Infosys Q1 FY20 Results - Press Conference

Good evening, ladies and gentlemen, and a warm welcome to the first quarter results for FY20 press conference. We will begin the press conference with the opening remarks from our CEO and Managing Director, Mr. Salil Parekh, followed by the Q&A session. Over to you, Salil.

Before we open the floor for Q&A, I would request you to ask one question per publication. We'll begin with electronic media, and the first question is from CNBC.

Hi, Salil. Great numbers, great deal wins, digital growth is great, and of course you have raised the revenue guidance. Could you tell us where you're going to see the revenue coming mostly from — organic and inorganic — and could you tell us the contribution from the ABN Amro deal, the Stater acquisition, especially in the BFSI vertical? And retail and life sciences seem a little soft, but where do you see the recovery here?

Okay, one question for Pravin and also for Nilanjan. Pravin, attrition still remains very high — 23.4 — it's really high. Can you give us a timeline as to when this will really come down, and what you're doing on this? And I'll just ask Nilanjan also a question. The operating margin is still a little low at 20.5. Are you still comfortable with that band of 21 to 23, and by which quarter do you see that entering that band for the year?

Attrition is definitely higher than where we want it to be, but there is a seasonality element to this. Quarter one is historically when you have higher attrition because of people going for higher education. In addition, in this quarter we have had a higher percentage of involuntary attrition as well. As part of it, we are doing multiple things, and in some sense this attrition is also a reflection of demand for talent. We are doing multiple things to address this. A big part of our attrition is at the lower levels, and in the current compensation review exercise we have tried to address it. We have launched a new employee value proposition, and we are doing many, many initiatives around it. So we expect over a period of time that attrition will come down to manageable levels. The high-performance attrition is much lower than the overall attrition, so that's a positive thing. We'll continue to focus on engaging with employees, giving them career opportunities, investing in their growth, and also giving a very rewarding experience and differentiating for high performers. So we believe that some of these steps will take some time, but over a period of time it should come down. So far we have not seen any impact of this attrition in terms of our deliverables, and we have been able to deliver — in some sense it's also reflected in the growth that we have had.

Yeah, so I think on the margins, Q1 is always a seasonal quarter from a margin perspective for the IT industry. Two big costs which kick in are the visa costs. So this has had an impact on us in quarter one as well — for the financial year 19 visas which come through — and also the comp hikes which we give at the beginning of the quarter. These are adequately built into our margin forecasts of the full year of 21% to 23%, and we remain confident to achieve that band.

Next question is from Bloomberg Quint.

Hi, Salil. Last year it was about stability and investments. This year you had suggested that it's going to be about momentum. My question then is, will investments increase, decrease, or remain the same in this particular year, and what areas will be the focus when it comes to investments? A word on Pravin — a word on subcontractor costs and external consultants. If you can give us an idea about what that is as a percentage of revenues, has it increased quarter on quarter, year on year? I'm assuming it has, but if you can give us an idea on that. And Nilanjan, given now that 85% of free cash flows will be returned to shareholders, how are you looking at the remaining 15% between capital expenditure and acquisitions for that matter?

On the subcontractor front, it's marginally increased. I think it's about 7.5% of our revenues. Overall now, subcontractor is an integral part of our supply chain thing because there are two or three reasons why we go after subcontractors. One is obviously sometimes we have a shortage of niche skills, and subcontract is a good route till we are able to ramp up. The second one is particularly onsite — many times we don't have enough time to fulfill or deploy people from here through the visa and other things. So sometimes in the short term you have to deploy subcontractors while we are able to backfill from sending people from here with visas. So it's a combination of things. In the last few quarters we have kept it in this band of 6.5% to 7.5%, and we expect that to stay in that range because now it's an integral part of our supply chain. Over a period of time we will rotate some of the subcontractors out, but there'll always be new subcontractors coming in to meet the demand.

Yeah, on the free cash flow policy, firstly it's after capex, so capex is already built in. The balance went up from 70% to 85%. I think that was the intent. We've been talking to a lot of the investors and shareholders, and one of the messages was, of course, if you don't have any need for that cash, please return it, and we think we've heeded that. I think that way it's quite progressive. The balance actually is for any tuck-in acquisitions which we may have, and I think our cash balance still is about three and a half billion, which we think is more than sufficient for what we look forward to.

Next question from ET Now.

Hi everyone, Rahul Dama from ET Now. I'll come to Salil first and then Pravin and Nilanjan. Salil, congratulations on an excellent set of numbers. Just want to dig deeper and understand where is this optimism really coming from? Of course the large deal signings have been great, especially over the last four quarters, but Gartner has indicated that tech spend, especially globally, while there are a lot of large deal signings, the closure, deal closures are getting delayed. Do you echo that sentiment, or that's not really the case with Infosys? Just trying to dig deeper and understand the optimism from large deal signings really.

So you're saying you can sustain this going ahead as well.

Alright. Pravin, two sets of questions. One, BFSI — last time also you had indicated that for full year you're still strong. I want to understand, is this limited to some client specific issue in Europe, or this is sort of broadening out to the US market as well — the pain points as far as BFSI? And secondly, also the talent strategy for the US market. It's interesting that Infosys has applied for a higher number of H-1B visas even as you go around with investments in localization. How will that really pan out going ahead?

Yeah, see, on the BFSI segment, we had a good quarter. We had a double-digit year-on-year growth on constant currency, partly aided by the Stater acquisition. Overall, as I said in the past as well, we are reasonably optimistic about our prospects in this space. In the large deal wins that we have had, about three of the large deal wins this quarter have been from the BFSI segment. In the past as well, we have had a good percentage of large deal wins from BFSI. While we see softness in the capital markets in both the US and Europe, on the other hand we are seeing a lot of opportunities in cards and payments, or in retail banking, corporate banking, and so on, driven by investments in digital transformation and legacy modernization. So we feel reasonably confident. Obviously, there is softness in some part of the BFSI space, but there is also growth opportunities elsewhere. We have done well this quarter, and we are hopeful in future. On the US talent — one of the statistics is about two years back we had committed to recruit 10,000 people. We have just completed that, we have crossed that 10,000. We have met the commitment. A big part of it, a good percentage of it, comes from hiring from universities — about 2,500 plus people are from the universities. So that US recruiting in the US will still continue. We will continue to recruit because there's tremendous demand for talent there. At the same time, we just talked about increase in subcontracting and so on. There's always demand for talent. So we also need to create opportunities from a supply chain perspective of having the ability to send people from here as well. So that's one of the reasons we have applied for a higher number of visas, so that in the long run we will be able to meet our talent requirements in a much more agile manner and reduce the dependence on subcontractors.

Alright. Nilanjan, just — sorry, margins again. And I'm sure everyone would pitch in and want to understand. Last time, interestingly, I think Salil mentioned there's no structural issue with the margin structure; IT business continues to be a high margin game. Do you still echo that sentiment? Also, as far as localization efforts are concerned, a large part of it has happened. So what are the levers you have in the coming quarters, really apart from operational efficiency, automation also — what else do you have to sort of ensure that margins... While analysts were penciling in an impact from wage hike, when would it get better?

Yeah, so if you see the RPP as well this quarter, it has gone up versus the previous quarter — how much we realize per person. You can see that from the fact sheet as well. From an elements perspective, how do we influence the margins going forward? Of course, automation is at the core of what we do, and we do it for ourselves, we do it for our clients, and we continue to see productivity improvements in that. The bigger next cost, of course, are onsite employment costs. And again, looking at the onsite-offshore mix, that's something we continuously optimize in projects, and also creating an onsite pyramid. A big part of that, as Pravin mentioned, is the whole hub structure and the localization. So we were able to take many more freshers into our system and create a much more cost-efficient pyramid model, and we think that's quite unique for us. All of this, as we know, will play out as the year progresses. We've had these first quarter impacts which are, as I said, seasonal from the industry. But if you look forward into our guidance of 21% to 23%, and we're sitting already at 20.5%, of course our margins will have to go up as the year progresses, and we're quite confident of that.

Next question from Deccan Herald.

Hi, yes. So basically, couple of questions here. The first is on buybacks. We have seen the government proposing 20% taxation on this. Infosys has been frequently doing buybacks, a couple of them in the past two, three years. So how do you strategize now that investors' wealth would get impacted because of that 20% taxation? How do you strategize on that front? And second question, if I can see, you have stopped reporting hiring numbers from this quarter, and there is no explanation which ideally should have been there. There is no explanation whatsoever in the fact sheet that you have provided. Can we know more about it? Why have you stopped the reporting on hiring numbers?

So, I think we give the net adds and the attrition figures in any case. So it's quite easy to derive. We just thought it didn't make sense to add the gross adds because from the net add and the attrition figure it's quite easy to get the gross adds in. We just removed some of the redundant information.

[laughter]

Next question from Moneycontrol.

Hi, I'm Swati. So there have been a little concern about the hikes for the senior level job band. So I have come to know that a couple of them haven't even got the hike email which they get in April and which is payable sometime in July.

Yeah. See, hikes — we have always staggered the hikes. When people get hikes at a lower level, people typically get hikes starting April; at middle level, they get starting July; and for senior management, it's starting October. That's something we have had in the recent years. So there is no change in that approach. This time, at a lower level for some small percentage of population, we moved it from April to July. I mean, these are things we keep on varying at periods of time. But other than that, there has been no change in any strategy or anything. It's what we said in April, it's something similar.

And again, regarding the attrition — it's 23.44%, which is quite high, and you did mention that you're doing a lot of efforts, but could you please know when do you see that reducing? We have been seeing that increasing over the quarters consistently — 23%, then 20%, now it's 23.4%. Could you give a timeline on that?

I mean, it's difficult. We have to really persevere on that. As I said earlier, this is something we don't want. I mean, it's higher than where we want it to be. At the same time, it has not really impacted our day-to-day business. There are a lot of efforts, including addressing whatever the pockets of areas where we have had challenges through the current compensation review, and so on. There's a continuous dialogue; we take feedback and we continue to work on it. This is something we have to continue to do. Difficult to predict when it'll come down, but we will continue our efforts on that.

And also, could you give an idea on how many joining letters were sent this year? On a quarter basis, the number of people who've been inducted.

We see overall for this quarter we have recruited close to 8,000 people — freshers about 2,500 or something. And for the year, we are looking at about 18,000 people from the universities perspective.

It's a little higher than the figure you had given last time, or...

I don't remember what I gave, but this is something we keep on calibrating, right? Because based on the business and the outcome we keep on calibrating.

Next question from Business Today.

Hi, I'm Rukmani. Going back to the capital allocation policy. You've been a company with an ethos of conserving capital. Now, your promoters have been talking about capital conservation all along. 85% of your free cash flow you're willing to give back to your shareholders. How much leeway do you have if you're looking at a bigger acquisition? Or is this an indication of you not looking at any kind of bigger acquisitions or your bandwidth to go out and chase the market? The other thing, Pravin — just a little more clarity on the hiring numbers. Your peer has gone ahead and hired big time, the biggest in the last 5 years, and they're saying that they're looking at the kind of growth and really bulking up their talent to be able to reach out to the market when need be. If you're seeing growth and you're anticipating demand, etc., your readiness in terms of your own talent supply that you have — how is that being managed? If 18,000 is what you look to roll out, but at the end of the day how many people join is again a bit of a question, right? Thanks.

Yeah, on the capital allocation, I think first, this is a free cash flow positive business. So except for any M&A, you really don't need the cash, and the shareholders have been telling us loud and clear is, if you are, rather give me the cash back than put it in the bank and get me 6%. And that was the whole ethos — if the value creation in their hands is going to be more, we should return the cash back. Having said that, we've kept the 15%, like I mentioned earlier, for any tuck-in acquisitions. Our balance sheet is still very, very strong. That's very, very healthy. We still have three and a half billion. So we can, at any point of time, dig into these reserves whenever we want. And at this moment we felt it was quite okay to give 85% back and be quite confident on it.

Yeah, on the hiring front, the numbers I gave are numbers we are recruiting from the campuses. We also hired laterals during the year. And we know what the demand is, we know the anticipated attrition, and today the utilization is around 83 and odd percent. In the past we have operated at utilization of 84-85%. I think we have enough leeway in the system, in our operating model, to deal with whatever demand that comes. So it's less of an issue. I think we are comfortable.

Next question from Reuters.

Hi, I'm from Reuters. So you've increased your revenue growth guidance, but the macro challenges still exist, right? So I just wanted to understand, in the US and in Europe, what sort of challenges are you expecting and which verticals do you think will be under pressure?

Next question from Hindu Business Line.

Hi, this is Vivek Anand. So I was just listening to your answers about the capital allocation policy. So if you're saying that after increasing the payout to your investors based on your free cash flow, based on your growth and your margin guidance, you are expecting at the same level to be able to pay your investors, that means your growth you've already baked it in the future for the next five years because you obviously cannot change it again very soon.

We have said that approximately 85% of our free cash flow, whatever that is each year, in a cumulative five-year span we will return cumulative because with different laws, rules, and regulations we cannot make commitments on any one pattern of return. We have a commitment on dividend in the nature of it and that we will be consistent with it. But because there are other components — buybacks and special dividends — we cannot make a commitment per year given the laws and regulations. But it doesn't imply anything else beyond that. It's simply saying 85% of free cash flow.

Just one more question. Can you give an update about the retail sector? One of your competitors had mentioned that there is some growth issues — like some stores are shutting, like Sears is shutting stores all over the world. So that has impacted their business. Are you seeing any impacts of the retail sector, the brick-and-mortar stores reducing their stores? Does that impact you in any way?

See, the retail sector normally will be fairly volatile because they're tightly linked to consumer sentiments and the macro. So you will see some volatility on a quarter-on-quarter basis for us. Last year first half we had fantastic growth in retail, and it slowed down in the second half. But this quarter we have slowly started seeing some uptick in retail. So we do find a lot of retailers continue to invest because there's a tremendous urgency to compete with the likes of Amazon, Facebook, Google, and so on. So there is continued investment opportunities within retail on the digital transformation. A lot of investments in terms of multi-channel store experience and so on. So we have seen as compared to last quarter we have seen some uptick in retail this quarter. But again, we have always consistently said that's one sector which probably you will see some degree of volatility depending on the macro and consumer sentiment.

Next question from Times of India.

Hi, sir. Your digital revenues has crossed a billion dollars. Can you break it down for us? And secondly, as much as there's so much momentum in the digital segment, the revenue per employee doesn't really reflect that. In fact, it's been flat and it's come down from 2017-18. So revenue per employee — is that a good measure even considering your digital momentum that you are seeing in the market? And secondly, we hear there are some redundancies already in job level seven and above. So is it an annual exercise which is the bottom trimming of 5% to 10%? If you can give us clarity on that.

Also, you have about 10,000 people in the US. So if you can talk about the utilization there — is it optimally utilized, or it's a partial utilization in comparison with your deal pipeline? If you can just take us through that.

So we don't break up the utilization we share externally into different geographies. We feel we have a lot of operational levers at our disposal to help us improve our operational business metrics. One of them is utilization.

Next question is from The Hindu.

Hi, Mini here. Pravin, most of the questions around attrition is already taken, but still I have a few more to ask. Pravin just spoke about this manageable level of attrition. Can you tell what exactly that level is going to be? And also, recently the US actually lifted this cap on the country cap on the green card. So will that be any good for you? And also, how many visas have you applied for so far this year?

See, on the green card, I mean, there is this new one. So every year we do apply for a percentage of green cards, and we don't see any change in that approach based on the new thing. It's only that some of the processing of green cards will be much faster, and there may be more number of people eligible. So that's on the green card. What was the first question?

Number of visas.

Oh, okay. Yeah, we don't really talk about number of visas we have filed. So we don't do that. And what was the first question?

The attrition — manageable.

Okay. See, historically, when the business was relatively stable, we used to have attrition between 13% to 15%. But today it's not — I mean, today we see a lot of disruptions happening, a lot of shortage of talent, a lot of new technologies coming into place, a lot of demand for skills. So this is a cycle where the industry itself is going through disruptions, so it's very difficult to comment what is manageable or not. But our approach is to make sure that we are able to retain the best talent internally so that we have less dependencies on subcontractors or we'll reduce the effort in terms of hiring if you are able to retain more. So in a normal circumstance, 13% to 15% is what we have seen in the past. But today's environment, I would not call it normal because we still see a lot of shortage of talent and a lot of adoption of newer technologies, but there's a huge talent gap. We will continue to see some higher degree of attrition.

Next question from Business Standard.

Hi, good afternoon sir. This is from Business Standard. I do have two or three questions on the back of an envelope. When I calculate the P&L on the reported currency side, it seems that the incremental revenue actually Infosys is earning is coming at a greater cost, at a higher cost. You have beforehand also said that the company is not entering into a structural thing where your margins are declining, but it's not reflected in numbers. I just need a view on that. Secondly, you have taken a lot of initiatives in signing up JVs, and the large deal momentum was also pretty in quarter one. How much of revenue actually is coming from those kind of initiatives, and how much of the deal which you have signed — I think 2 billion worth in quarter four of last fiscal — how much has actually ramped in and reflected revenue in this quarter? And thirdly, don't you think when you increased your revenue guidance to double digit, when you see the core revenue actually is flat and the reported currency side is actually negative, what drives that optimism that you'll be able to achieve a double-digit revenue growth number when 70% of your revenue is digital and the core thing is actually declining or flat? Thanks.

Yeah, so I think a few of you had already asked this question. I think last year to this year, as you seen, we have made those strategic investments which we called out when we rolled out the Navigating Your Next strategy about digitization and localization and the sales investments. I think, like we said, that's behind us last year. And as we look forward to this year, our guidance which is 21% to 23% actually reflects a stabilization of our margin profile. We are at 20.5%, and that was largely because of the one-offs which is factored into the guidance of 21% to 23%. So, like I said, going forward we expect this margin profile to improve as the year progresses.

Next question from Financial Express.

Hi, I'm Shilpa. I want to know what are the business segments having demands for cognitive technologies and cloud enterprise cloud technologies, the ones you have mentioned here. And also, are you increasing your number of product packages or service packages in the modern technology side, and how are you managing talent for that across geographies?

So there's a lot of focus on both reskilling and also on making sure that we bring in talent from colleges straight off — freshers — to make sure we train them from the start. The reskilling program is something we put in place with our own platform, Lex, where we have now almost all of our employees having access and downloaded it. A lot of them using it — almost 35 hours — is being used to drive all of this activity in the reskilling. So we have a lot of that traction in the reskilling here itself. And then we also bring in talent which is from adjacent spaces, and we do refactoring of that talent or skilling them in these new areas, and those are the techniques that we're using. Having said that, it's a constrained environment because there is not enough supply, and so that's something we have to work at every day.

Next question from Economic Times.

Hi. Congratulations, Salil, on good numbers. Just a couple of questions. Now that you've completed 10,000 hiring in the US, do you have another target for the region? And I think Infosys has been talking about non-STEM hiring as well, you know. So if you can give us, by now, what's the percentage of non-STEM employees who are into design thinking and all other areas like liberal arts students and all that? If you can give that percentage. And final question on Japan. I think you formed that joint venture with Hitachi, and I think the Japan government is coming up with a guideline from August 1st saying foreign companies cannot have a majority holding in high-tech areas, and you're going to have 81% holding there. So any thoughts on that?

Next question is from Kotak Mahindra.

Hi. So your deal wins during the quarter have been significantly higher than expectations. So I want to understand, is there any bunching up of deals that has happened, and how do you see this sustaining going ahead? And secondly, any impact from the restructuring at Deutsche Bank?

So what is the impact for Infosys, sir?

Thank you, everyone. With this we come to an end of this press conference. Friends from media who would like to listen to the earnings call, please move to the media center in building 12. We've arranged the cards outside this building to drop you to the media center. I would request you all to join us for refreshments at the MC lounge. Thank you so much. Have a nice evening ahead.