FA&Research Report on Tcs

8/9/2019 FA&Research Report on Tcs

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BY

B AJAY KUMAR REDDY

DM-05-06

Fundamental Analysis and the research report on TCS


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Fundamental Analysis

y Fundamentalanalysisisastock valuationmethodthatusesfinancialandeconomicanalysisto predictthemovementofstock prices.

y The fundamentalinformationcanincorporateacompany'sfinancial reports,andnon-financialinformationsuchasestimatesofthe growthofdemand for productssold bythe

company,industrycomparisons,andeconomy-widechanges,changesin government policies,envisaging the futuredemandandstabilityetc.,


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Fundamental Analysis

y Macro EconomicAnalysis

y IndustryAnalysis

y CompanyAnalysis


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Company Analysis

y QualitativeFactors

y QuantitativeFactors


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Presentation layout

y Understanding the Business

y Analyzing the business

y Analyzing the industry

y Understanding the business character

y Financial evaluation

y Valuation


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Understanding IT Services

y What is IT Services?y Providing technology services to

customers

y Includes

y Setting up the IT network

y Maintaining the IT network

y Developing software

y Maintaining softwaresystems/platforms

y Developing software products


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Analyzing the business

y Cyclical business partly function of economic growthy Can be CapEx oriented (software/product/hardware) or OpEx

oriented (BPO, management of software/product/hardware)y OpEx business is anuity in nature, CapEx is project orientedy People oriented business no physical manufacturingy Conundrum of being a Specialized and commodity service

y Each service provider can potentially do the same as the othery However work done for one customer differs from the other, non

standardized worky Differentiation lies in branding, delivery, execution, relationshipy Differentiation also comes through own IPR

y Location indifferenty Communication technology makes delivery of service possible

globally

y Intangibley Work delivered is software or management of software/hardware

y No substitutable servicey Great level of technology involved


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The business character

y A people oriented business

y People are the manufacturing capacity

y Wages will typically be 40-50% of revenues

y Not so much a fixed or working capital intensive

businessy Competitive intensity is high

y Anything you can do, I can too

y But client industry knowledge, track record, capabilities andbrand equity matter

y

Variable cost structurey Free cash generating business

y Entry barriers not many, but success for a few


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Financial Evaluation Key Players

Source: Industry, Deutsche Bank


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y TCShas revenueseven from project basedclients fromandoutsideIndia. Butapart from project based,ithas 1034 activeclients for whoit providestheservices.

y

Attrition rate = 11.8%

y Utilization rateexcluding trainees =81.8%

y Utilization rateincluding trainees = 74.3%

y 10,400 non Indiannationalsamong thetotalno.ofemployeebase globally.


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Onsite-Offsite Revenue Mix


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PEG Ratio

y PEG Ratio = PE Ratio

Growthy Where Growthis,TheCompanysyear onyear growthin

termsof PAT.

y Growth = Retention Ratio * ROE


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Retention Ratio:

Retentionisthemoneythatisleftafter thedistributionof

dividendstotheshareholders.Thisissenttothesurplusaccount.

If PEG > 1,Thenitisovervalued

< 1, Itisundervalued

= 1, Itis fairly valued


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I

If we observe the below table, the trend of TCS has been good,

except in the year 2009 because of the cut In IT spends due to

the economic slowdown.


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y Theabovetablesaystheaverage growthofthecompany for

past fiveyearsis 30%.We prognosticatethatthe growthof

thenextyear would be 25%.y Thenthe PEG Ratiois

21.89

25

Thatisequalto0.8756.Thatmeanstheshareisundervaluedandithasthe potentialto riseinthe future.


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Dividends


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DCF

y Finding outthe present value fromtheexpected growth rate

individendsandexpected rateof returns

y Where r istheexpected rateof returnand g isthe growth

rateindividends.


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y Letusthinkthe growth rateinthedividendsis 10% fromthe

abovetable.

y

Andtheexpected rateof returnis 12%.y Thedividend for thenextyear iscalculated by


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y = 20 * (1+0.1)

0.12-0.1

y = 1100

y Throughthis valuation,thecurrent priceofaTCSshareshould be

around 1100. Butitisquoting around 750.i.e.,theshare pricehasbeenundervaluedandthereisachance for the priceto rise.


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Dividend Discount Model (DDM)

Where P0 isthe valueoftheequityr isthecostofequity

g istheconstant growth rate

Costof Equity = RiskFree Rate + Beta * (Equity Premium Risk)

Where Equity premium risk = Market Rate RiskFree Rate


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Calculation of the value ofEquity

y Letusassume

y RiskFree Rate = 7%

y Market Rate = 14%

y Beta forTCSis 0.78y Growth rateintermsofdividendsis 10%

y Therefore, Equity Premium Risk = 14% - 7% = 7%

y Costof Equity = 7% + 0.78 *(7%)

= 12.46% = 0.1246


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y Dividend for nextyear can becalculatedas

y Currentyear dividend per equityshare = 20

Therefore,Valueof Equityisequalto

20*(1+0.1)

0.1246-0.1


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y i.e.,The valueofthe Equity = 894

y ButcurrentlytheTCSisquoting at 750.Thatmeansthesharehas beenundervaluedandithasthe potentialto riseup to

900.


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Ifwecomparethequarterstothe previousyearsquarters,therehas beenanaverage

growthof15 percentinthe PATmarginsand 20% growthinoperating profitsmargin.


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Relative Valuation

ROE = PAT

Equity

PAT = 7000.64 Crores

Equity = ShareCapital + Reserves & Surplus

= 295.72 + 18171

= 18466.72 Crores

ROE = 0.3790 = 37.90%


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y ROCE = PAT

TotalCapital

WhereTotalcapital Employed = Equity + Debt (Securedloans

& unsecuredloans) Investments

y Equity = 18466.72 Crores

y Debt = 103.25 Crores

y Investments = 3682.08Crores

y TotalCapital = 14887.89

y Therefore,ROCE = 0.4702 = 47.02%


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y EPS (Rs) = PAT

Total Equityshares

PAT = 7000.64 Crores

Totalequityshares = 195.72 crores

Therefore,EPS = 35.89


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Key Ratios


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Thankyou

Documents

FA&Research Report on Tcs