Tata Consultancy Services Ltd

NSE:TCS

Earnings Call Analysis

TCS Reports Resilient Growth Amidst Global Uncertainty

Tata Consultancy Services (TCS) demonstrated resilience with a 5.5% revenue growth year-over-year in constant currency, totaling $7.67 billion for Q2. Despite a decline in operating margins to 24.1%, improved demand in BFSI (Banking, Financial Services, and Insurance) is promising. Key segments like manufacturing faced minor setbacks but are expected to rebound. Guidance suggests maintaining margins between 26% to 28% in the medium term. Notably, 86 engagements in generative AI projects went live, reflecting strategic advancements. The company aims to sustain performance with strong pipeline growth across sectors while returning $1.4 billion in operating cash flow to shareholders.

Navigating Through Uncertainty

In the backdrop of ongoing geopolitical uncertainties, the company has demonstrated resilience with a solid second-quarter performance. With a 5.5% year-on-year revenue growth in constant currency, TCS recorded revenue of INR 64,259 crores (approximately USD 7.67 billion). Despite the challenges, the BFSI (Banking, Financial Services, and Insurance) sector showed promising signs of recovery, contributing positively to the overall performance.

Financial Highlights

Operating margins for the quarter stood at 24.1%, which reflects a sequential decline of 60 basis points, primarily due to ongoing investments in talent and infrastructure. The net margin held at 18.5%. Importantly, the earnings per share (EPS) grew by 6.2% year-over-year. The company's cash conversion rate was impressive at 100%, exemplifying strong operational efficiency.

Segment Performance and Demand Trends

Segmental performance showed varied results: BFSI, Consumer Business Group, and Life Sciences & Healthcare grew slightly at 0.1%, whereas Manufacturing recorded a more robust 5.3% growth. However, Technology & Services and Communication and Media segments saw declines, down by 1.9% and 10.3% respectively. The regional performance was markedly favorable, with India leading the charge at a whopping 95.2% growth, while North America faced a minor decline of 2.1%.

Investment in AI and Technological Advancement

TCS is positioning itself for long-term growth through its continued investment in AI and automation. The Ignio cognitive automation platform achieved 34 new deal wins this quarter, highlighting strong demand for technology solutions. TCS's emphasis on Generative AI (GenAI) led to a drastic increase in engagements—from 275 projects last quarter to 600 this quarter. This is indicative of the growing significance of AI in transforming business operations and enhancing efficiency.

Future Outlook and Revenue Guidance

Management remains cautiously optimistic about future growth. The order book stands robust at INR 8.6 billion, and while TCS anticipates a seasonal decline in Q3, Q4 is expected to rebound. The guidance is consistent, with a Target Contract Value (TCV) comfort zone of between $7 billion to $9 billion, which is critical for sustaining growth in the medium term.

Dividends and Shareholder Returns

The board has recommended an interim dividend of INR 10 per share, reflecting the company's commitment to returning surplus cash to shareholders. The capital allocation policy remains stable, aimed at returning substantial free cash flows.

Managing Margin Pressures

Margin pressures were felt primarily due to increased third-party expenses related to large transformational projects. Management has an aspiration for margins to recover towards the 26%-28% range in the near to medium term, with expectations that this will be supported by improved operational efficiency and an easing of current pressures.

Conclusion: A Balanced Approach Moving Forward

Overall, while TCS has faced challenges, particularly in the North American market and certain sectors, its diversified revenue portfolio, strategic investments in technology, and a strong pipeline provide a cautiously optimistic outlook. As geopolitical tensions and economic conditions stabilize, TCS is well-positioned to navigate forward, aiming for sustained growth and enhanced shareholder value.

Earnings Call Transcript 2025-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 Ms. Nehal Shah from the Investor Relations team at TCS. Thank you, and over to you.

[Nehal Shah, executive]

Thank you, operator. Good evening, and welcome to TCS' earnings call for Q2 FY '25. 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. K. Krithivasan, Chief Executive Officer and Managing Director.

[K. Krithivasan, executive]

Hi. Good day, everyone.

[Nehal Shah, executive]

Mr. Samir Seksaria, Chief Financial Officer.

[Samir Seksaria, executive]

Hello, everyone.

[Nehal Shah, executive]

And Mr. Milind Lakkad, Chief HR Officer.

[Milind Lakkad, executive]

Hi, everyone.

[Nehal Shah, executive]

Our management team will give a brief overview of the company's performance, followed by a Q&A session. As you are aware, we don't provide specific revenue or earnings guidance and anything said on this call, which reflects our outlook for the future or which could be construed as a forward-looking statement must be reviewed in conjunction with the risks that the company faces.

We have outlined this risk in the second slide of the quarterly fact sheet available on our website and e-mailed out to those who have subscribed to our mailing list.

With that, I would like to turn the call over to Krithi.

[K. Krithivasan, executive]

Thank you, Nehal, and good day, everyone. As most of you will know, today is a very sad day for all of us. Thank you to many of you who have sent us warm words of condolence.

It is a deep sorrow, we moan the passing of Mr. Ratan Tata, an extraordinary individual, whose life and legacy will always be a guiding light for Tata Consultancy Services. His wisdom, compassion and commitment to uplifting the lives of millions made him revered across the world.

This morning, the TCS leadership team under our Board of Directors went to pay our tributes to him and offer our condolences to his family. It was touching to see so many people who turned out to pay their respects to him and have also received many messages from our clients, partners and industry leaders.

Mr. Tata was one of a kind. His remarkable leadership marked by a unique blend of humility and confidence, guided TCS through transformative global expansions with a deep sense of service to the communities we operate in and the values we cherish.

He had a rare gift for making those around him feel valued and heard, earning the admiration and respect of all who had the privilege of knowing him. His approach to leadership, paired with his genuine care for people, has left an indelible mark on every one of us. Thank you for keeping him and his family in your thoughts today.

All my colleagues at TCS and I will remain forever inspired by him as we carry forward his vision. On that note, let me offer you some thoughts related to where our business stands this quarter and what we are looking to do so in the future.

Our performance in this quarter demonstrates the resilience of our diversified portfolio amidst an uncertain geopolitical situation. Our biggest vertical, BFSI showed signs of recovery. Growth markets also continued their strong performance.

Revenue grew 5.5% year-on-year in constant currency. Our operating margin for Q2 was 24.1% and net margin was 18.5%. I'll now invite Samir and Milind to go over different aspects of our performance during the quarter. I'll step in later to provide more color on the demand trends we are seeing in our business. Over to you, Samir.

[Samir Seksaria, executive]

Thank you, Krithi. Let me go over the financial details. In the second quarter of FY '25, our revenue was INR 64,259 crores, which is a year-over-year growth of 7.6%. In dollar terms, that revenue translates to USD 7.67 billion, a Y-o-Y growth of 6.4%. In constant currency terms, our revenue grew 5.5%.

Our Q2 operating margin was 24.1%, a sequential decline of 60 basis points. Our long-term direct investments to ensure sustainable growth, continuing talent acquisition and development, strengthening ecosystem partnerships and alliances, opening new delivery offices, nearshore centers and [indiscernible]. Net margin in Q2 was 18.5%. Our EPS grew 6.2% year-over-year. Our accounts receivable was at 72 DSO in dollar terms. Net cash from operations at $1.4 billion, which is a cash conversion of 100%, of percentage of net income.

Free cash flows were at $1.3 billion and invested funds at the end of the period stood at $6.4 billion. The Board has recommended an interim dividend of INR 10 per share, and our capital allocation policy remains consistent on returning surplus free cash flow back to our shareholders.

Let me walk you through our segmental performance. Please note that all growth numbers are on a year-on-year constant currency terms unless otherwise mentioned. BFSI, Consumer Business Group and Life Sciences and Healthcare verticals all grew 0.1%.

Manufacturing grew 5.3%. Technology & Services declined 1.9%. Communication and Media declined 10.3%. Energy Resources and Utilities grew 7%, and Regional Markets grew 50.4%.

Moving on to geographies. All growth markets grew above the company average. India led with 95.2% growth. Middle East and Africa grew at 7.9%. Asia Pacific grew 7.5% and Latin America grew 6.8%. Among major markets, United Kingdom grew 4.6% and Europe grew 1.8%. North America declined 2.1%.

I'm now going to talk about our industry-leading portfolio of products and platform. Ignio, our cognitive automation software suite saw 34 new deal wins and 4 go-lives. GenAI conversations are fueling an increase in conversation around traditional AI and automation. Ignio is steadily creating real-life GenAI use cases and making them an integral part of the platform to help customers realize quantifiable value.

TCS BaNCS, our flagship product for financial services, had 3 wins and 3 go-lives during the quarter. The TCS BaNCS' global banking platform now caters to the entire spectrum of banking technology from commercial, to urban cooperative, to rural, private and small finance banks in India.

With an installed base of close to 200 banking institutions in India, we continue to help our customers to transform and achieve their goals of digitization and become active players in the thriving ecosystem of Indian market.

TCS BaNCS' insurance platform continues to grow with 1 win and 3 go-lives during the quarter. Quartz Blockchain platform has 2 wins this quarter. TCS iON, our platform for digital assessment, exam administration and learning had 17 new wins and 80-plus platform capabilities, which went live. Our assessment platform administered more than 12 million candidates.

TCS OmniStore, our AI-powered Universal Commerce Suite, had 2 go-lives during the quarter. Clients have continued to prioritize enhancing their omnichannel capabilities and optimizing their checkout processes. The focus is on modernizing to create a seamless experience across online and in-store channels. Many retailers are investing in data insights and AI tools to gain deeper insights into customer behavior and optimize their personalization and marketing strategies.

Investment into cloud-based checkout solutions have surged, signaling a long-term commitment to staying agile and adaptable. TCS TwinX, our digital twin solution, had 2 wins and 2 go-lives.

In Life Sciences, our TCS ADD platform has 4 new wins and 3 go-lives this quarter. A U.S.-based leading pharma company extended their collaboration with TCS ADD for usage and cloudification of metadata repository platform for automation of biostatistical submissions to health authority. TCS ADD platform is able to automate more than 90% of the submission.

TCS Hubs, our suite of products for communication service providers had 2 new wins and 4 go-lives during the quarter. MasterCraft and Jile won 35 new deals in Q2.

Let me now go over our client metrics. As on 30th September, we have more than 1,300 clients in the $1 million-plus band. In Q2, we added 5 new clients year-over-year in the $100 million-plus band, bringing the total to 66. We added 6 clients in $20 million-plus band, bringing the total to 298, 8 clients in $10 million-plus band, taking the total to 491.

With this, I'll hand it over to Milind.

[Milind Lakkad, executive]

Thank you, Samir. Our workforce at the end of second quarter was 612,724. We added net 5,726 associates this quarter after adding a similar number last quarter also. We remain on track for fresher onboarding as planned for the year and have also commenced the process for recruiting freshers through the National Qualifier Test for FY '26.

Our workforce continued to be very diverse with 150 nationalities represented and with women making 35.5% of the base. We continue our focus on acquiring quality talent. Our current trainee hiring is segmented with differential compensation for each segment. This year, we have more than doubled our intake of higher cadre trainees. Training intensity has increased across organization, employees clocked 26.1 million learning hours year-to-date and acquired 2.6 million competencies. Education and skill development are also part of our core themes under community initiatives that we work on.

All our efforts are reflected in our retention rates, which are one of the best amongst industry peers. Our LTM attrition in IT services was at 12.3% [indiscernible] Q2, which is in our comfort range of 11% to 13%.

I will now request Krithi to speak on the various demand drivers during the quarter.

[K. Krithivasan, executive]

Thank you, Milind. I'm pleased to see some signs of improvement, most notably in financial services in North America in an environment of global uncertainty. Our diversified portfolio on yearly investments in growth markets are bearing fruit. All the growth markets continue to grow above company average. However, as a general trend in the major markets, the demand outlook continues to remain cautious, as seen in the last few quarters.

Key business themes seen across industries were cost optimization, vendor consolidation, customer experience transformation, supply chain modernization, risk and resiliency. Globally, clients continue to prioritize efficiency through cost transformation programs and demand for discretionary deals with low immediate ROI remained relatively subdued. Some recent trends that we are seeing in our major segments are: In BFSI, financial institutions in the U.S. are looking at sustaining the growth momentum with the Fed's first rate rut in 4 years.

Stability in the macro brings initial signs of confidence. With the easing of interest rate environment, consumer confidence and industry confidence will get better. This can potentially lead to improved investment. Customers are focused on operational efficiency and upgrades for the future with an eye on efficiency and automation.

While pipeline continues to remain strong, we are yet to see large transformational deals in the BFSI. TCS partnered with Tryg in the complex M&A integration journey following the Trygg-Hansa acquisition. TCS combined its M&A capabilities and deep contextual knowledge of Tryg business landscape to ensure a smooth IT integration within the stipulated time frame.

The entire IT estate of Trygg-Hansa was demerged and unified with minimum disruption to business. Post this integration, Trygg-Hansa's user experience has been elevated, and Tryg has been able to realize significant commercial synergies from the M&A. It has also enabled Tryg to focus on growth in the Swedish market, while further unlocking operational efficiencies through consolidation and transformation.

In Consumer Business Group, growth was led by TTH, which saw demand for customer engagement and hyper personalization, business process transformation, SaaS platform implementation and GenAI as key focus themes. In retail sector, customers are taking a cautious approach due to the macroeconomic and geopolitical situation. Consumer spending during the coming holiday season will also play a crucial role in determining budgets towards transformation initiatives.

Retailers are likely to wait and watch for these parameters and factor these into their planning for the next fiscal. Supply chain transformation continues to be a key priority, attracting investments from customers in addition to customer experience and M&A.

As an example, a leading U.S. supercenter chain partnered with TCS to modernize and transform their supply chain processes. The client faced several challenges with their existing warehouse management system, including system latency, inefficient product slotting, work allocation, scheduling and insufficient decision support.

TCS conducted design thinking workshops and implemented a user-centered modular, fully automated data-driven cloud-based system, integrating approximately 40 diverse applications to cover the end-to-end process. This has improved efficiency by 97%, increased agility and scalability to handle surges in demand, enable 5x faster deployment at new facilities, increased flexibility to accommodate diverse and evolving business needs, thereby improving sales, time to market and overall customer experience.

In manufacturing, we are seeing some pressure in the near term. Labor and supply side constraints are impacting the industry. However, barring these areas of concern, manufacturing continues to see a strong demand environment and deal pipeline.

Smart manufacturing and software-defined vehicles are the 2 mega long-term trends. TCS showcased its commitment to a sustainable and technologically advanced future for the aerospace industry at Farnborough International Airshow in 2024.

Cutting edge solutions designed to solve critical industry challenges were on display, including generative AI for supply chain and immersive MRO experience and exploration of quantum computing in aviation. These innovations underline TCS' dedication to pushing technological boundaries and shaping future-ready [indiscernible].

In Life Sciences and Healthcare, we had client-specific headwinds in the U.S. geography, resulting in significant impact. We expect the headwinds to stabilize in Q3 and return to growth in Q4. The tech software and services vertical saw sequential growth for the second consecutive quarter. Cost and efficiency remain the top priority for tech software and services customers, and they continue to be cautious on CapEx investments and transformation initiatives.

In CMI, telecom and media firms are keeping a keen continued focus on bottom line impact, doing more with less. ROI expectations continue to remain heightened.

Moving on to service lines. Growth this quarter was driven by cybersecurity, AI.Cloud and TCS Interactive. With increasing sophistication, ransomware, phishing and data breaches; enterprises are required to invest in advanced cybersecurity measures, including threat intelligence, endpoint security and incident response plans.

Artificial intelligence is aiding the sophistication of cyber crime, making it imperative for financial institutions to stay ahead of the curve. TCS partnered with one of the largest ground handling companies based in Europe to help them improve their cybersecurity maturity and reduce risk exposure.

TCS enabled comprehensive visibility of the enterprise cyber risk landscape, which enables the customer to measure the efficacy of their security operations, establish better control and governance on key security programs and track their returns on cybersecurity investments. On cloud front, we continue to see good growth in legacy modernization, data platform modernization and technology landscape simplification.

Over the past 2 years, companies have significantly increased their investments in AI and generative AI. They are focusing on using this technology strategically to drive business value and are becoming more aware of ethical considerations. Talent development and navigating the regulatory landscape are also key areas of focus. While challenges remain, the potential benefits of AI and generative AI are driving continued adoption and innovation.

On AI and generative AI, companies have moved past the point of experimentation through proof of concept and are increasingly viewing AI and generative AI strategic assets, integrating them into the entire value chain. We are now helping our most mature customers set up interdisciplinary AI offices where business and technology come together to rapidly turn ideas to AI POCs and scale them to production in an agile manner.

There is also a growing interest in using generative AI throughout the software development life cycle, including legacy migration and modernization initiatives across all industries. TCS was selected by the U.K. entity of a leading global insurer to transform its IT organization to meet the strategic growth objectives. As part of the multiyear partnership, TCS will help set up a future-proof operating model built on enterprise-wide distributed agile.

From modernizing the core insurance systems, to developing a cloud-native modular platform and embedding generative AI across the software development life cycle and business value chain, TCS will drive multiple traditional and disruptive initiatives. The program will enable the insurer to enhance productivity and improve customer experience while growing its market share in the region.

Openreach, U.K.'s largest telecom infrastructure company, has selected TCS as a strategic partner for the business operations transformation of their national rollout of next-gen fiber network. This managed services deal solidifies our role as a trusted partner in Openreach's end-to-end network transformation journey, delivering superior services for their flagship broadband business customers, while optimizing cost of network build, minimizing truck rolls and shortening of production cycles.

TCS will harness its unparalleled contextual expertise and domain knowledge of generative AI and cloud-led innovations to deliver efficient operations. A leading global FMCG company has engaged TCS to transform their global quality management. With contextual knowledge of the client's quality management, TCS implemented a generative AI solution that extracts value from millions of consumer feedback in over 130 languages for accurate translation and context preservation, sentiment tagging, root cause identification, feedback classification and prioritization.

This has increased operational efficiency by over 50% and is delivering actionable insights, enabling improved product quality management, brand perception and customer engagement. A global hospitality company partnered with TCS to improve its contract management processes.

TCS utilized generative AI models trained with diverse regional data to analyze contracts, identify differences in contract terms and streamline data extraction. This will improve audit efficiency and delivers approximately 17,000 person days, saving in manual effort, allowing experts to focus on higher-value activities. We are seeing the rise of AI in few service lines rather than stand-alone AI demand. The reimagination of contact centers with AI, for example, is showing a very strong trend.

Similarly, AI reimagined business process services and AI powered cloud modernization are also seeing strong traction. So it is safe to say that AI is now an integral part of everything we do and will continue to significantly benefit almost all services in the coming quarters.

Coming to our long-term growth strategy, we are investing significantly to create a large footprint in emerging growth markets. Top bets include India, APAC, Latin America, Middle East and Africa. We believe these markets are likely to turn into a sustainable driver of long-term growth.

A scalable presence in these markets is likely to provide the muscle for growth in TCS' overall business over the next couple of decades. We are establishing robust partnership with our ISV and other ecosystem partners to drive unparalleled efficiency in our operations across applications, infrastructure, engineering and business operations for our customers.

Our client relationships are more about building resilience together. As we face unprecedented global challenges, the strategic approach to collaboration will prove crucial for long-term success and improving market share.

TCV in Q2 was at $8.6 billion. The BFSI TCV was at $4.6 billion (sic) [ $2.9 billion ], while TCV for our consumer business group was at $1.2 billion. The TCV of deals signed in North America stood at $4.4 billion (sic) [ $4.2 billion ]. The gradual easing of inflation in the major markets, improving macroeconomic trends and expectations of a good holiday season spend among consumers give us hope and optimism around the prospect of improved discretionary spend and capital investments by our customers, which should bode well for our business.

Thank you. We can now open the line for questions.

[Operator]

[Operator Instructions] We'll take our first question from the line of Ankur Rudra from JPMorgan.

[Ankur Rudra, analyst]

Just maybe a few questions, maybe starting with demand. It seems like this was a challenging quarter for the international business, slightly soft on our headline numbers and also signings. Could you maybe elaborate in terms of the nature of demand environment? Has it begun to perhaps deteriorate overall after a couple of promising quarters? And should one assume that recovery perhaps get pushed out a bit from here?

[K. Krithivasan, executive]

Ankur. As we explained, like demand continues to be around areas of cost optimization and discretionary spend demand stays where it was. And in fact, what we saw is -- in some of the cases, the deal duration has slightly increased. Otherwise, we don't see a demand drop in a big way. And we also explained like BFSI North America has done well this quarter. Tech and Services has done well for a second consecutive quarter.

I also mentioned like we had challenges in a couple of accounts in Life Sciences and Healthcare, more client specific, where we were quite big, and large accounts and U.K. as well. So barring those instances, which are more client specific, I would say the environment has been quite similar to the previous quarter.

[Ankur Rudra, analyst]

Okay. And maybe just on financial services, if you could dig in a bit deeper and add some more color in terms of which is the segments of the broader financial services portfolio where you're seeing strength? And I think you also mentioned Manufacturing were a bit concerned, if you can elaborate on that one as well.

[K. Krithivasan, executive]

What is your question, Ankur, on manufacturing?

[Ankur Rudra, analyst]

I think there was some comment that manufacturing has begun to see some signs of weakness, I was just curious if you could add to that.

[K. Krithivasan, executive]

Okay. So first on BFSI. In North America, we see all-round growth. Actually, both North America and U.K., we see good growth in banking. And capital markets has been weak. Insurance has grown and regulations and risk and compliance has also grown in banking.

And in Europe, it's more or less very similar trend. U.K., again, the capital markets has been a problem. But also, as I said, U.K. is probably more a customer-specific situation than a overall trend. So this is broadly, but otherwise good thing is banking is coming up, insurance is coming up, which we hope will sustain in the coming quarters.

In manufacturing, what we mentioned is there is overall supply chain issue, like because of that -- some impact -- it's impacting the demand situation. But we believe it will be short term. Because -- we talked about labor situation and supply chain. We believe it will be short term. And once these issues are resolved -- because many of our customers have long order book, and they're quite strong in -- their health is strong and the order book is strong for our customers. So we expect our demand to pick up in the coming quarters, Ankur.

[Ankur Rudra, analyst]

Just if I can squeeze in a last question on margins. Clearly, there's been a lot of moving parts this time. Maybe the first part of the question would be, if you could highlight the -- I mean, there appears to be a bit of a margin trade-off here going through at least on the CMT side, perhaps because of one deal. Are there expected to be any sort of synergies? Is the worst of that deal margin impact behind us, number one.

Number two, overall, if I look at segmental margins, both on manufacturing and CMT, both are opposite directions of -- significantly out of long-term trends. How long will that last? When we will see this coming back to long-term trends?

[Samir Seksaria, executive]

Sure. Ankur, this is Samir here. So let me give you the margin bridge, and that will cover most of your first part of the question. So margins at 24.1% are a sequential decline of 60 basis points. And the headwinds were in form of the higher third-party expenses on account of a large transformational project, which you also mentioned about.

And that project is running at its peak. And that impact is about 60 basis points. We had incremental investments in talent and infra. That combined impact was about 70 basis points, and this was offset by mainly currency and a little bit of one-offs not recurring from Q1.

Your second part of the question in terms of segmental margins, the CMT one, as you called out, the large projects do reflect out here. There's nothing very specific. The trends on the overall margin versus on the segmental one, except for, I think, on the CMT, are on similar side, 1 or 2 segments had a slight positive.

[Operator]

We'll take our next question from the line of Apurva Prasad from HDFC Securities.

[Apurva Prasad, analyst]

So first off, deepest condolences from my side, too. Krithi, just to tie in with your comments of improvement and discretionary and optimism going forward, how should we think of growth visibility or acceleration beyond the current calendar, especially in absence of mega deals. If I look at bookings for the first half, TCV, it's down 20%, of course, with no mega deals there as compared to the comparable period earlier.

So any comments on how the pipeline around some of those mega deals and/or the ACV and duration of what you've been booking?

[K. Krithivasan, executive]

Apurva, like on the TCV front, like I should say, it's better than Q1. And like we explained last quarter and previous quarters also, TCVs always have some lumpiness, like what we expect to close in the last quarter sometimes gets pushed to the subsequent quarter. And we've always been maintaining that [indiscernible] $7 billion to $9 billion TCV is a comfort range. And particularly in the absence of a mega deal, like if you were comparing with last year, last year, Q2 itself, we had mega deals amounting to almost $2 billion.

So in the absence of those mega deals, I think it's a comfortable number. And from a pipeline perspective, actually, our pipeline is nearly at an all-time high and both, what we call a qualified pipeline and the overall pipeline. And the pipeline is also across all geographies and industries. So pipeline is looking strong. TCV is within our comfort range, and it has shown sign of improvement. And as I said, it's not easily comparable with last year because we had 2 mega deals also come in last year.

[Apurva Prasad, analyst]

Got that. And secondly, how much of the weakness this quarter relative to the previous quarter is sort of emblematic of macro versus the temporary client-specific factors that you mentioned. How long is this expected to last?

[K. Krithivasan, executive]

So quantification on how much on -- it will be difficult, Apurva, but that is, as I said, overall trend wise, there is -- demand environment has remained stable compared to last quarter. Then there is, as I said, a few accounts -- 2, 3 accounts overall, we had some client-specific situation, but all happening at the same quarter is probably a little unfortunate for us.

But I think that is a 1 quarter phenomenon, so we should rebound from that situation. So that's the way I would put it. Like I won't be able to split between how much is overall environment specific and how much is client specific. But we are confident that in near [indiscernible] Q3 is also a seasonally weak quarter, but Q4 onwards, these factors should ease out.

[Apurva Prasad, analyst]

Got it. And just finally, how is the GenAI pipeline converting to bookings and revenue, especially as one of your competitors is talked of numbers, which is not too different from our own pipeline. So if you could comment on that in terms of how integral it is becoming part of deals? And just finally, on margins, Samir, how much of the long-term growth strategy in growth markets? How should we think about margins from that point of view?

[K. Krithivasan, executive]

See, we have not been disclosing the AI, GenAI TCV, but it has been improving very well, almost like doubling every quarter. And the pipeline also remains very strong. And as of this quarter, the engagements in AI, GenAI, including the POCs, POVs, and the production engagements, we are doing more than 600 engagements, which increased -- which was almost 275 last quarter. So it's a very significant increase in the number of engagements.

And we also saw engagements that went into production also jump, like it's a sign of maturity. Last quarter, we said 8 engagements went into production. And this quarter, we have almost 86 engagements going into production. So we are finding all-round improvement and becoming mainstream.

And also the quality of engagements also like some of -- we've always been talking about engagements in terms of assist, augment and transform. And you're seeing more and more engagements in the higher order of generative AI, namely augment and transform. So we are quite comfortable and pleased, like we unveiled our WisdomNext platform and that's also getting a lot of traction with the customers.

[Samir Seksaria, executive]

Apurva, Samir here. From a long-term perspective, we stay committed to our 26% to 28%, and that will factor in any big bets, whether it is growth market or anything else, which we'll be taking into account. On an overall portfolio basis, we'd like to deliver the guiding we can, which we talk about.

[Operator]

We'll take our next question from the line of Sandeep Shah from Equirus Securities.

[Sandeep Shah, analyst]

Deepest condolence for TCS and Tata Group. Krithi, just some bookkeeping question. I wanted to understand and reconcile as you are saying, the BFSI has been showing signs of revival in the U.S. and North America, but this quarter, the North America as a region has not shown a growth, while Europe has shown a growth. So can you reconcile, is it fair to say challenges in non-BFSI segment is bigger in North America?

[K. Krithivasan, executive]

Yes. So what you said like if I split BFSI across geographies. North America has done well. And I did mention that there is a softness in U.K., Europe because of client situation for us. But the overall BFSI -- overall, BFSI still continues to grow.

And the other geography, I did talk about Life Sciences and Healthcare, North America having a softness because of one-off client issues. So that dragged the overall North America revenue growth. Similarly, like the BFSI growth in Europe has held in while some other verticals have been soft in Europe, the growth of BFSI has helped in overall Europe growth as well.

[Sandeep Shah, analyst]

Okay, okay. And just on the BSNL deal, one of the comments of CFO has been, it's at a peak rate. So is it fair to assume BSNL deal revenue in the second half would be materially lower versus first half? And this could be a growth headwind in the second half on a consol level?

[Samir Seksaria, executive]

So Sandeep, it's running at its peak, and we would expect maybe a quarter more where it would remain at similar levels. And as you rightly know, the transformational program, then we'll start tapering down.

[Sandeep Shah, analyst]

Okay. Okay. So this would also be a margin tailwind in the fourth quarter, maybe third quarter could be, again, a difficult quarter in terms of showing up what trend on the margins?

[Samir Seksaria, executive]

So while we don't say deal specific, but as you rightly called out, we have been calling out the third-party expenses incrementally going up. So once it starts tapering Q3, Q4 or Q1, that should reflect on both revenue and margins.

[Sandeep Shah, analyst]

Okay. And the last question with the tax ruling change on the buyback, how are we looking at capital allocation? Are we still looking in terms of incline towards buyback or we are more inclined towards dividend?

[Samir Seksaria, executive]

So overall, our capital allocation in terms of returning back substantial free cash flows back to our shareholders remains the same. The Board considers in terms of the mechanism of it, whether it should be buyback or special dividend, taking into account preferences of various varied group of stakeholders or shareholders which we have, and they will take a decision basis that when it is taken up for consideration.

[Operator]

We'll take our next question from the line of Vibhor Singhal from Nuvama Equities.

[Vibhor Singhal, analyst]

So Krithi, just to dwell a bit more on North America. If I look at strictly in terms of dollar revenue terms, we fell by almost $60 million in our North America revenue. Almost half of it assuming came from the Healthcare segment, which was down almost $28 million. So which are the other verticals in which we saw some kind of weakness in U.S. specifically? And was that also of a similar nature like Healthcare or client-specific issue which you expect to maybe recover in a couple of quarters? Or do you think there is a more structural issue to some of the shortfall in the revenue, maybe like the telecom sector?

[K. Krithivasan, executive]

It's from a client-specific perspective, we called out like it's essentially what we saw in Healthcare. It's a life sciences client-specific issue. You saw growth coming up in BFSI.

We had growth come up in energy, resources and utilities also and even technology and software and services grew. And we've been having the consumer business, we had the issue in terms of demand being slightly soft because of the discretionary spend cut.

And we also saw -- yes, that's primarily -- manufacturing also, we called out regarding manufacturing and telecom -- telecom has been a slightly long-term trend. We are hoping that it will recover once the interest rate environment becomes better. There will be a motivation to invest on the CapEx. But we are hoping for a good holiday season. Having a good holiday season would be good trigger for investments to resume in consumer industry.

[Vibhor Singhal, analyst]

Got it. Got it. So by that count, are we sticking to the commentary that we mentioned last quarter that retail sector has also possibly bottomed out for us. And next quarter onwards, we could see some green shoots in that sector as well?

[K. Krithivasan, executive]

Next year, we are hoping [indiscernible] macro uncertainties ease and economic environment improves, we are hoping it should be -- things should start improving. I don't want to, at this time, [indiscernible] that it's only half the year is over. It will be too early for me to call out like next year is better than this year, but we are hoping for the situation to improve with all the macros also improving.

[Vibhor Singhal, analyst]

Got it. Just one last question from my side on the headcount addition. I think another quarter of strong headcount addition. So how to read into this going forward? I mean, are we looking at -- maybe it's not similar, but still a positive headcount addition in the coming quarters? Is that more related to the kind of growth demand environment that you are seeing? Or is it just a backfill of the negative number that we had for the past 3 to 4 quarters?

[Milind Lakkad, executive]

I think we will -- from a trainee addition standpoint, which is our strategic addition, I think that we'll continue to do in the coming quarters, including Q3. Now other lateral intake from the market, we'll decide based on the market situation.

[Vibhor Singhal, analyst]

Got it. So on the lateral side, is it like we are focusing on specific technologies that we are looking to hiring? I know we kind of gave a number that we've trained so many people on GenAI. Is that the area that you're looking to hire lateral people or is it more across the broad?

[Milind Lakkad, executive]

See, we are working on various technologies and various transformational programs which are across technologies, right, from SAP S/4HANA, to GenAI, to very specific skill sets on certain products. All of that is something we continue to hire in the quarter.

[Operator]

We'll take our next question from the line of Kawaljeet Saluja from Kotak Securities.

[Kawaljeet Saluja, analyst]

A couple of questions actually from my side. One, Krithi, is that how's the furlough situation going to be this year from the initial conversation with clients? Is it any different than what you have seen in earlier years?

[K. Krithivasan, executive]

Okay. On furlough, at this time from whatever we know, it's similar to last year. We don't expect this to be any different compared to last year.

[Kawaljeet Saluja, analyst]

Got that. The second question is on the BSNL deal. Now there are various sizes, which are being discussed. I think your company announced $1 billion in terms of deal size? I'm just trying -- whereas when I read your annual report, there was a specific mention of additional 20,000 sites, which will be rolled out as part of deployment.

So I'm just trying to understand the overall size of the scope of the deal. And if it's $1 billion, then I guess in the last 4 quarters itself, the bidding would have reached around $750 million, so with that as a backdrop, how do you end up with, let's say, flattish deployment or rather another quarter of strong robust revenues from BSNL in the December quarter?

[Samir Seksaria, executive]

Kawal, overall, 100,000 sites need to be deployed. We are around the halfway mark on that. And that is the incremental information we can share on it. There is still scope to go. And like we have been sharing in the past, the entire thing is from the manufacturing until the installation and beyond in terms of acceptance. So there are various milestones also which are intermediately built into it. I will not be able to comment on how much of it is there, but back calculations probably can be done. But on a client-specific one, we'll obtain from the specific revenue numbers on it.

[Kawaljeet Saluja, analyst]

Got it. Now Samir, on this, specifically, when you look at the revenue dynamics, right, these large transformation contracts, the revenue and profitability dynamics may not be synchronized. At least from the financials, when I look at the CMT vertical, the absolute EBIT has been flat, whereas the revenues have grown, leading to an impression that it's been no margin kind of a business. Does this dynamic change as the transformation program hit specific milestones here?

[Samir Seksaria, executive]

So in the overall transformation program, during the transformation program, we don't expect the dynamics to change considerably.

[Kawaljeet Saluja, analyst]

Fair enough. The last question that I had is for Krithi, again. Krithi, you mentioned client-specific challenge. Actually, can you just elaborate what this client-specific challenge would be? And did it have any margin impact?

[K. Krithivasan, executive]

No. In this particular case, we had a scope reduction, and had a very significant presence and the client had a scope reduction, more abrupt, so leading into our revenue decline. So that's what I meant on client-specific. When I say challenge, it's a challenge because it's resulting in a scope reduction.

[Kawaljeet Saluja, analyst]

But does that scope change, let's say, as you move early into the next year? Or is it just...

[K. Krithivasan, executive]

See, the client -- no, this would, I would say, is probably like where the client decided to reduce the quantum of transformation work they were doing. And because of that, the program was stopped. So will they pick up the program again, we will know only once the situation turns positive, Kawal.

[Kawaljeet Saluja, analyst]

Okay. That's clear. Final question, I don't know if it was asked earlier, but I did hear about a specific instance of focus on growth market. All of us know that growth market may not be the most profitable one. So how do you intend to balance the aspiration of expanding into India or some of the other regions in Asia Pacific and the profitability aspirations you have?

[K. Krithivasan, executive]

See like our experience is that, yes, they're not -- the profit margin may not be as high as the major markets. At the same time, we've been able to manage overall at the portfolio level. And also it's a market where growth will come in and the kind of transformative engagements we do are very interesting.

And as the volume picks up, Kawal, my guess is, we'll be also able to manage the margin. Currently, also the volumes are low because of that SG&A expenses and the markets are slightly higher. Our expectation and the way we would operate is as the volume picks up, we should be able to manage our cost and improve the margins also.

[Samir Seksaria, executive]

Just to add to it, we could drive growth in that portfolio and drive efficiency in another portfolio. Our intent would be to deliver a combined mix of growth and profitability in the aspirations which we have set.

[Operator]

We'll take our next question from the line of Rishi Jhunjhunwala from IIFL Institutional Equities.

[Rishi Jhunjhunwala, analyst]

Just a couple of questions. Firstly, if you look at our SG&A expenses as a percentage of revenue, they are pretty much at an all-time low. And in the past 4 to 5 quarters, we have seen sequentially even the absolute amount coming down. Just wanted to understand, is it more a reflection of how things have slowed down in the past 4, 5 quarters and hence, you are trying to rationalize that or more a reflection of how the next 3, 4 quarters might look like and you're kind of managing investments there?

[Samir Seksaria, executive]

So if you look at it from an absolute perspective, SG&A expenses have been in the stable level. If you look at it from a year-on-year perspective, there have been investments in infrastructure as well as travel expenses going up.

And I'm assuming you're looking at it just from -- you are talking about from an absolute one. Because percentage, some of the nonservices revenue will also have an impact. But overall, SG&A is one of the levers in terms of stable management and efficient management on SG&A when we are looking at the combined margin, Rishi.

[Rishi Jhunjhunwala, analyst]

Okay, sir. And just secondly, on deals, right? So last quarter, we had indicated that there were delays in deal closures and so possibly that could have reflected in better wins this quarter. There hasn't been any material uptick, but you mentioned $7 billion to $9 billion is a comfortable range in which you are operating.

Just wanted to understand in order for our growth to accelerate to maybe high single digit or close to double digit over the next 12, 18 months, do you still need this number to go up substantially or the overall budgets might just reflect that even if it is not getting reflected in the TCV?

[K. Krithivasan, executive]

No, let's say, for the current revenue trajectory we are in, about $9 billion -- I'm not saying $7 billion will be comfortable consistently. But close to the range -- we have to get close to our book-to-bill ratio. If it gets somewhere around 1.1, 1.2, could service the growth that is required. So that's the reason we are coming up with a number of almost $7 billion to $9 billion.

But also, Rishi, the idea is that when you say $7 billion to $9 billion, there will be a couple of quarters where you will have a mega deal come in. So it will also give additional bump to the overall number. So $7 billion to $9 billion without mega deals is fine, like then we'll have sometimes a mega deal that will push the number up.

So that will be -- see, for instance, last year, we had almost more than INR 40 billion. This year, we had somewhere between close to INR 16 billion and INR 17 billion is what we have. With some large deals coming in and with all the better deal closure, we may be closer to the mark that we were last year or if you bill lesser, we will not be less by a big number. And as I said, 1.1, 1.2 book-to-bill is a decent number for sustaining the growth?

[Rishi Jhunjhunwala, analyst]

Got it. But do you have mega deals in the pipeline, which could potentially...

[K. Krithivasan, executive]

There'll always be a few megadeals in the pipeline, Rishi.

[Operator]

We'll take our next question from the line of Ravi Menon from Macquarie.

[Ravi Menon, analyst]

I wanted to touch upon one of the markets that you're already strong in, that's airline industry. We had heard about how they want to go direct-to-consumer and I guess, those plans have been put on hold as they struggled on other fronts. Do you see some of those kind of investments coming back?

[K. Krithivasan, executive]

Yes, definitely. Like from what we understand, those investments are coming back.

[Ravi Menon, analyst]

And in manufacturing, where you spoke of, were you talking about aerospace specifically or any other segments?

[K. Krithivasan, executive]

Definitely, as the labor issue is around aerospace. Supply chain issue is in auto as well as aerospace.

[Ravi Menon, analyst]

And one last question on BSNL [indiscernible]. I think if I understood correctly, by next year Q1, that's supposed to end? And is there a maintenance phase after that?

[K. Krithivasan, executive]

Yes, there will be a maintenance phase, like -- see, currently, the existing deal, we are on track to, in fact, close by Q4, okay? And Q1, there could be some residual work and some maintenance work will be there.

[Operator]

We have a next question from the line of Gaurav Rateria from Morgan Stanley.

[Gaurav Rateria, analyst]

First question is for Krithi. You did talk about optimism around discretionary spend returning back. So apart from macro data points, what are you seeing, either in your portfolio or client conversation or the pipeline, that gives you more confidence around a return of discretionary over a period of time?

[K. Krithivasan, executive]

There are a couple of things. One is, there is a lot of optimization work going on. Some of the work expense or spend or investments around technology [indiscernible] has not taken place. For instance, there's a workaround technology modernization, mainframe modernization, that is spending. And one good thing is, with generative AI becoming more and more mainstream, generative AI is also being seen as an important lever through which modernization could be expedited and accelerated. So that's one.

And the second is, our client conversations in terms of enhancing customer experience, okay? That's also -- in some cases that which should have happened last year did not happen. So our optimism comes from the backlog of work, which some of our customers have not been able to carry forward because of the current environment they are in.

[Gaurav Rateria, analyst]

Got it. Second question is on margins. I know that you did gave us a bridge, and that had a component of capacity building and infrastructure-related investments that had some impact on the margins. [Technical Difficulty] kind of coming back gradually, would you expect margins to return to the range that you talked about in the near term or will it be more like a medium-term phenomenon?

Basically, you have levers around India business sort of tapering down on that contract, which can lead to some margin expansion on top of it, some capacity creation has happened. That also kind of can lead to a margin expansion. So trying to understand 26% is more of a near-term phenomenon or more like a longer-term margin aspiration one should think about?

[Samir Seksaria, executive]

Gaurav, we'd like to get to 26% to 28% or nearer to 26% as soon as possible. Given how the macros are stacked up, we can't tell you it is in the immediate quarter or 2 quarters or 3 quarters or 4, but we'd like to get to it. Our aspiration, we exited at 26% in Q4, I'd be really happy if we can exit this year Q4 also at 26%.

[Operator]

We move on to the next question from the line of Nitin Padmanabhan from Investec.

[Nitin Padmanabhan, analyst]

You mentioned that the deal tenures have sort of expanded. So is that in specific cases or is that a very broad-based kind of phenomenon?

[Samir Seksaria, executive]

Nitin, I think probably what I meant was a deal cycle, right, like the time to close the deal. We saw an -- it's not the tenure of the deal. It's the time to close the deal has expanded between Q1 and Q2 in some of the cases.

[Nitin Padmanabhan, analyst]

Got it. Got it. And you mentioned that the headwinds that we have seen this quarter -- in some cases, it could sort of stabilize in the next quarter and then possibly improve. I think that was more Life Sciences. But broadly, do you get the sense that in all the areas where you have seen headwinds in the current quarter that's more or less peaked out and things can incrementally improve for those specific areas?

[K. Krithivasan, executive]

See, like we have never given a short-term commentary, near-term commentary, Nitin. But we believe like once the uncertainties are out of here -- they've been clear. Once we enter a more stable situation, we believe the growth should also return.

Current, we believe the short-term freeze or cut down on discretionary spend comes out of the market uncertainty. One that eases, the investment should return. But I don't want to say that it will immediately happen in Q3, but we believe in the medium term, it should happen.

[Nitin Padmanabhan, analyst]

Got it. And lastly, you mentioned that 86 sort of projects on GenAI have gone into production compared to 8 in the last quarter. What are the average sizes of these projects? Are they very large or...

[K. Krithivasan, executive]

No, at this time, Nitin, many of them tend to be small. But we do also get some large projects. For instance, for one of our clients, we established AI office. It's a program that sets the overall architecture, sets the guardrail and ensures the risk and regulatory framework, legal framework and then looks at all potential POCs and then evaluate the POCs and then creates a backlog and goes with each group to deliver one after other. Such projects will be more long tenured and the value could be higher. So if you are doing one single POC or one single program, the value may not be very high. But where they are long-standing long-term projects, the value also could be high.

[Nitin Padmanabhan, analyst]

Got it. Are you seeing any large AI projects where enterprises are sort of looking to build some sort of a broad infrastructure or framework where the entire org could sort of used irrespective of departments, just the broad individual building blocks, which is enterprise-wide?

[K. Krithivasan, executive]

That's what I mentioned is AI offices. We are trying to create an overall infrastructure. I's more a technical infrastructure as well as the framework and guardrail that's required. That's what we -- when I said AI office, that's what these programs tend to do, Nitin.

[Nitin Padmanabhan, analyst]

Got it. And just lastly, in such cases, how large would these programs be wherein an org tries to do this?

[K. Krithivasan, executive]

I'm sorry?

[Nitin Padmanabhan, analyst]

In the case where an enterprise seeks to create an AI office broadly, typically, how large will these projects be?

[K. Krithivasan, executive]

See, it can vary. Like see, it can vary based on the size of the organization, tenure of the deal. It could be $10 million to $20 million, #30 million based on the tenure and size of the organization.

[Operator]

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

[K. Krithivasan, executive]

Thank you, operator. We are quite pleased with our second quarter performance growing at 5.5% year-on-year in constant currency amidst the challenging geopolitical situation. Deal momentum continued to be strong in Q2 with order book at INR 8.6 billion for the quarter. Operating margins were at 24.1%, declining 60 bps sequentially. Our LTM attrition IT services was at 12.3%. I would like to thank the 612,000 TCSers whose valuable work is helping us achieve excellence every day.

With that, we wrap up our call today. Thank you for joining us.

[Operator]

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