Management's discussion and analysis

Overview

The financial statements have been prepared in compliance with the requirements of the Companies Act, 1956, guidelines issued by the Securities and Exchange Board of India (SEBI) and the Generally Accepted Accounting Principles (GAAP) in India. Our Management accepts responsibility for the integrity and objectivity of these financial statements, as well as for the various estimates and judgments used therein. The estimates and judgments relating to the financial statements have been made on a prudent and reasonable basis, so that the financial statements reflect in a true and fair manner the form and substance of transactions, and reasonably present our state of affairs, profits and cash flows for the year.

A. Industry structure and developments

Changing economic and business conditions and rapid technological innovation are creating an increasingly competitive market environment that is driving corporations to transform their operations. Consumers of products and services are increasingly demanding accelerated delivery times and lower prices. Companies are focusing on their core competencies and using outsourced technology service providers to adequately address these needs. The role of technology has evolved from supporting corporations to transforming their business. There is an increasing need for highly skilled technology professionals in the markets in which we operate. At the same time, corporations are reluctant to expand their internal IT departments and increase costs. These factors have increased the reliance of corporations on their outsourced technology service providers and are expected to continue to drive future growth for outsourced technology services.

1. Increasing trend toward offshore technology services

Outsourcing the development, management and ongoing maintenance of technology platforms and solutions has become increasingly important to companies. The effective use of offshore technology services offers a variety of benefits to them, including lower cost of ownership of IT infrastructure, lower labor costs, improved quality and innovation, faster delivery of solutions and more flexibility in scheduling. In addition, technology companies are also recognizing the benefits of offshore service providers in software research and development and related support functions, and are outsourcing a greater portion of these activities. This has also resulted in more and more diversification in the range of services delivered offshore.

2. The India advantage

India is widely recognized as the premier destination for offshore technology services. According to the NASSCOM Strategic Review 2011, IT services exports (excluding exports relating to business process outsourcing (BPO), hardware, engineering design and product development) from India are estimated to grow by 22.7% in fiscal 2011, to record revenues of US$ 33.5 billion. The same review also forecasts that BPO exports from India are estimated to grow by 14% in fiscal 2011 to record revenues of US$ 14.1 billion. There are several key factors contributing to the growth of IT and IT-enabled services (ITES) in India and by Indian companies. Some of these factors are high-quality delivery, significant cost benefits and abundant skilled resources.

3. Evolution of technology outsourcing

The realm of technology outsourcing is changing. In an environment of rapid technological advancement, globalization and regulatory changes, companies are looking at outsourcing approaches that require their technology service providers to develop specialized systems, processes and solutions along with cost-effective delivery capabilities.

4. Global Delivery Model (GDM)

Our GDM allows us to execute services where it is most cost effective and sell services where it is most profitable. The GDM makes the best use of our large pool of highly skilled technology professionals and our 24-hour execution capabilities across multiple time zones. Other factors that make it one of the best delivery models in the world are its ability to accelerate delivery times of large projects by simultaneously processing project components; cost competitiveness across geographic regions; built-in redundancy to ensure uninterrupted services; and a knowledge management system that enables us to re-use solutions where appropriate.

Our GDM mitigates risks associated with providing offshore technology services to our clients. Speedy and effective communication being the key, we use multiple service providers and a mix of terrestrial and optical fiber links with alternate routing. In India, we rely on two telecommunication carriers to provide high-speed links interconnecting our global development centers. We rely on multiple links on submarine cable paths to interconnect our development centers with network hubs in other parts of the world. Our significant investment in redundant infrastructure enables us to provide uninterrupted service to our clients.

5. Our end-to-end solutions

We complement our industry expertise with specialized support for our clients. We also leverage the expertise of our various Centers of Excellence and our software engineering group and technology lab to create customized solutions for our clients. In addition, we continually evaluate and train our professionals in new technologies and methodologies. Finally, we ensure the integrity of our service delivery by utilizing a scalable and secure infrastructure.

We generally assume full project management responsibility in each of our solution offerings. We strictly adhere to our SEI-CMMi Level 5 internal quality and project management processes. Our project delivery focus is supplemented by a robust knowledge management system that enables us to leverage existing solutions across our Company. We use in-house tools for project management and software lifecycle support. We believe that our processes, methodologies, knowledge management systems and tools reduce the overall cost to the client, mitigate risks, enhance the quality of our offerings and allow clients to improve time-to-market for their solutions. The revenues attributed to the custom application development, maintenance and production support, product engineering, package-enabled consulting and implementation and business transformation consulting services represented a majority of our total revenues in fiscal 2011.

B. Financial condition

Sources of funds

1. Share capital

At present, we have only one class of shares – equity shares of par value 5/- each. Our authorized share capital is 300 crore, divided into 60 crore equity shares of 5/- each. The issued, subscribed and paid up capital stood at 287 crore as at March 31, 2011 (same as the previous year).

During the year, employees exercised 1,88,675 equity shares issued under the 1998 Stock Option Plan and 1,37,692 equity shares issued under the 1999 Stock Option Plan. Consequently, the issued, subscribed and outstanding shares increased by 3,26,367. The details of options granted, outstanding and vested as at March 31, 2011, are provided in the Notes to the consolidated financial statements section in the Annual Report.

2. Reserves and Surplus

2.a Capital reserve

The balance as at March 31, 2011 amounted to 54 crore. During the previous year, the addition to the capital reserve account of 48 crore is on account of transfer of profit on sale of investments in OnMobile Systems Inc., U.S. of 48 crore, which was included in the net profit.

2.b Share premium

The addition to the share premium account of 35 crore during the year is primarily on account of premium received on issue of 3,26,367 equity shares, on exercise of options under the 1998 and 1999 Stock Option Plans of 24 crore.

An amount of 11 crore (10 crore in the previous year) was credited to the share premium account arising due to tax benefits in overseas jurisdiction of deductions earned on exercise of employees' stock options, in excess of compensation charged to the Profit and Loss account.

2.c General reserves

An amount of 645 crore representing 10% of the profits for the year ended March 31, 2011 (previous year 580 crore) was transferred to the general reserves account from the Profit and Loss account.

2.d Profit and Loss account

The balance retained in the Profit and Loss account as at March 31, 2011 is 15,591 crore, after providing the interim, 30th year special and final dividend for the year of 574 crore, 1,722 crore and 1,149 crore respectively and dividend tax of 568 crore thereon. The total amount of profits appropriated to dividend including dividend tax was 4,013 crore, as compared to 1,674 crore in the previous year.

2.e Shareholder funds

The total shareholder funds increased to 24,501 crore as at March 31, 2011 from 22,036 crore as of the previous year end. The book value per share increased to 426.73 as at March 31, 2011, compared to 384.01 as of the previous year-end.

Application of funds

3. Fixed assets

3.a Capital expenditure

We incurred a capital expenditure of 1,152 crore (565 crore in the previous year) comprising additions to gross block of 1,017 crore, net of 3 crore movement in land from leasehold to freehold for the year ended March 31, 2011. An increase of 90 crore on account of increase in capital work-in-progress and 45 crore on account of decrease in retention monies. The entire capital expenditure was funded out of internal accruals.

3.b Additions to gross block

During the year, we capitalized 1,017 crore to our gross block comprising 251 crore for investment in computer equipment and the balance of 764 crore on infrastructure investment and 2 crore on vehicles. We invested 225 crore to acquire 267 acres of land in Bangalore, Delhi and Mangalore. The expenditure on buildings, computer equipment, plant and machinery and furniture and fixtures, increased by 323 crore, 251 crore, 147 crore and 69 crore respectively.

During the previous year, we capitalized 787 crore to our gross block, including investment in computer equipment of 140 crore, 646 crore on infrastructure investment and 1 crore on vehicles. We invested 43 crore to acquire 161 acres of land in Hyderabad, Jaipur, Mysore and Mangalore.

3.c Deductions to gross block

During the year, we deducted 440 crore (net book value of nil) from the gross block on retirement of assets. During the previous year, we retired / transferred various assets with a gross block of 387 crore (net book value of nil) 8 crore on donation of computer systems and 21 crore on disposal of various assets.

3.d Capital expenditure commitments

We have a capital expenditure commitment of 742 crore, as at March 31, 2011 as compared to 267 crore as at March 31, 2010.

4. Investments

We made several strategic investments aimed at procuring business benefits and operational efficiency for us. During the previous year, the Company sold 32,31,151 shares of OnMobile Systems Inc., U.S., for a total consideration of 53 crore, net of taxes and transaction cost.

4.a Majority-owned subsidiary

Infosys BPO Limited

We established Infosys BPO Limited as a majority-owned and controlled subsidiary on April 3, 2002, to provide business process management services. Infosys BPO seeks to leverage the benefits of service delivery globalization, process redesign and technology to drive efficiency and cost effectiveness in customer business processes.

On December 4, 2009, Infosys BPO acquired 100% of voting interest in McCamish Systems LLC, a business process solutions provider based at Atlanta, U.S., for a cash consideration of 173 crore and a contingent consideration of 67 crore.

4.b Wholly-owned subsidiaries

During the year, the investments in our subsidiaries were as follows :

Subsidiary	In foreign currency	crore
Infosys Technologies (China) Company Limited	US$ 9 million	42
Infosys Tecnologia do Brasil Ltda	BRL 3.8 million	10
Infosys Technologies S. de R. L. de C. V., Mexico	MXN 40 million	14
Infosys Technologies (Shanghai) Company Limited ⁽¹⁾	US$ 2.5 million	11

⁽¹⁾ During the year, Infosys Technologies Limited incorporated a wholly-owned subsidiary Infosys Technologies (Shanghai) Company Limited