Ladies and gentlemen, good day and welcome to the TCS Earnings
Conference Call. As a reminder, all participant lines will be in the listenonly mode and there will be an opportunity for you to ask questions after
the presentation concludes. Should you need assistance during this
conference, please signal an operator by pressing star then zero on your
touchtone phone. Please note that this conference is being recorded. I
now hand the conference over to Ms. Nehal Shah, Head - Investor
Relations at TCS. Thank you and over to you.
Nehal Shah:
Thank you, operator. Good evening and welcome, everyone. Thank you for
joining us today to discuss TCS' financial results for the second quarter of
FY 2027 that ended on September 30th, 2026.
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. K Krithivasan, Chief Executive O icer and Managing
Director.
K Krithivasan:
Hi everyone.
Nehal Shah:
Ms. Aarthi Subramanian, Executive Director, President, and Chief
Operating O icer.
Aarthi Subramanian: Good evening, everyone.
Nehal Shah:
Mr. Samir Seksaria, Chief Financial O icer.
Samir Seksaria:
Hello everyone.
Nehal Shah:
And Mr. Sudeep Kunnumal, Chief HR O icer.
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Sudeep Kunnumal:
Hello everyone.
Nehal Shah:
Our management team will give a brief overview of the company's
performance followed by a Q&A session. As you are aware, we don't
provide any 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 risk that the company faces.
We have outlined these risks in the second slide of the quarterly fact sheet
available on our website and emailed them out to those who have
subscribed to our mailing list. With that, I would like to turn the call over
to Krithi.
K Krithivasan:
Thank you, Nehal. Good day everyone and thank you for joining us. I would
like to begin by calling out the key takeaways from our Q2FY27
performance.
First, we sustained our growth momentum this quarter, despite an
environment that remains selective and uneven. Revenue for the quarter
was ₹73,188 crore. In constant currency, revenue grew 0.5%
sequentially and 2.8% year-on-year. International revenue grew 1.2%
sequentially in constant currency. All international markets grew
sequentially, led by the United Kingdom at 3.5%, followed by North
America and Continental Europe at 0.4% each.
Second, our growth has broadened across our core portfolio. BFSI
grew 2.5% sequentially in constant currency, while Manufacturing and
Technology and Services each grew 3.1%. Consumer Business and
Energy, Resources and Utilities showed an improvement compared to
the previous quarter. India revenue grew 6%, and Regional Markets grew
3.6% year-on-year.
Third, our order book remained healthy. TCV for the quarter was US$9.6
billion. This excludes the Porsche and Best Buy deals. The quality of the
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wins demonstrates our continued relevance in large, complex, and
strategically important transformation programs.
Fourth, AI continues to scale as a structural growth opportunity.
Annualized AI revenue reached $3.1 billion and crossed 10% of our
overall revenue.
Finally, we advanced our strategy through AI-led deals, ecosystem
partnerships, and targeted acquisitions.
Our partnership with Porsche and the proposed acquisition of MHP,
which is subject to regulatory approvals, strengthen our position in AI
powered mobility and engineering.
-
The Best Buy GCC engagement highlights our ability to help clients
build and transform AI-native global capability centers.
-
We also launched TCS ADD AgentHub for drug discovery, domainspecific agentic control planes, and new Physical AI capabilities,
including Autonomous Engineering Lab powered by NVIDIA in
Bengaluru and an AI-first lights-out factory lab in Pune.
The demand environment has not materially changed since last quarter,
and discretionary programs without near-term value remain under
scrutiny. Against this backdrop, our primary opportunity and focus are on
translating the advances in AI into measurable enterprise advantage for
our clients.
I will now invite Samir, Aarthi, and Sudeep to go over di erent aspects of
our performance during the quarter. I'll step in later and provide more
color on the demand trends that we are seeing. Over to you, Samir.
Samir Seksaria:
Thank you, Krithi. Good day everyone.
Our quarterly revenue was ₹73,188 crore, a growth of 1.3% sequentially
and 11.2% on a year-on-year basis. In dollar terms, revenue was $7,642
million, a growth of 20 basis points sequentially and 2.4% year-on-year.
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In constant currency terms, our growth was 50 basis points QoQ and 2.8%
YoY.
Our operating margins remained stable sequentially at 24%. Consistent
with our philosophy to drive long-term profitable growth, we continued to
prioritize investments for growth.
In Q2, we made investments in strategic partnerships, M&A-related
initiatives, and hiring of niche talent. As we build future capacity and
navigate demand transitions, we have invested in a higher bench and
increased hiring of subcontractors to meet near-term skills and delivery
requirements. This quarter, we were able to mitigate these headwinds
partly by currency gains and operating leverage.
Many of these investments are strategic in nature and are focused on longterm value creation. Our disciplined approach to margin management
remains unchanged. As growth improves, we expect to benefit from
enhanced scale e iciency while continuing to optimize our cost
structures, align capacity with demand, and maintain our disciplined
execution.
While we are prioritizing investments, we are focusing on 5 key areas:
First, we continue to strengthen our portfolio through targeted
capability acquisitions.
Second, we are adding a stronger partnership ecosystem with
Frontier
AI
companies,
Hyperscalers,
Semi-Conductor
ecosystem, Tier-1 industrial suppliers, and enterprise software
providers.
Third, we are accelerating investments in our high-growth service
areas – We are making investments in sales, solutioning, service
transformation, new o erings, and business models across the
five big bets we have called out, with a specific focus on AI and
data.
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Fourth, we are investing in talent and capability creation at scale
on learning and development, as well as on hiring niche talent.
Lastly, we are creating new growth engines for the future. We are
expanding into adjacencies, such as data center services,
increasing our o erings for GCCs and the mid-market segments,
strengthening our presence in areas such as ServiceNow, Public
Services, and Sovereign Cloud.
Our priority remains clear: convert investments into sustainable growth
while preserving the discipline that has consistently underpinned our
profitability.
Our net margins for the quarter were 19%. DSO stood at 74 days, constant
sequentially in dollar terms.
Our cash conversion remains strong at 102.2% of net income and funds
invested at the end of the period stood at $5.98 billion.
Our capital allocation policy remains unchanged, and we remain
committed to returning substantial free cash flows to our shareholders
while judiciously investing to support our long-term growth aspirations.
I will now hand it over to Aarthi.
Aarthi Subramanian: Thank you, Samir. Good evening, everyone.
The biggest opportunity in front of us is in helping clients translate
advancements in AI into business outcomes.
Clients see TCS as a partner who can use AI to enable growth, speed,
e iciency. They are keen to invest the productivity benefits from AI into
enterprise transformation initiatives that will make their organizations
future-ready. TCS is benefiting from this shift, as evidenced by our growing
AI revenues that crossed $3 billion on an annualized basis this quarter.
Our priority is clear: use AI to create measurable value for our customers,
and to improve how we deliver work for them. This quarter, we made
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progress on both fronts, with growth in our AI business and wider adoption
of our Human+AI services delivery model.
We are seeing three distinct demand patterns: (1) AI-native solutions with
business outcomes, (2) AI-led transformation of enterprise systems, and
(3) Autonomous GBS. Enterprises are also prioritizing investments in
modernizing legacy data estates and building AI-ready data foundations.
Across these demand patterns, strong AI governance with secure AI
platforms is becoming a top need for enterprises.
Let me share an example of how we are building AI-native solutions with
assured business outcomes.
For a global industrial manufacturer, we are using an AI-native
approach to solve a critical business need, compressing lead-toquote time from 4.7 days to under an hour. We achieved this within
a quarter, clearly demonstrating speed to value. The next step is to
improve their lead-to-conversion metric. This is a good example of
focused problem-solving and business outcome realization with
AI.
Now let me share how AI is changing the approach to transforming
enterprise systems. AI is playing a key role in process mining, which helps
us understand existing workflows. Redesigning processes with a human
and AI approach by default is enabling upfront identification of agentic
opportunities. And the acceleration of implementations with AI is real.
In a large, complex S/4HANA enterprise transformation spanning
27 sites, more than 70 legal entities, we are using AI to redesign
processes and accelerate implementation. Our approach,
supported by TCS’ agentic platform, targets 25% to 30% faster
implementation.
Last quarter, I spoke about autonomous GBS and how agentic AI in
business process execution is scaling significantly. Business ops teams
are now embarking on agentic transformation across finance, HR,
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procurement, and customer service. This is opening new opportunities for
us to engage with business teams and create new value propositions.
For a North American energy resources company, we are
transforming their global HR operations to double operational
e iciency and increase self-serve adoption from less than 10% to
30%.
Beyond AI, cybersecurity is another area enterprises are prioritizing
globally. While enterprises continue to strengthen cyber controls, the
focus on cyber resilience and recovery is rising.
Frontier
models
are
also
changing
how
enterprises
manage
vulnerabilities, enabling discovery, prioritization and validation.
For a European bank, we are reimagining enterprise security
through an integrated AI-powered operating model.
Recent AI-related cybersecurity incidents are a reminder that AI needs the
same rigorous engineering and operational discipline as any enterprise
technology.
Strong governance and clear guardrails must therefore be built into every
enterprise AI deployment. As agents scale, enterprises will need more
robust orchestration, access controls, security, observability, cost
controls, and policy enforcement.
Cost discipline matters just as much. We help clients manage AI token
costs through benchmarking, model and architecture selection, token
economics, and FinOps advisory. Our focus is to deliver the right level of
intelligence at the right cost.
This creates a significant and growing opportunity for TCS across AI
governance services and platforms. We recently won an engagement with
a major global insurer to build an enterprise AI agentic platform and a
common agentic control tower for managing both in-house and third-
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party agents. Our engineering depth and working demonstrations helped
create di erentiation.
We are also working more closely with business teams to turn their
priorities into realized benefits. In one engagement where TCS was not the
incumbent, our team identified pain points and built working
demonstrations during a three-day customer workshop, which helped us
secure the deal. 21 Forward-Deployment Engineers are now working
directly with business on executions.
Over the last 12 months, we have made good progress in deploying our
Human+AI service autonomy model across client engagements. For
Agentic AMS, TCS has earned top ranking from customers, underscoring
the strength of our di erentiated capabilities delivered at scale.
Our investments in Salesforce are delivering results. By combining the
strengths of Coastal Cloud, ListEngage, and our own Salesforce practice,
we are driving significant growth. Recently, leading analysts have
recognized this progress, ranking TCS as the #1 Salesforce Services
partner.
Looking ahead, will continue to engage customers across their business
and technology transformation agenda, leveraging our capabilities,
context, and industry platform solutions to create distinctive value
propositions. These are early days, so being progressive and proactive
with our ideas and solutions is essential, and we are doing this the way we
know best – with a customer-centric approach.
Thank you. I will now hand it over to Sudeep.
Sudeep Kunnumal:
Thank you, Aarthi. Hello everyone.
This quarter, we continue to invest in future-ready talent, onboarding top
talent globally, taking our workforce to 598,056 associates.
Our hiring strategy continues to balance experienced talent, early career
talent, and internal mobility. As client demand evolves, we remain
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focused on strengthening AI and domain expertise, improving deployment
readiness, and investing in continuous learning.
Over the past year, we have significantly expanded our technology and AI
capabilities through large-scale learning and reskilling initiatives. Our
learning hours saw a 17% QoQ increase to 17.1 million hours.
LTM attrition in IT services reduced by 30 basis points sequentially to
13.3%.
This ability to combine workforce stability with continuous at-scale
learning remains a key di erentiator for TCS.
We remain committed to building a future-ready workforce and a
workspace where associates can learn, contribute, and grow.
Thank you and I now hand it back to Krithi.
K Krithivasan:
Thank you, Sudeep.
Let me now provide some additional color on industry trends before
concluding our prepared remarks.
BFSI was our strongest large vertical and the largest contributor to
growth, with 2.5% sequential and 3.9% year-on-year growth in
constant currency. Growth was broad-based across banking,
capital markets, and insurance, with strong momentum in the UK,
Europe, and Asia Pacific. Clients continue to invest in AI, risk and
regulatory modernization, cyber resilience, data platforms, and
operational e iciency.
Manufacturing grew 3.1% sequentially and 4.2% year-on-year.
Demand is improving around factory automation, engineering
productivity, product lifecycle modernization, supply chain
resilience, predictive maintenance, and industrial AI. Our
investments in AI-led vehicle engineering, smart manufacturing,
and physical AI are helping us participate in larger and more
strategic programs.
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Technology and Services grew 3.1% sequentially and 4.8%
year-on-year. Growth was driven by enterprise software,
technology products, engineering, cloud modernization, and
digital transformation. At the same time, traditional application
and infrastructure portfolios are seeing an increase in agentic AI
adoption. We are leading with AI-first software engineering,
autonomous operations, platform simplification, and AI-ready
data foundations.
Consumer Business declined by 0.7% sequentially and 1%
year-on-year. Retail and consumer products remain sensitive to
inflation, energy costs, and selective consumer spending. Travel,
transportation, and hospitality demand remained resilient, but
discretionary spending is a ected by cost pressure and increased
insourcing. We continue to see opportunities in operational
e iciency, supply chain visibility, customer experience, pricing,
cloud, data, and AI-led modernization.
Life Sciences and Healthcare grew 0.3% sequentially, with
stable demand supported by long-term priorities in compliance,
clinical and research platforms, data modernization, AI-enabled
drug
discovery,
patient
engagement,
revenue
cycle
modernization, and cybersecurity.
Communications and Media was broadly flat, with growth in
media, publishing, and digital platforms o set by continued
pressure in the telecom vertical.
Energy, Resources, and Utilities declined 0.5% sequentially,
although
investments
in
grid
modernization,
resilience,
cybersecurity, asset optimization, and AI-enabled operations
remain relevant.
International revenue grew sequentially. Performance improved across
most industry groups, and growth broadened across the core portfolio.
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Our TCV was at $9.6 billion, our win rates improved, and annualized AI
revenue reached $3.1 billion.
We believe clients are moving toward a new phase of enterprise AI
adoption. Opportunity is shifting from isolated use cases to redesigned
value chains, governed agentic systems, AI-ready infrastructure, and
Human+AI operating models. Our Infrastructure to Intelligence strategy,
contextual knowledge, delivery capabilities, platforms, and ecosystem
partnerships position us well for this transition.
We will continue to execute with discipline, invest in di erentiated
capabilities, and help our clients achieve measurable outcomes in
growth, productivity, and resilience. These priorities support our
aspiration to become the world’s leading AI-led technology services
company and create sustainable value for our clients, employees, and
shareholders.
With this, we will open the line for questions.
Moderator:
Thank you very much. We will now begin the question-and-answer
session. We will take our first question from the line of Sudheer Guntupalli
with Kotak Mahindra Asset Management. Please go ahead.
Sudheer Guntupalli: Hi, Krithi. Thanks for the opportunity. My first question: Your core markets’
growth accelerated quite nicely in this quarter. Do you think the
momentum in this part in the international business to continue in the
coming quarters as well?
K Krithivasan:
Sudheer, definitely, looking at all the parameters, I don't want to comment
on the immediate next quarter basis, but on a medium-term basis, looking
at the TCV, looking at the pipeline and the client conversations that we are
having, we're confident that growth momentum will continue.
Sudheer Guntupalli: Sure, sir. Both BFSI and Hi-Tech verticals are reflecting a typical
September quarter kind of seasonal strength this time. Given these two
verticals also are the ones which are early adopters of technology, is it fair
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to sort of assume or conclude that AI deflation impact, at least in these
two verticals, is now more than o set by incrementality of AI opportunity?
K Krithivasan:
I don't want to say it is complete, Sudheer, on one hand, there is a
deflation because of the productivity benefit. But also, these industries
use AI for modernization, and it also creates vendor consolidation
opportunities. Also, for instance, if you take BFSI. BFSI is where our AI
revenues, the percentage also grew very fast.
There are a number of things that are happening in these industries. I don't
want to conclude by saying that the deflation part is complete, but I think
there are a number of opportunities in these industries we are working on,
which gives us confidence that the growth can continue.
Sudheer Guntupalli: Okay, sir. One last question to Samir. On the subcon increase this quarter,
should we see this as a proxy for visa cost, given that we would not have
applied for a lot of visas, given the sharp jump in visa fee last year?
Samir Seksaria:
The overall increase in subcon has been across India as well as overseas.
It is more to meet near-term demand-supply skill mismatches. Some part
of it could be linked to visa fee hike also, but not completely.
Sudheer Guntupalli: Thanks, sir. All the very best.
Moderator:
Thank you. Our next question comes from the line of Ravi Menon with Axis
Capital. Please go ahead.
Ravi Menon:
Thanks for the opportunity. First of all, congrats on a pretty good
performance across multiple verticals this quarter. But we've seen the
India revenue decline by about 10% and also seen a slight decline in the
100 million clients as well this quarter and 50 million clients as well. Are
both these client metrics decline, and India revenue correlated, and what
caused this revenue decline in India?
K Krithivasan:
Ravi, as we have always been calling out, the regional market, while we
say regional market, it's a bunch of quite a few volatile segments. In India,
we had a project deferral, which caused this revenue decrease.
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Otherwise, there's no structural issue, and we are hoping to deliver these
projects in subsequent quarters once the projects are reinstated. We
don't see any major concern there.
On the client metric, we had only one specific drop. The second is coming
because of the currency exchange. The account, which was at the cusp,
dropped below the 100 million band, because of the currency movement.
So, there is no structural issue.
Ravi Menon:
Thanks so much for that. Can we think about this disclosure about AI
revenues as similar to what we've seen for digital? When we saw that
digital portfolio reached a certain level and that was growing much faster
than the overall portfolio, you saw that inflection point for growth. With AI
revenues now hitting 10%, can we say that from here, growth has troughed
out if you look at, say, on a last two, three years basis compared to looking
at the next two, three years? Would you say that you're more optimistic
that growth would be faster in the next two, three years compared to the
last two, three years?
Aarthi Subramanian: Ravi, this is Aarthi here. So, I think, like you said, I think we did quite well
on AI revenues this quarter. But when we look at our revenues, we look at
traditional revenues, new services revenues, and AI revenues. Our new
services revenues did well this quarter, whether what Krithi alluded to AIled tech modernization, enterprise core transformation, whether it's on
the ERP side or on the industrial side in manufacturing and pharma sector,
BPS, cybersecurity, all of them did well. Obviously, the AI growth rate came
out rather nicely.
On the traditional services also, vendor consolidation and AI-powered
software engineering, IT ops, how we innovate in execution is helping us
di erentiate and grow market share in traditional services also. In a space
where AI is definitely creating e iciency and productivity, but there are
tailwinds on the back of vendor consolidation in those traditional areas as
well.
Page 13 of 28
Ravi Menon:
Thank you so much for the detailed explanation. One last question to
Samir. To get back towards 26%, which is the aspirational margin, do you
think that we'll be able to bring down subcontracting costs over time, or
what are the key levers that could take you towards 26%?
Samir Seksaria:
Overall, our long-term aspiration remains unchanged, continues to be
26% to 28%. In the near term, we will continue to prioritize investments
for growth. Looking ahead, in terms of what are our levers available;
subcon expenses, given the rate at which it has increased, definitely is one
of the levers.
Also, some of the investments will start to deliver results. That could be
another lever. And we have been focused on our margin discipline as
always, and the traditional levers, whether it is productivity or utilization
will also continue. And some of our non-employee expenses also have
been increasing. So, at various points of time, we have used these levers.
And towards getting to 26%, these would definitely play a role.
Ravi Menon:
Thank you so much. Best of luck.
Moderator:
Thank you. Our next question comes from the line of Ruchi Mukhija with
ICICI Securities. Please go ahead.
Ruchi Mukhija:
Thank you for the opportunity. I'll take a stab at the AI question once again.
This quarter, we saw AI revenue grow by 19%, while the traditional non-AI
revenue declined. Should we interpret this as AI increasingly substituting
the traditional services, or we are seeing incremental client spending?
And what needs to happen for AI to become the overall revenue growth
driver?
Aarthi Subramanian: Definitely, we see AI as a net new driver of new opportunities. But I think,
Ruchi, the way we see it, more and more AI is becoming pervasive in an
organization and playing a role in every transformation a company
embarks on. So, whether it's any enterprise transformation, or business
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operations transformation, or an agentic transformation, which are new
ways that we can solve problems for business, I think AI is playing a role
across the board.
Ruchi Mukhija:
Okay. Secondly, on margin. So, this quarter we saw a gross margin decline
sequentially despite this quarter not having any wage hike impact. Samir,
could you quantify how much of this we see structural, meaning we are
making active investments for AI, and how much of this is temporary?
And second part to this, given the ongoing investment, we also have Best
Buy GCC coming in, and MHP consolidation playing out in H2. In that
context, how do we think about the margin commitment we had made
around exiting FY27, at 25% plus EBIT margin range?
Samir Seksaria:
Sure. First, on the gross margin part, as you can see the increase which is
in subcontractors, third-party expenses, directly reflects on the gross
margin. The other investments which I talked about are more SG&A linked
investments.
And as I mentioned earlier, we are prioritizing investments for growth. And
like you mentioned, looking ahead into the second half, we anticipate a
few headwinds. The acquisition-related dilution, particularly in MHP, is
likely to impact by about 50 basis points depending on the timing of
closure and when the integration starts. The normal furlough seasonality
and our continued ecosystem investments would be our headwinds.
And as I answered Ravi's question, some of the Q2 headwinds will start to
taper o
or start giving outcomes. And at the same time, we'll try to
balance with operating levers. While it's an uphill task, we'll continue to
endeavor to inch up on our margins.
Ruchi Mukhija:
Thank you.
Moderator:
Thank you. Our next question comes from the line of Nitin Padmanabhan
with Investec. Please go ahead.
Page 15 of 28
Nitin Padmanabhan: Yes, hi. Good evening. Thanks for the opportunity. Wanted your thoughts
on the regional markets, more specifically in the context of the BSNL deal.
Do you think that should sort of lend to some sort of support as we get into
the second half? The second bit is, in the context of we entering Q3, any
thoughts you have from a furlough perspective in conversations with
clients?
And third, I think from a margin perspective, I think we originally had this
thought process that, obviously Q1, we had the compensation increases,
and then as we go through the year, by the end of the year, at least from an
exit perspective, we should be closer to 25%. In terms of what has
changed in that thought process from an investment perspective, and
when do you think investments really peak out? Would be great to have
your thoughts on both these things as well. Thank you.
K Krithivasan:
Nitin, I'll answer the questions on BSNL and Q3. Samir can take up the
question on margin. BSNL can provide a cushion for the next couple of
quarters. But the fact is regional markets will be volatile; we don't do that
much of annuity-based work in the regional markets.
And also, for some of the programs we do here, the deliveries tend to be
lumpy. So, you will always see some volatility in regional markets. That's
the reason we call out the regional market separately. And in Q3, so far
from what we are seeing, the furlough will be very similar to the previous
years. We don't see any major change. Over to you, Samir.
Samir Seksaria:
So, Nitin, on the margins, for the past few quarters, we have been talking
about prioritizing the investments and focusing on growth, at the same
time maintaining the margin discipline.
And yes, right now also we are saying we want to inch up, but the primary
near-term focus has been on prioritizing the investments. And that's
where we have called out the investments we are making.
In the immediate timeline, I have called out the next phase of investments
for the coming few quarters. Will it peak out? I would expect some of them
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to start delivering results, and growth, being an important margin lever
should also help.
Nitin Padmanabhan: Perfect. That's very helpful. Thank you so much, and all the best.
Moderator:
Thank you. The next question is from the line of Vibhor Singhal with
Nuvama Equities. Please go ahead.
Vibhor Singhal:
Yes, hi. Thanks for taking my question. Two questions from my side. In the
last conference call, we had mentioned and many other companies have
also mentioned that with the advent of these LLM platforms, clients are
now increasingly coming to us and asking us to build an application layer
underneath which the LLMs kind of sit so that this provides these clients
a flexibility to switch between the LLMs, helps them optimize the token
cost, etc.
Have you seen that trend continue in this quarter as well? Any new things
that you might have picked up? Are the clients also kind of moving away
from the mainstream LLMs to some sort of small language models, where
our expertise becomes a very big deciding factor? Any color on that would
be very helpful?
K Krithivasan:
Vibhor, like what you said definitely is playing out. Last time also, we laid
out our Infrastructure to Intelligence where it's made up of infrastructure
layer and there's a model and data layer and on top of that is an agent
layer. And on the agent layer, we are building the agent control planes.
And on the model and data layer, we are building applicable model
harness so that customers can use either SLM or LLM or open-source,
open-weight model based on the need and criticality, and what is the
application.
So, those discussions continue. Particularly this quarter, we've seen
strong success in the agent control plane. I'll request Aarthi to provide
more color on this one.
Page 17 of 28
Aarthi Subramanian: Thank you, Krithi. Vibhor, absolutely, yes. I think as the enterprises are
focused on safe, secure, and responsible deployment of agentic AI, they
need a strong foundation to scale.
So, building the AI platform, and more so this year, agentic control plane
is becoming a key layer not just in terms of governance, but in terms of
cost management, really looking at agent performance and the full endto-end agent lifecycle. Like Krithi said, this quarter, we saw some very
good wins where we are building agentic control planes for our customers.
Vibhor Singhal:
And, Aarthi, if I can just dwell a bit more on that. Are there any specific
pockets or, let's say, verticals, maybe banking or hi-tech, some other
verticals where we're seeing more of this at this point of time and some
other key segments maybe lagging behind a bit and yet to catch up?
Aarthi Subramanian: Sure. I think that's a great question, Vibhor. What we are seeing is, first of
all, when we look at the $3.1 billion annualized revenues, AI revenue is
growing across every vertical. I think that's very positive.
Now, there are three verticals which are leading in terms of growth rate,
and the top three verticals are BFSI, Manufacturing, and Life Sciences and
Healthcare. And in these three verticals, we are seeing the whole agentic
control plane, AI governance. See, these are all evolving things, right?
So, while technology is rapidly developing, then, you know, you see
customers who are leading to create proof points and create the playbook
for enterprises to follow.
So, I think those verticals are leading, but I would say that Consumer,
Technology, and Energy, Resources, Utilities are also following pretty
closely in terms of very active adoption of these trends.
Vibhor Singhal:
Got it. Thanks a lot for that detailed answer. Just one last question for
Samir on the margins part. The margin trajectory that we are seeing at this
point in time is majorly because of the higher subcontracting expenses
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and the investments that we are doing. There is no pricing pressure that
we are seeing across any of the pockets. Is that the right assumption?
Samir Seksaria:
Broadly yes, and I'll give you some color. See, there would be some frontloading of productivity benefits that could happen. But at the same time,
we are seeing better pricing on the AI revenues we are generating. And if
you take the revenue per employee, you will see there's a slight reduction,
not a significant one. So, at an overall portfolio level, the pricing is broadly
stable.
Vibhor Singhal:
Got it, Samir. And just to wrap it up, given that we are at 24% at this point
of time, you mentioned around 50 basis point headwind from the MHP
deal. At some point in time, the BSNL project would also come in.
I mean, do we have a target in mind that we are looking for in terms of exit
rate for this year? Will we be able to get closer to 25%, or will that look
di icult from the vantage point that we are at this point in time?
Samir Seksaria:
As I mentioned, we'd look towards inching up from where we are, whilst
not losing sight of prioritizing investments for growth.
Vibhor Singhal:
Sure. Great. Thank you so much for taking my questions and wish you all
the best.
Moderator:
Thank you. Our next question comes from the line of Sandeep Shah with
Equirus Securities. Please go ahead.
Sandeep Shah:
Yes, thanks for the opportunity. The first question is, one of your large
peers who gave the guidance for the next year, this time, they clearly
notified that the growth in consulting and managed services would be
almost similar. And this could be because of clients now spending beyond
AI infra into AI-led services.
So, is your client conversation actually implying that? And once the
macro-led issues subside, this could be a trigger which one can expect in
the next calendar year?
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K Krithivasan:
So, Sandeep, when Aarthi spoke, she outlined a few types of projects that
we are doing in AI, right? That is, AI-native solutions with business
outcome, AI-led transformation of enterprise systems, autonomous GBS,
and AI coming up in technology modernization, modernizing data estate.
All these are, at this time, we see increasing in volume, increasing
recurrence or frequency.
So, clients are continuing to invest and explore opportunities on
optimizing the token cost. But there's a greater interest in leveraging AI for
a business outcome and technology modernization, and we believe that
will continue.
Sandeep Shah:
Okay. And just next question for the CFO, Samir. Sir, on an organic basis,
is it fair to assume that the guidance is still intact for reaching 25% by 4Q,
if I exclude the 50 bps kind of adverse impact from MHP consolidation?
Samir Seksaria:
See, there would be pluses and minuses. No point in looking at only
organic margin, right? There would be macro factors impacting
seasonality. So, on an overall basis, we will balance our investment
priorities and our disciplined execution, and we will work towards inching
margins higher from here. But right now, the near-term priorities on
investment continue.
Sandeep Shah:
Okay. And, Samir, just a related question. If I look at employee costs, there
has been an absolute decline of 0.6% QoQ despite increase in base in
employees this quarter, as well as last quarter. So, is it the lower variable
pay or incremental o shoring are the factors? And do you believe
incremental o shoring in an AI world could continue as a going forward
method of delivery?
Samir Seksaria:
Right, Sandeep. As you rightly called out, the employee expenses will
reflect a combined e ect of workforce mix, location mix, skill
composition, hiring patterns, etc. Having said that, given our performance
against internal targets, we have had a lower outlay in performance-linked
bonus this time.
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Sandeep Shah:
Okay. Thank you. All the best.
Moderator:
Thank you. The next question is from the line of Gaurav Rateria with
Morgan Stanley. Please go ahead.
Gaurav Rateria:
Hi. Thank you for taking my question. I have a couple of questions. My first
question is about your AI revenues. Is that accretive to the gross margins
at the company level? And if not, what will change over time? Is it more on
the revenue productivity side or the cost side that will drive margin
accretion from the new business?
The second question is on the comments, Samir, that you made on the
capacity creation on the bench side on the investment that you're making.
Is it to reflect the improving demand or broad basing of the demand in the
coming quarters? Or is it again the issue of supply-demand mismatch that
is leading to the bench creation that you spoke about?
And the last question is about your data center business. At what point in
time can we see some capacity getting operational and start contributing
to the revenues? Thank you.
Samir Seksaria:
Sure, I'll take all three of them, Gaurav. On the first one, the $3.1 billion AI
revenues which we have are coming in at a much higher margin than our
company average.
On the data center business, as we have consistently called out, we will
plan our expansion on or the capacity creation on the data centers once
the contract comes in, while the initial plans and layout are in place. And
it will take about 18 to 24 months before the revenues start kicking in. On
the capacity creation, Gaurav, if you can repeat it again, sorry.
Gaurav Rateria:
Yes. The question is about your comment that you made that created
more bench capacity this quarter. So, was it to reflect the improving and
broad basing of demand that you're seeing in coming quarters? Or was it
led by more supply-demand mismatch that you talked about?
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Samir Seksaria:
I think if you look at some of the new-age skills which we are hiring, first,
we need to get them, and then the deployment happens with a lag. So,
that's where the capacity creation. So, it is the prior one which you talked
about on the demand.
Gaurav Rateria:
Thank you, all the best.
Moderator:
Thank you. The next question is from the line of Dipesh Mehta with Emkay
Global. Please go ahead.
Dipesh Mehta:
Yes, thanks for the opportunity. Two questions. Just want to get sense
about North America. North America growth is lagging company average,
and YoY basis, it is almost half of company average. Can you provide some
sense how you are expecting North America growth to play out
considering overall industry exposure?
Second question is about two verticals particularly. One is ERU, Energy,
Resources, and Utility, and the Consumer, which softened this quarter,
but how do you expect it to play out entering into H2? Thank you.
K Krithivasan:
Yes. Dipesh, North America, see, overall, our discussions with the
customers and the TCV, they are all looking good. And we expect North
America revenue to recover and become healthy soon.
And in Consumer Business, seasonally, Q3 is an important quarter for the
Consumer business. In the medium term we are expecting growth to
improve.
In the medium term we see structurally ERU should also recover.
Overall, across multiple industry segments, looking at the TCV, looking at
the client conversation, we are positive that medium-term growth should
return.
Dipesh Mehta:
Understood. And last question on the margin. I think we covered it to some
extent, but if you look at it from gross margin to conversion perspective
and some of the AI business is sort of better margin than company
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average, by when do you expect our normal margin range to return
considering the mix change as well as some of the growth uptick which
you are envisaging currently?
Samir Seksaria:
One, on the gross margin, as we said, subcontractors, some of the M&A
initiatives are reflecting in it. I will, reiterate the same thing that right now,
we are prioritizing for growth and we do expect the growth, like we talked
about on the capacity creation, will reflect into the revenue in the coming
quarters, and I have called out that we'll have incremental headwinds.
And we are looking towards inching up from here.
Dipesh Mehta:
Thank you.
Moderator:
Thank you. Our next question is from the line of Rishi Jhunjhunwala with
IIFL Institutional Equities. Please go ahead.
Rishi Jhunjhunwala: Yes. Thanks for the opportunity. I have two questions. First one is, so
you've recently announced deals like, taking over GCC of Best Buy and
this MHP deal as well. It seems like, customers are willing to transfer their
IT operations or workload to you.
In an environment where AI is bringing significant productivity, what is the
thought process behind some of these customer deals that you've been
able to win? And are they expecting significant amount of that productivity
to be driven through you? And as a result, are these deals, while strategic
in nature, may also be dilutive on the margin side to begin with?
K Krithivasan:
So, Rishi, let's talk about the MHP deal. That's probably similar to other
cases also. This has got nothing to do with productivity. See, this is about
how they transform themselves as an organization, and they're bringing a
steep capability in automotive sector.
And what we will be doing with MHP is working with them and establishing
an AI Centre of Excellence for mobility that would transform the product
engineering, maintenance, engineering, develop design, and supply
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chain, all of them leveraging AI. And in the process, helping Porsche to
become an AI-first organization.
So, you have to look at this not from a productivity angle, but how do we
transform the organization to become AI-first. And that would be a very
similar playbook we'll be using in the other Best Buy deal also. Wherever
we are doing this, the organizations are coming to us to accelerate their
own AI transformation. And we leverage the domain capability and
industry knowledge they bring in with the customer context and with the
AI capability to help in the transformation.
Rishi Jhunjhunwala: Understood, sir. The second question is, and maybe some parts of this
has been asked earlier as well. There are three cost line items that if I
aggregate, which is fee to external consultants, cost of equipment and
licenses, and project expenses and software for service delivery.
These three put together seem to be in the nature of the cost that you incur
on providing delivery. For the past 2to 3 quarters, these costs have been
growing at almost 40% year-on-year versus your revenues growing at 11%,
12% in rupee terms.
So, just wanted to understand, how do we look at this significant increase
in these costs? Are these upfront investments being done and as a result,
will actually sweat out a lot better in the next, 4 to 8 quarters, or this is how
the nature of deals or the nature of delivery is now happening, if you can
give some color on that?
Samir Seksaria:
So, Rishi, as you called out, the fee to external consultants is where
incremental costs to fulfil delivery is sitting, project expenses are where
the partnership costs are primarily sitting. Cost of equipment, the thirdparty pass-through expenses have broadly been flat for the last 2-to 3
quarters.
Now, in terms of how do view these investments, it's a combination of
both. It is investing into the capacity for the growth that will come with a
lag. And if you look at my commentary in the previous quarters also, we
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have been calling that out. And we expect some of that to continue. On
the partnerships, we are accelerating on the 360-degree solutions.
Rishi Jhunjhunwala: So, safe to assume that some of these will be levers for your margin target
that you've been talking about over the next 2- to4 quarters?
Samir Seksaria:
So, safe to assume that we will continue the investments, safe to assume
that we will be looking at the traditional levers and some of them, like the
subcontractor costs, definitely as an opportunity to optimize. Safe to
assume that driving better productivity and driving better utilization would
be on our radar.
Rishi Jhunjhunwala: Got it, sir. Thank you so much.
Samir Seksaria:
Thank you, Rishi.
Moderator:
Thank you. The next question is from the line of Kumar Rakesh with BNP
Paribas. Please go ahead.
Kumar Rakesh:
Hi, good evening, and thank you for taking my question. My first question
was around the employee addition for the last couple of quarters have
been running ahead of the revenue growth sequentially, and Samir also
spoke about that subcontracting has increased in this quarter to match
the skill requirement?
Is this fair to see that this is a reflection of your confidence in growth going
into the near term, December quarter or near term, or this is just the timing
thing which we are looking at?
Sudeep Kunnumal:
Hi, Kumar. Sudeep here. So, we are seeing definitely the demand up, and
especially for next-gen skills. So, our hiring is to fulfill and capture the
demand.
Kumar Rakesh:
Got it. Thank you. And my second question was around margins. Samir,
you spoke about the 26% plus, 26%-28% margin band. That seems like
more of a North Star now, may not be realistic given all the investment
requirement in the business and the current environment.
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So, would we revise the band which gives sense for the floor of the margin
where it can potentially fall to give all the investments which the business
would need?
Samir Seksaria:
See, we have always called 26%-28% as our guiding beacon, and we
would not want to shift away from that. That is what rallies us to go
towards it, and we are going to keep it at 26%-28%. And that's the longterm aspiration we'll work towards.
Kumar Rakesh:
Sure. But from a medium-term perspective, the path to that, would we see
more of investments happening, some more softening on terms of margin
can be a reality, or we should expect this to be a floor now?
Samir Seksaria:
See, as we said, we are making those investments, and we are prioritizing
them.
Kumar Rakesh:
Got it. Thank you so much.
Moderator:
Thank you. The next question is from the line of Ashwin Mehta with Ambit
Capital. Please go ahead.
Ashwin Mehta:
Yes. Thanks for the opportunity. Two questions. So, we'd hoped for 2Q to
be better when we talked in 1Q. So, what were the areas of negative
surprises this quarter which kept the growth closer to the 1Q levels? And
the second question was in terms of the nature of deferrals in India deals.
So, were these deals involving hardware purchases, and given the bumpup in terms of prices there, was that the reason for the deferral? And do
we see that revenue materializing in 3Q, or it could get pushed out further
for later? And the last one was in terms of fresher hiring this quarter. What
did we have?
K Krithivasan:
Ashwin, I'll answer the first two questions, and Sudeep will answer on the
fresher hiring. On Q2, same as Q1, as we explained, Q2 has been good
almost across all parameters except the regional markets. If you compare
Q2 and Q1 on international growth, Q1 was almost flattish on
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international growth, and international growth in Q2 is almost like 1.2%,
only offset by the headwind we had in the regional market.
And what we talked about in India, it's not related to any third-party or
hardware pass-through. And we expect it'll come back because there was
a deferral, but we are very confident it will be back in the medium term.
We don't want to put a particular date, but this is the revenue that most
likely should come back. And Sudeep?
Sudeep Kunnumal:
Yes. Hi, Ashwin. We onboarded 10,000 graduates from the University this
year globally. And as we speak, we are in the final stages of our campus
hiring for the students who graduate in the coming financial year.
Ashwin Mehta:
Just one follow-up, given that we added 14,000 freshers last quarter, we've
added 10,000 in this quarter, and our net addition is just 13-odd thousand
people over the last two quarters, would it be fair to assume that the hiring
momentum could actually continue in the second half for us to have the
bench to service demand?
Sudeep Kunnumal:
Ashwin, as I said, we are hiring to demand, and definitely we're seeing
good demand in these new technologies. So, we will continue to hire to
staff those positions.
Ashwin Mehta:
Thanks, and all the best.
Sudeep Kunnumal:
Thank you.
Moderator:
Thank you. Ladies and gentlemen, we'll take that as our last question for
today. I now hand the conference over to the management for closing
comments. Over to you.
K Krithivasan:
Thank you, operator.
In Q2, our revenue grew 0.5% QoQ in constant currency, with
international markets growing strongly at 1.2%.
We delivered an operating margin of 24% and net margin of 19%.
Annualized AI services revenue crossed $3.1 billion.
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We had a TCV of $9.6 billion in Q2. We remain confident that TCS is
positioned well to convert the opportunities in our pipeline into growth as
client spending improves and enterprise AI adoption scales. This
concludes our call today. Thank you all for joining us.
Moderator:
Thank you, members of the management. On behalf of TCS, that
concludes this conference call. Thank you for joining us, and you may now
disconnect your lines.
Note: This transcript has been edited for readability and does not purport to be a verbatim
record of the proceedings.
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