An Analytical Project

On

Comparison of the financial performance of

TCS Ltd and Wipro Ltd

By

Pratik Bhosale

Under Guidance Of

CMA Dr. Ashish Thatte

For Course
Financial and Management Accounting

Submitted to

ABMTC

In partial fulfillment of the requirement for the award of the degree of

DOCTORATE OF BUSINESS ADMINISTRATION [D.B.A]

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Abstract

There is a broad consensus that the global center of economic growth is moving to
Asia, and as a large emerging nation with a growing middle class, India has captured
the attention of the developed economies looking for new investment and trade
opportunities. Those sectors which are growing very fast rate in India are called the
Emerging Sectors. By some estimates Indian economy will grow from its current $1.8
trillion GDP to a GDP close to $ 30 trillion to be the world’s third largest in 2030.
Information technology in India is an industry consisting of two major
components: IT services and business process outsourcing (BPO). The sector has
increased its contribution to India's GDP from 1.2% in 1998 to 7.5% in
2012. According to NASSCOM, the sector aggregated revenues of US$160 billion in
2017,with export revenue standing at US$99 billion and domestic revenue at US$48
billion, growing by over 13%. USA accounts for more than 60 per cent of Indian IT
exports. [1]
In this research we will make a comparison analysis of 2 listed companies from the
Indian IT Sector.

Keywords: Indian Economy, IT Sector, GDP

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Table of Contents

1 Introduction ........................................................................................................... 4
2 Market Size ........................................................................................................... 4
3 Investments/ Developments ............................................................................... 4
4 Government Initiatives ........................................................................................ 5
4.1 Road Ahead ................................................................................................. 5
5 Introduction ........................................................................................................... 6
6 Profile of Selected Companies .......................................................................... 6
6.1 Tata Consultancy Services (TCS Ltd) ..................................................... 6
6.2 Wipro Ltd ...................................................................................................... 6
7 Profitability Analysis ............................................................................................. 7
8 Liquidity Analysis.................................................................................................. 8
9 Findings ............................................................................................................... 11
10 Summary ............................................................................................................. 13
11 Reference ............................................................................................................ 14

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1 Introduction

The global sourcing market in India continues to grow at a higher pace compared to
the IT-BPM industry. India is the leading sourcing destination across the world,
accounting for approximately 55 per cent market share of the US$ 185-190 billion
global services sourcing business in 2017-18. Indian IT & ITeS companies have set
up over 1,000 global delivery centres in about 80 countries across the world.
More importantly, the industry has led the economic transformation of the country
and altered the perception of India in the global economy. India's cost
competitiveness in providing IT services, cost savings of 60–70 per cent over source
countries, continues to be the mainstay of its Unique Selling Proposition (USP) in the
global sourcing market. However, India is also gaining prominence in terms of
intellectual capital with several global IT firms setting up their innovation centres in
India.

India has become the digital capabilities hub of the world with around 75 per cent of
global digital talent present in the country.[2][3]

2 Market Size

The internet industry in India is likely to double to reach US$ 250 billion by 2020,
growing to 7.5 per cent of gross domestic product (GDP). The number of internet
users in India is expected to reach 730 million by 2020, supported by fast adoption of
digital technology, according to a report by National Association of Software and
Services Companies (NASSCOM).

Indian IT exports increased to US$ 126 billion in FY18 while domestic revenues
(including hardware) advanced to US$ 41 billion.
Indian IT and BPM industry is expected to grow to US$ 350 billion by 2025 and BPM
is expected to account for US$ 50-55 billion out of the total revenue.

Total spending on IT by banking and security firms in India is expected to grow 8.6
per cent year-on-year to US$ 7.8 billion by 2017!!.
India’s Personal Computer (PC) shipment advanced 11.4 per cent year-on-year to
9.56 million units in 2017 on the back of rise in the quantum of large projects.
Revenue from digital segment is expected to comprise 38 per cent of the forecasted
US$ 350 billion industry revenue by 2025. [2][3]

3 Investments/ Developments

Indian IT's core competencies and strengths have attracted significant investments
from major countries. The computer software and hardware sector in India attracted
cumulative Foreign Direct Investment (FDI) inflows US$ 29.825 billion from April
2000 to December 2017, according to data released by the Department of Industrial
Policy and Promotion (DIPP).

Leading Indian IT firms like Infosys, Wipro, TCS and Tech Mahindra, are diversifying
their offerings and showcasing leading ideas in blockchain, artificial intelligence to
clients using innovation hubs, research and development centres, in order to create
differentiated offerings.

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Some of the major developments in the Indian IT and ITeS sector are as follows:

 Nasscom has launched an online platform which is aimed at up-skilling over 2

million technology professionals and skilling another 2 million potential
employees and students.
 Revenue growth in the BFSI vertical reached nearly 9 per cent y-o-y in the
fourth quarter of 2017-18.
 As of March 2018, there were over 1,140 GICs operating out of India.
 Private Equity (PE)/Venture Capital (VC) investments in India's IT & ITeS
sector reached US$ 7.6 billion during April-December 2017.

4 Government Initiatives

Some of the major initiatives taken by the government to promote IT and ITeS sector
in India are as follows:

 As a part of Union Budget 2018-19, NITI Aayog is going to set up a national

level programme that will enable efforts in AI* and will help in leveraging AI*
technology for development works in the country.
 The Government of India is going to explore new opportunities in various
sectors such as providing BPO service from home, digital healthcare and
agriculture to achieve the target of making India a US$ 1 trillion digital
economy.

4.1 Road Ahead

India is the topmost offshoring destination for IT companies across the world. Having
proven its capabilities in delivering both on-shore and off-shore services to global
clients, emerging technologies now offer an entire new gamut of opportunities for top
IT firms in India. Export revenue of the industry is expected to grow 7-9 per cent
year-on-year to US$ 135-137 billion in FY19.

Exchange Rate Used: INR 1 = US$ 0.016 as of FY2018[2][3]

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5 Introduction

A business concern, being a commercial and profit seeking organization

have the prime and primary objective to earn and maximize the profit. A commercial
organization always tries to continue its better performance to achieve the ultimate
goal of profit earning. It is quite true that analysis of financial statement helps them in
this respect. In real practice stakeholders like investors, government, financial
institutions, employees, consumers, suppliers and researchers are directly or
indirectly interested to know the actual financial position of the concern and for such
purpose analysis and interpretation of financial statements are required. To evaluate
the financial position of selected IT companies the following aspects have been
attempted to be analyzed.

1. Profitability Analysis
2. Liquidity Analysis

6 Profile of Selected Companies

Indian IT giants Tata Consultancy Services (TCS Ltd) and Wipro Ltd, have selected
for their spectacular growth in export revenues and multi service activities in this
particular sector.

6.1 Tata Consultancy Services (TCS Ltd)

Tata Consultancy Services (TCS) Limited has been in operation since 1968
as division of Tata Sons Ltd. TCS a part of Tata Group at present continues its
operation in IT consulting and Business Process Outsourcing (BPO) services. The
head quarter of TCS is situated at Mumbai. TCS is the pioneer in the offshore
delivery model for IT services. Its expertise area includes independent consulting
division and IT services, assets-based solutions, IT infrastructure, engineering and
industry services, BPO segment. It has success fully embraced quality parameters of
IEEE, ISO 9001:2000, CMMI, SW-CMM, P-CMM and Six Sigma.

6.2 Wipro Ltd

Wipro Limited, being a multi business and multi-location corporate entity started its
operation as a groundnut-crushing unit in 1947. Later on, it expands its business
range from customer products to specialized IT products and services having two
wings namely Wipro Technologies and Wipro Infotech. Wipro has got its head
quarter in Bangalore. It is the first PLMM Level-5 and SEI CMM Level-5 certified IT
services company globally. This company is the largest independent R and D
services provider in the world, ranked among three offshore BPO providers.

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7 Profitability Analysis

The word ‘profit ‘comes from a Latin word “to make progress”. Profit is generally, is
making of gain in business activity for the benefit of owners of the business. Profit
can be defined in two ways. One is economic point of view and another is accounting
point of view. Pure economic profit is the increase in the wealth that an investor
possesses by making investment, taking into consideration all the costs associated
with that investment including opportunity cost of capital. Profit from the accounting
point of view is the reward of entrepreneur of taking risk. It is the difference between
the revenues and costs.
A purely commercial organization always aims to maximize profit. Profitability
Analysis helps to show the operating efficiency of the business. Different
stakeholders (management, investors, suppliers, employees etc.) want to know the
financial efficiency of the business. Financial Institutions like bank etc. wish to know
the profitability of the firm or business to access the credit worthiness of such
business. Owners always want to know the rate of return on capital employed in the
business.
Suppliers have the interest in the analysis for his credit payments. With this object we
have attempted to calculate the following ratios of the selected companies.

1. Net Profit Margin (NPM) = Net Profit/ Turnover*100

2. Capital Turnover Ratio (CTR) = Turnover/ Capital Employed

3. Return on Capital Employed (ROCE) = Profit/Turnover * Turnover/ Capital

Employed

PROFITABILITY ANALYSIS OF IT INDUSTRY (IN PERCENT)

Companies/Ratios 01-02 02-03 03-04 04-05 05-06 06-07 AVG

TCS LIMITED
NPM (%) 9.35 12.10 15.18 22.81 24.23 25.15 18.14

CTR (TIMES) 1.20 0.80 0.90 2.42 1.99 1.85 1.53

ROCE (%) 20.45 25.75 32.24 53.36 48.43 46.42 37.76

WIPRO LIMITED

NPM (%) 25.35 20.41 17.82 20.67 19.75 20.76 20.79

CTR (TIMES) 1.01 1.56 1.43 1.47 1.58 1.47 1.42

ROCE (%) 33.86 24.04 25.39 30.42 31.25 30.41 29.23

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NPM is the overall measure of the firm’s ability to turn each rupees sale into profit. If
the NPM is inadequate, the firm will fail to achieve satisfactory return on
shareholders’ funds, NPM will decline unless operating expenses decrease
significantly.
From the Table it is quite clear that both the companies has the sufficient and steady
NPM growth rate. WIPRO Ltd. records highest NPM growth in 2001-02 of 25.25
percent, TCS Ltd in 2006-07 of 25.15 percent.
The companies under the study follow an increasing trend in case of NPM.
Apparently ROCE is quite strong for selected companies as this ratio is very much
vital, conceptually sound appealing. ROCE is the indicator of profitability of a firm,
thus, it can be said that higher the return, the more profitable is the position of the
firm and vice versa. In this case all the companies maintain a quite bright percent (%)
in ROCE, which proves that companies are in a stable financial position and having
utmost ability to be succeed, attract financing, repay creditors and reward owners.
But after analysing it has come to notice that in 2004-05 TCS Ltd has ROCE of 53.36
percent, Wipro Ltd 30.42 percent. It means in this year profitability condition was not
good for this company as return on capital employed is showing a poor figure in
comparison to other 57 companies. But this company recovered this state
immediately and showing an improvement in ROCE 2005-06 and 2006-07
respectively.

If the question comes to CTR TCS Limited has the very low CTR in 2002-03 and
2003-04, it means that the company has not efficiently utilized the capital employed
by it. Wipro Ltd., maintain the required range of CTR.

8 Liquidity Analysis

The concept of ‘liquidity’ is important in financial statement analysis. By liquidity we

mean the amount of cash or cash equivalents the company has in hand and the
amount of cash it can raise in a short period of time. The term ‘liquidity’ refers the
ability of the firm to meet the current obligations as they become due. A firm should
ensure that it does not suffer from lack of liquidity which may dangerous for the
company as well as too much liquidity also can affect the company negatively.

Lack of liquidity leads to loss of creditors and investors’ confidence, poor credit
worthiness and bankruptcy of the company. Liquidity provides flexibility to take
advantages of changing market conditions and to react towards the strategic actions
by competitors. Liquidity also relates to the ability of a company to meet its
obligation as they mature. A class of financial metrics that is used to determine a
company’s ability to pay off its short-term debt obligation. Generally, the higher the
value of the ratio higher the margin of safety that the company possesses to cover
short-term debt.

This analysis is very vital for short-term creditors, lenders including

banks and debenture holders, management.

Common liquid ratios include the current ratio, liquid ratio, absolute liquid

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ratio, working capital to current assets ratio etc. A company’s ability to turn short-term
assets into cash to covers debts is of the utmost importance when creditors are
seeking payments. Bankruptcy analysts and mortgage originators frequently use the
liquidity ratios to determine whether a company will able to continue as a going
concern.

While liquidity ratios are most helpful for short-term creditors, suppliers/bankers,
they are also important to financial managers who must meet the obligations to
suppliers of credit and various Government agencies. A complete liquidity analysis
can help to uncover weaknesses in the financial position of the business. In brief, we
are taking the following into account –

1. Current Ratio (CR)= Current Assets/ Current Liabilities

2. Quick Ratio (QR) = Quick Assets/ Current Liabilities
3. Absolute Liquid Ratio (ALR) = Cash and Bank balance/ Current Liabilities
4. Debt Equity Ratio (DER) = External Liabilities/ Shareholders’ Equity

LIQUIDITY ANALYSIS OF IT INDUSTRY (IN TIMES)

Companies/Ratios 01-02 02-03 03-04 04-05 05-06 06-07 AVG

TCS LIMITED
CR 0.21 0.54 0.01 2.40 2.50 2.30 1.33

QR 0.02 0.01 0.01 2.40 2.50 2.30 1.21

ALR 0.01 0.01 0.01 0.17 0.15 0.33 0.11

DER 0.25 0.95 4.80 0.17 0.13 0.11 1.07

WIPRO LIMITED

CR 1.88 2.20 1.78 1.71 1.65 1.56 1.80

QR 1.74 2.03 1.65 1.61 1.57 1.48 1.68

ALR 0.55 0.69 0.35 0.44 0.46 0.62 0.52

DER 0.08 0.05 0.07 0.07 0.06 0.07 0.67

Current Ratio indicates the relation between Current Assets and Current liabilities. As
these two are also components of Working capital, this ratio also regarded as
Working capital ratio.
In General it can be stated that higher the ratio, the larger is the amount of rupee of
Current liabilities and accordingly greater is the safety of funds of short term
creditors. This ratio indicates the short-term solvency i.e. short-term debt paying
capacity of an enterprise. It is also known as solvency ratio.
The companies in our study are holding more or less sufficient ratios except TCS
Limited. In 2001-02 to 2003-04 this company is suffering from a very poor liquidity
position revealed from Current Ratio. But this company recovers it from 2004-05

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having more than two times of Current Assets against Current liabilities. It has 2.4,
2.5, 2.3 current ratio in 2004-05, 2005-06, 2006-07.

Quick Ratio indicates immediate loan repaying ability. True and fair solvency position
cannot be inferred from Current Ratio itself for inventories may be overvalued or full
of obsolete items. With a view to eliminate this shortcoming this item should be
excluded.
TCS Limited is suffering from a very poor solvency position form 2001-02 as 0.02 in
2001-02 0.01 in 202-03 and 0.01 in 2003-04 quick ratios. But it progressed in 2004-
05 and the quick ratio was 2.4 in 2004-05, 2.5 in 2005-06 and 2.3 in 2006-07.In
comparison to TCS Limited Wipro Limited was in a better position during 2001-02 to
2003-04.
Absolute liquid ratio indicates the utmost liquidity condition against the Current
liabilities. The same condition is continued with TCS Limited suffering from a low
liquid position from 2001-02 to 2003-04. The company makes its performance better
from 2004-05 to 2006-07. Wipro Limited, belonging to the better position of absolute
liquidity. That means it possess the sufficient amount of cash in their hand to meet
their short-term liability.

Debt Equity ratio is a very vital ratio because it indicates the degree of dependency of
the company on external funds. Higher the ration indicates more dependency on
external funds.

In case of Wipro Limited it is in fluctuating nature. In 2002- 03 it was 0.05 and

increases to 0.07 in 2006-07. But TCS maintain the declining trend during our study
period. It reveals TCS have been depending less on debt and more on equity.
Therefore, short term as well as long term liquidity of TCS can be considered as
favorable.

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9 Findings

Prior to 1980 there was no IT industry in India because of mainly hostile and
rigid Government policies, underdeveloped infrastructure and adverse situation
of the country. As a result, no impressive growth has been found at that time.
After post economic reform boom period started in this sector and it becomes
fastest growing industry among all other industries

If we consider the average of CR, Wipro Limited has CR of 1.80 while TCS Limited
has only 1.33 times during the study period so short-term solvency of this company is
not impressive. Wipro Limited have average of QR during the study period 1.68 times
but if we consider the average QR of TCS Limited it is not at all impressive as it is
only having 1.21 times during this period.

Now after considering the ALR it is revealed that TCS hs very poor and lowest
average of ALR of 0.11 times during the study period means the company is
suffering from shortage of liquid cash and WIPRO Ltd has the ALR of 0.52 for the
same period.

Average DER of TCS Ltd. is 1.07 indicated more dependency on external debt. On
the other hand Wipro Limited, HCL Infosystem Limited is having 0.67 times average
DER during this period

Now, it is the time to reveal the actual position of IT industry represented through
these companies CR is founding at an increasing trend from 2001-02 1.60 times to
2004-05 2.67 times but in 2005-06 and 2006-07 it is following the declining trend of
having 2.34 times and 2.10 respectively. QR is also following the same trend i.e. in
2001-02 1.33 times, 2002-03 1.61 times, 2003-04 1.86 times, 2004-05 2.43 times,
2005-06 2.34 times and 2006-07 2.10 times.

But in case of DER it is following the declining trend that means dependency on
external debt is reducing year by year. In 2001-02 0.33 times, 2002-03 0.46 times,
2003-04 1.15 times, 2004-05 0.26 times, 2005-06 0.25 times, 2006-07 .22 times. But
the fluctuation has been found in average of ALR. Now if we consider the overall
picture of IT industry the solvency position is good for this sector and expected to be
better in near future.

Wipro Limited have the highest average of NPM of 20.79% during the study period.
TCS Limited have 18.14% average NPM respectively during this period. If we
analyze the profit earning capacity of the selected companies then it will be cleared
that Wipro Limited has the more capacity than the TCS to earn profit.

If we take CTR then TCS Limited and Wipro Limited have 1.53 and 1.42 CTR for the
same period. Now if we consider ROCE then TCS Limited contains the highest return
of 38.07% on capital employed during the study period and Wipro Limited contain
29.23% of ROCE for that period.

Regression analysis is used for prediction and it predicted that liquidity and
profitability are balanced. The effect of liquidity (Quick Ratio) on profitability (ROCE)
is positive which implies that the sector is not following conservative liquid policy so
excess current or quick assets are not retaining in the business for a long period of
time. The current and quick assets are used for business purpose which facilitates to
raise the potential profits for the industry. Hence, directly help to increase the overall
profitability of the industry.

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Now, if we consider the total profitability scenario of IT industry then the NPM is
showing the increasing trend where this industry has the NPM (%) of 11.31% in
2001-02 then it reaches to 21.5% in 2006-07 and expected to be increased further in
near future. But the CTR (Times) is at fluctuating rate. In 2001-02 it has 2.3, 2.4 in
2002-03 and then 2.1 in 2003-04 again 2.6 in 2004- 05, 3.6 in 2005-06 and 1.9 in
2006-07.

So it is now cleared that sometimes it increases and sometimes it decreases. Now if

we move to ROCE (%) there we can see it follows the increasing trend. Where in
2001-02 the industry has 22.11% there it increases to 29.76% in 2006-07 and
expected to grow further. So the total profitability of IT industry is very much
impressive and
spectacular.

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10 Summary

At the present point of time Indian IT industry exists at its peak position. A
major part of export revenues has been earned by this sector. But the real picture
was
not always the same. This sector was most neglected up to 1980 and facing typical
certain problems of absence of local market, hostile and rigid government policies,
poor urban and rural infrastructure with heavy power cut, under developed transport
system etc. Due to all these hindrances the growth of IT sector was halted. But
during
1990 the picture was almost changed. That time has become one of the main centers
for software development work. The software market was boosted by domestic
deregulation, entrepreneurial flair technically well equipped and with abundant
English speaking manpower force.

This sector also contributes a great portion towards Indian GDP and its
contribution increases day by day. Opening of Indian economy helps to grow this
sector enormously. Now a day it presently contributes 7% approximately to Indian
GDP.

Indian IT industry is a flourishing industry and the liberalized policies of

Government help this sector to grow gradually. IT services and information
technology enabled services have shown unprecedented growth. The demand for
such
services has grown substantially. The growth of the Indian IT industry is likely to be
very good in future. The future trend of Indian IT industry appears to be very bright,
promising and prosperous.

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11 Reference

1. Information technology in India. (2018, June 26). Retrieved from

https://en.wikipedia.org/wiki/Information_technology_in_India
2. Media Reports, Press Information Bureau (PIB), Department of Industrial Policy
and Promotion (DIPP) statistics, Department of Information and Technology,
Union Budget 2017-18
3. Brand India. (n.d.). Retrieved from https://www.ibef.org/industry/information-
technology-india.aspx
4. http://www.rediffmoney.com /
5. http://www.nasscom.in /
6. http://www.expresscomputeronline.org /
7. Ministry of Communication and Information Technology, IT Amendment Bill, 2006
8. Sinha G, Accounting Theory and Management Accountancy, Book World,
Kolkata-700085, 1997
9. Forbes Magazine, 1997
10. Hair, Joseph F., et al, Multivariate Data Analysis, 2009, Pearson, New Delhi,
India.
11. Halsey Robert. F, Subramanyam K.R, 2006; Wild John.J, Financial Statement
Analysis, Tata McGraw Hill, New Delhi; India.

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