Tata Consultancy Services Ltd

NSE:TCS

Earnings Call Transcript 2023-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 of Investor Relations at TCS. Thank you, and over to you, sir.

[Kedar Shirali, executive]

Thank you, operator. Good evening, and welcome, everyone. Thank you for joining us today to discuss TCS' financial results for the third quarter of fiscal year 2023 that ended December 31, 2022.

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; Mr. N. G. Subramaniam, Chief Operating Officer and Executive Director; Mr. Samir Seksaria, Chief Financial Officer; Mr. Milind Lakkad, Chief HR Officer.

Our management team will give a brief overview of the company's performance, followed by a Q&A session. As you are aware, we don't provide specific revenue or earnings guidance, and anything said on this call, which reflects our outlook on 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 which has been 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, executive]

Thank you, Kedar. Good morning, good afternoon and good evening to all of you. We had a very good growth for a seasonally weak quarter. Our U.S. dollar revenue crossed to $7 billion mark in Q3 and revenues grew 19.1% in rupee terms and 13.5% in constant currency terms and 8.4% in dollar terms.

Our operating margin for the quarter was 24.5%, an expansion of 0.5% sequentially. Our net margin came in at 18.6%. I'm very happy to share that the Board has announced a dividend of INR 75 per share including a special dividend of INR 67 per share. Including the interim dividends paid out in the first half of the year, this translates into a shareholder payout of INR 33,297 crores for year till date.

I will now invite Samir, Milind and NGS to go over different aspects of our performance during the quarter. I'll step in again later to provide some more color on the demand trends that we are seeing. Over to you, Samir.

[Samir Seksaria, executive]

Thank you, Rajesh. Let me first walk through the headline numbers. In the third quarter of FY '23, our revenues grew 13.5% year-on-year on a constant currency basis. Reported revenue in INR was INR 582.29 billion, a year-on-year growth of 19.1%. In dollar terms, our revenue was $7.075 billion, a year-on-year growth of 8.4%.

Moving to the operating margin. We had 0.7 -- a 70 basis point benefit from the currency movement, operation [Audio Gap] turn to normalcy. Overall, our operating margin expanded 50 basis points sequentially to 24.5%.

Net income margin was 18.6%, impacted by foreign exchange fluctuations. Effective rate for the quarter was 25.7% effective tax rate. Our accounts receivable was at 66 DSO in dollar terms, up 4 days sequentially. Net cash from operations was INR 111.54 billion, which is a cash conversion of 102.8%.

Free cash flows were at INR 102.15 billion. Invested funds at the end of December stood at INR 669.24 billion. Lastly, as Rajesh mentioned, the Board has announced an interim dividend of INR 75 per share, which includes a special dividend of INR 67 per share. Total shareholder payout till date amount to 110% of free cash flows.

Over to you, Milind.

[Milind Lakkad, executive]

Thank you, Samir. You might recall that our approach to overcoming the supply side challenges placed by the industry was to bring in [indiscernible] at scale and then trend them on new technologies. In the prior fiscal quarter, we onboarded 135,000 fresh engineers. In Q3 alone, we brought on about another 7,000 fresh engineers in Q3 and bringing in a total of 43,000 freshers year-to-date. These are [ unprecedented ] numbers. Our biggest strength has been the nearly 125,000 TCS'es at middle and senior levels who have been with the company for over 10 years on average. They have been strengthened our ability to culturally and operationally integrate all the fresh events we brought on board and ensuring that the project work outcomes and customer experiences continue to be the best in class.

Last year, our net hiring was significantly ahead of our revenue growth. Our focus this year has been on utilizing all that excess capacity and looking over newest employees productive. Between that and elevated attrition, we had a net reduction of headcount and our workforce strength as of December 31 stood at 613,974.

We continue to have a very diverse workforce with 153 nationalities represented and with women making up 35.7% of the base. On the learning front, TCS has clocked 11.4 million learning hours in Q3, resulting in an acquisition of 1.3 million competencies.

LTM attrition in IT Services was at 21.3%, slightly down quarter-on-quarter, but still very elevated as it reflects the high levels of churn in the prior quarters. Our quarterly annualized attrition on the other hand, fell by nearly 6% in Q3, as we expect it to steadily trend down over the coming quarters.

Over to you, NGS, for some color on segments and products and platforms.

[N. Ganapathy Subramaniam, executive]

Thank you, Milind. Let me walk you through our segmental performance retail for the quarter. Our growth numbers are on a year-on-year constant currency basis. Growth was led by retail and CPG, which grew 18.7%, led by strong demand in the Travel & Hospitality segment. Our retailers had production [ progress ] during the holiday season. Life Sciences and Healthcare grew 14.4%. Technology & Services grew 13.6%. Communications and Media grew by 13.5%. Manufacturing 12.5%, while BFSI, our largest vertical, grew 11.1%.

Let me now walk you through the growth figures in the geography. Our major markets, North America as well as U.K. grew 15.4%, while Continental Europe grew by 9.7%.

Moving on to emerging markets, Latin America grew by 14.6%, India by 9.1%. Asia Pacific by 9.5% and Middle East and Africa by 8.6%.

Moving on, our industry-leading portfolio of products and platforms continue to perform well. Ignio, our cognitive automation software suite signed up 10 new customers and 7 clients went live during the quarter. The business health monitoring solution from Ignio is gaining traction with customers went live in over 2,000 stores for a major American auto retailer in Q3. Enterprises are increasing their investment in [ AIOps ] and automation technologies to improve employee productivity and resilience. Ignio is uniquely positioned to ride on this particular opportunity with an end-to-end platform, the [indiscernible] and machine learning ability across customer life cycle to help them in their journey of being an autonomous enterprise.

TCS BaNCS, our flagship product suite for the financial services domain had 6 new wins and 7 go-lives during the quarter. We continue to gain share in the market infrastructure institution segment with a new win in Q3. The subsidiary of the leading European CFB selected TCS BaNCS market infrastructure, implementing a unique system, offering deployment and correspondent banking services to their customers. One of the largest asset managers in The U.S.A. is over USD 7 trillion in global assets migrated its personal advisory services and digital advice offerings to the cloud-based TCS BaNCS' wealth management platform, enhancing their advisory experiences, improving accuracy and low latency responses for performance configuration analytics of millions of customer portfolio, the record numbers.

Our Quartz blockchain platform had 2 new wins and 1 go-live in Q3. [indiscernible] multinational pharma major has increased their adoption of Quartz further building on the successful initial pilots we executed using blockchain, smart contracts and digital payments. Quartz smart solution for contract performance monitoring and Quartz gateways are going to be used to eliminate inefficiency in cross-functional manual processes, entailing procurement, finance and treasury.

In Life Sciences, TCS ADD, our advanced drug development platform enabled by artificial intelligence, was implemented for 2 leading pharma companies for automation of adverse events intake and processes. With this, TCS ADD has successfully completed automated processing of 0.5 million adverse [ E1 ] cases. Our offerings in this platform continue to address patient centricity, smart clinical analytics, interoperability and AI-enabled automation that our emerging trends in the life sciences industry.

TCS OPTUMERA, our artificial intelligence powered retail merchandising suite went live for 4 clients. TCS OmniStore, our AI-powered universal commerce suite had 2 go-lives. TCS HOBS, our suite of products of communication services has 1 new win and 4 go-lives in Q3. TCS iON had 7 wins in the quarter ending December. During this period, we served over 35 assessment customers and administered exams for 8.8 million candidates. We reached a new industry partnership milestone in Q3, engaging with 1,580 corporates that leverage the TCS National Qualifier Test as their entry-level recruitment platform over 3,000 -- and over 3,700 candidates have gotten placed till date.

Lastly, MasterCraft and Jile won 10 new clients in Q3 and 21 renewals.

Let me now go over our client metrics. These metrics are an important validation of our customer-centric business model. In Q3, we added 1 more client year-on-year in the $100 million-plus band, bringing the total to 59; 12 more clients in the $50 million-plus band, bringing the total to 130; 35 more clients in the $20 million-plus band, bringing the total to 290; 30 more clients in the $10 million-plus band, bringing the total to 456; 39 more clients in the $5 million-plus band, bringing the total to 658; 42 more clients in the $1 million-plus band, bringing the total to 1,217.

Let me now request Rajesh to speak on the demand drivers during the quarter.

[Rajesh Gopinathan, executive]

Thank you, NGS. As mentioned by NGS, the seasonality led to some moderation in growth in verticals like BFSI, retail and technology and services and across all our key markets. While the seasonal aspect should reverse in the next quarter, the macroeconomic uncertainties are likely to result in a more balanced year in 2023 after 2 years of strong growth.

For now, we see a client caution translating into greater focus on cost optimization. We are seeing an increase in the number of large operating model transformation engagement. In the first 3 quarters of FY '23, we won 20 such deals versus 16 in the prior year same period. Our innovative approach to redesigning the operations embedding AI and intelligent automation into individual processes and using TCS CognIX has been delivering superior outcomes for our clients and a differentiated positioning for TCS. We are also seeing an uptick in vendor consolidation. Our scale, full services capability and track record of delivering outsized savings through operating model transformation is helping us win such deals. We have won quite a few such deals across BFSI, health care, manufacturing and telecom, and we see many more in the pipeline. Here is a good illustration.

The BT Group, U.K.'s leading provider of fixed and mobile telecommunications, announced a new partnership with TCS for its digital unit to boost its modernization plans. TCS will manage and ramp down over 70% of digital legacy technology estate and boost capacity to accelerate the build of its new strategic technology architecture supporting the group's growth.

Coming to cloud transformation, continues to be a strong area of growth. As I had mentioned last quarter, clients are much more focused on execution of the cloud journeys and the increased intensity is translating into an expanded opportunity for us. Our strategic industry-specific solution fabric built on market-leading hyperscaler platforms and covers enterprise digital transformation and drives exponential business value through industry innovations.

We've won several new cloud transformation deals in Q3. Here are a few examples. We were selected by Boston Scientific Corporation, a global medical devices company, as a strategic partner for purpose-led enterprise-wide multi-cloud acceleration program. TCS' decade-long transformative partnership will help deliver cloud-native resilient and futuristic operations that will fuel Boston Scientific's global business growth and the submission of transforming lives through innovative medical solutions.

TCS expanded its partnership with the U.K. headquartered international savings and investment firm to help and later transform into a cloud-only organization by 2025 through a series of technology and business transformation initiatives. Leveraging its deep contextual knowledge of the client's IT and business landscape, TCS will help modernize and transform the replication estate using cloud native architecture and seamlessly migrate them to a public cloud using TCS Cloud Counsel and TCS Migration Factory. This will also simplify the legacy infrastructure estate and facilitate their exit from on-premise data centers. We have been engaged by the largest online travel company to build a unified, modernized enterprise data platform, which entails creating a data lake abstracting data from transitional systems and other data sources and building intelligent self-learning engines, leveraging AI/ML models and rendering seamless experience to customers and associates. The marketing meta analytics we deploy will enable greater personalization and tailored recommendations on their portal.

Moving on to growth and transformation. We usually talk about G&T engagements focused on the front end, helping clients launch innovative new products and services or new technology-enabled business models or channel improvements and personalization that enhances customer experience. I'll come to those in a bit, but before that, I also wanted to share some examples of how technology-led innovations at the back end can also result in revenue growth and improve customer satisfaction, predictive analytics, machine learning and AI appealing such innovation.

Let me illustrate with 3 examples. PostNord, a European-based communications and logistics solution provider, has partnered with TCS to achieve their win and parcel key strategic priority and to be the market leader. Our key objective is to transport more parcels per truck in each trip made between the terminals and their regional hubs. TCS developed a touchless AI-based solution using machine vision and importantly, existing security CCTV cameras to accurately measure the truck fill rate in real time and leverage the TCS proprietary algorithm to optimize the line haul planning and truck departures. This has helped improve the revenue yield per truck, reducing the number of trips and associated costs and even the carbon footprint.

TCS partnered a U.S.-headquartered multinational biopharmaceutical company in co-creating and implementing an industry-first AI-based solution to transform the handling of patient complaints about drug device combination products such as prefilled injections and auto injectors. The solution triages complaints and automatically separates out product-related complaints from drug-related adverse events, resulting in faster processing of complaints, timely feedback to patients and internal design and the production teams for remediation. This has helped improve product quality, enhanced patient experience and contributed to improved sales of such combination products. Toyota Material handling in North America engaged TCS to transform its field service team's ability to diagnose and repair. TCS' solution enables guided troubleshooting, self-service and cognitive search of technical product support content using AI, ML and NLP which helped reduce downtime associated with unplanned maintenance by 10% to 15%.

The transformation has improved first time [indiscernible], reduce the dealer overheads and resulted in service stickiness leading to increased service part sales for dealers and to Toyota Material Handling.

M&A continues to be a recurring team in our customers' G&T agenda. They have been entrusting us with these integration or divestiture mandates on account of our contextual knowledge of the business and IT landscapes. Our highly collaborative inside-out approach to transformation, and proprietary accelerators such as TCS Crystallus, a set of pre-configured industry and business solutions available on all leading enterprise application platforms. Here are 3 examples of it. Philips Domestic Appliances, a carve out from Royal Philips and a global leader in kitchen coffee, garment care and home care appliances, engaged TCS as a sole source primary partner to support PDS transition to an independent entity and its business transformation to become a digital first and consumer-centric organization.

TCS established a digital core for the new business, designed lean business processes and successfully rolled out the pilot in 7 countries. We are now working towards a big bank go live for the rest of the world. This is expected to be the foundation for a 10x growth in sales through expansion into new markets and channels with 20 million highly engaged customers. Similarly, we are helping a leading North American bank with the seamless merger of our U.S. bank. TCS' deep contextual knowledge and platform expertise was critical for success in this large and complex amended program, involving online banking channels, treasury and payment services, auto and equipment financing, among others.

TCS did an end-to-end mapping of the products and processes of the acquired bank and carried out a parity uplift to ensure consistent experience for incoming acquired bank customers. At the back end, we integrated new lending and leasing products into the acquired banks portfolio and migrated the acquired banks products, customers and users to the acquirers platforms. With this successful integration, the acquirer bank expanded into a large complementary contiguous market in the U.S., doubling its branch footprint and onboarded over 1.5 million new customers and inherited a strong commercial business with a high-quality loan portfolio.

Finally, in Q3, we were chosen by European Life and Material Sciences company to lead the global integration of one of the largest acquisitions. TCS is responsible for end-to-end integration of warehouses and factories. It will set up a transformation management office to enable faster realization of synergies and serve as the foundation for future M&A.

Let me now provide a few examples of TCS partnering with clients to use digital technologies to help launch innovative new products or services that drive new revenue streams. A leading U.S. headquartered media and technology multinational partnered with TCS for building a single digital ecosystem platform spanning home entertainment and mobility. As the sole strategic partner, TCS was responsible for the full life cycle of the new technology platform for this new business line. TCS designed and implemented the solution through an API grid for the entire ecosystem, leveraging AI/ML for agile operations, proactive care, proactive service management and preventive fault management. The new business model helped deliver truly personalized and unique customer experiences to end customers of the client. It recently crossed 5 million customer connections and witnessed high NPS scores and customer satisfaction ratings.

TCS helped the leading U.S. money transfer service provider transform its technology estate into a modern cloud powered platform, enabling it to launch new products faster, expand into new markets and strengthen its customer relationships. Leveraging the new integrated next-generation multicurrency digital wallet and digital banking platform, our clients has forayed into digital banking in Europe, offering customers access to a variety of differentiated multicurrency payment services in a single app. The new platform has also helped the client successfully integrate with cross-industry ecosystem partners to offer millions of customers greater ease, reliability and access to money movement and payment service capabilities.

Overall, the transformation has resulted in increased customer loyalty, reduced customer journey barriers and created new revenue streams. Similarly in Q3, an APAC based automotive electronics manufacturer chose TCS as their co-innovation partner in developing next-gen instrument panel [indiscernible]. TCS Services will expand product development HMI or human machine interface, functional safety, cybersecurity and other cockpit related products. In prior calls, I've been giving examples of how TCS is participating in large industry transformation initiatives.

Now -- again, in the utility sector, we have had several examples of TCS helping utilities and power producers navigate energy transition. Our domain expertise and track record in executing successful transformation is firmly enabling us as the preferred -- establishing us as the preferred G&T partner in the sector. Here is one more example of the same.

Western Power, a leading Australian power generator and distributor, selected TCS for our credentials in this space to design, deliver and support a distribution system operator platform solution. Our solution enables the client to orchestrate distributed energy resources or DER such as rooftop solar, batteries and large appliances across homes and businesses into a virtual power plant, aggregating the excess electricity generated by their assets and then dispatching it into what will become new energy markets and services. The TCS Solution also addresses the critical issues like low-voltage network visibility and optimization. With over 650 participating customer energy assets still date, the platform has demonstrated the safety and reliability of aggregated the ER and help the client model -- help the client model the complexity of bidirectional energy flows. This will open doors for Western Power to participate in the futuristic energy market and build new revenue streams while safely operating within the technical limits of the distribution grid.

Likewise, we are participating in longer-term transformation trends in the transportation sector. Last year, I had spoken about the work we were doing for transport for London to transform the administration of taxies and private hire vehicles in London to prepare it for an electric and autonomous future.

In Q3, we won a deal that will transform the railway sector in the U.K. TCS was chosen by the Rail Delivery Group, U.K.'s leading rail industry membership body for the creation of a rail data marketplace. TCS will leverage data syndication, monetization and marketplace features of its DeXAM platform and the cloud native platform of a leading hyperscaler to combine fragmented sources of rail data into one digital service. This will optimize the sharing of data and real-time information to passengers and operational bodies, improving the transparency and enable U.K.-wide railway innovation ecosystem.

Let me now come to the Q3 order book. Our deal closures in Q3 amounted to a TCV of $7.8 billion. By vertical, BFSI had a TCV of $2.5 billion, while retail order book stood at $1.2 billion. The TCV of deals signed in North America stood at $4.2 billion.

With that, we'll open the line for questions.

[Operator]

[Operator Instructions] The first question comes from the line of Kumar Rakesh from BNP Paribas.

[Kumar Rakesh, analyst]

Wishing the team a very happy new year, hope 2023 be a great year for you. My first question was to better understand the headcount moderation during the quarter. Now during the press conference, Rajesh, you talked about the focus on headcount efficiency to continue in fourth quarter as well.

Assuming the head count stays steady in 4Q, you will be exiting the year with a headcount growth of about 4% Y-o-Y? So my question was, is that an indication of growth visibility that you have today? Or -- and hence, the rationalization? Or you are confident of driving similar or higher productivity gains? And hence, revenue growth could be significantly higher than that?

[Rajesh Gopinathan, executive]

Rakesh, a very happy new year to you, too. I think the best way to think about it is that on a year-on-year basis, our net headcount is comparable to 55,000 or so [indiscernible]. So we have significantly invested in building up capacity in 2021, tried as much as possible to bypass the industry's higher from each other attrition cycle and focused on hiring at entry level and invested in training and cross-training our resources. That investment has hit our productive capacity and stood us in the street. So the incremental hiring that we saw this year should be seen in context of what we've done in the last year also. And overall, we are very comfortable with where we are with our net headcount. We hired significantly ahead of revenue growth in '21 and balanced it with a more prudent hiring in '22 -- or '23 FY, calendar '22.

Going forward, we should be back to a more normal kind of hiring trend. While specific numbers will keep evolving, we should be expecting hiring in the range of -- gross hiring in the range of probably 125,000 to 150,000 for the year and offsetting it with a more expected normalization of attrition levels to our long-term averages, which will give us sufficient capacity to take care of growth and then we can keep bringing in shorter-term hiring to take care of demand as it unfolds. So that would be the best way to think about and model it.

[Kumar Rakesh, analyst]

That's very helpful. My second question was on the deal side. So you talked about that cost optimization deals have already started picking up meaningfully. In the past, during recessions, we have noticed that first, there's a sharp cut to IT budget before cost optimization deal starts picking up. I understand that visibility on client budget is still a couple of months away. But do you think this time the transition from discretionary IT spending to cost optimization deal could be far smoother than what we have seen in earlier recession periods?

[Rajesh Gopinathan, executive]

It's also a factor of how it is playing out in different markets. So as I said, if you take a market like U.K., that is well and truly into much more strategic long-term cost base restructuring kind of deals. And we are seeing multiple such ones play out, and we are participating very strongly in that. Market like U.S. is more -- we need to wait and watch how that will play in the next couple of quarters, but we are fairly constructive and our conversations with customers, it's a much more balanced one where they are equally positive as well as cautious, and we should see a mix of both cost and transformation deals.

Europe, decision-making is slow. So it's very difficult to call it one way or the other. So this is not some major single event that has happened globally. All 3 markets are moving to 3 different beats. And each of them are indexed to their own specific outlooks.

[Operator]

Our next question is from the line of Vibhor Singhal from [ Nuvama ] Equities.

[Vibhor Singhal, analyst]

I hope I'm audible. Congrats, Rajesh, for a great performance in our seasonally weak quarter. So Rajesh, I just wanted to basically [indiscernible] on the performance of the retail segment in this quarter. I think the company -- the segment has also found the company average growth rate also doing [indiscernible]. While globally, we are hearing about a lot of these retail chains calling out [indiscernible] especially in European parts as well. So any color on that would be helpful as to what drove this strong performance in this quarter? Is there some -- basically, do you expect this to sustain in the coming quarters also?

And also, is there some color to it in terms of, let's say, U.S. retail may be doing slightly better than Europe retail, as you just called out that in Europe, the decision making is slow on an overall basis.

[Rajesh Gopinathan, executive]

Okay, let me answer it as fast as I can. First of all, the numbers that we show in retail is a combination of Retail, CPG, Travel & Hospitality. So that's the industry group that we report on. Within that, if you look at it, Travel & Hospitality is enjoying a very strong rebound after a very, very challenging couple of years. And we are one of the largest, if not the largest, service provider in that industry. And we were significantly impacted in the last couple of years.

And also, we are now participating [indiscernible] also quite handsomely. The CPG sector continues to -- it's going through multiple forms of transformation, mostly led in various forms on direct-to-customer channel strategy transformation and significant investments going into that. And there also analytics, sustainability, direct to customer. Each of these themes are continuing to find a lot of attraction and continued investment and we are participating in all 3 quite well.

Retail itself is more regional and different markets have different focus. Plus within retail, grocery as a segment continues to do well. More of discretionary retail is, as I said, market specific. Going to the last part of your question, U.S. retail sales adjusted for inflation itself, still have come in stronger than last year, and last year was a very strong year.

So overall, from a volume perspective, retail in the U.S. has done well. However, profitability has been challenged both by customers working down the product line in terms of preferring a slightly cheaper product on a related basis as well as the fact that cost structures have been up. So profitability for many retailers has been under challenge. And we need to wait and see how this will translate it. But some of those costs are transient. Some of them will require more structural cost transformation deals. So it's a fairly complex set of drivers in there. It goes back to what we have always said, we stay close to the customer and we play each customer and each scenario on a one-on-one basis.

And overall, we believe that the industry continues to be very attractive. And we have the full suite of capabilities to be participating across this broad spectrum and to make sure that we stay relevant to customers on a very individualized basis.

[Vibhor Singhal, analyst]

Thanks for a very detailed and comprehensive answers. If I could just maybe drill down a bit more since you touched upon the Travel & Hospitality segment, as you mentioned, that we will be bore the brunt of it while COVID struck and the segment was down, and now we're seeing a strong rebound in the segment. I think globally also as we are seeing very strong bookings increase in [ Spain ] and baggage scan data also come up. So do you expect this momentum to maybe continue in the Travel segment in the coming quarters as well. Of course, this is such as far as results assuming no more waves and no more lockdowns and everything. But do you think -- do you expect this momentum to continue in this segment in the next couple of quarters given that these slides would now probably start spending more [indiscernible]?

[Rajesh Gopinathan, executive]

I think so. Of course, this is caveat and, of course, that there is no major event that happens. But if things continue as they are, we expect that this sector will continue to do well. One of -- there is the demand side. In fact, the sector is supply constrained. And as more capacity comes on board, they should continue to do very well.

More importantly, while they did a great job dealing with the pandemic, many structural changes that need to be done have been identified and those are longer-term programs that will need to be put in place. So we expect a lot more of proprietary investments on the more forward-looking customers and very high profitability during the course of this year. We'll give them that watches that is required to make sure that they make the investments for increasing the resilience of their network and resilience of their operation in any future potential scenarios.

[Operator]

Our next question is from the line of Sudheer Guntupalli from Kotak Mahindra Asset Management.

[Unknown Analyst]

Congratulations on the [Audio Gap].

[Rajesh Gopinathan, executive]

[Audio Gap] technology adoption cycle. And -- but the focus in terms of actual enterprise investments to execute on those transformation will continue. So there's a number of platforms, greater focus on larger programs, much more calmer technology environment, it's typical for this stage of technology adoption cycle. So probably that also kind of reflects the difference between the product space and the services space. But beyond that, I don't think we have any greater visibility.

[Unknown Analyst]

Sure. And my second question, the broad agreement by now is that growth for the industry in FY '21 -- '24 will revert to pre-COVID levels impacted by macro issues and the unwind of COVID pull forward impact, et cetera. Keeping aside the negativity around the near term, how do you think of the medium-term growth prospects for TCS? I'm not asking for a hard guidance, but do you continue to believe that once this near-term noise around macro, et cetera, is in the base and behind us, growth rates can again accelerate back to double digits, which has been our medium-term aspiration?

[Rajesh Gopinathan, executive]

We believe so. We believe that our stance is quite positive. And as I said, if we take market by market, U.S., we definitely think that that's the scenario. U.K., we are participating very well. Market itself is challenged.

Europe, once the geopolitical situation calms down, we believe that we have the full suite of capabilities to be able to participate and once decision-making starts, we should be participating with it. So overall, we're quite confident about, again, as I said, having the full suite of services to be able to be relevant to customers across a wide spectrum of actual scenarios. And therefore, we are quite confident about the medium- to long-term outlook.

[Operator]

Our next question is from the line of Pankaj Kapoor from CLSA.

[Pankaj Kapoor, analyst]

I have 2 questions. First, Rajesh, you mentioned that the higher share of cost takeout deals, which are now coming in the pipeline. So just wanted to understand if such deals are also moving faster in terms of decision-making? And any color if you can give on the competitive intensity for such deals? I mean is it normal? Or are you seeing such deal getting more competitively bid now by other lenders?

[Rajesh Gopinathan, executive]

Speed is varying by market. I would say that U.K. decision-making is quite fast. Customers are very clear, and there is a lot of action happening there. U.S. is normal. It continues to be doing well, but that does not account for the short-term kind of aspect of that market. Everybody is a bit cautious for the time being, but we don't think that will last into next year, but we'll see. In 3 months' time, we should be able to know better.

Europe decision-making has significantly slowed down. So that's the full spectrum there. But in terms of competitive intensity, many of the deal structures are quite complex, and that kind of narrows down the field to a more limited set of competitors. Within that, obviously, people are aggressive and everybody is hungry, but at least the competition set is a much narrower set than even a few years ago when deals were smaller, and there was a lot more focus on immediacy of response on the supply side of the channel.

[Pankaj Kapoor, analyst]

Understood. And my second question is on the special dividend. With this, you would have almost paid out the entire of the amount that we paid last year, which included a buyback. So does this mean there is a rethink in terms of the mode of capital return in favor of dividend versus buyback?

[Rajesh Gopinathan, executive]

No. Rather than look at it in absolute terms, on INR terms, we are growing at 15% plus kind of basis. So if you consider that growth, we are still benchmarked to that 80% to 100% of net profit or free cash flow kind of a trajectory, not much of difference to that.

[Pankaj Kapoor, analyst]

Okay. So our buyback remains something which our Board can consider whenever the window opens up?

[Rajesh Gopinathan, executive]

As you know, the current regulations require a 12-month gap between the 2 buyback announcements. So there will be no -- so that's not -- buyback will be considered when it becomes, what should I say, possible from the regulatory perspective. Right now, we are in a period where we couldn't anyway consider a buyback.

[Pankaj Kapoor, analyst]

Understand that. And wish you all the best for FY '24.

[Operator]

Our next question is from the line of Sandeep Shah from Equirus Securities.

[Sandeep Shah, analyst]

Rajesh, one broader question for -- at the industry level, where are we in terms of the cloud transformational journey or adoption by the enterprise client? And do you believe the pace of the adoption can change starting from CY '23 onwards irrespective of the macro issues?

[Rajesh Gopinathan, executive]

Cloud reduction journey is, I would say, 1/3 of the way in. Different customers have different challenges there. Some of them who have gone very rapidly to the cloud, mostly lift and shift are realizing that. Unless it is architected right, cloud costs are actually quite difficult to manage. And it's a fairly large bill that can come if you do not architect and if you do not actively manage the cloud environment. So some of the transformation activities and schedules that we are doing is to actually help them execute that transformation agenda so that their application stack is architected in a manner in that -- in which it can fully leverage the variability that the cloud model offers. Unless you're able to actually switch off and release the resource, you will not participate in the variability. And to be able to do that, you need to be able to architect your application properly so that resource dependency can be switched off on a variablized manner depending on what the requirements are. So that's one kind of work that is going on.

The other kind of work that's going on is actually the migration is still for complex workloads require a lot more heavy lifting and that is the other kind of an area that there's a lot of work going. So these are -- neither of them are easy to execute. So you should not expect much acceleration. It is more, as I said, next couple of years is going to be about execution, [ bigger ] operational capabilities. But it will be a steady move. It will not -- neither is it likely to accelerate significantly, neither is it likely to decelerate or all of the sort of with -- movement is committed. That direction is very clear. The investments are in place. The deals are in place. Now the execution and the operation has to happen. And that's likely to be the story for the next year or 2.

[Sandeep Shah, analyst]

Okay. This is helpful. Just a question in terms of CY '23 IT budgets. So do you believe the spend of the IT budgets could be conservative in the first half of the calendar year versus the second half? Or do you expect this spend to be -- remain normal like any other year, though the budgets may be slightly lower versus the earlier last 2 years because of the macro slowdown?

[Rajesh Gopinathan, executive]

Again, going by market by market, in U.K., unlikely that it is any different than last year because there is no incremental shift to the overall environment in U.K.

U.S., we'll have to wait and see how the next couple of months plays out. We are positive or rather we are hopeful that we'll have to actually wait for actual confirmation to come. We think that the immediate caution that is there probably will dissipate a few months into the year.

Europe, we'll have to wait for some major events to happen for it to change. Europe will be incrementally cautionary this year compared to last year.

[Sandeep Shah, analyst]

Okay. Okay. And just a last bookkeeping question. I think this third-party pass-through cost increase, this time does not relate to the domestic revenue. If I'm not wrong, it relates to the international revenue. And will it be a growth headwind in the fourth quarter if it doesn't repeat?

[Samir Seksaria, executive]

So third-party costs, actually, you could link it to the domestic revenue. There has been a sequential increase in domestic revenue. And typically, Q3 has some bit of it coming in. But, sir, on a year-on-year basis, we don't see that big jump.

[Operator]

Next question is from the line of Ravi Menon from Macquarie.

[Ravi Menon, analyst]

Congratulations, gentlemen, on a good quarter. Regional markets and other segments have seen an acceleration, year-on-year growth versus last quarter despite relatively [indiscernible] in India. Should we think that this comes from a flow traction in the insurance BPaaS area? I think NGS mentioned 16 go-lives in the contracts for banks. Any large deals here that you'd like to call out or maybe also share some comments on the deal pipeline in the segment?

[N. Ganapathy Subramaniam, executive]

Yes. Sorry, I didn't hear you properly. Could you repeat the question?

[Ravi Menon, analyst]

So NGS, you talked about 16 go-lives this quarter for banks. I was just wondering if there are any large deals in the BPaaS segment in the interim and how the pipeline is shaping up there?

[N. Ganapathy Subramaniam, executive]

So one of the areas that we are seeing opportunities and a significant pipeline is various digital core, whether it is pointing of capital markets or insurance and all of them are looking at putting together a new digital core. And it is going through a lull period in the last about 2 years or so. Then clearly, now people are thinking about new core banking system, our new security settlement system, which are really architected for the future, which are cloud native, which are inherently micro services, are inherently [indiscernible] capability of share marketplace with a significant amount of the APIs and micro services that will enable them to integrate into the ecosystem.

So as you may recall, you see now we -- during this quarter, we announced a large deal win with [indiscernible] Trust Banking Corporation. It is really the future core, right, in terms of architected fashion that it is cloudinated and it is truly providing open banking APIs and so on and so on. Those 2 opportunities are opening up. And as you see, at this moment, we are working on 3 our core such opportunities there from the larger brands that are looking at modernizing their core in favor of something which is completely open banking, open APIs and so are some of the market infrastructure institutions planning to create an open payment system. And some of them typically say that whatever you guys have implemented in India when you offer this whole instant payments, digital payment infrastructure in our geography. So these are opportunities that are coming our way. And there are a decent number of opportunities and pipelines that we see in banking [indiscernible] capital marketplace.

[Ravi Menon, analyst]

And SG&A travel costs have increased sharply. How close to normal some of -- do you think we are in business travel line? I think we are still about 30 bps below what we used to clock pre-COVID cash flow? So should we think of travel as a continued headwind? Or you think we'll stabilize at this level?

[N. Ganapathy Subramaniam, executive]

Yes. As normalcy continues to get through, we would expect travel costs to continue to increase. If you look at it more on the direct revenue side or the direct cost side, a lot of it is coming in. But on SG&A, as things open up more on sales related costs as well as team building exercises and also the team meetings happening, that cost is increasing. We will see it going back towards [indiscernible] the pre-pandemic levels.

[Operator]

Our next question is from the line of Abhishek Kumar from JM Financial.

[Unknown Analyst]

I have a question on budget. Rajesh, you mentioned U.S., there's a wait and watch mode and therefore, budget would take some time. Is there any possibility that because of that, there was probably a little bit of budget flush in 4Q, which could have supported the growth?

[Rajesh Gopinathan, executive]

Sorry, budget flush due to what?

[Unknown Analyst]

See, I mean there is possibly an indecision or wait and watch mode for CY '23 budget. So to a gross CY '22 budgets, was there, I mean, any possibility that there is a budget flush to exhaust the [indiscernible] budget?

[Rajesh Gopinathan, executive]

No. I don't -- no, I don't think so. It's more of -- no, the CY '23 will be slightly delayed in its initial couple of months till people -- but again, it's entirely [indiscernible] speculation. So we'll have to just wait and see how it peels out in the next few months.

[Unknown Analyst]

Okay. Another related question to this, is given this little bit of indecision in U.S., do you think the cost takeout projects in U.S. probably would be low compared to other geographies? At the same time, spending on discretionary would be cautious? And that would probably keep with the budgets a little low?

[Rajesh Gopinathan, executive]

Yes, fair assumption, even if you look at our U.S. TCV, that is down both sequentially and on a year-on-year basis. So that TCV still reflects that -- that decision making lag in this quarter.

[Operator]

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

[Gaurav Rateria, analyst]

Firstly, Rajesh, is it fair to believe that the ACV growth could be lower than TCV growth as a mix of the deals are changing? And should that be even considered as a lead indicator for growth going forward? Or you think the deal win trajectory could actually shift upwards over the coming quarters?

[Rajesh Gopinathan, executive]

Gaurav, I don't have a direct answer to that, but there is not much of change in terms of the mix of deal structures between large or small or long-dated or small dated so nothing that we can call out over the last 2, 3 quarters that we can say that we're seeing there is an elongation in decision-making, which we had spoken about last quarter also and which has also played out this quarter. So that the pipeline growth and the qualified pipeline growth is ahead of the actual TCV growth addressing. In fact, we have seen a sequential decline in TCV, while our qualified pipeline still continues to grow in absolute terms. So beyond that, the specific mix of deals is not materially changing.

[Gaurav Rateria, analyst]

Got it. Secondly, on the margins as headwinds on attrition subside would our immediate priority be to take margins back to our aspirational band of [ 26%, 28% ] or would we prefer to prioritize some investments, keeping margins stable after recovering, say, to 25%?

[N. Ganapathy Subramaniam, executive]

So Gaurav, our margins or our industry leading margins are on the back of the investments which we hit and most of our investments, whether it is in terms of talent, in terms of research and innovation, branding, all are factored in -- into the P&L. And our aspirations for the margins are taking into account all these investments.

[Operator]

Our next question is from the line of Ashwin Mehta from Ambit Capital.

[Ashwin Mehta, analyst]

Rajesh, one question. You've seen pretty strong growth in regional market and others over the last 2 quarters, it's of the order of almost 6% sequential. So what is the nature of demand here? And how sustainable is this going forward?

[Rajesh Gopinathan, executive]

The reason of calling the segment out is because it's volatile and difficult to predict. So the sustainability is difficult to answer. From an APAC perspective, it's come both from the market side, India has done very well. In fact, APAC ex Australia and -- also have done well. So markets have done well, as also the product side of the business that NGS spoke about on the assets and platform side also has done well. So it's come from both sides, both markets as well as from the product side.

[Ashwin Mehta, analyst]

Okay. Okay. Fair enough. And second question was that you mentioned in the press conference as well that manufacturing has been more resilient compared to your expectations. So any trends that we can take from manufacturing, given the fact that if you look at client financials, manufacturing growth over the next 2 years is expected to be actually better than what it was before?

[Rajesh Gopinathan, executive]

Yes. So -- well, that I didn't know that, but that correlates to what we are also seeing. But I'm still worried because all the global supply chain disruption, energy price disruption. Industries like process manufacturing are much more globally integrated. So they're not as sector-by-sector isolated as, let's say, retail. So we are still cautious. But our operating approach is always the same, take close to the customer, deal with the customer on a deal opportunity-to-opportunity basis. And we will continue to participate on that basis. But on a zoomed out way, talking to customers, there on -- it is an industry that has -- that's not completely out of the woods.

[Operator]

Our next question is from the line of Rahul Jain from Dolat Capital.

[Rahul Jain, analyst]

Basically, my question is related to TCV signing, which is $7.8 billion is slightly lower by our recent average win despite the fact that we have been favorable situation on the vendor consolidation exercise. So what explains this [indiscernible]? Is this because such deals are about to do more for the same or it reflects weak demand in Europe as articulated earlier?

[Rajesh Gopinathan, executive]

I think it's a combination of everything. It's a delayed decision-making. But the TCV will not be as linear as revenue, which is why we have given a band of saying $7 billion to $9 billion is what we think the TCV will remain on during the course of this year. And it has stayed well within that band for the last 3 quarters.

[Rahul Jain, analyst]

Right. And just a clarification on this retail deal that we announced separately, is it also reflecting the entire retail CPG or is this only retail specific?

[Rajesh Gopinathan, executive]

One second. Yes, it is.

[Operator]

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

[Rajesh Gopinathan, executive]

Thank you, operator. We are pleased with our performance in a seasonally weak December quarter, growing at 19.1% in INR terms and 13.5% in constant currency. Our order book was good, but softer than in prior quarters, reflecting the cautious stance that many of our clients have taken. Our operating margin expanded sequentially to 24.5%, and our net margin was at 18.6%.

On the people front, LTM attrition in IT services fell slightly to 21.3% and should continue to taper down in the quarters ahead. With that, we will wrap up our call. Thank you all for joining us on this call today. And I must say that you are a very mature and knowledgeable group for not having -- for having resisted asking us about the impact of [ strategy equity ] on our industry. Enjoy the rest of your evening or day and stay safe.

[Operator]

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