Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AAA/Stable/CRISIL A1+’ ratings on the long-term debt programme and commercial paper programme of Infosys Limited (Infosys).

 

Infosys is expected to sustain double digit revenue growth in fiscal 2023, led by strong deal wins across verticals and increase in demand for digital services. The company registered healthy revenue growth of 21% on-year in fiscal 2022 (19.7% in constant currency), owing to healthy demand for IT services across verticals such as financial services (32% of revenue), manufacturing (10.9% of revenue), retail (14.6% of revenue), communications (12.5% of revenue). OPBDIT (operating profit before depreciation, interest, and tax) remained healthy at 26.2% in fiscal 2022, though moderated by 140 basis points due to high employee costs with peak attrition rates and resumption of travel and discretionary costs. OPBDIT (operating profit before depreciation, interest, and tax) margin is likely to remain at 25-26% over the medium term, supported by higher share of digital offerings, cost optimisation measures, and sustained high employee utilization levels. Over the medium term, revenue and OPBDIT margin is likely to 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 40,006 crore as on March 31, 2022. These strengths are partially offset by exposure to intense competition in the global IT industry.

Analytical Approach

For arriving at its ratings, CRISIL Ratings has combined the business and financial risk profiles of Infosys and its majority-owned subsidiaries (refer annexure 2 for list of consolidated entities). CRISIL Ratings has also amortised the goodwill arising out of acquisitions amounting to Rs.758 crore, Rs 1,490 crore, Rs 413 crore and Rs 35 crore for fiscals 2021, 2020, 2019 and 2018, respectively, over a period of five years. With adoption of Ind AS 116 with effect from April 01, 2019, lease liabilities are treated as debt along-side adjustments are also made in depreciation and amortization and interest cost components.

 

Please refer Annexure - List of entities consolidated, 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 57% in fiscal 2022, (from 48.5% during fiscal 2021), 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 2022 which grew by ~20% during the year. The company also has presence in other verticals, such as retail (14.6% of revenue in fiscal 2022), communication (12.5%), energy, utilities, resources & services (11.9%), manufacturing (10.9%), Hi-Tech (8.3%), life sciences (7%), and others.

 

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 314,015 employees (as on March 31, 2022), proven project execution skills, and strong offshore delivery capability. The company has continued to win large deals amounting $9.5 billion during fiscal 2022, albeit moderated from $14.1 billion registered last fiscal; this is further expected to fuel revenue growth. Revenue growth and margins are supported by premium pricing power with increasing digital share and large spectrum of service offerings which are critical components in large deals. Operating margin is likely to moderate but remain healthy in the range of 25-26% for fiscal 2023, due to wage hikes, increased hiring cost with high attrition, resumption of travel and other discretionary costs.. 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 12,888 crore for fiscal 2022, after a dividend payout of Rs 12,734 crore.

 

Financial flexibility is strong, supported by robust liquidity in the form of cash and cash equivalents of Rs 40,006 crore as on March 31, 2022. 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 moderation in discretionary spending by large clients has impacted revenue growth in the IT industry during fiscal 2021, 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 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 57% 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 40,006 crore as on March 31, 2022. 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.

 

ESG Profile

CRISIL Ratings believes that Infosys’s Environment, Social, and Governance (ESG) profile supports its already strong credit risk profile.

 

The IT sector has a low impact on the environment because of the inherent nature of digital services, core operations as well as products. The sector has a social impact because of its large workforce. Infosys Ltd has continuously focused on mitigating its environmental and social impact. 

 

Key ESG highlights:

• Infosys has laid out ESG vision and strategy for 2030 with targets and timelines.
• The company has maintained its Carbon neutrality across Scope 1,2 and 3 emissions in fiscal 2022 having reduced scope 1 and 2 emissions by 48.9% against Business-as usual (BAU) scenario and reduced Scope 3 emissions by 78.5% over the 2020 baseline
• In fiscal 2022, 53.8% of electricity consumption in India was met through renewable energy sources while recycling 100% of the wastewater within campuses in India.
• The company has 39.6% women in the workforce with 25% women participation on the Board which is highest in the industry. The company is also recognized as Top Employers and Great Place to Work.
• It has a strong governance structure with 75% of its board comprising independent directors and extensive disclosures.

 

There is growing importance of ESG among investors and lenders. Infosys’s commitment to ESG principles will play a key role in enhancing stakeholder confidence, given its high share of market borrowings in its overall debt and access to both domestic and foreign capital markets.

Outlook: Stable

CRISIL Ratings 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

Downward 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 March 31, 2022, Infosys had 1,741 active clients and presence in more than 50 countries. The promoters held 13.11% stake in the company as on March 31, 2022.

 

For the year ended March 31, 2022, the company’s profit after tax (PAT) stood at Rs 21,607 crore (Rs 18,884 crore in fiscal 2021) on operating income of Rs 121,839 crore (Rs 100,688 crore).

Key Financial Indicators (CRISIL Ratings Adjusted figures)

As on/for the period ended March 31	Unit	2022	2021
Operating income	Rs.Crores	121,839	100,688
PAT	Rs.Crores	21,607	18,884
PAT margin	%	17.7	18.8
Adjusted debt/adjusted networth	Times	0.00	0.00
Interest coverage	Times	NM	NM

NM - Not meaningful

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of Instrument	Date of Allotment	Date of Redemption	Coupon Rate (%)	Issue size	Complexity Levels	Rating Assigned with Outlook
NA*	Long-term debt programme	NA	NA	NA	0.00	Simple	CRISIL AAA/Stable
NA*	Commercial paper programme	NA	7-365 days	NA	0.00	Simple	CRISIL A1+

*No borrowings issued against this programme