Valuation by

Tanushree Seth
 Company Snapshot
Global Headquarters: Bangalore, India

Founded: 1981

Global Presence: 36 Sales Offices in 17 countries

37 Global Development Centers

Employees: 49,422

LTM Dec ’05 Revenue/ 5 Year CAGR: $2,014 million/ 41%

LTM Dec ’05 Net Income/ 5 Year CAGR: $530 million/ 37%
 Company Statistics
Employer Type: Public Company

Stock Symbol: INFY

Stock Exchange: NASDAQ

Market Share price: $74.98*

Key Executives
President, CEO, MD: N. R. Narayana Murthy
Nandan M Nilekani CEO, President
T. V. Mohandas and MD: N.R.
PaiS. Gopalakrishnan Narayan Murthy
V. BalakrishnanK.
DineshS. D
ShibulalSrinath Batni

*As of 4/14/2006
 Outline
• Overview
• Investment Highlights
Business model
Investment positives
• Addressing Key market challenges: Risks
• Valuation
Estimated growth rates of 30% and 25%
• Comparable company analysis
• Recommendation
 Overview
Smart investments
 In 1999, the firm became the first Indian company to
list on NASDAQ
 In 2002, Infosys started a recruiting and marketing
blitz
 The firm registered sales of $740 million, up 50
percent over the previous year, 2002
 In 2004, , the firm hit its first billion
 Overview
The U.S. dream team

 The company turned its attention to the U.S. consulting market

in April 2004, forming Infosys Consulting

 Stephen Pratt, who was named CEO of the subsidiary; Romil

Bahl, former head of EDS' consulting practice; Pal Cole,
former head of global operations at CGE&Y; and Raj Joshi,
former CEO of Deloitte Offshore.

 In April 2004, the publication eWeek.com pointed out that the

move was a step toward competing in the U.S. consulting
market against the big guys like Accenture.
 Moving forward
 In 2003, Infosys launched a business-processing
subsidiary, Progeon, and secured a five-year, $30-million
contract from U.S. mortgage firm GreenPoint.

 In November 2004, Infosys and Microsoft announced an

enterprise IT transformation initiative

 In December 2003, the firm announced its intentions to

acquire Expert Information Services, an Australian IT services
firm, for around $23 million.
 Infosys Work Culture

Open-door culture

Hard work, lots of passion

A piece of heaven in Bangalore

 Investment Highlights
Large, Expanding Addressable Market

Highly-evolved Global Delivery Model

Rapid Differentiation

Scalable Execution

Exceptional Financial performance

Large, Expandable
Addressable Market
 Offshore Outsourcing is a Mega Trend

Outsourcing benefits:
 Convert fixed costs to variable 800 $728.00 bn
 Reduce TCO, enhance ROI
700 $606.00 bn
 Improve competitiveness
600
Corporate I T
500 Services
Offshore benefits: Spending
 Deliver high quality at great value 400
 Highly scalable with no foreseeable Offshore
300
Outsourcing I T
supply constraints Services
200
 Proven track record Spending
100 $51.00 bn
 Addressable market has increased $18.00 bn

0
CY 2004 CY 2007

Source: Infosys
 India: #1 Offshore Destination
Corporate Executives’ Preferred
Destinations for Offshore IT Services
The India Advantage:
Strong Track Record 80
80%

70
• High quality delivery
• 60
Significant costs benefits
• Strong government support 50
• Mature industry
40
• Man Power
20%
30
• Education system 17% 17%

• 24 x 7 working model advantage 20

10
Source: Infosys: IDC Offshore Best Practices Enterprise Survey, 2004

0
India Canada China Ireland
 Infosys is a Premier Global IT
Services Firm
Key competitive advantages
2500 $2,014.00
mm

• Extensive domain knowledge and expertise 2000

• Comprehensive offerings 1500

• Long-term relationships with blue chip Infosys Revenue
clients 1000
$294.00 mm
• Proven Global Delivery Model 500
• Execution excellence
0
• Competent leadership and management LTM Sep ' 00 LTM Sep '05
team
5 year CAGR (LTM Dec 00-LTM Dec 05)

Global IT Services 5%
India IT Exports 29%
Source: Infosys and Gartner 2004 Infosys 41%
 Business Model:

Highly-evolved Global
Delivery Model
 Highly-evolved Global
Delivery Model

Stage 1 Stage 2 Stage 3

Run the Grow the business Transform the
Client Requirements
business business
Infosys Delivery GDM GDM+ GDM+
Consulting
 Infosys’ Global Delivery Model
Management
Consulting
2005 ________
Business Process
Management

IT Outsourcing

Systems Integration
2001 ________________
Technology Consulting

Technology-enabled BPR

Enterprise Solutions
1996 ______________
Application Development and Maintenance

Software Engineering
1981 ____________
People|Organization|Infrastructure|Process|Quality
Infosys Global Delivery Model
Differentiation within
the IT industry
 Uniquely Positioned in Global IT Services
and Consulting
IN PROCESS
• Consulting + Solution mindset
• Build stronger brand
• Strengthen Board-level relationships

NEED TO:
• Replace resources
• Overcome “offshore-is-cost-center” mindset
• Combat revenue cannibalization
• Provide seamless sales and delivery
• Reduce SG&A
 Applying GDM to Consulting
100
90 ----------------------------------------------------- Client Budget
Significantly lower total cost
-------|
80
70 35% lowering total cost
60
of engagement
50
Business Change
Lower IT implementation cost
40
30 IT Implementation = flexibility in solution delivery
20
10 Greater ability to invest in
0
Traditional INFOSYS managing business change
Consulting consulting
Model
 Drivers of Scalability
Superior Talent
Management

World Class Processes

and Systems LEADS TO
SCALABLE
Flexible Organization
Structure
EXECUTION
Modular and Robust
Global Infrastructure
 Scalable Execution
Superior Talent Management:
World Class Processes and
Hiring the Best
Systems
Quality par excellence:
 Able to simultaneously evaluate
10,000 people across 7 cities in India  Benchmarked to Global Standards such as
EFQM
 Augmenting talent through new
geographies
 China, Eastern Europe Award-winning Knowledge Management
Processes
 Supplementing with experienced
local hires  PRIDE
 Currently hiring people 59  2004 Asian MAKE Award
nationalities
 Scalable Execution
Flexible Organization Structure Modular and Robust
Infrastructure
 Integrated platform for delivery  37 Global Development
of end-to-end solutions from Centers (“GDC”)
Consulting to BPM

 Self-governed business units  Ability to rapidly scale new

 By domain engagements
 By Market
 By Service
 Flexibility to distribute
engagements and capacity
across centers worldwide
Exceptional Financial
Performance
Superior Revenue Growth
Sustained Industry-leading
Profitability
Addressing Key Market Challenges
Challenges Infosys Strategy
Competitive • Continue to penetrate high value-
• Pricing add segments
• Onsite/offshore effort • Leverage GDM+
• Investment in sales and • Enhance internal productivity
marketing
• Leverage economies of scale and
brand
Economic
• Wage inflation
• Move to variable salary structure
• US$/Rupee exchange
and role-based compensation
rate
• Proactively hedge currency
exposure
 Valuation
Inputs:

Current EBIT = $491,000,000.00

Current Interest Expense = $0.00
Current Capital Spending $186,000,000.00
Current Depreciation & Amortization = $66,000,000.00
Tax Rate on Income = 14.66%
Current Revenues = $1,592,000,000.00
Current Non-cash Working Capital = $302,000,000.00
Chg. Working Capital = $152,852,304.00
Cash and Marketable Securities $688,000,000.00
Value of equity options issued by firm = $52,000,000.00
Book Value of Debt = $180,000,000.00
Book Value of Equity = $1,253,000,000.00
 Valuation

Market Value per share= $75

Number of shares outstanding= 274,530,000
Market Value of Debt= $180,000,000
Length of extraordinary growth period= 10 years
Beta of the stock= 2.03
Risk Free rate= 4.86
Risk Premium= 6.60%
Cost of Debt= 5.63%

Estimated Growth= 30%

 Valuation
Outputs:
Return on capital= 27.20%
Reinvestment Rate= 11%
Cost of Equity= 18.26%
Equity/(Debt+Equity)= 99.13%
After-tax Cost of debt= 4.80%
Debt/(Debt+Equity)= 0.87%

WACC: 18.14%
 Valuation

Current EBIT * (1 – tax rate) $419,019,400

- (Capital Spending – Depreciation) $120,000,000
- Change in WC $152,852,304

Current FCFF: $146,167,096.00

 NPV of FCFF
EBIT * (1 - tax rate) 2006 2007

$820,077,050.95
$586,198,084.13
- (CapEx-Depreciation) $167,877,120.00 $234,856,061.83

-Chg. Working Capital $120,490,752.00 $168,563,670.27

Free Cash flow to Firm $297,830,212.13 $416,657,318.85

Present Value $252,096,381.22 $298,520,895.88

 NPV of FCFF
EBIT * (1 - tax rate) 2010 2011 2012 2013

$2,245,357,256.2 $3,141,200,912.8 $4,394,464,688.31 $6,147,750,631.7

- (CapEx-Depreciation) $643,031,971.19 $899,586,294.92 $1,258,499,636.53 $1,760,610,787.5

-Chg. Working Capital $461,524,511.31 $645,661,714.74 $903,265,243.03 $1,263,646,396.6

Free Cash flow to Firm $1,140,800,773.7 $1,595,952,903.2 $2,232,699,808.75 $3,123,493,447.6

Present Value $495,677,391.45 $586,958,282.56 $695,048,899.58 $823,044,817.93

 NPV of FCFF
2014 2015 Terminal Year

$8,600,555,587.86 $12,031,970,854.09 $12,633,569,396.79

EBIT * (1 - tax rate)
- (CapEx-Depreciation) $2,463,052,237.07 $3,445,750,966.40 $3,158,392,349.20

-Chg. Working Capital $1,767,810,981.38 $2,473,125,135.49 $0.00

Free Cash flow to Firm $4,369,692,369.41 $6,113,094,752.19 $9,475,177,047.59

Present Value $974,611,675.13 $1,154,090,149.91

 NPV of FCFF
Present Value of FCFF in high growth phase = $6,052,135,216.05

Present Value of Terminal Value of Firm = $13,612,066,744.99

Value of the firm = $19,664,201,961.04

Cash and Marketable Securities = $688,000,000.00

Market Value of outstanding debt = $180,000,000.00

Market Value of Equity = $20,172,201,961.04

Value of Equity options issued by the company = $52,000,000.00

Market Value of Equity/share = $73.29

 Market Value at an estimated growth rate of
25%
Present Value of FCFF in high growth phase = $ 4,627,111,697.12

Present Value of Terminal Value of Firm = $ 8,458,660,426.31

Value of the firm = $ 13,085,772,123.43

Cash and Marketable Securities = $ 688,000,000.00

Market Value of outstanding debt = $ 180,000,000.00

Market Value of Equity = $ 13,593,772,123.43

Value of Equity options issued by the company = $ 52,000,000.00

Market Value of Equity/share = $ 49.33

Firm is overvalued
 Competitive Landscape
Infosys Technologies (INFY)
Competitors:

• Wipro (WIT)
• HCL Technologies Ltd.
• Satyam Computer Services (SAY)
• Cognizant Technology Solutions Corp.
• Syntel Inc.
• Tata Consultancy Services Ltd.
• i-flex
• Patni Computer Systems Ltd.
 Share Price

Comparable company analysis

Ticker Company name Share % of 52 week Equity Book Cash and
Price* high market cap (2) value
Symbol Indian IT Services equivalents
vendors
($/shr) (%) ($MM) ($MM) ($MM)
INFY Infosys Technologies $75.10 90.1% $20,616.8 $1,639.0 $969.0
(INFY)
WIT Wipro (WIT) $14.50 93.6% $20,649.3 $1,574.6 $773.8
629489 HCL Technologies Ltd. $13.47 85.0% $4,335.6 $840.8 $441.8

SAY Satyam Computer $38.71 87.0% $6,268.4 $914.8 $472.0

Services (SAY)

*Share price as per 4/10/2006

(2)
Includes in-the-money outstanding options, warrants and convertible securities, treasury-adjusted. Enterprise value is market
capitalization plus total debt and other value, less cash and equivalents.
 Comparable company analysis
Company name Cash % Total Debt Enterprise Revenue EBITDA

Indian IT Services vendors of market cap FY 07 FY 08 CY 06 CY 07

Value (2)

(%) ($MM) ($MM) ($MM) ($MM) ($MM) ($MM)

Infosys Technologies (INFY) 4.7% $0.0 $19,660.8 $2,622.5 $3,320.0 $846.7 $1,055.9

Wipro (WIT) 3.7% $32.3 $19,907.8 $2,886.8 $3,613.7 $689.0 $841.3

HCL Technologies Ltd. 10.2% $41.2 $3,937.5 $1,117.8 $1,418.0 $255.4 $319.1

Satyam Computer Services (SAY) 7.5% $16.9 $5,834.2 $1,343.6 $1,703.2 $300.1 $377.8

(2)
Includes in-the-money outstanding options, warrants and convertible securities, treasury-adjusted. Enterprise value is market
capitalization plus total debt and other value, less cash and equivalents.
 Comparable company analysis
Company name Enterprise Value/Revenue Enterprise Value/EBITDA

Indian IT Services vendors FY 07 FY 08 FY 07 FY 08  

(x) (x) (x) (x)  

Infosys Technologies (INFY) 7.5 x 5.9 x 23.2 x 18.6 x  

Wipro (WIT) 6.9 x 5.5 x 28.9 x 23.7 x  

HCL Technologies Ltd. 3.5 x 2.8 x 15.4 x 12.3 x  

Satyam Computer Services (SAY) 4.3 x 3.4 x 19.4 x 15.4 x  

 Comparable company analysis
Company name Earnings per share Price/Earnings Long-term PEG ratio

Indian IT Services vendors FY 07 FY 08 FY 07 FY 08 Growth rate FY 07 FY 08

($/shr) ($/shr) (x) (x) (%) (x) (x)

Infosys Technologies (INFY) $2.38 $2.87 31.6 x 26.2 x 29.4% 1.1 x 0.9 x

Wipro (WIT) $0.38 $0.46 37.9 x 31.6 x 23.4% 1.6 x 1.4 x

HCL Technologies Ltd. $0.54 $0.62 25.2 x 21.6 x NA NA NA

Satyam Computer Services (SAY) $1.54 $1.85 25.2 x 20.9 x 21.5% 1.2 x 1.0 x
Recommendation:
Buy at low
Thank you!