Tata Consultancy Services Ltd

NSE:TCS

Earnings Call Transcript 2021-Q3

[Operator]

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

[Kedar Shirali, Head of Global Investor Relations]

Thank you, Margaret. Good evening, and welcome, everyone. Thank you for joining us today to discuss TCS' financial results for the third quarter of fiscal year 2021 that ended December 31, 2020. This call is being webcast through our website and an archive, including the transcript, will be available on the site for the duration of this quarter. The financial statements, quarterly fact sheet and press releases are also available on our website.Our leadership team is present on this call to discuss our results. We have with us today Mr. Rajesh Gopinathan, Chief Executive Officer and Managing Director.

[Rajesh Gopinathan, CEO, MD & Executive Director]

Good evening, everyone.

[Kedar Shirali, Head of Global Investor Relations]

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

[Ganapathy Subramaniam Natarajan, COO & Executive Director]

Good evening, everyone.

[Kedar Shirali, Head of Global Investor Relations]

Mr. V. Ramakrishnan, Chief Financial Officer.

[Venkataraman Ramakrishnan, Chief Financial Officer]

Hello, everyone.

[Kedar Shirali, Head of Global Investor Relations]

And Mr. Milind Lakkad, Chief HR Officer.

[Milind Lakkad]

Hi, everyone.

[Kedar Shirali, Head of Global Investor Relations]

Rajesh and Ramki will give a brief overview of the company's performance followed by a Q&A session. As you 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 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'd like to turn the call over to Rajesh.

[Rajesh Gopinathan, CEO, MD & Executive Director]

Thank you, Kedar. Good morning, good afternoon and good evening to all of you. I hope all of you had a good year-end break. And I wish you and your dear ones a very happy new year.I'm delighted with our performance this quarter. The strong demand for core transformation services, market share gains and quick revenue conversion from all the deals we won earlier helped us build up a robust momentum that overcome seasonal weaknesses and post one of our strongest sequential growth figures for the December quarter.Our revenue grew 4.1% quarter-on-quarter in constant currency and 5.1% in dollar terms and 4.7% in rupee terms. The growth momentum of the last 2 quarters also helped us get back to growth on a year-on-year basis 1 quarter ahead of what we had originally expected in April at the start of the pandemic.On a year-on-year basis, we grew 0.4% in constant currency terms, 2.1% in dollar terms and 5.4% in rupee terms. The strong top line performance was matched by our various operating metrics, reflecting the power, flexibility and responsiveness of the SBWS operating model that we have spoken about many times in the past.Our operating margin for the quarter was 26.6%, an expansion of 0.4% Q-on-Q and 1.6% year-on-year. Our net margin was at 20.7%.I'll now ask Ramki to go over all the headline numbers and the financial and segmental performance, and I'll come back later to talk about the demand trends. Over to you, Ramki.

[Venkataraman Ramakrishnan, Chief Financial Officer]

Yes. Thank you, Rajesh. I'll now go through the headline numbers. In the third quarter FY '21, our revenue grew 4.1% sequentially on a constant currency basis. This is the strongest December quarter growth we have had in 9 years. Reported revenue in INR was INR 420.15 billion, a quarter-on-quarter growth of 4.7%. In USD terms, revenue was $5.702 billion, which is quarter-on-quarter growth of 5.1%.To come to the segmental details for the quarter, as a reminder, I'll be sharing quarter-on-quarter growth numbers in constant currency terms. Our largest 2 business verticals, BFSI and Retail, showed good sequential growth in a seasonally weak quarter. BFSI grew 2% quarter-on-quarter, one of its best December quarters in the recent past. And adjusted for seasonal headwinds, our performance on par with Q2. Growth was well-rounded across all geographies, except APAC and subverticals.The business themes that drove customer spending during the quarter included customer experience enhancement, new product initiatives, regulatory work and ESG initiatives. From a technology perspective, this translated into investments in call center modernization, analytics and insights, workplace transformation, cloud adoption, core modernization and cybersecurity.One last point on BFSI. Of the 2 large deals we signed in Q3, the Prudential Financial deal was closed in mid-December, but very little to the revenue was added in this quarter. And the Postbank Systems deal was closed actually on January 1.The Retail cluster grew 3.1% despite the seasonal softness of the holiday season and continued weakness in discretionary retail, CPG and the travel and hospitality subverticals.U.S. retail showed good recovery followed by Europe and U.K. Retailers continued to spend on initiatives to enhance customer experience, reimagine customer journeys by providing a seamless experience across channels, optimize fulfillment costs and find ways to leverage the physical store to provide value-added services and experiences.The Life Sciences & Healthcare vertical continued to outperform, growing 5.2% sequentially and 18.2% on a year-on-year basis.Other verticals also showed good growth. Manufacturing grew 7.1%, Communications & Media 5.5% and Technology Services 0.8%.On a year-on-year basis, constant currency -- on a year-on-year constant currency basis, Life Sciences & Healthcare continued to grow in double digits at 18.2%. BFSI and Technology & Services both moved into the positive territory, growing 2.4% each, while others continued to be below the December 2019 levels.By geography, sequential growth was led by North America, plus 3.3%; India, plus 18.1%; U.K., plus 4.5%; and Continental Europe, plus 2.5%. Other markets grew as well with -- and Asia Pacific growing 2.6%; EMEA 6.7%; and Latin America 3.1%, all positive.Coming to products and platforms. Our portfolio of award-winning products and platforms continued to grow well. Ignio, our suite of cognitive automation software, acquired 8 new logos in Q3 and saw 7 customers go-live on the product. During the quarter, the product won 3 more awards and was granted 2 more patents, bringing the total to 27 patents granted till date.As customers embark on their cloud transformation journeys and look to redeploy their talent from business as usual tasks to transformational projects, they are deploying ignio's various solutions in very creative use cases to proactively monitor their infrastructure, automate routine maintenance activities, create self-healing capabilities and build operational resilience.An European multinational chemical company is using ignio's HealthCheck dashboard to proactively monitor SAP operations around basis, adapt and the core ECC technical stack. Ignio provides start-up day business checks around a range of transactions, looking out for system unavailability, performance analysis, license expiry, et cetera. Such proactive monitoring helps preempt issues before they arise and avoid business disruptions due to system outages.An American Life Sciences multinational is using ignio to manage its Azure, AWS and GCP-based cloud operations. Over 5,500 virtual machines and 100% of incidents are currently being managed by ignio with a 36% automation index within weeks of implementation.Another North American utility is using ignio for user group management, cloud-based, cloud infrastructure migration, drive space administration and patch management. Ignio helps detect, qualify and report wasteful resources on the cloud using its contextual knowledge of operations, helping the customer reap the full economic benefits of its cloud usage.Coming to TCS BaNCS, our flagship product suite in the financial services domain, it had 5 new wins and 6 go-lives in Q3. We had 2 new wins for our digital banking product, 2 for our wealth management solution and 1 for payments. This includes one of the largest deal wins ever when TCS BaNCS was selected as a preferred cloud-based platform for its wealth management business in the U.S. by a global investment bank.The Quartz Smart Ledgers solution had 4 new wins and 1 go-live in Q3. Tier 2 customers are discovering all kinds of areas in their businesses, where Quartz can transform their operations and are deploying it in an ever-expanding set of unique use cases, often the first of the kind in the world.A global investment bank has selected Quartz surveillance, a next-generation blockchain plus AI solution, for trade surveillance for U.S. wealth management operations. A leading energy and urban development corporation in Singapore has used the Quartz DevKit solution to build a blockchain-based system for buying, selling and transferring of renewable energy certificates.In a first of its kind, one of the largest global custodian banks in the U.S. has deployed Quartz announcements as part of modernizing its asset servicing offering and replacing in-house legacy systems. The new system has resulted in higher straight-through processing, world-class corporate actions announcements processing standards and helped the bank deliver superior customer experience and drive growth in its prime services book of business.Our HOBS, SaaS suite of solutions for communication service providers, had 3 new wins and 4 go-lives during the quarter.TwinX, our AI-based digital twin solution, also had 3 wins.TCS MasterCraft, our suite of intelligent automation products for end-to-end enterprise application modernization, had 8 new wins in Q3.Coming to client metrics. Our client metrics stayed more or less flattish in Q3 versus the prior quarter. The revenue contribution by customers is calculated on an LTM basis. So we expect these metrics to remain soft for another couple of quarters until we fully cycle out the revenue declines of the June quarter. At the end of Q3, we had 48 clients in the $100 million-plus band, 97 clients in the $50 million-plus band, 229 clients in the $20 million-plus band, 386 clients in the $10 million-plus band, 565 clients in the $5 million band and 1,077 clients in the $1 million-plus band.Coming to margins, or moving on to our cost, we had our annual salary increase going into effect from October 1 this year. So our Q3 operating margin saw the full impact of that amounting to 160 basis points. I'm happy to point out that the operating efficiencies brought about by our SBWS operating model, aided by operating leverage from growth and a little bit of currency support, helped us mitigate the impact of the salary increase and still expand our EBIT margin sequentially by 0.4% Q-on-Q to 26.6%.Our net income margin was at 20.7%. Effective tax rate for the quarter was 25.4%. Our DSO was 69 in dollar terms.Net cash flow from operations was INR 119.52 billion, which is 137.4% of net income, our all-time high in cash conversion. Free cash flow was INR 112.3 billion, up 28.5% year-on-year.Invested funds as of December 31 stood at INR 653.77 billion. The Board has recommended an interim dividend of INR 6 per share.Coming to the people front. Our HR organization has shifted focus to supporting growth. In Q3, we had a net addition of 15,721, our highest ever in a quarter, resulting in a total headcount of 469,261. This includes around 1,500 employees joining our new delivery center in Ireland from Pramerica Systems Ireland Limited.Our workforce continues to be a very diverse one with women making 36.4% of the base and with 147 nationalities represented. We have reimagined our HR value chain to enhance employee experience and increase throughput. Last quarter, we had mentioned the early training and 100% virtual onboarding of project-ready trainees. In Q3, we onboarded 12,000 trainees.Our TCS National Qualifier Test reestablished its pioneer status by pivoting completely to a virtual mode, evaluating over 225,000 fresher candidates in the safety of their homes, leveraging advanced digital assessment methods. Including laterals, our -- over 130,000 candidates were remotely interviewed giving them a seamless experience and giving us access to the best available talent. At the end of Q3, we had trained 366,000 employees on new technologies and over 444,000 employees on agile methodologies.By prioritizing qualified internal candidates for open positions, requiring digital skills, we have increased role mobility and career growth opportunities for employees, while improving our velocity of project ramp-ups and utilization.As you are aware, TCS has been a global industry benchmark for talent retention. In Q3, our LTM attrition in IT services, which includes all departures, voluntary and involuntary, was at 7.6%, an all-time low, even by our own standards. However, as growth returns across the industry, we expect to see attrition inch up from these very low levels.I'll now turn it over to Rajesh for the demand drivers and trends.

[Rajesh Gopinathan, CEO, MD & Executive Director]

Thank you, Ramki. Coming to the demand side of data. I've spoken earlier about how cloud adoption is driving a multiyear technology spending cycle and that this will remain a secular growth driver for us over the next 3 to 5 years with the transformation playing out over multiple horizons. The trends we spoke about in October around cloud transformation are continuing very strongly, and much of our order book and pipeline reflect that spending.Last quarter, I had also spoken about how we have created new dedicated business units, focused on the 3 leading hyperscaler platforms. And that the idea was to make sure that we have focused on each of these individual ones separately.These units have hit the ground running in Q3, and we have been winning cloud engagements and -- across almost more than 200 customers in this quarter itself. And during the quarter, we are also very happy to share that we have been ranked as a leader by a leading industry analyst for the public cloud system integrator space in each of these platforms apart from this cloud infrastructure, brokerage, orchestration, services, et cetera. So it's a full-court press across the entire partnership and ecosystem. And the initial traction and pipeline visibility, et cetera, is very strong.Today, I also want to discuss opportunity from the 2 lenses that we are looking at it. One is what we call growth and transformation, where enterprises leverage the power of new technologies to embrace new business models, pursue new revenue lines or to deliver superior customer experience or engage with new segments of customers.The second one is the more traditional use of technology to drive efficiency and greater productivity. We believe that from a demand perspective, we will see traction on both these aspects. And I want to spend a few minutes looking at demand from this perspective and giving you a flavor for the kind of engagements that we won in Q3 along either of -- both of these areas.Coming to this growth and transformation front. A great example is the work that we're doing for a leading insurance provider in the North American market, where we are using our contextual knowledge of this customer and the insurance domain knowledge and combining that with our location independent agile to operate in this challenging environment and our expertise on cloud and API-Fication to implement a new platform that has significantly changed the way the insurance provider integrates with an ecosystem of third-party providers that are critical to its customer servicing. So if you consider an area like an auto loan, there are more than 10 outside providers or outside enterprises that they need to link to, to be able to either generate a quote or to do an efficient claim processing.Similarly, if it comes to a home loan area, there are almost more than 15 ecosystem partners that are involved in this whole value chain transaction. By leveraging cloud, by leveraging APIs, by leveraging and exposing core functionalities into a manner in which it can be seamlessly consumed, we've been able to reduce their quote time by 41%. And similarly, we've been able to help them bring products faster to market, and we are able to achieve 40% lesser time in markets where they are already present in. And their ability to enter new states with new products, we've been able to help them deliver a 50% faster time to market on it.So that's the kind of impact and transformation that this combination of contextual knowledge and our ability for an end-to-end solution can deliver to our customer. And all of this translates into being able to get into new markets, deliver new products. And in this specific case, the Net Promoter Score also went up by 10 points.So similarly, for another pharmacy -- leading pharmacy player in North America, we have been able to deliver a business benefit that is significantly impactful for their customers by being able to delink the individual customer from a specific pharmacy and allowing the customer the ability to actually get his or her prescription filled from any pharmacy in that chain. And underlying this is, of course, the transformation of the pharmacy system, migration of that into a cloud-based infrastructure and ability to ensure that data analytics, security, audit, all of that is able to be done in a node-independent manner and be able to deliver that to the customer.The flip side for a solution like this from the pharmacy perspective is that if an individual pharmacy node starts becoming a bottleneck with more customers than originally expected, they can actually farm out part of the work and leverage pharmacists available in other nodes, which are currently free and part of the work can be actually farmed out.Similarly, we are also able to use advanced AI/ML techniques to actually predict the nature of that load. And in certain cases, some of the formulations are very time-sensitive and, therefore, being able to predict that and predict when that customer will come in which node, significantly reduces wastage and improves customer experience. So these are examples of how cloud transformation goes beyond pure infrastructure and talking about how we leverage these native capabilities and also how those ecosystem kind of transformation helps.We have similarly worked with leading airline group, one of the airline conglomerations, where we have transformed. Typically, these groups have been able to deliver end-to-end reservations. But we have been able to extend that to end-to-end inter-airline baggage checking, baggage verification, travel document verification so that security standards, underlying validation are being transferred airline to airline. They can meet their individual regulatory requirements. And once again, by exposing it on to the cloud, by actually delivering on that borderless enterprise promise, we can significantly improve both efficiency and customer experience. So that's one area around the cloud-based transformation.Another big area that we are seeing, which is also linked in some way to this idea of borderless organization is this increased volume of corporate restructuring, M&A, mergers and divestitures, et cetera, that we are seeing. And we see this as accelerating part of our customer strategy as they realign themselves to the new industry norms. And this is a space that we have been investing in significantly and enhancing our capability to participate across the value chain. So we have been setting up capabilities on both integration as well as divestiture planning, day 1 readiness, running the integration management office and being able to ensure that this whole idea of a TSA is removed, and we can get to seamless operations in the least possible manner.For one of the leading health insurance providers, we have been able to carve out their group insurance business with around 3,000 people and deliver that in a manner in which that carve out was fully functional across all its operational parameters from day 1 of the separation, so that there is no lag in that whole activity. So this space, we believe, will both accelerate because of the business realities around us as well as this idea of borderless organization allows for logical separation and logical integration of businesses, both inside enterprises and across multiple enterprises.The other big area that we are seeing is in the area of supply chain, for example, for one of the leading cement manufacturers in India. We have been able to transform the way they do supply chain optimization. They need to do 1-day demand fulfillment in an environment with very highly fluctuating demand outlook and a very noisy environment in terms of data points across almost 2,000 distribution nodes. Again, being able to integrate the data, clean up the data structure in a manner in which learning algorithms can be deployed and integrating that with our platform solution allows for providing that kind of high certainty and reduced stock-outs and reduced outages across their entire distribution network.We are also participating significantly in customer experience side, leveraging these kind of combination of mobile and cloud applications for one of the leading European postal operators. We are helping them transform and deal with the e-commerce era and the e-mail era where they're moving away from delivering letters to delivering packages and moving to a customer-oriented delivery schedule. So we have helped them actually enable their customers to select delivery windows in a 2-hour window rather than 8 hour or 1 day kind of scenario that they were used to. This one has resulted in more than 0.5 million downloads of that app for them and customer NPS improving by 5 points, and they are expecting in their country to be the leading provider on the package and courier side of it.So these are the kind of transformation opportunities and the transformation engagements, which give us confidence and the excitement on the long-term prospects that we have been speaking about. The story is equally powerful on the operations transformation side. I would -- we have been significantly investing in integrating our multiple solutions across operations and automation as part of our MFDM journey. We have now integrated our solution suites into what we call the CogniX platform, that is AI/ML-enabled human-machine collaboration platform. That is reimagining the way cognitive business operations will be delivered to customers.I want to give you a very classical example of how we have been able to use it in B2B scenario for one of our leading customers in the workforce management space, one of the largest ones in the world. We have been able to deliver a solution, which allows them central procurement, but localized fulfillment by a large ecosystem of vendors across a large ecosystem of business users.So while the contracting and optimization happens at a central level, what the solution allows is for reduced reconciliation errors and reduced friction which -- while providers are able to actually satisfy local demand and provide local invoicing and local reconciliation and ensuring that this entire track and trace of it is turned in a manner in which both speed and efficiency as well as overall business experience is enhanced. And this scenario is in an abstractive form, very similar to any B2B procurement in a multi-node kind of scenario where both the purchase organization or rather the user organization and the supplier organization is going to do a multipoint to multipoint fulfillment.So these are examples of the kind of work that is getting enabled by the large-scale transformation that is currently going on in which our teams are participating. And that's the nature of demand that takes us so excited about the opportunity looking forward.Let me summarize by saying that our total contract wins, total contract value signed this quarter is $6.8 billion. And this -- when you compare that against $8.9 billion or $6.1 billion rather outside of the large deal that we did last quarter is a significant growth on both sequential basis and on an annual basis.And if you look at its components also, BFSI has delivered $2.6 billion TCV in this quarter. Only 1 of the 2 deals that we've spoken about in the past is counted here. Other deal closure happened early Jan, so that's not counted in this. So BFSI demand is also very strong and we're very, very positive about it. Similarly, Retail at close to $1 billion, $0.98 billion, and North America at $4 billion. So the TCV spread across our segments is also very strong.With that, let me close and open it up for questions. But -- yes, go ahead.

[Operator]

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

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

Great quarter. Just have a couple of questions. Firstly, Rajesh, if you look at from a macro standpoint, almost every vertical was impacted differently. Some verticals actually got benefited from pandemic as well. But your growth is broadly great across all the verticals. So what is happening? Are the customers behaving the same manner even if their business is getting impacted versus benefiting? Or the type of services are different, but the net result is same for you? And related to that, did you see any kind of budget flush this time as more CIOs won't have been able to spend their budget last year through the year?

[Rajesh Gopinathan, CEO, MD & Executive Director]

Thanks, Yogesh. Yogesh, I think the common factor across industries is that technology is the solution, irrespective of what the problem is, whether it is how to grow or it is how to find the efficiency or how to secure. I mean all of these cases, technology leverage is at the core of whatever we are doing.Some common themes were all progressive, especially in the early part of the pandemic. And digital collaboration suite, those rollouts and the security were very common themes. But in the recent quarter, it's a more heterogeneous spread of both growth-oriented investments as well as efficiency-oriented investments. So I don't -- there is no common theme other than technology leverage as being a theme. And I don't -- we have not seen it as a budget flush, but rather as strengthening of the investment mandates that they were receiving through the second half of the calendar year. So we're seeing steady strengthening of that.And I had shared earlier last quarter,that while our TCV was strong, there were smaller deals that were closing, though the pipeline had quite a few large deals. Actually, this quarter, many large deals have closed, not just the 2 mega ones that we called out. In the $50 million, $100 million range, the number of deals that have closed is significantly high. So we kind of made up for that listing in the last quarter that I spoke about. So I would say the strengthening of that trend that we saw rather than a flush, say, in terms of where the demand is moving.

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

Okay. Okay. And just secondly, Rajesh, so every technology, initial few years, the pricing is better. And as it scales up and there is a learning curve, it normalizes. So going forward, do you think on a -- with cloud ramping up, on a net basis, will pricing improve from here? And can it help margins? Or you think it will remain stable as things scale up?

[Rajesh Gopinathan, CEO, MD & Executive Director]

Yogesh, our pricing strategy is more broad-based and relationship-led rather than specific service or product led. We are not a product company. So our approach is more long-term strategic partnerships, where we are investing in creating the technology capability and making that available to the customer on an on-demand basis. So there are small variations. But we don't see significant volatility in our pricing across individual technology side. That's not our strategy.

[Operator]

The next question is from the line of Mukul Garg from Motilal Oswal Financial Services.

[Mukul Garg, Research Analyst]

Great. Congratulations on an excellent quarter. I had 2 questions now for Rajesh and Ramki. Rajesh, very good detail qualitatively on cloud. Is it possible to quantify some of the areas where spending is going to happen on operations? Or if you can comment about the top 3 cloud partners, verticals, which you have created towards the addressable market you have? And are you seeing any early bump in spend on cloud as people are kind of migrating and which should stabilize? Or do you expect it to accelerate?

[Rajesh Gopinathan, CEO, MD & Executive Director]

Very difficult to quantify. Significant shift will happen. How it happens is difficult to predict and quantify right now. But the addressable market is so large that it merits that organizational changes that we have spoken about.The -- could you repeat what was the second part of your question?

[Mukul Garg, Research Analyst]

Yes. So second part of question was, you definitely have seen 2 quarters of very strong growth. Would you attribute partially to increased pickup in cloud spending, which should settle down as the -- as clients kind of move more into the maturity phase? Or do you expect cloud to accelerate further?

[Rajesh Gopinathan, CEO, MD & Executive Director]

Again, sorry, we are keeping on saying, difficult to quantify. But think about it this way that, as I said, the lens to see it is what we have shared with you as the multi-horizon strategy. And enterprise will -- the first value proposition is the migration of the infrastructure to the cloud. And second, after that comes this actual rollout of programs that capitalize on that native capability and use it.So some of the examples that I told you. For example, the ecosystem integration or rather the pharmacy one that I told. These are all -- when you think about it logically, they come easier when you are onto a common fabric of cloud.And the other one, the insurance one, the ecosystem integration, once again, those are business model changes and enabled by the fact that you are on to some kind of a common discovery-based infrastructure. So, a is -- the first is about the immediate basic demand from cloud. But the second and the third horizon are, you could classify it as cloud or you could classify it as any other standard application development activity. But that is why we characterized cloud as a new ERP because the incremental functionality and the incremental differentiation will happen on these platforms. And that we can classify whichever way, but that will definitely be a big driver of future demand.

[Mukul Garg, Research Analyst]

Got it. Ramki, just quickly on margins. This quarter, margin performance was quite commendable. But if I look at the INR implied expenses per employee, that has come down a bit versus Q2. What would you characterize besides lower attrition or maybe some currency impact? Is there some benefits from variable pay or what is leading to the lower increase in employee cost?

[Venkataraman Ramakrishnan, Chief Financial Officer]

I think, see, one of the things, which as we talked about this new adding of people in Ireland, for instance, the employees have just come at the end of the quarter, right? So when you do the arithmetic, so your denominator is higher, but the revenue from that will come into the subsequent quarter. So other than that, there is no other structurally or anything to explain this.

[Rajesh Gopinathan, CEO, MD & Executive Director]

Yes. And to your question, our variable pay has been 100% in both last quarter as well as the quarter before that. And we have gone through, through the year promotions. We've continued the cycle as normal. The volumes were more based on what the actual business volumes were. And salary increases also, we have rolled out from H2 onwards, which is fully reflected in it. So none of that thing is -- so your question, this is inclusive of everything. No one-offs.

[Operator]

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

[Ankur Rudra, Research Analyst]

And congrats on stellar execution. On the demand side, Rajesh, thanks for the detailed commentary. I was curious whether the nature of the incremental demand you were seeing, especially the lenses you mentioned, on growth versus efficiency, wouldn't the volume of that be higher on the cost takeout efficiency side maybe supported by the cloudification you're doing rather than the growth side given the state of the economy?

[Rajesh Gopinathan, CEO, MD & Executive Director]

Depends on a client to client situation. But in aggregate, I think there is enough. So especially when you think about it in terms of incremental money, there is almost equal-faced opportunity on both sides of it. Our participation has traditionally been more on the efficiency side. And the investments that we have done and the capabilities that were created are designed to increase our participation on the growth and transformation side. But the net money spent especially when you, as I said, think from an incremental perspective of what is out there as demand is almost equal.

[Ankur Rudra, Research Analyst]

I understand. There's follow-up question I had was, clearly, very strong growth and unseasonal strength. I was curious if there's been any impact on the supply side? Have there been instances where you might have faced or you anticipate supply issues with certain skill sets, given the growth you're seeing is not typically of this part of the cycle as projects are ramping up?

[Rajesh Gopinathan, CEO, MD & Executive Director]

We had shared with you earlier about our commitment to completely onboard or honor our outstanding hiring offers that we had made, and we have hired and made offers assuming a much stronger demand scenario. So we have that inventory of almost 40,000 trainees that we are committed to bring onboard. That is a big part of it.Some amount of it, we have also been practical in using subcontractors. As you see, that remains a fairly sticky element and it has marginally trended up also this quarter. So we are both strategically on the hiring side, practically on the subcontractor side and even more structurally on the entire training and reskilling side, which I'll ask Milind to talk about a bit. We have actually executed around -- Milind, would you like to elaborate a bit on the reskilling and fulfillment from that?

[Milind Lakkad]

Yes, sure, Rajesh. I think there are a couple of dimensions here. The linkage between the organic investment in our talent through cross-skilling and business growth has emerged actually stronger than ever. For example, what we did in Q1 and what we did now, there is 100% increase in that. Basically, very contextual talent development looking into short-term needs in the 2 quarters from now and building on top of that is really working for us very, very well.Our contextual Master bull is grew -- growing by 25% in this quarter. This is helping continuously to strengthen our pool of growth and transformation leaders and capable of engaging with CXOs for customers and their transformation agenda.We have reached a number of 15,000 contextual masters. Contextual masters are, basically just to explain to those who don't know, people who are working with our customers for quite some time and have a deep contextual knowledge of that customer, whether it is industry domain, whether it's technology, whether it is the nature of the relationships and what will work, what will not work, all of that. So from all angles, building a contextual knowledge, building technology understanding, building domain understanding and bringing it all together on time and when it's needed the most, is actually our key talent strategy.And in addition to that, we are also basically building very strategic talent development programs internally, where we are -- at all levels, whether it is at the lowest level from 0 to 3 years experience people, whether it is in the middle level where we think of building specialists and then 9 years plus onwards, where we are starting to build growth and transformation leaders of the company. So that is the overall -- talent development has been a significant aspect of our growth, direct correlation to that and the long-term strategy as well.

[Ankur Rudra, Research Analyst]

If I could just squeeze a last one. Any thoughts on investing the near-term gains on margin from travel and G&A we've benefited from in CY '20 to gain market share as clients open up to -- right after sales consolidation, et cetera, and also helping them fund transformations?

[Rajesh Gopinathan, CEO, MD & Executive Director]

Sir, we are closing with INR 65,000 crores. So I don't need travel savings for investment. As you know, we have a very structured investment plan and very long-term commitment to investing in capabilities to drive strategic growth. And that agenda continues, and we are hardly capital constrained to be able to fund it.

[Operator]

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

[Sandip Kumar Agarwal, Vice President]

Congratulation on excellent execution, Rajesh and whole team. So Rajesh, I have a couple of questions. One, on the hyperscaler side. You have given a lot of details in past also. And now also, you have given a lot of details. But if you can give us some more detail, particularly, on what we are going to do, specifically, our approach will be to target these hyperscalers and build a unique or something...

[Operator]

I'm so sorry to interrupt you, Mr. Agarwal. This is the operator here. Your voice is breaking up. I would request you to please check. It is not very clear.

[Sandip Kumar Agarwal, Vice President]

Yes. Can you hear me now?

[Operator]

No, sir, it is not very clear. I would request you to rejoin the queue, sir, and check on the line.

[Sandip Kumar Agarwal, Vice President]

Yes, sure. Sure.

[Operator]

In the meanwhile, we'll move to the next question, which is from the line of Apurva Prasad from HDFC Securities.

[Apurva Prasad, Research Analyst]

Congrats on the quarter, Rajesh and team, and best wishes for the new year. So while -- I mean, the performance has been fairly consistent with, I think, what you said in the first quarter. It will be interesting to know which are the areas that performed better than your anticipation versus at the beginning of the quarter? So be it in terms of any verticals or subverticals or in terms of maybe stronger deal transition or faster conversion? Is there anything which is more structural in it, which you think can probably prolong? And you did mention the heterogeneous nature in this quarter. So any comments around that would be really helpful, Rajesh.

[Rajesh Gopinathan, CEO, MD & Executive Director]

Actually, quite frankly, no. There are no standout individual industry or market segments that actually performed I think. U.K., if anything, if you specifically push it, U.K. is difficult to call. So we are -- as we have always maintained over the last many years on U.K., we stay very, very positive and are staying very close to our customers and helping them deal with an extremely volatile environment. But yes, that's a market that is extremely difficult to assess, and we are very happy with what -- how it has turned out. And we hope that it will continue to remain equally strong. But it is a difficult market to talk about.Others are trend-wise. I couldn't say that any major surprises or turnarounds or significant changes. Obviously, there is acceleration, broad-based acceleration. And beyond that, I don't see anything to talk about.

[Apurva Prasad, Research Analyst]

Okay. And Rajesh, this is also tied to your earlier comments of more midsize earlier versus now more large size and a better mix. So do you see more when the consolidation opportunities getting bigger by volume or value as budgets are probably going to unlock more? And for the end-to-end transformation versus more peaceful transformation -- piecemeal transformation, which is happening earlier and thereby larger end-to-end service providers benefiting disproportionately? Anything around that.

[Rajesh Gopinathan, CEO, MD & Executive Director]

No, I think it was more a timing issue last quarter. And also, of course, the fact that the pandemic had changed the decision cycles and all. So the smaller deals were obviously happening faster. But last time also when we said that our Q2 TCV was more weighed to smaller ones, I'd also shared that, but our pipeline is more reflective of our traditional one. So I don't -- I think it's just a timing issue between quarters. And this quarter, our large deals are back to normal. And in fact, some amount of catch-up on the last quarter has also happened. So I don't see a significant shift in the distribution or the deal structure.

[Operator]

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

[Sudheer Guntupalli, Research Analyst]

Congrats on a good set of numbers. My first question is to Ramki sir. You indicated that the margin expansion is driven by higher utilization and productivity levels. I want to know your thoughts on the sustainability of these higher utilization levels and margins. Can they correct as we come out of the recovery mode and start chasing growth? Or do you see a case for structurally higher utilizations and margins going forward compared to FY '19-'20 levels?

[Venkataraman Ramakrishnan, Chief Financial Officer]

I think, see, growth will be one factor. We continue to maintain the momentum. I think the margin resilience will also be there. From other drivers, like whether it is utilization or productivity or leverage, et cetera, we'll continue to see where there are opportunities, and we will continue to improve. Because a large organization with more than 470,000 people, there will always be areas where we can work on some of those aspects. So we continue to stay focused on where we think the businesses can deliver. And -- so nothing more specific to call out on that.

[Sudheer Guntupalli, Research Analyst]

Sure, sir. And Rajesh, we understand that Continental Europe is a geography where the presence and competitive positioning of TCS has been notch ahead of its closest competitors. However, in the recent past, we noticed a trend of aggressive large captive takeovers by competition in this geography. Given the current situation and the fact, if more such captives may be up for sale, do you see the possibility of heightened competition for us in the future in this particular area?

[Rajesh Gopinathan, CEO, MD & Executive Director]

We see that as an indication of the market becoming closer to global norms, and our relative competitiveness continues to be strong. Beyond that, I think it's a normal progression that you would expect as that market converges with other markets.

[Operator]

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

[Diviya Nagarajan, Executive Director and Research Analyst]

Congrats on the strong quarter, and wish you all a very happy new year. Pardon me if this has been answered before. You have spoken about how next year you're looking at getting back to double-digit run rate. And we have seen a fair amount of margin upsides as well. How should we think about your 26%, 28% aspirations going into next year? Will the revenue lift then help you kind of get from the back into that range? You're already there. But from a full year basis, do you think that's a sustainable number even if some of your costs like hiring and further wage hike should look up?

[Rajesh Gopinathan, CEO, MD & Executive Director]

Yes, Diviya, you are asking about revenue or margin?

[Diviya Nagarajan, Executive Director and Research Analyst]

Margins, margins, the 26% to 28% range, that's the new target you provided. I do think about it for the next year.

[Rajesh Gopinathan, CEO, MD & Executive Director]

The margins -- the way we look at margin is as a strategic lever. It has 2 things for us. It is a validation of our strategic positioning and our relevance and our relative competitiveness within the market.Secondly, from a tactical perspective, it is a strategic lever for us because it gives us the headroom required to participate in more complex and longer-term kind of deal structure when the right opportunities come about. So this is -- I would say that coming back to that range is more reaffirmation validation of what we have always meted. But we have, as I maintained earlier also, we are not wedded to any given range, and we will chase opportunities aggressively when we find the right opportunities and in areas that are of long-term interest to us.So period to period, what happens to the margin, it will be a combination of that, plus the environment in terms of where the currencies and also some of the other elements like attrition, et cetera. So we're not that worried about that, but we are very interested that over cycle, we are able to bring it back and then be able to use that as a lever to feed our growth.

[Diviya Nagarajan, Executive Director and Research Analyst]

Got that. And the second point was something you just alluded to attrition. We've seen attrition come down to a very, very healthy number right now. Is this a sustainable? Or should we think about this as a new level where things are likely to be in a shorter range or a narrower range going forward? Or as the industry starts to hire more meaningfully into the next 12, 18 months, do you expect this to start inching up a bit towards where we used to be a few quarters ago?

[Rajesh Gopinathan, CEO, MD & Executive Director]

Milind, would you like to take that, please?

[Milind Lakkad]

Yes, I'll take that. I think our -- this number of 7.6% is the last 12 months' attrition, and it reflects that number. Going forward, we expect the number to -- actually will obviously go up a bit, but where it will come to original levels or not, we don't know yet. But the point is this is something which is last 12 months' attrition. And we expect that some margin in it will increase over quarters.

[Diviya Nagarajan, Executive Director and Research Analyst]

Okay. And we've just finished a round of wage hike. Going into the next year, what are you thinking about the cycle and timing of wage hikes?

[Milind Lakkad]

Yes. So this is -- this year was an exception for us, right? Instead of giving the raises in April, we gave it in October. We expect the next year to be normal year. And thereby, we will decide by the end of this quarter, by March, on the increments and timing and all of that. But we expect that to be a normal year.

[Operator]

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

[Sandip Kumar Agarwal, Vice President]

Congratulations to the whole management team for excellent execution. So Rajesh, I have just 2 small questions. First is on the BFSI side. We have not seen BFSI spending very aggressively for now like more than 10, 11 years. But with the kind of movement in the online traffic, do you see that banking sector will again -- once again start big CapEx and upgrade their core infrastructure? And if that happens, will it not move up the growth rate very, very substantially? That is part one.And part two is on the hyperscaler side. I just wanted to know a little more on that side that how are we taking the hyperscaler approach? Is it a one business, basically, we are targeting the whole hyperscaler as the one objective or one type of business? Or you're breaking it down and individually targeting each hyperscaler to one kind of unit? So just some light on that.And finally, in last few years, we have seen our subcon costs tripling. So now with this work from home and other things, will it recede to a substantially lower level? What I mean by tripling is that few of the players in the industry have tripled, some have seen substantial increase. So will it recede significantly from here? Or you think there is a limited room there?

[Rajesh Gopinathan, CEO, MD & Executive Director]

Yes. See, the BFSI demand, there are multiple levers that we think will drive long-term BFSI demand. One is related to the whole public cloud space. Almost all our customers in the BFSI space are -- either already have some kind of a public cloud strategy or are currently experimenting with it. But substantial workloads have not shifted, and there are still lingering issues being sorted out, both from redundancy perspective, security perspective, validation, et cetera. And also there is acceptance, but not complete large-scale adoption yet across the client universe. So which means that there is significant headroom. Because almost everybody is now conceptually aligned that, that is the right way to go and that is the only way to grow, in fact, and -- with the multi-cloud hybrid kind of structure. So that will be a fairly long-term demand driver, and it is linked to the overall plan that we have spoken about.Similarly, from a product perspective, wealth management is a huge aspect of realignment that many of our customers are doing. And there's a significant amount of investment going into that space. And given our very strong domain capabilities and both product and platform capabilities, we are participating very well in that space.Other elements like customer experience, et cetera, continue to be. So -- and insurance is another one that is significantly leveraging cloud to change its operating parameters and the way it is structured in terms of its complex operations. So we see fairly robust long-term demand drivers in this space. And as the largest service provider to the BFSI industry globally, we are very well positioned to participate in this upside.The question that you had about hyperscalers, the units that you are set up are dedicated units by each of these large platforms. And we believe that when you take a slightly longer term, 5-year plus kind of a view, each of them will evolve in their own unique ways. And therefore, it is important that we invest and create those kind of differentiated capabilities, which will drive long-term value creation for customers.And on the subcontractor side, Milind, would you like to take that? Or maybe rather NGS, you want to address that? I think the question was about our long-term strategy towards subcontractors and how SBWS and work from home, does it impact our subcontractor strategy?

[Ganapathy Subramaniam Natarajan, COO & Executive Director]

Yes. Thanks, Rajesh. I think you answered that the earlier question also. I think we have been proactively investing in building the skills organically. And that is our strategic priority, and that's something that has paid us rich dividends, which we will continue to do.On the subcontracting side, we have always been tactical about it and where it is absolutely required for market skills are fulfilling immediate opportunities and I think we've always used it. And we'll continue to use that. We have a phenomenal ecosystem of partners that have been -- that we have built over time in both emerging as well as established markets that help us in terms of bringing in the necessary skills on an immediate basis as well as typical market skills or regulatory skills that we keep looking for, I think that will continue to be practiced.

[Operator]

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

[Rajesh Gopinathan, CEO, MD & Executive Director]

Thank you, operator. So as we said, strong demand for our services and momentum from the strong deal wins over the last few months have given us a strong momentum, helping us clock 4.1% growth in constant currency sequentially and 0.4% on a year-on-year basis. We also grew on a year-on-year basis in constant currency terms, something which we were expecting to accomplish only in March, but we've done it a quarter earlier. So very happy to draw a line under this year as it were and look forward to the future.Our operating margin expanded by 0.4 basis points to 26.6%, our highest in the last 5 years. So even after absorbing the impact of the salary hike that we did in this quarter. And our strong growth momentum and order book of $6.8 billion, which includes an all-time high order book in BFSI and North America positions us very well in the new year.On the people front, we -- in keeping with our strong demand expectation and the growth expectation, we have had all-time high net addition of 15,721 people. And our retention continues to be an industry benchmark at an all-time low of 7.6% from the IT services attrition perspective.Looking ahead, both in business as well as personalized, there's every reason to be optimistic, but also to stay cautious. We are definitely not out of the woods yet. And we maintain a positive but cautious stance. But that caution aside, the medium- and long-term business opportunity is fairly substantial. And our scale as well as our sustained investments positions us very well to participate in that.Once again, thank you all for joining us on this call today, and wishing you all a happy and healthy 2021. Good night, and stay safe everyone.

[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.