FINANACIAL ANALYSIS ON TCS

SUBMITTED TOPROF. D.V.RAMANA

Submitted byVineet Kumar (107061)Mousumi Padhi Sanjay Varma

Table of contents

Sl No Topic Page No.

1. Acknowledgement 3

2. Executive summary 4

3. Evolution of IT Industry 5

4. Nasscom McKenzie Report 6

5. Indian IT industry 2007 8

6. TCS-Introduction 13

7. Condensed balance sheet 15

8. Condensed income statement 16

9. Condensed cash flow statement 17

10. Ratio Analysis 18

11. DuPont Analysis 25

12 Market capitalization 26

13 EVA calculation 27

14 Inter company analysis 28

15. Accounting Policies 29

16 Reference 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.

5

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

6

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. 

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.

7

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

IT Industry-Sector-wise break-up

USD billion FY 2006 FY 2007 FY 2008 P

IT Services 17.8 23.6 30-31

Exports 13.3 18.0 -

Domestic 4.5 5.6 -

9

190,000 230,000 284,000

430,114522,250

670,000

830,000

1,058,000

1,630,000

1,293,000

3.0 3.3 4.25.9 5.8

8.310.2

13.2

15.9

1.8 2.74.0

6.27.7

13.3

31.9

6.3

18.3

24.2

9.8

FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07E

DOMESTIC MARKET

EXPORTS

1.2%1.4%

1.8%

2.6%2.8%

3.2%3.6%

4.1%

4.7%

5.4%

4.8

6.0

8.2

12.1

13.5

16.1

21.6

28.5

37.4

47.8

of GDP

USD Billion

Direct Employment

Eng Services and R&D, S/W Prods 5.3 6.5 ~8

Exports 4 4.9 -

Domestic 1.3 1.6 -

ITES-BPO 7.2 9.5 11-12

Exports 6.3 8.4 -

Domestic 0.9 1.1 -

Total Software and Services

Revenues 30.3 39.6 49-50

Of which, exports are 23.6 31.4 39-40

Domestic 6.7 8.2 ~10

Hardware 7 8.2 -

Total IT Industry (including

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.

10

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.

IV. Employment figures-Software and Services sector

Sector FY 2006 FY 2007

IT Services 398,000 550,000

Engineering Services and

R&D and Software

Products

115,000 140,000

  513,000 690,000

ITES-BPO 415,000 553,000

Domestic Market (including

user organizations)

365,000 378,000

Total 1,293,000 1,621,000

*Figures do not include employees in the hardware sector

V. Domestic Market Matures

11

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

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

12

TCS Introduction

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.

24.1%

34.4%

31.2%

19.3%

23.3%

22.1%

31.4%FY00-07

28.9%FY00-10

23.2%FY07-10

CAGR

10 YR TARGET

ACHIEVED

REQUIRED

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

TOTAL

Source: NASSCOM

1.9 2.5 2.6 3.96.0

4.06.2 7.7

12.8

23.6

9-10

39-40

FY00 FY01 FY02 FY04 FY06 FY08P FY10^

DOMESTIC MARKET* EXPORTS*

USD Billion

^NASSCOM McKinsey Study 2005

13-15

60

PERIOD

Figures may vary slightly due to rounding off

13

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

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  TCS

  2006-07(Mn) 2005-06(Mn) 2004-2005(Mn)

Sales 189,142.60 133,778.80 98243.60

COGS  Nil   Nil   Nil

Operating Expenses 135,463.60 95796.9 70164.00

Depreciation 4,401.70 2,824.30 1588.20

PBIT 49,277.30 35,157.60 26491.40

Interest 94.50 91.4 154.50

PBT 49,182.80 35,066.20 26336.90

Tax 6,738.80 5,095.70 3969.90

PAT 42,444.00 29,970.50 22367.00

CONDENSED INCOME STATEMENT

  TCS

  2006-07(Millions) 2005-06(Millions) 2004-05(Millions)

Capital 978.60 489.30 480.10

Reserves 89,640.40 61,146.00 35,192.70

LTL 5067.5 1166.9 2,030.10

CL 35,458.00 22,981.00 14,535.40

Total 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

Total 131,144.50 85,783.20 52,238.30

15

CONDENSED CASH FLOW STATEMENT

  TCS

  2006-07(Mn) 2005-06(Mn) 2004-2005(Mn)

Opening CIH 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

Closing CIH 13,964.50 4,323.80 2,746.90

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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.

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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

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 2005-06 2004-05

CA 78,776.50 51,417.10 31,846.30

Stock 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

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.

18

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. 

19

 

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.

20

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

Interest Coverage Ratio 521.45 384.66 171.47

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.

21

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.

22

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 26,491.40

% Increase in PBIT 40.16 32.71  

PAT 42,444.00 29,970.50 22,367.00

% Increase in PAT 41.62 33.99  

OF 90,619.00 61,635.30 35,672.80

% Increase in OF 47.02 72.78  

CE 95,686.50 62,802.20 37,702.90

% 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

23

Decease in ROTA can be attributed to increase of 53% in TA where as

PBIT only increased by 40%.

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.

24

EVA CALCULATION-

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

Loans 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

From a negative EVA company in 2004-05 TCS has turned into a positive

EVA company from 2005-06 onwards.

25

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

26

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

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.

27

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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