INFOSYS FY16
An analysis of Infosys’ FY16 annual report shows a constant
currency revenue growth of 13%; while, the INR revenues grew at
17% (to INR624.4b). While, continued focus on employee retention
by - (a) reintroduction of ESOPs, and (b) hike in executive pay has
helped reduce attrition to 13.6% (FY15:18.9%), this might impact
future earnings. Expensing deferred consideration relating to
Lodestone acquisition of INR1.1b has impacted PBT by 0.6%.
Current effective tax rate of 28.0% is likely to increase to 32.6%, on
phasing out of tax incentives for units in Special Economic Zone.
Operating cash flow remained strong at INR98.6b, though high
surplus cash continued to impact return ratios. Over the last two
years, the management has increased cash utilization through: (a)
higher dividend payout, (b) acquisitions, and (c) capex. However,
RoCE remains muted at 27%. Increased depreciation cost due to
recognition of net assets at fair valuation under Ind-AS could
impact the company on future acquisitions.
The
ART
of annual report analysis
Focus on employee retention with
reintroduction of ESOPs & increase in Sr.
executive pay. Attrition declines to 13.6%
Effective tax rate could rise to 32.6%
(FY16: 28.0%) on withdrawal of tax
incentives to SEZ.
Cash allocation changed, but yet to pay off.
A
NNUAL
R
EPORT
T
HREADBARE
9 June 2016
Stock Info
Currency depreciation aids revenue growth:
Revenue for FY16
grew by 17% to INR624.4b (INR533.2b in FY15), as Infosys
continued to benefit from currency depreciation. EBITDA
increased to INR171.2b (INR148.7b in FY15), though EBITDA
margin declined by 50bp to 27.4% (27.9% in FY15) due to higher
sub-contracting costs.
Focus on employee retention increased
with: (a) Re-
introduction of ESOPs and (b) Increase in executive pay, which
led to the attrition declining to 13.6% (18.9% in FY15).
Effective tax rate could rise to 32.6%,
primarily on account of
withdrawal of tax incentives on income earned through its units
operating in SEZ, which has kept its current effective tax rate
low at 28.0%.
RoCE remains muted at 27%:
High cash balance continued to
impact Infosys’ return ratios. Over the last two years, the
company has increased its dividend payout (50%), and
utilization of funds for acquisitions and capex. However, this is
yet to result in any tangible impact on the return ratios.
Earnings impacted by deferred consideration for Lodestone
acquisition:
Upfront cash paid for Lodestone acquisition
amounted to INR11.9b which has been capitalized, while a
deferred consideration of INR6.1b payable over three years was
charged to the income statement following principles of IFRS.
Bloomberg
CMP (INR)
Equity Shares (m)
52-Week Range (INR)
M.Cap. (INR b)/(USD b)
1,6,12 Rel. Perf. (%)
Y/E Mar
Sales
EBITDA
PAT
EPS (INR)
EPS Gr. (%)
BV/Sh. (INR)
Payout (%)
P/E (x)
P/BV (x)
E: MOSL Estimates
2016
624.4
170.8
134.9
59.0
9.4
270.3
41.9
21.5
4.7
INFO IN
1,267
2,285.6
1,278/933
2,895.9/43.2
1/15/26
2017E
733.4
201.6
152.8
66.9
13.2
306.7
44.9
19.0
4.1
2018E
853.1
236.4
175.2
76.7
14.7
347.2
39.1
16.5
3.6
Standalone financial summary (INR b)
Shareholding pattern (%)
As on
Promoter
DII
FII
Others
Mar-16
12.8
17.5
40.7
29.1
Dec-15
13.1
17.6
56.8
12.5
Mar-15
13.1
15.1
54.2
17.7
Note: FII Includes depository receipts
Auditor’s name
BSR & Co. LLP, Chartered Accountants
ART will present a threadbare portrait of annual reports - statistical, strategic and structured. We believe ART's wide canvas - from accounting and auditing issues to
operating performance to management insights to governance matters - will help readers paint a clearer picture of the stock's investment worthiness.
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(S.Gupta@MotilalOswal.com); +91 22 39825544
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(Mehul.Parikh@MotilalOswal.com); +9122 3010 2492 /
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(Somil.Shah@MotilalOswal.com); +91 22 3312 4975
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

ART|
Infosys FY16
ART #1
Currency depreciation of aids
revenue growth, EBITDA
margins decline by 50bp
ACCOUNTING / AUDITING MATTERS
Currency depreciation continues to aid revenue growth
In FY16, Infosys reported a USD revenue growth of 9.1% to USD9.5b (USD8.7b in
FY15). However, in Indian currency terms, the company’s revenue grew by
17.1% to INR624.4b (INR533.2b in FY15), aided primarily by currency
depreciation.
We however note that in constant currency terms the revenue grew by 13%
(FY15: 7.1%).
EBITDA increased by 15.1% YoY to INR171.2b (INR148.7b in FY15), though
EBITDA margin declined by 50bp to 27.4% (27.9% in FY15), on account of higher
sub-contracting costs.
Exhibit 2: USD revenue growth remains muted (USD b)
Particulars
Revenues
17%
Operating profit
Operating
margins
Net profit
NPM
FY15
8.7
2.3
26.4%
FY16
9.5
2.4
25.3%
Growth (%)
9%
5%
-1%
Exhibit 1: Currency depreciation aids INR revenue growth
USD
24%
20%
12%
7%
6%
FY13
FY14
12%
6%
6%
FY15
7%
9%
FY16
INR
Constant currency
13%
2.0
2.1
2%
23.0%
22.0%
-1%
Source: Company Annual Report, MOSL
Source: Company Annual Report, MOSL
Exhibit 3: Margin declines on account of rise in sub-contracting costs (INR b)
FY15
Particulars
Net Revenue (Operations)
Personnel Cost
Software Development Expenses
Gross Margin
Selling And Marketing
Other Expenses
EBITDA
Depreciation
EBIT
Financial Charges
EBT
Other Income
PBT
Tax
PAT
(INR b)
533.2
298.0
32.2
203.0
23.1
31.2
148.7
10.2
138.5
-
138.5
34.3
172.8
49.1
123.7
(% of
Revenue)
100.0
55.9
6.0
38.1
4.3
5.8
27.9
1.9
26.0
-
26.0
6.4
32.4
9.2
23.2
(INR b)
624.4
344.2
48.1
232.2
27.1
33.9
171.2
12.7
158.5
-
158.5
31.3
189.8
53.0
136.8
FY16
(% of
Revenue)
100.0
55.1
7.7
37.2
4.3
5.4
27.4
2.0
25.4
-
25.4
5.0
30.4
8.5
21.9
Source: Company Annual Report, MOSL
Employee addition on the rise, though revenue per employee declines
In FY16, Infosys made a net addition of 17,857 employees, thus taking its total
employee base to 194,044 (176,187 in FY15), though revenue per employee
declined by USD479 to USD48,963 (USD49,442 in FY15).
9 June 2016
2

ART|
Infosys FY16
Exhibit 4: Revenue per employee declines
No. of Employees (in thousand)
Revenue per employee ($ in thousand)
194.0
150.0
156.7
160.4
176.2
46.6
47.2
51.4
49.4
49.0
FY12
FY13
FY14
FY15
FY16
Source: Company Annual Report, MOSL
Increased thrust on employee retention; ESOPs re-introduced
Employee attrition rate
declines to 13.6%
(FY15: 18.9%)
Under the leadership of Dr Sikka, Infosys has been laying greater emphasis on
employee retention. The company has (a) Re-introduced stock options and (b)
Offered a significant pay hike for its senior executives.
The management has recommended a budget of 1% of outstanding shares to be
allocated for meeting the needs of the ESOP plan that is equivalent to
approximately 24m shares (including 11m treasury shares held by the trust).
The ESOPs are currently accounted for at intrinsic value, though with the
adoption of Ind-AS method from FY17 onwards, the cost of ESOPs is likely to rise
after they are accounted for by using the fair value approach. This could lead to
an increase in the company’s employee expenses.
Moreover, the number of executives drawing remuneration in excess of
INR0.5m per month rose to 240, as against 101 in FY14.
Employee attrition rate declined from 18.9% in FY15 to 13.6% in FY16.
Exhibit 6: Retention strategy pays off
Attrition Rate
18.7%
18.9%
13.6%
Exhibit 5: Management band-with increases post FY14
Executives with pay exceeding INR 0.5 million p.m.
282
240
14.7%
16.3%
101
FY14
FY15
FY16
FY12
FY13
FY14
FY15
FY16
Source: Company Annual Report, MOSL
Source: Company Annual Report, MOSL
Effective tax rate could rise to 32.6%
Infosys’ current effective tax rate at 28.0% is lower than the marginal corporate
tax rate at 34.6%, primarily on account of tax incentives availed by the company
on income earned from its units operating in SEZ.
The Union Budget 2015 had proposed to reduce the corporate tax rate from
34.6% to 29.6% over the next four years in a phased manner. However, the
process of reducing the corporate tax rate is likely to be accompanied by
9 June 2016
3

ART|
Infosys FY16
rationalization and removal of various kinds of tax exemption and incentives for
corporate tax payers
(please refer our earlier report).
Based on our analysis, we believe that the company’s effective tax rate is likely
to increase to ~32.6% from the current ~28.0% once the tax changes come into
effect.
Exhibit 7: Effective tax rate (USD m) to increase after phasing out of SEZ tax incentives
Particulars
Profit before income taxes
Enacted tax rates in India
Computed expected tax expense
Tax effect due to non-taxable income for Indian tax
purposes
Overseas taxes
Tax reversals, overseas and domestic (net)
Effect of exempt non-operating income
Effect of unrecognized deferred tax assets
Effect of differential overseas tax rates
Effect of non-deductible expenses
Additional deduction on research and development
expense
Income tax expense
Effective tax rate
FY16 (Actual)
2,851
34.6%
987
(268)
109
(47)
(13)
9
1
30
(9)
799
28.0%
FY16 (Projected)
2,851
29.6%
844
-
109
(40)
(11)
8
1
26
(8)
928
32.6%
Source: Company Annual report, MOSL
Earnings to cash conversion remain healthy
Cash flow from operations remained strong at INR98.6b (INR83.5b in FY15).
Low working capital requirement helped the company generate strong
operating earnings to cash conversion of 92% (102% in FY15).
Exhibit 9: Earnings to cash conversion remains healthy
FY16
189.8
(11.1)
(58.7)
120.1
(14.8)
(15.2)
8.6
FY12
FY13
FY14
FY15
FY16
88%
92%
92%
Pre tax CFO to EBITDA
102%
102%
Exhibit 8: Strong operating cash flow (INR b)
Particulars
PBT
Add/(Less): Non-cash adjustments
Less: Direct taxes paid
Operating profit before w/cap
changes
Trade receivables
Loans and advances
Current liabilities and provisions
FY15
172.8
(13.4)
(67.5)
92.0
(14.8)
(2.2)
8.5
Cash generated from operations
83.5
98.6
Source: Company Annual Report, MOSL
Source: Company Annual Report, MOSL
High cash balance keeps RoCE muted
Post tax RoIC fell to 58% (65% in FY15), primarily on account of a decline in fixed
asset turnover to 5.1x (5.4x in FY15). Invested capital increased by INR49.5b to
INR222.8b (INR173.2b in FY15), mainly due to a rise of INR20.2b in investments
in fixed assets.
Infosys had cash & investments amounting to INR344.9b/60% of net worth
(FY15: INR325.4b, 64% of net worth), which resulted in low yields, thereby
4
9 June 2016

ART|
Infosys FY16
pulling down its RoCE. The company’s post-tax RoCE declined marginally to 27%
(28% in FY15).
Yield on cash & investments declined to 6.5% (7.8% in FY15), on account of the
falling interest regime.
Exhibit 10: Investment yield declines due to falling interest regime (INR b)
Cash & Investments
8.1%
7.8%
Loan to employees
7.2%
25.6
16.7
209.6
FY12
18.3
239.5
FY13
302.8
325.4
7.8%
49.1
Yield
68.3
6.5%
344.9
FY14
FY15
FY16
Source: Company Annual Report, MOSL
Cash allocated for higher
dividend pay-out, capex and
acquisitions
Cash allocation changes, but is yet to pay off
Operating cash flow has remained the predominant sources of funds.
During FY10-14, 32% of funds generated was distributed in the form of dividend,
while cash retained amounting to 35%.
Over the last two years, there has been a change in the company’s capital
allocation strategy by way of:
a) Higher dividend payout (50% for FY15 as well as FY16)
b) Utilization of cash for acquisitions and capex (acquisition and capex for two
years, respectively: INR21.3b, capex: INR49.7b)
However, the change in the company’s capital allocation is yet to have any
tangible impact on its return ratios since RoCE’s have remained muted at 27%
(FY15: 28%).
Exhibit 12: 35% of funds generated are retained as cash
Exhibit 11: CFO contributes 81% of funds
Sources of funds FY10-FY14
19%
Application of fund FY10-FY14
Capital expenditure
19%
32%
4%
10%
35%
Acquisition
Investments
Cash & cash equivalents
Dividend
Source: Company Annual Report, MOSL
Cash flow from
operations
Other Income
81%
Source: Company Annual Report, MOSL
9 June 2016
5

ART|
Infosys FY16
Exhibit 13: Investment liquidation contributes 19% of fund
generated
Exhibit 14: High dividend pay-out/acquisition curtails cash
retention
Sources of funds FY15-FY16
10%
19%
Cash flow from
operations
Other Income
71%
Sale of
investments
Application of funds FY15-FY16
19%
46%
8%
26%
Capital
expenditure
Acquisition
Cash & cash
equivalents
Dividend
Source: Company Annual Report, MOSL
Source: Company Annual Report, MOSL
Exhibit 15: High cash balance keeps RoCE muted
ROIC
68%
67%
ROCE
65%
58%
Exhibit 16: Dividend payout increased to 50%
Dividend Payout Raio (%)
50%
40%
30%
27%
30%
50%
29%
28%
28%
FY13
FY14
FY15
FY16
FY12
FY13
FY14
FY15
FY16
Source: Company Annual Report, MOSL
Source: Company Annual Report, MOSL
Recent acquisitions yet to
bear fruit. In-house R&D
expenses decline steadily
Acquisitions drive technology investments, while R&D investments decline
Over the past two years, the management has made several acquisitions
amounting to a total of INR23.5b.
The investments have been made in several platforms and service providing
companies, thereby resulting in an increasing in Infosys’ product offerings.
However, it must be noted that the company’s recent acquisitions are yet to
bear fruit.
The company’s in-house R&D expenses have been declining steadily and stood
at INR7.4b, 1.1% of revenue in FY16 (INR6.9b, 1.2% of revenue in FY15).
Exhibit 18: Investments in R&D decline (INR b)
Investments
14.0
6.5
0.6
2.5
6.8
FY12
9.5
FY13
8.9
FY14
6.9
FY15
7.4
FY16
1.9%
R&D Expense
2.2%
1.7%
1.2%
1.1%
% to revenue
Exhibit 17: Acquisitions since FY15 (INR b)
Particulars
Panaya Inc.
Kallidus Inc.
Skava Systems Pvt. Ltd.
Noah Consulting LLC
Total
23.5
Source: Company Annual Report, MOSL
Source: Company Annual Report, MOSL
9 June 2016
6

ART|
Infosys FY16
Exhibit 19: Muted performance of Lodestone group* (INR b)
Particulars
CY13
CY14
CY15
Revenue
27.0
29.9
33.1
PAT
0.7
(1.1)
0.2
Exhibit 20: Performance of recently acquired firms (INR b)
Particulars
FY 16
Turnover
-
1.0
2.0
0.3
0.0
0.4
2.1
2.2
PAT
-
0.0
(0.8)
-
-
0.1
0.1
0.2
*Refer annexure 1 for details Source: Company Annual Report, MOSL
Infosys Nova Holdings LLC
Panaya Inc.
Panaya Ltd.
Panaya GmbH
Panaya Japan Co. Ltd.
Skava Systems Pvt. Ltd.
Kallidus Inc.
Noah Consulting LLC
Noah Information Management
Consulting Inc.
0.1
(0.0)
Total
8.2
(0.5)
Source: Company Annual Report, MOSL
Deferred payment for Lodestone acquisition impact earnings
Proportionate charge of
deferred consideration
stood at INR1.1b/0.6% of
PBT in FY16
Infosys paid upfront cash amounting to INR11.9b for the acquisition of
Lodestone Holding AG in October 2012, while a deferred consideration of
INR6.1b is payable over three years to its promoters, subject to their continued
employment with the company.
The current accounting policy in India allows capitalization of any deferred
payments related to acquisitions. However, in line with the IFRS principles
followed by Infosys, it has recognized the investment in Lodestone at acquisition
cost, and the deferred consideration has been expensed on a proportionate
basis over a period of three years from the date of acquisition.
The proportionate charge of deferred consideration stood at INR1.1b/0.6% of
PBT (FY15: INR2.2b/1.3% of PBT). The entire liability was settled by FY16.
The current IGAAPs provide companies the option to account for
assets/liabilities acquired under M&A using book value of the seller or at fair
market valuation. The difference between the consideration paid and value of
asset recognized is treated as goodwill which is only tested for annual
impairment.
Ind-AS (accounting standards applicable from FY17) mandates accounting for
acquisitions using fair value of assets and liabilities which will result in lower
recognition of goodwill. We believe that this will lead to an increase in
depreciation/amortization cost (due to increased base of assets) for companies
in the case of future acquisitions.
Infosys has recently made several acquisitions, which under IGAAP have been
accounted for by the book value approach. During FY16, Infosys reported
addition of goodwill on account of acquisitions amounting to INR8.8b and
depreciation/amortization cost of INR12.7b under IGAAP, as compared to
~INR6.7b and INR14.6b, respectively under IFRS. The variation is primarily on
account of the difference in accounting policy under both accounting standards
as explained above.
Ind-AS may lead to higher
amortization charges on
future acquisitions
Amortization cost on future acquisitions could increase under Ind-AS
9 June 2016
7

ART|
Infosys FY16
ART #2
Statutory auditors to be
mandatorily changed post
FY17 in accordance with the
new Companies Act rules
GOVERNANCE MATTERS
Auditor rotation mandatory as per Companies Act
Infosys’ statutory auditors have been BSR & Co LLP for more than 15 years. The
Companies Act (2013) mandates rotation of auditors for listed entities after
serving tenure of 10 consecutive years. The Act further provides a period of three
years from April 1, 2014 to comply with this requirement.
All directors are regular in attending board meetings
The board comprises of nine members, out of which seven are independent
directors.
Infosys is regular in calling board meetings. During FY16, 8 board meeting were
held. All directors have been generally regular in attending the board meetings.
Prof. Jeffrey S. Lehman has been on the board for over 10 years. The Companies
Act 2013 mandates compulsory rotation of independent directors after 10 years,
prospectively from the date of implementation of the statute.
Exhibit 21:
Members regular in attending the board meetings (FY16)
Name of the director
R. Seshasayee
Dr. Vishal Sikka
U. B. Pravin Rao
Carol M. Browner *
Prof. Jeffrey S. Lehman
Prof. John W. Etchemendy
K. V. Kamath *
Kiran Mazumdar-Shaw
Dr. Punita Kumar-Sinha #
Ravi Venkatesan
Roopa Kudva
Independent
Executive
Executive
Independent
Independent
Independent
Independent
Independent
Independent
Independent
Independent
Held
8
8
8
8
8
8
8
8
8
8
8
Held During their
Attended
tenure
8
7
8
6
8
8
6
4
8
8
8
5
2
2
8
6
2
1
8
8
8
8
*: Retired during the year. #: Appointed for part of the year. Source: Company Annual Report, MOSL
9 June 2016
8

ART|
Infosys FY16
Annexure #1
Exhibit 22: Financial performance of Lodestone companies (INR b)
FY14
Particulars
Infosys Consulting Holding AG (formerly Lodestone Holding AG)
Infosys Consulting GmbH (2)
(formerly Lodestone Management
Consultants GmbH)
Infosys Management Consulting Pty. Limited (2) (formerly
Lodestone Management Consultants Pty. Limited)
Infosys Consulting AG (2)
(formerly Lodestone Management
Consultants AG)
Lodestone GmbH (2)(6) (formerly Hafner Bauer & Ödman GmbH)
Lodestone Management Consultants China Co., Ltd.
Infosys Consulting s.r.o. (2)
(formerly Lodestone Management
Consultants s.r.o.)
Lodestone Management Consultants GmbH (Austria)
Infosys Consulting SAS (2)
(formerly Lodestone Management
Consultants SAS)
Infy Consulting Company Limited (2) (formerly Lodestone
Management Consultants Ltd.)
Infy Consulting B.V. (2)
(formerly Lodestone Management
Consultants B.V.)
Infosys Consulting Sp. Z o.o. (2)
(formerly Lodestone Management
Consultants sp. z o.o.)
Lodestone Management Consultants Portugal, Unipessoal, Lda (2)
S.C. Infosys Consulting S.R.L. (2)
(formerly SC Lodestone
Management Consultants S.R.L.)
Infosys Consulting Pte Ltd. (2)
(formerly Lodestone Management
Consultants Pte Ltd.)
Lodestone Management Consultants Inc.
Lodestone Management Consultants (Belgium) S.A.
Infosys Consulting Ltda. (3)
(formerly Lodestone Management
Consultants Ltda.)
Lodestone Augmentis AG
Infosys Consulting S.R.L. (2)
(formerly Lodestone Management
Consultants S.R.L.)
Lodestone
Turnover
PAT
FY15
Turnover
PAT
FY16
Turnover
PAT
-
6.3
1.4
7.5
-
0.5
0.1
0.1
0.5
6.1
0.3
0.5
0.2
0.1
0.4
1.8
0.6
0.6
0.1
0.0
27.0
0.3
0.2
0.1
0.1
-
(0.0)
0.0
-
(0.1)
0.2
0.0
(0.0)
(0.0)
-
-
0.3
(0.1)
(0.4)
-
-
0.7
-
6.8
1.7
8.8
-
0.6
0.1
0.1
0.7
5.7
0.5
0.8
0.3
0.2
0.5
1.8
0.5
0.8
0.0
0.1
29.9
0.2
(0.2)
0.1
0.3
-
(0.2)
0.0
(0.0)
(0.2)
0.1
(0.0)
0.0
(0.0)
0.0
(0.1)
(0.1)
(0.2)
(0.8)
-
(0.0)
(1.1)
-
5.7
1.4
9.8
-
1.3
0.2
0.1
0.4
6.2
0.9
0.8
0.2
0.2
1.3
2.8
0.4
1.3
-
0.2
33.1
(0.0)
(0.1)
(0.1)
0.6
-
(0.2)
0.0
-
(0.1)
0.2
0.1
0.0
(0.0)
0.0
(0.1)
0.1
(0.0)
(0.4)
-
-
0.2
Source: Company Annual Report, MOSL
9 June 2016
9

Disclosures
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affiliated company(ies). This report is for personal information of the selected recipient/s and does not construe to be any investment, legal or taxation advice to you. This research report does not constitute an offer, invitation or
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Infosys FY16
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