ADD

Infosys (INFO)
Technology

FEBRUARY 09, 2015

UPDATE
Coverage view: Attractive

Will the results of reorganization be different this time? Infosys is undertaking

another reorganization that involves moving away from a verticalized structure with
single-point P&L responsibility to (1) separation of service lines from verticals into seven
independent practices and (2) new parameters to assess the performance of vertical
heads. Our initial assessment is (a) the reorganization aims to empower delivery and
places special emphasis on renewing service lines; and (b) a trade off in the new
structure is loss of single-point accountability. More details will emerge on the
reorganization. The emphasis on renewing delivery is evident from the new structure;
the company will have to manage the transition to ensure there is no senior
management attrition or loss of business momentum. We retain ADD.
Company data and valuation summary
Infosys
Stock data
52-w eek range (Rs) (high,low )
2,248-1,440
Market Cap. (Rs bn)
2,561.7
Shareholding pattern (%)
Promoters
13.1
FIIs
41.6
MFs
5.4
Price performance (%)
1M
3M
12M
Absolute
14.1
8.2
25.2
Rel. to BSE-30
7.3
5.1
(11.5)

Forecasts/Valuations
EPS (Rs)
EPS grow th (%)
P/E (X)
Sales (Rs bn)
Net profits (Rs bn)
EBITDA (Rs bn)
EV /EBITDA (X)
ROE (%)
Div. Yield (%)

2015
108.4
14.0
20.6
537.6
123.9
151.5
14.8
25.7
1.6

2016E
123.1
13.6
18.1
612.0
140.7
175.7
12.5
25.0
1.8

Price (`): 2,231

Target price (`): 2,350
BSE-30: 28,718

2017E
146.0
18.5
15.3
716.2
166.8
208.3
10.2
25.3
2.1

New structure empowers delivery; moves away completely from a verticalized structure
Infosys has reduced the number of industry verticals to five from six: (a) financial services,
(b) retail, CPG and logistics, (c) manufacturing, (d) energy, utilities, communications and
services, (e) and life sciences, healthcare and insurance.
Service lines have been moved out of a verticalized structure into independent practices.
Infosys has created seven service lines digital integration services, ADM, engineering
services, cloud and infrastructure services, independent validation and testing, enterprise
package application services and management consulting services.
Growth markets such as India, Australia, China, Japan, Germany and France will be
subsumed under the respective verticals and service lines.
All service line heads will report to Ravi Kumar who will head delivery and in turn report to
COO, UB Pravin Rao. The sales team will report to CEO, Vishal Sikka.
New parameters to assess performance of different groups
Vertical heads will be evaluated on revenue growth and pricing, not on unit-level profitability.
However, part of variable compensation is still linked to the companys performance.
Service line heads will be evaluated on productivity measures and gross margins. To put it
differently, delivery will be responsible for controlling something directly under control i.e.
cost of delivery. This can be achieved by controlling role ratios, managing the effort mix,
improving utilization rates and driving automation.

Kawaljeet Saluja
kawaljeet.saluja@kotak.com
Mumbai: +91-22-4336-0860

Jaykumar Doshi
jaykumar.doshi@kotak.com
Mumbai: +91-22-4336-0863

One of the interesting aspects of the change is attributing P&L responsibility in a different
mannerverticals managing pricing and revenues and service lines cost of delivery. Both these
aggregated together equates to P&L. Instead of holding a vertical head responsible for the
entire P&L, the new structure establishes accountability at functional levels.
Kotak Institutional Equities Research
kotak.research@kotak.com
Mumbai: +91-22-4336-0000
For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.

Technology

Infosys

Intent of reorganization and a few positives from it

Infosys intent of renewing service lines would not have worked under the current
verticalized delivery structure the delivery team was simply providing demand
fulfillment with little incentive for innovation. The new structure places greater emphasis
on the role of delivery and provides greater visibility to it in the organization. Under the
new structure, gross margin targets would compel the delivery team to implement new
ways of delivering servicesfocus on innovation and productivity.
The new structure provides scale and incorporation of best practices across service lines, a
positive. Utilization can improve with centralized resource management

Reorganization unlikely to be disruptive even though there is a trade-off

Change to the structure will lead to changes in reporting lines and invariably lead to
attrition though not material.
Elimination of single point responsibility, which was with the vertical head earlier, will
demand additional bandwidth of management to resolve disputes. The new structure
may give rise to disputes between verticals and service heads. Infosys requires a strong
conflict resolution system in place, in our view. Inevitably this will consume more CXO
level bandwidth.
Infosys has also changed the roles of some of the leaders. The new structure will also lead
to change in reporting for many. The company has to ensure seamless transition to
ensure minimal disruption to the business.
Bottomline. Emphasis on renewing delivery is evident from the new structure; the company
will have to manage the transition to ensure there is no senior management attrition and
loss of business momentum.

Key changes
Ravi Kumar who was head of insurance, healthcare, cards and payment has been made
delivery head. The heads of seven service lines (digital integration services, ADM,
engineering services, cloud and infrastructure services, independent validation and testing,
enterprise package application services and management consulting services) would
report to him. Mr Kumar will report to Pravin Rao, COO.
Mohit Joshi, who heads the financial services vertical, will also handle cards and payments
(now a part of financial services). Insurance and healthcare will be clubbed with life
sciences. Manish Tandon will continue to head this vertical.
Michael Reh, who joined from SAP and has been entrusted with turnaround of Finacle,
will now head the products and platform subsidiary, EdgeVerve (Sanjay Purohits portfolio)
as well. The company intends to appoint a CEO EdgeVerve who would report to Mr
Purohit.
Mr Purohit will head Management Consulting Services. Lodestone CEO Ronald Hafner
and Eric Rich (unit head of management consulting services) will report to him.
Srikantan Moorthy who heads HR will move back to delivery as head of independent
validation and testing.
Vishnu Bhat head of cloud and infrastructure services quit recently. EdgeVerve COO
Samson David has replaced him.
Infosys has appointed VG Dheeshjith, SVP and head of the growth market unit as the
Chief Information Officer (new position created).

KOTAK INSTITUTIONAL EQUITIES RESEARCH

Infosys

Technology

Previous reorganizations
Reorganization under NRN (June 2013 May 2014)
Infosys made several changes to its organizational structure under Narayana Murthys
leadership. Some of the changes were:
Appointment of two presidents, BG Srinivas and UB Pravin Rao, reporting to CEO. The
Executive Council (EC) was dissolved.
BFSI, manufacturing, energy & communications, public services, Lodestone, Strategic
Global Sourcing (large deals group), marketing and alliances reported to BG Srinivas.
Retail & CPG, logistics, life sciences, resources & utilities, growth markets, cloud and
mobility, quality and productivity and Infosys Leadership Institute reported to UB Pravin
Rao.
In addition, BG Srinivas was to focus on global markets while UB Pravin Rao would
focus on global delivery and service innovation.
Six countries (four in APAC, two in Europe) with high growth potential were carved out
of the verticalized structure to have separate P&Ls. This was done to give more freedom
to growth markets.
CS Kakal was given the responsibility to handle consulting & SI (33% of revenues) in
addition to BITS (62% of revenues). Effectively the entire delivery organization reported to
him.
Product, Platforms and Solutions (PPS) business was carved out into a separate subsidiary,
EdgeVerve. Sanjay Purohit was appointed as its head.
Infosys 3.0 reorganization (March 2011)
Industry verticals were consolidated in four and service offerings were grouped into three.
P&L responsibilities were taken away from service lines and the company P&L was
addition of four vertical P&Ls.
Consolidation into four verticals (a) financial services and insurance headed by Ashok
Vemuri, (b) manufacturing headed by BG Srinivas, (c) energy, utilities, communication and
services headed by Prasad Thrikutam and (d) retail, CPG, transport and life sciences
headed by UB Pravin Rao. In addition, there was one more vertical Infosys public services
subsidiary for handling the US governments public service work.
Services were re-grouped into three offerings (a) Business transformation (Consulting, SI,
ES and select Application development work), (b) Business operation (ADM, Independent
validation, IMS and BPO), and (c) Business innovation (products, platform, solutions and
accelerators).
Rest of the world geography was verticalized. The company retained special focus units in
certain investment countries such as France, Germany, China, Japan and India.

KOTAK INSTITUTIONAL EQUITIES RESEARCH

Technology

Infosys

Exhibit 1: Condensed consolidated financials for Infosys, March fiscal year-ends 2013-17E (` mn)
2013

2014

2015E

2016E

2017E

Profit model
Revenues

403,520

501,330

537,630

611,997

716,247

EBITDA
Depreciation
Other income

115,600
(11,310)
23,590

136,340
(13,740)
26,690

151,530
(11,006)
32,964

175,693
(14,209)
32,627

208,274
(17,406)
37,628

Pretax profits
Tax

127,881
(33,670)

149,291
(40,620)

173,490
(49,567)

194,112
(53,380)

228,497
(61,694)

94,211
82.4

108,671
93.2

123,924
108.4

140,731
123.1

166,803
146.0

Profit after tax

Diluted earnings per share (Rs)
Balance sheet
Total equity
Deferred taxation liability
Total borrow ings
Minority interest
Current liabilities

379,940
(4,690)

83,370

445,300
(6,290)

124,360

520,628
(6,290)

125,745

607,438
(6,290)

129,620

712,331
(6,290)

135,053

Total liabilities and equity

Cash
Other current assets
Goodw ill
Tangible fixed assets
Investments

458,620
218,320
140,120

82,790
17,390

563,370
259,500
180,240

93,390
30,240

640,083
314,526
192,253

103,064
30,240

730,768
364,380
214,395

121,754
30,240

841,094
434,245
247,410

129,200
30,240

Total assets
F ree cash flow
Operating cash flow , excl. w orking capital
Working capital changes
Capital expenditure

458,620

563,370

640,083

730,768

841,094

F ree cash flow

Key ratios and assumptions
Revenue grow th (US$ terms) (%)
Re/US$ rate
EBITDA margin (%)
EBIT margin (%)
Debt/equity
Net debt/equity
RoAE
RoIC

81,390
(11,820)
(32,460)

93,920
(2,810)
(27,450)

101,964
(10,628)
(20,680)

122,313
(18,267)
(32,899)

146,580
(27,583)
(24,852)

37,110

63,660

70,656

71,147

94,145

5.8
54.5
28.6

11.5
60.8
27.2

6.5
61.2
28.2

10.6
63.0
28.7

13.4
65.0
29.1

25.8

(0.6)
27.2
52.1

24.5

(0.7)
26.3
49.9

26.1

(0.7)
25.7
51.6

26.4

(0.6)
25.0
52.4

26.6

(0.7)
25.3
53.8

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH

Disclosures

"I, Kawaljeet Saluja, hereby certify that all of the views expressed in this report accurately reflect my personal views about
the subject company or companies and its or their securities. I also certify that no part of my compensation was, is or will be,
directly or indirectly, related to the specific recommendations or views expressed in this report."

Kotak Institutional Equities Research coverage universe

Distribution of ratings/investment banking relationships
Percentage of companies covered by Kotak Institutional
Equities, within the specified category.

70%

60%
Percentage of companies within each category for which Kotak
Institutional Equities and or its affiliates has provided
investment banking services within the previous 12 months.

50%
40.0%

40%
30%

23.2%

20%

19.4%

17.4%

10%
2.6%

3.2%

BUY

ADD

1.3%

1.3%

REDUCE

SELL

0%

* The above categories are defined as follows: Buy = We

expect this stock to deliver more than 15% returns over the
next 12 months; Add = We expect this stock to deliver 5-15%
returns over the next 12 months; Reduce = We expect this stock
to deliver -5-+5% returns over the next 12 months; Sell = We
expect this stock to deliver less than -5% returns over the next
12 months. Our target prices are also on a 12-month horizon
basis. These ratings are used illustratively to comply with
applicable regulations. As of 31/12/2014 Kotak Institutional
Equities Investment Research had investment ratings on 155
equity securities.

Source: Kotak Institutional Equities

As of December 31, 2014

Ratings and other definitions/identifiers

Definitions of rating
BUY. We expect this stock to deliver more than 15% returns over the next 12 months.
ADD. We expect this stock to deliver 5-15% returns over the next 12 months.
REDUCE. We expect this stock to deliver -5-+5% returns over the next 12 months.
SELL. We expect this stock to deliver <-5% returns over the next 12 months.
Our target prices are also on a 12-month horizon basis.

Other definitions
Coverage view. The coverage view represents each analysts overall fundamental outlook on the Sector. The coverage view will consist of one of the following
designations: Attractive, Neutral, Cautious.

Other ratings/identifiers
NR = Not Rated. The investment rating and target price, if any, have been suspended temporarily. Such suspension is in compliance with applicable regulation(s)
and/or Kotak Securities policies in circumstances when Kotak Securities or its affiliates is acting in an advisory capacity in a merger or strategic transaction
involving this company and in certain other circumstances.
CS = Coverage Suspended. Kotak Securities has suspended coverage of this company.
NC = Not Covered. Kotak Securities does not cover this company.
RS = Rating Suspended. Kotak Securities Research has suspended the investment rating and price target, if any, for this stock, because there is not a sufficient
fundamental basis for determining an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock
and should not be relied upon.
NA = Not Available or Not Applicable. The information is not available for display or is not applicable.
NM = Not Meaningful. The information is not meaningful and is therefore excluded.

KOTAK INSTITUTIONAL EQUITIES RESEARCH

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