Tata Consultancy Services 

Valuation: About the

Company
Tata Consultancy Services (TCS) is an Indian multinational technology
company that specializes in information technology (IT) services and
consulting, headquartered in Mumbai, Maharashtra, India and has its largest
workforce based in Chennai, Tamil Nadu, India. As of February,’2021 TCS is
the largest company in the IT sector in the world by the Market capitalisation
of $169.2 billion. It is a subsidiary of the Tata Group and operates in 149
locations across 46 countries.

TCS is the second-largest Indian company by market capitalisation. Tata

consultancy services is now placed among the most valuable IT services brands
worldwide. In 2015, TCS was ranked 64th overall in the Forbes World’s Most
Innovative Companies ranking, making it both the highest-ranked IT services
company and the top Indian company. As of 2018, it is ranked eleventh on the
Fortune India 500 list. In April 2018, TCS became the first Indian IT company
to reach $100 billion in market capitalisation, and second Indian company ever
(after Reliance Industries achieved it in 2007) after its market capitalisation
stood at ₹6,79,332.81 crore ($102.6 billion) on the Bombay Stock Exchange.

In 2016–2017, Parent company Tata Sons owned 72.05% of TCS; and more
than 70% of Tata Sons’ dividends were generated by TCS. In March 2018, Tata
Sons decided to sell stocks of TCS worth $1.25 billion in a bulk deal. From
here, we go ahead with Tata Consultancy Services Valuation and Intrinsic
Value of its shares.

TCS Income Statement Analysis

review of the company during FY18-19.

 Operating income during the year rose 19.0% on a year-on-year (YoY) basis.
 The company's operating profit increased by 21.5% YoY during the fiscal.
Operating profit margins witnessed a fall and down at 27.0% in FY19 as against
26.4% in FY18.
 Depreciation charges increased by 2.1% and finance costs increased by 280.8%
YoY, respectively.
 Other income grew by 18.4% YoY.
  Net profit for the year grew by 22.0% YoY.
 Net profit margins during the year grew from 20.4% in FY18 to 20.9% in FY19.

During FY19-20.

 Operating income during the year rose 7.2% on a year-on-year (YoY) basis.
 The company's operating profit increased by 6.6% YoY during the fiscal.
Operating profit margins witnessed a fall and stood at 26.8% in FY20 as against
27.0% in FY19.
 Depreciation charges increased by 71.6% and finance costs increased by 366.7%
YoY, respectively.
 Other income grew by 6.5% YoY.
 Net profit for the year grew by 2.8% YoY.
 Net profit margins during the year declined from 20.9% in FY19 to 20.1% in FY20.

During FY20-21.

Operating income during the year rose 4.6% on a year-on-year (YoY) basis.

 The company's operating profit increased by 7.6% YoY during the fiscal.
Operating profit margins witnessed a fall and down at 27.6% in FY21 as against
26.8% in FY20.
 Depreciation charges increased by 15.2% and finance costs decreased by 31.1%
YoY, respectively.
 Other income declined by 31.8% YoY.
 Net profit for the year grew by 0.4% YoY.
 Net profit margins during the year declined from 20.1% in FY20 to 19.5% in FY21.

TCS Income Statement 2018-19, 2019-20, 2020-21

MAR MAR MAR MAR % % %
2018 2019 2020 2021 CHANGE CHANGE CHANGE
IN 2019 IN 2020 IN 2021

NET SALES RS 1321040 1464630 156490 1641770 19.0% 7.2% 4.6%

Mn

OTHER INCOME RS 36420 43110 45920 31340 18.4% 6.5% -31.8%

Mn
TOTAL RS 1267460 1507740 1615410 1673110 19.0% 7.1% 3.6%
REVENUES Mn

GROSS PROFIT RS 325160 395,060 421090 453280 21.5% 6.6% 7.6%

Mn

DEPRECIATION RS 20140 20560 35290 40650 2.1% 71.6% 15.2%

Mn

INTEREST RS 520 1980 9240 6370 280.8% 366.7% -31.1%

Mn

PROFIT RS 340920 415630 422480 437600 21.9% 1.6% 3.6%

BEFORE TAX Mn

TAX RS 82120 100010 98010 111980 21.8% -2.0% 14.3%

Mn

PROFIT AFTER RS 258800 315620 324470 325620 22.0% 2.8% 0.4%

TAX Mn

GROSS PROFIT % 26.4 27.0 26.8

MARGIN

EFFECTIVE TAX % 24.1 24.1 23.2

RATE

NET PROFIT % 20.4 20.9 20.1

MARGIN

TCS Balance Sheet Analysis

review of the company during FY18-19.

 The company's current liabilities during FY19 stood at Rs 221 billion as compared
to Rs 178 billion in FY18, thereby witnessing an increase of 23.9%.
 Long-term debt down at Rs 440 million as compared to Rs 540 million during
FY18, a fall of 18.5%.
 Current assets rose 13% and stood at Rs 921 billion, while fixed assets rose 0%
and stood at Rs 133 billion in FY19.
 Overall, the total assets and liabilities for FY19 stood at Rs 1,149 billion as
against Rs 1,063 billion during FY18, thereby witnessing a growth of 8%.

During FY19-20.
  The company's current liabilities during FY20 stood at Rs 271 billion as
compared to Rs 221 billion in FY19, thereby witnessing an increase of
22.5%.
 Current assets fell 2% and stood at Rs 902 billion, while fixed assets rose
63% and stood at Rs 216 billion in FY20.
 Overall, the total assets and liabilities for FY20 stood at Rs 1,209 billion as
against Rs 1,149 billion during FY19, thereby witnessing a growth of 5%.

During FY 20-21

 The company's current liabilities during FY21 stood at Rs 342 billion as

compared to Rs 271 billion in FY20, thereby witnessing an increase of
26.2%.
 Current assets rose 10% and stood at Rs 993 billion, while fixed assets fell
1% and stood at Rs 275 billion in FY21.
 Overall, the total assets and liabilities for FY21 stood at Rs 1,268 billion as
against Rs 1,181 billion during FY20, thereby witnessing a growth of 7%

TCS Balance Sheet as on March 2019, 2020, 2021

MAR MAR MAR MAR % % %
2018 2019 2020 2021 CHANGE CHANGE CHANGE
IN 2019 IN 2020 IN 2021
NETWORTH RS 851280 894460 841260 864330 5.1% -5.9% 2.7%
Mn

CURRENT RS 178280 220840 270600 341550 23.9% 22.5% 26.2%

LIABILITIES Mn
LONG-TERM RS 540 440 0 0 -18.5% -100% 0%
DEBT Mn
TOTAL RS 1062960 1149430 1208990 1268280 8.1% 5.2% 7.4%
LIABILITIES Mn

CURRENT RS 812240 921310 902370 992800 1.4% -2.1% 10%

ASSETS Mn
FIXED RS 132510 132530 215510 275480 0% 62.6% -1%
ASSETS Mn
TOTAL RS 1062960 1149430 1208990 1268280 8.1% 5.2% 7.4%
ASSETS Mn
Cash Flow Statement Analysis
review of the company during FY18-19
 TCS's cash flow from operating activities (CFO) during FY19 stood at Rs 286
billion, an improvement of 14.1% on a YoY basis.
 Cash flow from investing activities (CFI) during FY19 stood at Rs 16 billion on a
YoY basis.
 Cash flow from financial activities (CFF) during FY19 stood at Rs -279 billion on a
YoY basis.
 Overall, net cash flows for the company during FY19 stood at Rs 23 billion from
the Rs 13 billion net cash flows seen during FY18.

During FY19-20

 TCS's cash flow from operating activities (CFO) during FY20 stood at Rs
324 billion, an improvement of 13.2% on a YoY basis.
 Cash flow from investing activities (CFI) during FY20 stood at Rs 86 billion,
an improvement of 436.7% on a YoY basis.
 Cash flow from financial activities (CFF) during FY20 stood at Rs -399
billion on a YoY basis.
 Overall, net cash flows for the company during FY20 stood at Rs 14 billion
from the Rs 23 billion net cash flows seen during FY19

During FY20-21

 TCS's cash flow from operating activities (CFO) during FY21 stood at Rs
388 billion, an improvement of 19.9% on a YoY basis.
 Cash flow from investing activities (CFI) during FY21 stood at Rs -81 billion
on a YoY basis.
 Cash flow from financial activities (CFF) during FY21 stood at Rs -326
billion, an improvement of 18% on a YoY basis.
 Overall, net cash flows for the company during FY21 stood at Rs -18 billion
from the Rs 14 billion net cash flows seen during FY20.

TCS Cash Flow Statement 2018-19, 2019-20, 2020-21

MAR MAR MAR MAR % % %
2018 2019 2020 2021 CHANGE CHANGE CHANGE
 IN 2019 IN 2020 IN 2021
Operating RS 250670 285930 323690 388020 14.1% 13.2% 19.9%
Activities Mn
Investing RS 28860 15960 85650 -81290 -44.7% 436.7%
Activities Mn
Financing RS -268850 -278970 -399150 -326340 - -
Activities Mn
NET RS 12860 23410 14220 -17880 82.0% -39.3%
CASH- FLOW Mn

Current Valuations for TCS

During 2018-19
 The trailing twelve-month earnings per share (EPS) of the company stands at Rs
84.1, an decline from the EPS of Rs 135.2 recorded last year.
 The price to earnings (P/E) ratio, at the current price of Rs 2,131.2, stands at 25.9
times its trailing twelve months earnings.
 The price to book value (P/BV) ratio at current price levels stands at 11.2 times,
while the price to sales ratio stands at 6.8 times.
 The company's price to cash flow (P/CF) ratio stood at 24.3 times its end-of-year
operating cash flow earnings.

During 2019- 20
 The trailing twelve-month earnings per share (EPS) of the company stands at Rs
86.5, an improvement from the EPS of Rs 84.1 recorded last year.
 The price to earnings (P/E) ratio, at the current price of Rs 2,265.0, stands at 27.7
times its trailing twelve months earnings.
 The price to book value (P/BV) ratio at current price levels stands at 8.7 times,
while the price to sales ratio stands at 4.7 times.
 The company's price to cash flow (P/CF) ratio stood at 24.1 times its end-of-year
operating cash flow earnings.

During 2019- 20
 The trailing twelve-month earnings per share (EPS) of the company stands at Rs
88.0, an improvement from the EPS of Rs 86.5 recorded last year.
 The price to earnings (P/E) ratio, at the current price of Rs 3,257.1, stands at 37.0
times its trailing twelve months earnings.
  The price to book value (P/BV) ratio at current price levels stands at 10.7 times,
while the price to sales ratio stands at 5.6 times.
 The company's price to cash flow (P/CF) ratio stood at 32.9 times its end-of-year
operating cash flow earnings

Per Share Data/Valuations

MAR 2019 MAR 2020 MAR 2021

Sales per share (unadj.) Rs 390.3 418.3 443.8

TTM Earning per Share Rs 84.1 86.5 88.0

Diluted earnings per Share Rs 82.4 87.7 88.0

Price to Cash Flow 24.3 34.0 32.9

TTM P/E ratio 25.9 37.5 37.0

Price/ book value ratio 11.2 8.5 10.7

Market Cap Rs Mn 8159459 12221705 12047995

Dividend per share (unadj.) Rs 30 73.0 38.0

Ratio Analysis for TCS

 Solvency Ratios

Current Ratio: The company's current ratio deteriorated and stood at 2.9x during
FY21, from 4.6x during FY18. The current ratio measures the company's ability to
pay short-term and long-term obligations.

Interest Coverage Ratio: The company's interest coverage ratio deteriorated and

stood at 46.7x during FY20, from 656.6x during FY18, improved and stood at
69.7x during FY21, from 46.7x during FY20 The interest coverage ratio of a
company states how easily a company can pay its interest expense on
outstanding debt. A higher ratio is preferable.
  Profitability Ratios

Return on Equity (ROE): The ROE for the company improved and stood at
38.6% during FY20, from 30.4% during FY18; then declined and down at 37.7%
during FY21, from 38.6% during FY21. The ROE measures the ability of a firm to
generate profits from its shareholders capital in the company.
Return on Capital Employed (ROCE): The ROCE for the company improved and
stood at 51.4% during FY21, from 40.1% during FY18.  The ROCE measures the
ability of a firm to generate profits from its total capital (shareholder capital plus
debt capital) employed in the company.
Return on Assets (ROA): The ROA of the company improved and stood at 28.3%
during FY20, from 24.4% during FY18; then declined and down at 26.2% during
FY21, from 28.3% during FY20. The ROA measures how efficiently the company
uses its assets to generate earnings.

Key Ratio Analysis

MAR 2019 MAR 2020 MAR 2021

Current ratio 4.2 3.3 2.9

Debtors’ Ratio Days 68 71 67

Interest Coverage 210.9 46.7 69.7

Debt to equity ratio 0 0 0

Return on assets % 27.6 28.3 26.2

Return on equity % 35.3 38.6 37.7

Return on Capital Employed % 40.1 51.3 51.4

TCS Share Price Performance

Over the year 2018-19, TCS share price has moved up from Rs 1,779.0 to Rs 2,131.2,
registering a gain of Rs 352.2 or around 19.8%.
Meanwhile, the S&P BSE IT Index is trading at Rs 15,424.7 (down 0.6%). Over the last
one year it has moved up from 13,223.1 to 15,424.7, a gain of 2,202 points (up 16.6%).
Overall, the S&P BSE SENSEX is up 14.1% over the year.
Over the year 2019-20, TCS share price has moved up from Rs 2,248.6 to Rs 2,265.0,
registering a gain of Rs 16.4 or around 0.7%.
Meanwhile, the S&P BSE IT Index is trading at Rs 18,100.7 (up 0.6%). Over the last one
year it has moved up from 15,638.8 to 18,100.7, a gain of 2,462 points (up 15.7%).
Overall, the S&P BSE SENSEX is up 3.7% over the year.

Over the year 2020-21, Over the last one year, TCS share price has moved up from Rs
2,217.7 to Rs 3,257.1, registering a gain of Rs 1,039.4 or around 46.9%.
Meanwhile, the S&P BSE IT Index is trading at Rs 29,678.8 (down 0.3%). Over the last
one year it has moved up from 15,680.9 to 29,678.8, a gain of 13,998 points (up 89.3%).
Overall, the S&P BSE SENSEX is up 44.1% over the year.

Valuations
Methodology Used:
Discounted cash flow (DCF) is a valuation method used to estimate the value
of an investment based on its expected future cash flows. DCF analysis
attempts to figure out the value of an investment today, based on projections
of how much money it will generate in the future. The following step by step
procedure is followed.

1. Determining the Revenue Growth Rates

2. Forecasting the Financial Statements
3. Deriving the FCFF and FCFE
4. Calculating the Terminal Value
5. Calculating the Discount Rate
6. Discounting the Cashflows
7. Arriving at the Intrinsic Value of the Shares

Step 1: Determining the Revenue Growth Rates

We arrive at the below table by using the past and expected future
performance of both the company and the economy. This along with
adjustments to changes in the management expectations, extraordinary events
and other macro factors give the revenue growth rates for Tata Consultancy
Services Valuation.
Financial Year Revenue Growth Rate
Year 1 7%
Year 2 14%
Year 3 14%
Year 4 13%
Year 5 12%
Revenue Growth Rates: Tata Consultancy Services Valuation
Step 2: Forecasting the Financial Statements
The financial statements are forecasted for a period of 5 years using the annual
report data of the company. The assumptions used for forecasting are
tabulated below. The Excel model is completely editable and can be adjusted
for specific changes which may happen over a period of time.
Financial Statements Forecast: Tata Consultancy Services Valuation
Step 3: Deriving the FCFF and FCFE
Free cash flow to the firm (FCFF) represents the amount of cash flow from
operations available for distribution after accounting for depreciation
expenses, taxes, working capital, and investments. FCFF is a measurement of a
company’s profitability after all expenses and reinvestments. It is given as
follows.

Free cash flow to equity (FCFE) is a measure of how much cash is available to
the equity shareholders of a company after all expenses, reinvestment, and
debt are paid. FCFE is a measure of equity capital usage.
F/S Items (INR Millions) Mar-20 Mar-21 Mar-22 Mar-23 Mar-24
Free Cash Flow to Firm 343762 362291 421354 483549 548194
Free Cash Flow to Equity 330736 414412 479000 536267 593516
FCFF and FCFE values: Tata Consultancy Services Valuation
Step 4: Calculating the Terminal Value
Terminal value (TV) is the value of a business or project beyond the forecast
period when future cash flows can be estimated. It assumes that a business
will grow at a set growth rate forever after the forecast period. Terminal value
often comprises a large percentage of the total assessed value.

Terminal Value Calculation Units INR Millions

Free Cash Flow to Firm 548193.65
Growth Rate 5.00%
Cost of Capital 10.45%
Terminal Value 10569073.31
Terminal Value: Tata Consultancy Services Valuation
Step 5: Calculating the Discount Rate
DCF analysis helps assess the viability of a project or investment by calculating
the present value of expected future cash flows using a discount rate. Here we
use the Weighted average cost of capital (WACC) to discount the cash flow.
The below table from the excel model shows the calculation of WACC for Tata
Consultancy Services Valuation.
WACC Calculation for Tata Consultancy Services Valuation.
Step 6: Discounting the Cashflows
The WACC and the Cost of Equity for the company calculated in the above
step are then used to discount the FCFF, FCFE and Terminal Value calculated
in Step 3 and 4. In our case, we’ll only consider the FCFF based Intrinsic price
of the shares as it represents the cash flow to all the suppliers of capital and
not only to the equity shareholders. Thus we arrive at Present value of future
FCFF for Tata Consultancy Services Valuation. (Units are INR Millions)
PV of FCFF and FCFE for Tata Consultancy Services Valuation.

Step 7: Arriving at the Intrinsic Value of the Shares

Dividing the PV of the FCFF and Terminal Value (the Value of the entire firm)
by the number of outstanding shares we get the per share intrinsic value. We
can compare this price with the current market price of the stock to get the
Discount or Premium to its intrinsic price.

Tata Consultancy Services Valuation Units

PV in INR Million 7659807
No of Shares Outstanding (In Million) 3790
Intrinsic Value 2021.06
Current Market Price of Share 2903
Current Discount/Premium 43%
Intrinsic Value of the Shares: Tata Consultancy Services Valuation
Tata Consultancy Services Valuation and Intrinsic
Share Price = INR 2021.06