Infosys Limited American Depositary Shares

Ladies and gentlemen, thank you for holding for the Infosys Limited earnings conference call. We would like to provide you with a few instructions. To ask a question, you may enter star and one on your phone. An operator will check your connection before announcing your turn. All participants are requested to use only handsets while asking a question. Please ensure that there is no background noise while addressing your questions to the management. You may be asked to return to the question queue if you do not have a clear connection. Thank you. The conference will begin shortly. Please continue to hold. Ladies and gentlemen, good day and welcome to the Enphasis Limited Earnings Conference Call. As a reminder, all participant lines will be in the listen-only mode. Should you need assistance during the conference call, please signal an operator by pressing star and then zero on your touch-tone phone. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. 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 Anja, hello everyone and welcome to Infosys earnings call to discuss Q3 FY23 financial results. Let me start by wishing everyone a very happy new year. Joining us today on this call is CIMM Minister Faral Tariq, CFO Mr. Nilanjan Roy and other members of the CIMM management team. We'll start the call with some remarks on the performance of the company by Faral and Nilanjan. Subsequent to this, we'll open up the call for questions. Finally, note that anything which we say that refers to our future outlook 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 filings with SEC, which can be found on www.sec.gov. I'd now like to pass it on to Salil. Thanks, Sandeep. Good evening and good morning to everyone on the call. Thank you for joining us. We are delighted to share with you that our Q3 performance was strong with year-on-year growth of 13.7% and quarter-on-quarter growth of 2.4%. This in a seasonally weak quarter for us and amid a changing global economy. We continue to gain market share. Growth in Q3 was broad-based with most industries and geographies growing in double digits in constant currency. Growth in constant currency for nine months of FI23 was 17.8% compared to the same period of FI22. Our large deal value was 3.3 billion, the highest in eight quarters. With 32 large deals, this is the largest number of large deals in our history. 36% of this is net new. Our pipeline of large deals remains strong. Our digital revenues grew at 22% in the quarter at constant currency and are now close to 63% of our overall revenue. Our cost services revenue grew at 2.4%. We are seeing growth in both areas of our business, digital and cost services. This is a testament to our industry-leading digital capabilities, including our COBOL cloud capability and our industry-leading automation capabilities. both of which are resonating with our clients. Our large deals by client are seeing increased traction for automation and cost efficiency programs. Our results reflect our deep-rooted client relationships coupled with client-centric strategy, differentiated digital and cloud capabilities, strength in automation, and the ability to pivot our business rapidly to changing client needs. Our cloud revenues continue to have healthy growth this quarter. Our clients are focused on accelerating the digital and cloud transformation, both to grow and to become more operationally efficient. They trust us to partner with them through the complexities in managing this change because of our differentiated capabilities. Our industry-leading cloud offering, Cobalt, is playing a key role in helping them navigate their digital transformation. Two examples of this. Cobalt is helping accelerate business growth and resilience for large telco and making the decision making more data driven. We're supporting a leading aerospace company by automation of the customer experience area, leveraging a modernized technology infrastructure, driving materials cost efficiency. Strong growth is accompanied by stable operating margin at 21.5%. This was driven by healthy revenue growth and cost optimization benefits. Our operating margins for the first 9 months of FI23 are at 21% in line with our margin guidance. Our voluntary quarterly annualized attrition continues to decline steadily, reduced by 6 percentage points sequentially to well below 20% for this quarter. We are encouraged by the immense confidence and trust our clients have in us. The signs around us around the slowing global economy are visible. Some areas such as mortgages and investment banking in financial services industry, telco, high tech and retail are more impacted and that is leading to delays in decision making and uncertainty in spending in these areas. We are confident that the strength of our digital and cloud capabilities and our automation capabilities will continue to position us well in the market. We are keeping a close watch on the global economy. Driven by our growth of 17.8% in constant currency for the first nine months of FY23 and strong large deal value for Q3, we are increasing our revenue growth guidance which was at 15% to 16% earlier to 16% to 16.5% despite the change in global economic conditions. We are retaining our operating margin guidance for FI23 at 21% to 22%. We anticipate to be at the lower end of this range. Thank you, and with that, let me request Nilanjan to share other updates. Thanks, Ali. Good evening, everyone, and thank you for joining this call. Let me start by wishing everyone a very happy and safe 2023. Q3 was another quarter of resilient performance. Our revenues grew by 13.7% year-on-year and 2.4% sequentially in constant currency terms despite seasonal weakness. Most of our business segments and GEOs grew in double digits year-on-year in constant currency. Specifically, manufacturing grew by 36.8%, EURS by 25.9%, and Europe grew by 25.3%. Digital revenues constitute 62.9% of total revenues and grew by 21.7% year-on-year in constant currency. Core revenue saw another quarter of growth reflecting the accelerated client focus and cost takeout. Client metrics continue to remain strong with year-on-year increases in client counts across revenue buckets. Number of 50 million clients increased by 15 to 79, number of 200 million clients increased by 5, while number of 300 million clients increased by 3 over the same quarter last year, reflecting our strong ability to mine top clients. During the quarter, we added 134 new clients. Utilization of student trainees reduced to 81.7%, reflecting seasonality and employees joining the bench post-completion of their training. On-site effort mix remained stable at 24.5%. Quarterly annualized attrition continued to trend downwards and reduced further by another 6% during the quarter. This is the lowest quarterly annualized attrition in the past seven quarters. Consequently, NPM attrition reduced to 24.3% as compared to 27.1% in Q2. We expect attrition to reduce further in the near term. Revenue growth was 17.8% in constant currency term for the 9 months FI23. Operating margin for the same period was 21% in line with the lower end of our previous guidance as called out earlier. QC operating margins remain steady at 21.5%. The major components of QMQ margin movement are as follows. There were tailwinds of approximately 40 basis points due to benefits from rupee depreciation and cross currency offset by lower benefits from revenue hedging. 70 basis points from cost optimization including lower subcons. This was offset by headwinds of 30 basis points from higher SG&E and the balance 80 basis points due to seasonal weakness in operating parameters, higher third-party costs, furloughs, etc. Q3 EPS grew by 13.4% in repeat terms on a year-on-year basis. BFO increased by three days sequentially to 68, reflecting higher billing during the quarter. Our balance sheet continues to remain strong and debt-free. ROE increased by 2.2% year-on-year to 32.6%. Free cash flow for the quarter was 3.76 million, a conversion of 72% of net profits. However, YTD EPS was 1.8 billion, which is implying a conversion of 81% of net profits. Yield on cash balances increased to 6.3% in Q3. Q3 marked the 30th consecutive quarter of delivering positive forex income despite the volatile currency environment. Consolidated cash and investments declined from 4.79 billion last quarter to 3.91 billion, consequent to 1.32 billion being returned to investors towards interim dividend and buyback. We initiated the buyback on December 7th and till date have bought back 31.3 million shares, worth Rs. 4790 crores of 51.5% of the total authorization of Rs. 9,300 crores at an average price of approximately Rs. 1531 per share compared to the maximum buyback price of Rs. 1850 per share. Coming to segment performance, we find 32 large deals in Q3 which is the highest ever. TCV was Rs. 3.3 billion, the highest in the last eight quarters with 36% net new. Seven large deals were in retail, six each in financial services and communication, five each in EURS and manufacturing, two in life sciences, and one in high tech. Region-wise, this was split by 25 in the Americas, five in Europe, and two in the rest of the world. Growth in financial services was impacted due to higher than normal furloughs and some specific project closures. These pipelines continue to be strong and oriented towards cost takeout and tech ops transformation. Our competitive position in the industry, as demonstrated in the past years, remains very strong. Retailers are seeing uncertainty on consumer spending as a result of high inflation, high interest rates, and sector economy. However, at the same time, direct-to-consumer and digital commerce are opening up many new opportunities on the back of our growing presence in leading e-commerce platforms and also our very own Infosys Equinox. We had healthy deal flow in the communication segment along with continued steady pipeline. However, cost pressures and economic concerns continue on the client side impacting discretionary budgets. Energy utility resources and services segments reported strong growth along with friendly level of large deal wins in the quarter. The deal pipeline is strong and on increasing trend versus the previous quarter giving medium term growth visibility. Manufacturing segment continues to be robust, supported by healthy pipelines of deals in both traditional and new technology areas. We are helping clients across engineering, IoT, supply chain, cloud ERP, and digital transformation, including helping clients accelerate their journey to the cloud. We continue to see caution around budgets and spending for consumers in the high-tech segment, especially around distributional spend areas. For digital service capabilities in Quadruxy, we have been ranked as leader in seven ratings for our cloud services, digital engineering services, and sales force implementation services. We have also been positioned as a major player in seven ratings for our IoT and engineering, security, and automation services. We believe our structural lever for medium to long-term work for the industry remain intact, and Infosys is well-positioned to support its customers in their transformational journey. With strong revenue performance in the first nine months of the year, the revenue guidance for SI23 is changed to 16% to 16.5%. Operating margin guidance band remains at 21% to 22% for the year, and as mentioned previously, we expect to be at the lower end of the range. With that, we can open the call for questions.

Thank you very much. We will now begin the question and answer session. Participants who wish to ask a question may press star and 1 on their touchtone phone. If you're using a speakerphone, please pick up your handset while asking a question. This is required to ensure optimum audio quality on the call. Should your line have any disturbance, you may be asked to return to the question queue if you do not have a clear connection. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Moshe Katri from Wedbush Securities. Please go ahead. It looks like Mr. Khatri's line has dropped. In the meanwhile, we'll move to our next question. That's from the line of Nitin Padmanabhan from Investec. Please go ahead.