Financial Accounting Assignment

Financial Ratio Comparison

IT Sector

Infosys VS Wipro

Submitted To – Submitted By -
Dr Meena Sharma Lovesh Gupta
MBA-IB
1st sem
Introduction
The global sourcing market in India continues to grow at a higher pace compared
to the IT-BPM industry. India is the leading sourcing destination across the world,
accounting for approximately 55 per cent market share of the US$ 185-190 billion
global services sourcing business in 2017-18. Indian IT & ITeS companies have set
up over 1,000 global delivery centers in about 80 countries across the world.
India has become the digital capabilities hub of the world with around 75 per cent
of global digital talent present in the country.

History of IT Sector in India

It started in 1974, when the mainframe manufacturing company, Burroughs, asked
its India sales agent, Tata Consultancy Services (TCS), to provide programmers for
the installation of system software for an American client. Like any other industry,
Indian IT too faced challenges, such as absence of a local market, and unfavorable
government policy regarding private enterprises. In those days, the industry mostly
comprised of Bombay-based conglomerates whose chief purpose was to supply
programmers to internationals IT firms overseas. The 1970s Indian IT faced the
most struggle. Remember, that back then, the economy hadn’t been opened up and
was state-controlled. The state was hostile to the software industry, and showed it
in the form of high import tariffs; 135% on hardware and 100% on software.
Software was not recognized as an industry; that meant exporters were not eligible
to seek finance from banks.
It would be 1984 when this industry finally saw some favorable changes, when
Rajiv Gandhi became Prime Minister and brought about a change in the
government’s attitude towards the IT sector. His New Computer Policy (NCP-
1984) offered a package of reduced import tariffs on hardware and software. A
reduction of up to 60% was seen.
Also, software exports finally got the recognition of as a “delicensed industry”.
This meant that exporters had now become eligible for bank finance and the
industry was unrestricted from license-permit raj. Foreign companies now had the
permission to set up autonomous, export-dedicated units. A project was also set up
to establish a chain of software parks to provide infrastructure at costs lower than
the market price. These policies eventually made the Indian IT industry what it is
today.
Current Trend:

Market Size

India’s IT & ITeS industry grew to US$ 181 billion in 2018-19. Exports from the
industry increased to US$ 137 billion in FY19 while domestic revenues (including
hardware) advanced to US$ 44 billion.
Spending on Information Technology in India is expected to grow over 9 per cent
to reach US$ 87.1 billion in 2018.
Revenue from digital segment is expected to comprise 38 per cent of the forecasted
US$ 350 billion industry revenue by 2025.

Investments/ Development
Indian IT's core competencies and strengths have attracted significant investments
from major countries. The computer software and hardware sector in India
attracted cumulative Foreign Direct Investment (FDI) inflows worth US$ 37.23
billion between April 2000 and March 2019 and ranks second in inflow of FDI, as
per data released by the Department for Promotion of Industry and Internal Trade
(DPIIT).
Leading Indian IT firms like Infosys, Wipro, TCS and Tech Mahindra, are
diversifying their offerings and showcasing leading ideas in block chain, artificial
intelligence to clients using innovation hubs, research and development centers, in
order to create differentiated offerings.
Some of the major developments in the Indian IT and ITeS sector are as follows:

 Nasscom has launched an online platform which is aimed at up-skilling over

2 million technology professionals and skilling another 2 million potential
employees and students.
 Revenue growth in the BFSI vertical stood at 6.80 per cent y-o-y between
July-September 2018.
 As of March 2018, there were over 1,140 GICs operating out of India.
 PE investments in the sector stood at US$ 2,400 million in Q4 2018.
 Venture Capital (VC) investments in the IT & ITeS sector stood at US$ 53.0
million during Q4 2018.
Government Initiatives
Some of the major initiatives taken by the government to promote IT and ITeS
sector in India are as follows:

 The government has identified Information Technology as one of 12

champion service sectors for which an action plan is being developed. Also,
the government has set up a Rs 5,000 crore (US$ 745.82 million) fund for
realizing the potential of these champion service sectors.
 As a part of Union Budget 2018-19, NITI Aayog is going to set up a national
level programme that will enable efforts in AI^ and will help in leveraging
AI^ technology for development works in the country.
 In the Interim Budget 2019-20, the Government of India announced plans to
launch a national programme on AI* and setting up of a National AI* portal.
 National Policy on Software Products-2019 was passed by the Union
Cabinet to develop India as a software product nation.

Achievements

Following are the achievements of the government during 2017-18:

 About 200 Indian IT firms are present in around 80 countries.

 IT exports from India are expected to reach highest ever mark of US$ 126
billion in 2017-18.
 Highest ever revenue was generated by Indian IT firms at US$ 181 billion in
2018-19.

Road Ahead

India is the topmost offshoring destination for IT companies across the world.
Having proven its capabilities in delivering both on-shore and off-shore services to
global clients, emerging technologies now offer an entire new gamut of
opportunities for top IT firms in India. Export revenue of the industry is expected
to grow 7-9 per cent year-on-year to US$ 135-137 billion in FY19. The industry is
expected to grow to US$ 350 billion by 2025 and BPM is expected to account for
US$ 50-55 billion out of the total revenue.
Exchange Rate Used: INR 1 = US$ 0.0139 as of Q3 FY19
India is the world's largest sourcing destination, accounting for approximately 55
per cent of the US$ 185-190 billion market in 2017-18. India’s highly qualified
talent pool of technical graduates is one of the largest in the world and the country
has a low-cost advantage by being 5-6 times inexpensive than US. India is the
second-fastest digitizing economy amongst 17 leading economies of the world.

The cloud market in India is expected to grow three-fold to Rs 49,621 crore (US$
7.1 billion) by 2022 with the help of Growing adoption of Big Data, analytics,
artificial intelligence and Internet of Things (IoT), according to Cloud Next Wave
of Growth in India report.

At Rs 9,57,493 crore (US$ 137 billion) in 2018-19. India ‘s IT sector market is

projected to reach Rs 6,98,900 crore (US$100 billion) by 2025.
Export revenue from digital segment forms about 20 per cent of the industry’s total
export revenue.

India’s IT industry contributed around 7.7 per cent to the country’s GDP and is
expected to contribute 10 per cent of India’s GDP by 2025.

India’s IT-BPM sector is expected to expand to US$ 350 billion by 2025 and BPM
is expected to account for Rs 3,49,450-3,84,395 crore (US$ 50-55 billion) out of
the total revenue. IT BPM industry revenues was estimated at around Rs 12,37,053
crore (US$ 177 billion) in FY2018-19 with a growth rate of 6.1 per cent.

Moreover, revenue from the digital segment is expected to form 38 per cent of the
total industry revenue by 2025 whereas, digital economy is estimated to reach Rs
69,89,000 crore (US$ 1 trillion) by 2025.

IT industry employs nearly 3.97 million people in India of which 105,000 were
added in FY18. The industry added around 105,000 jobs in FY18 and is expected
to add over 250,000 new jobs in 2019. Hardware exports from India are expected
to grow at 7-8 per cent in FY19^. The export sector crossed Rs 9,57,493 crore
(US$ 137 billion) of revenues and marginally grew at the rate of 7-9 per cent in
FY19.

The computer software and hardware sector in India attracted cumulative Foreign
Direct Investment (FDI) inflows worth Rs 2,60,200 crore (US$ 37.23 billion)
between April 2000 and March 2019 and ranks second in inflow of FDI, as per
data released by the Department for Promotion of Industry and Internal Trade
(DPIIT).

PE investments in the sector stood at Rs 11,881 crore (US$ 1.7 billion) in Q1 2019
and venture capital (VC) investments in the IT & ITeS sector stood at Rs. 461
crore (US$ 66.0 million) during Q1 2019.

The Government of India has extended tax holidays to the IT sector for software
technology parks of India (STPI) and Special Economic Zones (SEZs). As of May
2019, there were 273 approved SEZs across the country where 136 are exporting
SEZs.

Further, the country is providing procedural ease and single window clearance for
setting up facilities. On May 2019, the Ministry of Electronics and Information
Technology (MeitY) launched the MeitY Startup Hub (MSH) portal.
Also, the government has identified information technology as one of the 12
champion service sectors for which an action plan is being developed. It is setting
up a Rs 5,000 crore (US$ 745.82 million) fund for realising the potential of these
champion service sectors.

Recent Merger & Acquisition

 Larsen and Toubro Ltd (L&T) gained a controlling interest in Mindtree Ltd,
raising its stake to 60% in the Bengaluru-based company on Wednesday and
successfully concluding India’s first hostile takeover of a software
developer. L&T completed buying the 31% additional stake it targeted to
acquire in Mindtree for ₹4,988.82 crore through an open offer as large
investors rushed to sell their holdings. The 60% stake in Mindtree gives L&T
complete control over the software company’s board and management
Infosys
Established in 1981, Infosys Ltd is today one of the largest IT companies in India and
the world. The company provides business information technology (IT) services
comprising application development and maintenance, independent validation,
infrastructure management, engineering services comprising product engineering and
life cycle solutions and business process management.

Infosys – Building Tomorrow's Enterprise

2019 Infosys completes the formation of strategic partnership with ABN AMRO in Netherlands

2018 Completed 25 years as a listed Indian company

Planning to open a new technology and innovation hub in Hartford, US

2016 Revenues reach US$ 10 billion

2007 Quarterly revenues surpass US$ 1 billion

2004 Revenues reach US$ 1 billion

1999 Surpasses revenues of US$ 100 million and gets listed on NASDAQ

1998 Start of Enterprise Solution Practice

1995 First European office and Toronto, Mangalore global development centres started

1993 Becomes a listed company

1987 First international office is opened in Boston, US

1981 Set up in Pune, Maharashtra with an initial capital of US$ 250

Wipro
Wipro Limited is a global leader in information technology, consulting and business
process services. It harnesses the power of cognitive computing, hyper-automation,
robotics, cloud, analytics and emerging technologies to help its clients adapt to the
digital world and make them successful. A company recognized globally for its
comprehensive portfolio of services, strong commitment to sustainability and good
corporate citizenship, it has over 160,000 dedicated employees serving clients across
six continents.

Wipro – Be Transformed

2019 Wipro partners with Moogsoft to deliver next-gen AIOps solutions

2018 Recorded total income of Rs 471,896 million (US$ 7.32 billion) in FY18

2017 Launched new brand identity

2015 Launched 'Wipro Digital'. Key capabilities acquired through DesignIt & Appirio

2000 Listed on NYSE and enters the BPO business

1990 Entered into third party R&D service and IT services

1982 Entry into IT Products business

1945 Incorporation of WIPRO

 Comparing accounting method of two IT company –
Infosys & Wipro

 Method of depreciation followed :

Infosys - Property, plant and equipment are stated at cost, less accumulated
depreciation and impairment, if any. Costs directly attributable to acquisition are
capitalized until the property, plant and equipment are ready for use, as intended by
the Management. The Company depreciates property, plant and equipment over their
estimated useful lives using the straight-line method. The estimated useful lives of
assets are as follows:

Depreciation methods, useful lives and residual values are reviewed periodically,
including at each financial year end.Advances paid towards the acquisition of
property, plant and equipment outstanding at each Balance Sheet date is classified as
capital advances under other non-current assets and the cost of assets not ready to use
before such date are disclosed under ‘Capital work-in-progress’. Subsequent
expenditures relating to property, plant and equipment are capitalized only when it is
probable that future economic benefits associated with these will flow to the
Company and the cost of the item can be measured reliably. Repairs and maintenance
costs are recognized in the Statement of Profit and Loss when incurred. The cost and
related accumulated depreciation are eliminated from the financial statements upon
sale or retirement of the asset and the resultant gains or losses are recognized in the
Statement of Profit and Loss.

Wipro- The Company depreciates property, plant and equipment over the estimated
useful life on a straight-line basis from the date the assets are available for use.
Assets acquired under finance lease and leasehold improvements are amortized over
the shorter of estimated useful life of the asset or the related lease term. Term licenses
are amortized over their respective contract term. Freehold land is not depreciated.
The estimated useful life of assets is reviewed and where appropriate are adjusted,
annually.
When parts of an item of property, plant and equipment have different useful lives,
they are accounted for as separate items (major components) of property, plant and
equipment. Subsequent expenditure relating to property, plant and equipment is
capitalized only when it is probable that future economic benefits associated with
these will flow to the Company and the cost of the item can be measured reliably.
Deposits and advances paid towards the acquisition of property, plant and equipment
outstanding as at each reporting date and the cost of property, plant and equipment
not available for use before such date are disclosed under capital work- in-progress.

 Does company use IFRS (International Financial Reporting

Standards)?

Yes, both company Infosys & Wipro use IFRS (International Financial
Reporting Standards)
Balance sheet of Infosys:
Balance Sheet of Wipro
Ratios Analysis:
Ratios calculated from the information in financial statements help investors
in three ways:
 They simplify financial statements: Ratio analysis simply information
given in companies’ financial statements. Investors can easily obtain data
from a few ratios instead of trying to understand entire statements.
 They help detect a problematic trend: Each type of ratio analysed over a
long period can point to a defect in the functioning of a business. The
analysis can also predict the future performance of a company in a
particular aspect of business.
 They facilitate comparisons: Ratios not only help analyse the performance
of one company but also facilitate a comparison of the performances of
two or more companies within an industry or a sector.

Profitability Ratios
A profitability ratio is a measure of profitability, which is a way to measure a
company's performance. Profitability is simply the capacity to make a profit,
and a profit is what is left over from income earned after you have deducted all
costs and expenses related to earning the income. The formulas you are about
to learn can be used to judge a company's performance and to compare its
performance against other similarly-situated companies.

1. Gross Profit Margin: Gross margin tells you about the profitability of
your goods and services. It tells you how much it costs you to produce
the product. It is calculated by dividing your gross profit (GP) by your
net sales (NS) and multiplying the quotient by 100:

Gross Margin = Gross Profit/Net Sales * 100

GM = GP / NS * 100
 Mar Mar Mar Mar Mar
’19 ’18 ’17 ’16 ’15 Average

25.23
INFOSYS 23.35 25.65 26.77 27.03 23.35
18.356
WIPRO 16.26 17.75 18.47 18.87 20.43

INDUSTRY AVERAGE = 24.526

Infosys has shown higher growth in Gross profit margin (%) in the last five year.
Although this year its GPR drop compare to last year but it is still performing
better. Infosys on average has 14.29% more gross profit ratio than Wipro and just
2.8% more than industry average. Hence, Infosys can make more profit than
Wipro.
 2. Operating Profit Margin: Operating margin takes into account the costs of
producing the product or services that are unrelated to the direct production
of the product or services, such as overhead and administrative expenses. It
is calculated by dividing your operating profit (OP) by your net sales (NS)
and multiplying the quotient by 100:

Operating Margin = Operating Profit / Net Sales * 100

OM = OP / NS * 100

Industry Average = 27.01

Mar Mar Mar Mar Mar

’19 ’18 ’17 ’16 ’15

INFOSYS 25.54 27.92 29.02 29.09 29.9

WIPRO 18.2 20.02 20.75 20.83 22.32

Infosys has shown higher growth in Operating profit margin (%) in the last five
year as compare to Wipro and industry average. Infosys on average has 38.53%
more gross profit ratio than Wipro and just 4.7% more than industry average.
Hence, in longer run Infosys can make more profit than Wipro.
 3. Net Profit Margin: is a financial ratio used to calculate the percentage of
profit a company produces from its total revenue. It measures the amount of
net profit a company obtains per dollar of revenue gained. The net profit
margin is equal to net profit (also known as net income) divided by
total revenue, expressed as a percentage

Industry Average = 23.29

Mar Mar Mar Mar Mar
’19 ’18 ’17 ’16 ’15

INFOSYS 20.11 26.08 23.3 23.51 25.71

WIPRO 15.82 17.27 17.72 18.35 19.88

Infosys has shown higher growth in Net profit margin (%) in the last five year as
compare to Wipro and industry average. Infosys on average has 29.32% more
gross profit ratio than Wipro and just 10.3% more than industry average. Hence, in
longer run Infosys can make more profit than Wipro.
 4. Return on net worth: Return on Networth is a ratio developed from the
perspective of the investor and not the company. By looking at this, the
investor sees if entire net profit was passed on to him, how much return
would he be getting. It explains the efficiency of the shareholders’ capital to
generate profit.

RONW = Net Income / Shareholders’ Equity

Industry Average = 24.89

Mar Mar Mar Mar Mar
Average
’19 ’18 ’17 ’16 ’15

INFOSYS 23.44 25.44 20.31 20.78 20 21.994

WIPRO 15.41 18.27 17.47 19.89 23.66 18.94

Infosys has shown higher growth in Net profit margin (%) in the last five year as
compare to Wipro but both the company has less Net profit percentage than
industry average. While comparing both the company Infosys is slightly better than
Wipro.
Liquidity Ratio:
In accounting, the term liquidity is defined as the ability of a company to meet its
financial obligations as they come due. The liquidity ratio, then, is a computation
that is used to measure a company's ability to pay its short-term debts. There are
three common calculations that fall under the category of liquidity ratios.

1. Current Ratio: The current ratio indicates a company's ability to pay its
current liabilities from its current assets. This ratio is one used to quickly measure
the liquidity of a company. The formula for the current ratio is:

Current Ratio = Current Assets ÷ Current Liabilities

Industry Average = 2.73
Mar Mar Mar Mar Mar
Average
’19 ’18 ’17 ’16 ’15

INFOSYS 3.03 3.83 3.8 4.5 3.41 3.714

WIPRO 1.34 1.37 1.5 1.71 2.16 1.616

The Ideal Current Ratio is 2:1 which even though on an average more than that of
Industry is. Infosys is more stable in longer run as it has higher Current Ratio than
Wipro and value more than 2:1. Wipro on the other hand has low Current Ratio as
compared to the industry average and also less than the standard 2:1. So it might
face difficulty in paying off its debts
 2. Quick Ratio

Industry Average = 2.8

Mar Mar Mar Mar Mar
Average
’19 ’18 ’17 ’16 ’15

INFOSYS 2.96 3.74 3.77 4.47 3.38 3.664

WIPRO 2.35 1.85 2.17 2.49 2.95 2.362

Infosys is more stable in longer run as it has higher Quick Ratio than Wipro by
55.12%. Infosys quick ratio is quite higher than industry average hence it will not
have difficulty paying debts while Wipro will face little difficulty in paying its debt
since it has less quick ration than industry average.
INVESTMENT VALUATION RATIO
Investment Valuation Ratio are used by investors to estimate the attractiveness of a
potential or existing investment and get an idea of its valuation.

EPS

Investment
Valuation
Ratio

Book
Value /
Share
DPS

1. Earning Per Share (EPS):

Earnings per share (EPS), is the most commonly expressed, and most important,
measure of company valuation. EPS is generally regarded as the single most
significant factor for influencing a company’s stock price, either upward or
downward. A higher ratio result is always better. From an investment perspective,
this ratio is highly significant and less important from a lender perspective.
 Mar Mar Mar Mar Mar
Average
’19 ’18 ’17 ’16 ’15

INFOSYS 33.66 71.28 60.16 55.26 105.91 65.254

WIPRO 12.67 16.26 33.61 33.38 33.38 25.86

Industry Average = 56.57

Infosys has very high EPS ratio as compared to Wipro 152.33% and Industry
average. This means Infosys is more profitable and has more profits to distribute to
its shareholders. While Wipro is performing very less compare to the industry
average. However this ratio is affected by various other factors.
 2. Dividend Per share (DPS):

Dividend Per Share (DPS) is the total amount of dividend attributed to each
individual share outstanding of a company. Calculating the dividend per share
allows an investor to determine how much income from the company he or she
will receive on a per share basis. Dividends are usually a cash payment paid to the
investors in a company, although there are other types of payment that can be
received.

Dividend Per Share = Total Dividends Paid / Shares Outstanding or

Dividend Per Share = Earnings Per Share x Dividend Payout Ratio
Mar Mar Mar Mar Mar
Average
’19 ’18 ’17 ’16 ’15

INFOSYS 21.5 43.5 25.75 24.25 59.5 34.9

WIPRO 1 1 2 6 12 4.4

Industry Average = 23.64

Infosys has higher and sustained dividend per share when compare with industry
average and much more than Wipro. Hence it is more profitable for investor.
 3. Book Value per share
Book value of equity per share (BVPS) is the equity available to common shareholders divided
by the number of outstanding shares. This represents the minimum value of a company's equity.
Since preferred stockholders have a higher claim on assets and earnings than common
shareholders, preferred stock is subtracted from shareholders' equity to derive the equity
available to common shareholders. Shareholders’ equity is the owners’ residual claim in the
company after debts have been paid. It is equal to a firm's total assets minus its total liabilities,
which is the net asset value or book value of the company as a whole.

Mar Mar Mar Mar Mar

Average
’19 ’18 ’17 ’16 ’15

INFOSYS 143.96 290.76 296.24 266.04 418.71 283.142

WIPRO 81.86 93.42 192.16 166.87 140.25 134.912

Industry Average = 215.66

Infosys book value is higher than Wipro and industry average. Hence, Infosys is
doing better in terms of book value per share.
 MANAGEMENT EFFICIENCY RATIO
Efficiency Ratios are a measure of how well a company is managing its routine
affairs. Conceptually, these ratios analyze how well a company utilizes its assets &
how well it manages its liabilities.

1. Fixed Assets Turnover: The fixed assets turnover ratio measures the
efficiency of a company’s long-term capital investments. It reflects the level
of sales generated by investments in productive capacity. The formula of
fixed assets turnover is:

Fixed Asset Turnover = Sales/Average Fixed Assets

Mar Mar Mar Mar Mar

Average
’19 ’18 ’17 ’16 ’15

INFOSYS 3.57 3.45 3.66 3.67 3.5 3.57

WIPRO 4.3 4.19 4.44 4.6 4.59 4.424

Industry Average = 4.28

Like fixed asset turnover ratio, total asset turnover ratio is also affected by similar
factors. All else equal, a higher asset turnover is better as it indicates how effectively
entire funds (Assets=Capital + Liabilities) of a company is used. Here, Wipro has
upper hand over wipro.