Infosys Ltd (INFY) 2022 Q1 法說會逐字稿

Ladies and gentlemen, good day, and welcome to the Infosys Earnings Conference Call. (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, Margaret. Hello, everyone, and welcome to Infosys' earnings call to discuss Q1 FY '22 earnings release. I'm Sandeep from the Investor Relations team in Bangalore. Joining us today on this call is CEO and MD, Mr. Salil Parekh; COO, Mr. Pravin Rao; CFO, Mr. Nilanjan Roy; and along with other members of the senior management team. We'll start the call with some color on the performance of the company by Salil, Pravin and Nilanjan before opening up the call for questions.

Please note that anything that we say that's referred to our outlook for the future is a forward-looking statement, which must be read in conjunction with the risk that the company faces. A complete statement and explanation of these risks is available in our filings with the SEC. It can be found on www.sec.gov.

With that, I would now like to pass it on to Salil.

Thanks, Sandeep. Good evening, and good morning to everyone on the call. Thank you for joining us today. I trust each of you and your families are safe and well.

I'm delighted to share with you the results on landmark first quarter, with robust year-on-year growth of 16.9% and sequential growth of 4.8% in constant currency terms. This has been the fastest growth we have seen in 10 years. We continue to gain significant market share, with this growth being essentially organic and especially in the area of digital transformation.

This is a clear reflection of Infosys' resilience and client relevance that has grown stronger with the unwavering commitments of our employees and our differentiated digital portfolio. I would like to thank all of our employees for their enormous dedication and contribution, especially during another testing period with the second COVID wave in India.

Some of the highlights of our results are: revenues were $3.78 billion, which is growth of 16.9% year-on-year and 4.8% sequentially in constant currency. Our digital business grew by 42% year-on-year and now constitutes 53.9% of our overall revenues.

We had broad-based growth across all of our sectors, service lines and geographies. Financial Services grew by 22%; Retail, 22%; Life Sciences, 21%; Manufacturing, 18%; the North American geography by 21%. Our large deals were at $2.6 billion. Large deals are deals over $50 million in value. Operating margin was strong at 23.7%.

We have a tremendous focus on our employees, especially related to the wellbeing and to the new talent expansion approach that we have with employees. Free cash flow was strong at $863 million, 18.5% higher than the same quarter in the previous year. Attrition increased to 13.9%. We had a net headcount increase of 8,000, attracting leading talent from the market.

We remain comfortable with our ability to support our clients in their digital transformation journey. Our sustained approach in building differentiated digital capabilities is helping us enable our clients to move with speed, becoming agile and create value as they connect with their customers, employees and partners with new digital constructs. For example, with the cloud becoming a strategic priority for businesses, more clients across industries are engaging with us to take advantage of Infosys Cobalt solutions and services specialized on the cloud.

With a strong start to the financial year, good large deals in Q1, strong pipeline, we are increasing our annual revenue growth guidance, which was at 12% to 14%. We increased it to 14% to 16% growth in constant currency. Our operating margin guidance remains unchanged at 22% to 24%.

Last week, Infosys completed 40 years. I'm delighted to share with you the vision of our founders and all the leaders that have helped shape the company are contributing to us being well positioned for growth and being a strong and consistent partner for our clients in their digital transformation journey. I'd like to thank the founders, employees, clients, shareholders and all our stakeholders for their ongoing guidance, support and contribution.

With that, let me turn it over to Pravin.

Thank you, Salil. Hello, everyone. Hope you and your family are well, safe and healthy. After a period of extremely concerning medical situation caused by the second wave of pandemic, India is gradually returning to normalcy. We have been extremely focused on employee wellbeing, extending every possible help to overcome any medical situation of our employees. We have ramped up vaccination drive for employees and their families, and so far, we have vaccinated 58% of our employees in India with at least one shot.

We saw sustained growth acceleration in quarter 1, with year-on-year constant currency growth of 16.9%. Growth was broad-based, with 7 industry segments reporting strong double-digit growth, including the 2 largest, Financial Services and Retail, growing more than 20% year-on-year.

Operating parameters continued to improve during the quarter. Utilization improved further to a new all-time high of 88.5%. Onsite effort mix reduced further to a new low of 24.1%. However, subcon costs increased by 120 bps due to stronger-than-expected growth, high attrition and demand for new skills.

We won 22 large deals in quarter 1 totaling $2.6 billion: 9 in Financial Services; 4 deals in Retail and Energy, Utilities Resources and Services; 3 in Manufacturing; and 1 each in Communications, Hi-Tech and Life Sciences segments. Region-wide, 14 were from Americas, 5 were from Europe, 2 from Rest of the World and 1 from India. The share of new deals in quarter 1 was 30%.

Client metrics improved meaningfully with $100 million-plant count increasing to 34, an increase of 9 year-on-year. We added 113 new clients in the last quarter. With growth coming back, demand for top talent has also increased. Voluntary last 12-month attrition increased from 10.9% last quarter to 13.9% in quarter 1.

However, we not only backfilled attrition completely, but also added another 8,300 employees on a net basis, which is a testimony to the strength of recruitment engine at Infosys and our status as a Forbes top 4 employer. We are taking all necessary measures to enhance employee value proposition and improve both talent acquisition and retention.

However, we expect attrition to be high in the near term due to strong demand. In quarter 1, we onboarded over 10,000 college graduates. And for the full year, we have increased the college graduate hiring target to 35,000 globally to ensure unconstrained plant deliveries. As communicated earlier, the salary revision for fiscal '22 will kick off from July for a majority of our employees.

Moving to business segments. Industry-leading performance in Financial Services continued, with steady increase in growth momentum aided by signings during the quarter. Growth is led by U.S., especially in subsegments like banking, mortgages, wealth and retirement services. With the gradual opening of the economy, we are also seeing significant improvement in the payment sector.

There is visible acceleration in cloud adoption, and we are working with many of our plants on cloud migration, cloud management and other cloud-related platform deals. With the combination of our domain-plus tech-plus ops-plus digital capabilities, we are well positioned as a full-stack digital transformation player.

Performance of the Retail segment improved meaningfully, with both new deal signings during the quarter as well as ramp-up of previous deal wins. We are seeing aggressive investments by clients to uplift their digital capabilities. There's a huge opportunity for us to help them build omnichannel capabilities to compete with the digital native and rightsize their cost structure. Clients continue to invest in analytics across supply chain, trade promotion fulfillment, personalization using new life tools that drive [data] analytics with a traction of cost.

Communications segment performance improved compared to the previous quarter due to combination of fast signings and ramp-up of Tier 1 deals. With COVID accelerating the need for better connectivity, we are seeing improving deployment of 5G across the world. We are working with our customers in advanced IoT use cases and products.

Energy, Utility, Resources and Services vertical grew strong double digits, along with impressive deal wins during the quarter. The overall outlook is improving across subsectors and geographies we operate. Clients are slowly getting back to normalized levels of discretionary spending, especially in areas involving customer experience, operational efficiency and associated legacy transformation. Cybersecurity is also becoming important with recent incidents in Energy and Utility segments.

Growth in Manufacturing segment was strong, with tailwinds from deal wins in the past few quarters. Infosys grew market share through the pandemic across all sectors in automotive, aerospace and industrial. We see emerging opportunities on various trends in the ER&D space, resulting from increased spending on digital in areas like industrial IoT, cloud adoption, IT-OT integration, making the manufacturing value chain smarter and faster. As mentioned earlier, we expect Daimler deal to start ramping up in the weeks ahead.

Life Sciences segment also continued to grow at strong double-digit rates. Our recent offerings like personalized medicine solutions for complex biotherapies, commercial insights platform to help drive commercial efficiencies and digital health platform for patient engagement initiatives would help in accelerating digital adoption across pharma value chain.

Shares of digital to our overall revenues increased further to 53.9% in quarter 1, with a very strong growth of 42.1% year-on-year in constant currency terms. There's a pent-up demand to restart delayed products in addition to the continuation of the pandemic-related drive towards digital transformation of enterprise infrastructure and customer experience.

Clients have recognized that some of the adoptions they have made to their business are going to be permanent, and they are increasing their investment in digital panels and full-service product centers. In the last quarter, Infosys was ranked as leader in 10 digital service-related capabilities across cloud services, modernization, artificial intelligence and supply chain by industry analysts.

With that, I will hand over to Nilanjan.

Thanks, Pravin. Hello, everyone, and thank you for joining the call. I trust each of you and your families are safe and well. So we are encouraged with our quarter 1 performance, which has significant and broad-based acceleration in growth as we began the year.

At 4.8% CC growth, we clocked the highest sequential quarter 1 revenue growth in the last 11 years. On a year-on-year basis, revenue growth actuated to 16.9% in constant currency terms, which is the highest growth in any quarter over the last 10 years. This growth is on the back of a relatively strong Q1 '21 performance, which was the peak of pandemic-induced revenue impacts.

Operating margin for Q1 was 23.7% and increased by 100 basis points over quarter 1 '21, whilst being 80 basis points lower compared to quarter 4 '21. The major components of the sequential movement was a 10 basis point benefit due to currency movement, a 40 basis point benefit due to increase in utilization. And these benefits were offset by a 50 basis point impact due to increase in subcon and third-party costs and another balance 80 basis points impact due to all of the costs primarily related to employee hiring, promotions, retention and wellbeing costs.

EPS grew by 26.1% in dollar terms and 22.6% in INR on a year-on-year basis. DSO for the quarter improved by 1 day to 70 on the back of robust collections. Consequently, free cash flow continued to increase and was $863 million in quarter 1, an increase of 18.5% year-on-year. FCF conversion stood at 122% of net profit.

Driven by healthy cash generation, consolidated cash and investment was $5.07 billion after returning approximately $1 billion of final dividend and initiation of buybacks. Consequently, ROE increased to 29.3% in quarter 1 compared to 27.4% in quarter 4. I'm happy to share that ROE has increased by over 3.4% in last 2 years, driven by a robust capital allocation policy. Yield on cash balance continue to decline, with yield of 4.9% in quarter 1 compared to 5.1% in quarter 4 and 6.1% in quarter 1 last fiscal.

Now let me talk about the progress made on the buyback plans. We initiated share buyback on June 25 after securing shareholder approval during the AGM on June 29. Over the maximum buyback size of INR 9,200 crore till June 30, we had completed INR 690 crore or approximately 7.5% of the buyback by end of quarter 1. During this period, we bought back 4.4 million shares at an average price of INR 1,572. Till date, we have completed INR 1,542 crore of share buyback and bought back 9.8 million shares at an average price of INR 1,569.

As the pandemic situation is improving in any part of the world and businesses slowly return to normalcy, we expect some of the discretionary costs, including travel facilities, et cetera, to start normalizing in the coming quarters. In quarter 2, we will also roll out compensation hikes to majority of employees.

With the talent markets remaining heated, we are anticipating continuing costs relating to employee retention, acquisition and wellbeing in the short term. However, given our focus on structural levers to improve efficiency and cost structure, we remain confident of our margin guidance plan of 22% to 24% for the full year, driven by strong quarter 1 and visibility. Driven by deal signings, backed by a robust deal pipeline, we are increasing our revenue growth guidance for the year to 14% to 16% from 12% to 14% previously.

With that, we can open the call for questions.

(Operator Instructions) The first question is from the line of Moshe Katri from Wedbush Securities.

Congrats on the very strong results. So most of the questions we're getting this morning were around margins and the leverage in the model. And I guess there's a lot of focus on wage inflation that's picking up and attrition that's picking up.

Maybe you can talk a bit about the levers in the model and how do we get that comfort that the 22% to 24% EBIT margin range is sustainable beyond this year. And then should we assume that, I guess, the second half should have maybe some less pressure on margins given some of the normalization on the bench? Is that the right way to look at it?

Yes. So Moshe, so I think as we had given the guidance at the beginning of this year of 22% to 24% and coming on the back of 24.5% last year, I think we were very clear that there would be some headwinds, which we had got the one-off benefits during FY '21. And we've articulated that clearly in terms of travel facilities, some other discretionary costs, the deferred costs like wage hikes, promotions, et cetera, which were put on hold. And we had clearly said that, that will be an impact and a headwind as we look into FY '22, and that was really factored into the 22% to 24% margin as well.

What has changed slightly has been, of course, the demand which has picked up. And like I always say, it's better that demand chases supply than supply -- we have a new supply chasing demand because, in the long run, it's much better to fulfill demand as it comes. We can continue to work on our cost optimization levers, and that's why, of course, our guidance also goes up.

So we have seen these small headwinds during this year. And in terms of retention costs going up, some impact on subcons. But for instance, we just announced we will take now 35,000 college graduates, right, that will help us to fuel the pyramid, help us in cost optimization. And of course, we continue to look at the other avenues of automation, onsite-offshore mix, et cetera.

So I think that 22% to 24% is -- we're quite confident on that. Whilst there may be these short-term impacts, but I think some of them, like the subcons, et cetera, once hiring comes back on our own, we should see some benefits there. So I think, in our overall model, we remain quite confident within the 22% to 24%. But like I said, I mean, the most important thing is that, if demand is chasing supply, this is a situation we really want to be in rather than the other way around.

Understood. And just as a follow-up, given the fact that digital is almost 54% of revenues, should we assume any sort of pricing power coming up from that part of the business, especially based on some of the commentary you're seeing from some of the pure-play digital names out there?

Yes. So I think, as you know, there's been 2 structural impacts having the pandemic. One is, of course, the entire workforce transformation and the ability, basically, to work any part of the world, whether nearshore, offshore, [on-demand]. And the other one is, of course, the whole digital transformation impact, which is very, very fundamental to how the clients of our consumers are interacting with brands. I mean this is just not about mainline brick-and-mortar Retail. This extends to Manufacturing. It extends to Financial Services, insurance.

And I think a lot of our clients fundamentally realize that to support and fuel the spend towards new digital transformation, a lot of that can come from cost optimization, which, in a way, speaks to the whole offshoring trend. And COVID has demonstrated that we can then fulfill these requirements from any part of the world. And that savings can be fueled back into the digital transformation. So that's very -- at a demand level, very, very good news.

And also, I think, now, a lot of our conversations is also more navigating towards value. And that kind of value we are deriving for our clients, right, whether it's on the consumer side, it's on the retention side, it's in the supply chain logistics, and how we position ourselves, not just about the way travels are priced for us, but more about more innovative ways of pricing, where it's clearly linked to outcome linked to results of our clients.

And that's the way we think, in the future, this can help us in pricing. This has just about started the work we are doing. And we think, over the next few quarters, and more structurally, we may be able to get some tailwinds around this.

The next question is from the line of Diviya Nagarajan from UBS.

Congrats on a very strong quarter and the guidance raise. Just a follow-up to the earlier question on pricing. I noticed that you are talking about structural movements in pricing. But on the -- at the press conference, I think Salil has pointed out that pricing was more or less stable.

I'm trying to understand why we wouldn't be seeing a better pricing environment, given how strong demand is and the fact that there is a fair amount of supply pressure across pretty much every part of the digital value chain. That's my first question.

Thanks, Diviya. This is Salil. I think the point you make earlier in the press conference, the question was on how we've seen the pricing in Q1 from what we see in terms of our large deals and past interactions. Your point here in terms of what is the opportunity to see some pricing power and also building on the previous question. I think as Nilanjan was sharing with you, we believe we have an extremely differentiated digital portfolio. And we believe that, that creates a lot of value for our clients.

We are very active in making sure that we demonstrate and communicate that value. We will now see, over time, also because of the supply concern, but also because of the digital value, how that translates.

We don't want to create -- that's one of the strategic levers that Nilanjan has talked about, we've all talked about in the past. We feel that, among others, gives us good comfort for our guidance band, 22% to 24% on operating margin. We will see how that plays out. And especially with the supply constraint, if that gives us more leverage in the future, of course, that will become reflected in what we see in the business.

Got it. And I noticed that the net new deals were a little bit on the lower side compared to what you've done in the last few quarters. While I do appreciate that this is a quarter and you could have fluctuations, how do you see the deal pipeline on your net new TCV for the rest of the year, please?

So Diviya, you're absolutely right. I think these are quarterly fluctuations. We look really to those sort of stats on a longer time frame. We saw last year the net new was significant as we looked at the overall annual number. The pipeline looks good and strong. There's good focus on new deals.

There's also, of course, good focus on ensuring we continue where we are and expand into that portfolio. So no visible markers to change that. We'll probably look to replicate what we've done in the past few years where net new has been a critical factor. It remains something we look at proactively into the pipeline.

Sorry, but just a quick follow-up to that. Has the number of mega deals in the pipeline gone up since -- in the last few quarters, too?

So there, Diviya, we don't provide some more color on the specifics of the pipeline. Suffice it to say that the overall value of the pipeline is extremely good, nice increase from the previous quarter, and we see that continuing to increase. And the pipeline is comprised of a mix of the different types of large deals, the, let's call it, medium, the large and the very large.

The next question is from the line of Sudheer Guntupalli from ICICI Securities.

My first question is to Salil. Salil, until DFC also, Infosys was holding the pole position in the IT industry in terms of growth. But the next decade has not really panned out the way one would have hoped for. Again, over the last couple of years, even before the start of COVID and, of course, after the start of the pandemic as well, Infosys has been outperforming competition on growth and back to by a wide margin.

And you have been talking about -- very confidently talking about market share gains from competition. So how confident are you on sustainably driving the company to the pole position once again over the next decade?

So thanks for your question. I think that the way we are looking at this is this growth, 16.9%, 4.8% is really the fastest in the past 10, 11 years. It's essentially organic growth. So we feel extremely good because that's a good metric as, of course, you know well that clients are preferring Infosys, and that's the ultimate test in this market.

So we feel comfortable that the capabilities that we have built in that digital portfolio, and this extreme dedication of our employees in a very difficult period over the last several quarters, is combining to give us that outcome. So the focus remains on client relevance, and therefore, the outcome metric is growth. We will see how the pole position thing plays out over time.

For Salil, and my second question, actually, over the previous decade, whenever things started looking up, we faced some of the other hiccups. How confident are we that, this time around, it will not be the case, and the entire focus will be in terms of exceeding the industry leadership?

I don't follow that question, sorry. Could you just -- Sudheer, can you repeat the question so I can follow it?

Yes, yes. No, I was saying, over the previous decade, whenever things started looking up, we faced some of the other hiccups. But this time around, how confident are we that it will not be the case and there will not be any such risks, and probably the entire focus will be on achieving industry leadership?

Sudheer, if I follow it, it's still a little bit unclear with the sound, I mean. Our focus is to keep our attention to clients. We have an extremely motivated leadership team. The Board is extremely supportive, very strategically minded and really give good guidance and support to the management team and the broad leadership. So my own sense is we keep this attention to our clients and building on the digital capability and the rest will follow from that.

The next question is from the line of Pankaj Kapoor from CLSA.

Salil, my first question is also on this net new deal TCV. I think in the press release, you had mentioned that the focus of clients is now shifting away from cost optimization. So does it mean that clients are now taking longer on the -- to decide on the deal as well as in terms of the deal construct? Is that what is leading to maybe a softer net new deal TCV for us?

The quarter-on-quarter view of that percentage is always a little bit up and down. What we've seen in the pipeline is a significant amount of activity, where clients are looking at moving on the digital transformation programs and also working on areas which relate to cost efficiency. And also, we are seeing opportunities, which we've discussed in the past, of vendor consolidation. We don't see that the time line has changed in terms of deal movement, nor do we see some different sort of criteria in terms of the types of deals or the pricing.

What is clear is the broad economic growth in our end markets, which is coming back rapidly, is allowing for many industries to go through the transformation: companies within industries accelerating; companies which have lower digital presence are going faster to catch up and lead from; companies which already have digital presence are making sure that they maintain their advantage. So all of those things bode well for the technology spend, where we are positioned quite nicely in that technology spend.

Pankaj, was the question answered?

The next question is from the line of Ashwin Mehta from AMBIT Capital.

One question in terms of the guidance. So if I presume Daimler has not contributed to revenues until now, and even if I build in the numbers that are appearing in the press for that deal, the implied CQGR over the next 3 quarters appears to be pretty soft at between 0.6% to 1.8%. So are we building in some conservatism -- conservativeness in terms of our guidance? Or anything that we -- that makes us a little cautious here?

So on the guidance, and as you've seen on revenue growth guidance, we've increased it by 2 points, 12% to 14% to 14% to 16%. It's, I think, demonstrating our confidence in what is going on with respect to the demand outlook and with respect to the deals that we have done, of course, this quarter and also in the past. On the specific clients and their revenue mix, I won't comment, but I will say that we don't see, really, any softness in what we see in the coming quarters.

Okay. Okay. And just one more, given the fact that you've largely added freshers this quarter, do you think -- and you are expecting the supply-side pressures or attrition to increase further, do you think the subcontracting expenses will further get elevated from where they are?

So on the subcontractors, we, today, have an extremely attractive talent proposition, where, as you saw with the 8,000 people we added, net additions, we are managing extremely well to attract good talent. What we will ensure to do over this next quarter and, of course, in the quarters to come is to make sure that we are at the forefront of fulfilling the demand.

In terms of subcontractors, we don't specifically model or forecast that, whether it's up or down, but we have the flexibility to do all of that, plus our cost levers and margin levers, to ensure that our guidance will be in the range that we have given of 22% to 24%.

So Salil, just a follow-up to this. You had around 8,000 people getting added. From what I heard, if I heard it correctly, there were 10,000 freshers onboarded this quarter. So essentially, the hiring seems to be largely freshers, and they'll possibly take some time in terms of becoming productive. So do you think, near term, the hiring will be much more skewed towards lateral to sort of fulfill the demand that we are seeing?

Yes. Of the 8,000, while you're seeing the figure of freshers of 10,000, I think there's a big lateral hiring as well. And the attrition have caused a -- the attrition of freshers were on that side. So in that sense, we have a very strong engine. The first one is of cost pressures. That's after that, followed by laterals. And then, in a way -- in the case of top-ups, in a way, would be subcon. So all the 3, we accelerate. Like I said, it's very, very important to meet demand now, right? That is absolutely critical.

And the good thing is we have not let down any of our clients. I mean, Salil talked about earlier that we are seeing strong demand outlook and a lot of clients, who we've met, as [we had] mentioned, and therefore, very important to get that out of the door and then figure out our cost structure, subcons, et cetera, in due course. And I think that's something we're quite comfortable with. We continue to remain a brand of choice for new talent, and that's a very strong proposition which we have.

The next question is from the line of Keith Bachman from Bank of Montreal.

I wanted to ask about the margin guidance for the current fiscal year. If you take the guidance range of 22% to 24%, I just wondered if you could break down what are the key drivers for the year-over-year decline from what you already reported for FY '21.

And so I'm just wondering if you could break that down into the bigger pieces. And what I'm really trying to understand is how much wage inflation is impacting margins guidance for the year versus other factors such as mix, and particularly of the ramping of the large new deals, if there's any kind of comments you could help us understand. And then I have a follow-up question, please.

So yes, sure. So I think, again, like I said, it's important, firstly, to go back, even before the pandemic, into FY '20, in a way, when we had given this comfort range of 21% to 23%. And as we moved into FY '21, like I mentioned earlier in the call, we saw a lot of these one-off benefits, right? It was the discretionary spend, travel came down quite sharply; facilities costs, as people started working from home; marketing, some of the freshers spend like that; the deferral of the pay hike and, last year, the promotions.

And therefore, although we were at 24.5%, we were very clear at starting the guidance at the beginning of the year, that this would fall with the headwinds coming up of this year. As many of these costs reverted back to normal, we would roll out our pay hikes in January and in July, both of which stacked again. And therefore, our guidance of 22% to 24% versus the 24.5$ was clearly reflective of these headwinds coming up, right? And I think, more than once, we've talked about it.

As we looked ahead, we've factored in both the wage hikes. Yes, wage is always the #1 player in margins. We don't split out the impact of wage or deal mixes. But nevertheless, the largest impact on the margin movement on a year-on-year basis will be on wages. But despite this, we know we are very comfortable within the 22% to 24% -- the lever, which we continue to employ. Automation is a massive lever in terms of our cost optimization of -- taking our people from projects and redeploying them.

The onsite-offshore mixes, I think we are very unique in creating an onsite pyramid. Historically, most IT services companies were very, very steep onsite pyramid. Our 6 hubs in the U.S., our nearshore businesses, I think that helps us build a much more flatter pyramid, in a way, kind of mimicking what we have in the offshore geographies. We are going to hire 3,000 -- hired freshers from outside of India. So all these will help us in the future in terms of taking some of the wind out of these headwinds which are coming our way.

Okay. And my follow-up question, if I could, is similar. As you think about the year unfolding, do you think attrition moves lower from here, or stays the same or goes up? And similarly, as you think about the onsite mix has continued to move lower, so your offshore mix continues to move higher. Does that -- how do you think that unfolds through the year? Does that mix of onshore-onsite stay where it is, becomes more favorable? Or any comments on how attrition in the onsite-offshore mix might move as we look for the balance of the fiscal year. That's it for me.

Yes. So I think, on the attrition, like I said, I'd rather be in a situation where demand is chasing supply than the other way around. And therefore, that's fundamentally a good news for the industry. And I think it's important to realize that it takes time for the supply chain of the industry to catch up. Fundamentally, the only way new net demand can be -- they have full access to fresh accounts, right? Otherwise, it's a zero-sum game. My attrition is somebody else's lateral and somebody else's attrition is my lateral.

So fundamentally, the only way this demand can be serviced is through freshers. And as you know, most of the freshers -- historically, [we think] college campus freshers are recontracted 6 months to a year out. It is only now that we -- as the demand has suddenly surged that we are looking at new ways of getting freshers on. In the last call, we had only mentioned we would take 25,000 freshers. We've upped that up to 35,000 freshers and started a completely new parallel fresher hiring program off campus, through which we will service it.

So I think there may be some gaps in the -- short-term gaps in terms of when the supply chain sort of adjusts itself. But like I said, this is good news, it fundamentally, there is this large exposure of demand, which you're seeing across. So in that sense, we are -- our job is fundamentally to continue feeding this demand, whether it is through the freshers or through subcons or through the laterals. And I think we've already hired 8,000 net despite the attrition, high attrition in the quarter.

The second part of the question was, yes, I think, again, we've seen this massive change over the last 3 years. Firstly, it came from 30% to 27%, and it's within 1 year from 27% to 24%. And again, we talked about it earlier in our guidance that we would probably see a little bit of this easing out as travel, et cetera, opened up. But I think the secular trend, definitely, is it should continue in the long run.

And a big impact of the COVID has been that clients have been able to see that work can be performed across the globe. It necessarily doesn't have to be in the scene and their own workforce. They've seen it with us. That was -- doesn't have to necessarily perform in front of them -- in onsite. In on-prem. It can be same time zone, different locations, same time zone, nearshore. It can be offshore. And I think that's, in the long run, I think, very, very positive for the answer-searching industry. So we think, secularly, this should improve. But in the short term, there can be these stops and gaps as well.

The next question is from the line of Gaurav Rateria from Morgan Stanley.

Congrats on a great execution. The first question is on the BFSI. We have seen a very sharp recovery in North America Financial Services revenues compared to pre-COVID level, whereas Europe is still just about to recover to the same level. So is it fair to say the entire market share gain is largely concentrated in North America? Why there is a dichotomy? Any color on that would be helpful.

Yes, this is Pravin here. A big part of the growth has definitely come from North America, and primarily in subsegments like banking, mortgages and wealth and retirement services.

Hello?

Okay. I thought I had responded. I mean, I'm confirming that most of the growth has been primarily from...

My question was why there is a dichotomy in the performance between Europe and North America?

No, I think it's mostly to do with -- maybe it's lesser demand in some of the banking plans in Europe. And in some cases, we have won the deals, there is a delay in ramp-up as well. So I don't think it's a secular trend because, in this space, in the last 6 to 8 quarters, we have demonstrated a very strong growth consistently. And there have been times when we have seen growth led by U.S. side of the equation, and there have been times when you have seen much stronger growth in Europe and Asia Pacific. So I don't think -- I mean it's not a secular trend. We are not seeing any specific softness or anything with any specific plans in Europe. It is more a question of delayed ramp-ups and things like that.

Okay. Second question is on margins. What really are the drivers that can take you to the upper end of the guidance for the full year? What would be those 2 or 3 key factors? Is it growth coming towards the upper end of the guidance? Is the digital going -- continuing to grow at this kind of rate? Just trying to understand what are the variables which can take you to the -- open end of the guidance.

Why -- I think we've given what our guidance of 22% to 24% and not what is going to be the quartile of that. And we remain quite confident to operate within this. Our levers are quite well known. We've mentioned about automation, the mix, the pyramid, subcon, operating leverage. You're seeing a lot of benefit of operating leverage over the last year itself on our bottom line. So there have been multiple levers. And like I said, for us, it's -- to stay within that, we are quite confident without giving any quartile targets, et cetera.

The next question is from the line of Ankur Rudra from JPMorgan.

Congrats on a good start of the year. On the first question, do you, think looking at the demand environment that you'd want to be a bit more flexible on where your margins land and how you're optimizing for growth in investments compared to the plans you had at the start of the year?

Ankur, this is Salil. Thanks for the question. I'm not sure I fully follow it, but just to first respond then we can clarify. Where the demand environment is shaping up, which I know you see very well, is extremely strong. And our approach is to make sure that the capability sets we've built are available to our clients to help them with their digital programs and automation programs.

Within that, we, at this stage, are not trying to fine-tune what part will go more or less. We see that demand as a holistic picture, and we are driving to make sure that we work with our clients in doing that.

What is clear, as Nilanjan shared a little bit earlier, is that we have several levers in the operations toolkit, if you can call it that, which we are deploying so that each of the streams of work, wherever they start from, are then further optimized. And that gives us the confidence, because of those levers, that we will land fairly well, fairly clearly within the margin band. But that's the approach that we have in place today.

Salil, I think part of my question, which has not been probably completely addressed was, do you think, for example, the margins came in lower in 1Q versus what you had planned earlier and hence, you are being a bit more flexible in what you said, chasing demand as opposed to optimizing for margin?

There are no -- I think my sense is we had shared, over the last year, and I know Nilanjan had also shared, that many of the actions we took last year were giving us -- many of the outcomes last year were onetime benefits. For example, on the travel. Of course, the onsite-offshore mix has moved much more in a secular way. The fact that we reduced several other cost line items in the March-April-May time frame last year, it was a different view to where things are going.

So we didn't think, at least, in our minds, that the margin was going to be different. We started the year also with 22% to 24%, even as we closed out the previous year, 24.5%, because we could see the salary increase, which we had done later than originally planned in January, the second salary increase of July, all of those were coming up. So in that sense, we are not changing, as you call it, chasing something more because this margin has come in low.

So we had this view of the margin as we started the year. The demand outlook has actually become stronger. So we feel, what we started with 12% to 14%, with what we are seeing in the way these deals are working, and there's a lot of activity where clients are coming to us.

To give you one example, 2 weeks ago, I was in a client discussion where they want us to expand what we do within that client portfolio. Within this one client, it could be 30%, 40% expansion, and these are just anecdotal, which add up. And my colleagues, all of our sales team are having those sorts of discussion. So that gave us the confidence to increase the growth guidance now, but we are chasing something more because the margin was lower than what we expected.

Appreciate the color. Just one follow-up, if I can. Are -- do you think the supply situation that you're facing in the market -- which you elaborated on, do you think that had any bearing on the signings in the quarter? That's part one. And part two is that having -- is the supply situation having an impact on client conversations and competitive behavior from a pricing perspective?

What we are seeing in the supply situation, again, if you look back over the last 5 or 6 quarters, and this is something I've heard from many clients who feel that we have really consistently supported and delivered without any real constraint. And so we are seeing a benefit of clients and look -- we'd rather you scale up with us.

So the supply situation, however we put it, I feel it's coming to a benefit to us because we have, as Pravin has shared in other forums, an incredible brand, which attracts talent. We have an incredible training capability. And all of those things are not short-term things. These you cannot develop over a quarter. That helps us to bring in the talent, what clients see. And so yes, there is a supply constraint because there's a huge demand, but we are still seeing good growth and, in fact, expand -- improving our growth guidance.

The next question is from the line of Sandeep Shah from Equirus Securities.

The question is -- sorry to again harp on the margin. Just wanted to understand, is it the guidance factoring in some amount of pricing increase maybe in the later part of this financial year? Or the margin guidance is independent of this? Because if I look at -- wage hikes are still not coming into the numbers, attrition is going up, utilization at all-time highs, even the offshoring looks at all-time high.

So just wanted to understand sort of the guidance. Is baking them some pricing increase or it's independent or the same? And second, just a bookkeeping question. If I look at the unbilled revenue in this quarter, on a Q-on-Q basis, has gone up by 12 percentage points. Anything to read in the same, though free cash flow generation continues to move forward?

Yes. So I think, on the margin side, like I said, there are continuous levers, which we have -- the pyramid, onsite, offshore, pricing, subcon, operating leverage. And I think all of that is built into our models and how we look for the quarter and ahead. And on that basis, I think we are quite comfortable in the 22% to 24% range, as some of these cost headwinds come as well. So I think that -- we're quite clear on that.

The second question on the unbilled. I think there is some seasonality, always, which we see in quarter 1, always, if you see that. And usually, that starts tapering out. So nothing really concerning. I mean, we've seen the overall free cash flow, our DSO has come down as well. So I think...

(inaudible)

Yes. I think on percentage of revenue, we are same as the previous year as well, so actually as we indicated.

So Nilan, investor clarifications for your guidance, on the margin, you are baking in some pricing increase for FY '22?

Yes. So a lot of things is going. It's not like -- I know what's going to be the pricing environment to the team in the fourth quarter. We know some of the initiatives on pricing. Some of them will come through. Some of them, they won't come through. There will be some new cost pressures. There will be other levers.

So you have to be very dynamic and fleet-footed in our industry to continue to manage that, and you use probabilities of what can work, what won't work. Something -- some levers will over deliver. Some will under deliver. So all that is factored in as we forecast for the year ahead.

The next question is from the line of Dipesh Mehta from Emkay Global.

Congratulations for a strong execution. First question is about the margin related. Now Daimler deal, can you quantify what will be the impact of wage hike in the Daimler deal in Q2?

Second question is also related to margin, what's like medium term? Now 22 to 24 percentage margin in '22, which we are confident to defend for this year. But if one went from the short-term to medium-term perspective, do we think, considering that digital is now more than half of the revenue and growing very strongly, plus overall strong demand environment, we can again achieve our historical 25 percentage kind of EBIT trajection?

On the margin question, Daimler large deal is all factored in. We don't break out the impact of Daimler. We look at cost optimization across projects. We look at the various levers we talked about. And that, in a way, it's all built in to our 22% to 24% guidance as well. On the digital, the question was...?

On digital, with respect to -- this is Salil. I think your question was because it's becoming larger, will that give us the opportunity to have a different higher margin? We certainly see that the digital business is at a higher margin than our company average today. However, the guidance that we are giving for this financial year, for operating margin, which is 22% to 24%.

There are many levers, as Nilanjan shared. And of course, there are several areas which increased the cost as well. All of those will balance out. And at the end of this year, we will provide the view for the following year. But we don't have any particular view on that different number at this stage.

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. This is Salil. So first, thank you, everyone, for joining us for this session. I want to reiterate just a couple of points. One, on the demand side, we see a good environment. And with all of the points we've discussed and the way we see the market, we've increased our growth guidance with -- from 12% to 14% to 14% to 16% for this year.

On the margin, we have certain levers, which we have deployed and are continuing to deploy across the board, whether it's the mix, whether it's the utilization, whether it's a subcontractor usage, whether it's the overall role mix and pyramid, whether it's now more value and pricing on-demand for higher demand skills. Plus, there are some factors which relate to employee costs and some of the travel coming back.

When we mix all of that together, we have confidence that we will be in that margin guidance of 22% to 24%. We will continue to drive the business in that direction, keeping in mind our clients, employees and shareholders. We look forward to a very exciting and successful year, and thank you again for joining us.

Thank you. Look forward to connecting with you again. Have a good day.

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.