Exchange Rate Risk: Most of the IT sector’s revenues were denominated in foreign currency, mainly in US dollars (US$), euros, British pounds (GBP), Australian dollars (AUD), Canadian dollars (CAD), South African rands (ZAR), and Swiss francs (CHF). At the same time, costs were denominated in Indian rupees (INR). Any appreciation in the Indian currency made Indian exports dearer in the international market. .

Finance Case Studies | Case Study in Management, Operations, Strategies, Business Environment, Case Studies

PayPal (7 USD)

RISK MANAGEMENT AT INFOSYS

Infosys followed a formal and comprehensive approach toward risk management. The company had a detailed risk management framework which was implemented at every level (Refer to Exhibit V for risk management framework at Infosys). At the Board of Directors (BoDs) level, this framework ensured that the executive management focused on risk while executing business objectives. The company had a Risk and Strategy Committee (RSC) of six independent directors. This committee monitored and approved the risk management framework and related practices. It also reviewed and approved the risk-related disclosures of the company.

FOREIGN EXCHANGE RATE RISK

The major risk for Infosys was exchange rate risk as it faced risks related to exchange rate fluctuations due to the fact that it provided sales and services in foreign currency. Infosys earned 67.7% of its income in FY2018 in US dollars, 11.3% in euros, and 7.8% in Australian dollars (Refer to Exhibit VI for currency-wise revenues of Infosys). On the other hand, the Functional currency (capital and operating expenses) of Infosys was the Indian rupee (exceptions included Infosys Australia, Infosys China, Infosys Americas, and Infosys Sweden) and most of the company’s expenses were in Indian rupees.

INFLATION AND COST STRUCTURE RISK

Infosys operated from India, a developing country, which had a higher inflation rate compared to the developed countries. The higher inflation rate could disturb the company’s cost structure, leading to low margins and even make it less competitive...

LIQUIDITY RISK

Infosys was a highly liquid company, which kept a significant share of its assets in the form of cash and cash equivalents. This was the major source of liquidity for the company (Refer to Exhibit XII for liquidity position of Infosys). Infosys needed to keep enough funds to continue its operations in an unfavorable environment and make investments in R&D. Thus, an essential part of the company’s de-risking strategy was to have a liquid balance sheet and to sustain profitability. At the end of FY17, the company did not have any outstanding bank borrowings. It had Rs. 396.92 billion as working capital which included Rs. 226.25 billion of cash and cash equivalents and a current investment worth Rs. 99.70 billion.

CREDIT RISK

Infosys faced a credit risk largely due to trade receivables and unbilled revenue mostly earned from the US. Trade receivables and unbilled revenue were mostly unsecured. The company had well-established credit policies to manage credit risk. It managed this risk by credit approval, a well-defined credit limit, and regular monitoring of customers’ creditworthiness. Normally, the credit period at Infosys was in the range of 30 to 60 days. By the end of FY17, the company had Rs. 123.22 billion (Rs. 113.30 billion in FY16) of trade receivables and Rs. 36.48 billion (Rs. 30.29 billion in FY16) of unbilled revenue and sales outstanding of 68 days (66 days in FY16).

LOOKING AHEAD

The objective of risk management would always be to even out the volatility of cash flow and create value for the shareholders. In a highly competitive and turbulent period, the risk management systems in place would come under pressure and the various assumptions put in place would be questioned.

EXHIBITS

Exhibit I:Consolidated Three Years Profit & Loss Account of Infosys
Exhibit II: Consolidated Three Years Balance Sheet of Infosys
Exhibit III: Revenue of Infosys by Industry (in %)
Exhibit IV: Revenue of Infosys by Geography (in %)
Exhibit V: Risk Management Framework at Infosys
Exhibit VI: Currency-wise Revenues (in Percentage)
Exhibit VII: Monthly Exchange Rates of USD, GBP, Euro, and AUD with INR
Exhibit VIII: Derivative Financial Instruments Grouped on Basis of Maturity
Exhibit IX: Outstanding Foreign Currency Forward and Options Contracts
Exhibit X: Foreign Currency Risk from Financial Instruments as of March 31, 2017
Exhibit XI: Cost of Sales and Gross Profit of Infosys
Exhibit XII: Liquidity Position of Infosys