Infosys has come to be the gold standard in the Indian IT industry's success. From humble beginnings in 1981, the company today is the second largest exporter of software services from the country. It is known globally for its world-class management practices and work ethics. It has been making conscious and constant efforts to move up the software value chain and offers services like software development, maintenance, technology consulting, testing and package implementation. Infosys offers all these services through its highly integrated and widely acclaimed global delivery model. The company's revenues and profits have grown at average annual rates of 17.3% and 14% respectively during the last ten years (FY07-FY17).

Reasons to buy

	Better Cost Efficiencies Through Automation and Innovation: Infosys plans to maintain its margins by offsetting increasing employee costs with automation. The management is betting on automation as a key margin driver. In FY17 alone, Infosys could save effort of approximately 11,600 Full Time Equivalent (FTE's) through automation of lower end jobs. Most big IT services companies are investing heavily in automation of processes in their traditional businesses like BPO, application management, and infrastructure management and Infosys is among the frontrunners. Going forward, the company plans to accelerate automation and innovation, and in turn mitigate the impact of rising costs on margins.
	Consistent Client Growth: Despite the short-term headwinds, Infosys has been able to chart a robust increase in the number of clients. Apart from the steady rise in the number of clients, Infosys has successfully managed to retain clients as well, with a high share of repeat business at 97.3% in FY17. Going forward, Infosys plans to add new clients by focusing on offering a variety of new age services including cloud computing, data analytics, and artificial intelligence. Further, Infosys expects its investments in startups to help fuel innovation and help clients solve more problems. Automation and consistent innovation will help the company drive client growth.
	Strong Balance Sheet: In terms of balance sheet strength, Infosys' fundamentals remain very healthy. Infosys is sitting on a large pile of cash. The company changed its capital allocation policy from paying out 50% of PAT to 70% of Free Cash Flow. Additionally, it would payout US$ 2 billion in FY2018, however, the mode and timeline would become clear over the next few months.
	Onsite Development to Reduce Regulatory Risk: Outsourcing companies like Infosys are facing a multitude of regulatory hurdles, the biggest one being the H1B visa issue which is set to reduce Infosys' ability to bring in cheaper foreign workers to its most important market - the US. While regulatory changes like these are likely to have a short-term impact for earnings, Infosys has already been gearing up for reducing dependence on the H1B visa. Infosys has renewed its focused on increasing its presence in the US with a lot more local hiring in the past 24 months. The company is also looking at setting up development and training centres in the country and plans to hire over 10,000 American citizens for its US business. Apart from tiding over visa issues, local onsite centers will bring the company closer to their clients. Infosys is planning on a cluster based approach to increase its concentration and proximity to clients, and thus enhance its ability to attract clients.
	Consistent Improvement in Employee Utilization: One of the major drivers of profitability for a software company is the efficient use of its human resources. Large IT firms usually have several employees who at any given time are not deployed on projects. This 'bench strength' is absolutely required in case of a large deal win. The company can rapidly respond to the requirements of the client by deploying the adequate number of personnel for the project. However, if the number of such employees (as measured by the utilisation rate) becomes too large then the company's profitability will be adversely affected. This is what happened to Infosys between FY12 and FY13. The utilisation fell from 79.6% in FY11 to 72.5% in FY13. This resulted in bloated employee costs specifically at onsite locations. The company has since then implemented several corrective measures. Over time, the utilization has improved consistently and stands at a strong 82.3% as of FY17. The company will not need to hire in large numbers as it has a large bench which can be deployed on new projects. This was evident in FY17, when the company's workforce increased by just 3.3% while the topline in constant currency terms increased by 8.3%.

Reasons not to buy

	Corporate Governance - Founders vs Board: Over the past few months, Infosys has been in the news for all the wrong reasons. Primarily, the founders and the board have had public spats over executive pay and other corporate governance issues. Infosys, which has been long considered as a benchmark of corporate governance has seen its board come under attack by none other than its founders. While Infosys may not go the way of the Tata Group fiasco, it is prudent to keep tabs on the corporate governance and management situation at the company.
	H1B Visa and Regulatory Challenges: Infosys derives about 60% of its revenues from its US clients, and the US as such remains a crucial market for the software major. Recent regulatory pressures, especially the proposed changes in the H1B visa administration to limit foreign employees has potential to weigh on Infosys' margins as hiring costs increase. Infosys plans to tackle this by hiring over 10,000 American employees in the US over the next two years. With this, Infosys expects to tide over regulatory woes and focus on its core business. While the company is proactively taking measures to reduce its dependence on the H1B visa, the strict regulation is likely to cause short term headwinds for the software services sector.
	Volatility in Global IT Spend: Infosys earns about 85% of its revenues from North America and Europe alone. The company doesn't have a significant presence besides these markets. This makes Infosys very dependent on the spending by North American and European companies. In the current protectionist environment, and an overall slowdown in developed economies, Infosys could find itself vulnerable. Besides this, consulting forms a third of the company's revenues. As consulting is a discretionary expense for large global corporations, curbing such an expense in the event of an economic slowdown is common.
	Unionization Trend in the IT Sector: Large scale layoffs in the software services industry in recent times, has led to the formation of India's first independent union for information technology employees. The union, called Forum for Information Technology Employees, is set to register itself formally and will be the first independent association of its kind in the country. The union, which boasts of over 1000 online and 100 active members and 9 chapters, will work for women's safety, protect IT worker's rights and address their grievances. While unionization in the IT sector is currently in its nascent stage, the collective bargaining power can effectively limit the Infosys' ability to execute major layoffs or wage cuts in the future.

Capex

We expect the company to spend on average 4% of its consolidated revenues in capital expenditure over the next three years.

Infosys: A Good Operating Performance (Jan 13, 2018) Infosys v/s Wipro: Strategies and numbers (Apr 11, 2012) Infosys v/s Wipro: Their business strategy (Apr 4, 2012) Will Infosys and TCS disappear in 8-10 years? (Mar 28, 2012) Infosys v/s Wipro: Which is better? (Mar 21, 2012)

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