Annual Report Analysis Final- MA

7/31/2019 Annual Report Analysis Final- MA

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Annual report Analysis Management Accounting 2011

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Prepared by:

1. Alok Sinha (Roll No: ePGP-03-095)2. Nitin Jaiswal (Roll No: ePGP-03-139)3. Nitesh Kumar (Roll No: ePGP-03-138)4. Sharon Selvaraj (Roll No: ePGP-03-167)5. Yeshaswini GR (Roll No: ePGP-03-193)


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Table of Contents

1. OVERVIEW OF THE INDUSTRY ....................................................................................................................... 4

A. ITSOFTWARE,SERVICES AND BPO ..................................................................................................................... 4

B. OVERALL PERFORMANCE.................................................................................................................................. 5

a) Revenue................................................................................................................................................. 5

b) Exports .................................................................................................................................................. 5

c) Domestic Market ................................................................................................................................... 6

C. EXPORT DESTINATIONS .................................................................................................................................... 7

D. EMPLOYMENT ............................................................................................................................................... 7

E. FUTURE TRENDS............................................................................................................................................. 8

2. BEST AND WORST PART OF ANNUAL REPORTS.............................................................................................. 9

A. INFOSYS ..................................................................................................................................................... 9

Best Part........................................................................................................................................................ 9

Worst Part..................................................................................................................................................... 9

B. TCS ............................................................................................................................................................ 9

Best Part........................................................................................................................................................ 9

Worst Part..................................................................................................................................................... 9

3. MANAGEMENT ANALYSIS AND DISCUSSION SECTION ................................................................................. 10

A. INFOSYS ................................................................................................................................................... 10

a) Business............................................................................................................................................... 10

b) Subsidiaries ......................................................................................................................................... 11

c) Branding .............................................................................................................................................. 11

d) Awards and recognition ............. .............. ............ .............. .............. ............ ............. .............. ............. 11

e) Capital expenditure .............................................................................................................................. 12

f) Liquidity ............................................................................................................................................... 12

g) Increase in share capital....................................................................................................................... 12

h) Appropriations Dividend ............ .............. ............ .............. .............. ............ ............. .............. ............. 12

B. TCS .......................................................................................................................................................... 13

a) Dividend .............................................................................................................................................. 13

b) Transfer to Reserves............................................................................................................................. 13

c) Operating Results and Business ............................................................................................................ 13

d) International Credit Rating ................................................................................................................... 14

e) Strategic Acquisitions and Alliances ...................................................................................................... 14

f) Human Resource Development ............................................................................................................ 14

g) Fixed Deposits ...................................................................................................................................... 14

4. CASH FLOW STATEMENTS ........................................................................................................................... 14

A. INFOSYS ................................................................................................................................................... 15

B. TCS .......................................................................................................................................................... 15

5. RATIO ANALYSIS OF THE TWO COMPANIES ................................................................................................. 17

a) Profitability Ratios ............................................................................................................................... 17


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b) Solvency and Liquidity Ratios ............................................................................................................... 18

c) Investors Ratios .................................................................................................................................. 19

A. INFOSYS ................................................................................................................................................... 20

B. TCS .......................................................................................................................................................... 22

6. RECOMMENDATION .................................................................................................................................... 247. REFERENCES ................................................................................................................................................ 25


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1. Overview of the IndustryA. IT Software, Services and BPO

Information Technology has made possible information access at gigabit speeds. It hascreated a level playing field among nations and has made positive impact on the lives ofmillions who are poor, marginalized and living in rural and far flung topographies.Internet has made revolutionary changes with possibilities of e-filing Income Tax returnsor applying for passports online or railway e-ticketing.

Today a countrys IT potential is paramount for its march towards globalcompetitiveness, healthy GDP, improving defense capabilities and meeting up the energyand environmental challenges.

The Indian Information Technology- Information Technology-Enabled Services (IT-ITES) industry has continued to perform its role as the most consistent growth driver forthe economy. Service, software exports and BPO remain the mainstay of the sector. Overthe last five years, the IT & ITES industry has grown at a remarkable pace. Considersome of the significant indicators for these remarkable achievements. The IT/ITESexports have grown to a staggering US$ 46.3 billion in 2008-09, the IT sector currentlyemploying 2.2 million professionals directly and another 8 million people indirectlyaccounts for over 5% of GDP, a majority of the Fortune 500 and Global 2000corporations are sourcing IT/ITES from India and it is the premier destination for theglobal sourcing of IT/ITES accounting for 55% of the global market in offshore ITservices and garnering 35% of the ITES/BPO market.

The Indian IT-BPO sector including the domestic and exports segments continue to growfrom strength to strength, witnessing high levels of activity both onshore as well asoffshore. The companies continue to move up the value-chain to offer higher endresearch and analytics services to their clients. India's leadership position in the global ITand BPO industries are based primarily on the following advantages.

India accounts for around 28 per cent of IT and BPO talent among 28 low-cost countries.It has a rapidly growing urban infrastructure fostering several IT centers in the country.Offshore service centers are spawning in the country due to operational excellence withlow delivery cost, quality leadership and a conducive business environment. Favorable

policy interventions, enabling infrastructure and augmenting a wide skill base from thegovernment has further enhanced Indias brand image.

The Department of IT is coordinating strategic activities, promoting skill developmentprogrammers, enhancing infrastructure capabilities and supporting R&D for Indiasleadership position in IT and IT-Enabled services.


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B. Overall Performancea) Revenue

The Indian Software & services industry has grown at a remarkable pace since 2001-02.

The overall Indian Software & Services industry revenue is estimated to have grownfrom US$ 10.2 billion in 2001-02 to reach US $ 58.7 billion in 2008-09- translating to aCAGR of about 26.9 per cent. Despite the severe global recession, the industry grew atmodest rate of 12.9 % in 2008-09. . IT-ITES industrys growth trends are given in thetable below.

IT ITES Industry Revenue Trends

Year/ Item 2001- 02 2002- 03 2003- 04 2004- 05 2005- 06 2006- 07 2007- 08 2008- 09 CAGR

IT-ITeS Exports 7.6 9.5 12.9 17.7 23.6 31.1 40.4 46.3 28.6

IT-ITeS Domestic 2.6 3.0 3.8 4.8 6.7 8.2 11.7 12.4 22.2

Total 10.2 12.5 16.7 22.5 30.3 39.3 52.0 58.7 26.9

As per NASSCOM, the industry is diversified across three major focus segments ITServices, BPO and software products & Engineering services. While IT Services havebeen the mainstay of the industry, BPO and Engineering services sector has built uponthe India value proposition and today there exist integrated service providers across thethree focus areas as well as niche providers. The major three components of IT Services

sector are custom application development, application management and support andtraining. Other significant components are IT consulting, systems integration,Infrastructure Services (IS) outsourcing, network consulting & integration and softwaretesting.

Among the verticals serviced by Indias IT-ITES-BPO industry those that account forthe largest share of revenue are banking, financial services and insurance(BFSI-41%),Hi-Tech/Telecom(20%), manufacturing(17%), retail(8%), with smaller contributionscoming from media, publishing and entertainment, construction and utilities, healthcareand airlines and transportation. Important industry verticals being serviced by the BPOsegment are insurance, retail banking, travel and hospitality, auto manufacturing,

telecom and pharmaceuticals. Horizontals such as Customer Interaction and Support(CIS), Finance and Accounting (F&A) and Human Resource Management (HRM) areimportant areas in the BPO segment.

b) ExportsExports continue to dominate the revenues earned by the Indian Software & ServicesIndustry. The export intensity (the share of IT-ITeS Exports to total IT-ITeS Revenue)


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of Indian Software & Services Industry has grown from 74.5% in 2001-02 to 78.9% in2008-09. Total Software & Services Exports are estimated to have grown from US $ 7.6billion to US $ 46.3 billion in 2008-09, a CAGR of 28.6%.

The share of ITES-BPO exports has nearly doubled during this period. The total ITeS -

BPO exports is estimated to have increased from US $ 1.5 billion in 2001-02 to US $12.7 billion in 2008-09, a CAGR of about 39.2 per cent. BPO now accounts for about 27per cent of total exports. The Indian BPO sector has not only added scale in the last nineyears, but has also matured significantly in terms of scope of service offerings, buyersegments served and service delivery models. Apart from achieving maturity in thehorizontal segment, providers are increasingly developing vertical/domain specializationto capture greater value.

The fastest growing segment however is software products. It is growing at a CAGR of48.5 per cent. Segment wise export revenue trends are given in the table below.

Segment wise export Revenue Trends in IT ITES Industry

Year/ Item2001-

02

2002-

03

2003-

04

2004-

05

2005-

06

2006-

07

2007-

08

2008-

09CAGR

IT Service 5.8 5.5 7.3 10.0 13.3 17.8 23.1 26.5 23.2

ITeS-BPO 1.5 2.5 3.1 4.6 6.3 8.4 10.9 12.7 39.2

Software Products, Engineering

Services0.3 1.5 2.5 3.1 4.0 4.9 6.4 7.1 48.5

Total IT-ITeS 7.6 9.5 12.9 17.7 23.6 31.1 40.4 46.3 28.6

Source: Nasscom

c) Domestic MarketThough the IT-BPO sector is export driven, the domestic market is also significant. Therevenue from the domestic Software & Services market is estimated to have grown fromUS $ 2.6 billion in 2001-02 to US $ 12.4 billion in 2008-09 a CAGR of about 22.2 per

cent.

In the Domestic verticals of the Indian IT-ITeS Industry the IT Services segmentcontinues to dominate domestic portfolio of the industry. Its share however has declinedfrom 80.8% in 2001-02 to 66.9% in 2008-09.


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ITeS-BPO segment in the domestic market has witnessed noticeable growth over thepast few years. The share of ITeS-BPO industry in domestic market is estimated to haveincreased from 3.8% in 2001-02 to 15.3% in 2008-09.

Segment wise Domestic Revenue Trends in IT ITES Industry

Year/ Item2001-

02

2002-

03

2003-

04

2004-

05

2005-

06

2006-

07

2007-

08

2008-

09CAGR

IT Service 2.1 2.4 3.1 3.5 4.5 5.5 7.9 8.3 19.5

ITeS-BPO 0.1 0.2 0.3 0.6 0.9 1.1 1.6 1.9 44.5

Software Products, Engineering

Services0.4 0.4 0.4 0.7 1.3 1.6 2.2 2.2 23.7

Total IT-ITeS 2.6 3.0 3.8 4.8 6.7 8.2 11.7 12.4 22.2

C. Export DestinationsUSA & UK continues to be major markets for the IT software and services exports.However the share of USA has declined from 68.3 per cent in FY2005 to 60 per cent inFY2008, whereas that of Europe has increased from 23.1 per cent to 31 per cent over thesame period. Markets across Continental Europe and the Asia Pacific are also witnessing

significant year-on-year growth. This trend towards a broader geographic marketexposure is positive for the industry, not only as de-risking measure but also as a meansof accelerating growth by tapping new markets.

Market FY05 FY06 FY07 FY08

Americas 68.30% 67.18% 61.40% 60%

Europe (incl. UK) 23.10% 25.13% 30.10% 31%

Rest of the World (incl. APAC) 8.60%

D. EmploymentThe total IT Software and Services employment is estimated to touch 2.20 million in2008-09, as compared to 0.52 million in 2001-02. This represents a net addition of 1.68


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million to the industry employee base since 2001-02. The indirect employment attributedby the sector is estimated to about 8.0 million in 2008-09. This translates to the creationof about 10.20 million job opportunities attributed to the growth of this sector.

IT-ITeS Exports constitute the major source of employment for employment in this

industry and its share has increased over the years. The share of IT-ITeS Exports segmentin total employment of the IT Software & Services Industry has grown from 52.9% in2001-02 to 77.6% in 2008-09 whereas, the share of domestic market in total employmentof the IT Software & Services Industry has declined from 47.1% in 2001-02 to 22.6% in2008-09.

Employment in IT-ITeS Industry

Year/ Item 2001- 02 2002- 03 2003- 04 2004- 05 2005- 06 2006- 07 2007- 08 2008- 09

IT Services & Exports 0.17 0.21 0.30 0.39 0.51 0.69 0.86 0.92

BPO Exports 0.11 0.18 0.22 0.32 0.42 0.55 0.70 0.79

Domestic Market 0.25 0.29 0.32 0.35 0.38 0.38 0.45 0.50

Total Employment 0.52 0.67 0.83 1.06 1.29 1.62 2.01 2.21

E. Future TrendsGlobalization has a profound impact in shaping the Indian Information Technology (IT)

industry over the years with India capturing a sizeable chunk of the global market fortechnology sourcing and business services. Over the years the growth drivers for thissector have been the verticals of manufacturing, telecom, insurance, banking, financeand of late the fledgling retail revolution. As the new scenario unfolds it is getting clearthat the future growth of IT and IT enabled services will be fuelled by the verticals ofclimate change, mobile applications, healthcare, energy efficiency and sustainableenergy et al. Traditional business strongholds would make way for new geographies,there would be new customers and more and more of SMEs(Small and MediumEnterprises) will go for IT application and services.Rising up to the new challenges will only be possible when we scale-up the value chainand put in efforts toward providing more and more of end-to-end solutions to the clients.

Indian IT firms will have to strive for that extra mile and put in smart work to survive inthe newer growth opportunities.By the year 2010-11 our Software and Services export is expected to reach US $ 60billion and by 2011-12 which is also the terminal year of the eleventh five year plan, thefigures are expected to touch US$ 72 billion., this is assuming a 20% growth rateYOY(year over year) for 2011-12.


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2. Best and Worst Part of Annual ReportsA. INFOSYS

Best Part

1. In FY10,they grew in retail vertical -recorded the highest growth for Infosys(11.3%) to Rs 30.4 bn (US$ 641 mn), while the key banking, financial servicesand insurance (BFSI) vertical grew over 5% to Rs 77.3 bn (US$ 1,633 mn)

2. Infosys in FY10 incorporated 3 subsidiaries - Infosys Technologies (Sweden)AB, Infosys Tecnologia DO Brasil LTDA (total investments of Rs 180 mn) andInfosys Public Services Inc. (total investments of Rs 240 mn). Infosys Consulting,a 100% subsidiary of Infosys Technologies (total investments Rs 2.4 bn) also setup a wholly-owned subsidiary, Infosys Consulting India Limited, investing a sumof Rs 10 mn until March 31, 2020.

Worst Part

1. The telecom vertical de-grew by 6.3% to Rs 36.6 bn (US$ 773 mn) mainly owingto client-specific issues with British Telecom (BT), its largest telecom client

2. European geography saw revenues decline over 8% to Rs 46.3 bn (US$ 978 mn)3. Attrition spiked to 13.4% .4. Infosys' tax rate rose to 21.3% in FY10 from 13.3% in FY09 owing to the expiry

of the tax benefits under the STPI scheme for 5 of its STP facilities.

B. TCSBest Part

1. Retail vertical grew by an impressive 28.3%. The BFSI vertical grew 13%.2. Grew in all geographies3. Attrition did not go out of control at 12 %.

Worst Part

1. The telecom vertical de-grew by 2.9%, manufacturing vertical also de-grew.2. TCS had transactions with 22 fellow Tata Group companies during FY10, apart

from the holding company, Tata Sons.

3. TCS' average revenues per employee stood at a little under Rs 2 mn (US$41,678) in FY10, a 12.5% decline as compared with FY09 (Rs 2.2 mn, US$

47,153)


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3. Management Analysis and Discussion sectionA. INFOSYSa) Business

1. Total income increased to Rs. 21,140 crore from Rs. 20,264 crore in the previous year, at agrowth rate of 4.3%.

2. Software export revenues aggregated to Rs. 20,871 crore, up by 4.3% from Rs. 20,004 crorein the previous year. Of these, 67.9% of the revenues came from North America, 22.2% from

Europe and 9.9% from the Rest of the World. Our revenues from the Rest of the World have

increased from Rs. 1,821 crore to Rs. 2,068 crore, with a growth rate of 13.6% which is

higher than that of the other regions.

3. The share of fixed-price component of the business was 40.8%, compared to 37.6% duringthe previous year.

4. Gross profit amounted to Rs. 9,581 crore (45.3% of revenue) as against Rs. 9,119 crore(45.0% of revenue) in the previous year.

5. Onsite revenues decreased from 49.3% in the previous year to 48.7% in the current year. Theonsite person-months comprised 26.1% of the total billed efforts, compared to 28.4% during

the previous year.

6. The Profit before Interest, Depreciation, Taxes and Amortization (PBIDTA) amounted to Rs.7,360 crore (34.8% of revenue) as against Rs. 6,906 crore (34.1% of revenue) in the previous

year.

7. Sales and marketing costs were 4.6% of our revenue for the years ended March 31, 2010 andMarch 31, 2009.

8. General and administration expenses decreased from 6.3% in the previous year to 5.9% inthe current year.

9. The net profit after tax was Rs. 5,803 crore (27.5% of revenue) as against Rs. 5,819 crore(28.7% of revenue) in the previous year.

10.The net profit for the year includes income from sale of investments in OnMobile SystemsInc, USA, of Rs. 48 crore, net of taxes and transaction costs.

11.Derived 97.3% of our revenues from repeat business.12.Added 141 new clients, including a substantial number of large global corporations. The total

client base at the end of the year stood at 575.

13. Infosys have 338 million-dollar clients (327 in the previous year), 159 five-million-dollarclients (151 in the previous year), 97 ten-million-dollar clients (101 in the previous year), 26

fifty-million-dollar clients (20 in the previous year), and 6 hundred-million-dollar clients (4

in the previous year).

14.Added 28.61 lakh sq. ft. of physical infrastructure space. The total available space now standsat 255.04 lakh sq. ft.

15.Number of marketing offices as at March 31, 2010 was 65 as compared to 55 in the previousyear.


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b) Subsidiaries1. Have eight subsidiaries :

a. Infosys BPO Limited, Infosys Technologies (Australia) Pty Limited,b.

Infosys Technologies (China) Co. Limited, Infosys Consulting Inc,c. Infosys Technologies S. de R. L. de C. V. ,

d. Infosys Technologies (Sweden) AB,e. Infosys Tecnologia DO Brasil LTDA andf. Infosys Public Services Inc, USA.

We have six step-down subsidiaries :a. Infosys BPO s.r.o.,b. Infosys BPO (Poland) Sp.Z.o.o,c. Infosys BPO (Thailand) Limited,d. McCamish Systems LLC,e. Mainstream Software Pty Limited andf.

Infosys Consulting India Limited.

Acquired 100% voting interests in McCamish Systems LLC (McCamish), a business processsolutions provider based at Atlanta, U.S by entering into Membership Interest PurchaseAgreement for a cash consideration of Rs. 173 crore and a contingent consideration of Rs. 67crore. The acquisition was completed during the year and accounted as a business combinationwhich resulted in goodwill of Rs. 227 crore.

Annual Report does not contain the financial statements of these subsidiaries. The audited annualaccounts and related information of subsidiaries, where applicable, will be made available uponrequest. These documents will also be available for inspection during business hours at ourregistered office in Bangalore, India. The same will also be hosted on our website,

www.infosys.com

c) BrandingDuring this fiscal year, Infosys have been appreciated by the following bodies as recognition1. Ranked as the most admired company in India according to the Wall Street Journal survey2. Ranked among the 50 most respected companies in the world by Reputation Institutes Global

Reputation Pulse 20093. Ranked among the top 25 companies in Business Weeks InfoTech 1004. Ranked among the top 25 companies in the world for developing leaders by Fortune / Hewitt5. Ranked as the best company to work for in India by Business Todays ninth survey of Best

Companies to Work For.

d) Awards and recognitionThis fiscal year Infosys was1. Ranked among the best in investor relations in the APAC region2. Received the Gold Award for Investor Relations in Technology in the U.S. in the Asset

Triple A Corporate Awards


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3. Ranked as the most sought-after company in India by Business Today Survey4. Received the award for excellence in inclusivity instituted by the American Society for

Training & Development (ASTD)5. Honored with the Oracle Titan Partner Award at Oracle Open World 2009 event Received

the Excellence Award for Diversity Hiring Initiatives for Infosys BPO

6. Listed on Forbes Asian Fabulous 50 for the fourth consecutive year7. Recognized as one of Indias Best Companies to Work For in a survey conducted by GreatPlace to Work Institute

8. Listed in Fortunes 100 fastest-growing companies9. Ranked as the Best Outsourcing Partner by the Waters Rankings 200910. Listed among best companies for leaders by Hay Group and Chief Executive Magazine11.The sole company from India to be featured in the Top 25 list of Business Weeks InfoTech

10012.Received the distinction of having one of the Best Ranked Online Annual Reports in

Greater China & Asia / Pacific at IR Global Rankings 2009.

e)

Capital expenditure

During the year, Infosys capitalized Rs. 787 crore to our gross block comprising Rs. 140 crorefor investment in computer equipment and the balance of Rs. 646 crore on infrastructureinvestment, besides Rs. 1 crore on vehicles. We invested Rs. 43 crore to acquire 161 acres ofland in Hyderabad, Jaipur, Mysore and Mangalore.

f) LiquidityInfosys continue to be debt-free, and maintain sufficient cash to meet strategic objectives. As at

March 31, 2010, Infosys had liquid assets of Rs. 14,804 crore as against Rs. 10,289 crore at theprevious year-end.

These funds have been invested in deposits with banks, highly rated financial institutions,certificate of deposits and liquid mutual funds.

g) Increase in share capitalInfosys issued 9,95,149 shares on the exercise of stock options under the 1998 and 1999Employee Stock Option Plans. Due to this, the outstanding issued, subscribed and paid-up equityshare capital increased from 57,28,30,043 shares to 57,38,25,192 shares as at March 31, 2010.

h) Appropriations DividendThe total dividend amount paid out is Rs. 1,434 crore, as against Rs. 1,345 crore in the previousyear. Dividend (including dividend tax) as a percentage of profit after tax before exceptionalitems is 29.1% as compared to 27.0% in the previous year.


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Infosys propose to transfer Rs. 580 crore (10% of the net profit for the year) to the generalreserve and another Rs. 48 crore to capital reserve. An amount of Rs. 13,806 crore is proposedto be retained in the Profit and Loss account.

B. TCSa) Dividend1. Directors are pleased to recommend for approval of the members a final dividend of Rs.4/- per

share and a special dividend of Rs.10/- per share for 2009-10 on the enhanced capital of1,95,72,20,996 Equity Shares of Re.1/- each. The final dividend and the special dividend on theEquity Shares, if approved by the members would involve a cash outflow of Rs.3195.21 croreincluding dividend tax. The total cash outflow of dividend including dividend tax on EquityShares of the Company for the year 2009-10, including interim dividends already paid would

aggregate Rs.4569.12 crore resulting in a payout of 81.60% of the unconsolidated profits of theCompany.

2. The Redeemable Preference Shares allotted on March 28, 2008 are entitled to a fixed cumulativedividend of 1% per annum and a variable non-cumulative dividend of 1% of the differencebetween the rate of dividend declared during the year on the Equity Shares of the Company andthe average rate of dividend declared on the Equity Shares of the Company for the three yearspreceding the year of issue of the said Redeemable Preference Shares. Accordingly, the Directorshave recommended, for approval of the Members, a Dividend of Seventeen (17) paise per shareon 100,00,00,000 Redeemable Preference Shares of Re.1/- each for the financial year 2009-10.

b) Transfer to ReservesThe Company proposes to transfer Rs. 561.85 crore to the General Reserve out of the amountavailable for appropriations and an amount of Rs. 10458.13 crore is proposed to be retained in theProfit and Loss Account.

c) Operating Results and Business1.On an Unconsolidated basis, in 2009-10 TCS revenues were at Rs.23044.45 crore, a growth of

2.86% over 2008- 09. Operating margin (Profit before taxes excluding other income) grew189 basis points to 26.87% and net margin grew 342 basis points to 24.38%.

2.On a Consolidated basis, in 2009-10 TCS revenues were at Rs.30,028.92 crore, a growth of7.97% over 2008-09. Operating margin (Profit before taxes excluding other income) grew304 basis points to 26.70% and net margin grew 441 basis points to 23.31%.

3.Market capitalization increasing from Rs.52,845 crore (.4 billion) in March 2009 toRs.152,820 crore( billion) in March 2010.

4.Banking, Financial Services, Retail, Life Sciences & Health Care and Government sectorsregistered positive growth in FY10. However, sectors like Manufacturing, Telecom, Hi-Techand Insurance all declined on an annual basis.

5.TCS full services strategy was validated with new service lines like BPO, Infrastructure,Assurance and products all delivering double digit growth.


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d) International Credit Rating1.The Company continues to have an A3 investment-grade issuer rating from Moodys Investors

Services as well as an indicative foreign currency debt rating of Baa1, with a stable outlook.2.The Company has also been rated by Dun & Bradstreet at 5A1 (Condition-Strong). The rating

is assigned on the basis of tangible net worth and composite appraisal of the Company.

e) Strategic Acquisitions and Alliances1.TCS e-Serve Limited, TCS acquisition of Citigroups captive BPO operations in India, posted

a good performance in 2009-10. TCS e-Serve recorded revenues of Rs.1517.78 crore on aconsolidated basis, an increase of 19.31% over previous years revenues of Rs.1272.12 crore.

2.Profit after Tax (PAT) at Rs.659.38 crore, was significantly higher than previous years PATof Rs.82.33 crore.

f) Human Resource Development1.TCS is the largest private sector employer in India with total employee strength of 160,429

including those in its subsidiaries.2.During the year, there was a gross addition of 38,063 employees (including in subsidiaries).

The attrition rate for this fiscal was 11.8%, which is amongst the lowest in the industry.3.Utilization, excluding trainees, touched an all time high of 81.8% and including trainees it

touched 74.3% at the end of March 2010.4.TCS has 10,400 non-Indian nationals (including in subsidiaries) amongst its employee base

globally. The percentage of women working for the Company is 30%.

g)

Fixed DepositsThe Company has not accepted any public deposits and, as such, no amount on account ofprincipal or interest on public deposits was outstanding as on the date of the Balance Sheet.

4. Cash Flow StatementsA typical cash flow statement is divided into three parts: cash from operations (from dailybusiness activities like collecting payments from customers or making payments to suppliers andemployees); cash from investment activities (the purchase or sale of assets); and cash fromfinancing activities (the issuing of stock or borrowing of funds). The final total shows the netincrease or decrease in cash for the period.

When reviewing the cash flow patterns, one year is not particularly significant in determining acompanys financial performance. The pattern should be checked for consistency over time, andwhether or not the trends in each section are up or down.

This section performs an analysis of Infosys/TCS from Cash Flow perspective.


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A. INFOSYSThe cash flow summary for Infosys from 2006 to 2010 is given below:

When we analyze the cash flow for the period 2009-2010, the cash flow from operating activities has

shown a positive trend (+), cash flow from investing activities has shown a negative trend (-) and cash

flow from financing activities has shown a positive trend (+). This conveys that the company

generated sufficient cash from operations, but debt or stock issuance was required for additional

funding of operations and capital expenditure. The net cash increase is positive though it is declining

only for the period 2009-2010. The reason for decline in net cash increase, is a result of the

expenditure on Acquisition, fixed assets, FDs, Financial assets investments that has happened which

is shown by the cash outflow in investing activities.

The growth of cash flow from operations has more than doubled from 2006-2010. It has grown from

2237 cr to 5876 cr.

B. TCSThe cash flow summary for TCS from 2006 to 2010 is given below:


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When we analyze the cash flow for the period 2009-2010, the cash flow from operating activities has

shown a positive trend (+), cash flow from investing activities has shown a negative trend (-) and cashflow from financing activities has shown a negative trend (-). This represents a strong cash flow

pattern that generates enough cash from operations to fund capital investments, and repay debt or buy

back stock and for meeting it's working capital requirements. The cash flow from operations has

grown from 2344.42 cr to 6264.74 from 2006-2010. This is slightly better compared to Infosys. The

company has a negative cash flow for the period 2009-2010, which implies that the company has

spent more than it received during this year. Negative cash flows are often viewed as indicators of

financial ill health by people who are assessing companies to determine whether or not to invest in the

company. Less cash to work with means less cash for growth, and less cash to pay debts. In this

parameter, Infosys scores better. However, many things can influence cash flow, and a negative cash

flow should not necessarily be seen as a black mark because there are many reasons for a company toexperience a temporary negative cash flow as we see alternating increase and decrease over the years.

The detailed breakup of cash inflow/out flow is given below:


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In fiscal 2010, the Company Generated net cash from operating activities of Rs.7,406.23 crore

Used Rs.5,413.22 crore on investing activities (Bank FDs, Non-convertible debentures, Acquisition)

Used Rs.2,381.35 crore on financing activities (Dividend payment, taxes, repayment of bank

borrowings)

5. Ratio Analysis of the two Companiesa) Profitability Ratios

This section provides analysis of Infosys/TCS in terms of Profitability, Solvency, Liquidity and

Investors ratios for 2009-2010.

Profitability Ratios

Profitability ratios help in determining if the operations are profitable. Only if the operations are

profitable, the company will survive in the long run. The long term survival of a company

depends on its ability to earn sufficient surpluses and to grow.

Margin on sales

The margin on sales ratios helps in analyzing profitability by understanding costs/profits in

relation to revenue.

1. Gross profit margin (%) This provides details on the overall markup on the products sold. Thisreflects the efficiency of the use of direct inputs, given the price. Higher value of this reflects a

higher efficiency and hence Infosys is rated better in this parameter.

2. Operating profit margin (%) This margin is a reflection of the operations of the company. Thisdetermines the company's sales volume and gross margin. This is a reflection of the

management's performance. The comparison reveals that Infosys earns a higher margin and it is

also operationally more efficient than TCS.

3. Net Profit Margin This reflects the net income (overall surplus available out of sales). This is theamount available to distribute to shareholders. The net income is evaluated as a percentage of

sales. It is used to compare the margins of various companies in the same industry. It reflects the

operational efficiency, financing efficiency and taxation of the firm. A higher value indicates that

the company is having a higher margin and is operationally efficient.

Profitability based on the profit margin on sales implies that Infosys is operationally more

efficient and has a higher profit margin.


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Return on Investments

These ratios help in determining how the assets used are related to the profit earned. The

management can be evaluated based on how far they had been successful in profitably utilizing

the assets.1. ROA This provides the return (operating profits) on operating assets. The ratio analysis reveals

that Infosys is achieving a higher operating profit with lesser assets than TCS. Hence, it is

operationally more efficient and more profitable.

2. RONW This measures the net income as a percentage of the shareholders investment. It showshow well a company uses investment funds to generate growth. Investors are generally

interested in companies that have a high ROE. TCS scores better than Infosys here. However, this

also depends on the financing for a company. A company financed primarily by debt (selling

corporate bonds or getting bank loans) will have a higher ROE than one primarily financed by

equity.

Profitability based on return on investments reveals that Infosys is provides a better return onassets and TCS provides a better return on net worth which could be a result of the different

financing mechanisms employed by both the firms.

Efficiency of use of assets

The relationship of assets used to sales measures the efficiency of the use of assets.

These ratios help in determining how the assets used are related to the profit earned. The

management can be evaluated based on how far they had been successful in profitably utilizing

the assets.

3. Total Asset Turnover This measures how efficiently a company can use its assets to generatesales .

4. Operating Asset Turnover This measures how efficiently a company can use its operating assetsto generate sales .

5. Working capital turnover This measures how efficiently a company can use its working capitalto generate sales .

The analysis reveals that Infosys has a higher efficiency on the use of assets.

Based on the profitability analysis, Infosys provides a higher margin on sales, has a higher return

on investments, makes efficient use of assets and has a higher return per share of equity.

b) Solvency and Liquidity RatiosSolvency ratios (sometimes called liquidity ratios) indicate how well your business can pay itsbills in the short term without straining cash flows. As you can well imagine, your lenders are

usually quite interested in the short-term solvency of your business. (They want to make sure

they get their money back!) Some commonly calculated solvency ratios are Current ratio and

Total debt ratio.

Short term Solvency


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Solvency is the start of the organization , it is a situation where it is capable of meeting all its

current liabilities by its existing assets. The quick way to do the same is by taking the current

liabilities to cash and other quick realizable current assets, referred to as quick ratio or the acid

test ratio

1. Current ratio :It measures the relationship of current assets with the current liabilities2. Quick ratio or acid test ratio : It is usually calculated by taking the assets, which are quick

to be converted into cash and divide them by the current liabilities. If this ratio is high

company is in comfortable position with respect to the liquidity.

3. Accounts receivable turnover : It is calculated by dividing the credit sales by the averagereceivable and if the credit sales are not available uses the net sales instead.

4. Inventory turnover : Excess inventory represents the wasteful use of the resources. It iscalculated by dividing the Cost of goods sold by the average inventory

Long term Solvency

1. Debt-Equity Ratio : This ratio means that for every rupee of the shareholder funds in thecompany how much is the lenders claim. Lower the lenders claim to the shareholder;

lowers are the demands on the firms earnings for meeting fixed commitment in terms of

the interest.

2. Long-term Debt to Total Capital : this ratio means that for every rupee of the ownersfunds, there is a long term debt commitment from the lenders.. It is ratio of the long term

debt and shareholders equity.

3. Long term Debt to Fixed asset : This measure the amount of fixed assets available as abacking of the long term debts. It is the ratio of the Long-term debt to net fixed assets.

4. Times interest Earned : It is the ratio of the Earnings before interest and tax to the fixedinterest expense.

5. Times fixed Charges Covered : It is computed if the company has other fixedcommitments such as lease payments under the non-calculated obligations. It is the ratio

of the Earnings before interest and fixed charges to the interest and fixed charges.

6. Equity multiplier : It is the ability of the owners equity top to command resources and ismeasured as total assets/owners equity. It shows the extent of enhancement in the returns

to an equity holder due to the leverage or borrowing.

c) Investors RatiosThe basic five ratios we are interested in are:

Earnings per share

Dividends per share

Dividend yield


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Dividend cover

P/E ratio

1. Earnings per share :Earnings available for ordinary shareholders means profits afterinterest, taxation and preference dividends. Earnings per share is used by investors incalculating the priceearnings ratio or PE ratio. This is simply calculated as follows.

Earnings per share = Number of ordinary shares in issue / Earnings available for

ordinary shareholders.

EPS for Infosys is 100.37 , and TCS is 28.62. It is better to Invest in Infosys.

2. P/E Ratio :PE Ratio = Market price of share / Earnings per share

A high PE ratio means that the shares are seen as an attractive investment. For example,

if the PE ratio is 20, it means that investors are prepared to pay 20 times the annual level

of earnings in order to acquire the shares.

PE ratio for Infosys is 30, and TCS is 40.42.

3. Dividend per Share = Dividend /Number of Ordinary Shares4 Dividend cover = Dividend / Profit available to ordinary shareholders

This gives an indication of the security of future dividends. A high dividend cover ratio

means that available profits comfortably cover the amount being paid out in dividends.

The analysis reveals that Infosys has a higher return per share of equity.

A. INFOSYSInfosys Technologies

Key Financial Ratios ------------------- in Rs. Cr. -------------------

Mar '09 Mar '10


Operating Profit Margin(%) 34.09 34.82

Gross Profit Margin(%) 30.66 31

Adjusted Cash Margin(%) 32.57 29.75

Net Profit Margin(%) 27.52 26.31

Adjusted return on net

worth (%) 34.76 25.89


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Adjusted return on net

worth (%) 34.76 25.89

Adjusted Return on Net

Worth(%) 34.76 26.11

Return on Assets ExcludingRevaluations 310.9 384.69

Return on Assets Including

Revaluations 310.9 384.69

Return on Long Term

Funds(%) 39.8 33.9

Liquidity And Solvency Ratios

Current Ratio 4.71 4.28

Quick Ratio 4.67 4.2

Debt Equity Ratio -- --

Long Term Debt Equity

Ratio -- --

Investment Valuation Ratios

Face Value 5 5

Dividend Per Share 23.5 25

Operating Profit Per Share

(Rs) 120.59 128.64

Net Operating Profit Per

Share (Rs) 353.75 369.04

Free Reserves Per Share(Rs) 305.8 378.73

Bonus in Equity Capital 93.58 93.26

Earnings- to- Price Ratio Computations

No. of shares for EPS 57,24,90,211 57,04,75,923

Earnings Per Share 101.58 100.37

Book Value 310.9 384.69

Management Efficiency RatiosInventory Turnover Ratio -- --

Debtors Turnover Ratio 6.25 6.37

Investments Turnover

Ratio -- --

Fixed Assets Turnover

Ratio -- --


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Total Assets Turnover Ratio -- --

Asset Turnover Ratio 3.39 5.59

Average Raw Material

Holding -- --

Average Finished GoodsHeld -- --

Number of Days In

Working Capital 220.11 224.99

Profit & Loss Account Ratios

Material Cost Composition 0.09 --

Imported Composition of

Raw Materials Consumed -- --

Selling Distribution Cost

Composition 0.4 1.01

Expenses as Composition

of Total Sales 97.88 99.69

Cash Flow Indicator Ratios

Dividend Payout Ratio Net

Profit 27.03 28.84

Dividend Payout Ratio Cash

Profit 24.15 25.32

Earning Retention Ratio 74.6 70.92

Cash Earning Retention

Ratio 77.16 74.49Adjusted Cash Flow Times -- --

B. TCSTata Consultancy Services

Key Financial Ratios ------------------- in Rs. Cr. -------------------

Mar '09 Mar '10


Operating Profit Margin(%) 26.87 28.93

Profit Before Interest And Tax

Margin(%) 24.75 26.62

Gross Profit Margin(%) 25.01 26.89

Cash Profit Margin(%) 26.09 26.44


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Adjusted Cash Margin(%) 26.09 26.44

Net Profit Margin(%) 20.74 24.13

Adjusted Net Profit Margin(%) 20.74 24.13

Return On Capital Employed(%) 43.27 42.46

Return On Net Worth(%) 35.13 37.3

Adjusted Return on Net Worth(%) 41.06 37.75

Return on Assets Excluding


Return on Assets Including


Return on Long Term Funds(%) 43.27 42.46

Liquidity And Solvency Ratios

Current Ratio 1.83 1.49

Quick Ratio 1.83 1.48

Debt Equity Ratio 0.01 0.01

Long Term Debt Equity Ratio 0.01 0.01

Investment Valuation Ratios

Face Value 1 1

Dividend Per Share 14 20

Operating Profit Per Share (Rs) 61.52 34.06

Net Operating Profit Per Share (Rs) 228.92 117.74

Free Reserves Per Share (Rs) 134.37 75.24

Bonus in Equity Capital 59.3 79.65

Earnings- to- Price Ratio Computations

Earnings Per Share 47.92 28.62

Book Value 136.38 76.72

Management Efficiency Ratios

Inventory Turnover Ratio 1,321.77 3,398.94

Debtors Turnover Ratio 6 6.54

Investments Turnover Ratio 1,321.77 3,398.94


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Fixed Assets Turnover Ratio 5.15 4.74

Total Assets Turnover Ratio 1.66 1.52

Asset Turnover Ratio 5.15 4.74

Average Raw Material Holding 93.98 72.97

Average Finished Goods Held 0.07 0.04

Number of Days In Working Capital 67.44 55.58

Profit & Loss Account Ratios

Material Cost Composition 0.23 0.1

Imported Composition of Raw

Materials Consumed 79.74 78.67

Selling Distribution Cost Composition 0.09 0.03

Expenses as Composition of Total

Sales 93.01 92.38

Cash Flow Indicator Ratios

Dividend Payout Ratio Net Profit 34.2 81.61

Dividend Payout Ratio Cash Profit 31.41 75.3

Earning Retention Ratio 70.74 19.37

Cash Earning Retention Ratio 72.81 25.53

Adjusted Cash Flow Times 0.01 0.01

6. RecommendationBased on the profitability analysis, Infosys provides a higher margin on sales, has a higher return

on investments, makes efficient use of assets and has a higher return per share of equity.

From our analysis the current ratio best for the Infosys and the quick ratios are more than 1 for

all the company under considerations but again the Infosys is best. This gives confidence to the

investor.

For Infosys the liquidity ratios are close to 4.2 where as for TCS its close to 1.5, so from

liquidity angle the Infosys scores over TCS by a large margin.


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7. References1. http://www.mit.gov.in/content/it-software-services-and-bpo2.

www.moneycontrol.com

Documents

Annual Report Analysis Final- MA