Gaurav Rateria: Last question on your comment on one of the drivers for margin medium-term improvement was gen AI related automation related savings. How confident you are to retain these savings as quite possibly these get renegotiated over a period of time, and the clients kind of extract that back from the vendors? So just trying to understand, is this going to be sustainably, an important driver for margin improvement in the medium term? Thank you.
Jayesh Sanghrajka: So Gaurav, I think there the things will evolve over a period of time. At this point in time, we are able to retain part of the automation AI, gen AI part of the work that we are doing. But yes, you know, how it will evolve over a period of time is yet to be seen.
Operator: Gaurav, do you have any follow-up questions?
Gaurav Rateria: Thank you. That’s all from me. Thank you.
Operator: Thank you. The next question is from the line of Bryan Bergin from TD Cowen. Please go ahead.
Bryan Bergin: Hi, good evening. Thank you. First one on the workforce. So understanding you have still some room for utilization to move higher, but do you expect that the June quarter headcount might stabilize, or may that still be declining sequentially?
Jayesh Sanghrajka: So Bryan, on the utilization, we are currently at 82% excluding trainees and 83.5% including trainees. So we still have a headroom there as I mentioned earlier. We think, we can go up to 84%, 85% utilization.
Bryan Bergin: Okay. So implying headcount may continue to decline sequentially if that’s the case in usual and normal course on attrition?
Jayesh Sanghrajka: Yes, and coming back to the other question on headcount, if you look at through the year, we started the year with 77% utilization, and the demand environment was different. So, we had a different expectation, through the year that demand environment has changed. So that has impacted the headcount – or the need of the headcount. The attrition has significantly come down. We are now trending at around 12.6%. Plus, we got some benefit from our value-based selling in terms of pricing. So all of that has also resulted in a lesser requirement in terms of headcount. And that’s why you see a net negative. Going forward, again, as I said, we still have some headroom on utilization. So we will tap into that. We will look into demand. And over the years, we have moved to an agile hiring model, where we hire large number, we can hire large number of freshers of the campus. So, we will tap into that as required as we go through the year.
Bryan Bergin: Okay. Okay. I appreciate that detail. And then just on backlog. So you continue to post really strong large deal signings, it’s clearly not yet converting to revenue at the same pace. But maybe we can dig in a little bit on backlog trends. Has there been any material backlog degradation or leakage? Is it just significant widening in average duration? Just anything you do to help us understand some of the moving parts that are designed to revenue growth?
Jayesh Sanghrajka: I don’t think there is anything beyond what Salil mentioned earlier in the call in terms of discretionary coming down. There are no material, large deal being stopped, et cetera. So it’s just a discretionary ramp down – that is resulting into this.
Bryan Bergin: Okay. Thank you.
Operator: Thank you. Next question is from the line of Ashwin Mehta from Ambit Capital. Please go ahead.
Ashwin Mehta: Hi, thanks for the opportunity. Would like to ask this question a different way? You have close to $9.2 billion of net new deals in FY ’24. In addition, you will have net new from smaller deals as well, which you do not report. And in addition, there’ll be more deal signings in FY ’25. Plus, we’ve indicated most of the 2Q deal flow will ramp in FY ’25. So assuming whatever duration, I think the guidance should have been more. But where are the leakages in the existing business, and is discretionary demand worse in FY ’25 versus FY ’24?
Salil Parekh: So hi, this is Salil. Let me start. I think the point on the discretionary outlook, or digital transformation outlook, we find it similar to what we’ve been seeing in this Q4 and Q3. So, we don’t see a change in that. And that’s what we’ve factored in to how we’ve built the guidance, keeping in mind some of the benefits of the large deals.
Ashwin Mehta: Okay. My second question was, in terms of the 100 bps impact on margins, because of renegotiation, will that reverse immediately for us in 1Q or will it take time in terms of recovering?
Jayesh Sanghrajka: So, this is Jayesh here. This is one-time impact, because of re-scoping and renegotiation. There is no reversal happening of this.
Ashwin Mehta: Okay. Okay. And the last one, if I can squeeze the agile model of hiring is for freshers, which would typically take six to nine months to get productive. So is there a need to hire lateral as you go forward? Or from this year’s perspective, given there – our guidance is lateral hiring will be pretty limited?
Jayesh Sanghrajka: So, I mean see, lateral hiring, you don’t really need to plan a year in advance, right. In offshore, you can hire technically laterals, two to three months ahead of time. And onshore, you can hire one to one and a half months ahead of time. So that’s how we will keep tweaking the model as we go through the year. So there’s no, I mean, we have baked in what we see in terms of demand today. And if the demand environment changes, the hiring numbers will change accordingly.
Ashwin Mehta: Okay. Fair enough. Thanks a lot.
Jayesh Sanghrajka: Thanks, Ashwin.
Operator: Thank you. The next question is from the line of Sandeep Shah from Equirus Securities. Please go ahead.
Sandeep Shah: Yes, thanks. Thanks for the opportunity. My question is in terms of the impact on discretionary projects. If you look at the pace, the growth, slowdown for Infosys and maybe for the industry has started from 4Q, of FY ’23. And most of the reasons cited by you and the others are declining discretionary spend, which is impacting five quarters in a row for the industry, in terms of the discretionary spend. So the question is whether the pace of decline, the leakage in the discretionary projects entering FY ’25 would be similar to what we have seen in whole of FY ’24 starting with the 4Q, FY ’23 week exit rate?
Salil Parekh: Hi, this is Salil. I think what we are seeing is the way clients are looking at their discretionary work, or digital transformation work is quite similar to the recent quarter. So we have no comments specifically on things, which were like from three, four quarters back. We are more seeing how it’s changing, or not changing in like Q4, Q3 versus what we are seeing today, for the next period in financial year ’25.
Sandeep Shah: Okay. Okay. And the second question, Jayesh, just wanted to understand regarding the reversal of 100 bps on the revenue, what could be the impact related to 1Q to 3Q, or earlier quarters, which has been accounted in the fourth quarter, which could have been reversed in the first quarter of FY ’25?
Jayesh Sanghrajka: Sandeep, this is a renegotiation and re-scoping that has happened this quarter and the impact is taken in this quarter. We haven’t broken down into how much of this quarter and how much of the prior quarters.
Sandeep Shah: Okay. But is it fair to say fourth quarter will also include some reversal of the earlier quarters?
Jayesh Sanghrajka: We are not breaking it down further, Sandeep.
Sandeep Shah: Okay. Thanks, thanks. And congratulations, Jayesh.
Jayesh Sanghrajka: Thank you, Sandeep.
Operator: Thank you. Next question is from the line of Vibhor Singhal from Nuvama Equities. Please go ahead.
Vibhor Singhal: Yes, hi. Thanks for taking my question. So then my question was mainly on, if I could basically get an idea on a line item, which is your priority items not for service – clients. Now, I know we mentioned in the past that it’s become a strategic part of our business, and but if I look at this number compared to the last two years, it has gone up from around 4.5% of the revenue to around 7.5% today. It’s a sizable number at this point of time for the two years that I’m talking about. And typically these things would come at very little margin. Is this increasing part of this, as part of our revenue, hampering our ability to expand margins to what we could do? So, what I mean to say is that this becoming a part of our strategic business strategy, is that in some way hampering – our ability to expand margins from the levels that they are?
Jayesh Sanghrajka: Vibhor, it was very difficult to hear you. If you could come closer to the mic and repeat your question, please.
Vibhor Singhal: I’m so sorry. Am I better now? Is it better audio?
Jayesh Sanghrajka: Yes.
Vibhor Singhal: Yes. Okay. I’m so sorry. So what I wanted to ask was that if I look at this line item called third-party items, what for service-delivery to clients, which is essentially what we call – revenues. Now, that has increased significantly over the past three years, from 4.5% to 7.5%. Now, I know in the earlier quarters, you’ve called it out that it’s now a strategic part of our business. Be that as it may, this changing nature of our business in, which this is becoming an increasingly higher part of our revenue, does that impact our ability to expand our margins from the levels that they are today? Because as far as we know, these come at very little margin as compared to the overall company margin. And is this a trend that – we can expect to continue and this line item to continue increasing as a percentage of revenue going forward as well?
Jayesh Sanghrajka: So Vibhor, if you are undertaking transformation, large mega deals, it comes with all the costs. It’s not only effort costs, it comes with hardware, software costs, because you are taking over the turnkey project from the client. And that becomes an integral part of the project delivery. And as a result, you have to procure some of that, and provide the end-to-end services to the client. And that’s where you see this cost. The good part about this is that, these kind of businesses become very, very sticky businesses with the client and long-term commitments from the client. And so it’s a long-term business. So, far as we are making overall margins on the deal, that’s how we look at it. We don’t look at it, whether it is third-party cost or subcon costs or effort cost only.
We look at it whether we are making an overall margin on the deal, while deciding whether we want to go for a deal or not. More importantly, most of these deals that we have taken, we have got much more work from them, or significantly more work from them in the surround environment from the client, which is how we look at it as a portfolio of the business.
Vibhor Singhal: Got it.
Jayesh Sanghrajka: We don’t have a view in terms of whether – and whether it will remain at the same level or elevated level. It will depend on the kind and nature of these – and how we sign it in the future.
Vibhor Singhal: Got it. I think you preempted my next question. Thanks for that. But just one more question on the subcontractors. Subcontractors have actually come down over the past couple of years, from an overall percentage point of view. But it is still, I would say, higher than what we have historically done pre-COVID numbers. So where do you believe, where are we comfortable with this number? And given that generally at this point of time, given the revenue growth is quite low, the demand environment in terms of our work that we require is not that high, given our guidance of 1% to 3%. Do you believe there is scope for further reduction in the subcontracting cost from the current levels? Or do you believe that 8% that we are today, we kind of hit the number that hit the bottom and it’s probably going to stabilize at this level?
Jayesh Sanghrajka: Yes, so Vibhor, this is one of the tracks under Project Maximus, under the efficient pyramid of reducing subcontractors. We have reduced subcontractors from the peak of last year by almost 3%. Historically, in the past, we have operated in 5% to 6%. So, we believe there is some headroom to bring that down.
