A Case Study on Trend and Growth Analysis of Tata Consultancy Services Limited

A Case Study on Trend and Growth Analysis of Tata Consultancy Services Limited 1 Dr. K. Venkatachalam and 2 J.B. Rajaanjali 1 Assistant Professor, 3 PG Student, 1,2 Department of Commerce, PGP College of Arts & Science, Namakkal, Tamilnadu, India Abstract: India is the world s largest sourcing destination for the information technology (IT) industry, accounting for approximately 52 per cent of the S$ 124-130 billion market. The industry employees about 10 million Indians and continues to contribute significantly to the social and economic transformation in the country. The IT industry has not only transformed Indian s image on the global platform, but also fuelled economic growth by energizing the higher education sector especially in engineering and computer science. Tata Consultancy services Ltd (TCS) established in 1968 by Tata Sons is the largest Indian IT services company and one of the top ten global IT services company. The present study remained as an effort to analyse working capital, liquidity, solvency and profitability trend of TCS for the period of ten years from 2005-06 to 2014-15. The major findings revealed that the Short term and Long Term solvency position to be maintained properly which will ultimately enhance the liquidity and profitability trend of the TCS. Keyword: Destination, Liquidity, Profitability, Transformation, Working Capital. 1. INTRODUCTION Business is a dynamic process. It is very difficult to find complete information about business by way of analyzing the financial statement of tendency of business. To determine the directions of business, the past data relating to the problems are studied about the trend is determined. The analysis of the trends helps to judge the future tendency of the business. The calculation of trend ratio involves the ascertainment of arithmetical relationship which each item of several years to the same item of base year. The significance of trend analysis is to know the direction of movement of upwards or downwards and involves the computation of the per centage relationship that each statement item bears to the same item in base year. The concept of trend was taken up to analysis overall trends in operating and financial performances of Tata consultancy services, by appropriately linking up the relevant aspects of performance. II. PROBLEM OF THE STUDY Software industry represents an integral part of Indian economy. Since the industry faces ups and downs over the period of time, the companies in the industry have reported reduction in profit and in some rare cases even loss. When the industry is caught in a vicious cycle, the firms have rendered operations unviable and they face threats to their viability and sustainability so that the study is taken to establish a relevance to the present day problem. III. REVIEW OF LITERATURE Bhunia and Brahma (2011) conducted a study to examine and evaluate the importance of liquidity management on profitability as a factor responsible for unfortunate financial performance in the private sector steel Industry in India. Owolabi and Obida (2012) an attempt is made to measures the relationship between liquidity management and corporate profitability using data from selected manufacturing companies quoted on the floor of the Nigerian Stock Exchange. They found that managers can increase profitability by adopting good credit policy, short cash conversion cycle and effective cash flow management procedures. Seyed Mohammad Alavinasab and Esmail Davoudi (2013) in their study examined the relationship between working capital management and profitability hundrden forty seven companies were selected for the period of 2005-2009. The results of the statistical test of the hypothesis show a negative significant relationship exist between cash conversion cycle and return on assets and cash conversion cycle and return on equity. However, the relationship between current ratio and return on equity is insignificant. Dharmaraj and Kathirvel (2013) In India there is a huge scope for automobile companies. They are financially strong and they are growing at the rate of 17 per cent per annum and contributing to the Indian economy reasonably. Finally, the study provides companies with understanding of the activities that would enhance their financial performances. Moses Joshuva Daniel (2013) in order to analyze financial status of TATA Motors Ltd in terms of Profitability, Solvency, Activity and Financial stability various accounting ratios have been used. The company has stable growth and it shows a greater status in all the areas it works. The company has been suggested to Available Online@ 344

reduce the expenditure as it increases every year. Decrease in expenses will increase the profitability. IV. OBJECTIVES OF THE STUDY This study will be useful to the management to take investment decisions and strength of their intrinsic value. It would also enable shareholders, investors and investment analysts to identify the determinants of corporate performance. It also helps the academicians and researchers to develop new ideas for future study. Thus the following were the main objectives of the present research work. 1. To analyse the working capital trends of TCS 2. To assess the liquidity, solvency and profitability trends of TCS V. HYPOTHESIS OF THE STUDY There is no significant difference between actual value and the trend value of working capital among different years of TCS. Year VII. DATA ANALYSIS & INTERPRETATIONS VI. RESEARCH METHODOLOGY Methods of Data Collection: For collecting secondary data, annual reports of TCS will be used as well as financial reports available on various stock market websites are also used. The study is entirely descriptive and analytical. The secondary data, figures, facts and information has been collected from various publications, standard text books, internet journals, articles etc. Tools Used for the Analysis: Collected data is analyses and interpreted with the help of accounting and statistical tools and techniques which are as follows: 1. Ratio Analysis 2. Trend Analysis 3. Liner Regression 4. Mean 5. Standard Deviation 6. Co-efficient of variation Time Period of the Study: The study has been conducted from 2005-05 to 2014-15 ie. For Ten Years. Table 1: Analysis of Working Capital Trend of TCS for the period from 2005-06 to 2041-15 Current Assets Current Liabilities Net Working Capital (Y) Indices Trend Values (Yc) Difference (Y-Yc) 2005-2006 2520.18 1779.78 740.4 100.00-3726.98 4467.38 2006-2007 3126.52 2655.51 471.01 63.62-2089.83 2560.84 2007-2008 4166.44 3713 453.44 61.24-452.68 906.12 2008-2009 4214.61 5054.41-839.8-113.43 1184.46-2024.26 2009-2010 3551.39 7279.35-3727.96-503.51 2821.61-6549.57 2010-2011 7932.56 6426.99 1505.57 203.35 4458.75-2953.18 2011-2012 12391.93 9305.95 3085.98 416.80 6095.90-3009.92 2012-2013 15262.82 10286.77 4976.05 672.08 7733.04-2756.99 2013-2014 27046.72 13462.62 13584.1 1834.70 9370.19 4213.91 2014-2015 33551.6 17398.59 16153.01 2181.66 11007.34 5145.67 Source: Computed and Compiled from Annual Report of TCS Table 2: Projections for Working Capital of TCS (2015-16 to 2019-20) (Rs. In crores) Estimated Year Working Capital 2015-16 12644.48 2016-17 14281.63 2017-18 15918.77 2018-19 17555.92 2019-20 19193.06 Source: Computed Available Online@ 345

Table -3 Estimates of Trend Co-efficients for Net Working capital of TCS P = α + βt + e α βt R 2 F-value p-value -5364.12 1637.15 55.64*t 12.28% 0.00 S Source: Computed *S- Significant at 5% level NS Not Significant The amount of net working capital, their indices and trend values of net working capital of the TCS are shown in Table -1 it shows that as amount of net working capital registered in a rising trend except 2008-09 and 2009-10 due to current liabilities more than the current assets. It also indices recorded an increasing trend from S/NS 100 (base year 2005-06) to 2181.66 in 2014-15.The projections obtained for net working capital of TCS will be estimated Rs 12644.48 crores in 2015-16 to 19193.06 crores in 2019-20. There is significant difference between actual value and the trend value of net working capital among different years of TCS. Figure 1: Actual and Estimated Working Capital TCS Table 4: Short Term Solvency Trends of TCS YEAR CR INDICES QR INDICES CPR INDICES WTR INDICES 2005-2006 1.41 100.00 1.40 100.00 0.09 100.00 5.03 100.00 2006-2007 1.17 82.98 1.17 83.59 0.11 122.22 5.66 112.52 2007-2008 1.12 79.43 1.12 79.64 0.10 111.11 5.03 100.00 2008-2009 0.83 58.87 0.83 59.19 0.09 100.00 5.33 105.96 2009-2010 0.48 34.04 0.49 34.70 0.02 22.22 6.47 128.63 2010-2011 1.23 87.23 1.23 87.91 0.48 533.33 0.31 6.16 2011-2012 1.33 94.33 1.33 94.87 0.35 388.89 2.81 55.86 2012-2013 1.48 104.96 1.48 105.70 0.39 433.33 2.47 49.11 2013-2014 2.00 141.84 2.01 143.14 0.93 1033.33 2.20 43.74 2014-2015 1.92 136.17 1.93 137.39 0.94 1044.44 2.33 46.32 Mean 1.30 91.99 1.30 92.61 0.35 388.89 3.76 74.83 S.D 0.46 32.30 0.46 32.54 0.34 382.61 1.99 39.54 C.V(%) 35.12 35.12 35.14 35.14 98.39 98.39 52.83 52.83 SOURCE: Computed and Compiled from Annual Report of TCS Available Online@ 346

Figure 2: Short Term Solvency Trends of TCS Current ratio (CR): The idle ratio is 2:1. The ratio Cash Position Ratio (CPR): The cash position is less than standard norm during the study periods except 2013-2014 due to excess of current liabilities compare to current assets. The mean current ratio is 1.38 times with standard deviation 0.46 and coefficient of variation is 35.12 per cent. It indicates the short term solvency position of TCS is not satisfactory during the study periods except 2013-14. The trend of current ratio was 82.98 per cent in 2006-07 and it increased upto 141.84 per cent. Quick Ratio (QR): The quick ratio varied from 0.49 times to 2.01 times with the average of 1.30 times. The ratio remained more than 1 for the whole study period except 2008-09 to 2009-10 which indicated that the company was paying its cash obligation in an efficient manner and had financial strength and receivable management. ratio was highest 0.94 times 2014-15 while lowest 0.02 time in 2009-10. The average ratio remained 0.35 times. The cash position ratio was not satisfactory during the study period except 2013-14 and 2014-15, because the level of cash and bank balances maintained by the company is always lower than the standard norm 0.75:1. Working Capital Turnover Ratio (WTR): The working capital turnover ratio is low in the year 2010-11 0.31 times is low due to high investment in working capital and earn low profit. The ratio is high in the year 2009-10 with 6.47 times. This shows that working capital has been effectively utilized in making sales during the study period. The mean working capital turnover ratio is 3.76 times with 52.83 per cent of coefficient of variation. Table 5: Profitability Trends of TCS YEAR OPR INDICES NPR INDICES ROTA INDICES 2005-2006 29.71 100.00 24.19 100.00 48.13 100.00 2006-2007 28.79 96.90 25.14 96.22 46.33 96.26 2007-2008 27.11 91.25 24.32 99.47 40.90 84.98 2008-2009 26.87 90.44 20.96 115.41 34.82 72.35 2009-2010 28.93 97.37 24.38 99.22 37.08 77.04 2010-2011 29.93 100.74 25.85 93.58 38.59 80.18 2011-2012 29.30 98.62 28.24 85.66 43.98 91.38 2012-2013 29.54 99.43 26.40 91.63 39.07 81.18 2013-2014 33.29 112.05 28.56 84.70 41.85 86.95 2014-2015 28.57 96.16 26.17 92.43 42.16 87.60 Mean 29.20 98.30 25.42 95.83 41.29 85.79 S.D 1.77 5.95 2.19 8.74 4.12 8.55 C.V(%) 6.05 6.05 8.63 9.12 9.97 9.97 Source: Computed and Compiled from Annual Report of TCS Available Online@ 347

This ratio establishes the relationship between the total cost incurred and sales. Operating profit is the Net profit after depreciation but Before Interests and Taxes. The operating profit ratio remained highest 33.29 per cent during 2013-14 while lowest 26.87 during the year 2008-09 with the mean value 29.20, standard deviation 1.77 and co-efficient of variation 6.05 per cent. Finally, we conclude that the overall operational effectiveness of the business is at satisfactory. The net profit ratio was highest 28.56 per cent in 2013-14 and lowest 20.96 per cent during 2008-09. It implied that the management of the company was able to operate the business with sufficient and recover expenses of the period. Hence, the net profitability margin of TCS is at satisfactory position over the period of study. Return on total assets was highest 48.13 per cent in 2005-06 and lowest 34.82 per cent in 2008-09. The TCS was gained an immense growth in terms of ROTA i.e. 41.29. Figure 3: Profitability Trends of TCS Table 6: Motaal s Comprehensive Test of Profitability of TCS (over the period from 2005-06 to 2014-15) YEAR OPR R1 NPR R2 ROTA R3 Total Rank Ultimate Rank 2005-2006 29.71 3 24.19 9 48.13 1 13 3 2006-2007 28.79 7 25.14 6 46.33 2 15 5 2007-2008 27.11 9 24.32 8 40.90 6 23 9 2008-2009 26.87 10 20.96 10 34.82 10 30 10 2009-2010 28.93 6 24.38 7 37.08 9 22 8 2010-2011 29.93 2 25.85 5 38.59 8 15 5 2011-2012 29.30 5 28.24 2 43.98 3 10 2 2012-2013 29.54 4 26.40 3 39.07 7 14 4 2013-2014 33.29 1 28.56 1 41.85 5 7 1 2014-2015 28.57 8 26.17 4 42.16 4 16 7 Source: Computed and Compiled from Annual Report of TCS This test has been applied for determining the profitability position of TCS over the period under consideration. On the basis of ultimate ranking suggested by Motaal it may be concluded that profitability position of TCS in the year 2013-14 was best followed by the years 2011-12, 2005-06, 2012-13, 2006-07, 2010-11, 2014-15, 2009-10, 2007-08, and 2008-09 respectively. It indicates that profitability position of the enterprise is more or less improving over the period under study. VIII. FINDINGS AND SUGGESTIONS 1. The working capital was not adequate during the year 2008-09 and 2009-10. The working capital may be maintained according to the sales trend. Working capital need not be excessive or inadequate. If it is excessive, Available Online@ 348

invest in trade securities or repay the borrowings. If it is inadequate, reduce the inventory and provisions. 2. The current ratio and cash position ratio are less than standard norm 2:1 and 0.75:1 during the study period. The company must maintain a considerable amount of cash and bank balance in order to meet its short- term commitments and for emergency requirements. 3. Quick ratio remained more than 1:1 for the study period except 2008-09 to 2009-10. It may be concluded that the liquidity position of the company was satisfactory and therefore, the company should try to maintain adequate amount of liquid assets to meet its short term maturing obligations. 4. The net profitability margin of TCS is at satisfactory position over the period of study. Profitability position of TCS in the year 2013-14 was best followed by the years 2011-12, 2005-06, 2012-13, 2006-07, 2010-11, 2014-15, 2009-10, 2007-08, and 2008-09. 5. The selected companies are suggested to concentrate on liquidity, solvency and its profitability position. So as strengthen their financial position. CONCLUSION To conclude the study it may be said that the adoption of the above measures will undoubtedly help the TCS to improve their overall performance. Short term and Long Term solvency position to be maintained properly which will ultimately enhance the liquidity and profitability of the TCS. The industry will be able to generate funds from internal sources, thus breaking the various circles of financial stringencies. It is known that the maximum utilization of fixed assets as well as current assets will result in better performance. References [1] Kothari,C.R,. Research Methodology Methods & Techniques, New Age International Publishers, New Delhi, Second Edition, 2008. [2] Pandey, I. M, Financial Management, Vikas Publishing, House Pvt. Ltd, New Delhi. Ninth Edition, 2010. [3] Prasanna Chandra, Financial Management Theory and Practice, Tata McGram Hill Publishing House, New Delhi, Sixth Edition, 2006. [4] Sharma R.K. Shasi K. Gupta, Management Accounting, Kalyani Publishers, Ludhiana, India, 2003. [5] Khan.M.Y and Jain P.K, Financial Management, Text and Problems, Tata McGraw Hill Publishing Company Ltd, New Delhi, Fourth Edition, 2006. [6] Bhunia, A. and Brahma, B. Impact of Liquidity Management on Profitability, Asian Journal of Business Management, Volume (3) 2, 108-117, 2011. [7] Owolabi, Ajao & Obida, Liquidity Management and Corporate Profitability: Case Study of Selected Manufacturing Companies Listed on The Nigerian Stock Exchange Business Management Dynamics, Volume.2, No.2, pp.10-25, August 2012. [8] Seyed Mohammad Alavinasab and Esmail Davoudi, Studying the relationship between working capital management and profitability of listed companies in Tehran stock exchange, Business Management Dynamics, Volume.2, No.7, pp.01-08, January 2013. [9] Dharmaraj, A. and Kathirvel, N, Analysing the Financial Performance of Selected Indian Automobile Companies. Global Research Analysis, Volume: 2, Issue 4, Pp 18-20, April 2013. [10] Moses Joshuva Daniel, A, A Study on Financial Status of Tata Motors Ltd, Indian Journal of Applied Research, Volume 3, Issue 4, ISSN - 2249-555X, pp.320-322, April 2013. Websites: [11] www.moneycontrol.com [12] www.indiainfoline.com [13] www.tcs.com Available Online@ 349