Rating Rationale
October 25, 2019 | Mumbai
Infosys Limited
Rating placed on 'Watch Developing'  
 
Rating Action
Long-Term Debt Programme CRISIL AAA (Placed On 'Rating Watch with Developing Implication')
Commercial Paper Programme CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has placed its 'CRISIL AAA' rating on the long-term debt programme of Infosys Limited (Infosys) on 'Rating Watch with Developing Implications'; the rating on the commercial paper programme has been reaffirmed at 'CRISIL A1+'.
 
The rating action follows disclosure by the company on October 21, 2019, that it received anonymous whistleblower complaints alleging certain unethical practices in reporting financials, and irregularities in international-travel-related aspects of a senior management personnel.
 
On October 22, 2019, the company announced on the Bombay Stock Exchange and the National Stock Exchange that the whistleblower complaints were placed before its audit committee on October 10, 2019, and before the non-executive members of the Board on October 11, 2019, pursuant to its whistleblower practice. The company has retained the law firm Shardul Amarchand Mangaldas & Co to conduct an independent investigation. After the board meeting on October 11, 2019, the Audit Committee informed the independent internal auditors (Ernst &Young) as well as statutory auditors (Deloitte, India) about the developments.
 
The company also disclosed that on October 16, 2019, it was made aware of a letter dated October 3, 2019, which was written to the Office of the Whistleblower Protection Program, Washington D.C, along with emails and voice recordings in support of the allegations detailed in the whistleblower complaints. On October 24, Infosys announced that the Securities and Exchange Commission (SEC), USA, has initiated an investigation into the matter. Besides, the Securities and Exchange Board of India (SEBI) has requested additional information from Infosys concerning the whistleblower complaints. The company is cooperating with both regulators.
 
Further, the company mentioned a securities class action lawsuit that has been filed against it in a Federal Court in the US based on the allegations in the anonymous complaints. The company intends to defend itself in such a lawsuit.
 
CRISIL has taken note of the above developments and the steps taken by Infosys's Board and Audit Committee with respect to the whistleblower complaints. CRISIL will continue to monitor the situation and any additional developments. The rating will be removed from watch once there is adequate clarity on the outcome of the investigation, along with updates provided by Infosys' management. Any significant observations or findings, including from regulators and government agencies, will remain rating monitorables.
 
The ratings continue to reflect the leading position of the company in the Indian information technology (IT) services space, large scale of operations and robust operating efficiency, a robust financial risk profile with a debt-free balance sheet, and strong liquid surplus. These strengths are partially offset by exposure to moderation in demand for traditional IT services and to intense competition, which have impacted growth and profit margins, and susceptibility to volatility in foreign exchange rates.

Analytical Approach

For arriving at its rating, CRISIL has combined the business and financial risk profiles of Infosys, and Infosys's majority-owned subsidiaries.

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 also has a diversified range of offerings across service segments and industry verticals. While application development and maintenance services continue to be its mainstay, it has also been strengthening its capabilities in consulting services, systems integration, and package implementation. In terms of verticals, Infosys continues to derive about one third of its revenue from the banking, financial services, and insurance (BFSI) segment. The company has a large presence in other verticals too, with retail (contributing 16% of revenues in fiscal 2019), communication (13%), Energy & Utilities (13%) and manufacturing (10%). Company has steadily increased the digital share of revenues (31.2% of revenues in fiscal 2019 compared to 25.5% in fiscal 2018) driven by better client acceptance of its digital products and services.
 
* Large scale of operations and robust operating efficiency 
Infosys's business risk profile is supported by its leading market position, large scale of operations with a skilled resource base of 236,486 employees (as on September 30, 2019), proven project execution skills, and strong offshore delivery capability. Revenue growth has been healthy at about 17% with constant currency growth of about 9% for fiscal 2019, well supported by total contract value of large deals (greater than US Dollar 50 milion) of about US Dollar 6.3 billion as on March 31, 2019. Operating profitability declined to 26.0% in fiscal 2019 from 27.6% in fiscal 2018 due to higher employee costs as well as higher strategic investments for enhancing capabilities in sales & marketing and employee reskilling. Nevertheless, its profitability continues to be among the best in the industry supported by its superior revenue mix, cost optimisation measures, and delivery effectiveness.
 
* Robust financial risk profile, with debt-free balance sheet and high liquid surplus
Infosys has a robust financial risk profile, as its operations have been debt-free for over a decade. Financial flexibility is strong because of exceptional liquidity in the form of cash and cash equivalent of Rs 25,684 crore as on September 30, 2019. Net cash accrual stood at Rs 3,709 crore for fiscal 2019 after a dividend payout of Rs 13,712 crore. During August 2019, Infosys  completed the planned share buy back for Rs 8,260 crore as part of the capital allocation program announced in April 2018. Despite the acceleration in capital return program, liquidity will likely remain robust supported by sufficient funds to finance working capital and capital expenditure requirements over the medium term.
 
Weakness
* Exposure to intensely competitive business environment amid moderation in demand
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 TCS, HCL Technologies Ltd (rated 'CCR AAA/Stable') and Wipro Ltd, but also global IT giants such as International Business Machines Corporation (IBM), Accenture Plc, and Computer Sciences Corporation (CSC). 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 remain exposed to the challenging business conditions, its strategy of focusing on the traditional high-volume segments, increasing automation, and building capability in the higher margin digital and consulting segments, will mitigate the impact on profitability over the medium term.
Liquidity Superior

Liquidity remains superior driven by cash surplus of Rs 25,684 crore as on September 30, 2019. The company has no long term debt and plans to incur strategic investments of around Rs.4000 crore per annum towards internal product development, enhancing sale & marketing as well as client acquisition costs. CRISIL expects Infosys will maintain the liquidity over the medium term, as the existing funds and expected cash accrual will be more than sufficient to finance the working capital, capex requirements and investment requirements in various subsidiaries.

Rating Sensitivity factors
Downside factors:
*Any significant adverse observations or findings from the ongoing investigations into the whistle blower complaints, including from regulators and government agencies.
 
* Sustained slowdown in revenue growth or sustained decline in OPBDIT (Operating profit before depreciation, interest and tax) margins below 23% levels due to regulatory changes in its operating regions or reduction in client spending resulting in weakening of business risk profile.
 
* Sustained reduction in cash surplus below Rs 10,000 crore due to large acquisitions or capital return to investors which can impact the healthy financial risk profile.
About the Company

Infosys is a large Indian IT services company, offering a range of services, including application development and maintenance, consulting and systems integration, enterprise application and package implementation, and re-engineering services. It caters to industry verticals such as financial services, manufacturing, telecommunications, retail, life sciences, media and entertainment, and energy and utilities. The company has entered the business process management services segment through its subsidiary, Infosys BPO Ltd.
 
As on September 30, 2019, Infosys had 1364 active clients and presence in about 50 countries. The promoters held 13.10% stake in Infosys as on September 30, 2019.
 
For the six month period ended September 30, 2019, the company reported profit after tax (PAT) of Rs. 7,839 crores (Rs. 7,721 crores in the corresponding period of fiscal 2019), on net revenues of Rs 44,432 crores (Rs. 39,737 crores in the corresponding period of fiscal 2019).

Key Financial Indicators
As on / for the period ended March 31 Unit  2019 2018
Revenue Rs Crores 82,940 70,724
PAT Rs Crores 15,410 16,029
PAT margins % 18.6 22.7
Adjusted debt/adjusted net worth Times 0.00 0.00
Interest coverage Times NM NM

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)
ISIN Name of Instrument Date of Allotment Date of Redemption Coupon Rate (%) Issue size Rating Assigned
with Outlook
NA Long-term debt programme* NA NA NA 0.00 CRISIL AAA/Watch Developing
NA Commercial paper programme* NA 7-365 days NA 0.00 CRISIL A1+
*No borrowings issued against this programme
 
 
Sr No. Company name
1 Infosys Technologies (China) Co. Limited (Infosys China)
2 Infosys Technologies S. de R. L. de C. V. (Infosys Mexico)
3 Infosys Technologies (Sweden) AB. (Infosys Sweden)
4 Infosys Technologies (Shanghai) Company Limited (Infosys Shanghai)
5 Infosys Tecnologia DO Brasil LTDA. (Infosys Brasil)
6 Infosys Nova Holdings LLC. (Infosys Nova)
7 EdgeVerve Systems Limited (EdgeVerve)
8 Infosys Austria GmbH (formerly Lodestone Management Consultants GmbH)
9 Skava Systems Pvt. Ltd.  (Skava Systems)
10 Kallidus Inc. (Kallidus)
11 Infosys Chile SpA
12 Infosys Arabia Limited
13 Infosys Consulting Ltda.
14 Infosys CIS LLC
15 Infosys Luxembourg S.a.r.l
16 Infosys Americas Inc., (Infosys Americas)
17 Infosys Technologies (Australia) Pty. Limited (Infosys Australia)
18 Infosys Public Services, Inc. USA (Infosys Public Services)
19 Infosys Canada Public Services Inc
20 Infosys Canada Public Services Ltd
21 Infosys BPM Limited (formerly Infosys BPO Limited)
22 Infosys (Czech Republic) Limited s.r.o.
23 Infosys Poland, Sp z.o.o
24 Infosys McCamish Systems LLC 
25 Portland Group Pty Ltd
26 Infosys BPO Americas LLC.
27 Infosys Consulting Holding AG (Infosys Lodestone)
28 Lodestone Management Consultants Inc.(15)
29 Infosys Management Consulting Pty Limited
30 Infosys Consulting AG
31 Infosys Consulting GmbH
32 Infosys Consulting SAS
33 Infosys Consulting s.r.o.
34 Infosys Consulting (Shanghai) Co., Ltd.(formerly Lodestone Management Consultants Co., Ltd)
35 Infy Consulting Company Ltd
36 Infy Consulting B.V.
37 Infosys Consulting Sp. z.o.o
38 Lodestone Management Consultants Portugal, Unipessoal, Lda. 
39 S.C. Infosys Consulting S.R.L.
40 Infosys Consulting S.R.L.
41 Infosys Consulting (Belgium) NV
42 Panaya Inc. (Panaya)
43 Panaya Ltd.
44 Panaya GmbH
45 Panaya Japan Co. Ltd
46 Noah Consulting LLC (Noah)
47 Noah Information Management Consulting Inc. (Noah Canada)
48 Brilliant Basics Holdings Limited (Brilliant Basics)
49 Brilliant Basics Limited
50 Brilliant Basics (MENA) DMCC
51 Infosys Consulting Pte Limited (Infosys Singapore)
52 Infosys Middle East FZ LLC
53 Fluido Oy
54 Fluido Sweden AB (Extero)
55 Fluido Norway A/S
56 Fluido Denmark A/S
57 Fluido Slovakia s.r.o
58 Fluido Newco AB
59 Infosys Compaz PTE. Ltd (formerly Trusted Source Pte. Ltd)
60 Infosys South Africa (Pty) Ltd
61 WongDoody Holding Company Inc. (WongDoody)
62 WDW Communications, Inc
63 WongDoody, Inc
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  0.00  CRISIL A1+ 17-01-19  CRISIL A1+  29-06-18  CRISIL A1+  27-06-17  CRISIL A1+  29-06-16  CRISIL A1+  CRISIL A1+ 
Long Term Debt  LT  0.00
25-10-19 		 CRISIL AAA/(Watch) Developing  17-01-19  CRISIL AAA/Stable  29-06-18  CRISIL AAA/Stable  27-06-17  CRISIL AAA/Stable  29-06-16  CRISIL AAA/Stable  CRISIL AAA/Stable 
All amounts are in Rs.Cr.
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
Rating Criteria for Software Industry
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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