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Contents

COMPANY OVERVIEW ................................................................................................................................... 1

INDUSTRY OVERVIEW .................................................................................................................................... 1

ABRIDGED FINANCIAL STATEMENTS ........................................................................................................ 2

KEY ACCOUNTING POLICIES ........................................................................................................................ 3

OVERALL ANALYSIS ........................................................................................................................................ 4

CASH FLOW ANALYSIS .............................................................................................................................. 4

RATIO ANALYSIS ............................................................................................................................................. 5

TREND ANALYSIS ............................................................................................................................................ 6

COMMON SIZE ANALYSIS ........................................................................................................................ 6

COMPARATIVE ANALYSIS ............................................................................................................................. 7

OPERATING-FINANCIAL PERFORMANCE ASSESSMENT ....................................................................... 9

OPERATING-FINANCIAL STRENGTH AND WEAKNESS ........................................................................ 10

REFERENCES ................................................................................................................................................... 10

1

COMPANY OVERVIEW

Company Name : Tata Consultancy Services

Chairman : Cyrus Pallonji Mystry

CEO : N Chandrasekharan

Stock Exchange : National Stock Exchange, Bombay Stock Exchange

Tata Consultancy Services is a multinational IT services, consulting and business solutions company which is a

subsidiary of the much revered TATA group. Revenues for the financial year 2013-2014 was INR 13.44 billion.

Established in 1968 by Mr. JRD Tata as a subsidiary of Tata Sons, it is one of the first IT solutions companies in the

world and is headquartered in Mumbai. It became a separate entity in 1995. TCS is listed as one of the Top 10

technology firms in the world. Making its presence felt over 46 countries, it provides employment to around 3 lakh

people across the world and is the second largest employer in India after Coal India Ltd. The employees of the

company are from 80 different countries, making it one of the most diverse workplaces. The current CEO of the

company, Mr. N. Chandrashekharan also heads NASSCOM, the IT regulatory authority of India.

TCS is the largest provider of information technology in Asia and the second largest provider of business

process outsourcing in India. The company boasts of 95% customer retention and one of the lowest employee

attrition rate (11.8%). The business of the company spans numerous sectors such as banking, energy, hi tech,

insurance, telecom etc. The company has 58 subsidiaries. TCS delivers its business through its famous Global

Network delivery Model, which is considered as a benchmark of excellence in the field of software

development. TCS is the world’s first organization to achieve an enterprise-wide Maturity Level 5 on both CMMI

and P-CMM, using SCAMPISM, one of the best assessment methodologies. The Integrated Quality Management

System (IQMS) of TCS integrates people, process and technology through different frameworks such as IEEE, CMMI

and 6-Sigma.

INDUSTRY OVERVIEW

The IT industry in India is a USD 50 billion industry and is expected to touch the USD 85 billion mark this

year. The pace of overall economic growth of the nation can be attributed to the pace with which IT industry

has expanded in the country steadily from the 1990s. The industry contributes 8.1% to the GDP of India. The

industry comprises 4 major components: software products and engineering services, IT services, IT enabled

Services and hardware. Indian IT industry can be classified into two markets: exports and domestic. The US

accounts for two-thirds of the export revenues, which makes the fortunes of the industry heavily dependent on

the fluctuations in dollar. As of now, the corporate spending on the domestic IT industry has been lean due to

the weak economic status. Hardware continues to be the major chunk of the domestic industry while financial

services takes the lion’s share in the export category.

While the union budget does not have any specific emphasis on the IT sector, the government’s recent

allocation of funds worth INR 6000 Million for setting up virtual classrooms and IT development in the rural

areas is good news for the domestic IT sector. The number of IT based start-ups in the past few years have been

overwhelming (450+ start-ups in the last 5 years). The growth in the IT sector has been due to the increase in

exports. The main players in the IT sector industry in India are Tata Consultancy Services, Infosys, Wipro, HCL

and CTS. The reason for the huge boost for IT industry in India is attributed to the cost leadership of 3-4 times

that of USA, states NASSCOM in its 2014 reports. This is one of the reasons why CTS, an American company and

one of the leaders in the industry shifted its base to India. NASSCOM has predicted 12-14% growth rate in the

IT sector in India for the financial year 2014.

3

KEY ACCOUNTING POLICIES

TCS follows Indian GAAP to prepare its accounting statements.

Use of estimates

Estimates have been used for provision for doubtful receivables, employee benefits, provision for income taxes,

accounting for contract costs expected to be incurred, the useful lives of depreciable fixed assets and provision

for impairment. Due to the use of estimates, there is a possibility of change in the future results since there will

be a difference in the estimated values and the actual values, during the period in which the estimates

materialize.

Fixed assets

TCS states fixed assets at cost, less accumulated depreciation/amortization. Costs include the expenses incurred

to bring the assets to their present location and condition. Fixed assets excludes computers and other assets

which individually costs less than INR 50,000 which are not capitalized unless they are part of a larger capital

investment scheme.

Depreciation/ Amortization

Depreciation/amortization on fixed assets other than on freehold land and capital work-in-progress is charged

so as to write-off the cost of the assets. Fixed assets purchased for specific projects are depreciated over the

period of the project.

Revenue recognition

Revenue from contracts priced on a time and material basis are recognized when services are rendered and

related costs are incurred. Revenue from sale of software licenses are recognized upon delivery. Revenue is

reported net of discounts.

Taxation

Current income tax expense of TCS comprises taxes on income from operations in India and in foreign

jurisdictions. Minimum Alternative Tax (MAT) is recognized as an asset in the balance sheet when the asset can

be measured reliably and it is probable that the future economic benefit associated with it will fructify. Deferred

tax expense or benefit is recognized on timing differences being the difference between taxable incomes and

accounting income.

Investments

Long-term investments and current maturities of long-term investments are stated at cost, less provision for

other than temporary diminution in value. Current investments, except for current maturities of long term

investments, are stated at the lower of cost and fair value.

Cash and Cash equivalents

TCS considers all highly liquid financial instruments that are readily convertible into known amounts of cash and

having original maturities of 3 months or less from the date of purchase as cash equivalents.

Foreign Currency Transactions

Income and expense in foreign currencies are converted at exchange rates prevailing on the date of the

transaction. Premium or discount on foreign currency forward, option and futures contracts are amortized and

recognized in the statement of profit and loss over the period of the contract.

4

OVERALL ANALYSIS

Broad Highlights from Balance Sheet

The reserves have risen over the 5 year period, by nearly 200%. The reserves account for most of the

shareholders’ funds, nearly 99%.

Total current liabilities have risen from 72392.2 to 122399.10 Million, by close to 70%. Majority of the

increase has been from unearned revenue (about 6400 Million), other payables including statutory and

capital creditors (about 13000 Million), trade payables (about 11000 Million) and short term provisions

(about 19000 Million).

Debt has gone up by over 220% over the 5 years. Secured and unsecured loans have both contributed to it,

secured loans rising by 200% and unsecured loans rising by 313%.

Total equity and liabilities have gone up by 156%, with the major shares coming from reserves which

increased by 195% and Total current Liabilities which increased by 70%

Capital Work-in-progress has shown a huge increase of 224% largely arising from the amalgamation of

erstwhile subsidiaries into the company.

Trade receivables have gone up by 334% over the 5 years. The majority of these are due under 6 months

after their payment date.

Cash held by the company has gone up over the 5 years by almost 270%. The rise in trade receivables and

cash has led to an increase in current assets by 216%. Overall, the increase in cash and trade receivables has

fuelled the increase in the reserves and trade receivables in these 5 years

Broad Highlights from Income Statement

Operating income has gone up by 416310 Million over the 5 years, an increase of 180% from 2010.

During the same period operating expenses have increased by 582% and total expenses have gone up by

163%.

This has led to an increase in Operating profit of 178000 Million, a 260% increase from 2010.

Tax expenses have gone up by 42270 Million over the 5 years, an increase of nearly 490%.

CASH FLOW ANALYSIS

Broad Highlights from Cash Flow Statement:

The total cash held by the company has increased from 2930 Million to 4380 Million over the 5 years, an

increase of 50%.

Cash from Operating Activities

Net cash from Operating activities has gone up by 66630 Million, an increase of 106%.

Cash Flows decreased in 2012 compared to previous years but increased sharply again in 2013. This was

due to a large amount of trade receivables in 2014 compared to previous years.

The biggest factor in increasing the operating cash flow over the past 4 years has been the increase in Net

profit which has increased by 270%.

Cash used in investing activities

Net cash used in investing activities has fluctuated over the 5 years. In 2010, 45560 Million were used, and

this came down over the next two years and the company gained 4330 Million in cash from investing

activities in 2012. The outflow of cash rose in the next two years and 71430 Million were used in 2014

The major component in this trend was the dividend received which was much higher in 2012. Also, there

was a large change in the cash outflow due to fixed deposit placed with banks in 2014 compared to other

years which led to higher cash outflow.

Cash used in financing activities

There was a sharp increase in cash used for financing activities from 2010 to 2011 with a rise of 134%. The

amount has remained relatively steady since then with a 23% growth in the next 4 years

The biggest change from 2010 to 2011 is the dividend paid which has increased by 135%.

5

RATIO ANALYSIS

CURRENT RATIO

The current ratio of the company has shown a steady increase over the 5

years. This shows that the liquidity of the company has been increasing as

also shown by the increasing cash balance.

RECEIVABLES TURNOVER

The receivables turnover has steadily decreased showing that more and more

of the company’s revenue is tied up in credit deals and this is reducing the

efficiency of the operations

LIABILITY TO EQUITY

The company has low amount of liabilities as shown by the liability to equity

ratio. Most of the capital funding for the company is drawn from the reserves

and surplus which decreases dependency on outside agencies

3

PROFIT MARGIN

The profit margin of the company has steadily increased as the revenue from

sales has grown at a much faster rate than the operating expenses.

INTEREST COVERAGE

The company has very little debt. This reflects in the amount of interest to be

paid annually. The interest coverage ratio was over 1000 in 2014 which

shows that they will have no problems servicing the interests.

CURRENT ASSET TURNOVER

Apart from an increase in 2011, current asset turnover has decreased over

the 5 years. This shows that the company has become less efficient in utilizing

its current assets in raising sales, and the efficiency of the company has

decreased.

6

TREND ANALYSIS

Sales have gone up to 280% while

Accounts receivables have gone

up to 434%. This means that more

and more of the revenue is being

tied up in credit deals.

Though sales have grown by only

180%, Operating profit has

grown by a much larger amount,

270%. This is because the Total

expenditure has not grown at a

similar scale to sales, at only 163%

Operating Expenses have

become almost 6 times in the 5

year period, increasing by 583%.

Cost of Goods Sold (Traded

software packages) has not

increased at the same rate, at only

68%.

The Taxes Payable has increased

at a faster rate than Profit before

taxes. White Profit Before taxes

has increased by 270%, taxes

payable has increased by 489%

COMMON SIZE ANALYSIS

Reserves and Surplus form the

bulk of equity and liabilities, 66-

76%. The other major component

is Current Liabilities which

contribute from 32-22% over the

five years

The contribution of Debt to

Liabilities and equities is

negligibly low, at just around 0.2%

in 2014, with a highest of 0.4% in

2013

Current assets form the bulk of

total assets, ranging from 48% in

2010 to 59% in 2014. The major

components in this are accounts

receivables and cash which

accounts for 25% and 22% of total

assets in 2014

7

COMPARATIVE ANALYSIS

Gross Margin vs. Sales Growth

The Gross Margin has remained nearly constant near 100% over the 5 years for all three companies. This is

because as service companies, the cost of goods sold is 0 or negligible compared to the total sales. TCS has in

the same time shown a much higher increase in sales percentage compared to its competitors.

Profit Margin vs. Sales Growth

The Profit Margin of TCS has gone slightly up in the 5 years as its sales have gone up over that of its competitors.

This shows that operating expense of TCS has increased at a lower rate compared to its competitors.

Current Asset Turnover vs. Profit Margin

The Current Asset turnover of TCS is much higher than that of its competitors Wipro and Infosys, meaning that

TCS is able to use its assets in a much more efficient way to generate profits

Receivables Turnover vs. Profit Margin

8

We can see that in 2010, the recievables turnover of TCS was higher than its competitors. But over the 5 years,

TCS has used more credit sales and its recievables turnover ratio has gone below its competitors as the

efficience of its cash collection decreased.

Current Ratio vs. Profit Margin

We can see that the current ratio of TCS shows a steady increase as its competitors have maintained a steady

value for it. Even so Infosys still has a better Current ratio than TCS showing that it still has more liquidity.

Sales growth vs. Market Valuation

Despite a higher sales growth compared to its competitors, the market valuation of TCS is still much lower than

its competitors. The market valuation of both Wipro and Infosys has gone up while that of TCS has gone down

over the 5 years.

Dividend Payout vs. CapEx

We can see that the dividend offered by TCS has increased over the 5 years to be much higher than that offered

by its competitors. TCS is also spending much more on capital expenditures compared to its competitors and

its value has risen sharply to Rs. 35571 million.

9

OPERATING-FINANCIAL PERFORMANCE ASSESSMENT

The revenue of TCS has grown at a steady rate over the last 5 years at a much faster rate than its

competitors. At the same time the profit margin of TCS has also grown faster than the competitors, showing

that TCS is in a strong position in raising revenue as its expenses are not increasing as much as its revenue.

The company is financed almost exclusively through equity with very little debt to speak of. This is also

reflected in the interest that the company pays which is very low compared to the Earnings before Tax. The

cash balance of the company has grown year by year and forms a significant part of the assets in 2014. The

Reserves and Surplus allocated dominates the equity raised from shareholders. So TCS is in a position where it

is financed mostly from the cash raised through its operations and not dependent on its shareholders. This

means that there is high liquidity for the firm and it will have no problems meeting its short term obligations.

The company had trouble collecting its receivables during 2012 and 2013 leading to a decrease in cash

flow. Although the company has recovered some of these, we can see that the receivables turnover ratio has

suffered a steady increase over the five years. This shows that the company is having more and more trouble

receiving the cash from its operating activities.

Looking at the liquidity ratios, the current and quick ratios of the company are steadily increasing which

shows that the liquidity situation as can be seen by the increasing cash status. But we can see that the current

asset turnover of the company is steadily decreasing over the 5 years showing that TCS is not efficiently

utilizing its assets to deliver profits.

Looking at the overall industry, TCS leads its closest competitors Infosys and Wipro in almost all factors,

Profitability, Liquidity, Efficiency and Solvency. With its cash balance, high reserves and low debt, conditions

looks favorable for TCS to grow further and stay as the market leader in the industry.

10

OPERATING-FINANCIAL STRENGTH AND WEAKNESS

Weaknesses:

The high cash balance, while helping with liquidity also means that cash is lying idle with the

company. The management is not able to come up with projects to use the money available in an

efficient way and hence the company is losing out on profits it could have otherwise had.

TCS faced a problem with regaining money from credit sales during 2012 which affected its credit

sales. Its receivables turnover ratio is also showing a decrease in the efficiency of the company. This

situation is to be avoided to prevent more bad debt losses for the company.

The current asset turnover ratio of TCS has been declining through the five years. This is an area where

the company lags behind its closest competitors. The company has to start using its assets more

efficiently to maximize its revenue.

The taxes paid is rising at a much higher rate than the revenues. This is eating into the profits after tax

of the company.

Strengths:

The low amount of debt means that very little is spent as interest. The Reserves and Surplus also

account for most of the equity of the company. Hence the company is not dependent on creditors or

owners to provide capital.

The revenues of the company have increased at a steady high rate over the five years. This growth has

also outpaced the growth of operating expenses. At this rate, the profitability of the company will

outstrip that of its competitors in the near future.

TCS is able to give much more dividends compared to its competitors. This will enable it to raise more

capital from investors if the need arises.

With higher values of Current ratio and quick ratio, TCS has much more liquidity than its competitors.

Its high cash reserves also means that it is highly solvent and will have no trouble meeting its financial

obligations.

REFERENCES

http://www.capitaline.in/

http://www.tcs.com/investors/financial_info/Pages/default.aspx

http://www.infosys.com/investors/reports-filings/annual-report/

http://www.wipro.com/investors/annual-reports.aspx

http://www.nasscom.in/positive-outlook-itbpm-industry-fy-2014