Financial Statement Analysis and Business Valuation of Tcs

Pages: 17 (4671 words) Published: April 13, 2011
Financial Statement Analysis and Business Valuation of TCS

By:
Prashant Chaudhary

Calculation of Beta3
Cost of Capital4
Concepts of Cost of Capital4
Weighted Average Cost of Capital6
Financial Ratios8
Liquidity Ratios8
Solvency Ratios8
Profitability Ratios9
Comparison with Competitors in the Industry10
Free Cash Flow11
Sales forecast13
Reformulated balance sheet14
Reformulated Income Statement15
Appendix A: Balance Sheet16
Appendix B: Profit & Loss account (in Rs. Crores)17
Appendix C: Cash Flow (in Rs. Crores)19

Tata Consultancy Services (TCS) is Software services consulting company headquartered in Mumbai, India. TCS is the largest provider of information technology and business process outsourcing services in Asia. TCS has offices in 42 countries with more than 142 branches across the globe. The company is listed on the National Stock Exchange and Bombay Stock Exchange of India. TCS is a flagship subsidiary of one of India's largest and oldest conglomerate company, the Tata Group, which has interests in areas such as energy, telecommunications, financial services, manufacturing, chemicals, engineering, materials, government and healthcare. Calculation of Beta

The beta (β) of a stock or portfolio is a number describing the relation of its returns with that of the financial market as a whole. An asset with a beta of 0 signifies that its’ returns change independently of changes in the market's returns. A positive beta indicates that the asset's returns generally follow the market's returns, in the sense that they both tend to be above their respective averages together, or both tend to be below their respective averages together. A negative beta implies that the asset's returns generally move opposite to the market's returns: one will tend to be above its average when the other is below its average. The beta coefficient is a key parameter in the capital asset pricing model (CAPM). It measures the part of the asset's statistical variance that cannot be mitigated by the diversification provided by the portfolio of many risky assets, because of the correlation of its returns with the returns of the other assets that are in the portfolio. The formula for the beta of an asset within a portfolio is

where ra measures the rate of return of the asset, rp measures the rate of return of the portfolio, and Cov(ra, rp) is the covariance between the rates of return. The portfolio of interest in the CAPM formulation is the market portfolio that contains all risky assets, and so the rp terms in the formula are replaced by rm, the rate of return of the market. Beta is also referred to as financial elasticity or correlated relative volatility, and can be referred to as a measure of the sensitivity of the asset's returns to market returns, its non-diversifiable risk, its systematic risk, or market risk. On an individual asset level, measuring beta can give clues to volatility and liquidity in the marketplace. In fund management, measuring beta is thought to separate a manager's skill from his or her willingness to take risk. Beta can be calculated by calculating the rate of return of the market price of TCS and the rate of return on the market on the whole. For the purpose of this report, Beta has been calculated by considering market data on weekly basis for 2 years (from 2008 to 2010). Market Index has been considered with respect to BSE Sensex. Standard Deviation of X| 13.89234202|

Standard Deviation of Y| 52.21691911|
Correlation between TCS & Market| 14.92%|
Covariance (X,Y)| 107.169|
Variance(X)| 192.997|
Beta| 0.555|
| |

Based on these calculations, the Beta value of TCS is 0.555. This value indicates that TCS's returns generally follow the market's returns, in the sense that they both tend to be above their respective averages together,...