Infosys Limited: Form 20-F Summary
Business context and reporting period
This filing is an annual report for the fiscal year ended March 31, 2019, prepared under IFRS as issued by the IASB and presented in U.S. dollars. It does not provide a standalone 2018 fourth-quarter income statement; the relevant comparable period is fiscal 2018. Infosys is an India-based provider of consulting, technology, outsourcing, digital services, products and platforms. Its ADSs trade on the NYSE under “INFY,” with one ADS representing one equity share.
Fiscal 2019 revenue was concentrated in North America, Europe and financial services. North America represented 60.5% of revenue, Europe 24.1%, and financial services 32.0%. The company employed 228,123 people at March 31, 2019.
Financial performance and position
| Metric | Fiscal 2019 | Fiscal 2018 | Change |
|---|---|---|---|
| Revenue | $11,799 million | $10,939 million | +7.9% |
| Gross profit / margin | $4,112 million / 34.8% | $3,938 million / 36.0% | Margin down 1.2 points |
| Operating profit / margin | $2,696 million / 22.8% | $2,659 million / 24.3% | Profit +1.4%; margin down 1.5 points |
| Profit before tax | $3,003 million | $3,143 million | -4.5% |
| Net profit attributable to owners | $2,199 million | $2,486 million | -11.5% |
| Basic and diluted EPS | $0.51 | $0.55 | Down $0.04 |
| Net margin | 18.6% | 22.7% | Down 4.1 points |
| Operating cash flow | $2,262 million | $2,257 million | +0.2% |
| Capital expenditure | $349 million | $310 million | +12.6% |
| Cash and cash equivalents | $2,829 million | $3,041 million | -$212 million |
| Current investments | $958 million | $982 million | -$24 million |
| Working capital | $4,951 million | $5,243 million | -$292 million |
| Total equity | $9,400 million | $9,960 million | -$560 million |
Infosys reported no outstanding borrowings at March 31, 2019. Cash, current investments and operating cash flow were the principal liquidity sources. Trade receivables were $2,144 million, unbilled revenue was $777 million, and days sales outstanding improved to 66 days from 67 days.
Material changes versus the prior comparable period
- Revenue increased 7.9% in reported currency and 9.0% in constant currency. Digital revenue rose to 31.2% of revenue from 25.5%, while core revenue declined to 68.8% from 74.5%.
- Gross and operating margins contracted because of higher employee and subcontractor costs, third-party delivery costs, compensation increases, localization, sales and marketing, reskilling and digital investments. Utilization including trainees declined to 80.1% from 81.2%.
- Other income declined to $411 million from $513 million, primarily because the investable cash base decreased after shareholder distributions and fiscal 2018 included $41 million of interest on tax refunds.
- Income tax expense increased to $803 million from $657 million, and the effective tax rate rose to 26.7% from 20.9%. Fiscal 2018 benefited from a $225 million reversal related to a U.S. Advance Pricing Agreement.
- Fiscal 2019 included a $39 million reduction in the fair value of Panaya and a $65 million impairment adjustment, principally related to goodwill and customer relationships of Skava, after the Panaya and Skava disposal group ceased to qualify as held for sale.
- Infosys adopted IFRS 15 using the cumulative catch-up method; the reported effect was insignificant. The company expected IFRS 16 adoption on April 1, 2019 to increase right-of-use assets by approximately $395 million, net investment in subleases by approximately $60 million and lease liabilities by approximately $495 million.
- The company completed acquisitions of WongDoody, Fluido and a 60% interest in Infosys Compaz. It also paid a $30 million advance for the subsequent acquisition of HIPUS.
Capital allocation, outlook and risks
Under its policy of returning up to 70% of annual free cash flow, Infosys paid dividends including dividend distribution tax of approximately $1,956 million in fiscal 2019 and bought back shares for approximately $118 million. The fiscal 2019 buyback authorized up to ₹82.6 billion, at no more than ₹800 per share, began March 20, 2019. A further 57.6 million shares were bought back after year-end for approximately $624 million. The Board recommended a final dividend of ₹10.50 per share, subject to shareholder approval.
Management’s strategy focuses on scaling Agile Digital, energizing the core through automation and artificial intelligence, reskilling employees and expanding workforce localization. The filing does not provide a formal fiscal 2020 revenue or margin guidance figure in the supplied text.
Key risks include client technology-budget reductions, pricing pressure and competition, fixed-price contract execution, wage inflation, employee retention and utilization, immigration and visa restrictions, foreign-exchange volatility, concentration in North America and financial services, cybersecurity and data-privacy incidents, intellectual-property claims, tax-benefit expirations, acquisitions and goodwill impairment. A one-percentage-point change in the rupee/U.S. dollar exchange rate affected incremental operating margin by approximately 0.47% in fiscal 2019.
As of March 31, 2019, contractual capital expenditure commitments were $249 million. Other disclosed obligations included $477 million of operating lease commitments, $699 million of purchase obligations and $324 million of post-retirement benefit obligations. Unrecognized tax benefits were $630 million, and income-tax claims not acknowledged as debts were approximately $412 million; management expected its position to be upheld. The company disclosed no material off-balance-sheet arrangements and stated that ordinary-course litigation was not expected to have a material adverse effect.
Facts investors should verify
- Confirm that the requested “2018 Q4” analysis is intended to refer to fiscal year ended March 31, 2019, because this Form 20-F does not present a standalone fourth-quarter period.
- Reconcile the decline in net profit and margins with higher delivery, localization, subcontractor, compensation and tax costs.
- Assess the recurring earnings impact of the fiscal 2018 $225 million tax benefit and fiscal 2019 disposal-group adjustments.
- Track completion and cash cost of the buyback, the proposed final dividend and the effect of share-count changes on EPS.
- Evaluate cash conversion, receivables and unbilled revenue, including the $7,414 million of remaining performance obligations disclosed under IFRS 15.
- Review foreign-exchange sensitivity, tax claims, tax incentives, lease-accounting impacts and the $249 million capital expenditure commitment.
- Assess whether digital growth and acquisitions offset margin pressure and execution risks associated with localization, reskilling and fixed-price contracts.