FINANCIAL EFFICIENCY OF

INFOSYS

B13143- BIJOYINI GANGULY

B13168 - ROOPAN JOHN

B13169- SAIYAM SANGHVI

B13170- SANTANU MALLICK

B13175 – SUHAS KINI

Analyst reports and Credit worthiness Note on market reaction to information

Board of Directors & Shareholding Pattern A Note on the CEO and compensation

Dividend distribution and EPS plot Comparison with peers and sensex

General Information on the Company‟s stock

Shares issue , ADR, ESOP etc

Strategies of Infosys

Reaction to acquisition and takeover

General Information about the company Transparency, Compensation, Social Image

Topic 1

Topic 2

Topic 3

Topic 4

Topic 5

Topic 6

AGENDA

Internal Directors

• N.R. Narayana Murthy –Founder,Executive Chairman

• S. Gopalakrishnan - Co-Founder,Executive Vice Chairman

• S.D. Shibulal - Co-Founder, Member of the Board, CEO & Managing Director

• Srinath Batni-Member of the Board, Head of Delivery Excellence (since 2000)

• Pravin Rao- President and Member of the Board (since 2014)

• B.G. Srinivas- President and Member of the Board (since 2014)

BOARD OF DIRECTORS

Independent Directors

• K. V. Kamath- Lead Independent Director, Infosys, Non Executive Chairman,

ICICI Bank

• Ann M. Fudge – (On the boards of GE, Novartis, Unilever)

• Dr. Omkar Goswami – Founder and Chairman, CERG limited

• Jeffrey Sean Lehman – Vice Chancellor , NYU Shangai

• R Seshasayee – Executive Vice chairman, Ashok leyland

• Kiran Mazumdar Shaw – Chairman and Managing Director , Biocon

• Ravi Venkatesan – Director, member of Board, AB Volvo (Former Chairman ,

Microsoft India)

BOARD OF DIRECTORS

COMPENSATION 2011

Total calculated compensation: $242,815

* Salary: $75,549

* Bonus: $124,391

* All other compensation: $42,875

* Total annual cash compensation:

$242,815

* Total short term compensation: $199,940

* Other long term compensation: $42,875

Shibulal's monthly salary comes to

around .083 paisa on his annual salary

of Re 1

COMPENSATION 2014

• S.D. Shibulal (Shibu) is Co-Founder, Member of the Board, CEO and Managing Director

of Infosys.

• Prior to becoming Chief Executive Officer and Managing Director, Shibulal served as

COO between June 22, 2007 and August 20, 2011.

• Instrumental in the development of the Infosys Global Delivery Model services. CEO

since May „11

CEO’S COMPENSATION

Holder's Name No of Shares % Share Holding

Promoters 91508078 15.94%

ForeignInstitutions 229275165 39.93%

FinancialInstitutions 62442997 10.87%

GeneralPublic 60326712 10.51%

NBanksMutualFunds 30344521 5.28%

ForeignNRI 6745327 1.17%

Others 3541291 0.62%

Other Companies 3000408 0.52%

Custodians (ADRs) 15%

• The institutional investors consist

of mutual funds, FII and insurance

companies. These are primarily

growth seeking investors.

• The non institutional investors

consist of corporate bodies,

NRI/OCB , trusts etc..

• Here the marginal investor would

be the FII as they hold a major

chunk of the shares.

• It is assumed that the marginal

investor in case of an FII would be

well diversified and hence it would

be the non diversifiable risk that

matters.

Since the major returns given by the company are in form of capital

gains majority of the investors holding this stock would prefer a buyback

over a dividend. Also dividends are taxed at a higher rate.

SHAREHOLDING PATTERN

INDIVIDUALS (PROMOTERS &FAMILIES)

PUBLIC INSTITUTIONS

SHAREHOLDING PATTERN

Fiscal Bonus issue Stock split ratio

1994 1:1 2 for 1

1997 1:1 2 for 1

1999 1:1 2 for 1

2000 - 2 for 1

2004 3:1 4 for 1

2006 1:1 2 for 1

• Infosys had an IPO in February 1993 at a face value of Rs. 95 which was quoted at

Rs. 145 in the Market.

• Since then Bonus Shares have been issued 6 times.

• Hence an investor who purchased a share in 1993 would own 128 shares of the

company and his Capital Gain would be approximately Rs. 4,86,400.

• An investor who held a share for the last 5 years would earn Rs. 2637.4 by the way

of Capital gains and would have received a Total Dividend of Rs. 207.5 during these

years.

IPO/ ISSUE OF BONUS SHARES

Criteria Value

Share price 3782.70

52-week high Rs 3799.00

52-week low Rs 2190.00

EPS for quarter ended

December 2013.

Rs 167.46 per share

P/E) ratio 22.59

Book value Rs 627.95 per share

Price-to-book value 6.02

INFOSYS STATS (25TH

FEB, 2014)

• Market Cap: Rs 217.8k Crores

• FCFEs:

2013 – Rs.79600 Cr

2012 – Rs. 69810 Cr

• Current cash balance = Rs. 21832 Cr

• Transparent ownership

• Strict separation of ownership and the management.

• Stockholders cannot legally vote by post or the internet and have

to show up.

• Informs stockholders of upcoming meetings sufficiently in

advance to consider and execute their votes.

• Maintains a comprehensive website and presents its financial

statements according to multiple accounting standards.

• Discloses its financials and non-financials as if it were a US-

incorporated, SEC-registered company.

• Disclosure includes an exhaustive corporate governance review,

financial reports in four languages and reconciliation to eight

accounting standards

TRANSPARENCY AND STANDARDS

SOCIAL RESPONSIBILITY

• Accused of committing visa fraud by using B-1(visitor) visas for

work requiring H-1B(work) visas.

• Allegations initially made by an American employee of Infosys in

an internal complaint and subsequently sued the company,

claiming that he was harassed and sidelined after speaking out.

• Settled the civil suit with US authorities by paying US$ 34 million

but refused to admit guilt.

• Claimed that agreed to pay the fine only to avoid the nuisance of

'prolonged litigation.

SOCIAL CRITICISM – VISA FRAUD

• Variable compensation structure for all of employees.

• Consists of performance incentives payable upon the

achievement by the company of certain financial performance

targets

• Also based on individual performance.

• Starting salary at about 3.5 lakhs for fresh graduate engineers.

• Rohan's term as executive assistant is co-terminus with that of

Narayana Murthy and had requested a token compensation of one

rupee a year.

COMPENSATION

• In March 1999, it issued 20,70,000 ADSs (equivalent to 10,35,000

equity shares of par value of Rs. 10 each) at US $34 per ADS

under the American Depositary Shares Program

• The same were listed on the NASDAQ National Market.

• In the event of a matter submitted to the holders of ordinary

shares for a vote, the ADS holders on record as on a particular

date will be allowed to instruct the depositary bank to exercise

the vote in respect of the equity shares representing the ADS

held by them.

• Otherwise normal shares have voting rights.

ADS PROGRAM

1993- Infosys introduced ESOP. It was the first Indian company to offer stock options to employees the year it went public

68,600 shares reserved for allotment in preferential basis to employees of the company and group company (only 10,3000 shares taken up).

Balance 13,07,200 shares along with 58,500 shares not taken up by employees were issued to the public (all were taken up).

A total of 16,237 employees benefited until ESOPs were halted in July 2003.

• Infosys pioneered the

employee stock option

programme (ESOP) in the

country and famously made

thousands of its employees

crorepatis and millionaires,

has officially suspended its

ESOP scheme.

• Infosys's ESOP scheme was

in the limelight because it

made people ranging from

company chairman NR

Narayana Murthy to his

chauffeur and executive

assistant millionaires many

times over.

ESOP PROGRAM

1,152,522 on NasDaq 90 day average daily volume on Feb 24.

TRADING VOLUME ON NASDAQ

TRADING VOLUME STATISTICS

Period Average Volume Total Volume No. of Trading Days

Weekly 45225 226123 5

Fortnightly 39068 351610 9

Monthly 45750 869247 19

Quarterly 72600 4501197 62

Half Yearly 84222 10443520 124

Yearly 101240 25208875 2

TRADING VOLUME ON BSE

• 67 analysts follow this firm as per Bloomberg

• 12 month target price is 3979.25 (60/67)

• Infosys‟ 3rd quarter seems to be promising

with a better YoY and QoQ growth seems to

have propelled this.

Buy 47 70%

Hold 15 22.4%

Sell 5 7.5%

ANALYST OPINIONS AND CREDIT RATINGS

MARKET REACTION TO DIVIDEND PAYMENTS

MARKET REACTION TO EARNINGS

3 major acquisitions:

• McCamish-38

million

• Lodestone-330

million

• Portland(38.8

million)

Recently, the day before Narayana Murthy’s return, Infosys stocks went up by 3.32% though Sensex failed This is a sign of people inside knowing well in advance of the move.

MARKET REACTION TO ACQUISITIONS

• Looking into the past data of 5 years, the company has announced a minimum dividend payout of 200% and a maximum of 800%

• This shows that the company is quite cash rich and hence going on dividend distribution spree.

• Being an IT company (service based), its inventories are zero and cash is its major asset.

DIVIDEND DISTRIBUTION

EPS MOVEMENT AMONG IT INDUSTRY STOCKS

EPS MOVEMENT AMONG SENSEX COS.

Lodestone : $350m

EMEA (2012)

McCamish -38 million

ACQUISITIONS

EIS: $22m - Australia(2003)

“We were looking for a

company whose values

were similar to those of

Infosys. We have seen

these qualities in EIS“ – NR

Narayanamurthy

Traditional BPO Models Have Run Their Course and Traditional Outsourcers

Must Act Quickly Or Suffer

INFOSYS INVESTMENTS : PROVIDER TO CREATOR

• There are, presently,no explicit anti-takeover provisions in the

company‟s Articles.

• The company has removed from its Articles protections regarding Mr.

Murthy‟s position that may have been invoked during a takeover.

• Section 107 of Company Charter Amended

• “We are very focused on growing in the continent of Europe,

so that would be a good place for us to do an acquisition. We

are very focused on increasing our consulting and system

integration revenue. If you put these things together we want

to create a balanced portfolio, which means we need to grow

our product and platform revenue faster than the rest of the

revenue. If we want to enter the US public service market we

have to set up a subsidiary”

-S.D Shibulal

ANTI TAKEOVER AMENDMENTS - REMOVED

VIEW ON ACQUISITION

INFOSYS: A GROWTH STOCK

Infy‟s Vs Related IT cos. : Cash – MarketCap Ratio

• Already facing tax demands worth USD 214 million for fiscal 2005 to fiscal 2008.

• "mainly on account of disallowance of a portion of the deduction claimed by the company under Section 10A of the Income Tax Act."

• Income Tax department has slapped a fresh $106 million (Rs 582crore) tax demand notice on Infosys, for 2009 fiscal.

TROUBLED TAX MANAGEMENT

• According to regression analysis beta=0.58

• Expected return by shareholders = RF + beta*(RM-RF) = 12.74%.

• The return on equity for 2013 = 27.2%.

• The average return on equity for last 10 years = 35.35%

• Since the company has zero debt the return on firm is same as return on equity.

• Source-Moneycontrol.com

EXPECTED RETURN OF SHAREHOLDERS

DIV/FCFE DIV/OCF

AVG 0.3 0.21

STD DEV/Avg value 0.27 0.28571429

YEAR

FY

2013

FY

2012

FY

2011

FY

2010

FY

2009

FY

2008

FY

2007

FY

2006

FY

2005

FY

2004

FY

2003

Operating cash flow

per share 163.5 142 103.3 122.9 111.5 81 68.7 46.7 27.7 32.5 18.6

Free Cash Flow per

Share 126.9 115 80.45 111 88.28 54.9 41.6 26.7 12.2 24.5 14.4

DPS 42 37 30 38.4 23.5 13.3 11.5 7.5 5.75 3.69 3.38

DPS/FCFE 0.331 0.32 0.373 0.346 0.266 0.24 0.28 0.28 0.47 0.15 0.24

DPS/OCF 0.257 0.26 0.29 0.312 0.211 0.16 0.17 0.16 0.21 0.11 0.18

DIVIDENDS AND FREE CASH FLOWS

Source- bloomberg

COMPANY NAME

AVG CASH EQ/BV of

Assets(10 YRS)

STD DEV/MEAN OF

FCFE

Average payout

ratio for 5 years

INFOSYS LTD 0.3 0.59 0.27

TATA CONSULTANCY LTD 0.05 0.62 0.32

HCL TECHNOLOGIES LTD 0.05 0.94 0.29

WIPRO LTD 0.11 0.76 0.23

TECH MAHINDRA LTD 0.07 1.44 0.06

MPHASIS LTD 0.05 0.86 0.25

DIVIDEND POLICY IN COMPARISON TO PEERS

1. From analysis, Infosys has maintained an almost constant

payout ratio.

2. The div/FCFE ratio has increased over the last few years. One

inference over here could be that they are now returning more

to investors in form of dividends due to lack of investment

opportunities.

3. Also the cash flows of infosys are least volatile as compared

to its peers. It has a very high cash/ BV of assets ratio. Hence

Infosys is in a position to return more to its investors. This it

can do either in form of a buyback or extra dividends.

DIVIDEND POLICY

Running a regression on the dividend(DPS) and EPS

for the mentioned competitors we got,DPS = 0.06*

(EPS) + 5.14,

However the Rsquare value = 0.138, indicates that EPS

is not the main criteria for deciding dividend payment.

According to our model we found that the DPS for 2013

is 14.64 whereas Infosys paid 42.

Source- bloomberg

REGRESSION MODEL FOR COMPARISON WITH PEERS

• The annual report mentions that the cash reserves have been

invested in safe & sophisticated financial instruments.

• They earn a return of around 8%.

• Now WACC = Re = 12.74%

• Assuming that they have the same cash/BV as the industry

average in 2013 = 7.17%

• Excess cash as on march = (0.47- 0.0717)* (bv of assets) = 18.51

thousand crores.

• Assuming that 5 thousand crores are kept for exigencies

excess cash = 13.51 thousand crores.

• Therefore cost of excess cash = (12.74- 8) * (13.51 thousand

crores) = 877.4 crores

COST OF EXCESS CASH

• There has been no major buyback since the

company went public.

• There have been rumours at different points of time

and many analysts have also suggested buyback as

a good way to return to the shareholders.

• However it must be noted that the marginal investor

in infosys are FIIs. These are growth investors and if

Infosys continues with giving high dividends then

these investors will start selling the stock. Giving

high dividends would signal lack of significant

investment opportunities.

• These investors would prefer the company to go for

buyback.

BUYBACK

TOTAL RETURN FOR AN INVESTOR SINCE

INCEPTION

This represents the total gain of an

investor since inception

• Infosys is currently sitting on a large cashpile. It

needs to return a part of this to the investors. The

analysis shows that it is paying a high cost for this

cash.

• The investors would prefer a buyback because

Infosys is essentially is a growth stock. They will to

time the buyback appropriately and a large buyback

can also improve EPS.

• If a buyback is not feasible then it should pay excess

dividends.

CONCLUSION

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