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A N N U A L R E P O R T A N A LY S I S A N D R E C O M M E N D AT I O N S
Prepared by: 1. 2. 3. 4. 5. Alok Sinha (Roll No: ePGP-03-095) Nitin Jaiswal (Roll No: ePGP-03-139) Nitesh Kumar (Roll No: ePGP-03-138) Sharon Selvaraj (Roll No: ePGP-03-167) Yeshaswini GR (Roll No: ePGP-03-193)
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Table of Contents
1. A. B. OVERVIEW OF THE INDUSTRY ....................................................................................................................... 4 IT SOFTWARE, SERVICES AND BPO ..................................................................................................................... 4 OVERALL PERFORMANCE .................................................................................................................................. 5 a) Revenue................................................................................................................................................. 5 b) Exports .................................................................................................................................................. 5 c) Domestic Market ................................................................................................................................... 6 C. EXPORT DESTINATIONS .................................................................................................................................... 7 D. EMPLOYMENT ............................................................................................................................................... 7 E. FUTURE TRENDS ............................................................................................................................................. 8 BEST AND WORST PART OF ANNUAL REPORTS.............................................................................................. 9 A. INFOSYS ..................................................................................................................................................... 9 Best Part ........................................................................................................................................................ 9 Worst Part ..................................................................................................................................................... 9 B. TCS ............................................................................................................................................................ 9 Best Part ........................................................................................................................................................ 9 Worst Part ..................................................................................................................................................... 9 MANAGEMENT ANALYSIS AND DISCUSSION SECTION ................................................................................. 10 A. INFOSYS ................................................................................................................................................... 10 Business............................................................................................................................................... 10 Subsidiaries ......................................................................................................................................... 11 Branding.............................................................................................................................................. 11 Awards and recognition ....................................................................................................................... 11 Capital expenditure.............................................................................................................................. 12 Liquidity............................................................................................................................................... 12 Increase in share capital....................................................................................................................... 12 Appropriations Dividend ...................................................................................................................... 12 B. TCS .......................................................................................................................................................... 13 a) Dividend .............................................................................................................................................. 13 b) Transfer to Reserves............................................................................................................................. 13 c) Operating Results and Business ............................................................................................................ 13 d) International Credit Rating ................................................................................................................... 14 e) Strategic Acquisitions and Alliances...................................................................................................... 14 f) Human Resource Development ............................................................................................................ 14 g) Fixed Deposits...................................................................................................................................... 14 a) b) c) d) e) f) g) h) CASH FLOW STATEMENTS ........................................................................................................................... 14 A. B. 5. INFOSYS ................................................................................................................................................... 15 TCS .......................................................................................................................................................... 15 RATIO ANALYSIS OF THE TWO COMPANIES ................................................................................................. 17 a) Profitability Ratios ............................................................................................................................... 17
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The Indian Software & services industry has grown at a remarkable pace since 2001-02. The overall Indian Software & Services industry revenue is estimated to have grown from US$ 10.2 billion in 2001-02 to reach US $ 58.7 billion in 2008-09- translating to a CAGR of about 26.9 per cent. Despite the severe global recession, the industry grew at modest rate of 12.9 % in 2008-09. . IT-ITES industrys growth trends are given in the table below. IT ITES Industry Revenue Trends
Year/ Item IT-ITeS Exports 2001- 02 2002- 03 2003- 04 2004- 05 2005- 06 2006- 07 2007- 08 2008- 09 CAGR 7.6 9.5 3.0 12.5 12.9 3.8 16.7 17.7 4.8 22.5 23.6 6.7 30.3 31.1 8.2 39.3 40.4 11.7 52.0 46.3 12.4 58.7 28.6 22.2 26.9
As per NASSCOM, the industry is diversified across three major focus segments IT Services, BPO and software products & Engineering services. While IT Services have been the mainstay of the industry, BPO and Engineering services sector has built upon the India value proposition and today there exist integrated service providers across the three focus areas as well as niche providers. The major three components of IT Services sector are custom application development, application management and support and training. Other significant components are IT consulting, systems integration, Infrastructure Services (IS) outsourcing, network consulting & integration and software testing. Among the verticals serviced by Indias IT-ITES-BPO industry those that account for the largest share of revenue are banking, financial services and insurance(BFSI-41%), Hi-Tech/Telecom(20%), manufacturing(17%), retail(8%), with smaller contributions coming from media, publishing and entertainment, construction and utilities, healthcare and airlines and transportation. Important industry verticals being serviced by the BPO segment are insurance, retail banking, travel and hospitality, auto manufacturing, telecom and pharmaceuticals. Horizontals such as Customer Interaction and Support (CIS), Finance and Accounting (F&A) and Human Resource Management (HRM) are important areas in the BPO segment.
b) Exports
Exports continue to dominate the revenues earned by the Indian Software & Services Industry. The export intensity (the share of IT-ITeS Exports to total IT-ITeS Revenue)
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Source: Nasscom
c) Domestic Market
Though the IT-BPO sector is export driven, the domestic market is also significant. The revenue from the domestic Software & Services market is estimated to have grown from US $ 2.6 billion in 2001-02 to US $ 12.4 billion in 2008-09 a CAGR of about 22.2 per cent. In the Domestic verticals of the Indian IT-ITeS Industry the IT Services segment continues to dominate domestic portfolio of the industry. Its share however has declined from 80.8% in 2001-02 to 66.9% in 2008-09.
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C. Export Destinations
USA & UK continues to be major markets for the IT software and services exports. However the share of USA has declined from 68.3 per cent in FY2005 to 60 per cent in FY2008, whereas that of Europe has increased from 23.1 per cent to 31 per cent over the same period. Markets across Continental Europe and the Asia Pacific are also witnessing significant year-on-year growth. This trend towards a broader geographic market exposure is positive for the industry, not only as de-risking measure but also as a means of accelerating growth by tapping new markets.
Market Americas Europe (incl. UK) Rest of the World (incl. APAC) FY05 68.30% 23.10% 8.60% FY06 67.18% 25.13% FY07 61.40% 30.10% FY08 60% 31%
D. Employment
The total IT Software and Services employment is estimated to touch 2.20 million in 2008-09, as compared to 0.52 million in 2001-02. This represents a net addition of 1.68
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E. Future Trends
Globalization has a profound impact in shaping the Indian Information Technology (IT) industry over the years with India capturing a sizeable chunk of the global market for technology sourcing and business services. Over the years the growth drivers for this sector have been the verticals of manufacturing, telecom, insurance, banking, finance and of late the fledgling retail revolution. As the new scenario unfolds it is getting clear that the future growth of IT and IT enabled services will be fuelled by the verticals of climate change, mobile applications, healthcare, energy efficiency and sustainable energy et al. Traditional business strongholds would make way for new geographies, there would be new customers and more and more of SMEs(Small and Medium Enterprises) will go for IT application and services. Rising up to the new challenges will only be possible when we scale-up the value chain and put in efforts toward providing more and more of end-to-end solutions to the clients. Indian IT firms will have to strive for that extra mile and put in smart work to survive in the newer growth opportunities. By the year 2010-11 our Software and Services export is expected to reach US $ 60 billion and by 2011-12 which is also the terminal year of the eleventh five year plan, the figures are expected to touch US$ 72 billion., this is assuming a 20% growth rate YOY(year over year) for 2011-12.
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Worst Part 1. The telecom vertical de-grew by 6.3% to Rs 36.6 bn (US$ 773 mn) mainly owing to client-specific issues with British Telecom (BT), its largest telecom client 2. European geography saw revenues decline over 8% to Rs 46.3 bn (US$ 978 mn) 3. Attrition spiked to 13.4% . 4. Infosys' tax rate rose to 21.3% in FY10 from 13.3% in FY09 owing to the expiry of the tax benefits under the STPI scheme for 5 of its STP facilities.
B. TCS
Best Part 1. 2. 3. Retail vertical grew by an impressive 28.3%. The BFSI vertical grew 13%. Grew in all geographies Attrition did not go out of control at 12 %.
Worst Part 1. The telecom vertical de-grew by 2.9%, manufacturing vertical also de-grew. 2. TCS had transactions with 22 fellow Tata Group companies during FY10, apart from the holding company, Tata Sons. 3. TCS' average revenues per employee stood at a little under Rs 2 mn (US$ 41,678) in FY10, a 12.5% decline as compared with FY09 (Rs 2.2 mn, US$ 47,153)
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f)
Liquidity Infosys continue to be debt-free, and maintain sufficient cash to meet strategic objectives. As at March 31, 2010, Infosys had liquid assets of Rs. 14,804 crore as against Rs. 10,289 crore at the previous year-end. These funds have been invested in deposits with banks, highly rated financial institutions, certificate of deposits and liquid mutual funds.
g) Increase in share capital Infosys issued 9,95,149 shares on the exercise of stock options under the 1998 and 1999 Employee Stock Option Plans. Due to this, the outstanding issued, subscribed and paid-up equity share capital increased from 57,28,30,043 shares to 57,38,25,192 shares as at March 31, 2010. h) Appropriations Dividend The total dividend amount paid out is Rs. 1,434 crore, as against Rs. 1,345 crore in the previous year. Dividend (including dividend tax) as a percentage of profit after tax before exceptional items is 29.1% as compared to 27.0% in the previous year.
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B. TCS
a) Dividend 1. Directors are pleased to recommend for approval of the members a final dividend of Rs.4/- per share and a special dividend of Rs.10/- per share for 2009-10 on the enhanced capital of 1,95,72,20,996 Equity Shares of Re.1/- each. The final dividend and the special dividend on the Equity Shares, if approved by the members would involve a cash outflow of Rs.3195.21 crore including dividend tax. The total cash outflow of dividend including dividend tax on Equity Shares of the Company for the year 2009-10, including interim dividends already paid would aggregate Rs.4569.12 crore resulting in a payout of 81.60% of the unconsolidated profits of the Company. 2. The Redeemable Preference Shares allotted on March 28, 2008 are entitled to a fixed cumulative dividend of 1% per annum and a variable non-cumulative dividend of 1% of the difference between the rate of dividend declared during the year on the Equity Shares of the Company and the average rate of dividend declared on the Equity Shares of the Company for the three years preceding the year of issue of the said Redeemable Preference Shares. Accordingly, the Directors have recommended, for approval of the Members, a Dividend of Seventeen (17) paise per share on 100,00,00,000 Redeemable Preference Shares of Re.1/- each for the financial year 2009-10. b) Transfer to Reserves The Company proposes to transfer Rs. 561.85 crore to the General Reserve out of the amount available for appropriations and an amount of Rs. 10458.13 crore is proposed to be retained in the Profit and Loss Account. c) Operating Results and Business 1. On an Unconsolidated basis, in 2009-10 TCS revenues were at Rs.23044.45 crore, a growth of 2.86% over 2008- 09. Operating margin (Profit before taxes excluding other income) grew 189 basis points to 26.87% and net margin grew 342 basis points to 24.38%. 2. On a Consolidated basis, in 2009-10 TCS revenues were at Rs.30,028.92 crore, a growth of 7.97% over 2008-09. Operating margin (Profit before taxes excluding other income) grew 304 basis points to 26.70% and net margin grew 441 basis points to 23.31%. 3. Market capitalization increasing from Rs.52,845 crore (.4 billion) in March 2009 to Rs.152,820 crore( billion) in March 2010. 4. Banking, Financial Services, Retail, Life Sciences & Health Care and Government sectors registered positive growth in FY10. However, sectors like Manufacturing, Telecom, Hi-Tech and Insurance all declined on an annual basis. 5. TCS full services strategy was validated with new service lines like BPO, Infrastructure, Assurance and products all delivering double digit growth.
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g) Fixed Deposits The Company has not accepted any public deposits and, as such, no amount on account of principal or interest on public deposits was outstanding as on the date of the Balance Sheet.
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When we analyze the cash flow for the period 2009-2010, the cash flow from operating activities has shown a positive trend (+), cash flow from investing activities has shown a negative trend (-) and cash flow from financing activities has shown a positive trend (+). This conveys that the company generated sufficient cash from operations, but debt or stock issuance was required for additional funding of operations and capital expenditure. The net cash increase is positive though it is declining only for the period 2009-2010. The reason for decline in net cash increase, is a result of the expenditure on Acquisition, fixed assets, FDs, Financial assets investments that has happened which is shown by the cash outflow in investing activities. The growth of cash flow from operations has more than doubled from 2006-2010. It has grown from 2237 cr to 5876 cr.
B. TCS
The cash flow summary for TCS from 2006 to 2010 is given below:
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When we analyze the cash flow for the period 2009-2010, the cash flow from operating activities has shown a positive trend (+), cash flow from investing activities has shown a negative trend (-) and cash flow from financing activities has shown a negative trend (-). This represents a strong cash flow pattern that generates enough cash from operations to fund capital investments, and repay debt or buy back stock and for meeting it's working capital requirements. The cash flow from operations has grown from 2344.42 cr to 6264.74 from 2006-2010. This is slightly better compared to Infosys. The company has a negative cash flow for the period 2009-2010, which implies that the company has spent more than it received during this year. Negative cash flows are often viewed as indicators of financial ill health by people who are assessing companies to determine whether or not to invest in the company. Less cash to work with means less cash for growth, and less cash to pay debts. In this parameter, Infosys scores better. However, many things can influence cash flow, and a negative cash flow should not necessarily be seen as a black mark because there are many reasons for a company to experience a temporary negative cash flow as we see alternating increase and decrease over the years. The detailed breakup of cash inflow/out flow is given below:
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In fiscal 2010, the Company Generated net cash from operating activities of Rs.7,406.23 crore Used Rs.5,413.22 crore on investing activities (Bank FDs, Non-convertible debentures, Acquisition) Used Rs.2,381.35 crore on financing activities (Dividend payment, taxes, repayment of bank borrowings)
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Long term Solvency 1. Debt-Equity Ratio : This ratio means that for every rupee of the shareholder funds in the company how much is the lenders claim. Lower the lenders claim to the shareholder; lowers are the demands on the firms earnings for meeting fixed commitment in terms of the interest. 2. Long-term Debt to Total Capital : this ratio means that for every rupee of the owners funds, there is a long term debt commitment from the lenders.. It is ratio of the long term debt and shareholders equity. 3. Long term Debt to Fixed asset : This measure the amount of fixed assets available as a backing of the long term debts. It is the ratio of the Long-term debt to net fixed assets. 4. Times interest Earned : It is the ratio of the Earnings before interest and tax to the fixed interest expense. 5. Times fixed Charges Covered : It is computed if the company has other fixed commitments such as lease payments under the non-calculated obligations. It is the ratio of the Earnings before interest and fixed charges to the interest and fixed charges. 6. Equity multiplier : It is the ability of the owners equity top to command resources and is measured as total assets/owners equity. It shows the extent of enhancement in the returns to an equity holder due to the leverage or borrowing.
c) Investors Ratios The basic five ratios we are interested in are: Earnings per share Dividends per share Dividend yield
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A. INFOSYS
Infosys Technologies Key Financial Ratios Profitability Ratios Operating Profit Margin(%) Gross Profit Margin(%) Adjusted Cash Margin(%) Net Profit Margin(%) Adjusted return on net worth (%) ------------------- in Rs. Cr. ------------------Mar '09 34.09 30.66 32.57 27.52 34.76 Mar '10 34.82 31 29.75 26.31 25.89
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-6.37
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B. TCS
Tata Consultancy Services
Key Financial Ratios Profitability Ratios Operating Profit Margin(%) Profit Before Interest And Tax Margin(%) Gross Profit Margin(%) Cash Profit Margin(%)
------------------- in Rs. Cr. ------------------Mar '09 26.87 24.75 25.01 26.09 Mar '10 28.93 26.62 26.89 26.44
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6. Recommendation
Based on the profitability analysis, Infosys provides a higher margin on sales, has a higher return on investments, makes efficient use of assets and has a higher return per share of equity. From our analysis the current ratio best for the Infosys and the quick ratios are more than 1 for all the company under considerations but again the Infosys is best. This gives confidence to the investor. For Infosys the liquidity ratios are close to 4.2 where as for TCS its close to 1.5, so from liquidity angle the Infosys scores over TCS by a large margin.
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