Industry and Company Background Top Four Indian IT Companies: Financial Investigation The IT and ITeS companies revamped
Posted: Sun Apr 10, 2022 8:43 am
Industry and Company Background
Top Four Indian IT Companies: Financial Investigation
The IT and ITeS companies revamped their business models to take active control of
operate closer to customers' homes and offer member-customers a range of servicesi. Consequently, Indian IT &ITeS companies had set up over 1,000 global delivery centers in about 80 countries worldwideii. The information technology and business process management (IT-BPM) sector in India generated US$177 billioniii in 2019, witnessing a growth of 6.1% year on year. It was estimated that the size of the industry would expand to US$412iv by 2025. The IT industry employed 4.1 million people as of FY19. According to At Kearney global service location index-2019, India occupied the topmost position,v followed by China and Malaysia since the study's inception in 2004. Centre for Monitoring Indian Economy
(CMIE) surveyed 128 software companies'
branding, sourcing, services, distribution, pricing, and promotion,
top five companies account for 86.4% of the
industry’s total sales. Tata consultancy services, the largest company, reported a rise in net
sales of about $3.2 billion in 2019 over the previous year (see Table 1).
The banking, financial services, and insurance (BFSI) sector account for a significant chunk of overall tech services revenues, and it had been relatively weak for the past few quarters. The tech spends of BFSI clients, particularly in the US and Europe, impacted the software industry's earnings. Moreover, retail segment performance was muted as clients turned cautious because of perceived risks stemming from trade wars and geopolitical tensions. Among the high operating cost, heads, salaries, and wages account for 58% of the computer software industry's total expenses. Expenses on salaries and wages increased by 11.9% in
the September 2019 quarter compared to the corresponding quarter last year.
TCS and Infosys, the top two companies in our sample, reported an increase in
salaries and wages by 9.42% and 11.75%, respectively. TCS added 14,097 jobs during the September 2019 quarter, marking the highest number of employees that the company has onboarded in a quarter. Also, Wipro’s salaries and wages increased by 10.36% in the September 2019 quarter. Moreover, other industry expenses increased by 5.1% in the said quarter on a y-o-y basis. Effectively, the sector's operating costs increased by 8.8% in the
September 2019 quarter compared to the corresponding quarter last year.
The decrease in revenue impacted the industry's operating profit; it grew by a mere
1.4% in the September 2019 quarter. The industry's operating margin contracted by 141 basis points to 25.5% in the September 2019 quarter. TCS saw its active margin contract by 140 basis points in the said quarter. This was on account of a wage hike, the strong rupee against the US dollar, high attrition, and visa costs, as per the company. The contraction in margins at the operating level percolated to the net level as well. As mentioned above, the industry's net profit margin contracted 80 basis points to 20.5% in the quarter. This was on account of an increase in the post-operating expenses of the industry. Interest expenses and depreciation rose by 62.8% and 39.6% in the September 2019 quarter on a y-o-y basis. Total tax provisions of the sector declined by 4.6% in the said quarter. The industry noticed a 19% growth of other incomes in the September 2019 quarter. Going ahead, Infosys expects the financial performance of the company to be affected in the next couple of
IIUM Journal of Case Studies in Management, Vol. 12, No. 2, 2021 15
Bansal, Kar and Verma
Table 1: Quarterly financial performance of software companies in India
quarters. According to the company, sluggishness in capital markets and the European banking space will be driven by sluggishness. On the other hand, TCS is optimistic as the company's order book in the September 2019 quarter turned out to be the highest in the last
six quarters.
quarter
Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19
total income
7.26 13.61 17.10 15.16 17.04 9.97
net sales
7.85 14.77 17.28 16.56 16.58 8.90
operating net profit profit
Y-o-Y % change
operating profit margin
24.94 25.63 26.84 24.88 21.22 25.07 25.45
net profit margin
20.05 19.93 21.29 19.59 16.71 19.27 20.50
8.56 17.11 18.74 9.68 -1.43 6.42
11.49 5.80 16.63 -2.71 -3.78 4.80 3.54
7.57
April 2020; Created by the case writers using data from CMIE industry outlook database Financial performance
Sep-19
Source: Center for Monitoring Indian Economy (CMIE) database; industry outlook; assessed on 15-
6.99
1.39
Tushi gathered desirable financial information from secondary sources to conduct appropriate analyses and assist Anil in taking the investment call. He felt all three statements, namely financial statements (see Exhibit 1) and income statements (see Exhibit 2), and the cash-flow statements (see Exhibit 3 & 4), could be beneficial. He had also reviewed the application of traditional DuPont decomposition and alternate DuPont analysis using gathered information. He also applied various valuation ratios and free cash flow to
the available set of data. How would the data lead to the final decision, he was wondering?
The alternate DuPont decomposition approach separated a company’s return on equity (ROE) into three factors: (1) how profitably a company employed its assets to produce revenue; (2) the margins the company was making relative to sales; and (3) how extensive the firm’s asset base was the relation to shareholder’s equity in the firm, total assets to its total shareholder’s equity including reserves and surplus.
TCS performs better in return on capital employed (ROCE), return on long-term funds (ROLTF) & dividend per share. Still, HCL has a higher operating profit margin (OPM), profit before interest, and tax (PBIT), gross margin (GM), and net profit margins (NPM).
Infosys outperformed in terms of liquidity and solvency, followed by HCL, TCS, and Wipro.
Return on assets (ROA), for TCS 73.72%, HCL’s 33.76%, Infosys’s 23.73% and Wipro 18.69% respectively.
Overall, TCS performed well in terms of management efficiency ratios.
IIUM Journal of Case Studies in Management, Vol. 12, No. 2, 2021 16
Theoretical background
Top Four Indian IT Companies: Financial Investigation
Lots of research have been done in the area of accounting anomaly, information, and fundamental analysis. Many researchers, graduate students, and independent analysts are currently doing different types of research in the domain of accounting and financial valuations (Anthony et al., 2016). In this study, we are trying to identify companies based on DuPont analysis's fundamental ratios to determine their financial performance. Based on this, we can recommend them further. Early research in the field focused on earnings; the works of (Ball & Brown, 1968) and (Beaver, 1968) were the founders of the research between capital market behavior and financial statements. Both studies report that there is a significant positive relationship between changes in earnings and stock returns. (Frankel & Lee, 1998) inferred that the market’s reaction to an earnings announcement is anomalous. (Garrod et al., 2008) examined private companies in Slovenia and found a positive relationship between profitability and the write-off likelihood and magnitude.
This case investigated the extent to which returns on shares listed on the stock markets of Eastern Europe are predictable and attempted to determine what factors have the explanatory ability. Firstly, it has focused on the efficient market hypothesis, factor models, capital structure theory, and the relationship between accounting information and stock market returns. When the methodology of (Stephen H. Penman, 2007) and (Skogsvik, K. Skogsvik, S. & Thorsell, 2011) had applied to stocks listed in the EU nations, they find that the decomposed elements of the book to price ratio perform substantially differently. (Katchova & Enlow, 2013) evaluated DuPont ratios to compare the return on equity components among agri-businesses and all companies. DuPont analysis is based on return on equity, which is quite an essential variable for investors. A high DuPont ratio leads to better investment opportunities.
IIUM Journal of Case Studies in Management, Vol. 12, No. 2, 2021 17
Bansal, Kar and Verma
Table 2: Top Ten IT and ITs companies in India (Million INR)
Company
Tata Consultancy Services Ltd Infosys Ltd
Wipro Ltd
H C L Technologies Ltd
Tech Mahindra Ltd Capgemini Technology India Ltd
Cisco Systems India Pvt. Ltd Larsen & Toubro Infotech Ltd E I T Services India Pvt. Ltd
Mindtree Ltd
Rank by size
1 2 3 4 5
6 7 8 9
10
Total Income from Size income Sales financial services
1,025,520.0 1,312,550.00 1,231,770.00 79,400.00
Rank Company
1 Tata Consultancy Services Ltd
2 Infosys Ltd
3 Wipro Ltd
4 Cognizant Technology Solutions India Pvt. Ltd
5 Tech Mahindra Ltd
6 H C L Technologies Ltd
7 Capgemini Technology Services India Ltd
8 Larsen & Toubro Infotech Ltd
9 Oracle India Pvt. Ltd
10 J P Morgan Services India Pvt. Ltd
2018-19 (%) 16.72 09.93 06.36 03.75 03.70 03.51 01.84 01.21 01.02
01.02
735,913.33 561,135.50 288,953.33 268,878.83
128,611.50 82,668.08 65,061.83 54,253.90
48,927.00
759,650.00 508,016.00 268,220.00 281,797.00
140,171.00 79,246.00 92,385.00 55,597.00 71,126.00
731,700.00 481,238.00 260,120.00 272,492.00
136,089.00 75,871.00 89,072.00 54,944.70
70,215.00
24,990.00 25,686.00 7,900.00 8,297.00
3,700.00 2,999.00 3,157.00 554.00
834.00
Source: CMIE database; industry outlook; assessed on 15-April 2020; Created by the case writers using data from CMIE Industry Outlook database
Table 3: Market Share of IT and ITeS Companies Operating in India, 2018-19
Source: CMIE database; industry outlook; assessed on 15-April 2020; Created by the case writers using data from CMIE Industry Outlook database
Conclusion
Tushi was a self-motivated employee who was always looking forward to new projects. Performing routine tasks from the past few days, he was craving for some new tasks to complete. Rather than relaxing after work, he immediately started to collect the relevant information required for the job to accomplish. Top management of the investment company had several meetings with key members of the team. The team carried out multiple discussions and deliberations to explore all possibilities of financial valuation.
IIUM Journal of Case Studies in Management, Vol. 12, No. 2, 2021 18
Top Four Indian IT Companies: Financial Investigation
High investment ratio, profitability ratio, and high DuPont ratio lead to a better investment opportunity, and can we use these parameters to evaluate a company’s financial performance?
Suggested Questions
1. Calculate the financial ratios, namely, operating, leverage profitability, and market-based ratio using income statements and financial statements.
2. Calculate net working capital and net long-term assets for all four companies.
3. Based on DuPont decomposition, which company would you prefer and why?
IIUM Journal of Case Studies in Management, Vol. 12, No. 2, 2021 19
Bansal, Kar and Verma
Exhibit 1: Financial Statements for HCL, TCS, Infosys, and Wipro from 2017-2019, (All numbers in millions INR)
HCL 30/3/18
16940
23570
40510
96390
1720
0.0 245580
90940
-42140 48800
0.0
67990 73940 0.0
TCS
30/3/18
69390
357420
426810
249430
260
970 812240
239980
-125040 114940
0.0
17450
120
210
250720
Infosys
30/3/18 30/3/17
3041 3489 982 1538 4023 5027 2016 1900
0.0 0.0
14 6.0 7673 8282
3418 3140
-108340 -1663
115980 1940 1873 1816
0.0 670 883 995
15970 512 339 563 470 91 28 111 310 0.0 332 0.0
227260 4608 4582 4572
Wipro
30/3/18
44925
252258
297183
100990
3370
2555 506156
148081
-83638 64443
8874
117584
18113
3938
254484
760640
92991 24406 0.0 45632 19040
30/3/19
59290
41530
100820
117060
910
0.0 297220
105610
-50330 55280
0.0
90610
85340
40
288530
585750
Liabilities current liabilities
Current debt
Accountspayable
Taxes payable
Accruedliabilities 0.0 0.0 0.0 0.0 0.0 0.0 480 Deferredrevenues 0.0 0.0 0.0 0.0 0.0 0.0 410
30/3/19
158529
230099
388628
100489
3951
6820 571906
163779
-93178 70601
8151
116980
13762
9549
261265
833171
71099 28527 0.0 59777 26129
30/3/17
52710
292030
344740
94846
3915
5167 538898
165493
-95699 69794
7103
125796
15922
428
254618
793516
122801 23452 0.0 42034 18544
Assets & current assets Cash and cash equivalents Other short-term invest Total cash
Net receivables
Inventory
Other current assets
Total current assets
Non-current assets
Gross property, plant and equipment
Accumulated depreciation
Net property & plant
Equity & other investment
Goodwill
Intangible assets
Other long-term assets Total non-current assets
Total assets
30/3/17
13168
88654
101822
83012
2755
0.0 264697
82130
30/3/19
126520
292870
41939
273460
100
1360 921310
254850
30/3/17 30/3/19
40270 2829 416760 958 457030 3787 226840 2144
210 0.0
630 32 805260 7644
224320 3603
-37667
44462 113740
0.0 0.0
65043 17000 47333 1790 0.0 300
-141110
-1545 -1324
234650 192996 228120
480230 457694 114943
103252 12252 12255 12854
106296 000
11200 1760 1892 0.0 1810 2000 0.0 16230 13960 16368 62920 50940 62790 255 0.0 0.0 0.0 0.0 0.0 0.0 442
0.0 0.0 127 57 504 788 376 399 358 279
IIUM Journal of Case Studies in Management, Vol. 12, No. 2, 2021
20
Top Four Indian IT Companies: Financial Investigation
Other current liabilities
Total current liabilities
Non-current liabilities
Long-term debt
Deferred tax liabilities
Deferred revenues
Other long-term liabilities
Total non-current liabilities
Total liabilities
Stockholders' equity Common stock
Retained earnings
Accumulated other comprehensive income Total stockholders' equity
31100 31520 29357 740 480 400 408 117 76 122990 101070 113416 220840 178280 145120 2693 2164 2161
28740 2630 3549 0.0 540 0.0 0.0 0.0 0.0
8574 214350
28368 3417
0.0 3175
48068 262418
12068 534700
0.0 568116
12688 213507
45268 3059
0.0 2439
61787 275294
9048 453265
0.0 482936
7429 229543
19611 6614
0.0 1265
41278 270821
4861 490930
0.0 520304
793516
2260 340 0.0 2130 1790 1756 480 1060 399
48090 15300 13054 171080 116370 126470
2710 2780 2853 389640 316340 252417
0.0 0.0 0.0 413640 363860 329498
10420 8440 0.0
29600 250440
3750 855200
0.0 894460
11700 9190 5030 0.0 0.0 450
29380 21600 207660 166720
1910 1970
797550 710710
0.0 0.0
851280 862140
988232 101213 13 2.0 6.0
159 131 56
2852
339 11248
397
9391
2295 2217
190 199 11587 12190
Total liabilities and stockholders' equity
106296 103252 00
253 6.0 9960 10637 12255 12854
12252
Source: CMIE database; industry outlook; assessed on 15-April 2020; Created by the case writers using data from CMIE Industry Outlook database
585750 480230 457694
1149430
833171
760640
IIUM Journal of Case Studies in Management, Vol. 12, No. 2, 2021
21
Bansal, Kar and Verma
Exhibit 2: Income Statements for HCL, TCS, Infosys, and Wipro from 2017-2019, (All numbers in millions except shares and EPS)
HCL 3/30/18 505690 264070 241620
7320 142990
98630
530
110240
23020 87210
87210
31.11 31.09
2802
2804
EBITDA, INR
Source: CMIE database; industry outlook; assessed on 15-April 2020; Created by the
Particulars
Total revenue, INR
Cost of revenue, INR
Gross profit INR
Operating expenses, INR
Selling general and administrative, INR
Total operating expenses INR
Operating income or loss INR
Interest expense INR
Income before tax INR
Income tax expense INR
Net income INR
Net income available to common shareholders, INR Basic EPS, INR
Diluted EPS, INR
Basic average number of shares
Diluted average number of shares
3/30/19
604270
314880
289390
8520
170860
118530
1550 126220
25020 101200
101200
36.79 36.77
2750
2751
3/30/17
475675
239977
235698
8614 140076
95622
718
105427
19362 86064
86064
30.16 30.14
2852
3/30/19
1464630
805160
659470
126510
284970
374500
1980 415630
100010
314720
314720
83.05 83.05
3789
TCS 3/30/18 1231040 690960 540080
100540
233000
307080
520 340920
82120 258260
258260
67.09 67.09
3849
3/30/17 3/30/19
1179660 11799 644290 7687 535370 4112
99210 1220
230880 1381
304490 2731
320 -21 345130 3003
81560 803 262890 2199
262890 2199
66.7 0.51 66.7 0.51
3940 4347
3940 4353 365320 3018
Infosys
3/30/18 3/30/17
10939 10208 7001 6446 3938 3762
1116 1020
1268 1187
2670 2575
107 19 3143 2974
657 834 2486 2140
2486 2140
0.55 0.47 0.55 0.47
4510 4571
4515 4572
3/30/19
585845
413033
172812
75749
76117
96695
5616
115415
25242 90031
90031
14.99 14.95
6007
6022
Wipro 3/30/18 544871 385575 159296
71981
76490
82806
3451
102474
22390 80081
80081
12.65 12.62
6333
6344 127049
3/30/17
550402
391544
158858
64179
68756
90102
1916
110356
25213 84895
84895
13.11 13.07
6476
6495 135379
148500
124600
2855 114427
3789 438170
3849 361580
2959 2829
from CMIE Industry Outlook database
140505
case writers
using data
IIUM Journal of Case Studies in Management, Vol. 12, No. 2, 2021
22
Exhibit 3: Cash-flow Statements for HCL and TCS from 2017-2019, (all numbers in millions, INR)
HCL
3/30/19 3/30/18 3/30/17
3/30/19
-39220 20560 -21690 160 263620 -25640
285930
0.0
-22310 -500 -1162080 1173050 440
15960
22920
48830
72240
285930 -22310 263620
TCS 3/30/18
258260 20140 -2090 0.0 232050 -23930
250670
0.0
-18620 0.0 -1064450 1085980 -950
28860
10680
35970
48830
250670 -18620 232050
3/30/17
262890 19870 -6310 0.0 232330 -22310
252230
0.0
-19900 0.0 -1237240 1067560 4000
-167320
-25350 62950 35970
252230 -19900 232330
Top Four Indian IT Companies: Financial Investigation
Cash flows from operating activities Net income
Depreciation & amortization Change in working capital Inventory
Other working capital
Other non-cash items
Net cash provided by operating activities
Cash flows from investing activities
Investments in property Acquisitions, net
Purchases of investments Sales/maturities of investments Other investing activities
Net cash used for investing activities
Net change in cash
Cash at beginning of period Cash at end of period
Free cash flow Operating cash flow Capital expenditure Free cash flow
101200 20730 -24660 1080 55060 -4960
89710
0.0 -34650 -53440
87210 13830 -12340 1170 29840 -3900
86064 8281 3207 -202 50731 -6465
83280
89951
0.0 -28280 -276340 305160 -2040
-30730
44360
16990
59340
89710 -34650 55060
0.0 -2510 -260010 289450 -1550
-22830
3310
13210
16990
83280 -53440 29840
0.0 -5017 -219568 218543 -2717
-38165
6454
7329 13211
89951 -39220 50731
Source: CMIE database; industry outlook; assessed on 15-April 2020; Created by the case writers using data from
CASE STUDY 1: TOP FOUR INDIAN IT COMPANIES: FINANCIAL INVESTIGATION
Based on case study “Top Four Indian IT Companies: Financial Investigation” answer following questions:
1. Calculate the financial ratios, namely, operating, leverage profitability, and market-based ratio using income statements and financial statements. Make comments based on your calculation. (12 marks)
Top Four Indian IT Companies: Financial Investigation
The IT and ITeS companies revamped their business models to take active control of
operate closer to customers' homes and offer member-customers a range of servicesi. Consequently, Indian IT &ITeS companies had set up over 1,000 global delivery centers in about 80 countries worldwideii. The information technology and business process management (IT-BPM) sector in India generated US$177 billioniii in 2019, witnessing a growth of 6.1% year on year. It was estimated that the size of the industry would expand to US$412iv by 2025. The IT industry employed 4.1 million people as of FY19. According to At Kearney global service location index-2019, India occupied the topmost position,v followed by China and Malaysia since the study's inception in 2004. Centre for Monitoring Indian Economy
(CMIE) surveyed 128 software companies'
branding, sourcing, services, distribution, pricing, and promotion,
top five companies account for 86.4% of the
industry’s total sales. Tata consultancy services, the largest company, reported a rise in net
sales of about $3.2 billion in 2019 over the previous year (see Table 1).
The banking, financial services, and insurance (BFSI) sector account for a significant chunk of overall tech services revenues, and it had been relatively weak for the past few quarters. The tech spends of BFSI clients, particularly in the US and Europe, impacted the software industry's earnings. Moreover, retail segment performance was muted as clients turned cautious because of perceived risks stemming from trade wars and geopolitical tensions. Among the high operating cost, heads, salaries, and wages account for 58% of the computer software industry's total expenses. Expenses on salaries and wages increased by 11.9% in
the September 2019 quarter compared to the corresponding quarter last year.
TCS and Infosys, the top two companies in our sample, reported an increase in
salaries and wages by 9.42% and 11.75%, respectively. TCS added 14,097 jobs during the September 2019 quarter, marking the highest number of employees that the company has onboarded in a quarter. Also, Wipro’s salaries and wages increased by 10.36% in the September 2019 quarter. Moreover, other industry expenses increased by 5.1% in the said quarter on a y-o-y basis. Effectively, the sector's operating costs increased by 8.8% in the
September 2019 quarter compared to the corresponding quarter last year.
The decrease in revenue impacted the industry's operating profit; it grew by a mere
1.4% in the September 2019 quarter. The industry's operating margin contracted by 141 basis points to 25.5% in the September 2019 quarter. TCS saw its active margin contract by 140 basis points in the said quarter. This was on account of a wage hike, the strong rupee against the US dollar, high attrition, and visa costs, as per the company. The contraction in margins at the operating level percolated to the net level as well. As mentioned above, the industry's net profit margin contracted 80 basis points to 20.5% in the quarter. This was on account of an increase in the post-operating expenses of the industry. Interest expenses and depreciation rose by 62.8% and 39.6% in the September 2019 quarter on a y-o-y basis. Total tax provisions of the sector declined by 4.6% in the said quarter. The industry noticed a 19% growth of other incomes in the September 2019 quarter. Going ahead, Infosys expects the financial performance of the company to be affected in the next couple of
IIUM Journal of Case Studies in Management, Vol. 12, No. 2, 2021 15
Bansal, Kar and Verma
Table 1: Quarterly financial performance of software companies in India
quarters. According to the company, sluggishness in capital markets and the European banking space will be driven by sluggishness. On the other hand, TCS is optimistic as the company's order book in the September 2019 quarter turned out to be the highest in the last
six quarters.
quarter
Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19
total income
7.26 13.61 17.10 15.16 17.04 9.97
net sales
7.85 14.77 17.28 16.56 16.58 8.90
operating net profit profit
Y-o-Y % change
operating profit margin
24.94 25.63 26.84 24.88 21.22 25.07 25.45
net profit margin
20.05 19.93 21.29 19.59 16.71 19.27 20.50
8.56 17.11 18.74 9.68 -1.43 6.42
11.49 5.80 16.63 -2.71 -3.78 4.80 3.54
7.57
April 2020; Created by the case writers using data from CMIE industry outlook database Financial performance
Sep-19
Source: Center for Monitoring Indian Economy (CMIE) database; industry outlook; assessed on 15-
6.99
1.39
Tushi gathered desirable financial information from secondary sources to conduct appropriate analyses and assist Anil in taking the investment call. He felt all three statements, namely financial statements (see Exhibit 1) and income statements (see Exhibit 2), and the cash-flow statements (see Exhibit 3 & 4), could be beneficial. He had also reviewed the application of traditional DuPont decomposition and alternate DuPont analysis using gathered information. He also applied various valuation ratios and free cash flow to
the available set of data. How would the data lead to the final decision, he was wondering?
The alternate DuPont decomposition approach separated a company’s return on equity (ROE) into three factors: (1) how profitably a company employed its assets to produce revenue; (2) the margins the company was making relative to sales; and (3) how extensive the firm’s asset base was the relation to shareholder’s equity in the firm, total assets to its total shareholder’s equity including reserves and surplus.
TCS performs better in return on capital employed (ROCE), return on long-term funds (ROLTF) & dividend per share. Still, HCL has a higher operating profit margin (OPM), profit before interest, and tax (PBIT), gross margin (GM), and net profit margins (NPM).
Infosys outperformed in terms of liquidity and solvency, followed by HCL, TCS, and Wipro.
Return on assets (ROA), for TCS 73.72%, HCL’s 33.76%, Infosys’s 23.73% and Wipro 18.69% respectively.
Overall, TCS performed well in terms of management efficiency ratios.
IIUM Journal of Case Studies in Management, Vol. 12, No. 2, 2021 16
Theoretical background
Top Four Indian IT Companies: Financial Investigation
Lots of research have been done in the area of accounting anomaly, information, and fundamental analysis. Many researchers, graduate students, and independent analysts are currently doing different types of research in the domain of accounting and financial valuations (Anthony et al., 2016). In this study, we are trying to identify companies based on DuPont analysis's fundamental ratios to determine their financial performance. Based on this, we can recommend them further. Early research in the field focused on earnings; the works of (Ball & Brown, 1968) and (Beaver, 1968) were the founders of the research between capital market behavior and financial statements. Both studies report that there is a significant positive relationship between changes in earnings and stock returns. (Frankel & Lee, 1998) inferred that the market’s reaction to an earnings announcement is anomalous. (Garrod et al., 2008) examined private companies in Slovenia and found a positive relationship between profitability and the write-off likelihood and magnitude.
This case investigated the extent to which returns on shares listed on the stock markets of Eastern Europe are predictable and attempted to determine what factors have the explanatory ability. Firstly, it has focused on the efficient market hypothesis, factor models, capital structure theory, and the relationship between accounting information and stock market returns. When the methodology of (Stephen H. Penman, 2007) and (Skogsvik, K. Skogsvik, S. & Thorsell, 2011) had applied to stocks listed in the EU nations, they find that the decomposed elements of the book to price ratio perform substantially differently. (Katchova & Enlow, 2013) evaluated DuPont ratios to compare the return on equity components among agri-businesses and all companies. DuPont analysis is based on return on equity, which is quite an essential variable for investors. A high DuPont ratio leads to better investment opportunities.
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Table 2: Top Ten IT and ITs companies in India (Million INR)
Company
Tata Consultancy Services Ltd Infosys Ltd
Wipro Ltd
H C L Technologies Ltd
Tech Mahindra Ltd Capgemini Technology India Ltd
Cisco Systems India Pvt. Ltd Larsen & Toubro Infotech Ltd E I T Services India Pvt. Ltd
Mindtree Ltd
Rank by size
1 2 3 4 5
6 7 8 9
10
Total Income from Size income Sales financial services
1,025,520.0 1,312,550.00 1,231,770.00 79,400.00
Rank Company
1 Tata Consultancy Services Ltd
2 Infosys Ltd
3 Wipro Ltd
4 Cognizant Technology Solutions India Pvt. Ltd
5 Tech Mahindra Ltd
6 H C L Technologies Ltd
7 Capgemini Technology Services India Ltd
8 Larsen & Toubro Infotech Ltd
9 Oracle India Pvt. Ltd
10 J P Morgan Services India Pvt. Ltd
2018-19 (%) 16.72 09.93 06.36 03.75 03.70 03.51 01.84 01.21 01.02
01.02
735,913.33 561,135.50 288,953.33 268,878.83
128,611.50 82,668.08 65,061.83 54,253.90
48,927.00
759,650.00 508,016.00 268,220.00 281,797.00
140,171.00 79,246.00 92,385.00 55,597.00 71,126.00
731,700.00 481,238.00 260,120.00 272,492.00
136,089.00 75,871.00 89,072.00 54,944.70
70,215.00
24,990.00 25,686.00 7,900.00 8,297.00
3,700.00 2,999.00 3,157.00 554.00
834.00
Source: CMIE database; industry outlook; assessed on 15-April 2020; Created by the case writers using data from CMIE Industry Outlook database
Table 3: Market Share of IT and ITeS Companies Operating in India, 2018-19
Source: CMIE database; industry outlook; assessed on 15-April 2020; Created by the case writers using data from CMIE Industry Outlook database
Conclusion
Tushi was a self-motivated employee who was always looking forward to new projects. Performing routine tasks from the past few days, he was craving for some new tasks to complete. Rather than relaxing after work, he immediately started to collect the relevant information required for the job to accomplish. Top management of the investment company had several meetings with key members of the team. The team carried out multiple discussions and deliberations to explore all possibilities of financial valuation.
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Top Four Indian IT Companies: Financial Investigation
High investment ratio, profitability ratio, and high DuPont ratio lead to a better investment opportunity, and can we use these parameters to evaluate a company’s financial performance?
Suggested Questions
1. Calculate the financial ratios, namely, operating, leverage profitability, and market-based ratio using income statements and financial statements.
2. Calculate net working capital and net long-term assets for all four companies.
3. Based on DuPont decomposition, which company would you prefer and why?
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Exhibit 1: Financial Statements for HCL, TCS, Infosys, and Wipro from 2017-2019, (All numbers in millions INR)
HCL 30/3/18
16940
23570
40510
96390
1720
0.0 245580
90940
-42140 48800
0.0
67990 73940 0.0
TCS
30/3/18
69390
357420
426810
249430
260
970 812240
239980
-125040 114940
0.0
17450
120
210
250720
Infosys
30/3/18 30/3/17
3041 3489 982 1538 4023 5027 2016 1900
0.0 0.0
14 6.0 7673 8282
3418 3140
-108340 -1663
115980 1940 1873 1816
0.0 670 883 995
15970 512 339 563 470 91 28 111 310 0.0 332 0.0
227260 4608 4582 4572
Wipro
30/3/18
44925
252258
297183
100990
3370
2555 506156
148081
-83638 64443
8874
117584
18113
3938
254484
760640
92991 24406 0.0 45632 19040
30/3/19
59290
41530
100820
117060
910
0.0 297220
105610
-50330 55280
0.0
90610
85340
40
288530
585750
Liabilities current liabilities
Current debt
Accountspayable
Taxes payable
Accruedliabilities 0.0 0.0 0.0 0.0 0.0 0.0 480 Deferredrevenues 0.0 0.0 0.0 0.0 0.0 0.0 410
30/3/19
158529
230099
388628
100489
3951
6820 571906
163779
-93178 70601
8151
116980
13762
9549
261265
833171
71099 28527 0.0 59777 26129
30/3/17
52710
292030
344740
94846
3915
5167 538898
165493
-95699 69794
7103
125796
15922
428
254618
793516
122801 23452 0.0 42034 18544
Assets & current assets Cash and cash equivalents Other short-term invest Total cash
Net receivables
Inventory
Other current assets
Total current assets
Non-current assets
Gross property, plant and equipment
Accumulated depreciation
Net property & plant
Equity & other investment
Goodwill
Intangible assets
Other long-term assets Total non-current assets
Total assets
30/3/17
13168
88654
101822
83012
2755
0.0 264697
82130
30/3/19
126520
292870
41939
273460
100
1360 921310
254850
30/3/17 30/3/19
40270 2829 416760 958 457030 3787 226840 2144
210 0.0
630 32 805260 7644
224320 3603
-37667
44462 113740
0.0 0.0
65043 17000 47333 1790 0.0 300
-141110
-1545 -1324
234650 192996 228120
480230 457694 114943
103252 12252 12255 12854
106296 000
11200 1760 1892 0.0 1810 2000 0.0 16230 13960 16368 62920 50940 62790 255 0.0 0.0 0.0 0.0 0.0 0.0 442
0.0 0.0 127 57 504 788 376 399 358 279
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Top Four Indian IT Companies: Financial Investigation
Other current liabilities
Total current liabilities
Non-current liabilities
Long-term debt
Deferred tax liabilities
Deferred revenues
Other long-term liabilities
Total non-current liabilities
Total liabilities
Stockholders' equity Common stock
Retained earnings
Accumulated other comprehensive income Total stockholders' equity
31100 31520 29357 740 480 400 408 117 76 122990 101070 113416 220840 178280 145120 2693 2164 2161
28740 2630 3549 0.0 540 0.0 0.0 0.0 0.0
8574 214350
28368 3417
0.0 3175
48068 262418
12068 534700
0.0 568116
12688 213507
45268 3059
0.0 2439
61787 275294
9048 453265
0.0 482936
7429 229543
19611 6614
0.0 1265
41278 270821
4861 490930
0.0 520304
793516
2260 340 0.0 2130 1790 1756 480 1060 399
48090 15300 13054 171080 116370 126470
2710 2780 2853 389640 316340 252417
0.0 0.0 0.0 413640 363860 329498
10420 8440 0.0
29600 250440
3750 855200
0.0 894460
11700 9190 5030 0.0 0.0 450
29380 21600 207660 166720
1910 1970
797550 710710
0.0 0.0
851280 862140
988232 101213 13 2.0 6.0
159 131 56
2852
339 11248
397
9391
2295 2217
190 199 11587 12190
Total liabilities and stockholders' equity
106296 103252 00
253 6.0 9960 10637 12255 12854
12252
Source: CMIE database; industry outlook; assessed on 15-April 2020; Created by the case writers using data from CMIE Industry Outlook database
585750 480230 457694
1149430
833171
760640
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Exhibit 2: Income Statements for HCL, TCS, Infosys, and Wipro from 2017-2019, (All numbers in millions except shares and EPS)
HCL 3/30/18 505690 264070 241620
7320 142990
98630
530
110240
23020 87210
87210
31.11 31.09
2802
2804
EBITDA, INR
Source: CMIE database; industry outlook; assessed on 15-April 2020; Created by the
Particulars
Total revenue, INR
Cost of revenue, INR
Gross profit INR
Operating expenses, INR
Selling general and administrative, INR
Total operating expenses INR
Operating income or loss INR
Interest expense INR
Income before tax INR
Income tax expense INR
Net income INR
Net income available to common shareholders, INR Basic EPS, INR
Diluted EPS, INR
Basic average number of shares
Diluted average number of shares
3/30/19
604270
314880
289390
8520
170860
118530
1550 126220
25020 101200
101200
36.79 36.77
2750
2751
3/30/17
475675
239977
235698
8614 140076
95622
718
105427
19362 86064
86064
30.16 30.14
2852
3/30/19
1464630
805160
659470
126510
284970
374500
1980 415630
100010
314720
314720
83.05 83.05
3789
TCS 3/30/18 1231040 690960 540080
100540
233000
307080
520 340920
82120 258260
258260
67.09 67.09
3849
3/30/17 3/30/19
1179660 11799 644290 7687 535370 4112
99210 1220
230880 1381
304490 2731
320 -21 345130 3003
81560 803 262890 2199
262890 2199
66.7 0.51 66.7 0.51
3940 4347
3940 4353 365320 3018
Infosys
3/30/18 3/30/17
10939 10208 7001 6446 3938 3762
1116 1020
1268 1187
2670 2575
107 19 3143 2974
657 834 2486 2140
2486 2140
0.55 0.47 0.55 0.47
4510 4571
4515 4572
3/30/19
585845
413033
172812
75749
76117
96695
5616
115415
25242 90031
90031
14.99 14.95
6007
6022
Wipro 3/30/18 544871 385575 159296
71981
76490
82806
3451
102474
22390 80081
80081
12.65 12.62
6333
6344 127049
3/30/17
550402
391544
158858
64179
68756
90102
1916
110356
25213 84895
84895
13.11 13.07
6476
6495 135379
148500
124600
2855 114427
3789 438170
3849 361580
2959 2829
from CMIE Industry Outlook database
140505
case writers
using data
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Exhibit 3: Cash-flow Statements for HCL and TCS from 2017-2019, (all numbers in millions, INR)
HCL
3/30/19 3/30/18 3/30/17
3/30/19
-39220 20560 -21690 160 263620 -25640
285930
0.0
-22310 -500 -1162080 1173050 440
15960
22920
48830
72240
285930 -22310 263620
TCS 3/30/18
258260 20140 -2090 0.0 232050 -23930
250670
0.0
-18620 0.0 -1064450 1085980 -950
28860
10680
35970
48830
250670 -18620 232050
3/30/17
262890 19870 -6310 0.0 232330 -22310
252230
0.0
-19900 0.0 -1237240 1067560 4000
-167320
-25350 62950 35970
252230 -19900 232330
Top Four Indian IT Companies: Financial Investigation
Cash flows from operating activities Net income
Depreciation & amortization Change in working capital Inventory
Other working capital
Other non-cash items
Net cash provided by operating activities
Cash flows from investing activities
Investments in property Acquisitions, net
Purchases of investments Sales/maturities of investments Other investing activities
Net cash used for investing activities
Net change in cash
Cash at beginning of period Cash at end of period
Free cash flow Operating cash flow Capital expenditure Free cash flow
101200 20730 -24660 1080 55060 -4960
89710
0.0 -34650 -53440
87210 13830 -12340 1170 29840 -3900
86064 8281 3207 -202 50731 -6465
83280
89951
0.0 -28280 -276340 305160 -2040
-30730
44360
16990
59340
89710 -34650 55060
0.0 -2510 -260010 289450 -1550
-22830
3310
13210
16990
83280 -53440 29840
0.0 -5017 -219568 218543 -2717
-38165
6454
7329 13211
89951 -39220 50731
Source: CMIE database; industry outlook; assessed on 15-April 2020; Created by the case writers using data from
CASE STUDY 1: TOP FOUR INDIAN IT COMPANIES: FINANCIAL INVESTIGATION
Based on case study “Top Four Indian IT Companies: Financial Investigation” answer following questions:
1. Calculate the financial ratios, namely, operating, leverage profitability, and market-based ratio using income statements and financial statements. Make comments based on your calculation. (12 marks)