Tata Consultancy Services Financial Statements Analysis

Submitted By-

Prateek Agarwal (269/51)

Prateek Maheshwari (270/51)

Prateek Tewari (272/51)

Puneet Aggarwal (280/51)

Rajat Gupta (287/51)

8/31/2014

Part A: Summary of Key Findings from Part B

Tata Consultancy Services Limited (TCS) is the largest IT company in India. Approximately

92% of its revenues are earned from international clients. The company has been growing at a

very healthy rate over the years. In sales terms it has grown at a CAGR of 29.4% and in net

profit terms it has grown at a CAGR of 34.7%. Since the company has significant overseas

revenues, fluctuations in exchange rates also impact its revenues. It is evident from the fact that

in FY14, sales grew by 16.2% in USD terms and by 33.5% in INR terms. A weaker INR helps

TCS in a stronger growth. Some of our key findings from the detailed report after studying the

standalone statements of TCS and its competitors are summarised as below:

Key Accounting Policies of the Firm

The financial statements are prepared and presented under the historical cost convention on accrual basis of accounting in accordance with the Indian GAAP, except for certain financial

instruments which are measured at fair value. Fixed assets exclude computers and other assets individually costing 50,000 or less. Revenues from sale of software licences are recognised upon

delivery. Foreign currency monetary assets and liabilities are translated at the exchange rate prevailing on the balance sheet date and exchange gains and losses are recognised in the statement of profit and loss.

Analysis of Balance Sheet, Income Statement & Cash Flow Statement

The balance sheet has become 2.6 times over the 5 year period 2010-15. This has been

possible because of a strong and constant stream of Net Profits ensuring that the Reserves

and Surpluses account has increased at a CAGR of 31.2%

The company takes very little short term borrowings. These have remained negligible

over the years at about 0.05% of the balance sheet size.

The company’s Cash position has been getting stronger every year and is approx. at a

massive INR 130Bn at the end of FY14. It has grown at a CAGR of ~40% over the 5 year

period.

The operating margins remained constant at about 27-28% through 2010-13. This grew to

32% in FY 2013-14 on the back of productivity measures taken by the company. The

sales per employee increased by 22.8% in FY 14 vs FY 13. A weaker INR throughout

FY14 compared to FY13 also helped margins. Average USD/INR in FY14 was at 60.85

vs 54.55 in FY13.

TCS has been continuously generating Cash from operating activities. Cash inflow from

Operating Activities has steadily increased from INR 43.2Bn in FY 2010 to INR 157.9 in

FY 2014.

The company has been continuously using cash to invest in bank deposits. In FY 14, the

company invested over INR 65Bn in bank deposits with over 3 month maturity.

Ratio Analysis

TCS’s current ratio for FY 2013 was 2.67 and its average current ratio over the last 5

financial years has been 2.41 times which hints that the Company has not been facing

liquidity problems

TCS’s long term debt to equity ratio for FY 2014 was 0.22 and its average debt to equity

ratio over the last 5 financial years has been 0.25 times which indicates that the Company

is operating with relative low levels of debt. The industry’s desirable debt to equity ratio

is less than 0.6.

TCS’s interest coverage ratio for FY 2014 was 1006.74 and its average interest coverage

ratio over the last 5 financial years has been 668 which indicate that the Company has

been generating enough after servicing its debt obligations.

The Profit margins are on par with the industry standards but ROE and ROA have

continuously been higher indicating efficient utilizations of equity and asset base.

The dividend pay-out ratio has reduced from 49% to 34% but is still on par with the

industry standards.

TREND ANALYSIS & COMMON SIZE ANALYSIS

Sales, Net income and Assets have been on a strictly increasing trend. Liabilities have

also increased over the years except for in FY11.

Common Sizing reveals that the proportion of current assets with respect to long term

assets has increased over the years. This is because the company’s Cash has gone up

significantly as a good percentage of company’s earnings are being invested in bank

deposits.

COMPARATIVE ANALYSIS

Profit Margins are consistent for both TCS and Infosys, which are stable companies whereas for Mindtree, which is a growing company, the profit margins are rising but still way behind the

industry average due to its huge expenses. In 2012-13, due to macroeconomic factor, the Indian IT industry as a whole was under market pressure and sales growth decreased.

TCS has been fairly efficient in utilizing its assets as compared to Infosys, whereas Mindtree has been more efficient in utilizing its assets. This is due to excess capacity of TCS and Infosys. Also

due to foreign operations, the value of assets is higher for TCS and Infosys. From Liquidity analysis, we can conclude that the IT service industry as a whole has the capability of paying its

short-term liabilities. From the trend analysis, we see high correlation between current ratio and profitability for all the companies.

Investors perceive Mindtree as a growth stock as evident from the market valuation trend, whereas faith of investors in Infosys has been declining but they still consider TCS as a value

stock. TCS sees great potential in the market as evident from the high Capital Expenditure as compared to its rival Infosys.

Financial Position, Strength and Weakness: The balance sheet for TCS has been growing 20.7 % over the last 5 years as compared to

Infosys’s 15.11 % and Mindtree’s 17.4%. The sales for TCS has grown by 22.9 % over past 5

year compared to Infosys’s 15.96% and Mindtree’s 19.70%. EBIT for TCS has grown by 29.8%

over 5 years compared to Infosys’s 13.23% and Mindtree’s 18.41 %The current ratio (Av5 :

2.076 times) and quick ratio (Av5 :1.864times) Dividend Payout ratio (Av5 :36.6% ) revealed

financial strength and the firm retained 64% of the profits for future investments. With the

decrease in share capital due to share redemption, there has been a good utilization of free cash,

and has increased efficient capital structure and shareholder value.

Part B: INTRODUCTION

Name of the Company Tata Consultancy Services Limited

Name of the Chairman Cyrus Mistry

Listed in BSE/NSE

Financial Year end March 31

Tata Consultancy Services Limited (TCS) is a leading and India’s largest provider of IT

Services, Business Solutions and Outsourcing with revenues of INR 647 Bn during FY13-14.

TCS operates in 46 countries. It is a Tata Group company and is listed on the Bombay Stock

Exchange and the National Stock Exchange of India. TCS is the largest Indian company by

market capitalization and is the largest India-based IT services company. TCS and its 59

subsidiaries provide a range of information technology-related products and services including

application development, business process outsourcing, capacity planning, consulting, enterprise

software, hardware sizing, payment processing, software management and technology education

services.

INDUSTRY OVERVIEW

The Indian IT industry can be categorised into four main components: software products and

engineering services, IT services, ITeS (IT-enabled services) and hardware.

According to National Association of Software and Services Companies (NASSCOM), Indian

IT/ITeS export revenues are estimated to have risen by 13 per cent YoY to $86.4 billion in 2013-

14. The domestic market, however, is estimated to have posted aggregate revenues of $31.6

billion in 2013-14, which is a decline of 1.3 per cent YoY, owing to lower spending by

customers due to a weak macroeconomic environment. During the year, the revenues of the

top four players, i.e. Tata Consultancy Services, Infosys, Wipro and HCL Technologies, grew

by 19.2 per cent y-o-y to Rs. 1,621.9 billion, primarily because of volume expansion and a better

dollar conversion rate. Demand was across verticals, service lines and geographies.

Risks due to exchange rate fluctuations: A majority of the business of Indian IT services

players is transacted in foreign currencies, which makes the industry vulnerable to fluctuations in

the Indian rupee against major global currencies, namely the dollar, pound, yen and euro. Over

the past two years, the Indian rupee has exhibited prolonged volatility against the dollar.

Currency fluctuation puts the margins of players at risk. This has been a major cause for worry to

Indian players since the US accounts for over 60 per cent of the revenues of the Indian IT

industry. In addition, majority of the contracts from Europe and the Asia-Pacific region had been

priced in dollars.

Industry Outlook: While the industry trends suggest volume growth to continue, pressure on

billing rates may strain margins in the current challenging environment. In 2014-15, billing rates

can be expected to decline with the pressure also being heightened by aggressive bidding from

few players.

ABGRIDGED BALANCE SHEET, P&L AND CASH FLOW

Balance Sheet

TCS Infosys MindTreeIn Millions of INR 2014 2013 2012 2011 2010 2014 2013 2012 2011 2010 2014 2013 2012 2011 2010

Liabilities & Stockholders' Equity

Share Capital 1,959 2,957 2,957 2,957 2,957 2,860 2,870 2,870 2,870 2,870 417 415 405 400 395

Reserves & Surplus 4,38,560 3,22,665 2,45,609 1,92,838 1,48,209 4,18,060 3,57,720 2,94,700 2,42,140 2,17,490 15,992 12,722 9,171 7,364 6,065

Total Equity 4,40,519 3,25,623 2,48,566 1,95,795 1,51,166 4,20,920 3,60,590 2,97,570 2,45,010 2,20,360 16,409 13,137 9,576 7,764 6,460

Accounts Payable 39,776 33,499 28,479 21,534 20,283 680 1,780 680 850 960 82 189 107 167 122

Short-Term Borrowings & Liabilities 82,882 61,489 59,876 39,982 52,122 1,01,880 66,150 59,690 42,680 37,020 4,311 3,495 3,586 1,971 2,810

Total Current Liabilities 1,22,657 94,988 88,355 61,516 72,405 1,02,560 67,930 60,370 43,530 37,980 4,393 3,684 3,693 2,138 2,932

Long-Term Borrowings 897 831 962 363 345 - - - - - 27 32 37 41 31

Other Long-Term Liabilities 11,969 6,899 4,705 2,754 401 3,640 1,760 210 - 2,320 168 57 46 206 -

Total Long-Term Liabilities 12,866 7,730 5,667 3,117 746 3,640 1,760 210 - 2,320 195 89 83 247 31

Total Liabilities 1,35,523 1,02,718 94,022 64,633 73,151 1,06,200 69,690 60,580 43,530 40,300 4,588 3,773 3,776 2,385 2,963

Total Liabilities & Equity 5,76,042 4,28,340 3,42,588 2,60,428 2,24,317 5,27,120 4,30,280 3,58,150 2,88,540 2,60,660 20,997 16,910 13,352 10,149 9,423

Assets

Cash & Near Cash Items 4,224 3,143 3,180 5,754 415 2,37,150 1,74,010 1,80,570 2,940 6,460 1,175 1,238 585 3 169

Short-Term Investments 1,28,468 40,684 34,943 28,736 33,547 27,490 45,800 18,410 1,30,240 88,680 5,160 4,027 3,075 1,542 1,447

Accounts & Notes Receivable 1,44,719 1,12,023 91,077 48,067 33,323 73,360 63,650 54,040 42,120 32,440 6,004 4,508 4,078 2,825 2,218

Other Current Assets 70,938 77,455 36,189 23,148 40,555 52,550 43,920 31,630 54,640 41,710 2,338 1,710 1,016 1,999 1,955

Total Current Assets 3,48,348 2,33,305 1,65,389 1,05,705 1,07,840 3,90,550 3,27,380 2,84,650 2,29,940 1,69,290 14,677 11,483 8,754 6,369 5,788

LT Investments & LT Receivables 50,986 59,757 51,471 54,579 75,135 41,500 27,640 10,680 13,250 46,360 189 244 30 7 30

Net Fixed Assets 89,346 68,233 54,120 44,366 37,012 66,730 55,600 46,330 43,050 41,880 3,762 3,056 2,633 2,952 2,781

Other Long-Term Assets 87,362 67,045 71,609 55,778 4,330 28,340 19,660 16,490 2,300 3,130 2,369 2,127 1,935 821 824

Total Long-Term Assets 2,27,694 1,95,035 1,77,199 1,54,723 1,16,478 1,36,570 1,02,900 73,500 58,600 91,370 6,320 5,427 4,598 3,780 3,635

Total Assets 5,76,042 4,28,340 3,42,588 2,60,428 2,24,317 5,27,120 4,30,280 3,58,150 2,88,540 2,60,660 20,997 16,910 13,352 10,149 9,423

Income Statement

TCS Infosys MindTreeIn Millions of INR 2014 2013 2012 2011 2010 2014 2013 2012 2011 2010 2014 2013 2012 2011 2010

Net Sales 6,46,729 4,84,261 3,81,042 2,92,754 2,30,445 4,43,410 3,67,650 3,12,540 2,53,850 2,11,400 30,316 23,618 19,152 15,090 12,332

Less: Operating Expenses 4,42,198 3,49,227 2,74,067 2,10,497 1,68,421 3,29,030 2,67,060 2,19,610 1,77,060 1,45,390 25,019 19,382 16,914 14,019 10,609

Operating profit (loss) 2,04,532 1,35,034 1,06,976 82,257 62,023 1,14,380 1,00,590 92,930 76,790 66,010 5,297 4,236 2,238 1,071 1,723

Less: Foreign Exchange Losses (Gains) -50 -2,231 4,328 530 2,054 -2,780 -2,570 -810 -390 -390 -118 340 -196 -155 -709

Less: Net Non-Operating Losses (Gains) -31,097 -20,073 -31,180 -5,478 -3,830 -22,860 -20,410 -22,060 -11,030 -8,800 -376 -350 -188 -83 -55

Add: Other Income - - - - - - - - - - - - - 221 -

EBIT 2,35,679 1,57,338 1,33,827 87,204 63,799 1,40,020 1,23,570 1,15,800 88,210 75,200 5,791 4,246 2,622 1,530 2,487

- Interest Expense 234 306 164 200 95 - - - - - 4 10 5 4 25

Earnings before Tax (EBT) 2,35,445 1,57,032 1,33,663 87,004 63,704 1,40,020 1,23,570 1,15,800 88,210 75,200 5,787 4,236 2,617 1,526 2,462

- Tax Provision 50,696 29,168 23,904 11,304 7,519 38,080 32,410 31,100 23,780 17,170 1,275 847 430 295 381

Net profit (loss) 1,84,749 1,27,863 1,09,760 75,700 56,185 1,01,940 91,160 84,700 64,430 58,030 4,512 3,389 2,187 1,231 2,081

- Total Cash Preferred Dividends 288 190 220 110 170 - - - - - - - - - -

Net Inc Avail to Common Shareholders 1,84,462 1,27,673 1,09,540 75,590 56,015 1,01,940 91,160 84,700 64,430 58,030 4,512 3,389 2,187 1,231 2,081

Cash Flow Statement

TCS Infosys MindTreeIn Millions of INR FY 2014 FY 2013 FY 2012 FY 2011 FY 2010 FY 2014 FY 2013 FY 2012 FY 2011 FY 2010 FY 2014 FY 2013 FY 2012 FY 2011 FY 2010

Cash From Operations 1,57,888 1,08,971 59,631 60,886 43,244 1,14,170 69,420 81,420 53,560 67,070 3,441 2,831 2,180 496 2,420

Cash From Investing Activities -1,00,592 -52,496 -23,713 -12,305 -26,260 -45,760 -28,240 -16,220 21,490 -41,450 -2,465 -2,094 -2,426 -445 -1,047

Cash from Financing Activities -56,177 -56,461 -38,500 -45,856 -19,457 -31,430 -32,740 -22,380 -36,370 -15,540 -1,039 -84 391 8 -1,322

Net Changes in Cash 1,120 15 -2,582 2,725 -2,474 36,980 8,440 42,820 38,680 10,080 -63 653 145 59 52

Cash & Cash Equivalent (beginning) 3,239 3,190 5,772 2,933 5,407 2,04,010 1,95,570 1,51,650 1,12,970 1,02,890 1,238 585 440 349 180

Cash & Cash Equivalent (ending) 4,358 3,205 3,190 5,658 2,933 2,40,990 2,04,010 1,94,470 1,51,650 1,12,970 1,175 1,238 585 408 231

KEY ACCOUNTING POLICIES OF THE FIRM

The financial statements are prepared and presented under the historical cost convention on accrual basis

of accounting in accordance with the Generally Accepted Accounting Principles (GAAP) in India,

except for certain financial instruments which are measured at fair value. Some of the key accounting

practices for the firm are:

Fixed assets are stated at cost, less accumulated depreciation / amortisation. Costs include all

expenses incurred to bring the asset to its present location and condition. Fixed assets exclude

computers and other assets individually costing 50,000 or less which are not capitalised except when

they are part of a larger capital investment programme

Fixed assets purchased for specific projects are depreciated over the period of the project.

Depreciation/ amortisation are done on the following basis:

Type of Asset Method Rate/ Period

Leasehold Land & Buildings Straight Line Lease Period

Freehold Buildings Written Down Value 5.00%

Factory Buildings Straight Line 10.00%

Leasehold Improvements Straight Line Lease Period

Plant and Machinery Straight Line 33.33%

Computer Equipment Straight Line 25.00%

Vehicles Written Down Value 25.89%

Office Equipment Written Down Value 13.91%

Furniture and Fixtures Straight Line 100%

Intellectual Property/ Rights Straight Line 24 – 60 months

Rights under licensing agreement Straight Line License Period

Each lease rental paid under finance lease is allocated between the liability and the interest cost so as

to obtain a constant periodic rate of interest on the outstanding liability for each year. Lease rentals

under operating leases are recognised in the statement of profit and loss on a straight- line basis.

Recoverable amount of the asset is estimated in order to determine the extent of impairment.

Recoverable amount is the higher of an asset’s net selling price and value in use. Reversal of

impairment loss is recognised as income in the statement of profit and loss.

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

provision for other than temporary diminution in value.

The undiscounted amount of short-term employee benefits include compensated absences such as

paid annual leave, overseas social security contributions and performance incentives.

Revenues from sale of software licences are recognised upon delivery. In respect of Business Process

Outsourcing (BPO) services, revenue on time and material and unit priced contracts is recognised as

the related services are rendered, whereas revenue from fixed price contracts is recognised as per the

proportionate completion method with contract cost determining the degree of completion.

Tax expense relating to foreign operations is determined in accordance with tax laws applicable in

countries where such operations are domiciled. Advance taxes and provisions for current income

taxes are presented in the balance sheet after off-setting advance taxes paid and income tax

provisions arising in the same tax jurisdiction for relevant tax paying units.

Foreign currency monetary assets and liabilities other than net investments in non-integral foreign

operations are translated at the exchange rate prevailing on the balance sheet date and exchange gains

and losses are recognised in the statement of profit and loss.

*Reference for Accounting Policies – Company Annual Report

OVERALL INTERPRETATION OF FINANCIAL STATEMENTS

Balance Sheet

Over the 5 years, balance sheet has increased from INR 224 Bn to 576 Bn. This is due to a

constant stream of Profits being transferred into the Reserves and Surplus account.

The share capital had remained constant from 2010-13 at INR 2957 Mn and this decreased by

33.8% to 1959 Mn in 2014. This is because redeemable preference shares held by Tata Sons

were redeemed.

Short term borrowings for the company have remained negligible over the years at about 0.05%

of the balance sheet size.

Other long term liabilities have increased by 173% YoY in 2014 due to increased operational

lease liabilities and other liabilities.

Short term investments deposits have increased by 4 times YoY in 2014. This is mainly because

of increase in short term bank deposits by INR 83,930 Mn.

Income Statement

Sales have shown a healthy growth through the years and every year the increase has been in the

range of 27-34%.

The operating margins remained constant at about 27-28% through 2010-13. This grew to 32%

in FY 2013-14 on the back of productivity measures taken by the company. The sales per

employee increased by 22.8% in FY 14 vs FY 13.

The company incurs regular foreign exchange gains and losses as over 92% of its revenues come

from international clients.

Average yearly increase in Net Income is more than 35% for the past 5 years. Highest

percentage increase in Net Income has been 45% in FY 2011.

Cash Flow Statement Analysis

Cash inflow from Operating Activities has steadily increased from INR 43.2Bn in FY 2010 to

INR 157.9 in FY 2014 with the exception of FY 2012 in which it decline from INR 60.9Bn in

FY 2011 to 59.6Bn in FY 2012. Thus, we see that the cash inflow of TCS from operating

activities has increased by 365% over the last five years.

Such an increase of 365% over last 5 years has primarily been due to an increase of similar

magnitude in profits of TCS. The net income has steadily increased from INR 56.2 in FY 2010

to 184.7Bn in FY 2014, an increase of 329%. This increase in net income has been due to an

increase of 280% in Sales of TCS over last 5 years from INR 230.4Bn in FY 2010 to 646.7Bn in

FY 2014.

The company has been continuously using cash to invest in bank deposits with over 3 month

maturity over the years. The amount invested has gone up every year except in 2012. In 2013-14,

the company invested over INR 65Bn in these instruments.

Cash outflow from financing activities has been almost entirely due to dividends paid. Past 5

years the company has used cash to the tune of INR 43Bn per year to pay out dividends.

RATIO ANALYSIS

Current Ratio – Higher current ratio implies healthier short term liquidity comfort level. A current ratio

below 1 indicates that the company may not be able to meet its obligations in the short run. TCS’s

current ratio for FY 2013 was 2.67 and its average current ratio over the last 5 financial years has been

2.41 times which indicates that the Company has not been facing liquidity problems to meet its short

term objectives.

Debt to Equity Ratio – Companies operating with high debt to equity are vulnerable to economic

cycles. The industry’s desirable debt to equity ratio is less than 0.6. TCS’s long term debt to equity ratio

for FY 2014 was 0.22 and its average debt to equity ratio over the last 5 financial years has been 0.25

times which indicates that the Company is operating with relative low levels of debt.

Interest Coverage ratio – Interest coverage ratio indicates the comfort with which the company may be

able to service the interest expense on its outstanding debt. TCS’s interest coverage ratio for FY 2014

was 1006.74 and its average interest coverage ratio over the last 5 financial years has been 668 which

indicate that the Company has been generating enough after servicing its debt obligations.

Turnover/Efficiency – TCS has slipped in realizing the revenue leading to higher receivable days and

lower receivable turnover. The WC turnover has also decreased subsequently while the asset turnover

has improved marginally due to restructuring of non-performing assets.

Profitability – The Profit margins are on par with the industry standards but ROE and ROA have

continuously been higher indicating efficient utilizations of equity and asset base.

Cash Flow Ratios – We see that the company has stable levels of cash flow to sales and cash flow to

assets and on par with industry standards.

Market Ratios – The dividend pay-out ratio has reduced from 49% to 34% but is still on par with the

industry standards. There has been a healthy increase in growth rate rising rapidly from 20% to 35 % in

FY 11 and then dropping to 27 before increasing to 32 in FY 14

Year 2014 2013 2012 2011 2010

Liquidity Ratios

Current Ratio 2.84 2.46 1.87 1.72 1.49

Quick Ratio ( CA-Inv-PE / CL ) 2.56 2.14 1.65 1.57 1.40

Efficiency/ Turnover Ratios

Asset Turnover 1.29 1.26 1.26 1.21 1.13

Receivable Turnover 5.04 4.77 5.48 7.19 6.52

Working Capital Turnover 3.55 4.50 6.29 7.35 5.88

No. of Receivable Days 72.45 76.54 66.64 50.74 55.95

Solvency Ratios

Liabilities to Equity 0.31 0.32 0.38 0.33 0.48

Debt to Equity 0.22 0.21 0.26 0.22 0.35

Interest Coverage Ratio 1006.74 513.84 816.02 435.80 668.75

Profitability Ratios

Operating Profit Margin 32% 28% 28% 28% 27%

Profit Margin 29% 26% 29% 26% 24%

ROA 37% 33% 36% 31% 27%

Financial Leverage Multiplier 1.31 1.34 1.36 1.40 1.43

ROE 48% 45% 49% 44% 39%

Cash Flow Ratios

Cash Flow Yield 0.85 0.85 0.54 0.80 0.77

Cash Flow to Sales 0.24 0.23 0.16 0.21 0.19

Cash Flow to Assets 0.31 0.28 0.20 0.25 0.21

Market based Ratios

Dividend Pay-out Ratio 34% 34% 45% 21% 49%

Growth Rate 32% 30% 27% 35% 20%

TREND ANALYSIS & COMMON SIZE ANALYSIS

Sales & Net Profits Trend - Both sales & net profits have been rising steadily over the years. The

growth in net profit has been at a slightly faster rate than the growth in sales.

Assets & Liabilities Trend - The total assets have grown at a faster rate than the liabilities. This is

because the balance sheet is growing because of high amounts of retained earnings and because there

is very little debt financing being taken on books.

Current Assets & Long term Assets - There has been a general increase in the proportion of current

assets with respect to long term assets over the years. This is because the company’s cash and cash

equivalents are going up significantly as a good percentage of company’s earnings are being invested

in bank deposits and are not being used for capital expenditure.

Income Statement

2014 2013 2012 2011 2010 2014 2013 2012 2011 2010

Sales 281% 210% 165% 127% 100% 100% 100% 100% 100% 100%

Less: Operating Expenses 263% 207% 163% 125% 100% 68% 72% 72% 72% 73%

Operating profit (loss) 330% 218% 172% 133% 100% 32% 28% 28% 28% 27%

Less: Foreign Exchange Losses (Gains) -2% -109% 211% 26% 100% 0% 0% 1% 0% 1%

Less: Net Non-Operating Losses (Gains) 812% 524% 814% 143% 100% -5% -4% -8% -2% -2%

EBIT 369% 247% 210% 137% 100% 36% 32% 35% 30% 28%

- Interest Expense 245% 321% 172% 210% 100% 0% 0% 0% 0% 0%

Earnings before Tax (EBT) 370% 247% 210% 137% 100% 36% 32% 35% 30% 28%

- Tax Provision 674% 388% 318% 150% 100% 8% 6% 6% 4% 3%

Net profit (loss) 329% 228% 195% 135% 100% 29% 26% 29% 26% 24%

Trend Analysis Common Sizing

Balance Sheet

2014 2013 2012 2011 2010 2014 2013 2012 2011 2010

Share Capital 66% 100% 100% 100% 100% 0% 1% 1% 1% 1%

Reserves & Surplus 296% 218% 166% 130% 100% 76% 75% 72% 74% 66%

Total Equity 291% 215% 164% 130% 100% 76% 76% 73% 75% 67%

Accounts Payable 196% 165% 140% 106% 100% 7% 8% 8% 8% 9%

Short-Term Borrowings & Liabilities 159% 118% 115% 77% 100% 14% 14% 17% 15% 23%

Total Current Liabilities 169% 131% 122% 85% 100% 21% 22% 26% 24% 32%

Total Long-Term Liabilities 1725% 1036% 760% 418% 100% 2% 2% 2% 1% 0%

Total Liabilities 185% 140% 129% 88% 100% 24% 24% 27% 25% 33%

Total Liabilities & Equity 257% 191% 153% 116% 100% 100% 100% 100% 100% 100%

Cash & Near Cash Items 1018% 757% 766% 1387% 100% 1% 1% 1% 2% 0%

Short-Term Investments 383% 121% 104% 86% 100% 22% 9% 10% 11% 15%

Accounts & Notes Receivable 434% 336% 273% 144% 100% 25% 26% 27% 18% 15%

Other Current Assets 175% 191% 89% 57% 100% 12% 18% 11% 9% 18%

Total Current Assets 323% 216% 153% 98% 100% 60% 54% 48% 41% 48%

LT Investments & LT Receivables 68% 80% 69% 73% 100% 9% 14% 15% 21% 33%

Net Fixed Assets 241% 184% 146% 120% 100% 16% 16% 16% 17% 17%

Other Long-Term Assets 2018% 1548% 1654% 1288% 100% 15% 16% 21% 21% 2%

Total Long-Term Assets 195% 167% 152% 133% 100% 40% 46% 52% 59% 52%

Total Assets 257% 191% 153% 116% 100% 100% 100% 100% 100% 100%

Trend Analysis Common Sizing

COMPARATIVE ANALYSIS

For our analysis, we have chosen 2 competitors of TCS in the IT industry. Following section provides an idea how TCS fares when compared with the peers.

1) Profitability vs Sales Growth:

RatiosYear 2014 2013 2012 2011 2010 2014 2013 2012 2011 2010 2014 2013 2012 2011 2010

Liquidity Ratios

Current Ratio 2.84 2.46 1.87 1.72 1.49 3.81 4.82 4.72 5.28 4.46 3.34 3.12 2.37 2.98 1.97

Quick Ratio 2.56 2.14 1.65 1.57 1.40 3.81 4.82 4.72 4.94 4.46 2.95 2.77 2.15 2.20 1.97

Efficiency/ Turnover Ratios

Asset Turnover 1.29 1.26 1.26 1.21 1.13 0.93 0.93 0.97 0.92 0.90 1.60 1.56 1.63 1.54 1.31

Receivable Turnover 5.04 4.77 5.48 7.19 6.52 6.47 6.25 6.50 6.81 6.37 5.77 5.50 5.55 5.99 5.65

Working Capital Turnover 3.55 4.50 6.29 7.35 5.88 1.62 1.52 1.52 1.60 1.66 3.35 3.67 4.12 4.26 6.23

No. of Receivable Days 72.45 76.54 66.64 50.74 55.95 56.39 58.42 56.15 53.60 57.27 63.28 66.35 65.78 60.99 64.63

Solvency Ratios

Liabilities to Equity 0.31 0.32 0.38 0.33 0.48 0.25 0.19 0.20 0.18 0.18 0.28 0.29 0.39 0.31 0.46

Debt to Equity 0.22 0.21 0.26 0.22 0.35 0.25 0.19 0.20 0.17 0.18 0.27 0.27 0.38 0.29 0.44

Interest Coverage Ratio 1006.74 513.84 816.02 435.80 668.75 -NA- -NA- -NA- -NA- -NA- 1447.75 424.60 524.40 382.50 98.40

Profitability Ratios

Operating Profit Margin 32% 28% 28% 28% 27% 26% 27% 30% 30% 31% 17% 18% 12% 7% 14%

Profit Margin 29% 26% 29% 26% 24% 23% 25% 27% 25% 27% 15% 14% 11% 8% 17%

ROA 37% 33% 36% 31% 27% 21% 23% 26% 23% 27% 24% 22% 19% 13% 22%

Financial Leverage Multiplier 1.31 1.34 1.36 1.40 1.43 1.23 1.20 1.19 1.18 1.09 1.28 1.33 1.36 1.38 1.60

ROE 48% 45% 49% 44% 39% 26% 28% 31% 28% 29% 31% 30% 25% 17% 35%

Cash Flow Ratios

Cash Flow Yield 0.85 0.85 0.54 0.80 0.77 1.12 0.76 0.96 0.83 1.16 0.76 0.84 1.00 0.40 1.16

Cash Flow to Sales 0.24 0.23 0.16 0.21 0.19 0.26 0.19 0.26 0.21 0.32 0.11 0.12 0.11 0.03 0.20

Cash Flow to Assets 0.31 0.28 0.20 0.25 0.21 0.24 0.18 0.25 0.20 0.31 0.18 0.19 0.19 0.05 0.26

Market based Ratios

Dividend Pay-out Ratio 34% 34% 45% 21% 49% 35% 26% 32% 53% 54% 23% 15% 7% 8% 6%

Growth Rate 32% 30% 27% 35% 20% 17% 20% 21% 13% 13% 23% 25% 23% 16% 33%

MindTreeTCS Infosys

0%

5%

10%

15%

20%

25%

30%

35%

2010 2011 2012 2013 2014

Net Profit Margin

TCS

Infosys

Mindtree

0%

5%

10%

15%

20%

25%

30%

35%

40%

2010 2011 2012 2013 2014

Sales Growth

TCS

Infosys

Mindtree

Net profit for TCS has been consistent throughout the period,

and the sales growth has been increasing gradually. On the contrary, Net profit margin for Infosys has declined from 27%

(FY 2010) to 23% (FY 2014)

Profit Margins are consistent for both TCS and Infosys, which

are stable whereas for Mindtree, which is a growing company, the profit margins are rising but still way behind the industry average.

In 2012-13, due to Macroeconomic factor, the Indian IT industry as a whole was under market pressure and sales

growth decreased

2) Efficiency vs Profitability

TCS has been fairly efficient in utilizing its assets as compared to Infosys, whereas Mindtree has been more

efficient in utilizing its assets. This is due to excess capacity of TCS and Infosys. Also due to foreign

operations, the value of assets is higher for TCS and Infosys.

Receivable days have increased for TCS over the period, which can be explained partially by increased sales,

but the competitors have managed to keep Receivables days at the same level.

3) Liquidity vs Profitability

Liquidity of TCS has improved considerably over the years to a safe value of 2.8. Both the competitors are

also liquid as is the case with most of the companies in the IT industry

ROA and ROE for TCS has been healthy over the years and is showing upward trend as well. On the contrary,

Infosys has started to show declining profitability. For Mindtree, though ROA & ROE is lesser as compared

to other giants, but it has gained momentum since 2011-12 and even surpassed Infosys

The trend of current ratio and profitability are showing high correlation for all the companies.

4) Sales Growth vs Market Valuation

5) Dividend Pay-out vs CapEx

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

2010 2011 2012 2013 2014

Asset Turnover

TCS

Infosys

Mindtree0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

2010 2011 2012 2013 2014

Receivable Turnover

TCS

Infosys

Mindtree0%

5%

10%

15%

20%

25%

30%

35%

2010 2011 2012 2013 2014

Operating Profit Margin

TCS

Infosys

Mindtree

0.00

1.00

2.00

3.00

4.00

5.00

6.00

2010 2011 2012 2013 2014

Current Ratio

TCS

Infosys

Mindtree0%

5%

10%

15%

20%

25%

30%

35%

40%

2010 2011 2012 2013 2014

Return on Assets

TCS

Infosys

Mindtree0%

10%

20%

30%

40%

50%

60%

2010 2011 2012 2013 2014

Return on Equity

TCS

Infosys

Mindtree

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

2010 2011 2012 2013 2014

Market Value/ Book ValueTCS

Infosys

Mindtree

0%

10%

20%

30%

40%

50%

60%

2010 2011 2012 2013 2014

Dividend Payout

TCS

Infosys

Mindtree0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

2010 2011 2012 2013 2014

Capex/Assets

TCS

Infosys

Mindtree

Though market valuation for TCS has been good but in

the recent times, it has started to decline

Market value of Infosys is not only less but also declining

over the years

For Mindtree, which is a growing company, investors

interest in the company is evident from the market

valuation trend

In 2012-13, dividend paid by

the TCS and Infosys were

lower due to industry

slowdown.

Even in the slowdown, TCS

invested consistently as

compared to Infosys, which

had zero capital expenditure

OPERATING & FINANCIAL PERFORMANCE AND POSITION

Operational Performance:

For FY 2014, the Company’s total income from operations grew by 51.46 % to INR 2, 04,532 Bn as against INR 1, 35,034 Bn in FY 2013. The operating margins remained constant at about 27-28% through 2010-13 and increased to 32% in FY 2013-14 on the back of productivity measures

taken by the company. The average sales per employee increased by 22.8 % suggesting better operational efficiency.

Operational Position:

56.4% of the overall revenue of the Company comes from U.S., followed by 25.3% from Europe,

8.6% from India, 7.6% from the Asia Pacific region and 2.1% from the Middle East. The Company’s BFSI (Banking & Financial Services Industry) domain constitutes 43.1% of its total

revenue. The days receivable has detoriated in the last 5 years and has fallen below the industry standards and closest competitors. This has led to the accounts receivable to increase by 34.1% over 5 years compared to Infosys’s 18.2 %. The accounts payable though paints a favorable

picture for TCS with payable days more than the industry and closest peers.

Financial Position:

The balance sheet for TCS has been growing 20.7 % over the last 5 years as compared to Infosys’s 15.11 % and Mindtree’s 17.4%. Short term borrowings for the company have remained negligible

over the years at about 0.05% of the balance sheet size. This coupled with the solvency ratios project a very strong position to the debtors. Short term investments deposits have increased by 4 times in 2014. Other long term liabilities have increased by 173% YoY in 2014 due to increased

operational lease liabilities and other liabilities. The share capital has remained relatively constant with the only exception being 34% of share capital being redeemed in 2014. The reserves and

surplus has been steadily increasing with the majority share of profits coming back to the company.

Financial Performance:

The sales for TCS has grown by 22.9 % over past 5 year compared to Infosys’s 15.96% and

Mindtree’s 19.70%. EBIT for TCS has grown by 29.8% over 5 years compared to Infosys’s 13.23% and Mindtree’s 18.41%. The growth for EBIT being higher than sales is only seen in TCS highlighting higher operational and non-operational efficiency. The EBT has also seen a higher

growth in the last 2 years compared to the previous years because of rupee depreciation w.r.t. dollar leading to reduced foreign exchange losses and better revenues in INR.

OPERATING & FINANCIAL STRENGHTS AND WEAKNESS

Financial Strength:

The satisfactory current ratio (Av5 : 2.076 times) and quick ratio (Av5 :1.864times) reflected good working capital management and liquidity position. Satisfactory gross profit margin (Av5 :

27.084%) ,Net Profit Margin (Av5 : 26.8%) & Operating Profit Ratio (Av5 :28.06%) revealed cost price effectiveness of the operations. Good ROA (Av5 : 32.8%) depicted high returns on assets.. Dividend Payout ratio (Av5 :36.6% ) revealed financial strength because the firm retained 64% of

the profits for future investments. With the decrease in share capital due to share redemption, there has been a good utilization of free cash, and has increased efficient capital structure and

shareholder value.

Financial weaknesses:

Total assets turnover ratio (Av5 :1.54 times) shows less frequency with which the assets were realized .Dividend coverage ratio (Av5 :2.56 times) was low showing inability of company to pay dividends on shares. The market fluctuation may also be considered to be a weakness and if the

Rupee sees a bullish run, it would result in reduced margins and revenues for TCS.

Operational Strength:

The operational margins has been growing strongly and has shot up above its competitors. The cash flow from operational activities has been steadily increasing by 29.55% over the past 5 years.

The WC turnover and asset turnovers have been better than the industry average and the closest competitor Infosys highlighting a more efficient utilisation of asset and WC.

Operational Weakness:

The Cash flow to yield and sales are lower than the industry standards highlighting a weak

translation of sales and assets into CFOA compared to the industry. The receivable days has increased and though this may lead to higher revenues, this had caused higher bad debts and has

resulted in lower CFOA.