Tata Consultancy Services Limited (TCS) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the TCS earnings conference call. [Operator Instructions]. Please note that this conference is being recorded. I now hand the conference over to Mr. Nehal Shah from the Investor Relations team at TCS. Thank you, and over to you.

Thank you, operator. Good evening, and welcome, everyone. Thank you for joining us today to discuss TCS' financial results for the second quarter of FY 2026 that ended on September 30, 2026. This call is being webcast through our website and an archive, including the transcript, will be available on the site for the duration of this quarter. The financial statements, quarterly fact sheet and press releases are also available on our website. Our leadership team is present on this call to discuss our results. We have with us today Mr. K. Krithivasan, Chief Executive Officer and Managing Director.

Hi, everyone.

Ms. Aarthi Subramanian, Executive Director, President and Chief Operating Officer.

Good evening, everyone.

Mr. Samit Seksaria, Chief Financial Officer.

Hello, everyone.

And Mr. Sudeep Kunnumal, Cheif HR officer..

Hello everyone.

Our management team and the deal brief overview of the company's performance followed by a Q&A session. As you are aware, we don't provide any specific revenue or earnings guidance and anything said on this call, which reflects our outlook for the future or which could be funded by a forward-looking statement must be reviewed in Pandemic the risk data company. We have outlined these risks in the second slide of the quarterly fact sheet available on our website at e-mail outlook on who have opt our lending is. With that, I would like to turn the call over to Krithi.

Thank you, Nehal. Good day, everyone, and thank you for joining us. I would like to begin by calling out the key takeaways from our quarter 2 FY '20 performance. First, we sustained our growth momentum this quarter despite environment that remain selective during the year. Revenue for the quarter was INR 73,288 crores. In constant currency, revenue grew 0.5% sequentially and 2.8% year-on-year. International revenue grew 1.2% sequentially in constant currency. All international markets grew sequentially, led by the United Kingdom of 3.5%, followed by North America and Continental Europe. -- at 0.4%. Second, our growth was -- growth has broadened across our core port. BFS included 2.3% sequentially in constant currency, while manufacturing and technology services. Each grew 3.1%. Consumer business and Energy Resources and Utilities showed an improvement compared to the previous quarter. India revenue grew 6% and regional markets grew 3.6% year-on-year. Third, our order book remains healthy. TCV for the quarter was at USD 9.6 billion. This excludes the Porsche and West Bay deals. The quality of the wins demonstrate our continued relevance in large complex and strategically important transformation programs. continues to scale as a structural growth opportunity. annual revenue reached USD 3.1 billion and crossed 10% of our war ordering. Finally, we enhanced our strategy through deals ecosystem partnerships and targeted acquisitions. Our partnership with Porsche and the proposed acquisition of MMHE, which is subject to regulatory approvals, strengthen our position in AI power mobility and engineering. The best by GCC engagement highlights our ability to help clients build and transform a native global capability centers. We also launched TCS JDD agent hub for drug discovery, domain strategic agency control planes and new physical AI capabilities, including autonomous engineering labs, powered by NVIDIA in Bengaluru and an AI-first lighter factory lab in full. The demand environment has not materially changed since last quarter and discretionary programs without near-term value remain understood. Against this backdrop, our primary opportunity and focus on translating the advances in into measurable enterprise advantage for our clients. I'll now invite Samir, Aarti and Sudeep to go over our different aspects of our performance during the quarter. I'll step in later and provide more color on the demand trends we are seeing. Over to you, Samir.

Thank you, Kritihi. Good day, everyone. Our quarterly revenues, our category revenue was INR 788 crores a growth of 1.3% sequentially and 11.2% on a year-on-year basis. In dollar terms, revenue was USD 742 million, a growth of points sequentially and 2.4% year-on-year. In constant currency terms, our growth was 50 basis points Q-o-Q and 2.8% Y-o-Y. Our operating margins remained stable sequentially at 24%. Consistent with our philosophy to drive long-term profitable growth, we continue to prioritize investments for growth. In Q2, we made investments in strategic partnerships, M&A-related initiatives and hiring of net talent. As we build future capacity as we build future capacity and navigate demand transitions, -- we have invested in a higher bench and increased hiring of subcontractors to meet near-term skills and delivery requirements. This quarter, we were able to mitigate these headwinds partly by currency gains and operating leverage. Many of these investments are strategic in nature and our focus on long-term value creation. Our disciplined approach to margin management remains unchanged. As growth improves, we expect to benefit from enhanced scale efficiency while continuing to optimize our cost structures align capacity with demand and maintain our disciplined execution. While we are prioritizing investments, we are focusing on 5 key areas. First, we continue to strengthen our portfolio through targeted capability and acquisitions. Second, we are adding a stronger partnership ecosystem with frontier AI companies, hyperscalers semiconductor ecosystem, Tier 1 industrial suppliers and enterprise software providers. Third, we are accelerating investments in our high-growth service areas, we are making investments in sales, solutioning, service transformation, new offerings and business model across the 5 bets we have called out with a specific focus on AI and data. Fourth, we are investing in talent and capability creation at scale on learning and development as well as on hiring net talent. Lastly, we are creating new growth engines throughout the future. We are expanding into adjacencies, such as data center services, increasing our offerings for GCC and the mid-market segments, spending our presence in areas such as ServiceNow, public services and Southern Cloud. Our priority remains clear: Convert investments into sustainable growth while preserving the discipline that has consistently underpinned our profitability. Our net margin for the quarter was 19%. DSO stood at 74 days constant sequentially in dollar terms. Our cash conversion remained strong at 102.2% of net income and investment funds at the end of the period stood at $5.98 billion. Our capital allocation policy remains unchanged, and we remain committed to returning substantial free cash flow to our shareholders while judiciously investing to support our long-term growth aspirations. I'll now hand it over to Aarthi.

Thank you, Samir. Good evening, everyone. The biggest opportunity in front of us is in helping clients translate advancements in AI into business outcomes. Clients see TCS as a partner who can use AI to enable growth speed efficiency. We are keen to invest the productivity benefits from AI into enterprise transformation initiatives that will make their organization future-ready. TCS is benefiting from this shift. As evidenced by our growing AI revenues that crossed $3 billion on an annualized basis this quarter. Our priority is clear, use AI to create measurable value for our customers and to improve how we deliver work for this. This quarter, we made progress on both fronts with growth in our AI business and wider adoption of a human plus AI services delivery model. We are seeing 3 distinct demand factors, AI-native solutions and business outcomes, AI-led transformation of enterprise systems and autonomous GBS. Enterprises are also prioritizing investments in modernizing legacy data estate and building AI-ready data foundation. Across these demand partners, strong AI governance with secure AI platform is becoming a top need for enterprises. Let me share an example of how we are building AI solutions with assured business outcomes. For a global industrial manufacturer, we are using an AI-native approach to solve a critical business need, compressing lead to core time from 4.7 days to under an hour. We achieved this within a quarter, clearly demonstrating speed to value. The next step is to improve their lead to conversion metrics. This is a good example of focused problem solving and business outcome realization with AI. Now let me share how AI is changing the approach to transforming enterprise systems. AI is playing a key role in process mining, which helps us understand existing workflow redesigning processes with a human and AI approach by default is enabling upfront identification of agentic opportunities and the acceleration of implementations with AI is real. In a large complex S/4HANA enterprise transformation, spanning 27 sites, more than 70 legal entities, we are using AI to redesign processes and accelerate implementation. Our approach supported by TCS agentic platform targets 25% to 30% faster implementation. Last quarter, I spoke about autonomous GBS and how Agentic AI in business process execution is scaling significantly. Business ops teams are now embarking on agentic transformation across finance, HR, procurement and customer service. This is opening new opportunities for us to engage with business teams and create new value proposition. For the North American energy resources company, we are transforming their global HR operations to double operational efficiency and increased self-serve adoption from less than 10% to 30%. Beyond AI, cybersecurity is another area enterprises are prioritizing globally. While enterprises continue to strengthen fiber controls, the focus on cyber resilience and recovery is rising. Frontier models are also changing how enterprises manage vulnerability enable enabling discovery prioritization and validation. For a European bank, we are imagining enterprise security through an integrated AI forward operating model. Recent AI-related fiber security incidents are a reminder that AI needs the same rigorous engineering and operational discipline as any enterprise technology. Strong governance and clear guardrails must therefore be built into every enterprise AI deployment. As agent scale enterprises will need more robust orchestration, access controls, security, observability, cost controls and policy enforcement. Cost discipline matters just as much. We help clients manage AI total costs to benchmarking model and architecture selection, total economics and [ sign of advertising]. Our focus is to deliver the right level of intelligence at the right cost. This creates a significant and growing opportunity for TCS across AI government services and platforms. We recently won an engagement with a major global insurer to build an enterprise AI agent platform and a common agency control tower for managing both in-house and third-party agents. Our engineering depth and working demonstrations helped create differentiation. We are also working more closely with business teams to turn their priorities into realized benefits. In one engagement where TCS was not the incumbent, our team identified pain points and build working demonstrations during the 3-day customer workshop, which helped us secure the deal. 21 forward deployment engineers are now working directly with business on execution. Over the last 12 months, we have made good progress in deploying our human plus AI service adornment model across client engagements. For agentic AMS, TCS has earned top rankings from customers, underscoring the strength of our differentiated capabilities delivered at scale. Our investments in sales force are delivering results by combining the strength of coastal cloud listing at and our own sales force structure, we are driving significant growth. Recently, leading analysts have recognized this progress ranking TCS as the #1 sales force services partner. Looking ahead, we'll continue to engage customers across the business and technology transformation agenda, leveraging our capabilities, context, and industry platform solutions to create distinctive value proposition. These are early days. So being progressive and proactive with our ideas and solutions is essential. And we are doing this the way we know best with a customer-centric approach. Thank you. I'll now hand it over to Sudeep.

Thank you, Aki. Hello, everyone. This quarter, we continue to invest in future ready talent onboarding top talent globally, taking our workforce to 598,56 associates. Our hiring strategy continues to balance experienced talent, early career talent and the internal mobility. As client demand evolves, we remain focused on strengthening AI and remain expertise, improving employment readiness and investment in continuous learning. For the past year, we have significantly expanded our technology and AI capabilities to large-scale learning and reskilling initiatives. Our learning hours saw a 17% Q-on-Q increase to 17.1 million hours. Learning LTM action in IT services reduced by 30 basis points sequentially to 13.3 percentage. This ability to combine workforce stability with continuous at-scale learning remains a key differentiator for TCS. We remain committed to building a future workforce and the workplace to our associates can learn on top of. Thank you. Now I hand it over back to Krithi.

Thank you, Sudeep. Let me now provide some additional color on industry trends before concluding our prepared remarks. BFSI was our strongest large vertical and the largest contributor to growth. with 2.5% sequential and 3.9% year-on-year growth in constant currency. Growth was broad-based across banking, capital markets and insurance, with strong momentum in the U.K., Europe and Asia Pacific. Clients continue to invest in AI, risk and regulatory modernization, cyber resilience, data platforms and operational efficiency. Manufacturing grew 3.1% sequentially and 4.2% year-on-year. Demand is improving around factory automation, engineering productivity, product life cycle modernization, supply chain resilience, predictive maintenance and industrial AI. Our investments in led vehicle engineering, smart manufacturing and physical AI are helping us participate in larger and more strategic programs. Technology & Services grew 3.1% sequentially and 4.8% year-on-year. Growth was driven by enterprise software, technology products, engineering, to modernization and digital transformation. At the same time, traditional application and infrastructure portfolios are seeing an increase in agent PK adoption. We are leading with a first software engineering, autonomous operations, platform simplification, and read data foundations. Consumer business declined by 0.7% sequentially and 1% year-on-year. Retail and consumer products remain sensitive to inflation energy cost and selective consumer spending. Travel transportation and hospitality demand remained resilient, but discretionary spending is affected by cost pressure and increase in sourcing. We continue to see opportunities in operational efficiency, supply in visibility, customer experience, pricing, cloud, data and modernizations. Life Sciences and Healthcare grew 0.3% sequentially, with stable demand supported by long-term priorities in compliance, clinical and research platforms, data modernization, enabled digital discovery, patient engagement, revenue cycle modernization and cybersecurity. Communications and Media was broadly flat, with growth in media publishing and digital platforms, offset by continued pressure in the telecom vertical. Energy Resources and Utilities declined 0.5% sequentially, although investments in grid modernization, resilience cybersecurity asset optimization and enabled operations remain relevant. International revenue grew sequentially performance improved across most industry groups and growth broadened across the core portfolio. Our TCU was at $9.6 billion. Our win rates improved and annually revenue reached USD 3. We believe clients are moving forward towards a new phase of enterprise adoption. Opportunity is shifting from isolated use cases to redesign the value chains governed agentic systems, AI led infrastructure and human plus I operating models. Our infrastructure to intelligence strategy, artectural knowledge, delivery capabilities, platforms and ecosystem partner position us well for this transition. We will continue to execute with discipline, invest in differentiated capabilities and help our clients achieve measurable outcomes and growth, productivity and resilience. These priorities support our aspiration to become the world's leading AL led technology services company and create sustainable value for our clients, employees and shareholders. With this, we'll now open the line for questions.

[Operator Instructions]. We will take our first question from the line of Sudheer Guntupalli with Kotak Mahindra Asset Management.

My first question, your core market growth accelerated quite nicely in this quarter. Do you think the momentum in this part in the international business to continue in the coming quarters as well?

Definitely, like looking at all the parameters, like I don't want to comment on the immediate next quarter basis, which -- but on a medium-term basis, thanks to looking at the TCV and looking at the pipeline and the time conversations that we are having. We are confident the growth momentum will continue.

Sure, sir. Both BFSI and hi-tech verticals are reflecting a typical September quarter kind of seasonal strength this time. Given these 2 verticals are also are the ones which are early adopters of technology, is it fair to sort of assume or conclude that AI deflation impact, at least in these 2 verticals is now more than offset by incrementality of AI opportunity?

I don't want to say it is complete because there are -- but again, Sudheer on one hand, there is a deflation because of the productivity benefit. But also these industries use AI for modernization and it also creates vendor consolidation opportunities and are also -- for instance, if you take BFSI revenues, the percentage also grew very fast. So there are a number of things that work that are happening in these industries. I don't want to conclude saying that the deflation part is complete. But I think there are a number of opportunities in these industries we are working on, which gives us the confidence that the growth can continue.

Okay, sir. One last question to Samir. On the subcon increase this quarter, Sameer, should we see this as a proxy for visa costs, given that we would not have applied for a lot of visas given the sharp jump in vis-a-vis last year?

In the overall increase in H1, it has been across in India as well as overseas. It has more to be term demand supply skill mismatches. Some part of it could be linked to that also, but not completely.

Our next question comes from the line of Ravi Menon with Axis Capital.

First of all, congrats on a pretty good performance across multiple verticals this quarter. But we've seen the India revenue declined by about 10% and also seeing a slight decline in the 10 million clients as well this quarter and 50 million clients as well. Are both these client metrics decline. And India revenue correlated? And what caused the revenue decline in India?

Very like we've always been calling out. The regional market, while we see regional market, it's a bunch of quite a few volatile segments. And in India, we had a project deferral, which caused this revenue decrease. Otherwise, there's no structural issue and these are all the projects that will continue to get into the -- we are hoping to deliver these projects in subsequent quarters, like once the projects are reinstated and we don't see any major concern there. And on the client metrics, we had, I think, 2 -- essentially, it is only 1 specific drop. The second is coming because of the currency exchange thing. [indiscernible] a water line because of the exchange currency movement dropped below $100 million. So there's no sexual issues.

Can we think about this disclosure about AI revenues similar to what we've seen for digital when we saw that digital portfolio reached a certain level and that was growing much faster than your overall portfolio. You saw that inflection point for growth. With AI revenues now hitting 10%, can we say that from here growth has dropped out. If you look at, say, on a last 2, 3 years basis compared to looking at the next 2, 3 years, would you say that you're more optimistic that growth will be faster in the next 2, 3 years compared to the last 2, 3 years?

So Ravi, this is Aarthi here. So I think, like you said, I think we did quite well on air revenues this quarter. But when we look at our revenues, we look at traditional revenues, new services revenues and AI revenues. So our new services revenues did well as well, whether you look at it alluded to a AI led modernization enterprise cost transformation, whether it's on the ERP side or on the industrial side in manufacturing and pharma sectors. BPS, cybersecurity, all of them did well and obviously, I think the AI growth rates came out rather nicely. And on the traditional services also, vendor consolidation and AI-powered software engine, IT ops, right? How we innovate in execution is helping us differentiate and grow market share in traditional services also in a space where AI is definitely creating efficiency and productivity, but there are tailwinds on the back of vendor consolidation in those traditional areas.

One last question to Samir. To get back to the kind of towards 26% with the aspirational margin. Do you think that we'll be able to bring down subcontracting costs over time? Or what are the key levers that could take you towards 26%?

So overall, long-term aspiration remains unchanged to continue to 26% to 28%. While in the near term, as we have been talking about, we will continue to prioritize investments for growth, and looking ahead, so your question in terms of what are our levers available, Topcon, given the rate average has increased definitely is one of the levers. Also, if you look at some of the investments, we'll start to deliver results that could be another part of it. And as we we have been focused on our margin discipline as always, and the traditional levers, whether it is productivity utilization will also continue. And some of our on-net employee expenses also have been increasing. So at various points of time, we have used these levers and towards getting to '26 as we do it, these would definitely play in a role.

Our next question comes from the line of Ruchi Makhija with ICICI Securities.

I take stab on the AI question once again. So this quarter, we saw AI revenue grew by 19%, while the prediction on non-AI revenues should we interpret this as a increase in the substituting the traditional services or we are seeing incremental client spending and add to or what needs to happen for AI to become the overall revenue growth driver?

See definitely, we see AI as a net new, a driver of new opportunities. But I think, Ruchi, the way we see it, more and more AI is becoming pervasive in an organization and playing a role in every transformation a company and a -- so whether it's any enterprise transformation or business operations transformation or agency transformation, which are new ways that we can solve problems for business. I think AI is playing a role across the work.

Okay. Secondly, on margin. This quarter, outgross margin decline of -- the second part to this, given the ongoing investment we also have by GCC coming in MHP consolidation playing out in H2, so in that context, how do we think about the margin commitment we had made around exiting FY '27 is 25% plus EBIT margin range.

Sure. So first, on the gross margin impact. As you can see, there's the increase which is in subcontractors, third-party expenses directly reflects on the gross margin. The other investments, which I talk about are more G&A linked investments, right? And like I mentioned earlier, we are prioritizing investments for growth. And like you mentioned, looking ahead in the second half, we anticipate a few headwinds. The acquisition-related valuation, particularly in is likely to impact by about 50 basis points, depending on the timing of closure and when the integration starts, the normal furlough seasonality and our continued ecosystem would be our headwinds. And like to Ravi's question I mentioned, some of the Q2 headwinds will start to taper off or such giving outcomes. And at the same time, we'll try to balance. While it is an uphill task, we'll continue to endeavor to inch up on our margins.

Our next question comes from the line of Nitin Padmanabhan with Investec.

Wanted your thoughts on the regional markets, more specifically in the context of the BSNL deal. Do you think that should sort of lend to some sort of support as we get into the second half? The second bit is in the context of we entering Q3, any thoughts you have from a furlough perspective in conversations with clients. And third, I think from a margin perspective, I think we already had this thought process that -- obviously, in Q1, we had the comp increases and then as we go through the year, by the end of the year, at least from an exit perspective, we should be closer to 25%. Now from -- in terms of what has changed in that thought process from an investment perspective, and how are you -- when do you think investments really peak out? Would be great to have your thoughts on both these things as well?

Nitin, I'll answer the questions on BSNL in Q3. Samir can take up the question on margin. BSNL, like you said, it can provide a cushion for the next couple of quarters. But the fact is regional markets will be volatile if made up. we don't do that much of IT-based work in the regional market. And also some of the programs we do here the deliveries tend to be lumpy. So you will always see some volatility in regional. That's the reason we call the regional market separately out. And on Q3, so far from what we have seen, the furlough will be very similar to the previous years. We don't see any major change.

So Nitin, on the margins. For the past 2 quarters, we have been prioritizing -- we have been talking about triaging the investments and focusing on growth at the same time, maintaining the margin discipline. And yes, right now, also, we are saying we want to end up, but the primary near-term focus has been on prioritizing the investments. And that's why we have called out part investments that we are making. No specific immediate time line, I have called out what are the next phase of investments in the coming few quarters, will let pick up. I would expect some of them to start delivering results and growth being an important margin lever should help out per se.

The next question is from the line of Vibhor Single with Nuvama Equities.

Two questions from my side. First question on Krithi, so I think at the last conference call we had mentioned and many other companies have also mentioned that with the event of these MM platforms, clients are now increasingly coming to us and asking us to build an application layer underneath, which the LLM kind of sits. So that provides these clients or flexibility to sit within LLM, help them optimize the total cost, et cetera, et cetera. Have you seen that trend continue in this quarter as well? Any new things that you might have picked up. Are the clients also kind of moving away from the midstream elements to some sort of small language models where our expertise becomes siding factors? Any color on that would be helpful.

We were, like what you said definitely is playing off. we last time also we laid out our infrastructure to intelligence, where minor infrastructure layer in in the reserve model and data layer on top of that is an agent player. And on the agent layer, we are building the agent control plans. And on the model and data layer, we are building applicable model hardness, so that customers can use, either SLM or LLM or open source, open rate model based on the need and criticality and what is application. So that discussions continue. Particularly this quarter, we've seen strong success in the agent control plane. I'll request Aarthi to provide more color on this

Thank you, Krithi. So we bought absolutely, yes. I think as the enterprises are focused on safe, secure and responsible deployment of agentic AI. They need a strong foundation to scale. So building the AI platform and more so this year at control plane is becoming the key layer, not just in terms of governance, but in terms of cost management, really looking at agent performance and the full end-to-end agentic life signal, like Krithi said, this quarter, we saw some very good wins where we are building a control plane for our customers.

And Aarthi, if I can just dwell a bit more on that. Are there any specific pockets or, let's say, verticals, maybe banking or high-tech, some other verticals where we are seeing more of this at this point of time and some other key segments will be lagging behind it and need to catch up.

Sure. I think that's a great question, Vibhor.What we are seeing is, first of all, when we look at the $3.1 million annualized revenues, right, it is AI revenue is growing across every vertical. I think that's very positive. Now there are 3 verticals which are leading in terms of growth rates and the top 3 verticals are BFSI, manufacturing and licensed health care. And in these 3 verticals, we are seeing the whole agentic control play AI governance, these are all evolving things, right? So while the technology is rapidly developing, then you see customers who are leading actually create proof point and create the playbook for enterprises to follow. So I think those verticals are leading. But I would say that consumer, technology, energy resources utilities are also following pretty closely in terms of very active adoption of these strips.

Just 1 last question for some on the margin part. Samir, just on the margin part, the margin trajectory that we are seeing at this point of time. is majorly because of the higher contracting expenses and the investments that we are doing. There is no pricing pressure that we are seeing across any of the pockets. Is that the right assumption?

Broadly and I'll give you some color. There would be some frontloading of productivity benefits that could happen. But at the same time, we are seeing better pricing on the revenues, which we are generating. And if you take the revenue per employee, you would see there's a slight reduction, not a significant one. So at an overall portfolio level, the pricing is broadly stable.

And just to wrap it up, given that we are at 24% at this point of time, you mentioned around 50 basis point headwind from the NHB, there would be some -- at some point of time, the BSNL project would also come in I mean, do we have a target in mind that we are looking in terms of -- I know I probably was asked before in terms of exit for this year, Will we be able to get closer to 25%? Or that looks difficult from the vantage point that we are at this point of from?