ANALYSIS OF FINANCIAL STATEMENTS OF INFOSYS LIMITED

TABLE OF CONTENTS:

(1) INTRODUCTION TO IT INDUSTRY

(2) PROFILE OF INFOSYS LIMITED

(3) OBJECTIVE OF ANALYSIS AND METHODOLOGY

(4) FINANCIAL ANALYSIS USING RATIO ANALYSIS

(5) INTERPRETATIONS OF THE RATIOS

(6) RECOMMENDATIONS

(7) REFERENCES

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INTRODUCTION TO IT INDUSTRYThe Information technology industry in India has gained a brand identity as a knowledge economy due to its IT and ITES sector. The IT–ITES industry has two major components: IT Services and business process outsourcing (BPO). The growth in the service sector in India has been led by the IT–ITES sector, contributing substantially to increase in GDP, employment, and exports. The sector has increased its contribution to India's GDP from 1.2% in FY1998 to 4.8 % during the quarter in FY2013. The major cities that account for about nearly 90% of this sectors exports are Bangalore, Chennai, Hyderabad, Delhi, Mumbai and Kolkata. Bangalore is considered to be the Silicon Valley of India because it is the leading IT exporter. Export dominate the IT–ITES industry, and constitute about 77% of the total industry revenue. Though the IT–ITES sector is export driven, the domestic market is also significant with a robust revenue growth. The industry’s share of total Indian exports (merchandise plus services) increased from less than 4% in FY1998 to about 25% in FY 2012. The "Top Six Indian IT Services Providers" are Tata Consultancy Services, Infosys, Wipro, HCL Technologies, and Tech Mahindra, Mind Tree.

This sector has also led to massive employment generation. The industry continues to be a net employment generator - expected to add 230,000 jobs, thus providing direct employment to about 2.8 million, and indirectly employing 8.9 million people. Generally dominant player in the global outsourcing sector. However, the sector continues to face challenges of competitiveness in the globalized and modern world

The IT sector has been India's sunshine sector for quite some time now. The industry has contributed considerably to changing India's image from a slow developing economy to a global player in providing world class technology solutions. According to the IBEF (India Brand Equity Foundation) figures, the Indian IT industry is set to touch $225 billion by 2020. Industry experts and NASSCOM say the Indian IT workforce will touch 30 million by 2020, becoming the highest sector employer. This will be coupled with steady increase in pay in a sector already offering a high base. The outsourcing industry too is looking towards India and is expected to be a $2.5 billion industry in the next 24 months.

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ABOUT INFOSYS

Infosys technologies Ltd. was started in 1981 by seven people with US$ 250. Today, we are a global leader in the “next generation” of IT and consulting with revenues of over US$ 4 billion. Infosys is a NYSE listed global consulting and IT services company with more than 155,000 employees. From a capital of US$ 250, it has grown to become a US$ 7.398 billion (FY14 revenues) company with a market capitalization of approximately US$ 31 billion.

Infosys defines designs and delivers technology-enabled business solutions that help Global 2000 companies win in a Flat World. Infosys also provides a complete range of services by leveraging our domain and business expertise and strategic alliances with leading technology providers.

Infosys’ offerings span business and technology consulting, application services, systems integration, product engineering, custom software development, maintenance, re-engineering, independent testing and valuation services, IT infrastructure services and business process outsourcing.

Infosys pioneered the Global Delivery Model (GDM), which emerged as a disruption force in the industry leading to the rise of offshore outsourcing. The GDM is based on the principle of taking work to the location where the best talent is available, where it makes the best economic sense, with the least amount of acceptable risk.

Infosys has a global footprint with over 50 offices and development centers in India, China, Australia, the Czech Republic, Poland, the UK, Canada and Japan. Infosys and its subsidiaries have 105,453 employees.

Infosys take pride in building strategic long-term client relationship. Over 97% of Infosys revenue comes from its customers.

Milestones of Infosys over last 5 years:

2013

Infosys Board appoints N. R. Narayana Murthy as Executive Chairman of the Board

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Infosys begins trading on NYSE Euronext London and Paris markets

Infosys Edge™ wins the NASSCOM Business Innovation Award for 2013

Infosys presented with ‘2013 Environmental Tracking Carbon Ranking Leader’ award

Infosys employee strength grows to over 155,000

2012

Listed on the NYSE market Infosys acquires Lodestone Holding AG, a leading management consultancy based in

Switzerland

Forbes ranks Infosys among the world's most innovative companies

Infosys among top 25 performers in Caring for Climate Initiative

Infosys crosses the US$ 7 billion revenue mark

2011

N. R. Narayana Murthy hands over chairmanship to K.V. Kamath Infosys crosses US$ 6 billion revenue mark, employee strength grows to over

130,000

2010

Infosys crosses the US$ 5 billion revenue mark

2009

Infosys opens its first development center in Brazil and second Latin American development center in Monterrey, Mexico

Infosys selected as a member of The Global Dow

Employee strength grows to over 100,000

LOCATIONS

Infosys has 87 global software development centers of which 32 are in India and 55 are outside India. It has 69 sales offices around the world of which 2 are in India and 67 are outside India.

In recent years, Infosys has begun shifting operations to the United States and other countries outside of India. In 2012, Infosys announced a new office in Milwaukee,

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Wisconsin to service Harley-Davidson, being the 18th international office in the United States. Infosys hired 1,200 United States employees in 2011, and expanded the workforce by an additional 2,000 employees in 2012. Globally, Infosys has 67 offices between the US, India, China, Australia, Japan, Middle East, United Kingdom, Germany, France, Switzerland, Netherlands, Poland, Canada.

ACQUISITIONS

In December 2003, Infosys had acquired Australia-based IT service provider Expert Information Services for $23 million.

In December 2009, Infosys BPO acquired Atlanta-based McCamish Systems for about $38 million.

In January 2012, Infosys BPO acquired Australia-based Portland Group, provider of strategic sourcing and category management services, for about AUD 37 million.

In September 2012, Infosys acquired Switzerland-based Lodestone Management Consultants for about $345 million.

CURRENT SHAREHOLDING

As of 30 June 2013:

Shareholders ShareholdingPromoters group 16.04%

Life Insurance Corporation of India 06.72%

Aberdeen Asset Management PLC 03.89%

Abu Dhabi Investment Authority 02.35%

Oppenheimer Developing Markets Fund 02.13%

Financial Institutions and Individual investors 68.87%

Total 100.00%

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Board of directors

Name Designation

N R Narayana Murthy Executive ChairmanS D Shibulal Managing Director & CEOAshok Vemuri DirectorDavid L Boyles Independent DirectorJeffrey S Lehman Independent DirectorOmkar Goswami Independent DirectorR Seshasayee Independent DirectorB G Srinivas Director

S Gopalakrishnan Executive Vice ChairmanAnn M Fudge Independent DirectorV Balakrishnan DirectorDeepak M Satwalekar Independent DirectorLeo Puri Independent DirectorRavi Venkatesan Independent DirectorSrinath Batni DirectorK V Kamath Independent Director

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PROFILE OF INFOSYS LIMITEDHISTORY

Infosys was co-founded in 1981 by N.R. Narayana Murthy, Nandan Nikelani, N.S. Raghavan, S. Gopalakrishnan, S.D. Shibulal, K. Dinesh and Ashok Arora after they resigned from Patni Computer Systems. The company was incorporated as "Infosys Consultants Pvt Ltd." with a capital of $250 in Model Colony, Pune as the registered office and signed up its first client, Data Basics Corporation, in New York. In 1983, Infosys corporate headquarters was relocated to Bangalore.

CHANGE IN NAME

It changed its name to "Infosys Technologies Private Limited" in April 1992. It changed its name to "Infosys Technologies Limited" when it became a public limited company in June 1992. It was later renamed to "Infosys Limited" in June 2011.On 1 June 2013, Mr. Narayana Murthy, one of the founding members of Infosys and its long time CEO, returned from his retirement to assume office in Infosys as its Executive Chairman.

LISTING

Infosys made an initial public offer (IPO) in February 1993 with an offer price of Rs. 95 per

share against book value of Rs. 10 per share. Interestingly, Infosys IPO was under-

subscribed but it was "bailed out" by US investment banker Morgan Stanley which picked

up 13% of equity at the offer price.Its shares were listed in stock exchanges in June 1993

with trading opening at Rs. 145 per share. In October 1994, it made a private placement of

5,50,000 shares at Rs. 450 each against book value of Rs. 10 per share to Foreign

Institutional Investors(FIIs), Financial Institutions (FIs) and Corporates. In March 1999, it

issued 2,070,000 ADSs (equivalent to 1,035,000 equity shares of par value of Rs. 10 each)

at US $34 per ADS under the American Depositary Shares Program and the same were

listed on the NASDAQ National Market in US. The total issue amount was US $70.38 million.

The share price surged to Rs. 8,100 by 1999 making it the costliest share on the market at

the time. At that time, Infosys was among the 20 biggest companies by market 7

capitalization on the NASDAQ.During July 2003, June 2005 and November 2006, it made

secondary ADS issues of US $294 million, US $1.07 billion and US $ 1.605 billion

respectively.In December 2012, Infosys transferred the listing of its American Depositary

Shares (ADS) from the NASDAQ to the NYSE. The Credit Rating of the company is BBB+

(given by Standard and Poors  on 7-May-2010).

OPERARIONS

On 31 March 2013, Infosys had 798 clients across 30 countries. It earns 62% of its revenue from North America, 23% from EUROPE, 2% from India and remaining 13% from rest of the world. Infosys has 87 global software development centers of which 32 are in India and 55 are outside India. It has 69 sales offices around the world of which 2 are in India and 67 are outside India.

In recent years, Infosys has begun shifting operations to the United States and other countries outside of India. In 2012, Infosys announced a new office in Milwaukee, Wisconsin to service Harley-Davidson, being the 18th international office in the United States.Infosys hired 1,200 United States employees in 2011, and expanded the workforce by an additional 2,000 employees in 2012. Globally, Infosys has 67 offices between the US, India, China, Australia, Japan, Middle East ,United Kingdom, Germany, France, Switzerland, Netherlands, Poland, Canada.

BONUS SHARE AND ATOCK SPLIT

Fiscal Bonus Share Issue

Stock Split Ratio

1986 1:1 2 for 1

1989 1:1 2 for 1

1991 1:1 2 for 1

1992 1:1 2 for 1

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1994 1:1 2 for 1

1997 1:1 2 for 1

1999 1:1 2 for 1

2000 --- 2 for 1

2004 3:1 4 for 1

2006 1:1 2 for 1

Acquisitions

In December 2003, Infosys had acquired Australia-based IT service provider Expert Information Services for $23 million.

In December 2009, Infosys BPO  acquired Atlanta-based McCamish Systems for about $38 million.

In January 2012, Infosys BPO acquired Australia-based Portland Group, provider of strategic sourcing and category management services, for about AUD 37 million.

In September 2012, Infosys acquired Switzerland-based Lodestone Management Consultants  for about $345 million.

Current shareholding

As of 30 June 2013:

Shareholders Shareholding

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Promoters group 16.04%

Life Insurance Corporation of India 06.72%

Aberdeen Asset Management PLC 03.89%

Abu Dhabi Investment Authority 02.35%

Oppenheimer Developing Markets Fund 02.13%

Financial Institutions and Individual investors 68.87%

Total 100.00%

Initiatives

Infosys Foundation

In 1996, Infosys established the Infosys Foundation, to support the underprivileged

sections of society. At the outset, the Infosys Foundation implemented programs

in Karnataka. It subsequently covered Tamil Nadu , Andhra Pradesh , Maharashtra, Odisha,

and Punjab in a phased manner. A team at the Foundation identifies programs in the areas

of Healthcare, Education, Culture, Destitute Care and Rural Development.

Academic Entente

Infosys' Global Academic Relations team forges Academic Entente (AcE) with academic and

partner institutions. It explores co-creation opportunities between Infosys and academia

through case studies, student trips and speaking engagements. They also collaborate on

technology, emerging economies, globalization, and research. Some initiatives include

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research collaborations, publications, conferences and speaking sessions, campus visits and

campus hiring.

Infosys Labs

Infosys Labs is organized as a global network of research labs and innovation hubs.

Infosys Labs collaborates with leading national and international universities such as

the University of Southern California Viterbi School of Engineering, University of

Cambridge, Queensland University of Technology, University of Illinois at Urbana

Champaign, Indian Institute of Technology Bombay, IITB Monash Research

Academy, Purdue University , International Institute of Information Technology Bangalore.

Infosys Prize is an annual award given to scientists, researchers, engineers and social

scientists in India. It is given by the Infosys Science Foundation, a not-for-profit trust which

was set up in February 2009 by Infosys and some members of its Board. The prize is given

under six categories. Each category includes a gold medallion, a citation certificate, and

prize money of Rs. 50 Lacs.

Employees

Infosys had a total of 156,688 employees as on 31 March 2013, of which 34.7% were

women. Its workforce consists of employees representing 89 nationalities working from 32

countries. Out of its total workforce, 79% are software professionals, 15% are working in

its BPO arm and remaining 5% work for support and sales. The attrition rate of Infosys

Ltd., excluding its subsidiaries, for 12 months ending 31 March 2013, was 16.3%.

During FY 2012-13, Infosys received 378,994 applications from prospective employees and

had a gross addition of 37,036 employees.

Training Centre in Mysore

As the world's largest corporate university, the Infosys global education centre in the 340

acre  campus has 500 instructors and 200 classrooms, with international benchmarks at its

core. Established in 2002, it had trained around 100,000 engineering graduates by June

2012. It can train 12,000 employees with 3 batches of 4000 employees for 4 months each.

Infosys Leadership Institute (ILI)

ILI based in Mysore has 96 rooms and trains about 400 Infoscians annually to become

'leaders'.

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List of CEOs

Name Period

N. R. Narayana Murthy

1981 to March 2002

Nandan Nilekani March 2002 to April 2007

S Gopalakrishnan April 2007 to August 2011

S D Shibulal August 2011 till date

Awards and Recognitions

Infosys has consistently been honored by clients, industry bodies, media and other

influencers. It was ranked #19 amongst the world's most innovative companies by Forbes.

The company was ranked number one among the best managed companies in Asia Pacific

in the annual Euro money Best Managed Companies in Asia survey, 2013 and named a

leader in The Forrester Wave: Enterprise Mobility Services, Q1 2013 report.

The company also won the Oracle Excellence Award for Specialized Partner of the Year –

North America in both Financial Management and Human Capital Management categories,

at Oracle OpenWorld2012.

Boston Consulting Group  has listed it in the list of top ten technology companies for total

shareholder return. Infosys was in the list of top twenty green companies in Newsweek's

Green Rankings for 2012.

It has been voted India's most admired company in The Wall Street Journal  Asia 200 every

year since 2000. The company's corporate governance practices were recognized by The

Asset Platinum award and the IR Global Rankings. Infosys was also ranked as the 15th most

trusted brand in India by The Brand Trust Report .

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Infosys Cloud Ecosystem Hub won the 2012 Golden Peacock Award for the most innovative

product/service.

OBJECTIVE OF ANALYSIS AND METHODOLOGY

OBJECTIVE OF THE STUDY:

The objective of the study is to analyze the financial statements of Infosys Limited using the technique of ratio analysis so as to determine:

The financial position, i.e. strength and weakness of the firm over the past years. The performance levels of the firm over the years compared with the industry and

its competitor. The efficiency of management policy framework and its execution levels. The future prospects of the firm in terms of overall growth in the industry.

METHODOLOGY USED:

1. Source of data : The data extracted for the purpose of analysis is from a secondary but reliable source.

2. Period of analysis : The period taken into consideration for the purpose financial analysis is from financial years ranging from 2009 to 2013, i.e. March 2009: 1/4/2009 to 31/3/2010 March 2010: 1/4/2010 to 31/3/2011

March 2011: 1/4/2011 to 31/3/2012

March 2012: 1/4/2012 to 31/3/2013

March 2013: 1/4/2013 to 31/6/2013

3. Technique used for analysis : The technique used for the financial analysis is 13

ratio analysis. A ratio analysis is a statistical yardstick by means of which relationship between two or various accounting figures can be compared or measured. It is essentially concerned with the calculation of relationships which after proper identification and interpretation may provide information about the operations and state of affairs of a business enterprise.

The analysis is used to provide indicators of past performance in terms of critical success factors of a business. This assistance in decision-making reduces reliance on guesswork and intuition and establishes a basis for sound judgment.

Why only ratio analysis is used for financial analysis?

Simplifies financial statements

Facilitates inter-firm comparison: It provides data for inter-firm comparison. Ratios highlight the factors associated with successful and unsuccessful firm. They also reveal strong firms and weak firms, overvalued and undervalued firms.

Helps in planning: It helps in planning and forecasting. Ratios can assist management, in its basic functions of forecasting. Planning, co-ordination, control and communications.

Makes inter-firm comparison possible: Ratios analysis also makes possible comparison of the performance of different divisions of the firm. The ratios are helpful in deciding about their efficiency or otherwise in the past and likely performance in the future.

Help in investment decisions: It helps in investment decisions in the case of investors and lending decisions in the case of bankers etc.

Provides sufficient insight to appraise the future prospect of the firm.

Types of Ratios Analyzed:

(a) LIQUIDITY RATIOS :Liquidity refers to the ability of a firm to meet its short-term financial obligations when and as they fall due. The main concern of liquidity ratio is to measure the ability of the firms to meet their short-term maturing obligations. Failure to do this will result in the total failure of the business, as it would be forced into liquidation. Current Ratio: Current ratio may be defined as the relationship between

current assets and current liabilities. This ratio is also known as "working capital ratio". It is a measure of general liquidity and is most widely used to make the analysis for short term financial position or liquidity of a firm. It is calculated by dividing the total of the current assets by total of the current liabilities.

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Current Ratio = Current Assets / Current Liabilities

This ratio is a general and quick measure of liquidity of a firm. It represents the margin of safety or cushion available to the creditors. It is an index of the firm’s financial stability. It is also an index of technical solvency and an index of the strength of working capital.

A relatively high current ratio is an indication that the firm is liquid and has the ability to pay its current obligations in time and when they become due. On the other hand, a relatively low current ratio represents that the liquidity position of the firm is not good and the firm shall not be able to pay its current liabilities in time without facing difficulties. An increase in the current ratio represents improvement in the liquidity position of the firm while a decrease in the current ratio represents that there has been a deterioration in the liquidity position of the firm. A ratio equal to or near 2 : 1 is considered as a standard or normal or satisfactory. The idea of having double the current assets as compared to current liabilities is to provide for the delays and losses in the realization of current assets. However, the rule of 2 :1 should not be blindly used while making interpretation of the ratio. Firms having less than 2 : 1 ratio may be having a better liquidity than even firms having more than 2 : 1 ratio. This is because of the reason that current ratio measures the quantity of the current assets and not the quality of the current assets. If a firm's current assets include debtors which are not recoverable or stocks which are slow-moving or obsolete, the current ratio may be high but it does not represent a good liquidity position.

Quick Ratio: The quick ratio, also referred to as acid test ratio, examines the ability of the business to cover its short-term obligations from its “quick” assets only (i.e. it ignores stock & prepaid expenses).

As a general rule of thumb suggests that the quick ratio should be around 1.

Quick Ratio = Quick Assets / Current Liabilities

The quick ratio/acid test ratio is very useful in measuring the liquidity position of a firm. It measures the firm's capacity to pay off current obligations immediately and is more rigorous test of liquidity than the current ratio. It is used as a complementary ratio to the current ratio. Liquid ratio is more rigorous test of liquidity than the current ratio because it eliminates inventories and prepaid expenses as a part of current assets. Usually a high liquid ratios an indication that the firm is liquid and has the ability to meet its current or liquid liabilities in time and on the other hand a low liquidity ratio represents that the firm's liquidity position is not good. As a convention, generally, a quick ratio of "one to one" (1:1) is considered to be satisfactory. Although liquidity ratio is more rigorous test of liquidity than the current ratio, yet it should be used cautiously and 1:1 standard should not be used blindly. A liquid ratio of 1:1 does not necessarily mean satisfactory liquidity position of the firm if all the debtors cannot be realized and cash is needed immediately to meet the current obligations. In the same manner, a low liquid ratio does not necessarily mean a bad liquidity position as inventories are not absolutely non-liquid. Hence, a firm having a high liquidity ratio may not have a satisfactory liquidity position if it has slow-paying debtors. On the other hand, A firm having a low liquid ratio

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may have a good liquidity position if it has a fast moving inventories. Though this ratio is definitely an improvement over current ratio, the interpretation of this ratio also suffers from the same limitations as of current ratio.

(b) CAPITAL STRUCTURE/ LEVERAGE RATIOS- Any ratio used to calculate the financial leverage of a company to get an idea of the company's methods of financing or to measure its ability to meet financial obligations. There are several different ratios, but the main factors looked at include debt, equity, assets and interest expenses. It is a ratio used to measure a company's mix of operating costs, giving an idea of how changes in output will affect operating income. Fixed and variable costs are the two types of operating costs; depending on the company and the industry, the mix will differ.

Debt-Equity Ratio: Debt-to-Equity ratio indicates the relationship between the external equities or outsiders funds and the internal equities or shareholders funds. It is also known as external - internal equity ratio. It is determined to ascertain soundness of the long term financial policies of the company. Debt to equity ratio indicates the proportionate claims of owners and the outsiders against the firm’s 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 outsider creditors on the 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 owner’s 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.

Debt Equity Ratio = External Equities / Internal Equities

INTEREST COVERAGE RATIO- A ratio used to determine how easily a company can pay interest on outstanding debt. The interest coverage ratio is calculated by dividing a company's earnings before interest and taxes (EBIT) of one period by the company's interest expenses of the same period:

The lower the ratio, the more the company is burdened by debt expense. The interest coverage ratio is used to determine how easily a company can pay interest expenses

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on outstanding debt. When a company's interest coverage ratio is 1.5 or lower, its ability to meet interest expenses may be questionable. An interest coverage ratio below 1 indicates the company is not generating sufficient revenues to satisfy interest expenses. A ratio under 1 means that the company is having problems generating enough cash flow to pay its interest expenses. Ideally, you want the ratio to be over 1.5.

(c) PROFITABILITY RATIOS: Profitability is the ability of a business to earn profit over a period of time. Although the profit figure is the starting point for any calculation of cash flow, as already pointed out, profitable companies can still fail for a lack of cash. Without profit, there is no cash and therefore, profitability must be seen as a critical success factors. A company should earn profits to survive and grow over a long period of time. Profits are essential, but it would be wrong to assume that every action initiated by management of a company should be aimed at maximizing profits, irrespective of social consequences.

Profitability is a result of a larger number of policies and decisions. The profitability ratios show the combined effects of liquidity, asset management (activity) and debt management (gearing) on operating results. The overall measure of success of a business is the profitability which results from the effective use of its resources.

Gross profit ratio: It is the ratio of gross profit to net sales expressed as a percentage. It expresses the relationship between gross profit and sales. Gross profit ratio may be indicated to what extent the selling prices of goods per unit may be reduced without incurring losses on operations. It reflects efficiency with which a firm produces its products. As the gross profit is found by deducting cost of goods sold from net sales, higher the gross profit better it is. There is no standard GP ratio for evaluation. It may vary from business to business. However, the gross profit earned should be sufficient to recover all operating expenses and to build up reserves after paying all fixed interest charges and dividends.

Gross Profit Ratio = (Gross profit / Net sales) × 100

Net profit ratio: Net profit ratio is the ratio of net profit (after taxes) to net sales. It is expressed as percentage. The two basic components of the net profit ratio are the net profit and sales. The net profits are obtained after deducting income-tax and, generally, non-operating expenses and incomes are excluded from the net profits for calculating this ratio. Thus, incomes such as interest on investments outside the business, profit on sales of fixed assets and losses on sales of fixed assets, etc are excluded. NP ratio is used to measure the overall profitability and hence it is very useful to proprietors. The ratio is very useful as if the net profit is not sufficient, the firm shall not be able to achieve a satisfactory return on its investment. This ratio also indicates the firm's capacity to face adverse economic conditions such as price competition, low demand, etc. Obviously, higher the ratio the better is the profitability. But while interpreting

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the ratio it should be kept in mind that the performance of profits also be seen in relation to investments or capital of the firm and not only in relation to sales.

Net Profit Ratio = (Net profit / Net sales) × 100

Expenses Ratio: A measure of what it comes to an investment company to operate a mutual fund an expense ratio is determined through an annual calculation, where a fund's operating expenses are dividend by the average dollar value of its assets under management. Operating expenses are taken out of a fund's assets and lower the return to a fund's investors. It is also known as Management Expense Ratio (MER). The expense ratio of a stock or asset fund is the total percentage of fund assets used for administrative, management, advertising (12b-1), and all other expenses. An expense ratio of 1% per annum means that each year 1% of the fund's total assets will be used to cover expenses. The expense ratio does not include sales loads or brokerage commissions.

Operating profit ratio: The operating profit ratio is another measurement of management’s efficiency. It compares the quality of a company’s operations to its competitors. A business that has a higher operating margin than its industry’s average tends to have lower fixed costs and a better gross margin, which gives management more flexibility in determining prices. This pricing flexibility provides an added measure of safety during tough economic times.

Return on Capital Employed: It is the ratio of net profit to share holder's investment. It is the relationship between net profit (after interest and tax) and share holder's/proprietor's fund. This ratio establishes the profitability from the share holders' point of view. The ratio is generally calculated in percentage. The two basic components of this ratio are net profits and shareholder's funds. Shareholder's funds include equity share capital, (preference share capital) and all reserves and surplus belonging to shareholders. Net profit means net income after payment of interest and income tax because those will be the only profits available for share holders. This ratio is one of the most important ratios used for measuring the overall efficiency of a firm. As the primary objective of business is to maximize its earnings, this ratio indicates the extent to which this primary objective of businesses being achieved. This ratio is of great importance to the present and prospective shareholders as well as the management of the company. As the ratio reveals how well the resources of the firm are being used, higher the ratio, better are the results. The interfirm comparison of this ratio determines whether the investments in the firm are attractive or not as the investors would like to invest only where the return is higher.

Return on investment = [Net profit (after interest and tax) / Net worth] × 100

Earnings Per Share ratio(EPS): EPS Ratio is a small variation of return on equity capital ratio and is calculated by dividing the net profit after taxes and preference dividend by the total number of equity shares. The earnings per share

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is a good measure of profitability and when compared with EPS of similar companies, it gives a view of the comparative earnings or earnings power of the firm. EPS ratio calculated for a number of years indicates whether or not the earning power of the company has increased.

Earnings per share (EPS) Ratio = (Net profit after tax − Preference dividend) / No. of equity shares (common shares)

Dividend per Share (DPS): The sum of declared dividends for every ordinary share issued. Dividend per share (DPS) is the total dividends paid out over an entire year (including interim dividends but not including special dividends) divided by the number of outstanding ordinary shares issued. DPS can be calculated by using the following formula:

where, D - Sum of dividends over a period (usually 1 year)SD - Special, one time dividends

S - Shares outstanding for the period

Dividends per share are usually easily found on quote pages as the dividend paid in the most recent quarter which is then used to calculate the dividend yield. Dividends over the entire year (not including any special dividends) must be added together for a proper calculation of DPS, including interim dividends. Special dividends are dividends which are only expected to be issued once so are not included. The total number of ordinary shares outstanding is sometimes calculated using the weighted average over the reporting period. 

Dividend Payout Ratio: It is calculated to find the extent to which earnings per share have been used for paying dividend and to know what portion of earnings has been retained in the business. It is an important ratio because ploughing back of profits enables a company to grow and pay more dividends in future. The payout ratio is the indicator of the amount of earnings that have been ploughed back in the business. The lower the payout ratio, the higher will be the amount of earnings ploughed back in the business and vice versa. A lower payout ratio or higher retained earnings ratio means a stronger financial position of the company.

Dividend Payout Ratio = Dividend per Equity Share / Earnings per Share

(d) ACTIVITY RATIOS : If a business does not use its assets effectively, investors in the business would rather take their money and place it somewhere else. In order for the assets to be used effectively, the business needs a high turnover. Unless the business continues to generate high turnover, assets will be idle as it is impossible to buy and sell fixed assets continuously as turnover changes. Activity ratios are therefore used to assess how active various assets are in the business.

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Increased turnover can be just as dangerous as reduced turnover if the business does not have the working capital to support the turnover increase. As turnover increases more working capital and cash is required and if not, over trading occurs.

Debtor’s Turnover Ratio: A concern may sell goods on cash as well as on credit. Credit is one of the important elements of sales promotion. The volume of sales can be increased by following a liberal credit policy. The effect of a liberal credit policy may result in tying up substantial funds of a firm in the form of trade debtors (or receivables). Trade debtors are expected to be converted into cash within a short period of time and are included in current assets. Hence, the liquidity position of concern to pay its short term obligations in time depends upon the quality of its trade debtors. Debtor’s turnover ratio indicates the velocity of debt collection of a firm. In simple words it indicates the number of times average debtors (receivable) are turned over during a year. This ratio indicates the number of times the debtors are turned over a year. The higher the value of debtor’s turnover the more efficient is the management of debtors or more liquid the debtors are. Similarly, low debtors turnover ratio implies inefficient management of debtors or less liquid debtors. It is the reliable measure of the time of cash flow from credit sales. There is no rule of thumb which may be used as a norm to interpret the ratio as it may be different from firm to firm.

Debtors Turnover Ratio = Net Credit Sales / Average Trade Debtors

Inventory Turnover Ratio: A ratio showing how many times a company's inventory is sold and replaced over a period. The days in the period can then be divided by the inventory turnover formula to calculate the days it takes to sell the inventory on hand or "inventory turnover days.”

Although the first calculation is more frequently used, COGS (cost of goods sold) may be substituted because sales are recorded at market value, while inventories are usually recorded at cost. Also, average inventory may be used instead of the ending inventory level to minimize seasonal factors.

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This ratio should be compared against industry averages. A low turnover implies poor sales and, therefore, excess inventory. A high ratio implies either strong sales or ineffective buying.

High inventory levels are unhealthy because they represent an investment with a rate of return of zero. It also opens the company up to trouble should prices begin to fall.

A low turnover is usually a bad sign because products tend to deteriorate as they sit in a warehouse. Companies selling perishable items have very high turnover. For more accurate inventory turnover figures, the average inventory figure, ((beginning inventory + ending inventory)/2), is used when computing inventory turnover. Average inventory accounts for any seasonality effects on the ratio.

Working Capital Turnover ratio: It indicates the velocity of the utilization of net working capital. This ratio represents the number of times the working capital is turned over in the course of year.The working capital turnover ratio measures the efficiency with which the working capital is being used by a firm. A high ratio indicates efficient utilization of working capital and a low ratio indicates otherwise. But a very high working capital turnover ratio may also mean lack of sufficient working capital which is not a good situation. If the information about cost of sales is not available the figure of sales may be taken as the numerator.

Working Capital Turnover Ratio = Cost of goods sold / Net Working Capital

Fixed Assets Turnover Ratio: It is also known as sales to fixed assets ratio. This ratio measures the efficiency and profit earning capacity of the concern. Higher the ratio, greater is the intensive utilization of fixed assets. Lower ratio means under-utilization of fixed assets. The ratio is calculated by using following formula:

Fixed Assets Turnover Ratio = Cost of goods sold / Net Fixed Assets

Method used for interpretation: The interpretation of the various ratios are done at two levels :

(i) The individualistic firm’s performance from financial years 2009 to 2013. For example, in the case of interpreting the current ratio the data interpreted will be shown in this manner:

Mar'09 Mar'10 Mar'11 Mar'12 Mar'134.31 4.34 4.65 3.98 4.3

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(ii) The firm’s performance pitched with the industrial performance and competitor (TCS). For example, in the data interpreted for the current ratio will be shown in this manner :

MAR’13 MAR’12 MAR’11 MAR’10 MAR’09

INDUSTRY 2.285 2.36 2.50 2.23 2.14

INFOSYS 4.31 4.34 4.65 3.98 4.3

TCS 3 2.69 2.85 1.87 2.22

Data of Industry: For arriving at a rational interpretation the industry’s data is imperative. The performance of the firm’s ratios with respect to industrial ratios for the period FY05 to FY08 is a relevant yardstick for gauging the firm’s overall performance.

Now, for calculating the industrial ratios, the cumulative data of the following firms are taken into consideration:

Infosys

Tata Consultancy Services(TCS)

Wipro

HCL

Tech Mahindra

Mindtree

Profile of TCS: Tata Consultancy Services Limited (TCS) is an Indian multinational information technology (IT) services, business solutions and consulting company headquartered in Mumbai, Maharashtra  TCS operates in 44 countries and has 199 branches across the world.  It is a subsidiary of the Tata Group and is listed on the Bombay Stock Exchange and the National Stock Exchange of India. TCS is the largest Indian company by market capitalization and is the largest India-based IT services company by 2013 revenues.

 

(7) Why TCS chosen to be a competitor for comparison: As we can reckon from the above profile of TCS that it has substantial presence in India as well as it is trying to expand globally. The firm has greater exposure to the market, market capitalization and revenue centers than TCS.

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Therefore comparing Infosys with TCS, will provide us with a rationale of appraising the futuristic position of Infosys in the industry as it comes to the levels of TCS, as in the future Infosys will have approximately more market capitalization as TCS has it today.

FINANCIAL ANALYSIS USING RATIO ANALYSIS

LIQUIDITY RATIOS:Current Ratio of Infosys-

Mar '13 Mar '12 Mar '11 Mar '10 Mar '09

4.31 4.34 4.65 3.98 4.3

As per the rule of thumb says that the current ratio should be at least 2:1, that is the current assets should meet current liabilities at least twice, is considered as satisfactory.

Now, by seeing the current ratios of Infosys from 2009 to 2013, we can easily examine that there is first increasing trend, followed by decreasing trend in Mar'12 and increased to 4.3 in Mar'13.

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As we can observe that the firm was having a high current ratio in Mar’09, that is 4.31 which higher than the standard. This figure can be explained with the fact that the firm was trading with less current liabilities in its books, as we compare the current liabilities of Mar’13 with Mar’12.

In Mar’10,it had a strong liquid figure with a substantial increase in fixed deposits and short term loans and advances, though there was an increase in current liabilities by 19.9% from Mar’09, but it was not sufficient to curb the high current ratio i.e. 4.34 still ways above the standards.

In Mar’11, it touched the highest current ratio, i.e. 4.65 in the last 5 years. It had a strong liquid figure with huge increase in fixed deposits (51.86%), though there was an increase in current liabilities by 17.19% from Mar’10, but it was not sufficient to curb the high current ratio, i.e. 4.65 still ways above the standards.

In Mar’12, the current ratio was corrected with a quantum dip, it was 14.40% less than Mar’11. This major correction was experienced with further more introductions of current liabilities which increased with 32.80% compared with Mar’11 and with the complete removal of the funds locked up in the fixed deposits and substantial reduction of short term loans and advances. The firm was having a weakest current ratio as compared with the others i.e. 3.98, it just managed to sweep through its current liabilities.

In Mar’13, , the current ratio showed an improving positive sign and the firm managed to attain a high current ratio, far away from the standards i.e. 4.3. This can be explained by again substantial increase in the loans and advances and sundry debtors which contributed a 80.46% to the total current assets and a reduced rate of increase in current liabilities i.e. only 14.28% as compared with Mar’12.

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COMPARISON AMONG INFOSYS, TCS AND INDUSTRY-

MAR’13 MAR’12 MAR’11 MAR’10 MAR’09

INDUSTRY 2.285 2.36 2.50 2.23 2.14

INFOSYS 4.31 4.34 4.65 3.98 4.3

TCS 3 2.69 2.85 1.87 2.22

As we can observe from the above chart that Infosys has always been an outperformer in maintaining its high current ratio above the industry benchmark. This shows a respectful management of working capital as per current ratio performance.

On the other hand, TCS has been managing to fulfill its current liabilities with always over performing the industry standards, but way far from the levels of Infosys. Its current ratio position has been increasing from 2.22 IN Mar’09 to 3 in Mar’13. It just managed to cover up its current liabilities in Mar’10. It has to improve on its current ratio to compete with the levels of Infosys.

QUICK RATIO OF INFOSYS-

Mar’13 Mar’12 Mar’11 Mar’10 Mar’09

4.25 4.27 4.56 3.89 4.26

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As the quick ratio represents the ability of the firm to cover its current liabilities without considering its inventories and it also provides us with an insight much clear and deeper than the current ratio. It shows the performance of quick assets in compensating the current liabilities and presents us with weight of funds blocked in inventories.

As the rule of thumb, a quick ratio of 1:1 is considered satisfactory.

Now, as we can observe from the chart above that the quick ratio of Infosys has always remained above the standards, though having a increasing trend followed by a decreasing trend and has followed the same pattern as that of the current ratio, which provides us with a rational that the firm is not dependant on its inventories for clearing its current liabilities and the firm has as an efficient inventory management, as the funds locked up in inventories does not affect the liquidity position of the firm.

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This chart above in-depth interprets that the quick ratio of Infosys is always following the same trend as that of the current ratio. The difference is because of the absence of inventories in quick assets and the minute difference reflects a strong liquidity front for Infosys as it can clear its current liabilities without liquidating its inventories.

COMPARISON AMONG INFOSYS, TCS AND INDUSTRY-

Mar’13 Mar’12 Mar’11 Mar’10 Mar’09

Industry 2.45 2.59 2.62 2.24 2.14

Infosys 4.25 4.27 4.56 3.89 4.26

TCS 3.01 2.66 2.83 1.86 2.21

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As we can observe from the chart above that Infosys has always performed above the industry standards and has shown its strong liquidity front with a high quick ratios. This also reflects its efficient planning in investing funds into its inventory and having least dependency on inventory for clearing its current liabilities, which is far better than the industrial standards.

On the other hand, TCS is following up the industry trend and is far below than Infosys. In fact in the case of quick ratios, its position has slightly weakened as compared with its position in current ratios because of the exclusion of inventories. It has to improve the way of planning in investing funds into its inventory, so as to have minimal dependency on inventory for clearing up the current liabilities and to touch the level of Infosys.

CAPITAL STRUCTURE/ LEVERAGE RATIOS:

1. DEBT EQUITY RATIO -

This ratio measures the proportion of Debt and Capital , both equity and preferences, in the capital structure of a company. In other words it measures the extent of assets financed through long term borrowing.

DEBT EQUITY RATIO = Long term Debt/ (Equity Shareholders Fund+ Preference Capital)

The ratio helps in assessing whether a company is relying more on debts or capital financing for more assets. Higher the debts, more is the financial risk of defaults in intrests and debt service. It

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also hampers the capacity of a company to raise cheaper funds. A high capital content means not passing the cost differential of debt and equity to the equity holders.

Debt Equity Ratio (Infosys)

Mar ‘13 Mar ‘12 Mar ‘11 Mar ‘10 Mar ‘09

- - - - -

As we know that Infosys is a 0 debt firm, So the debt part is 0 which is the numerator part of the ratio so so the debt equity ratio is 0 all over.

Debt Equity Ratio Comparison (Infosys, TCS, Industry)

Mar ‘13 Mar ‘12 Mar ‘11 Mar ‘10 Mar ‘9

Infosys - - - - -

TCS 0.01 0.01 0.01 0.01 0.04

Industry 0.1 0.16 0.2 0.13 0.22

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While comparing the company performance with the competitor TCS and with the overall IT industry The graph prepared above shows that Infosys is a 0 debt firm, So the debt part is 0 which is the numerator part of the ratio so the debt equity ratio is 0 all over. When we observe the condition of TCS we found that the in the period 2009-10 the ratio decreased with a high ate that can happen in only two situations. First one is about the debt part which according to the graph seems to be decreasing which is a good sign for the firm.

Secondly the other condition could be that the share holders fund and the preference shares have increased which good and beneficial for future. As a comparison Infosys is a 0 debt company so it is unmatchable but TCS is also balancing the ratio in last 4 years that determines the company performance is consistent

Now keeping the whole industry in the mind the debt equity ratio is overall decreasing in last five years and an increment of 53% in year 2010-11. It seems the industry is doing well but the comparison is with Infosys the second one is far better.

2. INTEREST COVERAGE RATIO -

The ratio measures the capacity of a company to pay the intrest liability it has incurred on its long term borrowing, out of its each profit. It is also known as times intrest covered.

INTEREST COVERAGE RATIO = (Profit after tax + interest on long term debt + noncash charges) / interest on long term debt

The ratio helps in assessing whether a company is comfortably placed to service its interest’s obligations out of revenues it is generating. Higher the ratio, greater the ability of a company to service interest, lesser the financial risk of default and higher the comfort level of the lender.

Interest Coverage Ratio (Infosys)

Mar ‘13 Mar ‘12 Mar ‘11 Mar ‘10 Mar ‘09

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- - - - -

As we know that Infosys is a 0 debt firm, so the debt part is 0 which is the denominator part of the ratio so the debt equity ratio is 0 all over. In other words we can say that the Company has concern only with the profit there is no debt or financial liability that’s a very overwhelming fact

Interest Coverage Ratio (Infosys, TCS, Industry)

Mar ‘13 Mar ‘12 Mar ‘11 Mar ‘10 Mar ‘9

Infosys - - - - -

TCS 374.06 627.33 415.57 519.56 240.84

Industry 143.18 199.98 140.72 188.65 70.07

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As we know that Infosys is a 0 debt firm, so the debt part is 0 which is the denominator part of the ratio so the debt equity ratio is 0 all over. In other words we can say that the Company has concern only with the profit there is no debt or financial liability that’s a very overwhelming fact

While comparing with TCS the graph shows continuous rise and fall in every year. In the year 2009-10 the ratio has a drastic increase in the interest coverage ratio that means either the debt part is decreasing or profit is increasing. Both things signifying the rise of the company that’s a good thing but it decreased rapidly in the next financial year but after is again has a drastic increase of 210 percent in the profit in the period 2011-12. Then there is a downfall but overall the company is running in profit. The profit is increased 55% in the last 5 year time that is 2009-13.The company performance is not consistent we can say, overall.

Now talking about the industry, the ratio has increased 105% as an overall performance of the industry. But the performance is not good or consistent.

PROFITABILITY RATIOS:

1. Profit Ratios based on turnover -

a. Gross Profit Ratio of Infosys-

Mar’13 Mar’12 Mar’11 Mar’10 Mar’09

25.85 29.04 29.51 30.59 29.67

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As we can observe from the above chart that the gross profit ratio of Infosys has shown a more over a sluggish growth from 29.67% in Mar’09 to 25.85% in Mar’13. This sluggish growth in gross profit ratio can be explained from the fact that as the net sales heavily increased by 86.01% from Mar’09 to Mar’13, but on the other hand the cost of goods sold also increased in a similar weight. The cost of goods sold were increasing proportionately with the increase in the net sales, therefore leaving us with a sluggish growth rate of gross profit ratio from Mar’09 to Mar’13, but the positive point here is that in spite of such increasing rate of cost of goods the firm managed in maintaining the levels of gross profit ratio, with proportionately increasing the growth in net sales.

COMPARISON AMONG INFOSYS, TCS AND INDUSTRY-

Mar’13 Mar’12 Mar’11 Mar’10 Mar’09

Industry 19.35 19.46 19.55 21.68 21.32

Infosys 25.85 29.04 29.51 30.59 29.67

TCS 26.92 27.64 27.98 26.82 23.75

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As we can observe from the chart above that Infosys has always performed with higher gross profit ratios as compared with the industrial standards as well as with its peer (TCS).

Despite of suffering with the highest growth rate in cost of goods sold, it has able to generate sufficient growth rate in net sales to maintain its high gross profit ratio in the industry. However, TCS has better gross profit ratio than Infosys in Mar’13. The reason for this can be attributed as the reduction in cost of goods sold with slight increase in net sales.

This is a positive sign for Infosys in case of general profitability position as it maintain its high gross profit margins from Mar’09 to Mar’12, but it has to increase its net sales along with the reduction in cost of goods sold to compete with main competitor (TCS) to maintain its high profitability position in the IT Industry.

b. Net Profit Ratio of Infosys-

Mar’09 Mar’10 Mar’11 Mar’12 Mar’13

26.48 26.49 23.84 23.41 22.07

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As we can examine from the above chart that the net profit ratio which is represented by the percentage of net sales has shown an decreasing trend from 26.48% in Mar’09 to 22.07% in Mar’13. This can be explained by the fact that net profit increased by 57.46% from Mar’09 to Mar’13 which is much lower than the increase in net sales, i.e. 86.01% . Thus, the net profit ratio decreased by 19.99% from Mar’09 to Mar’13.

COMPARISON AMONG INFOSYS, TCS AND INDUSTRY-

Mar’09 Mar’10 Mar’11 Mar’12 Mar’13

Industry 14.26 19.27 16.07 15.75 17.47

Infosys 26.48 26.49 23.84 23.41 22.07

TCS 18.69 23.07 23.93 21.11 21.68

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As we can examine from the chart above that Infosys has shown a stable performance in maintaining a high overall net profit ratio as compared with the industry as well as with its peer(TCS) over a period of time, i.e. Mar’09 to Mar’13. In Mar’11, TCS gave a hard time to Infosys and matched up with the level of Infosys, but unable to maintain in the further years. Now, let’s compare the net sales, to reckon the efficiency in producing net profits.

Mar’09 Mar’10 Mar’11 Mar’12 Mar’13

Industry 15,072 16,312 19,621 24,616 28,241

Infosys 21,693 22,742 27,501 33,734 40,352

TCS 27,812 30,028 37,324 48,893 62,989

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By observing the chart above, we can analyze that the scale of net sales for Infosys are greater than IT Industry standards, but lower than TCS. It is clearly visible after examining the above graph that TCS is on a different level than Infosys, its way above in the scale of net sales. We can say that TCS is approximately 100% above Infosys in respect to net sales from Mar’09 to Mar’13.

After comparing the net sales and the net profit ratio of Industry, Infosys and TCS, we can say that as the net sales of Infosys are lower than TCS, but it is a better performer in its net profit ratio. This means that Infosys performs efficiently in generating better net profits with comparatively less net sales. Hence, this proves that Infosys is trading at better spreads as compared with its peer and industry. This is a positive sign for Infosys for its profitability as per net profit ratio is concerned.

c. Selling and Administrative Expenses Ratio of Infosys-

Mar’09 Mar’10 Mar’11 Mar’12 Mar’13

7.85 7.87 7.94 8.47 4.99

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We can observe from the above graph that Infosys follows an increasing trend from Mar’09 to Mar’12 and the followed by a decreasing trend from Mar’12 to Mar’13. Thus, it can be interpreted as Infosys always managed to maintain its selling and administrative expenses ratio far above industry standards. In Mar’12, the firm is attaining lowest expense ratio over 5 years which is favorable for a firm. This can be explained as reduction in the selling and administrative expenses by 41.08% from Mar’12 to Mar’13.

COMPARISON AMONG INFOSYS, TCS AND INDUSTRY-

Mar’09 Mar’10 Mar’11 Mar’12 Mar’13

Industry 8.88 6.55 5.35 6.13 0.83

Infosys 7.85 7.87 7.94 8.47 4.99

TCS 6.51 6.37 5.09 0.00 0.00

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It can be observed from the graph that Infosys has higher selling and administrative expenses ratio than its peer(TCS) AND IT Industry standards.

On the other hand, TCS, is far below from the industry standards in selling and administrative ratios and is far away from Infosys.

d. Operating Profit Ratio of Infosys-

Mar’09 Mar’10 Mar’11 Mar’12 Mar’13

33.18 34.57 32.61 31.79 28.58

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As we can observe from the above chart that the operating profit ratio followed an increasing trend from 33.18% in Mar’09 to 34.57% in Mar’10, followed by a decreasing trend from 34.57% in Mar’10 to 28.58% in Mar’13. This increase in the operating profit ratio from Mar’09 to Mar’10 can be explained by the fact that the gross profit increased by 55.65% and the operating expenses only increasing by 45.6%, which gives a strong numerator number for the ratio and for the denominator side the net sales increased by 48.4% from Mar’09 to Mar’10. The operating profit ratio presented a downward trend from 34.57% in Mar’10 to 28.58% in Mar’13. This can be explained by fact that the operating expenses increased by 51.5% from Mar’10 and the gross profit increased by only 29.94% because of reduction in cost of goods sold, which gives a weak numerator number for the operating profit ratio as compared with previous years and the net sales also increased by only 35.11% .

COMPARISON AMONG INFOSYS, TCS AND IT INDUSTRY-

Mar’09 Mar’10 Mar’11 Mar’12 Mar’13

Industry 24.42 24.99 22.57 22.19 21.88

Infosys 33.18 34.57 32.61 31.79 28.58

TCS 25.77 29.02 29.95 29.52 28.63

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As we can reckon from the chart above that Infosys is an out performer in its operating profit ratio. The firm is above the industrial standard performance and is far above from its peer (TCS) from Mar’09 to Mar’12. This shows that the company has kept its operating expenses in control in an efficient manner for generating greater operating profits. This is again a positive sign for the firm’s general profitability as operating profit ratio is concerned.

On the other hand, TCS continued to control its operating expenses in an efficient manner which resulted in the increasing operating profit ratio from 25.77% in Mar’09 to 28.63% in Mar’13. In Mar’13, TCS controlled its operating expenses in an efficient manner for generating greater operating profits and thus, matched up with the level of Infosys.

2. Profit Ratios Based on Investment :

a. Return on Capital Employed of Infosys-

Mar’09 Mar’10 Mar’11 Mar’12 Mar’13

40.25 34.1 35.74 37.18 33.68

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As we can observe from the above chart that the return on capital employed for Infosys follows an decreasing trend from 40.25% in Mar’09 to 33.68% in Mar’13. This decreasing trend can be explained by the fact that the net profits after tax of the firm increased sluggishly and average capital employed increased from Mar’09 to Mar’10, resulting in the downfall of return on capital employed.

In Mar’10 to Mar’12, the ratio increased by 34.1% to 37.18%. This explains the better utilization of funds and the profitability of the company and rate of impressive return on capital employed.

In Mar’13, the ratio decreased 37.18% from Mar’12 to 33.68%. The slight drop in the ratio value for the financial year 2013indicates a marginal reduction in the returns available to the concern, yet the overall figure holds good for the firm.

COMPARISON AMONG INFOSYS, TCS AND INDUSTRY-

Mar’09 Mar’10 Mar’11 Mar’12 Mar’13

Industry 39.17 35.66 27.68 29.27 30.19

Infosys 40.25 34.1 35.74 37.18 33.68

TCS 42.44 45.04 44.77 46.96 46.67

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From the chart we can observe that the return on capital employed of Infosys has been following industry standards majorly. The ratio has followed a stable and steady path unlike than its peer which had a increasing trend always. In Mar’11, Infosys crossed the industrial standards and ended up just below its peer(TCS).

By analyzing the following we can say that Infosys might not be having a high return on capital employed in the industry but has a stable and steadily increasing return on investment. This represents that the firm is less volatile in its returns and has shown a stable sustained growth in case of R.O.I, which means that the shareholders fund are not entangled in high variable returns and hence they bear the least risk on their investment. This is a positive sign from the point of investment in case of long-term investments as per R.O.I is concerned.

b. Earnings Per Share(EPS) of Infosys-

Mar’09 Mar’10 Mar’11 Mar’12 Mar’13

101.58 101.13 112.22 147.5 158.75

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As we can observe from the above chart that EPS of Infosys has followed an increasing trend from 101.58 in Mar’09 to 158.75 in Mar’13 with a change of 56.28% .This represents a strong earning power of the firm as the ratio has followed an increasing trend and has followed the same path as that of return on equity, which in turn is a positive sign. The increasing E.P.S is a positive sign for the profitability of the firm but we have to compare it with its peers to have a rational projection of the profitability.

COMPARISON AMONG INFOSYS and TCS-

Mar’09 Mar’10 Mar’11 Mar’12 Mar’13

Infosys 101.58 101.13 112.22 147.5 158.75

TCS 47.92 28.62 38.62 55.97 65.23

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As we can observe from the above chart that both firms have followed an increasing trend in their respective earning per share ratio. This means that both the firms have earning power in the industry and they contribute positively to the earnings of the whole industry as well as to the return to their respective shareholders.

Now, as we can observe that Infosys is above its peer in its E.P.S ratio. Hence, we can say that Infosys has the potential of earning and has performed in its E.P.S. increasingly over the years and the firm has the scope of increasing its earning power by coming up to the level of sales as that of its peer.

c. Dividend Per Share of Infosys-

Mar’09 Mar’10 Mar’11 Mar’12 Mar’13

23.50 25.00 60.00 47.00 42.00

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We can observe from the graph that the ratio has increased at a faster growth from Mar’10 to Mar’11, but followed by the decreasing trend. Increasing ratio of dividend per share is a positive sign and the company management believes that the company growth can be sustained in the coming future. It shows the exact amount of profit earned by the owners and thus, attracts more investors and shareholders in the company.

COMPARISON AMONG INFOSYS AND TCS-

Mar’09 Mar’10 Mar’11 Mar’12 Mar’13

Infosys 23.5 25 60 47 42

TCS 14 20 14 25 22

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We can observe from the graph that Infosys has always better dividend per share ratio that TCS and showed better profits to the owners. Infosys has followed an increasing trend from 24.5 in Mar’09 to 60 in Mar’11 and followed decreasing trend afterwards, but maintained its position at top of the IT Industry.

On the other hand, TCS has always underperformed that Infosys and has to earn better profits to the owners by efficient utilization of the resources to match up with the level of Infosys, though it has also an increasing trend from Mar’09 to Mar’10 and Mar’11 to Mar’12, but not able to maintain its results.

d. Dividend Payout Ratio of Infosys-

Mar’09 Mar’10 Mar’11 Mar’12 Mar’13

26.26 26.71 58.71 37.51 29.69

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As we can observe from the above chart that the dividend payout ratio of Infosys as followed an overall increasing trend from 26.26 in Mar’09 to 58.71% in Mar’11 with an impressive increase of just 123.57% over 3 years and then followed decreasing trend from 58,71% in Mar’11 to 29,69 in Mar’13.

The chart reflects that after Mar’11, the firm started to payout less percent of dividend and retained the rest to build its retained earnings block for its long term/expansion objectives.

A clear analysis about this ratio can be made after comparing it with its peer and industry.

COMPARISON AMONG INFOSYS, TCS AND INDUSTRY-

Mar’09 Mar’10 Mar’11 Mar’12 Mar’13

Industry 24.70 25.19 30.17 30.09 26.82

Infosys 26.26 26.71 58.71 37.51 29.69

TCS 30.59 65.54 35.32 54.85 36.21

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As we can observe from the above chart that the industry has a increasing trend in its dividend payout ratio, which means that the every player in the industry is trying to retain its earning to maximum and give the least dividend, so as to build their respective ‘retained earning’ block for utilizing the retained funds in its long term/expansion objectives. Hence we can depict from this phenomena that the IT Industry in India is at its expansion.

Now, Infosys dividend payout ratio has not followed the industrial trend and is always above the industrial standard but is way below the levels of TCS. This means that the firm is paying out dividend at a higher rate as compared with the industry but that rate is much lesser than that of its peer. Hence we can comment that the firm is building up its ‘retained earning’ block with a greater rate as compared with its peer but can be more restrictive in its dividend paying out policy, as it is still way above the industrial standards. This also reflects that Infosys is in a better position to perform on its long term/expansion plans as it is saving up its earnings at a much greater rate than its peer. This is a positive sign for Infosys as per the dividend payout ratio is concerned.

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ACTIVITY RATIOS:

1. DEBTOR TURNOVER RATIO

Debtors Turnover Ratio is calculated to comment upon the liquidity/efficiency with which the liquid resources are being used by the firm.

DEBTOR TURNOVER RATIO = Net credit sales / Average debtors

Net credit sales = Total sales –cash sales– sales return

Average debtors= (Opening debtor + closing debtor)/ 2

A high Debtors ratio indicates less credit time allowed by the firm to its clients and it is good and the vice versa. Average Collection period shows the velocity of debt collection of a firm. It also shows the number of times the average debtors (receivables) are turned over during a year.

Debtor Turnover Ratio (Infosys)

Mar ‘13 Mar ‘12 Mar ‘11 Mar ‘10 Mar ‘09

6.22 6.4 6.75 6.35 6.23

As the graph shows the ratio is almost constant allover except having the increment in 2010-11 that shows the company had max credit sales in that period as comparing to last 5 years.

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Debtor Turnover Ratio (Infosys, TCS, Industry)

Mar ‘13 Mar ‘12 Mar ‘11 Mar ‘10 Mar ‘9

Infosys 6.22 6.4 6.75 6.35 6.23

TCS 4.92 4.96 5.31 5.06 4.88

Industry 5.26 5.5 5.71 5.23 5.26

Now for the comparison we know that As the graph shows the ratio is almost constant allover except having the increment in 2010-11 that shows the company had max credit sales in that period as comparing to last 5 years.

In case of TCS the analysis shows that there is an increment of 8.8% from the period 2009-11 and same decrement in the period 2011-13. The overall ratio is increased in five year period .

Now comparing with the industry the same pattern is going as in case of Infosys and TCS.

As an overall comment the pattern is same so we can say they are performing consistently but the value is greater in case of Infosys so it is the more better among all the three standards we have taken. The table shows that Infosys has the greater net credit sales which makes the ratio greater everywhere and than anyone in the sector.

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2. INVENTORY TURNOVER RATIOS

This ratio shows how fast the inventory can be sold. Actually inventory is always seen as less liquid able item and it costs the company. Japanese Company like Toyota discovered Just in Time approach to reduce the inventory cost. A high inventory ratio is good from the point of view of better and quick utilization of inventory.

INVENTORY TURNOVER RATIOS= Cost of goods sold / Average inventory

Cost of goods sold = Total net sales / Gross profit

Average inventory = (opening inventory –closing inventory) /2

A low inventory ratio represent that the inventory in slow moving and costs the company in the form of carrying cost i.e. salary of stores persons, lighting, rent, insurance etc.

Inventory Turnover Ratio (Infosys)

Mar ‘13 Mar ‘12 Mar ‘11 Mar ‘10 Mar ‘09

- - - - -

Actually inventory is always seen as less liquid able item and it costs the company. In case of Infosys the value is 0 because of no inventories. Having no problem is the best solution of every problem so there is the problem of inventory we are talking about and Infosys doesn’t has this.

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Inventory Turnover Ratio (Infosys, TCS, Industry)

Mar ‘13 Mar ‘12 Mar ‘11 Mar ‘10 Mar ‘9

Infosys - - - - -

TCS 2978.23 2751.48 2048.55 2120.69 860.55

Industry 1508.6 1443.1 913.87 963.45 528.99

Comparing it with the industry and the competitor TCS as we know that actually inventory is always seen as less liquid able item and it costs the company. In case of Infosys the value is 0 because of no inventories. Having no problem is the best solution of every problem so there is the problem of inventory we are talking about and Infosys doesn’t has this.

Now talking about TCS we can see by the graph that the inventory ratio is high and is getting higher by the time that means the inventory is moving very fastly and that’s a good thing. The ratio is drastically increased by 246.2% and that’s great.

In case of industry the same pattern can be observed from the graph and the increment is 185%, but above all the ratio is the greatest in case of Infosys.

3. WORKING CAPITAL TURNOVER RATIO

The ratio shows the number of times the working capital is turned over in the course of the year.

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WORKING CAPITAL TURNOVER RATIO=Cost of goods sold / Net working capital

This ratio measures the efficiency with which the working capital is being used by a firm. A higher ratio shows efficient working capital and low ratio indicates otherwise.

Working Capital Turnover Ratio (Infosys)

Mar ‘13 Mar ‘12 Mar ‘11 Mar ‘10 Mar ‘09

246.22 260.08 262.75 221.33 214.08

This ratio measures the efficiency with which the working capital is being used by a firm. As higher the ratio will be, the company will said to b efficiently using money. Here the graph shows that the ratio increased in the year 2009-11 and then decreasing in the further period that means the company’s working capital is being used efficiently in the first half and then the efficiency decreased the percentage increment and downfall are 22.5% and 6% respectively. And overall it’s increasing by 13%.

Working Capital Turnover Ratio (Infosys, TCS, Industry)

Mar ‘13 Mar ‘12 Mar ‘11 Mar ‘10 Mar ‘9

Infosys 246.22 260.08 262.75 221.33 214.08

TCS 148.2 138.39 138.18 89.84 96.75

Industry 106.53 119.83 113.69 99.47 92.15

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This ratio measures the efficiency with which the working capital is being used by a firm. As higher the ratio will be, the company will said to b efficiently using money. Here the graph shows that the ratio increased in the year 2009-11 and then decreasing in the further period that means the company’s working capital is being used efficiently in the first half and then the efficiency decreased the percentage increment and downfall are 22.5% and 6% respectively. And overall it’s increasing by 13%.

In case of TCS the overall increment is 54% in the period 2009-13 that means the company is efficiently using money for itself.

In case of overall industry the ratio is increased by 15 % in 5 years and decreased by 10 percent in last year. Comparing all, the overall performance is much better in case of Infosys.

4. FIXED ASSETS TURNOVER RATIO

The ratio measures the extent of turn over or volume of gross income generated by the fix assets of a company or in other words the efficiency in its utilization.

FIX ASSET TURNOVER RATIO= Net sales / Average working capital

Capital work in progress does not lead to revenue generation; Hence it is not included here.

Fix assets are the income generating assets of the company .Naturally the more efficiency they are utilized, the more they contributed towards operating revenue and it turn more towards return on net worth (RONW). An analyst therefore made to study and assess the fixed asset efficiency of a company.

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Fix Asset Turnover Ratio (Infosys)

Mar ‘13 Mar ‘12 Mar ‘11 Mar ‘10 Mar ‘09

4.48 4.22 3.63 3.29 3.39

This ratio shows the extent to which the investment in fixed asset contributes to sales. In case of Infosys the ratio is constantly increasing during the 5 year period. The overall increment is 32% that means the company has continuously utilizing its fix assets in this period.

Fix Asset Turnover Ratio (Infosys, TCS, Industry)

Mar ‘13 Mar ‘12 Mar ‘11 Mar ‘10 Mar ‘9

Infosys 4.48 4.22 3.63 3.29 3.39

TCS 5.73 5.18 5.18 5.07 5.23

Industry 4.42 4.03 3.88 3.62 3.68

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Here the pattern is same for industry and for TCS the permanently increasing pattern is being followed. The thing is Infosys is doing the job with an average speed that is 10% per year. TCS is doing the same with a very slow rate that is 2 % per year and the industry is using its fix assets with the higher rate of 20% as compared to the others.

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INTERPRETATIONS OF THE RATIOS

OVERALL LIQUIDITY PERFORMANCE OF INFOSYS LIMITED:

From the above trend analysis of the liquidity ratios of Infosys from March 2009-13 and comparative analysis between Industry vs. Infosys vs. TCS.

We can positively draw upon the following results:

(1) Infosys has always performed outstandingly and above the industry standards as per the liquidity of the firm is concerned.

(2) Infosys has shown abundant and surplus net current assets which reflects that the firm has efficient working capital management policies. This can be seen observed from the following chart.

MAR’13 MAR’12 MAR’11 MAR’10 MAR’09

INDUSTRY 2.285 2.36 2.50 2.23 2.14

INFOSYS 4.31 4.34 4.65 3.98 4.3

TCS 3 2.69 2.85 1.87 2.22

Now we can observe that after clearing off all the current liabilities Infosys is still having surplus current assets and it has never experienced a liquidity crunch ( as its peer TCS has, which had lower net current ratio in Mar’10), adding to this the firm is maintaining higher liquidity position as compared to the industrial standards.

(3) Infosys has proven the fact that it does not depends upon its inventory to clear up the current liabilities and has sound inventory management system as the optimum level of funds have been allocated for maintaining appropriate inventories. And as we have observed in the quick ratio aspect, the firm has a reasonable percentage of contribution of inventories in its total current assets.

(4) The dependency on Loans and Advances for covering up the current liabilities is minimal in the case of Infosys as compared with TCS, which highly depends on its

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Loans and Advances as well as compared with the industrial standards. This can observed in the following data:

Percentage of Loans and Advances in Total Current Assets, Loans and Advances (%) on an average from Mar’09 to Mar’13

This a very positive sign for Infosys with respect to the liquidity front of the firm.

OVERALL PROFITABILITY PERFORMANCE OF INFOSYS LIMITED:

From the above trend analysis of the profitability ratios of Infosys from March 2009-2013 and comparative analysis between Industry vs. INFOSYS vs. TCS.

We can positively draw upon the following results:

(1) Infosys has managed its operations efficiently in producing its products and maintains its high gross profit ratio, which is highest in the industry.

(2) Infosys has maintained highest operating profit ratio in the industry. This reflects that the firm is managing its affairs with efficient management policies, cost control techniques and overall productivity. This provides a positive sign for the investors, as their funds are used and applied with highest utility.

(3) The firm has performed outstandingly in generating high net profit ratios in the industry, giving reliance to its investors for their respective investment.

(4) The firm has maintained a consistently increasing return on capital employed ratio, which follows the industrial patterns as well as which are stable, steady and least volatile in nature. This provides a positive sign for the investors as their respective investments are not baring high degree of risk.

(5) The EPS of the firm has also witnessed an increasing trend that adds up value to the firm, the firm has consistently performed in increasing its earnings from the period Mar’09 to Mar’13 which is a positive aspect for the investors as their investments are earning decent, stable and steady returns and which are exposed to least variance/risk, which is the most suitable in today’s market condition..

(6) The dividend payout ratio suggests us that the firm has a restrictive dividend paying out policy and has a practice of ploughing back its earnings into its reserves for

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Industry 37.87

Infosys 0

TCS 62.53

further efficient utilization in contributing into its long term/expansion plans as compared with its peer.

OVERALL ACTIVITY PERFORMANCE OF INFOSYS LIMITED

From the above trend analysis of the Activity ratios of Infosys Limited from 2009-13 and comparative analysis between Industry v/s Infosys Limited v/s TCS.

We can positively draw upon the following results

(1) The firm has efficient debtor’s turnover ratio with an average stock velocity period . This and are operating efficiently as we can see from the comparison Infosys has higher debtor turnover ratio all over than industry and TCS both. There is a highest rate in the year 2010-11. represents that the management is following and has planned a well-versed credit policy

(2) The firm has performed extremely well in its inventory turnover ratio which is 0 means that the management has effective inventory management policies so as to maintain its credit sales as well as recovering it with a superior debtor’s velocity.

(3) The firm performs with optimum working capital in its operation having a higher working capital turnover ratio. This represents that the management is operating efficiently with its working capital and has an efficient working capital management policies at its disposal.

(4) The firm has a low and poor performance in its fixed assets turnover ratio, this is a matter of concern for the management and they have to work hard to cope-up to the industrial standards. The firms fixed assets are underutilized and the management has to plan effectively so as to utilize its fixed assets to the maximum. The management has to work on :

Generating more volume sales

Flexibility in its credit policy to increase sales

Stringent costing of its goods.

OVERALL LEVERAGE PERFORMANCE OF INFOSYS LIMITED

Debt Equity Ratio While comparing the company performance with the competitor TCS and with the overall IT industry The graph prepared above shows that Infosys is a 0 debt firm, So the debt part is 0 which is the numerator part of the ratio so the debt equity ratio is 0 all over. When we observe the condition of TCS we found that the in the

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period 2009-10 the ratio decreased with a high ate that can happen in only two situations. First one is about the debt part which according to the graph seems to be decreasing which is a good sign for the firm.

Interest Coverage Ratio While comparing with TCS the graph shows continuous rise and fall in every year. In the year 2009-10 the ratio has a drastic increase in the interest coverage ratio that means either the debt part is decreasing or profit is increasing. Both things signifying the rise of the company that’s a good thing but it decreased rapidly in the next financial year but after is again has a drastic increase of 210 percent in the profit in the period 2011-12. Then there is a downfall but overall the company is running in profit. The profit is increased 55% in the last 5 year time that is 2009-13.The company performance is not consistent we can say, overall.

RECOMMENDATIONS AFTER THE ANALYSISAfter studying the Infosys’s profile, analyzing the financial statements of the firm from the period of Mar’09 to Mar’13 and comparative analysis of the various important business ratios between the firm, its peer (TCS) and the industry, I conclude my analysis with the following recommendations:

(A) For the MANAGEMENT

The management has implemented efficient inventory management policy which can be applauded with optimum levels of maintaining inventories as required by the sales turnover and executing efficient inventory velocity period, which the management can still has a scope to reduce it.

The firm’s fixed assets are fully utilized and the company has excessive stringent credit policy in its industry which is a positive aspect for the operations of the management. The management should improve its fixed assets turnover ratio in coming years by they should continue

Generating more volume sales by application of better sales promotion Relaxing its credit policy, so as to increase its sales turnover Working more stringently in controlling its direct expenses Starting operations from its new hotels without any delay

The management has performed outstandingly in keeping its operating expenses to the lowest in the industry. This represents that the management operates with efficient management policies, cost control techniques and high overall productivity. This framework should be maintained by the management as it can easily survive the present harsh market conditions.

The management is following a restrictive dividend paying out policy and has a practice of ploughing back its earnings into its reserves for further efficient utilization in contributing into its long term/expansion plans. This is a positive aspect of the dividend policy maintained by the management as it is in-sync with its vast expansion plans and

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the management can further correct its dividend-paying out percentages as the industry is more restrictive than in giving out dividends.

The management has framed an efficient working capital management policy and has also implemented it effectively. This can be reflected by its strong liquidity position and surplus net current assets and has never faced any liquidity crunch. The management has sufficient funds for maintaining its working capital requirements and does not rely on its debt portion of capital. Even if the trend shows that there is some additional current assets requirements but the same is justifiable since the company is into the expansion mode. Overall it should maintain its working capital management policies more stringently than before so as to sail through the present slowdown in the economy easily.

(B) For the SHAREHOLDERS :

The economy is facing a slowdown in its growth rate as well as the global economy is under recessionary pressure and the stock markets have driven into bearish modes. All these are negative factors which have affected the growth of IT Industry as well as for Infosys negatively.

Infosys is undergoing a huge expansion plan for its operation in the country by increasing its presence.

(C)For the DEBT-HOLDER’s : The firm has highly leveraged capital structure, which entails maximum risk for

the debt holders. The firm has till date covered the debt-burden effectively with high debt-service

ratios but the long term creditor’s should be more vigilant with its client as the major macroeconomic and industrial indicators indicate a slowdown.

The firm has introduced debt into its capital structure for facilitating its expansion plans but this could be very stringent time as well as testing period for the firm as the industry is in a slowdown and firm is into its expansion. So any delay in its expansion plans will affect the firm as well as the debt provider’s in a negative manner.

The long term creditor’s who have provided unsecured loans are in under maximum risk and should take effective steps to de-risk their respective investments.

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REFERENCES:The following are the references from where the relevant information and data for analysis purposes have been extracted:

Annual Report of Infosys Limited 2009-2013 http://www.infosys.com http://www.moneycontrol.com/ http://money.rediff.com http://economictimes.indiatimes.com/

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