Financial Analysis of

TCS and Infosys

Submitted by:

Name: Roll Number (EGMP 26):

1. Mahesh Devarajan 26129

2. Mahesh SV 26130
3. Meenakshi Patil 26132
4. Nagaraj Deivasigamani 26134
5. Naveen Chawla 26136

Submitted on: 24 Aug 2012

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Contents
Executive Summary ................................................................................................................................. 3

Sales Growth over time and Trend: ........................................................................................................ 4

Profitability & Du Pont Analysis: ........................................................................................................... 6

Liquidity: .............................................................................................................................................. 10

Debt Analysis: ....................................................................................................................................... 12

Stock Analysis: ..................................................................................................................................... 13

Cash Flow Analysis: ............................................................................................................................. 16

Auditors Report, Directors Report and MDA: ...................................................................................... 18

Assumptions:......................................................................................................................................... 19

Summary & Conclusion:....................................................................................................................... 20

References: ............................................................................................................................................ 22

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Executive Summary
In India, IT industry has been a story of ‘significant growth’ and has put India on a
Global Map. In the last ten years, IT Industry in India has grown at an average annual rate of
28%. As a result of cost advantage and talent pool available in India, the country has emerged
as a preferred destination for IT services. According to NASSCOM, India can reach USD 130
billion in revenues (IT related) by 2015, with Compounded Annual Growth of 14%.1 Tata
Consultancy Services (TCS) is a part of the Tata group providing information technology and
management consultation services to organizations, in addition to the software packages for
electronic banking, insurance billing, customer relationship management, and hospital
management, with its presence in more than 40 countries.2 Infosys Limited is a global leader
in consulting, technology and outsourcing. Infosys provides business consulting, technology,
engineering and outsourcing services in Aerospace & Defence, Airlines, Automotive,
Communication Services, Consumer Packaged Goods, Education, Energy, Financial
Services, Healthcare, High-Tech, Hospitality and Leisure, Industrial Manufacturing,
Insurance, Life Sciences, Logistics and Distribution, Media & Entertainment, Publishing,
Resources Industries and Retail to clients in over 30 countries. Infosys also offers Products &
Platforms innovation led-services in cloud computing, mobility, big data and rich media to
provide guaranteed business outcomes. (clean up and reduce the size )

We have chosen these two companies for our analysis on their financial performance,
since they are the leading entities within the industry and together they account for a quarter
of the country’s software exports and (in) the IT services sector. Infosys was a market leader
a few years ago but TCS has grabbed the position for some time now. Investors are not so
much optimistic towards Infosys stock while the rivals have overtaken Infosys both in terms
of market value and quarterly earnings. Unlike most of its rival companies, Infosys is also
shying away from giving any growth guidance or quarterly revenue forecasts due to its
inability to gauge near term growth.3 This report analyses the financial performance of
Infosys and TCS over the past five fiscal years from 2008 to 2012. We have evaluated the
Consolidated Balance Sheet, Profit & Loss statement and the Cash Flow statement of the
companies from their published annual reports. In addition references have been made to
various sources from the internet and text book, which helped in analysis of the firm in terms

1
http://stockshastra.moneyworks4me.com/it-sector-analysis-and-review-of-indian-economy/
2
http://www.bazaartrend.com/index.php?symbolname=TCS and Annual Report for TCS for 2011-12
3
http://economictimes.indiatimes.com/news/news-by-company/corporate-announcement

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of their trends, both horizontal and vertical and also in terms of industrial comparisons. It
observes the patterns and makes some inferences on the analysed trends. The analysis is
more from the investors’ point of view and as part of analysis we have given more weightage
to parameters that are perhaps more under the direct influence of the company.

Sales Growth over time and Trend:

From the published Consolidated Profit &Loss statements, for both Infosys and TCS,
it could be inferred that 2009-10 had been a tough year after two successful years of double
digit growth since 2007-08 for the IT industry in terms of ‘ Revenue’ from the Software
Services and Products (Figure 1.1) . Both the companies had seen a slump in 2009-10 with a
marginal growth (less than 5% in case of Infosys and less than 8% in case of TCS.) However,
both TCS & Infosys got back on track in terms of their revenue growth in double digits from
2010-11 onwards, with TCS having a steep growth (31%) in as compared to Infosys
(22.66%) in 2011-12.

Figure 1.1

Sales grew linearly for both the companies, except for the year 2009-10 due to tough
macro-economic environment. As inferred from chart 1.1 below, TCS dependency on
volumes and foreign exchange gains and losses is quite high for their revenue growth. The
impact of lower volumes and lower foreign exchange gain is clearly evident in its lower
revenue growth in 2009-10 as compared to 2008-09. According to Management Discussions
4
and Analysis, one can infer that higher volume is a result of their strategic acquisitions in
different parts of the world.

Chart 1.1

Amongst all the other factors mentioned in the Annual Report for TCS in 2011-12,
the company emphasizes its increase in revenues to a favourable exchange rate conversion
that added 7.99% to its total of 31% income growth in 2011-12. In terms of TCS risk
assessment towards Foreign Exchange fluctuations (check) it could be inferred that TCS is
better positioned in terms of their hedging strategy in the foreign currency future and options.
For instance, in 2008-09 to 2009-2010 the currency hedging helped increase the revenue by
10.8% and 2.04%. However, due to reforms in Indian Economy and Reserve Bank of India
policies, the increase in INR to foreign exchange ratio, the of 2010-11 saw a decline of 4.20%
in terms of foreign exchange contribution to revenue growth.

The International Revenue for the company consistently grew in terms of percentage
contribution from 90.96% in 2008 to 91.40% in 2012. In contrast, the domestic India revenue
contribution to total income has been on a declining trend from 9.04% in 2008 to 8.60% in
2012. The segment revenue from BFSI (Banking, Financial Services & Insurance) and from
Telecom, Media, Entertainment declined in terms of percentage contribution to total revenue
in 2012 as compared to 2011 (i.e. 43.08% in 2012 versus 44.28% in 2011 for BFSI and
12.69% in 2012 versus 14.18% in 2011 for Telecom, Media and Entertainment.)

In comparison with TCS, Infosys maintained the International Revenue consistently at

97.70% in consecutive fiscal years 2012 and 2011 as compared to 98.7% in 2010. In contrast,
the domestic India revenue contribution to total income has been on an increasing trend from
1.3% in 2010 to 2.3% in 2012. The segment revenue (chart 1.2 below) from Financial
Services and Manufacturing accounts for more than 50% of the revenue for the last 5 years
and Infosys has been able to maintain a steady hold on these domains. Infosys recorded an
impressive growth in Retail segment from 12.44% in 2008 to 21.92% in 2012.

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 For TCS from 2008 onwards, revenue growth is mainly from the company’s core
business of IT solutions and services (Chart 1.2 below). Despite the decline in its contribution
to the Total revenue, the revenue from IT solutions and services has continued to grow over
the previous year thereby maintaining it as a core segment contributing more than 55% to the
revenue over the years. While one can infer the granule segment details from the
Management Discussion and Analysis section of the TCS annual reports, the major
contribution to Infosys revenues, as per company’s annual reports, is from their offshore
development centres with Financial Services and Manufacturing being the important
segments. Ideally for analysis it would have been preferable to have business segment
specific information for both TCS and Infosys. But this has been available only for TCS and
Infosys publishes vertical specific information only.

Chart 1.2

Profitability & Du Pont Analysis:

From the chart 1.1 and further Ratio Analysis of TCS, it could be inferred that the
company continues to focus mainly on volumes that may have led to lower returns on asset
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and deterioration of company’s profitability in 2011-12. As stated in TCS annual report, the
company added an average of 12 customers per month in 2011-12. The company recorded an
increase of 18.16% in terms of number of clients as compared to 15.19% growth in the
previous year.4 If the margin for TCS had not gone down in 2012, Return on Assets would
have been 34.68% instead of 28.41%.

From the Financial Ratio Analysis of Infosys, as stated in the company’s annual
report, it added 172 customers in 2011-12. The International Revenue for the company
recorded a higher percentage contribution of 97.70% in 2012 as compared to 97.66% in 2011.
In contrast, the domestic India revenue contribution to total income remained constant with a
marginal decrease of 0.04% in 2012 as compared to 2.26% in 2011. The revenue for Infosys
grew marginally by 2%, the operating expenses increased by 3% in 2012 as compared to
2011. Software packages bought for service delivery due to an increase in volume of system
integration projects and communication expenses together contributed 16.45% of total
revenue in 2012.

While the revenue for TCS grew by 31% in 2012 versus 2011, the operating expenses
grew more in comparison at 31.79% in 2012 versus 2011 (Chart 1.3). Employee benefit
expenses accounted for 36.29% of the total revenue in 2012 versus 34.91% of total revenue
in 2011. Clearly, the IT industry is very labour intensive and with the focus on increasing
volume, the employee numbers are tend to further increase making the employee cost as one
of the highest contributing cost factor for the company. One of the reasons disclosed by TCS
in its Annual Reports 2011-12 is that higher employee cost is due to lower utilization clearly
indicating that the company is lacking efficiency in manpower deployment. This is also
exemplified in its decrease in Return on Assets in 2012 as compared to 2011.

4
Annual Report 2011-12 Tata Consultancy Services

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 Chart 1.3

The company also attributed lower profits to increase in tax cost due to expiry of tax
holiday period for STP units and tax on dividends received from foreign subsidiaries, as
reported in the Annual Report for 2011-12. The Effective Tax Rate for TCS increased to
24.42% in 2011-12 as compared to 16.61% in the previous year5. Therefore despite the
income growth of 31% the net profit growth was only 14.84% in 2011-12 as compared to the
previous year. This could have significant impact on future earnings since the tax expense
component increased from 4.91% of income in 2011 to 6.95% in 2012. Whereas in case of
Infosys, despite lower revenue growth, the growth in Net Profit was at 21.90 % in 2011-12

5
Annual Report 2011-12 Tata Consultancy Services

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over the previous year. This was mainly attributed to lower increase in Effective Tax rate
from 26% in 2010-11 to 27% in 2011-12, as reported in the Annual Reports for Infosys for
2011-12.

In case of TCS, profitability is mainly coming from IT solutions and services. On an

average the IT solutions and services has contributed more than 65% of the total revenue.
Although there are diversifications in business from BPO and EIS, the main drivers for the
profitability are the margin based business that includes IT solutions, IT infra services,
Global Consulting practise and Asset based solutions. From the strategic perspective, TCS is
perhaps targeting volume based businesses for non-linear growth.

As per the trend analysis for TCS, the growth in PBIDT (Profit before Interest,
Depreciation and Tax) is in line with the income growth. However, in 2009-10 the reduction
in Operation Expenses (mainly due to decline in overseas business expenses, allowances paid
overseas and travelling & conveyance expenses) by 18.75%, as highlighted earlier in Chart
1.3, was probably the main reason for increase in PBIDT growth . This perhaps shows that
TCS was quick to adapt to market conditions in 2009-10 since the economic situation at a
global level was deteriorating. Hence, the company was able to drive more profit margins
(PBIDT & Net Profit) despite the lower income growth (Chart 1.3 below).

As per the Chart 1.3, we can infer that Infosys had a difficult 2009-10 in terms of
growth and it was able to maintain a narrow profit margin by containing the operating
expenses such as overseas travel expenses, warranty cost and other expenses. In spite of
having a growth of 20.93% in 2010-11 as compared to previous year, profit margin increased
only by 5% due to the escalation of operating expenses (such as overseas travel expenses,
sales & marketing and general & administration expenses).

Hence, from the Profit & Loss statement for both the companies, it could be inferred
that despite the macro economic conditions in 2009-10, TCS and Infosys managed to control
and trim their operational expenses for better profit margins. In contrast to the marginal sales
growth for both the companies in 2009-10 they both managed to record a consistent net profit
margin. While Infosys managed to record a profit margin growth almost in line with the sales
growth (4.49% and 4.83%), TCS was able to record a higher growth in profit margin as
compared to sales growth (33.18% and 7.97%) in 2009-10 mainly due to high reduction in
operation expenses by almost 18.74%.
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 Chart 1.4

For both TCS and Infosys, the operational expenses continued to remain stagnant
during 2009 and 2010. This perhaps resulted in profit margins for both the companies despite
a decline in sales growth.

Despite marginal sales growth in 2010, both the companies have managed to achieve
a higher growth in Profit Margins, mainly due to control on operational expenses and also
due to gain realized from Foreign Exchange / Currency fluctuation. However, it may be
inferred that the earnings quality as compared to other years for both the companies, in 2010,
was perhaps inferior since profit is not in correlation with the sales growth.

Fixed cost for TCS has significantly increased in 2010 and in 2012 due to purchase of
fixed assets against the secured loans. Infosys has been incurring capital expenditure
for the last 5 years. INR 12960 million and INR 11520 million were set aside in 2012 and
2011 completely funded by internal accruals. Amongst the 5 years, only in 2010, INR 5810
million invested was the lowest one.

Liquidity:
Being an IT industry, the inventories for the companies are not very high. Therefore
the difference between the Current Ratio and Quick Ratio is almost negligible.
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 There has been an increase in their debt collection period indicating a deterioration of
its collections in 2012 as compared to that in 2011.

While there has been an income growth of 31% for TCS, the debtors contribution to
total revenue has gone up to 23.56% in 2012 as compared to 21.97% in 2011. Infosys income
grew 22.66% in 2012, the debtors contribution to the total revenue went up to 17.3% from
16.6% in 2011.

Hence, a focus on higher volumes might have led to further relaxation of credit
period or deterioration in debt collection period from the clients. This is evident from the
analysis of the financial statements as Average Debt Collection period for TCS has increased
by almost 5 days and 3 days for Infosys in 2012 as compared to that in 2011.

From the trend analysis for TCS, it could be inferred that increase in debtors is much higher
in comparison to the income growth, since 2008-09 onwards. For instance, debtors increase
was from 14% to 40% in 2010-11 and then sustained at 41% from then onwards. Infosys has
been able to have a good control of maintaining Debtors, between 15% to 20%, for the last 5
years.

Chart 1.5

Inferring from the annual reports for both the companies and as highlighted in above
Chart 1.5, it could be said that despite the reduction in debtors turnover, there has been an
increase in debt collection period for TCS & Infosys in 2012 as compared to the previous
year. Infosys probably projected a better control on their ‘debtor collection’ since it only
increased by 3 days in contrast to that of 5 days of TCS in 2012 versus 2011. In financial year
2010-11, both the companies projected better control over the previous year in terms of their
‘debtor collection’ since they both managed to reduce it (4 days for TCS and 3 days for
Infosys) with higher sales growth. In financial year 2009, as inferred from the Annual
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Reports of both the companies, there was probably an increase in credit line to generate
higher sales in tough macro-economic conditions that resulted in an increase in their ‘debtors
collection.’ This however may have not been a major concern since incremental sales growth
is also a resultant effect of credit sales.6

Debt Analysis:
Although the debt level for TCS has come down since fiscal year 2007-08, there has
been a 55% increase in its debt in 2011-12 as compared to 2010-11. This is mainly due to
increase in its Secured Loans maturities that were obtained against fixed assets under the
finance lease arrangements. Despite this TCS has practically become a debt free company but
it is increasing its dependence on liabilities. For instance, the Liability to Equity ratio has
increased from 0.31 in Fiscal Year 2010-11 to 0.37 in Fiscal Year 2011-12 while the debt to
equity ratio has been zero in both the years. TCS is therefore appears to be gradually moving
away from unsecured loans to secured loans over the years. The company however has
sufficient income to cover its interest requirement by a wide margin and this has grown to
almost double in 2012 (608.07 times) as compared to 2011 (394.38 times). Also, in
comparison to the share capital, this outstanding debt is too small for TCS that it may be
treated as negligible. On the other hand, Infosys has nil interest expense since it is
completely debt free as it is funding its growth by raising additional equity or by using
retained earnings. Therefore both the companies are good in terms of their debt status and
that improves their market positioning.

When it comes to raising capital, Infosys seems conservative compared to TCS. Since
Infosys is dependent on retained earnings for funding its growth, this perhaps increases the
risk for shareholders since it has the possibility of diluting the dividends when the number of
investors could go up. On the contrary, TCS seems to be more open to taking up secured
loans, as mentioned earlier, to raise capital that would perhaps fuel its future growth
expansion. This has the benefit of reducing the risk for shareholders since share capital is not
the only source of investment and also the value addition comes in because dividend yield is
improved.

6
R. Narayanaswamy, Financial Accounting, A Managerial Perspective, (PHI Learning, 2011) pp 546

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Stock Analysis:
In terms of future prospects, both TCS and Infosys are in good position, with an
average revenue growth rate which is in the range of 20-25% for the past 5 years. It could be
a fair expectation that TCS and Infosys’s future revenue growth would continue to remain in
the same range as analysed by NASSCOM, India can reach USD 130 billion in revenues (IT
related) by 2015, with Compounded Annual Growth of 14%.7

Although the Price Earning (PE) Ratio for TCS has been consistently above 22 times
for last 3 years, there is a decline of 9.05% in PE in 2012 as compared to PE in 2011. In case
of Infosys, the PE ratio is around 20 times in 2012, which was declined by 26% from 2011.
In comparison to the Industry performance (18.1 times in 20128), the TCS PE ratio is higher
by 3.98 points and Infosys is higher by 2.30 points.

In 2009-10, because of share split for TCS, it caused a reduction in ‘Earnings Per
Share’ (EPS) to INR 35.67 as compared to INR 53.63 in the previous year. This led to a
resultant increase in PE ratio to 22.46 in 2010 from 9.55 in 2009. The market price on the
other hand grew by 56%. In case of Infosys, EPS remained constant around 100 in 2009-10
and the previous year, while the PE ratio grew to 27 in 2010 as compared to 12.61 in the
previous year. There was a 112% increase in the market price for Infosys in 2009-10.

In 2009-10, because of share split for TCS, it caused a reduction in ‘Earnings Per
Share’ (EPS) to INR 35.67 as compared to INR 53.63 in the previous year and the stock price
increased by 56%, This led to a resultant increase in PE ratio to 22.46 in 2010 from 9.55 in
2009. In case of Infosys, EPS remained constant around 100 in 2009-10 and the previous
year, while the PE ratio grew to 27 in 2010 as compared to 12.61 in the previous year. There
was a 112% increase in the market price for Infosys in 2009-10.

7
http://stockshastra.moneyworks4me.com/it-sector-analysis-and-review-of-indian-economy/
8
http://www.moneycontrol.com/india/stockpricequote/computerssoftware/tataconsultancyservices/tcs

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 Chart 1.6

However, due to 4.32% increase in average stock price in 2012 in comparison to that
in 2011, the cash return on the stock or share increased from 1.25% in 2011 to 2.13% in
2012. The total return to the shareholder in fiscal year 2011-12 declined to 6.55% as
compared to 41.97% in the previous year. This could be also due to, as mentioned above
(excluding financial year 2008 to 2010 that witnessed economic downturn worldwide), much
of the correction of market sentiments towards TCS rather the actual company’s
performance.

The annual basic ‘Earnings per Share’ is at INR 53.07 as compared to INR 139.07
and PE ratio at 22.08 as compared to 20.40 for TCS and Infosys respectively in 2011-12. This
is a clear indication that market has given more valuation to TCS stock over Infosys, because
of superior income growth of TCS over Infosys, since 2010.In case of Infosys, the PE to
Income Growth ratio was overvalued in 2010-11,hence there was a correction to the market
price by (INR 243) in 2011-12. For TCS, in 2010-11 the stock was at fair value and also the
increase in stock price in the following year is marginal in relative to the Income Growth.

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Therefore, we infer that the TCS stock has become undervalued and hence it will be a good
‘Buy.’

There are lot of stock valuation methods present in the stock market, we have chosen
the PE to Growth (PEG) ratio9 for valuation in perspective of long term investors to realise
the future benefit of the EPS and the revenue growth. In-terms of valuation10, the stock is
undervalued if PEG is less than 100 and overvalued if more than 100.

Though both TCS and Infosys PE to Revenue Growth ratio is less than 100, on
comparative basis one can infer that TCS (PEG=71.24) is undervalued than Infosys
(PEG=89.99) in 2011-12.

From above Chart 1.6, one can infer that in past 5 years TCS has recorded an average
EPS of INR 48 and sales growth by 21.6%, whereas Infosys EPS was at 106.32 and sales
growth at 19.6%. Assuming that in the future, average EPS and Sales growth continues for
both TCS and Infosys, the fair value of the stock can be calculated from PE to Revenue
Growth ratio by multiplying the EPS and Growth Percentage. Thus, according to the PE to
Revenue Growth ratio valuation, the better buy position for TCS stock price would be below
INR 1037 and Infosys below INR 2083.

In 2012 the average stock price for TCS is INR 1173.11, traded higher than calculated
PEG fair value by 13%. For Infosys, the average stock price in 2012 is INR 2836.4, traded
higher than calculated PEG fair value by 36%.

As for as the dividend pay-out ratios for last 5 years, the averages for Infosys is 31.7%
and TCS is 30.4%. From 2009 onwards, TCS issued better dividends than previous years.
Thus it’s averages for last 5 years amounts to 30.4%.

From the analysis of financial statements for both the companies, it could be inferred
that, since the average growth rate for TCS & Infosys is in the range of 20-25% for the past 5
years, their future prospects for growth would also remain in the same range. From the long
terms investment perspective, both TCS and Infosys stock appear to be a good investment
since their dividend pay-out ratio averages 30%. However, Infosys P/E ratio at 21.12 is

9
http://www.en.wikipedia.org/wiki/stock_valuation
10
http://www.en.wikipedia.org/wiki/stock_valuation

15
marginally higher than TCS at 18.89 and according to PE to Revenue Growth ratio TCS stock
price is undervalued than Infosys. Therefore, comparatively speaking, TCS stock is perhaps a
better investment than Infosys, as mentioned earlier.

Cash Flow Analysis:

As inferred from Chart 1.7 below, the net cash flow from operating activities for TCS
has increased by 5.96% in 2011-12 as compared to the previous year. However, the profit has
not been fully realized in cash because of accruals i.e. net cash flow from operating activities
in 2011-12 is INR 70083.50 million which is less compared to the sum of profit and
depreciation at INR 148412.5 million. This may infer that the company’s earnings are not of
high quality.11 Comparatively, Infosys net cash flow from operating activities has increased
by 32.74% in 2011-12 as compared to previous year.

However, TCS converts its receivables into cash rapidly. For instance in 2011-12,
cash received from customers is INR 455242.60 million which is 93.11% of its net sales /
revenue for the same year. Since inventories for TCS is very low, the increase in debtors
(trade receivables) by INR 33253.8 million has resulted in strain on the cash generated from
operations.12 If we eliminate the effect of exchange rate differential on translation of foreign
cash and currency conversion, there has been a decrease of 34.03% in TCS net cash and cash
equivalent balance in 2011-12 compared to 2010-11. This is also mainly due to the increase
in investment activities arising from inter corporate deposits placed (increase of 486%) and
purchase of shares from minority shareholders (an increase of 3377%) in 2011-12 versus
2010-11.

In 2010-11, TCS had a dip in net cash flow to net profit as compared to the previous
year mainly due to the decision that was taken by the management towards special dividend
of INR 10 announced in 2009-10 and in the respective year Infosys announced 30th year
special dividend of INR 30 per share, making in all INR 60 per share as dividend for the year
which resulted in lower net cash flow to net profit as compared to the previous year.

Also the cash from operating activities got impacted due to increase in effective tax
rate in 2011-12. In addition to this the increase in inter corporate deposits as mentioned above
had a further impact on the net cash flow to net profit ratio.
11
R. Narayanaswamy, Financial Accounting, A Managerial Perspective, (PHI Learning, 2011) pp 606
12
R. Narayanaswamy, Financial Accounting, A Managerial Perspective, (PHI Learning, 2011) pp 606

16
 Chart 1.7

TCS appears to fund its expansion (purchase of fixed assets) comfortably from the net
cash from investing activities in particular from the maturity amounts of the Fixed Deposits
that are placed with the banks. For example the purchase of fixed assets of INR 20071
million could be easily financed by the fixed deposit maturity amount of INR 35514 million
received during 2011-12. The dividend paid by TCS in 2011-12 has come down to 55.35% of
the net cash from operating activities as compared to 69.31% in the previous year. TCS is
definitely a stable company with normal growth since the company has been generating
positive ‘free cash flow’ for the last 5 years. However, the amount of free cash flow as
compared to income has declined since 2009-10 from 21.23% to 12.88% in 2010-11 and
10.27% in 2011-12.

Infosys on the other hand, irrespective of the net profit growth YOY transfers 10% of
it to a General reserve and it being a debt free company, funds its expansion by the retained
earnings for computer equipment, infrastructure and acquiring land. Infosys invested INR
36980 million in securities in 2009-10, returns of which were received in 2010-11.Due to
which Infosys was able to maintain cash equivalent of 37% increase compared to previous
year in spite of paying total dividend of INR 60 per share which included 30th year special
dividend of INR 30 per share.

The net cash from operating activities declined for both companies in 2010-11. This
could be possibly being due to increase in debtors and also due to 100% increase in income

17
tax paid. Since for both the companies, while the cash is coming from Operating Activities,
the outflow of cash is mainly towards investment activities i.e. purchase of fixed assets. The
cash flow witnessed a linear growth from 2008 to 2010 with a proportional increase in
contributions from Operations, Investing and Financing Activities. Although, in 2011 and
2012, the ratio of net cash flow to net profit is lower than the previous years, further analysis
shows that the overall profit has grown.

In case of TCS, the increase in debtors by 45% and 41% in 2011 and 2012, perhaps
translated to a reduced cash flow from operating activities to net profit ratios. For Infosys, the
debtors increased by 33% and 26% in 2011 and 2012. This translated to decrease of cash
from operating activities to net profit ratio in 2011and a partial recovery in 2012 in
conjunction with a growth of 33% in Net Cash generated from Operating activities.

Hence, for TCS, the cash flow from Financial Activities went negative because of
Special dividend payout of INR 10 in 2011 and increase in inter-company deposits in 2012.
For Infosys, the dividend payout of INR 60 per share contributed to increase in cash outflow
in 2011.

Auditors Report, Directors Report and MDA:

Interestingly, in case of TCS the auditor’s report clearly highlights its limitation of
assessing and giving an opinion only on Consolidated Statements (balance sheet, profit and
loss statement, and cash flow statement) since some of the subsidiaries are audited by a
different firm. Therefore references given in this report are subject to those limitations as it
had not included verification of any of the subsidiaries annual / financial reports.

The auditor report for Infosys clearly states its limitation in assessing and giving an
opinion that was limited to procedures and implementation adopted by Infosys for corporate
governance as per Clause 49 of Securities & Exchange Board of India Act.13

Overall the numbers in the directors report correlate with the numbers projected in the
Consolidated Financial Statements for TCS and Infosys. Looking at the overall firm’s

13
http://www.sebi.gov.in/commreport/clause49.html

18
performance though, 2010 seems to be the year of anomaly where the net revenue growth of
8% translates itself into a net profit growth of 33% as compared to previous year. Looking
deeper into causes for the drop in net revenue following reasons cited by management:

• From a vertical point of view both Telecom and Manufacturing Industry

Solutions suffered a dip in revenues of 2% and 10% respectively.
• Common cause for both the revenue dip is attributed to the global economic
slowdown in fiscal year 2010.
• For telecom vertical specifically in 2010, drop in volumes in European market
could not be compensated despite the fact that it has actually shown growth in
emerging markets.
• From a business segment point of view, Business Intelligence services,
Enterprise solutions, EIS and Global Consulting practises suffered a dip of
about 16% on an average in 2010.

As inferred from MDA analysis of Infosys, it is highlighted by the management that

from a vertical point of view, Telecom suffered a decline in revenues of 6.3%. Similar to
TCS, drop in Telecom volumes in European market in 2010 could not be compensated
despite the fact that it has shown growth in other emerging markets.

Common cause for the revenue dip for both the companies is therefore largely
attributed to the global economic slowdown in 2010.

Assumptions:
For this project on financial analysis, some assumptions were made to arrive at a fair
comparison of the performance of the two companies. It was assumed that non-current assets,
including long term investments are to be excluded for arriving at Net Operating Assets for
the firms for all the years mentioned here for analysis. Since there has been a change in
Schedule VI applicable to the companies in India, with effect from 2011 onwards, the non-
current assets are identifiable from the Annual Report of 2011-12 for the firms and therefore
can be distinctly excluded from Current Asset that is required for estimation of Liquidity and
Solvency Ratio of the companies. Therefore, the changes are reflected in the reformulated
balance sheet for 2011-12 and adjusted 2010-11 figures in the attached worksheet. Similarly,
segregation of current investments was made in the previous years as well as the schedules of
balance sheet of each year could help identify those current investments. However, no clear
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distinction was made between long term and short term provisions, prior to the revised
schedule VI in 2012. Therefore, in the reformulated balance sheet the current and non-current
liabilities for the years 2008, 2009 and 2010 may be included under the total Current
Liabilities. This might therefore reflect different current or quick ratio for the years 2008 to
2010 as mentioned in this report as compared to those in the Annual Reports of the
companies.

Summary & Conclusion:

The recent results of TCS and Infosys (financial results of first quarter of fiscal year
2012-13) also serve a strong indication of the TCS continuing reign and dwindling fortune of
Infosys. It is estimated that TCS would exceed NASSCOM estimate of 10-12% growth for
the fiscal year 2012-13, while Infosys has lowered its expectation to 5% growth.14 However,
in comparison to Infosys, the high dependence on BFSI segment and Europe market for TCS
may place it at a higher relative risk.

As reported in the recent newspaper article (Economic Times dated 24 Aug 2012), the
gap between TCS and Infosys has increased to 300% in 2012 as compared to three years ago
(from USD 1 billion in 2010 to USD 3 billion in 2012). Infosys further slipped into number 3
on the top IT company list. If the Y2K aftermath hurled the IT companies into a hyper growth
orbit, the uncertain market conditions are posing new threat to the companies. While there are
divergent views on the industry, it is expected that Infosys will probably have a 5% growth
and TCS between 11 to 14% growth for fiscal year 2013. TCS have managed to win some
new contracts over the last one year as compared to its immediate rival. According to the
Global outsourcing tracker Information Services Group, close to 690 outsourcing deals with a
value of at least USD 25 million are due to expire in 2012. Most of these deals are expected
to be renegotiated at lower rates putting pressure on margins that could be unattractive for
companies such as Infosys. According to Gartner Research, the global spend on IT grew by
15.26% between 2005 and 2008, and at a lower 13% rate between 2008 and 2012. Therefore
with the global spends declining, companies have been eating into each other’s market share
for gains in income. The performance of TCS may appear to be better than Infosys, but this is
primarily due to short term gains, such as winning business on overseas contract renewals.

14
http://www.ciol.com/News/News-Reports/Analysts-top-reasons-for-Infosys-fall-TCS-rise/164357/0/

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Therefore the decisions are tough to make in a challenging environment where IT spending is
declining. 15

As recently reported in the news, the increase in visa fees and stricter visa norms for
US would possibly induce cost pressure on IT industry. Even the market leaders like TCS and
Infosys for which US is one of the most important markets will possibly face adverse impact
on their financial performance for the current fiscal year. According to NASSCOM, the US
visa rejection rate is as high as 40% and the industry body is lobbying with US administration
to seek more clarity on regulations and interpretation of visa rules.16

Conclusively speaking, despite the tough macroeconomic conditions, both the

companies highlighted in this report managed to earn a profit margin in 2010. Subsequently,
TCS managed to grow more in income and superseded Infosys in terms of market
dominance. While Infosys manages its growth through retained earnings, TCS is leveraging
on secured loans for future business expansion. Both the companies are relatively debt free
and have a higher liquidity ratio compared to the industry average. Despite the higher
margins in case of Infosys, the company seems to be less attractive as compared to TCS.
Therefore, as inferred from this analysis report, in the current economic environment TCS
stock might be in a better ‘buy’ position for the long term investors.

15
Economic Times, IT needs Retooling to Regain Paradise, Mumbai Edition 23 Aug 2012
16
http://profit.ndtv.com/News/Article/rising-visa-costs-may-pinch-tcs-infosys-profits-307858

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References:
Narayanaswamy.R, Financial Accounting, A Management Perspective, Edition 6, PHI
Learning 2011, Delhi, India

Annual Report for TCS 2007-08, 2008-09, 2009-10, 2010-11, 2011-12

Annual Report for Infosys 2007-08, 2008-09, 2009-10, 2010-11, 2011-12

Web Sources:

http://stockshastra.moneyworks4me.com/it-sector-analysis-and-review-of-indian-
economy/

http://www.bazaartrend.com/index.php?symbolname=TCS and Annual Report for

TCS for 2011-12

http://economictimes.indiatimes.com/news/news-by-company/corporate-
announcement

http://www.moneycontrol.com/india/stockpricequote/computerssoftware/tataconsulta
ncyservices/tcs

http://www.en.wikipedia.org/wiki/stock_valuation

http://profit.ndtv.com/News/Article/rising-visa-costs-may-pinch-tcs-infosys-profits-
307858

http://www.ciol.com/News/News-Reports/Analysts-top-reasons-for-Infosys-fall-TCS-
rise/164357/0/

http://www.en.wikipedia.org/wiki/stock_valuation

Other Sources:

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Economic Times, IT needs Retooling to Regain Paradise, Mumbai Edition 23 Aug
2012

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