Infosys Ltd (INFY) 2013 Q3 法說會逐字稿

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. There will be an opportunity for you to ask questions at the end of today's presentation. (Operator Instructions). Please note that this conference is being recorded.

I would now like to hand the conference over to Mr. Sandeep Mahindroo of Infosys. Thank you and over to you, sir.

Thanks, Marina. Hello everyone, I'm Sandeep from the Investor Relations team in New York. Happy New Year to all and a very warm welcome to discuss Infosys' financial results for the quarter ended December 31, 2012.

Joining us today on this earnings call is CEO and MD Mr. S.D. Shibulal, CFO Mr. Rajiv Bansal along with other members of the senior management team. We'll start the proceedings with some remarks on the performance of the Company for the recently concluded quarter followed by outlook for the year ending March 31, 2013. Subsequently we'll open up the call for questions.

Before I pass it on to the management team, I would like to remind you that anything that we say which 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 pass it on to Mr. S.D. Shibulal.

Good morning, everyone. My best wishes for a great 2013. We have performed well in Q3. In dollar terms our revenue grew sequentially by 6.3% including the Lodestone acquisition that was completed this quarter. Excluding the acquisition, our revenue grew by 4.2%. Our EPS for the quarter was $0.76 as against $0.75 last quarter.

Our growth was broad based. We added 53 new clients in Q3. We won eight large deals amounting to $730m. Four of those were in US, three in Europe, one in India. They include new client engagements as well as renewals and expansions for existing programs.

Our win rates in the large deal [win] segment accelerated in Q3 as clients leveraged our strong solutions and differentiated offerings in this space. That is regarding the BITS space, the Business and IT Operations space. Consulting & System Integration has done well this quarter. It grew by 15% sequential in Q3; 8% sequential without including Lodestone. In the Products & Platform and Solutions business our contract value increased from $485m at the end of Q2 to $603m at the end of Q3. We have launched a total of 20 products and platforms over the last year and a half, sold them to over 70 unique clients so far. In Q3 itself we have [13] new wins on -- and on-boarded eight new clients.

We are seeing stability in pricing. There continues to be quarterly movements due to change in business mix.

Our growth came in spite of adverse impact of Superstorm Sandy on billable days, longer than normal furloughs in December and client-specific ramp downs. We worked very closely with our clients and their business priorities through December to mitigate the impact of these events.

During the quarter, as I said, we completed the acquisition of Lodestone, aimed at increasing the momentum of our Consulting Service as well as strengthening our presence in Continental Europe. It contributed approximately $39m in Q3 revenue, for November and December. Even though we are in the early stages of integration, it is on track and progressing well. We have already secured our first win bidding under the single umbrella of Infosys and Lodestone.

While we have done well in Q3, the overhang of uncertainty continues in the broader economic environment. In US, US is working itself from its fiscal cliff and the debt ceiling issues. European nations are continuing to battle their sovereign debt. Emerging markets are witnessing a slowdown of growth.

In my conversations with global clients it is clear that they believe that while the worst is over, some of these events can impact their business prospects in a manner difficult to predict. Their ability in gauging the full impact of these events on their business is affecting their confidence in taking spending decisions, even though they have huge amounts of cash reserves. This has resulted in longer conversion time for program wins and program wins into actual revenues.

Early signs indicate flat to declining IT spend in the next year's budget. We expect to have better indication by the end of January or mid of February.

The fundamentals of our business has remained intact. We believe that technology has surely taken center stage in the business of our clients, especially in difficult times like this. Today, technology is at the heart of many of their business decisions, whether in rationalizing their cost structure, increasing productivity, standardizing and simplifying processes, expanding into new markets or in launching new sales channels and, most importantly, remaining competitive. We continue to believe that our full suite of solution and service capabilities across transformation, operation and innovation will hold us in good stead in the long term. This is true even as we continue to navigate short-term challenges due to the uncertainty in the marketplace.

Now let me give you some color on the industry verticals. In financial services our clients expect their business prospects to be muted, at least for the next one to two years. This can lead to a strong focus on cutting costs through layoff, elimination of less profitable businesses, monetizing assets and vendor consolidation in IT and operations. The shrinkage being witnessed at the industry level is manifesting itself in declining 2013 budgets for most of our large clients. Meanwhil,e we expect some areas such as customer-centric applications, risk management and governance to continue to see robust spending and we are focusing on capitalizing such opportunities.

The retail and CPG is seeing investment towards digitization, efficiency enhancement, SAP rollout, trade promotions and big data. There is also increased focus on vendor consolidation and move to a managed services model. We have good wins across the entire roster in Q3, especially in managed service deals, platform deals, transformational deals and proactive solutions. We see good market traction with our platforms like BrandEdge, ComplianceEdge, ProcureEdge in this vertical.

Coming to manufacturing, clients are focusing on long-term savings as well as increasing the effectiveness of their operation through data mining, analytics and business intelligence.

We expect short-term growth to come from America as the US manufacturing sector has seen a resurgence, driven by higher automation, falling energy prices and rising labor costs elsewhere. Clients in Europe are discussing transformational engagements through the financial troubles in the region while cautious of decision-making. In APAC we are seeing interest in platforms and solutions with lower CapEx.

Within the manufacturing vertical in Q3, we had multiple wins across the gamut of transformation, operation and innovation.

Energy and utilities and communication services space we have initiated new programs and ramped up engagements with clients that were added in recent quarters. At the industry level we are seeing spend being driven by ERP-led transformation, technology and infrastructure modernization adaption of cloud technologies in enterprise. We are focusing on increasing our wireless, media and entertainment and cable business as the traditional wireline segment continues to see challenges.

Our Finacle business grew by 8.9% in Q3. Our BPO business grew by 13.6% sequentially in Q3. As you are aware, Finacle is a product business and it is representative of the non-effort based models that we are focusing on as part of our strategy, Infosys 3.0.

Our growth this quarter has been broad-based. We have added 53 new clients in Q3. We have won 8 deals in the Business and IT Operations space, four of which in the US, three of which in Europe and one in India. These wins include new client engagements as well as renewals and expansions of existing programs.

This quarter we added 8,400 new employees. We have strengthened our engagement with employees, instituted offshore and onsite wage increases and are looking at promoting 6,000 to 9,000 employees in Q4.

So, looking ahead we are gaining confidence due to a strong pipeline of large deals, especially in the Application Development, Maintenance and Infrastructure Management. Clients are embarking on restructuring their IT and operations spend. The Continental European region also presents a strong pipeline of large deals as they move towards the managed services model. We believe that our strong brand coupled with our execution engine enables us to remain competitive and capitalize on any growth opportunities.

We continue to remain focused on delivering strong results even in uncertain and challenging environment, keeping in mind the interests of all our stakeholders.

Now before I hand it off to Rajiv for details on the financial performance, I would like to thank you all for your support. I have met many of you through the course of the year. We are encouraged with the positive feedback we are receiving in response to the execution of our strategies. Thank you. Now let me hand it off to Rajiv.

Good morning, everyone. Let me quickly take you through the highlights of the financial performance.

Q3 has been good for us. Our revenues in US dollar terms grew by 6.3% including Lodestone and 4.2% without Lodestone sequentially. Our operating margin during the quarter was 25.7% including Lodestone and at 26.1% excluding Lodestone.

We have done well this quarter despite the negative environmental headwinds which we faced during the early part of the quarter. We are also able to maintain our operating margin despite the wage increases that were rolled out for offshore in Q3.

Our pricing has gone up by 1.8% during the quarter primarily because of change in business mix. CSI, Consulting & System Integration as a percentage of revenue increased from 30% to 31.2% in Q3. We see pricing to be stable as we go along. Volumes have increased by 1.5% during the quarter.

Our integration with Lodestone is going very well. As mentioned earlier, we expect this acquisition to be EPS accretive over the next 18 months. We will have an additional quarterly charge of approximately $8m on account of deferred compensation and amortization of intangible assets.

As we mentioned earlier, we plan to institute the onsite wage increase of 2% to 3% in Q4. This will impact our operating margin by approximately 1% in Q4.

In terms of exchange rates, the average rupee has appreciated by 0.5% over the last quarter. We have assumed a INR54.50 as an exchange rate for Q4 purposes. On the hedging front we have hedges of $1.1b as on date.

We continue to generate strong cash from operations. You will be happy to note that our operating cash flow is at 103% of net margins. Our DSO is at 62 days as against DSO of 65 days last quarter, in spite of it being a challenging quarter.

Though the Q3 has been an exceptionally good quarter, challenges remain in terms of timely deal closures and ramp ups. We usually have visibility of 95% to 96% at the beginning of the quarter and Q4 is traditionally a soft quarter for us.

We need a sequential growth of 2.8% to achieve our earlier guidance of 5%. Our revised revenue guidance, including Lodestone now, stands at 6.5%. Our EPS guidance remains unchanged at $2.97. Though there are challenges, we remain cautiously optimistic about meeting our guidance.

With that I would like to open it for questions.

Thank you very much, sir. Ladies and gentlemen we will now begin the question and answer session. (Operator Instructions). The first question is from Joseph Foresi from Janney Montgomery Scott. Please go ahead.

Hi. My first question here is just, I think in the quarter it sounded like the commentary was cautious on the quarter in general coming from management. I wonder if you could talk about the progression of revenues through the quarter. Did it improve post Sandy and what was the cause for the change in tone versus the execution?

So if you look at it, when we actually entered the quarter we had a -- for the rest of the year, to achieve our 5% guidance, we have to do two quarters of 3.7% growth in Q3 as well as in Q4. And Q4 is definitely a slightly more -- it's a softer quarter for us, which means in Q3 we have to do even more than 3.7%.

Now, once we entered the quarter two phenomenas happened. Number one, we had -- started experiencing sudden furloughs which was not planned before. We also saw furloughs being extended beyond our original plan which means that we will lose revenue as well as billing days because of furlough. Number two, the Sandy impacted and many of our people were not in the office for a week or even at times two weeks. So both posed serious challenges in a quarter where in which we have to do 3.7% or more and another quarter in which we have to do 3.7%.

What happened -- and those challenges were articulated. And so what happened was two, three things. Number one, we of course have very strong relations with our clients and we were able to work very closely with our clients to mitigate. A lot of the additional gap which would have emerged because of unplanned furloughs or the Sandy, both were -- we were able to mitigate most of those, number one.

Number two, when we started off the quarter we have not factored in any pricing increase. If you look at this quarter, the pricing increase of 1.8% has shown up because of the portfolio shift. This is not something which can be predicted on a weekly basis. That actually comes towards the end because we are running about 10,000 programs and each of these -- each one of them is behaving in a slightly different manner.

Finacle and BPO grew substantially well this quarter. So the challenges we articulated were definitely there. They were based on extended as well as the number of furloughs being higher than what we had planned and impact of the Sandy and losing billing days. We were fortunate enough to mitigate most of that through our relationships and ramp ups. And then the pricing favored us by 1.8% growth because of the portfolio shift.

Rajiv wants to add to this.

Little bit to it. See, if you look at it, no, we had a services growth of 3.7% last quarter. We had a volume increase of 3.8% last quarter. And this quarter our volume has been about 1.5% and the services growth has been about 3.3%. So a lot of growth this quarter has come from Finacle which is a product business which is choppy, which depends on the license sale and the deal closures. BPO has grown about 14%. So what surprised was in terms of the business mix change and the pricing increase that we got, about 1.8% during the quarter.

And also when we actually spoke about the challenges, we also said there are four months in the half year left for us to mitigate some of the stuff that we are seeing. We had spoken to all of you around October 12 and then we spoke to you again after some 40 days. The environment had turned bad. There were more challenges that we had seen at that point of time. But at that time also we were talking about having four more months in the half year left for us to be able to meet the guidance and that we're going to go all out and try to meet our numbers.

Okay. Maybe you could just talk about pricing. I know you addressed it in your earlier call, but is this pricing increase sustainable? In other words do you think that the mix shift could continue to favor you through the back half of the year? And is it fair to say that the pricing increase is not being driven by any macro terms, in other words demand is increasing or picking up so that is driving the pricing?

No, I think you should not read too much into the pricing increase because these are quarterly phenomenas depending on the business mix change, depending on the deal closures and ramp ups which happen across 10,000 programs as Shibu was mentioning. So I think business mix change over the period of time, if you see a business mix shift over multiple quarters then it could signify a pricing change. But I think, other than that, on a quarterly basis you should not read too much into it.

We expect pricing to be stable and with a quarterly movement up and down depending on the business mix changes.

Okay. Last question from me. We've had a -- sorry, go ahead. Okay, just last question from me. We've had a string of quarters where things have been more difficult. Do you feel like you've got the proper business momentum underneath your feet after this quarter?

And how do you think about the margin profile? I know that you've kept it at the level it is. Should we expect that to continue into the next year, into 2013 and what could be the changes there?

The business environment continues to be challenging. The clients are still not very confident about spending and making longer-term investments into the IT. I think a lot of it would depend on how the economic environment in the country is, how the consumer -- confidence index is, how much it confidence it gives to the corporates in this money. So I think the environment remains challenging. The clients, those with [RFP] activities have picked up, the deal volumes have picked up but the deal closure times are still very long and the decision-making cycles are actually much longer and goes multiple levels for approval. So that continues and that is the reason it's very difficult to forecast and predict numbers on an accurate basis at a very short period of a quarter.

Coming on the margin, we have been able to maintain margins in this quarter in spite of the wage increase that we gave at offshore. However we are giving wage increases for our overseas folks and that is likely to impact our margins by about 1% next quarter. I expect the margins -- if I look at, moving into the next year, our utilization is still at about 71%. We would ideally like it to be around 79% to 80% which means that we have about 9% utilization lever which gives me a lever to have margins of about 4% in the next year if the volumes pick up.

So I think we have levers on the margins but I would expect margins to move in the narrow band of about 100 to 200 basis points going into the next year. I think Shibu wants to add something to this.

So as Rajiv was saying, and I was saying, that we have done well this quarter but the world has not changed. The world is exactly what it was; there is no secular change in the world. And I'm sure all of you are aware of this. The US uncertainties continue. In fact in financial services alone, I was reading reports which said that there is an over-employment of 60,000 people and we have seen layoffs in multiple organizations. If you look at Europe, the sovereign debt issues are continuing. So our clients' confidence has really not changed. Even though they have cash, their confidence has really not changed too much which means that the ability to invest for long-term programs, their ability to take quick decisions and the ability to even ramp up on decisions where they've taken -- in cases where they've taken decisions is still low. So we remain quite cautious at this point in time.

But even if I look at next year, you should know that if I look at next year we expect the budgets to be flat or marginally down. We expect it to be more than marginally down in certain segments like FSI. And we also expect that even after the budget closures there will be scrutiny of the budget while it is being spent on a quarter-on-quarter basis.

So we have done well in Q3. We remain quite cautiously optimistic.

Thank you.

Thank you. The next question is from Moshe Katri from Cowen & Company. Please go ahead.

Hi, thanks. Just to follow up on the margin question, so should we assume now that the mid-20% level is the new base for EBIT margins for Infosys compared to where we were maybe a couple of years ago, close to the 30% range? Thanks.

As I said, we have acquired Lodestone so the numbers that you see now include Lodestone also. And Lodestone being a European consulting company is going to be at lower single-digit margins. So once we see the consolidation impact, we do see an impact on margins for the Group as a whole.

Having said that, margin is a factor of growth because, if you look at it, we as any other IT company would hire most of our requirements through campuses which requires us to make a demand projection almost about 18 months ahead of time. If we go to the campuses this year we would typically be taking a call on the demand in 2015 or the revenue flows in 2015. So it is a difficult thing to predict about the growth two years down the line in this kind of unfavorable and volatile environment.

So in case we are able to predict well and we hire only to meet our demand, I think the margins will start improving because as utilization starts going up, you would see that the margins are improving because the cost is already built up. The only cost which will come incrementally is the differential between the onsite and offshore costs for the people who have to go onsite for starting projects.

So at 71% utilization I believe that we have enough levers for margins. But having said that I would like to say that when we are in the middle of our execution of the new strategy as we spoke about, Infosys 3.0, it requires us to make a lot of investment in the business, a lot of investment in the product platforms or services, in the consulting space, in our frontline. And I would believe that 'til we reach a steady stage in that journey maybe the margins in the mid-20% range is what should [be good].

Okay, understood. And then just for clarification purposes, FSI was up 6% sequentially. Is there a way to take out Lodestone from that and see what the number was, seeing that Lodestone did contribute to growth in FSI? And then maybe we could go through the same exercise with Europe.

(multiple speakers) on Lodestone was marginal for the quarter. So even if --

How about Europe?

-- talking Europe.

If you're looking at sequential growth out of Europe, maybe we can take Lodestone out and also try to get what was the number actually organically?

Even if you take out Europe -- Lodestone, Europe has done well for us during the quarter. Our revenues for Europe have actually gone up by about 1.5% as a percent of total revenues. So Europe has seen good growth. And as Shibu was saying, quite a few deals that we have signed up this quarter have been in Europe. So Europe continues to do well. There are a lot of opportunities in the European market. So even without Lodestone we are seeing good traction in Europe and the growth has been quite healthy in Europe this quarter.

Okay. And then out of 53 new client additions, how many came from Europe?

13 new clients were added during the quarter, excluding Lodestone, for Europe.

Understood. And you don't have the organic number for Europe out of Lodestone yet?

We have. Sequentially we were 1.2% up for Europe, excluding Lodestone.

Okay. Thank you very much.

Thank you. The next question is from Anantha Narayan from Credit Suisse. Please go ahead.

Thank you and my best New Year wishes to the management team. Rajiv, just one follow-up question on the margin side. The guidance for next quarter that you've given basically implies that on an organic basis margins will probably decline by about 250 basis points for FY '13 as a whole which seems to be -- it's a little bit higher than the earlier 200 basis points that you had guided towards. And the rupee has actually been significantly weaker than what you had estimated for the second half of this year. Can you just help us understand what has really changed?

I think -- no, I couldn't hear you. Can you speak a little louder; I couldn't get the full question.

Is it any better?

Yes, it is better.

Okay. So, Rajiv, my question was that the -- your guidance on margins for next quarter implies a 250 basis point decline in organic margins for the year versus the earlier guidance of 200 basis points while the INR has actually been a lot weaker than what you had initially assumed for the second half. So can you just help us understand the change now?

No, see when we spoke about the margin we said the margins will move between 200 basis points and 300 basis points when we gave a guidance in October, when we gave for 2.97%, $2.97 we had assumed certain set of expenses, certain set of revenue growth, the business mix change. And so now it has moved from about 200 basis points as you're saying to 250 basis points. On a quarter-on-quarter basis we have been able to maintain our margins this quarter. Next quarter is a soft quarter. We are instituting all our onsite wage increases. And also we have taken about $13m impact because of Lodestone. As I explained because of amortization of intangibles and deferred compensation there is an impact of roughly about $8m a quarter and that's a charge that we have to take for Lodestone. Also Lodestone is coming at a much lower margin. And once we consolidate it will have an impact on the overall margins for the Company.

So the 250 basis points is the organic number that I was mentioning. Lodestone shouldn't impact that number, right?

Lodestone charge will come on the IL books because it is -- because when Infosys bought Lodestone, a part of the compensation -- a part of the purchase price is towards deferred compensation which is being amortized over the next 36 months. So that is a charge that comes on the IL books.

Okay, thank you.

Thank you. The next question is from David Grossman from Stifel Nicolaus. Please go ahead.

Thank you. I wonder if I could just go back to the flow of revenue over the course of the quarter. It sounds like the big change vis-a-vis some of your messaging intra quarter was an unanticipated realization benefit from a mix shift to CSI given that your unit growth kind of [tempered] out organically at about 1.5% sequential growth. So as you look at that -- and obviously some benefit from Finacle and BPO as well.

But when you look back at that CSI activity, how much of that was tied to the contract activities signed in the fiscal second quarter? And just maybe you could help us understand the types of contracts that we're talking about that drove that unexpected increase and what the follow through could look like over (background noise) quarter.

So actually there are two factors to that commentary. One was the unexpected negativity we saw because of the furloughs and Superstorm Sandy and that we were able to mitigate. Most of it we were able to mitigate. That we were able to mitigate working with our clients. Even in situations where clients announced unanticipated furloughs we were able to work with our clients and definitely continue most of the critical programs. So that mitigated that. And that we could only make out as time went by because we were discussing in the beginning of December and it was still in progress.

The second part is the portfolio shift we are talking about. If you remember last quarter when we discussed, we had discussed about transformational wins. Transformational wins generally show up within a quarter. Within a quarter it will start showing up, at least definitely in the second quarter.

So what happened was that we realized as the quarter went by and especially after the middle of the quarter, we had ramped up some of the transformational wins which we had in the previous quarter. And that portfolio shift happened during the quarter, but it will show up towards the end of the quarter. So the ramp-up which happened in Consulting and System Integration is predominantly due to the wins which we actually announced I think in the previous quarter.

So if we -- going back to that follow through in the fourth quarter and beyond, front-end revenue on some large (technical difficulty) the quarter.

David, you were not clear. I couldn't make out. Could you please repeat?

Sure. So the question was really how this flows out into the next couple of quarters. It sounds like you got some transformational business booked last quarter. You saw some of that revenue ramp this quarter. Should we expect that to continue to ramp over the next couple of quarters? Or is this something that was more front-end related to some large business signed in the second quarter.

I'm sorry, David. See the reflection -- the interesting thing is there is always a lag in the revenue profile change versus the win rate -- win profile change. So last quarter we had transformational wins. If you look at this quarter we are talking about large deal wins. We said that we have won about $730m of TCV, most of it in the Business and IT Operations space. Those will flow through in the next two quarters. We expect them to flow through in the next two quarters unless something unforeseen happens.

So when that happens, you will see a different portfolio shift. The BP programs which we talked about have ramped up and probably continue to be on that run rate or maybe marginally higher. The BITS and the large deals which we have won will also start showing up. So that is why the portfolio will shift quarter on quarter reflecting wins from the past. So, for example, if these $700m opportunities start ramping up that will definitely show up in the BITS space.

Okay. So would you expect the mix to shift back a little bit in the fourth quarter?

In fourth quarter the mix, based on the wins it could shift back marginally. These will operate in a narrow range. We're running 10,000 programs at any point in time, 10,000 programs. And so some of them could suddenly ramp up and some of them may not ramp up as we think in the current quarter, especially in a volatile environment. When the volatility is not there, we know exactly how many people will get the RFP this quarter. But because of client uncertainties and various other things, today there is volatility in that.

So I would tend to believe that it will operate in a narrow band. But this quarter win, Q3 wins were -- the ones which we talked about are predominantly in the BITS space.

Okay. Then let me just go back to the margin equation, Shibu. My calculation is that margins, based on your guidance and tax rate guidance, is about down 280 basis points versus your previous guidance I think was down 200 basis points. And I think one of the previous questions mentioned that currency runs probably about 50 to 60 basis points incremental tailwind versus your previous guidance.

So clearly the margin guidance has come down and I understand the impact from Lodestone and the impact from utilization on your margins. So you've put a wage increase in last quarter; you're putting one in this quarter. Help us understand how we should think about both the impact of wages and utilization going forward because utilization at some point becomes somewhat of a discretionary item when you can increase it or decrease it based on how much of a bench you want to keep in place. So could you maybe just quickly walk us through your thoughts going into next year in terms of how we should think about the wage increases given what you've done this year and the utilization rate?

So let me address the wage increase first. We gave a wage increase of 6% offshore. We had delayed it for the year and we did it in October. We also are planning to do an onsite wage increase in the US, 3% to 4% actually right now in Q4. We did 12,000 promotions about two quarters back. We are also going ahead with 6,000 to 9,000 promotions in Q4. That is that side.

And each one of them has an impact. 6% increase in offshore compensation is approximately about 1% impact on the margins and about 4% increase on our -- in onsite US compensation would be about 1%, another 1% possibly. Yes, 1% impact on our margins.

So our operating margin has remained in a very narrow band. In fact, it has come down by 0.2% without the impact of Lodestone and that 0.2% is because of the currency appreciation of 0.5%.

Now if you look at the utilization, it is -- I wouldn't call it discretionary actually. The utilization for us, it's very important for us to keep it to 78% to 80%. It's very important. Because it is even more important for our people that they have work to do, so it is 78% to 80%. Yes, when the prediction doesn't happen as we think we will end up with excess bench.

The impact of the utilization is the following. The additional 8% bench which we are carrying actually has a margin impact, a direct impact of 1.5% because 8% of 17% which is our offshore compensation and a indirect impact of 2.5% because of the revenue loss. If the revenue is there that will give us better margins. So the impact of that 8% is approximately direct 1.5% and indirect about 2.5%, about 4% on our margins in the coming year.

So the solution to all this is growth. If growth happens the utilization will pick up. If the utilization picks up the direct impact will definitely come down and the indirect impact will take off about -- will accrue on the positive side. So if the utilization goes up to about 78% to 79% we expect to gain benefit of that in the margin, based on -- there are many other levers, that's why I'm not giving a number -- but based on the 1.5% plus 2.5% I talked about.

Just to add to that on the margin front, when you said about 200 basis points to 250 basis points, just to be more clear, there's a 0.2% impact because of rupee and 0.3% impact because of Lodestone charge which comes into the IL books. Because this is about when we acquired Lodestone, a part of the total purchase price is tied to the compensation, deferred compensation which is paid only if the management stays with us till the end of third year. That under IFRS is a charge on the P&L of IL which is on a monthly basis. This is roughly to be about $8m a quarter.

So for the half year, the charge is about $13m because this is effective November. So a charge of $13m on the half year revenue is roughly about 0.3% to 0.4% impact on the margins. Rupee appreciated about 0.5% during the quarter. If you take it for the half year the impact is roughly about 0.2%. And that would explain the reason why the margins would move between 200 basis points to 250 basis points.

I see, great. Thank you very much.

Thank you. The next question is from Jesse Hulsing from Pacific Crest. Please go ahead.

Yes, thanks, guys, for taking my question. I wanted to follow up on dynamics related to mix shift versus rate. So from a broader perspective in these larger deals that you're pursuing, what is the broader industry trend in your view of where rates are going in the ADM side of your business? Are they pretty stable or are you seeing them trend down or trend up?

And as a follow-up to that, do you think that the mix will shift significantly to ADM because of the Consulting lead-in work that you saw in Q4?

Okay. So we have assumed pricing as stable for the rest of the year. And there are pockets of our business which is definitely price sensitive. I would think that Application and Maintenance space is price sensitive. I would think that there are certain other areas which are price sensitive. In those areas we are doing things like managed service, we are doing ticket based pricing and various other models to address those challenges. But there are areas which are price sensitive.

That is why it is even more important for us to manage the portfolio and have growth in areas where the sensitivity is lower. So if you look at the Consulting and System Integration space we operate under the pricing under the Global SI and that allows us to actually maintain pricing premiums.

So the whole approach if you look at the Infosys 3.0 strategy is actually to address this problem in the long term. And it's about creating a balanced portfolio, one which is Consulting and System Integration which has higher revenue productivity, Products and Platforms which is non-linear in nature to effort and grow where some part of the business is price sensitive. That's the whole approach and that is how we are trying to manage the portfolio.

Now I don't see what we call ADM work will -- I will never say never -- but for most part will not flow from the Consulting work into ADM. What we call Consulting is quite comparable to what Global SIs call Consulting work. It is [gosl] consulting, system integration and packages like SAP and Oracle-led transformational work and some of the follow-up work which we do. What we call ADM work is pure application development and maintenance which will be greenfield development work of an application within Java or (inaudible) any one of those. The chance of that coming out of the Consulting work which we do is there but it's very minimal.

Great, thanks. And the large deals closed in this quarter.

The large deals which we closed, many of them this quarter are -- or most of them this quarter are in the BITS space, Business and IT Operations space. And many of them are multi-tower and some of them are infra-led deals.

Did you -- for those deals were the wins primarily sole-sourced or did you win those in a bake-off RFP process?

Many of them are in RFP-like process. Some of them are vendor consolidation, where we have won our portion and additional work from the client. And I would say maybe one of them are sole-sourced. But many of them are RFP-led and some of them are vendor consolidation.

Okay, thanks. And to follow up on previous questions about Sandy, were you able to quantify Sandy's impact on the quarter? You mentioned that it was difficult intra quarter. Looking back have you been able to put an number on how many hours slipped out due to Sandy?

As Shibu was referring earlier, we were able to mitigate most of it and the impact of Sandy has been very negligible on us.

Okay. Thanks guys.

Thank you. The next question is from David Koning from Baird. Please go ahead.

Hey, guys. Just following up I guess on the last question a little bit too on the core ADM work. I know that's kind of your most stable recurring business and I think your biggest offering too. That did go into negative mode this quarter. I think it declined 3% year over year, first decline in about four or five years. I guess what's the confidence that that picks up again and maybe you can just go through why it did decline this quarter.

I wouldn't see this as a secular trend. First of all, many of the deal wins which we had this quarter are in the BITS space.

Now this whole thing about ADM, focusing on ADM, going forward may not be the right approach because we will look at BITS as a portfolio and the boundaries are soft. That's the whole purpose of looking at it as a portfolio. If you keep such hard boundaries for people or for revenue, the benefit of that service line or the offering will not reach the client. So it's actually a porous, slightly porous boundary line.

From a BITS perspective which is actually a combination of Application Development and Maintenance, Infrastructure, Independent Validation, BPO, I think that will be a core offering from our side and it will continue to grow. It is a must for us to grow because that is our largest offering. 60% of our business comes from there so it has to grow.

Okay, great. And then I guess one other thing. The other income line that was $92m this quarter, how much of that is core interest income, just so we know how to model that going forward because I know there's a lot of moving parts in that line. Just wanted to know what the core part of that $92m is.

No, almost all of it is interest income. We did not have any impact of ForEx into this time's non-operating income.

Okay. Great, thank you.

Thank you. The next question is from Rod Bourgeois from Bernstein. Please go ahead.

Yes, guys. So you received a major boost from the rupee since 2011 when the rupee really began to depreciate. Yet margins have dropped and they still seem to be dropping heading into the March quarter. So I guess the question is where has your expense structure changed since mid 2011? Or if the expense structure has not materially changed then is there something that's happened on pricing on like-for-like deals even though your overall reported pricing has held up?

Well, there are two factors which have contributed to the drop in margins if you normalize for the rupee depreciation which has taken place. One is definitely the pricing. Our year-on-year pricing has actually topped by about 3.5% which is quite significant and which flows through to the bottom line. And second is also with this type of utilization. If you're comparing with 2011/2012 our utilization used to be in high 70s and roughly about 79% to 80% if I remember right and today we are operating at about 71% utilization.

So these two, the pricing has impacted about 3.5%; you had inflation drop of about 9% and these two (inaudible) are flowing into the operating margins.

If you look at it we have been able to mitigate some of -- some impact of it because the drop in operating margin is roughly about 2.5%. Though if you look at the pricing that was 3.5%, utilization of 8% it would have been much more. We have actually been running it very efficiently during the year. As Shibu said we delayed compensation increases because we saw the utilization (inaudible) low and the pricing drops are happening.

So we have done a lot in terms of trying to keep our margins good. And we expect that as the growth starts picking up we would see the utilization start going up to 80% which is where we would like it to be.

And pricing I believe would remain stable. We have lost about 3.5% in pricing during the year. But going forward I expect pricing to be stable. There could be quarterly movement depending on the business mix change but I don't really see a secular trend in the pricing drops anymore.

So on the pricing question that's very helpful to know that pricing on a like-for-like basis has dropped in such a way that it's contributed to the underlying margin degradation. But I guess the question that raises is what's changing in the market or in your strategy that would cause pricing to go stable after the decline that it's experienced in a pretty meaningful way over the last year?

So actually or more importantly the question is what is changing in our strategy to keep our revenue realization stable, because the pricing is definitely dependent on the market at least for a certain set of services which we offer. So the important issue is to make sure that the revenue realization is stable or hopefully marginally going up over a period of time.

So for that the important issues are the following. Number one, to have revenue growth in high productivity areas like Consulting and System Integration. Number two, have revenue growth in Products and Platforms space where I expect that in the medium term the effort dependency is 50%, 50% of what the other areas are. And in the areas where it is price sensitive we'll move to more of a managed services model. So if you look at the wins this quarter, many of them are managed services wins where the client is looking at outcomes rather than input, the effort. So by doing that, if we can increase productivity, if we can drive efficiency, if we can do it better than what we have promised the client, some of it accrues to us.

So the strategy is about making sure that the revenue realization is stable or we can improve on it over a period of time.

(Technical difficulty). The plan is it appears to stabilize pricing is to shift your mix towards higher-end segments and also on managed services in the commodity segment. But barring the mix shift which generally requires pretty strong revenue growth to make a meaningful mix shift, barring a mix shift what do you think happens to pricing on like-for-like deals? Are we still in a position where like-for-like pricing is in a decline?

You see we run pricing in a portfolio. It also depends on the opportunities that we see, whether we are incumbent, whether we are (inaudible) into a client where the competition is very strong and we want to make a strategic entry, if it's a client that we have been trying to pursue for the last couple of years, it's a different geography. So you know pricing strategy has a mix of lot of factors. And it's not about -- no two deals are alike.

So pricing strategy also depends on what the competition is and what is the kind of opportunities for you to improve your margins as you go along. So this is not a very simple thing to say about that on a like-to-like basis how the margins are changing on deal to deal. But as we've said we expect that keeping our pricing strategy and our portfolio mix we would expect the pricing to be stable as we go into the next year.

Thank you, guys.

Thank you. The next question is from Mayank Tandon from Needham. Please go ahead.

Thank you. I just have a question on some of the key trends looking into 2013. Could you provide some perspective on the resiliency of the European growth? Do you think we can see the trend continue over the course of 2013 based on client activity?

Also in terms of the regulatory side do you think that both healthcare and financial services could be important catalysts over the course of the year?

And last but not least, would you consider maybe buying some captives to scale up your operations particularly on the BPO side?

This is BG. With respect to Europe while there is definitely a macro overhang and the challenges and the uncertainty will continue into this calendar year, it's very difficult to predict on a medium-term to long-term basis how the scenario will pan out. However currently what we are seeing is there is less of panic. There is a relatively stable environment within our clients. The clients are in the process of finalizing their budgets. The early indicators -- though the budgeting process is not complete the early indicators are flat to negative. And that is the data point we have today.

So we presume if the environment continues to be stable and the decision-making cycles continue as business as usual then there is possibility of an upswing in the revenues for the year. But this is something we need to watch on a quarterly basis as it's difficult to predict in the medium term. And this is something we are watching very closely. We continue to make investments into Europe in terms of accessing markets both in continent and in UK.

In terms of other markets we are seeing new initiatives in client activity both in financial services and manufacturing in the Nordics. That's an area which we will look into as we go into this -- our fiscal year starting March.

Also any comments on the regulatory side? And also in terms of captive strategy?

Okay. The regulatory side obviously from a financial services and telco they are the industries which will continue to invest into introducing new controls and the back systems which support. This is an area where we are also focusing on. However, it's again difficult to predict the discretionary spend which will go into this. But we are already working with our clients on some of these initiatives and we are also bringing in expertise to help clients actually deploy these new control measures with this less overall cost of implementation, also leveraging technology.

But again like I said while these are the areas of focus we will definitely see a revenue stream occurring because of investments in these areas.

We are also looking at some of the initiatives within our clients on risk management and that's an area of focus as well. Even when overall environment in financial services and telcos are under significant cost pressures, the initiatives are also on cost take-out measures. That's something and again an area where we are looking into.

I just wanted to get a sense of the strategy around captives. It seems like there are some opportunities to buy captives (technical difficult;ty) on the BPO side.

Mr. Tandon, do you have any further questions?

Finally, I just wanted to get a sense of your strategy around captives. It seems like there's some opportunities to buy captives [particularly on] the BPO side. I wanted to see if that would be one of the priorities looking into 2013 for Infosys.

Yes, hi, it's Swami here. Yes, from a BPO growth standpoint the growth engines are really both -- all three lines which is really organic and inorganic and as well as captives. If you remember, recall 2007 we had picked up the Philips captives and that journey is pretty much on. So the growth that we are seeing is obviously coming across on all three streams of activity and initiatives that we regularly launch.

So very clearly in this year we obviously have also started to look at emerging economies very closely. We have launched four geo business units which is an India business unit and LATAM business unit, an Eastern Europe business unit and the Asia Pacific business unit which really focuses on selling solutions and propositions to corporations and to governments in these emerging economies.

So as a part of that obviously we continue to scan the environment on captive opportunities which we believe is a value that we can pretty much add and leverage.

Great, thank you.

Thank you. Ladies and gentlemen, due to time constraints that was the last question. I now hand the conference back to Mr. Sandeep Mahindroo for closing comments.

So thanks, everyone, for spending time with us. We look forward to talking to you again over the next few weeks. Thanks and have a good day. Bye.

Thank you, members of the management team. Ladies and gentlemen, that concludes this conference call. Thank you for joining us and you may now disconnect your lines. Thank you.