iim calcutta cfr tcs report 10 page
DESCRIPTION
Tata Consultancy Services is a multinational IT services, consulting and business solutions company which is a subsidiary of the much revered TATA group. Revenues for the financial year 2013-2014 was INR 13.44 billion. Established in 1968 by Mr. JRD Tata as a subsidiary of Tata Sons, it is one of the first IT solutions companies in the world and is headquartered in Mumbai. It became a separate entity in 1995. TCS is listed as one of the Top 10 technology firms in the world. Making its presence felt over 46 countries, it provides employment to around 3 lakh people across the world and is the second largest employer in India after Coal India Ltd. The employees of the company are from 80 different countries, making it one of the most diverse workplaces. The current CEO of the company, Mr. N. Chandrashekharan also heads NASSCOM, the IT regulatory authority of India. TCS is the largest provider of information technology in Asia and the second largest provider of business process outsourcing in India. The company boasts of 95% customer retention and one of the lowest employee attrition rate (11.8%). The business of the company spans numerous sectors such as banking, energy, hi tech, insurance, telecom etc. The company has 58 subsidiaries. TCS delivers its business through its famous Global Network delivery Model, which is considered as a benchmark of excellence in the field of software development. TCS is the world’s first organization to achieve an enterprise-wide Maturity Level 5 on both CMMI and P-CMM, using SCAMPISM, one of the best assessment methodologies. The Integrated Quality Management System (IQMS) of TCS integrates people, process and technology through different frameworks such as IEEE, CMMI and 6-Sigma. TRANSCRIPT
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Contents
COMPANY OVERVIEW ................................................................................................................................... 1
INDUSTRY OVERVIEW .................................................................................................................................... 1
ABRIDGED FINANCIAL STATEMENTS ........................................................................................................ 2
KEY ACCOUNTING POLICIES ........................................................................................................................ 3
OVERALL ANALYSIS ........................................................................................................................................ 4
CASH FLOW ANALYSIS .............................................................................................................................. 4
RATIO ANALYSIS ............................................................................................................................................. 5
TREND ANALYSIS ............................................................................................................................................ 6
COMMON SIZE ANALYSIS ........................................................................................................................ 6
COMPARATIVE ANALYSIS ............................................................................................................................. 7
OPERATING-FINANCIAL PERFORMANCE ASSESSMENT ....................................................................... 9
OPERATING-FINANCIAL STRENGTH AND WEAKNESS ........................................................................ 10
REFERENCES ................................................................................................................................................... 10
1
COMPANY OVERVIEW
Company Name : Tata Consultancy Services
Chairman : Cyrus Pallonji Mystry
CEO : N Chandrasekharan
Stock Exchange : National Stock Exchange, Bombay Stock Exchange
Tata Consultancy Services is a multinational IT services, consulting and business solutions company which is a
subsidiary of the much revered TATA group. Revenues for the financial year 2013-2014 was INR 13.44 billion.
Established in 1968 by Mr. JRD Tata as a subsidiary of Tata Sons, it is one of the first IT solutions companies in the
world and is headquartered in Mumbai. It became a separate entity in 1995. TCS is listed as one of the Top 10
technology firms in the world. Making its presence felt over 46 countries, it provides employment to around 3 lakh
people across the world and is the second largest employer in India after Coal India Ltd. The employees of the
company are from 80 different countries, making it one of the most diverse workplaces. The current CEO of the
company, Mr. N. Chandrashekharan also heads NASSCOM, the IT regulatory authority of India.
TCS is the largest provider of information technology in Asia and the second largest provider of business
process outsourcing in India. The company boasts of 95% customer retention and one of the lowest employee
attrition rate (11.8%). The business of the company spans numerous sectors such as banking, energy, hi tech,
insurance, telecom etc. The company has 58 subsidiaries. TCS delivers its business through its famous Global
Network delivery Model, which is considered as a benchmark of excellence in the field of software
development. TCS is the world’s first organization to achieve an enterprise-wide Maturity Level 5 on both CMMI
and P-CMM, using SCAMPISM, one of the best assessment methodologies. The Integrated Quality Management
System (IQMS) of TCS integrates people, process and technology through different frameworks such as IEEE, CMMI
and 6-Sigma.
INDUSTRY OVERVIEW
The IT industry in India is a USD 50 billion industry and is expected to touch the USD 85 billion mark this
year. The pace of overall economic growth of the nation can be attributed to the pace with which IT industry
has expanded in the country steadily from the 1990s. The industry contributes 8.1% to the GDP of India. The
industry comprises 4 major components: software products and engineering services, IT services, IT enabled
Services and hardware. Indian IT industry can be classified into two markets: exports and domestic. The US
accounts for two-thirds of the export revenues, which makes the fortunes of the industry heavily dependent on
the fluctuations in dollar. As of now, the corporate spending on the domestic IT industry has been lean due to
the weak economic status. Hardware continues to be the major chunk of the domestic industry while financial
services takes the lion’s share in the export category.
While the union budget does not have any specific emphasis on the IT sector, the government’s recent
allocation of funds worth INR 6000 Million for setting up virtual classrooms and IT development in the rural
areas is good news for the domestic IT sector. The number of IT based start-ups in the past few years have been
overwhelming (450+ start-ups in the last 5 years). The growth in the IT sector has been due to the increase in
exports. The main players in the IT sector industry in India are Tata Consultancy Services, Infosys, Wipro, HCL
and CTS. The reason for the huge boost for IT industry in India is attributed to the cost leadership of 3-4 times
that of USA, states NASSCOM in its 2014 reports. This is one of the reasons why CTS, an American company and
one of the leaders in the industry shifted its base to India. NASSCOM has predicted 12-14% growth rate in the
IT sector in India for the financial year 2014.
3
KEY ACCOUNTING POLICIES
TCS follows Indian GAAP to prepare its accounting statements.
Use of estimates
Estimates have been used for provision for doubtful receivables, employee benefits, provision for income taxes,
accounting for contract costs expected to be incurred, the useful lives of depreciable fixed assets and provision
for impairment. Due to the use of estimates, there is a possibility of change in the future results since there will
be a difference in the estimated values and the actual values, during the period in which the estimates
materialize.
Fixed assets
TCS states fixed assets at cost, less accumulated depreciation/amortization. Costs include the expenses incurred
to bring the assets to their present location and condition. Fixed assets excludes computers and other assets
which individually costs less than INR 50,000 which are not capitalized unless they are part of a larger capital
investment scheme.
Depreciation/ Amortization
Depreciation/amortization on fixed assets other than on freehold land and capital work-in-progress is charged
so as to write-off the cost of the assets. Fixed assets purchased for specific projects are depreciated over the
period of the project.
Revenue recognition
Revenue from contracts priced on a time and material basis are recognized when services are rendered and
related costs are incurred. Revenue from sale of software licenses are recognized upon delivery. Revenue is
reported net of discounts.
Taxation
Current income tax expense of TCS comprises taxes on income from operations in India and in foreign
jurisdictions. Minimum Alternative Tax (MAT) is recognized as an asset in the balance sheet when the asset can
be measured reliably and it is probable that the future economic benefit associated with it will fructify. Deferred
tax expense or benefit is recognized on timing differences being the difference between taxable incomes and
accounting income.
Investments
Long-term investments and current maturities of long-term investments are stated at cost, less provision for
other than temporary diminution in value. Current investments, except for current maturities of long term
investments, are stated at the lower of cost and fair value.
Cash and Cash equivalents
TCS considers all highly liquid financial instruments that are readily convertible into known amounts of cash and
having original maturities of 3 months or less from the date of purchase as cash equivalents.
Foreign Currency Transactions
Income and expense in foreign currencies are converted at exchange rates prevailing on the date of the
transaction. Premium or discount on foreign currency forward, option and futures contracts are amortized and
recognized in the statement of profit and loss over the period of the contract.
4
OVERALL ANALYSIS
Broad Highlights from Balance Sheet
The reserves have risen over the 5 year period, by nearly 200%. The reserves account for most of the
shareholders’ funds, nearly 99%.
Total current liabilities have risen from 72392.2 to 122399.10 Million, by close to 70%. Majority of the
increase has been from unearned revenue (about 6400 Million), other payables including statutory and
capital creditors (about 13000 Million), trade payables (about 11000 Million) and short term provisions
(about 19000 Million).
Debt has gone up by over 220% over the 5 years. Secured and unsecured loans have both contributed to it,
secured loans rising by 200% and unsecured loans rising by 313%.
Total equity and liabilities have gone up by 156%, with the major shares coming from reserves which
increased by 195% and Total current Liabilities which increased by 70%
Capital Work-in-progress has shown a huge increase of 224% largely arising from the amalgamation of
erstwhile subsidiaries into the company.
Trade receivables have gone up by 334% over the 5 years. The majority of these are due under 6 months
after their payment date.
Cash held by the company has gone up over the 5 years by almost 270%. The rise in trade receivables and
cash has led to an increase in current assets by 216%. Overall, the increase in cash and trade receivables has
fuelled the increase in the reserves and trade receivables in these 5 years
Broad Highlights from Income Statement
Operating income has gone up by 416310 Million over the 5 years, an increase of 180% from 2010.
During the same period operating expenses have increased by 582% and total expenses have gone up by
163%.
This has led to an increase in Operating profit of 178000 Million, a 260% increase from 2010.
Tax expenses have gone up by 42270 Million over the 5 years, an increase of nearly 490%.
CASH FLOW ANALYSIS
Broad Highlights from Cash Flow Statement:
The total cash held by the company has increased from 2930 Million to 4380 Million over the 5 years, an
increase of 50%.
Cash from Operating Activities
Net cash from Operating activities has gone up by 66630 Million, an increase of 106%.
Cash Flows decreased in 2012 compared to previous years but increased sharply again in 2013. This was
due to a large amount of trade receivables in 2014 compared to previous years.
The biggest factor in increasing the operating cash flow over the past 4 years has been the increase in Net
profit which has increased by 270%.
Cash used in investing activities
Net cash used in investing activities has fluctuated over the 5 years. In 2010, 45560 Million were used, and
this came down over the next two years and the company gained 4330 Million in cash from investing
activities in 2012. The outflow of cash rose in the next two years and 71430 Million were used in 2014
The major component in this trend was the dividend received which was much higher in 2012. Also, there
was a large change in the cash outflow due to fixed deposit placed with banks in 2014 compared to other
years which led to higher cash outflow.
Cash used in financing activities
There was a sharp increase in cash used for financing activities from 2010 to 2011 with a rise of 134%. The
amount has remained relatively steady since then with a 23% growth in the next 4 years
The biggest change from 2010 to 2011 is the dividend paid which has increased by 135%.
5
RATIO ANALYSIS
CURRENT RATIO
The current ratio of the company has shown a steady increase over the 5
years. This shows that the liquidity of the company has been increasing as
also shown by the increasing cash balance.
RECEIVABLES TURNOVER
The receivables turnover has steadily decreased showing that more and more
of the company’s revenue is tied up in credit deals and this is reducing the
efficiency of the operations
LIABILITY TO EQUITY
The company has low amount of liabilities as shown by the liability to equity
ratio. Most of the capital funding for the company is drawn from the reserves
and surplus which decreases dependency on outside agencies
3
PROFIT MARGIN
The profit margin of the company has steadily increased as the revenue from
sales has grown at a much faster rate than the operating expenses.
INTEREST COVERAGE
The company has very little debt. This reflects in the amount of interest to be
paid annually. The interest coverage ratio was over 1000 in 2014 which
shows that they will have no problems servicing the interests.
CURRENT ASSET TURNOVER
Apart from an increase in 2011, current asset turnover has decreased over
the 5 years. This shows that the company has become less efficient in utilizing
its current assets in raising sales, and the efficiency of the company has
decreased.
6
TREND ANALYSIS
Sales have gone up to 280% while
Accounts receivables have gone
up to 434%. This means that more
and more of the revenue is being
tied up in credit deals.
Though sales have grown by only
180%, Operating profit has
grown by a much larger amount,
270%. This is because the Total
expenditure has not grown at a
similar scale to sales, at only 163%
Operating Expenses have
become almost 6 times in the 5
year period, increasing by 583%.
Cost of Goods Sold (Traded
software packages) has not
increased at the same rate, at only
68%.
The Taxes Payable has increased
at a faster rate than Profit before
taxes. White Profit Before taxes
has increased by 270%, taxes
payable has increased by 489%
COMMON SIZE ANALYSIS
Reserves and Surplus form the
bulk of equity and liabilities, 66-
76%. The other major component
is Current Liabilities which
contribute from 32-22% over the
five years
The contribution of Debt to
Liabilities and equities is
negligibly low, at just around 0.2%
in 2014, with a highest of 0.4% in
2013
Current assets form the bulk of
total assets, ranging from 48% in
2010 to 59% in 2014. The major
components in this are accounts
receivables and cash which
accounts for 25% and 22% of total
assets in 2014
7
COMPARATIVE ANALYSIS
Gross Margin vs. Sales Growth
The Gross Margin has remained nearly constant near 100% over the 5 years for all three companies. This is
because as service companies, the cost of goods sold is 0 or negligible compared to the total sales. TCS has in
the same time shown a much higher increase in sales percentage compared to its competitors.
Profit Margin vs. Sales Growth
The Profit Margin of TCS has gone slightly up in the 5 years as its sales have gone up over that of its competitors.
This shows that operating expense of TCS has increased at a lower rate compared to its competitors.
Current Asset Turnover vs. Profit Margin
The Current Asset turnover of TCS is much higher than that of its competitors Wipro and Infosys, meaning that
TCS is able to use its assets in a much more efficient way to generate profits
Receivables Turnover vs. Profit Margin
8
We can see that in 2010, the recievables turnover of TCS was higher than its competitors. But over the 5 years,
TCS has used more credit sales and its recievables turnover ratio has gone below its competitors as the
efficience of its cash collection decreased.
Current Ratio vs. Profit Margin
We can see that the current ratio of TCS shows a steady increase as its competitors have maintained a steady
value for it. Even so Infosys still has a better Current ratio than TCS showing that it still has more liquidity.
Sales growth vs. Market Valuation
Despite a higher sales growth compared to its competitors, the market valuation of TCS is still much lower than
its competitors. The market valuation of both Wipro and Infosys has gone up while that of TCS has gone down
over the 5 years.
Dividend Payout vs. CapEx
We can see that the dividend offered by TCS has increased over the 5 years to be much higher than that offered
by its competitors. TCS is also spending much more on capital expenditures compared to its competitors and
its value has risen sharply to Rs. 35571 million.
9
OPERATING-FINANCIAL PERFORMANCE ASSESSMENT
The revenue of TCS has grown at a steady rate over the last 5 years at a much faster rate than its
competitors. At the same time the profit margin of TCS has also grown faster than the competitors, showing
that TCS is in a strong position in raising revenue as its expenses are not increasing as much as its revenue.
The company is financed almost exclusively through equity with very little debt to speak of. This is also
reflected in the interest that the company pays which is very low compared to the Earnings before Tax. The
cash balance of the company has grown year by year and forms a significant part of the assets in 2014. The
Reserves and Surplus allocated dominates the equity raised from shareholders. So TCS is in a position where it
is financed mostly from the cash raised through its operations and not dependent on its shareholders. This
means that there is high liquidity for the firm and it will have no problems meeting its short term obligations.
The company had trouble collecting its receivables during 2012 and 2013 leading to a decrease in cash
flow. Although the company has recovered some of these, we can see that the receivables turnover ratio has
suffered a steady increase over the five years. This shows that the company is having more and more trouble
receiving the cash from its operating activities.
Looking at the liquidity ratios, the current and quick ratios of the company are steadily increasing which
shows that the liquidity situation as can be seen by the increasing cash status. But we can see that the current
asset turnover of the company is steadily decreasing over the 5 years showing that TCS is not efficiently
utilizing its assets to deliver profits.
Looking at the overall industry, TCS leads its closest competitors Infosys and Wipro in almost all factors,
Profitability, Liquidity, Efficiency and Solvency. With its cash balance, high reserves and low debt, conditions
looks favorable for TCS to grow further and stay as the market leader in the industry.
10
OPERATING-FINANCIAL STRENGTH AND WEAKNESS
Weaknesses:
The high cash balance, while helping with liquidity also means that cash is lying idle with the
company. The management is not able to come up with projects to use the money available in an
efficient way and hence the company is losing out on profits it could have otherwise had.
TCS faced a problem with regaining money from credit sales during 2012 which affected its credit
sales. Its receivables turnover ratio is also showing a decrease in the efficiency of the company. This
situation is to be avoided to prevent more bad debt losses for the company.
The current asset turnover ratio of TCS has been declining through the five years. This is an area where
the company lags behind its closest competitors. The company has to start using its assets more
efficiently to maximize its revenue.
The taxes paid is rising at a much higher rate than the revenues. This is eating into the profits after tax
of the company.
Strengths:
The low amount of debt means that very little is spent as interest. The Reserves and Surplus also
account for most of the equity of the company. Hence the company is not dependent on creditors or
owners to provide capital.
The revenues of the company have increased at a steady high rate over the five years. This growth has
also outpaced the growth of operating expenses. At this rate, the profitability of the company will
outstrip that of its competitors in the near future.
TCS is able to give much more dividends compared to its competitors. This will enable it to raise more
capital from investors if the need arises.
With higher values of Current ratio and quick ratio, TCS has much more liquidity than its competitors.
Its high cash reserves also means that it is highly solvent and will have no trouble meeting its financial
obligations.
REFERENCES
http://www.capitaline.in/
http://www.tcs.com/investors/financial_info/Pages/default.aspx
http://www.infosys.com/investors/reports-filings/annual-report/
http://www.wipro.com/investors/annual-reports.aspx
http://www.nasscom.in/positive-outlook-itbpm-industry-fy-2014