Assignment-I

Icfai University, Dehradun

Student Name SRIKANTH N

IUD Number 0901202412

IBS Number 09BS0002412

Section A

Subject STRATEGIC FINANCIAL MANAGEMENT

Course-Code SLFI606

Faculty-Name Prof. Dennis Raj Kumar

Assignment Type Field based  Non-Field based

Please tick [ ]
appropriate one

Date of Submission: 29th November, 2010

Topic of the Assignment

CORPORATE VALUATION OF TCS USING

DISCOUNTED CASH FLOW METHOD

Student Signature Faculty Signature

A BRIEF LIGHT ON TCS (Tata Consultancy Services)

Established in the Year 1968

Chair-Person: Ratan N Tata

Present CEO: N.Chandrashekaran

Current Revenue: 23225.2 crores

Current Market-Price: INR 1025

PROFIT & LOSS ACCOUNT:

Mar '06 Mar '07 Mar '08 Mar '09 Mar '10

12 mths 12 mths 12 mths 12 mths 12 mths

Income
Sales Turnover 11236.01 14942.09 18536.55 22404 23044.84
Excise Duty 5.51 2.12 2.83 2.08 0.39
Net Sales 11230.5 14939.97 18533.72 22401.92 23044.45
Other Income -1.19 216.04 440.45 -456.24 182.1
Stock Adjustments 4.14 -2.79 -0.04 1.73 -1.38
Total Income 11233.45 15153.22 18974.13 21947.41 23225.17
Expenditure
Raw Materials 161.5 22.02 45.81 53.67 23.75
Power & Fuel Cost 66.85 93.89 135.57 164.34 183.62
Employee Cost 5113.96 6186.85 6015.19 7370.09 7882.43
Other Manufacturing 793.01 3095.82 5687.82 6947.6 6446.99
Expenses
Selling and Admin Expenses 756.39 765.08 991.43 1218.41 1268.03
Miscellaneous Expenses 1005.52 472.04 632.25 628.71 571.08
Preoperative Exp Capitalized 0 0 0 0 0
Total Expenses 7897.23 10635.7 13508.07 16382.82 16375.9
Mar '06 Mar '07 Mar '08 Mar '09 Mar '10

12 mths 12 mths 12 mths 12 mths 12 mths

Operating Profit 3337.41 4301.48 5025.61 6020.83 6667.17

PBDIT 3336.22 4517.52 5466.06 5564.59 6849.27
Interest 4.49 3.43 3.42 7.44 9.54
PBDT 3331.73 4514.09 5462.64 5557.15 6839.73
Depreciation 257.38 343.41 458.78 417.46 469.35
Other Written Off 0 0 0 0 0
Profit Before Tax 3074.35 4170.68 5003.86 5139.69 6370.38
Extra-ordinary items -38.03 -2.59 -37.52 -103.11 -13.98
PBT (Post Extra-ord Items) 3036.32 4168.09 4966.34 5036.58 6356.4
Tax 319.45 410.8 457.58 340.37 737.89
Reported Net Profit 2716.87 3757.29 4508.76 4696.21 5618.51

BALANCE SHEET

Mar '06 Mar '07 Mar '08 Mar '09 Mar '10

12 mths 12 mths 12 mths 12 mths 12 mths

Sources Of Funds
Total Share Capital 48.93 97.86 197.86 197.86 295.72
Equity Share Capital 48.93 97.86 97.86 97.86 195.72
Share Application Money 0 0 0 0 0
Preference Share Capital 0 0 100 100 100
Reserves 5560.4 7961.13 10806.95 13248.39 14820.9
Revaluation Reserves 0 0 0 0 0
Networth 5609.33 8058.99 11004.81 13446.25 15116.62
Secured Loans 26.52 41.76 9.27 32.63 29.25
Unsecured Loans 8.98 8.98 8.98 7.74 6.49
Total Debt 35.5 50.74 18.25 40.37 35.74
Total Liabilities 5644.83 8109.73 11023.06 13486.62 15152.36
Mar '06 Mar '07 Mar '08 Mar '09 Mar '10

12 mths 12 mths 12 mths 12 mths 12 mths

Application Of Funds
Gross Block 1695.13 2315.36 3240.64 4359.24 4871.21
Less: Accum. Depreciation 525.35 854.75 1300.11 1690.16 2110.69
Net Block 1169.78 1460.61 1940.53 2669.08 2760.52
Capital Work in Progress 280 757.85 889.74 685.13 940.72
Investments 1963.52 3252.04 4509.33 5936.03 7893.39
Inventories 22.94 12.06 17.19 16.95 6.78
Sundry Debtors 2326.63 2799.8 3747.01 3717.73 3332.3
Cash and Bank Balance 170.61 314.66 402.24 479.93 212.31
Total Current Assets 2520.18 3126.52 4166.44 4214.61 3551.39
Loans and Advances 1490.57 1925.74 3104.74 3910.85 4101.84
Fixed Deposits 0.56 242.48 125.28 1125.33 3183.85
Total CA, Loans & Advances 4011.31 5294.74 7396.46 9250.79 10837.08
Deffered Credit 0 0 0 0 0
Current Liabilities 1239.24 1750.46 2525.56 3604.18 3352.74
Provisions 540.54 905.05 1187.44 1450.23 3926.61
Total CL & Provisions 1779.78 2655.51 3713 5054.41 7279.35
Net Current Assets 2231.53 2639.23 3683.46 4196.38 3557.73
Miscellaneous Expenses 0 0 0 0 0
Total Assets 5644.83 8109.73 11023.06 13486.62 15152.36

SOURCE: http://www.moneycontrol.com/financials/tataconsultancyservices/balance-sheet/TCS

SOURCE: http://www.moneycontrol.com/financials/tataconsultancyservices/Profit-Loss-
Account/TCS

CALCULATION OF FREE-CASH-FLOWS:

FREE CASH FLOWS TO THE FIRM = EBIT (1-Tax) (1-Re-Investment Rate)

EXPEXTED GROWTH RATE in EBIT=Re-Investment Rate*Return-on-Capital

Capital- depreciation change in working EBIT Cap-invested

Expenditure capital
1169.78 257.38 3078.84 2821.46
1460.61 343.41 86.03 4174.11 3916.73
1940.53 458.78 115.37 5007.28 4663.87
2669.08 417.46 -41.32 5147.13 4688.35
2760.52 469.35 51.89 6379.92 5962.46
Average=2000.104 389.276 52.9925 4757.456 4410.574

Tax-Rate=Marginal-Tax Rate=30%

Re-Investment Rate= (Capital-Expenditure-Depreciation+ Change in Working Capital)/EBIT (1-

Tax)

= (2000.104-389.276+52.99)/ 4757.456(1-0.3)
 = 39.94%

Return-On-Capital Invested = EBIT (1-Tax)/Capital-Invested

= 4757.456(1-0.3)/ 4410.574

= 42.30%

Expected Growth in the EBIT=Re-investment Rate*Return on Capital

= 0.3994*0.4230

= 0.1689=16.89%

FREE CASH FLOW TO THE FIRM

FCFF
expected ebit ebit(1-t) ebit(1-t)(1-
rr)
2010 6379.92
1 2011 7457.488488 5220.242 3135.27731
2 2012 8717.058294 6101.941 3664.825648
3 2013 10189.36944 7132.559 4283.8147
4 2014 11910.35394 8337.248 5007.351003
5 2015 13922.01272 9745.409 5853.092587
6 2016 16273.44067 11391.41 6841.679925
7 2017 19022.02479 13315.42 7997.239664
8 2018 22234.84478 15564.39 9347.973443
9 2019 25990.31007 18193.22 10926.84616
10 2020 30380.07344 21266.05 12772.39047
11 2021 33418.08078 23392.66 14049.62952
12 2022 36759.88886 25731.92 15454.59247
13 2023 40435.87774 28305.11 17000.05172
14 2024 44479.46552 31135.63 18700.05689
15 2025 48927.41207 34249.19 20570.06258
16 2026 53820.15328 37674.11 22627.06884
- - - -
17
- - - -
18
So On Till
19 Perpetuity
ASSUMPTIONS IN FREE-CASH-FLOW:

*Growth-In-EBIT until 10 years from now (2011-2020) =16.89%

*Growth-In-EBIT from 10th year till perpetuity (2021-perpetuity) = 10%

CALCULATION OF COST OF CAPITAL:

TCS Capital Structure Consists of

ITEM VALUE (Crores) WEIGHTAGE

(%)
Equity 195.72 59.047
Preference Share 100 30.169
Debt 35.74 10.782

Cost of Equity:

Cost of Capital has been calculated using CAPM (Capital-Asset-Pricing-Model)

According to CAPM

Ke=Kf+Beta (Km-Kf)

Ke= Cost of Equity

Kf=Risk-Free-Return

Km=Market-Return

BETA:

Average Beta for the last 5 years has been considered

YEAR BETA
2006 1.006
2007 0.5466
2008 0.678
2009 0.496
2010 1
Average 0.75
RISK-FREE-RETURN:

Present 364-Day T-Bill Rate=7.20%

SOURCE: http://www.rbi.org.in/home.aspx

MARKET-RETURN:

Average of the Return on S&P-CNX-Nifty for the past 5 years has been considered

YEAR RETURN (%)

2007 45.85
2008 59.58
2009 -62.44
2010 16.08
Average 14.76%

Ke=7.2%+0.75(14.76%-7.2%)

= 12.645%

COST OF DEBT AND PREFERENCE SHARE CAPITAL:

Cost of Debt= 8%

Cost of Preference Share= 8%

SOURCE: (Annual-Report 2009-

2010)http://www.tcs.com/investors/financial_info/Pages/default.aspx

CALCULATION OF WACC (Weighted Average Cost-of-Capital)

WACC=We*Cost-of-Equity + Wp*Cost-of-Preference-Share-Capital + Wd*Cost-of-Debt

= 0.59047*12.645%+0.30169*8%+0.10782*8%= 10.98%

APPLICATION OF DISCOUNTED CASH FLOW METHOD FOR VALUATION OF THE COMPANY:

Calculation of Present Value of the future cash flows:

Discounting-Rate= WACC=10.98%
YEAR CASH-FLOWS PRESENT
VALUE
2011 3135.27731 2825.083
2012 3664.825648 2975.527
2013 4283.8147 3133.982
2014 5007.351003 3300.876
2015 5853.092587 3476.657
2016 6841.679925 3661.798
2017 7997.239664 3856.8
2018 9347.973443 4062.185
2019 10926.84616 4278.508
2020 12772.39047 4506.351

TOTAL 36,077.77
2021 14049.62952 PV from 2021-
perpetuity
using Constant
Growth Model=
1576999.232
2022 15454.59247
2023 17000.05172
2024 18700.05689
2025 20570.06258
2026 22627.06884
-
Till
Perpetuity
TOTAL 1,613,077.00

CONSTANT GROWTH MODEL from 2021-Perpetuity@10%:

PV= Value on 2021(1+g)/(Ke-g)

= 14049.62 (1+0.10)/ (0.1098-0.10)

= 1576999.232 crores

TOTAL PRESENT VALUE OF THE COMPANY= 36,077.77 + 1576999.232= INR 1,613,077.00

crores

TOTAL-VALUE IN BILLIONS = INR 1613.077 Billions

TOTAL-VALUE IN US DOLLARS = INR 1613.077 Billions/45.649= 35.34 Billion USD

VALIDITY OF THE TCS PRESENT VALUE:

Present Market Capitalization (Total-Equity-Value) = 33.9 Billion USD

SOURCE: (Annual-Report 2009-

2010)http://www.tcs.com/investors/financial_info/Pages/default.aspx

Calculated Value (Includes Equity+Debt+Preference) using Discounted Cash flow Model= 35.34
Billion USD

CALCULATION OF SHARE-PRICE USING DIVIDEND DISCOUNT MODEL:

Price = D (1+g)/ (Ke-g)

Assumption= Dividend Grows at a Constant Growth of 10% till perpetuity

Dividend per Year =20

SOURCE: (Annual-Report 2009-

2010)http://www.tcs.com/investors/financial_info/Pages/default.aspx

Price=20(1+0.10)/ (0.12645-0.10)

= INR 831.73

Current Market-Price of TCS in S&P CNX-NIFTY= INR 1025

As per the comparison with current market price the company’s share-price seems to be over-
valued. There is a lot of probability that the Share-Price may come down to 831.73. Therefore it
is better for the Stock-holders to sell the Stock at the current market price and book profits.

REFERENCES:

1. CORPORATE FINANCE/Theory and Practice/Second-Edition/Aswath Damodaran

2. http://www.tcs.com/investors/financial_info/Pages/default.aspx
3. http://www.rbi.org.in/home.aspx
4. http://www.moneycontrol.com/financials/tataconsultancyservices/balance-sheet/TCS
5. http://www.nseindia.com/