Tata Consultancy Services Ltd. (TCS) Q2 2021 Earnings Call Transcript

Tata Consultancy Services Ltd.  (NSE : TCS) Q2 2021 earnings call dated Oct. 07, 2020

Corporate Participants:

Kedar Shirali — Head of Global IR

Rajesh Gopinathan — Chief Executive Officer and Managing Director

N Ganapathy Subramaniam — Chief Operating Officer & Executive Director

V Ramakrishnan — Chief Financial Officer

Milind Lakkad — Global Head, Human Resources

Analysts:

Shashi Bhushan — Axis Capital — Analyst

Sandip Agarwal — Edelweiss — Analyst

Sudheer Guntupalli — ICICI Securities — Analyst

Diviya Nagarajan — UBS Securities — Analyst

Pankaj Kapoor — CLSA — Analyst

Ankur Rudra — JPMorgan Chase & Co. — Analyst

Rishit Parikh — Nomura — Analyst

Vibhor Singhal — Phillip Capital — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to the TCS Earnings Conference Call. [Operator Instructions]

I now hand the conference over to Mr. Kedar Shirali. Thank you, and over to you, sir.

Kedar Shirali — Head of Global IR

Thank you, Margaret.

Good evening and welcome, everyone. Thank you for joining us today to discuss TCS’ financial results for the second quarter of fiscal year 2021 that ended September 30, 2020.

This call is being webcast through our website and an archive, including the transcript, will be available on the site for the duration of this quarter. The financial statements, quarterly fact sheet and press releases are also available on our website. Our leadership team is present on this call to discuss our results. We have with us today Mr. Rajesh Gopinathan, Chief Executive Officer and Managing Director.

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Good evening and good day to all of you.

Kedar Shirali — Head of Global IR

Mr. NG Subramaniam, Chief Operating Officer.

N Ganapathy Subramaniam — Chief Operating Officer & Executive Director

Hello, everyone.

Kedar Shirali — Head of Global IR

Mr. V Ramakrishnan, Chief Financial Officer.

V Ramakrishnan — Chief Financial Officer

Yeah. Hello, everyone.

Kedar Shirali — Head of Global IR

And Mr. Milind Lakkad, Chief HR Officer.

Milind Lakkad — Global Head, Human Resources

Yeah. Hi, everyone.

Kedar Shirali — Head of Global IR

Rajesh and Ramki will give a brief overview of the Company’s performance, followed by a Q&A session.

As you are aware, we don’t provide specific revenue or earnings guidance, and anything said on this call, which reflects our outlook for the future or which could be construed as a forward-looking statement must be reviewed in conjunction with the risks that the Company faces. We have outlined these risks in the second slide of the quarterly fact sheet available on our website and emailed 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, good evening and welcome to this call. Thank you for joining us.

I’m pleased to share with you our Q2 performance, which has seen a very sharp recovery in our revenue growth and margins and another very strong order book. Of course, after last quarter’s deep fall, our revenues mostly continued to be below prior year level in constant currency and US dollar terms. So we will use sequential or quarter-on-quarter growth figures in this call to give you a better idea of the immediate trends.

Our revenue grew 4.8% Q-on-Q in constant currency terms and 7.2% in reported dollar terms. In rupee terms, the revenue growth was 4.7% on a sequential quarter-on-quarter basis. Excluding an exceptional item towards a legal claim, our operating margin for the quarter was 26.2%, a sequential expansion of 259 basis points, and our net margin came in at 21%.

I’ll now have Ramki go over all the headline numbers and the financial and segmental performance, and later I shall and step back in to talk about demand trends that we see.

Over to you, Ramki.

V Ramakrishnan — Chief Financial Officer

Thank you, Rajesh.

Let me go through the headline numbers.

In the second quarter FY ’21, our revenue grew 4.8% sequentially, as Rajesh mentioned on a constant currency basis. Reported revenue in INR was INR401.35 billion, a quarter-on-quarter growth of 4.7%. And in USD [Phonetic], revenue was $5.424 billion, which is a Q-on-Q growth of 7.2%.

Coming into the segmental details for the quarter. As Rajesh mentioned, I’ll be sharing the quarter-on-quarter growth numbers in constant currency terms. We saw strong growth in our two largest business verticals, BFSI and Retail, in Q2. BFSI grew 6.2% with a strong momentum led by the retail banking and mortgage subverticals. The capital markets and insurance segments also performed well. The Retail cluster grew 8.8% despite continued weakness in discretionary retail, CPG and the travel and hospitality subverticals. In addition to increased digital investments, we also benefited from the ongoing flight to quality resulting in market share gains. The Life Sciences & Healthcare vertical continued to outperform, growing 6.9% sequentially and 17.2% on a Y-on-Y basis. Technology & Services grew 3.1%; Manufacturing, 1.4%; while Communications & Media degrew by 2.4%.

All our markets showed good sequential growth, with North America growing 3.6%, UK 3.8% and Continental Europe 6.1%. Among the emerging markets, India grew 20%, MEA 8%, Latin America 5.5% and Asia Pacific 2.9%.

Our portfolio of award-winning products and platforms continued to report strong demand and business expansion in Q2. ignio, our suite of cognitive automation software, acquired 10 new logos in Q2. In this period, 12 customers went live on the product. We have — we have been harnessing its context awareness and was [Indecipherable] in very innovative business use cases, driving tremendous transformational outcomes for our customers. For one large American department store company, we have built an always-on store solution powered by ignio that provides an interactive dashboard of the detailed view of the health of the asset — IT assets of each store such as servers, databases, routers, POS terminals, printers, scanners and so on. Using this, operations team can now complete their ready for business assurance checks for all the stores within minutes every morning. Store managers can start their day without the fear of disruption due to application or infrastructure issues and the resultant business losses.

We continued to expand Digitate channel partnerships, adding four new partners in Q2. During the quarter, the Digitate Academy trained and certified 449 professionals from customer as well as partner organizations, an indicator of the strong demand for ignio skills in the market.

TCS BaNCS, our flagship suite product in the financial services domain, had five new wins and 10 go-lives in Q2. We had two new wins for our digital banking platform, two for our securities platform and one for payments.

The Quartz smart ledger solution had two new wins and one go-live in Q2. One of the wins is to implement a distributed ledger ecosystem for a leading private sector bank in India to enable the seamless exchange of information with their counterparty banks and significantly improve the efficiency in their interbank borrowing process.

Our HOBS SaaS platform for communication service providers had two new wins. In both cases, the customers are looking to power their business process transformation using TCS TwinX, an enterprise digital twin solution powered by AI simulation and intelligent predictive capabilities.

As customers progress in their core transformation journeys and modernize their application estates, they are seeing accelerated demand for TCS MasterCraft, a suite of intelligent automation products for end-to-end enterprise application modernization. In Q2, there were 12 new wins for MasterCraft.

Jile, our cloud-based enterprise agile DevOps platform had three new wins, taking the total number of users past the 12,000 mark.

Let me now go over our client metrics. The steady upward movement of customer accounts up the revenue buckets is a surest validation of our customer centric strategy, and is driven by our constant investment in newer capabilities and launch of newer services and products that cater to an expanding set of stakeholders. In Q2, we added two more clients in the $100 million plus band, bringing the total to 49; three clients in the $20 million plus band, bringing the total 228; 11 clients in the $5 million band, bringing the total to 565; and 44 clients in the $1 million plus band, taking the total to 1,076.

Coming to margins. We have always maintained that growth is the best margin lever, and that is very evident in our numbers this quarter. But before we get there, I want to inform you that we have provided INR1,218 crores as an exceptional item this quarter purely as a matter of prudential accounting towards the legal claim that we are contesting in the US courts. All the numbers I discuss this point on are excluding the impact of this provision. Our operating margin expanded 259 basis points to 26.2% despite a neutral currency. Our net income margin also expanded to 21%. The effective tax rate for the quarter was 24.8% and our DSO in dollar terms was at 65, an all-time low.

Net cash from operations was INR106.18 billion, which is 125.9% of net income. Free cash flow was INR99.86 billion, up 25.6% year-on-year. Invested funds as of September 30 stood at INR585.94 billion. The Board has recommended an interim dividend of INR12 per share. Additionally, they’ve also approved the buyback of 53.33 million equity share of TCS which is 1.42% of the total paid up equity capital at INR3,000 per equity share for an aggregate amount not exceeding INR160 billion rupees. This excludes taxes and related expenses. The buyback will be executed on a proportion — proportionate basis under the tender offer route using the stock exchange mechanism subject to shareholder approval through a postal ballot.

On the people front, we increased our recruitment globally to support our growth, ending the quarter with a total headcount of 453,540. It’s a diverse workforce, with women making up 36.4% of the base and with 147 nationalities represented. We continue to invest heavily in our organic talent development initiatives, reimagining the learning process to also cover virtual leadership development programs.

The learning intensity went up sharply in Q2, with TCS-ers logging 10.2 million learning hours during the quarter, a 29% increase over the prior quarter. Over 352,000 employees have been trained on multiple new technologies, and over 25% of open positions were fulfilled this quarter with internal candidates. We continued deep engagement with over 35,000 campus hires with a purpose of getting them industry-ready through innovative learning practices, using virtual hackathons, podcast series, professional ninja certifications, idea zones and business skills training using online games and simulations.

During the quarter, our HR achieved 100% virtual onboarding of over 8,000 freshers across India, the US and Europe after first making them project-ready through our Xplore program. And in Q3, we plan to onboard another 12,000 freshers.

As you all know, our continued investments in people, our empowering culture and progressive HR policies have made us a global industry benchmark for talent retention. In Q2, our LTM attrition in IT services, which includes all departures, voluntary and involuntary, was at 8.9%, an all-time low even by our own standards. Will be also rolling out salary increases with the effect from October 1.

I now turn to Rajesh for the demand drivers and trends.

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Thank you, Ramki.

Let me start by giving you an update on our operations story, which has been a very core pillar to the performance that we’ve seen in the quarter. So, on behalf of NGS, let me give you a short summary of it.

Now, with the health and well-being of our employees being our top priority and in line with our Vision 25 x 25, we’ve been encouraging all our employees to continue working remotely using our Secure Borderless Workspaces model. Currently, about 3% of our workforce is working out of our facilities, and that too, only for the most business-critical activities. We have invested in setting up medical helplines, ambulance services, first line COVID isolation centers within TCS premises at 11 cities. We are also providing self-help and counseling services which have already been availed by nearly 8,000 TCS-ers in Q2.

We’ve also ramped up our employee engagement and outreach. Our One TCS channel has hosted inspirational leaders, mental health and well-being experts, virtual town halls and global talent competitions, all have been designed to ensure that we increase engagement, we increase interactivity and reduce stress and the feeling of isolation, so our employee morale at a high. We are further strengthening our SBWS model for greater operational resilience and to make it location-independent by default. We are embedding it with richer analytics and dashboards to provide more visibility of ongoing projects to project managers as well as customers and facilitate a data driven delivery excellence model that we have always been known for. This is also helping business leaders to more closely track the unit performance across a range of operating metrics and take decisions that are transparent and backed with data.

We have rolled out what we call the IUX workspace resilience solution at all of our locations in India and in some of our larger centers overseas. It is an AI powered business command center which empowers local site administrators to access employee risk profile on a daily and weekly basis and use that to decide on who can be safely allowed to return to work if they were required to do so. This solution is also now available to all of our customers as they design their return to work strategies and receiving a lot of interest and traction across a wide spectrum.

Coming now to demand drivers in the quarter. As detailed by Ramki, we had broad based growth across all markets and industry verticals. The sharp rebound in our revenue growth in Q2 was driven by multiple factors, a big component of it being a flight to quality which we spoke about earlier and which is continuing at pace. While there were a few formal vendor consolidation exercises, customers have been reassigning many small-sized engagements from existing incumbents to TCS across our customer spectrum.

Customers are also accelerating their technology investments to power their recovery and revival as well as their transformation journeys, and we are their preferred partners in this exercise. Our customers’ technology investments during the quarter continued to be along one or more of three distinct themes: customer experience, employee experience and operational resilience. This is driving strong growth for individual service offerings related to these themes, like cloud services, cybersecurity services, analytics and cognitive business operations.

More importantly, initiatives for enhancing customer experience or strengthening operational resilience are triggering large core transformation initiatives in some cases. Our differentiated positioning is helping us win more than a fair share of these deals. Our deep domain expertise and contextual knowledge as well as our ability to stitch together multiple service capabilities to create a bespoke solution closely tailored to meet each customer’s unique context and business imperative is one of our core strengths, which we have spoken about in the past also. Similarly, our Machine First approach and our intellectual property are often very central to many of these transformations and help significantly accelerate the business value realization of our customers.

The total contract value of deals signed in Q2 was $8.6 billion. In BFSI, the TCV of deals signed during this quarter stood at $1.7 billion, while the Retail order book was at $1 billion. The TCV from deals signed in North America stood at $3.2 billion. Our pipeline continues to be very strong and well distributed across industry verticals and markets with a good mix of small, medium and large deals.

I spoke earlier about the multiyear tech cycle. Stepping back a little from near-term trends and looking at the larger technology landscape, I would say that the pandemic has been a material catalyst in driving a better appreciation and urgency and adoption of hyperscale cloud platforms by enterprises globally. While the hyperscale providers have been steadily building on their technology stacks over the last five years, enterprise reduction has been measured. And the current unfortunate situation has precipitated a much more accelerated value realization and adoption of these solutions. The pandemic has driven home the downsides of carrying a technology debt and the need for greater resilience, resulting in accelerated initiatives to put in place cloud-based foundations that will serve as a secure resilient and scalable digital score.

We are probably at the — or the start of a multiyear technology upgradation cycle. The full strategic value of these investments will be realized only when these platforms are viewed, not just as a compute and storage solution but as complete innovation ecosystems. Once the customer has a robust digital core, we help them harness the power of other technologies like AIML and the rich native capabilities of these platforms to create innovative new business models to anchor purpose driven ecosystems and to provide differentiated customer experiences. We believe this is an even larger opportunity because enterprises will depend ever more on technology-led innovation to drive their differentiation in a post-pandemic world.

We have intensified our investments and created new cloud practices to gain market share in this rapidly expanding opportunity. Our cloud practices aligned to major cloud hyperscalers are full-service, multi-disciplinary units offering customers the full range of services, transformational as well as operational, on the respective technology stacks spanning advisory services; migration; modernization across applications, including SaaS and enterprise productivity suites as well as infrastructure, data and security, etc.

Over the last few months, we have operationalized local management centers across 10 cities globally. These provide our customers a full set of cyber resiliency services with built-in service assurance, data segregation and compliance to various regulatory requirements. While these investments are very important and the deep technology expertise we are building in each of these technology stacks is invaluable to our customers, it is our firm belief that what truly sets us apart in our industry is our domain and contextual knowledge and our investments in research and innovation. Let me spend a couple of minutes on each of these.

From a domain knowledge perspective, our value to our customers comes not just from supplying technology skills, but in terms of — it’s our solutioning approach where we use our deep domain knowledge and our technology expertise to come up with innovative technology solutions to their most pressing business problems. Our verticalized and industry based organization structure has helped foster and grow industry vertical expertise over the last decade. We keep receiving external validation of our leadership in these areas. Recently, the head of a — recently the head of our mortgage services practice received the Houseware Award for thought leadership in the home lending industry.

There are multiple such instances of recognition across a wide set of forums on our work both from a contextual perspective and from a domain perspective. And research firms also routinely place us as number one rankings on industry-centric capabilities in BFSI, life sciences, retail, manufacturing, etc. Industry knowledge itself is valuable, but when it is ported across and applied in a different industry, it creates a new driver for innovation and value creation in the new industry context.

In this kind of cross-industry leverage of knowledge and skills, which we are uniquely positioned to orchestrate, makes us even more attractive strategic partners to our customer universe. And there are multiple instances of it. For example, what happens from our BFSI — our knowledge of claims processing and operations in the BFSI sector lends itself very well to the demands of the healthcare sector or dynamic pricing which has been a hallmark in the retail space for quite some time now is being leveraged across a wider range like auto OEM and other transformation that we’re seeing in multiple other industries.

Coming to the second big pillar of our differentiator. We’ve spoken a lot about contextual knowledge. And this is the tacit, often undocumented knowledge about our customers’ business operations, their technology landscape that our teams pick up on the job from extended exposure to that environment. At TCS, we value this knowledge immensely because this is at the core of coming up with differentiated solutions that best address our customers’ business problems and integrate seamlessly with their IT landscape.

Knowing what works or doesn’t work in a political environment given the nuances of the systems, databases and mix of technologies in this environment can go a long way to both accelerate as well as avoid costly mistakes and reduce risk for our customers and saving time and resources. Contextual knowledge, because of its nature, is also very highly differentiated and difficult to obtain. It is only where working on the systems over a prolonged period that individuals pick up these insights. Combined with that fact is — is our focus on talent retention, which allows us to continuously develop and invest and build on this knowledge pool.

We have — we have been investing into this — we have spoken a lot about it — but this quarter, we have — also have a big milestone that I’d like to share on this. We have formally run programs to recognize and nurture this talent, and in this quarter, that program has now crossed 10,000 contextual masters in TCS, and we are looking forward to increasing that number multifold as we go forward.

Finally coming to research and innovation. The — the third big differentiator is our tradition of investing ahead of the curve in research and innovation and proactively coming up with innovative new solutions that can solve our customers’ business problems. In many instances, the innovation results in intellectual property: products, platforms or other accelerators that can help customers accelerate business value realization for new profitable revenue streams for — Ramki has already covered the strong performance of our products and platforms, so I won’t go over that again. But it is increasingly becoming a core component of our solution footprint across our largest customers. In this context and, earlier, to the differentiators, I would say that our most productive research and innovation initiatives have been at the intersection of industries and technologies, and one of these areas being cyber insurance — an example of that. This is a suite of solutions and services to help insurers adopt a insight base to selection and pricing for their cyber products.

But — so, many of these themes, we have spoken about in the past. What we’ve seen is a renewed urgency and a renewed demand for many of these solutions. We have said in the past that the technology imperative and the technology availability has always been there. The financial capability to invest has also been there. What was in shorter supply was a very strong business imperative to do so. The current circumstances have unfortunately addressed that business imperative by bringing home the importance of that resiliency that is so core to continued growth and transformation. So, we are well-positioned to participate in that, and this quarter is an example of that — of that participation, and which is why we believe that it positions us well going forward.

With that, we can open the line for questions. Thank you.

Questions and Answers:

Operator

[Operator Instructions] The first question is from the line of Shashi Bhushan from Axis Capital. Please go ahead.

Shashi Bhushan — Axis Capital — Analyst

Yeah. Thanks for taking my question. And congrats on a great comeback. What percentage of the growth in the quarter was due to easing of supply side constraint and seasonality and what would be otherwise?

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Shashi, not very meaningful from a supply side perspective. So I don’t — I don’t have a breakup for it, but it is not — very meaningful.

Shashi Bhushan — Axis Capital — Analyst

Okay. Do you think the pace of digital transformation could slow once pandemic concerns eases or is it more structural than sticky in nature? And also, do you think ROI expectation of clients for these digital investments have increased or is it at the same level where it was pre-COVID level?

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Good question. If you look at — we have been speaking about this multi-horizon technology cycle. What we’re currently seeing is a significant focus on resiliency, digital core and digital collaboration, and a lot of it is being achieved by significantly adopting cloud technologies and migrating enterprise workloads on both — on the productivity side as well as on core enterprise functionality side on to these hyperscalers’ platforms. That is phase one, we believe, and it does deliver on the resiliency part.

But once this migration is done, they actually significantly opens up the opportunity to start incrementally exploiting native capabilities of these platforms. And that is the real business value driver that will come. And given that the heavy-lifting and friction of this migration is getting addressed currently driven by the urgency of the pandemic, we believe that post to that phase two would almost be an inevitability, though the timing and the velocity of it, we would not be able to comment on right now. But I believe that we are, over a very, very important technological hump, if you will, in terms of going to the new technology architecture of the future, and that is why our optimism comes — that’s where the optimism comes from.

What was your second question?

Shashi Bhushan — Axis Capital — Analyst

Second question was on ROI perspectives and…

Rajesh Gopinathan — Chief Executive Officer and Managing Director

ROI. Yeah, in fact, that’s an interesting question. So if you think about it, all these value that we’ve spoken about, adaptability, resilience security, etc., these existed in these technology platforms. But the reason adoption was not as fast was because business cases were routinely underplaying the value of resilience, the value of security, the value of adaptability. But what the pandemic has done, unfortunately, but what it has actually emphasized is it has very immediately put a business value to this resilience.

So I don’t think that the ROI expectation has changed. It is actually the numerator has suddenly got many more line items whose reality has been emphasized beyond doubt. So that is what is driving the accelerated decision. The technology always existed, the capabilities existed it. It’s just been passed the business case when — when compared against a depreciated asset, and now it’s a completely new lens that people are looking at it from. And that will continue, and that hump has gone. The good thing is that the next phase is a low capex phase with significantly high ROI because it is incremental spend rather than single, heavy asset shift kind of a model.

Shashi Bhushan — Axis Capital — Analyst

And the last one from my side, this H2 FY ’21 outlook. Do you think seasonality would have similar impact as of yester years or is the tailwind strong enough to offset some of these headwinds like [Indecipherable]?

Rajesh Gopinathan — Chief Executive Officer and Managing Director

I would not like to comment about FY — beyond the current quarter and year. So we’ll have to wait and see how it transpires.

Shashi Bhushan — Axis Capital — Analyst

Thanks a lot. And all the best, folks.

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Thank you.

Operator

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

Sandip Agarwal — Edelweiss — Analyst

Yeah, hi. Thanks for taking my question. Congrats on a very, very great set of number and congrats on very good execution and very good commentary. So, Rajesh, I have one very simple question. How you are seeing the correlation of data — cheaper and wider availability of data and higher speed with cloud adoption, and digital pre-pandemic and post-pandemic, if there is a view you can share. And secondly, how are you seeing the movement of digital? Because what I’ve just sensed when we see the numbers, it looks like our business is also becoming very, very B2C kind of transformation is happening versus B2B earlier. And I think that leads to a very bigger and sustainable acceptability or adaptability of the technology versus earlier. Are this — are these inferences right or you would say that it is too early to call that?

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Sandip, not sure I’ve understood your question fully. So let me attempt it, but we are seeing entirely our commentary, and the demand that we’re seeing is very, very focused on B2B. At the end part of it, our customers are focused on customer experience. They are focused on employee experience. But our clientele remains very strongly large global enterprises, and that is where our focus is, and that is where the opportunity is. We are not seeing a shift into a B2C business model at our level. The question in terms of adoption of digital technologies, data, etc., that is very real. The current focus has been more on the infrastructure resilient side. The next element of it will be in building a multifaceted digital core and the exploitation of these in true business value terms beyond — over and beyond the resilience factors will come when the data is exploited and new business model created based on that dataset.

So we are — we are actually going to be seeing much faster adoption of many of the themes that we’ve spoken off in the past. None of this is new. It is just that we are now, as we said, beyond a certain threshold from which the incremental adoption can be much faster.

Sandip Agarwal — Edelweiss — Analyst

Yeah. Thanks. Actually, the answer which you — and [Indecipherable] also, actually my question was a little — I think not clear. But the answer was right. So I was just trying to understand that because of wider adoptability of digital, the B2C piece which your customer actually goes and generate a revenue and make decision-making, that basically has more cascading effect now than earlier. So I got your answer. Thanks a lot.

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Thank you.

Operator

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

Sudheer Guntupalli — ICICI Securities — Analyst

Yeah. Good evening, gentlemen. And congrats on a stronger than expected comeback. My first question is on Europe geography. Does this trend have to do more with the fact that most of the economies in this continent have broadly recovered from the medical situation or it has to do more with the fact that — more with the general trend that we are significantly ahead of competition in this particular geography? What I’m trying to understand is that as other geographies also come out of the medical situation, can the current robustness in Europe, both on demand and supply, be a good lead indicator.

Rajesh Gopinathan — Chief Executive Officer and Managing Director

I think it’s a combination of all these factors. It is about the sustained investment that we’ve done in this geography and the customer relationships and the footprint that we have built, as also the, what I would say, the earlier recovery trajectory that many of these — or earlier normalcy trajectory that many of these countries enjoyed. So it’s a combination of all of it. And we have seen us have a very good revenue momentum in this geography in the past. So it’s kind of reversing — reverting back to that growth trajectory what we’re experiencing.

Sudheer Guntupalli — ICICI Securities — Analyst

Sure, Rajesh. And deal wins this quarter, excluding [Indecipherable] which is $6.1 billion, it looks a tad lower than the average of the previous two quarters. In the press briefing, you gave some color about the nature and size of the deals. Apart from the typical lumpiness, is there some other trend which is worth noting here?

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Not much. As I said, I spoke about it in the press, as you said, this quarter has been particularly characterized by much larger volume of relatively smaller-sized deals, but when we look into our pipeline, the distribution is not very different from what we’ve seen in the past. So, there could be various explanations for it, but we don’t see any structural shift to the overall nature of the deal. Just that this quarter has been more — more about smaller TCVs and a much more broad-based wider participation across the large customer set.

Sudheer Guntupalli — ICICI Securities — Analyst

Sure, Rajesh. One last question to Ramki. Sir, margins are now within your aspirational band of 26%, 28% excluding some seasonal factors like, let’s say, wage hikes which are impending. Do you believe margins can be sustained at this level or expanded going forward? What are the pluses and minuses you see from the current level?

V Ramakrishnan — Chief Financial Officer

We — definitely, I think we believe it can be sustained. And primarily growth momentum has to be also an important factor. And you rightly pointed out — so we will have some impact from when we roll out the salary increases, etc. But this is — definitely we — we have been working on various efficiency levers across the business. And as I said earlier, the broad-based revenue growth also brings in its own efficiencies. So I think we are confident, Sandip.

Sudheer Guntupalli — ICICI Securities — Analyst

Sure, sir. Thanks and all the best.

Operator

Thank you. The next question is from the line of Diviya Nagarajan from UBS Securities. Please go ahead.

Diviya Nagarajan — UBS Securities — Analyst

Thanks for taking the question. Congrats on a strong quarter and a good comeback after Q1. I think many of my questions have already been answered, but just wanted to get some color on — from a contract flow perspective, what are the big change that you’re seeing — what you’ve seen in post –post COVID contract flows and the nature of contract flows to what you were looking at earlier? Specifically, if it’s just that we are seeing an acceleration in the pace at which customers are moving or has the nature of contract also started to change? That’s question one.

Secondly, I think on the press conference, you talked about some exaggerated Q3 behaviors. Could you kind of elaborate on what you meant by that? Thanks.

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Could you repeat that, Diviya? Exaggerated?

Diviya Nagarajan — UBS Securities — Analyst

You talked about some exaggerated seasonality going into the second half. So just wanted to understand what you — what you were saying there.

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Okay. So the nature of deal wins, as I commented earlier, has been more weighed towards medium and small deals this quarter. But we don’t necessarily see this as a trend while we are watching it, because as you said, the pipeline itself, composition is much more classical than what this Q2’s numbers are. The deal decision-making, nothing dramatic for us to be able to call out a movement in one way or the other. The digital transformation agenda is fair and center with all CFO levels. So we are seeing much more traction across a wider spectrum of CXO [Phonetic] executive suite. But I wouldn’t be — there’s nothing further color that we can currently add to it, and we’ll wait and see how it progresses.

From an exaggerated impact of Q3, we are seeing some amount of dialog along those lines in — I don’t want to call out till it is a specific one, but we’ll have to wait for another month or so to see whether that picks up steam. The current deal momentum that — the current revenue momentum that we have will be a tailwind and the seasonality talk that we’re hearing would be — would be a headwind and we’ll have to balance it out and see where it lines up. Sorry, but we can’t — we don’t have much more visibility to share with you currently.

Diviya Nagarajan — UBS Securities — Analyst

Okay. Just as a follow-up, I think it’s good to see the Retail pick up this quarter. Could you kind of — kind of break this down into how much of that recovery was because your customers had started spending more and how much of it is to some of the unique offerings that you have within the retail space?

Rajesh Gopinathan — Chief Executive Officer and Managing Director

It’s a combination of both. I wouldn’t be able to break it up that way, but one — I don’t know whether you picked up, I shared that I think in the press conference, that the retail CPG, as a sub-segment of our overall Retail. So if you exclude travel and hospitality, revenue growth is positive on a year-on-year basis, and that has been driven a lot by changes that are happening with what you call the essential retailers, and they have been at the forefront of leveraging all forms of technology transformation, both on the e-commerce side as well as significantly on data security. And also our product suite, which we call Optumera, has been a big component of participation in this space, whether it is dynamic pricing, merchandizing, store allocation, inventory and supply chain optimization across the full spectrum, our solutions have found very — very good resonance.

So it is — it is essentially driven by new technology spend among a whole space of retailers, especially on what you would call essential retailers. Discretionary retail still continues to be weak, and that will — the holiday season will have a big impact. You will see whether they recover strongly during the holiday season.

Diviya Nagarajan — UBS Securities — Analyst

Got it. And just a last follow-up on the earlier question on the pipeline. You said that the pipeline that you have is much more classical in terms of size distribution. But specifically in the — in the last three months of the plus four to five months post pandemic, has there been — have you seen large deals continue to — new large deals continue to come into the pipeline the way you were seeing it before?

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Yes. If you are asking have new deals come into the pipeline, absolutely yes. Quite a few of them have been, and they are also progressing well. So there is no delay that we’ve seen. There is a lot of interest and they’re progressing well. You’ll have to wait and see how the conversion happens.

Diviya Nagarajan — UBS Securities — Analyst

Got it. Thanks for taking my question and wish you all the best for the rest of the year.

Operator

Thank you. The next question is from the line of Pankaj Kapoor from CLSA. Please go ahead.

Pankaj Kapoor — CLSA — Analyst

Yeah, hi. Thanks for the opportunity and congratulation on a good quarter. Rajesh, even in March-April when you spoke and everybody was generally uncertain you had talked of a strong V shape kind of a recovery coming in these — especially in the second half. So, given the way things have played out in the last few months, do you think the pace of recovery has been much stronger than your early assessment? And was there any advancement of the growth from the second half now to the second quarter itself?

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Absolutely, Pankaj. This is — this was — I wouldn’t say it’s dramatically faster than what we said, but this was slightly faster than what we expected. Remember that we are still minus 3% on a constant currency basis from a year-on-year perspective. So our target of trying to — we had first set a target saying let’s get back to the INR high point by Q3 and flat by Q4 on a constant currency basis. So, we are still touch and go on whether we can bring the Q4 forward to Q3. We’ll have to wait and see whether we can achieve constant currency flat in Q3. I’m not 100% on that yet.

The positivity in the demand environment — earlier, we had shared that on the expectation that this is not a structural breakdown of a given industry unlike what happened in 2000 — during the GFC times. And we are also counted on the positive impact of the significant balance sheet help that governments had very rapidly committed to, both the volume and the speed at which it had happened. And all of that has actually helped because definitely in many industries that balance sheet help has been at the — been pillar or the cornerstone of the recovery and the investment sentiment that we’ve seen. So short answer, it is better than what we had originally anticipated, but not very dramatically different than what we said, and we are on that trajectory with a slight, I would say, slight — slightly ahead.

Pankaj Kapoor — CLSA — Analyst

Understood. And your caution on the — on the second half, is it largely centric on the macro variables like how — whether there’ll be a second wave, etc., or this is something at a micro level also, do you see any of this?

Rajesh Gopinathan — Chief Executive Officer and Managing Director

One is of course the health side. If that happens, it’s of course, a totally predictable one. And on the — more the economy side, as this balance sheet support gets withdrawn, if it is withdrawn, we will have to see how it plays out because that’s also unexplored territory. So there are — there are significant uncertainty still. That’s why I was also –mentioned in multiple forums that the recovery is real, and directionally it is definitely positive. But we need to be careful because we are not out of the woods by any stretch of imagination.

Pankaj Kapoor — CLSA — Analyst

Understood. And just lastly, obviously there is a strong spend on digital which is boosting your digital portfolio. But do you think that because of this increased investment in digital, is there some cutback happening on the legacy services portfolio of ours either in terms of volumes and bid or in terms of pricing?

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Look, if you know, we stopped calling this out because we fundamentally believe that it’s very difficult now to differentiate between quote, unquote digital and legacy. If you look at a lot of what this current quarter has been about, it is about moving existing workloads onto the cloud and that requires a very in-depth knowledge of the existing technology landscape of the applications, the environments, the nuances of it, and also a good appreciation of the to-be environment and how to move these kind of [Indecipherable].

In fact, for one of the European customers, we are deploying mainframe solutions on a private and hybrid cloud kind of environment. So would you call it legacy, would you call it digital, these distinctions no longer make sense. What is important is that technology agenda or technology is front and center on every CXO agenda, every board agenda, and we are very well positioned to participate from that.

Pankaj Kapoor — CLSA — Analyst

Understood. Thank you, and wish you all the best for the rest of the year.

Operator

Thank you. The next question is from the line of Ankur Rudra from JPMorgan. Please go ahead.

Ankur Rudra — JPMorgan Chase & Co. — Analyst

Hi. Thank you. Congratulations on a very strong broad-based performance. Rajesh, as you are seeing the signs of recovery in demand from your perspective, could you elaborate the main things which give you confidence that this is a multiyear secular demand recovery as opposed to a cyclical recovery from the things we saw a few quarters ago?

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Ankur, it’s based on this, or should I say the call, that I think I said at the beginning of this call also, the big hump was committing to the new architecture, and the new architecture is the cloud architecture. It is the hyperscaler architecture. And that hump is being crossed. And once it is crossed on to that, the decision to actually consume the native capabilities there and therefore the decision to incrementally keep on changing the architecture to be more aligned to the capabilities there will be a much easier decision.

So we believe that what this pandemic has done is to actually kind of give a push over the technology hump, and that hump was — if you are comparing the potential unknown future benefits against a highly depreciated technology asset and asking of it doesn’t make sense. That question went out of the window, and the jump has been made and the jump is being currently made, and that should portend well for the future demand for many of the good things that we have been talking about for quite some time. So that is where the thesis is built on. We fundamentally believe that is the — that is true. This is based on our — our interactions with our customer. But you’ll need to make your own call on whether you believe in that thesis.

Ankur Rudra — JPMorgan Chase & Co. — Analyst

Understood. Thank you. And just one follow-up on the demand side. You mentioned that the — your order book is full of smaller deals and — or at least medium sized deals as opposed to before. Are you seeing for these kind of deals, sales cycles shortening because access to decision makers is faster and also are you seeing any kind of acceleration on execution from deal to revenues because maybe perhaps virtual onboarding is faster in the current environment. How do you see that change?

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Ankur, for the small and medium ones, absolutely; faster deal cycle, faster execution. We are now routinely onboarding on a 100% virtual across a wide spectrum of services, not just so — I mean, traditional as well as the new, and very, very fast dynamic standing up of teams and it is the — while still small, but SBWS’ impact on fast turnaround in new deals is very, very visible and gaining momentum. So, absolutely, that’s the case.

And the larger deals, as I said, that, the pipeline is there and we’ll have to see how the conversion happens.

Ankur Rudra — JPMorgan Chase & Co. — Analyst

And just last question on the — you had six months now living with the pandemic. Any further thoughts of your talent model, any incremental streamlining on your — how you’re thinking about this on an overall basis?

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Nothing significantly different from what we have already been sharing. The biggest benefit that we’re looking at and the biggest change in the operating model is talent fungibility because we should be able to maximize utilization of talent when we think about it as a much more fungible talent base. We were earlier more thinking regionally rather than collectively. So that is where the — the big opportunity lies. And we believe that now it is only a matter of time that we’ll be actually be able to think of that as one single talent cloud because that acceptability threshold has been significantly reduced and there’ll be no going back on it now.

Ankur Rudra — JPMorgan Chase & Co. — Analyst

Makes sense. Thank you so much. Best of luck.

Operator

Thank you. The next question is from the line of Rishit Parikh from Nomura. Please go ahead.

Rishit Parikh — Nomura — Analyst

Hi. Thanks for taking my question. Most of my questions have been answered, but just one question, Rajesh, for you. The urgency to drive digital transformation. Do you think that it will over a longer term — medium to longer term, drive an increase in IT budgets across client segments? And while obviously it’s initial time but any instances that we’ve seen to support that thesis? And second, where would the investment come from given client financials across the board are largely stressed, right, and the [Indecipherable] away across the board? Thank you.

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Absolutely, technology budgets will see increased money flowing to them. That is — that is the core of our thesis. And we’re seeing this in industry after industry. If you take Retail, as I said, e-commerce and touch-less fulfillment has become a cornerstone. If you take manufacturing, automobiles, the entire dominance of a dealer-centric customer outreach or channel system is being now challenged by much more digital front-end solutions. So something as traditional as automobile is significantly experimenting. I wouldn’t say it’s still shifting but experimenting with something that was almost unheard of a year back or so. And areas like healthcare, we are seeing a very structural shift from location-centric to a very centralized kind of an architecture to a much more decentralized service delivery architecture. We have seen shift from more fee-based to value-based model as the data-centric nature of the healthcare industry keeps on unfolding. So, industry after industry, we are seeing a very meaningful commitment to leveraging technology and very core business model changes, and that can only be good from a technology budget perspective.

And on the — where will the funding come from, actually, as I’ve said in the past also, client balance sheets were in very good shape. So if you leave aside a few stressed sectors like airlines, client balance sheets going into this crisis were in a very good shape. So the funding per se or the accessibility to funds was never an issue. It was more the rationale — and the business rationale, which was not always meeting whatever was the decision-making thresholds that were kept, that has got addressed. I don’t believe investable surplus was the issue that was holding it.

Rishit Parikh — Nomura — Analyst

Okay. And just one question on Retail, right. While you’ve answered partly some of it, but if I look at just the — some of the data points that’s coming out of the US, right, in general, I think we have seen a larger — a higher increase in bankruptcy rates there, right. So do you think the recovery that we’ve seen now is more sustainable or you think it is more or less to drive sort of investments or make yourself ready for the upcoming holiday season, and that’s what’s driven the current set of uptick?

Rajesh Gopinathan — Chief Executive Officer and Managing Director

I think it’s more sustainable. It is the surviving ones investing more to ensure that they don’t go down the same path. It’s been — similarly, the US is very efficient in recycling assets and protecting potential future value. So bankruptcy itself is always a positive driver or mostly a positive driver there. And their part out of bankruptcy will also be technology-driven. So I think it’s a very efficient market there and it’s acting as it was expected to.

Rishit Parikh — Nomura — Analyst

Perfect. Thank you so much. And congrats on a good quarter.

Operator

Thank you. The next question is from the line of Vibhor Singhal from Phillip Capital. Please go ahead.

Vibhor Singhal — Phillip Capital — Analyst

Yeah. Good evening, sir. Thanks for taking my question. And congrats on a great set of numbers. So just one question from my side. So I just wanted to pick your brain on — basically, given the proximity of US elections and given the uncertainty that we have in terms of how long the actual results might be [Indecipherable] given the postal ballot [Indecipherable] everything, do you — are we seeing some delay in the closures from the client side or the delays in decision making? I know we probably keep asking these questions every four years, but is this some kind of a delay that we’re seeing on the ground as of now or it’s probably the same thing and nothing much that has changed?

Rajesh Gopinathan — Chief Executive Officer and Managing Director

From a business decision-making perspective, I don’t think we’ve seen any significant impact due to the election cycles.

Vibhor Singhal — Phillip Capital — Analyst

Okay. And if at all there is something, you believe that it will probably [Indecipherable] come back post-election as it always has in the adjacent quarter?

Rajesh Gopinathan — Chief Executive Officer and Managing Director

I don’t want to speculate on that. Many more well-informed people who right extensively about it.

Vibhor Singhal — Phillip Capital — Analyst

Fair enough. Just so much, guys. Thanks a lot for taking my questions.

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. And let me close by saying that in July we had said that the peak impact of the pandemic was behind us, and I’m happy that we have rebounded sharply from there with the 4.8% sequential growth. Our operating margin has also expanded nicely by 260 basis points to 26.2% with a net margin of 21%. The growth as well as our very strong order book of $8.6 billion was driven by market share gains and increased spending by customers along three broad themes: customer experience, employee experience and operational resilience.

On the people front, we onboarded about 8,000 freshers entirely virtually and also ramped up our hiring to support our growth. Our investments in organic talent development saw a surge in the learning effort during this quarter. Our retention continues to be an industry benchmark and a significant competitive differentiator for us with IT services attrition at 8.9% which is an all-time low.

Looking ahead, we will need to ride out the storm — the short-term volatility, but in the medium and longer term, we will benefit from the multiyear technology upgradation cycle that is playing out as enterprises embrace the hyperscale platforms and use their native capabilities to fill their innovation and competitive differentiation. Our expertise on these platforms as well as our industry knowledge and customer-specific contextual knowledge and our investments in research and innovation positions us very well to benefit fully from this secular tailwind.

Thank you, all, for joining us on this call today, and wish you all a very good night. Stay safe.

Operator

[Operator Closing Remarks]