Infosys Technologies Limited and subsidiaries
(Dollars in millions except share data)
|
Note
|
Three months ended December 31,
|
Nine months ended December 31,
|
|
|
2009
|
2008
|
2009
|
2008
|
|
|
|
|
|
|
Revenues
|
|
$1,232
|
$1,171
|
$3,508
|
$3,542
|
Cost of sales
|
|
700
|
661
|
2,005
|
2,049
|
Gross profit
|
|
532
|
510
|
1,503
|
1,493
|
Operating expenses:
|
|
|
|
|
|
Selling and marketing expenses
|
|
68
|
55
|
178
|
184
|
Administrative expenses
|
|
82
|
82
|
255
|
265
|
Total operating expenses
|
|
150
|
137
|
433
|
449
|
Operating profit
|
|
382
|
373
|
1,070
|
1,044
|
Other income
|
2.13
|
50
|
7
|
154
|
50
|
Profit before income taxes
|
|
432
|
380
|
1,224
|
1,094
|
Income tax expense
|
2.16
|
98
|
48
|
260
|
134
|
Net profit
|
|
$334
|
$332
|
$964
|
$960
|
Other comprehensive income
|
|
|
|
|
|
Exchange differences on translating foreign
operations
|
|
$151
|
$(134)
|
$377
|
$(724)
|
Total other comprehensive income
|
|
$151
|
$(134)
|
$377
|
$(724)
|
|
|
|
|
|
|
Total comprehensive income
|
|
$485
|
$198
|
$1,341
|
$236
|
|
|
|
|
|
|
Profit attributable to:
|
|
|
|
|
|
Owners of the company
|
|
$334
|
$332
|
$964
|
$960
|
Non-controlling interest
|
|
-
|
-
|
-
|
-
|
|
|
$334
|
$332
|
$964
|
$960
|
Total comprehensive income attributable to:
|
|
|
|
|
|
Owners of the company
|
|
$485
|
$198
|
$1,341
|
$236
|
Non-controlling interest
|
|
-
|
-
|
-
|
-
|
|
|
$485
|
$198
|
$1,341
|
$236
|
|
|
|
|
|
|
Earnings per equity share
|
|
|
|
|
|
Basic ($)
|
|
0.59
|
0.58
|
1.69
|
1.69
|
Diluted ($)
|
|
0.59
|
0.58
|
1.69
|
1.68
|
Weighted average equity shares used in computing earnings per
equity share
|
2.17
|
|
|
|
|
Basic
|
|
570,602,970
|
569,755,757
|
570,353,792
|
569,571,267
|
Diluted
|
|
571,183,310
|
570,449,069
|
571,039,216
|
570,650,033
|
The accompanying notes form an integral part of the unaudited
consolidated interim financial statements
Infosys Technologies Limited and subsidiaries
(Dollars in millions except share data)
|
Shares
|
Share capital
|
Share premium
|
Retained earnings
|
Other components of equity
|
Total equity attributable to
equity holders of the company
|
Balance as of April 1, 2008
|
571,995,758
|
$64
|
$655
|
$2,896
|
$301
|
$3,916
|
Changes in equity for the nine months ended December 31,
2008
|
|
|
|
|
|
|
Shares issued on exercise of employee stock options
|
645,745
|
—
|
10
|
—
|
—
|
10
|
Share-based compensation
|
—
|
—
|
1
|
—
|
—
|
1
|
Dividends (including corporate dividend tax)
|
—
|
—
|
—
|
(559)
|
—
|
(559)
|
Total comprehensive income
|
—
|
—
|
—
|
960
|
(724)
|
236
|
Balance as of December 31, 2008
|
572,641,503
|
$64
|
$666
|
$3,297
|
$(423)
|
$3,604
|
Balance as of April 1, 2009
|
572,830,043
|
$64
|
$672
|
$3,618
|
$(570)
|
$3,784
|
Changes in equity for the nine months ended December 31,
2009
|
|
|
|
|
|
|
Shares issued on exercise of employee stock options
|
705,190
|
—
|
13
|
—
|
—
|
13
|
Treasury shares*
|
(2,833,600)
|
—
|
—
|
—
|
—
|
—
|
Reserves on consolidation of trusts
|
—
|
—
|
—
|
10
|
—
|
10
|
Dividends (including corporate dividend tax)
|
—
|
—
|
—
|
(330)
|
—
|
(330)
|
Total comprehensive income
|
—
|
—
|
—
|
964
|
377
|
1,341
|
Balance as of December 31, 2009
|
570,701,633
|
$64
|
$685
|
$4,262
|
$(193)
|
$4,818
|
The accompanying notes form an integral part of the unaudited
consolidated interim financial statements
*Treasury shares held by controlled trusts consolidated effective
July 1, 2009.
Infosys Technologies Limited and subsidiaries
(Dollars in millions)
|
Note
|
Nine months ended December 31,
|
|
|
2009
|
2008
|
Operating activities:
|
|
|
|
Net profit
|
|
$964
|
$960
|
Adjustments to reconcile net profit to net cash provided by
operating activities:
|
|
|
|
Depreciation and amortization
|
2.4 and 2.5
|
149
|
120
|
Share based compensation
|
2.15
|
-
|
1
|
Income tax expense
|
2.16
|
260
|
134
|
Income on investments
|
2.6
|
(16)
|
-
|
Changes in working capital
|
|
|
|
Trade receivables
|
|
66
|
(47)
|
Prepayments and other assets
|
|
(33)
|
21
|
Unbilled revenue
|
|
(11)
|
(70)
|
Trade payables
|
|
(3)
|
(8)
|
Client deposits
|
|
2
|
4
|
Unearned revenue
|
|
60
|
31
|
Other liabilities and provisions
|
|
(16)
|
73
|
Cash generated from operations
|
|
1,422
|
1,219
|
Income taxes paid
|
2.16
|
(290)
|
(123)
|
Net cash provided by operating activities
|
|
1,132
|
1,096
|
Investing activities:
|
|
|
|
Payment for acquisition of business, net of cash
acquired
|
2.2
|
(37)
|
(3)
|
Expenditure on property, plant and equipment
|
2.4
|
(102)
|
(226)
|
Loans to employees
|
|
1
|
(2)
|
Non-current deposits placed with corporation
|
|
-
|
(16)
|
Income on investments
|
|
16
|
-
|
Investment in certificates of deposit
|
|
-
|
(43)
|
Investment in available-for-sale financial
assets
|
|
(1,774)
|
(60)
|
Redemption of available-for-sale financial
assets
|
|
673
|
76
|
Net cash used in investing activities
|
|
(1,223)
|
(274)
|
Financing activities:
|
|
|
|
Proceeds from issuance of common stock on exercise of employee
stock options
|
|
13
|
10
|
Payment of dividends (including corporate dividend
tax)
|
|
(330)
|
(559)
|
Net cash used in financing activities
|
|
(317)
|
(549)
|
Effect of exchange rate changes on cash and cash
equivalents
|
|
203
|
(383)
|
Net (decrease)/ increase in cash and cash
equivalents
|
|
(408)
|
273
|
Cash and cash equivalents at the beginning
|
2.1
|
2,167
|
2,058
|
Opening balance of cash and cash equivalents of controlled
trusts
|
|
10
|
-
|
Cash and cash equivalents at the end
|
2.1
|
$1,972
|
$1,948
|
Supplementary information:
|
|
|
|
Restricted cash balance
|
2.1
|
$15
|
$1
|
The accompanying notes form an integral part of the unaudited
consolidated interim financial statements
1. Company Overview and Significant Accounting
Policies
1.1 Company overview
Infosys Technologies Limited (Infosys or the company) along with its
controlled trusts, majority owned and controlled subsidiary, Infosys BPO Limited
(Infosys BPO) and wholly owned and controlled subsidiaries, Infosys Technologies
(Australia) Pty. Limited (Infosys Australia), Infosys Technologies (China) Co.
Limited (Infosys China), Infosys Consulting, Inc. (Infosys Consulting), Infosys
Technologies S. DE R.L. de C.V. (Infosys Mexico), Infosys Technologies (Sweden)
AB (Infosys Sweden), Infosys Tecnologia DO Brasil LTDA. (Infosys Brasil) and
Infosys Public Services, Inc, (Infosys Public Services), is a leading global
technology services company. The Infosys group of companies (the Group) provides
end-to-end business solutions that leverage technology thereby enabling its
clients to enhance business performance. The Group's operations are to provide
solutions that span the entire software life cycle encompassing technical
consulting, design, development, re-engineering, maintenance, systems
integration, package evaluation and implementation, testing and infrastructure
management services. In addition, the Group offers software products for the
banking industry and business process management services.
The company is a public limited company incorporated and domiciled
in India and has its registered office at Bangalore, Karnataka, India. The
company has its primary listing on the Bombay Stock Exchange and National Stock
Exchange in India. The company’s American Depositary Shares representing equity
shares are also listed on NASDAQ Global Select Market. The company’s
consolidated interim financial statements were authorized for issue by the
company’s Board of Directors on January 25, 2010.
1.2 Basis of preparation of financial statements
These consolidated interim financial statements as at and for the
three months and nine months ended December 31, 2009, have been prepared in
compliance with International Financial Reporting Standards as issued by the
International Accounting Standards Board (IFRS), under the historical cost
convention on the accrual basis except for certain financial instruments which
have been measured at fair values. These financial statements are prepared in
accordance with IAS 34, Interim Financial Reporting, and should be read in
conjunction with the consolidated financial statements and related notes
included in the company's Annual Report on Form 20-F for the fiscal year ended
March 31, 2009.
Accounting policies have been applied consistently to all periods
presented in these financial statements.
1.3 Basis of consolidation
Infosys consolidates entities which it owns or controls. Control
exists when the Group has the power to govern the financial and operating
policies of an entity so as to obtain benefits from its activities. In assessing
control, potential voting rights that are currently exercisable are also taken
into account. Subsidiaries are consolidated from the date control commences
until the date control ceases.
The financial statements of the Group companies are consolidated on
a line-by-line basis and intra-group balances and transactions including
unrealized gain / loss from such transactions are eliminated upon consolidation.
These financial statements are prepared by applying uniform accounting policies
in use at the Group. Non-controlling interests which represent part of the net
profit or loss and net assets of subsidiaries that are not, directly or
indirectly, owned or controlled by the company, are excluded.
1.4 Use of estimates
The preparation of the financial statements in conformity with IFRS
requires management to make estimates, judgments and assumptions. These
estimates, judgments and assumptions affect the application of accounting
policies and the reported amounts of assets and liabilities, the disclosures of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the period. Application of
accounting policies that require critical accounting estimates involving complex
and subjective judgments and the use of assumptions in these financial
statements have been disclosed in Note 1.5. Accounting estimates could change
from period to period. Actual results could differ from those estimates.
Appropriate changes in estimates are made as management becomes aware of changes
in circumstances surrounding the estimates. Changes in estimates are reflected
in the financial statements in the period in which changes are made and, if
material, their effects are disclosed in the notes to the unaudited consolidated
interim financial statements.
1.5 Critical accounting estimates
Revenue recognition
The company uses the percentage-of-completion method in accounting
for its fixed-price contracts. Use of the percentage-of-completion method
requires the company to estimate the efforts expended to date as a proportion of
the total efforts to be expended. Efforts expended have been used to measure
progress towards completion as there is a direct relationship between input and
productivity. Provisions for estimated losses, if any, on uncompleted contracts
are recorded in the period in which such losses become probable based on the
expected contract estimates at the reporting date.
Income taxes
The company's two major tax jurisdictions are India and the U.S.,
though the company also files tax returns in other foreign jurisdictions.
Significant judgments are involved in determining the provision for income taxes
including expectation on tax positions which are sustainable on a more likely
than not basis. Also refer to Note 2.16.
1.6 Revenue recognition
The company derives revenues primarily from software development and
related services, from business process management services and from the
licensing of software products. Arrangements with customers for software
development and related services and business process management services are
either on a fixed-price, fixed-timeframe or on a time-and-material
basis.
Revenue on time-and-material contracts are recognized as the related
services are performed and revenue from the end of the last billing to the
balance sheet date is recognized as unbilled revenues. Revenue from fixed-price,
fixed-timeframe contracts is recognized as per the percentage-of-completion
method. Efforts expended have been used to measure progress towards completion
as there is a direct relationship between input and productivity. Provisions for
estimated losses, if any, on uncompleted contracts are recorded in the period in
which such losses become probable based on the current contract estimates. Costs
and earnings in excess of billings are classified as unbilled revenue while
billings in excess of costs and earnings are classified as unearned revenue.
Maintenance revenue is recognized ratably over the term of the underlying
maintenance arrangement.
In arrangements for software development and related services and
maintenance services, the company has applied the guidance in IAS 18, Revenue,
by applying the revenue recognition criteria for each separately identifiable
component of a single transaction. The arrangements generally meet the criteria
for considering software development and related services as separately
identifiable components. For allocating the consideration, the company has
measured the revenue in respect of each separable component of a transaction at
its fair value, in accordance with principles given in IAS 18. The price that is
regularly charged for an item when sold separately is the best evidence of its
fair value. In cases where the company is unable to establish objective and
reliable evidence of fair value for the software development and related
services, the company has used a residual method to allocate the arrangement
consideration. In these cases the balance consideration after allocating the
fair values of undelivered components of a transaction has been allocated to the
delivered components for which specific fair values do not exist.
License fee revenues are recognized when the general revenue
recognition criteria given in IAS 18 are met. Arrangements to deliver software
products generally have three elements: license, implementation and Annual
Technical Services (ATS). The company has applied the principles given in IAS 18
to account for revenues from these multiple element arrangements. Objective and
reliable evidence of fair value has been established for ATS. Objective and
reliable evidence of fair value is the price charged when the element is sold
separately. When other services are provided in conjunction with the licensing
arrangement and objective and reliable evidence of their fair values have been
established, the revenue from such contracts are allocated to each component of
the contract in a manner, whereby revenue is deferred for the undelivered
services and the residual amounts are recognized as revenue for delivered
elements. In the absence of objective and reliable evidence of fair value for
implementation, the entire arrangement fee for license and implementation is
recognized using the percentage-of-completion method as the implementation is
performed. Revenue from client training, support and other services arising due
to the sale of software products is recognized as the services are performed.
ATS revenue is recognized ratably over the period in which the services are
rendered.
Advances received for services and products are reported as client
deposits until all conditions for revenue recognition are met.
The company accounts for volume discounts and pricing incentives to
customers as a reduction of revenue based on the ratable allocation of the
discounts/ incentives amount to each of the underlying revenue transaction that
results in progress by the customer towards earning the discount/ incentive.
Also, when the level of discount varies with increases in levels of revenue
transactions, the company recognizes the liability based on its estimate of the
customer's future purchases. If it is probable that the criteria for the
discount will not be met, or if the amount thereof cannot be estimated reliably,
then discount is not recognized until the payment is probable and the amount can
be estimated reliably. The company recognizes changes in the estimated amount of
obligations for discounts in the period in which the change occurs. The
discounts are passed on to the customer either as direct payments or as a
reduction of payments due from the customer.
The company presents revenues net of value-added taxes in its
statement of comprehensive income.
1.7 Property, plant and equipment including capital
work-in-progress
Property, plant and equipment are stated at cost, less accumulated
depreciation and impairments, if any. The direct costs are capitalized until the
property, plant and equipment are ready for use, as intended by management. The
company depreciates property, plant and equipment over their estimated useful
lives using the straight-line method. The estimated useful lives of assets are
as follows:
Buildings
|
15 years
|
Plant and machinery
|
5
years
|
Computer equipment
|
2-5 years
|
Furniture and fixtures
|
5
years
|
Vehicles
|
5
years
|
Depreciation methods, useful lives and residual values are
reviewed at each reporting date.
Advances paid towards the acquisition of property, plant and
equipment outstanding at each balance sheet date and the cost of assets not put
to use before such date are disclosed under "Capital work-in-progress".
Subsequent expenditures relating to property, plant and equipment is capitalized
only when it is probable that future economic benefits associated with these
will flow to the Group and the cost of the item can be measured reliably.
Repairs and maintenance costs are recognized in the statement of comprehensive
income when incurred. The cost and related accumulated depreciation are
eliminated from the financial statements upon sale or disposition of the asset
and the resultant gains or losses are recognized in the statement of
comprehensive income. Assets to be disposed off are reported at the lower of the
carrying value or the fair value less cost to sell.
1.8 Business combinations
Business combinations have been accounted for using the purchase
method under the provisions of IFRS 3 (Revised), Business
Combinations.
The cost of an acquisition is measured at the fair value of the
assets transferred, equity instruments issued and liabilities incurred or
assumed at the date of acquisition. The cost of acquisition also includes the
fair value of any contingent consideration. Identifiable assets acquired and
liabilities and contingent liabilities assumed in a business combination are
measured initially at their fair value on the date of acquisition.
Transaction costs that the Group incurs in connection with a
business combination such as finders’ fees, legal fees, due diligence fees, and
other professional and consulting fees are expensed as incurred.
1.9 Goodwill
Goodwill represents the cost of business acquisition in excess of
the Group's interest in the net fair value of identifiable assets, liabilities
and contingent liabilities of the acquiree. When the excess is negative, it is
recognized immediately in the statement of comprehensive income.
Goodwill is measured at cost less accumulated impairment
losses.
1.10 Intangible assets
Intangible assets are stated at cost less accumulated amortization
and impairments. Intangible assets are amortized over their respective
individual estimated useful lives on a straight-line basis, from the date that
they are available for use. The estimated useful life of an identifiable
intangible asset is based on a number of factors including the effects of
obsolescence, demand, competition, and other economic factors (such as the
stability of the industry, and known technological advances), and the level of
maintenance expenditures required to obtain the expected future cash flows from
the asset.
Research costs are expensed as incurred. Software product
development costs are expensed as incurred unless technical and commercial
feasibility of the project is demonstrated, future economic benefits are
probable, the company has an intention and ability to complete and use or sell
the software and the costs can be measured reliably. Research and development
costs and software development costs incurred under contractual arrangements
with customers are accounted as cost of sales.
1.11 Financial instruments
Financial instruments of the Group are classified in the following
categories: non-derivative financial instruments comprising of loans and
receivables, available-for-sale financial assets and trade and other payables;
derivative financial instruments under the category of financial assets or
financial liabilities at fair value through profit or loss. The classification
of financial instruments depends on the purpose for which those were acquired.
Management determines the classification of its financial instruments at initial
recognition.
a. Non-derivative financial instruments
(i) Loans and receivables
Loans and receivables are non-derivative financial assets with fixed
or determinable payments that are not quoted in an active market. They are
presented as current assets, except for those maturing later than 12 months
after the balance sheet date which are presented as non-current assets. Loans
and receivables are measured initially at fair value plus transaction costs and
subsequently carried at amortized cost using the effective interest method, less
any impairment loss. Loans and receivables are represented by trade receivables,
unbilled revenue, cash and cash equivalents, prepayments and
other assets and certificates of deposit. Cash and cash equivalents
comprise cash and bank deposits and deposits with corporations. The company
considers all highly liquid investments with a remaining maturity at the date of
purchase of three months or less and that are readily convertible to known
amounts of cash to be cash equivalents. Certificates of deposit is a negotiable
money market instrument for funds deposited at a bank or other eligible
financial institution for a specified time period.
(ii) Available-for-sale financial assets
Available-for-sale financial assets are non-derivatives that are
either designated in this category or are not classified in any of the other
categories. Available-for-sale financial assets are recognized initially at fair
value plus transactions costs. Subsequent to initial recognition these are
measured at fair value and changes therein, other than impairment losses and
foreign exchange gains and losses on available-for-sale monetary items are
recognized directly in other comprehensive income. When an investment is
derecognized, the cumulative gain or loss in other comprehensive income is
transferred to net profit in the statement of comprehensive income. These are
presented as current assets unless management intends to dispose off the assets
after 12 months from the balance sheet date.
(iii) Trade and other payables
Trade and other payables are initially recognized at fair value, and
subsequently carried at amortized cost using the effective interest
method.
b. Derivative financial instruments
Financial assets or financial liabilities, at fair value through
profit or loss.
This category has two sub-categories wherein, financial assets or
financial liabilities are held for trading or are designated as such upon
initial recognition. A financial asset is classified as held for trading if it
is acquired principally for the purpose of selling in the short term.
Derivatives are categorized as held for trading unless they are designated as
hedges.
The company holds derivative financial instruments such as foreign
exchange forward and option contracts to mitigate the risk of changes in foreign
exchange rates on trade receivables and forecasted cash flows denominated in
certain foreign currencies. The counterparty for these contracts is generally a
bank or a financial institution. Although the company believes that these
financial instruments constitute hedges from an economic perspective, they do
not qualify for hedge accounting under IAS 39, Financial Instruments:
Recognition and Measurement. Any derivative that is either not designated a
hedge, or is so designated but is ineffective per IAS 39, is categorized as a
financial asset, at fair value through profit or loss.
Derivatives are recognized initially at fair value and attributable
transaction costs are recognized in the statement of comprehensive income when
incurred. Subsequent to initial recognition, derivatives are measured at fair
value through profit or loss as exchange gains or losses. Assets/ liabilities in
this category are presented as current assets/current liabilities if they are
either held for trading or are expected to be realized within 12 months after
the balance sheet date.
c. Share capital and treasury shares
Ordinary Shares
Ordinary shares are classified as equity. Incremental costs directly
attributable to the issuance of new ordinary shares and share options are
recognized as a deduction from equity, net of any tax effects.
Treasury Shares
When any entity within the Group purchases the company's ordinary
shares, the consideration paid including any directly attributable incremental
cost is presented as a deduction from total equity, until they are cancelled,
sold or reissued. When treasury shares are sold or reissued subsequently, the
amount received is recognized as an increase in equity, and the resulting
surplus or deficit on the transaction is transferred to/ from retained
earnings.
1.12 Impairment
a. Financial assets
The Group assesses at each balance sheet date whether there is
objective evidence that a financial asset or a group of financial assets is
impaired. A financial asset is considered impaired if objective evidence
indicates that one or more events have had a negative effect on the estimated
future cash flows of that asset. Individually significant financial assets are
tested for impairment on an individual basis. The remaining financial assets are
assessed collectively in groups that share similar credit risk
characteristics.
(i) Loans and receivables
Impairment loss in respect of loans and receivables measured at
amortized cost are calculated as the difference between their carrying amount,
and the present value of the estimated future cash flows discounted at the
original effective interest rate. Such impairment loss is recognized in net
profit in the statement of comprehensive income.
(ii) Available-for-sale financial assets
Significant or prolonged decline in the fair value of the security
below its cost and the disappearance of an active trading market for the
security are objective evidence that the security is impaired. An impairment
loss in respect of an available-for-sale financial asset is calculated by
reference to its fair value and is recognized in net profit in the statement of
comprehensive income. The cumulative loss that was recognized in other
comprehensive income is transferred to net profit in the statement of
comprehensive income upon impairment.
b. Non-financial assets
(i) Goodwill
Goodwill is tested for impairment on an annual basis and whenever
there is an indication that goodwill may be impaired, relying on a number of
factors including operating results, business plans and future cash flows. For
the purpose of impairment testing, goodwill acquired in a business combination
is allocated to the Group's cash generating units (CGU) expected to benefit from
the synergies arising from the business combination. A CGU is the smallest
identifiable group of assets that generates cash inflows that are largely
independent of the cash inflows from other assets or group of assets. Impairment
occurs when the carrying amount of a CGU including the goodwill, exceeds the
estimated recoverable amount of the CGU. The recoverable amount of a CGU is the
higher of its fair value less cost to sell and its value-in-use. Value-in-use is
the present value of future cash flows expected to be derived from the
CGU.
Total impairment loss of a CGU is allocated first to reduce the
carrying amount of goodwill allocated to the CGU and then to the other assets of
the CGU pro-rata on the basis of the carrying amount of each asset in the CGU.
An impairment loss on goodwill is recognized in the statement of comprehensive
income and is not reversed in the subsequent period.
(ii) Intangible assets and property, plant and
equipment
Intangible assets and property, plant and equipment are evaluated
for recoverability whenever events or changes in circumstances indicate that
their carrying amounts may not be recoverable. For the purpose of impairment
testing, the recoverable amount (i.e. the higher of the fair value less cost to
sell and the value-in-use) is determined on an individual asset basis unless the
asset does not generate cash flows that are largely independent of those from
other assets. In such cases, the recoverable amount is determined for the CGU to
which the asset belongs.
If such assets are considered to be impaired, the impairment to be
recognized in net profit in the statement of comprehensive income is measured by
the amount by which the carrying value of the assets exceeds the estimated
recoverable amount of the asset.
c. Reversal of impairment loss
An impairment loss for financial assets is reversed if the reversal
can be related objectively to an event occurring after the impairment loss was
recognized. An impairment loss in respect of goodwill is not reversed. In
respect of other assets, an impairment loss is reversed if there has been a
change in the estimates used to determine the recoverable amount. The carrying
amount of an asset other than goodwill is increased to its revised recoverable
amount, provided that this amount does not exceed the carrying amount that would
have been determined (net of any accumulated amortization or depreciation) had
no impairment loss been recognized for the asset in prior years. A reversal of
impairment loss for an asset other than goodwill and available- for-sale
financial assets that are equity securities is recognized in the statement of
comprehensive income. For available-for-sale financial assets that are equity
securities, the reversal is recognized in other comprehensive
income.
1.13 Fair value of financial instruments
In determining the fair value of its financial instruments, the
company uses a variety of methods and assumptions that are based on market
conditions and risks existing at each reporting date. The methods used to
determine fair value include discounted cash flow analysis, available quoted
market prices and dealer quotes. All methods of assessing fair value result in
general approximation of value, and such value may never actually be
realized.
For all other financial instruments the carrying amounts approximate
fair value due to the short maturity of those instruments. The fair value of
securities, which do not have an active market and where it is not practicable
to determine the fair values with sufficient reliability, are carried at cost
less impairment.
1.14 Provisions
A provision is recognized if, as a result of a past event, the Group
has a present legal or constructive obligation that can be estimated reliably,
and it is probable that an outflow of economic benefits will be required to
settle the obligation. Provisions are determined by discounting the expected
future cash flows at a pre-tax rate that reflects current market assessments of
the time value of money and the risks specific to the liability.
a. Post sales client support
The company provides its clients with a fixed-period post sales
support for corrections of errors and telephone support on all its fixed-price,
fixed-timeframe contracts. Costs associated with such support services are
accrued at the time related revenues are recorded and included in cost of sales.
The company estimates such costs based on historical experience and estimates
are reviewed on a periodic basis for any material changes in assumptions and
likelihood of occurrence.
b.Onerous contracts
Provisions for onerous contracts are recognized when the expected
benefits to be derived by the Group from a contract are lower than the
unavoidable costs of meeting the future obligations under the contract. The
provision is measured at the present value of the lower of the expected cost of
terminating the contract and the expected net cost of continuing with the
contract. Before a provision is established the Group recognizes any impairment
loss on the assets associated with that contract.
1.15 Foreign currency
Functional and presentation currency
The functional currency of Infosys and Infosys BPO is the Indian
rupee. The functional currencies for Infosys Australia, Infosys China, Infosys
Consulting, Infosys Mexico, Infosys Sweden, Infosys Brasil and Infosys Public
Services are the respective local currencies. These financial statements are
presented in U.S. dollars (rounded off to the nearest million) to facilitate
global comparability.
Transactions and translations
Foreign-currency denominated monetary assets and liabilities are
translated into the relevant functional currency at exchange rates in effect at
the balance sheet date. The gains or losses resulting from such translations are
included in net profit in the statement of comprehensive income. Non-monetary
assets and non-monetary liabilities denominated in a foreign currency and
measured at fair value are translated at the exchange rate prevalent at the date
when the fair value was determined. Non-monetary assets and non-monetary
liabilities denominated in a foreign currency and measured at historical cost
are translated at the exchange rate prevalent at the date of
transaction.
Transaction gains or losses realized upon settlement of foreign
currency transactions are included in determining net profit for the period in
which the transaction is settled. Revenue, expense and cash-flow items
denominated in foreign currencies are translated into the relevant functional
currencies using the exchange rate in effect on the date of the
transaction.
The translation of financial statements of the foreign subsidiaries
to the functional currency of the Company is performed for assets and
liabilities using the exchange rate in effect at the balance sheet date and for
revenue, expense and cash-flow items using the average exchange rate for the
respective periods. The gains or losses resulting from such translation are
included in currency translation reserves under other components of equity. When
a subsidiary is disposed off, in part or in full, the relevant amount is
transferred to net profit in the statement of comprehensive income.
Goodwill and fair value adjustments arising on the acquisition of a
foreign entity are treated as assets and liabilities of the foreign entity and
translated at the exchange rate in effect at the balance sheet
date.
1.16 Earnings per share
Basic earnings per share is computed by dividing the net profit
attributable to the equity holders of the company by the weighted average number
of equity shares outstanding during the period. Diluted earnings per share is
computed by dividing the net profit attributable to the equity holders of the
company by the weighted average number of equity shares considered for deriving
basic earnings per share and also the weighted average number of equity shares
that could have been issued upon conversion of all dilutive potential equity
shares. The diluted potential equity shares are adjusted for the proceeds
receivable had the shares been actually issued at fair value (i.e. the average
market value of the outstanding shares). Dilutive potential equity shares are
deemed converted as of the beginning of the period, unless issued at a later
date. Dilutive potential equity shares are determined independently for each
period presented.
The number of shares and potentially dilutive equity shares are
adjusted retrospectively for all periods presented for any share splits and
bonus shares issues including for changes effected prior to the approval of the
financial statements by the Board of Directors.
1.17 Income taxes
Income tax expense comprises current and deferred income tax. Income
tax expense is recognized in net profit in the statement of comprehensive income
except to the extent that it relates to items recognized directly in equity, in
which case it is recognized in other comprehensive income. Current income tax
for current and prior periods is recognized at the amount expected to be paid to
or recovered from the tax authorities, using the tax rates and tax laws that
have been enacted or substantively enacted by the balance sheet date. Deferred
income tax assets and liabilities are recognized for all temporary differences
arising between the tax bases of assets and liabilities and their carrying
amounts in the financial statements except when the deferred income tax arises
from the initial recognition of goodwill or an asset or liability in a
transaction that is not a business combination and affects neither accounting
nor taxable profit or loss at the time of the transaction. Deferred tax assets
are reviewed at each reporting date and are reduced to the extent that it is no
longer probable that the related tax benefit will be realized.
Deferred income tax assets and liabilities are measured using tax
rates and tax laws that have been enacted or substantively enacted by the
balance sheet date and are expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect of changes in tax rates on deferred income tax assets and liabilities is
recognized as income or expense in the period that includes the enactment or the
substantive enactment date. A deferred income tax asset is recognized to the
extent that it is probable that future taxable profit will be available against
which the deductible temporary differences and tax losses can be utilized.
Deferred income taxes are not provided on the undistributed earnings of
subsidiaries and branches where it is expected that the earnings of the
subsidiary or branch will not be distributed in the foreseeable future. The
income tax provision for the interim period is made based on the best estimate
of the annual average tax rate expected to be applicable for the full fiscal
year. The company offsets current tax assets and current tax liabilities, where
it has a legally enforceable right to set off the recognized amounts and where
it intends either to settle on a net basis, or to realize the asset and settle
the liability simultaneously. Tax benefits of deductions earned on exercise of
employee share options in excess of compensation charged to income are credited
to share premium.
1.18 Employee benefits
1.18.1 Gratuity
In accordance with the Payment of Gratuity Act, 1972, Infosys
provides for gratuity, a defined benefit retirement plan (the Gratuity Plan)
covering eligible employees. The Gratuity Plan provides a lump-sum payment to
vested employees at retirement, death, incapacitation or termination of
employment, of an amount based on the respective employee's salary and the
tenure of employment.
Liabilities with regard to the Gratuity Plan are determined by
actuarial valuation at each balance sheet date using the projected unit credit
method. The company fully contributes all ascertained liabilities to the Infosys
Technologies Limited Employees' Gratuity Fund Trust (the Trust). In case of
Infosys BPO, contributions are made to the Infosys BPO's Employees' Gratuity
Fund Trust. Trustees administer contributions made to the Trusts and
contributions are invested in specific designated instruments as permitted by
law and investments are also made in mutual funds that invest in the specific
designated instruments.
The Group recognizes the net obligation of a defined benefit plan in
its balance sheet as an asset or liability, respectively in accordance with IAS
19, Employee benefits. The discount rate is based on the Government securities
yield. Actuarial gains and losses arising from experience adjustments and
changes in actuarial assumptions are charged or credited to the statement of
comprehensive income in the period in which they arise. When the computation
results in a benefit to the Group, the recognized asset is limited to the net
total of any unrecognized past service costs and the present value of any future
refunds from the plan or reductions in future contributions to the
plan.
1.18.2 Superannuation
Certain employees of Infosys are also participants in a defined
contribution plan. Until March 2005, the company made monthly contributions
under the superannuation plan (the Plan) to the Infosys Technologies Limited
Employees' Superannuation Fund Trust (Infosys Superannuation Trust) based on a
specified percentage of each covered employee's salary. The company has no
further obligations to the Plan beyond its monthly contributions. Effective
April 1, 2005, a portion of the monthly contribution amount is being paid
directly to the employees as an allowance and the balance amount is contributed
to the Infosys Superannuation Trust.
Certain employees of Infosys BPO are also eligible for
superannuation benefit. Infosys BPO has no further obligations to the
superannuation plan beyond its monthly contribution which are periodically
contributed to a trust fund, the corpus of which is invested with the Life
Insurance Corporation of India.
Certain employees of Infosys Australia are also eligible for
superannuation benefit. Infosys Australia has no further obligations to the
superannuation plan beyond its monthly contribution.
1.18.3 Provident fund
Eligible employees of Infosys receive benefits from a provident
fund, which is a defined benefit plan. Both the employee and the company make
monthly contributions to the provident fund plan equal to a specified percentage
of the covered employee's salary. The company contributes a part of the
contributions to the Infosys Technologies Limited Employees' Provident Fund
Trust. The remaining portion is contributed to the government administered
pension fund. The rate at which the annual interest is payable to the
beneficiaries by the trust is being administered by the government. The company
has an obligation to make good the shortfall, if any, between the return from
the investments of the Trust and the notified interest rate.
In respect of Infosys BPO, eligible employees receive benefits from
a provident fund, which is a defined contribution plan. Both the employee and
Infosys BPO make monthly contributions to this provident fund plan equal to a
specified percentage of the covered employee's salary. Amounts collected under
the provident fund plan are deposited in a government administered provident
fund. The company has no further obligation to the plan beyond its monthly
contributions.
1.18.4 Compensated absences
The Group has a policy on compensated absences which are both
accumulating and non-accumulating in nature. The expected cost of accumulating
compensated absences is measured based on the additional amount expected to be
paid/availed as a result of the unused entitlement that has accumulated at the
balance sheet date. Expense on non-accumulating compensated absences is
recognized in the period in which the absences occur.
1.19 Share-based compensation
The Group recognizes compensation expense relating to share-based
payments in net profit using a fair-value measurement method in accordance with
IFRS 2, Share-Based Payment. Under the fair value method, the estimated fair
value of awards is charged to income on a straight-line basis over the requisite
service period for each separately vesting portion of the award as if the award
was in-substance, multiple awards. The Group includes a forfeiture estimate in
the amount of compensation expense being recognized.
The fair value of each option is estimated on the date of grant
using the Black-Scholes-Merton valuation model. The expected term of an option
is estimated based on the vesting term and contractual term of the option, as
well as expected exercise behaviour of the employee who receives the option.
Expected volatility during the expected term of the option is based on
historical volatility, during a period equivalent to the expected term of the
option, of the observed market prices of the company's publicly traded equity
shares.
Expected dividends during the expected term of the option are based
on recent dividend activity. Risk-free interest rates are based on the
government securities yield in effect at the time of the grant over the expected
term.
1.20 Dividends
Final dividends on shares are recorded as a liability on the date of
approval by the shareholders and interim dividends are recorded as a liability
on the date of declaration by the company's Board of Directors.
1.21 Operating profit
Operating profit for the Group is computed considering the revenues,
net of cost of sales, selling and marketing expenses and administrative
expenses.
1.22 Other income
Other income is comprised primarily of interest income and dividend
income. Interest income is recognized using the effective interest method.
Dividend income is recognized when the right to receive payment is
established.
1.23 Recent accounting pronouncements
1.23.1 Standards early adopted by the company
1.
|
IFRS 8, Operating Segments is applicable for annual periods
beginning on or after January 1, 2009. This standard was early adopted by
the company as at April 1, 2007. IFRS 8 replaces IAS 14, Segment
Reporting. The new standard requires a 'management approach', under which
segment information is presented on the same basis as that used for
internal reporting provided to the chief operating decision maker. The
application of this standard did not result in any change in the number of
reportable segments. Allocation of goodwill was not required under
Previous GAAP and hence goodwill has been allocated in accordance to the
requirements of this Standard.
|
2.
|
IFRS 3 (Revised), Business Combinations, as amended, is
applicable for annual periods beginning on or after July 1, 2009. This
standard was early adopted by the company as at April 1, 2009. Business
Combinations consummated after April 1, 2009 will be impacted by this
standard. IFRS 3 (Revised) primarily requires the acquisition-related
costs to be recognized as period expenses in accordance with the relevant
IFRS. Costs incurred to issue debt or equity securities are required to be
recognized in accordance with IAS 39. Consideration, after this amendment,
will include fair values of all interests previously held by the acquirer.
Re-measurement of such interests to fair value would be carried out
through net profit in the statement of comprehensive income. Contingent
consideration is required to be recognized at fair value even if not
deemed probable of payment at the date of
acquisition.
|
IFRS 3 (Revised) provides an explicit option on a
transaction-by-transaction basis, to measure any non-controlling interest (NCI)
in the entity acquired at fair value of their proportion of identifiable assets
and liabilities or at full fair value. The first method will result in a
marginal difference in the measurement of goodwill from the existing IFRS 3;
however the second approach will require recording goodwill on NCI as well as on
the acquired controlling interest. Upon consummating a business transaction in
future the company is likely to adopt the first method for measuring
NCI.
3.
|
IAS 27 Consolidated and Separate Financial Statements, as
amended, is applicable for annual periods beginning on or after July 1,
2009. This standard was early adopted by the company as at April 1, 2009.
It requires a mandatory adoption of economic entity model which treats all
providers of equity capital as shareholders of the entity. Consequently, a
partial disposal of interest in a subsidiary in which the parent company
retains control does not result in a gain or loss but in an increase or
decrease in equity. Additionally purchase of some or all of the NCI is
treated as treasury transaction and accounted for in equity and a partial
disposal of interest in a subsidiary in which the parent company loses
control triggers recognition of gain or loss on the entire interest. A
gain or loss is recognized on the portion that has been disposed off and a
further holding gain is recognized on the interest retained, being the
difference between the fair value and carrying value of the interest
retained. This Standard requires an entity to attribute their share of net
profit and reserves to the NCI even if this results in the NCI having a
deficit balance.
|
1.23.2 Recently adopted accounting pronouncements
1.
|
IAS 1, Presentation of Financial Statements is applicable for
annual periods beginning on or after January 1, 2009. This Standard was
adopted by the company as at April 1, 2009. Consequent to the adoption of
the standard, title for cash flows has been changed to ‘Statement of Cash
Flow’. Further, the company has included in its complete set of financial
statements, a single ‘Statement of Comprehensive
Income’.
|
2.
|
IFRIC Interpretation 18, Transfers of Assets from Customers
defines the treatment for property, plant and equipment transferred by
customers to companies or for cash received to be invested in property,
plant and equipment that must be used either to connect the customer to a
network or to provide the customer with ongoing access to a supply of
goods or services, or to do both.
|
The item of property, plant and equipment is to be initially
recognised by the company at fair value with a corresponding credit to revenue.
If an ongoing service is identified as a part of the agreement, the period over
which revenue shall be recognised for that service would be determined by the
terms of the agreement with the customer. If the period is not clearly defined,
then revenue should be recognized over a period no longer than the useful life
of the transferred asset used to provide the ongoing service. This
interpretation is applicable prospectively to transfers of assets from customers
received on or after July 1, 2009. The company has adopted this interpretation
prospectively for all assets transferred after July 1, 2009. There has been no
material impact on the company as a result of the adoption of this
interpretation.
2 Notes to the unaudited consolidated interim financial
statements
2.1 Cash and cash equivalents
Cash and cash equivalents consist of the following:
(Dollars in millions)
|
As of
|
|
December 31, 2009
|
March 31, 2009
|
Cash and bank deposits
|
$1,639
|
$1,911
|
Deposits with corporations
|
333
|
256
|
|
$1,972
|
$2,167
|
Cash and cash equivalents as of December 31, 2009 include restricted
cash balance of $15 million. The restricted cash balance as of March 31, 2009
was less than $1 million. The restrictions are primarily on account of cash
balances held by irrevocable trusts controlled by the company and unclaimed
dividends.
The deposits maintained by the Group with corporations comprise of
time deposits, which can be withdrawn by the Group at any point without prior
notice or penalty on the principal.
The table below provides details of cash and cash
equivalents:
(Dollars in millions)
|
As of
|
|
December 31, 2009
|
March 31, 2009
|
Current accounts
|
|
|
ABN Amro Bank, China
|
$4
|
$1
|
ABN Amro Bank, China (U.S. dollar account)
|
6
|
3
|
Bank of America, USA
|
41
|
116
|
Bank of America, Mexico
|
5
|
-
|
Citibank N.A., Australia
|
5
|
7
|
Citibank N.A., Brazil
|
1
|
-
|
Citibank N.A., Czech Republic (Euro account)
|
-
|
1
|
Citibank N.A., Czech Republic (U.S. dollar
account)
|
-
|
1
|
Citibank N.A., Japan
|
1
|
-
|
Citibank N.A., New Zealand
|
1
|
-
|
Citibank N.A., Singapore
|
1
|
2
|
Deutsche Bank, Belgium
|
1
|
1
|
Deutsche Bank, Germany
|
1
|
1
|
Deutsche Bank, India
|
4
|
2
|
Deutsche Bank, Netherlands
|
1
|
-
|
Deutsche Bank, Switzerland
|
1
|
-
|
Deutsche Bank, Thailand
|
1
|
-
|
Deutsche Bank, Philippines (U.S. dollar
account)
|
1
|
-
|
Deutsche Bank, United Kingdom
|
8
|
11
|
Deutsche Bank-EEFC account in Euro, India
|
1
|
5
|
Deutsche Bank-EEFC account in Swiss Franc,
India
|
-
|
1
|
Deutsche Bank-EEFC account in U.S. dollars,
India
|
2
|
2
|
HSBC Bank, United Kingdom
|
-
|
2
|
ICICI Bank, India
|
10
|
4
|
ICICI Bank-EEFC account in United Kingdom Pound Sterling,
India
|
1
|
1
|
ICICI Bank-EEFC account in U.S. dollars, India
|
7
|
8
|
National Australia Bank Limited, Australia
|
5
|
6
|
National Australia Bank Limited, Australia (U.S. dollar
account)
|
2
|
2
|
Royal Bank of Canada, Canada
|
1
|
1
|
Wachovia Bank, USA
|
2
|
-
|
|
$114
|
$178
|
Deposit accounts
|
|
|
Andhra Bank, India
|
$20
|
$16
|
Allahabad Bank
|
22
|
-
|
Bank of Baroda, India
|
183
|
163
|
Bank of Maharashtra, India
|
107
|
106
|
Barclays Bank, Plc. India
|
45
|
28
|
Canara Bank, India
|
191
|
157
|
Central Bank of India
|
22
|
-
|
Citibank N.A., Czech Republic
|
4
|
1
|
Corporation Bank, India
|
26
|
68
|
DBS Bank, India
|
11
|
5
|
Deutsche Bank , Poland
|
3
|
-
|
HSBC Bank, India
|
-
|
56
|
ICICI Bank, India
|
218
|
110
|
IDBI Bank, India
|
115
|
108
|
ING Vysya Bank, India
|
5
|
10
|
Indian Overseas Bank
|
45
|
-
|
National Australia Bank Limited, Australia
|
64
|
45
|
Oriental Bank of Commerce
|
20
|
-
|
Punjab National Bank, India
|
81
|
95
|
Standard Chartered Bank, India
|
-
|
7
|
State Bank of Hyderabad, India
|
55
|
39
|
State Bank of India, India
|
34
|
416
|
State Bank of Mysore, India
|
107
|
99
|
Syndicate Bank, India
|
107
|
99
|
The Bank of Nova Scotia, India
|
-
|
69
|
Union Bank of India, India
|
20
|
17
|
Vijaya Bank, India
|
20
|
19
|
|
$1,525
|
$1,733
|
Deposits with corporations
|
|
|
HDFC Limited, India
|
$332
|
$256
|
Sundaram BNP Paribus Home Finance Limited
|
1
|
-
|
|
$333
|
$256
|
Total
|
$1,972
|
$2,167
|
2.2 Business combinations
On April 1, 2008, Infosys Australia acquired 100% of the equity
shares of Mainstream Software Pty Limited (MSPL) for a cash consideration of $3
million. Consequent to this acquisition, intellectual property rights amounting
to $3 million were recorded. Considering the economic benefits expected to be
obtained from the intellectual property rights this amount has been fully
amortized during the previous year.
On December 4, 2009, Infosys BPO acquired 100% of the voting
interests in McCamish Systems LLC (McCamish), a business process solutions
provider based in Atlanta, Georgia, in the United States. The business
acquisition was conducted by entering into Membership Interest Purchase
Agreement for a cash consideration of $37 million and a contingent consideration
of up to $20 million. The fair value of the contingent consideration on the date
of acquisition was $9 million.
This business acquisition is expected to enable Infosys BPO to
deliver growth in platform-based services in the insurance and financial
services industry and is also expected to enable McCamish to service larger
portfolios of transactions for clients and expand into global markets.
Consequently, the excess of the purchase consideration paid over the fair value
of assets acquired has been accounted for as goodwill.
The purchase price has been allocated based on Management’s
estimates and an independent appraisal of fair values as follows:
(Dollars in millions)
Component
|
Acquiree's carrying amount
|
Fair value adjustments
|
Purchase price
allocated
|
Property, plant and equipment
|
$1
|
–
|
$1
|
Net current assets
|
2
|
–
|
2
|
Intangible assets-Customer contracts and
relationships
|
–
|
10
|
10
|
Intangible assets-Computer software platform
|
–
|
3
|
3
|
|
$3
|
$13
|
$16
|
Goodwill
|
|
|
30
|
Total purchase price
|
|
|
$46
|
The amount of trade receivables acquired from the above business
acquisition was $4 million. Based on the past experience, management expects the
entire amount to be collected.
The identified intangible customer contracts and relationships are
being amortized over a period of nine years whereas the identified intangible
computer software platform is being amortized over a period of four months,
being management's estimate of the useful life of the assets.
The acquisition date fair value of each major class of consideration
as at the acquisition date is as follows:
(Dollars in millions)
Particulars
|
Consideration settled
|
Fair value of total consideration
|
|
Cash paid
|
$34
|
Liabilities settled in cash
|
3
|
Contingent consideration
|
9
|
Total
|
$46
|
The payment of the contingent consideration is dependent upon the
achievement of certain revenue targets and net margin targets by McCamish over a
period of 4 years ending March 31, 2014. Further, in the event that McCamish
signs a deal with a customer with total revenues of $100 million or more, the
aforesaid period will be extended by 2 years. The total contingent consideration
can range between $14 million and $20 million.
The fair value of the contingent consideration is determined by
discounting the estimated amount payable to the previous owners of McCamish on
achievement of certain financial targets. The key inputs used for the
determination of fair value of contingent consideration are the discount rate of
13.9% and the probabilities of achievement of the net margin and the revenue
targets ranging from 50% to 100%.
The transaction costs of $1 million related to the acquisition have
been included under cost of sales in the statement of comprehensive
income.
2.3 Prepayments and other assets
Prepayments and other assets consist of the following:
(Dollars in millions)
|
As of
|
|
December 31, 2009
|
March 31, 2009
|
Current
|
|
|
Rental deposits
|
$7
|
$7
|
Security deposits with service providers
|
11
|
7
|
Loans to employees
|
18
|
22
|
Prepaid expenses
|
7
|
7
|
Interest accrued and not due
|
2
|
1
|
Withholding taxes
|
65
|
33
|
Advance payments to vendors for supply of
goods
|
3
|
3
|
Other assets
|
4
|
1
|
|
$117
|
$81
|
Non-current
|
|
|
Loans to employees
|
$6
|
$2
|
Deposit with corporation
|
67
|
50
|
|
$73
|
$52
|
|
$190
|
$133
|
Financial assets in prepayments and other
assets
|
$176
|
$122
|
Withholding taxes primarily consist of input tax credits. Other
assets primarily represent advance payments to vendors for rendering of
services, travel advances and other recoverable from customers. Security
deposits with service providers relate principally to leased telephone lines and
electricity supplies.
Deposit with corporation represents amounts deposited to settle
certain employee-related obligations as and when they arise during the normal
course of business.
2.4 Property, plant and equipment
Property, plant and equipment consist of the following as of
December 31, 2009:
(Dollars in millions)
|
Gross carrying value
|
Accumulated depreciation
|
Carrying value
|
Land
|
$70
|
-
|
$70
|
Buildings
|
688
|
(149)
|
539
|
Plant and machinery
|
292
|
(153)
|
139
|
Computer equipment
|
291
|
(245)
|
46
|
Furniture and fixtures
|
186
|
(111)
|
75
|
Vehicles
|
1
|
-
|
1
|
Capital work-in-progress
|
91
|
-
|
91
|
|
$1,619
|
$(658)
|
$961
|
Property, plant and equipment consist of the following as of March
31, 2009:
(Dollars in millions)
|
Gross carrying value
|
Accumulated depreciation
|
Carrying value
|
Land
|
$56
|
-
|
$56
|
Buildings
|
574
|
(106)
|
468
|
Plant and machinery
|
233
|
(103)
|
130
|
Computer equipment
|
243
|
(189)
|
54
|
Furniture and fixtures
|
153
|
(76)
|
77
|
Vehicles
|
1
|
-
|
1
|
Capital work-in-progress
|
134
|
-
|
134
|
|
$1,394
|
$(474)
|
$920
|
Following are the changes in the carrying value of property, plant
and equipment for the three months ended December 31, 2009:
(Dollars in millions)
|
Land
|
Buildings
|
Plant and machinery
|
Computer equipment
|
Furniture and fixtures
|
Vehicles
|
Capital work-in-progress
|
Total
|
Carrying value as at October 1, 2009
|
$68
|
$523
|
$141
|
$48
|
$78
|
$1
|
$87
|
$946
|
Translation differences
|
1
|
16
|
7
|
2
|
3
|
-
|
4
|
33
|
Additions/ (deletions)
|
1
|
12
|
6
|
9
|
3
|
-
|
-
|
31
|
Acquisition through business combination
|
-
|
-
|
-
|
1
|
-
|
-
|
-
|
1
|
Depreciation
|
-
|
(12)
|
(15)
|
(14)
|
(9)
|
-
|
-
|
(50)
|
Carrying value as at December 31, 2009
|
$70
|
$539
|
$139
|
$46
|
$75
|
$1
|
$91
|
$961
|
Following are the changes in the carrying value of property, plant
and equipment for the three months ended December 31, 2008:
(Dollars in millions)
|
Land
|
Buildings
|
Plant and machinery
|
Computer equipment
|
Furniture and fixtures
|
Vehicles
|
Capital work-in-progress
|
Total
|
Carrying value as at October 1, 2008
|
$57
|
$381
|
$108
|
$47
|
$60
|
$1
|
$295
|
$949
|
Translation differences
|
(1)
|
(20)
|
(6)
|
-
|
-
|
-
|
(4)
|
(31)
|
Additions/ (deletions)
|
-
|
89
|
30
|
21
|
20
|
-
|
(102)
|
58
|
Depreciation
|
-
|
(9)
|
(7)
|
(15)
|
(7)
|
-
|
-
|
(38)
|
Carrying value as at December 31, 2008
|
$56
|
$441
|
$125
|
$53
|
$73
|
$1
|
$189
|
$938
|
Following are the changes in the carrying value of property, plant
and equipment for the nine months ended December 31, 2009:
(Dollars in millions)
|
Land
|
Buildings
|
Plant and machinery
|
Computer equipment
|
Furniture and fixtures
|
Vehicles
|
Capital work-in-progress
|
Total
|
Carrying value as at April 1, 2009
|
$56
|
$468
|
$130
|
$54
|
$77
|
$1
|
$134
|
$920
|
Translation differences
|
5
|
43
|
13
|
4
|
6
|
-
|
10
|
81
|
Additions/ (deletions)
|
9
|
61
|
37
|
30
|
18
|
-
|
(53)
|
102
|
Acquisition through business combination
|
-
|
-
|
-
|
1
|
-
|
-
|
-
|
1
|
Depreciation
|
-
|
(33)
|
(41)
|
(43)
|
(26)
|
-
|
-
|
(143)
|
Carrying value as at December 31, 2009
|
$70
|
$539
|
$139
|
$46
|
$75
|
$1
|
$91
|
$961
|
Following are the changes in the carrying value of property, plant
and equipment for the nine months ended December 31, 2008:
(Dollars in millions)
|
Land
|
Buildings
|
Plant and machinery
|
Computer equipment
|
Furniture and fixtures
|
Vehicles
|
Capital work-in-progress
|
Total
|
Carrying value as at April 1, 2008
|
$57
|
$395
|
$113
|
$58
|
$68
|
-
|
$331
|
$1,022
|
Translation differences
|
(10)
|
(80)
|
(24)
|
(13)
|
(12)
|
-
|
(53)
|
(192)
|
Additions/ (deletions)
|
9
|
151
|
64
|
52
|
38
|
1
|
(89)
|
226
|
Depreciation
|
-
|
(25)
|
(28)
|
(44)
|
(21)
|
-
|
-
|
(118)
|
Carrying value as at December 31, 2008
|
$56
|
$441
|
$125
|
$53
|
$73
|
$1
|
$189
|
$938
|
The depreciation expense for the three months and nine months ended
December 31, 2009 and December 31, 2008 is included in cost of sales in the
statement of comprehensive income.
Carrying value of land includes $32 million and $22 million as at
December 31, 2009 and March 31, 2009, respectively, towards deposits paid under
certain lease-cum-sale agreements to acquire land including agreements where the
company has an option to purchase the properties on expiry of the lease period.
The company has already paid 99% of the market value of the properties
prevailing at the time of entering into the lease-cum-sale agreements with the
balance payable at the time of purchase.
The contractual commitments for capital expenditure were $57 million
and $73 million as of December 31, 2009 and March 31, 2009,
respectively.
2.5 Goodwill and intangible assets
Following is a summary of changes in the carrying amount of
goodwill:
(Dollars in millions)
|
As of
|
|
December 31, 2009
|
March 31, 2009
|
Carrying value at the beginning
|
$135
|
$174
|
Goodwill recognized on acquisition (Refer Note
2.2)
|
30
|
-
|
Translation differences
|
13
|
(39)
|
Carrying value at the end
|
$178
|
$135
|
Goodwill has been allocated to the cash generating units (CGU),
identified to be the operating segments as follows:
(Dollars in millions)
Segment
|
As of
|
|
December 31, 2009
|
March 31, 2009
|
Financial services
|
$87
|
$53
|
Manufacturing
|
20
|
18
|
Telecom
|
3
|
2
|
Retail
|
49
|
44
|
Others
|
19
|
18
|
Total
|
$178
|
$135
|
The entire goodwill relating to Infosys BPO’s acquisition of
McCamish has been allocated to the ‘Financial Services’ segment.
For the purpose of impairment testing, goodwill acquired in a
business combination is allocated to the CGU which are operating segments
regularly reviewed by the chief operating decision maker to make decisions about
resources to be allocated to the segment and to assess its
performance.
The recoverable amount of a CGU is the higher of its fair value less
cost to sell and its value-in-use. The fair value of a CGU is determined based
on the market capitalization. The value-in-use is determined based on specific
calculations. These calculations use pre-tax cash flow projections over a period
of five years, based on financial budgets approved by management and an average
of the range of each assumption mentioned below. As at March 31, 2009, the
estimated recoverable amount of the CGU exceeded its carrying amount. The
recoverable amount was computed based on the fair value being higher than
value-in-use and the carrying amount of the CGU was computed by allocating the
net assets to operating segments for the purpose of impairment testing. The key
assumptions used for the calculations are as follows:
|
In %
|
Long term growth rate
|
8-10
|
Operating margins
|
17 -20
|
Discount rate
|
13.3
|
The above discount rate is based on the Weighted Average Cost of
Capital (WACC) of the company. These estimates are likely to differ from future
actual results of operations and cash flows.
Following is a summary of changes in the carrying amount of acquired
intangible assets:
(Dollars in millions)
|
As of
|
|
December 31, 2009
|
March 31, 2009
|
Gross carrying value at the beginning
|
$11
|
$11
|
Intellectual property rights (Refer Note
2.2)
|
-
|
3
|
Customer contracts and relationships (Refer Note
2.2)
|
10
|
-
|
Computer software platform (Refer Note 2.2)
|
3
|
-
|
Translation differences
|
1
|
(3)
|
Gross carrying value at the end
|
$25
|
$11
|
|
|
|
Accumulated amortization at the beginning
|
$4
|
-
|
Amortization expense
|
6
|
4
|
Accumulated amortization at the end
|
$10
|
$4
|
Net carrying value
|
$15
|
$7
|
The intangible customer contracts recognized at the time of Philips
acquisition are being amortized over a period of seven years, being management's
estimate of the useful life of the respective assets, based on the life over
which economic benefits are expected to be realized. During the three months
ended December 31, 2009 the amortization of this intangible asset has been
accelerated based on the usage pattern of the asset. As of December 31, 2009,
the customer contracts have a remaining amortization period of five
years.
The intangible customer contracts and relationships, and computer
software platform recognized at the time of McCamish acquisition are being
amortized over a period of 9 years and 4 months, respectively, being
management’s estimate of the useful life of the respective assets, based on the
life over which economic benefits are expected to be realized.
The aggregate amortization expense included in cost of sales, for
the three months and nine months ended December 31, 2009 was $5 million and $6
million, respectively, and for the three months and nine months ended December
31, 2008 was $1 million and $2 million, respectively.
Research and development expense recognized in the statement of
comprehensive income, for the three months and nine months ended December 31,
2009 was $25 million and $67 million, respectively and for the three months and
nine months ended December 31, 2008 was $18 million and $40 million,
respectively.
2.6 Financial instruments
Financial instruments by category
The carrying value and fair value of financial instruments by
categories as at December 31, 2009 were as follows:
(Dollars in millions)
|
Loans and receivables
|
Financial assets/liabilities at fair value
through
profit and loss
|
Available for sale
|
Trade and other payables
|
Total carrying value/ fair value
|
Assets:
|
|
|
|
|
|
Cash and cash equivalents (Refer Note 2.1)
|
$1,972
|
-
|
-
|
-
|
$1,972
|
Available-for-sale financial assets
|
-
|
-
|
1,133
|
-
|
1,133
|
Trade receivables
|
724
|
-
|
-
|
-
|
724
|
Unbilled revenue
|
173
|
-
|
-
|
-
|
173
|
Derivative financial instruments
|
-
|
16
|
-
|
-
|
16
|
Prepayments and other assets (Refer Note 2.3)
|
176
|
-
|
-
|
-
|
176
|
Total
|
$3,045
|
$16
|
$1,133
|
-
|
$4,194
|
Liabilities:
|
|
|
|
|
|
Trade payables
|
-
|
-
|
-
|
$3
|
$3
|
Client deposits
|
-
|
-
|
-
|
3
|
3
|
Employee benefit obligations (Refer Note 2.7)
|
-
|
-
|
-
|
76
|
76
|
Other liabilities (Refer Note 2.9)
|
-
|
-
|
-
|
361
|
361
|
Total
|
-
|
-
|
-
|
$443
|
$443
|
The carrying value and fair value of financial instruments by
categories as at March 31, 2009 were as follows:
(Dollars in millions)
|
Loans and receivables
|
Financial assets/liabilities at fair value through profit and
loss
|
Available for sale
|
Trade and other payables
|
Total carrying value/ fair value
|
Assets:
|
|
|
|
|
|
Cash and cash equivalents (Refer Note 2.1)
|
$2,167
|
-
|
-
|
-
|
$2,167
|
Trade receivables
|
724
|
-
|
-
|
-
|
724
|
Unbilled revenue
|
148
|
-
|
-
|
-
|
148
|
Prepayments and other assets (Refer Note 2.3)
|
122
|
-
|
-
|
-
|
122
|
Total
|
$3,161
|
-
|
-
|
-
|
$3,161
|
Liabilities:
|
|
|
|
|
|
Trade payables
|
-
|
-
|
-
|
$5
|
$5
|
Derivative financial instruments
|
-
|
22
|
-
|
-
|
22
|
Client deposits
|
-
|
-
|
-
|
1
|
1
|
Employee benefit obligations (Refer Note 2.7)
|
-
|
-
|
-
|
69
|
69
|
Other liabilities (Refer Note 2.9)
|
-
|
-
|
-
|
284
|
284
|
Total
|
-
|
$22
|
-
|
$359
|
$381
|
Income from financial assets or liabilities that are not at fair
value through profit or loss is as follows:
(Dollars in millions)
|
Three months ended December 31,
|
Nine months ended December 31,
|
|
2009
|
2008
|
2009
|
2008
|
Interest income on deposits
|
$34
|
$46
|
$121
|
$135
|
Income from available-for-sale financial
assets
|
9
|
-
|
16
|
-
|
|
$43
|
$46
|
$137
|
$135
|
Derivative financial instruments
The company uses derivative financial instruments such as foreign
exchange forward and option contracts to mitigate the risk of changes in foreign
exchange rates on trade receivables and forecasted cash flows denominated in
certain foreign currencies. The counterparty for these contracts is generally a
bank or a financial institution. These derivative financial instruments are
valued based on quoted prices for similar assets and liabilities in active
markets or inputs that are directly or indirectly observable in the marketplace.
The following table gives details in respect of outstanding foreign exchange
forward and option contracts:
(In millions)
|
As of
|
|
December 31, 2009
|
March 31, 2009
|
Forward contracts
|
|
|
In U.S. dollars
|
380
|
278
|
In Euro
|
13
|
27
|
In United Kingdom Pound Sterling
|
10
|
21
|
Option contracts
|
|
|
In U.S. dollars
|
194
|
173
|
The company recognized a net gain on derivative financial
instruments of $22 million and $41 million for the three months and nine months
ended December 31, 2009, respectively, as against a net loss on derivative
financial instruments of $28 million and $144 million for the three months and
nine months ended December 31, 2008, respectively, which are included in other
income.
The foreign exchange forward and option contracts mature between 1
to 12 months. The table below analyzes the derivative financial instruments into
relevant maturity groupings based on the remaining period as at the balance
sheet date:
(Dollars in millions)
|
As of
|
|
December 31, 2009
|
March 31, 2009
|
Not later than one month
|
$105
|
$68
|
Later than one month and not later than three
months
|
230
|
197
|
Later than three months and not later than one
year
|
274
|
250
|
|
$609
|
$515
|
Financial risk management
Financial risk factors
The company's activities expose it to a variety of financial risks:
market risk, credit risk and liquidity risk. The company's primary focus is to
foresee the unpredictability of financial markets and seek to minimize potential
adverse effects on its financial performance. The primary market risk to the
company is foreign exchange risk. The company uses derivative financial
instruments to mitigate foreign exchange related risk exposures. The company's
exposure to credit risk is influenced mainly by the individual characteristic of
each customer and the concentration of risk from the top few customers. The
demographics of the customer including the default risk of the industry and
country in which the customer operates also has an influence on credit risk
assessment.
Market risk
The company operates internationally and a major portion of the
business is transacted in several currencies and consequently the company is
exposed to foreign exchange risk through its sales and services in the United
States and elsewhere, and purchases from overseas suppliers in various foreign
currencies. The company uses derivative financial instruments such as foreign
exchange forward and option contracts to mitigate the risk of changes in foreign
exchange rates on trade receivables and forecasted cash flows denominated in
certain foreign currencies. The exchange rate between the rupee and foreign
currencies has changed substantially in recent years and may fluctuate
substantially in the future. Consequently, the results of the company’s
operations are adversely affected as the rupee appreciates/ depreciates against
these currencies.
The following table gives details in respect of the outstanding
foreign exchange forward and option contracts:
(Dollars in millions)
|
As of
|
|
December 31, 2009
|
March 31, 2009
|
Aggregate amount of outstanding forward and option
contracts
|
$609
|
$515
|
Gains / (losses) on outstanding forward and option
contracts
|
$16
|
$(22)
|
The outstanding foreign exchange forward and option contracts as at
December 31, 2009 and March 31, 2009 mature between one to twelve
months.
The following table analyzes foreign currency risk from financial
instruments as at December 31, 2009:
(Dollars in millions)
|
U.S. dollars
|
Euro
|
United Kingdom Pound Sterling
|
Australian dollars
|
Other currencies
|
Total
|
Cash and cash equivalents
|
$52
|
$4
|
$9
|
$76
|
$30
|
$171
|
Trade receivables
|
495
|
66
|
85
|
2
|
76
|
724
|
Unbilled revenue
|
109
|
18
|
28
|
7
|
8
|
170
|
Prepayments and other assets
|
25
|
1
|
2
|
1
|
3
|
32
|
Trade payables
|
-
|
-
|
-
|
-
|
(2)
|
(2)
|
Client deposits
|
(3)
|
-
|
-
|
-
|
-
|
(3)
|
Accrued expenses
|
(51)
|
(1)
|
-
|
(2)
|
(7)
|
(61)
|
Accrued compensation to employees
|
(33)
|
-
|
-
|
(3)
|
(7)
|
(43)
|
Other liabilities
|
(172)
|
(29)
|
(15)
|
(13)
|
(10)
|
(239)
|
Net assets / (liabilities)
|
$422
|
$59
|
$109
|
$68
|
$91
|
$749
|
The following table analyzes foreign currency risk from financial
instruments as at March 31, 2009:
(Dollars in millions)
|
U.S. dollars
|
Euro
|
United Kingdom Pound Sterling
|
Australian dollars
|
Other currencies
|
Total
|
Cash and cash equivalents
|
$125
|
$8
|
$14
|
$59
|
$11
|
$217
|
Trade receivables
|
481
|
58
|
116
|
3
|
61
|
719
|
Unbilled revenue
|
77
|
14
|
19
|
3
|
20
|
133
|
Prepayments and other assets
|
3
|
-
|
1
|
-
|
1
|
5
|
Trade payables
|
(3)
|
-
|
-
|
-
|
(1)
|
(4)
|
Client deposits
|
(1)
|
-
|
-
|
-
|
-
|
(1)
|
Accrued expenses
|
(41)
|
(1)
|
(3)
|
(1)
|
(34)
|
(80)
|
Accrued compensation to employees
|
(31)
|
-
|
-
|
(2)
|
(4)
|
(37)
|
Other liabilities
|
(73)
|
(35)
|
(18)
|
(10)
|
(16)
|
(152)
|
Net assets / (liabilities)
|
$537
|
$44
|
$129
|
$52
|
$38
|
$800
|
For the three months ended December 31, 2009 and December 31, 2008,
every percentage point depreciation / appreciation in the exchange rate between
the Indian rupee and the U.S. dollar, has affected the company's operating
margins by approximately 0.3% and 0.4%, respectively.
For the nine months ended December 31, 2009 and December 31, 2008,
every percentage point depreciation / appreciation in the exchange rate between
the Indian rupee and the U.S. dollar, has affected the company's operating
margins by approximately 0.5% and 0.4%, respectively.
Sensitivity analysis is computed based on the changes in the income
and expenses in foreign currency upon conversion into functional currency, due
to exchange rate fluctuations between the previous reporting period and the
current reporting period.
Credit risk
Credit risk refers to the risk of default on its obligation
by the counterparty resulting in a financial loss. The maximum exposure to the
credit risk at the reporting date is primarily from trade receivables amounting
to $724 million each as at December 31, 2009 and March 31, 2009. Trade
receivables are typically unsecured and are derived from revenue earned from
customers primarily located in the United States. Credit risk is managed through
credit approvals, establishing credit limits and continuously monitoring the
creditworthiness of customers to which the company grants credit terms in the
normal course of business.
The following table gives details in respect of percentage of
revenues generated from top customer and top five customers:
(In %)
|
|
Three months ended December 31,
|
Nine months ended December 31,
|
|
|
|
|
2009
|
2008
|
2009
|
2008
|
Revenue from top customer
|
|
|
|
4.7
|
6.2
|
4.6
|
7.2
|
Revenue from top five customers
|
|
|
|
17.6
|
17.3
|
16.7
|
18.3
|
Financial assets that are neither past due nor
impaired
Cash and cash equivalents and available-for-sale financial assets
are neither past due nor impaired. Cash and cash equivalents include deposits
with banks and corporations with high credit-ratings assigned by international
and domestic credit-rating agencies. Available-for-sale financial assets include
investment in liquid mutual fund units. Of the total trade receivables, $439
million as at December 31, 2009, and $427 million as at March 31, 2009, were
neither past due nor impaired.
Financial assets that are past due but not
impaired
There is no other class of financial assets that is past due but not
impaired except for trade receivables. The company’s credit period generally
ranges from 30-45 days. The age analysis of the trade receivables have been
considered from the date of the invoice. The age wise break up of trade
receivables, net of allowances that are past due, is given below:
(Dollars in millions)
|
As of
|
Period (in days)
|
December 31, 2009
|
March 31, 2009
|
31 – 60
|
$197
|
$248
|
61 – 90
|
$54
|
$36
|
More than 90
|
$33
|
$10
|
The allowance for impairment of trade receivables for the
three months ended December 31, 2009 was a credit of $5 million whereas the
allowance for impairment of trade receivables for the nine months ended December
31, 2009 was $5 million. The allowance for impairment of trade receivables for
the three months and nine months ended December 31, 2008 was $2 million and $12
million, respectively. The movement in the allowance for impairment of trade
receivables is as follows:
(Dollars in millions)
|
Three months ended December 31,
|
Nine months ended December 31,
|
|
2009
|
2008
|
2009
|
2008
|
Balance at the beginning
|
$32
|
$17
|
$21
|
$10
|
Translation differences
|
2
|
-
|
3
|
-
|
Impairment loss recognized
|
(5)
|
2
|
5
|
12
|
Trade receivables written off
|
-
|
-
|
-
|
(3)
|
Balance at the end
|
$29
|
$19
|
$29
|
$19
|
Liquidity risk
As of December 31, 2009, the company had a working capital of $3,438
million including cash and cash equivalents of $1,972 million and
available-for-sale financial assets of $1,133 million. As of March 31, 2009, the
company had a working capital of $2,583 million including cash and cash
equivalents of $2,167 million. As of December 31, 2009 and March 31, 2009, the
company had no outstanding bank borrowings and accordingly, no liquidity risk is
perceived.
The table below provides details regarding the contractual
maturities of significant financial liabilities as at December 31,
2009:
(Dollars in millions)
Particulars
|
Less than 1 year
|
1-2 years
|
2-4 years
|
4-7 years
|
Total
|
Trade payables
|
$3
|
-
|
-
|
-
|
$3
|
Client deposits
|
3
|
-
|
-
|
-
|
3
|
Incentive accruals (Refer Note 2.7)
|
5
|
-
|
6
|
-
|
11
|
Other liabilities (Refer Note 2.9)
|
$352
|
$1
|
$2
|
$6
|
$361
|
The table below provides details regarding the contractual
maturities of significant financial liabilities as at March 31,
2009:
(Dollars in millions)
Particulars
|
Less than 1 year
|
1-2 years
|
2-4 years
|
4-7 years
|
Total
|
Trade payables
|
$5
|
-
|
-
|
-
|
$5
|
Client deposits
|
1
|
-
|
-
|
-
|
1
|
Incentive accruals (Refer Note 2.7)
|
-
|
5
|
6
|
-
|
11
|
Other liabilities (Refer Note 2.9)
|
$284
|
-
|
-
|
-
|
$284
|
2.7 Employee benefit obligations
Employee benefit obligations comprise the following:
(Dollars in millions)
|
As of
|
|
December 31, 2009
|
March 31, 2009
|
Current
|
|
|
Compensated absence
|
$25
|
$21
|
Incentive accruals
|
5
|
-
|
|
$30
|
$21
|
Non-current
|
|
|
Compensated absence
|
$40
|
$37
|
Incentive accruals
|
6
|
11
|
|
$46
|
$48
|
|
$76
|
$69
|
2.8 Provisions
Provisions comprise the following:
(Dollars in millions)
|
As of
|
|
December 31, 2009
|
March 31, 2009
|
Provision for post sales client support
|
$16
|
$18
|
Provision for post sales client support represent cost associated
with providing sales support services which are accrued at the time of
recognition of revenues and are expected to be utilized over a period of 6
months to 1 year.
The movement in the provision for post sales client support is as
follows:
(Dollars in millions)
|
Three months ended December 31,
|
Nine months ended December 31,
|
|
2009
|
2008
|
2009
|
2008
|
Balance at the beginning
|
$22
|
$12
|
$18
|
$13
|
Translation differences
|
-
|
-
|
-
|
-
|
Provision recognized
|
(5)
|
3
|
(2)
|
4
|
Provision utilized
|
(1)
|
-
|
-
|
(2)
|
Balance at the end
|
$16
|
$15
|
$16
|
$15
|
Provision for post sales client support for the three months and
nine months ended December 31, 2009 and December 31, 2008 is included in cost of
sales in the statement of comprehensive income.
2.9 Other liabilities
Other liabilities comprise the following:
(Dollars in millions)
|
As of
|
|
December 31, 2009
|
March 31, 2009
|
Current
|
|
|
Accrued compensation to employees
|
$111
|
$107
|
Accrued expenses
|
135
|
120
|
Withholding taxes payable
|
72
|
43
|
Retainage
|
15
|
11
|
Unamortized negative past service cost (Refer Note
2.11.1)
|
6
|
6
|
Liabilities arising on consolidation of trusts
|
15
|
-
|
Others
|
4
|
3
|
|
$358
|
$290
|
Non-current
|
|
|
Liability towards acquisition of business
|
$9
|
-
|
|
$9
|
-
|
|
$367
|
$290
|
Financial liabilities included in other
liabilities
|
$361
|
$284
|
Accrued expenses primarily relates to cost of technical
sub-contractors, telecommunication charges, legal and professional charges,
brand building expenses, overseas travel expenses and office maintenance. Others
consist of unclaimed dividends and amount payable towards acquisition of
business.
2.10 Expenses by nature
(Dollars in millions)
|
Three months ended December 31,
|
Nine months ended December 31,
|
|
2009
|
2008
|
2009
|
2008
|
Employee benefit costs (Refer Note 2.11.4)
|
$649
|
$607
|
$1,856
|
$1,858
|
Depreciation and amortization charges (Refer Note 2.4 and
2.5)
|
55
|
39
|
149
|
120
|
Travelling costs
|
42
|
42
|
106
|
152
|
Consultancy and professional charges
|
14
|
13
|
42
|
44
|
Cost of software packages
|
24
|
15
|
61
|
55
|
Communication costs
|
11
|
14
|
35
|
45
|
Cost of technical sub-contractors
|
17
|
20
|
49
|
66
|
Power and fuel
|
8
|
8
|
23
|
25
|
Repairs and maintenance
|
13
|
13
|
41
|
40
|
Commission
|
2
|
2
|
4
|
5
|
Branding and marketing expenses
|
3
|
3
|
11
|
17
|
Provision for post-sales client support (Refer Note
2.8)
|
(5)
|
3
|
(2)
|
4
|
Allowance for impairment of trade receivables (Refer Note
2.6)
|
(5)
|
2
|
5
|
12
|
Operating lease payments (Refer Note 2.14)
|
7
|
6
|
20
|
19
|
Others
|
15
|
11
|
38
|
36
|
Total cost of sales, selling and marketing expenses and
administrative expenses
|
$850
|
$798
|
$2,438
|
$2,498
|
2.11 Employee benefits
2.11.1 Gratuity
The following tables set out the funded status of the gratuity plans
and the amounts recognized in the company's financial statements as at December
31, 2009, March 31, 2009 and March 31, 2008:
(Dollars in millions)
|
As of
|
|
December 31, 2009
|
March 31, 2009
|
March 31, 2008
|
Change in benefit obligations
|
|
|
|
Benefit obligations at the beginning
|
$52
|
$56
|
$51
|
Actuarial gains
|
(1)
|
-
|
(2)
|
Service cost
|
13
|
11
|
14
|
Interest cost
|
3
|
3
|
4
|
Benefits paid
|
(5)
|
(5)
|
(6)
|
Plan amendments
|
-
|
-
|
(9)
|
Translation differences
|
6
|
(13)
|
4
|
Benefit obligations at the end
|
$68
|
$52
|
$56
|
Change in plan assets
|
|
|
|
Fair value of plan assets at the beginning
|
$52
|
$59
|
$51
|
Expected return on plan assets
|
4
|
4
|
4
|
Actuarial gains
|
-
|
-
|
1
|
Employer contributions
|
11
|
7
|
4
|
Benefits paid
|
(5)
|
(5)
|
(6)
|
Translation differences
|
6
|
(13)
|
5
|
Fair value of plan assets at the end
|
$68
|
$52
|
$59
|
Funded status
|
-
|
-
|
$3
|
Prepaid benefit
|
-
|
-
|
$3
|
Net gratuity cost for the three months and nine months ended
December 31, 2009 and December 31, 2008 comprises the following
components:
(Dollars in millions)
|
Three months ended December 31,
|
Nine months ended December 31,
|
|
2009
|
2008
|
2009
|
2008
|
Service cost
|
$4
|
$5
|
$13
|
$9
|
Interest cost
|
1
|
-
|
3
|
2
|
Expected return on assets
|
(1)
|
-
|
(4)
|
(2)
|
Actuarial gains
|
(1)
|
-
|
(1)
|
-
|
Plan amendments
|
(1)
|
-
|
(1)
|
(1)
|
Net gratuity cost
|
$2
|
$5
|
$10
|
$8
|
The net gratuity cost has been apportioned between cost of sales,
selling and marketing expenses and administrative expenses on the basis of
direct employee cost as follows:
(Dollars in millions)
|
Three months ended December 31,
|
Nine months ended December 31,
|
|
2009
|
2008
|
2009
|
2008
|
Cost of sales
|
$2
|
$4
|
$9
|
$7
|
Selling and marketing expenses
|
-
|
1
|
1
|
1
|
Administrative expenses
|
-
|
-
|
-
|
-
|
|
$2
|
$5
|
$10
|
$8
|
Effective July 1, 2007, the company amended its Gratuity Plan, to
suspend the voluntary defined death benefit component of the Gratuity Plan. This
amendment resulted in a negative past service cost amounting to $9 million,
which is being amortized on a straight-line basis over the average remaining
service period of employees which is 10 years. The unamortized negative past
service cost of $6 million each as at December 31, 2009 and March 31, 2009, has
been included under other current liabilities.
The weighted-average assumptions used to determine benefit
obligations as of December 31, 2009, March 31, 2009 and March 31, 2008 are set
out below:
|
As of
|
|
December 31, 2009
|
March 31, 2009
|
March 31, 2008
|
Discount rate
|
7.6%
|
7.0%
|
7.9%
|
Weighted average rate of increase in compensation
levels
|
7.3%
|
5.1%
|
5.1%
|
The weighted-average assumptions used to determine net periodic
benefit cost for the three months and nine months ended December 31, 2009 and
December 31, 2008 are set out below:
|
Three months ended December 31,
|
Nine months ended December 31,
|
|
2009
|
2008
|
2009
|
2008
|
Discount rate
|
7.0%
|
7.9%
|
7.0%
|
7.9%
|
Weighted average rate of increase in compensation
levels
|
7.3%
|
5.1%
|
7.3%
|
5.1%
|
Rate of return on plan assets
|
9.0%
|
7.9%
|
7.0%
|
7.9%
|
The company contributes all ascertained liabilities towards gratuity
to the Infosys Technologies Limited Employees' Gratuity Fund Trust. In case of
Infosys BPO, contributions are made to the Infosys BPO Employees' Gratuity Fund
Trust. Trustees administer contributions made to the trust and contributions are
invested in specific designated instruments as permitted by Indian law and
investments are also made in mutual funds that invest in the specific designated
instruments. As of December 31, 2009 and March 31, 2009, the plan assets have
been primarily invested in government securities.
Actual return on assets for each of the three months ended December
31, 2009 and December 31, 2008 was $1 million. The actual return on assets for
each of the nine months ended December 31, 2009 and December 31, 2008 was $4
million.
The company assesses these assumptions with its projected long-term
plans of growth and prevalent industry standards. The company's overall expected
long-term rate-of-return on assets has been determined based on consideration of
available market information, current provisions of Indian law specifying the
instruments in which investments can be made, and historical returns. Historical
returns during the three months and nine months ended December 31, 2009 and
December 31, 2008 have not been lower than the expected rate of return on plan
assets estimated for those years. The discount rate is based on the government
securities yield.
Assumptions regarding future mortality experience are set in
accordance with the published statistics by the Life Insurance Corporation of
India.
The company expects to contribute approximately $3 million to the
gratuity trusts during the remainder of fiscal 2010.
2.11.2 Superannuation
The company contributed $5 million and $4 million to the
superannuation plan during the three months ended December 31, 2009 and December
31, 2008 and contributed $14 million and $13 million to the superannuation plan
during the nine months ended December 31, 2009 and December 31, 2008. Since
fiscal 2008, a substantial portion of the monthly contribution amount is being
paid directly to the employees as an allowance and a nominal amount has been
contributed to the plan.
Superannuation contributions have been apportioned between cost of
sales, selling and marketing expenses and administrative expenses on the basis
of direct employee cost as follows:
(Dollars in millions)
|
Three months ended December 31,
|
Nine months ended December 31,
|
|
2009
|
2008
|
2009
|
2008
|
Cost of sales
|
$5
|
$4
|
$13
|
$12
|
Selling and marketing expenses
|
-
|
-
|
1
|
1
|
Administrative expenses
|
-
|
-
|
-
|
-
|
|
$5
|
$4
|
$14
|
$13
|
2.11.3 Provident fund
Infosys has an obligation to fund any shortfall on the yield of the
trust’s investments over the administered interest rates on an annual basis.
These administered rates are determined annually predominantly considering the
social rather than economic factors and in most cases the actual return earned
by the company has been higher in the past years. In the absence of reliable
measures for future administered rates and due to the lack of measurement
guidance, the company’s actuary has expressed its inability to determine the
actuarial valuation for such provident fund liabilities. Accordingly, the
company is unable to exhibit the related information.
The company contributed $9 million and $8 million to the provident
fund during the three months ended December 31, 2009 and December 31, 2008, and
contributed $26 million and $25 million during the nine months ended December
31, 2009 and December 31, 2008.
Provident fund contributions have been apportioned between cost of
sales, selling and marketing expenses and administrative expenses on the basis
of direct employee cost as follows:
(Dollars in millions)
|
Three months ended December 31,
|
Nine months ended December 31,
|
|
2009
|
2008
|
2009
|
2008
|
Cost of sales
|
$8
|
$7
|
$23
|
$22
|
Selling and marketing expenses
|
1
|
1
|
2
|
2
|
Administrative expenses
|
-
|
-
|
1
|
1
|
|
$9
|
$8
|
$26
|
$25
|
2.11.4 Employee benefit costs include:
(Dollars in millions)
|
Three months ended December 31,
|
Nine months ended December 31,
|
|
2009
|
2008
|
2009
|
2008
|
Salaries and bonus
|
$633
|
$589
|
$1,806
|
$1,811
|
Defined contribution plans
|
6
|
5
|
17
|
16
|
Defined benefit plans
|
10
|
12
|
33
|
30
|
Share-based compensation
|
-
|
1
|
-
|
1
|
|
$649
|
$607
|
$1,856
|
$1,858
|
The employee benefit cost is recognized in the following line items
in the statement of comprehensive income:
(Dollars in millions)
|
Three months ended December 31,
|
Nine months ended December 31,
|
|
2009
|
2008
|
2009
|
2008
|
Cost of sales
|
$567
|
$541
|
$1,633
|
$1,653
|
Selling and marketing expenses
|
52
|
42
|
140
|
132
|
Administrative expenses
|
30
|
24
|
83
|
73
|
|
$649
|
$607
|
$1,856
|
$1,858
|
2.12 Equity
Share capital and share premium
Infosys has only one class of shares referred to as equity shares
having a par value of $0.16. The amount received in excess of the par value has
been classified as share premium. Additionally, share-based compensation
recognized in the statement of comprehensive income is credited to share
premium.
Retained earnings
Retained earnings represent the amount of accumulated earnings of
the company.
Other components of equity
Other components of equity consist of currency
translation.
The company’s objective when managing capital is to safeguard its
ability to continue as a going concern and to maintain an optimal capital
structure so as to maximize shareholder value. In order to maintain or achieve
an optimal capital structure, the company may adjust the amount of dividend
payment, return capital to shareholders, issue new shares or buy back issued
shares. As at December 31, 2009, the company has only one class of equity shares
and has no debt. Consequent to the above capital structure there are no
externally imposed capital requirements.
The rights of equity shareholders are set out below.
2.12.1 Voting
Each holder of equity shares is entitled to one vote per share. The
equity shares represented by American Depositary Shares (ADS) carry similar
rights to voting and dividends as the other equity shares. Each ADS represents
one underlying equity share.
2.12.2 Dividends
The company declares and pays dividends in Indian rupees. Indian law
mandates that any dividend be declared out of accumulated distributable profits
only after the transfer to a general reserve of a specified percentage of net
profit computed in accordance with current regulations. The remittance of
dividends outside India is governed by Indian law on foreign exchange and is
subject to applicable taxes.
The amount of per share dividend recognized as distributions to
equity shareholders for the nine months ended December 31, 2009 and December 31,
2008 was $0.48 and $0.89, respectively.
2.12.3 Liquidation
In the event of liquidation of the company, the holders of shares
shall be entitled to receive any of the remaining assets of the company, after
distribution of all preferential amounts. However, no such preferential amounts
exist currently, other than the amounts held by irrevocable controlled trusts.
The amount distributed will be in proportion to the number of equity shares held
by the shareholders. For irrevocable controlled trusts, the corpus would be
settled in favour of the beneficiaries.
2.12.4 Share options
There are no voting, dividend or liquidation rights to the holders
of options issued under the company's share option plans.
2.13 Other income
Other income consists of the following:
(Dollars in millions)
|
Three months ended December 31,
|
Nine months ended December 31,
|
|
2009
|
2008
|
2009
|
2008
|
Interest income on deposits
|
$34
|
$46
|
$121
|
$135
|
Exchange gains/ (losses) on forward and options
contracts
|
22
|
(28)
|
41
|
(144)
|
Exchange gains/ (losses) on translation of other assets and
liabilities
|
(18)
|
(16)
|
(28)
|
53
|
Income from available-for-sale financial assets/
investments
|
9
|
-
|
16
|
-
|
Others*
|
3
|
5
|
4
|
6
|
|
$50
|
$7
|
$154
|
$50
|
* Other income for the nine months ended December 31, 2008 includes
a net amount of $4 million, consisting of $7 million received from Axon Group
Plc as inducement fee offset by $3 million of expenses incurred towards the
transaction.
2.14 Operating leases
The company has various operating leases, mainly for office
buildings, that are renewable on a periodic basis. Rental expense for operating
leases was $7 million and $6 million for the three months ended December 31,
2009 and December 31, 2008, respectively, and was $20 million and $19 million
for the nine months ended December 31, 2009 and December 31, 2008,
respectively.
The schedule of future minimum rental payments in respect of
non-cancellable operating leases is set out below:
(Dollars in millions)
|
As of
|
|
December 31, 2009
|
March 31, 2009
|
Within one year of the balance sheet date
|
$18
|
$16
|
Due in a period between one year and five
years
|
$45
|
$44
|
Due after five years
|
$13
|
$14
|
The operating lease arrangements extend up to a maximum of ten years
from their respective dates of inception and relate to rented overseas premises.
Some of these lease agreements have price escalation clauses.
2.15 Employees' Stock Option Plans (ESOP)
1998 Employees Stock Option Plan (the 1998 Plan): The company’s 1998
Plan provides for the grant of non-statutory share options and incentive share
options to employees of the company. The establishment of the 1998 Plan was
approved by the Board of Directors in December 1997 and by the shareholders
in January 1998. The Government of India has approved the 1998 Plan,
subject to a limit of 11,760,000 equity shares representing 11,760,000 ADS to be
issued under the 1998 Plan. All options granted under the 1998 Plan are
exercisable for equity shares represented by ADSs. The options under the 1998
Plan vest over a period of one through four years and expire five years from the
date of completion of vesting. The 1998 Plan is administered by a compensation
committee comprising four members, all of whom are independent members of the
Board of Directors. The term of the 1998 Plan ended on January 6, 2008, and
consequently no further shares will be issued to employees under this
plan.
1999 Employees Stock Option Plan (the 1999 Plan): In fiscal 2000,
the company instituted the 1999 Plan. The Board of Directors and shareholders
approved the 1999 Plan in June 1999. The 1999 Plan provides for the issue
of 52,800,000 equity shares to employees. The 1999 Plan is administered by a
compensation committee comprising four members, all of whom are independent
members of the Board of Directors. Under the 1999 Plan, options will be issued
to employees at an exercise price, which shall not be less than the fair market
value (FMV) of the underlying equity shares on the date of grant. Under the 1999
Plan, options may also be issued to employees at exercise prices that are less
than FMV only if specifically approved by the shareholders of the company in a
general meeting. All options under the 1999 Plan are exercisable for equity
shares. The options under the 1999 Plan vest over a period of one through six
years, although accelerated vesting based on performance conditions is provided
in certain instances and expire over a period of 6 months through five years
from the date of completion of vesting. The term of the 1999 plan ended on June
11, 2009, and consequently no further shares will be issued to employees under
this plan.
The activity in the 1998 Plan and 1999 Plan during the nine months
ended December 31, 2009 and December 31, 2008 are set out below.
|
Nine months ended December 31, 2009
|
Nine months ended December 31, 2008
|
|
Shares arising
out of options
|
Weighted average
exercise price
|
Shares arising
out of options
|
Weighted average
exercise price
|
1998 Plan:
|
|
|
|
|
Outstanding at the beginning
|
916,759
|
$18
|
1,530,447
|
$20
|
Forfeited and expired
|
(57,889)
|
$33
|
(67,122)
|
$43
|
Exercised
|
(441,058)
|
$17
|
(341,008)
|
$19
|
Outstanding at the end
|
417,812
|
$16
|
1,122,317
|
$19
|
Exercisable at the end
|
417,812
|
$16
|
1,122,317
|
$19
|
1999 Plan:
|
|
|
|
|
Outstanding at the beginning
|
925,806
|
$25
|
1,494,693
|
$29
|
Forfeited and expired
|
(306,433)
|
$42
|
(180,201)
|
$40
|
Exercised
|
(264,132)
|
$15
|
(304,737)
|
$14
|
Outstanding at the end
|
355,241
|
$22
|
1,009,755
|
$25
|
Exercisable at the end
|
312,658
|
$18
|
652,885
|
$15
|
The weighted average share price of options exercised under the 1998
Plan during the nine months ended December 31, 2009 and December 31, 2008 was
$43.91 and $39.61, respectively. The weighted average share price of options
exercised under the 1999 Plan during the nine months ended December 31, 2009 and
December 31, 2008 was $42.75 and $36.17, respectively.
The cash expected to be received upon the exercise of vested options
for the 1998 Plan and 1999 Plan is $7 million and $6 million,
respectively.
The following table summarizes information about share options
outstanding and exercisable as of December 31, 2009:
|
Options outstanding
|
Options exercisable
|
Range of exercise prices
per share ($)
|
No. of shares arising
out of options
|
Weighted Average
remaining contractual life
|
Weighted average
exercise price
|
No. of shares arising
out of options
|
Weighted Average
remaining contractual life
|
Weighted average
exercise price
|
1998 Plan:
|
|
|
|
|
|
|
4-15
|
229,424
|
1.15
|
$12
|
229,424
|
1.15
|
$12
|
16-30
|
188,388
|
0.78
|
$21
|
188,388
|
0.78
|
$21
|
|
417,812
|
0.99
|
$16
|
417,812
|
0.99
|
$16
|
1999 Plan:
|
|
|
|
|
|
|
5-15
|
183,402
|
1.11
|
$9
|
183,402
|
1.11
|
$9
|
16-30
|
62,709
|
0.14
|
$16
|
62,709
|
0.14
|
$16
|
31-53
|
109,130
|
1.73
|
$46
|
66,547
|
1.61
|
$46
|
|
355,241
|
1.13
|
$22
|
312,658
|
1.02
|
$18
|
The following table summarizes information about share options
outstanding and exercisable as of March 31, 2009:
|
Options outstanding
|
Options exercisable
|
Range of exercise prices
per share ($)
|
No. of shares arising
out of options
|
Weighted Average
remaining contractual life
|
Weighted average
exercise price
|
No. of shares arising
out of options
|
Weighted Average
remaining contractual life
|
Weighted average
exercise price
|
1998 Plan:
|
|
|
|
|
|
|
4-15
|
431,762
|
1.58
|
$12
|
431,762
|
1.58
|
$12
|
16-30
|
428,997
|
1.39
|
$21
|
428,997
|
1.39
|
$21
|
31-45
|
46,720
|
0.32
|
$37
|
46,720
|
0.32
|
$37
|
46-60
|
9,280
|
0.10
|
$51
|
9,280
|
0.10
|
$51
|
|
916,759
|
1.41
|
$18
|
916,759
|
1.41
|
$18
|
1999 Plan:
|
|
|
|
|
|
|
5-15
|
446,185
|
1.26
|
$10
|
446,185
|
1.26
|
$10
|
16-30
|
77,893
|
0.52
|
$19
|
77,893
|
0.52
|
$19
|
31-53
|
401,728
|
1.06
|
$42
|
327,223
|
0.75
|
$42
|
|
925,806
|
1.11
|
$25
|
851,301
|
1.00
|
$23
|
The share-based compensation recorded during each of the
three months and nine months ended December 31, 2009 was less than $1 million.
The share-based compensation recorded during each of the three months and nine
months ended December 31, 2008 was $1 million.
2.16 Income taxes
Income tax expense in the statement of comprehensive income
comprises:
(Dollars in millions)
|
Three months ended December 31,
|
Nine months ended
December 31,
|
|
2009
|
2008
|
2009
|
2008
|
Current taxes
|
|
|
|
|
Domestic taxes
|
$106
|
$46
|
$246
|
$116
|
Foreign taxes
|
15
|
3
|
53
|
50
|
|
121
|
49
|
299
|
166
|
Deferred taxes
|
|
|
|
|
Domestic taxes
|
(18)
|
-
|
(35)
|
(30)
|
Foreign taxes
|
(5)
|
(1)
|
(4)
|
(2)
|
|
(23)
|
(1)
|
(39)
|
(32)
|
Income tax expense
|
$98
|
$48
|
$260
|
$134
|
Entire deferred income tax for the three months and nine months
ended December 31, 2009 and December 31, 2008 relates to origination and
reversal of temporary differences. No amounts have been directly recognized in
equity during the three months and nine months ended December 31, 2009 and
December 31, 2008.
A reconciliation of the income tax provision to the amount computed
by applying the statutory income tax rate to the income before income taxes is
summarized below:
(Dollars in millions)
|
Three months ended December 31,
|
Nine months ended
December 31,
|
|
2009
|
2008
|
2009
|
2008
|
Profit before income taxes
|
$432
|
$380
|
$1,224
|
$1,094
|
Enacted tax rates in India
|
33.99%
|
33.99%
|
33.99%
|
33.99%
|
Computed expected tax expense
|
$147
|
$129
|
$416
|
$372
|
Tax effect due to non-taxable income for Indian tax
purposes
|
(29)
|
(80)
|
(109)
|
(252)
|
Tax reversals, net
|
(16)
|
(12)
|
(36)
|
(19)
|
Effect of exempt income
|
1
|
-
|
(7)
|
-
|
Interest and penalties
|
1
|
1
|
3
|
5
|
Effect of unrecognized deferred tax assets
|
(2)
|
2
|
-
|
4
|
Effect of differential foreign tax rates
|
2
|
7
|
13
|
13
|
Effect of non-deductible expenses
|
5
|
4
|
6
|
9
|
Others
|
(11)
|
(3)
|
(26)
|
2
|
Income tax expense
|
$98
|
$48
|
$260
|
$134
|
The foreign tax expense is due to income taxes payable overseas,
principally in the United States of America. The company benefits from certain
significant tax incentives provided to software firms under Indian tax laws.
These incentives include those for facilities set up under the Special Economic
Zones Act, 2005 and software development facilities designated as "Software
Technology Parks" (the STP Tax Holiday). The STP Tax Holiday is available for
ten consecutive years, beginning from the financial year when the unit started
producing computer software or April 1, 1999, whichever is earlier. The Indian
Government through the Finance Act, 2009 has extended the tax holiday for the
STP units until March 31, 2011. Most of our STP units have already completed the
tax holiday period and for the remaining STP units the tax holiday will expire
by the end of fiscal 2011. Under the Special Economic Zones Act, 2005 scheme,
units in designated special economic zones which begin providing services on or
after April 1, 2005 are eligible for a deduction of 100 percent of profits or
gains derived from the export of services for the first five years from
commencement of provision of services and 50 percent of such profits or gains
for a further five years. Certain tax benefits are also available for a further
period of five years subject to the unit meeting defined
conditions.
Infosys is subject to a 15% Branch Profit Tax (BPT) in the U.S. to
the extent its U.S. branch's net profit during the year is greater than the
increase in the net assets of the U.S. branch during the fiscal year, computed
in accordance with the Internal Revenue Code. As at March 31, 2009, Infosys'
U.S. branch net assets amounted to approximately $481 million. As of December
31, 2009, the company had not triggered the BPT. The company has recorded a
deferred tax liability on its net assets in the United States, to the extent it
intends to distribute its branch profits in the foreseeable future.
Deferred income tax liabilities have not been recognized on
temporary differences amounting to $193 million and $166 million as at December
31, 2009 and March 31, 2009, respectively, associated with investments in
subsidiaries and branches as it is probable that the temporary differences will
not reverse in the foreseeable future.
The gross movement in the current income tax asset/ (liability) for
the three months and nine months ended December 31, 2009 and December 31, 2008
is as follows:
(Dollars in millions)
|
Three months endedDecember 31,
|
Nine months ended December 31,
|
|
2009
|
2008
|
2009
|
2008
|
Net current income tax asset/ (liability) at the
beginning
|
$(78)
|
$(80)
|
$(61)
|
$(46)
|
Translation differences
|
(1)
|
3
|
(4)
|
10
|
Income tax paid
|
126
|
47
|
290
|
123
|
Income tax expense
|
(121)
|
(49)
|
(299)
|
(166)
|
Net current income tax asset/ (liability) at the
end
|
$(74)
|
$(79)
|
$(74)
|
$(79)
|
The tax effects of significant temporary differences that resulted
in deferred income tax assets and liabilities are as follows:
(Dollars in millions)
|
As of
|
|
December 31, 2009
|
March 31, 2009
|
Deferred income tax assets
|
|
|
Property, plant and equipment
|
$42
|
$26
|
Minimum alternate tax credit carry-forwards
|
67
|
56
|
Deductible temporary difference on computer
software
|
4
|
-
|
Trade receivables
|
8
|
2
|
Compensated absences
|
10
|
2
|
Others
|
5
|
2
|
Total deferred income tax assets
|
136
|
88
|
Deferred income tax liabilities
|
|
|
Intangible asset
|
–
|
–
|
Temporary difference related to branch profits
|
(8)
|
(7)
|
Total deferred income tax liabilities
|
(8)
|
(7)
|
Total deferred income tax assets
|
$128
|
$81
|
Deferred income tax assets to be recovered after more than 12
months
|
$121
|
$81
|
Deferred income tax liability to be recovered after more than
12 months
|
-
|
-
|
Deferred income tax assets to be recovered within 12
months
|
15
|
7
|
Deferred income tax liability to be recovered within 12
months
|
(8)
|
(7)
|
|
$128
|
$81
|
In assessing the realizability of deferred income tax assets,
management considers whether some portion or all of the deferred income tax
assets will not be realized. The ultimate realization of deferred income tax
assets is dependent upon the generation of future taxable income during the
periods in which the temporary differences become deductible. Management
considers the scheduled reversals of deferred income tax liabilities, projected
future taxable income, and tax planning strategies in making this assessment.
Based on the level of historical taxable income and projections for future
taxable income over the periods in which the deferred income tax assets are
deductible, management believes that the company will realize the benefits of
those deductible differences. The amount of the deferred income tax assets
considered realizable, however, could be reduced in the near term if estimates
of future taxable income during the carry forward period are
reduced.
The gross movement in the deferred income tax account for the three
months and nine months ended December 31, 2009 and December 31, 2008 is as
follows:
(Dollars in millions)
|
|
Three months ended December 31,
|
Nine months ended December 31,
|
|
|
|
|
2009
|
2008
|
2009
|
2008
|
Net deferred income tax asset at the beginning
|
|
|
|
$101
|
$93
|
$81
|
$73
|
Translation differences
|
|
|
|
4
|
(5)
|
8
|
(16)
|
Credits relating to temporary differences
|
|
|
|
23
|
1
|
39
|
32
|
Net deferred income tax asset at the end
|
|
|
|
$128
|
$89
|
$128
|
$89
|
The credits relating to temporary differences during the three
months and nine months ended December 31, 2009 and December 31, 2008 are
primarily on account of minimum alternate tax credit, compensated absences and
property, plant and equipment.
Pursuant to the enacted changes in the Indian Income Tax Laws
effective April 1, 2007, a Minimum Alternate Tax (MAT) has been extended to
income in respect of which a deduction may be claimed under sections 10A and
10AA of the Income Tax Act; consequently the company has calculated its tax
liability for current domestic taxes after considering MAT. The excess tax paid
under MAT provisions being over and above regular tax liability can be carried
forward and set off against future tax liabilities computed under regular tax
provisions. The company was required to pay MAT, and, accordingly, a deferred
income tax asset of $67 million and $56 million has been recognized on the
balance sheet as of December 31, 2009 and March 31, 2009, respectively, which
can be carried forward for a period of ten years from the year of
recognition.
The tax loss carry-forwards of $61 million and $54 million as of
December 31, 2009 and March 31, 2009 relating to foreign subsidiaries, for which
no deferred income tax asset has been created, will expire at various dates
through March 31, 2030, as it is not probable that future taxable profit will be
available against which the Group can utilize the benefits
therefrom.
2.17 Earnings per share
The following is a reconciliation of the equity shares used in the
computation of basic and diluted earnings per equity share:
|
Three months ended December 31,
|
Nine months ended December 31,
|
|
2009
|
2008
|
2009
|
2008
|
Basic earnings per equity share - weighted average number of
equity shares outstanding
|
570,602,970
|
569,755,757
|
570,353,792
|
569,571,267
|
Effect of dilutive common equivalent shares - share options
outstanding
|
580,340
|
693,312
|
685,424
|
1,078,766
|
Diluted earnings per equity share - weighted average number of
equity shares and common equivalent shares outstanding
|
571,183,310
|
570,449,069
|
571,039,216
|
570,650,033
|
Options to purchase 123,641 shares for the three months ended
December 31, 2008 under the 1998 Plan and 406,166 shares for the three months
ended December 31, 2008 under the 1999 Plan were not considered for calculating
diluted earnings per share as their effect was anti-dilutive.
Options to purchase 66,880 shares for the nine months ended December
31, 2008 under the 1998 Plan and 109,130 shares and 406,166 shares for the nine
months ended December 31, 2009 and December 31, 2008, respectively under the
1999 Plan were not considered for calculating diluted earnings per share as
their effect was anti-dilutive.
2.18 Related party transactions
List of subsidiaries:
|
|
Holding as at
|
Particulars
|
Country
|
December 31, 2009
|
March 31, 2009
|
Infosys BPO
|
India
|
99.98%
|
99.98%
|
Infosys Australia
|
Australia
|
100%
|
100%
|
Infosys China
|
China
|
100%
|
100%
|
Infosys Consulting
|
U.S.A
|
100%
|
100%
|
Infosys Mexico
|
Mexico
|
100%
|
100%
|
Infosys BPO s. r. o *
|
Czech Republic
|
99.98%
|
99.98%
|
Infosys BPO (Poland) Sp.Z.o.o *
|
Poland
|
99.98%
|
99.98%
|
Infosys BPO (Thailand) Limited *
|
Thailand
|
99.98%
|
99.98%
|
Mainstream Software Pty. Ltd **
|
Australia
|
100%
|
100%
|
Infosys Sweden ***
|
Sweden
|
100%
|
-
|
Infosys Brasil ****
|
Brazil
|
100%
|
-
|
Infosys Consulting India Limited*****
|
India
|
100%
|
-
|
Infosys Public Services, Inc. #
|
U.S.A
|
100%
|
-
|
McCamish Systems LLC* (Refer Note 2.2)
|
U.S.A
|
99.98%
|
-
|
* Infosys BPO s.r.o, Infosys BPO (Poland) Sp Z.o.o, Infosys BPO
(Thailand) Limited and McCamish Systems LLC are wholly-owned subsidiaries of
Infosys BPO.
** Mainstream Software Pty. Ltd, is a wholly owned subsidiary of
Infosys Australia.
***During fiscal 2009, the Company incorporated wholly-owned
subsidiary, Infosys Technologies (Sweden) AB, which was capitalised on July 8,
2009.
**** On August 7, 2009 the Company incorporated wholly-owned
subsidiary, Infosys Tecnologia DO Brasil LTDA.
*****On August 19, 2009 Infosys Consulting incorporated wholly-owned
subsidiary, Infosys Consulting India Limited.
#
On October 9, 2009 the Company incorporated wholly-owned subsidiary, Infosys
Public Services, Inc.
Infosys has provided guarantee for performance of certain contracts
entered into by Infosys BPO.
List of other related parties:
Particulars
|
Country
|
Nature of relationship
|
Infosys Technologies Limited Employees' Gratuity Fund
Trust
|
India
|
Post-employment benefit plans of Infosys
|
Infosys Technologies Limited Employees' Provident Fund
Trust
|
India
|
Post-employment benefit plans of Infosys
|
Infosys Technologies Limited Employees' Superannuation Fund
Trust
|
India
|
Post-employment benefit plans of Infosys
|
Infosys BPO Limited Employees’ Superannuation Fund
Trust
|
India
|
Post-employment benefit plan of Infosys BPO
|
Infosys BPO Limited Employees’ Gratuity Fund
Trust
|
India
|
Post-employment benefit plan of Infosys BPO
|
Infosys Technologies Limited Employees’ Welfare
Trust
|
India
|
Employee Welfare Trust of Infosys
|
Infosys Science Foundation
|
India
|
Controlled trust
|
Refer Note 2.11 for information on transactions with post-employment
benefit plans mentioned above.
Transactions with key management personnel
The table below describes the compensation to key management
personnel which comprise directors and members of the executive
council:
(Dollars in millions)
|
Three months ended December 31,
|
Nine months ended December 31,
|
|
2009
|
2008
|
2009
|
2008
|
Salaries and other short-term employee
benefits
|
$1
|
$1
|
$5
|
$5
|
2.19 Segment reporting
IFRS 8 establishes standards for the way that public business
enterprises report information about operating segments and related disclosures
about products and services, geographic areas, and major customers. The
company's operations predominantly relate to providing IT solutions, delivered
to customers located globally, across various industry segments. The Chief
Operating Decision Maker evaluates the company's performance and allocates
resources based on an analysis of various performance indicators by industry
classes and geographic segmentation of customers. Accordingly, segment
information has been presented both along industry classes and geographic
segmentation of customers. The accounting principles used in the preparation of
the financial statements are consistently applied to record revenue and
expenditure in individual segments, and are as set out in the significant
accounting policies.
Industry segments for the company are primarily financial services
comprising enterprises providing banking, finance and insurance services,
manufacturing enterprises, enterprises in the telecommunications (telecom) and
retail industries, and others such as utilities, transportation and logistics
companies. Geographic segmentation is based on business sourced from that
geographic region and delivered from both on-site and off-shore. North America
comprises the United States of America, Canada and Mexico, Europe includes
continental Europe (both the east and the west), Ireland and the United Kingdom,
and the Rest of the World comprising all other places except those mentioned
above and India.
Revenue and identifiable operating expenses in relation to segments
are categorized based on items that are individually identifiable to that
segment. Allocated expenses of segments include expenses incurred for rendering
services from the company's offshore software development centers and on-site
expenses, which are categorized in relation to the associated turnover of the
segment. Certain expenses such as depreciation, which form a significant
component of total expenses, are not specifically allocable to specific segments
as the underlying assets are used interchangeably. Management believes that it
is not practical to provide segment disclosures relating to those costs and
expenses, and accordingly these expenses are separately disclosed as
"unallocated" and adjusted against the total income of the company.
Fixed assets used in the company's business are not identified to
any of the reportable segments, as these are used interchangeably between
segments. Management believes that it is currently not practicable to provide
segment disclosures relating to total assets and liabilities since a meaningful
segregation of the available data is onerous.
Geographical information on revenue and industry revenue information
is collated based on individual customers invoiced or in relation to which the
revenue is otherwise recognized.
2.19.1 Industry segments
(Dollars in millions)
Three months ended December 31, 2009
|
Financial services
|
Manufacturing
|
Telecom
|
Retail
|
Others
|
Total
|
Revenues
|
$425
|
$237
|
$200
|
$161
|
$209
|
$1,232
|
Identifiable operating expenses
|
165
|
106
|
67
|
68
|
86
|
492
|
Allocated expenses
|
104
|
58
|
50
|
40
|
51
|
303
|
Segment profit
|
156
|
73
|
83
|
53
|
72
|
437
|
Unallocable expenses
|
|
|
|
|
|
55
|
Operating profit
|
|
|
|
|
|
382
|
Other income
|
|
|
|
|
|
50
|
Profit before income taxes
|
|
|
|
|
|
432
|
Income tax expense
|
|
|
|
|
|
98
|
Net profit
|
|
|
|
|
|
$334
|
Depreciation and amortization
|
|
|
|
|
|
$55
|
Non-cash expenses other than depreciation and
amortization
|
|
|
|
|
|
-
|
Three months ended December 31, 2008
|
Financial services
|
Manufacturing
|
Telecom
|
Retail
|
Others
|
Total
|
Revenues
|
$409
|
$230
|
$196
|
$147
|
$189
|
$1,171
|
Identifiable operating expenses
|
163
|
97
|
74
|
61
|
74
|
469
|
Allocated expenses
|
101
|
57
|
48
|
36
|
49
|
291
|
Segment profit
|
145
|
76
|
74
|
50
|
66
|
411
|
Unallocable expenses
|
|
|
|
|
|
38
|
Operating profit
|
|
|
|
|
|
373
|
Other income
|
|
|
|
|
|
7
|
Profit before income taxes
|
|
|
|
|
|
380
|
Income tax expense
|
|
|
|
|
|
48
|
Net profit
|
|
|
|
|
|
$332
|
Depreciation and amortization
|
|
|
|
|
|
$39
|
Non-cash expenses other than depreciation and
amortization
|
|
|
|
|
|
$1
|
Nine months ended December 31, 2009
|
Financial services
|
Manufacturing
|
Telecom
|
Retail
|
Others
|
Total
|
Revenues
|
$1,182
|
$690
|
$575
|
$472
|
$589
|
$3,508
|
Identifiable operating expenses
|
470
|
308
|
198
|
192
|
232
|
1,400
|
Allocated expenses
|
299
|
175
|
146
|
120
|
149
|
889
|
Segment profit
|
413
|
207
|
231
|
160
|
208
|
1,219
|
Unallocable expenses
|
|
|
|
|
|
149
|
Operating profit
|
|
|
|
|
|
1,070
|
Other income
|
|
|
|
|
|
154
|
Profit before income taxes
|
|
|
|
|
|
1,224
|
Income tax expense
|
|
|
|
|
|
260
|
Net profit
|
|
|
|
|
|
$964
|
Depreciation and amortization
|
|
|
|
|
|
$149
|
Non-cash expenses other than depreciation and
amortization
|
|
|
|
|
|
-
|
Nine months ended December 31, 2008
|
Financial services
|
Manufacturing
|
Telecom
|
Retail
|
Others
|
Total
|
Revenues
|
$1,212
|
$687
|
$656
|
$434
|
$553
|
$3,542
|
Identifiable operating expenses
|
506
|
293
|
238
|
182
|
222
|
1,441
|
Allocated expenses
|
320
|
181
|
172
|
114
|
149
|
936
|
Segment profit
|
386
|
213
|
246
|
138
|
182
|
1,165
|
Unallocable expenses
|
|
|
|
|
|
121
|
Operating profit
|
|
|
|
|
|
1,044
|
Other income
|
|
|
|
|
|
50
|
Profit before income taxes
|
|
|
|
|
|
1,094
|
Income tax expense
|
|
|
|
|
|
134
|
Net profit
|
|
|
|
|
|
$960
|
Depreciation and amortization
|
|
|
|
|
|
$120
|
Non-cash expenses other than depreciation and
amortization
|
|
|
|
|
|
$1
|
2.19.2
|
Geographic segments
|
(Dollars in millions)
Three months ended December 31, 2009
|
North America
|
Europe
|
India
|
Rest of the World
|
Total
|
Revenues
|
$820
|
$269
|
$15
|
$128
|
$1,232
|
Identifiable operating expenses
|
328
|
112
|
4
|
48
|
492
|
Allocated expenses
|
201
|
66
|
4
|
32
|
303
|
Segment profit
|
291
|
91
|
7
|
48
|
437
|
Unallocable expenses
|
|
|
|
|
55
|
Operating profit
|
|
|
|
|
382
|
Other income
|
|
|
|
|
50
|
Profit before income taxes
|
|
|
|
|
432
|
Income tax expense
|
|
|
|
|
98
|
Net profit
|
|
|
|
|
$334
|
Depreciation and amortization
|
|
|
|
|
$55
|
Non-cash expenses other than depreciation and
amortization
|
|
|
|
|
-
|
Three months ended December 31, 2008
|
North America
|
Europe
|
India
|
Rest of the World
|
Total
|
Revenues
|
$755
|
$299
|
$14
|
$103
|
$1,171
|
Identifiable operating expenses
|
310
|
122
|
2
|
35
|
469
|
Allocated expenses
|
187
|
74
|
3
|
27
|
291
|
Segment profit
|
258
|
103
|
9
|
41
|
411
|
Unallocable expenses
|
|
|
|
|
38
|
Operating profit
|
|
|
|
|
373
|
Other income
|
|
|
|
|
7
|
Profit before income taxes
|
|
|
|
|
380
|
Income tax expense
|
|
|
|
|
48
|
Net profit
|
|
|
|
|
$332
|
Depreciation and amortization
|
|
|
|
|
$39
|
Non-cash expenses other than depreciation and
amortization
|
|
|
|
|
$1
|
Nine months ended December 31, 2009
|
North America
|
Europe
|
India
|
Rest of the World
|
Total
|
Revenues
|
$2,306
|
$814
|
$39
|
$349
|
$3,508
|
Identifiable operating expenses
|
921
|
329
|
12
|
138
|
1,400
|
Allocated expenses
|
584
|
206
|
10
|
89
|
889
|
Segment profit
|
801
|
279
|
17
|
122
|
1,219
|
Unallocable expenses
|
|
|
|
|
149
|
Operating profit
|
|
|
|
|
1,070
|
Other income
|
|
|
|
|
154
|
Profit before income taxes
|
|
|
|
|
1,224
|
Income tax expense
|
|
|
|
|
260
|
Net profit
|
|
|
|
|
$964
|
Depreciation and amortization
|
|
|
|
|
$149
|
Non-cash expenses other than depreciation and
amortization
|
|
|
|
|
-
|
Nine months ended December 31, 2008
|
North America
|
Europe
|
India
|
Rest of the World
|
Total
|
Revenues
|
$2,225
|
$957
|
$43
|
$317
|
$3,542
|
Identifiable operating expenses
|
936
|
380
|
10
|
115
|
1,441
|
Allocated expenses
|
587
|
253
|
11
|
85
|
936
|
Segment profit
|
702
|
324
|
22
|
117
|
1,165
|
Unallocable expenses
|
|
|
|
|
121
|
Operating profit
|
|
|
|
|
1,044
|
Other income
|
|
|
|
|
50
|
Profit before income taxes
|
|
|
|
|
1,094
|
Income tax expense
|
|
|
|
|
134
|
Net profit
|
|
|
|
|
$960
|
Depreciation and amortization
|
|
|
|
|
$120
|
Non-cash expenses other than depreciation and
amortization
|
|
|
|
|
$1
|
2.19.3 Significant clients
No client individually accounted for more than 10% of the revenues
in the three months and nine months ended December 31, 2009 and December 31,
2008.
2.20 Litigation
The company is subject to legal proceedings and claims which have
arisen in the ordinary course of its business. The company’s management does not
reasonably expect that legal actions, when ultimately concluded and determined,
will have a material and adverse effect on the results of operations or the
financial position of the company.
2.21 Tax contingencies
The company has received demands from the Indian taxation
authorities for payment of additional tax of $67 million, including interest of
$12 million, upon completion of their tax review for fiscal 2004, fiscal 2005
and fiscal 2006. The demands for fiscal 2004, fiscal 2005 and fiscal 2006 were
received during fiscal 2007, fiscal 2009 and fiscal 2010, respectively. The tax
demands are mainly on account of disallowance of a portion of the deduction
claimed by the company under Section 10A of the Income tax Act. The deductible
amount is determined by the ratio of export turnover to total turnover. The
disallowance arose from certain expenses incurred in foreign currency being
reduced from export turnover but not reduced from total turnover.
The company is contesting the demands and management and its tax
advisors believe that its position will likely be upheld in the appellate
process. No additional provision has been accrued in the financial statements
for the tax demands raised. Management believes that the ultimate outcome of
these proceedings will not have a material and adverse effect on the company's
financial position and results of operations. The Commissioner of Income tax
(Appeals) has given the order in favor of the company for fiscal 2004. The tax
demand with regard to fiscal 2005 is pending before the Commissioner of Income
tax (Appeals), Bangalore whereas with regard to the tax demand for fiscal 2006,
the company is in the process of filing the appeal before Commissioner of Income
tax (Appeals), Bangalore.
In addition to historical information, this discussion contains
certain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. When used in this discussion, the words 'anticipate,'
'believe,' 'estimate,' 'expect,' 'intend,' 'project,' 'seek,' 'should,' 'will'
and other similar expressions as they relate to us or our business are intended
to identify such forward-looking statements. The forward-looking statements
contained herein are subject to certain risks and uncertainties that could cause
actual results to differ materially from those reflected in the forward-looking
statements. Factors that might cause such differences include but are not
limited to, those discussed in the section entitled 'Risk Factors' and elsewhere
in this Quarterly Report. Readers are cautioned not to place undue reliance on
these forward-looking statements, which reflect management's analysis only as of
the date of this Quarterly Report. The following discussion and analysis should
be read in conjunction with our financial statements included herein and the
notes thereto. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
Overview
We are a leading global technology services company that provides
comprehensive end-to-end business solutions that leverage technology for our
clients, including technical consulting, design, development, product
engineering, maintenance, systems integration, package evaluation and
implementation, validation and infrastructure management services. We also
provide software products to the banking industry. Through Infosys BPO, we
provide business process management services such as offsite customer
relationship management, finance and accounting, and administration and sales
order processing. Our clients rely on our solutions to enhance their business
performance.
Our professionals deliver high quality solutions by leveraging our
Global Delivery Model through which we divide projects into components that we
execute simultaneously at client sites and at our development centers in India
and around the world. We seek to optimize our cost structure by maintaining the
flexibility to execute project components where it is most cost effective. Our
sales, marketing and business development teams are organized to focus on
specific geographies and industries and this helps us to customize our service
offerings to our client's needs. Our primary geographic markets are North
America, Europe and the Asia Pacific region. We serve clients in financial
services, manufacturing, telecommunications, retail, utilities, logistics and
other industries.
There is an increasing need for highly skilled technology
professionals in the markets in which we operate and in the industries to which
we provide services. At the same time, companies are reluctant to expand their
internal IT departments and increase costs. These factors have increased the
reliance of companies on their outsourced technology service providers and are
expected to continue to drive future growth for outsourced technology services.
We believe that because the effective use of offshore technology services may
offer lower total costs of ownership of IT infrastructure, lower labor costs,
improved quality and innovation, faster delivery of technology solutions and
more flexibility in scheduling, companies are increasingly turning to offshore
technology service providers. India, in particular, has become a premier
destination for offshore technology services. The key factors contributing to
the growth of IT and IT enabled services in India include high quality delivery,
significant cost benefits and abundant availability of skilled IT professionals.
Our proven Global Delivery Model, our comprehensive end to end solutions, our
commitment to superior quality and process execution, our long standing client
relationships and our ability to scale make us one of the leading offshore
technology service providers in India.
There are numerous risks and challenges affecting the business.
These risks and challenges are discussed in detail in the section entitled 'Risk
Factors' and elsewhere in this Quarterly Report.
We were founded in 1981 and are headquartered in Bangalore, India.
We completed our initial public offering of equity shares in India in 1993 and
our initial public offering of ADSs in the United States in 1999. We completed
three sponsored secondary ADS offerings in the United States in August 2003,
June 2005 and November 2006. We did not receive any of the proceeds from any of
our sponsored secondary offerings.
During fiscal 2009, Infosys Australia acquired 100% of the equity
shares of Mainstream Software Pty Limited (MSPL) for a cash consideration of $3
million.
Also, during fiscal 2009, the investments held by P-Financial
Services Holding B.V. in its wholly owned subsidiaries Pan-Financial Shared
Services India Private Limited, Infosys BPO (Poland) Sp. Z.o.o., and Infosys BPO
(Thailand) Limited were transferred to Infosys BPO, consequent to which
P-Financial Services Holding B.V. was liquidated. Further, Infosys BPO merged
its wholly owned subsidiary Pan-Financial Shared Services India Private Limited,
retrospectively with effect from April 1, 2008, through a scheme of amalgamation
sanctioned by the Karnataka and Tamil Nadu High courts.
During fiscal 2009, the company incorporated a wholly owned
subsidiary, Infosys Technologies (Sweden) AB which was capitalized on July 8,
2009.
On August 7, 2009 the Company incorporated wholly-owned subsidiary,
Infosys Tecnologia DO Brasil LTDA. Additionally on August 19, 2009 Infosys
Consulting incorporated wholly-owned subsidiary, Infosys Consulting India
Limited.
Further, on October 9, 2009 the Company incorporated wholly owned
subsidiary, Infosys Public Services, Inc.
On December 4, 2009, Infosys BPO acquired 100% of the voting
interests in McCamish Systems LLC (McCamish), a business process solutions
provider based in Atlanta, Georgia, in the United States. The business
acquisition was conducted by entering into Membership Interest Purchase
Agreement for a cash consideration of $37 million and a contingent consideration
of up to $20 million. The fair value of the contingent consideration on the date
of acquisition was $9 million.
At our Annual General Meeting held on June 20, 2009, our
shareholders approved a final dividend of $0.27 per equity share, which in the
aggregate resulted in a cash outflow of $188 million including corporate
dividend tax of $27 million.
Our Board of Directors, during its meeting held on October 9,
2009 approved payment of an interim dividend of $0.21 per equity share for
fiscal 2010 which in the aggregate resulted in a cash outflow of $142 million
including corporate dividend tax of $21 million.
As of December 31, 2009 we had approximately 109,900 employees as
compared to approximately 104,900 employees as at March 31, 2009.
The following table sets forth our revenues, net profit and earnings
per equity share for the nine months ended December 31, 2009 and fiscal
2009:
(Dollars in millions)
|
Nine months ended
December 31, 2009
|
Fiscal 2009
|
Revenues
|
$3,508
|
$4,663
|
Net profit
|
$964
|
$1,281
|
Earnings per equity share (Basic)
|
$1.69
|
$2.25
|
Earnings per equity share (Diluted)
|
$1.69
|
$2.25
|
We added 94 new customers during the nine months ended December 31,
2009 as compared to 156 new customers during fiscal 2009. For the nine months
ended December 31, 2009 and fiscal 2009, 97.9% and 97.6%, respectively, of our
revenue came from repeat business, which we define as revenue from a client who
also contributed to our revenue during the prior fiscal year.
Our business is designed to enable us to seamlessly deliver our
onsite and offshore capabilities using a distributed project management
methodology, which we refer to as our Global Delivery Model. We divide projects
into components that we execute simultaneously at client sites and at our
geographically dispersed development centers in India and around the world. Our
Global Delivery Model allows us to provide clients with high quality solutions
in reduced time-frames enabling them to achieve operational
efficiencies.
Revenues
Our revenues are generated principally from technology services
provided on either a time-and-materials or a fixed-price, fixed-timeframe basis.
Revenues from services provided on a time-and-materials basis are recognized as
the related services are performed. Revenues from services provided on a
fixed-price, fixed-timeframe basis are recognized pursuant to the
percentage-of-completion method. Most of our client contracts, including those
that are on a fixed-price, fixed-timeframe basis can be terminated by clients
with or without cause, without penalties and with short notice periods of
between 0 and 90 days. Since we collect revenues on contracts as portions of the
contracts are completed, terminated contracts are only subject to collection for
portions of the contract completed through the time of termination. Most of our
contracts do not contain specific termination-related penalty provisions. In
order to manage and anticipate the risk of early or abrupt contract
terminations, we monitor the progress on all contracts and change orders
according to their characteristics and the circumstances in which they occur.
This includes a focused review of our ability and our client's ability to
perform on the contract, a review of extraordinary conditions that may lead to a
contract termination, as well as historical client performance considerations.
Since we also bear the risk of cost overruns and inflation with respect to
fixed-price, fixed-timeframe projects, our operating results could be adversely
affected by inaccurate estimates of contract completion costs and dates,
including wage inflation rates and currency exchange rates that may affect cost
projections. Losses on contracts, if any, are provided for in full in the period
when determined. Although we revise our project completion estimates from time
to time, such revisions have not, to date, had a material adverse effect on our
operating results or financial condition. We also generate revenue from software
application products, including banking software. Such software products
represented 4.0% and 3.9% of our total revenues for the nine months ended
December 31, 2009 and fiscal 2009.
We
experience from time to time, pricing pressure from our clients. For example,
clients often expect that as we do more business with them, they will receive
volume discounts. Additionally, clients may ask for fixed-price, fixed-time
frame arrangements or reduced rates. We attempt to use fixed-price, fixed-time
frame arrangements for engagements where the specifications are complete, so
individual rates are not negotiated.
Cost of Sales
Cost of sales represented 57.2% of total revenues for the nine
months ended December 31, 2009 and 57.9% of total revenues for fiscal 2009. Our
cost of sales primarily consists of salary and other compensation expenses,
depreciation, amortization of intangible assets, overseas travel expenses, cost
of software purchased for internal use, cost of technical subcontractors, rent
and data communication expenses. We depreciate our personal computers, mainframe
computers and servers over two to five years and amortize intangible assets over
their estimated useful life. Third party software is expensed over the estimated
useful life. We recorded share-based compensation expense of $1 million under
cost of sales during fiscal 2009 using the fair value recognition provisions
contained in IFRS 2, Share-based Payment. The share-based compensation expense
recorded for the nine months ended December 31, 2009 was less than $1 million.
Amortization expense included under cost of sales for the nine months ended
December 31, 2009 was $6 million whereas it was $4 million for fiscal
2009.
We typically assume full project management responsibility for each
project that we undertake. Approximately 75.8% and 74.9% of the total billed
person-months for our services during the nine months ended December 31, 2009
and fiscal 2009, respectively, were performed at our global development centers
in India, and the balance of the work was performed at client sites and global
development centers located outside India. The proportion of work performed at
our facilities and at client sites varies from quarter to quarter. We charge
higher rates and incur higher compensation and other expenses for work performed
at client sites and global development centers located outside India. Services
performed at a client site or at a global development center located outside
India typically generate higher revenues per-capita at a lower gross margin than
the same services performed at our facilities in India. As a result, our total
revenues, cost of sales and gross profit in absolute terms and as a percentage
of revenues fluctuate from quarter- to- quarter based in part on the proportion
of work performed outside India. We intend to hire more local employees in many
of the overseas markets in which we operate, which could decrease our gross
profits due to increased wage and hiring costs. Additionally, any increase in
work performed at client sites or global development centers located outside
India may decrease our gross profits. We hire subcontractors on a limited basis
from time to time for our own technology development needs, and we generally do
not perform subcontracted work for other technology service providers. For the
nine months ended December 31, 2009 and fiscal 2009, approximately 2.4% and
3.1%, respectively, of our cost of sales was attributable to cost of technical
subcontractors. We do not anticipate that our subcontracting needs will increase
significantly as we expand our business.
Revenues and gross profits are also affected by employee utilization
rates. We define employee utilization as the proportion of total billed person
months to total available person months, excluding administrative and support
personnel. We manage utilization by monitoring project requirements and
timetables. The number of software professionals that we assign to a project
will vary according to the size, complexity, duration, and demands of the
project. An unanticipated termination of a significant project could also cause
us to experience lower utilization of technology professionals, resulting in a
higher than expected number of unassigned technology professionals. In addition,
we do not utilize our technology professionals when they are enrolled in
training programs, particularly during our normal 19-week training course for
new employees.
Selling and Marketing Expenses
Selling and marketing expenses represented 5.1% of total revenues
for the nine months ended December 31, 2009 and 5.1% of total revenues for
fiscal 2009. Our selling and marketing expenses primarily consist of expenses
relating to salaries and other compensation expenses of sales and marketing
personnel, travel expenses, brand building, commission charges, rental for sales
and marketing offices and telecommunications. For the nine months ended December
31, 2009 and fiscal 2009, share-based compensation included in selling and
marketing expenses was less than $1 million. We may increase our selling and
marketing expenses as we seek to increase brand awareness among target clients
and promote client loyalty and repeat business among existing clients. We also
intend to hire more sales and marketing employees in many of the overseas
markets, in which we operate, which could increase our sales and marketing
expenses.
Administrative Expenses
Administrative expenses represented 7.3% of total revenues for the
nine months ended December 31, 2009 and 7.5% of total revenues for fiscal 2009.
Our administrative expenses primarily consist of expenses relating to salaries
and other compensation expenses of senior management and other support
personnel, travel expenses, legal and other professional fees,
telecommunications, office maintenance, power and fuel charges, insurance, other
miscellaneous administrative costs and provisions for doubtful accounts
receivable. The factors which affect the fluctuations in our provisions for bad
debts and write offs of uncollectible accounts include the financial health of
our clients and of the economic environment in which they operate. For the nine
months ended December 31, 2009 and fiscal 2009, share-based compensation
included in administrative expenses was less than $1 million.
Other Income
Other income includes interest income from deposits, income from
available-for-sale financial assets/ investments, foreign currency exchange
gains / (losses) on translation of other assets and liabilities, including
marked to market gains / (losses) on foreign exchange forward and option
contracts. For the nine months ended December 31, 2009, the interest income on
deposits was $121 million whereas the income from available-for-sale financial
assets / investments was $16 million. We also recorded a foreign exchange gain
of $41 million on forward and options contracts, partially offset by a foreign
exchange loss of $28 million on translation of other assets and liabilities
during the nine months ended December 31, 2009.
Functional Currency and Foreign Exchange
The functional currency of Infosys and Infosys BPO is the Indian
rupee. The functional currencies for Infosys Australia, Infosys China, Infosys
Consulting, Infosys Mexico, Infosys Sweden, Infosys Brasil and Infosys Public
Services are the respective local currencies. The consolidated interim financial
statements included in this Quarterly Report are presented in U.S. dollars
(rounded off to the nearest million) to facilitate global comparability. The
translation of functional currencies to U.S. dollars is performed for assets and
liabilities using the exchange rate in effect at the balance sheet date, and for
revenue, expenses and cash flow items using the average exchange rate for the
respective periods. The gains or losses resulting from such translation are
included in currency translation reserves under other components of
equity.
Generally, Indian law requires residents of India to repatriate any
foreign currency earnings to India to control the exchange of foreign currency.
More specifically, Section 8 of the Foreign Exchange Management Act, or FEMA,
requires an Indian company to take all reasonable steps to realize and
repatriate into India all foreign currency earned by the company outside India,
within such time periods and in the manner specified by the Reserve Bank of
India, or RBI. The RBI has promulgated guidelines that require the company to
repatriate any realized foreign currency back to India, and either:
·
|
sell it to an authorized dealer for rupees within seven days
from the date of receipt of the foreign
currency;
|
·
|
retain it in a foreign currency account such as an Exchange
Earners Foreign Currency, or EEFC, account with an authorized dealer;
or
|
·
|
use it for discharge of debt or liabilities denominated in
foreign currency.
|
We typically collect our earnings and pay expenses denominated in
foreign currencies using a dedicated foreign currency account located in the
local country of operation. In order to do this, we are required to, and have
obtained, special approval from the RBI to maintain a foreign currency account
in overseas countries like the United States. However, the RBI approval is
subject to limitations, including a requirement that we repatriate all foreign
currency in the account back to India within a reasonable time, except an amount
equal to our local monthly operating cost for our overseas branch. We currently
pay such expenses and repatriate the remainder of the foreign currency to India
on a regular basis. We have the option to retain those in an EEFC account
(foreign currency denominated) or an Indian-rupee-denominated account. We
convert substantially all of our foreign currency to rupees to fund operations
and expansion activities in India.
Our failure to comply with these regulations could result in RBI
enforcement actions against us.
Income Taxes
Our net profit earned from providing software development and other
services outside India is subject to tax in the country where we perform the
work. Most of our tax paid in countries other than India can be applied as a
credit against our Indian tax liability to the extent that the same income is
subject to tax in India.
Currently, we benefit from the tax incentives the Government of
India gives to the export of software from specially designated software
technology parks, or STPs, in India and for facilities set up under the Special
Economic Zones Act, 2005. The STP Tax Holiday is available for ten consecutive
years beginning from the financial year when the unit started producing computer
software or April 1, 1999, whichever is earlier. The Indian Government through
the Finance Act, 2009 has extended the tax holiday for the STP units until March
31, 2011. Most of our STP units have already completed the tax holiday period
and for the remaining STP units the tax holiday will expire by the end of fiscal
2011. Under the Special Economic Zones Act, 2005 scheme, units in designated
special economic zones which begin providing services on or after April 1, 2005
are eligible for a deduction of 100 percent of profits or gains derived from the
export of services for the first five years from commencement of provision of
services and 50 percent of such profits or gains for a further five years.
Certain tax benefits are also available for a further five years subject to the
unit meeting defined conditions. When our tax holidays expire or terminate, our
tax expense will materially increase, reducing our profitability.
As a result of these tax incentives, a substantial portion of our
pre-tax income has not been subject to significant tax in recent years. These
tax incentives resulted in a decrease in our income tax expense of $109 million
and $325 million for the nine months ended December 31, 2009 and for fiscal
2009, respectively, compared to the effective tax amounts that we estimate we
would have been required to pay if these incentives had not been
available.
Further, as a result of such tax incentives our effective tax rate
for the nine months ended December 31, 2009 and fiscal 2009 was 21.2% and 13.2%,
respectively. The increase in the effective tax rate to 21.2% for the nine
months ended December 31, 2009 from 13.2% for fiscal 2009 is mainly due to the
expiration of the tax holiday period for the majority of our STP units. Our
Indian statutory tax rate for the same period was 33.99%.
Pursuant to the enacted changes in the Indian Income Tax Laws
effective April 1, 2007, a Minimum Alternate Tax (MAT) has been extended to
income in respect of which a deduction may be claimed under sections 10A and
10AA of the Income Tax Act; consequently, we have calculated our tax liability
for current domestic taxes after considering MAT. The excess tax paid under MAT
provisions being over and above regular tax liability can be carried forward and
set off against future tax liabilities computed under regular tax provisions. We
are required to pay MAT, and, accordingly, a deferred tax asset of $67 million
has been recognized on the balance sheet as of December 31, 2009, which can be
carried forward for a period of ten years from the year of
recognition.
Results for the three months ended December 31, 2009 compared to the
three months ended December 31, 2008
Revenues
The following table sets forth the growth in our revenues for the
three months ended December 31, 2009 over the corresponding period in
2008:
(Dollars in millions)
|
|
Three months ended December 31,
|
Change
|
Percentage Change
|
|
2009
|
2008
|
|
|
Revenues
|
$1,232
|
$1,171
|
$61
|
5.2%
|
Revenues increased significantly in the retail segment, whereas
there was a marginal decrease in revenues in most other segments of our
business.
During the three months ended December 31, 2009, the U.S dollar
depreciated against a majority of the currencies in which we transact business.
The U.S. dollar depreciated by 0.6% and 3.4% against the United Kingdom Pound
Sterling and Australian dollar, respectively and appreciated by 1.4% against the
Euro.
There were significant currency movements during the three months
ended December 31, 2009. Had the average exchange rate between each of these
currencies and the U.S. dollar remained constant, during the three months ended
December 31, 2009 in comparison to the three months ended December 31, 2008, our
revenues in constant currency terms for the three months ended December 31, 2009
would have been lower by $11 million at $1,221 million as against our reported
revenues of $1,232 million, resulting in a growth of 4.3% as against a reported
growth of 5.2%.
The following table sets forth our revenues by industry segments for
the three months ended December 31, 2009 and December 31, 2008:
|
Percentage of revenues
|
|
Three months ended December 31,
|
Industry Segments
|
2009
|
2008
|
Financial services
|
34.6%
|
34.9%
|
Manufacturing
|
19.3%
|
19.6%
|
Telecommunication
|
16.2%
|
16.7%
|
Retail
|
13.1%
|
12.6%
|
Others including utilities, logistics and
services
|
16.8%
|
16.2%
|
The increase in the percentage of revenues from the retail segment
during the three months ended December 31, 2009 as compared to the three months
ended December 31, 2008 was primarily due to addition of new clients. The
decline in the percentage of revenues from the telecommunication segment during
the three months ended December 31, 2009 as compared to the three months ended
December 31, 2008 was primarily due to decrease in business from European
clients operating in this segment.
There were significant currency movements during the three months
ended December 31, 2009 and the following table sets forth our revenues by
industry segments for the three months ended December 31, 2009, had the average
exchange rate between each of the currencies namely, the United Kingdom Pound
Sterling, Euro and Australian dollar, and the U.S. dollar remained constant,
during the three months ended December 31, 2009 in comparison with the average
exchange rate experienced during the three months ended December 31,
2008:
Industry Segments
|
Three months ended December 31, 2009
|
Financial services
|
34.7%
|
Manufacturing
|
19.3%
|
Telecommunication
|
15.9%
|
Retail
|
13.2%
|
Others including utilities, logistics and
services
|
16.9%
|
The following table sets forth our industry segment profit (revenues
less identifiable operating expenses and allocated expenses) as a percentage of
industry segment revenues for the three months ended December 31, 2009 and
December 31, 2008 (refer note 2.19.1 under item 1 of this Quarterly
Report):
|
Three months ended December 31,
|
Industry Segments
|
2009
|
2008
|
Financial services
|
36.7%
|
35.5%
|
Manufacturing
|
30.8%
|
33.0%
|
Telecommunication
|
41.5%
|
37.8%
|
Retail
|
32.9%
|
34.0%
|
Others including utilities, logistics and
services
|
34.4%
|
34.9%
|
Our revenues are also segmented into onsite and offshore revenues.
Onsite revenues are for those services which are performed at client sites as
part of our engagements, while offshore revenues are for services which are
performed at our global development centers. The table below sets forth the
percentage of our revenues by location for the three months ended December 31,
2009 and December 31, 2008:
|
Percentage of Revenues
|
|
Three months ended December 31,
|
|
2009
|
2008
|
Onsite
|
46.1%
|
45.8%
|
Offshore
|
53.9%
|
54.2%
|
The services performed onsite typically generate higher revenues
per-capita, but at lower gross margins in percentage as compared to the services
performed at our own facilities. The table below sets forth details of billable
hours for onsite and offshore for the three months ended December 31, 2009 and
December 31, 2008:
|
Three months ended December 31,
|
|
2009
|
2008
|
Onsite
|
22.5%
|
23.1%
|
Offshore
|
77.5%
|
76.9%
|
Revenues from services represented 96.1% of total revenues for the
three months ended December 31, 2009 as compared to 95.8% for the three months
ended December 31, 2008. Sale of our software products represented 3.9% of our
total revenues for the three months ended December 31, 2009 as compared to 4.2%
for the three months ended December 31, 2008.
The following table sets forth the revenues from fixed-price,
fixed-timeframe contracts and time-and-materials contracts as a percentage of
total services revenues for the three months ended December 31, 2009 and
December 31, 2008:
|
Percentage of revenues
|
|
Three months ended December 31,
|
|
2009
|
2008
|
Fixed-price, fixed-time frame contracts
|
38.3%
|
36.3%
|
Time-and-materials contracts
|
61.7%
|
63.7%
|
The following table sets forth our revenues by geographic segments
for the three months ended December 31, 2009 and December 31, 2008:
|
Percentage of revenues
|
|
Three months ended December 31,
|
Geographic Segments
|
2009
|
2008
|
North America
|
66.6%
|
64.5%
|
Europe
|
21.9%
|
25.5%
|
India
|
1.2%
|
1.2%
|
Rest of the World
|
10.3%
|
8.8%
|
A focus of our growth strategy is to expand our business to parts of
the world outside North America, including Europe, Australia and other parts of
Asia, as we expect that increases in the proportion of revenues generated from
customers outside of North America would reduce our dependence upon our sales to
North America and the impact on us of economic downturns in that
region.
There were significant currency movements during the three months
ended December 31, 2009 and the following table sets forth our revenues by
geographic segments for the three months ended December 31, 2009, had the
average exchange rate between each of the currencies namely, the United Kingdom
Pound Sterling, Euro and Australian dollar, and the U.S. dollar remained
constant, during the three months ended December 31, 2009 in comparison with the
average exchange rate experienced during the three months ended December 31,
2008:
Geographic Segments
|
Three months ended December 31, 2009
|
North America
|
67.1%
|
Europe
|
21.9%
|
India
|
1.2%
|
Rest of the World
|
9.8%
|
The following table sets forth our geographic segment profit
(revenues less identifiable operating expenses and allocated expenses) as a
percentage of geographic segment revenue for the three months ended December 31,
2009 and December 31, 2008 (refer note 2.19.2 under item 1 of this Quarterly
Report ):
|
Three months ended December 31,
|
Geographic Segments
|
2009
|
2008
|
North America
|
35.5%
|
34.2%
|
Europe
|
33.8%
|
34.4%
|
India
|
46.7%
|
64.3%
|
Rest of the World
|
37.5%
|
39.8%
|
During the three months ended December 31, 2009, the total billed
person-months for our services other than business process management grew by
5.9% compared to the three months ended December 31, 2008. The offshore billed
person-months growth for our services other than business process management was
7.6% whereas there was a growth of 1.8% in the onsite billed person-months for
our services other than business process management, during the three months
ended December 31, 2009 compared to the three months ended December 31, 2008.
During the three months ended December 31, 2009, there was a 3.9% increase in
onsite rates and 2.7% decrease in offshore rates compared to the three months
ended December 31, 2008 for our services other than business process
management.
Cost of sales
The following tables set forth information regarding our cost of
sales for the three months ended December 31, 2009 and December 31,
2008:
(Dollars in millions)
|
|
Three months ended December 31,
|
Change
|
Percentage Change
|
|
2009
|
2008
|
|
|
Cost of sales
|
$700
|
$661
|
$39
|
5.9%
|
As a percentage of revenues
|
56.8%
|
56.4%
|
|
|
(Dollars in millions)
|
Three months ended December 31,
|
Change
|
|
2009
|
2008
|
|
Employee benefit costs
|
$567
|
$541
|
$26
|
Depreciation and amortization
|
55
|
39
|
16
|
Travelling costs
|
29
|
31
|
(2)
|
Cost of software packages
|
24
|
15
|
9
|
Provision for post-sales client support
|
(5)
|
3
|
(8)
|
Operating lease payments
|
4
|
3
|
1
|
Communication costs
|
4
|
4
|
-
|
Cost of technical sub-contractors
|
17
|
21
|
(4)
|
Consumables
|
4
|
1
|
3
|
Repairs and maintenance
|
1
|
1
|
-
|
Other expenses
|
-
|
2
|
(2)
|
Total
|
$700
|
$661
|
$39
|
The increase in cost of sales in the three months ended December 31,
2009 from the three months ended December 31, 2008 was attributable primarily to
an increase in employee benefit costs and amortization of intangibles. During
October 2009, we conducted a compensation review whereby we increased the
offshore wages of our employees by 8% and the onsite wages of our employees by
2%. The amortization of certain intangibles has been accelerated based on the
usage pattern of the asset which has also resulted in the increase in cost of
sales during the three months ended December 31, 2009 when compared to the three
months ended December 31, 2008.
Gross profit
The following table sets forth information regarding our gross
profit for the three months ended December 31, 2009 and December 31,
2008:
(Dollars in millions)
|
|
Three months ended December 31,
|
Change
|
Percentage Change
|
|
2009
|
2008
|
|
|
Gross profit
|
$532
|
$510
|
$22
|
4.3%
|
As a percentage of revenues
|
43.2%
|
43.6%
|
|
|
The increase in gross profit for the three months ended December 31,
2009 from the three months ended December 31, 2008 was attributable to a 5.2%
increase in revenue which has been partially offset by a 0.4% increase in cost
of sales as a percentage of revenue for the three months ended December 31,
2009, compared to the three months ended December 31, 2008.
Revenues and gross profits are also affected by employee utilization
rates. The following table sets forth the utilization rates of billable
employees for total services, excluding business process management
services:
|
Three months ended December 31,
|
|
2009
|
2008
|
Including trainees
|
68.0%
|
68.5%
|
Excluding trainees
|
76.2%
|
74.8%
|
Selling and marketing expenses
The following tables set forth information regarding our selling and
marketing expenses for the three months ended December 31, 2009 and December 31,
2008:
(Dollars in millions)
|
|
Three months ended December 31,
|
Change
|
Percentage Change
|
|
2009
|
2008
|
|
|
Selling and marketing expenses
|
$68
|
$55
|
$13
|
23.6%
|
As a percentage of revenues
|
5.5%
|
4.7%
|
|
|
(Dollars in millions)
|
Three months ended December 31,
|
Change
|
|
2009
|
2008
|
|
Employee benefit costs
|
$52
|
$42
|
$10
|
Travelling costs
|
7
|
5
|
2
|
Branding and marketing
|
3
|
3
|
-
|
Commission
|
2
|
1
|
1
|
Operating lease payments
|
1
|
-
|
1
|
Communication costs
|
1
|
-
|
1
|
Consultancy and professional charges
|
2
|
1
|
1
|
Other expenses
|
-
|
3
|
(3)
|
Total
|
$68
|
$55
|
$13
|
The number of our sales and marketing personnel decreased to 815 as
of December 31, 2009 from 839 as of December 31, 2008. The increase in selling
and marketing expenses and selling and marketing expense as a percentage of
revenue during the three months ended December 31, 2009 from the three months
ended December 31, 2008 was attributable primarily to an increase in our
employee benefit costs. During October 2009, we conducted a compensation review
whereby we increased the offshore wages of our employees by 8% and the onsite
wages of our employees by 2%.
Administrative expenses
The following tables set forth information regarding our
administrative expenses for the three months ended December 31, 2009 and
December 31, 2008:
(Dollars in millions)
|
|
Three months ended December 31,
|
Change
|
Percentage Change
|
|
2009
|
2008
|
|
|
Administrative expenses
|
$82
|
$82
|
-
|
-
|
As a percentage of revenues
|
6.7%
|
7.0%
|
|
|
(Dollars in millions)
|
Three months ended December 31,
|
Change
|
|
2009
|
2008
|
|
Employee benefit costs
|
$30
|
$24
|
$6
|
Consultancy and professional charges
|
12
|
12
|
-
|
Office maintenance
|
8
|
9
|
(1)
|
Repairs and maintenance
|
4
|
3
|
1
|
Power and fuel
|
8
|
8
|
-
|
Communication costs
|
6
|
9
|
(3)
|
Travelling costs
|
6
|
6
|
-
|
Allowance for impairment of trade receivables
|
(5)
|
2
|
(7)
|
Rates and taxes
|
2
|
1
|
1
|
Insurance charges
|
2
|
1
|
1
|
Operating lease payments
|
2
|
1
|
1
|
Printing and stationery
|
1
|
-
|
1
|
Postage and courier
|
1
|
1
|
-
|
Other expenses
|
5
|
5
|
-
|
Total
|
$82
|
$82
|
-
|
The decrease in administrative expense as a percentage of revenue
during the three months ended December 31, 2009 compared to the three months
ended December 31, 2008 was due to a decrease in the allowance for impairment of
trade receivables which was substantially offset by an increase in employee benefit
costs.
The factors which affect the fluctuations in our allowance for
impairment of trade receivables include the financial health of our clients and
the economic environment in which they operate. No one client has contributed
significantly to a loss, and we have had no significant changes in our
collection policies or payment terms during the three months ended December 31,
2009 from the three months ended December 31, 2008. Allowance for impairment of
trade receivables as a percentage of revenue was (0.4)% and 0.2% for the three
months ended December 31, 2009 and December 31, 2008, respectively.
Operating profit
The following table sets forth information regarding our operating
profit for the three months ended December 31, 2009 and December 31,
2008:
(Dollars in millions)
|
|
Three months ended December 31,
|
Change
|
Percentage Change
|
|
2009
|
2008
|
|
|
Operating profit
|
$382
|
$373
|
$9
|
2.4%
|
As a percentage of revenues
|
31.0%
|
31.9%
|
|
|
The increase in operating profit for the three months ended December
31, 2009 from the three months ended December 31, 2008 is attributable to a 4.3%
increase in gross profit, partially offset by a 23.6% increase in selling and
marketing expenses during the same period.
Other income
The following table sets forth information regarding our other
income for the three months ended December 31, 2009 and December 31,
2008:
(Dollars in millions)
|
Three months ended December 31,
|
Change
|
Percentage Change
|
|
2009
|
2008
|
|
|
Other income
|
$50
|
$7
|
$43
|
614.3%
|
Other income includes $34 million of interest income, $9 million of
income from available-for-sale financial assets, foreign exchange gain of $4
million and miscellaneous income of $3 million for the three months ended
December 31, 2009. Other income includes $46 million of interest income, foreign
exchange loss of $44 million and miscellaneous income of $5 million for the
three months ended December 31, 2008.
Other income for the three months ended December 31, 2008 includes a
net amount of $4 million, consisting of $7 million received from Axon Group Plc
as inducement fees offset by $3 million of expenses incurred towards the
transaction.
We generate a major portion of our revenues in foreign currencies,
particularly the U.S. dollar, the United Kingdom Pound Sterling, Euro and the
Australian dollar, whereas we incur a majority of our expenses in Indian rupees.
The exchange rate between the rupee and each of currencies namely, the U.S.
dollar, the United Kingdom Pound Sterling, Euro and the Australian dollar has
changed substantially in recent years and may fluctuate substantially in the
future. Consequently, the results of our operations are adversely affected as
the rupee appreciates against the aforementioned currencies. Foreign exchange
gains and losses arise from the appreciation and depreciation of the rupee
against other currencies in which we transact business and from foreign exchange
forward and option contracts.
The following table sets forth the currency in which our revenues
for the three months ended December 31, 2009 and December 31, 2008 were
denominated:
|
Percentage of Revenues
|
|
Three months ended December 31,
|
Currency
|
2009
|
2008
|
U.S. dollar
|
73.9%
|
72.5%
|
United Kingdom Pound Sterling
|
8.4%
|
11.0%
|
Euro
|
6.6%
|
6.7%
|
Australian dollar
|
6.3%
|
4.2%
|
Others
|
4.8%
|
5.6%
|
The following tables set forth information on the foreign exchange
rates in rupees per U.S. dollar, United Kingdom Pound Sterling, Euro and
Australian dollar for the three months ended December 31, 2009 and December 31,
2008:
|
Three months ended December 31,
|
Appreciation / (Depreciation) in percentage
|
|
2009(Rs.)
|
2008(Rs.)
|
|
Average exchange rate during the period:
|
|
|
|
U.S. dollar
|
46.62
|
49.42
|
5.7%
|
United Kingdom Pound Sterling
|
76.25
|
75.87
|
(0.5)%
|
Euro
|
68.94
|
65.30
|
(5.6)%
|
Australian dollar
|
42.43
|
33.12
|
(28.1)%
|
|
Three months ended December 31,
|
|
2009 (Rs.)
|
2008 (Rs.)
|
Exchange rate at the beginning of the period:
|
|
|
U.S. dollar
|
48.11
|
46.97
|
United Kingdom Pound Sterling
|
76.85
|
84.68
|
Euro
|
70.01
|
67.41
|
Australian dollar
|
42.00
|
38.28
|
Exchange rate at the end of the period:
|
|
|
U.S. dollar
|
46.53
|
48.71
|
United Kingdom Pound Sterling
|
75.06
|
70.59
|
Euro
|
67.02
|
68.54
|
Australian dollar
|
41.85
|
33.73
|
Appreciation / (depreciation) of the rupee against the
relevant currency during the period (as a percentage):
|
|
|
U.S. dollar
|
3.3%
|
(3.7)%
|
United Kingdom Pound Sterling
|
2.3%
|
16.6%
|
Euro
|
4.3%
|
(1.7)%
|
Australian dollar
|
0.4%
|
11.9%
|
The following table sets forth information on the foreign exchange
rates in U.S. dollar per United Kingdom Pound Sterling, Euro and Australian
dollar for the three months ended December 31, 2009 and December 31,
2008:
|
Three months ended December 31,
|
Appreciation / (Depreciation) in percentage
|
|
2009($)
|
2008($)
|
|
Average exchange rate during the period:
|
|
|
|
United Kingdom Pound Sterling
|
1.64
|
1.54
|
(6.5)%
|
Euro
|
1.48
|
1.32
|
(12.1)%
|
Australian dollar
|
0.91
|
0.67
|
(35.8)%
|
|
Three months ended December 31,
|
|
2009 ($)
|
2008 ($)
|
Exchange rate at the beginning of the period:
|
|
|
United Kingdom Pound Sterling
|
1.60
|
1.80
|
Euro
|
1.46
|
1.44
|
Australian dollar
|
0.87
|
0.81
|
Exchange rate at the end of the period:
|
|
|
United Kingdom Pound Sterling
|
1.61
|
1.45
|
Euro
|
1.44
|
1.41
|
Australian dollar
|
0.90
|
0.69
|
Appreciation / (depreciation) of U.S. dollar against the
relevant currency during the period (as a percentage):
|
|
|
United Kingdom Pound Sterling
|
(0.6)%
|
19.4%
|
Euro
|
1.4%
|
2.1%
|
Australian dollar
|
(3.4)%
|
14.8%
|
For the three months ended December 31, 2009, every percentage point
depreciation / appreciation in the exchange rate between the Indian rupee and
the U.S. dollar has affected our operating margins by approximately 0.3%. The
exchange rate between the rupee and U.S. dollar has fluctuated substantially in
recent years and may continue to do so in the future. We are unable to predict
the impact that future fluctuations may have on our operating
margins.
We have recorded a gain of $22 million and a loss of $28 million for
the three months ended December 31, 2009 and December 31, 2008, respectively, on
account of foreign exchange forward and option contracts, which are included in
total foreign currency exchange gains / losses. Our accounting policy requires
us to mark to market and recognize the effect in profit immediately of any
derivative that is either not designated a hedge, or is so designated but is
ineffective as per IAS 39.
Income tax expense
The following table sets forth information regarding our income tax
expense and effective tax rate for the three months ended December 31, 2009 and
December 31, 2008:
(Dollars in millions)
|
Three months ended December 31,
|
Change
|
Percentage Change
|
|
2009
|
2008
|
|
|
Income tax expense
|
$98
|
$48
|
$50
|
104.2%
|
Effective tax rate
|
22.7%
|
12.6%
|
|
|
The effective tax rate for the three months ended December
31, 2009 and three months ended December 31, 2008 was 22.7% and 12.6%,
respectively. The increase in the effective tax rate is primarily due to the
expiration of the tax holiday period for approximately 64.5% of our revenues
from STP units that were benefiting from a tax holiday in fiscal
2009.
Net profit
The following table sets forth information regarding our net profit
for the three months ended December 31, 2009 and December 31, 2008:
(Dollars in millions)
|
Three months ended December 31,
|
Change
|
Percentage Change
|
|
2009
|
2008
|
|
|
Net profit
|
$334
|
$332
|
$2
|
0.6%
|
As a percentage of revenues
|
27.1%
|
28.4%
|
|
|
The decrease in net profit as a percentage of revenues for the three
months ended December 31, 2009 from December 31, 2008 is attributable to a 10.1%
increase in income tax expense as a percentage of revenue during the same period
which has been partially offset by an increase in other income mainly due to
increase in income from available-for-sale financial assets.
Results for the nine months ended December 31, 2009 compared to the
nine months ended December 31, 2008
Revenues
The following table sets forth the information regarding our
revenues for the nine months ended December 31, 2009 and December 31,
2008:
(Dollars in millions)
|
|
Nine months ended December 31,
|
Change
|
Percentage Change
|
|
2009
|
2008
|
|
|
Revenues
|
$3,508
|
$3,542
|
$(34)
|
(1.0)%
|
Revenues increased in almost all segments of our business except in
the financial services and telecommunication segments.
During the nine months ended December 31, 2009, the U.S. dollar
depreciated against a majority of the currencies in which we transact business.
The U.S. dollar depreciated by 12.6%, 8.3% and 30.4% against the United Kingdom
Pound Sterling, Euro and Australian dollar, respectively.
There were significant currency movements during the nine months
ended December 31, 2009. Had the average exchange rate between each of these
currencies and the U.S. dollar remained constant, during the nine months ended
December 31, 2009 in comparison to the nine months ended December 31, 2008, our
revenues in constant currency terms for the nine months ended December 31, 2009
would have been higher by $47 million at $3,555 million as against our reported
revenues of $3,508 million, resulting in a growth of 0.4% as against a reported
decline of 1.0%.
The following table sets forth our revenues by industry segments for
the nine months ended December 31, 2009 and December 31, 2008:
|
Percentage of revenues
|
|
Nine months ended December 31,
|
Industry Segments
|
2009
|
2008
|
Financial services
|
33.7%
|
34.2%
|
Manufacturing
|
19.7%
|
19.4%
|
Telecommunication
|
16.4%
|
18.5%
|
Retail
|
13.5%
|
12.3%
|
Others including utilities, logistics and
services
|
16.7%
|
15.6%
|
The increase in the percentage of revenues from the retail segment
during the nine months ended December 31, 2009 as compared to the nine months
ended December 31, 2008 is primarily due to addition of new clients. The decline
in the percentage of revenues from the telecommunication segment during the nine
months ended December 31, 2009 as compared to the nine months ended December 31,
2008 is primarily due to decrease in business from European clients operating in
this segment.
There were significant currency movements during the nine months
ended December 31, 2009 and the following table sets forth our revenues by
industry segments for the nine months ended December 31, 2009, had the average
exchange rate between each of the currencies namely, the United Kingdom Pound
Sterling, Euro and Australian dollar, and the U.S. dollar remained constant,
during the nine months ended December 31, 2009 in comparison with the average
exchange rate experienced during the nine months ended December 31,
2008:
Industry Segments
|
Nine months ended December 31, 2009
|
Financial services
|
33.6%
|
Manufacturing
|
19.6%
|
Telecommunication
|
16.7%
|
Retail
|
13.5%
|
Others including utilities, logistics and
services
|
16.6%
|
The following table sets forth our industry segment profit (revenues
less identifiable operating expenses and allocated expenses) as a percentage of
industry segment revenues for the nine months ended December 31, 2009 and
December 31, 2008 (refer note 2.19.1 under item 1 of this Quarterly
Report):
|
Nine months ended December 31,
|
Industry Segments
|
2009
|
2008
|
Financial services
|
34.9%
|
31.8%
|
Manufacturing
|
30.0%
|
31.0%
|
Telecommunication
|
40.2%
|
37.5%
|
Retail
|
33.9%
|
31.8%
|
Others including utilities, logistics and
services
|
35.3%
|
32.9%
|
Our revenues are also segmented into onsite and offshore revenues.
Onsite revenues are for those services which are performed at client sites as
part of our engagements, while offshore revenues are for services which are
performed at our global development centers. The table below sets forth the
percentage of our revenues by location for the nine months ended December 31,
2009 and December 31, 2008:
|
Percentage of Revenues
|
|
Nine months ended December 31,
|
|
2009
|
2008
|
Onsite
|
46.2%
|
46.9%
|
Offshore
|
53.8%
|
53.1%
|
The services performed onsite typically generate higher revenues
per-capita, but at lower gross margins in percentage as compared to the services
performed at our own facilities. The table below sets forth details of billable
hours for onsite and offshore for the nine months ended December 31, 2009 and
December 31, 2008:
|
Nine months ended December 31,
|
|
2009
|
2008
|
Onsite
|
22.6%
|
23.8%
|
Offshore
|
77.4%
|
76.2%
|
Revenues from services represented 96.0% of total revenues for the
nine months ended December 31, 2009 as compared to 96.1% for the nine months
ended December 31, 2008. Sale of our software products represented 4.0% of our
total revenues for the nine months ended December 31, 2009 as compared to 3.9%
for the nine months ended December 31, 2008.
The following table sets forth the revenues from fixed-price,
fixed-timeframe contracts and time-and-materials contracts as a percentage of
total services revenues for the nine months ended December 31, 2009 and December
31, 2008:
|
Percentage of revenues
|
|
Nine months ended December 31,
|
|
2009
|
2008
|
Fixed-price, fixed-time frame contracts
|
38.1%
|
34.4%
|
Time-and-materials contracts
|
61.9%
|
65.6%
|
The following table sets forth our revenues by geographic segments
for the nine months ended December 31, 2009 and December 31, 2008:
|
Percentage of revenues
|
|
Nine months ended December 31,
|
Geographic Segments
|
2009
|
2008
|
North America
|
65.7%
|
62.8%
|
Europe
|
23.2%
|
27.0%
|
India
|
1.1%
|
1.2%
|
Rest of the World
|
10.0%
|
9.0%
|
A focus of our growth strategy is to expand our business to parts of
the world outside North America, including Europe, Australia and other parts of
Asia, as we expect that increases in the proportion of revenues generated from
customers outside of North America would reduce our dependence upon our sales to
North America and the impact on us of economic downturns in that
region.
There were significant currency movements during the nine months
ended December 31, 2009 and the following table sets forth our revenues by
geographic segments for the nine months ended December 31, 2009, had the average
exchange rate between each of the currencies namely, the United Kingdom Pound
Sterling, Euro and Australian dollar, and the U.S. dollar remained constant,
during the nine months ended December 31, 2009 in comparison with the average
exchange rate experienced during the nine months ended December 31,
2008:
Geographic Segments
|
Nine months ended December 31, 2009
|
North America
|
64.9%
|
Europe
|
24.1%
|
India
|
1.2%
|
Rest of the World
|
9.8%
|
The following table sets forth our geographic segment profit
(revenues less identifiable operating expenses and allocated expenses) as a
percentage of geographic segment revenue for the nine months ended December 31,
2009 and December 31, 2008 (refer note 2.19.2 under item 1 of this Quarterly
Report):
|
Nine months ended December 31,
|
Geographic Segments
|
2009
|
2008
|
North America
|
34.7%
|
31.6%
|
Europe
|
34.3%
|
33.9%
|
India
|
43.6%
|
51.2%
|
Rest of the World
|
35.0%
|
36.9%
|
During the nine months ended December 31, 2009 the total billed
person-months for our services other than business process management grew by
4.6% compared to the nine months ended December 31, 2008. The offshore billed
person-months growth for our services other than business process management
increased by 7.0% whereas there was a decrease of 0.9% in the onsite billed
person-months for our services other than business process management, during
the nine months ended December 31, 2009 compared to the nine months ended
December 31, 2008. During the nine months ended December 31, 2009, there was
1.7% decrease in onsite rates and 6.3% decrease in offshore rates compared to
the nine months ended December 31, 2008 for our services other than business
process management.
Cost of sales
The following tables set forth information regarding our cost of
sales for the nine months ended December 31, 2009 and December 31,
2008:
(Dollars in millions)
|
|
Nine months ended December 31,
|
Change
|
Percentage Change
|
|
2009
|
2008
|
|
|
Cost of sales
|
$2,005
|
$2,049
|
$(44)
|
(2.1)%
|
As a percentage of revenues
|
57.2%
|
57.8%
|
|
|
(Dollars in millions)
|
Nine months ended December 31,
|
Change
|
|
2009
|
2008
|
|
Employee benefit costs
|
$1,633
|
$1,653
|
$(20)
|
Depreciation and amortization
|
149
|
120
|
29
|
Travelling costs
|
76
|
109
|
(33)
|
Cost of software packages
|
61
|
55
|
6
|
Provision for post-sales client support
|
(2)
|
4
|
(6)
|
Operating lease payments
|
12
|
12
|
-
|
Communication costs
|
13
|
15
|
(2)
|
Cost of technical sub-contractors
|
49
|
66
|
(17)
|
Consumables
|
4
|
4
|
-
|
Repairs and maintenance
|
4
|
4
|
-
|
Other expenses
|
6
|
7
|
(1)
|
Total
|
$2,005
|
$2,049
|
$(44)
|
The decrease in cost of sales and cost of sales as a percentage of
revenues in the nine months ended December 31, 2009 from the nine months ended
December 31, 2008 was attributable primarily to a decrease in our travelling
costs, employee benefit costs and cost of technical sub-contractors. The
reduction in travelling costs is primarily due to reduction in non-billable
travel costs. Further, due to uncertain business environment, the salary
increase for the current fiscal year which normally occurs annually in April was
postponed to October 2009. The offshore and onsite wages of our employees
increased by 8% and 2%, respectively, as against the average offshore and onsite
wage increase of 11% to 13% and 4% to 5%, respectively, during fiscal 2009. The
reduction in the cost of technical sub-contractors is due to decreased
engagements of technical sub-contractors.
Gross profit
The following table sets forth information regarding our gross
profit for the nine months ended December 31, 2009 and December 31,
2008:
(Dollars in millions)
|
|
Nine months ended December 31,
|
Change
|
Percentage Change
|
|
2009
|
2008
|
|
|
Gross profit
|
$1,503
|
$1,493
|
$10
|
0.7%
|
As a percentage of revenues
|
42.8%
|
42.2%
|
|
|
The marginal increase in gross profit for the nine months ended
December 31, 2009 from the nine months ended December 31, 2008 was attributable
to a 2.1% decrease in cost of sales in the same period compared to the nine
months ended December 31, 2008.
Revenues and gross profits are also affected by employee utilization
rates. The following table sets forth the utilization rates of billable
employees for total services, excluding business process management
services:
|
Nine months ended December 31,
|
|
2009
|
2008
|
Including trainees
|
66.9%
|
69.6%
|
Excluding trainees
|
73.1%
|
73.8%
|
Selling and marketing expenses
The following tables set forth information regarding our selling and
marketing expenses for the nine months ended December 31, 2009 and December 31,
2008:
(Dollars in millions)
|
|
Nine months ended December 31,
|
Change
|
Percentage Change
|
|
2009
|
2008
|
|
|
Selling and marketing expenses
|
$178
|
$184
|
$(6)
|
(3.3)%
|
As a percentage of revenues
|
5.1%
|
5.2%
|
|
|
(Dollars in millions)
|
Nine months ended December 31,
|
Change
|
|
2009
|
2008
|
|
Employee benefit costs
|
$140
|
$132
|
$8
|
Travelling costs
|
16
|
21
|
(5)
|
Branding and marketing
|
11
|
16
|
(5)
|
Commission
|
3
|
4
|
(1)
|
Operating lease payments
|
2
|
-
|
2
|
Communication costs
|
2
|
-
|
2
|
Consultancy and professional charges
|
4
|
4
|
-
|
Other expenses
|
-
|
7
|
(7)
|
Total
|
$178
|
$184
|
$(6)
|
The number of our sales and marketing personnel decreased to 815 as
of December 31, 2009 from 839 as of December 31, 2008. The decrease in selling
and marketing expenses during the nine months ended December 31, 2009 from the
nine months ended December 31, 2008 was primarily attributable to a decrease in
our travelling costs and branding and marketing costs, partially offset by an
increase in employee benefit costs, operating lease payments and communication
costs.
Administrative expenses
The following tables set forth information regarding our
administrative expenses for the nine months ended December 31, 2009 and December
31, 2008:
(Dollars in millions)
|
|
Nine months ended December 31,
|
Change
|
Percentage Change
|
|
2009
|
2008
|
|
|
Administrative expenses
|
$255
|
$265
|
$(10)
|
(3.8)%
|
As a percentage of revenues
|
7.3%
|
7.5%
|
|
|
(Dollars in millions)
|
Nine months ended December 31,
|
Change
|
|
2009
|
2008
|
|
Employee benefit costs
|
$83
|
$73
|
$10
|
Consultancy and professional charges
|
38
|
40
|
(2)
|
Repairs and maintenance
|
11
|
9
|
2
|
Office maintenance
|
26
|
27
|
(1)
|
Power and fuel
|
23
|
25
|
(2)
|
Communication costs
|
20
|
27
|
(7)
|
Commission
|
1
|
-
|
1
|
Travelling costs
|
14
|
22
|
(8)
|
Allowance for impairment of trade receivables
|
5
|
12
|
(7)
|
Rates and taxes
|
5
|
5
|
-
|
Insurance charges
|
5
|
4
|
1
|
Operating lease payments
|
6
|
4
|
2
|
Postage and courier
|
2
|
2
|
-
|
Printing and stationery
|
2
|
2
|
-
|
Other expenses
|
14
|
13
|
1
|
Total
|
$255
|
$265
|
$(10)
|
The decrease in administrative expense and administrative expense as
a percentage of revenue during the nine months ended December 31, 2009 compared
to the nine months ended December 31, 2008 was primarily due to a decrease in
the travelling costs and communication costs and a decrease in allowance for
impairment of trade receivables, partially offset by an increase in employee
benefit costs.
The factors which affect the fluctuations in our allowance for
impairment of trade receivables include the financial health of our clients and
the economic environment in which they operate. No one client has contributed
significantly to a loss, and we have had no significant changes in our
collection policies or payment terms during the nine months ended December 31,
2009 from the nine months ended December 31, 2008. Allowance for impairment of
trade receivables as a percentage of revenue was 0.14% and 0.34% for the nine
months ended December 31, 2009 and December 31, 2008, respectively.
Operating profit
The following table sets forth information regarding our operating
profit for the nine months ended December 31, 2009 and December 31,
2008:
(Dollars in millions)
|
|
Nine months ended December 31,
|
Change
|
Percentage Change
|
|
2009
|
2008
|
|
|
Operating profit
|
$1,070
|
$1,044
|
$26
|
2.5%
|
As a percentage of revenues
|
30.5%
|
29.5%
|
|
|
The increase in operating profit and operating profit as a
percentage of revenues for the nine months ended December 31, 2009 from the nine
months ended December 31, 2008 was attributable primarily to a 3.3% and 3.8%
decrease in selling and marketing expenses and administrative expenses,
respectively, for the nine months ended December 31, 2009, and a 0.7% increase
in gross profit, in the same period compared to the nine months ended December
31, 2008.
Other income
The following table sets forth information regarding our other
income for the nine months ended December 31, 2009 and December 31,
2008:
(Dollars in millions)
|
Nine months ended December 31,
|
Change
|
Percentage Change
|
|
2009
|
2008
|
|
|
Other income
|
$154
|
$50
|
$104
|
208%
|
Other income includes $121 million of interest income, $16 million
of income from available-for-sale financial assets, foreign exchange gain of $13
million and miscellaneous income of $4 million for the nine months ended
December 31, 2009. Other income includes $135 million of interest income,
foreign exchange loss of $91 million and miscellaneous income of $6 million for
the nine months ended December 31, 2008.
Other
income for the nine months ended December 31, 2008 includes a net amount of $4
million, consisting of $7 million received from Axon Group Plc as inducement
fees offset by $3 million of expenses incurred towards the
transaction.
We generate a major portion of our revenues in foreign currencies,
particularly the U.S. dollar, the United Kingdom Pound Sterling, Euro and the
Australian dollar, whereas we incur a majority of our expenses in Indian rupees.
The exchange rate between the rupee and each of currencies namely, the U.S.
dollar, the United Kingdom Pound Sterling, Euro and the Australian dollar, has
changed substantially in recent years and may fluctuate substantially in the
future. Consequently, the results of our operations are adversely affected as
the rupee appreciates against the aforementioned currencies. Foreign exchange
gains and losses arise from the appreciation and depreciation of the rupee
against other currencies in which we transact business and from foreign exchange
forward and option contracts.
The following table sets forth the currency in which our revenues
for the nine months ended December 31, 2009 and December 31, 2008 were
denominated:
|
Percentage of Revenues
|
|
Nine months ended December 31,
|
Currency
|
2009
|
2008
|
U.S. dollar
|
73.2%
|
70.4%
|
United Kingdom Pound Sterling
|
9.4%
|
13.6%
|
Euro
|
7.2%
|
7.0%
|
Australian dollar
|
5.8%
|
4.5%
|
Others
|
4.4%
|
4.5%
|
The following tables set forth information on the foreign exchange
rates in rupees per U.S. dollar, United Kingdom Pound Sterling, Euro and
Australian dollar for the nine months ended December 31, 2009 and December 31,
2008:
|
Nine months ended December 31,
|
Appreciation / (Depreciation) in percentage
|
|
2009(Rs.)
|
2008(Rs.)
|
|
Average exchange rate during the period:
|
|
|
|
U.S. dollar
|
47.94
|
45.31
|
(5.8)%
|
United Kingdom Pound Sterling
|
77.08
|
80.69
|
4.5%
|
Euro
|
68.17
|
65.71
|
(3.7)%
|
Australian dollar
|
39.91
|
37.31
|
(7.0)%
|
|
Nine months ended December 31,
|
|
2009 (Rs.)
|
2008 (Rs.)
|
Exchange rate at the beginning of the period:
|
|
|
U.S. dollar
|
50.72
|
40.02
|
United Kingdom Pound Sterling
|
72.49
|
79.46
|
Euro
|
67.44
|
63.25
|
Australian dollar
|
35.03
|
36.55
|
Exchange rate at the end of the period:
|
|
|
U.S. dollar
|
46.53
|
48.71
|
United Kingdom Pound Sterling
|
75.06
|
70.59
|
Euro
|
67.02
|
68.54
|
Australian dollar
|
41.85
|
33.73
|
Appreciation / (depreciation) of the rupee against the
relevant currency during the period (as a percentage):
|
|
|
U.S. dollar
|
8.3%
|
(21.7)%
|
United Kingdom Pound Sterling
|
(3.5)%
|
11.2%
|
Euro
|
0.6%
|
(8.4)%
|
Australian dollar
|
(19.5)%
|
7.7%
|
The following table sets forth information on the foreign exchange
rates in U.S. dollar per United Kingdom Pound Sterling, Euro and Australian
dollar for the nine months ended December 31, 2009 and December 31,
2008:
|
Nine months ended December 31,
|
Appreciation / (Depreciation) in percentage
|
|
2009($)
|
2008($)
|
|
Average exchange rate during the period:
|
|
|
|
United Kingdom Pound Sterling
|
1.61
|
1.78
|
9.7%
|
Euro
|
1.42
|
1.45
|
1.9%
|
Australian dollar
|
0.83
|
0.82
|
(1.1)%
|
|
Nine months ended December 31,
|
|
2009 ($)
|
2008 ($)
|
Exchange rate at the beginning of the period:
|
|
|
United Kingdom Pound Sterling
|
1.43
|
1.99
|
Euro
|
1.33
|
1.58
|
Australian dollar
|
0.69
|
0.91
|
Exchange rate at the end of the period:
|
|
|
United Kingdom Pound Sterling
|
1.61
|
1.45
|
Euro
|
1.44
|
1.41
|
Australian dollar
|
0.90
|
0.69
|
Appreciation / (depreciation) of U.S. dollar against the
relevant currency during the period (as a percentage):
|
|
|
United Kingdom Pound Sterling
|
(12.6)%
|
27.1%
|
Euro
|
(8.3)%
|
10.8%
|
Australian dollar
|
(30.4)%
|
24.2%
|
For the nine months ended December 31, 2009, every percentage point
depreciation / appreciation in the exchange rate between the Indian rupee and
the U.S. dollar has affected our operating margins by approximately 0.5%. The
exchange rate between the rupee and U.S. dollar has fluctuated substantially in
recent years and may continue to do so in the future. We are unable to predict
the impact that future fluctuations may have on our operating
margins.
We have recorded a gain of $41 million and a loss of $144 million
for the nine months ended December 31, 2009 and December 31, 2008, respectively,
on account of foreign exchange forward and option contracts, which are included
in total foreign currency exchange gains / losses. Our accounting policy
requires us to mark to market and recognize the effect in profit immediately of
any derivative that is either not designated a hedge, or is so designated but is
ineffective, as per IAS 39.
Income tax expense
The following table sets forth information regarding our income tax
expense and effective tax rate for the nine months ended December 31, 2009 and
December 31, 2008:
(Dollars in millions)
|
Nine months ended December 31,
|
Change
|
Percentage Change
|
|
2009
|
2008
|
|
|
Income tax expense
|
$260
|
$134
|
$126
|
94.0%
|
Effective tax rate
|
21.2%
|
12.2%
|
|
|
The effective tax rate for the nine months ended December 31,
2009 and nine months ended December 31, 2008 was 21.2% and 12.2%, respectively.
The increase in the effective tax rate is primarily due to the expiration of the
tax holiday period for approximately 65.6% of our revenues from STP units that
were benefiting from a tax holiday in fiscal 2009.
Net profit
The following table sets forth information regarding our net profit
for the nine months ended December 31, 2009 and December 31, 2008:
(Dollars in millions)
|
Nine months ended December 31,
|
Change
|
Percentage Change
|
|
2009
|
2008
|
|
|
Net profit
|
$964
|
$960
|
$4
|
0.4%
|
As a percentage of revenues
|
27.5%
|
27.1%
|
|
|
The marginal increase in net profit and net profit as a percentage
of revenues for the nine months ended December 31, 2009 from December 31, 2008
was attributable to a 2.5% increase in operating profit and 208.0% increase in
other income which is partially offset by a 94.0% increase in income tax expense
during the same period.
Liquidity and capital resources
Our growth has been financed largely by cash generated from
operations and, to a lesser extent, from the proceeds from the sale and issuance
of equity securities. In 1993, we raised approximately $4.4 million in gross
aggregate proceeds from our initial public offering of equity shares in India.
In 1994, we raised an additional $7.7 million through private placements of our
equity shares with foreign institutional investors, mutual funds, Indian
domestic financial institutions and corporations. On March 11, 1999, we raised
$70.4 million in gross aggregate proceeds from our initial public offering of
ADSs in the United States.
As of December 31, 2009, we had $3,438 million in working capital,
including $1,972 million in cash and cash equivalents, $1,133 million in
available-for-sale financial assets and no outstanding bank borrowings. As of
March 31, 2009, we had $2,583 million in working capital, including $2,167
million in cash and cash equivalents, and no outstanding bank borrowings. We
believe that our current working capital is sufficient to meet our requirements
for the next 12 months. We believe that a sustained reduction in IT spending, a
longer sales cycle, or a continued economic downturn in any of the various
geographic locations or industry segments in which we operate, could result in a
decline in our revenues and negatively impact our liquidity and cash
resources.
Our principal sources of liquidity are our cash and cash equivalents
and the cash flow that we generate from our operations. Our cash and cash
equivalents comprise of cash and bank deposits and deposits with corporations
which can be withdrawn at any point of time without prior notice or penalty.
These cash and cash equivalents included a restricted cash balance of $15
million as at December 31, 2009. The restricted cash balance as of March 31,
2009 was less than $1 million. These restrictions are primarily on account of
unclaimed dividends and cash balances held by irrevocable trusts controlled by
the company.
In summary, our cash flows were:
(Dollars in millions)
|
Nine months ended December 31,
|
|
2009
|
2008
|
Net cash provided by operating activities
|
$1,132
|
$1,096
|
Net cash used in investing activities
|
$(1,223)
|
$(274)
|
Net cash used in financing activities
|
$(317)
|
$(549)
|
Net cash provided by operations consisted primarily of net profit
adjusted for depreciation and amortization, deferred taxes and income taxes and
changes in working capital.
Trade receivables decreased by $66 million during the nine months
ended December 31, 2009, compared to an increase of $47 million during the nine
months ended December 31, 2008. Trade receivables as a percentage of last 12
months’ revenues were 15.6% and 15.4% as of December 31, 2009 and December 31,
2008, respectively. Days sales outstanding on the basis of last 12 months’
revenues were 57 days and 56 days as at December 31, 2009 and December 31, 3008,
respectively. Prepayments and other assets increased by $33 million during the
nine months ended December 31, 2009 compared to a decrease of $21 million during
the nine months ended December 31, 2008. There was an increase in unbilled
revenues of $11 million during the nine months ended December 31, 2009, compared
to an increase of $70 million during the nine months ended December 31, 2008.
Unbilled revenues represent revenues that are recognized but not yet invoiced.
Other liabilities and provisions decreased by $16 million during the nine months
ended December 31, 2009, compared to an increase of $73 million during the nine
months ended December 31, 2008. Unearned revenues increased by $60 million
during the nine months ended December 31, 2009, compared to an increase of $31
million during the nine months ended December 31, 2008. Unearned revenue
resulted primarily from advance client billings on fixed-price, fixed-timeframe
contracts for which related efforts have not been expended. Revenues from
fixed-price, fixed-timeframe contracts and from time-and-materials contracts
represented 38.1% and 61.9% of total services revenues for the nine months ended
December 31, 2009, as compared to 34.4% and 65.6% for the nine months ended
December 31, 2008.
Net cash used in investing activities, relating to our acquisition
of additional property, plant and equipment for the nine months ended December
31, 2009 and December 31, 2008 was $102 million and $226 million, respectively
for our software development centers. During the nine months ended December 31,
2009, we invested $1,774 million in available-for-sale financial assets and
redeemed available-for-sale financial assets of $673 million. During the nine
months ended December 31, 2008, we invested $60 million in available-for-sale
financial assets, $43 million in certificates of deposits, $16 million in
non-current deposits with corporations, and redeemed available-for-sale
financial assets of $76 million. The proceeds realized from the redemption of
available-for-sale financial assets were used in our day to day business
activities.
On December 4, 2009, Infosys BPO acquired 100% of the voting
interests in McCamish Systems LLC (McCamish), a business process solutions
provider based in Atlanta, Georgia, in the United States. The business
acquisition was conducted by entering into Membership Interest Purchase
Agreement for a cash consideration of $37 million.
Previously, we provided various loans to employees including car
loans, home loans, personal computer loans, telephone loans, medical loans,
marriage loans, personal loans, salary advances, education loans and loans for
rental deposits. These loans were provided primarily to employees in India who
were not executive officers or directors. Housing and car loans were available
only to middle level managers, senior managers and non-executive officers. These
loans were generally collateralized against the assets of the loan and the terms
of the loans ranged from 1 to 100 months.
We have discontinued fresh disbursements under all of these loan
schemes except for personal loans and salary advances which we continue to
provide primarily to employees in India who are not executive officers or
directors. We also provide allowances for purchase of cars and houses for our
middle level managers.
The annual rates of interest for these loans vary between 0% and 4%.
Loans aggregating $24 million were outstanding at each of December 31, 2009 and
March 31, 2009.
The timing of required repayments of employee loans outstanding as
of December 31, 2009 is as detailed below:
(Dollars in millions)
12 months ending December 31,
|
Repayment
|
2010
|
$18
|
2011
|
6
|
|
$24
|
Net cash used in financing activities for the nine months ended
December 31, 2009 was $317 million which comprised primarily of dividend
payments of $330 million partially offset by $13 million of proceeds received
from issuance of 705,190 equity shares on exercise of share options by
employees. Net cash used in financing activities for the nine months ended
December 31, 2008 was $549 million which comprised primarily of dividend
payments of $559 million partially offset by $10 million of proceeds received
from issuance of 645,745 equity shares on exercise of share options by
employees.
As of December 31, 2009, we had contractual commitments for capital
expenditure of $57 million, compared to $73 million as of March 31, 2009. These
commitments include $2 million in commitments for domestic purchases as of
December 31, 2009, compared to $64 million as of March 31, 2009, and $55 million
in commitments for imports of hardware, supplies and services to support our
operations generally as of December 31, 2009, compared to $9 million as of March
31, 2009, which we expect to be significantly completed by June 30,
2010.
Reconciliation between Indian GAAP and IFRS
All financial information in this Quarterly Report is presented in
accordance with IFRS, although we also report for Indian statutory purposes
under Indian GAAP. The material differences that affect us are primarily
attributable to IFRS requirements for the:
-
accounting for share-based compensation under IFRS 2;
and
-
amortization of intangible
assets
Reconciliation of Net Profit
(Dollars in millions)
|
Nine months ended December 31,
|
|
2009
|
2008
|
Net profit as per Indian GAAP
|
$970
|
$963
|
Share-based compensation
|
-
|
(1)
|
Amortization of intangible assets and others
|
(6)
|
(2)
|
Net profit as per IFRS
|
$964
|
$960
|
The Securities and Exchange Board of India (SEBI) had on November 9,
2009 issued a press release permitting listed entities having subsidiaries to
voluntarily submit the consolidated financial statements as per IFRS. Pending
the notification of the circular, for the quarter ended December 31, 2009, the
company has voluntarily prepared and published consolidated IFRS Financial
Statements (in Indian Rupees), in addition to preparing and publishing audited
standalone and audited consolidated financial statements in accordance with
Indian GAAP. Our statutory auditors have, additionally, performed a review of
the Consolidated IFRS financial statements as at and for the quarter and nine
months ended December 31, 2009 and have issued an unqualified review
report. Upon issuance of the notification of the Circular by SEBI and change in
Listing Agreement, we will only publish consolidated financial statements as per
IFRS.
Off Balance Sheet Arrangements
None
General
Market risk is attributable to all market sensitive financial
instruments including foreign currency receivables and payables. The value of a
financial instrument may change as a result of changes in the interest rates,
foreign currency exchange rates, commodity prices, equity prices and other
market changes that affect market risk sensitive instruments.
Our exposure to market risk is a function of our revenue generating
activities and any future borrowing activities in foreign currency. The
objective of market risk management is to avoid excessive exposure of our
earnings and equity to loss. Most of our exposure to market risk arises out of
our foreign currency accounts receivable.
Risk Management Procedures
We manage market risk through treasury operations. Our treasury
operations' objectives and policies are approved by senior management and our
Audit Committee. The activities of treasury operations include management of
cash resources, implementing hedging strategies for foreign currency exposures,
borrowing strategies, if any, and ensuring compliance with market risk limits
and policies.
Components of Market Risk
Exchange rate risk. Our exposure to market risk arises
principally from exchange rate risk. Even though our functional currency is the
Indian rupee, we generate a major portion of our revenues in foreign currencies,
particularly the U.S. dollar, the United Kingdom Pound Sterling, the Euro and
the Australian dollar, whereas we incur a majority of our expenses in Indian
rupees. The exchange rate between the rupee and the dollar has changed
substantially in recent years and may fluctuate substantially in the future.
Consequently, the results of our operations are adversely affected as the rupee
appreciates / depreciates against the U.S. dollar and other currencies. For the
nine months ended December 31, 2009 and December 31, 2008, U.S. dollar
denominated revenues represented 73.2% and 70.4%, respectively, of total
revenues. For the same periods, revenues denominated in United Kingdom Pound
Sterling represented 9.4% and 13.6%, respectively, of total revenues; revenues
denominated in the Euro represented 7.2% and 7.0%, respectively, of total
revenues, and revenues denominated in the Australian dollar represented 5.8% and
4.5%, respectively, of total revenues. Our exchange rate risk primarily arises
from our foreign currency revenues, receivables and
payables.
We use derivative financial instruments such as foreign exchange
forward and option contracts to mitigate the risk of changes in foreign exchange
rates on accounts receivable and forecasted cash flows denominated in certain
foreign currencies. The counterparty for these contracts is generally a
bank.
As of December 31, 2009, we had outstanding forward contracts of
$380 million, Euro 13 million and United Kingdom Pound Sterling 10 million and
option contracts of $194 million. As of March 31, 2009, we had outstanding
forward contracts of $278 million, Euro 27 million and United Kingdom Pound
Sterling 21 million and option contracts of $173 million. The forward contracts
typically mature within one to twelve months, must be settled on the day of
maturity and may be cancelled subject to the payment of any gains or losses in
the difference between the contract exchange rate and the market exchange rate
on the date of cancellation. We use these derivative instruments only as a
hedging mechanism and not for speculative purposes. We may not purchase adequate
instruments to insulate ourselves from foreign exchange currency risks. In
addition, any such instruments may not perform adequately as a hedging
mechanism. The policies of the Reserve Bank of India may change from time to
time which may limit our ability to hedge our foreign currency exposures
adequately. We may, in the future, adopt more active hedging policies, and have
done so in the past.
Fair value risk. The fair value of our market rate risk
sensitive instruments approximates their carrying value.
Recent Accounting Pronouncements
Standards early adopted by the company
1.
|
IFRS 8, Operating Segments is applicable for annual periods
beginning on or after January 1, 2009. We have early adopted this standard
as at April 1, 2007. IFRS 8 replaces IAS 14, Segment Reporting. The new
standard requires a 'management approach', under which segment information
is presented on the same basis as that used for internal reporting
provided to the chief operating decision maker. The application of this
standard did not result in any change in the number of reportable
segments. Allocation of goodwill was not required under Previous GAAP and
hence goodwill has been allocated in accordance to the requirements of
this Standard.
|
2.
|
IFRS 3 (Revised), Business Combinations, as amended, is
applicable for annual periods beginning on or after July 1, 2009. We have
early adopted this standard as at April 1, 2009. Business Combinations
consummated after April 1, 2009 will be impacted by this standard. IFRS 3
(Revised) primarily requires the acquisition-related costs to be
recognized as period expenses in accordance with the relevant IFRS. Costs
incurred to issue debt or equity securities are required to be recognized
in accordance with IAS 39. Consideration, after this amendment, will
include fair values of all interests previously held by the acquirer.
Re-measurement of such interests to fair value would be carried out
through net profit in the statement of comprehensive income. Contingent
consideration is required to be recognized at fair value even if not
deemed probable of payment at the date of
acquisition.
|
IFRS 3 (Revised) provides an explicit option on a
transaction-by-transaction basis, to measure any Non-controlling interest (NCI)
in the entity acquired at fair value of their proportion of identifiable assets
and liabilities or at full fair value. The first method will result in a
marginal difference in the measurement of goodwill from the existing IFRS 3;
however the second approach will require recording goodwill on NCI as well as on
the acquired controlling interest. Upon consummating a business transaction in
future we are likely to adopt the first method of measuring NCI.
3.
|
IAS 27, as amended, is applicable for annual periods beginning
on or after July 1, 2009. We have early adopted this standard as at April
1, 2009. It requires a mandatory adoption of economic entity model which
treats all providers of equity capital as shareholders of the entity.
Consequently, a partial disposal of interest in a subsidiary in which the
parent company retains control does not result in a gain or loss but in an
increase or decrease in equity. Additionally purchase of some or all of
the NCI is treated as treasury transaction and accounted for in equity and
a partial disposal of interest in a subsidiary in which the parent company
loses control triggers recognition of gain or loss on the entire interest.
A gain or loss is recognized on the portion that has been disposed off and
a further holding gain is recognized on the interest retained, being the
difference between the fair value and carrying value of the interest
retained. This Standard requires an entity to attribute their share of net
profit and reserves to the NCI even if this results in the NCI having a
deficit balance.
|
Recently adopted accounting pronouncements
1.
|
IAS 1, Presentation of Financial Statements is applicable for
annual periods beginning on or after January 1, 2009. We have adopted this
standard as at April 1, 2009. Consequent to the adoption of the standard,
title for cash flows has been changed to ‘Statement of cash flows’.
Further, we have included in our complete set of financial statements, a
single ‘Statement of comprehensive
income’.
|
2.
|
IFRIC Interpretation 18, Transfers of Assets from Customers
defines the treatment for property, plant and equipment transferred by
customers to companies or for cash received to be invested in property,
plant and equipment that must be used either to connect the customer to a
network or to provide the customer with ongoing access to a supply of
goods or services, or to do both.
|
The item of property, plant and equipment is to be initially
recognised at fair value with a corresponding credit to revenue. If an ongoing
service is identified as a part of the agreement, the period over which revenue
shall be recognised for that service would be determined by the terms of the
agreement with the customer. If the period is not clearly defined, then revenue
should be recognized over a period no longer than the useful life of the
transferred asset used to provide the ongoing service. This interpretation is to
be applied prospectively to transfers of assets from customers received on or
after July 1, 2009. We have adopted this interpretation prospectively for all
assets transferred after July 1, 2009. There has been no material impact on the
company as a result of the adoption of this interpretation.
Critical Accounting Policies
We consider the policies discussed below to be critical to an
understanding of our financial statements as their application places the most
significant demands on management's judgment, with financial reporting results
relying on estimates about the effect of matters that are inherently uncertain.
Specific risks for these critical accounting policies are described in the
following paragraphs. For all of these policies, future events may not develop
exactly as forecasted and the best estimates may routinely require
adjustment.
Estimates
We prepare financial statements in conformity with IFRS, which
requires us to make estimates, judgments and assumptions. These estimates,
judgements and assumptions affect the application of accounting policies and the
reported amounts of assets and liabilities, the disclosures of contingent assets
and liabilities at the date of the financial statements and reported amounts of
revenues and expenses during the period. Application of accounting policies
which require critical accounting estimates involving complex and subjective
judgments and the use of assumptions in the consolidated interim financial
statements have been disclosed below. However, accounting estimates could change
from period to period and actual results could differ from those estimates.
Appropriate changes in estimates are made as and when we become aware of changes
in circumstances surrounding the estimates. Changes in estimates are reflected
in our financial statements in the period in which changes are made and, if
material, their effects are disclosed in the notes to the consolidated financial
statements.
a. Revenue recognition
We use the percentage-of-completion method in accounting for
fixed-price contracts. Use of the percentage-of-completion method requires us to
estimate the efforts expended to date as a proportion of the total efforts to be
expended. Efforts expended have been used to measure progress towards completion
as there is a direct relationship between input and productivity. Provisions for
estimated losses, if any, on uncompleted contracts are recorded in the period in
which such losses become probable based on the expected contract estimates at
the reporting date.
b. Income taxes
Our two major tax jurisdictions are India and the U.S., though we
also file tax returns in other foreign jurisdictions. Significant judgments are
involved in determining the provision for income taxes, including expectation on
tax position which are sustainable on a more likely than not basis.
Revenue Recognition
We derive our revenues primarily from software development and
related services, business process management services and the licensing of
software products. Arrangements with customers for software development and
related services and business process management services are either on a
fixed-price, fixed-timeframe or on a time-and-material basis.
We recognize revenue on time-and-material contracts as the related
services are performed. Revenue from the end of the last billing to the balance
sheet date is recognized as unbilled revenues. Revenue from fixed-price,
fixed-timeframe contracts is recognized as per the percentage-of-completion
method. Efforts expended have been used to measure progress towards completion
as there is a direct relationship between input and productivity. Provisions for
estimated losses, if any, on uncompleted contracts are recorded in the period in
which such losses become probable based on the current contract estimates. Costs
and earnings in excess of billings have been classified as unbilled revenue
while billings in excess of costs and earnings have been classified as unearned
revenue.
At the end of every reporting period, we evaluate each project for
estimated revenue and estimated efforts. Any revisions or updates to existing
estimates are made wherever required by obtaining approvals from officers having
the requisite authority. Management regularly reviews and evaluates the status
of each contract in progress to estimate the profit or loss. As part of the
review, detailed actual efforts and a realistic estimate of efforts to complete
all phases of the project is compared with the details of the original estimate
and the total contract price. To date, we have not had any fixed-price,
fixed-timeframe contracts that resulted in a material loss. We evaluate change
orders according to their characteristics and the circumstances in which they
occur. If such change orders are considered by the parties to be a normal
element within the original scope of the contract, no change in the contract
price is made. Otherwise, the adjustment to the contract price may be routinely
negotiated. Contract revenue and costs are adjusted to reflect change orders
approved by the client and us, regarding both scope and price. Changes are
reflected in revenue recognition only after the change order has been approved
by both parties. The same principle is also followed for escalation
clauses.
In arrangements for software development and related services and
maintenance services, the company has applied the guidance in IAS 18, Revenue,
by applying the revenue recognition criteria for each separately identifiable
component of a single transaction. The arrangements generally meet the criteria
for considering software development and related services as separately
identifiable components. For allocating the consideration, the company has
measured the revenue in respect of each separable component of a transaction at
its fair value, in accordance with principles given in IAS 18. The price that is
regularly charged for an item when sold separately is the best evidence of its
fair value. In cases where the company is unable to establish objective and
reliable evidence of fair value for the software development and related
services, the company has used a residual method to allocate the arrangement
consideration. In these cases the balance consideration after allocating the
fair values of undelivered components of a transaction has been allocated to the
delivered components for which specific fair values do not exist.
License fee revenues have been recognized when the general revenue
recognition criteria given in IAS 18 are met. Arrangements to deliver software
products generally have three elements: license, implementation and Annual
Technical Services (ATS). We have applied the principles given in IAS 18 to
account for revenues from these multiple element arrangements. Objective and
reliable evidence of fair value has been established for ATS. Objective and
reliable evidence of fair value is the price charged when the element is sold
separately. When other services are provided in conjunction with the licensing
arrangement and objective and reliable evidence of their fair values have been
established, the revenue from such contracts are allocated to each component of
the contract in a manner, whereby revenue is deferred for the undelivered
services and the residual amounts are recognized as revenue for delivered
elements. In the absence of objective and reliable evidence of fair value for
implementation, the entire arrangement fee for license and implementation is
recognized using the percentage-of-completion method as the implementation is
performed. Revenue from client training, support and other services arising due
to the sale of software products is recognized as the services are performed.
ATS revenue is recognized ratably over the period in which the services are
rendered.
Advances received for services and products are reported as client
deposits until all conditions for revenue recognition are met.
We account for volume discounts and pricing incentives to customers
by reducing the amount of discount from the amount of revenue recognized at the
time of sale. In some arrangements, the level of discount varies with increases
in the levels of revenue transactions. The discounts are passed on to the
customer either as direct payments or as a reduction of payments due from the
customer. Further, we recognize discount obligations as a reduction of revenue
based on the ratable allocation of the discount to each of the underlying
revenue transactions that result in progress by the customer toward earning the
discount. We recognize the liability based on an estimate of the customer's
future purchases. If it is probable that the criteria for the discount will not
be met, or if the amount thereof cannot be estimated reliably, then discount is
not recognized until the payment is probable and the amount can be estimated
reliably. We recognize changes in the estimated amount of obligations for
discounts using a cumulative catch-up adjustment. We present revenues net of
sales and value-added taxes in our consolidated statement of comprehensive
income.
Income Tax
Our income tax expense comprises current and deferred income tax and
is recognized in statement of comprehensive income except to the extent that it
relates to items recognized directly in equity, in which case it is recognized
in equity. Current income tax for current and prior periods is recognized at the
amount expected to be paid to or recovered from the tax authorities, using the
tax rates and tax laws that have been enacted or substantively enacted by the
balance sheet date. Deferred income tax assets and liabilities are recognized
for all temporary differences arising between the tax bases of assets and
liabilities and their carrying amounts in the financial statements except when
the deferred income tax arises from the initial recognition of goodwill or an
asset or liability in a transaction that is not a business combination and
affects neither accounting nor taxable profit or loss at the time of the
transaction. Deferred tax assets are reviewed at each reporting date and are
reduced to the extent that it is no longer probable that the related tax benefit
will be realized.
Deferred income tax assets and liabilities are measured using tax
rates and tax laws that have been enacted or substantially enacted by the
balance sheet date and are expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect of changes in tax rates on deferred income tax assets and liabilities is
recognized as income or expense in the period that includes the enactment or the
substantive enactment date. A deferred income tax asset is recognized to the
extent that it is probable that future taxable profit will be available against
which the deductible temporary differences and tax losses can be utilized.
Deferred income taxes are not provided on the undistributed earnings of
subsidiaries and branches outside India where it is expected that the earnings
of the foreign subsidiary or branch will not be distributed in the foreseeable
future. The income tax provision for the interim period is made based on the
best estimate of the annual average tax rate expected to be applicable for the
full fiscal year. Tax benefits of deductions earned on exercise of employee
share options in excess of compensation charged to income are credited to share
premium.
Business Combinations, Goodwill and Intangible
Assets
Business combinations have been accounted for using the purchase
method under the provisions of IFRS 3 (Revised), Business Combinations. The cost
of an acquisition is measured at the fair value of the assets transferred,
equity instruments issued and liabilities incurred or assumed at the date of
acquisition. The cost of acquisition also includes the fair value of any
contingent consideration. Identifiable assets acquired and liabilities and
contingent liabilities assumed in a business combination are measured initially
at their fair value on the date of acquisition. Transaction costs that the Group
incurs in connection with a business combination such as finders’ fees, legal
fees, due diligence fees, and other professional and consulting fees are
expensed as incurred.
Goodwill represents the cost of business acquisition in excess of
our interest in the net fair value of identifiable assets, liabilities and
contingent liabilities of the acquiree. When the excess is negative, we
recognize the same immediately in the statement of comprehensive income.
Goodwill arising on the acquisition of a non-controlling interest in a
subsidiary represents the excess of the cost of the additional investment over
the fair value of the net assets acquired at the acquisition date and is
measured at cost less accumulated impairment losses.
Intangible assets are stated at cost less accumulated amortization
and impairments. They are amortized over their respective individual estimated
useful lives on a straight-line basis, from the date that they are available for
use. The estimated useful life of an identifiable intangible asset is based on a
number of factors including the effects of obsolescence, demand, competition,
and other economic factors (such as the stability of the industry, and known
technological advances), and the level of maintenance expenditures required to
obtain the expected future cash flows from the asset.
We expense research costs as and when the same are incurred.
Software product development costs are expensed as incurred unless technical and
commercial feasibility of the project is demonstrated, future economic benefits
are probable, we have the intention and ability to complete and use or sell the
software and the costs can be measured reliably. Research and development costs
and software development costs incurred under contractual arrangements with
customers are accounted as cost of sales.
As of the end of the period covered by this Quarterly Report, our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, has carried out an evaluation of the effectiveness of our
disclosure controls and procedures. The term “disclosure controls and
procedures” means controls and other procedures that are designed to ensure that
information required to be disclosed in the reports we file or submit under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported, within the time periods specified in the rules and forms of the
Securities and Exchange Commission. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by us in our reports that we file or submit under the
Exchange Act is accumulated and communicated to management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding our required disclosure. In designing and evaluating our
disclosure controls and procedures, management recognizes that any controls and
procedures, no matter how well conceived and operated, can only provide
reasonable assurance that the objectives of the disclosure controls and
procedures are met.
Based on their evaluation as of the end of the period covered by
this Quarterly Report, our Chief Executive Officer and Chief Financial Officer
have concluded that our disclosure controls and procedures were effective to
provide reasonable assurance that the information required to be disclosed in
filings and submissions under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified by the SEC's rules
and forms, and that material information related to us and our consolidated
subsidiaries is accumulated and communicated to management, including the Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions about required disclosure.
There has been no change in our internal control over financial
reporting that occurred during the period covered by this Quarterly Report that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
The company is subject to legal proceedings and claims, which have
arisen in the ordinary course of its business. The company’s management does not
reasonably expect that legal actions, when ultimately concluded and determined,
will have a material and adverse effect on the results of operations or the
financial position of the company.
Risk Factors
This Quarterly Report contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those set forth in the following risk factors and elsewhere
in this Quarterly Report.
Risks Related to Our Company and Our Industry
Our revenues and expenses are difficult to predict and can vary
significantly from period to period, which could cause our share price to
decline.
Our revenues and profitability have grown rapidly in recent years
until the onset of the global economic slowdown in 2008, and are likely to vary
significantly in the future from period to period. Therefore, we believe that
period-to-period comparisons of our results of operations are not necessarily
meaningful and should not be relied upon as an indication of our future
performance. It is possible that in the future some of our results of operations
may be below the expectations of market analysts and our investors, which could
cause the share price of our equity shares and our ADSs to decline
significantly.
Factors which affect the fluctuation of our operating results
include:
A significant part of our total operating expenses, particularly
expenses related to personnel and facilities, are fixed in advance of any
particular period. As a result, unanticipated variations in the number and
timing of our projects or employee utilization rates, or the accuracy of our
estimates of the resources required to complete ongoing projects, may cause
significant variations in our operating results in any particular
period.
There are also a number of factors, other than our performance, that
are not within our control that could cause fluctuations in our operating
results from period to period. These include:
-
the
duration of tax holidays or tax exemptions and the availability of other
incentives from the Government of India;
-
changes in regulations and taxation in India or the other
countries in which we conduct business;
-
currency fluctuations, particularly when the rupee appreciates in
value against the US dollar, the United Kingdom Pound Sterling, the Euro
or the Australian dollar, since the majority of our revenues are in these
currencies and a significant part of our costs are in
rupees; and
-
other
general economic and political factors, including the economic conditions in
the United States, Europe or any other geographies in which we
operate.
In addition, the availability of visas for working in the United
States may vary substantially from quarter to quarter. Visas for working in the
United States may be available during one quarter, but not another, or there may
be differences in the number of visas available from one quarter to another. As
such, the variable availability of visas may require us to incur significantly
higher visa-related expenses in certain quarters when compared to others. For
example, we incurred $10 million in costs for visas in the three months ended
December 31, 2009, compared to $5 million in the three months ended December 31,
2008.
Such fluctuations may affect our operating margins and profitability
in certain quarters during a fiscal year.
We may not be able to sustain our previous profit margins or levels
of profitability.
Our profitability could be affected by pricing pressures on our
services, volatility of the exchange rates between the rupee, the dollar and
other currencies in which we generate revenues or incur expenses, and increased
wage pressures in India and at other locations where we maintain
operations.
Since fiscal 2003, we have incurred substantially higher selling and
marketing expenses as we have invested to increase brand awareness among target
clients and promote client loyalty and repeat business among existing clients.
We may incur increased selling and marketing expenses in the future, which could
result in declining profitability. In addition, while our Global Delivery Model
allows us to manage costs efficiently, if the proportion of our services
delivered at client sites increases we may not be able to keep our operating
costs as low in the future, which would also have an adverse impact on our
profit margins.
The appreciation of the rupee against the U.S. dollar adversely
impacted our revenues and operating results for fiscal 2007, 2008 and the nine
months ended December 31, 2009. During fiscal 2009, the U.S. dollar appreciated
substantially relative to the rupee. The exchange rate for one dollar as
published by the Foreign Exchange Dealers' Association of India, or FEDAI, was
Rs. 50.72 as of March 31, 2009, as against Rs. 40.02 as of March 31, 2008.
Although the dollar appreciated against the rupee during fiscal 2009, we still
experienced losses during such period related to foreign currency fluctuations
as a result of our hedging activities. As such, exchange rate fluctuations and
our hedging activities have in the past impacted, and may in the future,
adversely impact our operating results. As of December 31, 2009, the exchange
rate for one dollar as published by the FEDAI was Rs. 46.53.
Increased selling and marketing expenses, and other operating
expenses in the future, as well as fluctuations in foreign currency exchange
rates including, in particular, the appreciation of the rupee against foreign
currencies or the appreciation of the U.S. dollar against other foreign
currencies, could materially and adversely affect our profit margins and results
of operations in future periods.
The economic environment, pricing pressure and decreased utilization
rates could negatively impact our revenues and operating results.
Spending on technology products and services in most parts of the
world has been rising for the past few years. However, there was a decline in
the growth rate of global IT purchases in the latter half of 2008 due to the
global economic slowdown. This downward trend continued into 2009, with global
IT purchases declining due to the challenging global economic
environment.
Reduced IT spending in response to the challenging economic
environment has also led to increased pricing pressure from our clients, which
has adversely impacted our billing rates. For instance, during the nine months
ended December 31, 2009, our onsite and offshore billing rates, other than for
business process management, decreased by 1.7% and 6.3% when compared to
the nine months ended December 31, 2008.
In addition to seeking reduced billing rates, many of our clients
have also been seeking extensions in credit terms from the standard terms that
we provide, including pursuing credit from us for periods of up to 60 days or
more. Such extended credit terms may reduce our revenues, or result in the delay
of the realization of revenues, and may adversely affect our cash flows.
Additionally, extended credit terms also increase our exposure to
customer-specific credit risks. Reductions in IT spending and extended credit
terms arising from or related to the global economic slowdown, and any resulting
pricing pressures, reduction in billing rates or increased credit risk may
adversely impact our revenues, gross profits, operating margins and results of
operations.
Further, reduced or delayed IT spending has also adversely impacted
our utilization rates for technology professionals. For instance, for the nine
months ended December 31, 2009, our utilization rate for technology
professionals, including trainees, was approximately 66.9% as compared to 69.6%
during the nine months ended December 31, 2008. This decrease in employee
utilization rates has adversely affected our profitability for the nine months
ended December 31, 2009, and any further decrease in employee utilization rates
in the future, whether on account of reduced or delayed IT spending,
particularly if accompanied by pricing pressure, may adversely impact our
profits.
In addition to the business challenges and margin pressure resulting
from the global economic slowdown and the response of our clients to such
slowdown, there is also a growing trend among consumers of IT services towards
consolidation of technology service providers in order to improve efficiency and
reduce costs. Our success in the competitive bidding process for new
consolidation projects or in retaining existing projects is dependent on our
ability to fulfill client expectations relating to staffing, efficient
offshoring of services, absorption of transition costs, deferment of billing and
more stringent service levels. Our failure to meet a client's expectations in
such consolidation projects may adversely impact our business, revenues and
operating margins. In addition, even if we are successful in winning the
mandates for such consolidation projects, we may experience significant pressure
on our operating margins as a result of the competitive bidding
process.
Moreover, our ability to maintain or increase pricing is restricted
as clients often expect that as we do more business with them, they will receive
volume discounts or special pricing incentives. In addition, existing and new
customers are also increasingly using third-party consultants with broad market
knowledge to assist them in negotiating contractual terms. Any inability to
maintain or increase pricing on this account may also adversely impact our
revenues, gross profits, operating margins and results of
operations.
Our revenues are highly dependent on clients primarily located in
the United States and Europe, as well as on clients concentrated in certain
industries, and an economic slowdown or other factors that affect the economic
health of the United States, Europe or these industries may affect our
business.
In the nine months ended December 31, 2009, fiscal 2009 and fiscal
2008, approximately 65.7%, 63.2% and 62.0% of our revenues were derived from
projects in North America. In the same periods, approximately 23.2%, 26.4% and
28.1% of our revenues were derived from projects in Europe. The recent crisis in
the financial and credit markets in the United States, Europe and Asia led to a
global economic slowdown, with the economies of the United States and Europe
showing significant signs of weakness. If the United States or European economy
remains weak or weakens further, our clients may reduce or postpone their
technology spending significantly, which may in turn lower the demand for our
services and negatively affect our revenues and profitability.
In the nine months ended December 31, 2009, fiscal 2009 and fiscal
2008, we derived approximately 33.7%, 33.9% and 35.8% of our revenues from the
financial services industry. The crisis in the financial and credit markets
in the United States has led to a significant change in the financial services
industry in the United States in the past year, with the United States federal
government being forced to take over or provide financial support to leading
financial institutions and with leading investment banks going bankrupt or being
forced to sell themselves in distressed circumstances. The subprime mortgage
crisis and the resultant turbulence in the financial services sector may result
in the reduction, postponement or consolidation of IT spending by our clients,
contract terminations, deferrals of projects or delays in purchases, especially
in the financial services sector. Any reduction, postponement or consolidation
in IT spending may lower the demand for our services or imp act the prices that
we can obtain for our services and consequently, adversely affect our revenues
and profitability.
Further, if the economy of the United States does not recover as
rapidly as expected or at all, any lingering weakness in the United States
economy could have a material adverse impact on our revenues, particularly from
businesses in the financial services industry and other industries that are
particularly vulnerable to a slowdown in consumer spending. In the nine
months ended December 31, 2009, fiscal 2009 and fiscal 2008, we derived
approximately 33.7%, 33.9% and 35.8% of our revenues from the financial services
industry, 16.4%, 18.1% and 21.6% of our revenues from clients in the
telecommunications industry and about 13.5%, 12.5% and 11.8% of our revenues
from clients in the retail industry, which industries are especially vulnerable
to a slowdown in the U.S. economy. Any weakness in the U.S. economy or in the
industry segments from which we generate revenues could have a negative effect
on our business and results of operations.
Currency fluctuations may affect the results or our operations or
the value of our ADSs.
Our functional currency is the Indian rupee although we transact a
major portion of our business in several currencies and accordingly face foreign
currency exposure through our sales in the United States and elsewhere, and
purchases from overseas suppliers in various foreign currencies. Generally, we
generate the majority of our revenues in foreign currencies, such as the U.S.
dollar or the United Kingdom Pound Sterling, and incur the majority of our
expenses in Indian rupees. Recently, as a result of the global economic slowdown
and the increased volatility in foreign exchange currency markets, there has
been increased demand from our clients that all risks associated with foreign
exchange fluctuations be borne by us. Also, historically, we have held a
substantial majority of our cash funds in rupees. Accordingly, changes in
exchange rates may have a material adverse effect on our revenues, other income,
cost of services sold, gross margin and net income, and may have a negative
impact on our business, operating results and financial condition. The exchange
rate between the rupee and foreign currencies, including the U.S. dollar, the
United Kingdom Pound Sterling, the Euro and the Australian dollar, has changed
substantially in recent years and may fluctuate substantially in the future, and
this fluctuation in currencies had a material and adverse effect on our
operating results in the nine months ended December 31, 2009, fiscal 2009 and
2008. We expect that a majority of our revenues will continue to be generated in
foreign currencies, including the U.S. dollar, the United Kingdom Pound
Sterling, the Euro and the Australian dollar, for the foreseeable future and
that a significant portion of our expenses, including personnel costs, as well
as capital and operating expenditures, will continue to be denominated in Indian
rupees. Consequently, the results of our operations are adversely affected as
the rupee appreciates against the dollar and other foreign
currencies.
We use derivative financial instruments such as foreign exchange
forward and option contracts to mitigate the risk of changes in foreign exchange
rates on accounts receivable and forecast cash flows denominated in certain
foreign currencies. As of December 31, 2009, we had outstanding forward
contracts of $380 million, Euro 13 million and United Kingdom Pound Sterling 10
million and option contracts of $194 million. We may not purchase derivative
instruments adequate to insulate ourselves from foreign currency exchange risks,
and over the past year, we have incurred significant losses as a result of
exchange rate fluctuations that have not been offset in full by our hedging
strategy.
Additionally, our hedging activities have also contributed to
increased losses in recent times given the recent volatility in foreign currency
markets. For example, in fiscal 2009, we incurred losses of $165 million in our
forward and option contracts. These losses offset by gains of $71 million as a
result of foreign exchange translations during the same period, resulted in a
total loss of $94 million related to foreign currency transactions, which had a
significant and adverse effect on our profit margin and results of operations.
If foreign exchange currency markets continue to be volatile, such fluctuations
in foreign currency exchange rates could materially and adversely affect our
profit margins and results of operations in future periods. Also, the volatility
in the foreign currency markets may make it difficult to hedge our foreign
currency exposures effectively.
Further, the policies of the Reserve Bank of India may change from
time to time which may limit our ability to hedge our foreign currency exposures
adequately. In addition, a high-level committee appointed by the Reserve Bank of
India had recommended that India move to increased capital account
convertibility over the next few years, and proposed a framework for such
increased convertibility. Full or increased capital account convertibility, if
introduced, could result in increased volatility in the fluctuations of exchange
rates between the rupee and foreign currencies.
During the nine months ended December 31, 2009, we derived 26.8% of
our revenues in currencies other than the U.S. dollar including 9.4%, 7.2% and
5.8% of our revenues in United Kingdom Pound Sterling, Euro and Australian
dollars, respectively. During the nine months ended December 31, 2009, the U.S.
dollar depreciated against a majority of the currencies in which we transact
business, with the U.S. dollar depreciating by 12.6%, 8.3% and 30.4% against the
United Kingdom Pound Sterling, Euro and Australian dollar respectively. These
cross currency fluctuations adversely impacted our reported revenues for the
nine months ended December 31, 2009, and may adversely impact our reported
revenues in future periods.
Fluctuations in the exchange rate between the rupee and the U.S.
dollar will also affect the dollar conversion by Deutsche Bank Trust Company
Americas, the Depositary with respect to our ADSs, of any cash dividends paid in
rupees on the equity shares represented by the ADSs. In addition, these
fluctuations will affect the dollar equivalent of the rupee price of equity
shares on the Indian stock exchanges and, as a result, the prices of our ADSs in
the United States, as well as the dollar value of the proceeds a holder would
receive upon the sale in India of any equity shares withdrawn from the
Depositary under the Depositary Agreement. Holders may not be able to convert
rupee proceeds into dollars or any other currency, and there is no guarantee of
the rate at which any such conversion will occur, if at all.
Any inability to manage our growth could disrupt our business and
reduce our profitability.
We have grown significantly in recent periods. Between
March 31, 2005 and March 31, 2009 our total employees grew from
approximately 36,800 to approximately 104,900. As of December 31, 2009, we had
approximately 109,900 employees. In addition, in the last five years we have
undertaken and continue to undertake major expansions of our existing
facilities, as well as the construction of new facilities. We expect our growth
to place significant demands on our management and other resources. Our growth
will require us to continuously develop and improve our operational, financial
and other internal controls, both in India and elsewhere. In addition, continued
growth increases the challenges involved in:
-
recruiting, training and retaining sufficient skilled technical,
marketing and management personnel;
-
adhering to and further improving our high quality and process
execution standards;
-
preserving our culture, values and entrepreneurial
environment;
-
successfully expanding the range of services offered to our
clients;
-
developing and improving our internal administrative
infrastructure, particularly our financial, operational, communications and
other internal
systems; and
-
maintaining high levels of client
satisfaction.
Our growth strategy also relies on the expansion of our operations
to other parts of the world, including Europe, Australia, Latin America and
other parts of Asia. In October 2003, we established Infosys China and in
January 2004, we acquired Infosys Australia to expand our operations in those
countries. In April 2004, we formed Infosys Consulting to focus on consulting
services in the United States. In addition, we have embarked on an expansion of
our business in China, and have expended significant resources in this
expansion. During fiscal 2008, we established a wholly owned subsidiary and
opened a development center in Mexico. Also, during fiscal 2008, as part of an
outsourcing agreement with a client, Philips Electronics Nederland B.V.
(“Philips”), our majority owned subsidiary, Infosys BPO, acquired from
Koninklijke Philips Electronics N.V., certain shared services centers in India,
Poland and Thailand that were engaged in the provision of finance, accounting
and procurement support services to Philips' operations worldwide. Further,
during 2009, we formed Infosys Public Services, Inc. to focus on governmental
outsourcing and consulting in the United States. The costs involved in entering
and establishing ourselves in new markets, and expanding such operations, may be
higher than expected and we may face significant competition in these regions.
Our inability to manage our expansion and related growth in these regions may
have an adverse effect on our business, results of operations and financial
condition.
We may face difficulties in providing end-to-end business solutions
for our clients, which could lead to clients discontinuing their work with us,
which in turn could harm our business.
Over the past several years, we have been expanding the nature and
scope of our engagements by extending the breadth of services that we offer. The
success of some of our newer service offerings, such as operations and business
process consulting, IT consulting, business process management, systems
integration and infrastructure management, depends in part, upon continued
demand for such services by our existing and new clients and our ability to meet
this demand in a cost-competitive and effective manner. In addition, our ability
to effectively offer a wider breadth of end-to-end business solutions depends on
our ability to attract existing or new clients to these service offerings. To
obtain engagements for our end-to-end solutions, we are competing with large,
well-established international consulting firms as well as other India-based
technology services companies, resulting in increased competition and marketing
costs. Accordingly, our new service offerings may not effectively meet client
needs and we may be unable to attract existing and new clients to these service
offerings.
The increased breadth of our service offerings may result in larger
and more complex client projects. This will require us to establish closer
relationships with our clients and potentially with other technology service
providers and vendors, and require a more thorough understanding of our clients'
operations. Our ability to establish these relationships will depend on a number
of factors including the proficiency of our technology professionals and our
management personnel.
Larger projects often involve multiple components, engagements or
stages, and a client may choose not to retain us for additional stages or may
cancel or delay additional planned engagements. These terminations,
cancellations or delays may result from the business or financial condition of
our clients or the economy generally, as opposed to factors related to the
quality of our services. Cancellations or delays make it difficult to plan for
project resource requirements, and resource planning inaccuracies may have a
negative impact on our profitability.
Intense competition in the market for technology services could
affect our cost advantages, which could reduce our share of business from
clients and decrease our revenues.
The technology services market is highly competitive. Our
competitors include large consulting firms, captive divisions of large
multinational technology firms, infrastructure management services firms, Indian
technology services firms, software companies and in-house IT departments of
large corporations.
The technology services industry is experiencing rapid changes that
are affecting the competitive landscape, including recent divestitures and
acquisitions that have resulted in consolidation within the industry. These
changes may result in larger competitors with significant resources. In
addition, some of our competitors have added or announced plans to add
cost-competitive offshore capabilities to their service offerings. These
competitors may be able to offer their services using the offshore and onsite
model more efficiently than we can. Many of these competitors are also
substantially larger than us and have significant experience with international
operations. We may face competition in countries where we currently operate, as
well as in countries in which we expect to expand our operations. We also expect
additional competition from technology services firms with current operations in
other countries, such as China and the Philippines. Many of our competitors have
significantly greater financial, technical and marketing resources, generate
greater revenues, have more extensive existing client relationships and
technology partners and have greater brand recognition than we do. We may be
unable to compete successfully against these competitors, or may lose clients to
these competitors. Additionally, we believe that our ability to compete also
depends in part on factors outside our control, such as the price at which our
competitors offer comparable services, and the extent of our competitors'
responsiveness to their clients' needs.
Our revenues are highly dependent upon a small number of clients,
and the loss of any one of our major clients could significantly impact our
business.
We have historically earned, and believe that in the future we will
continue to earn, a significant portion of our revenues from a limited number of
corporate clients. In the nine months ended December 31, 2009, fiscal 2009 and
fiscal 2008, our largest client accounted for 4.6%, 6.9% and 9.1% of our total
revenues, and our five largest clients together accounted for 16.7%, 18.0% and
20.9% of our total revenues. The volume of work we perform for specific clients
is likely to vary from year to year, particularly since we historically have not
been the exclusive external technology services provider for our clients. Thus,
a major client in one year may not provide the same level of revenues in a
subsequent year. However, in any given year, a limited number of clients tend to
contribute a significant portion of our revenues. There are a number of factors,
other than our performance, that could cause the loss of a client and that may
not be predictable. In certain cases, we have significantly reduced the services
provided to a client when the client either changed its outsourcing strategy by
moving more work in-house or replaced its existing software with packaged
software supported by the licensor. Reduced technology spending in response to a
challenging economic or competitive environment may also result in our loss of a
client. If we lose one of our major clients or one of our major clients
significantly reduces its volume of business with us or there is an increase in
the accounts receivables from any of our major clients, our revenues and
profitability could be reduced.
Legislation in certain countries in which we operate, including the
United States and the United Kingdom, may restrict companies in those
countries from outsourcing work to us.
Recently, some countries and organizations have expressed concerns
about a perceived association between offshore outsourcing and the loss of jobs.
With the growth of offshore outsourcing receiving increasing political and media
attention, especially in the United States, which is our largest market, and
particularly given the prevailing economic environment, it is possible that
there could be a change in the existing laws or the enactment of new legislation
restricting offshore outsourcing or imposing restrictions on the deployment of,
and regulating the wages of, work visa holders at client locations, which may
adversely impact our ability to do business in the jurisdictions in which we
operate, especially with governmental entities. It is also possible that private
sector companies working with these governmental entities may be restricted from
outsourcing projects related to government contracts or may face disincentives
if they outsource certain operations.
The recent credit crisis in the United States and elsewhere has also
resulted in the United States federal government and governments in Europe
acquiring or proposing to acquire equity positions in leading financial
institutions and banks. If either the United States federal government or
another governmental entity acquires an equity position in any of our clients,
any resulting changes in management or reorganizations may result in deferrals
or cancellations of projects or delays in purchase decisions, which may have a
material adverse effect on our business, results of operations or financial
condition. Moreover, equity investments by governmental entities in, or
governmental financial aid to, our clients may involve restrictions on the
ability of such clients to outsource offshore or otherwise restrict offshore IT
vendors from utilizing the services of work visa-holders at client locations.
Any restriction on our ability to deploy our trained offshore resources at
client locations may in turn require us to replace our existing offshore
resources with local resources, or hire additional local resources, which local
resources may only be available at higher wages. Any resulting increase in our
compensation, hiring and training expenses could adversely impact our revenues
and operating profitability.
In addition, in the United Kingdom, the Transfer of Undertakings
(Protection of Employees) Regulations, or TUPE, including the revisions to those
regulations, will allow employees who are dismissed as a result of "service
provision changes", which may include outsourcing to non-UK companies, to seek
compensation either from the company from which they were dismissed or from the
company to which the work was transferred. This could deter UK companies from
outsourcing work to us and could also result in our being held liable for
redundancy payments to such workers. Any such event could adversely affect our
revenues and operating profitability.
Our success depends largely upon our highly skilled technology
professionals and our ability to hire, attract and retain these
personnel.
Our ability to execute projects, to maintain our client
relationships and to obtain new clients depends largely on our ability to
attract, train, motivate and retain highly skilled technology professionals,
particularly project managers and other mid-level professionals. If we cannot
hire and retain additional qualified personnel, our ability to bid for and
obtain new projects, and to continue to expand our business will be impaired and
our revenues could decline. We believe that there is significant worldwide
competition for technology professionals with the skills necessary to perform
the services we offer. For example, in India, since 2004, hiring by technology
companies has increased significantly, although there has been a decline in
hiring in recent months. We added approximately 3,000, 12,400 and 13,700 new
employees, net of attrition, in the three months ended December 31, 2009, fiscal
2009 and fiscal 2008, excluding Infosys BPO and our other
subsidiaries.
Increased hiring by technology companies, particularly in India, and
increasing worldwide competition for skilled technology professionals may lead
to a shortage in the availability of qualified personnel in the markets in which
we operate and hire. A shortage in the availability of qualified IT
professionals in the markets in which we operate may affect our ability to hire
an adequate number of skilled and experienced technology professionals. Our
inability to hire such professionals may have an adverse effect on our business,
results of operations and financial condition.
Changes in policies or laws may also affect the ability of
technology companies to hire, attract and retain personnel. For instance,
although the Finance Act, 2009 has abolished a fringe benefit tax, or FBT, on
companies previously applicable on specified securities or equity shares
allotted or transferred, directly or indirectly, by the company free of cost or
at a concessional rate to its employees, it has proposed to restore the taxation
of such benefits in the hands of employees. The imposition of such taxes may
reduce the effectiveness of stock option grants in attracting and retaining
employees and may affect our ability to hire skilled and experienced technology
professionals.
Increased demand for technology professionals has also led to an
increase in attrition rates. For instance, our comparable attrition rate for the
nine months ended December 31, 2009, fiscal 2009 and fiscal 2008 was 11.6%,
11.1% and 13.4%, without accounting for attrition in Infosys BPO or our other
subsidiaries. Furthermore, attrition in the business process management industry
is generally significantly higher than in the technology services industry. We
may not be able to hire and retain enough skilled and experienced technology
professionals to replace those who leave. Additionally, we may not be able to
redeploy and retrain our technology professionals to keep pace with continuing
changes in technology, evolving standards and changing client preferences. Our
inability to attract and retain technology professionals may have a material
adverse effect on our business, results of operations and financial
condition.
It is possible that the Central Government or State Governments in
India may introduce legislation requiring employers to give preferential hiring
treatment to under-represented groups. The quality of our work force is critical
to our business. If any such Central Government or State Government legislation
becomes effective, our ability to hire the most highly qualified technology
professionals may be hindered.
Our success depends in large part upon our management team and key
personnel and our ability to attract and retain them.
We are highly dependent on the senior members of our management
team, including the continued efforts of our Chairman, our Chief Executive
Officer, our Chief Operating Officer, our Chief Financial Officer, other
executive members of the Board and members of our executive council which
consists of certain executive and other officers. On July 9, 2009, Nandan M.
Nilekani stepped down as the Co-Chairman of the Company’s Board of Directors to
take up a role with the Government of India. Our future performance will be
affected by any disruptions in the continued service of our directors,
executives and other officers. Competition for senior management in our industry
is intense, and we may not be able to retain such senior management personnel or
attract and retain new senior management personnel in the future. Furthermore,
we do not maintain key man life insurance for any of the senior members of our
management team or other key personnel. The loss of any member of our senior
management or other key personnel may have a material adverse effect on our
business, results of operations and financial condition.
Our failure to complete fixed-price, fixed-timeframe contracts or
transaction-based pricing contracts within budget and on time may negatively
affect our profitability.
As an element of our business strategy in response to our clients'
reduced IT budgets, we are offering an increasing portion of our services on a
fixed-price, fixed-timeframe basis, rather than on a time-and-materials basis.
In the nine months ended December 31, 2009, fiscal 2009 and fiscal 2008,
revenues from fixed-price, fixed-timeframe projects accounted for 38.1%, 35.4%
and 31.0% of our total services revenues, including revenues from our business
process management services. Decreased IT budgets of our clients have led us to
deviate from our standard pricing policies and to offer varied pricing models to
our clients in certain situations in order to remain competitive. For example,
we have recently begun entering into transaction-based pricing contracts with
certain clients in order to give our clients the flexibility to pay as they use
our services.
The risk of entering into fixed-price, fixed-timeframe arrangements
and transaction-based pricing arrangements is that if we fail to properly
estimate the appropriate pricing for a project, we may incur lower profits or
losses as a result of being unable to execute projects on the timeframe and with
the amount of labor we expected. Although we use our software engineering
methodologies and processes and past project experience to reduce the risks
associated with estimating, planning and performing fixed-price, fixed-timeframe
projects and transaction-based pricing projects, we bear the risk of cost
overruns, completion delays and wage inflation in connection with these
projects. If we fail to estimate accurately the resources and time required for
a project, future wage inflation rates, or currency exchange rates, or if we
fail to complete our contractual obligations within the contracted timeframe,
our profitability may suffer. We expect that we will continue to enter into
fixed-price, fixed-timeframe and transaction-based pricing engagements in the
future, and such engagements may increase in relation to the revenues generated
from engagements on a time-and-materials basis, which would increase the risks
to our business.
Our client contracts can typically be terminated without cause and
with little or no notice or penalty, which could negatively impact our revenues
and profitability.
Our clients typically retain us on a non-exclusive,
project-by-project basis. Most of our client contracts, including those that are
on a fixed-price, fixed-timeframe basis, can be terminated with or without
cause, with between zero and 90 days' notice and without any
termination-related penalties. Additionally, our contracts with clients are
typically limited to discrete projects without any commitment to a specific
volume of business or future work. Our business is dependent on the decisions
and actions of our clients, and there are a number of factors relating to our
clients that are outside of our control which might lead to termination of a
project or the loss of a client, including:
-
financial difficulties for a
client;
-
a
change in strategic priorities, resulting in a reduced level of technology
spending;
-
a
demand for price reductions;
-
a
change in outsourcing strategy by moving more work to the client's in-house
technology departments or to our
competitors;
-
the
replacement by our clients of existing software with packaged software
supported by licensors;
-
mergers and acquisitions;
and
-
consolidation of technology spending by a client, whether arising
out of mergers and acquisitions, or
otherwise.
Our inability to control the termination of client contracts could
have a negative impact on our financial condition and results of
operations.
Our engagements with customers are singular in nature and do not
necessarily provide for subsequent engagements.
Our clients generally retain us on a short-term,
engagement-by-engagement basis in connection with specific projects, rather than
on a recurring basis under long-term contracts. Although a substantial majority
of our revenues are generated from repeat business, which we define as revenue
from a client who also contributed to our revenue during the prior fiscal year,
our engagements with our clients are typically for projects that are singular in
nature. Therefore, we must seek out new engagements when our current engagements
are successfully completed or are terminated, and we are constantly seeking to
expand our business with existing clients and secure new clients for our
services. In addition, in order to continue expanding our business, we may need
to significantly expand our sales and marketing group, which would increase our
expenses and may not necessarily result in a substantial increase in business.
If we are unable to generate a substantial number of new engagements for
projects on a continual basis, our business and results of operations would
likely be adversely affected.
Our client contracts are often conditioned upon our performance,
which, if unsatisfactory, could result in less revenue than previously
anticipated.
A number of our contracts have incentive-based or other pricing
terms that condition some or all of our fees on our ability to meet defined
performance goals or service levels. Our failure to meet these goals or a
client's expectations in such performance-based contracts may result in a less
profitable or an unprofitable engagement.
Some of our long-term client contracts contain benchmarking
provisions which, if triggered, could result in lower future revenues and
profitability under the contract.
As the size and duration of our client engagements increase, clients
may increasingly require benchmarking provisions. Benchmarking provisions allow
a customer in certain circumstances to request a benchmark study prepared by an
agreed upon third-party comparing our pricing, performance and efficiency gains
for delivered contract services to that of an agreed upon list of other service
providers for comparable services. Benchmarking provisions in our client
engagements may have a greater impact on our results of operations during an
economic slowdown, because pricing pressure and the resulting decline in rates
may lead to a reduction in fees that we charge to clients that have benchmarking
provisions in their engagements with us. Based on the results of the benchmark
study and depending on the reasons for any unfavorable variance, we may be
required to reduce the pricing for future services to be performed under the
balance of the contract, which could have an adverse impact on our revenues and
profitability.
Our increasing work with governmental agencies may expose us to
additional risks.
Currently, the vast majority of our clients are privately or
publicly owned. However, we are increasingly bidding for work with governments
and governmental agencies, both within and outside the United States. Projects
involving governments or governmental agencies carry various risks inherent in
the government contracting process, including the following:
-
Such
projects may be subject to a higher risk of reduction in scope or termination
than other contracts due to political and economic factors such as changes in
government, pending elections or the reduction in, or absence of, adequate
funding;
-
Terms
and conditions of government contracts tend to be more onerous than other
contracts and may include, among other things, extensive rights of audit, more
punitive service level penalties and other restrictive covenants. Also, the
terms of such contracts are often subject to change due to political and
economic factors;
-
Government contracts are often subject to more extensive scrutiny
and publicity than other contracts. Any negative publicity related to such
contracts, regardless of the accuracy of such publicity, may adversely affect
our business or reputation; and
-
Participation in government contracts could subject us to stricter
regulatory requirements, which may increase our cost of
compliance.
In addition, we operate in jurisdictions in which local business
practices may be inconsistent with international regulatory requirements,
including anti-corruption regulations prescribed under the U.S. Foreign Corrupt
Practices Act (“FCPA”), which, among other things, prohibits giving or offering
to give anything of value with the intent to influence the awarding of
government contracts. Although we believe that we have adequate policies and
enforcement mechanisms to ensure legal and regulatory compliance with the FCPA
and other similar regulations, it is possible that some of our employees,
subcontractors, agents or partners may violate any such legal and regulatory
requirements, which may expose us to criminal or civil enforcement actions,
including penalties and suspension or disqualification from U.S. federal
procurement contracting. If we fail to comply with legal and regulatory
requirements, our business and reputation may be harmed.
Any of the above factors could have a material and adverse effect on
our business or our results of operations.
Our business will suffer if we fail to anticipate and develop new
services and enhance existing services in order to keep pace with rapid changes
in technology and in the industries on which we focus.
The technology services market is characterized by rapid
technological change, evolving industry standards, changing client preferences
and new product and service introductions. Our future success will depend on our
ability to anticipate these advances and develop new product and service
offerings to meet client needs. We may fail to anticipate or respond to these
advances in a timely basis, or, if we do respond, the services or technologies
that we develop may not be successful in the marketplace. The development of
some of the services and technologies may involve significant upfront
investments and the failure of these services and technologies may result in our
being unable to recover these investments, in part or in full. Further,
products, services or technologies that are developed by our competitors may
render our services non-competitive or obsolete.
We have recently introduced, and propose to introduce, several new
solutions involving complex delivery models combined with innovative, and often
transaction based, pricing models. For instance, we recently introduced an
integrated service solution, Software as a Service, or SaaS, that combines the
supply of hardware, network infrastructure, application software and associated
professional services, maintenance and support. Our new solutions, including the
SaaS solution, are often based on a transaction-based pricing model even though
these solutions require us to incur significant upfront costs. The complexity of
these solutions, our inexperience in developing or implementing them and
significant competition in the markets for these solutions may affect our
ability to market these solutions successfully. Further, customers may not adopt
these solutions widely and we may be unable to recover any investments made in
these solutions. Even if these solutions are successful in the market, the
dependence of these solutions on third party hardware and software and on our
ability to meet stringent service levels in providing maintenance or support
services may result in our being unable to deploy these solutions successfully
or profitably. Further, where we offer a transaction-based pricing model in
connection with an engagement, we may also be unable to recover any upfront
costs incurred in solutions deployed by us in full.
Additionally, clients are also seeking extensions in credit terms
from the standard term that we provide, and have been seeking credit terms of up
to 60 days or higher. Extended credit terms may reduce revenues or delay the
realization of revenues and adversely impact our cash flow.
Compliance with new and changing corporate governance and public
disclosure requirements adds uncertainty to our compliance policies and
increases our costs of compliance.
Changing laws, regulations and standards relating to accounting,
corporate governance and public disclosure, including the Sarbanes-Oxley Act of
2002, new SEC regulations, NASDAQ Global Select Market rules, Securities and
Exchange Board of India or SEBI rules and Indian stock market listing
regulations are creating uncertainty for companies like ours. These new or
changed laws, regulations and standards may lack specificity and are subject to
varying interpretations. Their application in practice may evolve over time as
new guidance is provided by regulatory and governing bodies. This could result
in continuing uncertainty regarding compliance matters and higher costs of
compliance as a result of ongoing revisions to such governance
standards.
In particular, continuing compliance with Section 404 of the
Sarbanes-Oxley Act of 2002 and the related regulations regarding our required
assessment of our internal control over financial reporting requires the
commitment of significant financial and managerial resources and external
auditor's independent assessment of the internal control over financial
reporting.
In connection with our Annual Report on Form 20-F for fiscal
2009, our management assessed our internal controls over financial reporting,
and determined that our internal controls were effective as of March 31,
2009, and our independent auditors have expressed an unqualified opinion over
the effectiveness of our internal control over financial reporting as of
the end of such period. However, we will undertake management assessments of our
internal control over financial reporting in connection with each annual report,
and any deficiencies uncovered by these assessments or any inability of our
auditors to issue an unqualified opinion could harm our reputation and the price
of our equity shares and ADSs.
Furthermore, during 2009, there has been a renewed focus on
corporate governance by the U.S. Congress and by the SEC in response to the
recent credit and financial crisis in the United States, additional
corporate governance standards have been, and are expected to be, promulgated in
the near future with respect to companies whose securities are listed in the
United States.
It is also possible that laws in India may be made more stringent
with respect to standards of accounting, auditing, public disclosure and
corporate governance. We are committed to maintaining high standards of
corporate governance and public disclosure, and our efforts to comply with
evolving laws, regulations and standards in this regard have resulted in, and
are likely to continue to result in, increased general and administrative
expenses and a diversion of management time and attention from
revenue-generating activities to compliance activities.
In addition, it may become more expensive and/or more difficult for
us to obtain director and officer liability insurance. Further, our Board
members, Chief Executive Officer, and Chief Financial Officer could face an
increased risk of personal liability in connection with their performance of
duties and our SEC reporting obligations. As a result, we may face difficulties
attracting and retaining qualified Board members and executive officers, which
could harm our business. If we fail to comply with new or changed laws or
regulations, our business and reputation may be harmed.
Disruptions in telecommunications, system failures, or virus attacks
could harm our ability to execute our Global Delivery Model, which could result
in client dissatisfaction and a reduction of our revenues.
A significant element of our distributed project management
methodology, which we refer to as our Global Delivery Model, is to continue to
leverage and expand our global development centers. We currently have 59 global
development centers located in various countries around the world. Our global
development centers are linked with a telecommunications network architecture
that uses multiple service providers and various satellite and optical links
with alternate routing. We may not be able to maintain active voice and data
communications between our various global development centers and our clients'
sites at all times due to disruptions in these networks, system failures or
virus attacks. Any significant failure in our ability to communicate could
result in a disruption in business, which could hinder our performance or our
ability to complete client projects on time. This, in turn, could lead to client
dissatisfaction and a material adverse effect on our business, results of
operations and financial condition.
We may be liable to our clients for damages caused by disclosure of
confidential information, system failures, errors or unsatisfactory performance
of services.
We are often required to collect and store sensitive or confidential
client and customer data. Many of our client agreements do not limit our
potential liability for breaches of confidentiality. If any person, including
any of our employees, penetrates our network security or misappropriates
sensitive data, we could be subject to significant liability from our clients or
from our clients' customers for breaching contractual confidentiality provisions
or privacy laws. Unauthorized disclosure of sensitive or confidential client and
customer data, whether through breach of our computer systems, systems failure
or otherwise, could damage our reputation and cause us to lose
clients.
Many of our contracts involve projects that are critical to the
operations of our clients' businesses, and provide benefits which may be
difficult to quantify. Any failure in a client's system or breaches of security
could result in a claim for substantial damages against us, regardless of our
responsibility for such failure. Furthermore, any errors by our employees in the
performance of services for a client, or poor execution of such services, could
result in a client terminating our engagement and seeking damages from
us.
Although we generally attempt to limit our contractual liability for
consequential damages in rendering our services, these limitations on liability
may be unenforceable in some cases, or may be insufficient to protect us from
liability for damages. We maintain general liability insurance coverage,
including coverage for errors or omissions, however, this coverage may not
continue to be available on reasonable terms and may be unavailable in
sufficient amounts to cover one or more large claims. Also an insurer might
disclaim coverage as to any future claim. A successful assertion of one or more
large claims against us that exceeds our available insurance coverage or changes
in our insurance policies, including premium increases or the imposition of a
large deductible or co-insurance requirement, could adversely affect our
operating results.
We are investing substantial cash assets in new facilities and
physical infrastructure, and our profitability could be reduced if our business
does not grow proportionately.
As of December 31, 2009, we had contractual commitments of
approximately $57 million for capital expenditures, particularly related to the
expansion or construction of facilities. We may encounter cost overruns or
project delays in connection with new facilities. These expansions will increase
our fixed costs. If we are unable to grow our business and revenues
proportionately, our profitability will be reduced.
We may be unable to recoup our investment costs to develop our
software products.
In the nine months ended December 31, 2009, fiscal 2009 and fiscal
2008, we earned 4.0%, 3.9% and 3.6% of our total revenue from the licensing of
software products. The development of our software products requires significant
investments. The markets for our primary suite of software products which we
call FinacleTM are
competitive. Our current software products or any new software products that we
develop may not be commercially successful and the costs of developing such new
software products may not be recouped. Since software product revenues typically
occur in periods subsequent to the periods in which the costs are incurred for
the development of such software products, delayed revenues may cause periodic
fluctuations in our operating results.
Our insiders who are significant shareholders may control the
election of our Board and may have interests which conflict with those of our
other shareholders or holders of our ADSs.
Our executive officers and directors, together with members of their
immediate families, beneficially owned, in the aggregate, 12.8% of our issued
equity shares as of January 22, 2010. As a result, acting together, this group
has the ability to exercise significant control over most matters requiring our
shareholders' approval, including the election and removal of directors and
significant corporate transactions.
We may engage in acquisitions, strategic investments, strategic
partnerships or alliances or other ventures that may or may not be
successful.
We may acquire or make strategic investments in complementary
businesses, technologies, services or products, or enter into strategic
partnerships or alliances with third parties in order to enhance our business.
For example, during fiscal 2008, as part of an outsourcing agreement with
Philips, our majority-owned subsidiary, Infosys BPO, acquired from Koninklijke
Philips Electronics N.V. certain shared services centers in India, Poland and
Thailand that were engaged in the provision of finance, accounting and
procurement support services to Philips' operations worldwide. Further,
during the three months ended December 31, 2009, Infosys BPO completed the
acquisition of McCamish Systems LLC. It is possible that we may not
identify suitable acquisitions, candidates for strategic investment or strategic
partnerships, or if we do identify suitable targets, we may not complete those
transactions on terms commercially acceptable to us, or at all. Our inability to
identify suitable acquisition targets or investments or our inability to
complete such transactions may affect our competitiveness and our growth
prospects.
Even if we are able to identify an acquisition that we would like to
consummate, we may not be able to complete the acquisition on commercially
reasonable terms or because the target is acquired by another company.
Furthermore, in the event that we are able to identify and consummate any future
acquisitions, we could:
-
issue
equity securities which would dilute current shareholders' percentage
ownership;
-
-
incur
significant acquisition-related expenses;
-
assume contingent liabilities;
or
-
These financing activities or expenditures could harm our business,
operating results and financial condition or the price of our common stock.
Alternatively, due to difficulties in the capital and credit markets, we may be
unable to secure capital on acceptable terms, if at all, to complete
acquisitions.
Moreover, even if we do obtain benefits from acquisitions in the
form of increased sales and earnings, there may be a delay between the time when
the expenses associated with an acquisition are incurred and the time when we
recognize such benefits.
Further, if we acquire a company, we could have difficulty in
assimilating that company's personnel, operations, technology and software. In
addition, the key personnel of the acquired company may decide not to work for
us. These difficulties could disrupt our ongoing business, distract our
management and employees and increase our expenses.
We have made and may in the future make strategic investments in
early-stage technology start-up companies in order to gain experience in or
exploit niche technologies. However, our investments may not be successful. The
lack of profitability of any of our investments could have a material adverse
effect on our operating results.
Risks Related to Investments in Indian Companies and International
Operations Generally
Our net income would decrease if the Government of India reduces or
withdraws tax benefits and other incentives it provides to us or when our tax
holidays expire or terminate.
Currently, we benefit from the tax incentives the Government of
India provides to the export of software from specially designated software
technology parks, or STPs, in India and for facilities set up under the Special
Economic Zones Act, 2005. The STP tax holiday is available for ten consecutive
years beginning from the financial year when the unit started producing computer
software or April 1, 1999, whichever is earlier. The Indian Government, through
the Finance Act, 2009, has extended the tax holiday for STP units until March
31, 2011. Most of our STP units have already completed the tax holiday period
and for the remaining STP units, the tax holiday will expire by the end of
fiscal 2011.
In the Finance Act, 2005, the Government of India introduced a
separate tax holiday scheme for units set up under designated special economic
zones, or SEZs, engaged in manufacture of articles or in provision of services.
Under this scheme, units in designated SEZs which begin providing services on or
after April 1, 2005, will be eligible for a deduction of 100 percent of profits
or gains derived from the export of services for the first five years from
commencement of provision of services and 50 percent of such profits or gains
for a further five years. Certain tax benefits are also available for a further
five years subject to the unit meeting defined conditions. The expiration,
modification or termination of any of our tax benefits or holidays, including on
account of non-extension of the tax holidays relating to STPs in India, would
likely increase our effective tax rates significantly, and have a material and
adverse effect on our net income.
As a result of these tax incentives, a substantial portion of our
pre-tax income has not been subject to significant tax in recent years. These
tax incentives resulted in a decrease of $109 million and $325 million in our
income tax expense for the nine months ended December 31, 2009 and for fiscal
2009 respectively, compared to the effective tax amounts that we estimate we
would have been required to pay if these incentives had not been
available.
Further, the Finance Act, 2007, included income eligible for
deductions under sections 10A and 10AA of the Indian Income Tax Act in the
computation of book profits for the levy of a Minimum Alternative Tax, or MAT.
The rate of MAT, effective April 1, 2010, is 15% (excluding a surcharge and
education cess) on our book profits determined after including income eligible
for deductions under Sections 10A and 10AA of the Indian Income Tax Act. The
Income Tax Act provides that the MAT paid by us can be adjusted against our tax
liability over the next ten years. Although MAT paid by us can be set off
against our future tax liability, due to the introduction of MAT, our net income
and cash flows for intervening periods could be adversely affected.
In the event that the Government of India or the government of
another country changes its tax policies in a manner that is adverse to us, our
tax expense may materially increase, reducing our profitability.
In the recent years, the Government of India has introduced a tax on
various services provided within India including on the maintenance and repair
of software. The Government of India has in the Finance Act, 2008, included
services provided in relation to information technology software under the ambit
of service tax, if it is in the course or furtherance of the business. Under
this tax, service providers are required to pay a tax of 10% (excluding
applicable education cess) on the value of services provided to customers. The
Government of India may expand the services covered under the ambit of this tax
to include various services provided by us. This tax, if expanded, could
increase our expenses, and could adversely affect our operating margins and
revenues. Although currently there are no material pending or threatened claims
against us for service taxes, such claims may be asserted against us in the
future. Defending these claims would be expensive, time consuming and may divert
our management's attention and resources from operating our
company.
We are subject to a 15% Branch Profit Tax (BPT) in the U.S. to the
extent that our U.S. branches’ net profit during the year is greater than the
increase in the net assets of our U.S. branches during the fiscal year, computed
in accordance with the Internal Revenue Code. As at March 31, 2009, Infosys'
U.S. branch net assets amounted to approximately $481 million. As of December
31, 2009, the company had not triggered the BPT. The company has recorded a
deferred tax liability on its net assets in the United States, to the extent it
intends to distribute its branch profits in the foreseeable future.
We operate in jurisdictions that impose transfer pricing and other
tax-related regulations on us, and any failure to comply could materially and
adversely affect our profitability.
We are required to comply with various transfer pricing regulations
in India and other countries. Failure to comply with such regulations may impact
our effective tax rates and consequently affect our net margins. Additionally,
we operate in several countries and our failure to comply with the local and
municipal tax regime may result in additional taxes, penalties and enforcement
actions from such authorities. In the event that we do not properly comply with
transfer pricing and tax-related regulations, our profitability may be adversely
affected.
Wage pressures in India and the hiring of employees outside India
may prevent us from sustaining our competitive advantage and may reduce our
profit margins.
Wage costs in India have historically been significantly lower than
wage costs in the United States and Europe for comparably skilled professionals,
which has been one of our competitive strengths. Although, currently, a vast
majority of our workforce consists of Indian nationals, we expect to increase
hiring in other jurisdictions, including in the United States and in Europe. Any
such recruitment of foreign nationals is likely to be at wages higher than those
prevailing in India and may increase our operating costs and adversely impact
our profitability.
Further, in certain jurisdictions in which we operate, legislation
has been adopted that requires our non-resident alien employees working in such
jurisdictions to earn the same wages as similarly situated residents or citizens
of such jurisdiction.
Additionally, wage increases in India may prevent us from sustaining
this competitive advantage and may negatively affect our profit margins. We have
historically experienced significant competition for employees from large
multinational companies that have established and continue to establish offshore
operations in India, as well as from companies within India. This competition
has led to wage pressures in attracting and retaining employees, and these wage
pressures have led to a situation where wages in India are increasing at a
faster rate than in the United States, which could result in increased costs for
companies seeking to employ technology professionals in India, particularly
project managers and other mid-level professionals. We may need to increase our
employee compensation more rapidly than in the past to remain competitive with
other employers, or seek to recruit in other low labor cost jurisdictions to
keep our wage costs low. For example, we established a long term retention bonus
policy for our senior executives and employees. Under this policy, certain
senior executives and employees will be entitled to a yearly cash bonus upon
their continued employment with us based upon seniority, their role in the
Company and their performance. Every year, we typically undertake a compensation
review, and, pursuant to such review, the average salaries of our employees have
increased significantly on an annual basis. Any compensation increases in the
future may result in a material adverse effect on our business, results of
operations and financial condition.
Terrorist attacks or a war could adversely affect our business,
results of operations and financial condition.
Terrorist attacks, such as the attacks of September 11, 2001 in
the United States, the attacks of July 25, 2008 in Bangalore, the attacks
of November 26 to 29, 2008 in Mumbai and other acts of violence or war, such as
the continuing conflict in Iraq, have the potential to have a direct impact on
our clients or on us. To the extent that such attacks affect or involve the
United States or Europe, our business may be significantly impacted, as the
majority of our revenues are derived from clients located in the United States
and Europe. In addition, such attacks may destabilize the economic and political
situation in India, may make travel more difficult, may make it more difficult
to obtain work visas for many of our technology professionals who are required
to work in the United States or Europe, and may effectively reduce our ability
to deliver our services to our clients. Such obstacles to business may increase
our expenses and negatively affect the results of our operations. Furthermore,
any attacks in India could cause a disruption in the delivery of our services to
our clients, and could have a negative impact on our business, personnel, assets
and results of operations, and could cause our clients or potential clients to
choose other vendors for the services we provide. Terrorist threats, attacks or
war could make travel more difficult, may disrupt our ability to provide
services to our clients and could delay, postpone or cancel our clients'
decisions to use our services.
The markets in which we operate are subject to the risk of
earthquakes, floods and other natural disasters.
Some of the regions that we operate in are prone to earthquakes,
flooding and other natural disasters. In the event that any of our business
centers are affected by any such disasters, we may sustain damage to our
operations and properties, suffer significant financial losses and be unable to
complete our client engagements in a timely manner, if at all. Further, in the
event of a natural disaster, we may also incur costs in redeploying personnel
and property. In addition if there is a major earthquake, flood or other natural
disaster in any of the locations in which our significant customers are located,
we face the risk that our customers may incur losses, or sustained business
interruption and/or loss which may materially impair their ability to continue
their purchase of products or services from us. A major earthquake, flood or
other natural disaster in the markets in which we operate could have a material
adverse effect on our business, financial condition, results of operations and
cash flows.
Regional conflicts in South Asia could adversely affect the Indian
economy, disrupt our operations and cause our business to
suffer.
South Asia has, from time to time, experienced instances of civil
unrest and hostilities among neighboring countries, including between India and
Pakistan. In recent years there have been military confrontations between India
and Pakistan that have occurred in the region of Kashmir and along the
India-Pakistan border. Further, in recent months, Pakistan has been experiencing
significant instability and this has heightened the risks of conflict in South
Asia. Military activity or terrorist attacks in the future could influence the
Indian economy by disrupting communications and making travel more difficult and
such political tensions could create a greater perception that investments in
Indian companies involve higher degrees of risk. This, in turn, could have a
material adverse effect on the market for securities of Indian companies,
including our equity shares and our ADSs, and on the market for our
services.
Restrictions on immigration may affect our ability to compete for
and provide services to clients in the United States, which could hamper our
growth and cause our revenues to decline.
The vast majority of our employees are Indian nationals. Most of our
projects require a portion of the work to be completed at the client's location.
The ability of our technology professionals to work in the United States, Europe
and in other countries depends on the ability to obtain the necessary visas and
work permits.
As of December 31, 2009, the majority of our technology
professionals in the United States held either H-1B visas (approximately 8,700
persons, not including Infosys BPO employees or employees of our wholly owned
subsidiaries), allowing the employee to remain in the United States for up to
six years during the term of the work permit and work as long as he or she
remains an employee of the sponsoring firm, or L-1 visas (approximately 1,600
persons), not including Infosys BPO employees or employees of our wholly owned
subsidiaries), allowing the employee to stay in the United States only
temporarily. Although there is no limit to new L-1 visas, there is a limit to
the aggregate number of new H-1B visas that the U.S. Citizenship and
Immigration Services, or CIS, may approve in any government fiscal year which is
65,000 annually. In November 2004, the United States Congress passed a measure
that increased the number of available H-1B visas to 85,000 per year. The
20,000 additional visas are only available to skilled workers who possess a
Master's or higher degree from institutions of higher education in the United
States. Further, in response to the terrorist attacks in the United States, the
CIS has increased its level of scrutiny in granting new visas. This may, in the
future, also lead to limits on the number of L-1 visas granted. In addition, the
granting of L-1 visas precludes companies from obtaining such visas for
employees with specialized knowledge: (1) if such employees will be
stationed primarily at the worksite of another company in the U.S. and the
employee will not be controlled and supervised by his employer, or (2) if
such offsite placement is essentially an arrangement to provide labor for hire
rather than in connection with the employee's specialized knowledge. Immigration
laws in the United States may also require us to meet certain levels of
compensation, and to comply with other legal requirements, including labor
certifications, as a condition to obtaining or maintaining work visas for our
technology professionals working in the United States.
Immigration laws in the United States and in other countries are
subject to legislative change, as well as to variations in standards of
application and enforcement due to political forces and economic conditions. It
is difficult to predict the political and economic events that could affect
immigration laws, or the restrictive impact they could have on obtaining or
monitoring work visas for our technology professionals. Our reliance on work
visas for a significant number of technology professionals makes us particularly
vulnerable to such changes and variations as it affects our ability to staff
projects with technology professionals who are not citizens of the country where
the work is to be performed. As a result, we may not be able to obtain a
sufficient number of visas for our technology professionals or may encounter
delays or additional costs in obtaining or maintaining the conditions of such
visas. Additionally, we may have to apply in advance for visas and this could
result in additional expenses during certain quarters of the fiscal
year.
Changes in the policies of the Government of India or political
instability could delay the further liberalization of the Indian economy and
adversely affect economic conditions in India generally, which could impact our
business and prospects.
Since 1991, successive Indian governments have pursued policies of
economic liberalization, including significantly relaxing restrictions on the
private sector. Nevertheless, the role of the Central and State governments in
the Indian economy as producers, consumers and regulators has remained
significant. The current Government of India, formed in May 2009, has announced
policies and taken initiatives that support the continued economic
liberalization policies pursued by previous governments. However, these
liberalization policies may not continue in the future. The rate of economic
liberalization could change, and specific laws and policies affecting technology
companies, foreign investment, currency exchange and other matters affecting
investment in our securities could change as well. A significant change in
India's economic liberalization and deregulation policies could adversely affect
business and economic conditions in India generally, and our business in
particular.
For instance, in April 2007, the Government of India announced a
number of changes in its policies applicable to Special Economic Zones, or SEZs,
to provide for, among other things, a cap on the size of land available for
SEZs. The Indian Government has also announced its intent to make further
changes in the SEZ policies. Some of our software development centers located at
Chandigarh, Chennai, Mangalore, Pune and Trivandrum currently operate in SEZs
and many of our proposed development centers are likely to operate in SEZs. If
the Government of India changes its policies affecting SEZs in a manner that
adversely impact the incentives for establishing and operating facilities in
SEZs, our business, results of operations and financial condition may be
adversely affected.
Political instability could also delay the reform of the Indian
economy and could have a material adverse effect on the market for securities of
Indian companies, including our equity shares and our ADSs, and on the market
for our services.
Our international expansion plans subject us to risks inherent in
doing business internationally.
Currently, we have global development centers in 15 countries around
the world, with our largest development centers located in India. We have
recently established or intend to establish new development facilities. In
October 2003, we established Infosys China and in January 2004, we acquired
Infosys Australia to expand our operations in those countries. In April 2004, we
formed Infosys Consulting to focus on consulting services in the United States.
Recently, we established a wholly-owned subsidiary, Infosys Technologies S. De
RL De CV ("Infosys Mexico"), in Monterrey, Mexico, to provide business
consulting and information technology services for clients in North America,
Latin America and Europe. During fiscal 2008, as part of an outsourcing
agreement with Philips, our majority-owned subsidiary, Infosys BPO, acquired
from Koninklijke Philips Electronics N.V. certain shared services centers in
India, Poland and Thailand that are engaged in the provision of finance,
accounting and procurement support services to Philips' operations worldwide.
In 2009, we established a wholly-owned subsidiary, Infosys
Tecnologia DO Brasil LTDA in Brazil to provide information technology services
in Latin America.
We also have a very large workforce spread across our various
offices worldwide. As of December 31, 2009, we employed approximately 109,900
employees worldwide, and approximately 21,900 of those employees were located
outside of India. Because of our global presence, we are subject to additional
risks related to our international expansion strategy, including risks related
to compliance with a wide variety of treaties, national and local laws,
including multiple and possibly overlapping tax regimes, privacy laws and laws
dealing with data protection, export control laws, restrictions on the import
and export of certain technologies and national and local labor laws dealing
with immigration, employee health and safety, and wages and benefits, applicable
to our employees located in our various international offices and facilities. We
may from time to time be subject to litigation or administrative actions
resulting from claims against us by current or former employees, individually or
as part of a class action, including for claims of wrongful termination,
discrimination (including on grounds of nationality, ethnicity, race, faith,
gender, marital status, age or disability), misclassification, payment of
redundancy payments under TUPE-type legislation, or other violations of labor
laws, or other alleged conduct. Our being held liable for unpaid compensation,
redundancy payments, statutory penalties, and other damages arising out of such
actions and litigations could adversely affect our revenues and operating
profitability. For example, in December 2007, we entered into a voluntary
settlement with the California Division of Labor Standards Enforcement regarding
the potential misclassification of certain of our current and former employees,
whereby we agreed to pay overtime wages that may have been owed to such
employees. The total settlement amount was approximately $26 million, including
penalties and taxes.
In addition, we may face competition in other countries from
companies that may have more experience with operations in such countries or
with international operations generally. We may also face difficulties
integrating new facilities in different countries into our existing operations,
as well as integrating employees that we hire in different countries into our
existing corporate culture. As an international company, our offshore and onsite
operations may also be impacted by disease, epidemics and local political
instability. Our international expansion plans may not be successful and we may
not be able to compete effectively in other countries.
Any of these events could adversely affect our revenues and
operating profitability.
It may be difficult for holders of our ADSs to enforce any judgment
obtained in the United States against us or our affiliates.
We are incorporated under the laws of India and many of our
directors and executive officers reside outside the United States. Virtually all
of our assets are located outside the United States. As a result, holders of our
ADSs may be unable to effect service of process upon us outside the United
States. In addition, holders of our ADSs may be unable to enforce judgments
against us if such judgments are obtained in courts of the United States,
including judgments predicated solely upon the federal securities laws of the
United States.
The United States and India do not currently have a treaty providing
for reciprocal recognition and enforcement of judgments (other than arbitration
awards) in civil and commercial matters. Therefore, a final judgment for the
payment of money rendered by any federal or state court in the United States on
the basis of civil liability, whether or not predicated solely upon the federal
securities laws of the United States, would not be enforceable in India.
However, the party in whose favor such final judgment is rendered may bring a
new suit in a competent court in India based on a final judgment that has been
obtained in the United States. The suit must be brought in India within three
years from the date of the judgment in the same manner as any other suit filed
to enforce a civil liability in India. 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. Furthermore, it is unlikely that an Indian court would en force
foreign judgments if it viewed the amount of damages awarded as excessive or
inconsistent with Indian practice. A party seeking to enforce a foreign judgment
in India is required to obtain approval from the Reserve Bank of India under the
Foreign Exchange Management Act, 1999, to repatriate any amount recovered
pursuant to the execution of such a judgment.
Holders of ADSs are subject to the Securities and Exchange Board of
India’s Takeover Code with respect to their acquisitions of ADSs or the
underlying equity shares, and this may impose requirements on such holders with
respect to disclosure and offers to purchase additional ADSs or equity
shares.
Under the Securities and Exchange Board of India (Substantial
Acquisition of Shares and Takeovers) Regulations, 1997, or the Takeover Code,
upon the acquisition of more than 5%, 10%, 14%, 54% or 74% of the outstanding
shares or voting rights of Infosys, an acquirer (meaning a person who directly
or indirectly, acquires or agrees to acquire shares or voting rights in Infosys,
or acquires or agrees to acquire control over Infosys, either alone or with any
person acting in concert) is required to disclose the aggregate of such
shareholding or voting rights in Infosys to Infosys. Infosys and such acquirer
would then be required to notify all the stock exchanges on which the shares of
Infosys are listed. Further, the Takeover Code requires that any person holding
more than 15% and less than 55% of the shares or voting rights of Infosys, upon
the sale or purchase of 2% or more of the shares or voting rights of Infosys,
must disclose such sale or purchase and the revised shareholding to Infosys and
all the stock exchanges on which the shares are listed within two days of such
purchase or sale or receipt of intimation of allotment of such shares. A person
who holds more than 15% of the shares or voting rights in Infosys is required to
make an annual disclosure of holdings to Infosys (which in turn is required to
disclose the same to each of the stock exchanges on which Infosys’ shares are
listed).
Further, upon the acquisition of 15% or more of the shares or voting
rights of Infosys, or a change in control of Infosys, the Takeover Code requires
the acquirer to make a public announcement offering to purchase from the other
shareholders at least a further 20% of all the outstanding shares of Infosys at
a minimum offer price determined pursuant to the Takeover Code. If an acquirer
holding more than 15% but less than 55% of the shares acquires 5% or more shares
during a fiscal year, the acquirer is required to make a public announcement
offering to purchase from the other shareholders at least 20% of all the
outstanding shares of Infosys at a minimum offer price determined pursuant to
the Takeover Code. Any further acquisition of outstanding shares or voting
rights of Infosys by an acquirer who holds more than 55% but less than 75% of
the shares or voting rights of Infosys, may, under certain circumstances, also
require the making of an open offer to acquire such number of shares as would
not result in the public shareholding being reduced to below the minimum
specified in the listing agreement with the exchanges in India on which our
shares are listed.
By a notification dated November 6, 2009, SEBI has amended the
Takeover Code to require holders of ADSs entitled to exercise voting rights on
the underlying shares who cross the applicable threshold limits set out above to
make a public announcement offering to purchase our shares from other public
shareholders at a price that is determined in accordance with the Takeover Code.
These provisions could materially and adversely impact our ADS
holders.
The laws of India do not protect intellectual property rights to the
same extent as those of the United States, and we may be unsuccessful in
protecting our intellectual property rights. We may also be subject to third
party claims of intellectual property infringement.
We rely on a combination of patent, copyright, trademark and design
laws, trade secrets, confidentiality procedures and contractual provisions to
protect our intellectual property. However, the laws of India do not protect
proprietary rights to the same extent as laws in the United States. Therefore,
our efforts to protect our intellectual property may not be adequate. Our
competitors may independently develop similar technology or duplicate our
products or services. Unauthorized parties may infringe upon or misappropriate
our products, services or proprietary information.
The misappropriation or duplication of our intellectual property
could disrupt our ongoing business, distract our management and employees,
reduce our revenues and increase our expenses. We may need to litigate to
enforce our intellectual property rights or to determine the validity and scope
of the proprietary rights of others. Any such litigation could be time consuming
and costly. As the number of patents, copyrights and other intellectual property
rights in our industry increases, and as the coverage of these rights increase,
we believe that companies in our industry will face more frequent infringement
claims. Defense against these claims, even if such claims are not meritorious,
could be expensive, time consuming and may divert our management's attention and
resources from operating our company. From time to time, third parties have
asserted and may in the future assert patent, copyright, trademark and other
intellectual property rights against us or our customers. Our business partners
may have similar claims asserted against them. A number of third parties,
including companies with greater resources than Infosys, have asserted patent
rights to technologies that we utilize in our business. If we become liable to
third parties for infringing their intellectual property rights, we could be
required to pay a substantial damage award and be forced to develop
non-infringing technology, obtain a license or cease selling the applications or
products that contain the infringing technology. We may be unable to develop
non-infringing technology or to obtain a license on commercially reasonable
terms, or at all. An unfavorable outcome in connection with any infringement
claim against us as a result of litigation, other proceeding or settlement,
could have a material and adverse impact on our business, results of operations
and financial position.
Our ability to acquire companies organized outside India depends on
the approval of the Government of India and/or the Reserve Bank of India, and
failure to obtain this approval could negatively impact our
business.
Generally, the Reserve Bank of India must approve any acquisition by
us of any company organized outside of India. The Reserve Bank of India permits
acquisitions of companies organized outside of India by an Indian party without
approval if the transaction consideration is paid in cash, the transaction value
does not exceed 400% of the net worth of the acquiring company as on the date of
the latest audited balance sheet, or unless the acquisition is funded with cash
from the acquiring company's existing foreign currency accounts or with cash
proceeds from the issue of ADRs/GDRs.
It is possible that any required approval from the Reserve Bank of
India and the Ministry of Finance of the Government of India or any other
government agency may not be obtained. Our failure to obtain approvals for
acquisitions of companies organized outside India may restrict our international
growth, which could negatively affect our business and prospects.
Indian laws limit our ability to raise capital outside India and may
limit the ability of others to acquire us, which could prevent us from operating
our business or entering into a transaction that is in the best interests of our
shareholders.
Indian law relating to foreign exchange management constrains our
ability to raise capital outside India through the issuance of equity or
convertible debt securities. Generally, any foreign investment in, or
acquisition of an Indian company, subject to certain exceptions, requires
approval from relevant government authorities in India, including the Reserve
Bank of India. There are, however, certain exceptions to this approval
requirement for technology companies on which we are able to rely. Changes to
such policies may create restrictions on our capital raising abilities. For
example, a limit on the foreign equity ownership of Indian technology companies
or pricing restrictions on the issue of ADRs/GDRs may constrain our ability to
seek and obtain additional equity investment by foreign investors. In addition,
these restrictions, if applied to us, may prevent us from entering into certain
transactions, such as an acquisition by a non-Indian company, which might
otherwise be beneficial for us and the holders of our equity shares and
ADSs.
Additionally, under current Indian law, the sale of a technology
services company can result in the loss of the tax benefits for specially
designed software technology parks in India. The potential loss of this tax
benefit may discourage others from acquiring us or entering into a transaction
with us that is in the best interest of our shareholders.
Risks Related to the ADSs
Historically, our ADSs have traded at a significant premium to the
trading prices of our underlying equity shares, and may not continue to do so in
the future.
Historically, our ADSs have traded on NASDAQ at a premium to the
trading prices of our underlying equity shares on the Indian stock exchanges. We
believe that this price premium has resulted from the relatively small portion
of our market capitalization previously represented by ADSs, restrictions
imposed by Indian law on the conversion of equity shares into ADSs, and an
apparent preference of some investors to trade dollar-denominated securities. We
have already completed three secondary ADS offerings and the completion of any
additional secondary ADS offering will significantly increase the number of our
outstanding ADSs. Also, over time, some of the restrictions on the issuance of
ADSs imposed by Indian law have been relaxed and we expect that other
restrictions may be relaxed in the future. As a result, the historical premium
enjoyed by ADSs as compared to equity shares may be reduced or eliminated upon
the completion of any additional secondary offering of our ADSs or similar
transactions in the future, a change in Indian law permitting further conversion
of equity shares into ADSs or changes in investor preferences.
Sales of our equity shares may adversely affect the prices of our
equity shares and ADSs.
Sales of substantial amounts of our equity shares, including sales
by our insiders in the public market, or the perception that such sales may
occur, could adversely affect the prevailing market price of our equity shares
or the ADSs or our ability to raise capital through an offering of our
securities. In the future, we may also sponsor the sale of shares currently held
by some of our shareholders as we have done in the past, or issue new shares. We
can make no prediction as to the timing of any such sales or the effect, if any,
that future sales of our equity shares, or the availability of our equity shares
for future sale, will have on the market price of our equity shares or ADSs
prevailing from time to time.
Indian law imposes certain restrictions that limit a holder's
ability to transfer the equity shares obtained upon conversion of ADSs and
repatriate the proceeds of such transfer which may cause our ADSs to trade at a
premium or discount to the market price of our equity shares.
Under
certain circumstances, the Reserve Bank of India must approve the sale of equity
shares underlying ADSs by a non-resident of India to a resident of India. The
Reserve Bank of India has given general permission to effect sales of existing
shares or convertible debentures of an Indian company by a resident to a
non-resident, subject to certain conditions, including the price at which the
shares may be sold. Additionally, except under certain limited circumstances, if
an investor seeks to convert the rupee proceeds from a sale of equity shares in
India into foreign currency and then repatriate that foreign currency from
India, he or she will have to obtain Reserve Bank of India approval for each
such transaction. Required approval from the Reserve Bank of India or any other
government agency may not be obtained on terms favorable to a non-resident
investor or at all.
An investor in our ADSs may not be able to exercise preemptive
rights for additional shares and may thereby suffer dilution of such investor's
equity interest in us.
Under the Companies Act, 1956, or the Indian Companies Act, a
company incorporated in India must offer its holders of equity shares preemptive
rights to subscribe and pay for a proportionate number of shares to maintain
their existing ownership percentages prior to the issuance of any new equity
shares, unless such preemptive rights have been waived by three-fourths of the
shares voting on the resolution to waive such rights. Holders of ADSs may be
unable to exercise preemptive rights for equity shares underlying ADSs unless a
registration statement under the Securities Act of 1933 as amended, or the
Securities Act, is effective with respect to such rights or an exemption from
the registration requirements of the Securities Act is available. We are not
obligated to prepare and file such a registration statement and our decision to
do so will depend on the costs and potential liabilities associated with any
such registration statement, as well as the perceived benefits of enabling the
holders of ADSs to exercise their preemptive rights, and any other factors we
consider appropriate at the time. No assurance can be given that we would file a
registration statement under these circumstances. If we issue any such
securities in the future, such securities may be issued to the Depositary, which
may sell such securities for the benefit of the holders of the ADSs. There can
be no assurance as to the value, if any, the Depositary would receive upon the
sale of such securities. To the extent that holders of ADSs are unable to
exercise preemptive rights granted in respect of the equity shares represented
by their ADSs, their proportional interests in us would be reduced.
ADS holders may be restricted in their ability to exercise voting
rights.
At our request, the Depositary will electronically mail to holders
of our ADSs any notice of shareholders' meeting received from us together with
information explaining how to instruct the Depositary to exercise the voting
rights of the securities represented by ADSs. If the Depositary receives voting
instructions from a holder of our ADSs in time, relating to matters that have
been forwarded to such holder, it will endeavor to vote the securities
represented by such holder's ADSs in accordance with such voting instructions.
However, the ability of the Depositary to carry out voting instructions may be
limited by practical and legal limitations and the terms of the securities on
deposit. We cannot assure that holders of our ADSs will receive voting materials
in time to enable such holders to return voting instructions to the Depositary
in a timely manner. Securities for which no voting instructions have been
received will not be voted. There may be other communications, notices or
offerings that we only make to holders of our equity shares, which will not be
forwarded to holders of ADSs. Accordingly, holders of our ADSs may not be able
to participate in all offerings, transactions or votes that are made available
to holders of our equity shares.