tata consultancy services limited fy05-q3 analysts / … · moderator good afternoon ladies and...

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Tata Consultancy Services Limited FY05-Q3 Analysts / Investors Conference Call

January 13, 2005 14:30 hrs IST Moderator Good afternoon ladies and gentlemen. I am Pratibha, the moderator

for this conference. Welcome to the TCS conference call. For the duration of the presentation, all participants’ lines will be in the listen-only mode. After the presentation, the question-answer session will be conducted for participants connected to the SingTel bridge. After that, the question-answer session for participants connected to CyberBazaar India. Participants may note that the call is being recorded. I would now like to hand over to Mr. Arjun Marphatia, Head of Investor Relations at Tata Consultancy Services. Thank you and over to Mr. Marphatia.

Arjun Marphatia Thank you, Pratibha. Good afternoon ladies and gentlemen, and a very happy New Year to all of you and a warm welcome to the analyst call of Tata Consultancy Services Limited. It is my privilege to introduce to you the leadership team of TCS who are present in this call. First and foremost I have Mr. S Mahalingam, the Chief Financial Officer of our company, and the Executive Vice-President Mr. N Chandrasekaran who heads our Global Operations, Mr. S Padmanabhan, who is head of Human Resources and Organizational Development. The proceeding will begin with Maha who will give an overview of the third quarter results and discuss the financial performance. Chandra will share the growth in the geographies and Paddy will then move on and share the developments in the human resources space. Maha will then conclude the presentation with a summary and some strategic insight. After the discussions, which are expected to continue for about 15 minutes, we will have a 45-minute question and answer session. Ladies and gentlemen there is one request: in order to allow an opportunity to all participants to ask a question, may I request each one of you to please restrict to just one question only in the first round. Time permitting, we shall comeback again and take your question.

A simultaneous live audio webcast will be up shortly. A copy of this presentation and the results have been uploaded on the website. Also please note that TCS will not be giving any guidance for the quarter or the financial year. This call is being recorded and before I request Maha to speak, I have a small but important duty to perform, which is to remind you that anything we say on this call and which reflects our outlook in the future or which can be construed as a forward-looking statement must be read in conjunction with the risks that the company faces The full statement of this is available in the disclaimer slide in

FY05-Q3 Analysts / Investors Conference Call (January 13, 2005 14:30 hrs IST)

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the presentation. I now request Maha to begin the proceedings. Thank you.

S Mahalingam Good afternoon. We have just concluded our board meeting here and I am not too sure how many of you had a chance to look at our web page that we have displayed the presentation and the results. So it has been an extremely interesting quarter to say the least.

Now let me take you through the financial numbers, because many of you may not have had the opportunity to look at it. If you go to the slide 6, which essentially shows the growth summary, we have had an exceedingly good quarter-on-quarter growth. In terms of Indian rupees, the growth from a revenue perspective was 6.08 and operating income perspective was 9.12, and the net income perspective was 23.06. Year-on-year growth has also been to our satisfaction, and as expected the revenue grew by 38.18%, operating income by 49.38% and net income by 54.05%. If you go to the next chart, where we have indicated the growth summary consolidated US GAAP in rupees million, our net income crossed Rs.7 billion in this quarter and it stands at 7.093, and just for the record, the last quarter, in Q2, our net income was 5.764 billion. So there has been a substantial increase in the net income. The revenue grew from 24.307 billion rupees to 25.784 billion rupees and the operating income grew from 6.767 billion rupees to 7.385 billion rupees. From a 9 months perspective, again the revenue stands at 71.427 billion rupees. TCS is well on way to cross the 2 billion dollar mark. And the operating income is 20.146 billion rupees and net income at 17.909 billion rupees in excess of the overall profit for the whole of 2003-04.

Let me take you through some of the numbers in the next statement, which is the US GAAP income statement quarterly where we have given the details on Q3 FY05. I have already talked to you about the revenue. Our gross margin has improved to 47.55% as against 45% in Q2, and our operating income and operating margin has grown from 27.84% in Q2 to 28.64% in Q3, reflecting margin improvement in our operational activity, and at the same time showing growth in the gross margin area as well as in the operating income area. Other income, which substantially includes the result of the forward cover that we had taken - it reflects the result of mark-to-market of our position as well as the adjustment that takes place during the period in terms of realizing some of gains or losses - stands at 1.040 billion rupees as against loss of 7.56 million in the previous quarter. Therefore income before Indian taxes moved from 6.759 billion rupees to 8.425 billion rupees, and again there has been a substantial jump in the margins. Percentage, it has moved from 27.81 to 32.68%.

I would like to just reemphasize that a fair amount of the increase in the income before taxes has come as a result of the forward covers, and that is not a phenomenon that we expect to continue as far as the next quarter is concerned There has been an increase in income tax from


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940 million rupees to 1.282 billion rupees, and therefore net income after minority interest has moved from 5.763 billion rupees to 7.093 billion rupees, crossing both the 6 billion and moving on to the 7 billion mark.

The earnings per share stands at 14.77 as against Rs.12.01 the earlier one.

If you are going to the next one, I will explain to you as to how the gross margin improved. Basically this has come as a result of the productivity improvement that we have been targeting, and specifically the employee cost. As a policy we take in cost of revenue all the direct manpower expenses that are incurred on billable projects. So the employee cost stands at 42.41% as against 44.86% in the previous quarter, reflecting both productivity increase as well as a shift to offshore that you would see later on in the presentation that my colleagues will be making.

The other percentages have remained more or less the same, whether it is other cost of depreciation, equipment and software, and therefore the cost of revenue has moved down from 55% to 52.45%.

If you take the SG&A, the employee cost, has been slightly lower from 8.34 to 8.13, and the other parameters have been more or less constant except the other costs, which have moved from 7.98 to 9.54%. The SG&A overall has essentially…expenses have moved from 17.16, to 18.91, but if you go to the previous chart, you would see that there has been an improvement in the operating margins, actually we have moved to 28.64 from 27.84.

Nine months GAAP again we have given in the next chart and you can go through those figures. Just to emphasize that the net income after minority interest is 17.909 billion, and of course there was one off item which we took up last quarter in terms of the ESPS grant, and net income after one-off items was 15.823 billion, the earnings per share being 38.33 before one-off, and 33.86 after one-off.

We have given the balance sheet, US GAAP balance sheet. Another objective that we had with us was in terms of ensuring that we become cash positive. We had, if you recollect, started with a borrowed picture earlier, and this time we have become cash positive. You will have to look at short-term borrowing and match it against investments. We have a substantial amount in the mutual fund investments and also in cash and cash equivalents. So combined we are cash positive, and we have achieved this before Q4, which is within our target that we had specified. The quarterly income statement in the Indian GAAP and you can see that, and the quarterly income at the consolidated level stands at 718.61 crores of rupees, pretty close to the overall consolidated figure of US GAAP. And Indian GAAP statement at the 9 months level again at the consolidated is 1711 90 crores of rupees and again pretty


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close to what we have come up with.

We have given the Indian GAAP balance sheet as well, and we have also indicated the reconciliation between the US GAAP and Indian GAAP. Another objective that we have set for ourselves as we looked at in the last quarter, especially with the view to being cash positive is to really reduce the number of debtor days. We have actually gone down to 69 days, a substantial reduction from last quarter that we have specified, and our intention is to keep improving that, and this has significantly added to the cash flow generation, and at present our total amount of debtors is in fact less than the debtors that we had when we ended Q2.

So, from a financial perspective, we knew we were operating in an era where the rupee is going to be appreciating, and therefore we had taken a number of steps in terms of improving our productivity and improving the margins both from the cost of revenues as well as from a selling and general administration expenses. We also had another objective in terms of becoming cash positive and that we have seen through a combination, through better collection mechanism, improved collection mechanism. So it has been an extremely interesting performance and to describe the business dynamics, I will now turn over to Chandra.

N Chandrasekaran Good afternoon everybody. Before I go on to the slide 17 where we are giving the graphic of different quarters, overall the business growth this quarter has been extremely good and the overall performance has been outstanding from our point of view. Apart from all the improvements, margin improvements Maha talked about, we are also seeing excellent traction for our high value offerings, and that is also driving further growth both in terms of revenue and in terms of margins.

And this quarter has been the quarter of awards. TCS received a number of awards. The company…from the HR side, from the business side, a number of awards were received.

And moving on to slide 17, where we give the Q on Q figures for the last three quarters, the revenue, operating income, and net income. Maha already explained the numbers, but the growth has been pretty good.

Moving on to slide 18, again you have got these figures. I want to spend a couple of minutes on the gross income and gross margin as well. We have made an improvement of 2.5% shift in the gross margin this quarter from 45 to 47.5. I want to highlight that this has occurred under two important scenarios: our overall revenue from our large customer GE has come down to 14.8 from 15.9 in the previous quarter and over 17 in Q1, and the second one is the overall onsite offshore mix has also shifted about 2.5% towards offshore. So the offshore mix is about 40% now and under this scenario the margin improvement


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has also improved positively.

Then the next slide 19, gives you the revenue, operating income, and net income numbers again for the 9 months YTD. I will now move on to slide #21, where we give the geography wise revenues. Again, all the geographies have grown very well during this quarter, and Europe has grown to 23.5% of our overall revenues. Continental Europe in particular has seen a significant growth on a sequential quarter basis, and we have acquired a number of marquee clients, including Ferrari. All our global development centers are acting as growth engines and they are receiving excellent traction from our customers, and all GDCs have been adding customers. In this quarter, we added 5 customers in China GDC, 4 in Hungary, and 2 in Uruguay, and these are deals which are helping us to grow overall.

Moving on to the next slide, slide #22, the service practice-wise revenues. Again, what we have seen is our broad portfolio apart from the application development and maintenance and the enterprise solutions; remote engineering services, BPO; our value engines, consulting offerings, asset leveraged solutions, all are getting traction and this holistic set of offerings are enabling us to be competitive and it is helping us to serve the customers much better, and we are seeing that in terms of new client additions. We have added 4 new clients in the remote infrastructure management service area and one new client in the BPO transaction services domain. We have executed and also won a large number of engagements in the enterprise solution space, in the ERP, CRM and the supply chain areas. Process consulting, which acquired a large number of customers in last quarter, continues to be successful and we added 11 clients this quarter, out of which 9 are existing clients of TCS who are using this as an additional service, increasing our cross selling ability in accounts, and we also added 2 new clients in this area.

Then moving on to the next slide, industry practice-wise revenues. Again, the growth has been pretty good in a number of verticals. We have been adding customers in a variety of verticals, and during this quarter we also completed a large number of engagements successfully. To name some of the engagements which we have won, one is the system integration engagement for a Central Depository in South East Asia, and a large grocery retailer in UK has selected us for merchandizing solution - it is going to be a large package implementation engagement. And a large bank in Germany has selected us to build a booking and transaction engine. And we are also winning both technology-related and business-related consulting work. And a large telco in the US market selected us for business process consulting engagement. This is just to give you a sample of the kind of engagements that we are seeing in the marketplace.

Then moving on to the next slide, operational excellence. The move is towards offshore We have moved the offshore mix to 40% now going


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up from 37.5% in the last quarter, and we think that the move towards offshore will continue to happen but in a marginal way. And in terms of the contract type, our fixed price engagements have slightly gone up to 52.3%. As we have maintained in the past, I think we expect this number to be in the range of 50 to 55% of our overall work. So this is pretty much in line with our expectations.

Then moving on to the slide on client concentration, this quarter also saw a significant number of client additions. Specifically if you look at the number of million-dollar clients, we went up from 177 to 192. The number of $5 million clients went up to 71 from 65 in the last quarter. The $10 million clients went up to 37 from 34 and the $20 million clients from 19 to 21, and we continue to have 5 clients who are $50 million plus. As I mentioned earlier, the contribution from GE went down to 14.8% from 15.9% in Q2 and 17.1% in Q1 of this financial year. And if you see the contribution of revenues from the top one, top 5, top 10, they are all very healthy.

Then, moving on to the client acquisition and expansion slide, where I want point out that we added 72 new clients this quarter compared to 52 in the previous quarter and this takes our active clients to 506. And in terms of the repeat business from existing customers, it stands at 94.2% and our new business looks very healthy at 5.8% because all these customers are likely to give us repeat business in the following quarters.

Then, I want to spend a few minutes explaining the kind of solution delivery that we have made and delivered to our customers during this quarter. Firstly, the State Bank of India core banking solution which is a flagship engagement for us in this country is going extremely well and we crossed 500 branches during the quarter. And in the U.S. in North America, we implemented a comprehensive end-to-end policy administration and claims notice system for a large insurance company, which has been rolled out in 45 different states. For another insurance company, we built a sophisticated business solution and came up with a single product which could provide cover for both their life and non-life businesses, because this was the insurance company which acquired another non-life insurance company and they wanted to have a product which will cover both, and this system was delivered successfully by TCS. In Europe, for a leading European telco, we implemented a major CRM package solution covering both the customer service and order management. The solution went live during the quarter. And in Japan for a global manufacturing company, we implemented a very, very comprehensive solution involving an ERP and enterprise application integration, integrating some business intelligence and infrastructure solutions, and again this solution went live and resulted in follow on business for TCS. And for another global publishing company, we implemented one of the largest ERP solutions covering a variety of functional domains and we have been working on this system throughout last year and this went live successfully during


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the last quarter. Then for a global oil and gas company we implemented a single standardized business process solution based on a single ERP because this company had acquired 2 other companies and they all had different systems and this was again a very large engagement, a multi year engagement, which was successfully rolled out during the last quarter, and again this resulted in substantial follow on work for TCS. And another engagement which is interesting is the implementation of process, architecting and implementing a process for Sarbanes-Oxley compliance for a major financial services company; again this was completed successfully. This is just to give you the kind of engagements that we completed during the last quarter. Now I am passing it on to my colleague, Paddy for giving an update on HR.

S Padmanabhan Good afternoon everyone. During this quarter we have added 3239 associates in TCS and its overseas subsidiaries. This comprised of an addition of 3002 associates in India and 237 overseas. In India, we have added total 1604 trainees and 1398 experienced professionals. 718 people have left us, resulting in a net addition of 2521. The total number of associates in TCS, its overseas subsidiaries and all its India subsidiaries put together is 43,681. TCS and its overseas subsidiaries alone have 39,217. We have for the nine-month period made 5917 campus offers and these would be joining us next year. Our attrition rate for the last 12 months is 7.6%, down from 7.9% last quarter. The absolute number of associates leaving the company has been coming down from 936 in Q1, 795 in Q2, to 718 in Q3. Our utilization including trainees is 75.3%, and excluding trainees is 79.3%. We have a total of 1321 non-Indian nationals, which is up from 1122 as of Q2. This is 3.5% of our total associate base as compared to 3% in Q2. As of now, we have 21% women associates in the company which is the same as last quarter. 57% of our associates have greater than 3 years’ experiences as compared to 55% in Q2. We continue to invest in our competency building programs through initial learning, continuous learning, and management development programs. During the quarter, 2631 associates completed their initial learning program, 2765 associates who are trained in hot skills, the high demand skills, and the total participant base in continuous learning program during the quarter is 46,000 days. Thank you.

S Mahalingam Thanks Paddy, this is Maha back again. I will just summarize the discussion so far. We went through the numbers and so on. We have had a strong growth on a fairly large base that TCS has, and we have had this growth along with margin improvement, and the margin improvement has come as a result of operational efficiency and cost management. In these days of rupee appreciation, we have managed the treasury and also we have made sure that we improved our collection efficiency and so on, and therefore on all parameters there has been a growth, whether it is in terms of business, geography, people, and financials. And just to add to some of the awards that we had got this year, TCS was awarded the Hewitt Best Employer of the India award for the year 2004 across 15 industry groups and it is also


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rated the Best Employer amongst IT companies in India by DataQuest survey for the year 2004, and of course, Ramadorai, the Chief Executive and MD was judged the Businessman of the Year in the Business India assessment, and he was also declared the IT man of the year. So there has been a fair amount of recognition from peer group, and one can state this from a HR perspective, the attrition rate falling down has also been result of strong HR practices that TCS has had. Now, I would just turn it over to Arjun to coordinate the question and answer.

Arjun Marphatia Thank you, Maha. After this, we will have a question answer session, I would once again request all of you to kindly ask one question each please, and we will come back in the next round, time permitting. Pratibha could you commence the questions please.

Moderator Surely sir. At this moment, I would like to hand over the floor to Kala at SingTel to conduct the Q&A for participants connected there. After this, we will have a question-answer session for participants connected to CyberBazaar India. Thank you and over to Kala.

Moderator Thank you, Pratibha. We will now begin the Q&A session for participants connected to the SingTel bridge. Please press 01 to ask a question. We have Pratik Gupta, Citigroup, Singapore. Go ahead please.

Pratik Gupta Yeah hi, this is Pratik. Congratulations once again on a very strong quarter. Actually before I ask my question I was wondering if it is possible to get the results and the presentation etc on the website or by email, I think some of us still have not seen those, and basically my question is if you could just elaborate a bit more on the quarter’s performance, in particular, I was wondering if there are one-off items in terms of either revenues or cost or non-operating items. The line was not very clear, so I was wondering if you could elaborate a bit more on the FX cover and the FX hedges, and what sort of FX gains you have had in the quarter. And the second part to my question is, you referred to some improvements in the onsite-offshore mix, I was wondering if you could elaborate a bit more on your long-term targets over there, where do you think you can be in say about 2 year’s time on that particular metric?

Arjun Marphatia Pratik, Arjun here, thank you. The presentation is being uploaded on the website. I think in a couple of minutes you should be able to see it, and the results are being flashed on the wires and the exchanges. It has been done, you will get it very shortly, and we will try and email it to as many people as possible. Your points are noted, I will request Maha to repeat some of the key things.

S Mahalingam Pratik, the first question on one-off items, there are no one-off items as far as this quarter is concerned. The only one-off item was there in the


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Q2, and that was on ESPS, and there is nothing here. But what we have done is, there is a certain amount of re-classification that has taken place…which has improved the operating margin in Q2 as well as Q1. There were certain items that were in the other income column which have been shifted up to reduce it from the expenses and therefore the operating margin percentage has increased in the previous quarter, and the growth from an operating income perspective is lower than it should have been had we continued with our old practice. So, I just want to say that because later when you essentially look at the operating margin of Q2, you would find a slightly different figure that we had announced earlier, that is a more a re-classification. Net income does not undergo any changes. Now coming to FX hedges, we have outstanding foreign exchange hedge contract provision of 606 million US dollars as on December 31, 2004, and it is sitting at an average forward contract rate of 44.98, and the average maturity was 108 days. We substantially increased the hedges in October and November from US $274 (million) at the end of last quarter, and in terms of the gains that we have made in this quarter, as I had explained last time as well when we were reporting Q2 performance, you need to look at the foreign exchange gains and losses in various categories and the remittances and collections of receivables is one factor. There we had a loss of Rs.16.65 crores and reclassification of debtors, we had a loss of Rs.14.05 crores. The forward gain that we realized during this period was 109.58 crores. This is the one that has given us on a net basis Rs.78.88 crores in terms of the total gain. I have given you the details because I think we will have to view it from this perspective. Now I will turn to Chandra for the onsite-offshore question.

N Chandrasekaran The onsite-offshore mix was at 62.5 and 37.5, where 62.5% onsite and 37.5% offshore. That has moved 2.5% in favor offshore, that is, now the current mix is 60-40 onsite-offshore. We continue to see that the offshore mix will increase but it will be a marginal increase. We don’t think that it will be a dramatic increase in the coming quarters. And in terms of long-term target, I cannot give you a specific number but it will continue to move maybe a percentage point or little more than that every quarter.

Pratik Gupta Sorry, did you say one percentage point every year or did I hear one percentage point every quarter.

N Chandrasekaran Quarterly basis it will continue to improve towards offshore.

Pratik Gupta Okay, alright.

N Chandrasekaran But I cannot give you a specific number.

Pratik Gupta Yeah sure, fair enough, and going back to the FX number, I did not hear that properly, did you say Rs. 78 crores was the net FX gains after


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all these things.

S Mahalingam That is right Rs. 78.88 crores.

Pratik Gupta Okay, thank you very much.

Moderator Next we have Mr. Dillon, Arete Research, UK.

Mick Dillon Just to reinforce what the previous person said, the streaming was not working on the website either for slides. Unfortunately the references to slides during the presentation was not particularly useful. Can I ask two questions please about your cash flows for the quarter and what was end of quarter cash balance? Also, can I just get a clarification on your growth, you said during the presentation that it was 38% growth, there is a report here on the wires that talks of Rs. 26.9 billion for the quarter which will actually be 44% growth. Can you just clarify those two please? And finally can you talk about the pricing environment.

S Mahalingam As far as the cash flow position is concerned, what we have done is, we have become cash positive overall, we are over Rs.2 billion in terms of cash positive status at this time. What we have done is to essentially also go in for certain tax-free advantages from a mutual fund investment, so we have something parked there as well as cash in hand, and we continue to have some short-term borrowing more to help us in terms of the exchange cover at this time because in this environment, we find that there also an effective hedge against the rupee appreciating, so these are the positions.

Arjun Marphatia Mick, could you repeat your question on growth, we were unable to hear you clearly.

Mick Dillon Yeah, there were 2 questions, one was on growth. You referred to 38% growth, I heard the figure that was mentioned during the call. I was just checking - was that the growth rate because on Bloomberg there was a report and at the moment given that there is no email and no presentation, the only data we have is either Bloomberg or what comes up the call. On Bloomberg they are reporting 26.9 billion rupees of sales which would actually translate to 44% growth, so I am just trying to reconcile given the lack of data whether it is 44% growth for the quarter or 38% growth for the quarter. And then the final one was on the pricing environment, can you talk about whether average pricing is increasing, stable or declining please.

S Mahalingam Okay, as far as the growth is concerned, I would repeat what I said at that time that the revenue as has grown by 38.18%. Now what you are getting from Bloomberg is really the Indian GAAP income statement. The other income which includes the forward cover and so on is shown; income from operations and other incomes combined is really 26.917 billion rupees.


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Mick Dillon That is perfectly clear now, thank you, and then on the pricing environment.

N Chandrasekaran In terms of pricing, our gross margin improvement also is due to certain amount of increase in the high value offerings. So we are able get better pricing for the value delivered for high-value offerings. For normal services, the pricing is stable or some new contracts are marginally better.

Dillon Okay, so you are seeing a mix shift benefit but not yet rising in pricing to incumbent clients.

S Mahalingam Correct, yeah. As we move up the value chain, we certainly are finding an improvement.

Mick Dillon Okay, thank you very much for the questions. Thank you.

Moderator We have Ajay Sharma from Citigroup.

Ajay Sharma Yeah, hi, congratulations on reporting good set of numbers. Just a small question, what was the dollar growth in revenues quarter on quarter?

S Mahalingam We need to work that out and get back to you. We are not announcing it at this time.

Ajay Sharma Okay, thanks.

Moderator To ask a question, please press 01. Thank you.

Moderator At this moment, there are no more questions from the participants at SingTel bridge. Over to you, Pratibha.

Moderator Thank you very much, Kala. We will begin the Q&A interactive session for participants connected to CyberBazaar India. Participants who wish to ask questions, please press *1 on your touchtone-enabled telephone keypads. On pressing *1, participants will get a chance to present their questions on a first-in-line basis. Participants are requested to restrict to one question in the initial round of Q&A session. Follow up questions will be taken later. Please use your handsets while asking a question. To ask a question, please press *1 now. First in line, we have Mr. Manoj Singla from JP Morgan.

Manoj Singla Yeah, hi. Good afternoon, sir. Congratulations on a good quarter. My question just relates to the margins that we have reported. I just wanted to understand, first of all, what would have been the margin increase on the adjusted numbers. Because as you said, 45% was the gross margin last quarter, what you have reported and this time there is some difference So what is the actual increase in margin given the


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adjustments? And if we were to look at this margin increase, what is this composed of basically given the fact that rupee has already appreciated by around 4% in the quarter. So could you actually break up in terms of which segments have contributed to the margin increase? And I would also like to get the employee compensation expense, the variable part for this quarter. Thanks.

S Mahalingam Thanks, Manoj. In the reclassification nothing has really affected the gross margin, it is really in the operating income level that you will find a slight change as far as the last quarter is concerned, and then of course this quarter. So, you will have to look at it from that perspective, so as I said we moved from 27.84 to 28.64.

I will just give you reconciliation in case you are looking at that. Earlier, you know, if you looked at the operating income in Q2, we had reported 6678, actually it is through this reclassification whereby we adjusted the other income through certain reduction in expenses, it is now 6767. So I am really looking at it from a 6767 position to what we are at this moment in time. So there is an increase there that is there for the purpose of comparison. So that is as far as the margin is concerned. The other one is, you were asking questions on the impact of foreign exchange. I think, essentially as per the practice that we follow and I have been running through the US GAAP numbers, we are putting in all the foreign exchange related gains and losses in the other income. Of course, the revenue is getting realized at a slightly lower rate. I don’t have exactly what it would have been had we had the same kind of average rates for Q2. We will get back with that analysis.

S Padmanabhan Manoj, on the variable compensation, this quarter we distributed 798 million rupees as variable compensation as compared to 999 million rupees last quarter. And overall for the first nine months, we have distributed 2477 million rupees, and this is well within the budget for the year, which is 3300 million rupees for the whole year.

Manoj Singla Sure sir, thank you.

Moderator Thank you very much sir. Next question comes from Mr. Anantha Narayan of JM Morgan Stanley.

Anantha Narayan Hi, good afternoon everyone and wish you all a Happy New Year. I had a couple of questions. The first is on the margin front. In your view, is the fixed price project component of your business helping margins at this point of time because we are seeing some expansion despite the currency? And secondly on the accounting for the forex gains, did you consider the cash flow hedges as against marking it to market? And if so, why have we chosen the later? This could potentially create a lot of volatility in earning streams going forward.

N Chandrasekaran In terms of the first question on fixed price, see if you really look at the gross margin improvement, as I mentioned, there are three aspects. The first one is that the movement towards offshore, 2.5%, that has helped a bit. The second one is definitely increase in our high value offerings at better pricing and that has definitely contributed to the


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margin improvement. And the third one is more at the productivity improvement in fixed price projects. But I wouldn’t say that that has contributed significantly particularly in this quarter because all our fixed price projects, as a process we continue to invest in productivity tools and continue to reap benefits on those sort of engagements. Okay?

Anantha Narayan Yeah thanks, Chandra.

S Mahalingam Anantha, as far as the mark to market to cash flow hedges accounting policy, we have been following this mark to market earlier of course for US GAAP continuously, and Indian GAAP of course from the time that it was introduced, and as of now we do not have any plan to move to cash flow hedge system.

Anantha Narayan Thanks Maha and wish you all the best.

Moderator Thank you very much, sir. Our next question comes from Mr. Pramod Gupta of HSBC.

Pramod Gupta Hello everybody. Just wanted to know what was the average rupee realization for this quarter and last quarter for you? I mean, conversion rate, average rupee to dollar rate for this quarter.

S Mahalingam I will get back a little later on this specific question.

Pramod Gupta Okay. The other thing that, we are still not able to get those details, if you could put up those that would be really helpful.

Arjun Marphatia Pramod, Arjun here. It is up on the website already.

Pramod Gupta Okay. Thanks, I will check it up and come back to you.

Moderator Thank you very much, sir. Our next question comes from Mr. Mahesh Vaze of Brics Securities.

Mahesh Vaze Yeah, hi. You seem to have had a very significant move in offshore business, 2.5%. Just wanted to understand the underlying dynamics and what is the outlook like going forward?

N Chandrasekaran As I explained, the onsite-offshore mix will move more and more towards offshore, but in a marginal way. I think this 2.5% shift was expected because the long-term contracts, as we complete the transition, are moving towards offshore. And some of the existing contracts where we have grown in volume, I think they have reached a stable stage where we are able to do more work offshore. This is something that we discuss jointly with our customers and then make the decision to move offshore. So, the general direction is that this onsite-offshore mix will move more towards offshore, but it will be marginally and not dramatic.

Mahesh Vaze But, just wanted to understand what has been the…this quarter suddenly we saw very large movement. So what was it specifically that happened this quarter?

N Chandrasekaran No, I think if you see the last few quarters, we have been continuously moving the work towards offshore In this quarter the movement has


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been a little bit more than the usual, but we expect that it will continue for the next few quarters and it is primarily because some of the long-term contracts…there are two aspects, long term contracts reaching a level of maturity, the customers are okay for us to move more work offshore, and we support the systems from offshore. The second one is, some of the large engagements where we have done the transition and we are able to complete the transition and start the work offshore. So, these two aspects have contributed.

Mahesh Vaze Okay, couple of figures, I think you might have mentioned it before, I just missed them. What is your current hedge position and what is the recruitment for the quarter?

S Mahalingam I will tell you the hedge position and Paddy will reply on the recruitment. Hedge position as of December-end was US $606 million. It is roughly around the same figure at this point in time. Maybe a little lower, but roughly around the same.

S Padmanabhan On the recruitment side, during this quarter we had a gross addition of 3002 people in TCS India, and 237 persons overseas. This 3002 is broken down into 1604 trainees and 1398 experienced professionals. This is TCS and all its overseas subsidiaries.

Mahesh Vaze No, what would be the consolidated number Paddy, I missed it, 3002 and 270 you said.

S Padmanabhan Okay, let me give all the numbers. See all companies put together, that is TCS and its overseas subsidiaries, we have added a gross of 3239.

Mahesh Vaze 3239, okay.

S Padmanabhan And we had an attrition of 718.

Mahesh Vaze Okay.

S Padmanabhan Net addition is 2521.

Mahesh Vaze 2521.

S Padmanabhan That is right.

Mahesh Vaze Okay fine. Thanks a lot and all the best.

Moderator Thank you very much, sir. Next in line, we have a question from Mr. Ashish Agarwal of IL&FS Investsmart.

Ashish Agarwal Yeah, my question is, in your SG&A, your other cost has increased, so could you give me what this other cost is?

S Mahalingam I will come back to you.

Ashish Agarwal Another question is, what is your capex plan going forward?

S Mahalingam We had announced that we would have total 600 crores of rupees this year of which 200 crores will be on technology and 400 crores on physical infrastructure We are moving towards the 200 crores in


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technology…(inaudible).

Ashish Agarwal Yeah. Thanks.

Moderator Thank you very much, sir. Coming up next is a question from Mr. Shekhar Singh of ICICI Securities.

Shekhar Singh Hi sir, congratulations on a very good set of numbers. A few questions: one, what was the total mark to market of the forward cover? What was the total amount of forward cover which you have marked to market during the quarter leading to this 78 crores of forex profits?

S Mahalingam See, as I explained, the overall profit is a combination of what happened at the transaction level during that period, the revaluation as well as the forward thing. The total amount that was marked to market was 606 million dollars as I said, and we had position of 274 million US dollars at the end of September. So there was an increase that we have done as far as the forward position is concerned because we felt that we are to be covering the net income received in India for forward cover, especially at the dollars area. So that’s why we broke it up into many… At the transaction level we had a loss of 15.65 crores, at a revaluation level we had a loss of 14.05, and at the forward gain level we had a total of 109.58 crores totally, and that is giving us a net position of 78.88 crores of gain during this period.

Ashish Agarwal Okay. Secondly, I just wanted to know like, what was the performance of the domestic business? What was the growth rate in domestic business?

S Mahalingam We will put that up as far as the growth is concerned.

N Chandrasekaran See, actually, most of the growth this quarter has come from the TCS international business. If you take the domestic business, there is TCS India business and there is the CMC business. The CMC revenues and results were published yesterday by CMC, so you should have those figures, but they have…seems that the domestic business has grown sequentially, but the TCS domestic business on a quarterly basis has not grown. So most of the business…in fact there has been a marginal dip in the domestic revenues. So the overall growth this quarter has been predominantly in the international business.

S Mahalingam Yeah, and in fact it actually has been flat as far as the domestic business is concerned.

N Chandrasekaran Yeah, if you put both of the CMC and TCS together.

Ashish Agarwal Okay, and lastly, out of the 2521 employee addition, how many employees have been taken for the BPO business?

S Padmanabhan No this 2521 does not include companies like AFS, ASDC, WTI, BTS, and CMC.

Ashish Agarwal That is great.

S Padmanabhan This is TCS and its subsidiaries, overseas subsidiaries.


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Ashish Agarwal Okay, and lastly, if you can just given an indication of what was the growth in the billed man months or the number of employees, which were getting billed, to basically give an idea of what was the volume growth?

N Chandrasekaran We don’t give those numbers.

Ashish Agarwal Okay.

N Chandrasekaran But we have given you the utilization numbers though. We have the employee numbers, beginning of the quarter and end of the quarter and also you have the utilization including and excluding trainees.

Ashish Agarwal Okay that should be fine. Thanks a lot, sir.

N Chandrasekaran Thank you

Moderator Thank you very much, sir. We have our next question from Ms. Parul Inamdar of Prabhudas Lilladher.

Amisha Vora This is Amisha Vora here from Prabhudas Lilladher. I wanted to know what is the comparative number of net profit for the quarter as compared to Q2 net profit of 579 crores.

S Mahalingam It is actually 576 crores in previous quarter. Let me just give you that number. This quarter our net income…

Amisha Vora Profit, I am looking for

S Mahalingam Yeah, net income…we are essentially talking about, that is the PAT, at the US GAAP consolidated levels, which is the figure that needs to be compared with 576 crores, is 709 crores.

Amisha Vora So that means 709 crores includes operational improvement plus the FX gains.

S Mahalingam This is right. In fact that is why we said that FX gain is not repeatable one so we will have to discount that for comparison when we look at it from Q4 perspective. Yes it includes both.

Ms. Amisha Vora So, Q4 purpose, for a comparable purpose, from 709 crores I should exclude 78 crores?

S Mahalingam Yeah, in fact you know, you can see that we have grown by 133 crores, and in that of course 78 crores has to be excluded, so, you know, the balance is the position from operational side.

Ms. Amisha Vora Why I am asking this bit more in detail because probably 78 crores of FX gain will be taxed differently than your business profits, is that true?

S Mahalingam You know, we have given you the tax numbers and so on that we have paid, or we are provided for, and we have had detailed examination of these issues and so on, so you will find it in the figures.

Amisha Vora Okay, and sir, one more sincere request that next time onwards when you hold a conference call if you can just postpone it a bit so that we have a proper look at the all the numbers and all of us don’t keep on


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confusing ourselves for one hour when you do the conference call.

S Mahalingam Thanks, you know, but what has happened is that our board meeting took a little longer and that was the reason why we had a process to follow in terms of stock exchange and so on before we could put on website and therefore we ran out of time, but certainly I will take that into account.

Amisha Vora Okay sir, thanks a lot.

S Mahalingam And the other thing I would like to inform everyone that the board will meet next week for interim dividend.

Moderator Thank you very much, sir. Next question comes from Mr. Pankaj of ABN Amro.

Hitesh Shah Hello this is Hitesh Shah from ABN Amro.

S Mahalingam Yeah.

Hitesh Shah Can you give us some color on how your BPO business is doing?

N Chandrasekaran Yes. See the BPO business, as we mentioned, we are focused on vertical play and transaction processing predominantly, and last quarter we had acquired good number of…in Q2, we had given a complete status because it was first time we had an analyst call after our first announcement of result. This quarter again the BPO is growing well, from all the customers we have acquired, the ramp up is happening, and in this quarter we acquired one customer in the transaction processing area.

Saurabh Hi! This is Saurabh here. In this particular quarter you had a 2.2% growth in GE business, and we have seen it coming down over the last few quarters. Now, what is your view on what would be a stable proportion this business will be or what kind of growth rates are you looking for this kind of business over the next couple of years?

N Chandrasekaran Saurabh, this is Chandra. First let me just confirm what you are asking, probably you have taken the 14.8% concentration of the GE business and then you have calculated the proportion of revenues in the absolutely numbers, you are seeing a 2.2% growth. Is that the basis for your question?

Saurabh Absolutely.

N Chandrasekaran Okay. See, I hope you have taken in the numbers after the exchange gains etc., but in any case, the GE business continues to operate at a certain level and any growth…there are three points I want to make. One is, we have a certain market share, which is very healthy market share of GE’s outsourcing business and that continues to be stable with marginal increase. Second, the growth rate of the GE business when compared to the growth rate of the rest of the customers and the new customers is definitely significantly low because of the size in which it operates. The third point is that the GE business already enjoys good offshore mix but it continues to grow in the onsite offshore


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mix. So as a result, the quantum of our revenue from GE will be more or less around the same figure with marginal increase. Okay?

Saurabh Okay, that is in absolute sense?

N Chandrasekaran That’s in absolute sense. That is right.

Saurabh Thanks

N Chandrasekaran So the concentration of GE of the overall revenue will definitely continue to decline

Saurabh Sure. Thanks

Moderator Thank you very much sir. Next question comes from Mr. Trideep Bhattacharya of UBS.

Trideep Bhattacharya

Yeah, good afternoon and congratulations. I have one question, in this particular quarter or in the previous one, has there been a case where you have taken over the assets of any of firm or revenue corresponding to that, I mean, inorganic means has been included over the last couple of quarters?

S Mahalingam No, as far as this quarter is concerned, no, there has been nothing that has really come in. As far as the last quarter is concerned, I will have to recheck whether the last quarter or the quarter before there was a small thing that we had brought in both from PGS which has been renamed as BTS and also WTI.

N Chandrasekaran By and large there has not been asset takeover related revenue…


Okay, and also nothing from inorganic means as well?

S Mahalingam Nothing from inorganic means as well.


My second question is, as we move on to CY05 you might have spoken to your large customers. What are they saying with respect to their spending plans on volume and pricing with respect to that of previous year? I apologize if I am duplicating the question, but I couldn’t hear earlier.

N Chandrasekaran See we are seeing a healthy pipeline and as I remarked earlier, we are seeing up-tick in high-value offerings from our customers, both in the packaged software area and also in some of the process consulting and other technology consulting and other value engines as we call, we are seeing increase in those kind of…attractiveness for those kind of offerings. So we are quite positive about the next year.


And all this value added offerings that you are classifying form how much proportion of your sales right now?

N Chandrasekaran See currently we don’t classify and report it separately. It is predominately being reported as part of the ADM Service Practice. As we move into the future and this becomes substantial we will start classifying and reporting separately.


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Pardon me for harping on a little bit more, but what I am trying to say that…could you give us some specific feedback with respect to pricing or on volume side, I know demand comprises of both, but how does in both these parameters demand really look to you?

N Chandrasekaran On the pricing side I think the comment that I made, I would like repeat it in this context. I think there is an interest for the high value offering, and for those we are able to charge for the value we deliver. And for the new contracts, we are seeing marginal improvement in pricing, and in terms of volumes there is a healthy pipeline.


Thanks a lot and best of luck.

N Chandrasekaran Thank you.

Moderator Thank you very much, sir. Participants are requested to restrict to one question in the initial round. Next in line, we have Ms. Mitali Ghosh of DSP Merrill Lynch.

Mitali Ghosh Good afternoon and congratulations on a good set of numbers.

S Mahalingam Thank you

Mitali Ghosh My question was on understanding…you had very impressive margin improvement this quarter. Firstly I could not quite catch what has been reclassified from the operating expenses to the other income, so just if you could go through that. And in terms of how you can manage margins going forward, if you can give us some understanding on what is the kind of buffer you see in utilization, offshore shift or other expense control?

S Mahalingam Mitali, the one thing is other way round in the sense that there was something in other income which has really gone up and taken off from expenses in SG&A, so that is there. So to that extent, other income has come down in the previous quarters and operating income in the previous quarter has gone up, and overall we had something close to 26.8 crores, which has been spilt 8 crores or 9 crores in the previous one and the balance, I think it is about 8 crores or so in this current quarter. So that is the reclassification that was done. The reason I was spending time in explaining was that had we stuck to our earlier basis then we might have seen a much higher growth from an operating income perspective. So that the reason why I essentially looked at it. As far as the margins…

N Chandrasekaran As far as the second part of your question on the utilization…as you might have seen it has come down from the Q2 to this quarter to 75.3%. This is predominantly due to some of the large fixed price engagements, some of which I outlined, getting completed in this quarter, and all those employees getting reassigned to other engagements. So to that extent there will be again a little bit increase in the utilization from the current 75.3% reported going forward into the next quarter. And in terms of the margin, as I clearly said, there has been a jump of about 2 5% in the gross margins predominantly one


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due to the offshore movement and as we saw the offshore movement has gone 2.5% more towards offshore, predominantly happened with two or three accounts, but one large account moved significantly offshore this quarter and we expect to see this kind of offshore movement, but it will be marginal as we said. So to that extent that will benefit the margins. And the other aspect is that we are seeing traction for our high-value offerings. We have done a quite bit of engagements in the second quarter, that is the previous quarter, as well as the current quarter, Q3, and we are seeing pipeline building up for the Q4. The interesting thing about these engagements is that predominantly you can complete either mostly within the quarter or in two quarters. So you are able to complete the engagement and bill for these engagements. So these are the levers that play towards margins.

Moderator We are going to take the last two questions. Next in line, we have Mr. Richard from Four Dimensions.

Richard Good afternoon sir. I just wanted one clarification. Can you give the break up of your other income element of 141 crores?

S Mahalingam Other income element I have already talked about, it is 78 crores net that we have got from the exchange and then there are some interest and dividends, which is about 84 lakh negative, and then there is equity accounting is 14 lakhs, and some others, which is at 10.48 crores. These are the other…including the mutual funds and the exchange gain/loss….

Richard I see. So that 141 crores other income includes only 78 crores of FX gain. The net FX gain is included in that.

S Mahalingam Just one minute, let me just make sure that I have got the figures right, just give me half a minute. See the other income portion is 104 crores, that is, I am talking, all these I have given with reference to US GAAP statement.

Richard Okay.

S Mahalingam Yeah. So 104 crores of which about 78 crores is really the foreign exchange, the remaining 26 crores is the other income.

Richard Okay, okay sir. Thank you.

Moderator Thank you very much, sir. Next question comes from Mr. Sanjay Parekh of Prabhudas Lilladher.

Sanjay Parekh Yeah, my question has been answered. Thanks.

Moderator Thank you very much, sir. At this moment, I would like hand over the floor back to Mr. Arjun Marphatia for final remarks.

Arjun Marphatia Thank you everyone for participating in this analyst call. The presentation and the results are up on the website and you could download them and look at them. It was very interesting to have you all with us today, and we look forward to interacting with you once again in the next quarter Thank you and have a great New Year


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Over to you Pratibha.

Moderator Thank you very much, sir. Ladies and gentlemen, thank you for choosing CyberBazaar’s conferencing service. That concludes this conference call. Thank you for your participation. You may now disconnect your lines. Thank you and have a nice day.

Note: This transcript has been edited to improve readability

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