INFOSYS TECHNOLOGIES LIMITED

INTRODUCTION It was early in the morning of February 10, 1999. While Mr. Nandan Nilekani read the Infosys U.S. S.E.C. registration statement, his driver fought his way through the smog filled Bangalore traffic. Mr. Murthy, current CEO of Infosys Technologies Limited (Infosys or the Company), prepared to issue a press release announcing his resignation and the transition of Nandan to CEO. I am quite happy with the smooth transitioning of the responsibility of day-to-day operations to Nandan. This is in keeping with our philosophy of younger people assuming greater responsibilityMy best wishes to him in his new role. Mr. Murthys best wishes notwithstanding, Nandan had quite a lot on his mind. Infosys had grown from a small start-up into one of Indias most respected software companies with a strong financial performance in the last few years (Appendix I comprises the financial statements for the Company). Just this past September, The Economic Times proclaimed Infosys as Indias Company of the Year. On January 22, 1999, the share price crossed the Indian Rs. 5,000 ($118) mark1, making it the one of the most expensive stocks in Indian history. Despite the success, Nandan had concerns for the future. Primary among them was the valuation of the companys attempt to issue American Depository Shares (ADS). While the company had achieved impressive growth over the past four years (CAGR over 50%), a significant portion of the growth was due to Year 2000 (Y2K) related consulting and services. Furthermore, 82% of the revenue came from the United States. As demand for Y2K services would most probably drop within the next six months, Infosys needed to develop new businesses and services to maintain leadership in the Indian marketplace and emerge as a leader in global software services, while continuing to construct production capabilities within India. To achieve his goal for diversification without hampering capacity, Infosys needed to invest additional capital. This is where the ADS came into the picture. He wondered about the prospects of an ADS issue in the U.S. Was the offering undervalued given the optimism demonstrated by investors in U.S. technology stocks? Or would the issue be successful as U.S. investors continued to
1

For a Rs. 10 par value stock, Infosys has probably been the highest quoted stock. The stocks effective split recently had it quoting in the $50 range. Other stocks had been known to quote at higher rates, but these were Rs. 100 par value stocks, e.g. Cipla, a pharmaceutical Company quoted at Rs. 46,000 during intra day trading on January 31, 1994.

This case was prepared by Fuqua MBA students Noelle M. Diederich '99, Lalit Khanna '99, Nandini Kini '99, Rakesh Mehta '99, and Daniel Sevall '99 under the supervision of Professor Campbell Harvey ( February 1999). The case presents a business situation in the context of emerging markets and does not reflect an endorsement either of an appropriate or inappropriate way to handle the situation. Furthermore, the "story" of Mr. Nilekani riding through traffic in Bangalore was created by the case writers to enhance the presentation of the case. 1

maintain the stock's momentum (see Exhibit A below) of recent months? Given the recent turmoil in Russia and Brazil, what could Infosys expect from an ADS issue in terms of international investor reaction? Exhibit A
Infosys Share Price and Volume Trends 4000000 3500000 3000000 2500000 Volume 40.00 2000000 30.00 1500000 1000000 500000 0 12/30/94 12/29/95 12/31/96 12/31/97 12/31/98 9/30/94 3/31/95 6/30/95 9/29/95 3/29/96 6/28/96 9/30/96 3/31/97 6/30/97 9/30/97 3/31/98 6/30/98 9/30/98 20.00 10.00 70.00 60.00 50.00

Share Price (in US$)

Volume Price (US$)

Time

INDIA2 India is any quantitative investors nightmare but a stock pickers paradise. - Shanta Acharya, Investing in India, p. xi. Political History British rule in India ended in 1947 after a sustained campaign for independence. Soon after gaining independence as a secular and democratic country, India was partitioned amid great bloodshed, resulting in the Islamic state of Pakistan. Fascinated by the Soviet Unions planned economy system, India's first prime minister, Jawaharlal Nehru, introduced the notion of 5-year plans that are still in existence3 today. The 5-year plans were Nehrus attempt to force the state to play a significant role in industrial development by investing state resources in infrastructure and other core sectors through the creation of a public sector. Of the 28 million workers in organized employment in India, 70% work for the state.

2 3

This section is largely excerpted from Economic Intelligence Unit Country Reports. For a 3 year period in the 1960s these 5-year plans were replaced by annual plans to overcome the acute food shortage caused by crop failures. A direct consequence was Indias attempt at a Green Revolution whereby agricultural resources were concentrated in fertile areas to boost agricultural production, instead of distributing resources on a more equitable basis. Even though agricultural production has grown, on a per capita basis there still has been no significant improvement owing to increases in population. Another consequence of the Green Revolution was the skewness in wealth distribution, which saw the North develop at the expense of the East. 2

The state continues to account for only around one-third of economic output and less than one-third of investment. The vast majority of public-sector enterprises are unproductive, massively overstaffed and debt-ridden. A high level of unionization (and political expediency) restrict labor reforms and technological advances that could threaten jobs, and as a consequence, deter investors. In 1966 Nehru's daughter, Indira Gandhi (after whom the Congress (I) was named), became Prime Minister. Her administration continued to implement an inward-looking economic policy, as well as manifesting particularly authoritarian tendencies. In 1975, Mrs. Gandhi declared a state of emergency which lasted for two years. Civil rights were suspended, the press was controlled and many of her critics were imprisoned. The electorate responded by ousting Congress (I) from government and Mrs. Gandhi from her seat in the 1977 general election. A key consequence of the socialist economic controls policies followed by the Nehru Gandhi dynasty and the subsequent government was the expropriation of private assets by the central government. Mrs. Gandhi nationalized all the major domestic commercial banks and brought them under the control of the central government. A change in political power to Janata Party-led coalitions resulted in foreign private businesses (e.g. IBM and the Coca Cola Company) leaving the country because new legislation was written prohibiting foreign majority ownership of businesses in India. Mrs. Gandhi returned as Prime Minister in 1980. In 1984 she was assassinated by Sikh bodyguards and her elder son, Rajiv, succeeded her as prime minister. An election later that year gave Mr. Gandhi an unprecedented majority, and his administration began cautious steps towards economic liberalization. But Congress lost its majority in the 1989 general election amid a series of corruption scandals, and Mr. Gandhi stepped down. He was assassinated by Sri Lankan Tamil extremists during the 1991 election campaign. Following the 1991 general election, Congress (I) formed a minority government under P.V. Narasimha Rao. Mr. Raos government took the helm under a dark cloud. The devaluation of the rupee by 22% against the dollar in two installments in July 1991 was followed by the introduction of a market-determined exchange rate in March 1993 and current-account convertibility in August 1994. In July 1995, it was decided that all official foreign debt-service payments would be channeled through the inter-bank market. The rupee is not yet fully convertible on the capital account. The devaluation occurred at a time when Indias foreign currency reserves declined to approximately $2 billion dollars and the country was forced to pawn gold reserves to prevent defaults on its foreign payment obligations. Since then the situation has stabilized. India's foreignexchange reserves were up to $24.8 billion in August 1998; gold reserves are around $2.5bn; total reserves are equivalent to more than six months of imports. Institutional Framework India continues to demonstrate features of a developing economy while possessing the institutional features of a developed market. See Appendix II for a comparison between

the U.S. and India on key socio-economic and political factors to contrast a developing economy with a developed market economy. Federalism - the Center versus the States The Republic of India is a constitutional democracy made up of 26 states and six union territories. Its federal structure often leads to demands for further devolution of powers and responsibilities to the states, as well as demands for new states to be created. (In 1998 the government was considering the carve-out of 2 new states). The Indian constitution delegates some powers to the center and some to the states, while the remainder - the socalled concurrent list - are shared. But in practice, the center has frequently claimed for itself powers allocated to the states. India's 26 states have limited powers of taxation and rely on transfers from the center for most of their finance. With increased efforts to decentralize powers below the state level - to several tiers of local government structures, and the decline of central planning, the states have begun to assume more individual profiles. The Judiciary and the Legislature The Indian constitution provides for an independent judiciary, with courts in every state and a Supreme Court in New Delhi. In spite of the recent history of the Supreme Court to demonstrate its independence from the legislature, the legal process is painstakingly slow. India has 16.34 million under-trial prisoners (persons charged with crimes whose cases are yet to be decided or who havent yet managed to procure bail there are cases where undertrials are eventually released after they have served out the maximum possible sentence for the crime they were charged with even though the case was yet to be decided). Democracy and Corruption India is the world's largest democracy, with regular and fairly free elections. In several areas, poll-rigging and intimidation are commonplace; party spending is far in excess of legal limits; and many of the country's elected representatives have a criminal record. However, a high level of political awareness and the sheer size of the electorate generally ensure that, despite these obstacles, the final results do reflect the wishes of the people. Despite almost half a century of democracy, governmental agencies emerged as prolific breeding grounds for corruption. Ministers, the elected representatives of the people, topped the list of groups seen to be prone to non-transparent functioning. The police came a (dis)honorable second; in Punjab, in fact, it even surpassed ministers.5 The Berlin-based organization, Transparency International, pointed out that India was ranked 66th out of the 85 countries surveyed in terms of level of corruption.6
4 5

August 1998 estimate reported by India Today magazine. Survey conducted by India Today magazine and ORG-MARG in November 1997. 6 1998 Corruption Perceptions Index; http://www.transparency.de/documents/cpi/index.html. Indias score has improved marginally since 1995 (from 2.8 to 2.9 on a scale out of 10.0). 4

In May 1996, the Hindu nationalist Bharatiya Janata Party (BJP) formed a government that lasted for only 13 days. The BJP came into power by fomenting dissension among the electorate along religious lines by appealing to religious extremism. This was followed by a minority United Front (UF) coalition supported from the back benches by Congress. The UF government continued to implement the economic reforms begun under Congress, but Congress withdrew its support in November 1997 and the government fell. The era of coalition politics and unstable governments has continued after the general elections of 1998. The BJP finally formed a coalition government with 13 other parties; Atal Behari Vajpayee became Prime Minister. Following the election, in which the BJP won 181 seats, it was forced to form alliances across caste, linguistic and political lines. The government has therefore been vulnerable to demands by smaller regional parties which have perpetually been demanding central government resources to boost economic development in their region by threatening the withdrawal of political support. Political considerations make it difficult for ruling coalitions to make difficult economic decisions. Border Conflict and Tensions India's army is the second largest in the world, with total armed forces of 941thousand active servicemen and first-line reserves of another 528,400. The armed forces have a strictly non-political role, although they have increasingly been drawn into India's more intractable domestic law-and-order problems, such as those simmering in Kashmir and the North-Eastern states. Consistently high levels of tension in the region make major defense cuts unlikely and difficult to implement. Additionally, since independence, India has fought four border warsthree with Pakistan and one with China. More recently, tensions between Pakistan and India have increased over test explosions of nuclear weapons. The Economy Around 70% of India's population relies on agriculture, forestry and fishing, which account for about 30% of GDP. Most land is cultivated at subsistence level, and only one-third is irrigated. Annual population growth of 1.8% in recent years will make India the world's most populous country in the next century. Human development indicators are among the worst in the world, but India also has a wide range of advanced expertise such as the IT industry, and a number of internationally regarded industrial houses. Throughout the 1980s, GDP grew at an annual rate of about 5.5%--a significant improvement on previous decades, which saw rates of around 3.5% per year (equal to GDP per head growth of just over 1%). GDP growth slowed in the early 1990s, but then revived to surpass 5% in four successive financial years. GDP growth peaked at 7.5% in 1996/97 slowing to 5% in 1997/98. Gross national savings and investment as a percentage of GDP have risen steadily, if slowly, in recent years. Despite increases in household and corporate savings, savings still account for only about 26% of GDP, the result of a persistent weakness in public-

sector savings. As a result, capital formation is low. India's household sector provides the overwhelming majority (almost 90%) of national savings. A shortage of power is also a serious constraint on growth, and investors have been wary to enter a market where the purchasers, state electricity boards, are effectively bankrupt. India's large-scale private sector is similarly inefficient. Capital productivity has fallen steadily, with negligible growth in total factor productivity and low levels of capacity utilization. Even after recent reforms, India still has high levels of protection for manufacturing. Inflation is a very sensitive issue in India because it bears directly on real incomes and income distribution. Politicians worry that popular displeasure with rising pricesas occurred in 1998 when supply problems caused food prices to spikewill be conveyed through the political arena. Annual average rates of inflation have been relatively stable but high in recent years. Money supply growth remains above the rate of expansion of nominal GDP, which can be inflationary. High inflation, poor product quality (stemming in part from high import controls) and infrastructure constraints have undermined India's export competitiveness. Although India has been largely untouched by the Asian financial crisis, the devaluation of the currencies of several export-competing countries has posed problems for India's exporters and manufacturers. Disincentives to export have led to a steady decline in India's share of world trade, from 2.4% in 1951/52 to under 1% in the late 1980s and 1990s. For a comparison of Indias performance with other emerging markets, see Appendix III. Economic Reforms The financial crisis of 1991 forced recourse to IMF financing and a program of economic reforms was initiated by Mr. Raos government. In July 1991, the Indian government began a structural adjustment program focusing on supply-side reforms. The reforms targeted improvements in trade and industrial policies, taxation, public sector initiatives and the financial sector. The goal was to enhance the conditions for investment and employment by enabling the capital markets to "assume an integral role in the allocation of resources in the nation's development."7 Within six years, India affected a fundamental change in the country's attitudes, goals, and values regarding growth in its economy and changes in its industry and society.8 Still, the Indian government's approach has been gradual, following more of a "crisis management" approach in the eyes of some country analysts. Some worry that India requires another crisis in order to continue its reforms. Key reform initiatives included:
7 8

Acharya, Shanta. Investing in India. London: MacMillan Press Ltd. 1998. p. 1. Acharya. p.1. 6

The encouragement of foreign direct investment with majority equity, except in a few consumer goods sectors. Red tape was greatly reduced. Portfolio investment was encouraged also. De-licensing of most industries to encourage competition. Only a few (15) sectors, including luxury and defense-related items, as well as industries reserved for the small-scale sector, remained subject to licensing, with gradual plans for a phase-out. The de-control of some aspects of business decision-making, such as location and technology transfer. However, labor relations, exit policy (shutting down loss-making enterprises) and areas such as the environment remain controlled. Trade policy has been cautiously liberalized, with the conversion of some import quotas into tariffs and phased reductions in import tariff rates. The capital markets were liberalized, with the entry of private mutual funds, foreign institutional investors and country funds, and with stronger and more transparent regulation of the stock market.

Subsequently the reforms have continued although at a slow, measured pace, given changes in government. The Information Technology industry, however, continues to retain a favorable position with the Indian government. See Appendix IV to capture a snapshot of various indicators of recent Indian macroeconomic trends. Conservative estimates by Professor SP Gupta of the Delhi School of Economics (see Exhibit B) indicate that the size of the black economy is growing: Exhibit B Amount (Rs. Billion) 338.54 570.00 960.00 % of GDP 28 31 33

1980-81 1983-84 1987-88

Some estimate the black economy to be approximately half of the Indian economy. The pressures imposed by a failure to collect revenues from essentially half the economy, may force a policy change on tax breaks provided to the Information Technology sector since it is going through an exponential growth phase. The latest Budget announcements seem to indicate a slight reversal in tax rate trends with the government announcing increases in income tax rates, where as previous budgetary announcements had reduced these rates. This may be construed as additional pressure for the government to raise revenues from alternate sources, including the Information Technology sector.

THE INFORMATION TECHNOLOGY INDUSTRY IN INDIA The Comparative Advantage of India The Information Technology (IT) Industry in India moved from a new-fangled idea of the 60s and 70s to a respectable member of the 90s global economy. It was only in the mid-1980s that forecasters, analysts and government policy planners recognized the potential of Indian business in computer hardware, software, and services. Several factors were responsible for the growth of the IT industry in India. First, India has a large, highly skilled labor pool that is available at a relatively low labor cost. With over four million engineers, India ranks second only to the United States as the country with the largest population of English-speaking technical personnel. This sizable pool of IT talent in India is available to companies worldwide at relatively low labor costs. A second key factor driving the Indian software market is the capability of Indian IT firms to deliver a product that satisfies the requirements of clients who expect high quality standards. The New York Times reported that the Indian software industry is breaking new ground, with a software unit in Bangalore achieving SEI-CMM Level 59 quality certification. Worldwide, only one other organization has achieved this distinction. Of the 20 SEI Level-4 certified companies worldwide, 5 are in India. National Association of Software and Services Companies (NASSCOM) estimates that the Indian software industry will soon have the maximum number of ISO 9000 certified companies in the world. Exhibit C compares India's High Quality/Low Cost with other emerging market countries, indicating Indias relative superiority vis--vis other developing economies in this industry. Exhibit C

Thirdly, differences in time zones allows work to be carried on by Indian teams on a 24hour basis, shortening cycle times and improving productivity and service quality. The approximate 10- to 12-hour time difference between India and its IT industrys largest market, the United States, is a considerable advantage for India based operations.

Independent Quality standard created by Carnegie-Mellon University. 8

Fourthly, recent Indian governments have recognized the importance of the IT sector to the Indian economy. Public policy10 has created a favorable atmosphere for Indian hi-tech businesses through measures including: relief from import duties on hardware, a tax deduction for income derived from software exports11, and tax holidays and infrastructure support for companies operating in Software Technology Parks. Government policy towards the IT industry is also being driven by the desire of the central government to encourage exports to generate foreign currency reserves. The total size of the Hardware Business (a sector of the industry that is complementary to the software business) in 1996-97 was $2.03 billion, and the size of the Software Business was $1.82 billion. Exports contributed to a major share of IT industry sales, totaling almost $2 billion. For an analysis of the IT sectors components see Appendix V. The Software Business The realization that India had significant potential in IT led to the formulation of the computer software policy in 1986 by the government. It was predicted that software would be one of the fastest growing sectors in the Indian economy and provide significant export revenue. Just 13 years later, the Indian Software Business had surpassed all forecasts. The CAGR in this sector over the last five years was 52.6%, including both the domestic and export segments. Despite these high growth rates, Indias share in the world software market is low (accounting for only about 1% of the total). However, projections for the future are very optimistic, given the countrys unique advantages in the industry. Exhibit D shows the expected sales growth rate in software service sales12 for the United States the largest market for software services. These trends enhanced Infosys' strategic position as a software services exporter. Exhibit D
Projected growth of U Software Services Indus S try 20 15 10 5 0 1996 1997E 1998E Y ear 1999E 2000E

10 11

Tax holidays are given for 5 to 10 years, and no income tax is charged on export income. Section 80HHE of the Indian Income Tax Act provides an effective 0% tax rate on profits attributable to export activity. However, for the tax benefit to occur, Revenues must be converted into Indian Rupees on a timely basis. 12 Standard & Poor's Industry Surveys, Computers:Software, September 17, 1998, p13. 9

US$ billions

Trends in the Software Business The Indian Software Business was expected to reach $10 billion by 2000 AD. This was expected to be driven mainly by outsourcing projects from large U.S. corporations (e.g. IBM, AT&T, Microsoft, and Texas Instruments). The total Indian size (See Exhibit E) was projected at $16 billion by 2001-2002, with exports accounting for over 63% of the revenues. 13 In the coming years, the industry was expected to use foreign joint ventures and strategic alliances as drivers of growth, with the main focus being on Europe. Other markets being explored include Korea, South Africa, Latin America and some countries in Asia-Pacific. Exhibit F shows the current breakdown of India's software export industry. Exhibit E
1 8,0 00 1 6,0 00 1 4,0 00 1 2,0 00
1 6 ,0 0 0

Exhibit F

Industry Size

1 0 ,2 3 5

1 0,0 00 8,00 0 6,00 0

4 ,3 0 0

E x p o rts D o m es tic T o ta l

6 ,6 0 0

4,00 0 2,00 0 0 1 9 9 6 /9 7
1 ,8 2 0

2 ,7 8 5

1 9 9 7 /9 8

1 9 9 8 /9 9

Y E AR

1 9 9 9 /0 0

2 0 0 0 /0 1

2 0 0 1 /0 2

THE COMPANY Infosys History Infosys Technologies Ltd., started in 1981, was the largest professional-owned software company in India. They provided quality software services and products to customers across the globe. They pioneered cross-border collaborative software development in India. The company has since then established offices in North America, Europe, Japan and India. Infosys had established a strong reputation through highly competent management, dedication to quality, employee satisfaction, and investment in infrastructure. The Company was incorporated by seven founders and six of these original founders (see Appendix VI for the list of continuing promoters/managers) have remained with the Company, retaining over 30% of the stake in the company. N.R. Narayana Murthy has served as Chairman of the Board and Chief Executive Officer of Infosys since 1981. In 1997 & 1996, the readers of Asiamoney voted Infosys The best managed company in India. The companys growth since its inception in 1981 has been impressive, with a
13

Source: Indian Software Scenario, http://www.nasscom.org/indian.htm 10

CAGR of over 50%. Table 1 below shows the historical performance of the company during 1994-9814.
Table 1 1994 23 4 3 572 6,033 45 Infosys performance, 1994-98 1995 1996 25 39 5 6 4 903 6,526 81.9 5 1171 6,909 83.7 1997 66 8 8 1705 6,414 172 1998 105 12 10 2605 6,622 697.1

Customers Marketing Offices Development Centers Employees Shareholders Market cap (Million $US)

Strategic position of Infosys in the world markets Key elements of Infosys business strategy:15

Pursue World Class Operating Model. Management believes that one of the most critical factors to the Company's success has been its commitment to pursue high quality standards in all aspects of its business, including the quality of its services, operations, investor relations and management of human resources. Invest Heavily in Human Resources. The Company believes that its continued success will depend upon its ability to recruit, train, deploy and retain highly talented IT professionals. Even as the field of software engineering has been attracting the best and brightest Indian students, management believes the Company has become, for Indian engineering graduates, one of the most sought after employers. Focus on Managed Software Solutions. Since its inception, the Company has dedicated itself to providing managed software solutions, many of which are offered on a fixed-price, fixed-time frame basis. By taking full project management responsibility on every project, the Company enables its clients to receive high quality, cost-effective solutions with lower risk. Such services offer the Company the opportunity to build client confidence with the potential benefit of enhanced margins. Management believes that by demonstrating the ability to manage and successfully execute large projects, the Company is better positioned to become a long-term partner to its clients for all of their IT needs. In this business, fixed-time frame contracts with a fixed price are higher margin businesses. Capitalize on Well-Established Offshore Development Model. As one of the pioneers of the offshore software development model, the Company has made significant investments in its infrastructure and has developed the advanced processes and expertise necessary to manage and successfully execute projects in multiple locations with seamless integration.

14 15

Presentation made at Annual General Meeting, 1998 : http://www.inf.com/corpo/english/fina/index.html Based on public information provided by the company relating to the ADS offer. 11

Maintain Disciplined Focus on Business and Client Mix. The Company provides a wide range of IT services and maintains a disciplined focus on its business mix in an effort to avoid service or client concentration. Beginning in fiscal 1996, the Company aggressively sought to minimize its client concentration and to accept as clients only those that met strict guidelines for overall revenue potential and profitability. For fiscal 1997, fiscal 1998 and the nine months ended December 31, 1998, the Company's largest client accounted for 15.6%, 10.5% and 6.7%, respectively, of revenues and its five largest clients accounted for 43.1%, 35.1% and 29.2%, respectively, of revenues. Similarly, the Company has endeavored to maintain a balance among its service offerings despite certain trends in the marketplace, in particular the Year 2000 problem. This balance is key to ensuring that the technology skill sets of the Company's IT professionals remain diversified.

The market situation Dataquest has estimated that the worldwide market for IT consulting, development, integration and outsourcing will increase to $291 billion by 2001 from $177 billion in 1998. Simultaneously with this significant increase in demand for IT services, the supply of qualified IT professionals has decreased in most developed countries, particularly the United States, Western Europe and Japan. According to the United States Department of Education, from 1986 to 1995, the number of bachelor degrees in computer science awarded annually at U.S. universities fell by 41.7% from 41,889 to 24,404. One result of this downward trend is a growing shortage of IT professionals in the United States. The Information Technology Association of America reports that at U.S. companies with more than 100 employees, the number of unfilled positions for IT professionals was 346,000 in January 1998. Furthermore, the United States Department of Commerce has estimated that between 1994 and 2005, U.S. companies will require more than one million new IT professionals to fill newly created positions and replace workers who are retiring or are otherwise leaving the IT sector. Markets, products and client profile The Company has its worldwide sales headquarters in Fremont, California and branch sales offices in Atlanta, Bangalore, Boston, Chennai, Chicago, Dallas, Detroit, Frankfurt, London, Los Angeles, Mumbai, New Delhi, New York, Seattle, Tokyo and Toronto. Infosys generates the vast majority of its revenue from developed countries. A majority of the customers were also based in the U.S. (see Appendix VII for a list of key clients), though the customer base in other regions had been growing. Table 2 compares the percentage breakout of Infosys total income by geography from 1997 to 1998: Table 2
Geography North America 1997 79% 1998 82%

12

Europe India Rest of World

10% 3% 8%

9% 1% 8%

Performance16 The companys financial performance (see Table 3 below) has been consistently strong, and shareholder value has increased exponentially since the companys inception. Future financial forecasts continued to be optimistic about the Company's prospects, based upon the companys reputation for sound strategy and competent management. Table 3
Nine Months Ended December 31 1997 1998 100.0 100.0 58.4 54.6 41.6 45.4 18.8 15.9 4.4 23.2 18.4 1.3 19.7 2.0 0.1 17.6 2.8 18.7 26.7 1.4 28.1 4.1 0.2 23.8

Revenues Cost of revenues Gross profit Selling, general and administrative expenses Amortization of deferred stock compensation expense Total operating expenses Operating income Other income, net Income before income taxes Provision for income taxes Subsidiary preferred stock dividends Net income

Fiscal Year Ended March 31 1994 1995 1996 1997 1998 100.0 100.0 100.0 100.0 100.0 59.0 58.6 58.8 57.1 58.8 41.0 41.4 41.2 42.9 41.2 13.8 18.5 16.4 17.7 19.3 0.0 13.8 27.2 3.4 30.6 2.6 -28.0 0.3 18.8 22.6 4.1 26.7 4.9 -21.8 1.4 17.8 23.4 5.5 28.9 3.4 -25.5 1.9 19.6 23.3 1.9 25.2 3.3 -21.9 3.8 23.1 18.1 1.2 19.3 1.1 0.1 18.1

Management explained changes in operations for the nine months ending 1998, disclosed as part of Table 3 above, as follows: Cost of Revenues: The marginal decrease as a percentage of revenues was attributable to a favorable business mix and a decrease in depreciation and software expenses, which represented 9.3% of total revenues in the nine months ended December 31, 1998 as compared to 12.0% of total revenues for the same period in fiscal 1997. The decrease was partially offset by an increase in compensation rates. Gross Profit: The increase was attributable to a favorable business mix and a decrease in depreciation and software expenses as a percentage of revenues due to improved infrastructure utilization. Selling, General and Administrative Expenses: The decrease as a percentage of revenues was a result of the Company's ability to leverage its higher revenues in 1998 without a proportionate increase in management, finance, administrative and occupancy costs.
16

A significant portion of our analysis in this section is based on Company provided data such as offer documents and press releases 13

THE ADS OFFER Terms of Offer Indeed, Infosys had experienced a wild ride of success over the past few years, and Mr. Nilekani wanted to ensure that success would continue. The management team carefully crafted its strategy and firmly believed that an equity issue in the U.S. would further establish Infosys' reputation as a global leader in information technology solutions. Given the recent meltdown in the Russian Federation and the devaluation of the Real in Brazil, Mr. Nilekani wondered what impact these events might have on an equity valuation. Specifically, Infosys was planning to issue 1,800,000 American Depository Shares (ADSs) representing 900,000 equity shares. Each ADS offered represents onehalf of one equity share (par value 10). The Registration Statement filed with the SEC in February 1998 notes an estimated offer price of $55.76, making the offer size approximately $50.18 million. ADSs are mirror equity securities that represent an equivalent stake in the ownership of the business. The key differences from regular equity are: Each ADS is equal to one half of an equity share ADSs may be subsequently converted to regular equity shares, but no reconversion is possible into ADSs subsequent to the original conversion They would be traded on the NASDAQ, and would not be subject Indian Stamp Duty which is typically applied to security transactions in India. The issue of ADSs would immediately increase the net tangible book value (total tangible assets less total liabilities, divided by the number of Equity Shares outstanding) of $0.67 per ADS to existing shareholders and an immediate dilution of $26.22 per ADS to new investors purchasing ADSs. Perceived Risks Despite Infosyss past success, Nandan was worried about the effect that several factors would have on the ADS price. Y2K The Y2K computer bug had the potential to embroil Infosys in a legal quagmire, while at the same time creating new business possibilities. In order to mitigate the legal consequences, Infosys had the necessary legal clauses in the Y2K contracts limiting its liabilities and protecting Infosys from consequential or third-party liabilities. Mr. T.V. Mohandas Pai, Senior Vice PresidentFinance and Administration, stated, The company has an active risk management policy in place to face the challenges ahead. A provision has been made to meet any additional cost, due to

14

systemic failures on account of Y2K problems suffered by our technology and data communication service providers. Infosys used the problems associated with Y2K to grow its business. Rather than just focusing on helping companies deal with Y2K, Infosys used Y2K consulting as a springboard for developing sustainable relations with new customers. Mr. N.R. Narayana Murthy, Chairman and Managing director, said, At Infosys, we clearly see the share of Y2K revenue coming down this financial year. Our strategy of using Y2K to enter into long-term relationship with our customers have been fairly successful. Infosys restricted its Y2K business to not more than 25% of total income and anticipated that this revenue source would disappear within the next six months. Recourse Against Management Substantially all of the Company's directors and executive officers reside outside the United States, and a substantial portion of the assets of the Company and of such persons are located outside the United States. As a result, it would be difficult for investors to use the U.S. Courts system to enforce their rights. India was not a party to any international treaty in relation to the recognition or enforcement of foreign judgments. The Government of India does not completely recognize judicial decisions from U.S. Court of law. Further, it is unlikely that a court in India would award damages on the same basis as a foreign court if an action is brought in India. Finally, it was unlikely that an Indian court would enforce foreign judgments if it viewed the amount of damages awarded as excessive or inconsistent with Indian practice. It was unclear how potential minority shareholders would view this legal position. Managing Growth and Employee Related Issues The software business is volatile. Infosys results have fluctuated and may fluctuate in the future based on various factors outside the control of the company. Additionally, the company is driven by several key employees who are instrumental in the growth and direction of the company. Its ability to grow depends on its ability to attract, retain and motivate highly skilled IT professionals. A significant degree of the companys success demands upon the continued contribution of the Companys senior management and other key research and development and sales and marketing personnel. Valuation Issues In addition, Nandan was worried about the inadequacy of conventional financial theory when it came to value what was practically a software start-up residing in India, from a U.S. investors perspective. Given Wall Streets reliance on comparables analysis, what would the implied valuation for Infosys be? He recalled a presentation made the previous year by Mohandas Pai, where Infosys compared favorably to its benchmark companies (see Exhibit G below), which were all software services providers in the U.S. He extracted a document from his

15

briefcase that summarized multiples (see Appendix VIII) over time comparing Infosys to the benchmark companies. And he observed the lack of permanency in the multiples used over time, as well as the diverging range within a peer group. How valid were these comps at providing valuations over time? Some might argue that they were not even relevant since the comparison was essentially between an Indian company and a set of companies established in the developed capital markets. Exhibit G
Cambridge Technology Partners Sales 449 Market capitalization 2,883 Beta 0.96 EPS $ 0.69 P/E 74 Book Value $ 3.11 Price/Book 16.48 Return on Assets (%) 18.06 Return on Equity (%) 27.08 Cash per share $ 1.00 Debt/Equity 0.00 Source : http://pcn.marketguide.com Claremont Technology 81 170 0.72 (0.63) 5.74 3.49 (9.30) (11.60) 0.52 0.02 Keane Inc., 723 3,194 0.93 0.82 58 4.05 11.84 19.45 23.45 0.31 0.00 Sapient Corp. 105 1,073 1.00 0.56 77 3.39 12.79 16.14 18.58 2.66 0.00 Whittman -Hart Inc., 203 968 0.67 0.49 80 4.30 9.13 10.61 12.62 3.00 0.00 $ Millions Infosys

68 910 0.89 0.81 71 3.26 17.40 24.96 29.49 1.01 0.00

Nandan knew that U.S. investors would be driven by IRR expectations. If the Discounted Cash Flow methodology was to be used, questions arose about the discount factor, specifically the value of Beta to be applied? Could a relevant Beta be estimated? Was the Capital Asset Pricing Model (CAPM) considered relevant to an Emerging Markets situation, given that the underlying assumptions may not hold? How would that affect return expectations for the U.S. investors? And delving deeper into the meaning of Beta, the relationship between something and the market, required that the something be identified. Was it the Infosys stock that quoted on an imperfect bourse in Mumbai? Was it some software based index? Was it some emerging market index? Was it some U.S. based index? Sure, the data could be collected [in fact it already had by a couple of analysts covering small cap stocks (see Appendix IX), who were struggling with the same set of issues), but who would determine the appropriate something? If Beta estimation becomes an exercise in futility, what other alternatives were out there? And were these alternatives acceptable? He had come across two alternative theories: Goldman, Sachs and Company had documented another methodology where by they had added a sovereign yield spread to a traditional CAPM model and generated expected return on equity. The add-on was explained as a measure of Country Risk (i.e., the risk of expropriation, etc.) that was not captured by the traditional CAPM model. This helped explain why a high-risk emerging market economy could have a Beta of zero, but still have a high discount rate. Even though it was simple to understand, the mere addition of a sovereign yield spread did not rectify the error in the Beta that was still included in the calculations. And he wondered whether the

16

current yield spread of 688 basis points was too high which would deflate the value of the business?

The use of country credit ratings as a way to identify the appropriate expected return on equity stood up to statistical tests and produced remarkably strong results. What he had gathered about this methodology was basically, that there was a strong relationship between the countrys credit rating and a country discount factor, which could be adjusted to an industry level rate. The model introduced by Erb, Harvey and Viskanta17 stated that based on the current credit ratings, the expected return on equity of India was 15.30% and for Indian software companies was 17.28%. Yet how many people would use such information when it came to price the ADS issue, was the next question?

Even if the discount factor could be determined, what cash flows would the market apply it to, considering this was a small business growing exponentially in an industry known for its unpredictable nature of operations, as reflected by the volatility of hi-tech stocks? Additionally, a large part of the growth of the industry was driven by the tax structure related to software imports. How would the U.S. market view this advantage given the fickle nature of Indian fiscal policy. Based on historical performance, anyone could project cashflows (see Appendix X). But the question remained whether any projections were predictable enough to withstand the volatility of the business. Finally, Mr. Nilekani had heard of the financial concept, Value at Risk, which indicated the dollar amount of risk that a portfolio faced over a specific horizon. He wondered if this tool could help show the risk of Infosys to investors (given a 99% confidence level, say over a ten day period). Such information might help Infosys management evaluate investor reactions to the ADS issue. He further wondered, given Infosys stock price history (see Appendix XI), could investors really estimate how much they stood to lose? He paused and took a deep breadth. Its ironical that as a software engineer and as an executive manager he had solved complex problems on a routine basis. Maybe he needed to his thoughts were interrupted by the driver, who had turned around and said, Good news sir, we shall reach the airport soon, as the fog has cleared up. Mr. Nilekani smiled as he finally got the solution it was so clear! The fog had indeed cleared up in more ways than one.

17

Erb, Claude, Campbell R. Harvey, and Tadas Viskanta., 1996, Expected Returns and Volatility in 135 Countries. Journal of Portfolio Management (1996). Spring, 46-58. 17

Appendix I Page 1 of 6 FINANCIAL STATEMENTS

INFOSYS TECHNOLOGIES LIMITED CONSOLIDATED BALANCE SHEETS ASSETS As of March 31, -----------------------1997 1998 ----------- ----------Current assets: Cash and cash equivalents.............. $ 8,320,331 Trade accounts receivable, net of allowances.............................. 4,994,607 Inventories............................ 11,458 Prepaid expenses and other current assets.................................. 2,826,506 Prepaid income taxes................... 983,859 ----------Total current assets.................. 17,136,761 Property, plant and equipment--net...... 14,930,862 Deferred tax assets..................... 382,395 Investments............................. 362 Other assets............................ 473,079 ----------Total assets............................ $32,923,459 =========== As of December 31, 1998 -------(Unaudited) $22,797,989 21,270,407 -5,302,824 -----------49,371,220 22,795,198 1,642,311 177,938 2,595,128 ----------$76,581,795 ===========

$15,419,265 10,263,084 -3,751,289 536,969 ----------29,970,607 16,695,503 1,089,948 362 1,025,605 ----------$48,782,025 ===========

Effective April 1997, Bharat S. Raut and Company was engaged as the new principal independent accountants.

18

Appendix I Page 2 of 6 FINANCIAL STATEMENTS

INFOSYS TECHNOLOGIES LIMITED CONSOLIDATED BALANCE SHEETS LIABILITIES AND SHAREHOLDERS' EQUITY As of March 31, -----------------------1997 1998 ----------- ----------Current liabilities: Accounts payable....................... $ 125,579 Customer deposits...................... 196,710 Other accrued liabilities.............. 1,960,941 Provision for income taxes............. -Unearned revenue....................... -----------Total current liabilities............. 2,283,230 Non-current liabilities................. -----------Total liabilities....................... 2,283,230 ----------Preferred stock of subsidiary........... -Shareholders' equity: Common stock, $0.32 par value; 50,000,000 Equity Shares authorized as of 1997 and 1998; Issued and outstanding Equity Shares--29,038,400 and 32,034,400 as of 1997 and 1998, respectively ............... 2,310,270 Additional paid-in capital............. 15,712,247 Accumulated other comprehensive income.................................. (3,531,811) Deferred compensation--Employees Stock Offer Plan............................ (3,507,715) Retained earnings...................... 19,681,740 Loan to Trust.......................... (24,502) ----------Total shareholders' equity.............. 30,640,229 ----------Total liabilities and shareholders' equity................................. $32,923,459 =========== $ 149,086 190,173 4,979,306 ------------5,318,565 -----------5,318,565 ----------2,317,500 As of December 31, 1998 -------(Unaudited) $ 81,400 109,809 6,186,528 1,582,516 5,356,200 ----------13,316,453 -----------13,316,453 ------------

4,545,811 24,415,920 (7,042,229)

4,545,811 44,802,455 (9,384,666)

(7,831,445) (25,813,924) 27,994,268 49,942,298 (936,365) (826,632) ----------- ----------41,145,960 63,265,342 ----------- ----------$48,782,025 =========== $76,581,795 ===========

Effective April 1997, Bharat S. Raut and Company was engaged as the new principal independent accountants.

19

Appendix I Page 3 of 6 FINANCIAL STATEMENTS

INFOSYS TECHNOLOGIES LIMITED CONSOLIDATED STATEMENTS OF INCOME Nine Months Ended Years Ended March 31, December 31, ----------------------------------- ------------------------1996 1997 1998 1997 1998 ----------- ----------- ----------- ----------- ------------(Unaudited) $26,607,009 $39,585,919 $68,329,961 $48,412,398 $ 86,101,258 15,637,577 22,615,070 40,156,509 28,280,589 47,001,970 ----------- ----------- ----------- ----------- ------------10,969,432 16,970,849 28,173,452 20,131,809 39,099,288 ----------- ----------- ----------- ----------- -------------

Revenues................ Cost of revenues........ Gross profit............ Operating expenses: Selling, general and administrative expenses.............. Amortization of deferred stock compensation expense.. Total operating expenses............... Operating income........ Other income, net....... Income before income taxes.................. Provisions for income taxes.................. Subsidiary preferred stock dividends........ Net income.............. Earnings per Equity Share: Basic.................. Diluted................ Weighted Equity Shares used in computing basic earnings per Equity Share: Basic.................. Diluted................

4,350,710

7,010,211

13,225,492

9,107,747

13,706,594

360,853 767,926 2,566,613 2,105,036 2,404,056 ----------- ----------- ----------- ----------- ------------4,711,563 7,778,137 15,792,105 11,212,783 16,110,650 ----------- ----------- ----------- ----------- ------------6,257,869 9,192,712 12,381,347 8,919,026 22,988,638 1,460,329 769,560 800,799 606,324 1,211,520 ----------- ----------- ----------- ----------- ------------7,718,198 894,561 9,962,272 1,320,270 13,182,146 770,458 9,525,350 977,865 24,200,158 3,532,000

--67,500 33,750 151,331 ----------- ----------- ----------- ----------- ------------$ 6,823,637 $ 8,642,002 $12,344,188 $ 8,513,735 $ 20,516,827 =========== =========== =========== =========== ============= $0.24 $0.30 $0.41 $0.29 $0.67 =========== =========== =========== =========== ============= $0.23 $0.29 $0.41 $0.28 $0.67 =========== =========== =========== =========== =============

29,034,400 29,283,514

29,036,394 29,704,060

29,787,144 30,403,904

29,416,886 30,260,320

30,540,000 30,624,604

Effective April 1997, Bharat S. Raut and Company was engaged as the new principal independent accountants.

20

Appendix I Page 4 of 6 FINANCIAL STATEMENTS

INFOSYS TECHNOLOGIES LIMITED CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended March 31, ------------------------------------1996 1997 1998 ----------- ----------- ----------Cash flows from operating activities: Net income............. Adjustments to reconcile net income to net cash provided by operating activities: Gain on sale of property, plant and equipment.................. Depreciation........... Deferred tax benefit... Gain on sale of investment in deconsolidated subsidiary............ (Gain)/Loss on sale of short-term investments................. Amortization of deferred stock compensation expense.......... Loss relating to deconsolidated subsidiary.................. Subsidiary preferred stock dividend........ Changes in assets and liabilities: Accounts receivables.. Inventories........... Prepaid expenses and other current assets................. Prepaid income taxes.. Accounts payable...... Customer deposits..... Unearned revenue...... Other accrued liabilities................. Net cash provided by operating activities.. Nine Months Ended December 31, -----------------------1997 1998 ----------- ----------(Unaudited) $ 8,513,735 $20,516,827

$ 6,823,637

$ 8,642,002

$12,344,188

-2,679,577 (391,532) --360,853 --(1,139,150) 3,104 (718,442) (234,383) (3,488) 233,367 -528,544 ----------8,142,087 -----------

-3,034,984 (249,220) -374,380 767,926 --(1,534,731) 40,022 (1,200,316) (591,147) 62,203 (65,304) -134,397 ----------9,415,196 -----------

(2,929) 6,121,650 (707,553) --2,566,613 -67,500 (5,268,477) 11,458 (924,783) 446,890 23,507 (6,537) -2,482,653 ----------17,154,180 -----------

-3,944,096 (109,744) --2,105,036 -33,750

-5,101,293 (552,363) (620,958) -2,404,056 1,934,556 151,331

(4,959,368) (11,327,154) 9,024 -(309,856) 214,341 77,549 (119,120) -962,448 ----------10,361,891 ----------(1,602,704) 536,969 (18,364) (80,364) 5,356,200 3,165,538 ----------24,964,863 -----------

21

Appendix I Page 5 of 6 FINANCIAL STATEMENTS

INFOSYS TECHNOLOGIES LIMITED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) Years Ended March 31, ------------------------------------1996 1997 1998 ----------- ----------- ----------Cash flows from investing activities: Expenditure on property, plant and equipment.................. Proceeds from sale of property, plant and equipment............. Loans to employees..... Proceeds from sale of investment in deconsolidated subsidiary............ Proceeds from sale of investments in affiliates.................. Purchases of short-term investments........... Proceeds from sale of short-term investments................. Purchase of investments in affiliates......... Net cash used in investing activities.... Cash flows from financing activities: Repayment of long-term borrowings............ Net proceeds from issuance of Equity Shares................ Net proceeds from issuance of preferred stock by subsidiary............ Payment of cash dividends................. Loan to trust.......... Net cash provided by (used in) financing activities............ Nine Months Ended December 31, -----------------------1997 1998 ----------- ----------(Unaudited)

(4,003,108) 57,599 (196,789)

(7,201,749) 33,453 (418,790)

(7,891,441) 8,079 (552,526)

(5,273,833) (11,598,726) 667 (667,100) 5,704 (1,579,837)

--(1,274,018) -------------

-78,819 -2,859,420 ------------

----------------

----------------

1,500,000 ---(177,576) -----------

(5,416,316) (4,648,847) (8,435,888) (5,940,266) (11,850,435) ----------- ----------- ----------- ----------- -----------

(759,613) --

(1,253,125) 2,789

-2,020,350

-2,020,350

---

--

--

2,250,000

2,250,000

--

(804,688) (1,062,475) (1,467,427) (534,269) (1,037,628) --(911,863) (944,335) 109,733 ----------- ----------- ----------- ----------- ----------(1,564,301) (2,312,811) 1,891,060 2,791,746 (927,895) 22

Appendix I Page 6 of 6 FINANCIAL STATEMENTS

INFOSYS TECHNOLOGIES LIMITED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) Years Ended March 31, ------------------------------------1996 1997 1998 ----------- ----------- ----------Net cash provided by operating activities.. Net cash used in investing activities.... Net cash provided by (used in) financing activities............ Effect of exchange rate changes on cash........ Effect of deconsolidation on cash................... Net increase/(decrease) in cash and cash equivalents during the year............... Cash and cash equivalents at the beginning of the year........... Cash and cash equivalents at the end of the year................... Supplementary information: Cash paid for interest................... Cash paid for taxes.... 8,142,087 (5,416,316) 9,415,196 (4,648,847) 17,154,180 (8,435,888) Nine Months Ended December 31, -----------------------1997 1998 ----------- ----------(Unaudited) 10,361,891 24,964,863

(5,940,266) (11,850,435)

(1,564,301) (1,438,382) --

(2,312,811) (1,902,597) --

1,891,060 (3,510,418) --

2,791,746 (3,462,515) --

(927,895) (2,342,437) (2,465,372)

(276,912) 8,046,302 ----------$ 7,769,390 ===========

550,941 7,769,390 ----------$ 8,320,331 ===========

7,098,934 8,320,331 ----------$15,419,265 ===========

3,750,856 8,320,331 ----------$12,071,187 ===========

7,378,724 15,419,265 ----------$22,797,989 ===========

$ 217,650 $ 1,306,358

$ 172,268 $ 1,856,548

-323,568

-840,073

-$ 1,412,515

Effective April 1997, Bharat S. Raut and Company was engaged as the new principal independent accountants.

23

Appendix II COMPARISON OF INDIA VS. U.S.

Comparative Factors Population Age Structure: Literacy India (from www.odci.gov) 984,003,683 0-14 years--34% 15-64 years--61% >65 years--5% (>age 15 can read & write) 52% 65.5% male 37.7% female Life Expectancy Legal System Date of Constitution Political Institutions: Executive Total Population: 62.9 years Male: 62.11 years Female: 63.73 years Based on English Common Law 1950 Parliamentary Chief of State (elected through electoral college every 5 years) Prime Minister (elected by Legislative majority) Bicameral Parliament (Sansad) Council of States (Rajya Sabha-250 members serving 6 years) People's Assembly (Lok Sabha-545 members serving 5 years) Judicial Branch Supreme Court (appointed by Chief of State, until age 65) Several List of Major Parties Congress (I) Bharatiya Janata Party (BJP) Janata Dal Party (JDP) Rashtriya Janata Dal (RJD) $1.534 trillion 5% 941,000 (world's second largest) Yes United States (from www.census.gov) 271,978,381 0-14--23.6% 15-64--64.6% >65 years--12.8% (Level II and above) 77% (no breakdown between sexes) Total Population: 75.3 years Male: 73 years Female: 78 years Based on U.S. Constitution 1789 Based on Separations of Powers President (elected through electoral college every four years)

Legislative

Bicameral Congress U.S. Senate (100 members--6 year terms) U.S. House of Representative (435 members--two year terms) Supreme Court (appointed by President for life)

Political Parties

Democratic Republican Other minor parties

Gross Domestic Product GDP Real Growth Rate (4th Qtr-1998) Military Strength (India Land Forces vs. U.S. Army): Nuclear Capability

$8.531 trillion 6.1% 495,000 (world's most capable) Yes

24

Appendix III Page 1 of 2 COMPARISON OF INDIA VS. OTHER EMERGING MARKET COUNTRIES

Economic trends - a comparison Country GNP per capita External debt (% of GNP) Debt service ratio* (% growth per year) 1965-80 1980-93 1980 1994 1980 1994 India 1.5 3.0 11.9 34.2 10.0 26.9 Brazil 6.3 0.3 31.8 27.9 67.7 35.8 China 4.1 8.2 2.2 19.3 4.4 9.3 Indonesia 5.2 4.2 28.0 57.4 13.9 32.4 Russia. NA -1.0 NA 25.4 NA 6.3 Thailand 4.4 6.4 25.9 43.1 20.4 16.3 * Debt service as a % of exports of goods and services Source: World Development Reports, 1995, 1996; Human Development Report, 1996

Public expenditure on education and health Country Education Higher Ed. (as % GNP) (% all levels) 1960 1990 1992 India 2.3 3.5 15 China 1.8 2.3 19 Indonesia 2.5 0.9 na Philippines 2.3 2.9 15* South Korea 2.0 3.6 7 Thailand 2.3 3.8 16 * Data refers to a period other than that specified Source: Human Development Reports, 1995 and 1996.

Health (as % of GNP) 1960 1990 0.5 1.3 1.3 2.1 0.3 0.7 0.4 1.0 0.2 2.7 0.4 1.1

25

Appendix III Page 2 of 2 COMPARISON OF INDIA VS. OTHER EMERGING MARKET COUNTRIES

Gross domestic investment as % of GDP Country 1971-80 1990 1994 India 20.5 26.3 23 China 33.9 36.6 42 Indonesia 19.3 36.1 29 Korea 28.6 36.9 38 Singapore 41.2 39.7 32 Thailand 25.3 41.1 40 Source: Asian Development Outlook, 1994; World Development Report, 1996

Ratio of imports to exports (in % terms) Country 1990-91 1993-94 1995-1996E India 151.1 105.2 127.6 China 85.9 113.4 88.8 Hong Kong 93.7 97.6 101.9 Indonesia 98.6 91.9 99.0 Philippines 123.5 125.7 125.3 Thailand 115.8 106.3 108.2 Source: Scogen-Crosby Research; Indian Economic Survey, 1996-97

Country

Average annual rate of inflation (%) 1970-80 1984-94 Brazil 38.6 900.3 China 0.6 8.4 India 8.4 9.7 Indonesia 21.5 8.9 Russian Federation -0.1 124.3 Philippines 13.3 10.0 Thailand 9.2 5.0 Source: World Development Report 1995, 1996

26

Appendix IV Page 1 of 2 PERFORMANCE OF INDIA OVER TIME

Structure of India's private consumption (% of total) Items 1970-71 Food, beverages & tobacco 63.4 Clothing & footwear 8.6 Rent, water, fuel & power 14.3 Furniture & furnishings 2.6 Transport & communication 3.2 Others 7.9 Per capital consumption (Rs)* Per capita income (Rs)* Per capital consumption as % of per capita income* * Figures based upon current prices Source: Centre for Monitoring the Indian Economy 602 793 76.0

1980-81 58.8 11.2 12.6 2.8 5.1 9.5 1462 2008 72.8

1990-91 53.9 10.7 10.8 3.4 10.6 10.6 4003 6246 64.0

India foreign investment flows ($mm) 1991-92 1994-95 1996-1997* FDI 150 1314 1700 Portfolio 8 3581 2343 investment FII 0 1503 1002 Euroequity 0 1839 812 Offshore funds 8 239 20 Total 158 4895 4053 * From April until December. Figures in this table are based upon actual inflows & may differ from foreign investment flows in the Balance of Payments which are on an accrual basis. Source: Indian Economic Survey, 1996-97 India's debt service payments - select ratios Key indicators 1990-91 1995-1996E Debt service ratio* 35.3 25.7 External debt/GDP 30.4 28.7 External assistance/net capital 26.8 31.0 flows Import cover** 0.6 6.1 Current payments cover** 0.8 3.8 Rate of growth in debt service 9.2 20.8 Exports/imports 66.2 78.4 * total debt service repayments as % of current receipts ** in # of months Source: Indian Economic Surveys, 1995-96, 1996-97

Even though in the long-run, the country was moving away from a subsistence style economy, the reforms of 1991 clearly show a noticeable increase in foreign investments and an improvement in Indias foreign obligation payment capacity.

27

Appendix IV Page 2 of 2 PERFORMANCE OF INDIA OVER TIME

Funds raised via public capital issues in India (Rs billions) 19881989-90 1990199189 91 92 # of issues 253 379 351 497 Amount raised 54.6 122.8 110.5 145.9 As % of GDS 6.5 11.9 8.7 10.4 As % of GDCF 5.6 10.7 7.6 10.1 Source: Indian Economic Survey, various issues

199293 1034 167.5 10.8 9.9

199394 1143 243.7 12.9 12.7

1994-95 1666 276.2 11.6 11.1

1995-96 1725 208.0 7.4 6.9

Market capitalization as % of GDP Year 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 Source: ING Baring Securities (India) Pvt. Ltd.

% 12.1 20.6 57.4 25.1 49.7 48.2 45.8

A direct impact of the reform movement is clearly perceived in the move towards stronger capital market activity, as indicated above.

28

Appendix V ANALYSIS OF INDIAN IT INDUSTRY

Analysis of IT Industry into its Core Businesses

Maintenance: 5.4%
Players : Over 30

Training: 4.6%
Players : Over 70

Software: 44.5%
Players: Over 350

Hardware: 45.5%
Players: Over 300

Analysis of the Hardware Business in India

Infotech 10% Telecom 24% Industrial 14%

Components 20%

Consumer Electronics 32%

Analysis of the Software Business in India

29

Appendix VI EXTENT OF SHAREHOLDING BY FOUNDERS Shares % Prior to Owned ADS Issue 2,523,600 7.9 1,765,600 1,716,200 1,594,800 1,172,200 1,074,200 5.5 5.4 5.0 3.7 3.4 % After ADS Issue 7.7 5.4 5.2 4.8 3.6 3.3

Founder N.R. Narayana Murthy N.S. Raghavan Nandan M. Nilekani S. Gopalakrishnan K. Dinesh S.D. Shibulal

Designation Chairman of the Board, Chief Executive Officer Head of Education and Human Resources Managing Director, President, Chief Operating Officer Head of Technology and Client Delivery Head--Quality, MIS and Productivity Head of Year 2000 Business Unit, Manufacturing, Distribution, Internet and Intranet Business Unit

Total

10,144,200

31.7%

30.8%

30

Appendix VII LIST OF KEY CLIENTS

Financial Services Avco Financial Services, Inc. Bank of America N.T. & S.A. BankBoston, N.A. Goldman, Sachs & Co. Northwestern Mutual Life Insurance Co. The Western and Southern Life Insurance Company Visa International Service Association

Manufacturing and Distribution ConAgra, Inc. Cooper Industries, Inc. Kent Electronics Company Levi Strauss & Co. Quest International Reebok International Ltd. Salomon S.A. Toshiba Corporation

Telecommunications and Technology Apple Computer, Inc. Ascend Communications, Inc. AST Research, Inc. Limited Belgacom Mobile N.V./S.A. Bell Atlantic Corporation NCR Corporation Northern Telecom Limited Epson Software Development Laboratory, Inc.

Retail Ann Taylor, Inc. B.J.'s Wholesale Club, Inc. Sainsbury's Supermarkets J.C. Penney Company Corporation Nordstrom, Inc. Staples, Inc. The Gap, Inc. The TJX Companies, Inc.

31

Appendix VIII COMPARISON OF INFOSYS WITH BENCHMARK COMPANIES OVER TIME

COMPANY INFOSYS TECHNOLOGIES LIMITED MULIPLE P/E P/BV Market Capitalization / Sales Market Capitalization / EBITDA CAMBRIDGE TECHNOLOGY PARTNER P/E P/BV Market Capitalization / Sales Market Capitalization / EBITDA CLAREMONT TECHNOLOGY GROUP P/E P/BV Market Capitalization / Sales Market Capitalization / EBITDA KEANE, INC. P/E P/BV Market Capitalization / Sales Market Capitalization / EBITDA SAPIENT CORPORATION P/E P/BV Market Capitalization / Sales Market Capitalization / EBITDA WHITTMAN-HART, INC. P/E P/BV Market Capitalization / Sales Market Capitalization / EBITDA 20.65 2.70 1.10 7.99 18.75 2.20 0.94 7.26 48.37 32.81 4.96 24.02 12/1994 1 12/1995 1 16.24 4.27 3.85 10.85 77.70 18.67 6.39 35.02 12/1996 1 23.97 7.09 5.75 17.06 86.06 19.93 6.87 38.93 58.33 6.68 2.68 17.82 41.78 5.41 2.23 16.72 75.22 8.09 10.86 45.82 85.42 7.05 5.90 59.33 12/1997 1 48.49 16.93 11.36 33.87 73.03 17.09 5.63 33.07 68.52 3.22 2.27 15.08 59.74 11.14 4.11 27.19 65.16 9.83 8.20 35.31 77.84 8.73 4.46 40.68 12/1998 E 2 38.97 15.98 8.80 26.99 26.60 6.16 2.21 15.60 N/A 4.73 3.19 31.09 30.03 7.94 1.99 15.71 70.70 9.11 8.20 67.53 78.93 10.26 3.86 63.34

NOTES:
1. Based on financial statements extracted from WORLDSCOPE. 2. Casewriters' estimates

32

Appendix IX Page 1 of 3 TRENDS IN SOFTWARE RELATED INDICES, THE WORLD MARKET AND INFOSYS SHAREPRICES
DATE-YYMM MSCI WORLD 30 YEAR TINDEX BOND YIELD INFOSYS SHARE PRICE MSCI EMERGING MARKETS-DATA PROCESSING & REPRODUCTION INDEX MSCI EMERGING MARKETS HARDWARE/ COMPONENTS INDEX S&P400 CRISIL 500 SERVICES & INDIA COMPUTER COMPUTER SYSTEMS SUB-INDEX INDEX MSDW INTERNATIONAL SOFTWARE INDEX MSDW INDIA SOFTWARE INDEX

9101 9102 9103 9104 9105 9106 9107 9108 9109 9110 9111 9112 9201 9202 9203 9204 9205 9206 9207 9208 9209 9210 9211 9212 9301 9302 9303 9304 9305 9306 9307 9308 9309

1043.55 1140.34 1106.91 1115.75 1141.22 1070.95 1121.71 1118.34 1147.86 1166.66 1116.02 1197.46 1175.49 1155.41 1101.17 1116.72 1161.34 1122.65 1125.72 1153.31 1142.95 1112.20 1132.30 1141.66 1145.69 1173.04 1241.27 1299.02 1329.17 1318.23 1345.60 1407.50 1381.72

8.27 8.03 8.29 8.21 8.27 8.47 8.45 8.14 7.95 7.93 7.92 7.7 7.58 7.85 7.97 7.96 7.89 7.84 7.6 7.39 7.34 7.53 7.61 7.44 7.34 7.09 6.82 6.85 6.92 6.81 6.63 6.32 6

90.97 93.64 94.19 97.11 102.99 102.74 113.05 119.75 121.51 125.64 121.5 116.66 112.18 120.06 121.99 123.83 124.68 135.34 140.04 134.37 132.9 142.02 76.07 72.13 72.5 61.25

34.77 36.88 32.89 30.43 29.75 27.63 35.44 32.97 32.50 33.50 35.24 40.42 51.57 65.38 97.79 102.03 62.39 68.67 60.82 69.92 75.52 61.91 52.67 57.89 54.21 48.96 31.94 41.48 37.21 33.31 32.35 32.56 32.59 33

Appendix IX Page 2 of 3 TRENDS IN SOFTWARE RELATED INDICES, THE WORLD MARKET AND INFOSYS SHAREPRICES
DATE-YYMM MSCI WORLD 30 YEAR TINDEX BOND YIELD INFOSYS SHARE PRICE MSCI EMERGING MARKETS-DATA PROCESSING & REPRODUCTION INDEX MSCI EMERGING MARKETS HARDWARE/ COMPONENTS INDEX S&P400 CRISIL 500 SERVICES & INDIA COMPUTER COMPUTER SYSTEMS SUB-INDEX INDEX MSDW INTERNATIONAL SOFTWARE INDEX MSDW INDIA SOFTWARE INDEX

9310 9311 9312 9401 9402 9403 9404 9405 9406 9407 9408 9409 9410 9411 9412 9501 9502 9503 9504 9505 9506 9507 9508 9509 9510 9511 9512 9601 9602 9603 9604 9605 9606

1420.02 1339.92 1405.71 1498.66 1479.51 1415.97 1459.99 1464.00 1460.19 1488.21 1533.29 1493.27 1536.02 1469.67 1484.18 1462.17 1483.77 1555.59 1610.11 1624.19 1624.01 1705.58 1667.89 1716.80 1690.09 1749.09 1800.55 1833.45 1844.95 1875.99 1920.44 1922.45 1932.51

5.94 6.21 6.25 6.29 6.49 6.91 7.27 7.41 7.4 7.58 7.49 7.71 7.94 8.08 7.87 7.85 7.61 7.45 7.36 6.95 6.57 6.72 6.86 6.55 6.37 6.26 6.06 6.05 6.24 6.6 6.79 6.93 7.06

4.18 3.67 3.82 3.75 3.41 3.58 3.78 3.58 3.98 3.78 3.54 3.75 3.41 3.26 2.61 2.91 2.78 3.43 3.45 4.54 4.64 5.07

100.28 76.10 77.72 89.97 82.36 82.71 84.50 77.74 81.54 95.13 90.21 85.29 91.27 85.75 84.12 79.53 89.96 78.16 83.26

99.88 83.41 85.77 103.84 103.12 104.90 103.06 93.23 85.88 89.21 81.64 79.63 85.02 79.55 80.86 80.36 94.51 95.22 97.56

56.4 57.15 59.95 58.36 65.59 70.89 74.66 64.76 65.04 66.74 67.39 68.81 75.15 80.54 90.51 83.05 86.48 86.08 90.85 91.33 98.63 95.56 101.27 109.58 105.09 110.98 101.48 97.03 100 101.04 102.88 96.55 101.21

30.13 33.76 32.84 38.68 46.15 44.32 42.92 45.63 48.63 53.48 51.71 46.72 46.38 47.61 35.98 35.42 32.81 34.63 32.32 32.98 29.23 28.17 27.16 25.70 25.73 22.53 23.11 21.52 26.00 26.68 34.35 35.21 36.16

105 110 115 126 125 133 137 151 171 182 183 191 186 208 232 311 329 330

351 340 365 333 336 317 306 299 300 299 252 264 246 299 294 353 345 361 34

Appendix IX Page 3 of 3 TRENDS IN SOFTWARE RELATED INDICES, THE WORLD MARKET AND INFOSYS SHAREPRICES
DATE-YYMM MSCI WORLD 30 YEAR TINDEX BOND YIELD INFOSYS SHARE PRICE MSCI EMERGING MARKETS-DATA PROCESSING & REPRODUCTION INDEX MSCI EMERGING MARKETS HARDWARE/ COMPONENTS INDEX S&P400 CRISIL 500 SERVICES & INDIA COMPUTER COMPUTER SYSTEMS SUB-INDEX INDEX MSDW INTERNATIONAL SOFTWARE INDEX MSDW INDIA SOFTWARE INDEX

9607 9608 9609 9610 9611 9612 9701 9702 9703 9704 9705 9706 9707 9708 9709 9710 9711 9712 9801 9802 9803 9804 9805 9806 9807 9808 9809 9810 9811 9812

1864.57 1886.35 1960.56 1974.60 2085.61 2052.56 2077.65 2101.90 2060.69 2128.40 2260.16 2373.25 2482.91 2317.18 2443.43 2315.20 2356.54 2385.63 2452.49 2618.78 2729.76 2756.85 2722.70 2787.71 2783.64 2412.84 2455.93 2678.37 2838.07 2977.15

7.03 6.84 7.03 6.81 6.48 6.55 6.83 6.69 6.93 7.09 6.94 6.77 6.51 6.58 6.5 6.33 6.11 5.99 5.81 5.89 5.95 5.92 5.93 5.7 5.68 5.54 5.2 5.01 5.25 5.06

4.61 4.79 4.63 4.82 4.88 5.34 5.79 7.32 7.02 10.09 10.22 12.99 15.44 17.48 22.02 18.44 18.00 15.72 13.92 17.80 23.15 27.12 29.22 26.23 30.84 30.13 29.59 28.60 27.42 34.81

79.13 77.51 84.56 83.35 100.35 94.16 97.36 109.72 125.21 122.18 135.76 159.64 193.72 151.00 113.64 86.57 84.33 86.88 90.26 130.87 112.01 94.33 77.28 68.21 79.01 59.59 65.55 71.55 84.38 78.48

83.20 85.54 88.08 86.37 96.55 91.06 97.12 101.78 122.47 138.73 150.95 196.67 261.28 245.74 198.26 138.87 127.67 128.40 146.44 199.94 174.63 157.08 121.45 103.98 109.21 80.99 88.82 109.55 123.69 117.93

109.32 105.97 85.59 81.97 79.03 81.08 86.6 92.8 93.94 87.17 81.01 84.48 82.42 88.44 94.97 101.95 99.11 95.75 107 120.2 115.9 129.99 142.22 134.13 122.66 140.88 137.03 123.77 101.44 114.14

33.20 31.44 28.60 27.86 28.59 32.45 33.70 45.51 39.94 50.97 52.14 61.89 72.14 80.04 97.29 89.58 82.85 81.76 79.33 98.12 121.12 168.84 196.35 150.28 165.74 167.82 173.45 164.38 158.41 196.14

282 326 363 387 411 439 409 358 360 422 523 539 595 565 589 587 604 687 702 829 891 855 763 911 789 619 606 592 565 700

320 314 284 283 272 298 339 369 410 536 541 644 764 850 1,046 977 963 923 878 1,061 1,309 1,908 2,313 1,915 2,119 2,188 2,206 2,046 1,932 2,486 35

Appendix X
CASH FLOW FORECASTS

Assumptions % of shares held in the form of ADSs Terminal Value Growth Rate

2.74% 3.00%

Cash Flow Projections (Unless otherwise specified, all amounts are in US$ M) Time Period Year 0 1999 1 2000 2 2001 3 2002 4 2003 5 2004

Market Size Infosys Market Share (%) Local revenues (in US$ terms) Y2K Revenues Other Revenues Total Revenues Operating Margin (%) Operating Profits Taxes Net Income Depreciation Working Capital Increases Capital Expenditures Free Cash Flows for the Entire Company

4,300.00 35 135.45 322.07 1,047.48 1,505.00 18.51 278.61 27.86 250.75 6.80 3.92 11.2 242.43

6,613.05 35 208.31 495.32 1,610.94 2,314.57 18.93 438.25 43.83 394.42 9.66 5.59 15.9 382.59

10,170.35 35 320.37 0.00 3,239.26 3,559.62 19.37 689.36 68.94 620.42 13.72 7.96 22.6 603.60

15,641.18 35 492.70 0.00 4,981.71 5,474.41 19.81 1,084.35 108.44 975.91 19.48 11.34 32.1 951.99

24,054.87 35 757.73 0.00 7,661.48 8,419.20 20.26 1,705.65 170.57 1,535.08 27.67 16.15 45.5 1,501.06

36,994.46 35 1,165.33 0.00 11,782.73 12,948.06 20.72 2,682.95 268.30 2,414.65 39.31 23.00 64.7 2,366.27

NOTE: THESE ARE BASED ON CASEWRITER'S ESTIMATES

36