Infosys - Earnings Call - Q4 24/25
April 17, 2025
Transcript
Operator (participant)
Ladies and gentlemen, good day and welcome to Infosys Limited Q4 FY 2025 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 star, then zero on your touch-tone 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 (Financial Controller and Head of Investor Relations)
Hello everyone and welcome to Infosys earnings call for Q4 and FY 2025. Joining us on this earnings call is CEO and MD Mr. Salil Parekh, CFO Mr. Jayesh Sanghrajka, and other members of the leadership team. We'll start the call with some remarks on the performance of the company, subsequent to which the call will be opened up for questions. Kindly note that anything we say which refers to our outlook for the future is a forward-looking statement that must be read in conjunction with the risks that the company faces. A full statement and explanation of these risks is available in our filings with ICC, which can be found on www.icc.gov. I'd now like to pass on the call to Salil.
Salil Parekh (CEO)
Thanks, Sandeep. Good evening and good morning to all of you. Thank you for joining us on this call. We had an excellent year and financial year 2025. Our revenues grew at 4.2% in constant currency terms. Our operating margin was 21.1%. We generated $4.1 billion in free cash flow, and we had $11.6 billion in large deals. In Q4, we had year-on-year growth of 4.8% and an operating margin of 21%. We are seeing growing demand from clients to partner with them on AI. They're moving from a use-case-based approach to an AI-led transformational approach, with AI agents playing a critical role. We're working on AI projects by bringing Infosys Topaz, a generative and agent AI-powered services and solutions for their benefit. AI work spans a wide spectrum of priority areas like process improvement, engineering, customer service, cybersecurity, and employee productivity.
We're helping a large U.S. financial services company navigate the AI transformation to deliver hyper-personalized, conversational, AI-powered customer experience with accuracy of over 80%. We're working with a Europe-based company to create a master solution driving multiple AI-first transformation projects that is automating 70% of the process landscape. We continue with our strategic expansion with acquisitions, one in the energy consulting space in the U.S., one in cybersecurity in Australia, and with a new strategic partner joining a joint venture in Japan. All of these are areas of interest and strategic focus for the company. We have a set of capabilities that support our clients in their growth areas related to AI, cloud, and digital, and in their efficiency areas related to automation, cost reduction, lean, and consolidation.
Based on what we are seeing in the environment today and building on our large deal wins in the past quarters, our guidance for growth for financial year 2026 is 0%-3% in constant currency terms. The environment is uncertain, and we will execute our plans with agility while keeping a close watch on events as they unfold. Our margin guidance for financial year 2026 is 20%-22%. With that, let me pass it on to Jayesh for his views.
Jayesh Sanghrajka (CFO)
Thank you, Salil. Good morning, good evening, everyone, and thank you for joining the call today. We entered financial year 2025 with significant uncertainties relating to interest rates, elections in large years, and geopolitical situations. Over the course of the year, reduction in uncertainties, our strong market position, reflecting in robust deal wins and improvement in discretionary spend in financial services, led to better growth than our initial projections. A year ago, when I started my journey as the CFO of Infosys with a vision to increase our market share, strengthen collaboration with business, drive Project Maximus to expand operation margins, operating margins, and improve cash flow, I'm very glad that we have been able to achieve success in each of these parameters. Let me start by talking about the key highlights for the quarter and the year.
We closed the year with revenues at $19.3 billion, a growth of 4.2% in constant currency terms and 3.9% in reported terms. Acquisitions contributed 80 basis points to the growth in financial year 2025. Financial services, EURS, and manufacturing grew above company average for the year. I'm particularly glad that operating margins for the financial year improved 50 basis points over FY 2024 to 21.1% after absorbing multiple headwinds. This has been a key focus area over the last year, and I will elaborate on this later. Sequentially, revenue declined by 3.5% in constant currency terms due to reduction in third-party costs and seasonal weakness. Approximately 2/3 of the sequential revenue drop was due to reduction in third-party, with the decline being higher than our expectation. Balance 1/3 drop was due to volume decline and lower calendar and working date driven by Q4 seasonality.
Revenue increased by 4.8% on a year-on-year basis in constant currency terms in Q4. Europe grew 3x of the company rate at 14% in constant currency terms driven by our focused approach of client mining, ramp-up, or large deals and acquisitions. Europe now accounts for 30% of our revenues. Financial services and manufacturing grew double-digit year-on-year at 12.6% and 14% respectively in constant currency terms. In rupee term, revenue growth for FY 2025 was 6.1%. Revenue growth accompanied by operating margin expansion led to 8.3% growth in EPS terms on normalized basis, adjusting for interest on tax refunds for FY 2024 and 2025. We closed 24 large deals in Q4 with a TCV of $2.6 billion. 63% of this was net new. For the full year, we closed 96 deals with TCV of $11.6 billion and 56% net new. DSO reduced by 5 days to 69 sequentially.
Further, the DSO, including unbilled net of unearned, reduced by 3 days to 83. Free cash flow for FY 2025 was highest ever at $4.2 billion, 129% of net profit. Adjusted for tax refund, it stood at $3.5 billion, 112% of net profit. Headcount at the end of the year was 323,578, an increase of 6,000 year-on-year. Attrition remained contained at 14.1%. Operating margin for Q4 was at 21%, a decline of 30 basis points sequentially, bringing the financial year margins at 21.1%, an increase of 50 basis points from FY 2024 levels.
The major components of sequential margin change for the quarter are as follows: headwind of 140 basis points from compensation-related costs, 40 basis points impact from acquisition, mainly on account of amortization of intangibles, partly offset by tailwind of 80 basis points from lower post-sales customer support, 30 basis points from Maximus, 20 basis points from currency movement, and 20 basis points from lower third-party costs. Higher travel and visa costs were offset by lower other costs, leading to a decline of 30 basis points sequentially. Utilization, excluding trainees, stands at 84.9%. On-site mix further reduced to 23.6%. We hired 15,000 freshers this year and expect to hire over 20,000 freshers in FY 2026. EPS increased by 1.8% in financial year 2025 in rupee terms on reported basis and 8.3% adjusted for interest on tax refunds.
The increase in margins by 50 basis points over FY 2024 was achieved despite multiple headwinds from salary increases, higher variable pay, impact from large deal ramp-ups, and acquisition-related amortization. These headwinds were more than offset through combined benefits from various tracks under Project Maximus, especially value-based selling, lean and automation, improvement in critical portfolio, improvement in utilization, etc. We have been able to institutionalize these initiatives and make a structural shift in our approach. We expect Project Maximus to further aid in margin improvements from current levels. Consolidated cash and cash equivalents stood at $5.56 billion at the end of the year. Yield on cash balance was 7.13% in Q4, and ROE stood at 29%. Coming to cash flows, FY 2025 free cash flows are highest ever at $4.1 billion, an increase of 42% year-on-year.
Free cash flows, the percentage of net profit for financial year was 129%, and we expect FY 2026 free cash flows to be above 100% of net profit. Excluding income tax refunds, our free cash flows for the year were at $3.5 billion, up 21% year-on-year. Free cash flows, the percentage of net profit was at 112%. We expect effective tax rate for financial year 2026 to be in the range of 29%-30%. The board has proposed a final dividend of INR 22 for financial year 2025. Including the interim dividend, the total payout for FY 2025 will be INR 43, an increase of 13.2% once the final dividend is approved by the shareholders. We closed 24 deals in Q4 with a TCV of $2.6 billion, 63% of this net new.
Vertical-wise, we signed seven deals in financial services, five in EURS, four in manufacturing, three in communication, two each in high-tech and life sciences, and one in retail. Region-wise, we signed 12 large deals each in America and Europe. Coming to verticals, in financial services, budgets are flat to slightly higher in AI regulatory compliance and cost management. We anticipate steady growth in capital markets and cards and payments in large global banks and U.S. regional banks. Mortgage sector will see an uptick if spend in interest rates reduce going forward. Our investment in AI-related propositions, regulatory compliances, risk mitigation, and cost management is expected to create growth opportunities. We have been selected as an AI partner for many of our clients. Manufacturing sector has grown double-digit over the last few years. For CY 2025, budgets are lower for auto and industrial manufacturing and flat for aero.
Recent challenges in terms of tariffs, market uncertainties, and trade barriers are likely to lead to a subdued spend and delayed decision-making. Weakness in auto, especially in Europe, continues. We are helping clients in aerospace resolve bottlenecks in their supply chain. Pipelines remain healthy with focus on cost takeouts, opportunities in infrastructure transformation and consolidation, and some traction in ERP modernization programs. Retail sector has been impacted by economic uncertainty resulting in lower consumer spending in core markets. Due to recent tariff announcements, clients' budgets are expected to be tightened, and there is increased caution. Decision cycles are getting stretched for discretionary spend and larger deals. Across geos, there is increased focus on AI, cloud, estate modernization, cost takeout, and investing in core tech capabilities. Energy, utility, resources, and services sector continues to grow, and we see a strong pipeline of opportunities both from existing and potential clients.
Energy prices remain volatile. However, new markets in midstream and downstream energy are opening in the U.S. region. There is an increased M&A and tax-related work with services clients focusing on cloud migration and vendor consolidation. Utilization is prioritizing AI-driven enterprise transformation and services and is seeing traction in software services and IP deals. The acquisition that we announced today will strengthen our vertical expertise and open new buying centers in energy trading and risk management areas. Communication sector continues to remain soft. Discretionary spend is under pressure with clients focusing on cutting costs, restructuring, and consolidation deals. Our growth will be led by recent deals and deal wins and opportunities in areas like cost reduction, AI and database solutions, and cybersecurity. Lower interest rates could improve the profitability of telco OEMs, which in turn can help increase IT budgets.
In high-tech, most clients remain cautious due to the macroeconomic headwinds and tariff announcements, with discretionary spend still remaining under pressure. There is increased margin pressure on account of committed spend on data centers. Exiting FY 2025, global uncertainties relating to tariff and impact of that on client sentiments and spend are taking center stage. Basis our assessment of the current macroeconomic environment and the visibility we have today, we expect FY 2026 growth to be 0%-3% in constant currency terms. This excludes the acquisition that we announced today, and this assumes a reduction in third-party revenues versus FY 2025 based on existing deals and the new deals in pipeline that we have today. Our operating margin guidance for the year is 20%-22%.
We will continue to keep a close watch on the economic environment and its impact on client budgets and reassess our guidance as we progress during the year. With that, we can open the floor for questions.
Operator (participant)
Thank you very much. We will now begin with the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone 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. Participants, you may press star and one to ask a question. The first question is from the line of Ankur Rudra from J.P. Morgan. Please go ahead.
Ankur Rudra (Executive Director)
Thank you. On the fourth quarter, can you talk a bit about the linearity?
Operator (participant)
Ankur, sorry to interrupt you. Your audio is not clear. Can I request you to come in a better reception area, please?
Ankur Rudra (Executive Director)
Okay. Can you hear? Is it better now?
Operator (participant)
No, sir. The network is not clear at your end.
Ankur Rudra (Executive Director)
Okay. Let me come back.
Salil Parekh (CEO)
The network is better. Go ahead.
Ankur, go ahead. We can hear you now.
Ankur Rudra (Executive Director)
All right. Thanks.
Okay. The question was, in terms of the fourth quarter, can you talk a bit about the linearity? Did the softness or the relative miss to guidance play out only in March, or was there something you saw over the course of the quarter?
Jayesh Sanghrajka (CFO)
Ankur, as I said earlier, 2/3 of our decline was on account of third-party costs and the revenue related to that. Some of the deals that we had in the pipeline had slipped, so this decline was higher than what we anticipated. The balance was the usual Q4 seasonality and the volume decline that we saw. Two-thirds of a 3.5% decline was on the back of third-party cost and revenue.
Ankur Rudra (Executive Director)
I appreciate that, totally. I was curious if that played out more in March or if that played out over the course of the entire quarter.
Jayesh Sanghrajka (CFO)
Yeah. Generally, these deals happen towards the end of the quarter, and that's where it slipped from there.
Ankur Rudra (Executive Director)
Okay. Understood. If I talk a bit about the guidance, it seems to apply something like 0.8%-1.9% asking for the rest of the year. Could you highlight if this will be a normal seasonality or is it going to be different given the heightened uncertainty you might be seeing right now?
Sandeep Mahindroo (Financial Controller and Head of Investor Relations)
Ankur, sorry, can you repeat the question? It wasn't very clear.
Ankur Rudra (Executive Director)
The guidance, does it imply a normal seasonality for the year?
Jayesh Sanghrajka (CFO)
Yeah. As we said earlier, we do see a heightened uncertainty in the environment, and that's the reason we have given a three-point guidance. Depending on which end of the guidance you're looking at, the seasonality will also change, or the uncertainty will also change. Outside of that, we are expecting normal seasonality.
Ankur Rudra (Executive Director)
Okay. Understood. Just the last question. In terms of you spoke a lot about AI-led transformation that clients are expecting from you. Are you infusing AI into existing projects that might lead to any kind of revenue deflation which you have to overcome?
Salil Parekh (CEO)
Hi, Ankur. This is Salil. First, AI is part of all the discussions on the new deals. We are using AI in many of our existing programs, but here we are seeing benefits which relate to how we can now use AI with clients in different areas. As a composite, what we saw last year, 4.2% growth, we feel pretty confident that we will see benefits from it, even as we see some productivity improvements. We do not see anything in terms of the revenue on that.
Ankur Rudra (Executive Director)
Okay. Appreciate it. Thank you and best of luck.
Operator (participant)
Thank you. Next question is from the line of Kumar Rakesh from BNB Paribas. Please go ahead.
Kumar Rakesh (Associate Director)
Hey, hi. Good evening, and thank you for taking my question. My first question was, you spoke about that the third-party slipped towards the end of the quarter. How was the volume trend during the quarter? Does that imply that as they come back in the next quarter, in the guidance, you are expecting the third-party contribution to be higher in FY 2026?
Jayesh Sanghrajka (CFO)
If you look at what I said, through the quarter, we had a softer start at the beginning of the quarter from volumes perspective, but we did see some recovery there in terms of volumes. On the third-party, we are expecting for FY 2026 third-party to be lower than FY 2025, considering the deals that we have signed and the deals that we have in the pipeline. That is baked in.
Kumar Rakesh (Associate Director)
Volume trend during the quarter?
Jayesh Sanghrajka (CFO)
Yeah. The volume trend during the quarter, we had a softer start. January is generally the soft month, and then the volumes start stacking up, and we saw a similar trend this quarter as well.
Kumar Rakesh (Associate Director)
Great. Thanks. My second question was, from a longer-term perspective, over the last two, three years, we have seen all the froth which was created in many of the deals with very low ROIs being signed. They were reassessed by the clients, and many of them were ramped down, and we saw the impact of that in terms of revenue growth. Do you see there is still some scope left if clients start reassessing the projects again if the macroeconomic uncertainty continues for a little longer? There is more of reassessment of the projects which may again start happening the way we have seen over the last year or two?
Salil Parekh (CEO)
Hi. First, the changes that we have seen in the economic environment impact have happened very recently and over a short span. Having said that, the discussions we've had specifically on some of the deals we've signed in the recent quarters, we have not seen a change in the trajectory that we were anticipating at this stage. However, we'll keep a lookout on that as we develop it.
Kumar Rakesh (Associate Director)
Thanks for that, Salil. Just a clarification. My question was more around that the ROIs now that we are offering in terms of the deals which we are doing for our clients, now has it on a portfolio level, has it improved so that we are no longer in a risk if such a reassessment happens? Do you still see that there are some of the projects which are at risk which could be reassessed?
Jayesh Sanghrajka (CFO)
I mean, what we saw in the past was more of—sorry, Gopal. What we saw in the past was more of the discretionary spend where the clients had put a stop or there were ramp-downs there. If the environment deteriorates significantly from where we are, yes, the clients will relook at some of that. At this point in time, we are not looking—we are not seeing any of that happening significantly for us.
Kumar Rakesh (Associate Director)
Great. Thanks.
Operator (participant)
Thank you. Next question is from the line of Abhishek Pathak from Motilal Oswal. Please go ahead.
Abhishek Pathak (Research Analyst)
Yeah. Hi. Thanks for the opportunity. My first question was, could you please just expand a bit on the underlying assumptions and the top end of our guidance? Do we assume an acceleration in deal wins for this to be achieved, or do you think better-than-expected ramp-ups could probably take us to 2%, 3%? That is one. The second question was, which I think is probably partly answered, but considering a few of your peers have called out some deferrals or at least some uncertainty in decision-making, how does the next immediate quarter look in terms of, let's say, deferrals or ramp-downs? Do you see any significant risk in the extreme short-term? Lastly, do the current events kind of push down the recovery in short-cycle deals a bit more? Do you feel short-cycle deals are again something that will struggle to take off? Thank you.
Jayesh Sanghrajka (CFO)
Yeah. Leading up to guidance, we always run multiple models that lead us to the top end, bottom end, or the middle end of the guidance. That is the same process that we have followed even at this point in time. The reason that we gave a three-point guidance was because there is an uncertainty. At the lower end of the guidance, we have baked in some further deterioration in the environment. At the top end of the guidance, we have baked in steady to marginally improving environment. That is how the guidance has been planned out from the environment perspective. Having said that, on the ramp-downs, we have not really seen any major ramp-downs at this point in time or major closures of the deals. We do see clients being cautious that decision-making is delayed in pockets.
As I said, what we see today has been baked in the lower end of the guidance from the uncertainty perspective.
Abhishek Pathak (Research Analyst)
Got it. I think just the last bit on short-cycle deals, if you could just clarify that.
Operator (participant)
Abhishek, do you have any follow-up question?
Abhishek Pathak (Research Analyst)
Yeah. Hi. Am I audible?
Operator (participant)
Yes, we can hear you.
Abhishek Pathak (Research Analyst)
Hello. Yeah. Sorry. No, just the last bit on the wage hike impact for Q1 and how do we just model that in. Thanks.
Jayesh Sanghrajka (CFO)
Yeah. Abhishek, most of our employees got the wage hikes in January, and the middle-level to senior-level employees will get wage hike effective 1st of April. The impact of that has been baked in in the guidance range that we have given. As you could see, for the financial year 2025, we have improved our margins by 50 basis points. We are now at 21.1. Despite all the headwinds, whether it was wage hike, whether it was higher variable pay, the large deal ramp-ups, acquisition-related costs, and our endeavor going forward is to improve from where we are in the current environment.
Abhishek Pathak (Research Analyst)
Understood. Thanks. Thanks a lot.
Operator (participant)
Thank you. Next question is from the line of Gaurav Rateria from Morgan Stanley. Please go ahead.
Gaurav Rateria (Executive Director)
Hi. Thanks for taking my question. My first question is on small deal.
Operator (participant)
Gaurav, sorry to interrupt you. Can I request you to speak a little louder, please?
Gaurav Rateria (Executive Director)
Hi. Am I audible now?
Operator (participant)
Yes. Go ahead.
Gaurav Rateria (Executive Director)
Hi. My first question is on small deal environment. Have you seen any change compared to a few months back? Is it fair to believe that the midpoint of guide assumes a stability in the environment on the small deal front?
Jayesh Sanghrajka (CFO)
Gaurav, as I said, there are various models that lead to multiple ends of the guidance. At the lower end, I'll repeat, we have assumed deteriorating environment, and at the upper end, we have assumed steady to marginally improving environment. In the middle is anywhere between the two.
Gaurav Rateria (Executive Director)
Okay. Got it. Second question is on margins for FY 2026. Normally, what we have always been hearing is that when growth improves, it creates an operating leverage and provides a cushion to improve margins. If I take this midpoint of your guide, it's kind of slowing compared to FY 2025. Is it fair to believe that kind of creates some operating deal leverage and creates some pressure on margins? What would be the levers to offset that and still stay within the band, within FY 2025 range? Thank you.
Jayesh Sanghrajka (CFO)
Gaurav, if you look at the last year also, we had a large comp impact coming into the year because we had the previous comp was rolled out in November. Full year impact of that came into this year, and then we had additional comp that we rolled out in January. There was a comp impact. There was an impact of the large deals that we signed in the previous year, 20 basis points of impact from the acquisition that we did, and so on. Despite all of those headwinds, we have been able to improve margins by 50 basis points while rewarding our employees better through a higher variable pay through the year. We are confident at this point in time that there are opportunities where we can double down and improve margins.
At this point in time, the endeavor is to improve margins from where we are for FY 2026.
Gaurav Rateria (Executive Director)
Thank you.
Operator (participant)
Thank you. Next question is from the line of Jonathan Lee from Guggenheim. Please go ahead.
Jonathan Lee (Managing Director)
Great. Thanks for taking our questions. First question, can you clarify what the inorganic contribution is that's contemplated in your outlook for fiscal 2026?
Jayesh Sanghrajka (CFO)
Jonathan, the guidance does not include the acquisition that we announced today. We have not closed them yet. The board has approved the acquisition. We still have to go through the closing formalities. That will take a few weeks to maybe a month or so. Depending on the closure, we will figure out in the next cycle on the guidance. At this point in time, to clarify, the guidance does not include the acquisition that we announced today.
Jonathan Lee (Managing Director)
Thanks for that clarification. Second, how would you characterize the pricing environment through the quarter, and how does that compare to what you've seen since the beginning of this fiscal year?
Jayesh Sanghrajka (CFO)
We continue seeing stable pricing even through the quarter, generally at the overall business levels. Everything that has changed in the environment has been very recent, so we've not really seen any significant impact coming from them on the pricing environment. Having said that, one of the key pillars on our cost optimization or the margin improvement program is the value-based selling. That's not only pricing. That is everything around pricing, including getting the chain request for the scope creep, rotating our employees, long-tenured employees across projects so that we get better pricing on them, having a differentiated pricing model for different services. All of that has helped in the last year, and that endeavor continues in this year as well.
Jonathan Lee (Managing Director)
Appreciate that color. Thank you.
Operator (participant)
Thank you. Next question is from the line of Keith from BMO Capital Markets. Please go ahead.
Keith Bachman (Senior Research Analyst)
Hi. Thank you very much for taking the call. I wanted to return to AI on the delivery side. I wanted to go back to the first question, which I was not sure I understood your answer. How is AI changing the nature of pricing discussions and/or structure as of late? How do you think that is going to unfold in FY 2026? In other words, does the deflationary nature of AI, is that impacting performance-based contracts or any structure that you are putting in the contract? Is it leading to any different price discussions? If you could also call out, is there an area, whether it is BPO or deployment or ADM, that you see using AI more in the delivery, or is it all the different areas?
Is there any one area specifically within your portfolio or solution portfolio that you think will be impacted more by delivery? Thank you very much.
Salil Parekh (CEO)
On AI and pricing, what we are seeing is there are areas where we have discussions with clients, and this is building up through the last year, through the quarters, and we anticipate seeing that going ahead as well. Where, for example, if there are large customer service programs, we see that there could be benefits to the clients of 20%-40%. If there are different areas where generative AI can be applied, those discussions are very much at the forefront on clients' minds. Sometimes the client views are maybe larger than what we are seeing in realization, and so we have a choice to make there. Many times they're aligned, and AI is one component of automation, of lean, then AI, and then consolidation, all of which gives some benefits in a cumulative way to the client. We see that ongoing.
With that, we also see AI gives us some new opportunities. There are new projects we are doing, for example, in credit risk or AI platform for a telco. These give us new areas for revenue as well. As a cumulative, while all this was still going on last year, we still saw the 4.2% increase in revenue. That is the way we see it at a composite level. On that, we superimpose the changes in the economic environment, which is where we see some differences, as Jayesh was sharing earlier, in the range of that guidance, if that makes sense.
Keith Bachman (Senior Research Analyst)
Okay. Just for my follow-up, when you mentioned there are some situations where AI is generating 20%-40% efficiency gains, I think that's sort of similar to what IBM and Accenture have said. On a like-for-like pricing in that situation where you can deliver such meaningful efficiency gains to the client, how are those efficiency gains shared with the customer? In other words, do your revenues go down by 20%-40%, or how is that shared in terms of just on a like-for-like basis for a given contract? That's it for me. Thank you.
Salil Parekh (CEO)
Where we've seen that range has been more, for example, on customer service. We don't have a large sort of voice business. We typically bid on a combination of technology and operations, and part of it could be that. Typically, these are not our existing book of business. That customer service is not something we have a large book of business in. In terms of sharing, there are different ways these are shared depending on the client situation. There are situations where there's a consolidation activity with the client where there's a share in some part where the customer service is not within our portfolio, and there's consolidation which gives us some benefit. It's not like one number which gets shared then with clients. It is shared, yeah.
Keith Bachman (Senior Research Analyst)
Okay. Okay. Many thanks for the answers, and I wish you all the best of luck.
Salil Parekh (CEO)
Thank you.
Operator (participant)
Thank you. Next question is from the line of Surendra Goyal from Citi. Please go ahead.
Surendra Goyal (Managing Director)
Yeah. Thanks a lot. Salil, Jay, just one question. You have been calling out improvement in discretionary spending through the course of FY 2025. What did you see in the month of March and April so far? Apologies if you have already answered this question before.
Jayesh Sanghrajka (CFO)
Surendra, March month has been usual. I don't think we have seen a significant change either way in the environment in terms of volumes. We did have positive volumes in March.
Surendra Goyal (Managing Director)
Understood. Thank you.
Operator (participant)
Thank you. Next question is from the line of Abhishek Kumar from JM Financial. Please go ahead.
Abhishek Kumar (Equity Research Analyst)
Yeah. Hi. Good evening. Thanks for taking my question. I have a question on cost of third-party items. First is, when we say some of the booking of third-party items got spilled over, does that mean that will come back in Q1 and that will help Q1 revenue? A related question is, is the visibility getting into Q1 similar to what we have seen maybe Q1 of last year, better, worse, any color on that? Thank you.
Jayesh Sanghrajka (CFO)
Sorry, Abhishek, if you could repeat the first question on the third-party, I didn't get that well.
Abhishek Kumar (Equity Research Analyst)
Yeah. I mean, we said that some of the weakness in Q4 was because some third-party items got spilled over. Is that just a deferral and it'll come back in Q1, or that is something that we have lost?
Jayesh Sanghrajka (CFO)
Yeah. Abhishek, at this point in time, the third-party costs that, as I said earlier, 2/3 of our decline was because of the lower third-party cost and revenue. Some of those deals slipped. It is uncertain at this point in time if and when these deals come back. At this point in time, they have slipped. You should read that in conjunction with the fact that I also said FY 2026 third-party cost and revenue are going to be lower than FY 2025 third-party cost and revenue.
Abhishek Kumar (Equity Research Analyst)
Okay. Maybe in that context, visibility overall for Q1, given we are in the midst of the uncertain macro, how are we looking at Q1 compared to previous years?
Jayesh Sanghrajka (CFO)
Yeah. I think both the years have had unique factors that led to an uncertainty. I don't know if you can put it in quantifiable terms, whether it is similar or not. We started the year last time, there were uncertainties around interest rates, geopolitical tensions. Half the world was going through elections. There were uncertainties around that. Today, we have uncertainties around tariff. We don't know the rates to the extent to which countries will get impacted, how those countries will retaliate, the timing of that, and the downstream impact of that. I think all of that is uncertain as we speak, Abhishek, but the guidance that we have provided at this point in time is what we see today. Our philosophy on guidance has been to reduce asymmetry of information between us and our investors, and we are guiding what we see today.
Abhishek Kumar (Equity Research Analyst)
One quick question on margin. Two-thirds of 3.5% decline coming from third-party, but the margin uplift because of that has been very limited, right, around 30 basis points. I'm just trying to reconcile why the margin uplift is so low. Thank you.
Jayesh Sanghrajka (CFO)
Abhishek, the margin uplift on that is around 20 basis points. If you look at the reduction in third-party cost, it's $100 million. Obviously, we make some margin on those deals as well. You will only get that benefit to the extent of the delta margin of the company versus those third-party deals, and that is where the margin's impact is.
Abhishek Kumar (Equity Research Analyst)
Sure. Thank you. That's helpful. All the best.
Operator (participant)
Thank you. Next question is from the line of Sandeep Shah from Equirus Securities. Please go ahead.
Sandeep Shah (Director of Equity Research)
Yeah. Thanks for the opportunity. Salil, just wanted to understand in this uncertain macro environment, if discretionary spend is difficult to predict, but at the same time, clients may not postpone their AI-related investment. Is it fair to assume clients may start in terms of doubling down on the outsourcing cost takeout kind of deals? Whether same is coming into your discussion, and is it fair to assume that the deal pipeline could improve on the cost takeout and the mega deals could be a part of the deal when entering FY 2026 as well?
Salil Parekh (CEO)
The changes in the economic environment are recent and also in a short period. Not everything is understood about that. Having said that, learning from the past, we typically see that this sort of an environment will provide more cost takeout opportunities, consolidation, automation, lean. We have also pivoted our sales activities into focusing and building more proactive pitches to clients on that area. We will now see how that executes and what is the dynamic of the economic environment. In general, our portfolio has got that ability, which is also on AI cloud and also on cost takeout. We are emphasizing much more on the cost takeout.
Sandeep Shah (Director of Equity Research)
Okay. Jayesh or Salil, whoever can answer this, whether fair to assume the seasonality of 1H better than 2H may continue even in FY 2026, what are your guidance assumptions for the same?
Jayesh Sanghrajka (CFO)
I mean, typically, our 2H is softer because you have furloughs, you have lower working and calendar days, etc., etc. That part of the seasonality will remain. As we see today, I do not expect that seasonality to change. Beyond that, in an uncertain environment like this, it is very difficult to predict how the quarters will look like. As I said earlier, at the bottom and the higher end of the guidance, we have factored various scenarios, and depending on how that will play out, we will have to see how the quarters progress. Overall, we do not see a significant change in seasonality beyond the uncertainties.
Sandeep Shah (Director of Equity Research)
Okay. Just last bookkeeping question. In terms of your margin work, you have said the M&A-related cost being 40 basis points as a headwind to the margin. Is it one-off and may not re-occur in the first quarter of the coming financial year? If I assume both acquisitions being closed at the end of 1Q and maybe consolidated for nine months, is it fair to assume it will add 40-50 basis points to the revenue growth?
Jayesh Sanghrajka (CFO)
That is right. The 40 basis points of charge that we took related to the acquisition is one-off in a way. If you recall, we had said earlier this year that the automobile sector, especially in the German or European markets, has been seeing software. That is why we have reassessed the value of customer intangibles, and we had to take a charge on that. From that perspective, it is a one-off. Coming to the second question, what was the second question?
Sandeep Shah (Director of Equity Research)
The M&A?
Jayesh Sanghrajka (CFO)
Yeah, the acquisitions. The impact of the acquisitions, yeah, if we close in the Q1, the impact would, I mean, the benefit that we would get would be 40-50 basis points for the full year, which is not baked in in the guidance.
Sandeep Shah (Director of Equity Research)
Okay. Thanks and all the best.
Operator (participant)
Thank you.
Jayesh Sanghrajka (CFO)
Thank you.
Operator (participant)
Next question is from the line of Vibhor Singhal from Nuvama Institutional Equities. Please go ahead.
Vibhor Singhal (Executive Director)
Yeah. Hi. Thanks for taking my question. Just two quick questions from my side. One is, traditionally, especially over the last few years, we have seen 1H do the heavy lifting for us in terms of growth. The second half gets marred by the industry seasonality in Q3 and our own seasonality in Q4. This year, do you see—I mean, I know this is part of the talking about this question, but this year, I think a lot of our peers have called out uncertainty in the first quarter, which also led to one of the things that drives through a very weak quarter Q1 yesterday itself. Do you see that impacting the entry growth rate for us this year, which would probably lead to maybe slightly lower growth or, let's say, a skewed trajectory of the growth that we have seen over the past two years?
Jayesh Sanghrajka (CFO)
Both, sorry, again, your voice wasn't very clear. It was getting muffled in between. Can you summarize the question again, please?
Vibhor Singhal (Executive Director)
Sure.
Jayesh Sanghrajka (CFO)
Sorry. Did we lose everybody?
Operator (participant)
Yes, sir. The line for the participant dropped. We move on to the next participant. The next question is from the line of Nitin Padmanabhan from Investec. Please go ahead.
Nitin Padmanabhan (Lead Analyst)
Yeah. Hi. Good evening. The JV that we signed with Mitsubishi, how is that different from the one that TCS has signed in the early part of the last decade? You could just give some context there.
Jayesh Sanghrajka (CFO)
Nitin, this is not a JV that we have signed. We have inducted Mitsubishi in the existing JV, and we have diluted our share by 2%. It is an existing JV where we have just inducted a strategic partner in the JV. It is an endeavor to build a long-term relationship with a large giant in Japan.
Nitin Padmanabhan (Lead Analyst)
Got it. Got it. Just one last question is, see, as we entered the last year, which is as we entered fiscal 2025, we had a large order book of large deals which we had to execute, which sort of helped us in the first half of last year. As we enter this year, how would you contrast that in terms of the order backlog relative to last year, right? I'm asking this considering that our organic growth this year is possibly around 3.4%. In that context, our guidance at the top end is almost similar. Just wanted some context in terms of how it was then and how it is now.
Jayesh Sanghrajka (CFO)
Yeah, Nithin, you're right. If you look at just purely the quantum of the deals that were getting ramped up in Q4 of the previous year and compare that to quantum of deals that are getting ramped up, you will see a stark difference, or you'll see some difference. We should also remember that many of those deals were larger deals and longer duration deals versus what we have today, which, so there's a delta between the tenure of the deals, and mega deals are generally a much longer tenure deal. You will see some of the filings with respect to the mega deals that we have done with SEBI also, or stock exchanges also earlier. We should see that in that context.
Nitin Padmanabhan (Lead Analyst)
It's not that these deals have any anniversary impact at the moment, or it is a continued ramp that you're sort of anticipating there?
Jayesh Sanghrajka (CFO)
Also, as we had said.
Operator (participant)
Sir Jayesh?
No, I think we've lost him.
Jayesh Sanghrajka (CFO)
Yeah. No, sorry. If you look at most of the deals that we had talked about earlier, which were signed in FY 2024, they had ramped up in the Q4 of FY 2024, and then we saw the benefit of them in FY 2025. They are pretty much at a steady state at this point in time.
Nitin Padmanabhan (Lead Analyst)
Got it. Got it. That's very helpful. Thank you so much, and all the very best.
Jayesh Sanghrajka (CFO)
Thank you.
Operator (participant)
Thank you. We take the follow-up question from the line of Vibhor Singhal from Nuvama. Please go ahead.
Vibhor Singhal (Executive Director)
Yeah. Hi. Hope I'm audible this time. Sorry, I got dropped in between. Sorry. My question was basically on the growth trajectory that we're expecting. For the last two years, our growth has been pretty much first half heavy, and seasonality of industry and our seasonality coming in Q3 and Q4. This time, a lot of our peers have called out weakness in Q1, especially because of the uncertain macro. Do you believe that could impact the growth trajectory that we see through the year? It could be more skewed towards the Q2 and Q3, or maybe the second half, and the first half might not be as good as we have seen over the past couple of years. Just some light on that would be really great.
Jayesh Sanghrajka (CFO)
As I said earlier, from a seasonality perspective, I don't see—I mean, the regular seasonality perspective, I don't see a change in seasonality. The working days, calendar days impact will be similar to earlier years. The furloughs will remain. The uncertainty is the only unknown factor, and we'll have to see how that pans out in Q1, Q2, and the implication of that to see whether Q1, Q2 is going to be better or worse versus earlier years. In short, the uncertainty remains. That's the reason why we have given a three-point guidance. At the bottom end of our guidance, we have seen—we have expected higher uncertainty. At the top end of the guidance, if we end up there, then you will see a regular seasonality in H1 and H2 at the top end of the guidance.
Yeah, at the bottom end of the guidance, it's going to be unpredictable.
Vibhor Singhal (Executive Director)
Right. Right. Got it. Okay, let me just ask maybe just a follow-up on that. Are you expecting any, let's say, unexpected—I mean, extra weakness in Q1 because of the uncertain macro at this point of time?
Jayesh Sanghrajka (CFO)
We don't give quarterly guidance, unfortunately.
Vibhor Singhal (Executive Director)
Sure. Not a problem. I don't.
Jayesh Sanghrajka (CFO)
We are going to stick to our overall guidance, and that is what we see today.
Vibhor Singhal (Executive Director)
Yes, I was just trying my luck. Lastly, on the margins front, where do we stand on the Project Maximus benefit? Do you believe there are still some fruits to be plucked from that, or are we mostly done with that project?
Jayesh Sanghrajka (CFO)
If you look at this year, despite multiple headwinds, we have been able to improve margins of 50 basis points, right? We did absorb the comp that we did in the previous year. Full year impact of that came in FY 2025. We gave higher variable pay to our employees. We have had ramp-ups of many of the mega deals, which obviously are lower margins in the beginning of the year. We had an impact from acquisition or intangibles of the acquisition. I think we have absorbed all of that and delivered 50 basis points of margin. There are multiple tracks which are still underway under the project. Value-based selling is still delivering value. Lean automation is still creating value. I think there are opportunities that make us believe that there is still opportunity to improve margins from where we are, and that's the end of it.
Vibhor Singhal (Executive Director)
Got it. Got it. Great. Thank you so much for taking my questions, and wish you all the best.
Jayesh Sanghrajka (CFO)
Thank you, Vibhor.
Operator (participant)
Thank you. Next question is from the line of Manik Taneja from Axis Capital. Please go ahead.
Manik Taneja (Executive Director)
Hi. Thank you for the opportunity. You made a remark regarding the fact that we should probably be expecting some decline in the cost of pass-through or the pass-through revenues in FY 2026. We've basically seen a very steady increase from this slide item increasing from about 2% of revenues to about closer to 8% of revenues in FY 2025. Is there anything on the ground which is changing because of which you may see a lower this number essentially being a drag on revenue growth, and how should we be thinking about this number playing out over the next three, four years?
Jayesh Sanghrajka (CFO)
Vibhor, sorry, Manik, this is the third-party costs are typically the costs which are embedded in a large transformation deal, a multi-year large transformation deal. We know what the deals that we have signed in the year, and we know what are the deals in the pipeline. When we analyze those two components, is when we estimate what the cost is going to be. At this point in time, looking at what we have signed and what we have in the pipeline, we expect FY 2026 third-party costs to be lower than FY 2025.
Manik Taneja (Executive Director)
Did we mishear this going back to possibly where it used to be FY 2020 or 2021?
Jayesh Sanghrajka (CFO)
Yeah. I mean, eventually, we will have to see where we end up, Vibhor. Once many of the mega deals that we have signed in the past, those transformation finishes, we will have significant reductions as well.
Manik Taneja (Executive Director)
Sure. Thank you. All the best for the future.
Operator (participant)
Thank you. Next question is from the line of Ashwin Mehta from Ambit Capital. Please go ahead.
Ashwin Mehta (Head of Research)
Hi. Thanks for the opportunity. Just one clarification. In our cost of sales line, we have almost INR 145 crore negative number for consultancy and professional charges. Haven't seen a negative number ever here. What is driving this?
Jayesh Sanghrajka (CFO)
Ashwin, this was an insurance claim that we got with respect to the cyber event that we had last year. This is the benefit of $20 million that we got. I did not call it out in the margin box because there were other negatives against that, like utilization, etc. Those kind of offset each other.
Ashwin Mehta (Head of Research)
A follow-up in terms of the provision for post-sale support as well, the reversal seems to be pretty high. Is that also related to this as well?
Jayesh Sanghrajka (CFO)
No. Post-sale customer support is typically there's a seasonality there. Typically, if you look at last few years, then you will see a reduction in Q4 generally on that because many of the projects typically come to an end with the financial year end. That is one reason. The second reason is, of course, there are a lot of things which we are driving under Project Maximus, whether it is in terms of effort optimization, whether it is in terms of change request, a tighter control of many of those projects. All of that reflects into lesser warranty in terms of SLAs, lesser warranty, lesser costs in future on many of those projects. All of that reflects in PSCS for us, post-sale customer support.
Ashwin Mehta (Head of Research)
Okay. Thanks a lot for the clarification.
Jayesh Sanghrajka (CFO)
Thank you.
Operator (participant)
Thank you. Next question is from the line of Girish Pai from BOB Capital Markets. Please go ahead.
Girish Pai (Head of Institutional Research)
Yeah. Thanks for the opportunity. Salil, are there any silver linings to the current macroeconomic situation around tariffs? Are you having any conversations with clients around supply chain solutions or anything like that?
Salil Parekh (CEO)
What we see is we have a portfolio which has got both things for growth like AI, cloud, digital, but also very good solutions for cost and cost efficiency, automation, productivity from AI, lean. We are making sure that those are getting already in the short time period from the changes in the economic outlook. We are making sure those are getting communicated, discussed with clients. My guess is we do not know the impact yet, but we are going to make sure that if clients are looking for cost and efficiency, we will be there. On supply chain, we are working to make sure that we provide because we have a consulting business which can give some insights. We also have supply chain tech solutions. If clients are rerouting their supply chains or if they want to optimize it, how we can support them in it.
We are positioning for it. We do not know right now what is the potential impact benefit, but we are definitely positioning for the cost and these sort of activities.
Girish Pai (Head of Institutional Research)
Okay. My second and last question has to do with AI and budgets around AI. Do clients have a separate budget for GenAI or AI, or is it coming from savings that you're doing on normal projects as things stand today?
Salil Parekh (CEO)
Yeah. I mean, if I look back at the last year, the overall tech budgets are there. Now, there are some cases where a client is doing large transformation. We are able to fund that transformation from, let's say, a large opportunity on consolidation or cost efficiency. In some cases, because at the start, AI was a little bit more distributed, not so much central. There were also some sort of distributed within the company, different divisions and budgets and so on. My guess is it will become more and more one budget for the company from which there will be spend on our services for AI and so on. We will see how that plays out. That is what we anticipate.
Girish Pai (Head of Institutional Research)
Okay. Thank you.
Operator (participant)
Thank you. Ladies and gentlemen, I now hand the conference over to the management for closing comments.
Salil Parekh (CEO)
Thanks. Thank you, everyone, and thank you for detailed set of questions. We can imagine with the changes, we're all looking for insights. Conclusion from my side, first, we are delighted with a strong financial year 2025, growth, margin, very good cash, large deals, net new. What we see, what we have built over the years is a balanced portfolio within the company with AI, cloud, digital for growth, cost, automation, consolidation, lean for efficiency. We find that this environment gives us a good ability to work on both and maybe do one more than the other depending on how the environment will unfold. We will support our clients in that ability. We have also taken care to build a guidance with how Jay has described with different ends and assuming different scenarios.
We feel we are well positioned on the margin side with a lot of the work that's being done in our margin program. Overall, we remain quite confident to support our clients on what they want to drive and to deliver and execute on our business. Thank you, everyone, and look forward to catching up in a quarter.
Jayesh Sanghrajka (CFO)
Thank you.
Operator (participant)
Thank you very much, members of the management. Ladies and gentlemen, on behalf of Infosys Limited, that concludes this conference call. Thank you all for joining us, and you may now disconnect your lines. Thank you.