5 takeaways from Infosys Annual Report

Annual reports can have a wealth of information. This is especially so if you are an investor, looking to
understand the companys future prospects.IT major, Infosys, recently published its annual report for the financial
year 2015-16.

Here are five key takeaways, according to a research report by Kotak Securities:
New technology, new innovation:
Read the Annual Report and you will find Infosys talk a lot about Automation and Design Thinking.
Automation, especially, seems to be a big focus for the IT company as part of its efforts to improve
efficiencies in this world of changing technology. In fact, Infosys managed to save efforts of 1,700 people in
the March 2016 quarter partly led by automation platforms. Going forward, this is expected to help reduce
costs for the company and improve profit margins.

Cost optimisation:
Infosys is also on a cost-optimisation spree to help improve profit margins. Some of these measures include
traditional methods like improving the utilisation and reducing the number of employees who are benched.
This is a departure from the usual IT company behaviour to hire more employees than required and
benching them. The idea is to ensure the company is always ready for more work. However, it leads to
extra costs as the company has to pay these benched employees monthly salaries. Infosys is challenging
this notion and reducing its bench. Infosys is also considering other measures like having more low-level
employees than senior managers and reducing the number of employees sent abroad for costlier, onsite
projects.

Sub-contractor costs:
Infosys and other IT companies often face huge delays in their project for various reasons like getting a Visa.
To bypass these problems, companies often recruit sub-contractors. However, they cost 40% more than
Infosys own employees. This cost amounts to 5.7% of Infosys total revenues in FY16. This puts pressure
on Infosys margins. Hence, a 1% reduction in subcontracting costs can aid margins by 30 bps (0.3%). We
believe there is scope for improvement on this front in FY17, the Kotak Securities report noted.

Some margin pressures remain:

While Infosys optimises its cost to improve profits, there are some factors that can offset any gains. Three
major factors are 1) rise in depreciation charges, 2) potentially higher variable compensation as against 75-
80% in FY16 and 3) absence of rupee depreciation. We see 50-60 bps (0.5-0.6%) risk to EBIT margin in
FY2017 in the absence of rupee depreciation, Kotak Securities said in its report. EBIT or Earnings Before
Interest and Taxes represents the companys profits from its core operations. EBIT margin, thus, helps
measure the companys operating profit margin the percentage of revenue that the company pockets as
operating profits.

One-time benefits:
Companies do not always receive payments from clients on time. These are called accounts receivables.
Sometimes, though, companies classify some of these receivables as doubtful. They then set out a portion
of their profit to cover these losses. These are called provisions on doubtful receivables. In FY16, Infosys
managed to recover a lot of these doubtful receivables. This led to a negative provision, and thus, a 0.4%
higher profit margin. This, however, is a one-time benefit that cannot be counted into future expectations.

o You can find more information in the annual report. Read more
o What has changed for Infosys with Vishal Sikka? His focus on innovation, use of design thinking to create
proposals for clients plus the re-skilling of manpower and leveraging of automation tools. Read more

Rs 34.3 crore
Infosys CEO and MD, Vishal Sikka, was paid Rs 34.3 crore as compensation in 2015-16, a near doubt of last
years Rs 18.56 crore. This is apart from his variable pay of Rs 14 crore. That said, he is just one of the 48
employees in India who were paid over Rs 1 crore in annual compensation.