Tata Consultancy Services Ltd Q1 2025 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Ankur Rudra - JPMorgan - Analyst : So just maybe the first question, we've seen an element of pickup in overall growth momentum this quarter. However, if I peel out the growth from India, growth in the international business is about 1.5%, both sequentially and year over year on constant currency terms. So in this context and also the fact that deal wins are sort of weaker than the last four-quarter average, the question is what gives you the confidence that fiscal '25 will truly be better than fiscal '24? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JULY 11, 2024 / 1:30PM, TCS.NS - Q1 2025 Tata Consultancy Services Ltd Earnings Call

Question: Ankur Rudra - JPMorgan - Analyst : Okay. Appreciate it. The follow-on question for me would be on Generative AI. You did highlight that your overall AI pipeline has strengthened. But if you just stay with Generative AI, how is that impacting your business? If you can give us some color in terms of how it's impacting specific projects and customer perception. A related question is do you feel that Generative AI in client conversations and client thinking is potentially creating a headwind for spending on IT services?

Question: Ankur Rudra - JPMorgan - Analyst : Appreciate it. Just last question, if I can squeeze in. Any comments on pricing given the nature of the business? Thank you.

Question: Sudheer Guntupalli - Kotak Mahindra Asset Management Companies Limited - Analyst : Congrats on a good set of numbers. In March, you indicated that the demand visibility has certainly improved over December quarter. Now you delivered growth better than expectations. In that backdrop, just trying to get a context of your comments in the press that you don't want to yet call out the sustainability of the current growth number given the volatile environment. Is it just a philosophical stance you are taking not to indulge in near-term guess work or quarterly guidance given the uncertainty? Or is this by any chance, led by a relative weakening of demand visibility versus March quarter for whatsoever reasons? What I'm trying to understand is that directionally, are we seeing a steady improvement or stability in demand over time? Or is demand moving like a sinusoidal curve over quarters?

Question: Sudheer Guntupalli - Kotak Mahindra Asset Management Companies Limited - Analyst : Sure, sir. And the second question is on your other statement that clients are neither going for large-scale technology initiatives nor going for deep spending cuts. So if we were to quantify this qualitative statement, is it fair to say that since the deep spend cuts are already in the denominator, incrementally not having them should still be a mathematical tailwind for us in terms of growth?

Question: Kumar Rakesh - BNP Paribas - Analyst : My first question is more of a request, Krithi. If you could consider starting to give guidance on a full-year basis, that would be really helpful. Because I really don't understand why a large company and successful one like TCS should not have a guidance and almost every other peer of yours have. And the challenge, which at least I face is the operating matrices which you share are not enough to give us a full picture of how the trends are panning out. The deal TCV has a very poor correlation with the revenue trend, and the other operating metrics is -- also are relatively lesser than what the peers have been giving. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JULY 11, 2024 / 1:30PM, TCS.NS - Q1 2025 Tata Consultancy Services Ltd Earnings Call Now demand appears to have started stabilizing. You have settled in your office for a few quarters now. So now may be a good time to relook at this strategy, whether you want to start giving a guidance. I understand TCS hasn't in the past, but maybe a good start to give. And if you take a feedback and if you still conclude that you should not give a guidance, then at least maybe you start giving some more operating matrices such as order backlog or ACV numbers that we can do our own numbers and come to a sense that what direction the growth potentially could be.

Question: Kumar Rakesh - BNP Paribas - Analyst : That would be great. Thanks. My second question specifically was on the GenAI side. So you did talk about $1.5 billion of deal pipeline on AI and GenAI side. Can you give some sense how the booking and revenue conversion could possibly be? You have spoken about 270 projects you are working on. So is it fair to expect that about triple-digit million dollars of total revenue TCV you may have been working on, on the GenAI side?

Question: Kumar Rakesh - BNP Paribas - Analyst : Sure, sure, makes sense. Yes. One question on the BFSI side. So it was encouraging to see that BFSI has now returned to growth. So is that a reflection of absence of last two quarters of furlough? Or you are seeing some recovery on the ground in terms of client engagement as well?

Question: Abhishek Pathak - Motilal Oswal Financial Services Limited - Analyst : My first question was on the communications vertical. Sir, what near-term catalysts do you see in this vertical, which could meaningfully alter client behavior and it could bring it back to growth? We've seen almost five quarters of decline now. So when do you expect the historic CapEx that the operators have done to trickle down to services? That's one. And secondly, the life sciences vertical, it has been quite strong for FY24, another strong quarter. So do you think client behavior here is any different to, let's say BFSI, where cost takeout is the main theme? Do you see more adventurous projects here? Or is the theme pretty much similar? Thank you.

Question: Ravi Menon - Macquarie Group - Analyst : Krithi ji, you spoke about how we finally see America and North America come back to sequential growth. I don't think even during the financial crisis, we've had a situation where we had five quarters of sequential decline. So this was an unusual time, but do you think that we've finally bottomed out here? And should we see sequential growth from here in North America?

Question: Ravi Menon - Macquarie Group - Analyst : If you look at the trailing 12 months book-to-bill as well, this is -- when we started seeing that drop, that's when I think a very new start. Should we think about that as a lead indicator? And now we've seen that trend up -- last quarter, of course, you had a pretty extraordinarily good-looking REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JULY 11, 2024 / 1:30PM, TCS.NS - Q1 2025 Tata Consultancy Services Ltd Earnings Call quarter. So that moved that up as well. But you're are trending above [1.35, 1.37], now for three, four quarters. So should we think about that as a good leading indicator, if not for a quarterly indicator but at least for the full year?

Question: Ravi Menon - Macquarie Group - Analyst : Thanks. And one last question, if I may. You were, I think, moving to a pattern of onboarding all the fresh graduates you make offers to in the first half of the year. And then this year, are you planning to continue that? Or should we see this more spread out over the quarters?

Question: Nitin Padmanabhan - Investec India - Analyst : I had three questions. The first one is on the press conference, you had mentioned that you look at three indicators broadly when you look to assess a recovery. So I think which was reevaluation of ongoing projects. How many -- how much people want to spend on cost optimization and how much people want to invest? Now could you give us -- could you please expand on that, at least from a BFSI and retail, CPG perspective? So that's the first one on how you're seeing trends across those three buckets. The second is on margin levers. I think last year, after the first quarter, we saw almost a 100 basis points margin expansion each quarter. But since then, I think we have sort of brought down subcontracting fairly well. We have also improved utilization fairly. So I just wanted your thoughts on the puts and takes on margins on how we should think about it on a going-forward basis. And lastly, ISG basically spoke about some 30% cost savings in ADM and infra from -- due to GenAI. I just wanted to understand your experience on that and how you're seeing this -- that pan out. Thank you. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JULY 11, 2024 / 1:30PM, TCS.NS - Q1 2025 Tata Consultancy Services Ltd Earnings Call

Question: Nitin Padmanabhan - Investec India - Analyst : Yeah, I just had a small follow-up for Krithi but I'll go after you.

Question: Nitin Padmanabhan - Investec India - Analyst : Sure, sure. So Krithi, just had a follow-up. So the reevaluation of ongoing projects, I think, last quarter was pretty bad. Not the recent quarter, the quarter before, was pretty bad, not only for you but for everybody. There was a lot of reprioritization of projects. From a client perspective, are you seeing that come off? Or it is still very extremely uncertain? While it might have been better this quarter, do you see that it is still very uncertain on the reprioritization basis? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JULY 11, 2024 / 1:30PM, TCS.NS - Q1 2025 Tata Consultancy Services Ltd Earnings Call

Question: Sandeep Shah - Equirus Securities Private Limited - Analyst : Krithi, just wanted to understand, is it fair to believe that the first quarter performance has been higher than the management expectation and what has led to this? Is it largely better-than-expected discretionary spend revival or better-than-expected ramp-up in the cost takeout deals?

Question: Sandeep Shah - Equirus Securities Private Limited - Analyst : Okay. Okay. Fair enough. And second, in terms of ramp down pace in the discretionary project, are you witnessing any kind of a declining pace in the ramp down of discretionary project on a Q on Q or a YoY basis? Or do you believe the pace of ramp down continues to remain at the same elevated level and there is no change in the pace?

Question: Sandeep Shah - Equirus Securities Private Limited - Analyst : Okay. Okay. And Krithi, last question in terms of annuity projects, which are larger projects coming for renewal. What is your experience in terms of clients negotiating for a productivity gain because of the GenAI? Is it -- the earlier response also being true for such kind of an experience on a large renewal, where you expect 5% to 20% reduction in those renewals?

Question: Vibhor Singhal - Nuvama Group - Analyst : So two questions from my side. One, Krithi, just wanted to understand on the retail segment. I mean, this is a quarter in which we kind of believe we turned the corner. But for us to be able to report growth on a sustainable basis in this, what exactly are the clients' worries in the sector at this point of time? So like in BFSI, we know that I think if the US macro improves, I think that should lead to some, let's say, incremental spending or revival of tech spending that they have put on hold. Interest rate cuts could be possible triggers and all. But what is that is keeping these retail clients -- their spend on hold? And what could possibly change in the coming quarters for us to start reporting growth in this segment on a sustainable basis?

Question: Vibhor Singhal - Nuvama Group - Analyst : Got it. But then improving macro situation in which maybe inflation is coming down with the CPI data today or let's say, there's some possibility of, let's say, interest rate cuts, you expect this segment -- those should act as tailwinds for the sector?

Question: Vibhor Singhal - Nuvama Group - Analyst : Got it. Got it. Absolutely helpful. Just my last question, on the manufacturing and healthcare verticals. Now these two verticals have done really well for us, especially over the past three quarters. They've been doing well for almost the entire industry with the kind of spends in that. Any possible headwinds that you are seeing in this segment? Or at least at this point of time, the growth momentum should continue? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JULY 11, 2024 / 1:30PM, TCS.NS - Q1 2025 Tata Consultancy Services Ltd Earnings Call

Question: Gaurav Rateria - Morgan Stanley - Analyst : The first question is around the nature of deal pipeline. If you could just a little bit elaborate more on what kind of deals you're seeing in the pipeline. And has there been any shift in the mix of the deals towards more smaller deals that get consumed into revenue faster or it continues to remain the way it was in last few quarters?

Question: Gaurav Rateria - Morgan Stanley - Analyst : Got it. Secondly, on the BFS, you did talk about some better trend in North America this quarter. Is there any reason to believe that the projects that you have embarked upon would not continue in the near term? I'm just trying to understand that from a visibility perspective, at least some of these projects should continue if they are longer tenured, right? So then from a visibility point of view, in the BFS vertical, there should be a decent visibility at least for the near term?

Question: Gaurav Rateria - Morgan Stanley - Analyst : Got it. Last question from me. The head count, we have seen the positive addition in last several quarters. So is this a reflection of that utilization has kind of peaked out from -- or reached an optimal level, where we should be? Or is it also a reflection that our order book has to be executed in the coming quarters and hence, we will be needing more heads on the roles? Thank you.