Institute of Rural Management Anand

Investment and Risk Management

Group Assignment-I

Submitted to: Prof. Abhinav Kumar Rajverma

Submitted by Group-1

GROUP 1 ROLL NO. NAME

1 P42060 Ajay kumar

2 P42100 Sangeeta Kumari

3 P42109 Shreya Singh

4 P42120 Deepesh Kumar

5 P42126 Hargunjot Singh

6 P42131 Komal Singh

7 P42146 Reeya Thakur

8 P42156 Saurabh Jaiswal

9 P42245 Suraj Kumar Singh

 IT Sector
Two firms- TCS and HCL technology

1. TCS

Balance Sheet :
In Rs. Cr.
Particulars FY21 FY20 Average
NON-CURRENT ASSETS
Fixed Assets 16920 16903 16911.5
Non-current Investments 2405 2189 2297
Other Non-current Assets 3734 4468 4101
TOTAL NON-CURRENT ASSETS 26221 25781 26001

CURRENT ASSETS
Cash and Cash Equivalents 3142 4824 3983
Inventory 7 5 6
Accounts Receivable 25222 28660 26941
Current Investments 28324 25686 27005
Other Current Assets 15979 12749 14364
TOTAL CURRENT ASSETS 83160 79194 81177
TOTAL ASSETS 109381 104975 107178

SHAREHOLDER’S FUND
Equity Share Capital 370 375 372.5
Reserves and Surplus 74424 73993 74208.5
Other Reserves
TOTAL SHAREHOLDER’S FUND 74794 74368 74581

NON-CURRENT LIABILITIES
Long-term Borrowings 0 0 0
Other Non-current Liabilities 5697 6234 5965.5
TOTAL NON-CURRENT LIABILITIES 6062 6581 6321.5

CURRENT LIABILITIES
Short-term Borrowings 0 0 0
Accounts Payable 7962 8734 8348
 Other Current Liabilities 19213 15057 17135
TOTAL CURRENT LIABILITIES 28525 24026 26275.5
TOTAL CAPITAL AND LIABILITIES 109381 104975 107178

P&L:
Particulars in Rs. Crores in Rs. Cr.
FY21 FY20 Average
REVENUE
Gross Sales 135963 131306 133634.5
GST & Other Levies 0 0 0
Net Sales 135963 131306 133634.5
Other Income 5400 8082 6741
Net Revenue 141363 139388 140375.5

EXPENSES
Material 0 0 0
Salary & other expenses 94423 92357 93390
Total Expense 99243 97397 98320

EBITDA 42120 41991 42055.5

Depreciation & Amortization Expenses 3053 2701 2877
EBIT 39067 39290 39178.5
Interest Expense 537 743 640
PBT 38530 38547 38538.5
Corporate Tax 9942 8731 9336.5
PAT 28588 29816 29202
Extra Income (Discontinuing Operations etc.) 2372 3444 2908

Net income (for the period) 30960 33260 32110

Dividend Payout (Including DDT) 10850 31896 21373
Transfer to Reserves & Surplus 20110 1364 10737
Retention Ratio 0.650 0.041 0.345
2. Firm- HCL

Balance Sheet:

Particulars In Rs. Cr.

FY21 FY20 Average
NON-CURRENT ASSETS
Fixed Assets 21150 22932 22041
Non-current Investments 5041 4207 4624
Other Non-current Assets 788 849 818.5
TOTAL NON-CURRENT ASSETS 27647 29985 28816

CURRENT ASSETS
Cash and Cash Equivalents 5056 1291 3173.5
Inventory 18 14 16
Accounts Receivable 5217 7504 6360.5
Current Investments 6605 6668 6636.5
Other Current Assets 5977 4662 5319.5
TOTAL CURRENT ASSETS 27714 23530 25622
TOTAL ASSETS 55361 53515 54438

SHAREHOLDER’S FUND
Equity Share Capital 543 543 543
Reserves and Surplus 43010 36753 39881.5
Other Reserves 0 0 0
TOTAL SHAREHOLDER’S FUND 43553 37296 40424.5

NON-CURRENT LIABILITIES
Long-term Borrowings 207 160 183.5
Other Non-current Liabilities 716 1343 1029.5
TOTAL NON-CURRENT
LIABILITIES 1789 2278 2033.5

CURRENT LIABILITIES
Short-term Borrowings 0 0 0
Accounts Payable 2707 2273 2490
Other Current Liabilities 7085 11499 9292
TOTAL CURRENT
LIABILITIES 10019 13941 11980
TOTAL CAPITAL AND LIABILITIES 55361 53515 54438
 P&L:
Particulars in Rs. Crores in Rs. Cr.
FY21 FY20 Average
REVENUE
Gross Sales 35673 32606 34139.5
GST & Other Levies 0 0 0
Net Sales 35673 32606 34139.5
Other Income 965 587 776
Net Revenue 36638 33193 34915.5

EXPENSES
Material 142 144 143
Salary & other expenses 13584 12471 13027.5
Total Expense 24228 22016 23122

EBITDA 12410 11177 11793.5

Depreciation & Amortization Expenses 2813 1952 2382.5
EBIT 9597 9225 9411
Interest Expense 177 238 207.5
PBT 9420 8987 9203.5
Corporate Tax 3667 2208 2937.5
PAT 5753 6779 6266
Extra Income (Discontinuing Operations etc.) 2990 2190 2590

Net income (for the period) 8743 8969 8856

Dividend Payout (Including DDT) 3257 1357 2307
Transfer to Reserves & Surplus 5486 7612 6549
Retention Ratio 0.63 0.85 0.74
Q1.)
Compare the following ratios of the two firms (last two years average) and comment.
a) Net Profit Margin, Equity Multiplier (Total Assets/Equity), Asset Turnover Ratio
b) Return on Equity (ROE) and Return on Assets (ROE)
c) Financial Leverage (Debt ratio, DE ratio) and Solvency ratios (ICR and DSCR).

TCS Ratios:
S. NO Ratio Formula
1 Net profit margin = (revenue-cost)/revenue 0.298
2 Equity multiplier = total asset/ equity 1.437
Asset turnover
3 ratio = net sales/ average total asset 1.269
4 ROE = net income / shareholder equity 1.877
5 ROA = net income / total asset 0.289
6 Financial leverage
6(a) debt ratio = Total debt/ total asset 0.059
6(b) DE ratio = debt/ equity 0.085
7 Solvency ratio
7(a) ICR = EBIT/ interest expense 61.216
7(b) DSCR = net operating income/ debt service 17.303

HCL Ratios:
S. NO Ratio Formula
1 Net profit margin = (revenue-cost)/revenue 0.300
2 Equity multiplier = total asset/ equity 0.634
Asset turnover
3 ratio = net sales/ average total asset 0.627
4 ROE = net income / shareholder equity 0.219
5 ROA = net income / total asset 0.163
6 Financial leverage
6(a) debt ratio = Total debt/ total asset 0.037
6(b) DE ratio = debt/ equity 0.050
7 Solvency ratio
 7(a) ICR = EBIT/ interest expense 45.354
7(b) DSCR = net operating income/ debt service 5.800

Comparison between HCL and TCS:

S. NO Ratio TCS HCL
1 Net profit margin 0.298 0.300
2 Equity multiplier 1.437 0.634
Asset turnover
3 ratio 1.269 0.627
4 ROE 1.877 0.219
5 ROA 0.289 0.163
6 Financial leverage
6(a) Debt ratio 0.059 0.037
6(b) DE ratio 0.085 0.050
7 Solvency ratio
7(a) ICR 61.216 45.354
7(b) DSCR 17.303 5.800

1) Net Profit margin indicates how much profit is earned by the company as a percentage of
the revenue generated. As both the companies belong to the same sector (IT) we can say
that both the companies are operating effectively and the rate of profit generation is almost
equal.

2) Equity multiplier indicates the portion of assets of the company financed by the
shareholder’s equity and not by debt. TCS have a value greater than 1, indicating their
majority investments are financed by the debt rather than equity whereas HCL have a value
less than 1 indicates financing is mostly done by equity. The companies having higher
financial leverage can increase the risk but at the same time can be an advantage to the
companies as debt is a cheaper way to generate funds
vice versa for lower financial leverage.

3) Asset turnover ratio would indicate the rate at which the company is generating revenue per
dollar of its total assets. As the companies belong to the IT sector which has a low asset
base and high sales volume, a higher ratio (>1) for both the companies is expected.
Although, TCS is performing better as compared to HCL tech in terms of converting its
assets to revenue.
 4) ROE indicates how efficiently the company uses the shareholder’s capital to generate
profit. Higher the ROE greater the company’s ability to increase shareholder’s value and
profitability. Here, TCS has a greater value of ROE than HCL which indicates P&G is
more efficient in utilizing the company’s equity.

5) ROA indicates how the company employs its assets to generate its profit. In ROA the debt
or financial leverage of the company is also considered. TCS has a higher ROA than HCL
which shows TCS is more efficient in generating profit from its assets.

6) Debt ratio indicates the measure of financial leverage of the company to fund its activities.
Higher debt ratio increases the financial burden on the company. Here, both the firms have
a debt ratio less than 0.5 which can be considered a low debt ratio which indicates their
good creditworthiness to other investors.

7) D/E ratio indicates the extent to which the company has taken debt in terms of its equity
capital. Here both the companies are from the IT sector which is less capital intensive, we
can say that the companies have a healthy D/E ratio.

8) The ICR ratios indicate the portion of operating profits available to fund the interest expenses
of the company. Although the companies had similar D/E and Debt ratios, HCL as a lower
ICR as compared to TCS which indicates that HCL has only less portion of its operating
profits available to meet its huge interest expense.

9) The ability of the company to meet its debt obligations from its operating profits is measured
by the DSCR ratio. A DSCR ratio of 1 or above shows that the firm is generating sufficient
operating profit to cover its annual debt obligations. An ideal ratio is suggested to be 2 or
higher. A higher ratio increases the creditworthiness of the firm. Here DSCR of TCS is
greater than HCL probably because of the latter’s high-interest payments.

Q2.) Assuming the existing cash reserves are not used to fuel sales growth a) Compute the
growth in sales the two firms may attain with internal capital only (IGR). b) Find the growth in
sales firms may attain with constant financial leverage (SGR).

SOLUTION:

S. NO. Ratio Formula TCS HCL

1 IGR = b*ROA/(1-b*ROA) 0.111 0.136
2 SGR = b*ROE/(1-b*ROE) 1.841 0.193
Q3.) Prepare a pro forma balance sheet with 40% sales growth in the next fiscal. Estimate the
external funding needed (EFN) to achieve the projected sales growth. Discuss the fundraising
strategy for the same.

Pro-forma

Narration Mar-20 Mar-21 Mar-22

NON-CURRENT ASSETS
Fixed Assets 16903 16920 23688
Non-current Investments 2189 2405 3367
Other Non-current Assets 4468 3734 5227.6
TOTAL NON-CURRENT ASSETS 25781 26221 36709.4

CURRENT ASSETS
Cash and Cash Equivalents 4824 3142 4398.8
Inventory 5 7 9.8
Accounts Receivable 28660 25222 35310.8
Current Investments 25686 28324 39653.6
Other Current Assets 12749 15979 22370.6
TOTAL CURRENT ASSETS 79194 83160 116424

TOTAL ASSETS 104975 109381 153133.4

SHAREHOLDER’S FUND
Equity Share Capital 375 370 518
Reserves and Surplus 73993 74424 104193.6
Other Reserves
TOTAL SHAREHOLDER’S FUND 74368 74794 104711.6

NON-CURRENT LIABILITIES
Long-term Borrowings 0 0 0
Other Non-current Liabilities 6234 5697 7975.8
TOTAL NON-CURRENT LIABILITIES 6581 6062 8486.8
CURRENT LIABILITIES
Short-term Borrowings 0 0 0
Accounts Payable 8734 7962 11146.8
Other Current Liabilities 15057 19213 26898.2
TOTAL CURRENT LIABILITIES 24026 28525 39935
TOTAL CAPITAL AND LIABILITIES 104975 109381 153133.4

TCS

Growth rate(g) 40.00%

Total assets 109381
Total sales 135963
Total current liability 28525
Profit margin 0.23
Forecasted sales 190348.20
Retention Ratio(b) 0.59
Total Fund required = (g)*TA 43752.40
Extraa credit extended by supliers (spontanious liability)=(1+g)*A/c payable 11410.00
Internal Funds =PM*sales*(1+g)*b 25572.96

EFN=(TA*g)-Internal Funds - (g*SL) 6769.44

The IGR of firm is 11.1% but the required growth is 40%. The company needs
extra fund that is 6769.44 crores to have a growth of 40%
HCL Pro-forma:
Pro-Forma
Narration Mar-20 Mar-21 Mar-22
NON-CURRENT ASSETS
Fixed Assets 22932 21150 29610
Non-current Investments 4207 5041 7057.4
Other Non-current Assets 849 788 1103.2
TOTAL NON-CURRENT ASSETS 29985 27647 38705.8

CURRENT ASSETS
Cash and Cash Equivalents 1291 5056 7078.4
Inventory 14 18 25.2
Accounts Receivable 7504 5217 7303.8
Current Investments 6668 6605 9247
Other Current Assets 4662 5977 8367.8
TOTAL CURRENT ASSETS 23530 27714 38799.6
TOTAL ASSETS 53515 55361 77505.4
SHAREHOLDER’S FUND
Equity Share Capital 543 543 760.2
Reserves and Surplus 36753 43010 60214
Other Reserves 0 0 0
TOTAL SHAREHOLDER’S FUND 37296 43553 60974.2

NON-CURRENT LIABILITIES
Long-term Borrowings 160 207 289.8
Other Non-current Liabilities 1343 716 1002.4
TOTAL NON-CURRENT LIABILITIES 2278 1789 2504.6

CURRENT LIABILITIES
Short-term Borrowings 0 0 0
Accounts Payable 2707 2273 2490
Other Current Liabilities 7085 11499 9292
TOTAL CURRENT LIABILITIES 10019 13941 11980
TOTAL CAPITAL AND LIABILITIES 55361 53515 54438
TOTAL CURRENT LIABILITIES 10019 13941 11980
TOTAL CAPITAL AND LIABILITIES 55361 53515 54438

Growth rate(g) 40.00%

Total assets 55361
Total sales 34139.5
Total current liability 10019
Profit margin 0.25
Forecasted sales 47795.30
Retention Ratio(b) 0.16
Total Fund required = (g)*TA 22144.40
Extra credit extended by suppliers (spontaneous liability) =(1+g)*A/c payable 4007.60
Internal Funds =PM*sales*(1+g) *b 1874.24
EFN=(TA*g)-Internal Funds - (g*SL) 16262.56

The IGR of firm is 13.6% but the required growth is 40%. The company needs
extra fund that is 16262.56 crores to have a growth of 40%