FINANCIAL ACCOUNTING REPORT

Guide: Prof. (Dr.) Ashish Kumar

FINANCIAL ANALYSIS OF IT INDUSTRY

Candidate # Name Roll Number Company

Candidate 1 Abhishek Singh Rathore MBA20078 Mphasis

Candidate 2 Akash Nandy MBA20082 Wipro

Candidate 3 Anshul Singh MBA20093 TCS

Candidate 4 Atulya Shekhar MBA20096 HCL Technologies

Candidate 5 Sachin Gupta MBA20126 Mindtree

Candidate 6 Samarth Garg MBA20127 L&T Infotech

TABLE OF CONTENTS

1. Industry Overview………………………………………………………………………...3

2. Company Overview……………………………………………………………………….4

3. Ratios analysis…………………………………………………………………………….6

a. Liquidity ratio……………………………………………………………………..6

i. Current ratio……………………………………………………………….6

ii. Quick Ratio………………………………………………………………..7

b. Profit margin ratios………………………………………………………………..8

i. EBITDA margin…………………………………………………………..8

ii. Net Profit Margin………………………………………………………...10

c. Insolvency ratio…………………………………………………………………..11

i. Debt/Equity ratio………………………………………………………....11

ii. Debt Capitalization ratio…………………………………………………12

iii. Interest coverage ratio……………………………………………………14

iv. Total debt service ratio…………………………………………………...14

d. Valuation ratio…………………………………………………………………16

i. Earning per share………………………………………………………...16

ii. Dividend per share……………………………………………………….17

iii. Retention ratio…………………………………………………………....18

iv. Price to earning ratio……………………………………………………..19

v. Price to book value ratio…………………………………………………20

e. Overall Performance ratio………………………………………………………..21

i. Return on total assets ratio……………………………………………….21

ii. Return on equity ratio……………………………………………………22

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 iii. Return on capital employed ratio………………………………………...23

iv. Equity Turnover ratio…………………………………………………….25

4. 5 factor DuPont analysis………………………………………………………………...26

5. Key Performance metrics………………………………………………………………...28

a. Revenue per client………………………………………………………………..28

b. Earning per client………………………………………………………………...29

c. Revenue per employee…………………………………………………………...30

d. References………………………………………………………………………..31

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 IT Industry Overview

★ The Indian IT industry leads technology outsourcing of the world with $125 billion share.
★ It is expected to grow at 7.7% year-on-year to reach $350 bn by 2025
★ These IT companies have 1000 centres across 80 nations, employing over 1 million techies.
★ The domestic IT industry is valued at $44 billion and export revenue stood $147 billion in
Financial year 2020.
★ The major IT firms TCS, Infosys, Wipro and HCL collectively employed 205,000 new
hires till the beginning of 2020.
★ During COVID-19 pandemic, the digital adoption has accelerated and the business
opportunities for IT industries promise healthy growth.
★ The IT industry assists all other sectors like banking & finance, healthcare, tourism &
hospitality, retail, transportation and upcoming education sector.

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 Company overview

HCL Technologies Limited

HCL Technologies Limited, headquartered in Noida, Uttar Pradesh, is

an Indian multinational information technology (IT) services and consulting company. It is a
subsidiary of HCL Enterprise. A next gen global technology which is helping companies
reimagine their businesses and making them ready for the new digital age. HCL is operating in
49 countries and is serving 250 companies of fortune 500 companies. HCL is having unmatched
prowess and is one of the leading companies in this industry.

Mphasis
Mphasis Limited is a public IT company with its headquarter in
Bangalore, India. It specializes in a plethora of domains like
application development, product maintenance services,
outsourcing of infrastructure services, providing solutions to
clients regarding outsourcing of knowledge and business process.
It was incorporated on August 10th, 1992, after the merger of a
US consulting firm Mphasis and an Indian IT firm called BFL
Software Limited. Recently, in April 2016, Hewlett Packard Enterprise (HPE) sold its majority
stake in Mphasis for a grand sum of US$ 1 Billion to the Blackstone Group.

Tata Consulting Services (TCS):

TCS is the Information Technology subsidiary of Tata Group based in
India. TCS serves from 149 locations across 46 countries. It is ranked 2nd
in terms of market capitalization among Indian companies. It provides IT
support for software development, service outsourcing, consulting,
enterprise software maintenance, and education services. The company is
well known for employee-friendly policies and the investments show as
massive revenue leveraged by employee benefit expenses. TCS has been
helping the health sector R&D with artificial intelligence and is now investing in new opportunities
opened by accelerated digital adoption by the pandemic situation.

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Mindtree:
Mindtree Limited is an Indian multinational IT and business
outsourcing company with headquarters in New Jersey, USA and
Bangalore, India. Mindtree is now part of the Larsen & Toubro group
after the latter acquired the former in 2019 by buying 61.08% stake
in the company. It provides services in application development and
maintenance, data analytics, digital services, enterprise application integration, business process
management, engineering R&D, testing and infrastructure management services. It deals with
clients in verticals like banking, capital markets, consumer devices and electronics, consumer
packaged goods, independent software vendors, manufacturing, insurance, media and
entertainment, retail, semiconductors and travel and hospitality industry.

Wipro:

Wipro Limited is an Indian multinational corporation that engages in IT,

consulting and business process services. It has its headquarters in
Bangalore, India. They focus on the power of cognitive computing,
hyper-automation, robotics, cloud, analytics and emerging technologies
to help the clients adapt to the digital world and make them successful.
A company has been recognized globally for its competencies in services, commitment to
sustainability and responsible CSR. They also have over 180,000 employees serving clients across
six continents.

LARSEN & TOUBRO INFOTECH LTD. (LTI)

Larsen & Toubro Infotech Limited (L&T Infotech)
incorporated in 1997 is a subsidiary of Larsen & Toubro Limited.
L&T Infotech is a global digital solutions and technology consulting
company headquartered in Mumbai, India. It employs more than 30,000
LTItes and has helped more than 420 clients excel in their businesses. It's
a Business-to-IT solution and deeply committed people provide an upper
edge to its clients by providing the best technology to enhance the
effectiveness of their business. L&T Infotech has 23 software development centers and 44 sales
offices spread across the globe. The company identifies the following opportunities in its line of
business: Insurance, Banking and Financial Services, Energy and Utilities, Manufacturing, Retail
and Pharma, CPG, entertainment and Hi-Tech media. In 2017, according to the Everest Group's
PEAK Matrix for IT service providers, LTI was amongst the top 15 IT service providers globally

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 RATIOS

Liquidity ratios

Current ratio
A company’s liquidity is measured using the current ratio, basically the ability of a company to
pay off its debts or loans.
Information is value to creditors to decide how much loan they can give to a company if they have
agreed to do so.
Higher the current ratio, greater is the ability of the company to pay off its debts

Current ratio = Current Assets/Current Liabilities

Inference:
Industry average: 1.17

● HCL: Current ratio for HCL has been constant, but because of the unprecedented COVID
situation, in FY2020, the company acquired 30% more current assets but saw an increase
of almost 100% increase in current liabilities.
● Mphasis: Current ratio has been higher than the industry average though it has declined in
the last 3 years after an initial rise. This is the result of a sharp jump of current liabilities.
● TCS: The company’s current ratio is higher than average indicating a buffer of liquidity.
However, the ratio has been falling due to investments. The fall between 2019 and 2020 is
due to decline in current assets from moving of assets to right-of-use-assets category.
● Wipro: A steady rise in the ratio with a CAGR of 3.8%, shows its ability to pay off short
term debts easily. Although assets and liabilities do not have a steady trend, the company
has well balanced the ratio.

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 ● Mindtree: Current ratio is above the industry average. Current ratio saw a decline from
2019 to 2020 because the percentage increase in current liabilities was more than the
percentage increase in current assets. The same reason can be attributed to a decrease in
ratio from 2017 to 2018.
● LTI: Current ratio has increased over the years from 2016 to 2019 but suddenly it dropped in
2020. This is because the percentage increase in current assets was less than the percentage
increase in current liability.

Quick ratio

It is used to measure a company's short-term position on liquidity, basically, it indicates whether

a company will be able to meet short-term obligations wrt to current liabilities without selling
inventory or looking for further financing.
Higher the ratio, the greater the company’s position to meet short term obligations.

Quick Ratio = (Current Assets - Inventory)/Current Liabilities

Quick ratio is more or less the same as the current ratio or has very little difference between the
values as IT companies are usually low in inventories or have zero value.

Inference:
The trend is almost the same as the current ratio.

● HCL: Quick ratio is following the same trend as the current ratio for HCL, as the inventory
of HCL is 0.2% of current assets, where inventory is also constant for the FY2019 and
FY2020.

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 ● Mphasis: Due to being low or zero or inventory, the quick ratio is similar to current ratio.
Though unbilled services have increased. Quick ratio has declined in the last 3 years after
initial increase due to sharp jump in current liabilities and limited increase in inventory.
● TCS: The inventory dependency is negligent for this company and thus Quick ratio follows
the trend of the current ratio for this company. The ratio in 2020 is 3.12 indicating good
solvency ability.
● Wipro: The solvency has risen for the company, following its current ratio. This shows
short term financial stability of the company.
● Mindtree: The inventory for the company is 0 and hence Quick ratio is identical to current
ratio. It follows the same trajectory as the current ratio.
● LTI: the solvency of the company has increased from 2016 to 2019 and there is a slight
dip in 2020 as the inventory has increased in 2020. But still, the company has a healthy
Quick ratio

Profit margin ratios

EBITDA Margin
EBITDA stands for earnings before interest, taxes, depreciation and amortization.
It is used to measure how much percentage is the operating profit of the company when compared
to its revenue.
This helps us in analyzing the relative profitability of two companies with respect to other
companies in the industry.

EBITDA Margin = EBITDA / Total Sale

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Inferences:

● HCL: HCL has had an increase of 3,000 crores of EBITDA in FY 2020. Throughout the 5
year time period, HCL’s EBITDA margin has been stable at 24-25%. This is because of
HCL’s strong fundamentals and market perception.
● Mphasis: EBITDA margin has risen consistently over the years. Both revenues and
EBITDA has increased over the years with EBITDA increasing at a higher rate.
● TCS: The ratio has been stable over the period 2016-20 for TCS and also being the highest
among the companies, TCS being most profitable. The current decline from 2019 to 2020
can be attributed to an increase in employee benefit expenses.
● Wipro: EBITDA margin has been stable over time (averaging nearly 21%) without a
significant rise. Since its profitability is relatively good amongst the competition, we can
expect stability and consistent returns.
● Mindtree: EBITDA has seen fluctuations over the years. There has been a decline in
margin from 2019 to 2020 because expenses increased proportionately more compared to
revenue.
● LTI: Company has almost constant EBITDA margin but in 2020 it dipped by 1.4% points as
employees benefit expenses increased due to which EBITDA decreased

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Net Profit Margin
Net profit margin is used to measure what percentage is the net profit of the company with respect
to the revenue it generates.
It can be seen as the amount of profit generated from every 100 rupees collected as revenue,
It helps the investors assess whether the management of the company is generating enough profit
or not and how efficiently it is managing it is containing its operating and overhead costs.

Net Profit Margin = Net Income/ Total Sales

Inference:

● HCL: On the contrary of EBITDA margin being stable, HCL’s net profit margin has been
stable throughout but fell in FY2020 to 15.64%. This is seen because there has been a 400%
increase in the interest cost of the firm.

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 ● Mphasis: NPM for Mphasis has slightly but consistently increased over the years. It is
attributed to consistent increase in both revenues and net income.
● TCS: The company has maintained the highest positive net profit margin in the category.
The fall of 1.5% from 2019 to 2020 is due to increased partly due to increase in employee
expenses, depreciation & amortization expenses and interest expenses.
● Wipro: The company has not performed well on this parameter with low profit to revenue
figures. The yearly ratios fall way below the industry average. Although Net sales increased
at CAGR 3.41%, net profit did not keep pace.
● Mindtree: Similar to EBITDA margin, Net Profit margin has also seen fluctuations over
the year. There is a fall in margin from 2019 to 2020 by 2.6% because net profit growth
was proportionately less compared to revenue.
● LTI: since the employee benefit expenses increased much more as compared to increase
in sales, therefore, net income dropped in 2020 and hence Net profit margin dropped by 2%
points

Insolvency ratios

Debt/Equity Ratio

The ratio is used to find out a company’s financial leverage. It also shows the ability of shareholder
equity to cover all outstanding debts in the event of business collapse.

Debt/Equity = Total Debt/Total Shareholders’ Equity

A high debt/equity ratio often comes with high risk; it means the company has been aggressively
financing growth through debt. If profit from this debt is higher than the costs of debt, then that
will mean higher returns for shareholders. However, if the cost of debt is more than the increased
income generated through debt, share values may fall.

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A Debt/Equity ratio of 1-1.5 is generally considered a healthy ratio. Some capital-intensive sectors
may go for upto 2 where high PPE is needed. Since we see a trend of high PPE values in our
companies as well as compared to other liabilities. We can say the companies analyzed can
leverage a bit more for profits but are fairly stable from shareholder’s point of view.

Inference:
Industry average: 0.62

● HCL: HCL has a very low Debt/Equity ratio throughout the years. Although there has been
a sudden increase in the ratio in the FY2019 and FY2020. This is seen because there is a
jump of 853% in debt. Still the company is operating at a very low level of debt to equity
ratio.
● Mphasis: The debt has been significantly lowered than the industry average but has more
than doubled in the last 5 years. This is attributed to sudden rise in debt due to increasing
financial liabilities whereas the equity has more or less remained constant.
● TCS: The company has maintained a low debt to equity ratio, but there is an increasing
trend of leverage by debt. It is found that the company is buying back equity shares and
slightly increased borrowing leading to this trend.
● Wipro: With very low Debt-Equity ratio, and continuously decreasing the shareholder
interests are safe. But a bit more debt can be leveraged if profits can be made. But there is
a 34% decrease in the ratio from 2018 to 2019, showing healthy reforms.
● Mindtree: Company has very low debt-to-equity ratio. Ratio is way below industry
average indicating low risk. The company has reduced debt to almost 0 in 2019 and 2020.
● LTI: The company is in good financial condition as its Debt/Equity ratio is less. This implies that
the shareholders’ interests are safe. It has increased marginally from 2019 to 2020 as the company
took some extra debt for financial activities

Debt Ratio / Debt Capitalization Ratio

The debt-to-capital ratio is calculated on the debt liable for interest payments, considering both
short and long-term liabilities and dividing it by the total capital. This ratio gives analysts and
investors an idea of a company's financial structure and whether or not the company is a suitable
investment. Considering Ceteris paribus, the higher the ratio, the riskier the company. This is
because the higher ratio, interprets as the company is funded by debt than equity. Since higher debt
means greater risk of forfeiture on the loan if the debt cannot be paid timely.

Debt-Capital ratio = Debt/ (Debt + Equity)

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Inferences:
Since all the ratios are below 1, hence it's very safe for the shareholders. And the companies are
less risky to invest in from the debt point of view.

● HCL: HCL has been under a safe margin of debt capitalisation ratio for the past 5 years.
Although it has seen a growth in debt in the past 2 years, it is still under the safe limits of
10%, and is a safe bet for an investor to make an investing decision.
● Mphasis: Ratio has been low signifying low risk investment but it has doubled in last 5
years which may be a concern to be assessed.
● TCS: The steady growing ratio indicates increasing risk in investment. However, till 2020
only 10% of the total capital comes from debts so it is still safe for investors.
● Wipro: Although the debt-capital ratio has been increasing, but the numbers are well
within acceptable limits (way below 1).
● Mindtree: It follows a similar trend as debt-to-equity ratio. Low debt capitalisation ratio
that too way below 1 indicates that the company is safe for shareholders to invest. It almost
has 0 debt capitalisation ratio in 2019 and 2020.
● LTI: The company is less risky as its debt to capital ratio is very less. This means that the
company is in surplus from its debt and can handle unexpected losses.

Interest Coverage Ratio

This is a debt to profitability ratio used to determine a company’s ease of payment of interest on
its outstanding debt. This ratio is also called “times interest earned.” Mainly used by investors
and creditors, is used to determine a company's riskiness relative to its current debt or for future
borrowing.

Interest coverage ratio: EBIT/ Interest

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Inferences:
Industry average: 0.69

● HCL: Interest coverage ratio has fallen from 160 to 28 points. This is because of the heavy
increase in interest cost in the past two financial years. The majority increase in interest
may come from short term debt increase in HCL.
● Mphasis: Ratio is at a relatively good level but it reduced drastically after sustaining a
good level for 3 years. This is primarily attributed to sharp reduction in financial cost and
then an increase in last year and EBIT has maintained a good year-on-year growth.
● TCS: The interest expense rose by 281% from 2018 to 2019 and by 367% from 2019 to
2020. While there was an increase in debt, the interest from increase in lease liabilities was
the main reason for bigger interest payments in 2020. Still a ratio of 46 tells that company
is in position to pay off interests comfortably.
● Wipro: With sufficiently large value for earning to interest ratio. Company seems stable
from a short-term interest payment perspective. But the falling value has been a concern
with a fall of nearly 18% over 5 years.
● Mindtree: The ratio is lowest in 2020 due to huge increase in interest amount compared
to previous years. The ratio in 2019 is high due to very low interest amounts. EBIT has
grown steadily over the years.
● LTI: The company maintained a good Interest coverage ratio over the years but it had fallen from
192 in 2019 to 25 points in 2020. This is because of high interest charges and lowering of earnings
as the employee expenses have increased for the company.

Total Debt Service Ratio

The term total debt service (TDS) ratio refers to a debt service measurement that financial lenders
use when determining the proportion of gross profit that is already spent on payment of debt.
Lenders consider each potential borrower’s taxes, monthly debt obligations to calculate the ratio

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of income to debt, and then compare that number to the lender’s benchmarks for deciding whether
or not to extend credit.

Total Debt Service ratio: EBIT/ (Interest + Debt)

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Inferences:

● HCL: There is an upward then a downward trend seen in HCL’s total debt service ratio.
Ratio in FY2018 was leading amongst the 6 companies. A sharp fall in FY2019 is because
of growth in debt and interest cost of the company. It is cause of problem for the firm, and
it should look into this matter.
● Mphasis: After an initial spike in ratio, it has continuously decreased to half the level in
the last three years, which is a positive sign for lenders to extend the credit line.
● TCS: The company observes a falling Debt service ratio despite a steady increase in EBIT.
This is because of disproportionate increase in interest and debt. However, with EBIT 4
times the interest and debt amount, the company has capacity to pay off debts in a single
year.
● Wipro: This is a cause of concern with the falling Earning to outstanding debt related
payment ratio. The company has been accumulating debt without substantial increment in
Earnings. Additional debt financing can be a problem.
● Mindtree: Due to very low debt and low interest in 2019 there is a sharp increase in total
debt service ratio for that year. Ratio for other years has been normal comparatively.
● LTI: The Debt service ratio of the company has decreased from 2017 to 2020 and there was a
huge dip in 2020, that was because operating expenses increased for the company as well as its
debt increased. The company still has good total debt service ratio

Test of dividend policy and Valuation ratio

Earnings Per Share

EPS gives the measure of how much profit the company makes annually per share that can be
distributed to the equity shareholders or retained for future operations and expansion plans of the
company. The earning power of the company is a sign of the health of the business.

Earnings per share (EPS) = Net Income / Number of shares outstanding

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Inferences:
The average EPS comes out to be 55 in 2020. Positive EPS for all the companies shows the industry
has healthy growth.

● HCL: Earning per share has been stable for HCL throughout the five years. This has been
possible because of the company's strong fundamentals, financials and market perception.
● Mphasis: EPS has almost doubled in the last 5 years which shows that the company is
healthy and earning power is increasing.
● TCS: From the graph, we can see TCS had the highest EPS for the period 2016-18, but
from 2019 it’s EPS dipped. The reason being an increase in number of shares in the year
2019 causing dilution in earnings.
● Wipro: EPS has fallen to below average in the period 2018-20.
● Mindtree: Mindtree’s EPS has been slightly fluctuating over the years.Although there has
been steady growth in net income, there’s fluctuation due to change in no of outstanding
shares.
● LTI: EPS has increased steadily over the last 5 years with a jump of over 30% from 2016
to 2020. This shows that the company is in good health.

Dividend per share:

It is the amount received by an ordinary shareholder per share from the company. Companies
distribute a certain amount from their profit to the shareholders to build confidence in the market
about the company’s profitability and provide an incentive for prospective investors, in case the
company wishes to raise funds from equity.

Dividend Declared / Number of share outstanding

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Inferences:
The average dividend paid for 2020 by these 6 companies is Rs 26.

● TCS: has been sharing the highest dividend per share, sending signals of making good
profits in business.
● HCL: Dividend paid by HCL has been declining steadily over 2016-20.
● Mphasis: Mphasis has been quite steady in its dividend distribution with reducing it to half
the level for 2 years but again reverting back to the initial dividend value.
● Mindtree: Mindtree’s dividend pay was steady between 2016-19 but it showed a big jump
from 2019 to 2020.
● Wipro: The company is retaining its earnings to improve business and pay off interests. It
has shown signs of improvement in rising assets turnover ratio and lowering debt-capital
ratio. The dividend payment may increase as such.
● LTI: Dividends paid by L&T have shown growth as well but the amount paid is still below
average.

Retention ratio:
It is the percentage of the amount retained in business from funds raised by selling equity shares.
The shares are sold at market price, which forms the fund inflow to the company. The company
then pays back the shareholders in the form of dividends, which is the net outflow to shareholders.
The rest of the fund from equity rests with the company.

Retention Ratio = 1 - (dividend per share / market price of share)

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Inferences:

● The average retention rate for the 6 companies in 2020 is 70%.

● TCS, Wipro and L&T infotech have high retention rates.
● Since TCS pays a high dividend amount, the investors’ confidence reflects in the high price
of its shares. TCS is hence able to retain a high percentage of the funds from selling shares.
● HCL and Mphasis have good and moderate levels of retention ratio with both showing the
same level of improvement on this front with slight dip in last year after a good stint for 3
years.
● Mindtree has around 60% or above retention ratio from 2016 to 2019 with a sharp decline
in 2020

Price to earnings ratio:

It is the amount of money an investor is willing to pay to help the company earn unit profit per
share.
A P/E ratio higher than industry average indicates the confidence of investors in the company’s
earning power, and expected to have good yields in future. Such a stock is called growth stock.
A low P/E ratio accompanied by high dividend payment compared to the industry trends suggest
that the stock might be of a mature company (indicated by stable net income) going through
negative publicity, or it is an undervalued stock and not many have realised the growth potential
of that company.

Price to earnings ratio = Market price per share / Earnings per share

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Inferences:

● HCL: PE ratio has grown for HCL in FY2020, which is a good sign for investors as it tells
that the market is willing to pay more for HCL in recent years.
● Mphasis: Price earning has maintained a good growth rate over the year with sharp decline
in the last year due to 30% decline in market value per share over the last year.
● TCS: It is a mature company, and has paid greater dividends compared to industry average
over the years. The recent improvement in the P/E ratio is due to the increase in market
price of TCS shares which followed after the company bought back its shares at a high
price of Rs 2100 per equity share in 2018-19. It is accompanied by a dilution in EPS
resulting from release of 1:1 share to each shareholder.
● Wipro: Both the MPS and the EPS values falling over years, it shows a gloomy picture
from an investment perspective.
● Mindtree: P/E ratio has increased in 2017 and had a very low value in 2019 and had
comparatively normal value in other years. Shows fluctuation in investor confidence.
● LTI: P/E ratio has increased steadily over the years. In 2020 there is an increase of 8%
points in P/E ratio, that means that investors see a growth potential in the company

Price to book value

P/B ratio is used to compare the market value of share to its book value. A stock can be
undervalued/overvalued if it has a lower/higher P/B ratio. This ratio is very useful to investors as
it gives a true picture to them while making an investing decision.

P/B ratio = Market price of share/ Book value per share

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Inferences:

● HCL: HCL has seen a constant rate of fall in P/B value ratio. This is because of constant
increase in total shareholders fund. Hence, book value per share has increased throughout
the 5 years, which has shown a fall in P/B ratio.
● TCS: There has been a substantial rise in P/B ratio consecutively in 2019 and 2020.
Analysis shows the total equity has been falling and the company has increased its number
of shares in the market. The market price has increased too, but increasing net income and
dividend payout show the investor’s confidence may not be misplaced as opposed to
suggestion by P/B ratio.
● WIPRO: With low book values decreasing at CAGR -12.39%, and continuously falling.
It seems to be underperforming with respect to industry.
● Mindtree: P/B ratio has seen decline from 2017 to 2019 and it picked up slightly in 2020
compared to 2019. Shares of Mindtree have been at good value generally.
● Mphasis: Ratio has steadily increased to double the amount in the last 5 years with decline
in last year. Overall it shows mphasis’ share is valued at a good level.
● LTI: The company is not undervalued. It has had a good P/B ratio over the years and the
market is willing to pay a higher premium for the company.

Overall Performance Ratios

Return on Total Assets

ROTA shows the amount of financial and operational income a company receives in a financial
year as compared to the average of that company's total assets. It shows how a company is using
its total assets to generate revenue.

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 ROTA (after Tax) = EBIT(1-Tax) / Total Average Assets

Inferences:
Industry Average: - 6.9%

● HCL: Two factors have together affected the fall in FY2020 ROTA ratio. Covid situation
has made it hard for the company to earn profits lately. Also, there has been an increase in
total average assets of HCL which has contributed to the fall in ROTA.
● TCS: It has the highest ROTA among all consistently over the period, indicating efficient
use of assets.
● Wipro: ROTA has risen from a fall in the years showing constructive steps by management
since 2018. But the low overall values compared to industry is a concern.
● Mindtree: ROTA is well above industry average for all the years. It has been oscillating
over the years due to fluctuations in EBIT.
● Mphasis: ROTA has increased steadily over the past 5 years owing to EBIT increasing to
1.5x of its value with marginal increase in assets. It shows the company is utilizing its
assets in a more efficient way year-on-year to generate revenues.
● LTI: The company has fluctuated ROTA over the years and in the last year its ROTA has
dropped because the company did not make any significant improvement in earnings after
tax even though it invested in the assets.

Return on Equity
It shows the return earned by the company by using total shareholders’ funds. It is also known as
return on net total assets. Higher/ lower ROE is inferred from the industry's return and what is
normal in that segment.

ROE = Net income/ Total shareholder’s funds

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Inferences:

● HCL: ROE has been north of 20% throughout the 5 years for HCL, which is a good sign
for the investors. A fall has been seen in FY2020 because of a 25% increase seen in total
shareholder’s funds.
● TCS: There has been substantial decline in equity and the company’s revenue is
increasingly levered by debts. However, since the company has diluted shareholding, the
increasing ROE looks promising to the market.
● Wipro: The financial year 2019-20, showed promising growth after steady fall for 4 years.
This can be attributed to an increase in profits. The issue of bonus had also caused some
disturbance in the ratio.
● Mindtree: ROE of the company has been consistent in the range 20-23% only 2017 being
the exception. It indicates good and consistent return on equity.
● Mphasis: ROE has increased by 75% over the past 5 years owing to good growth in net
income over the years with margin decrease in share capital.
● LTI: The company on an average has an ROE of 32% that means it is generating Rs.32
revenue using Rs. 100 of shareholders. This is not great but is better than many companies
in the same domain.

Return on Capital Employed (ROCE)

Return on Capital Employed is a financial ratio that can be used to gauge a company's profitability
and capital efficiency. Simply put, the ratio will help us to interpret how well a company is
generating profits from its capital.

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 ROCE = EBIT/ (Total Assets - Current Liabilities)

ROCE tells us the amount of profit generated by the company per ₹1 of capital employed. Greater
the profit a company can generate the better it is for the company. Therefore, higher ROCE
indicates higher and stronger profitability for the company.

Inferences:

● HCL: HCL’s ROCE ratio is operating similar to the industry’s average. It has shown a
movement in the range of 20%-30% in the past five years. There has been a fall in the
recent quarter because of the unprecedented situation.
● TCS: The company is faring better than in the last 5 years and also has the highest ROCE
among other IT companies. The recent change in capital structure towards more debt seems
to be levering the company’s returns on capital.
● Wipro: With the increase in profitability in recent years, we see an increase in the ROCE
figures. There was a fall from 24.02% to 19.97% from 2016-2019 but again grew in 2020.
● Mindtree: The company has received good ROCE in 2016, 2018 and 2019. There was a
fall in 2017 and 2020 due to fluctuations in current liabilities and EBIT.
● Mphasis: has maintained a very good ROCE ratio over the years and increased it by 50%
in the last 5 years. This shows the increased ability of the company to generate profits from
its capital. Though current liabilities increased by 75% over 5 years but it was
overshadowed by good growth in EBIT and current assets.
● LTI: Company has good ROCE as compared to industry average. Its ROCE dropped in
2020 because there was not much increase in EBIT and the capital expenditure increased
comparatively more.

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Equity turnover ratio

Equity turnover ratio helps to interpret the efficiency with which the company is using equity to
generate revenue. It helps us to determine whether the company is generating adequate revenue so
that shareholders find it worth to hold the equity of the company.

Equity Turnover Ratio = Sales/Equity

When equity turnover ratio is more, it turns out to be better for the organization. In general
perspective, increase in ratio provides positive indication whereas decrease in ratio gives negative
indication.

Inferences:

● HCL: Equity turnover ratio for HCL has been steady for the past 5years. During Covid
times too, HCL has maintained its sales, and hence maintained its ratio. This is a very
positive indication for the interested organisations to invest in HCL.
● TCS: An increasing trend is observed suggesting increasingly efficient use of equity. The
investors can trust the company for higher returns and this is reflected by the high price to
earnings ratio as well.
● Wipro: With sales outperforming equity, Wipro has a good equity turnover ratio. With the
exception of 2019 where it took a dip to 1.09, it has always been steady at close to 1.15.
● Mindtree: The company has the highest equity turnover ratio among the others in the same
industry. There has been steady growth in ratio over the years indicating that the company
has been generating adequate revenue for shareholders to invest.
● Mphasis: The ratio has increased by 50% in the last 5 years showing increasing trust of
shareholders in holding equity in the company. This was attributed to a similar proportion
of increase in sales by the company.

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 ● LTI: L&T has a fairly good equity turnover ratio. It is competent in its industry and the
ratio has increased over the past year as shareholders equity is utilized in a better way to
generate revenues

5 Factor DuPont Analysis

Return on equity (ROE) is an important ratio among investors. It tells how well a company's
management creates value for its shareholders. However, ROE can be deceptive as it is vulnerable
to factors that increase its value along with making the share riskier. DuPont analysis is a
framework which provides deeper insight into ROE by breaking it down into various components
and thus enabling investors to see which part is causing the movement.

According to DuPont analysis, there are three major financial metrics that drive return on equity
(ROE):
1. Net Profit Margin (NPM): Measure of operating efficiency. Tells about how much
income is generated as a percentage of revenue
2. Asset Turnover: Measure of Asset efficiency. Tells how efficiently companies are using
their assets to generate sales
3. Equity Multiplier: Measure of financial leverage. It is the ratio of a company's assets to
equity which gives an idea about how a company is financing its assets, by equity or debt.

ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier

Further Net Profit is divided into three factors:

1. Tax Factor: This is the ratio of Net Income by Earnings before Tax. This ratio is always
less than 1. It gives an idea of how much tax a company is paying on its earnings. Closer
it is to 0, higher the tax is paid by the company.
2. Interest Factor: It is the ratio of EBT and EBIT. It tells how much a company is paying
in interest on its earnings. Interest factor lies between 0 to 1. The closer the value to 0, the
larger interest is paid by the company
3. EBIT Margin: It is the ratio of operating income over operating sales. This margin helps
in understanding the true operating cost of a business. It tells how much revenue generated
is getting used in running the main operations of the company.

Net Profit Margin= (Net Income/EBT)*(EBT/EBIT)*(EBIT/Sales)

Therefore, 5 factor DuPont

ROE= (Tax Factor)*(Interest Factor)*(EBIT Margin)*(Asset Turnover)*(Equity Multiplier)

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 = (Net Income/EBT)*(EBT/EBIT)*(EBIT/Sales)*(Sales/TA)*(TA/Equity)

Inferences:

● HCL: ROE has been steady for HCL and is above the range 20% throughout the 5 years.
Fall in ROE in FY2020 is because of a 25% increase in total shareholder’s fund as
compared to 10% increase in net income.
● TCS: The fluctuations in ROE correspond to similar trends in Asset turnover ratio and total
leverage ratio while the other factors have remained constant. From 2018 to 2020, the
revenue and total assets have increased but there has been a decrease in equity due to
buyback of shares, pointing to total leverage being a major contributor to increase in ROE
for 2020.
● Wipro: With low value largely attributed to low EBIT factor and Interest factor, the 5
factor value has been way below industry standards. The positive aspect has been the rise
in the value in 2029-2020, after a steady fall for 4 years.
● Mindtree: Tax factor and Interest factor has been consistent over the years. ROE has been
oscillating due to fluctuations in EBIT margin, ATR and Total Leverage. But it was in the
range of 20-23% over the years only 2017 being the exception.
● Mphasis: Tax factor is mostly constant with marginal increase. Interest factor has also
been constant. EBIT margin has gained year-on-year. Asset turnover ratio has increased by
25% in the last 5 years. Total leverage has increased steadily over the years.

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 ROE has increased by 75% over the past 5 years. From 5-point analysis, compared to other
companies in the industry, ROE of Mphasis is mostly driven by ATR. The company is
lagging a bit in terms of EBIT margin with respect to its peers.
● LTI: Tax factor is mostly constant with marginal increase. Interest factor has also been
constant. EBIT margin has also been almost constant. Asset turnover ratio has decreased
by 29% in the last 5 years. Total leverage has decreased marginally. ROE has decreased
by 41% over the past 5 years.

Key Performance Metrics

Revenue per clients

Revenue per user is used to express revenue generated by a company on a per-client basis. It is most often
used by companies that generate revenue through client services and measures how robust the company
management is in project acquisition and retention.

Revenue per clients = Total revenue/ no. of clients

● HCL technologies has shown the best improvement in this category and overtook TCS in
2018 and has grown at a fast pace after that.
● Mphasis’ revenue per client has decreased year on year.
● Mindtree’s revenue per client was low compared to others in the same industry.
● Other companies had a rise in the first year and then had marginal decrease in subsequent
years.

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Earning per client

This shows how profitable the company is in running its operations. A very high value might indicate low
payments to employees or a very good financial policy. This is also affected by the type of projects
(development or support) the company majorly works in.

Earning per client = Net Earning/no. Of clients

● TCS boasts of a number of $100 Mn+ revenue band clients, and it is reflected in the
highest earnings per client in this category.
● HCL overtakes TCS in the year 2020, showing steady growth rate in revenue.
● Rest companies report comparatively low earnings per share and constant ratio.

Revenue per employees

Revenue per employee provides insight into an important ratio that roughly measures how much
money each employee generates for the firm. This is most useful when looking at historical
changes in a company's own ratio or when comparing it against that of other companies in the
same industry as part of a fundamental analysis. Higher ratio indicates greater productivity.

Revenue per employees = Total revenue / Number of employees

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● HCL: Revenue per employee has seen a very consistent growth, from being lowest
among peers in 2016 to highest among them in 2020.
● Mphasis: RPE has increased consistently over the years and shown good growth and has
been slightly above the industry average for most years.
● TCS: The company has seen an average 5% increase in number of employees per year
till 450k in 2020. As such, an increasing revenue per employee shows the company has
trained more employees and levered the revenue through their skills.
● Wipro: The revenue per employee has been increasing by an average of 2.8%, which
shows better productivity measures by the management and HR. This also shows
optimism for future results.
● Mindtree: Revenue per employee has steadily increased from 2016 to 2020 indicating
increase in money each employee generates for the firm and rise in productivity.
● L&T Infotech: RPE was high in 2016 but it decreased and remained almost constant
thereafter. It decreased because the company did a mass hiring in late 2016 and the
revenues generated were almost same as compared to last year

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 References:

1. Capital Market: http://www.capitalmarket.com/Company-

Information/Information/About-Company/Mphasis-Ltd/3361

2. Wikipedia: www.wikipedia.org

3. Investopedia: www.investopedia.com

4. Mphasis Annual Reports: www.mphasis.com

5. HCL Technologies Annual Reports: www.hcltech.com

6. TCS Annual Reports: www.tcs.com

7. Wipro Annual Reports: www.wipro.com

8. Mindtree Annual Reports: www.mindtree.com

9. L&T Infotech Annual Report: www.lntinfotech.com

10. Prof. Ashish Class Notes :)

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