FINANCIAL STATEMENT ANALYSIS UNIVERSITY OF FLORENCE

Equity Research Report Infosys Technologies Ltd

Index
KEY TAKEAWAYS FOR THE INVESTOR 1. 2. 3. 4. INDUSTRY AND CORPORATE STRATEGY GROWTH PROFITABILITY FINANCIAL CONDITIONS 1 1 2 2 3

Blo o mbe rg Co m pe t i ti o n T r ad e I d e a s T y pe o f a n al y si s: fu nd a me n t al

We suggest to: BUY KEY TAKEAWAYS FOR THE INVESTOR

Industry and corporate strategy: very strong increase in demand trend; great capacity to attract
and retain high quality technology professional; strategic investments in human resources and physical infrastructure;

Growth: strong increase in revenues; extraordinary raise in the number of employees; Profitability: great operating margins; very good dynamic in labor productivity; Financial conditions: optimal working capital management; great capital solidity and minimum financial risk;

1. INDUSTRY AND CORPORATE STRATEGY

Infosys is one of Asias largest IT services company with significant experience across vertical domains (BFSI1, manufacturing and Telecom) and technology platform. Today the company is consolidating into four keys industry verticals and aligning all the service lines to three groups: Operational, Business Innovation and Transformational, to make the structure leaner and responding better to client requirements. The company operates in an highly competitive and rapidly changing market and compete with consulting firms such as Accenture Limited, Deloitte Consulting LLP, but also with offshore technologies services firms such as Tata Consultancy Service Limited an Wipro Technologies Limited.
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The companys strategy is focalized on strategic differentiation and operational superiority to clients. The principal competitive factors in its business include the ability to effectively integrate onsite and offshore execution capabilities to deliver seamless, scalable, cost-effective services; breadth of service offerings to provide one-stop solution; attract and retain high quality technology professional and maintain financial strength to make strategic investments in human resources and physical infrastructure through business cycles. India is widely recognized as the premier destination for offshore technology services. According to NASSCOM2 Strategic Review 2010, IT services exports from India grew by 5.8% in 2010 fiscal year; several key factors contribute to the growth of IT and IT-enabled services in India and by Indian companies such as high-quality delivery, significant cost benefits and abundant skilled resources. Analysts expect the Indian IT services to grow ahead of the overall global IT industry as off-shoring remain a secular trend and Indian players continue to gain market share at the expense of global vendors.

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Banking, Financial Services and Insurance The National Association of Software and Services Companies

In conclusion, we can underline that the technology demand environment remains positive and the company should benefit from a pick-up in discretionary spends, which could aid pricing improvements.

2. GROWTH
Looking at the income statement by 2006 at now we can underline a strong increase in revenues, driven by the company expansion strategy in emerging business (such as the Chinese one), and both by an increase in the size and number of projects executed for clients as well as an expansion in the solutions provided for customers. This increase (25% year on year) faced a small drop in 2010, probably caused by the companys business strategy, that, in response to client requirements and pressures on IT budgets, offered an increasing portion of its service on a fixed-price basis; a solution which had adversely affected it revenues. Analyzing gross profits dynamic its evident a constant growth year on year. This aspect looks very significant, because it underlines the company ability to optimize its cost structure, maintaining the flexibility to execute project components where it is most cost effective. The company is grown significantly in recent periods; employees represent the most valuable and vital asset for the company, and this aspect is confirmed by the strong increase in and continue to undertake major expansions of its existing facilities, as well the construction of new facilities; these factors have increased corporation reliance on it outsourced technology service providers and are driving the continuous growth of its structural investments.
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the number of employees (26% growth yearly). In the last five years Infosys have undertaken

3. PROFITABILITY
Although since 2006 fiscal year the company incurred in substantially higher selling and marketing expenses, trying to reach the goal of increasing brand awareness and promote client loyalty, it could maintain a very high profitability, especially thanks to its Global Delivery Model which allowed to manage costs in a very efficient way. This aspect had a very positive effect on ROS, which increased significantly during the last years; analyzing the drivers of this indicator, we can underline a very good dynamic in labor productivity: as we said before, the company realized several investments in structural facilities with the purpose to develop high skills for its employees, and thus improving this

labor productivity. This dynamic is fully confirmed by the positive downward trend of the labor cost by product unit. Considering the aspect of the operating risk and analyzing the companys cost structure, appears the remarkable relevance of variable costs (especially outsourced manufacturing). This is a very positive element, because it offers the company the opportunity to reduce the influence of possible drops in revenues dynamic (as in 2010 fiscal year) on operating margins, thus reducing the operating leverage degree.

4. FINANCIAL CONDITIONS
Through the analysis of the three most important levers which drive Infosys free cash flow from operations (in constant increase in the last years), we can observe the high operating margins resulting from the effectiveness of the companys differentiation strategy; the optimal working capital management that is based on business policies which are able to maintain shorter deferred payments for customers and longer for suppliers (as confirmed by the increase year over year of the suppliers turnover indicator) that underlines the great contractual strength of the company; the huge PP&E (several investments regarded the very important acquisitions of P-Financial Services in 2007, Mainstream in 2008 and McCamish Systems in 2009, as a result of the companys expansion strategy) which guarantee the
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possibility of an higher future profitability although absorbing a large amount of potential free cash flow. By the coverage sources point of view, the company shows a financial structure exclusively based on equity, and consequently it has a very strong capital solidity degree. Shareholders look ready to perform continuous share capital increases year over year, thanks to the outstanding companys capacity to generate self-financing, optimizing the operating leverage effect. Considering that the company is able to go on without borrowed capital, there is a great benefit in the terms of nullifying the debt cost and so interest expenses, thus reducing financial risk and amplifying the current income.
Functions on Bloomberg that have been used on the terminal: BRC,EE,FA,ANR,GP,BSSA,GF,WEI,EQS,GPMR,CAST,IMAP,MRR,IBQ,BI,WECO,ECO,TOP ECO Short description of articles/analysts reports in Bloomberg: Analyst equity research on Infosys Ltd (Infosys 3.0s mantra seems to be complete verticalization, but this will present initial challenges) by Viju K George and Amit Sharma (Jp Morgan), 10 May 2011 Analyst equity research on Information Technology sector (key highlights for the month) by Batlivala & Karani (B&K Securities), 16 may 2011