Infosys Limited (INFY) Q3 2022 Earnings Report, Transcript and Summary

Ladies and gentlemen, good day and welcome to the Infosys Earnings Conference Call. As a reminder, all participant lines will be in the listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sandeep Mahindroo. Thank you, and over to you, sir.

Thanks, Margareth. Hello, everyone, and welcome to Infosys earnings call to discuss Q3 FY 2022 results. I'm Sandeep from the Investors Relations team in Bangalore. Let me begin by wishing everyone a very happy New Year. Joining us today on this earnings call are CEO and MD, Mr. Salil Parekh; CFO, Mr. Nilanjan Roy; along with other members of the senior management team. We'll start the call with some remarks on the performance of the company by Salil and Nilanjan, after that we'll open up the call for questions. Please note that anything which we say that refers to our outlook for the future is a forward-looking statement, which must be read in conjunction with the risks that the company faces. A full statement and explanation of these risks is available in our filings with the SEC, which can be found on www.sec.gov. I would now like to turn it on to Salil.

Thanks Sandeep. Good evening, good morning to everyone on the call. Wish you all a happy new year and trust you and your dear ones are well and safe. Thank you for making the time to join us today. I am delighted to share with you that we had an extremely strong quarter, with 7% sequential growth and 21.5% year-on-year growth in constant currency terms. Our year-on-year growth was the fastest we have had in 11 years. The growth was broad-based across industries, service lines, and geographies, driven by a differentiated digital and cloud capabilities. A strong broad-based growth in a seasonally weak quarter is a clear testament to the enormous confidence clients have in us to help them accelerate their business transformation. This has been made possible by the relentless commitment from our employees through these challenging times. I'm extremely proud as well as grateful for the extraordinary efforts in delivering success for our clients. Our growth has been accompanied by resilient operating margins at 23.5%. We delivered these margins while keeping in the forefront our focus on our employees with increased compensation and benefits. Our digital business grew by 42.6% and is now 58.5% of our overall revenues. Within digital, our cloud work is growing faster and at Cobalt cloud capabilities are resonating tremendously with our clients. Some of the highlights of our results are: revenues at $4.25 billion where the growth 21.5% year-on-year and 7% sequential in constant currency, broad base across all industries, service lines and geographies. All of our segments reported strong double-digit growth. Large deals at $2.5 billion; onsite mix at 23.8% and utilization at 88.5%; operating margins strong at 23.5%; free cash flow at $719 million; attrition increased to 25.5%. Our quarterly annualized attrition was flattish on sequential basis. We had a net headcount increase of 12,450, attracting leading talent from the market. We've increased our annual college recruiting target to 55,000 and Nilanjan will comment more on this. We remain comfortable with our ability to support our clients in their digital transformation journey. Financial Services grew at 15.5% in constant currency, with broad-based growth across geographies and steady deal wins. Various sub-sectors like lending, mortgage, cards, payments have seen increasing demand and clients are driving cloud transformation initiatives to build resilient and scalable platforms. The Retail segment growth was 19.8% in constant currency. Across sub verticals we see increased client spend on digital transformation, including digital supply chain, omni-channel commerce and large scale cost takeout initiatives to improve business resilience. We signed six large deals in this sector in the segment during the quarter. The Communication segment grew at 22.2% in constant currency. Segment performance continued to improve with ramp up of recently one deal. Client budgets are focused on digital and customer experience programs, increasing networking infrastructure, cloud adoption, and security with emphasis on 5G rollout and innovation spend. Energy, Utilities, Resources and Services vertical continue its steady performance, with 13.6% constant currency growth and five large deal wins. We are seeing gradual improvement across various businesses as consumer spending continues to increase and clients' focus on increasing technology transformation around areas like customer experience, cybersecurity and workload migration to the cloud. Manufacturing segment growth accelerated to 48.4% in constant currency, with continued ramp up of the Daimler deal and steady momentum in new deal wins. We see across the broad improvement within various sub-sectors and geographies, and expect client focus to continue in areas like smart manufacturing, IoT, digital supply chain and connected products. Hi-Tech growth improved during the quarter to 18.9% in constant currency. Clients are seeing renewed momentum in terms of spending on digital transformation programs linked to customer, partner and employee engagement. The Life Sciences segment performance also improved further to 29.2% growth. Adoption of digital health, steady health and patient access programs are resulting in significant uptake of cloud IoT patient-facing applications, patient portals, and next-generation CRM work. We had a very strong performance on our income tax program in India. Over 5.8 crore or 58 million tax returns were filed using the new system by the deadline of December 31st, 2021. On the last day over 46 lakh or 4.6 million tax returns were filed, and during the peak hours over or 5 lakh or 500,000 tax returns were filed. We are proud to be supporting the digital strategy for India and for the government, and working on this program for future modules that will be developed. Across digital services, in Q3, we have been ranked as leader in 12 digital service related capabilities from artificial intelligence and automation, cloud services, IoT, engineering, modernization, and big data and analytics. The strong overall performance stems from four years of sustained strategic focus on areas of relevance for our clients in digital and cloud, continuing rescaling of our people and deep relationships of trust our clients have with us. With this strong momentum in the business and the robust pipeline, we are increasing our annual revenue growth guidance from 16.5% to 17.5%, moving up to 19.5% to 20% in constant currency. Our operating margin guidance remains at 22% to 24%. With that, let me hand it over to Nilanjan for his update.

Thanks, Salil. Hello everyone, and thank you for joining the call. Let me start by wishing everyone a very happy and safe 2022. Q3 was another successive quarter of continued acceleration in revenues at 7% constant currency Q-on-Q growth and 21.5% constant currency year-on-year growth, the highest year-on-year growth in the last 11 years. Despite the Q3 seasonality, it was just strong broad-based growth across fields and verticals. Our largest geography North America grew at 21.4%, while growth in the Europe accelerated to an impressive 27.2% year-on-year in constant currency terms. Retail, Communication, Manufacturing, and Life Sciences also saw 20% or higher year-on-year growth in constant currency. We won 25 large deals and large deals those with over $15 million TCV, totaling $2.5 billion of TCV six in Retail; five each in Financial Services, Communication and Energy, Utilities, Resources and Services; two in Manufacturing and one in Hi-Tech and Life Sciences. Region-wise 16 were from the Americas, seven were from Europe and two from ROW. The share of new deals increased in Q3 to 44% within the larger deal numbers. Client metrics improved further with 100 million, client count increasing to 37, an increase of eight year-on-year. We added 111 new clients in the last quarter. Operating parameters remain robust. Utilization was 88.5%, slightly lower than the previous quarter easing some of the supply side pressures. Onsite FX mix in stock marginally to 23.8%. Q3 margins remained resilient at 23.5%, a marginal drop of 10 basis points versus previous quarter. The major component of the sequential margin movement was below. 80 basis points impact due to comp hikes and promotions and other employee intervention, 40 basis points impact due to the utilization decline. These will offset by about 20 basis points benefit due to the rupee and other cross currency movement, a 50 basis points benefit due to cost optimization. And then another 40 basis points benefit due to SG&A leverage and other one-off included therein. Q3 EPS grew by 11.2% in dollar terms and 13.1% in rupee term on a year-on-year basis. Although, DSO increased to 71 days due to higher seasonal billing and increase the five days work in the last quarter, it is still a reduction of two days versus Q3 of prior year. Free cash flow for the quarter was healthy at $719 million. Free cash flow as a percentage of net profit was 93% for Q3 and 104% for the nine months to-date. Yield on cash balances improved to 5.29% compared to 5.13% in Q2. Our balance sheet remains strong and debt-free. Consolidated cash and investments at the end of the quarter stood at $4.28 billion after paying over $815 million of interim dividend during the quarter. Return on equity increased further to 30.4%, an increase of 3% over Q3 of the prior year, driven by robust performance and consistent capital return through share buyback and increase dividend payouts. On the employee front, voluntary long-term 12 months efficient increased to 25.5%. And as Salil commented while attrition continues to increase due to the tail effect quarterly annualized attrition was flattish compared to Q2. We will continue to invest in all aspects of talent retention, including compensation, promotion, skills incentive, learning, and career progression. We have also simultaneously increased the pace of hiring, talent reskilling and the usage to subcon to prevent any impact on client commitments. We have added over 12,450 employees, talented employees on a net basis in the last quarter, which is the highest ever. Our global college graduate hiring program for this fiscal has been increased to over 55,000 versus the previous quarter number of 45,000. In India, over 93% of inpatients have received at least one dose of the vaccine. Over 90% of our employees globally are presently working in a remote environment due to the heightened precautions against the new variant. Driven by robust demand environment and our continued market share gains, we have further increasing our revenue guidance for FY 2022 to 19.5% to 20% in constant currency terms from 16.5% to 17.5% earlier. And the margin guidance remains unchanged at 22% to 24%. With that, we can open the call for questions.

Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Ankur Rudra from JP Morgan. Please go ahead.

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

Hi Ankur. This is Salil. Sorry, you broke up a little bit. You said there was the incremental?

Where the incremental surprise came from? The full year guidance has been increased very sharply, given the performance in the quarter. Where did the surprise come from?

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

Thank you, Salil. Salil, the growth trajectory has continued on a year-over-year basis for the last six quarters.

Sorry to interrupt Mr. Rudra. Your voice again -- it was breaking.

Apologies. Let me try it again if you can hear?

I'm afraid. Sir, your voice is not clear. I would just request you to please check your phone line and rejoin the queue. In the meanwhile, we'll move to the next question, which is from the line of Moshe Katri from Wedbush. Please go ahead.

Hey, thanks. Happy New Year and congrats on very strong results. One, I know this is -- we just reported Q3, but are you ready to talk a bit about the entire calendar year down the road 2022? What do we -- what's changed in terms of visibility? Maybe I guess the biggest question is going to be if this is sustainable down the road and what can you kind of talk about in terms of color to give us that comfort? And then on top of that, maybe you can talk a bit about some of the cushion in margins and what sort of levers that you have in the model, especially as some of the bench continues to benefit from the off-campus recruiting, that's been pretty robust. Thanks a lot.

Thanks Moshe. This is Salil. I'll start off with the first part and Nilanjan will comment on the margin leavers. Of course, as you referenced, we have guidance through March 31 of this year, the color for this calendar year, broadly we see the demand environment remaining strong, declined budgets are looking good. Our overall pipeline is the largest we have had in a very long time. The number of large deals that we would able to close as Nilanjan shared, 25 large deals each over $50 million for a total of $2.5 billion and 44% of these are net new. So, all of those things are giving us a good confidence for what we see going ahead. Of course, we will have our guidance for the -- for our financial year in April. Nilanjan, over to you please.

Yeah. Thanks Salil. Hi, Moshe. So on the margins, like I mentioned earlier, they were quite resilient for the quarter. I think a couple of things I just wanted to call out. Of course, in armory, cost leavers, whether it's the onsite offshore mix, it's the pyramid whether it's automation. Of course, these are something which we continually look deploying. Going ahead, of course, our subcon for us really ramped up and that’s an area we will continue to look ahead. The other thing is cost pricing. And it's important to talk about that as the higher cost cut not feeding into a new deal, et cetera. I think that should hopefully have a benefit. Of course, as digital talent start getting pricing, we are able to show value to our clients in terms of the business transformation. Now, again, this is something we have started recently. It will take time to kick-in and we've talked about in the last quarter as well. But really that is the focus. If we can start getting into more that cost side and also making sure that we are not leaving any $0.03 and dollars on the table as part of our pricing negotiation.

Thanks guys. Good luck.

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

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

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

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

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

Okay. So, more of a reflection of flexibility that you want to keep it yourself. Got it. Thanks a lot for those answers. I fall back.

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

Yes. Thank you. I want to pick up on that line of questioning. If you could just talk about the puts and takes, as you see margins over the course of the next three, four or five quarters, really calendar year 2022. And I wanted to see if you could address what you think the impact would be for a few things. So, for instance, one of the headwinds this quarter was utilization. What -- how should we be thinking about utilization trends during calendar year 2022? Number two, could you speak to -- I think you said attrition was flat sequentially. How do you think about attrition trends over the course of calendar year 2022? Do you think that they can move lower, or is the market such that demand so strong that attrition will probably remain elevated? And then number three would be, you just brought up travel or any other issues that we should be thinking about that may impact calendar year 2022 margins and any other issues you want to bring up, and that's it for me. Thank you.

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

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

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

Terrific. Many thanks. Congratulations.

Thank you. The next question is from the line of Diviya Nagarajan from UBS. Please go ahead.

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

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

Got it. You earlier elaborated your skills and capabilities, but if you were to kind of think of any future investment that you're going to make, in which direction would your kind of direct that in terms of your skills and capabilities?

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

Good enough. One last bookkeeping question, your other segment had a big swing this quarter. If anything particular that we should be looking at you? Any one-off or is it something -- and if not, what drove that extensive.

Yeah. So I will take that. So, that's coming from India. We have some seasonality with some of our clients at quarter-end and that we will also in the [technical difficulty] of India.

Got it. Thank you and wish you all the best for coming season.

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

Thanks for the opportunity and congrats on good set of numbers.

Sorry to interrupt you Mr. Mehta. I would request you to come closer to the phone.

Sorry. Can you hear me better?

Yes, this is better. Please go ahead.

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

Salil, do you want to take that?

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

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

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

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

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

Yeah. Hi. Good evening to the management team. Happy New Year, and thanks for taking my question. First of all, congratulations on a very good set of number. So, Salil, I have a very simple question. You see now -- a lot of core which is 41%, 42% of the businesses stabilizing on a year-over-year basis. It is probably a stat, a little growth is there, but digital continues to be at 40%-plus growth. So, is this trend continues next year? Maybe our core will become 32%, 33% of the overall pie. So what is your sales from a long-term perspective? Where do you see this core stabilizing, or do you think it will be very unfair to see them separately? And in next two, three years, you think everything will converge together? So any idea, any thing which you can share on that one will be very helpful.

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

Yes. Thanks. That very helpful and best of luck for the current quarter. Thank you.

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

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

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

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

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

No, I don't think so. I think we will continue to have very robust fresher program, it's always been there. We have an internal -- strong internal rotation program, so people will -- based on the skills they take into to our reskilling program, we will move them to new projects, promotion. In that sense, we think it will be a combination of what laterals and freshers as well. I don't think we see any change in that.

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

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

Yeah. Thanks for the opportunity, and congratulations on a solid execution, both on revenue and margins. The first question is, see 2021 or FY 2022 had a benefit of mega deal wins, especially from Vanguard as well as Daimler, as well as some amount of pent-up demand for you as well as the industry. So, the question is, entering into next year, do you believe that these elements one has to take care in terms of tapering of any growth in the next year, or do you believe the digital adoption journey, cloud adoption journey has a low penetration, which does not make us upset in looking in the next year in terms of the growth momentum as of now?

So, thanks for the question. For first, the guidance increase, as I'm sure you've seen is strong, the year ending March of this year, we have not yet commenting then the quantitative guidance for next year. What is clear nonetheless is the demand environment remains strong and upward for year of services and capabilities, especially on cloud and digital are resonating with clients. And we see a good pipeline for that. Our large deal in this quarter was also very strong. We continue to see a good last deal pipeline. We've seen a steady expansion of our clients, so 50, 100, 200 million and so on. And so we see that expansion within client is working very well and also a new client wins, new accounts are working well. So, overall, with the various elements of continuing this demand environment strongly, that we don't have a specific guidance yet for April 1/2022 -- year starting in April 1/2022.

No. No. Fair enough. And just last two bookkeeping question. The way I look at as Daimler deal has two legs to ramp up, one being the rebadging and employee related ramp up and second being the pass-through data center related ramp up. Is it fair to say that most of these two legs ramp up is largely behind or may continue in Q4 as well as 1Q of next financial year? And second, in terms of FY 2022 wage hike, is it largely over or something is due in the fourth quarter as well?

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

Okay. Thanks and all the best.

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

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

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

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

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

Sure. Thank you and all the best for the future.

Thank you. The next question is from the line of Ruchi Burde from BOB Capital Markets. Please go ahead. Ruchi Burde, your line has been unmated. We lost the line. So we'll move to the next question, which is from the line of Rahul Jain from Dolat Capital. Please go ahead.

Yeah. Hi. Thanks for the opportunity. I have -- and congratulations on strong numbers. I have a question regarding the core revenue, which has seen stabilization in this year. I think if this point partly, but wanted to understand what could be the prospect for this side of the revenue in the coming years, especially when we talk about so much shift to digitalization. So what should be the prospect out here, this is the question number one.

So, there we have no individual guidance for digital or for the core in that sense, which is -- even for Q4 or for the next financial year. But structurally what is clear is, we have been successful in guiding automation and modularization. We make sure that we are probably the most competitive, large player in the market working with large enterprises [technical difficulty] we can continue to execute on that. My view is [technical difficulty] and that will own benefits in the medium term.

Right. Right. I appreciate the color. One more thing, on the taxation part, our tax rate -- you don’t study, it has been upwards of 27% on an average. This looks little higher, given the kind of country that most of our earning belongs to, so any flavor you can share in terms of what should be the ideal tax rate on accumulable [ph] basis and in the year ago.

Yeah. So, I think our tax rate has always or around this 27%, 28% range. And I don't think you'll see much movement going against it because any case, as you know, the India only -- because it is India only plus country which have today, that's a 25% India only. So, I think in the long run you will be around this range itself.

So, which region profitability is or tax rate much higher than the 25% rate, also for taking this number higher than the average for India itself.

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

Okay. Okay. So, if you had not able to set that up, that is result in double taxation and -- to jurisdiction. That is also a reason. Okay. Got it. Thank you so much.

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

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

Yeah. So, what we had announced in FY 2020 basically was that we had taken our capital allocation to 85%. It was 70%. And we said that we will pay this out over a period of five years, through a combination of progressive growth oriented dividend policy plus either shared buybacks or one-off -- special dividend. And in the first two years, as we announced, we have actually paid back 83% through higher increased normal dividends. And also through this share buyback, which we announced last year. So, we've already paid back 83% and we remain quite committed to our overall 85% five-year number.

Got it. Thank you so much.

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

Yeah. Thank you for the opportunity and congratulations on a great quarter. My question is on your employment cost, which partially has been addressed. But how should we think about the core employee cost growth, which comes under the cost of revenue, which has been around 4% over the last -- over Q1 of FY 2021 versus a 6% revenue growth. And this has been in light of a very sharp increase in attrition. And, of course, so that's applied challenges and et cetera. So, if you could just highlight, I mean, what -- how has the company sort of -- are our wage hikes in line with the industry, or have they been much, much higher than the industry? How should we think about this historically? And if you could give some kind of an outlook over there as well. Thanks.

Yeah. So you have to see both employee cost and subcon together for the cost of people as a combination of both Q1 in isolation, that's number one. Number two, we get some overall cost perspective. We have thought -- are very focused on attrition and being competitive in the market, as well as being employer of choice for many of our employees going ahead. So we look at more interventions on the compensation side, like Salil said in Q1, Q2, we did across -- in January, we did across the board. In July, we've done across the board. In Q3 as well we have done very segmented and targeted on talent, and we continued doing that into Q4, et cetera. And looking at high points of attrition, do we get much more tactically to see where we are seeing, demand being high in the market for those skills and target those employees really. So, I think it is a very nuanced and like I said [indiscernible] and we will continue doing that.

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

In terms of the guidance, it's a very strong guidance, which is 19.5 to 20. There is no further other -- and saying that it is going to [technical difficulty] also stable. This year very good demand outlook. We see good large deals, good for the year. But the guidance is I think a very big move up from where we were in the last quarter.

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

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

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

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

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