INFOSYS TECHNOLOGIES LIMITED

INFOSYS TECHNOLOGIES LIMITED INTRODUCTION It was early in the morning of February 10, 1999 While Mr Nandan Nilekani read the Infosys U.S S.E.C registration statement, his driver fought his way through the smog filled Bangalore traffic Mr Murthy, current CEO of Infosys Technologies Limited (“Infosys” or “the Company”), prepared to issue a press release announcing his resignation and the transition of Nandan to CEO “I am quite happy with the smooth transitioning of the responsibility of day-to-day operations to Nandan This is in keeping with our philosophy of younger people assuming greater responsibility…My best wishes to him in his new role.” Mr Murthy’s best wishes notwithstanding, Nandan had quite a lot on his mind Infosys had grown from a small start-up into one of India’s most respected software companies with a strong financial performance in the last few years (Appendix I comprises the financial statements for the Company) Just this past September, The Economic Times proclaimed Infosys as India’s Company of the Year On January 22, 1999, the share price crossed the Indian Rs 5,000 ($118) mark1, making it the one of the most expensive stocks in Indian history Despite the success, Nandan had concerns for the future Primary among them was the valuation of the company’s attempt to issue American Depository Shares (“ADS”) While the company had achieved impressive growth over the past four years (CAGR over 50%), a significant portion of the growth was due to Year 2000 (“Y2K”) related consulting and services Furthermore, 82% of the revenue came from the United States As demand for Y2K services would most probably drop within the next six months, Infosys needed to develop new businesses and services to maintain leadership in the Indian marketplace and emerge as a leader in global software services, while continuing to construct production capabilities within India To achieve his goal for diversification without hampering capacity, Infosys needed to invest additional capital This is where the ADS came into the picture He wondered about the prospects of an ADS issue in the U.S Was the offering undervalued given the optimism demonstrated by investors in U.S technology stocks? Or would the issue be successful as U.S investors continued to For a Rs 10 par value stock, Infosys has probably been the highest quoted stock The stock’s effective split recently had it quoting in the $50 range Other stocks had been known to quote at higher rates, but these were Rs 100 par value stocks, e.g – Cipla, a pharmaceutical Company quoted at Rs 46,000 during intra – day trading on January 31, 1994 This case was prepared by Fuqua MBA students Noelle M Diederich '99, Lalit Khanna '99, Nandini Kini '99, Rakesh Mehta '99, and Daniel Sevall '99 under the supervision of Professor Campbell Harvey ( February 1999) The case presents a business situation in the context of emerging markets and does not reflect an endorsement either of an appropriate or inappropriate way to handle the situation Furthermore, the "story" of Mr Nilekani riding through traffic in Bangalore was created by the case writers to enhance the presentation of the case maintain the stock's momentum (see Exhibit A below) of recent months? Given the recent turmoil in Russia and Brazil, what could Infosys expect from an ADS issue in terms of international investor reaction? Exhibit A 4000000 70.00 3500000 60.00 3000000 50.00 Volume 2500000 40.00 2000000 30.00 1500000 20.00 1000000 Share Price (in US$) Infosys Share Price and Volume Trends Volume Price (US$) 10.00 500000 9/30/98 12/31/98 6/30/98 3/31/98 12/31/97 9/30/97 6/30/97 3/31/97 12/31/96 9/30/96 6/28/96 3/29/96 12/29/95 9/29/95 6/30/95 3/31/95 12/30/94 9/30/94 Time INDIA2 “India is any quantitative investor’s nightmare but a stock picker’s paradise.” - Shanta Acharya, Investing in India, p xi Political History British rule in India ended in 1947 after a sustained campaign for independence Soon after gaining independence as a secular and democratic country, India was partitioned amid great bloodshed, resulting in the Islamic state of Pakistan Fascinated by the Soviet Union’s planned economy system, India's first prime minister, Jawaharlal Nehru, introduced the notion of 5-year plans that are still in existence3 today The 5-year plans were Nehru’s attempt to force the state to play a significant role in industrial development by investing state resources in infrastructure and other “core” sectors through the creation of a public sector Of the 28 million workers in organized employment in India, 70% work for the state This section is largely excerpted from Economic Intelligence Unit Country Reports For a year period in the 1960s these 5-year plans were replaced by annual plans to overcome the acute food shortage caused by crop failures A direct consequence was India’s attempt at a Green Revolution whereby agricultural resources were concentrated in fertile areas to boost agricultural production, instead of distributing resources on a more equitable basis Even though agricultural production has grown, on a per capita basis there still has been no significant improvement owing to increases in population Another consequence of the Green Revolution was the skewness in wealth distribution, which saw the North develop at the expense of the East The state continues to account for only around one-third of economic output and less than one-third of investment The vast majority of public-sector enterprises are unproductive, massively overstaffed and debt-ridden A high level of unionization (and political expediency) restrict labor reforms and technological advances that could threaten jobs, and as a consequence, deter investors In 1966 Nehru's daughter, Indira Gandhi (after whom the Congress (I) was named), became Prime Minister Her administration continued to implement an inward-looking economic policy, as well as manifesting particularly authoritarian tendencies In 1975, Mrs Gandhi declared a state of emergency which lasted for two years Civil rights were suspended, the press was controlled and many of her critics were imprisoned The electorate responded by ousting Congress (I) from government and Mrs Gandhi from her seat in the 1977 general election A key consequence of the socialist economic controls policies followed by the Nehru – Gandhi dynasty and the subsequent government was the expropriation of private assets by the central government Mrs Gandhi nationalized all the major domestic commercial banks and brought them under the control of the central government A change in political power to Janata Party-led coalitions resulted in foreign private businesses (e.g – IBM and the Coca Cola Company) leaving the country because new legislation was written prohibiting foreign majority ownership of businesses in India Mrs Gandhi returned as Prime Minister in 1980 In 1984 she was assassinated by Sikh bodyguards and her elder son, Rajiv, succeeded her as prime minister An election later that year gave Mr Gandhi an unprecedented majority, and his administration began cautious steps towards economic liberalization But Congress lost its majority in the 1989 general election amid a series of corruption scandals, and Mr Gandhi stepped down He was assassinated by Sri Lankan Tamil extremists during the 1991 election campaign Following the 1991 general election, Congress (I) formed a minority government under P.V Narasimha Rao Mr Rao’s government took the helm under a dark cloud The devaluation of the rupee by 22% against the dollar in two installments in July 1991 was followed by the introduction of a market-determined exchange rate in March 1993 and current-account convertibility in August 1994 In July 1995, it was decided that all official foreign debt-service payments would be channeled through the inter-bank market The rupee is not yet fully convertible on the capital account The devaluation occurred at a time when India’s foreign currency reserves declined to approximately $2 billion dollars and the country was forced to pawn gold reserves to prevent defaults on its foreign payment obligations Since then the situation has stabilized India's foreignexchange reserves were up to $24.8 billion in August 1998; gold reserves are around $2.5bn; total reserves are equivalent to more than six months of imports Institutional Framework India continues to demonstrate features of a developing economy while possessing the institutional features of a developed market See Appendix II for a comparison between the U.S and India on key socio-economic and political factors to contrast a developing economy with a developed market economy Federalism - the Center versus the States The Republic of India is a constitutional democracy made up of 26 states and six union territories Its federal structure often leads to demands for further devolution of powers and responsibilities to the states, as well as demands for new states to be created (In 1998 the government was considering the carve-out of new states) The Indian constitution delegates some powers to the center and some to the states, while the remainder - the socalled concurrent list - are shared But in practice, the center has frequently claimed for itself powers allocated to the states India's 26 states have limited powers of taxation and rely on transfers from the center for most of their finance With increased efforts to decentralize powers below the state level - to several tiers of local government structures, and the decline of central planning, the states have begun to assume more individual profiles The Judiciary and the Legislature The Indian constitution provides for an independent judiciary, with courts in every state and a Supreme Court in New Delhi In spite of the recent history of the Supreme Court to demonstrate its independence from the legislature, the legal process is painstakingly slow India has 16.34 million under-trial prisoners (persons charged with crimes whose cases are yet to be decided or who haven’t yet managed to procure bail – there are cases where undertrials are eventually released after they have served out the maximum possible sentence for the crime they were charged with even though the case was yet to be decided) Democracy and Corruption India is the world's largest democracy, with regular and fairly free elections In several areas, poll-rigging and intimidation are commonplace; party spending is far in excess of legal limits; and many of the country's elected representatives have a criminal record However, a high level of political awareness and the sheer size of the electorate generally ensure that, despite these obstacles, the final results reflect the wishes of the people Despite almost half a century of democracy, governmental agencies emerged as prolific breeding grounds for corruption Ministers, the elected representatives of the people, topped the list of groups seen to be prone to non-transparent functioning The police came a (dis)honorable second; in Punjab, in fact, it even surpassed ministers.5 The Berlin-based organization, Transparency International, pointed out that India was ranked 66th out of the 85 countries surveyed in terms of level of corruption.6 August 1998 estimate reported by India Today magazine Survey conducted by India Today magazine and ORG-MARG in November 1997 1998 Corruption Perceptions Index; http://www.transparency.de/documents/cpi/index.html India’s score has improved marginally since 1995 (from 2.8 to 2.9 on a scale out of 10.0) In May 1996, the Hindu nationalist Bharatiya Janata Party (BJP) formed a government that lasted for only 13 days The BJP came into power by fomenting dissension among the electorate along religious lines by appealing to religious extremism This was followed by a minority United Front (UF) coalition supported from the back benches by Congress The UF government continued to implement the economic reforms begun under Congress, but Congress withdrew its support in November 1997 and the government fell The era of coalition politics and unstable governments has continued after the general elections of 1998 The BJP finally formed a coalition government with 13 other parties; Atal Behari Vajpayee became Prime Minister Following the election, in which the BJP won 181 seats, it was forced to form alliances across caste, linguistic and political lines The government has therefore been vulnerable to demands by smaller regional parties which have perpetually been demanding central government resources to boost economic development in their region by threatening the withdrawal of political support Political considerations make it difficult for ruling coalitions to make difficult economic decisions Border Conflict and Tensions India's army is the second largest in the world, with total armed forces of 941thousand active servicemen and first-line reserves of another 528,400 The armed forces have a strictly non-political role, although they have increasingly been drawn into India's more intractable domestic law-and-order problems, such as those simmering in Kashmir and the North-Eastern states Consistently high levels of tension in the region make major defense cuts unlikely and difficult to implement Additionally, since independence, India has fought four border wars—three with Pakistan and one with China More recently, tensions between Pakistan and India have increased over test explosions of nuclear weapons The Economy Around 70% of India's population relies on agriculture, forestry and fishing, which account for about 30% of GDP Most land is cultivated at subsistence level, and only onethird is irrigated Annual population growth of 1.8% in recent years will make India the world's most populous country in the next century Human development indicators are among the worst in the world, but India also has a wide range of advanced expertise such as the IT industry, and a number of internationally regarded industrial houses Throughout the 1980s, GDP grew at an annual rate of about 5.5% a significant improvement on previous decades, which saw rates of around 3.5% per year (equal to GDP per head growth of just over 1%) GDP growth slowed in the early 1990s, but then revived to surpass 5% in four successive financial years GDP growth peaked at 7.5% in 1996/97 slowing to 5% in 1997/98 Gross national savings and investment as a percentage of GDP have risen steadily, if slowly, in recent years Despite increases in household and corporate savings, savings still account for only about 26% of GDP, the result of a persistent weakness in public- sector savings As a result, capital formation is low India's household sector provides the overwhelming majority (almost 90%) of national savings A shortage of power is also a serious constraint on growth, and investors have been wary to enter a market where the purchasers, state electricity boards, are effectively bankrupt India's large-scale private sector is similarly inefficient Capital productivity has fallen steadily, with negligible growth in total factor productivity and low levels of capacity utilization Even after recent reforms, India still has high levels of protection for manufacturing Inflation is a very sensitive issue in India because it bears directly on real incomes and income distribution Politicians worry that popular displeasure with rising prices—as occurred in 1998 when supply problems caused food prices to spike—will be conveyed through the political arena Annual average rates of inflation have been relatively stable but high in recent years Money supply growth remains above the rate of expansion of nominal GDP, which can be inflationary High inflation, poor product quality (stemming in part from high import controls) and infrastructure constraints have undermined India's export competitiveness Although India has been largely untouched by the Asian financial crisis, the devaluation of the currencies of several export-competing countries has posed problems for India's exporters and manufacturers Disincentives to export have led to a steady decline in India's share of world trade, from 2.4% in 1951/52 to under 1% in the late 1980s and 1990s For a comparison of India’s performance with other emerging markets, see Appendix III Economic Reforms The financial crisis of 1991 forced recourse to IMF financing and a program of economic reforms was initiated by Mr Rao’s government In July 1991, the Indian government began a structural adjustment program focusing on supply-side reforms The reforms targeted improvements in trade and industrial policies, taxation, public sector initiatives and the financial sector The goal was to enhance the conditions for investment and employment by enabling the capital markets to "assume an integral role in the allocation of resources in the nation's development."7 Within six years, India affected a fundamental change in the country's attitudes, goals, and values regarding growth in its economy and changes in its industry and society.8 Still, the Indian government's approach has been gradual, following more of a "crisis management" approach in the eyes of some country analysts Some worry that India requires another crisis in order to continue its reforms Key reform initiatives included: Acharya, Shanta Investing in India London: MacMillan Press Ltd 1998 p Acharya p.1 • • • • • The encouragement of foreign direct investment with majority equity, except in a few consumer goods sectors Red tape was greatly reduced Portfolio investment was encouraged also De-licensing of most industries to encourage competition Only a few (15) sectors, including luxury and defense-related items, as well as industries reserved for the small-scale sector, remained subject to licensing, with gradual plans for a phase-out The de-control of some aspects of business decision-making, such as location and technology transfer However, labor relations, exit policy (shutting down loss-making enterprises) and areas such as the environment remain controlled Trade policy has been cautiously liberalized, with the conversion of some import quotas into tariffs and phased reductions in import tariff rates The capital markets were liberalized, with the entry of private mutual funds, foreign institutional investors and country funds, and with stronger and more transparent regulation of the stock market Subsequently the reforms have continued although at a slow, measured pace, given changes in government The Information Technology industry, however, continues to retain a favorable position with the Indian government See Appendix IV to capture a snapshot of various indicators of recent Indian macroeconomic trends Conservative estimates by Professor SP Gupta of the Delhi School of Economics (see Exhibit B) indicate that the size of the black economy is growing: Exhibit B 1980-81 1983-84 1987-88 Amount (Rs Billion) 338.54 570.00 960.00 % of GDP 28 31 33 Some estimate the black economy to be approximately half of the Indian economy The pressures imposed by a failure to collect revenues from essentially half the economy, may force a policy change on tax breaks provided to the Information Technology sector since it is going through an exponential growth phase The latest Budget announcements seem to indicate a slight reversal in tax rate trends with the government announcing increases in income tax rates, where as previous budgetary announcements had reduced these rates This may be construed as additional pressure for the government to raise revenues from alternate sources, including the Information Technology sector THE INFORMATION TECHNOLOGY INDUSTRY IN INDIA The Comparative Advantage of India The Information Technology (“IT”) Industry in India moved from a new-fangled idea of the 60s and 70s to a respectable member of the 90’s global economy It was only in the mid-1980’s that forecasters, analysts and government policy planners recognized the potential of Indian business in computer hardware, software, and services Several factors were responsible for the growth of the IT industry in India First, India has a large, highly skilled labor pool that is available at a relatively low labor cost With over four million engineers, India ranks second only to the United States as the country with the largest population of English-speaking technical personnel This sizable pool of IT talent in India is available to companies worldwide at relatively low labor costs A second key factor driving the Indian software market is the capability of Indian IT firms to deliver a product that satisfies the requirements of clients who expect high quality standards The New York Times reported that the Indian software industry is breaking new ground, with a software unit in Bangalore achieving SEI-CMM Level 59 quality certification Worldwide, only one other organization has achieved this distinction Of the 20 SEI Level-4 certified companies worldwide, are in India National Association of Software and Services Companies (“NASSCOM”) estimates that the Indian software industry will soon have the maximum number of ISO 9000 certified companies in the world Exhibit C compares India's High Quality/Low Cost with other emerging market countries, indicating India’s relative superiority vis-à-vis other developing economies in this industry Exhibit C … Thirdly, differences in time zones allows work to be carried on by Indian teams on a 24hour basis, shortening cycle times and improving productivity and service quality The approximate 10- to 12-hour time difference between India and its IT industry’s largest market, the United States, is a considerable advantage for India based operations Independent Quality standard created by Carnegie-Mellon University Fourthly, recent Indian governments have recognized the importance of the IT sector to the Indian economy Public policy10 has created a favorable atmosphere for Indian hi-tech businesses through measures including: relief from import duties on hardware, a tax deduction for income derived from software exports11, and tax holidays and infrastructure support for companies operating in Software Technology Parks Government policy towards the IT industry is also being driven by the desire of the central government to encourage exports to generate foreign currency reserves The total size of the Hardware Business (a sector of the industry that is complementary to the software business) in 1996-97 was $2.03 billion, and the size of the Software Business was $1.82 billion Exports contributed to a major share of IT industry sales, totaling almost $2 billion For an analysis of the IT sector’s components see Appendix V The Software Business The realization that India had significant potential in IT led to the formulation of the computer software policy in 1986 by the government It was predicted that software would be one of the fastest growing sectors in the Indian economy and provide significant export revenue Just 13 years later, the Indian Software Business had surpassed all forecasts The CAGR in this sector over the last five years was 52.6%, including both the domestic and export segments Despite these high growth rates, India’s share in the world software market is low (accounting for only about 1% of the total) However, projections for the future are very optimistic, given the country’s unique advantages in the industry Exhibit D shows the expected sales growth rate in software service sales12 for the United States – the largest market for software services These trends enhanced Infosys' strategic position as a software services exporter Exhibit D US$ billions Projected growth of US Software Services Industry 20 15 10 1996 1997E 1998E 1999E 2000E Year 10 Tax holidays are given for to 10 years, and no income tax is charged on export income Section 80HHE of the Indian Income Tax Act provides an effective 0% tax rate on profits attributable to export activity However, for the tax benefit to occur, Revenues must be converted into Indian Rupees on a timely basis 12 Standard & Poor's Industry Surveys, Computers:Software, September 17, 1998, p13 11 Trends in the Software Business The Indian Software Business was expected to reach $10 billion by 2000 AD This was expected to be driven mainly by outsourcing projects from large U.S corporations (e.g IBM, AT&T, Microsoft, and Texas Instruments) The total Indian size (See Exhibit E) was projected at $16 billion by 2001-2002, with exports accounting for over 63% of the revenues 13 In the coming years, the industry was expected to use foreign joint ventures and strategic alliances as drivers of growth, with the main focus being on Europe Other markets being explored include Korea, South Africa, Latin America and some countries in Asia-Pacific Exhibit F shows the current breakdown of India's software export industry Exhibit E Exhibit F 18,000 16,000 16,000 14,000 Industry Size 12,000 Exports Domestic Total 10,235 10,000 8,000 6,600 6,000 4,300 4,000 2,000 2,785 1,820 1996/97 1997/98 1998/99 YEAR 1999/00 2000/01 2001/02 THE COMPANY Infosys History Infosys Technologies Ltd., started in 1981, was the largest professional-owned software company in India They provided quality software services and products to customers across the globe They pioneered cross-border collaborative software development in India The company has since then established offices in North America, Europe, Japan and India Infosys had established a strong reputation through highly competent management, dedication to quality, employee satisfaction, and investment in infrastructure The Company was incorporated by seven founders and six of these original founders (see Appendix VI for the list of continuing promoters/managers) have remained with the Company, retaining over 30% of the stake in the company N.R Narayana Murthy has served as Chairman of the Board and Chief Executive Officer of Infosys since 1981 In 1997 & 1996, the readers of Asiamoney voted Infosys “The best managed company in India” The company’s growth since its inception in 1981 has been impressive, with a 13 Source: Indian Software Scenario, http://www.nasscom.org/indian.htm 10 Appendix I Page of FINANCIAL STATEMENTS INFOSYS TECHNOLOGIES LIMITED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) Years Ended March 31, 1996 1997 1998 - - Cash flows from investing activities: Expenditure on property, plant and equipment Proceeds from sale of property, plant and equipment Loans to employees Proceeds from sale of investment in deconsolidated subsidiary Proceeds from sale of investments in affiliates Purchases of short-term investments Proceeds from sale of short-term investments Purchase of investments in affiliates Net cash used in investing activities Cash flows from financing activities: Repayment of long-term borrowings Net proceeds from issuance of Equity Shares Net proceeds from issuance of preferred stock by subsidiary Payment of cash dividends Loan to trust Net cash provided by (used in) financing activities (4,003,108) (7,201,749) (7,891,441) 57,599 (196,789) 33,453 (418,790) 8,079 (552,526) (1,274,018) - -78,819 -2,859,420 Nine Months Ended December 31, -1997 1998 - (Unaudited) (5,273,833) (11,598,726) 667 (667,100) 5,704 (1,579,837) 1,500,000 (177,576) - (5,416,316) (4,648,847) (8,435,888) (5,940,266) (11,850,435) - - - - - (759,613) (1,253,125) 2,789 2,020,350 2,020,350 2,250,000 2,250,000 (804,688) (1,062,475) (1,467,427) (534,269) (1,037,628) (911,863) (944,335) 109,733 - - - - (1,564,301) (2,312,811) 1,891,060 2,791,746 (927,895) 22 Appendix I Page of FINANCIAL STATEMENTS INFOSYS TECHNOLOGIES LIMITED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) Years Ended March 31, 1996 1997 1998 - - - Nine Months Ended December 31, -1997 1998 - (Unaudited) Net cash provided by operating activities 8,142,087 9,415,196 17,154,180 10,361,891 Net cash used in investing activities (5,416,316) (4,648,847) (8,435,888) (5,940,266) (11,850,435) Net cash provided by (used in) financing activities (1,564,301) (2,312,811) 1,891,060 2,791,746 (1,438,382) (1,902,597) (3,510,418) (3,462,515) Effect of exchange rate changes on cash Effect of deconsolidation on cash Net increase/(decrease) in cash and cash equivalents during the year Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year Supplementary information: Cash paid for interest Cash paid for taxes (276,912) 24,964,863 (927,895) (2,342,437) (2,465,372) 550,941 7,098,934 3,750,856 7,378,724 8,046,302 - 7,769,390 - 8,320,331 - 8,320,331 - 15,419,265 - $ 7,769,390 =========== $ 8,320,331 =========== $15,419,265 =========== $12,071,187 =========== $22,797,989 =========== $ 217,650 $ 1,306,358 $ 172,268 $ 1,856,548 $ -840,073 -$ 1,412,515 -323,568 $ Effective April 1997, Bharat S Raut and Company was engaged as the new principal independent accountants 23 Appendix II COMPARISON OF INDIA VS U.S Comparative Factors Population Age Structure: India (from www.odci.gov) 984,003,683 0-14 years 34% 15-64 years 61% >65 years 5% (>age 15 can read & write) United States (from www.census.gov) 271,978,381 0-14 23.6% 15-64 64.6% >65 years 12.8% (Level II and above) 52% 65.5% male 37.7% female 77% (no breakdown between sexes) Legal System Date of Constitution Total Population: 62.9 years Male: 62.11 years Female: 63.73 years Based on English Common Law 1950 Total Population: 75.3 years Male: 73 years Female: 78 years Based on U.S Constitution 1789 Political Institutions: Parliamentary Based on Separations of Powers Executive Chief of State (elected through electoral college every years) Prime Minister (elected by Legislative majority) President (elected through electoral college every four years) Legislative Bicameral Parliament (Sansad) Literacy Life Expectancy Council of States (Rajya Sabha-250 members serving years) U.S Senate (100 members year terms) People's Assembly (Lok Sabha-545 members serving years) U.S House of Representative (435 members two year terms) Judicial Branch Supreme Court (appointed by Chief of State, until age 65) Political Parties Several Gross Domestic Product List of Major Parties Congress (I) Bharatiya Janata Party (BJP) Janata Dal Party (JDP) Rashtriya Janata Dal (RJD) $1.534 trillion GDP Real Growth Rate (4th Qtr-1998) Military Strength (India Land Forces vs U.S Army): Nuclear Capability Bicameral Congress Supreme Court (appointed by President for life) Democratic Republican Other minor parties $8.531 trillion 5% 6.1% 941,000 (world's second largest) 495,000 (world's most capable) Yes Yes 24 Appendix III Page of COMPARISON OF INDIA VS OTHER EMERGING MARKET COUNTRIES Economic trends - a comparison Country GNP per capita External debt (% of GNP) Debt service ratio* (% growth per year) 1965-80 1980-93 1980 1994 1980 1994 India 1.5 3.0 11.9 34.2 10.0 26.9 Brazil 6.3 0.3 31.8 27.9 67.7 35.8 China 4.1 8.2 2.2 19.3 4.4 9.3 Indonesia 5.2 4.2 28.0 57.4 13.9 32.4 Russia NA -1.0 NA 25.4 NA 6.3 Thailand 4.4 6.4 25.9 43.1 20.4 16.3 * Debt service as a % of exports of goods and services Source: World Development Reports, 1995, 1996; Human Development Report, 1996 Public expenditure on education and health Country Education Higher Ed (as % GNP) (% all levels) 1960 1990 1992 India 2.3 3.5 15 China 1.8 2.3 19 Indonesia 2.5 0.9 na Philippines 2.3 2.9 15* South Korea 2.0 3.6 Thailand 2.3 3.8 16 * Data refers to a period other than that specified Source: Human Development Reports, 1995 and 1996 Health (as % of GNP) 1960 1990 0.5 1.3 1.3 2.1 0.3 0.7 0.4 1.0 0.2 2.7 0.4 1.1 25 Appendix III Page of COMPARISON OF INDIA VS OTHER EMERGING MARKET COUNTRIES Gross domestic investment as % of GDP Country 1971-80 1990 1994 India 20.5 26.3 23 China 33.9 36.6 42 Indonesia 19.3 36.1 29 Korea 28.6 36.9 38 Singapore 41.2 39.7 32 Thailand 25.3 41.1 40 Source: Asian Development Outlook, 1994; World Development Report, 1996 Ratio of imports to exports (in % terms) Country 1990-91 1993-94 1995-1996E India 151.1 105.2 127.6 China 85.9 113.4 88.8 Hong Kong 93.7 97.6 101.9 Indonesia 98.6 91.9 99.0 Philippines 123.5 125.7 125.3 Thailand 115.8 106.3 108.2 Source: Scogen-Crosby Research; Indian Economic Survey, 1996-97 Country Average annual rate of inflation (%) 1970-80 1984-94 Brazil 38.6 900.3 China 0.6 8.4 India 8.4 9.7 Indonesia 21.5 8.9 Russian Federation -0.1 124.3 Philippines 13.3 10.0 Thailand 9.2 5.0 Source: World Development Report 1995, 1996 26 Appendix IV Page of PERFORMANCE OF INDIA OVER TIME Structure of India's private consumption (% of total) Items 1970-71 Food, beverages & tobacco 63.4 Clothing & footwear 8.6 Rent, water, fuel & power 14.3 Furniture & furnishings 2.6 Transport & communication 3.2 Others 7.9 Per capital consumption (Rs)* Per capita income (Rs)* Per capital consumption as % of per capita income* * Figures based upon current prices Source: Centre for Monitoring the Indian Economy 602 793 76.0 1980-81 58.8 11.2 12.6 2.8 5.1 9.5 1990-91 53.9 10.7 10.8 3.4 10.6 10.6 1462 2008 72.8 4003 6246 64.0 India foreign investment flows ($mm) 1991-92 1994-95 1996-1997* FDI 150 1314 1700 Portfolio 3581 2343 investment FII 1503 1002 Euroequity 1839 812 Offshore funds 239 20 Total 158 4895 4053 * From April until December Figures in this table are based upon actual inflows & may differ from foreign investment flows in the Balance of Payments which are on an accrual basis Source: Indian Economic Survey, 1996-97 India's debt service payments - select ratios Key indicators 1990-91 1995-1996E Debt service ratio* 35.3 25.7 External debt/GDP 30.4 28.7 External assistance/net capital 26.8 31.0 flows Import cover** 0.6 6.1 Current payments cover** 0.8 3.8 Rate of growth in debt service 9.2 20.8 Exports/imports 66.2 78.4 * total debt service repayments as % of current receipts ** in # of months Source: Indian Economic Surveys, 1995-96, 1996-97 Even though in the long-run, the country was moving away from a subsistence – style economy, the reforms of 1991 clearly show a noticeable increase in foreign investments and an improvement in India’s foreign obligation payment capacity 27 Appendix IV Page of PERFORMANCE OF INDIA OVER TIME Funds raised via public capital issues in India (Rs billions) 19881989-90 1990199189 91 92 # of issues 253 379 351 497 Amount raised 54.6 122.8 110.5 145.9 As % of GDS 6.5 11.9 8.7 10.4 As % of GDCF 5.6 10.7 7.6 10.1 Source: Indian Economic Survey, various issues 199293 1034 167.5 10.8 9.9 Market capitalization as % of GDP Year 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 Source: ING Baring Securities (India) Pvt Ltd 199394 1143 243.7 12.9 12.7 1994-95 1995-96 1666 276.2 11.6 11.1 1725 208.0 7.4 6.9 % 12.1 20.6 57.4 25.1 49.7 48.2 45.8 A direct impact of the reform movement is clearly perceived in the move towards stronger capital market activity, as indicated above 28 Appendix V ANALYSIS OF INDIAN IT INDUSTRY Analysis of IT Industry into its Core Businesses Maintenance: 5.4% Players : Over 30 Training: 4.6% Players : Over 70 Software: 44.5% Hardware: 45.5% Players: Over 350 Players: Over 300 Analysis of the Hardware Business in India Infotech 10% Telecom 24% Industrial 14% Components 20% Consumer Electronics 32% Analysis of the Software Business in India 29 Appendix VI EXTENT OF SHAREHOLDING BY FOUNDERS Founder N.R Narayana Murthy N.S Raghavan Nandan M Nilekani S Gopalakrishnan K Dinesh S.D Shibulal Total Designation Chairman of the Board, Chief Executive Officer Head of Education and Human Resources Managing Director, President, Chief Operating Officer Head of Technology and Client Delivery Head Quality, MIS and Productivity Head of Year 2000 Business Unit, Manufacturing, Distribution, Internet and Intranet Business Unit Shares Owned 2,523,600 % Prior to ADS Issue 7.9 % After ADS Issue 7.7 1,765,600 5.5 5.4 1,716,200 5.4 5.2 1,594,800 5.0 4.8 1,172,200 3.7 3.6 1,074,200 3.4 3.3 10,144,200 31.7% 30.8% 30 Appendix VII LIST OF KEY CLIENTS Financial Services Avco Financial Services, Inc Bank of America N.T & S.A BankBoston, N.A Goldman, Sachs & Co Northwestern Mutual Life Insurance Co The Western and Southern Life Insurance Company Visa International Service Association Manufacturing and Distribution ConAgra, Inc Cooper Industries, Inc Kent Electronics Company Levi Strauss & Co Quest International Reebok International Ltd Salomon S.A Toshiba Corporation Telecommunications and Technology Apple Computer, Inc Ascend Communications, Inc AST Research, Inc Limited Belgacom Mobile N.V./S.A Bell Atlantic Corporation NCR Corporation Northern Telecom Limited Epson Software Development Laboratory, Inc Retail Ann Taylor, Inc B.J.'s Wholesale Club, Inc Sainsbury's Supermarkets J.C Penney Company Corporation Nordstrom, Inc Staples, Inc The Gap, Inc The TJX Companies, Inc 31 Appendix VIII COMPARISON OF INFOSYS WITH BENCHMARK COMPANIES OVER TIME COMPANY MULIPLE INFOSYS TECHNOLOGIES LIMITED P/E 12/1994 P/BV Market Capitalization / Sales Market Capitalization / EBITDA CAMBRIDGE TECHNOLOGY PARTNER 12/1996 12/1997 12/1998 E 16.24 23.97 48.49 38.97 4.27 7.09 16.93 15.98 3.85 5.75 11.36 8.80 10.85 17.06 33.87 26.99 P/E 48.37 77.70 86.06 73.03 26.60 P/BV 32.81 18.67 19.93 17.09 6.16 4.96 6.39 6.87 5.63 2.21 24.02 35.02 38.93 33.07 15.60 58.33 68.52 N/A 6.68 3.22 4.73 Market Capitalization / Sales Market Capitalization / EBITDA CLAREMONT TECHNOLOGY GROUP 12/1995 P/E P/BV Market Capitalization / Sales Market Capitalization / EBITDA KEANE, INC SAPIENT CORPORATION P/E 2.27 3.19 15.08 31.09 20.65 18.75 41.78 59.74 30.03 P/BV 2.70 2.20 5.41 11.14 7.94 Market Capitalization / Sales 1.10 0.94 2.23 4.11 1.99 Market Capitalization / EBITDA 7.99 7.26 16.72 27.19 15.71 75.22 65.16 70.70 8.09 9.83 9.11 P/E P/BV WHITTMAN-HART, INC 2.68 17.82 Market Capitalization / Sales 10.86 8.20 8.20 Market Capitalization / EBITDA 45.82 35.31 67.53 P/E 85.42 77.84 78.93 P/BV 7.05 8.73 10.26 Market Capitalization / Sales 5.90 4.46 3.86 59.33 40.68 63.34 Market Capitalization / EBITDA NOTES: Based on financial statements extracted from WORLDSCOPE Casewriters' estimates 32 Appendix IX Page of TRENDS IN SOFTWARE RELATED INDICES, THE WORLD MARKET AND INFOSYS SHAREPRICES DATE-YYMM 9101 9102 9103 9104 9105 9106 9107 9108 9109 9110 9111 9112 9201 9202 9203 9204 9205 9206 9207 9208 9209 9210 9211 9212 9301 9302 9303 9304 9305 9306 9307 9308 9309 MSCI WORLD 30 YEAR TINDEX BOND YIELD 1043.55 1140.34 1106.91 1115.75 1141.22 1070.95 1121.71 1118.34 1147.86 1166.66 1116.02 1197.46 1175.49 1155.41 1101.17 1116.72 1161.34 1122.65 1125.72 1153.31 1142.95 1112.20 1132.30 1141.66 1145.69 1173.04 1241.27 1299.02 1329.17 1318.23 1345.60 1407.50 1381.72 8.27 8.03 8.29 8.21 8.27 8.47 8.45 8.14 7.95 7.93 7.92 7.7 7.58 7.85 7.97 7.96 7.89 7.84 7.6 7.39 7.34 7.53 7.61 7.44 7.34 7.09 6.82 6.85 6.92 6.81 6.63 6.32 INFOSYS SHARE PRICE MSCI EMERGING MARKETS-DATA PROCESSING & REPRODUCTION INDEX MSCI EMERGING MARKETS HARDWARE/ COMPONENTS INDEX S&P400 CRISIL 500 SERVICES & INDIA COMPUTER COMPUTER SYSTEMS SUB-INDEX INDEX 90.97 93.64 94.19 97.11 102.99 102.74 113.05 119.75 121.51 125.64 121.5 116.66 112.18 120.06 121.99 123.83 124.68 135.34 140.04 134.37 132.9 142.02 76.07 72.13 72.5 61.25 MSDW INTERNATIONAL SOFTWARE INDEX MSDW INDIA SOFTWARE INDEX 34.77 36.88 32.89 30.43 29.75 27.63 35.44 32.97 32.50 33.50 35.24 40.42 51.57 65.38 97.79 102.03 62.39 68.67 60.82 69.92 75.52 61.91 52.67 57.89 54.21 48.96 31.94 41.48 37.21 33.31 32.35 32.56 32.59 33 Appendix IX Page of TRENDS IN SOFTWARE RELATED INDICES, THE WORLD MARKET AND INFOSYS SHAREPRICES DATE-YYMM 9310 9311 9312 9401 9402 9403 9404 9405 9406 9407 9408 9409 9410 9411 9412 9501 9502 9503 9504 9505 9506 9507 9508 9509 9510 9511 9512 9601 9602 9603 9604 9605 9606 MSCI WORLD 30 YEAR TINDEX BOND YIELD 1420.02 1339.92 1405.71 1498.66 1479.51 1415.97 1459.99 1464.00 1460.19 1488.21 1533.29 1493.27 1536.02 1469.67 1484.18 1462.17 1483.77 1555.59 1610.11 1624.19 1624.01 1705.58 1667.89 1716.80 1690.09 1749.09 1800.55 1833.45 1844.95 1875.99 1920.44 1922.45 1932.51 5.94 6.21 6.25 6.29 6.49 6.91 7.27 7.41 7.4 7.58 7.49 7.71 7.94 8.08 7.87 7.85 7.61 7.45 7.36 6.95 6.57 6.72 6.86 6.55 6.37 6.26 6.06 6.05 6.24 6.6 6.79 6.93 7.06 INFOSYS SHARE PRICE 4.18 3.67 3.82 3.75 3.41 3.58 3.78 3.58 3.98 3.78 3.54 3.75 3.41 3.26 2.61 2.91 2.78 3.43 3.45 4.54 4.64 5.07 MSCI EMERGING MARKETS-DATA PROCESSING & REPRODUCTION INDEX 100.28 76.10 77.72 89.97 82.36 82.71 84.50 77.74 81.54 95.13 90.21 85.29 91.27 85.75 84.12 79.53 89.96 78.16 83.26 MSCI EMERGING MARKETS HARDWARE/ COMPONENTS INDEX 99.88 83.41 85.77 103.84 103.12 104.90 103.06 93.23 85.88 89.21 81.64 79.63 85.02 79.55 80.86 80.36 94.51 95.22 97.56 S&P400 CRISIL 500 SERVICES & INDIA COMPUTER COMPUTER SYSTEMS SUB-INDEX INDEX 56.4 57.15 59.95 58.36 65.59 70.89 74.66 64.76 65.04 66.74 67.39 68.81 75.15 80.54 90.51 83.05 86.48 86.08 90.85 91.33 98.63 95.56 101.27 109.58 105.09 110.98 101.48 97.03 100 101.04 102.88 96.55 101.21 30.13 33.76 32.84 38.68 46.15 44.32 42.92 45.63 48.63 53.48 51.71 46.72 46.38 47.61 35.98 35.42 32.81 34.63 32.32 32.98 29.23 28.17 27.16 25.70 25.73 22.53 23.11 21.52 26.00 26.68 34.35 35.21 36.16 MSDW INTERNATIONAL SOFTWARE INDEX MSDW INDIA SOFTWARE INDEX 105 110 115 126 125 133 137 151 171 182 183 191 186 208 232 311 329 330 351 340 365 333 336 317 306 299 300 299 252 264 246 299 294 353 345 361 34 Appendix IX Page of TRENDS IN SOFTWARE RELATED INDICES, THE WORLD MARKET AND INFOSYS SHAREPRICES DATE-YYMM 9607 9608 9609 9610 9611 9612 9701 9702 9703 9704 9705 9706 9707 9708 9709 9710 9711 9712 9801 9802 9803 9804 9805 9806 9807 9808 9809 9810 9811 9812 MSCI WORLD 30 YEAR TINDEX BOND YIELD 1864.57 1886.35 1960.56 1974.60 2085.61 2052.56 2077.65 2101.90 2060.69 2128.40 2260.16 2373.25 2482.91 2317.18 2443.43 2315.20 2356.54 2385.63 2452.49 2618.78 2729.76 2756.85 2722.70 2787.71 2783.64 2412.84 2455.93 2678.37 2838.07 2977.15 7.03 6.84 7.03 6.81 6.48 6.55 6.83 6.69 6.93 7.09 6.94 6.77 6.51 6.58 6.5 6.33 6.11 5.99 5.81 5.89 5.95 5.92 5.93 5.7 5.68 5.54 5.2 5.01 5.25 5.06 INFOSYS SHARE PRICE 4.61 4.79 4.63 4.82 4.88 5.34 5.79 7.32 7.02 10.09 10.22 12.99 15.44 17.48 22.02 18.44 18.00 15.72 13.92 17.80 23.15 27.12 29.22 26.23 30.84 30.13 29.59 28.60 27.42 34.81 MSCI EMERGING MARKETS-DATA PROCESSING & REPRODUCTION INDEX MSCI EMERGING MARKETS HARDWARE/ COMPONENTS INDEX 79.13 77.51 84.56 83.35 100.35 94.16 97.36 109.72 125.21 122.18 135.76 159.64 193.72 151.00 113.64 86.57 84.33 86.88 90.26 130.87 112.01 94.33 77.28 68.21 79.01 59.59 65.55 71.55 84.38 78.48 83.20 85.54 88.08 86.37 96.55 91.06 97.12 101.78 122.47 138.73 150.95 196.67 261.28 245.74 198.26 138.87 127.67 128.40 146.44 199.94 174.63 157.08 121.45 103.98 109.21 80.99 88.82 109.55 123.69 117.93 S&P400 CRISIL 500 SERVICES & INDIA COMPUTER COMPUTER SYSTEMS SUB-INDEX INDEX 109.32 105.97 85.59 81.97 79.03 81.08 86.6 92.8 93.94 87.17 81.01 84.48 82.42 88.44 94.97 101.95 99.11 95.75 107 120.2 115.9 129.99 142.22 134.13 122.66 140.88 137.03 123.77 101.44 114.14 33.20 31.44 28.60 27.86 28.59 32.45 33.70 45.51 39.94 50.97 52.14 61.89 72.14 80.04 97.29 89.58 82.85 81.76 79.33 98.12 121.12 168.84 196.35 150.28 165.74 167.82 173.45 164.38 158.41 196.14 MSDW INTERNATIONAL SOFTWARE INDEX MSDW INDIA SOFTWARE INDEX 282 326 363 387 411 439 409 358 360 422 523 539 595 565 589 587 604 687 702 829 891 855 763 911 789 619 606 592 565 700 320 314 284 283 272 298 339 369 410 536 541 644 764 850 1,046 977 963 923 878 1,061 1,309 1,908 2,313 1,915 2,119 2,188 2,206 2,046 1,932 2,486 35 Appendix X CASH FLOW FORECASTS Assumptions % of shares held in the form of ADSs Terminal Value Growth Rate 2.74% 3.00% Cash Flow Projections (Unless otherwise specified, all amounts are in US$ M) Time Period Year 1999 2000 2001 2002 2003 2004 Market Size Infosys Market Share (%) 4,300.00 35 6,613.05 35 10,170.35 35 15,641.18 35 24,054.87 35 36,994.46 35 Local revenues (in US$ terms) Y2K Revenues Other Revenues 135.45 322.07 1,047.48 208.31 495.32 1,610.94 320.37 0.00 3,239.26 492.70 0.00 4,981.71 757.73 0.00 7,661.48 1,165.33 0.00 11,782.73 Total Revenues 1,505.00 2,314.57 3,559.62 5,474.41 8,419.20 12,948.06 18.51 18.93 19.37 19.81 20.26 20.72 Operating Margin (%) Operating Profits Taxes 278.61 438.25 689.36 1,084.35 1,705.65 2,682.95 27.86 43.83 68.94 108.44 170.57 268.30 250.75 394.42 620.42 975.91 1,535.08 2,414.65 Depreciation 6.80 9.66 13.72 19.48 27.67 39.31 Working Capital Increases 3.92 5.59 7.96 11.34 16.15 23.00 Capital Expenditures 11.2 15.9 22.6 32.1 45.5 64.7 242.43 382.59 603.60 951.99 1,501.06 2,366.27 Net Income Free Cash Flows for the Entire Company NOTE: THESE ARE BASED ON CASEWRITER'S ESTIMATES 36 ... Inc The TJX Companies, Inc 31 Appendix VIII COMPARISON OF INFOSYS WITH BENCHMARK COMPANIES OVER TIME COMPANY MULIPLE INFOSYS TECHNOLOGIES LIMITED P/E 12/1994 P/BV Market Capitalization / Sales Market... Portfolio Management (1996) Spring, 46-58 17 Appendix I Page of FINANCIAL STATEMENTS INFOSYS TECHNOLOGIES LIMITED CONSOLIDATED BALANCE SHEETS ASSETS As of March 31, -1997 1998 ... the new principal independent accountants 18 Appendix I Page of FINANCIAL STATEMENTS INFOSYS TECHNOLOGIES LIMITED CONSOLIDATED BALANCE SHEETS LIABILITIES AND SHAREHOLDERS' EQUITY As of March