Infosys Case Study and analysis 2021: In this article, we will look into the fundamentals of Infosys, focusing on both qualitative and quantitative aspects. Here, we will perform the SWOT Analysis of Infosys, Michael Porter’s 5 Force Analysis, followed by looking into Infosys key financials. We hope you will find the Infosys case study helpful.
Disclaimer: This article is only for informational purposes and should not be considered any kind of advisory/advice. Please perform your independent analysis before investing in stocks, or take the help of your investment advisor. The data is collected from Trade Brains Portal.
Table of Contents
About Infosys and its Business Model
In 1981, Narayana Murthy with a team of six members incorporated Infosys in Pune with an initial capital of just $250 and within the very first year itself, they locked in the deal with Data Basics Corporation of New York.
The theme of the organization is “Sustainable and Resilient” and since its inception, the company has been delivering sustainable solutions. Currently, the company is heavily investing in digital platforms like Data Analysis, Agile Technology, Artificial Technology, Cloud Infrastructure, etc.
Infosys primarily provides the following products and services :
- IT Services (Application Services, IMS, SOA Services, Infrastructure Services, etc.)
- Engineering Services (Product Engineering, Manufacturing Process, IT Strategies, etc.)
- BPO Services (Business Platforms, Human Resource Outsourcing, Order Management, etc.)
- Product and Platforms (Finacle, Infosys ActiveDesk, Infosys Mconnect)
As of FY20, the company has a client base of 1411, which has shown a growth of CAGR 6.62% in the last 4 years. Infosys BPO, Infosys Consulting, Infosys Australia, Infosys China and Infosys Mexico are the subsidiary companies of Infosys. It also has its offices in the top cities of the world like Singapore, New York, Tokyo, Shanghai, etc.
Infosys Case Study – Industry Analysis
As of FY20, the IT-BPM industry of India is worth USD 191 billion, which has been growing 7.7% y-o-y and by 2025, it is estimated to reach USD 350 billion. The Digital Segment has seen rapid growth in recent years and is expected to cover around 38% revenue of the entire industry. As of FY20, 147 billion USD was contributed by the export revenue and the domestic revenue was at US$40 billion.
Indian IT industry exports to more than 80 countries across the world with over 1000 global delivery centres. IT sector of India attracts the second largest FDI inflows as per the report by the Department for Promotion of Industry and Internal Trade. Currently, India leads the world in sourcing destinations with 75% of global digital talent present in the nation.
As per NITI Aayog, by 2035, Artificial Intelligence can boost the nation’s annual growth rate by 1.3%. Currently, the IT industry of India contributes 7.7% to the country’s GDP and is expected to increase its contribution to 10% by 2025. With the growth of AI, Data Analytics and IoT, the demand of India’s cloud market is expected to reach USD 7.1 billion by the end of 2022, signifying a triple fold jump.
Michael Porter’s 5 Force Analysis of Infosys
1. Rivalry Amongst Competitors
- IT Industry is a very competitive one with every leading company providing almost similar solutions. Moreover, the competition is not only limited to the nation itself but beyond the boundaries, too as many countries like China are working briskly to provide technologically advanced services at a cheaper cost.
2. A Threat by Substitutes
- With the world getting greatly dependent on technology, there is almost no substitute for it. In the case of ITeS and BPO segments, the companies can still develop their IT department. However, this trend has witnessed a continuous fall as companies feel that it is better to outsource and focus on their core business rather than investing in the IT department.
3. Barriers to Entry
- As the IT industry is hugely capital intensive and with rich talent in the digital space, the barriers to entry in the IT Industry are not very high. With the government also extending its help to new tech startups, the competition in this industry is increasing.
- As technology is changing every second, new companies have to focus on innovation because outdated technology gets no importance, which requires a regular flow of skill and cash. However, some focused niche-based startups can eat up a huge market share of the existing companies. For example, AI, IoT, etc.
4. Bargaining Power of Suppliers
- India is rich in skilled IT labor, having more than 75% of the global digital talent, that too at a very cheap cost. Moreover, the business is not concentrated on a limited group and the work is distributed over many divisions, which decreases the bargaining power of suppliers.
5. Bargaining Power of Customers
- Bargaining power in the case of customers is a two-way variable. At first, customers enjoy a very high bargaining power as there are various companies providing quality solutions but when they get installed with the products, the increasing switching costs result in a fall in bargaining power for them. As the company gets dependent on the IT partner for all future updates and technological developments, the bargaining power of customers decreases.
Infosys Case Study – SWOT Analysis
Now, moving forward in our Infosys case study, we will perform the SWOT analysis.
1. Strengths
- The company has a wonderful brand value and is one of the pioneers in the IT sector as it has been providing end-to-end world-class business solutions consistently. The company enjoys a huge cash reserve with one of the finest corporate governances.
- Since its inception, the company has been highly focusing on innovation and strengthening its roots in the new technologies especially AI, IoT, etc.
2. Weaknesses
- Even though the company has made a strong presence worldwide, it still lags in making its dominance within the boundaries of the nation.
- Nearly 85% of the business is concentrated in North America and few countries of Europe, which makes the business prone to unwanted volatilities and uneven growth.
- The company is not efficiently focusing on growing economies that are seeing a massive development into technology.
- As the company is one of the biggest mass recruiters of the nation, it faces a high rate of attrition. This means a lot of employees leave the company for better pay and job, which deteriorates the company’s image.
3. Opportunities
- Infosys can focus on the emerging economies of the world as the demand for technology will rise hugely there and it can acquire a big market share in those countries coming out as their market leader in the future.
- As the company has a huge pile of cash in its reserve, it can use it in R&D for the latest technologies, developing world-class products and entering new segments. For example, cloud-based solutions.
- With the government’s major focus on the digitalization of its undertakings, Infosys can play an important role in the same. Especially in the BFSI sector where Infosys has done a terrific job in the past.
4. Threats
- As most of the company’s revenue is earned in dollars and euros, it imposes a currency risk on the earnings of the company.
- Infosys faces stiff competition from its competitors. Well-established companies like TCS, Accenture, etc. eat up the market share. Moreover, intense competition leads to a contraction in margins and a force to invest in the latest technologies.
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Infosys Management
Nandan Nilekani, who co-founded the company with Narayana Murthy, is the current chairman of the board for Infosys. IITian by degree, he was awarded Padma Bhusan in 2006 and held numerous awards in the corporate world.
Salil Parekh is the Chief Executive Officer and Managing Director of the company, who has more than three decades of experience in the IT services industry. In Jan 2014, Mr Pravin Rao joined the board of the company and he is the COO and Whole-time Director of the same.
Kiran Mazumdar-Shaw, who is also the chairperson and MD of Biocon Limited, is the Lead Independent Director of the company. There are a total of 4 Independent Directors on the board.
Financial Analysis of Infosys
- Financial Services contribute the maximum for the company (32%), followed by Retail (16.4%). Both Energy Utilities and Communication contribute 12.6% in the total revenue of the company, 9.9% by Manufacturing. Life Sciences and Hi-Tech contribute 6.3% and 7.5% respectively.
- 60.5% of the company’s business is from North America, followed by Europe which contributes 24.1%. Only 2.5% of the total business is based in India and 12.9% comes from the rest of the world.
- The company has a 4% software testing services segment market share.
- As of Mar’20, the company spends 0.91% on R&D as a % of total sales which is falling with every quarter. In Dec’20, Constant Currency Growth in the BFSI sector almost doubled to 12% from the level of 6.2% in the same period the previous year.
- As of FY20, the Net Profit Margin for the company is 18.33%, which has been continuously falling for the last few years, especially from the level of 22.83% in FY18. However, the 3-year average stands at 19.93%.
- 3 Year CAGR Revenue Growth for the company is 9.85% which is almost the same as the last year’s data (9.82%). However, Net Profit Growth has shown a great rise, as in FY20, it was at 7.73% and 3 Yrs CAGR for the same is 4.95%.
- The company has one of the finest cash flow statements. Cash Flow from Operating Activities has been rising tremendously year after year and so is the outflow in cash flow in financial services; hence, the company pays a good dividend every year from the cash they receive.
Infosys Financial Ratios
1. Profitability Ratios
- In FY 2016, EBITA Margin for the company was 27.28% and from this level, it has fallen continuously year by year. As of FY20, EBITDA Margin is at 23.96%
- Return on Equity for the company has shown a rise in the recent few financial years. As of FY17, RoE for the company was 22.03% which has shown a rise to the level of 25.62% in FY20. The 3 Yr. average RoE for the company is 24.50%.
| EBITA Margin | RoE | RoCE | RoA | |
|---|---|---|---|---|
| TCS | 26.83 | 37.6 | 50.02 | 28.17 |
| Infosys | 23.96 | 25.62 | 34.01 | 19.08 |
| Tech Mahindra | 18.92 | 18.92 | 21.44 | 11.26 |
| HCL Tech | 24.45 | 23.87 | 28.42 | 16.18 |
| Wipro | 20.19 | 17.55 | 20.05 | 11.98 |
- An almost similar trend can also be noticed in RoCE, it has risen from the level of 30.57% in FY17 to 34.01% in FY20. The 3 Yr. average RoCE for the company is 32.26%.
2. Leverage Ratios
- Quick Ratio and Current Ratio for the company is far above the threshold levels of 2.62% each, which is a very positive sign for the company’s liquidity position.
- Infosys enjoys a debt-free status and has an Interest Coverage Ratio of 130.45.
| Quick Ratio | Current Ratio | Interest Coverage Ratio | D/E | |
|---|---|---|---|---|
| TCS | 3.33 | 3.33 | 46.72 | 0 |
| Infosys | 2.62 | 2.62 | 130.45 | 0 |
| Tech Mahindra | 2.12 | 2.12 | 27.39 | 0.012 |
| HCL Tech | 1.62 | 1.62 | 28.68 | 0.1 |
| Wipro | 2.39 | 2.4 | 17.72 | 0.14 |
3. Efficiency Ratios
- The Asset Turnover Ratio for the company is 1.04 as of FY20, which showed an improvement from the level of 0.87 in FY17. This can also be deduced from the increased RoE in the same period as NPM growth is muted for that period.
- Receivable days for Infosys have increased from the level of 61.74% in FY19 to 66.96% in FY20, indicating the buyers’ bargaining power. Payable days for the company have also increased from the level of 8.9% in FY19 to 15.03% in FY20, which shows the company’s bargaining power over the suppliers.
| Asset Turnover Ratio | Receivable Days | Payable Days | |
|---|---|---|---|
| TCS | 1.36 | 67.3 | 25.8 |
| Infosys | 1.04 | 66.96 | 84.46 |
| Tech Mahindra | 1.06 | 71.95 | 47.63 |
| HCL Tech | 1.03 | 66.72 | 11 |
| Wipro | 0.75 | 61.18 | 61.49 |
Infosys Case Study – Shareholding Pattern
- 12.95% shares are owned by the promoters of the company without any pledging of shares, which has been more or less constant from the previous few quarters.
- FIIs have slightly increased their shareholding from the level of 30.47 in June 2020 Q to 32.26% in the latest quarter.
- As of Dec 2020 quarter, DIIs own 23.75% of the company, which has come down from the level of 25.42% in June 2020 Q.
- 13.78% shareholding is by the public, which has been almost constant for the last few quarters. Also, 17.26% of owners are others who have shown a similar trend.
Closing Thoughts
In this article, we tried to perform a quick Infosys case study. Although there are still many other prospects to look into, however, this guide would have given you a basic idea about Infosys.
What do you think about Infosys fundamentals from the long-term investment point of view? Do let us know in the comment section below. Take care and happy investing!
