indian it industry analysis: wipro, tcs,infosys
TRANSCRIPT
Indian IT Industry Analysis-Wipro, TCS, Infosys
Neelutpal
Pankaj
Akshay
Background
• India is the world's largest sourcing destination for the information technology (IT) industry, accounting for approximately 52 per cent of the US$ 124-130 billion market.
• The industry employs about 10 million Indians and continues to contribute significantly to the social and economic transformation in the country.
• The IT industry has not only transformed India's image on the global platform, but has also fuelled economic growth by energizing the higher education sector especially in engineering and computer science.
• India's cost competitiveness in providing IT services, which is approximately 3-4 times cheaper than the US, continues to be its unique selling proposition (USP) in the global sourcing market.
Macroeconomic Factors• Labour arbitrage has been the competitive edge of the Indian
software sector over the last few years. However, the focus has now shifted to providing value to clients beyond cost savings.
• The new Indian government is emphasizing on better technology enabled delivery mechanisms for a multitude of government projects.
• Government Initiatives: The adoption of key technologies across sectors spurred by the 'Digital India Initiative' could help boost India's gross domestic product (GDP) by US$ 550 billion to US$ 1 trillion by 2025.
• Policy and Promotion: In the electronics and IT sector, 100% FDI is permitted under the automatic route. The major fiscal incentives provided by the Government of India in this sector have been for export-oriented units (EOU), software technology parks (STP) and special economic zones (SEZ).
• Exchange Rate: Recent changes in global economy such as recession and looming threat of deflation in the US and Europe has contributed to the weakening of the USD against major other currencies including the rupee. This has affected India’s export sector, especially information technology sector because sixty seven percent of their revenues come from US and about ninety percent of exports are invoiced in USD.
• Business Cycle: While the business model has enabled Indian software companies to transit smoothly from software "body-shopping" services to off-shore software development in India, it has also made them vulnerable to the business cycles in client countries.
• Inflation: The nature of inflation in India is mainly cost push inflation, which leads to rise in rise in factor costs such as land, labor and capital. Since the Indian IT industry is more dependent on Manpower, the cost of HR increases significantly in the form of salaries. This rise in cost in the IT industry is compensated by the depreciation in the value of rupee. Therefore, Indian IT industry is largely unaffected by inflation unless there is an external factor like global economic slowdown etc.
Wipro
• The company was established in 1945 by Mohamed Hasham Premjias Western India Products Limited listed on the New York Stock Exchange. Wipro was initially set up as a vegetable oil manufacturer in 1945 in Amalner, Maharashtra, producing sunflower Vanaspati oil and soaps. At that time, the company was called Western India Vegetable Products Limited (later abbreviated down to Wipro).
• Wipro marketed the first indigenous homemade PC from India in 1985. In 1966 Azim Premji, still the majority shareholder as the chairman of the company at the age of 21 and with the passage of time transformed it into one of the largest IT outsourcing services provider of the world. By 2000, Wipro Technologies emerged as the largest publicly listed software exporter in India and the first software services provider to be assessed at SEI Level 5 in the world.
Technical AnalysisTrend
Relative Strength Index
Simple Moving Averages
Fundamental Analysis of Ratiosin million rupees
Items 2014-15 2013-14 2012-13
Book Value 166 140 116
Market Price of Share 628.85 543.2 473.15
EPS 35.25 31.76 25.01
DPS 12 8 7
Book Value
Items 2014-15 2013-14 2012-13
EPS 35.25 31.76 25.01
DPS 12 8 7
Pay-out Ratio 0.340426 0.251889 0.279888
Average 0.290734248
Payout Ratio
in million rupees
Items 2014-15 2013-14 2012-13
Share Capital 4937 4932 4926
Reserves and Surplus 341279 288627 237369
Net Worth 409628 344886 284983
PAT 86528 77967 61362
ROE 0.211236 0.226066 0.215318
Average ROE 0.21753989
Return on Equity
Items 2014-15 2013-14 2012-13
EPS 35.25 31.76 25.01
Market Price of Share 628.85 543.2 473.15
P/E Ratio 17.83972 17.10327 18.91843
Price-Earnings Ratio
Items 2014-15 2013-14 2012-13
Sales(in million rupees) 412100 387651 332296
PAT(in million rupees) 86528 77967 61362
Profit Margin 20.99685 20.11268 18.46607
EPS (in Rupees) 35.25 31.76 25.01
DPS (in Rupees) 12 8 7
Rate of Growth
Items 2014-15 2013-14 2012-13
Current Assets 398555 326042 283848
Current Liabilities 173653 148852 161246
Current Ratio 2.295123 2.190377 1.760341
PBT 105570 96082 72051
Interest/Finance Cost 3629 3747 3524
EBIT 109199 99829 75575
Interest Coverage Ratio 30.09066 26.64238 21.4458
Shareholder Funds 346216 293559 242295
Debt 78913 51592 63816
Debit Equity Ratio 0.22793 0.175747 0.263381
Ratios
Items 2014-15 2013-14 2012-13
PAT 86528 77967 61362
Total Assets 534085 457369 407066
ROA 0.162012 0.170468 0.150742
Return on Assets
Intrinsic Value CalculationKe= Rf+β(Rm-Rf)= 0.1212Average Dividend Payout Ratio=0.2907
Average Retention Ratio=1-0.2907=0.7093
Average ROE=0.2175
Growth(g)=(Reinvestment value*ROE)
=0.7093*0.2175
=0.15427275
Current Dividend Per Share =12 million
Future Dividend = 12*(1+0.1542)
=13.8504
=14 (approx)
WACC=Weight1*Cost of debt+Weight2*Cost of EquityNow taking Cost of debt as benchmark prime lending rate=14.6%
WACC=0.18*0.146+0.82*0.1212 =0.1256
For Intrinsic Value calculation, we will use a multi-stage model
Let us assume this high growth slowly declines to about 7% in steps of 2 and becomes constant after thatSo growth rate for next 5 years ia 15.4%, 13%, 11%, 9%, 7%
FCFF=EBIT(1-tax rate) +Depreciation-Capital Expenditure-Increase in Net Working Capital
=109199(1-0.22)+7784-0-(331518-307602)
69043.22 million rupees
1585737.139 million rupees or 158573.7 crores
33973.4 million rupees or 3397.34 crores4
847868.2283 million rupees or 84786.8 crores
Now, after year 5, we will find the Share Price using Dividend Growth Model as growth will become constant after that
Year DividendDividend Growth
Dividend(Rounding off)
Terminal Value
2015 12 0.1542 122016 13.8504 0.13 142017 15.65095 0.11 162018 17.37256 0.09 182019 18.93609 0.07 19
2020 20.26161 21410.156
3
Present Value of Share is NPV (Dividend Pay in each year)+NPV of Terminal Value=12+14/(1.08)+16/(1.08)^2+18/(1.08)^3+19/(1.08)^4+(21+410.16)/(1.08)^5
360.3751829
Analysis• Market Firm value(Projected)=1585.7 billion rupees• Actual Book Value (Net Worth)= 409.628 billion rupees• Therefore Book to Market Ratio(Projected)= 409.628/1585.7 = 0.26• Calculated Share Price=360.375• Actual Share Price trading = 565.60 (less than March closing of 628.85)• No of shares= 1,812,022,464• Therefore Current Market value is (No. of shares*Share trading price)• =1024.88 billion rupees• And Book to Market Ratio= 0.399• Share Prices are overvalued according To Dividend Growth Model. It is partly due
to the high growth rate of Software Industry. Wipro has the same case. Long term investors should look at a time period of about 3 years for capital growth and then constant growth of dividend payment.
• According to FCFF model, share prices should go higher as current Book to market ratio is lower than the projected Book to market ratio (keeping Book value constant)
• Investors looking for short time gains should not invest in Wipro in general due to high volatility of stocks. Though the year 2014-15 saw very high growth, but same is not reflected by current share prices. It is impossible to maintain so high growth rates always
TCS
• Tata Consultancy Services Limited (TCS) is an Indian multinational information technology (IT) service, consulting and business solutions company headquartered in Mumbai, Maharashtra. TCS operates in 46 countries.
• It is a subsidiary of the Tata Group and is listed on the Bombay Stock Exchange and the National Stock Exchange of India. TCS is one of the largest Indian companies by market capitalization ($80 billion) and is the largest India-based IT services company by 2013 revenues.
• TCS is now placed among the ‘Big 4’ most valuable IT services brands worldwide. In 2013, TCS is ranked 57th overall in the ForbesWorld's Most Innovative Companies ranking, making it both the highest-ranked IT services company and the first Indian company. It is the world's 10th largest IT services provider, measured by the revenues.
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TCS
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TCS
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TCS
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Fundamental Analysis of RatiosBook Value
Items 2014-15 2013-14 2012-13
Book Value of share 9376.12 7034.81 8141.87
Market Price of Share 2,553.95 2,251.90 1,589.90
EPS 101.35 97.67 70.99
DPS 79 32 22
Payout Ratio
Items 2014-15 2013-14 2012-13
EPS 101.35 97.67 70.99
DPS 79 32 22
Pay-out Ratio 0.779477 0.327634 0.309903
Average 0.318768336
Price-Earnings Ratio
Items 2014-15 2013-14 2012-13
EPS 101.35 97.67 70.99
Market Price of Share 2,553.95 2,251.90 1,589.90
P/E Ratio 25.19931 23.05621 22.39611
Return on Equity
Share Capital 195.87 195.87 295.72
Reserves and Surplus 50438.89 48998.89 38350.01
Net Worth 50634.76 49194.76 284983
PAT 19852.18 19,163.87 38,645.73
ROE 0.392066 0.389551 0.135607
Average ROE 0.305741475
Rate of Growth
Items 2014-15 2013-14 2012-13
Sales(in million rupees) 97878.32 83,446.10 64,167.71
PAT(in million rupees) 19852.18 19,163.87 13,917.31
Profit Margin 20.28251 22.96557 21.68896
EPS (in Rupees) 101.35 97.67 70.99
DPS (in Rupees) 79 32 22
RatiosItems 2014-15 2013-14 2012-13
Current Assets 48813 42897.69 31398.46
Current Liabilities 20318.24 15670.31 11664.71
Current Ratio 2.402423 2.737514 2.691748
PBT 26298.49 25401.86 18089.73
Interest/Finance Cost 2890.06 2891.02 1945.9
EBIT 29188.55 28292.88 20035.63
Interest Coverage Ratio 10.09963 9.78647 10.29633
Shareholder Funds 50634.76 49194.76 284983
Debt 299.83 254.35 211
Debit Equity Ratio 0.005921 0.00517 0.00074
Return on Assets
Items 2014-15 2013-14 2012-13
PAT 19852.18 19,163.87 13,917.31
Total Assets 73660.88 57604.19 52267.22
ROA 0.269508 0.332682 0.266272
Intrinsic Value Calculation
For Intrinsic Value calculation, we will use a multi-stage model
Let us assume this high growth slowly declines to about 7% in steps of 2 and becomes constant after thatSo growth rate for next 5 years are 20%, 16%, 12%, 9%, 7%
Ke= Rf+β(Rm-Rf)
=0.08+0.1903(0.1690-0.08)=0.0969
Average Dividend Payout Ratio=0.32Average Retention Ratio=1-0.32=0.68Average ROE=0.3057
Growth(g)=(Reinvestment value*ROE)
=0.68*0.3057
=0.207876Current Dividend Per Share =12 millionFuture Dividend = 12*(1+0.207876)
=14.4=14 (approx)
WACC=Weight1*Cost of debt+Weight2*Cost of Equity
Now taking Cost of debt as benchmark prime lending rate=14.6%WACC=0.004*0.146+0.996*0.0969 =0.0971
FCFF=EBIT(1-tax rate) +Depreciation-Capital Expenditure-Increase in Net Working Capital
=29188.55(1-0.22)+1,798.69-136.56-22,633.58-21,495.39)
23291.009 crore rupees
1185932.939 crores
18922.825 crores
970713.7116 crores
Now, after year 5, we will find the Share Price using Dividend Growth Model as growth will become constant after that
Year DividendDividend Growth
Dividend(Rounding off) Terminal Value
2015 39 0.2 39
2016 46.8 0.16 47
2017 54.288 0.12 54
2018 60.80256 0.09 61
2019 66.27479 0.07 66
2020 70.91403 711386.718
75
Present Value of Share is NPV (Dividend Pay in each
year)+NPV of Terminal Value
=79+47/(1.08)+54/(1.08)^2+61/(1.08)^3+66/(
1.08)^4+(71+1386.72)/(1.08)^51257.85029
Analysis• Market Firm value(Projected)= 1185932.939 cr rupees • Actual Book Value (Net Worth)= 50634.76 cr rupees• Therefore Book to Market Ratio(Projected)= 50634.76 /1185932.94 = 0.04• Calculated Share Price=1257.85• Actual Share Price trading = 2550 • No of shares= 1,958,727,979• Therefore Current Market value is (No. of shares*Share trading price)• =49947.56 Cr• And Book to Market Ratio= 50634.76/49947.56 = 1.013• The projected share price according to the Dividend growth model is
almost half of the present value, but the current Book to Market ratio is more than 1 showing that the shares are undervalued. Again from the FCFF model, we can see the projected Book to market ratio is 0.04 and the shares are undervalued. Thus the two models give same results. The fact is TCS with its current growth rate is undervalued in the market and investors should buy shares. But after a while the share prices will dip and reach equilibrium. According to our analysis, it is an attractive proposition for short time till the growth curve dips.
Infosys
• Infosys Limited is an Indian multinational corporation that provides business consulting, information technology, software engineering and outsourcing services.
• It is headquartered in Bangalore• The Company also offers products, platforms and
solutions to clients in different industries. Its business solutions include business IT services, consulting and systems integration services, products, business platforms and solutions, and cloud computing and enterprise mobility
Technical Analysis
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Infosys
Nifty
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RSI
INFOSYS
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Infosys
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Analysis of ratios Book Value
Items 2014-15 2013-14 2012-13
Book Value 418.54 736.64 627.95
Market Price of Share 1963.5 3119.10 2811
EPS 105.91 178.4 158.75
DPS 59.5 63 42
Payout Ratio
Items 2014-15 2013-14 2012-13
EPS 105.91 178.4 158.75
DPS 59.5 63 42
Pay-out Ratio 0.562 0.353 0.265
Average 0.39
Return on Equity
Items 2014-15 2013-14 2012-13
Share Capital 574 286 287
Reserves and Surplus 47494 41806 35772
Net Worth 48068 42092 36059
PAT 12164 10194 9116
ROE 0.25 0.24 0.25
Average ROE 0.25
Analysis of ratios
Rate of Growth
Items 2014-15 2013-14 2012-13
Sales(in Cr rupees) 412100 44341 36765
PAT(in Cr rupees) 12164 10194 9116
EPS (in Rupees) 105.91 178.4 158.75
DPS (in Rupees) 59.5 63 42
RatiosItems 2014-15 2013-14 2012-13
Current Assets 33095 28689 26127
Current Liabilities 5700 4503 3181
Current Ratio 5.81 6.37 8.21
PBT 16798 14002 12357
Dividend/Interest
Income 5111 3618 2412
EBIT 21909 17620 14769
Shareholder Funds 574 286 287
Weight (Equity) 1 1 1
Price-Earnings Ratio
Items 2014-15 2013-14 2012-13
EPS 105.91 178.4 158.75
Market Price of Share 5.3 4.46 4.6
P/E Ratio 19.98 40 34.51
Return on Assets
Items 2014-15 2013-14 2012-13
PAT 12164 10194 9116
Total Assets 48068 42092 36059
ROA 0.253 0.242 0.253
Intrinsic Value CalculationKe= Rf+β(Rm-Rf)
=0.08+0.7581(0.1690-0.08)
0.1474709
Average Dividend Payout Ratio=0.39
Average Retention Ratio=1-0.39=0.61
Average ROE=0.25
Growth(g)=(Reinvestment value*ROE)
=0.61*0.25
0.1525
Current Dividend Per Share =59.5
Future Dividend = 59.5*(1+0.1525)
68.57375
=69 (approx)
For Intrinsic Value calculation, we will use a multi-stage model
Let us assume this high growth slowly declines to about 7% in steps of 2 and becomes constant after that
So growth rate for next 5 years ia 15.25%, 13%, 11%, 9%, 7%
FCFF=EBIT(1-tax rate) +Depreciation-Capital Expenditure-Increase in Net Working Capital
=21909(1-0.22)+913+0-0 Taking Corporate Tax rate =22%
18002.02
Now
1087223.69
Now, after year 5, we will find the Share Price using Dividend Growth Model as growth will become constant after that
Year Dividend Dividend Growth Dividend(Rounding off)Terminal Value
2015 59.5 0.1522 59.5
2016 68.5559 0.13 69
2017 77.46817 0.11 77
2018 85.98967 0.09 86
2019 93.72874 0.07 94
2020 100.2897 100 1953.125
Present Value of Share is NPV (Dividend Pay in each year)+NPV of Terminal Value
=59.5+69/(1.08)+77/(1.08)^2+86/(1.08)^3+94/(1.08)^4+(100+1953.125)/(1.08)^5
1724.088733
=18002.02(1+0.152)/(1+.1474)+18002.02(1+0.13)(1.152)/(1+.1474)^2 + 18002.02(1+0.11)(1.13)(1.152)/(1+.1474)^3+18002.02(1+0.09)(1.11)(1.13)(1.152)/(1+.1474)^4 + 18002.02(1.07)(1+0.09)(1.11)(1.13)(1.152)/(1+.1474)^5 +18002.02(1+0.07)^2(1.09)(1.11)(1.13)(1.152)/((.1474-.07)(1+.1474)^5)
Analysis
• Market Firm value(Projected)= 1087223.69 cr rupees • Actual Book Value (Net Worth)= 48068 cr rupees• Therefore Book to Market Ratio(Projected)= 48068 /1087223.69 = 0.04• Calculated Share Price= Rs 1724.08• Actual Share Price trading = Rs 1090.70 • No of shares= 1,14,84,72,332• Therefore Current Market value is (No. of shares*Share trading price)• =125263.88 Cr• And Book to Market Ratio= 48068/125263.88 = 0.38• The projected share price according to the Dividend growth model and
discounted cash flow model shows that the current market price of the share is undervalued and it will continue to rise in future.
• Also according to FCFF model, it is undervalued as well, since so we advise investors to buy the stock at current period and hold for a while.
Thanks