Accounting Project Report FM

7/31/2019 Accounting Project Report FM

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Top 5 Indian IT companies: Trend and Ratio analysis

Prepared under Guidance of

Prof. Pankaj Gupta

by

Table of ContentsExecutive Summary ................................................................................................................................. 2


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Introduction ............................................................................................................................................ 3

Methodology ........................................................................................................................................... 4

Findings ................................................................................................................................................... 4

Operating Income- .............................................................................................................................. 5

Operating Income Trend Analysis- ...................................................................................................... 5

Current Ratio: ...................................................................................................................................... 8

Profit margin: ..................................................................................................................................... 9

Debt To Equity Ratio: ........................................................................................................................ 10

Significance of Debt to Equity Ratio: ............................................................................................... 10

PE RATIO: .......................................................................................................................................... 11

Conclusion ............................................................................................................................................. 13

Bibliography .......................................................................................................................................... 13

Executive Summary

Indian IT sector has grown leaps and bounds over last few decades such that it contributes a

major part of countrys GDP even when majority of population is involved in agriculture.This growth has resulted into increase in stakeholders in terms of employees, investors,

lenders, managers and customers. Everyone is interested in understanding how good/bad

the company in which one has stake is performing in market for many reasons. They plan

and decide their employer, investment portfolio, loan/no-loan, loan amount, growth

prospects and business partners. This is where studying the trends and different ratios

become very crucial as they reflect the health of company in comparison to other

companies and in comparison to its own in previous years

Data for analysis was availed from online database-Captitaline and annual reports of top 5

Indian IT companies were referred from their respective websites to get various parameters.

Seven years of data has been taken to study the trends of various companies. Some of the

parameters were calculated on the basis of data available and some were used directly.

Some of the very interesting trends and information were found. Infosys is a zero debt

company that is why the debt to equity ratio is always zero for it. There is a considerable

gap between the operating income of top three IT companies and remaining two. And the

list is long. Why profit margin of Patni computers increased in 2008 when every other

company faced tough times with profit margins? Why HCL had a debt of $585 million in


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2009? Similarly what was the reason behind shooting up of Wipro debts in 2008? Attempt

has been made to answer such teasing questions with the help of data available.

On the basis of study and analysis, some sort of conclusion has been driven which could be

helpful to the stakeholders. Attempt has been made to suggest the various stakeholders on

picking the company among these five which should be relied upon for their future

investments in terms of money, career, business partnership and even career.

For the successful completion of every study one must bind the study and analysis into

certain limits which could not be fulfilled due to scarcity of resources whether it is

knowledge, time or any other quantifiable constraint. This boundary helped us to stay focus

on our limits and to finish the study in stipulated time frame.That also defines the line which

has to be crossed when this study is carried out further for even bigger goals and greater

benefits.

Introduction

The Information Technology industry in India employs close to 2.5 million people making it

one of the largest job creators in India Inc. With its contribution to the Gross Domestic

Product being close to 5.19% it is also one of the most profitable sectors in India. In 2010-11

this sector is estimated to have grown to over US$76 billion making it the largest this side of

the Atlantic Ocean. However due to close ties to USA and European Union, hiring had

dropped sharply during the global financial crisis.

In this age of street smart investors and tech savvy corporate population, it is no longer a

case of the stockbroker doing the work behind the scenes for successful investors. Financial

jargon has become just the opposite of what the term means, with terms such as P/E ratio,

Current ratio, EPS etc being thrown about with increasing frequency.

The media has been flooded with information regarding the various companys share price,

policy changes, also their earnings etc, with this overflow of information it is necessary for

managers of various firms, investors, shareholders etc to be able to analyse the information

they have been given in a precise and decisive manner so as to be able to base their

decisions and future planning in order to maximize their return on investment. Be it money,

time, policies in competing firms etc.

Also due to introduction of sharekhan.com, icicidirect.com, kotaksecurites.com etc it has

become essential for investors to understand the true meaning behind financial ratios so as

to be able to make good investments.


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We have undertaken this report so as to be able to explain the trend of the IT industry from

the information we have gathered and explain the reason for the various fluctuations and

trends we have observed after doing the necessary analysis.

This project has been taken upon by us as an integral part of our course for the subject

Financial Management, and we have selected this sector as we have ascertained the

importance of the IT industry for the future of the Indian economy.

Methodology

The financial data for all the top five Indian IT companies have been taken from Capitaline.

Seven major parameters were identified for the financial analysis of these companies:

Profit Margin Operating Income Operating Income Trend Analysis Price Earnings Ratio Current Ratio Debt Equity Ratio Earnings Per Share

Profit margin and operating income trend analysis data was calculated by us from the data

derived from Capitaline. The remaining data was directly available.

Graphs were plotted over a seven year period from 2005 to 2011 on each parameter

comparing all the five companies. Each graph has one parameter and all five companies

data over the years.

This data was analyzed to see the common trends across all the companies over the seven

years. These trends were then compared with the overall economic trends and explained

accordingly.

A few aberrations were also found and the reasons were identified by looking at the past

news articles and the data from companies websites.

Findings

We have done analysis for top five India Information Technology Company on the basis of

data collected for last ten years(2000 to 2010).We have calculated seven ratio and have

plotted graph and analyze the reason behind sudden change in a particular IT companysratio.


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Ranking of Top ten Indian IT company

Rank Company

1 Tata Consultancy Services Ltd.

2 Infosys Technologies Ltd.

3 Wipro Technologies Ltd.

4 Satyam Computer Services Ltd.

5 HCL Technologies Ltd.

6 Patni Computer Systems Ltd.

7 I-flex Solutions Ltd.

8 Tech Mahindra Ltd. (formerly Mahindra-British Telecom Ltd.

9 Perot Systems TSI (I) Ltd.

10 L&T InfoTech Ltd.

Operating Income-

Operating income is the difference between operating revenues and operating expenses.

When a firm has zero non-operating income, then operating income is sometimes used as a

synonym for EBIT and operating profit

EBIT = Revenue Operating expenses+ Non-operating income

Operating income = Revenue Operating expenses

Operating Income Trend Analysis-

Operating Income Trend Analysis is calculation of percentages change in operating income

statement items for a number of successive years .We first assign a value of 100 to

theOperating Income items in a past financial year used as a base year value. Here we havedone trend analysis for top five Indian IT company taking 2005 as a base year

0.00

5,000.00

10,000.00

15,000.00

20,000.00

25,000.00

30,000.00

35,000.00

2005 2006 2007 2008 2009 2010 2011

Operating Income

TCS

Patni

Wipro

Infosys

HCL
http://d/wiki/Non-operating_incomehttp://d/wiki/Profit_(accounting)http://d/wiki/Revenuehttp://d/wiki/Operating_expensehttp://d/wiki/Non-operating_incomehttp://d/wiki/Non-operating_incomehttp://d/wiki/Operating_expensehttp://d/wiki/Revenuehttp://d/wiki/Profit_(accounting)http://d/wiki/Non-operating_income


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Although Infosys has been a consistent performer on this front, TCS has seen a steep rise

after 2010.HCL although looks the best of the lot but it is primarily because of the low bases.

Reason for HCL Better Income Trend - In 2004 HCL becomes the largest manufacturer of PC

in India. The market for laptop has grown manifold in 2006-2007 and HCL introduced its

range of laptops in the same year and achieved a market share of 7.4% within 12 month of

launch

Earnings per share (EPS) are the amount of earnings per each outstanding share of a

company's stock.

Earnings per share = Profit/Weighted Average Common Shares

Significance of EPS: The earnings per share ratio is mainly useful for companies with publicly

traded shares. By itself, EPS doesn't really tell whole lot. But if we compare it to the EPS

from a previous quarter or year it indicates the rate of growth a companys earnings are

growing (on a per share basis)

Earnings per share (EPS) are used as a comparison tool.

EPS = Net Earnings / Outstanding SharesSuppose Company A had earnings of $100 and 10 shares outstanding, which equals an EPS

0

50

100

150

200

250

300

350

400

450

2005 2006 2007 2008 2009 2010 2011

Operating Income Trend

TCS

Patni

Wipro

Infosys

HCL


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of 10 ($100 / 10 = 10). Company B had earnings of $100 and 50 shares outstanding, which

equals an EPS of 2 ($100 / 50 = 2).

So, I should buy Company A with an EPS of 10.The EPS is helpful in comparing one company

to another, assuming they are in the same industry, but it doesnt tell us whether its a good

stock to buy or what the market thinks of it. For that information, we need to look at some

other ratios also.

0

20

40

60

80

100

120

2005 2006 2007 2008 2009 2010 2011

EPS

TCS

Patni

Wipro

Infosys

HCL


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The Dip in EPS in 2010 is because TCS underwent a stock split 1:1 in 2009-2010.A

similar dip in EPS 2007 numbers is also for the same reason. Infosys also saw a dip in

EPS in 2007 because it also underwent 1:1 stock split.

Current Ratio:

A liquidity ratio that measures a company's ability to pay short-term obligations.

The Current Ratio formula is:

Also known as "liquidity ratio", "cash asset ratio" and "cash ratio".

Current ratio is a financial ratio that measures whether or not a company has enough

resources to pay its debt over the next business cycle (usually 12 months) by comparing

firm's current assets to its current liabilities.

Significance of current ratio:

Acceptable current ratio values vary from industry to industry. Generally, a current ratio of

2:1 is considered to be acceptable. The higher the current ratio is, the more capable the

company is to pay its obligations. Current ratio is also affected by seasonality.

If current ratio is below 1 (current liabilities exceed current assets), then the company may

have problems paying its bills on time. However, low values do not indicate a critical

problem but should concern the management. One exception to the rule is considered fast-

food industry because the inventory turns over much more rapidly than the accounts

payable becoming due.

Current ratio gives an idea of company's operating efficiency. A high ratio indicates "safe"

liquidity, but also it can be a signal that the company has problems getting paid on its

receivable or have long inventory turnover, both symptoms that the company may not beefficiently using its current assets


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In this case every company has a acceptable current ratio over the period of time.

Profit margin:

Profit margin, net margin, net profit margin or net profit ratio all refer to a measure

ofprofitability. It is calculated by finding the net profit as a percentage of the revenue.

Net profit Margin = (Net Income / Revenue) x100

Significance:

Profit margin is an indicator of a company's pricing strategies and how well it controls costs.

Differences in competitive strategy and product mix cause the profit margin to vary among

different companies.

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

2005 2006 2007 2008 2009 2010 2011

TCS

Patni

Wipro

Infosys

HCL

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

2005 2006 2007 2008 2009 2010 2011

TCS

Patni

Wipro

Infosys

HCL
http://en.wikipedia.org/wiki/Profit_(accounting)http://en.wikipedia.org/wiki/Net_profithttp://en.wikipedia.org/wiki/Revenuehttp://en.wikipedia.org/wiki/Revenuehttp://en.wikipedia.org/wiki/Net_profithttp://en.wikipedia.org/wiki/Profit_(accounting)


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Most of the companies suffered a dip in profit during the recession of 2008 and recovered

later. However Patni computers has seen a spike in margin mainly due to the layoffs in

recession which meant it was working on zero bench.

Debt To Equity Ratio:

The debt-to-equity ratio (D/E) is a financial ratio indicating the relative proportion of

shareholders' equity and debt used to finance a company's asset. Closely related to

leveraging, the ratio is also known as Risk, Gearing or Leverage. The two components are

often taken from the firm's balance sheet or statement of financial position (so-called book

value), but the ratio may also be calculated using market values for both, if the company's

debt and equity are publicly traded, or using a combination of book value for debt and

market value for equity financially.

Debt to Equity Ratio = Total Liabilities / Owners Equity or Net Worth

Significance of Debt to Equity Ratio:

Debt to equity ratio indicates the proportionate claims of owners and the outsiders against

the firms assets. The purpose is to get an idea of the cushion available to outsiders on the

liquidation of the firm. However, the interpretation of the ratio depends upon the financial

and business policy of the company. The owners want to do the business with maximum of

outsider's funds in order to take lesser risk of their investment and to increase their earnings

(per share) by paying a lower fixed rate of interest to outsiders. The outsiders creditors) onthe other hand, want that shareholders (owners) should invest and risk their share of

proportionate investments. A ratio of 1:1 is usually considered to be satisfactory ratio

although there cannot be rule of thumb or standard norm for all types of businesses.

Theoretically if the owners interests are greater than that of creditors, the financial position

is highly solvent. In analysis of the long-term financial position it enjoys the same

importance as the current ratio in the analysis of the short-term financial position.


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From the analysis of balance sheet it is found that Infosys is a zero debt company. The debt

to equity ratios of other companies are also acceptable. There is a rise in debt to equity ratio

of wipro due to the following reasons

Wipro acquires Oki Techno Centre Singapore Pvt Ltd(OTCS) in 2007 and then Citi'sIndian IT arm in 2008.

HCL's debt shot up in 2009 as it took a $585 million for acquiring British Sap specialistAxon.

PE RATIO:

The P/E ratio (price-to-earnings ratio) of a stock (also called its "P/E", or simply "multiple")

is a measure of the price paid for a share relative to the annual net income or profit earned

by the firm per share. The P/E ratio can therefore alternatively be calculated by dividing the

company's market capitalization by its total annual earnings.

Significance:

The PE ratio is the current price of the stock divided by the reported earnings per share of

the stock. As a result the PE of a stock is subject to daily change. Since, the future earningsof a company are often built into the price of a stock, the PE ratio signifies to what extent

the price is valued at the earning of the share of the past year. It is essentially the price you

are willing to pay for Re 1 of a company's earnings. Given that future earnings of a company

are uncertain, robust companies are able to extract a premium for their earnings. It has little

to do with the returns that a stock could deliver. As a result you cannot use it as a means to

forecast future performance, to elucidate further; PE of 18.50 times does not mean that the

stock price will essentially grow to 18.50 times. It only means that investors are valuing the

stock at 18.50 times of its earnings.

0

0.25

0.5

0.75

1

2005 2006 2007 2008 2009 2010 2011

TCSPatni

Wipro

Infosys

HCL


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PE ratio is a function of share price and that's why we see the most fluctuations in this

graph.

Most of the companies saw a dip during the recession and once again picked up after 2009.

But Patni started rising before others. We found two reasons for this. One as explained in

the profit margin graph that it had started layoffs and improved its margin. And at the same

time Patni was also linked with IBM, Fujitsu and NTT for a stake sale.

Scope for improvement:

As we have the data some of the companys data for financial year 2011 was notfound. So the improvement can be done by taking their current 2011 data.

We have taken only 5 companies but we have left out companies like Mahindrasatyam due to their complexity of value due to satyam scam. That could have lead us

to a very different results.

Also company like Accenture has been left out because only 30% of their employeesare Indians.

We have taken 7 parameters to do the financial analysis. So there is a scope that wecan include some of the other parameters and also find out the effect of change in

one parameter to the other parameter.

Annual reports can be extensively used for detailed analysis. To understand the IT industry it is also desirable to take some small it companies.

Because the effect of change in economic environment to the big companies is

somehow less responsive due to their large size. So in the improvement we can add

some of the small emerging IT companies to identify the pattern more effectively.


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Conclusion

We have compared the top five IT companies namely

TCS Infosys Wipro HCL Patni

These companies were analyzed on the following parameters

Operating Income Operating Income Trend Analysis Earnings Per Share Profit Margin Current Ratio Debt Equity Ratio Price Earnings Ratio

Based on our analysis, at this point of time TCS and HCL are the most growing IT companies

in India. Their growth rates and profit margin look the best at the moment. TCS is the

biggest and it has now beaten Infosys as Investors top pick. HCL because of its lower base

and strong growth rate has a huge upside potential.

Bibliography

The following references were used

http://www.capitaline.com/new/index.asp http://www.patni.com/ http://www.tcs.com/homepage/Pages/default.aspx http://www.infosys.com/pages/index.aspx http://www.hcl.in/ http://www.wipro.com/Pages/Index.aspx
http://www.capitaline.com/new/index.asphttp://www.capitaline.com/new/index.asphttp://www.patni.com/http://www.patni.com/http://www.tcs.com/homepage/Pages/default.aspxhttp://www.tcs.com/homepage/Pages/default.aspxhttp://www.infosys.com/pages/index.aspxhttp://www.infosys.com/pages/index.aspxhttp://www.hcl.in/http://www.hcl.in/http://www.wipro.com/Pages/Index.aspxhttp://www.wipro.com/Pages/Index.aspxhttp://www.wipro.com/Pages/Index.aspxhttp://www.hcl.in/http://www.infosys.com/pages/index.aspxhttp://www.tcs.com/homepage/Pages/default.aspxhttp://www.patni.com/http://www.capitaline.com/new/index.asp

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Accounting Project Report FM