Anand Dube Report v1

Prin. L. N.
Welingkar Institute of Management Development & Research
SPECIALIZATION PROJECT
On
Financial Statement Analysis and Business Valuation
By Anand Dube
PGDM (2009 11) Specialization: Finance
ROLL NO. 03
PROJECT FACULTY GUIDE
Prof. Madhavi Lokhande
Prepared by: Anand Dube | PGDM (2009-11), Roll Number 3
PROJECT COMPLETION CERTIFICATE
This is to certify that project titled - Financial Statement Analysis and Business Valuation
is successfully done by Mr. Anand Rajkumar Dube in partial fulfillment of his two years full time course Post Graduation Diploma in Management recognized by AICTE through the Prin. L. N. Welingkar Institute of Management Development & Research, Bangalore. This project in general is done under my guidance.
___________________________ (Signature of Faculty Guide) Name: Prof. Madhavi Lokhande
Date: ______________________
Acknowledgment
I wish to express my deep sense of gratitude to my project guide Prof. Madhavi Lokhande for her able guidance and useful suggestions, which helped me in completing the project work. I would also like to thank my teachers at Prin. L. N. Welingkar Institute of Management Development & Research for their guidance all through the course. I thank my parents for their blessings and my friends for their help and wishes for the successful completion of this project.
Table of Contents
1. Introduction ............................................................................................................................................ 1 2. About TCS ............................................................................................................................................... 3 3. Strategy Analysis .................................................................................................................................... 6 3.1. Business Strategy ............................................................................................................................ 7 3.2. Generic Business Strategy .............................................................................................................. 8 3.3. Global Strategy ............................................................................................................................. 10 3.3.1.Market Penetration Strategy ................................................................................................ 12 3.3.2.Market Development Strategy ............................................................................................. 13 3.3.3.Product Development Strategy ............................................................................................ 13 3.3.4.Other global strategies ......................................................................................................... 13 3.4. Corporate Strategy ....................................................................................................................... 14 3.5. Strategic Alliances ......................................................................................................................... 15 3.6. Acquisition Strategy ...................................................................................................................... 16 3.7. TCS Joint ventures ........................................................................................................................ 18 4. Accounting Analysis .............................................................................................................................. 19 5. Ratio Analysis........................................................................................................................................ 20 6. Discounted Cash Flow Valuation Analysis ............................................................................................ 22 7. An Analysts view .................................................................................................................................. 25 8. Key Assumptions .................................................................................................................................. 26 9. References ............................................................................................................................................ 29
Introduction
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Introduction
Financial statement analysis is defined as the process of identifying financial strengths and weaknesses of the firm by properly establishing relationship between the items of the balance sheet and the profit and loss account. There are various methods or techniques that are used in analyzing financial statements, such as comparative statements, schedule of changes in working capital, common size percentages, funds analysis, trend analysis, and ratios analysis. Financial statements are prepared to meet external reporting obligations and also for decision making purposes. They play a dominant role in setting the framework of managerial decisions. But the information provided in the financial statements is not an end in itself as no meaningful conclusions can be drawn from these statements alone. However, the information provided in the financial statements is of immense use in making decisions through analysis and interpretation of financial statements. The flow of the project will be as follows: Section 2 gives a brief overview about TCS Section 3 delves into the strategies pursued by TCS with respect to following points SWOT Analysis Business Strategy Global Strategy Corporate Strate99gy Acquisition Strategy Section 4 presents a accounting analysis of TCS Section 5 looks at various ratios of TCS and interpretation
Introduction
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Section 6 attempts to value the business of TCS using Discounted Cash Flow Method Section 7 gives an analysts impression of TCS Section 8 lists down key assumptions made in valuing the company
About TCS
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About TCS
Tata Consultancy Services (TCS) is an IT services, business solutions and outsourcing organization that delivers real results to global businesses. TCS offers a consulting-led, integrated portfolio of IT and IT-enabled services delivered through its unique Global Network Delivery Model, recognized as the benchmark of excellence in software development. It is the worlds first organization to achieve an enterprise-wide Maturity Level 5 on CMMI and P-CMM based on SCAMPISM, the most rigorous assessment methodology. Its Integrated Quality Management System (iQMS) integrates processes, people and technology maturity through various established frameworks and practices, including IEEE, ISO 9001: 2000, CMMi, SW-CMM, P-CMM and SixSigma. A part of the Tata group, Indias largest and oldest industrial conglomerate company, the Tata Group or Tata Sons Limited which has interests in wide range of businesses such as energy, telecommunication, financial services, manufacturing, chemicals, healthcare and so on. It has over 180,000 IT consultants in 42 countries. It generated consolidated revenues of USD7.98 billion and a net profit of USD1.25 billion as per quarter ending December 2010. It is listed on the National Stock Exchange and Bombay Stock Exchange in India. In the last couple of years it has won various awards notable of them being SAP Pinnacle Award in 2009. One of its initiatives, mobile-based advisory platform mKrishi won the NASSCOM Social Innovation Honors in 2010. In 2010 it was also won the Golden Peacock Award. TCS offers its expertise to the clients in the following areas: IT Services IT Infrastructure Services
About TCS
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Enterprise Solutions Consulting Business Intelligence and Performance Management Engineering and Industrial Services IT and Business Solutions for Small and Medium Business Enterprises TCS has the depth and breadth of experience and expertise that businesses need to achieve business goals and succeed amidst fierce competition. TCS helps clients from various industries solve complex problems, mitigate risks, and become operationally excellent. Some of the industries it serves are: Banking and financial services Insurance Telecom Media and information services Government Healthcare and life sciences Energy and utilities Retail and FMCG Travel, transport and hospitality Manufacturing High-tech and professional services TCS achieved 8% revenue growth on the back of 17% volume growth. On a consolidated basis, operating profits (EBT before Other Income) grew to `8,018 crore, an increase of 21.91 per cent during the year. As a result, operating margins increased to near historic highs of 26.7% up from 23.66% last year.
About TCS
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Historical EBIT versus PAT Margin of TCS

29.00% 27.00% 25.00% 23.00% 21.00% 19.00% 17.00% FY06 FY07 EBIT Margin FY08 PAT Margin FY09 FY10
Profits after tax increased to `7,001 crore, a growth of 33.2% in 2009-10. Net margin stood at 23.32% for 2009-10 up from 18.91% in the previous year and earnings per share for the year were `35.67. From an industry perspective, recovery in financial services sector in North America played a key role in the revenue growth for TCS. This reduced the impact of slowness in sectors like telecom and manufacturing though signs of recovery can be seen in these sectors towards the end of the year. North America continued to be the top client destination for TCS in terms of growth. UK also grew but rest of Europe remained stagnant. Though Emerging Markets contribute over USD1.0 billion in revenue it is still largely project based and not annuity which is both an opportunity and threat for TCS.
Strategy Analysis
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Strategy Analysis
Tata Consultancy services (TCS) is one of the major IT service providers. The company provides a wide range of services including business consulting, information technology, business process outsourcing, infrastructure, and engineering. The increasing competition threatens to erode its market share.
Strengths
- Extensive Global Reach - Strong Financial Performance - Employee Management Skills - Availability of talent pool - Proven delivery model( Global Network Delivery Model) - Innovatoin Labs - Strong brand
Weaknesses
- Excessive dependence on US for revenues 67 % of revenues from USA - Significant exposure to financial services market - Low expertise in high end services like Consultancy and KPO.
Opportunities
- Focus on Small and Medium Business Segment - Growth in worldwide IT services - Focus on high-end business consulting - Expanding operations in countries like China - Focus on cloud-computing
TCS
Threats
- Increasing employee costs - Intense competition from foreign firms like HP, IBM, Accenture - Currency Fluctuations - Increased competition from low-wage countries like China - The economic environment, pricing pressure and rising wages in India and overseas
With over 180,000 employees on payroll spread across 42 countries, managing employees is a challenge in itself. TCS underwent organization restructuring in 2008 to make it more agile to respond to external environments. Having an organization structure that would respond to customer demands is most efficient way to lay down your business strategies. TCS did it little late but just in time. The new structure they adopted was a matrix type organization. The matrix organization is a combination of functional departments which provide a stable base for specialized activities and a permanent location for staff and units that integrate various activities of different functional departments on a project team, product, program, geographical or systems basis.
Strategy Analysis
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Figure 1 TCS Operating Structure
Business Strategy
TCS calls its Business Units as Industry Service Practice. TCS BU wise revenue distribution is as shown below:
Strategy Analysis
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TCS Revenue Breakup - Industry Practicewise (Q3FY10-11)

Telecom 12% BFSI 45% Retail & Distribution 11% Manufacturing 7%
Others 5%
Hi-Tech 5% Life Sciences and Healthcare 5% Energy & Utilities 4% Travel & Hospitality 4%
Media & Entertainment 2%
From the above graph it is evident that TCS derives 45% of its revenues from the Banking and Financial Services sector and the exposure level is very high. It needs to diversify accordingly to bring down its exposure to this sector, as the world is still reeling from the after-effects of subprime crisis. It must come up with strategies to increase its revenues from other sectors.
Generic Business Strategy

Low cost Global delivery 24X7 model. Focus on customer relationship management, customer retention (for repeat business revenue which is 95.6%). Timely delivery with the help of proven delivery & quality framework iQMS. Differentiation in low end services in terms of cost, resources. Differentiation in high end services such as consulting in term of niche offerings, expertise. Protection from currency fluctuations with the help of currency hedging.
Strategy Analysis
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Due to its strong knowledge management system and resource strength, TCS has been successful in getting the cost leadership in the industry. Since last decade, TCS has been following a more focused strategy where they are going as per local needs of customer and their nature of business. E.g. Middle East, Australia. They are being more focused region wise and customer wise rather than being generic. Focus on the Centers of Excellence (CoE) to strengthen capability so as to build state-of-the-art solutions in specific technologies such as service-oriented architecture, testing, cloud computing and virtualization. These high-end skills and scale will help TCS to tackle larger projects aimed at transforming clients IT applications and infrastructure. If we analyze the data of revenue of TCS on the basis of service practice, we get the following distribution:
TCS Revenue Breakup - Service Practicewise (Q3FY10-11)

Business Intelligence 5%
Enterprise Solutions Assurance 10% Services 7% Engineering & Industrial Services 5%
Application Development 45%
Infrastructure Services 11% Business Process Outsourcing 11% Global Consulting Asset Leverage 2% Solutions 4%
This shows that TCS has a heavy exposure to IT Solutions Application Development & Maintenance 45%. TCS has traditionally a low cost outsourcing player which
Strategy Analysis
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provides application development and maintenance services, which till date account for almost half of its revenue. Though TCS has managed to bring down this percentage significantly in last decade by entering into niche areas like, BPO, infrastructure services, business consulting, IT consulting, asset leveraged solutions etc. TCS sees a strong growth potential especially into consulting, BPO and infrastructure services. Thus TCS is investing heavily into these areas to explore new market segments.
BCG Matrix for TCS: HIGH
Business Growth Rate
BPO Infrastructure Services
Consulting Pacakaged Implementation KPO Engineering & Industrial Services
Software Products Application Development and Maintenance LOW
None
HIGH
Relative Position (Market Share)
LOW
Global Strategy
TCS' Global Network Delivery Model is the engine of TCS global strategy, a strategy that allows it to provide reliable, scalable and cost effective delivery of services and solutions. This time-tested model has enabled it to achieve client satisfaction ratings of
Strategy Analysis
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89% for meeting quality expectations and an average budget variation on projects of just 3% -- both figures far better than industry norms. TCS' Global Network Delivery Model enables its clients to: Choose a sourcing strategy best suited to their most important business considerations, e.g., cost optimization, cultural alignment, location proximity, language capabilities or risk-mitigation. Be assured of the highest quality of service delivery regardless of the mix of services, technologies, and locations. Lower the Total Cost of Ownership (TCO) of Information Technology by managing different service streams -- such as Consulting, IT Services, IT Infrastructure Services, etc. -- through a unified delivery framework. All of TCS' processes and infrastructure have been developed from the ground up -as opposed to being cobbled together over time. The Global Network Delivery Model consists of 3 integrated components: Global Workforce o Highly effective and scalable talent management - recruiting, staffing, training and retention Integrated Processes o CMMI Level 5 quality processes o World-class security procedures o Project Management processes and tools (iQMS, etc.) Multi-Tiered Infrastructure o Multi-continent and interconnected global development center
network (local, regional, global model) to allow for better risk management and follow-the-sun coverage. o State of the art telecommunications network
Strategy Analysis
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Global collaboration tool
Follow the sun strategy:
Market Penetration Strategy Current Markets: USA and Europe Current Products: ADM, BPO, KPO, consultancy services (in BFSI, manufacturing and retail) and software products (financial products). Recommendation: As most large clients in US and Europe are cutting costs, TCS needs to be more aggressive on cost and quality front.
Strategy Analysis
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Market Development Strategy New/Emerging Markets: India, Middle-east and Australia Current Product: ADM, BPO, KPO, consultancy services (in BFSI, manufacturing and retail) and software products (financial products). Recommendation: Since these are fast developing IT market, TCS needs a paradigm shift in focus from US and EU markets to these markets. Product Development Strategy Current Market: USA and Europe New Product: Consultancy and package implementation services in relatively growing sectors esp. life sciences & healthcare, aviation sector, and KPO services. Recommendation: Concentrate on building expertise in these domains by strategic acquisitions. Other global strategies Since last few years TCS is successfully leveraging labor cost in Eastern Europe, South America and China. Getting big foreign names on board of directors is also one of the key strategies for TCS. The current three foreign directors are: Clayton M Christensen (HBS Professor, joined in 2006), Dr. Ron Sommer (former Chairman of the Board of Management of Deutsche Telekom AG, joined in 2006) & Laura M Cha (member of the Executive Council of the Hong Kong Special Administrative Region (SAR) and Non-Executive Chairman of HSBC Investment Asia Holdings Limited) Look beyond US and UK for growth and beyond India for skills to emerge as a global firm. Clearly bullish with successes such as ABN Amro in continental Europe, Qantas in Australia, and almost 18% to 20% revenue from the Asia Pacific market, TCS wants to grow its businesses in global markets including India.
Strategy Analysis
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Recent acquisitions in Ireland and Latin America demonstrate its ambition to create delivery centers of respectable size outside of India. TCS have a keen view in looking US and UK for the Business Revenue markets and India for the skilled employees. TCS is very keen in establishing global delivery centers outside India which can demonstrate TCS as a Global company. TCS was the first one to set the global delivery centre in China which distinguished TCS from other corporate companies.
Corporate Strategy
TCS is a firm believer in organic growth and acquires only those companies which are in line with TCS strategic long term goals. In February 2008, TCS restructured its global operations to adopt an integrated, customer-centric approach, which is expected to helpful in eliminating the risk factors arising from the U.S. economic collapse. The companys operations are now divided into five units: 1. Industry Solutions (for vertical-specific services) 2. Major Markets (North America, Western Europe and the U.K) 3. New Growth Markets (Latin America, Eastern Europe, Middle East & Africa and India) 4. Strategic Growth Business (TCS Financial Solutions, SMB and Platform-based BPO) 5. Organizational Infrastructure. TCSs diversification plan seems to have worked since the company has been gaining momentum in Europe and other emerging markets, which is evident in the companys marked growth rate of 40% year to year in its FY08s European operations and the company has been able to maintain that growth rate in FY10 as well. The firms operations in Latin America and Middle East have also seen considerable expansion. In order to deepen its penetration, TCS has established delivery and offshore centers in countries like Brazil, Uruguay and Mexico.
Strategy Analysis
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Strategic Alliances
TCS has strategic relationships with various global technology vendors. These relationships are in various dimensions such as Customer, Service Provider, Supplier, and Alliance Partner. Extending collaborative research to several global technology vendors has made relationships with them more holistic. TCS and these technology vendors collaborate on joint research leveraging each others strengths to research and to the development of best-of-breed offerings. The intent is to define and develop solutions with associated services and offer the same as an integrated business model to customers. Some of the strategic alliances are listed below. Intel: Intel and TCS provide information technology products and services that complement each other. The companies are engaging in a technology alliance model in which the two organizations collaborate on research and develop solution offerings to deliver customer-specific solutions to the marketplace. This alliance has matured over the last two years of collaborative work, with the companies implementing a well-defined model for collaboration using a threestage approach: Joint innovation engagements Defining new or improved solutions Joint go-to-market strategies for the solutions
The companies have completed two significant virtualization and balanced compute research projects with these objectives: Virtualization: Demonstrate server consolidation through virtualization using multi-core Intel Xeon processors and Intel Virtualization Technology on a real-life customer application to reduce total cost of ownership. Balanced Compute: Demonstrate and validate balanced compute model usages in real end-user scenarios, showcasing central manageability and
Strategy Analysis
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client side computing using a combination of OS and application streaming technologies on Intel vPro technology-based platforms.
SAP: SAP as a leading technology and product vendor is one of the key partners of TCS. The partnership with SAP has been a long-standing one and multidimensional. Leveraging and extending this existing partnership to collaborate for joint research and innovation was a logical next step for both SAP and TCS. Senior Research Scientists of SAP and TCS initiated this collaboration setting the objectives and defining the modus operandi for carrying out research in a collaborative manner. And they committed to cause by undertaking the responsibility to be Executive Sponsors in the respective organizations. Collaboration with SAP Research was initiated after detailed discussions and exchange of research interests from both SAP and TCS. Identified areas include Model-driven Architecture and Integration of Enterprise-Data, Web 2.0, Internet of Services, and Internet of Things. Hewlett-Packard: HP and TCS have initiated discussions for joint research in the areas of SaaS, Power Management & Cooling, Utility/Grid Computing, Cloud Computing, Green IT and Next Generation Data Center. Some of the potential research initiatives could also involve development of market-specific offerings based on value-added services, using products and solutions from HP. EMC2: With TCS being an IT solutions and services provider, EMC2 and TCS have conceptualized IT solution architectures for specific industry-domains integrating products from EMC2 and software platforms from TCS.
Acquisition Strategy
TCS is looking at growth from two ways first through organic means and second through the inorganic way. The inorganic way of growth is through acquisitions of those companies that make business sense to TCS. The companies should add great value to TCS. Like for instance TCS acquisition of CMC is helping it taking a sharper
Strategy Analysis
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look at the domestic IT business. Both the companies have synergies in the government sector, since both the companies are well known for doing work for the government. TCS as part of its strategy to look at growth options has set up an internal team which will focus only on acquisition strategies .Below are some of the acquisitions of TCS in the recent past: Nov 2008: TCS Acquisition of Citigroup Services. TCS gains a range of new capabilities, with end-to-end banking BPO service offerings, and an opportunity to provide integrated IT and BPO services to the banking market, as well as the significant contracted revenue commitment. Over 12,000 staff has transferred with the deal. From the Citigroup side, they get a cash payment, and an external partner committed to deliver (and probably to improve) the services they have monetized their investment in setting up CGS (Citigroup Services). They no longer have direct responsibility for managing an offshore delivery centre in a market becoming increasingly competitive, and they have significantly reduced their overall headcount. Feb 2006: Tata InfoTech (TIL) Limited was merged into TCS Limited. TIL was a software services company like TCS with operations in the UK, U.S, and Australia among others. The merger gave TCS a broader customer base and deeper penetration into key geographies. The acquisition was touted as providing TCS more ability to provide full-service to customers in affected markets. March 2006: TCS, through its subsidiary, Diligenta, acquired a basis in part of UKs Pearl Group. Pearl is the 2nd largest player in the UKs life insurance and pension BPO industry, giving TCS a new stake in BPO work for the UK market. Right after Pearl, TCS picked up Comicron in Latin America to offer banking solutions in both IT and BPO services in that market, and now Spanish language capability. Experience gained here will again allow TCS to expand further into new markets with BPO offerings, especially in the rather large and underaddressed Spanish-speaking world.
Strategy Analysis
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Oct. 31, 2006: Similar to the financial stakes made above, TCS again expanded its banking products and consolidated its European operations after acquiring a 75% equity stake in its Switzerland-based partner, TKS-Teknosoft. TKS was the marketing agent for TCS in Europe.
TCS Joint ventures

TCS went for a joint venture (JV) in Feb 2007 with three Chinese partners and is billed by the company as a "role model for the Chinese IT industry. The TCS joint venture, in which Microsoft took a 10 per cent stake, planned to employ over the next five year at least 5,000 people that would represent a considerable scaling up from the company's then present strength of 800 employees in China. The Chinese software industry remains fragmented and lacks scale. Only about 10 Chinese IT firms among some 8,000 employ more than 1,000 people. The TCS joint venture will thus be one of the largest software companies in China once it reaches its 5,000-employee target. The new venture is widely expected to enable TCS to finally break into the $30-billion domestic Chinese IT market, a market that has in the past proved elusive for Indian IT companies. Another JV is between TCS and SBI (State Bank of India) in Nov 2005 to cater advanced technology solutions and domain consulting for the banking and financial services sector. The joint venture is called C-Edge Technologies Ltd. and has an authorized capital of `40 crore. TCS holds 51 per cent of the equity in C-Edge and SBI the balance with no asset transfer. The joint venture was to offer transformational capabilities to banks and financial institutions in India and other markets by helping them to use technology as a competitive tool in the market place using bureau services and service platforms. "In three to five years, we hope the company creates niche services in the national and international stage,'' said Mr. Ramadorai.
Accounting Analysis
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Accounting Analysis
TCS emerged stronger out of the global economic downturn. The Company was aggressive in its quest for new contracts, executed on its full services strategy and maintained pricing discipline. This helped to deliver 8% revenue growth for the year along with improvement in margin. On an Unconsolidated basis, in 2009-10 TCS revenues were at `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%. On a Consolidated basis, in 2009-10 TCS revenues were at `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%. This stellar performance was well received by investors, with the market capitalization increasing from `52,845 crore ($10.4 billion) in March 2009 to `152,820 crore ($34 billion) in March 2010. The Companys business grew even in those sectors affected by the economic meltdown, mainly because the customers appreciated the Companys value proposition. 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. The Company sees improvement in its order position in these industry segments as well as growth in almost all geographical markets.
Ratio Analysis
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Ratio Analysis
Year
EBITDA Margin Current Assets to Sales (%) ROCE Interest Coverage Ratio Average Recievables in days Net Margin DEBT EQUITY RATIO DEBT/EBITDA Current Ratio
Profit before Taxes/Sales *Sales/Average Assets *Average Assets/Average Equity *(1-Average tax Rate) "="Return on Equity *1-dividend Payout ratio Sustainable Growth rate Sustainable Growth Rate(Average growth rate)
2006 0.28 0.39 0.60 415.51 88.84 22.40% 0.02 0.03 2.25 0.26 2.13 1.05 0.86 0.50 0.78 0.39 29.41%
2007 0.28 0.41 0.56 568.15 82.99 22.50% 0.06 0.09 2.24 0.26 1.98 1.08 0.87 0.48 0.74 0.35
2008 0.28 0.43 0.50 214.58 84.10 21.67% 0.04 0.07 2.24 0.25 1.80 1.05 0.87 0.42 0.73 0.30
2009 0.24 0.48 0.41 235.27 79.49 18.86% 0.04 0.08 2.26 0.22 1.70 1.05 0.87 0.34 0.74 0.25
2010 0.29 0.52 0.47 556.93 70.08 23.26% 0.01 0.01 1.88 0.27 1.61 1.03 0.83 0.37 0.45 0.17
A quick glance at the financial ratios of TCS, suggests that company has been in healthy position which is only possible due to sound management techniques. PAT has remained steady over the period of previous 5 years. Though sales has increased there seems to be tremendous pressure on the profit margin in the last two years. The growth rate has been impressive over the last five years though it has dropped in the previous two years. The reasons of the slowdown in the growth rate can be attributed to over-dependence on the US and European markets for revenue generation and lack of diversification in other services. When these markets slowed down, as a result of the financial tsunami that had engulfed the world, companies began cutting down on their IT spends and negotiated hard on the prices. As a result growth in both the top line and bottom-line was affected. This fact has been acknowledged by the management. The direct consequence was that the management of TCS began aggressively diversifying in other markets and providing different services to clients apart from application development which has been the strength of TCS over the years.
Ratio Analysis
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The company has lot of room to leverage its balance sheet. It has traditionally been a cash-rich company as it can be seen from the consistent dividends being paid out even in difficult times. The recent spurt in demand in IT services in the traditional markets of US and Europe and new focus on emerging markets bodes well for TCS going forward and it seems capable of maintaining its double-digit growth rate for coming years.
Discounted Cash Flow Valuation Analysis
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Step 1 Calculation of Beta: We calculate Beta by regressing monthly returns for TCS against market return. The data we are using is historical data since listing of TCS on NSE on August 25, 2004. The regression equation is given by Y = MX + C. In our case, Y monthly return on TCS stock X monthly return on NIFTY M Beta Following is the summary of regression output:
From the above output we get value of Beta as 0.6648 Step 2: Next we calculate the weighted average cost of capital using the capital asset pricing model.
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Beta
Risk free rate
0.66 8.10% 2% 6.10%
10 year Government Bond Yield Liquidity Premium
Risk free rate

Market Rate of Return
Nifty on March 1, 2001 Nifty on February 28, 2011
1,358.05 5,333.25 14.66%
Index Returns (CAGR)

Dividend Returns 2001-2002 2002-2003 2003-2004 2004-2005 2005-2906 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011 Average Dividend Returns

Cost of Equity Cost of Debt After Tax Cost of Debt
1.27% 2.02% 2.16% 2.14% 1.72% 1.36% 1.06% 1.49% 1.21% 1.02% 1.54% 16.20% 12.82% 15.63% 10.47% 12.80%
Cost of Capital
Step 3: Forecast the cash flows.
Base Year Year Revenue Expenditure EBIDTA Depriciation PBIT Tax Rate PBIT * ( 1-Tax Rate) Capex Depriciation Capex - Depriciation Debtors Inventories Less: Current Liablilities Change in Non-Cash Working Capital Add: After Tax Net Interest Expense Free Cash Flows to Firm (FCFF) Cost of Capital Growth Rate 1,481.48 660.89 820.59 1,851.86 826.11 1,025.74 2,314.82 1,032.64 1,282.18 2,893.52 1,290.80 1,602.72 3,616.91 1,613.50 2,003.40 4,521.13 2,016.88 2,504.26 5,199.30 2,319.41 2,879.89 5,979.20 2,667.32 3,311.88 0 2010 30,495.77 21,529.15 8,966.62 660.89 8,305.73 14.44% 7,106.38 6,876.08 3,067.42 3,808.66 1 2011 38,119.71 26,911.44 11,208.28 826.11 10,382.16 15% 8,824.84 2 2012 47,649.64 33,639.30 14,010.34 1,032.64 12,977.70 15% 11,031.05 3 2013 59,562.05 42,049.12 17,512.93 1,290.80 16,222.13 15% 13,788.81 4 2014 74,452.56 52,561.40 21,891.16 1,613.50 20,277.66 15% 17,236.01 5 2015 93,065.70 65,701.75 27,363.95 2,016.88 25,347.08 15% 21,545.01 10 9 8 7 6 2020 2019 2018 2017 2016 107,025.56 123,079.39 141,541.30 162,772.50 187,188.37 75,557.01 86,890.57 99,924.15 114,912.77 132,149.69 31,468.55 36,188.83 41,617.15 47,859.72 55,038.68 4,056.66 3,527.53 3,067.42 2,667.32 2,319.41 29,149.14 33,521.51 38,549.73 44,332.20 50,982.02 33% 33% 33% 33% 33% 19,529.92 22,459.41 25,828.32 29,702.57 34,157.96 7,907.49 3,527.53 4,379.96 9,093.61 4,056.66 5,036.95
Terminal Year 11 2021 196,547.79 138,757.18 57,790.62 4,259.49 53,531.13 33% 35,865.85 9,548.29 4,259.49 5,288.80 1,797.08 5.46 26,384.63 (24,582.09) 34.07 32,612.00 12.80% 15% 14,033.04 37,498.68 12.80% 15% 14,304.50 43,118.38 12.80% 15% 14,581.46 49,581.02 12.80% 15% 14,864.02 55,193.22 12.80% 5% 197,403.79
4,688.03 4,076.54 3,544.82 3,082.45 (278.61) 1,463.85 1,829.82 2,287.27 2,859.09 3,573.86 2,680.39 14.24 12.39 10.77 9.37 8.14 10.86 8.69 6.95 5.56 4.45 (18.81) 4,093.76 5,117.20 6,396.50 7,995.63 9,994.53 12,493.16 14,367.14 16,522.21 19,000.54 21,850.62 25,128.22 (297.42) (3,648.90) (4,561.13) (5,701.41) (7,126.76) (8,908.45) ######### (13,430.39) (15,444.95) (17,761.69) (20,425.95) 34.07 34.07 34.07 34.07 34.07 34.07 34.07 34.07 34.07 15.49 15.49 6,598.70 11,463.48 14,344.07 17,921.56 22,393.44 27,983.28 28,362.70 12.80% 12.80% 12.80% 12.80% 12.80% 12.80% 12.80% 15% 25% 25% 25% 25% 25% 25% 6,598.70 10,162.46 11,272.92 12,485.97 13,830.86 15,321.77 13,767.02 338,626.50 103.25 338,523.25 295.72
Using the DCF method of calculation share price comes out to be as `1144.74.
PV of FCFF
PV of Cash Flows(Year 1 - 10) Debt outstanding Equity value Number of shares(in crores)

Price/Share 1,144.74
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An Analysts view
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An Analysts view
TCS is into Software Services business, the segment which is tipped to be growing at more than 15% worldwide. In India, however, the growth story is much stronger with segment growing at double the NASSCOM predictions. The growth is due to enhanced business opportunities provided by the emerging markets as they make their services more technology friendly. The expected value per equity share (as per our valuation) is `1144.22 and the current market price of TCS is `1182.50. Hence at current levels, market has fairly valued the share of TCS. In the long term buoyed by strong revenue growth, the share is a buy from a long term perspective. Therefore, it is recommended that the shares can be bought current levels.
Key Assumptions
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Key Assumptions
1) Growth rate of 25% for the first five years of projection which will decline to 15% for next five years. The 28% growth is based on geometric mean calculation of revenue growth from 2006-2010 periods. The 15% growth is based on the NASSCOM report for IT sector for 2011 where it forecasts 15% growth for the next decade. We have chosen a relatively conservative growth forecast for TCS based on its historical performance. The compounded annual growth in revenues is at 22.44% and as per geometric mean calculation the growth is pegged at 28.4%. Our own sustainable growth based on simple average pegs the growth of TCS at 29.4%. Averaging out the three growth forecasts, we assume the growth of revenues will be at 25% for the first five years, eventually tempering out to 15%. This growth will be fuelled by high demand for IT services from the emerging markets with developed markets being the cash-cows for TCS. 2) The terminal growth rate is assumed at 5%. This will be because the size of firm eventually will be a hindrance in its growth. 3) The above mentioned growth rate is incorporated in the growth in revenues of TCS. 4) All operating and financial expenses are assumed to grow in proportion to the growth in revenues. 5) Tax rate we have assumed to be at 15% for the next years. Due to the intense lobbying currently on, we are assuming the Government will extend the tax benefits to the IT sector for another period of five years and withdraw all benefits thereafter. The tax rate after the withdrawal of all sops is assumed to be at 33%. 6) Debtors and inventory would increase in proportion to sales, as these two components are anyways required for the day-to-day running of the business. 7) The value of Beta is calculated by regressing TCSs monthly returns against monthly returns of NIFTY.
Key Assumptions
27 | Page
8) Risk free rate is computed as follows:

Risk free rate
10 year Government Bond Yield Liquidity Premium
Risk free rate
8.10% 2% 6.10%
The Yield on 10 year Government Bonds (as on March 1, 2011) is taken as the Risk free rate for investment for 10 year period. 2% Liquidity premium is deducted from it to arrive at the Liquidity free-Risk free rate. 9) Market rate of return is computed as follows:
Nifty on March 1, 2001 Nifty on February 28, 2011
Index Returns (CAGR)

Dividend Returns 2001-2002 2002-2003 2003-2004 2004-2005 2005-2906 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011 Average Dividend Returns
1,358.05 5,333.25 14.66% 1.27% 2.02% 2.16% 2.14% 1.72% 1.36% 1.06% 1.49% 1.21% 1.02% 1.54% 16.20%
We have taken the value of Nifty as on March 1, 2001 and on February 28, 2011. We have found out the CAGR in the value of the index to arrive at the Index returns. Then we have taken the available Dividend returns for the same period of 6 years from 2001 to 2011 and taken the average for the Dividend returns to arrive at the Dividend Yield.
Key Assumptions
28 | Page
10) Equity value is computed as follows:

CALCULATION OF EQUITY
Share Capital Reserves & Surplus

Equity Capital CALCULATION OF DEBT Debt
295.72 18,171.00
18,466.72
103.25
Long Term (interest free) Advances from Customers

Debt PREFERENCE CAPITAL
0
103.25
(Note: Preference shares are convertible into Equity, so we have assumed it to be ZERO for future years)
11) Preference Shares are convertible into Equity, so we have assumed that all the preference shares would be converted into Equity shares. So, we have found out the Diluted Value per share of the company for the purpose of Valuation.
References
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References
http://www.tcs.com/about/Pages/default.aspx http://www.tcs.com/investors/Pages/default.aspx http://www.nseindia.com http://www.indiaearnings.com www.bseindia.com Annual Reports of TCS from 2005-2010 NASSCOM Report on The IT-BPO Sector in India Strategic Review 2010, 2011

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Prin. L. N.

Welingkar Institute of Management Development & Research

Financial Statement Analysis and Business Valuation

PGDM (2009 11) Specialization: Finance

PROJECT FACULTY GUIDE

Prof. Madhavi Lokhande

Prepared by: Anand Dube | PGDM (2009-11), Roll Number 3

PROJECT COMPLETION CERTIFICATE

___________________________ (Signature of Faculty Guide) Name: Prof. Madhavi Lokhande

Prepared by: Anand Dube | PGDM (2009-11), Roll Number 3

Prepared by: Anand Dube | PGDM (2009-11), Roll Number 3

Prepared by: Anand Dube | PGDM (2009-11), Roll Number 3

Prepared by: Anand Dube | PGDM (2009-11), Roll Number 3

Prepared by: Anand Dube | PGDM (2009-11), Roll Number 3

Prepared by: Anand Dube | PGDM (2009-11), Roll Number 3

Prepared by: Anand Dube | PGDM (2009-11), Roll Number 3

Historical EBIT versus PAT Margin of TCS

Prepared by: Anand Dube | PGDM (2009-11), Roll Number 3

Figure 1 TCS Operating Structure

Prepared by: Anand Dube | PGDM (2009-11), Roll Number 3

TCS Revenue Breakup - Industry Practicewise (Q3FY10-11)

Media & Entertainment 2%

Generic Business Strategy

Prepared by: Anand Dube | PGDM (2009-11), Roll Number 3

TCS Revenue Breakup - Service Practicewise (Q3FY10-11)

Enterprise Solutions Assurance 10% Services 7% Engineering & Industrial Services 5%

Application Development 45%

Business Growth Rate

BPO Infrastructure Services

Consulting Pacakaged Implementation KPO Engineering & Industrial Services

Software Products Application Development and Maintenance LOW

Relative Position (Market Share)

Prepared by: Anand Dube | PGDM (2009-11), Roll Number 3

Global collaboration tool

Follow the sun strategy:

Prepared by: Anand Dube | PGDM (2009-11), Roll Number 3

TCS Joint ventures

Prepared by: Anand Dube | PGDM (2009-11), Roll Number 3

Prepared by: Anand Dube | PGDM (2009-11), Roll Number 3

Prepared by: Anand Dube | PGDM (2009-11), Roll Number 3

Discounted Cash Flow Valuation Analysis

Discounted Cash Flow Valuation Analysis

Prepared by: Anand Dube | PGDM (2009-11), Roll Number 3

Discounted Cash Flow Valuation Analysis

0.66 8.10% 2% 6.10%

10 year Government Bond Yield Liquidity Premium

Risk free rate

Nifty on March 1, 2001 Nifty on February 28, 2011

1,358.05 5,333.25 14.66%

Index Returns (CAGR)

Market Rate of Return

Step 3: Forecast the cash flows.

Prepared by: Anand Dube | PGDM (2009-11), Roll Number 3

Discounted Cash Flow Valuation Analysis

Prepared by: Anand Dube | PGDM (2009-11), Roll Number 3

Prepared by: Anand Dube | PGDM (2009-11), Roll Number 3

Prepared by: Anand Dube | PGDM (2009-11), Roll Number 3

8) Risk free rate is computed as follows:

10 year Government Bond Yield Liquidity Premium

Risk free rate

Market Rate of Return

Nifty on March 1, 2001 Nifty on February 28, 2011

Index Returns (CAGR)