January 16, 2015

Infosys Ltd. (INFY-NYSE)

Current Recommendation NEUTRAL Prior Recommendation Outperform Date of Last Change 04/08/2014

Current Price (01/15/15) $34.17 Target Price $36.00

SUMMARY Infosys came up with decent third-quarter 2015 SUMMARY DATA results with earnings exceeding both the Zacks Consensus Estimate and year ago figure. Strong 52-WeekRisk HighLevel * $34.94 Below Avg.,volume growth along with increased productivity 52-WeekType Low of Stock $25.38 Large-Growthlevels and utilization rates were the positives. One-YearIndustry Return (%) 15.61 It ServicesFurthermore, the company has formed a number of Beta Zacks Industry Rank * 1.34 158 out of 267strategic collaborations that are expected to drive Average Daily Volume (sh) 2,547,153 growth, going forward. However, strengthening U.S. ZACKSdollar CONSENSUS negatively affected ESTIMATES the company’s revenues in Shares Outstanding (mil) 1,143 the quarter under review. Also, reduced spending in Market Capitalization ($mil) $39,056 Revenue Estimates (In millionsIT of technologies, $) stiff competition and a persistent Short Interest Ratio (days) 14.95 Q1 Q2 Q3 Q4 Year Institutional Ownership (%) 9 volatility in exchange rates remained the concerns. (Jun) (Sep) (Dec) (Mar) (Mar) Insider Ownership (%) 22 Hence, our Neutral recommendation on Infosys 2013remains1,752 A in place.1,797 A 1,911 A 1,938 A 7,398 A

Annual Cash Dividend $0.58 2014 1,991 A 2,066 A 2,100 A 2,092 A 8,249 A Dividend Yield (%) 1.69 2015 2,133 A 2,201 A 2,218 A 2,259 E 8,784 E 2016 2,283 E 2,335 E 2,448 E 2,639 E 9,601 E 5-Yr. Historical Growth Rates Sales (%) 12.2 Earnings Per Share Estimates Earnings Per Share (%) 7.9 (EPS is operating earnings before non-recurring items, but including employee Dividend (%) 6.3 stock options expenses) Q1 Q2 Q3 Q4 Year (Jun) (Sep) (Dec) (Mar) (Mar) P/E using TTM EPS 19.5 2013 $0.37 A $0.38 A $0.38 A $0.39 A $1.52 A P/E using 2015 Estimate 19.4 2014 $0.37 A $0.37 A $0.41 A $0.43 A $1.58 A P/E using 2016 Estimate 17.9 2015 $0.42 A $0.44 A $0.46 A $0.44 E $1.76 E 2016 $0.44 E $0.46 E $0.48 E $0.53 E $1.91 E Zacks Rank *: Short Term 1 – 3 months outlook 3 - Hold Projected EPS Growth - Next 5 Years % 15 * Definition / Disclosure on last page © 2015 Zacks Investment Research, All Rights reserved. www.Zacks.com 10 S. Riverside Plaza, Chicago IL 60606 OVERVIEW clients to reduce maintenance costs. Infosys also deploys a small group of on-site Headquartered in Bangalore, India, Infosys consultants for its clients, to help streamline Technologies is the one of the largest IT and coordinate its support functions. services company in India. Founded in 1981, the company enables its clients to leverage its Software Re-engineering – This service helps performance by utilizing its proprietary Global its customers to convert existing IT Systems to Delivery Model (‘GDM’). newer technologies and platforms developed by third-party vendors. An example of this type of Infosys operates across six business segments service by Infosys would be to help a client – Financial services and insurance (FSI), move from a client-server platform to an Manufacturing (MFG), Energy & utilities, Internet platform. Communication and Services (ECS), Retail, Consumer packaged goods and Logistics Package Evaluation and Implementation – (RCL), Life Sciences and Healthcare (LSH) and Infosys is able to assist its clients in the Growth Markets (GMU). Infosys markets its evaluation and implementation of third-party services to large enterprises in North America, software packages and provides training and Europe and the Asia Pacific region. support services in the course of Infosys has a strong market presence in North implementation. It specializes in enterprise America and is working toward expanding its resource planning packages developed by presence in Europe. The range of services vendors such as SAP or Oracle, Business offered by the company includes: Intelligence packages from vendors such as Business Objects and Cognos, and enterprise Business Process Management (BPM) application integration packages from vendors Services – Infosys, through its subsidiary such as IBM and TIBCO. Progeon, Ltd., offers its customers the chance to outsource several process-intensive Other Solutions – Other solutions consist of functions related to Customer Relationship new offerings that are expected to grow as the Management, Finance and Accounting, and company expands its businesses and currently Administration and Sales Order Processing. include: Testing Services, Engineering Services, Operations and Business Process IT Consulting – The company’s consultants Consulting, Systems Integration, and offer technical advice in developing and Infrastructure Management Services. recommending appropriate IT architecture, hardware and software to deliver IT solutions designed to meet specific business needs of its clients.

Custom Application Development – Infosys is able to create new customized software solutions for its clients, and can increase the functionality of existing software solutions. These projects vary, but are typically longer REASONS TO BUY than one year and include all aspects of the software development from designing and prototyping to integration and installation across  Infosys brings together its expertise and several software platforms. core competence in consulting, IT services and business process management to Maintenance and Production Support – create solutions that allow clients to Offering a team of consultants based in India transform their businesses, optimize that works to provide maintenance and support operations and drive innovation, thereby functions for existing software systems across a making them more competitive in their wide range of technologies, Infosys helps its operating market. The company’s suite of comprehensive, end-to-end business

Equity Research INFY | Page 2 solutions that leverage technology, enable it its global ecosystem of strategic partnership to offer services through its broad network by investing in innovative firms. Out of this of relationships. Moreover, it facilitates the company recently dedicated $250 Infosys to increase the dialogue with key million towards the 'Innovate in India Fund’. decision makers within each client, and This initiative is to aid the development of raise the points of sale for new clients. the most promising start-ups in India and Hence, over the past few quarters, the which thereby will be incorporated in the company has been witnessing volume company’s global ecosystem of strategic growth, client additions, significant deal wins partners. and increased sales momentum in its business In the reported quarter too, the  Infosys has been strengthening its core company witnessed volume growth of about competencies by pursuing strategic 4.2% – the highest figure in over 3 years – collaborations in its domain. The company’s which is noteworthy and promises bright alliance strategy is targeted at partnering growth prospect. with leading technology providers, which allows it to take advantage of emerging  Moreover, Infosys relies on its GDM for technologies in a mutually beneficial and the efficient and economic development of cost-competitive manner. In the reported its business solutions, which enables the quarter, Infosys formed strategic partnership company to design IT platforms from with Deutsche Bank for integrating and initiation to completion and carry on with revamping the latter’s enterprise application ongoing maintenance work using its systems. Additionally, the company’s workforce on-site and/or at its development Finacle core banking platform is gaining centers located in India and abroad. The momentum. The platform has been selected economic cost structure and quality control by the U.S. based- Discover Financial measures ensure the desired quality and Services for enhancing their banking system scheduled project execution within a set and operational efficiency. timeframe, cheaper than if all the personnel were on site. All these enable Infosys to generate sufficient dry powder to fuel its REASONS TO SELL growth. At present, the company has a robust financial position with cash & cash  The company business is highly prone to equivalents of $5,080 million as of Dec 31, the currency volatility between the Indian 2014 and no long-term debt. Rupee and the U.S. Dollar as majority of its revenues are derived from the U.S.  Infosys has realigned its business markets. The recent appreciation of the portfolio to deepen its focus on enhancing rupee against the U.S dollar can have client relationships, productivity, market severe implications for the company’s share and creating service differentiation business. During fiscal 2014, fiscal 2013 through a culture of innovation and agility. In and fiscal 2012, there was volatility in the his efforts to equip Infosys for the increasing exchange rate of the Indian rupee against industry requirements and to outpace its the U.S. dollar. During fiscal 2014, 2013 peers, Vishal Sikka, the current CEO of and 2012, the average exchange rate for Infosys has taken initiatives like ‘design one dollar was 60.75, 54.54 and 48.10 thinking’ to enhance the training and respectively. In the reported quarter, the knowledge base of its employees. company’s revenues bore a negative Consequently, the company has impact of around 1.8% owing to the collaborated with Stanford Graduate School unfavorable U.S. dollar exchange rates. of Business for the development of an integrated executive education program.  Spending on technology products and Furthermore, the company has also services is subject to fluctuations expanded its innovation fund from $100 depending on many factors, including the million to $500 million in order to enhance economic environment in the markets

Equity Research INFY | Page 3 where the clients operate. There was a The L.A. Health Care Plan offers healthcare decline in the growth rate of global IT services to more than 1.6 million individuals purchases in the latter half of 2008 due to residing in the U.S. Infosys Public Services has the global economic slowdown. This modernized the L.A. Health Care Plan with an downward trend continued into 2009, with innovative solution, thereby supporting global IT purchases declining due to the healthcare services for an additional 24000 challenging global economic environment. individuals of the country. In order to make the Further, Reduced IT spending in response experience easy for users, the company has to the challenging economic environment implemented the Benaissance Exchange Point has led to increased pricing pressure from financial management platform. the clients, which can adversely impact the company’s productivity. Currently, the Furthermore, in order to encourage smooth company’s financial business in the U.S. is exchange of data, the company has upgraded facing headwinds due to reduced spending the conventional riZetto QNXT application of levels in the IT industry, especially from the the L.A. Care. The innovative solutions by the large international banks. company would support the interests of the Affordable Care Act and assist in providing  Infosys can also be affected by the ongoing superior-quality subsidized health services to all demand shift from the conventional IT members. technologies to the sophisticated big data and analytics in some of the domains. The initiative, coming in the wake of Infosys’ Though the company has been leveraging social awareness, would augment its brand its big data capabilities, the traditional IT value in the global technology industry. technologies form a significant share of its Economic growth can be triggered by business. Any reduction in the budget for improvement in national income, but these can significantly weigh upon Infosys’ wholesome economic development can only be financials. On the other hand, traditional achieved with growth in both income and social technologies are expected to face pricing welfare. Health being a social good of an pressures as well over the long run. economy, equal access to healthcare is a right of all the nationals in a country.  Infosys operates in a highly competitive and rapidly changing market. The company expects intensified competition from established IT peers and may also experience rivalry from new competitors. In particular, the company expects increased Infosys Beats on Q3 Earnings, Affirms competition from firms that strengthen their Revenue Guidance – Jan 9, 2014 offshore presence in India or other low-cost locations and from firms in market segments Infosys Technologies reported third-quarter that Infosys has recently entered. fiscal 2015 earnings per ADS from continuing operations of $0.46, surpassing the Zacks Consensus Estimate of $0.43 by 7% and the RECENT NEWS year-ago earnings of $0.41 by 12.2%.

Quarterly results were primarily driven by strong volume growth as well as increased productivity Infosys Boosts U.S. Health Plan with and utilization. Further, the company has been Innovative Solutions – Jan 13, 2014 undertaking cost-optimization initiatives along Infosys Public Services has boosted the biggest with efforts to reduce attrition rates. U.S. public health plan with a new format of Additionally, the company’s ‘renew and new’ billing and payment solution. strategy is benefiting its business. Quarter in Detail

Equity Research INFY | Page 4 Total revenue came in at $2,218 million, up as of Dec 31, 2014, as against $4,331 million 5.6% year over year. However, it fell short of as of Mar 31, 2014. the Zacks Consensus Estimate of $2,260 million. Revenues were negatively impacted by Infosys has inflated its innovation fund from the strengthening U.S. dollar. $100 million to $500 million. This move comes as part of the company’s efforts to enhance its Infosys recorded an operating profit of $592 global ecosystem of strategic partnership by million compared with $526 million in the prior- investing in innovative firms related to year quarter, reflecting an increase of 12.5%. automation, Internet of things, and collaboration Meanwhile, operating margin expanded 170 and design sectors, among others. basis points to 26.7% from 22% in the comparable prior-year quarter. Net profit after Outlook Reiterated tax deductions came in at $522 million in the quarter, up 12.7% year over year. Infosys reaffirmed its revenue guidance for fiscal 2015 in the range of 7–9%, considering Infosys witnessed high sales volume, client the exchange rates on Sep 30, 2014. additions and significant deal wins in the VALUATION quarter. The company added 59 new clients in total and notable among them is the strategic Infosys’ current trailing 12-month earnings partnership with Deutsche Bank. multiple is 19.5X, compared to the 146.3X Moreover, the company formed various average for the peer group and 18.5X for the collaborations with diverse entities like S&P 500. Over the last 5 years, the company’s DreamWorks Animation, Tableau Software shares have traded in a range of 12.9X to Partner and Stanford Graduate School of 30.3X trailing 12-month earnings. The stock is Business to drive growth in the quarter. trading at a discount to the peer group based on forward earnings estimates. Geographical Segment Performance Our long-term Neutral recommendation on the Infosys reported strong growth in regions like stock indicates that it will perform in line with North America and India. North America the broader market. Our target price is $36.00 witnessed growth rates of 2.1% sequentially or 20.5X 2015 EPS, which is well within the and 2.3% on a constant currency basis. India’s historical range. growth rate was 14% on a sequential basis and 16.7% on constant currency basis. Key Indicators P/E P/E Europe reported a sequential decline of 2.1%, 5-Yr 5-Yr P/E P/E Est. 5-Yr P/CF P/E High Low but the company’s growth on a constant F1 F2 EPS Gr% (TTM) (TTM) (TTM) (TTM) currency basisInfosys was Ltd. (INFY)1.9%. On the other hand, 19.4 17.9 14.6 19.6 19.5 30.3 12.9 Rest of the world reported a decline of 2.3% sequentially,Industry but Averagegrowth of 3.4% on a constant 254.7 60.0 15.7 28.0 146.3 233.5 67.2 S&P 500 16.0 15.0 10.7 15.9 18.5 19.4 12.0 currency basis. CDW Corporation (CDW) 14.1 12.8 12.5 11.6 15.6 15.5 13.1 Industry SegmentCyber-Ark Software Performance Ltd. (CYBR) 3775.0 471.9 25.0 NA NA NA NA Science Applications International Corporation (SAIC) 18.0 15.9 6.0 19.9 18.1 19.3 11.5 RevenuesAmdocs in the Ltd. FSI(DOX) segment grew 1.8% 15.1 14.3 8.0 11.8 16.0 17.1 12.2 sequentially, while that TTM in is MFG trailing division12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow improved 1.4%. Also, revenues in the RCL and ECS divisions rose 1.1% and 1.9%P/B year over Last P/B P/B ROE D/E Div Yield EV/EBITDA year, respectively. Qtr. 5-Yr High 5-Yr Low (TTM) Last Qtr. Last Qtr. (TTM) Infosys Ltd. (INFY) 4.5 7.6 3.3 24.9 0.0 1.7 12.7 Other Financial Details Industry Average Infosys maintained a strong liquidity13.5 position13.5 13.5 5.1 0.9 0.6 -69.7 with cash S&P& cash 500 equivalents of 5.1$5,080 million9.8 3.2 24.8 2.0

Equity Research INFY | Page 5 Equity Research INFY | Page 6 Earnings Surprise and Estimate Revision History DISCLOSURES & DEFINITIONS

The analysts contributing to this report do not hold any shares of INFY. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts’ personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts’ compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1109 companies covered: Outperform - 15.3%, Neutral - 78.4%, Underperform – 6.0%. Data is as of midnight on the business day immediately prior to this publication.

Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company’s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock’s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively.

Analyst: Prachi Jhunjhunwala Content Editor: Lekha Gupta QCA: Supriyo Bose Reasons for Update: Q3 Earnings Update

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