Operating Profit Analysis

Tata Consultancy Services (TCS)

By:
Rajat Singla
 Analysis of Revenue Growth

Analysis of Growth % 2009-10 2008-09 2007-08 2006-07 2006-05

Volume 17.37 19.33 27.75 - -
Price -3.32 -4.89 6.04 - -
Mix (Onsite/Offshore) -8.12 -2.27 -1.44 - -
Exchange rate 2.04 10.8 -9.65 - -
Total Growth % 7.97 22.97 23.45 41.38 38.9
 % of Revenue Growth
45

40

35

30

25 % of Revenue Growth

20

15

10

0
2006-05 2006-07 2007-08 2008-09 2009-2010
 Analysis of Revenue Growth

Over the years, the % growth in revenue has decreased

from 38.9% in 2006 FY to 7.97% in 2010 FY. Although, the
absolute revenue has increased from Rs. 13263.99 crores
in 2006 FY to Rs. 30028.92 crore in 2010 FY.
Although, the absolute revenue growth is decent over the
years but the % revenue has decreased to just 7.97%. The
company has not been able to maintain a healthy % rate
of growth. This can be due to Global Recession which has
affected the discretionary spending of all companies.
Thus, the company should take steps to maintain the
previous % rate of growth.
 Revenues – Service Lines
Service Lines 2009-10 2008-09 2007-08 2006-07 2005-06

% of % of % of % of % of
Revenues Revenues Revenues Revenues Revenues
IT Solutions and          
Services
Application 48.73 48.48 48.3 52.2 58.2
Development & Maintanence

Business Intelligence 5.69 8.06 9.7 9.5 8.5

Enterprise Solutions 10.47 12.49 13.1 12.2 13.8
Assurance Services 5.04 4.22 3.8 2.3 1.5
Subtotal IT Solutions and Services 69.93 73.25 74.9 76.2 82

Enginnering & Industrial 4.98 5.96 5.4 5.8 6.6

Services
Infratructure 8.36 7.98 6.5 6.0 4.4
Consulting 1.91 2.66 3.4 3.4 2.9
Products 3.29 2.90 3.6 2.8 2.7
Business Process 11.53 7.25 6.2 5.8 1.4
Outsourcing
Total 100.00 100.00 100.0 100.0 100.0
 Revenues – Service Lines
The Company’s newer service offerings such as
Infrastructure Services, Assurance Services and
Business Process Outsourcing (BPO) have been
showing significant growth.
The increase in revenues from BPO is mainly attributable
to the acquisition of Citi Global Services Limited in
December 2008.
The decline in Business Intelligence and Enterprise
Solutions is attributable to the general business
conditions and reduction in discretionary spending.
The revenues from Application Development &
Maintenance also decreased over the years.
 Revenues by Industry Segment
Revenues by Industry Segment

2009-10 2008-09 2007-08 2006-07 2005-06

Industry Segment % of % of % of % of % of
Revenues Revenues Revenues Revenues Revenues
Banking, Financial
Services 44.92 42.89 44.14 43.89 38.77
& Insurance (BFSI)
Telecom, Media &
14.54 16.17 16.15 16.09 14.78
Entertainment
Manufacturing 8.10 9.78 12.93 12.72 15.97

Retail and Consumer

10.59 8.91 6.45 5.90 5.00
Packaged Goods

Others 21.85 22.25 20.33 21.40 25.48

Total 100.00 100.00 100.00 100.00 100.00
 Segment-wise Profit
50

45

40

35

30

25

20

15

10

0
2009-10 2008-09 2007-08 2006-07 2005-06

Banking, Financial Services Telecom, Media & Entertainment Manufacturing Retail and Consumer

Others
 Revenues by Industry Segment
In spite of the financial difficulties faced by customers in
fiscal 2010, primarily in BFSI segment, the Company’s
revenues from this segment have remained strong.
Retail and Consumer Packaged Goods segment has
registered an impressive growth from 5% in 2006 FY to
10.59% in 2010 FY and also in verticals like Life Science &
Healthcare, Energy & Utility included in ‘Others’ reported
above.
The revenues from Manufacturing Sector have however,
decreased to 8.10% in 2010 FY from 15.97% in 2006 FY.
The revenues from Telecom, Media & Entertainment
segment have remained stable over the years.
Onsite-Offsite Revenue Mix (% of Revenues)
Onsite-Offsite Revenue Mix (% of Revenues)

  2009-10 2008-09

Offshore Revenues -India 51.00 44.20

Offsite Revenues - GDC 5.70 4.60

Revenues - Offsite 56.70 48.80

Revenues - Onsite 43.30 51.20

Total Revenues 100.00 100.00

60.00

50.00

40.00

Offshore Revenues -India

Offsite Revenues - GDC

30.00
Revenues - Offsite

Revenues - Onsite
20.00

10.00

0.00
2009-10 2008-09
 Revenues by Geographic Segment
Revenues by geographic segment

2009-10 2008-09 2007-08 2006-07 2005-06

Geographic segment
% of % of % of % of % of
Revenues Revenues Revenues Revenues Revenues

North America 52.80 51.38 50.77 52.43 57.06

United Kingdom 16.18 18.99 19.78 20.29 15.52
Europe 10.49 10.53 9.21 8.19 6.91
India 8.65 7.85 8.95 9.00 12.49
Asia Pacific 5.24 4.75 5.20 4.78 4.11
Iberoamerica 4.72 4.71 4.40 3.85 1.98
Middle East and Africa 1.92 1.79 1.69 1.46 1.93

Total 100.00 100.00 100.00 100.00 100.00

 Revenues by Geographic Segment

Although the economic conditions in North America

were adversely affected, TCS’s focus on customer needs
has resulted in growth in volume of business in this
geography.
The foreign exchange fluctuation was the key reason
for lower growth/decline in Europe and United
Kingdom.
The revenues from India and Asia Pacific declined
over the years.
Nature of
OPERATING EXPENSES
For year ended For year ended For year ended For year ended For year ended
Expenses March 31, 2010 March 31, 2009 March 31, 2008 March 31, 2007 March 31, 2006

Rs. Crore % of Rs. Crore % of Rs. Crore % of Rs. Crore % of Rs. Crore % of
Revenue Revenue Revenue Revenue Revenue

Software, hardware
and material costs 987.79 3.29 1,031.22 3.71 1,068.26 4.58 819.12 4.33 793.44 5.93

Software licences
464.24 1.54 423.51 1.52 466.23 2.00 318.22 1.68 234.21 1.75
Communication
422.87 1.41 390.33 1.40 308.42 1.32 237.83 1.26 192.35 1.44
Travelling and
conveyance 341.90 1.14 421.83 1.52 419.45 1.80 346.02 1.83 241.87 1.81

Rent
720.53 2.40 664.35 2.39 423.85 1.82 300.77 1.59 189.03 1.41
Legal and professional
fees 206.00 0.69 256.63 0.92 198.33 0.85 196.03 1.04 121.25 0.91

Repairs and
maintenance 212.77 0.71 176.53 0.63 145.53 0.62 122.15 0.65 83.42 0.62

Electricity expenses
233.72 0.78 196.23 0.71 158.22 0.68 115.86 0.61 75.99 0.57

Recruitment and
training 112.21 0.37 120.99 0.44 173.03 0.74 144.80 0.77 78.96 0.59

Other Expenses 920.73 3.06 903.62 3.25 848.51 3.63 728.56 3.85 565.56 4.23

Total Other Operating

Expenses 4,622.76 15.39 4,585.24 16.49 4,209.83 18.03 3,329.36 17.60 2576.08 19.26
 OPERATING EXPENSES
The Company took a number of measures to control costs
in all areas of operations, both in India and overseas. This
initiative was widely deployed with extensive employee
participation. The result of these efforts was reflected in
multiple expense heads.
Due to this, the Total Operating and Other Expenses as a
percentage of revenues decreased to 15.39% in fiscal 2010
from 19.26% in fiscal 2006.
However, the Company had to increase its provision for
doubtful debts from Rs.63.09 crore (0.23% of revenues in
fiscal 2009) to Rs.169.67 crore in fiscal 2010 (0.57% of
revenues in fiscal 2010). Some of these provisions arose as
a result of restructuring of customer organizations in
financial distress.
 FINANCIAL PERFORMANCE
For year ended March 31, For the year ended For the year ended For year ended For year ended
  2010 March 31, 2009 March 31, 2008 March 31, 2007 March 31, 2006

% of % of % of % of % of
Revenues from Operations Rs. Crore Rs. Crore Rs. Crore Rs. Crore Rs. Crore
Revenues Revenues Revenues Revenues Revenues

Information technology and

consultancy services 29,085.21 96.86 26,781.86 96.29 21,681.30 94.83 17,806.60 95.30 12408.68 93.55

Sale of equipment and software

licenses 943.71 3.14 1,031.02 3.71 1,182.09 5.17 878.61 4.70 855.31 6.45

Total Revenues 30,028.92 100.00 27,812.88 100.00 22,863.39 100.00 18,685.21 100.00 13,263.99 100.00
Expenditure                    
Employee costs 10,879.57 36.23 9,910.92 35.63 7,854.60 34.35 8,002.85 42.83 4719.19 35.58

Overseas business expenses

(employee allowances paid overseas) 4,186.18 13.94 4,572.28 16.44 3,556.44 15.56 998.54 5.34 1392.33 10.50

Total Employee Costs 15,065.75 50.17 14,483.20 52.07 11,411.04 49.91 9,001.39 48.17 6111.52 46.08
Overseas business expenses (other
than employee allowances paid 383.89 1.28 460.07 1.65 438.42 1.92 370.00 1.98 231.02 1.74
overseas)

Services rendered by business

associates and others 1,261.97 4.20 1,114.57 4.01 850.49 3.72 845.61 4.53 661.08 4.98

Operation and other expenses 4,622.76 15.39 4,585.24 16.49 4,209.83 18.41 3,329.36 17.82 2576.08 19.42

Total Expenditure 21,334.37 71.05 20,643.08 74.22 16,909.78 73.96 13,546.36 72.50 9,579.70 72.22
Other Income, Net 272.07 0.91 -426.99 -1.54 486.06 2.13 229.05 1.23 113.89 0.86
Depreciation 660.89 2.20 564.08 2.03 563.71 2.47 440.17 2.36 282.43 2.13
Operating Profit 8,033.66 26.75 6,605.72 23.75 5,389.90 23.57 4,698.68 25.15 3,401.86 25.65
 Operating Profit

9,000.00

8,000.00

7,000.00

6,000.00

5,000.00

4,000.00 Operating Profit

3,000.00

2,000.00

1,000.00

0.00
2006 2007 2008 2009 2010
 Operating Profit
The operating profit of the company increased to Rs.
8033.66 crores in 2010 FY from Rs. 3401.86 crores in
2006 FY. The revenue growth has been decent as seen in
the line chart.
This has been possible due to the strict cost cutting
measures implemented by the company.
The percentage of the operating profit as a % revenue
remained stable from 25.65 % in 2006 FY to 26.75% in
2010 FY. However, in 2009 FY, this % decreased to
23.75% and due to cost cutting measures implemented
by the company.
Infosys Technologies
Operating Profit Analysis
Revenue Analysis
Trend for net income
Year Mar '05 Mar '06 Mar '07 Mar '08 Mar '09 Mar '10
Net Income 6,859.66 9,028.00 13,149.00 15,648.00 20,264.00 21,140.00
%Change in income NA 32% 46% 19% 29% 4%
Change from base(2005) 32% 92% 128% 195% 208%
 Income
25,000.00 2.5

20,000.00 2

15,000.00 1.5

10,000.00 1

5,000.00 0.5

0.00 0
1 2 3 4 5 6

Net Income %Change in income Change from base(2005)

The graph above shows the trend of the revenue, the change in revenue from previous year and
change in revenue from the year 2005 for the period 2006-2010.
There is a steady growth in the absolute revenue of the company which has increased more than
200% in the period of five years.
The growth rate of the revenue has declined over the years, from almost 46% in 2007 it has
dropped to 4% in the year 2010.

The IT sector in India was at a high till at least 2008 when the world economy started to crumble
under the economic downturn. The effect can be seen in the graph above. Though, the revenues
for Infosys show an upward trend for all the years, but the growth has dwindled to 4% for the last
year. This growth in the revenue is due to the all round growth in various segments of the
business mix and growth in business volumes.
Revenue by Location and products

Revenue by location(%) Mar '05 Mar '06 Mar '07 Mar '08 Mar '09 Mar '10
Onsite 50.2 49.8 51.7 50.9 49.3 48.7
Offshore 49.8 50.2 48.3 49.1 50.7 51.3

By product Mar '05 Mar '06 Mar '07 Mar '08 Mar '09 Mar '10
Software services 6647 8671 12611 15051 19416 20215
Software products 213 357 538 597 848 925
 Revenue by Location
52

51

50

49

48

47

46
Mar '05 Mar '06 Mar '07 Mar '08 Mar '09 Mar '10

Onsite Offshore

As is evident from the figures and the graphs above, the revenue from onsite and offshore
activities tend to be around 50% for all the years.
 Revenue by Product
25000

20000

15000

10000

5000

0
Mar '05 Mar '06 Mar '07 Mar '08 Mar '09 Mar '10

Software services Software products

There are two types of products Infosys mainly deals in- Software products and software
services. The revenue from the software services comprise the major portion of the revenue
that is, around 96% and it has been consistent for the last five years.
Segmentation on the basis of Geography
Revenues
Revenue by North America Europe India Rest of the world Total
Geographical Location
2010 14170 4633 269 2068 21140
2009 13123 5060 260 1821 20264
2008 9873 4207 219 1349 15648
2007 8395 3393 214 1147 13149
2006 6168 2337 165 851 9521

Revenues by Geographical segment

16000
14000
12000
10000
8000
6000
4000
2000
0
2006 2007 2008 2009 2010

North America Europe India Rest of the world

Operating Income
Operating Income by North America Europe India Rest of the world Total
Geographical Segment
2010 5028 1650 133 549 7360
2009 4437 1795 136 538 6906
2008 3099 1489 117 258 4963
2007 2649 1226 108 242 4225
2006 1997 827 58 209 3091

Operating Income by Geographical segment

6000

5000

4000

3000

2000

1000

0
2006 2007 2008 2009 2010

North America Europe India Rest of the world

Operating Profit%
Operating Profit% by North America Europe India Rest of the world Total
Geographical segment
2010 35.5 35.6 49.4 26.5 34.8
2009 33.8 35.5 52.3 29.5 34.1
2008 31.4 35.4 53.4 19.1 31.7
2007 31.6 36.1 50.5 21.1 32.1
2006 32.38 35.4 35.15 24.56 32.46

Operating Profit % by Geograhical segment

60

50

40

30

20

10

0
2006 2007 2008 2009 2010

North America Europe India Rest of the world

North America is the region that contributes
maximum to the revenue of the company. The revenue
contribution has grown steadily from 29% in the year
2005 to 67% in the year 2010. Europe and others have
also increased the contribution to the total revenue by
98% and 143% respectively however; the contribution
is quite small as compared to that of North America.
Business from Europe took a dip (from 24% to 22%) in
the year 2010 possibly owing to the financial crisis in
that part of the world. The business from India forms a
small percentage of the total i.e. 1%.
Segmentation on the basis of Industry
a. Revenues
Revenue by Industry Financial Services Manufacturing Telecom Retail Others Total
2010 7354 3988 3234 2989 3575 21140
2009 7020 3876 3450 2699 3219 20264
2008 5706 2291 3215 1945 2491 15648
2007 4951 1805 2409 1386 2598 13149
2006 3427 1324 1566 968 2236 9521

Revenue by Industry
8000
7000
6000
5000
4000
3000
2000
1000
0
2006 2007 2008 2009 2010

Financial Services Manufacturing Telecom Retail Others

Operating Income
Operating Income by
Industry Financial Services Manufacturing Telecom Retail Others Total
2010 2644 1258 1167 1065 1226 7360
2009 2374 1296 1198 929 1109 6906
2008 1856 691 1010 624 782 4963
2007 1568 584 788 450 835 4225
2006 1074 402 601 311 703 3091

Operating Income by Industry

3000
2500
2000
1500
1000
500
0
2006 2007 2008 2009 2010

Financial Services Manufacturing Telecom

Retail Others
Operating Profit%
Operating Profit% by
Industry Financial Services Manufacturing Telecom Retail Others Total
2010 35.9 31.5 36.1 35.6 34.3 34.8
2009 33.8 33.4 34.7 34.4 34.5 34.1
2008 32.5 30.2 31.4 32.1 31.4 31.7
2007 31.7 32.4 32.7 32.5 32.1 32.1
2006 31.3 30.4 38.4 32.1 31.4 32.5
 The company makes the maximum revenue and the maximum operating income from the financial
services industry which accounts for more than 35% of the total revenue generated however the
revenue from this industry has dropped from 38% in 2007 to 35% in the last year.
 An upward revenue percentage growth trend is seen for the Retail and the Manufacturing industry.
The revenue have increased over the years for almost all the sectors except Telecom in the last year
however, the rate of growth has decelerated. We can see the growth rates taking a dip in the trend
chart below:-
Gross Profit Margin
Year Revenue Cost of sales Gross profit Gross profit margin%
2005 2147 1225 922 43%
2006 2865 1661 1204 42%
2007 13893 7458 6435 46%
2008 16692 9207 7485 45%
2009 21693 11765 9928 46%
2010 22742 12071 10671 47%
Infosys has a gross profit margin of 47% for the year
2010. This means that the company is in an extremely
comfortable position to be profitable. Also, we can see
that the company’s gross profit margin is ranging
between 42 – 47%. There is an increase in the revenues
and correspondingly there is an increase in the cost of
sales also. In the year 2010, the increase in revenues is
just 4.6% but the increase in cost of goods sold is 3%
hence, there is an overall increase in the gross profit
margin from the previous year.
Operating expense Variance Analysis
 Operating Expense Analysis
Raw Materials 13.55 16 22 18 20 22
Change in Cost 2.45 6 -4 2 2
%Change in cost 18% 38% -18% 11% 10%
As % Net sales 0.18% 0.17% 0.12% 0.10% 0.10%
Power & Fuel Cost 40.2 62 88 106 125 122
Change in Cost 21.8 26 18 19 -3
%Change in cost 54% 42% 20% 18% -2%
As % Net sales 0.69% 0.67% 0.68% 0.62% 0.58%
Employee Cost 3183.25 4274 6316 7771 9975 10356
Change in Cost 1090.75 2042 1455 2204 381
%Change in cost 34% 48% 23% 28% 4%
As % Net sales 47.34% 48.03% 49.66% 49.23% 48.99%
Other Manufacturing Expenses 563.47 792 1290 1443 1697 1993
Change in Cost 228.53 498 153 254 296
%Change in cost 41% 63% 12% 18% 17%
As % Net sales 8.77% 9.81% 9.22% 8.37% 9.43%
Selling and Admin Expenses 697.15 773.49 1050.53 1214 1367 992
Change in Cost 76.34 277.04 163.47 153 -375
%Change in cost 11% 36% 16% 13% -27%
As % Net sales 8.57% 7.99% 7.76% 6.75% 4.69%
Miscellaneous Expenses 35.84 120.51 156.47 132 172 293
Change in Cost 84.67 35.96 -24.47 40 121
%Change in cost 236% 30% -16% 30% 70%
As % Net sales 1.33% 1.19% 0.84% 0.85% 1.39%
Total Expenses 4533.46 6038 8923 10684 13356 13778
Change in Cost 1504.54 2885 1761 2672 422
%Change in cost 33% 48% 20% 25% 3%
As % Net sales 66.88% 67.86% 68.28% 65.91% 65.18%
Operating Profit 2,326.20 2,990.00 4,226.00 4,964.00 6,908.00 7,362.00
Trend for Operating profit 33% 32% 32% 34% 35%
The various expenses for Infosys as a percentage of net sales
for that year as is shown in the graph (i), are almost at the
same level. There is a reduction in the raw material and
selling and administration costs. The overall cost has
decreased by almost 1.5%.
The revenue has increased over the years and the operating
cost has been maintained at almost the same level. Hence,
there is an improvement in the operating profit of the
company as depicted in the second graph. The trend line is
going upwards though in the year 2007 and 2008 we can see
a dip in the operating profit. In the graph for expenses also,
we can see that there is an increase for these two years.
Overall, the firm seems to have good control over its
operating activities.