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FINANCIAL ANALYSIS OF
INFOSYS TECHNOLOGIES LIMITED

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1) The profitability of the group or company over the last two years?

Profit margin shows a decrease of around 4% over previous year but is not intoned with
growth rate in sales which is around 41%. It is due high growth rate in other income
which is return of investments. It reflects the future returns and profit, company is going
to make.

PAT shows an increase of 42% over previous year which can be attributed to improve in
sales. Profit on share capital shows a decrease a decrease despite of increase in PAT is
because of increase in share capital by 107%.

Profit on net worth shows a decrease of around 12% over the previous year as net worth
has increased by around 62%. It is a sign of growing assets while keeping their liabilities
stable.

Return of investment shows a decrease of 14% over the previous year which indicates
capital employed was not used efficiently and invested in non core competency of
Infosys. Moreover return from investment is coming less than the normal profit margin.

Book value of Infosys increased due to high net worth, i.e., thus Infosys should shed off
or return profit to shareholder or could utilize money in expansion.

EPS shows that overall company is generating profit at a good rate and maximizing the
profit by channelising excess reserves in other fields.

2) The manner in which the liquidity position of the group or company has been
managed, particular attention should be given to the control of working capital
over the period?

Liquidity Position of Infosys and Control of Working Capital over the period
(2006/2007)

Liquidity is concerned with the company’s current financial position and in particular its
capacity to pay its debts as they rise in the short term. If an organization has a liquidity
problem, there is an increased risk of it’s failing to generate any future cash flows.
Examples include working capital and quick ratios, debtor and creditor collection stock
times and stock turnover all of which will vary according to industry and the individual
company strategy.

The most commonly used measure of liquidity is the current ratio which is a comparison
of current assets with current liabilities. The current ratio details of Infosys Technologies
Limited are mentioned below.

Current Ratio Year

1. 2.73 2006

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2. 4.91 2007.
As a thumb rule if the current ratio is more than 2 we can say that the company is free
from liquidity problems, however today because of development in technology successful
companies have been able to minimise the need to hold cash and other current assets. As
a result of that their current ratio is less than 1. But in the case of Infosys Technologies
Limited the current ratio has increased by 2.73 in 2007 which clearly indicates the fact
that the company does not face any liquidity problems. Another ratio which explains the
liquidity state of a company is Acid Test Ratio or Quick ratio. The acid test ignores stock
and concentrates upon those assets which can immediately be turned into cash if liquidity
problems occur. Hence a healthy Current ratio and a weaker Quick ratio indicate the
inability of the company to meet its short term liabilities. Though low current ratio will
reflect on the liquidity problems of the company, higher current ratio will refer to larger
amount of unproductive current assets in the company.

The current ratio details of TCS are mentioned below.

Current Ratio Year

1. 1.97 2006
2. 2.16 2007

Comparison of Current ratios of the two companies clearly indicates that Infosys Limited
does not have any liquidity problems and also has steady growth in Current Ratio when
compared with TCS.

Working Capital –

Working Capital is a measure of both a company’s efficiency and its ability to meet the
short term liabilities of the company.

Working Capital = Current Assets – Current Liabilities.

Working Capital of Infosys Technologies Limited in 2006 and 2007 are as follows:-
(2006) 2471 Crores
(2007) 4735 Crores

We can infer from the above data that there has been a 75% growth in the working capital
in 2007. Positive working capital means that the company is able to pay off its short term
liabilities. This tremendous growth in the working capital of Infosys Technologies
Limited also gives investors an idea of their operational efficiency. A company generally
uses Working capital to fund operations and purchase inventory. Working capital
turnover indicates the relationship between the funds allotted for operations and
purchasing inventory to sales generated from these funds. Working capital turnover ratio
of Infosys in 2007 was 1.35 which indicates (positive growth of) sales in proportion to
the funds allotted for new Projects and inventory. Hence we can say that there was a
significant growth in working capital of Infosys in 2007 and also the working capital

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turnover ratio is more than “ 1 “ which indicates more sales compared to the money used
to fund the sales.
3) Discuss the manner in which the group or company is funded highlighting any
changes in the capital structure?

There are two sources of funding a company

(1) Using the Reserves of the company
(2) Taking loan.

Looking at the balance sheet of the company for 2006 & 2007 we come to know that the
company has Surplus reserves & no loan obligations. This means that the company is at
very low risk.

Even we notice that there is a change in the share capital of the company. It increases
from 138 to 286 crores. This can be accounted to the bonus issue of 1:1 by capitalizing a
sum of 138 crores from the general reserves. The additional shares were given by
exercising the stock options.

4) Using a recent share price of any one competitor, calculate and compare the price
earning ratios of the two companies and explain what factors might have
contributed to the difference?

Following are the data available for Infosys for 2006 and 2007

Investment Ratios

Year 2007 2006

Return on Owner’s equity =

Post tax profit/ (share capital + reserves) 41.88% 47.62%

Return on capital employed =

PBIT/ (capital + reserves) 45.03% 52.2%

Return on total assets =

operating profit/total assets 42.58% 49.6%

EPS = PAT/number of shares 0.85 0.59

Dividend yield =
Dividend per share/market price per share 60.5% 153.13%

Return on owner’s equity:

The return on owner’s equity is decreasing from 2006 to 2007 by 5.74%, implying the
share capital has not been utilized as effectively as in 2006. We observe that the profit
has increased by 42.3% but the share capital and reserves have grown by 62.2%.

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Return on capital employed:

There is a drop in ROCE from 2006 to 2007, mainly due to a large increase in reserves of
the company. Since the reserves are very high, and also the company has gone for a share
buy-back (number of shares has decreased by 100 since 2006) it means the company is
trying to build trust in the market as well as is planning for expansion.

Return on total assets

The operating profits of the company are increasing, and even the total assets are
increasing from 2006 to 2007. Even then, the returns on total assets are decreasing. This
shows that the company has more total assets. That shows that the company has future
expansion plans, because of which it is investing in assets, and so its operating profit is
not increasing much. From the investors’ point of view, the decline in the total assets
should be encouraging to invest, because the company is in the plans of expansion of its
business by investing more in total assets.

Dividend Yield per share

The dividend yield per share is decreasing. The dividend per share is decreasing, which
shows that the company is holding more reserves and giving out less percentage of its
profits in the form of dividends. Also, the market price per share has increased from 2006
to 2007 by almost 50 rupees. This shows that there is more demand of the shares in the
market, as the company is performing well in the terms of profitability. From investment
point of view, thought the company is giving out smaller dividends out of its profit, it is
increasing on its reserves, which might have some further future plans expansions, which
would reflect in its increase in its profitability. Also, the market value of the share is quite
high, so the investors should invest in it, not thinking about the lower dividend yields.

EPS
The total number of shares in the market is decreasing by 100. At the same time, the
company is making more Profit after Tax. As the profit is more and there are
comparatively less number of shares, over which the profit is to be divided, the Earnings
per share has increased. So, from investor’s point of view, it is a good option to invest in
these shares, because the company is seen to improving on its profit terms, and is also
seen that it does not have surplus unneeded shares in the market. Company is getting the
required share capital from the market, by issuing right number of shares.

5) Using a recent share price of any one competitor, calculate and compare the price
earning ratios of the two companies and explain what factors might have
contributed to the difference?

The P/E to EPS growth was approximately 0.56, compared to 1.20

For the previous year. This represents our valuation in comparison to
Our growth in earnings.
Appreciation in our share price (adjusted for bonus issues and stock

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Splits since 1994) over the public issue price is 2, 71,987%. Since
The public issue, our market capitalization has grown to Rs.1, 15,307
Crores as on March 31, 2007 from the public issue valuation of
Rs 31.84 crores during February 1993.

P/E ratio of TCS is 45.4.

MPS of TCS 1388
EPS 30.32

The Company's (unconsolidated) revenues increased by 33.03% to Rs. 14,939.97 crores

in fiscal 2007, from Rs 11,230.50 crores in fiscal 2006. Revenues from information
technology and consultancy services increased by 34.79% to Rs. 14,407.95 crores in
fiscal 2007 from Rs. 10,688.86 crores in fiscal 2006.

Other Income in fiscal 2007 increased to Rs. 216.55 crores from Rs. 63.26 crores in fiscal
2006. Other Income comprises interest received on deposits with banks, dividends
received on investments in subsidiaries, dividends from mutual funds and gains due to
exchange rate fluctuations. Primary reasons for the increase in Other Income are (a)
exchange gain in fiscal 2007 of Rs. 55.91 crores compared to a loss of Rs. 69.14 crores
(Included in Operating and Other expenses in fiscal 2006), (b) profit on sale of stake in
SITEL India of Rs. 66.28 crores in fiscal 2007 as compared to Rs. 'Nil' in fiscal 2006 and
(c) dividends of Rs. 35.44 crores from investments in Mutual Funds in fiscal 2007 as
compared to Rs. 15.05 crores in fiscal 2006.

Appendix 1:

RATIO ANALYSIS FOR Infosys – INDIA

DATA from BS, CFS & PLA
2007 2006

Sales Revenue: 5871 4141

Other Income / Revenue: 375 144

PBIDT: 5496 3997

PBIT: (Sales - Operating Expense) 5027 3588

PBT: (PBIT - Interest Paid) 5027 3588

PAT + Other Earning (net to tax) 4675 3285

Interest Payment: 0 0

Depreciation: 469 409

Current Asset (CA): 8961 5049

Current Liability (CL): 1824 2217

Fixed Asset (Net): (FA - Depr) 3107 2133

Share Capital: (Sh Cap) 286 138

Reserves & Surplus: (RES) 10876 6759

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Long term Loan (Debt): 0 0

Working Capital (CA - CL): (WC) 7137 2832

Net Worth / Equity (SC+Res): (NW) 11162 6897

Capital Employed (Loan+NW): (CE) 11162 6897

Dividend: (DIV) 649 1238

Inventories:(INV) 0 0

Sundry Debtors: (SDrs) 2292 1518

EVA: 2109 1386

No of Shares: 5500 5600

Total Assets: (TA) 12907 8058

Mkt Price of Shares: Avg of 6 mth 195 144

Installment: 0 0

PAT: (without Exceptional Income) 3783 2421

Investment: 839 876

Other Loans & Advance: 1162 1252

Total Expenditure: 1646 1152

Total Income 13149 9028

Appendix 2:

LIQUIDITY RATIO:

Formula 2007 2006

Current Ratio: CA/CL 4.91 2.28

Acid-Test Ratio: (CA - Inv)/CL 4.91 2.28

SOLVENCY RATIO:
Debt:Liquidity: DEB/LIQ 0.00 0.00

Times Interest Coverage-Times: PBIT / INT #DIV/0! #DIV/0!

Debt-Service Coverage-Times: (PAT+Dep)/(INT+Inst) #DIV/0! #DIV/0!

PROFITABILY RATIO:
Profit Margin: with exc inc (PBIT/Sales) * 100 38.23 39.74

Profit on Share Capital: (PAT / Sh Capital)*100 1634.62 2380.43

Profit on Net Worth: (Profit / NW) * 100 41.88 47.63

Return on Investment (ROI): (PBIT / CE ) * 100 45.04 52.02

Book Value per share (Rs): NW / No of Shares 2029.45 1231.61

EPS (Rs): PAT / No of Shares 850.00 586.61

Market Value per share (Rs): MV 195.20 144.35

OTHERS / ACTIVITY RATIO:

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Dividend per Share: DIV / No of Share 118.00 221.07

Dividend Yield: Mkt Price / DPS 1.65 0.65

Dividend Payout Ratio: DPS / EPS 0.14 0.38

CE Turnover: Sales / CE 0.53 0.60

Total Asset Turnover: Sales / TA 0.45 0.51

Fixed Asset Turnover: Sales / FA 1.49 1.38

Current Asset Turnover: Sales / CA 0.66 0.82

Working Capital Turnover: Sales / WC 0.82 1.46

Inventory Turnover: Sales / INV #DIV/0! #DIV/0!

Debtors Turnover: Sales / Drs #DIV/0! #DIV/0!

No of Days of Inventory Stock: 365 * INV / Sales 0.00 0.00

No of Days Debtors: 365 * Drs / Sales 142.49 133.80

EVA: 21.09 13.86

(% Inc in PBIT) / (% Inc in
Degree of Operating Leverage DL Sale)
0.96 Na

Degree of Financial Leverage DF (% Inc in PBT) / (% Inc in PBIT) 1.00 Na

Deg of Total Leverage: DL * DF 0.960 Na

References:-

1. Financial Accounting, Reporting and Analysis (Stice and Stice)

2. www.Infosys.com
3. www.tcs.com
4. www.investopaedia.org
5. www.easyearnings.com
6. www.rediffmoney.com

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