Infosys Ltd Q3 FY2023 Concall Summary

Key Takeaways

• Strong quarter, guidance raised: Constant-currency revenue grew 13.7% YoY and 2.4% QoQ in a seasonally weak period, prompting management to lift the full-year growth outlook to 16%–16.5%.
• Record large-deal haul: \$3.3 bn in TCV across 32 large deals, the highest deal count ever, with 36% net new and a pipeline that remains strong.
• Demand is splitting into two streams: Transformation work is slowing in pockets while cost-efficiency and automation programs accelerate, a shift management is capturing through both engines.
• Margins held flat despite headwinds: Operating margin stayed at 21.5% as currency and cost optimization offset seasonal furloughs and higher SG&A; the full-year guide is retained at the lower end of 21%–22%.
• What to watch next quarter: Whether the softness in mortgages, investment banking, telco, hi-tech and retail deepens or stabilizes, and the FY24 growth and margin outlook that management will only give at the end of Q4.

Demand Environment

• The split picture: Financial services is seeing impact beyond mortgages into investment banking; telco, hi-tech and retail are showing caution and delays in some clients. Energy, utilities and manufacturing remain extremely strong.
• Where budgets are flowing: Clients are reducing tech spend in some areas and using the savings to fund transformation, while automation and cost-efficiency programs are seeing increased traction across the board.
• Europe vs. US: Europe is "a little bit more impacted today than certainly the US," though Infosys's own Europe business is very strong because of a platform built over the last 18–24 months and large programs launched in that period.
• No FY24 visibility yet: Management declined to comment on FY24 growth, budgets or hiring, saying guidance will come at the end of Q4.

Parekh: "What we are seeing today, in addition to what we said last quarter, for example in financial services beyond mortgages, we see the investment banking side of our clients as well are showing an impact of the economic environment; and they are in telco, hi-tech and retail, in some clients."

Deal Wins & Order Book

• Record volume: 32 large deals signed in Q3, the highest ever, with \$3.3 bn in TCV, the highest in eight quarters. 36% is net new.
• Pipeline remains strong: Increased traction for automation and cost-efficiency programs, while digital transformation and cloud (Cobalt) deals continue in supportive industries.
• Cost-efficiency deal economics: These deals are not fully correlated with client budgets; clients use the savings to fund transformation. Profitability is within the range of the rest of the company and has been increasingly so.
• New deal margin mechanics: Initial phases carry lower-than-portfolio margins because clients demand productivity and efficiencies upfront; existing deals reaching higher profitability offset the pressure.
• Smaller deals undisclosed: Management declined to comment on deals below \$50 mn TCV, describing the pipeline only as "good healthy."

Roy: "Since many clients want the productivity, efficiencies upfront. So we always see that the initial part of the deals will be lower-than-portfolio margins."

Vertical & Geographic Performance

Margins

• Levers for the next few quarters: Utilization at 81.7% is one of the lowest in years and provides headroom; subcon costs have been brought down from over 11% to 8.7% with a historical norm of 7%; a large fresher bench is being trained and will provide pyramid benefit as they enter production; pricing is stable.
• Full-year margin guide retained: 21%–22%, with management expecting to be at the lower end.
• Attrition benefit ahead: Attrition has declined steadily quarter-on-quarter to well below 20%, the lowest in seven quarters, and is expected to reduce further, which should positively impact margins.

Roy: "And you have seen at 81.7% - this is probably, I think, one of the lowest in the last three to four years since I've been here. So that is one lever which we will have."

People & Utilization

• Attrition declining: Down 6 percentage points sequentially to well below 20%, the lowest in seven quarters; expected to reduce further based on early Q4 figures.
• Utilization drop is intentional: 81.7% excluding trainees reflects a large fresher bench; many of the ~46,000 freshers hired cumulatively through the year are in training and cannot be deployed overnight. This is an investment that will provide pyramid benefit as they enter production.
• Revenue per employee declined: Down ~6% YoY to approximately \$54,000, reflecting the utilization drop; margins remained stable QoQ.
• Fresher target: Expect to be around 50,000 freshers by the end of FY23.
• No FY24 hiring comment: Management declined to comment on FY24 hiring numbers, saying guidance will be laid out at the end of the quarter.

Competitive Position & Pricing

• Market share gains: Management believes Infosys is gaining share because its growth over 12, 24 and 36 months is ahead of the industry average; gains are in cloud (Cobalt), digital, data/analytics, and cost efficiency/automation.
• Pricing stable: A more stable pricing regime than historically, partly due to high inflation and compensation hikes. Management is working with clients to pass on costs, with some successes. Discounts have come down over the years.
• Vendor consolidation a tailwind: Infosys is seeing benefits with large clients, though management declined to comment on who is losing out.

Parekh: "We think we are gaining market share, because if you look at the growth, average growth over the last 12 months, 24 months, 36 months, including in this quarter of the industry and you look at our growth, we think we are ahead of the average." [38–39]

Guidance & Commitments

Key Metrics