Infosys Ltd (INFY) Q2FY27 Concall Transcript - Sep-2026 Qtr
Moderator: Ladies and gentlemen, greetings, and welcome to Infosys Limited Q2 FY '27 earnings conference call. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during this conference call, please signal an operator by pressing "*" then "0" on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Sandeep Mahindroo. Thank you, and over to Mr. Mahindroo.
Sandeep Mahindroo (Infosys Ltd): Hello, everyone, and welcome to this earnings call to discuss Infosys' Q2 FY '27 results. Joining us on this call is CEO and MD, Mr. Salil Parekh; CFO, Mr. Jayesh Sanghrajka, along with other members of the leadership team. We'll start the call with some remarks by Salil and Jayesh on the performance of the company, subsequent to which we'll open up the call for questions. Please note that anything we say that refers to our future outlook is a forward-looking statement that must be read in conjunction with the risks that the company faces. A complete statement 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 on the call to Salil.
Salil Parekh (Infosys Ltd): Thanks, Sandeep. Good evening and good morning to everyone on the call. Thank you for joining us. Our revenue growth for Q2 was at 1.5% year-on-year, and 1.2% sequentially in constant currency terms. Our AI revenue was standout, at [inaudible] percent of our total revenue, growing 29% sequentially. Last quarter, it was at 8.2%.
Salil Parekh (Infosys Ltd): a large international company for a period of 7 years, and it's net new. This deal is expected to contribute over 1% of revenue growth in the coming financial year. The second mega deal was for $1 billion for a renewal. The large deal pipeline is healthy and includes some other mega deals. Operating margin was stable at 21%. Free cash flow was strong at $928 million for the quarter. As enterprises adopt AI at scale, another quarter of strong growth in AI revenues is a recognition of our differentiated market positioning and client confidence. We are advising large global enterprises on their AI, and continue to invest in deep domain and technology capabilities to bring new ideas and an integrated ecosystem to help businesses unlock AI value at scale. A premier food services company was processing over 10,000 invoices a day across siloed systems, which made approvals, disputes, and payment tracking difficult. The new solution had to leave existing legacy systems running undisturbed. We used AI to turn business requirements directly into working software and built a single invoicing platform alongside the old systems. The result was 40% faster time to market, 80% less rework, and 30% more defects caught before go-live. In another example, by embedding AI in agents into the software modernization life cycle, we helped an education technology company modernize its aging platform with significantly lower risk and effort, achieving 40% effort reduction and a production-ready solution. As an ecosystem integrator, we continue to work closely with frontier model companies, including both open-weight and closed models. Our deep investments in Topaz Fabric help our clients seamlessly navigate between models to ensure token optimization and value realization. Infosys continues to gain market share, especially where economics of the program is aligned to the stakeholder interests. We remain the preferred AI strategy and deployment partner for our top clients. As AI remains central to enterprise transformation in the years ahead, Infosys is well positioned to help navigate this shift. Based on our Q2 performance and revised outlook for the rest of the year, our revenue growth guidance is 1% to 2% year-on-year in constant currency terms. Our operating margin guidance remains the same at 20% to 22%. Thank you. And with that, let me hand it over to Jayesh for his comments.
Jayesh Sanghrajka (Infosys Ltd): Thank you, Salil. Good morning, good evening, everyone, and thank you for joining the call today. Let me begin with some comments about the broader environment. Client spending remains cautious reflecting geopolitical tensions, inflationary pressures, and shifting technology priorities. Selective discretionary spend also tempered the usual Q2 seasonal growth. Against this backdrop, the key outcomes for the quarter were revenue growth was below our expectations, while AI-first revenue now account for 10.5% of our revenues. Operating margin was at 21%. Free cash flow was at $928 million, representing 113% of net profit. Large deal wins were at $5.2 billion with 62% net new. Let me now turn to performance drivers and what it means for our outlook. Q2 revenues were at $5,145 million, an increase of 1.2% sequentially and 1.5% on year-on-year in constant currency terms. Acquisitions contributed approximately 0.4% to sequential growth. Growth was below our expectations. Volume were softer, and price increases were lower than anticipated amidst high competitive intensity. Q2 AI revenue is now 10.5% of total revenue with strong sequential growth of over 29%. Clients are expanding enterprise-wide AI adoption, and we are investing in Topaz capabilities and partnerships to support this opportunity. H1 revenue growth was at 1.9% in constant currency terms and 2.1% in reported terms. We won 19 large deals in Q2 with a TCV of 5.2 billion, which is second highest quarterly TCV in last 5 years. Of this, 62% was net new. This includes an entirely net new $2 billion-plus, 7-year mega deal with a financial services client. Transition is expected to begin in the second half of Q4.
Jayesh Sanghrajka (Infosys Ltd): one in high-tech. Region wise, we sign nine deals each in North America and Europe, and one in rest of the world. This takes H1 total large deal wins to 8.8 billion, which is an year-on-year growth of 28% with 62% net new. This will lay a solid foundation for future growth. Q2 operating margins were at 21%, decline of 0.1% sequentially. Major components of the changes are as below: Headwinds of 70 basis point from sequential sequential change in post sales customer support, 20 basis points addition impact from acquisitions due to one month additional consolidation, offset by tailwinds of 40 basis points from rupee depreciation, 20 from project Maximus, and 20 basis points from higher calendar and working days. Additionally, normalization of 40 basis point impact from EURS program terminated in Q1 was offset by lower realization due to high competitive intensity. For H1, operating margins stood at 21% at the midpoint of our guided range. Onsite mix reduced further to 22.6%, reflecting a sustained effort to help clients achieve cost reduction. For H1, onsite mix was down by 0.7%. Utilization including trainees improved by 0.5% sequentially to 85.4%, demonstrating continued operational focus. Utilization including trainees decreased to 81.9 due to fresher intake. Net headcount increased by about 4,400 employees. We hired about 13,000 freshers in H1 in line with our target of approximately 20,000 for FY27. As mentioned last quarter, we are rolling out compensation hikes to most of our employees effective October 26, with the next phase effective January 27. Attrition reduced to 12.7% versus 13% sequentially. We expect effective tax rate for the year to be in the range of 29% to 30%. Q2 yield on cash investment balance was at approximately 6.9%. DSO for the quarter was 64, down by seven days compared to DSO last year. DSO including unbilled net of revenues was 77 days, down by 10 days as compared to last year. Free cash flow generation was strong at 928 million, at 113% of net profit. We ended the quarter with cash and cash equivalent at 4.7 billion and a debt-free balance sheet. EPS for the quarter stood at ₹19.32, up 8.7 on a year-on-year basis. H1 EPS stood at ₹38.51, a double-digit growth of 11.7%. The board has announced an interim dividend of ₹26, an increase of 13% compared to last year. Coming to verticals, we had robust large deal size signings in financial services of more than 3.5 billion in Q2 and saw growth momentum across global and regional banks, cards and payments, capital markets, and Europe. Mortgage sector is expected to see slow down due to increased rate hike rate hike expectations. Clients are prioritizing modernization and AI initiatives, focused on cost efficiency and enhanced customer experience. They are also increasingly moving from AI experimentation to enterprise-wide AI adoption, with Infosys being the preferred AI partner across vast majority of our top clients. While geopolitical and interest rate uncertainty continues to drive cautious spending, strong deal wins and a healthy pipeline positions us well for sustained growth. Manufacturing continues to face near-term pressures, including lower revenue from a large client. Middle East conflict, inflation, and tariffs are constraining discretionary spend and extending decision cycles. Competitive intensity remains high, particularly around AI-led productivity commitments. We are helping clients navigate uncertainty by driving initiatives across supply chain visibility, more efficiently more efficient factories, and better processes. Clients are relooking at their partners across the value chain, leading to vendor consolidation opportunities. EURS segment continues to see stable demand with client spending concentrated on targeted, high-impact programs, rather than broad-based discretionary initiatives. Cost optimization, vendor consolidation, core modern modernization, and AI-led transformation remain key priority. While competitive intensity remains high, we are investing in sales and domain capabilities and leveraging differentiated AI-led solutions to improve conversions. Large deal pipeline has grown significantly in last one year, which provides future growth visibility. Substantial growth in sequential growth in retail segment was primarily impacted by lower third-party revenues. Additionally, subdued environment and macro uncertainty resulted in soft consumer demand, which has led to ramp-downs in some clients. Consumer tech and logistics are most impacted on account of supply chain disruptions. However, there are opportunities around large cost takeouts as well as transformation programs towards AI. Expectations for AI-led productivity commitments are increasing
Jayesh Sanghrajka (Infosys Ltd): changing demand environment with clients maintaining tight control over discretionary spend and prioritizing cost efficiency. AI-led driven productivity expectations and are putting pressures on pricing and delivery models. While cost takeouts and vendor consolidations remain the primary drivers, some opportunities are emerging in transformation, legacy modernization, and AI-led programs. We are strengthening domain capabilities and execution speed to help clients scale AI and capture these opportunities. Hi-Tech segment was impacted by lower third-party revenues as well as reduced spend in few large clients due to cost pressures emanating from budget cuts. Clients remain focused on cost control with hardware spending constrained by macro uncertainty. We are revising our full year revenue growth guidance to 1% to 2%, reflecting slower than expected H1 performance and our updated assessment for the rest of the year. The lower end assumes further deterioration in macro while the upper end assumes improvement. FS and EURS are expected to grow higher than the company average. Our assumptions regarding acquisitions, the large deal European manufacturing client, and the shift towards offshore delivery remains broadly unchanged. Our operating margin guidance is 20% to 22%. H2 margins will be impacted by compensation hikes, softer revenue seasonality, continued sharing of AI-driven productivity benefits, and ramp-up of large deals. These headwinds will be partly offset by initiatives under Project Maximus. In summary, while growth in the first half has was lower than expectations, deal signings during the period and a strong large deal pipeline with few mega deals provide a solid foundation for future growth. With that, we can open up for the questions. Thank you.
Moderator: Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Kumar Rakesh from BNP Paribas Mutual Fund. Please go ahead.
Kumar Rakesh (BNP Paribas Mutual Fund): Hi. Good evening. Thank you for taking my questions. My first question was this year understandably you had multiple impacts from macroeconomic, offshoring, client-specific issues as well. Now, as we go into the next year, now especially with a large deal also which you announced, there hopefully will be no large offshoring impact the way it is having this year. You'll have additional contribution from the mega deal as well. Now assuming ceteris paribus, I know assuming everything else being equal is a great way of building model, but a terrible way of running a business, but just humor me for a minute. Based on the deals that you have logged in so far and the visibility that you have on the flux of your existing deals, do you think you can see next year organic growth, which is flat this year, to see some recovery? The purpose of this question is not for you to give a guidance on anything next year, just to understand if the headwinds are still emerging or or you think that we are largely past past them.
Salil Parekh (Infosys Ltd): Hi, Rakesh. This is Salil. I think we feel with the two big sort of movements of this quarter, first, on the AI, which is looking very strong at 29% growth quarter-on-quarter. And that builds on something that has been going on, strong growth over the last few quarters. And the mega deal win that we shared which gives us support for next year, plus the pipeline that we see on the mega deals and large deals overall. We feel good that the organic be in a good shape in next year.
Kumar Rakesh (BNP Paribas Mutual Fund): Thanks, Salil, for that. My next question, second question was around margins. So, we are consistently running a higher level of subcontractors. So, what is the business need to run this at a higher level, and what is stopping us to bring it down to the pre-COVID levels, which used to be about 6 odd percent?
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