Indian IT industry analysis: wipro, tcs,infosys
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Technical and Fundamental analysis of Wipro, TCS, Infosys
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Indian IT industry analysis: wipro, tcs,infosys
- 1. Indian IT Industry Analysis- Wipro, TCS, Infosys Neelutpal Pankaj Akshay
- 2. 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.
- 3. 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).
- 4. • 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.
- 5. Wipro • The company was established in 1945 by Mohamed Hasham Premji as 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.
- 9. 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 MarketPrice of Share 628.85 543.2 473.15 P/ERatio 17.83972 17.10327 18.91843 Price-Earnings Ratio
- 10. 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
- 11. Intrinsic Value Calculation Ke= Rf+β(Rm-Rf)= 0.1212 Average 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 Equity Now 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 that So growth rate for next 5 years ia 15.4%, 13%, 11%, 9%, 7%
- 12. 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
- 13. 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(Ro unding off) Terminal Value 2015 12 0.1542 12 2016 13.8504 0.13 14 2017 15.65095 0.11 16 2018 17.37256 0.09 18 2019 18.93609 0.07 19 2020 20.26161 21 410.156 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/(1.0 8)^4+(21+410.16)/(1.08)^5 360.3751829
- 14. 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
- 15. 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 Forbes World'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.
- 18. Simple Moving Averages 0 500 1000 1500 2000 2500 3000 17-01-2013 06-02-2013 26-02-2013 18-03-2013 09-04-2013 02-05-2013 21-05-2013 10-06-2013 28-06-2013 18-07-2013 07-08-2013 29-08-2013 19-09-2013 10-10-2013 31-10-2013 21-11-2013 11-12-2013 01-01-2014 21-01-2014 10-02-2014 03-03-2014 22-03-2014 11-04-2014 07-05-2014 27-05-2014 16-06-2014 04-07-2014 24-07-2014 14-08-2014 05-09-2014 25-09-2014 21-10-2014 13-11-2014 03-12-2014 23-12-2014 13-01-2015 03-02-2015 24-02-2015 16-03-2015 SharePrice TCS 20 day Avg 50 day Avg 200 day Avg 0 500 1000 1500 2000 2500 3000 17-01-2013 06-02-2013 26-02-2013 18-03-2013 09-04-2013 02-05-2013 21-05-2013 10-06-2013 28-06-2013 18-07-2013 07-08-2013 29-08-2013 19-09-2013 10-10-2013 31-10-2013 21-11-2013 11-12-2013 01-01-2014 21-01-2014 10-02-2014 03-03-2014 22-03-2014 11-04-2014 07-05-2014 27-05-2014 16-06-2014 04-07-2014 24-07-2014 14-08-2014 05-09-2014 25-09-2014 21-10-2014 13-11-2014 03-12-2014 23-12-2014 13-01-2015 03-02-2015 24-02-2015 16-03-2015 TCS Close
- 19. Fundamental Analysis of Ratios Book 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
- 20. 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 Ratios Items 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
- 21. 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 that So 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=0.32 Average Retention Ratio=1-0.32=0.68 Average ROE=0.3057 Growth(g)=(Reinvestment value*ROE) =0.68*0.3057 =0.207876 Current Dividend Per Share =12 million Future 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
- 22. 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
- 23. 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(Rou nding 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 71 1386.718 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)^5 1257.85029
- 24. 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.
- 25. 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
- 26. Technical Analysis 0.00 10.00 20.00 30.00 40.00 50.00 60.00 70.00 80.00 90.00 100.00 Infosys Nifty
- 29. 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
- 30. 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 Ratios Items 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
- 31. 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 2(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
- 32. 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.
- 33. Thanks