TCS Valuation Raports

8/9/2019 TCS Valuation Raports

1/22

We are initiating the coverage of TCS with anOutperform rating and a 12-manth target price in therange of US$ 17 to 19.5. We anticipate that focusedstrategy on domestic market and European & Asiancountries will drive companys revenue on a sustainedgrowth path. The companys brand positioning, servicenetwork, various services, low attrition rate & segmentswill help in achieving the revenue and profitabilityprojections. Company internal R&D also contributing toreduce the cost and increase the efficiency of thecompany.

The companyhasbeenoutperforming the industry indomesticaswellasoverseassegment.Itdominateswitha31.05%marketshare.

Expect that consolidated revenue of the company isexpected to be in the range of $ 1689.2 Mn in JFM2009.The QOQ growth was 6.34% in OND2009 and YOYgrowth is 10.27%.

EBITDA margin for the FY10 is 25.73% on YOY basis. Gross margin improvement was not only because o

improvement in revenue but also cost cutting measures taken by management and expected to increase. Its notgrowing more some reason behind that is appreciation inrupees.

Recent share is trading at trailing at 22.1 FY09earnings. At the price of USD12.67, the company isexpected to trade at forward P/E of 27.76 for FY10 &20.44 for FY11.

Sector-IT Industry Current Market Price-Rs. 796.75Cygnus Business Consulting & Research Pvt. Ltd 31st March 2010

Source: BSEIndi* In June 2009 TCS has issued bonus shares in the ratio of 1:1

Relative Price Performance

0

50

100

150

200

250

1/4/2009

7/5/2009

4/6/2009

2/7/2009

30

-07

-

2009

27

-08

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2009

25

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2009

28

-10

-

2009

26

-11

-

2009

24

-12

-

2009

TCS BSE-IT SENSEX

Shareholding pattem

Promoters

74%

FII

12%

Other

8%

Others

0%

Financial

Institutions /

Banks

3%

Mutual Funds /

UTI

5%

Noninstitutional

investor

6%


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INVESTMENT RATIONALEIndustry on Growth TrackThe global IT industry is coming out of recession. IT industry in India is growing at 17 to 19percent. Over the past 3 years. It accounts for 5.8 per cent of Indias GDP and employs over 2.3million people directly and eight million indirectly. Indias IT and BPO (business process

outsourcing) services industry could be bringing in US$60 Bn in the year 2010, growing at over25% in YOY. Indias software and services exports were $17.2 Bn in this fiscal year. Theextended product portfolio and increased global customer base help in demonstrating Indiansoftware industry. The top ten companies still dominate accounting for 84 percent of the segmentrevenue. Indias domestic IT services market is the fastest growing market in Asia Pacific. ITservices contributing 57% of total software and service exports. Exports revenue growth rate is16 to 17% in the 2008-09 due to demand from vertical market is increasing. IT services(excluding BPO, Engineering Services, R&D) contributing to 57 percent of the total softwareexport, remains the dominant segment. India enjoys a cost advantage of around 60-70 percent ascompared to source markets. Indian ITSS industry is projected to increase from US$13.7Bn in2008 to US$24.6Bn in 2013.Expacted CAGR for 2008-13 is 12%. Additional productivity

improvements and the development of tier 2/3 cities as future delivery centers, is expected toenhance Indias cost competitiveness.

Top line growth leads to improve in volumeDuring the quarter ended OND 2009 TCS has registered a Net profit of INR18441.6MN, postinga growth of about 11%. India's largest information technology services provider, TataConsultancy Services, beat market expectations with its third quarter (October-December 2009)results. The growth drivers were North America and BFSI (banking financial services andinsurance), signaling a recovery in the sector. Financial services shows improvement as globalfinancial institution Started performing well after global Financial stimulates package theyhelped to growing in recession period. North America shows recovery where as Europe is under

performer. The main reason for this growth is improvement in USA economy & strong presencein USA market which leads to growth in business. TCS focus on new engagement model andresearch and innovation model to growing much more in future.

Operating efficiency keeps margin pressure under controlTCS has witnessed a growth of 2.89% in its revenue. The growth drivers were North Americaand BFSI (banking financial services and insurance), signaling a recovery in the sector. FromApril onward TCS has seencontinues growth. EBDITof TCS has grown about7.8% QOQ. EBDIT for

OND2009 was 21048.3whereas it was 19520.2 forJAS 2009. Gross marginimprovement was not onlybecause of improvement inrevenue but also costcutting measures taken bymanagement.T

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Consistent on growth path

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JAS2008 OND2008 JFM2009AMJ2009 JAS2009 OND2009

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%

EBDIT Net profit NPM(%)

Source: Companys Website


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Establishing footprint in International Market

On December 31, 2008 TCS acquired a 96.26 percent equity interest in Citi group (now knownas TCS e-serve limited), a BPO provider within BFS sector, for USD504.5mn include acquisitioncost USD2.5mn. It is very helpful for the company by this company want to establish theirfootprint in International BPO market. Citi group is a largest BPO provider in India with a

trained workforce. TCS is entitled to pay some specified claims on Citi group. Now TCS is in aposition to acquire new customers in addition to the existing client base and create substantialbusiness in BPO services in the BFS sector. TCS has also taken on board 300 associates at itssoftware delivery centre in Ohio (US) which help the company to increase their business in US.

RISK FACTORS

Over dependence on USThe companys revenue major part around 80% has been coming from the developed economiesand in the total revenue US contribute 60%. It shows company has more dependent on developed

nations. With economic slowdown along with the effect of credit squeeze across the globe andincrease in govt. bailouts, bankruptcies, company faced difficulties and the strategy ofconducting the business globally is changing continuously.

Exchange Rate RiskVolatility of the Indian rupee has had both positive and negative impact on the IT industry infiscal 2009. And it may continue in fiscal 2010. In the last fiscal year 2008-09 the company hassuffered foreign exchange loss of $779.8mn. So more volatility in exchange rate affects thecompany revenue in a big way. The scenario of exchange risk exposure is quite different inpresent era, currency movement have added an additional area of volatility.

Treasury RiskCompany does more hedging transaction for want to reduce their exchange risk. But it also arisetreasury risk, because the treasury operations have to conducted through banks which mandatedby RBI as authorized banks. And in it daily record are maintained of all such option & forwardcontract and daily P/L statement. In the recent downturn all leading banks have been affected invarying degree.

High Attrition Rate

High attrition rate of company is another risk for the company. In last fiscal year 2008-09 &JAS09 it stood at 11.4% which is less than compared to previous fiscal year 2007-08 and also itis low in the industry. But at that level it is also an issue for the company. The reason for high

attrition rate is the competitor activity; they are ready to provide more salaries to the employee ofrivalry companies and the experienced employee also ready to grab this opportunity whichconstitutes 58% level of employment in the company. Another reason for it is high employmentlevel of female around 30% in the company. Due to their marriage and family they are generallymove to other place so there is always high degree that they will leave the job. For reducing itcompany investing in learning and development programs for employees, empoweringemployees at all levels etc. due to it the company had achieved this low attrition rate in FY09 at11.4%.T

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Competitive risk

Increased competition could result in pressure on pricing and change pattern of some servicesand also create new services. Risk is also associated with innovation. Risk attach with translatingthe investment making in innovation into successful business opportunities for future is veryhigh. Biggest emerging competitor to Indian IT industry is Philippines.

FINANCIAL FORECAST AND ASSUMPTIONSRevenue of TCS is expected to grow by 21.23% in FY11 to touch at 7689.64 USD million. Itwill continue to grow at a CAGR 17.32% for the next five years from FY09 up to 2013-14.

The EBITDA will increases to 25.73% in FY10 to touch at US$1631.88million from US$1549.4million in FY09.

We anticipate that PAT would grow to US$1314.26 in FY10 from the level of US$1123.8 inFY09.we expect pat will continue to grow at a CAGR 21.43% for the next five years from FY09up to 2013-14.

Key Assumptions (Refer Financial Assumptions Table)

RevenueTheprojectionof revenuefromoperation isbasedupon thegrowthrateofdifferentverticalandgeographicalsegmentsandemployeeutilizationratio. It directlygivestherevenuefromoperationOverall revenueof thecompany isexpected to increaseby21.23% in FY11.Butweseeverticasegmentsofthecompanyisexpectedtogrowhigherthancompanyexpectedgrowthandalsoretail&Transportationande-governanceisexpectedtogrowathigherthanotherverticalofthecompanybutlittlebitlowerthancompanyexpectedgrowth.

IfweseegeographicalsegmentsofthecompanyAsiancountriesandMEAisexpectedtogrowat5%,5.6%andintheUSonlyIberoAmericaisexpectedtogrowby8.8%tillFY12.Thisishigherthanoverallcompanyexpectedgrowth.We calculated sales by taking the average of vertical sales and geographical sales Employeeutilizationratio.Operational Expenses1.CostofITandConsultancyserviceshasbeentakenasa51.20%ofnetsalesinFY10i.e,105basispointslowerthanthelevelofFY09.DuringFY10ithasbeenrecordedaslowerat51.75%ofnetsales.ItisexpectedtobedeclinebyFY12.

2.CostofequipmentandSoftwarelicenseswhichconstitutearound3.32%ofnetsalesinFY10.Ithasbeenexpectedonthebasisofpasttrendoflastsixquarter.InFY10itisexpectedtodeclineby53basispoints.3. Selling andAdministrationexpenseswhichconstitutearound 18.96%of net sales in FY10 isexpectedtobestablesomelittlebitlowerandupperfromthislevelbyFY12.4.Research&Developmentwhichconstitute0.25%ofnetsalesinFY10isexpectedtodeclineto0.11%ofsalesinFY12.IthasbeenexpectedtodeclinebecausecompanyhasestablisheditsownR&Dhub.

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5.Depreciationhasbeenlinkedwiththeassetsof thecompanyandtakesintoaccountthecapitainvestment of the companywhichdependsupon the recruitmentof the company and itdependuponthesalesofcompany.Itisexpectedthatitwillincreaseinthefuturesodepreciationhasbeenincreaseinthefuture.WecalculateddepreciationaftermaintainedthelevelofATR.

CapexCapitalexpenditurewhichconstitutearound8-10%ofnetsalesinthepastisnilintheFY09duetoglobalslowdown.ButintheFY10Companyhavetodothis.InFY10itisexpectedtospend7.7%ofnetsalesonCAPEXandexpected itis also leadbyFY11. It isdependupon saleswhichareexpected tobe increase in future.Weexpected thatCAPEXwillbe increasing on a sustainablerange.CAPEX is also indirectly linkedwith the employment levelof the companywhich is alsorelatedwithcompanysales.Tax RateWehavetakeneffectivetaxrateof14%forFY10uptill2012.Duetomoreexportcompanyhavetodotaxmanagementuntilnowandalsoavail thebenefitof taxholidaywhichisavailableuptoFY11andisexpectedtoincreasesubstantiallyinthefuture.Itisexpectedthatcompanywillalsodo

more taxplanning in future.Butdueto increase inMAT to18%from15%,effectivetaxof thecompanyisexpectedtoincreasefurther.Dividend DistributionWeexpectthatthedividendpayoutratioof thecompanywillsustaininthefutureontheleveloflittle low thanthepresent level. Thepast rangeof payout ratioof theCompany is 25-30%andcompanywillmaintainitinfutureonthelevelof30%.Current Assets and Current liabilitiesWeprojectedthecurrentassets(exceptcash)asa%ofsaleandexpectitwilllieinfuturearoundthispastlevel.Afteritwecalculatecurrentratioof lastthreeyearsanddecidetherangeof itfor

future.Thenatendwecalculatecurrentliabilitiesofthecompany.InvestmentsWeprojectinvestmentasa%ofsalesforthelastthreeyears.ButweleftthelastFY09andtaketheaverageof anothertwoyearsand expect that companywillmaintainatsomevariation from thislevel.ItwillbeincreasingataCAGRof16%by2012.AssetsWeexpectthattheassetsof thecompanyinfuturewillincreasebasedupontheexpectedsalesofthe company. After calculated A.T.R. for the last three years it is expected that company wilmaintained thesametrend in the future.Becausein ITcosassetsaregenerallydependupon the

sales.WeexpectthelevelofcompanyA.T.R.willmoveinthebetween7.50%-8.00%.Interest expensesCompanyhasalreadyused someamountofdebt but is very lowasa%of totalcapital.Soweexpectthatcompanyinthefuturealsousesomeamountofdebt.Anexpenseofdebthasaround5-7%ofthetotaldebt.Soweexpectitwillmovewithinthisrangeinthefuture.T

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Table 2: DCF Valuation

Relative Valuation

Table 3: Relative Valuation Infosys Wipro TCS HCL Tech Patni

Market Capitalization

(Rs. mn ) 23,372.71 14,207.57 24,805.81 3,293.44 15.92

Book Value 3,784.00 2,958.00 3,085.60 1,186.70 467.52

Debt / Equity 0.00 0.12 0.04 0.01 6.89

P/E (Trailing) * 18.25 18.33 22.1 13.48 2.78

Dividend Yield %

EPS 2.23 0.53 0.57 0.36 13.48

Return on Net Worth 34% 26% 36% 21% 254%

Current Ratio 5.91 1.44 1.98 0.92 5.5

Quick Ratio 4.46 1.38 1.97 0.89 5.06 TCSwastradingatatrailingP/Eof22.10on3March,thebasedateofthisvaluationexerciseT

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Book Value of Debt 129.7

Fundamental Value of Equity 41687.9

No of Outstanding Shares 1957.2

45

Fundamental Value per share (USD) 21.3 977.Fundamental Value per share (USD)

Rs./USD Exchange Rate (As on 04/03/2010)

DCF VALUATION

In USD M

2007-08 2008-09 2009-10E 2010-11E 2011-12E 2012-13E 2013-14

Revenue 5634.40 6015.70 6342.80 7689.64 9365.02 11198.02 13371

EBIT 1276.00 1424.90 1502.33 1807.45 2379.18 2807.42 3315

% of Revenues 22.65 23.69 23.69 23.51 25.41 25.07 24Depreciation 143.80 124.50 129.55 157.06 191.28 228.72 273

% of Revenues 2.55 2.07 2.04 2.04 2.04 2.04 2

EBITDA 1419.80 1549.40 1631.88 1964.51 2570.46 3036.14 3588

% of Revenues 25.20 25.76 25.73 25.55 27.45 27.11 26

Less: Cash Tax 187.50 190.40 222.89 270.01 356.82 423.79 503

NOPLAT 1232.30 1359.00 1409.00 1694.49 2213.64 2612.35 3085

Capex -75.10 -47.21 -220.07 -273.76 -299.51 -355.21 0

Changes in WC 0.00 132.50 -256.53 -245.58 -305.49 -334.23 -396

Post Tax Non-operating cash flows 146.58 -92.94 0.00 0.00 0.00 0.00 0

Free Cash Flows 1303.78 1351.36 932.39 1175.16 1608.64 1922.91 2688

PV of Estimated FC Flows 904.97 1012.23 1229.68 1304.48 1618Horizontal Value 59377

PV of Estimated Perpetuity Flows 35747

Total Present Value (EV) 41817

(as on December 31, 2009

It is assumed Free Cash flow beyond FY12 grows at 7.8%


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Infosys TCS HCL T PatniMarket Price 28.89 11.11 101.75 10.54

P/E 12.85 9.67 278.56 11.28

P/BV 4.35 3.52 57.36 1.81

EV/EBITDA 10.40 70.05 1456.20 5.54

EV/Sales 3.06 18.04 301.95 1.98 After considering industry P/E we expect the trailing P/E range is 12.2 to 20.8 for TCSConsideringtheprojectedEPSofUS$0.671forFY10thestockisexpectedtohaveapricerangeofUS$8.2 to14.0.SimilarlytheexpectedrangethroughP/BVmultiplegivesarangeofUS$5.7 to14.8andEV/EBITDAgivesarangeofUS$5.80to11.6.OnthesemultipletheshareareexpectedtotradeinapricerangeofUS$13.0to18.2.

BUSINESS ANALYSIS

Company background

Tata Consultancy Services started in 1968, belongs to TATA Group, which is headed by Mr.Ratan Tata. Tata Consultancy Services, Asia's largest software and Services Company, has over143,000 of the world's best trained IT consultants in 42 countries. Companys registered office islocated at Mumbai in Maharashtra. The company offers a comprehensive range of servicesincluding consulting, IT, IT infrastructureand also provide product based solutions. CurrentlyTCS has a presence is 42 countries through its 140 offices globally. Now company remainedfocused on helping customer experience certainly. Company closed 28 large deals and added 163new customers globally in the past one year. There was an increase in the number of customersacross all revenue bands of $1mn, $5mn, $10mn, $20mn and $50mn. TCS entered the EU in1975 by opening an office in the UK. Since then, it has opened several offices across the EUAfter the USA, the UK is the second largest market for TCS. It has over 5000 consultantsworking for more than 130 UK clients.

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2008-09 200910

P/E Expected Adj. PAT Expected Price Expected price

12.20 0.671 8.2

15.45 0.671 10.4

20.80 0.671 14.0

P/BV Expected Book value Expected Price

2.80 2.05 5.7

5.75 2.05 11.8

7.25 2.05 14.8

EV/EBIDTA Expected EBIDTA (USD m) Expected EV (USD m)

6.90 1631.9 11260.0 5.8

10.60 1631.9 17298.0 8.8

13.95 1631.9 22764.8 11.6


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Business Model and StrategyValue PropositionTCS provides power and flexibility to its customers to stay out in front. It produces software &services as per the specific need of there customers. It aims at adding value to its customersbusiness by providing solution as their requirement. TCS follows Global Network Delivery

Model. It enables its customers-choice a sourcing strategy best suited to their most importantbusiness considerations, assurance of the highest quality of service delivery and Lower the TotalCost of Ownership (TCO).

Target CustomersConsidering its global footprint and its ability & experience to serve clients across the world,company is in position add value to the business of its customers. Companys main segments ofcustomers are BFSI, Telecom, Chemical and Manufacturing. These sectors are biggestcontributor to companys value. Now TCS is targeting 8 Million small & medium sectorenterprises by scaling up IT-as-a-Service business.

Distribution ChannelTCS' Global Network Delivery Model (GNDM) is the engine that allows company to provide

reliable and cost effective delivery of services and solutions. It enables company to deliverhighest quality of service regardless of the mix of services, technologies, and locations. Thismodel enables company to get in touch with their customers on 24*7 basis make them delivertailored-made solutions to customers as per their need.

Customer RetentionGNDM model allows company to provide timely, reliable and cost effective delivery of servicesand solutions, which helps them to maintain high level of customer satisfaction. Its ability toserve customers needs, helps them to increased business from its existing clients. TCS has over40 years record of customer retention and increased customer base.

Revenue Stream

Main revenue of TCS comes from BFSI, Manufacturing and Services segment. Company gets it

revenue directly from its clients on the basis of type of contract entered into. Arrangements withcustomers for software development and related service are either on fixed-price, fixedtimeframe.

Core CapabilitiesThe core strength of company is its highly skilled and well trained professionals. TCS has 7center of excellence in India and has 11 Innovation Labs in India. It has more than 142 offices inmore than 42 countries across the globe. TCS BaNCS its universal banking, it consists of acomprehensive portfolio of solutions for banks, capital markets firms, insurance companies, anddiversified financial institutions. It is considered among the leaders in global evaluation of retailcore banking solutions.

Value Configuration

The Tata Research Development and Design Centre (TRDDC) were established in 1981 as adivision of TCS. TRDDC is home to three R&D labs: Process Engineering, SoftwareEngineering and Systems Research. SET Labs collaborated with leading national andinternational universities such as Columbia University, Georgia Institute of Technology, IndianInstitute of Technology, Bombay, Indian Institute of Technology, Kanpur, Stanford Universityand University of Massachusetts, Amherst.

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Partners Network

Transport service provider, hotels, Airlines companies and canteen service providers are the fewpartners who get the business from TCS. Company also entered in partnership with globabusiness firms and institutions to innovate and provide latest technological business solutions.

1) Dow and TCS expand global alliance -The alliance to create jobs for mid-Michigan while

lowering Dows long-term costs. November 20092) TCS and USA networking giant Cisco Systems announced an alliance Tuesday to helptheir customers buildnext-generation datacentre. February 2009

Cost Structure

The major element of overallcost is salary & wagesexpenses (82% of totalexpenses) under differentdepartments like software

development and maintenance,selling and marketing andadministration.

Partner networkThe major partner network for the company is technology services provider and educationalprovider. The company is also taking their clients inputs to implement in their business model.Company follows Global Network Delivery Model & integrated business model in whichcompany has main focus on highly motivated and competent employees because these are thebasic force behind generating value to different services provided by the company.

Key business drivers

Increase in volumes

During the quarter ended Sept 2009/10,companys sales witnessed growth of2.40% to Rs 57444mn compared toprevious quarter. The strong growth wasdue to recovery in global financialmarket which helps to increase volume

and energy & life science posted highergrowth compared to other vertical. BFSIalso posted growth but only 4.7%. Rupeewas started appreciating against dollarand due to less hedging position its helpcompany to show higher growth inbottom line.

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Cost Structure for OND09

Other

9%

Other Cost

3%

Rent

4%

Communication

2%Travel

2%

Depriciation

3%

Equipment &

Software

4%

Employee Cost

82%

Sales & sales Growth

66,000

68,000

70,000

72,000

74,000

76,000

78,000

JAS2008 OND2008 JFM2009 AMJ2009 JAS2009 OND2009

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Sales(LHS) Growth(RHS)


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PAT & GrowthPATgrowthdecreaserapidly insept2009quarterto5.57% compareto largegrowthinpreviousquarter.Thereasonisnotstillincreaseinmarginfront.Thereisforexlossduetohedging.Otherincomewasfallduelossincurredunderforexhedging.

Leadership in BFSI verticalBFSI is themajorstrengthof thecompanyasitsmainfocusonthisvertical. Because in the recessionperiod also this sector have hadrestructure themselves and theresult that in adverse conditioncompanywasalsogotgoodprofitfrom this sector. As globaleconomy is coming out of therecession which helps globalBanking&Financialinstitutionto

start spending on these verticals.AndalsoLifescienceandEnergy& Utilities recorded better thanaveragegrowthinallmarketsegments.Major chunk in USTheUSAcontinued tobethe largestmarketforTCSandcontributearound51% to the companys revenue. UKhas contributed around 19% to thecompanys revenue. This is due to

ramp-ups from recent largeoutsourcing contracts continued todrivegrowthinthesecountries.

Increased Utilization RateThe utilization rate of company hasbeen improved. Comparison to firstquarter of FY10 (AMJ10), in thesecond quarter (JAS10) utilization rate of company improved to 79.5% (excluding trainee) and73.6%(includingtrainee).AlongwiththistheattritionrateofcompanyarealsolowintheindustryInJAS10theattritionrateofcompanywasat11.4%comparewith13.2%inthesamequarteroflast

fiscalyear.Outofthis11.4%ITservicesattritionratewas10.8%andBPOwas18%.Market shareCompanyhasmoremarketshareintheindustrywhichis15.32%higherthanothercompetitorlike,Wipro, Infosys etc. Competition is Moderate to high as its Herfindahl Index value is around2292.74.ButitshowingthecompanyinBFSIverticalitsgivingtoughcompetitiontoitscompetitorduetoitscorestrengthinBFSIvertical.

Segment Analysis OND2009

Travel &

Hospitality, 3.40%

Energy & Utilities,

3.40%

BFSI, 45%

Telecom, 12.10%

Retail &

Distribution, 12%

Manufacturing,

8.30%

Hi-tech, 5%

Life Services &

health care, 5.90%

Media &

Entertinment,

2.10%

Others,

2.8

0%

Geographical Segmentation

MEA

2%

Asia Pacific

6%India

9%

UK

16%

Ibero America

5%

Continental

Europe10%

North America

52%

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Improve cost structureOverallcoststructureofcompanyisimprovingwhichmeancostofcompanyhasbeengoingdown.Mainpartof costwhichhasbeencontinuouslydecline isR&DbecausecompanyhasestablishedtheirinternalR&Dhub.

Financial PerformanceThe ROE for the companydecreasefrom47%on31stmarch2006-07 to 35% due to sameequity capital level & issue ofbonus shareandmoretransfer toreserve & surpluses. This isindicationthatcompanyisoneofthemajor playerswhich showinghigherwealthforitsshareholders.Since ROCE is decreasing from

52% in FY2006-07 to 38% inFY2008-09duetodebtlevelbecomesnilinFY2008-09&PBITdecreasesduetoslowdowninthebusinessofthecompany.

Segmental analysis

Vertical Segment sales & growthDuring the quarter ended Sept. 2009-10, overall companys sales growth comes from BFSI divisioncompared to previousquarter. The growth inthe division was on

account of 4.97% (Rs25849.8mn). The otherdivision also performedwell which addedcompanys top linegrowth. Out Of totaldivisions somedivisions (Telecom,Transportation &

Manufacturing)witnessed dip due tounprecedented volatility

and uncertainty in the global financial markets. Now company is more focus on new segment like lifescience & Energy so due to the low base effect these vertical shows higher growth. But some sector havehad to restructure themselves (BFSI, Engineering services) so TCS had registered growth in this vertical.Agreement with Citi broadens TCS portfolio of end to end IT & BPO services in global BFSI sector

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Profitability

43.26

56.06

49.05 49.6248.9546.63

40.9138.82

30

35

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2005-2006 2006-2007 2007-2008 2008-2009

%

ROCE ROE

Segment wise Revenue

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BFSI

Te

lecom

Re

tail&

Distribu

tion

Manu

fac

turing

Hi-tec

h

Life

Serv

ices

&hea

lthcare

Trave

l&

Hosp

ita

lity

Energy

&

Utilities

Me

dia&

En

tert

inmen

t

Others

INRMN

JAS2009 OND2009


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Geographical AnalysisYOY revenue growth has been seen maximum in USA market as company started to focus ondifferent markets to cutits overdependence onUSA market. Its

register growth 26% inlast year & Europeshows growth of 38.5%CPLY. Due to theglobal recovery moredemand comes fromUSA so volumes areincreasing and revenuealso increasing.

Client Utilization AnalysisClient utilization is showing high growth in top clients which showing growth of 22.17%compare to previous quarter. This is due to big clients started their IT spending after revival ofsituation. Top 5 clients growing at 8.20% and its giving good signal that spending is comingback on track. At present it stood at to 6.8%, 20.5%, and 28.9% respectively.

Growth in Service Line

In the terms of service line there continue to be strong demand for application development andmanagement services, while the BPO and Assurance services continue to be grow but at a lessgrowth because customer realize the combined value of full services offering with globanetwork delivery model. TCSs flagship BaNCS added 11 new customers in the global financial

service industry in the last quarter and 7 product implementations went live.

Cost structure

The company in quarterended December 2009 hasregistered negligible growthrate with respect to employeecost but employee cost areexpected to rise as companyresumes hiring in big way ascompany is going to start

new project called as IT-as-a-service. TCS has Stertedhiring in big way. TCS hasimplemented a host ofinitiatives such as the reuseof assets and codes, the creation of templates and intellectual property (IP) and the use ofplatform business process outsourcing (BPO).

Geographical wise Revenue

0

5000

10000

15000

20000

25000

30000

3500040000

45000

Total

Revenue

North

America

Ibero

America

UK Continental

Europe

India Asia Pacific

INRMN

JAS2009 OND2009

Cost of Revenue

40

42

44

46

48

50

52

54

56

JAS2009 OND2009

%

Revenue Employee Cost Equipment & SoftwarDepriciation Travel CommunicationRent Other Cost

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Markets and Competition

IT industry is highly competitiveindustry. This industry runs on thephenomenon of quality of services andsupport. Although there are few

customer in this industry but there issteep competition among them. TCS isthe largest exporter in the Asia pacific.As TCSs major revenue comes fromexport which is again highly dependentupon Americas export, TCS isexploring new markets to reduce itsdependence on USA. The HerfindahlIndex shows the concentration of the industry, this shows that industry is highly competitive.TCS has always adapted quickly to changing circumstances by its responsive and creativethinking.

Issues, Concerns and Policy

High fluctuation in Exchange RatesThemajor concern for IT industry is volatility in exchange rate.Most of themajor companiesdependupontheothercountriesfortheiroperations.Sowhenthevalueofdollarhasbeenreducedagainst rupee then it badly affects the exportof companieswhichdirectly affect the revenue ofcompanies.Andwhenitincreaseagainstrupeethenitisbeneficialforcompanies.

Lack of infrastructureLack of infrastructure in the country is also major issue for IT industry. In the absence of i

companies faced the problem inworking. Employee transportation, lackof infrastructure is themajorissueforITindustry. High Attrition Rate

IT industry has also faced the problem of high attrition rate. Attrition rate is very high in ITindustry;duetoitproductivityofcompanyhasbeenreduced.Employeesofcompanieshavebeenchangeregularlysocompaniessaleshaveaffectedbyit.Fake Resume

Mostofpeopleputtheirfakeresumeonthecompaniessite.Whencompanieshirespeopleonthebasisoftheir resumethenwrongselectionhasbeenmade.Duetoitqualityofserviceshasbeen

gonedownwhichdirectlyaffecttheclientsofcompanyanditaffecttherevenueofcompany.Software Piracy

SoftwarepiracyisalsooneofmajorissueforITindustry.Whenanycompanylaunchesanynewsoftwareinmarketthenafteritanotherplayerinmarketcopiedthatthingandproducesthesamethingandsellsinmarketatalowerratethenitaffectsthecompanyimage.

Market Shares of Market leaders OND2009

TCS, 31%

Wipro, 29%

Infosys, 26%

Tech

Mahindra, 5% HCL,5

%

Patni,4%

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contributedbyunorganizedsector.InITSSsomebigcompaniesdominatethetotalindustry;around75%industryisconstitutedbytop10companies.

Outlook of ITSSWeexpectthatITSSindustrywillgrow

byCAGRof7.1%till2012.BecauseglobalITspendingwillpickupfrom2010.AtpresentITSSindustrysmainfocusoncost&operationalefficienciessoitisexpectedthatitwillenhanceglobalsourcing.ItisexpectedthatIndiawillgoingtoincreaseitsmarketshareinglobalsoftwaremarketwithitshigherCAGRof18.4%incomingyearsandindustrywillachievesizearoundUSD42billionby2010inwhichUSD

32billionwillbejustexport.NextgrowthdriversfortheindustryareexpectedRetail,gaming&animation,Healthcareandgovernmentspending.M&AwillhelptheITindustrytoincreasetheirreachininternationalmarket.

FINANCIAL STATEMENT

0

100,000

200,000

300,000

400,000

500,000

600,000

Rs.

Cr.

2007 2008 2009 2010 2011 2012

Growing Market Size

Domestic & Export Revenue

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

2007 2008 2009 2010 2011 2012

Rs.Mn

Domestic Revenue Export Revenue

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Balance Sheet

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Particulars 2007-08 2008-09 2009-10E 2010-11E 2011-12E 2012-13E 2013-14

Assets

Fixed Asset

Investments 660.10 340.10 924.21 1,429.47 2,111.15 2,957.37 3,956

Equity method investment in affiliates 0.70 0.30 0.30 0.30 0.30 0.30 0

Property, plant and equipment, net 753.30 738.90 656.55 719.57 802.04 872.83 954

Intangible assets, net 90.60 163.20 163.20 163.20 163.20 163.20 163

Goodwill 276.9 510.6 510.6 510.6 510.6 510.6 51

Other non-current assets 258.9 331.2 317.14 384.48 468.25 559.90 668

Toal Fixed Assets 2,040.50 2,084.30 2,572.01 3,207.62 4,055.54 5,064.20 6,253

Current Asset

Cash and cash equivalents (Balancing figure) 258.10 292.50 391.07 627.54 951.07 1360. 94 1856

Accounts receivable 1,330.90 1,191.00 1,409.51 1,708.81 2,081.12 2,488.45 2,971

Unbilled revenues 337.20 291.90 352.38 427.20 520.28 622.11 742

Inventories 10.60 7.10 9.39 11.38 13.86 16.58 19

Prepaid expenses and other current assets 386.50 620.70 654.45 793 .42 966.28 1,155.41 1 ,379

Total Current Assets Excluding Cash 2,065.20 2,110.70 2,425.73 2,940.81 3,581.54 4,282.55 5,113Total Current Assests 2,323.30 2,403.20 2,816.80 3,568.35 4,532.61 5,643.49 6,970

Capital Deployed 4,363.80 4,487.50 5,388.81 6,775.97 8,588.15 10,707.69 13,223

Liabilities

Current Liabilities & Provisions

Accrued expenses and other current liabilities 846.40 935.10 983.13 1,191.89 1,451.58 1,735.69 2,072

Unearned and deferred revenues 177.00 174.10 190.28 230.69 280.95 335.94 401

Short-term debt 9.30 101.50 95.78 116.11 141.41 169.09 201

Total Current Liabilities & Provisions 1,032.70 1,210.70 1,269.19 1,538.70 1,873.94 2,240.72 2,675

Non-Current Liabilities

Long-term debt 142.80 34.70 32.83 35.98 40.10 43.64 47

Mandatorily redeemable preference shares with Tata Sons Limited 24.90 19.70 19.70 19.70 19.70 19.70 19

Other non-current liabilities(Deferred taxes) 18.80 75.30 0.00 0.00 0.00 0.00 0

Total non-current Liabilities 186.50 129.70 52.53 55.68 59.80 63.34 67

Minority interests 57.30 61.50 61.50 61.50 61.50 61.50 61Shareholder's equity

Share Capital 568.20 568.20 568.20 568.20 568.20 568.20 568

Retained earnings 2,295.80 3,073.90 3,993.89 5,108.39 6,581.21 8,330.43 10,407

Accumulated other comprehensive (loss)/income 223.3 -556.5 -556.5 -556.5 -556.5 -556.5 -55

Total Stock Holder's Equuity 3,087.30 3,085.60 4,005.59 5,120.09 6,592.91 8,342.13 10,419

Capital Employed 4,363.80 4,487.50 5,388.81 6,775.97 8,588.15 10,707.69 13,223

USD in millions


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Cash Flow Statement

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2007-08 2008-09 2009-10E 2010-11E 2011-12 2012-13 2013-141

PAT 1249.30 1123.80 1314.26 1592.16 2104.02 2498.88 2967

Add: Depreciation 143.80 124.50 129.55 157.06 191.28 228.72 273Add: Interest Expense 11.30 11.50 3.07 3.89 4.90 6.00 7Add: Other Non-Cash ChargesAdd: Direct taxes paid 187.50 190.40 222.89 270.01 356.82 423.79 503

Operating Profit Before WC Changes 1591.90 1450.20 1669.78 2023.12 2657.02 3157.39 3750

Changes in Current Assets (excluding cash) (45.50) (315.03) (515.08) (640.73) (701.01) (831.3

Changes in Current Liabilities 178.00 58.49 269.50 335.24 366.78 435.0

Changes In WC 132.50 (256.53) (245.58) (305.49) (334.23) (396.3

Cash Generated From Operations 1591.90 1582.70 1413.24 1777.54 2351.53 2823.16 3354

Less: Direct Taxes Paid 187.50 190.40 222.89 270.01 356.82 423.79 503Less: Others (provision for deferred tax) 0.00 56.50 -75.30 0.00 0.00 0.00 0Net Cash Generated From Operations 1404.40 1335.80 1265.65 1507.52 1994.71 2399.37 2851

2 Cash Flow from Investing Activities

Capital Expenditure (CAPEX) (75.10) (47.21) (220.07) (273.76) (299.51) (355.2

Change in Other non-current assets (72.30) 14.06 (67.34) (83.77) (91.65) (108.7

Investments 320.00 (584.11) (505.25) (681.68) (846.22) (998.6

Change in Intangible Assets (72.60) 0.00 0.00 0.00 0.00 0.0

Change in Goddwill (233.70) 0.00 0.00 0.00 0.00 0.0

Accumulated other comprehensive (loss)/income (779.80) 0.00 0.00 0.00 0.00 0.0

Interest Received 14.10 22.40 37.89 58.61 86.56 121.25 162.2Mandatorily redeemable preference shares 5.20 0.00 0.00 0.00 0.00 0.0

Equity method investment in affiliates 0.40 0.00 0.00 0.00 0.00 0.0

Others 49.40 -188.49 -58.61 -86.56 -121.25 -162

Net Cash Used In Investing Activities 14.10 (836.10) (767.86) (792.67) (1039.21) (1237.38) (1462.6

3 Cash Flow from Financing Activities

Change in Debt (108.10) (1.87) 3.15 4.12 3.54 4.1

Change in Equity 0.00 0.00 0.00 0.00 0.00 0.00 0

Dividends Paid (370.00) (345.70) (394.28) (477.65) (631.21) (749.67) (890.1

Interest Paid (11.30) (11.50) (3.07) (3.89) (4.90) (6.00) (7.3

Others

Net Cash used in Financing Activities (381.30) (465.30) (399.23) (478.38) (631.98) (752.12) (893.3

Net Increase in Cash and Cash Equivalents 1037.20 34.40 98.57 236.47 323.52 409.87 495.1

Cash and cash equivalents At the beginning 258.1 292.5 391.07 627.54 951.07 1360

Net Increase in Cash and Cash Equivalents 1037.20 34.40 98.57 236.47 323.52 409.87 495

Cash and cash equivalents At the end 1037.20 292.50 391.07 627.54 951.07 1360.94 1856

cash balance as per balance sheet 258.1 292.5 391.1 627.5 951.1 1360.9 185

difference 0.00 0.00 0.00 0.00 0.00 0

Cash Flow from Operating Activities

USD in million


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Ratio Analysis

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2007-08 2008-09 2009-10E 2010-11E 2011-12E 2012-13E 2013-14E

Profitability Ratios

Return on Assets (ROA) 28.63% 25.04% 24.39% 23.50% 24.50% 23.34% 22.44%

Return on Equity (ROE) 40.47% 36.42% 32.81% 31.10% 31.91% 29.96% 28.48%Return on Capital Employed (ROCE) 29.24% 31.75% 27.88% 26.67% 27.70% 26.22% 25.07%Dupont Analysis-ROE Decomposition

PAT/PBT (Tax Efficiency) 0.863 0.847 0.855 0.855 0.855 0.855 0.855PBT/EBIT (Interest Burden) 1.134 0.932 1.023 1.030 1.034 1.041 1.047EBIT/Sales (OPM) 22.65% 23.69% 23.69% 23.51% 25.41% 25.07% 24.79%Sales/Total Assets (Asset Turnover) 1.291 1.341 1.177 1.135 1.090 1.046 1.011TA/NW (Financial Leverage) 1.41 1.45 1.35 1.32 1.30 1.28 1.27ROE 40.47 36.42 32.81 31.10 31.91 29.96 28.48

Liquidity Ratios

Current Ratio 2.250 1.985 2.219 2.319 2.419 2.519 2.605Acid Test Ratio 2.239 1.979 2.212 2.312 2.411 2.511 2.598Debt-Equity Ratio 0.06 0.04 0.01 0.01 0.01 0.01 0.01

Efficiency Ratios

Assets Turnover Ratio 1.291 1.341 1.177 1.135 1.090 1.046 1.011Working Capital Turnover Ratio 4.366 5.045 4.098 3.789 3.522 3.291 3.114F.A. Turnover Ratio 2.761 2.886 2.466 2.397 2.309 2.211 2.138C.A. Turnover Ratio 2.43 2.50 2.25 2.15 2.07 1.98 1.92Debtors Turnover Ratio 4.234 5.051 4.500 4.500 4.500 4.500 4.500Debtors Velocity 86.217 72.263 81.111 81.111 81.111 81.111 81.111

Margin Ratios (%)

EBITDA Margin 25.20% 25.76% 25.73% 25.55% 27.45% 27.11% 26.84%Pre-Tax Margin 25.69% 22.06% 24.23% 24.22% 26.28% 26.10% 25.95%Net Profit Margin 22.17% 18.68% 20.72% 20.71% 22.47% 22.32% 22.19%

Growth Ratios YoY (%)

Net Sales - -23.23% -9.05% 26.64% 42.24% 28.18% 29.25%EBITDA - 9.13% 5.32% 20.38% 30.85% 18.12% 18.19%Adj.PAT - -10.05% 16.95% 21.14% 32.15% 18.77% 18.73%Adj.EPS - -10.05% -41.53% 21.14% 32.15% 18.77% 18.73%

Working Ratios (Days)

Inventory 0.687 0.431 0.540 0.540 0.540 0.540 0.540Debtors 86.217 72.263 81.111 81.111 81.111 81.111 81.111Net Working Capital Excluding Cash 66.886 54.607 66.553 66.553 66.553 66.553 66.553

Other Ratios (%)

Other Income/PBT 11.64% -8.17% 0.00% 0.00% 0.00% 0.00% 0.00%

Per Share (Rs.)

Adj.EPS 1.277 1.148 0.671 0.813 1.075 1.277 1.516CEPS 1.424 1.276 0.738 0.894 1.173 1.394 1.655DPS 0.353 0.403 0.244 0.323 0.383 0.455 0.455BVPS 3.155 3.153 2.047 2.616 3.369 4.262 5.323Cash Per Share 0.26 0.30 0.20 0.32 0.49 0.70 0.95

Valuation Parameters

P/E 14.08 9.67 24.76 20.44 15.47 13.02 10.97P/CEPS 0.00 8.71 22.54 18.60 14.18 11.93 10.04P/BV 0.00 3.52 8.12 6.36 4.94 3.90 3.12EV/EBITDA 123.80 70.05 199.20 165.36 126.25 106.75 90.19EV/SALES 31.20 18.04 51.25 42.24 34.65 28.94 24.20


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Financial Assumptions

TCS is betting on higher domestic growth. After posing Q3FY10 numbers better than expected,it is increasing its employee base, taking advantage of expected rise in demand and scaling up It-as-service.TCS has started global expantion acquiring foreign companies, infact company wants

to do better than Industry as a whole. It is also looking for new markets like latin America, NewZealand, Malaysia, Singapore etc., to deacrease theire dependency on America's nation. TCS isconcentrating on Tier-II, III and IV cities for unexplored and better market to repeat the story ofNANO in software. TCS scaling up its IT-as-a-service business to cater to the needs ofaround 8 million small and medium sized companies in the country.

Top Five Near shore Growth Strategies for 2010 include: Expand public sector business Build through key acquisitions Strengthen FAO and Shared Services competencies Leverage second-tier Latin America locations

Take advantage of Latin America positioning to re-shape the perception of being anIndian outsourcer.

Expected CAGR of IT industry for 2008-13 is 12% and TCS is expected to perfrm better thanindustry. More of technological services coming. IT, e-governence spend may touch $4 bn nextficcal. Indian ITSS industry is projected to increase from US$13.7bn in 2008 to US$24.6bn in2013.

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Documents

TCS Valuation Raports