FUNDAMENTAL ANALYSIS

OF

TCS

PRESENTED BY:

KAUSTAV BANERJEE

ROLL-13706V091004

MASTER OF FINANCE AND CONTROL

P.G DEPARTMENT OF COMMERCE

UTKAL UNIVERSITY

CONTENTS

1)ECONOMIC ANALYSIS

A. POLITICAL EQUATIONB. GLOBAL RECESSION AND INDIAN ECONOMYC. ECONOMIC GROWTHD. GOVERNMENT POLICYE. BUDGETF. INFRASTRUCTUREG. TAXATION POLICYH. INTEREST RATEI. INFLATION

2)INDUSTRY ANALYSIS

A. INDUSTRY PERFORMANCE AND PROJECTIONSB. HISTORICAL GROWTH OF I.T SECTORC. COMPETITIVE STRUCTURED. SURVIVALE. GROWTHF. DEPENDENCE ON KEY FACTORS

3)COMPANY ANALYSIS

A. COMPANY OVERVIEWB. SYSTEMATIC GROWTH AND NEW VENTURESC. MANAGEMENT TEAMD. P/L A/C FOR THE YEAR ENDED MARCH 31ST 2009E. PROJECTED P/L A/C FOR THE YEAR ENDING MARCH 31ST 2010F. JUSTIFICATIONS FOR PROJECTIONS IN VARIOUS FIGURES G. PROJECTED P/E RATIOH. INTRINSIC VALUE OF SHARE

4)CONCLUSION

ECONOMIC ANALYSIS

the mood is upbeat and India is well on the path of economic recovery. By being the first country to kick off a calibrated fiscal consolidation it has demonstrated that the fundamentals of its economy are sound. As the Economic Survey points out the reforms would make India the 4th fastest growing economy in the next 4 years. What has helped the economy to look up is the brilliant performance of the industrial sector which has recorded consistent growth this year. Though the negative growth in the export sector has been arrested, it is still not out of the red. Calibrated policy measures are thus in tune with the needs of the economy. The focus now has to be on dealing with the double digit food inflation, which is a source of concern for the time being.

A)POLITICAL EQUATION

Presently India has a stable government at the centre. The Dr. Manmohan Sighn led UPA government is working efficiently for the development of country. The various steps taken by the government indicates a steady growth both in agricultural and industrial sector. Currently our agricultural growth is about , and industrial growth is about , the GDP is about 7.2%, which is expected to touch double – digit in 2014 – 15. The stimulus packages announced by the government and exemption of CTT and FBT and decrease in corporate taxes ensured growth of industry

in recessional phase. Now, the decision of withdrawing the stimulus in a phased manner in the last Budget is a encouraging step for the betterment of the economy.

B) GLOBAL RECESSION AND INDIAN ECONOMY

The bad times are gone ,now it is the time to witness the favourable advantages,INDIA has almost recovered from the global crisis.Starting from US Sub-prime crisis, the World had seen a worst recession after The Great Depression of 1930’s. The Indian stock market have hit by the global crisis. India’s growing service sector and manufacturing sector are adversely affected by this. But, still due to our mixed economy policy and proper steps taken by the government, Indian economy is least affected by the global meltdown. While most of the developing countries are still recovering from recession, India had almost recovered from the downturn, showing a great growth prospective in all sectors.

C)ECONOMIC GROWTH

Economic growth is a key indicator of development of a country. It shows the efficient utilization of the resources in a optimal way. The growth rate of 9.8% in 2007/08 decreased to 6.2% in last fiscal due o global recession. But now with a sign of recovery Indian economy is growing at 7.2% which is expected to touch double – digit in 2014/15. After China, India is second developing nation in the World. Thus, one can say, the economic growth of India is steady and continuous.

D)GOVERNMENT POLICY

Government policy has a direct impact on the economy. A government that is perceived to be pro-industry will attract investment. The liberalization policy of Narsimha Rao government excited the developed World and foreign investors to invest in India. The initiatives of former BJP government in improving infrastructure grabbed the attention of foreign investors. From the last two budget it is quite clear that the present government is also focusing on infrastructure. Stimulus packages, tax cut, monetary & fiscal policy measure taken by the government has proved the immense importance of government policy.

E)BUDGET

The latest budgetary exercise has clearly been an attempt to reconcile two equally pressing considerations—economic growth and financial consolidation. While growth is important to have a larger cake to share, financial consolidation is needed to ensure that the gains do not

dissipate as a consequence of inflation. It was in this backdrop that the Finance Minister Mr. Pranab Mukherjee in his budget proposals, took the first step towards fiscal consolidation by making a modest beginning in partially withdrawing the concessions given in the stimulus package last year. The economy then was in a serious downturn and it needed government help to withstand global pressures. The picture today is different. All indicators point to a reviving economy, much before other world economies. The cuts in excise duties on all non- petroleum products have thus been restored by 2 percent to 10 percent, still less than 12 percent earlier. The service tax has not been raised but broad

based. In his post-budget interviews Mr. Mukherjee has made it clear that while a modest beginning has been made he would consider a full withdrawal of the stimulus package only when the economy attains a growth of 8.5 to 9 percent. According to his own estimates, corroborated by other surveys, the economy would grow by around 7.2 percent in the current financial year which would go up to 8 to 8.5 percent in 2010-11

and reach 9 percent and more in the subsequent year. A clear disinvestment plan has also been put in place. The government is confident that it will be able to raise Rs. 25,000 crore though disinvestment in the current fiscal ending 31 March 2010. It also envisages to collect Rs.40,000 crore through disinvestment in the next fiscal. The 3-G auction is estimated to bring in about another Rs.35,000 crore.

F)INFRASTRUCTURE

The development of a country is dependent on its infrastructure. Industry needs electricity to manufacture and road to transport goods. Bad infrastructure leads to inefficiencies, poor productivity, wastage and delays. This is Probably the reason why the last two budgets lay so much emphasis on infrastructure.

G)INTEREST RATE

A LOWER INTEREST RATE GENERALLY RESULTS IN STIMULATED INVESTMENT,ON THE OTHER HAND A HIGH INTEREST RATE RESULTS IN HIGHER COST OF PRODUCTION AND LOWER CONSUMPTION. IN INDIA THE INTEREST RATES ARE REGULATED BY THE RESERVE BANK OF INDIA AND AT

PRESENT THE INTEREST RATES ARE LOW AS COMPARED TO LAST YEAR AND HENCE IT INDICATES INCREASING GROWTH IN THE INVESTMENT,MOREOVER INCREASING COMPETITION AMONG THE COMMERCIAL BANKS HAS ALSO HELPED

H)TAXATION POLICY

Tax policy has a direct impact on the economy. If tax rates are low, people have more disposable income, which is a incentive to invest. The recent tax policy of government, i.e, increase in tax slab, increase in Mat from 15% to 18%, decrease in surcharge from 10% to 7.5%, The cuts in excise duties on all non- petroleum products have thus been restored by 2 percent to 10 percent, still less than 12 percent earlier. The service

tax has not been raised but broad based. The relief given to the middle class by raising income slabs for personal tax and allowing a further savings of Rs.20,000 in infrastructure bonds for tax relief, will on the one hand leave more money will the people to spend and thus raise demand and on the other hand provide for better savings, given the propensities of an average Indian. This will lead to creation of additional

funds for investment.

I)INFLATION

Inflation has an enormous effect in the economy. Within the country it erodes purchasing power. As a consequence demand falls, which affects the industry adversely. What the country is witnessing today is food inflation primarily due to supply constraints on account of the worst monsoon in 30 years. The food inflation is about 17.53% and the WPI- inflation is about 8.25% which may touch double digit soon as stated by

RBI Deputy Governor.The increase in excise duty on petroleum prices is no doubt going to increase inflationary pressures but as the Minister put it the impact will only be marginal which will be absorbed in due course of time.

INDUSTRY ANALYSISIn today’s competitive global market, adoption of technology has become a fundamental imperative for corporations to sustaintheir competitive advantage in the marketplace. Faster technology deployment, availability of systems and the irreliability, flexibility to respond to changes in the business environment are essential demands by businesses the world over.As individuals, we take many things for certain. Why should IT systems in corporate environments be any different? INDUSTRY PERFORMANCE AND PROJECTIONS

Globally technology spending continues to grow even during tough economic times and this is expected to further increase once the global economy starts its recovery process. Information Technology (IT) has becomean integral part of business operations across industries and is seen by organizations as a primary driver ofproductivity improvement and business transformation that lead to sustained competitive advantages in themarket place. The IT services segment grew by 9.0% in 2008 to USD 820 billion and is expected to grow at aCompounded Annual Growth Rate (CAGR) of 7.1% till 2012, according to a Gartner Dataquest estimate. The Business Process Outsourcing sector grew by 11.9% worldwide last year as per NASSCOM strategic review2009.

HISTORICAL GROWTH OF I.T INDUSTRY

The IT revolution started in India in 1980’s and since then it is constantly growing. After USA, Indian is second in producing software. This shows the rapid growth in IT sector in India. The pattern of shareholder, revenue earned and dividend allowed are significant. The growth rate of IT industry in 1995 was 1.1%, which is about 8.7% now. Though the sector is affected by the global slowdown, but the influence on Indian IT sector is least. Indian It sector has revived from recession and now it is in growth phase. The graph shows the pattern of growth in IT sector

COMPETITIVE STRUCTURE

There are many players in the IT sector of India, which indicates the competitiveness in the industry. Out of these TCS, Infosys, Wipro, HCL, Satyam are the major IT giants of the country. While the IT sector contributes about 30% to the GDP, these companies contribute 80% of that. All these companies are MNCs and listed in NASDAQ

SURVIVAL

Enterprises are embarking on various forward – thinking approaches and new technologies. As the global economy slowed down and the macro-economic situation continued to be challenging, IT companies are looking for ways to trim spending and improve their output. Technology trends in networking market point out toward growth. According to Mr. Naresh Wadhwa, President and Country manager, India & saarc, Cisco, the networking and communication market will propel the growth of Indian IT sector. While banking, financial services & insurance and telecom service provider will remain key adopter in the market, the government is likely to emerge as a big spender due to various e-governance and state wide area network (SWAN), initiatives. Thus, it can be said that the IT industry will survive in long-run.

GROWTH

The Indian IT industry has contributed significantly to the Indian economy,clocking 30 per cent growth year over year, over the last decade. While today, overtwo million individuals are directly employed by the industry – another seven toeight million jobs have been created downstream. With exports of USD 40.4 billion in 2008-09, the industry today constitutes 25 per cent of the country’s exports. Over the years, this industry has continued to expand geographically, added new service lines and created new business models. Customers are serviced in over 80 countries and significant amount of intellectual property and new products and solutions have been created by the young and bright professionals. In some manners, the IT industry has also become the face of the new vibrant India..This growth has been contributed by Indian service providers, multinationals anda large number of the global companies, who set up their research, IT, back-officeoperations and centres of excellence in India. The industry has a large number ofsmall and medium companies – that are creating innovative solutions and newbusiness models.

The recent global crisis which led to an unprecedented economic crisis the world affected the Indian IT sector and helped the industry emerge stronger and operationally more robust. The last two quarter result of all IT companies showed a growth. The graph below show the market capitalization of IT sector, which clearly indicates the growth prospective of IT industry.

DEPENDENCE ON KEY ELEMENTS LIKE OIL,FASHION ETC

It can be said that this sector is less dependent on essential commodities like oil. The growing fashion trend will also has no direct influence on the IT industry. Thus on this basis, the IT sector has a competitive advantages upon the other sector.

COMPANY ANALYSIS

COMPANY OVERVIEW

DRIVING THE I.T INDUSTRY ON FRONT FOOT

The history of TCS has been a story of firsts. It was the first company to convince customers that doing projects from India, thousands of miles away from their home bases in the United States and United Kingdom made for a compelling value proposition. The business model was built around an India-centric delivery model complemented by having people based at customer sites to ensure seamless delivery of services. As customers expanded globally, TCS built the capability to leverage its core process and delivery strengths and proactively set up operations across the globe. Specifically, it entered into markets like Europe, Asia Pacific, Latin America as well as Middle East and Africa. TM It has also created a Global Network Delivery Model (GNDM ) which links Mumbai to Montevideo and Hangzhou to Hyderabad, and delivers a single service standard globally. TM The GNDM has once again helped TCS become the pioneer in global software development and delivery.

Engineering and Industrial Services:

TheEngineering and Industrial Services (EIS)business is an integral element of TCS’ strategy to provide full services across the engineering and product development value stream of companies in the manufacturing and hi-techsectors. The EIS portfolio of TCS provides a wide range of R&D and Product Development solutions. These end-to end services are New Product Development Solutions, Plant Solutions & Services and Geospatial Solutions.

Revenues from Engineering and Industrial Services (EIS)

TCS employees with experience greater than 3 years in last three years

MARKET PRESENCE

In terms of geographies the Company continues to grow in multiple geographies, particularly in mature marketslike North America and Europe including the United Kingdom, The Company has increased its focus on the Western European markets like Germany, France, Benelux and the Nordic region as well as emerging markets like Latin America and Asia Pacific regions. The Company has also been investing in emerging markets such as the Middle East, Africa and Eastern Europe, identified as future high growth markets. TCS’ geographical growth strategy has a two pronged approach focused on major markets and new growth markets.

RESEARCH AND DEVELOPMENT

TCS established the first software R&D centre in Pune, India in 1981 called the Tata Research Design and Development Centre, mindful of the importance of research to ensure sustained market leadership. Over the last two and a half decades, R&D has evolved in TCS in line with the environment and market conditions with renewed customer focus. As on March 31, 2009, TCS had established 20 R&D Innovation Labs with specific focus on technologies and verticals. The Company has also established 46 Centers of Excellence (CoEs) in all areas of information technology and business services as well as on partner products. This ensures all our offerings incorporate the latest products and services capabilities from the Company and its alliance partners and allows us to build new skill sets among the employee base. The network of TCS Innovation Labs work on research themes ranging from Operational Efficiency, Business Agility and Simplification, to Customer Experience, Ubiquity and Enterprise Security. They also explore new areas like Green IT and emerging technologies like Cloud Computing andthe evolution of the internet beyond Web 2.0. The Innovation labs work closely with the TCS business units andcustomers across a well-defined set of innovation horizons.

Dividends declared and proposed bonus issue

For fiscal 2009 the Company declared three interim dividends of Rs.3 each on the equity shares. A final dividend of Rs.5 per equity share has been recommended. On approval of the final dividend, total dividend for fiscal2009 would be Rs.14 per equity share. The total outflow on dividend would stand at 34.13% of the profits of the Company. Complete details of the dividend paid are available in the director’s report. On preference shares a dividend of 7% has been proposed. The Directors have recommended issue of bonus shares in the ratio of 1:1 subject to the approval of the shareholders.

Vision, Mission and Values

In the last four decades, TCS has established a global reputation for its ability to help customers achieve their business objectives by providing innovative, best-in-class consulting, IT solutions and services and making it a joy for all stakeholders to work with the Company. These objectives are underpinned by a robust code of transparency, ethics and governance based on the Tata Code of Conduct which embodies leadership with trust, integrity and excellence; respect for the individual as well as learning and sharing. TCS has pioneered a new level of transparencyand direct focus on quality of customer experience, by building “Experience Certainty” dashboards for customers to view and compare quality of delivery vis-à-vis their quality of experience. These “Experience Certainty” dashboards have been successfully piloted in 50 customer accounts across verticals and geographies lastyear where C-level executives at customers have on-line real-time access to their relationship metrics. In these times of uncertainty, TCS transparency on the “Experience Certainty” brand promise is being very positively viewedby its customers.

MANAGEMENT TEAM

PROJECTED P/L A/C FOR 31ST MARCH 2010

PARTICULARS 2006 2007 2008 2009 2010(EXP)TOTAL INCOME 11293.76 15156.52 18979.67 21947.76 27873.65EXPENDITURE 8219.41 10985.84 13975.81 16808.07 21500P.B.T 3074.35 4170.68 5003.86 5139.69 6373.65TAX 637.36P.A.T 2716.87 3757.29 4508.76 4696.21 5736.29BAL B/F FROM PREVIOUS YEAR

1005.47 2833.30 4919.99 7347.89 9990.41

PROFIT FOR APPROPIATIONS

3858.50 6590.59 9428.75 12071.10 15726.7

E.P.S 27.76 38.39 46.07 47.91 58.61 JUSTIFICATIONS

TOTAL INCOME HAS BEEN ASSIGNED A GROWTH RATE OF 27%

1)FROM THE PAST YEARS IT IS SEEN THAT THE COMPANY IS GROWING AT AN AVERAGE RATE OF 24.5%2)THE RECESSION IS OVER AND GDP IS AT 7.2 % AND IS EXPECTED TO TOUCH DOUBLE DIGIT BY 2014,THE BANKING SECTOR HAS REVIVED AND SO HAS THE TELECOM SECTOR MOREOVER THE RECOVERY OF COUNTRIES LIKE U.K FROM THE ADVERSE EFFECT OF GLOBAL MELTDOWN IS ALSO A FAVOURABLE FACTOR FOR GROWTH OF I.T INDUSTRIES3)T.C.S HAD UNDERTAKEN SOME NEW PROJECTS IN THE YEAR 2009 WHICH WILL ALSO BE REFLECTED IN THE TOTAL REVENUE OF T.C.S IN THE YEAR 20104)T.C.S HAS MAINTAINED A CONSISTENT GROWTH RATE EVEN IN THE RECESSIONARY PERIOD AND HENCE FAVOURABLE ECONOMY WILL GENERALLY ENSURE EVEN MORE GROWTH5)HOWEVER THE GROWTH RATE WILL NOT BE VERY HIGH BECAUSE THE ECONOMY HAS RESCENTLY RECOVERED RECESSION,HENCE GROWTH WILL NOT BE SEEN SO QUICKLY IN THE ANNUAL REPORT OF 2009-2010,BECAUSE THE THE FINANCIAL YEAR HAS ALMOST COME TO ITS END ,OF COURSE A MUCH BETTER GROWTH RATE COULD BE SEEN IN THE FORTH COMING YEARS.

TOTAL EXPENDITURE HAS BEEN ASSIGNED A GROWTH RATE OF 28%1)FROM THE PAST RECORDS IT IS SEEN THAT THE COMPANY’S EXPENDITURES IS GROWING AT AN AVERAGE RATE OF 26.6%2)THE INFLATION WAS COMPARATIVELY HIGH IN THE YEAR 2009 INDICATING HIGH LABOUR COSTS AND HIGH OPERATIONAL EXPENDITURES3)NEW PROJECTS UNDERTAKEN WILL BE FAVOURABLE TOWARDS RISE IN EXPENDITURES

PROVISON FOR TAXATION1)TCS MAINTAINS AROUND 9% RATE ON INCOME AS PROVISON FOR TAXATION AND IT IS PROJECTED THAT THE RATE OF PROVISON FOR TAXATION ON TAXABLE INCOME WOULD BE AROUND 10% ,THE CHANGES AND REVISONS MADE IN THE TAXATION POLICY BY F.M PRANAB MUKHARJEE WILL NOT BE REFLECTED IN THE ANNUAL REPORT OF 2010-11 AS BECAUSE TAX IS CALCULATED ON BASIS OF PREVIOUS YEAR.HOWEVER INCREASE IN MAT FROM 15% TO 18% AND EXCISE DUTY FROM 2% TO 10% WILL BE REFLECTED IN THE ANNUAL REPORT FOR THE YEAR 2010-11

PROJECTED P/E AND INTRINSIC VALUE OF SHARE OF TCS

If we have a look at the share prices of TCS from the year 2006,we will notice that the the shares of tcs which were traded at around rs.2000 in the market at 31st December 2006 had come down to rs.840 by 17 march 2010,of course the main factor behind this drastic change in the share price of tcs is the recessionary trend in between 2006 to 2009 ,because of which the investors were not in favour of the market and vice versa and the same situation was prevelant even in case of other giants like wipro ,Infosys etc, but the economy has hugely recovered from the crisis if we further look at the share chart and p/e of tcs the p/e on 31 st march 2006 was 50 ,on 31st march 2008 it was 32.06,on 31st march 2009 it was 17.58 and on 31st march 2009 it was 11.27,but if we look at the other aspect although price of tcs fell down to even 400 from 2000 because of recessionary pressure but as soon as the market has started reviving the price of tcs has again started gaining momentum ,the market and economy are in better condition now and the investors are in favour of market, currently it is traded at rs.840 .on basis of this I project the p/e ratio of tcs to be around 16 as on 31st march 2010,

Intrinsic value

Intrinsic value =projected eps x projected p/eProjected p/e =15

Projected eps =58.61 Intrinsic value = 58.61x15 = 879.15

Current market price = Rs.840 INTRINSIC VALUE > CURRENT MKT VALUE

CONCLUSION

If we compare the intrinsic value of tcs and mkt value it is clear that the intrinsic value is more than the market value , the market is favourable and the share price is likely to go more up in future ,hence I suggest the holders of shares of TCS to hold the shares for now.