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Valuation by Tanushree Seth

Valuation by Tanushree Seth. Company Snapshot. Global Headquarters: Bangalore, India Founded: 1981 Global Presence: 36 Sales Offices in 17 countries 37 Global Development Centers Employees: 49,422 LTM Dec ’05 Revenue/ 5 Year CAGR: $2,014 million/ 41%

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Valuation by Tanushree Seth

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  1. Valuation by Tanushree Seth

  2. Company Snapshot Global Headquarters: Bangalore, India Founded: 1981 Global Presence: 36 Sales Offices in 17 countries 37 Global Development Centers Employees: 49,422 LTM Dec ’05 Revenue/ 5 Year CAGR: $2,014 million/ 41% LTM Dec ’05 Net Income/ 5 Year CAGR: $530 million/ 37%

  3. Company Statistics Employer Type: Public Company Stock Symbol: INFYStock Exchange: NASDAQ Market Share price: $74.98* Key Executives President, CEO, MD: N. R. Narayana Murthy Nandan M Nilekani T. V. Mohandas PaiS. Gopalakrishnan V. BalakrishnanK. DineshS. D ShibulalSrinath Batni *As of 4/14/2006 CEO, President and MD: N.R. Narayan Murthy

  4. Outline • Overview • Investment Highlights Business model Investment positives • Addressing Key market challenges: Risks • Valuation Estimated growth rates of 30% and 25% • Comparable company analysis • Recommendation

  5. Overview Smart investments • In 1999, the firm became the first Indian company to list on NASDAQ • In 2002, Infosys started a recruiting and marketing blitz • The firm registered sales of $740 million, up 50 percent over the previous year, 2002 • In 2004, , the firm hit its first billion

  6. Overview The U.S. dream team • The company turned its attention to the U.S. consulting market in April 2004, forming Infosys Consulting • Stephen Pratt, who was named CEO of the subsidiary; Romil Bahl, former head of EDS' consulting practice; Pal Cole, former head of global operations at CGE&Y; and Raj Joshi, former CEO of Deloitte Offshore. • In April 2004, the publication eWeek.com pointed out that the move was a step toward competing in the U.S. consulting market against the big guys like Accenture.

  7. Moving forward • In 2003, Infosys launched a business-processing subsidiary, Progeon, and secured a five-year, $30-million contract from U.S. mortgage firm GreenPoint. • In November 2004, Infosys and Microsoft announced an enterprise IT transformation initiative • In December 2003, the firm announced its intentions to acquire Expert Information Services, an Australian IT services firm, for around $23 million.

  8. Infosys Work Culture • Open-door culture • Hard work, lots of passion • A piece of heaven in Bangalore

  9. Investment Highlights • Large, Expanding Addressable Market • Highly-evolved Global Delivery Model • Rapid Differentiation • Scalable Execution • Exceptional Financial performance

  10. Large, Expandable Addressable Market

  11. Offshore Outsourcing is a Mega Trend Outsourcing benefits: • Convert fixed costs to variable • Reduce TCO, enhance ROI • Improve competitiveness Offshore benefits: • Deliver high quality at great value • Highly scalable with no foreseeable supply constraints • Proven track record • Addressable market has increased Source: Infosys

  12. India: #1 Offshore Destination Corporate Executives’ Preferred Destinations for Offshore IT Services The India Advantage: Strong Track Record • High quality delivery • Significant costs benefits • Strong government support • Mature industry • Man Power • Education system • 24 x 7 working model advantage Source: Infosys: IDC Offshore Best Practices Enterprise Survey, 2004

  13. Infosys is a Premier Global IT Services Firm Key competitive advantages • Extensive domain knowledge and expertise • Comprehensive offerings • Long-term relationships with blue chip clients • Proven Global Delivery Model • Execution excellence • Competent leadership and management team Source: Infosys and Gartner 2004 5 year CAGR (LTM Dec 00-LTM Dec 05) Global IT Services 5% India IT Exports 29% Infosys 41%

  14. Business Model:Highly-evolved Global Delivery Model

  15. Highly-evolved Global Delivery Model Stage 1 Stage 2 Stage 3 Client Requirements Infosys Delivery

  16. Infosys’ Global Delivery Model 2005 ________ 2001 ________________ 1996 ______________ 1981 ____________

  17. Differentiation within the IT industry

  18. Uniquely Positioned in Global IT Services and Consulting IN PROCESS • Consulting + Solution mindset • Build stronger brand • Strengthen Board-level relationships NEED TO: • Replace resources • Overcome “offshore-is-cost-center” mindset • Combat revenue cannibalization • Provide seamless sales and delivery • Reduce SG&A

  19. Applying GDM to Consulting ----------------------------------------------------- Client Budget -------| 35% lowering total cost

  20. Drivers of Scalability SCALABLE EXECUTION LEADS TO

  21. Superior Talent Management: Hiring the Best Able to simultaneously evaluate 10,000 people across 7 cities in India Augmenting talent through new geographies China, Eastern Europe Supplementing with experienced local hires Currently hiring people 59 nationalities World Class Processes and Systems Quality par excellence: Benchmarked to Global Standards such as EFQM Award-winning Knowledge Management Processes PRIDE 2004 Asian MAKE Award Scalable Execution

  22. Flexible Organization Structure Integrated platform for delivery of end-to-end solutions from Consulting to BPM Self-governed business units By domain By Market By Service Modular and Robust Infrastructure 37 Global Development Centers (“GDC”) Ability to rapidly scale new engagements Flexibility to distribute engagements and capacity across centers worldwide Scalable Execution

  23. Exceptional Financial Performance

  24. Superior Revenue Growth

  25. Sustained Industry-leading Profitability

  26. Challenges Competitive Pricing Onsite/offshore effort Investment in sales and marketing Economic Wage inflation US$/Rupee exchange rate Infosys Strategy Continue to penetrate high value-add segments Leverage GDM+ Enhance internal productivity Leverage economies of scale and brand Move to variable salary structure and role-based compensation Proactively hedge currency exposure Addressing Key Market Challenges

  27. Valuation Inputs: Current EBIT = $491,000,000.00 Current Interest Expense = $0.00 Current Capital Spending $186,000,000.00 Current Depreciation & Amortization = $66,000,000.00 Tax Rate on Income = 14.66% Current Revenues = $1,592,000,000.00 Current Non-cash Working Capital = $302,000,000.00 Chg. Working Capital = $152,852,304.00 Cash and Marketable Securities $688,000,000.00 Value of equity options issued by firm = $52,000,000.00 Book Value of Debt = $180,000,000.00 Book Value of Equity = $1,253,000,000.00

  28. Valuation Market Value per share= $75 Number of shares outstanding= 274,530,000 Market Value of Debt= $180,000,000 Length of extraordinary growth period= 10 years Beta of the stock= 2.03 Risk Free rate= 4.86 Risk Premium= 6.60% Cost of Debt= 5.63% Estimated Growth= 30%

  29. Valuation Outputs: Return on capital= 27.20% Reinvestment Rate= 11% Cost of Equity= 18.26% Equity/(Debt+Equity)= 99.13% After-tax Cost of debt= 4.80% Debt/(Debt+Equity)= 0.87% WACC: 18.14%

  30. Valuation Current EBIT * (1 – tax rate) $419,019,400 - (Capital Spending – Depreciation) $120,000,000 - Change in WC $152,852,304 Current FCFF: $146,167,096.00

  31. NPV of FCFF

  32. NPV of FCFF

  33. NPV of FCFF

  34. NPV of FCFF

  35. Market Value at an estimated growth rate of 25% Firm is overvalued

  36. Competitive Landscape Infosys Technologies (INFY) Competitors: • Wipro (WIT) • HCL Technologies Ltd. • Satyam Computer Services (SAY) • Cognizant Technology Solutions Corp. • Syntel Inc. • Tata Consultancy Services Ltd. • i-flex • Patni Computer Systems Ltd.

  37. Comparable company analysis *Share price as per 4/10/2006 (2) Includes in-the-money outstanding options, warrants and convertible securities, treasury-adjusted. Enterprise value is market capitalization plus total debt and other value, less cash and equivalents.

  38. Comparable company analysis (2) Includes in-the-money outstanding options, warrants and convertible securities, treasury-adjusted. Enterprise value is market capitalization plus total debt and other value, less cash and equivalents.

  39. Comparable company analysis

  40. Comparable company analysis

  41. Recommendation:Buy at low

  42. Thank you!

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