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Report on Infosys Technologies Limited 1

FINANCIAL ANALYSIS OFINFOSYS TECHNOLOGIES LIMITED


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1) The profitability of the group or company over the last two years?

Profit margin shows a decrease of around 4% over previous year but is not intoned with

growth rate in sales which is around 41%. It is due high growth rate in other incomewhich is return of investments. It reflects the future returns and profit, company is going

to make.

PAT shows an increase of 42% over previous year which can be attributed to improve in

sales. Profit on share capital shows a decrease a decrease despite of increase in PAT is

because of increase in share capital by 107%.

Profit on net worth shows a decrease of around 12% over the previous year as net worth

has increased by around 62%. It is a sign of growing assets while keeping their liabilities

stable.

Return of investment shows a decrease of 14% over the previous year which indicates

capital employed was not used efficiently and invested in non core competency ofInfosys. Moreover return from investment is coming less than the normal profit margin.

Book value of Infosys increased due to high net worth, i.e., thus Infosys should shed off

or return profit to shareholder or could utilize money in expansion.

EPS shows that overall company is generating profit at a good rate and maximizing the

profit by channelising excess reserves in other fields.

2) The manner in which the liquidity position of the group or company has been

managed, particular attention should be given to the control of working capitalover the period?

Liquidity Position of Infosys and Control of Working Capital over the period(2006/2007)

Liquidity is concerned with the companys current financial position and in particular its

capacity to pay its debts as they rise in the short term. If an organization has a liquidityproblem, there is an increased risk of its failing to generate any future cash flows.

Examples include working capital and quick ratios, debtor and creditor collection stock

times and stock turnover all of which will vary according to industry and the individual

company strategy.

The most commonly used measure of liquidity is the current ratio which is a comparisonof current assets with current liabilities. The current ratio details of Infosys Technologies

Limited are mentioned below.

Current Ratio Year1. 2.73 2006


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2. 4.91 2007.

As a thumb rule if the current ratio is more than 2 we can say that the company is freefrom liquidity problems, however today because of development in technology successful

companies have been able to minimise the need to hold cash and other current assets. As

a result of that their current ratio is less than 1. But in the case of Infosys Technologies

Limited the current ratio has increased by 2.73 in 2007 which clearly indicates the factthat the company does not face any liquidity problems. Another ratio which explains the

liquidity state of a company is Acid Test Ratio or Quick ratio. The acid test ignores stockand concentrates upon those assets which can immediately be turned into cash if liquidity

problems occur. Hence a healthy Current ratio and a weaker Quick ratio indicate the

inability of the company to meet its short term liabilities. Though low current ratio willreflect on the liquidity problems of the company, higher current ratio will refer to larger

amount of unproductive current assets in the company.

The current ratio details of TCS are mentioned below.

Current Ratio Year1. 1.97 20062. 2.16 2007

Comparison of Current ratios of the two companies clearly indicates that Infosys Limiteddoes not have any liquidity problems and also has steady growth in Current Ratio when

compared with TCS.

Working Capital

Working Capital is a measure of both a companys efficiency and its ability to meet the

short term liabilities of the company.

Working Capital = Current Assets Current Liabilities.

Working Capital of Infosys Technologies Limited in 2006 and 2007 are as follows:-

(2006) 2471 Crores

(2007) 4735 Crores

We can infer from the above data that there has been a 75% growth in the working capital

in 2007. Positive working capital means that the company is able to pay off its short term

liabilities. This tremendous growth in the working capital of Infosys TechnologiesLimited also gives investors an idea of their operational efficiency. A company generally

uses Working capital to fund operations and purchase inventory. Working capital

turnover indicates the relationship between the funds allotted for operations andpurchasing inventory to sales generated from these funds. Working capital turnover ratio

of Infosys in 2007 was 1.35 which indicates (positive growth of) sales in proportion to

the funds allotted for new Projects and inventory. Hence we can say that there was asignificant growth in working capital of Infosys in 2007 and also the working capital


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turnover ratio is more than 1 which indicates more sales compared to the money used

to fund the sales.

3) Discuss the manner in which the group or company is funded highlighting any

changes in the capital structure?

There are two sources of funding a company(1) Using the Reserves of the company

(2) Taking loan.

Looking at the balance sheet of the company for 2006 & 2007 we come to know that the

company has Surplus reserves & no loan obligations. This means that the company is atvery low risk.

Even we notice that there is a change in the share capital of the company. It increases

from 138 to 286 crores. This can be accounted to the bonus issue of 1:1 by capitalizing asum of 138 crores from the general reserves. The additional shares were given by

exercising the stock options.

4) Using a recent share price of any one competitor, calculate and compare the price

earning ratios of the two companies and explain what factors might have

contributed to the difference?

Following are the data available for Infosys for 2006 and 2007

Investment Ratios

Year 2007 2006

Return on Owners equity =Post tax profit/ (share capital + reserves) 41.88% 47.62%

Return on capital employed =

PBIT/ (capital + reserves) 45.03% 52.2%

Return on total assets =

operating profit/total assets 42.58% 49.6%

EPS = PAT/number of shares 0.85 0.59

Dividend yield =Dividend per share/market price per share 60.5% 153.13%

Return on owners equity:

The return on owners equity is decreasing from 2006 to 2007 by 5.74%, implying theshare capital has not been utilized as effectively as in 2006. We observe that the profit

has increased by 42.3% but the share capital and reserves have grown by 62.2%.


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Return on capital employed:

There is a drop in ROCE from 2006 to 2007, mainly due to a large increase in reserves of

the company. Since the reserves are very high, and also the company has gone for a sharebuy-back (number of shares has decreased by 100 since 2006) it means the company is

trying to build trust in the market as well as is planning for expansion.

Return on total assets

The operating profits of the company are increasing, and even the total assets areincreasing from 2006 to 2007. Even then, the returns on total assets are decreasing. This

shows that the company has more total assets. That shows that the company has future

expansion plans, because of which it is investing in assets, and so its operating profit is

not increasing much. From the investors point of view, the decline in the total assetsshould be encouraging to invest, because the company is in the plans of expansion of its

business by investing more in total assets.

Dividend Yield per shareThe dividend yield per share is decreasing. The dividend per share is decreasing, which

shows that the company is holding more reserves and giving out less percentage of itsprofits in the form of dividends. Also, the market price per share has increased from 2006

to 2007 by almost 50 rupees. This shows that there is more demand of the shares in the

market, as the company is performing well in the terms of profitability. From investment

point of view, thought the company is giving out smaller dividends out of its profit, it isincreasing on its reserves, which might have some further future plans expansions, which

would reflect in its increase in its profitability. Also, the market value of the share is quite

high, so the investors should invest in it, not thinking about the lower dividend yields.

EPS

The total number of shares in the market is decreasing by 100. At the same time, thecompany is making more Profit after Tax. As the profit is more and there are

comparatively less number of shares, over which the profit is to be divided, the Earnings

per share has increased. So, from investors point of view, it is a good option to invest in

these shares, because the company is seen to improving on its profit terms, and is alsoseen that it does not have surplus unneeded shares in the market. Company is getting the

required share capital from the market, by issuing right number of shares.

5) Using a recent share price of any one competitor, calculate and compare the price

earning ratios of the two companies and explain what factors might have

contributed to the difference?

The P/E to EPS growth was approximately 0.56, compared to 1.20

For the previous year. This represents our valuation in comparison toOur growth in earnings.

Appreciation in our share price (adjusted for bonus issues and stock


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Splits since 1994) over the public issue price is 2, 71,987%. Since

The public issue, our market capitalization has grown to Rs.1, 15,307Crores as on March 31, 2007 from the public issue valuation of

Rs 31.84 crores during February 1993.

P/E ratio of TCS is 45.4.MPS of TCS 1388

EPS 30.32

The Company's (unconsolidated) revenues increased by 33.03% to Rs. 14,939.97 crores

in fiscal 2007, from Rs 11,230.50 crores in fiscal 2006. Revenues from informationtechnology and consultancy services increased by 34.79% to Rs. 14,407.95 crores in

fiscal 2007 from Rs. 10,688.86 crores in fiscal 2006.

Other Income in fiscal 2007 increased to Rs. 216.55 crores from Rs. 63.26 crores in fiscal2006. Other Income comprises interest received on deposits with banks, dividends

received on investments in subsidiaries, dividends from mutual funds and gains due toexchange rate fluctuations. Primary reasons for the increase in Other Income are (a)exchange gain in fiscal 2007 of Rs. 55.91 crores compared to a loss of Rs. 69.14 crores

(Included in Operating and Other expenses in fiscal 2006), (b) profit on sale of stake in

SITEL India of Rs. 66.28 crores in fiscal 2007 as compared to Rs. 'Nil' in fiscal 2006 and(c) dividends of Rs. 35.44 crores from investments in Mutual Funds in fiscal 2007 as

compared to Rs. 15.05 crores in fiscal 2006.

Appendix 1:

RATIO ANALYSIS FOR Infosys INDIA

DATA from BS, CFS & PLA

2007 2006

Sales Revenue: 5871 4141

Other Income / Revenue: 375 144

PBIDT: 5496 3997

PBIT: (Sales - Operating Expense) 5027 3588

PBT: (PBIT - Interest Paid) 5027 3588

PAT + Other Earning (net to tax) 4675 3285

Interest Payment: 0 0

Depreciation: 469 409

Current Asset (CA): 8961 5049

Current Liability (CL): 1824 2217

Fixed Asset (Net): (FA - Depr) 3107 2133

Share Capital: (Sh Cap) 286 138

Reserves & Surplus: (RES) 10876 6759


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Long term Loan (Debt): 0 0

Working Capital (CA - CL): (WC) 7137 2832

Net Worth / Equity (SC+Res): (NW) 11162 6897

Capital Employed (Loan+NW): (CE) 11162 6897

Dividend: (DIV) 649 1238

Inventories:(INV) 0 0

Sundry Debtors: (SDrs) 2292 1518

EVA: 2109 1386

No of Shares: 5500 5600

Total Assets: (TA) 12907 8058

Mkt Price of Shares: Avg of 6 mth 195 144

Installment: 0 0

PAT: (without Exceptional Income) 3783 2421

Investment: 839 876

Other Loans & Advance: 1162 1252

Total Expenditure: 1646 1152

Total Income 13149 9028

Appendix 2:

LIQUIDITY RATIO:

Formula 2007 2006

Current Ratio: CA/CL 4.91 2.28

Acid-Test Ratio: (CA - Inv)/CL 4.91 2.28

SOLVENCY RATIO:

Debt:Liquidity: DEB/LIQ 0.00 0.00

Times Interest Coverage-Times: PBIT / INT #DIV/0! #DIV/0!

Debt-Service Coverage-Times: (PAT+Dep)/(INT+Inst) #DIV/0! #DIV/0!

PROFITABILY RATIO:

Profit Margin: with exc inc (PBIT/Sales) * 100 38.23 39.74

Profit on Share Capital: (PAT / Sh Capital)*100 1634.62 2380.43

Profit on Net Worth: (Profit / NW) * 100 41.88 47.63

Return on Investment (ROI): (PBIT / CE ) * 100 45.04 52.02

Book Value per share (Rs): NW / No of Shares 2029.45 1231.61

EPS (Rs): PAT / No of Shares 850.00 586.61

Market Value per share (Rs): MV 195.20 144.35

OTHERS / ACTIVITY RATIO:


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Dividend per Share: DIV / No of Share 118.00 221.07

Dividend Yield: Mkt Price / DPS 1.65 0.65

Dividend Payout Ratio: DPS / EPS 0.14 0.38

CE Turnover: Sales / CE 0.53 0.60

Total Asset Turnover: Sales / TA 0.45 0.51

Fixed Asset Turnover: Sales / FA 1.49 1.38

Current Asset Turnover: Sales / CA 0.66 0.82

Working Capital Turnover: Sales / WC 0.82 1.46

Inventory Turnover: Sales / INV #DIV/0! #DIV/0!

Debtors Turnover: Sales / Drs #DIV/0! #DIV/0!

No of Days of Inventory Stock: 365 * INV / Sales 0.00 0.00

No of Days Debtors: 365 * Drs / Sales 142.49 133.80

EVA: 21.09 13.86

Degree of Operating Leverage DL (% Inc in PBIT) / (% Inc inSale) 0.96 Na

Degree of Financial Leverage DF (% Inc in PBT) / (% Inc in PBIT) 1.00 Na

Deg of Total Leverage: DL * DF 0.960 Na

References:-

1. Financial Accounting, Reporting and Analysis (Stice and Stice)

2. www.Infosys.com3. www.tcs.com4. www.investopaedia.org

5. www.easyearnings.com

6. www.rediffmoney.com

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