Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Kedar Shirali – IR

N. Chandrasekaran – CEO and Managing Director

Rajesh Gopinathan – Chief Financial Officer

Ajoy Mukherjee – Head of Global Human Resources

Analysts

Joseph Foresi – Janney Montgomery Scott

Anantha Narayan – Credit Suisse

Diviya Nagarajan – UBS

Keith Bachman – Bank of Montreal

Sandip Agarwal – Edelweiss

Sandeep Shah – CIMB

Nitin Padmanabhan – Espirito Santo

Yogesh Aggarwal – HSBC Securities

Pankaj Kapoor – Standard Chartered Securities

Ravi Menon – Centrum

Nitin Mohta – Macquarie Research

Ashwin Mehta – Nomura

Mukul Garg – Societe Generale

Pramod Gupta – HDFC Standard Life

Dipesh Mehta – SBICAP Securities

Yash Mehta – Equirus Securities

Ankit Pande – Quant Capital

Tata Consultancy Services Limited (TCS.BO) F2Q14 Earnings Call October 15, 2013 9:30 AM ET

Operator

Ladies and gentlemen, good day and welcome to the TCS earnings conference call. As a reminder, all participants' lines will be in a listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. (Operator Instructions) Please note that this conference is being recorded.

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

Kedar Shirali

Thank you, Umba. Good evening and welcome everyone. Thank you for joining us today to discuss TCS’ financial results for the second quarter of fiscal year 2014 ending September 30, 2013. 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 statement, results presentation and press releases are also available on our website.

Our leadership team is present on this call to discuss our results this evening. We have with us today Mr. N. Chandrasekaran, Chief Executive officer and Managing Director; Mr. Rajesh Gopinathan, Chief Financial Officer; Mr. Phiroz A. Vandrevala, Director; and Mr. Ajoy Mukherjee, Head of Global Human Resources.

Chandra and Rajesh will give a brief overview of the company’s performance followed by the Q&A session. As you are aware, we don’t provide specific revenue or earnings guidance. Anything said on this call which reflects our outlook for the future or which could be construed as a forward-looking statement must be reviewed in conjunction with the risks that the company faces. We have outlined these risks in the second slide of the analyst presentation that we e-mailed out earlier this evening and which is also available on our website.

With that, I would like to turn the call over to Chandra.

N. Chandrasekaran

I am happy to talk to all of you and report that we have had another strong financial performance in Q2. The highlights of the quarter as follows: The volumes have come strong at 7.3%, of which ALTI will account for about 1.2% and 6.1% organic sequentially.

The revenue growth in terms of rupee terms is 16.6% and CC terms little under 6.1% and in dollar terms 5.4%. The growth has come across all markets, industries and service lines. In fact, the growth from each of the segments, whether it is from a geography perspective, from industry perspective or services perspective, has been decent and credible and close to the company average.

In terms of operating margin, it’s been another great quarter with the expansion of 314 basis points. While all the currency benefits have flown through to the operating margin levels, there are an operational improvement of above 40 basis points, which have been used to overcome the headwind in the margins that came with the ALTI integration.

In terms of gross margin, we delivered a 22.4%, an improvement of 130 basis points, overcoming two major headwinds. One is the higher tax rate – three headwinds, higher tax rate. Second is lesser treasury income because of the huge payout of the dividend at the beginning of the quarter and higher hedging loss. The operating margin of 20.2% is our best yet.

In terms of the customer metrics, again it’s been very nice. We have added 30 clients in the 1 million bucket, a significant coming through the organic TCS growth and the three customers moved from below 100 million revenue category to 100 million plus category at the top end.

In terms of markets, Europe, U.K., and Asia Pacific led and industries, licenses, BFSI, energy and utilities and media and entertainment led the growth. In terms of service lines, enterprise solutions, assurance, infrastructure, asset management or asset leverage solutions, all led the growth.

We announced a good deal with very healthy and the employee addition, very healthy, on the utilization has gone up, 70 basis points, excluding trainees and 250 basis points, including trainees. As you know, we have been operating as 72-ish percentage of utilization, including trainees and that has gone up to 75% this quarter.

And overall, it has been an excellent education on all front. And from the market point of view, they have got a contribution from the discretionary spend also, and the demand environment is strong and we achieved good momentum. And discretionary spend is expected to continue to pick up.

Specifically with regards to Q3, it is a quarter where we will have the effect of furloughs and that will be a growth dampener. And those are the comments I want to make to start with and I’d hand it over to Rajesh.

Rajesh Gopinathan

Thank you, Chandra. Let me quickly go over the headline numbers once again. Our second quarter revenue of Rs. 209.772 billion represents a growth of 16.6% quarter-on-quarter and 34.3% year-on-year. Revenue in dollar terms is $3.337 billion, which is a sequential growth of 5.4% and a year-on-year growth of 17%. In constant currency, our revenue growth is 6% Q-on-Q.

Organic revenue growth, that is excluding the full quarter revenue from ALTI, was 15.2% in rupee terms and 4.2% in USD terms on a sequential quarter basis. The breakup of our sequential INR growth of 16.6%, volume growth of 7.3% and constant currency realization impact of 94 basis points, currency benefits of 10.6% and offshore leverage of 38 basis points negative. We had an operating margin of 30.17%, which is up 314 basis points over the previous quarter and reflects a 3.1% benefit from rupee depreciation.

Net income margin expanded by 130 basis points to 22.4% and despite a higher effective tax rate of 24.8% and a Forex loss of Rs. 3.77 billion. Our accounts receivable was at 80 days outstanding which is two days less compared to the quarter ago period. Invested funds as of September 30 was Rs. 161 billion and lastly, the board has recommended an interim dividend of Rs. 4 per share.

With that, we can open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from Joseph Foresi of Janney Montgomery Scott.

Joseph Foresi – Janney Montgomery Scott

My first question here is, why has growth come back the way it has and how sustainable do you think it is? And is the goal still to grow faster than the industry?

N. Chandrasekaran

I think we are on track as per the growth that we have been delivering. In fact, last quarter also we delivered a especial volume growth. So I think we have been continuing to execute and deliver to the trend that we have been following. I have said that we will grow above the industry, above the NASSCOM estimates and also commented that our growth this year, in fact, will be better than last year. That’s the statement they stick with.

Joseph Foresi – Janney Montgomery Scott

I wonder if you could just drill a little bit down on -- have you seen a shift at all on the ERP or SAP implementations that you have been doing towards newer technologies? And if so, how would you compare the growth rate of those two? I'm just wondering if there has been any kind of major market shift on the consulting side.

N. Chandrasekaran

See, I will use some broad statements but I won’t be able to quantify. I think the SAP Oracle business is growing for us. But in addition, we are also seeing technologies like Salesforce, Workday, those kind of technologies gaining traction with the customers, and also a lot of solutions are on digital which use a variety of products, not necessarily the standard products, a variety of products. And so it’s a mixed bag.

Joseph Foresi – Janney Montgomery Scott

And then the final question from me is just as you look at your margin profile, how should we think about those margin levels going forward, especially since there has been a lot of commoditization taking place? I mean, how sustainable are the margin levels ex-currency?

N. Chandrasekaran

We have basically said that they are comfortable operating around the 27 range. That’s the indication we have given and I think we would like to stick to that. I am assuming that your question is more medium term, right?

Joseph Foresi – Janney Montgomery Scott

Well, it’s both. It’s medium and long. I am wondering if there is -- we have also seen your competitors –

N. Chandrasekaran

I think we believe that it is industries important to execute a decent margin. That’s what gives us the investment fund and we need to be able to invest because the changes that are happening are pretty rapid. It only gets more rapid, and also the number of new business models, new online initiatives that we have to drive. So we will need really to operate at good margins and so we have been committed to operating a good margin and delivering growth. That’s what we are committed to and we said that we were comfortable around 27, because remember when rupee was 48, we delivered more than 37%, we are operating close to 29%. So I think in general lot of times is that we want to – we would like to operate around 35%.

Operator

Our next question is from Anantha Narayan from Credit Suisse.

Anantha Narayan – Credit Suisse

Actually a couple of more questions on the margin front. The first is -- and maybe that is to Rajesh, have you changed the exchange rate assumptions while bidding for fixed price projects or are you still retaining what you had say three months back? And secondly just on the margins, assuming the rupee remains at say 60 for the next foreseeable future, is that comfort range still 27% or would you revisit that?

Rajesh Gopinathan

Anantha, we have – as we discussed it in early September, the currency volatility that we are seeing currently is just a couple of months old. And we would like to wait to see where the currency settles in before making a significant change to our strategies. Our target operating range of 26% to 28% as of now continue. If there is a change of strategy, we will communicate that at the appropriate period.

What was your first question? That, yes. So as of now, no internal change assumptions on the model side. We are on a wait and watch mode as far as the currency goes.

Operator

Our next question is from Diviya Nagarajan of UBS.

Diviya Nagarajan – UBS

Couple of questions. Chandra, you spoke about furloughs that could impact the December quarter. Could you kind of us a sense on what is the normal seasonality that you see versus any abnormal furloughs that you could see because of the government shutdowns in the U.S.?

N. Chandrasekaran

No, I am not factoring in anything because of government shutdown, Diviya. Basically the Q3 quarter we faced furloughs especially the manufacturing companies and hitech companies, sometimes telcos, Last year we even faced in some services companies. So some companies where there is a furlough, we already know and some we will get to know during most of the quarter. So that could impact but I am not factoring in anything because of the government shutdown, it’s just a seasonal thing. And Q3 tends to be a dampener due to furloughs.

Diviya Nagarajan – UBS

Ajoy, a question on the hiring front. This fiscal so far we have seen very lateral-heavy hiring and entry-level hiring seems to have come off and utilization, ex-trainees is just a couple of percentage points away from your all-time highs. So any thoughts on how this will progress for the rest of the year, or will it continue to be heavily -- heavy, as skewed towards the lateral hiring?

Ajoy Mukherjee

Hiring as far as this year is concerned, we have said it is about 45,000 to 50,000. We are pretty much on tract. And hiring, if they are looking at from lateral to trainee kind of percentages, at the overall number point of view it will be difficult to get a sense because of the hirings are geography specific, it is service line specific, hiring in BPO was, rightly it is turned out to be different. But as far as IT services in India hiring is concerned, we are pretty much on track what we had mentioned earlier, that there is a trainee to lateral kind of ritual and that is, we are continuing with that target.

N. Chandrasekaran

Diviya, I would like to add. We will maintain that higher trainee additions. And we will also factor it in when we plan for next year. We are already talking about it. So we will ensure that the trainee component is maintained.

Operator

Our next question is from Keith Bachman of Bank of Montreal.

Keith Bachman – Bank of Montreal

I want to also ask questions on margins, but I wanted to go ask about a different way. As you think about over the next four quarters, if you exclude currency, because we can make our own assumptions there, what are the puts and takes that you think about either positive or negative as it relates to your margins? So including areas such as utilization do you think that's up or down, mix, how do these other forces or any other that you want to address as you think about the margins over the next four quarters even directionally up or down?

N. Chandrasekaran

Our margin profile is a net outcome of the operating model that we have and the strategy that we have put in place over the last few years. So it is a factor of mix of service lines, mix of geographies, broad-based delivery organization, a focus on execution and better clients mining. In the context of that, we believe that we are fairly confident of operating in a narrow range as you have specified, with the currency volatility being outside of this. So over a three, four quarter period, I don’t see any change to this model and we should be fairly confident of executing within that range.

Keith Bachman – Bank of Montreal

Well, then as a corollary, as currency goes against you, can you maintain within this range, given some of the opportunities such as utilization that you might have to offset it?

N. Chandrasekaran

Again as I said, within the range of currency we have said that we will maintain the 26% to 28%. If currency swings widely, at that time we will have to see what changes would have to be made and we will address the question at that point.

When we invest in specific initiatives, we also take into account the number of initiatives we want to pursue at any time in time. And there also we kind of take a call based on the comfort we have, because we commit to these initiatives whether it is going into new markets or new bets that we are making, etc., how much funds we allocate, etc. all those things we take into account what our comfort level is, at the margin, margin on the currency.

Keith Bachman – Bank of Montreal

Let me transition to a specific opportunity for you guys in business process services. The growth was a little bit under your corporate average. How are you seeing the competitive dynamics in this particular area as you look out over the next four quarters? Is it getting more competitive and/or would you envision that business process services would grow faster, or the same or slower than the corporate weighted average?

N. Chandrasekaran

We got our business process services business for the last two years or three years. I think we have grown faster the new units. It’s been one of the good service lines which has built scale. Post the Citi acquisition, if you really see, we have been able to expand in the number of customers in the financial services and many transaction processing areas on our business process services vertical base, on also platform based. So I think we see lot more opportunities, not only for the transaction processing but not from this all times [ph]. But it depends on which timeframe we are talking about, the platforms will take time to mature, even the Diligenta platform which we created took five years for us to mature it. Now it is very industrial strength and we are trying to scale it across market. So similarly, those kind of initiatives we will take and they will take to mature but in terms of transaction processing on domain BPOs, valued BPOs, I think we don’t see any issue.

Operator

Our next question is from Sandip Agarwal of Edelweiss.

Sandip Agarwal – Edelweiss

I have two questions. So one question for Chandra, and then I will follow up with Rajesh with another question. Can you throw some light on the BFSI recovery, because I know it is one of the largest vertical and we know that at least this is doing good in that vertical. But what is your strength now, is there any significant change which should be called out? Are you seeing an increasing traction there? And another question on the SMAC space. I know the deal sizes probably are slightly smaller in that space compared to transformation ones, but how frequent are those deals? Are -- the decision making is faster or not in that area?

N. Chandrasekaran

I don’t know, what was the second question? First question was on BFSI, second question was?

Sandip Agarwal – Edelweiss

On the SMAC, social media analytics cloud space.

N. Chandrasekaran

On the BFSI side, I think we delivered a good quarter. Our growth has been 6.1% on constant currency terms and 17% on rupee terms. We see a lot of traction with BFSI across markets, so both in the developed markets and in the emerging markets, it’s one of our strong verticals. And the type of engagements on optimization related, risk and regulatory complaints related and also digital related. So we see a traction across the board. And also there are opportunities to create platform in the BFSI side, if you are purchasing.

And in terms of digital space, a lot of opportunities especially discretionary spending going in this direction. In our press release, we have given a large number of engagements just to give you a color on the type of engagements we are seeing. It is a cloud based, some are digital based, some are mobility in terms of tablet based, omni-channel, multi-channel. There is a huge number of engagements and also customers are looking to look at these technologies in a holistic manner to be able to see how they can reinvent themselves in terms of business models and business processes. So it’s a good opportunity. Yes, the deal sizes are small but then you kind of win and execute and bill and collect the money in one or two quarters.

Sandip Agarwal – Edelweiss

So one follow-up question for Rajesh. Rajesh, when you say that you are billing in a 26% to 28% kind of margin, that is a comfortable level where you see the company to execute it, excluding currency. Does that number anyways take a cautious stand from utilization levels from here or do you take a stable state utilization level?

Rajesh Gopinathan

Again, on the margin, we are not calling out individual lever by lever and giving them, and the linkage to that. So within a certain ranges that we are operating on our various operating parameters, we are comfortable maintaining that range and then multiple lever to play around with.

Sandip Agarwal – Edelweiss

So, let me rephrase the question. Is this utilization level on the higher side or is it in the comfortable zone?

Rajesh Gopinathan

This utilization is in line with our operating model and to that extent, we don’t see it on either being on the higher or lower side. This is in the – our operating range. I think the point – we would like to convey is that it's a statement of intent and also a commitment to operate at just margin level. There are lot of levers and I said in the past, if you were to push up utilization above 82%, you can’t. It’s not – because our scale is, when you are talking about 300,000 people, it is not the same company well utilized when we were 100%. So these parameters, these targets et cetera will keep changing. So we would not like to, but you get about anything. We have a business model, we have a need for operating at a such margin level, to achieve such and such growth rate. And we have got levers which we will walk through and it’s very difficult to give you certain numbers on each parameter and lock ourselves in the spreadsheet.

Operator

Our next question is from Sandeep Shah of CIMB.

Sandeep Shah – CIMB

Firstly, congrats again on the good execution. Just, sorry to stress again on the margin, just one thing, like FY’13 the realized rupee-dollar for TCS was 54.40 and at that point in time, you delivered ex off one-off margin of closer to around 27.3%, 27.4%. Today, rupee-dollar is closer to around 60/61 and we are still maintaining a guidance of 27% kind of a comfortable level. So, what we foresee in terms of the size of the investment to be made in future still remains sizable to still keep the guidance at the same level despite rupee depreciation of 10% to 11%? Is it a fair way to look at what you are trying to say?

Rajesh Gopinathan

First of all, I want to say is that it is not a guidance. Just repeating guidance multiple times, we are not giving any guidance, and it is a comfort level and it is our intent to operate at this level is what we say. And that doesn’t mean that any excess margins will be immediately invested, we will have to make the right decision. For example, with two quarters this time, we captured the upside straight away and then we reported 30.2. So what we will do will be sensible. Our need to operate at the operating margin is what we are conveying. It is not that we cannot operate above that margin at some point in time, or we will not go below that margin at some other point in time is some other factors. But our statement of intent is operate at such level and that’s the message we are giving.

Sandeep Shah – CIMB

And just the second question, what explains the 94 bps change in the realized pricing, because of the mix change, despite we had ALTI, which has been consolidated, which according to me is more towards discretionary? And looking at the growth also more balanced or more slightly tilted towards discretionary revenue. So, what has led to this, because even the effort mix has not materially changed on a Q-on-Q basis?

N. Chandrasekaran

So the realization – if you look back our historical realization trend, what we have said is that we report realization and not pricing. Realization gets impacted by various factors, including number of working days, mix, pricing et cetera. Geography, mix et cetera and you would find that realization stays in a certain band. So it might have a couple of quarters up, couple of quarters down, a quarter flat and that’s in the range. So what you should look for is multi-quarter trend, the then Q on Q changes. Last time also we had said that we will not call out individual quarter impact. We don’t think that is material. We don’t see a change in the pricing environment. If there is a directional change, either up or down, we will call it out and let you guys know.

Operator

Our next question is from Nitin Padmanabhan of Espirito Santo.

Nitin Padmanabhan – Espirito Santo

Just want to understand what is TCS' perspective in terms of what you see in the overall demand environment? Do you get a feel in terms of the deals and the traction that's out there that FY’15 could be a better year for the industry? What are your thoughts broadly in terms of the demand overall?

Rajesh Gopinathan

It’s too early to comment on FY’15. So I think you should give us some more time to come back to you on FY’15. But in general hypothesis it’s both in the press announcement and also in the media interviews. We find the demand environment to be strong robust pipelines, both in terms of our energy business as well as in terms of [asset] management. And how we are going to translate in the next 8 to 10 quarters, we need to wait and see. So at this point in time, [indiscernible].

Nitin Padmanabhan – Espirito Santo

And just another in terms of -- when you look at the competition and generally when it comes to pricing for deals, does it work out at the end of it that the vendor who basically uses a rupee benefit, who is able to get the lowest price, is that a trend that you are seeing or that's not something that vendors are doing in terms of competitiveness?

Rajesh Gopinathan

I can’t really tell which vendor is going to use the currency benefit. I can only know some people when they drop the price, or not, whether they drop the price or what’s in a price I cannot say. It’s nothing new, always you have a situation where somebody is undertaking. That’s not very specific this quarter, last quarter, it has always existed. And as you build your business, it is something that you learn to live with. And it’s more important for us to do what we think is right and what works for us. I wouldn’t speak about it.

Nitin Padmanabhan – Espirito Santo

And just one last one if I may. Are you seeing a crunch in terms of availability of mid-level talent? Is that something that you would worry about maybe going into the next 12 months or so from an industry perspective? Is that a difficult resource going forward?

Ajoy Mukherjee

So from a hiring point of view, we don’t see any issues so far. We have been hiring about – as you know that we hired about 17,000 as far as this particular quarter was concerned. And from our side, we have – and our hiring is global. So we are finding the talent that we need, and particularly if you see our overall retention side we have been having the industry leading retention. Even in this quarter, our retention or the attrition rate was 10.9, previous quarter it was 10.5. And our internal engine to develop competency based on the need as far as the business is going and which way the business is growing and all these factors play into it. So I think we are not concerned as far as this particular aspect is concerned.

Operator

We will take our next question from Yogesh Aggarwal of HSBC Securities.

Yogesh Aggarwal – HSBC Securities

Hi. Sorry, I have two, but I will make it quick. Firstly on the demand environment, Chandra, you mentioned that discretionary spending is picking up, but if you have to compare today's spending environment with let's say 2010 or ‘07, both in terms of discretionary and EBIT, how far are we in terms of Visa spending? Is it still weak, or are we matching up to those two good years? And secondly, just a quick one for Rajesh. Your unbilled revenues have gone up in the past 10 quarters by around 15% to 21% of sales, but the fixed price contract hasn't changed much, so any just two words on that would be great.

N. Chandrasekaran

I think on the – first question, it is very difficult for me to visualize 2007 and 2010. I think the only comment that I would make is that we are seeing a momentum in terms of discretionary spend, customers are investing, especially in digital space and lot of transformation initiatives are just getting attention. So I think the momentum is very good, it’s been picking up continuously as I have article writing from the fourth quarter. So that’s all I can tell you. I can’t really say whether it is like 2007 or like 2010.

On the UBR, Yogesh, you need to look at UBR minus UER as a metric because that gives you a better picture. And if you look at that last two quarters it has been increasing, previous two quarters it was decreasing. Overall trend is more a reflection of the nature of contracts and the size of contracts other than just T&M versus your turnkey. And certain ones like, when you see previous their product base, or as what we call our asset leverage based projects, they can. Those tend to have a different billing profile. So it is not just a difference between T&M and turnkey.

Operator

Our next question is from Pankaj Kapoor of Standard Chartered Securities.

Pankaj Kapoor – Standard Chartered Securities

I will just come back again on the pricing -- rather on the realization, because we have seen this quarter-on-quarter decline for the third quarter now. So, I'm just wondering what's basically changing in the underlying side in terms of the mix, which probably determines this number if you can just give some color on that please.

N. Chandrasekaran

Realization, we have two quarters. Previously we have seen flat and we have seen uptick previously. So you need to see it in a slightly longer range. As I said reported quarterly realization is a factor of multiple things, it is not price. So we don’t see a trend in either direction that we want to call out right now. And the proof of that is that it has been moving up and down. And that stays, and it’s the nature of that metric.

So I think I want to give a comfort that overall we are not seeing a decline in pricing. Pricing is pretty still good. So the realization is a combination of several factors. And as we expand into new markets, that we have more revenue coming from emerging markets in the quarter to be able to [realize], more revenues coming from that [indiscernible] for example. So not only service lines, but also you have to look at the markets in which you operate. As pointed out earlier, also the number of working days, so many factors are there. And I think it’s not a cost structure.

Pankaj Kapoor – Standard Chartered Securities

Chandra, can you also put some number to the deal wins, the eight deal wins that we had announced, any combined contract value, anything?

N. Chandrasekaran

We don’t publish our order book. So I don’t want to give something suddenly in a call. I would say that our order book is healthy and we continue to do better every quarter in terms of the overall we call as the order book.

Pankaj Kapoor – Standard Chartered Securities

And is it fair to assume then that each of these deals would be like say $50 million plus, any threshold that you have when you say –

N. Chandrasekaran

That’s the other way of asking. So Pankaj, I think I don’t have that number.

Pankaj Kapoor – Standard Chartered Securities

And finally, Ajoy, if you can put some number to the campus offer that you're planning to give for the next year?

Ajoy Mukherjee

The campus offers is something that we target but with somebody – what we did last year was 35,000, as far as the next year is concerned, we have not announced that yet and that is something that we will be announcing in a day or two.

Operator

Our next question is from Ravi Menon of Centrum.

Ravi Menon – Centrum

I was just wondering about the new sort of digital spending that you're seeing. How long are these contracts typically and what's the average contract value?

N. Chandrasekaran

All formats, some are small contracts, I mean $100 million, some are multi-million dollars. Some are set up as a big initiative and lot of small projects are in that initiative. So the contract values vary but generally the billing and invoicing timelines are couple of quarters in general.

Ravi Menon – Centrum

And would you think that these are a little more onsite heavy than average?

N. Chandrasekaran

Not really, in some basis yes, not really.

Operator

Our next question is from Nitin Mohta of Macquarie.

Nitin Mohta – Macquarie Research

Chandra, I just wanted to get your thoughts, there is a lot of disruption in the market in terms of whether it be SaaS or organization making changes to endorse digital technology in a big way. So, from a deal-size perspective, does it make things tougher for the vendors? So, the other way to ask is, is there a need to fill the funnel faster as compared to how things were say three or five years ago?

N. Chandrasekaran

What is the reason you are asking, there is a problem, organizational – in the customer organization?

Nitin Mohta – Macquarie Research

So your clients are probably endorsing either say SaaS or making changes in the front-end with digital technologies, is it making it difficult in terms of the deal's tenure?

N. Chandrasekaran

Not really, actually the deal cycles and [organization] times are not longer. The only time they will be longer is whenever we are looking at a platform based solution and those deal cycles are longer. But discretionary projects in terms of digital et cetera are similar.

Nitin Mohta – Macquarie Research

Who is in a second one in Europe had been a great performer for FY’12, FY13 continues to do well, but just in terms of the gap and growth rate within Europe and North America, any thoughts about Asia, how that would give that to shape up?

N. Chandrasekaran

I think Europe is still much smaller for us compared to North America. So we are gaining – we have gained critical mass in Europe as a whole or individual market, whether it’s Nordics, Benelux, Switzerland, Germany, France, are gaining critical mass. So when we get that critical mass and have a number of different client in region of those markets, then automatically as those bases come. And over the next two to three years period I expect Europe to grow faster

Operator

Our next question is from Ashwin Mehta of Nomura.

Ashwin Mehta – Nomura

One question in terms of discretionary spending. You mentioned that you're seeing this continuing to pick up. So where exactly is the outlook incrementally better or worse say a few quarters ago?

N. Chandrasekaran

I think the digital space is picking up lot more momentum now. That is investments can get bigger, investments in multi-channel omnichannel, customer insight platforms, all the front end staff, these investments are picking up.

Ashwin Mehta – Nomura

And basically on the core ERP side, any changes -- because that's been one segment, which has been sluggish in the past. Any changes in terms of the core ERP side of business?

N. Chandrasekaran

Core ERP, there are definitely opportunities for upgrade, consolidation, and the new models like the Salesforce, Workday models and those kind of engagements are differently picking momentum in the traditional ERP system.

Ashwin Mehta – Nomura

And secondly in terms of tax rates, what are we looking on tax rates going to this year and the next?

Rajesh Gopinathan

So this quarter we have had a slight increase in our – it has gone up to 24.76, it has got one of the major sectors that is impacting is as we have – it’s made a dividend of 250 million from our overseas subsidiaries and there is a tax impact of it both GAAP difference between IFRS and IGAAP, as well as some incremental tax on related to that. Net of that, there are minor q-on-q variation, we think that is in the range of 24 to 24.5 would be the stable range for the [indiscernible].

Operator

Our next question is from Mukul Garg of Societe Generale.

Mukul Garg – Societe Generale

You're seeing quite a bit of discretionary spend on new digital technologies, Chandra, I mean, especially in mobile, Big Data, omnichannel, et cetera. Can you help us quantify the dollar revenue impact from this segment and any impressions on how the growth rate is compared to your normal business would be quite helpful?

Rajesh Gopinathan

We don’t have a separate segment for that. Obviously I can’t answer that question. But the number of engagements that we have been winning, as we just have said from $200,000 to $3 million are the typical deal sizes, I have listed a large number of engagements just to give you at this stage but it is a [indiscernible].

Operator

Our next question is from Pramod Gupta of HDFC Standard Life.

Pramod Gupta – HDFC Standard Life

Just had one small question regarding the cash flow. We have had a very good revenue growth in dollar terms of about 15.5% in the first half, EBIT has grown about 23%. But somehow our cash flow growth is very low, in fact it is negative if we take FX and acquisition. And what's the view of the management on that and do we expect it to improve, if you can give us a color on that?

Rajesh Gopinathan

In terms of cash from operation, we generated about 3900 odd crores from operations and invested about 700 crores in CapEx giving us the free cash flow of about 3300 crores. The cash from operations to revenue is about 18.7% and our target range is about 17% to 19% which I think is the stable range given our current capital investment horizon and the growth profile that we see. And this is a range that is fairly good. Last quarter we had a one-off fluctuation which we had called out separately and explained what the changes were. But otherwise if you go back couple of quarters back, it has been fairly in the state of [pretty good].

Pramod Gupta – HDFC Standard Life

So, this 17% to 19% is a range that we can basically expect the cash flow?

Rajesh Gopinathan

Absolutely.

Operator

Our next question is from Dipesh Mehta of SBICAP Securities.

Dipesh Mehta – SBICAP Securities

Mostly my question has been answered. Only one update on furloughs, you mentioned furloughs -- so in the last few days whether you have seen any unusual weakness in any of the vertical than what you usually see from seasonal perspective?

Rajesh Gopinathan

No, it is just a yearly pattern that I would – I think across giving any specific.

Operator

Our next question is from Yash Mehta of Equirus Securities.

Yash Mehta – Equirus Securities

Just wanted to know that if the currency stays at the current level, then just as we have Forex loss of 377 odd crores, what kind of a Forex impact are we looking at?

Rajesh Gopinathan

Would you repeat the question?

Yash Mehta – Equirus Securities

If the currency stayed at the current level, rupee stayed at the current level, what kind of Forex impact?

Rajesh Gopinathan

So we have carried OCI impact of 139 crores which is a net impact that we could expect [indiscernible] Q3 and Q2.

Yash Mehta – Equirus Securities

139 crores, over the next two quarters?

Rajesh Gopinathan

Over the next two quarters, yes, on the closing rate.

Operator

Our next question is from Ankit Pande of Quant Capital.

Ankit Pande – Quant Capital

I just had a question with respect to the various service lines, especially where the growth -- the visibility that we have that will pan out over the next three or four quarters. So, amidst infra or managed services and ATM and enterprise, how do we see that shaping up, which is likely to gain more share?

Rajesh Gopinathan

No, we have – if you look at our track record and also the pipeline, the deals we won, definitely yes, we will do very well, infrastructure services, assurance, we also expect to do very well in the enterprise solutions on digital. So I think IS, assurance, digital and enterprise solutions, definitely.

Ankit Pande – Quant Capital

And just a little bit more information on the immigration bill side and how we're tackling that issue. So, have you changed anything in the way we are set up to service onshore and near-shore service centers, are we hiring more?

Rajesh Gopinathan

Since the [indiscernible] loss, I think the situation has been quite soft on the front, we have to watch what’s happened because as all of you are aware of the benefits of the bill and the whole question of it. And so we are waiting as to what the plan and progression of the bill will be. We have multiple scenarios and we are working on all those scenarios depending upon value and [KFS].

Ankit Pande – Quant Capital

So, at that point in time, you have changed something as far as subcontractors or anything of that sort?

N. Chandrasekaran

Things that we are doing to prepare ourselves for all different scenarios.

Operator

Our next question is from Sandeep Shah from CIMB.

Sandeep Shah – CIMB

Rajesh, we wanted to know is there any change in terms of the type of the cover which we take in the hedging, are we moving more from an options to forward kind of a scenario, if you highlight some color on that?

Rajesh Gopinathan

Structurally, no, so we use forward cover primarily for seasonal association and options primarily on our [AX] position. No changes in that. We cover 1 to 2 purchase forward and again as a strategy no changes there. Currently we are covered with it late on Q4.

Sandeep Shah – CIMB

Chandra, just a comment, in terms of large outsourcing deal flows, are you witnessing that starting from Q3 of this calendar year, the deal flows are better versus what it used to be in the first half of the calendar year?

N. Chandrasekaran

I have said that’s incrementally getting better but currently we said last quarter also we are comfortable. We continue to make just that --

Operator

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

N. Chandrasekaran

Thank you all for listening and very nice to talk to you once again to summarize. I would like to say that we have had a good strong set of numbers, broad based across markets, across industries and across service lines. Our operating metrics, whether it is in terms of volume, or in terms of operating margins or margin, everything is on track and quite strong this quarter. Deal wins have been good, utilization is good. We already improved the trainee utilization which has been one of the important achievements this quarter. And our cash generation this quarter is significantly better than last quarter. Last quarter they are one-off effects which we have explained and this quarter we are back on track. And in terms of the pipeline, it is quite strong and we remain positive as we leave this conference call. Thank you.

Operator

Thank you members of the management team. Ladies and gentlemen on behalf of TCS, that concludes this conference. Thank you for joining us. And you may now disconnect your lines.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Tata Consultancy Services' CEO Discusses F2Q14 Results - Earnings Call Transcript
This Transcript
All Transcripts