Infosys Limited American Depositary Shares

Ladies and gentlemen, good day and welcome to Infosys Limited Earnings Conference Call. As a reminder, all participant lines will be in the listen-only mode. 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 and then zero on your touchtone telephone. Please note that this conference is being recorded. I now hand the conference over to Mr. Sandeep Mahindra. Thank you, and over to you, sir.

Thanks, Simba. Hello, everyone, and welcome to Mr. Dhoni's call to discuss U-123 financial results with Sandeep and the IRB in Bangalore. Joining us today on this call is UNM Minister Sharan Parekh, CFO Mr. Nilanjan Roy, and other members of the senior management team. We'll commence the call with some remarks on the performance of the company by Sharan and Nilanjan, subsequent to which we'll open up the call for questions. Please note that anything which we say that affects our outlook for the future is a forward-looking statement. that must be read in conjunction with the risks that the company faces. A full statement and explanation of these risks is available in our findings with SEC, which can be found on www.sec.gov. I'd now like to pass on the call to Salim.

Thanks, Sandeep. Good morning and good evening to everyone on the call. Thank you all for taking the time to join us. We've had an excellent start to the financial year with 5.5% sequential growth. and 21.4% year-on-year growth in constant currency terms. We continue to gain market share with our COBOL cloud capability and our differentiated digital value proposition, driving a significant pipeline of opportunities for us. For example, a premier online retailer in the U.S., leveraged Infosys COBOL, to embark on a cloud-driven transformation journey to enhance the customer experience and improve the security posture. Another example is a European manufacturer who is reimagining their digital workplace and best-of-breed network security with IT infrastructure powered by Infosys Cobalt. There are examples like this all across the spectrum in different sectors. that are driving Infosys Cobalt into the market. Clients continue to place an immense amount of trust and confidence in Infosys to help accelerate their digital transformation agenda, both on efficiency and the growth dimension of their business. The strong growth we have seen in the quarter lays a robust foundation for the year. Growth continues to remain broad-based across the segments, service lines, and geographies. Each of our business segments grew in double digits, with several of them growing at 25% or higher. In terms of geography, the U.S. geography grew at 18.4%, and Europe grew at 33.2%. This indicates a healthy demand environment and is a reflection of how our industry-leading digital capabilities are relevant for our clients. Our digital revenues were 61% of the total and grew at 37.5% in the quarter in constant currency terms. Within digital, our cloud work continues to grow faster, with our Cobalt cloud capabilities seeing significant traction with our clients. Our overall pipeline remains strong. We do see pockets of weakness, for example, the area of mortgages in financial services, We keep a close watch on the evolving macro environment in terms of the changes to the pipeline. Within our pipeline, we also have focus, in addition to the growth areas in digital and cloud, to the cost areas through automation and AI. Our operating margins were at 20%. We have completed the majority of our compensation review for this year. Nilanjan will also provide more details on the overall margin update. Some other highlights of our results are we signed 19 deals with a large deal value of $1.69 billion. This comprises of 50% net new work. Our on-site mix was at 24.3%. As we build capacity for the future, our utilization was at healthy levels of 84.7%. Our free cash flow was strong at $656 million. Our quarterly attrition declined. Historically, Q1 attrition increases at three to four points sequentially on a quarterly annualized basis. However, our attrition declined by one point on a sequential basis, reflecting the impact of various initiatives we have put in place. We are a net headcount increase of over 21,000 employees, attracting leading talent from the market. This is a reflection of our enhanced recruitment capabilities, solid brand, and deeper penetration into various talent markets. Our COBOL cloud capability continues to be market-leading. We have 360 technology and domain solutions. Five of our assets have over 50 clients each. We have 150 industry-focused solutions, 20 Infosys living labs, 50 experimentation playgrounds, and 60,000 knowledge assets. Our one Infosys approach is serving us well to bring the best of Infosys in service to our clients' needs. Earlier this month, we announced the acquisition of Base Life Sciences, a Denmark-based technology and consulting firm in the life science industry. Base brings to Infosys domain expertise in medical, digital marketing, clinical, and regulatory areas. With a strong growth in Q1 and a current outlook on demand opportunity and pipeline, We increase our revenue growth guidance, which was at 13% to 15%, now to 14% to 16% for the full year. We keep our margin guidance at 21% to 23%. With the increased cost environment, we will be at the lower end of this margin guidance. Thank you. And with that, let me hand it over to Nilanjan for his update. Thanks, Talal. Good morning, everyone, and thank you for joining this call on an early Monday morning. We had a strong start to fiscal 23 with a robust year-on-year growth of 21.4% in constant currency. All our business segments and major NGOs recorded double-digit growth with manufacturing, communications, and shore, along with Europe region, recording 25%-plus growth. Sequentially, revenue growth was 5.5%, which was led by a healthy volume growth and some RTP benefits. Digital revenues now constitute 61% of total and grew by 37.5% in constant currency. Client metrics were strong, with increase in client counts across revenue buckets compared to the previous year. Number of $50 million clients increased by 10 to 69, creating the next potential centurion. Number of $100 million clients increased by 4 to 38, and the number of $200 million clients has grown by six in the last one year. This reflects our ability to deepen mining across our large clients. We had another quarter of strong employee additions of over 21,000 to cater to the growth opportunities ahead. The fresher addition was particularly strong, which resulted in drops in utilization to 84.7%. On-site effort mix increased up to 24.3%. Voluntary LCA nutrition increased marginally to 28.4%. Quarterly annualized attrition declined by another 1% from Q4 levels, despite Q1 usually seeing an uptick due to seasonality. As announced earlier, we have given competitive salary increases for the majority of our employees from April. Given the supply tightness and high prevailing inflation, salary increases across all GOs this year are higher than historical levels. The increases vary based on job levels and performance of employees with top performers getting double-digit hikes. Salary hikes for other employees is doubling than effective first July. Q1 margins stood at 20%, a drop of 150 basis points versus previous quarter. The major components of the sequential margin movements were as below. Headwinds of 1.6% due to salary increases, 0.4% due to drop in utilization as we create capacity for future, 0.3% due to increases in third party and other costs. These were offset by tailwinds of 0.5% due to increase in RTP from higher working days a reversal of a client's contractual provision in our FF segment, partially offset by discounts. 0.3% benefit from rupee depreciation benefits, partially offset by cross-currency headwinds. Q1 EPS grew by 4.4% in rupee terms on a year-on-year basis. Our balance sheet continues to be strong and debt-free. Insolidated cash and investments were 4.4 billion at the end of the quarter after returning more than 815 million to the shareholders through dividends. This has led to an increase in ROE to 31%. Free cash flow for the quarter was $636 million, which is a conversion of 95% of net profits. Yield on cash balance remained stable at 5.3% in Q1. DSO declined by four days sequentially to 63. DSO, including net unbill, was 82 days, an increase of one day versus Q4. Coming to segmented performance, we signed 19 large deals in Q1 with a TCV of $1.69 billion. This comprises of 60% net new. We had five large deals in retail and CPG, four in high-tech, three each in financial services and energy utilities and software and services, and two each in manufacturing and communications verticals. Region-wide, 15 were in America, and two each in Europe and ROW. In financial services, clients are continuing to focus on building customer experience, contact center transformation, and virtual branches aimed at improving customer engagement. While the order pipeline remains strong across regions, We have seen some slowness in mortgage, industry, and lending business due to increased interest rates. We remain watchful of impacts of emerging global developments on budgets of clients. In the retail segment, the pace of digital transformation, large-scale cost takeouts, and improving business resilience continues to be on the rise across various subsegments. Our focus on proactive engagement has helped us in creating a robust pipeline. Clients are monitoring the emerging macro situation and the impact of that on their business. In communication segments, clients are focused on rapid digitization and protecting their assets from cyber threats. We see enormous potential to partner with them both on the digital transformation agenda as well as on the cost takeout front. Deep pipeline in energies, utilities, resources, and services segments comprise of opportunities around cost takeout, vendor consolidation, digital transformation, cloud-led transformation, and asset monetization across industry sub-verticals. Manufacturing segment is seeing broad-based growth across geographies and industries sub-verticals. The sector is seeing traction across energy, IoT, supply chain, cloud ERP, and accelerated cloud adoption. In quarter one, we have been ranked as leader in nine ratings in the areas of Oracle Cloud, SAP S4HANA, Public Cloud, Industry 4.0, Employee Experience, and Automation Services. In this supply-controlled environment, we continue to invest in our growth momentum, which requires us to hire premium-skilled talent, while simultaneously investing in existing employees through competitive compensation increases across deals. Additionally, we expect normalization of costs like travel and other overheads. We will continue to focus on various cost optimization measures, including rationalization of subcons, flattening of the pyramid, increasing automation, reducing on-site mix, and increasing pricing. Whilst we retain our operating margin guidance of 21% to 23%, we expect to be at the bottom end of the range. Review guidance for the year has been revised to 14 to 15 percent from 13 to 15 percent earlier. With that, we can open the call for questions.

Thank you very much. Ladies and gentlemen, we will now begin the question and answer session. Anyone who wishes to ask a question may enter star and one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Our first question is from the line of Surendra Goyal from Citigroup. Please go ahead.

Yeah, hi, thanks for that. Good morning. Just a couple of questions from my side. Firstly, a clarification.

So, Niranjan, I believe you said that the contractual provision was largely offset by discounts. Could you please clarify, did you mean discounts to the same client or discounts in general? Curious because on one hand, we are talking of a strong demand environment and potential price hike, and at the same time, we are also talking of discounts. So, the comment was that it's not the entire 0.5% increase in RPT, the combination of three to four elements, the higher working days, the client contractual provision, reverse and benefits, partially offset by discounts. So it's not a direct linkage of discounts and client contractual provisions. It's not the same client. This is generic discounts. And these automatically keep on coming. But we have, like I said, we have come down less as we started negotiating with our clients in terms of pricing. But that's a net impact of all these. Okay, sure. And just another question on margins down 360 bps year over year.

Operating profit is growth, YOY is words and historical trends, despite all the strong demand and growth we are talking about.

So if you just think about this 360 basis point decline, how much of that is really investment to which you think can be recouped as we go forward from it? Yeah, so like we said, when we were 350, we knew we were... having some benefits in a way of the back end of COVID. Our utilization was very high. We were at 88% which we had never operated before. The benefits of travel, et cetera, now we're seeing that more and more. That has been coming back. So that's something which we were aware of, well aware of in last year. But as we see the demand volume ahead, I think we are very clear that in terms of our ability to support this demand, because we have to hire, we have to pay competitively, so we actually did actually two wage hikes in calendar year 2021, and now this year we've already rolled out in March. So within one and a half years, we've done three substantial CRs, and actually in September last year also we did a fill base. So we've been continuously investing behind that, and we know that to capture this demand, we have to pay FOR PREVIOUS SKILLS, WE HAVE TO GO BEHIND VOLUME, IN SOME CASES, SUBCON COST FOR US, YOU KNOW, FROM AN INDUSTRY, I THINK LEADING 6.5 POSITION, WE ARE CLOSER TO 11%. BUT AGAIN, WE HAVE SOMETHING WE KNOW OVER A PERIOD OF TIME, WE HAVE A LOT OF OPTIMIZATION LEVERS, RIGHT? AND WE DON'T WANT TO LEAVE A FIVE-YEAR DEMAND ON THE TABLE BECAUSE OF SHORT-TERM COST SPECIAL. AND THESE WE CAN OPTIMIZE, YOU KNOW, OVER THIS YEAR AND OVER THE FUTURE AS WELL. SO IN THAT SENSE, WE'RE QUITE CONFIDENT, AND THAT'S WHY WE HAVE TALKED ABOUT we will be in the 21 to 23 at the bottom end of the range. And, of course, if we're at 20% today, we will see that improvement as we go forward. Sure. Thanks for that. I'll get back to you.

Thank you. Our next question is from the line of Moshe Katri from Wedbush Securities. Please go ahead.

Hey, thanks. Spectacular numbers, especially in the revenues side of the business, with Just a follow-up to the last kind of topic or question about margins. We're getting a lot of pushback on that. From your perspective, you know, looking at the levers that you kind of highlighted, what do you think is the biggest potential lever here for you to be able to kind of catch up to the margin range that you mentioned? And then I have a follow-up after that. Yeah, so, Moshe, hi. So I think, firstly, if you see our margin profile, how it has changed, right? So one, of course, has been this utilization and, in fact, high 21,000 net ads during the quarter, which is well above our volume. And that is to create the buffer so that when we put in pressures, we are able to train them, and then over a period of time, able to put them into production, right? So you can't just hire pressures and expect them to start contributing from day one. And they're very vigilant about that. They go through our mandatory training and MISO, and then we put that. So that's one big part of where we think we can start improving. As the hiring has caught up, automatically you see the stabilization of subcontracts. As a person with a revenue, you are seeing this increase every quarter. Now we've seen a flattening out. And over the future, as we've got our recruitment tax together and been able to hire freshers, we should see benefits coming out of that. pyramid benefits will continue to happen for us. While we have seen some adverse impact of the onsite movement, which is largely as travel overseas has picked up, but we think this is more of a, you know, aberration in terms of uptick because the inherent story of taking costs out and having a more offshore mix in the entire cost optimization, that should come into benefits, especially in this environment where cost takeout is becoming a big theme across our clients. So we know we can have multiple areas. Pricing is another thing we've been talking about. We have seen less impact of pricing in terms of discounts, et cetera. We are going back to clients in terms of full hours, in terms of when our renewals happen. Now, again, these are much more longer-term impact decisions. But I think at least the conversations have started in right earnest across, you know, all the segments. And you can hear similar commentary across. So I think these are the areas we continue to, you know, focus on. And that's something we've done, you know, over the years. We feel that we continue to be very, you know, forceful in terms of across, you know, efficiency exercises. Okay. And just as a follow-up, just remind us, what's your sensitivity for margins versus utilization rates? i.e. 100 basis points expansion utilization rates, what does it mean to margins in terms of sensitivity? Thank you. Yeah, so I think it depends on by which level we see utilization. So it's quite complicated. You know, you have a different utilization in on-site, different in offshore, and then the impact of pressures in the pyramid in that utilization. So it's a bit complicated how the mix changes. So I just can't give you off the number of, you know, what 1% will lead to, but to give you a large impact for the lots in this quarter, I think 40 basis points because of utilization and margins. All right. Thanks for the call.

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

Hi. Good morning. Thank you for taking my question. My first question was continuation on the margin side. So at the end of the fourth quarter, and not just in focus, but across the industry, what the management committee had indicated compared to that the margin performance appears to be a sharper decline. What do you think could be the reason behind that? Is it determined by higher than expected demand and higher use of subcontracting than what you were planning earlier? Or is it more supply-side, given that the pressure was higher than what we had planned for through the quarter? Yeah, you're talking about us in particular or about the industry? Anything, whatever you could give us color on, because the trend has been very similar. I think we don't operate in a vacuum, and this industry doesn't operate in a vacuum. The attrition trend, are pretty much very similar across industries. But the good news, like you said, is that attrition is coming down. Our quarter attrition figure is actually below our NPM figures. And as Salim said, we're already 1% down. On a sequential basis, we were 5% down in the previous quarter, and we were flat. So I think this is more the reported NPM, of course, is more of a catch-up effect. And in that sense, we will see fast stabilization. The sectors will start coming in and getting permeated. That benefit, in a way, should start creeping into the cost structure, right? Because at the end of the day, if you're splitting pressure, you have less attrition. The press height which you have to give for laxal higher should come down. The burning bonuses, in fact, that, in fact, should come down. So these are the things which will play in our favor. And like I said, you've seen these numbers of declines pretty much across industries. But we have, I think, a very, very sharp cost optimization program in a way which will go and offset these headwinds. Got it. So it appears the supply-side pressure was higher than what you were expecting. My second question was on the... I think there's no question about that. In terms of, you know, the CR attrition and the net as the growth hiring has been very high. And, of course, in fact, in terms of our stretches and all we have to offer. So it is an overall industry issue led from the demand side. Sure. Thanks. My second question was on base acquisition. So we already have a pretty strong life sciences factor with more than $1 billion scale. So what exactly we are looking and targeting to get help from this acquisition? On base, there are multiple things. This is a business which is very high-end in the life sciences area. When we launched our strategy a few weeks ago, just at the start of the quarter, we had shared also a new focus or an expanded focus on Europe. And Denmark, for us, is a very strategic market. The whole Scandinavian market is a very strategic market for us. So that's the second area that it benefits us in. And we also see clients are using the capabilities of BASE as a starting point. And then that leads to large technology transformation, digital transformation. That helps us overall in terms of scaling up that segment. That's a segment which we feel is a strong segment for the future and where we are, in our view, underweight in percentage terms. So we want to enhance that with our deep existing capabilities. Got it. Thanks a lot for that.

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

Hi. Thank you very much. My first question is I wanted to get your views on how you think wage inflation will impact the balance of the year, and what are the tensions on that to your margin model? So you mentioned that attrition has, in fact, moved lower. Do you think, A, attrition continues to move lower, and how do you think wage inflation will will unfold over the next three, four quarters and be a force in the gross margin equation. And then I will follow up. Yeah. So I think like we started last year, we were very clear that we have to be competitive in the market. So we did the first hike in January of 21. Then we did the next hike in July of 21. Then we did a follow-up on our C talent in September of 2021. And in a way, we had not waited one year. We've actually gone ahead and done our majority of our wage hike from 1st of March to 1st of April this year. We had a little carry-on effect in terms of the higher middle to senior folks, which will happen in July, but not in the same margin, in fact, of quarter one, which was very broad-based. But other than that, I think we think these are quite competitive. And, you know, of course, if you see in the mix, we also get a lot of lactose. And there's a hidden cost of hiring lactose because they come at special. So, in a way, your compensation overall, weighted average compensation in any case is going up. But I think overall, I think this is a very competitive hike in terms of in India, it's more like high single digits. And in overseas geos also, because of high wage inflation across, we have given very competitive heights, something which we've not done in this kind of wage environment and inflation environment before. So these are very much higher than what we've given in the past. But we think this is something which is going to stand up in good stead in terms of efficient. And like I said, we've seen sort of three-quarters of the efficient benefits over a period of time going in. Okay. Okay. We cover a number of software companies, and software companies have started to say they're seeing pockets of weakness with demand elongation on sales cycles. It doesn't sound like, I know you made one very specific industry comment, but it doesn't sound like you're seeing any kind of iteration on the demand side, particularly on the negative side. But if you could just clarify, are you seeing any elongation on the new business front? And yes or no, and if the macro does weaken, will that in fact help your wage situation? And that's it for me. Thank you. So thanks for that. This is Salil. A couple of points that you raised. I think what we see on the demand, the pipeline that we have today for our large deals is larger than what we had three or six months ago. Having said that, we, of course, recognize what is going on in the global environment, and we mentioned a couple of areas. Nilanjan talked within retail. He also mentioned ISHAB within financial services, mortgages. So we see pockets where we see some impact. On the overall deal discussions, we see a little bit where it's slowing in the decision-making. However, the pipeline remains strong for us today. We've also got two types of deals. One is deals which are on digital transformation or cloud, which are growth-orientated for clients driving to what they want to do with their customers or in their supply chain, how they want to make an impact there. And the second is on costs. we have a very strong play on cost and efficiency through our automation work, through our artificial intelligence work, where we can really impact the cost base in the tech landscape of our clients. So those are areas which we are already very active with within this environment. And given our positionings, we feel good that those will start to come into play as and when the environment changes. But today, this is how we're seeing the demand situation. Now, the other question was, will that have a change on the age or if the macro evolves? We don't have a clear view on where that will go because it's a function of how the macro evolves and what happens. Of course, we are seeing attrition starting to come off a little bit, and that will clearly have a positive impact for us with respect to compensation. So the timeline is not clear. It depends on how the macro evolves. Okay, great. Many thanks.

Thank you. Our next question is from the line of Nitin Padmanabhan from Investex. Please go ahead.

Hi, good morning. Thanks for the opportunity. I have two questions. So one is from a margin perspective, whatever we saw as one-offs in the previous quarter, which included visa and these contract provisions, both of them have been sort of offset in this quarter.

Is that a fair understanding? That's the first.

The second is, In terms of salary increases, is it only for the associate level this quarter?

And if so, then the question is that we have 1,45,000 associates, JLC and below, and some 130,000 people in the mid-level. And general understanding is mid-level, obviously, as a percentage of the employee comp cost, it should be higher. So the thought was, shouldn't your margin be higher next quarter? If you could just help with that thought process, that would be very helpful. Those are two questions.

Thank you. As I said, in the margin walk, we had a benefit of 50 bits in RPP, which is a combination of working-based client contractual provision reversals, partially offered by this company. We've seen a benefit there. There's no, in a way, what we said that hasn't been eroded. We have got the benefit of client contractual provisions clearly. The other one on visa travel, I think they were largely, you know, offset against each other. And what are the other questions? On the outlook on wages, like I said, we've done it for most of our employees, right? It is up to mid-level. And more at the senior level is what we're going to roll out in July. And that impact will be far less than 1.6% which we've done, which is a much more broad-based process. Sure. So both associate and mid-level happen this quarter itself.

It's not only associate. Yeah.

No, no, no.

Associate and mid-level, correct. Perfect, perfect. That's very helpful. Thank you so much.

Thank you. Our next question is from the line of Brian Bergen from Khawn. Please go ahead.

Hi. Thanks for taking the question. I wanted to just dig in on the commentary around pockets of weakness. So, heard you mention mortgages, mentioned, I guess, the stuff component of retail. Can you just give us a sense, maybe quantify, what mix of your business is actually seeing some slowing decision-making? Is it 5%? Is it 10%? Is it less? And even does this help frame or quantify areas that are seeing pockets of weakness? So, thanks for the question, Mr. Salil. We don't quantify typically what part of our financial services, mortgages, or the other areas which are impacted. We're now seeing pockets. This is not across our whole business. And the way I would sort of look at it is with all of that, given our pipeline, we've increased our revenue guidance. So the majority of our business is still seeing good demand. It's really pockets without quantifying. That's how I would give a context to it. Okay. And then just a follow-up on margin. You gave sequential changes. Can you give us what the year-on-year changes in operating margin, the different categories? Yes. So largely we know it was the comp-related hike that's nearly about 350 basis points. That wasn't the biggest one. And this was offset by some rupee benefits, which was also a benefit, but there was cross-currency as well, which offset probably half of that. And then we got some benefits of cost optimization. We got some hits on lower utilization. So these were the broad things, but the biggest one was comp, which was about 370 basis points. Thank you.

Thank you. Our next question is from the line of Sudhir Guntapalli from Kotak Mahindra Asset Management. Please go ahead.

Yeah. Good morning, gentlemen. Thanks for giving me this opportunity. I have just one question on margins. Ideally, the strong growth at the headline level should have translated into some operating leverage, but that doesn't seem to be happening. And we seem to be of the view we'll chase growth for now and focus on margin optimization at a later date. What is the risk to that hypothesis? Because this growth margin paradox seems to be a mere reflection of what is happening in U.S. and U.K. now. A very tight job market, very high nominal growth, but very little benefit trickling down to the bottom line level. So sooner or later, these nominal growth rates may cool off, and on-site job markets and some supply costs may auto-recalibrate. But back in India, job market may not be as much of a free market as it is in U.K. and U.S. There may be some sticky elements, both at headcount and wage level, translating into negative operating leverage as demand moderates. So what is the risk that margins will remain structurally lower than even the pre-COVID levels going ahead? Because demand tends to be more cyclical while some of the supply costs tend to be more sticky.

So a couple of things. One is that many of these cost increases can't be passed on the client on day one, right? So if I have to give a wage hike on all my existing days, they will come up for renewal, right? That's the time when you have a wage discussion. When you're doing new deals, automatically we will build it and the industry in a way builds it into their wage profile. So these things will automatically flow back. There's no free lunch for anybody, right? So that's one thing that will happen over a period of time. But that's more of a generic point I'm making. But in terms of, say, subcoms, right, we've operated at 6, 6.5% of subcoms. Today we're sitting at, what, 11.1%, right? There's no reason for us to be at these levels because we know what wage market, the overall demand environment, our recruiting picks up. We can replace these subcons at our own headcount, put more pressures into projects, and this is something we've been doing very well in the past as well. So I think these levers are well known for us. We know how utilization works. We know how pyramid works. So we're quite confident in the go-forward model of taking out costs from our overall structure.

Just one more question, if I may. So when we say the pipeline is larger now, just curious if the pipeline is getting bigger and bigger because some of the decision-making is getting slower. Is there any correlation you read between the two?

So there is, Salim. The pipeline, what we are seeing is there is appetite, and you go by different industries, for digital transformation programs for large cloud programs, for programs which start to relate to cost and efficiency. That's what is in the pipeline. It's not a function of the timeline, the delay that you referenced, which is causing an increase. It is where we see traction with more and more client discussions as of today that we see. Now, we will see how that evolves, but that's the outlook we have today here.

Thanks, Salil. Thanks, Manu. That's it from me. All the very best.

Thank you. Our next question is from the line of Ankur Rudra from J.P. Morgan. Please go ahead.

Thank you for taking my question. First question is, what's the level of conservatism or realism infused into both the revenue and the margin guide this time? Part of that is on the revenue guide, we've given the potential macro headwinds ahead of us and the ask rate from the second half of this year. And similarly, on margins, we still have another round of wage hikes, which could impact margins by maybe as much as 100 basis points, if I look at the wage hike impact so far, and a similar ratio between the first and the second rounds in the previous years, and also keeping up travel and facility costs.

Thank you.

Hi, Ankur. Thanks for the question, Mr. Salim. Let me start off, and then Nilanjan may have a few points to add. On the guidance for growth, as we have shared in the past, the approach we take is we see how things are as we look at the financial year today. What we saw is in Q1, we had extremely strong revenue growth, 5.5%. We also had underlying volume growth that we had in reference, which was very strong. Then we see the outlook where we have clarity looking ahead for some period of time, and then a set of estimates that we have for the rest of the financial year. And also looking at how typically H2 works versus H1, and then putting in some views on where the end of the year could be. Based on that, we felt comfortable to increase the revenue growth guidance. Whether it's conservative or realistic, you know, that is the approach we take to make sure that we then share what we think the revenue is going to look like for the year. On the margin, I'll start off and then I'm going to talk a little bit about the wage component of what we've done. Overall, on the margin, we've made sure that we work to get all of the levers in place. So the approach to driving cost efficiency is in place. Several levers that Niranjan mentioned. One of the bigger ones, we've got the bulk, the vast majority of our compensation increase already done in Keynote. So yes, there's a small component, but it's not nearly a huge component that will come up. And then we see a steadily increasing other areas which will help us. There are areas where we can focus on how the subcontracting works. There are areas where we can focus on discussions with clients vis-a-vis wage increases and COLA. There are areas where we're doing work which is driving significant impact for clients. So we think there are a set of those levers that can help us through the margin discussion that will be focused on this financial year. Our approach very much is to make sure that we remain a high-margin business, and that's the underlying theme that we're working with. Given where we are, given the inflation around the world, we thought it was clear to make sure that we communicated that in the way we see the market. Anything else you want to add? No, no, that's good point. Okay, just a quick follow-up, if I may, on margins. Nilanjan, are there any one-offs in the margin this time? Also, another way, what would be the pro forma margins if the provision reversal was not to happen? And related to that, can you say that 20% in Q1 should be the bottom-up margins going forward so that we can get back to 21% for the year, realistically? Yeah, so I think we mentioned the margin walk at the beginning of the call earlier. So if we are 20 and we are, you know, diving at the bottom end of 21, so mathematically the case that we have to improve way forward. So absolutely, from 20, we will have to see the improvement at quarter and quarter. Okay. Thank you, investment.

Thank you. Our next question is from the line of Ravi Menon from Aquari. Please go ahead.

Thank you, gentlemen. You've got a good set of numbers. First of all, your thoughts on how God bless North America. You've not seen, I think, such progress sustained for a long time. And though you called out some headwinds in BFSI, isn't that still having quite a bit of revenue? Could you give some follow-up about how sustained the demand environment is there? And secondly, you know, on the pyramid, you know, we've already seen a large intake of fresh hazards last year. So, had hoped that some of that would have come into production and, you know, helped us offset the margin headwinds through this quarter. But it looks like, you know, given the utilization as well, it doesn't look like much of that has happened. So we could give some color on that. Hi, Ravi. This is Salil. I didn't catch the first part of the question. I think it was about demand. Maybe you can just say the first part of it. It was around the demand. We've seen broad-based revenue addition across verticals in North America. And if you're seeing the pipeline also along similar lines, are there any specific verticals where you see some softness starting to come in? Yeah. So the softness, as we referenced, we see some pockets of softness within our overall business. That's why we want to be very clear that that is something that is visible and A couple of examples we've shared were financial services and retail. But there are areas where we see that weakness. However, once we say that, we also have a view and we see it in our pipeline. The overall pipeline is stronger. So there are areas where we see some good traction as well. And it's a mix of the growth and the cost opportunities within our pipeline. And I think the second one was about the pyramid, I think. So, yes, we've had a lot of pressures last year, and many of them also have gone into training pipeline because as we had the previous year, there was nothing really in the pipeline in terms of hiring. So, in fact, if you see our utilization, there's a 2% gap between the excluding trainees and including trainee numbers on a year-on-year basis as well. We continue to deploy them into projects, and like I said, we can't overnight involve projects with pressures in, and that's why it's important to build a pipeline in advance, make them go through the training, so then put them into production bench, and then move them into projects as well. So that benefit will come in, and we are seeing that slowly coming in. But it's important to invest ahead, right? If you just have just in time, you'd be probably... you know, sub-optimizing in terms of how fast you can deploy. So that's why we have made these investments because we know it will take time for these sessions to go on, but it's important to make the investment ahead. Thanks, gentlemen. One follow-up on this last quarter's contractual revenue. Did you recognize all of them this quarter, or is there still something pending? Yeah, it was all recognized this quarter. Thank you. Good luck.

Thank you. Our next question is from the line of Pankaj Kapoor from CLSA. Please go ahead.

Yeah, hi. Thanks for the opportunity. Can you give some color on the overall order book since we reported TCV what we give?

That covers only 50 million plus deal and may not really be representative. So any quantitative or qualitative comment on the scale and how the overall order book has grown? That would be helpful.

Thanks for the question, Pankaj. As you know, we share the large D win number. We don't publish the overall D win. Having said that, the main sort of context I would put is the increase in the growth guidance that we've provided. That factors in, in that sense, all of the inputs that you may be looking for. which then comes from essentially a very strong Q1 execution, the 5.5%, 21% growth, and then a view that we have on what we see in the coming quarters, and then an overall view of how we look at H1, H2 in our mix within the company. That is sort of broadly how we looked at it. On the large deals, we've shared this in the past. Typically, this is a number which is a little bit more volatile because we only report deals which are larger than $50 million in our large deals. And so that's really the way maybe to make a difference.

My second question is on the profitability in the manufacturing vertical where the margins have been coming down. And, in fact, the last three quarters probably they have halved despite a very strong revenue growth. I understand this could be because of a very large deal which is still ramping up there. Can you give us sense how the profitability curve in this vertical could shape over the next two, three quarters?

What I'm trying to understand is that has it bottomed out now, or you think that this would potentially go down further? Thank you. Yeah, so I think without specifically commenting, I think, you know, on Nansen's particular deal, I think, firstly, there is, you know, you've seen the revenue growth, which has been quite spectacular in this segment. This has been led by large deals. And as we've talked about a large deal approach, you know, from day one, a lot of clients would like to see savings. But we are very clear that over a period of time that we have a lot of cost optimizations because on day one, you can pivot the cost structure, right, whereas clients may ask for the savings. But we know over a period of time the levers which we continue to deploy on all these, you know, large deals and If I go back to the last three years, you know, four years, in fact, when the large deal kind of strategy started, we've actually seen an increase in margins over that. So there's been more, you know, there's more historical correlation in terms of saying whether large deals are diluted because we continue working on taking out costs to the system. And these are factored into our entire, you know, big process. We look at, you know, how we can optimize on-site offshore. Many of these projects require automatic automation. We can inject that to all our services which we're providing. We know how the sediment works. So these are things which we know, you know, over the lifetime of these large deals. And that's something we know we can, you know, deploy. So that's, you know, something, you know, without getting into specifically manufacturing, what we do well. Got it. Thank you and wish you all the best.

Thank you. Our next question is from the line of Gaurav Ratharia from Morgan Stanley. Please go ahead.

Hi, good morning. Thank you for taking my question. So firstly, is there any difference in the client decision-making behavior in U.S. versus European clients? And the reason is that I'm asking is U.S.

is seeing a fair bit of broad-based growth across segments, but when we look at Europe, there is a weakness specifically in retail and communication vertical, whereas the other two verticals energy side, high-tech has grown very, very well. So just trying to understand, are there any client-specific pockets, especially in Europe, where you kind of see decision-making behavior has changed compared to the U.S.

market? Thanks for that question. So today, we are not seeing that, which is more geography-based, as you are describing. We see some which is more globally industry-based and client-based, as you know well, is mainly U.S., Europe, and Australia. So not so much color, which is more geography-related. Okay. Second question on margins, your margin outlook at the lower end. You explained very well the supply side and cost-related factors which has led to this, but is there also an element of expectation of pricing increase that has been tapered down, which has led you to now take the margin outlook to the lower end? And is it fair to say that with all the cost levers that you have in place, the exit margin should be better than the lower end of the guidance?

Thank you.

Yeah, so I think... When we do our sort of margins, you know, forecast is a combination of factors we look at, and that equation keeps on changing. It's so dynamic, you know, what happened in the previous quarter, what do we see as outlooks, what's happening on sub-con, wage inflation. So that mix continues to change and evolve. Sometimes we have to push harder on some pedals in terms of accelerating some programs. But going back to the whole, you know, if we are today at 20 and we are saying we're going to be at the bottom end of 21, I think that should give you a good sense of the margin trajectory for the rest of the year. Thank you.

Thank you. Our next question is from the line of Ritesh Rathore from Nippon, India. Please go ahead.

Yeah, hi. Just on this margin question, Within a quarter, you have to lower your guidance on the margin side. So this is despite rupee depreciation benefit, despite attrition coming down in last two quarters. So what has surprised internally in your expectations so that you have to bring it down to the low end? Yeah, so I think, like I just mentioned, this is a very dynamic and moving, you know, I could forecast completely what is the impact of attrition, how much wage hikes will come and for new hires. So it's very dynamic how the pricing play out. So in that sense, this is a, you know, very fluid situation. But 21 to 23, we said we are within that, of course, at the bottom end of it. And we have been committed, you know, from where we are today at 20. to do all our various cost optimizations, factoring in the cost impacts of what we see in terms of wage inflations, there could be potential benefits of the rupee, et cetera. So it's a combination of all this into the forecast. And what would have been a bigger surprise element? Would it be the wage or would it be the pricing benefit not coming through?

Any one highlight compared to what you expected at the start of the year?

It's a combination of various things. And I won't say surprise. I think, like I said, it's a fluid situation, and we have to remain agile. That's more important rather than anything else. And coming to pockets of weakness, which is pointed out retail, mortgages, can you give some color? Are clients taking a pause in machine making? Are the new deals not getting converted? Or are the existing deals, which have been worn, they are not getting ramped up? What's the exact sense on the weakness over there? So there, within the areas of that pocket that we described, there we see a slowing, for example, If you look at the mortgage situation, the volume there in the market, meaning the client volume at the macro level has gone down in the European and U.S. market. So our work there is proportionally reduced. But the overall point, which I shared earlier, we see some slowing in decision-making, but nonetheless the pipeline remains stable. Today, in a good position, that allows us to increase the guidance.

And last one, on your deal means, on LTM basis, your deal means are down sharply if you see last trading four quarters versus the previous four quarters.

And even if I adjust the base because of the high value deals which you won in a couple of quarters, four quarters back, you're still down minimum by 15%. How do you connect those two dots that your LTE and basic dealings are down but your deal pipeline is all the time high? Are the deal conversion ratios dropping than what was historical? On the large deals, we typically always share we see some volatility because these are These which are larger, the ones we share in this number, which are larger than 50 million in value. We do see the pipeline being larger than where it was, and what we reference in some areas, a slowing of it. But we don't see any change in the other parameters on the pipeline. Okay. Thank you. Vishal, will you?

Thank you. Our next question is from the line of Manik Daneja from GM Financial. Please go ahead.

Hi, thank you for the opportunity. Sorry for harping on the margin question once again. I just wanted to understand how should we be thinking about the segmental or the improvement in segmental margins for manufacturing vertical given the sharp drop that we've seen over the last three quarters and how does that lead in terms of the overall margin output? Thank you.

Yeah, I learned that somebody else has asked a similar question. And without going into specifics, we have seen that growth coming out of large deals in manufacturing. And like I said, as we look at the tenure of these large deals, in some cases they start off with lower than portfolio margins because clients may ask for savings up front. But we have a very started plan in terms of over quarter and quarters what do we need to do to bring back profitability because someday one client comes to us because they know we can optimize the cost structure. So that's something which is, you know, generally what we've been doing since we started the last strategy, right, and we've seen margin improvements over that period. So I think we're quite, you know, confident of the future profile of these businesses. Sure. Thank you.

Thank you. Our next question is from the line of Apoorva Prasad from HDFC Securities. Please go ahead.

Yes, thanks for taking my question. Tanil, this is on mega deals. While the industry frequency tends to be low and it's been a while for enforcers, it would be good to know your comments on mega deals from a pipeline perspective. And secondly, on pricing, how is the ability to get price increase versus last quarter? Do you see any changes to that? Well, the mega deals, I think, again, we don't share anything specific in terms of what we publish. The color from our side is we have mega deals in our pipeline, if that gives you a context. On the pricing, we've seen pricing currently holding in our deal values for Q1. My sense is we have seen examples that Nilanjan was sharing earlier where we have worked with clients to demonstrate to them the impact of compensation increases and that is translated to COLA or price benefits. We've had examples where we've had increases which are related from more of the digital high-value work that we are driving for clients. We now have to make sure we take that across our whole portfolio and see the benefits coming into our business. The salary increase happens, you know, at a periodic time. And these things where we've not seen a high inflation environment like this for over 40 years in the Western markets, that takes a longer time. But that's what, as Arvind said, is part of what we've put in place to support our margin as we go ahead. Thank you for that.

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

Thank you, everyone. This is Salil. Thanks again for joining this call. I just want to summarize with a few points. First, we've had industry-leading growth in Q1, 5.5% quarterly, 21% year-on-year. We clearly see tremendous market share gain driven primarily by the strength of our digital and the cloud cobalt capability set that is resonating with our clients. We highlighted there are pockets of weakness, and we are aware of the environment around us. We see in our pipeline both growth opportunities in digital cloud and cost opportunities in automation. With all of that, we increase the growth guidance for the full year. We are now seeing attrition coming down on a quarterly basis. We see many of the initiatives we put in place starting to create some impact. We have levers for the margin, several that Dilanjan shared, Large programs will transition to steady state, COLA because of increases in compensation costs to pricing, pyramid adjustments as we have college hires joining the production environment, subcontractor usage, and then several others on the cost side. Given all of that, we feel we are really well positioned to work with clients to on their growth and cost opportunities and have a margin profile that is something that sustains the high margin approach of the company. So we're looking forward to this year with strength and optimism. And once again, thank you all for joining us and catch up in the next quarter. Thank you.

Thank you, 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.