X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Infosys: Will ESOPs pinch? - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Dec 24, 2004

    Infosys: Will ESOPs pinch?

    After the rapid run over the past few months, stocks from the software sector have finally witnessed some pressure. Apart from owing to profit booking, Infosys' latest filing with the SEC (US Securities and Exchange Commission) has raised fears of Indian software companies not being able to maintain margins in the wake of rising competition from global corporations.

    In its latest filing with the SEC, Infosys' management has indicated that the company might see increasing pressure on its margins in the wake of pricing pressure on some of its services, volatility of the rupee against the US dollar and wage inflation in India. The company has also maintained that in its initiatives of moving up the value chain by providing high-end services, high onsite component might also impact its margins going forward.

    While the above factors have hurt the company's margins in the past, a new impediment in the form of 'expensing of stock options' is likely to put additional pressure. Infosys is required to adopt revised accounting policies with regard to expensing of stock options from the month of July 2005. And the company's filing with the SEC states that this change in the accounting policy with respect to the treatment of employee stock option grants will adversely affect its earnings in the future.

    While the modalities of ESOP expensing are still in the process of being finalised, we believe that it will affect profitability of the company. This risk also applies to its peers who have been following a similar strategy of employee reward and retention. The table below indicates the effect on Infosys' net profits (based on US GAAP) if the company had applied the accounting policy for stock-based compensation (SFAS Statement No. 23).

    Effect of expensing ESOPs
    (US$ m) FY02 FY03 FY04
    Reported net income 164 195 270
    Net ESOP expenses* 59 57 47
    Adjusted net income 105 138 223
    % of actual 64.0% 70.8% 82.6%
    * Determined under SFAS Statement no. 23

    As seen from the table above, Infosys' net profits reduce to 64.0%, 70.8% and 82.6% in the last three financial years if the respective expenses on account of ESOPs are charges to the P&L account. A similar calculation for Wipro reduces its net income to 77.0%, 63.1% and 79.2% in the respective years.

    While the effect of adopting the new accounting policy is likely to be clarified by the management of Infosys in the upcoming 3QFY05 result announcements, we believe that stock options (or ESOPs), apart from being a reward mechanism, will continue to be one of the most potent tools to retain people. Moreover, while companies like Infosys and Wipro are likely to have greater challenges in maintaining their profitability growth despite the new adjustments, we believe that long-term investors should look at scalability and execution capabilities as more important factors in making their investment decisions in the software sector.

     

     

    Equitymaster requests your view! Post a comment on "Infosys: Will ESOPs pinch?". Click here!

      
     

    More Views on News

    Infosys: A Decent Start to FY18 (Quarterly Results Update - Detailed)

    Jul 14, 2017

    Infosys starts FY18 on an encouraging note with a stable performance.

    Infosys: A Flat End to FY17 (Quarterly Results Update - Detailed)

    Apr 13, 2017

    Infosys ends FY17 with a 7% QoQ fall in net profit for the March quarter.

    Infosys: A Decent Quarter (Quarterly Results Update - Detailed)

    Jan 13, 2017

    Infosys has reported a 0.2% QoQ decrease in the topline and an increase of 4.6% QoQ in the bottomline for the quarter ended December 2016.

    Tech Mahindra: Our Revised View (Quarterly Results Update - Detailed)

    Aug 2, 2017

    A better than expected turnaround in performance results in a change in view.

    Wipro: A Decent Start to the Year (Quarterly Results Update - Detailed)

    Jul 27, 2017

    Digital services drive growth for Wipro in 1QFY18.

    More Views on News

    Most Popular

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    The Most Important Innovation in Finance Since Gold Coins(Vivek Kaul's Diary)

    Aug 10, 2017

    Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    5 Steps To Become Financially Independent(Outside View)

    Aug 16, 2017

    Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

    More
    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    INFOSYS LTD SHARE PRICE


    Aug 22, 2017 03:36 PM

    TRACK INFOSYS LTD

    • Track your investment in INFOSYS LTD with Equitymaster's Portfolio Tracker. Set live price alerts, get research alerts and more. Get access now...
    • Add To MyStocks

    INFOSYS LTD 5-YR ANALYSIS

    Detailed Financial Information With Charts

    COMPARE INFOSYS LTD WITH

    MARKET STATS