How do we think of FY27 growth, given the exit run rate and where our order booking is and also high expectations around some AI-led deflation?
As we mentioned, we have a good order book getting into FY27. We have strong three mega deals booked in this quarter. And as we also described, most of the industry verticals, we see a positive momentum and our new age services are also gaining traction. So overall, we are getting into our next year with a lot of positivity and confidence.
Getting into FY27, we are exiting at a healthy growth. We are also exiting with a bulk of multiple mega deals and across verticals as well, it seems demand has started improving, at least growth for TCS has started improving. Would you call out and say that we should start getting back to 3-4% sort of a growth in the international business where we used to be or better than that or the recovery is going to be far more gradual this year?
Kumar, I don't want to put a number, but I would say that, again, as I was telling Sudheer, we are quite positive about FY27, quite positive about the international growth.
SG&A in the second half has been elevated. So, is this the new normal we should now start looking at or it should normalize back to below 15% where it used to be?
As you know, we have been investing on the 'Build-Partner-Acquire' strategy and incremental investments on partnerships, on recruitment and training, on the new businesses are all reflecting on the SG&A. Some part of it will see an elevated increase, both in the absolute amount as well as in percentage of revenue.
From a margin perspective, how should we think about margins going forward? Because on one hand, you do have the currency giving you a tailwind and on the other side, you have to invest on capabilities and multiple other things.
Nitin, we are exiting FY26 at a four-year high on annual margins at 25%. And we see continued positive momentum. Our focus will be to ensure growth with profitability, so we'll not be shying away from making the right investments for ensuring strategic growth. Stepping into FY27, the immediate headwinds would be the annual increments which we have talked about. And also, as you rightly mentioned, we'll continue our focus on the build, acquire and partner framework and investments around that would be part of it. While some of those we would want to mitigate with better operational rigor, with the help of the usual levers which we have called out and also look at optimization on some of the non-employee expenses. As you rightly called out, the rupee depreciation does help, not guaranteed always. Overall, we'd want to balance it and keep margins within a tighter reach. We'd like to move towards 26%, but on a longer-term basis.
Krithi, we mentioned our AI revenue to be around $2.3 billion annualized, that's basically almost 6.5% to 7% of our total revenue. Wanted to basically understand, if I were to draw a parallel to the last digital cycle, there also after a certain stage, we had started quantifying our digital revenue. The way we saw that cycle play out is that initially there was cannibalization of revenue. Are we seeing a similar trend this time? Is that a good way to look at the GenAI cycle?
Structurally what you are saying is correct, however, I don't know whether it will be the same time period in which the whole thing will change. You would expect the AI revenues to increase going forward, along with some of the traditional revenues to slowly taper down and AI revenue to overcompensate for the reduction in the revenue in other parts of the service line. But the timelines probably can vary. I'm not able to predict the timelines on how all these different cycles will move. Aarthi added: if you have to compare to the digital transformation that you alluded to, where is the transformation budget, right, largely bucketed as AI going? There are three buckets, one is, Enterprise transformation. The second one, which is very purely AI-led, is the modernization opportunities that we see. The third is the pure play AI transformation.
If you look at FY26, we ended the year at -2.4% CC YoY decline. If I compare our revenue growth this year with our closest competitor, the difference would be almost 5 to 6 percentage points. That's probably the widest that the gap has ever been. But on the other side, our margins are very, very strong. What is the company level strategy at this point of time, like, we want to continue to focus on the profitable growth part. Should we be ready to compromise a bit of margins to maybe boost growth?
Vibhor, I get the question. Fundamentally, we believe our focus on margin is not affecting our revenue growth. Of course, at the same time, in fact, we believe the good margins we have, gives us greater flexibility to approach new deals and be more competitive in gaining market share. And we have been able to prove that time and again. We don't lose deals on pricing. We work with our customers, we ensure that we give the best solution, and we've been able to win deals. This is our overall thesis. We believe margin and growth are not conflicting with one another. We should be able to do well on both. We don't believe these are at loggerheads with one another.
While you've started giving annualized AI revenues, would it be possible to throw some color on AI deals as well, just to get some sense of how those are progressing?
Rishi, if you look at it, AI deals are -- I would say of two kinds, one is many of the mega deals that Krithi spoke about today, they have a significant amount of AI embedded into them, in terms of how we deliver the service, also in terms of how we transform clients' business. But apart from this, when we are saying AI revenue, we are only calling out the specific AI for business transformation revenue, which we said has exceeded $2.3 billion on an annualized basis and when you look at the nature of programs, it's across industries, across markets. And we see that a lot of these programs are rapid build, 12-to-16-week delivery type of solutions. These are high impact problems that the customers are choosing, that we can deliver in faster cycles with forward deployment engineers.
AI for business, when you look at the revenue productivity and the margins in that portion of the business, how does it compare to company average? Is it better? Is it in line? Is it lower?
Gaurav, on the AI and data part, the revenue productivity is definitely much better than the TCS average or the traditional business, both at onsite and offshore. Margins, I will not call out because there would be investments which would be temporary or in the initial phase, so it wouldn't be like to like for comparison.
Is there any foreseeable change in quantity or quality of client inquiries or even bookings around agentic AI implementation post first week of Feb when Anthropic announced a string of agentic AI launches?
Sudheer, definitely clients are curious to know about expanding capabilities of all the models. And they also want to leverage their models to achieve both productivity as well as business value chain re-imagination, but is it because post Anthropic, I won't say that. As the model capability improves, there'll be more interest in seeing how they can leverage. Aarthi added: Client interest and demand actually increases with new capabilities coming out of the model providers.
Many of these frontier model companies, they're just announcing a new project or agent, which may be in their development pipeline, but not yet launched. The latest example being Claude Mythos. Is this in any way leading to client's sort of deferring their existing IT spends to maybe wait and watch, once the product actually hits the shelf, maybe a few months or years down the line?
We have not seen that, Sudheer. It's been, as I said, our clients are quite interested in leveraging it. They know this will be constantly evolving. And there is no major benefit in waiting for the next best model to come. So, clients are willing to invest now, and we have been helping them with the overall philosophy that their architecture is built for change. We are helping them in building that architecture so that they can exploit and leverage the models as they come in.
Just for a clarification, our restructuring is done or there's more cost associated to that which has to come through? But there is a restructuring charge, which you have booked in the quarter, right?
So if you look at Q4, we have not called out any one-offs, so it is business as usual. We have not called out any one-off for Q4. The combined one-off for the year is Rs.1,300 crores; there are no one offs in this quarter. Krithi added: The restructuring program that we started, we have completed that program. The program towards restructuring has been completed.
On the next few quarters, can we expect the similar type of seasonality going forward? Because the reason I'm asking is there's not been much headcount addition, so the typical seasonality of better first half, does that still work going forward? Usually the first and the second quarter are stronger than Q4, right?
We are looking at a regular Q1, regular Q2 that we are used to seeing, and this is the way we are looking at as we stand now, Yogesh. That is what I said. We are also expecting a stronger 1H. Our planning assumption is along those lines only.
Going back to this AI stuff. So usually in the past, you had all these historical relationships and partnerships with software companies like SAP and all these diamonds, platinum ratings. Can you talk a little bit about what are these partnerships with the AI models, especially Anthropic? What is the level of tiering with them? And does it really matter anymore?
Yogesh, I think with all the model companies, we are building strategic partnerships. We have announced with OpenAI, we are already working significantly with Anthropic and will be announcing strategic partnerships with them in the near future. We are very closely working with Mistral. With all model companies, it's extremely important for us to build a strategic partnership. But I would say that we are also trying to shape these partnerships differently than the traditional GTM partnerships of the past. So, we want to make them 360-degree partnerships. Also because of our investment in HyperVault, we have a very unique opportunity where they can become our customers. You saw the announcement that we made with OpenAI, where there is a committed capacity of 100 MW and the opportunity to grow that to 1 GW.
Krithi, initially, you mentioned some caution in BFSI during the quarter. I just wanted your thoughts on how clients are thinking about spending going forward, considering the macro. Do you think this ends up like last year where you had the Liberation Day and we thought we were probably getting into good start, but then you had all these headwinds. So, in the context of what you see today, what are the conversations with clients?
See, at this time, if you look at our direct impact from the geopolitical situation, so far has been restricted to Middle East and to some extent into our travel and transportation industry and we have not seen major impact in other industries so far. But Nitin, as you would know, if things continue and if it results in further supply chain disruption or any other secondary issues, it may have an impact. But at this time, I think the impact will be limited to our travel and transportation and probably the work we do in Middle East. We have not been hearing any other specific concerns from our clients in other industries or other geographies.
Coming out of last year and getting into the next, do you believe that all known client-specific headwinds are behind, and we should see better revenue accretion from deal wins and from a deal win momentum perspective as well?
By and large, most of the headwinds we know probably are behind us, excepting few that may come up or that we have already accounted for. But at this time, we are not expecting. Of course, nobody can predict what will happen down the line, but I think most of the issues are behind us.
Samir, what is the impact of wage hikes that we see in terms of our margins next quarter? And secondly, any color in terms of this deal flow that we've announced, which is pretty strong? What is the renewal share in terms of that?
On the wage increments, you should expect a similar impact on what we have seen in the past annual increment cycle, which had been in the range of 150 to 200 basis points. Krithi added: In terms of colour or the characteristics of the deals of TCV, I would say about mostly a 50-50 or 45-55 in terms of between renewals and new programs. I think this quarter maybe about 50% to 55% could be on renewals, around 40% to 45% would be on new programs. And this varies typically in a smaller band, between 40% to 60% band, it varies one way or another.
In terms of deals, are you seeing early renewals wherein vendors like yourself as well are going in for early renewals or the deals are largely getting renewed on time?
By and large on time, but when we also see an opportunity to go back to a customer and ensure that there is really a renewal can be done with greater AI infusion, greater productivity delivered, and at the same time, with expansion in scope. We do go to the customers, and we offer to renew early whenever they see value and whenever it's mutually beneficial as well.
Just if we think about your thought process around wage hikes. So, we've deferred it twice in the last five, six years since COVID. This time, we have reinstated it after when we announced it in September, back to the April cycle. Just wanted to understand what's the thought process behind that, given that the overall demand environment, the supply side environment, and the macro uncertainties largely remain there and haven't seemed to be changing materially over the past six to nine months.
Rishi, it's a reflection as a first is we want to ensure that we properly reward all the associates who have been working tirelessly for us. And as you know, that while in September, we were able to give increments to 80% of associates, for the senior executive associates we were unable to give increments at that time. We wanted to ensure that when we restart our increment cycle, we reset it and start for everyone. But it's also a reflection of the fact that we believe that we have enough deal momentum and demand on our side, so that we'll be able to handle the increased wage cost, wage bill, because of increments.
My first question for Krithi is your comment that you made on the growth in the client's band of revenue bands in mid and large size and you talked about stability returning. Is this due to a lower leakage compared to the past or is it more led by better macro, which is improving the spend in these accounts?
So, Gaurav, first on the client metric improvement. See it's a combination of all the factors, because you will not be able to grow if there's no stability or there's no revenue coming in and essentially, it's a reflection of the fact, overall at a high level, the clients are more comfortable in getting into larger transformation programs or some amount of discretionary spend improving. And, of course, it's also possible there are some cases of vendor consolidation happening where you gain market share, but definitely, it indicates that the stability and the increased confidence from the clients as well.
On AI. If you keep the macro aside for the moment, would you expect the new AI services to be accretive to revenue growth in fiscal '27, net of all the deflation that you see in your renewals existing business or is it too early to confirm any such trend?
For your question about AI, again, our expectation is AI will be net accretive, like to see the initial year, our attempt would be to ensure that we arrest the degrowth while the AI revenue increase. But, of course, over a period of time, AI revenue or AI related revenue, because it will become very difficult to classify after some time on what is AI, what is AI adjacent revenue, but ensure that they all grow, we will expect them to grow much faster. At that time, the deflation in the other part may not matter materially like same cycle with whatever happened during the digital transformation cycle that trend will resume.