Financial Analysis on Tcs

FINANACIAL ANALYSIS ON TCS SUBMITTED TO PROF. D.V.RAMANA

Submitted by Vineet Kumar (107061) Mousumi Padhi Sanjay Varma

Table of contents

Sl No 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.

Topic Acknowledgement Executive summary Evolution of IT Industry Nasscom McKenzie Report Indian IT industry 2007 TCS-Introduction Condensed balance sheet Condensed income statement Condensed cash flow statement Ratio Analysis DuPont Analysis

Page No. 3 4 5 6 8 13 15 16 17 18 25

12 13 14 15. 16

Market capitalization EVA calculation Inter company analysis Accounting Policies Reference

26 27 28 29 31

2

ACKNOWLEDGEMENTS We wish to put to record the heartfelt gratitude and immense respect to Prof D.V.Ramana (Faculty, Financial Accounting). We wish to thank him for the valuable time he gave us and the immense patience he had, in answering even the seemingly trivial queries we had to ask. He had explained the concepts so minutely to us that even while analyzing the annual reports of companies we encountered very few problems.

3

EXECUTIVE SUMMARY The Financial Accounting project needed to have a real company analysis done, with regards to its standings in the market in the share holder’s eyes and a brand sector. We chose TCS and IT Industry, just because of the huge IT exports that it delivers each year. TCS is the part of the Tata group which is a highly respected group in India. The EIC – Environment Industry and the Company analysis was done to understand the various external factors and their affect on the company and its proceedings. The various ratios of FSA were calculated and analyzed so as to give us a complete picture of the company’s performance in the last three years.

4

Evolution of Indian IT Industry India’s software exporting industry is one of the world’s most successful information technology industries. The industry was begun by Bombay-based conglomerates in 1974 which entered the business by supplying global IT firms located overseas with programmers. Their success owed to the innovative exploitation of a new global market opportunity and protection from transnational corporations and startups by policy. This protected environment restricted the growth of project management and domain skills so that, despite access to a large pool of programmers, the industry could not grow in value-addition. A decade later, along with policy reforms that reduced costs of imported hardware and software caused the Indian software industry to shift from supplying programmers to supplying software programs. Beginning in the mid-1990s, the establishment of the Internet facilitated the separation of services, such as software maintenance and email management, from the site where the software was located. In 2000, reforms in foreign ownership rules, intellectual property protection and venture capital policy induced diasporas and foreign venture capital entry. The traditional software services industry, dominated by large local firms, has subsequently competed with firms with superior domain skills. In consequence, the industry as a whole is seeing new leadership, more products development and higher value-addition.

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The NASSCOM - McKinsey report on India's IT industry According to a NASSCOM-McKinsey report, annual revenue projections for India’s IT industry in 2008 are US $ 87 billion and market openings are emerging across four broad sectors, •

IT services,

•

Software products,

•

IT enabled services,

•

E-businesses thus creating a number of opportunities for Indian companies.

In addition to the export market, all of these segments have a domestic market component as well. Other key findings of this report are: •

Software & Services will contribute over 7.5 % of the overall GDP growth of India

•

IT Exports will account for 35% of the total exports from India

•

Potential for 2.2 million jobs in IT by 2008

•

IT industry will attract Foreign Direct Investment (FDI) of U.S. $ 4-5 billion

•

Market capitalization of IT shares will be around U.S. $ 225 billion

Promotion of IT - governmental incentives Government of India (GOI) has taken a major step towards promoting the domestic industry and achieving the full potential of the Indian IT entrepreneurs.

6

Constraints have been comprehensively identified and steps taken to overcome them and also to provide incentives. Thus for example, venture capital has been the main source of finance for software industry around the world. However, majority of the software units in India is in the small and medium enterprise sector and there is a critical shortage of venture capital kind of support. In order to alleviate this situation and to promote Indian IT industry, the Government of India has set up a National Task Force on IT and Software Development to examine the feasibility of strengthening the industry. The Task Force has already submitted its recommendations, which are under active consideration. Norms for the operations of venture capital funds have also been liberalized to boost the industry. The Government of India is also actively providing fiscal incentives and liberalizing norms for FDI and raising capital abroad.

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Indian IT industy-2007

I. Highlights

FY 2006-07 witnessed a revalidation of the Indian Information Technology – Business Process Outsourcing (IT-BPO) growth story, driven by a maturing appreciation of India’s role and growing importance in global services trade. -

Industry performance was marked by sustained double-digit revenue growth

-

The sector closed the year at record levels, with the revenue aggregate growing by nearly ten times over the past ten years

-

Positive market indicators include large unaddressed white-spaces and the unbundling of IT-BPO mega-deals with increasing shares of global delivery

-

Strong optimism of the industry to achieve its aspired target of USD 60 billion in exports by 2010

8

II. Industry Performance over the Last Ten Years

5.4%

USD Billion

4.7%

DOMESTIC MARKET

1,630,000

4.1%

EXPORTS

3.6%

1,293,000

3.2% 2.6%

2.8%

1,058,000

1.2%

of GDP

1.4%

670,000 430,114

190,000

Direct Employment

1.8

FY98

3.3

284,000

2.7

FY99

4.2

FY00

5.9

6.2

FY01

5.8

24.2 18.3 15.9

13.3 9.8

4.0

28 .5

21 .6

16 .1

13 .5

12 .1

8. 2

6. 0

4. 8 3.0

230,000

522,250

7.7

FY02

31.9

37 .4

830,000

1.8%

47 .8

13.2 10.2

8.3

6.3

FY03

FY04

FY05

FY06

FY07E

IT Industry-Sector-wise break-up

USD billion IT Services Exports Domestic Eng Services and R&D, S/W Prods Exports Domestic ITES-BPO Exports Domestic

FY 2006

FY 2007

FY 2008 P

17.8 13.3 4.5 5.3 4 1.3 7.2 6.3 0.9

23.6 18.0 5.6 6.5 4.9 1.6 9.5 8.4 1.1

30-31 ~8 11-12 -

9

Total Software and Services Revenues Of which, exports are Domestic Hardware Total IT Industry (including

30.3 23.6 6.7 7

39.6 31.4 8.2 8.2

49-50 39-40 ~10 -

Hardware)

37.4

47.8

-

Total may not match due to rounding off *NASSCOM estimates have been reclassified to provide greater granularity − Historical values for a few segments have changed due to availability of updated information III. Growth in Revenues



Revenue from the Indian IT software and services sector (including the domestic and exports segments and excluding hardware) touched nearly USD 40 billion during FY 07 and is expected to grow by nearly 27 percent to clock USD 49-50 billion in FY08.



Contribution to GDP in FY 07 was 5.2% up from 4.8% last year.



Service and software exports remain the mainstay of the sector contributing USD 31.3 billion during FY 07, beating forecast to register a 33% growth.



Increasing traction in offshore product development and engineering services is supplementing India’s efforts in IP creation. This segment has grown by 22-23 percent to report USD 4.9 billion in exports.



MNC investments reach an unprecedented scale; over USD 10 billion announced in FY 2006-07, to be invested over the next few years.

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IV. Employment figures-Software and Services sector Sector IT Services Engineering Services and

FY 2006 398,000 115,000

FY 2007 550,000 140,000

ITES-BPO Domestic Market (including

513,000 415,000 365,000

690,000 553,000 378,000

user organizations) Total

1,293,000

1,621,000

R&D and Software Products

*Figures do not include employees in the hardware sector

V. Domestic Market Matures Complementing the continued growth in IT-ITES exports and for the first time ever in FY 2007 showed signs of breaking out of the hardware led growth and the trend of software and services gaining share is expected to continue 

The total size of the domestic market (including hardware) was USD 16.4 billion in FY 07



Traditionally, this segment has been led by MNCs. However, Indian firms are gradually gaining ground. Overtime this segment could become a larger SME play, as the mid-sized firms increase their levels of IT adoption

VI. Going forward For India to fully capitalize on the opportunity and sustain a disproportionate lead in the global IT-ITES space, stakeholders need to continue working towards timely and coherent execution of initiatives to address supply-side concerns across the following areas 11

 Augmenting Talent Supply  Creating world-class infrastructure  Strengthening information security  Enhancing operational excellence  Providing regulatory support  Catalyzing domestic market development  Fostering an ecosystem for innovation INDUSTRY IS ON TRACK TO REACH THE TARGETED $60BN IN EXPORTS BY 2010

CAGR

PERIOD

DOMESTIC MARKET*

EXPORTS* TOTAL

10 YR TARGET

FY00-10

22.1%

31.2%

28.9%

ACHIEVED

FY00-07

23.3%

34.4%

31.4%

REQUIRED

FY07-10

19.3%

24.1%

23.2%

60

* Includes IT Software and Services, ES and Products, and ITES-BPO

39-40

23.6 13-15 USD Billion

1.9

4.0

12.8

2.6

2.5

Source: NASSCOM FY00 FY01 Figures may vary slightly due to rounding off

9-10

7.7

6.2

FY02

3.9

FY04

6.0

FY06

^NASSCOM McKinsey Study FY08P FY10^ 2005

TCS Introduction

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Tata Consultancy Services Limited is one of the world’s largest providers of IT, consulting, services and business process outsourcing which commenced operations in 1968. As of 2007, it is Asia’s largest IT services firm with annualized revenues of over US $4 billion and has the largest number of employees among all the Indian IT companies with strength of 95000. Major Milestones in history of TCS:•

TCS was established in 1968. It started off as a division of the Tata Group, Tata Computer Centre, whose main business was to provide computer services to the other group companies. But soon after the company was named TCS.

•

TCS’ first software export was undertaken in 1974 when it converted the Hospital Information system from Burroughs Medium System COBOL to Burroughs Small System COBOL.

•

In 1979, TCS was the first Indian software firm to open overseas office in New York.

•

In early and mid 1990s, TCS reinvented itself to become a software products company.

•

In 2001, TCS commissioned the latest 64-bit z Series eServer from IBM, there by becoming the first organization in the ASEAN and South Asia region to adopt the latest technology in mainframe computing.

•

In 2004, TCS became a public listed company.

•

In 2005, TCS received an application maintenance project from ABN AMRO worth US$250 million which is the largest deal signed by an It Company.

•

TCS has also implemented E-governance projects in stares like Andhra Pradesh.

•

In 2006, Tata InfoTech Limited and three wholly-owned subsidiaries of the company, namely Airline Financial Support Services and TCS Business Transformation Solutions ltd have amalgamated with the company.

CONDENSED BALANCE SHEET 13

TCS 2006-07(Millions)

Capital

2005-06(Millions)

2004-05(Millions)

978.60

489.30

480.10

Reserves LTL

89,640.40 5067.5

61,146.00 1166.9

35,192.70 2,030.10

CL

35,458.00

22,981.00

14,535.40

131,144.50

85,783.20

52,238.30

Fixed Assets

39,799.30

27,319.90

16,176.60

Investments

12,568.70

7,046.20

4,215.40

CA

78,776.50

51,417.10

31,846.30

131,144.50

85,783.20

52,238.30

Total

Total

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CONDENSED INCOME STATEMENT

TCS

2006-07(Mn)

2005-06(Mn)

2004-2005(Mn)

Sales

189,142.60

COGS

Nil

Operating Expenses

135,463.60

95796.9

70164.00

4,401.70

2,824.30

1588.20

49,277.30

35,157.60

26491.40

94.50

91.4

154.50

49,182.80

35,066.20

26336.90

6,738.80

5,095.70

3969.90

42,444.00

29,970.50

22367.00

Depreciation

PBIT

Interest

PBT

Tax

PAT

133,778.80

Nil

98243.60

Nil

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CONDENSED CASH FLOW STATEMENT

TCS

2006-07(Mn)

Opening CIH

2005-06(Mn)

2004-2005(Mn)

4,323.80

2,746.90

277.70

CFF

6,868.20

9,167.50

9,632.50

CFI

18,136.40

14,356.90

28,091.20

CFO

34,718.70

24,882.50

20,920.50

13,964.50

4,323.80

2,746.90

Closing CIH

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RATIO ANALYSIS FOR TCS LIQIUDITY RATIOS:A class of financial metrics that is used to determine a company's ability to pay off its short-terms debts obligations. Generally, the higher the value of the ratio, the larger the margin of safety that the company possesses to cover short-term debts. A company's ability to turn short-term assets into cash to cover debts is of the utmost importance when creditors are seeking payment. Bankruptcy analysts and mortgage originators frequently use the liquidity ratios to determine whether a company will be able to continue as a going concern. COMMON LIQUIDITY RATIOS:•

Current Ratio:Current Ratio= Current Assets/ Current Liabilities

The ratio is mainly used to give an idea of the company's ability to pay back its short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The higher the current ratio, the more capable the company is of paying its obligations. A ratio under 1 suggests that the company would be unable to pay off its obligations if they came due at that point. While this shows the company is not in good financial health, it does not necessarily mean that it will go bankrupt - as there are many ways to access financing - but it is definitely not a good sign. •

Liquid Ratio:Liquid Ratio= (CA-Inventory)/CL

A stringent test that indicates whether a firm has enough short-term assets to cover its immediate liabilities without selling inventory

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•

Absolute Cash Ratio:Absolute cash Ratio= (CA-Inventory-Debtors)/CL

This ratio indicated the real liquidity of the firm at that point of time.

2006-07 CA

2005-06

2004-05

78,776.50

51,417.10

31,846.30

416.00

806.40

320.00

Sundry Debtors

42,979.30

32,531.30

20,559.60

CL

35,458.00

22,981.00

14,535.40

Current Ratio

2.22

2.24

2.19

Liquid Ratio

2.21

2.20

2.17

Absolute Cash Ratio

1.00

0.79

0.75

Stock

TCS being an IT company it does not have high amount of inventory so there is not much difference between current ratio and liquid ratio. The debtors as a percentage of CA are high which makes the Cash Ratio lower. This is a trend of IT industry as most of the work is done on credit. The increase in the value of cash ratio in 2006-07 can be attributed to the fact that CA has increased which was due to increase in cash and loan advances.

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Solvency Ratios:Ratios used to measure a company's ability to meet long-term obligations. Common solvency Ratios:•

Debt Ratio Debt Ratio= Debt/ Total Assets Debt= Long term Loans/ Borrowings/Bonds A ratio that indicates what proportion of debt a company has relative to its assets. The measure gives an idea to the leverage of the company along with the potential risks the company faces in terms of its debt-load. A debt ratio of greater than 1 indicates that a company has more debt than assets; meanwhile, a debt ratio of less than 1 indicates that a company has more assets than debt. Used in conjunction with other measures of financial health, the debt ratio can help investors determine a company's level of risk.

•

Equity Ratio Equity Ratio= Networth/ Total Assets

A ratio used to help determine how much shareholders would receive in the event of a company-wide liquidation. The ratio, expressed as a percentage, is calculated by dividing total shareholders' equity by total assets of the firm, and it represents the amount of assets on which shareholders have a residual claim. The figures used to calculate the ratio are taken from the company's balance sheet.

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•

Debt to Equity Ratio Debt to Equity Ratio= Long Term Debt/ Networth

A high debt/equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense. If a lot of debt is used to finance increased operations (high debt to equity), the company could potentially generate more earnings than it would have without this outside financing. If this were to increase earnings by a greater amount than the debt cost (interest), then the shareholders benefit as more earnings are being spread among the same amount of shareholders. However, the cost of this debt financing may outweigh the return that the company generates on the debt through investment and business activities and become too much for the company to handle. This can lead to bankruptcy, which would leave shareholders with nothing. •

Interest Coverage Ratio ICR= PBIT/Interest A ratio used to determine how easily a company can pay interest on outstanding debt. The lower the ratio, the more the company is burdened by debt expense. When a company's interest coverage ratio is 1.5 or lower, its ability to meet interest expenses may be questionable. An interest coverage ratio below 1 indicates the company is not generating sufficient revenues to satisfy interest expenses.

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•

Debt Service Ratio A debt service measure that financial lenders use as a rule of thumb to give a preliminary assessment of whether a potential borrower is already in too much debt 2006-07

2005-06

2004-05

Debt Ratio

0.04

0.01

0.04

Equity Ratio

0.69

0.72

0.68

Debt Equity Ratio

0.06

0.02

0.06

521.45

384.66

171.47

Interest Coverage Ratio

TCS is in a very comfortable position with respect to its solvency. ICR is increasing due to the fact that PBIT has almost doubled in the last three years and interest rates have been decreasing Profitability Ratios A class of financial metrics that are used to assess a business's ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time. For most of these ratios, having a higher value relative to a competitor's ratio or the same ratio from a previous period is indicative that the company is doing well. Some examples of profitability ratios are profit margin, return on assets and return on equity. It is important to note that a little bit of background knowledge is necessary in order to make relevant comparisons when analyzing these ratios.

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Common Profitability Ratios:•

ROTA ROTA= PBIT/TA

A ratio that measures a company's earnings before interest and taxes (PBIT) against its total net assets. The ratio is considered an indicator of how effectively a company is using its assets to generate earnings before contractual obligations must be paid. The greater a company's earnings in proportion to its assets (and the greater the coefficient from this calculation), the more effectively that company is said to be using its assets. •

ROCE ROCE= PBIT/CE

A ratio that indicates the efficiency and profitability of a company's capital investments. ROCE should always be higher than the rate at which the company borrows; otherwise any increase in borrowing will reduce shareholders' earnings. •

RONA RONA= PAT/NW

A measure of a corporation's profitability that reveals how much profit a company generates with the money shareholders have invested. The RONW is useful for comparing the profitability of a company to that of other firms in the same industry.

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•

EPS EPS= PAT/ No. of Shares

The portion of a company's profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company's profitability. In the EPS calculation, it is more accurate to use a weighted-average number of shares outstanding over the reporting term, because the number of shares outstanding can change over time. However, data sources sometimes simplify the calculation by using the number of shares outstanding at the end of the period. ROTA and ROCE give the profit generation ability of the firm where as RONW, EPS and DPS give the profit distributing ability of the firm.

•

2006-07

2005-06

2004-05

TA

131,144.50

85,783.20

52,238.30

% Increase in TA

52.88

64.22

PBIT

49,277.30

35,157.60

% Increase in PBIT

40.16

32.71

PAT

42,444.00

29,970.50

% Increase in PAT

41.62

33.99

OF

90,619.00

61,635.30

% Increase in OF

47.02

72.78

CE

95,686.50

62,802.20

% Increase in CE

52.36

66.57

Shares

2,187.00

1,089.00

1,080.00

PBIT/TA(ROTA)

0.38

0.41

0.51

PBIT/CE(ROCE)

0.51

0.56

0.70

PAT/OF(RONW)

0.47

0.49

0.63

PAT/no of shares(EPS)

19.41

27.52

20.71

26,491.40

22,367.00

35,672.80

37,702.90

Decease in ROTA can be attributed to increase of 53% in TA where as PBIT only increased by 40%.

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•

Decrease in ROCE in 2005-06 can be attributed to 66% increase in CE where as PBIT only increased by 33%.

•

Decrease in RONW in 2005-06 can be attributed to increase in OF by 73% where as PAT only increased by 34%.

•

Decrease in EPS is due to increase in number of shares.

MARKET RESULTS

2006-07

2005-06

2004-05

BV

90,619.00

61,635.30

35,672.80

No. of shares

2,187.00

1,089.00

1,080.00

BV/Share

41.44

56.60

33.03

MV/Share(31st March)

1,231.20

1,914.75

1,432.75

MV/BV

29.71

33.83

43.38

Market Capitalization

2,692,634.40

2,085,162.75

1,547,370.00

Market Capitalization has been increasing. Decrease in BV/ Share and MV/Share is due to issue of shares in 2006-07.

EVA CALCULATION24

A measure of a company's financial performance based on the residual wealth calculated by deducting cost of capital from its operating profit (adjusted for taxes on a cash basis). (Also referred to as "economic profit".) 2006-07

2005-06

2004-05

PBIT

49277.30

35157.60

26491.40

TAX

6751.75

5108.98

3993.19

NOPAT

42525.55

30048.62

22498.21

OF

90619.00

61635.30

35672.80

5067.50

1166.90

2030.10

t

0.14

0.15

0.15

I

0.02

0.08

0.08

Kd

1.61

6.69

6.46

Rf

6.00

6.00

6.00

Rm

18.00

18.00

18.00

β

1.80

1.80

1.80

Ke

0.28

0.28

0.28

CC

33166.05

24823.15

22966.83

EVA

9359.50

5225.47

-468.62

Loans

From a negative EVA company in 2004-05 TCS has turned into a positive EVA company from 2005-06 onwards.

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Accounting Policies a) Basis of Preparation The consolidated financial statements of Tata Consultancy Services Limited, its subsidiaries, associates and joint ventures (“the Group”) are prepared under the historical cost convention and in accordance with the requirements of the Companies Act, 1956.Comparative figures do not include the figures of the newly acquired subsidiaries namely, TKS - Teknosoft S.A. and TCS Management Pty Ltd. Consequently, the comparative figures are not strictly comparable with the figures for theyear ended and as at March 31, 2007. b) Principles of consolidation The financial statements of the subsidiary companies used in the consolidation are drawn up to the same reporting date as of the Company. The consolidated financial statements have been prepared on the following basis: i) The financial statements of the Company and its subsidiary companies have been combined on a line-by-line basis by adding together like items of assets, liabilities, income and expenses. Inter-company balances and transactions and unrealized profits or losses have been fully eliminated. ii) Interest in a jointly controlled entity is reported using proportionate consolidation. iii) The consolidated financial statements include the share of profit / loss of associate companies, which are accounted under the ‘Equity method’ as per which the share of profit of the associate company is added to the cost of investment. An associate is an enterprise in which the investor has significant influence and which is neither subsidiary nor a joint venture. iv) The excess of cost to the Company of its investments in subsidiary companies over its share of the equity of the subsidiary companies at the dates on which the investments in the subsidiary companies are made, is recognized as ‘Goodwill’ being an asset in the consolidated financial statements. Alternatively, where the share of equity in the subsidiary companies as on the date of investment is in excess of cost of investment of the Company, it is

26

recognized as ‘Capital Reserve’ and shown under the head ‘Reserves and Surplus’, in the consolidated financial statements. v) Minority interest in the net assets of consolidated subsidiaries consists of the amount of equity attributable to the minority shareholders at the dates on which investments are made by the Company in the subsidiary companies and further movements in their share in the equity, subsequent to the dates of investments. c) Use of estimates The preparation of financial statements requires the management of the Company to make estimates and assumptions that affect the reported balances of assets and liabilities and disclosures relating to the contingent liabilities as at the date of the financial statements and reported amounts of income and expenses during the period. Example of such estimates include provisions for doubtful debts, employee retirement benefit plans, provision for income taxes, accounting for contract costs expected to be incurred to complete software development and the useful lives of fixed assets. d) Fixed Assets Fixed Assets are stated at cost less accumulated depreciation. Costs include all expenses incurred to bring the assets to its present location and condition. Exchange differences on translation of foreign currency loans obtained to purchase fixed assets from countries outside India are included in the cost of such assets. Fixed assets exclude computers and other assets individually costing Rs. 50,000 or less which are not capitalized except when they are part of a larger capital investment program.

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Reference: 1) www.tcs.com 2) www.nasscom.com 3) www.investopedia.com 4) The NASSCOM - McKinsey report on India's IT industry 5) “Origin and growth of software industry in India.” By Rafiq Dossani, Stanford university 6) TCS Annual Report 2006-07 7) www.satyam.com 8) www.infosys.com

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