ANNUAL REPORT ANALYSIS
5 JUN 2014
Infosys
BUY
INDUSTRY
IT SERVICES
CMP (as on 5 Jun 2014)
Rs 3,041
Target Price
Rs 3,871
Focus on turnaround
STOCK PERFORMANCE (%)
Infosys’ FY14 Annual Report reveals management’s
intent to revive growth and margin trajectory. The
company has lagged peers like TCS/HCL Tech on
revenue growth by a wide margin. Infosys intends to
increase focus on ‘Business IT’ services (~61% of
revenues) and large deal wins. It also intends to
regain margin leadership by improving various
operating parameters like utilisation, pyramid
correction and rationalization of support functions.
Key takes from FY14 annual report are as follows.
52 Week high / low

Nifty
7,474
Sensex
25,020
KEY STOCK DATA
Bloomberg/Reuters
INFO IN/INFY.BO
No. of Shares (mn)
574
MCap (Rs bn) / ($ nn)
1,746 / 29,439
6m avg traded value (Rs mn)
4,260
Rs 3,850 / 2,343
3M
6M
12M
Absolute (%)
(20.4)
(9.3)
23.6
Relative (%)
(38.0)
(28.6)
(4.3)
SHAREHOLDING PATTERN (%)
Promoters
15.94
FIs & Local MFs
13.66
FIIs
42.10
Public & Others
28.30
Source : BSE
Madhu Babu
madhu.babu@hdfcsec.com
+91-22-6171-7316
d) Infosys Cloud EcoSystem Hub : This enables
clients to establish and manage a scalable, hybrid
cloud eco-system.

driving client spends and Infosys is seeing resilient
demand for SMAC technologies across key verticals.
Company sees new channels of revenue growth
emerging from these initiatives.

Report mentions Infosys developing tools and
platforms to enable automation and hence improve
efficiencies in delivery. This will reduce effort and
improve productivity. Some of the market
differentiators in the delivery model include :
b) Infosys Global Agile and Vscrum methodology :
These methodologies enable company to deliver
projects efficiently on a global scale with better
utilisation of resources across its global centres.
c) Infosys Big Data Edge : The solution enables
enterprises to analyse BigData to discover
relevant information and develop Insights.
Client wins : Infosys added 238 clients during the
year and total client base at the end of year stands at
890. Infosys derived 97.7% of the consolidated
revenues from repeat business in FY14. Infosys had 13
clients which contributed to over USD 100mn per year
in revenues for FY14. Infosys expanded its global
delivery footprint by adding a new centre in
Netherlands. In India, Infosys commenced work for
new campuses in Indore, Mohali, Noida and Nagpur.
New tools for Delivery Efficiency : The Annual
a) IT Service Management Platform : An end to end
solution that automates ticket resolution and IT
service management. Infosys indicates that ITSM
has the potential to achieve 25% service
automation.
Growth Drivers : Digital transformation has been
FINANCIAL SUMMARY - CONSOLIDATED
(Rs mn)
FY13
FY14
FY15E
FY16E
Net Sales
403,520
501,330
540,078
596,201
EBITDA
115,580
136,340
148,953
165,232
94,210
108,670
120,524
134,024
164.9
190.2
211.0
234.6
P/E (x)
18.5
16.4
14.5
13.0
EV / EBITDA (x)
13.0
10.7
9.4
8.1
RoE (%)
25.7
24.4
23.6
22.9
PAT
Diluted EPS (Rs)
Source: Company, HDFC sec Inst Research
HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters
INFOSYS : ANNUAL REPORT ANALYSIS



Strategy : Business strategy evolved during the year is
focused on achieving three objectives (1) Cost
optimization (2) Sales efficiency and (3) Delivery
efficiency. Infosys indicated of focusing on reducing
the operational costs to deliver margin expansion.
Employee costs account for 70-80% of the total
operating expenses for Infosys. Management
indicated of improving pyramid structure, boosting
utilisation rates and streamlining business support
functions to improve efficiencies. Infosys has already
started reaping the benefits of cost optimisation. EBIT
margin expanded to 25.5% as on 4QFY14 as compared
to 23.5% in 1QFY14. In a bid to improve delivery
efficiency, Infosys intends to strengthen its IP-based
solutions to delink revenues from effort. Company is
also focusing on re-energizing the sales team by
enabling them with better systems, training, processes
and metrics.
Products and Platforms : Infosys has created a new
subsidiary named EdgeServe Systems Ltd to transfer
the existing products and platforms (excluding
Finacle). This would enable Infosys to increase focus
and provide operational flexibility. It operates the
products and platforms business under the Edge suite
and has over 90 clients. Some of the products
developed include Infosys Assist Edge, Infosys Brand
Edge, Infosys Credit servicing platform, Infosys Digital
Edge, Infosys Interact Edge, Infosys Digital Edge,
Infosys Procure Edge, Infosys Trade Edge.
Infosys Labs : During the fiscal year FY14, Infosys Labs
filed 79 unique patent applications at various
jurisdictions. R&D expenditure for FY14 stood at Rs
8.73bn (~2% of standalone revenues).

Growth trends for FY14 : Infosys delivered 11.5% USD
revenue growth in FY14 (vs. 5.8% in FY13). Healthcare
(up 50% YoY), Life Sciences (up 22% YoY) and
Manufacturing (up 16% YoY) delivered higher growth
on the vertical front for FY14. India (up 38% YoY) and
Europe (up 18% YoY) delivered higher growth on
geographic front. IMS (up 14.6% YoY), Testing (up
15.2% YoY), Consulting and SI (up 18% YoY) delivered
higher growth on the service front.

Metrics : Though gross addition for FY14 stood at
39,985 employees, net addition was a minuscule 3,717
employees. Attrition rate stands at 18.7% compared
to 16.3% for the previous year. Exit headcount at the
end of FY14 stands at 160,405 employees. The group
has 93 global development centres as at Mar-14, of
which 36 are located in India, 18 in North and South
America, 20 in the APAC region and 19 in Europe.

Investment in subsidiaries : During the year, Infosys
(standalone) invested Rs 1.36bn and Rs 0.75bn in
Lodestone and Infosys Public Services subsidiaries.

Financial Metrics : Capex (consolidated) for the year
FY14 stood at Rs 25.3bn. A major part of the capex (Rs
17.63 bn) was in Infrastructure development for the
business. Cash and liquid assets on balance sheet as at
Mar-14 were Rs 302.7bn vs. Rs 239.4bn in the
previous year.

Dividend policy : Company paid Rs 63/sh dividend for
FY14. Dividend payout ratio (Including dividend tax)
for FY14 stands at 40% (vs. 30% for the previous year).
Infosys intends to maintain a dividend payout ratio of
40% over the coming period.
Page | 2
INFOSYS : ANNUAL REPORT ANALYSIS
View


We model 8.2/11.3% USD revenue growth for
FY15E/FY16E. However, Infosys’ growth in FY15 is
likely to be much lower than peerset. We expect
TCS/HCL Tech to deliver 15.5/14.2% USD revenue
growth for FY15. Recent key exits in top management
have been weighing on the stock. We believe that
some of these exits have also led to middle level
churn which could weigh on near term growth.
Infosys is currently trading at 25% discount to TCS
owing to lower revenue growth and EBIT margin.
Considering the prolonged volatile operating
performance of Infosys, we think re-rating will take a
while. An impending CEO change could lead to further
uncertainty in the near term. However, this could also
be a turning point in the positive direction.

Attractive valuations (12.7x FY16 EPS) and strong cash
position on balance sheet (Rs 302.5bn, Rs 528/sh)
offer comfort. Our TP is Rs 3,871/sh (16.5x FY16E EPS).
Maintain BUY.
Page | 3
INFOSYS : ANNUAL REPORT ANALYSIS
GEOGRAPHY WISE REVENUES
Europe and India delivered
higher growth on geographic
front. Higher growth in Europe
is owing to full impact of
Lodestone consolidation
USD MN
North America
Growth (%)
Europe
Growth (%)
India
Growth (%)
Rest of the world
Growth (%)
Total Revenues
Growth (%)
FY10
3,164
7.2
1,106
(9.9)
57
(9.5)
477
13.1
4,804
3.0
FY11
3,944
24.7
1,301
17.6
133
133.2
663
38.9
6,041
25.7
FY12
4,468
13.3
1,531
17.7
155
17.0
839
26.6
6,994
15.8
FY13
4,604
3.0
1,712
11.8
152
(1.8)
930
10.9
7,398
5.8
FY14
5,004
8.7
2,016
17.8
210
38.1
1,019
9.5
8,249
11.5
Source: Company, HDFC sec Inst Research
VERTICAL MIX OF REVENUES
BFSI vertical has shown uptick
in growth in FY14.
Manufacturing delivered
higher growth aided by full
impact of lodestone
consolidation. Healthcare and
Life sciences verticals delivered
strong growth on a smaller
base
USD MN
BFSI
Growth (%)
Manufacturing
Growth (%)
Retail and CPG
Growth (%)
Transport and Logistics
Growth (%)
Healthcare
Growth (%)
Life sciences
Growth (%)
Energy and Utilities
Growth (%)
Communication services
Growth (%)
Others
Growth (%)
Total Revenues
Growth (%)
FY12
2,453
1,438
1,096
124
111
271
411
715
376
6,994
FY13
2,508
2.2
1,627
13.2
1,206
10.0
130
4.3
115
4.1
320
17.8
380
(7.6)
719
0.6
394
4.9
7,398
5.8
FY14
2,765
10.3
1,887
16.0
1,299
7.7
142
9.7
173
50.1
392
22.6
423
11.4
686
(4.5)
482
22.3
8,250
11.5
Source : Company, HDFC sec Inst Research
Page | 4
INFOSYS : ANNUAL REPORT ANALYSIS
SERVICE LINE MIX
IMS, Testing and BPM delivered
strong growth on the service
front
Consulting and SI delivered 18%
YoY growth in FY14 owing to
full impact of Lodestone
consolidation
USD MN
FY12
FY13
FY14
Business IT services
4,410
4,657
5,076
5.6
9.0
1207
1301
2.7
7.8
1514
1519
1588
418
0.3
509
584
21.8
14.6
621
716
13.1
15.2
Growth (%)
a)Application Development
b) Application Maintenance
Growth (%)
c) Infrastructure Management Services
Growth (%)
d) Testing Services
Despite much hype, Products
and Platform delivered a muted
3.3% YoY growth
1176
Growth (%)
549
Growth (%)
e)Business Process Management
325
Growth (%)
f) Others
190
183
(0.6)
238
246
270
2,180
3.2
2,320
2,738
6.4
18.0
404
421
435
4.3
3.3
7,398
8,249
5.8
11.5
Growth (%)
Products and Others
Growth (%)
Total Revenues
Growth (%)
433
17.0
184
Growth (%)
Consulting & System Integration
370
14.0
(3.1)
Growth (%)
g) Product engineering
4.6
6,994
10.0
Source: Company, HDFC sec Inst Research
Page | 5
INFOSYS : ANNUAL REPORT ANALYSIS
HEADCOUNT
FY11
FY12
FY13
FY14
Total Employees (Consolidated)
130,820
149,994
156,688
160,405
S/W professionals (IT Services and Consulting)
106,696
122,337
123,666
125,344
92,183
105,957
112,440
111,986
Banking Product Group
6,220
8,139
7,249
6,254
Trainees
8,293
8,241
3,977
7,104
Support and sales
6,011
7,134
8,388
7,904
Infosys BPO
18,113
20,523
24,634
27,157
Gross additions - consolidated
43,120
45,605
37,036
39,985
Net additions - consolidated
17,024
19,174
6694
3,717
Laterals hired - consolidated
15,883
14,966
16,781
12,247
LTM Attrition (Standalone)
17.0%
14.7%
16.3%
18.7%
Voluntary LTM Attrition (Standalone)
15.5%
14.0%
15.0%
17.5%
Onsite
29.4%
30.4%
30.5%
30.6%
Onsite
70.6%
69.6%
69.5%
69.4%
Including trainees
70.3%
66.9%
67.0%
72.3%
Excluding trainees
78.2%
74.1%
70.7%
76.4%
Billable
Attrition remained on an
uptrend over the past two
years
Infosys showed steep
improvement in utilisation
rates in FY14 owing to
company’s focus on improving
operating efficiencies
Effort (IT Services and Consulting)
Utilization measures (IT Services and Consulting)
Source : Company, HDFC sec Inst Research
Page | 6
INFOSYS : ANNUAL REPORT ANALYSIS
INCOME STATEMENT
BALANCE SHEET
(Rs mn)
FY12
FY13
FY14
FY15E
FY16E
(Rs mn)
Revenue (US$ mn)
6,994
7,398
8,249
8,929
9,937
SOURCES OF FUNDS
FY12
FY13
FY14
FY15E
FY16E
Growth (%)
15.8
5.8
11.5
8.2
11.3
Share Capital
2,860
2,860
2,860
2,860
2,860
Average Exchange Rates
48.2
54.6
60.7
60.5
60.0
Reserves
331,750
395,110
472,440
543,694
622,929
337,340
403,520
501,330
540,078
596,201
Total Shareholder’s Funds
334,610
397,970
475,300
546,554
625,789
Net Sales
Growth (%)
22.7
19.6
24.2
7.7
10.4
188,710
241,510
307,670
331,325
366,579
Selling and Marketing Expenses
17,570
20,340
26,250
26,594
29,214
TOTAL SOURCES OF FUNDS
Administrative Expenses
23,900
26,090
31,070
33,206
35,176
APPLICATION OF FUNDS
107,160
115,580
136,340
148,953
165,232
EBIDTA Margin (%)
31.8
28.6
27.2
27.6
27.7
CWIP
1,730
3,680
3,420
3,420
3,420
EBIDTA Growth (%)
19.5
7.9
18.0
9.3
10.9
Goodwill
9,930
19,760
21,570
21,570
21,570
Cost of Sales
EBIDTA
Depreciation
EBIT
9,370
11,290
13,740
14,712
14,972
97,790
104,290
122,600
134,241
150,260
28.9
25.8
24.5
24.9
25.2
EBIT Margin (%)
Other Income
PBT
19,040
23,590
26,690
32,000
34,600
116,830
127,880
149,290
166,241
184,860
Tax
33,670
33,670
40,620
45,716
50,837
APAT
83,160
94,210
108,670
120,524
134,024
2,190
0
0
Exceptional item
RPAT
83,160
94,210
106,480
120,524
134,024
145.5
164.9
190.2
211.0
234.6
21.8
13.3
15.4%
10.9%
11.2%
EPS
EPS Growth(%)
Source: Company, HDFC sec Inst Research
Deferred Taxes
120
1,190
640
640
640
1,090
1,490
3,230
1,300
1,300
335,820
400,650
479,170
548,494
627,729
54,090
64,680
78,870
86,158
91,186
Long Term Provisions
Net Block
Investments
3,890
21,330
32,760
32,760
32,760
LT Loans & Advances
27,220
35,530
50,290
41,520
45,620
Trade Receivables
77,550
95,180
111,620
121,185
133,778
Cash & Equivalents
205,910
218,320
259,500
323,964
386,934
Current Assets
310,680
349,030
421,410
486,669
566,332
24,560
30,820
47,450
42,697
43,715
21,770
29,910
40,140
48,115
52,554
1,330
2,130
3,790
3,790
3,790
Other current Liabilities
Trade payables ,Unearned
Revenues
Provisions
Current Liabilities
47,660
62,860
91,380
94,602
100,059
Net current assets
263,020
286,170
330,030
392,066
466,273
3,160
5,030
12,520
12,520
12,520
335,820
400,650
479,170
548,494
627,729
Misc expenses and others
TOTAL APPLICATION OF FUNDS
Source: Company, HDFC sec Inst Research
Page | 7
INFOSYS : ANNUAL REPORT ANALYSIS
CASH FLOW
KEY RATIOS
(Rs mn)
FY12
FY13
FY14
FY15E
FY16E
83,160
94,210
106,480
120,524
134,024
PROFITABILITY (%)
(12,107)
(12,006)
(14,445)
(16,750)
(18,090)
71,053
82,204
92,035
103,774
115,934
9,370
11,290
13,740
14,712
14,972
(10,410)
(10,720)
(190)
498
70,013
82,774
107,425
118,984
(16,410)
(32,470)
(27,450)
Reported PAT
Non-operating & Interest Income
PAT from Operations
Depreciation
Working Capital Change
OPERATING CASH FLOW ( a )
Capex+ Acquisitions
Free cash flow
FY13
FY14
FY15E
FY16E
GPM
44.1
40.1
38.6
38.7
38.5
EBITDA Margin
31.8
28.6
27.2
27.6
27.7
EBIT Margin
29.0
25.8
24.5
24.9
25.2
(11,237)
APAT Margin
24.7
23.3
21.7
22.3
22.5
119,669
RoE
27.4
25.7
24.4
23.6
22.9
(22,000)
(20,000)
RoCE
27.2
25.6
24.2
23.5
22.8
43.7
38.3
34.3
34.2
36.4
53,603
50,304
79,975
96,984
99,669
ROIC
7,907
(6,034)
(8,135)
16,750
18,090
EFFICIENCY
(8,503)
(38,504)
(35,585)
(5,250)
(1,910)
Tax Rate (%)
60
10
-
-
-
Investments
INVESTING CASH FLOW ( b )
FY12
Share capital Issuance
Debt Raised
(890)
28.8
26.3
27.2
27.5
27.5
Asset Turnover
1.0
1.0
1.0
0.9
0.9
Unbilled Days
20.3
22.0
20.5
20.0
20.0
Dividend
(23,270)
(31,230)
(31,430)
(49,270)
(54,789)
Debtor Days
62.8
63.2
60.0
60.0
60.0
FINANCING CASH FLOW ( c )
(23,210)
(32,110)
(31,430)
(49,270)
(54,789)
Creditor days
16.3
15.2
10.9
10.9
10.9
38,300
12,160
40,410
64,464
62,970
Cash Conversion Cycle
66.7
70.0
69.5
69.1
69.1
950
250
770
-
-
0
0
0
0
0
205,910
218,320
259,500
323,964
386,934
(0.63)
(0.55)
(0.56)
(0.61)
(0.83)
-
-
-
-
-
NET CASH FLOW (a+b+c)
Effect of change in Exchange rates
Closing Cash & Equivalents
Source: Company, HDFC sec Inst Research
Debt/EBITDA (x)
Net D/E
Interest Coverage Ratio
VALUATION
EPS (Rs/sh)
145.5
164.9
190.2
211.0
234.6
CEPS (Rs/sh)
162
185
210.4
236.7
260.8
BV (Rs/sh)
586
696
832.0
899.8
1110.5
DPS
47
43
63.4
73.8
82.1
P/E
21.0
18.5
16.4
14.5
13.0
P/BV
5.2
4.4
3.7
3.4
2.7
14.3
13.0
10.7
9.4
8.1
4.6
3.7
2.9
2.6
2.2
Dividend Yield (%)
1.6%
1.4%
2.1%
2.4%
2.7%
FCFE/Mcap(%)
3.1%
2.9%
4.6%
5.7%
5.7%
OCF/EV
4.6%
5.5%
7.4%
8.7%
9.0%
FCF/EV
3.5%
3.3%
5.5%
7.2%
7.5%
EV/EBITDA
EV/Revenues
Source: Company, HDFC sec Inst Research
Page | 8
INFOSYS : ANNUAL REPORT ANALYSIS
RECOMMENDATION HISTORY
Infosys
4,500
Date
12-Jul-13
9-Oct-13
11-Oct-13
11-Jan-14
17-Feb-14
15-Apr-14
5-Jun-14
TP
4,000
3,500
3,000
2,500
Jun-14
May-14
Apr-14
Mar-14
Feb-14
Jan-14
Dec-13
Nov-13
Oct-13
Sep-13
Aug-13
Jul-13
2,000
CMP
2,804
3,110
3,275
3,556
3,655
3,260
3,041
Reco
BUY
BUY
BUY
BUY
BUY
BUY
BUY
Target
2,944
3,247
3,675
3,870
3,871
3,871
3,871
Rating Definitions
BUY
: Where the stock is expected to deliver more than 10% returns over the next 12 month period
NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period
SELL
: Where the stock is expected to deliver less than (-)10% returns over the next 12 month period
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It should not be considered to be taken as an offer to sell or a solicitation to buy any security. HDFC Securities Ltd may from time to time solicit from, or perform broking, or other services for, any company
mentioned in this mail and/or its attachments.
HDFC Securities and its affiliated company(ies), their directors and employees may; (a) from time to time, have a long or short position in, and buy or sell the securities of the company(ies) mentioned herein or (b)
be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company(ies) discussed herein or act as an
advisor or lender/borrower to such company(ies) or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions.
HDFC Securities Ltd, its directors, analysts or employees do not take any responsibility, financial or otherwise, of the losses or the damages sustained due to the investments made or any action taken on basis of
this report, including but not restricted to, fluctuation in the prices of shares and bonds, changes in the currency rates, diminution in the NAVs, reduction in the dividend or income, etc.
HDFC Securities Ltd and other group companies, its directors, associates, employees may have various positions in any of the stocks, securities and financial instruments dealt in the report, or may make sell or
purchase or other deals in these securities from time to time or may deal in other securities of the companies / organisations described in this report.
HDFC securities
Institutional Equities
Unit No. 1602, 16th Floor, Tower A, Peninsula Business Park, Senapati Bapat Marg, Lower Parel,
Mumbai - 400 013
Board : +91-22-6171 7330
www.hdfcsec.com
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