Tata Consultancy Services Ltd

NSE:TCS

Earnings Call Transcript 2018-Q3

[Operator]

Ladies and gentlemen, good day, and welcome to TCS Q3 FY '18 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Kedar Shirali. Thank you, and over to you, sir.

[Kedar Shirali]

Thank you, Zed. Good evening, and welcome, everyone. Thank you for joining us today to discuss TCS financial results for the third quarter of fiscal year 2018 ending December 31, 2017. 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 statement, quarterly fact sheet and press releases are also available on our website and have been e-mailed out to those on the mailing list. Our leadership team is present on this call to discuss our results. We have with us today Mr. Rajesh Gopinathan, Chief Executive Officer and Managing Director.

[Rajesh Gopinathan, CEO, MD & Executive Director]

Hi. Good evening, everyone.

[Kedar Shirali]

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

[N. Ganapathy Subramaniam, COO & Executive Director]

Good evening, everyone. Pleasure to be here.

[Kedar Shirali]

Mr. V. Ramakrishnan, Chief Financial Officer.

[Venkataraman Ramakrishnan, Chief Financial Officer]

Hello, everyone.

[Kedar Shirali]

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

[Ajoyendra Mukherjee]

Hi, everyone.

[Kedar Shirali]

Rajesh and Ramki will give a brief overview of the company's performance followed by the Q&A session. As you're 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 outline these risks 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 Rajesh.

[Rajesh Gopinathan, CEO, MD & Executive Director]

Thank you, Kedar. And once again, good evening, and good day, to all of you. And let me start by wishing all of you a very happy new year, a very happy 2018. It's my pleasure to start off the new year with a discussion on our December quarter, which turned out to be fairly strong, considering the seasonally weak nature of this period. We had strong beam closures, particularly in Digital, which we'll talk about in more detail later on. We had a robust volume growth of 1.6% Q-on-Q, the strongest we have had for a December quarter in the last 3 years. On a year-on-year basis, we grew 9.1% in USD terms and 3.9% in INR terms and 6.2% in constant currency. On a sequential basis, we had a revenue growth of 1.3% Q-on-Q in constant currency, 1% in USD terms and 1.2% in INR terms. Let me give you now details of our segment performance. On a year-on-year basis, with the exception of BFSI and retail, all other industry verticals continued to show revenue growth upwards of 9.5% with 4 of them growing in double digits. Two of our verticals, Energy & Utilities and Travel & Hospitality, grew in fact about 20%. On a sequential basis, I'm happy to report that our retail and CPG vertical showed a good turnaround, growing at 6.4% Q-on-Q. Other than that, we had growth coming in from Energy & Utilities at 8.5% Q-on-Q; Travel & Hospitality at 2.9%; life sciences, health care and CMI, all upwards of 2%, 2.5%. The laggards in this quarter were BFSI, which declined 1.5% Q-on-Q; and technology and services, which grew marginally at 0.1%. Seasonal headwinds affected both these verticals, more so in BFSI, due to preexisting softness in that industry, which we've spoken about in the past. We had a very strong set of deal wins in Q3, nicely distributed across industry verticals and regions. Of the 11 key wins, we had 3 wins in BFSI, 2 in retail and energy and resources and 1 each in manufacturing, CMI health care and technology. From a geography perspective, year-on-year growth was led by Continental Europe, which grew 22.3% year-on-year; and U.K., which grew at 8.2%; and APAC at 6.2%. North America continued to grow below company average on account of softness in the BFSI and retail over the last one year. On a sequential basis, North America, Continental Europe and Latin America grew above the company average after steep decline last quarter, and yet stabilized in Q3. From a deal perspective, of the 11 key wins in Q3, we had 5 in North America, 3 in Europe, 2 in U.K. and 1 in APAC. In the last part, I had spoken about the new Business 4.0 that we are living in, characterized by a technology-driven transformation of business into smarter and more agile enterprises capable of harnessing technology-enabled abundance to personalize leveraged ecosystems, embrace risks and deliver exponential value. This Business 4.0 framework that TCS has embraced and taken to its market, to its with customers is resonating very well. And we see customers embrace this vision and use this framework to accelerate their transformation with TCS as their preferred partner. As a consequence, we are seeing digital deal sizes that have been steadily trending up over time. In Q3, we crossed a key milestone, signing our first $50 million-plus digital transformation deal. While a deal of this scale is still relatively rare, confined to mostly -- most technologically progressive customers, we believe that this is the shape of things to come, as more and more organizations start implementing the long-term digital strategies. In fact, it's more than that. It's really a unique combination of the power of digital, combined with TCS's understanding of the technology and domain knowledge that we possess and the contextual understanding that we have of the specific requirements of our customers, which is enabling us to stitch together these offerings into transformative and large-scale opportunities, where we are uniquely positioned to compete.Revenue from Digital engagements made up 22.1% of our overall revenue this quarter, an industry-leading growth of 29.6% year-on-year. The setting up of dedicated service practices within our Business and Technology Services unit, targeting the various digital areas, is giving us tremendous market focus, as is evidenced by over 150 wins that we have seen in this quarter. I listed a few of those in our press release to give you a flavor for the kind of work that we are doing for our customers. Strong customer references for the transformational work we do for them and the very evident market success is resulting in high rankings in various assessments published by industry analysts. In Q3, TCS ranked as a leader in 14 digital-related assessments by independent industry analysts. From a client metrics perspective, we had a good Q3 with strong additions across revenue bucket. During this quarter, we added 3 clients in the $50 million-plus band with additions across all the other bands. Our strong client metrics are a direct outcome of our customer-centric business model. And as is spoken about many times in the past, our deep contextual knowledge and the trust that we have developed through our long engagements with our customers. And this has become a very critical differentiator as we spoke to you about our unique ability to enable all of this together to actually use the business for a lot of framework to drive growth and transformation across our customer segment. From a products and platforms perspective, speaking of Business 4.0, when you apply these core concepts to our own business, the elements was positioned to deliver exponential value in the long term [indiscernible] platform. Our TCS BaNCS product suite for the financial services industry had 4 new wins and 8 go-lives in Q3. I'm particularly excited by Quartz blockchain solution we launched for financial institutions earlier this year. As you all know, distributed ledger technology is showing immense promise in many different areas and I'm convinced will substantially transform how business is transacted in the future. To begin, we are focusing on a few selective cases, corporate announcements, loan securitization, trade finance and card payments, but its usage will continue to increase across the spectrum. In Q3, Quartz was [ 4 wins ], including the engagement with BNP Paribas Securities Services, for whom we are -- we very rapidly deployed Corporate Events Connect, an innovative blockchain-based platform that uses Quartz to provide fast, accurate and secured corporate event announcement to BNP's clients around the world. When you look at ignio, and we're very encouraged by the rapid gains that it is showing in the market. It -- we had more than 10 wins this quarter. And when you look at the large wins that we announced, you will find that more than -- or 4 of them were leveraged ignio very deeply. What's more important is that ignio, which was started as primarily focused on the introspective space, is rapidly evolving into a full-spectrum cognitive automation and orchestration platform. The deals you will see has -- are distributed between infrastructure, enterprise applications, like SAP, health care, analytics, et cetera. So we are seeing automation and intelligent analytics getting deeply embedded across the spectrum, and ignio is a great driver for this transformation. We -- ignio now has -- is approaching close to 50 customers with strong wins this quarter. On terms of other platforms, TCS HOBS is a pay integrated end-to-end platform for telecom business and operations support. And it won 2 new customers in Q3, bringing it -- the total number of customers to 27. Other platforms like TAP and Optumera had 1 win each. And our iON assessment platform assessed more than 6 million candidates in Q3, and we now have about 100 million candidate assessments that we have conducted till date on this platform. So we are able to use technology and deploy it at a fairly unprecedented scale, and you're seeing rapid acceleration across that and one of the reasons why we are optimistic about the power of these technologies to transform the businesses of our customers where we work in. On the people front, we continue to recruit steadily. And in Q3, we added 12,534 employees on a gross basis, of whom -- of which almost 3,000 were recruited outside India. Net additions was at 1,667. And our -- we closed the quarter with a total headcount of 3,90,000 -- or 390,880 employees. Overall, in the last 12 months, we have recruited 59,700 employees, which includes 12,700 recruited outside India, a good indicator of our localization initiatives are progressing. We always prided ourselves in our ability to attract and retain diverse talent. We performed very well on this front in Q3. And our attrition in IT Services continues to trend down, reducing 20 bps Q-on-Q to 11.1%. I'm also very happy to see the percentage of women in the workforce continues to trend up, and we now are at 35.2% of our associates in this metric. And this compares very well against -- most of our peers in this industry and across. So overall, in conclusion, if we step back and take a look at where we stand as we enter 2018, several of the headwinds that impacted our performance over the last 3 years are steadily getting addressed and behind us. Telecom and Hi-Tech have been growing very well for us over the last few quarters. Diligenta that we spoke about, we have seen strong traction. We have seen conversion of some of the deals. And other deals in the pipeline also, we are quite optimistic about the way that whole space is shaping up. Retail has turned around. We had spoken about it last quarter, and we are now seeing the early stages of that recovery. And we remain optimistic about it with a 1-year forecast. We think that the current trajectory, it is well placed to deliver double-digit growth in FY '19, which leaves us with the [ lingering ] pockets of weakness in BFSI. While we don't have immediate visibility into when we might expect to turn around there, we hope for more positive macro triggered by the various developments in the U.S. and other markets would probably lead to a better demand outflow or demand outlook in that space. With that, I'll conclude my opening remarks. And over to you, Ramki.

[Venkataraman Ramakrishnan, Chief Financial Officer]

Yes. Thank you, Rajesh. Let me go through the headline numbers. In the third quarter of FY 2018, our revenue grew 1.3% Q-on-Q on a constant currency basis driven by a strong volume growth of 1.6%. The cross-currency movement resulted in the minus 0.3% impact revenue Q-on-Q in USD terms and a minus 0.1% impact in INR terms. Reported revenue in INR was INR 309.04 billion, which is sequential growth of 1.2% and Y-on-Y growth of 3.9%. In USD terms, revenue was $4.787 billion, which is a Q-on-Q growth of 1% and Y-on-Y growth of 9.1%. On a year-on-year basis, constant currency growth was 6.2%. With the continued focus on operational efficiency, we were able to improve our EBIT margin in Q3 by 0.1% to 25.2% Q-on-Q. Net income margin was 21.1%. The effective tax rate for the quarter was 24.3%. And our DSO for the accounts receivable of 75 days, and it was down 1 day Q-on-Q. Tighter working capital management through concerted efforts by all of our teams resulted in very strong cash conversion this quarter. During the quarter, the net cash flow from operations was INR 77.8 billion, which is 25.2% of revenue and 119.2% of net income. Free cash flow was INR 74.1 billion. Invested funds as of December 31 was at INR 405.9 billion. The board has recommended an interim dividend of INR 7 per share. With that, we can open the line for questions, operator.

[Operator]

[Operator Instructions] The first question is from the line of Diviya Nagarajan from UBS.

[Diviya Nagarajan, Executive Director and Research Analyst]

Rajesh, you spoke about the banking outlook. Two questions here. Could you run us through how the banking space, BFSI has shaped up versus your expectations in the quarter? And within those 2 segments, could you run us through where are the pockets of weakness and the pockets of strength that you expect in 2018?

[Rajesh Gopinathan, CEO, MD & Executive Director]

Okay. Maybe I'll open -- start and then I'll ask NGS to add more color to this. Related to expectations, I -- BFSI has been somewhere in that space, still. We were expecting weakness, and it continues to be there. You've seen both impact of furloughs as well as some softening of demand, which has impacted the overall performance. From a region perspective, relatively, Europe is better. And the weakness is more pronounced in the U.S. Within the sectors of BFSI, again, as we spoke, the insurance space is relatively better compared to the more retail banking space. So -- but these are no different from the trends that we had spoken of in the past. And I'd like NGS to add on some more color to this.

[N. Ganapathy Subramaniam, COO & Executive Director]

Thank you, Rajesh. I think the softness that we see in the BFSI is pretty much attributed to seasonal factors and, in particular, only in North America. In fact, now, we have grown in BFSI in rest of the world. Whether it is Canada, whether it is Europe, whether it is Australia, we have growth. And we are -- in the last quarter, I articulated about the kind of digital programs that are emerging in the banking financial services space. And I'm pleased to note that we are participating in such -- we have 2 digital programs. In fact, some of the digital growth that we have seen in this quarter is actually marked by a couple of engagements that we have participated in large -- with the large financial institutions. And overall, blockchain, IoT, these are kind of technologies, which are gaining lot of traction. And we see that look -- our participation in banking financial services space in the digital engagements will continue to grow. Fundamentally, we don't see any major hurdles. And I believe that the institutions in the North America, they continue to invest internally in terms of building the skills that are required and moving grains through the workplace and workforce transformation that they are getting into. And some of them are nearly completing it. Some of them are still -- this particular aspect is work in progress. And we hope that now, with the developments that we are seeing in the North America, whether it is the tax cuts or others, we believe that it should do well for the industry. And then more spending will take place across the 3 dimensions of what they will do internally, what they will do with the captives and what will they -- what they will do with partners like us.

[Diviya Nagarajan, Executive Director and Research Analyst]

That's helpful. Just a quick follow-up. You spoke about retail coming back to potentially double-digit growth. What goes into that assumption? Is that the deal momentum that you've already signed that you are beginning to see? Could you just give us some color on that, please?

[N. Ganapathy Subramaniam, COO & Executive Director]

Diviya, multiple things are going into it. Some of it is obviously deal momentum and the pipeline visibility that we have. And some of the deals have materialized, the most recently, very transformative deal that we have done with Marks & Spencer. But even more importantly, if you look at what's happening in the industry and if -- particularly, if you look at the numbers coming off U.S. on the last holiday season, you're seeing traditional retailers bounce back strongly with a much more integrated technology play. And it's no longer about online versus offline. It is the more traditional retailers leveraging technology to enhance their overall value proposition to the customers and taking the customer by -- away from a pure pricing call to a more integrated experience and ownership call. The -- we have seen customers, like Home Depot, Best Buy, all of them emerge very strongly through this holiday season. So that's the trend that we are really enthused about. A combination of our own pipeline and what we see as transformative change in the industry is what is leading us to this optimization.

[Operator]

The next question is from the line of Ankur Rudra from CLSA.

[Ankur Rudra, Research Analyst]

The first one is Europe. Clearly, good trends continuing there. Could you maybe add some more color, thematically, perhaps country-wise and vertical-wise where are you seeing more opportunity, a? And b, is that a reason for margin softness that Europe tends to operate at slightly lower margins than maybe a U.S. business and Australian business and as that increases, you will have a source of margin headwind, which you might face?

[N. Ganapathy Subramaniam, COO & Executive Director]

Ankur, Europe performance, encouragingly, is happening across a wide spectrum, so both from a vertical industry perspective as well as from a region perspective. If you even look at our -- the deals that we have announced, you'll see a very good spectrum of deals in Europe. For example, we have announced in BFS as we announced in the EPC side. And so across the board, we are seeing deal momentum. From a region perspective also, we have been strong in the Nordics and the Middle East region, and that continues to do well. Germany is performing very well for us. And even markets, like France, are tracking on double-digit growth now, up fairly -- so Europe is broad-based -- sorry. While you are right in the fact that in Europe, deal structures are more complex and operating environment is more complex, I would actually say that as overall volume and overall deal sizes increase, and as we gain scale in individual markets, the margin profile on a like-to-like basis will improve over time and converge with our other markets. So we are looking at Europe not -- still as investment area. And we are focused on achieving scale in all the key markets there. And I'm quite optimistic that its overall profile will be not significantly different from what we have seen. It's a more -- it's a different construct, but not a negative construct.

[Ankur Rudra, Research Analyst]

That's helpful. Just on BFSI, if I could go back to that, sounds like from what you're saying, the weakness is still concentrated in the large U.S. banks. Is there any more source of weakness that you saw this quarter? And what needs to happen for your overall BFSI momentum to improve from here?

[N. Ganapathy Subramaniam, COO & Executive Director]

Ankur, this is NGS here. I think you are right, as we explained earlier. It is limited to a few banks in the North American market. And they're all in different stages of the internal investments that they are making in terms of getting them ready for collaborative workplaces and agile -- adopting enterprise agility and so on and so on. And clearly, the investments are largely in the digital area. And keeping is -- I think, most of them are evaluating different possibilities and technologies of artificial intelligence and machine learning work kind of architectures that they need to deploy. I think, in the next 2 or not 2 quarters, maximum, I think they will have that visibility. And then they will probably finalize the activity of digital stack, including, what I call, a specific [indiscernible] architecture that will span across IT, IS and operations. As that happens, we should see that -- and combined with the benefits that we see in the overall business environment, I believe that they should be able -- they should be spending more -- balance the proportional spend that they are making across the 3 dimensions of what they will do internally and with the captives and the -- and partners, like us.

[Ankur Rudra, Research Analyst]

That's very helpful. Just last question on the bookkeeping side, maybe something everybody wants to know. Ramki, anything you can add in terms of color or visibility you have on the impact of this base erosion tax provision in terms of what your numbers will see -- maybe in the -- over CY '18?

[Venkataraman Ramakrishnan, Chief Financial Officer]

So for FY '18, we don't see anything because this will -- anything which is applicable from there will be from the next financial year. I think the -- where the act as sort of come just 15 days back, and there are still some areas where there is lack of clarity. And so we are still evaluating. We are looking at the provisions and also consulting. So right now, we are not in a position to say what it could have. But the fact is, of course, there is a reduction in the overall tax rate, so that will come in. And some impact definitely would be there from the acquisitions, especially on the -- some of the intercompany transactions. So we'll have to wait and watch.

[Operator]

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

[Sandip Agarwal, Vice President]

So just one question to Rajesh. Rajesh, wanted to get an update how you are seeing the digital deals. Is there a continuous trend of the deal sizes increasing? And the kind of the scale going up there, which is implied that the deals start moving a little bit from the boutique firms and the start-ups to the large-scale players, are you seeing that kind of trend or you'd like to give some more color or other kind of color on that?

[Rajesh Gopinathan, CEO, MD & Executive Director]

Definitely, we are seeing some increasing trend of the digital deals becoming much more enterprise-wide. And as I said earlier in my commentary, the whole point is that it is an ability to leverage the power of the new technology stack, combine them with domain knowledge, combine that with the contextual knowledge of that customer, to be able to stitch together a transformation agenda. Even -- so there is the pure-play deals that themselves are increasing in size, but the deal that we've announced with the U.K. retailer, Marks & Spencer, that itself is a transformation agenda. It's a complete re-imagination of the technology and business operating and architecture, which leverages these technologies and leverages new-age working models, like Agile and -- on the cloud-first and the machine-first delivery paradigm. So we are going beyond the concept of just digital at some point solutions or point technology ones to starting to see enterprise-level architectural adoption, and that will become the norm. So I don't know whether I answered your question, but we are seeing all our large deals, the transformation agenda is very strongly -- everyone, by the ability to leverage this technology and combine that with what is currently on the ground and to stitch together a transformation agenda.

[Sandip Agarwal, Vice President]

Sorry, but if I can maybe rephrase that question again, what I'm trying to understand here is that -- and I understand that you partly answered that as well, but I'm just trying to understand more, like, will it be fair to call that the stage where we, in spite of being way ahead of others in the digital space, did not get a big chunk or big share because the size is very, very small, but with sizes increasing our share will go up significantly? Will it be fair to call that?

[Rajesh Gopinathan, CEO, MD & Executive Director]

I think it will be wrong [indiscernible] we didn't get [indiscernible], but that's beside the point. That's a question of how you look at it. If you ask me, are you confident about digital continuing to drive growth? Yes, we are very confident about digital driving growth.

[Operator]

The next question is from Viju George from JPMorgan.

[Viju K. George, Research Analyst]

First question on people addition. I think this -- in this Y-to-D, your people addition has been very measured. Is that something we can continue to expect going forward? Or is this got to do with utilization? Or do you think there is a great element of automation also kicking in, which can be a sustainable factor going forward, so -- which means that if you're growing at the rate that you are, you should be -- really having people additions?

[Ajoyendra Mukherjee]

Okay. Viju, this is Ajoy. Now from a people addition point of view, yes. If you look at this year, it is about, net-net basis, about 3,600. And as we mentioned in the beginning that goes to these last full quarters, gross level, we have done about 59,000. I think, this full year, the year prior to that, when we did the campus hire, when we had given about 40,000 offers, we are building capacity. We are building -- doing the investments to create the necessary pool that was required to meet our customer demand in terms of the digital knowledge, in terms of the digital scale. And the whole talent development that we have done in building and upscaling our people and giving them the opportunity to learn new technologies, to learn new ways of doing things, be agile, train, be aware of all the technologies and get more competencies. So that is the reason why the hiring is more controlled at this point in time. And it would -- the second part of automation, I think we have talked about the various deals that we have gotten, how automation is coming in and how it's helping us in our delivery model itself. So both what you said are true. And going forward, again, as far as the hiring is concerned, but sometimes, it's going to be measured and controlled based on what our demand forecast and based on what our delivery teams need. And we will -- we'll go accordingly as for that.

[Viju K. George, Research Analyst]

Okay. So what I was trying to get answered is, is that a larger part of the -- muted people addition, is it due to utilization improvement, a good cap activation measures? Or is it due to automation? I think it's more due to the former, right? That's what you've indicated that you had set up capacity, which has started to sort of burn.

[Ajoyendra Mukherjee]

That is true, that is true. And at the same time, automation has also helped us because I think the number of the deals that we have won, that is also helping us. But the capacity that we've created, that definitely is getting utilized.

[Viju K. George, Research Analyst]

Sure. The other question I had was on digital more broadly. Obviously, the growth here is very impressive. But if I look at the overall revenue growth of the company, it still stays stuck in the 6% to 7% range. At some point, I know this has got to do with the weakness in BFSI. But do you think that Digital needs to get to some critical threshold for it to be self-sustaining to drive the overall revenue base because there is some legacy business also under pressure? Any idea what that threshold might be given the current pressure on legacy?

[Ajoyendra Mukherjee]

I think, Viju, rather than thinking of it on a horizontal-cut basis, I think it is much better to think of it from a vertical-cut basis. I think, from specific areas, we have been addressing one by one. BFSI continues to be the space. And within BFSI, also, we are going at it segment by segment. So I would think it's more a vertical issue, rather than a horizontal issue. I don't think there is a magic number beyond, which it will impact. Our growth, put it in perspective and -- on comparative basis in the reported period, we are tracking quite well, overall. And we are confident that, that should continue to benefit from the capacity and capability that we built on digital.

[Operator]

The next question is from Shashi Bhusan from Axis Capital.

[Shashi Bhusan, Executive Director of IT and Telecom]

My question again related to BFS. What is leading to the softness in BFS? Is it the financial health of our client? Or is it unwillingness to spend? Or is it like we are not present where the spend is happening? Or is it just like our size has reached to a level where growth is going to be suboptimal?

[Rajesh Gopinathan, CEO, MD & Executive Director]

I think the best way to think about it is that we are not losing market share in BFSI. The -- maintaining market share, both at an industry level as well as at our client level. And in fact, in its most [indiscernible] you saw the maximum amount of transformation in this industry as regulatory pressures and strength in investments took over, over the last many years. Our market share is steadily expanded in this industry, amongst the largest competition set. So the question of not participating is absolutely not there. And with a very objective way, you can see that. The question as to, is there health of clients being an issue? That's also not true. In fact, the banking industry is quite well positioned. And it's well out of its blues. It had lingering provision requirements for legal, both a year or 2 back, but even that this beyond. So the issue is more around what NGS said, that for them to start the next wave of transformation, there is -- than earlier -- what should I say, experimentation, but they're still in a process of actually adopting a certain architecture and thinking through how they want to do it and how they want to scale it. We see European clients, in fact, paradoxically, in this industry way ahead of adoption of cloud and automation. In fact, just like Agile, large European banks are significantly ahead of U.S. banks in the -- with the extent of enterprise-wide adoption programs that they have kicked off. And our participation in all of them is very, very high. In fact, we are the leading partner for the biggest banks in Europe, which are at the forefront of adopting Agile and cloud. So we are participating very strongly. I think it's more in terms of how this spend starts off and how it impacts the larger base.

[Shashi Bhusan, Executive Director of IT and Telecom]

So final question regarding the IT budget. Any early indication on IT budget for CY '18 for any of the verticals that you have got and shared with us?

[Rajesh Gopinathan, CEO, MD & Executive Director]

I answered this in the press meet also that probably, the whole idea about thinking about an annual IT budget as a clear indication of where the spend is becoming dated, the technology in terms [indiscernible] these things are happening. One is that the long-term planning cycles are no longer limited to annual cycles. They are more client-specific and they're more focused on their own business periods. But even more importantly, deal structures are becoming much more complex. They encompass transformation, both at the IT level as well as at the business level. So annual IT budget probably is something that is no longer a clear indication, and we find it not the reason. And I think the -- from a period perspective, typically, January is still early to call it. And again, as I said, if at all, we have to think about budget, it should be across the CXO organization rather than just the CIO organization.

[Operator]

The next question is from Ravi Menon from Elara Securities.

[Ravi Menon]

Digital has shown a surprisingly good acceleration, right? So I think you've -- somebody had asked this question in a different fashion, but let me try and take a stab at this. So is this led by a broadening of adoption or bigger deal sizes? And how sustainable is this growth momentum in Digital, given that your base is now quite large?

[Rajesh Gopinathan, CEO, MD & Executive Director]

Ravi, 39% is not something that I would initiate, [ here ] or bet on. But the answer is -- to your question is that it's a deepening of adoption, rather than just a broadening. So the last year or so was about broadening of the digital adoption with more and more of our clients experimenting across the board with this technology stack. But recently, deal sizes are increasing is because they are seeing the depth increase and actual leverage happening across the full architecture of a client in a given business unit or a business process or overall transformation agenda. So it's depth that is driving it, rather than breadth.

[Ravi Menon]

Right. And would you say that this is -- this should continue for some more time? And are there any pockets where you see people have not clearly gone into this or experimented with it or are still in very early stages?

[Rajesh Gopinathan, CEO, MD & Executive Director]

That's we are talking, it's still early stages. There are only a few that have really embarked upon full enterprise-wide transformation and committed to large programs. So that would be very much in the early stages of that.

[Ravi Menon]

Great. And secondly, I thought that you had a deal where you had significant re-badging, and I was expecting that to show up in the regional markets quite strongly. That hasn't come through. So is this something that we should expect in a more measured fashion to ramp up or this is just something that -- where the contract signing hasn't happened or it is still delayed by corporate...

[Rajesh Gopinathan, CEO, MD & Executive Director]

We don't announce a deal without a contract signing. So any deal that we have spoken about has always happened only after a contract signing. But different deals have different periods and different forms of profile, come in all initial transformation. And then operations aspect have involved initial lift and chip of operations and then a transformation. So it really depends on how it plays out.

[Operator]

The next question is from Ashish Chopra from Motilal Oswal Securities.

[Ashish Chopra, Research Analyst]

Rajesh, the first question I had was on the margins. So you did mention that if we look at the current levels versus the aspired band, probably currency explains a large part of that. But if you look at currency currently, this gap could perhaps widen as a contribution from that factor. So wanted to understand, in the past, you've spoken about calibrating investments versus the movements in currency. So how should we really expect the margin trajectory were rupee to remain at current levels? Would you gradually kind of tender back to [ 26 ] or would be kind of recalibrated?

[Rajesh Gopinathan, CEO, MD & Executive Director]

I don't want to speculate about currency levels. What we have said about calibrating investments based on currency continues to be our overarching philosophy, but we have also said that once we commit to an investment, we stay very, very focused on that investment, irrespective of where the overall currency or the margin point is. Diligenta is a great example. We have -- we've stayed very deeply invested in the company, very committed to the transformation over 10 years. And it has really made us stand out compared to many others who attempted similar kind of deal structures. So our commitment to any investment that we start is absolutely limitless. We will stay because it is not a quarter-on-quarter kind of phenomenon. The impact of currency on the business model is a well-documented fact. I think many of you have written about it with inflation differential. There is a rational expectation that currency depreciation will compensate for that inflation differential. And when we see currency flows and create flows resulting in currency movements in different directions, you will see that impacts on it. Long term, where does that play out? We don't know. But we are focused on executing things that we can control and calibrating the business model along the lines of what we see as one for us in the beginning. When we go into markets, we go in without -- we are not deterred by margin profiles of those markets. We are more focused on border, to be margin structures of those markets are once we scale them. And again, Europe is a great example where early investments are proving very helpful. And as we increase scale, we will see margin support coming from that market.

[Ashish Chopra, Research Analyst]

Got it. And just lastly from my side. So the new segment that you now break out within your vertical, which is regional market and others, so that is like the second-largest contributor to the overall top line in that breakup. Just wanted to understand why that has been really soft quarter-on-quarter and Y-o-Y. And if you could just share some color on what are the subsegments over there, which would be weak.

[Rajesh Gopinathan, CEO, MD & Executive Director]

I guess, all the non-vertical [indiscernible] systems. It has our platforms in there. It has regional markets in there. So India, Japan, all of that is there. I think Kedar can probably walk you through that. And the whole idea about clumping all of them together is the one to report. Was that their performance is a lot less linear than our more traditional market, so there's nothing out of the way in that. It's a nontypical revenue profile. And that is the whole idea of clumping it together, so that you guys have visibility on what that is versus the rest of the verticals.

[Operator]

The next question is from Ashwin Mehta from Nomura.

[Ashwin Mehta, Executive Director of Research]

So while quantification might be difficult to give so early on the tax reform, is it possible to give a directional sense on the direct impacts of this tax reform? Would it be negative, neutral, positive, according to you?

[Rajesh Gopinathan, CEO, MD & Executive Director]

Ashwin, we wouldn't like to speculate on it.

[Ashwin Mehta, Executive Director of Research]

Okay. Just a follow-up in terms of insurance. So while your U.K. platform business is expected to recover, what are you seeing on your U.S. insurance side? And any impacts of the recent hurricanes or fires in terms of business there?

[Rajesh Gopinathan, CEO, MD & Executive Director]

Obviously, those are elements that do impact that business. But I would say that is why the business exists. So there might be period to period impact, but I don't think that is structural. And probably, we're not going to see U.S. insurance fold up because of some individual events. The platform business and our pipeline on the platform business in U.S. is -- continues to be quite encouraging. And we are optimistic about extending the platform play from -- into U.S. also. So -- and that's also an area that we think will provide some strength going forward.

[Operator]

The next question is from Sandeep Shah from CIMB.

[Sandeep Shah, Vice President]

Just on the banking, what I get to understand is it looks like the incremental spending on the first wave of digital, which looks like clients are in-sourcing rather than outsourcing. So what could be the reason for a decline in this quarter? It should be, at least, worst case, could be flat. Is it more to do with the renewal effect, which is actually impacting you and you believe this may continue for the next couple of quarters, as you are seeing that the next wave of digital investment which they may outsource may take couple of quarters?

[Venkataraman Ramakrishnan, Chief Financial Officer]

I think, as I explained earlier, the softness that we see in BFS is limited to North America. And it's pretty much due to seasonal factors, and I wouldn't read too much into it at this stage. We are not hearing any negative commentary from any of our clients with respect to their expense on -- whether it's on technology. And as -- I think you know there is a lot more in terms of their ability to actually accept transformation leads in the wave, too, and how the architecture and the digital stack plays out. Clearly, there are 3 dimensions of spend, as I explained, along the internal IT and captives [indiscernible]. And depending upon what they would like to do, whether it is compliance-related or whether it is more operations-related, which is our more high-end technology-related, it is -- or more IT-related or competency-related, there are many factors that play into it based on which particular spend is distributed across those 3 dimensions. So we are confident that this will come back. And as Rajesh explained, we continue to gain market share in the BFS, amongst all the players. And we are not losing market share.

[Sandeep Shah, Vice President]

Okay, Just further to that, so on the market share or the wallet share, if we look at some of the larger peers on organic basis, actually, they are growing higher than what your growth rate has been on my calculation for the 9 month, which is 2.5% to 3%. So is it, like, we should not read too much in terms of one period? It could be a timing difference or it could be a portfolio specific. Why the others are growing faster, despite a higher base on that?

[Rajesh Gopinathan, CEO, MD & Executive Director]

For the calendar year -- or you're talking specific to the vertical or for the whole company?

[Sandeep Shah, Vice President]

No, just for the vertical BFS.

[Venkataraman Ramakrishnan, Chief Financial Officer]

I think all of the things that you said. It could be a portfolio-specific. It could be a country-specific. Or it could be service line-specific, right? All I can say is that, look, we have built a lot of capabilities. We continue to add digital capabilities as well as new offerings by the quarter. And we are participating in each one of these adequately. And in fact, as I explained earlier, the revenue growth that we have seen in Digital is also contributed by our revenue uptick in Digital segment from the BFSI institutions.

[Sandeep Shah, Vice President]

Okay, okay. Just last few. The decision-making, Rajesh, if you can give -- what NGS and you, color in terms of addition making on the larger deals because if we look at some lead indicators from the ISG index, it looks like the deal awards are improving. So is it -- do you also believe that is happening in the industry? And also especially for some of the low-penetrated services, like IMS, is it the deal addition making has been improving? And second, just Ramki, on the BEAT tax, will -- even the fourth Q will not have an impact for FY '18. You are saying it will start from 1Q of FY '19.

[Rajesh Gopinathan, CEO, MD & Executive Director]

So the deal momentum, we have been saying that we are seeing an improving pipeline and we're seeing conversion on that pipeline, also. So I think, as to be expected, the analysts are reporting events as they happen, where you will be reporting, you -- or what we see in the pipeline, which is more forward-looking. So it is in line with what we are seeing. We are seeing larger deals. We are seeing conversion of the pipeline, and that's overall optimistic.

[Venkataraman Ramakrishnan, Chief Financial Officer]

Yes. On the -- it is applicable for tax year starting after January 1, 2018. And we follow the financial year for the U.S., which is April to March, so it is really applicable for the FY '19, not for this current FY '18.

[Operator]

The next question is from Jai Doshi from Kotak Securities.

[Jai Doshi]

Earlier this year, you are indicated that dividend payout to the extent of about 80% of free cash flow. And you're also indicated possibility of more consistent payout, rather than lumpy payout to shareholders. However, if I look at your dividend payout for the first 9 months, it looks like we may not be able to -- you are nowhere close to that 80% mark in FY 2018? So how should we think about this dividend payout policy?

[Rajesh Gopinathan, CEO, MD & Executive Director]

I think you probably misunderstood what we said. We have said that we have paid historically 80% of our free cash flow, and we don't see that ratio coming down. And we would, in fact, if anything, see that improving. So -- and that -- the pattern of payout is something that we are considering. But if you look at it over the last 9 months, the total money returned to shareholders is a staggering INR 25,300 crores, which is unprecedented in this industry. So I think you should take, what I should say, solace from that, that we have no intention to move away from our very disciplined return of cash to shareholders.

[Jai Doshi]

Understood. So that will apply starting FY '19? Is it right to assume FY '18 because you are a buyback, so...

[Venkataraman Ramakrishnan, Chief Financial Officer]

I said what I have said. You can...

[Operator]

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

[Rajesh Gopinathan, CEO, MD & Executive Director]

Thank you. So in closing, we have wrapped 2017 with a good December quarter with a 9.1% revenue growth in USD terms, early strong volume synergies [indiscernible] quarter and closure of some industry-defining deals. As we have discussed during this call and earlier, with the exception of BFSI and retail, all of our industry verticals grew upwards of 9.5% on an annual basis with 4 verticals growing in double digits. So from a vertical split perspective, we see broad-based growth recovery across many verticals, while our largest BFSI -- has lingering weakness, which we are focused on addressing. Our investment in re-skilling the workforce and research and innovation and building intellectual property for each platforms are all resulting in good growth in our digital revenues. And that's showing through both in the numbers as well as in the deal flow. We signed our first $50 million deal in Digital, making -- marking a coming-of-age asset for this technology stack. And lastly, we continue to re-skill our workforce at scale, even as we recruit talented individuals across the world. We are focused on ensuring that we are able to impart to our existing workforce, on an ongoing basis, the skills that they need to deal with today's technology, which is showing through in our industry-leading retention rates, as attrition continues to tick down on a quarter-on-quarter basis. So overall, we're quite happy with where we see ourselves, very happy with the participation that we are seeing in the growth and transformation agenda of our customers and the overall resonance that our unique blend of technology capability, investments in digital, our domain knowledge and our contextual knowledge is doing to our customers and its impact on our growth and in our deal pipeline. So once again, thank you all for joining us today, and a very happy and prosperous new year to all of you.

[Operator]

Thank you very much, members of management. Ladies and gentlemen, on behalf of TCS, that concludes today's conference call. Thank you for joining us, and you may now disconnect your lines.