Executive Summary

As per Deloittes 2016 report, the IT sector as a whole is advancing at an immense pace.
Businesses are transforming and technology is changing the way how IT companies operate, sell
their products & services and define their growth trajectory. Companies are gearing up for the
next economy resulting from todays disruptive and unprecedented change.
Looking at the various ratios and industry trends, it is very obvious that the IT industry as a
whole is moving towards low debt financing. Industries are generating enough cash to sustain
and grow and thats where they see the future prospects. The enterprises in account, both TCS
and Infosys are market leaders in India. TCS with a market cap of $80bn & Infosys with a
market cap of $42.5bn are leading Indian IT industry.
Looking at the profitability ratios, both the companies are doing pretty well as compared to the
industry standards and are able to generate significant earnings. ROCE for TCS is way above the
industry average and truly represents their high efficiency. Management of both the companies
must be pretty satisfied with their performances with the only area of concern being the
operating margin for Infosys, which might also make investors a bit skeptical about the processes
being followed by Infosys.
Being a debt free company, the solvency ratios of Infosys are almost zero. TCS did raise debt to
grow and expand but now is following the same suit and reducing its debts every year. Also, the
liquidity ratios of Infosys are way above the industry average and TCS has also maintained a
decent score here. Both these factors build confidence in the lenders, banks or other financial
institutions and they will be willing to invest in these companies.
Valuation ratios show that both the companies are giving good amount of their earnings to their
shareholders. Earnings per share in case of TCS are significantly higher as compared to Infosys
which shows the market perception must be very positive for them. Whereas Infosys issued
bonus shares in FY-15 and FY-16 leading to drop in EPS over these years.
Shareholders do also look at how the companies are planning to expand and what are they doing
to compete in this fast evolving world. TCS has been filing multiple patents every year whereas
Infosys has filed few. Also, on one hand TCS has been continuously increasing its R&D budget
every year and on the other hand Infosys R&D budget is being cut every year. This shows that
TCS is trying to evolve with times and this also strengthens shareholders confidence.

Liquidity Analysis
As we have learnt from the classroom discussion, liquidity ratios indicate the ability of the firm
to meet the short term obligations as and when they mature. An accurate measure of liquidity is
the current ratio which calculated as current assets/current liabilities. On calculating these for
TCS and Infosys, we notice that both TCS and Infosys have a healthy current ratio (around 2.8
for TCS and 3.4 for Infosys).
On analyzing the balance sheet, we noticed that the cash balance of Infosys was much greater
than that of TCS and this is line with the strategy of Infosys being a debt free company which

funds future operations and expansions through the money generated from its current operations.
Infosys also maintains high levels of cash balance so that the high liquidity enables it to grasp
an opportunity in the market when it comes.
The sudden increase in the current ratio for TCS in FY16 can be attributed to the fact that the
company has increased its current investments significantly by investing heavily in Government
bonds.
Both the companies have a current ratio higher than that of the industry average and this
indicates that neither of the two companies is in a situation where there might a high risk of
meeting the short term obligations.

Solvency Analysis
Similar to liquidity, solvency measures the ability of a firm to meet its long term obligations. The
quantify and measure this, the two most popular ratios used are debt to equity ratio which
indicates how much debt a firm is using to finance its assets compared to the net worth while the
debt ratio which shows the proportion of assets which are financed through debt.
On analyzing the vales, we see that TCS has a relatively high value for the debt to equity ratio
depicting their strategy of raising debt to fuel growth. Meanwhile, as mentioned earlier, Infosys
prefers to fund its growth from the cash generated internally and this is evident is the lower value
of the debt to equity ratio.
When looking at the debt ratios, we see that Infosys has a very low value which indicates that the
company is a debt-free one whereas TCS has a healthy value which signifies the long term
financial stability and optimal utilization of resources at TCS. However, as seen from the graph,
the debt ratio for TCS has also decreased considerably over the past years which show that TCS
is adopting a strategy similar to Infosys of reducing the debt and increasing cash reserves.

Profitability Analysis
Net Profit Margin: Infosys despite having lower revenues has better profit margins than TCS
because it is debt free and hence interest charges are minimum. These margins have improve for
Infosys in FY 16 as a result of acquisition of Edge Verve Systems further contributing to better
Margins
Operating Margin: Infosys lower value for the above metric reflects high relative variable costs.
This difference is due to lesser revenues for Infosys.
Return On Assets: For TCS ROA has dipped slightly due to increase in current investments
whereas Infosys has improved PAT as a result of acquisition leading to improvement in ROA.
Return on Capital Employed: Both the organizations have comparable Shareholders funds, but
Infosys has little or no debt compared to TCS which accounts for better returns for TCS with
higher revenues.

Valuation Analysis
Earnings Per Share: Adjusting for same par value TCS has far high earnings per share compared
to Infosys however the amount of capital needed to create these earnings is more important. EPF
for Infosys dropped with the issue of bonus shares. Hence EPS is not a stable metric for financial
analysis.
Dividend Payout Ratio: Describes how much of the net income is distributed to shareholders.
Both Infosys and TCS have a comparable ratio around 35%.
PE Multiple (Adjusted for par value of Rs 1 per share): PE shot up for Infosys because of
issue of bonus shares which reduced EPS drastically, whereas for TCS PE multiple has first
increased over FY4 to FY15 because of net debt reduction leading to higher retained earnings
and distribution among shareholders leading to increased stock price and hence higher PE
Multiple. Thereafter EPS for the next year increased substantially bringing the denominator
down.

DuPont Analysis
Return on Equity: It is observed that TCS has a relatively higher ratio compared to the industry
whereas Infosys is close to the industry average.
Asset Turn-over Ratio: On further investigation into Leverage, Turnover and Net Profit Margin
we observe stark differences in the asset Turnover ratio. Infosys has lower asset turnover ratio
indicating that it is not utilizing its assets as effectively in comparison to TCS which contributes
significantly to the lower RoE.
Leverage: Infosys has historically been debt free compared to TCS and hence is less leveraged
compared to TCS contributing to a slightly lower RoE value.

Appendix:
Attaching here all the graphs for your reference1. Current Ratio

2. Net Profit Margin

35

4.5

30

3.83

3.5
3

3.12
2.84

2.5
2

2.36

2.46
2.28

3.01
2.97
2.6

TCS
Infosys
Industry

1
0.5

25
20

FY14

25.72

22.99

19.79

18.84

18.28

10

TCS
Infosys
Industry

FY15

FY16

FY14

3. Operating Margin

FY15

FY16

4. Return on Asset

40

25

29.24
26.64

30

26.17

15

1.5

35

28.56

60
36.44
28.7
25.77

32.75
27.59
27.51

33.92

50

28.72
27.13

40

20

30

15
TCS
Infosys
Industry

10
5
0

20

51.93

52.68

26.91
22.78

27.13
21.6

48.56

25.59
23.75
TCS
Infosys
Industry

10
0

FY14

FY15

FY16

FY14

FY15

FY16

5. Return on Capital Employed

6. Debt to Equity Ratio

60

TCS

0.25

Infosys

52.68

51.93

50

48.56

Industry

0.203

0.2

40
0.15
30

27.13
21.6

26.91
22.78

20

25.59
23.75

0.142

0.1

TCS

10

Infosys

0.06

0.05

0.04

Industry

0.008

FY14

FY15

FY16

FY14

7. Debt Ratio
TCS

18.00%
16.00%

Infosys

15.57%

3
2.5

12.00%

2
10.26%

1.5

8.00%
6.44%

6.00%
4.00%

1
0.5

2.00%

0.00%

0.69%

FY14

0.0006
FY15
FY16

8. Working Capital Turnover Multiple

3.5

14.00%
10.00%

0.085

0.07

0.10%
0.05%
FY15
FY16

TCS
FY14

FY15

FY16

TCS
2.86
Infosys 1.53

3.07
1.62

2.41
1.76

9. Receivables Turnover Multiple

10. PE Multiple

12

10
8

6
4
2
0
Infosys
TCS

FY14

FY15

FY16

6.04
4.46

5.48
4.31

5.5
4.5

11. Earnings Per Share

700
600
500
400
300
200
100
0
TCS

FY14

FY15

FY16

471

491.5

580.5

105.91

68.73

Infosys 178.39

45
40
35
30
25
20
15
10
5
0
Infosys
TCS

FY14

FY15

FY16

4.59
22.59

10.46
25.91

17.72
21.67

12. Return on Equity

45
40
35
30
25
20
15
10
5
0

TCS
Infosys
Industry

FY14

FY15

FY16