Infosys Limited American Depositary Shares

Ladies and gentlemen, good day and welcome to the Infosys earnings conference call. As a reminder, all participant 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 Mr. Sandeep Mahindru. Thank you, and over to you, sir.

Thanks, Margaret. Hello, everyone, and welcome to Infosys Earnings Call to discuss Q3 FY22 results. I'm Sandeep from the Investor Relations Team in Bangalore. Let me begin by wishing everyone a very happy New Year. Joining us today on this Earnings Call is CEO and MD, Mr. Salil Pare, CFO, Mr. Malanjan Roy, along with other members of the Senior Management Team. We'll start the call with some remarks on the performance of the company by Sellers and Millengen. After that, we'll open up the call for questions. Please note that anything which we say that 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 and explanation of these risks is available in our filing with the SEC. It can be found on www.sec.gov. I'd now like to turn it over to Sellers.

Hi, Sunday. Good evening and good morning to everyone on the call. Wish you all a happy new year and trust you and your dear ones are well and safe. Thank you for making the time to join us today. I am delighted to share with you that we are an extremely strong quarter with 7% sequential growth and 21.5% year-on-year growth in constant currency terms. Our year-on-year growth was the fastest we have had in 11 years. The growth was broad-based across industries, service lines, and geographies, driven by our differentiated digital and cloud capabilities. A strong broad-based growth in a seasonally weak quarter is a clear testament to the enormous confidence clients have in us to help them accelerate their business transformation. This has been made possible by the relentless commitment from our employees through these challenging times. I'm extremely proud as well as grateful for the extraordinary efforts in delivering success for our clients. Our growth has been accompanied by resilient operating margins at 23.5%. We deliver these margins while keeping in the forefront our focus on our employees with increased compensation and benefits. Benefits. Our digital business grew by 42.6% and is now 58.5% of our overall revenues. Within digital, our cloud work is growing faster, and our cobalt cloud capabilities are resonating tremendously with our clients. Some of the highlights of our results are revenues at $4.25 billion, where the growth 21.5% year-on-year and 7% sequential in constant currency, broad base across all industry service line geographies. All of our segments reported strong double-digit growth. Large deals at 2.5 billion. On-site mix at 23.8% and utilization at 88.5%. Operating margins strong at 23.5%. Free cash flow at 719 million. Attrition increased to 25.5%. Our quarterly annualized attrition was flattish on a sequential basis. We had a net headcount increase of 12,450, attracting leading talent from the market. We've increased our annual college recruiting target to 55,000, and Elanjan will comment more on this. We remain comfortable with our ability to support our clients in their digital transformation journey. Financial services grew at 15.5% in constant currency with broad-based growth across geography and steady daily wins. Various sub-sectors like lending, mortgage, cards, payments are seeing increasing demand and clients are driving cloud transformation initiatives to build resilient and scalable platforms. The retail segment growth was 19.8% in constant currency Across sub-verticals, we see increased client spend on digital transformation, including digital supply chain, omni-channel commerce, and large-scale cost takeout initiatives to improve business resilience. We signed six large deals in this segment during the quarter. The communications segment grew at 22.2% on constant currency, Segment performance continued to improve with ramp up of recently one deal. Client budgets are focused on digital and customer experience programs, increasing networking infrastructure, cloud adoption and security with emphasis on 5G rollout and innovations. Energy, utilities, resources and services vertical continues its steady performance. with 13.6% constant currency growth and five large deal wins. We are seeing gradual improvement across various businesses as consumer spending continues to increase and clients focus on increasing technology transformation around areas like customer experience, cybersecurity, and workload migration to the cloud. Manufacturing segment growth accelerated to 48.4% in constant currency with continued ramp-up of the Daimler deal and steady momentum in new deal wins. We see across the broad improvement within various subsectors and geographies and expect client focus to continue in areas like smart manufacturing, IoT, digital supply chain, and connected products. High tech growth improved during the quarter to 18.9% in constant currency. Clients are seeing renewed momentum in terms of spending on digital transformation programs linked to customer, partner, and employee engagement. Life sciences segment performance also improved further to 29.2% growth. Adoption of digital health, telehealth, and patient access programs are resulting in significant uptake of cloud, IOT, patient-facing applications, patient portals, and next generation CRM work. We had a very strong performance on our income tax program in India. Over 5.8 crore or 58 billion tax returns were filed using the new system by the deadline of December 31, 2021. On the last day, over 46 lakh or 4.6 million tax returns were filed. And during the peak hour, over 5 lakh or 500,000 tax returns were filed. We are proud to be supporting the digital strategy for India and for the government and working on this program for future modules that will be developed. Across digital services in Q3, we have been ranked as leader in 12 digital service-related capabilities from artificial intelligence and automation, cloud services, IoT, engineering, modernization, and big data and analytics. The strong overall performance stems from four years of sustained strategic focus on areas of relevance for our clients in digital and cloud, continuing reskilling of our people, and deep relationships of trust our clients have with us. With the strong momentum in the business and the robust pipeline, we are increasing our annual revenue growth guidance from 16.5% to 17.5%, moving up to 19.5% to 20% in constant currency. Our operating margin guidance remains at 22% to 24%. With that, let me hand it over to Milunjan for his update. Thanks, Kalil. Hello, everyone, and thank you for joining the call. Let me start by wishing everyone a very happy and safe 2022. Q3 was another successive quarter of continued acceleration in revenues at 7% constant currency Q1-Q2 growth and 21.5% constant currency year-on-year growth, the highest year-on-year growth in the last 11 years. Despite the Q3 seasonality, we registered strong broad-based growth across fields and verticals, Our largest geography, North America, grew at 21.4%, while growth in Europe accelerated to an impressive 27.2% year-on-year in constant currency terms. Retail, communication, manufacturing, and life sciences also saw 20% or higher year-on-year growth in constant currency. We won 25 large deals, and large deals being those with over 15 million PCVs, totaling $2.5 billion of PCVs. six in retail, five each in financial services, communication, and energy, utilities, resources, and services, two in manufacturing, and one in high-tech and life sciences. Region-wide, 16 were from the Americas, seven were from Europe, and two from ROW. The share of new deals increased in two, three to 44% within the large deal numbers. Client metrics improved further with 100 million client counts increasing to 37 and increase of eight year-on-year. We added 111 new clients in the last quarter. Operating parameters remained robust. Utilization was 88.5%, slightly lower than the previous quarter, easing some of the supply side pressures. On-site efforts mixed in shop marginally to 23.8%. Q3 margins remained resilient at 23.5%, a marginal drop of 10 basis points versus previous quarter. The major components of the sequential margin movement were as below. 80 basis points impact due to comp hikes and promotions and other employee interventions, 40 basis points impact due to the utilization decline. These were offset by about 20 basis points benefit due to the rupee and other transparency movements, 50 basis points benefit due to cost optimization, and another 40 basis points benefit due to SGA leverage and other one-offs included with ARINs. Q3 EPS grew by 11.2% in dollar terms and 13.1% in rupee terms on a year-on-year basis. Although DSO increased to 71 days due to higher seasonal billing, an increase of five days versus the last quarter, it is still a reduction of two days versus Q3 of prior year. Free cash flow for the quarter was held at $719 million. Free cash flow as a percentage of net profit was 93% for Q3 and 104% for the nine months to date. Yield on cash balances improved to 5.29% compared to 5.13% in Q2. Our balance sheet remained strong and debt-free, consolidated cash and investments at the end of the quarter stood at $4.28 billion after paying over $815 million of interim dividend during the quarter. Return on equity increased further to 30.4%, an increase of 3% over Q3 of the prior year, given by robust performance and consistent capital returns to share buyback and increase dividend payouts. On the employee front, voluntary long-term 12-months attrition increased to 25.5%, and as Bill commented, while LCM attrition continues to increase due to the tail effect, quarterly annualized attrition was flattish compared to Q2. We will continue to invest in all aspects of talent retention, including compensation, promotions, skills incentives, learning, and career progression. We have also simultaneously increased the pace of hiring, talent reskilling, and the usage of subcoms to prevent any impact on client commitment. We have added over 12,450 employees, talented employees on a net basis in the last quarter, which is the highest ever. Our global college graduate hiring program for this fiscal has been increased to over 55,000 versus the previous quarter number of 45,000. In India, over 93% of insurgents have received at least one dose of the vaccine. Over 90% of our employees globally are presently working in remote environments due to the heightened precautions against the new variant. Driven by robust demand environment and our continued market share gains, we are further increasing our revenue guidance by 522 to 19.5 to 20% in constant currency terms from 16.5 to 17.5 earlier, and the margin guidance remains unchanged at 22 to 24%. With that, we can open the call for questions. Thank you very much.

We will now begin the question and answer session. Anyone who wishes to ask a question may press star and 1 on the touchtone telephone. If you wish to remove yourself from the question queue, you may press star and 2. Participants are requested to use handsets while asking a question. Anyone who would like to ask a question, please press star and 1 at this time. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Ankur Rudra from JP Morgan. Please go ahead.

Thank you. Happy New Year to everybody. Excellent numbers for the quarter. Really, you know, very, very strong growth for the third quarter. Could you maybe start with elaborating where the incremental execution came from versus the previous full year forecast? Why was the difference so sharp?

Hi, Ankur. This is Salim. Sorry, you broke up a little bit.

You said where was the incremental growth? Where the incremental surprise came from? The full year guidance has been increased very sharply given the performance of the quarter. Where did the surprise come from?

Oh, yeah. So there, I think what we are seeing in the quarter and then all through the year is the demand environment remains extremely strong and then more and more traction on the digital and the cloud programs. This is where we saw the most impact In the quarter in Q3, we had this really strong growth of 7%, and therefore, the overall guidance jumping up by 3%. In terms of verticals, as I was sharing earlier, it's really broad-based. Of course, we have very strong momentum in manufacturing. That was something that we were looking forward to. There's also good momentum that we're seeing in financial services given It's our largest vertical. And in life sciences that I described before, retail is starting to come back nicely as well. As Niranjan mentioned, Europe again was standout. Those are some of the elements that gave us a good outcome in Q3 and then the support for expanding the margin for the full year. Sorry, the guidance for the full year. Thank you, Salil.

Thank you. The next question is from the line of Moshe Katri from Redbush. Please go ahead.

Okay, thanks. Happy New Year, and congrats on very strong results. One, I know this is, we just recorded Q3, but are you ready to talk a bit about the entire calendar year down the road, 22? What's changed in terms of visibility? Maybe I guess the biggest question is going to be if this is sustainable down the road, and what can you talk about in terms of color to give us that comfort? And then on top of that, maybe you can talk a bit about some of the cushion and margins and what sort of levers that you have in the model, especially as some of the bench continues to benefit from the off-campus recruiting that's been pretty robust. Thanks a lot.

Thanks, Moshe. This is Salil. I'll start off with the first part, and then Lanjan will comment on the margin levers. Of course, as you mentioned, we have guidance through March 31, March 31 of this year. The color for this calendar year, broadly, we see the demand environment remaining strong. The client budgets are looking good. Our overall pipeline is the largest we've had in a very long time. The number of large deals that we were able to close at the London share, 25 large deals, each over $50 million for a total of $2.5 billion. And 44% of these are net new. So all of those things are giving us good confidence for what we see going ahead. Of course, we will have our guidance for our financial year in April. Nilanjan, over to you, please. Yeah, thanks, Salim. Hi, Moshe. So on the margins, like I mentioned earlier, they were quite resilient for the quarter. I think a couple of things I just want to call out, of course, you know, in the armory of, you know, cost levers, you know, whether it's the on-site offshore mix, it's the pyramid, whether it's automation, of course, these are something which we continuously are deploying. Going ahead, of course, up on cost for us has really ramped up, and that's an area we will continue to look ahead. The other thing is, of course, pricing, and it's important to talk about that as the higher cost starts now feeding into our new deals, et cetera. I think that should hopefully have a benefit. And, of course, as digital talent starts getting priced in, we are able to show value to our clients in terms of the digital transformation. Now, again, this is something we have started recently, It will take time to kick in, and we've talked about it in the last quarter as well. But really, that is the focus that we can start getting into both our cost side and also making sure that we are not leaving any free cents and dollars on the table as part of our pricing negotiations.

Thanks, guys. Good luck. Thanks, guys.

Thank you. The next question is from the line of Kumar Rakesh from BNP Paribas. Please go ahead.

Hi. Good evening, everyone, and thank you for taking my question. Congratulations on a great set of numbers. My first question, Falil, was around going into this calendar year. So one of the largest years so far have indicated a very strong growth to continue through this year. So looking at our portfolio of capabilities and offerings, do you see that we are well aligned to meet or beat their growth numbers? Or do you see that we need some intervention to build up our own capability to continue this strong growth going ahead?

Thanks for that question. I think in terms of our capability set, we have a strong portfolio across digital and cloud. Our Cobalt set of capabilities is resonating extremely well with our client. We see the growth in digital really a reflection of the focus we've had on making these choices over the past four years and positioning the portfolio for where the clients are most looking for work. We also see the cloud capability faster going than our digital capability. So yes, we are well positioned to benefit from this. In addition to that, we have a strong set of capabilities in automation, in modernization. We've even seen our cost services which is now stable this quarter in terms of growth. It's not shrinking. So our view is that our set of capabilities and portfolio are reflecting what our client expectation demands are. And we have the ability to meet all of those from the capability perspective. We also have the capacity with the expanded recruiting at the college level and our ongoing recruiting ability to attract talent, which is helping us to deliver on our projects on a regular basis. So we feel quite good about our position as we go ahead into the next year as well.

Thanks for that, Salim.

My next question was around the margin guidance plan, which we have 22 to 24%, and currently we are trending towards the upper end of that. So how should we see that? What is it an indication of? Is it that you want to keep a flexibility with yourself in anticipation of any large deal or any cost hindrance potentially coming from that? Or is there an indication that you're looking at some major cost hindrance which are going to come in coming quarters, and hence you're maintaining this margin guidance?

Yeah, so I think the margin guidance for us is really a comfort range within which we operate. So we really don't, you know, fine-tune that as the year progresses. So this is a band which we are happy to be in. It was 21 to 23, you know, just before COVID. Now we are 22 to 24. So that's more like a, you know, a rail for us rather than anything else. And I think looking ahead, we continue to focus. We know there are cost headwinds potentially in terms of employees, et cetera, could be traveled into the next year. But like I said, we have a very robust cost optimization and, of course, new levers which we continue to deploy. So we remain quite confident on this.

Okay. So more of a reflection of flexibility that you want to teach it yourself. Got it. Thanks a lot for those answers. I'll call back.

Thank you. The next question is from the line of Keith Backman from BMO Capital Markets. Please go ahead.

Yes, thank you. I want to pick up on that line of questioning. If you could just talk about the puts and takes as you see margins over the course of the next three, four, five quarters, really calendar year 22. And I wanted to see if you could address what you think the impact would be for a few things. So for instance, One of the headwinds this quarter was utilization. How should we be thinking about utilization trends during calendar year 22? Number two, could you speak to, I think you said attrition was flat sequentially. How do you think about attrition trends over the course of calendar year 22? Do you think that they can move lower, or is the market such that demand's so strong that attrition will probably remain elevated? And then number three would be, you just brought up travel or any other issues that we should be thinking about that may impact calendar year 22 margins and any other issues you want to bring up. And that's it for me. Thank you.

Yes. So I think that we don't give up the margin guidance for the next year. Now, having said that, looking at the headwinds, which we actually face pretty much every year, you have your compensation hikes, you have clients, coming back for discounts on renewals. And some of that you offset with the cost optimization programs that we run. And I mentioned that a bit earlier in terms of whether it's the pyramid, whether it's subcon, whether it's automation. Blue lever, which we're looking at, is pricing. So that's something which we're continuously working on and remain quite confident. Of course, travel is one thing which is quite unknown at this moment in terms of when does it come back. even if it comes back, does it come back to pre-COVID levels or does it stay at a slightly lower level? So we'll have to watch out for that, really. In terms of attrition, I think it's a larger industry issue. It's not peculiar to us. And fundamentally, I think it's largely stemming from that the volume increase for this industry fundamentally has to come from fresh air, right? Otherwise, it's a zero-sum game in terms of somebody else's attrition is my lateral and my attrition is somebody else's lateral. So As long as the pressure intake starts increasing, because first they have to come into training, then they go into production after three or four months, and that will take time for this industry to start absorbing. And I think that's something which will help the attrition in the medium term. And like I said, we have seen attrition flattening sequentially on a quarterly annualized basis. And looking ahead, we are seeing some positive signs, but it's too early to say whether it will dramatically come down. But like I said, as special feed into the system, we should see the overall environment in terms of attrition in the market really working.

Okay. Okay. But any comments specifically on is utilization, you think, a help or a hurt or neutral just broadly? And as part of that, I noticed you're offshore for 10% of labor increased year over year, is that also a trend that you think continues given the dynamics in front of you? And I will see the floor thereafter.

Sure. So in terms of utilization, of course, this is higher than what we would normally like to be. You know, we'd rather operate at, you know, sort of an 85, 86%. But having said that, even if we bring this down in the future, in terms of cost, it's largely offshoring because all the effort is, you know, 75% of the effort is sitting there. So utilization doesn't directly link to the margin because of the way the offshore costs operate. So that's one factor. I think there was a second question on on-site offshore. I think in the long run, if you see, I think COVID, while it's had this huge impact on demand, I think the entire ability for this supply side to be delivered in a remote environment really, for me, is a shine out because really that has opened up the eyes of many of our clients that really every sort of work doesn't have to be done near shore. It can be done, you know, I mean, on site. It can be done in near shore locations. It can be done offshore. And I think the beauty of that is secularly we believe this will help the industry in much more larger offshoring at an overall level. And, of course, part of that benefit will be shifting more work to offshore locations. So I think this is a good sign. I think there can be short-term impacts like we've seen this quarter, you know, 10, 20 basis points here and there. But the secular trend, we think, will continue to see that the, you know, the large labor markets available in there will open up a lot more offshore opportunities.

Terrific. Many thanks. Congratulations. Thank you.

The next question is from the line of Divya Nagarajan from UBS. Please go ahead.

Thanks for taking my question, and congratulations on a very impressive quarter. My question is on pricing. We've seen now several quarters of strong demand, and it looks like we are looking at another year, looking at the run rate that they're exiting the calendar with of pretty strong demand as well. And we just discussed supply in the last few comments that we made. How do you see pricing really trend in the next 12, 18 months? Is there an opportunity for this to go up on the like-to-like basis?

Hi, Diga. Thanks for that question. This is Salil. I think on pricing first, we've seen some level of stability in what we saw in the specific deal that we closed in Q3 versus Q2. On the longer term, the language shared in the past, we've put in place a very focused effort on communicating the value that we are helping create with our clients through the digital programs. We are also seeing, as we shared, wage increases. We've done three of them in the last 12 months. And broadly, we are seeing large enterprises for the first time in a very long time I see inflation in their daily environment. And so I'm more open to having these discussions. With these factors in mind, we feel we will see some more value that we can bring in through communicating and demonstrating our digital impact that we're creating through those programs. And that while it will not be immediate, but over the next several quarters, in my view, will help us to build out more resilience in the margin profile.

You earlier enumerated your skills and capabilities, but if you were to kind of think of any future investment that you were going to make, in which direction would you kind of

So today, the biggest drive within our clients is really cloud. Our COBOL capabilities are very strong and we are constantly announcing it. Whether we look at the public cloud partnerships, we have also a very strong ecosystem of private cloud partnerships. We have a good ecosystem with the SaaS players, extremely strong cloud-native, cloud-first development. Those will be really the first area where we are already leading, but we will continue to grow. Then you have the areas which focus on cybersecurity, which focus on data and analytics, which focus on IoT. Those are the areas which we are seeing this incredible traction with our clients. Very strong industry modernization and automation, leveraging artificial intelligence and machine learning. We continue to build that out. Our approach is going to be to drive all of these through our current margin. So that's what we drive through as opposed to any new plays for industry.

That's enough. One last bookkeeping question. Your other segment had a big swing this quarter. Is there anything particular that we should be looking at here? Any one-off, or is it something, and if not, what drove that?

Yeah, so I'll take that. So that's coming from India. We have some functionality with some of our clients towards the quarter, and that you'll see also in the geography sector of India.

Got it. Thank you, and wish you all the best for 2022.

Thank you. The next question is from the line of Ashwin Mehta from Ambit Capital. Please go ahead.

Thanks for the opportunity and congrats. I had one question on the third party bought out items for service delivery. That item seems to have gone up by almost $71 million this quarter, almost 1.8% of revenues. So just want to check what does this pertain to? And is it possibly related to the data center takeovers that we would have done in some of our last years?

Can I take that? Yeah, please go ahead. Yeah, so I think as we're looking at many digital end-to-end transformations, whether it's, you know, IT as a service, full-stack transformations, these involve infrastructure, tasks, you know, data transformation, So it's a full-stack transformation, and in many cases, these involve infrastructure and software as well. So these are bundle deals, which are end-to-end transformations, and we think they're very, very important as well going ahead when we look at these digital transformations. So I think as part of our overall deal profiles, we continue to see these deals giving up increased visibility into the organization IT infrastructure and allowing us future deals ahead once we are pretty much front and center in the IT landscape. So that's what these are.

Okay, okay, fair enough. And just one last question in terms of our margin outlook over the near term. Do you think with the attrition starting to, on a quarterly annualized basis, normalizing, the interventions that are required possibly go down in the future? in the near term so that we can possibly make a higher exit at the end of this year so that we can maintain margins in the next year as well?

Yeah, so like I said, we haven't seen a decline as yet. These are flattening and this probably will start inching off. So we will continue to do what it takes to invest behind our employees because we know this is more than the comfort rate which we'd be happy in. So I think it's premature to say when this will really come off. But as of now, we are focused on doing all these interventions. This quarter, like we mentioned, 80 basis points of our margin was behind these interventions.

Okay. Thanks a lot. Congrats again and all the best.

Thank you. The next question is from the line of Sandeep Agarwal from Edelweiss. Please go ahead.

Yeah, hi. Good evening to the management team. Happy New Year and Thanks for taking my question. First of all, congratulations on a very good set of number. So, Sunil, I have a very simple question. You see now, you know, our core, which is 41-42% of the business is stabilizing on a year-over-year basis. It is probably a little growth is there, but digital continues to be at 40% plus growth. So, if this trend continues next year, maybe, you know, our core will become 32-33% of the overall pie. So what is your sense from a long-term perspective, where do you see this core stabilizing or you think it would be very unfair to, you know, see them separately and in next two, three years you think everything will converge together. So any idea, anything which you can share on that point would be very helpful.

Yeah, so thanks for that question, Mr. Salim. As you pointed out, the digital growth is very strong at over 40%, at 42%, and that shows the resilience, the demand profile, and a portfolio which is overlapping. The key for the core, instead of looking at the percentage of the business, the key for us is really that core is now stable with a very small growth. so we didn't see the decline that we had for some quarters. And this makes it extremely strong for us. We have probably the best capability in automation and modernization across the industry. And with this, while everyone else's core is still shrinking, ours will be stable or possibly even have a small uptick and that means we'll be the most competitive in this area. So I'm really looking at this as a very positive step. We, of course, have to maintain this, and we have to keep building out our automation capabilities. So if we succeed in that, I think that has a very good outlook for us in the quarters ahead.

Yes, thanks. That's very helpful, and best of luck for the current quarter. Thank you.

Thank you. The next question is from the line of Nitin Padmanabhan from Investec. Please go ahead.

Yeah. Hi, good evening, everyone. And thanks for the opportunity. I had two questions. The first is on the employee side of things. I think if you look at the employee cost under cost of revenue, it's consistently been as a percentage of revenue is actually below what it used to be pre-COVID times. and a lot of the growth has actually been added on the subcon side of things and even if you look at the numbers it looks like most of the additions are all pressures so keeping this dynamic in mind just wanted to understand as we go forward and maybe attrition sort of normalizes how do you see this subcon sort of evolving from an operational perspective do you think you will have to hire these subcontractors directly onto your roles or And would that involve slightly higher costs? How should one think of this dynamic overall was the first question. The second question was around the digital proportion of the business has meaningfully gone up. And if you look into the next year, I'm sure it will be even higher. From that perspective, does it mean that our ability to sort of garner price increases will be far higher going into next year than what we see today? Thank you.

So I'll take the first question on subcon. Really, and as Salil said, the demand environment is so strong that we don't want to leave anything on the table. And therefore, whether it's through subcon, whether it's through lateral or freshers, we will first intend to fulfill that demand. And, of course, over a period of time, we will optimize that entire structure. So whether it is programmed to rehire some of the subcons, some of them we will, of course, and they will get new lateral hires, and we will promote from within. So that dynamic will play itself out over the next year. But at the moment, it's critical that we don't leave any demand on the table. And, of course, this will remain an optimization lever for us. We were one of the lowest in the industry at about 6.9 pre-COVID, and we are, I think, above 11% now. But this is a lever we will have over the medium term to optimize.

Khalid?

On the pricing, as the digital work will increase, what we have been putting in place which is demonstrating to our clients the value creation through digital will give us a larger opportunity for that because the revenue will be larger. So I think your assumption is absolutely valid. We will have an additional ability to do that as long as we execute on that value.

Perfect. Thanks for that. Just a clarification on the first answer. So on the first one, considering pressure additions are so strong this year and subcon is so strong, does it mean that next year our ability to add as many freshers will be a little more inhibited in the sense that we'll need to focus a little more on laterals next year. Is that a way to think about it?

No, I don't think so. I think we will continue to have a very robust special program. It's always been there. We have a strong internal rotation program, so people will, based on the skills they're taking through our reskilling program, we will move them to new projects, promotions, etc. In that sense, we think it will be a combination of both laterals and freshers as well. I don't think we see any change in that.

Fair enough. Thank you so much and all the very best.

Thank you. The next question is from the line of Sandeep Shah from Equalis Securities. Please go ahead.

Yeah. Thanks for the opportunity and congratulations on a solid execution both on revenue and margins. The first question is CY21 or FY22 had a benefit of mega deal wins, especially from Vanguard as well as Daimler, as well as some amount of pent-up demand for you as well as the industry. So the question is entering into next year, do you believe that these elements one has to take care in terms of tapering of any growth in the next year or you believe the digital adoption journey, cloud adoption journey has a low penetration? which does not make us upset in looking in the next year in terms of the growth momentum either way.

So thanks for the question. First, the guidance increase, as I'm sure you've seen, is for the year-ending March of this year. We are not yet commenting in terms of quantitative guidance for next year. What is clear, nonetheless, is the demand environment remains strong. And our portfolio of services and capabilities, especially on cloud and digital, are resonating well with clients. So we see a good pipeline for that. Our large deals in this quarter are also very strong. We continue to see a good large deal pipeline. We've seen a steady expansion of our clients over 50, 100, 200 million and so on. And so we see that expansion within clients is working very well as well. And also our new client wins, new accounts are working well. So overall, we have the various elements of continuing this demand environment strongly. But we don't have a specific guidance yet for April 1-22, years starting in April 1-22.

Fair enough. And this last two bookkeeping question, the way I look at it is Daimler deal has two legs to ramp up, one being the re-badging and employee-related ramp up and second being the pass-through data center-related ramp up. Is it fair to say that most of these two legs ramp up is largely behind or may continue in Q4 as well as 1Q of next financial year? And second, in terms of F522 wage hike, is it largely over or something is due in the fourth quarter as well?

On the Daimler, we don't have any more specific. I can understand what you're looking for, but we have not gone into that specific now with Q3 and Q4. The overall guidance is increase of the revenue covers all of that including Bangla and many other clients and especially with Q4 in the seasonality of that quarter. In terms of salary and compensation increases, we have done three of them for this year. There is nothing specific that is planned for Q4. We will start to look at what we will do in the next financial year that will come up. There's nothing specific in the plan in Q4.

Thanks and all the best.

Thank you. The next question is from the line of Manik Taneja from JM Financial. Please go ahead.

I thank you for the opportunity. Just wanted to understand, we've seen a significant increase in offshore mix of revenues over the last 18 months, and this quarter saw slight aberrations. What caused that and how do you see this metric going forward? Thank you.

So there, this is Sanil. The mix has changed over the last 18 months with a lot of the remote working that was put in place, work from home, allowing the work to be delivered from a different location with tremendous ease and efficiency. What we saw in the last quarter was a little bit things that opened up in terms of travel. It also being extremely optimal in what we had done in the previous quarters. And this is something that has given us more ability to drive connects with clients and growth We see in the medium term a tremendous opportunity for an efficient mix because clients have also seen that once the work is done remotely or work from home, that more opportunity exists for that work to be done from a location further away. So in general, as a medium term trend, we see that as a positive trend. We will have, of course, each quarter some movements up and down, but as a longer-term trend, we see that as a positive.

Thank you, Sunil. I had one more additional question. Just wanted to get your thoughts around what we are seeing from a revenue productivity metric standpoint or revenue per person standpoint. And while there is significant amount of offshore shift over the last 18 months, we have seen utilization go up. This So what's causing the increase in revenue productivity despite the significant offshore shift that we've seen over the last 18 months? If you could talk about some of the factors that are driving that. Thank you.

On the revenue productivity, there are a number of things that are going on. We see some of the mix of our work, which is also changing more to digital. and there we see much more revenue productivity coming in. As you pointed out, utilization has also gone up. We're also seeing some of our work, for example, on the consulting side, the data and analytics side is growing very well, and that's giving us some level of boost. There is also some impact which we've not quantified externally, on leveraging some amount of automation and platforms that gives us this benefit. So there are several factors which then work despite the onshore-offshore mix changing. Sure. Thank you and all the best in the future.

Thank you. The next question is from the line of Ruchi Purte from B.O.B. Capital Markets. Please go ahead. We lost our line, so we'll move to the next question, which is from the line of Rahul Jain from Dollard Capital. Please go ahead.

Yeah, hi. Thanks for the opportunity.

I have a, and congratulations on strong numbers. I have a question regarding the core revenue, which has seen a stabilization in this year. I think you've addressed this point partly, but wanted to understand what could be the prospect for this side of the revenue in the coming years. especially when we talk about so much shift to digitalization.

So what should be the prospect out here? This is the question number one.

So there, we have no individual guidance for digital or for the core in that sense, which is even for Q4 or for the next financial year. But structurally, what is clear is we have been successful in driving automation, and modernization well to make sure that we are probably the most competitive, large player in the market working in the large enterprise. And we've certainly encountered this kind of competition in the last four months. And we continue to execute an ongoing activity Automation is what might change for us. If we can continue executing that, my vision is we will save the cost of the game and that will have its own benefits in the medium term. Right, right. I appreciate the color. One more thing on the taxation part. Our tax rate steadily has been upwards of 27% on an average. This looks a little higher given the kind of country where most of our earnings belongs to. So any flavor you can share in terms of what should be the ideal tax rate on a sustainable basis and in near term? So I think our tax rate has always overgrown this 27-28% range. And I don't think you'll see much movement going against this because any case, as you know, the India-only rate, because it is India-only plus countries that have India, that's a 25% India-only. So I think in the long run, you will be around this range itself. So which region profitability or tax rate are much higher than the 25% rate also?

for taking this number higher than the average for India itself.

Yeah, so we can't give that individually, but there are some jurisdictions and also in some jurisdictions where those tax cannot be set off here as well. So it's a combination of both.

Okay, okay.

So if we are not able to set that off, that results in double taxation and true jurisdiction.

That is also a reason. Okay, got it. Thank you so much.

Thank you. The next question is from the line of James Friedman from Susquehanna. Please go ahead.

Hi. Let me echo the congratulations. It's Jamie at Susquehanna. I just had one simple question, perhaps for Nilanjan. Can you remind us what the capital allocation strategy is? I remember you had put it out at the analyst day in November 2020, but where is share of purchase in the prioritization? Thank you.

Yeah, so what we had announced in FY20 basically was that we had taken our capital allocation to 85%. It was 70%. And we said that we will pay this out over a period of five years through a combination of progressive growth-oriented dividend policy plus either share buybacks or one of the special dividends. And in the first two years, as we announced, we have actually paid back 83% through higher increased normal dividends and also through this share buyback which we announced last year. We've already paid back 83% and we remain quite committed to our overall 85% five-year number.

Got it. Thank you so much.

Thank you. The next question is from the line of Vimal Gohil from Union AMC. Please go ahead.

Yeah, thank you for the opportunity and congratulations on a great quarter. My question is on your employee cost, which partially has been addressed. But how should we think about the core employee cost growth, which comes under the cost of revenue, which has been around 4% CQTR over Q1 of FY21 versus a 6% revenue growth. And this has been in light of a very sharp increase in attrition And of course, other supply challenges and etc. So if you could just highlight, I mean, how has the company sort of, are our wage hikes in line with the industry or have they been much, much higher than the industry? How should we think about this historically? And if you could give some kind of an outlook there as well. Thanks.

Yeah, so you have to see both employee cost and subcon together. So the cost of people is a combination of both. You can't see one in isolation. That's number one. Number two, just from an overall cost perspective, we, of course, are very focused on attrition and being competitive in the markets, as well as being an employer of choice for many of our employees going ahead. So we look at interventions on the compensation side Like Salil said, in Q1, Q2, we did across – in January, we did across the board. In July, we've done across the board. In Q3 as well, we have done very segmented and targeted on talent. And we continue doing that into Q4, et cetera, and looking at, you know, high points of attrition and doing it much more tactically to see where we are seeing, you know, demand being highest in the market for those skills. and target those employees really. So I think it is very nuanced, and like I said, the horses for crosses, and we will continue doing that.

Right. And how should we think about, so basically if we were to look at your guidance, versus your implied, your guidance implies a zero to 2% sort of revenue growth in Q4. Considering the fact that there was some furloughs in Q3, your revenue growth could be higher than what you reported in Q3. So is your guidance conservative at this point in time? How should we think about that?

In terms of the guidance, it's a very strong guidance which is 19.5 to 20. There is no further color in saying whether it's conservative, aggressive, or sort of stable. We see a very good demand outlook. We see good large deals and good portfolio. But the guidance is, I think, a very big move up from where we were in the last quarter.

Thank you so much and all the very best.

Thank you. Ladies and gentlemen, that was the last question for today. I now hand the conference over to the management for closing comments.

Thank you, everyone. This is Sabine. Just to close from our side, first, thank you all for making the time. We feel extremely good about the quarter 7% growth, Q&Q 21% year-on-year growth. Very strong digital, 42%. Very good on large fees, 2.5 billion. So overall, really excellent market demand. And we're seeing market share gains, which is a very good sign for us. Primarily, which are coming from a well-positioned portfolio and a good execution from all of our teams. Our revenue guidance, of course, has gone up 19.5 to 20%. Our operating margin remains at a good level at 23.5. And we have very good, strong trust and confidence of our clients. Overall, a strong outlook and positive about what we see in the future for our digital and cloud transformation programs. So with that, thank you all. I wish you a happy new year and look forward to catching up in April.

Thanks for the closing comments and thanks everyone for joining us on this call. Look forward to talking to you again during the year. Thank you.

Thank you very much, members of the management. Ladies and gentlemen, on behalf of Infosys, that concludes this conference call. Thank you for joining us and you may now disconnect your lines.