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									FINANCIAL ACCOUNTING
ACC 301 Group Assignment – Financial Analysis of Infosys and TCS Faculty: Mr. Hemant Kaushik

Words:

Group: Ankur Sharma Chanpreet Singh Dhillon Dinesh Kumar Raj Kamal Barman

Saturday, December 1, 2007

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Assignment Objectives

The report analyzes the companies from the shareholders, suppliers, employees and lending institutions point of view. Accounting Standard (AS) 1 (issued 1979) deals with the disclosure of significant accounting policies followed in preparing and presenting financial statements. The purpose of this statement is to promote better understanding of financial statements by establishing through an accounting standard the disclosers of significant accounting policies and the manner in which accounting policies are disclosed in the financial statements. Such disclosure would also facilitate a more meaningful comparison between financial statements of different enterprises. (ICAI-Accounting standards, 2006)

Further we intend to view and comprehend carious statements like the Chairman’s report, Director’s report, Management Discussions and Analysis. Also, we will present our views on company accounts like balance sheet, profit and loss accounts and cash flow statement and further analyzing them through financial ratios.

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Overview of the Industry
The Industry Structure and Developments Changing economic and business conditions, rapid technological innovation, proliferation of the internet and globalization are creating an increasingly competitive market environment that is driving corporations to transform the manner in which they operate.

Customers are increasingly demanding improved products and services with accelerated delivery times and at lower prices. To address these needs adequately, corporations are focusing on their core competencies and are using outsourced technology service providers to help improve productivity, develop new products, conduct research and development activities, reduce business risk, and manage operations more effectively.

The Role of Technology The role of technology has evolved from supporting corporations to transforming them. The ability to design, develop, implement, and maintain advanced technology platforms and solutions to address business and customer needs has become a competitive advantage and a priority for corporations worldwide. Concurrently, the prevalence of multiple technology platforms and a greater emphasis on network security and redundancy have increased the complexity and cost of IT systems, and have resulted in greater technology-related risks. The need for more dynamic technology solutions and the increased complexity, cost and risk associated with these technology platforms has created a growing need for specialists with experience in leveraging technology to help drive business strategy.

4 There is an increasing need for highly skilled technology professionals in the markets in which we operate. At the same time, corporations are reluctant to expand their internal IT departments and increase costs. These factors have increased corporations' reliance on their outsourced technology service providers and are expected to continue to drive future growth for outsourced technology services. In April 2007, the Forrester U.S. IT Spending Update: Q1 2007 has indicated that the growth in spending on IT outsourcing and IT consulting and integration services in the United States will be 6% and 10%, respectively, in 2008 as compared to 2007.

The Indian Advantage India is recognized as the premier destination for offshore technology services. According to a Fact Sheet on the Indian IT Industry recently published by NASSCOM, the total combined Indian IT services and IT-enabled services export market in fiscal 2006 was nearly $24 billion and is estimated to be approximately $31 billion in fiscal 2007. A report published by NASSCOM-KPMG in 2004 indicated that the total Indian IT services and ITenabled services export market is projected to grow to $49 billion by 2009.

5 There are several key factors contributing to the growth of IT and IT-enabled services:

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High quality delivery: According to NASSCOM, as of December 2006, over 440 Indian companies had acquired quality certifications with 90 companies certified at SEI CMM Level 5 - higher than any other country in the world. SEI-CMM is the Carnegie Mellon Software Engineering Institute's Capability Maturity Model, which assesses the quality of organizations' management system processes and methodologies. Level 5 is the highest level of the CMM assessment.

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Significant cost benefits: The NASSCOM Strategic Review 2007 suggests that India has a strong track record of delivering a significant cost advantage, with clients reporting savings of up to 25-50% over the original cost base.

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Abundant skilled resources: India has a large and highly skilled englishspeaking labor pool. According to the NASSCOM Strategic Review 2007, India produces approximately 3.1 million university and college graduates, including approximately 5,00,000 engineering degree and diploma holders from its educational institutions annually. NASSCOM Strategic Review 2007 suggests that the large and growing pool of skilled professionals has been a key driver of the rapid growth in the Indian ITITES sector. According to NASSCOM, India has the single largest pool of suitable offshore talent - accounting for 28% of the total suitable pool available across all offshore destinations and outpacing the share of the next closest destination by at least a factor of 2.5.

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The factors listed above also make India the premier destination for other services such as ITenabled services, which we refer to as business process management. Industry analysts have observed that business process management services of leading offshore technology service providers have strong prospects for growth given the providers' experience, proven track record and breadth of client relationships. According to a Fact Sheet on the Indian IT Industry recently published by NASSCOM, the total Indian IT-enabled services export market in fiscal 2006 was $6.3 billion. The 2004 NASSCOM-KPMG report estimates that the Indian IT-enabled services export market will grow to approximately $21 billion by 2009.

While these advantages apply to many companies with offshore capabilities in India, we believe that there are additional factors critical to a successful, sustainable and scalable technology services business.

7 Market Cap No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Companies (BSE - All Groups) TCS Infosys Wipro Satyam HCL Tech I-Flex Solution Tech Mahindra Financial Tech Aftek Mphasis Rolta Patni Computer Tanla Solutions Firstsource Sol Core Projects & Other Total Market Cap (Rs. cr) 99,226.21 91,624.92 67,169.79 29,442.11 21,257.40 12,600.77 12,451.92 10,790.85 6,504.89 5,964.98 5,847.16 4,346.94 3,490.00 2,787.40 2,138.57 47,281.99 422,925.90

Source: www.moneycontrol.com

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Source: www.moneycontrol.com

For detailed information regarding all the companies taken into the calculations, please see the appendix #1.

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Overview of the Companies
The companies we chose to do our assignment on are Infosys and TCS.

INFOSYS
Company History Infosys Technologies Ltd (Infosys) was incorporated on July 2, 1981, as a private ltd company. It became public limited company on June 1992 and subsequently the name was also changed to Infosys Technologies Ltd. It was the first Indian company to be listed on American Stock Exchange. The Company is one of India's leading information technologies (IT) services companies. It is mainly engaged Out-Sourced application & Infrastructure Services, Enterprise Services, Product R&D Services and Consulting Services. The company also develops and markets certain company owned software products.

Infosys Technologies came out with an IPO in Feb. 1993 at a premium of Rs 95 for a face value of Rs 10 per share. Since then, it has issued three bonus issues (each in the ratio of 1:1) and split its face value to Rs 5 each. In Feb 2000,the ADRs was split in the ratio of 2:1.

Company Overview Infosys Technologies Limited ('Infosys' or 'the company') along with its majority owned and controlled subsidiary, Infosys BPO Limited, India ('Infosys BPO') formerly known as Progeon Limited, and wholly owned subsidiaries, Infosys Technologies (Australia) Pty. Limited ('Infosys Australia'), Infosys Technologies (China) Co. Limited ('Infosys China'),

10 formerly known as Infosys Technologies (Shanghai) Co. Limited and Infosys Consulting, Inc., USA ('Infosys Consulting'), is a leading global technology services organisation. The Company provides end-to-end business solutions that leverage technology thereby enabling clients to enhance business performance. The Company provides solutions that span the entire software life cycle encompassing technical consulting, design, development, re-engineering, maintenance, systems integration and package evaluation and implementation, testing and infrastructure management services. In addition, the Company offers software products for the banking industry.

Infosys provides its services to various industries like Aerospace & Defence, Automotive, Banking & Capital Markets, Communication Services, Energy, Insurance, Healthcare, Media, Transportation Services etc.,

Company Locations The company is having its Headquarters in Bangalore and has 17 offshore development facilities located throughout India. The company has development centers with 90.26 lakh sq ft of space with 41,166 seats and an additional 53.43 lakh sq.ft which would have 20,200 seats is under construction.

11 Company’s Client Base In 2004-05 the company has signed up 136 new clients and had a total client base of 438 at the end of the year.

Awards The year saw the company emerging as true global brand. The company was the highest ranked IT Services company in the world, and No.10 overall, in the anuual Business Week InfoTech100.

Some of the awards that Infosys received during the financial year:  Ranked as the `Best company to work for in India 2006' in the BT -Mercer-TNS survey published in Business Today 

BusinessWeek cover story cited Infosys as one of the companies turning the technology services industry on its head

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BusinessWeek named Infosys as one of the 10 global companies to watch Ranked No. 11 in Wired 40 (in 2006)

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Ranked the `Businessworld Most Respected Company' in a survey. The special issue featured rankings of top companies from all sectors

  

Ranked No. 36 on the worldwide list of the World's Most Innovative Companies

Named among 74 Global High Performers chosen from Forbes' Global 2000 list

BusinessWeek ranked Infosys No.10 among World's Most Innovative Companies in the APAC region

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ICAI judged Infosys Annual Report 2006 best in `Information Technology, Communication and Entertainment Enterprises' category

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Best Presented Accounts in Communication and Information Technology Sector in SAFA (South Asian Federation of Accountants) BPA Awards, 2005. Overall winner of the SAFA Best Presented Accounts 2005

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Rated among the top five investor relations websites in APAC/Africa by IR magazine

Named the most admired company for the sixth consecutive survey by Asia Wall Street Journal

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Gartner placed Finacle(R), the universal banking solution from Infosys in the leaders quadrant

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Finacle(R) the Asian Banker Best Implementation award 2006 for implementations in large and mid-sized banks

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Rated as leader by Forrester in strategy with the highest overall score amongst 13 leading providers of application outsourcing

Human Resource In 2006 the company has completed the construction of an employee training facility centre in Mysore, India to further enhance our employee training centre capabilities. The Mysore Training complex will accommodate 4,500 trainees at a time. The company will provide training of approx. 12000 employees annually.

13 Employees are vital to Infosys. Infosys created a favorable work environment that encourages innovation and meritocracy. We have also set up a scalable recruitment and human resources management process, which enables us to attract and retain high caliber employees.

Infosys added 15,173 (net) and 22,567 (gross) employees, taking the total strength to 59,831 up from 44,658 at the end of the previous year. The attrition rate stands at 13.7% compared to 11.2% for the previous year. Over the last year, 13,02,368 people applied to the company for employment and the company continues to remain an employer of choice in the industry.

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Overview of the Companies Contd. TCS
Company History Tata Consultancy Services (TCS), the largest Indian IT company, with its mammoth scale of operations, has positioned itself in areas where global IT spending holds the maximum promise for Indian vendors. TCS has a wide presence in horizontal (services line), vertical (industry), and geographical domains. And with its domain width and depth, it delivers integrated end-to-end solutions across the globe. Vertically, it has a wide presence in high spending banking, financial services and insurance (BFSI); telecom; and manufacturing verticals coupled with emerging life science and healthcare; energy and utilities; retail and distribution, transportation and logistics; media and entertainment, and government verticals.

Company Overview The Company is amongst the leading IT companies in the world and continues to retain its leadership position in the Indian IT Industry. The Company has provided effective business solutions to Global and Indian companies by leveraging its domain knowledge across industry verticals, excellence in technology and robust processes. It has continued to win new engagements and grow existing relationships in the traditional area of Application Development and Maintenance and is strengthening its presence in areas such as Consulting, Infrastructure

15 Management Services, Asset Based Solutions, Engineering & Industrial Services, IT Enabled Services and Business Intelligence Services. These higher-value businesses, in the opinion of the Company, have significant potential to scale up in the next five years.The Company continued to see strong and profitable growth in the financial Year 2006-07 across all markets driven by good performance in existing and New areas of business.For the year ended March 31, 2007, the Company earned a total income of Rs.15156.52 crores an increase of 34.20% over previous year's Rs. 11293.76 crores.The net profit of the Company for the year increased to Rs.3757.29 crores (24.79% of the total income) as compared to Rs.2716.87 crores (24.06% of total income) in the previous year.

The Company’s continued investments in innovation and technology have enabled it to undertake a number of large, end-to-ends, mission critical projects in diverse business areas and technology domains.

Company Locations The Company has 148 offices globally. In addition, the Company also has Delivery Centres in a number of countries. Major Delivery Centres outside India is in Hungary Brazil, Chile, Uruguay and China. The Company services the needs of its global clients by linking the clients to one or more of these Delivery Centres. Through the establishment of Delivery Centres in different parts of the globe with the same high quality processes and by enabling customers to make use of a group of these Centres depending on their needs, TCS has pioneered the Global Network Delivery Model TM, which the customers see as a key differentiator.

16 Awards  During the year, the Company received various awards and recognitions, significant amongst which are the following:        

Company of the Year - 2006 from the Economic Times

Dataquest Best IT Employer for 2006

Frost & Sullivan Company of the Year Award - 2006

Most Admired Knowledge Enterprise (MAKE) Award 2006

MapInfo Asia Partner of the Year Award

CII-EXIM Bank Award for Business Excellence 2006

Golden Peacock Global Award for Corporate Social Responsibility

Top position in 'Top 10 Best Performing IT Services providers' category in the 2007 Global Services 100 listing

 

Ranked among the Top 10 US application management services vendors

Dataquest Path breaker Award 2006 for the MCA-21 project, India's largest egovernance initiative of the Ministry of Company Affairs, which is implemented by TCS.



'Most Distinguished Achievement Award in Information Management (APAC) - 2006' from IBM

17     IBM Software Group Excellence and IBM Web Sphere Awards for TCS Middle East

Verizon's Supplier Excellence Award for the third consecutive year

APAC Oracle Partner of the Year 2006 Award

Avaya Global Connect Customer Responsiveness Award - 2006

The Company became the first organization in the world to be certified enterprise-wide for ISO 900,12000, IS027001:2005 and ISO 20000:2005 in January 2007. Our customers can continue to experience, the certainty of 'high quality of service delivery', as we stay focused on continuous improvement of security, quality and processes in an industry where technology changes occur frequently.

Human Resources TCS continues to be recognized for its good human resources practices. This year TCS won the Data Quest Best Employer award for the third consecutive time. In this high-growth industry, TCS continues to be the employer of choice, marked by the lowest attrition rate of 11.3%.

With over 85,000 employees from 67 nationalities, the Company is emerging as a true global firm with a diverse employee base. This heterogeneous base is central to sustaining the Company's competitive edge. At the end of the year, non-Indian nationals working for the Company was 9.6% out of a total employee base of over 85,000. The percentage of women working for the Company increased to 26% from 24% last year. During the year, the Company added a net of 22,750 persons through recruitment and through mergers and

18 acquisitions. The Company's recruitment practice ensures that suitable candidates with merit are recruited and provided with the right opportunities. The Company received about 8 lakh applications during the year for employment. TCS received the RASBIC award for 2006 - as Recruiting and Staffing Industry Leader of the Year.

International Credit Rating The Company continues to have from Moody’s Investors Services, an investment-grade issuer rating of A3 as well as an indicative foreign currency debt rating of Baa1, with the ratings outlook as stable. The rating is not for any specific debt issuance by TCS. The Company has also been rated by Dun & Bradstreet at 5A1 (Condition-Strong).

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Analysis of Financial Statements
Basis of Preparation of Financial Statements - We have taken all information from the standalone GAAP statements, and have not made any reference to the consolidated statements.

The following rules have been followed by the companies while making the annual reports:

Infosys The financial statements are prepared in accordance with Indian Generally Accepted Accounting Principles ('GAAP') under the historical cost convention on the accruals basis. GAAP comprises mandatory accounting standards issued by the Institute of Chartered Accountants of India ('ICAI'), the provisions of the Companies Act, 1956 and guidelines issued by the Securities and Exchange Board of India. Accounting policies have been consistently applied except where a newly issued accounting standard is initially adopted or a revision to an existing accounting standard requires a change in the accounting policy hitherto in use. Management evaluates all recently issued or revised accounting standards on an ongoing basis.

TCS The financial statements are prepared in compliance with the Companies Act, 1956 and generally accepted accounting principles in India. In the Consolidated financial statements, the comparative numbers of the previous year ended March 31, 2006 do not include the numbers in respect of the newly setup / acquired subsidiaries, namely, Tata Consultancy

20 Service (China) Co. Ltd. in China, TKS-Teknosoft S.A. in Switzerland, TCS Management Pty Limited in Australia, Tata Solution Center S.A. in Ecuador, Financial Services Beijing Co. Limited in China and PT Tata Consultancy Services in Indonesia and are therefore not strictly comparable with the numbers for the year ended March 31, 2007.

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Balance Sheet of Infosys
Shareholders fund of Long-term loans The company has an authorized share capital of Rs. 300 crores, out of which the issued capital is Rs. 286 crores. In comparison with last year’s figure authorized capital has increased to 300 crores from 150 crores and issued capital has increased about 148 crores from 138 crores to 286 crores the reason could be their expansion plans. The reserves and surplus of the company amount to Rs. 10876 crores as compared to last years figures of 6759 crores. The company is operating on zero debt and so there are no long-term liabilities in the form of secured or unsecured loans.

Source of funds – chart

Fixed Assets

The value of the fixed assets held by the company is 30.12 % of the Net Current Assets.

The fixed assets shown in the company balance sheet are:

Chart

22 Amongst these the percentage of building is the highest at 56.04 %, followed by plant and machinery 16.09 % of total fixed Assets. Infosys operate large-scale services, which require huge infrastructure and buildings. They also developed new development centers in the previous year.

Investments

Investment form 7.51 % of the Total Application of Funds of the company. Infosys believes in strategic investment in various companies in order to procure substantial business benefits. Over the year Infosys bought various companies worldwide, other investments include non-trade (unquoted), current investments, at the lower of cost and fair value liquid mutual fund units.

Current Assets Loans and Advances

The company has current assets of Rs. 8961 crores and net current assets of Rs. 7137 crores. Out of which it retains Rs. 2292 crores of sundry debtors, cash and bank balance of Rs. 5507 crores and loans & advances of Rs. 1162 crores.

Balance Sheet of TCS
Shareholders fund of Long-term loans The company has an authorized share capital of Rs. 120 crores, out of which the issued capital is Rs. 97.86 crores. In comparison with last year’s figure authorized capital has increased to 120

23 crores from 60 crores and issued capital has increased about 48.93 crores from 48.93 crores to 97.86 crores i.e. it is doubled the reason could be their expansion plans. The reserves and surplus of the company amount to Rs. 7961.13 crores as compared to last years figures of 5560.40 crores. The company is not operating on zero debt and so there are long-term liabilities in the form of secured or unsecured loans. These are: Secured Loans: 41.76 crores Unsecured Loans: 8.98 crores Total long-term liabilities: 50.74 crores

Source of funds – chart

Fixed Assets

The value of the fixed assets held by the company is 42.19 % of the Net Current Assets.

The fixed assets shown in the company balance sheet are:

Chart

24 Amongst these the percentage of building is the highest at 37.37 %, followed by plant and machinery 0.258 % followed by comp. equipments 20.11 % of total fixed Assets. TCS also operate large-scale services, which require huge infrastructure and buildings.

Investments

Investment form 39.80 % of the Total Assets of the company. Infosys strongly believes in strategic investment in various companies in order to procure substantial business benefits. Over the year TCS bought a large number of companies worldwide, other investments include nontrade (unquoted), current investments etc.

Current Assets Loans and Advances

The company has current assets of Rs. 5257.13 crores and net current assets of Rs. 2662.23 crores. Out of which it retains Rs. 2799.80 crores of sundry debtors, cash and bank balance of Rs. 557.14 crores and loans & advances of Rs. 1363.74 crores

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Analysis of Profit and Loss Account INFOSYS
2006-07 (Cr) 2005-06 (Cr) As a % of Total Revenue 2006-07 Revenue Information technology and consultancy services Sale of equipment and software licences Total revenue Other income (net) Total Expenses Employee costs Operation and other expenses Total Costs Employee costs Salaries and Incentives Social security and other benefit plans (overseas employees) Provident Fund Staff welfare expenses Total Operations and other expenses Overseas travel expenses Overseas employee allowances Overseas business expenses Services rendered by business associates and 2005-06 As a % of Total Cost 2006-07 2005-06

Business Transactions

14407.95 532.02 14939.97 216.55 15156.52

10688.86 541.64 11230.50 63.26 11293.76

96.44 3.56 100.00 1.45 101.45

95.18 4.82 100.00 0.56 100.56

135.43 5.00 140.43 2.04 142.46

134.32 6.81 141.13 0.79 141.93

6186.85 4452.15 10639.00

3999.57 3957.97 7957.54

41.41 29.80 71.21

35.61 35.24 70.86

58.15 41.85 100.00

50.26 49.74 100.00

5543.89

3576.85

37.11

31.85

52.11

44.95

197.10 94.81 309.06 6144.86

117.49 102.77 152.02 3949.13

1.32 0.63 2.07 41.13

1.05 0.92 1.35 35.16

1.85 0.89 2.90 57.76

1.48 1.29 1.91 49.63

224.70 873.09 390.99 756.12

211.03 1113.36 191.80 635.29

1.50 5.84 2.62 5.06

1.88 9.91 1.71 5.66

2.11 8.21 3.68 7.11

2.65 13.99 2.41 7.98

26 others Software, hardware and material costs Cost of software licences Communication expenses Travelling and conveyance expenses Rent Legal and professional fees Repairs and maintenance Electricity expenses Recruitment and training expenses Other expenses Total Total expenses taken

645.85 229.35 196.35 210.17 228.83 90.33 92.19 93.89 107.44 189.99 4329.29 16619.01

540.15 195.45 163.14 145.24 133.18 80.31 71.13 66.85 62.67 161.17 3770.77 11669.03

4.32 1.54 1.31 1.41 1.53 0.60 0.62 0.63 0.72 1.27 28.98 111.24

4.81 1.74 1.45 1.29 1.19 0.72 0.63 0.60 0.56 1.44 33.58 103.90

6.07 2.16 1.85 1.98 2.15 0.85 0.87 0.88 1.01 1.79 40.69 156.21

6.79 2.46 2.05 1.83 1.67 1.01 0.89 0.84 0.79 2.03 47.39 146.64

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Analysis of Profit and Loss Account TCS
2006-07 (Cr) 2005-06 (Cr) As a % of Total Revenue 2006-07 Revenue Income from software services and products Other income, net Total revenue Expenses Software development expenses Selling and marketing expenses General and administration expenses Total Cost Software development expenses Salaries and bonus including overseas staff expenses Overseas group health insurance Contribution to provident and other funds Staff welfare Technical sub-contractors – Subsidiaries Technical sub-contractors – Others Overseas travel expenses Visa charges and others Software packages for own use 13149.00 375.00 13524.00 9028.00 144.00 9172.00 100.00 2.85 102.85 100.00 1.60 101.60 147.34 4.20 151.55 149.49 2.38 151.88 2005-06 As a % of Total Cost 2006-07 2005-06

Business Transactions

7278.00 719.00 927.00 8924.00

4887.00 499.00 653.00 6039.00

55.35 5.47 7.05 67.87

54.13 5.53 7.23 66.89

81.56 8.06 10.39 100.00

80.92 8.26 10.81 100.00

5396.00 101.00 143.00 41.00 633.00 231.00 283.00 109.00 192.00

3687.00 45.00 86.00 28.00 367.00 125.00 232.00 65.00 134.00

41.04 0.77 1.09 0.31 4.81 1.76 2.15 0.83 0.00 1.46

40.84 0.50 0.95 0.31 4.07 1.38 2.57 0.72 0.00 1.48

60.47 1.13 1.60 0.46 7.09 2.59 3.17 1.22 0.00 2.15

61.05 0.75 1.42 0.46 6.08 2.07 3.84 1.08 0.00 2.22

28 for service delivery to clients Communication expenses Total Selling and marketing expenses Salaries and bonus including overseas staff expenses Overseas travel expenses Brand building Total General and administration expenses Salaries and bonus including overseas staff expenses Professional charges Telephone charges Power and fuel Traveling and conveyance Office maintenance Total Total costs taken

25.00 52.00 269.00

29.00 48.00 211.00

0.19 0.40 2.05

0.32 0.53 2.34

0.28 0.58 3.01

0.48 0.79 3.49

442.00 92.00 69.00 603.00

286.00 59.00 46.00 391.00

3.36 0.70 0.52 4.59

3.17 0.65 0.51 4.33

4.95 1.03 0.77 6.76

4.74 0.98 0.76 6.47

172.00 137.00 106.00 88.00 85.00 95.00 683.00 9364.00

125.00 94.00 76.00 62.00 63.00 66.00 486.00 6325.00

1.31 1.04 0.81 0.67 0.65 0.72 5.19 71.21

1.38 1.04 0.84 0.69 0.70 0.73 5.38 70.06

1.93 1.54 1.19 0.99 0.95 1.06 7.65 104.93

2.07 1.56 1.26 1.03 1.04 1.09 8.05 104.74

29 Infosys Management Salaries Designation Chairman & Chief Mentor Co-Chairman Managing Director & CEO Director Director Director Director Director Director Director Director & COO Director Director Director Director Company Secretary Name N R Narayana Murthy Nandan M Nilekani S Gopalakrishnan Deepak M Satwalekar Marti G Subrahmanyam Omkar Goswami Claude Smadja Sridar A Iyengar David L Boyles Jeffrey Lehman S D Shibulal K Dinesh T V Mohandas Pai Srinath Batni Rama Bijapurkar K Parvatheesam Remunerations 4,078,459.00 5,135,076.00 5,174,567.00 2,216,590.00 2,001,090.00 2,001,090.00 2,001,090.00 2,001,090.00 2,001,090.00 1,924,113.00 4,637,888.00 5,120,715.00 9,165,861.00 7,764,648.00 2,001,090.00 -

TCS Management Salaries Designation Chairman Managing Director & CEO Director Director Director Director Company Secretary Independent Director Independent Director Executive Director & COO Executive Director & CFO Executive Director Executive Director Source: Capitalineplus Database Name R N Tata S Ramadorai Aman Mehta Naresh Chandra V Thyagarajan Clayton M Christensen S H Rajadhyaksha Ron Sommer Laura M Cha N Chandrasekaran S Mahalingam S Padmanabhan P A Vandrevala Remunerations 4,880,000.00 25,760,400.00 5,695,000.00 5,330,000.00 4,840,000.00 1,215,000.00 4,701,807.00 1,810,000.00 930,000.00 -

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Cash Flow Statements – The Analysis
Cash flows are reported using the indirect method, whereby net profit before tax is adjusted for the effects of transactions known cash nature and in any deferrals or accruals of past or future cash receipts or payments. The cash flows from regular revenue generating, investing and financing activities of the company are segregated.

Accounting standards (AS) 3, cash flow statement (revised 1997), issued by the council of the institute of chartered accountants of India, comes into effect in respect of accounting periods commencing on or after 1-4-1997. (ICAI- Accounting Standards, 2006)

TCS The starting point in this analysis is to enquire whether the firm has generated positive cash from operating activities. Several factors affect a firm’s ability to generate positive cash flow operating activities (Bhattacharayya, 2002). TCS is a healthy firm functioning in a steady state and in a mature as a result it generates positive cash flow from operations. This further implies that the firm is self sufficient. The surplus cash that is available after working capital investment is available for distribution to debt-holders (interest and installment), long term investment and distribution to share holders. Cash flow from operating activities is higher than the previous year. The net cash inflow from operating activities of TCS covers interests and equity dividends income. Cash flows from operating activities have increased from 3074.35 crores to 4170.68 crores. Cash flows from investing activities has increased from 1464.97 crores to 2076.42 crores.

31 Infosys Cash flow from investing activities indicates the firm strategy for long term growth. The firm is experiencing a cash outflow situation for both the years. However, it has managed to cut back on its cash outflows owing to increased inflows from investment in securities, interest and dividend income, reduced outflow for investment in subsidiaries and purchase of assets. Infosys is a zero debt company and so it is free from repaying are long-debts. The outflow of cash for Infosys only consists of dividend payment and dividend tax. The inflow comprises of proceeds from issuance of share capital. And like previous year the inflows outweighs the outflows as a result the net cash in financing activities is coming out to be a positive figure. Thus, the cash flow statement of Infosys, we can depict that the company generated sufficient cash from its operating activity (Rs 3256 crores) to cover all servicing of finance activities (Rs 421 crores) to pay the tax due, meet its investment needs (Rs 1065 crores) and pay dividend.

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Ratio Analysis
INFOSYS

S.No. Ratios

Previous year (2006) 43.33 %

Current year (2007) 37.85 %

Variance

Industry ratio** 39.72%

1.

Return on Capital Employed Operating Profit Margin Gross Profit Margin Expenses/sales ratio Fixed asset turnover Sales/current assets ratio Current ratio Acid Test Ratio Return on equity Earnings per share

(5.48 %) 33.108 % 45.868 % 66.89 % 300 % 149.247 % 2.728 2.728 35.102 % 44.34 32.131 % 44.649 % 67.868 % 333 % 146.735 % 4.912 4.912 33.891 % 67.93 (0.98 %) 30.94% (1.22 %) 0.98 % 33 % 427% (2.51%) 119 % 2.18 2.24 2.18 (1.21 %) 23.59 -

2. 3. 4. 5. 6. 7. 8. 9. 10.

**Industry ratio are based on 2006 data

33

Ratio Analysis
TCS S.No. Ratios Previous year (2006) 54.46 % Current year (2007) 51.42 % (3.04%) 29.458 % 70.851 % 304% 494.62 % 1.92 1.90 48.43 % 27.76 29.228 % 71.211 % 240% 561.18 % 1.57 1.56 46.62 % 38.39 (0.23%) 30.94% 0.36% (64.2%) 427% 66.56% 119% (0.35) 2.24 (0.34) (1.81%) 10.63 Variance Industry ratio** 39.72%

1.

Return on Capital Employed Operating Profit Margin Gross Profit Margin Expenses/sales ratio Fixed asset turnover Sales/current assets ratio Current ratio Acid Test Ratio Return on equity Earnings per share*

2. 3. 4. 5. 6. 7. 8. 9. 10.

*Calculated with the weighted average number of share **Industry ratio are based on 2006 data

34

Ratio Analysis Calculated
Return on Capital Employed

Net Profit Before Interest and Tax ROCE = Share capital + Reserves + Long Term Loans x 100

The standard return on capital employed is about 15%. If the actual ratio is equal to or above 15% it indicates higher productivity of the capital employed and vice-versa. (Rao, 2004)

Infosys
2006 ROCE= 2989 6897 * 1oo = 43.33 %

ROCE=

2007 4225 11162

* 1oo = 37.85 %

The ROCE of Infosys is well above the standard figure and is ahead of industry percentage. The ratio has considerably decreased by 5.48%. However, it is still high indicating that the earning power of the capital employed in the business is healthy and therefore the company is utilizing its funds and capital in an efficient manner.

35 TCS
2006 ROCE= 3074.35 5644.77 * 1oo = 54.46 %

2007 ROCE= 4170.68 * 1oo = 51.42 8109.73 %

The ROCE of TCS is considerably better than Infosys, yet it has marginally decreased by 3.04% over the time period of one year. TCS is utilizing its wealth in an effective manner, yet some of its investments are low return investments or perhaps returns have been further invested.

Operating Profit Margin Operating Profit OPM = Net Sales or Turnover x 100

Infosys
2006 OPM= 2989 9028 * 1oo = 33.108 %

2007 OPM= 4225 * 1oo = 32.131 13149 %

The ratio is calculated mainly to ascertain the operational efficiency of the management in their business operations, as it shows the operating profit, generated by net sales. The operating profit

36 is specially taken out by deducting all other expenses occurred, even the ones that were not calculated while taking out the gross profit, such as administration expenses, selling and marketing expenses.

TCS
2006 OPM= 3308.37 11230.5 * 1oo = 29.458 %

OPM=

2007 4366.76 * 1oo = 29.228 14939.97 %

This ratio is higher than the industry figure of 30.94%, due to the slight rise in the company’s expenses there has been a minor decline in the operating profit ratio by 0.98%.

Fixed Asset Turnover Net Sales FAT = Fixed Assets Infosys
2006 FAT= 9028 * 1oo = 300 % 3009

x 100

FAT=

2007 13149 * 1oo = 333 % 3946

37

This ratio reveals that the company holds enough fixed assets to suit its requirements and there is no indication of over investments in any type of assets. The fixed asset turnover ratio has increased from 300 % in the current year to 333 %, which accounts to nearly 11% growth; the reason for the increase is the better utilization of fixed assets. The standard fixed turnover ratio is 427 %.

TCS
2006 11230.5 * 1oo = 304% 3693.3

FAT=

FAT=

2007 14939.97 6228.35

* 1oo = 240%

In the past year TCS has been acquiring more assets, as compared to their growth in sales. Thus their fixed asset turnover has decreased by 62.4%, and is considerably less than the industry average of 427%.

38 Sales/Current Assets Net Sales S/CA = Current Assets x 100

Infosys
2006 S/CA= 9028 * 1oo = 149.247 % 6049

S/CA=

2007 13149 * 1oo = 146.735 8961 %

The company is becoming more efficient in generating sales through lesser number of current assets. The figures have marginally dropped from 1.492 times to 1.468 times.

TCS
2006 S/CA= 11230.5 2270.41 * 1oo = 494.62 %

S/CA=

2007 14939.97 * 1oo = 561.18 2662.23 %

At TCS the sales are growly a lot faster as compared to the investments being made in current assets.

39 Debt/Equity Ratio* Infosys Since Infosys has no debt, its ratio is zero. *Calculated for the company for which data was completely available.

Gross Profit Margin* Gross Profit GPM = Net Sales or Turnover x 100

Infosys
2006 GPM= 4141 9028 * 1oo = 45.868 %

2007 GPM= 5871 * 1oo = 44.649 13149 %

Normally 25% to 30% margin is anticipated. For Infosys profit ratio which is high (45.9 %) reflects high efficiency with which the management produces each unit of product. This ratio has also declined meagerly as there has been declined meagerly as there has been a decline in the percentage increase in the sales in the current year. As a result, this has reduced the profit for the year 2007. *Calculated for the company for which data was completely available.

40 Expenses/Sales Ratio Expenses E/S = Sales 100 x

Infosys
2006 E/S= 6039 9028 * 1oo = 66.89 %

E/S=

2007 8924 * 1oo = 67.868 13149 %

Higher expenses/sales ratio is unfavorable since it will leave a small amount of operating income to meet interest, dividend etc. Operating ratio for Infosys indicates that 67.89% of sales have been consumed together by the cost of goods sold and other operating expenses. This implies that 32.11% of sales are left to cover interest taxes and earnings to owners. TCS
2006 E/S= 7957.54 11230.5 * 1oo = 70.851 %

2007 E/S= 10639 * 1oo = 71.211 14939.97 %

41 In TCS, the ratio very marginally increased by 0.36%, which shows that sales have increased, and with that the expenses has also shown a steady rise, thus both have grown, but in comparison to sales and expenses, they remain very much similar.

Current Ratio Current Assets Current = Current Liabilities

Infosys
2006 6049 2217

C.R =

= 2.728

C.R=

2007 8961 1824

= 4.912

The current ratio has increased in the current year, the company has to reduce this ratio to free its working capital which will be profitable for the company. The industry figure for current ratio is 2.24:1.

42 TCS
2006 2270.41 1180.14

C.R =

= 1.92

C.R =

2007 2662.23 1689.85

= 1.57

In comparison, the liabilities have increased as the current ratio has increased by 0.35, which shows that assets have increased, and the liabilities have marginally decreased.

Acid Test Ratio Current Assets - Stock Acid = Current Liabilities Infosys
2006 6049 2217

Acid=

= 2.728

Acid=

2007 8961 1824

= 4.912

This ratio has increased in the current year and it has increased almost 2.18 which are encouraging for its suppliers. This improves their confidence in the company and it shows a excellent growth of the company.

43 TCS
2006 2247.47 1180.14

Acid=

= 1.90

Acid=

2007 2650.17 1689.85

= 1.56

Since TCS does have stock or inventories, thus the ratio is comparatively lower than Infosys. In comparison to Infosys, which has the same ratio for current and acid ratios, in the case of TCS, it cannot be the same since TCS does have some inventory or stock which needs to be deducted from current assets.

Return on Equity Net profit after tax and preference dividend ROE = Ordinary share capital plus reserves Infosys
2006 RoE = 2421 6897 * 1oo = 35.102 %

x 100

RoE =

2007 3783 * 1oo = 33.891 11162 %

44 For Infosys the ROE has dipped a little from previous year but it’s not harming the investor’s interest much. The share holders received a return of 33.8% in 2007 which quite high revealing that the firm has soundly used the resources of owners. Moreover, this ratio is critical as it is used to compare the performance of company’s equity capital with those of other companies, and thus help the investors in choosing a company with higher return on equity capital. TCS
2006 2716.86 RoE= * 1oo = 48.43 % 48.93+5560.40

ROE=

2007 3757.2 * 1oo = 46.62 97.86+7961.13 %

In TCS the share capital and reserves have increased more in comparison to the net profit after tax. According to the balance sheet, the shares issued have doubled in March 31, 2006: 48,93,05,249 equity shares of Re. 1 each to 97,86,10,498 equity shares of Re. 1 each in 2007.

45 Earnings per Share Earnings available to ordinary shareholders EPS = No. of ordinary shares in issue Infosys
2006 24210000000 545989022

EPS=

= 44.34

EPS=

2007 37830000000 556852399

= 67.93

The ratio indicates the earnings per equity share. It establishes the relationship between net profit available for equity shareholders and the number of equity shares. The earnings per share have increased to a great extent from 44.34 in the previous year to 67.93 in the current year, the reason behind this is the increase in the turnover of the company, which basically indicates that the company has acquired more profits in the current year which will attract more shareholders towards buying the shares for the company.

TCS
2006 24210000000 2716.86

EPS=

= 27.76

EPS=

2007 37830000000 3757.2

= 38.39

46 This following ratio has been taken from the balance sheet for the purpose of obtaining accurate results. TCS EPS has shown an increase of 10.63, which is deemed as healthy growth. Although the ratio is still lower than Infosys’s EPS, which is giving very healthy returns to its investors. This ratio is significant as it is regarded by many investment analysts as a fundamental measure of share performance. This trend in EPS over time was used to help assess the investment potential of a company’s shares.

47

Bibliography
1. Pandey, 1, M., 1995, Financial Management, 7 th Rev. Edn, Vikas Publishing House Pvt. Ltd.

2. Rao M.E.T., 2004, Cost and Management Accounting, New Age International (P) Limited, Publishers 3. Schmidgall R. S. Hospitality Industry Managerial Accounting, 5 th Edition, 2002 paperback.

4. Capitaline India Database

5. www.infosys.com/

6. www.tcs.com/

7. www.moneycontrol.com

8. Infosys, Annual report 2005-2006

9. Infosys, Annual report 2006-2007

10. TCS, Annual report 2005-2006

11. TCS, Annual report 2006-2007

48

Appendix

No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33

Companies (BSE - All Groups) TCS Infosys Wipro Satyam HCL Tech I-Flex Solution Tech Mahindra Financial Tech Aftek Mphasis Rolta Patni Computer Tanla Solutions Firstsource Sol Core Projects & Northgate Tech 3i Infotech Geodesic Infotech Enter Transworld Info Mindtree Cons ICSA Cranes Software NIIT Tech Take Solutions iGATE Solutions IOL Broadband Hinduja Venture Teledata Info Hexaware Tech Polaris Nucleus Softwar Subex Azure

Market Cap (Rs. Cr) 99,226.21 91,624.92 67,169.79 29,442.11 21,257.40 12,600.77 12,451.92 10,790.85 6,504.89 5,964.98 5,847.16 4,346.94 3,490.00 2,787.40 2,138.57 2,118.71 1,750.32 1,721.46 1,682.91 1,615.39 1,577.66 1,552.52 1,398.95 1,307.22 1,275.24 1,258.90 1,211.90 1,197.37 1,133.02 1,116.49 1,081.19 1,032.27 1,015.05

49 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 HTMT Global Sol KPIT Cummins Cambridge Sol Tata Elxsi Allied Digital Mastek KLG Systel Sasken Comm Mascon Global Megasoft Zylog Systems aurionPro Sol Dhanus Tech Zenith Infotech Prithvi Info Sonata Geometric Spanco Tele Zensar Tech Logix Micro Silverline Vakrangee Kernex Micro Sparsh BPO Svcs Lanco Global Goldstone Tech Quintegra Solut Glodyne Techno Micro Tech HOV Services Ramco System Helios and Mat Aztecsoft Info Drive Soft IT People ALLSEC Tech Accel Frontline Intra Infotech Omnitech Infoso 995.99 969.84 944.69 810.22 799.13 798.28 792.12 773.64 606.73 553.34 522.09 498.23 495.31 468.17 451.47 448.5 443.94 412.79 402.99 398.24 387.71 350.09 314.12 290.57 270.38 259.83 250.31 237.73 234.52 228.86 225.13 224.3 223.4 218.75 208.05 188.96 185.02 160.69 160.5

50 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104 105 106 107 108 109 110 111 Datamatics Tech Visualsoft Four Soft IKF Software Asian CERC Info Panoramic Uni Saksoft Tricom India R Systems Intl Intellvisions S Intense Tech Indo Pacific Se Crazy Infotech Cambridge Tech Softsol India FCS Software Softpro Sys Moschip Semi California Soft SQL Star Tera Software Visesh Infotech Kale Consult Accentia Techno Blue Star Info Genesys Int Allied Computer Kaashyap Tech Zen Tech Trigyn Tech Cybertech Mindteck PSI Data System Aventel Softech Visu Intnl Sanra Software ABM Knowledg Nucleus Sec Onward Tech 159.81 159.64 157.01 156.34 151.69 141.11 138.92 134.05 125.84 124.6 120.8 119.61 119.12 115.76 115.39 108.45 105 103.69 100.96 98.54 98.34 90.49 89.02 83.63 82 77.39 75.07 71.75 59.21 58.28 56.1 54.7 51.61 49.65 49.64 46.28 45.66 41.87 40.83

51 112 113 114 115 116 117 118 119 120 121 122 123 124 125 126 127 128 129 130 131 132 133 134 135 136 137 138 139 140 141 142 143 144 145 146 147 148 149 150 Compucom Soft Virinchi Tech IQMS Software Solix Technolog Axon Infotech Powersoft Glob Pentasoft Tech Valuemart Info Pan India Corp Orient Info Tutis Tech C S Software Cat Technologie Appu Industries Maars Software Silicon Valley Advent Computer VJIL Consulting KFA Corporation RS Software AXIS IT&T Ram Informatics Zigma Software ASM Tech S Kumars.com Synergy Log-In Supan Syntech Computech Inter Usha Martin Inf Encore Software Ontrack Systems In House Prod Ravileela Fin Unitex Designs Nexxoft Interworld Digi Cybermate Info Cressanda Sol T Spirutual 40.7 39.64 35.37 35.27 34.56 33.32 32.14 30.81 28.07 27.97 27.21 27.19 26.33 25.47 24.88 24.12 22.9 22.79 22.47 22.3 22.2 20.4 17.93 17.65 17.47 16.69 16.52 16.18 16.11 15.37 15 14.73 14.41 14.22 13.99 13.94 13.84 13.05 12.6

52 151 152 153 154 155 156 157 158 159 160 161 162 163 164 165 166 167 168 169 170 171 172 173 174 175 176 177 178 179 180 181 182 183 184 185 186 187 188 189 Strauss Ind Melstar Info IEC Software Jindal Online Dynacons Sys Icnet Wisec Global Netvision Web Odyssey Tech Danlaw Tech Netlink Sol Saven Tech Zenu Infotech Curare Labs NCJ Inter Grandpa Trading Crystal Softwar Ace Software Hit Kit Global Contech Soft Eonour Tech Shonkh Tech Cellulo Chem Indo-City Tr Kanika Infocom Gazi Sec Datanet Systems Frontier Info Comp-u-learn Libord Infotech Kushagra Soft Lee and Nee Sof Suri Capital Nihar Info Twinstar Soft Telesys Soft Meghana Finance IQ Infotech Netvista Info 12.46 12.24 11.94 11.88 11.55 11.19 11.17 10.54 9.83 9.73 9.58 8.53 7.99 7.82 7.78 7.72 7.69 7.47 7.1 7.05 7 6.97 6.67 6.52 6.43 6.1 5.81 5.46 5.26 5.2 5.12 5.07 4.83 4.83 4.69 4.58 4.29 4.01 3.84

53 190 191 192 193 194 195 196 197 198 199 200 201 202 203 204 205 206 207 208 209 210 211 212 213 214 215 216 217 218 219 EZ Comm Trade Indus Networks E.Star Info NCC Finance Omni Axs Soft Omega Int Tech Mangalya Soft Venus Universal Vasanthi Marine Softbpo Asia HR Technol CG-Vak Software Otco Int Kedia Infotech Brahma Cap Transcon Res Integr Hitech Sta Rite Sec Linkson Interna Cyberscape Mult Relson India Everest Market Avance Tech Sriven Multi Choksh Sec Gamma Rays Tran Women Net Vantel Tech Stock Net Inter Matrix Software Total 3.79 3.63 3.53 3.46 3.43 3.31 3.27 3.27 3.2 3.18 3.01 2.88 2.81 2.76 2.55 2.51 2.45 2.34 2.19 1.98 1.92 1.9 1.85 1.83 1.47 1.23 0.95 0.94 0.8 0.75 422,925.90


								
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