Tata Consultancy Services Ltd

NSE:TCS

Earnings Call Transcript 2022-Q2

[Operator]

Ladies and gentlemen, good day, and welcome to the TCS Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Kedar Shirali, Global Head, Investor Relations at TCS. Thank you, and over to you, sir.

[Kedar Shirali, Head of Global Investor Relations]

Thank you, Stephen. Good evening, and welcome, everyone. Thank you for joining us today to discuss TCS's financial results for the second quarter of fiscal year 2022 that ended September 30, 2021. This call is being webcast through our website. And an archive, including the transcript, will be available on the site for the duration of this quarter. The financial 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]

Good evening, everyone.

[Kedar Shirali, Head of Global Investor Relations]

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

[Ganapathy Subramaniam Natarajan, COO & Executive Director]

Good evening, everyone.

[Kedar Shirali, Head of Global Investor Relations]

Mr. Samir Seksaria, Chief Financial Officer.

[Samir Seksaria, Chief Financial Officer]

Hello all.

[Kedar Shirali, Head of Global Investor Relations]

And Mr. Milind Lakkad, Chief Human Resources Officer.

[Milind Lakkad]

Hi, everyone.

[Kedar Shirali, Head of Global Investor Relations]

Rajesh and Samir will give a brief overview of the company's performance, followed by a Q&A session. As you are aware, we don't provide specific revenue or earnings guidance. And anything said on this call, which reflects our outlook for the future, all of which could be construed as a forward-looking statement, must be reviewed in conjunction with the risks that the company faces. We have outlined these risks in the second slide of the quarterly fact sheet available on our website and which has been e-mailed out to those who have subscribed to our mailing list. With that, I would like to turn the call over to Rajesh.

[Rajesh Gopinathan, CEO, MD & Executive Director]

Thank you, Kedar, and once again, welcome, everyone. Thank you for joining us on a Friday evening. We are very pleased with the all-around strong performance this quarter. On the revenue side, all of our industry verticals grew in the mid-teens or more. Overall, we grew 15.5% in year-on-year on constant currency terms and 16.8% in reported dollar terms as well as on reported rupee terms. Our operating margin for the quarter showed its inherent resilience, expanding to 25.6% despite industry level inflationary headwinds. Net margins in Q2 came in at 20.5%. I'll now ask Samir to go over on the headline numbers, financials and segmental performance. And I'll join you again later to talk about the demand trends we are seeing and the emerging opportunities in growth and transformation. Over to you, Samir.

[Samir Seksaria, Chief Financial Officer]

Thank you, Rajesh. Let me first walk you all through the headline numbers. The second quarter of FY '22, our revenues grew 15.5% Y-o-Y on a constant currency basis. Reported revenue in INR was INR 468.67 billion, which is a growth of 16.8%. In USD terms, revenue was $6.33 billion, again, a Y-o-Y growth of 16.8%. Let me now provide our segmental performance details for the quarter. All growth numbers are in Y-o-Y, year-on-year constant currency terms. We saw strong double-digit growth in all our verticals. Growth was led by manufacturing verticals, which grew 21.7%, followed by Life Sciences and Healthcare at 19%, retail and CPG at 18.4% and BFSI at 17%. Speaking of BFSI, an important milestone worth highlighting here is our quarterly run rate from our major markets, BFSI services, alone crossed $2 billion mark. Including revenues from our products platforms and regional markets, we would be one of the largest providers of IT consulting services and solutions in the BFSI industry globally. We also saw good acceleration in Communication & Media, which grew 15.6% and in Technology & Services, which grew 14.8%. In geography terms, we had good growth across all our markets. Growth was led by North America at 17.4%, U.K. grew 15.6% and Continental Europe grew 13.5%. Among regional markets, growth was led by India at 20.1%, followed by Latin America, 15.2%, Middle East and Africa at 13.8% and Asia Pacific at 7.6%. Our portfolio of products and platforms performed well in Q2. Ignio, our cognitive automation software, signed up 22 new customers and 8 go-lives. Digital has continued to build out a strong ecosystem in terms of technology partners as well as channel partners. Its adaptive factory now provides 50 out-of-box integrations between Ignio and third-party commercial production platforms. Digital Academy has trained 9,761 professionals till date and 35 -- 3,106 professionals on Ignio. Ignio success stories continue to come in. Here is one example. One of the largest Midwestern consumer banks of U.S. went live this quarter with Ignio AIOps and has experienced reduced MTTR, meantime to restore, by 90%, which significantly improves their operational resilience and reduces downtime of critical applications and avoiding the critical business [indiscernible]. TCS BaNCS, our flagship product suite for financial services domain, has 5 new wins and 3 go-lives in Q2. One of India's leading private insurance players has successfully rolled out TCS banks for insurance across India for servicing, renewal and claims processing of its health insurance policies. 1.9 million policies, spanning more than 30 products in health and personal excellence were migrated in this program. Our Quartz blockchain platform has 2 new wins and 1 go-live in Q2. We also won our first consumer -- first customer in pharma industry. A large custodian in U.K. has selected Quartz for handling announcements for its centralized corporate actions, event capture utility that services multiple business lines, including global custody, local custody and fund accounting. TCS cloud protection as a service solution will provide security, compliance and high availability that financial services companies require combined with the flexibility and agility of the cloud. TCS HOBS suite of products for communication service providers has 4 new wins and 6 go-lives in Q2. The HOBS product cloud was also leveraged by one of the largest telecom service providers in India to launch a first-of-its-kind converged solution to deliver mass personalization by bundling to our more services. TwinX, our AI-based digital twin solution, has had 4 wins and 6 go-lives. TCS Advanced continues to be the largest assessment provider in the country and we have now expanded our work in education transformation through our engagements in states of Odisha, Kerala and Telangana. Lastly, TCS MasterCraft, our suite of intelligent automation products for enterprise application development, modernization and delivery, has 22 new wins in Q2. Jile, our enterprise agile planning and delivery platform saw 3 new wins. Moving on to client metrics. We track these closely because they are proof points that our customer-centric strategy are continually expanding, and deepening our engagement is working. In Q2, we had robust additions in every revenue bucket compared to a year ago period. We added 5 more clients in 100 million-plus band, bringing the total to 54. We added 17 more clients in 50 million-plus band, bringing the to total 114; 19 clients in 20 million-plus band, bringing the total to 247; 31 clients in 10 million-plus band, taking the total 417; 44 in 5 million-plus band with a total of 609; and lastly, 62 more clients in 1 million-plus band, taking the total to 1,138. Let me now go over the financials. Supply side shortages and increased employee churn have led to higher backfilling expenses and greater use of subcontractors across the industry. Additionally, currency was not favorable this quarter. While the dollar -- U.S. dollar appreciated, all other currencies depreciated against the rupee, creating a margin headwind. Despite these headwinds, through disciplined execution, we were able to expand our operating margin by 10 basis points to 25.6%. Net income margin was at 20.5%, and our EPS grew 15.8% year-over-year. ETR, our effective tax rate for the quarter was 25.6%. Our accounts receivable was at 67 days sales outstanding in dollar terms, up 2 days compared to Q1. Net cash from operations was at INR 99.45 billion, which is a cash conversion of 103% of net income. Free cash flow was INR 92.29 billion. Invested funds for September 30 stood at INR 605.4 billion. The Board has recommended an interim dividend of INR 7 per share. On the people front, we had net additions of 19,690 in Q2, bringing the total head count to 528,748. It continues to be a very diverse workforce with 157 nationalities. While this is still the lowest in the industry, it is a big increase from the unusually low attrition we had over the last year due to pandemic and reflects the industry-wide churn. We had the foresight to continue hiring in large numbers throughout the second half of the last year and the first half of this year. In this fiscal, we have already onboarded 43,000 fresh engineers, all trained on latest technology while also ramping up our organic talent development initiatives and our employee engagement outreach. This helps us create a solid pipeline of talent while containing attrition. This has helped us overcome the supply-side challenges seen across the industry and continue to meet all our delivery commitments. Over 95% of our associates have received at least 1 dose of the vaccine and over 70% have been fully vaccinated. We plan to bring back our workforce to the workplace gradually by the end of the year. Over to Rajesh now for demand drivers and trends.

[Rajesh Gopinathan, CEO, MD & Executive Director]

Thank you, Samir. When we look at our growth over the last few quarters, it has been driven by 3 broad trends: increased outsourcing, investment in building a digital core, and growth and transformation for clients. Our strong growth in Q2 was once again driven by all 3 drivers. Let me now talk a little about each of these. Operations optimization has been an ongoing theme with many of our customers. And I mentioned earlier, customers are looking to free up resources, both human and financial, to support the transformation program. This is resulting in higher levels of outsourcing activity in IT operations as well as in business operations. And it's gaining further urgency because of the scarcity of talent and the speed at which the demand is being driven. We continue to dominate the space by taking a differentiated approach that leverages our innovative machine-first delivery model, or MFDM. By embedding intelligent automation within the enterprise, we are able to help customers unlock tremendous value that traditional models based on labor arbitrage alone find very difficult to match. At the heart of our machine-first approach is TCS CogniX, an AI-driven human machine collaboration suite that consists of a large library of prebuilt solutions addressing the entire breadth of IT and business operations across multiple industries. Using this, we are able to very quickly transform operations, embedding AI, machine learning and machine vision and conversational systems across the enterprise and take the customer to an end-state operating model that is leaner, more agile and reduces turnaround time for key processes to deliver superior customer experience. In the last 12 months since we launched CogniX, we have won multiple engagements using this suite. In Q2, we had 6 large deals that use CogniX to transform the customers' operating model. In addition to this, we continue to gain market share, benefiting from a flight to quality that we have seen over the last 18 months as well as in structured vendor consolidation exercises. Coming to cloud transformation and cloud adoption. Possibilities for business transformation that the hyperscale stack opens up continue to be very big drivers of growth. These multi-horizon cloud transformation journeys typically begin with cloud migration, including application modernization and data [ strict ] modernization. Once again, this quarter, we have had a large number of deal wins around such Horizon 1 initiatives, some of which we have listed in our press release. As part of the modernization, we also saw instances of customers shifting their ERP and other enterprise applications from on-premise model to SaaS and hosted versions. Areas of focus include e-commerce and customer experience, supply chain and human capital and leveraging SAP S4 HANA, our Salesforce cloud -- our IT cloud suite, along with other leading SaaS applications. As an example, a U.S.-based medical technology that's multinational where we are implementing an SAP S4 HANA solution to help them realize their vision of consolidating onto 1 global ERP platform to harmonize the business processes and support new business model opportunities. Some of them are also progressing to Horizon 2, using native capabilities of the cloud to transform the core activities, driving superior business outcomes and also paving the way for innovative business models.For example, for a large reinsurer in Europe, they have engaged us to design and develop their next-generation credit and surety insurance underwriting platform on the cloud. The new platform will leverage cloud-native capabilities to help our clients transform their underwriting process using larger and richer data sets, deep analytics and automation to significantly enhance underwriting quality, speed and throughput. This will enable them to take on more business and offer a broader range of products and provide a superior customer experience. But more importantly, the platform is also being architectured so that it can be monetized in the future by opening it up to other smaller insurers or reinsurers and giving the max to new attractive risk pools through the large ecosystem of banks and other lenders anchored by our clients. This is the kind of Horizon 3 opportunities that we are most excited about where individual anchored clients will start -- we are adjoining ecosystems to come together around these cloud-based solutions to reach -- seamlessly reach multiple customers. Coming to the second broad theme of industry transformation. We have been highlighting how TCS has been playing an impactful role in helping individual enterprises realize their growth aspirations through technology-enabled business transformation and business model innovations. The impact is manyfold higher when the customer happens to be an ecosystem owner or a market infrastructure whose transformation can reshape an entire an market while delivering. Let me share a couple of examples. In Australia, the Australian Energy Market Operator, or AEMO, is an independent organization that manages all electricity and gas systems and markets across Australia. It's responsible for the settlement of National Electricity Market, which connects the grids of Eastern and Southern Australian states to create a wholesale energy market. Until now AEMO had only been able to settle the market in 30-minute blocks, limited by its ability to segment the data. This time block was thought to favor incumbent technologies and handicap innovation. To address these inequities, the 5-minute settlement rule that was introduced in what might be the biggest-ever market reform in the Australian energy market till date and possibly one of the leading reforms globally in this market. The 5-minute settlement rule will shift the current 30-minute wholesale electricity spot market settlement period to 5 minutes or less, providing a better price signal for investment in faster-response technologies such as batteries and gas peaking generators. It will also enable more efficient bidding, operational decisions and investments aligned to dispatch and financial settlement periods. TCS was chosen as a technology partner for this change on the basis of the solution we proposed, and the cloud-based settlement platform we designed and developed successfully went live on October 1. Similarly, in the financial services industry, as you know, we are the largest independent software provider to the market infrastructure and institutions with our proven suite of TCS BaNCS for market infrastructure and custody solutions powering the operations of over 50 market-critical institutions across 66 countries. With its unique ability to support multiple markets, currencies and asset classes on the same platform and its support for a wide range of messaging standards that enable real-time interfaces with market participants and external ecosystems, it has been a key catalyst in driving transformation in many markets worldwide. But coming closer home to India, some of you would have followed our recent announcement of the work that we are doing with Multi-Commodity Exchange of India, which has selected TCS as its technology partner for its growth and transformation. As part of Project Udaan, TCS will help MCX build a new technology core, transforming its trading as well as post-trade functions to support its future growth and further strengthen its leadership position in the commodity derivatives market in India. The interesting aspect of this is how we have partnered with another customer of ours, Deutsche Boerse, where we are using solution components from them, tightly integrated with settlement component from banks to create a world-class solution for MCX in India. This kind of ecosystem-based opportunities where multiple technology solutions come together from different players in the industry will be the part of the future. And we see our role as a system integrator with significant domain capabilities and a strong suite of our own products and platforms being the unique glue that will hold this ecosystem together. Another example is our newly launched Quartz for Markets, which helps market infrastructure institutions such as exchanges, depositories and central banks, payment infrastructure, et cetera, evolve with the times and launch next-generation services around tokenized securities to drive the future growth. Four market infrastructure institutions have already signed up Quartz, including 3 in India, and deployment is currently underway. Another area that we have spoken about in the past and we are very excited about is this field of engineering services. Product innovation is central to our customers' growth and transformation strategies, building newer products or newer features or capabilities in existing products that allow them to sell more to existing market segments or address new segments altogether. We have spoken multiple times about [ consolidation ] as a common theme. But we have also seen -- we've seen that traditionally being strong players in this space, helping product companies expand their innovation velocity and capability by using our engineering design, R&D and industrialization services. The emergence of digital technologies, particularly IoT, big data analytics and cloud, has significantly expanded the addressable market for us as more and more product manufacturers make the products intelligent with sensors and embrace an as-a-service model, building service layers around the product to enable lifelong engagement with the customer and to drive new revenue streams. Our engineering services practice has been -- has seen steady growth over the last 5 years, [ straddling ] the product innovation opportunity end-to-end, helping customers develop an idea into a prototype and a product and then take the concept product all the way to production. With connected technologies like IoT, TCS also helps track product usage performance at the customer end, closing the loop as it were. Very importantly, we are a major player in the ongoing case ecosystem that is creating connected autonomous shared electric transformation of the automotive sector, working with almost all the major auto OEMs, startups and Tier 1 suppliers in their product innovation life cycle. TCS teams are working with leading Tier 1s and OEMs in building these new-age solutions, such as autonomous AI-based algorithms, electric vehicle battery management software, some of which we have spoken about last time, and cloud-based connected car applications. One particular engagement, which I think exemplifies the breadth and depth of TCS automotive design capability is something that we're doing with a European-headquartered global auto OEM. TCS has been the strategic partner for developing a new range of car models catering to the emerging markets. These markets, as you can appreciate, are characterized by price-sensitive consumers. So the product design and engineering has to adapt accordingly. We are doing the complete strategy, product design and engineering, homologation and helping build a high level of localization of the parts of each market, all designed to very stringent cost targets. This is another example of how TCS is going beyond its traditional limit, where we are actually working with the customer to build out that supply ecosystem and working with their suppliers to actually go into an iterative design mode to get to the price targets that the end customer -- end product that this customer seeks to launch in the market 2 to 3 years ahead. So that kind of ability to see that and to link that back into a tight value engineering loop and to leverage technology and the ability to engage with the domain knowledge with the entire ecosystem is something that we believe is quite unique to TCS in the spread of services that we have systematically been investing and building out on. The customer appreciated our ability to bring together this entrant capabilities that are needed to help it and the deep product design and innovation expertise, value engineering, et cetera. The work that started for Asian market has now been expanded to cover Latin American markets also, and they've been deeply appreciated by the customers who has awarded us the best supplier award among the other areas of appreciation that they have given to us. Moving on to another space, which is gaining a lot of traction in recent times, is the emergence of the B2B commerce opportunity and some -- also the direct-to-consumer commerce opportunity. Coming to the right of consumers, CPG companies, in particular, have been investing in this direct-to-consumer initiatives to gain direct access to end consumers and to deepen insight-driven consumer engagement without encumbering the intermediary channels. We are enabling rapid shift to online e-commerce as the preferred channel from brick-and-motor stores or aggregator retailers, helping our clients establish direct customer connect, gain better margins and enhanced scale of business and volumes. A leading Swiss-based pharmaceutical company specializing in dermatological treatments and skin care products has selected TCS to implement a human-centric, hyper-personalized and experience-driven D2C customer journey to enable health care professionals with next-generation e-commerce capabilities. The project includes an initial implementation for 3 countries followed by a global rollout for 30-plus countries over 3 years and support leveraging a leading commerce cloud platform. Another example is the leading global dental and medical products distributor who has partnered with TCS to accelerate transformation of the digital channels. Dealing with competition from online, our client wanted to move to a more touchless sales and service paradigm. The program covers B2B e-commerce transformation across Europe, U.K., Americas, covering customer-facing interactions and channels. Countertrend to this is that channel intermediaries are investing in technology to make themselves more relevant to the customers, and in certain cases, even seeking to eclipse OEMs. We are participating in that opportunity as well. For example, for a global distributor of electrical and electronic components, TCS has helped build a cloud-based industrial IoT platform that connects and collects data from high-value industrial assets and provides comprehensive analytical dashboards and insights for driving improvements in predictive maintenance, reliability management and operational efficiency. Using this, our client has been able to offer a range of new services and deliver a range of benefits to their end customers beyond just being the preferred supplier of multiple individual vendor items that they were originally positioned at. The productive maintenance capacity has resulted in availabilities reaching 99% and acts as a new SKU, which is their own SKU being delivered into their end customer systems. Partnering with TCS has helped our clients accelerate the transformation from being a component distributor to an industrial digital solution provider. The new platform created new revenue streams with component [ prioritization ] boosted profitability and reinforce its position as an innovation pioneer in industrial component ecosystems. So the broad theme here is as we have been talking in the past on growth and transformation as a common agenda. Coming back to some of the things that we've spoken about in the past. M&A, divestitures is -- continues to be a great area of growth for us. And we are, once again, participating in several new deal wins in Q2. There is -- an example of that is the sale of Cordis, the world-leading cardiovascular and endovascular medical devices company was spun off from Cardinal Health to Hellman & Friedman in August. TCS was engaged and enabled Cordis to function as an independent company. TCS will lead the development of their end-state technology strategy. This includes portfolio rationalization, day one readiness planning as well as business case support and cost model options. TCS will also create post-day 1 operational support organization to provide an optimized OpEx model. Similarly, we have been selected by a leading consumer goods company in Europe to enable the divestiture of its domestic appliances business and drive their business transformation into a state-of-the-art digital for CPG company. TCS will design, build and implement brand-new greenfield processes and applications to set up the new entity as an agile D2C company, leveraging one of the most respected brands in this industry and manage its technology landscape. We have spoken about how we have invested early in a dedicated M&A strategy offering that brings together multiple service offerings, acceleration framework and sophisticated change management capabilities. Leveraging this and our contextual knowledge of our customers' complex IT landscape, we're able to provide practical and pragmatic M&A solutions to our clients from strategy through execution. Over the last 3 years, we built a solid reputation in this domain, a specialist who can be relied upon to enable smooth day 1 operations, helping us win more and more with such deals. Coming to the area of sustainability that we spoke about at length last time. I want to showcase a few recent engagements. The Port Authority in Middle East and Africa region has selected TCS for implementation of TCS Clever Energy for its terminals to build a monitoring and visualization system by integrating various utility nature and the building management systems into a single platform. Similarly, a Middle Eastern warehousing corporation has engaged TCS to help analyze and report their carbon footprint across the value chain to effectively manage their overall carbon emission. A leading European bank has partnered with TCS to incorporate climate risk factors and credit risk scoring across climate risk scenarios to quantify the bank's exposure to climate risk. And TCS was engaged by a leading U.K.-based bank in the strategic climate risk assessment program. TCS will provide services for data sourcing, climate methodology analysis and dashboard reporting in compliance with the regulation. So coming now and -- to the Q2 order book. These are some of the representative trends that we've been -- that have been driving our strong growth in revenue as well as in our order book. On the back of a very strong order book in Q1, we once again had a strong set of deal wins in Q2 across all industry verticals and geographies. Our TCV in Q2 was $7.6 billion. Once again, it's a very heterogenous mix of large, midsized and small deals. And you compare this against the year on -- the last year's number and removing the one very large mega deal that we reported in Q2 of last year, this represents a 25% expansion on like-to-like TCV. By vertical, BFSI had a TCV of 2.1 billion, while retail once again had a very strong order book of 1.2 billion. The TCV of deals signed in North America stood at 3.9 billion. Lastly, while the strength of the demand environment is now no longer in doubt and we are very confident of its sustainability over the next -- the medium term, we also believe that the growth tailwind offers us an opportunity to position ourselves as the preferred growth and transformation partner of our customers. While pursuing the opportunities at hand, we will continue to invest in organic talent development to build the workforce of the future in research and innovation, intellectual property and in building out a comprehensive set of offerings that cater to the needs of every key stakeholder in the enterprise across every point in the business cycle. We believe this is very important to build a sustainable business that will continue to create value for all our stakeholders in the long term. With that, thank you for listening in, and we'll open the line for questions.

[Kedar Shirali, Head of Global Investor Relations]

Operator, you can now open the line for questions.

[Operator]

[Operator Instructions] The first question is from the line of Yogesh Aggarwal from HSBC.

[Yogesh Aggarwal, Head of India Research and India Tech Analyst]

I just have a couple of questions, if I may. Rajesh, I'm just trying to reconcile the TCV of 7.6 billion with overall demand environment. And I think you mentioned 25% growth ex of 1 large deal. But one of the trends we have seen at the sector level in the recent months is limited mega deal, but high velocity of smaller deals. So in your mix of your 7.6 billion, how is the mix looking like? Has the duration come down and if the ACV or the annual contract value is better than TCV of 25% growth?And secondly, in the past, we have seen deflation in legacy business, which you have talked about as well whenever there is a renewal. Are you seeing or more importantly, are you expecting this rate of deflation in legacy to come down with all the supply trends and overall strong demand?

[Rajesh Gopinathan, CEO, MD & Executive Director]

Yogesh, I wouldn't call out any significant change to the overall TCV or the pipeline. Mega deals, by definition, their frequency is different. And when you look at the pipeline or the TCV without the mega deals, they are pretty much similar. It's a good mix of both low duration as well as medium to long-duration deal. So there's no significant movement to either expanded durations or reduce the duration. The second question -- I think this is a topic that we have discussed multiple times in the past individually. So the trend that we are seeing is in line with the overall technology agenda. That is deals that come up for renewal 5 years later will benefit from all the technological progress that have happened in that period. So when you compare it against the deal value of last period versus this period, there might seem optically to be a reduction. But remember that it also reflects the kind of efficiency gains that have been achieved in the space, if you take something as traditional as, let's say, infrastructure support. Nowadays deals come packaged a lot with cloud-based businesses. Or even in the past, the same infrastructure at stake will be significantly more compressed on a like-to-like basis when you think of a 5-year duration. The point is not that. The point is that is the technology spending at a client level and the technological intensity of the overall value chain reducing or increasing? And as long as it is increasing, the total value is what we are trying to address. And this is in line with other trends that have happened in this industry. Cost of compute goes down, total compute consumption increases. Cost of network goes down, total network consumption increases. Not just the volume of network consumption increases, the total value spent on network consumption increases. So this is not very different. And I don't see any change to this scenario. Unit costs will go down, total consumption will increase. If you invest to stay ahead of the curve to be the most efficient producer, you will participate in this cycle or the cycle will kill you.

[Yogesh Aggarwal, Head of India Research and India Tech Analyst]

Got it. Got it. No, that's what I was trying to understand if the recent -- the supply current has changed it, but you are saying it's the same trend as the past.

[Rajesh Gopinathan, CEO, MD & Executive Director]

Yes. There's nothing more to it.

[Operator]

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

[Sandip Kumar Agarwal, Vice President]

I have one question on the margin and one question on the growth. So the way the deal momentum is building up and you made a statement it is one of the best times in a decade. So what is your sense? Where are we seeing the growth predictability to be moving? In particular, will there be any impact of seasonality, which generally happens because the kind of demand we are seeing and the supply concerns, clients would have seen they might have pushed some of the deals for the next quarter? So do you think that there was some kind of challenge in execution also because of the high attrition and manpower issue? That is number one. And number two will be on the margin front. Will it be fair to call that the peak of the pain in terms of the financial intervention to retain employees is behind us and we can see a substantial improvement going forward on the margin front?

[Rajesh Gopinathan, CEO, MD & Executive Director]

Sandip, the demand environment is very strong and is likely to continue to be strong in the medium term. However, the seasonality of demand and seasonality of operations, it will be an overlay on top of it. Now how much will that impact be? That, we will get to know only closer to the end of the year. But I don't think the seasonality will go away, but the underlying demand trend will provide a significant positive support to it. And the important thing is that when we spoke about the nature of this demand environment, the period of time for which we think that this demand environment is likely to remain strong is quite high. And that is where this has changed in terms of the visibility of the demand environment, which you've called out in the past also. So we are investing into that kind of a spectrum, which is why our significant focus over the last many quarters is also on very high campus hiring because we want to make sure that we have the right talent. While we continue to invest into our existing talent, we want to enhance that with fresh campus hiring. And we are doing that at one of the unprecedented scale, which is betting on the sustainability of the demand environment. Short-term volatility to cost base is coming from the attrition levels that you see, should we expect it to play out. But these are not structural elements, but more transitionary elements as industry supply chain settles down. And it's triggered by the fact that many players in the industry did not invest early on into creating that supply chain, but that will rationalize over the next few quarters. And our agenda is slightly longer, and we continue to invest into that demand visibility.

[Operator]

The next question is from the line of Gaurav Rateria from Morgan Stanley.

[Gaurav Rateria, Research Associate]

Two questions. Firstly, has fulfillment-related challenges limited your ability to grow revenue in the current quarter or the trends have broadly been in line with the expectations?

[Rajesh Gopinathan, CEO, MD & Executive Director]

Actually, like I said earlier, we have planned for growth 2 quarters ahead at this time. And that's why we brought in 45,000 campus hires in the first 2 -- first half of the year. And then we continue to hire from the market with very high risk and high volumes in the last 2 quarters also. So the impact of supply on -- literally on the growth is definitely not there till now. We'll continue to basically get in more and more and plan better and better, invest more and more so that we don't cause lack of growth because of supply.

[Gaurav Rateria, Research Associate]

Okay. Secondly, typically, in 2Q, we see an operating leverage playing out on the margins and probably there were supply-related issues and margins have been resilient on a sequential basis. But I'm just trying to understand the split between the investments made and potential headwinds from the supply side challenges and how long these investments will continue, after which the large operating leverage will be visible in the margins.

[Rajesh Gopinathan, CEO, MD & Executive Director]

I think the operating leverage is visible in the expansion in margin that you've seen. The extent of it might not be as much given our increased dependence on subcontractors, partially caused by the still restrictions on travel and mobility of talent. So as some of those restrictions ease, we should be able to rationalize the employee pool further. But it is not -- again, it's not structurally any different than what we have seen in the past. Coming to the investment side, our investment agenda will continue at pace. We have always spoken about the fact that it is our investment agenda that gives us the industry-leading margins. And it is our intent to continue with that and across even a wider cross-section of spaces that we are interested in. And you see that playing out in all aspects of our business, whether it be products and platforms or new services or new markets that we are investing into.

[Operator]

The next question is from the line of Apurva Prasad from Elara Capital.

[Apurva Prasad]

Rajesh, good to hear your confidence in sustainability of demand. So a couple of ones. So on -- while I understand that mega deals have got long cycles, do you think there's any change in the frequency of mega deals? And more so, can you highlight from a pipeline perspective composition? Does it look similar to recent wins? Or do you think that can change? And I'm getting to this with the assumption that there are more G&T deals in the mix and more deals with ecosystem partners, so is that increasing the complexity and reducing the frequency of mega deals?

[Rajesh Gopinathan, CEO, MD & Executive Director]

I don't think these 2 are linked to the frequency of mega deals. If anything, as you can see, when you take a slightly longer-term perspective, let's say, 10 years, there are a lot more mega deals today than there used to be in the past at an industry level. So that's one aspect of it. But the pipeline that we have, that has a mix of deals of all places. Growth and transformation deals typically will be of smaller value but shorter duration. So the ACV level will not be very different. And ecosystem partner leverage does not significantly change the nature. We rarely have scenarios where we pass partner revenues to our book. So what we are seeing is our own value of the deal. So it does not significantly change that mix. So short answer.

[Apurva Prasad]

Got that. And just a related piece on that, Rajesh. So on the cloud transformation deals that you refer to. And so in your assessment, as customers transition from Horizon 1 to Horizon 2, do you think that can have a bearing on total -- I mean on deal sizes with increase and scope?

[Rajesh Gopinathan, CEO, MD & Executive Director]

Yes and no. Typically, Horizon 1 deals are multiyear deals, more consumption driven. So they are more simpler deals. Whereas Horizon 2 deals are more complex project-based deals. But the value per se -- so typically, Horizon 1 deals start small and then the consumption is driven by new programs that come onboard, which will one way or the other have Horizon 2, Horizon 3 features. So it is very difficult to break out the value difference. But Horizon 2 deals are more project-centric and then lead to ongoing consumption.

[Apurva Prasad]

Got that. And just finally, if I may. So Europe appears to be slowing on a sequential basis versus prior quarter trends. So any color or any vertical flavor from Continental Europe? That will be helpful.

[Rajesh Gopinathan, CEO, MD & Executive Director]

Europe has had a soft quarter per se, but we don't think it's structurally a very different one. But it has been across multiple verticals and multiple themes driving it. In some areas, a very large project that we had, a very large program that has come to an end, and that has had some impact. We are also seeing a much more enhanced offshoring out of Europe as they tackle the whole talent scarcity by significantly increasing leverage closer to global standards. And that has -- that provides volume, but has a deflationary impact on the reported revenue. But there is a slowdown across some industry sectors, but which we are keeping a close watch on. When you look at the deals per se, new customer addition and new deal signings in Europe are actually higher. And that gives us the confidence that this is a transitionary phase, and we should see continuing momentum there when we look 1 or 2 quarters forward.

[Operator]

The next question is from the line of Ruchi Burde from Bank of Baroda.

[Ruchi Burde, Research Analyst]

I have 2 questions. First, for Milind. With energized hiring engine and talent pipeline, do you expect the intensity of supply pressure to ease possibly maybe 3, 4 quarters down the line?

[Milind Lakkad]

We are -- our estimating is about 2 to 3 quarters. Now this will continue. And then it will ease. So from Q2 onwards and what we will see, it will start easing. These are our estimates based on what we are seeing. But we'll continue to watch this, monitor this.

[Ruchi Burde, Research Analyst]

Okay. That's helpful. Secondly, I mean, last year, December quarter was anything but seasonally weak. Do you see -- Rajesh, what is your initial sense on furloughs and seasonality impact this year?

[Rajesh Gopinathan, CEO, MD & Executive Director]

Ruchi, last year, Q3 was when we actually got back the revenue parity. So on a sequential basis, it had a very, or should I say, benign comparatives. We are currently coming off 5 -- 4 quarters of straight growth. So seasonality, we'll have to wait and see how it plays out.

[Operator]

The next question is from the line of Sudheer Guntupalli from ICICI Securities.

[Sudheer Guntupalli, Research Analyst]

Rajesh, congratulations on your reappointment, sir. My first question, while we do understand that year-on-year growth rate still looks strong, there is still a base discussion given that September 20 itself is below what the normal trend line would have been in the absence of COVID. But if I look at it on a Q-o-Q basis, overall constant currency growth of around 3.6% and growth ex of India at 3.1% looks tepid, especially in the context that September is seasonally a strong quarter. So Rajesh, are we seeing a situation where as the base correction is happening, growth rates are reverting to pre-COVID trend lines?

[Rajesh Gopinathan, CEO, MD & Executive Director]

The constant currency growth rate this quarter sequentially will be 4%, so which is fairly strong even from a sequential basis. So the growth trends and the growth visibility that we are talking about -- or the sustainability of the growth visibility that we're talking about is fairly extended given the nature of work that is demanding it -- that is driving it. So I spoke earlier about the cloud transformation kind of programs, the various platform-driven programs. So the nature of demand is such that we think that the growth visibility into the medium term continues to be very strong.

[Sudheer Guntupalli, Research Analyst]

And second question is for Milind. Given the job market, we are actually seeing companies hiring at salary hikes. Of course, TCS still seems to be disciplined on that trend. But when we look at the industry trends, the higher salaries kind of distort the internal employee parity and may remain structurally elevated for several years to come, however, demand can be more cyclical. So how do you read the situation? And what are your thoughts on the sectoral impact of this on the long-term margin perspective of the industry?

[Rajesh Gopinathan, CEO, MD & Executive Director]

So I think a couple of points here. One is, yes, when we back fill attrition, yes, there is a marginal increase in the cost we see and which is not for this quarter. It has been like this for a reasonably good period of time. The point is, internally, the way we manage [ salaries ], we do have strategic talent development programs where people go through that and significantly can accelerate [indiscernible] their compensation. So there are ways to increase and accelerate compensation internally also. So those 2 things kind of balance each other in a reasonably good way for us.

[Operator]

The next question is from the line of Sandeep Shah from Equirus Capital.

[Sandeep Shah, Director of Research]

[indiscernible]

[Operator]

Mr. Shah, we are unable to hear you, if you can take the phone off speaker, please?

[Sandeep Shah, Director of Research]

Yes. Can you hear me now?

[Operator]

Yes, sir.

[Sandeep Shah, Director of Research]

Yes. Rajesh, in one of our interview earlier, you indicated that the adoption of the Horizon 1 deal is faster by the clients versus the adoption of the Horizon 2. So just wanted to understand where are we in terms of the adoption by the client on the Horizon 1? And do you believe once it achieves a desired level of adoption, the growth can be slightly slower versus what we have seen in Horizon 1? And in television interview, you also said that the growth is getting consolidated versus earlier quarters. So is it that comment is for specific segment? Or is it at the overall level as a whole?

[Rajesh Gopinathan, CEO, MD & Executive Director]

I'll answer the first part. I didn't fully understand the second. But first one, workload migration to the cloud on -- just on a pure migration perspective, estimates vary. But it's somewhere in the range of 20% to 30% while it might vary by industry to industry. So we are still at the early stages of this kind of adoption of the Infrastructure as a Service, which is the primary driver of Horizon 1 demand. And that still has quite a few legs to play out. So that's -- the second question, I didn't understand.

[Sandeep Shah, Director of Research]

Yes. Just a follow-up to that. Once this Horizon 1 phase is over and we enter Horizon 2, do you believe the growth rate sustainability may be similar or slightly lower? And in your television interview today, you also made the comment that growth is getting consolidated versus high growth in the last few quarters. Is it specific to some segments or the market or is it overall?

[Rajesh Gopinathan, CEO, MD & Executive Director]

The Horizon 1, as it plays out, we have spoken about this in the past, if you think architectural shift that we're seeing. And that is the major point. In the past, we have seen that happen when we went from client server to web technologies and later on as we went from web to mobile technologies. These are architectural shifts that have significant benefits. So Horizon 1 is the enabler towards that architectural shift. Once that migration is there, it unlocks a lot more possibilities and triggers new investment. So while the Horizon 1 base case volume might go down, but it will unlock significantly higher volumes on the Horizon 2, Horizon 3 spectrum. And that's the promise and the hope that this industry is always built on. On the consolidation of demand, I would have said it in certain context but -- and/or in terms of a sequential trend per se. I think what I said is that we are consolidating the growth and looking forward into the future, but I don't exactly remember what the context was.

[Sandeep Shah, Director of Research]

And just second question, just to Samir, I think in your television interview, you also said generally seasonally second half our margin picks up versus the first half. But this time could be slightly different because attrition may have a short-term challenges in terms of margin management even in the second half of this year.

[Samir Seksaria, Chief Financial Officer]

Yes. So the mention is about short-term volatility. And whenever there is short-term volatility, there would be tightness and pressure on margins. And the kind of supply side challenges, which we have seen, we were able to maintain our -- so in spite of those supply-side challenges, we were able to sustain our margins in Q2. But we will have to watch it out for the next couple of quarters, still the challenges continue.

[Sandeep Shah, Director of Research]

Okay. Okay. And Rajesh, were the clients receptive about this in terms of compensating through pricing increase? Or is it too early to call out? Or looking at legacy portfolio being also higher for the industry, the overall pricing increase may not be a tailwind at a consol level for the industry as a whole?

[Rajesh Gopinathan, CEO, MD & Executive Director]

We are seeing a full spectrum of response there. I mean a lot of the consolidation-led engagement are predicated on a win-win, which includes overall efficiency gains for the client while we use technology levers to transform the operating estate that we spoke about in the early part of my commentary today. Newer areas are command pricing premium. Areas like what we spoke about, design thinking, developing new platforms, investing in Horizon 2, Horizon 3 kind of engagements. These are all coming at a premium. So there is both efficiency-led business and innovation and transformation-led business, which comes at different price points. Net-net, it's a balancing kind of an environment. There is no significant move in either direction. But it stays -- at a portfolio level, it stays fairly stable.

[Operator]

The next question is from the line of Manik Taneja from JM Financial.

[Manik Taneja, Research Analyst]

Rajesh, just wanted to get your thoughts around the fact that if you're seeing any new engagement models emerge beyond the typical on-site/offshore model as the clients as well as the industry at large tries to address the talent deficit as well as the significant need to accelerate or fulfill demand.

[Rajesh Gopinathan, CEO, MD & Executive Director]

I think the one that we are most excited about is the leverage of automation in a deeply embedded manner, which we call the machine-first development model, MFDM. But this is a space that we think still has quite a lot of upside left in it, and we are systematically investing in how to embed it deeper into our service provision. So that's the biggest delivery model change. Otherwise, agile, which significantly changes the efficiency of consumption is, of course, another transformative model. And the third model that has a lot of resonance is what we call a product-centric operating model, which combines agile at its core and integrate technologies a lot more closely with business transformation. So these -- all of these are trends that are gaining momentum systematically.

[Operator]

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

[Rajesh Gopinathan, CEO, MD & Executive Director]

Thank you. We are strong -- to repeat, we had a strong broad-based growth across all our industry verticals and very strong deal wins again in Q2. Our client additions were very strong across all revenue buckets this quarter, an important measure of the depth of our customer relationships. Our margins continue to be industry-leading and have shown immense resilience despite supply-side challenges this quarter and currency headwinds. On the people front, by investing ahead of time in hiring the right talent across the world and onboarding a record number of fresh engineers, we have been able to overcome supply-side challenges and stay on track with all our execution time lines. Our attrition went up this quarter but continues to be lowest in the industry. We are still watching this closely for the next few quarters. We have vaccinated 70% of our employees fully, and over 95% have received at least 1 dose. This sets us up well to start bringing them back to the workplace towards the end of the year. Thank you all for joining us on this call today. Enjoy the rest of your evening and do stay safe. Thank you.

[Operator]

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