Infosys Ltd

NYSE:INFY

Earnings Call Transcript 2019-Q3

[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, Irma. Hello, everyone, welcome to Infosys earnings call to discuss Q3 FY '19 earnings release. [indiscernible] wishing everyone a very happy new year. 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; interim CFO, Mr. Jayesh Sanghrajka; President, and 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 commentary by Mr. Pravin Rao and Jayesh. Subsequent to which, we'll open up the call for questions. Please note that anything which say which refers to our outlook for the future is a forward-looking statement which must be read in conjunction with the risk that the company faces. A full statement and explanation of these risks is available in our filings with the SEC, which can be found on www.sec.gov. I'd now like to pass it on to Mr. Salil Parekh.

[Salil Satish Parekh, MD, CEO & Director]

Thanks, Sandeep, and good evening and good morning, everyone, on the call. Wish you a very happy new year. We had a strong performance in Q3 with 2.7% sequential growth in constant currency terms and 2.2% growth in reported terms. The revenue growth year-over-year is 10.1% in constant currency. This is a reflection of our unwavering focus on the needs of our clients and the clients' trust in Infosys. Digital revenues had another good quarter, with 5% sequential growth and 33.1% year-on-year growth in constant currency terms. Our core services had a robust performance this quarter with 1.8% sequential growth in constant currency terms. In terms of geography. North America had a growth of 2.6% sequentially, 8.7% year-on-year. Europe, 3.8% sequential; 9.8%, year-on-year. All of this in constant currency terms. We saw strong growth in our business segments. To give you a few examples, in Financial Services, 3.6% sequentially; 9.4% year-on-year. Energy, Utilities, Resources & Services, 7.4% sequential; 17.3% year-on-year. Manufacturing, 7.6% sequential; 16.2% year-on-year. All in constant currency. Once again, we saw a good momentum in large deal signing. We had $1.57 billion in that in Q3. This shows a good trend over the past 3 quarters, stemming from our increased investment in sales and a clear focus on the portfolio that supports our clients. Operating margins were at 22.6% in Q3, which included our continuing investment trajectory in sales, localization, Agile and reskilling that we've indicated from the start of the year. And also included a catch-up in compensation. All of this is after our plan and remains a very strong focus for us as we reorient what we are driving in the future portfolio of the company. It also includes an additional charge and the impact of acquisitions. Jayesh will cover more details on the operating margin during his comments. Attrition declined by 2 points this quarter. We're continuing on the path of increased employee engagement. Our subsidiaries, Panaya and Skava, based on evaluation and proposals received and progress of negotiations with potential buyers, we concluded that it is no longer highly probable that sale will be completed by March 31, 2019. We now plan to repurpose Skava's business and refocus Panaya's suite of products. Earlier in the year, I talked about our 3-year road map. And the results so far are encouraging. These are still early days and we are focused on executing on our 3-year plan. There are macro level concerns in the environment. But we have not seen as of now clients' ultimate spending plans or trajectory. We are keeping a close watch on external development and simultaneously focused on steadfast execution of our plans. Our broad suite of digital services and deep client relationships and our strong deal wins give us confidence as we head into the new year of 2019. With a strong performance during the year, we are revising our full year revenue guidance -- revenue growth guidance to 8.5% to 9% in constant currency terms. We retain our operating margin guidance at 22% to 24% for the full year. With that, I will request Pravin to give detail on the business segments and other key areas.

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

Thanks, Salil. Hello, everyone. Let me extend my wishes to everyone for a great 2019 ahead. We had broad-based momentum during the quarter, which led to year-on-year growth crossing 10% in constant currency terms at overall level and also for Retail; Energy; Utilities, Resources & Services; Manufacturing and Hi Tech at the [indiscernible] level. Volume grew 2.6%, which is good considering that quarter 3 is a seasonally weak quarter. Client addition was particularly strong with 101 new client additions, partly aided by Fluido acquisition. Top client metrics were stable during the quarter. Attrition, which has been an important area of our focus, declined by 2.1% to 17.8% at the stand-alone level and by 2.3% to 19.9% at the group level. Gross additions of employee was over 18,700 in quarter 3, almost similar to quarter 2 level. Employee count at the end of the quarter was over 225,000. We had 14 large deal wins during the quarter with a TCV of USD 1.57 billion. 10 deals were in Americas, 3 in Europe and 1 in rest of the world. Vertical-wise, 4 deals each were in FSI and Manufacturing, 2 in Communication and 1 each in Retail, Life Sciences, EURS and other business segments. Client budgets for 2019 are progressing as per normal time line in most large verticals. Overall, budgets are expected to be flattish with higher allocation towards newer areas focused on [indiscernible]the business segment. Now let me give some color on the various business segments. Financial services sector continued to grow on the back of sustained momentum in client spend and ramp-up of previous wins. We are seeing momentum in new account acquisitions and expansion of accounts opened recently. Wins in the Americas were driven by robust deal wins and market share gains in our top accounts. However, Europe performance was weaker in the last quarter, primarily due to the impact of furloughs. Clients continued to increase spend in digital, analytics, cloud, cybersecurity and other new technology domains. Sequential performance in Retail segment was affected by seasonal weakness. Our Utilities is focused on digital transformation that leads in subsegments like CPG, transportation, logistics, apparel, consumer tech, et cetera which are resulting in a steady increase in deal wins and deal pipeline. We are seeing increased client interest in cybersecurity, cloud, analytics, retail store ops and infrastructure outsourcing. Clients are countering the Amazon effect by implementing multiple strategies focusing on customer experience and convenience. Communication sector remains under pressure due to sector-specific headwinds, however, the downflow opens up new opportunities for outsourcing and grow efficiency and reduce costs. Our performance remained relatively stable even in a seasonally weak quarter due to ramp-up of previous deal wins. And we expect further momentum in the coming quarters. We are seeing increased interest in areas like cybersecurity, customer experience, IoT, analytics, cloud computing, et cetera. Energy, Utilities, Resources & Services segment continued its strong momentum with ramp-up in the previous deal wins and was led by utilities in Europe and services in Americas. While Energy and Resources segment were feeling the pains of lower oil and commodity prices, our growth was supported by strong client spend. Customer service and digital experience and information remains the top agenda for the utilities sector, along with a focus on cloud migration, RPA, digitization of legacy systems and Smart Grid. Energy companies continue [indiscernible] in IoT, RPA and digital [indiscernible] contracts to enhance efficiency and reduce costs. We had strong growth in the Manufacturing segment despite seasonality. The future of spending is being directed towards digital, e-commerce, analytics cloud. Other companies are focused towards investment in autonomous technology, electric vehicle technologies and green initiatives. Aerospace and defense companies are optimizing spending in core areas while industrial manufacturing companies are spending towards integration of digital platform, modernization of legacy systems and IoT. We have a healthy pipeline of deals and new contract wins across geographies. Life Sciences performance remained flattish due to seasonal factors and business in select key plans. And health care witnessed stronger performance. Coming to digital, we are seeing good traction in our digital strategy and this portfolio geographically command a larger share of overall revenue. Digital is already growing at a faster rate across client verticals and geographies. We are accelerating our digital journey through focused investment in learning, [indiscernible] and by building a team of digital strategist. We have been rated as leaders in [indiscernible] services across the digital [ pipeline ] in [ Digital Bangladesh ] ratings, which is a testimony for the quality and utility of our offering. With this, I will pass on to Jayesh.

[Jayesh Sanghrajka, Interim Chief Financial Officer]

Thank you, Pravin. Hello, everyone. Wish you all a very happy new year. Let me start by giving key highlights for the quarter 3. During the quarter, we had strong sequential revenue growth of 2.7% in constant currency terms and 2.2% in reported terms. This is also the highest sequential growth in Q3 in last 6 years, driven by growth in all geos and most business segments. Our year-on-year growth in constant currency terms was 10% after 10 quarters. Operating parameters in Q3 were healthy. Utilization excluding trainees was at 83.8% compared to 85.6% in Q2. The drop in utilization is mainly on account of furloughs. Revenue productivity for employees were stable, sequentially dipped by furloughs. On-site mix increased by 30 basis points to 28.7% as a result of deal won in recent quarters. We had another quarter of solid large deal wins at $1.6 billion, which took the total TCV for 9 months to $4.7 billion, which is more than double of $2.2 billion that we won in 9 months for FY '18. Operating margin in Q3 were at 22.6% compared to 23.7% last quarter. During the quarter, drop in utilization and higher on-site mix impacted operating margin by 80 basis points. Compensation increases impacted margin by 30 basis points. Continued sales investment impacted margin by another 30 basis points. And acquisitions impacted margin by 20 basis points. Further, due to the reclassification of Panaya and Skava from assets held for sale, we had an additional depreciation charge of $12 million, impacting margin by 40 basis points pertaining to 9 months when the assets were held for sale. This has partly offset the benefit from rupee depreciation and the revenue hedges of [ 50 ] basis points and the benefit of lower living costs and reduction in other expenses of 30 basis points, resulting in 1.1% decline in operating margin over Q2. Operating margin for 9 months were at 23.3%, which is the upper half of the FY '19 guidance of 22% to 24%. Q3 witnessed significant currency volatility with rupee depreciating by 1.6% against U.S. dollar on a quarter ended basis but appreciated by 3.7% on a period end basis. Our effective hedging program ensure that we have 14 consecutive quarter of gains in nonoperating income. We had a hedge book of $2.1 billion at the end of the quarter. Fee and other income was 7.81% on -- in Q3 as compared to 7.53% in Q2. DSO for quarter stood at 67 days compared to 66 days in Q2 and 70 days in Q3 of last year. Cash generation in Q3 continued to be strong with operating cash flows at $610 million and free cash flows at $534 million. Operating cash flow for first 9 months were at $1,679 million and free cash flows were $1,446 million. Cash generation for the 9 months had declined compared to the same period last year mainly on account of lower interest income as a result of $2 billion share buyback concluded in December 2017. Let me now come to capital allocation. In April 2018, we had announced distribution of INR 13,000 crores in [ rev rec ] for FY '19 out of the cash and balance sheet. Out of this, we had already paid out INR 2,633 crores through special dividends in June 2018. Out of the remaining INR 10,357 crores, the board has recommended a buyback of INR 8,260 crores at a maximum buyback price of INR 800 per share. The balance amount of approximately INR 2,100 crores will be paid out as special dividend amounting to dividend per share of INR 4. Coming to guidance, driven by better-than-expected 8.1% constant currency growth in the first 9 months last year compared to 9 months of FY '18, we have revised FY '19 guidance to 8.5 to 9% in constant currency terms. We are maintaining our FY '19 operating margin guidance band at 22 to 24%. We expect Q4 operating margin to be impacted due to rupee appreciation, targeted compensation correction, continued investment in business and initial margin impact due to transition and ramp-up of recently won deals. With that, we can open the floor for questions.

[Operator]

[Operator Instructions] The first question is from the line of Edward Caso from Wells Fargo.

[Edward Stephen Caso, Managing Director and Senior Analyst]

Two questions. One, if you could update us on your localization efforts. How far are you along? Have you increased, decreased your targets now that you've had some experience rolling out the new facilities? And my other question is, if you could just give us more color on the Skava, Panaya moves. What changed? What are the plans going forward?

[Ravi Kumar Singisetti, President & Deputy COO]

Yes. This is Ravi. I'm going to take the question on localization. So we're on track to what we said in May of 2017, where we said we're going to hire 10,000 U.S. jobs. We have very much done 7,600 plus. So we've opened the 5 hubs now. We've announced 6 of them, and we've opened 5 of them. And we have hired 3,000 plus school grads, campus hires. So it's all on track. We've not changed our original estimate which we have set forth. So this is going pretty well. And a lot of learning in the last 18 months or so has been essentially on track because we have to get them onboard, get campus hires onboard, train them with partnerships from universities, almost like a finishing school, and then move them into light projects. The mentors we have established is to transition work into Agile development scrum teams and co-innovate with clients. So that has happened really well as well. So we are on track on localization. And then I will hand over probably your second question to Salil.

[Salil Satish Parekh, MD, CEO & Director]

Thanks, Ravi. And on Panaya and Skava, Ed, the approach we've taken, as I shared in my statement earlier, is as we looked at the proposals we had, we came to the conclusion it would not be a sale by March 31, 2019. With that in mind, with the accounting guidelines, we reclassified it outside of assets held for sale. We are now refocusing the work that we do in Skava. And we are reorienting the products within Panaya.

[Operator]

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

[Bryan C. Bergin, Director]

Just a quick follow-up on the Panaya, Skava. Was there a revenue impact from the quarter now that they've been reclassified? And then the depreciation impact, is that onetimes, meaning the catchup from the prior periods? Or is this on an ongoing expense now, the level that you see here?

[Jayesh Sanghrajka, Interim Chief Financial Officer]

This is Jayesh here. There's no additional revenue coming out of Panaya and Skava on account of reclassification. The revenue from Panaya and Skava will be part of our revenue even though they were held for sale. So there is no change there. With appreciation and depreciation on the intangibles, when you hold an asset for sale, you don't really charge depreciation on that. So we had to do a catchup for 9 months when these assets were held for sale and the $12 million or 40 basis points represent the depreciation. That's a onetime.

[Bryan C. Bergin, Director]

Okay. And then I wanted to ask on BFSI, can you give us details on the banking vertical across key regions for you, the demand drivers and the outlook?

[Mohit Joshi, President]

This is Mohit. Yes, so look, I think as we've mentioned in the introductory notes, growth was fairly consistent across geographies and across sub verticals. I think that we saw some bit of a slowdown in Europe because of some end-of-quarter furloughs. Insurance was very strong. Finacle was extremely strong, right. We had double-digit growth in Finacle. The only place where we've seen some sort of a slowdown is on the buy side because of the significant drop -- sorry, because of the significant drop in assets under management just in Q3. Otherwise, strong growth across geographies, across sub verticals. And a very significant opportunity for us, right. Especially given the Finacle presence as well, as a large number of banks across the world look at [ continental ] business model changes. So that's it, that's the sort of short summary. Any questions?

[Bryan C. Bergin, Director]

No.

[Operator]

The next question is from the line of Abhishek Bhandari from Macquarie.

[Abhishek Bhandari, Analyst]

My question is more around the margin. When the 9-month margin has been 23.4%, we have left the full year guidance unchanged at 22% to 24%. That leaves a very wide range for the fourth quarter. I understand you mentioned some of the incremental wage corrections you have to do. But if you could give us some more color of the reason behind giving such a wide range, which is almost 4 percentage point from the lower end to the higher end?

[Jayesh Sanghrajka, Interim Chief Financial Officer]

This is Jayesh here. We really not change margin guidance every time in the past as well. What we'll say right now as well, at the beginning of the year, we gave a guidance of 22% to 24%. That will have to take into account all the investments and business needs. The first product -- first 9 months of the year was at 23.3% and I've already laid out some of the headwinds in terms of competition, continued investments and so on. But we can't really give a specific guidance for the quarter.

[Abhishek Bhandari, Analyst]

Okay. My second question, to continue over here is -- I know Ravi mentioned that you have hired close to 7,600 out of targeted 10,000 people in U.S. So is it safe to assume that bulk of our U.S. investments would probably be done over next 2 or 3 quarters?

[Ravi Venkatesan, Former Independent Director]

Not really. This is a sustained effort. And as a part of our operating model, we would like to continue hiring in the U.S. from schools and build a training infrastructure around it and then actually building a natural pyramid on-site as well. So this is a sustained effort, so it's going to continue as we go forward.

[Operator]

The next question is from the line of Ashish Chopra from Motilal Oswal Securities Limited.

[Ashish Chopra, Research Analyst]

I just wanted to get some color on the investments, if Salil you could help. So what you've seen is that while your localization efforts have been resetting the cost base at a higher level, how should we really think about the operating leverage from some of these investments kicking in? Because when we see the margins, we see a lot of one-offs and we see a lot of investments but not as much of an impact from -- coming in from pricing. So do you see that there'll have to be longer gestation before we start seeing good growth feeding through the margins? Or could that happen maybe sometime in a few quarters?

[Salil Satish Parekh, MD, CEO & Director]

In terms of the investment and then leading into your question, the view on the margins going ahead. First, for the fiscal '19, we've set a fairly definitive investment plan. We started tracking to it much better by Q2. And in Q3, we are now very well tracking to those investments. These investments, we had planned at that stage for fiscal '19. We don't see that we are going to do incremental investments in fiscal '20. We see the benefits on sale and on localization already start to come through, as you've seen in our sales trajectory and our revenue guidance. For fiscal '20, at this stage, we're not giving any view on what the margin or indeed the revenue outlook is. We have been quite clear that these are investments that bring us even more, which is building more relevance to our clients now and that they're not investments that are incremental and that keep happening over a period of time.

[Ashish Chopra, Research Analyst]

Got it. That's helpful. And just one more question from my side. I think Pravin was alluding, during the media briefing, on the change that is happening in on-site in the form of a lower utilization and in the form of pyramid, that is, in building up. So if you could just share some additional color on quantitatively how would the utilization rates now compare versus in the past as a result of this exercise?

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

We have not seen -- in the on-site, we have not seen too much change in the utilization so far. We're typically out there with a very high level utilization. The point of the question was around the impact of margins on on-site. So my response was primarily on that count. I was responding to say that when we -- earlier, we had modern ways to deploy people compared to on-site. But we've retained the same compact to local hires; so there is no margin impact because of training that [ head ]. In addition, only difference would be if, in the earlier model, it's -- in a lower economy, you would have the ability to send people back to India during bench time. Whereas in the new model area, they are increasingly reliant on more local hires, probably it will carry a larger benefit. But to build that, we are also building a pyramid on-site and we talked about -- I queried all the people -- maybe a couple of people that have been able to deploy them at a fairly good utilization. So as long as we have good growth and everything, I don't see any impact on utilization. Utilization remains to be the main prio on-site.

[Operator]

The next question is from the line of Parag Gupta from Morgan Stanley.

[Parag Gupta, Executive Director]

So I just had 2 questions. First one to Salil. Salil, when you talked about your strategy last year and also in your Analyst Day, you talked about the company going through the phase of consolidation stability and then acceleration. And acceleration being in the third year. Now given the kind of demand environment you're seeing today, which is also evident from pretty strong deal wins that you've been seeing over the last 3 quarters, is there a possibility that an acceleration can actually happen faster than you were earlier expecting? Or would you still hold on to your third year being the year of acceleration? And the second related question is, you did mention about some sluggishness in Europe, especially in BFSI, due to end-of-quarter furloughs. But are you also seeing clients holding back on spend or taking longer to make decisions because of what they're seeing in the marketplace? Or do you think that's not really the case and these spends can actually come back pretty quickly?

[Salil Satish Parekh, MD, CEO & Director]

On the first one -- first question, we are still very much planning to execute on that 3-year plan. We have seen that we've been fortunate to build client trust and win significantly in Q2 and Q3. It is a comprehensive, clear plan, which we will go through in a very systematic way to execute upon. So we stick with that plan in that sense. Of course, as some of the deals have come in Q2, Q3, and we see a good pipeline today for Q4, we raised our revenue guidance for the full year in fiscal '19. Outside of that, the focus will remain on making sure that we're watching out for all of the macro development that I referred to in my opening comments as well and entirely execute upon that 3-year plan. On Financial Services, I'll request Mohit to give a quick comment on the European point.

[Mohit Joshi, President]

Thank you. So look, I think on Financial Services, the only comment that I'd make was that we saw relative to the very strong performance in the Asia Pacific region and relative to the very strong performance in the U.S., we saw relative weakness in the Europe portfolio. And that was not because of a drop-off in volume or a drop-off in others, that was largely because of some unanticipated furloughs towards the end of the quarter. I don't expect as of now for this to be a trend or for us to see this as a sign of ongoing weakness in Europe.

[Operator]

The next question is from the line of Viju George from JPMorgan.

[Viju K. George, Research Analyst]

I had a couple of questions on Financial Services. Mohit, you had alluded to the fact that interest rates moving up can be net positive for your clients and, therefore, your business. If the trajectory of interest rates softened in the U.S., do you think the contrary can happen that there could be some pressures that could possibly -- or softness that could surface in the -- through CY '19?

[Mohit Joshi, President]

No, actually, we do. I think that is absolutely possible. If there is sort of the dark lark changes and if the expected rate hikes well in fact don't happen, then banks will clearly need to take a relook at their budgets. Again, like we've said, that the spend will depend on the broader macroeconomic environment, and the interest rates are clearly one part of it. The second part, which I referred to in a response to an earlier question, is you will have seen a fairly significant drop in assets under management just because of the downward pressure on the indexes. And you'll see that for some buy-side players, they are taking a relook at their budgets.

[Viju K. George, Research Analyst]

Sure, sure. That's helpful. The other question was more on large integrated deals. I'm not trying to be subtle here, but I think that the big difference probably in growth rates between you and [indiscernible] in this year had been they're greedy. They took a very large platform deal to maybe hitch their integrated deals. And clearly, that's where Infosys should start putting its resources. How satisfied are you with the efforts made in that direction so far? And what do you think remains to be done to close the gap?

[Jayesh Sanghrajka, Interim Chief Financial Officer]

So I speak for what we are doing in this regard specifically. First, we've made significant investments in streaming up our sales capacity, putting together digital specialists, driving skill set and portfolio in the 5 elements of the Pentagon that define our digital approach. We believe that some of what we are seeing in terms of traction is coming from our ability to do multiple components of digital and, in many cases, build upon core services and platform means to win some of these large deals. We think our capabilities are quite strong. In terms of how satisfied I am, of course we've seen the performance. It's strong. We are never really fully satisfied because there's always more to do, and we want to make sure then this is -- are focused on that to make sure we have larger and larger deals built on core services and on digital.

[Viju K. George, Research Analyst]

Sure. And lastly, there's a margin headwind possibly in Q4 for a bunch of factors. Is there something that is additional to Q4 of this fiscal versus the normal Q4 that you see?

[Jayesh Sanghrajka, Interim Chief Financial Officer]

Oh, we do. That's correct because we have, as I said, some targeted compensation this Q4 which wasn't there last Q4. Salil talked about investments, and we had said earlier that H2 -- the rate of investment in H2 was higher than the rate of investment in H1 and the initial margin impact due to transition and the also recently won deals. So all of these 3 factors that I talked about are additional.

[Viju K. George, Research Analyst]

Sure, sure. And Salil, just to clarify, you did mention that you will not see incremental investments of this magnitude for FY '20?

[Salil Satish Parekh, MD, CEO & Director]

No. I -- what I shared earlier was first, we're not commenting on specifically fiscal '20 in this discussion. What we've made clear is the investments we are making today, we're not looking in a midterm perspective of this incrementally investing. We made a series of investments in fiscal '19. We see good return from those investments. And we don't have a view that this is going to keep on increasing as time goes on. However, to be clear, we're not making any specific comment on our fiscal '20 outlook.

[Operator]

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

[Keith Frances Bachman, MD & Senior Research Analyst]

I had 2 questions, please. The first is on currency in your operating margins. I understand you made a comment about Q4. But I would just want to see if you could speak more philosophically about the impact of your currency on your margins. And that is to say, if the Rupee appreciates, should we assume that, that will, in fact, impact your margins and you'll just let it flow through over time? Or how should we think about the less favorable environment, least recently of the rupee-dollar exchange rate and the impact of margins over time? And then a follow-up, please.

[Jayesh Sanghrajka, Interim Chief Financial Officer]

This is Jayesh here. So coming -- this quarter for us -- or this quarter, we got a benefit of a rupee depreciation of 50 basis points. And as we get into the next quarter, rupee has already appreciated from INR 71.5 to INR 70 now? Yes. So that will ultimately impact margin. Every 1% appreciation or depreciation in rupee impacts margin approximately by 25 basis points, but that gets offset by the cross-currency appreciation or depreciation.

[Keith Frances Bachman, MD & Senior Research Analyst]

Okay. But sorry, over the last -- just to clarify, over the last 2 years, the rupee has been a source of margin help. If the rupee stays where it is, at a minimum it won't be a help, right. It'll probably end up being a headwind over time. So should we just think about that being a potential negative to your operating margins? Or do you change behavior in terms of pricing or something along those lines to offset it?

[Jayesh Sanghrajka, Interim Chief Financial Officer]

Over the longer period of time, rupee appreciation or depreciation automatically gets priced in the rebidding and so on. So you won't really see a long-term impact of rupee appreciation or depreciation. We typically see that only in a quarterly -- quarter-by-quarter or half year-by-half year basis impact if the rupee appreciates. If you look at it, rupee should be at INR 55 earlier. Now it's gone to INR 70. Going by that logic, margins for everybody should have gone up significantly, but all of that gets priced in the bids that you do and repricing.

[Keith Frances Bachman, MD & Senior Research Analyst]

Okay. My follow-up question relates to -- just wanted to clarify on your comments around operating margin. So we looked at '20. You said there wouldn't be incremental investments consistent with what's happened over the last year. And so should investors assume that the level of investments will stay the same? In other words, the current range for margin is probably appropriate range as we think about FY '20?

[Jayesh Sanghrajka, Interim Chief Financial Officer]

What I said was -- to the answer to Viju where he asked as compared to Q4 of last year is the investment and incremental investment and incremental costs. Therefore, it is what I replied to, saying that, yes, that is because at the beginning of the year when we articulated our strategy, we had very clearly called out the investment that we are making in the business, investment in terms of sales, investment in terms of digital services, investments for reskilling and retraining our employees and investments in localization strategy. And by very nature, most of these investments are investment in people. And therefore the H2 investments were supposed to be higher than the H1 investment.

[Operator]

Srini Rao from Deutsche Bank.

[Srinivas Rao, Research Analyst]

Srini here. I have 2 questions. First, on your verticals. I know in your disclosure, what comes out is the share of fixed-price contracts and digital is significantly higher for your retail and communication verticals compared to BFSI. First question is if you could comment as to why that's happening, why that is the case. Secondly, when you have fixed-price contracts, is there any element of flexibility to change pricing? And in that context, how do you think you manage the risk if your expected efficiency don't come through? I mean, what has been your experience on how the fixed-price contract share has gone up? Secondly, a smaller question. This thing, an acquisition of Hitachi's business in December. Just some feedback as to what it is would be helpful.

[Mohit Joshi, President]

Well, it's Salil here. On the first question, there is still no correlation between fixed price and segments because we find fixed-price projects where costs augment over and beyond secular trend. So it would be -- it's not what -- we're leaning into it. If we have the data, then we can [indiscernible]. And on the fixed-price project, the whole idea is if we are able to drive better efficiency, then we can capture the benefits, whereas in a Time & Material project, we pass on the benefits to the customer. There is a time line in which we take -- typically take -- expect projects. But in any fixed-price project, sometimes we are not able to do that, in which case we obviously have to take that hit. And there are also times when there are scope changes in which we get [indiscernible] and so on. So in general, in a fixed-price project, when we -- in the case of the scope, then we get the benefit of increased pricing or increased revenues. But otherwise, we have to manage within our --- whatever we have committed, and there's a huge potential for us to capture the benefits if we are able to execute on that.

[Ravi Venkatesan, Former Independent Director]

Yes, this is Ravi here. I'm going to give you a quick view on Hitachi. So it's a joint venture between Hitachi, Panasonic and a local HR firm called Pasona in Japan. What we are simply doing here is we are taking over a subsidiary of Hitachi, which does indirect procurement end to end, and we want to take it over and run it as a joint venture with Infosys. Infosys has the majority stake. And the idea is directly expand this into indirect procurement into the larger Hitachi organization across the world, then to Panasonic, which is equally big here so it's very historic, but 2 large manufacturing high-tech electronics producers are coming together for one common cause, which is indirect procurement. And we're going to likely apply technology on it and make it powerful enough to generate value. And thereafter, we want to use the -- use this joint venture to go to other manufacturers in Japan where indirect procurement is a big category of spend.

[Srinivas Rao, Research Analyst]

Understood. This is really helpful. If -- I will just ask a small rejoinder. I mean, the increase in the fixed-price contracts that is happening, is it driven by the -- by your clients? Or is it more driven by Infosys?

[Mohit Joshi, President]

It's primarily driven by Infosys. I mean, some of the projects like large maintenance projects lend itself to fixed price for clients. So they expect you to bid with fixed price on that for the -- but a good percentage of our projects typically are Time & Material and plans are probably okay with PLM and Time & Material. And that is where the opportunity is for us to try to convert it into fixed price.

[Operator]

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

[Nitin Padmanabhan, Analyst]

Jayesh, I just had a question on the 20 bps impact on margins due to acquisitions. From what I understand, Fluido is pretty small to land that kind of an impact. So is there -- is that a onetime thing there? Or is there something to do with Hitachi as well?

[Jayesh Sanghrajka, Interim Chief Financial Officer]

Yes. So acquisitions, there's a couple of aspects when you talk about the impact on margin. One is on the consolidation, the impact on account of the margins of the entity that we acquired. The second is when you acquire some part of the budget side, it also gets accounted as intangibles, and that gets amortized over a period of time. So that also impacts consolidated margins. In addition to that, there could be earn-outs and retention payouts that would be factored in the deal. That will also impact the margins.

[Nitin Padmanabhan, Analyst]

Sure. So how much of this would be on a running basis?

[Jayesh Sanghrajka, Interim Chief Financial Officer]

On a quarter -- so you will see this -- a sequential impact from the last quarter to this quarter. But on a quarter-quarter, you won't really see an impact because that becomes the base.

[Nitin Padmanabhan, Analyst]

Sure. And secondly, just wanted to understand. There were a couple of bankruptcy announcements in the U.S. both in utilities and retail. Anything you would like to call out there going into the next quarter or next year? And second, if you could, as always, highlight what the proportion of net new TCV would be of the total TCV that we won for the quarter.

[Jayesh Sanghrajka, Interim Chief Financial Officer]

So the net new TCV, that's 30% of the total TCV. And coming to the bankruptcy at retail, whatever we are aware of, we have taken care of in the books in terms of provision as adequately as required. There's nothing that we know which has not been taken cared of.

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

In fact -- it's Pravin here. In fact, in retail, there have been some number of store closings this year as compared to last year. So this -- I mean, these are all things which we can't predict, but there's no neglect there.

[Operator]

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

[Diviya Nagarajan, Executive Director and Research Analyst]

Congrats on the quarter numbers. Just to go back on the investments, Salil. I'm trying to understand what your comments really mean. So should I take it to understand that this year there's a certain intensity of investments which could vary or not repeat or occur every year? Is that how we should think about it? Or are you saying that at this point, all you can comment on is that this year is what it is and you might still end up looking at investments on sales next year?

[Salil Satish Parekh, MD, CEO & Director]

So first, we're not making any comments about fiscal '20 in specific terms. What I was attempting to say earlier is we have investment in sales which are enabling us a good result today. And that's -- there -- that's the plan we have put in place at the start of fiscal '19, and that's the plan we're executing upon. We don't see that there'll be incremental investments in a midterm period on an ongoing basis. And I have no comment specifically on fiscal '20 in this call. We're now going to work through in Q4 what our plan will look like in terms of our budgets or the market environment will look like, but we see the growth dynamics. And therefore, what we see in terms of where we need to focus our investments, if any, in term of incremental investments for fiscal '20. So no specific comment on that. It's more a broad-based comment on the incremental wager, the question that had come before.

[Diviya Nagarajan, Executive Director and Research Analyst]

And secondly, on the margin front, I think Jayesh had alluded to some costs coming in next quarter as well. But from a large deal ramp-up perspective, are we looking at any contracts where you have taken the costs up front, but the revenue ramp-up is yet to happen? Or is that something that's more -- from a timing perspective, is there any mismatch between cost and revenue is what I'm trying to understand here.

[Jayesh Sanghrajka, Interim Chief Financial Officer]

Yes, so there will always be large deals, and there'll always be transition. In addition, when the large deal happens, you typically have a higher on-site in the paper work as you get into the deal. So that is what I was referring to.

[Diviya Nagarajan, Executive Director and Research Analyst]

Sorry, the last question from my end, could you just run us through the push and pull that you saw in the telecom sector this quarter?

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

The growth in the telecom sector this quarter has been moderate, only about 0.5%. However, in the last couple of quarters, we have had a few large deals in this segment. So we expect that industry to gain in the coming quarters. Having said that, from an industry perspective, definitely the sector is under stress. But at the same time, it also opens up new opportunities for outsourcing mainly for efficiencies and reduce cost. And on the back of this, we have been able to win a few deals in the recent quarters, and we expect momentum to pick up in the coming quarters.

[Operator]

The next question is from the line of Joseph Foresi from Cantor Fitzgerald.

[Joseph Dean Foresi, Analyst]

So my first question here is, how would you describe the 2019 outlook -- calendar year 2019 outlook for IT budgets? Are they the same, better or worse in 2018? And any commentary on -- that you could add to that would be helpful.

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

The plan budgeting process is progressing, and it is likely to conclude in the next month or so. But the indications are the budgets are expected to be flattish at a percentage level and yes, probably greater emphasis on moving budgets from -- around the business, within the business. Barring that, we are not seeing any indications of changes, either geography-wise or sector-wise. Well, obviously, all clients were -- in any budget process. But by and large, at least early indicators are it will be flattish.

[Joseph Dean Foresi, Analyst]

Got it. Okay. And then my second question is, it seems like your revenue growth rates have accelerated. I'm wondering what you would attribute that to. Was that revitalizing the digital engine? Are you participating in large deals? Do you feel like you're taking market share? I'm trying to get a sense of what's causing the acceleration. And then just as importantly, do you think it's sustainable?

[Salil Satish Parekh, MD, CEO & Director]

So the 10.1% growth we've seen in this quarter on a year-on-year basis, where it's coming from, we think the very -- the tough focus on strategic direction, working with our clients on what's relevant to them. So building our digital portfolio on the one hand with the 5 elements of digital that we outlined at the start of the year, which is really strong catching, for example, in the cloud space. We see good traction on the SaaS space. We see very good traction with the digital studios and digital marketing piece. We see good traction on analytics. And we see good traction on IoT. With those areas, a lot are contributing to this over 30% growth in the digital space. We also see our cost savings in business is growing. So both large components of our business are growing. Of course, this is, even though at a smaller growth rate, growing because of the investments we're making in artificial intelligence, in EMEA platform, and that's resonating with our clients. As Pravin was sharing earlier, there's a push from clients to make more efficient their core tech platforms and invest for growth, differentiation or speed in the digital platforms. With our portfolio, we have the ability to play on both of those dimensions. In addition, we've put in place programs to look more carefully at account scaling, to look more carefully at how new work can be generated, look more carefully at what are the specific things we have to do to introduce digital specialists into each of our large accounts. We have also then expanded our sales capacity from the start of the year through to Q3. All of these things have helped and comprised what we've been calling investments that we've put in place in CIS. We've also taken a lot of effort to reskill our employees into the new technologies and reconfigure our spaces into the future Agile workspaces. These also have -- and investments we've made in this year to be more aligned to where clients are going. This was an increased intensity with our go-to-market efforts in the field and the long-standing trust that clients have had with Infosys over the past 30 years has helped us start to drive this growth. We think if we can continue to execute on that and the macro remains the way it is, we see, with this approach, we will be more and more relevant for our clients.

[Joseph Dean Foresi, Analyst]

Got it. Okay. I'm going to sneak one last one in here. People have tried to ask you about margins long term probably about 6 or 7 different ways on this call. Why the hell don't you seem to give long-term outlooks on margins or next year's outlook on margins? Because clearly, the market is incredibly focused on your sustainability. And if you can't give us next year, do you think that margins will be flat, up or down over the long term and why?

[Salil Satish Parekh, MD, CEO & Director]

So on margins, my view today is we are in the start of our 3-year plan. We've got a sense of how we can drive our go-to-market and planned traction. We will now, in our fiscal year fourth quarter, start to do a more comprehensive view on how the next fiscal year starting in April will look like for us. Internally, we will also start to put some thoughts on a more specific basis on how this outlook will work on multiple year basis. At this stage, we're not ready to come and say specifically what fiscal '20 will look like and certainly what the midyear trajectory on margins will look like. However, we are very clear that we are focused on driving value with our clients on digital. Internally, we know that our margin for that business is higher than the average margin of the company. We have a strong focus on driving that margin acceleration operationally, although we're not ready at this stage to speak specifically on fiscal '20 or indeed the midterm in terms of margin.

[Operator]

The next question is from the line of Georgios Kertsos from Berenberg.

[Georgios Kertsos, Analyst]

Yes. Guys, can you please reconfirm the level of profitability in digital relative to the rest of the business? I think in the past, you've disclosed this, so an update on that one would be helpful.

[Salil Satish Parekh, MD, CEO & Director]

We are not specifically giving the number in terms of the operating margin of digital versus the rest of the business. My comment today and most likely in the past is more qualitative, which is that it is higher than the average margin of the company.

[Georgios Kertsos, Analyst]

Okay. So if memory serves me right, last set of results, I think it was quoted approximately couple of percentage points higher margin in digital relative to rest of the business. But maybe I'm wrong. Anyway. Okay, fine. And a quick follow-up for me. Is there any -- is that constant currency revenue growth all organic? Or is there any sort of M&A contribution there?

[Salil Satish Parekh, MD, CEO & Director]

I'm sorry, I didn't follow. Are you talking about contribution in Q3 or for the future?

[Georgios Kertsos, Analyst]

Contribution of any M&A in Q3, constant -- I mean, in Q3, the revenue growth, is the 10.1% this year revenue in Q3 all organic? Or is there a bit of M&A in that number?

[Salil Satish Parekh, MD, CEO & Director]

Yes, so Q3 had an impact on small acquisitions that we did, which is on Fluido, of around 30 basis points, which is inorganic. A part from the revenue was organic.

[Operator]

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

[Salil Satish Parekh, MD, CEO & Director]

Thanks, everyone, for joining us on this call. We look forward to talking to you in relation to the quarter. Have a good weekend ahead.

[Operator]

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