Infosys Ltd Q2 FY2023 Concall Summary

Key Takeaways

• Strong quarter, guidance raised: Constant-currency revenue grew double digits across all industries and geographies, and the full-year revenue growth guidance was narrowed to 15%–16%, at the higher end of the previous band.
• Record large deal signings: TCV of \$2.7 bn is the highest in seven quarters, with 54% net new, driven by a deliberate pivot toward cost optimization and automation deals alongside digital transformation.
• Margins expanded sharply: Operating margin rose 150 bps QoQ to 21.5%, powered by cost optimization, currency benefits, and a reduction in subcontractor spend, partly offset by compensation hikes.
• Attrition is on a clear downward path: LTM attrition fell to 27.1% from 28.4% in Q1, marking three consecutive quarters of decline, with further improvement expected.
• What to watch next quarter: Whether the cautious client behavior in mortgages, retail, hi-tech, and telecom spreads to other verticals, and how the seasonal furlough impact in Q3 is absorbed against the margin guidance.

Demand Environment

• Broad-based double-digit growth: All industries and geographies grew in double digits in constant currency, with digital revenue at 61.8% of the total growing 31.2% and core services accelerating due to automation capabilities and client interest in cost optimization.
• Two engines running: Management emphasized a dual strategy: digital transformation work continues strong, while a deliberate pivot toward automation and cost-efficiency deals is capturing demand from clients under macro pressure. The large deal pipeline reflects both.
• Pockets of caution emerging: Specific areas showing client cautiousness include mortgages in financial services, parts of retail, and now hi-tech and telecom, where discretionary spend is under pressure and deal closures face some delays. No project cancellations have been seen.
• Europe a standout: Europe delivered 28.5% constant currency growth, continuing a multi-quarter trend of very good traction.
• Budget visibility approaching: Management noted that Q2 is when they start to get a sense of calendar-year client budgets; that picture was not available last quarter but will become clearer in the next few months.

Parekh: "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."

Deal Wins & Pipeline

The large deal engine delivered its best quarter in nearly two years: 27 large deals signed with TCV of \$2.74 bn, 54% net new. The pipeline going forward is larger than in the last couple of quarters, with a strong focus on cost reduction programs in addition to digital transformation.

• Pivot to cost optimization: Management has put more emphasis within the pipeline to actively look at automation and cost deals with clients, and this is showing up in the growth of core services. Traction is good in some industries, moderate in others.
• Differentiation claim: Management believes the combination of digital and core/automation capabilities creates differentiation from peers, allowing Infosys to be appropriate for clients regardless of which way the macro environment evolves.
• Deal tenure and mix: Management declined to share the mix between cost optimization and transformation deals in TCV or whether deal tenure has increased, calling it information not shared externally.
• No inherent size difference: When asked whether cost-takeout deals are inherently larger than digital deals, management pushed back, stating that sometimes digital transformation programs are very large, sometimes modernization-plus-cost-efficiency programs are large, and sometimes pure cost-efficiency programs are large — one is not inherently larger than the other.

Parekh: "The deal wins I think represent the strength that we have on both sides of the capabilities - on digital and on core, automation. So what we have seen 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 ready for that."

Margins

• H1 margin at 20.7%: Full-year guidance is 21%–22%, with management expecting to be at the bottom end of that range. H2 margins must rise from the H1 level to hit that target, despite Q3 and Q4 being seasonally weak due to furloughs and lower working days.
• Fresher investment as a deliberate drag: Utilization at 83.6% is much lower than historical levels because freshers are kept in training rather than deployed on day one. Management calls this a long-term investment and is comfortable taking the margin hit, with a plan to inch utilization back toward 85% over time.
• Subcontractor cost nuance: The 120 bps decline in subcontracting cost as a percentage of revenue does not mechanically flow to margins; the margin impact is only the premium paid to subcontractors versus own employees, which was 40 bps.
• Cost structure flexibility: Management argued that operating leverage is quite small compared to other fixed-cost businesses, and they can pivot on lateral intake, fresher intake, attrition, and subcontractors literally by quarter to align the cost structure with revenue.
• Pricing progress: Discounts on renewals have visibly come down, and COLA clauses have seen larger implementation. Management is trying to increase prices on the digital rate card but describes pricing improvement as a long haul that will take time.

Roy: "We are very cognizant of not putting them into projects on day one and therefore we are ready to take a hit on the margins and utilization on account of this. We know this is long-term investment for us. We strongly believe the industry can only grow through fresher intake year-on-year and that is an investment we are ready to make."

People & Attrition

• Attrition declining steadily: LTM attrition fell to 27.1% from 28.4% in Q1, the third consecutive quarter of decline on a quarterly annualized basis. Q2 alone saw a decline of over two percentage points. Indicators are positive going into Q3 because many geographies have a 90-day notice period, giving reasonable forward visibility.
• Fresher hiring at scale: Close to 40,000 freshers were brought in during the first half across all streams, and the full-year target will exceed 50,000. Physical training at the Mysuru campus is cited as a big attraction.
• Attrition initiatives working: Management credits a well-defined early-career path, emphasis on leadership development and skilling, programs with large global universities, and an online platform for self-improvement as the combination yielding benefits.
• Moonlighting stance: Infosys does not support dual employment. It supports gig work after prior manager approval and is developing more comprehensive policies. In the last 12 months, employees doing blatant work in two specific companies with confidentiality issues have been let go.
• Return to work: A flexible approach has been well received. The company is gradually increasing office attendance and will continue to provide flexibility where possible, while following specific actions where client situations require it.

Capital Allocation

• Share buyback: The board announced a buyback of ₹9,300 Crores (\$1.13 bn) through the open market route, at a maximum price of ₹1,850 per share, subject to shareholder approval. The maximum is limited to 15% of share capital and reserves (about ₹9,400 Crores). The board felt the open market route was preferable given US listings, regulatory concerns, and EPS accretion.
• Interim dividend: The board recommended an interim dividend of ₹16.50 per share for FY23, a 10% increase from ₹15 per share in FY22.
• Capital allocation policy: The predictable five-year policy from FY20 to FY24 commits to returning 85% of free cash flows, with a mix of dividends, buybacks, and the option for a special dividend.

Guidance & Commitments

Key Metrics