Infosys Ltd

NSE:INFY

Earnings Call Transcript 2021-Q2

[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]

Thanks, Margaret. Hello, everyone, and welcome to Infosys earnings call to discuss Q2 FY '21 financial results. I'm 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. Nilanjan Roy; along with other members of the senior management team. We'll initiate the call with some remarks on the performance of the company by Salil, Pravin and Nilanjan on the most recently concluded quarter before opening 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 complete 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 Salil.

[Salil Satish Parekh, MD, CEO & Director]

Thanks, Sandeep. Good evening and good morning to everyone on the call. I trust each of you are safe and healthy.We've had an exceptional quarter in the second quarter across multiple dimensions; client impact, revenues, digital scaling, large deal wins, continued account expansion, operating margin expansion, strong cash flows and reduction in employee attrition. I'm grateful to our clients for their continued trust in us, and I'm proud of our team for their incredible commitment to our clients.Let me share with you some of the highlights for Q2.Revenues in constant currency grew at 2.2% year-on-year and 4% sequentially on the back of a very strong Q1. Our growth for H1 over H1 was 1.9% in constant currency terms. Digital revenues grew at 25.4% year-on-year in constant currency, and now accounts for 47.3% of our revenues. We delivered operating margin of 25.4%, which is an expansion of 370 basis points year-on-year and 270 basis points sequentially. This was achieved after rewarding our employees with variable pay at 100% and awarding a onetime special bonus.Large deal wins, which are wins of work above USD 50 million in TCV per contract, were at $3.15 billion. Large deal pipeline remains strong as clients look at accelerating digital transformation programs and continuing their focus on automation and cost efficiency.Our voluntary attrition in IT services is at 7.8%. Our operating cash flow was at $793 million, a 53 -- 52% increase year-on-year. Our balance sheet remains strong with cash and investments position at $4.6 billion, with no debt.Our industry-leading performance over the first half of this year has been due to the immense commitment of our over 240,000 employees. Recognizing the continuing stellar contribution from our employees during these times, we are paying out a variable pay for the quarter at 100%. We will pay a onetime special incentive in Q3 for our junior-level employees. The salary increase process will restart now and will be effective as of January 1, 2021. We restarted promotions in the last quarter at our junior levels. This will now be expanded across all levels. I'm thankful to each one of our employees for staying deeply committed to serving our clients, as they themselves navigated their own personal challenges associated with the ongoing COVID situation and a remote operating model.We launched Infosys Cobalt, where we brought together all our cloud services, platforms and solutions, to support our clients in accelerating their cloud journey and reducing the risk to their cloud programs. Cobalt has 200 industry templates and 14,000 cloud components available to our clients for their cloud choice programs. Cobalt is built with strong partnerships with leading SaaS, PaaS and infra-as-a-service companies across public, private and hybrid cloud environments.In Q2, we took another large step in our local hiring plans in the U.S. In the past 3 years, we've launched 6 digital centers in the U.S. and hired over 13,000 U.S. workers. We now announced plans to hire an additional 12,000 U.S. workers over the next 2 years, bringing a hiring commitment in the U.S. to 25,000 over 5 years. We believe our localization approach is a significant market differentiator and will help us better navigate regulatory changes. The sustained localization investments will ensure that we are able to continue servicing our clients across markets with the combination of local and global talent.The past 3 months also saw us announce 3 acquisitions: guidewire -- GuideVision, focused on ServiceNow; Blue Acorn, focused on Adobe; and Kaleidoscope, focused on medical product design. Our service delivery continues to be exceptional. The feedback from clients remains positive, and the dedication of employees is tremendous. Today, 99% of our workforce continues to work from home. Our results in Q2 are a combination of our continued focus on the needs of our clients, steady execution, and a clear strategy to build a digital and cloud-aligned company.Looking ahead, we continue to see strong traction in our business. We increased our revenue guidance for the full year, from 0% to 2%, moving it to 2% to 3% growth in constant currency year-over-year. We increased our operating margin guidance for the full year, from 21% to 23%, moving it to 23% to 24% for the full year.Thank you. And now let me request Pravin to update you on our operations. Over to you, Pravin.

[U. B. Pravin Rao, COO & Whole]

Thank you, Salil. Hello, everyone. Hope you are all well and safe. As we continue to wait through the continuing complexities posed by the pandemic, our rock-solid focus on client relevance and employee well-being is helping us navigate this challenge successfully. With most of our delivery centers across the globe remaining closed, the vast majority of our employees are working effectively from home. And we are making all efforts to ensure ease of work delivery in a secure manner.Growth accelerated during the quarter as economies across the world started opening up gradually and clients focused on technology to help overcome the impediments. Revenues increased by 4% sequentially on constant currency, on top of the robust performance in quarter 1. Year-on-year growth continued to remain positive and increased further to 2.2% in constant currency. Quarter 2 revenues included only a marginal contribution from the Vanguard deal, which should start ramping up from quarter 3 onwards.Several operating parameters improved during the quarter; utilization, onshore delivery share, RPP and subcon costs. Utilization in quarter 2 improved by 240 bps to 83.6%, mainly on account of improvement in offshore utilization. On-site/offshore effort mix improved by 190 bps to 26.1%, the lowest ever. RPP also improved both on year-on-year and sequential basis.Client metrics remained strong. We added 96 clients during the quarter, while the number of $100 million clients increased by 5 sequentially, to reach 30 at the end of quarter 2. Large deal wins in quarter 2 was the highest ever at $3.15 billion. We won 16 large deals in quarter 2; out of which 6 deals were in Financial Services, 3 deals in Retail, 2 deals each in Communication and Hi-Tech and 1 deal each in Energy, Utility, Resource & Services, Manufacturing and others. Region-wise, 11 were from Americas, 4 were from Europe and 1 from rest of the world. Share of new deals was 86%.Voluntary attrition for IT services declined to 7.8%, and significantly lower than our comfort band of 14% to 15%.Recognizing the stellar efforts of our employees, which has been the key reason for our strong performance in last 6 months, we have decided to effect salary increase across all levels, effective January 1, 2021. We are paying 100% variable pay for quarter 2, along with a special incentive, which will be paid to employees in lower levels.Recently, the U.S. Department of Labor and Homeland Security issued 2 separate rules restricting the H-1B visa program on both scrutinizing qualifications and mandating significantly higher wages. However, our dedicated focus over the past 3 years on a local American workforce and our technology and innovation hubs across the U.S. gives us the ability to navigate across this new regulatory terrain.Moving to business segments. Financial Services saw a continued improvement in performance, both on year-on-year and sequential basis. The uptick in business has been in areas that banks are investing in significantly post COVID, such as mortgage servicing, call center technology and operations, lending services to cater to various government relief programs, as well as pickup of large digital transformation programs. We have signed 6 large deals in this segment in the last quarter, including the Vanguard deal. This should propel revenue growth for Financial Services in the coming quarters.Finacle, our award-winning banking platform, has received multiple industry recognitions during the quarter and is seeing lot of tractions as banks across the world embark on their digital transformation.We have also started seeing some momentum back in Retail with increased volumes in quarter 2 and ramp-up of earlier deal wins. We, however, remain cautious on this segment given continuing demand and liquidity issues and possibly increased furloughs in the coming months.Performance in Communications segment remained weak, given pressure on spending, especially in media, entertainment, advertising and OEM segments. We continue to have a strong pipeline of deals in this segment and have won 2 large deals in the last quarter, which should help in stabilizing performance for this segment.Energy, Utility, Resources and Services vertical is also under pressure due to constrained spending in the Oil and Gas, Travel and Hospitality, and Resources sector. However, the current volatility is presenting significant opportunities for cost takeout, and we continue to build a strong pipeline.Manufacturing segment was stable during the quarter, which is a massive improvement from the sequential decline in quarter 1. While there are disruptions across that segment, we are seeing opening up of pockets, although the pace of recovery may remain sluggish. Cost takeout is a major focus for our clients across sectors. We expect gradual improvement in these segments with recovery in volumes and robust new account openings. The deal pipeline remains at a healthy level and makes us hopeful of the future prospects.Our Digital portfolio is growing strong at over 25% year-on-year in constant currency and now constitutes 47.3% of overall revenues. In the last quarter, we have been rated as leader in 11 services-related capabilities across digital pentagon areas by industry analysts.Lastly, my heartfelt condolences to the families of 5 of our colleagues whom we have lost due to the pandemic. We stand together and are extending all possible support to their families during these trying times.With that, I will hand over to Nilanjan.

[Nilanjan Roy, Chief Financial Officer]

Thanks, Pravin. Hi, everyone. I hope all of you are well and safe with your families and loved ones.On the back of a strong quarter 1, quarter 2 continues to show up improving performance, with our unwavering focus on client relevance, operational excellence, costs and liquidity management. Revenues for the quarter grew 4% sequentially in constant currency. This translates to a 2.2% growth year-on-year and 1.9% for H1 year-on-year in constant currency. Operating margins expanded by 270 basis points sequentially to 25.4%. The sequential improvement in margins was led by a 100 basis points improvement due to increase in RPP, 80 bps due to a 2.4% increase in utilization and 80 bps due to a 1.9% improvement in on-site/offshore mix, partly due to the temporary travel restrictions. Benefits from reduction in SG&A and other expenses were offset by increase in depreciation and amortization and cross-currency headwinds. Improved Q2 margin performance has consequently led to H1 operating margins at 24.1%, higher than the 21% to 23% band and 3% higher compared to 21.1% reported for the comparative prior period. As some of the margin improvement had arisen from the cost deferrals, et cetera, we expect some of these benefits to shrink in quarter 2 as we roll out promotions and salary hikes for employees, commence hiring across the organization, with higher travel and overhead costs. All this will consequently impact H2 margins. Q2 EPS grew by 14.9% in dollar terms and by 20.8% in INR on a year-on-year basis. H1 EPS grew by 9.5% in dollar terms and 17.1% in INR on a year-on-year basis. Collections remained robust, with DSO reducing by 2 days to 69. The increase in CapEx spend during the quarter was mainly towards technological enablement of our employees.FCF for quarter 2 was a healthy $674 million, which is a growth of 70% year-on-year and 59% in H1 growth of year-on-year. Free cash flow as a percentage of net profit was 103% for Q2 and 116% for H1. Return on equity increased to 26.7% compared to 25.1% in the prior year.We continue to maintain a very strong debt-free and liquid balance sheet. Cash and investments at the end of quarter 2 were $4.55 billion. Yield on cash balance improved to 6.33% in Q2 compared to 6.11% in the previous quarter. Quarter 2 marked the 21st consecutive quarter of positive ForEx income despite significant currency volatility across the globe. Consistent with the improved cash flow and our capital allocation policy, the Board has declared an interim dividend of INR 12, which is a 50% growth over the interim dividend per share of FY '20.Based on the strong performance in H1, we are increasing our guidance on revenue for FY '21 to 2% to 3% in constant currency terms from the previously announced 0% to 2%. We are also increasing the margin guidance for this year, from 21% to 23%, to 23% to 24%.With that, we can open up the call for questions.

[Operator]

[Operator Instructions] The first question is from the line of Yogesh Aggarwal from HSBC.

[Yogesh Aggarwal, Head of India Research and India Tech Analyst]

Just 2 clarifications, if I may. Firstly, while you have upgraded the guidance, the second half implied guidance doesn't look that strong, largely in line with the seasonality, despite such strong deal wins. And there is a little bit contribution, hopefully, from the acquisitions as well. So are you expecting some decline in certain verticals going forward? And secondly, on the cost front, Nilanjan, employee cost is down actually quarter-on-quarter. This is despite the bonus and special incentives. So is that largely the offshore mix?

[Salil Satish Parekh, MD, CEO & Director]

Thanks, Yogesh. This is Salil. Let me start with the first one. We see for all the Q3 and Q4 steadily improving quarter-on-quarter activity in different industries. For example, Hi-Tech is looking strong, as Pravin mentioned. Life Sciences is good. Financial Services stable. Retail also now starting to see some progress. However, there are furlough impact in Q3 normally. And traditionally, Q4 has always been a soft quarter for Infosys. So we don't see anything negative in the outlook. And in fact, we've raised our guidance, keeping very much in mind the strong demand that you see and the good conversion, large deals that we have in place.For the second part, Nilanjan, over to you.

[Nilanjan Roy, Chief Financial Officer]

Yes, Yogesh. So if you see from a net headcount, we only added about 1,000 people, so this was less than 0.5%. So there was not much of a headcount change. But in -- absolutely, you're right, the on-site/offshore mix has helped the overall employee cost to come down. But like you said, this is temporary due to the travel restrictions imposed.

[Operator]

The next question is from the line of Nitin Padmanabhan from Investec.

[Nitin Padmanabhan, Analyst]

Congrats on a great quarter. I had 2 questions actually. One is, on the deals that we have won so far, obviously, there's a lot that's already spoken about Vanguard. But excluding that, now what is the nature of services that you're largely seeing within these deals? Are you seeing a lot more app modernization, cloud migration? And the second is, how are clients funding these spends? You did mention that, this time, we had a onetime offshore shift because of travel restrictions. Do you see clients funding incremental spends through higher offshore shifts going forward? And these are the 2 broad questions.

[Salil Satish Parekh, MD, CEO & Director]

Thanks. This is Salil. I'll start with the first one. The types of things we're seeing in our deal pipeline and what we've closed are essentially 3 areas. One is an area which is on everything related to digital transformation, for which a large part of it is cloud and the area around cloud migration, but also cloud deployment, building cloud-first applications, rolling out SaaS, working in public and hybrid cloud -- private cloud environments. The second relates to efficiency, which is focused on automation, cost efficiency and how the IT estate can essentially be modernized in that sense and made to be more efficient for our clients. And the third, we are seeing some in the pipeline which is on consolidation, vendor consolidation, where its benefits we'll see over the next few quarters in terms of conversions, but we have discussions in those areas where we see some traction.In terms of how are the clients funding it, I think the main thesis, as you alluded, is really taking costs out of existing estate through automation or other means and funding it -- funding programs, which give growth differentiation, access and experience for our clients for their work going forward. Part of it will be the mix in offshore because, clearly, this last few months has also demonstrated what could be done in an offshore environment. But we still see despite all of that that there will be both volume growth and revenue growth, which is within our pipeline there.

[Nitin Padmanabhan, Analyst]

Sure. So I think on the offshore perspective, if I got it right, you were suggesting that the -- so far, the offshore shift is travel-restriction based, but there could be future offshore shifts based on the experience that we have seen so far. Is that the right takeaway?

[Salil Satish Parekh, MD, CEO & Director]

The on-site/offshore mix ratio is difficult to forecast in that sense. Once the travel restrictions become less, there will probably be more work on-site. Equally, structurally, there is now more understanding of what are the possibilities on offshore. So those are both countervailing in the sense of how they will play out. And the timing also will not be clear which one will happen first, at what speed, but both of those are relevant points as we look ahead into the mix.

[Operator]

The next question is from the line of Moshe Katri from Wedbush Securities.

[Moshe Katri]

Congratulations for the team. 2 questions here. One, given the fact that the M&A pace is accelerating, is there a way to quantify the expected contributions from M&A to your guidance for fiscal year '21 in terms of growth? And then just as a follow-up, did you just say that the renewal rate for bookings was, I think, 14% for the quarter, which is actually very good in terms of incremental new business?

[Salil Satish Parekh, MD, CEO & Director]

On the second one, Pravin will comment on the net new and the renewal. On the first, there were 3 M&A transactions we did over the last 3 months. I don't know if there'll be an acceleration. We have a good pipeline of deals. We've not quantified in our business model the percentage that will come in that sense from M&As. We don't have a targeted percentage from M&A. What we do have is a fairly clear view of which areas. We did something in Salesforce, in Adobe. We did something in product design. We've done something in ServiceNow. And so those are specific areas where we see tremendous growth and a good organic business within the company. So that will be the way we play. In terms of this year specifically, we don't have a target in how much will come from M&A. Pravin, on the net new, if you want to add something?

[U. B. Pravin Rao, COO & Whole]

Yes. Moshe, this is Pravin here. You're absolutely right. The net new in the total large deal TCV is 86%. And obviously, these numbers do vary quarter-on-quarter depending on the nature of deal. And there are times when a lot of renewals are due for -- come due in a particular quarter. But it's obviously a very positive thing. Higher net new is definitely good news.

[Moshe Katri]

When you look at your bid and proposal pipeline for the next 6 to 12 months, would you say that the mix is different in terms of renewals versus new deals? Is there anything different in terms of the historical mixes?

[U. B. Pravin Rao, COO & Whole]

I would say -- I mean it's a combination, right? It's finally -- I mean we have got a healthy mix of both renewals as well as net new in the mix. It's very difficult to predict the time lines when these deals will get closure. So that will probably have a bearing in terms of how -- I mean the percentage of net new. Obviously, the -- probably, I mean, if you look at historical things, maybe the percentage of net new in this pipeline is probably on a higher side. But -- I mean, at this stage, I can't really quantify how much higher it is, but it's definitely on the higher side.

[Operator]

The next question is from the line of Keith Bachman from Bank of Montreal.

[Keith Frances Bachman, MD & Senior Research Analyst]

I had a couple of questions as well. First off, could you just clarify, when you talk about in the press release, the TCV that was booked in the quarter, $3.15 billion? What was the growth rate of that year-over-year, is my first question? And the second question is related to, is there a limit that you see for offshore work? I know you said there was tension on some forces at work that would suggest more onshore work, but the cost advantage of offshore work in the quarter were 73.9%. Is there a limit on how high you think that percent could go? Any natural barriers to that moving higher, which is a significant enhancement of margin?Just got a third question out there, is -- could you tell us how many of your employees are currently using visas in the U.S.? And I'll cede the floor.

[Salil Satish Parekh, MD, CEO & Director]

Thanks for that question. This is Salil. I'll go with the second one, and then the other 2, Pravin can jump in with the answers. In terms of the offshore, is there a natural limit? I think there's certainly an ability for more of the work to be done offshore. There are different things that have opened up, as we've all learned from both the clients and us through the course of the last 6 months. So I don't see that there's some sort of a ceiling there. I think what is also critical is, as we see more and more work that's going on which relates to experience and how design is working through some of our digital studios, we see some of that work also expanding. And that work has benefits from having some proximity, and it can also be done from an offshore perspective. So specifically, we don't see, in that sense, the ceiling to the offshore work, but it's a function of how that starts to get carved out in different discussions and what the client approach is as that moves along.For the other 2, Pravin, if you want to go ahead, please.

[U. B. Pravin Rao, COO & Whole]

See, on the first question, on year-on-year when compared with large deals, I'm just getting that number. I'll come back to you before the call end.

[Nilanjan Roy, Chief Financial Officer]

Pravin, Pravin, I can just chip in quickly on that. So we did last year 2.8, this year 3.1. But the big difference is, last year, we only did 11% of net new in the figure. We are now 86%. So the quality of the order book has dramatically improved.

[U. B. Pravin Rao, COO & Whole]

And what was the third question?

[Keith Frances Bachman, MD & Senior Research Analyst]

Number of visas that are currently at use of your employee base in the U.S., either net new or renewals that are -- but just current number of employees out of your employee base that are subject to visas in the U.S.?

[U. B. Pravin Rao, COO & Whole]

Yes.

[Nilanjan Roy, Chief Financial Officer]

So in that -- go ahead.

[U. B. Pravin Rao, COO & Whole]

Yes. Go ahead, Nilanjan.

[Nilanjan Roy, Chief Financial Officer]

Yes. So as we mentioned, what we call visa-dependent employees in the U.S., currently, we are at about 37%.

[Operator]

The next question is from the line of Sandip Agarwal from Edelweiss.

[Sandip Kumar Agarwal, Vice President]

And first of all, congrats on excellent execution and excellent numbers. I also wish all Infoscions good health. And also very good gesture by management of rewarding employees in line with world-class technology companies like Amazon. I have just 2 questions. One is the leakage in core has still been quite high in the current quarter also. And all our strong growth and good work on digital is still get hurt because of that. So when do you think this will probably stabilize? Or you think it will continue for long in the same way? I am asking this question as our small competitors like EPAM and others in other geographies, they are growing probably at the same percentage at a much lower base, but they have this advantage of core not being hurting them? That is question #1. And question #2, do you think pandemic has put cloud on a faster acceleration than even digital now and we will see those benefits going forward? And also, if you can finally answer on the attrition, what is your understanding on attrition level going forward, whether you are okay with this 7.5% kind of rate or you think it will shoot up to low double digits?

[Salil Satish Parekh, MD, CEO & Director]

Thanks, Sandip. This is Salil. I'll answer the second one on the digital and cloud, and the first and the third, Pravin will come back.The way we are seeing, first, overall, digital growth continues to be robust at 25%. I think you are right, we see our clients are adopting cloud at a faster pace. In keeping with some of that and our own capabilities, we launched our own cloud set of assets under the name of Infosys Cobalt. We see a tremendous traction on the cloud side, and we feel in quite good shape in many places. And some of the acquisitions we are doing are also further strengthening already where we are good and where we can expand faster. So cloud is definitely something that's working well, and we believe, obviously, will work for the next several years.So Pravin, over to you, please.

[U. B. Pravin Rao, COO & Whole]

Yes. See, on the core shrinkage, I mean, today, when we look at what's happening, clients are investing in technology to deal with the pandemic, building resiliencies, fixing supply chain issues and so on. And in fact, we are seeing tremendous uptick in digital transformation of workplace, which started about a couple of years back, and this pandemic has only accelerated it as every client is looking at how to become different in the post-COVID world. Obviously, the IT spend is not increasing. So they are really funding this digital transformation initiatives by taking costs out from the core to automation and other means. So that's one aspect of it. And secondly, in general, I think the IT spend is always a percentage of overall revenues. And more often than not, it remains the same steady percentage. And people are able to fund some of the discretionary spend or digital spends by repurposing from taking away from core. So you will always see -- as your digital share increases, you will always see the core shrinking because you're really talking about the same pie. But as long as your overall growth -- you're also seeing overall growth, then it's positive for us. And even, in fact, wherever we are seeing some of our core shrinking, we also have a play because part of the core shrinking is also because we are proactively taking ideas to customers, taking costs out and other thing. And in many of the large deals, with almost every large deal win that we win also has an element of modernization of legacy. So that means that part of the core gets modernized, and now that gets counted under digital. So the way to look at it is you have -- I mean you have a IT spend. And within the IT spend, clients actually mix between core -- and I mean they'll invest some in core, but they will also look at how to optimize core so that they can fund some of the newer technologies and some of the discretionary spends that they need to stay competitive. So as long as we continue to grow and we continue to have a role to play both in terms of core as well as in the digital spend, then I think we are -- we view it as a very positive thing.Now on the attrition, obviously, the attrition that we have today is one of the lowest we have seen in the history of Infosys. I mean it's a combination of 2 things. One, obviously, is the combination of the market, but it's also how we have reacted to the pandemic, the focus that we have put in terms of employee welfare, a lot of engagements with the employees in the virtual world. We're also focused -- we also recognize that the employees have been under stress. So there's a lot of focus on both physical and mental wellness and so on. We have launched more than 200 interventions, combination of -- I mean, involving families. And we have also supported them a lot during the pandemic, particularly in cases where employees have tested positive and so on. It's a combination employees are really appreciative of how the company has gone beyond this one in terms of enabling them to work from home as well as dealing with the current crisis. But the reality is, once the market opens up, there will be some amount of attrition going up because there will definitely be a war for talent. So our sense is over a period of time, it will probably go back to maybe, I mean, low single digits, as you talked about, which has always been our comfort zone over the years.

[Operator]

The next question is from the line of Bryan Bergin from Cowen and Company.

[Bryan C. Bergin, MD & Analyst]

I wanted to ask first on margin sustainability. So understanding you have some benefits that dissipate in the second half, but really based on how you're delivering projects today and how clients have become more accepting of virtual delivery, how should we think about the sustainability of some of the cost factors here as operations normalize? Is there any ability to give us a sense on how much of a mix of the margin expansion you've shown is lasting versus short term?

[Nilanjan Roy, Chief Financial Officer]

Yes. So ...

[Salil Satish Parekh, MD, CEO & Director]

Nilanjan, do you want to go ahead?

[Nilanjan Roy, Chief Financial Officer]

Yes, yes. I'll go with that. Yes. So like I mentioned in my speech, that we have seen this benefit both of our 3 levers, which we kick-started at the beginning of the year. First was the cost deferrals, which we've talked about in terms of promotions, the wage hikes, the recruitment fees, which we had implemented at the beginning of the quarter -- first quarter. And clearly, we see that coming back and which will start impacting the margins. It has helped us in the first half, but it will start impacting the margins. We've talked about that from 1st of January we will roll out wage hikes across all levels. We've also mentioned that the promotions, which had been limited largely to the junior level employees, will now be across. So we will see a headwind from that. Second is, also, we had cut discretionary expenditure like travel, and you can see that in our results. Our cost travel has come down dramatically. Some of the more discretionary expenditure like brand building, et cetera, also cut back. We will see some of that going up as well. Third is the strategic cost lever, which for us is the most important. And this is an ongoing program, which we have around the offshore/on-site mix. We have seen some benefits of that temporarily. And as Salil had mentioned in an earlier question, we will see some timing issues of that as travel returns. But strategically, we have seen that coming down over a period of time. And our intent remains to continue to see that on-site/offshore mix changing. Second is a pyramid. I think we've done a lot of work around the broad-basing the pyramid offshore. And now looking at that for the on-site as well, the hub strategy really helps us in inculcating freshers from community colleges, et cetera, and the on-site pyramid as well. Automation remains at the heart. We continue to get more and more productive and efficient for our clients. Some of that is passed back to our clients at discounts and improved productivity. And part of that is a margin improvement strategically. So these are the different strategic levers. So we -- as we've talked about the 3-pronged approach, we will see some of this come back, but it's premature to say that how much of this is sustainable. Work from home is very, very premature as of now in terms of what does it do for facilities or travel. But we think that some of this will come back. And if we move to a hybrid model, which remains to be seen, how much of that benefits we can keep. And we will have to invest more in technology, in communication and security. So there may have been a -- there may be some balancing there as well. So a bit premature to talk about that.

[Bryan C. Bergin, MD & Analyst]

Just to clarify. For that last bucket or that last prong around strategic levers, how much was the benefit year-over-year in margin from some of those actions -- from the operational actions?

[Nilanjan Roy, Chief Financial Officer]

I don't think we've given this number out before. But I can tell you the year before that, in the fiscal '20, we gave -- we had set out a target of $150 million of savings, and we had overachieved against that number.

[Bryan C. Bergin, MD & Analyst]

Okay. And then 2 quick house coupling -- housekeeping ones I may have missed here. Did you say how much the Vanguard deal was within the $3.15 billion of signings? And how much is the inorganic included in your updated '21 revenue growth outlook?

[Nilanjan Roy, Chief Financial Officer]

We haven't, and we don't mention the deal sizes, that's number one. Number two is in terms of inorganic, it's a very, very small portion. Many of them have just kicked off in terms of the signing implementation. So that impact is going to be very marginal for the rest of the year.

[Operator]

The next question is from the line of Kawaljeet Saluja from Kotak.

[Kawaljeet Saluja, Senior Executive Director & Head of Research]

And congratulations to the management team on a fantastic quarter. My question is also on profitability. Now I understand that certain cost deferrals have led to an increase in the margin band this year. But at the end of the day for Infosys, the margin band has kept on bouncing around quite a bit in the last 3 to 4 years. Now many of our companies work with a certain aspirational margin band. So how should really one really think about the current year's margin band increase? And should that if -- I mean one assume as a more sustainable band going forward? Or any thoughts on this will be welcome.

[Nilanjan Roy, Chief Financial Officer]

Yes, Kawal. So I think we've been very focused over the last 2 years in the margin guidance band on 21% to 23% because the year prior to that, when we rolled out the new strategy, this was about making the investments in the hubs in the Salesforce side, and clearly, that -- which had an impact on margin. So we've been very, very conscious that we need to get the stability in margins, and this is why the 21% to 23% margin guidance was given in the prior 2 years. And for us, that is the most critical part, is to continue to show stability rather than exactly what you mentioned, was much more volatile. Clearly, this is an exceptional year in more ways than one, with so many moving parts and variable elements. Many of these, like I said, will not be sustainable. They are one-timers in terms of deferrals. So things will come back to normal. But for us, we are confident that our strategic levers will continue to help us, making sure that we continue to stay in a steady and a stabilized margin environment. As well, of course, aspiration is always to improve margins. But in no way can we take the 23% to 24% as something which you can model and go ahead from.

[Kawaljeet Saluja, Senior Executive Director & Head of Research]

Sorry. Did you say that 23%, 24% is the sustainable margin band to model going forward?

[Nilanjan Roy, Chief Financial Officer]

No, no. I said there is no way that you can take the 23% to 24% as a sustainable number going forward.

[Kawaljeet Saluja, Senior Executive Director & Head of Research]

Okay. That absolutely helps. The second thing is, I was surprised with the increase in RPP. I thought that we are living in a recessionary -- I mean, actually, we are in recession. And against that backdrop, the increase in RPP is a remarkable achievement. Is that largely operations led? And do cost takeout figure in client discussions quite a lot? And if yes, I mean should that -- when does the impact of that really come in into RPP going forward?

[Nilanjan Roy, Chief Financial Officer]

Yes. So in the RPP.

[Salil Satish Parekh, MD, CEO & Director]

Go ahead. Go ahead, Nilanjan.

[Nilanjan Roy, Chief Financial Officer]

Yes. I'll answer the first one. The second, if Salil, you can take. This is the first one, quickly on RPP, the 100 bps, it's a combination of multiple factors. I think one is, of course, the days impact during this quarter. We have seen some improvement in productivity as well through our automation. And so I think these are 2 large ones. A slightly more moderated discount environment. But like I said, discounts always are not secular. So you can always see these ups and downs as well. So these are the 3 large carve-outs within that 100 basis points. Salil, you can take the other one.

[Salil Satish Parekh, MD, CEO & Director]

Thanks. Kawal, the point on the cost discounts versus RPP with client discussions, I think as Nilanjan was sharing, the environment in Q2, especially has been quite stable vis-à-vis discounts is, what I mean is, not anything unusual. It's been a small number anecdotal, and so we feel quite comfortable at this stage, and there's none of that a large sort of thing coming in into the RPP. But as Nilanjan explained, there were some specific reasons. We're also quite focused on RPP. So we're going to make sure, over time, we find a sustained method of doing it. So we'll watch and see how that goes over the next few quarters.

[Operator]

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

[Diviya Nagarajan, Executive Director and Research Analyst]

Congrats on a blowout quarter this quarter. I think most of my questions have been discussed. So let me focus on another topic here, which is your headcount. I think Nilanjan earlier pointed out that this quarter, we have seen fairly muted headcount addition. How do you see this in the next -- in the rest of the year? That's first part of my question.And secondly, I appreciate that you said that there are some strategic cost levers and there are some that you cannot predict given the fluidity of the situation. I heard you quote a $50 million target that you were looking at for your strategic cost initiative savings. How has that trended so far? What is that target? Could you quantify that, please?

[Salil Satish Parekh, MD, CEO & Director]

On the first one, Pravin, you want to go ahead?

[U. B. Pravin Rao, COO & Whole]

Yes, yes. Yes. This is Pravin here. On the headcount, obviously, the headcount increase in -- will be in line with the growth. This quarter, we had 5,500 additions, about 3,000 were freshers, both in India and abroad, and about 2,500 laterals. Our utilization, if you recall, was much lower in quarter 1, and it has improved significantly. So the number of hiring was on the lower side this quarter. So hiring in subsequent quarters, the quarter 4 will obviously be dependent on the growth. In terms of freshers in India, this year, we expect to add about -- onboard about 16,500 people. And next year, we are planning to add another 15,000 people. This is mainly freshers in India.

[Nilanjan Roy, Chief Financial Officer]

Diviya, on your question on your -- sorry, quickly, I'll finish the cost optimization part. So we were $150 million. We exceeded that. I think we are well on our way of doing similar numbers this year, well above $150 million. But like I said, a lot of this then gets compensated by price and wage hikes, et cetera. So it's not that all this money flows into the bank.

[Diviya Nagarajan, Executive Director and Research Analyst]

Fair enough. And Salil, back to the digital growth numbers that you've seen. We've seen a fairly steady 25% kind of growth number on the digital side. Given that there is definitely a scenario where we're looking at possible acceleration in digital spends overall, how do you see the scope for this number accelerating in the next 12, 24 months?

[Salil Satish Parekh, MD, CEO & Director]

So there, Diviya, I think we had -- if you look in the previous financial year numbers, our growth number is around 30%, 35%, in one of the quarters before that even higher. But there are 2 factors; one, our size of this digital also is -- at large is pretty close to half our company today. That's a big -- practically, over $6 billion business, growing at 25%, which is quite remarkable. So that has its own sets of constraints, especially in services type of companies. And second is the underlying secular trend, which, today, as we were discussing earlier, the cloud part of digital is on a terrific growth in terms of the market, in terms of what clients are doing, in terms of what the large partners of -- are doing. And then there are other areas, for example, on data, on experience, which are in good traction. So we'll obviously try to drive that faster still. But we also have a large size. So we have to find a way to keep it at this level as well.

[Diviya Nagarajan, Executive Director and Research Analyst]

Sorry, if I may just sneak in one last question. You did talk about how legacy is likely to kind of be taken out, the core gets modernized, and therefore, that trend of negative momentum that we have seen could continue. But we have seen in the last 2 quarters the pace of core decline accelerate. Do you expect that will kind of stabilize and go back to where it was pre-COVID as customers start to stabilize?

[Salil Satish Parekh, MD, CEO & Director]

On that -- go ahead with that, Pravin.

[U. B. Pravin Rao, COO & Whole]

Okay. I can take a shot at this. Salil, you can add. My own sense is, I think, given the nature of the pandemic and how clients are reacting to it, you will see a lot more of spend on technology. And clients also realize that for them to implement and take advantage of technology, their legacy has to be modern, it has to be agile. Otherwise, it's very tough to get the benefit and even to drive any innovations in their own organization. So at least, I do expect the pace of modernization of legacy to continue much more aggressively than what we have seen in the past.

[Operator]

The next question is from the line of Ankur Rudra from JPMorgan.

[Ankur Rudra, Research Analyst]

Congratulations. Indeed, an exceptional performance all around. Just the first question. Salil, very strong performance, both on revenues and deal wins. If you could just unpack this a bit more. How much of this is the reflection of the overall demand environment versus your ability to gain share in the new state of play? And what's helping you do that?

[Salil Satish Parekh, MD, CEO & Director]

Thanks, Ankur. The way we see it is -- we've had year-on-year growth. Some of our last years have had year-on-year declines. We definitely see market share gain going on in that play. Part of it, I think, is some of the strategic choices we made and investments we made over the past several years. For example, scaling up digital, working very focused way on looking at large deals, looking at what we're doing that Pravin was describing earlier on localization and extreme focus on reskilling that we put into place and our own internal digital infrastructure, which has helped us. We are completely digital from the inside and also has helped us to scale the work-from-home very rapidly in this COVID landscape, which is -- give an increased trust with our clients. So part of it is that -- part of it, I think, has been with the demand environment itself in a good shape, specifically for these sorts of activities where the investments have come. And of course, there's a lot of it in our business, as you know well, is this steady execution, a continuous sort of traction to that. I think those are the combination of things which are sustaining us so far, and hopefully, we keep up the execution and sustain further.

[Ankur Rudra, Research Analyst]

Just as a follow-up to that. I think this was asked before, but maybe you can unpack this a bit more. Your implied guidance for the second half, it appears to be slightly at odds to the strengths you've seen so far in the first half, the current momentum, the deals won. Is this due to some planned offshore shift or conservatism on the outlook based on something you're seeing out there and building in?

[Salil Satish Parekh, MD, CEO & Director]

Today, I think one person's conservatism is another person's aggression. We see a very good guidance increase on revenue. And there is the solo effect in Q3, as you know, Ankur. And in Q4, typically, Infosys -- historically, we've had a fairly muted quarter. We don't see any -- there are no specific constraints from which we model it. We generally model it from a view of what we've seen as a past view of the business plus the current deals that we have closed and the pipeline that we're seeing. And we are seeing good traction all around, as we've described. And it's a big change; 0 to 2, to 2 to 3. We've moved the bottom by 2 points. So it's quite a big change in terms of revenue growth guidance.

[Ankur Rudra, Research Analyst]

Understand. Just lastly, the pandemic has clearly given you a significant margin tailwind. Is it time to think about this strategically? Will you, for example, think about this to enter market space in situations which you otherwise wouldn't participate to try and expand your addressable market if this tailwind sustains?

[Salil Satish Parekh, MD, CEO & Director]

I mean without sort of knowing specifically which addressable market you're thinking of, I think the general answer would be yes. There are markets which we would love to be in. However, what we see today is, the ones we have defined have got a nice traction in them. And we can deepen our presence in those quite well. And given our operating model, we can build a good business in them at our margin structure for the future. But yes, I think generically, we would look at other markets as well.

[Operator]

The next question is from the line of Pankaj Kapoor from CLSA.

[Pankaj Kapoor, Research Analyst]

Salil, first a clarification. Did I hear you right when you said that the vendor consolidation is still something that you are in talks with the clients? And we haven't yet seen any major deal or relationship conversion so far. Is that the right way to understand that?

[Salil Satish Parekh, MD, CEO & Director]

The -- on vendor consolidation, there is discussion. It's in our pipeline. We've seen a few small things moving. My sense is those things will play out over multiple quarters, because this is a business which has an inherent stickiness, but there has been a big change in perceptions in this COVID time in work-from-home, delivery quality impact stability of company and so on. So my sense is many of those will play out over time, but we have seen some early benefit of it, but not a material benefit.

[Pankaj Kapoor, Research Analyst]

Understood. And second, what kind of a macro environment are you building in your guidance, given that the band also is now reduced? So have you factored in any potential second wave of pandemic coming in the end-user markets? Or do you think that this is something which could be over and above to what you will estimate?

[Salil Satish Parekh, MD, CEO & Director]

So today, we have considered a scenario which is based on how we've seen the trajectory move in the global economy in Q1 and Q2. If we see something dramatic in terms of second wave in terms of COVID, that is not something that we have put it into our model. We don't anticipate it. Of course, it's a possibility. No one quite knows what that scenarios could be. But we generally modeled it on how we have seen this Q1 and Q2 evolve. And that's how we look to the next couple of quarters for this financial year.

[Pankaj Kapoor, Research Analyst]

Understood. And on the order book, if I take the Vanguard deal, how does the order book operation look like in terms of -- is it dominated by smaller size deals? Or there are -- besides Vanguard also, there are fairly large deals dominating it?

[Salil Satish Parekh, MD, CEO & Director]

We are not decoupling a large deals number, as you know. What I can say is within -- generally speaking, within large deals wins in the last few quarters, plus the pipeline, we have a decent size of megadeals. It's -- there aren't obviously loads of them, but there's a decent number of them, and there's a decent number of other sizes as well.

[Pankaj Kapoor, Research Analyst]

Okay. Perfect. And is it possible to understand how the new versus renewal ratio would be if we exclude Vanguard? Will that be very similar to our historical run rate?

[Salil Satish Parekh, MD, CEO & Director]

I think the way to look at it, as Pravin was sharing earlier, is if you look, let's say, 12 months ago or 24 months ago, the new -- net new number -- percent number, we see is good in this quarter for sure. But in general, in the pipeline, it seems to be a little bit higher than that percentage, is the way Pravin described it. So instead of becoming the Q2 number, that would be the way to look at it as we look ahead.

[Operator]

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

[Salil Satish Parekh, MD, CEO & Director]

Thank you. Thank you, everyone, for joining this session. We are really excited with the way this quarter has played out. Our commitment to our employees has been incredible and has been the most critical element in serving our clients. And you can see from our actions that we want to make sure we address that absolutely fully. And we're delighted with the growth we've seen overall and in digital and with the margin profile of our business. And that's really given us the confidence to increase both the revenue and the margin guidance. Thank you all for joining in the call. Take care. Stay safe.

[Operator]

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