Presented By: – DSO Associates (EMEA Non-Spread Team) Priya Agarwal Darshana Wairkar

Presented To: Venue: Training Room 2, DSO Associates 2nd Floor, CRISIL LTD.,Executive Analyst Kensington, SEZ Powai.

Rating Analysis includes Business Risk Analysis

Financial Analysis

Country risk Industry factors Company position Profitability/peer group comparisons

Political Risk

Economic Risk

Inflation risk

Interest rate risk

Industry-Specific Factors Risk

Institutional risk

Accounting and reporting transparency

Government regulation

Infrastructure and labor problems

Foreign exchange Rate Risk / Foreign exchange controls

Rating Rationale: Infosys Technologies Ltd: BBB/Positive/--

Constraints affecting India-based operations: The inadequate infrastructure of Indian cities and visa restrictions are two major constraints for India-based IT service providers. Infrastructure, such as transportation, power, and other amenities, is inadequate in some Indian cities where Infosys operates.

Exposure to foreign exchange fluctuations: Infosys derives more than 95% of its revenue from overseas contracts with the largest two being North America and Europe at 63.3% and 26.4% of total revenue, respectively, while its operating expenses are largely denominated in local currency. Although Infosys actively hedges its foreign currency exposure by at least two quarters, the company's profitability is nevertheless affected by currency movements. The company estimates that a 1% appreciation of the Indian rupee can reduce operating margins by as much as 50 basis points. .

Crucial Industry risk factorsFrom this extensive list the ones which have a highest impact on credit risk

Industry trends Risk Analysis Industry Structure Market size Growth potential Cyclicality Degree of competition Capital intensity Technological risk Energy cost sensitivity Regulation/Deregulation

Size consideration Diversification factors Keys to success Management evaluation Other organizational/corporate culture

considerations

Profitability- Income statement adjustmentsA.Income statement adjustments remove the effect of

foreign exchange gains/ losses; litigation reserves; write-downs and other non-recurring or extraordinary

gains/losses; un-remitted equity earnings of subsidiary

B.Interest is adjusted by Adding capitalized interest Interest computed on debt equivalents

Profitability ratios

Quality of earnings and analytical adjustments Validation of company position Trends Peer comparisons

Return on Capital employed Operating income percentage Earnings on business segment assets

Analysis of Accounting CharacteristicsDifferent national and international accounting

frameworks Differences in accounting may arise in Potential impact of pending changes in accounting

standards is monitored Delays in filing reports, restatements, investigations

by SEC or any other regulatory agency, material weaknesses identified by auditors are also assessed for impact on credit ratings

Analytical AdjustmentsAnalytical adjustments are made to the company’s reported financial statements Common analytical adjustments are

Financial Policy and Corporate Governance

Financial Policy Corporate Governance Ownership structure Organizational problems Board of directors independence and involvement

Cash flow adequacyImportant cash flow ratios areA.Debt payback ratios

FFO/total debt Debt/EBITDA

B.Debt service ratios EBITDA/Interest FOCF+ interest/interest FOCF+ interest/ interest + annual principal repayment

obligation C.Financial Flexibility

FFO/Capital expenditures

Capital Structure and Asset protection What constitutes debt?

Capital structure ratios Liquidity/Short term factors

Risk Profile

Minimal Moderate

Intermediate

Aggressive

Highly Leveraged

Excellent AAA AA A BBB BB

Strong AA A A- BBB- BB-

Satisfactory

A BBB+ BBB BB+ B+

Weak BBB BBB- BB+ BB- B

Vulnerable

BB B+ B+ B B-# The matrix does not apply to the lowest rungs of credit spectrum i.e. ‘CCC’ category and below

Note: The above grid is only an indicative framework to guide an Analyst in determining the rating.

Rating Directs

G:Drive – E-learning

Wikipedia

Investopedia