Tata Consultancy Services' (TCS.BO) CEO N. Chandrasekaran on Q4 2016 Results - Earnings Call Transcript

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Tata Consultancy Services Ltd (TCS.BO) Q4 2016 Earnings Conference Call April 18, 2016 9:30 AM ET

Executives

Kedar Shirali - Head, Global Investor Relations

N. Chandrasekaran - CEO & Managing Director

Rajesh Gopinathan - CFO

Analysts

Diviya Nagarajan - UBS

Ankur Rudra - CLSA

Ashwin Mehta - Nomura Securities

Nitin Mohta - Macquarie

Sandip Agarwal - Edelweiss

Sagar Rastogi - Ambit Capital.

Sandeep Muthangi - IIFL

Ravi Menon - Elara Securities

Ashish Chopra - Motilal Oswal

Sandeep Shah - CIMB Research

Shashi Bhusan - IDFC Securities

Nitin Padmanabhan - Investec Bank

Aniket Pandey - Karvy Stock Broking

Operator

Welcome to the TCS Earnings Conference Call. [Operator Instructions]. I would now like to hand the conference over to Mr. Kedar Shirali. Thank you and over to you, sir.

Kedar Shirali

Thank you, Karuna. Good evening and welcome everyone. Thank you for joining us today to discuss TCS' financial results for the fourth quarter and full year of fiscal year 2016, ending March 31, 2016. 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 Factsheet 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. N. Chandrasekaran, Chief Executive Officer and Managing Director; Mr. Rajesh Gopinathan, Chief Financial Officer and Mr. Ajoy Mukherjee, Executive Vice President and Head of Global Human Resources. Chandra and Rajesh will give a brief overview of the company's performance followed by a Q&A session.

As you are aware, we do not provide specific revenue or earnings guidance and anything said on this call which reflects our outlook for the future or which could be construed as a forward-looking statement must be reviewed in conjunction with the risk that the company faces. We have outlined these risks in the second slide of the quarterly fact sheet available on our website and e-mailed out to those who have subscribed to our mailing list.

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

N. Chandrasekaran

Thank you, Kedar. Good morning, good afternoon and good evening to all of you. We've ended the fiscal year 2016 on Q4 on a relatively stronger growth. For the quarter, we've delivered a robust volume growth of 3.2% quarter-on quarter which is very impressive for a seasonally weak quarter that resulted in a constant currency revenue growth of 2.1% QoQ, under rupee revenue growth of 4% QoQ, under USD revenue growth of 1.5% QoQ.

Our operating margin during the quarter was 26.1% at the operating level and the net margin was at 22.3%. For the full year, constant currency revenues grew by 11.9% and incremental revenue addition of $1.83 billion. Volume growth was at 12% for the prior year, while the constant currency realization were flattish. In INR terms, our revenues crossed a trillion rupee mark this year blocking INR1.086 trillion in growth of 14.8% year-on-year.

The reported USD numbers on the other hand were severely disrupted by a cross currency impact of 4.8% resulting in USD revenue growth of 7.1% year-on-year. Coming to the margin, we had the gross margin of 43.9% under operating margin for the year of 26.5%, well within our preferred range of 26% to 28%. Net margin for the year was at 22.3%.

From a client metrics point-of-view, our customer-centric business model and our philosophy of investing in building newer capabilities to continually broaden our participation in our customers' IT spending has paid us rich dividends. Our client metrics continue to be outstanding. During the quarter we added three more clients in the 100 million band and eight customers in the 50 million band and 17 in the 10 million band. For the full-year, we added eight more clients in the 100 billion revenue band, bringing the total to 37 and in the 10 million revenue band, we added 37 clients this year, bringing the total to 298.

Now, let me give you some color on how the various segments performed. Given the severity of the gross currency-induced distortion, I'll stick to only constant currency numbers in the rest of my commentary tonight. In Q4, growth was led by BFSI which grew 3.2% QoQ. Clearly the weakness in insurance is now behind us and even diligent is bottoming out. Three other verticals, retail, manufacturing, energy and utilities also grew above the company average during the quarter. Geography-wise, North America grew by 2.4% and Continental Europe by 3.6% QoQ, India at 2.2% and Middle East and Africa at 9.5% on a QoQ basis. From [indiscernible] services, growth came from asset leverage solutions, engineering and industrial services, assurance and infrastructure services.

For the full-year, the growth was led by a strong performance in BFSI which grew at 11.7% year-on-year, an acceleration over the previous prior year's growth. Excluding insurance our banking and financial services business grew at 14.8% year-on-year. Besides BFSI, another five verticals, retail, manufacturing, licenses and healthcare, energy and utilities and travel and hospitality all grew above the Company average growth in constant currency terms.

Geography-wise, growth was fairly well distributed with smaller geographies like Latin America, Asia-Pacific, Middle East and Africa showing higher growth. From a services perspective growth was led by asset leverage solutions, infrastructure services and assurance. In terms of demand, the key events this quarter we signed several large deals which were distributed across six verticals, two in banking, one each in insurance, manufacturing, healthcare, high-tech and media.

Georgaphy-wise North America accounted for five out of the seven deals and of the remaining two, we had one each in Continental Europe and United Kingdom. If you step back and look at what have been the broad drivers of demand for services, we can put them into three broad categories, digital adoption; the quest for efficiency and simplification. All the three are interlinked, but of these customers are most excited by the possibilities opened up by digital technologies and are investing bit time. Their digital programs are now well established and progressing well. The scope and size of programs are continually increasing.

Revenues from digital engagement grew in double digits QoQ and made up 15.5% of our Q4 revenues. For the full year, digital revenues made up 13.8% of revenues crossing the $2 billion mark, a growth rate of 52.2% over the prior year. Within the digital stack, our digital marketing, mobility revenues crossed $1 billion milestone in April 2016 or 52% of our clients have engaged us for digital services and in many of the key verticals, we're the primary digital partner for our large clients in those verticals. Many investments made over the last several years have helped us achieve this level of trust.

Let me now spend a couple of minutes on these investments. We firmly believe that there are only legacy technologies and not legacy people. Our responsive technology change has always been to invest in reskilling our people. This is how we adapted the mainframes gave way to client servers and client servers gave way to the technologies. Now as digital adoption proceeds, we’re once again in the midst of another transformation of our workforce. Only this time, the scale, the complexity and the rapidity of change are of a different order of magnitude. Digital is not any one technology or any one particular skill. To be relevant in the digital era, we need the soft skills, the design skills, multi-technology skills and most importantly strong domain skills. We're responding to the challenges of digital revolution in couple of these. First, we're hiring individuals with a right, in fact very diverse, sometimes mixed skills quite different from our historically preference for engineers which has resulted in a very rich multidisciplinary teams that can examine design problems from very different viewpoints and deliver very creative outcomes.

Second, we're fundamentally re-margined our approach to talent development. At the center of this new approach is our digital learning platform, an integrated ecosystem that combines virtual, physical and experiential learning with high-quality content available from anywhere, anyplace, anytime and on any device. The platform offers courses on 400 different digital tools platforms and skill sets and allows individuals to pick what they need to learn and learn it the way they can and they want to, to the extent of depth that they require in their particular role. From a push model, we have now moved to an employee-centric pull model which is more in line with the demands of the particular era and also the millennial mindset. Feedback from our employees has been immensely positive and the outcomes have far exceeded our expectations.

In FY 2016, we were able to impart over 349,000 competencies to over 120,000 plus employees. There is another transformation that is underway at TCS today which is even more fundamental to our delivery model. The digital era where customers are investing in leveraging these two technologies to transform themselves and gain competitive advantage, speed is of the essence and therefore agility is key.

Consequently, new projects use agile development or dev/ops by default and we're systematically driving agile adoption across the company. We have successfully demonstrated that a globally distributed delivery model can significantly leverage agile and have plenty of instances of successfully delivering very large program using agile dev/ops in our global network delivery model framework. For one European telco, we delivered a program with over 90% off shore our global leverage out of the 13 global locations.

For U.S. financial services clients we used agile delivery with over 80% off shore leverage using 14 global locations. These kinds of engagements entail a different style of working and we have invested in building a very collaborative workspace required for this purpose in our development centers. A big part of the success, we've had digital space has been on account of the industry-specific innovation that we've been able to develop and proactively offer to our clients. Some of you, who visited our executive briefing center last month in Mumbai have seen live examples of how we have leveraged digital technologies to help our clients in different industry verticals, re-image their businesses. These solutions are conceptualize and designed through collaboration between domain experts and the technology experts at our various innovation centers. These groups are now working on emerging areas like block chain and frictionless access in banking.

In store experience and multi-node supply chains in retail, connected cost and predictive maintenance in manufacturing, genomics and medical services and life sciences area form part of this. Then there is a foundational research, where a core research and development team is focused on emerging area like metagenomics, materials, machine learning, cognitive computing and so on. In addition, we look for innovation from outside TCS as well. Our co-innovation network is a very scalable program to tap into the innovation pools within the academia and the start of ecosystem.

In the start universe we've cast a wide net screening over 1400 startups from across the world. For detailed evaluation and treatment, we've engaged with around 38 of them to do a couple of things, either go jointly to the market or in some times integrate their solutions and products into our overall solution for the client or to our products.

The other important area I should talk about is a design studio and our investment in the executive business center. The other module we're following is one of co-innovation with our customers. To facilitate this, we have invested in building co-innovation workspaces. Our one such facility is our digital reimagination studio in Santa Clara stocked by top notch talent from across the globe. These creative lead multidisciplinary teams work closely with our customer teams applying the principles of design thinking to ideate, develop and even pro-type creative digital solutions to our clients' business problems.

Likewise, the executive business center that some of you have seen at our Banyan Park Campus in Mumbai is another such workspace where we not only showcase many of our on the ground digital solutions, but also collaborate and co-innovate with our clients on new ones. The fifth zone of investment we're making is in building our own digital intellectual property. We now have a portfolio of digital products and platforms, some in the technology space, some in the horizontal functions and others which cater to industry specific needs. Last year around this time, I have spoken of our seven growth platforms and they had crossed the $100 million mark in terms of annual revenue run rate. This year, those platforms have delivered $175 million, a growth rate of 37% year-on-year. iON assessment continues to be on a role crossing a major milestone this year, as of March 31 it had assess more than 50 million candidates including 7.7 million in Q4 and delivered an 88% reduction in turnaround time.

Proma [ph], our HR platform to enable next generation employee experience is gaining good traction in the market. In FY 16, it was adopted by four clients including one in Q4. [Indiscernible] platform also did well winning five claims this year, including two in Q4. Our Integrated Urban Exchange and our Customer Intelligence and Insights products both had a win in each in Q4. In June, last year, we launched ignio, the world's first neural automation system for IT operations and enterprises creating a brand new category that we call services as a software. With this cognitive capability, ignio is technologically ahead of automation products in the market. We have 524 patents around ignio till date and have some more in the pipeline.

Ignio has grown itself in very diverse customer environment using its context other capabilities to deliver incredible results even in use cases very different from the usual infrastructure maintenance services. For example, a U.S.-based financial services client ignio has been able to compress the time taken [indiscernible] diagnostics from 4 hours to 10 minutes certain. For another client, ignio has been able to streamline the employee onboarding process which used to take several days to complete it in less than two hours. This has generated a lot of interest amongst clients and prospects. Since the launch, we have signed up 16 customers for ignio. In addition, the horizontal platforms of technology products, we also invested in building a portfolio of industry-specific digital products and platforms.

Our advanced digital merchandising suite, Optumera, is showing a big promise to two the retailers as our customers. Two leading retailers adopted this product in April 2016 including one in Q4. Likewise, TCS Advanced Drug Development Product is transforming the clinical trials process for our customers. Today, three out of the top 10 pharma companies are using this software product. In FY ‘16, we have seven wins in this area including one in Q4. TCS HOBS, our comprehensive pre-integrated suite of hosted OSS/BSS applications and pre-modeled business processes is finding good traction with 16 clients using it in various models. In FY ‘16, we had six new client wins for this platform including one in Q4.

From a people front, we've ended the year with 353,843 employees, adding over 90,000 employees on a gross basis and over 34,000 employees on a net basis. Attrition rate continues to go on a downward trend. Q4 attrition on a LTM basis has come down further by 60 basis QoQ to 14.7% in IT services. For FY ‘17, we've announced wage increase of 8% on the average and going up to 12% for top performers for employees in India. In other geographies, the increase ranges from 2% to 6%. Further, we have done away with the bell curve for performance ranking. Performance ranking is now based on individual performance. With all of our investments in training increase the employee engagement and implementation of employee-friendly practices, we expect further improvement in employee satisfaction and retention levels in FY ‘17. The improved retention and increased productivity should also result in reduced overall hiring next year.

In addition, we've worked on automation of many of the engagements that we're doing. So, we expect about 32,000 trainees to join us from the campus offers made in FY ‘16; any other lateral addition will be very recalibrated, but I can tell you it will be a much lower figure compared to FY ‘16. Equally, we're focused on reducing our dependency on work visas. I would like to say that we're focused on reducing our dependency on work visas through increased local hiring and leveraging the global delivery network. In FY ‘16, that is this month in April, we have applied for only a third of the work visa that what we had applied for in the prior year. We've taken in significant number of local recruits in all markets, including from university campuses. Today, we believe, we're one of the biggest recruiters in the market in which we operate, particularly the United States.

When we look at FY ‘17, while we don't give revenue or earnings guidance, there are a number of business systems that give me great confidence. First, we're witnessing a dramatic acceleration in digital spending by customers. Their focus is now shifting from pure front-end work of prior years to a tighter integration with their existing applications time. With speed to market being critical, our scale and digital capability positions us strongly to become the preferred digital partner for more and more clients and win a disproportionate share of their incremental spending.

Second, large segments of our business BFSI, North America and Continental Europe have shown very good resilience and have grown very well in Q4 with a good exit, building up strong momentum going into FY ‘17. Third, all the major headwinds from the same time last year be it Diligenta, insurance or Japan have all softened. In fact Latin America has actually turned the corner and has done very well during the last couple of quarters and India has done well reasonably this quarter. Lastly, our order book is looking good and our deal pipeline is strong. Customer metrics are looking excellent, our digital platforms are gaining customer traction and are in a growth mode. So, all in all, we're well placed to deliver a strong year in FY 2017.

Before I conclude, I wanted to make a brief statement on the adverse jury verdict from the recently completed trials in a lawsuit filed against TCS by Epic Systems in the court of Western District Madison, Wisconsin. We want to reiterate that TCS did not misuse or derive any benefit from any of the documents downloaded from the Epic Systems' user web portal. We've already issued press statement as the case is with the court. We would not like to make any further statements as far as this particular case is concerned. This is something that they wanted to share with you and conclude my speech. Over to you Rajesh.

Rajesh Gopinathan

Thank you Chandra, I'll quickly just go through the headline numbers once again before we turn it over for questions. In the fourth quarter, our revenues grew 2.1% Q-on-Q on a constant currency basis. In INR terms, we had a cross currency benefit of 1.9% resulting in a reported revenue of INR284.486 billion which is a sequential growth of 4% and a year-on-year growth of 17.5%. In USD terms cross currency impact was 60 basis points negative, resulting in a reported revenue of $4.207 billion which is a Q-on-Q growth of 1.5% and a year-on-year growth of 7.9%. The constant currency growth of 2.1% is made up of our volume growth of 3.2% and realization impact of negative 1.1%. Our full year revenue for FY 2016 was INR1.086 trillion and year-on-year growth of 14.8% in INR terms.

In U.S. dollar terms, our revenue was $16.545 billion and translates into an annual growth of 7.1%. Our constant currency revenue growth for the year is 11.9% which is made up of a volume growth of 12% and the constant currency realization of a flattish negative 0.1%. With our incremental revenue on a constant currency basis is $1.83 billion. The reported incremental revenue is $1.1 billion with cross currency movements during the year erasing nearly $750 million of our revenue. Operating margin, at the operating margin level these currency movements resulted in a benefit of 0.6% mitigating the 1.1% increase in expenses mainly towards our various investments. So, overall operating margin are a 26.1% for the quarter and a 26.5% for the full-year. Net income for the fourth quarter stayed flat at 22.3% and for the full year, net income margin declined 0.6% year-on-year to 22.3. Our effective tax rate for the year is at 23.6.

In cash flow terms, we've ended this quarter with a cash from operations of 22.5% and overall cash flow operations of the INR64.1 billion. For the full year net cash from operations amounted to INR233.8 billion which is 21.5% of revenue and free cash flow was INR214.2 billion, a growth of 17% year-on-year. After paying out of this INR95.15 billion in dividends during the year, our invested funds as of March 31, 2016 is at INR329.3 billion. The board has recommended a dividend of INR27, bringing the total for the year to INR43.5 per share, a payout ratio of 42% on our constantly dated of it.

With that we open the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions]. First question is from the line of Diviya Nagarajan from UBS. Please go ahead.

Diviya Nagarajan

Two questions please. In your earlier remarks on CNBC, you talked about having the leeway to invest within your margin band. My question to you is what form of investment would that essentially be? What are the key areas that you're thinking off in terms of investments?

N. Chandrasekaran

Yes, I think we have primarily said that we'll operate in the 26 to 28 band and the most of the investments are going in building out our digital business and the digital business is picking up momentum. When it is picking up moment, we don't want to be shy of any investments. So, we want to have that flexibility. I think if you look at the investments that we have made, they are pretty significant. We've probably are undertaking the largest digital training exercises of any corporation any part of the world. Already, 120,000 people have been trained for 350,000 plus competencies. We have built a state of the art digital learning platform which brings physical and digital together.

We have an innovative an [indiscernible] framework which integrates the digital learning with the physical workspace. We have built a number of platforms, foundations platforms, technology platforms or functional platforms and industry domain-solution based platforms. I walked through some of them in the commentary that I gave and as we see opportunities, we're not shying away from making those investments.

Then, in terms of the physical workspaces, whether it is building out design studios or building out executive briefing centers, there are many such investments happening. So, I think it is in people, it is in the infrastructure, it is in the area of intellectual property, creative thinking workspaces, I think it is of different nature. Then, we're also wining a lot of cloud business. We're also winning a business that integrates different digital technologies and transformative redesign of business processes. So, I think all these require a large amount of investments and that's what it meant.

Diviya Nagarajan

Just one more question from me and then I'll come up for follow-up. In the past couple of quarters we had cited some sporadic instances of irrational pricing in the market. Has that eased, how do you see the price competition in the market today?

N. Chandrasekaran

So, as I have always said that, you always see sporadic situations of pricing which we find it strange, but those things do happen and it is not that we don't see it happening, but it is not any different from what we've had before. So this is something that happens and we have said that our pricing is generally stable, there might be variations in between quarter and we've seen that play out this year as well. So, that is something that you're going to watch out for, but I wouldn't put a cautionary statement on this.

Operator

Next question is from the line of Ashwin Mehta from Nomura Securities. Please go ahead.

Ashwin Mehta

Just two questions, one, while digital has grown well for you, I wanted to check on the outlook for the non-digital piece of business which seems to be flattish for us for the past two quarters. Do we see an acceleration in that going forward?

N. Chandrasekaran

I think if you look at service lines, we're doing very well on asset leverage, some of it is digital platform, some of it is non-digital platforms and products and then they are doing very well in infrastructure. We've seen good momentum in engineering and industrial services at this time. We're also seeing good momentum in assurance, but you know each of these service lines also morph into digital. So, when we say digital, it is cutting across all these service lines. As you go into the future, more and more of these service lines will transform themselves and exhibit themselves as digital. So, that's what we should look for. So, digital should not be seen as another service line. Digital is to be seen as a transformation that is happening across service lines, so as the world goes to our system.

Ashwin Mehta

Second question is in terms of what are the items on your cost side which is cost of equipment and software that seems to have jumped by almost 40% this quarter, it's more than half of your incremental revenues. So, what is causing such a sharp jump, because typically geographies like EMEA and India is what causes the jump in equipment sales and they don't seem to have contributed that much to incremental revenues.

N. Chandrasekaran

Ashwin if you look at it on a Q-on-Q basis it's 1, but if you go back it's about 2.5 is our typical average. You'll find that if you go back and look at it in the last year's numbers. That line item of cost reflects third-party equipment or software that we buy in part of our servicing of customers. It could be system integration deals, it could be cloud deals. It could be managed services deal and any of those line items, so it's broadly in line with our long term average and beyond that, there is nothing much to call out on it.

Operator

The next question is from the line of Ankur Rudra from CLSA. Please go ahead.

Ankur Rudra

To begin with, Chandra, you've obviously done very well in banking financial services and insurance this time. How do you see the rest of the year is shaping out given the recent challenges we've seen from banks. Are you expecting your market share gain to overcome the headline challenges?

N. Chandrasekaran

Yes, I think when we met in [indiscernible] on the Analyst Day, I clearly articulated that we're seeing good traction in the BFSI space. If you look at our BFSI revenue for the year it grew at 11.8% and BFS revenue grew at 14.8%. So arguably insurance was a drag last year and insurance has turned the corner, so that is an added confidence that we get that the BFSI is going through well and it is going to be a strong year positive segment in BFSI [ph].

Ankur Rudra

Also if you could help me with one thing, we've seen some progressive changes in disclosures in operating metrics such as onsite offshore utilization. I understand this is probably because of change in your business model. If you could elaborate, why this is less relevant now and also the new metrics that investors should be looking at beyond the headline numbers. Thanks.

Rajesh Gopinathan

In fact, we continued to maintain from a global benchmarking perspective, one of the highest disclosure standards in this industry and as business becomes more complex and business models become more heterogeneous, some of these metrics like utilization will steadily lose relevance as we grow more and more into investment metrics modules, as business models develop and as they mature and stabilize, we will consider what kind of new metrics could be used and we constantly monitor the disclosures coming from our competitive set to get an assessment of where the metric side of it is going. I would like to assure you that we will remain among the best quality disclosures and as new metric become available, we'll share with you.

Ankur Rudra

Just last question, if I could just squeeze in. You mentioned that you're moving to front office to full stack implementation of any of your digital clients. As this happens, do you think the ability to leverage offshore and asset leverage solution that you've been developing over the last several years to improve and hence gross margins and those kind of deals improve as well. Thanks.

N. Chandrasekaran

I think there is an opportunity there because there are many things are playing out here, a very strong integration capability, a very strong backend capability in addition to the funding capability and tools, automation all those things will play a part. At the same time, from the gross margin prospect, it is okay, but we should not forget that investment cycles are going to continue because when we see an inflection point, when we see the momentum continue, we don't want to be shy.

Operator

Next question is from the line of Nitin Mohta from Macquarie. Please go ahead.

Nitin Mohta

Chandra, I had a specific question on the infrastructure services practice, another solid year of 20% CC growth. There are two-part question; firstly, there are some concerns amongst investors, as deals come up for renewal, do you think there is more pricing pressure that we're seeing in this particular practice. And secondly, as we have seen a very solid 10 years of growth in this underpenetrated area, are we going to see kind of plateauing of growth rates?

N. Chandrasekaran

I think there are two answers I would like to give. In terms of pricing pressure, I already said there will be sporadic instances. There will be companies which will try to be very sharp on the pricing, but to my point of view infrastructure has a [indiscernible] growth opportunities and there is a tremendous play here with private cloud, enterprise private cloud, off premise -- public cloud, not from the infrastructure point of view, but what happens to everything that is sitting on top of it. How do we integrate and deliver value? That is something that we've been pretty successful and we're seeing traction. So, I feel that we should look at that and look at the differentiation in the play, but we just can't be looking at the commodity pricing.

Nitin Mohta

So, we should consider that these kind of growth rates sustainable you don't think we're going to hit a plateau given that it's been such a solid performer for the industry overall.

N. Chandrasekaran

I'm not giving guidance, but I think that area have lot of growth ahead.

Operator

Next question is from the line of Sandip Agarwal from Edelweiss. Please go ahead.

Sandip Agarwal

Chandra, I have one question. While I understand that your own digital, as you said, it has grown at 52% year-over-year and digital cannot be bifurcated from verticals or service lines. But if you exclude the digital part, does it look like that the non-digital part of the business is growing at a very, very low rate? And if yes, then what is actually hitting us there? And my question is also followed by on the enterprise solution and consulting side. I think that is one area where we have not done probably well this year. So, what is your view there and what is impacting us on that side? And finally, one question to Rajesh, while you have given a math margin band of 26 to 28, but will it be on a year-over-year basis, you are saying or there could be quarterly volatility or even yearly volatilities in that range. Thank you.

N. Chandrasekaran

I think as I said, digital should not be looked as a service line. The key service line we report all our digital components and whether it is enterprise solutions, whether you have infrastructure. I mean you got to look at all those things. There is a digital play. The digital play comes from three major areas which is big on analytics [ph], digital marketing, mobile channels and then cloud. So, when you look at all these three, the benefit across service lines, so taking that and then comparing, leaving the rest will not give you the right comparison. So, I would request you or suggest that you don't do that kind of comparison.

Second, with respect to Enterprise Solutions and Consulting, I think we have taken steps where we have integrated these two practices to bring in the necessary capabilities that is particularly required in the future from a digital point of you, what it mean to provide the consolidated capability. So, you should see growth.

On the margin front, we're very happy with our overall performance during the year. We're ending at 26.5 which is fairly in the midpoint of our stated target band and on cash generation perspective also it has been a good year, hopefully, we will be ending the year with free cash to revenue of about 21.5% and this quarter has been a 22.5%. So, overall the profitability and performance has been very good. And as we build out into a more heterogeneous business model, we're committed to chasing opportunity and doing the investment that is required to make sure that we maintain our leadership position. The impact of that on margin, we believe is containable, but period to period, numbers will depend on a complex set of how the growth spans out and how the currency impacts and certain other variation that could happen on a period-to-period basis, but structurally the pricing side is stable, demand side is positive. Overall, we see very strong momentum in the areas where we've made investments and therefore we remain optimistic on the profitability.

Operator

Next question is from the line of Sagar Rastogi from Ambit Capital. Please go ahead.

Sagar Rastogi

Could you explain what drove the margin drop this quarter?

Rajesh Gopinathan

We had a fairly good performance and the idea about having a kind of a broad range is to be able to give us the flexibility to operate with [indiscernible]. In terms of your numbers, gross margins were down about 90 bps and we pulled back some of it on the SG&A side, primarily driven from benefits on the employees part of the man power cost. So net-net, we're ending with about 50 bps down compared to that. And for the full year, we're at 26.5 which is net of an exchange impact of about 130 bps positive. So, broadly it's in line with what we've been saying.

Sagar Rastogi

Sorry Rajesh, would you be able to split out the impact of INR depreciation, the realization like you used to earlier?

Rajesh Gopinathan

Impact of INR depreciation for the quarter is 60 basis points out of it and for the full year is 130 basis points. Realization, we don't split out, the rest of it is business in fact.

Operator

Next question is from the line of Sandeep Muthangi from IIFL. Please go ahead.

Sandeep Muthangi

I wanted to chip in on a quick question about some of the automation initiatives you might be doing. Chandra, when do you see as the tipping point for some of these automation initiatives to gain real scale? Would we be looking at second half of 2017 of FY ‘18 to be the year, when some of these things become really materials? And also, what would your strategy be when they become material? Would you be competing on the price point or would it be just gaining more efficiencies and using it as margin lever?

N. Chandrasekaran

Sandeep, if you really look at the charts I presented in the March meeting, we have shown that our incremental revenue per person or basically the headcount additions or the incremental revenues for the last five years has consistently gotten better with the last calendar year showing about $100,000. That's a pretty significant and steep progress, if you really look at where we're as a overall average and we have shown the numbers for 2009 and where we're today and so on.

And it is the result of many things, some utilization and also result of many of the automation and business model changes that we've been trying to bring in. So, I believe that we're at a stage that we will see benefits growing accruing from automation point of view, whether it is in managed services contract or in infrastructure contracts or in other types of contracts as we have done some engagement and we have done some thinking and work so and so forth. That is why in my opening commentary, I clearly said that we will see material reduction in the gross sales numbers. If you look at the gross sales numbers over the last several years, it has gone up year-on-year for past several years. And this year, you will see a big trade in terms of material reduction in the gross number, that is our estimate. So, how it will span out, let's wait and watch and what we will do or how we will compete, this will evolve. We have options in front of us, but we need to evolve this.

Sandeep Muthangi

And just one quick question, I'm not sure if you'll be able to answer this, but I'll ask it anyway. In terms of the timeline the case, could we get some clarity on the Epic case about, what are the next steps and are you waiting for the judge's verdict or what's the basic timeline we're looking for.

N. Chandrasekaran

I think as we had said in the press statement, the judge verdict will come in six weeks' time. About six weeks' time is what we know and after that, depending upon the outcome, we have an opportunity to appeal. That's all I can say.

Operator

Next question is from the line of Sandeep Shah from CIMB. Please go ahead.

Sandeep Shah

Chandra, any discussion with your clients indicates that client maybe a bit cautious in terms of releasing the digital IT spend, looking at the volatile macro or do you believe that digital spend sensitivity to macro will not be that big versus what we used to see earlier in terms of the traditional discretionary spend?

N. Chandrasekaran

From what I see, I can tell you that the discretionary spend on digital is happening.

Sandeep Shah

Okay and even the client discussion does not foresee any kind of conservatism about the -- some amount of skepticism now in terms of the macro [indiscernible] spread from Asia to develop countries or?

Rajesh Gopinathan

I have not heard it in any of my discussions or any of my management teams have not heard anything or highlighted.

Sandeep Shah

Okay and Rajesh, just in terms of margins, generally we exit the financial year with a better margin exit trades, this time you are exiting with a lower end of comfort of 26 to 28. When we enter FY ‘17, there could be some additional headwinds through declining currency benefits, there could be higher visa charges which could be because of U.S. fees increase as well as some UK visa change regulations. So, do you believe this time the challenge could be slightly higher in FY ‘17 in terms of managing the margin band of 26-28?

N. Chandrasekaran

I think we're right FY ‘17 is going to pose quite a few challenges which will have negative impact on the margin, but equally FY ‘17 also has fairly amount of positives. So, if you look at it, the momentum in our largest segments, whether it be the U.S. market or the banking market continues to be strong and that provides us quite a lot of comfort. Similarly, our investments across the board are doing quite well. While we're likely to continue to remain in an investment mode, but scale in these investments and momentum in these investment gives us a lot of confidence. And as we have been mentioning areas like automation, areas in terms of digital learning, productivity, etcetera are all positive elements on the margin. So, it's going to be a tough year. I will have to earn my salary, but there are negative elements and there are positive elements. We'll see how it plays out.

Sandeep Shah

Okay. Just a follow-up, any quantification for the UK visas rule change, about the salaries?

N. Chandrasekaran

No. We're not quantifying the impact of -- next year, that's next year. But I want you to take notes of the opening commentary I gave. We have made significant efforts over the last few years to reduce our dependency on visas in very market and both in the U.S. and UK it is true. We believe that we're a top recruiter in both these markets and other markets. And we've filed one-third of the work visa applications this year than we filed last year in the U.S. And the number of applications, we'll require in the UK this year will also be less -- considerably less compared to last year as we go into the future and that's the business model which we're operating on.

Operator

Next question is from the line of Ravi Menon from Elara Securities. Please go ahead.

Ravi Menon

I had two questions. One is the [indiscernible] deal was having pretty strong even in restructuring contracts. Again, your comments also seem be raising [ph] regarding that. Would you say dealer whatsoever last three to six months was significantly better than during the first half of FY ‘16?

N. Chandrasekaran

I think from our deal momentum point of view, all I can say is that I'm more interested to say that the headwinds we had six months ago are not there today. This momentum is from a company point of view, our own business perspective, but from the deal momentum point of view, it continues to be good, it continues to be solid.

Ravi Menon

So, do you think that the client environment too has improved compared to last year, the demand in environment overall?

N. Chandrasekaran

See, from the demand environment point of view as I said, digital has significantly improved. And many of the other deals you are talking about is all connected with digital in one form or another.

Ravi Menon

And one more follow up. Do you think that the digital learning platform that you described for use for your employees, can it also be opened up to clients, to retrain their work force?

N. Chandrasekaran

Let me put it this way. We have a lot to do at this point in time, so we're focused on completing complete retraining of our 300,000 plus employees, the digital learning platform is getting enhanced and new experience is coming up all the time. Potentially it has got opportunities, but at this point in time, we're pretty focused on what we have achieved.

Operator

Next question is from the line of Shashi Bhusan from IDFC Securities. Please go ahead.

Shashi Bhusan

So we talked about BFS to be stronger enough by FY ‘17. What is driving the confidence? Is it our discussion with clients, deal pipeline or deal wins and some insight in BFS in terms of service line that are resulting in the optimism?

N. Chandrasekaran

I think as I said, the BFS segment last year delivered a 14.8%. BFSI segment delivered 11.8%. So the 14.8% which is the BFS segment came down 11.8% because of the [indiscernible] we had in insurance and Diligenta as part of insurance overall from segment perspective. And we feel that the BFS momentum is continuing to be there and we've come off the headwinds we had in the insurance. So, overall BFSI should do better -- should do well, it's a strong year so, that's where the confidence comes from. Obviously, it has to be followed up with the fact that we're winning deals and everything else.

Shashi Bhusan

Sure. And as we're towards the lower end of the margin guidance in terms of exit rate, do you think that our ability to invest in the business has diminished or is there a possibility of lowering our margin guidance if that become hindrance to growth?

N. Chandrasekaran

Shashi, we have INR32,900 crores on the balance sheet and 26.5% margin, 21.5% cash performance which is way ahead of anybody else in the business. If this does not give us the ability to invest, something must be seriously wrong with us?

Operator

Next question is from the line of Ashish Chopra from Motilal Oswal. Please go ahead.

Ashish Chopra

Chandra, you touched upon the turnaround in multiple week segments in the opening remarks. I just wanted to understand in particular about the two of them. So, while areas like India and Latin America have been more volatile, I think Diligenta and secondly Japan have been slightly more secular decline. So, how would you see those spanning out going forward, the latter two?

N. Chandrasekaran

So, Diligenta has been consistently dropping for the past several quarters, definitely the last fall by a good drop and now it is bottomed up. Okay, so we believe that from here it will be at least flattish if not good. So that's where it is and in Japan. Also, we believe that has bottomed out and it needs to grow, it will grow, but how much it will grow is something that I can't tell.

Ashish Chopra

Sure and would you like to call out any segment or the sub-segment within the portfolio right now which would probably be the most challenging in the overall business for TCS?

N. Chandrasekaran

See as I've said, if you look at the metrics even in this quarter, where the constant currency growth has been 2.1%, all segments except of high-tech have all grown. So, no particular segment has a specific headwind that I call out at this point in time, but all of them grow at a different pace. We feel pretty good about our large segments like BFSI, retail, manufacturing, life sciences, travel and the energy resource utilities have done well this quarter, though we have synergy headwinds, so I believe that will do well as well, Telecom and media has had challenges last year and this year I think it's out of the woods, but how much it will grow, we will wait and watch.

Ashish Chopra

And just lastly from my side on the Asset Leveraged Solutions business, assume that the regional split of that business would be very different than overall TCS's business, just would there be any particular regions where the growth has been particularly strong on the product side or would it have been across the board.

N. Chandrasekaran

I think it's across the board and it will be a different mix from the TCS' service mix, but there is no lopsided effect from many markets.

Operator

Next question is from the line of Nitin Padmanabhan from Investec Bank. Please go ahead.

Nitin Padmanabhan

You spoke about the investments in hiring a lot of local across the U.S. and UK over the past two years. I just wanted to understand where are we today versus where we were a few years ago. How close are we to possibly be 50% of the headcount there have been locals today and much more is there to go.

N. Chandrasekaran

So, I think, I don't want to use specific numbers, as I said we're increasingly becoming -- wanting to become and becoming less dependent on work visas and that is the direction we have taken and as I said the number of visas we applied for this year is far lower, compared to last year.

Nitin Padmanabhan

Sure, the other thing was, do you think that would be an additional headwind on margins for this particular year.

N. Chandrasekaran

In terms of margin, the whole issue needs to be seen in perspective of on a like-to-like basis at onsite cost expats and all are not any less expensive than local recruits. The decision between local versus expert is a purely recent decision based on the quality of the supply available, the nature of the demand and mobility requirements of the job and for today, say the interest of the various stakeholders. It's not a margin driven call and I wouldn't see it having a substantial impact on the margins.

Operator

Next question is from the line of Aniket Pandey from Karvy Stock Broking. Please go ahead.

Aniket Pandey

Sir, given the impetus on digital in the business, just wanted to understand in that case, every company is focusing on digital business and they are able to grow also. So, how TCS could be able to give a competitive edge to its competitors and what are the EBITDA margins in this digital business and how is the digital business environment in the coming next two to three years?

N. Chandrasekaran

I think, as I said clearly, the investments that we have made in digital which we articulated from a talent perspective, from intellectual property perspective, industry domain, as well as technology expertise that we bring, the type of hiring we're doing, the different skill sets that we bring, the spaces for creative thinking, the design studios. I mean many such investments we're making and we built some very unique solutions and as it goes along and that will differentiate ourselves. But apart from that what I can say, I think while there will be individual engagements which will be of a particular margin, but the investment cycle will continue to build out this.

Operator

Next question is from the line of [indiscernible] from HDFC Securities. Please go ahead.

Unidentified Analyst

Just one quick follow-up on the UK business which I suppose the drag is obviously a result of the drag in Diligenta, but still the fourth quarter exit CC growth is actually negative, right?. On a full-year basis, the UK business might look optically excusable, let's say at, 8.3%, but the fourth quarter exit looks particularly weak. So, the specific question is, is this directly related to Diligenta which would be what 13%, 14% of the UK business?

N. Chandrasekaran

Okay. I think that's a good question and I think as I was indicating that are the good question, I will be making the concluding remarks. This answer to this question will very nicely fit into my concluding remarks. So, with your permission I'd like to start the concluding remarks and as part of the remarks will address this question.

I think the key thing that I would like to highlight is the exit rate in general for FY ‘16 as I believe compared to where we were in FY ‘15 is lower, at the company level. For Diligenta business, definitely it will be lower because during the last four quarters consistently it has been a drag and so every quarter the drag has affected the growth rate. So, you are obviously ending up with a much lower co-pay [ph]. So, my commentary is that definitely we're at the lower exit rate compared to last year at the same time, but last year at this point in time, I had single doubt and called out many drags or many headwinds, whether it is Diligenta, whether it is Japan or insurance, electronic media, the energy verticals compared during the year. So there are many such instances and the things that I feel good about in Q4 performance is first of all I am happy and relieved that we have been able to deliver a very good quarter, meeting the expectations and some places exceeding the expectations. But the point here is the footprint is very good, the volume growth of 3.2% on a seasonally weak quarter, particularly when we’re coming off of a very bad Q3. And if you look at the four sectors, the banking, North America, the Continental Europe which are important segments for us to watch out are all increasing nicely.

The headwinds the same time that I talked about last year, they have bottomed out and I am not seeing those segments expanding and the digital business is gaining traction and gaining scale and we feel that incremental contribution of the digital business to our overall business as a percentage rapidly has improved. And many of the investments that we've made in digital, although we will continue to make more investment are beginning to deliver results in terms of customer wins and, as a result, revenues will grow. I think the footprint is very good.

So that's what I feel good about in this quarter, not so much specific numbers, I would take a good footprint than a better number at poorer footprint, and as I say footprint, the operating metrics, the different things [indiscernible]. If you look at the customer metrics, is incredibly good metrics from a 29 to a 100 million customers to 37, of which three happened this quarter, a significant increase in the 15 million customers of which 8 have [indiscernible] this quarter. So I think the customer metrics is absolutely top-class and our key initiatives, whether it is digital learning or whether it is investments that we've made into workspaces is not be restrictive, that we’re trying to build and build a profile that's required in order to be able to partners is very good. I also pointed out that 52% of our customers see us as the key partner of choice for digital. So, given all this, I think we’re in a good place, how it translates into business, growth rates, we will have to wait and see. Thank you for your patience and I deeply appreciate for taking the time for this call.

Operator

Thank you very much sir. Ladies and gentlemen, on behalf of TCS, that concludes this conference call. Thank you for joining us and you may now disconnect your lines.

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