infy term paper

8/8/2019 Infy Term Paper

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INFOSYS TECHNOLOGIES LTD.

Annual Report Analysis


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The Infosys Annual Report 2007-08 contains a human touch with the

key theme being various company initiatives towards attracting,

training, retaining and empowering talent. FY08 was another

watershed year for Infosys with robust business performance

(industry-leading dollar growth) , judicious expenditure management

and strengthened financial position. Infosys, the behemoth, continues

to move from strength to strength. Our analysis of the Annual Report

revealed following interesting findings.

Income statement robust growth and unparalleled size and

profitability

In dollar terms, stand-alone revenues increased by 34.1% yoy

comprising 27.5% growth in volumes (onsite 26.2% & offshore

28.2%) and a 5.3% improvement in per capita revenues (onsite 4.3%


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& offshore 7.2%). The rupee revenue growth was reduced to 19% due

to 11.2% appreciation of the currency. It was the second consecutive

year of 5%+ blended pricing improvement.

The onsite:offshore revenue mix shifted towards the latter (from

~52:48 to ~51:49) due to higher volume growth and pricing

improvement. The onsite:offshore effort mix was ~30:70. The revenue

contribution of fixed-price fixed-time frame contracts increased to 33%

from 28% in the previous year.

Top 10 clients grew 38.8% yoy and the non-Top 10 clients grew by33.6% yoy in dollar terms demonstrating a balanced growth across

customers. About 97% of revenues represented repeat business. Product

revenues were Rs5.97bn (3.6% of consolidated revenues) representing

11% yoy growth.

Consolidated GPM at 44.8% was lower by 150 bps than 46.3% earned

in FY07. The decline was due to more than proportionate increase of

26% in employee cost driven by a similar increase in year-end

headcount and annual salary increments. Judicious expenditure on

overseas travel, sub-contracting and software packages mitigated the

impact of higher employee cost.

Consolidated OPM was stable yoy at 31.4% due to 120 bps savings

from lower sales and marketing (S&M) cost. The S&M expenditure

declined 1.4% yoy despite 10% increase in employees cost (11.7%


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increase in headcount here). Infosys curtailed all the other S&M

expenses such as brand building, commissions, professional charges and

overseas travel. General & administration (G&A) expenditure was

steady yoy at 8% of revenues.

During the year, Infosys spent Rs2.01bn on R&D, about 1.3% of its

revenues. The company filed for 10 patents in India and the US and has

119 patent applications outstanding in both countries at the end of FY08.

Other income jumped 89% in FY08 to Rs7.04bn driven by 116%

increase in interest and dividend income that formed 97% of the total.

Realized yield on deposits and mutual funds was 9.5% against 7.4% in

FY07. Other income constituted material 13.2% of the consolidated

PBT.

The net profit of FY08 and FY07 includes a tax reversal of Rs1.21bn

and Rs1.25bn respectively with respect to overseas jurisdictions.


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Excluding the tax reversals, the effective tax rate would have been

15.1% in FY08.

During FY08, two more SEZs at Pune and Mangalore commenced

operations. About 6% of revenues were delivered from SEZs.

Infosys had 3.03mn options outstanding at the end of FY08 under its

two ESOP plans (1998 plan and 1999 plan) representing an insignificant

potential dilution of 0.5%. About 87% of these outstanding options have

been vested.

Pro forma net profit for FY08 after deducting employee stock-basedcompensation using fair value method under SFAS 123 stood at

Rs46.46bn implying no material change from the reported figure.

The parent company added net 13,659 employees and gross 22,671

employees in FY08. Company recruited from 1,079 engineering colleges

and made 18,146 campus offers. The attrition at 13.4% was lower than

last year. Consolidated year-end headcount stood above 91,000.

The company has 47 marketing offices at the end of the year.


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The total subsidiary revenues recorded far higher growth than the

parent company.

The five subsidiaries added net Rs10.46bn (6.3%) to consolidated

revenues after netting off the Rs7.73bn subcontract business between

them and the parent company. The gross revenue contribution was

10.9% and the yearend employee count was 19.4% of the total.

With a combined 10.4% NPM, these subsidiaries continue to dilute

profitability of the consolidated company. However, the subsidiaries

appear to have earned a higher combined GPM than the parent(consolidated GPM higher than stand-alone GPM).

Infosys China and Infosys Consulting reported significant losses as

they remain in the investment phase.

The Mexico subsidiary was set-up during the year with a development

centre to serve the North American clients.

During the year, Infosys acquired 100% equity in Phillips BPO for

Rs1.07bn. The acquired entity has skill sets in finance and

administration space and global presence with centres in Poland,

Thailand and India. This acquisition added ~Rs750mn to Infosys BPO

revenues but diluted the profitability with its negative NPM of 2.7%.

Excluding this, NPM of Infosys BPO would have been 17.8%.

Special dividend and increase in payout ratio reflects companys

confidence in growth


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For FY08, apart from an interim and final dividend of Rs6 and Rs7.25

respectively, Infosys declared a special dividend of Rs20 per share to

acknowledge companys achievement of greater than US$1bn in

consolidated profits.

The total annual dividend payout of Rs19.02bn (excluding tax) is the

largest in the corporate history of India.

Company also decided to increase the dividend payout ratio (DPR) to

30% of net profits from 20% effective FY09. This raise in DPR reflects

Infosyss confidence in generating adequate future cash flows frombusiness to cover the growth drivers (capex and strategic investments)

and enhanced shareholder returns (dividends).

The payout in the last two years was near the dividend policy rate of

20%.

Infosyss balance sheet continues to remain strong, debt-free and

highly liquid. The C&CE constituted 46.7% of total assets. More


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importantly, it has been covering an increasing proportion of revenues

and operating expenditure thereby lending further strength to balance

sheet and safety to business.

DSO stood at 72 against 64 at the end of FY07 reflecting more than

proportionate increase in debtors. The largest client contributed 21.4%

of debtors.

The parent company incurred a capex of Rs13.7bn during FY08

comprising Rs11.81bn on physical infrastructure and Rs1.89bn on

technological infrastructure. Capital expenditure commitment stood atRs6bn at the yearend. The capex at the consolidated level was

Rs14.94bn.

During the year, Infosys added 45.12 lakh sqft of physical

infrastructure space taking the total available space to 164.77 lakh sqft

representing 77,754 seats. An additional 83.63 lakh sqft is under

construction that would provide 26,881 seats. Infosys expanded capacity

at Brno, Czech Republic and set-up a nearshore facility in Mexico and a

new campus in Thiruvananthpuram. Company also paid for acquiring

land in Chennai and Hyderabad.

In FY08, company issued 7,85,896 shares on exercise of stock optionsby employees under the two ESOP schemes. As a result, equity capital

increased by Rs3.9mn to Rs2.86bn. The total founder holding was at

16.5% at the end of the year.


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Cash flows more than sufficient to cover growth, dividends and

contingencies

CFO constituted 87.6% of pre-exceptional profit and 24.5% of

revenues in FY08. The yoy growth in CFO at 16% was below that in the

net profit.

Strategic investments include payments for purchase of business, IPRs

and minority interest in subsidiaries.

The dividend outflow comprises interim dividend of FY08 and the

final dividend of FY07 including the taxes. The payment of the final and

special dividend of FY08 amounting ~Rs18.2bn including the taxes

would occur in FY09 from the year-end cash balance.


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Infosys generated >Rs20bn in cash for the last two years. This along

with already sufficient liquidity (to cover business and financial risks)

on books would have prompted the Board to raise the DPR.

Corporate Governance leading across industries

Of the 15 directors on the Board of Infosys, 8 ie >50% are independent

All the Board committees are made up of only Independent directors

The independent directors hold about 1,32,200 equity shares and

options of the company

The CEO and CFO certification confirms the adequacy of companysinternal control systems

There has been no qualifications by the auditors

Re-organization to sustain competitiveness

In November 2007, Infosys re-organized its business units to deepen

transformational capabilities, broaden customer base and strengthen

current portfolio. Key highlights of the re-organization are:

Six vertical industry business units (IBUs) and five horizontal business

units that cut across all verticals were formed

E

uropean business was divided into industry verticals and integratedwithin the IBUs


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New Growth Engine (NGE) unit formed to expand business in

Australia, China, Japan, Middle East, Canada, South America and Latin

America

India Business Unit formed to focus on India and tap the growing

domestic market

Increased focus on delivery excellence

Consolidated consulting skills

Consolidated sales and marketing functions

As a part of the above re-organization, an Executive Council comprisingthe CEO, COO, CFO, executive board members and select unit heads

was constituted. EC members will participate in formulation of business

strategy, framing policy for strategy deployment, management and

operational supervision and risk mitigation strategies.

Current valuations above fair value; maintain SELL

The IT sector (BSE IT) has rallied 31% in the last three months

outperforming Sensex by 29%. The bounce back was led by the sectors

relative attractiveness, compression in valuations by 40-50% and the

one-year extension of STPI tax exemption. Infosys has led this

outperformance by rallying 40% in the above period, far ahead of the

peers. The excess stock performance has been fuelled by companysbetter positioning (due to lower forex cover) to take advantage of the

depreciating rupee. We expect company to upgrade FY09 guidance, but

based solely on the higher Re/$ assumption.


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The business fundamentals remain challenging. We maintain SELL and

our target price of Rs1,670 represent 10% downside from current levels.

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