Infosys Limited (NSE: INFY) Q2 2021 earnings call dated Oct. 14, 2020

Corporate Participants:

Sandeep Mahindroo — Financial Controller and Head – Investor Relations

Salil Parekh — Chief Executive Officer and Managing Director

Pravin Rao — Chief Operating Officer and Whole-Time Director

Nilanjan Roy — Chief Financial Officer

Analysts:

Yogesh Aggarwal — HSBC Securities — Analyst

Nitin Padmanabhan — Investec — Analyst

Moshe Katri — Wedbush — Analyst

Keith Bachman — BMO Capital Markets — Analyst

Sandip Agarwal — Edelweiss Capital — Analyst

Bryan Bergin — Cowen — Analyst

Kawaljeet Saluja — Kotak Securities — Analyst

Diviya Nagarajan — UBS — Analyst

Ankur Rudra — J.P. Morgan — Analyst

Pankaj Kapoor — CLSA — Analyst

Presentation:

Operator

Ladies and gentlemen, good day, and welcome to the Infosys Earnings Conference Call. [Operator Instructions]

I now hand the conference over to Mr. Sandeep Mahindroo. Thank you. And over to you, sir.

Sandeep Mahindroo — Financial Controller and Head – Investor Relations

Thanks, Margaret. Hello, everyone, and welcome to Infosys earnings call to discuss Q2 FY ’21 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 the quarter before opening up the call for questions. Please note that anything which we say which refers to our outlook for the future is a forward-looking statement, which must be read in conjunction with the risks that the company faces. A complete statement and explanation of these risks is available in our filings with the SEC, which can be found on www.sec.gov.

I would now like to pass it on to Salil.

Salil Parekh — Chief Executive Officer and Managing 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, a 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 one-time special bonus.

Large deal wins, which are wins of worth about $50 million in TCV per contract were at $3.15 billion. Large pipeline remained 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 52% increased year-on-year. Our balance sheet remained strong with cash and investments positioned 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 one-time 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 extended 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 three years, we’ve launched six 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 two years, bringing our hiring commitment in the U.S. to 25,000 over five 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 three months also saw us announce three acquisitions; 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.

Pravin Rao — Chief Operating Officer and Whole-Time Director

Thank you, Salil. Hello, everyone. Hope you are all well and safe. As we continue to wait through the continuing complexity caused by the pandemic, our rock-solid focus on client relevance and employee well being is helping us navigate this challenge successfully. 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 one. Year-on-year growth continued to remain positive and increased further to 2.2% in constant currency. Quarter two revenues included only a marginal contribution from the Vanguard deal, which should start ramping up from quarter three onwards.

Overall operating parameters improved during the quarter, utilization, onshore delivery share, RPP and subcon costs. Utilization in quarter two improved by 240 bps to 83.6%, mainly on account of improvement in offshore utilization. Onsite 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 sequentially to reach 30 at the end of quarter two.

Large deal wins in quarter two was the highest ever at $3.5 billion. We won 16 large deals in quarter two, out of it, six deals were in financial services, three deals in retail, two deals each in communication and high-tech and one deal each in energy utility resources services, manufacturing and others. Region-wise, 11 were from America, four were from Europe and one 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 six months, we have decided to effect salary increase across all levels, effective January 1, 2021. We are paying 100% variable pay for quarter two along with the special incentive, which will be paid to employees in lower levels.

Recently the U.S. Department of Labor and Homeland Security issued two separate rules, restricting the H-1B Visa program on both scrutinizing qualifications and mandating significantly higher wages. However, our dedicated focus over the past three 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 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 pick-up of large digital transformation programs. We have signed six 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 we’re seeing lot of traction 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 two and ramp up of earlier deal wins. We however remained cautious on this segment given continuing demand and liquidity issues and possibly increased furloughs in the coming months.

Performance in Communication 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 two large deals in the last quarter which should help in stabilizing performance for this segment.

Energy, Utilities, Resources & 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 take-out, and we continue to build a strong pipe. Manufacturing segment was stable during the quarter, which is a massive improvement from the sequential decline in quarter one. While there are disruptions for segment, we are seeing opening up of pockets, although the pace of recovery may remain sluggish. Cost take-out is a major focus for our clients across sectors. We expect gradual improvement in this segment with recovery in volumes and robust new account openings.

The deal pipeline remains at the 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 constitute 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 five of our colleagues whom we have lost due to the pandemic. We stand together and are extending all possible supports to their families during this trying times.

With that, I will hand over to Nilanjan.

Nilanjan Roy — Chief Financial Officer

Thanks, Pravin. Hi, everyone. Hope all of you are well and safe with your families and loved ones. On the back of a strong quarter one, quarter two continues to show up improving performance with our unwavering focus on client relevance, operational excellence, cost 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 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 onsite 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 risen from the cost deferrals, etc., we expect some of these benefits to shrink in quarter two as we rollout 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 two days to 69. The increase in capex spend during the quarter was mainly towards technological enablement of our employees. FCF for quarter two 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 two were $4.55 billion. Yield on cash balance improved to 6.33% in Q2 compared to 6.11% in the previous quarter. Quarter two marked 21 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 INR12, 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.

Questions and Answers:

Operator

Thank you very much. [Operator Instructions] The first question is from the line of Yogesh Aggarwal from HSBC. Please go ahead.

Yogesh Aggarwal — HSBC Securities — Analyst

Yeah, hi. Thanks for taking my question. Just two clarifications, if I may. Firstly, while you have upgraded 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, and Nilanjan, employee cost is down actually quarter-on-quarter. This is despite the bonus and special incentives. So is that largely for offshore mix?

Salil Parekh — Chief Executive Officer and Managing Director

Thanks, Yogesh. This is Salil. Let me start with the first one. We see for 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

Yeah. 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 absolute, you’re right, the onsite offshore mix has helped the overall employee cost to come down. But like I said, this is temporary due to the travel restrictions imposed.

Yogesh Aggarwal — HSBC Securities — Analyst

Got it. Got it. Many thanks, guys. Thank you.

Operator

Thank you. The next question is from the line of Nitin Padmanabhan from Investec. Please go ahead.

Nitin Padmanabhan — Investec — Analyst

Yeah, hi. Thanks for taking my question, and congrats on a great quarter. I had two questions actually. One is on the deals that we have won so far, obviously, there is a lot that’s already spoken about, Vanguard. But excluding that, 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 one-time offshore shift because of travel restrictions. Do you see client funding incremental spends through higher offshore shift going forward? I think these are the two broad questions. Thank you.

Salil Parekh — Chief Executive Officer and Managing Director

Thanks. This is Salil. I’ll start with the first one. The types of things we are seeing in our deal pipeline and what we’ve closed, essentially three 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 will see over the next few quarters in terms of conversions. 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 cost out of existing estate through automation or other means and funding it — funding programs which gave the 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.

Nitin Padmanabhan — Investec — 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 future offshore shifts based on the experience that we have seen so far. Is that the right takeaway?

Salil Parekh — Chief Executive Officer and Managing Director

The onsite offshore mix ratio is difficult to forecast in that sense. But once the travel restrictions become less, there will probably be more work onsite. Equally, structurally, there is now more understanding of what are the possibilities and option. So there 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 element points as we look ahead into the mix.

Nitin Padmanabhan — Investec — Analyst

Sure. Thank you so much, and all the best.

Operator

Thank you. The next question is from the line of Moshe Katri from Wedbush Securities. Please go ahead.

Moshe Katri — Wedbush — Analyst

Hey, thank you very much, and congratulations for the team. Two 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 gross? And then just as a follow-up. Did you just say that the renewals — renewal rates for bookings was I think 14% for the quarter, which is actually very good in terms of incremental new business? Thank you.

Salil Parekh — Chief Executive Officer and Managing Director

On the second one, Pravin will comment on the net new and the renewal. On the first, there were three M&A transactions we did over the last three months. I don’t know there will be an acceleration. We have a good pipeline of deals. We’ll not quantify it 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 play. In terms of this year, specifically, we don’t have a target that how much will come from M&A.

Pravin, on the net new, you want something?

Pravin Rao — Chief Operating Officer and Whole-Time Director

Yeah. Hi, Moshe. This is Pravin here. You are absolutely right. The net new in the total liabilities is 86%. And obviously, these numbers do vary quarter-on-quarter depending on the nature of deal. And there are times when lot of renewals were due for — come due in a particular quarter, but it’s obviously very positive thing. Higher net new is definitely good news.

Moshe Katri — Wedbush — Analyst

When we look at your bid and proposal pipeline for the next six months 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?

Salil Parekh — Chief Executive Officer and Managing Director

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 timeline when these deals will get closure. So that will probably have a varying in terms of how — I mean, the percentage of net new. Obviously — probably, I mean, if you look at historical thing, maybe the percentage of net new in this pipeline is probably on the higher side. I mean at this stage, I can’t really quantify how much higher it is, but it’s definitely on the higher side.

Moshe Katri — Wedbush — Analyst

Helpful. Thanks, and congrats.

Salil Parekh — Chief Executive Officer and Managing Director

Thank you.

Operator

Thank you. The next question is from the line of Keith Bachman from Bank of Montreal. Please go ahead.

Keith Bachman — BMO Capital Markets — Analyst

Hi. Thank you very much. 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 was 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? And I’ll just throw a third question out there. Could you tell us how many of your employees are currently using visas in the U.S.? And I’ll cede the floor. Thank you very much.

Salil Parekh — Chief Executive Officer and Managing Director

Thanks for that question. This is Salil. I’ll go with the second one. And then the other two, Pravin can jump in with the answers. In terms of the offshore, is there a natural limit, I think there is 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 six months. So I don’t see that there is some sort of a ceiling there.

I think what is also critical is as we see more and more growth 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 this can also be done from an offshore perspective. So specifically, we don’t see in that sense a ceiling to the offshore work, but it’s a function of how that starts or gets carved down in different discussions and what the client approach is as that moves on.

For the other piece, Pravin, do you want to go ahead please?

Pravin Rao — Chief Operating Officer and Whole-Time Director

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, 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.

Keith Bachman — BMO Capital Markets — Analyst

Okay.

Salil Parekh — Chief Executive Officer and Managing Director

And what was the third question?

Keith Bachman — BMO Capital Markets — Analyst

Number of visas 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.?

Salil Parekh — Chief Executive Officer and Managing Director

Yeah. So in…

Nilanjan Roy — Chief Financial Officer

Go ahead.

Salil Parekh — Chief Executive Officer and Managing Director

Go ahead, Nilanjan.

Nilanjan Roy — Chief Financial Officer

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

Keith Bachman — BMO Capital Markets — Analyst

Okay, great. Thank you very much, and congratulations.

Operator

Thank you. The next question is from the line of Sandip Agarwal from Edelweiss. Please go ahead.

Sandip Agarwal — Edelweiss Capital — Analyst

Hi. Thanks for the opportunity. 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 two questions. One is, the leakage on 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 is, 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. So that is question number one.

And question number two. 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 the attrition level going forward? Whether you are okay with the 7.5% kind of range or you think it will shoot up to low-double-digit? Thanks a lot.

Salil Parekh — Chief Executive Officer and Managing 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 adopting cloud at the 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 in many cases. 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 very. We believe, obviously, it will work for the next several years.

So Pravin, over to you please.

Pravin Rao — Chief Operating Officer and Whole-Time Director

Yeah. On the core shrinkage, I mean, today when we look at what’s happening, plan for 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, which started about couple of years back and this pandemic has only accelerated it as every client is looking at how to become resilient in the post-COVID world. Obviously, the IT spend is not increasing, so they are really funding this digital transformation initiatives by taking cost out from the core through 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 spend 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 we are really talking about the same pie. But as long as your overall growth — you are 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 customer, taking cost out and other thing. And many of the large deal wins, 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 content on the digital.

So the way to look at it is, you have — I mean, you have a pie IT spend. And within the IT spend, clients actually mix between core, I mean they will 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 spend 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 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 two things. One, obviously, it’s 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 engagement with the employees in the virtual world. We are also focused — they are also focused — they also recognized that employees have been under stress. So there is 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 a lot during the pandemic, particularly in cases where employees have test positive and so on. So 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.

Sandip Agarwal — Edelweiss Capital — Analyst

Thanks a lot. Thanks again. And best of luck for next quarter.

Pravin Rao — Chief Operating Officer and Whole-Time Director

Thank you.

Operator

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

Bryan Bergin — Cowen — Analyst

Hi. Thank you. 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? Any ability to give us a sense on how much of the mix of the margin expansion you’ve shown is lasting versus short-term?

Nilanjan Roy — Chief Financial Officer

Yeah. So…

Salil Parekh — Chief Executive Officer and Managing Director

Nilanjan, you want to go ahead?

Nilanjan Roy — Chief Financial Officer

Yeah, yeah. I’ll go with that. Yes. So like I mentioned in my speech that we have seen this benefit both of our three 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 it will start impacting the margins. It has helped us in the first half, but will start impacting the margins. We’ve talked about that from 1st of January, we will rollout wage hike 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, as you can see that in our results. Of course, travel has come down dramatically. Some of the more discretionary expenditure like brand building, etc. also were 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. This is an ongoing program which we have around the offshore onsite mix. We have seen some benefits of that temporarily. And as Salil had mentioned in 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 onsite offshore mix changing.

Second is a pyramid. I think we’ve done a lot of work around broad basing the pyramid offshore and are now looking at that for the onsite as well. The hub strategy really helps us in calculating freshers from community colleges, etc. the onsite 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 as discounts and improve productivity and part of that is a margin improvement strategically.

So these are the different strategic levers. So as we’ve talked about the three-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 you move to a hybrid model, it remains to be seen how much of that benefit we can keep and we will have to invest more in technology, in communication and security. So they may have been — there may be some balancing there as well. So bit premature to talk about that.

Bryan Bergin — Cowen — Analyst

Just to clarify. So 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 and 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 our target of $150 million of savings, and we had overachieved against that number.

Bryan Bergin — Cowen — Analyst

Okay. And then two quick 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 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.

Bryan Bergin — Cowen — Analyst

Okay, understood. Thanks.

Operator

Thank you. The next question is from the line of Kawaljeet Saluja from Kotak. Please go ahead.

Kawaljeet Saluja — Kotak Securities — Analyst

Yeah, hi. Thank you for the opportunity. And congratulations to the management team on a fantastic quarter. My question is also on profitability. Now I understand that certain cost deferrals had 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 three years to four years. Now many of our companies work with a certain aspirational margin band. So how should really one really think about the current year as margin band increase? And should that — if I mean one assume as a more sustainable band going forward or any thoughts on this could be welcome?

Nilanjan Roy — Chief Financial Officer

Yeah, Kawal. So I think we’ve been very focused over the last two 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 sales force 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, which is why the 21% to 23% margin guidance was given in the prior two years. And for us that is the most critical part is to continue to show stability rather than exactly what you mentioned was a much more volatile.

Clearly this is an exceptional year in more ways than one with so many moving parts and variable element. 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 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 — Kotak Securities — Analyst

And did you say that 23% to 24% is a sustainable margin band to model based upon it?

Salil Parekh — Chief Executive Officer and Managing Director

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

Kawaljeet Saluja — Kotak Securities — Analyst

Okay. That absolutely helps. The second thing is, the price with the increase in RPP, I thought that we are living in recessionary — I mean actually in rescission and this had backdrop. The increase in RPP is a remarkable achievement. Is that largely operations led? And do cost take-out a figure in kind discussions quite a lot? And if yes, I mean, should that — when does the impact of that will come in into RPP going forward?

Nilanjan Roy — Chief Financial Officer

Yeah. So in the RPP…

Salil Parekh — Chief Executive Officer and Managing Director

Go ahead. Go ahead, Nilanjan.

Nilanjan Roy — Chief Financial Officer

Yeah. So I’ll answer the first one. The second, if Salil, you can take?

Salil Parekh — Chief Executive Officer and Managing Director

Yeah.

Nilanjan Roy — Chief Financial Officer

So just the first one, quickly on RPP, the 100 bps is a combination of multiple factors. I think one is of course is a day’s impact during the quarter. We have seen some improvement in productivity as well to our automation. And so I think these are the two large ones. It’s slightly more moderated discount environment. But like I said, discount always are not secular. So you can always see these ups and downs as well. So these are the three large carve-outs within that 100 basis points.

Salil, you can take the other one.

Salil Parekh — Chief Executive Officer and Managing Director

Thanks. Hi, Kawal. The point on the cost discounts versus RPP client discussions, I think as Nilanjan was sharing, the environment in Q2 especially has been quite stable vis-a-vis discount 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 is none of that a large sort of thing coming in into the RPP. But as Nilanjan explained, there were some specific reasons we are also quite focused on RPP, but we’re going to make sure over time we find a sustained method of doing it. So we watch and see how that goes over the next few quarters.

Kawaljeet Saluja — Kotak Securities — Analyst

Fantastic. Thanks, Nilanjan. Thanks, Salil. And all the best for the future.

Salil Parekh — Chief Executive Officer and Managing Director

Thanks, Kawal.

Operator

Thank you. The next question is from the line of Diviya Nagarajan from UBS. Please go ahead.

Diviya Nagarajan — UBS — Analyst

Thanks for taking my question, and 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 headcount. I think Nilanjan earlier pointed out that this quarter we have seen fairly new to the 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, and 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 initiatives savings. How has that trended so far? What is that target? Could you quantify that please?

Salil Parekh — Chief Executive Officer and Managing Director

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

Pravin Rao — Chief Operating Officer and Whole-Time Director

Yeah. This is Pravin here. On the headcount, obviously, the headcount increase will be in line with the growth. This quarter we had 5,005 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 one and it has been put significantly. So the number of hiring was on the lower side this quarter. Hiring in subsequent quarter, quarter four 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, mainly freshers in India.

Diviya Nagarajan — UBS — Analyst

Got it. Got it.

Salil Parekh — Chief Executive Officer and Managing Director

Diviya, on your question on your…

Diviya Nagarajan — UBS — Analyst

Sorry. Go ahead.

Salil Parekh — Chief Executive Officer and Managing Director

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, etc. So it’s not that all this money flows into the bank.

Diviya Nagarajan — UBS — Analyst

Fair enough. And Salil, back to the digital growth numbers that we’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 are looking at possible acceleration in digital spend overall, how do you see the scope for this number accelerating in the next 12 months, 24 months?

Salil Parekh — Chief Executive Officer and Managing Director

So there, Diviya, I think we add — if you look in the previous financial year numbers, growth numbers around 30, 35, in one of the quarters before that even higher, but there are two factors. One, our size of the digital also is quite larger, it’s 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 in a delay as we were discussing earlier, the cloud part of digital is on a rate growth in terms of the market, in terms of what clients are doing, in terms of what the large partners of ours are doing. And then there are other areas, for example, on data, on experience, which are in good traction. So we will 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 — UBS — 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 two quarters the pace of core decline accelerate. Do you expect that kind of stabilize and go back to where it was pre-COVID as customers start to stabilize?

Salil Parekh — Chief Executive Officer and Managing Director

On that — go ahead, Nilanjan, sorry.

Nilanjan Roy — Chief Financial Officer

Okay. I can take a shot at it. 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.

Diviya Nagarajan — UBS — Analyst

Thanks. That’s very helpful. Wish you all the best for the rest of the year.

Salil Parekh — Chief Executive Officer and Managing Director

Thank you.

Operator

Thank you. The next question is from the line of Ankur Rudra from J.P. Morgan. Please go ahead.

Ankur Rudra — J.P. Morgan — Analyst

Thank you, and 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 Parekh — Chief Executive Officer and Managing Director

Thanks, Ankur. The way we see it is, we’ve had year-on-year growth — some of our last years we’ve 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’ve made and investments we’ve made over the past several years. For example, scaling our digital, working very focused way on looking at large deals. Looking at what they’re doing at revenues starting earlier on localization, an extreme focus on rescaling that we’ve 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 has given increased trust with our clients. 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, a lot of it in our business, as you know well, is the steady execution, a continuous sort of traction to that. So I think those are the combination of things which are sustaining us. Hopefully, we keep up the execution and that sustains for us.

Ankur Rudra — J.P. Morgan — 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 Allstream, the strength we’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 are seeing out there and building it?

Salil Parekh — Chief Executive Officer and Managing Director

Today, I think one person’s conservatism is another person’s regression. We see a very good guidance increase on revenue. And there is the further effect in Q3, as you know, a good — 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’ve generally modeled 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 zero to two to two to three. We have moved the bottom by two points, so it’s quite a big change in terms of revenue growth guidance.

Ankur Rudra — J.P. Morgan — Analyst

Understood. And just lastly, the pandemic has clearly given you significant margin tailwind. Is it time to think about this strategically? Will you, for example, think about this to enter market space in a situation which you otherwise wouldn’t participate to try and expand your addressable market if this deal win sustains?

Salil Parekh — Chief Executive Officer and Managing Director

I mean, these aren’t — specifically which addressable market you are thinking. 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 one we have defined have got a nice traction in them and we can deepen our presence in those quite well. And given 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.

Ankur Rudra — J.P. Morgan — Analyst

Understand. Thank you, and best of luck.

Salil Parekh — Chief Executive Officer and Managing Director

Thanks.

Operator

Thank you. The next question is from the line of Pankaj Kapoor from CLSA. Please go ahead.

Pankaj Kapoor — CLSA — Analyst

Yeah, hi. Thanks for the opportunity. Salil, first a clarification. Did I heard 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 a new major lead or a relationship conversion so far. Is that the right way to understand that?

Salil Parekh — Chief Executive Officer and Managing Director

On vendor consolidation, there is discussion. It’s in our pipeline. We’ve seen few small things moving. My sense is those things will play out over multiple quarters because this is a business which had an inherent stickiness, but there have 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 — CLSA — 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 market or do you think that this is something which could be over and above to what you will estimate to us?

Salil Parekh — Chief Executive Officer and Managing Director

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 pertained into a model. We don’t anticipate it. Of course, it’s a possibility. No one quite knows what the 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 — CLSA — Analyst

Understood. And on the order book, if I take the Vanguard deal out of the order book composition, it looks like in terms of — is it dominated by smaller-sized deals or besides Vanguard also there are fairly large deals dominating it?

Salil Parekh — Chief Executive Officer and Managing Director

Well, we are not decoupling large deals number, as you know. What is within our — generally speaking, within our large deal wins in the last few quarters plus the pipeline, we have a decent size of mega deals. It’s — there are not obviously loads of them, but there is a decent number of them and there is a decent number of other sizes as well.

Pankaj Kapoor — CLSA — Analyst

Okay. Got it. 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 Parekh — Chief Executive Officer and Managing 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 it’s good in this quarter for sure, but in general, in the pipeline it seems to be a little bit higher than that percentage is a way Pravin described it. So instead of sort of decoupling the Q2 number that would be the way to look at it as we look ahead.

Pankaj Kapoor — CLSA — Analyst

Understood. Thank you, and wish you all the best.

Salil Parekh — Chief Executive Officer and Managing Director

Thanks.

Operator

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

Salil Parekh — Chief Executive Officer and Managing Director

Thank you. Thank you everyone for joining this session. We’re really excited with the way this quarter has played out. Commitment of our employees has been incredible. It has been the most critical element in serving our clients. And you can see from our actions, we really make sure we addressed that absolutely fully. And we are 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

[Operator Closing Remarks]