TCS Q2 FY '25 Earnings Call Analysis

1. Summary of Quarterly Results

Financial Performance

• Revenue
  • Total Revenue: ₹64,259 crores (US$7.67 billion)
    • Year-over-Year (YoY) Growth: 7.6% in INR terms, 6.4% in USD terms
    • Constant Currency Growth: 5.5% YoY
• Margins
  • Operating Margin: 24.1% (↓ 60 basis points sequentially)
  • Net Margin: 18.5%
  • Earnings Per Share (EPS): ↑ 6.2% YoY
• Cash Flow
  • Net Cash from Operations: $1.4 billion (Cash Conversion: 100.2%)
  • Free Cash Flows: $1.3 billion
  • Invested Funds: $6.4 billion
• Accounts Receivable
  • Days Sales Outstanding (DSO): 72 days (USD terms)
• Dividend
  • Interim Dividend: ₹10 per share

Segmental Performance

• Verticals
  • BFSI, Consumer Business Group, Life Sciences Health Care: ↑ 0.1%
  • Manufacturing: ↑ 5.3%
  • Technology & Services: ↓ 1.9%
  • Communication and Media: ↓ 10.3%
  • Energy Resources and Utilities: ↑ 7.0%
  • Regional Markets: ↑ 50.4%
• Geographical Growth
  • India: ↑ 95.2%
  • Middle East and Africa: ↑ 7.9%
  • Asia Pacific: ↑ 7.5%
  • Latin America: ↑ 6.8%
  • United Kingdom: ↑ 4.6%
  • Europe: ↑ 1.8%
  • North America: ↓ 2.1%

Key Metrics

• Total Contract Value (TCV): $8.6 billion
  • BFSI: $2.9 billion
  • Consumer Business Group: $1.2 billion
  • North America Deals: $4.4 billion
• Client Base
  • Clients in $1 million+ Band: 1,300+
  • New Clients Added:
    • $100 million+ Band: 5 (Total: 66)
    • $20 million+ Band: 6 (Total: 298)
    • $10 million+ Band: 8 (Total: 491)

Workforce

• Total Employees: 612,724
  • Net Additions This Quarter: 5,726
  • Diversity: 150 nationalities, 35.5% female
• Attrition Rate: 12.3% (LTM, within target range of 11-13%)

2. Management Guidance and Outlook

• Operating Margin Target: Committed to achieving a 26-28% operating margin. Management aims to reach the 26% mark by Q4 FY '25, assessing progress based on macroeconomic conditions and operational efficiencies.
• Total Contract Value (TCV) Guidance: Maintaining a comfortable range of $7 billion to $9 billion per quarter. Emphasis on maintaining a book-to-bill ratio of 1.1 to 1.2 to sustain growth.
• Growth Markets Strategy: Continued significant investments in emerging growth markets such as India, APAC, Latin America, and Middle East & Africa to drive long-term growth.
• AI and GenAI Initiatives: Expansion of AI-related projects with over 600 engagements, including 86 projects moving into production, indicating maturity and mainstream adoption.

3. Key Analyst Concerns

Demand Environment

• Concern: Potential deterioration in the overall demand environment after previous promising quarters.
• Management Response: Emphasized stability in demand focused on cost optimization and operational efficiency. Highlighted strong performance in BFSI and Technology & Services segments, with client-specific challenges being isolated incidents.

Margin Decline

• Concern: Sequential decline in operating margin by 60 basis points and segmental margin pressures in Manufacturing and CMT.
• Management Response: Attributed margin decline to higher third-party expenses from large transformational projects and incremental investments in talent and infrastructure. Assured that these impacts are temporary and expect margins to improve as projects stabilize.

TCV and Deal Momentum

• Concern: Lower TCV compared to previous quarters and absence of mega deals affecting growth trajectory.
• Management Response: Highlighted that TCV remains within the comfort range of $7-$9 billion, with a strong pipeline across geographies and industries. Mentioned an all-time high qualified pipeline and ongoing mega deals to support future growth.

Segmental Weaknesses

• Concern: Declines in Technology & Services, Communication & Media, and North America revenue.
• Management Response: Explained that declines are due to client-specific challenges and macroeconomic factors. Reiterated strong growth in other segments and geographies to offset weaknesses.

4. Management Tone Analysis

• Overall Tone: Respectful, resilient, and cautiously optimistic.
• Key Characteristics:
  • Respectful: Expressed condolences for the passing of Mr. Ratan Tata, highlighting his legacy and impact.
  • Resilient: Emphasized the company's ability to navigate geopolitical uncertainties and maintain a diversified portfolio.
  • Cautiously Optimistic: Acknowledged current challenges but expressed confidence in recovery and long-term growth through strategic investments and market expansion.
• Changes Compared to Previous Calls: No significant shift in tone noted. Continuation of a balanced approach addressing both achievements and challenges with a forward-looking perspective.