This document presents a financial analysis of the American Depositary Shares (ADS) of Infosys. It discusses the risks associated with investing in the ADS of Infosys, including interest rate risk, purchasing power risk, management risk, business risk, financial risk, global risk, intellectual property risk, liquidity risk, political risk, convertibility risk, and default risk. The analysis provides details on the ADS offering by Infosys in 1999, valuations of the ADS, and potential causes and solutions for each risk factor.

1. A Presentation
Of
Financial Engineering
On
“Risk Perception of ADS Shares of Infosys”
Compiled By,
Mudit Chandra
2012MB76
Nidhi Kumari
2012MB04
Sanatan Srivastava
2012MB30
Vijay Shukla
2012MB63
School of Management Studies
Motilal Nehru National Institute of Technology, Allahabad
1

2. Table of Contents
•
Introduction to Infosys
•
ADS & Risk Perception
•
ADS of Infosys
•
Valuation of ADS of Infosys
•
Different risks associated with ADS of Infosys
•
References
2

3. Introduction to Infosys
•
Infosys is a global leader in consulting, technology and outsourcing solutions
•
Had an Income growth of 31.5% this year.
•
Had an year on year growth of 1.6 % in EPS value.
Revenues:
US$ 2,066 million
Net Income after taxes:
US$ 383 million
Earnings per ADS:
US$ 0.67 (basic)
Total assets:
US$ 8,397 million
Cash and cash equivalents:
US$ 4,297 million
 Figures updated till September 2013
3

4. ADS & Risk Perception
•
A U.S. dollar-denominated equity share of a foreign-based company available for
purchase on an American stock exchange.
•
American Depositary Shares (ADSs) are issued by depository banks in the U.S.
under agreement with the issuing foreign company.
•
The entire issuance is called an American Depositary Receipt (ADR) and the
individual shares are referred to as ADSs.
•
Risk perception is the subjective judgment that people make about the
characteristics and severity of a risk.
4

5. ADS of Infosys
Size of Issue/ Number of equity shares
1.8 mn ADS/ 0.9 mn equity shares
Number of ADS per equity shares
2
Offer price
$ 27.88 per ADS / $ 55.76 per share
Actual price obtained
$ 34 per ADS / $ 68 per share
Premium on the offer price
22% or $ 6.12 per ADS
Issue Amount
$ 61.2 million
Green Shoe Option
15% of $ 61.2 mn = $ 9.18
Total Amount Raised
$ 70.38 million
BSE Closing Price
Rs 3201/- as on 10 March, 1999
5

6. Valuation of ADS of Infosys
•
On March 10, 1999, the closing price of Equity Shares on the Stock Exchange,
Mumbai was Rs.3,160.00, equivalent to $74.35 per Equity Share ($37.18 per ADS
on an imputed basis).
•
Translated at the Noon Buying Rate of Rs.42.50 per $1.00 on March 10, 1999.
•
Before the issue of ADS Infosys share prices increased 3 times from Third Quarter
Rs 1,486 (High) to Fourth Quarter Rs 3,405 (High).
•
Infosys ADS price was over valued because they have not quoted it on the average
price of equity share traded in fourth quarter i.e. Rs 2,496.
•
The ADSs have quoted above the issue price since the listing day.
6

7. Interest / Exchange Rate Risk
•
The risk that an investment's value will change due to a change in:
• The absolute level of interest rates,
• In the spread between two rates,
• In the shape of the yield curve or
• In any other interest rate relationship.
•
With Infosys:
• Exchange rate fluctuation between US Dollars and India Rupee.
7

8. Interest / Exchange Rate Risk
•
Causes:
• The value of Rupee declined by approximately 39.5 %
• It affected the conversion of US Dollar by the depository of any cash
dividend
• It affected the US Dollar equivalent of Indian Rupee price of equity share
on Indian Stock Exchange.
•
Solutions:
• Forward Contracts
• Hedging
8

9. Purchasing Power Risk
•
An increase or decrease in how much consumers can buy with a given amount of
money.
•
Consumers lose purchasing power when prices increase, and gain purchasing power
when prices decrease.
•
With Infosys:
• Wage rate inflation in India
• That too higher than that of US
• Resulting in higher Attrition rates which affects the performance
9

10. Purchasing Power Risk
•
Cause:
• High wage cost due to dependency on highly skilled labor
• Inability to retain additional qualified professional.
•
Solutions:
• In House Hiring
• Efficient Retention Schemes
• Investment in Training & Development rather than hiring
10

11. Management Risk
•
The
risks
associated
with
ineffective,
destructive
or
underperforming
management, which hurts shareholders and the company or fund being managed.
•
With Infosys:
• Dependency on Key Personnel
• Incapability to control and manage fast paced growth
• Loss of such Top Management Employee adversely affects the
business of the firm.
11

12. Management Risk
•
Cause:
• Over dependence on Senior Management in marketing and Research
& Development
•
Solution:
• Management Employment Agreements
12

13. Risk Related to Capital Expenditure
•
Budgeted capital expenditure of 32.4 million US Dollars in fourth quarter of Fiscal
year 1999 to equip new facilities.
•
Contractual commitments of expenditure of 6.3 million US Dollars
•
It will increase the company’s fixed cost
•
It will adversely affect if the company fails to generate revenue propotionately
13

14. Business Risk
•
The possibility that a company will have lower than anticipated profits, or that it
will experience a loss rather than a profit.
•
With Infosys:
• Loss of a major client
• Competitor
• Maintenance of infrastructure
14

15. Business Risk
•
Cause:
• The company’s believes that it will continue to derive a significant portion
of its revenues from a limited number of large corporate clients.
• Market is highly competitive including competitors that are international
firms as well as national, regional and local firms located in US, Europe
and India.
•
Solution:
• Extensive voluntary disclosure about risk management.
• People, process and technology.
• Role of the board ( SAP Software)
15

16. Financial Risk
•
The possibility that shareholders will lose money when they invest in a company
that has debt, if the company's cash flow proves inadequate to meet its financial
obligations.
•
With Infosys:
• Potential fluctuation in operating results.
• Estimating, planning and performing fixed- price, fixed- time frame
projects.
• Insurance coverage.
16

17. Financial Risk
•
Cause:
• Company believes that periodic comparisons of its results of
operations are not necessarily meaningful.
• Substantial investment in new facilities.
•
Solution:
• Documentation and legal agreement
• Timely measurements and reporting of exposures.
• Capital structure.
17

18. Global Risk
•
External (environmental) risk outside the influence of a country's government.
•
With Infosys:
• International policies.
• Restrictions on Foreign Investment.
• Administering its business globally.
18

19. Global Risk
•
Cause:
• Changes in existing US immigration laws that make it more
difficult for the Company to obtain H-1B and L-1 visas.
• Inability to convert Equity shares into ADSs.
•
Solution:
• Operational efficiency and effectiveness.
• Take approvals before implementation.
• Focus on insight, not just data and analytics.
19

20. Intellectual Property Risk
•
Risk related to copying of innovation for the monetary benefits of others.
•
With Infosys:
• Registration of trademarks, copyrights and patents.
• IPR infringement.
• Contracts and license agreement.
20

21. Intellectual Property Risk
•
Cause:
• Less concerned about registered trademarks, copyrights and patents in US.
• Competitors are able to obtain patents for software product and processes.
•
Solution:
• Formal clearance procedure.
• Intellectual property registration.
• Formulate response plan.
21

22. Liquidity Risk
•
Lack of marketability of an investment
•
Reflected in unusually wide bid-ask spreads
•
Inability to easily exit a position
•
With Infosys
• Delay in conversion in rupee.
• Fluctuation of Rupee against Dollar.
22

23. Liquidity Risk
•
Causes
• Convert rupee proceeds from a sale in India into foreign currency will
have to obtain RBI approval for each such transaction.
•
Solution
• Foreign exchange reserve
• Stop self prophecy & try to build strong Brand Loyalty.
23

24. Political Risk
•
Civil unrest
•
Unstable Govt.
•
Hostilities among neighboring countries
•
Policy amendments
•
With Infosys
• There will be operational difficulties.
24

25. Political Risk
•
Causes
• United States imposed ban economic sanction against India in
response to India’s testing of nuclear devices.
•
Solution
• Increase capital reserve
• Stay calm; don’t poke your nose into any new venture
• Majority of its revenue will continue to be generated in US dollars for
the foreseeable future and that a significant portion of the co.’s
expenses
25

26. Convertibility Risk
•
Inability to convert equity shares into ADS
•
More time taking, complex procedure
•
Not getting actual value while conversion
•
With Infosys
• Conversion of ADS into Indian currency isn’t easy task
26

27. Convertibility Risk
•
Causes
• RBI approval is essential if you want to convert it
•
Solution
• Try to float more shares within that particular market
• Return in their currency
27

28. Default Risk
•
Unable to make the required payments on their debt obligations
•
Failing to repay principal and interest in a timely manner
•
With Infosys
• Potential fluctuation in Their operating profit
28

29. Default Risk
•
Cause
• Due to fluctuation in Dollars their expenditure will be increased
•
Solution
• Operational efficiency
• Diversify their area of service
29

30. References
•
Annual Report, 2013, Infosys
•
Red Herring Prospectus, ITL Infosys , March 1999
•
“http://www.infosys.com/about/Pages/index.aspx”, as retrieved on 16 November 2013.
•
“www.investopedia.com/definitions/index.aspx”, as retrieved on 16 November 2013.
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