Categories Earnings Call Transcripts, Technology

Infosys Limited (INFY) Q2 2022 Earnings Call Transcript

INFY Earnings Call - Final Transcript

Infosys Limited (NYSE: INFY) Q2 2022 earnings call dated Oct. 13, 2021

Corporate Participants:

Sandeep Mahindroo — Financial Controller & Head, Investor Relations

Salil Parekh — Chief Executive Officer and Managing Director

Pravin Rao — Chief Operating Officer and Whole-Time Director

Nilanjan Roy — Chief Financial Officer

Analysts:

Ankur Rudra — J.P. Morgan — Analyst

Moshe Katri — Wedbush — Analyst

Diviya Nagarajan — UBS — Analyst

Sandip Agarwal — Edelweiss Capital — Analyst

Pankaj Kapoor — CLSA — Analyst

James Friedman — Susquehanna Financial group — Analyst

Sudheer Guntupalli — ICICI Securities — Analyst

Keith Bachman — BMO Capital Markets — Analyst

Kawaljeet Saluja — Kotak Securities Limited — Analyst

Gaurav Rateria — Morgan Stanley — Analyst

Presentation:

Operator

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.

Sandeep Mahindroo — Financial Controller & Head, Investor Relations

Thanks, Margaret. Hello, everyone, and welcome to Infosys earnings call to discuss Q2 FY ’22 earnings release. I am 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 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 we open up the call for questions.

Please note that anything which we say that refers 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, which can be found on www.sec.gov.

I’d now like to pass it on to Salil.

Salil Parekh — Chief Executive Officer and Managing Director

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

I am delighted to share with you that we had another exceptional quarter with increased market share gain, and demonstrating more and more trust that our clients are placing with us and the strength of our digital and cloud capabilities. Our growth was 19.4% year-on-year and 6.3% quarter-on-quarter in constant currency terms. I would like to thank the entire 270,000 employees at Infosys for their incredible dedication and world-class skills that made the work we do for our clients so impactful. Our year-on-year growth was the fastest we have seen in 11 years and built on a quarter that was a great quarter, this time last year. Our growth has been accompanied by resilient operating margins at 23.6%. We delivered these margin, while we kept, in the forefront, our focus on employees with increased compensation and benefits.

Our digital business grew by 42% and is now 56% of our overall revenues. Within digital, our cloud work is growing even faster and our Cobalt cloud capabilities are resonating tremendously with our clients. We are working with a large global company, for example, on the private cloud deployment. We are working with a large bank on the public cloud expansion. We are working with several of our clients on SaaS transformation and cloud native developments.

Some of the other highlights of our result are: revenues were $3.998 billion, which is a growth of 19.4% year-on-year and 6.3% sequentially in constant currency. Our digital business grew by 42.4% year-on-year and now constitutes 56.1% of our overall revenues. We had broad-based growth across all our sectors and service lines. All our sectors reported double-digit growth. Financial Services grew by 20.5%, this, of course, is our largest sector and growing exceptionally well. Manufacturing grew by 42.5%; Retail by 17.2%; Life Sciences by 26.1%.

In terms of geography, North America grew by 23.1%; Europe by 19.6%. Our large deals were strong at $2.15 billion. Our onsite mix moved to 23.6% and our utilization to 89.3% and operating margins were resilient at 23.6%. Free cash flow was strong at $712 million. Our attrition moved up to 20.1%, and we will talk a little bit more about that later in the call with Pravin. We had a net headcount increase of 11,664, attracting leading talents from the market. We remain comfortable with our ability to support our clients in their digital transformation journeys. We are rapidly expanding our global talent pool and have increased our college graduate hiring to 45,000 for this year. Last quarter, we had this number at 35,000 people.

I’m also delighted with our increased focus on ESG. As many of you know, we have already been carbon-neutral since 2020. Our ambition for 2030 is well articulated and we are building on the momentum to create impact. We are accelerating our goals with the launch of Infosys Springboard to bring digital skills to millions of students.

With a strong start to the financial year, good deal momentum in Q2, a robust pipeline, we are increasing our annual revenue growth guidance from 14% — which was at 14% to 16% previously, now we move it to 16.5% with 17.5% growth in constant currency. Our operating margin guidance remains the same, 22% to 24%.

We have a very special moment in this quarter. It will be Pravin’s last full quarter before he retires after an incredible journey of 35 years with Infosys. Pravin’s contribution to the company are innumerable. [Indecipherable] will definitely miss his tremendous depth of knowledge of the business and his contagious sense of humor. My best wishes to Pravin in all his future plans. We will announce our future structure in the coming weeks, well before Pravin steps down.

With that, now let me hand it to Pravin for his update.

Pravin Rao — Chief Operating Officer and Whole-Time Director

Thank you, Salil. Hello, everyone. Hope you and your family are doing good, safe and healthy.

Growth acceleration continued in quarter two with year-on-year constant currency growth of 19.4%. Quarter two witnessed broad-based double-digit growth across all business segments and both North America and Europe. Operating parameters continued to improve further. Utilization improved to new all-time high of 89.2%. Onsite effort mix reduced further to a new low of 23.6%.

We won 22 large deals up over $50 million, totaling $2.2 billion TCV; five each in Financial Services and Energy Utility, Resources & Services; three each in Retail and Manufacturing; two each in Communication and Hi-Tech; and one each in Life Sciences and Other segment. Region wise, 15 were from Americas, six were from Europe and one from Rest of the World. The share of the new deals in quarter two was 37%.

Client metrics improved with $100 million client count increasing to 35, an increase of 5 year-on-year. We added 117 new clients in the last quarter. Voluntary last 12 months attrition increased to 20.1%. While attrition has increased on the back of high industry growth and supply tightness, especially in the Michigan [Phonetic] area, we continued to fulfill client commitments through increased hiring, talent reskilling and higher usage of subcons. We have stepped up our hiring program and have added more than 11,600 talent employees on a net basis; highest ever in a single quarter. In H1, we onboarded over 25,000 colleagues graduates and for the full year, we have increased the college graduate hiring target to 45,000 globally.

The vaccination drive for our employees and their dependents across locations continued unabated. Currently over 86% Infoscions have received at least one dose of vaccine.

Moving to business segments. Starting with Financial Services, I’m happy to share that in the last quarter, Infosys was ranked Number 1 by HfS in the Banking and Financial Services Providers Top 10, 2021. As you are aware, our year-on-year growth was over 20% on constant currency basis this quarter and this industry-leading growth has sustained over the past several quarters. We are seeing strong demand and momentum across all regions. North America, however, continues to lead growth as we execute on those [Phonetic] transformation programs and win market share.

Banks are increasingly focusing on virtual branches, improved customer experience through AI and analytics and digital transformation-led cost takeout agenda. Our focused investments in building strong sub-vertical and platform capabilities in regional banking, retirement services, mortgages, asset management and payments are working as a differentiator in winning large deals and digital transformation programs. We are well-positioned as full stack digital transformation player with combination of our domain plus technology plus operations plus digital transformation capability.

Performance of Retail segment remained strong as clients continued to make investments in new digital capabilities in commerce, marketing and supply chain areas. We have been focused on areas like digital consumer, analytics, digital promotions, personalization, cyber security, etc. Our recently launched Equinox platform is seeing significant traction from both our existing and top quartile clients. We have a strong pipeline and expect steady performance for this segment in the coming quarters.

Communications segment performance improved meaningfully on both sequential and year-on-year basis on the back of ramp up of earlier deal wins. We’re witnessing increasing momentum for capex rollout for 5G deployment across regions. Our 5G leading [Indecipherable] with its capabilities and the promise of future innovation is a key differentiator in the 5G space for CFTs and OEMs.

Energy, Utility, Resources & Services vertical growth accelerated further with continued large deal wins. Clients in various sub-segments are being returned to normalcy and are prioritizing projects on cloud transformation, customer experience, data analytics, automation, cyber security, etc. In Energy, we have made good progress in developing the integrated Energy as a Service solution which aims to enable plants to access reliable low-carbon energy, use energy more efficiently and to optimize supply and demand across multiple uses and assets without having to invest in additional energy infrastructure.

Growth in Manufacturing segment accelerated significantly with the Daimler deal starting to ramp up. Growth in the last quarter was broad-based across Europe and U.S. as well as across industrial, automotive and aerospace industries. We are seeing traction in engineering, IoT, supply chain, cloud ERP, digital transformation and cloud migration areas. The pipeline continues to be strong and this directs the confidence that growth in Manufacturing for Infosys will continue to be market-leading.

Infosys BPM performance remained stable as most of the geographies are witnessing slow return to normalcy. We see good deal pipeline with a healthy share of digital deals. Share of digital to overall revenues increased further to 56.1% in quarter two with continuous strong growth of 42.4% year-on-year in constant currency terms. We continue to see big focus on digital transformation, especially around cloud, commerce and employee experience as customers adjust to the permanent changes in both shopping habits and hybrid working. Cost takeout has been surpassed by the improvement of the digital experiences that increased sales and drive customer or employee loyalty.

In the last quarter, we have been ranked as leader in nine digital services-related capabilities in the areas of cloud services, experience and design, big data and analytics, IoT and engineering, modernization and artificial intelligence.

To conclude, I want to thank you for the wholehearted support and wishes that you have extended to Infosys over the year. Personally, I have thoroughly enjoyed the discussions with you and felt enriched from your insights. I wish you good health and success in your future endeavor.

With that, I will hand over to Nilanjan.

Nilanjan Roy — Chief Financial Officer

Thanks, Pravin. Hello, everyone, and thank you for joining the call. Hope all of you and your families are safe and well.

Revenue growth accelerated further in quarter two on the back of a very strong quarter one. We had strong double-digit growth in all the business segments led by Manufacturing and Financial Services, which grew at 42.5% and 20.5%, respectively year-on-year in constant currency. Our largest geography, North America, also grew year-on-year at 23.1% in constant currency. Consequently, constant currency year-on-year growth increased to 19.4%, which is the highest growth in any quarter in the last 11 years. Sequential growth in Q2 also saw an acceleration to 6.3% in constant currency, which is the highest sequential revenue growth in any quarter in the last six years.

Q2 margin remained resilient at 23.6% despite headwinds from salary increases for most of our employees, higher subcon costs and supply side challenges which were largely offset by improvements in operational parameters and scale benefits resulting from growth. The major components of the sequential margin movement are as follows: 1.1% impact to the comp hikes given, effective July, to most of our employee base; a 0.5% increase in subcon costs, which were offset by 80 basis point benefit due to cost optimization and improvement in operating parameters; a 50 basis points due to SG&A scale benefits; and a 30 basis points benefit due to UC and cross currency movement, overall, leading to a 10 basis points drop in sequential operating margins.

Q2 EPS grew by 13% in dollar terms and 12.7% in rupee term on a year-on-year basis. DSOs stood at 66 days, an improvement of four days versus the last quarter on the back of robust collection. Free cash flow for the quarter was healthy at $712 million and as a percentage of net profit, was 97.1% for Q2 and 109.5% for H1. Yield on cash balance was 5.1% compared to 4.9% in Q1.

We have completed the buyback of INR9,200 crores on September 8 at an average price of approximately INR1,649 per share compared to a maximum buyback price of INR1,750 per share, leading to a 1.31% reduction in share capital. With this, the company has returned approximately 82% of the free cash flow for FY ’20 and FY ’21 through dividends and buybacks, close to the 85% stated in our five-year capital allocation policy. Even after the capital return, we continue to maintain a very strong debt-free and liquid balance sheet. Consolidated cash and investments at the end of the last quarter were $4.40 billion.

Return on equity increased further to 29.8%, an improvement of 3.1% over Q2 last year, driven by consistent performance and increased capital returns. The Board has also announced an interim dividend of INR15 per share, an increase of 25% over prior year interim dividend and equal to the final dividend of prior year.

We see a robust demand environment, coupled with tightness in the supply side, which will result in higher recruitment, compensation and retention costs in the near future, along with seasonal headwinds relating to [Indecipherable]. However, we remain confident of our ability to partially offset some of these cost headwinds through the cost — structural cost efficiency improvement measures and deliver well within our margin guidance for the year. With a strong Q1 and a robust deal pipeline, we are increasing our revenue growth guidance for the year to 16.5% to 17.5% from 14% to 16% previously. We reiterate our operating margin guidance of 22% to 24% for the full year.

With that, we can open the call for questions.

Questions and Answers:

Operator

Thank you very much. [Operator Instructions] The first question is from the line of Ankur Rudra from J.P. Morgan. Please go ahead.

Ankur Rudra — J.P. Morgan — Analyst

Thank you. First of all, Pravin, [Technical Issues] clearly, very good results, like, and I just see the margin execution and the guidance upgrade. To start off with, Salil, if you could give us a sense about how you feel about demand visibility, given where you see the visible — increasing guidance, but we continue to see a drop in the large deals side. So how do we think about that?

Salil Parekh — Chief Executive Officer and Managing Director

Thanks, Ankur. This is Salil. In terms of demand, we continue to see a good pipeline in terms of large deals. We are participating more and more in areas which relate to digital transformation, which relate to cloud work, which relate to data and analytics work. We see this across all industries and we see that large enterprises are accelerating their spend. Their trust in us is strong because of the capabilities we have built. So the demand from that piece, which is the large deals, is looking good. Then there is a demand which is from our existing client base where we are seeing tremendous expansion in all of our large clients. Some of the stats on this are the number of clients over $100 million and number of clients over $50 million, both of which are expanding quarter-on-quarter and as you look back to this time last year, year-on-year.

With that, we feel good today to increase the revenue growth guidance, and that’s the clearest indication that the demand is looking quite good right now. So overall, still in a good shape with the demand and feeling quite confident with the way we’ve increased the guidance.

Ankur Rudra — J.P. Morgan — Analyst

Thank you. Just one thing on the talent supply side. How do you feel about the ability to meet with this continued strong demand, and maybe a comment on the graduate onboarding? Have you been, for example, able to reduce the time taken to billing from onboarding for that part of the supply?

Pravin Rao — Chief Operating Officer and Whole-Time Director

Yeah. Ankur, this is Pravin here. I think we have been — I mean, if you remember, earlier last quarter, we had talked about 35,000 campus hires for this year. But based on the demand outlook and increased attrition, we were able to quickly ramp up to 45,000 for this year. And, in fact, in this quarter, we added about 15,000 campus recruits, which is probably the highest ever in Q3. So, today we have the ability to recruit campus hires because of the investments we have made in assessment platforms, the MPTQ and other things which allows us to access talent anywhere in India and even globally, for that matter. And the turnaround time is much faster. So we are pretty confident and if there’s a need to revise this further, based on our needs, we are more than equipped to deal with it.

Ankur Rudra — J.P. Morgan — Analyst

Understood. Just a last question on margins. Nilanjan, clearly very good execution this time. In terms of the headwinds and the tailwinds you see for us now, would we — would it be fair to assume the headwinds are behind us? And could you also comment about why not narrow the margin band while the revenue band is being narrowed?

Nilanjan Roy — Chief Financial Officer

So I think as we’ve talked about, we’ve done this compensation hike in Q2 and we will continue to do what is necessary and, in fact, Pravin also mentioned, in Q3, we have also rolled out skill-based plans. Also cost of hiring is going up, so we will see some headwinds along with the seasonal headwinds of furloughs and working days in the future — near future. But, overall, I think for the — from a margin guidance perspective, we are quite comfortable to stay within the 22% to 24%. And I think, historically, as you’ve seen, we’ve never changed the margin guidance. This is more of an operating band we are comfortable to be in. So we don’t narrow that down historically.

Ankur Rudra — J.P. Morgan — Analyst

Okay, thank you and best of luck.

Operator

Thank you. The next question is from the line of Moshe Katri from Wedbush. Please go ahead.

Moshe Katri — Wedbush — Analyst

Thanks. Also, congrats on very strong results. And Pravin, we’re going to miss you. It’s been really great experience working with you and best of luck. Two questions. One, can you talk a bit about what we’re doing to contain — the attrition rates remain pretty high? Maybe there’s a way to also break down attrition by voluntary and involuntary? And then the other question is more broad-based. Salil, looking at the budget cycle for calendar ’22, maybe a bit too early, but are we getting any specific indications about budgets for next year? And in that context, the strong growth that we’re seeing this year, do we feel that this is still part of that multi-year spending cycle that INFY has been talking about for a couple of quarters? Thanks a lot.

Pravin Rao — Chief Operating Officer and Whole-Time Director

This is Pravin here. Thank you very much for your wishes. From a voluntary attrition perspective, as we mentioned, on an LTM basis, it has increased to 20.1%. Most of the attrition has been for people in lower levels between three to six years of experience. And this has been the trend in this industry, because in these experience levels, people are still not emotionally connected with the company and sometimes it’s easier for to move around. And that’s what that we are seeing this time around as well. And as I mentioned earlier, this is — I mean, cause of this is also due to unprecedented demand, as well as in some geographies, we have also seen lack of talent mobility, that has also restricted fueled attrition in some of the countries.

What we have done, I mean, obviously we expect this to probably, perhaps, continue for a couple of quarters or so. But once we have more talent available in the system, this should ease and get back to the real level. But having said that, we have done significant interventions to contain this. We have had two rounds of compensation reviews, skill-based correction for some high demand skills, targeted retention for niche skills, a higher number of promotions and so on. We are also focused a lot on mobility of people. We have had lot of IJP’s, we have focused a lot on employee engagement, over close to 5,000 employee connect sessions, lot of focus on career development, continuous learning. We have introduced new career posts like Digital Specialist, we have big programs as well, and we have also launched several wellness initiatives as well. And as we talked about, we are also ramping up our entry level hiring in an aggressive way so that we are able to meet some of the demands that are out there.

In the long term, we are also taking a fresh look at the talent strategy approach. There is not only given the current high attrition, but also our belief is there’s a fundamental shift in employee thinking, behavior in the post-COVID world. And that means that we have to relook at the employee value proposition and fine tune that. So that’s something we have started taking a look at — hard look at it. So that’s from an attrition and talent perspective.

In terms of the budgets, I think in the current context, budgets are no longer relevant in that sense, because there is lot of pent-up demand and at least this will continue for few quarters if not years. And there are various reports, we talk about tech intensity increasing from 3 to 5. In fact, one of the Gartner report talked about the kind of spending in the next two to three years will probably — you have to go back to 2010 or — to see that kind of demand and so on. So in that context, my own sense is — I mean, while budget may be an operational thing, well, people will still do that, but it may not have relevance because there is enough and more demand at least for the next few quarters.

Moshe Katri — Wedbush — Analyst

Thanks for the color.

Operator

Thank you. The next question is from the line of Diviya Nagarajan from UBS. Please go ahead.

Diviya Nagarajan — UBS — Analyst

Thanks for taking the questions and congrats on a strong execution in the quarter. Just a couple of questions from my end. Could you kind of talk about the puts and the takes that you had for margins this quarter? I believe there were some headwinds. So run us through how you’ve managed to maintain margins in terms of the puts and takes, please. That’s question number one.

Nilanjan Roy — Chief Financial Officer

Yeah, so Diviya, I think in my opening remarks, I’ve been quite straightforward in the margin walk. The comp hike, which was broad-based across — this is sequentially, that was a 1.1% impact. We had a 50 basis points [Indecipherable] on subcon. We’ve seen our subcon costs going up due to higher fulfillment. These were offset by about 80 basis points due to cost optimization and other operating parameters; 50 basis points on scale benefits on SG&A; and finally, a 30 basis benefit on rupee and cross currency movement. So I think the comp hike and subcons were negated by cost optimization and scale benefits.

Diviya Nagarajan — UBS — Analyst

Got it. That’s helpful. And from the — I think, Pravin, you talked about the Daimler contract having positive effect this quarter. Could you kind of give us some sense on how many months or weeks of revenue contribution came in from that? And was there any impact at all from that contract on margins? Was there any pass-through revenues or anything that is yet to come or how should we think about that going forward?

Nilanjan Roy — Chief Financial Officer

Yeah. So I think, of course, Daimler had taken [Phonetic] during the quarter and like I said — look at the impact, like I said, you can see on Manufacturing. But even if you strip that out — we can’t give the numbers really, but even if you strip that out, you can see a very broad-based growth across all sectors, both on a sequential and a year-on-year basis. So it’s — like I said earlier, it’s more than an icing on a cake rather than any — and impacting the underlying growth.

Diviya Nagarajan — UBS — Analyst

Got it, got it. So my last question is that, how should we think about seasonality going into December and March? Should we expect some kind of normal seasonality? Your guidance seems to project that you’re looking at a fair amount of seasonality — slowdown coming in at the top end as well. Is that something that’s driven by holidays or whatever or do you think there’s some normalization of demand that’s coming in as well?

Salil Parekh — Chief Executive Officer and Managing Director

Hi, Diviya, this is Salil. So there is always seasonality that you referenced, which I know you’re aware of, in Q3 and Q4. Especially in Q3, we will typically see some level of furloughs, and typically that, at least at Infosys in our Q4, less trend historically. Having said that, the demand environment today looks extremely strong. So we’ve tried to balance those two things in increasing our guidance significantly from 14% to 16% to 16.5% to 17.5%, yet making sure that we have everything that we know of today to deliver to that high level of growth. So we will see some seasonality, but there is a good overall demand outlook as well.

Diviya Nagarajan — UBS — Analyst

Thanks for taking the questions. Pravin, it’s been a pleasure working with you, hope to stay in touch. And I’ll come back in the queue if there is time. Thank you.

Pravin Rao — Chief Operating Officer and Whole-Time Director

Thank you, Diviya.

Operator

Thank you. The next question is from the line of Sandip Agarwal from Edelweiss. Please go ahead.

Sandip Agarwal — Edelweiss Capital — Analyst

Yeah, hi, good evening. Thanks for taking my question. So, congratulation on a great set of numbers. And best of luck, Pravin, and — for your long — for a great stint and for ahead. I have only one question. Now, Salil, if you see our composition of business, we have more than half of the business coming in from digital and the way the growth is coming, it looks like that next couple of years, we will be probably three-fourth of [Technical Issues]

Operator

I’m sorry to interrupt you Mr. Agarwal, your voice is breaking up, sir. We cannot hear you well.

Sandip Agarwal — Edelweiss Capital — Analyst

Yeah, can you hear me now? I’m actually on handset phone only. So my question is that, by — in next couple of years, with the same growth continuing in digital, we will be probably three-fourth in digital. So does it not mean that structurally the industry is moving towards high growth if we see it from a longer-term perspective or you think that there’ll be some saturation also in the digital growth, which we may see after a couple of years? Any thought on that front?

Salil Parekh — Chief Executive Officer and Managing Director

So thanks for your question. This is Salil. In terms of what we are seeing with clients today, the capabilities that we have built out, so for example, Cobalt, we’ve also launched and announced another capability called Equinox, which is relating more to everything which is online in the e-commerce space. There are other areas of digital, which we have invested and scaled up over the past few years. Those areas, we are seeing the demand very strong in today. It’s difficult to say in that two-year horizon that you are mentioning, our growth guidance really is for this year where we have expanded it. But everything would indicate to me that this scaling up, this digital work transformation is something which is ongoing and many large enterprises are at the early stages of their digital and cloud journey. So I don’t see — I don’t get the sense that we are in the late stage. But in terms of really the guidance, we are focused on this year. But overall, I’m quite optimistic that this is a good place to be in terms of the future.

Sandip Agarwal — Edelweiss Capital — Analyst

Thanks a lot. That’s all from my side and best of luck for the current quarter. Thank you.

Salil Parekh — Chief Executive Officer and Managing Director

Thank you.

Operator

Thank you. The next question is from the line of Pankaj Kapoor from CLSA. Please go ahead.

Pankaj Kapoor — CLSA — Analyst

Yeah, thanks for the opportunity. Pravin, just increase in the fresher intake to 45,000, is this one-time because of the current situation or do you think there is a structural shift in the way we are going to hire? If you can give some sense of what kind of plans you have for offers also in next year.

Pravin Rao — Chief Operating Officer and Whole-Time Director

Yeah. This is obviously based on the current demand outlook that we are seeing and high attrition. It’s too early to comment whether this will be a structural shift but if whatever we are seeing and hearing, if this demand continues for the next several quarters, then you could potentially see — given the shortage of talent, you will probably see a higher number of such a recruitment globally. It’s a bit early to think about next year, but at this stage, we believe that it will be on similar lines at what we’ve talked about this year, but we’ll take a look at it on a quarter-on-quarter basis. And as I mentioned earlier to one of the questions, today, our ability to recruit on a dynamic basis is much higher, given the virtual ways, our investment in platform, the ability to assess candidates all through the year through the online platform. So we will take a look at it. So at this stage, our sense is, next year also will be on similar lines and difficult to comment beyond that.

Pankaj Kapoor — CLSA — Analyst

I understand. And Salil, my question was also on the renewal that we have been seeing, which have been obviously pretty dominating in the last two, three quarters. Our new deal wins seems to be just around less than 40% of the deal base. Any sense in terms of what is — what could be the reason behind it? Are you seeing fewer number of those mega contracts which were there, say, four quarters back? Are clients are taking slightly longer time to decide on them? Or are you seeing them getting restructured more into smaller contracts?

Salil Parekh — Chief Executive Officer and Managing Director

There — this is Salil, there on the renewals, the way we look at it is, first, where we have an existing relationship and long-term work, we are very clear that we want to make sure that the clients trust in us, gives us a longer stay extension and typically some level of expansion. And that’s why it’s more critical for us, certainly, to look at the renewals in absolute value because that is, depending on when those contracts come up, we want to make sure that, that continues. In terms of the new work, what we are seeing, Pravin shared earlier, we had 22 large deals, large deals for us being deals over $50 million, in this quarter and that number is very robust. When we compare the number for H1 versus last H1, that’s very robust.

The one distinction is a mega deal that we had last year in this quarter, those things in terms of mega deals, are things which are difficult to predict which quarter they will show up in. In our pipeline, we have a good representation of those. Overall, the pipeline is quite strong. So at this stage, given all of those things, we’ve chosen to increase our guidance and therefore remain quite positive on how the outlook is there for our businesses.

Pankaj Kapoor — CLSA — Analyst

Understood. Thank you and wish you all the best.

Salil Parekh — Chief Executive Officer and Managing Director

Thank you.

Operator

Thank you. The next question is from the line of James Friedman from Susquehanna. Please go ahead.

James Friedman — Susquehanna Financial group — Analyst

Hi. And let me echo the congratulations, Pravin. I’ve learned a lot from you over the years and I appreciate it. I just — I know you keep getting asked about this, but we do too. Any sense at this point when or if you would see stabilization in the attrition at the industry level? And where is the industry losing the people to? Are they going to tech pure plays, to your customers, to captives? We’re just wondering about that. Thank you.

Pravin Rao — Chief Operating Officer and Whole-Time Director

Thank you. It’s Pravin here. I think at this stage, maybe in next two to three quarters, perhaps the attrition will stabilize, given such influx of talent. The demand is far outstripping talent supply that’s available even globally and that’s why we are seeing this phenomenon, not only with us but across the industry and we are seeing it even in other industries as well. In terms of where they’re going, I mean it’s a common thing, right? I mean, typically we lose people to competition and we also recruit from competition, so one part of it. But again we are also seeing losing people to captives, we’re losing people to — and the hyperscalers have also started recruiting, we are seeing we’re losing candidates, and of course in India, start-up now again has become very attractive with lot of unicorns and so on. It’s a combination of things. And I think the only way it can stabilize is to influx more talent into the mix. And that, we believe probably in the next two to three quarters, that will happen. With aggressive reskilling, we should be able to bring it back under control.

James Friedman — Susquehanna Financial group — Analyst

Thank you, Pravin. All the best.

Pravin Rao — Chief Operating Officer and Whole-time Director

Thank you.

Operator

Thank you. The next question is from the line of Sudheer Guntupalli from ICICI Securities. Please go ahead.

Sudheer Guntupalli — ICICI Securities — Analyst

Yeah, good evening, gentlemen. Thanks for giving me this opportunity, and congrats on a good quarter. Firstly, Nilanjan, on the effort mix, right, onsite offshore effort split, it’s little — I’m just curious as to why the onsite share of effort has come down in this quarter despite Daimler deal ramp up and in the beginning — in the initial phases, I would have expected that the ramp-up would show up as higher share of onsite. That is number one. And then the little bit of travel has also opened up, if not completely. So despite these two reasons, I think you are able to show higher offshore effort — offshore share of effort in this quarter. Any sense on what might be driving that?

Nilanjan Roy — Chief Financial Officer

Yeah. So I think, like I said, Daimler is not just one fact [Phonetic] we have, I mean, there is a large business which we run. And we also had Daimler ramp up in the last quarter, it’s not suddenly that everybody is onsite on one day. So you will see these blips in the onsite offshore mix and last quarter it was more flatter, but now you’ve seen movement. But I think more importantly to see a secular trend, like I said, there’s demand at global level. I think, where is it going to get really sustained from is, in the long run, it is going to be from talent here, because at that quantity and scale and digitally skilled talent is largely available in India. So whilst we continue to hire locally in large numbers, our localization, the U.S. has already reached 70%. We announced more than 10,000 additional hires over two years. But despite that, if you see the volume growth and the mix within that, it will continue to secularly move towards more offshore.

Sudheer Guntupalli — ICICI Securities — Analyst

And, Pravin, my second question, if you actually look at the experience bucket you spoke about, where we had seen the highest attrition, which is in the two- to six-year, bucket, so at this level or perhaps at the entry level if you had seen last 10 years, industry has not seen much of salary revisions, right? On a real basis if you see — real rupee basis if you see, perhaps it would have been in the negative territory. I’m not talking just about Infosys but for the entire industry. Now, given the kind of demand we are seeing for this experience bucket, can we expect some sort of a structural increase in the salary levels which can have a longer-term impact on margins, let’s say, one or two years down the line when the demand might not be as robust as it is today?

Pravin Rao — Chief Operating Officer and Whole-Time Director

See, I think — see, on the salary at entry levels, it’s a function of — because when we recruit people, we also — companies also invest a lot in training and enabling them, they take a while before they become productive. But as they move up the system, their salaries increase dramatically. So for the people between two to six years who are quitting, they would have got a good salary again along the way as well. So I don’t see the entry level salary dramatically changing in any way. I mean, there’ll be some corrections here and there. At the same time, at least from our perspective, we have also started differentiating in — at entry level itself.

We have created two set of streams. One is — one called Power Programmer and other one is called Digital Specialist. And these streams, we are recruiting them at a much higher compensation and we are also attracting and there is a very, very stringent criteria for selecting these candidates, based on their background as well as passing a couple of tests. So if people are able to pass that, then we recruit them in these two streams and at a much higher compensation. So going forward, rather than — because at the entry-level, we are recruiting in scale, right, but within that, we are trying to differentiate and where we feel that people come with very strong skills, capabilities, they can deploy — be deployed immediately, we are looking at a different compensation rate.

Sudheer Guntupalli — ICICI Securities — Analyst

Thanks, Pravin. As always, interactions with you have always been very insightful. Congrats and all the best for your future endeavors.

Pravin Rao — Chief Operating Officer and Whole-Time Director

Thank you.

Operator

Thank you. The next question is from the line of Keith Bachman from BMO Capital Markets. Please go ahead.

Keith Bachman — BMO Capital Markets — Analyst

Hi, thank you very much. I wanted to also ask about attrition and you did make the comment that you think attrition improves next year. And I wanted to — I don’t disagree with you, but I wanted to understand your thinking. And more specifically, is it because demand slows across the industry? And as you referenced, it’s an industry issue and that allows attrition to improve or there is something fundamentally that you think demand can stay at these levels or maybe moderate a touch, but you can continue to hire more freshers to meet that? But it is an industry problem, your numbers increased substantially quarter-to-quarter on attrition. And so, just wanted to understand a little bit more about why you think attrition improves, because this is such a significant industry problem, not just an Infosys issue. And then I’ve a follow-up, please.

Pravin Rao — Chief Operating Officer and Whole-Time Director

Yeah. This is Pravin here. I think it’s — I mean we are saying that the attrition will stabilize probably because of the influx of talent. The demand will continue, we are not seeing, at least in the near future, demand coming down by all accounts. But today there’s shortage of talent and particularly in some of the geographies. Because of travel restrictions, we are not even able to deploy people from India in those geographies where there’s a need. So — but over a period of time, I think, not only Infosys, but almost every company, many of our peers have also started announcing, talking about how they’ll be hiring from campuses. Right? So that will result in higher availability of talent. And once we are able to hire this talent and skill them appropriately, then they will be available to be deployed and to meet the demand and that’s when we expect the attrition to come down. Right now, demand far out-supplies — I mean, far outpaces the supply and those were the challenges — outstrips the supply.

Keith Bachman — BMO Capital Markets — Analyst

Okay. Do you think this suggests a different headcount management strategy? In other words, do you think you need to diversify? Because it sounds like it’s — the problem is much more significant in India versus other markets. Does this, you think, suggest a broadening of your reach in terms of supply capabilities, Eastern Europe or otherwise? Does it suggest a different strategy on managing your headcount?

Pravin Rao — Chief Operating Officer and Whole-Time Director

There are a couple of things, right? One is, of course, in terms of talent availability, in terms of scale and quantity, I don’t think any other country can match that. So from that extent, I think most of the noise and other things we are hearing from are in India only. So that is one part of it, because I don’t see any other country being able to provide such kind of talent with scale. So that’s why you’re seeing higher — this thing. And the second one is, this is a very unusual phenomenon. We have not really seen this kind of sought-for talent for a long period of time and as myself being in the industry for over 35 years, I cannot yet think of a time when we have seen this kind of thing. And despite anything — I mean, many people when we talk to them when they’re leaving, most of them are very complimentary about Infosys, they talk very highly about the culture, the kind of training, kind of opportunities they get and other things. But they’re also saying, at the same time, the kind of compensation they are being offered is significantly higher.

And so today, despite all the HR interventions and other things, compensation seems to be a very big criteria. And particularly for some of the companies who are just scaling up or who are setting up centers here, there are no option but to go aggressive on compensation to attract and get the talent. So I would say that is the reason. And this is an unusual thing where some of your normal HR levers don’t seem to work and people do acknowledge that they’re happy otherwise, but the kind of offer they’re getting is too attractive for them to refuse. And these are all junior people, they are not really emotionally fully connected with the company, whereas at a senior-level — mid-level and senior-level, they are much more connected with the company. They understand the culture, they understand the industry and other things. So there, some of your HR practices works better. But at the junior level, while we try, what they thought there is very, very attractive and that becomes a challenge.

Keith Bachman — BMO Capital Markets — Analyst

Okay, one more then I’ll cede the floor. You mentioned a number of times that you don’t see attrition improving over the next couple of quarters. But does your reported number get worse over the next couple of quarters just so we can manage investor expectations?

Pravin Rao — Chief Operating Officer and Whole-Time Director

I didn’t get the question, but I just wanted to clarify that, it’ll probably take a couple of quarters before attrition easing, because that’s when — because you have to onboard supply, you have to skill them, train them and other thing. Right? So that will take some time before they’re — supply is really available to be deployed in projects. So that is the time that will take before attrition eases. That’s what I meant. But I didn’t get your question. So if you can repeat, I’ll be happy to respond.

Keith Bachman — BMO Capital Markets — Analyst

Does attrition — does your reported attrition number get worse in September and December than — excuse me, than the December and March quarters? Does it — can attrition get worse before it gets better?

Pravin Rao — Chief Operating Officer and Whole-Time Director

It’s difficult to predict. We hope it’s not the case, but it’s difficult to predict. But as I said earlier, so far we have been able to manage all the client expectations through hiring, through reskilling and through usage of subcontractors. So at this stage, we are comfortable to meet all our planned commitments.

Keith Bachman — BMO Capital Markets — Analyst

Okay. Many thanks and congratulations on solid results.

Pravin Rao — Chief Operating Officer and Whole-Time Director

Thank you.

Operator

Thank you. The next question is from the line of Kawaljeet Saluja from Kotak. Please go ahead.

Kawaljeet Saluja — Kotak Securities Limited — Analyst

Hi, everyone. Pravin, learned a lot from you and let’s hope you stay in touch. I have a couple of questions, one for Pravin and one for Nilanjan. Nilanjan, for you the question is that you mentioned that the impact of wage increase is approximately 110 basis points. And if I just do the back of the envelope math, your offshore wages, that percentage of revenue is 20%. So that equates to just a 5% wage increase effectively. I mean, is that sufficient in the current environment?

Nilanjan Roy — Chief Financial Officer

Yeah. So, couple of things, one is, of course, there’s — there were onsite and offshore both. There’s a mix of that and it is only up to JL6s. So we are — we’ve planned for the senior and title holders in October. Also from October, we are rolling out more skill-based intervention compensation changes. So, as you know, this is — we did something in January, then we’ve done something in June. And like I said, we are going to do something in September as well; not at the same level, but like I said, we need to do whatever is required. It will, of course, keep talent back, hire laterals as well, because as Pravin mentioned, even the cost of lateral goes up. I mean the churn is rotational in the industry, right? It’s a zero sum game, somebody else’s lateral is somebody else’s churn.

So we will do whatever is required to even onboard lateral fresher. But at the end of the day, I think from an industry perspective, it’s only once the freshers come in, can you really start seeing this thing really easing up. But we are quite comfortable in that sense in terms of our guidance, in terms of fulfilling what the clients are asking for. And one of the ways is, of course, the subcon increase is not the best from a margin perspective, but we have — you’ve seen our stats on subcon slightly going up just to fulfill that gap.

Kawaljeet Saluja — Kotak Securities Limited — Analyst

What will be the impact of wage revision, let’s say, in December because that would be rolled out at a senior level? So it would impact or rather — I mean, the impact of that would be a higher percentage offshore overall compensation number. So what will be the impact of wage revision in December?

Nilanjan Roy — Chief Financial Officer

So we can’t — we don’t call out, but the overall wage impact of the senior level is definitely lower than — I mean the headcount is a much, much smaller amount than what we have rolled out. But we can’t really give a number of what’s the margin impact.

Kawaljeet Saluja — Kotak Securities Limited — Analyst

Got that. Now the second — thanks for that, Nilanjan. And the second question I had is for Pravin. Now, Pravin, we have been wired through your performance historically that whenever the attrition rates go up, your utilization rates go down. But this time around, they seem to be moving in the same direction, which is rather unusual. When do you think that this divergence really starts playing out the way, logically, it has done historically?

Pravin Rao — Chief Operating Officer and Whole-Time Director

Thanks, Kawal, for that question. I am not sure about the correlation you’re talking about, and because if attrition goes up, the natural correlation would be utilization also improving, so this is a need to fulfillment. Right? So I’m not sure where — I mean you’re talking about contrary, so I am not sure of the application. [Speech Overlap]

Kawaljeet Saluja — Kotak Securities Limited — Analyst

Sorry to interrupt you, Pravin. Sorry about that, but the logic is straightforward. I think if the attrition is higher, normally you require greater project bench to fulfill customer demand, and it also indicates a healthy growth environment. A high attrition environment also indicates a healthy growth environment, so again, which need a larger bench. So that was the logic behind that statement.

Pravin Rao — Chief Operating Officer and Whole-Time Director

Yeah, okay. But anyway, in the current situation, there is no supply, right? So the only way you can — I mean, as I said, you have to recruit people, train them and then deploy, that will take some time. You have to look at your existing people, reskill them and deploy, that is the fastest thing for you to do. That means higher utilization and wherever there are gaps, we also look at subcons and we have seen increased subcon as well. So the high utilization is definitely a function of lack of availability of talent and we are recruiting as much as we can to meet the demands of our customers.

Kawaljeet Saluja — Kotak Securities Limited — Analyst

Okay, fantastic. Thanks and congratulations to all of you for a great quarter.

Pravin Rao — Chief Operating Officer and Whole-Time Director

Thank you.

Operator

Thank you. The next question is from the line of Gaurav Rateria from Morgan Stanley. Please go ahead.

Gaurav Rateria — Morgan Stanley — Analyst

Hi, congratulations on great performance and all the best to Pravin. Two questions, the first question is to Nilanjan on margins. We just want to understand the puts and takes on margins in the second half. When we look at the various headwinds, they are continued rising attrition rates, higher travel expenses potentially; very high for a section of employees, full impact of the large deal ramp up, which is likely to take place in 3Q as well. So just trying to understand what are the tailwind that can help to offset some of these impacts and keep the margin within the bag.

Nilanjan Roy — Chief Financial Officer

Yeah. So I think you answered half the question yourself because it makes it easier for me. But we’re going to have these headwinds, like you said, I mean, on retention, on hiring, etc. But I think, like we demonstrated this quarter as well, I mean we have a very strong cost optimization program also ongoing, automation, onsite offshore mix with broad basing of the pyramid, both onsite offshore. I mean, like I mentioned, I mean we’re among the few companies who have these DCs and global DCs now in the West, where we can rope in freshers, right? So I mean, actually, this was — we would not have had freshers in our onsite business, but now we are having more than 3,000-odd freshers a year in the onsite locations. So this also helps in the pyramid. And as you know, 75% of our people cost is onsite. So unless we really address onsite costs, you can’t really make an impact on the overall cost structure. So all this is going on.

We are also looking at pricing much more holistically at this time, although it’s not easy to go and get price hikes just on the basis of a rate card. But basically working with our sales force on how to sell on value, how to sell on more innovative commercial constructs and the idea is not to leave those cents and pennies on the table and in this market, be a bit more bold in terms of pricing. But this is a long haul, but I think if there’s any a time to start something on this, it’s now.

Gaurav Rateria — Morgan Stanley — Analyst

Got it. My second question is to Salil. With respect to visibility, as we enter calendar 2022, is it fair to say that when we entered calendar 2021, the visibility was higher than usual, given the large amount of the new deals already in the bag, which may not necessarily be the case as we get into the calendar 2022? So fair to say that the visibility will be relatively lower than calendar 2021, which was at a very, very high and elevated level? Thank you.

Salil Parekh — Chief Executive Officer and Managing Director

Hi, thanks for the question. This is Salil. I think the way we see our business, we look at it from the financial year perspective. When we started this financial year, you will recall the COVID situation was quite — really within all of us in all the geographies. And while we had a healthy pipeline because of the digital work, that was always something of an overhang that was there. Then you have seen that from our initial guidance, we increased the guidance last quarter. We’ve now further increased the guidance this quarter. So we have extremely good visibility for this financial year with the guidance we given.

Now as we finish Q3 and start to get into Q4, we will start to have a good idea of what the following financial year will look like. My own sense is the demand that we have is really quite comprehensive and that will certainly continue to help us as long as we build out the new capabilities well and be part of the clients’ digital and cloud journey. So the increase in guidance gives us more confidence now for this financial year.

Gaurav Rateria — Morgan Stanley — Analyst

Got it. Thank you so much.

Operator

Thank you. Ladies and gentlemen, that was the last question for today. I now hand the conference over to the management for closing comments.

Salil Parekh — Chief Executive Officer and Managing Director

Thank you, everyone. This is Salil, so I’ll just spend a couple of minutes in closing. First, we’ve had the best quarter in terms of growth, 19.4%, that we’ve had in 11 years. So we are extremely delighted with that outcome. The demand is strong. There are multiple components of demand. One is large deals, which is still looking good with the pipeline we have, including the $2 billion that we have sold in this quarter. There is a huge amount of existing client base that we have, where we are seeing incredible demand. This doesn’t come into the large deals bucket. It will be different sizes, some are large, some are not. But every client that I talked to last week in a meeting with a CIO, we were looking at multiple thousand people expansion at a client where we already have an account base of over $100 million today. Then we see the capability set and our demand in digital and cloud, clients are really extremely thrilled with our capabilities and we see good traction in that.

Second, the operating efficiency is strong. The margin resilience that we talked about, we’ve done really well in doing that. Of course, as Nilanjan mentioned, we do see some additional cost that will come and we are very comfortable with our margin guidance that we’ve given. Third, we talked a lot, Pravin gave a lot of detail, we are expanding our supply capacity that we are taking in and that is the medium-term play that we have because the demand is long term and we will make sure the supply with our incredible brand and training will continue. Fourth, we’ve increased our guidance. So we are extremely optimistic and bullish with 16.5% to 17.5% on growth. And overall, I personally remain positive about the future in our tech services business growing at 19% today.

So thank you everyone for joining us and please stay safe and healthy.

Operator

[Operator Closing Remarks]

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