well in that space. Regional banks in Europe are also doing well. Smaller banks in North America is also doing well, but if you look at the large banks across Europe or U.K. and even Wall Street almost all of them are continuing to be under pressure and there is softness across the board on that. So that's the spread from a BFSI perspective. Retail we have seen our expected deals that we were expect -- basically deals getting pushed out. They are still not canceled, the hope is still there, but it has got pushed out a lot more than what we were thinking when we spoke last quarter.
So by Q3, Q4, would that be...
We'll have to wait and see how these deals comes through. So the pipeline is still there, but closure we'll have to see.
Okay. Ramki, if you could give us a breakup of margins? Margins, you indicated in the press release that you've worked in reinvesting into the business, so -- but still if I look at the numbers, margins are up 9 quarters ago. What is the reason for that? Are there any headwinds that you are seeing over and above the macroeconomic volatility?
I think 2 elements when you look at the margins especially in the current time frame. One, of course, we definitely expected growth to be higher. And as Rajesh just said, retail, of course, we expect it to pick up from where we were about 3, 4 quarters back. And the trend was trending up but there seems to be a slowdown there. And the BFSI, again has -- why we have called off, so that is again -- so the -- from a growth perspective, these have been lower. Whereas if you look at additions of people, we have added about 12,000 last quarter, 14,000 this quarter. And definitely -- and also the deal pipeline, which has been very strong. So the overall capacity in the investments in that have taken place with this geared for higher growth. So the second aspect is there is a perception that there's currency depreciation in this quarter, but if you really look at the breakdown in the currencies, dollar actually within the quarter while there were variations. Overall it's 0.7% rupee depreciation. Whereas the other currencies especially in Europe in the pound sterling has been a rupee appreciation and euro has been more or less flat. And other currencies also there has been a rupee appreciation. And if you look at our growth, the significant growth has been in U.K. and continental Europe. So those currencies have been actually where we have rupee appreciation rather than a depreciation. So the impact of currency is really not there. And we have always said that, that is one of the factors including currency into the margins. So this is where I think one should look at it in a holistic manner of where they are.
We have Sajeet with Bloomberg-Quint.
Rajesh, you've been adding more than $5 billion in TCV every quarter and this quarter more than $6 billion. But you mentioned something about longer time for conversion of deals into revenues. So why is it taking time to convert those deals into -- these are digital most of or a part of it, including the deals which are coming in are in digital space, why is it taking time for you to convert into -- convert these deals? Can you give some idea of why as compared to the digital one, we're given incentive a quarter to ramp it up, but digital shouldn't be taking that much of time?
In fact, we have very specifically spoke about the nature of digital deals that we are participating in is much more transformative and much more end to end than touching the core, and that's where the volume is coming from. And that's the nature of the deals that we are actually seeing. So that doesn't lend itself to an immediate conversion. As you said $5 million-plus, it's been in the range of about 1x, 1.5x revenue, which is pretty much the stable replacement rate for the kind of growth that we have seen. So there is a steady uptick, there is steady participation. It's an important thing that we are participating well in the opportunities. But it is not very different from what we would expect looking at the revenue versus TCV ratio.
And you mentioned this quarter basically on BFSI's case, and as you can see the outlook for BFSI especially in Europe and continental and some part of Wall Street is very slow growth is coming there. Considering all this thing and BFSI being a big one for you, do you foresee missing a lot of the double-digit growth in revenue? Because you mentioned what you have to do hard -- work harder in the second half as compared to the first. But that also means quarter-on-quarter higher growth coming in. And if you can also shed some light on constant currency growth quarter-on-quarter from Q1 to Q2 in revenue and profitability terms?
Sure. So growth definitely as we have laid out, but if you look at the positive side, verticals like Life Sciences have continued to grow at 16%. Telecom has been steadily improving, it has now crossed over to double-digit growth. Manufacturing you see a steady improvement over the last few quarters and it has good momentum. It is now at more than 7% growth and on the back of deals that we have won, we believe that it should break into double-digit soon in the next couple of quarters or so. So there are various other verticals, which are actually picking up the growth slack. But you are right that BFSI is the largest vertical. And the news flow is whatever the news flow is. We are focused on trying to increase our participation in the opportunities that we see. And there are deals out there. So the deal pipeline, if you -- BFSI deal closure this quarter actually has been higher than ever in the last -- so just like I said, overall TCS TCV is the highest ever at the last 6 quarters. BFSI TCV is also the highest ever in the last 6 quarters. So there is good demand capture happening. Of course, the team and everybody is focused on looking at individual opportunities and converting it.
Ramki, one particularly on the EBIT margins, if you look at the EBIT margin on a half yearly basis, 171 bps down, tracking to healthy basis, it's at 24.1% or so. Do you see EBIT margin bordering around at 24%? Or do you see further pressure coming in because you mentioned about the fact that you'll do further investments. I won't get -- because you have a good deal pipeline coming in. So is there any pressure on the margins of which the 24% mark going into the second half?
I think the first part of your question on half year. Half year had almost -- had a revenue about 2.6% impact because of currency, so it has been an area where currency has not really helped. So that is one of the factors. With respect to your -- how this would, we'll definitely continue to optimize. It's not that we definitely have been building -- we hired, we had given campus offers, et cetera, people have joined. Plus the growth has been slower than in at least these 2 major sectors compared to what we planned, but we'll continue. We focused on margins. There is absolutely no movement away from that. And we will continue to optimize. And so I can't give you an answer whether this is a bottom out sector because our goal and expectation is that it should be higher than where it is.
You should be hitting the aspirational EBIT margin?
Rather than getting into that aspect, definitely our expectation and goal is to be much higher than that.
One question on patents, you said your patents have been increasing. What is it that the company is doing to monetize those patents and how and will we see some kind of revenues? Is there any metrics which we can bring in terms of how is contributing to revenues or EBITDA or and on margins?
I don't think we'll be able to make a direct correlation between patents and revenues, but you'll see it reflected in higher value-add business that we are doing. Like the Products & Platforms business that we speak about on the extensive work that is going on across the board, across the whole spectrum of IP if you look at it were laid out very detailed in our annual report and a lot of that is where is this innovation portfolio is coming. And patents is only one leg of it. The overall participation in the innovation ecosystem is significantly high. We are seeing ourselves more and more as a source of valuable, replicable innovation capability to our customer set, and that ecosystem play is becoming very -- resonating very well with our customers. We sometime back announced multiple innovation centers, one with Total where a refinery port, auto innovation center has been set up for them in Pune. And similarly with couple of customers out of Australia and other locations. So you see that the favor tend to the innovation space. Patents is one part of it. And the Co-Innovation Network is another part of it. Our investments in areas we'd like to call our Pace Ports that's another part of it. Our investments into academic collaboration, that's also a part of it. So it's a part of a much larger portfolio of activities that we are doing in swinging into more and more IP-led work. And on the...
Thinking of patents is an integral part our Products & Platform business. The differentiation that you want to create inherently lies in the patents, number one and that's part and parcel of the things that we see in this. If you look at it in TCS BaNCS, the first half of this year we are having something like 19 clients, and each one of them are transformation dates, it's because of the digital transformation that the product brings in and the inherent value that the patents and the portfolio of patents bring in to our customers.
Okay. We're going to move on to Pranay Jain with ET Now.
It seems that your growth has come around 1.5% in constant currency terms eventually. So I mean, we already knew that there is stress on capital markets and also weakness in European banks incrementally and after that information have you seen the malaise spread through other client groups not just in Europe but also in North America because after that the information which you have shared in Q1, the Street was still hoping for a 2.5% growth. So 2% has come as a disappointment. So what will you attribute to this weakness, too? Because incrementally, the flow of revenue has clearly sink in.
I think incremental weakness Q1 to Q2 is primarily coming from retail. As we had shared at that time, we are expecting much better numbers out of retail. So incremental weakness in retail is different, that is across both U.K. and the U.S. In BFSI, it is more strengthening on what the trend that we saw there is not trend changing per se. Then across the regional market spectrum, there has been weakness across. India is weak, Middle East is weak, Japan is weak, APAC has had a soft -- couple of soft quarters. So you'll see, but those are anyway volatile markets but we are seeing kind of synchronized weakness in those markets also. So those are the 2 elements that are kind of incrementally more than where we were in Q1.
So in halfway mark when we see that the revenue has grown 7.2% in the other doors, and given that second half is comparatively soft, you have lower number of working days. So with the macro uncertainty or issues that you see around global economic slowdown, Brexit and the U.S.-China trade war, which may be affecting client decision making, is 7.2% going to be really difficult to maybe even match up in the second half because it seems that you have the orders in hand, but the conversion or the execution is taking a little more time, and also in your commentary you see that there's more confidence in terms demand over medium, long term, you see this kind of ambition in the short and near term?
H2 we'll have to wait and see. As you said, seasonally H2 is weaker. If we have to get to double digit we'll have to deliver in H2 which is better than H1. And as of now, it does look challenging, but we are focused on making sure that we participate in all the opportunities that are there and put our best foot forward.
Also, the dividends this quarter was $6.4 billion. Could you give us some color on how much came from BFS, digital and other segments?
So we started breaking this out over the last 6 quarters. We do -- we break it out across verticals and geographies. So BFS is $2.2 million and retail is about $800 million and North America altogether is about $3.4 million, but these are overlapping numbers.
On a margin stand, I wanted to understand what will be the trajectory that we should look at realistically? I know you're at higher number than the current one, but we didn't even expect such a lower number this time. There are efficiencies that is perhaps trends that will help you in the next quarter to an extent, but is 25% could be reasonable setting? Is it getting difficult to add to the industry level because subcontracting flow off the road and these factors to maintain margins the last time?
Structurally, none will there. There certainly some of them we mentioned. Some of those additional costs, et cetera. So there we will try and do as much optimization as possible. The only factor is currency where we cannot put -- we cannot say how it will turn out. If there is some rupee appreciation it'll still put more strain. But if it is a depreciation, then it will take care of some of the increases which had already happened. For instance, our salary increases happened in the first quarter. We've had the hiring, et cetera. So those additional investments which have happened will get compensated by the rupee depreciation. So I think the variable where we may not have direct control is not the currency. Any other factors where we can influence and where we can rule we'll continue to grow optimization. As I said, we were geared for higher growth in this quarter. So we'll continue to optimize that.
Just the last question on the corporate tax cut. To what extent could it benefit your earnings for this year and whatever additional savings there are, will you be using it for buyback put in place.
Number one, the tax cut has reduced the rates to around 25%. But the only caveat is if you want to move to that we will have to stop taking any of the other concessions, et cetera. So at this point of time, we do not believe that we will use the new regime of taxation. So we will continue to evaluate this. So to answer your question, because of the changes which had happened through the ordinance, there is no direct impact on us. There may be some minor elements here and there, but not from a tax number perspective. And I think we just announced the special dividend today, it was close to about INR 16,000 crores in terms of dividend plus the taxes, et cetera. So we have been -- we have maintained that we would give back to our shareholders mostly -- almost nearly 100%, between 80% to 100% of free cash flow and this is in that direction. So we don't expect that.
Okay. We have Anita with Business Standard.
So since you've announced the highest ever TCV this time as well as the highest ever hiring in a quarter, I just wanted to understand, is there a lot of -- do we basically see a lot of smaller projects coming in terms OF faster going verticals where you're adding this talent?
Talent addition is part of our structured plan which we have spoken about in the past also. So if you look at our numbers, actually, our -- subcontractor cost as we have been able to keep it steady after a long time. It has been steadily growing earlier. And we had spoken about our strategy and that our strategy is to first participate and capture the demand and then we will over time, fix the cost structure. So subcontractor getting that under control is one big component of it. Direct hiring to replace it is another part of it. Hiring, and we have spoken about acceleration of onboarding of fresh trainees to gear ourselves up from an internal talent development for the medium-term growth that we see. So that's also on track. We have been able to onboard all the 30,000 that we spoke about last time, all 30,000 have been onboarded. So this is part of a much more long-term strategy, which we are executing on systematically.
And this question here it also look at campus hiring for this year, I know this process has changed completely, but is there any guidance on the number of freshers you intend to hire this time around?
No. We intend to go with a similar number. We are going to go about 30,000 people in the next year, same.[Audio Gap]
Build on partnership rather than investment of our Co-Innovation Network, which has close to 2,000 startups over 1,800-odd startups in it, is a very unique and differentiated strategy that allows us very strong participation, very high visibility and we co-create and co-collaborate with them and our customers to develop on opportunities that we see. So that we have been pioneers in it. And we're far ahead in terms of actually the breadth and depth of participation that we have. And we are doubling down on that side.
Right. I understand that, but so unlike a lot of other conglomerates just for understanding, you don't see investment as a part of it, whether it'd be taking a minority stake or just M&A in general for a lot of early stage funds, do you take partnership as a getaway?
We invest significantly. We've been investing for long, but our investment is in terms of actually working with them, the training that we do, the curation that we do, the joint go-to-market that we do with them, and the investment and infrastructure to do co-collaboration and co-innovation. So we have been investing significantly into this space. It is just that equity is not our game. We participate in partnership and collaboration with customers.
We have [ Ananthi ] with The Economic Times.
Yes. Since everything has been covered, I just wanted to understand, basically the -- what you said at the beginning of the year and what has happened now, essentially is it because of maybe some delay in execution of the larger contracts or just the broader scope of opportunities are lower than expected? That's something I wanted to understand. And as an extension to Romita's question, the newer talent that has been recruited, is it -- are they going to be more towards the digital side of your business?
Actually as I said, nothing significantly has changed from here. It has been more advanced change. BFS is weaker than what -- where it was at the beginning of the year. Retail has steadily weakened during the course of the year, where we had expected it to bounce back. But trend-wise, these were not very different from where we were. It is just that it's strengthened a bit. So I don't have anything in terms of that side of it. On the talent you want to?
Yes, I think we've been hiring from the colleges that where we've always been hiring and the majority of this workforce is going for a digital training today. That's how it is. So doesn't mean that we don't do other things, but majority is in digital.
Okay. We have [ Ashish ] with PTI.
Rajesh, you spoke about H2 has to be much more faster despite the seasonal difficulties we generally face. So what are the levers which really exist both on the margins as well as on the revenue front to which -- who are -- can probably help you meet that aspiration of double-digit growth?
On the revenue front, we'll have to just work harder. But actually as I said, the deal pipeline is still strong. And some of the deals that had got postponed, we will -- we hope to see whether that conversion comes through. And overall, we are not too worried about the demand environment. There is some amount of delay but we're not too worried about the demand environment.On the margin front, the levers continue to be the same. It is about rightsizing our cost base. Over time in the last few quarters, we have been speaking about that when demand was very strong, we were first focused on capturing demand, and we had said that we will restructure the cost base over time. And that is where -- so the employee onboarding at the bottom of the pyramid, the investment in building up the talent side is all part of a cost structure rationalization program that will see us clean up our pyramid and rationalize it better. And that will give -- come through on the margin part of it. And we remain hopeful that the currency will remain -- will be more rational than where it is. And with that hope, some of the margin figure should get addressed.
Okay. We'll open up the room now to some additional questions starting with Kritika.
And yes, I couldn't ask you earlier, I want to understand the digital growth. Of course, the base was lesser. So you were on a run rate of 35%, 40% growth. Now of course, it's at 37%, higher than the industry average, yes. But are you still at the scale that you can continue to grow at a 30% plus growth figure or an up to 40% growth figure in digital? And if you look at the quarter-on-quarter or year-on-year scale that you have seen in digital, how much more can you achieve now keeping the order book in mind?
Thank you. See as we said that look now, some point in time, everything will become digital for us, right? We are very pleased with the traction that we are having, the amount of the order book that we've signed. The majority of them is also embeds a lot of our digital services, whether it is cloud adoption, whether it is blockchain-based solutions or some of the core transformations, including data analytics, machine learning, artificial intelligence. All of this are having tremendous amount of traction. And you know, Rajesh talked about an all-time high of deal closures, total contract value for the last 6 quarters. I'd also say that in terms of digital deals, we've again seen the highest in the last 6 quarters in terms of deal closures as well, right? So we are pretty happy with the way that our digital services are all coming together. And it's a very, very fast evolving and fast changing -- what constitutes digital is really about integrating all the new things that comes up, including the fintechs or regtechs or insurtechs and all that startup firms that we do have partnerships, we'll have to bring all of them together and stitch together the ecosystem for our customers and harnessing the abundance, which is out there, right? So I think we're very happy and I don't see any slowdown in our pace. And in fact, what we're looking at -- the very fact the way that we have added the net additions, et cetera, we're hoping to add cylinders to our run while we are running it.
It will lead you to 40% to digital growth?
We hope to do it because of the -- demand is there. Demand is there and it is only constrained by the talent pool that's available at the right time at the right place. What we are really doing is upskilling our talent base that we have, leverage the contextual knowledge that we have through the Business 4.0 framework that we have come up with in a much more holistic manner and make sure that we are there at the right time at the right place.
Any purposes on academic, I remember Rajesh had indicated that there is an aspiration that at some point in time you could give a breakdown of which services or of revenues in digital services. So can you give us a sense, where are the large deals coming in within digital?
It's very harder to define that, we struggle a little a bit because digital is not one technology, right? We can say that, look, it's a large cloud transformation, but then within that cloud transformation, analytics comes in. Within the cloud transformation, the whole data aspects come in, right? And then there is an element of blockchain that is thrown at, right? There's a lot of these technologies coming together, but data analytics is one big area, cloud transformation is another big area, automation, leveraging machine learning and artificial intelligence and building algorithms is the third one. These third -- these 3 things are -- will be there in every single digital deal. If I can protect that area.
Satisfied. A very good question with respect to the attritional causes if you compare to the industry standards much lower. The fact is Q3, Q4, they are followers, they are seasonally weaker quarters. So would you expect attrition to see some kind of an increase? What is the bandwidth that you're working with? And also in terms of the levers you have, I know you don't give the utilization figure. But the levers you have within utilization to be able to inch up margins, what are they?
See first of all, our -- normal attritions go up a bit in Q1, Q2 because of seasonal reasons. So Q3, Q4 I don't expect anything significant different to that. With respect to utilization, actually we -- this is -- as Rajesh and Ramki said earlier, all of this has been done by design. All this talent acquisition of 30,000 people already in, never happened before. It's already done. And all of this will be leveraged to fulfill the pipeline of $6.4 million coming in, right? So I think all of this is by design. And this will -- I expect all of this to be utilized in the next 2 -- next couple of quarters and it will automatically have a significant improvement on the margins from there.
Okay. We can move over to Sajeet.
If you can give us some idea of the capital utilization, I know you give a special dividend this time. But when you spoke at the end of first quarter, you said that the Board will look at it because there's a buyback tax which came at that point in time. And so have you -- has the Board deliberated on how to give the cash to the shareholders or is the special dividend is the only way you have as of now?
This is the output of the Board deliberation. So the first is capital allocation policy that remains unchanged. We have spoken that 80% to 100% of free cash flow will need to be returned to shareholders. So no change to that capital allocation. Except that mechanisms of doing that will be optimized based on what was the current regulatory environment. So looking at both the kind of stakeholders that we have and the regulatory environment, Board has decided to announce a special dividend, which is in line with the overall capital allocation policy.
Second thing is on the retail. When you said that some of the retail deals are getting pushed out. Have we seen any kind of retail deals which have come in but has been now junked or put on hold by your customers? Is the situation in retail so bad now? Can you give us more -- shed more light on what exactly is happening on retail?
The situation being very bad per se, but some product-led deals. As you know, we have a very strong portfolio of retail products called Algo Retail where we participate across the complete value chain of retail operation. And many of them are triggers for transformation. So some of those opportunities are getting -- taking longer to close. And in some form indicating whether the appetite for it exists or not. So I wouldn't characterize it very negatively, it is just that people are spending more time diligence in actually committing to those kind of transactions.
And on the BFS piece, last year, in the second, third quarter, we saw some kind of pickup happening in BFSI. We thought okay, BFSI is coming back. Again, we have seen slowdown happening in BFSI. Is this more cyclical in nature or is it more to do with the kind of structuring that businesses are going through -- a deposit cycle they're going through? And how do you -- if you look at last year and now, do you see a difference in the way the slowdown is happening and so the way you look at it is different?
The change in mode in BFSI much more bringing [ NGS ] and me have commented on it. If we turn to let me turn to NGS to get an insider track on it.
No. I think Rajesh, I think, articulated it better. There are large ones that we are dealing with. There are midsized and smaller ones we're dealing. In that the midsize and smaller ones are going and then they are the ones who are fairly quick to change track as well and across North America and Europe, right. The large ones, I think, you know by nature they are global. They are hostage to macroeconomic indicators and what's happening. And most of them they felt that, look, if you take Brexit, for example, they all felt that it would have been and dusted, the interest rates will go up. Their business plans for '19, '20, et cetera, are banking on the fact that interest rates will go up, they'll make more money. So suddenly they see that they need to contain this thing. So there is some pressure in that front plus the uncertainty around Brexit means that there are more data flows, how it's going to -- how that business is going to function for them. They're constantly under evaluation which is kind of holding up some of this. Plus in the major markets, if you take North America, I mean, U.S. or Canada or U.K. or some parts of Europe, there are market infrastructure programs have been announced in these things like I want to change the payment systems. They want to see, for example, how the emerging markets, some of the markets like India how digitize the payments infrastructure. So instant payments and all other things are getting initiated. So when such things happen, people also look back and say that, "Look, should we go and do the payment transformation now or should we wait for those standards to emerge and then take part." So multiple instances. I think, large banks, there is some holding back, right, on how they should deal with the situation. But overall, I don't see structurally anything to call out except that, look, you know we continue to be a -- enjoy a fantastic relationship with all our customers, so are the largest verticals for us as you rightly said. And we participate in areas that they are spending and in which we want to participate, I'll put it this way.
So can...
Can you make this one last question, please?
So do you -- I think some of the analysts, they are saying 2021 would be a very tough year for BFSI going forward, given the kind of headwinds we're seeing. And you don't...
We don't.
And you don't have the contest for years, but what we see now and as we go into the next year and the next financial year, it's going to be a tougher climate and tougher growth coming from that space?
We are not hearing anything like that from our customers, so I'll put it this way. I can only share with you what we hear from our customers and what we see in the marketplace. We're not seeing any such thing. And structurally, we believe that we are well-positioned in terms of the investment that we have made to stay relevant to our customer base. And specifically in the banking, financial services and insurance space. Insurance is doing just great. And capital markets, there's some softness, but then you know, not all. As I said, the whole banking and financial services is susceptible to indicators and then where the industry is going. So we just have to be agile about it. And I think I'm very proud to say that our team in banking, financial services is more agile than anyone else.
There's a gentleman in the blue shirt at the back of the room.
I am Promit from Reuters. I'm sorry I walked in late, so I don't know if you have already answered this. But have you been able to quantify the impact of Brexit now that it's just right at the corner, and the impact of trade war? And if not, at least can you just give us some kind of a rough idea as to what you really think would be the impact?
I don't want to be trivial about it, but if I could do that, I'll get the Nobel Prize for economics. Let me put it this way that times of economic stress are times that many customers participate both on the transformation side as well as on optimization side. And our -- as NGS said, our ability to stay agile and focused on the opportunity has led to us converting this opportunity into actual revenue. Last year, U.K. grew more than 20% for us. This year in H1, it has grown 14% or 15% and -- 13% this quarter, even higher last quarter. So we are participating and that's been our strategy that we stay focused on the opportunity on hand and try to do it, but trying to impact-wise and look at the macro is not our cup of tea. Again, on a lighter note, I am very enthused by the fact that analysts were very positive about BFSI at the beginning of the year. So now they're very negative about next year, so that gives us a lot of hope.
[indiscernible] go ahead for me.
We are seeing pricing being [indiscernible] in Q4. Any reaction on how you want to go about that could help us. And also, are we seeing incremental deals happening with along sales cycle particularly the shift there, or perhaps there will be more involvement of large number of clients against the institutionally [ obligated ]. Is that why your medium to long-term outlook is more confident and near-term less certain?
The order book we said $6.4 billion for the quarter and the medium to long-term is more in terms of our engagement in transformation discussions that people are doing. Almost across the board most industries were well on that path of investing into transformation, whether it be leveraging what we call the Business 4.0 framework, where there are multiple pillars on which the transformation was getting executed on leveraging digital technologies, of course, but executing on our growth and transformation agenda. And we have seen that systematically come across multiple industries. The near term is more a reflection of what has happened over the last couple of quarters, just being more circumspect, given that it has been weaker than what we thought at the beginning of the year.
So objectively, if we just look at the margins a little bit, Q3 seasonality is soft, then also you're seeing that exit rate this quarter is also on the softer side than what you'd like. In a quarter when there is some tailwind from rupee depreciation and it is flowing through as of now, it's still telling that your margins came in at 24% and are lower than previous quarter in terms of the wage hike, diesel cost and there were some other headwinds. So how is it that it's so tough in this environment to have margins and is that also going to be the near-term state?
I think structurally we still don't see any significant headwinds to margin expansion, right. But there will be always blips in -- within the different quarters. The only -- as I said earlier, I think probably I'm repeating myself, but the currency is the one factor, which we cannot -- in fact, we cannot predict and that impact will also be important. But otherwise, plus most of the hiring we've done so far and as we go along, hiring would be more specific to what we required on projects, et cetera. So that is one lever which we will definitely optimize. And so which is a significant factor because in our overall cost structures, and also Rajesh talked about how there we will shape the overall cost structure to the current dynamics.
Also, your underlying capacity are weighing more, so that's why I ask if the trajectory is still going to take some time or not and then improve?
No, I -- but see there one -- 2 parts. One there were investments which we do from -- more from a medium and long-term perspective. We will continue to do that and we'll not stay away from those investments because they are important for our continued growth and continued success. Tactically in a quarter-to-quarter situation, we will make certain adjustments to our overall operating environment. So wherever we have the control in levers, we continue to exercise that.
So still [indiscernible] growth addition on margin.
Certainly not.
Okay. Well, we have to conclude the event. Thank you so much everyone.