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 touch-tone telephone. 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, Indra. Hello, everyone, and welcome to Infosys Earnings Call to discuss Q2FI 23 financial results. This is Sandeep from the Investor Relations Team in Bangalore. Joining us today on this call is CEO and MD Mr. Salil Parekh, CEO for Mr. Nilanjan Roy, and other members of the Senior Management Team. We'll start the call with some remarks on the performance of the company by Salil and Nilanjan. Subsequently, we'll open up the call for questions. Kindly note that anything... that he says it sets us to our outlook for the future is a forward-looking statement, which must be read in conjunction with the risk that the company faces. A full statement and explanation of these risks is available in our pilot with the SEC, which can be found on www.sec.gov. I'd now like to pass on the call to Salil.

Thanks, Sandeep. Good afternoon, good evening, and good morning to everyone joining the call, and thanks for joining our call. Our Q2 performance was strong with year-on-year growth at 18.8% and sequential growth at 4% in constant currency. Growth in Q2 was broad-based with all industries and geographies growing in double digits in constant currency. Growth in constant currency in the first half of financial year 23 was 20.1% compared to the first half of financial year 22. This momentum is accompanied by a strong pipeline of large deals and the highest large deal value in the last seven quarters of $2.7 billion. 54% of this was net new. These elements are a clear reflection of the deeply differentiated digital and cloud capabilities we have developed that are highly relevant to a client's strategic priorities. Our digital revenues are at 61.8% of our overall revenue and grew 31.2% in the quarter in constant currency terms. While digitally continues to see some strong growth rates, we are seeing acceleration in growth trajectory of our core services this quarter. This is due to our industry-leading automation capabilities and reflects an interest among clients towards cost optimization programs. We also see this in a large D pipeline with strong focus on cost reduction programs. While we do not generally share the specific amount of our cloud revenue, we are delighted to share that in Q2, our cloud revenue was larger than $1 billion, showing tremendous strength of our cloud services, especially our industry-leading COBOL capabilities. Several examples of client transformation demonstrate the value we deliver. First, a European telecommunications company is closely engaging with us to accelerate the business growth and prepare for the digital future. Second, an aviation giant is working with us to digitally advance the engineering of the product development and emerging aircraft programs. And third, a fast-growing logistic company is working with us to secure the cloud environment and build greater resilience into the operations. These examples and several others showcase a commitment to deliver value for our clients and the trust and confidence in our expanding digital capabilities. Strong growth this quarter was accompanied by operating margin expansion of 150 basis points. The operating margin for the quarter was 21.5%. This was because of cost efficiencies, optimization in large deals, and currency benefits. The luncheon will provide more color on this. H1 operating margins are 20.7%. Our attrition has now been decreasing for the past three quarters, including this Q2, on a quarterly analyzed basis. While the overall demand environment continued to be healthy, as reflected in broad-based growth and robust large-deal pipeline, We also see signs of cautious behavior by clients due to macro concerns. Apart from slowness in the mortgage segment of financial services and the retail industry segment we talked about last quarter, we see emerging concerns in high tech and telecom industry segments in the form of reduced spend, especially towards discretionary programs. We are well positioned to help our clients with their digital agenda and their cost agenda. Growth in our digital and our cost services demonstrates that. As the macro environment evolves, both of these components of our business will help us to be appropriately positioned with our clients. We have initiated a pivot to focused cost programs within our large deals pipeline. Our operating model and offerings are agile to deliver value for clients in this evolving macro environment. In keeping with our capital allocation policy, the Board has announced a share buyback of Rs. 9,300 crores, or $1.13 billion, and an interim dividend of approximately Rs. 6,940 crores, or $850 million. Our H1 performance of 20% growth in common currency and robust large deal signings in Q2 give us the confidence to change our revenue growth guidance, which was at 14% to 16% earlier, to 15% to 16%, even as we are seeing emerging concerns that we talked about earlier. Our ability to grow at strong rates and take market share gains is a clear validation of the relevance, depth, and breadth of our service offerings and deep client relationships. We change our operating margin guidance for financial year 23 only for this year to 21% to 22%, which was earlier 21% to 23%. We anticipate we'll be at the lower end of this range. With that, let me request Nilanjan to share other updates. Thanks, Salim. Good evening, everyone, and thank you for joining this call. Q2 revenue grew by 18.8% year-on-year and 4% sequentially in constant currency terms. All business segments and geos grew in double digits year-on-year in constant currency. Specifically, North America grew by 15.6%, Europe by 28.5%, manufacturing by 45%, URS by 24.3%, communication by 18.4%, and retail by 15.4%. Digital revenues constitute 61.8% of total revenues and grew by 31.2% year-on-year in constant currencies. Revenue growth was 20.1% in constant currency terms in H123 over H122. Client metrics remain strong with year-on-year increases in client count across revenue buckets. Number of $50 million clients increased by 15 to 77, while number of 100 million clients increased by 4 to 39. Number of 300 million clients increased from two in the quarter to last year, reflecting a strong ability to mind top clients by providing them multiple services. Employee counts increased by approximately 10,000 to 345,000. Utilization, excluding trainees, was 83.6%. On-site effort mix remained flattish at 24.4%. Quarterly, annualized voluntary attrition came down further by another 2.5% during the quarter. This is also starting to reflect in reduction in our LPM attrition numbers, which reduced to 27.1% compared to 28.4% in Q1. We expect attrition to reduce further in the coming quarters. Q2 operating margins stood at 21.5% and increased of 150 basis points Q1-Q. The major components of the Q1-Q margin movements were as follows. The margin tailings comprising of 70 basis points comprising of rupee depreciation, partially offset by cross-currency, 90 basis points from cost optimization, including large deal optimizations, RPP increase, et cetera, partially offset by lower utilization, 40 basis points from reduction and sub-conference, before offset by headwinds of approximately 40 basis points from compensation related increases and impact. Q2 EPS grew by 11.5% in repeat terms on a year-on-year basis. Our balance sheet continues to remain strong and debt-free, Consolidated cash and investments were $4.8 billion at the end of the quarter. Free cash flow for the quarter was $589 million, supplying conversion of 79% of net profits. Free cash flow generation is typically low in Q2 due to higher tax payouts in both India and the U.S. ROE increased by 1% year-on-year to 30.8%. Yield on cash balances increased to 5.8% in Q2, DSO increased by two days, sequentially to 65, reflecting higher billing done during the quarter. Coming to segmental performance, we signed 27 large deals in Q2 with a CCB of $2.74 billion, with 54% net new. Five large deals were in financial services, four each in retail, communication, energy, utility resources and services, and high-tech segments. Three in manufacturing, two in life sciences, and one in other verticals. Region-wide, 18 were in the Americas, six in Europe, one in India, and two in the rest of the world. Growth in financial services segment continues to be strong, backed by large yield wins, account expansion, and new account openings. We continue to see an acceleration in cloud adoption in the FF sector, and are working with many of our clients in cloud migration, cloud management, and other cloud-related platform deals. In retail, we are seeing focus on digital consumer engagement, supply chain transformation initiatives, IT cost operations, legacy modernization, and new install capabilities. There are, however, some pockets of slowdown in business cycles, especially for fashion apparel retail and general merchandisers. We have a healthy mix of outsourcing and digital deals. In communication segments, we have seen healthy order pipeline and deal conversion, but we expect cost pressures from client side with impact on budgets, especially for traditional services due to macroeconomic concerns. Energy, utility, resources, and services segment reported robust and steady growth. The cost-takeout initiative continues to take momentum in the world. Manufacturing segment growth continues to remain strong and broad-based along with steady flow of new deals. We see continued tech spend by customers driven by the need to increase security posture, migration to cloud, increasing productivity by transforming to smart factory, transitioning to smart products, and other broader digital transformation initiatives. In smaller verticals like high-tech as well, we are seeing some increasing consciousness amongst clients around discretionary spend and consequently there have been some delays in deal closure. For digital services capabilities in Q2, we have been ranked as leader in 19 ratings in the area of the public cloud, tax, design experience, automation, and data and analytics. We remain committed to maximizing our total shareholder returns and in line with the capital allocation policy of returning 85% of free cash over the period The Board has recommended the following. An interim dividend of Rs. 16.50 per share for SPI 23 versus Rs. 15 per share for SPI 22. This is a 10% increase in dividend per share. Buyback of equity shares of up to Rs. 9,300 crores through open market route post-approval of shareholders at a maximum buyback price of Rs. We believe our progressive capital allocation policy continues to provide predictability to our shareholders. Although there's a gradual abatement of talent cost pressures, they continue to exert pressures on the cost factors and hence will need to be countered by our various cost optimization measures, including rationalization of subcons, flattening of the pyramid, increasing automation, reducing on-site mix, and engaging with clients to increase pricing. While H1 growth was strong, we expect H2 growth to be impacted due to seasonality, comprising of furloughs and low working days. The revenue guidance for the year has changed to 15% to 16%. As we mentioned in the last quarter earnings call, F523 operating margins would be at the bottom end of the guidance band. We are now narrowing the guidance range to 21% to 22% for F523, and we expect to be at the lower end of the range. 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 touchtone 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. Anyone who has a question may enter star and one. We'll take our first question from the line of Ankur Rudra from J.B. Morgan. Please go ahead.

Hi, thank you and good evening. The first question is, you know, Salil, you mentioned the macroeconomic conditions. In that context, could you elaborate how realistic or conservative your guidance is for the second half? And also, what has been the nature of the client conversations in the last month or so? And have you seen any sort of impact on the pipeline refill rate in this period? Thanks, Ankur. This is Salil. On the guidance, I think what we saw was very strong large deals in Q2. We had great growth in Q1 and Q2. We continue to see overall pipeline for large deals is quite strong. In fact, it's larger than it was in the last couple of quarters. We also see the macro points that I shared earlier, specifically mortgages in financial services, some aspects of retail or high-tech or telecom. So keeping all that in mind, we came with a view on the guidance, which is from the 14 to 16, moving it to 15 to 16, which is the higher end of that band. The conversations with clients, we've seen for this quarter, our digital business has grown over 30%, and our cost services has also grown. We see in our pipeline a good focus on cost programs and on the growth programs. And there are clients in different sectors at different intensity looking at both of those. So the conversation depends more on the context that the client is in. We feel that given these two engines that we have, we are somewhat well prepared for the evolving macro environment. Thank you. And, you know, Nilanjan, it's really great to see the margins back in the band and the extent of margin recovery in the quarter. Could you elaborate if there were any special interventions that were taken that drove this change in the quarter, perhaps with respect to wage increases or something else, and if there's any one-offs within this? Thanks. Yeah, Pankaj, as we explained, I think our cost optimization engine continues to peddle along well. I think, you know, working on the pyramid, working, you know, on subcons, I think, I mean, this was something which was very accurate. You would have also seen the numbers, you know, queue on queue. So I think it's been overall the continued focus across, and we've seen that, you know, benefit helping us. But, you know, for the year, as you know, we are still at 20.7, and, you know, we have guidance of 21 to 22, and we said we'd be at the bottom end of that range. So we still have ways to go. And, of course, this is going to continue to be the conversations on pricing, how the clients are continuously ahead. Like I just mentioned earlier, press conference, you know, our discounts definitely have come down. We continue to push our, you know, Salesforce team, you know, how to go and approach clients on this. So I guess this is a long haul on pricing, but at least the discussions have started around this. Just one clarification in your margin breakup that you'd highlighted before. The impact of compensation in Q1 seemed a bit light. Is there any change in the compensation change trajectory over the next two or three quarters? Or if you don't mind maybe elaborating that part a bit more. No, there was nothing because this is largely for the Q1 had the biggest impact. This was more for the mid-senior level of work. So I don't think there's anything unusual in that. Okay, appreciate it. Thank you, investor.

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

Hey, thanks for taking my question in the mid-quarter. So what do you point to clients being cautious beyond longer sales cycles and delayed deal closures? Are we also seeing practically deferrals or project cancellations? Oh, we're not there yet, but obviously this would be us playing the 2008 kind of slow down playbook. So I just wanted to get some more color on that.

Hi, I couldn't hear properly with this. What I understood was, are there any project cancellations or other such things in the quarter? If that's the question, We didn't see any project cancellations in the quarter. We saw some slowness in discretionary spend within the macro segments that I mentioned. For example, in high-tech, we saw that. We saw some in telco. We had mentioned last quarter in mortgages within financial services and the parts of retail indices. And that's how we saw it for this quarter.

And how would you categorize the discretionary spend? Is it predominantly cost accounts?

For that, the discretionary spend are more spend which support transformation programs is the way we see it. For the cost programs, those are different, more, let's say, targeted or fixed spends.

Okay. Okay. Do you have any views about the budget cycle for next year? Do you think we'll see any sort of slippage, i.e., rather than budgets being all set and ready sometime, you know, by January, maybe you'll see some sort of slippage there because of the MACRA?

So today, what we are seeing is within a large these pipeline there's a large number of programs which are cost related and we see our own core services growing so what it shows us is there is an interest from clients on both some elements of digital and now also on elements of cost the budget cycle this is the quarter in which we will start to get a sense for the calendar year budget So it's not something that we have within our grasp from the previous quarter. In the next few months, we'll start to see that.

Okay. Just final point, just a slight detail. Can we get the number in terms of subcontractor costs for the quarter as a percentage of revenues?

Just a second. No worries.

All right. Thank you very much. Yeah, did you get that, Moshe? Yes, I did. Thank you very much. Thank you.

Our next question is from the line of Ashwin Mehta from Ambit Capital. Please go ahead.

Hi, thanks for the opportunity. I had a question on what is happening in the manufacturing vertical in terms of margins, because we had a 46 million incremental revenue addition, but our segmental profitability bumped up by almost 49 million.

So that seems to have helped our margins by almost 40%. 100 bits plus. So we wanted to get some color on what exactly is happening there and then clarification on our cloud revenues. You mentioned it's now above a billion dollars.

So is it on a quarterly basis or on an annual basis? Yeah.

So the manufacturing margins, I think the same question I think many of you had in the previous quarter. And we took heed of that advice. So we have worked on making sure our manufacturing margins across deals and large deals and get to show that, yes, we have plans on how deals evolve over a period of time, and that should give us comfort, which it has over the last four or five years of how we approach large deals and large deal margin improvements. And, of course, the other cost optimization levers across the entire manufacturing, which help the other sectors as well. The second question I didn't hear you yet. Thank you. Our next question is from the line of Jamie Friedman from Susquehanna. Please go ahead. Hi.

Again, let me echo the congratulations on the robust results. I'm sorry to come back to the macro, Salil, but in the instance that there were a recession, is that contemplated in the guidance?

Thanks for your question. The way we've looked at it today is the guidance is for our financial year, which is two more quarters. We've kept in mind what we've done in Q1 and Q2 and the very strong large deals number that we had in Q2 with the 54% net new. We also kept in mind the seasonality, which I know all of you know. For example, in this RQ3, there will be some impact with furloughs. And typically, Infosys has more seasonality in Q3 and RQ3 and Q4. And then we built in what we see today of the macro environment, specifically those industry segments that I talked about where we see some of the slowing. Keeping all that in mind, we built this guidance for the revenue growth given where we are. That's what we factored in to the guidance update.

Okay, and then in terms of the potential transition from transformational work to cost containment, you're obviously very well positioned for both. Is there a gross profit or margin difference for the same quantum of work, like a dollar of transformation versus a dollar of cost containment? How do we think about the margin implications from that transition?

So there first, as you pointed out, we see growth today in both of these engines, which is a huge positive for Infosys. It's something that we are very differentiated from many of our peers. The margin profile is not so much differentiated on the type of work. There are different scenarios in the margin profile For example, depending on the scale of the impact, the industry, the geography, in general, we will see that at an aggregate level, so aggregate cost programs, aggregate transformation programs, we'll have a similar margin outlook. So we don't consider today that that pivot itself has any positive or negative impact on margins. However, as Niranjan was pointing out, we have a very strong internal cost program which he and the team have put in place, and that will continue to give us benefit in either of the scenarios.

Thank you so much. I'll drop back in the queue.

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

Hi, this is Zach Aisman on for Brian. First question we have.

Sorry to interrupt. Sir, may we request you to please switch to a handset mode and speak? We are not able to hear you that well. Thank you.

Hi, thanks. First question that we have is on the revenue per full-time employee. It looks like it's trying to lower for multiple quarters now. Can you give us a sense of the dynamics here, what the expectation is going forward?

Yeah, so I think this is directly reflecting our utilization as well. So like I mentioned, in fact, pricing has been actually stable to positive this quarter, but revenue per employee is across the entire headcount of the company, and we have put so many pressures in both in our training programs and my store and on the bench. So this is just a mathematical number around revenue per employee. It's not indicating anything about pricing, really. Okay, and I've just been handed a note. There's also a cross-currency impact as well, as you can imagine, because only 65% of our revenues are in dollars. 35% are in currencies outside dollars, and those are, of course, depreciated. So just on the pure metric, these will also automatically come down.

Understood. Makes sense. And our follow-up is more of a broader one on the macro. So more industries are seeing caution now. We heard high-tech and telecom this quarter in addition to what we heard in the prior quarter. Are there any other specific areas that are expecting to get worse going forward based on line of sight here?

Dan, this is Salil Aching. what we are seeing today is in the areas that you just mentioned and that reflects in some of the discretionary spend which is slowing. We also see that the large deals pipeline is at a very strong level. We see somehow some balance in the cost programs also becoming a part of the large deals pipeline. But in terms of the macro, we see those areas as of today, but we are watchful and, you know, sort of making sure we have early signs if any other areas show this sort of a point in the future.

Thank you.

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

Hi, thank you for taking the question. I wanted to ask you about the sensitivity of your margins to revenue growth. And more specifically, what I wanted to see if you could address is we look out over the horizon to calendar year 23. If revenue growth were to slow to something like 10%, just to pick a number, How sensitive is that growth rate to margins? And specifically what I'm asking, could you let attrition and or lower subcons, you know, could you reduce the subcontractors and or just let attrition take your headcount lower such that you could maintain your 21%, you know, percent kind of operating margins? Or just any characterizations on how we should be thinking about the sensitivity of operating margins to the growth rate, which I think you can tell by the question a lot of investors are concerned growth will continue to slow as we look a little bit longer term than your fiscal year. Thank you.

Yeah, I think you answered most of the question yourself. The reality is that we can pivot our operating model quite fast, and fundamentally in the IT services business, the operating leverage element is quite small compared to other fixed cost businesses. So you can in terms of both the points like you've mentioned, right? Firstly, your intake of laterals, your intake of freshers, gradual attrition, the subcon, all these four, you know, literally by quarter you can pivot on these and to get your cost structure in line. So I don't think it's a big, you know, drag and unlike, you know, high six cost industry. So in that sense, I think in the past also we've seen it. A perfect example I would say is looking at the COVID period. where in six months, pretty much everybody in the industry, you know, when they were seeing negative growth, had pivoted, at least on the margin front. Of course, we didn't see degrowth during that time, but nonetheless, even the slower growth at that time, we were able to pivot our entire cost model.

Okay, yeah, and to be clear, I wasn't asking you to guide margins. I was just asking for the sensitivity when we think about it. I think your answer embeds that you can manage your cost structure better regardless of the revenue growth rate, to sustain margins even if growth were to slow. Okay. Okay. And any comments more specifically on, you know, how we should be thinking about attrition as you exit the year? You said you would move it lower, but, you know, should we be thinking, you know, kind of a point and a quarter, or how should we be thinking about attrition as we look out to the end of your fiscal year? And that's it for me. Thank you.

Yeah, so I think like Salil has mentioned, you know, three consecutive quarters of decline, 2.5% decline in this quarter itself, and indicators into going into Q3 because we have a lot of geographies like a 90-day notice period, and that gives us a reasonable view of what's coming ahead. And we continue to see that, you know, go that figure of attrition going down.

Okay, many thanks.

Thank you. Our next question is from the line of Ankit Pandey from ICSS Securities. Please go ahead.

Hi. Thank you for the opportunity. I just have two questions. Sanil wanted to understand the trend of your TCV number. Wanted to understand how the mix between cost optimization and transformation change since last three quarters and has the deal tenure increased now as compared to before?

So, thanks for the question, Mr. Salil. First, on the large daily pipeline itself, are you asking on the PCB we declared as large deals?

The trend between the PCB actually. For the large deals. How the mix has changed between cost optimization and transformation.

Yes. So there, on the large deals itself, we have looked at it within our numbers. That's not information that we have shared outside. What I can share with you is what we see in our pipeline today is a good focus on cost programs. And we are also seeing, because of the growth of call that I shared earlier, that we have both sides growing. Of course, digital growing over 30%, but we also see now the cost programs, which core reflects in part, are also growing.

Thank you. Last question. And then if I turn to pricing, right? So just wondering what the tone and tenor of pricing conversation have been and how they have progressed since last two quarters. And right now, How are you building in? Thank you.

Yeah, so like we said, you know, it's horses for courses. It is client-specific. It is whether there's a new deal, is it a renewal, is it an SP deal, is it a T&M, is there a COLA clause? It is really, really complex. But one message clearly I've said is that we are actually purchasing discount, which used to be quite a large in order of pricing, you know, in terms of renewals, etc., That definitely has come down to a lot more focus with this on the client, and the clients also appreciate that because they're seeing the same impact on their tuition, et cetera. So these are some of the things we've seen. Cola clauses, we are seeing a more, you know, a larger implementation of that being able to push some of the cola increases. In some cases, it is you have to show more value to the customers in terms of digital rates, what are you able to offer to clients in terms of transformation dollars. So like I said, it's varied across clients, but like I said, it's going to be a long haul. We've never said it's going to be easy, and that continues.

Thank you.

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

Hi. Good evening, team, and thank you for taking my question. My first question, Salil, was for you to help us understand on the deal-in side. So we have seen quite a sharp acceleration in the event, especially in the new deal side, which has almost doubled both quarter on quarter and YOY basis. At the same time, we are talking about some caution coming in at some of the verticals and some of the clients taking more cautious turns. So in that context, what is driving the sharp increase in our new deal event? Is it that these discussions of caution is still at the CXO level and we are yet to see the impact of that? in the deal wins, or these concerns are getting compensated by higher focus on the cost side?

Thanks, Salil. The deal wins, I think, represent the strength that we have on both sides of the capabilities, on digital and on core automation. And so what we are seeing today is we have the ability to be appropriate for clients depending on what macro they are facing. And as the overall macro evolves, we have both sides, let's say, ready for that. And there, my sense is we have sort of a differentiation from up here with this approach. We've also put a little bit more emphasis within our pipeline on proactively looking at automation cost deals with our clients. So that is what's driving it. Having said that, it's also to be kept in mind that large deals are deals which are over 50 million for us, and we've always maintained that these are not, there is no sort of quarter-on-quarter trend on this. It's more to look at, you know, a four-quarter period and gives you a sense. So that's also something to keep in mind.

Got it. Thanks for that. Second question goes for Nilan. So you have talked about margin band and margin coming closer to 21%, and we have already done 21.5% in this quarter. So that effectively implies we are not expecting sequential margin improvement meaningful from here on. And that is in the context when we are talking about that the supply side concerns have started easing and our subcontracting cost is also coming down. So where do these two points meet when the supply side issues are resolving, but we do not expect margin to expand from here on this year?

Yeah, so I think firstly, we are at 20.7, right, for H1. And like we said, the guide is to 21 to 22%. We also go into a Q3, Q4 in a seasonally weak quarter as well because of furloughs and working days. And those are straightaway a drop down to margins. Yes, we are seeing some of the benefits which we are getting from a lower attrition figure. And all these basically play into, you know, the guidance which we have given for the year.

Got it. Thank you. That answers my question.

Thank you. Next question is from the line of Dipesh Mehta from MK Global. Please go ahead.

Yeah, thanks for the opportunity. Two questions. First about moderation in revenue group trajectory, which you are implying from the revised guidance. So can you answer some of the segments which are likely to be softer? But even after considering, there seems to be some sizable moderation which is happening in next two quarters. So, if you can provide some sense whether any specific industries where you are seeing more weakness of client-specific situation. Second thing is about the deal intake. Now, you indicated about cost efficiency program and cost takeout program. So, in optic kind of thing, do you think it would lead to higher deal TCV closures in next few quarters? And any mega deal which you can, let's say, how the mega deal pipeline is tipping up and if you can provide some progress or clients are different to take those kinds of decisions. Thanks. Hi, this is Salil. I didn't follow all of it. The first one, I think, is talking about the future Q3, Q4 growth in the segments. If that's the question, we don't give more color for future growth, firstly by quarter or by segment. But overall, I go back to what we shared earlier, that the macro environment has some areas which we are looking at with more caution. Our overall demand, the pipeline is strong. And both sides of our engines, both engines are doing well, digital and core and automation. then I didn't follow the next point. The second question was about the cost efficiency program or cost takeout. Generally, they are large in TC because of tenure and overall volume efficiency which clients are generally expecting. Considering the mix is now tilting towards those programs compared to discretionary digital program, do you think DLTC will be showing uptake which we have seen even in Q2 which is the seven-quarter high kind of DCD? So on the cost optimization, if I follow what you're saying, we see good discussions of that with our clients. In some of the industries, we see more of that in others at a moderate level. So that's where we are seeing a good traction which is also showing up in the growth of core services. Deal TCV, again, to us, quarter by quarter, it can go up and down because these are deals over 50 million and these deals take some time to build up. As the London share is at 27 deals in Q2. But if I look more at an annual cycle, you know, there's a good way of looking at large deals across. On a quarter-on-quarter basis, we don't have like a simple way where we forecast it. It can go up and down. Let me rephrase the question. Do you think that size of the deal between digital and cost takeout, by nature cost takeout will be larger in size or you don't think any such thing? Oh, the size of the deal. Sorry, I did not follow that. No, I don't think so because sometimes there's a very large digital transformation program at a client and sometimes there could be a large modernization plus cost efficiency program. Sometimes there could be only cost efficiency program. So there is not like one is larger and one is smaller like that.

Understood.

Thank you.

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

Yeah, hi, good evening. Thanks for the opportunity. I wanted to ask on the client performance this quarter. So I think most of the revenues have come from the non-top 25, and top 25 has been relatively soft. So I just wanted your thoughts on that. Is that what you're seeing? Do you see that softness sort of continuing? And do you think, you know, the remaining can sort of hold up? So that's the first question. The second one is, do you think the, I think over the past two years, there were a lot of smaller size deals that sort of was a reasonable mix. overall and that sort of led to faster velocity and deal conversion, deal to revenue conversion. Do you think in the new sort of setup wherein it is more cost optimization, the deal to revenue conversion should slow down or there is no such thought process there? Thank you. I will start with the second one. In general, at a higher level, there is no big correlation between the conversion of a deal to revenue. Sometimes there is an immediate large impact because there is early transformation. Sometimes there is rapid transition. And other times it's more drawn out in the size of these, specifically large deals, which are more than 50 million. There is no real correlation. like a conversion like that, which is, you know, you can correlate it to something. And the first point was, I think, the top client. I think the question was about the 25 clients, you know, the decline from 36.3 to probably 35.3. No, I don't think there's anything reading that. In fact, I'm also seeing it for the first time. But one thing to be kept in mind is also there's a lot of cross-currency applicable during this time, right? So there could be clients in certain geographies like Europe, etc., who could be in the mix. But nothing we have seen unusually in the top 25 is slowing down or anything like that. Sure, fair enough. Just one last quick one from my end. How big is capital markets for us within the financial services piece? Because I thought that should normally be a cause for concern, but I haven't heard that in any of the calls so far. So just wanted your thoughts on the same. So there, we typically don't break up the segment beyond what we have given in financial services. We have a very good business in capital markets across the board, but whole financial services as retail, insurance, asset management, and capital markets, among other things. But is there any slowness that you're seeing within that piece or that wasn't a call out at all? So just curious. There we are not. So the ones we called out at this stage were related to what I shared earlier, which was on mortgages and financial services, parts of retail, high tech and telco. Sure. Thank you so much and all the very best.

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

Yeah. Thanks for the opportunity.

Sorry to interrupt. Mr. Shah, this is the operator. May we request you to switch to a web mode, please, and speak? Thank you.

Yeah. Am I clear now?

Better, sir. Thank you.

Yeah, yeah.

Just if I look at the... I'm sorry, Mr. Shah, your voice is fading again. Maybe if you can rejoin the queue. Am I clear now? This is better. This is fine, sir.

Yeah, yeah. So can I start now?

Yes, please. Could you repeat the question, please?

Yeah, yeah.

So the ask rate to achieve the guidance is 0 to 1.2% in the next two quarters, which looks softer despite a strong deal wins. Also, we are talking about more cost optimization deal coming along the digital deals. so is it a client specific issue or is it higher than a normal furloughs are we factoring or this is more a conservative way of looking at things because of the higher macro issue in the second half and I have a follow up which I will ask later. So there first what we are seeing typically as you know the Q3 has furloughs. We have not estimated anything higher or lower. We've essentially had a sort of a similar estimate to previous years. We typically have both Q3 and Q4 have more seasonality for us in the past year, so that's what we've estimated. And then for the macro, what I shared earlier is the sort of color that we put as we were developing the guidance, and then we factored in the largest. So there is no, let's say, additional view to say whether it's conservative or not conservative. It's those factors we've taken into account and developed the guidance. Yeah, and the follow-up is the question to Nilanjan. So, if I look at, we are implying EBIT margin guidance of 21.3 in the second half versus 21.5 in the second quarter. This is a Q1Q decline versus Nilanjan, your first quarter comment was in 2Q, 3Q, 4Q, we may see a Q1Q increase in the margins. And the way we are in terms of the utilization as well as likelihood of lower subcontracting costs, likelihood of lower pass-through costs. Is it fair to say again on margin we are conservative or there are some additional cost headwinds which we should be aware about? No, I don't think we are conservative. I think we are realistic in our margin projections. We see, like I said, certain headwinds. We see some impact of furloughs. Like I said, yes, some of the efficient impacts will come, but those are more longer-term impacts. Some of that will be in sub-coms, etc. And also, of course, with the seasonality of the volume, of course, the levers in that sense, you don't have growth as a lever, really, in terms of operating leverage. And the question came to dramatically change your margin profile. So SG&A, for instance, You know, there are other things where you have some operating leverage. So, these are multiple things and that's all factored into the figure which is even called RH2. Okay, okay. And just last thing, on the variable pay, it looks like in the first quarter, we might have paid 70%. How was the variable pay payment in the second quarter? Is it a headwind or a tailwind on a QRQ basis? So in variable pay, we don't share that number externally. As you know, we will come back with what we do from an internal basis when we disclose it internally. Okay. Thanks and all the best.

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

Hi. Thank you for the opportunity. Just had one clarification question related to the margin performance for the margin improvement this quarter. When one looks at our cost schedules it appears that subcontracting expenses are down by about 120 bits, while in your opening remarks you suggested that subcontracting is down 40 bits. So, just to understand if some of the large deals cost optimization being captured in the in the cost of taking the subcontractors.

So I think that is the cost as a percentage of revenue. But the impact on margin is what is the premium you are paying to subcontractors or employees. It's just not a mathematical impact of subcontractor cost coming down from 11 to 10. By that token, if we say we can bring down subcontractors to zero, our margin can go up by 10%. So this is just the premium you are paying to subcontractors which is impacting your margin. That's the quality of this.

Sure. And one last question was with regards to the hiring process. that we have seen through the year. We have already hit the full year hiring target in terms of the pressure intake. How should, how are we thinking about the pressure intake in second half of the year given the fact that there have been some media reports of companies in the sector delaying pressure onboarding?

Like I said, we are 40,000 in H1 and we will be above the 50,000 as far as We'll get back later on what the number is, but we will go above our 50,000. Sure.

Thank you, and all the best for the future.

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

Hi, thank you. Congratulations on excellent margin performance, Scott, especially considering that utilization has dropped. Could you talk a bit about how you see headroom for utilization and margin improvement as attrition has started to decline? Yeah, sure. So I think at 83.6, we are much lower than what historically we've been. But part of it, in a way, is that the pressure which we have gotten, we want to make sure that we are learning both in our training facility in Mysore plus on the bench. So we are very cognizant of not putting them into projects on day one. And therefore, we are ready to take a hit on, you know, the margins and utilization on account of this because this, you know, is a long-term investment for us. End of the day, we strongly believe the industry can only grow through this special intake year on year. And that's an investment we're ready to make. And over a period of time, of course, we know we can, as, you know, demand picks up and we are able to train them, we can rotate them into projects. So we are quite comfortable. And, of course, we want to get this figure slowly inching back towards our more comfortable 85 area. Great, thanks. And while you talked about concerns starting to emerge in industry verticals like retail, high-tech, telecom, and the market sub-verticals, have we actually started seeing project cancellations or are we just seeing slower decision-making for new programs? So today we are seeing where there are discretionary work that we see slowness in that area. We will keep a watch on anything else that starts to develop in those specific industry verticals. So we don't see cancellations of programs. We see slowness in the discretionary part of the programs. Thank you so much. Best of luck.

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

Thanks everyone for joining us.

Just a few comments from me to close out. In summary, first, we really have both sides, both engines in our business, digital and core, growing, which is very strong for us. digital capabilities and cobalt are resonating and core and automation we believe we have a leading industry leading set of capabilities and that makes us ready for the evolving macro environment. We had large deals of 2.7 billion which we are delighted with and we had a very strong margin performance at 21.5 so margin is clearly part of our focus and we have a strong internal cost program that will help us drive all of these things. Accretion is coming down, so we see a huge impact of the initiatives that we put in place some time ago. So overall, we feel we are a good quarter and we are well positioned for the environment that's coming ahead in whichever scenario that evolves in that environment. Thank you all for joining and we'll catch up in a quarter or so.

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