EQUITY RESEARCH
GROUP ASSIGNMENT
Submitted to: Prof. Sanjay Shanbhag
Submitted by:
Ankul Gupta (201601239, Sec-B)
Romil Bhawsar (201601238, Sec-A)
Design of the study
Title of the study
“Equity Valuation of Top Three IT Companies”
Objectives of the study
a) To study the performance of three IT Companies namely Wipro, Infosys, TCS.
b) To evaluate the financial performance of these companies through fundamental analysis by
taking in to consideration data of last five years
c) 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 maximum returns.
Scope of the study
a) The study is conducted only on the Equity shares of the company
b) The study covers only top three companies in IT sector
c) Five years (2003-07) data has been taken into consideration for the study
Need for Equity valuation of IT Companies
India’s information technology services companies, the proud mascot of a modern, resurgent India, and
darling of investing public, have started losing 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 do they have the talent, resources and infrastructure to overcome the
daunting problems that afflict them now and hit the high-growth path once again. So it is very necessary
to know what the investors should do at this time.
Equity Valuation
Equity valuation in recent years has become one of the important aspects in finance field. Today Equity
Valuation has received much attention and it is the need of the hour. Equity Valuation is a way of
determining the value of equity share of the company. To evaluate 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 India’s
contribution in the world’s 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.
This is generally how the equity is valued. Equity Valuation is becoming increasingly important as India is
operating in global scenario where it becomes important to know what exactly the value of company is.
India in Global Economy
Global economic health has never been more robust, as the number of countries in recession has fallen
to the lowest level in decades, according to a new report from Deutsche Bank.
An analysis of International Monetary Fund forecasts for individual countries’ real gross domestic
product year-over-year growth from 1980 out to 2021 reflects that the global economy has “never been
in better shape,” said Torsten Slok, Deutsche Bank’s chief international economist.
Central Statistics Organization and International Monetary Fund numbers indicate that India is now the
fastest growing major economy in the world. The divergence between macro growth estimates and
other indicators such as Index of Industrial Production, exports, corporate profits, credit growth,
investment data has, however, fuelled speculation that India’s growth may have suffered as much as
China.
Still, Indian economy bags the seventh position among the other strongest and largest economies
among the world. Being one of the top listed countries among the developing countries in terms of
industrialization and economic growth, India holds a robust stand with an average growth rate of
approx. 7%.
The Indian economy has emerged as a robust economic player among the economic giants like-US, UK,
China, etc. Even though the rate of growth has been sustainable and comparatively stable, but there are
still fair opportunities of growth.
With the growing standards and opportunities in India, it is expected to very soon capture a very
dominant position among the others in the world. With the global economy in search of a new engine of
growth, and with India emerging as the fastest growing major economy, there is some speculation that
India might take over China’s role.
IT Industry Performance
Exhibit 1 :(Source: https://www.statista.com/statistics/320776/contribution-of-indian-it-industry-to–
india-s-gdp/)
This statistic depicts the size of the information technology and business process management (IT-BPM)
industry in India as a share of India’s gross domestic product (GDP) between the fiscal years 2008/09
and 2016/17. In fiscal year 2017 the IT-BPM sector contributed 7.7 percent to India’s overall GDP.
Though IT sector contributes a good portion for India’s GDP but its contribution has declined since last
year and is assumed to decline further in coming years due to uncertainties in market.
Uncertainties in the market:
• Technavio’s market research analyst predicts the global IT services market to grow at a CAGR of
not more than 5% by 2020. Companies are increasingly outsourcing their IT-related
requirements such as application and infrastructure management to ITO service providers. They
are implementing IT services such as managed services and ITO services to focus on their core
operations.
• For the first time since 2009-10, Tata Consultancy Services Ltd (TCS), Infosys and Wipro Ltd,
which make up a quarter of the IT industry’s total business, grew slower than the industry’s
8.6% growth in constant currency terms in 2016-17. Constant currency eliminates the effect of
currency movements.
• Profitability, too, took a hit at the largest IT companies, which employed 3.9 million people as at
the end of March 2017, lobby group National Association of Software and Service Companies
(Nasscom) said in May.
