Meeting the challenges of global competition – Financial excellence T. V. Mohandas Pai

Analyst Meet 2003© Infosys Technologies Limited Slide 1 Agenda »Guidance »Cost structure built to meet competitive challenges »Mitigating the impact of rupee appreciation »Meeting the competitive challenges »Others »Cash policy »Stock option accounting

Guidance

Analyst Meet 2003© Infosys Technologies Limited Slide 3 The environment »Competitive landscape is challenging »Customers »Enhanced focus on cost savings »Prefer end-to-end players »ROI conscious »GDM becoming mainstream »Weak US economic environment »Visa issues

Analyst Meet 2003© Infosys Technologies Limited Slide 4 Our guidance in April 2003 »Our guidance in April 2003 was given in the background of »Uncertain US economy »Iraq war and consequent pressure on IT spending »SARS impact – lesser client and prospect visits »Impact of rate pressures anticipated – % for the fiscal estimated

Analyst Meet 2003© Infosys Technologies Limited Slide 5 What changed since then… »Macro environment »Uncertainties related to Iraq war and SARS subsided »Competitive factors »Pricing decline lesser than anticipated »Business gains »Stronger volume growth than estimated »Benefit of higher offshore revenues »Internal cost optimization initiatives »Improvement in utilization »Reduced cost of onsite subcontractors »Rationalized onsite non-billable resources »Others »Accounting estimates »Change in estimated tax liability

Analyst Meet 2003© Infosys Technologies Limited Slide 6 What has not changed since then… »Offshore becoming mainstream »Uncertain US economy »Competition from global majors

Analyst Meet 2003© Infosys Technologies Limited Slide 7 Upward guidance revision - July 2003 Guidance Growth rate over previous Year aGuidance provided on April 10 Infosys Stand Alone Revenues (Rs.Cr)4,408 – 4, % % EPS (Rs)161 – % % Progeon Revenues (Rs.cr)76 – % % Consolidated Revenues (Rs.Cr)4,484 – 4, % % EPS (Rs)162 – % % bRevised guidance Infosys Stand alone Revenues (Rs.Cr)4,420 – 4, % % EPS (Rs) % % Progeon Revenues (Rs.cr) % - 307% Consolidated Revenues (Rs.Cr)4,496 – 4, % % EPS (Rs) % %

Analyst Meet 2003© Infosys Technologies Limited Slide 8 Upward guidance revision - July 2003 c Revision in EPS guidance attributed to: Original EPS guidance (Rs) Less : decrease in EPS on account of rupee appreciation (April 10 guidance based on Rs while current is Rs 46.40)(3.40)(3.44) Add : Reduction in tax reestimated at 4.8% of revenues as against 5.3% on April Scale benefit on enhanced revenues Revised EPS Guidance (Rs.)

Analyst Meet 2003© Infosys Technologies Limited Slide 9 Guidance factors the challenges »Factored in the pricing decline »Pricing decline for first quarter lower than anticipated »Pricing challenges continue and we have factored in a decline in prices for the full year »Impact of salary revisions »Substantial part of savings from expense optimization ploughed back for variable salary increases »Salary increases for the full year as a percentage of revenue expected to be between 1.0 – 1.4% »Enhanced revenues - scale benefits on SG&A costs

Cost structure built to meet competitive challenges

Analyst Meet 2003© Infosys Technologies Limited Slide 11 Robust cost structure (as % of total revenue ) Income StatementFY 2001FY 2002FY 2003Q1 FY04 Income100 Software development expenses Gross Profit Selling, General and Administration expenses Sales and Marketing expenses General and administration expenses Total SG&A Expenses Operating profit before Interest, Deprn and Amortization Interest0000 Depreciation and amortization Operating profit after Interest,Deprn and Amortization Other income Provision for investments Profit before tax Provision for Taxation Profit after tax Extraordinary income Net Profit after Tax

Analyst Meet 2003© Infosys Technologies Limited Slide 12 Direct costs »Offshore salaries – variable salary proportion – 15% average and 35% at senior levels »US salaries »Per-capita monthly cost of US$ 6,400 is one of the highest in the Indian software industry »Full compliance with H1-B minimum wage regulations »We pay the same salaries for H1-B and L1 employees Note : Perdiem costs re-classified from travel to onsite personnel costs (as % of total revenue ) Software Development ExpensesFY 2001FY 2002FY 2003Q1 FY 2004 Employee Costs Offshore personnel costs Onsite personnel costs Total personnel costs Staff welfare Foreign travel expenses consumables Cost of software packages own use Service delivery to client Provision for post-sales client support0.1 (0.20)0 Computer maintenance Communication expenses Consultancy services Total

Analyst Meet 2003© Infosys Technologies Limited Slide 13 Direct costs »Other direct costs – excluding personnel, contractor and travel costs »Q1 – increase of 0.5% in cost of software for service delivery to clients »Scope for escalation of other costs is limited

Analyst Meet 2003© Infosys Technologies Limited Slide 14 S&M costs »Repeat business - 88% and 92% in fiscal 2002 and 2003 respectively (% of total revenue) Sales & Marketing ExpensesFY 2001FY 2002FY 2003Q FY04 Salaries and bonus including overseas staff expense: Foreign travel expenses Brand building Professional charges Commission charges Marketing expenses Telephone charges0.1 Rent Office maintenance Other expenses Total

Analyst Meet 2003© Infosys Technologies Limited Slide 15 G&A costs (% of total revenue) General & Administration ExpensesFY2001FY 2002FY2003Q1 FY 04 Salaries & Bonus including overseas staff expenses Professional Charges Rent Power & Fuel Telephone Charges Office maintenance Traveling & Conveyance Provision for bad & doubtful debts Insurance Charges Repair to building Donations Other Expenses Total

Analyst Meet 2003© Infosys Technologies Limited Slide 16 Depreciation »Projected capex for FY 2004 – Rs crores in Rs. Crore FY 2001FY 2002FY 2003Q1 FY04 Revenue ( Rs. Cr.) Depreciation & amortization % to Total Revenue Depreciation & amortization

Analyst Meet 2003© Infosys Technologies Limited Slide 17 Tax expense »Full tax compliance in all countries of operations »Tax charge depends upon »Proportion of onsite versus offshore revenues »Proportion of revenues from various countries of operations »Quantum of other income »Accounting policy »Computed using the tax effect accounting method »Provision is made for income taxes annually based on tax liability computed after considering tax allowances and exemptions »Deferred tax assets or liabilities recorded for timing differences

Analyst Meet 2003© Infosys Technologies Limited Slide 18 Tax expense »Effective tax rate expected to come down to about % for the rest of the year »Pricing decline factored »Lesser taxable income overseas than anticipated »4.8% of revenues for Q1FY04. Expected to remain at these levels for the rest of the year »Previous year Indian tax liability higher on account of 10% taxability provision under section 10A of Indian Income Tax Act Initial GuidanceRevised guidance Tax / Revenue % Domestic taxes1.4% Foreign taxes3.9%3.4% Total5.3%4.8%

Mitigating the impact of rupee appreciation

Analyst Meet 2003© Infosys Technologies Limited Slide 20 Impact of rupee appreciation in the first quarter »Rupee has appreciated by »an average of 1.5% in Q1 FY04 »on a quarter end to quarter end basis, it has appreciated by 2.4%. »Impact of translation differences %, mitigated by gains on forward contracts US dollar Exchange Rate Average Rate Period end rate Q4FY Q1FY % appreciation-1.5%-2.4% Q1- Impact of Currency Movement (% of revenues) US dollar Other CurrenciesTotal Impact on Gross Margin-0.70%0.09%-0.61% Translation impact-1.33%0.18%-1.16% Net Impact of Rupee depreciation / Appreciation-2.01%0.25%-1.76% Gains on forward Contracts 1.88% Net Impact 0.12%

Analyst Meet 2003© Infosys Technologies Limited Slide 21 Mitigating the impact.. »Impact of Rs. 100 crore on full year revenues - on initial revenue guidance in rupee terms »Exchange rate of Rs adopted in July compared to Rs for guidance provided in April »Hedge for the next two quarters »Over $250 million sold forward at an average rate of about Rs »Translation adjustments on account of sharp appreciation at quarter end could have an impact

Meeting the competitive challenges

Analyst Meet 2003© Infosys Technologies Limited Slide 23 Structural advantage of the Global Delivery Model Latest quarter available AccentureKPMG - BEIBMEDSINFOSYS QE Jun 03QE Jun 02QE Mar 03 QE Jun 03 Revenue100.0% Cost of Revenue68.3%75.9%64.0%92.3%57.0% Gross Profit31.7%24.1%36.0%7.7%43.0% Selling Expenses*7.5% General & Administrative Expenses7.6% SGA Expenses20.1%20.2%25.6%9.6%15.1% Operating Income11.6%3.9%10.4%-1.9%27.9% Total Other Income & (Expenses) (Net)1.2%0.5%-0.4%0.0%2.3% Amortization of stock compensation exp0.2% Amortization of intangible assets0.3% Interest Expenses0.1%0.4%0.2%1.1%0.0% Earnings before tax12.7%4.0%9.8%-3.0%29.7% Income Tax Expenses4.8%3.8%3.0%-1.0%4.7% Minority Interest4.1%0.0% Net Income from Consulting Operations3.8%0.2%6.8%-2.0%25.0% * Breakup of S&M and G&A not available for all companies Source : Publish Reports

Analyst Meet 2003© Infosys Technologies Limited Slide 24 Meeting the competitive challenges »The challenges and how we are geared »Pricing and margin challenges »Increasing offshore revenues »Moving up the value chain »Improving utilization rates »Wage inflation »Variable employee compensation »Sales and marketing »Scale benefits from S&M investments already made

Analyst Meet 2003© Infosys Technologies Limited Slide 25 Increasing offshore Quarterly Annual Q1 02Q2 02Q3 02Q4 02Q1 03Q2 03Q3 03Q4 03Q1 04FY 02FY 03 Effort - Services Onsite5,7995,8745,9616,5397,5778,6349,63410,92411,59024,17336,769 Offshore12,03712,60313,08013,34414,49915,54117,06819,20122,08351,06466,309 Total Sequential growth Onsite1.3%1.5%9.7%15.9%14.0%11.6%13.4%6.1%52.1% Offshore4.7%3.8%2.0%8.7%7.2%9.8%12.5%15.0%29.9% Total3.6%3.1%4.4%11.0%9.5%10.5%12.8%11.8%37.0% Effort mix Onsite32.5%31.8%31.3%32.9%34.3%35.7%36.1%36.3%34.4%32.1%35.7% Offshore67.5%68.2%68.7%67.1%65.7%64.3%63.9%63.7%65.6%67.9%64.3% Total100.0%

Analyst Meet 2003© Infosys Technologies Limited Slide 26 Moving up the value chain

Analyst Meet 2003© Infosys Technologies Limited Slide 27 Improving utilization rates Quarterly Annual Q1 02Q2 02Q3 02Q4 02Q1 03Q2 03Q3 03Q4 03Q1 04FY 02FY 03 Utilization Utilization-excluding trainees73.2%72.7% 72.9%80.2%84.2%82.2%82.1%83.9%72.9%82.2% Utilization-including trainees69.5%68.8%69.6%72.4%78.9%78.1%76.1%77.8%77.3%70.1%77.6%

Analyst Meet 2003© Infosys Technologies Limited Slide 28 Variable employee compensation »Variable compensation proportion averages 15% for the company and 35% at senior levels »Variable compensation tied to »Attainment of revenue targets »Attainment of operating margin targets »Department, team and individual performance »Onsite salary costs increases to be controlled

Analyst Meet 2003© Infosys Technologies Limited Slide 29 Scale benefits from SG&A expenses Q1 02Q2 02Q3 02Q4 02Q1 03Q2 03Q3 03Q4 03Q1 04FY 02FY 03 SGA expenses( Rs. Cr) Sales and Marketing General & Admn Total SGA expenses ( % of revenue) Sales and Marketing4.5%5.1%5.0%5.3%7.2%7.9%7.7%6.8%7.4%5.0%7.4% General & Admn9.6%7.8%7.7%7.5% 7.1%7.3%7.9%7.5%8.1%7.5% Total14.1%13.0%12.7% 14.7%15.0% 14.7%14.9%13.1%14.8%

Analyst Meet 2003© Infosys Technologies Limited Slide 30 Investment in S&M »Employees in client facing roles

Cash Policy and Stock Option Accounting

Analyst Meet 2003© Infosys Technologies Limited Slide 32 Our cash policy »Need for high liquidity on the Balance Sheet »Cash flow business »Remains a high-growth high-risk business »Global operations prone to government risks »Financial risk not to be added to existing business risk »Adequate liquidity needed at all times to seize business opportunities »Liquidity not available in case of need considering high risk in the business »Over 49% of revenues comprises aggregate employee costs – no credit available »Financial policies »Capex to be met out of internal accruals »Dividend to be paid out of annual cash surpluses after meeting capex requirements »Return on Capital employed – 2x Cost of Capital »FY x »LTM June x »Return on Invested capital – 3x Cost of Capital »FY x »LTM June x

Analyst Meet 2003© Infosys Technologies Limited Slide 33 Stock option accounting »Major developments on this front recently »Microsoft announcement »Being discussed internally

Analyst Meet 2003© Infosys Technologies Limited Slide 34 In a nutshell »We are geared to meet the competitive challenges »Focus on enhancing offshore business »Target utilization gains »Improve margins by improving service mix »Enhanced variable component in compensation costs »Lesser escalation in onsite compensation costs »Continuous expense optimization measures »Rigorous control of G&A costs »Scale benefits on S&M costs »Liquidity on the balance sheet »Debt-free status

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