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Fundamental Analysis of Infosys and TCS performance for Financial year 2010-11
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ACKNOWLEDGEMENT
I am grateful to Mr K.K. Mittal (PMS Department Head, Globe Capital Market Ltd.) for providing me an opportunity to do work at Globe Capital Market Ltd. as a summer trainee. My project guide Mr. Archit Singhal timely support and encouragement helped me to complete the project successfully. I am thankful to Prof. Neeta Gupta for her guidance at every step of development of my internship project. It is a matter of great satisfaction to work in Globe Capital Market Ltd. and I thank all the staff of Globe Capital Market Ltd. who directly or indirectly helped me in completing this internship successfully.
Ankit Garg PGDM, FORE School of Management 2010-12 Batch FMG 191126
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CERTIFICATE
This is to certify that Mr.Ankit Garg Roll No.191126 has completed his summer internship at Globe Capital Market Ltd. and has submitted this project report entitled FUNDAMENTAL ANALYSIS OF INFOSYS AND TATA CONSULTANCY SERVICES PERFORMANCE FOR FINANCIAL YEAR 2010-11 towards part fulfilment of the requirements for the award of the Post Graduate Diploma in Management (FMG-19) 20102012.
This Report is the result of his/her own work and to the best of my knowledge no part of it has earlier comprised any other report, monograph, dissertation or book. This project was carried out under my overall supervision.
Date: Place:
Executive Summary
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Indian IT sector has seen phenomenal growth during early 2000. It has been first choice of institutional and retail investors. However due to increased competition and recent recession, the sector has been facing a lot of challenges. Financial year 2010-11 has produced mixed results wherein large companies underperformed and small companies unexpectedly outperformed the market. The main objective is to analyse financial year performance of Infosys and TCS for investment purposes. In order to analyse these companies, IT sector outlook of last year and various reviews were analysed along with government policies which apply on IT sector. Then trend analysis is performed in order to analyse Infosys and TCS. The results show that TCS though fundamentally strong is less probable to outperform market in coming 2-3 years and Infosys is fundamentally weak which is surrounded by legal issues and change management. Also Infosys still focuses on traditional projects. TCS on the other hand expending its product line and entered into services for cloud computing as well. The growth of Infosys was only 20% much less than expected growth rate of 25%. TCS has been able to meet the market expectations of 25%. Lastly for long term investors, Infosys is recommended SELL and TCS is recommended HOLD.
Table of Contents
Chapter 1: Introduction 9
Chapter 3: Objective. 13 Chapter 4: Methodology of Study. 14 Chapter 5: IT Industry Analysis. 15 Chapter 6: Common Size Statements. ......20 Infosys Technologies 20 Tata Consultancy Services 22
Chapter 7: Analysis of Financial Year 2010-11: Infosys Technologies.. .24 Chapter 8: Analysis of Financial Year 2010-11: Tata Consultancy Services Ltd...35 Chapter 9: Conclusion.. ..43 Chapter 10: Recommendation . ..45 Chapter 11: References.. ..46 Annexure .. .47
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List of Tables
Table Table Table Table Table Table Table Table Table Table Table Table Table 1 Common Size Balance Sheet: Infosys.....................................19 2 Common Size Income Statement: Infosys...............................20 3 Common Size Balance Sheet: TCS..........................................21 4 Common Size Income Statement: TCS....................................22 5 Utilization rate: Infosys.........................................................31 6 Customer Acquisition and Concentration: Infosys...................32 7 Customer Acquisition: TCS....................................................40 8 Customer Concentration: TCS................................................40 9 Balance Sheet: Infosys..........................................................47 10 Income Statement: Infosys..................................................48 11 Balance Sheet: TCS.............................................................49 12 Income Statement: TCS.......................................................50 12 Income Statement: TCS
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List of Figures
Figure Figure Figure Figure Figure Figure 1 2 3 4 5 5 Functioning of Software Segment........................................14 Market Share of IT industry.................................................14 Porter Five forces Model..................................................15 SWOT Analysis: Infosys........................................................33 SWOT Analysis: TCS.............................................................41 SWOT Analysis: TCS
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List of Annexure
Annexure I: Company Profile 45 Annexure II: Financial Statements 46
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Chapter 1: INTRODUCTION
In an increasingly globalised world, significant complexity and uncertainty is getting attached to the unprecedented economic crisis. The Indian economy has also been impacted by the recessionary trends, with a slowdown in GDP growth to seven per cent. The focus and exponential growth in the domestic market has partially offset this fall and insulated the country, resulting in net overall momentum. The IT-BPO industry in India has today become a growth engine for the economy, contributing substantially to increases in the GDP, urban employment and exports, to achieve the vision of a young and resilient India. During the year, the sector maintained its double digit growth rate and was a net hirer. This growth has been fuelled by increasing diversification in the geographic base and industry verticals, and adaptation in the service offerings portfolio. While the effects of the economic crisis are expected to linger in the near term future, the Indian IT-BPO industry has displayed resilience and tenacity in countering the unpredictable conditions and reiterating the viability of Indias fundamental value proposition. Consequently, India has retained its leadership position in the global sourcing market. While the industry has significant headroom for growth, competition is increasing, with a number of countries creating enabling business environments aimed at replicating Indias success in the IT-BPO industry. Hence, concentrated efforts are required by all stakeholders to address the current challenges, to ensure that India realizes its potential, and maintains its leadership position. The big picture for tier-I Indian IT services remains attractive, with global IT spending (ex hardware) exceeding US$1tn and a directly addressable offshore market of US$500bn. Despite India being the dominant offshore location, the Indian IT market share remains ~6% of global IT spend (excluding hardware). This leaves significant room for growth and significant untapped market space across service lines (Infrastructure management services (IMS), BPO, engineering services and package implementation), verticals (governments, healthcare, energy and utilities) and geographies (continental Europe, Japan). Near-term trends on improvement in developed country macro fundamentals, discretionary traction indicated by Accenture, Oracle and SAP signings and consolidation trends in the industry augur well from a demand perspective for the tier I Indian IT companies. Tier-I Indian IT companies are expected to grow US dollar revenues at a CAGR of 23% over FY11-13F. However, the recovery is not going to be a costless one and we expect EBITDA margins to decline by 80-200bps over FY12-14F (versus consensus expectation of margin stability). Abnormal growth will have to come at the cost of margins because operational scope is
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largely exhausted, lateral hiring would need to increase, competitive activity from MNCs is intensifying, price increases might not be sufficient and wage inflation will likely be doubledigit, with even a possibility of wage inflation at the entry level in FY13F. Further, tier-I IT companies will need to increase their sales spending to target the available growth, given that a large part of growth will come from deal rebids, newer clientele and underpenetrated market spaces over the medium term, in our view. Tier-I earnings are expected to lag revenue growth over FY12-14F. Investing in the IT sector through stocks is advised in those comapnies that benefit from: 1) strong discretionary demand sustenance and possible mix-based pricing upticks on greater skew towards this segment; 2) those better placed to compete with MNCs; 3) those gaining from aggressive MNC offshoring, and; 4) those with higher operational scope to limit the impact of supply-side pressures/growth investments. Big picture continues to be attractive There is significant scope for the Indian IT services industry to grow and, within the sector, for top-tier IT names to capture a disproportionate portion of that growth, on account of:
Huge market potential and big addressable market: Global IT spending (excluding hardware) exceeds US$1tn and the addressable market for offshore vendors is over US$500bn, according to NASSCOM estimates for 2010. This is 5x the offshore IT/Engineering services spending and 6x current offshore BPO spending. Low Indian IT market share: Indias IT market share is at ~6% of global IT spend (excluding hardware), according to NASSCOM estimates for 2010. Significant untapped market space: Across: 1) geographies (continental Europe, Japan and emerging markets); 2) verticals (healthcare, government, energy and utilities); and 3) service lines (IMS, engineering services, BPO). Industry consolidation trends: Top-5 Indian and Top-5 global IT players contribute ~23% of the global IT market according to Gartner estimates for 2010. We see consolidation of the fragmented 77% of the market towards larger players. Consolidation trends already visible in India with the top-5 players increasing their market share by 7% over the past six years to 34%. Current market trends augur well for offshoring: The key trends that we see are: 1) IT spending improving as US economic data recovers; 2) near-term deal renegotiations provide an opportunity for market share shifts; 3) a shift from insourcing to outsourcing; and 4) a shift from custom application development to packaged delivery.
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This paper presents a framework for industry analysis and business strategy development. Porter's five forces include - three forces from 'horizontal' competition: threat of substitute products, the threat of established rivals, and the threat of new entrants; and two forces from 'vertical' competition: the bargaining power of suppliers and the bargaining power of customers. F. Donaldson Brown (1914) This paper presents DuPont model of financial analysis. The DuPont Model is a technique that can be used to analyze the profitability of a company using traditional performance management tools. Bradford Cornell (2010) This paper points out that the performance of equity investments is inextricably linked to economic growth. Nonetheless, few studies on investing have explicitly taken research on economic growth into account. This study bridges that gap by examining the implications for equity investing of both theoretical models and empirical results from growth theory. The study concludes that over the long run, investors should anticipate real returns on common stock to average no more than about 4 percent. Allam & Lymer (2003) This Paper points out the result of a survey of 250 companies in five different countries showed continued progress in the area of internet financial reporting. Their study also showed that there was more voluntary financial information available online. Companies seem to be taking advantage of the internet and are disclosing a greater range of financial as well as nonfinancial information to investors and prospective investors, and other stakeholders. Bollen, Hassink, Lange, & Buijl (2008) This paper suggests that the primary objective of internet investor relations disclosures should be to provide investors with financial information to make capital allocation decisions. As we move into an era where online trading is likely to increase, investors and potential investors should easily be able to get information to make investment decisions. Omaima Hassan and Claire Marston (2010) This is the first study to provide an extensive and critical review of different techniques used in the empirical accounting literature to measure disclosure. The purpose is to help future researchers to identify exemplars and to select suitable techniques or to develop their own techniques. It also provides in depth discussion of current measurement issues related to disclosure and identifies gaps in the current literature which future research may aim to cover.
Chapter 3: Objective
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The objective of this report is to analyse financial performance of Infosys Technologies and Tata Consultancy services Ltd. in fiscal year 2010-11. This report aims to analyse the IT sector and emerging trend in IT sector. The purpose is to analyse whether these two companies have flexibility to adapt to emerging trends in technology. This research report aims to suggest investors whether to invest in stocks of these companies for long term period (essentially 1-2 year time period horizon).
A. RESEARCH DESIGN The project work was basically a descriptive research as it is confined to analysis of Infosys and TCS financial statements. B. METHODOLOGY First, background information on the IT sector was obtained. It was analysed using Porters five forces Model and PEST Analysis. Next, financial statements of last five years were assessed and analysed through Common Size Statements and Ratio Analysis. Then SWOT Analysis is being done on Infosys and TCS. Finally, conclusions and recommendations are given as appropriate. C. CHOOSING METHODS Porters five forces Model and PEST Analysis is used to analyse IT sector. Common Size Statements are prepared in order to perform trend analysis. Ratio Analysis is used to analyse Infosys and TCS various aspects of financial statements. SWOT Analysis is being used to analyse individual companies strengths, weaknesses, opportunities and threats.
MARKET SHARE
Indian IT industry is dominated by few large companies with presence of number of small and medium companies. TCS has the highest market share of 11% followed by Infosys which has 10%.
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When analyzing an industry, the analyst must recognize that the economic fundamentals can differ among industries. Analysis of the competitive environment with an emphasis on implications of the environment for corporate strategy is known as strategic analysis. Michael Porters five forces framework is the classic starting point for it. PORTERS FIVE FORCES MODEL
PEST ANALYSIS Political: Political stability: Indian political structure is considered stable enough expect the fact that there is a fear of hung Parliament (no clear majority). - Positive U.S. government has declared that U.S companies that outsource IT work to other locations other than U.S. will not get tax benefit. - Negative Government owned companies and PSUs have decided to give more IT projects to Indian IT companies. - Positive Terrorist attack or war. Negative Economical: Global IT spending (demand). (ve) Domestic IT Spending (Demand): Domestic Market grow by 20% Nasscom (+VE). Currency Fluctuation (-ve) Real Estate Prices: Increase in real estate prices has resulted increasing the rental expenditure (-ve). Attrition: Due to recession, the layoffs and job-cuts have resulted in low attrition rate (+ve). Economic attractiveness: Due to cost advantage and other factors (+ve) Social: Language Spoken: English is widely spoken language in India. English medium is the most accepted medium of education.(+ve) Education: Large number of technical institutes and universities over the countries provide IT education. (+ve) Working age population. (+ve) Technological: Telephony (+ve) India has the world lowest call rates India has the second largest telephone network after china. Enterprise telephone services, 3G, Wi-Max, VPN, poised to grow. Internet Backbone: Due to IT revolution in 90s India is well connected with undersea optical cables. (+ve)
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New IT Technologies: Technologies like SOA, web 2.0, High definition content, grid computing, and innovation in low cost technologies is presenting new challenges & opportunities for Indian IT industry.(+ve)
GROWTH DRIVERS OF IT SECTOR 1. Easy availability of Talent pool and cost advantage The sector is human power and knowledge-oriented and this cost accounts for more than 40% of overall cost. Indians are considered to have better mathematical skills required for writing software. The easy availability of this talent pool makes it a long-term advantage. Widespread knowledge of English makes this pool employable, as compared to other countries like China, Japan etc. Also, it is 5 to 8 times cheaper to employ an Indian technologist than one from developed countries and thus the business has been flowing to India over the years. 2. Process and Quality Nearly all the Indian software companies take CMM (Capability Maturity Model) certification, which is the benchmark of quality management. Out of approximately 250 companies reaching supreme level i.e. level 5 of CMM, 60 are from India. This gives the impression of the company being dependable and hence, helps them tap the market easily. 3. Unique geographic location The major consumer of IT products so far has been the US. The time difference between India and US is 12 hours and it offers economy of 24 hours a day by communication equipment. 4. Emerging technologies: Smartphone technology and cloud computing provides ample of opportunities for Indian IT companies to cater to the demand of these technologies. In order to sustain long term profitability and being in the commanding position, ADM services for these areas has to be looked upon. CONCERNING FACTORS FOR IT INDUSTRY 1. Threat of new emerging service economies Along with India, Israel and Ireland carry most of the benefits for development of IT Sector. These countries are now taking up the market share and posing threat to Indian IT sector. Moreover, software sector of Korea, Taiwan, Philippine challenges India. 2. Emergence of China as substitute China is gradually emerging as a tough competitor in offshore IT services. China has begun offering better rates with reduced operational costs as compared to India, because of its low cost talent pool. The government of China is taking measures to improve the IT sector and to overcome the language barrier. Chinas IT and BPO sector is expected to grow 30 percent annually by 2013. Bill Gates has forecasted that software sector of China would reach Indias in 5 years. 3. Hardware Sector lagging behind India is the leader for Software and ITeS sector. However, the development of hardware sector has been lagging, due to it being a low margin business. Indian companies thus have to depend on foreign countries for their hardware requirement. 4. Poor Infrastructure Greater communication facilities are necessary for software, ITeS, BPO to grow at faster rate. Communication network in India is far behind most of the
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western developed countries and worse than our closest competitor China. Arrival of 3G however, will give a relief to some extent. 5. Concentrated market and Anti-outsourcing United States and United Kingdom have been the dominant market for Indian IT sector. This dependency and concentration on few markets resulted in sudden fall in demand towards the end of last decade on the aftermath of the recent global crisis. Also, countries have started raising their concerns regarding migration of jobs to India. Diversified client base would help reduce the dependency of the sector on few economies. 6. Domestic consumption Overseas market accounts for 75% of Indian software sector, mainly from software outsourcing. The demand for IT products within India has been very less, as compared to those by other countries. The environment necessary for further growth of software sector would come with domestic consumption of its products. 7. Exchange rate A major part of the Sector revenue is earned in Foreign currency (due to high exports) but it incurs expenses (e.g. employee salary) in Indian rupees. Thus, appreciation of rupee reduces revenues whereas depreciation increases the revenues. The fluctuating exchange rate brings volatility in operating margins for IT sector. 8. Government policies - The extension of the tax holiday for STP units has been turned down by Indian government and moreover, the contentious provisions in the draft Direct Taxes Code ("DTC") seeking to levy Minimum Alternate Tax ("MAT") on Special Economic Zone ("SEZ") units have also been fast forwarded.
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Total Liabilities APPLICATION OF FUNDS : Gross Block Less:Accumulated Depreciation Net Block Capital Work in Progress Investments Current Assets, Loans & Advances Sundry Debtors Cash and Bank Loans and Advances Total Current Assets Less : Current Liabilities and Provisions Current Liabilities Provisions 19 | P a g e
7.89 8.45
8.12 19.54
6.32 12.24
6.30 10.94
5.48 12.29
Total Current Liabilities Net Current Assets Deferred Tax Assets Deferred Tax Liabilities Net Deferred Tax
Total Assets
Table 2 Common Size Income Statement: Infosys 2007 INCOME : Operating Income Excise Duty Net Operating Income Other Income Stock Adjustments 97.18 0.00 100.0 0 2.82 0.00 100.0 0 2008 95.82 0.00 100.0 0 4.18 0.00 100.0 0 2009 95.86 0.00 100.0 0 4.14 0.00 100.0 0 2010 95.63 0.00 100.00 4.37 0.00 2011 95.68 0.00 100.00 4.32 0.00
Total Income EXPENDITURE : Cost of Traded Software Packages Operating Expenses Employee Cost Power/Electricity Charges Selling and Administration Exp. Miscellaneous Expenses Total Expenditure Operating Profit Gross Profit 20 | P a g e
100.00
100.00
Depreciation Profit Before Tax Tax Deferred Tax Reported Net Profit Extraordinary Items Adjusted Net Profit
Loans and Advances Total Current Assets Less : Current Liabilities and Provisions Current Liabilities Provisions Total Current Liabilities Net Current Assets Deferred Tax Assets Deferred Tax Liabilities Net Deferred Tax Total Assets
25.54 78.63
26.72 71.17
28.06 67.76
27.56 66.49
22.66 64.20
Table 4 Common Size Income Statement: TCS 2007 INCOME : Operating Income Excise Duty Net Operating Income Other Income 98.60 0.01 98.59 1.43 100.0 0 2008 96.38 0.01 96.37 3.63 100.0 0 2009 98.72 0.01 98.72 1.28 100.0 0 2010 99.24 0.00 99.24 0.76 100.0 0 2011 98.34 0.00 98.34 1.66 100.0 0
Total Income EXPENDITURE : Cost of Traded Software Packages Operating Expenses Employee Cost Power/Electricity Charges Selling and Administration Exp. Miscellaneous Expenses Total Expenditure Operating Profit Interest Gross Profit 22 | P a g e
0.14 12.79 48.27 0.62 7.25 1.12 70.19 29.81 0.02 29.79
0.24 11.98 49.54 0.71 7.30 1.44 71.20 28.80 0.02 28.78
0.23 11.40 51.39 0.72 7.16 4.57 75.48 24.52 0.03 24.49
0.10 11.08 50.74 0.86 6.18 1.54 70.50 29.50 0.04 29.46
0.06 12.36 49.46 0.81 5.64 0.58 68.90 31.10 0.07 31.03
Depreciation Profit Before Tax Tax Fringe Benefit tax Deferred Tax Reported Net Profit Extraordinary Items Adjusted Net Profit
employees. Infosys takes pride in building strategic long-term client relationships. Over 97% of our revenues come from existing customers. REVENUES: Revenue is the top line of an Income statement. Companies in an industry may use different revenue recognition policies which may affect its revenues figure. However the growth in revenue is what matters most to an investor rather than the method used. But any change in revenue recognition accounting policy might affect the revue figure which needs to be adjusted. Both Infosys and TCS generate revenues primarily on fixed timeframe or time and material basis. Revenues from software services based on fixed price or fixed timeframe are recognized as per the proportionate completion method. On time and material contracts the revenue is recognized as the related services are rendered. Infosys revenue grew to Rs 25385 crore from Rs 21140 crore in the previous year at a growth rate of 20.1%. However this growth rate didnt meet investors expectations due to which Infosys stock saw a major decline of over 9%. The following charts show the revenue and operating income figures of Infosys of last five years.
The following line chart shows growth rate of Infosys revenues and operating income for last four years. Infosys margins hit last year as can be seen from lower operating income growth as compared to revenue growth.
Industrial Segmental profitability: Following charts shows the revenue and operating income figures of Infosys by industry.
The above chart shows that financial services contribute a major portion of revenues of Infosys. The growth rate of financial services, manufacturing and telecom sector last year clearly shows that these areas will be main target areas for the company. The same is true for the operating income. However the large decline in telecom operating income as compared to its revenue decline shows that the operating margin in this sector has hit badly. Obviously Infosys should try to disinvest in this sector if this negative growth rate prevails in the sector and the company wants to maintain its margin.
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Geographical Segmental Profitability: Following pie charts show the segmental revenues and segmental operating income in percentage terms for fiscal year ending 2011.
Following bar graph shows the growth rate in geographical segment revenue and operating income over last year. As it can be seen how the margins of the company has hit over last year. Despite the revenue growth of 120% in India, operating income grew only by 40%. This shows that projects in domestic market offer less return for the companies. Also margins in America and Europe have also declined. PROFITABILITY RATIOS: The ability to generate profit on capital invested is a key determinant of a companys overall and the value of securities it issues. Consequently profitability is considered to be a key aspect in investment analysis. Operating Profit Margin and Net Profit Margin: Infosys operating profit margin has improved but net profit margin has declined as shown in following chart.
The improvement in operating margin is due to the decline in selling and administration expenses as a percentage of revenues. However the increase in effective tax rate has lowered net profit margin of Infosys. Indian corporate tax rate as of March 2011 is 33.22%. According to companys Annual Report, currently the company is entitled to tax benefit under two schemes of government of India viz., the Software Technology Parks(STPI) and Special Economic Zone(SEZ) scheme. For the current year, 1.61% of revenues came from STP unit at Thiruvananthapuram, which was under tax holiday, 9.60% came from Mahindra City- Unit 1, Chennai which was eligible for 50% deductions and 13.34% came from other SEZs which were eligible for entire deductions. The balance 75.45% was entitled to entire tax rate which is up approximately 5% from previous year. Return on Capital Employed and Return on Equity: ROCE measures the profits a company earns on all of the capital that it employs. ROE measures the return a company earns on its equity capital. Due to decline in net profit margin returns of the company has also declined. This trend can be seen in decline of ROCE and ROE of Infosys.
VALUATION RATIOS Earnings per Share: Earnings per share measure the net profit of the company attributable to each share of common stock. The following line chart shows the EPS of the company for last 5 years. It can be seen that EPS grew by 5.6 % in last year against revenue which grew by
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20%. This shows how the margins of company have affected due to rising taxes and employee costs.
ACTIVITY RATIOS These ratios are also known as asset utilization ratios. These ratios measure how well a company manages various activities, particularly its assets. Since Infosys has no inventory and no accounts receivable there is no need for inventory turnover and accounts receivables turnover ratios. Debtors Turnover Ratio and Number of days of Payables: This reflects the average number of days the company takes to pay its suppliers and debtor turnover ratio measures how many times a year company pays off all its suppliers. Infosys debtors turnover ratio is increasing since last 4 years. Generally this is a negative sign as it means the credit terms are not in favour of the company. But here due to large cash reserves and less investment opportunites, the company need not have to avail best credit terms. Following trend line shows the Debtor turnover ratio of Infosys for last five years. Number of days of payables trend line also supports this trend as the number is decreasing since last 4 years.
Fixed Assets turnover: May be the company has improved marginally over last year but again its fixed asset turnover ratio lower than its competitors indicates that company has not been able to utilize its fixed assets efficiently. This is largely in part due to the companys policy of using no debt which has made its Cost of Retained Earnings higher. This might have led to decline in number M&As which I personally dont think of projects which would have been appropriate. The following chart shows the otherwise profitable. The large cash companys fixed assets turnover for last 5 balance is enforcing company to go for years.
LIQUIDITY RATIOS: These ratios focus on companys ability to meet short term obligations. Liquidity measures how quickly assets are converted into cash. The level of liquidity differs from industry to industry. A particular companys position may also vary according to the anticipitated need for funds at any given time. Current Ratio and Cash Ratio: This ratio expresses current assets in relation to current liabilities. Ideal current ratio should be 2:1. However looking at IT industry average this ratio seems to be 2.6:1. Looking at the trend line of Infosys Cash Ratio, it can be seen that company has huge reserves of cash due to which its current ratio is too high. This is a negative sign as it indicates that company doesnt have enough investment opportunities and its cash balances are deteriorating due to the high inflation in India.
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The following chart shows the cash and bank balances in comparison to total current assets in absolute terms.
On average cash balances accounts for 60% of total current assets which simply means that company lacks investment opportunities. This fact can be further illustrated from the trend line showing dividend payout ratio of the company.
OPERATIONAL PERFORMANCE: In service industry, human resource is of utter importance. Changing dynamics and needs of the customer possess challenges for the companies to retain its talent pool. Thus operational performance of the company shows how well the company is able to manage and retain its human resource. Employee cost per unit Revenue: This ratio measures the employee cost per unit of revenue generated. Looking at the trend line of Infosys and IT industry, it is clearly visible that Infosys is in line with IT industry average.
Revenue per Employee: Following trend line shows the revenue of Infosys per employee. Stable revenue per employee shows that company has been able to maintain its efficiency level. As of March 2011, Infosys had total of 130820 employees (net addition of 17024 over last year).
Attrition Rate: This has always been a sensitive issue for all organizations. For Infosys this aspect is of key concern as the attrition rate has climbed up to 17% from 13.4% in the previous year. This means last year 17% of talented workforce left the organization. However exact data on the costs associated with these attritions are not available but they can be estimated to be around 15-20% of employee costs. Utilization: Utilization measures the proportion of available time the employees are working. For Infosys, this has increased from 74.4% to 78.9% which might be seen as positive sign. But this is well below its competitors for which utilization rate is well above 80%. Again Infosys lacks behind its competitors in human resource management aspect. The table below shows the utilization rate including and excluding trainees for fiscal year ending 2011 and 2010.
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CUSTOMER ACQUISITION AND CONCENTRATION In highly competitive IT industry, acquisition of new clients is important for an individual company since the contracts are generally long term. This implies a contract provides economic benefits for several years. Another aspect is the concentration of clients according to the value added by them, i.e. the number of million dollar clients. The following table shows the concentration of clients of Infosys for fiscal year ending 2011 and 2010.
Table 6 Customer Acquisition and Concentration: Infosys
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Looking at above table, one can easily see how well the company has managed to acquire new clients. The performance is deteriorating as can be seen from additions year wise or quarter wise. Also the contribution of top clients has also decreased. The main reason could be high cost of retained earnings leading to high hurdle rate resulting in fewer positive NPV projects which otherwise would have been profitable. Also the aggressive pricing strategies (less profit margin) adopted by other companies like HCL Technologies and Mphasis, has resulted into fierce competition in IT industry.
SWOT ANALYSIS
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The following line chart shows the growth rate of TCS revenues and operating income in last 4 years. As it can be seen TCS margins have improved and the companys outlook is looking good for future years as well.
Industrial Segmental Profitability: The following pie chart shows the segmental revenue and segmental operating income as a percentage of total revenue and total operating income respectively.
The following bar chart shows the growth rate of revenues and operating income in different industry sectors.
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The above bar chart shows that Retail and Consumer packaged sector posted highest growth followed by Banking, Financial and Insurance sector. However the profit margins have declined implying the lower margins for the company. Also manufacturing sector posted negative growth rate in operating income. This means that profitability has deteriorated in this sector and the company should look to disinvest if its possible. Geographical Segmental Profitability: Following figures show the segmental revenues in percentage terms and growth rate in different geographical segments over last year for fiscal year ending 2011.
Growth rate predicts that there are opportunities in the domestic sector to which TCS can bank upon. However the profitability in domestic sector as well as other emerging economies will be lower. Comparing it with Infosys, TCS has outperformed Infy in American and European markets. PROFITABILITY RATIOS Operating Profit Margin and Net profit Margin: As shown below, net profit margin is in line with operating profit margin which shows that company still enjoys tax benefits. These tax benefits seem to be available for upcoming year which means TCS will continue to outperform its competitor Infosys.
Return on Capital Employed and Return on Equity: Due to high operating margins and net profit margins, TCS continues to outperform Infosys on the basis of ROCE and ROE. Also since TCS employs less capital as compared to Infosys, its ROCE is comparatively higher than Infosys. VALUATION RATIOS Earnings per share: The following trend line shows the earning per share for last 5 years. EPS grew up by 43% much higher as compared to growth rate of Infosys.
Dividend Payout Ratio: The following trend line of dividend payout ratio shows that the company has reduced its dividend payout ratio over last year which is a good sign for investors as it shows that company has good future projects for which it require cash reserves. Also dividend payout ratio in 2010 was 70% as US and Europe was still facing slowdown due to which there were not enough opportunities for Indian IT companies to grow.
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ACTIVITY RATIOS Debtors Turnover Ratio and Number of Days of Payables: Debtor turnover ratio is increasing (or No. of Days of Payables is decreasing) since last 4 years. This is generally considered a negative sign but here the company is trying to settle its liabilities as soon as possible.
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Fixed Assets Turnover Ratio: This ratio was on decline for earlier years as can be seen from trend line. However last year the companys operations has improved and due to high sales growth the fixed assets turnover ratio has also marginally improved. LIQUIDITY RATIOS: Current Ratio and Cash Ratio: For the financial year March 2010-11, TCS current ratio is somewhat near to ideal ratio of 2:1. Also long run average is also 2:1. The ratio was lower in 2010 due to slowdown in US economy. Also the companys cash ratio is increasing which means that company is accumulating cash suggesting availability of investment opportunities for TCS.
OPERATIONAL PERFORMANCE: Employee cost per unit Revenue: For every unit of revenue, TCS incurred on an average Rs . 49. As can be seen from the trend line companys employee cost per unit revenue is more than the industry average. This means that either TCS pay-package for employees is higher or TCS employs proportionately higher number of employees.
As of March 2011, TCS employs 175313 employees. This is fractionally higher than what it should be for generating same revenue. This is the reason why employee cost per unit revenue is higher. Revenue per employee: Following trend line shows the revenue per employee of the TCS. The revenue has marginally improved in 2010-11 as compared to previous year. However it still lags behind its peer group.
Attrition rate: TCS attrition rate is lowest in the industry which is 13.13%. This implies that TCS has been able to retain its talent pool effectively as compared to its peer group. However given the revenue per employee figure the attrition rate suggests that company is employing more than what it should have been. Utilization rate: TCS utilization rate for fiscal year 2010-11 is 82.14% (excluding trainees) & 75.1% (including trainees). This is way above the industry average of 80% (excluding employees). This shows that company has been utilizing its talent pool effectively. CUSTOMER ACQUISITION AND CUSTOMER RETENTION
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The following table shows the number of clients added by TCS in fiscal year ending March 2011. TCS has been able to attract more clients as compared to previous year which is a positive sign for the company.
Table 7 Customer Acquisition: TCS
The following table shows the contribution of clients and distribution of clients according to contract size. Contribution of top client has reduced which is a positive sign as it signals a lower risk of losing that client. Also there is large number of additions in small size contracts which means lesser risk for the company.
Table 8 Customer Concentration: TCS
SWOT ANALYSIS
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Chapter 9: Conclusion
Infosys and TCS are two major giants of Indian IT industry. Fiscal year 2010-11 has shown mixed results in IT industry. Infosys on one hand underperformed the market whereas TCS met its expectations. Looking closely one would find Infosys fundamentals weak due to several reasons outlined below:
1. Deteriorating cash reserves: High inflation and lack of investment opportunities has 2.
3. 4.
5.
resulted in deterioration of cash reserves of Infosys. High Cost of retained earnings: Since company finances all its projects internally, investors expectation of 25% growth means that company must select its projects earning at least 25%. This has resulted in fewer investment projects. High attrition rate: Infosys attrition rate is high compared to Industry average which means it has failed to retain its talent pool. Traditional approach: Infosys still invests in traditional projects. Smartphones and cloud computing require new array of applications which means there are opportunities in newer technology. Geographical segments: Infosys still confines itself to US and Europe whereas its peer group has started diversifying into other geographies.
TCS on the other hand sound good as it has entered into cloud computing. Following reasons could be attributed to its strong fundamental position:
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1. Lowest attrition rate: TCS has lowest attrition rate in whole industry. Also the
utilization rate is among the top companies. This means that company manages its human resources efficiently. 2. Diversification into new areas: After BPO sector, TCS is looking forward to cloud computing which provides a lot of scope to domestic players. 3. Focus on emerging economies: TCS has started focusing on domestic market due to high uncertainties in developed economies. Also in recent bidding process of ADHAAR project of Indian government, TCS looks way ahead of its competitors after HP and IBM has back out. However the whole IT industry is facing a transition where they no longer can work traditionally. Few challenges for whole IT industry are:
1. Government Policies: The extension of tax holiday has been turned down by Indian
government which means IT companies will have to pay higher taxes resulting in lower margins. 2. Legal Issues: Tax Authority if India is scrutinizing IT companies for their onshore revenues. It has already sent a legal notice to Infosys to pay Rs 450 crore as taxes for their onshore revenue in fiscal year 2008-09. Tax authorities can go 7 years back and make IT companies pay their dues which will result in cash problems for them. 3. High Uncertainty: US and Europe has not overcome recession yet and recent publications suggest that there is going to be slowdown for several years. For most of the IT companies, these two regions contribute over 80% of the business. Also US government is against outsourcing. 4. Higher costs: As Indian economy is developing the input costs for IT companies are also increasing. Since the employees account for a larger portion of expenses, IT companies will face lower margins in the future years. IT sector is now under a lot of trouble which requires better leadership and new avenues so that it can overcome resistance and mark new heights. As of next year, investors should diversify in other areas in order to reduce their risk.
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Romila Thapar (ed) India: Another Millennium, Viking Penguin Books, New Delhi, 2000
8. Newspaper articles and other publicly available data
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Total Liabilities APPLICATION OF FUNDS : Gross Block Less:Accumulated Depreciation Net Block Capital Work in Progress Investments Current Assets, Loans & Advances Sundry Debtors 40 | P a g e
Cash and Bank Loans and Advances Total Current Assets Less : Current Liabilities and Provisions Current Liabilities Provisions Total Current Liabilities Net Current Assets Miscellaneous Expenses not written off Deferred Tax Assets Deferred Tax Liabilities Net Deferred Tax
903 9 316 4 155 93 112 6 217 9 330 5 122 88 0 139 37 102 178 09 237 0
979 7 389 8 169 39 138 8 241 0 379 8 131 41 0 313 232 81 220 36 211 0
136 65 486 7 227 44 134 3 301 0 435 3 183 91 0 406 176 230 245 01 274 9
Total Assets
Contingent Liabilities
Table 10 Income Statement: Infosys 2007 INCOME : Operating Income Excise Duty Net Operating Income Other Income Stock Adjustments 13149 0 13149 381 0 1353 0 15648 0 15648 683 0 1633 1 20264 0 20264 876 0 2114 0 21140 0 21140 967 0 2538 5 0 2538 5 1147 0 2008 2009 2010 2011
2210 2653 7 2
1163.
1295.
1576
1913
2636
4 Employee Cost Power/Electricity Charges Selling and Administration Exp. Miscellaneous Expenses Less : Pre-operative Expenses Capitalised 6293 88 1298. 6 65 0
37 7791 106 1363. 09 111.5 4 0 1066 7 5664 1 5663 546 5117 650 17 -20 4470 0.14 4469. 86 0 4844 2672 6642 1902 0 665 9960 125 1556 513 0 1373 0 7410 2 7408 694 6714 898 0 -3 5819 0.14 5818. 86 -1 6642 2155 10305 1345 0 470 10340 122 1362. 72 40.28 0 1244 8 142 1735 9 0
Total Expenditure Operating Profit Interest Gross Profit Depreciation Profit Before Tax Tax Fringe Benefit tax Deferred Tax Reported Net Profit Extraordinary Items Adjusted Net Profit Adjustment below Net Profit P & L Balance brought forward Appropriations P & L Balance carried down Dividend Preference Dividend Equity Dividend %
8908 4622 1 4621 469 4152 375 17 -23 3783 6.11 3776. 89 -1 2195 1133 4844 649 0 230
1377 1697 8 0 8329 9562 2 1 8327 9561 807 740 7520 8821 1696 2521 0 0 21 -143 5803 6443 48 0 5755 0 10305 2302 13806 1434 0 500 6443 0 1380 6 4658 1559 1 3445 0 1200 102. 35 102. 35 426. 85
Earnings Per Share-Unit Curr Earnings Per Share(Adj)-Unit Curr Book Value-Unit Curr
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Table 11 Balance Sheet: TCS 200703 200803 200903 201003 201103 SOURCES OF FUNDS : Share Capital Reserves Total Equity Share Warrants Equity Application Money Total Shareholders Funds Secured Loans Unsecured Loans Total Debt 97.86 7961.1 3 0 0 8058.9 9 41.76 8.98 50.74 8109.7 3 197.86 10806. 95 0 0.05 11004. 86 9.27 8.98 18.25 11023 .11 197.86 13248. 39 0 0.05 13446. 3 32.63 8.41 41.04 13487 .34 295.72 14820. 9 0 0.03 15116. 65 29.25 6.49 35.74 15152 .39 295.72 19283. 77 0 0.03 19579. 52 35.87 5.25 41.12 19620 .64
Total Liabilities APPLICATION OF FUNDS : Gross Block Less:Accumulated Depreciation Less:Impairment of Assets Net Block Lease Adjustment Capital Work in Progress Investments Current Assets, Loans & Advances Inventories Sundry Debtors Cash and Bank Loans and Advances Total Current Assets Less : Current Liabilities and Provisions Current Liabilities Provisions Total Current Liabilities Net Current Assets 43 | P a g e
Miscellaneous Expenses not written off Deferred Tax Assets Deferred Tax Liabilities Net Deferred Tax
Total Assets
Contingent Liabilities
Table 12 Income Statement: TCS 2007 INCOME : Operating Income Excise Duty Net Operating Income Other Income Stock Adjustments 14942. 09 2.12 14939. 97 216.55 -2.78 15153 .74 18292. 68 2.83 18289. 85 689.82 -0.04 18979 .63 22406. 08 2.08 22404 289.87 1.73 22695 .6 23044. 84 0.39 23044. 45 177.6 -1.38 23220 .67 29275. 68 0.27 29275. 41 494.73 -0.87 29769 .27 2008 2009 2010 2011
Total Income EXPENDITURE : Cost of Traded Software Packages Operating Expenses Employee Cost Power/Electricity Charges Selling and Administration Exp. Miscellaneous Expenses
21.5 1938.6 6 7314.0 5 93.89 1099.1 5 168.97 10636 .22 4517. 52 3.43 4514.0 9 343.41 4170.6
45.13 2272.9 7 9401.9 7 135.57 1384.6 3 273.3 13513 .57 5466. 06 3.42 5462.6 4 458.78 5003.8
52.67 2587.4 8 11663. 54 164.34 1624.7 5 1038.2 3 17131 .01 5564. 59 7.44 5557.1 5 417.46 5139.6
23.73 2571.7 2 11783. 19 200.49 1434.8 1 357.46 16371 .4 6849. 27 9.54 6839.7 3 469.35 6370.3
17.71 3678.4 1 14723. 6 240 1678.8 7 172.42 20511 .01 9258. 26 20.01 9238.2 5 537.82 8700.4
Total Expenditure
8 Tax Fringe Benefit tax Deferred Tax Reported Net Profit Extraordinary Items Adjusted Net Profit P & L Balance brought forward Appropriations P & L Balance carried down 406.84 17.75 -11.2 3757. 29 66.51 3690.7 8
6 440.47 24.65 29.98 4508. 76 7.18 4501.5 8 4919.9 9 2053.8 6 7374.8 9 1370.0 5 0.08 1400
9 375.59 23 44.89 4696. 21 46.7 4649.5 1 7374.8 9 2080.6 9 9990.4 1 1370.0 5 7 1400
8 864.3 0 112.43 5618. 51 120.44 5498.0 7 9990.4 1 5150.7 9 10458. 13 3914.4 3 17 2000
2740.1 11 1400
Earnings Per Share-Unit Curr Earnings Per Share(Adj)Unit Curr Book Value-Unit Curr
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