Infosys Limited (INFY) Q3 FY22 Earnings Concall Transcript

Infosys Limited (NSE: INFY) Q3 FY22 Earnings Concall dated Jan. 12, 2022

Corporate Participants:

Sandeep Mahindroo — Financial Controller and Head Investor Relations

Salil Parekh — Chief Executive Officer and Managing Director

Nilanjan Roy — Chief Financial Officer

Analysts:

Ankur Rudra — J.P. Morgan — Analyst

Moshe Katri — Wedbush — Analyst

Kumar Rakesh — BNP Paribas Securities — Analyst

Keith Bachman — BMO Capital Markets — Analyst

Diviya Nagarajan — UBS — Analyst

Ashwin Mehta — Ambit Capital — Analyst

Sandip Agarwal — Edelweiss Capital — Analyst

Nitin Padmanabhan — Investec — Analyst

Sandeep Shah — Equirus Securities Pvt Ltd — Analyst

Manik Taneja — JM Financial Institutional Securities Limited — Analyst

Rahul Jain — Dolat Capital — Analyst

James Friedman — Susquehanna Financial Group — Analyst

Vimal Gohil — Union AMC — 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 and Head Investor Relations

Thanks, Margaret. Hello, everyone, and welcome to Infosys earnings call to discuss Q3 FY ’22 results. I am Sandeep from the Investor Relations team in Bangalore. Let me begin by wishing everyone a very happy New Year. Joining us today on this earnings call is CEO and MD, Mr. Salil Parekh; CFO, Mr. Nilanjan Roy, along with other members of the senior management team. We’ll start the call with some remarks on the performance of the company by Salil and Nilanjan. After that, we’ll 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 full 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 turn it over to Salil.

Salil Parekh — Chief Executive Officer and Managing Director

Thanks, Sandeep. Good evening and good morning to everyone on the call. Wish you all a Happy New Year and trust you and your near ones are well and safe. Thank you for making the time to join us today. I am delighted to share with you that we had an extremely strong quarter with 7% sequential growth and 21.5% year-on-year growth in constant currency terms.

A year-on-year growth was the fastest we have had in 11 years. The growth was broad based across industries, service lines and geographies, driven by our differentiated digital and cloud capabilities. A strong broad-based growth in a seasonally weak quarter is a clear testament to the enormous confidence clients have in us to help them accelerate their business transformation. This has been made possible by the relentless commitment from our employees through these challenging times.

I’m extremely proud as well as grateful for their extraordinary efforts in delivering success for our clients. Our growth has been accompanied by resilient operating margins with 23.5%. We deliver these margins while keeping in the forefront our focus on our employees with increased compensation and benefits. Our digital business grew by 42.6% and is now 58.5% of our overall revenues.

Within digital, our cloud work is growing faster and our Cobalt cloud capabilities are resonating tremendously with our clients. Some of the highlights of our results are: revenues at $4.25 billion where the growth is 21.5% year-on-year and 7% sequentially in constant currency, broad-based across all industries, service line and geographies.

All of our segments reported strong double-digit growth. Large deals at $2.5 billion, onsite mix at 23.8% and utilization at 88.5%, operating margins strong at 23.5%, free cash flow at $719 million, attrition increased to 25.5%, our quarterly annualized attrition was flattish on sequential basis. We had a net headcount increase of 12,450, attracting leading talent from the market. We’ve increased our annual college recruiting target to 55,000 and Nilanjan will comment more on this.

We remain comfortable with our ability to support our clients in their digital transformation journey. Financial Services grew at 15.5% in constant currency with broad-based growth across geography and steady deal wins. Various sub-sectors like lending, mortgage, cards, payments are seeing increasing demand and clients are driving cloud transformation initiatives to build resilient and scalable platforms.

Retail segment growth was 19.8% in constant currency. Across sub-verticals, we see increased client spend on digital transformation including digital supply chain, omnichannel commerce and large scale cost takeout initiatives to improve business resilience. We signed six large deals in this sector — in this segment during the quarter.

The communication segment grew at 22.2% in constant currency. Segment performance continued to improve with ramp-up of recently won deal. Client budgets are focused on digital and customer experience programs, increasing networking infrastructure, cloud adoption and security with emphasis on 5G rollout and innovation. Energy, Utilities, Resources and Services vertical continues its steady performance with 13.6% constant currency growth and five large deal wins.

We are seeing gradual improvement across various businesses as consumer spending continues to increase and clients focus on increasing technology transformation around areas like customer experience, cyber security, and workload migration to the cloud. Manufacturing segment growth accelerated to 48.4% in constant currency with the continued ramp-up of the Daimler deal and steady momentum in new deal wins.

We see across the broad improvement within various sub sectors and geographies and expect client focus to continue in areas like smart manufacturing, IoT, digital supply chain and connected products. Hi-tech growth improved during the quarter to 18.9% in constant currency. Clients are seeing renewed momentum in terms of spending on digital transformation programs linked to customer, partner and employee engagement.

Life Sciences segment performance also improved further to 29.2% growth. Adoption of digital health, telehealth and patient access programs are resulting in significant uptake of cloud, IoT, patient-facing applications, patient portals and next generation CRM work. We had a very strong performance on our income tax program in India. Over 5.8 crore or 58 million tax returns are filed using the new system by the deadline of December 31, 2021. On the last day, over 46 lakh or 4.6 million tax returns were filed and during the peak hour over 5 lakh or 500,000 tax returns were filed.

We are proud to be supporting the digital strategy for India and for the government and working on this program for future modules that will be developed. Across digital services, in Q3, we have been ranked as leader in 12 digital service related capabilities from artificial intelligence and automation, cloud services, IoT, engineering, modernization and big data and analytics.

The strong overall performance stems from four years of sustained strategic focus on areas of relevance for our clients in digital and cloud, continuing re-skilling of our people and deep relationships of trust our clients have with us. With the strong momentum in the business and the robust pipeline, we’re increasing our annual revenue growth guidance from 16.5% to 17.5%, moving up to 19.5% to 20% in constant currency. Our operating margin guidance remains at 22% to 24%.

With that, let me hand it over to Nilanjan for his update.

Nilanjan Roy — Chief Financial Officer

Thanks, Salil. Hello, everyone and thank you for joining the call. Let me start by wishing everyone a very happy and safe 2022. Q3 was another successive quarter of continued activation in revenues at 7% constant currency Q-on-Q growth and 21.5% constant currency year-on-year growth, the highest year-on-year growth in the last 11 years.

Despite the Q3 seasonality, we just saw strong broad-based growth across geos and verticals. Our largest geography, North America grew at 21.4%, while growth in Europe accelerated to an impressive 27.2% year-on-year in constant currency terms. Retail, Communication, Manufacturing and Life Sciences also saw 20% higher year-on-year growth in constant currency. We won 25 large deals and large deals in those with over 15 million PCV, totaling $2.5 billion of PCV, six in retail, five each in financial services, communication and energy, utilities, resources and services, two in manufacturing and one in high-tech and life sciences.

Region wise, 16 were from the Americas, seven were from Europe and two from ROW. The share of new deals increased in Q3 to 44% within the large deal numbers. Client metrics improved further with $100 million client count increasing to 37, an increase of eight year-on-year. We added 111 new clients in the last quarter. Operating parameters remain robust. Utilization was 88.5%, slightly lower than the previous quarter using some of the supply side pressures.

Onsite effort mix inched up marginally to 23.8%. Q3 margins remained resilient at 23.5%, a marginal drop of 10 basis points versus previous quarter. The major components of the sequential margin movement was below, 80 basis points impact with the comp hikes and promotions and other employee interventions, 40 basis points impact due to the utilization decline. These were offset by about 20 basis point benefit due to the rupee and other cross currency movement, a 50 basis point benefit due to cost optimization and another 40-basis point benefit due to SBA leverage and other one-off included therein.

Q3 EPS grew by 11.2% in dollar terms and 13.1% in rupee terms on a year-on-year basis. Although DSO increased to 71 days due to higher seasonal billing, an increase of five days versus the last quarter is still a reduction of two days versus Q3 of prior year. Free cash flow for the quarter was healthy at $719 million, free cash flow as a percentage of net profit was 93% of Q3 and 104% for the nine months to date. Yield on cash balances improved to 5.29% compared to 5.13% in Q2.

Our balance sheet remained strong and debt free. Consolidated cash and investments at the end of the quarter stood at $4.28 billion after paying over $850 million of interim dividend during the quarter. Return on equity increased further to 30.4%, an increase of 3% over Q3 of the prior year, driven by robust performance and consistent capital return to share buybacks and increased dividend payout.

On the employee front voluntary long-term 12-month attrition increased to 25.5% and as Salil commented while LTM attrition continues to increase due to the tail effect, quarterly annualized attrition was flattish compared to Q2. We will continue to invest in all aspects of talent retention including, compensation, promotion, skill incentives, learning and career progression. We have also simultaneously increased the pace of hiring, talented, skilled and the usage of subcons to prevent any impact on client commitments.

We have added over 12,450 employees — talented employees on a net basis in the last quarter, which is the highest ever. Our global college graduate hiring program for this fiscal has been increased to over 55,000 versus the previous quarter number of 45,000. In India, over 93% of Infoscions have received at least one dose of the vaccine. Over 90% of our employees globally are presently working in a remote environment due to the heightened precautions against a new variant. Driven by robust demand environment and our continued market share gains, we are further increasing our revenue guidance of FY ’22 to 19.5% to 20% in constant currency terms from 16.5% to 17.5% earlier and the margin guidance remains unchanged at 22% to 24%.

With that, we can open the call for questions.

Questions and Answers:

Operator

Thank you very much. We will now begin the question-and-answer session. [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. Happy New Year to everybody, excellent numbers for the quarter. Clearly very, very strong growth for the third quarter. Could you maybe start with elaborating where the incremental, sir, execution came from versus the previous full year forecast? Why was the difference so sharp?

Salil Parekh — Chief Executive Officer and Managing Director

Hi, Ankur. This is Salil. Sorry you broke up a little bit, you said there was the incremental?

Ankur Rudra — J.P. Morgan — Analyst

Where the incremental surprise came from? The full-year guidance has been increased very sharply, given the performance in the quarter, where did the surprise come from?

Salil Parekh — Chief Executive Officer and Managing Director

Yes, okay. So, there, I think what we are seeing in the quarter and then all through the year is the demand environment remains extremely strong. And then more and more traction on the digital and the cloud programs. This is where we saw the most impact in the quarter in Q3, where we had this really strong growth of 7% and therefore the overall guidance jumping up by 3%.

In terms of verticals, as I was sharing earlier, it’s really broad based, of course, we have very strong momentum in manufacturing. That was something that we were looking forward to. There’s also good momentum that we’re seeing in financial services, given, it’s our largest vertical and in life Sciences that I described before, Retail is starting to come back nicely as well. As Nilanjan mentioned, Europe again was stand out. Those are some of the elements that gave us a good outcome in Q3 and then the support for expanding the margin for the full year, sorry, the guidance for the full year.

Ankur Rudra — J.P. Morgan — Analyst

Thank you, Salil. Salil, the growth trajectory has continued on a year-over-year basis for the last six quarters consistently.

Operator

Sorry to interrupt you, Mr. Rudra, your voice again — it was breaking.

Ankur Rudra — J.P. Morgan — Analyst

Apologies. Let me try again if you can hear this time. Growth trajectory.

Operator

I’m afraid, sir, your voice is not clear. I would just request you to please check your phone line and rejoin the queue. In the meanwhile, we’ll move to the next question, which is from the line of Moshe Katri from Wedbush. Please go ahead.

Moshe Katri — Wedbush — Analyst

Thanks, Happy New Year and congrats on very strong results. One, I know this is you just reported, Q3, but are you ready to talk a bit about the entire calendar year down the road ’22? What do we — what’s changed in terms of visibility? Maybe just the biggest question is going to be, if this sustainable down the road and what can you kind of talk about in terms of color to give us that comfort? And then on top of that, maybe you can talk a bit about how are the cushion in margins and what sort of levers that you have in the model, especially as some of the bench continues to benefit from the off-campus recruiting that’s been pretty robust? Thanks a lot.

Salil Parekh — Chief Executive Officer and Managing Director

Thanks Moshe. This is Salil. I’ll start off with the first part and Nilanjan will comment on the margin levers. Of course, as you referenced, we have guidance through March 31, 2022. The color for this calendar year, broadly, we see the demand environment remaining strong. The client budgets are looking good. Our overall pipeline is the largest we’ve had in a very long time. The number of large deals that we were able to close at the London share, 25 large deals each over $50 million for a total of $2.5 billion and 44% of these are new. So all of those things are giving us good confidence for what we see going ahead. Of course, we will have our guidance for the — for our financial year in April. Nilanjan, over to you, please.

Nilanjan Roy — Chief Financial Officer

Yes, thanks. Salil. Hi, Moshe. So on the margins, like I mentioned earlier, we have a quite resilient for the quarter. I think couple of things I just want to call out of course in armory of cost levers, whether it be onsite, offshore mix, it’s the pyramid where there’s automation. Of course, we’ve got something which we’re continuously deploying. Going ahead of course subcon costs for us have really ramped up and that’s an area we will continue to look ahead. The other thing is of course pricing and it’s important to talk about that as the higher cost, now feeding into our new deals, etc. I think that should hopefully have a benefit.

And of course as digital talent start getting price stim, we are able to show value to our clients in terms of the digital transformation. Now, again, this is something we have started recently, which will take time to kick in and we’ve talked about in the last quarter as well. But really, that is the focus that we can start getting into both our cost side and also making sure that we are not leaving any free cents and dollars on the table as part of pricing negotiation.

Moshe Katri — Wedbush — Analyst

Thanks guys, good luck.

Operator

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

Kumar Rakesh — BNP Paribas Securities — Analyst

Hi, good evening, everyone, and thank you for taking my question. Congratulations on great set of numbers. My first question Salil was around going into this calendar year. So, the one of the largest periods so far have indicated a very strong growth to continue through this year. So, looking at our portfolio of capabilities and offerings, do you see that we are well aligned to meet our detailed growth numbers or do you see that we need some intervention to build up our own capability to continue this strong growth going ahead?

Salil Parekh — Chief Executive Officer and Managing Director

Thanks for the question. I think in terms of our capability set, we have a strong portfolio across digital and cloud. Our Cobalt set of capabilities, as you guys are noting, extremely value with our client. We see the growth of digital really a reflection of the focus we’ve had on making these choices over the past four years and positioning the portfolio to where the plan goes looking forward. We also see the cloud capability is faster growing than our digital capability. So, yes, we are well positioned to benefit from this.

In addition to that, we have a strong set of capabilities in automation and modernization. We will see in our core services, which is now stable this quarter in terms of growth, it’s not shrinking. So our view is that our set of capabilities and portfolio are reflecting that our client expectation demands are and we have the ability to meet all of those from the capability perspective. We also have the capacity which we expanded recruiting at the college level and our ongoing recruiting ability to attract talent, which is helping us to deliver on our projects on a regular basis. So we feel quite good about how we’re positioned as we go ahead into the next year as well.

Kumar Rakesh — BNP Paribas Securities — Analyst

Thanks for that Salil. My next question is around the margin guidance band which we have 22% to 24% and currently we are trending towards the upper end of that. So how should we see that, what is it an indication of, is it that you want to keep a flexibility with yourselves or in anticipation of any large deals or any cost headwinds potentially coming from that? Or is there an indication that we are looking at some major cost trends which are going to come in coming quarters and hence you are maintaining this margin guidance?

Nilanjan Roy — Chief Financial Officer

Yes. So, I think the margin guidance for us is really a comfort range within which we operate. So, we really don’t know fine tune that as the year progresses. So this is band, which we are happy to be in, at 21% to 23% just before COVID, now we are 22% to 24%. So, that’s more like a real for us rather than anything else. And I think looking ahead, we continue to focus. We know our cost headwinds potentially in terms of employees, etc., could be travel into the next year. But like I said, we have a very robust cost optimization and of course new levers, which we continue to deploy. We remain quite confident on this.

Kumar Rakesh — BNP Paribas Securities — Analyst

Okay. So more of a reflection of flexibility that you want to keep at yourself.

Nilanjan Roy — Chief Financial Officer

Correct.

Kumar Rakesh — BNP Paribas Securities — Analyst

Thanks a lot for those answers. I’ll fall back.

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

Yes, thank you. I want to pick up on that line of question. And if you could just talk about the puts and takes as you see margins over the course of the next three, four, five quarters really calendar year ’22. And I wanted to see if you could address what you think the impact would be for a few things? So, for instance, one of the headwind this quarter was utilization. How should we be thinking about utilization trends during calendar year ’22?

Number two, could you speak to, I think you said attrition was flat sequentially, how do you think about attrition trends over the course of calendar year ’22? Do you think that they can move lower or if the market sets that demand so strong that attrition will probably remain elevated? And then number three would be, you just brought up travel or any other issues that we should be thinking about that may impact calendar year ’22 margins and any other issues you want to bring up? And that’s it from me. Thank you.

Nilanjan Roy — Chief Financial Officer

Yes. So, I think that we don’t give out the margin guidance for the next year. Now having said that, looking at the headwinds, which we actually face pretty much every year. You have your compensation hikes. You have clients coming back for discounts on renewals and some of that you offset with the cost optimization program which we run. I mentioned that a bit earlier in terms of whether it’s the pyramid, whether it’s subcon, whether it’s automation, new levers which we are looking at is pricing. So that’s something which we are continuously working on and remain quite confident.

Of course travel is one thing which is quite unknown at this moment in terms of when does it come back. Even if it comes back that would come back to peak COVID levels or is it fair to slightly lower level. So, we’ll have to watch out for that really. In terms of attrition, I think, it’s a larger industry issue, it’s not peculiar to us. And fundamentally, I think it’s largely stemming from that the volume increase for this industry fundamentally has to compensate right. Otherwise, it’s a zero-sum game in terms of somebody else’s attrition is my lateral and my attrition is somebody else’s lateral.

So as long as we sector and take starts increasing because first we have to come into training then we go into production after three or four months and that will take time for this industry to start absorbing and I think that’s something which will help the attrition in the medium term and like I said, we have seen attrition flattening sequentially on the quarter on the annualized basis. And looking ahead we are seeing some positive signs, but it’s too early to say whether it will dramatically come down, but like I said as efficiency — as freshers feed into the system, we should see the overall environment in terms of attrition in the market really working.

Keith Bachman — BMO Capital Markets — Analyst

Okay. But any comments, specifically on — as utilization you think would help or heard or neutral, just broadly. And as part of that, as you’re offshore percent of labor increase year-over-year, is that also a trend that you think continues given the dynamics in front of you? And I will see the floor thereafter.

Nilanjan Roy — Chief Financial Officer

Yes, so in terms of utilization, of course this is higher than what we would normally like to be. We rather operated in sort of an 85%, 86%. But having said that, even if we bring this down in the future in terms of cost, it’s largely offshoring, which because all the effort is 75% of offshore. Therefore utilization doesn’t has directly linked to the margin because of where offshore cost operate. So that’s one factor.

I think the second question on onsite, offshore, I think there is a long run — I think the long run if you see I think COVID virus had huge impact on demand. I think the entire ability for the supply side to be delivered in a remote environment really shine out because really that has opened up the eyes of many of our clients that really every sort of work doesn’t have to be done near shore. It can be done onsite, it can be done in near shore locations, it can be done offshore.

And I think the beauty of that is secularly we believe this will help the industry in much more larger offshoring at an overall level and of course, part of that benefit will be shifting more to offshore location. So, I think this is a good sign. I think there can be short-term impacts that we’ve seen with quarter 10, 20 basis points here and there, but the secular trend we think we’ll continue to see that the large labor markets available in India will open up a lot more offshoring opportunities.

Keith Bachman — BMO Capital Markets — Analyst

Terrific. Many thanks. Congratulations.

Nilanjan Roy — Chief Financial Officer

Thank you.

Operator

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

Diviya Nagarajan — UBS — Analyst

Thanks for taking my question and congratulations on a very impressive quarter to the team. My question is on pricing. Salil, we’ve seen now several quarters of strong demand and it looks like we are looking at another year, looking at a run rate as you’re exiting the calendar with — of pretty strong demand growth. And is the supply in the last few comments that you made. How do you see pricing really trend in the next 12, 18 months? Is there an opportunity for this to go up on a like to like basis?

Salil Parekh — Chief Executive Officer and Managing Director

Hi, Diviya. Thanks for that question. This is Salil. I think on pricing for us, we’ve seen some level of stability in what we saw in the specific deal that we closed in Q3 versus Q2. On the longer team, like we shared in the past, we put in place a very focused effort on communicating the value that we are helping create with our clients through the digital programs. We’re also seeing share wage increases eventually than in the last 12 months. And broadly, we are seeing a large enterprises for the first time in a very long time are seeing inflation in their daily advances. And so are more open to having these discussions.

With these factors in mind, we’ve seen — we will see some more value that we could bring in through communicating and demonstrating our digital impact that we’re creating through those programs and that’s while it will not be immediate, but over the next several quarters, in my view will help us to build out more resilience in the margin profile.

Diviya Nagarajan — UBS — Analyst

You earlier enumerated your skills and capabilities, but if you were to kind of think of any future investment that you’re going to make, in which direction would you kind of direct sourcing that in the cultural in terms of your skills and capabilities?

Salil Parekh — Chief Executive Officer and Managing Director

So, today the biggest [Indecipherable] within our clients is really cloud, our Cobalt capabilities are very strong and we are constantly announcing whether we look at the public cloud partnerships, we have also a very strong ecosystem of private cloud partnerships. As we have a good ecosystem with the SaaS players, extremely strong guide native, cloud first development, those will be really the first area where we are already leading, but we will continue to grow.

When you have the areas which focus on cyber security, which focus on data analytics, which focus on IoT. Those are the areas, which we are seeing this incredible traction with our clients. [Technical Issues] modernization and automation are leveraging artificial intelligence and machine learning. We’ll continue to build that out. Our approach is going to be to drive all of these through our current margin. So, that’s what will drive through as opposed to any new [Technical Issues]

Diviya Nagarajan — UBS — Analyst

Fair enough. One last bookkeeping question, your other segment had a big swing this quarter. If there’s any think particular that we should be looking at you, any one-offs or is it something? And if not, what drove that [Technical Issues]

Nilanjan Roy — Chief Financial Officer

Yes, so, I’ll take that. So that’s coming from India. We have for the seasonality with some of our clients towards the quarter and that we’ll see also in the geography sector of India.

Diviya Nagarajan — UBS — Analyst

Got it. Thank you and wish you all the best for 2022

Operator

Thank you. The next question is from the line of Ashwin Mehta from Ambit Capital. Please go ahead.

Ashwin Mehta — Ambit Capital — Analyst

Thanks for the opportunity. And congrats on good set of numbers.

Operator

Sorry to interrupt you Mr. Mehta. I would request you to come closer to the phone.

Ashwin Mehta — Ambit Capital — Analyst

Sorry, can you hear me better.

Operator

Yes, this is better. Please go ahead.

Ashwin Mehta — Ambit Capital — Analyst

Yes, I had one question on the third-party bought out items for service delivery. That item seems to have gone up by almost $71 million this quarter, almost 1.8% of revenues. So just wanted to check what does this pertain to and is it possibly related to the datacenter takeovers that we would have been done in some of our large deals?

Nilanjan Roy — Chief Financial Officer

Salil, should I take that.

Salil Parekh — Chief Executive Officer and Managing Director

Yes, please go ahead.

Nilanjan Roy — Chief Financial Officer

Yes. So I think as we’re looking in many digital end-to-end transformation whether IT as a service full stack transformation, we’ve involved infrastructure, data. So it’s a full stack transformation and in many cases these involve infrastructure and software as well. So, we got bundled deals, which are end-to-end transformations and we think they’re very, very important as well going ahead when we look at these into transformation.

So, I think as part of our overall deal profile, we continue to see these deals giving up increased deal visibility into the organizational IT infrastructure and allowing us future deals ahead once we are pretty much front and center in the IT landscape. So that’s what these are.

Ashwin Mehta — Ambit Capital — Analyst

Okay, fair enough. And just one last question, in terms of our margin outlook over the near term, do you think with the attrition starting to — on a quarterly annualized basis normalizing, the interventions that are required, possibly go down in the near term, so that we can possibly make a higher exit at the end of this year. So that we can maintain margins in the next year as well.

Nilanjan Roy — Chief Financial Officer

Yes. So like I said, we haven’t seen a decline as yet. These are flattening and probably will start inching up. So, we will continue to do what it takes to invest behind the employees because we know this is more in the comfort range which we would be happy in. So I think it’s premature to say when this will really come off, but as of now, we are focused in doing all these interventions. This quarter it sounds like we mentioned 80 basis point of our margin was behind these important interventions.

Ashwin Mehta — Ambit Capital — Analyst

Okay. Thanks a lot. Congrats again and all the best.

Operator

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

Sandip Agarwal — Edelweiss Capital — Analyst

Yes, hi. Good evening to the management team. Happy New Year and thanks for taking my question. First of all, congratulations on a very good set of number. So, Salil, I have a very simple question. You see now, our core, which is 41%, 42% of the business is stabilizing on a year-over-year basis, it is probably start — little growth is there, but digital continues to be at 40% plus growth. So, if this trend continues, next year, maybe our core will become 32%, 33% of the overall pie. So what is your sales from a long-term perspective. Where do you see this core stabilizing or you think it be very unfair to see them separately and in next two, three years you thing everything will converge together. So any idea, any thing, which you can share on that front will be very helpful.

Salil Parekh — Chief Executive Officer and Managing Director

Yes. So, thanks for that question. This is Salil. First as you pointed out, the digital growth is very strong at over 40%, at 42% and that shows the resilience of the demand profile and a portfolio which is overlapping. The key for the core, instead of looking at the percentage of the business, the key for us is really that core is now stable with a very small growth. So, we didn’t see the decline that we had for some quarters and this makes it extremely strong for us.

We have, probably the best capability in automation and modernization across the industry and with this, while everyone else’s core is still shrinking, as will be stable or possibly even have a small uptick and that means, we’d be the most competitive in this area. So, I’m really looking at this as a very positive step. We, of course, have to maintain this and we have to keep building out our automation capabilities. So, if we exceed in that, I think that has a very good outlook for us in the quarters ahead.

Sandip Agarwal — Edelweiss Capital — Analyst

Yes, thanks. That’s very helpful and best of luck for the current quarter.

Salil Parekh — Chief Executive Officer and Managing Director

Thank you.

Operator

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

Sandip Agarwal — Edelweiss Capital — Analyst

Yes, hi, good evening, everyone, and thanks for the opportunity. I had two questions. The first is on the employee side of things. I think over the past — if you look at the employee cost under cost of revenue with consistently being as a percentage of revenue is actually below what it used to be pre-COVID. And a lot of the growth has actually been added on the subcon side of things.

And even if you look at the numbers, it looks like most of the additions are all pressure. So keeping these dynamic in mind, just wanted to understand as we go forward and maybe attrition sort of normalizes, how do you see this subcon sort of evolving from an operational perspective? Do you think you will have to hire these subcontractors directly onto your roles or/and would that involve slightly higher costs? How should one think of this dynamic overall, was the first question?

The second question was around the digital proportion of the business has meaningfully gone up and if you look into the next year, I’m sure it will be even higher. From that perspective, does that mean that our ability to sort of garner our price increases will be far higher going into next year than what we see today? Thank you.

Nilanjan Roy — Chief Financial Officer

So I’ll take the first question on subcon really and as Salil said the demand environment is so strong that we don’t want to leave anything on the table. And therefore, whether it’s through subcon, whether it’s through lateral or pressures, we will first intend to fulfill that demand. And of course, over a period of time, we will optimize that entire structure.

So, whether it is program to re-hire some of the subcons, some of them we will of course lapse and we will get new lateral hire, some we will promote from within, so that dynamic will play itself out over the next year. But at the moment, it’s critical that we don’t leave any demand on the table. And of course, this will remain a optimization lever for us, we were the, one of the lowest in the industry at about 6.9 a peak over it and we are, I think above 11% now. But this is a lever we will have over the medium term to optimize. Salil?

Salil Parekh — Chief Executive Officer and Managing Director

On the pricing, as the digital work will increase, what we have been putting in place, which is demonstrating to our clients the value creation through digital will give us a larger opportunity for that because the revenue will be larger. So, I think your assumption is absolutely valid. We will have an additional ability to do that as long as we execute on that front.

Nitin Padmanabhan — Investec — Analyst

Perfect. Thanks for that. Just a clarification on the first answer. So, on the first one, considering pressure additions are so strong this year and subcon is so strong, does it mean that next year our ability to add as many freshers will be little more inhibited in the sense that we’ll need to focus a little more on laterals next year. Is that the way to think about it?

Nilanjan Roy — Chief Financial Officer

No. I don’t think so. I think we will continue to have a very robust pressure program. It’s always been there. We have an internal — strong internal location program, so people will based on the skills, we’re taking — through our reskilling program, we will move them to new projects, promotion. So in that sense, we think it will be a combination of both laterals and freshers as well. I don’t think we see any change in that.

Nitin Padmanabhan — Investec — Analyst

Fair enough. Thank you so much and all the very best.

Operator

Thank you. The next question is from the line of Sandeep Shah from Equirus Securities. Please go ahead.

Sandeep Shah — Equirus Securities Pvt Ltd — Analyst

Yes, thanks for the opportunity and congratulations on a solid execution both on revenue and margins. The first question is CY ’21 or FY ’22 had a benefit of mega deal wins, especially from Vanguard as well as Daimler, as well as some amount of pent-up demand for you as well as the industry. So, the question is entering into next year, do you believe that these elements, one has to take care in terms of tapering off any growth in the next year or you believe the digital adoption journey, cloud adoption journey has a low penetration, which does not make us upset in looking in the next year in terms of the growth momentum as a whole?

Salil Parekh — Chief Executive Officer and Managing Director

So, thanks for the question. First, the guidance increase as I’m sure you’ve seen as [Indecipherable] ending March of this year. We are not yet commenting in terms of quantitative guidance for next year. What is clear down the line is the demand environment remain strong and after review of services and capabilities, especially on cloud and digital, are resonating well with clients and we see good pipeline for that. Our large deals in this quarter are also very strong.

We continue to see a good large deal pipeline. We’ve seen a steady expansion of our clients over 50, 100 200 million and so on and so we see that expansion within client is working very, very well and also new client wins and new accounts are working well. So, overall, we have the various elements of continuing this demand environment strongly, but we don’t have a specific guidance yet. So, April 1, 2022, years after the [Indecipherable].

Sandeep Shah — Equirus Securities Pvt Ltd — Analyst

Fair enough. And just last two bookkeeping questions. The way I look at is Daimler deal has two legs to ramp up, one being the rebadging and employee related ramp up and second being the pass through data center related ramp up. Is it fair to say that most of these two legs ramp up is largely behind or may continue in Q4 as well as 1Q of next financial year. And second, in terms of FY ’22 wage hike, is it largely over or something is due in the fourth quarter as well?

Salil Parekh — Chief Executive Officer and Managing Director

On the Daimler, we don’t have any more specific. I can understand what you’re looking. And we have not gone into that specific now with Q3 and Q4, and the overall guidance — increase of the revenue covers all of that including Daimler and many other clients, especially with Q4 in the seasonality of that quarter. In terms of salary and compensation increases, we have done three of them for this year. There is I think specific that is planned for Q4. We will start to look at what we will do in the next financial year that will coming up, but nothing specific is being planned in Q4.

Sandeep Shah — Equirus Securities Pvt Ltd — Analyst

Okay. Thanks and all the best.

Operator

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

Manik Taneja — JM Financial Institutional Securities Limited — Analyst

Hi, thank you for the opportunity. Just wanted to understand, we’ve seen a significant increase in offshore mix of revenues over the last 18 months. And this quarter, saw a slight aberration. What caused that and how do you see this metric going forward? Thank you.

Salil Parekh — Chief Executive Officer and Managing Director

So there — this is Salil. The mix has changed over the last 18 months, which a lot of the remote working that was taking place, work from home, allowing them, they’re going to be delivered from a distant location with tremendous ease and efficiency. What we saw in the last quarter was a little bit thing that opened up in terms of target, we’re also being extremely optimal in what we have done in the previous quarters. And this is something that has given us more ability to drive, connects with clients and growth.

We see in the medium term tremendous opportunity for [Indecipherable] because clients have also seen that once the work is done remotely or work from home that small opportunity is this kind of work to be done from a location further away. So, in general, as a medium-term trend, we’ll see that as the positive trend. We will have, of course, each quarter, some movements up and down, but as a longer-term trend, we see that as a positive.

Manik Taneja — JM Financial Institutional Securities Limited — Analyst

Thank you. I had one more additional question, just wanted to get your thoughts around what we are seeing from a revenue productivity metric standpoint or revenue per person standpoint? And while there is significant amount of offshore shift over the last 18 months, we have seen utilization go up. So what’s causing the increase in revenue fluctuate despite the significant offshore shift that we’ve seen over the last 18 months, if you could talk about some of the factors that are driving that? Thank you.

Salil Parekh — Chief Executive Officer and Managing Director

On the revenue productivity, there are a number of things that are going on. We see some of the mix of our work, which is also changing more to digital and there we see much more revenue productivity coming in. As you pointed out, utilization has also gone up. We’d also seen some of our work for example on the consulting side, data and analytic sides growing really well and that’s giving us some level of a boost. There is also some impact, which we’ve not quantified externally on leveraging some amount of automation and platforms that gives us the benefit. So there’s several factors, we’ve been worked despite the mix — onshore-offshore mix changing.

Manik Taneja — JM Financial Institutional Securities Limited — Analyst

Sure. Thank you and all the best for the future.

Operator

Thank you. The next question is from the line of Ruchi Burde from BOB — sorry BOB Capital Markets. Please go ahead. Ruchi Burde, your line has been unmuted or have we lost your line. So, we’ll move to the next question, which is from the line of Rahul Jain from Dolat Capital. Please go ahead.

Rahul Jain — Dolat Capital — Analyst

Yes, hi, thanks for the opportunity. I have a — and congratulations on a strong numbers. I have a question regarding the core revenue, which has seen a stabilization in this year. I think if I stress this point partly, but wanted to understand what could be the prospect for this side of the revenue in the coming years, especially when we talk about so much shift to digitalization? So what should with the prospect out here? This is the question number one.

Salil Parekh — Chief Executive Officer and Managing Director

So there we have no individual guidance for digital or for the core in that sense, which is even for Q4 or for the next financial year, but structurally what is clear is we have been successful in driving automation and modernization well. We make sure that we are probably the most competitive large player in the market, working with large [Technical Issues] We continue to execute [Technical Issues] if you can continue to execute on that, my view will be [Technical Issues] And that has its own benefits in the medium term.

Rahul Jain — Dolat Capital — Analyst

Right. I appreciate the color. One more thing on the taxation part. Our tax rate, steadily has been upwards of 27% on an average. This look little higher given the kind of — can see that where most of our earnings belongs to. So, any flavor you can share in terms of what should be the ideal tax rate on a sustainable basis and in near term?

Nilanjan Roy — Chief Financial Officer

Yes. So, I think our tax rate has already over ground this 27%, 28% range. And I don’t think you’ll see much movement going against it because any case, as you know, India only — because it is India only plus countries, which are there, that’s a 25% India only. So, I think in the long run you will be around this range itself.

Rahul Jain — Dolat Capital — Analyst

So which region profitability is or tax rate much higher than the 25% rate also for taking this number higher than the average for India itself?

Nilanjan Roy — Chief Financial Officer

Yes. So, we can’t give that individually. But there are some jurisdictions and also in some jurisdictions where tax cannot be set off here as well. So it’s a combination of both.

Rahul Jain — Dolat Capital — Analyst

Okay. So, we are — if we are not able to set that — that result in double taxation and to jurisdiction that is also a reason. Okay. Got it. Thank you so much.

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. Let me echo the congratulations. It’s James from Susquehanna. I just had one simple question perhaps for Nilanjan. Can you remind us what the capital allocation strategy is? I remember you had put it out I think at the Analyst Day in November 2020, but where is share repurchase in the prioritization? Thank you.

Nilanjan Roy — Chief Financial Officer

Yes. So, what we had announced in FY ’20 basically was that we had taken capital allocation to 85%, it was 70% and we said that we will pay this out over a period of five years through a combination of projected growth-oriented dividend policy plus either share buyback or one of the special dividends. And in the first few years, as we announced, we have actually paid back 83% through higher increased normal dividends and also through the share buyback, which we announced last year. We’ve already paid back 83% and we remain quite committed to our overall 85% five-year number.

James Friedman — Susquehanna Financial Group — Analyst

Got it. Thank you so much.

Operator

Thank you. The next question is from the line of Vimal Gohil from Union AMC. Please go ahead.

Vimal Gohil — Union AMC — Analyst

Yes, thank you for the opportunity and congratulations on a great quarter. My question is on your employee cost, which partially has been addressed, but how should we think about the core employee cost growth, which comes under the cost of revenue, which has been around 4% over the last — over Q1 of FY ’21 versus a 6% revenue growth. And this has been in light of a very sharp increase in attrition and of course other supply challenges and etc. So, if you could just highlight, I mean what — how has the company sort of — are over wage hikes in line with the industry or have they been much, much higher than the industry? How should we think about this historically? And if you could give some kind of an outlook over there as well. Thanks.

Nilanjan Roy — Chief Financial Officer

Yes, so you have to see both employee cost and subcon together for the cost of people as a combination of both Q1 and Q2 in isolation. That’s number one, Number two, we get some our overall cost perspective. We, of course, are very focused on the attrition and being competitive in the markets, as well as being employer of choice for many of our employees going ahead. So, we look at no — intervention on the compensation side in Q1, Q2, we did across — in January any we did across the board; in July, we’ve done across the board.

In Q3 as well, we have done very segmented and targeted on talent and we’ll continue doing that into Q4, etc. I’m looking at, due to high points of attrition, we get much more practically to see where we are seeing demand being high in the market for those skills and target those employees really. So, I think it is very new and like I said, the offers for offers and we will continue doing that.

Vimal Gohil — Union AMC — Analyst

Right. And sir, how should we think about — so basically, if we were to look at your guidance versus your implied — you’re guidance implies a 0% to 2% sort of a revenue growth in Q4. Considering the fact that there were some furloughs in Q3, your revenue growth would be — could be higher than what you reported in Q3. So how should — is your guidance conservative at this point in time. How should we think about that?

Nilanjan Roy — Chief Financial Officer

In terms of the guidance, it’s a very strong guidance, which is 19.5% to 20%. There is no further color in saying whether it’s [Technical Issues] also get stable. We will see a very good demand outlook. We see good large deals. When the guidance is I think a very big move up from where we were in the last quarter.

Vimal Gohil — Union AMC — Analyst

Fair enough. Thank you so much and all the very best.

Operator

Thank you, ladies and gentleman 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. Just to close from our side. First, thank you all for making the time. We feel extremely good about the quarter, 7% growth. Q-on-Q, 21% year-on-year, very strong digital 42%, very good on large deals $2.5 billion. So, overall, really excellent market demand and we are seeing market share gains, which is a very good sign for us, primarily which are coming from a well positioned portfolio and a good execution from all of our teams.

Our revenue guidance, of course, has gone up 19.5% to 20%, our operating margin remains at a good level at 23.5% and we have a very good strong trust and confidence of our clients. Overall, a strong outlook and positive about what we see in the future for our digital and cloud transformation programs. So, with that, thank you all. Wish you are Happy New Year. And look forward to catching up in April.

Sandeep Mahindroo — Financial Controller and Head Investor Relations

Thanks Salil for the closing comments. And thanks everyone for joining us on this call. Look forward to talking to again during the year. Thank you.

Operator

[Operator Closing Remarks]