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PROJECT REPORT ON

FINANCIAL ANALYSIS OF ITSERVICES SECTOR (SONATA vs INFOSYS)

Under the Guidance of:

Dr. Sandeep Goel

13/09/2010

Group-9, PGPM-2010 Sec-A Nipun Goel(10P035)

Atul Bucha(10P013)Manu Kulkarni(10P028)Vaibhav Goyal(10P058)Harsh Maru(10P018)Dheeraj Nagpal(10P015)


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ACKNOWLEDGEMENT

We wish to express our sincere gratitude to Dr.Sandeep Goel for providing us an opportunity to do our

project work on FINANCIAL ANALYSIS OF IT SERVICES SECTOR (INFOSYS vsSONATA) .This project bears

on imprint of many people. We sincerely thank to him as our project guide for guidance and

encouragement in carrying out this project work.

We wish to avail ourselves of this opportunity, express a sense of gratitude and love to our friends,

project mates and our beloved parents for their manual support, strength, and help and for everything

Place: Gurgaon

Date: 02/13/2010


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Table of ContentsTHE INDIAN IT SECTOR .................................................................................................................................. 4

INFOSYS ......................................................................................................................................................... 5

Global Delivery Model (GDM) ....................................................................................................................... 7

Enterprise Risk Management (ERM) ............................................................................................................. 7

SONATA ......................................................................................................................................................... 8

Opportunities and threats: ........................................................................................................................... 8

Financial highlights:..................................................................................................................................... 10

PERFORMANCE SUMMARY ......................................................................................................................... 12

Infosys Technologies (Analysis of Balance sheet) ....................................................................................... 13

Sources of funds .......................................................................................................................................... 14

Applications of funds .................................................................................................................................. 14

Analysis of Income Statement .................................................................................................................... 16

Earnings before interest and tax (EBIT) ...................................................................................................... 17

Sonata Software (Analysis of Balance sheet) .............................................................................................. 19

Sources of funds .......................................................................................................................................... 20

Applications of funds .................................................................................................................................. 20

Analysis of Income Statement .................................................................................................................... 22

Sales ............................................................................................................................................................ 23

EBIT ............................................................................................................................................................. 23

Net Profit ..................................................................................................................................................... 24

Share Price Performance ............................................................................................................................ 25


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RAG STATUS: ............................................................................................................................................... 25

INDIVIDUAL RATIOs: .................................................................................................................................... 27

Solvency Ratio ................................................................................................ Error! Bookmark not defined.

RECEIVABLE TURNOVER .............................................................................................................................. 28

DAYS OF SALES OUTSTANDING ................................................................................................................... 28

FIXED ASSET TURNOVER ............................................................................................................................. 29

TOTAL ASSET TURNOVER ............................................................................................................................ 29

CURRENT RATIO .......................................................................................................................................... 30

QUICK RATIO ............................................................................................................................................... 31

CASH RATIO ................................................................................................................................................. 31

DEFENSIVE INTERVAL RATIO ....................................................................................................................... 32

Financial Leverage Ratio: ............................................................................................................................ 33

Profitability Ratio: ....................................................................................................................................... 34

Gross Profit Margin ..................................................................................................................................... 34

Operating Profit Margin .............................................................................................................................. 34

Calculation Templates ................................................................................................................................. 39

REFERENCES ................................................................................................................................................ 39

THE INDIAN IT SECTOR


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The Indian software industry, from its very humble beginnings, has grown tremendously over

the past few years and is now the undisputed leader in the outsourcing of software services

now. While the rest of the financial world was bogged down by the recent economic recession,

most Indian IT companies faced the crisis head on and actually managed to cash in upon it as

an opportunity. The uniqueness of the Indian IT industry, and possibly one of the main reasonsfor its recent upsurge is the fact that it is service oriented and export driven. Apart from these,

other factors that have led to this increase in demand for Indian software services include cost

efficiency, abundance in qualified software engineers and the fact that it is managed by

professional and entrepreneurial managements. IT industry has played a major role in

strengthening the economic and technical foundations of India. Indian professionals are

setting up examples of their proficiency in IT, in India as well as abroad.

India is widely recognized as the premier destination for offshore technology services.According to the NASSCOM Strategic Review 2010, IT services exports (excluding

exports relating to business process outsourcing (BPO), hardware, engineering design

and product development) from India are estimated to grow by 5.8% in fiscal 2010, to

record revenues of US $27.3 billion. This review also estimates BPO exports from India

to have grown by 6% in fiscal 2010 to record revenues of US $12.4 billion. There are

several key factors contributing to the growth of IT and IT-enabled services (ITES) in

India and by Indian companies. Some of these factors are high-quality delivery,

significant cost benefits and abundant skilled resources.

INFOSYS

Infosys Technologies (Infosys) is a leader in providing IT consulting and software

services which include a complete range of services such as business-technology

consulting, Internet and e-business consulting, system integration, custom application

development, re-engineering and sustenance.

The company provides end-to-end business solutions that leverage technology for their

clients, including technical consulting, design, development, product engineering,

maintenance, systems integration, package-enabled consulting, and implementation

and infrastructure management services. Infosys was the pioneer of the Global Delivery


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Model and has over 114000 employees in over 60 offices and development centres

worldwide and 590 clients across geographies and industry verticals. Going forward the

Company has identified seven key areas that it believes would see increased influence

and present great scope. Also, the Company targets US and Europe to contribute 40%

each of the revenues of the Company.

The companys solutio ns include building next generation communication, networking,

and e-infrastructure products for clients. Its global delivery model leverages cost-

competitive development centres in different parts of the world to provide high quality,

rapid time-to-market solutions on time and within budget.

The business model of Infosys focuses on having long-term strategic relationships with clients

and a significant portion of its revenue comes from repeat business. The company has 293

active clients spread across a well diversified industry class including insurance (contributing

16% of its revenues during the past twelve months), banking and financial services (20.3%),

manufacturing (17.5%), telecom (16.9%), retail (10.7%) besides utilities, transportation and

logistics and others (together 18.6%). Like other Indian software services companies, Infosys

continues to depend on North America with 72.1% of its revenues for the last twelve months

from this region.

The aim of Infosys is to become a leading global technology services company by successfully

differentiating its service offerings and increasing the scale of their operations. Keeping that

objective in mind, Infosys has recently made some key acquisitions in December 2009. It

acquired US-based business process solutions provider McCamish Systems LLC through Infosys

BPO at Rs.218 cr. The past performance of Infosys has been impressive, considering its

revenues grew from $4,176 million in fiscal 2008 to $4,804 million in fiscal 2010, representing

an annualized growth of 7.3%. Infosys has been recognized with various awards by different

corporate bodies and magazines. Its net income observed growth of annualized growth of 6.3%

from $1,163 million to $1,313 million. It has been rated as the best employer in India by the

Business Today. Hewitt associates also rated Infosys as the best employer to work for from the

year 2000 to 2002.


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The following feature of Infosys act as its USP and differentiates it from other players in

the IT industry:

Global Delivery Model (GDM)

Infosyss GDM allows it to execute services where it is most cost effective and sell

services where it is most profitable. The GDM enables it to derive maximum benefit

from its large pool of highly skilled technology professionals; 24-hour execution

capabilities across multiple time zones; the ability to accelerate delivery times of large

projects by simultaneously processing project components; cost competitiveness across

geographic regions; built-in redundancy to ensure uninterrupted services; and a

knowledge management system that enables us to re-use solutions where appropriate.Further its GDM mitigates risks associated with providing offshore technology services

to its clients. Speedy and effective communication being the key, they use multiple

service providers and a mix of terrestrial and optical fibre links with alternate routing. In

India, Infosys rely on two telecommunication carriers to provide high-speed links

interconnecting its global development centres. They rely on multiple links on submarine

cable paths provided by several service providers to interconnect its development

centres with network hubs in other parts of the world.

Enterprise Risk Management (ERM)

The Enterprise Risk Management (ERM) at Infosys encompasses practices relating

to identification, assessment, monitoring and mitigation of various risks to our

business. ERM at Infosys seeks to minimize adverse impact on our business objectives

and enhance stakeholder value. Further, our risk management practices seek to

sustain and enhance long-term competitive advantage of the Company. Risk

management is integral to our business model, described as Predictable, Sustainable,

Profitable and De-risked' (PSPD) model.


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SONATA

Sonata Software Limited , headquartered in Bangalore, India, is a leading IT consulting

and services company. Sonata's customers are located across the US, Europe, Middle

East and the Asia-Pacific region. Its portfolio of services includes IT Consulting, Product

Engineering Services, Travel Solutions, Application Development, Application

Management, Managed Testing, Business Intelligence, Infrastructure Management and

Packaged Applications. As per the industry rankings released by NASSCOM for 2009-

10, Sonata Software figured among the Top 20 IT Software Services Exporters in India

for the third consecutive year. Sonata Software has also been ranked Global #2 in the

2008 Top Ten ESO: Outsourced Software Development in The Black Book of

Outsourcing.

Its subsidiaries include:

Sonata Software Limited

TUI InfoTech GmbH

Sonata Software FZ - LLC

Sonata Information Technology Limited (SITL)

Sonata Software North America Inc. Sonata Software GmbH

Sonata Europe Limited

Sonata's shares are publicly traded in Indian Stock Exchanges. As per the industry

rankings released by NASSCOM for 2008-09, Sonata Software figured among the Top

20 IT Software Services Exporters in India for the second consecutive year. Sonata

Software has also been ranked Global #2 in the 2008 Top Ten ESO: Outsourced

Software Development in The Black Book of Outsourcing. Sonata has alliances with

Microsoft, IBM, SAP and Oracle. Sonatas total income FY 2009 2010 was Rs 291.97

million

Opportunities and threats:


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In every challenge lies an opportunity. Today's enterprises are looking for solutions that

can help them reduce their operational cost and derive maximum value from their IT

spend. According to industry analysts like

Forrester, enterprises are looking for help making the move from a Time &

Material model of engagement to a managed services model which not only help in

driving down costs but also ensures that the projects are more outcome oriented. The

Industry has been talking about this changed business, engagement and pricing models

for some time now. However, they are fast becoming a reality. Further, enterprises are

prioritizing at projects that involve application consolidation / rationalization and those

which are collaborative and high impact solutions that enhance productivity.

In the customer segment of Software Product companies who outsource their productdevelopment to offshore outsourcing companies, there has been a growing preference

for engagement models that align their costs with activity levels (output). We have seen

an increased level of activity among product companies that are relatively new to off

shoring - driven by the need to compete in a challenging economy.

With Sonata's proven track record in delivering solutions to product companies, we

are well poised to capitalize on the above trends in the enterprise and productdevelopment markets..

The financial upheaval that hit the developed markets last year threw up a risk which

the Industry was not really exposed to earlier i.e. 'Customer Sustainability'. Constantly

changing business priorities, mergers, acquisitions and consolidations of companies

require IT service providers to be quick and deliver according changing situations.

Companies which are slow to react will get negatively impacted by risks on account of

failed projects, unhappy customers and in extreme cases customer delinquencies. .

Further, with costs of delivery from near shore locations closing up with that offshore,

emergence of these centres coupled with protectionist steps taken by developed

economies faced with the recession could threaten the growth prospects of this sector.


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Financial highlights:

1. Revenues:

Revenue from US was 46.21% and Europe was 48.21% for the year ended 31st March

2010 as compared to 38.81% from US and 60.19% from Europe for the same period

last year. Your Company's strategy of building strong delivery capability with its multi-

pronged emphasis on technology, people & processes has resulted not only in

increased business from existing customers but also in new customer acquisition.

2. Operating Expenses:

The ratio of operating expenditure to total income has decreased by 1.95% over the

same period last year.

3. EBIDT:

The EBIDT was at 28.79% for the year ended 31st March 2010 as compared to 26.59%for the same period last year.

4. Profit after Tax:

Profit after Tax was at 24.94% for the year ended 31st March 2010 as compared to

21.81% for the same period last year.

5. Interest and Borrowings:

The Company was debt free as on 31st March 2010 and had a Net Cash balance of

Rs.338.21 million (includes investment in Mutual Funds). During the year the Company

has not incurred any interest cost.


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6. Capital Employed:

The Return on Average Capital Employed (ROCE) for the year ended 31st March

2010 was 22.90% as compared to 25.41% for the same period last year.

7. Net Worth:

The Return on Average Net worth (RONW) for the year ended 31st March 2010 was

22.90% as compared to 25.23% for the same period last year.

8. Fixed Assets:

The Company added fixed assets to the extent of Rs.151.60 millions.

Additions were mainly incurred for new facilities at Bangalore (SEZ Unit at Global

Village).

9. Receivables:

Debtors as number of days' sales stood at 87 days for the year ended 31st March 2010

as compared to 64 days for the same period last year.

10. Cash Generation:

Cash generated from operations was Rs.428.15 million for the year ended

31st March 2010.

11. Manpower:

The total employee strength as on 31st March 2010 was 2124 as against 2034

as on 31st March 2009.


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Infosys Technologies (Analysis of Balance sheet)


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Sources of funds

As aptly visible from the graph above, the reserves and surpluses form the dominant part of thesources of funds accounting to about 98% of the total funds. This shows that the company has

no debt and is not dependent on the shareholders capital. In fact, the shareholders capital hasremained constant at Rs. 286 crores over the past four years.

Applications of funds

The companys growth has been financed largely by its own cash balances. As of March 31 st ,2010, the company had approximately Rs. 10,500 crores in cash and bank balances which formsroughly 38% of the asset base. The companys cash and cash equivalents comprise of cash andbank deposits with corporations which can be withdrawn without prior notice. The companyfeels it has sufficient current working capital to finance its operations for next 12 months. Thecompanys primary source of liquidity is the cash flow generated from operations. A significantportion (13%) of the companys asset base has been allocated in investments in available -for-


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sale financial assets and certificate of deposits. Moreover, even the receivables account foraround 13% in the companys asset base. This is because the company has a longer sales cycle.

All in all, the balance sheet of the company looks very strong and favorable and shows thecompany in a healthy state of affairs.


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Analysis of Income Statement


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Sales

The companys revenues are principally generated from technology services provided on timeand materials for a fixed price contract. The increase in revenue was attributable to addition of new clients from the telecommunications sector. Revenues from services accounted for over95.8% of the total revenues for FY 2010 while remaining 4.2% was represented by sale of software products. The company provides its services in various locations including NorthAmerica and Europe both acco unting for over 69% of the companys total revenue. The saleshave grown at a compounded annual growth rate of 9.7% from FYs 2006 to 2010.

Earnings before interest and tax (EBIT)


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The increase in EBIT and EBIT as a percentage of revenue was attributable to an increase ingross profit and decline in the administrative expenses. The EBIT have grown at a compundedannual growth rate of 7.5% from FYs 2006 to 2010.

Net Income

The increase in net income was attributable to an increase in the operating profit and also inthe other income. This increase was partially offset by an increase in the income tax expensefor the same period. The net income has grown at a compounded annual growth rate of 6.9%

from FYs 2006 to 2010.


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Sonata Software

Analysis of Balance sheet


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Sources of funds

It is clearly visible from the graph above, the reserves and surpluses form the dominant part of the sources of funds accounting to about 96% of the total funds. The company just like Infosysis a zero debt company and the share capital has remained constant to Rs. 10.5 Crores.

Applications of funds


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The major contributors to the assets are Investments, Loans and Advances and SundryDebtors. Loans and advances have increased from Rs. 31.05 Crores in 2009 to 2010. This is ajump of almost 270% on year on year basis. Investments form a major part of the applied fundsbut they have seen a decline of 6% as compared to the previous year. The cash in hand and inbank has increased by almost 100% and is almost Rs. 24 Crores as of 2010.

The number of days required to realize the payment has increased from 60 to 74 days. This isnot a healthy sign as the company depends a lot on the loans and advances for its dailyoperational needs.


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Analysis of Income Statement


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Sales

0

50

100

150

200

250

300

2006 2007 2008 2009 2010

In Rs Crores

Sales

Sales

The company provided IT services including consulting, design, infrastructure and outsourcingservices of which IT service segment accounts for majority of the revenues. The revenue fromthe core IT consulting has decreased by 3.1%, however there is a marginal increase in therevenue from other activities.

EBIT

0

10

20

30

40

50

60

70

2006 2007 2008 2009 2010

In Rs Crores

EBIT

EBIT


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Since the company is debt free i.e. it has not taken any long term loans, there is no liability forthe company to pay any income tax. Hence the EBIT is same as EBT. The increase in the EBITfrom previous years despite the reduction in sales is attributed to the decrease in the expensesfor the same period. There is a 9% increase in EBIT even after a 3.1% decrease in the net sales

revenue.

Net Profit

0

10

20

30

40

50

60

70

2006 2007 2008 2009 2010

In Rs Crores

Net Income

Net Income

The increase in the net income is attributable to the decrease in the net expenditure. The netincome has grown at a compounded annual growth rate of 20.1% from FYs 2006 to 2010.

All in all, we can see that the sales, EBIT and net income have grown at a very healthy rate andshowcase the company in a very good light. However, the area of concerns for the firm is thereduction in top line, the increase in the number of days of outstanding receivables and the

huge increase in the amount of loans and advances outstanding.


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Share Price Performance

All in all, we can see that the sales, EBIT and net income have grown at a very healthy rate andshow cases the company in a very good light. This growth can be attributed to an increase inthe size and number of projects as well as expansion in the solutions provided.

RAG STATUS:Before we analyse the ratio of the two companies in detail, let us see the snapshot of the performanceof the two companies by comparing financial year 2009 and 2010. Below is the snapshot or the ragstatus of the performance. It tells us if the performance of the company has improved or reduceddepending on the significance of increase or decrease in the value of the ratio.

Note:

Red Arrow Not good for the company

Green Arrow Good for the company

Downwards Decreases

Upward Increases


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Liquidity Ratios Infosys Sonata

Current ratio

Quick ratio

Cash Ratio

Defensive Interval Ratio

Activity Ratios Infosys Sonata

Receivable Turnovers

Days of Salesoutsanding

Fised Asset Turnover

Total Asset Turnover


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Profitability Ratios Infosys Sonata

Growth Profit Margin

Net Profit Margin

Return on Assets

Return on Equity

Solvency & ValuationRatios

Infosys Sonata

Financial Leverage Ratio

Dividend per Share

Cash Flow per Share

INDIVIDUAL RATIOs:

Activity Ratio


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RECEIVABLE TURNOVERFormula: Revenue/Average Receivables

Receivable turnover for Sonata is observed to have decreased from 6.0 to 4.9 y-o-y, while thatfor Infosys has not changed. This shows that sonata is providing services at credit basis more in2009 as compared to 2008, possibly due to lenient credit policies to bring in more business forthe growing company.

DAYS OF SALES OUTSTANDING

Formula: Number of days in period/Receivable turnover


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This value has been found to be increasing for Sonata while for Infosys it has been constant, themain reason could be that Sonata being a new business and a small firm, is providing more daysof credit to its clients as compared to a well established firm like Infosys whose DOS is relatively

constant.

FIXED ASSET TURNOVERFormula: Revenue/Average Net Fixed Assets

We can observe that Sonata has higher Fixed Asset Ratio than Infosys and it is also fluctuating.The reason for the same, is that Sonata being a new company has lesser fixed assets and is ableto realize more revenue relative to its fixed assets. However, being a new establishment, itsrevenue generation is fluctuating. Therefore, the fixed asset ratio is fluctuating for Sonata.

For Infosys, a well established company, these ratios are only slightly increasing since theirrevenue and fixed asset value are stabilized.

TOTAL ASSET TURNOVERFormula: Revenue/Average Total Assets


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In this case, total assets of Infosys have been increasing on account of increasing cash/bankbalances, and loans and advances, while revenue is not increasing at the same rate. Hence, thetotal asset turnover for Infosys being higher than Sonata at 2008 is decreasing on y-o-y basis.On the other hand, Sonatas current assets are increasing at a lower rate, while the revenue isfluctuating. Hence, the ratios are obtained as above.

CURRENT RATIO

Formula: Current Assets/Current Liabilities

In this case, Infosys has had both current assets and current liabilities increasing at the samerate and therefore, current ratio has been relatively same, while for Sonata, current assets are


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increasing at a higher rate than its current liabilities. Therefore, Sonatas ratio decrease d slightlyin 2009 but increased highly in 2010.

QUICK RATIOFormula: Cash+Short-term marketable investments+Receivables/Current Liabilities

For quick ratio also, due to increase in cash and receivables at a higher rate than currentliabilities for 09-10, an increase is observed for quick ratio. On the other hand, for Infosys, theratio is relatively constant, since cash and liabilities have grown at a similar rate. only slightlyincreasing, in 2009 due to increase in higher rate of increase in cash and receivables.

CASH RATIOFormula: cash+marketable securities/current liabilities


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For Sonata, this ratio first decreased between 2009-09 because of decrease in current liabilitiesand slight increase in cash and bank balances. From 2009-2010, the cash & bank balances haveincreased considerably owing to better business, and current liabilities have also increased,hence the ratio increased.

For Infosys, the cash ratio first increased due to high increase in cash and bank balances andrelative lesser increase in current liabilities, on the other hand, from 2009-2010, the cash ratiohas decreased owing to higher increase in current liabilities.

DEFENSIVE INTERVAL RATIOFormula: (Cash + Marketable Securities + Receivables)/average daily expenditures


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For Infosys, as is evident from the graph, the defensive interval ratio is high, since it is anestablished company with rich cash reserves, while for a company like Sonata which is still in itsearly stages, this ratio is less, since it has small cash reserves and also high relative daily

expenditure.

Solvency Ratio:Since the two companies are zero debt companies, we do not have any other ratio for thesolvency of the companies.

Financial Leverage Ratio:

Sonata financial leverage ratio is more near to 1 when compared to that of Infosys. This showsthat Sonata has better utilization of equity when compared to Infosys. But when we see Infosysindividually, the financial leverage ratio is also almost equal to 1 because of zero long termdebts. Thus both the companies are financially sound in the long term.


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Profitability Ratio:

Gross Profit Margin

The ratio is high for Infosys. It signifies that there is high profit made by the Infosys per revenuegenerated when compared to Sonata. This is very good for the share holders of Infosys.

Operating Profit Margin

0

10

20

30

40

50

2008 2009 2010

Operating Profit Margin

Sonata

Infosys


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Again here Infosys has a high value when compared to Sonata. This ratio shows that theoperating profit of Infosys is very high. This means that the company is generating huge profitson core competencies. Since Sonata is a newer company when compared to Infosys, its ratio isless. The company can capitalize more on their core competencies in the long run.

Net Profit Margin

Even the net profit margin of Infosys is higher than that of Sonata. This means that even afterproviding for interest and taxes, Infosys has a higher net profit margin when compared toSonata which is good. Individually Sonata also has a good net profit margin.

Operating ROA:


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Infosys has a higher operating return on assets when compared to Sonata. Though the ratio forboth of them is


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There is a huge difference in the DPS ratio for Infosys and Sonata. Though the issued sharecapital has increased roughly from 10.5 57 Cr for Infosys, there is a huge increase in theamount of dividends paid by Infosys. An increase from 5.2 1902 Cr for Infosys whencompared to Sonata. Thus an equity share holder would receive more dividends by investing inInfosys rather than Sonata.

Cash Flow per Share:


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Infosys has very high cash flow per share when compared to Sonata. This is attributed to thefact that the cash flow from operations for Infosys is very high when compared to that of Sonata, an increase from 42 6173 Cr. Thus much of the cash is due to operations which isvery good for the company.

Calculation Templates Attached below are the templates used to find the ratios for Sonata and Infosys respectively.

SonataCalculations.xlsx

InfosysCalculations.xlsx

REFERENCES1. www.capitaline.com

2. www.wikipedia.org

3. www.sec.gov

4. www.sonatasoftware.in

5. www.investopedia.com

6. www.infosys.com
http://www.capitaline.com/http://www.capitaline.com/http://www.wikipedia.org/http://www.wikipedia.org/http://www.sec.gov/http://www.sec.gov/http://www.sonatasoftware.in/http://www.sonatasoftware.in/http://www.investopedia.com/http://www.investopedia.com/http://www.infosys.com/http://www.infosys.com/http://www.infosys.com/http://www.investopedia.com/http://www.sonatasoftware.in/http://www.sec.gov/http://www.wikipedia.org/http://www.capitaline.com/

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