Download - 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