Infosys Limited American Depositary Shares

Hey and welcome to Infosys earnings conference call. As a reminder, all virus front lines will be in the listen only mode and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mrs. Sandeep Mahindru. Thank you and over to you, sir.

Thanks, Margaret. Hello, everyone, and welcome to Infosys earnings call to discuss Q4 and FI21 earnings release. I'm Sandeep from the IR team in Bangalore. Joining us today on this call is CEO and MD, Mr. Salil Parekh, CEO, Mr. Praveen Rao, CEO for Mr. Nilanjan Roy, along with other members of the senior management team. We'll start the call with some color on the performance of the company by Salil, Praveen, and Nilanjan. before you open up the call for Q&A. Please note that anything which we say which refers to our outlook for the future is a forward-looking statement, which must be read in conjunction with the risks that the company faces. A full statement explanation of these risks is available in our filings with the SEC, which can be found on www.sec.gov. I'd now like to pass it on to Salil.

Thanks, Sandeep. Good evening and good morning to everyone on the call. Thank you for joining us for this session. I trust you and your families are well and safe. We've had an exceptional year and an exceptional quarter. Our year-on-year constant currency growth was at 9.6% for Q4. Our volume growth for Q4 was at 4.6% quarter-on-quarter, reflecting accelerating momentum in the business. Our revenue growth was at 2% in constant currency quarter-on-quarter. with one point higher offshore effort mix, lower contribution from third-party deals, and a typical week carrying on in my opening statement. For the full year, our growth in constant currency was at 5%. Our digital business grew by 34% year-on-year in Q4, representing 51.5% of the overall business. Our large deal wins were at $14 billion for the full year, a growth of 57% from the previous year, and were $2.1 billion for Q4. Our net new percentage for FY21 was at 66%, helping us set up for strong growth in financial year 22. With these exceptional results, we had industry-leading growth in financial year 21, We continue to gain market share. I'm grateful for the trust our clients have in Infosys as we partner with them for the digital transformation programs. Our growth was broad-based with several of our industry segments showing strong growth here and here, and stems from our market-leading capabilities in digital, cloud, cybersecurity, and in data and analytics. This is what allows us to be the most critical partner for our clients' digital transformation programs. Our operating margins for FY21 improved by 320 basis points to reach 24.5% for the full year. It was also at 24.5% for Q4. Our free cash flow was close to $3 billion, 39% larger than in the previous financial year. Our cash and balance sheet was at $5.3 billion at the end of the financial year. I'm extremely proud of our employees and their enormous commitment, especially during this past year, but in general across the years. We will launch a second compensation review in a phased manner starting in July 2021. Our employees and our entire leadership team work cohesively and for the benefit of our clients, This approach of one Infosys has really enabled us and enabled the company to have a successful financial year in financial year 21. Looking ahead, we see continued strong demand from our clients, especially in digital, cloud, and in data. And we have a strong foundation of our large deal success in financial year 21. Hence, our constant currency full year revenue guidance for financial year 22 is growth between 12% and 14%. For operating margin, our superior margin performance in financial year 21 was in part because of improvement in our strategic cost levers and in part because of cost avoidance and deferment. With normalcy returning gradually across the world, we anticipate some of the costs to return. With that, our guidance for operating margin for financial year 22 is between 22% and 24%. In keeping with our capital allocation policy, we propose to increase the total dividend per share by 54% over the previous financial year for a full year dividend at Rs. In addition, we propose a buyback of equity shares up to an amount of Rs. 9,200 crores which is approximately $1.2 billion through the open market method. With that, let me pause and thank you, and let me pass it on to Praveen for his update. Praveen, over to you. Thank you, Salil. Hello, everyone. Hope you and your family are doing good, safe and healthy. Growth accelerated further in quarter four with year-on-year constant currency growth of 9.6%. Growth momentum was strong across various business segments, with three of them, financial services, high-tech, and life sciences, reporting double-digit growth. Volume growth was strong, despite quarter four traditionally being a soft quarter. Most of the critical operating parameters continued to improve during the quarter. Utilization increased further to a new all-time high of 87.7%. Onshore effort mix reduced further to a new low of 24.3%. Subcom costs increased further by 50 bps due to growth acceleration and high utilization. We won 23 large bills in Q4, totaling $2.1 billion. Six each were in financial services and retail, three in life sciences, and two deals each in communications, manufacturing, energy utility resources and services, and high-tech segments. Region-wise, 16 were from America, six were from Europe, and one from the rest of the world. The share of new deals in quarter four was a healthy 52%. For FY21, The large deal ECV crossed 14 billion. Share of new deals within this 14 billion cost 9.4 billion, higher than TCV of all large deals signed in FY20. Plant metrics remained robust, with 100 million plant counts increasing to 32, an increase of 4 year on year. We added 130 new plants in the last quarter. Net employee addition during the quarter was over 10,300 and share of women employees increased to 38.6%. Voluntary attrition for IT services calculated on annualized basis increased to 15.2% as demands for talent increased. We have implemented salary increase effective January 1, 2021 and as mentioned by Salil already, The next cycle will kick off from July 2021 in a phased manner with the start date of July 2021 for the majority of our employees. Moving to business segments, financial services continue to record industry-leading performance with growth momentum improving further. In the last few quarters, we have seen strong demand uptick in areas that banks have had to significantly invest in post-COVID such as customer experience transformation, front-to-back digitization, multi-gauge transformation, call center technology and operations, lending services, as well as higher investments in large end-to-end digital transformation programs. In FY21, we have won 25 large deals from this segment, including six in quarter four, which provides a solid base for growth in the coming year. Sequential improvement continued in the retail segment along with improvement in deal activity. While many of the sub-segments in retail remain challenged, we see opportunities in areas like intra and apps modernization, adoption of microservices architecture, cloud strategy and workload migration, and cyber security. Given the pace of recovery since second quarter of FY21 and new large deal wins in second half of FY21, we remain optimistic about this sector as we look ahead into FY22. Communication segment weakened marginally in the last quarter. However, with the deal wins, we expect the performance to improve in the coming quarter. Digital-led transformation, consolidation, 5G edge computing, cybersecurity, next-gen technologies like AI, IoT will be the disrupting themes in CMT. Energy utility resources and services vertical remains soft for most of FY21 due to constrained spend in the oil and gas, travel and hospitality, and resources sector. However, we see signs of stability returning to various sub-segments given some of the recent large deal wins and quality new account openings. We see opportunities in the areas of cost takeout, lender consolidation, cloud-led transformation, and asset monetization. smart grid initiatives, and uberization of services. They are a strong deal pipeline despite pressure on discretionary budgets in some of the impacted customer industries. Manufacturing was one of the most adversely impacted sectors because of COVID. While automotive and industrial segments are emerging strongly as the economies open up, aerospace sector will take few quarters to get back to previous capacity. We have seen significant traction and momentum as evidenced by the new wins throughout the year, including the largest ever deal in Infosys history signed in Q3. We are very positive on the sector on the back of strong relationship built during the pandemic and continued net new wins throughout the year. Even as the effects of pandemic continue and as companies emerge from crisis, our pipeline in the sector is strong and we are confident of gaining market share. Infosys BPM has grown at double-digit rates, with clients investing significantly in digital transformation to enhance efficiency, effectiveness, and experience in business processes within their enterprise and global shared services environment. A lot of this growth is given through combined IT plus BPM deals, captive callouts, vendor consolidation, and managed services. The digital portfolio contribution to overall revenue increased further to 51.5% in Q4, with robust growth of 34.4% year-on-year in constant currency terms. In FY21, digital revenues have grown by 29.4% in constant currency terms. We continue to expand these digital capabilities, especially with Infosys Cobalt Cloud Portfolio. In the last quarter, we announced a partnership with LivePerson for conversational AI to help brands manage AI-powered conversation with consumers and employees. We also launched Infosys Cortex AI-first, cloud-first customer engagement platform and applied AI cloud built on NVIDIA DGX A100 systems. We completed a definitive agreement to purchase assets and onboard employees of Carter Digital one of Australia's leading and award-winning experience design agencies. In quarter four, InfoVis was ranked as leader in nine services-related capabilities across digital Pentagon areas by industry analysts. With that, I hand over to Neelanjan. Thanks, Praveen. Good evening, good morning, and thank you, everyone, for joining the call. We entered FY21 with three focus areas, operational agility, liquidity, and cash management, and cost takeouts. We maintained razor-sharp focus on each of these areas throughout the year, and our FY21 results are a testimony to that. We closed the year with 5% revenue growth in constant currency terms and 24.5% operating margins. This was backed by largest-ever deal closures of $14.1 billion, a growth of 57% year-on-year, 29.4% growth in digital revenues, improved operating parameters with both utilization and offshore effort mixed, at all-time highs of 84.7 and 74.2, respectively. Operating margins for FI21 increased by 3.2% over FI20. As mentioned earlier, this was due to a combination of factors comprising of strategic cost levers, cost deferrals, and other cost benefits, some of which are expected to normalize ahead. Record free cash flows for FI21 of approximately $3 billion, an increase of 38% over FI20, were driven by strong focus on DSO and CAPEX optimization. DSO for the year was 71 days. We had a specific focus on CAPEX reduction during the year. Although there was some increased technology-related CAPEX, largely to support remote working, we continued to optimize on CAPEX related to physical infrastructure creation. CAPEX for FY21 reduced to $285 million compared to $465 million last year, despite the higher technology-enabled spend. Consequently, FTS conversion as a percentage of net profits was 113.4% for FI21 compared to 91.8% in FI20. FI21 ETF grew by 12.5% in dollar terms and 17% in INR on a year-on-year basis, driven by strong top line and margin expansion. Return on equity for FI21 improved by 1.6% to 27.4% over the last year. Coming to quarter four performance, we saw another quarter of revenue acceleration with growth accelerating to 9.6% year-on-year in constant currency terms. After absorbing the effects of salary increase across job levels, operating margins in Q4 stood at 24.5% versus 21.1% in Q4 FY20, an expansion of 3.4%. This compares to operating margins of 25.4% in quarter three. The sequential margin movement is primarily due to a 1.3% impact due to the compensation increases rolled out effective Jan 1st, a 0.3% impact due to increase in G&A costs, partially offset by lower leave costs, improved operating parameters and cost optimization, and other one-offs. Our balance sheet continues to remain strong, liquid and debt-free. Cash and cash equivalents increase further to $5.28 billion at the end of FY21. Yield on cash balances continued to decline. The yield was approximately 5.1% in quarter four compared to 6% in quarter three. Quarter four also marked the 23rd consecutive quarter of positive forex income despite significant currency volatility across the globe. As you know, we have been increasingly emphasizing on total shareholder returns and increasingly aligning our executive compensation to TSR creation. I'm happy to share that TSR for our investors in FI21 was in the top quartile of our peer group and ahead of market indices. In line with our capital allocation policy of returning 85% of FCF over five years, the board has recommended the following. A final dividend of Rs. 15 per share, which will result in a total dividend of Rs. 27 per share for FI21 versus Rs. 17.5 per share for FI20. This is a 54% increase in dividend per share for the year. Buyback of equity shares of up to Rs. 9,200 crores through open market route post-approval of shareholders in the AGM. Final dividend along with share buyback would lead to cash payouts of Rs. 15,600 crores, excluding taxes, in the coming months. Another step to demonstrate our commitment of consistent TSR generation for our investors. This would mean total payouts of approximately 83% of our FCF for FY20 and 21 through dividends and buybacks compared to the 85% over five years that we announced during the rollout of our capital allocation policy in July 2019. Coming to guidance, with a strong exit momentum and the ramp-up of landmark large deal wins, we have built a solid base for double-digit growth in FI22. We expect FI22 revenues to grow by 12 to 14% in constant currency. Operating margin guidance for FI22 is 22 to 24%. after considering the impact of compensation reviews, transition impact of large deals, and partial rebound of costs like travel, et cetera. With that, we can open up the call for questions.