Company report

On

"Financial Statements & Ratio Analysis of Tata Consultancy Services”

By

Anaika Bonita Rodrigues

Enrolment number - A40104615053

In Partial Fulfilment of the Requirements for the Degree on

Bachelors of Commerce (Honours)

At

Amity University, Dubai

Under the Guidance of

Mr. CT Sunilkumar
 DECLARATION

Title of project report: Financial Statements & Ratio Analysis of Tata Consultancy Services

I declare,

a) That the work presented for assessment in this Company Report project is my own,
and that it has not previously been presented for another assessment and that my debts
(words, data findings, arguments and ideas) have been appropriately acknowledged.

b) That the work in this report adheres to all the guidelines for presentation and style set
out in the relevant document for company report guidelines.

Date:

Anaika Bonita Rodrigues

B-Com Honors- Class of 2018

 ACKNOWLEDGMENT

It is with deep gratitude and immense pleasure that I, Anaika Bonita Rodrigues; present this
project on the financial statements and ratio analysis of TCS. I am indebted to each and every
person for his/her cooperation to me, without which this project would not have been
accomplished. I take this opportunity to thank my program leader CA Mukund Jakiya and
also, Mr. CT Sunilkumar, faculty guide for his valuable guidance and support, which has
helped me a lot in the completion of this project.
NEED AND OBJECTIVES OF THE STUDY
 To understand and analyse the financial statements of Tata Consultancy Services.
 To evaluate the liquidity, solvency and profitability position of TCS.
 To assess TCS’s financial strengths, weaknesses, threats and areas of financial
opportunity.

Research Methodology

Methods of Data collection - For collecting secondary data, annual reports of companies
will be used as well as financial reports available on various stock market websites are also
used. No field work has been done in order to collect primary data for the study and the study
is entirely descriptive and analytical.

Data Analysis & Interpretation - Collected data is analysed and interpreted with the help of
accounting and statistical tools and techniques which are as follows:

1. Comparative and Common-size income statement and balance sheet.

2. Ratio Analysis

The financial ratio analysis has been done using the financial data of TCS for the last five
financial years i.e March 2013 – March 2017.
 Introduction

Details of the Company

Name of the Company: Tata Consultancy Services Limited (TCS)

Type of Activity: Information Technology services and IT business consulting services and
outsourcing services

Year of Incorporation: 1968

Key people: Nataraj Chandrasekaran (Chairman); Rajesh Gopinathan (CEO and MD)

About the Company

Tata consultancy Services (TCS) is an information technology services, consulting and

business solutions organization that offers real solutions to several global businesses,
ensuring a level of assurance no other firm can match. Headquartered in Mumbai,
(Maharashtra) India, the company had begun its operations in 1968 and now, it operates in
more than 46 countries. TCS is considered to be one of the largest Indian companies in terms
of market capitalization, and is included in the “Big 4” most established IT services company
across the globe. Being a subsidiary of Tata Sons, TCS contributes to more than 70%
dividends of the parent company.

TCS is under one of Asia’s largest conglomerates- Tata Group of companies-which with its
diversified interests in areas of Telecommunications, Energy, Chemicals, Finance,
Engineering, provides the subsidiary with a solid understanding of various business
challenges facing global companies.

Products and Services

TCS and its 67 subsidiaries deliver a range of IT-related products and services including
business process outsourcing, application development, consultancy services, capacity
planning, enterprise software, software management, payment processing and technology
education services. The firm’s most renowned software products are TCS BaNCS and TCS
MasterCraft. TCS helps clients to identify opportunities and build the roadmap to getting
there and leverage technology to make it possible, by providing world class services and
solutions such as consulting, IT services, application development, application development
and maintenance, asset leverage solutions and enterprise solutions.
 Data Analysis & Interpretation

Income Statement of Tata Consultancy Services Ltd

Consolidated Balance Sheet of TCS
Consolidated Cash Flow Statement
 Comparative Balance Sheet

Absolute Change
Fiscal year ends in March. 2017-03 2016-03 Increase/Decrease %Change
Assets
Current assets
Cash
Cash and cash equivalents 35970 67848 -31878 -46.984
Short-term investments 431100 223592 207508 92.807
Total cash 467070 291439 175631 60.263
Receivables 0 240697 -240697 -100.000
Inventories 210 163 47 28.834
Other current assets 337980 98375 239605 243.563
Total current assets 805260 630674 174586 27.682
Non-current assets
Property, plant and equipment
Gross property, plant and equipment 15410 212048 -196638 -92.733
Accumulated Depreciation -89270 89270 -100.000
Net property, plant and equipment 115980 122778 -6798 -5.537
Intangible assets 16440 20199 -3759 -18.610
Deferred income taxes 28280 8229 20051 243.663
Other long-term assets 66560 111963 -45403 -40.552
Total non-current assets 227260 263170 -35910 -13.645
Total assets 1032520 893844 138676 15.515

2017-03 2016-03 Increase/Decrease %Change

Liabilities and stockholders' equity
Liabilities
Current liabilities
Short-term debt 0 1130 -1130 -100
Capital leases 2000 0 2000
Accounts payable 62790 75399 -12609 -16.723
Taxes payable 13980 13980
Other current liabilities 66350 143226 -76876 -53.6746
Total current liabilities 145120 219755 -74635 -33.9628
Non-current liabilities
Long-term debt 3 -3 -100
Capital leases 822 -822 -100
Deferred taxes liabilities 9190 4412 4778 108.2956
Minority interest 3660 5022 -1362 -27.1207
Other long-term liabilities 12410 10224 2186 21.38106
Total non-current liabilities 25260 20483 4777 23.32178
Total liabilities 170380 240238 -69858 -29.0787
Stockholders' equity
Additional paid-in capital 19189 -19189 -100
Retained earnings 506187 -506187 -100
Accumulated other comprehensive income 862140 128230 733910 572.3388
Total stockholders' equity 862140 653606 208534 31.90515
Total liabilities and stockholders' equity 1032520 893844 138676 15.51456
 Comparative Income Statement

2017-03 2016-03 Increase/Decrease Percentage Change

Revenue 1,179,660 1086462 93,198 8.578
C ost of revenue 616210 691709 -75,499 -10.915
Gross profit 563450 394753 168,697 42.735
Operating expenses
Sales, General and
adm... 0 48097 -48,097 -100.000
Other operating
expens... 260530 55668 204,862 368.007
Total operating
expens... 260530 103766 156,764 151.075
Operating income 302920 290988 11,932 4.101

Interest Expense 320 198 122 61.616

Other income
(expense) 42530 25970 16,560 63.766
Income before taxes 345130 316759 28,371 8.957
0
Provision for income
t... 81560 73009 8,551 11.712
Net income from
contin... 263570 243749 19,821 8.132
0
Other -680 -831 151 -18.171
Net income 262890 242918 19,972 8.222

Preferred dividend
Net income
available t... 262890 242918 19,972 8.222
 Common size Balance Sheet

Absolute Amount Percentage of BS Total

Particulars 2017-03 2016-03 2017-03 2016-03
Assets
Current assets
Cash
Cash and cash equivalents 35970 67848 3.484 7.591
Short-term investments 431100 223592 41.752 25.015
Total cash 467070 291439 45.236 32.605
Receivables 240697 0.000 26.928
Inventories 210 163 0.020 0.018
Other current assets 337980 98375 32.734 11.006
Total current assets 805260 630674 77.990 70.558
Non-current assets
Property, plant and equipment
Gross property, plant and equipment 15410 212048 1.492 23.723
Accumulated Depreciation -89270 0.000 -9.987
Net property, plant and equipment 115980 122778 11.233 13.736
Intangible assets 16440 20199 1.592 2.260
Deferred income taxes 28280 8229 2.739 0.921
Other long-term assets 66560 111963 6.446 12.526
Total non-current assets 227260 263170 22.010 29.442
Total assets 1032520 893844 100.000 100.000

Absolute Amount Percentage of BS Total

Particulars 2017-03 2016-03 2017-03 2016-03
Liabilities and stockholders' equity
Liabilities
Current liabilities
Short-term debt 0 1130 0 0.12642027
Capital leases 2000 0.193701
Accounts payable 62790 75399 6.081238 8.43536456
Taxes payable 13980 1.353969
Other current liabilities 66350 143226 6.426026 16.02360143
Total current liabilities 145120 219755 14.05493 24.58538626
Non-current liabilities
Long-term debt 3 0.000335629
Capital leases 822 0.091962356
Deferred taxes liabilities 9190 4412 0.890055 0.493598436
Minority interest 3660 5022 0.354473 0.561843006
Other long-term liabilities 12410 10224 1.201914 1.143823754
Total non-current liabilities 25260 20483 2.446442 2.291563181
Total liabilities 170380 240238 16.50138 26.87694945
Stockholders' equity
Additional paid-in capital 19189 2.14679519
Retained earnings 506187 56.6303516
Accumulated other comprehensive income 862140 128230 83.49862 14.34590376
Total stockholders' equity 862140 653606 83.49862 73.12305055
Total liabilities and stockholders' equity 1032520 893844 100 100
 Common Size Income statement

Absolute Change Percentage of Net Revenue

Particulars 2017-03 2016-03 2017-03 (%) 2016-03 (%)
Revenue 1,179,660 1086462 100.000 100.000
C ost of revenue 616210 691709 52.236 63.666
Gross profit 563450 394753 47.764 36.334
Operating expenses
Sales, General and adm... 0 48097 0.000 4.427
Other operating expens... 260530 55668 22.085 5.124
Total operating expens... 260530 103766 22.085 9.551
Operating income 302920 290988 25.679 26.783

Interest Expense 320 198 0.027 0.018

Other income (expense) 42530 25970 3.605 2.390
Income before taxes 345130 316759 29.257 29.155

Provision for income t... 81560 73009 6.914 6.720

Net income from contin... 263570 243749 22.343 22.435

Other -680 -831 -0.058 -0.076

Net income 262890 242918 22.285 22.359

Preferred dividend
Net income available t... 262890 242918 22.285 22.359
 Ratio Analysis

Liquidity Ratios
Liquidity ratios indicate the capacity of a business to meet its short-term liabilities. It is
important to study the liquidity position of a business so as to know whether the company has
sufficient liquidity to pay off short-term debts and also to survive in tough financial times.
Lack of liquidity may result in a firm having to take decisions such as selling of assets for
low price, borrowings with high interest rates and also selling off a part of the company to
vulture investors.

Current Ratio

Current ratio indicates the amount of current assets that a company has in order to meet short
term liabilities.

Current Ratio = Current Assets/ Current Liabilities

The ideal current ratio is 2:1 which signifies that the company’s current assets are sufficient
to meet twice the amount of short term liabilities.

(In millions) March 2017 March 2016 March 2015 March 2014 March 2013

32.61+ 26.93 27.22+ 27.25+ 23.24+27.15+ 14.73+ 26.93+

Current 45.24 + 0.02+ + 0.02+11.01 = 0.02+ 11.28 = 0.02+ 13.48= 0.04+ 18.71 =
Assets 32.73 = 77.99 70.56 66.27 63.90 60.41

6.08+ 1.35+ 8.44+ 0.13

Current 11.99+ 0.25+ 8.25+ 0.19+ 8.51+ 0.16+
6.62 = 14.05 +16.02 = 24.59
Liabilities 15.34 = 27.58 14.91 = 23.34 13.99 = 22.66
Current
= 77.99/14.05 = 70.56/24.59 = 66.27/27.58 = 63.90/23.34 =60.41/22.66
Ratio
= 5.55 = 2.87 = 2.40 = 2.74 = 2.67
(CA/CL)

TCS’s Current Ratio for the year ended March 2017 is 5.55 and for the year ended March
2016 it was 2.87. The company’s average current ratio over the past five years is 3.24 which
show that TCS is not facing any liquidity problems and is able to meet its short term
obligations. However, the company had a high current ratio of 5.55 for the year ended 2017
which indicates inadequate investment.
Quick Ratio

Quick ratio, also known as Acid test ratio, shows the ratio of cash and other liquid resources
in a firm in comparison to the short term liabilities. The ideal QR is 0.5 which is indicative of
a company’s ability to settle half of its current liabilities without any difficulties.

Quick Ratio = CA- Inventory- Prepaid Expenses/ Current Liabilities

(In millions) March 2017 March 2016 March 2015 March 2014 March 2013
77.99 – 0.02 70.56- 0.02 66.27-0.02 63.90-0.02 60.41- 0.04
Quick Assets
= 77.97 = 70.54 =66.25 = 63.88 = 60.37
Current
= 14.05 =24.59 =27.58 =23.34 =22.66
Liabilities
Quick Ratio
= 3.79 = 2.86 =2.39 =2.69 =2.59
(QA/CL)

TCS’s Quick Ratio for the year ended March 2017 is 2.59 and for the year ended March 2016
it was 2.69. The company’s quick ratio indicates that the firm’s capacity to pay out its quick
liabilities is strong. Considering the quick ratio value for the past five financial years, TCS
has a strong average quick ratio value of 2.85. A high quick ratio means that TCS’s liquidity
position is strong and they are able to meet commitments without delay.
 Solvency Ratios
Solvency ratios, also referred to as leverage ratios, determine a company’s ability to keep the
operations on going by comparing debt levels with equity, assets and earnings. This ratio
focuses on the long term sustainability of the business instead of short-term liabilities.

Debt-Equity Ratio

Debt-Equity ratio indicates proportion of debt fund in relation to owner’s fund. It reflects the
capital structure, financial and solvency position of the company.

Debt-Equity Ratio = Debt (Long term borrowings)/ Equity (Shareholders funds)

(In millions) March 2017 March 2016 March 2015 March 2014 March 2013
Total debt
25,260 20,483 27,079 22,727 17,787
(Long + Short)
Total stock-
862,140 653,606 506,348 491,948 386,457
holders equity

DER = 0.029 = 0.031 = 0.053 = 0.046 = 0.046

TCS’s debt-equity ratio is in the range of 0.01-0.05 over the last five years. The value is
nearly negligible which is considered highly favourable from long term creditors’ point of
view. There is a high margin of safety for the creditors. The ratio is below the norm of 1:1.

Debt-equity ratio is important because if a firm has a higher debt-equity ratio, it means that
there is high level of risk indicating potential to be forced into bankruptcy. TCS has a
minimal debt-equity ratio for the past 5 financial years which shows that the company is not
relying heavily on debt as a source of financing.

Interest Coverage Ratio

Interest coverage ratio measures the company’s ability to make interest payments on long-
term debts taken by the company. This is a very significant ratio for creditors and investors to
determine the profitability and risk of the business. Investors will use Interest coverage ratio
to find out the ability of the company to settle its payments on time without having to
compromise its profits and operations.

Interest Coverage ratio = EBIT (Earnings before Interest and Taxes)/ Interest Expense
 (In millions) March 2017 March 2016 March 2015 March 2014 March 2013

EBITDA 365,320 336,437 282,014 267,895 192,181

Interest
320 198 1042 385 485
Expense
ICR (EBITDA/
1141.62 1699.17 270.64 695.83 396.24
IE)

TCS’s interest coverage ratio is 1141.62 for the year ended March 2017 and it was 1699.17
for the year ended March 2016. If the computation is less than 1, it means the company isn’t
making enough money to pay its interest payments. If the coverage equation equals 1, it
means the company makes just enough money to pay its interest. The company’s average
ICR over the last 5 financial years has been 840.7. The ratio is very high for the study period
reflecting that TCS may have undesirable lack of debt or is paying too much debt with
earnings.

Capital Gearing Ratio

Capital gearing ratio is a tool used to analyse the capital structure of a company and is
calculated by dividing common stock-holders equity by fixed interest or dividend bearing
funds. The ratio involves measuring the relationship between funds provided by the common
stockholders and the funds provided by those who receive periodic interest or dividend at
fixed rates. Capital gearing ratio is also known as “Financial leverage”.

A company is said to be low geared if the larger portion of the capital is composed of
common stockholders’ equity. On the other hand, the company is said to be highly geared if
the larger portion of the capital is composed of fixed interest/dividend bearing funds.

Capital Gearing Ratio = Common stock-holders equity/ Fixed cost bearing funds

(In millions) March 2017 March 2016 March 2015 March 2014 March 2013
Common
stock-holders 8,62,140 6,53,606 5,06,348 4,91,948 3,86,457
equity
Fixed cost
7,18,450 4,77,084.67 3,49,205.51 3,61,726.47 2,86,264.44
bearing funds
CGR 1.20 1.37 1.45 1.36 1.35
From the above table, it is observed that there has been an upward trend in the CGR of the
company, but March 2017 witnessed a fall in the CGR. TCS has a low geared capital
structure which means that there is more common stockholders equity. This ratio is very
important to investors because it represents the capital structure and financial strength of the
company. It is considered risky to invest in a firm with high gear because it indicates that the
company has to pay more interest on loans and dividends on preference shares, and therefore
has less level of dividend for common stockholders during times of low profits.
 Efficiency Ratios
Efficiency ratios give investors insight into the efficiency levels of a business in employing
resources invested in fixed assets and working capital.

Asset Turnover Ratio

The asset turnover ratio measures the company’s ability to generate sales from its assets by
comparing Net sales with Average total assets. The ratio calculates net sales as a percentage
to indicate the quantity of sales generated from each dollar of company’ assets.

Asset Turnover Ratio = Net sales/ Average Total Assets

This ratio measures how efficiently a firm uses its assets to generate sales, so a higher ratio is
always more favourable. Higher turnover ratios mean the company is using its assets more
efficiently. Lower ratios mean that the company isn't using its assets efficiently and most
likely have management or production problems.

(In millions) March 2017 March 2016 March 2015 March 2014 March 2013
Net Sales 1,179,660 1,086,462 946,484 818,094 629,895

=1,03,2520+ = 893,844+ = 736,609 + = 671,378+

Average total = 522,672 +
893,844/2 736,609 = 671,378/2 522, 672 =
assets 417469.78/2
= 9,63,182 8,15,226.5 = 7,03,993.5 5,97,025
= 470070.89

ATR = 1.22 = 1.33 = 1.34 = 1.37 = 1.34

TCS has a strong and high asset turnover ratio for the last 5 financial years. The ATR has
been greater than 2 in all the five years, which indicates that the company is using its assets
efficiently and is able to quickly generate sales from total assets.

The ratio is important because it gives creditors and investors an overall view of how the
company is managing and using its assets to generate sales.

Inventory Turnover Ratio

The inventory turnover ratio shows how companies are able to manage their inventories and
this can be done by comparing Cost of goods sold with Average inventory. Therefore, it will
measure the times average inventory is turned into sales during the period. Through this
ratio, interested parties are able to study how well the company is able to sell its inventory
ensuring minimum stock levels. If the company cannot sell these greater amounts of
inventory, it will incur storage costs and other holding costs.

Inventory Turnover Ratio = Costs of Goods Sold / Average Inventory

(In millions) March 2017 March 2016 March 2015 March 2014 March 2013
COGS/COS 616,210 691,709 621,211 495,235 391,581
Average
186.35 161.700 156.399 181.800 194.599
Inventory
ITR 3306.73 4277.73 3971.94 2724.06 2012.24

From the data in the above table, it can be concluded that the company’s inventory turnover
ratio has a mixed trend of increase and decrease. The turnover levels of stock were very high
in the last three years which reflects financial threat of inefficient stock management.

Day Sales Outstanding

Day sales outstanding measures the average number of days that a company takes to collect
revenue after sales has been made.

Days Sales Outstanding = Accounts receivable / Total credit sales x Number of days

Year March 2017 March 2016 March 2015 March 2014 March 2013
DSO 50.02 74.76 74.56 72.07 74.16

A low DSO value means that it takes a company fewer days to collect its accounts receivable.
A high DSO number shows that a company is selling its product to customers on credit and
the time period to collect dues is large. Therefore, TCS’s days receivable has decreased over
the last 5 years indicating that the company is taking lesser days to collect revenues after its
sales.
 Profitability Ratios
Profitability ratios tell you how good a company is at converting business operations into
profits. Profit is a key driver of stock price, and it is undoubtedly one of the most closely
followed metrics in business, finance and investing.

Return on Assets Ratio

The return on assets ratio measures the net income produced by total assets during a period
by comparing net income to the average total assets. The ratio shows how the company is
able to manage assets to produce profits during the relevant year. Some investors see ROA as
a return on investment for the company since capital assets are the biggest investments.

Return on Assets = Net Income / Average Total Assets

(In millions) March 2017 March 2016 March 2015 March 2014 March 2013

Net Income 262,890 242,700 198,521 191,639 139,173

Average total
963,182 815226.5 703993.5 597025 469069.7
assets

ROA (%) = 27.29% = 29.77% = 28.199% = 32.098% = 29.67 %

ROA shows how efficiently a company can convert the money used to purchase assets into
net income or profits. TCS has a positively consistent ROA with slight ups and downs in the
ROA value over the last 5 years. A positive ROA ratio usually indicates an upward profit
trend as well. In the case of TCS, their assets would mainly be computers and softwares, and
a healthy ROA is indicative of efficiencies in management of assets to produce greater
amounts of net income. The ratio was very high from standard of 10%.

Return on Equity (ROE)

The return on equity ratio measures the ability of a firm to generate profits from its
shareholders investments in the company. It shows how much profit each rupee of common
stockholder’s equity generates.

Return on Equity = Net Income / Average Stockholder Equity

(In millions) March 2017 March 2016 March 2015 March 2014 March 2013
191,639 139,173
Net Income 262,890 242,700 198,521
 Average
stock-holders 7,57,873 5,79,977 4,99,148 4,39,202.5 3,41,696.53
equity

ROE = 34.687% = 41.846% = 39.77% = 43.633% = 40.73%

TCS’s Return on equity ratio is significant to the investors because it computes the amount of
money based on the investors’ investment in the company. The average ROE of Tata
Consultancy is between 39-44% and fluctuates depending on market conditions. Investors
will be interested in seeing a high ROE because it shows effective use of investors’ funds.
Company growth or a higher ROE doesn't necessarily get passed onto the investors however.
If the company retains these profits, the common shareholders will only realize this gain by
having an appreciated stock.

Gross Profit Margin

Gross Profit Margin measures the efficiency of a company in using its materials and labour to
produce and sell products profitably. GP ratio is an important indicator of the profitability of
the core business activities without considering indirect costs. This gives investors a key
insight into how healthy the company actually is.

Gross Profit Percentage = {Gross Profit (Total sales – Cost of Revenue)}/ Net Sales x 100

Here, Gross Profit = Total Sales – Cost of Revenue and Net sales means Sales – Sales Return

(In millions) March 2017 March 2016 March 2015 March 2014 March 2013
322,859
Gross Profit 563,450 394,753 325,273 238,313

1,086,462 946,484 818,094 629,895

Sales 1,179,660

GPR = 47.763% = 36.333% = 34.366% = 39.464% = 37.833%

A low GP margin indicates under-pricing while a high GP margin indicates that a company is
making reasonable profit on sales. Investors are interested in this ratio because they will only
choose to invest in a firm that earns higher gross profits. They are typically interested in GP
as a percentage because this allows them to compare margins between companies no matter
their size or sales volume.
TCS has a healthy gross profit ratio, and the company’s GP margin has been increasing since
2013. The year 2016-17 witnessed an increase in the company’s GP which shows that costs
are kept under control and TCS is able to earn more with the sale of every Rs 100.

Net Profit Margin

The net profit margin, also known as net margin, indicates how much net income a company
makes with total sales achieved. A higher net profit margin means that a company is more
efficient at converting sales into actual profit.

Net Profit Margin = Net Income/ Total Sales x 100

(In millions) March 2017 March 2016 March 2015 March 2014 March 2013
262,890 242,918 139,173
Net Income 198,522 191,639
1,179,660 1,086,462 946,484 818,094
Sales 629,895

NPR = 22.228% = 22.358% = 20.974% = 20.425% = 22.094%

The above table indicates that the company is having a stable net profit margin since 2013.
There has been no sudden increase in net profit to elevate the net profit margin. A higher
NPR attracts investors because it highlights the effectiveness of the company in turning

revenues to actual profit. Therefore, it can be said that TCS has positively consistent and
progressive net profit ratio.

The net profit margin is likely to be affected by internal and external factors such as
industries & segments, selling price, cost of factors of production, efficiency of operations,
debt-equity ratio, taxation and variations in accounting policies.

Earnings per Share

Earnings per share, is a market prospect ratio that measures the net income earned per share
of stock outstanding. These earnings are the amount of money each share of stock would
receive if the profits were distributed to the outstanding shares at the end of the year.
This is a very important ratio from lenders and investors point of view as it shows the
profitability of the company on a shareholder basis. Higher the EPS, greater amount of the
company’s earnings will be divided amongst the shares of stock.

Earnings per share = (Net Income – Preferred dividends)/ Weighted average common shares
outstanding

In millions March 2017 March 2016 March 2015 March 2014 March 2013
Net income 262,890 242,918
198,522 191,639 139,173
Preferred
-
Dividends - - 337 222

WACS O/S 1,971 1,959 1,957

1,970 1,959
= 133.41 = 123.28 = 97.67 = 70.99
EPS (INR) = 101.35

Earnings per share ratio has the same significance as any profitability or market ratio. Higher
EPS signifies that the company is able to make higher profits and hence distribute higher
dividends to its shareholders. A higher EPS forms the stock price of a company.

From the above table, it can be inferred that TCS has a very strong EPS in the financial year
ended March 2017. There has been an increasing trend in the EPS for this company and this
reflects a positive image about the company’s position in the market.

Operating Margin Ratio

The operating margin ratio demonstrates how much revenues are left over after all the
variable or operating costs have been paid. This ratio is important to both creditors and
investors because it helps show how strong and profitable a company's operations are.

Operating Margin Ratio = Operating Income/ Net Sales

(In million) March 2017 March 2016 March 2015 March 2014 March 2013
Operating
302,920 290,988 233,988 233,042 239,428
Income
Net Sales
1,179,660 1,086,462 946,484 818,094 629,895
OMR
= 25.678% = 26.783% = 24.721% = 28.485% = 38.01%
From the above table, it can be deduced that TCS had a very strong operating margin ratio in
2013, and ever since the ratio has decreased and now comes between the range of 20-25%.
TCS will only be considered stable if it can make enough money from its operations to keep
the business going. A high Operating margin is more favourable as compared with a lower
ratio because this shows that the company is making enough money from its on -going
operations to pay for its variable costs as well as its fixed costs.
 Price Ratios
Price ratios are used to get an idea of whether a stock's price is reasonable or not. Price ratios
are "relative" metrics, meaning they are useful only when comparing one company's ratio to
another company's ratio, a company's ratio to itself over time, or a company's ratio to
a benchmark.

Price-to-Earnings Ratio (P/E)

The price earnings ratio is a market ratio that calculates the market value of stock relative to
its earnings by dividing market price by earnings per share. The ratio determines what the
market is willing to pay for stock based on current earnings.

Investors often use this ratio to evaluate what a stock's fair market value should be by
predicting future earnings per share. Companies with higher future earnings are usually
expected to issue higher dividends or have appreciating stock in the future.

P/E Ratio = Price per Share / Earnings per Share

EPS aggregated 133.41 in the year ended March 2017; 123.28 in fiscal 2016 (` 101.35 in
fiscal 2015, ex rewards) – a growth of 21.63%.

A company with a lower P/E ratio indicates poor present and future performance. A higher
ratio attracts investors because of anticipated higher growth, performance and profitability.

Expressed in M INR
Fiscal Period March
March 2017 March 2016 March 2015 March 2013
March 2014
P/E Ratio 18.2 20.5 25.3 21.9 22.20

P/E ratio shows the desirability of the company’s shares compared to other companies. This
is a very crucial ratio for equity investors as it helps them decide whether the company’s
shares are overpriced or under-priced compared with its real value and with the other shares
in the same sector. P/E ratios lower than 15 indicate that a company’s shares are undervalued
and a P/E ratio above 20 indicates overvaluation of shares.

TCS has an average price to earnings ratio of 21.62 over the last 5 years. The company’s P/E
ratio was overvalued in 2013, 2014 and 2015 which indicates that the shares were overpriced
and the ratio fell to the stable level in the year ended March 2016 and March 2017.
Considering that TCS is a technology based company, it is normal for them to have higher
P/E ratios than other sectors because of their rapid growth rate that in turn gives investors a
higher return on equity.
 Brief Analysis of TCS Annual Report (Year 2015-2016)
From the annual report, it can be concluded that TCS prepares its reports in accordance with
the Companies Act, 2013 and follows all the standards of generally accepted accounting
principles (GAAP). The company has decided to follow the Indian Accounting Standards for
preparation of its financial statements from the financial year beginning April 2016. As stated
in the annual report, TCS has developed an IFRS 9 Compliance Services that mainly equip
financial institutions with cost-efficient methods to address compliance needs. The IFRS 9
service is a broad program that covers all spheres of compliance i.e Classification,
Measurement, Hedge Accounting, Impairment and Disclosures.

Revenues

TCS’s revenues aggregated at Rs 108,646.21 cr in fiscal 2016 and Rs 94, 648.41 in fiscal
2015, indicating a growth of 14.79%. The revenue growth rate in fiscal 2016 was lower than
that of fiscal; 2016 because of low business growth rate. The year 2016 witnessed substantial
movement in exchange rates particularly affecting USD, AUD, CAD and EUR.

Earnings before interest, tax, depreciation and amortisation (EBITDA)

The EBITDA aggregated ` 30,589.79 crores in fiscal 2016 (` 27,109.62 crores in fiscal 2015)
– a growth of 12.84%.

Profit before tax

PBT aggregated ` 31,675.87 crores in fiscal 2016 (` 28,926.40 crores in fiscal 2015, ex
rewards) – a growth of 9.51%.

Profit after tax

PAT aggregated ` 24,291.82 crores in fiscal 2016 (` 21,911.85 crores in fiscal 2015, ex
rewards) – a growth of 10.86%.

Earnings per share (EPS)

TCS’s earnings per share aggregated at 132.28 in the fiscal year 2016 as compared to 101.35
for the year ended March 2015.
Acquisition / amalgamation (Note 29)

April 1, 2015 - CMC Limited, a subsidiary, amalgamated with the Company in accordance
with the terms of the Scheme of amalgamation sanctioned by the High Court of Judicature at
Bombay vide its Order dated August 14, 2015 and the High Court of Judicature at Hyderabad
vide its Order dated July 20,2015.

July 2, 2015- The Company through its wholly owned subsidiary, Tata Consultancy Services
Netherlands BV subscribed to 76% share capital of Tata Consultancy Services Saudi Arabia.

October 30, 2015- TCS through its wholly owned subsidiaries TCS Inversiones Chile
Limitada and Tata Consultancy Services Chile S.A. subscribed to 100% share capital of
Technology Outsourcing S.A.C, an information technology services provider in Peru.

Significant Accounting Policies

Basis of Preparation - Financial statements are prepared under Historical cost on accrual
basis, except for certain financial instruments which are measured at fair value.

Use of Estimates – The management is required to make estimates and assumptions that
affect the reported balances of assets and liabilities and disclosures relating to the contingent
liabilities as at the date of the financial statements and reported amounts of income and
expense during the year.

Example – Employee benefits, provision for doubtful debts, provision for income taxes

Recording of Fixed Assets – Fixed assets are recorded at cost less accumulated depreciation/
amortisation.

Method adopted for depreciation – For fixed assets, straight line method of depreciation is
used to write off the costs of the assets over the useful lives and for assets acquired prior to
April 1, 2014, the carrying amount as on April 1, 2014 is depreciated over the remaining
useful life based on an evaluation.

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, comprising investments
in mutual funds, government securities and bonds are stated at the lower of cost and fair
value.
 Observations and Findings
Tata consultancy services (TCS) is a leading IT giant in India and is positioned as the top
employer in the Indian IT industry. The company generates about 6% of its global revenues
from India. It is confident of maintaining leadership position in the domestic market that is
beholding a strong technology adoption in private and public sectors. From the ratio analysis,
it can be concluded that the company is financially strong. The overall performance in terms
of revenues and profits is remarkable, and the company’s revenues and profits are increasing
every financial year.

Looking at the company’s current ratio, it can be said that the current ratio is more than the
ideal ratio; however the ratio should not be as high as 5.5:1 because it indicates inefficient
usage of short term assets. The satisfactory current ratio (Av5: 3.24 times) and quick ratio
(Av5= 2.85 times) reflects good liquidity and good working capital management. The gross
profit margin (AV5= 39.15%) and net profit margin (AV5= 21.61%) indicates cost
effectiveness. The debt-equity ratio has been in the range of 0.01-0.05 in the last five years
which indicates that TCS is not relying heavily on debt as source of finance.

The interest coverage ratio has an average of 840.7 which poses a financial threat that TCS
might be unable to pay fixed charges. TCS’s capital gearing ratio is healthy, indicating a low
geared structure which is highly favourable from investors’ point of view. Total assets
turnover ratio has an average of 1.32 times showing possibility that there is less frequency
with which assets are realized.

The company’s inventory turnover ratio reflects very high levels of inefficiency in inventory
management (Av5 = 3258.54). Although return on assets seems to be consistent, it is still very
low when compared to the standard. TCS has average earnings per share of 105.34 which
can also prove to be a financial opportunity of the firm to make their capital structure more
optimal.
 Conclusion

The financial ratio analysis helped us to understand the liquidity, solvency, capital structure
and profitability position of TCS. The liquidity ratios have shown that the liquidity is sound
for the company. Trends of sales, PBIT, PAT and EPS reflected financial strength of
satisfactory probability. In terms of solvency ratios, it can be concluded that TCS has lesser
amount of debt as compared to own funds. The company can try to employ more borrowed
funds as compared to own funds, keeping the financial expenses under control. Overall
profitability of TCS measured with the help of different ratios is satisfactory and they should
use this opportunity to raise their profit margins which will attract investors and also increase
economic prosperity. Certain ratios that highlighted weaknesses and threats include asset
turnover, inventory turnover, and price to earnings ratio. In conclusion, TCS has a healthy
average growth rate and there are financial opportunities for the firm to improve its debt-
equity mix and dividend payout.