1. Equity Evaluation of Top 3 IT companiesPreface The securities market in India has undergone a metamorphosis in the past decade.The advents of new technologies and widespread awareness among the masses about theactivities of the securities have given new blood to the market, which underwent some badphases in the early nineties. The new reforms introduced aftermath of stock scam of 1992,have brought about a significant transformation in the activities of that securities markets inIndia. Economic growth of any country lies on the basic infrastructure facilities available inthat country but how and by whom is this basic infrastructure provided to the people of thecountry? The government of the country, which needs huge funds for it, meets theseinfrastructure needs of the people. The government raises funds from the public and otherinstitutional investors by issuing securities in the form of T-bills, Government securities, etc.but when the government invites private parties to participate in the infrastructure projects,these companies too raise funds from the market which comprises individuals, corporates,institutions etc.in the form of debt or equity. Further, the individuals will also be in need oflong term funds to meet their basic needs of owning an asset. Thus we find that the need forthe long term funds is all pervasive and the parties to the demand and supply of funds aresame. Funds are normally raised in the IPO market through the issue of shares, debenturesand bonds.In India, though the capital market is denominated by the debt market, equity markets aremore attractive with a lot many participants. The government owned securities marketconstitutes the majority of the total capital market of India. The securities market is beingclassified in to primary or new issue market, and secondary market. The new issues of boththe government and private corporate sectors are floated in the primary market. Thesecondary market provides liquidity to the outstanding securities or existing securities.Babasabpatilfreepptmba.com Page 1

2. Equity Evaluation of Top 3 IT companiesThe securities market no doubt plays a vital role in the distribution of economic prosperity ina country over the masses when a large number of people invest their surpluses in securities.The stock market is an integral part of organized capital market.It facilitates the sale of initial and further issues, and subsequently provides liquidity to thesecurities subscribed by the individual and institutional participants. The stock marketprovides a place where ownership or creditorship securities are traded. The stock exchangeis a place where industrial securities like shares, debentures and bonds are traded.In the early eighties, the public awareness of the stock market in India was at a very lowlevel, and the activities in the stock market confined only to the institutional investors butthe situation changed in the late eighties and the market activity reached its zenith in theearly nineties but the stock market scam of 1992 came as a major blow to the developmentof market, and it called for a mammoth effort on the part of the regulatory authorities toresurrect the lost confidence of the investors. The role of leading regulator of the securitiesmarket in India namely SEBI, is remarkable for a span of few years it has brought aboutorganized structure of operations. It clearly defines the roles of various participants,introduced innovative changes to meet their demands and to ensure transparency in thefunctioning of the securities market and safety of investors money.For investment purposes it is very important to know about security marketsespecially equity market. Thus the present work involves the study of equity market, aboutits evolution and its structure the way the trading takes place and its settlement process andalso evaluating the probable equity prices of top IT Companies namely Wipro, TataConsultancy Services, Infosys Technologies, Satyam Computers, and Patni Computers forthe future period. The equity prices will be determined after careful analysis of the Balancesheets of last five years of all the companies and also by adopting various models.Babasabpatilfreepptmba.com Page 2 3. Equity Evaluation of Top 3 IT companiesCONTENTS1. Executive Summary7-132. Introduction143. Organization Profile 15-164.Stock Market17-215.Global Economy22-236.Indian Economy24-327.IT Industry 33-368.Data Analysis 37-69 a) Wipro 37-47 b) Infosys 48-59 c) TCS 60-698.Equity Valuation Models 70-819. Findings 82-8310. Recommendations8411.Bibilography85AnnexureBabasabpatilfreepptmba.comPage 3 4. Equity Evaluation of Top 3 IT companies 1) Ratio formulas 85 2) Beta valuation 86-107Executive Summary Equity markets, the world over, grew at a great speed in the decadeof nineties. After bear markets of the late eighties, the world markets saw one of the largestever bull markets of more than ten years. The market capitalization of all the listedcompanies in the world market increased from US $9,399,659 million in1990 to US$32,222,750 million in 2000; the market capitalization thus increased to more than 3.4 timesin 10 years. The increase of the market capitalization in the developing countries was evenmore marked, with an increase to 4.3 times the market capitalization in 1990. the worldmarket capitalization as a percentage of the world GDP also increased from 48% in 90 to105.% in 2000. Thus, the growth of equity market has outpaced the GDP growth of theworld. However due to recession in the world economy, the world market capitalizationdecreased to US $27,818,618 million during 2001. The spectacular growth was partly due toincrease in the number of listed companies, which grew from 25,424 in 90 to 45,645 in2001. Indian stock markets have turned extremely buoyant with the Sensex, thebellwether index of the Indian stock markets zooming sky high to a peak of 20000- a featwhich could not have even been imagined by anyone just one year ago. Surprisingly, whileengineering, steel, cement, oil and gas, construction and power among others have shot upinto prominence, the information technology sector the proud mascot of modern resurgentIndia have started loosing their shine. If we take the present fiscal year, Sensex has givenreturn of about 45% since April 2007 till now; IT index has shown a loss of around 6%. Sothe present study would be to know the reason for the same and also to know the futureprices of these stocks. Hence Equity Valuation of these companies have been undertaken bytaking in to consideration five years data pertaining to these companies so as to find out theBabasabpatilfreepptmba.com Page 4 5. Equity Evaluation of Top 3 IT companiesreasons and to frame proper strategies for the investors as to what sort of steps should betaken by them in future.Design of the studyTitle of the study Equity Valuation of Top Three IT CompaniesObjectives of the studya) To study the performance of three IT Companies namely Wipro, Infosys, TCS.b) To evaluate the financial performance of these companies through fundamentalanalysis by taking in to consideration data of last five yearsc). To determine the Equity prices through Equity Valuation Models.d) To evaluate the prices of these companies.e) To design strategy for profitable investment in equities which yields maximumreturns.Scope of the studya) The study is conducted only on the Equity shares of the companyb) The study covers only top three companies in IT sectorBabasabpatilfreepptmba.comPage 5 6. Equity Evaluation of Top 3 IT companiesc) Five years (2003-07) data has been taken into consideration for the studyNeed for the study The knowledge of securities markets, particularly of the equity markets, is essential tocome to grips with the fundamental analysis of a company and the environment surroundingit- the economy in general and the industry in particular. The global market scenario alsoaffects the pricing of a companys share or any issue, in todays boundary less world. So,equity valuation of a company is the need of the hour so as to know the competitiveness ofthe company when compared with industry benchmark and with its competitors and also topredict the future price of the company to know where the company stands which wouldhelp the investor whether or not to hold the scrip for a longer period.Need for Equity valuation of IT Companies.Indias information technology services companies, the proud mascot of amodern, resurgent India, and darling of investing public, have started loosing their appeal.Their shares have lost their shine and have grossly underperformed inn a buoyant market,which is scaling newer peaks almost every month. Is it the time to write them off? Or dothey have the talent, resources and infrastructure to overcome the daunting problems thatafflict them now and hit the high-growth path once again. So it is very necessary to knowwhat the investors should do at this time.Babasabpatilfreepptmba.comPage 6 7. Equity Evaluation of Top 3 IT companiesMETHODOLOGY OF DATA COLLECTIONSOURCES OF DATA PRIMARY DATA Discussion with the company official Discussion regarding the IT sector and IT Companies performance and how equity shares of these companies are performing presently.SECONDARY DATA Internet sources Annual Reports of the companies Business magazinesCONCEPTUAL DESIGNSample unit: Equity shares of the selected companiesSample size: 5 years financial data of these companiesBabasabpatilfreepptmba.com Page 7 8. Equity Evaluation of Top 3 IT companies Sample method: direct.FINDINGS 1) The Indian economy is growing very fast. Its contribution to the worlds GDP isaround 7.7%. Next only to China and U.S. This revels the fact that it will have positiveimpact on all the industries of the country. 2) The growth of IT Industry has been commendable in the recent past. It has been thefastest growing industry but the stocks performance revels a different story. The last 16months performance has been very disappointing. The main reasons being stockmarkets high volatility, Rupee appreciation and U.S. slowdown. In such case it canadopt the following remedies. 3) The fundamental analysis of the companies revels the following a) The companies are fundamentally very strong. There has been full utilization of the resources, except for TCS very there was a lack of liquidity in the year 2004 b) The earnings of the companies have been very good. c) When a comparison is made between the three companies, Infosys stands fundamentally very strong. it has outperformed in all the aspects be it, the ROE, EPS, book value and even in terms of liquidity. The company having no Debt in its capital structure has been earning revenues higher than the revenues earned by Wipro and TCS. d) The next company better in terms of fundamentals is TCS. It has performed better than Wipro in all the aspects of fundamentals. 4) The stock market performance also depicts the same picture. It is Infosys, which is inthe lead followed by TCS and Wipro. 5) The most risky stocks among the three has been TCS share prices having a Beta valueof . 0.91 followed by Wipro which has got beta of 0.79 and Infosys is less riskier as ithas got beta of 0.68Babasabpatilfreepptmba.comPage 8 9. Equity Evaluation of Top 3 IT companiesThe findings from the Equity has reveled the following ModelWipro TCSInfosys Discount Model Rs.605Rs.1508Rs.2385 Multi Period Rs.731Rs.1859Rs.2843 Two StageRs.1325 Rs.1745Rs.1453 ModelThe above table shows the expected future equity price of respective shares. It can beobserved from the above table that1) The Dividend Discount Model, which speaks about the future, expected price is Rs.572 incase of Wipro. It means that stock will perform better in future compared to its presentvalue.2) The generalized Model, which speaks about future, expected price in forthcoming years isvalued at Rs.694. Which is again higher than its previous value of Rs.572.3) The Multi period model, which indicates the intrinsic value of share in future, is aboutRs.1085 in next 8 years, which will be lower than its share price. It shows a good sign as alesser intrinsic value compared to market price indicates that the stock has got greatpotential to perform in future and investment in such stock would be profitable.4) The same can be noticed in case of TCS and Infosys. There market prices going toRs.1508 in case of TCS and Rs.2385 in case of Infosys. The intrinsic value of these stocks isalso lesser compared to their market price, indicating better performance in future.5) A comparison between these stocks reveals that, Infosys shares will perform bettercompared to TCS and Infosys. The reason is that the company is fundamentally very strong.Babasabpatilfreepptmba.comPage 9 10. Equity Evaluation of Top 3 IT companiesRECOMMENDATION1) In spite of fall in the value of share prices in the recent past, I would definitelyrecommend the investors to invest in these companies. Reasons being the companiesare financially very strong.2) The current volatility in the market is due to Rupee appreciation, andU.S.slowdown but the companies have taken several measures to see that these twoproblems are resolved. They have diversified their business and also they havehedged against the rupee appreciation. So investment in these stocks would not leadto loss.3) The recommendation would be to invest for a longer period of time. At least for 5years as they would yield better returns.4) As the intrinsic value of all the three stocks are lesser compared to their marketprice so the suggestion would be hold the stocks if they have bought or buy theshares as they will definitely give good returns in the future.5) If a choice has to be made among the three then it would be better to chooseInfosys as the option, as it is fundamentally very strong company and it has gothigher value in market currently and it will also give better returns in the futurecompared to other two stocks.6) It is advisable for the investor to go through the fundamental of the companiesbefore investing and avoid investing based on the market sentiments, as they wouldBabasabpatilfreepptmba.com Page 10 11. Equity Evaluation of Top 3 IT companiesbe misleading. Investing in a fundamentally strong company for longer period oftime would be a worthy decision.7) A better Strategy for any investor would be to invest in these companies and not totrade or speculate because share market is not a casino. And dont panic if the valuesof shares are coming down, as it is only temporary.Equity Valuation Equity valuation in recent years has become one of the important aspects infinance field. Today Equity Valuation has received much attention and it is the need of thehour. Equity Valuation is a way of determining the value of equity share of the company. Toevaluate the equity price of any company the most important steps to be taken are To study the Global Economy: To know the growth of the world economy and Indias contribution in the worlds GDP. To study the Indian Economy: To assess the track record of Indian Economy so as to know at what rate the economy is growing and to see impact of economy on the industries and particularly to IT sector. To Study about IT sector: To know how the industry as a whole is performing so as to assess its impact on the companies. To know where does the industry stands in its life cycle to know whether the industry is growing or matured, which will tell us whether the company is performing poorly or the industry itself is stagnated. To fundamentally assess the companies: to study the performance of the companies for five years so as to evaluate the performance critically. The fundamental analysis includes analysis of Balance sheet and Profit and Loss account of these companies and to calculate the key ratios, which will help in assessing the value anchor, which gives the expected market price for the next year. Lastly assessing the equity price of company through Equity Models. The models used in the study are Dividend Discount Model, Multi period Model, Two stage Model. Dividend Discount Model, which is used to assess the market, price of share for the next year. Multi Period Model is used to assess the expected market price of share for N number of years. Two Stage Model is used to evaluate the intrinsic value of share in future.Babasabpatilfreepptmba.com Page 11 12. Equity Evaluation of Top 3 IT companies This is how the equity is valued. Equity Valuation is becoming increasingly important asIndia is operating in global scenario where it becomes important to know what exactly is thevalue of company and it is also becoming very important for analysts and also for investorwho would like to know the value of the equity before investing. Equity valuationMotilal Oswal Securities LtdMotilal Oswal Financial Services is a well-diversified financial services group havingbusinesses in securities, commodities, investment banking and venture capital.With 1300 business locations and more than 3,85,000 customers in over 425 cities, MotilalOswal is well suited to handle all your wealth creation and wealth management needs. Thecompany has in the last year placed 9.48% with two leading private equity investors - NewVernon PrivateEquityLimited andBessemerVenture Partners.Motilal Oswal FinancialServicesLtd., consists of fourcompanies.Motilal Oswal Investment Advisors Pvt. Ltd. is our Investment Banking arm withcollective experience of over 100 years in investment banking/corporate banking andadvisoryservicesMotilal Oswal Commodities Broker (P) Ltd. has been providing commodity tradingfacilities and facilities and related products and services since 2004.Motilal Oswal Venture Capital Advisors Private Limited has launched the IndiaBusiness Excellence Fund (IBEF), a US$100 mn India focused Private Equity Fund.Motilal Oswal Securities Ltd. (MOSt) is a leading research and advisory based stockbroking house of India, with a dominant position in both institutional equities and wealthmanagement. Our services include equities, derivatives, e-broking, portfolio management,mutualfunds, commodities, IPOs and Depository Services.In March 2006, AQ Research, a firm that analyses the accuracy of a brokers research call,declaredMotilal Oswal Securitiesthe bestresearchteamBabasabpatilfreepptmba.comPage 12 13. Equity Evaluation of Top 3 IT companiesResearch is the solid foundation on which Motilal Oswal Securities advice is based. Almost10% of revenue is invested on equity research and we hire and train the best resources tobecome advisors. At present we have 24 equity analysts researching over 26 sectors. From afundamental, technical and derivatives research perspective; Motilal Oswals researchreports have received wide coverage in the media.Motilal Oswal Securities has witnessed rapid organic growth due to favorable marketconditions as well as efforts put in by the company itself. FY05 and FY06 saw the companygrow inorganically through acquisition of three significant regional broking firms fromKarnataka, Kerala and UP. Over a period of time many more regional broking firms may beacquired togain solid footing invariousregions ofIndia.The company has also established a base in the UAE to address the needs of the overseasaudience.Motilal Oswal Securities Ltd. was founded in 1987 as a small sub-broking unit, with justtwo people running the show. Focus on customer-first-attitude, ethical and transparentbusiness practices, respect for professionalism, research-based value investing andimplementation of cutting-edge technology have enabled us to blossom into an almostOur institutional business unit has relationships with almost all leading foreign institutionalinvestors (FIIs) intheUS, UK, Hong Kong andSingapore.The retail business unit provides equity investment solutions to more than 3,85,000 investorsthrough 1300 Business locations spanning over 425 cities. A force of over 2000 employeesand over 808 Business Associates provides these solutions. We provide advice-basedbroking (equities and derivatives), portfolio management services (PMS), e-Broking,depository services, commodities trading, IPO and mutual fund investment. Companys unique Wealth Creation Study, authored by Mr. Raamdeo Agrawal, ManagingDirector, is now in its eleventh year. Investors keenly await this annual study for the wealthof information it has on how companies created wealth during the preceding five years.The organization finds its strength in its team of young, talented and confident individuals.Qualified professionals carry out different functions under the able leadership of itspromoters, Mr. Motilal Oswal and Mr. Raamdeo Agrawal. Stringent employee selectionprocess, focus on continuous training and adoption of best management practices drive thequest to achieving our Core Purpose and ValuesBabasabpatilfreepptmba.comPage 13 14. Equity Evaluation of Top 3 IT companiesStock MarketCapital occupies a position so dominant to the economic theory of production anddistribution that it is natural to assume that it should occupy at least an equally importantplace in the theory and practice of economic growth. The subject whether approachedhistorically or analytically or from the standpoint of policy, it is the process of capitalaccumulation that occupies the front of the stage. It is usually implied that economic growthand capital accumulation with a high positive and significant correlation and additions to thestock of capital can provoke and facilitate faster rate of growth even under the circumstanceswhich can be described as shortage of capital.Capital market means the market for all the financial instruments, short term and long termas also commercial, industrial and government paper. The capital market deals with capital.The capital market is a market where borrowing and lending of long term funds takes place.Capital markets deal in both debt and equity. The governments both central and state raisemoney in the capital market, through the issue of government securities. Capital marketsrefer to all the institutes and mechanisms of raising medium and long-term funds, throughvarious instruments available like shares, debentures, bonds etc.Corporate both in the private sector as well as in the public sector raise thousands of croresof rupees in these markets. The government, through Reserve Bank of India, as well asfinancial institutions also raises a lot of money from these markets. Example of well-developed markets is The Global depository and American depository.The two important operations carried out are 1) Raising of the new capitalBabasabpatilfreepptmba.com Page 14 15. Equity Evaluation of Top 3 IT companies2) Trading in securities issued by the company.:The important constituents of capital market are:1. The stock exchanges2. Banks3. The investment trusts and companies4. Specialized financial institutions or development banks.5. Mutual funds6. Post office saving banks7. Non banking financial institutions8. International financial investors and institutions.The supply in this market comes from saving from different sectors of the economy. Thesecome from the following sources:1. Individuals2. Corporate3. Governments4. Foreign countries5. Banks6. Provident funds7. Financial institutions.Moreover the establishment of National Stock Exchange and Bombay Stock Exchange hasbeen turning point in the working of capital markets. Even tough BSE is the oldestexchange in the country the performance of NSE has been commendable. NSE started in theyear 1994 and BSE in 1857.BSE trade for the top thirty companies in India where as NSEtrades for top fifty companies. The establishment time, and number of companies tradeddiffers so as their indices points and turn over. There has been considerable change in thepercentage change that takes place in these exchanges. They never go parallel. Recently theRBI has allowed participation of individuals in the government securities markets. Thismove is likely to open new avenues for investment to individuals. Moreover the FinanceMinistry has announced the removal of income tax on dividend in the hands of the receiverand no capital gains tax on investments made in equity after 1.3.03 and held for one year..Babasabpatilfreepptmba.com Page 15 16. Equity Evaluation of Top 3 IT companiesEvolution of Indian Capital MarketThe history of the capital market in India dates back to the eighteenth century whenEast India Company securities were traded in the country. Until the end of the nineteenthcentury, securities trading were unorganized and the main trading centers were Bombay(now Mumbai) and Calcutta (now Kolkata). Of the two, Bombay was the chief tradingcentre wherein bank shares were the major trading stock. During the American Civil War(1860-61), Bombay was an important source of supply for cotton. Hence, trading activitiesflourished during the period, resulting in a boom in share prices. This boom, the first in thehistory of the Indian capital market, lasted for a half a decade. The bubble burst on July 1,1865, when there was tremendous slump in share prices.Trading was at that time limited to a dozen brokers: their trading place was under a banyantree in front of the Town Hall in Bombay. These stockbrokers organized an informalassociation in 1875-Native Shares and Stock Brokers Association, Bombay. The stockexchanges in Calcutta and Ahmadabad, also industrial and trading centers, came up later.The Bombay Stock Exchange was recognized in May 1927 under the Bombay SecuritiesContracts Control Act, 1925.The capital market was not well organized and developed during the British rule because theBritish government was not interested in the economic growth of the country. As a result,many foreign companies depended on the London capital market for funds rather than on theIndian capital market.In the post-independence period also, the size of the capital market remained small. Duringthe first and second five-year plans, the governments emphasis was on the development ofthe agricultural sector and public sector undertakings. The public sector undertakings werehealthier than the private undertakings in terms of paid-up capital but their shares were notBabasabpatilfreepptmba.com Page 16 17. Equity Evaluation of Top 3 IT companieslisted on the stock exchanges. Moreover, the Controller of Capital Issues (CCI) closelysupervised and controlled the timing, composition, interest rates, pricing, allotment, andfloatation costs of new issues. These strict regulations demotivated many companies fromgoing public for almost four and a half decades.In the 1950s, Century Textiles, Tata Steel, Bombay Dyeing, National Rayon, and KohinoorMills were the favorite scrips of speculators. As speculation became rempant, the stockmarket came to be known as Satta Bazaar. Despite speculation, non-payment or defaultswere not very frequent. The government enacted the Securities Contracts (Regulation) Actin 1956s was also characterized by the establishment of a network for the development offinancial institutions and state financial corporations. The 1960s was characterized by wars and droughts in the country, which led tobearish trends. These trends were aggravated by the ban in 1969 on forward trading andbadla, technically called contracts for clearing. Badla provided a mechanism for carryingforward positions as well as borrowing funds. Financial institutions such as LIC and GIChelped to revive the sentiment by emerging as the most important group of investors. Thefirst mutual fund of India, the Unit Trust of India (UTI) came into existence in 1964.In the 1970s, badla trading was resumed under the disguised form of hand-deliverycontracts-A group. This revived the market. However, the capital market received anothersevere setback on July 6, 1974, when the government promulgated the Dividend RestrictionOrdinance, restricting the payment of dividend by companies to 12 per cent of the face valueor one-third of the profits of the companies that can be distributed as computed undersection 369 of the Companies Act, whichever was lower. This led to a slump in marketcapitalization at the BSE by about 20 per cent overnight and the stock market did not openfor nearly a fortnight. Later came buoyancy in the stock markets when the multinationalcompanies (MNCs) were forced to dilute their majority stocks in their Indian ventures infavour of the Indian public under FERA, 1973. Several MNCs opted out of India.The 1980s witnessed an explosive growth of the securities market in India, with millions ofinvestors suddenly discovering lucrative opportunities. Many investors jumped into thestock markets for the first time. The governments liberalization process initiated during themid-1980s, spurred this growth. Participation by small investors, speculation, defaults, banon badla, and resumption of badla continued. Convertible debentures emerged as a popularinstrument of resource mobilization in the primary market. The introduction of public sectorbonds and the successful mega issues of Reliance Petrochemicals and Larsen and Toubrogave a new lease of life to the primary market..Babasabpatilfreepptmba.comPage 17 18. Equity Evaluation of Top 3 IT companiesThe 1990s will go down as the most important decade in the history of the capital market ofIndia. Liberalizations and globalization were the new terms coined and marketed during thisdecade. The Capital Issues (Control) Act, 1947 was repealed in May 1992. The decade wascharacterized by a new industrial policy, emergence of SEBI as a regulator of capitalmarket, advent of foreign institutional investors, Euro-issues, free pricing, new tradingpractices, new stock exchanges, entry of new players such as private sector mutual fundsand private sector banks, and primary market boom and bust.Major capital market scams took place in the 1990s. These shook the capital market anddrove away small investors from the market. The securities scam of March 1992 involvingbrokers as well as bankers was on of the biggest scams in the history of the capital market.In the subsequent years owing to free pricing, many unscrupulous promoters, who raisedmoney from the capital market, proved to be fly-by-night operators. This led to erosion inthe investors confidence. The M S Shoes case, one such scam which took place in March1995, put a break on new issue activity.The 1991-92 securities scam revealed the inadequacies of and inefficiencies in the financialsystem. It was the scam, which prompted a reform of the equity market. The Indian stockmarket witnessed a sea change in terms of technology and market prices. Technologybrought radical changes in the trading mechanism. The Bombay Stock Exchange wassubject to nationwide competition by two new stock exchanges-the National StockExchange, set up in 1994, and Over the Counter Exchange of India, set up in 1992. TheNational Securities Clearing Corporation (NSCC) and National Securities DepositoryLimited (NSDL) were set up in April 1995 and November 1996 respectively form improvedclearing and settlement and dematerialized trading. The Securities Contracts (Regulation)Act, 1956 was amended in 1995-96 for introduction of options trading. Moreover, rollingsettlement was introduced in January 1998 for the dematerialized segment of all companies.With automation and geographical spread, stock market participation increased.In the late 1990s, the Information Technology (IT) scrips were dominant on the Indianbourses. These scrips included Infosys, Wipro, and Satyam. They were a part of the favoritescrips of the period, also known as New Economy scrips, along with telecommunicationsand media scrips. The new economy companies are knowledge intensive unlike the oldeconomy companies that were asset intensive.The Indian capital market entered the twenty-first century with the Ketan Parekh scam. As aresult of this scam, badla was discontinued from July 2001 and rolling settlement wasintroduced in all scrips. Trading of futures commenced from June 2000, and Internet tradingwas permitted in February 2000.Babasabpatilfreepptmba.comPage 18 19. Equity Evaluation of Top 3 IT companiesIt has been a long journey for the Indian capital market. Now the capital market isorganized, fairly integrated, mature, more global and modernized. The Indian equity marketis one of the best in the world in terms of technology. Advances in computer andcommunications technology, coming together on Internet are shattering geographicboundaries and enlarging the investor class. Internet trading has become a globalphenomenon. The Indian stock markets are now getting integrated with global markets.The Global EconomyThe movement of the World Wide Economy from a Traditional Economy to a Global onehas come through the technological advancements strengthened by modern technologicaldiscoveries, beginning from the days of the Industrial Revolution in England. However dueto rapid globalization, national economies along with rules & regulations are losingimportance. Mergers between multinational corporations are in vogue, as every organizationwants to exercise total control over the World Market.The main features of the Global Economy are as follows1) Global output (gross world product (GWP) rose by 4.4% in 2005, led by China(9.3%), India (7.6%), and Russia (5.9%). The contribution of U.S.A. was 3.5%.2) gross world product:purchasing power parity exchange rates are $59.38trillion(2005),$51.48 trillion (2004), $49 trillion (2002).3)GDP - real growth rate: 4.3% (2005 est.), 3.8% (2003), 2.7% (2001)4)GDP - per capita: purchasing power parity - $9,300 (2005), $8,200 (2003), $7,9005)GDP - composition by sector: agriculture: 4% industry: 32% services: 64% (2004)Babasabpatilfreepptmba.comPage 19 20. Equity Evaluation of Top 3 IT companies 6) Inflation rate (consumer prices): developed countries 1% to 4% typically; developingcountries 5% to 60% typically; national inflation rates vary widely in individual cases, fromdeclining prices in Japan to hyperinflation in several Third World countries (2003)7) Global debt issuance: $5.187 trillion (2004), $4.938 trillion (2003), $3.938 trillion (2002)8)Global equity issuance: $505 billion (2004), $388 billion (2003), $319 billion (2002)EmploymentUnemployment rate: 30% combined unemployment and underemployment in many non-industrialized countries; developed countries typically 4%-12% unemploymentIndustriesIndustries: dominated by the onrush of technology, especially in computers,robotics,telecommunications and medicines and medical Industrial production growth rate: 3% (2002 est.)EnergyYearly electricity - production: 15,850,000 GWh (2003 est.), 14,850,000 GWh (2001 est.)Yearly electricity - consumption: 14,280,000 GWh (2003 est.), 13,930,000 GWh (2001est.)Oil- production: 79.65 million bbl/day (2003 est.), 75.46 million barrel/day (12,000,000m/d) (2001)Oil - consumption: 80.1 million bbl/day (2003 est.), 76.21 million barrel/day (12,120,000m/d) (2001)Oil - proved reserves: 1.025 trillion barrel (163 km) (2001 est.)Natural gas- production: 2,569 km (2001 est.)Natural gas - consumption: 2,556 km (2001 est.)Natural gas - proved reserves: 161,200 kmCross-borderYearly exports: $6.6 trillion (f.o.b., 2002 est.)Exports - commodities: the whole range of industrial and agricultural goods and servicesBabasabpatilfreepptmba.com Page 20 21. Equity Evaluation of Top 3 IT companiesExports - partners: US 17.4%, Germany 7.6%, UK 5.4%, France 5.1%, Japan 4.8%, China4% (2002)Yearly imports: $6.6 trillion (f.o.b., 2002 est.)Imports - commodities: the whole range of industrial and agricultural goods and servicesImports - partners: US 11.2%, Germany 9.2%, China 7%, Japan 6.8%, France 4.7%, UK4% (2002)Debt - external: $2 trillion for less developed countries (2002 est.) Gift economyYearly economic aid - recipient: Official Development Assistance (ODA) $50 billion...CommunicationsTelephones - mainlinesin use:843,923,500 (2003)1,263,367,600 (2005)Telephones - mobile cellular: 2,168,433,600 (2005)Internet Service Providers(ISPs): 10,350 (2000 est.)Internet users: 1,311,050,595 (January 18, 2008 est.), 1,091,730,861 (December 30, 2006est.), 604,111,719 (2002 est.)INDIAN ECONOMYThe economy of India when measured in USDexchange-rate terms, is the twelfth largestinthe world, with a GDP of US $1.25 trillion (2008).It is the third largest in terms ofpurchasing power parity India is the second fastest growingmajor economy in the world,with a GDP growth rate of 9.4% for the fiscal year 20062007. However, Indias hugepopulation has a per capita income of $4,542 at PPP and $1,089 in nominal terms (revised2007 estimate).The World Bankclassifies India as a low-income economy.Babasabpatilfreepptmba.comPage 21 22. Equity Evaluation of Top 3 IT companiesIndias economy is diverse, encompassing agriculture, handicrafts, textile,manufacturing, and a multitude of services. Although two-thirds of the Indian workforcestill earn their livelihood directly or indirectly through agriculture, services are a growingsector and play an increasingly important role of Indias economy. The advent of the digitalage, and the large number of young and educated populace fluent in English, is graduallytransforming India as an important back office destination for global outsourcing ofcustomer services and technical support. India is a major exporter of highly-skilled workersin software and financial services, and software engineering Other sectors likemanufacturing, pharmaceuticals, biotechnology, nanotechnology, telecommunication,shipbuilding aviation and tourism are showing strong potentials with higher growth rates.India followed a socialist-inspired approach for most of its independenthistory, with strict government control over private sector participation, foreign trade, andforeign direct investment. However, since the early 1990s, India has gradually opened up itsmarkets through economic reforms by reducing government controls on foreign trade andinvestment. The privatisation of publicly owned industries and the opening up of certainsectors to private and foreign interests has proceeded slowly amid political debate.India faces a fast-growing population and the challenge of reducing economic and socialinequality. Poverty remains a serious problem, although it has declined significantly sinceindependence. Official surveys estimated that in the year 2004-2005, 27% of Indians werepoor.Public expenditureIndias public expenditure is classified as development expenditure, comprising central planexpenditure and central assistance and non-development expenditures; these categories caneach be divided into capital expenditure and revenue expenditure. Indias non-development revenue expenditure has increased nearly fivefold in 200304 since 199091 and more than tenfold since 19851986. Interest payments are the singlelargest item of expenditure and accounted for more than 40% of the total non-developmentexpenditure in the 200304 budgets. Defense expenditure increased fourfold during thesame period and has been increasing due to growing tensions in the region, the expensivedispute with Pakistan over Jammu and Kashmir and an effort to modernize the military.Administrative expenses are compounded by a large salary and pension bill, which risesperiodically due to revisions in wages, dearness allowance etc. subsidies on food, fertilizers,education and petroleum and other merit and non-merit subsidies account are not onlyBabasabpatilfreepptmba.comPage 22 23. Equity Evaluation of Top 3 IT companiescontinuously rising, especially because of rising crude oil and food prices, but are alsoharder to rein in, because of political compulsions.Public receiptsIndia has a three-tier tax structure, wherein the constitution empowers the union governmentto levy Income tax, tax on capital transactions (wealth tax, inheritance tax), sales tax, servicetax, customs and excise duties and the state governments to levy sales tax on intra-state saleof goods, tax on entertainment and professions, excise duties on manufacture of alcohol,stamp duties on transfer of property and collect land revenue (levy on land owned). Thelocal governments are empowered by the state government to levy property tax, Octroi andcharge users for public utilities like water supply, sewage etc. More than half of the revenuesof the union and state governments come from taxes, of which half come from Indirecttaxes. More than a quarter of the union governments tax revenues is shared with the stategovernments.The tax reforms, initiated in 1991, have sought to rationalise the tax structure and increasecompliance by taking steps in the following directions:Reducing the rates of individual and corporate income taxes, excises, customs and making itmore progressiveReducing exemptions and concessionsSimplification of laws and proceduresIntroduction of Permanent account number to track monetary transactions21 of the 29 states introduced Value added tax(VAT) on April 1, 2005 to replace thecomplex and multiple sales tax systemThe non-tax revenues of the central government come from fiscal services, interest receipts,public sector dividends, etc., while the non-tax revenues of the States are grants from thecentral government, interest receipts, dividends and income from general, economic andsocial services.Inter-State share in the federal tax pool is decided by the recommendations of the FinanceCommission to the President.General budgetBabasabpatilfreepptmba.comPage 23 24. Equity Evaluation of Top 3 IT companiesThe Finance minister of India presents the annual union budget in the Parliament on the lastworking day of February. The budget has to be passed by the Lok Sabha before it can comeinto effect on April 1 the start of Indias fiscal year. The Union budget is preceded by aneconomic survey which outlines the broad direction of the budget and the economicperformance of the country for the outgoing financial year. This economic survey involvesall the various NGOs, women organizations, business people, old people associations etc.Indias union budget for 200506, had an estimated outlay of Rs.5,14,344 crores ($118billion). Earnings from taxes amount to Rs. 2,73,466 crore ($63b). Indias fiscal deficitamounts to 4.5% or 1,39,231 crore ($32b). The fiscal deficit is expected to be 3.8% of GDP,by March 2007.Currency systemRupee The Rupee is the only legal tender accepted in India. The exchange rate as of October13, 2007 is about 39.18 to a US dollar, 55.56 to a Euro, and 79.82 to a UK pound. TheIndian rupee is accepted as legal tender in the neighboring Nepal and Bhutan, both of whichpeg their currency to that of the Indian rupee. The rupee is divided into 100 paise. Thehighest-denomination banknote is the 1,000 rupee note; the lowest-denomination coin incirculation is the 25 paise coin.Exchange ratesUnder the fixed exchange rate system, the value of the rupee was linked to the British poundsterling until 1946, and after independence, 30% of Indias foreign trade was determined inpound sterling. In 1975, as per the floating exchange rate system, the value of the rupee waspegged to a basket of currencies and was tightly controlled by the Reserve Bank of India.Babasabpatilfreepptmba.comPage 24 25. Equity Evaluation of Top 3 IT companiesSince 2005, its value has been appreciating against the US dollar, Euro and British PoundSterling. Since liberalisation reforms in early 1990s, the rupee is fully convertible on tradeand current account. This appreciation of rupee aganist dollar in the year 2008 does have avery big negative impact on the overall economy since indian economy is direclty linked toits IT sector, IT sector contributes a major part of indian economy.Physical infrastructureSince independence, India has allocated nearly half of the total outlay of the five-year plansfor infrastructural development] Development of infrastructure was completely in the handsof the public sector and was plagued by corruption, bureaucratic inefficiencies, urban-biasand an inability to scale investment.Indias low spending on power, construction, transportation, telecommunications and realestate, at $31 billion or 6% of GDP in 2002 had prevented India from sustaining highergrowth rates.This had prompted the government to partially open up infrastructure to the private sectorallowing foreign investment which has helped in a sustained growth rate of close to 9% forthe past six quarters. India holds second position in the world in roadways construction,more than twice that of China. As of 2005 the electricity production was at 661.6 billionkWh with oil production standing at 785,000 bbl/day. Indias prime import partners are :China 8.7%, US 6%, Germany 4.6%, Singapore 4.6%, Australia 4% as of 2006 CIAFactBook As of 15 January 2007, there were 2.10 million broadband lines in India. Lowtele-density is the major hurdle for slow pickup in broadband services. Over 76% of thebroadband lines were via DSL and the rest via cable modems.Financial institutionsIndia inherited several institutions, such as the civil services, Reserve Bank of India,railways, etc., from its British rulers. Mumbai serves as the nations commercial capital, withthe Reserve Bank of India (RBI), Bombay Stock Exchange (BSE) and the National StockExchange (NSE) located here. The headquarters of many financial institutions are alsolocated in the city.The RBI, the countrys central bank was established on 1 April 1935. It serves as the nationsmonetary authority, regulator and supervisor of the financial system, manager of exchangecontrol and as an issuer of currency. The RBI is governed by a central board, headed by agovernor who is appointed by the Central government of India.The BSE Sensex or the BSE Sensitive Index is a value-weighted index composed of 30companies with April 1979 as the base year (100). These companies have the largest andmost actively traded stocks and are representative of various sectors, on the Exchange. Theyaccount for around one-fifth of the market capitalisation of the BSE. The Sensex is generallyregarded as the most popular and precise barometer of the Indian stock markets.Babasabpatilfreepptmba.comPage 25 26. Equity Evaluation of Top 3 IT companiesIncorporated in 1992, the National Stock Exchange is one of the largest andmost advanced stock markets in India. The NSE is the worlds third largest stock exchangein terms of transactions. There are a total of 23 stock exchanges in India, but the BSE andNSE comprise 83% of the volumes. The Securities and Exchange Board of India (SEBI),established in 1992, regulates the stock markets and other securities markets of the country.IndustryPer capita GDP (at PPP) of South Asian economies versus those of South Korea, as apercentage of the US India is fourteenth in the world in factory output. They togetheraccount for 27.6% of the GDP and employ 17% of the total workforce. However, about one-third of the industrial labour force is engaged in simple household manufacturing only. Economic reforms brought foreign competition, led to privatisation of certainpublic sector industries, opened up sectors hitherto reserved for the public sector and led toan expansion in the production of fast-moving consumer good Post-liberalisation, the Indianprivate sector, which was usually run by oligopolies of old family firms and requiredpolitical connections to prosper was faced with foreign competition, including the threat ofcheaper Chinese imports. It has since handled the change by squeezing costs, revampingmanagement, focusing on designing new products and relying on low labour costs andtechnology.34 Indian companies have been listed in the Forbes Global 2000 ranking for 2007. ] The 10leading companies areWorldProfitsAssets MarketIndustry Revenuerank (billion (billion Value Company (billion) (billion Oil and Natural Oil & Gas23915.64 3.46 26.98 38.19 Gas Corporation Operations Reliance Oil & Gas25818.05 2.11 21.75 42.62 Industries Operations State Bank of326 Banking13.66 1.24 156.37 12.35 India Indian Oil Oil & Gas39934.22 1.11 22.68 10.92 CorporationOperations494NTPC Utilities6.061.31 17.25 26.06536ICICI Bank Banking5.790.54 62.13 16.72800Steel Authority of Materials6.300.91 7.0610.16Babasabpatilfreepptmba.comPage 26 27. Equity Evaluation of Top 3 IT companiesIndia LimitedTata Consultancy Software &10472.980.67 1.93 26.27Svcs Services1128Tata Steel Materials4.540.84 4.61 5.80InfosysSoftware &11302.140.55 2.09 26.19Technologies ServicesServicesIndia is fifteenth in services output. It provides employment to 23% of work force, and it isgrowing fast, growth rate 7.5% in 19912000 up from 4.5% in 195180. It has the largestshare in the GDP, accounting for 53.8% in 2005 up from 15% in 1950.Business services(information technology, information technology enabled services, business processoutsourcing) are among the fastest growing sectors contributing to one third of the totaloutput of services in 2000. The growth in the IT sector is attributed to increasedspecialisation, availability of a large pool of low cost, but highly skilled, educated and fluentEnglish-speaking workers (a legacy of British Colonialism) on the supply side and on thedemand side, increased demand from foreign consumers interested in Indiasservice exports or those looking to outsource their operations. Indias IT industry, despitecontributing significantly to its balance of payments, accounted for only about 1% of thetotal GDP or 1/50th of the total services.Banking and finance Structure of the organised banking sector in India. Number of banks are in brackets.The Indian money market is classified into: the organised sector (comprising private, publicand foreign owned commercial banks and cooperative banks, together known as scheduledbanks); and the unorganised sector (comprising individual or family owned indigenousbankers or money lenders and non-banking financial companies (NBFCs)). The unorganisedsector and microcredit are still preferred over traditional banks in rural and sub-urban areas,especially for non-productive purposes, like ceremonies and short duration loans.Prime Minister Indira Gandhi nationalised 14 banks in 1969, followed by six others in 1980,and made it mandatory for banks to provide 40% of their net credit to priority sectors likeagriculture, small-scale industry, retail trade, small businesses, etc. to ensure that the banksfulfill their social and developmental goals. Since then, the number of bank branches hasincreased from 10,120 in 1969 to 98,910 in 2003 and the population covered by a branchdecreased from 63,800 to 15,000 during the same period. The total deposits increased 32.6times between 1971 to 1991 compared to 7 times between 1951 to 1971. Despite an increaseof rural branches, from 1,860 or 22% of the total number of branches in 1969 to 32,270 or48%, only 32,270 out of 5 lakh (500,000) villages are covered by a scheduled bank...Babasabpatilfreepptmba.comPage 27 28. Equity Evaluation of Top 3 IT companiesExternal trade and investmentShare of top five investing countries in FDI inflows. (20002007)[81]InflowsRank CountryInflows (%)(Million USD)1 Mauritius 85,17844.24%2 United States 18,0409.37%3 United Kingdom15,3637.98%4 Netherlands 11,1775.81%5 Singapore 9,742 5.06%Global trade relations:Until the liberalisation of 1991, India was largely and intentionally isolated from the worldmarkets, to protect its fledgingeconomy and to achieve self-reliance. Foreign trade was subject to import tariffs, exporttaxes and quantitative restrictions, while foreign direct investment was restricted by upper-limit equity participation, restrictions on technology transfer, export obligationsand government approvals; these approvals were needed for nearly 60% of new FDI in theindustrial sector. The restrictions ensured that FDI averaged only around $200M annuallybetween 1985 and 1991; a large percentage of the capital flows consisted of foreign aid,commercial borrowing and deposits of non-resident Indians.Indias exports were stagnant for the first 15 years after independence, due to thepredominance of tea, jute and cotton manufactures, demand for which was generallyinelastic. Imports in the same period consisted predominantly of machinery, equipment andraw materials, due to nascent industrialisation. Since liberalisation, the value of Indiasinternational trade has become more broad-based and has risen to Rs. 63,080,109 crores in200304 from Rs.1,250 crores in 195051 Indias major trading partners are China, the US,the UAE, the UK, Japan and the EU. The exports during April 2007 were $12.31 billion upby 16% and import were $17.68 billion with an increase of 18.06% over the previous year.India is a founding-member of General Agreement on Tariffs and Trade (GATT) since 1947and its successor, the World Trade Organization. While participating actively in its generalcouncil meetings, India has been crucial in voicing the concerns of the developing world.For instance, India has continued its opposition to the inclusion of such matters as labourand environment issues and other non-tariff barriers into the WTO policies.Babasabpatilfreepptmba.comPage 28 29. Equity Evaluation of Top 3 IT companiesBalance of paymentsSince independence, Indias balance of payments on its current account has been negative.Since liberalisation in the 1990s (precipitated by a balance of payment crisis), Indias exportshave been consistently rising, covering 80.3% of its imports in 200203, up from 66.2% in199091. Although India is still a net importer, since 199697, its overall balance ofpayments (i.e., including the capital account balance), has been positive, largely on accountof increased foreign direct investment and deposits from non-resident Indians; until thistime, the overall balance was only occasionally positive on account of external assistanceand commercial borrowings. As a result, Indias foreign currency reserves stood at $285billion in 2008, which could be used in infrastructural development of the country if usedeffectively.India is a net importer: in 2005, imports were $89.33bn and exports $69.18bn.Indias reliance on external assistance and commercial borrowings has decreased since199192, and since 200203, it has gradually been repaying these debts. Declining interestrates and reduced borrowings decreased Indias debt service ratio to 4.5% in 2007.Foreign Direct Investment in IndiaAs the third-largest economy in the world in PPP terms, India is a preferred destinations forforeign direct investments (FDI)]; India has strength in information technology and othersignificant areas such as auto components, chemicals, apparels, pharmaceuticals andjewellery. India has always held promise for global investors, but its rigid FDI policies werea significant hindrance in this regard. However, as a result of a series of ambitious andpositive economic reforms aimed at deregulating the economy and stimulating foreigninvestment, India has positioned itself as one of the front-runners of the rapidly growingAsia Pacific Region. India has a large pool of skilled managerial and technical expertise.The size of the middle-class population at 300 million exceeds the population of both the USand the EU, and represents a powerful consumer market.Babasabpatilfreepptmba.com Page 29 30. Equity Evaluation of Top 3 IT companiesIndias recently liberalised FDI policy (2005) allows up to a 100% FDI stake inventures. Industrial policy reforms have substantially reduced industrial licensingrequirements, removed restrictions on expansion and facilitated easy access to foreigntechnology and foreign direct investment FDI. The upward moving growth curve of the real-estate sector owes some credit to a booming economy and liberalized FDI regime. In March2005, the government amended the rules to allow 100 per cent FDI in the constructionbusiness. This automatic route has been permitted in townships, housing, built-upinfrastructure and construction development projects including housing, commercialpremises, hotels, resorts, hospitals, educational institutions, recreational facilities, and city-and regional-level infrastructure. A number of changes were approved on the FDI policy to remove the caps in mostsectors. Restrictions will be relaxed in sectors as diverse as civil aviation,constructiondevelopment, industrial parks, petroleum and natural gas, commodityexchanges, credit-information services and mining. But this still leaves an unfinished agendaof permitting greater foreign investment in politically sensitive areas such as insurance andretailing. FDI inflows into India reached a record US$19.5bn in fiscal year 2006/07 (April-March), according to the governments Secretariat for Industrial Assistance. This was morethan double the total of US$7.8bn in the previous fiscal year. Between April and September2007, FDI inflows were US$8.2bn.The IT IndustryThe Indian software industry has grown from a mere US $ 150 million in 1991-92 to astaggering US $ 5.7 billion (including over $4 billion worth of software exports) in 1999-2000. No other Indian industry has performed so well against the global competition.The annual growth rate of Indias software exports has been consistently over 50percent since 1991. As per the projections made by the National Association of Softwareand Services Companies (NASSCOM) for 2000-2001 (April 1, 2000 - March 31, 2001),Indias software exports would be around $ 6.3 billion, in addition to $ 2.5 billion indomestic sale.The growth story:Babasabpatilfreepptmba.com Page 30 31. Equity Evaluation of Top 3 IT companies 80% 70% 60% 50% 40% 30% 20% 10%0% 93-94 97-98 2000- 2002- 2004- 2006-01030507IT services Exports The almost three-decade-old Indian IT industry crossed the $25billionmark. The top tier Indian firms-TCS, Infosys, Wipro , HCL, firmly established themselvesamong the leading global players in IT services.Growing products market:Software products: the story of Indian software products was that of renewed success. At $1.7 billion, the top 10 Indian software product companies showed very strong growth.International products characterize the market, barring a few. The key trend was reduction inpiracy and the acceptance of the value of software.Geographic break up: top firmsFinancial year 2006Babasabpatilfreepptmba.comPage 31 32. Equity Evaluation of Top 3 IT companies73%3% 3% 21%north america europe asia othersTotal sales: Rs.35579 CroreFinancial year 200762% Total sales: Rs.63749 Crore. This is based on data of top eight services firms:5% TCS, Infosys, Wipro, 4%Satyam, HCL, Tech29% Mahindra, Patni computers. europenorth america asia othersConcern Areas:The share market clearly believes that there are: Indias big software four- Infosys,TCS, Wipro, and Satyam has seen values fall by 15 to 20%. The main reasons beingslowdown of U.S. economy and strengthening of the Rupee.This has hit Indian softwareexporters hard because most software companies bill most of their clients in dollar terms,and U.S. accounts for about 60 % of the work that the Indian companies do. Hence the shareprices of these IT companies have seen a sharp fall.Whats wrong with IT stocksBabasabpatilfreepptmba.com Page 32 33. Equity Evaluation of Top 3 IT companiesIt has been a year since the dark clouds around the Indian information technology industryhave been squaring in, and storm in the form of a U.S. slowdown appears to be knocking atthe doors. Last fiscal the rupee appreciated nearly by 12%. Due to slowdown many investorshave already reduced their exposure to IT stocks, and valuation of software companies areclose to the lower end of their historical price earning multiples.Fortunately, the trend emerging from the guidance of global IT companiessupport the more optimistic argument that a slowdown, will prompt greater outsourcing andhigher volumes for large software companies.Profitability puzzle454035Infosys30TCS2520Wipro15satyam10HCL 5 0 Q4FY06Q2FY07 Q3FY07 Q1FY08Q2FY08 Q3FY08 Q1FY07Q4FY07The graph shows the operating profit margin of these top companies in various quarters. Itcan be seen fro the graph that the profit margin of these companies has been very volatiledue to causes mentioned above.What the big guys do?Issues RemediesBabasabpatilfreepptmba.comPage 33 34. Equity Evaluation of Top 3 IT companies# Rupee appreciation # Hedging risk#Pressure on volumes #Cross selling of services# High dependence on BFSI#Strengthening skills in verticals#Margin pressures#Better utilization, lower attrition#U.S. slowdown # Geographical diversificationValue picks Among the Indian IT pack, it is mainly the large cap companies, which canboast of a diverse global presence and a varied client mix, which could help them weatherany slowdown in demand of IT services. Thus Infosys, TCS, Wipro and Satyam remain thetop picks. After a hefty beating over the past few months, their valuations are down to thelowest range of the respective historical price earning multiple bands. This means that mostof the bad news surrounding the prospects of these companies have already factored in. thecompanies indicate a cautious stance, in their top and bottom line guidance going forward.indicators of further any loss and which is not yet discounted in the share price, will perhapsbe visible in the next quarter results.Company AnalysisBabasabpatilfreepptmba.comPage 34 35. Equity Evaluation of Top 3 IT companiesWipro Ltd Wipro started 60 years back as a company manufacturing vegetable oil and today it isworlds one of the leading technology service provider. Wipro Technologies is aglobal services provider delivering technology-driven business solutions that meet thestrategic objectives of clients. Wipro has 40+ Centers of Excellence that create solutionsaround specific needs of industries. Wipro delivers unmatched business value to customersthrough a combination of process excellence, quality frameworks and service deliveryinnovation. - 8,000 shares subscribed for by directors, etc. 9,000 shares offered at par topublic in February-March 1946.Business Units 1) Wipro Technologies global IT service and products 2) WiproSpectramind - IT enabled services 3) Wipro InfoTech 4) Wipro consumer care and lighting.Rewards and RecognitionsWipro has become the second largest company in terms of market capitalization on theBombay Stock Exchange.- The Company for the fourth year has won the top award of STPI for software exports forthe year 1999-2000.- The Company has been awarded first prize, at national level, for outstanding exportperformance during 1999-2000 from the Software Technology Parks of India.- The Company has bagged the PC Quests Users Choice Awards, 2000, in Office OCSegment- The company has strong software engineering processes & also achieved ISO 9000certification. Wipro is the first software company to get SEI Level 5 & also implementedSix Sigma TQM practices to software projects and support functions.- Chairman Azim Premji, with a net worth of $5.9 billion, has made it to the Forbes list often most powerful billionaires in the worldWipro in terms of NumbersBabasabpatilfreepptmba.com Page 35 36. Equity Evaluation of Top 3 IT companiesthe graph shows the number of customer in terms of crores.Babasabpatilfreepptmba.com Page 36 37. Equity Evaluation of Top 3 IT companiesThe above picture shows the trend in the revenue earned from global IT services andproducts. The growth has been manifold .The above graph shows the growth in operating income in terms of crore.Babasabpatilfreepptmba.com Page 37 38. Equity Evaluation of Top 3 IT companiesPerformance of Wipro Stock v/s its index in 2005-06.140120100 80wipro 60price S &P 40CnX 200 ch ay ly neiln c ov b ct gp r JadeAu SeFeJuOAp ar MJuN MIt can be seen from the graph that in the year 2005-06 the performance of stock was inaccordance with its index. I.e. there was less volatility in shares performance whencompared.From the above graph it can be seen that the performance of stock against its index is morevolatile. This is the period where the stocks started loosing their value.Babasabpatilfreepptmba.com Page 38 39. Equity Evaluation of Top 3 IT companiesFinancial statement analysis of Wipro Ltd.Balance sheets(Rs.in million)Particulars2003 2004 2005 2006 2007Share Capital465.128465.52 1407.142852 2918Reserve and surplus3283834610475296327793077Shareholders fund33303.128. 35075.52 48936.14 6612995995Loan funds 6974.771006.886207583856Capital employed 34000.82436082.79 49557.40 6688799851Fixed assets 65915.10 79472.9115822168337962Investments14407.16124560.33 28595.11 3081233249Net current assets 13002.15 35751.793802.91439228640Total34000.82436082.79 49557.40 6688799851 The table shows the balance sheet of Wipro Ltd. The tablecontains the data of 5 years.i.e. From 2003 to 2007.the performance ofthese years have been analyzed as follows.Babasabpatilfreepptmba.comPage 39 40. Equity Evaluation of Top 3 IT companiesShare capital350030002500200015001000 500 0 2003 20042005 20062007The company had raised funds through IPO for the first time in the year 1946. the totalcapital being 1700000,the number of shares being 17000. Company there after has not raisedmoney through IPO. it has increased the capital either through stock split or through bonusissue. The graph shows the trend of share capital .it can be observed from the graphthat in the year 2003 and 2004 the capital has been kept constant later on it has beenincreased to 1407, by the issue of bonus issue in the ratio of 2:1 and the face value beingRs.2. The capital was further increased to Rs. 2852 Mn in the year 2006by the allotment ofequity shares pursuant to exercise of stock options. The same thing continued in the yearwherein the capital was further increased to Rs.2918.Loan Funds45004000350030002500200015001000 500 0200320042005 20062007It can be noticed from the graph that there has been considerable increase in the loan fundsin the year 2007 compared with 2006. the reason being borrowing from banks, term loansand also from financial institution have been increased in the year.Babasabpatilfreepptmba.comPage 40 41. Equity Evaluation of Top 3 IT companiesCapital employed120000100000 80000 60000 40000 20000020032004 2005 2006 2007Considerable increase in the capital employed as the company has expanded its business andhave also acquired some of the companies in last few years. It has therefore increased itsshare capital by the way f issuing bonus shares and stock splits and also by making hugeinvestments.Investment350003000025000200001500010000 500002003200420052006 2007The graph shows the investment pattern of Wipro Ltd. Investments has been made in plantand machinery, equipment and in many other fixed assets. Investment has also being madein to money market instruments, mutual funds and in many other instruments of the stockmarket.Babasabpatilfreepptmba.comPage 41 42. Equity Evaluation of Top 3 IT companiesProfit and loss account of Wipro Ltd.Particulars20032004 2005 2006 2007Net sales410324525967 732669 107566 152945Cost of goods sold 25523 347114783271484102420Gross profit 14324 17885254343608250525Operating expenses 5873.78 7037.718108 1226817440PBIT 9635.34 10857.64 17325.91 2381433085Interest 29304 3517 5568 35 124PBT960610821175702378032961TAX1473.71 1673.672622.023391 3868PAT8132.32 9148.80149482038829093Dividend 2325.64 6750.023517.867129 8697Retained earnings7869.97 15339109361254519456The report shows that there has been considerable increase in the net sales as manyacquisitions took place in the past two to three years. And there has also been increase inoperating profit and the net profit. Dividend has been declared every year. It was in the year2005 where there has been a decline in the dividend declared and in the next two years therehas been considerable increase in it.Babasabpatilfreepptmba.comPage 42 43. Equity Evaluation of Top 3 IT companiesThe key ratiosParticulars2003 2004200520062007Current ratio2.90 1.192.911.441.67Debt to equity 0.20 0.280.30038 0.26ROE24.4126.08 30.04 30.08 30.03Book 143180 695 463 657value/shareEPS36.8139.56 21.48 14.37 19.92Bonus11 3.022.021.02adjustmentfactorP/E ratio36.8139.52 64.80 29.02 20.38P/B ratio4.19 5 0.961.280.92Retention0.96 0.167 0.730.610.66ratioDividend per 4.26.4 5 5 5shareCAGR of sales 1/4 /(Sales in 2007 sales in 2001) - 1 1/4(152945/410324.11) -1 = 22%CAGR of EPS1/4/(EPS in 2007 EPS in 2001) - 11/4(19.22/36.81) -1 = 14.99%Babasabpatilfreepptmba.comPage 43 44. Equity Evaluation of Top 3 IT companiesVolatility of ROE = 5.67/27.6 = 20%Estimation of next year income statementParticulars2006 2007 % IncreaseNet sales107566 152945 42%Cost of goods sold 71484102420 43%Operating expenses 122681744042%Interest 35 124354%Tax3391 3868 14%Estimated Profit and Loss account for the next year Particulars 2008 Net sales 217181.9 Cost of goods sold146460.6 Gross profit70721.3 Operating expenses24764.8 PBIT45956.5 Tax 11489 PAT 34467Estimated EPS =Amount available to equity shareholders Number of equity shares outstanding = 3446700000= Rs.23.89 144,233,782Babasabpatilfreepptmba.comPage 44 45. Equity Evaluation of Top 3 IT companiesAverage retention ratio = 0.73+0.61+0.66 = 0.663Average payout ratio = 1-0.66 = 0.34Required rate of returnBeta= 0.79Risk free rate=8%Market return on IT stocks=25%Market risk premium= 17%Required rate of return = 0.08+0.79*0.17=0.2143 = 21.43%Expected Growth rate of DividendAverage retention ratio in last 3 years * average return on Equity0.73 + 0.61 +0.66 * 30.04 +30.08 + 30.03330.66 * 30.05=19.83%P/E ratio as per constant dividend Model Average payout ratioAverage retention ratio expected growth rate of dividend0.34=21.25 0.2143 - 0.1983Value anchor Value anchor gives the expected price of share for next year. Expected EPS * Expected P/E ratio 23.89 *21.25 = Rs. 507Babasabpatilfreepptmba.com Page 45 46. Equity Evaluation of Top 3 IT companiesInfosys Technologies Ltd1981- On July 2nd the company was incorporated as Infosys Consultants Private Limited atMumbai.- INFOSYS was promoted by software professionals, Viz Mr. S. Gopalakrishnan, Mr. K.Dinesh, Nandan M Nilekani, Mr. S.D. Shibulal, Mr. N.R. Narayana Murthy & Mr. N SRaghavan.- The company is engaged in software development in the form of services, turnkey projectsand products for the domestic and export market. The software development is targetedtowards the distribution, banking, telecommunication and manufacturing sectors worldwide.1992- On April 21st the name changed to Infosys Technologies Private Limited, and theRegistered office was moved to Bangalore.- On June 2nd the company was converted into a Public Limited Company under the nameInfosys Technologies Ltd. - The company provides software maintenance, re-engineeringand downsizing of software applications in these market segments. It also marketsinternationally, two well-known packages, one for the distribution industry (DMAP) and onefor retail banking (Bancs 2000).- The company has a joint venture in USA with KSA (Kurt Salmon Associates). KSA is a$40 million management consultancy company operating in ten cities of the USA and alsoin eight different countries. The company also has an offshore software development centrefor General Electric USA. Yantra Corporation is an wholly owned subsidiary of theCompany.1993- The Company turned up with ISO 9000 certification.- 19,76,100 No. of equity shares of Rs 10 each issued, subscribed and paid-up (15,84,000shares to directors, promoters; 2,68,100 shares to employees of the company and 1,24,000shares at a prem., of Rs 70 per to shareholders on right basis).Babasabpatilfreepptmba.comPage 46 47. Equity Evaluation of Top 3 IT companies- 68,600 shares reserved for allotment in preferential basis to employees of the company andgroup company (only 10,3000 shares taken up). Balance 13,07,200 shares along with 58,500shares not taken up by employees were issued to the public (all were taken up)..To part finance the Companys project for setting up a Software Technology Park, Companymade a public issue of 13,76,000 equity shares of Rs. 10 each at a premium of Rs. 85 pershare in February.1998- During the year, the issued, subscribed and paid-up capital increased by Rs. 8,75,76,000consequent to the issue of 7,49,000 shares of Rs. 10 each, fully paid, to employees of theCompany and the Employees Welfare Trust under the ESOP, and a bonus issue of 80,08,600shares in the ratio of 1:1 to the members, as of the record date. Of the total paid-up capital ofRs. 16,01,72,000, Rs. 12,92,69,000 (81% of the paid-up capital), has been issued as bonusshares.- During the year the company received several AWARDS. 1. For the second year insuccession, the Company received the Silver Shield from the Institute of CharteredAccountants of India for the Best-Presented-Accounts, amongst the entries received fromnon-financial, private sector companies, for the year 1995-96.- The readers of Asia Money magazine, once again, voted Infosys the best in Strategy andManagement from among the listed companies in India, and among the best in Asia, for theyear 1996-97.- BANCS 2000 received the CSI-WIPRO award for the Best-Packaged-Application, inDecember 1997, at the SEARCC 97 Conference in Delhi.- A Certificate of Merit, was received from the Ministry of Commerce, Government ofIndia, for meritorious performance in the field of exports during 1995-96.2000- Indian Information Technology giant Infosys Technologies has confirmed its plan ofsetting up a centre for exports in Mohali, twin city of Chandigarh.- During the year a new methodology and toolkit to port applications from OS/2 toWINDOWS NT was developed.- The Company it had tied-up with Japans Toshiba Corporation to provide enterpriseresource planning (ERP) software solutions for Toshibas business processes.. - The Company proposes to increase its software professional strength to 2,400 from thepresent 1,200.- The Company has re-emerged as Indias second most valuable company, replacing theFMCG heavyweight, HLL. .Babasabpatilfreepptmba.comPage 47 48. Equity Evaluation of Top 3 IT companies2001- The Company has been awarded silver shield for the best presented accounts competitionfor the sixth consecutive year by the Institute of Chartered Accountants of India.- The Company has allotted 100 equity shares of par value of 5 per share to the BankersTrust Company, New York, the depository to the companys ADS issue as underlying sharesin respect of 200 ADRs to be issued and allocated to the purchasers.- Infosys Technologies board has allocated 67,050 No. of equity shares at a par value of Rs 5par to employees of the company.2002- Receives Motilal Oswal Award for Wealth Creation for 1996-2001- Mr. Nandan Nilekani becomes the new CEO of the company. Mr. Narayanamurthyassumes the role of Chairman & Chief Mentor- Adjudged best Indian employer in a study conducted by Hewitt Associates and BusinessToday- Infosys Tech bags prestigious Corporate University Exchange Excellence Award for 2002- NASDAQ selects Infosys as the best value reporterOperations- RBI permits 100% FII purchase in Infosys- N R Narayana Murthy receives the Ernst & Young Entrepreneur of the Year award for2002- Company declares that it has won Most Admired Knowledge Enterprises (MAKE) awardin the Asia region for 2002- Implements `Balanced Score Card (BSC), a unique concept that entails establishment ofstrategic objectives and a measurement system, which not only targets on financial measuresbut also non-financial measures2004-Infosys greets Karnataka Bank for deploying Finacle-Nandan Nilekani ranks 35th in the world business leaders-Infosys gets ICAI award for the year 03-Infosys completes five yrs on NASDAQ-Infosys Chief Narayana Murthy joins NDTV Board-Comes out with a bonus issue in the ratio of 3:1Babasabpatilfreepptmba.comPage 48 49. Equity Evaluation of Top 3 IT companiesInfosys Share prices v/s its indices for the year 2005-064000350030002500 indices From the graph2000 it can be seen1500 infosys that the prices1000 of shares are 500 0 lessvolatile when compared may july nov jun aug jan sepfeb oct Apr decmar with its index.For 2006-07500040003000 indices2000 infosys1000 0 Apr May jun julAug Sep OctNov Dec Jan Feb MarFrom the above graph it can be seen that prices of shares are more volatile. We can noticethat the share prices have decreased over a period.Babasabpatilfreepptmba.com Page 49 50. Equity Evaluation of Top 3 IT companiesBabasabpatilfreepptmba.com Page 50 51. Equity Evaluation of Top 3 IT companiesThe above-mentioned charts are income, exports, PAT of the company. The values haveincreased over a period of time.Financial Statements of Infosys LtdBalance sheet(Rs.in crores)Particulars 200320042005 20062007Share Capital 33.12 33.22 135.29 138286Reserve and surplus 1954.75 2387.09 4110.185507 9714Shareholders fund 1987.87 2420.31 4245.475645 10000Loan funds872.78833.12996.26 1252 1162Capital employed2860.65 3253.43 5241.736897 11162Fixed assets772.72970.301494.422133 3107Investments 33.20 1027.38 1328.70876839Net current assets2054.73 1255.75 2418.613888 7216Total 2860.65 3253.43 5241.736897 11162The Balance sheets are analyzed belowBabasabpatilfreepptmba.com Page 51 52. Equity Evaluation of Top 3 IT companiesShare capital 350 300 The share capital of 250 Infosys shows an 200 increasing trend. In 150 the year of inception 100 the share capital was50 raised through the 0 public offer. Later it 20032004 20052006 2007was increased year to year by the issue of bonus issue in theratio of 1:1.Reserves and surplus1200010000 8000 6000 4000 2000 0200320042005 2006 2007 The Reserves and Surplus of the company have increased over a period of time. Theincrease in Reserves and Surplus is due to increase in Profits of the company through whichsubstantial amount has been contributed to Reserves and Surpluses.Babasabpatilfreepptmba.com Page 52 53. Equity Evaluation of Top 3 IT companiesInvestments 1400 1200 10008006004002000 20032004 20052006 2007The investment has increased to a greater level from mere 23 crore in 2003 to Rs.1200crore in 2005 and later it was again saw a decrease of 400 crores. The company hassignificantly invested in different types of securities, which yield better returns.Net Current Assets 8000 7000 6000 5000 4000 3000 2000 10000 20032004 200520062007Babasabpatilfreepptmba.com Page 53 54. Equity Evaluation of Top 3 IT companiesInfosys has always enjoyed better liquidity position. It has got better position compared totheir competitors Wipro, Infosys. Its has increased its liquidity position with increase in itsobligation.Profit and Loss Account of Infosys for 5 yearsParticulars 2003 200420052006 2007Net sales 3622.694760.89 6859.66 9028 13149Cost of goods sold1813.302495.31 3654.93 4887 7278Gross profit1809.392265.58 3204.73 4141 5871Operating expenses537.25 681.93879.621152 1646PBIT1272.041583.65 2325.11 2989 4225Interest188230 268.22409469PBT 1158.9 1470.47 2056.89 2580 3756TAX 201227 325 303352PAT 953124319042421 3783Dividend178.81 862 309.801238 649Retained earnings 766.82 200 190 242378The report shows that there has been considerable increase in the net sales as manyacquisitions took place in the past two to three years. And there has also been increase inoperating profit and the net profit. Dividend has been declared every year. It was in the year2005 where there has been a decline in the dividend declared and in the next two years therehas been considerable increase in it.Babasabpatilfreepptmba.comPage 54 55. Equity Evaluation of Top 3 IT companiesThe key ratios of Infosys Technology LtdParticulars20032004200520062007Current ratio2.901.192.911.441.67Debt to equity --- --- --- --- ---ROE0.470.510.440.420.37Book 536197125 195value/shareEPS1823344467Bonus1 1 4 1.022.07adjustmentfactorP/E ratio28.33 26.72 32.37 33.53 29.48P/B ratio25232410Retention0.8 0.660.880.790.62ratioDividend per 5 6.6 9.5010.511.50shareCAGR of sales1/4/(Sales in 2007 sales in 2001) -1 1/4(13195/3622)-1 = 38%CAGR of EPS 1/4Babasabpatilfreepptmba.comPage 55 56. Equity Evaluation of Top 3 IT companies / (EPS in 2007 EPS in 2001) -1 1/4(18/67)-1 = 38.7%Volatility of ROE = 37%Estimation of next year income statementParticulars2006 2007 % Increase/Net sales9028 1314945%Cost of goods sold 4887 7289 49%Operating expenses 1152 1646 42%Interest 40946914%Tax30335216%Estimated Profit and Loss account for the next year Particulars 2008 Net sales 19066.05 Cost of goods sold10857.63 Gross profit8208.42 Operating expenses2337.32 PBIT5871.1 Tax 1334 PAT 4002.44Estimated EPS =Amount available to equity shareholders Number of equity shares outstanding = 4002.44 crore= Rs.71.87Babasabpatilfreepptmba.com Page 56 57. Equity Evaluation of Top 3 IT companies 556852339Average retention ratio = 0.88+0.79+0.62= 0.76 3Average payout ratio = 1-0.76= 0.24Required rate of returnBeta= 0.68Risk free rate=8%Market return on IT stocks=25%Market risk premium= 17%Required rate of return = 0.08+0.68*0.17=0.195 =19.5%Expected Growth rate of DividendAverage retention ratio in last 3 years * average return on Equity0.73 + 0.61 +0.66 * 34.04 +33.08 + 33.03330.5* 34.9 =17.5%P/E ratio as per constant dividend ModelAverage payout ratioAverage retention ratio expected growth rate of dividend0.5 =33.33Babasabpatilfreepptmba.com Page 57 58. Equity Evaluation of Top 3 IT companies0.195 - 0.175Value anchorValue anchor gives the expected price of share for next year.Expected EPS * Expected P/E ratio71.70 *33.33 = Rs. 2340TCS Ltd.Tata Consultancy Services is one of leading software providers in theworld. It has got 38 years of experience in the field of IT servies, Business solutions, andoutsourcing activities. It has got authorized share capital of 1,200,000,000 of Rs.1 each andhas got issued capital of 978,610,498 shares.The management Team includesRatan Tata ChairmanRon sommerIndependent DirectorA mehta Independent DirectorS. Ramaodorai CEO and M.DLaura Cha Independent DirectorStrategic Alliances and Acquisitions Strategic Acquisitions 1) TkS-Teknosoft S.A, Switzerland 2) TCS Management Pty Ltd, Austrailia Strategic Alliances 1) Tata Consultancy Services (China) Co.Ltd 2) MP online LtdBabasabpatilfreepptmba.comPage 58 59. Equity Evaluation of Top 3 IT companiesHuman Resource DevelopmentIt has got 85000 employees from 67 nationalities. TCS continues to be recognized for itsgood human resources practices. In the 2006 it has own Data Quest Best Employer awardfor the third consecutive time. It is marked by the lowest attrition rate of 11.3%.Awards and RecognitionDuring the year 2006-07 company received various awards and recognitions, significantamong which are the following a) Company of the year-2006 from the Economic Times. b) Dataquest best Employer-2006 c) Most Admired Knowledge Enterprise (MARK) d) CII EXIM Bank Award for Business Excellence 2006 e) Most Distinguished Achievement Award in Information Management from IBM.TCS in NumbersThe above chart shows the key markets in world wide IT spends. It can be seen that themajor customer for IT services is America, which receives about 51% followed by WesternEurope and the least being Middle East, and Africa.Babasabpatilfreepptmba.comPage 59 60. Equity Evaluation of Top 3 IT companies40003500The above shows the PAT of TCS. Aconsiderable increase can be noticed.30002500The performance of Shares v/s itsIndices20001500For the year 20061000 500 0 2004 2005 2006 20074000350030002500 Indices2000 TCS15001000 500 0 Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Marfrom the above graph it can be seen that share prices have underperformed compared to itsindices but volatility is less.For the year 2007Babasabpatilfreepptmba.com Page 60 61. Equity Evaluation of Top 3 IT companies45004000350030002500 Indices2000 TCS15001000 500 0 M ayjulDecOctJunJanFebAugSep AprM arNovIn this graph it can be noticed that value of share prices have been volatile and the value hasalso seen a decline.Financial Statement Analysis of TCS LtdBalance sheets (Rs.in crores)Particulars 200320042005 2006 2007Share Capital 36.44 36.44 48.0148.93 97.86Reserve and surplus 1244.76 10643273.045560.43 7961.13Shareholders fund 1856.92100.44 3321.055609.36 8058.99Loan funds90.12 127.35185100.09111.35Capital employed3228.22 3328.23 3506.115709.52 8170.34Babasabpatilfreepptmba.comPage 61 62. Equity Evaluation of Top 3 IT companiesFixed assets831.50985.551028.44 1449.8 2218.46Investments 414 1285.22 1404.42 1963.523252.04Net current assets1982.72 1057.46 1073.25 2296.222699.84Total 3228.22 3328.23 3506.11 5709.528170.34Share Capital120100 80 60 40 2002003 200420052006 2007The company has got an authorized capital of 1200,000,000 of equity shares out of which ithas issued 910,678,410 shares of Rs.1 each in the year 2007, but it was 36 crore in 2003 andit was not increased to a greater extent till 2007. The strategic acquisitions and alliances inthe year 2007 have lead to this increase in share capital.Babasabpatilfreepptmba.comPage 62 63. Equity Evaluation of Top 3 IT companiesReserves and Surplus900080007000600050004000300020001000 02003 2004200520062007The reserves and surplus have gradually increased over the period of time. Reason beingincrease in the profit earned by the company. It can be seen that the profit after tax of thecompany have increased manifold since 2004 hence the contribution to reserves and surplushave also increased.Investments350030002500200015001000 5000 20032004 200520062007The investments are showing an impressive growth. The reason for increase in investment isthe strategic tie up with many countries across the world. It has invested in newertechnologies and Wireless Application Protocol (WAP) as a strategic area of focus. Towardsthis the company has signed a memorandum of understanding with Jataayu Software (P)Ltd. It has also invested heavily in Research and development area. The investment has beenaround 200 crore.Babasabpatilfreepptmba.comPage 63 64. Equity Evaluation of Top 3 IT companiesNet Current Assets30002500200015001000500 02003 20042005 2006 2007The liquidity position of the company has been volatile. Company also faced a problem ofliquidity in the year of 2004.It can be seen from the graph that the liquidity position haddroped in the year 2004 and 2005 and gradually increased in the year 2006-07.Profit and Loss Account of 5 years of TCS Ltd(Rs. In Crores)Particulars2003 2004 20052006 2007Net sales4914 5517.888102.58 11293.76 15156.52Cost of goods sold 2012.703058 5548.37957.5410639Gross profit 2902 2459.882554.23074.354517.52Operating expenses 253.33 453.3526.3 257.38 343.41PBIT 2648.672006.582027.89 2816.974174.11Interest 6.68 7.89 10.40 4.49 3.43PBT2641.991998.692017.50 2812.484170.68Babasabpatilfreepptmba.com Page 64 65. Equity Evaluation of Top 3 IT companiesTAX 201 220 241.00322.41406PAT 2440.91778.69 1776.50 24903790Dividend178.81230.02240.06220.9 391.44Retained earnings 100810641205.47 3105.35294The report shows that there has been considerable increase in the net sales as manyacquisitions took place in the past two to three years. And there has also been increase inoperating profit and the net profit. Dividend has been declared every year. There has beenconsiderable increase in the dividend declared.The key ratios of TCS LtdParticulars 2003 2004200520062007Current ratio 3.14 0.051.772.251.99Debt to equity0.010.010.037.97 0.53ROE 36.5240.05 424447Book10.5012.92 69.17 114.6482.35value/shareEPS 3.72 4.1738.15 42.52 38.39Bonus 11 1.311.012adjustmentfactorP/E ratio -- 26323638P/B ratio ---20181015Babasabpatilfreepptmba.com Page 65 66. Equity Evaluation of Top 3 IT companiesRetention0.620.630.73 0.610.66ratioDividend per 1.001.2011.5013.50 11.50shareCAGR of sales1/4 /(Sales in 2007 sales in 2001) - 1 1/4(15156.52/4914)-1 = 32%CAGR of EPS 1/4/(EPS in 2007 EPS in 2001) - 1 1/4(38.89/3.87) -1 = 38.7%Volatility of ROE = 45%Estimation of next year income statementParticulars 20062007 % Increase/Net sales 11293.7615156.52 34%Cost of goods sold7957.54 1063933%Operating expenses257.38343.41 33%Interest4.493.49 22%Tax 322.4140616%Estimated Profit and Loss account for the next yearBabasabpatilfreepptmba.com Page 66 67. Equity Evaluation of Top 3 IT companies Particulars 2008 Net sales 20309.73 Cost of goods sold14149.87 Gross profit6159.86 Operating expenses230 PBIT6029.86 Tax 2109 PAT 3918Estimated EPS =Amount available to equity shareholders Number of equity shares outstanding= 3918,00,00,000= Rs. 40.04 97,86,10,498Average retention ratio = 0.88+0.79+0.62 = 0.53 3Average payout ratio = 1-0.53 = 0.47Required rate of returnBeta= 0.91Risk free rate=8%Market return on IT stocks=25%Market risk premium= 17%Babasabpatilfreepptmba.comPage 67 68. Equity Evaluation of Top 3 IT companiesRequired rate of return = 0.08+0.91*0.17=0.2347 =23.47%Expected Growth rate of DividendAverage retention ratio in last 3 years * average return on Equity0.73 + 0.61 +0.66 * 34.04 +33.08 + 33.03330.53 * 42=22.26%P/E ratio as per constant dividend Model Average payout ratioAverage retention ratio expected growth rate of dividend0.47=38.84 0.2347 - 0.2226Value anchor Value anchor gives the expected price of share for next year. Expected EPS * Expected P/E ratio 41.40*38.84= Rs. 1607.97Equity Valuation Models Equity valuation Models used for the study are as followsBabasabpatilfreepptmba.com Page 68 69. Equity Evaluation of Top 3 IT companies 1) Dividend Discount Model 2) Generalized Dividend Discount Model 3) Multi-period Model.Dividend Discount Model This model is used to calculate the expected price of share for the next year. The formulaused for calculation is as follows.Po = D1 + P1 (1+r) (1+r)WherePo = current Market PriceD1= Dividend per share in current yearR= expected rate of return on equityThe model is very useful in determining the market price of the share for the next year. Themodel is simple and easy to calculate as the data used are easily available and it is realisticas no assumpti