| Infosys Limited | ||||
| Ratings reaffirmed at 'CRISIL AAA / Stable / CRISIL A1+ ' | ||||
| Rating Action | ||||
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| 1 crore = 10 million | ||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL has reaffirmed its ‘CRISIL AAA/Stable/CRISIL A1+’ ratings on the long-term debt programme and commercial paper programme of Infosys Ltd (Infosys).
Infosys is expected to register a revenue growth of 8% in fiscal 2021, led by strong deal wins. OPBDIT (operating profit before depreciation, interest, and tax) margin is likely to be in the range of 26-27%, supported by higher share of digital offerings and cost optimisation measures. In the first half of fiscal 2021, the company posted revenue growth of 8.6% (1.9% in constant currency), while OPBDIT margin rose to 27.4%, compared with 24.3% in the first half of fiscal 2020, driven by cost deferrals, reduction in sales and marketing expenses, and improvement in onsite-offshore mix partly amidst travel restrictions.
During fiscal 2020, revenue increased by 9.8% over the previous year, owing to healthy demand for IT services across verticals such as communications (13% of revenue), energy, utilities, resources & services (13%) and financial services (32%), which grew by 16%, 13% and 8%, respectively. OPBDIT margin was stable at 26%, as increase in cost related to employees and visa applications and lower realisations in the traditional business were nearly offset by cost optimisation measures such as automation, prudent onsite-offshore mix and control on subcontractor cost, and higher share of the digital business.
Over the medium term, revenue and margin will be supported by focus on critical areas for clients such as process digitisation, migration to cloud-based technologies, workplace transformation, business model transformation and enhanced cybersecurity controls.
The ratings continue to reflect Infosys’ leading position in the Indian information technology (IT) services space, its large scale of operations and healthy operating efficiency, strong financial risk profile with a debt-free balance sheet and robust liquid surplus of Rs 35,749 crore as on September 30, 2020. These strengths are partially offset by exposure to intense competition in the global IT industry. |
Analytical Approach For arriving at its ratings, CRISIL has combined the business and financial risk profiles of Infosys and its majority-owned subsidiaries (refer annexure 2 for list of consolidated entities). CRISIL has also amortised the goodwill arising out of acquisitions amounting to Rs 1,490 crore, Rs 413 crore and Rs 35 crore for fiscals 2020, 2019 and 2018, respectively, over a period of five years.
Please refer Annexure - Details of Consolidation, which captures the list of entities considered and their analytical treatment of consolidation. |
Key Rating Drivers & Detailed Description Strengths: Leading player in the Indian IT services space, with established position across verticals and service lines Infosys is the second largest listed Indian IT services company in terms of revenue. It has a diversified range of offerings across service segments and industry verticals. The share of revenue from digital services has grown steadily to 46% in the first half of fiscal 2021, (from 39% during fiscal 2020), driven by higher demand for transformation to cloud and other digital products and services, amid the pandemic. In terms of verticals, Infosys derived about 32% of its revenue from the banking, financial services, and insurance (BFSI) segment during fiscal 2020. The company also has presence in other verticals, such as retail (16% of revenue in fiscal 2020), communication (13%), energy, utilities, resources & services (13%), and manufacturing (10%).
Large scale of operations and healthy operating efficiency Infosys’s business risk profile is supported by its leading market position, large scale of operations with a skilled resource base of 2,40,208 employees (as on September 30, 2020), proven project execution skills, and strong offshore delivery capability. Revenue grew by 8.6%, with constant currency growth of 1.9% during the first half of fiscal 2021, supported by total contract value of large deals (greater than USD 50 million) of USD 4.9 billion. OPBDIT margin increased to 27.4% from 24.3% during the corresponding period of the previous fiscal, due to deferrals of expenses such as promotions and wage hikes; reduction in sales and marketing expenses, and improvement in onsite-offshore mix, due to the temporary travel restrictions. Though some of these actions will be reversed in the second half of fiscal 2021, the margin is likely to be in the range of 26-27% for fiscal 2021. The company’s profitability remains among the best in the industry, supported by its superior revenue mix, cost optimisation measures, and delivery effectiveness.
Strong financial risk profile and robust liquidity Infosys has a strong financial risk profile, driven by its healthy annual cash generating ability and debt-free balance sheet (for over a decade). Net cash accrual stood at Rs 10,015 crore for fiscal 2020, after a dividend payout of Rs 9,517 crore.
Financial flexibility is strong, supported by robust liquidity in the form of cash and cash equivalents of Rs 35,749 crore as on September 30, 2020. Despite the policy to return 85% of free cash flows to shareholders cumulatively over five years from fiscal 2020, liquidity will remain robust, supported by sufficient funds to finance working capital and capital expenditure (capex) requirement over the medium term. Infosys is also expected to invest in niche acquisitions to strengthen its domain expertise in the medium term. These will be largely funded from its cash surplus and healthy accrual.
Weakness: Exposure to intense competition in the global IT industry The current moderation in discretionary spending by large clients has impacted revenue growth in the IT industry, especially in traditional outsourcing services. Furthermore, being a leading player in the IT outsourcing space, Infosys competes with not just Indian IT majors such as Tata Consultancy Services Ltd (TCS), HCL Technologies Ltd (‘CCR AAA/Stable’) and Wipro Ltd, but also global IT giants such as Atos SE, Capgemini SE and Accenture Plc. The slowdown in IT spend by global clients and the consequent decline in contract value in the industry has intensified competition among players. Infosys derives around 46% of revenue from digital services and remaining from traditional IT services. While the company remains exposed to challenging business conditions, its strategy of focusing on building capability in the higher margin digital and consulting segments and increasing automation to improve core technologies will mitigate the impact on profitability over the medium term. |
Liquidity: Superior Liquidity remains superior driven by cash surplus of Rs 35,749 crore as on September 30, 2020. The company has moderate capex plans and no long-term debt. CRISIL believes Infosys will maintain strong liquidity over the medium term, as the existing funds and expected cash accrual will be more than sufficient to finance working capital, capex, investment in various subsidiaries, as well as the capital return to investors. |
Outlook Stable CRISIL believes Infosys will maintain its strong position in the Indian IT services sector and its robust financial risk profile and liquidity over the medium term. |
Rating Sensitivity factors Downside factors: * Sustained slowdown in revenue growth or decline in OPBDIT margin below 20%, due to regulatory changes in operating regions, or reduction in client spending, weakening the business risk profile
* Consistent reduction in cash surplus to below Rs 15,000 crore due to large acquisitions or capital return to investors, affecting financial flexibility. |
About the Company Infosys is a large Indian IT services company, offering a range of digital and traditional IT services. Digital services include revenue from emerging segments such as artificial intelligence-based analytics and big data, engineering digital products and Internet of Things (IoT), application program interface, and micro services, modernisation of legacy technology systems, migration to cloud applications, and implementation of advanced cyber security systems. Traditional IT services include application development and management services, product engineering and management, infrastructure management services, enterprise application implementation, support and integration services. It caters to industry verticals such as financial services, retail, communication, manufacturing, hi-tech, life sciences, and energy, utilities, resources & services.
As on September 30, 2020, Infosys had 1,487 active clients and presence in 46 countries. The promoters held 12.95% stake in the company as on September 30, 2020.
For the six months ended September 30, 2020, the company reported a profit after tax (PAT) of Rs 9,131 crore (Rs 7,839 crore in the corresponding period of fiscal 2020) and net revenue of Rs 48,234 crore (Rs 44,432 crore). |
Key Financial Indicators
NM – not meaningful |
Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
*No borrowings issued against this programme |
Annexure – List of entities consolidated
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