Sandeep Mahindroo - Financial Controller and Head of Investor Relations Salil Parekh - Chief Executive Officer and Managing Director Pravin Rao - Chief Operating Officer Ranganath Mavinakere - Executive Vice President and Chief Financial Officer Mohit Joshi - President Ravi Kumar - President and Deputy Chief Operating Officer

Moshe Katri - Wedbush Securities Yogesh Agarwal - HSBC Sandeep Shah - CGS-CIMB Joseph Foresi - Cantor Fitzgerald Ashish Chopra - Motilal Oswal Securities Surendra Goyal - Citigroup Viju George - JP Morgan Ankur Rudra - CLSA Bryan Bergin - Cowen and Company

Ladies and gentlemen, good day, and welcome to the Infosys Earnings Conference Call. As a reminder, all participant lines will be in the listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. [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.

Thanks, Karuna. Hello, everyone, and welcome to Infosys’ earnings call to discuss Q2 FY 2019 Earnings Release. I am Sandeep from the Investor Relations team in Bangalore. Joining us today on this call is CEO and MD, Mr. Salil Parekh; COO, Mr. Pravin Rao; CFO, Mr. M. D. Ranganath; Presidents and the other members of the senior management team. We’ll start the call with some remarks on the performance of the company during the quarter by Mr. Parekh, followed by comments by Mr. Pravin Rao and Mr. Ranganath, subsequent to which we’ll open up the call for questions. Please note that anything which we say, which refers to our outlook for the future is a forward-looking statement, which must be read in conjunction with the risks 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 pass it on to Mr. Parekh.

Thank you, Sandeep. Sorry I was on without the line and thank you for everyone to join the call. Good evening and good morning to everyone on the call and thank you for joining us. I am delighted to share with you our results. We had a strong quarter in Q2. Our growth in Q2 was broad based across all business segments, geographies and service lines. Our large deal wins were strong at over $2 billion with over 60% last year. On a constant currency basis, our revenue growth quarter-on-quarter was a robust 4.2%. Our digital revenue growth was 13.5% quarter-on-quarter and 33.5% year-on-year. Our digital business is now 31% of our overall business. Within digital, we see strong demand especially in cloud, IoT, cyber, and data and analytics. Operating margin for Q2 was at 23.7%. Our financial services business grew then 5.8% quarter-on-quarter, retail at 5.9%, manufacturing at 4.8%. Several of our success a gain over 10% year-on-year. In fact financial services, we saw improving demand trends in the U.S. in Q2. We see strong growth in our business process management, cloud infrastructure services, and data and analytics service lines. Our large client growth was strong with our largest ten clients growing at 5% quarter-on-quarter, higher than the company overall. The demand environment looks stable across U.S., Continental Europe, UK and Australia. We are continuing our investments in agile, in digital, automation, artificial intelligence and also in our people via training and compensation. Overall, we see positive in our strategy of agile digiting and automation and AI and cost services is resonating well with our clients and building more relevance for us with them. The first step of our three year transformation program are being picking place and are starting to show traction. With this strong quarter, we remain on track for a guidance for constant currency growth of 6% to 8% on full year and operating margin guidance of 22% to 24%. With that, let me hand it over to Pravin for a few remarks.

Thank you, Salil. Good morning everyone. As Salil said, we had a good quarter, both in terms of performance, as well as deal wins. We had 12 large deal wins during the quarter with a PPE of $2.03 billion. 7 of the 12 deals were in Americas, four in Europe, and one in the rest of the world. Three deals each year in financial services and manufacturing verticals, two in high tech verticals, and one each in retail, communications and other verticals. Volume grew by 2.8% and realization in constant currency terms also improved by 0.9% sequentially. Utilization excluding trainees was 85.6%. Attrition declined marginally to 19.9% on a standalone basis and 22.2% on a consolidated basis. We are taking specific measures to bring this down further. In quarter two, we have added 19,721 professionals on a gross basis. Now let me comment on three of the business segments. Performance in financial services improved in line with our expectations as claim-specific issues abated to a large extent. After declining for last two three quarters, growth returned in top accounts in the Americas, and spending was broad based helped by backsets and writing in the states. Spending by U.S. banks is expected to continue for the next few quarters. Let’s continue to increase spend in digital, data and cloud. Our proactive efforts have resulted in a large digital-led deal pipeline. As we expect momentum in the business for the next two quarters driven by new account openings and expansion of accounts opened earlier, near-term growth will also be impacted by seasonality. Insurance continues to perform strong with robust deal pipeline, especially in RTA and BPM, opportunities on automation, data management, analytics and BPM. In August 2018, Gartner published the Magic Quadrant for Life Insurance Policy Administrative Systems for North America and – as a leader, reconfirming our strong capabilities in this sector. We are seeing increasing trends in retail segment randomly driven by our practice in digital areas and large deal constructs. Growth was led by CPG, transportations and logistics, consumer technologies and lifestyle sub-segments, while sub-segments in detail continued to see recurrences. Its increased focus on modernization, supply chain transformation and optimization, each pipeline in the vertical remains strong. Communication segment has strong deal pipelines with its broad base across geographies. We expect near-term growth to remain strong due to recent deal wins though quarter three will be impacted due to transition, lower working days and furloughs. We have seen investments around adoption and deployment of ID leading to advances in consumer, IoT. We are working with plans and industry forums to develop 5G use cases like network slicing that will reinforce the monetization of 5G networks. Manufacturing vertical reported sustained momentum driven mainly by Europe and improvement in Americas. Automotive and industrial manufacturing in Europe and aerospace in Americas performed well. As this pipeline is strong, we command a strong position in the automotive space in Europe and acquisition of Fluido, Brilliant Basics and Wongdoody, we further solidify our presence as we gradually integrate the respective with our overall offerings. Energy, utilities resources, and services sectors continues to grow strongly on the back of continued momentum in planned accounts and ramp up of previous wins. Stable oil price reporting at a tailwind for players across the value chain in the energy segment. In the utilities space, enhanced systems and drives – of the results, investments on smart grids, automation for safety and sustainability are the focus areas. Outsourcing with a few dealings with the sectors to attain software reach. Overall, we attained healthy growth in our deal pipeline. [Indiscernible] was achieving industry-leading organic growth and margins with solid deal pipeline both in traditional as well as digital and platform based offerings. We have seen increasing demand across the major developing sectors like high tech, insurance, healthcare, et cetera. Mechanics continues to be a good growth opportunity for us. Finally, digital adoptions continues to expand across verticals and we have seen tremendous growth in this area. We have seen more and more discretionary spend being focused on digital technologies. We continue to invest to further enhance capabilities and customer relationships and the acquisition of Fluido will further enhance our footprint in digital in newer geographies. Our digital strategies win capabilities across digital demand and takes lead on all digital transformation and grid wins. The deal pipeline in digital space looks healthy with a good news for large deals. I will pass on to Ranga to talk, give some color on the financials.

Thanks, Salil, and Pravin. Hello everyone. Welcome to the Q2 earnings call. We had a strong performance in Q2. Several key financial metrics and operational metrics saw multi year highs during the quarter. Revenue growth, digital share, top-line growth, calculation and margins saw good trajectory during the quarter. Salil and Pravin have already talked about the revenue metrics, client metrics and business outlook. Let me start with a few outcomes during the quarter. First, on a first half year-over-half year basis, our revenues grew 6.9% terms and 7.1% in constant currency terms. In rupee terms, the H1 growth was 14.7% over the last year H1. Second, our EPS in dollar terms grew sequentially in Q2 by 8.8% and year-on-year by 5.7%. After normalizing for the Panaya charge that we took in Q1, sequential EPS growth in Q2 works out to 1.4%. In Rupee terms, EPS growth in Q2 as compared to Q2 of last year was 16%. Third, our operating margin for the quarter was heading at 23.7% at the higher end of margin guidance of 22% to 24%. I will provide more color on this shortly. Fourth, our return on equity, ROE was healthy at 24.7%, an increase from 21.2% in Q2 of last year and an increase of 3.5% over one year. Fifth, our relentless focus on operational efficiency parameters continued this quarter. Utilization excluding trainees continued to be high at 85.6%. On-site mix which I have been talking about for last few quarters further moderated to 28.4% which is one of the lowest we have seen in several years. Due to continued productivity improvements, stable utilization and increase in digital share, revenue per employee increased by 3.8% year-on-year to $64,663. Sixth, free cash flow was at $360 million for the – and for the half year the free cash flow was $912 million. In H1 of 1999 we had higher tax payments due to ATA that was concluded earlier in the year and more other income due to the share buyback which we concluded of $2 billion in December 2017 as compared to H1 2018. Now let me come to revenues, price realization and margins. Revenues in Q2 2019 were $2921 million, a sequential growth of 3.2% in dollar terms and 4.2% in constant currency terms. In Rupee terms, the revenue growth for the quarter, revenue for the quarter was 20,609 crores. This is a sequential growth of 7.7%. As compared to Q2 of last year, revenues grew 7.1% in dollar terms, 8.1% in constant currency terms and 17.3% in rupee terms. Price utilization in Q2 in constant currency terms was stable on a year-on-year basis and improved by almost 1% in constant currency terms quarter-on-quarter basis, we will believe that year-on-year, change in price is a better indicator. Blended revenue, blended volume growth in Q2 was 2.8% on a quarter-over-quarter basis. In first half year, H1, our blended volume growth stood at 78.8% as against the constant currency growth of 7.1%. However, our focus on optimizing on-site employee cost including sharper focus on productivity, on-site pyramids, localization and optimization measures led to a decrease in the on-site employee cost as a percentage of revenue to 37.4% in Q2 as compared to 37.9% previous quarter. This is one of the lowest we have seen in several years. However, our sub-contractor expenses as a percentage of revenue increased to 7.4% of revenue in Q2 as compared to 6.8% in the last quarter and 6.2% in Q2 of last year which is an increase of 1.2% year-on-year. During Q2, we made further investments in expanding our localization initiatives and other areas as we have outlined at the beginning of the year. These investments will continue till rest of the year as we had outlined in the beginning of the year. Operating margin in Q2 was 23.7%, same as last quarter. During the quarter rupee distribution net of cross currency provided a benefit of 80 basis points including in operating parameters, including higher pricing and lower on-site mix which I talked about and to some extent even lower cost, head the margins sequentially by another 70 basis points. This aggregate benefit of 150 basis points was offset by compensation increases and higher variable pay amounting to 100 basis points and certain interventions that is yet to address the attrition. Further, increase in our sub-contractor cost on-site localization and investment impacted the margins by 50 basis points. So overall, operating margins remains flat sequentially. We ended the quarter with a total headcount of 217,739 employees which is an increase of 3.7% from last quarter. Gross headcount addition increased to 19,721. We had 11,887 employee quits during the quarter as compared to 11,911 quits last quarter. We continue to focus on measures to mitigate attrition. Cash generated from operating activities in Q2 as per IFRS consolidated was 438 million, which was after the 76 million of taxes paid after the APA entered with the United States IRS earlier in 2018. Capital expenditure for the quarter was $78 million, which is approximately INR554 crores. Cash and cash equivalents including investments stood at $4,185 million, which converts to approximately INR30,366 crores. Debtor days outstanding for the quarter stood at 66 days due to superior working capital management. Q2 continue to witness huge volatility in currency markets and we managed to navigate the same effectively. Yield on cash for the quarter was 7.53% as compared to 7.2% last quarter. Hedge position as on September 30 was $1,966 million. The company today announced an interim dividend of INR7 approximately $0.10 per ADS as compared to an interim dividend of INR6.5 per share after a bonus share at this month announced same quarter last year. This is in line with the capital allocation policy as articulated earlier in the year. We plan to make further investments as we outlined in the beginning of the year on employees, trying to address attrition in the coming months towards residual salary included for package holders and targeted increases for some part of our workforce. Coming to operating margin guidance for fiscal 2019 retaining our operating margin in the guidance range of 22% to 24%. Coming to revenue guidance in constant currency terms, we continue to retain 68% based on March 31, 2018 rates. Lastly, I would like to thank each one of you in the investor community for the wholehearted support that I received over the last three years in my role as CFO of this iconic company. During the last three years, the company delivered its strong and resilient financial and operational performance on multiple strides, free cash flow, return on equity, growth in digital, execution of capital allocation policy and significant improvements in productivity parameters like per capita revenue and utilization. Between fiscal 2015 and 2018, while the revenue increased by 26% in dollar terms and the free cash flow expanded by 40% utilization interest high level 5% and return on equity improved and we executed capital allocation policies with a share buyback of $2 billion. Unwavering focus of the entire management team made these outcomes possible. I am happy that the company’s financial performance is strong and resilient as I pass the baton to my successor. Thank you very much for you support all these years and we will open the floor for questions.

[Operator Instructions] The first question is from the line of Moshe Katri with Wedbush Securities. Please go ahead.

Okay, thanks. I appreciate for letting me to ask a question here and congratulations on strong execution. Just going back to the commentary on margin trend. So obviously, there is some investments that are going on. You mentioned sub-contractor use and I think there is also variable comps that went up. What makes us comfortable that you can sustain the margin range that we guided for this? Number one. And then from a big picture perspective, is there any color in terms of your enterprise clients are saying regarding their comfort about 5G spending – spending initiatives even with the volatile political uncertainty about this. Thanks a lot.

Hey, Moshe, Ranga here. Thanks for the questions. First, we are comfortable with the margin guidance of 22% to 24%. If you look at the first half of the year, we ended at 23.7% pretty much at the higher end of the guidance. And as I said earlier, for this quarter sequentially the margin was steady at 23.7% in spite of the rupee depreciation, because as I said, some part of it went into the compensation hikes for the middle to senior levels and to some extent in the higher sub-contractor expenses as I said. Coming to the sub-contractor expenses, we have to see in the broader context for the talent supply chain for the U.S. especially for the digital areas, there we need certain niche skills at short notice due to the design and other – gain certain timelines we have to go for a higher sub-contractor without – and to ensure that we are doing the business on the table. At the same time, we are also looking at seeing how to moderate this in a meaningful manner. So, overall, I think, coming to the investments that you talked about, we have planned certain investments to leverage digital opportunity to localization at the beginning of the year and we had also said that the trajectory of these investments have more towards a H2 than H1 because some of them are hiring related, some of them are investments that take – that has a cycle time to realize. So in the H2, we expect the higher investment trajectory. So these are combination of factors which are really into the overall margin perspectives, but we are quite comfortable with the margin guidance we have given and first quarter has been pretty much at the top end of the guidance.

Moshe, this is Salil here. Just wanted to address your query on the expense. If you look at our performance this quarter, yes, we spend broad base across verticals and geographies. We saw 4% constant currency growth in Europe, North America 3.8% and the comeback in North America after few quarters. Rest of the world, we grew 6.8% on constant currency and even when you look at it from the vertical perspective we had good growth in financial services, retail and CPG, as well as manufacturing. We had moderate growth in fuel and high tech. We saw some softness in communication and life sciences and healthcare. But looking forward, given the demand environment, the pipeline that we have, we feel fairly comfortable that almost all the verticals and geography wise as well, the spending mix, obviously we have to keep in mind the seasonality, quarter three is basically a soft quarter given the higher number of furloughs and lower working days, but something you need to wait and watch out for. But barring that, barring life sciences and healthcare where you see some softness, we expect good momentum in the coming quarters across all other verticals both in Americas, as well as in Europe.

Much appreciated. Thank you.

Thank you. The next question is from the line of Yogesh Agarwal from HSBC. Please go ahead.

Yes, hi. I have couple of questions if I may. But before that Ranga, all the best for your future and I wish my best wishes. Firstly, Pravin, I wanted to ask on U.S. banks. You mentioned that the next few quarters, you will see ramp up of existing deals plus the new ones. But there will be seasonality hit as well. So, the net of everything you think seasonally versus the previous year seasonality will still be better because of the new deals?

This is Mohit, Yogesh. No, I think, look, the seasonality trend is the same as the previous year. We will see some furloughs and end of year budget pressure. Basically, we see very strong momentum in this quarter and we you or many people tried this, we are in a strong position in this sector. I think the performance numbers for this quarter speak for themselves and we will see headwinds in any quarter, but overall, we should see the same as the previous year and we remain within the long-term very positive about the sector.

Right, okay. And just generally, I wanted to ask on digital pricing. Most of the large lines will be governed by a big MSA, whereas digital pricing has to be higher as you guys have mentioned in the past. So, most of these deals are not coming in MSA and you price them separately and if not, how do you price it higher than an average deal pricing?

Yes, so, this is Ravi here. The digital services you’ve seen are a strategy in the pentagon. It falls from those pies below. A lot of this is spend in the market in terms of maturities is in cloud infer, strategic cloud applications, modernization, API micro services which is the accelerate tower of – accelerate pillar of the pentagon. So that’s where a lot of the spend is and it’s attached to the legacy world, but it’s kind of spend – you are migrating from the legacy world to the new world as you migrate workload to the cloud and as you take legacy cloud applications into on-premise applications into the cloud. So, we kind of attach ourselves with the master services agreements but we also have an opportunity to comp the models as new services and ask for CDM. But as these services progress in terms of mode momentum into areas of experience in sites, innovate and assure the other four pillars. I would actually see we could comp them all separately and turn this to finally kind of continuing with existing rate cards and using wherever we have an opportunity to change those agreements.

Okay, got it. Thank you so much.

Thank you. The next question is from the line of Sandeep Shah from CGS-CIMB. Please go ahead.

Yes, hi, thanks for the opportunity and congrats on a good execution. Just looking at the order book, Salil, can you give some color that the improvement is because of more internal factors led by the internal restructuring to pursue the large deals? Or is it more to do with the improvement in market conditions and the demand conditions? And second, do you believe looking at the pipeline, now confidently crossing $1 billion is a new normal going forward for you? And this quarter what is the average tenure of the bills?

The way this was put together, I think, clearly the market is in a good shape as we shared earlier as is the demand environment is quite strong across many of our large sectors we see good demand across all the geographies we see a stable demand. So that is part of it. Part of it is, the way we are now intensely focusing on what our clients need and putting together a real execution element to what the large deals group creation was some time ago. So there is a combination of those things from what we see. In terms of the size of the large deals, and these are lumpy deals as I am sure you see. It’s difficult to have in that payments designed target each quarter. We look for this earning for six to eight quarter basis. Having said that, our demand pipeline today is quite strong and robust. And so we feel quite comfortable in the demand environment and also for large deals is strong. It is difficult to be specific about what the size of that each quarter, it will be up and down. In terms of the tenure, we don’t disclose it in terms of the overall tenure. That I know sort of the largest deals have had a very short tenure. So we look forward to having the support outlook in terms of revenue in the coming quarters.

Just to follow-up for the second, because I am looking to the implied guidance, at the lower end we are indicating a decline on a compounded Q-on-Q basis for the next two quarters. This is despite a strong commentary for a majority of industry segments, as well as strong order book – so, and plus from inorganic acquisitions coming in. So, why – why not upgrade just the lower end of the guidance?

Do you mean the demand environment is strong except the guidance at the start of the year our execution remains something it happens, and in that regard we are comfortable where we are with respect to where we landed in H1. We continue to see good traction that we will land in that sort of range as we look into the year. We decided not to make any changes in terms of the band.

Okay. Thanks and all the best and all the best, Ranga.

Thank you.

Thank you very much.

The next question is from the line of Joseph Foresi from Cantor. Please go ahead.

Hi. So my first question is, do you think you expect in the future the trade-off margins for investments, if you think that's going to happen long term? And what's the cadence for the margin profile in the second half of the year?

Hi, Joe. Ranga here. I think, as I was saying earlier, the first half of the year margin has been 23.7% pretty much at the top-end of the guidance and though we had certain rupee benefits, we also had certain additional investments in compensation and also in some of the localization features. I think, coming back to – and of course, our strategy for investments in the second half is likely to be higher than in the first half as I had outlined in the beginning of the year. But overall I think we are comfortable with the margin band that we have given. At the same time, we are also looking at some of the sub-contractor expenses moderation and some of the other items that you need to look at, overall I think we are comfortable and it is not new to any lumpy cost or lumpy investments. It’s pretty much on the lines that we had planned.

Okay. But I guess, and I just have one other question after this, but, how do you feel about the margin profile over the long-term? I mean, you got digital growing at a nice pace for you. It seems like investments are necessary. You are looking at M&A. Do you think that – as you go forward half this year, will that 22% to 24% band being something that you are comfortable with? Or do you feel like you'll trading off investments for margins over the long-term?

I think the way we are looking at our margin plays on two, three maxes. The first max is on the digital itself. As we have been completely consistently retained our digital site points better and more importantly our digital gross margins are certainly higher than the core IT by couple of percentage points. And so, as the digital share increases, that is one play that we have on the margin. The second part is on the core IT services, the focus with G&A on – productivity improvements to automation, productivity, and as well as the cost – on-site cost optimization by way of – on the on-site pyramid with the localization and the fresh hiring that we have started. These are some of the pieces that we continue to seek for. It is a twin play between the margin expansion in the digital part which we have seen as well as the – not the margin expansion, but the higher margin provided to digital that we have seen as well as the productivity led margin improvement in the core IT. So I think in the medium-term, we are comfortable in the current range of 22% to 24%.

Okay. And then the last question, can you frame for us your exposure to the European banks and maybe your expectations for their performance in the second half of the year, how that fits into your overall financial services commentary? Thanks.

Joe, it’s Mohit here. I think, look, this quarter, we had steady performance across the earnings in Europe or in the – in the U.S. we saw strong performance. Obviously, our performance in the Europe was the strongest. Having said that, we do have a large exposure to European banks and we feel very comfortable about our growth prospects there. Obviously there is some concern around volatility around what’s being happened with Brexit. But as of now, we have a very strong competitive position among our banking clients in Europe and we feel very comfortable with the growth trajectory that we see there which is in line what we see across the world.

Thank you.

Thank you. The next question is from the line of Ashish Chopra from Motilal Oswal Securities. Please go ahead.

Hi, thanks for the opportunity. I just had one question around the margins. Ranga, if you may help me. So the couple of areas which are offsetting the impact from currency is rounded off multiple times being some of the interventions due to the high attrition, comp hikes, et cetera and also the strategic investments for the year. So, just wanted to get some more color on the nature of continuity for these. Would you think that maybe intervention-related cost would roll-off by the end of the year or they continue into the future into FY 2020 as well in order to contain attrition? And even on the investments front, while the trajectory would be maybe skewed towards the second half, do you expect it to maybe cool off and you will be fairly invested going into the next fiscal?

Hey, this is Ranga here. I think, as we’ve said, earlier, especially this quarter, we had 100 basis points on account of the compensation and the specific interventions I talked about. On the compensation part, as I had said in Q1, 85% of the employed headcount in Q1 and for the balance 15% we had something into this – commenced in July, that’s one point. And the second point, these interventions that we had to make by the higher promotions in certain cases, as well as certain comp increases that’s dealt. So, we do not – while we continue to focus on how the attrition trajectory moves, we do not expect on an ongoing basis or multiple quarters, we do not expect that. Second, on the investment trajectory, clearly declined in the beginning of the year, separately to recollect, we had brought down the margin guidance down by 1% in the beginning of the year. That trajectory is something that’s we are investing in and first half was – we started to make those investments, so there is localization or the sales, as well as the digital investment. And as I said earlier, the trajectory will be sharper in the second half as compared to first half. And at this point in time, beyond fiscal 2019, the investment piece at this juncture, we do not see beyond what we had - as anticipated at the beginning of the year.

Got it. That’s helpful, Ranga. That’s it for my side and wish you all the very best.

Thank you. The next question is from the line of Surendra Goyal from Citigroup. Please go ahead.

Yes, hi. I just had a couple of questions here. Firstly, Ranga, I am looking at gross margins Y-on-Y. 90 BPS down despite 10% INR move realizes and this despite cross currencies would definitely have been a tailwind. And I think, as you said earlier and as well as on TV the digital has better gross margins and all the growth for YOY seems to be coming from there. So, can you please help us reconcile, because the quantum still seems to be quite big and yet margins are down 90 BPS YOY?

Well, I think, let me see what they YOY reconciliation on the margin. Two factors, as you rightly pointed out on the currency exposure between YOY et cetera. Now, if you look at the cross currency on a YOY I am talking about the quarter-over-quarter, rupee impact was a positive of 2.2% and cross currency had another 0.1 positive, so the total was 2.3% overall positive. The comp review that we – if you look at in Q1 as it could kind of flowing through to Q2 had a 2.3% negative. So it’s entirely negative. Additionally, we had a 10 basis point additional impact because of the higher variable pay, 95% in Q2 as compared to earlier year. Then certain operational – so essentially that negated the entire rupee and cross currency impact net-net. So, beyond that, we had certain positive impact on the margins on account of higher utilizations to 40 basis points on-site mix 30 basis points which entirely was negated by the sub-con – higher sub-con expenses that we have. So, net-net I think, if you knock off the rupee and cross currency by higher comp review and variable pay that could essentially negated back. The improvement in operational parameters was taken by additional sub-con and certain other expenses. So net-net, the net decline was 0.5%. So that’s the broad god reconciliation.

Sure. And is it possible to quantify the investment that you have been talking about, because while you keep on saying that margins are in line with the guidance, but when the guidance was provided the currency levels are very different. So I just wanted to understand if there is a way to quantify the investments?

Well, I think, especially, the sales investment we can pretty much see in our financials, in the employee cost piece that is clearly visible. And now these investments are also in localization that we talked about they are some across CapEx which will result into some additional depreciation as well as some of the OpEx that we did. And, also I would like to say that some of the digital areas where we had certain hiring that we did will also reflect in the employee cost. At this point in time, even in the beginning of the year, we are not really quantified this amount for what we can say, but the overall 1% reduction that we talk in the beginning of the year fairly reflects 1% in the guidance, fairly reflects the quantum. Roughly, I think the second half would be much more the trajectory in the second half could be sharper for those investments.

So, Ranga, let me ask that question a little differently. Has investments that you had planned for, have they gone up, because the currency move is quite sharp and despite that, you are maintaining the margin bands. I am just trying to understand if the investment we have to plan has actually gone up compared to where they were when you were guiding for the full year?

No, that topic is, I would say that the total quantum that are anticipated has not moved up. But the trajectory and the pattern of those investments probably are more in the second half, but we see it, the trajectory is much more intense in the second half.

Sure. And just one last question for Pravin. Pravin, you said in your opening remarks that Q3, and again, I am talking about communications here, the 2Q will be impacted by transition as one of the factors. And looking at the press report, it does seem like the large deal has a lot of rebagging et cetera and our understanding was that, revenue should start coming in as soon as the transition kind of goes through. So is it that the transition will take long enough that the revenues will start picking in only in Q4. Is that a correct understanding?

Yes, we have – when you look at the $3 billion. In some of the wins we do have some element of rebagging, mainly that this is – you may not have much of rebagging. It’s a combination of things. So our experience is whenever we will not think it takes a period of time before revenue starts getting in, the transition is important. So, we would expect like we have $3 billion plus, some of it will start reflecting in our numbers only subsequently. That is what I meant when I said the advantage in impact as well. Well, apart from that we have developed seasonality in quarter three of lower working days and furloughs.

Sure. My question was, so just to communications that – that does answer my question. Thank you.

Thank you. The next question is from the line of Viju George from JP Morgan. Please go ahead.

Thank you for giving me an opportunity. I just wanted to dig a little bit deep into the cost. I think there are a host of factors that you’ve cited. What are the elements of the cost, I mean, we talked about sub-contracting out of sales, but was there been higher compensations, promotions, et cetera, et cetera, what are the elements of cost that you feel will be non-repeating as you go forward?

Hi, Viju, this is Ranga here. I think the investments costs are pretty much we had outlined and we are pretty much seeing the same trajectory. Nothing outside the trajectory. We had kind of said that in the second half the trajectory will be intense. And the compensation that 100 basis points that I talked about, the part of it was compensation, the 16% of the employees which has really planned for the Q2 as well. And so these two are there and the sub-contractor expenses are going up something which is really the demand and supply chain management related, that is something which we are looking at to see how best to optimize that. So these are the two critical elements for Q2.

Are there any elements that you think, Ranga, you are also taking us forward, are there any elements that you think will not repeat in the sense some of the pay outs in order to reining attrition is that something that you expect has largely been done and that’s only not sustained, because I just don’t understand what is the element besides the investment that anyway you said we look to Q2 among where the variables would probably not repeat to the same extent. So do you think is it logical to assume that because Q3 will be a slower quarter variable pay may not be that high like what the sub-contracting may not be that high. So, maybe those causes should not read logically speaking.

And I think, I don’t want to kind of see, the sub-contractor pieces as you know, it’s really the short-term budget we had to undertake, primarily to meet the certain specific on-site demand, which otherwise, so our employee basically are not able to fulfill. And, so that is, in the short-term it is difficult to predict that, but at the same time, now that the 7.4% from 6.2% last quarter, we are also seeing certain with headcount additions that you saw this quarter both on-site and off-shore has been broadly in line with our plan. So, these are some of the two factors that will really play into the sub-contractor needs to – what extent we could start with our own employees. So, at this point in time, we are fine with the current levels and we will see how the next two quarters play out.

Sure. And when you step back and started the year and look at how the cost picture had signed out, except for the cost that you’ve incurred in connection with reining in attrition and therefore, the payouts you’ve incurred in this quarter, would you say that most of the elements have been as on track, nothing has been unexpected?

Well, I don’t think so, because as I said, clearly not. Now the question is, are there any unforeseen costs that we have to encounter, that’s clearly not the case. The sub-contracted fees I talked about and some of the interventions, some of the attrition that we talked about, even for the second half the investments have been planned out and these are all pretty much that we see at this point in time and it is not that certain unforeseen cost that happened that really kind of brought down our – the positive impact that repeated in the quarter. That’s not the case.

Sure. And Mohit, one question here on financial services if I may, please. I think the same time last year, you had also indicated optimism basically – then on possibly the interest rates will rise in the U.S. and interest rates are rising right now and today you’ve got growth in and it looks like you’ve got a better order book this time last year. So, do you think that therefore there are more concrete data points if you suggest that some are across the line and therefore this momentum would sustain in a more certain manner?

So Viju, I think, look, last time last year, at the end of Q2 we had a couple of other internal issues that you know about apart from the lines of investments met with issues. This time around, based on the results that you see from the banks, based on the projection we have built not just in the U.S., but across the world, seems to be more sustainable. We also think – see we had two broad theme areas, right. First is, we are continuing our traditional dominance of consolidation of the round part of the business where clients are still looking to focus on reducing the cost income ratio. So that continues to be a traditional area today. The other piece is on the digital piece, right, where increasingly we are seeing a demand from clients asking us to come and bid for business to build, build a platform to ensure improvements. That seem to be a perspective that banks are looking to expand after a long time. They are pretty much after the financial crisis. Banks are looking to expand. Having said that, are we – only has been sort of medium and long term. From a quarter-to-quarter basis, you will always see headwinds and tailwinds, but in the long run, we remain optimistic about the state of the business.

Sure, sure. Can I switch in one more question for Salil? Salil, as an industry there is a lot of cost pressures in the system. H1B visas are tough to come by. It looked like costs had moved up. I think the wage inflation in U.S. is hot. So the market for software services is red hot right now. Do you think as an industry pricing that we pass on to clients, sub-contracting does not hit, do you think as an industry, we are ready to sort of conversation with clients in their input costs are increasing, and therefore it’s time you start so that has conversations on price increases. Is that happening at an industry level at a player-specific level or is it clearly driven by mix still?

First, if you look at our data, pricing is stable from previous quarter which already is a good sign. In general, I think there are elements around digital where there is an ability to demonstrate more and more value. If you can do that across the sector, then there is possibility of what you are just striving. In other places, there is a huge benefit if you can apply more and more automation and artificial intelligence and that can give us some benefit of holding pricing than having some impacts on margin. And as Ranga described earlier, there is other parameters which I think, we can craft internally as we go through the rest of this year and into the next year which should help us to make sure that our margin profile remain stable or even sometimes find ways to get that expanded.

Sure. Thank you. Ranga, all the best.

Thank you.

Thank you very much, Viju.

The next question is from the line of Ankur Rudra from CLSA. Please go ahead.

Hi, thanks. Could you a bit start with comments on, add color to substantially higher deal wins were higher this quarter. And if there is any change or departure from previous margin or asset intensity thresholds for the nature of deal you signed?

In terms of the …

I just wanted to get some more color on the deal win or the order book design and if there was any departure on previous margin and asset intensity thresholds?

Ankur, this is Pravin here. As we said, we had 12 large deal wins. Seven in Americas, four in Europe and one rest of the world, big percentage of deals are in financial services, manufacturing and couple of them in high tech, one in retail and et cetera. Overall, we have not seen any significant change in the intensity or the competitiveness of those deals. On those deals, we have faced global competition before winning the deals. And as we have done in the recent past, we continue to be aggressive on winning large deals and executing on our margin improvements, leveraging some of the investments we are making on tools, technologies, automation, AI and so on. And to some extent I think we said last two quarters we see the effect from a pricing perspective, realization perspective has been fairly flat on a year-on-year basis. So to that extent I think our strategy of going aggressive and winning of deals and trying to execute on – superior execution and meeting our margin requirements have stood us so far. Net-net, we don’t see any change in the pattern, any dramatic change and we are not seeing any significant change. This space it is a competitive – it needs to be a very competitive space. We continue to look for cost pick out for a better infrastructure in other areas and but then, we will continue.

Thanks. Also, earlier in the call, Pravin, I think commented that spending looks maybe financial services looks strong for the next few quarters. You seem to stock short of giving a more structural view on financial services spending. Is that something that limits your visibility right now if you limit your comments just for the next two or three quarters on a very strong order book and good momentum?

Ankur, this is Mohit here. So, look I think, what Pravin is trying to say is that, we definitely had a strong quarter. We had good deal activities. We had strong volume momentum. But if you talk about that Q3 is a EBITDA quarter. There are some clients who have annual budget pressures. So we just wanted to give that qualification. We remain very confident about the overall state of the sector and our competitive positioning the qualification is, without that if you go back previous years, there is a fee income in the business.

Sure. But beyond the seasonality which should show up perhaps in Q3, maybe in Q4, there is nothing else structurally which makes you most comfortable about the demand environment?

We remain very confident about the state of the industry in terms of spend and we remain very comfortable about our competitive positioning.

Okay, thank you. So, one last question on the cost. I know you discussed a lot, but was the incremental sub-contracting cost perhaps despite the offshore shift, something that was kind of expected from what you sought would happen over the cost of this year’s? Is it something on the supply side that worries you and maybe it is causing greater than expected cost inflation?

Ankur, Ranga here. I think, as I was saying the sub-contracted cost pretty much on-site to meet the demand which otherwise we couldn't really staff from internal sources. It’s a play on both the gross addition as well as the attrition and they both play a role. And so this time I think on the odd side, now those requirements came because of these elements. And that side is 7.4 and we have had some good gross additions, rather net additions on-site this quarter, which should play into the next quarter. So we are closely monitoring that. But, we expected the current level no substantial, no reduction.

Okay, thanks and best of luck.

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

Hi, thank you. A few for you. First, can you tell us if you assumed contribution from inorganic growth is in the full year growth range?

Very negligible.

Okay. And then on margin. Can you give us a sense of the level of benefit to operating margin that you’ve seen from niche initiatives that you commented thus far? And then on the sub-contractors, should we be thinking about – as you go through the previous transformation plan, a new structural range so to speak as far as the level of sub-contractor expenses?

I think, these two have in the close to 7% several quarters ago and they’ve got moderated to late – early 5%. I think at the same time, during the last 12 months or so, we also have seen certain changes in the United States. And so it put a certain lead time for the visas and while we have accelerated the localization and local hiring, and still we need certain, you need to meet certain immediate project requirements especially in digital and niche areas. So, that is the reason, we have had and they also had certain elevated level of attrition on-site. So, a combination of these two factors that has led to an incremental uptick in the sub-contractor to 7.4%. And nevertheless, I think as we have seen certain net addition improving during Q2 which will play into Q3, we are closely monitoring that. Having said that, in the mere one or two quarters we don’t see significant change from the current levels.

Bryan Bergin, are you done with your questions?

Yes, thank you.

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

Thank you very much.

Thank you. Ladies and gentlemen, on behalf of Infosys, that concludes this conference call. Thank you for joining us and you may now disconnect your lines.