Infosys Ltd Q4 FY23 Earnings Conference Call Insights

Key highlights from Infosys Ltd (INFY) Q4 FY23 Earnings Concall

Management Update:

• [00:10:15] INFY said it doesn’t expect any material impact on its operations due to the recent news in the regional banking segment.

• [00:13:46] INFY expects its revenue to grow in FY24 by 4-7% in constant currency terms.

Q&A Highlights:

• [00:04:42] Yogesh Aggarwal from HSBC enquired if the 7% revenue growth guidance for FY24 is based on a macro pick-up or current possibilities. Salil Parekh CEO said the revenue growth guidance for FY24 is set at 4-7% based on existing deals and ongoing work. Despite potential variations in the pipeline of large deals, including mega deals, INFY believes there are opportunities to achieve the higher end of the guidance range, based on the strength of the pipeline.

• [00:15:29] Yogesh Aggarwal from HSBC asked about recent top level management exits and if it has impacted INFY and what’s the new structure. Salil Parekh CEO said INFY has implemented a structure for the delivery organization and will soon roll out a new structure for the financial services team. The company is confident in its leadership pool and believes that these leaders will successfully execute its strategic goals in broader and larger roles within the organization.

• [00:17:38] Bryan Bergin at TD Cowen asked that on the 4-7% growth guidance, how much of backlog is already in hand vs. the pipeline to be converted. Salil Parekh CEO replied that INFY doesn’t have a specific number to share externally. In past financial year, INFY had good large deals of $9.8 billion with 40% net new and also saw some strong relationships. Keeping these factors the guidance of 4-7% was built.

• [00:19:05] Bryan Bergin at TD Cowen enquired about the stated target of cost reduction that INFY is expecting to achieve. Salil Parekh CEO replied that the company has an internal plan with targets and roadmaps for sub-categories. Initiatives will be executed in the coming quarters without external disclosure of targets. The focus is on delivering results in the medium-term.

• [00:20:29] Ankur Rudra with J.P. Morgan asked about the reason for the miss on revenue and margins vs. the guidance. Salil Parekh CEO answered that in 4Q23, there were unplanned project ramp downs in sectors like telecom, retail, high-tech, and parts of financial services including mortgages, investment banking, and asset management. There were also some one-time impacts observed during 4Q.

• [00:27:45] Kawaljeet Saluja from Kotak asked if the process of guidance has been tightened given the magnitude of revenue miss in the quarter. Salil Parekh CEO replied that INFY has tried to put in place what is changing and uncertain economic environment. So such factors were taken in building the guidance.

• [00:32:52] Pankaj Kapoor from CLSA enquired about the timeframe for FY24 wage hike. Nilanjan Roy CFO replied that it will be continuously evaluated. INFY has built in compensation into its guidance and will take a decision during the year looking at the market and competitive context. Currently, no decision is taken for the hike.

• [00:36:37] Abhishek Bhandari from Nomura asked that on M&A as an opportunity for global companies to sell captives, is there enough of these conversations in the pipeline for meaningful capital deployment this year. Salil Parekh CEO said INFY has the ability to do M&A of any size, and is currently looking at many opportunities. INFY will consider factors such as strategic fit, valuations, cultural fit, and the ability to integrate them in when deciding whether or not to pursue a deal.

• [00:39:22] Ashwin Mehta from Ambit Capital asked about the nature of the one-off client issue and if it will reverse out like 4Q22. Nilanjan Roy CFO said this is a one-off client revenue issue that involves a mixture of clients and it includes both provisions against them and cancellations, which can have a revenue impact beyond the volume impact.

• [00:41:41] Ashwin Mehta from Ambit Capital enquired what drives a CQGR requirement of 2.9% quarterly growth in an uncertain demand environment. Salil Parekh CEO replied that INFY closed some large deals in the last financial year and have a large pipeline of potential deals, including some mega deals that could provide the company with a steady flow of income.

• [00:45:12] Gaurav Rateria from Morgan Stanley asked about the stabilization seen in March and if things will improve sequentially from hereon. Salil Parekh CEO answered that INFY is not seeing any major changes in the environment, but it is being watchful and agile. INFY expanded its growth guidance band to 3 points is to take into account any potential environmental changes.

• [00:46:05] Gaurav Rateria from Morgan Stanley queried about margins, how much of the downtick is mainly a cost lead issue. Salil Parekh CEO answered that INFY has provided a margin guidance of 20-22% with a midpoint of 21%. There are some headwinds and tailwinds that affect this margin, but the company is still striving to improve it.

• [00:49:39] Surendra Goyal from Citigroup asked if the revenue guidance is all organic and comments on medium term margins. Salil Parekh CEO clarified that the guidance is all organic. INFY is targeting inefficiencies such as utilization to help it reach its target margin of 20-22%, with 21% being the midpoint for the year, after sacrificing efficiency during the pandemic to grab more volume.

• [00:52:17] Keith Bachman at BMO Capital asked about the growth rate of backlog in the pipeline in 4Q23 vs. 3Q23. Nilanjan Roy CFO said it can’t be quantified, but the majority has been due to volumes and the balance due to the one-timer across clients, some related to cancellation and other provisions.