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Tata Consultancy Services Ltd (TCS) Q4 2022 Earnings Call Transcript

TCS Earnings Call - Final Transcript

Tata Consultancy Services Ltd  ( NSE: TCS) Q4 2022 earnings call dated Apr. 11, 2022

Corporate Participants:

Kedar Shirali — Global Head, Investor Relations

Rajesh Gopinathan — Chief Executive Officer and Managing Director

N. Ganapathy Subramaniam — Chief Operating Officer and Executive Director

Samir Seksaria — Chief Financial Officer

Analysts:

Kumar Rakesh — BNP Paribas — Analyst

Diviya Nagarajan — UBS — Analyst

Sandip Agarwal — Edelweiss — Analyst

Apoorva Prasad — HDFC Securities — Analyst

Mukul Garg — Motilal Oswal Financial Services — Analyst

Sandeep Shah — Equirus Securities — Analyst

Ravi Menon — Macquarie — Analyst

Gaurav Rateria — Morgan Stanley — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to the TCS Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Kedar Shirali, Global Head, Investor Relations at TCS. Thank you, and over to you, sir.

Kedar Shirali — Global Head, Investor Relations

Thank you, Steven. Good evening and welcome, everyone. Thank you for joining us today to discuss TCS’ financial results for the fourth quarter and full year fiscal year 2022 that ended March 31, 2022. This call is being webcast through our website and an archive, including the transcript, will be available on the site for the duration of this quarter. The financial statements, quarterly fact sheet and press releases are also available on our website.

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

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Good evening, everyone.

Kedar Shirali — Global Head, Investor Relations

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

N. Ganapathy Subramaniam — Chief Operating Officer and Executive Director

Good evening, everyone.

Kedar Shirali — Global Head, Investor Relations

Mr. Samir Seksaria, Chief Financial Officer.

Samir Seksaria — Chief Financial Officer

Hello, everyone.

Kedar Shirali — Global Head, Investor Relations

Our Chief HR Officer, Mr. Milind Lakkad, could not join us today due to a personal emergency, but Samir will be also speaking on behalf of Milind. Our leadership team will give a brief overview of the company’s performance, followed by a Q&A session.

As you are aware, we do not 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 Slide 2 of the quarterly fact sheets available on our website and e-mailed out to those who have subscribed to our mailing lists.

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

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Thank you, Kedar. Good morning, good afternoon and good evening to all of you. We are closing fiscal year 2022 on a strong note. Our full year revenue growing at 16.8% in rupee terms and 15.4% in constant currency terms and 15.9% in dollar terms. We added $3.533 billion in incremental revenue during the year, our highest ever. Our operating margins of the year was at 25.3% and net margin was at 20%.

Having crossed the $25 billion milestone this year, we are now focused on ways to get to the next $25 billion. Towards that, we are rolling out a new industry-first organization structure that adds customer relationship stage to the existing three-dimensions, that is the geography in the three vertical and service lines.

The new structure is more customer-centric and will enable curated experiences to our customers based on what stage they are at their relationship journey with TCS. We believe this would ease the path for us to become a growth and transformation partner for more of our customers.

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

Samir Seksaria — Chief Financial Officer

Thank you, Rajesh. Let me walk you through the headline numbers. In the fourth quarter of FY’22, our revenue crossed INR50,000 crore mark, reaching INR50,591 crore, which is a year-on-year growth of 15.8%. In dollar terms, revenues was $6.696 billion or a Y-o-Y growth of 11.8%. And in CC terms, our revenue growth in Q4 was 14.3%.

For the full year, our revenue was INR191,754 crore, which is a growth of 16.8%. This in dollar terms was a reported revenue growth of $25.707 billion, a growth of 15.9%. And in constant currency terms, this translates to 15.4%.

Let me now go over the financial performance. Our operating margin in Q4 stayed flat sequentially at 25%. As in the previous quarter, we had headwinds of about 90 basis points from ongoing supply-side challenges, which were mitigated from operational efficiencies and 10 basis points of currency support. For the full year, our operating margins continued to be industry-leading at 25.3%.

Annual increment, tactical intervention and increased subcontractor usage represented a headwind of 330 basis points, offset by some — to some extent by operational efficiencies, improved realization and some currency support.

Net income margin in Q4 was 19.6%, and for the full year, 20%. EPS grew 16.1% during the year, excluding the provision we made towards legal payment in FY ’21. Effective tax rate for the year was 25.6%. Our accounts receivable was at 64 days DSO, in dollar terms down three days sequentially and four days year-on-year. Net cash flow from operations was INR110.51 billion, which is a cash conversion of 111% of net income. Free cash flow was INR102.59 billion. Invested funds as on March 31 stood at INR560.53 billion.

The Board has recommended a final dividend of INR22 per share. For the full year, this represents a shareholder payout of INR31,424 crore, and this does not include the INR4,000 crores of buyback tax which has an outflow in the month of April.

Now since Milind could not join the call today, let me go over the people metrics as well. On the people front, this has been a standout quarter where we set many benchmarks. We had an all-time high net additions in the quarter as well as for the full year at 35,209 in Q4 and 103,546 respectively for the full year, bringing the total headcount to 592,000 — 592,195. The record net addition is a reflection of the strength of our employer brand and our ability to draw talent across the world.

We received several accolades and external validations this quarter for our commitment to excellence and talent management. We were recognized by the Confederation of Indian Industry, CII, with the Role Model in HR Excellence and Prize for Leadership in HR Excellence awards at the CII HR Excellence Awards. The Role Model award has been given only twice before in the last 12 years.

TCS ranked number one in the LinkedIn Top Companies list of the best workplaces for career growth in India, with top scores in providing the ability to advance, skills growth, company stability, external opportunity, company affinity, gender diversity and spread of educational backgrounds. Lastly, we were recognized as the Global Top Employer for the seventh year in a row by the Top Employers Institute.

Our focus on diversity and inclusion and localized hiring in all our major markets has resulted in a very diverse workforce in 153 nationalities represented and women making up 35.6% of the base. We continue to invest heavily in organic talent development. In Q4, TCS’ers clocked 22 million learning hours. For the full year, TCS’ers locked 60.3 million learning hours and acquired 3.5 million digital competencies.

The number of contextual masters, that is, individuals who have demonstrated deep contextual knowledge of their customer’s business and IT landscape, hit a new milestone crossing 50,000 in Q4.

Moving to talent retention. We have a track record of consistently maintaining the highest talent retention in the industry, even in the face of high levels of churn across the industry. Our attrition in IT services continued to rise on an LTM basis and was at 17.4%. However, the quarterly annualized attrition is plateauing.

Lastly, we have announced a salary increment with effect from April 1, similar in quantum to prior years.

With that, I’ll request NGS to give the segmental and product commentary.

N. Ganapathy Subramaniam — Chief Operating Officer and Executive Director

Hello, again. Thank you for joining us. Let me begin by providing the segmental performance result for the quarter. All growth numbers are on year-on-year constant currency basis. All our industry verticals grew in the mid to-high teens in Q4 and for the full year. Q4 growth was led by retail and CPG, which grew 22.1%, manufacturing and utilities which grew 19%, and communications and media grew by 18.7%. Technology and services grew 18%, life sciences and healthcare grew 16.4%, and financial services grew by 12.9%.

For the full year, growth was led again by retail and CPG, which grew by 20.6%, manufacturing and utilities which grew by 19.4%, life sciences and healthcare 19.2%, financial services 15.1%, technology and services 15.8% and communications and media by 14%.

On an accounting segment basis, including revenues from emerging markets and products and platforms, our BFSI segment crossed $10 billion milestone this year.

Moving on to geographic markets. Growth in Q4 was led by North America, which grew by 18.7%, U.K. grew by 13% and Continental Europe by 10.1%.

On our emerging markets, Latin America grew by 20.6%, Middle East and Africa grew by 7.3%, India by 7%, Asia Pacific by 5.5%. On a full year basis, North America grew by 17.5%, Continental Europe by 15%, and U.K. by 14.3%. On emerging markets, Latin America grew 18.2%, India grew by 16%, Middle East and Africa grew by 12.9%, while Asia Pacific has 6.7% growth. Our portfolio of products and platforms continue to do well in the market.

Ignio, our cognitive automation software signed up 36 new clients in Q4, and we had six clients went live with ignio during the quarter. For the full year, ignio closed over 100 deals and had 27 go-lives. The Digitate Academy has trained over 11,500 professionals in the marketplace and certified more than 4,100 professionals on ignio. ignio continues to transform operations across domains using AI and automation, to enhance resilience in delivering superior business outcomes. For a leading energy generation and distribution company in North America, ignio is managing over 100,000 incidents autonomously, with 100% successful resolution rate, covering 30% of their overall IT footprint.

A global professional services provider has gone live with ignio’s Digital Workspace, proactively managing the health of over 11,000 laptops globally for better user experience and productivity. ignio also manages group policies, privileges and updates for improved compliance and reduced vulnerability.

TCS BaNCS, our flagship product suite for financial services domain had four new wins and three go-lives in Q4. In FY’22, TCS BaNCS won 22 new logos and had 16 key go-lives. Half the wins were for the SaaS model, demonstrating the growth adoption of cloud and, more importantly, TCS BaNCS’ cloud readiness for large initiative projects.

During the quarter, TCS BaNCS Global Securities platform has impacted a leading South African financial services group for their personal and business financial banking, business banking offerings catering to investor services and while — and it includes custody and corporate actions as well. With this new deal, almost 95% of the custody transactions in South Africa will run on TCS BaNCS in addition to the Central Depository.

Quartz blockchain platform had two new wins in Q4. The Quartz brand has extended its presence across multiple industries, ranging from financial services to the energy sector and pharmaceuticals. The leading Corporate Depository in India has selected Quartz for markets to implement a solution for corporate bond issuance and covenant monitoring. The solution will facilitate the creation of bond instruments by bringing together different stakeholders, including CFD’s, debenture trustees, valuation firms and exchangers into a blockchain built ecosystem. The solution is designed to enable greater transparency in digital traffic by eliminating potential double counting of underlying assets, enabling real-time information based on various stakeholders and providing a single source of truth through the shared ledger.

TCS HOBS suite of products for communication services had two big wins in Q4. TCS TwinX, our AI-based digital print solution had six wins and three go-lives during the quarter. TCS OmniStore, our AI-powered universal commerce suite had three new wins. TCS Optumera, our AI-powered merchandise optimization suite had two new deal wins and three go-lives.

TCS iON has now onboarded 700 plus corporates to enable job outcome linkage. In FY’22, TCS iON conducted 45 million in-center and 2.9 million remote assessments at national and regional scale.

Let me now spend some time on our client metrics. As you know, our customer centric strategy entails continually investing and building newer capabilities to create value in newer parts of our client’s business, so that our relationship keeps expanding and deepening over time. Measuring our customers’ upward progression across various revenue buckets is that surest validation of our strategy. So we track these metrics very closely.

In Q4, we added 10 more clients for the last 12 months in the $100 million plus band, bringing the total to 58. We added 19 more clients in the $50 million plus band, bringing the total to 120. We added 40 more clients in the $20 million band, bringing the total to 268. We added 52 more clients in the $10 million band, bringing the total to 439. We added 69 more clients in the $5 million band, bringing the total to 638. We added 86 more clients in the $1 million plus band, bringing the total to 1,182.

With that, let me hand it over to Rajesh, for some additional color on the demand drivers and the order book.

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Thank you, NGS. We have spoken about three broad growth drivers this year, increased outsourcing, cloud adoption and growth and transformation. When we talk about cloud adoption, it’s not a single event, but a multi-horizon transformation journey that begins with migration and other Horizon 1 activities. GMT is often the primary driver of our customers’ Horizon 2 investments and so partnering customers in the initial stages of their cloud adoption is also opening the doors to us for CMT initiatives.

Coming to Horizon 1, as in prior quarters, we have several new wins around Horizon 1, initiatives such as cloud migration, application and data modernization, etc. I’ll give a few examples of such instances. For a co-leading Swedish retailer, engaged us to migrate critical logistics applications to the public cloud. This migration has approved core systems and enhanced its agility and scalability.

For a large Australian power utility, TCS helped execute the end-to-end transformation, including cloud discovery and assessment, foundation services, cloud migration, application modernization and operations management. Using our factory approach, we helped migrate more than 150 applications and over 1,800 servers to the cloud, helping decommission its IT infrastructure, reduce technology debt and enhance resilience and provide a solid foundation for the company’s Horizon 2 plans.

Similarly for a large U.K.-based communication service provider, TCS has been engaged as its strategic data and analytics transformation partner, to help build their common and simplified data platform on a public cloud, enabling future use cases around hyper-personalization, micro marketing, differentiated customer experience and even new revenue streams like data monetization.

In terms of Horizon 2, while such initiatives help improve the organization’s operational resilience, it gives greater agility and scalability to handle future growth. The real value unlocking of the cloud investments comes from Horizon 2 initiatives, which use the native capabilities of the cloud to try out new ways of working and innovations around products of business models and new customer experiences.

A few examples from what we mean when we talk about new ways of working. A leading European financial services firm engaged us to transform their time-consuming and error-prone financial spreading process used for determining the creditworthiness of corporate clients. Our TCS FaaS, the FinancingSpreading-as-a-Service solution on a hyperscaler cloud, digiting process, extracting data from financial statements and regulatory filings using ML-based modules to reduce the time by up to 7 times, with 99% accuracy. This enabled more accurate credit scoring, broker lending decisions and higher throughput and business growth.

This engagement highlights how we are integrating and winning these Horizon 2 deals. The idea itself came up as a visible manifestation of contextual knowledge during an Innovation Day hackathon we had organized for the client. The account team then proactively pitched the idea to the clients’ risk management organization, eventually leading to an engagement.

For Rabobank, a leading European bank, has partnered TCS to build a modern data warehouse platform on a public cloud for their wholesale customers’ KYC business domain. The platform will ingest, curate and generate KYC reports to view customer data in a consistent way across the globe, using cloud-native analytics and reporting tools and enable faster forecasting and business positioning and onboarding.

So really, we have been selected by a leading ship building materials provider as a strategic partner for its plants of tomorrow initiative, digital transformation and journey to Net Zero coal. TCS will leverage it’s neural manufacturing framework to develop IoT-based digital solutions, enabling predictive operations and maintenance, intelligent automation and robotics. These are expected to improve asset and client performance to reduce energy costs and carbon growth footprint.

Looking at a few examples from product innovation, recurring theme in Horizon 2 initiatives, is product and service innovation to enable new business models, generate new revenue streams and to drive growth. Here are a couple of examples. For an American corporation that specializes in water treatment, purification, cleaning, hygiene and infection prevention solution, TCS is helping develop a cloud-based connected products platform that will remotely monitor multiple equipment and related sanitizing consumables at customer sites. Using this, the company can launch innovative products like digitally connected appliances for hand hygiene, surface to air sanitization and dishwashing. That will enable an as-a-service business model in the Facilities Management area and drive new revenue streams. Actionable insights from the platform leveraging AI and predictive analytics will enable timely refill, proactive maintenance and unlock the ability to cross-sell and upsell.

Similarly, we have been selected by Hartmann, a leading surgical and medical instrument manufacturing company to work on a future product line to add to their high compression bandage products portfolio. TCS will conceptualize, design and co-develop a digital health solution for healthcare professionals and patients using IoT to simplify the patient monitoring process. TCS will develop the center for it and it’s associated software components to detect the pressure sensor data and transmit it using NSG to the Patient Monitoring mobile application and cloud back end.

Coming on to customers’ experience, lastly, with the idea of Metaverse catching on in the enterprise world, we are seeing growing interest in providing customers and users with immersive online experiences using a cloud or extended reality.

Let me give you a couple of examples. A leading U.S.-based communication service provider faced with the challenge of driving retail sales while the physical stores were seeing lower footfall during the pandemic, partnered with TCS to provide a personalized at-home experience of a real store. TCS organized the design thinking workshops to conceptualize and design a virtual replica of a store using passive VR, which customers can enter and virtually navigate on their mobile devices. Built using TCS’s our presence foundry and the web AR technology, the virtual store is accessible from any device with virtual try-on and try-out features.

It has integrated commerce capabilities where customers can purchase the products and accessories on display just as in a physical store. The cloud native framework made it easier to integrate with existing e-Commerce platforms to provide real time insight and scale the solution. The virtual store has resulted in better customer engagement, a 30% increase in sales conversion and an 80% growth in digital channel sales.

For marketing of the newly launched product, prefilled injections, a leading medical devices manufacturer engaged TCS to provide an immersive experience for its healthcare partners to show them how the model can be conveniently self-administered. TCS came up with various options using AR experience and recommended the best approach to the client. It used Web AR to create a realistic virtual 3D model of the injection which provides users with usage instructions on to immersive experience, obviating the need to go through lengthy user guides.

The successful use of AR to market has sort of just led to interest in building similar experiences around their other products as well.

Coming now to the Q4 order book. While these examples are continuing and demand trends that we’ve seen in our order book and trading strong growth over the course of the year. In Q4, we had very strong tailwinds, resulting in an all-time high order book with TCV of $11.3 billion. This includes two mega deals of roughly $1 billion each. Even excluding these two mega deals, our order book TCV in Q4 is at $9.5 billion, which is also an all-time high. By vertical, BFSI had very strong TCV of $3.2 billion, while retail posted an order book of $4.6 billion. The TCV of deals signed in North America stood at $6.1 billion. For the full year, our order book TCV was $34.6 billion, a growth of 9.5% over the prior year.

With that, we can open the line for questions.

Questions and Answers:

Operator

[Operator Instructions] The first question is from the line of Kumar Rakesh from BNP Paribas. Please go ahead.

Kumar Rakesh — BNP Paribas — Analyst

Good evening, everyone, and thank you for taking my questions and congratulations especially on great events during the quarter.

My first question was around the margins. So we had set our aspiration band above 26%. In the current context of the supply side constraint and especially for FY ’23, how do you see that aspirational band spanning out and what are the headwinds and tailwinds we are looking at immediately in the next few quarters?

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Yes. Hi, Kumar. So the 26% to 28% remains our guiding base, and our long-term cost structures are very well placed and we firmly believe that we can operate in the 26% to 28% band based on our long-term cost structures.

If you look at the near term, we will try to double down on our operational levers to help us get closer to the band. While if I look at from a short- and near-term perspective, given what we are seeing across specifically in terms of the churn, until it plateaus down and completely goes back to our normal rates which we are looking at, we will see some volatility on margins. So that’s our view. And if I look at FY ’23 going forward, that would mean that, at least initially, we would be seeing some churn and pressure on margins.

Kumar Rakesh — BNP Paribas — Analyst

And how would the onsite wage hike impacts? And how are we handling that given that now we’d be ramping up the onsite as well with the travel resuming. How would be the wage hikes on the onsite side? And how are we looking to mitigate that impact?

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Rakesh, this is Rajesh here. So overall, we think that salary hikes will be similar from a medium perspective to what was there last year, with a slightly upward bias. While there will be pressures at individual markets or individual capability side, the hiring and the pyramid rebalancing that has happened, will also give a significant support. And we think that, as travel opens up more and more, our optimization levers will also increase. So there is no one specific answer to it. If you take a given variable, of course those variables have their own unidirectional impact. But in aggregate, we believe that the portfolio can lend itself for some optimization, but short-term volatility is to be expected.

Kumar Rakesh — BNP Paribas — Analyst

Okay. Thanks for that, Rajesh. One clarification. So early this month we had announced some large material deal win from a large American company. So this quarter deal in which we have announced of $11.6 billion, so that includes that or — $11.3 billion, it includes that or –?

Rajesh Gopinathan — Chief Executive Officer and Managing Director

It includes that. We announced that just — it happened just on the cash profit. This $11.3 billion includes that deal.

Kumar Rakesh — BNP Paribas — Analyst

Got it. I’ll fall back in the queue. Thank you for that.

Operator

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

Diviya Nagarajan — UBS — Analyst

Thanks for taking my question and congrats on the strong finish to the year. Couple of questions from my side. NGS, so earlier on the press conference you had talked about some of your customers stepping back and you kind of described that as backing down on or — backing up, not backing down. Could you kind of explain what that means in terms of the budget expectation for spending trends that you’re seeing with some of your customers? That’s question number one.

And question two. From an overall perspective, if you were to look at your demand outlook and the confidence that you have on the outlook versus last year, how would you kind of rate that? Is it the same, are you seeing more risk, or how would you characterize that?

N. Ganapathy Subramaniam — Chief Operating Officer and Executive Director

Thank you, Diviya. I think I answered that in the context of the Europe performance in the current quarter compared to the previous quarters, in that perspective. What we see in Europe typically across verticals is that they are the ones which were most impacted by COVID, because different countries affected by COVID in different types, and they are integrated economy, number one.

Number two is that they are just about to also manage the Brexit which happened during the last 18 months or so, and then now the war situation. All of that put together, there is some thinking about what should be the investment areas. At the same time, there is enormous focus on sustainability, whether it is across verticals, everybody in Europe is looking at sustainability as the good time agenda. Looking at all of this, there is a kind of flipping back and see where are the investors, what should be the priorities for technology investments and so on and so on. In that context, some readjustment and re-orientation of budgets are taking place. But as we explained in the press conference as well, that technology is the solution for majority of the issues that we are facing. In that context, the technology spend continues to happen, but there are some reallocation in terms of where they actually go and they spend on technology.

To your second question on the overall demand outlook, it looks very good, and I think you know the kind of deal wins and the momentum that we have, we are clearly in a better position now compared to what we were in the previous financial year at the same time. So that should augur value for our growth and our aspirations for FY ’23.

Diviya Nagarajan — UBS — Analyst

That’s very helpful. Thank you. I’ll come back in the queue if there is time. Wish you all the best.

N. Ganapathy Subramaniam — Chief Operating Officer and Executive 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

Yes. Thanks for taking my questions. Congrats on a good quarter. Well, I have only one question on the manpower side. So just wanted to understand that the situation we are going through is led by high demand and the supply is not matching it. So basically, there is kind of poaching from one another. So the real solution probably is the supply increasing. So what is your feel, how will supply increase in next two quarters given that we completely through this fresher hiring which has happened in past and the way we are hiring right now or you think that you know there are other ways to increase the supply, like cutting down the training time through accelerated training programs? Are there some other options by which we can increase the supply? Because I think that is where we are right now most hurt and probably demand environment remains robust. So what is your sense on supply issues cooling off, by when you think it will happen?

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Sandip, Rajesh here. As you rightly pointed out, what we’re seeing is a demand/supply mismatch in our industry. Fresher hiring and the productive use of freshers is a long-cycle activity. But you have seen a industry wide step-up of hiring for the last four quarters and we expect that as that supply hits the productive use, that will ease up a lot of what was going on over the last few quarters. So that’s why when we say that as we look forward two quarters ahead, we think that attrition will continue to taper down and at least flat line first and then start tapering.

The expectation is that bulk of this hiring that has gone on, is across the industry in the last calendar year. So that will start coming in and playing out also. It’s very similar to what we were seeing, is that there will be this little bit of a lag that we think that by middle of the year we should see it.

Sandip Agarwal — Edelweiss — Analyst

Thank you. That’s all from my side and best of luck for the current quarter.

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Thank you.

Operator

Thank you. The next question is from the line of Apoorva Prasad from HDFC Securities. Please go ahead.

Apoorva Prasad — HDFC Securities — Analyst

Thanks for taking my question. Rajesh, couple of quick ones. So I mean, the changes in the operating structure that you mentioned and the participation across a wider spectrum now, how does that intersect with the hyperscaler deals? And as a result of this, likely to reflect more in the $100 million client bucket or do you think it’s probably going to reflect more in the $10 million category initially?

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Apoorva, let me explain what we are doing and hopefully that will answer the question, because the services, our focus on cloud and hyperscalers is independent of what we’re doing on the structure side. So on the structure side, what we are doing is, we are realigning our governance to bring in focus in our engagement model for customers across different points of their engagement with us, and we are creating three different groups. One, focused on customers who are at the early stage of their relationship with us. Typically, in that stage, a customer is very focused on assessing whether TCS can deliver the specific project given to them. As we go forward with that customer relationship, typically the focus shifts for many of our customers to try and see will TCS be a strategic vendor around whom they can consolidate. Typically, most customers prefer to have one or two or three large vendors and vendor consolidation is a common theme across our customer base. And at that time, the question is, do we have the full spectrum of services? Do we have an ability to deliver those services in a consolidated manner? Can we manage the relationship that has set that level in terms of an enhanced support to them across both services as well as across geographical markets that they operate in, etc.? So the focus shifts to the full services model and our ability to scale up to be a strategic supplier to them. And as that phase passes through, the focus then shifts that, okay, can we step beyond being a scaled strategic vendor to being a vendor who can participate well in their transformation initiatives and across a wide spectrum of their CSO initiatives.

Now I’ve laid it out in a very kind of a time-bound manner. Many times it might happen in different sequences, but broadly this is the sequence in which a relationship kind of develops. So we are standing up different organizational groups that are focused on ensuring that the engagement models are aligned to these three stages of the customer relationship.

The specific service that we offer, for example at early stage itself, the first project might be a product implementation or it could be a TCS IT being delivered or it could be a transformative engagement on the G&P side. It doesn’t matter what that is. That project has to be executed. So that is the proof point of the early part of the relationship.

So whether it is hyperscalers, not hyperscaler, whether it is G&P not — that is not actually a pre-decided based on any of these three structures. It is more the way the engagement is governed that is being set-up. I hope that answers your question.

Apoorva Prasad — HDFC Securities — Analyst

Yes, Rajesh, that clarifies. I was also actually trying to understand how does that reflect in the $100 million versus $10 million and usually it’s the latter initially, but I get the point.

My second question Rajesh is, you did earlier mention of TCV reverting to $8 billion, $8.5 billion. So I want to understand from you how is the mega deal pipeline looking and any additional color on the two mega deals?

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Yes. Apoorva, that question was — or rather that point was in a context, I will come to it. So if you look at our commentary through the last few quarters, we had consistently maintained that the pipeline distribution of deal sizes is fairly even and similar to earlier periods. But when a very large mega deal closes or not is very hard to predict. I think this quarter’s numbers are a validation of the fact that there is nothing — no skew to the pipeline. It’s not that the industry is shifting towards very large deals or very small deals. So the quarter’s results actually validate the point that we have been emphasizing over the last few quarters.

The point about $8.5 billion was more I was saying that a better way to think about the overall pipeline progression and demand outlook. If you look at the long-term trend line of the TCV and there we used to be in the $6.5 billion range, let’s say, eight quarters back, whereas we are now well into $8 billion plus range currently and that’s the context of that $8.5 billion. It is not to say that $11.3 billion will immediately step down to $8.5 billion, but I was saying that we have seen a steady expansion of our base TCV levels, which is indication of the robust demand environment and the relevance of our services and market presence for the target customers that we have.

Apoorva Prasad — HDFC Securities — Analyst

Got it. And just the second part of that, on the two mega deals and does that mean better line of sight to replicate the $3.5 billion incremental next year?

Rajesh Gopinathan — Chief Executive Officer and Managing Director

That is a very leading question, which I shall skip.

Apoorva Prasad — HDFC Securities — Analyst

Thank you.

Operator

Thank you. The next question is from the line of Mukul Garg from Motilal Oswal Financial Services. Please go ahead.

Mukul Garg — Motilal Oswal Financial Services — Analyst

Yes. Thanks. Just two questions from my side. The first one is on the pricing and its impact on margins. You guys indicated — mentioned earlier on that you are seeing some impact of pricing in part of your business. So if you can zoom in a little bit on that segment. Is there a way to quantify the change of pricing which is happening at this point of time versus maybe a year or two prior to this? And just moving that forward, is that something which can help you mitigate the margin pressure which is there? And can that be more of a H2 event or is that impact going to flow through in FY ’24?

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Difficult to put a timeframe to it, but let me try and give you some color on what’s happening on the pricing side. Typically, renewals and other aspects of ongoing relationships, there is a slight uptick in terms of the pricing that we are seeing. It could manifest itself Kolar class [phonetic] as being better and forcible, manifest in terms of renewals at a slightly increased price point, so customers whom where we have had a good relationship and also who has seen us stand by them during the pandemic period.

So that’s the nature of the pricing. Whereas if you look at fresh new deals that are coming in, the competitive intensity is quite high and the price points there are reflective of the nature of the work. If it is a very wide field with lots of competition, the pricing reflects that. So there is no one single answer to it. It is more the smaller aspects of it are where the slight uptick of pricing is happening.

The cumulative impact of it will take some time to come through. For the full year, of course gaining from the base effect of last year, we have had a net improvement in realization. But for the quarter per se, actually the realization has been flattish. So, as I said, the cumulative effect will take some time for it to become a material impact.

Mukul Garg — Motilal Oswal Financial Services — Analyst

Sure. And the second question was on the net adds. You guys have done an incredible job of adding over 100k employees this year, how should we look at this, given that you don’t share broad utilization levels? How much of that adds this year was more to do with the future growth which you have visibility on? And how much — was there portion which was to kind of ease out the stressed deals which saw very strong growth last year and hence got consumed there?

N. Ganapathy Subramaniam — Chief Operating Officer and Executive Director

Mukul, NGS here. Overall, we had about 100,000 people who were freshers during the last financial year. Yes. So initially, we thought that we will add about 40,000, but then we remained agile and our hiring normal kind of allowed us to source the required number of people at the right levels through the year. Taking that into account, we are planning to do the same thing. We will start whereabout 40,000 freshers for the target mark of this year. But having said that, I think there is our utilization levels, including the freshers has come down in this quarter. So that is an opportunity for us to improve the utilization in the coming quarter as well as probably the H1 also.

We are also looking at other levers, right. The whole productivity has — will hopefully improve in the coming quarters. Combined with our approach to bringing people to work and then that should also see that certain amount of better utilization and better way of structuring the teams as we move forward as well, right. So all this should contribute to a better utilization and better overall realization, while we continue to look for the right talent and the majority of them will be organically grown as well.

The new organization structure and operating model that we have to take place, also means that there are additional investments that we are making in and the talent is aligned to that curated customer journey that we are putting in place. So at the entry-level, the focus is more on the right amount of technology skills, the process orientation, making sure that rigor in delivery takes place and the overall quality of experience is improved at the base level.

While at the top of the business transformation growth, we look for talent specifically contributing to the growth and transformation programs that we look at, partly from the contextual master programs that we have and then partly from the local market knowledge that we’ll be acquiring.

So it’s very well-rounded thinking process by which a good amount of talent is sourced fresh, upskilled internally as well as hired laterally and aligns the right team and putting together horses for courses or courses for horses as the situation demands for it.

Mukul Garg — Motilal Oswal Financial Services — Analyst

Sure. Thanks for answering my questions.

Operator

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

Sandeep Shah — Equirus Securities — Analyst

Yes. Thanks for the opportunity. Rajesh, just the first question is in terms of this new operating model. TCS is always best known in terms of client mining efforts. So whether this new operating model will take into consideration an acceleration of a client mining efforts and whether the variable incentives of the sales and the delivery and the other subject matter experts will have a laser-sharp focus in terms of mining across all the buckets? So how this will provide an incremental benefit to TCS? Just that is what I wanted to understand.

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Thanks. The model is more designed to ensure that the right talent in TCS is brought to bear at the right stage of client relationship, so that we can maximize the value that we add to our customers. So that’s the main focus I’d say. More than incentivization, it is about choosing the right people and also setting up their support structures appropriately and investing in that aspects of the engagement model, and also the distribution of people and customers and the kind of concentration that we have of relationships. That’s the focus. So A, more than incentive, it is about finding the right people for the right roles and structuring the roles in a more concentrated way. And B, it is about making sure that we maximize the value that we add to our customers.

Sandeep Shah — Equirus Securities — Analyst

Okay. And just second question, NGS in his comments has also said, while entering FY’23, we are more confident versus FY’22, while what we foresee in FY’23 is definitely not many macro related issues. So is it how client discussion indicates that this time the co-relation of the IT spend versus macro issue would be no longer be that direct and the IT spend will not get impacted despite the macro related issue as a whole? So just wanted to understand any client discussion which gives you some concern in terms of reprioritization of spend, delay in terms of project starts or ramp up valuables?

N. Ganapathy Subramaniam — Chief Operating Officer and Executive Director

Sandeep, you know, I mentioned that comment in the context of — to temporarily speaking as we were last year. And where we were — yes, we have to see us. Comparatively speaking, I think from our momentum that we see, the demand environment that we see and the pipeline and the deals that we have contracted, all that when I compare it, I think we are in a better bracket compared to what we were in the same time last financial year, last year. That is the context in which I made that statement. I said that I think you know the macro issues, there are many comments are being made, economists — IMF has made a series of comments on this. World Health Organization has made certain comments, the war situations are there. We are tracking all of this and then we will have to stay agile and force correct ourselves as we execute our operations, one.

Secondly, I think we also — what we see is that, whether it is in good time or in bad time or in the stuck situation or in a very nice situation, technology is really the answer and the people — the investment bucket might change from one to the other, but then the technology spend is likely to remain robust. That’s the way that we see things. That’s the way that we also try and measure the impact on geopolitical risk with other macroeconomic indicators.

Sandeep Shah — Equirus Securities — Analyst

Okay. And just lastly bookkeeping. For these two large mega deals, is it possible to share the tenure of these two deals? And also in cost of revenue line, this time the absolute travel cost has been one of the lowest in the fourth quarter, have slightly improved. So will that remain in this level? Because work from office is starting across most of the vendors as a whole. So what is the reason for such a lower cost on travel?

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Let me answer the first part and then Samir will take the next one. Typically for larger deals, the deal tenure for us is somewhere in the five to seven range and for deals which are closer to $1 billion, they are upwards of seven years and these deals are also similar to that, it’s in the seven to 10 year kind of a range, both the deals that we have.

Samir Seksaria — Chief Financial Officer

And on the travel costs, in fact travel has been sluggish, specifically in the first two months of the quarter, and also there was moderation in Visa cost during the quarter. As we have called out, we expect discretionary expenses to increase and that is to that extent an abnormality. We haven’t seen travel expenses increasing through the previous quarters and that trend should continue.

Sandeep Shah — Equirus Securities — Analyst

Okay. Thanks and congratulation on a great quarter. Thanks.

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Thank you.

Operator

Thank you. The next question is from the line of Ravi Menon from Macquarie. Please go ahead.

Ravi Menon — Macquarie — Analyst

Thank you. Gentlemen, congratulations on a pretty good quarter of very strong bookings and your extremely strong employee additions. First, I want to understand before, typically in Q3 you have furloughs and lower number of working days with a lot of holidays and Q4, you really get the benefit of that despite fewer days in the quarter. At this time, I think we have not really seen that absolute incremental revenue has declined compared to what you averaged in Q2. So what were the headwinds? And did we not have any furloughs in Q3, usual seasonality, the focus on it like [phonetic]?

Rajesh Gopinathan — Chief Executive Officer and Managing Director

So, one thing to look at in Q3, this quarter, Christmas was an holiday. So technically there was one more working day compared to usual period. Furloughs did continue in Q3. But I think that is one if you look at from a working days perspective, Q3 had one more day because of the National Hot Dog global holiday being one-off, weekend.

Ravi Menon — Macquarie — Analyst

Thank you. And then in Europe, we had a slight revenue decline in absolute terms. So I think you mentioned in your first comment about the deal answer at Postbank? Is there anything else, do you have any programs put on pause by clients because of the war situation in Ukraine or anything else that you see as temporary or is there anything specific that you’re concerned about?

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Yes. I think it’s more in terms of we got to feed the perspective of what. Q3 was a very strong numbers, so it’s off that that this growth should be seen. Beyond that, there is not much of a — it’s a normalization from the Q3. And Q3 we had a 6% plus growth in Europe. So it’s in that perspective.

Ravi Menon — Macquarie — Analyst

Last question from my side. You’ve got now 14.3% Y-o-Y growth in constant currency terms, but your headcount is up maybe 21.2% Y-o-Y. NGS did speak about utilization including training. But the trainees you would have onboarded —

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Could you speak up a bit?

Ravi Menon — Macquarie — Analyst

Yes, sorry. In the first half of FY ’22, the trainees you onboarded, I would assume have been largely deployed if not wholly deployed. So why this large gap between the employee addition and revenue growth? Should we say that this is just capacity that’s built up because of attrition and preparing for better growth, so that you’re not really short of people? Are we just playing safe?

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Okay. If you are asking why is the mismatch in terms of when there is employee addition happens and where the revenue comes, that, Ravi, we have been long-term focus, especially on our fresher hiring, it’s a programmatic hiring approach that we have taken and we were one of the few companies that hired through the pandemic, honored every offer that we made and continued to hire through the pandemic. So our approach to fresher hiring has always been medium-term focused and not directly in the — more the EP hiring is the one that is more short term one. But short term side, as you can see from our subcontractor expenses, we are anyway running very tight on that. So the EP hiring continues, fresher hiring is more longer-term focused, medium to long term focused.

Ravi Menon — Macquarie — Analyst

Great. Thank you, Rajesh. Best of luck.

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Thank you.

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. Thank you for taking my question. The first one is, just your comment around Europe, you talked about some re-allocation and reorientation of technology budgets. Just trying to understand how did this manifest in client behavior in terms of timing of deal closures or decision-making cycle?

N. Ganapathy Subramaniam — Chief Operating Officer and Executive Director

No, I think the re-allocation of budgets comment has made in the context of again, Europe, right, where there are multiple scenarios are emerging there. And in certain verticals, sustainability is important, pretty much in across the client base that we see. Most of them want to see — they have made some very strong commitments on the sustainability front and the goal front. From that perspective, one of the things that happened is, every program that they are doing, there is a very strong alignment to the sustainability goals and how the technology that we are implementing is going to be contributing to their sustainability goals. To that extent, some amount of reallocation takes place.

The other thing is actually the war situation currently, means should we really look at it in the context of where we should invest or how we should do? And as a conscious thing on the customer, they’re asking us to see whether we could actually execute it from our Eastern European development centers, because that is a skill sets that are coming and then they are available. Number two is that also, the least that we can do at this point in time used to be meaningful to the communities in those countries. So in that sense, there is some amount of reallocation will continue taking place in terms of how the technology can take place, how the allocation of the technology are — where the trend has o take place. These are things that have been deliberated.

Gaurav Rateria — Morgan Stanley — Analyst

Okay. Thank you. The second question is around margins. So you talked about volatility in margins in fiscal ’23. So is there any threshold level below which you would want margins to not go or the focus will be largely to fulfill the demand without caring too much about the volatility in the near term?

Rajesh Gopinathan — Chief Executive Officer and Managing Director

We don’t have any specific floor or cap on the margin front. Our commentary on margin has always been about where we think the overall opportunity is and where we think we can stabilize it. But per se, as you said, we have never put margin over given business or growth opportunity. But we stay very disciplined in chasing growth, and we prefer profitable growth over litigants.

Gaurav Rateria — Morgan Stanley — Analyst

Okay. Thank you so much.

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

Perfect. Thank you. As I said, we had a strong well-rounded growth in Q4, which helped us close FY ’22 on a strong note, growing 16.8% in rupee terms and 15.4% in constant currency terms and 15.9% in dollar terms. Our margins continue to be industry-leading. The strong growth came from our customer-centric model, which visibly shows in our clients metrics where we have had strong adoption across all revenue bands.

We are now doubling down on that customer-centricity by rolling out a new organization structure that will enable curated experiences for our customers depending on what stage they are at their relationship with TCS. The strength of demand for our services showed through in an all-time high order book during the quarter, even after excluding the two mega deals we won in Q4. We have hired fresh talent in record numbers this year in India and in our major markets, while taking tactical measures to retain our best talent in the midst of an elevated churn across the industry.

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

Operator

[Operator Closing Remarks]

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