On the Logistics vertical - you've announced a deal but earlier alluded to a potential large deal there as well. Is this that large deal? When does Logistics get back into double-digit growth? On BFS - with interest rates coming down, do you see refinance business picking up and adding volumes, contributing more to back half of the year? On weakness in top customer - when does that end? And on regional banks noise in the US - any concerns within your clients or new uncertainty?
On regional banks - doesn't seem to be a systemic concern. We are not hearing that from large banking customers nor from sponsors active in the private credit market. Given our portfolio, we are fairly comfortable. Systemic risk hasn't really showed up. On growth in largest customer - on a sequential basis, it has grown far in excess of the company growth, and we expect that growth trend to continue for the rest of the year. How long that takes for trailing 12 months to wash out is a matter of arithmetic. On Logistics and Transportation - we will see growth in Q3 on a sequential basis. Double-digit growth on a YoY basis might take a while given the ramp-down in some segments. On mortgage refinance - we don't want to sound the whistle when we've had a couple of false starts in the last 12 months. After the September 2024 25-basis point cut, the 10-year went up by 100 basis points. Following the three cuts earlier this year, very complex to say whether we'll see meaningful pickup. Some clients have reached out proactively asking us to create capacity. December cut is under question given lack of data and government shutdown. We are not calling for that. We've already seen healthy sequential growth in that business this quarter on the back of new deal wins where our ability to take out operations from customers, deploying AI into that business, is driving the growth. Base case - wallet share gains continue. If a second vector gets added, that will only be accretive.
Despite closure of strong deal wins, the pipeline commentary is very robust. Is it fair to assume the deal TCV numbers can continue above $300 Mn, $350 Mn, $400 Mn as a new normal going forward?
Large deals will continue to be lumpy in nature. While we are quite confident our trajectory and run rate has increased over the last three or four quarters, the best thing will be to look at maybe a trailing 12-month metric versus just one quarter or two-quarter metric. We've seen a robust jump in our long-term trend in terms of quarterly TCV average. Directionally, we do believe there is an opportunity to uptick that to the next level. We're very happy we've done that in the last three quarters, and hopefully we'll continue given the strength of the pipeline and conversion rates.
On the commentary - the revenue exit run rate in fourth quarter could be much better this year, which can set a platform for higher growth in FY27 if macro-led concerns do not elevate further. Is that the right way of looking at it? And on margins - if we exclude the hedge, the margin improvement has been good. How to model where these revenue line hedge losses settle going forward, given rupee depreciation above INR 88?
On FY26 exit run rate - arithmetically what you're saying is right, but the big 'IF' is what happens to the environment when executing those. Directionally we are headed there. We do expect the growth rate will continue to have an uptick as we build the run rate over Q3 and Q4. How that sets us up for FY27 is a little bit premature - we'll probably be in a better position to talk about that in Q4. On hedging (Aravind): there is a hedge loss, we report our OCI on a designated hedge policy. We have somewhat similar number expected in a couple of quarters. We hedge about 80% of our exposure irrespective of volatility - we don't do a tactical approach to currency, that never works. It will take some time before the full effects of currency depreciation flow in. Currency has become one of the integral factors of our P&L - we don't look at margins ex-currency. We protect our hedging policies to protect from sudden volatility.
On the negative margin for Logistics vertical - this investment that led to negative margin - is it some kind of delivery capability investment built to enhance our capabilities across the vertical or is it client-specific investment? Any colour on the nature of investment, and by when do you expect it to reverse? Will we be back to single-digit positive territory or to the normal gross margins of 20%+ that we used to report in the vertical?
It's client-specific. It is about offering some transformational capabilities to the client. That's the nature of the investment. I don't want to get into a guidance of margins at a vertical level. We've kind of given a view in terms of where we will operate at a company level, and that should give you comfort. The investment phase is over - you will see it get back closer to normalcy. The specific investment was timely, and that is kind of done.
On the new AI platform - what does the adoption curve look like, how many clients are adopting our platform, does it change stickiness with relationships, and does it lead to multi-tower deal construct compared to one or two services? Any implication on revenue conversion? On deal pipeline to deal intake to revenue conversion - any changes because of AI getting embedded? On absolute versus relative performance commentary - by when do you expect absolute performance commentary given deal intake and pipeline is known? And on Locate and Aokah minority investments - any detail?
On the minority investment - we did a small minority stake in a company called Aokah, which is part of our GCC strategy. We've given out a press release on that. The other one, Locate, is part of a customer consolidation deal. We've done a couple of these structures in the past, and they've been quite good for us. We are getting a deal where we are consolidating this vendor and getting the business from the client. That's the nature of Locate and Aokah. (Nitin) On absolute versus relative - until we make a structural shift from giving relative guidance to absolute guidance, we'll continue to give directional guidance on relative performance. It's the philosophy we've followed for many years. There is enough information to extrapolate. On NeoIP and deal cycle - it has given us strong confidence in constructing propositions and taking them to market. That's embedded in increase in pipeline and deal wins, increased competitiveness, sharpens messaging, aligns to outcomes, creates risk sharing and potential upside. Like any change, this is evolution not revolution because of element of change management on client side and our own people. Part of standardizing through NeoIP launch is to accelerate at scale. We have multiple clients where we've already incorporated this - in many cases live in client environment, in many cases live in sandbox. TCV to deal conversion sometimes takes one to two quarters but it's a seven-year, six-year, five-year deal. The Insurance example I gave is a two-quarter cycle. It's increasing competitiveness, sharpening message, giving propensity to win larger deals that are multi-tower - across applications and infra, but even within applications - app dev, maintenance, application refactoring, application modernization, cloud operations, finops operations. Pretty comprehensive set of opportunities. Deal-making gets more complex with more variables.
Last quarter we were talking about 3Q seeing a good impact of the deal ramp-ups won in the June quarter, and expecting strong growth in 3Q and second half. Any update on the furlough front and how next two quarters will pan out? And on BFS this quarter sequentially looks a bit soft - is that also impacted by the ATM business on a sequential basis or were you just referring to year-on-year impact on ATM business?
On the second question - the impact of ATM business was more YoY. On a sequential basis, the impact is actually a lot more muted, but in general, on a CQGR basis, over the last four quarters, our BFS business has grown at about 4% in Direct. We were the first ones to call for a bottoming in BFS headwinds. Sequentially, sometimes there will be puts and takes primarily driven by project deliverables. Growth outlook intact for the second half of the year in BFS. On Q3 ramp-ups - a number of those Q1 deals already converted, will continue to convert through the remainder of the year. Some deals where there's quick conversion (rebadge) will have converted quicker; others (like the Insurance client example) typically have a three to six-month ramp. In some cases infusing tech requires hardening environments and cybersecurity tests. We are aligned on track with conversion of not just Q1 deals, but also Q2 deals. On seasonality and furlough - too early to say whether it'll be same as last year, but given mix has changed in favour of fixed price, we may have the opportunity to optimize compared to last year. Net-net, we should have decent growth in the second half of the year. Whether the growth is more lopsided in favour of Q4 versus Q3 is something we have to optimize based on seasonality.
On Travel and Logistics - on segment margin, it has turned into losses in this quarter from a mid-single-digit margin last quarter. Is there a further investment in this vertical that has led to gross margin losses?
There was a specific investment we had made with respect to this vertical, which has contributed to the swing in the gross margin you've seen in Q2. You will see a complete return to normalcy on margins from Q3 onwards. You will see a sharp uptick because this is more of a one-time in nature, and you will see a pickup in revenue backed on new deals we are winning. You will see a trend up from what you've seen in Q2.
Some larger global peers seem to be suggesting significant improvement in short-term discretionary projects in Banking - are you seeing further acceleration on that trend? On internals around headcount addition and utilization metrics - offshore utilization jumped sharply, probably the best in five years - how are those trends playing out? On services and software construct - while it is translating into revenue per headcount going up, when does it start showing up at overall margin profile level?
On discretionary spend pickup in Banking - we were probably the first ones in the industry to call this dynamic three or four quarters ago. There was disbelief at that point, but we've delivered on the numbers. The demand environment for Banking, especially around AI adoption, seems to be the narrative. This is already in our numbers for the last few quarters. On platform IP - over the last two years, things are evolving rapidly. Our focus has been strengthening propositions, creating repeatable construct through IP platform, running multiple MVPs with customers, hardening platforms for cybersecurity, ISO certifications. Immediate focus is creating 'Lighthouse' programs in every vertical and large client segment. That will give us learnings on commercialization, pricing, margin leverage, client maturity. We are not playing the pricing game alone - we play Savings-Led Transformation game and don't have to sacrifice profitability. There is certain de-linkage between revenue growth and headcount growth. How much that correlation stabilizes at, it's too early to say. We are running a rolling 90-day forecast and trying to meet that supply chain. So utilization is not an input metric, but it's an outcome of where we end up. That's the model you can expect us to follow over the next two or three quarters.
On overall demand environment - we've continued to win strong deals but at macro level are there any positive or negative changes in the macro environment from when we spoke last time in July? And on H1B visa - we know it won't impact our business much, but did that event create another layer of uncertainty into the system?
On macro - it's the new normal. Volatility based on events like H1B which wasn't expected. Client behaviour at this point is less macro dependent, more dependent on what proposition they're trying to drive. Efficiency and savings remain a theme but not in isolation of transformation needs. If you bundle a construct where client spend is stable with slight marginal growth bias on overall tech spend but the shape of spend is undergoing a big change because they're moving spend into new technology areas, there's a lot of business to be done. We will run the business on a micro basis and not worry about what the macro leads us to. On H1B - does it impact short term, the answer is not really. It's also not what it was feared to be when announced - significant slimming down of that proclamation. We haven't seen much activity from clients - they're mature buyers with their own centres and H1B workforce. It will result in three things: First, we have to make our supply chain more resilient to H1B over 24 months which at our scale is easier given supply environment for white collar tech talent is tail-winded. Second, this is likely to globalize work even more so we don't depend on mobility of people. Third, this will pull forward faster automation and application of AI, eliminating dependence on local resident workforces.
On the deal pipeline - you mentioned the deal pipeline remains very strong despite strong deal wins reported. Is the deal pipeline strong across verticals? And specifically in BFSI, are we seeing a very good deal pipeline which might lead to good deal wins and good revenue conversion in coming quarters?
We gave a detailed breakdown of pipeline across BFS and non-BFS. The deal pipeline has grown quite broad-based. Two cuts available - BFS, non-BFS: BFS pipeline growth is 45% YoY, non-BFS pipeline growth is 139% YoY. Top 10 clients pipeline growth is 122% YoY and non-top 10 clients is 89% YoY. Pretty broad-based across geographies, verticals, client segments and tribe archetypes. Pretty healthy place from a pipeline standpoint, we are very pleased, but the focus is on converting it.
On AI - how much of the work you do is cost optimization related versus innovation or growth related on the AI side?
Given our client base at the top end of enterprise segment, there is high degree of maturity in identifying levers for efficiency and cost optimization. If I go to a customer with a Banking, Insurance or Travel proposition that has efficiency play, it's unlikely the efficiency play can be delineated from transformation play. That's why the North Star for almost all our deals is what we call Savings-Led Transformation - we will find efficiency, but also ability to change the way they operate. All metrics like time to market, time to resolution, availability, velocity, throughput, error rates are important. Best lever today is to embed some form of technology, AI or not, in driving efficiency. When it comes to use of AI for innovation versus efficiency, they are two sides of the same coin - if I'm giving you the ability to drop code 30%, 40%, 50% faster, that is innovation in itself. Unless you're using something tactical like eliminating paper or automating controls, for the most part they're quite well bundled together.
Still on AI - everybody seems to have a platform strategy now. So how does one vendor differentiate versus the other or how do customers differentiate one vendor from the other?
The way of selling is changing - not only changing proposition nature where you bundle a solution that has elements of tech. Clients are also asking us to not just show on PPT but actually show in a live sandbox environment - 'RFPs are turning into hackathons'. That's their yardstick. It has become more about ability to showcase through execution. MVPs, forward deployed engineers, seed teams, proof of architectures are part of sophisticated client RFPs. Other way to differentiate is through strength of platform itself - taking broader view, thinking of problems clients may not have thought of, creating assets they can use in perpetuity like the intelligence platform I talked about. Clients are willing to listen to new ideas. There's not one thing that differentiates - it's a combination. When in RFP process or when third-party advisors benchmark, we go through benchmarking which is also a good input to our platform development cycle.
On AI-related hallucinations - how do vendors protect themselves in contracts where there could be problems? Do you commercially protect yourself when customer contracts are signed?
We use a market standard process. Since we are not providing base LLMs, there is a pass-through assumption that the choice of platform or LLM is what the customer is making. The biggest protection for us always is a human in the loop. None of these are out-of-the-box, black box solutions - they always require intelligent engineering to be accompanied. They will always have experts that will curate the process. Even if a process is 60%, 70% automated, there are checks and balances built in. Contractually, yes, we do protect ourselves.
On the interplay between contract acquisition cost, contract assets and liabilities - despite very strong deal wins, the other non-current assets are stable while current assets actually declined. Why have the other non-current assets not increased? Is it because the acquisition cost was low for the deals won, or that amortization of previous contract acquisition cost offset the increase, and how have other things moved?
Not all deals come with a contract acquisition cost. The deals we won in the current quarter do not come with the kind of structures we saw for the deals in Q1. This is very specific to deal and customer. Multiple dimensions go into it. To presume a direct linear equation between contract acquisition cost and TCV may not play out. Deals won in current quarter don't have meaningful investment from a CAC standpoint. From contract asset standpoint, that's just nature of projects. Our fixed price has gone up substantially - certain fixed price unbilled goes into contract assets, T&M unbilled goes into debtors. So that's more a change of mix reflected in the financials.
The DSOs of 82 days that we have shown - does that include unbilled or is this just billed days?
The DSO that we showed on the deck is 89 days. It's gone up by five days. That includes a combination of debtors, unbilled, and contract assets. So it includes everything.