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INDIAN IT INDUSTRIES
Name Company
Wipro
Nisheeth Porwal
TCS
Infosys
Arpit Mishra
MindTree
HCL
Sidhant Shisodia
L&T Infotech
Sitoria Polaris Software
Pirmamadzoda Cranes Software
2
Overview of IT Industry
India is the largest sourcing destination for the information technology (IT) industry, which
accounts for 67 per cent of the US$ 124-130 billion market. The Indian IT and ITeS industry is
divided into four major segments IT services, business process management (BPM), software
products and engineering services, and hardware.
The Indian Information Technology (IT) sector is expected to grow 11 per cent per annum and
triple its current annual revenue to reach US$ 350 billion by FY 2025, as per National
Association of Software and Services Companies (NASSCOM). Increased penetration of Internet
(including in rural areas) and rapid emergence of e-commerce are the main drivers for
continued growth of data center co-location and hosting market in India.
Indian IT's core competencies and strengths have attracted significant investments from major
countries. The computer software and hardware sector in India attracted cumulative Foreign
Direct Investment (FDI) inflows worth US$ 18.17 billion between April 2000 and September
2015, according to data released by the Department of Industrial Policy and Promotion (DIPP).
In the year 2015 the Aggregate industry revenues touched USD 146 billion, where domestic
market grew by 14%. This is faster than the average industry growth, and is largely being driven
by the booming E-Commerce segment. Stable government with a technology focused growth
agenda is further boosting technology adoption in the domestic market. The export segment of
the industry is aggregated to around USD 98.5 Billion. The exports for the year 2016 is expected
to grow by 12-14 % whereas the domestic market is expected to grow by 15-17%
3
The year also witnessed hyper-growth in the technology start-up and product landscape and
India is already ranked as the 4th largest startup hub in the world with over 3100 startups in the
country.
IT companies often face huge delays in their project for various reasons like getting a Visa. To
bypass these problems, companies often recruit sub-contractors. However, they cost 40% more
than Infosys own employees. This cost amounts to 5.7% of Infosys total revenues in FY16. This
puts pressure on Infosys margins. Hence, a 1% reduction in subcontracting costs can aid
margins by 30 bps (0.3%). We believe there is scope for improvement on this front in FY17,
4
Company- Tata Consultancy Services (TCS)
5
Current Ratio= 63067/21957 = 2.872 [From Previous Assignment]
6
NPM= 22882/85863 = .266 [From Previous Assignment]
Question 1 - Analyze the Capital structure of companies and report if any change is there
Capital Structure
Rs. In Millions
2015-16 2014-15
Equity capital including reserves and surplus 65360 99.87% 50634 99.77%
Long term Borrings 82.53 0.13% 114.27 0.23%
65442.5 50748.2
Total Capitalization 3 7
For calculating capitalization and capital structure, the Reserve and surplus are not taken into
consideration.
Due to increase in Equity capital of the company from 2014-14 to 2015-16, the total
capitalization of the company has increased to Rs. 50748.27 million from Rs. 65442.53 million.
However, the company huge reserve and surplus for both the financial years in the tune of Rs.
65442.53 millions. It means that the company is having huge net worth. So the debt component
is not that high in comparison to the net worth of the company.
Question 2 Calculate the individual cost of capital (Cost of debt/loan, equity for both years)
and overall cost of capital (WACC)
Cost of Debt
The finance cost given for the company is including long term and short term borrowings. So
while calculating the cost of debt, both the borrowings are taken into calculation.
As the finance cost or interest cost is quite low for the company, the cost of debt has come very
less. For the year 2014-15, the cost of debt is only 34.98% and for year 2015-16, the cost of
debt is 10.14%.
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Cost of Equity
The Total Equity Risk premium (Rm) for India is 9.71% taken from Damodarans report.
The risk free rate of return for India is 6.67% taken from RBI website.
The cost of equity is calculated for the current year from the data given above.
Ke = Rf + *(Rm-Rf)
As the cost of debt and accost of equity are known now, we can calculate the WACC by finding
the weighted average of the cost of capital.
The WACC for both the year is quite low due to the minimal cost of debt and its higher
proportion in the capital structure.
The WACC has also decreased from 0.733% to 0.727% in 2015-16 due to increased borrowing
and its higher proportion in the capital structure from the previous year.
Dividend Policy
8
Comment:
TCS has been returning cash to shareholders consistently from the time of listing, through
interim dividends every quarter, final dividend at the year-end and an occasional special
dividend.
9
Company- Wipro
Capital Structure:
10
11
Current Ratio= 450287/166071 = 2.872 [From Previous Assignment]
12
NPM= 80990/474561 = .17 [From Previous Assignment]
Question 1 - Analyze the Capital structure of companies and report if any change is there
Capital Structure
Rs. In Millions
2015-16 2014-15
Equity capital including reserves and surplus 409052 97.27% 346216 97.02%
Long term Borrings 11465 2.73% 10632 2.98%
Total Capitalization 420517 356848
For calculating capitalization and capital structure, the Reserve and surplus are not taken into
consideration.
Due to increase in Equity capital of the company from 2014-14 to 2015-16, the total
capitalization of the company has increased to Rs. 420517 million from Rs. 356848 million.
However, the company huge reserve and surplus for both the financial years in the tune of Rs.
404101 millions. It means that the company is having huge net worth. So the debt component
is not that high in comparison to the net worth of the company.
Question 2 Calculate the individual cost of capital (Cost of debt/loan, equity for both years)
and overall cost of capital (WACC)
Cost of Debt
The finance cost given for the company is including long term and short term borrowings. So
while calculating the cost of debt, both the borrowings are taken into calculation.
As the finance cost or interest cost is quite low for the company, the cost of debt has come very
less. For the year 2014-15, the cost of debt is only 6.01% and for year 2015-16, the cost of debt
is 7.88%.
As the borrowing has increased in the latest year because new loan is taken by the company,
the cost of debt has increased from 0.2% to 0.86%.
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Cost of Equity
The Total Equity Risk premium (Rm) for India is 9.71% taken from Damodarans report.
The risk free rate of return for India is 6.67% taken from RBI website.
The cost of equity is calculated for the current year from the data given above.
Ke = Rf + *(Rm-Rf)
As the cost of debt and accost of equity are known now, we can calculate the WACC by finding
the weighted average of the cost of capital.
The WACC for both the year is quite low due to the minimal cost of debt and its higher
proportion in the capital structure.
The WACC has also increased from 7.17% to 7.23% in 2015-16 due to increased borrowing and
its higher proportion in the capital structure from the previous year.
Dividend Policy
Directors recommend a final dividend of Rs 1/- per equity share of face value of Rs 2/- each to
be appropriated from the profits of the Company for the financial year2015-16, subject to the
approval of the shareholders at the ensuing Annual General Meeting. Pursuant to the approval
of the Board on January 18, 2016, your Company distributed an interim dividend of Rs 5/- per
equity share of face value of Rs 2/- each, to shareholders who were on the register of members
as on closing hours of January 27, 2016, being the record date fixed for this purpose. The total
dividend for the year ended March 31, 2016 would accordingly be Rs 6/- per equity share of
face value of Rs 2/- each. During the year 2015-16, unclaimed Dividend for financial year 2007-
14
08 of Rs 5,094,480/- was transferred to the Investor Education and Protection Fund, as required
under the Investor Education and Protection Fund (Awareness and Protection of Investor)
Rules, 2001.
Comment:
For the year ending March 2016, Wipro has declared an equity dividend of 300.00% amounting
to Rs 6 per share. At the current share price of Rs 442.35 this results in a dividend yield of 1.36%
15
Company Infosys Limited
Infosys is the third-largest Indian IT services company by 2016 revenues, and the fifth largest
employer of H-1B visa professionals in the United States in FY 2013. On 15 February 2015, its
market capitalisation was 263,735 crores ($42.51 billion), making it India's sixth largest
publicly traded company.
16
Cash Flow Statement:
17
Profit/Loss Statement:
Question 1 - Analyze the Capital structure of companies and report if any change is there
Capital Structure
Rs. In Crore
2015-16 2014-15
Equity capital including reserves 57157 99.87% 48068 99.94%
and surplus
Long term Borrowings 73 0.13% 30 0.06%
Total Capitalization 57230 48098
For calculating capitalization and capital structure, the Reserve and surplus are not taken into
consideration.
Long-term borrowings of the company increased from 2014-15 to 2015-16, the total
capitalization of the company has increased to Rs. 57230 crore from Rs. 48098 crore. The Debt
component has increased from 0.06% to 0.13%.
Companys huge reserve and surplus for both the financial years in the tune of near about Rs.
52500 crore (Average value for both the financial years). It means that the company is having
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huge net worth. So the debt component is quite low in comparison to the net worth of the
company.
This year, on a standalone basis, Infosys capitalized Rs.2,540 crore. This comprises Rs. 694 crore
for investment in computer equipment, Rs. 3 crore on vehicles and the balance of Rs. 1,843
crore on infrastructure investments. In the previous year, we capitalized Rs. 2,381 crore. This
comprised Rs. 672 crore for investment in computer equipment, Rs. 3 crore on vehicles and the
balance of Rs. 1,706 crore on infrastructure investments.
Question 2 Calculate the individual cost of capital (Cost of debt/loan, equity for both years)
and overall cost of capital (WACC)
Cost of Debt
The finance cost given for the company is including long term and short term borrowings. So
while calculating the cost of debt, both the borrowings are taken into calculation.
As the finance cost or interest cost is quite low for the company, the cost of debt has come very
less. For the year 2015-16, the cost of debt is only 1.24% and for year 2014-15, the cost of debt
is 2.71%.
Cost of Equity
The Total Equity Risk premium (Rm) for India is 9.71% taken from Damodarans report.
The risk free rate of return for India is 6.67% taken from RBI website.
The cost of equity is calculated for the current year from the data given above.
Ke = Rf + *(Rm-Rf)
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As the cost of debt and accost of equity are known now, we can calculate the WACC by finding
the weighted average of the cost of capital.
The WACC for both the year is quite low due to the minimal cost of debt and its higher
proportion in the capital structure.
Infosys pays dividend twice a year. The board generally declares an interim dividend in October
along with the adoption of second quarter results. Additionally, the Board recommends a final
dividend in April along with the adoption of annual results. The final dividend is subject to the
approval of shareholders at the Annual General Meeting (AGM).
Infosys does not offer a dividend reinvestment program or dividend stock program at present.
Infosys pays dividends to its shareholders. The current dividend policy is to distribute up to 50
percent of the PAT (consolidated Indian GAAP) as dividend. The Board of Directors reviews the
dividend policy periodically and on Apr 24, 2015 decided to hike the dividend policy to up to 50
percent of post-tax profits from up to 40 percent of post-tax profits earlier.
Dividend Declared
For the year ending March 2016, Infosys has declared an equity dividend of 485.00% amounting
to Rs 24.25 per share. At the current share price of Rs 921.55 this results in a dividend yield of
2.63%.
The company has a good dividend track report and has consistently declared dividends for the
last 5 years.
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Infosys payout as % of EPS,
From an investor's point of view, when the company's main business earns an operating margin
of around 24 percent, investing the extra cash in bank deposits, government bonds and
certificates of deposit is a loser - earning not more than 8.5-9.5 percent annually. This level of
returns can easily be achieved by the shareholder on his/her own, and does not need an Infy
treasury official to do it for him/her.
A particular pattern was clearly visible on the dividend policy adopted by the company. So
investor looking for dividend can follow this certain trend to benefit them.
A particular pattern was observed in the dividend declaration of Infosys. Apart from 2011,
Infosys in last 5 years has declared dividend twice. In the month of October they have positively
declared dividend. Apart from October, they have declared dividend either in May or June.
Minimum dividend declared is 500% & it has gone up to 1100% in 2010.So investor can
positively expect more than 500 % dividend & dividend in the month of October.
Infosys Board, in its meeting held on April 24, 2015, decided to revise and increase the dividend
payout ratio to up to 50% of post-tax consolidated profits effective fiscal 2015 from the existing
cap of up to 40%. Further, the company, in its meeting held on April 24, 2015, has
recommended a final dividend of Rs. 29.50/- per equity share (equivalent to Rs. 14.75/- per
share post the 1:1 bonus issue, if the 1:1 bonus issue approved by members, pursuant to the
Postal Ballot Notice dated April 24, 2015) for the financial year ended March 31, 2015. The
proposal is subject to the approval of shareholders at the Annual General Meeting to be held
on June 22, 2015. The total dividend appropriation (excluding dividend tax) for the current year
is Rs. 5,111 crore, as against Rs. 3,618 crore in the previous year. Dividend (including dividend
tax) as a percentage of consolidated net profit after tax is 49.8%, as compared to 39.7% in the
previous year. The Register of Members and Share Transfer Books will remain closed on June
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17, 2015 for the purpose of payment of the final dividend for the financial year ended March
31, 2015, and the Annual General Meeting.
Question 4 Analyze the working capital (Cash, inventory and receivables with suitable
ratios)
FY 2016 FY 2015
Operating Profit Margin (%) 29.19 % 29.51%
Gross Profit Margin (%) 29.24% 25.71%
Cash Profit Margin (%) 24.32 % 25.02%
Return on Capital Employed 31.47% 34.15%
(%)
Return On Net Worth (%) 30.89% 34.08%
Infosys talk a lot about Automation and Design Thinking. Automation, especially, seems to be a
big focus for the IT Company as part of its efforts to improve efficiencies in this world of
changing technology. In fact, Infosys managed to save efforts of 1,700 people in the March
2016 quarter partly led by automation platforms. Going forward, this is expected to help reduce
costs for the company and improve profit margins.
Infosys is also on a cost-optimization spree to help improve profit margins. Some of these
measures include traditional methods like improving the utilization and reducing the number of
employees who are benched. This is a departure from the usual IT company behavior to hire
more employees than required and benching them. The idea is to ensure the company is
always ready for more work. However, it leads to extra costs as the company has to pay these
benched employees monthly salaries. Infosys is challenging this notion and reducing its
bench. Infosys is also considering other measures like having more low-level employees than
senior managers and reducing the number of employees sent abroad for costlier, onsite
projects.
22
Companies do not always receive payments from clients on time. These are called accounts
receivables. Sometimes, though, companies classify some of these receivables as doubtful.
They then set out a portion of their profit to cover these losses. These are called provisions on
doubtful receivables. In FY16, Infosys managed to recover a lot of these doubtful receivables.
This led to a negative provision, and thus, a 0.4% higher profit margin. This, however, is a one-
time benefit that cannot be counted into future expectations.
While Infosys optimizes its cost to improve profits, there are some factors that can offset any
gains. Three major factors are 1) rise in depreciation charges, 2) potentially higher variable
compensation as against 75-80% in FY16 and 3) absence of rupee depreciation. We see 50-60
bps (0.5-0.6%) risk to EBIT margin in FY2017 in the absence of rupee depreciation. EBIT or
Earnings Before Interest and Taxes represent the companys profits from its core operations.
EBIT margin, thus, helps measure the companys operating profit margin the percentage of
revenue that the company pockets as operating profits.
Gross profit on a standalone basis amounted to Rs. 19,472 crore (41.2% of revenue), as against
Rs. 17,603 crore (39.7% of revenue) in the previous year. Sales and marketing costs were 5.4%
of our revenue for each of the years ended March 31, 2015 and March 31, 2014. General and
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administration expenses were 6.3% and 6.0% of our revenues during the current year and
previous year, respectively. The operating profit before depreciation amounted to Rs. 13,962
crore (29.5% of revenue), as against Rs. 12,527 crore (28.3% of revenue) in the previous year.
The profit before exceptional item and tax was Rs. 16,386 crore (34.7% of revenue), as against
Rs. 14,002 crore (31.6% of revenue) in the previous year.
Infosys continue to be debt-free and maintain sufficient cash to meet strategic objectives.
Company understand that liquidity in the Balance Sheet has to balance between earning
adequate returns and the need to cover financial and business risks. Liquidity enables us to
make a rapid shift in direction, if there is a market demand. During fiscal 2015, internal cash
flows have more than adequately covered working capital requirements, capital expenditure,
investment in subsidiaries and dividend payments. As on March 31, 2015, on a standalone
basis, company had liquid assets of Rs. 29,705 crore, as against Rs. 28,149 crore at the previous
year-end. On a consolidated basis, company had liquid assets of Rs. 32,543 crore at the current
year-end, as against Rs. 30,277 crore at the previous year-end. These funds comprise deposits
with banks and highly rated financial institutions, liquid mutual funds, fixed maturity plans,
certificates of deposit, tax-free bonds and government bonds. The details of the tax-free bonds
and government bonds are disclosed under the ''non-current investments'' section in the
financial statements in this Annual Report.
24
Company MindTree Ltd.
25
Cash Flow Statement:
26
Profit/Loss Statement:
Question 1 - Analyze the Capital structure of companies and report if any change is there
For calculating capitalization and capital structure, the Reserve and surplus are not taken into
consideration.
Long-term borrowings of the company decreased from 2014-15 to 2015-16, the total
capitalization of the company has increased to Rs. 24182 million from Rs. 20131 million. The
Debt component has also decreased from 2.08% to 0.72%.
Companys huge reserve and surplus for both the financial years in the tune of near about Rs.
23000 millions. It means that the company is having huge net worth. So the debt component is
quite low in comparison to the net worth of the company.
Question 2 Calculate the individual cost of capital (Cost of debt/loan, equity for both years)
and overall cost of capital (WACC)
27
Cost of debt for both the years: -
The finance cost given for the company is including long term and short term borrowings. So
while calculating the cost of debt, both the borrowings are taken into calculation.
As the finance cost or interest cost is quite low for the company, the cost of debt has come very
less. For the year 2015-16, the cost of debt is only 0.72% and for year 2014-15, the cost of debt
is 0.22%.
Cost of Equity
The Total Equity Risk premium (Rm) for India is 9.71% taken from Damodarans report.
The risk free rate of return for India is 6.67% taken from RBI website.
The cost of equity is calculated for the current year from the data given above.
Ke = Rf + *(Rm-Rf)
As the cost of debt and accost of equity are known now, we can calculate the WACC by finding
the weighted average of the cost of capital.
WACC = 0.08%
The WACC for both the year is quite low due to the minimal cost of debt and its higher
proportion in the capital structure.
28
Question 3 - Analyze the companys Dividend Policy and comment on it
Dividend Policy:
Companys philosophy:
Mindtree looks upon good Corporate Governance practices as a key driver of sustainable
corporate growth and long-term stakeholder value creation. Good Corporate Governance
Practices enable a Company to attract high quality financial and human capital. In turn, these
resources are leveraged to maximize long-term stakeholder value, while preserving the
interests of multiple stakeholders, including the society at large. Our Dividend philosophy is in
line with the above principles. Our Dividend payout ratio has increased consistently from 7% in
FY12 to 29% in FY16. Subject to business requirements and general economic conditions, the
Company will attempt to maintain a consistent dividend record to reward shareholders.
Declaration of Dividend:
In line with the philosophy described above, the Board reviews the operating performance
every quarter and may recommend interim / final dividends from time to time. All dividends
are subject to statutory regulations and approvals, as applicable. Overall, the dividend payout in
each year will depend upon business performance, investment requirements of the annual
operating plan for the year and any other strategic priorities identified by the Company.
Circumstances under which the shareholders of the listed entities may not expect dividend:
The Board may choose not to recommend a dividend, if there are important strategic priorities
which require large investments that would deplete the companys cash reserves or
uncertainties in the business performance in the near to medium term.
The financial parameters that may be considered before declaring dividend are profitability,
cash flow and future growth and profitability outlook of the company
29
Internal and external factors considered while declaring dividend:
The Board leads the strategic management of the company on behalf of the Shareholders,
exercise supervision through direction and control and appoints various committees to handle
specific areas of responsibilities. In this endeavor, the Board reviews various types of
information provided to it, which has a bearing on declaring dividend. Key internal and external
factors are listed below (not exhaustive):
Internal:
External:
Macro-economic environment
Competition
Legislations impacting business
Client related risks
Any other matter / risks
Retained earnings would be used to further the companys business priorities. If there are
excess reserves beyond the medium to long-term business requirements, the retained earnings
would be distributed to shareholders via Dividends or other means as permitted by applicable
regulations.
Currently, the Company has only one class of shares. If the Company has more than one class of
shares in future, dividend for each class would be subject to prescribed statutory guidelines as
well as terms of offer of each class to the investors of that class of shares. To the extent
permitted, the Company would aim for highest level of transparency and equitable treatment
of all investors.
30
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Question 4 Analyze the working capital (Cash, inventory and receivables with suitable
ratios)
FY 2016 FY 2015
Operating Profit Margin (%) 18.61 % 19.91%
Gross Profit Margin (%) 15.60% 17.04%
Cash Profit Margin (%) 16.53 % 17.51%
Return on Capital Employed 31.47% 34.15%
(%)
Return On Net Worth (%) 25.03% 26.57%
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Working Capital is measure of company efficiency and operating liquidity. The working capital is
usually calculated by subtracting Current Liabilities from Current Assets. It is important
indicator of the firm ability to continue its normal operations without additional debt
obligations.
Working Capital can be positive or negative, depending on how much of current debt the
company is carrying on its balance sheet. In general terms, companies that have a lot of
working capital will experience more growth in the near future since they can expand and
improve their operations using existing resources. On the other hand, companies with small or
negative working capital may lack the funds necessary for growth or future operation. Working
Capital also shows if the company has sufficient liquid resources to satisfy short-term liabilities
and operational expenses.
MindTree Limited has Working Capital of 10.56 B. This is much higher than that of the sector,
and significantly higher than that of Working Capital industry, The Working Capital for all stocks
is over 1000% lower than the firm.
33
HCL India
The HCL journey has been relentless, gratifying and marked with a series of achievements. Our
unified efforts have catapulted the company from a garage start-up to a conglomerate whose
businesses span across four verticals. HCL is humbled by the long journey they have made so far
and at the same time, is confident of raging forward and scaling greater heights. Over the years,
HCL has conscientiously set high business standards by way of providing sustainable, world-
class products, solutions and services; a feat that has helped the organization to touch the lives
of millions with possibilities.
Founded in 1976 as one of India's original IT garage start-ups, HCL is a pioneer of modern
computing with many firsts to its credit, including the introduction of the 8-bit microprocessor-
based computer in 1978 well before its global peers. Today, the HCL enterprise has its presence
across varied sectors that include technology, healthcare and talent management solutions.
The organization, as a whole, comprises of four companies - HCL Infosystems, HCL
Technologies, HCL Healthcare and HCL TalentCare. The enterprise generates annual revenue of
over US$ 7 billion with more than 110,000 employees from 100 nationalities operating across
31 countries, including over 500 points of presence in India.
34
MANAGEMENT DISCUSSION AND ANALYSIS
The global Information Technology (IT) industrys future is being shaped by economic forces
and the adoption of new technologies. The industry is witnessing a shift from a linear to a non-
linear growth , and thus following a differentiated path. With a strong innovation backed
ecosystem, the industry will continue to partner with global clients and enable business success
as technology continues to evolve.
Industry Outlook
NASSCOM projects that industry exports will continue to grow at 12% to 14% driven by the
demand in transformational technologies.
The global sourcing model continues to grow in importance. The Engineering Research and
Development (ER&D) services portfolio is witnessing a greater emphasis on product
engineering and innovation at product and process levels.
Enterprise Applications are moving to the cloud and anything-as-a-service, and technology
enablement in emerging verticals and regions are presenting significant new opportunities for
the IT industry. There is an increased focus on verticalized businesses and geographies, and on
continuous innovation for customer growth. Amongst geographies, Continental Europe, the
Middle East andAfrica (MEA), and Asia Pacific (APAC) are the faster growing markets.
Gen 3.0 Value Chain Aligned Propositions across Digital, IoT, Service Integration and Cloud
TOM for ITO
35
Positioned as a Provider of end-to-end services with in-depth domain knowledge along with
required skills
Going beyond traditional levers to achieve non-linear growth and thus leading to higher
margins.
A Snapshot
Offerings: Business analytics services, business assurance and testing, CRM, e-Commerce and
omni-channel, HCM, integration and middleware, Microsoft, Oracle, SAP, collaboration and
enterprise content management platforms
Industries: Consumer services, financial services, life sciences and healthcare, manufacturing,
and public services.
36
Balance Sheet as at 30 June 2015
37
Statement of Profit and Loss for the year ended 30 June 2015
38
Cash flow statement
39
Ration Analysis Interpretation:
40
Question 1 - Analyze the Capital structure of companies and report if any change is there
Capital Structure
Rs. In Millions
2015-16 2014-15
Equity capital including reserves and surplus 19405.73 99.86% 15745.61 99.83%
For calculating capitalization and capital structure, the Reserve and surplus are not taken into
consideration.
Due to increase in Equity capital of the company from 2014-14 to 2015-16, the total
capitalization of the company has increased to Rs. 15773.06 million from Rs. 19432.95 million.
However, the company huge reserve and surplus for both the financial years in the tune of Rs.
19432.53 millions. It means that the company is having huge net worth. So the debt component
is not that high in comparison to the net worth of the company.
Question 2 Calculate the individual cost of capital (Cost of debt/loan, equity for both years)
and overall cost of capital (WACC)
Cost of Debt
222.78% 144.00%
The finance cost given for the company is including long term and short term borrowings. So
while calculating the cost of debt, both the borrowings are taken into calculation.
41
The finance cost or interest cost is quite High for the company, the cost of debt has also come
High. For the year 2014-15, the cost of debt is only 144.00% and for year 2015-16, the cost of
debt is 222.78%.
Cost of Equity
The Total Equity Risk premium (Rm) for India is 9.71% taken from Damodarans report.
The risk free rate of return for India is 6.67% taken from RBI website.
The cost of equity is calculated for the current year from the data given above.
Ke = Rf + *(Rm-Rf)
As the cost of debt and accost of equity are known now, we can calculate the WACC by finding
the weighted average of the cost of capital.
The WACC for both the year is quite low due to the minimal cost of debt and its higher
proportion in the capital structure.
The WACC has also decreased from 0.746% to 0.739% in 2015-16 due to increased borrowing
and its higher proportion in the capital structure from the previous year.
42
Question 3 - Analyze the companys Dividend Policy and comment on it.
Dividend Policy
Comment:
HCL has been returning cash to shareholders consistently from the time of listing, through
interim dividends every quarter, final dividends at the year-end and an occasional special
dividend.
43
L&T Infotech India
L&T Infotech Limited (then, L&T Infotech BFL Limited) was formed in June 2000 after the
merger of the US-based IT consulting company L&T Infotech Corporation (founded in 1998) and
the Indian IT services company BFL Software Limited (founded in 1993).
Over the years we have left an indelible impression in the IT solutions domain with an
impressive clientele and an extensive global presence. The accolades we have been garnering
can be attributed to our undeterred focus in delivering quality solutions across verticals that
meet the challenging requirements of our esteemed customers. Our integrated solutions
offering is aimed at creating value for our customers, helping them in improving their business
processes with minimum hassles and capital outlays. The perfect blend of technical excellence,
business performance monitoring, business intelligence and customer experience management
is what makes us endearing to our clients.
Global Footprint
Our global footprint includes both mature markets such as Americas, Europe, Australia and
New Zealand; and emerging markets such as India, Sri Lanka, Philippines and Indonesia, which
cater to BPO, Apps and ITO services. We have in-depth focus on select countries offering geo-
specific services in chosen verticals. Backed by technology and process expertise, global
alliances, balanced delivery global footprint and globally consistent processes and tools, we
bring best in class practices to all projects.
With our well-balanced and integrated portfolio of Applications, Business Process Outsourcing,
IT Infrastructure Services and Consulting solutions, we help you manage change to drive
business performance and to derive maximum value from IT investments.
The complexity and competitive nature of the IT industry has brought diverse risks and
opportunities to businesses. As well managed risks become opportunities, your Company has
instituted an Enterprise Risk Management (ERM) program adhering to global standards,
to proactively identify, mitigate, monitor and report those risks across the enterprise that have
the potential to prevent your Company from meeting its business objectives. Broadly enterprise
risks are managed under the following categories:
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i) Strategy Risks - These have the potential to impact the entitys mission which arises out of
strategic decisions and its long term marketing, resource allocation, delivery models and other
activities. These risks are generally non-routine in nature;
ii) Operational Risks - These have the potential to impact the efficiency and effectiveness of the
operations;
iii) Information Risks - These have the potential to impact information assets and information
processing systems;
iv) Financial & Reporting Risks - These have the potential to impact on statutory financial
statements and transmission of timely and accurate information to stakeholders;
v) Compliance Risks - These have potential to expose the Company to statutory and legal action.
Strategy Risks
This risk arises when high percentage of revenue is received from very few clients/partners. HP
Channel business which stood at 71% of the total revenue in 2010 was identified as one of
important partner concentration risks. Your group implemented the Go To Market strategy
and focused in getting direct channel business. This has significantly reduced your Companys
exposure towards dependency on HP Channel business which stands at 34% as on 31st March
2015, as against the direct business which is at 66% of the total revenue, thus mitigating this
risk to a great extent.
The Groups ability to remain competitive depends on the ability to adapt to changing models
of business delivery. Over the last 12 months the Group has focused on Digital, GRC and
Customer Experience Management which has helped the Company to remain competitive by
securing contracts in these areas.
Operational Risks
New business models, new service offerings and growing volume of operations, have brought
risks related to delivery and adherence of SLA terms and conditions. The Group with its years of
experience and complemented by our partnership with HP has implemented a framework to
enhance the review and control mechanisms to ensure contractual terms are captured and
complied with.
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Contract Management Risk
This was identified as an important risk as contractual terms bring legal binding on the
Company and can adversely affect in many ways. To ensure that the terms of engagement are
not vague, infeasible promises are not made and implementation is possible, a robust function
has been created with adequate checks and balances to ensure that this risk is well mitigated.
To surmount challenges posed by the rapid changes in the industry, customer relationships and
high quality service delivery have assumed even greater criticality to sustain performance and
growth. Human capital is seen as the differentiator in achieving this.
Risk of Fraud
Instances of corporate fraud and misconduct remain a constant threat to public trust and
confidence in the market. Your Company through various governance structures, internal audits
and Whistleblower mechanisms has built a strong framework to detect and mitigate fraud risk.
Information Risks
Increased disruptions due to manmade and natural calamities are posing a risk to the
enterprise Information Technology infrastructure and in turn to the business operations.
Recovery and availability of enterprise applications and infrastructure post any such disruptions
have become critical for uninterrupted service delivery.
With the advancement of technology and growing cyber threats, the industry is exposed to
different types of risks related to information assets and data breaches. To mitigate these risks,
your Company has implemented a robust IT Security framework and is also certified on ISO
27001.
Governments across globe are enacting stringent Privacy Laws and your Company is exposed to
the risk of privacy breaches and legal action as the nature of your Companys operation involves
handling and processing such personal information of Customers and Clients.
Compliance Risks
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With presence across multiple geographies your Group is subjected to multitudes of constantly
changing legislations. There is a risk of non-compliance or delay in compliance with statutory
requirements. The Group uses the services of professional consultants to ensure compliance
with domestic and overseas laws and regulations.
The industry has seen increased scrutiny by various governments for non-compliance of
Immigration laws. Your Company is equipped with the expertise to handle the complications of
immigration laws and has processes to ensure compliance.
Inventories
Inventory comprises of traded goods and is measured at lower of cost and net realisable value.
Cost includes direct materials and related direct expenses. Cost is determined on a weighted
average basis. Net realisable value is the estimated selling price in the ordinary course of
business, less estimated cost necessary to make the sale.
Pursuant to the notification of Schedule II of the Companies Act, 2013 by the Ministry of
Corporate Affairs effective 01 April 2014, the management has internally reassessed and
changed, wherever necessary the useful lives to compute depreciation, to conform to the
requirements of the Companies Act, 2013.
Fixed assets are stated at the cost of acquisition or construction less accumulated depreciation
and write down for, impairment if any. Direct costs are capitalised until the assets are ready to
be put to use. Borrowing costs directly attributable to acquisition or construction of those fixed
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assets which necessarily take a substantial period of time to get ready for their intended use,
are capitalised. Fixed assets purchased in foreign currency are recorded at cost, based on the
exchange rate on the date of purchase.
Subsequent expenditure related to an item of fixed asset is added to its book value only if it
increases the future benefits from the existing asset beyond its previously assessed standard of
performance. All other expenses on existing fixed assets, including day-today repair and
maintenance expenditure and cost of replacing parts are charged to the statement of profit and
loss for the period during which such expenses are incurred.
Acquired intangible assets are capitalised at the acquisition price. Internally generated
intangible assets are stated at cost that can be measured reliably during the development
phase and capitalised when it is probable that future economic benefits that are attributable to
the assets will flow to the Group.
Leases under which the Group assumes substantially all the risks and rewards of ownership are
classified as finance leases. Such assets acquired are capitalised at the fair value of the asset or
the present value of the minimum lease payments at the inception of the lease, whichever is
lower.
Cost of assets not ready for use at the balance sheet date is disclosed under capital work-in-
progress.
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Consolidated Balance Sheet as at 31 March 2015
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Consolidated statement of Profit and Loss for the year ended 31 March 2015
NPM=6776/57948 = .116
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Question 1 - Analyze the Capital structure of companies and report if any change is there
Capital Structure
Rs. In Millions
2015-16 2014-15
Equity capital including reserves and surplus 54947.72 94.67% 51149.75 92.22%
For calculating capitalization and capital structure, the Reserve and surplus are not taken into
consideration.
Due to increase in Equity capital of the company from 2014-14 to 2015-16, the total
capitalization of the company has increased to Rs. 55463.63 million from Rs. 58041.47 million.
However, the company huge reserve and surplus for both the financial years in the tune of Rs.
58041.47 millions. It means that the company is having huge net worth. So the debt component
is not that high in comparison to the net worth of the company.
Question 2 Calculate the individual cost of capital (Cost of debt/loan, equity for both years)
and overall cost of capital (WACC)
Cost of Debt
6.50% 2.58%
The finance cost given for the company is including long term and short term borrowings. So
while calculating the cost of debt, both the borrowings are taken into calculation.
As the finance cost or interest cost is quite low for the company, the cost of debt has come very
less. For the year 2014-15, the cost of debt is only 2.58% and for year 2015-16, the cost of debt
is 6.50%.
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Cost of Equity
The Total Equity Risk premium (Rm) for India is 9.71% taken from Damodarans report.
The risk free rate of return for India is 6.67% taken from RBI website.
The cost of equity is calculated for the current year from the data given above.
Ke = Rf + *(Rm-Rf)
As the cost of debt and accost of equity are known now, we can calculate the WACC by finding
the weighted average of the cost of capital.
The WACC for both the year is quite low due to the minimal cost of debt and its higher
proportion in the capital structure.
The WACC has also decreased from 0.824% to 0.789% in 2015-16 due to increased borrowing
and its higher proportion in the capital structure from the previous year.
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Question 3 - Analyze the companys Dividend Policy and comment on it.
Dividend Policy
Comment:
L&T INFOTECH has been returning cash to shareholders consistently from the time of listing,
through interim dividends every quarter, final dividends at the year-end and an occasional
special dividend.
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Polaris Consulting
(Source:http://www.tradingeconomics.com/india/government-
bond-yield)
(Source : http://www.valuewalk.com/2015/05/market-risk-
premium-risk-free-rate-used-for-41-countries-in-2015/)
(Source : http://economictimes.indiatimes.com/polaris-
software-lab-ltd/stocks/companyid-4416.cms)
WD = 0
As on 31-03-2015, the company has not raised capital by issuing preference shares
WP = 0
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Cost of equity, KE = RF + B(RM RF) = 7.74 + 0.77( 8.40-7.74) = 8.24 %
WD = 0
As on 31-03-2015, the company has not raised capital by issuing preference shares
WP = 0
Polaris
Capital Structure
For the period 2014 to 2015, Polaris has not relied on long term debt and 60% of its sources of
funds is from shareholders' funds.
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In Current Liabilities, 'Trade payables' has a higher percentage of funds. This is due to accrued
salaries, provision for expenses and creditors.
The capital structure of the company has primarily been equity. Given below is the
composition since 2010.
Cranes Software
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The company does not have any long term debt but has a high proportion of current liabilities,
particularly 'Other current liabilities'. This is due to the current portion of the outstanding long
term debts that were due in 2014-15.
Reserves and surplus is negative because of the losses accrued over the past years.
The company has not had long term debt in its capital structure and has relied on equity.
Given below is the composition since 2010.
Polaris
Dividend Policy
*Company did not give out dividends in the 7 years prior to 2012
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For the year 2014-2015
a) Final dividend: The Board of Directors at its meeting held on 30th April 2015 proposed a final
dividend of Rs.10/ per equity share of face value of Rs.5/ per equity share (200%) upon
approval of the shareholders at the 22nd Annual General Meeting. This dividend will be paid
out of the profits of the Company.
b) Interim Dividend: The Board of Directors at its meeting held on 19th March, 2015 declared
interim dividend of Rs. 5/ per equity share of face value of Rs.5/ per equity share (100%) for
the financial year 2014 2015 to those shareholders whose names were in the Register of
Members as on 31st March 2015. With this, the companys total dividend payout is 300% for
the financial year 20142015.
Leverage
Financial Leverage
Operating Leverage
A negative operating leverage is a situation where fixed cost has a greater portion in the total
cost structure of the company and there is a decrease in sales. Such a situation has a negative
effect on the revenue of the firm resulting in a greater percentage decrease in net operating
income.
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Degree of Combined Leverage
Cranes Software
Dividend Policy
Cranes Software International has not declared any dividend for the last several years
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Leverage
Financial Leverage
As the EPS is negative, we would obtain a negative degree of financial leverage. A negative
financial leverage occurs when the assets acquired with the debts and preferred stock generate
a rate of return that is less than the rate of interest or dividend payable to the providers of
debts or preferred stock. Negative financial leverage is a loss for common stockholders.
Operating Leverage
As the EBIT is negative, the degree of operating leverage would be negative. A negative
operating leverage is a situation where fixed cost has a greater portion in the total cost
structure of the company and there is a decrease in sales. Such a situation has a negative effect
on the revenue of the firm resulting in a greater percentage decrease in net operating income.
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Overall Indian IT Industry Analysis
The global IT sourcing grew by 9%-10% in FY15. This was 2x faster than the growth in total IT
spends. Indian IT-BPM industry grew by 13% in FY15 as per NASSCOM. The growth projection
for FY16 is 12%-14%. The growth will be driven by new digital technologies. The adoption of
these technologies will bring disruption to the industrys traditional business model.
Indian IT companies had a good year in terms of financial performance, driven by factors like
such as digitization, and non-linear models, and the depreciation of the Indian rupee. Indian IT
firms continue to move up the value chain by providing more end-to-end solutions and
engaging more closely with clients. The drive towards internal cost optimization to improve
profitability gathered steam in FY15. The industry is unlikely to add employees in the same
numbers as it did before.
Indias IT industry can be divided into six main components, viz. Software Products, IT services,
Engineering and R&D services, ITES/BPO (IT-enabled services/Business Process Outsourcing),
Hardware, and e-commerce. Export revenues continue to drive growth with IT Services. This
accounts for about Rs 68 bn of total revenues followed by BPM at Rs 26 bn, Engineering
services at Rs 18 bn, e-commerce at Rs 14 bn, hardware at Rs 14 bn and Software Products at
Rs 6 bn. The growth in e-commerce (33% YoY) was unprecedented and has given a boost to the
BPM industry. The Indian IT sector will benefit significantly from the governments schemes like
Digital India, Make in India, and Start Up India.
The Indian software sectors value proposition remains unmatched in the world. Entry-level
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wages remain 8x-10x lower than in developed nations. The numbers of global delivery centers
(GDC) have increased to about 640 in FY15 in about 78 countries. About 27% of incremental
GDCs were set up in India. Indias global market share grew to 55% by the end of FY15.
The new Indian government is emphasizing on better technology enabled delivery mechanisms
for a multitude of government projects. Further, with the new digital India and start up Indian
initiatives being launched, the domestic market for software services looks bright.
Key Points
Supply Abundant supply across segments, mainly lower-end, such as ADM. Lower supply in
higher-end areas like IT/Business Consulting, but competition is very tough.
Demand - The global downturn had put considerable pressure on global IT spending but the
situation is now improving.
Barriers to entry - Low, particularly in the ADM & BPO segments, as these are prone to
relatively easy commoditization. Its high in value-added services like IT/Business Consulting
and R&D where in-domain expertise creates a barrier. The size of a particular
company/scalability and brand-image also creates barriers to entry; as such firms have built up
long-term relationships with major clients.
Competition - Competition is global in nature and stretches across boundaries and geographies.
It is expected to intensify due to the attempted replication of the Indian offshoring model by
MNC IT majors as well as small startups.
Substitution of IT services and products - IT continues to be a driving force towards all aspects
connected with our lives. While a particular technology may become obsolete and a particular
company specializing in it may suffer, the obsolete technology can only get substituted by a
newer technology offered by the same/different player in the IT/ITES industry.
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Financial Year '15
The Indian IT/ITES industry earned revenue of over US$ 146 bn during FY15. Out of this, exports
accounted about 67% of the industrys revenue.
In terms of growth by industry verticals, BFSI, Telecom/Hi-Tech, Manufacturing, and Retail are
the most important at 41%, 18%, 16%, and 10% shares respectively.
The USA accounts for about 62% of the export revenue followed by the UK and Continental
Europe, with 17% and 11% respectively. Other regions such as Asia Pacific are catching up, with
a contribution of 8%.
At the end of FY15, Indias share in the global outsourcing market stood at 55%.
Prospects
As per NASSCOM, the Indian IT/ITES industry is expected to maintain a growth of 12-14% in
FY2016. NASSCOM has also envisaged the Indian IT/ITES industry to achieve a revenue target of
USD 225 bn by 2020.
As the global sourcing industry continues to grow and as Indian IT companies continue to
increase market share, outlook for the sector remains robust.
Emerging protectionist policies in the developed world are expected to affect the Indian IT
companies. Due to US restrictions on visas as well as rising visa costs, most Indian IT companies
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are increasingly subcontracting onsite jobs to local employees in the US. This has adversely
affected margins of Indian IT companies.
Indian IT companies are increasingly adopting the global delivery model. They are setting up
development centers in Latin America, South East Asia and Eastern European countries to take
advantage of low cost and also cater to the local market. In the US, such centers will help
mitigate the risks of the new immigration bill and increase the probability of winning projects in
highly regulated sectors such as healthcare, government services, utilities etc.
ADM services, which used to provide major chunk of revenues to the domestic IT players, are
getting affected due to the falling billing rates. Hence, the companies are now venturing into
new high value services such as the new digital services. Large Indian companies like Infosys,
TCS, Wipro, Tech Mahindra, HCL Technologies, and Mindtree will benefit the most from this
trend.
Billing rates are expected to remain under pressure due to commoditization of traditional
services. Therefore, companies are expected to preserve their margins through effective cost
containment measures like shifting more wore work offshore, improving employee utilization
and the increasing use of automation software.
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