What would need to happen for you to see an acceleration at the midpoint on an organic basis?
These are things which are always more difficult to estimate, as you know well. However, the view emerging is that the situation in the Middle East may find some sort of a good resolution. Then the underlying economic trends are pretty good in the markets where we are large, so that could give rise to a more stable macro environment. Our AI traction and partnerships are good. So those things, the first and the second accelerate, then we will see some good outcomes. But it is more of going in. We see the environment today, we have not seen some big change to give us a view that we have to do a 3-point range and so on at this stage. And overall, we see growth which is not a compression.
With AI model advances happening as fast as they are, has the amount of productivity compression you are seeing changed in the current contracts relative to one or two quarters ago? And can you dimension the mix of business directly exposed to productivity pass-throughs vs more insulated?
So, on the first one, the models and the technology is moving with great innovation. We have not seen in one or two quarters, the change that you referenced, though what we are seeing is that competitive intensity is pretty high. So every now and then, we see a competitor doing something which looks outside the range of what we think the models can do today. So that thing we do see, but not that is just the tech in the last two quarters, meaning over the last 2 years of course there have been changes. In the terms of services exposed, I think we have not like shared that data. But I think we have shared very clearly what our service line data is and so you can make some estimates with that, I think.
On the construct of growth - macro is improved vs last year, AI services is larger and growing faster (tailwind), and the deflationary impact on existing business. The first two tailwinds look better than last year but organic growth midpoint does not look better. Is the deflationary impact assumed at the midpoint slightly higher than last year?
Hi, Gaurav. This is Salil. I think what you described is the way it starts off, which is we see very strong activity on AI services. On the macro, as the year progressed last year, the situation of the tariff got better and better understood, as you know. Then when the war started, that again had a little bit of a constraining effect on the macro. There is a general view that it is coming to a resolution, but it has not happened. So, while among the economic indicators are forecasted in a better way, it is not yet into the system in that sense. So we will see when it actually comes in. When you put all that together, we see actually something which looks stronger in that sense to what we saw last year. Now the compression is definitely there, I do not know if I have a sense that it is more than last year. We are definitely seeing the compression, but we also seeing the growth and that is how we are sort of dissecting it if you will. Jayesh: We do have a client in Manufacturing, in Europe where we have stayed away from a deal where it did not meet our return estimations. There is some ramp-downs on that client happening because the client is going through a challenging macro environment. So that is baked in. We have also baked in the onsite mix that will impact in the guidance. The exit trajectory of onsite mix is already pretty much 40 to 50 basis points from the future year perspective. So that is baked in in the guidance already.
Would it be fair to say the new AI services come at a relatively higher revenue productivity and better gross margins? And when would the wage hike cycle kick in?
So Gaurav, yes, generally the AI projects come at a better pricing and therefore it reflects in a better margin. Of course, it also has a higher cost compared to the regular projects because the talent is a premium talent at this point in time. So, it is always a factor of how much ahead of the curve you are in terms of benchmark and that is what will define the premium that you will get in the market. If you are at the benchmark level, you would not get a premium. If you are ahead of the curve, you do get a premium. And at this point in time, if you look at the numbers in terms of deals that we are winning, we have won $15 bn deals, that kind of talks about our positioning in the market. In terms of wage increases, we have not really decided the timing at this point in time. We do take multiple factors when we decide that in terms of the level of attrition that we have, when did we do the last wage increases, what the market scenario, what is the inflation etc. We will take all of those decision into consideration and decide.
In the new deals signed, are productivity levels with AI tools similar to what you are passing on in the existing business? The order book looks strong but that is not translating into improved organic growth in FY27. Is the base business seeing much higher deflation than expected? Can you quantify the impact of the European manufacturing client ramp-down, the offshore shift, and Vanguard insourcing?
So there, we are not sharing the specifics on what we are seeing in the portfolio in the growth compression side as opposed to what we have shared which is our overall guidance with some of the points that Jayesh mentioned, the onsite mix, the Manufacturing vertical etc. So, I think we see with that solid growth outlook where we are keeping pace, making sure that what we are seeing in the AI services growth, some of the other areas of growth that we see, is growth which then manages the compression that we see on some of the other parts of our business. So, we do not have a way of sharing that this is the compression, this is the gross growth and then this is the net growth, if you will. Jayesh: Yeah, so Sumeet, if you look at what I said earlier, 1% impact or close 75 bps to 1% impact will come from the European client, which is combination of a deal which did not meet our returns expectation and the ramp-downs in this client through the year as the macro environment is challenging in that sector. The 70 basis points is a reduction in onsite mix we are expecting. 40 to 50 basis points is already visible in the exit trajectory and we do, as we see forward we still believe there will be even further improvement on the onsite mix. So that will also impact the revenue growth from that perspective.
We are seeing percentage of net new deals come in at the lowest level we have seen in recent years. So, can you help us unpack whether that is a function of capability set or AI pressure impacting the demand environment or any other factor there? And what do you expect for net new deals for the year given what you are seeing in your pipeline today?
Yeah, so Jonathan, if you look at the combination of net new and the renewal, is what percentage of deals are coming in for renewal and what percentage of deals are in the pipeline from net perspective. For the full year if you look at, we did sign $15 bn of deals, 96 of them, pretty much 55% net new in that. So I think, by any stretch of imagination that is a strong performance. It is almost 28% growth on a year-on-year basis.
Can you help us understand what transpired over the course of the quarter and how that may have tracked relative to your internal expectations? When may you have started to see some of the outside deflationary impact or some of the down-tick in revenue realization?
We do not really give a visibility in terms of what were we setting as goals or looking at plans in terms of net large deals and performance against that. I think in our view $3.2 bn is a strong performance. Yeah, we do see in some pockets some slower decision making in March, but I do not know if it has got a significant impact on the large deal sign-ups. I would not call that at this point in time.
On AI deflation/compression - where do you think we are in that revenue deflation cycle? Like the last digital cycle, are we already at the trough of that revenue deflation cycle? Or is there more deflation to come? Or is the worst behind?
So hi, this is Salil. On that, what we are seeing is there are different dimensions to the compression. Meaning, we are now working with clients where some of the productivity discussions were baked into the deals over the past year or so and then you have a multiple year outlook. So, all of that will not happen on the first year, it goes through it. So, the actual compression will be dependent on the mix, first year deal, second year deal and so on. We have not got a sense of where we are on that path, but we have a sense of like what the foundation models and other tools are able to support and use that as a basis for what, we are doing with forward deals like three-year, five-year deals and so on. But on that sort of a scenario, we do not have a view that we can share on like where that path is. But we are definitely very clear on where, like when working with the foundation model and tools, what is possible, where is it effective, different models or different tools are more relevant for different parts of the AI work that we are doing with clients.
How may the growth algorithm change from a volume perspective given the AI efficiency gains on the supply side? In the past, if you grew at 3%, you might have needed to grow volumes by 5% or 6%. One competitor suggested volume variance may need to double because of efficiency gains.
Keith, the reality is we do see as Salil was saying earlier, we do see some deflation from our existing services, right? And part largely part of that is getting offset by the new services, the new AI-driven services. Overall at this point in time, the volumes for the last year has remained flattish. And as we go forward, we continue to see volumes to remain flatter or marginally positive as what we have baked in the guidance at this point in time, which is reflected in the lower end. On the upper end as I said earlier, we have expected better macro environment which would reflect in better volumes.
Can you talk about the push-pulls for the guidance like at the lower end and at the upper end what are you assuming? And the INR depreciation has not impacted the margin outlook - which areas have the INR depreciation been invested in?
Hi Yogesh, this is Jayesh here. At the lower end of the guidance we have assumed higher deterioration in the environment and at the upper end, we have assumed improved environment, like similar to what we have done in the last year as well. In terms of margin walk, I did give you a broad margin walk, but largely we have invested all the benefit that we got from Rupee as well as from Maximus back into the business, whether it is sales and marketing costs which has gone up by 40 basis points on a full year basis, the AI talent and the AI partnerships etc.. So, I think all of all of that has been absorbed in in the margin in the financial year.
You mentioned productivity pass-through impacted margins. Why should that be the case if there was productivity improvement?
So Yogesh, market is competitive. As I said, the competitive intensity in the market has gone up and the productivity will get passed back to the client largely.
You have chosen to guide in a 200 basis point band versus a slightly wider band in the last couple of years. Is your visibility better this year? Also, 2.25% organic at the midpoint appears to be a slowdown vs the 2.4% organic in FY26. Is it demand environment, structural AI deflation, or the one large account ramping down?
Yeah, so Ankur, if you look at the guidance last year we gave a 3-point guidance because the whole environment changed pretty much very close to the time when we were giving guidance, right? And we had very little clarity in terms of how that environment change on the back of tariff changes is going to impact the client behavior etc. So where we stand today, I think there is a better clarity in terms of what happened, the environment has been like this for last few quarters and we know how clients are behaving at least at this point in time. On the construction of the guidance, we are seeing the growth on AI services. We are seeing very good traction on that. We have started a program where we are working with large companies with a smaller footprint that Infosys has. We are expanding that quite nicely. Then we saw the large deals, the net new was 55%. So that will contribute for the this financial year in a significant way. And then on the other hand, there is the productivity benefits that are coming through which our clients are looking for with AI on the existing portfolios. Then Jayesh shared a couple of situations with Manufacturing, Europe, with on-site mix, there some technical factors. The environment I find is good. Our large deal pipeline is good.
On overall business and headcount - do you envision a scenario where total headcount could be down in total when the year is over? And subcontractor intensity in the year ahead?
So on the overall headcount, first, as you pointed out, we will recruit 20,000 college graduates. That is our plan today. We have a model, which does some of it at one particular time and the rest of it throughout the year. So, we have like a variability built in if we see some changes. But what we see today, we think 20,000 looks like a good place to start. We still have at least now we look out for this quarter, next quarter, very good demand for people, which are coming at higher levels, lateral recruitments. So, I think that will continue. We do not have a plan that the headcount will be less at the end of the year. On the subcon, Bryan, if you look at last few years, Subcon as a percentage of revenue has come down. So we do not really expect subcons to significantly change from these numbers. Over a medium-term period, we expect to maybe go down from the current level, but at this point in time, not significantly changed.
In the last two months with the latest launch of Anthropic models, have you seen increased productivity demand from clients? You mentioned in the press conference that nothing material has changed in the last three months.
So there the sense I have is, the need for productivity is similar. There is some level of competitive intensity which is higher, which then leads to more demand. There are some cases where it is way outside the bound where there is not a lot of engagement then, it is something which we do not see a way of getting to, so we are not going down those paths. But those are very infrequent. If you look at the vast majority we see, not this like big changes has come literally in the last two months or so at this stage. Now things are moving fast, productivity over time which is over multiple quarters, year, that has changed, but it is not something that suddenly has like a step change in the last two months that we have seen that.
Are we also seeing deals which we had signed 6 months ago or 12 months ago where the client has come back and asked for incremental productivity benefits to be passed? Has the INR depreciation benefit also stopped trickling in?
So Vibhor, I do not think we have seen, scenarios where what we signed few months back, a client has come back and asked us, different productivity to be baked in again. What Salil was talking about when a deal comes up for bid or when you are bidding for a new deal. On margins/rupee - two points there, Vibhor. Generally, I mean, you do have rupee benefit that sometimes gets offset by or most of the times gets offset by cross-currency headwinds. Because when US dollar appreciates, it appreciates against most currencies and that kind of offset each other. And your portfolio of non-US as it grows, that offset becomes larger and larger. If you look at this quarter specifically for us as I called out in the margin walk, there was close to 50 basis points of headwind that that we got because of amortization of one of the acquisition related intangibles. Last quarter we had a 30 basis points gain, so in a way these two went into two different directions for us in terms of margin impact, both became a headwind. And then 20 basis points on account of employee related costs. So, all of those were headwinds that were offset by 40 basis points from currency and 30 basis points from Maximus.
On deals we left on the table - is the industry being disrupted by leaner, more AI native companies who are pricing very low? Or is this a race to the bottom from traditional vendors creating irrational pricing? Over the next 2-3 years does the industry need to find newer leaner models?
So there, I mean, it is not that this is something widely prevalent. We do see sometimes a particular competitor doing pricing which seems unusual, but this is something that has happened, over the course of the years for different reasons. Just now it may be linked with the client's mind to AI productivity, at other times it is got other things. So, I do not see that it is something which is across everything. At the end, we had 96 deals with close to $15 bn in large deals for last year, so it is a very broad-based robust outcome, plus the pipeline is pretty good. But there are anecdotal things where some of the productivity thing looks out of the range and we see with what is possible with what we have understood with some of the foundation models. So, it is more of that sort of a comment, we do not see that as being a sort of trend of some sort.
On pricing competitiveness - is it more competitive today than over the last couple years? When competitors are getting more aggressive on pricing with AI cost curves that may have more uncertainty, does that introduce incremental risk in how you are philosophically thinking about pricing?
I will start on that pricing point. The way we are seeing it is the point you made about competitive intensity, we do see there is increased intensity. If you look at last financial year, we had a growth, some other players had negative revenue. So, one can imagine some of that sort of a scenario. In pricing, it is actually Jayesh will talk a little bit about it, I think overall realization is better in the year than we have seen before. So maybe the execution is better and the portfolio at least we feel is less risky in that sense. Jayesh: If I can just add to what Salil was saying. If you look at little elevated level, despite the softer volume through the year most of our growth came from the realization. That reflects in what we have been able to get on the back of AI, that reflects in the value that we are creating for our clients. And to some extent that also reflects the contribution from Project Maximus through the lean automation, value-based selling and all of those tracks, right. So that is given. If you look at despite the competitiveness in the market, despite all of that, we have been able to maintain our margins for the year. We have invested back in the business, 50 basis points and or 40-odd basis points in sales and marketing, the AI talent that we are building, the AI capabilities that we are building, all other AI related investments. So, all of that has been absorbed in the margin while keeping margin constant.
Any comments on the direction of the onsite mix? Is the AI compression or AI embedded in services and contract structures impacting the delivery mix? And for FY27, is the onsite exit similar and third-party cost similar next year vs this?
No Apurva, I think it is multiple factors. Little bit of the environment, little bit of the visa situations in some of the countries, little bit of our own initiative to deliver more from offshore. So, I think it is a combination of all of that. Sorry just to add, the discretionary spend has also come down which generally needs higher onsite. Third-party cost, I did say that earlier, we expect it to be in the similar range. FY27 exit is difficult to project at this point in time as I said, the FY26 exit itself gives us approximately 40-50 basis points of lower onsite mix and we think trend will continue to some extent. But it is very difficult to predict what will be FY27 exit.