CRISIL has reaffirmed its ratings on Infosys Technologies Ltd’s (Infosys’s) long-term debt and commercial paper programmes. The reaffirmation follows Infosys’s announcement, on August 25, 2008, of its decision to acquire Axon Group Plc (Axon), a UK-based SAP consulting firm. The aggregate cost of the acquisition is about GBP407.1 million. The acquisition will be funded entirely through Infosys’s internal accruals. The ratings continue to reflect Infosys’s leading position in the Indian information technology (IT) services space, its strong global competitiveness, favourable financial profile, and a debt-free balance sheet. These strengths are, however, partially offset by the company’s geographic concentration of revenues, its limited presence in the high-end services and consultancy space, and the competitive business environment in which it operates.

Infosys’s superior business position is underlined by its skilled resource base of over 91,000 employees (as on March 31, 2008), proven project execution skills, and strong offshore delivery capabilities. The company registered a compounded annual growth rate (CAGR) of 36 per cent in revenues during the past five years, leveraging on its global delivery model and project management skills. The acquisition of Axon will facilitate the expansion of Infosys’s consulting capabilities. Infosys’s operating profit margins stood at 31.4 per cent in 2007-08 (refers to financial year, April 1 to March 31), as against 31.7 per cent in 2006-07, despite the challenging currency environment. CRISIL believes that while the acquired entity has lower operating and net margins than Infosys has, long-term benefits, in the form of strengthening the consultancy domain and access to Axon’s customers, will provide the impetus for growth in Infosys’s European operations. In CRISIL’s opinion, Infosys will maintain its operating profit margins through its strategy of moving up the services value chain and improving utilisations, apart from getting scale benefits in selling, general, and administrative (SG&A) expenses. The company is also expected to sustain its favourable financial profile over the medium term.

Infosys has a comfortable capital structure, as it has been running debt-free operations for more than 10 years now. Its strong financial flexibility is marked by cash and cash equivalents of Rs.70 billion as on March 31, 2008. The company reported net cash accruals of Rs.30 billion in 2007-08, after a dividend payout of Rs.19 billion, following a 20 per growth in sales. Infosys’s liquidity position will continue to be strong, supported by sufficient funds to finance its working capital and capital expenditure requirements over the medium term.

Outlook:Stable
Infosys’s enhanced service offerings and integrated solutions will boost its sales and improve its net cash accruals. The Axon acquisition will result in some pressure on operating margins, but the company’s strategy of moving up the value chain, its improving utilisation rates, and the scale benefits of SG&A expenses are expected to ease the pressure on its operating margins. CRISIL also expects the company to maintain its strong financial profile.

About the company
Infosys offers application development and maintenance, systems integration, package implementation, consulting, design, and re-engineering services in the IT space. It also offers software products for the banking industry. The company has ventured into the business process management services segment through its subsidiary, Infosys BPO Ltd. As on March 31, 2008, Infosys had 52 development centres, which together employ over 91,000 people, including support staff and personnel catering to the IT service requirements of over 500 clients. The promoters hold 16.5 per cent stake in Infosys. The company reported earnings of Rs.47 billion on net sales of Rs.167 billion in 2007-08.