Tata Consultancy Services Ltd (TCS) Q2 2022 Earnings Call Transcript

Tata Consultancy Services Ltd (TCS) Q2 2022 earnings call dated Oct. 08, 2021

Corporate Participants:

Kedar Shirali — Investor Relations

Rajesh Gopinathan — Chief Executive Officer and Managing Director

N. Ganapathy Subramaniam — Non-Independent, Executive

Samir Seksaria — Chief Financial Officer

Milind Lakkad — Executive Vice President and Global Head, Human Resources

Analysts:

Yogesh Aggarwal — HSBC — Analyst

Sandip Agarwal — Edelweiss — Analyst

Gaurav Rateria — Morgan Stanley — Analyst

Apurva Prasad — Elara Capital — Analyst

Ruchi Burde — Bank of Baroda — Analyst

Sudheer Guntupalli — ICICI Securities — Analyst

Sandeep Shah — Equirus Capital — Analyst

Manik Taneja — JM Financial — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to the TCS Earnings Conference Call. As a reminder, all participant lines will be in the listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. [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 — Investor Relations

Thank you, Steven. Good evening, and welcome, everyone. Thank you for joining us today to discuss TCS’ financial results for the second quarter of fiscal year 2022 that ended September 30, 2021. This call is being webcast through our website and an archive including the transcript will be available on the site for the duration of this quarter. The financial statements, quarterly fact sheet and press releases are also available on our website.

Our leadership team is present on this call to discuss our results. We have with us today, Mr. Rajesh Gopinathan, Chief Executive Officer and Managing Director.

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Good evening, everyone.

Kedar Shirali — Investor Relations

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

N. Ganapathy Subramaniam — Non-Independent, Executive

Good evening, everyone.

Kedar Shirali — Investor Relations

Mr. Samir Seksaria, Chief Financial Officer.

Samir Seksaria — Chief Financial Officer

Hello, all.

Kedar Shirali — Investor Relations

And Mr. Milind Lakkad, Chief Human Resources Officer.

Milind Lakkad — Executive Vice President and Global Head, Human Resources

Hi, everyone.

Kedar Shirali — Investor Relations

Rajesh and Samir will give a brief overview of the company’s performance, followed by the Q&A session. As you’re aware, we don’t provide specific revenue or earnings guidance, and anything said on this call, which reflects our outlook for the future or which could be construed as a forward-looking statement, must be reviewed in conjunction with the risks that the company faces. We 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’ve subscribed to our mailing list.

With that, I’d like to turn the call over to Rajesh.

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Thank you, Kedar, and once again welcome everyone. Thank you for joining us on a Friday evening. We are very pleased with the all-round strong performance this quarter. On the revenue side, all our industry verticals grew in the mid-teens or more. Overall, we grew 15.5% in year-on-year on constant currency terms and 16.8% in reported dollar terms as well as on reported rupee terms.

Our operating margin for the quarter showed its inherent resilience, expanding to 25.6%, despite industry level inflationary headwinds. Net margins in Q2 came in at 20.5%. I’ll now ask Samir to go over all the headline numbers, financials, and segmental performance and I will join you again later to talk about the demand trends we are seeing and the emerging opportunities in growth and transformation. Over to you, Samir.

Samir Seksaria — Chief Financial Officer

Thank you, Rajesh. Let me first walk you all through the headline numbers. The second quarter of FY 2022, our revenues grew 15.5% Y-o-Y on a constant currency basis. Reported revenue in INR was INR468.67 billion, which is a growth of 16.8%. In USD terms, revenue was $6.33 billion; again, a Y-o-Y growth of 16.8%.

Let me now provide our segmental performance details for the quarter. All growth numbers are in Y-o-Y, year-on-year in constant currency terms. We saw strong double-digit growth in all our verticals. Growth was led by manufacturing verticals, which grew 21.7%, followed by Life Sciences and Healthcare at 19%, Retail and CPG at 18.4% and BFSI at 17%.

Speaking of BFSI, an important milestone worth highlighting here is our quarterly run rate from our major markets BFSI Services alone crossed $2 billion mark.

Including revenues from our products, platforms, and regional markets, we would be one of the largest providers of IT consulting services and solutions in the BFSI industry globally. We also saw good acceleration in communication and media, which grew 15.6% and in technology and services, which grew 14.8%.

In geography terms, we had good growth across all our markets. Growth was led by North America at 17.4%. U.K. grew 15.6% and Continental Europe grew 13.5%. Among regional markets, growth was led by India at 20.1%, followed by Latin America 15.2%, Middle East and Africa at 13.8% and Asia-Pacific at 7.6%.

Our portfolio of products and platforms performed well in Q2. ignio, our cognitive automation software signed up 22 new customers and eight go-lives. Digitate has continued to build out a strong ecosystem in terms of technology partners as well as channel partners. It’s adaptive factory now provides 50 out-of-the-box integrations between ignio and third party commercial products and platforms. Digitate Academy has trained 9,761 professionals till-date and certified 3,106 professionals on ignio. ignio success stories continue to come in. Here is one example. One of the largest Midwestern consumer banks of U.S. went live this quarter with ignio AI ops and has experienced reduce MTTR, meantime to restore, by 90%, which significantly improves their operational resilience and reduces downtime of critical applications and avoiding the critical business SLMS.

TCS banks, our flagship product suite for financial services domain has five new wins and three go-lives. One of India’s leading private insurance players has successfully rolled out TCS BaNCS for insurance across India for servicing, renewal and claims processing of its health insurance policies. 1.9 million policies, spanning more than 30 products in health and personal accident were migrated in this program.

Our Quartz Blockchain platform has two new wins and one go-live in Q2. We also won our first consumer — first customer in pharma industry. A large custodian in U.K. has get selected Quartz for handling announcements for its centralized corporate actions event capture utility that services multiple business lines, including global custody, local custody and fund accounting.

TCS Corporate-Action-as-a-Service solution will provide security, compliance and higher availability that financial services companies require, combined with the flexibility and agility of the cloud. TCS HOBS suite of products for communication service providers has four new wins and six go-lives in Q2. The HOBS product cloud was also leveraged by one of the largest telecom service providers in India to launch our first of its kind converged solution to deliver mass personalization by bundling to our most services.

To enhance our AI-based digital twin solution has had four wins and six go-lives. TCS iON continues to be the largest assessment provider in the country and we have now expanded our work in education transformation through our engagements in States of Odisha, Kerala, and Telangana.

Lastly, TCS MasterCrafts, our suite of intelligent automation products for enterprise application development, modernization and delivery, has 22 new wins in Q2, while our Enterprise Agile Planning and Delivery platform saw three new wins.

Moving on to client metrics. We tracked these closely because they are proof points that our customer-centric strategy of continually expanding and deepening our engagement is working. In Q2 we had robust additions in every revenue bucket compared to a year-ago period. We added five more clients in $100 million plus band, bringing the total to 54. We added 17 more clients in $50 million plus band, bringing the total to 114; 19 clients in $20 million plus band, bringing the total to 247; 31 clients in $10 million plus band, taking the total to 417; 44 clients in $5 million plus band, with a total of 609; and lastly, 62 more clients in $1 million plus band, taking the total to 1,138.

Let me now go over the financials. Supply side shortages and increased employee churn have led to higher backfilling expenses and greater use of subcontractors across the industry. Additionally, currency was not favorable this quarter. While the U.S. dollar appreciated, all other currencies depreciated against the rupee, creating a margin headwind. Despite these headwinds, through disciplined execution, we were able to expand our operating margin by 10 basis points to 25.6.

Net income margin was at 20.5% and our EPS grew 15.8% year-over-year. ETR, our effective tax rate, for the quarter was 25.6%. Our accounts receivable was at 67 days sales outstanding in dollar terms, up two days compared to Q1.

Net cash from operations was at INR99.45 billion, which is a cash conversion of 103% of net income. Free cash flow was INR92.29 billion. Invested funds for September 30 stood at INR605.48 billion. The Board has recommended an interim dividend of INR7 per share.

On the people front, we had net additions of 19,690 in Q2, bringing the total headcount to 5,28,748. It continues to be a very diverse workforce with 157 nationalities represented with women making up 36.2% of the range. We continue to invest in the employees to help them gain the thrill and capabilities needed to realize their potential.

Our digital earning platforms or TCS’ logged over 14.3 million learnings hours in Q2, over 417,000 employees who are now trained on multiple new technologies, and we now have 26,000 plus contextual masters in the company.

LTM attrition and IT services was at 11.9%. While this is still the lowest in the industry, it is a big increase from the unusually low attrition we had over the last year due to pandemic and reflects the industry wide churn.

We had the foresight to continue hiring in large numbers throughout the second half of the last year and the first half of this year. In this fiscal, we have already onboarded 43,000 fresh engineers, all trained on latest technologies while also ramping up our organic talent development initiatives and our employee engagement outreach. This helps us create a solid pipeline of talent containing attrition. This has helped us overcome the supply side challenges seen across the industry and continuing to meet all our delivery commitments.

Over 95% of our associates have received at least one dose of the vaccine and over 70% have been fully vaccinated. We plan to bring back our workforce to the workplace gradually by the end of the year.

Over to Rajesh now for demand guidance and trends.

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Thank you, Samir. When you look at growth over the last — if we look at our growth over the last few quarters, it has been driven by three broad trends; increased outsourcing, investment in building a digital core, and growth and transformation agendas of our clients. Our strong growth in Q2 was once again driven by all three drivers. Let me now talk a little about each of these.

Operations optimization has been a ongoing theme with many of our customers. And I’ve mentioned earlier, customers are looking to free up resources, both human and financial to support their transformation programs. This is resulting in higher levels of outsourcing activity in IT operations as well as in business operations. And it’s gaining further urgency because of the scarcity of talent and the speed at which the demand is being driven. We continue to dominate the space by taking a differentiated approach that leverages our innovative machine-first delivery model or MFDM. So by embedding intelligent automation deep within the enterprise, we are able to help customers unlock tremendous value that traditional models based on labor arbitrage alone find very difficult to match.

The heart of our machine-first approach is TCS Cognix, an AI-driven human machine collaboration suite that consists of a last library of pre-build solutions, addressing the entire breadth of IT and business operations across multiple industries. Using this, we are able to very quickly transform across multiple industries. Using this, we are able to very quickly transform operations, embedding AI and Machine Learning and Machine Vision and Conversational Systems across the enterprise and take the customer to an end-state operating model that is leaner, more agile and reduces turnaround time for key processes to deliver superior customer experience.

In the last 12 months, since we launched CogniX, we have won multiple engagements using this suite. In Q2, we had six large deals that used CogniX to transform the customer’s operating model. In addition to this, we continue to gain market share, benefiting from a flight to quality that we’ve seen over the last 18 months as well as in structured vendor consolidation exercises.

Coming to the cloud transformation and cloud adoption, possibilities for business transformation that the hyperscaler stack opens up, continue to be very big drivers of growth. These multiyear horizon cloud transformation journeys typically begin with cloud migration, including application modernization and data estate modernization.

Once again this quarter, we have had a large number of deals wins around such Horizon 1 initiatives, some of which we have listed in our press release. As part of the modernization, we also saw instances of customers shifting their ERP and other enterprise applications from on-premise models to SaaS and hosted versions. Areas of focus include e-commerce and customer experience, supply chain and human capital and leveraging SAP S/4 HANA or Salesforce Cloud or I’d say Cloud Suite along with other leading SaaS applications.

As an example, a U.S.-based medical technology multinational, where we’re implementing an SAP S/4 HANA solution to help them realize their vision of consolidating onto a one global ERP platform to harmonize their business processes and support new business model opportunities. Some of them are also progressing to Horizon 2, using native capabilities of the cloud to transform their core activities, driving superior business outcomes and also paving the way for innovative business models. For example, for a large reinsurer in Europe, they have engaged us to design and develop their next generation credit and surety insurance underwriting platform under cloud. The new platform will leverage cloud native capabilities to help our client transform their underwriting process using larger and richer datasets, deep analytics and automation to significantly enhance the underwriting quality, speed and throughput. This will enable them to take on more business and offer a broader range of products and provide a superior customer experience. But more importantly, the platform is also being architected, so that it can be monetized in the future by opening it up to other smaller insurers or reinsurers and giving them access to new, attractive risk pools through the larger ecosystem of banks and other lenders anchored by our client. This is the kind of Horizon 3 opportunities that we’re most excited about, where individual anchored clients will start reenergizing ecosystems to come together around these cloud-based solutions to seamlessly reach multiple customers.

Coming to the second broad theme of industry transformation, we have been highlighting how TCS has been playing an impactful role in helping individual enterprises realize their growth aspirations through technology-enabled business transformation and business model innovations. The impact is many folds higher when the customer happens to be an ecosystem owner or a market infrastructure whose transformation can reshape an entire market altogether. Let me share a couple of examples.

In Australia, the Australian Energy Market Operator or AEMO is an independent organization that manages all electricity and gas systems in markets across Australia. It’s responsible for the settlement of national electricity markets, which connects the grids of eastern and southern Australian states to create the wholesale energy market. Until now, AEMO had only been able to settle the market in a 30 minute blocks, limited by its ability to segment the data. This time, block was thought to favor incumbent technologies and handicapped innovation.

To address these inequities, the five minute settlement rule that was introduced in what would might be the biggest ever market reform in the Australian energy market till date and possibly one of the leading reforms globally in this market. The five minute settlement role will shift the current 30 minute wholesale electricity spot market settlement period to five minutes or less, providing a better price signal for investment in faster response technologies such as batteries and gas peaking generators.

It’ll also enable more efficient bidding, operational decisions and investments aligned to disburse and financial settlement period. TCS was chosen as the technology partner for this change on the basis of the solution we propose, and the cloud-based settlement platform we designed and developed successfully went live on October 1.

Similarly, in the financial services industry, as you know we have the largest independent software provider to the market infrastructure institutions with our proven suite of TCS banks for our market infrastructure and custody solutions powering operations of over 50 market critical institutions across 66 countries. With its unique ability to support multiple markets, currencies and asset classes on the same platform and its support for a wide range of messaging standards that enable real time interfaces with market participants and external ecosystems, it has been a key catalyst in driving transformation in many markets worldwide. But coming closer home to India, some of you would have followed our recent announcement of the work that we’re doing with Multi Commodity Exchange of India, which has selected TCS as its technology partner for growth and transformation.

As part of Project Udaan, TCS will help and see build a new technology core, transforming its trading as well as co-state function to support its future growth and further strengthen its leadership position in the commodity derivatives market in India.

The interesting aspect of this is how we partnered with another customer of ours Deutsche Borse, where we are using solution components from them, tightly integrated with settlement components from banks to create a world-class solution for MCX in India. This kind of ecosystem based opportunity, where multiple technology solutions come together from different place in the industry will be the part of the future, and we see our role as a system integrator with significant domain capabilities and a strong suite of our own products and platforms being the unique glue that will hold the ecosystem together.

Another example is our newly launched Quartz for markets, which helps market infrastructure institutions such as exchanges, depositories and central banks, payment infrastructures, etc., evolved with the times and launched next generation services around tokenized securities to drive the future growth. For market infrastructure, institutions have already signed up for this, including three in India, and deployment is currently underway.

Another area that we have spoken about in the past and we’re very excited about is this field of engineering services. Product innovation is central to our customer’s growth and transmission strategies. Building newer products or newer features or capabilities in existing products that allow them to sell more to existing market segments or address new segments altogether. We have spoken multiple times about privatization as the common theme, but we have also seen that we’ve traditionally been strong players in this space, helping product companies to extend their innovation velocity and capability by using our engineering design, R&D and industrialization services.

The emergence of digital technologies, particularly IoT, big data analytics and cloud, has significantly expanded the addressable market for us as more and more product manufacturers make the products intelligent with sensors and embrace an as-a-service model, building service layers around the product to enable lifelong engagement with the customer and to drive new revenue streams.

Our engineering services practice has seen steady growth over the last five years, straddling the product innovation opportunity end-to-end, helping customers develop an idea into a prototype and a product, and then take the concept product all the way to production with connected technologies like IoT. TCS also helps track product usage performance at the customer end, closing the loop as it were.

Very importantly, we are a major player in the ongoing case ecosystem that is creating great connected, autonomous, shared electric transformation of the automotive sector, working with almost all the major auto OEMs, startups and Tier 1 suppliers in their product innovation life cycling.

TCS teams are working with leading Tier 1s and OEMs in building these new age solutions such as autonomous AI-based algorithms, electric vehicle battery management software, some of which we’ve spoken about last time, and cloud-based connected car applications.

One particular engagement, which I think best exemplifies the breadth and depth of TCS automotive design capability, is something that we’re doing with the European headquartered global auto OEM. TCS has been the strategic partner for developing a new range of car models catering to the emerging markets. These markets, as you can appreciate, are characterized by price sensitive consumers, so the product design and engineering has to adapt accordingly. We are doing the complete strategy of product design and engineering, homologation and helping build a high level of localization of the parts of each market, all designed to very stringent cost targets. Another example of how TCS is going beyond its traditional remit, where we are actually working with the customer to build out that supply ecosystem and working with their suppliers to actually go into an iterative design mode to get to the price targets that the end customer — end product that this customer seeks to launch in a market two to three years ahead. So that kind of ability to see that and to link that back into a tight value engineering loop and to leverage technology and the ability to engage with the domain knowledge with the entire ecosystem is something that we believe is quite unique to TCS in the spread of services that we have systematically been investing and building out on.

The customer appreciates our ability to bring together these end-to-end capabilities that are needed to help it and this product design and innovation expertise, value engineering etc. The work that started for Asian market has now been expanded to cover Latin American markets also, and that’s been deeply appreciated by the customer, who has awarded us their Best Supplier Award among other areas of appreciation that they have given to us.

Moving on to another space, which is gaining a lot of traction in recent times is the emergence of the B2B commerce opportunity and also the direct-to-consumer e-commerce opportunity. Coming to the direct-to-consumer, CPG companies in particular has been investing in this direct-to-consumer initiatives to gain direct access to end consumers and to deepen inside driven consumer engagement without encumbering the intermediary channels.

We are enabling rapid shift to online e-commerce as the preferred channel from brick-and-mortar stores or aggregator retailers, helping our clients establish direct customer connect, gain better margins and enhance scale of business and volumes.

Our leading Swiss-based pharmaceutical companies specializing in dermatological treatments and skincare products has selected TCS to implement a human centric hyper and experience driven B2C customer journey to enable healthcare professionals with next generation e-commerce capabilities. The project includes an initial implementation for three countries, followed by a global rollout for 30-plus countries over three years and support leveraging a leading e-commerce cloud platform. Another example is a leading global dental and medical products distributor who has partnered with TCS to accelerate transmission of the digital channels.

Dealing with competition from online wages our client wanted to move to a more touch-less sales and service paradigm. The program covers B2B e-commerce transformation across Europe, U.K., Americas, covering customer facing interactions and channels.

Countertrend to this is that channel intermediaries are investing in technology to make themselves more relevant to the customers; and in certain cases, even seeking the eclipsed OEMs. We are participating in that opportunity as well. For example, for a global distributer of electrical and electronic components, TCS has helped to build the cloud-based industrial IoT platform that connects and collects data from high value industrial assets and provides comprehensive analytical dashboards and insights for driving improvements and predictive maintenance, reliability management and operational efficiency. Using this, our client has been able to offer a range of new services and deliver a range of benefits to their end customers, beyond just being the preferred supplier of multiple individual vendor items that they were originally positioned there. Their predictive maintenance capacity has resulted in availabilities reaching 99% and access a new SKU, which is there on SKU being delivered into their end customer systems.

Partnering with TCS helped our client accelerate the transformation from being a component distributor to industrial digital solutions provider. The new platform created new revenue streams with components privatization, boosted profitability and reinforce its position as an innovation pioneer in industrial component ecosystems.

So the broad scheme here is, as we have been talking in the past on growth and transformation as the common agenda. Coming back to some of the things that we’ve spoken about in the past, M&A divestitures is, continues to be a great area of growth for us and we are once again participating in several new deal wins in Q2. There is an example of that is the sale of Cordis, the world’s leading cardiovascular and endovascular medical devices company was spun-off from Cardinal Health to Hellman & Friedman in August. TCS was engaged, enabled Cordis to function as an independent company. TCS will lead the development of their end stage technology strategy. This includes portfolio rationalization, day-one readiness planning as well as business case support and cost model options. TCS will also create post-day-one operational support organization to provide an optimized opex model.

Similarly, we have been selected by a leading consumer goods company in Europe to enable the divestiture of its domestic appliances business and drive their business transformation into a state-of-the-art digital-first CPG company. TCS will design, build and implement brand new greenfield processes and applications, and set up the new entity as an agile B2C company, leveraging one of the most respected brands in this industry and manage its technology landscape.

We have spoken about how we have invested early in a dedicated M&A strategy offering that brings together multiple service offerings, acceleration framework and sophisticated sales management capabilities. Leveraging this and our contextual knowledge of our customers, complex IT landscapes, we’re able to provide practical and pragmatic M&A solutions to our clients from strategy through execution.

Over the last three years, we have now built a solid reputation in this domain, especially as who can be relied upon to enable smooth day-one operations, helping us win more and more with such deals.

Coming to the area of sustainability that we spoke about at length last time, I want to showcase a few recent engagements. The Port Authority in the Middle East and Africa region has selected TCS for implementation of TCS Clever Energy for its terminals to build a monitoring and visualization system by integrating various utility meters and their building management systems into a single platform.

Similarly, a Middle Eastern Warehousing Corporation has engaged TCS to help analyze and report their carbon footprint across the value chain to effectively manage their overall carbon emission. A leading European bank has partnered with TCS to incorporate climate risk factors and credit risk scoring across climate risk scenarios to quantify the bank’s exposure to climate risk. Finally, TCS was engaged by a leading U.K.-based bank in the Strategic Climate Risk Assessment Program. TCS will provide services for data sourcing, climate methodology analysis and dashboard reporting and compliance with the regulation.

So coming now to the Q2 order book, is some of the representative trends that we have been — that have been driving our strong growth in revenue as well as and our order book. On the back of very strong order book in Q1, we once again held strong set of deal wins in Q2 across all industry verticals and geographies.

Our TCV in Q2 was $7.6 billion. Once again, it’s a very heterogeneous mix of large, mid-sized and small deals. And you compare this against the last year’s number and removing the one very large megadeal that’s we put in Q2 of last year, it represents a 25% expansion on like-to-like TCV. By vertical, BFSI had a TCV of $2.1 billion, while retail once again had a very strong order book of $1.2 billion. The TCV deal signed in North America stood at $3.9 billion.

Lastly, while the strength of demand environment is no longer in doubt and we are very confident of its sustainability over the next — in the medium term, we also believe that the growth tailwind offers us an opportunity to position ourselves as the preferred growth and transformation partner of our customers. While pursuing opportunities at hand, we will continue to invest in organic talent development to build the workforce of the future in research and innovation, intellectual property and in building out a comprehensive set of offerings that cater to the needs of every key stakeholder in the enterprise across every point in the business cycle. We believe this is very important to build a sustainable business that will continue to create value for all of stakeholders in the long-term.

With that, thank you for listening in and we’ll open the line for questions.

Kedar Shirali — Investor Relations

Operator, you can now open the line for questions.

Questions and Answers:

Operator

Thank you very much. [Operator Instructions] The first question is from the line of Yogesh Aggarwal from HSBC. Please go ahead.

Yogesh Aggarwal — HSBC — Analyst

Yes. Hi. I just have a couple of questions, if I may. Rajesh, just trying to reconcile the TCV of $7.6 billion with overall demand environment. And I think you mentioned 25% growth ex of one large deal. But one of the trends we have seen at the sector level in the recent months is limited mega deals but higher velocity of smaller deals. So in your mix of, your $7.6 billion, how is the mix looking like if the duration comes down and if the ACV or the annual contract value is better than TCVs 25% growth?

And secondly, in the past we have seen deflation in legacy business, which you have talked about as whenever there is a renewal. Are you seeing — or more importantly, are you expecting this rate of deflation in legacy to come down with all the supply trends and overall strong demand? Thanks.

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Yogesh, I wouldn’t call out any significant change to the overall TCV or the pipeline. Mega deals, by definition, their frequency is different. And when you look at the pipeline or the TCV without the mega deals, they are pretty much similar. It’s a good mix of both low duration as well as medium to large duration deal. So there is no significant movement to either expanded durations or reduced durations. What was the second question?

Kedar Shirali — Investor Relations

Deflation in legacy.

Rajesh Gopinathan — Chief Executive Officer and Managing Director

I think this is a topic that we have discussed multiple times in the past, individually also. The trend that we’re seeing is in line with the overall technology agenda, that is deals that come up for renewal five years later will benefit from all the technological progress that have happened in that period. So when you compare it against the deal value of last period versus this period, there might seem optically to be a reduction. But remember that it also reflects the kind of efficiency gains that have been achieved in the space. If you take something as traditional as, let’s say, infrastructure support.

Nowadays, deals come packaged a lot with cloud-based businesses, or even in the past, the same infrastructure at stake would be significantly more compressed on a like-to-like basis when you think of a five-year duration. The point is not that. The point is that, is the technology spending at a client level? And the technological intensity of the overall value chain reducing or increasing? And as long as it is increasing, the total value is what we’re actually trying to address. And this is in line with other trends that have happened in this industry, cost of compute goes down, total compute consumption increases; cost of network goes down, total network consumption increases. Not just the volume of network consumption increases, the total value spent on network consumption increases. So this is not very different. And I don’t see any change to this scenario. Unit cost will go down, total consumption will increase. If you invest to stay ahead of the curve, to be the most efficient producer, you will participate in this cycle or the cycle will kill you.

Yogesh Aggarwal — HSBC — Analyst

Got it. Got it. No, that’s what I was trying to understand, if the recent supply occurrence has changed? But you are saying it’s the same trend as the past.

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Yes, Yogesh, nothing on that.

Yogesh Aggarwal — HSBC — Analyst

Yes. Thank you.

Operator

Thank you. The next question is from the line of Sandip Agarwal from Edelweiss. Please go ahead.

Sandip Agarwal — Edelweiss — Analyst

Yes. Hi. Thanks for taking my question. Just, I have one question on the margin and one question on the growth. So the way the deal momentum is building up and you made a statement, I think one of best time in a decade. So what is your sense, where are we seeing the growth trajectory to be moving? In particular, will there be any impact of seasonality which generally happens? Because you know, the kind of demand we are seeing and the supply constraint plans sort of seem they might have pushed some of the deals to the next quarter. So do you think that there was some kind of challenge in execution also because of the high attrition and manpower issue? That is number one.

And number two will be on the margin front. Will it be fair to call the peak of the pain in terms of financial intervention to retain employees is behind us and we can see substantial improvement going forward on the margin front?

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Sandip, the demand environment is very strong and it’s likely to continue to be strong in the medium term. However, the seasonality of demand and seasonality of operations, it will be overlay on top of it. Now how much will that impact be? That we’ll get to know only closer to the end of the year. But I don’t think the seasonality will go away, but the underlying demand trend will provide a significant positive support to it.

And the important thing is that when we spoke about this, the nature of this demand environment, the period of time for which we think that this demand environment is likely to remain strong is quite high. And that is where this has changed in terms of the visibility of the demand environment which you called out in the past also.

So we are investing into that kind of a spectrum, which is very significant focus over the last many quarters, also on very high off campus hiring because we want to make sure that we have the right talent, while we continue to invest into our existing talent and enhance that with fresh campus hiring. And we are doing that at one of the unprecedented scale, which is working on the sustainability of the demand environment.

Short-term volatility to cost basis coming from the attrition levels should be expected to play out. But these are not structural elements, but more transitional elements as industry supply chain settles down and is triggered by the fact that many players in the industry did not invest early on into creating that supply chain. But that is vastly over the next few quarters and our agenda is slightly longer and we continue to invest into that demand visibility.

Sandip Agarwal — Edelweiss — Analyst

Thank you. That’s all from my side.

Operator

Thank you. The next question is from the line of Gaurav Rateria from Morgan Stanley. Please go ahead.

Gaurav Rateria — Morgan Stanley — Analyst

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

Rajesh Gopinathan — Chief Executive Officer and Managing Director

So we still, like I said earlier, we have planned for growth two quarters ahead this time. And that’s why we brought in 43,000 campus hires in the first half of the year and then we’ll continue to hire from the market. It’s very high volumes in the last two quarters also. So the impact of supply basically on the growth is definitely not there till now, but it’ll continue to basically get in more and more and plan better and better, invest more and more, so that we don’t cause lack of growth because of supply.

Gaurav Rateria — Morgan Stanley — Analyst

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

Rajesh Gopinathan — Chief Executive Officer and Managing Director

I think the operating leverage is visible in the expansions in margin that you’ve seen. The extent of it might not be as much given our increased dependence on subcontractors partially caused by the still restrictions on travel and mobility of talent. So as some of those restrictions ease, we should be able to rationalize the employee pool further. But it is not — again, it’s not structurally any different than what we have seen in the past.

Coming to the investment side, our investment agenda will continue at pace. We have always spoken about the fact that it is our investment agenda that gives us the industry leading margins. And it is our intent to continue with that and across even a wider cross-section of spaces that we are interested in. And you see that playing out in all aspects of our business, whether it be production platforms or new services or new markets that we are investing into.

Gaurav Rateria — Morgan Stanley — Analyst

Got it. Thank you.

Operator

Thank you. The next question is from the line of Apurva Prasad from Elara Capital. Please go ahead.

Apurva Prasad — Elara Capital — Analyst

Yes. Thanks for taking my question. And Rajesh, good to hear your confidence in sustainability of demand. So a couple of ones. So I understand that mega deals have got long cycles. Do you think there’s any change in the frequency of mega deals? And more so, can you highlight, from a pipeline perspective, composition, does it look similar to recent wins or do you think that can change?

And I’m getting to this with the assumption that there are more G&T deals in the mix and more deals with ecosystem partners. So, is that increasing the complexity and reducing the frequency of mega deals?

Rajesh Gopinathan — Chief Executive Officer and Managing Director

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

Apurva Prasad — Elara Capital — Analyst

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

Rajesh Gopinathan — Chief Executive Officer and Managing Director

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

Apurva Prasad — Elara Capital — Analyst

Got that. And just finally, if I may, so Europe appears to be slowing on sequential basis versus prior quarter’s trend. So any color or any vertical flavor from a continental Europe that will be helpful. Thank you.

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Europe has had a soft quarter per se, but we don’t think it’s structurally a very different one, but it has been across multiple verticals and multiple themes driving it. In some areas, very large project that we had, a very large program that has come to an end and that has some impact. We are also seeing a much more enhanced offshoring out of Europe as they tackle the whole talent scarcity by significantly increasing leverage closer to global standards. And that does, that provides volume, but has a deflationary impact on the reported revenue, but there is a slowdown across some industry sectors, but which we are keeping a close watch on.

When you look at the deals per se, new customer addition and new deal signings in Europe are actually higher. And that gives us the confidence that this is a transitionary phase and we should see, you know, in continuing momentum there when we look one or two quarters forward.

Apurva Prasad — Elara Capital — Analyst

Thank you. All the best.

Operator

Thank you. The next question is from the line of Ruchi Burde from Bank of Baroda. Please go ahead.

Ruchi Burde — Bank of Baroda — Analyst

Hi. Thank you for the opportunity. I have two questions. First, for Milind. With energized hiring engine and talent pipeline, do you expect the intensity of supply pressure to ease possibly, maybe four quarters down the line?

Milind Lakkad — Executive Vice President and Global Head, Human Resources

We are basically overestimating about two to three quarters. This will continue and then it will increase. So from Q2 onwards is what we say it will start easing, is our estimate based on what we are seeing. But we will continue to watch this long-term goal.

Ruchi Burde — Bank of Baroda — Analyst

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

Rajesh Gopinathan — Chief Executive Officer and Managing Director

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

Ruchi Burde — Bank of Baroda — Analyst

Got it. Thank you. All the best.

Operator

Thank you. The next question is from the line of Sudheer Guntupalli from ICICI Securities. Please go ahead.

Sudheer Guntupalli — ICICI Securities — Analyst

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

Rajesh Gopinathan — Chief Executive Officer and Managing Director

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

Sudheer Guntupalli — ICICI Securities — Analyst

And second question is to Milind. Given the balancing job markets, we are actually seeing companies hiring at exorbitant salary hikes. Of course, TCS still seems to be disciplined on that front. But when you look at the industry front, the highest salaries kind of distort the internal employee parity and they remain structurally elevated for several years to come. However, demand can be more cyclical. So how do you read the situation and what are your thoughts on the subsequent impact of this on the long-term margins aspects of the industry?

Milind Lakkad — Executive Vice President and Global Head, Human Resources

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

Sudheer Guntupalli — ICICI Securities — Analyst

Perfect. Thanks and all the best.

Operator

Thank you. The next question is from the line Sandeep Shah from Equirus Capital. Please go ahead.

Sandeep Shah — Equirus Capital — Analyst

Yes. Thanks for the opportunity.

Operator

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

Sandeep Shah — Equirus Capital — Analyst

Yes. Can you hear me now?

Operator

Yes, sir.

Sandeep Shah — Equirus Capital — Analyst

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

Rajesh Gopinathan — Chief Executive Officer and Managing Director

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

So that’s — I think the second question, I didn’t understand.

Sandeep Shah — Equirus Capital — Analyst

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

Rajesh Gopinathan — Chief Executive Officer and Managing Director

The Horizon 1, as it plays out — we have spoken about this in the past if you think as architectural shift that we are seeing, and that is the major point. In the past, we have seen that happen when we went from client server to web technologies and later on as we went from web to mobile technologies. These are architectural shifts that have significant benefit So Horizon 1 is the enabler towards that architectural shift. And once that migration is there, it unlocks a lot more possibilities and triggers new investment.

So while the Horizon 1 base case volume might go down, but it’ll unlock significantly higher volumes on the Horizon 2, Horizon 3 spectrum. And that’s the promise and the hope that this industry is always built on. And the consolidation of demand, I would have said it in certain contexts, but and/or in terms of a sequential trend per se. I think what I’ve said is that we’re consolidating the growth and looking forward into the future, but I don’t exactly remember what the context was.

Sandeep Shah — Equirus Capital — Analyst

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

Samir Seksaria — Chief Financial Officer

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

Sandeep Shah — Equirus Capital — Analyst

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

Rajesh Gopinathan — Chief Executive Officer and Managing Director

We are seeing a full spectrum of response there. I mean, a lot of the consolidation-led engagement are predicated on a win-win, which includes overall efficiency gains for the client while we use technology levers to transform the operating estate that we spoke about in the early part of my commentary today.

Newer areas are coming in pricing premium, areas like what we spoke about design thinking, developing new platforms, investing in Horizon 2, Horizon 3 kind of engagements. These are all coming at a premium. So there is both efficiency-led business and innovation and transmission-led business, which comes in different price points. Net-net, it’s a balancing kind of an environment. There is no significant move in either directions, but it stays — at a portfolio level, it’s stays fairly stable.

Sandeep Shah — Equirus Capital — Analyst

Okay. Thanks. Helpful, and all the best.

Operator

Thank you. The next question is from the line of Manik Taneja from JM Financial. Please go ahead.

Manik Taneja — JM Financial — Analyst

Hi. Thank you for the opportunity. Rajesh, just wanted to break your thoughts around the fact that if you’re seeing any new engagement models emerge beyond the typical onsite offshore model as the clients as well as the industry at large tries to address the talent deficit as well as the significant need to accelerate or fulfil demand?

Rajesh Gopinathan — Chief Executive Officer and Managing Director

I think the one that we’re most excited about is the leverage of automation in a deeply embedded manner, which we call the machine-first development model, MFDM. But this is a space that we think still has quite a lot of upside left in it. And we are systematically investing in how to embed it deeper into our service provision.

So that’s the biggest delivery model change. Otherwise, agile significantly changes the efficiency of consumption, is of course another transformative model. And the third model that has a lot of resonance is what we call a product-centric operating model, which combines agile at its core and integrates technology lot more closely with business transformation. So all of these are trends that are gaining momentum systematically.

Manik Taneja — JM Financial — Analyst

Thank you and all the best for the future.

Operator

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

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Thank you. We are a strong — to repeat, we have a strong broad-based growth across all our industry verticals and really strong tailwinds yet again in Q2. Our client additions were very strong across all revenue buckets this quarter, an important measure of the depth of our consumer relationships. Our margins continue to be industry-leading and have shown immense resilience despite supply side challenges this quarter and currency headwinds.

On the people front, we’re investing ahead of time in hiring the right talent across the world and onboarding a record number of fresh engineers. We have been able to overcome supply side challenges and stay on-track with all our execution timelines. Our attrition went up this quarter, but continues to be lowest in the industry. We are still watching this closely for the next few quarters.

We have vaccinated 70% of our employees fully and over 95% have received at least one dose. This sets us up well to start bringing them back to the workplace towards the end of the year.

Thank you all for joining us on this call today. Enjoy the rest of your evening and do stay safe. Thank you.

Operator

[Operator Closing Remarks]