ANALYSISBEYONDCONSENSUS

THENEWABCOFRESEARCH
TCSvsInfosys|AnnualReportAnalysis

A comparison of FY13 annual reports of Infosys and TCS presents varying trends on various critical metrics between the two IT behemoths. While Infosys follows a stable and conservative hedging policy (only forwards), TCShedgingpolicyisvaried(forwards+options).Hedges,asaproportion of revenue, is lower for Infosys visvis TCS, which is likely to favour the former in an INR depreciating scenario. Infosys ranks better on disclosure parameters, translation of earnings into cash, margin stability, whereas TCS ranks better in terms of earnings growth, tax efficiency and dividend payout. While Infosys cash surplus is primarily in fixed deposits/mutual funds,TCScashsurplusalsorepresentsnonconvertibledebentures(NCD) andintercorporatedeposits(ICD),resultinginhigheryields.

KeyHighlights
Derivativesandhedges The two companies follow different hedging proportions and strategies. We believeInfosyshasastableandconsistenthedgingstrategyvisvisTCS;thelatter has a varied policy for hedging its currency risk. TCS has mix usage of options and forward contracts as hedging instruments, while Infosys has only foreign currency forwardcontracts. Higher coverage in FY12 led to higher derivative losses for TCS; part of losses was recognised in hedging reserves. TCS recognises portion of gains/losses on derivative contracts in reserves, being designated as effective cash flow hedges, and balance in P&L. Infosys booked all gains/losses in P&L as all the hedges were consideredineffective.

Qualityofaccountingpolicydisclosures Quality of Infosys accounting policy disclosures was observed to be better. The company provides exhaustive disclosures in the annual report related to revenue recognition, postsales support costs and warranties. TCS did not specifically provide disclosuresontheaboveitems. Translationofearningsintocash Conversion ratio of earnings into cash flow was consistently higher for Infosys compared to TCS. Cash conversion ratio dipped in FY11 for both the companies, however Infosys recovered quickly visvis TCS. Average collection period was consistentlylowerfortheformerversusTCS.

ManojBahety,CFA
+912266233362 manoj.bahety@edelweissfin.com

SandeepGupta
+912240635474 sandeep.gupta@edelweissfin.com

Analysis beyond Consensus (ABC) is our initiative to provide a differentiated perspective to our clients onvariousnonroutineandintricateissues.Thisunitofresearchworksindependentofthesector/stock researchteamandviewsexpressedinthisreportmayvarywiththatofrespectivesector/stockanalyst.
Edelweissresearchisalsoavailableonwww.edelresearch.com, 1 BloombergEDEL<GO>,ThomsonFirstCall,ReutersandFactset.

July8,2013 EdelweissSecuritiesLimited

AnnualReportAnalysis
Cumulativecashgenerationanddisposal TCS paid out higher amount of cash on acquisitions and paying dividends to shareholders compared to Infosys during the past five years. Cash held as a percentage of net worth is significantlyhigherforInfosysvisvisTCS. Investmentyields TCS generated better yields on average cash and investments for three years since FY11, especially in FY13, due to investments in high yielding corporate debentures issued by parent company Tata Sons and its subsidiaries (12% of surplus cash is invested in NCDs issuedbygroupcompanies).

Scorecard(Basedonourassessment) Parameters Derivativesandhedging

Disclosure quality Earningstranslationintocashflow Cashflowgrowthandutilisation Revenue andPATgrowth Revenue &PATperemployee PAT&EBITDAmargins Dividendpayout RoEcomposition Investment yield Effective taxrate

TCS

Infosys

Remarks Stablederivativecoverageandconsistenthedgingpolicy byInfosys Detailedpolicydisclosures byInfosys Consistentlyhigher conversionratio Higher spends onacquisitions,payingdividendandlower cashheldonbooks byTCS Higher growthYoYcomparedtoInfosys Consistentlyhighper employeemetrics for Infosys Higher margins maintainedbyInfosys TCSpaidhigher dividends infiveyears exceptinFY11 Consistentlyhigher for TCSin5 years Higher for TCSduetohighyieldinginvestments Lower taxratemaintainedfor pastfour years

Source: Companyannualreport,Edelweissresearch

Hedgingproportionandstrategy
Hedging coverage as percentage of average revenue is higher for TCS compared to Infosys.However,theproportionhasbeenvaryingincaseofTCS,whereasforInfosysit hasbeenstableandconsistent(between10%and15%)overthepastfiveyears.

Varyinghedgingproportionand strategyobservedbetweenthe twocompanies.Infosyshasa stableandconsistenthedging strategyvisvisTCS.

Hedgingcoveras%ofaveragerevenue
55.0 45.4 35.8 66.0 59.8 53.6 47.4 41.2 35.0

26.2 16.6 7.0

FY09 TCS(%)

FY10

FY11 INFY(%)

FY12

FY13 USD/INR

(USD/INR)

(%)

Source: Companyannualreport,Bloomberg,Edelweissresearch
2 EdelweissSecuritiesLimited

TCSVsInfosys
Derivativeinstrumentsusedforhedgingfirmcommitments/forecastsalestransactions. TCS enters into contracts ranging from 1 day to 8 years and has a mix of both foreign exchangeforwardcontractsandforeigncurrencyoptionscontracts.Theproportionhas been varying year on year. Due to options contract, the company will benefit from favourableexchangeratesmovements. Infosys enters into contracts maturing between 1 and 12 months. Outstanding exposure as at March 31, 2013, and past three years data reveals that use of options has been discontinued and hedging strategy is to use only foreign exchange forward contracts.Absenceofoptions contractsresultsinlowerhedgingcost;however,itlimits thecompanysabilitytobenefitfromfavourableexchangeratesmovements.

ForwardsandOptionsmix
TCS 100% 80% 60% 40% 20% 0% FY09 FY10 FY11 FY12 FY13

ForwardsandOptionsmix
Infosys 100% 80% 60% 40% 20%

Forwards Cashflowhedgesroutedthroughreserves Options Cashflowhedgesroutedthroughreserves ForwardsandOptions RoutedthroughP&L

0%

FY09

FY10 Forwards

FY11

FY12 Options

FY13

Source: Companyannualreport,Edelweissresearch

Accountingofderivativegains/losses
TCSpostedhigheramountof derivativelossesinFY12 comparedtoInfosysonaccount ofhigherderivativecover. Infosys,duetolowderivative coverage,postedlowerlossesin FY12andbookedagaininFY13 onderivativecontracts.
Both TCS and Infosys have adopted AS30 Financial Instruments: Recognition and measurement. Consequently, TCS records MTM gains/ losses directly in reserves for all effectivehedgesdesignatedascashflowhedges. Infosys routes all gains/ losses through P&L because the disclosure in the companys financial statements states that currently hedges taken by the group are ineffective and hence resultant gains/ losses consequent to fair valuation are recorded directly in the profit andlossaccount.

EdelweissSecuritiesLimited

AnnualReportAnalysis
Derivativegains/lossesreportedinfinancialstatementsandnotestoaccountsbyTCSand Infosys

DerivativeGains/(Losses)
TCS 9.0 5.0

DerivativeGains/(Losses)
4.0 1.6

Infosys

(INRbn)

(3.0) (7.0)

(INRbn)
FY09 FY10 FY11 FY12 FY13

1.0

(0.8) (3.2) (5.6) (8.0)

(11.0)

FY09

FY10

FY11

FY12

FY13

Derivative Gain/(Loss)recordedinP&L Derivative Gain/(Loss)recordedinReserves

Derivative Gain/(Loss)recordedinP&L

Source: Companyannualreport,Edelweissresearch *(FY09andFY10figuresforInfosysarebasedonstandalonefinancialsasconsolidatednumbers arenotavailable)

Comparisonofaccountingpolicydisclosures
QualityofInfosysaccountingpolicydisclosureswasobservedtobebetterthanTCS.

Accountingpolicies Accountingpolicies Revenue recognition

Observations Infosyshas providedfairlydetailedpolicydisclosurefor revenuerecognition.Theaccounting policyfor revenuerecognitionincludes specific mentiononvolumediscounts andpricing incentives tocustomers,estimates involvedinassessingtheamounts andbasis ofallocationtothe underlyingrevenuetransactions. TCSrevenuerecognitionpolicyis verybroadinnatureandlacks specific disclosures onvolume discounts,incentives andextentofestimates involvedinrecognisingthesecosts. Detailsofamount involvedwasnot separatelydisclosedbyboththe companies. Infosysseparatelydiscloses its policyfor recognitionofpostsales supportcosts andwarranties provisions.Itestimates suchcosts onbasis ofhistorical experienceandestimates arereviewed annuallyfor anymaterial changes. FY13Provisionfor post salesclient support andwarrantiesstoodat INR0.8bn(FY12INR0.6bn) Cumulative provisionfor post salesclient support andwarrantieswasat INR2.13bn(FY12 INR1.33bn) TCSdoes notprovideanysuchspecific disclosures regardingwarranties/sales supportcosts. Nospecificdetailsavailable oncostsincurred.

Post salesclient support andwarranties

Source: Companyannualreport,Edelweissresearch
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TCSVsInfosys
Earningstocashconversion
ConversionratioofearningstooperatingcashflowpansoutconsistentlybetterforInfosys thanTCS.

A) TranslationofadjustedEPStooperatingcashflowpershare.

Cashflowsanalysis
TCS Particulars FY09 FY10 FY11 Net cashfrom operatingactivities 54.1 74.1 66.4 Interestexpenses paid (0.3) (0.2) (0.3) Net cashfrom operatingactivitiespost interest 53.8 73.9 66.1 Operatingcashflowper share(OCFPS) 27.5 37.8 33.8 EPS(Reported) 26.8 35.7 46.3 Other income per share (2.2) 1.4 3.1 Adj EPS(ExOther Income) 29.0 34.3 43.2 AdjEPS(Exclotherincome)RepresentedbyOCFPS(%) 94.7 110.1 78.2 FY12 69.8 (0.2) 69.6 35.5 53.1 2.2 50.9 69.8 FY13 116.2 (0.5) 115.7 59.1 71.0 6.0 65.0 91.0 Infosys FY09 FY10 FY11 53.3 61.9 47.5 53.3 61.9 47.5 93.0 108.4 83.2 104.6 109.0 119.7 16.0 16.6 21.2 88.6 92.4 98.5 104.9 117.2 84.5

(INRbn)
FY12 63.1 63.1 110.4 145.8 33.3 112.5 98.1 FY13 73.7 73.7 129.1 165.0 41.4 123.6 104.4

Source: Companyannualreport,Edelweissresearch

Earningstocashconversionratio(%)
130.0 114.0 98.0
(%)

%ofAdj.EPS(Excl.Otherincome)
TCS Infy FY09 94.7 104.9 FY10 110.1 117.2 FY11 78.2 84.5 FY12 69.8 98.1 FY13 91.0 104.4

82.0 66.0 50.0 FY09 FY10 TCS FY11 FY12 Infy FY13

Source: Companyannualreport,Edelweissresearch

Infosys ratio has been consistently higher in the past five years, whereas TCS conversion ratio deteriorated, especially FY11 onwards, primarily due to increase in trade and other receivables. TCS also has exposure to government sector/ vertical which was one of the driversofincrementalgrowthin2012.

EdelweissSecuritiesLimited

AnnualReportAnalysis
Averagecollectionperiod 89
80 71 61 52 43 FY09 FY10 TCS FY11 FY12 Infy FY13

Receivabledays
TCS Infy FY09 73 59 FY10 69 58 FY11 69 54 FY12 74 57 FY13 74 59

(Days)

Source: Companyannualreport,Edelweissresearch

ReceivablescollectiondayscontinuedtobehigherforTCS. B) Cumulativecashflowgenerationandutilisationanalysisoverpast5years(FY0913) Sourcesofcash Netoperatingcashflow generationhasbeenlowerforInfosysoncumulativebasis in the past five years compared to TCS. Relative proportion of dividend, interest andotherincomeisalsosignificantlylargerfortheformerthanthelatter. Sourcesofcashgenerationfrom2009to2013

TCS Investment Income 5%

Investment Income 19%

Infosys

Net Operating Cashflows 95%

Utilisation

Net Operating Cashflows 81%

Source: Companyannualreport,Edelweissresearch

Both the companies invested nearly equal amounts in fixed capital. TCS has a largerpercentageofdividendpaymentcomparedtoInfosys.Cashheldonbooksas percentageoftotalcashgeneratedcontinuestobesignificantlylargeforInfosys.In terms of spending on acquisitions, TCS spent more than Infosys in the past five years.TCShasalsolargerpercentageoffundsinvestedinfixeddepositsandshort/ longterminvestmentsvisvisInfosys.

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TCSVsInfosys
Cashutilisationaspercentageofcashgenerationfrom2009to2013 Netcash TCS surplus/ (deficit) Capex 14% Netdebt 21% repaid Netcash 1% surplus/ Acquisition (deficit) 6% NCDsand 41% ICDs 12% Purchase ofminority interest 1%
Dividend 45%

Infosys

Capex 19%

Acquisition 4%

Dividend 36%

Source: Companyannualreport,Edelweissresearch

TCSYoYcashgenerationandutilisationFY09toFY13
Sources
Operating profit Les s :Interes t Les s :Ta xes Add:Inves tmentIncome Cashprofits Worki ngca pi ta l cha nges Cashprofitsafterworkingcap Equi ty Total

(INRbn)
Total Application FY09
11.0 24.4 16.1 0.8 0.3 (0.1) 3.4 55.8

FY09
64.3 0.4 12.1 2.1 53.9 1.9 55.8 0.0

FY10
88.3 0.2 19.1 1.1 70.2 4.8 75.0 0.1

FY11
110.7 0.3 22.6 4.1 91.9 (21.9) 70.0 0.0

FY12
145.0 0.2 40.7 4.3 108.4 (34.6) 73.8 0.1

FY13

FY10
10.3 (0.3) 19.7 13.9 4.0 (0.1) 27.4 75.0

FY11
18.1 (0.3) 46.1 0.4 0.2 (0.1) 5.6 70.0

FY12
19.9 2.3 39.1 3.8 0.3 0.0 8.5 73.9

FY13
26.3 1.6 57.4 27.4 (0.8) 0.2 11.6 123.7

Total
85.6 25.5 2.3 178.3 46.3 4.1 (0.0) 56.5 398.5

Ca pex Acqui s i ti ons Purcha s e ofmi nori tyi nt. Di vi dend NCDs a nd ICDs Netdebtrepa i d Mi s cel l a neous Netca s h a nd i nves tments (FDs ,Mutua l funds ) 55.8 75.0 70.0 73.9 123.7 398.5 Total

182.0 590.4 0.5 1.5 48.2 142.7 8.1 19.6 141.4 465.8 (17.7) (67.5) 123.7 398.3 0.2

Source: Companyannualreport,Edelweissresearch

TCScashflowposted17%CAGRoverpastfiveyears

InfosysYoYcashgenerationandutilisationFY09toFY13
Sources
Operating profit Les s :Interes t Les s :Ta xes Add:Inves tmentIncome Cashprofits Worki ngca pi ta l cha nges Cashprofitsafterworkingcap Equi ty Total

(INRbn)
Application FY09 FY10
6.7 1.7 15.7 47.4

FY09
66.9 9.0 10.6 68.4 (4.6) 63.8 0.6 64.5

FY10
80.1 17.5 8.7 71.3 (0.6) 70.8 0.9 71.6

FY11
90.3 28.5 11.5 73.3 (14.3) 59.0 0.2 59.2

FY12
108.4 31.2 18.1 95.4 (14.2) 81.2 0.1 81.3

FY13
118.5 32.9 19.7 105.3 (11.8) 93.4 0.0 93.4

Total
464.2 119.1 68.6 413.6 (45.5) 368.2 1.8 370.0

FY11
13.1 0.0 36.6 9.5

FY12
15.3 2.0 23.3 40.7

FY13
20.9 11.6 31.2 0.9 28.9

Total
69.2 15.5 131.8 0.9 152.6

Ca pex 13.3 Acqui s i ti ons 0.2 Di vi dend 24.9 Netdebtrepa i d Netca s h a nd i nves tments 26.1 (FDs ,Mutua l funds )

Total

64.5

71.6

59.2

81.3

93.4

370.0

Source: Companyannualreport,Edelweissresearch

Infosyscashflowposted8%CAGRoverpastfiveyears.

EdelweissSecuritiesLimited

AnnualReportAnalysis
PBTgrowthversuscashflowgrowth
Growth in cash flow from operations versus PBT has been unstable for TCS, except for FY10 when it was almost equal. For Infosys, cash flow growth has been in line with PBT growth, except for FY11 when it was negative due to significant increase in receivables and taxes paid.

PBTandCashflowgrowth
80.0 60.0 40.0 TCS

PBTandCashflowgrowth
42.0 28.0 14.0 Infosys

(%)

20.0 0.0 (20.0) FY09 FY10 FY11 FY12 FY13

(%)
0.0 (14.0) (28.0)

FY09

FY10

FY11

FY12

FY13

PBT(%growthYOY) Cashflowfromoperations(%growthYOY)

PBT(%growthYOY) Cashflowfromoperations(%growthYOY)
Source: Companyannualreport,Edelweissresearch

PATandEBITDAmargins
Despite TCS better revenue growth in FY13 visvis Infosys, the latters profit margin continued to be better. Infosys EBITDA margin has been higher than TCS except in FY13 whereitisalmostequalforboththecompanies. EBITDAmargin 42.0

PATmargin 29.5

27.0 24.5

38.0 34.0

(%)

(%)
22.0 19.5 17.0
30.0 26.0 22.0

FY09 TCS

FY10

FY11

FY12 INFY

FY13

FY09

FY10 TCS

FY11

FY12 INFY

FY13

Source: Companyannualreport,Edelweissresearch

8 EdelweissSecuritiesLimited

TCSVsInfosys
RevenueandPATperemployee
RevenueperemployeeandPATperemployeecontinuestobehigherforInfosysvisvis TCS. PATperemployee

Revenueperemployee

0.70 0.60 0.50

(INRmn)

3.0 2.4
(INRmn)

0.40 0.30 0.20

1.8 1.2 0.6

0.10 0.00

0.0
FY11 TCS FY12 INFY FY13

FY11 TCS

FY12 INFY

FY13

Source: Companyannualreport,Edelweissresearch

Dividendpayoutratio
Dividend payout has been higher for TCS in past five years, except for FY11, compared to Infosys.FY11increaseindividendforInfosysisonaccountofspecialdividendoncompletion of30years.

Dividendpayout(%)

Infosys 60.0 48.0 36.0

(%)
24.0 12.0 0.0

FY09

FY10 TCS

FY11

FY12 INFY

FY13

Source: Companyannualreport,Edelweissresearch

EdelweissSecuritiesLimited

AnnualReportAnalysis
ROEanalyser
TCS continues to exhibit higher ROE as compared to Infosys; however latter has higher returnonoperatingassets(RNOA)asrevealedbyROEanalyserbelow.

ROEcomparison 51.0
45.0 39.0
(%)

33.0 27.0 21.0

FY09

FY10 TCS

FY11

FY12 INFY

FY13

Source: Companyannualreport,Edelweissresearch

RoE analyser analysis profitability on the scale of operating and capital allocation efficiency (detailedconceptexplainedinAnnexureA).WehaveanalysedTCSandInfosysprofitability forFY13,resultsandkeyfindingsofwhicharegivenbelow:

TCSROEanalyser Particulars A.Returnonnet operatingassets(RNOA) OPATO (operatingassetturnover)(x) NOPATmargin(%) B.Returnfrom leverage (FLEVxspread)(%) FLEV(financial leverage)(x) NFI (netfinancingincome)(%) Netfinancial spread(RNOANBC)(%) C.Returnfrom other funding(%) ROEDerived(A+B+C)(%)

FY13 42.1 2.0 21.0 (5.2) (0.2) 12.5 29.6 0.3 37.1

*Netfinancingincomeisbasedonclosingaveragefigures(ReferAnnexureAfordetails)

10

EdelweissSecuritiesLimited

TCSVsInfosys
ROEtreeTCS 45.0
4.9 36.0 27.0
(%)

0.3

18.0 9.0 0.0

42.0

37.4

RNOA

Returnfrom leverage

Returnfromother funding

ROAE

Source: Companyannualreport,Edelweissresearch

InfosysROEanalyser Particulars A.Returnonnet operatingassets(RNOA) OPATO (operatingassetturnover)(x) NOPATmargin(%) B.Returnfrom leverage (FLEVxspread)(%) FLEV(financial leverage)(x) NFI (netfinancingincome)(%) Netfinancial spread(RNOANBC)(%) C.Returnfrom other funding(%) ROEDerived(A+B+C)(%)

FY13 50.8 2.6 19.4 (25.1) (0.6) 7.4 43.5 25.7

*Netfinancingincomeisbasedonclosingaveragefigures(ReferAnnexureAfordetails)

ROEtreeInfosys

Source: Companyannualreport,Edelweissresearch

11

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AnnualReportAnalysis
Yieldoninvestments
Infosyscashandinvestments as%ofnetworthissignificantly highat59%ascomparedtoTCS 20%.
Further,TCSgeneratedbetter returnsoncashandinvestments comparedtoInfosys. The increase is FY13 seems to be primarily on account of investment in high yielding non convertible debentures issued by parent company Tata Sons and its subsidiaries (interest rangingfrom8.5%to9.5%)andinvestmentinotherdebenturesandbonds.

Yieldsonaveragecashandinvestments
Infosys 16.0 12.8 9.6

(%)

6.4 3.2 0.0

FY09

FY10 TCS

FY11

FY12 INFY

FY13

Source: Companyannualreport,Edelweissresearch

Effectivetaxrate
TCSeffectivetaxratehasbeenconsistentlylowerinpastfouryearscomparedtoInfosys.

Effectiveincometaxrate(%)
Infosys 35.0 28.0 21.0

(%)
14.0 7.0 0.0

FY09

FY10 TCS

FY11

FY12 INFY

FY13

Source: Companyannualreport,Edelweissresearch

12

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TCSVsInfosys
Geographicalrevenuesplit
US and Europe contribute significantly to revenues of both TCS and Infosys. While revenue contributionfromUShasbeenflattishforTCS,USrevenuegrowthdippedmarginallyincase ofInfosys.

Revenuecontribution(%)
100% 80% 60% TCS

Revenuecontribution(%)
100% 80% 60% Infosys

(%)

(%)
40% 20% 0% 40% 20% 0% FY10 FY11 FY12 Europe India FY13 Others

FY09 Americas

FY09

FY10 Europe

FY11 India

FY12

FY13

NorthAmerica

Restofthe World

Source: Companyannualreport,Edelweissresearch

13

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AnnualReportAnalysis

ANNEXURES

14

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TCSVsInfosys
AnnexureAROEanalyzer
ROE analyser analyses the profitability on the scale of operating efficiency and capital allocationefficiency.Whileoperatingefficiencyisameasureofhowefficientlythecompany is making use of operating assets, capital efficiency is the measure of balance sheet efficiency. Theaboveanalysisinvolves: 1. Dissectionofprofitabilityalongtwomajordrivers: a. Returnfromoperatingactivities(RNOA:returnonnetoperatingassets). b. Returnfromfinancingactivities(leveragingeffectonROE). ROE=Returnfromoperatingactivities(RNOA)+Returnfromleverage Or ROE = Operating margin x Operating assets turnover + Leverage spread x Leverage multiplier Whereas: RNOA=NOPAT/Averageoperatingassets Operatingmargin=NOPAT/Operatingrevenue Operatingassetsturnover=Operatingrevenue/Averageoperatingassets Leveragespread=RNOANetborrowingcost Leverage multiplier = Average net financial obligation/Average common shareholders equity 2. Reformulation of balance sheet, wherein we have regrouped assets and liabilities into operating and financing categories (against traditional current and noncurrent categorisation). 3. Reformulationofincomestatement,wherein wehaveregroupedincomeandexpenses intooperatingandfinancingactivities.

15

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AnnualReportAnalysis
Summaryfinancials EdelweissSecuritiesLimited,EdelweissHouse,offC.S.T.Road,Kalina,Mumbai400098. Board:(9122)40094400,Email:research@edelweissfin.com
VikasKhemani NischalMaheshwari NiravSheth Recentresearch Date Title HeadInstitutionalEquities CoHeadInstitutionalEquities&HeadResearch HeadSales vikas.khemani@edelweissfin.com nischal.maheshwari@edelweissfin.com nirav.sheth@edelweissfin.com +912222864206 +912240635476 +912240407499

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TCSVsInfosys

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