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Keynote Capitals Institutional Research 2

INFOSYS LTD. Accelerating Innovation… November 22, 2011

Key Stock Data

Sector IT-Software CMP ` 2723 52wk High/Low 3494 / 2169 Market Cap `156,363Cr 6m Avg. daily vol 143,055 BSE Sensex 16065 Reco ‘Buy’ Target Price `3149

Stock Codes

Bloomberg Code INFO IN Reuters Code INFY.BO BSE Code 500209 NSE Code INFY Face Value `5

Shareholding pattern (30th Sep, 2011)

Price Performance (%)

1 Mth 3 Mths 6 Mths 1 Yr

-2.3% 19.6% -6.6% -10.3%

Stock Price Performance

Investment Summary

Infosys established in 1981 by a group of seven people with an investment of `10,000. It is a global leader having presence in the IT and consulting services. As of September 30, 2011, the company along with its subsidiaries has a workforce of 141,822 employees. It is a global technology services firm that defines designs and delivers IT enabled business solutions to its clients. It has a global footprint with 65 offices and 63 development centers, out of which 33 development centers situated outside India.

Client addition continues to be strong: Infosys has consistently increased its number of clients as well as revenue per clients. The revenue per client has grown at a CAGR of 16% in the last 5 years, whereas the number of client has grown by 6%, implying that deal size has been increasing.

Strong cash and bank position as compared to peers: High cash position helps company to target large size acquisition ($300mn - $500mn) as compared to its peers. This will aid the company to strengthen its presence in Europe, Japan, and Australia with new client addition and to build its healthcare, consulting or package implementation offering.

Improvement in Utilization and Revenue per Employee could boost the growth momentum: Revenue per employee has grown at a CAGR of 5% over FY08 to FY11. The revenue per employee has moved in close range of `0.18Cr to `0.21Cr from FY08 to FY11. Currently the company has 141,822 employees and utilization excluding trainees and including trainees stood at 77.30% and 70.20% as on Q2FY12 respectively.

We expect company’s consolidated revenues to grow at 20.8% and 19.5% for the year FY12E and FY13E respectively. We initiate coverage on Infosys with a ‘Buy’ recommendation at target price of `3149 with potential upside of 15.7%

Key Financials (`Cr) Particulars FY09 FY10 FY11 FY12E FY13ESales 21693.0 22742.0 27501.0 33232.2 39713.8Y-o-Y Growth (%) 30.0% 4.8% 20.9% 20.8% 19.5%Total Expenditure 14498.0 14881.0 18533.0 22654.4 27005.1EBITDA 7195.0 7861.0 8968.0 10577.8 12708.7Y-o-Y Growth (%) 37.4% 9.3% 14.1% 18.0% 20.1%EBITDA Margin (%) 33.2% 34.6% 32.6% 31.8% 32.0%Other Income 473.0 934.0 1211.0 1429.2 1681.5NPAT 5988.0 6266.0 6835.0 7998.5 9623.3Y-o-Y Growth % 28.5% 4.6% 9.1% 17.0% 20.3%NPAT Margin (%) 27.6% 27.6% 24.9% 24.1% 24.2%ROE (%) 37.4% 30.3% 27.9% 28.5% 29.4%EPS (`) 104.8 109.7 119.7 140.0 168.5PE(x) 17.4 25.7 22.8 19.4 16.2P/BV 5.7 6.9 6.0 5.1 4.4E- Keynote Capitals Institutional Research Estimates

Promoter 16%

FII 37%

DII11%

Public &

Others

36%

70

80

90

100

110

120Infy Sensex BSE IT

K E Y N O T E

3 Keynote Capitals Institutional Research

Company Background Infosys Ltd. established in 1981 by a group of seven people with an investment of `10,000. It is a global leader having presence in the IT and consulting services. As of June 30, 2011, the company along with its subsidiaries has a workforce of 141,822 employees. It is a global technology services firm that defines designs and delivers IT enabled business solutions to its clients. The company provides end-to-end business solutions that leverage technology for its clients, including technical consulting, design, development, product engineering, maintenance, systems integration, package-enabled consulting and implementation and infrastructure management services. The company also provides software products to the banking industry. It has developed ‘Finacle’, a universal banking solution for large and medium size banks across India and overseas. Through Infosys BPO, a subsidiary, the company provides business process management services, such as offsite customer relationship management, finance & accounting and administration & sales order processing. The company has marketing and technical alliance with IBM, Intel, Microsoft, Oracle and System Application Products (SAP) that address its clients' business and technology problems. The company has recently introduced a new strategy named Infosys 3.0 ‘Building Tomorrow’s Enterprises’. To introduce this strategy, the main aim of the company is to make itself more relevant to its clients and proactively help them in 'Building Tomorrow's Enterprise'. The company intends to focus more on better mix of business and non-liner revenues. Chart 1

Strategies introduced by Infosys

Source: Company

Infosys 1.0 (1981)1. Introduced Global Delivery Model (GDM).2. The ability to move technology work to a different geography where

the talent is available.

Infosys 2.0 (2001)1. It was about integrating the GDM with consulting, industry vertical

focus and end to end service capability within the company.2. The business model is a model based on repeat business.

Infosys 3.0 (2011)1. Increasing strategic partnership with clients.2. Establishing new business models of engagement with clients.

K E Y N O T E


The company moved into its third chapter (Infosys 3.0). Where the first was about global delivery models, second was about developing verticals and third is about innovation and consolidation. The company has identified seven key areas like Digital consumers, Emerging economies, Sustainable tomorrow, Smarter organizations, New commerce, Pervasive computing and Healthcare economy, which are growing and present great scope for IT innovations. It has also identified new solutions in the areas of Cloud Computing, Enterprise Mobility and Sustainability along with the other solution like, Learning solution, business platforms Solution. Considering the macroeconomic indicators, the customers may go for reducing operational cost or transform their business operations or innovation to differentiate in the marketplace, thereby resulting in delivering their services to their clients at lower cost. This may drives opportunities for total IT outsourcing deals and Infosys is expected to be benefited from this. Key Management Personal Mr. K V Kamath, non-executive chairman of ICICI Bank, has replaced iconic founder Mr. Narayana Murthy, who retired this year after nearly 30 years with the company. Mr. Kamath is first 'outsider' to head the company's board. He was already an independent director with the company. Mr. Kris Gopalakrishnan, who was earlier the CEO of the company, has been promoted to executive co-chairman and he will be helping Mr. Kamath in his task. The company has also reorganized its business into new vertical based structure and assigned new leaders for every verticals. Chart 2

New Management Structure

Source: Company

Narayana MurthyChairman Emeritus

S GopalkrishnanCo Chairman

SD Shibulal,CEO and MD

Ashok Vemuri

BG Srinivas

Prasad Thrikutam

UB Pravin Rao

Eric Paternoster

KV KamathChairman

K E Y N O T E


Business Structure Infosys has reorganized the business into four verticals and service lines into three key categories. Under the service lines, first one is Business Transformation, which consists of business consulting work, system Integration and some part of application development. The second service line is Business Operations, which includes 'run-the-business' initiatives like application development & maintenance, testing and BPO. The third one is Innovation, including products and platforms. The company’s target is to have one third of the revenue from each of these service line by the next 5-7 years. For Q2FY12, the revenue contribution from Business Operations was 60.9% while Business Transformation and Innovation contributed 31.2% and 7.9%, respectively. We believe, in coming quarters, vertical like BFSI, Retail, Healthcare and Energy and Utilities could deliver better performance, whereas telecom looks weak. From Q1FY12, Infosys has reclassified its segments and service offerings in following ways. Chart 3

Organizational structure diagram

Source: Company

Infosys Ltd.

Segments

FSI

Manufacturing

RCL

ECS

Service lines

Business transformation

Business operation

Business innovation

K E Y N O T E


Segment overview

Banking, Financial services and Insurance (BFSI) BFSI forms the largest chunk of company’s revenues, contributing more than 36% of total revenue, which has increased to `9857.34Cr for FY11 from `7731.63Cr for FY10. BFSI’s revenue has grown at a CAGR of 16% for the period of FY09-11 and we are expecting BFSI’s revenue to grow at more than 17% in FY12E. Finacle, the universal banking solution developed by Infosys, has won 11 deals in Q1FY12, out of which three were from the Asia Pacific region (APAC) and eight were from Europe, Middle East and Africa (EMEA). Infosys has also developed a newer edition of Finacle, named Finacle LiteTM. Finacle Lite™ is the banking solution on a private cloud environment for co-operative banks, community banks and credit unions worldwide.

Manufacturing The company offers business solutions for manufacturing industries through key technologies like Device convergence, Deployment convergence, Changing face of application and Information visibility whereas functional domains like Supply chain and Costumer intrinsic. The company has fair number of clients across the sub verticals within the manufacturing sector. Major contribution in manufacturing sector’s revenue comes from automotive, aerospace, industrial manufacturing and resources segment. In this segment, the company has its major clients from US and Europe. The income from manufacturing segment has grown by 20% to `5393.37Cr for FY11 from FY10. The manufacturing segment is growing at a CAGR of 12% over the period of FY09-11. In FY11, EBITDA margin of the segment has increased by 100 bps to 32% as against 31% in FY10.

Telecom In the telecommunication segment, the company’s presence is predominantly in the wire-line space. Infosys is investing in building solutions and capabilities to diversifying into wireless, cable, media and entertainment. In the first quarter, the company got a large deal in the telecommunication space outside the wire-line area and there are good numbers of deals in pipeline. We believe that over the next quarters, probably in Q3FY12 and Q4FY12, the dip will start flattening out and probably from Q1FY13 onward, we can see growth picking up in the telecom business. The company has presence in all areas, starting from market identification to customer care. The company is launching some new applications for its consumer in telecom segment. At this point, telecom is weak segment because it is going through an investment cycle and the spending in the industry is low. The segment has declined at a CAGR of 5% over the period of FY09-11 and its contribution to the total revenue was 13% in FY11. The revenue from this segment has decreased by 3% to `3548.87Cr for FY11 as compared to FY10 whereas the EBITDA margin came down to 35% from 40%.

K E Y N O T E


Retail

Infosys has good traction in retail segment through its platforms and products, which is driven by Digital commerce, Digital marketing and Mobile commerce. According to RIS survey of leading Retailers in North America, Infosys was rated as the number one IT and consulting services provider for the retail industry. The contribution by Retail segment in total income has gone up from 13% to 14% in FY11. Income from Retail segment also increased by 29% to `3900.12Cr in FY11 whereas the EBITDA stood at `1263.12Cr in FY11.

Other (E&U and Services) Other includes Energy & Utilities and Services. In Energy & Utilities, the traction is more towards smart grid. It is a domain intensive vertical with focus on two basic services of package implementation and Application Development Management (ADM), which contributes 70% of revenues from the US. This segment contributes 17% in the total income and it is growing at a CAGR of 18% over the period of FY09-11. EBITDA has also increased to `1483.30Cr in FY11 from `1290.41Cr in FY10. Chart 4

Segment-wise Revenue Contribution (%)

Source: Company

35.8% 33.9% 34.0% 35.8%

14.7% 19.8% 19.8% 19.6%

11.8% 12.6% 13.3% 14.2%21.6% 17.9% 16.1% 12.9%

16.1% 15.7% 16.7% 17.5%

0%10%20%30%40%50%60%70%80%90%

100%

FY08 FY09 FY10 FY11

BFSI Manufacturing Retail Telecom Others

K E Y N O T E


Chart 5

Segment wise EBITDA margin (%)

Source: Company Chart 6

Revenue break-up - Onsite and Offshore (%)

Source: Company

25%

27%

29%

31%

33%

35%

37%

39%

41%

FY08 FY09 FY10 FY11BFSI Manufacturing Retail Telecom Others

48.5%

46.7% 46.1%

49.2%

51.6%

53.3% 53.9%

50.8%

42%

44%

46%

48%

50%

52%

54%

56%

FY08 FY09 FY10 FY11

Onsite Revenue % Offshore Revenue %

K E Y N O T E


Chart 7

Service-wise Revenue break up (FY11)


Geography-wise Revenue Distribution (FY11)

Source: Company

61.1%

31.2%

7.7%

Business Operations

Consulting & Systems Integration

Products, Platforms and Solutions

65.3%

21.5%

2.2%11.0%

North America

Europe

India

RoW

K E Y N O T E


Performance at glance For Infosys, FY10 was a challenging year as the company has grew only by 5% in term of revenues and PAT as compared to FY09. The growth was tempered by global economic slowdown and declining in client spending. Whereas FY11 was much better year as company posted improved performance owing to recovery in global economy. For FY11, the company gave revenue guideline and projected a revenue growth of 9-11% in rupee terms and 16-18% in US$ terms. But the company has surpassed its own projection and achieved a growth of 21% in rupee terms and 26% in US$ terms. Its revenues and PAT in FY11 stood `27,501Cr and `6,835Cr, respectively. Out of the total revenue, 65.3% of revenue came from North America, 21.5% from Europe, 2.2% from India and 11.0% from the Rest of the World. The number of million-dollar clients has increased to 366 in FY11 from 338 in the FY10. The significant achievement of the company is to maintain its EBITDA margin in the range of 31-35%. The company has consistently outperformed its peer group companies in term of EBITDA margin, indicating its pricing power and robust execution capabilities. The company also reported EBITDA and PAT growth at a CAGR of 24% and 23% respectively over the last five year. It has added 139 new clients and 17,024 in net employees during the FY11. The company possesses a healthy balance sheet with zero debt and substantial cash and bank balance of `15,095Cr as on 31st March, 2011. It has strong cash position relative to its peer group companies which further strengthen its plan for large size acquisition. We believe, the company will continue to increase its client base and employee strength in coming years

(`Cr)

Particulars FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 5 Years CAGR

Sales 3640.0 4853.0 7130.0 9521.0 13893.0 16692.0 21693.0 22742.0 27501.0 23.6%

% change

33.0% 47.0% 34.0% 46.0% 20.0% 30.0% 5.0% 21.0%

EBITDA 1270.0 1594.0 2335.0 3091.0 4391.0 5238.0 7195.0 7861.0 8968.0 23.7%

EBITDA Margin % 35.0% 33.0% 33.0% 32.0% 32.0% 31.0% 33.0% 35.0% 33.0%

PAT 955.0 1244.0 1892.0 2458.0 3856.0 4659.0 5988.0 6266.0 6835.0 22.7%

PAT Margin % 26.0% 26.0% 27.0% 26.0% 28.0% 28.0% 28.0% 28.0% 25.0%

PAT % change

30.0% 52.0% 30.0% 57.0% 21.0% 29.0% 5.0% 9.0%

Total Employees 15356 25255 36750 52715 72241 91187 104850 113796 130820 29.9%

Active Client 345 393 438 460 500 538 579 575 620 6.2%

Source: Company

K E Y N O T E


Sales as compared to peers Chart 9

Source: Company & Keynote Capitals Institutional Research (Note- HCL Tech ltd year ending is June)

EBITDA margin as compared to peers (%) Chart 10

Source: Company & Keynote Capitals Institutional Research (Note- HCL Tech ltd year ending is June)

0

5000

10000

15000

20000

25000

30000

35000

40000

FY06 FY07 FY08 FY09 FY10 FY11

Infosys TCS Wipro HCL Tech*

` C

r

32.5% 31.6% 31.4%33.2%

34.6%32.6%

27.8% 27.5%25.2% 25.8%

29.0% 29.9%

21.0%20.1%

17.3%

17.5%

19.1% 18.2%19.93% 20.33%

17.28%

17.91%

15.99% 15.61%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%



K E Y N O T E


Investment Rationale

Client addition continues to be strong. Infosys has consistently increased its number of clients as well as revenue per clients. The revenue per client has grown at a CAGR of 16% in the last 5 years, whereas the number of client has grown by 6%, implying that deal size has been increasing. The percentage of repeat business from its existing clients has increased by 200 bps from 97% to 99% by the end of the Q1FY12 as compared with Q4FY11, suggesting that Infosys expertise in deeper client mining and its ability to capture a greater share of its customers IT spend. Chart 11

Repeat business from existing client (%)


Revenue per clients

Source: Company

97.1%

98.1%

97.3%

98.1%98.5%

95.0%95.5%96.0%96.5%97.0%97.5%98.0%98.5%99.0%

FY08 FY09 FY10 FY11 Q2FY12

345393

438 460 500 538

579 575620

0

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30

40

50

0

100

200

300

400

500

600

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FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11

Active Client Revenue per client (RHS)

` Cr

K E Y N O T E


During FY11, the company added 139 new clients and indicates improving IT spending from clients. These early signs suggest that clients are spending on IT. Top 10 clients contribute 26% of the revenue. We are expecting that new client addition may increase due to focus on newer geography. The company added 45 new clients in Q2FY12. The total client base of the company stood at 647. During the 2nd quarter the company won three transformational deals & three large deals and the number of clients contributing annual revenue of $90Mn increased to 14 from 12. Despite macroeconomic concern in developed economies, the company indicated that it is not witnessing any budget cut by clients.

Number of million dollar clients

Mn $ clients FY08 FY09 FY10 FY11 Q1FY12 Q2FY121 Million $ Clients 310 327 338 366 374 38810 Million $ Clients 89 101 97 126 125 12850 Million $ Clients 18 20 26 28 32 3590 Million $ Clients 6 7 8 11 12 14100 Million $ Clients 6 4 6 11 11 11200 Million $ Clients 1 1 1 2 2 2300 Million $ Clients 1 1 0 0 0 1Source: Company

Top clients contribution in the revenues

Client contribution FY08 FY09 FY10 FY11

Top clients 9.1% 6.9% 4.6% 4.7%

Top 5 clients 21.1% 18.3% 16.6% 15.5%

Top 10 clients 31.7% 28.0% 26.3% 25.9%Source: Company

Strong cash and bank position as compared to peer. The company's cash position is strong as compared to its peer group companies which supports large size acquisition target. Therefore, the management is targeting acquisition in the range of $300mn - $500mn much higher as compared to its peer and the acquisition aims to strengthen presence in Europe, Japan, and Australia with new client addition and to build its healthcare, consulting or package implementation offering. In addition that we believe the company may continue to acquire IP for expanding its non-liner revenue. The company received highest Interest on deposit with bank as compared to its peer. This could help the company to maintain its PAT margin. Whereas, the peer group companies have less cash balance with bank they are getting less interest.

K E Y N O T E


Chart 13

Cash and bank position as on 31st March

Source: Company & Keynote Capitals Institutional Research (*HCL Tech Ltd year ending is June) Chart 14

Interest received on Cash and Bank Balance

Source: Company & Keynote Capitals Institutional Research (*HCL Tech Ltd year ending is June)

Improvement in Utilization and Revenue per Employee could boost the growth momentum. Revenue per employee has grown at a CAGR of 5% over FY08 to FY11. The revenue per employee has moved in close range of `0.18Cr to `0.21Cr from FY08 to FY11. Currently the company has 141,822 employees and utilization excluding trainees and including trainees stood at 77.30% and 70.20% as on Q2FY12. Utilization excluding trainees was up 240 basis points and including trainees up 60 basis points as compared to Q1FY12. During the Q2FY12 the company and its subsidiaries saw over 7,090 employees leaving. While the company and its subsidiaries hired 15,352 employees, the net addition stood at 8,262 for the reported quarter. In Q2FY12 EBITDA margin was up by 200 basis points as compared to Q-o-Q. The margin was up due to rupee appreciation and improvement in utilization.

15,095

7,378

6,114

1,7300

2000400060008000

10000120001400016000

FY06 FY07 FY08 FY09 FY10 FY11Infosys TCS Wipro HCL Tech*

`Cr

1,133

497

406

1360

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1200



`Cr

`Cr

K E Y N O T E


Chart 15

Revenue per employee (`Cr)

Source: E - Keynote Capitals Institutional Research Chart 16

Employee metrics

Source: E - Keynote Capitals Institutional Research The company is planning to hire 45,000 employees in FY12 to create adequate bench strength in order to take up opportunities in the market. We are expecting the number of employees to be plus 1,50,000 and 1,80,000 in FY12E and FY13E and Utilization excluding trainees to be in the range of 75% to 77% in coming years due to slightly increase in client spending and the company’s initiative to extent its capabilities and expand in new geographies could lead to outperformance going forward.

0.183

0.2070.200

0.2100.217 0.219

0.170

0.190

0.210

0.230

05,000

10,00015,00020,00025,00030,00035,00040,00045,000

FY08 FY09 FY10 FY11 FY12E FY13E

Revenue Revenue per employee (RHS)

3317728231 27639

4312049847

59079

1894613663

8946

1702422137

28277

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Total Employee Gross Employee Addition (RHS) Net Addition (RHS)

K E Y N O T E


Chart 17

Utilization including and excluding trainees (%)

Source: E - Keynote Capitals Institutional Research In FY11 utilization excluding trainee and including trainee was 78.95% and 72.08%. The company does not provide utilization on the basis of onsite and offshore. We are expecting utilization could remain subdued due to high fresher addition in next few quarters.

Revenue contribution from Product, Platform and Solutions to increase in coming years. Product, Platform and Solutions contributes 7.9% in the revenue, up 80 basis points in Q2FY12 as compared to Q2FY11. Finacle is the highest revenue contributor in product segment. It is chosen by 140 Bank across 73 countries to power operations across 47000 branches. It is one of the most scalable core-banking solutions in the world with an unparalleled performance benchmark of 104 million effective transactions per hour for channel (non-branch) transactions. Product segment also consist products like Flypp, iTransform, iEngange, iProwe etc. Finacle solutions address the core banking, e-banking, Islamic banking, treasury, wealth management and CRM requirements of retail, corporate and universal banks worldwide. Several powerful and differentiating features make Finacle one of the most comprehensive, flexible and scalable universal banking solution in its class. These solutions, when associated with Finacle services, empower banks to maximize their opportunities for growth, while minimizing the risks that come with large-scale business transformation.

Recently Finacle was implemented by following banks. • ECM ltd implemented Finacle Treasury as their trading platform for credit derivative and

total return swaps products.

• Wema bank from Nigeria selected Finacle as its banking solution for strengthening its retail banking services over 150 branches.

• Bank of Chinatrust from Indonesia implemented Finacle core banking solution.

75.85%73.73% 74.35%

78.95%76.33% 76.49%

70.00%68.60% 68.10%

72.08%70.00%

72.00%

62%64%66%68%70%72%74%76%78%80%

FY08 FY09 FY10 FY11 FY12E FY13E

Excluding Trainees Including Trainees

K E Y N O T E


• City Saving Bank from Philippines has chosen Finacle core banking solution to power the

bank’s strategic business transformation. Chart 18

Revenue contribution from Product segment

Source: Company

The company provides following products and solutions to their clients.

Source: Company

Retail Segment to outperform.

Retail segment growing at 25% CAGR over FY2008-FY2011. It is expected that it may give healthy performance in coming years. A large US based retailer partnered with Infosys on its e-commerce offerings. According to RIS News survey of leading Retailers in North America, rated Infosys as the number one IT and consulting services provider for the retail industry. Income from Retail segment stood `3900Cr up 29% and EBITDA `1263.12Cr in FY2011.

7.3%7.1%

8.2% 8.2% 8.3%7.9%

6%

7%

7%

8%

8%

9%

Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12

Product revenue (%)

Products Solutions Finacle Product master syndication Flypp Shopping Trip 360 Infosys HIMI Plant design and management system Infosys iEngage Sales effective center Infosys iProwe Product lifecycle management Infosys MaskIT 360 eHealth Solutions Infosys mConnect Infosys research on demand Infosys unified communications and collaboration (UC)

iTransform Supply chain visibility

K E Y N O T E


The company provides different solution for example: Revenue Optimization, Infosys iEngage digital consumer platform, Shopping Trip 360 etc. and services like Application development and Maintenance, Packaged Application services etc. to the retail clients. Considering the macroeconomic indicators, the customers may go for reducing cost of operation or transform their business operations or innovation to differentiate in the marketplace, thereby resulting in delivering their services to their clients at lower cost. This drives the total IT outsourcing deals and we expect that the company could be benefited from this.

The company has focus on following areas.

Business Transformation:

The company helps retail companies transform their consumer experience and supply chain systems with solutions like Next Generation Commerce and Logistics Optimization.

Accelerating Innovation:

Retailers have redefined their customer-centricity and made their digital commerce more effective with leading-edge Infosys solutions like ShoppingTrip360 and Smart Visual Merchandising.

Efficient Operations:

The company helps improve efficiency in organizations through its competencies in improving supply chain efficiencies, reducing interdependencies and making account maintenance more effective.

Chart 19

Business Delivery process Retail Yearly performance

Source: Company

September quarter ended results comparison with peers.

IT frontline companies have registered 6% to 8% top-line growth in the September quarter ended as compared to Q-o-Q. IT companies have shown better performance in the Sales growth and new clients additions, despite the global uncertainty. Infosys posted 10.7% growth in PAT (Profit after Tax), whereas TCS, HCL Tech and Wipro declined as compared to Q-o-Q. The company specific Infosys performance was better than its peer group companies in terms of PAT (Profit after Tax) growth and it has consistently maintained its highest EBITDA margin as compared to its peer.

11.8% 12.6% 13.3% 14.2%

30.4%32.8% 33.8% 32.4%

0%5%10%15%20%25%30%35%40%

0

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2000

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FY08 FY09 FY10 FY11Retails % of total income EBITDA Margin

K E Y N O T E


The companies have also added new employees during the quarter and going forward they could continue hiring employees because if the opportunities come, then the company should be in position to take the advantage of the growth. The companies have large deals in pipeline and have provided strong revenue guidance for FY12E. Robust hiring guidance is led by the improved revenue visibility and is expected to increase in volumes. Infosys has given guidance of 50-100 basis points decline in the Margin due to wages hike, currency fluctuation and lower utilization in FY12E. The company is expecting revenues to be in the range of `33501Cr and `34088Cr up 21.8% to 24.0% in FY12E.

September quarter ended results (`Cr)

Source: Company & Keynote Capitals Institutional Research (*HCL year ending is June)

Expenditure to Sales ratio is likely to be maintained in the near future The company is always known for its higher EBITDA margin as compared to its peer. The company is well positioned to manage its total expenditure very efficiently. It has maintained Expenditure to Sales ratio to 67% in FY11, which is lowest as compared to its peers. The company is being an IT service provider invests significantly in its human capital. The predominant costs are employee’s salaries and related benefit. The company has high expenditure in the Software and development which is 55% of sales and Selling and marketing and General and administration are 12% of sales. We are expecting total expenditure to sales ratio could increase to 68%-69% in FY12E due to increase in wages.

Particulars Infosys TCS Wipro HCL Tech*

Sales 8099.0 11633.5 9094.5 4651.3

Q-o-Q % change 8.2% 7.7% 6.2% 8.2%

Y-o-Y % change 16.6% 25.3% 17.6% 25.4%

Total Expenditure 5585.0 8249.0 7354.7 3856.4

Expenditure % of sales 69.0% 70.9% 80.9% 82.9%

EBITDA 2514.0 3384.5 1739.8 794.9

EBITDA Margin % 31.0% 29.1% 19.1% 17.1%

PAT 1906.0 2301.0 1300.9 496.7

PAT Margin % 23.5% 19.8% 14.3% 10.7%

Q-o-Q % change 10.7% -4.7% -2.6% -2.7%

Y-o-Y % change 9.8% 6.1% 1.3% 50.0%

EPS 33.4 12.5 5.3 7.2

New clients addition 45 35 44 66

Net Employee addition 8262 12580 5240 3836

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Chart 20

Expenditure to Sales ratio (FY11)

Source: Company & Keynote Capitals Institutional Research (HCL Tech year ending is June)

ROE (Return on Equity) expected to increase to 29.4% in FY13E

We are expecting the company’s net profit to post 18.5% CAGR over FY11-13E. Rupee depreciation and Higher utilization could have positive impact on margin Chart 21

Return ratios (%)

Source: E - Company & Keynote Capitals Institutional Research

Opportunity in Cloud Computing

The company is looking for opportunities in cloud computing. Cloud computing facilitates sharing of technological resources, software and digital information. It operates on a pay-per-use model, helping companies to cut costs as they do not have to invest heavily in infrastructure. Cloud services currently form about 3% of Infosys’s overall income and more than 10% if cloud products are also included. The company is concentrating on core issues in cloud like transitioning companies towards cloud, running cloud services and new solutions offering. India's domestic cloud computing market could see a huge lift over the next decade. Recent research from NASSCOM shows that India's cloud market could reach $16bn by 2020, while at the same time the global opportunity is projected to grow to $680bn by NASSCOM. The company’s vision is to deliver a trusted Cloud Ecosystem and Its offerings address all aspects of cloud adoption include:

67.4% 70.1%81.8% 84.4%

0%

20%

40%

60%

80%

100%

Infosys TCS Wipro HCL TechTotal Expenditure to Sales ratio FY11

30.3%

27.9%28.5%

29.4%

27.0%27.5%28.0%28.5%29.0%29.5%30.0%30.5%

FY2010 FY 2011 FY 2012 E FY 2013 E

ROE(%)

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Comprehensive Professional Services for the Cloud: The Company provides a single

point of accountability across the entire Cloud lifecycle. It encompasses strategy and planning, Cloud ecosystem setup to migration, creation and aggregation of Cloud services. It integrates Cloud services with existing enterprise investments.

Industry-leading Services in the Cloud: Infosys’s services in the Cloud enable Line of

Business (LOB) functions such as sales, marketing, customer service, and human resources and industry functions such as banking. The company operate and manage services on a subscription-based pricing model.

An Ecosystem of Partnerships: Ecosystem of partners comprises best-in-class Cloud

service providers, addressing various aspects of the Cloud ecosystem. Strategic and opportunity-based relationships with leading Cloud service providers help Infosys deliver trusted Cloud ecosystem.

Chart 22

Cloud offerings

Source: Company

Q3FY12E analysis and expectation We are expecting sales to grow 7.5% Q-o-Q and 22.6% Y-o-Y. There is still pressure on the margin due to the higher tax rate and currency fluctuation. We are expecting PAT Margin to decline by 50bps to 100bps in third quarter as compared to Y-o-Y. We are expecting Infosys to report an EPS of `37.2 for the quarter. The company commented that the recent blood bath in the global economies and the concern spreading on double dip recession in the US and financial crisis in the Europe has not seen any project cancellation yet and demand for price reduction. The company sticks to 21.8%% to 24.0% revenue forecast for FY12E.

Infosys as a Cloud Ecosystem Integrator

Comprehensive Professional services for the Cloud

Cloud Strategy Adoption

Cloud Builder

Cloud Orchestrator

Industry leading services in the Cloud

Flypp

Infosys iEngage

An Ecosystem of Partnership

Amazon Web Services

CA Technologies

HP

Microsoft

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December quarter ended result of Infosys

(`Cr)

Particulars Q3FY08 Q3FY09 Q3FY10 Q3FY11 Q3FY12E

Sales 4271.0 5786.0 5741.0 7106.0 8709.0Q-o-Q % Change 4.0% 6.8% 2.8% 2.3% 7.5%Y-o-Y % Change 16.9% 35.5% -0.8% 23.8% 22.6%Total Expenditure 2879.7 3755.6 3703.6 4743.7 5835.0% of sales 67.4% 64.9% 64.5% 66.8% 67.0%Y-o-Y % Change 17.1% 30.4% -1.4% 28.1% 23.0%EBITDA 1391.3 2030.4 2037.4 2362.3 2874.0EBITDA Margin (%) 32.6% 35.1% 35.5% 33.2% 33.0%Y-o-Y % Change 16.3% 45.9% 0.3% 16.0% 21.7%PAT 1230.3 1640.4 1581.4 1779.3 2133.7PAT Margin (%) 28.8% 28.4% 27.5% 25.0% 24.5%Y-o-Y % Change 25.2% 33.3% -3.6% 12.5% 19.9%EPS (`) 21.4 28.6 27.5 31.0 37.2Source: E - Company & Keynote Capitals Institutional Research Foreign Exchange Gains / (losses)

Foreign Exchange Gains and losses is the major problem for the company. Because every 1% movement in the Indian rupee against the US dollar has an impact of approximately 60 to 70 basis points on EBITDA Margin. The company use foreign exchange forward contracts and options to hedge the exposure to movements in foreign exchange rates. The use of these foreign exchange forward contracts and options reduces the risk. At the end of Q2FY12 the company has close to $742mn of hedging cover against $745mn in Q1FY12.The Company earned `42Cr on Foreign Currency in FY11 as against `30Cr in FY2010. We expect the EBITDA margin to be positively impacted due to dollar appreciation. An appreciating dollar improves the top-line of the company; however the increase in the top-line offset the cost calculation. In our valuation we are expecting `46.6 and `46.6 per dollar in FY12E and FY13E.

Impact of $ appreciation and depreciation on the EBITDA margin for the year FY12E and FY13E

Particulars ` VS $ EBITDA ($Mn) Margin % change in $ % change in margin

FY12E (Base) 46.6 2270.5 31.8%FY13E (Base) 46.6 2727.0 32.0%FY12E 45.5 2104.1 30.2% -2.3% -1.6%FY13E 45.5 2525.2 30.4% -2.4% -1.6%FY12E 47.6 2425.6 33.3% 2.2% 1.5%FY13E 47.6 2909.1 33.4% 2.1% 1.4%FY12E 48.0 2486.9 33.8% 3.0% 2.0%FY13E 48.0 2982.3 34.0% 3.0% 2.0%Source: E - Keynote Capitals Institutional Research

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The composition of Currency-Wise revenue for the years ended March 31, 2011.

For the year ended FY11, North America accounted for 65.38% of the total revenue as compared to 65.83% in the last year. Revenue from Europe was 21.50% of the total revenue for the year ended FY11 as compared to 23.08% of the total revenue for the year ended FY10. Over the years dollar revenue has been 70% of the total revenue. Therefore the company has developed hedging strategy for the movement of rupee with respect to different currencies. Hence the hedging strategy could help the company to minimize the losses due to the currency movement.

Source: Company & RBI

Subsidiary-Wise performance

The company has 9 subsidiaries and its important subsidiaries are Infosys BPO ltd., Infosys Technology (Australia) PTY. Ltd., and Infosys consulting Inc. The company established Infosys BPO ltd as control subsidiary on April, 2002 to provide business process management services such as offsite customer relationship management, finance and accounting, and administration and sales order processing. Infosys BPO has operations in the US, Asia Pacific, Australia and Europe with over 19,765 employees as on Q2FY12. Its revenues stood at $323.06mn up 10% and PAT was $43.17mn as on FY11. Infosys BPO is looking for acquisition across the globe as it eyes to reach $1bn revenue target over the next few years. The company would look at targets which would help Infosys BPO strengthen its core competency in area like sourcing and procurement and legal process outsourcing. The CEO of Infosys BPO mentioned that, Overall the Indian BPO sector is optimistic about growth, despite the global economic uncertainties and have expressed optimism over growth opportunities in the market.

Currency ( % ) FY11 FY10 1 Year ` trend against $

US Dollar ($) 73.7 74.4

UK Pound (GBP) 6.5 8.5

Euro (EUR) 6.8 6.7

Australian Dollar (AUD) 6.6 5.8

Others 6.4 4.6

Total 100 100

434445464748495051

USD/INR

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Financial Performance of Subsidiaries

Revenue ($MN) FY09 FY10 FY11

Subsidiaries Revenue PAT Revenue PAT Revenue PAT

Infosys BPO ltd 279.46 134.60 293.38 50.76 323.06 43.17

% change 19% 285% 5% -62% 10% -15%

Infosys Technologies (Australia) Pty.ltd 119.01 38.08 150.40 9.80 216.30 18.33

% change -14% 50% 26% -74% 44% 87%

Infosys Consulting Inc. 62.42 29.03 98.65 23.25 186.38 17.67

% change 1% -327% 58% -20% 89% -24%

Infosys Technologies (China) company ltd 27.45 15.66 47.88 9.22 78.99 8.73

% change 45% -1153% 74% -41% 65% -5%

Infosys Technologies (Mexico) 7.82 -2.04 14.86 -0.09 21.75 -0.21

% change 1128% 21% 90% -96% 46% 133%

Infy Sweden - 0.20 2.22 0.07 2.49 0.13

% change - - - -65% 12% 86%

Infy Brazil - -3.18 1.78 -1.60 11.22 -1.58

% change - - - -50% 530% -1%

Infosys Public Services Inc - -0.16 - -0.03 - -0.13

% change - - - - - -

Infosys Technologies S. de R. L. de C. V. - - - - - -

% change - - - - - - Source: Company

Pricing Strategy The company charges their clients by using Time and Material based pricing and Fixed price contract. T&M based projects provide the clients with flexibility in terms of changing requirements. The clients are charged based on how many man hours are used in executing a project. Increase in Fixed price contracts may help the company to maintain its margin as usually these contracts have higher margins. The company has 40:60 ratio of Fixed price contracts and Time and Material.

K E Y N O T E


Chart no. 23

Revenue by project type (excluding product) (%)

Source: Company

Revenues split onsite and offshore Onsite revenue is earned by Infosys employee on client’s premises. The contribution of Onsite revenue was increased in FY11 by 310 basis points and it is good for the company in terms of revenues but negatively impact margins. We expect onsite revenue mix may be higher in FY12E due to the venturing into higher value added services and this initiative would help company to increase its revenue. Onsite and Offshore split always keep changing according to business environment. We believe a 47:53 onsite and offshore revenue split would be an ideal combination for the company. However the business environment is very dynamic and clients asking for off-shoring more work could ask for more proximity based delivery once the environment improves.

Revenue split onsite and offshore FY08 FY09 FY10 FY11 FY12EOnsite Revenue % 48.5% 46.7% 46.1% 49.2% 50.2%Offshore Revenue % 51.6% 53.3% 53.9% 50.8% 49.8%Sales growth % 20.1% 30.0% 4.8% 20.9% 20.8%EBITDA Margin % 31.4% 33.2% 34.6% 32.6% 31.8%

Source: E - Keynote Capitals Institutional Research

Risk and Concerns • Foreign exchange risks

Currency fluctuation is the major problem for the IT companies. Our estimates suggest that every 1% movement in the Indian rupee against the US dollar has an impact of approximately 55 to 65 basis points on EBITDA Margin.

0%

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30%

40%

50%

60%

70%

80%

Fixed price Time & Material

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• Attrition

The continuous increase in attrition rate could lead to supply side concerns.

• Highly dependent on clients primarily located in the U.S. and Europe

Infosys is highly dependent on clients primarily located in the U.S. and Europe, as well as in certain industries, and an economic slowdown or other factors that affect the economic health of the U.S, Europe or these industries may affect Infosys business.

Valuation

At current market price of `2723.15 stock is trading at 19.4x FY2012E and 16.2x FY2013E earnings, which is low as compared to its historical forward PE of 25x. Considering improved deal position and increase in client addition, we initiate coverage with a “BUY” recommendation with the DCF based target price of `3149, arriving at 22.5x FY12 and 18.7x FY13 earning for the unlevered firm. Current management change, Focus on new geographies and looking for medium and large size deals may help Infosys to achieve high growth as compared to its peers. Valuation Table

Chart no. 24

Forward PE band chart

Source: Company & Keynote Capitals Institutional Research

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Particulars FY09 FY10 FY11 FY12E FY13EEPS (`) 104.8 109.7 119.7 140.0 168.5ROE (%) 37.4% 30.3% 27.9% 28.5% 29.4%PE (x) 17.4 25.7 22.8 19.4 16.2P/BV (x) 5.7 6.9 6.0 5.1 4.4

K E Y N O T E


DCF valuation using FCFE

High Growth Phase ` per Share

Transition Phase ` per Share

Particulars 2017 2018 2019 2020 2021WC 863.9 969.3 1064.3 1143.1 1200.3Delta WC 110.1 105.4 95.0 78.8 57.2Exponential Index 6 7 8 9 10Growth rate 14.6% 12.2% 9.8% 7.4% 5.0%Earnings 309.2 347.0 381.0 409.1 429.6-(Capex-Depreciation) -6.7 -7.5 -8.2 -8.8 -9.3- Delta WC 110.1 105.4 95.0 78.8 57.2FCFE 205.8 249.0 294.2 339.2 381.7Beta-Declining factor 0.06 Beta 0.80 0.74 0.68 0.62 0.56 0.50Ke 12.8% 12.4% 12.0% 11.6% 11.3%PV 99.9 109.7 118.6 125.9 131.4Sum of Transition Phase 585.5

Particulars RateRisk free rate 8.0%Risk premium 6.5%Beta 0.75Ke 12.9%Gh 17.0%Gn 5.0%Beta high growth 0.80Beta stable growth 0.50Declining factor 2.4%

Particulars 2010 2011 2012 2013 2014 2015 2016Exponential Index 0 1 2 3 4 5High growth phase 2011 2012 2013 2014 2015 2016EPS (`) 119.7 140.0 168.5 197.1 230.6 269.8% change in EPS 17.0% 20.3% 17.0% 17.0% 17.0%(Capex-Depreciation) -3.4 7.9 -3.6 -4.2 -5.0 -5.8WC 240.1 344.1 399.7 470.7 550.7 644.3 753.9Change in WC 104.4 55.8 71.2 80.0 93.6 109.5FCFE 18.7 76.3 100.9 121.3 142.0 166.1PV 18.7 67.6 79.2 84.4 87.5 90.7SUM OF PV Hg 409.3

K E Y N O T E


Terminal Value ` per Share

Source: E - Keynote Capitals Institutional Research

Particulars

WC 1260.3 Delta WC 60.0 (assuming capex is offset by depreciation) FY 2022 EPS (`) 451.1 - Delta WC 60.0 FCFE 391.1 Terminal Value 6,257.1 Present Value of Terminal Value 2,154.6 Total Present Value 3,149.4 CMP 2723.2 Return (%) 15.7%

K E Y N O T E


Consolidated Financial Statement Profit and Loss A/c `Cr

Particulars FY10 FY11 FY12E FY13E Sales 22742.0 27501.0 33232.2 39713.8% change 4.8% 20.9% 20.8% 19.5%Total Expenditure 14881.0 18533.0 22654.4 27005.1% change 2.6% 24.5% 22.2% 19.2%EBITDA 7861.0 8968.0 10577.8 12708.7EBITDA Margin (%) 34.6% 32.6% 31.8% 32.0%Depreciation and Amortization 905.0 854.0 1050.1 1207.6EBIT 6956.0 8114.0 9527.7 11501.1Other Income 934.0 1211.0 1429.2 1681.5Provision for Investment -9.0 - - -Net Profit Before Tax and Minority Interest 7899.0 9325.0 10956.8 13182.6Provision for Tax 1681.0 2490.0 2958.3 3559.3NPAT & Before exceptional item 6218.0 6835.0 7998.5 9623.3Profit on sale of investment 48.0 - - -NPAT 6266.0 6835.0 7998.5 9623.3Source: E - Keynote Capitals Institutional Research Estimates ($1=`46.6)

Balance Sheet Statement `Cr

Source: E - Keynote Capitals Institutional Research Estimates ($1=`46.6)

Particulars FY10 FY11 FY12E FY13ESources of funds Share capital 286.0 286.0 286.0 286.0Reserve and surplus 22763.0 25690.0 29879.2 35033.8Deferred Tax liability 232.0 176.0 212.7 254.2Total 23281.0 26152.0 30377.9 35573.9Application of funds Fixed asset 7839.0 8501.0 10001.1 11501.0Less: Depreciation & Amortization 2893.0 3266.0 3916.4 4503.8Net book value 4946.0 5235.0 6084.7 6997.2Add: Capital work in progress 409.0 525.0 630.0 724.6Total 5355.0 5760.0 6714.7 7721.8Investments 3712.0 144.0 153.1 158.9Deferred Tax Asset 432.0 497.0 564.9 675.1Current Asset Sundry debtors 3494.0 4653.0 5617.6 6637.1Cash and bank balance 10556.0 15095.0 17627.9 20740.1Loans and Advances 4187.0 5320.0 5981.8 7148.5Less: Current Liability & Provision Current liability 2343.0 2677.0 3186.6 3808.2Provision 2112.0 2640.0 3095.6 3699.4Net Current Assets 13782.0 19751.0 22945.1 27018.2Total 23281.0 26152.0 30377.9 35573.9

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Cash flow Statement `Cr

Particulars FY10 FY11 FY12E FY13EPBT 7899.0 9325.0 10956.8 13182.6Tax paid -1681.0 -2490.0 -2958.3 -3559.3Depreciation & amortization 905.0 854.0 1050.1 1207.6Working capital changes -147.0 -1430.0 -661.1 -960.9Others -428.0 -481.0 -399.7 -620.2Net cash from operations 6548.0 5778.0 7987.7 9249.8Net cash from investments -4459.0 2725.0 -1682.2 -1710.4Net cash from financing -1228.0 -3964.0 -3772.6 -4427.2Net change in cash 861.0 4539.0 2532.9 3112.2Cash at the beginning 9695.0 10556.0 15095.0 17627.9Cash at the end of the period 10556.0 15095.0 17627.9 20740.1


Key Ratios

Particulars FY10 FY11 FY12E FY13EMargin ratios EBITDA 34.6% 32.6% 31.8% 32.0%EBIT 30.6% 29.5% 28.7% 29.0%PBT 34.7% 33.9% 33.0% 33.2%PAT 27.6% 24.9% 24.1% 24.2%TAX Rate (%) 21.3% 26.7% 27.0% 27.0%Efficiency ratios Average asset turnover 1.1 1.1 1.2 1.2RoANW (%) 30.3% 27.9% 28.5% 29.4%RoAA (%) 30.1% 27.7% 28.3% 29.2%Valuation ratios CAGR 3 years 17.9% 18.1% 15.3% 20.4%EPS (`) 109.7 119.7 140.0 168.5EBITDA (`Cr) 7,861.0 8,968.0 10,577.8 12,708.7BV (`) 407.0 457.2 531.1 621.9P/E (x) 25.7 22.8 19.4 16.2P/BV (x) 6.9 6.0 5.1 4.4EV 141278.3 140307.3 137765.3 134647.3EV/EBITDA (x) 18.0 15.6 13.0 10.6Dupont Analysis A) PAT/Sales 27.6% 24.9% 24.1% 24.2%B) Sales/NA 1.09 1.11 1.18 1.20C) NA/NW 1.01 1.01 1.01 1.01ROE (%) 30.3% 27.9% 28.5% 29.4%


K E Y N O T E


KEYNOTE CAPITALS LTD.

Member Stock Exchange, Mumbai (INB 010930556)

National Stock Exchange of India Ltd. (INB 230930539) Over the Counter Exchange of India Ltd. (INB 200930535) Central Depository Services Ltd. (IN-DP-CDSL-152-2001)

4th Floor, Balmer Lawrie Building, 5, J. N. Heredia Marg, Ballard Estate, Mumbai 400 001. INDIA Tel. : 9122-2269 4322 / 24 / 25 • www.keynotecapitals.com

DISCLAIMER • This report has been prepared and issued by Keynote Capitals Limited, based solely on public information and sources believed to be reliable. • Neither the information nor any opinion expressed herein, constitutes an offer, or an invitation to make an offer, to buy or sell any securities or any options, futures or other derivatives related to such securities and also for the purpose of trading activities. • Keynote Capitals Limited makes no guarantee, representation or warranty, express or implied and accepts no responsibility or liability as to the accuracy or completeness or correctness of the information in this report. • Keynote Capitals and its affiliates and their respective officers, directors and employees may hold positions in any securities mentioned in this Report (or in any related investment) and may from time to time add to or dispose of any securities or investments. • Keynote Capitals may also have proprietary trading positions in securities covered in this report or in related instruments. • An affiliate of Keynote Capitals Limited may also perform or seek to perform broking, investment banking and other banking services for the company under coverage. • If ‘Buy’, ‘Sell’, or ‘Hold’ recommendation is made in this Report, such recommendation or view or opinion expressed on investments in this Report is not intended to constitute investment advice and should not be intended or treated as a substitute for necessary review or validation or any professional advice. The views expressed in this Report are those of the analyst which are subject to change and do not represent to be an authority on the subject. Keynote Capitals may or may not subscribe to any and/ or all the views expressed herein. • The opinions presented herein are liable to change without any notice. • Though due care has been taken in the preparation of this report, Keynote Capitals limited or any of its directors, officers or employees shall be in any way be responsible for any loss arising from the use thereof. • Investors are advised to apply their judgment before acting on the contents of this report. • This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Keynote Capitals Limited.

Institutional Equity Team Rakesh Chaudhary (CEO) [email protected] +91 22 3026 6034

Analysts / Associates

Denil Savla [email protected] +91 22 3026 6073

Deepak Kolhe [email protected] +9122 3026 6084

Rohan Admane [email protected] +91 22 2269 6059

Rajesh Sinha [email protected] +91 22 3026 6088

Mamta Singh [email protected] +91 22 3026 6057

Technical Analyst

Sanjay Bhatia [email protected] +91 22 3026 6047

Dealing / Sales

Nilesh Dhruv [email protected] +91 22 3026 6040

Puja Shah [email protected] +91 22 3026 6043

Nisha Sharma [email protected] +91 22 3026 6041

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