INFOSYS ANALYSIS

A Study on the market standing of the IT major

NOVEMBER 4, 2016
VIKRAM KHARVI
PART TIME MBA – IES COLLEGE OF MANAGEMENT & RESEARCH | ROLL NO. MM-2016-08

INFOSYS MM -08 VIKRAM KHARVI

INDUSTRY OVERVIEW

The Indian IT industry is divided into four major segments:

1. IT services
2. Business process management (BPM)
3. Software products and engineering services
4. Hardware

 India is the world's largest sourcing destination for the information technology (IT) industry,
accounting for approximately 67 per cent of the US$ 124-130 billion market.
 India's cost competitiveness in providing IT services, which is approximately 3-4 times cheaper
than the US.
 India’s highly qualified talent pool of technical graduates is one of the largest in the world available
at a cost saving of 60-70 per cent to source countries.
 This large pool of qualified skilled workforce has enabled Indian IT companies to help clients to
save US$ 200 billion in the last five years.
 India is a net exporter for IT services. It is estimated that market size will US$ 75.83 billion in FY15.
Over 67 per cent of revenue comes from the export market. US being the biggest importer of
Indian IT export services.
 BPM: Segment accounted for 23.46 per cent of total IT exports during FY15. Expected market size
is USD 28.15 billion during FY 15.
 Software products and engineering services : Expected market size is 24.11 billion during FY 15.
Over 79 % of revenues comes from Exports.
 Hardware: 17.91 billion during FY 15.

India’s growing market size:

 India’s technology and BPM sector (including hardware) is estimated to have generated US$
146 billion in revenue during FY15 compared to US$ 118 billion in FY14, implying a growth
rate of 23.72 per cent
 The contribution of the IT sector to India’s GDP rose to approximately 9.5 per cent in FY15
from 1.2 per cent in FY98
 The top six firms contribute around 36 per cent to the total industry revenue, indicating the
market is fairly competitive, with TCS being the leader accounting for about 10.1 per cent
 The BPM sector in India grew at a CAGR of 15 per cent over 2010-15, which is 3-4 times higher
than the global.
 Indian software product industry is expected to reach the mark of USD100 billion by 2025.
 India’s internet economy is expected to touch US$ 151.6 billion by 2018, accounting for 5 per
cent of the country’s GDP.
 Indian e-commerce industry is expected to grow at a CAGR of 35 per cent to reach US$ 100
billion size in the next five years, as per a study by Assocham-PricewaterhouseCoopers.
 The Indian IT industry’s total estimated value is USD 146 billion and is expected to be at USD
300 billion by 2020.

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GOVERNMENT’S INITIATIVES
 Tax holidays extended to the IT sector.
 More liberal system for raising Global Capital, funding for seed capital & growth, and ease of
doing business.
 USD 0.17 Billion have been allocated for raising global capital, cut on royalty fee on tech
services to 10%
 The GOI has launched the Digital India program to provide several government services. 
This Initiative could help boost India's GDP by US$ 550 billion to US$ 1 trillion by 2025, as per
research firm McKinsey.

COMPANY OVERVIEW
 Infosys Limited is an Indian multinational corporation that provides business consulting,
information technology, software engineering and outsourcing services.
 It is headquartered in Bangalore, Karnataka. Infosys was co-founded in 1981 by Narayan
Murthy, Nandan Nilekani, N. S. Raghavan, S. Gopalakrishnan, S. D. Shibulal, K. Dinesh and
Ashok Arora after they resigned from Patni Computer Systems.
 Infosys is the second-largest India-based IT services company by 2014 revenues. On 15
February 2015, its market capitalisation was ₹ 263,735 crores ($42.51 billion), making it
India's sixth largest publicly traded company. (other 5 – TCS, Reliance, HDFC, ITC, ONGC)
 The company had liquid assets of INR 32,585 crore at the end of fiscal 2015 as compared to
INR 30,251 crore at the end of fiscal 2014.

SWOT
Strengths

 The workforce is high skilled in Information Technology, recently over a Lakh of employees were
trained on Design Thinking.
 Infosys is in a strong financial position as its business turned over more than $4 billion in 2008.
This strong financial position shows that its capital is expanding, and it provides the base to
leverage the potential investors.
 The company has 44 global development centers, most of them are located in India. This company
has offices in many developed and developing nations. This means that Infosys is becoming a
global brand and it has capability to support global operations, which it carries out for its
multinational clients.

Weaknesses

 Infosys struggles in the US markets on different occasions, and has particular problems in
securing United States Federal Government contracts in North America. As these contracts
are very profitable and they can be continued for long periods of time, Infosys is losing its
strength in lucrative business
 This company is considered the big IT Company if it is compared to its Indian competitors, but
Infosys is much smaller than its global competitors

Opportunities

2|Page VIKRAM KHARVI MM - 08

  Poised to benefit from the acquisition of Lodestone Holding (Global Management Consulting
firm)
 The company needs to fulfil increasing demand for cloud computing services.
 They should give positive outlook for enterprise mobility market.
 The company can get the benefit of big data about IT technology.

Threats

 The Indian economy has low labour cost although its economic indicators are quite weak as
increasing rate of inflation.
 The company has to face intense competition in the local markets as various local players
provide similar services at cheap rates.
 Employee attrition may increase personnel costs of the company.
 Another great threat is instability of economic environment. The company can face pressure
for conducting business because of pricing and low employee utilization.

SOME KEY DECISIONS MADE DURING THE YEAR 2014-15

 The company’s board decided to issue bonus shares in 1:1 ratio in October 2014, which was
completed in December 2014 with an objective of broadening the shareholder base and
liquidity
 The Board also decided to increase the dividend payout ratio from up to 40% of post-tax
profits to up to 50% of post-tax profits effective fiscal 2015. This led to a final dividend of INR
29.50 per share for fiscal 2015.

CURRENT SCENARIO
 Under the tenure of its new CEO, Vishal Sikka, the company saw revenue grow 14.1 per cent
and net profit increase 8.5 per cent in 2015-16. The company’s stock price went up 9.8 per
cent.
 Sikka took over as Infosys’ CEO and MD in August 2014 when the stock’s valuation was inching
lower every quarter. Between 2010-11 and 2013-14, Infosys recorded an annual growth of
only 11 per cent vis-à-vis TCS’ 18 per cent.
 Sikka’s focus on innovation, use of design thinking to create proposals for clients plus the re-
skilling of man power and leveraging of automation tools (thanks to Panaya acquisition) has
helped improve delivery and competitiveness.
 Attrition in the recent March 2016 quarter was 12.6 per cent, down from a year ago of 13.4
per cent and way lower than 21.1 per cent in the September 2014 quarter.
 Employee utilisation stands at 80.1 per cent, up from 78.6 per cent in the same quarter last
year.
 In 2015-16, the company added a total of 325 new clients (gross) - higher than the last five
year’s average of 200 clients a year. The total contract value of large deal signings in 2015-16
was $2.79 billion, 45 per cent up over the previous year’s $1.927 billion.
 Revenue growth for the full year 2015-16 was 13.3 per cent in constant currency terms, ahead
of both its own guidance (10-12 per cent) and market estimates.
 For 2016-17, the company has given a revenue guidance of 11.5-13.5 per cent (in constant
currency).

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PERFORMANCE OVER THE YEARS

Total Income from Operations

53,983.00
47,300.00
44,341.00
36,765.00
31,254.00

FY 2012 FY 2013 FY 2014 FY 2015 FY 2016

GROWTH (%)

23.12%
20.61%
17.63%
14.13%

6.67%

FY 2012 FY 2013 FY 2014 FY 2015 FY 2016

PAT

12,164.00
10,194.00
9,116.00
8,470.00

FY 2012 FY 2013 FY 2014 FY 2015 FY 2016

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 Yearly Results of Infosys ------------------- in Rs. Cr. -------------------

Mar '16 Mar '15 Mar '14 Mar '13 Mar '12

Net Sales/Income from operations 53,983.00 47,300.00 44,341.00 36,765.00 31,254.00

Other Operating Income -- -- -- -- --
Total Income From Operations 53,983.00 47,300.00 44,341.00 36,765.00 31,254.00
EXPENDITURE
Consumption of Raw Materials -- -- -- -- --
Purchase of Traded Goods -- -- -- -- --
Increase/Decrease in Stocks -- -- -- -- --
Power & Fuel -- -- -- -- --
Employees Cost 28,207.00 25,115.00 24,350.00 19,932.00 15,473.00
Depreciation 1,115.00 913.00 1,101.00 956.00 794.00
Excise Duty -- -- -- -- --
Admin. And Selling Expenses -- -- -- -- 1,584.00
R & D Expenses -- -- -- -- --
Provisions And Contingencies -- -- -- -- --
Exp. Capitalised -- -- -- -- --
Other Expenses 10,067.00 8,223.00 7,464.00 5,818.00 4,136.00
P/L Before Other Inc. , Int., Excpt. 14,594.00 13,049.00 11,426.00 10,059.00 9,267.00
Items & Tax
Other Income 3,006.00 3,337.00 2,576.00 2,298.00 1,829.00
P/L Before Int., Excpt. Items & Tax 17,600.00 16,386.00 14,002.00 12,357.00 11,096.00
Interest -- -- -- -- --
P/L Before Exceptional Items & Tax 17,600.00 16,386.00 14,002.00 12,357.00 11,096.00
Exceptional Items -- 412.00 -- -- --
P/L Before Tax 17,600.00 16,798.00 14,002.00 12,357.00 11,096.00
Tax 4,907.00 4,634.00 3,808.00 3,241.00 3,110.00
P/L After Tax from Ordinary 12,693.00 12,164.00 10,194.00 9,116.00 7,986.00
Activities
Prior Year Adjustments -- -- -- -- --
Extra Ordinary Items -- -- -- -- 484.00
Net Profit/(Loss) For the Period 12,693.00 12,164.00 10,194.00 9,116.00 8,470.00
Equity Share Capital 1,148.00 574.00 286.00 287.00 287.00
Reserves Excluding Revaluation 56,009.00 47,494.00 35,772.00 29,470.00 24,214.00
Reserves
Equity Dividend Rate (%) -- 1,190.00 1,260.00 840.00 940.00
EPS Before Extra Ordinary
Basic EPS 55.26 102.33 178.39 157.55 147.51
Diluted EPS 55.26 102.33 178.39 157.55 147.50
EPS After Extra Ordinary
Basic EPS 55.26 105.91 178.39 158.76 147.51

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Diluted EPS 55.26 105.91 178.39 158.76 147.50
Public Share Holding
No Of Shares (Crores) -- 80.65 39.03 41.13 40.48
Share Holding (%) -- 70.23 67.96 71.62 70.49
Promoters and Promoter Group Shareholding
a) Pledged/Encumbered
- Number of shares (Crores) -- -- -- -- --
- Per. of shares (as a % of the total -- -- -- -- --
sh. of prom. and promoter group)
- Per. of shares (as a % of the total -- -- -- -- --
Share Cap. of the company)
b) Non-encumbered
- Number of shares (Crores) -- 15.02 9.15 9.21 9.21
- Per. of shares (as a % of the total -- 100.00 100.00 100.00 100.00
sh. of prom. and promoter group)
- Per. of shares (as a % of the total -- 13.08 15.94 16.04 16.04
Share Cap. of the company)

Infosys continued to be debt-free and has maintained sufficient cash to meet its strategic objectives.

The current shareholding positions

Promoters group 15.94%
Life Insurance Corporation of India 04.95%
Aberdeen Asset Management PLC 03.89%
Abu Dhabi Investment Authority 02.48%
Oppenheimer Developing Markets Fund 02.33%
Government of Singapore 01.98%
Others 68.43%

Current Market Position

BSE 967.90
NSE 966.45
Total Market shares 5,74,151,559
Total Income 2013 Rs. 53,983 Cr.
Market Capitalization 32.66 Billion

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5 key takeaways from the annual report of 2015-16:

 New technology, new innovation:

Infosys talk a lot about Automation and Design Thinking. Automation, especially, seems to be a
big focus for the IT company as part of its efforts to improve efficiencies in this world of changing
technology. In fact, Infosys managed to save efforts of 1,700 people in the March 2016 quarter
partly led by automation platforms. Going forward, this is expected to help reduce costs for the
company and improve profit margins.

 Cost optimisation:
Infosys is also on a cost-optimisation spree to help improve profit margins. Some of these
measures include traditional methods like improving the utilisation and reducing the number of
employees who are ‘benched’. This is a departure from the usual IT company behaviour to hire
more employees than required and ‘benching’ them. The idea is to ensure the company is always
ready for more work. However, it leads to extra costs as the company has to pay these ‘benched
employees’ monthly salaries. Infosys is challenging this notion and reducing its ‘bench’. Infosys is
also considering other measures like having more low-level employees than senior managers and
reducing the number of employees sent abroad for costlier, onsite projects.

 Sub-contractor costs:
Infosys and other IT companies often face huge delays in their project for various reasons like
getting a Visa. To bypass these problems, companies often recruit sub-contractors. However, they
cost 40% more than Infosys’ own employees. This cost amounts to 5.7% of Infosys’ total revenues
in FY16. This puts pressure on Infosys’ margins. “Hence, a 1% reduction in subcontracting costs
can aid margins by 30 bps (0.3%). We believe there is scope for improvement on this front in
FY17,” the Kotak Securities report noted.

 Some margin pressures remain:

While Infosys optimises its cost to improve profits, there are some factors that can offset any
gains. Three major factors are 1) rise in depreciation charges, 2) potentially higher variable
compensation as against 75-80% in FY16 and 3) absence of rupee depreciation. “We see 50-60
bps (0.5-0.6%) risk to EBIT margin in FY2017 in the absence of rupee depreciation,” Kotak
Securities said in its report. EBIT or Earnings Before Interest and Taxes represents the company’s
profits from its core operations. EBIT margin, thus, helps measure the company’s operating profit
margin – the percentage of revenue that the company pockets as operating profits.

 One-time benefits:
Companies do not always receive payments from clients on time. These are called accounts
receivables. Sometimes, though, companies classify some of these receivables as ‘doubtful’. They
then set out a portion of their profit to cover these losses. These are called ‘provisions on doubtful
receivables’. In FY16, Infosys managed to recover a lot of these doubtful receivables. This led to a
negative provision, and thus, a 0.4% higher profit margin. This, however, is a one-time benefit that
cannot be counted into future expectations.

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FUTURE PLAN
 The Company is eyeing year-on-year growth for the fiscal 2016 in the range of 10-12%
 Their plan is overtake TCS and establish themselves as an Technology bellwether stock
 The mission of management team is to prepare the company to achieve an aspirational goal
of US $20 billion in revenue by calendar 2020 with at least 30% operating margin, with specific
targets of: Increasing revenue per FTE to US $80,000 by deploying automation and innovation
in existing businesses, with a goal of generating at least 30% productivity improvements in
existing service lines from these solutions and thereby making Infosys more competitive to
win large deals.
 Inorganic investment strategies to influence approximately US $1.5 billion of new revenue.
 Bringing attrition levels down to the lowest in the industry and achieving at least 25% in
diversity in top leadership.
 The Company’s aspiration is to make Infosys a great place to work and attracting the best
talent in the industry globally.

‘TO DO’ LIST

 In its vision 2020, the company has indicated that it wants to hit target revenue of $20 billion
at 30 per cent EBIT margin and revenue productivity of $80,000/person.
 To achieve this, the company would have to grow revenue at a CAGR of 19 per cent plus and
pull up more margin levers.
 The revenue per employee stands now at about $48,963 and EBIT margin in the March 2016
quarter was 25.5 per cent.
 Profit margins have been improving over the last few quarters, but, given the rising pricing
pressure, Infosys needs to further improve onsite-offshore mix, employee utilisation and
productivity. Infosys Information Platform and Infosys Automation Platform have seen about
220 and 125 engagements in 2015-16 with about 3,900 full-time employees freed up due to
automation. If these numbers continue to improve, margins may also edge up.

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Sources & References
https://www.infosys.com/
http://www.moneycontrol.com/india/stockpricequote/computers-software/infosys/IT
http://profit.ndtv.com/stock/infosys-ltd_infy/research
http://www.business-standard.com/company/infosys-2806/brokerage-reports
http://www.reuters.com/finance/stocks/analystResearch?symbol=INFY.NS
http://content.icicidirect.com/mailimages/IDirect_Infosys_Q2FY16.pdf
http://www.angelbroking.com/research/fundamental-research/market-outlook

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