appraisal - tcs - final

Financial Analysisof

TATA Consultancy ServicesPresented By

Syndicate I

Name PRN

Chaitanya Pande 12020541095

Deepanker Ray 12020541097

Manish Chandra Renu 12020541107

Shaliesh Jain 12020541129

Sonal Meshram 12020541132

Paramveer Singh Khosa 12020541151

Sakshi Bateja 12020541153

RATIO ANALYSIS

Ratio analysis is the process of determining and interpreting numerical relationship based on financial statements. It is the technique of interpretation of financial statements with the help of accounting ratios derived from the balance sheet and profit and loss account.

E.g. : Profitability Ratios, Liquidity Ratios etc.

Liquidity Ratios

Definition: A class of financial metrics that is used to determine a company's ability to pay off its short-terms debts obligations. Generally, the higher the value of the ratio, the larger the margin of safety that the company possesses to cover short-term debts.

E.g. : Current Ratio, Quick Ratio, Cash Ratio etc.

Liquidity Ratios

Ratio Formula 2013 2012 2011

Current RatioTotal Current Assets/Total

Current Liabilities2.429 1.8715 2.428

Quick Ratio(Total Current

Assets-Inventory)/Total Current

Liabilities2.428 1.871 2.427

Cash RatioCash & Cash

Equivalents/Total Current Liabilities

1.576 1.402 1.639

Definition: A class of financial metrics that are used to assess a business's ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time. For most of these ratios, having a higher value relative to a competitor's ratio or the same ratio from a previous period is indicative that the company is doing well.

Profitability Ratios

E.g. : Gross Profit Ratio, Operating Profit Ratio, Return on Shareholder’s Fund (ROE), Return on Capital Employed (ROI)



Gross Profit Ratio

(EBITDA/Sales)*100 32.64 33.87 31.1

Operating Profit Ratio (EBIT/Sales)*100 31.06 32.213 29.29

Return on Shareholder’s

Fund(ROE)

(PAT/Shareholder’s

fund)*10039.27 44.16 38.66



Return on Capital

Employed (ROCE)

EBIT/Capital Employed*100 47.2 52.64 44.29

Microsoft Office Excel 97-2003 Worksheet

Activity/Turnover Ratios

• Activity ratios indicate the performance of an organization

• This indicate the effective utilization of the various assets of the organization

• Most of the ratios falling under this category are based on turnover and hence these ratios are called as turnover ratios

Microsoft Excel Worksheet

Total Assets Turnover Ratio

NAME FORMULA RATIO2012-13 2011-12 2010-11

Total Assets Turnover Ratio

Net Sales/Avg Total Assets

Service Revenue/Avg total assets 1.25 1.17 1.27

REMARK:- Rate of increase of assets is much more than rate of increase of Sales, hence the ratio is declining

• Indicates efficiency of assets for the purpose of generating revenue

• Higher ratio indicates company has acquired more assets which are productive in nature

Fixed Asset Turnover Ratio


Fixed assets turnover ratio

Net Sales/Avg Fixed Assets

Service revenue/avg fixed assets 7.85 7.65 7.14

REMARK:- Rate of increase of net sales is more than rate of increase of revenue, hence the increasing revenue

• This ratio gives an indication of how efficiently a company uses its fixed assets in doing its business

• A High fixed asset turnover ratio indicates the capability of the firm to earn maximum sales with the minimum investing in fixed assets

Inventory Turnover Ratio


Inventory turnover ratio

Cost of goods sold/Avg inventory

Sales Revenues/Avg inventory 9241.6 8013.5 10903

REMARK:- (I) since the inventory is very less hence high ratio(II) higher ratio is preferred since lesser inventory is good for company

• This financial ratio measures the number of times inventory is turned over during the year

• High inventory turnover suggests good levels of liquidity

Debtors Turnover Ratio


Debtors turnover ratio

Net Credit sales /Average Receivables

Service revenue/avg trade receivables 4.77 5.48 6.09

Debt Collection Period 365/DTR 365/DTR 76.54 66.64 59.93REMARK:- (I) Although there is an increase in sales, but the increase in receivables is much more than that.so it is bad for the business (II)Because of decline in DTR there is considerable increase in Debt collection period, so the company will have to depend more on recovery which is bad for the company

• Indicates the speed with which amount is collected from debtors• Higher the ratio, better it is• Lower ratio indicates inefficient credit sales policy of the

management• Assessment of sales policy of the management can be done

Working Capital Turnover Ratio


Working Capital Turnover Ratio

Net Sales/Working Capital Employed

Service Revenue/ (current assets-current liabilities) 3.50 4.95 3.18

REMARK:- (I) A high ratio indicates efficient utilization of working capital and a low ratio indicates otherwise(II)But a very high working capital turnover ratio may also mean lack of sufficient working capital which is not a good situation

• Measures efficiency in working capital usage. It establishes relationship between cost of sales and working capital

• Positive working capital means that the company is able to pay off its short-term liabilities

• Negative working capital means that a company currently is unable to meet its short-term liabilities with its current assets

Leverage Ratios

• A leverage ratio is a comparison of a combination of a company's debt, equity, assets and interest payments to ascertain its long-term solvency and ability to meet its financial obligations

• Leverage refers to the use of loans or other forms of debt to finance acquisitions or investments

• The goal of using these financing options is to earn a higher rate of return than the rate of interest on the loan and amplify gains

• Companies with a high degree of leverage are considered risky and highly vulnerable to economic downturns because they must continue to meet obligations to the debt in spite of poor production or sales


Debt/Equity Ratio


Debt-Equity Ratio Debt/Equity

(Non current liabilities+Current liabilities) / (Share capital+reserve & surplus) 0.32 0.37 0.33

REMARK:- Ideal ratio can be 2:1,since it is much less than that, the company can take much more debt to increase the degree of financial leverage

• Debt-to-Equity ratio is the ratio of total liabilities of a business to its shareholder’s equity

• It is a leverage ratio and it measures the degree to which the assets of the business are financed by the debts and the shareholder’s equity of a business

Fixed Asset ratio


Fixed asset ratio

Fixed assets/long term funds

Fixed assets/Non current Liabilities(long term borrowings & provisions) 11.36 12.18 18.54

REMARK:- Since this ratio looks bad as the company seems to be using short term funds for its fixed assets but actually the company is using its reserve and surplus to buy those assets

• This ratio establishes the relationship between long term funds (equity plus long-term loans) and fixed assets.

• It is advised that fixed assets should be purchased out of long term funds only

Total Debt Ratio


Total debt ratio

total debt/total assets

Non current+current liabilities/Total assets 0.24 0.27 0.21

REMARK:- Since the debt is about 1/4th of the total assets, so the company can remove its debt liability very easily

• Debt-to-assets ratio or total debt ratio is the ratio of total liabilities of a business to its total assets

• It measures the portion of the assets of a business which are financed through debt

• Total liabilities include both the current and non-current liabilities

Coverage Ratios

• It is a measure of a company's ability to meet its financial obligations.• In broad terms, the higher the coverage ratio, the better the ability of

the enterprise to fulfill its obligations to its lenders.• Types:

– Debt Service Coverage Ratio– Interest Service Coverage Ratio– Dividend Coverage Ratio– Total Fixed Charge Coverage Ratio– Total Cash Flow Coverage Ratio


Debt Service Coverage Ratio• In corporate finance, debt service coverage ratio is the amount of cash flow

available to meet annual interest and principal payments on debt, including sinking fund payments.

• Formula used:– (net operating income) / (total debt service)OR– (Annual Net Income + Amortization/Depreciation + Interest Expense + other non-cash

and discretionary items (such as non-contractual management bonuses)) / (Principal Repayment + Interest payments + Lease payments)

• Values for TCS:

• Inference:– Value of ratio is well above the ideal value of 1. this means that enough income is being

generated in order to service the debt obligations.

FY 2010-11 FY 2011-12 FY 2012-1317.184067 18.810358 16.765679

Interest Service Coverage Ratio

• Interest service coverage ratio is used to determine how easily a company can pay interest on outstanding debt.

• Formula used:– (EBIT) / (Interest Expense)

• Values for TCS:

• Inference:– the interest coverage ratio of value well above 1 indicates that the

company is generating sufficient revenues to satisfy interest expenses.

FY 2010-11 FY 2011-12 FY 2012-13433.8041 814.02012 511.84063

Dividend Coverage Ratio

• It indicates the capacity of an organization to pay dividends out of profit attributable to the share holders. A dividend cover of 3 implies that a company has sufficient earnings to pay dividends amounting to 3 times of the present dividend payout during the period.

• Formula used:– (Profit after tax - Dividend paid on Irredeemable Preference Shares)/(Dividend paid to

Ordinary Shareholders)• Values for TCS:

• Inference:– Generally, companies would aim to sustain a dividend cover of at least 2 times in order

to avail adequate financing through retained earnings while providing a reasonable cash return on shareholder's investment. A high dividend cover here of more than 2 suggests that TCS is retaining a higher portion of its earnings to meet its financing requirements which may result in higher dividend payouts in the future.

FY 2010-11 FY 2011-12 FY 2012-132.7626692 2.2431822 2.9695068

Total Fixed Charge Coverage Ratio• It indicates a firm's ability to satisfy fixed financing expenses, such as

interest and leases.• Formula used:

– (EBIT + fixed charges before tax) / (fixed charged before tax + interest)

• Values for TCS:

• Inference:– A ratio over 1 indicates that TCS is able to pay its fixed charges.

FY 2010-11 FY 2011-12 FY 2012-131.4218029 1.4850458 1.4580297

Total Cash Flow Coverage Ratio

• It is an indicator of the ability of a company to pay interest and principal amounts when they become due. This ratio tells the number of times the financial obligations of a company are covered by its earnings.

• Formula used:– (net earnings+depreciation+amortization) / (total debt)

• Values for TCS:

• Inference:– A ratio equal to one or more than one means that the company is in good

financial health and it can meet its financial obligations through the cash generated by operating activities.

FY 2010-11 FY 2011-12 FY 2012-13132.63226 103.56166 70.141427

Earnings per Share• The portion of a company's profit allocated to each outstanding share

of common stock. Earnings per share serves as an indicator of a company's profitability.

• Formula used:– (PAT-Preference dividend) / (no. of shares)

• Values for TCS:

• Inference:– Two companies could generate the same EPS number, but one

could do so with less equity (investment) - that company would be more efficient at using its capital to generate income and, all other things being equal, would be a "better" company.

FY 2010-11 FY 2011-12 FY 2012-13433.8041 814.02012 511.84063

Appraisal Of Management Of Long Term Funding

As atMarch 31, 2013(Rs. Cr)

As atMarch 31, 2012 (Rs. Cr)


Authorised225,00,00,000 equity shares of Re. 1 each (March 31, 2012: 225,00,00,000 equity shares of Re. 1 each)

225.00 225.00 225.00

100,00,00,000 redeemable preference shares of Re. 1 each(March 31, 2012: 100,00,00,000 redeemable preference shares of Re. 1 each)

100.00 100.00 100.00

325.00 325.00 325.00Issued, Subscribed and Fully paid up 195,72,20,996 equity shares of Re. 1 each(March 31, 2012: 195,72,20,996 equity shares of Re. 1 each)

195.72 195.72 195.72

100,00,00,000 redeemable preference shares of Re. 1 each(March 31, 2012: 100,00,00,000 redeemable preference shares of Re. 1 each)

100.00 100.00 100.00

295.72 295.72 295.72

The Authorised, Issued, Subscribed and Fully paid-up share capital comprises of equity shares and redeemable preference shares having a par value of Re. 1 each as follows:

Long Term FundsShared Capital

Share capital is very less as compared to reserves & surplus

Long Term borrowings As atMarch 31, 2013(Rs. Cr)


As atMarch 31,2011(Rs. Cr)

(a) Secured loans 81.58 93.47 32.33

Long term maturities of obligations under finance Lease

(b) Unsecured loans 1.52 2.76 4.00

Other borrowings (from entities other than banks)

83.10 96.23 36.33

Long - term borrowings consist of the following:

Obligations under finance lease are secured against fixed assets obtained under finance lease arrangements.Secured loan and unsecured loan is decreased but in a negligible amount as compared to reserve and surplus. The company has not taken any more loans as its reserves and surplus are huge.

Long Term Borrowings

As atMarch 31, 2013

As atMarch 31, 2012

As atMarch 31, 2011

General Reserve Rs. 5515.11 Cr Rs. 4280.74 Cr Rs. 3183.14 CrForeign Currency Translation Reserve

Rs. 174.61 Cr Rs. 152.46 Cr Rs. 101.61 Cr

Reserve & Surplus Rs. 32266.53 Cr(31% increase)

Rs. 24560.91 Cr(27.37% increase)

Rs. 19283.77 Cr(30.11% increase)

Reserves and Surplus

The company has huge reserves and surplus

It is almost a zero debt company



As atMarch 31,2011(Rs. Cr)

Trade Payables - 10.63 -

Other Liabilities 251.87 186.96 129.91

251.87 197.59 129.91

Other Long -Term Liabilities

Trade payables are settled as compare to last year & other liabilities are increased due to capital creditors

It has been increased from Rs. 31.63Cr to Rs. 54.34Cr in FY 2012-13

Capital Gearing Ratio

• Debt-Equity Ratio= Debt/Equity • (Non-current liabilities + Current liabilities) / (Share capital+

reserve & surplus)• Ideal ratio should be less than 1; since it is much less than

ideal ratio• The company can take much more debt to increase the

degree of financial leverage

Financial Year Debt- Equity RatioFY 2012-13 0.32

FY 2011-12 0.37

FY 2010-11 0.33

• Total debt ratio= total debt/total assets i.e. (Non-current liabilities +current liabilities)/Total assets

• Since the debt is about 1/4th of the total assets, so the company can remove its debt liability very easily

Financial Year Total Debt RatioFY 2012-13 0.24FY 2011-12 0.27FY 2010-11 0.25

Total Debt Ratio

• Proprietary ratio= shareholders funds/total assets i.e. (Share Capital + Reserve & Surplus)/total assets

• It represents the amount of assets on which shareholders have a residual claim. The higher the ratio, the more shareholders may receive.

Financial Year Proprietary(Shareholders Equity) Ratio

FY 2012-13 0.76

FY 2011-12 0.73

FY 2010-11 0.75

Proprietary Ratio ( Shareholders Equity Ratio)

Degree of Financial Leverage (DFL)

• Degree of Financial Leverage= EBIT/EBT • i.e. (EBT + Interest)/EBT • It represents that higher the interest higher is degree of

financial leverage• Since DFL is 1.00 from past financial years, it indicates that the

company has not taken any advantage of the financial leverage

Financial Year DFLFY 2012-13 1.00

FY 2011-12 1.00

FY 2010-11 1.00

Degree of Operation Leverage (DOL)

• Degree of Operation Leverage (DOL) = Contribution/Operating Profit

• There is no mentioning of variable cost in annual reports

Financial Year DOLFY 2012-13 NilFY 2011-12 NilFY 2010-11 Nil

Appraisal of Investment Decision

AssetsAs at March 31, 2013 March 31, 2012 March 31, 2011

Tangible assets 5059.48 4012.16 3363.78

Intangible assets 44.80 51.46 58.40

Capital work in progress 1763.85 1399.82 1072.86

Fixed Assets 8141.87 5463.44 4495.04

Deferred tax assets (net) 310.22 139.74 52.03

Long-term loans and advances 5234.13 4332.81 2864.09

Non-Current Assets 20690.66 17723.02 15472.33

Total Assets 43012.14 34258.81 26042.81

Current Assets

Particulars 2013 2012 2011

Current investments 348.65 538.24 337.58

Trade receivables 11202.32 9107.72 4806.67

Cash and bank balances 4054.16 3280.07 3120.52

Short term loans and advances 4911.48 1648.72 1369.05

Other current assets 682.34 389.43 94.92

Total Current Assets 23508.64 16535.79 15428.04

Proportion of fixed assets= Fixed assets/ Total assets


Fixed Assets/ Total Assets 0.19 0.16 0.17

Proportion of current assets = Current assets/ Total assets


Current Assets/ Total Assets 0.55 0.48 0.59

Current Ratio

Current ratio = Total current assets/ Total current liabilities

Year Calculation Current Ratio

2011 15428.04 / 6353.18 2.429

2012 16535.79 / 8835.48 1.8715

2013 23508.64 / 9676.91 2.428

Quick Ratio

Quick ratio = (Current Assets – Inventory)/Current liabilities

Year Calculation Quick Ratio

2011 15428.04 / 6353.18 2.427

2012 16535.79 / 8835.48 1.871

2013 23508.64 / 9676.91 2.428

Fixed Asset Turnover Ratio

Fixed Asset Turnover Ratio = Net Sales/Average Fixed Assets

Year Calculations Fixed asset Turnover Ratio

2011 29275.41/4098.14 7.14

2012 38104.23/4979.24 7.65

2013 48426.14/6165.78 7.85

• Current Ratio is well above the standard ratio of 2:1 hence Margin of Safety for the liabilities is sufficient and the company is in a healthy position to pay its current liabilities out of its current assets.

• Quick Ratio has increased in 2012-13 compared to 2010-11 which means, cash or cash equivalent are more and, if there is any favorable Investment opportunity, company would be able to capitalize on it.

• The fixed-asset turnover ratio measures a company's ability to generate net sales from fixed-asset investments A higher fixed-asset turnover ratio shows that the company has been more effective in using the investment in fixed assets to generate revenues. In other words, the fixed assets are adequately being utilized to generate sales for the company

• Investments are justified.

Financial Highlights• Company rewarded their shareholders with regular dividend

and paid total dividend of Rs 22 per share including Rs 13 proposed as final dividend

• Company added 80 new customers across globe making active customer base to 1156

• Company acquired Computational Research Laboratories Limited (CRL)

• The Company had 58 subsidiaries as on March 31, 2013

• No public deposits accepted by the company and hence no interest on public deposits was outstanding

Appraisal of Working Capital Management

WORKING CAPITAL

Working Capital = Current Assets – Current Liabilities

Rs Crore Year 2013-2012 2012-2011 2011-2010

Current Assets (A) 23508.64 16535.79 15428.04

Current Liabilities (B) 9676.91 8835.48 6227.76

Working Capital (A-B) 13831.73 7700.31 9200.28

The company has shown a steady increase in its working Capital from year 2012 to 2013 The current assets have risen on account of increase in current investments and trade receivables. The current liabilities have also substantially risen on account of rising of short term borrowings.

CURRENT RATIO

Current Ratio= Total Current Assets / Total Current Liabilities

Rs Crore Year 2013-2012 2012-2011 2011-2010

Total Current Assets (A) 23508.64 16535.79 15428.04

Total Current Liabilities (B) 9676.91 8835.48 6227.76

Current Ratio (A/B) 2.4293 1.8715 2.4773

Current Ratio of 2:1 is considered satisfactory Higher value of current ratio is indication of margin of safety that TCS has The firm is in a good position to pay back its liabilities from its current assets Also FY 2012-2013, the trade receivables amounts to Rs 11202.32 crore, which is much higher than its combined total current liabilities

QUICK RATIOQuick Ratio= (Total Current Assets – Inventory)

Total Current Liabilities

Rs Crore Year 2013-2012 2012-2011 2011-2010



Inventory (C) 6.34 4.14 64.7

Quick Ratio {(A-C)/B} 2.4286 1.8710 2.4773

Quick Ratio of 1:1 is considered to represent a satisfactory current financial conditionThere is very small evident difference in value of current and quick ratio. This is because TCS has very little inventoryIncreasing quick ratio for TCS indicates that the company is experiencing top-line growth, quickly converting receivables into cash, and easily able to cover its financial obligations

WORKING CAPITAL TURNOVER RATIO

Working Capital Turnover Ratio = Net Sales/ Net Working Capital

Rs Crore Year 2013-2012 2012-2011 2011-2010



Net Sales (C) 48426.14 38858.54 29770.14

Working Capital Turnover {C/(A-B)} 3.50 5.04 3.23

Net Sales has increased over the period of analysis. However working capital has shown rise, which is more in proportion to sales This ratio has declined from 2012-2011 to 2013-2012, which indicates that company was not able to use its working capital for generating sales TCS has much lower time period of conversion of working capital into sales

ASSET TURNOVER RATIO

Asset Turnover Ratio = Net Sales/ Total Assets

Rs Crore Year 2013-2012 2012-2011 2011-2010


Total Non Current Assets (B) 19503.5 14575.94 10906.98

Net Sales (C) 48426.14 38858.54 29770.14

Asset Turnover {C/(A+B)} 1.12 1.24 1.13

Asset turnover measures a firm's efficiency at using its assets in generating sales or revenue - the higher the number the better There is a minor decrease in Asset Turnover in FY2013 from FY 2012 owing to increase in the Total assets of the companyCompared with Infosys (1.2 FY 2013-12), TCS is maintaining same industry standard

Appraisal of Working CapitalFY 2011-2010 :1) TCS' working capital management has consistently lagged its primary peer,

Infosys, particularly over the financial year 2010 - 11. On an average, Infosys' Operating Cash Flow (OCF) had been 134% as against TCS' 99% since FY09 to FY11

2) TCS attributed this to the increased proportion of revenue from geographies such as India and Latin America

3) Much of the work done in India relates to servicing the government sector, where the cash cycles tend to be longer

4) Debtor days declined during 2010-11, but were still higher than Infosys.

FY 2012-20111) In FY12, debtor and unbilled revenue days rose significantly to 103 days

from 93 days in FY11 and taxes paid also surged nearly 80% YoY. 2) This was the key reason for the slow 6% YoY growth in OCF, despite a

healthy 29% YoY growth in EBIT.

Appraisal of Working CapitalFY 2013-2012 :1) TCS’ working capital management improved in FY13 compared

with FY12 because of better debtor management. The IT major’s debtor days witnessed an improvement from 86 days in FY12 to 82 days in FY13. On the unbilled revenue front, unbilled revenue days rose slightly to 18 from 17 in FY12.

2) Thus, overall debtor and unbilled revenue days declined from 103 in FY12 to 100 in FY13, the key reason for improved working capital management.

3) Thus, in FY13, significant improvement in working capital management ensured that healthy EBIT growth also translated into strong OCF growth.

Microsoft Office Excel Worksheet

Appraisal Of Overall Financial Management Of Tata Consultancy Services

Revenue growth showing 6 fold increase in 9yrs• CAGR of 26.27%• Realization and offshore leverage• Exchange rate fluctuation

Financial Performance

Growth of 24.97%

Growth of 29.92

Growth of 33.65%

Gross Dividend paid was to the tune of Rs 5,024.06 crores

Growth of 33.77%

EBITDA

PBT

PAT

DIVIDEND

EPS

Critical Analysis-EBITDA

• EBITDA as a percentage of revenue(in crores)Year 2013 2012

EBITDA/Revenue Rs 18,039.91 Rs 14,435.31

There is a decrease of 0.88% mainly because

• Increase in Employee and BA related costs by 1.23%• Increase in operation and other expenses by 0.37%

Effect Of High WC, In Business

In FY2013, an additional amount of Rs 1,766.54 crores (Rs 3,458.36 crores in fiscal 2012) was used in working capital to meet the expanding business requirements.

Strategic Alliances and Subsidiaries

• In fiscal 2013 TCS acquired Computational Research Laboratories Limited for Rs 162.62 crores

• TCS has 54 Subsidaries and 4 subsidaries were set up in the year 2012

– (i) Tata Consultancy Services Qatar S.S.C. – (ii) Nippon TCS Solution Center Limited – (iii) Tata Consultancy Services Osterreich GmbH – (iv) Tata Consultancy Services Danmark ApS

Financial Performance on Ratio Basis

Current ratio -2.429• Higher current ratio implies healthier short term liquidity

comfort level• Company has not been facing liquidity problems to meet its

short term objectives

Debt/equity ratio- 0.32%• This ratio indicates the proportion of equity and debt used by

the company to finance its assets• TCS’s long term debt to equity ratio for FY 2013 is 0.32 and

its average long term debt to equity ratio over the last 5 financial years has been 0.003 times which indicates that the Company is operating with very low levels of debt

Return on Capital Employed (ROCE)-47.2%• Amount of profit which the company generates on money

invested by the equity shareholders.

• Also called as ‘Return on investment’

• There is a slight drop in the ratio value which indicates there is a marginal reduction in the returns available to the firm, yet overall figures still holds good for the firm

Operating profit ratio-31.06%• Tells the overall profitability of the company

Quick Ratio -2.428%• Indicates companies ability to pay out quick liabilities from

quick assets

• Indicateso Liquidity position o Short term financial position

• Ability to meet commitments without delay

• It has increased from 1.871% to 2.428% indicating the capacity of the company to pay out obligations

appraisal - tcs - final

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