Business context and reporting period
Infosys Limited is an India-based provider of consulting, technology, outsourcing, business process management and digital transformation services. This Form 20-F is an annual report for the fiscal year ended March 31, 2020, prepared under IFRS as issued by the IASB. The requested “2019 Q4” period is not presented as a standalone quarter in the provided filing; the filing reports fiscal 2020 results, including the fourth quarter.
Primary markets were North America, Europe, the rest of the world and India, representing 61.5%, 24.1%, 11.8% and 2.6% of fiscal 2020 revenue, respectively. Digital services represented 39.2% of revenue, compared with 31.2% in fiscal 2019.
Key financial metrics
| Metric | Fiscal 2020 | Fiscal 2019 | Change |
|---|---|---|---|
| Revenue | $12,780 million | $11,799 million | +8.3% |
| Gross profit | $4,228 million | $4,112 million | +2.8% |
| Gross margin | 33.1% | 34.8% | Down 1.7 percentage points |
| Operating profit | $2,724 million | $2,696 million | +1.0% |
| Operating margin | 21.3% | 22.8% | Down 1.5 percentage points |
| Net profit | $2,338 million | $2,200 million | +6.3% |
| Net margin | 18.3% | 18.6% | Down 0.3 percentage points |
| Profit attributable to owners | $2,331 million | $2,199 million | +6.0% |
| Basic and diluted EPS | $0.55 | $0.51 | +7.8% |
| Operating cash flow | $2,611 million | $2,262 million | +15.4% |
Cost of sales increased 11.3% to $8,552 million, primarily due to higher employee and subcontractor costs, travel, depreciation and amortization, and currency effects. Other income declined to $395 million from $411 million, while finance cost of $24 million was recorded following adoption of IFRS 16.
- Cash and cash equivalents: $2,465 million, compared with $2,829 million at March 31, 2019.
- Current investments: $615 million, compared with $958 million.
- Working capital: $4,455 million, compared with $4,951 million.
- Total assets: $12,260 million; total equity: $8,701 million.
- The Group reported no outstanding borrowings and described its balance sheet as debt-free.
- Capital expenditure was $465 million, compared with $349 million, and remaining capital expenditure commitments were $180 million.
- Trade receivables and unbilled revenue totaled $3,384 million; days sales outstanding increased to 69 days from 66 days.
- Employees totaled 242,371 at March 31, 2020, including 228,449 client-service professionals.
Material changes versus the prior comparable period
- Revenue increased 8.3% in reported currency and 9.8% in constant currency, driven primarily by large deal wins and higher volumes across most segments.
- Digital revenue increased to 39.2% of total revenue from 31.2%, while core revenue declined to 60.8% from 68.8%.
- Revenue from products and platforms rose to $777 million from $615 million; software services revenue rose to $12,003 million from $11,184 million.
- Margins contracted because of compensation increases, higher H-1B visa costs, subcontractor and onsite costs, lower realization in certain businesses and cross-currency movements. Rupee depreciation and cost optimization partly offset these pressures.
- Operating cash flow improved despite increased capital expenditure and higher receivables. Financing cash outflows included $1,359 million of dividends, $1,070 million for share buyback and $80 million of lease-liability payments.
- The Company completed its open-market buyback on August 26, 2019, purchasing and extinguishing 110,519,266 shares at an average price of ₹747.38 per share for ₹8,260 crore, excluding transaction costs.
- Fiscal 2020 acquisitions included 81% of HIPUS for approximately $30 million, 75% of Stater for approximately $171 million and 100% of Simplus for consideration of up to $250 million.
- Infosys adopted IFRS 16 using the modified retrospective method, recognizing a $551 million right-of-use asset at year-end and $612 million of lease liabilities. The filing states that the effect on operating profit, net profit and EPS was insignificant.
Guidance, outlook, management commentary and risks
The filing does not provide fiscal 2021 revenue or profit guidance because of COVID-19 uncertainty. Management stated that the fourth-quarter fiscal 2020 impact was not significant, with approximately two-thirds of the impact supply-related during work-from-home enablement and approximately one-third demand-related from project ramp-downs and delayed client approvals.
- Management expected near-term pressure from slower client technology spending, project deferrals, reduced discretionary spending and margin pressure.
- Longer term, management identified potential demand from digitization, cloud migration, workplace transformation, cybersecurity, automation and IT cost optimization.
- By the filing date, 98% of employees were enabled to work remotely; the Company stated that business continuity procedures had been successfully activated.
- Cost and liquidity actions included tighter working-capital management and collections, reduced or deferred capital expenditure, automation, workforce-pyramid rationalization, optimization of onsite-offshore staffing and subcontractor costs, and potential deferral of compensation revisions and hiring.
- Effective fiscal 2020, the Company expected to return approximately 85% of cumulative free cash flow over five years through dividends, buybacks and/or special dividends, subject to applicable laws and approvals. The Board recommended a fiscal 2020 final dividend of ₹9.50 per share, subject to shareholder approval.
- Principal risks include COVID-19-related customer cancellations or delays, prolonged payment terms, work-from-home delivery constraints, cybersecurity and data-privacy incidents, fixed-price contract overruns, currency volatility, immigration and visa restrictions, wage inflation, client concentration, intense competition, acquisitions and goodwill impairment.
- Each one percentage point movement in the Indian rupee against the U.S. dollar affected incremental operating margins by approximately 0.45% in fiscal 2020.
- Income-tax claims not acknowledged as debts from Indian authorities were $443 million at March 31, 2020; management and its advisers expected the Company’s position to be upheld and did not expect a material adverse effect.
- The independent auditor issued an unqualified opinion but included an emphasis-of-matter paragraph regarding inquiries from Indian regulatory authorities. The SEC investigation related to whistleblower complaints was concluded in March 2020 with no anticipated further SEC action. A U.S. purported class action was voluntarily dismissed without prejudice on May 21, 2020.
Most important facts for investors to verify
- Confirm that comparisons use the fiscal year ended March 31, 2020 rather than a standalone 2019 fourth quarter.
- Reconcile reported revenue growth with constant-currency growth and assess the sustainability of the 39.2% digital revenue mix.
- Monitor operating-margin recovery, employee compensation, subcontractor costs, onsite mix, visa costs and currency movements.
- Assess collections and working capital, particularly the increase in receivables, unbilled revenue and DSO.
- Review COVID-19 effects after March 31, 2020, including project cancellations, client pricing requests, payment delays, force majeure claims and remote-working costs.
- Evaluate acquisition integration, contingent consideration, option arrangements and goodwill exposure, including the Simplus, Stater and HIPUS transactions.
- Review outstanding tax claims, uncertain tax positions of $696 million, applicable SEZ incentives and the transition from dividend distribution tax to shareholder-level dividend taxation.
- Verify the proposed final dividend, the 85% free-cash-flow capital-allocation policy and the Company’s continuing ability to fund dividends, buybacks and capital expenditure without debt.