Business Analysis and

Valuation of Indian IT
Companies
TCS, Wipro and Zylog Systems.

Submitted by
Group no 7, Section B
Rohit Agarwal PGP02045
S Arun Kumar PGP02046
Sagar Choudhury PGP02047
Tanuj Maggon PGP02057
Varun Arya PGP02059

Contents
OBJECTIVE:....................................................................................................3

Business Analysis and Valuation of Indian IT Companies

DATA USED:...................................................................................................3
OVERVIEW:....................................................................................................3
INDIAN IT INDUSTRY:........................................................................................................... 3
INDUSTRY OUTLOOK WORLDWIDE:........................................................................................... 3
INDUSTRY OUTLOOK INDIA..................................................................................................... 4
TCS................................................................................................................................. 5
Background:............................................................................................................... 5
Products:..................................................................................................................... 5
Market share............................................................................................................... 6
Revenue Composition.................................................................................................6
WIPRO............................................................................................................................ 6
Background:............................................................................................................... 6
Products:..................................................................................................................... 7
Revenue Composition:................................................................................................ 7
ZYLOG............................................................................................................................ 7
Background................................................................................................................. 7
Products...................................................................................................................... 8
Revenue Composition.................................................................................................8
BUSINESS STRATEGY ANALYSIS......................................................................9
PORTERS FIVE FORCES MODEL:............................................................................................. 9
EMPLOYEE RETENTION RATE................................................................................................10
CUSTOMER RETENTION RATE...............................................................................................10
OWNERS COMPOSITION...............................................................................11
DIVIDEND POLICY:........................................................................................12
RISK:.......................................................................................................... 12
RATIO ANALYSIS:.........................................................................................13
VALUATION.................................................................................................. 14
RELATIVE VALUATION:..................................................................................16
CONCLUSION:.............................................................................................. 16

Objective:
The objective of this report is to perform business analysis and valuation of the
Indian IT companies. In this report we are analysing the IT industry of India with
focus on the following three companies:

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Business Analysis and Valuation of Indian IT Companies

1. Tata Consultancy Services TCS
2. Wipro
3. Zylog Systems

Data used:
We used the database of Prowess to get the consolidated balance sheet and
profit/loss statement of the companies. Annual report of the companies have
been studied to look into the reasons for the accounting or financial changes.
Nasscom reports have been used in predicting the future growth.

Overview:
Indian IT Industry:
Indian IT sector can be classified into following types:
1. IT- Software These companies help in developing and implementation of different
software for their clients worldwide. These software could be for documentation, security
services, banking softwares etc.
2. ITeS Business process outsourcing (BPO) Major Corporations across the world
outsource their back-office operations to some companies. E.g. Employee payroll for a US
companys global workforce is maintained by an Indian BPO. Slowly the definition is
expanding to Human resources, accounting, logistics, legal processes etc.
3. IT- Hardware and peripherals - The stuff you can actually see and touch, and would
likely break if you threw it out a fifth-story window, is hardware. This would include laptops,
desktops, Storage devices, Networking devices, LCD, printers etc.
4. IT- Education This segment provides training for employment in the other segments. This
would include companies providing various certification courses, like Java, Oracle etc. These
companies also provide training for employees in corporate sector. Recently, some companies
have also expanded this service to cater to schools and colleges.

Industry Outlook Worldwide:

Gartner Report
Global IT spendings are expected to grow by 4.4 per cent in 2013 to reach $3.78 trillion.
Gartner expects global enterprise spending on public cloud services to grow to $109 billion in
2012 from $91 billion in 2011. By 2016, enterprise public cloud services spending will reach
$207 billion.
Business process as a service (BPaaS) still accounts for the vast majority of cloud spending
by enterprises, but other areas such as platform as a service (PaaS), software as a service
(SaaS) and infrastructure as a service (IaaS) are growing faster.

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Business Analysis and Valuation of Indian IT Companies

Industry Outlook India
Nasscom

Global technology related spend expected to grow by 5 per cent in 2012

Global sourcing to continue growth trend as organisations aim to cut costs, access
local market and innovation and sourcing requirements
Indian IT-BPO services exports expected to grow by 11-14 per cent while domestic
services to grow by 13-16 per cent (in Rs terms)
India accounts for less than 5 per cent of global technology spending tremendous
untapped potential for growth of Indian IT-BPO sector, in both core as well as emerging
opportunities
To achieve this growth, the sector has to continue to re-invent itself through new
business models, global delivery, partnerships and transformative focus
Prevailing global megatrends presents new opportunities and risks for the industry,
which will shape the technology industry landscape
IT-BPO sector will need to build on its strengths and address challenges around
competition, talent, security and business environment
In the future, the industry to drive transformation, innovation and inclusivity in
business and India

TCS
Background:

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Business Analysis and Valuation of Indian IT Companies

Tata Consultancy Services was founded in 1968 by JRD Tata. It is headquartered in Mumbai
with Ratan Tata as its chairman. One of its first contracts was to provide punched card
services to sister company Tata Steel (then TISCO). It is listed on the Bombay Stock
Exchange and the National Stock Exchange of India and is a subsidiary of the Tata Group
conglomerate. It has service revenue of US$ 10.17 billion and a profit of US$ 2.2 billion.
TCS is a leader in the global marketplace and among the top 10 technology firms in the
world. It has more than 40 years of experience and adds real value to global organizations
through domain expertise plus solutions with proven success in the field and world-class
service. It is the largest India-based IT services firms.
With around 238,600 employees TCS is one of the largest private sector employers in India
and the second-largest employer among listed Indian companies .TCS has one of the lowest
attrition rates in the Indian IT industry.
Products:
TCS offers products in basically 2 domains:
Services: It provides IT consulting services in almost every vertical with BFS (business financial
sector) being its major revenue sector.

Software: It has different software Technology, Knowledge, Engineering, Healthcare and

banking products.

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Business Analysis and Valuation of Indian IT Companies

Market share

Top 10 IT companies in India commands over 95% market share of Indian IT Services
Industry (Software excluding hardware) in 2011.
Top 5 IT companies commands over 80% market share of indian software industry as of
2011.
TCS enjoys 25% while Infosys has 18% market share.
Revenue Composition

TCS posted a net profit of Rs. 2,932 crore, up 22.6% year-on-year and 1.6% compared with
the trailing quarter. Revenue grew 30.5% from a year ago to Rs. 13,259 crore, but a mere
0.4% from the preceding quarter, according to International Financial Reporting Standards.
TCS made a revenue of $10.17 billion in 2011-12.
Its North America business rose 1% sequentially to account for 53.6% of its overall revenue.
The companys UK business, accounting for 15.2% of revenue, rose 1.6%. But business in
continental Europe, accounting for 9.8% of its total revenue, fell 6.2%. The India business
was up 1.6% to account for 8.5% of the overall revenue.
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Business Analysis and Valuation of Indian IT Companies

TCSs banking, financial services and insurance segment accounted for 42.2% of its revenue,
down 2% in the March quarter sequentially. Telecom was down 0.3% at 10%, while retail and
distribution grew 2.4% and accounted for 12.5% of the overall business.

WIPRO
Background:

The company was incorporated on 29 December 1945 at Mumbai by Mohamed Hasham

Premji as Western India Products Limited, later abbreviated to Wipro. It was initially set up
as a manufacturer of vegetable ghee, vanaspati, refined oils including salad oil in Amalner,
Maharashtra under the trade names of Kisan, Sunflower and Camel.

During the 1970s and 1980s, the company shifted its focus and began to look into business
opportunities in the IT and computing industry, which was at a nascent stage in India at that
time. In February 2001, Wipro became the first software technology and services company in
India to be certified for ISO 14001 certification. Wipro recently in 2012 made its 17th
acquisition in IT business when it acquired Australian analytics product firm Promax
Applications Group (PAG) for $35 million

Products:
Wipro also offers following services and products:
Services: It provides IT consulting services, Cloud services, Analytics, Business process outsourcing,
Infrastructure Management services, Eco energy, Business Application, Mobile and Product
engineering services.

Products: It provides Desktops and Infrastructure Technology solutions.

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Business Analysis and Valuation of Indian IT Companies

Revenue Composition:

ZYLOG
Background

ZSL is a publicly traded IT solutions company with over 15 years of experience leveraging
global workforce talent in software engineering and subject matter expertise to evolve
products and technology solutions in a broad range of business applications. ZSL Inc, is an
ISO 9001 certified provider of Onshore, Offshore & Near shore technology solutions and
services to enterprises & technology companies across the globe. It works with some of the
worlds leading innovative ISVs and software-enabled businesses, ranging from start-ups to
established industry leaders.
Products
Zylog offers IT products and solutions and IT services to various verticals
including banking, financial services and insurance (BFSI), telecom, retail,
manufacturing, pharma/ healthcare and government etc. Apart from IT products
and services, ZSL also offers wireless broadband services in the domestic market
using Wi-Fi technology.
ZSL has recorded robust business growth over the last several years driven both
by organic expansion as well as acquisition of several small and medium-sized
entities during the course of its operating history. Like its domestic peers, ZSL
derives the bulk of its revenues from the US market; although unlike peers, its
business model differs in terms of effort mix which remains skewed in favour of
onsite delivery resulting in relatively lower profitability.

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Business Analysis and Valuation of Indian IT Companies

Revenue Composition

Business Strategy Analysis

Porters Five Forces model:

Power of buyers: the Indian IT sector has a large number of players and few entry
barriers for new entrants. Thus, the buyer has many options to choose from and can
clearly articulate their needs. However, the bigger companies also enjoy the advantage
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Business Analysis and Valuation of Indian IT Companies

of switching costs. It means that once a particular client selects a particular company
as its partner, it becomes dependent on that company for all its upgrades and
technology requirements, making it difficult for the client to switch. Thus, the buyers
have a MEDIUM bargaining leverage.
Power of suppliers: Knowledgeable human resource is the largest requirement for the
IT Sector. Large supply of this human source, at low cost is available from around the
world. Also, a lot of matured education and training is easily available. As there exist
many competitive suppliers in the supplier has very LOW or NO power in the IT
sector.
Competitive rivalry: No huge capital investment is required to start a new company,
leading to very large numbers of small and medium-size companies. It is becoming
increasingly difficult for players to differentiate, which has led to a decrease in
margins. However, a few top and niche players still enjoy pricing power. Thus, the
competition in the sector is HIGH.
Availability of Substitutes: certain countries e.g. China, Korea, Taiwan, Israel have
started to develop an environment required for growth of IT sector and are emerging
as suppliers of these products and services. Indian companies need to continuously
innovate to have an edge over the others. Thus, the availability of substitutes is
MEDIUM.
Threat of new entrant: Set up cost is almost negligible. Further the government
policies also promote the entrepreneurs by providing benefits in terms of tax holidays
an building software Technology Parks. Apart from this there are many venture
capitalists who are ready to fund new start ups enabling them to scale up. With
increased demand and higher margins the threat of new entrant is HIGH.

Employee Retention Rate

TCS
The rigorous focus on talent engagement, deployment on right projects,
role & career progression and benchmarked compensation & benefits
helped the Company to attract and retain the best talent. The Company
has launched Employee Assistance Programme, which would provide
employees 24X7 confidential counseling services, to enable them to cope
more effectively with stressful situations. The Company improved its
talent retention globally which is reflected in the attrition dropping from
14.4% in the year 2010-11 to 12.2% in the year 2011-12.
Wipro
In IT Services segments, wipro had 135,920 employees as of March 31,
2012.
Attrition for the year in wipro IT Services business segment (excluding BPO
operations, Indian IT operations and other overseas subsidiaries) was
19.5% compared with 24.1% last year. Voluntary attrition stood at 17.6%
compared with 22.3% last year.

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Business Analysis and Valuation of Indian IT Companies

Customer Retention Rate

TCS
Over the last 12 months TCS added 141 new customers across the world
to take its active customer base to 1076. The movement of customers
across each revenue band from $1 million onwards is very positive,
including growing the number of $100 million customers to fourteen from
eight in the previous year.
Wipro
Wipro added 173 new customers in the current year, compared to 155 in
the previous year. Its top customer contributed 3.6% of our revenue, top 5
customers 11.3% and the top 10 customers accounted for 19.6% of our
revenue. Wipro has 7 customers contributing more than $100 million
revenues in the current year, an increase from 3 in the previous year.
Revenue contributed by the customers added during the year was at 2%,
the same level as in the previous year.

Suppliers
Wipro
At an aggregate level, nearly 88% of its supplier base is based in India
which translated into 73% of the procurement by value for the reporting
year. It also started an exercise in consolidating its supply chain base in
order to make our engagement more focused and meaningful. In FY13,
wipro will also be launching its supplier engagement program on ESG
principles with a select group of suppliers.

Owners Composition
TCS
Share Holding Pattern in (%)
View details
DEC' 11

SEP' 11

JUN' 11

MAR' 11

Promoter

74.08

74.08

74.08

74.05

FII

13.41

12.81

12.80

12.64

DII

7.67

8.10

8.10

8.11

Others

4.84

5.01

5.02

5.20

100.00

100.00

100.00

100.00

Total

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Business Analysis and Valuation of Indian IT Companies

Wipro
Share Holding Pattern in (%)
View details
SEP' 11

JUN' 11

SEP' 10

79.17

79.23

79.36

FII

5.08

5.37

5.28

DII

4.15

3.74

3.52

11.60

11.66

11.84

100.00

100.00

100.00

Promoter

Others
Total

Zylog
Share Holding Pattern in (%)
View details
SEP' 11

JUN' 11

MAR' 11

DEC' 10

41.22

36.68

36.68

35.95

FII

0.35

0.37

0.66

0.73

DII

3.81

3.06

3.21

3.70

54.62

59.89

59.45

59.62

100.00

100.00

100.00

100.00

Promoter

Others
Total

Dividend Policy:
In 2011-12 TCS paid dividends 4 times to its shareholders. The dividend expense
of TCS increased by 78% in 2011-12 from the previous year. The company
recently paid dividend of Rs8 per share in June 2012. The dividend payout of TCS
however is non uniform with low dividends in 2010-2011.
The dividend policy of Wipro has been conservative. The dividend per share of
the company has been low and is close to 6 as compared to TCS whose DPS was
25 in 2011-2012. The company only paid high dividend in the year 2004.
The dividend policy of Zylog Systems has been more liberal than that of Wipro.
The DPS of Zylog has been 8 for the previous year. For the past four years Zylog
has come out with only 4 dividends.

Risk:
Some of the major risks faced by the IT companies of India are:
1. Dependency on the US Economy. The major clients of IT companies in India
are in US leading to a high dependency on US market.
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Business Analysis and Valuation of Indian IT Companies

2. Volatile currency movements

3. Exposure to high wage inflation and attrition rate.
For TCS the individual risk would be to maintain the momentum which Infosys
failed to maintain. A lot of new companies are coming up with expertise in newer
technologies or sector eating up the possibility of TCS to enter in those areas.
Disruptive technology can also hinder the growth of the TCS.
Wipro has been overtaken by Cognizant making it 4 th largest IT Company of India
from the previous position of third. The news of Wipro joint CEO Girish Paranjape
and Suresh Vaswani leaving the organization citing personal reasons in January
2011 was also a difficult pill to swallow. The results of Wipro havent been
impressive. The tough competition leading to loss of market share poses a high
risk to the growth of Wipro.
For Zylog Systems risk is obviously to compete with Giant Players like TCS,
Infosys, Cognizant, Wipro etc. Few other risk were delays in leveraging synergies
with Brainhunter which it acquired in 2010. Also Zylog has entered into capital
intensive business like Wi-fi and e-governance causing a reduction in the profit
margin.

Ratio Analysis:
TCS:

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Business Analysis and Valuation of Indian IT Companies

A quick glance at the financial ratios of TCS, suggests that company has been in
healthy position which is only possible due to sound management techniques.
PAT has remained steady over the period of previous 5 years. Though sales has
increased there seems to be tremendous pressure on the profit margin in the last
two years. TCS is a zero debt company and all the ratios are fairly constant
throughout the year.
Wipro:

Interest cover ratio Wipro has fallen down to 10.77 from 42.95 shows that
company paid high interest in Mar 12. The debt to equity ratio remained the
same but low interest cover ratio was due lower turnover. The asset turnover of
the company is also decreasing was due to low turnover recorded.

Zylog Systems:

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Business Analysis and Valuation of Indian IT Companies

The current ratio of the company has fallen which was due the acquisition of
Brainhunter by Zylog in the year 2010 and other acquisitions. The sales of the
company increased by 95% in the year 2012, though it was not reflected in the
various ratios because consequently there was increase in the values on the
asset side of the balance sheet.

Valuation
Key Points in Valuation

Risk free rate is taken as 6.5%.

Market Risk premium has been taken at 9%.
Book Value of Debt is taken by dividing the interest by total borrowings.
Beta is taken from annual risk and return profile.
Terminal growth rate is taken as 5% which is less than the GDP growth rate
of India to take care of the point that Stable companies will grow at a
slower rate than GDP because a country would comprise of growing and
stable companies.

Risk free rate calculations:

The Indian government had 10-year Rupee bonds outstanding, with a yield to
maturity of about 8.5% on January 1, 2012. In January 2012, the Indian
government had a local currency sovereign rating of Baa3. The typical default
spread (over a default free rate) for Baa3 rated country bonds in early 2012 was
2%.
risk free rate= yield to maturity on the 10-year bond Default spread
= 6.5%
Tata Consultancy Services

Valuation is done using a two stage model.

We have forecasted Sales to grow by 23% in the next five years which is the
CAGR of sales of the past five years. We have taken 23% because TCS has
been consistently beating market expectations.
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Business Analysis and Valuation of Indian IT Companies

After the first 5 years, sales have been forecasted to grow at 14% which is the
current forecast for the Indian IT Services Industry by NASSCOM till 2020.
Depreciation, EBITDA and Capital Expenditures are taken as percentage of
sales based on the CAGR of the past five years.
WACC comes to 11.03%.
And the final stock price is 1034.77.
The detailed DCF valuation of TCS is TCS valuation.xlsx
Wipro

Valuation is done using a two stage model.

We have forecasted Sales to grow by 21% in the next five years which is the
CAGR of sales of the past five years.
After the first 5 years, sales have been forecasted to grow at 14% which is the
current forecast for the Indian IT Services Industry by NASSCOM till 2020.
Depreciation, EBITDA and Capital Expenditures are taken as percentage of
sales based on the CAGR of the past five years.
WACC comes to 11.03%.
And the final stock price is 369.65.
The detailed DCF valuation of Wipro is Wipro valuation.xlsx
Zylog Systems

Valuation is done using a two stage model.

We have forecasted Sales to grow by 45% in the first year which is the CAGR
of sales of the past five years and decreasing by 5% every year till 2018 and
then stabilizes at 15% till 2020 based on NASSCOM Report.
Depreciation, EBITDA and Capital Expenditures are taken as percentage of
sales based on the CAGR of the past five years.
WACC comes to 7% because of high percentage of debt.
And the final stock price is 268.89.
The detailed DCF valuation of Zylog Systems is Zylog Valuation.xlsx

Relative valuation:
For relative valuation we have used P/E method.
The industry P/E average for software industry =18.10

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Business Analysis and Valuation of Indian IT Companies

INDUST
RY P/E

EPS

PRICE BY
MULTIPLE
VALUATION

TCS
18.1
59.84 1083.104
WIPRO
18.1
18.68 338.108
ZYLOG
18.1
55.11 997.491
SYSTEM
The values of TCS and WIPRO are coming near to their market price but ZYLOG
system is coming out to be very high above the market price. This is because
zylog system is a mid cap company and its P/E is way better than the industry
P/E.

Conclusion:
Company
TCS
Wipro
Zylog
Systems

Current Stock
Estimated Stock
price
Price
1277.45
1034.77
353.65
369.65
297.4

268.89

If we compare the current stock price and the estimated stock price it seems that all the stocks
are fairly valued. TCS seems to be little overvalued with the current market price of 1277.45.
The business fundamental of TCS seems to be strong but it seems that it had been slightly
overvalued by the market. Hence we recommend that you can hold the stocks at the current
price but do not buy them.

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