“Risk Perception of ADS Shares of Infosys”

A Presentation

Of

Financial Engineering

On

School of Management StudiesMotilal Nehru National Institute of Technology, Allahabad

Compiled By,

Mudit Chandra 2012MB76

Nidhi Kumari 2012MB04

Sanatan Srivastava 2012MB30

Vijay Shukla 2012MB63

1

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

Introduction to Infosys

3

• 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

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

ADS of Infosys

5

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

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

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.

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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

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

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

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

Management Risk

• Cause:

• Over dependence on Senior Management in marketing and Research

& Development

• Solution:

• Management Employment Agreements

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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

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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

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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)

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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.

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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.

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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

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.

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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.

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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.

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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.

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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.

 

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Political Risk

• Civil unrest

• Unstable Govt.

• Hostilities among neighboring countries

• Policy amendments

• With Infosys

• There will be operational difficulties.

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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

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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

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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

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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

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Default Risk

• Cause

• Due to fluctuation in Dollars their expenditure will be increased

 

• Solution

• Operational efficiency

• Diversify their area of service

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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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