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 Ltd (Infosys).

 

The ratings continue to reflect the strong market position of Infosys, being the second largest player in the Indian information technology (IT) services space, the company’s healthy operating efficiency and strong financial risk profile. These strengths are partially offset by intense competition in the global IT industry.

 

The Indian IT industry saw muted growth in fiscal 2024 on account of delayed client decisions, cutbacks in digital transformation initiatives, and declining discretionary spending amidst macroeconomic headwinds globally. Infosys registered a 4.7% rupee revenue growth in fiscal 2024 (1.4% in constant currency [CC] terms) compared with strong growth of over 21% in the past two fiscals. Recovery is expected hereon on account of revival in discretionary spending and a gradual improvement in macroeconomic conditions. Infosys will also benefit from the $17.7 billion deals won in fiscal 2024.

 

With the industry facing margin pressures due to high employee costs, the earnings before interest, taxes, depreciation and amortisation (Ebitda) margin of Infosys moderated by 90 basis points to 23.9% in fiscal 2024. The Ebitda margin is expected at 24-26% over the medium term, driven by increased focus on managing employee costs and moderating attrition in the industry.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of Infosys and its subsidiaries, held directly or indirectly, as all the companies have a common management and are in the same business.

 

Goodwill on acquisitions amounting to Rs 280 crore, Rs 630 crore, Rs 758 crore and Rs 1,490 crore for fiscals 2024, 2023, 2021 and 2020, respectively, has been amortised over five years.

 

With adoption of Ind AS 116 with effect from April 1, 2019, long-term lease liabilities are included in debt along with related adjustments in Ebitda for depreciation and amortisation and interest costs.

 

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 position in the Indian IT services space: 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. Most of the revenue continues to come from digital services, driven by higher demand for cost optimisation programmes and other digital products and services. In terms of verticals, Infosys derived about 27% of its revenue from the banking, financial services, and insurance (BFSI) segment during fiscal 2024. The company also has presence in other verticals, such as retail (14.7%), communication (11.7%), energy, utilities, resources & services (13.0%), manufacturing (14.5%), Hi-Tech (8.1%), life sciences (7.5%), and others (3.1%).

 

• Large scale of operations and healthy operating efficiency: The business risk profile of Infosys is supported by its leading market position, large scale of operations with a skilled resource base of 317,240 employees (as on March 31, 2024), proven project execution skills, and strong offshore delivery capability. The company continued to win large deals amounting to $17.7 billion during fiscal 2024, compared with $9.8 billion in the previous fiscal, which will fuel revenue growth. Revenue growth and profitability are supported by premium pricing power with increasing digital share and large spectrum of service offerings which are critical components in large deals. The operating margin is expected to sustain with easing supply-side challenges such as reducing attrition, healthy mix of on/off-shore employee mix and healthy employee utilisation rates. The company’s profitability remains among the best in the industry, supported by its superior revenue mix, cost optimisation measures, and delivery efficacy.

 

• Strong financial risk profile and robust liquidity: Infosys has a strong financial risk profile, driven by a solid networth of Rs 78,387 crore and surplus cash of Rs 41,991 crore as on March 31, 2024. The total debt of Rs 8,359 crore as on March 31, 2024, is completely attributed to lease financing. Net cash accrual stood at Rs 16,195 crore for fiscal 2024, after a dividend payout of Rs 14,731 crore. Despite the policy to return 85% of free operating cash flow to shareholders cumulatively over the five years from fiscal 2025, liquidity will remain robust, supported by sufficient funds to finance working capital and capital expenditure (capex) requirement over the medium term. Infosys is also likely to invest in niche acquisitions to strengthen its domain expertise over the medium term. These will be largely funded through cash surplus and healthy accrual.

 

Weakness:

• Exposure to intense competition in the global IT industry: The moderation in discretionary spending by large clients impacted revenue growth in the IT industry in fiscal 2024, 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. While Infosys 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 41,991 crore as on March 31, 2024. The company has moderate capex plans, which include acquisitions of companies from diverse domains. Infosys does not have any long-term debt. CRISIL Ratings 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 capital return to investors.

 

ESG profile

CRISIL Ratings believes the Environment, Social and Governance (ESG) profile of Infosys supports its already strong credit risk profile, which benefits from support from the Government of India (GoI).

 

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 has continuously focused on mitigating its environmental and social impact.

 

Key ESG highlights:

• Infosys continues to be carbon neutral for the fifth year in a row, when factoring in all emission categories (Scope 1, 2, and 3).
• In fiscal 2024, three of the company’s India campuses received True Zero Waste Platinum certifications from Green Business Certification Inc (GBCI).
• Attrition rate for the IT services operations of Infosys (excluding business process management services) dropped significantly to 12.6% in fiscal 2024 from 27.7% in fiscal 2022.
• The company reported one instance of a material data breach in fiscal 2024, which involved customer information.
• The governance structure is characterised by 78% of the board comprising independent directors and 22% being women directors, as well as extensive financial disclosures.

 

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

Outlook: Stable

CRISIL Ratings believes Infosys will maintain its strong position in the Indian IT services sector and will sustain its robust financial risk profile and liquidity over the medium term.

Rating Sensitivity factors

Downward factors:

• Sustained slowdown in revenue growth or decline in operating profit before depreciation, interest, and tax (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 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 programme 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. Infosys caters to industry verticals such as financial services, retail, communication, manufacturing, hi-tech, life sciences, and energy, utilities, resources and services.

 

As on March 31, 2024, Infosys had 1,882 active clients and presence in 50+ countries. The promoters held 14.71% stake in the company as on March 31, 2024.

Key Financial Indicators (CRISIL Ratings-adjusted figures)

As on / for the period ended March 31	Unit	2024	2023
Operating income	Rs crore	153,877	147,088
PAT	Rs crore	26,248	23,450
PAT margin	%	17.1	15.9
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	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity Levels	Rating assigned with outlook
NA	Long-term debt programme*	NA	NA	NA	0	Simple	CRISIL AAA/Stable
NA	Commercial paper programme*	NA	7-365 days	NA	0	Simple	CRISIL A1+

*No borrowings issued against this programme