Infosys Ltd (INFY) Q1 FY23 Earnings Concall Transcript

Infosys Ltd (NSE:INFY) Q1 FY23 Earnings Concall dated Jul. 24, 2022

Corporate Participants:

Sandeep Mahindroo — Financial Controller & Head, Investor Relations

Salil Parekh — Chief Executive Officer and Managing Director

Nilanjan Roy — Chief Financial Officer

Analysts:

Surendra Goyal — Citigroup — Analyst

Moshe Katri — Wedbush Securities — Analyst

Kumar Rakesh — BNP Paribas — Analyst

Keith Bachman — BMO — Analyst

Nitin Padmanabhan — Investec — Analyst

Bryan Bergin — Cowen — Analyst

Sudheer Guntupalli — Kotak Mahindra Asset Management — Analyst

Ankur Rudra — JP Morgan — Analyst

Ravi Menon — Macquarie — Analyst

Pankaj Kapoor — CLSA — Analyst

Gaurav Rateria — Morgan Stanley — Analyst

Ritesh Rathod — Nippon India — Analyst

Manik Taneja — JM Financial — Analyst

Apoorva Prasad — HDFC Securities — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to Infosys Limited Earnings Conference Call. [Operator Instructions]

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 Inba. Hello everyone and welcome to Infosys earnings call to discuss Q1 ’23 financial results. With Sandeep and [Indecipherable] team in Bangalore. Joining us today on this call is CEO, Mr. Salil Parekh; CFO, Mr. Nilanjan Roy and other members of the senior management team. We will commence the call with some remarks on the performance of the company by Salil and Niranjan, subsequent to which will 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, that must be read in conjunction with the risk that the company faces. A full statement that makes mention 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 on the call to Salil.

Salil Parekh — Chief Executive Officer and Managing Director

Thanks Sandeep. Good morning and good evening to everyone on the call. Thank you all for taking the time to join us. We’ve had an excellent start to the financial year with 5.5% sequential growth and 21.4% year-on-year growth in constant currency terms. We continue to gain market share with our Cobalt Cloud capabilities and a differentiated digital value proposition, driving a significant pipeline of opportunities for us.

For example, a premier online retailer in the U.S. leveraged Infosys Cobalt to embark on a cloud driven transformation journey to enhance their customer experience and improve the security posture [Phonetic]. Another example is a European manufacturer who’s reimagining their digital workplace and best of breed network security with IT infrastructure powered by Infosys Cobalt. There are examples like this all across the spectrum in different sectors that are driving Infosys Cobalt into the market.

Clients continue to place an immense amount of trust and confidence in Infosys, to help accelerate their digital transformation agenda, both on efficiency and the growth dimension of the business. The strong growth we have seen in the quarter, lays a robust foundation for the year.

Growth continues to remain broad, based across the segments, service lines and geographies. Each of our business segments grew in double digits, with several of them growing at 25% or higher. In terms of geography, the U.S. geography grew at 18.4% and Europe grew at 33.2%. This indicates a healthy demand environment and is a reflection of how our industry-leading digital capabilities are relevant for our clients.

Our digital revenues were 61% of the total and grew at 37.5% in the quarter. In constant currency terms. Within digital, our cloud work continues to grow faster, with Cobalt Cloud capabilities to significant traction with our clients. our overall, pipeline remains strong. We do see pockets of weakness, for example, the area of mortgages and financial services. We people close watch on the evolving macro environment, in terms of the changes to the pipeline. Within our pipeline we also have focused, in addition to the growth areas in digital and cloud to the cost areas through automation and AI. Our operating margins were at 20%. We have completed the majority of our compensation review for this year. Niranjan will also provide more details on the overall margin update.

Some other highlights of our results are; we signed 19, deals with a large deal value of $1.69 billion. This comprises of 50% net new work, and on site mix was at 24.3%. As we build capacity for the future, our utilization was that healthy levels of 84.7%. Our free cash flow was strong at $656 million. Our quarterly attrition declined, and historically, Q1 attrition increases at three to four points sequentially on a quarterly annualized basis. However, attrition declined by one point on a sequential basis, reflecting the impact of various initiatives we are putting in place.

We had a net headcount increase of over 21,000 employees, attracting leading talent from the market. This is a reflection of our enhanced recruitment capabilities, solid brand and deeper penetration into various talent markets.

Our Cobalt Cloud capability continues to be market leading. We have 360 technology and domain solutions. Five of our assets have over 15 clients each. We have 150 industry focused solutions, 20 Infosys Living Labs, 50 experimentation playgrounds and 60,000 knowledge assets. Our One Infosys approach is serving us well, to bring the best of Infosys in service to our clients’ needs.

Earlier this month, we announced the acquisition of BASE Life Sciences, a Denmark based technology and consulting firm in the life science industry. BASE brings to Infosys domain expert expertise in medical, digital, marketing, clinical and regulatory areas. With a strong growth in Q1 and our current outlook on demand opportunity and pipeline, we increased our revenue growth guidance, which was at 135 to 15%, now to 14% to 16% for the full year. We keep our margin guidance at 21% to 23%. With the increased cost environment, we will be at the lower end of this margin guidance.

Thank you and with that, let me hand it over to Nilanjan for his update.

Nilanjan Roy — Chief Financial Officer

Thanks Salil. Good morning everyone and thank you for joining this call on an early Monday morning. We had a strong start to fiscal ’23, with the robust year on year growth of 21.4% in constant currency. All our business segments and major geos recorded double digit growth, with manufacturing, communication and SURE [Phonetic] along with Europe region recorded 25% plus growth. Sequentially revenue growth was 5.5%, which was led by a healthy volume growth and some RPP benefits. Digital revenues now constitute 61% of total and grew by 37.5% in constant currency. Client metrics were strong, with increase in client counts across revenue buckets compared to the previous year. Number of $50 million clients increased by 10 to 69, creating the next potential Centurion.

Number of $100 million clients increased by 4 to 38 and the number of $200 million clients has grown by 6 in the last one year. This reflects our ability to deepen mining across our large clients. We had another quarter of strong employee additions of over 21,000 to cater to the growth opportunities ahead. The fresher addition was particularly strong, which resulted in drop in utilization to 84.7%. On site effort mix reached up to 24.3%. Voluntary LTM attrition increased marginally to 28.4%. Quarterly analyzed attrition declined by another 1% from the Q4 level, despite Q1 usually seeing an uptick due to seasonality.

As announced earlier, we have given competitive salary increases for majority of employees from April. Given the supply tightness and high prevailing inflation, salary increases across all geos this year are higher than historical levels. The increases vary based on job levels and performance of employees, with top performers getting double digit hikes. Salary hikes for the employees is being done effective 1st July.

Q1 margin stood at 20%, a drop of 150 basis points versus the previous quarter. The major components of the sequential margin movement were as below; headwinds of 1.6% due to salary increases; 0.4% due to drop in utilization, as we create capacity for future. 0.3% due to increases in [Indecipherable] third party and other costs. These were offset by [Indecipherable] of 0.5% due to increase in RPP from higher working days, a reversal of a client contractual provision in our FX segment partially offset by discounts. 0.3% benefit from rupee depreciation benefits, partially offset by cross currency headwinds. Q1 EPS grew by 4.4% in rupee terms on a year-on-year basis.

Our balance sheet continues to be strong and debt free. Consolidated cash and investments were $4.4 billion at the end of the quarter, after returning more than $850 million to the shareholders through dividends, which has led to an increase in ROE to 31%. Free cash flow for the quarter was $656 million [Phonetic], which is a conversion of 95% of net profit. Yields on cash balance remained stable at 5.3% in Q1. DSO declined by four days sequentially to 63. DSO including net unbilled was 82 days, an increase of one day versus Q4.

Coming to segmented performance, we signed 19 large deals in Q1 with a PCV of $1.69 billion. This comprises of 50% net new. We had five large deals in retail and CPG, four in high tech, three each in financial services and energy utility, and software and services, and two each in manufacturing and communications verticals. Region wise, 15 were in Americas and two weeks in Europe and ROW.

In Financial Services, clients are continuing to focus on building customer experience, contact center transformation and virtual branches, aimed at improving customer engagement. While the order pipeline remains strong across regions, we have seen some slowness in mortgage industry and lending business due to increased interest rates. We remain watchful of impact of emerging global developments on budgets of clients.

In the retail segment, the pace of digital transformation, large scale cost takeouts and improving business resilience continues to be on the rise across various subsegments. Our focus on proactive engagement has attracted [Phonetic] creating a robust pipeline. Clients are monitoring their emerging macro situation and the impact of that on their business.

In the communications segment, clients are focused on rapid digitization and protecting the assets from cyber threats. We see enormous potential to partner with them, both on the digital transformation agenda, as well as on the cost takeout front. These pipeline and energies, utilities, resources and services segment, comprises of opportunities around cost takeouts, vendor consolidation, digital transformation, cloud led transformation and asset monetization across industry subverticals.

Manufacturing segment is seeing broad based growth across geographies and industries subverticals. The sectors seeing traction across energy, IOT, supply chain, cloud ERP and accelerated cloud adoption. In quarter one, we have been ranked as a leader in nine ratings in the areas of Oracle Cloud, SAP S/4 HANA, public cloud, industry 4.0, employee experience and automation services. In this supply constrained environment, we continue to invest in our growth momentum, which requires us to hire premium skilled talent, while simultaneously investing in existing employees should competitive compensation increases across the years. Additionally, we expect normalization of costs like travel and other overheads. We will continue to focus on various cost optimization measures, including rationalization of subcon, flattening of the pyramid, increasing automation, reducing onsite mix and increasing pricing.

Whilst we retain our operating margin guidance of 21% to 23%, we expect to be at the bottom end of the range. The revenue guidance for the year has been revised to 14% to 16% from 13% to 15% earlier.

With that we can open the call for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question is from the line of Surendra Goyal from Citigroup. Please go ahead.

Surendra Goyal — Citigroup — Analyst

Yeah hi, thanks for that. Good morning. Just a couple of questions from my side. Firstly a clarification. So Nilanjan, I believe you said that the contractual provision was largely offset by discounts? Could you please clarify your bit, did you mean discounts to the same client or discounts in general? Curious because on one hand we are talking of a strong demand environment and potential price hikes, and at the same time we are also talking of discounts?

Nilanjan Roy — Chief Financial Officer

So Surender, the comment was that it’s not the entire 0.5% increase in RPP, it is a combination of three to four elements; the higher working days the client contractual provision reversal benefits, partially offset by discount, so it’s not a direct linkage of discounts and client contractual provisions. It’s not the same client, this is generic discount. And these automatically keep on coming. But like I said, we have come down less and as we started negotiating with our clients in terms of pricing. But that’s the net impact of all these.

Surendra Goyal — Citigroup — Analyst

Okay, sure. And just another question on margins down 360 bps year over year; operating profit is where growth YOY is worse than historical trends, despite all the strong demand and growth we are talking about. So if you just think about this 360 basis point decline, how much of that is really investment, which you think can be recouped as we go forward from here?

Nilanjan Roy — Chief Financial Officer

Yeah, of course, like we said, when we were 360, we knew we were having some benefit in a way of the — back end of COVID. Our utilization was very high. We were really at 88% which we had never operated before, the benefits of travel etc, now we’re seeing that more and more, that has been coming back. So that’s something which we were well aware of in last year. But as we see the demand volume ahead, I think they are very clear that in terms of our ability to support this demand, first we have to hire, we have to pay competitively, so we actually did actually two wage hikes in calendar year 2021, and now this year we’ve already rolled out in March. So within 1.5 years, we’ve done three substantial CRs [Phonetic] and actually September last year also, we did a [Indecipherable].

So we’ve been continuously investing behind that, and we know that to capture the demand, we have to pay for premium skills. We have to go behind the volume, in some cases subcontract for us, you know, from an industry, I think leading 6.5 position we are closer to 11%. But again, we have something we know over a period of time, we have a lot of optimization levers, right, and we don’t want to leave a five year demand on the table, because of short term cost pressures and these we can optimize you know, over this year and over the future as well.

So in that sense, we are quite confident and that’s why we have talked about — we will be in the 21% to 23% at the bottom end of the range, and of course if we had 20% today, we will see that improvement as the year progresses.

Surendra Goyal — Citigroup — Analyst

Sure, thanks for that. I’ll get back in the queue.

Operator

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

Moshe Katri — Wedbush Securities — Analyst

Thanks. Spectacular numbers, especially on the revenues side of the business. Just a follow up to the last kind of topic or question about margins. We’re getting a lot of pushback on that. From your perspective, you know, looking at the levers that you kind of highlighted, what do you think is the biggest potential lever here for you to be able to kind of catch up to the margin range that you mentioned? And then I have a follow up after that?

Nilanjan Roy — Chief Financial Officer

Yeah, Moshe, hi. So I think firstly if you see, our margin profile, how it has changed right? So one of course has been this utilization and in fact high 21,000 net adds during the quarter, which is well above our volume and that is to create the buffer, so that when we put in freshers, we are able to train them and then over a period of time, able to put them into production right? So you can’t just hire freshers and expect them to start contributing from day one, and we are very vigilant about that, they go through our mandatory training in Mysore and then we put them. So that’s one big part of you know where we think we can start improving. As the hiring has caught up automatically, you see the stabilization of subcon costs, right, as a percentage of revenue. You are seeing this increase every quarter, now you see it sort of flattening out, and over the future as we got our recruitment back together and been able to hire freshers, we should see benefits coming out of that.

Pyramid benefits will continue to happen for us. Whilst we have seen some adverse impacts of the onsite movement, which is largely as travel overseas has picked up, but we think this is more of a, you know, [Indecipherable] because the inherent story of taking costs out and having a more offshore mix in the entire cost optimization, that should come into benefits, specially in this environment, where cost takeout is becoming a big theme across that line.

So we know we can have multiple, you know, areas. Pricing is another thing we’ve been talking about. We have seen less impact of pricing in terms of discounts etc. We are going back to clients in terms of COLAs, in terms of our renewals happen. Now again, these are much more longer-term impact decision, but I think it is a conversation that started in right next across all the segments and you can hear similar commentary across. So I think these are the areas we continue to focus on, and that’s something we’ve done over the years, we’ve seen that continue to be very hopeful in terms of [Indecipherable] efficiency exercises.

Moshe Katri — Wedbush Securities — Analyst

Okay. And just as a follow-up, just remind us what’s the sensitivity for margin versus utilization rates? I.e., 100 basis point expansion in utilization rates, what does that mean to margins in terms of sensitivity? Thank you.

Nilanjan Roy — Chief Financial Officer

Yeah, so I think it depends on by which level we see utilization, so it is quite complicated. It you know you have a different utilization and on site different in off shore, and then the impact of freshers in the pyramid in that utilization. So it’s a bit complicated how the mix changes. So I just can’t give you off the number of you know what 1% will lead to. But to give you a — there was a large impact, we lost [Phonetic] in this quarter — I think 40 basis points is for the utilization and margin.

Moshe Katri — Wedbush Securities — Analyst

Alright, thanks for the color.

Operator

Thank you, our next question is from the line of Kumar Rakesh from BNP Paribas. Please go ahead.

Kumar Rakesh — BNP Paribas — Analyst

Hi good morning, thank you for taking my question. My first question was continuation on the margin side. So at the end of the fourth quarter, and not just Infosys but across the industry, what the management community had indicated, compared to that the margin performance appears to be a sharper decline. Now Salil, what do you think could be the reason behind that? Is it determined by higher than expected demand and hence higher use of subcontracting that than what you were planning earlier? Or is it more supply side, given that the pressure was higher than what we had planned for, through the quarter?

Salil Parekh — Chief Executive Officer and Managing Director

Are you talking about us in particular or about the industry?

Kumar Rakesh — BNP Paribas — Analyst

Anything, whatever you could give us color on? Because the trend has been very similar [Speech Overlap]

Nilanjan Roy — Chief Financial Officer

Yeah, so we don’t operate in a vacuum and the industry doesn’t operate in a vacuum. The attrition trends are pretty much very similar across industries. But the good news, like you said is, that attrition is coming down. Our quarter attrition figure is actually below our LTM figures. And, as Salil said, we are already 1% down. On a sequential basis, we were 5% down in the previous quarter and we were flat. So I think this is more the reported LTM across is more of a catch up effect. And in that sense, you will see fast stabilization. The sectors will start coming in and getting permeated. So that benefit in a way should start seeping into the cost structure, right, because at the end of the day, if you’re putting freshers, you have less attrition. But the [Indecipherable] hike which you have to give for lateral hires to come down, like joining bonuses, in fact that should come down.

So these are the things which will play in our favor and like I said, you know you’re seeing these numbers of declines pretty much across industries. But we have a very-very sharp cost optimization program, in a way which will go and offset these headwinds.

Kumar Rakesh — BNP Paribas — Analyst

Got it. So it appears, sir, supply side pressure was higher than what we were expecting? My second question was…

Nilanjan Roy — Chief Financial Officer

I think there’s no question about that, that in terms of [Indecipherable] attrition and the net adds, the gross hiring has been very high. And of course that tells in terms of our [Indecipherable] and all we have to offer. So it is an overall industry issue led from the demand side.

Kumar Rakesh — BNP Paribas — Analyst

Sure, thanks. My second question was on BASE acquisition. So we already have a pretty strong life sciences practice, that’s more than $1 billion scale. Sowhat exactly we are looking and targeting to get help from this acquisition?

Salil Parekh — Chief Executive Officer and Managing Director

On BASE, you know there are multiple things. This is the business which is very high end in the life sciences area. When we launched our strategy a few weeks ago, just at the start of the quarter, we had shared also a new focus — or expanded focus on Europe; and Denmark for us is a very strategic market. The whole Scandinavian market is a very strategic market for us. So that’s the second area that it benefits us in. And we also see clients are using the capabilities of BASE as a starting point, and then that leads to large technology transformation, digital transformation, that helps us overall in terms of scaling up that segment. That’s a segment which we feel is a strong segment for the future, and where we are in our view, underweighed in percentage terms. So we want to enhance that with a deep existing capability.

Kumar Rakesh — BNP Paribas — Analyst

Got it, thanks a lot for that Salil.

Operator

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

Keith Bachman — BMO — Analyst

Hi, thank you very much. My first question is, I wanted to get your views on how you think wage inflation will impact the balance of the year, and what are the you know — what are the tensions on that to your margin model? So you mentioned that attrition has in fact moved lower, do you think A, attrition continues to move lower, and how do you think wage inflation will unfold over the next call it, three, four quarters and be a force in the in the gross margin equation? And then I have a follow up.

Nilanjan Roy — Chief Financial Officer

Yeah, so I think like we started last year, we were very clear that we have to be competitive in the market. So we did the first hike in January of ’21. Then we did the next hike in July of ’21, then with the follow up on [Indecipherable] talented December of ’21 and in a way we have not waited one year, we’ve actually gone ahead and done our — majority of our wage hikes from 1st of March — 1st of April this year. There’s a little carry-on effect in terms of the more middle to senior, higher middle to senior folks, which will happen in July, but not in the same margin impact of quarter one, which was very broad based. But other than that, I think we think these are quite competitive and you know, of course, if you see in the mix, we also get a lot of laterals, and there’s a hidden cost of hiring laterals, because they come [Indecipherable]. So in a way, your compensation — overall weighted average compensation in any case is going up.

But I think overall, I think this is a very competitive hike in in terms of — in India, it’s more like high single digits. And in overseas geos also, because of high wage inflation across, we have given very competitive hikes, something which we’ve not done in this kind of inflated environment before. So these are very much higher than what we’ve given in the past. But we think this was something which was going to stand up in good stead in terms of attrition. And like I said, we’ve seen like sort of three quarters of the attrition benefits over a period of time, going in.

Keith Bachman — BMO — Analyst

Okay. Okay. We cover a number of software companies, and software companies have started to say they’re seeing pockets of weakness with demand elongation on sales cycles. It doesn’t sound like — I know you made one very specific industry comment, but it doesn’t sound like you’re seeing the same — any kind of iteration on the demand side, particularly on a negative side? But if you could just clarify, are you seeing any elongation on the new business front? And — yes or no — and if the macro does weaken, will that in fact help your wage situation? And that’s it for me. Thank you.

Salil Parekh — Chief Executive Officer and Managing Director

So thanks for that. This is Salil. Couple of points that that you raised, I think what we see on the demand, the pipeline that we have today for our large deals is larger than what we had three or six months ago. Having said that, we of course recognize what is going on in the global environment, and we mentioned a couple of areas, Nilanjan talked within retail, he also mentioned [Indecipherable] within financial services, mortgages. So we see pockets where we see some impact.

On the overall deal discussions, we see a little bit where it’s slowing in the decision making. However, the pipeline remains strong for us today. We’ve also got two types of deals, one is deals which are on digital transformation or cloud, which are growth orientated for clients driving towards — what they want to do with their customers or in their supply chain, how they want to make an impact. And the second is on cost. We have a very strong play on cost and efficiency, through our automation work, through our artificial intelligence work, where we can really impact the cost base in the tech landscape of our clients.

So those are areas which we are already very active with, within this environment, and given our positioning, we feel good that those will start to come into play as and when the environment changes. But today this is how we are seeing the demand situation.

Now you know other question was, will that have a change on the wage or if the macro evolves? We don’t have a clear view on here where that will go, because it is a function of you know how the macro evolves and what happens. Of course, we are seeing attrition starting to come off a little bit, and that will clearly have a positive impact for us with respect to compensation. So the timeline is not clear. It depends on how the macro evolves.

Keith Bachman — BMO — Analyst

Okay great, many thanks.

Operator

Thank you, our next question is from the line of Nitin Padmanabhan from Investec. Please go ahead.

Nitin Padmanabhan — Investec — Analyst

Hi good morning thank you for the opportunity. So I had two questions, so one is from a margin perspective whatever we saw as one offs in the previous quarter, which included visa and this contract provision, both of them have been sort of offset in this quarter, is that a fair understanding? That’s the first. The second is in terms of salary increases, is it only for the associate level this quarter? And if so, then the question is that, we have 145,000 associates, JLP and below, and some 130,000 people in the middle level. And general understanding is mid-level obviously the — as a percentage of the employee comp cost, it should be higher. So the thought process was, shouldn’t your margin as well be higher next quarter? If you could just help with that thought process, that will be very helpful. Those are the two considered questions. Thank you.

Nilanjan Roy — Chief Financial Officer

As I said in the margin walk, we had a benefit of 50 bps in RPP, which is a combination of baseline contractual provision reversals, partially offset by discounts. So we’ve seen a benefit there. There’s no — in a way what we said that has been eroded. We have got the benefit of client contracting provisions clearly. The other one on visa travel, I think they were largely, you know, offset against each other. And what was the other question?

On the outlook on wages? And like I said, we’ve done it for most of our employees, right? It is up to mid-level and more at the senior levels is what we want to roll out in July, and that impact will be far less than 1.6%, which we have done — which is much more broad based across.

Nitin Padmanabhan — Investec — Analyst

Sure. So both associates and mid-level happened this quarter itself? It’s not only associates?

Nilanjan Roy — Chief Financial Officer

Yeah, no, no, no — associates and mid-level, correct.

Nitin Padmanabhan — Investec — Analyst

Perfect. That’s very helpful. Thank you so much.

Operator

Thank you. Our next question is from the line of Bryan Bergin from Cowen. Please go ahead.

Bryan Bergin — Cowen — Analyst

Hi, thanks for taking the question. I wanted to just dig in on the commentary around pockets of weakness. So heard you mention mortgages, mentioned I guess the stuff component of retail. Can you just give us a sense, can you quantify what mix of your business is actually seeing some slowing decision making? You know is it 5%, is it 10%, is it less? And even does this help frame what quantify areas that are seeing pockets of weakness?

Salil Parekh — Chief Executive Officer and Managing Director

So thanks for the question. This is Salil. We don’t quantify typically, you know what part of our financial services, mortgages or the other areas which are impacted. We are now seeing pockets, this is not across our whole business, and the way I would sort of look at it is, with all of that, given our pipeline, we’ve increased our revenue guidance, so the majority of our business is still seeing good demand. It’s really pockets without quantifying that’s how I would give a context to it.

Bryan Bergin — Cowen — Analyst

Okay, and then just to follow up on margin, you gave sequential changes, can you give us what the year-on-year changes in operating margin in the different categories?

Nilanjan Roy — Chief Financial Officer

So largely we know, it was the comp related hike, that nearly about 350 basis points that was the biggest one and this was offered by some rupee benefit, which was also — a benefit for those cross currency as well, which offset probably half of that. And then we got some benefits of cost optimization. We got some hits on lower utilization. So these are the broad things, but the biggest one was subcon [Phonetic], which was about 370 bps.

Bryan Bergin — Cowen — Analyst

Alright, thank you.

Operator

Thank you and next question is from the line of Sudheer Guntupalli from Kotak Mahindra Asset Management. Please go ahead.

Sudheer Guntupalli — Kotak Mahindra Asset Management — Analyst

Yeah, good morning gentlemen. Thanks for giving me this opportunity. I have just one question on margins. Ideally the strong growth at the headline level should have translated into some operating leverage, but that doesn’t seem to be happening. And Nilanjan, you seem to be of the view, we will chase growth for now and focus on margin optimization at a later date. What is the risk to that hypothesis? Because this growth margin paradox seemed to be a mere reflection of what is happening in U.S. and U.K. now. A very tight job market, very high nominal growth, but very little benefit trickling down to the bottom line level. So sooner or later, these nominal growth rates may cool off and on site job markets and some supply costs may auto recalibrate. But back in India job market may not be as much of a free market as it is in U.K. and U.S. There may be some sticky elements, both at headcount and wage level, translating into negative operating leverage, as demand moderates.

So what is the risk that margins will remain structurally lower than even the pre COVID levels going ahead? Because demand tends to be more cyclical, while some of the supply costs tend to be more sticky?

Nilanjan Roy — Chief Financial Officer

A couple of things. See, one is that many of these cost increases can’t be passed on to the client on day one, right? So if I have to give a wage hike on all my existing base right, they will come up for renewals, right? That’s the time when we have a wage discussion. When you are doing new deals, automatically, we will build it and the industry will build it into their wage profile. So these things will automatically flow back. There is no free lunch for anybody, right? So that’s one thing that will happen over a period of time. But that’s more of a, you know generic point I’m making.

But in terms of say, subcon, right, we’ve operated at 6%. 6.5% of subcon, today we’re sitting at what, about 11.1%, right? There’s no reason for us to be at these levels, because we know what grade market, the overall demand environment, recruiting picks up. We can replace the subcon with our own headcount, put more freshers into projects, and this is something we’ve been doing very well in the past as well.

So I think these levers are well known for us. We know how utilization works, you know, pyramid works. So we’re quite confident in the go forward model of, taking out costs from our structure.

Sudheer Guntupalli — Kotak Mahindra Asset Management — Analyst

Just one more question, if I may. So when we say the pipeline is larger now. Just curious if the pipeline is getting bigger and bigger, because some of the decision making is getting slower. Is there any correlation — you read between the two?

Nilanjan Roy — Chief Financial Officer

This is Salil; the pipeline what we are seeing is, there is appetite and you go by different industry for digital transformation programs, for large cloud programs, for programs which start to relate to cost and efficiency, that’s what is in the pipeline. It’s not a function of the timeline, which — the delay that you referenced, which is causing an increase. It is where we see traction with more and more client discussions as of today, that we see. Now, we will see how that evolves with. That’s the outlook we have today.

Sudheer Guntupalli — Kotak Mahindra Asset Management — Analyst

Thanks Salil. Thanks Nilanjan. That’s it from my side. All the very best.

Operator

Thank you, our next question is from the line of Ankur Rudra from JP Morgan. Please go ahead.

Ankur Rudra — JP Morgan — Analyst

Thank you for taking my question. First question is, what’s the level of conservatism or realism infused into both the revenue and the margin guide this time? Part of that is on the revenue guide, given the potential macro headwinds ahead of us, and the ask rate from the second-half of this year? And similarly on margins, we still have another round of wage hikes, which could impact margins by maybe as much as 100 basis points, if I look at the wage hike impact so far, and a similar ratio between the first and the second rounds in the previous years and also keeping up travel and facility costs? Thank you.

Salil Parekh — Chief Executive Officer and Managing Director

Hi Ankur. Thanks for the question. This is Salil, let me start off and then Nilanjan may have a few points to add. On the guidance for growth as we’ve shared in the past, the approach we take is, we see how things are, as we look at the financial year today. What we saw is, in Q1, we had extremely strong revenue growth, 5.5%. We also had underlying volume growth that Nilanjan referenced, which is very strong. When we see the outlook, where we have clarity looking ahead for some period of time, and then a set of estimates that we have for the rest of the financial year. And also looking at how typically H2 works versus H1, and then putting in some views on where the end of the year could be. Based on that, we felt comfortable to increase the revenue growth guidance. Whether it’s conservative or realistic, that is the approach we take, to make sure that we then share what we think the revenue is going to look like for the year.

On the margin, I’ll start off and then Nilanjan will talk a little bit about the wage component and what we’ve done. Overall on the margin, we have made sure that we work to get all of the levers in place. So the approach to driving cost efficiency is in place. Several levers that Nilanjan mentioned, one of the bigger ones — we’ve got the bulk, with regards to the majority of compensation increase already done in Q1. So yes, there’s a small component, but it’s not really a huge component that will come up. And then we see steadily other areas which will help us. There are areas where we can focus on how the subcontracting works. There are areas where we can focus on discussions with clients, vis-a-vis wage increases and COLA, areas where we’re doing work, which is driving significant impact for clients.

So we think there are a set of those leaders that can help us through the margin discussion, that will be focused on this financial year. Our approach very much is, to make sure that we remain high margin business, and that’s the underlying theme that we are working with. Given where we are, given the inflation around the world, we thought it was clear to make sure that we communicated that, in the way we see the market. Anything else if you want to add?

Nilanjan Roy — Chief Financial Officer

No, no. That’s good.

Ankur Rudra — JP Morgan — Analyst

Okay. Just a quick follow up if I may, on margins. Nilanjan, are there any one offs in the margin this time? Ask another way, what would be the proforma margins, if provision reversal was not to happen? And related to that, can you say that 20% in Q1 should be the bottom of margins going forward, so that we can get back to 21% for the year realistically?

Nilanjan Roy — Chief Financial Officer

So I think we mentioned the margin walk at the beginning of the call. Probably at ’20 and we are guiding at the bottom end of ’21 to mathematically dictate that we have to improve [Technical Issues]. Absolutely, from ’20 [Indecipherable] improvement quarter-on-quarter.

Ankur Rudra — JP Morgan — Analyst

Okay. Thank you and best of luck.

Operator

Thank you. Our next question is from the line of Ravi Menon from Macquarie. Please go ahead.

Ravi Menon — Macquarie — Analyst

Thank you. Congrats on a good set of numbers. Just wanted your thoughts on how corporate [Technical Issues] such progress sustained for a long time? Although you called out some headwinds in BFSI, [Technical Issues] revenue. Just if you could give some color about, how [Technical Issues]. And secondly, the pyramid, you know we’ve already seen a large intake of fresh candidates last year, so I’d hope that some of that would have come into production and you know, helped us offset the margin headwinds into this quarter, but looks like given the utilization as well, doesn’t look like much has happened. So if you could give some color?

Salil Parekh — Chief Executive Officer and Managing Director

Hi Ravi, this is Salil. I didn’t catch the first part of the question. I think it was about demand, but maybe you can just say the first part of the question?

Ravi Menon — Macquarie — Analyst

It was around the demand — we’ve seen broad based revenue addition across verticals in North America. And you know, if you’re seeing the pipeline also along similar lines, or are there any specific verticals where you see some softness starting to come in?

Salil Parekh — Chief Executive Officer and Managing Director

Yeah. See the softness, as we reference, we see some pockets of softness within our overall business. That’s why we want to be very clear, that that is something that is visible. A couple of examples you shared were Financial services and retail, but there are areas where you see that weakness. However once we say that, we also have a view and we see it in our pipeline. The overall pipeline is stronger, so there are areas where we see some good traction as well, and it’s a mix of the growth and the cost opportunities within our pipeline.

And I think the second one was about the pyramid, I think?

Nilanjan Roy — Chief Financial Officer

So yes, we have had a lot of freshers last year, and many of them also have gone into training pipeline, because as we had — the previous year, there was nothing really in the pipeline in terms of hiring. So in fact if you see our utilization, there’s a 2% gap between the excluding trainees and including trainee numbers on a year-on-year basis as well. We continue to deploy them into projects. And like I said, we can’t overnight, in all projects put freshers in, and that’s why it’s important to build the pipeline in advance, make them go through the trainings and then put them into production bench and then you know move them into projects as well. So that benefit will come in and we have seen that slowly coming in. But it is important to invest ahead right? If you just have — just in time you would be probably you know suboptimizing in terms of how fast you can deploy it. So that’s why we have made these investments, because we know it will take time for these freshers to join [Phonetic], but it’s important to make that investment ahead.

Ravi Menon — Macquarie — Analyst

Thanks. And one follow up if I may, on this last quarter’s contractual revenue. So did you recognize all of them this quarter, or is there’s still something pending [Phonetic]?

Nilanjan Roy — Chief Financial Officer

Yeah, it was all recognized this quarter.

Ravi Menon — Macquarie — Analyst

Thank you. Best of luck.

Operator

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

Pankaj Kapoor — CLSA — Analyst

Yeah hi, thanks for the opportunity. Salil, can you give some color on the overall order book since the reported TCB what we give? That covers only $50 million plus deals, and may not really be representative. So any quantitative or qualitative comment on the scale and how the overall order book has grown? That will be helpful.

Salil Parekh — Chief Executive Officer and Managing Director

Thanks. Thanks for the question, Pankaj. As you know we share the large deals win number. We don’t publish the overall deal [Indecipherable]. Having said that, the names or the context I would put is, the increase in the growth guidance that we provided. That factors in, in that sense, all of the inputs that you may you may be looking for, which then comes from essentially a very strong Q1 execution, at a 5.5%, 31% growth, and then a view that we have on what we see in the coming quarters, and then an overall view of how we look at H1, H2 in our mix within the company. That that is sort of broadly how we looked at it.

On the large deals, we’ve shared this in the past; typically this is a number which is a little bit more volatile, because we only report deals which are larger than $50 million in our large deals. And so that that’s really the way they need to look at it.

Pankaj Kapoor — CLSA — Analyst

Fair enough. My second question is on the profitability in the manufacturing vertical, where the margins have been coming down? And in fact the last three quarters probably they have halved, despite a very strong revenue growth. I understand this could be because of a very large deal, which is still ramping up there. Can you give us a sense how the profitability curve in this vertical could shape over the next two, three quarters? What I’m trying to understand is that, has it bottomed out now, or you think that this could potentially go down further? Thank you.

Salil Parekh — Chief Executive Officer and Managing Director

Yeah, so I think without specifically commenting, I think you know on particular deal, I think firstly there is — we think the revenue growth, which has been quite spectacular in this segment. This has been led by large deals, and as we’ve talked about our large deal approach, you know from day one, lot of clients would like to see savings. But we are very clear that over a period of time, that we have a lot of cost optimizations; because on day one you can’t [Indecipherable] get the cost structure right, whereas clients may ask for the savings. But we know over a period of time, the lever which we continue to deploy on all these, you know large deals and if I go back to the last three years, you know when — four years in fact, when the large wheel sort of strategy started, we’ve actually seen an increase in margins over that.

So there’s been no — you know, there’s no historical correlation in terms of staying where the large deals are diluted, because we continue working on taking out costs for the system, and these are factored into our entire, you know, bid process. We look at, you know how we’re going to optimize onsite, offshore. Many of these projects require pneumatic automation. We can inject that through all our services, which we providing. We know how the pyramid works. So these are the things which we know you know you know over a lifetime of these large deals. And that’s something we know we can deploy. So that’s you know something, something you know without getting into specifically manufacturing what we do well.

Pankaj Kapoor — CLSA — Analyst

Got it. Thank you and wish you all the best.

Operator

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

Gaurav Rateria — Morgan Stanley — Analyst

Hi good morning, thank you for taking my question. So firstly is there any difference in the client decision-making behavior in U.S. versus Europe in clients? And the reason is that I’m asking is U.S. is seeing fair bit of broad based growth across segments. But when we look at Europe, there is a weakness specifically in retail and communication vertical, whereas the other two verticals energy side, high tech has grown very-very well. So just trying to understand, are there any client specific pockets, especially in Europe, where you kind of see a decision making behavior has changed compared to the U.S. market?

Salil Parekh — Chief Executive Officer and Managing Director

Thanks for that question. Today, we are not seeing that which is more geography based as you are describing. We see some, which is more globally industry based and client based, as you know well, is mainly U.S., Europe and Australia. So not so much color, which is more geography related.

Gaurav Rateria — Morgan Stanley — Analyst

Okay, second question on margins. Your margin outlook at the lower end, you explained very well the supply side and cost related factors, which has led to this. But is there also an element of expectation or pricing increase that has been tapered down, which has led you to now take the margin outlook to the lower end? And is it fair to say that, with all the cost levers that you have in place, the exit margin should be better than the lower end of the guidance? Thank you.

Salil Parekh — Chief Executive Officer and Managing Director

Yeah, so I think when we do our sort of margin forecast, there is a combination of factors we look at, and that equation keeps on changing and it’s so dynamic you know, what happened in the previous quarter, what do we see as outlook, what’s happening on subcon, wage inflation. So that mix continues to change and evolve? Sometimes you have to push harder on somebody in terms of accelerating some programs. But then going back to the whole you know — if we are today at 20%, and we are saying, we want to be at the bottom end of 21%, I think that should give you a good sense of the margin directly [Phonetic] for the rest of the year.

Gaurav Rateria — Morgan Stanley — Analyst

Thank you.

Operator

Thank you. Our next question is from the line of Ritesh Rathod from Nippon India. Please go ahead.

Ritesh Rathod — Nippon India — Analyst

Yeah. Hi just want this margin, within a quarter, you have to lower your guidance on the margin side. So this is despite rupee depreciation benefit, despite attrition coming down in last two quarters. So what has surprised internally in your expectations, so that you have to bring it down to the lower end?

Nilanjan Roy — Chief Financial Officer

Yeah. So I think like I just mentioned, this is a very dynamic and moving — I could forecast completely what is the impact of attrition, how much wage hikes will come and for new hires, so it’s very dynamic, how does pricing play out. So in that sense, this is a, you know very fluid situation, but the 21% to 23% we said, we are — within that would have dropped at the bottom end of it, and we remain committed from where we are today at 20%, to do all our various cost optimization, factoring the cost impacts of what we see in terms of wage inflations there could be potential benefits of the rupee etc. So it’s a combination of all this into the forecast.

Ritesh Rathod — Nippon India — Analyst

And then what would have been the bigger surprise element? Would it be the wage or would it be the pricing benefit not coming through, and any one highlight compared to what you expected at the start of the year?

Nilanjan Roy — Chief Financial Officer

It’s a combination of various things. And I won’t be surprised, I think like I said, it’s a fluid situation and we have to remain agile, that’s more important rather than anything else.

Ritesh Rathod — Nippon India — Analyst

And coming to pockets of weakness you just pointed out, retail mortgages, can you give some color? Are clients taking a [Indecipherable] decision making? Are the new deals not getting converted or are the existing deals which have been won, they’re not getting ramped up? What’s the exact sense from the weakness over there?

Nilanjan Roy — Chief Financial Officer

So there within the areas of that pocket that we describe, there we see a slowing. For example, if you look at the mortgage situation, the volume there in the market, meaning the client volume at a macro level has gone down in the European, U.S. market. So our work there is proportionally reduced. But the overall point which I shared earlier, we see some slowing in decision making. But nonetheless the pipeline remains today in a good position, and that allows us to increase the guidance.

Ritesh Rathod — Nippon India — Analyst

And maybe the last one on your deal win — on LTM basis, your deal win fell down sharply, if you see last trading form, four quarters versus the previous four quarters? And even if I adjust the base because of the high value deals which you won in a couple of quarters, four quarters back, you’re still down minimum by 15%. What — how do you connect those two dots that your LTM with the deals are down, but your deal pipeline is at an all-time high? Are the deal conversion ratios dropping than what it was historically?

Nilanjan Roy — Chief Financial Officer

There on the large deals, typically we always share — we see some volatility, because these are these are deals which are larger than the ones we share in this number, which are larger than $50 million in value. We do see the pipeline being larger than where it was, and what we referenced in some areas, slowing of it. But we don’t see any change in the other parameters of the pipeline.

Ritesh Rathod — Nippon India — Analyst

Okay, thank you. Wish you good luck.

Operator

Thank you, our next question is from the line of Manik Taneja from JM Financial. Please go ahead.

Manik Taneja — JM Financial — Analyst

Hi, thank you for the opportunity and sorry for harping on the margin question once again. I just want to understand, how should we be thinking about the segmental, or the improvement in segmental margins for manufacturing vertical, given the sharp drop that we’ve seen over the last three quarters? And how does that lead [Phonetic] in terms of the overall margin outlook? Thank you.

Nilanjan Roy — Chief Financial Officer

Yeah, you know like — I guess somebody else was asked a similar question, and like without going into specifics we have seen that growth coming out of the large deals in manufacturing. And like you said, as we look at the tenure of these large deals, in some cases they start off with lower than portfolio margins, because clients may ask for you know savings upfront. But we have very, you know — started plan in terms of quarter-on-quarters what do we need to do, to bring back profitability, because from day one clients come to us, because they know we can optimize the cost structure. So that’s something which is, you know, generically, what we’ve been doing, since we started the large deal strategy right, and we’ve seen margin improvements over that period. So I think we are quite confident of the future profile of these businesses.

Manik Taneja — JM Financial — Analyst

Sure, thanks.

Operator

Thank you. Our next question is from the line of Apoorva Prasad from HDFC Securities. Please go ahead.

Apoorva Prasad — HDFC Securities — Analyst

Yes, thanks for taking my question. Salil, this is on mega deals, while the industry frequency tends to be low and it has been awhile for Infosys, so it’ll be good to know your comments on mega deals from a pipeline perspective? And secondly on pricing, how is the ability to get price increase versus last quarter? Do you see any changes to that?

Salil Parekh — Chief Executive Officer and Managing Director

On the mega deals, I think again we don’t share anything specific in terms of what we publish. The color from our side is, we have mega deals in our pipeline, to give you a context. On the pricing, we’ve seen pricing currently holding in deal values of this quarter — for Q1. My sense is, we have seen examples that Nilanjan was sharing earlier, where we are working, we have worked with clients to demonstrate to them, the impact of compensation increases, and that is translated to COLA or price benefits. We’ve had examples where we’ve had increases which are related from — more of the digital high value work that we are driving for clients. We now have to make sure we take that across whole portfolio and see the benefits coming into our business.

Typically, the salary increase happens, at a periodic time, and these things where we’ve not seen a high inflation environment like this for over 40 years in the rest of markets, that takes a longer time, but that’s what Nilanjan shared, is part of what we put in place, to support our margin as we go ahead.

Apoorva Prasad — HDFC Securities — Analyst

Thank you for that.

Operator

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

Salil Parekh — Chief Executive Officer and Managing Director

So thank you everyone, this is Salil. Thanks again for joining for this call. I just want to summarize with a few points first. We’ve had industry-leading growth in Q1. 5.5% quarterly, 21% year-on-year. We clearly see tremendous market share gain, driven primarily by the strength of our digital and the cloud Cobalt capability set, that is resonating with our clients. We highlighted, there are pockets of weakness and we are aware of the environment around us. We’ve seen our pipeline both growth opportunities in digital cloud and cost opportunities in automation. With all of that, we increase the growth guidance for the full year.

We are now seeing attrition coming down on a quarterly basis. We see many of the initiatives we put in place starting to create some impact. We have levers for the margin, several that Nilanjan shared, large programs will transition to steady state, COLA because of increases in compensation costs to pricing. Pyramid adjustments, as we have college hires joining the production environment, subcontractor usage, and then several others on the cost side.

Given all of that, we see we are really well positioned to work with clients on their growth and cost opportunities, and have a margin profile that is something — that sustains the high margin approach of the company. So we’re looking forward to this year with strength and optimism, and once again thank you all for joining us and catch up in the next quarter. Thank you.

Operator

[Operator Closing Remarks]