An analysis of TCS’ FY16 annual report shows constant currency
revenue growth of 11.9%, while INR revenues grew at 14.8% to
INR1086b. While revenue growth has been at its lowest level
since FY10, EBITDA margin fell 40bp YoY to a five-year low of
28.2% (which is still the highest in the industry). Higher income
from SEZ helped keep the effective tax rate low at 23%, which,
however, is likely to rise post the withdrawal of tax incentives.
Cash flow from operations declined marginally to INR191.2b
(FY15: INR193.7b) on account of increased working capital. Cash,
investments & ICD at INR335b (51% of net worth), which yield
6.8% returns, have been a drag on RoCE. Accounting for the
merger of CMC using the pooling of interest method boosts RoE
by 80bp. Contingent liability surged 3x due to a claim by EPIC
Systems and a rise in income tax liability.
Waning growth:
Revenue for FY16 grew 14.8% (lowest level
since FY10) to INR1,086b, while EBITDA increased to INR306b
(FY15: INR271b). However, EBITDA margin declined by 40bp
to lowest level since FY09 at 28.2% (FY15: 28.6%) due to
higher personnel cost.
Effective tax rate likely to increase on phasing out of SEZ
incentives:
TCS enjoys substantially lower effective tax rate of
23% compared to Infosys’ 28%. This is primary due to higher
proportion of income from SEZ which enjoys tax benefits.
However, the phasing out of tax incentives, as announced in
the Union Budget 2015 will adversely impact the company.
Earnings to cash conversion declines to 87% v/s 95% in FY15:
This is on account of an increase in working capital
requirements, primarily receivables which have increased to
INR240.7b (FY15: INR204.4b).
Cash, investment and ICDs at INR335b keep RoCE muted:
Over the past five years, the company has allocated 28% of its
funds toward cash, investments and ICDs (yield: 6.8%). This
has constrained RoCE to 42% which is still best among the
industry, though well below impressive RoIC of 71%.
CMC merger boosts RoE by 80bp:
CMC merger using the
pooling of interest method, recognizing asset/liabilities at
book value with no recognition of goodwill. As a result, RoE
for FY16 was higher by 80bp. Ind-AS mandates accounting for
acquisitions using fair valuation of assets/ liabilities, leading to
an increase in amortization cost.
Contingent liability rises 3x to 23% of net worth:
This is
primarily on account of IPR violation case filed by Epic
Systems Corporation for ~INR68b, while income tax demands
increased to INR80b (FY15: INR39b).
TCS FY16
The
ART
of annual report analysis
Effective tax rate could rise on
withdrawal of tax incentives to SEZ.
High investment in non-core assets keep
RoCE muted at 42%, well below RoIC of
71%.
Contingent liability rises 3x to 23% of Net-worth.
A
NNUAL
R
EPORT
T
HREADBARE
29 June 2016
Stock Info
Bloomberg
CMP (INR)
Equity Shares (m)
52-Week Range (INR)
M.Cap. (INR b)/(USD b)
1,6,12 Rel. Perf. (%)
Y/E Mar
Sales
EBITDA
PAT
EPS (INR)
EPS Gr. (%)
BV/Sh. (INR)
Payout (%)
P/E (x)
P/BV (x)
E: MOSL Estimates
As on
Promoter
DII
FII
Others
TCS IN
2,462
1,970.4
2,769/2,119
4,851.1/71.4
-4/0/0
2017E
1,248.5
339.4
265.4
135.0
9.6
421.1
35.5
18.2
5.8
2018E
1,437.3
389.2
305.5
155.4
15.1
508.8
35.9
15.8
4.8
Financial
summary (INR b)
2016
1,086.5
306.8
242.1
123.2
11.2
371.4
35.2
20.0
6.6
Shareholding pattern (%)
Mar-16
73.4
5.2
16.8
4.6
Note: FII Includes depository receipts
Dec-15
73.4
5.2
16.8
4.6
Mar-15
73.9
4.7
17.0
4.5
Auditor’s name
Deloitte Haskins & Sells LLP, Chartered Accountants
ART will present a threadbare portrait of annual reports - statistical, strategic and structured. We believe ART's wide canvas - from accounting and auditing issues to
operating performance to management insights to governance matters - will help readers paint a clearer picture of the stock's investment worthiness.
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(S.Gupta@MotilalOswal.com); +91 22 39825544
Mehul Parikh
(Mehul.Parikh@MotilalOswal.com); +9122 3010 2492 /
Somil Shah
(Somil.Shah@MotilalOswal.com); +91 22 3312 4975
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

ART|
TCS FY16
ART #1
ACCOUNTING / AUDITING MATTERS
Faltering growth accompanies declining margins
Revenue growth and
EBITDA margins decline
In FY16, TCS reported (in Indian currency terms) revenue growth of 14.8% to
INR1,086b (INR946b in FY15), while constant currency growth stood at 11.9%.
EBITDA increased 12.8% YoY to INR306b (INR271b in FY15), though EBITDA
margin declined marginally by 40bp to 28.2% (28.6% in FY15) on account of
higher personnel cost, however the EBITDA margins remained the highest in the
industry.
While revenue growth has been at its lowest level since FY10, EBITDA margin
too has been at its lowest level since FY09.
Exhibit 2: EBITDA margin on declining trend
EBITDA margins
30.7
29.5
28.6
15.7%
14.8%
11.9%
FY 16
FY 12
FY 13
FY 14
FY 15
FY 16
28.6
28.2
Exhibit 1: Faltering revenue growth
INR Operating revenue growth
Constant currency Operating revenue growth
28.9%
28.8%
29.9%
22.7%
15.8%
FY 12
FY 13
17.2%
FY 14
16.9%
FY 15
Source: Company Annual Report, MOSL
Source: Company Annual Report, MOSL
Exhibit 3: Higher personnel cost impacts EBITDA margins (INR b)
Particulars
Net Revenue (Operations)
Operating and Administrative Expenses
Personnel Cost
EBITDA
Depreciation
EBIT
Financial Charges
EBT
Other Income
PBT (Before Exceptional Items)
Exceptional Items
PBT
Tax
PAT
FY15
(INR b)
946
315
361
271
18
253
1
252
32
284
-21
263
62
201
(% of
revenue)
100.0
33.2
38.1
28.6
1.9
26.7
0.1
26.6
3.4
30.0
(2.3)
27.8
6.6
21.2
(INR b)
1,086
363
418
306
19
286
0
286
31
317
-
317
73
244
FY16
(% of
revenue)
100.0
33.4
38.4
28.2
1.8
26.4
0.0
26.3
2.8
29.2
-
29.2
6.7
22.4
Source: Company Annual Report, MOSL
Unbilled revenue declines to 3.7% of revenue
Unbilled revenue stood at INR39.9b (3.7% of revenue) in FY16, marginally higher
than INR38.3b (4.0% of revenue) in FY15.
29 June 2016
2

ART|
TCS FY16
Exhibit 4: Unbilled revenue declines to 3.7% of revenue (INR b)
Unbilled Revenue
4.6%
5.0%
4.9%
4.0%
3.7%
% of Revenue
22.5
FY12
31.6
FY13
40.1
FY14
38.3
FY15
39.9
FY16
Source: Company Annual Report, MOSL
Higher share of SEZ income keeps effective tax rate low
Phasing out of tax
incentives to adversely
impact the company
TCS’ current effective tax rate of 23.0% is lower than the marginal corporate tax
rate of 34.6%, primarily on account of tax incentives availed by the company on
income earned from its units operating in SEZ.
TCS also enjoys a substantially lower effective tax rate compared to Infosys’
28.0%.
However, we note that the Union Budget 2015 had proposed to reduce the
corporate tax rate from 34.6% to 29.6% over the next four years in a phased
manner. However, the process of reducing the corporate tax rate is likely to be
accompanied by rationalization and removal of various kinds of tax exemption/
incentives for corporate tax payers
(please refer our earlier report).
Phasing out of tax incentives to adversely impact the company.
(please refer to
our earlier report).
Exhibit 5: TCS’ effective tax rate lower due to higher share of SEZ income
TCS
28.8%
24.4%
26.3%
22.2%
27.6%
23.9%
Infosys
28.4%
27.9%
23.7%
23.0%
FY12
FY13
FY14
FY15
FY16
Source: Company Annual Report, MOSL
Increased working capital drags operating cash flows
Earnings to cash
conversion declines
to 87%
Earning to cash conversion remains strong, but declined to 87% in FY16 (99% in
FY15).
Cash flow from operations declined to INR191.2b (FY15: INR193.7b) on account
of an increase in working capital requirements, primarily due to a rise in loans &
advances by INR5.9b and trade receivables by INR37.6b.
29 June 2016
3

ART|
TCS FY16
Exhibit 6: Higher working capital strains CFO (INR b)
Particulars
PBT
Add/(Less): Non-cash adjustments
Add/(Less): Non-Operating adjustments
Less: Direct taxes paid
Operating profit before w/cap changes
Unbilled Revenue
Trade receivables
Loans and advances
Trade payables
Cash generated from operations
Less: Financial cost
Cash generated from oper. post interest
Less: Capital expenditure
Free cash flows post interest
FY15
263.0
15.4
(17.4)
(74.8)
186.2
2.1
(21.6)
(7.1)
34.1
193.7
(1.0)
192.6
(29.4)
163.2
FY16
316.8
20.2
(21.8)
(75.7)
239.4
(1.6)
(37.6)
(5.9)
(3.1)
191.2
(0.2)
191.0
(20.2)
170.7
Exhibit 7: Earnings to cash conversion remains healthy
Pre tax CFO to EBITDA
91%
77%
99%
87%
87%
FY 12
FY 13
FY 14
FY 15
FY 16
Source: Company Annual Report, MOSL
Source: Company Annual Report, MOSL
High fund allocation to cash and investments…
28% of funds allocated to
non-core assets
Over FY12-16, with a 92% contribution, operating cash flows remained the
primary source of funds.
While 53% of funds were utilized for dividend payout, funds allocated to cash
(18%), investments (5%) and inter-corporate deposits (5%) totaled 28%.
Exhibit 9: High fund allocated to investments, cash & loans
Exhibit 8: Operating cash flow primary source of funds
Sources of funds FY12-FY16
8%
CFO
Other Income
Application of funds FY12-FY16
1%
16%
Capex
Investments
18%
5%
5%
2%
Cash
Inter corporate Deposit
Acquisition
Dividend
Others
Source: Company Annual Report, MOSL
53%
92%
Source: Company Annual Report, MOSL
…keep RoCE muted
Investment in no-core
assets leads to RoCE of 42%,
well below RoIC of 71%
Currently 51% (FY15: 45%) of net worth (INR335b) is invested in cash,
investments and ICD, which generate a yield of 6.8% (FY15:7.3%).
Management has highlighted that the lower YoY yield in FY16 is partly a
function of steep difference in cash base at the end and beginning of year–
effected by large payouts of one-time employee bonus (IN26.3b) besides
dividend.
Cash & bank balance has reduced significantly to INR68b (FY15: INR186b);
however, about INR207b (FY15: nil) has been deployed in tax-free bonds and
certificate of deposits. Inter corporate deposits have increased significantly to
INR42b (FY15: INR27b), but the recipients of such deposits are not known.
Such high investments in non-core assets have led to a constrained RoCE of 42%
(FY15: 40%) well below impressive RoIC of 71% (FY15: 63%).
29 June 2016
4

ART|
TCS FY16
Exhibit 10: 51% of net worth deployed in non-core areas (INR b)
Inter corporate deposits
Cash & bank balance
41%
27%
32%
226
Investments
% to NW
45%
51%
68
144
58
8 14
FY12
68
19
36
FY13
34
24
FY14
186
17
27
FY15
42
FY16
Source: Company Annual Report, MOSL
Exhibit 11: High cash and investments keep RoCE muted
ROCE
64%
53%
41%
44%
ROIC
63%
40%
71%
Exhibit 12: Yield continues to decline
Yield
8.6%
7.9%
7.3%
6.8%
42%
FY13
FY14
FY15
FY16
FY13
FY14
FY15
FY16
Source: Company Annual Report, MOSL
Source: Company Annual Report, MOSL
CMC merger boosts return ratios
Ind-AS may lead to higher
amortization charges on
future acquisitions
TCS merged its subsidiary CMC, wherein it held a 51.1% share, which is
accounted for by the pooling of interest method (using book value).
This resulted in no recognition of goodwill; instead net assets recognized are
adjusted against the reserves (boosting RoE by 80bp).
Ind-AS (accounting standards applicable from FY17) mandates accounting for
acquisitions using fair value of assets and liabilities, which will result in lower
recognition of goodwill. We believe that this will lead to an increase in
depreciation/amortization cost (due to increased base of assets) for companies
in the case of future acquisitions.
29 June 2016
5

ART|
TCS FY16
Exhibit 13: Accounting for CMC merger boosts RoE
Reported ROE
43.6%
41.9%
40.8%
39.8%
41.1%
Adjusted ROE
FY13
FY14
FY15
FY16
Source: Company Annual Report
Contingent liability surges to 23% of net worth
Contingent liability rose to INR152b (23% of net worth; FY15: INR43b, 8% of net
worth) broadly on account of:
(a) Claims against the company not acknowledged as debt increased to INR70b
(FY15: INR2b) on account of legal claim filed by Epic Systems Corporation for
alleged infringement of confidential information and trade secrets.
(b) Income tax-demand stood at INR80b (FY15: INR39b) for consolidated
operations, while entire demand pertained to standalone operations.
However, the CARO report highlights that the unpaid amount for standalone
operations stood at ~INR40b (which effectively is the worst-case cash flow
implication).
Exhibit 14: Contingent liability rises to 23% of NW (INR b)
Particulars
Claims against the Group not
acknowledged as debt
Income tax demands
Indirect tax demands
Guarantees given by the Group
Other contingencies
Total
% of Net-worth
FY 12
1
14
2
7
0
23
8%
FY 13
1
28
1
5
0
35
9%
FY 14
FY 15
FY 16
2
2
70
39
39
80
1
2
2
5
-
-
0
-
-
47
43
152
10%
8%
23%
Source: Company Annual Report, MOSL
29 June 2016
6

ART|
TCS FY16
ART #2
Statutory auditors to be
mandatorily changed post
FY17, in accordance with
the new Companies Act
GOVERNANCE MATTERS
Auditor rotation mandatory as per Companies Act
Deloitte Haskins & Sells LLP has been TCS’ statutory auditor for more than 10
years. The Companies Act (2013) mandates rotation of auditors for listed entities
after serving tenure of 10 consecutive years. The Act further provides a period of
three years from April 1, 2014 to comply with this requirement.
Directors are regular in attending board meetings
TCS board comprises 11 members, of which six are independent directors, one is
executive director, and five are non-executive non-independent directors.
TCS is regular in calling board meetings (eight meetings held in FY16). All
directors have been generally regular in attending the board meetings.
Mr. Aman Mehta, Mr. V Thyagarajan and Prof Clayton M. Christensen have been
on the board for over 10 years. The Companies Act 2013 mandates compulsory
rotation of independent directors after 10 years, prospectively from the date of
implementation of the statute.
Exhibit 15:
Directors are regular in attending board meetings
Name of the director
Mr. Cyrus Mistry
Mr. N. Chandrasekaran
Mr. Aman Mehta
Mr. V. Thyagarajan
Prof. Clayton M. Christensen
Dr. Ron Sommer
Dr. Vijay Kelkar
Mr. Ishaat Hussain
Mr. O. P. Bhatt
Mr. Phiroz Vandrevala
Ms. Aarthi Subramanian
Category
Non Independent, Non-Executive
Non Independent, Executive
Independent
Independent
Independent
Independent
Independent
Non Independent, Non-Executive
Independent
Non Independent, Non-Executive
Non Independent, Non-Executive
No. of Meeting
Held
Attended
8
8
8
8
8
8
8
8
8
7
8
8
8
8
8
7
8
8
8
8
8
8
Source: Company Annual Report, MOSL
Brand equity payment reduces to 0.4% of PBT
TCS pays its parent company a share of its earnings for the use of brand name
(INR1.3b or 0.4% of PBT in FY16, as against INR1.2b or 0.5% of PBT in FY15).
Exhibit 16: Brand equity contribution declines (INR b)
Brand equity contribution
0.6%
0.6%
0.4%
0.5%
0.4%
% to PBT
0.8
FY 12
1.1
FY 13
1.1
FY 14
1.2
FY 15
1.3
FY 16
Source: Company Annual Report, MOSL
29 June 2016
7

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ART|
TCS FY16
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FY
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In respect of any matter arising from or in connection with the research you could contact the following representatives of MotilalOswal Capital Markets Singapore Pte Limited:
Varun Kumar
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29 June 2016
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