Company Analysis-2

A Case on IT Companies in India

Example: Infosys

Finacle, a product of the company is recognized as the world's scalable openended system based on providing corebanking solutions. In the year 2004, it crossed the billionrevenue mark. As on 31/03/2005, promoters held 21.76 % shares of the company while institutional investors held 47.62 %. Other investors and the general public held 11.62% and 19.01 % respectively.
Dr. Jitendra Mahakud 2

Financial Analysis as on March 31 2005

53.15% jumps in net profit Operating income of the company grew by 44.08% Operating profit grew by 47.73% Net profit margin was up by 182 basis points to 27.25% from 25.43% for the year under review.
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Infosys Vs. Index

Company & Index
7000 6000 5000 10000 9000 8000 7000 6000 5000 3000 2000 1000 0 1999-00 2000-01 2001-02 Sensex Infosys 2002-03 2003-04 4000 3000 2000 1000 0

4000

Dr. Jitendra Mahakud

Infosys Market Price

Sensex Indices

Return and Market Price

Infosys (Return of Market Price % Sensex)
160% 140% 120% 100% 80% 60% 4/1/2004

7/1/2004

10/1/2004 Return (Market Price)

1/1/2005 Return (Sensex)

5

Dr. Jitendra Mahakud

SWOT Analysis of Infosys

Strengths:

Weaknesses:

Good brand recall amongst decision-makers. Strong technical expertise Attrition amongst key professionals, especially on the delivery side. Inability to take on the Global Big Five in terms of scale. Growth in package implementation, consulting services and availability of cash reserves to pursue acquisitions MNCs building offshore capabilities, anti-off shoring lobby in Western markets
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Opportunities:

Threats:

WIPRO

Wipro is the largest company in India in terms of market capitalization. The company operates through five principal business segments: Global IT Services and Products, IT Enabled Services, India and Asia-Pac IT Services and Products, Consumer Care and Lighting and Health Science.
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Financial Analysis as on March 31 2005

The net profit growth has increased from 23.3% to 56.5% The company gross profit margin is 24.9% The company decided to lessen the dividend this year which Rs. 29 per share to Rs. 5 per share.
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One year Wipros comparative graph with BSE

. WIPRO

....- BSE Sensex

Dr. Jitendra Mahakud 9

SWOT Analysis of Wipro

Strengths:

Weaknesses:

The company The company The company The company The company The company

has brand recognition. provides quality products. has strong licensing networks. has a strong economic base. does an effective advertising campaigning. is growing in international markets.

Opportunities:

There is lack of backward and forward integration in the company. The companys revenues are highly dependent on its IT service sales. The company is possibly slow in technology development. The company has no clear future plan. IT boom back after the debacle of 9/11. Offshore outsourcing is being increasingly accepted as a strategic imperative by more organizations today

Threats:

There are new technologies available for small engines that the company cannot compete with. There are new entrants into the market.

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Satyam

Satyam Computer Services Ltd (Satyam) is a leading global consulting and IT services company It has excellent domain competencies in verticals such as Automotive, Banking & Financial Services, Insurance & Healthcare, Manufacturing, and in TIMES i.e. the Telecom, Infrastructure, Media, Entertainment & Semiconductors sector. As on 31/03/05 the Promoters, Institutional Investors, General Public and Others held 15.67%, 66.96%, 4.47% and 12.90% of the share holding pattern of the company respectively.
Dr. Jitendra Mahakud 11

Financial Analysis as on March 31 2005

There is 36.30% growth in sales. There is a 28.38% growth in operating profit Gross profit increased by 25.52% Net profit margin increased by 238 basis points from19.40 % to 21.78%

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Company and Index

Company & Index
7000 6000 5000
Sexsex

5000 4500 4000

Satyam Market Price

3500 3000 2500

4000 3000 2000 1000 0 1999-00 2000-01 2001-02 Sensex Satyam 2002-03 2003-04

2000 1500 1000 500 0

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Return and Market Price

Satyam (Return of Market Price % Sensex)
160% 140% 120% 100% 80% 60% 4/1/2004

7/1/2004

10/1/2004 Return (Market Price)

1/1/2005 Return (Sensex)

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SWOT Analysis of Satyam

Strengths:

Weaknesses:

They have the third largest market share in India. Satyam has a strong financial position. Company revenues and earnings have been rising steadily, a low tax rate
Satyam is smaller in size compared to its direct competitors. Infosys, Wipro, Tata, CSC, are all multibillion. The companys revenues are highly dependent on its IT service sales

Opportunities:

Threats:

Satyam has been selected by Check Free Investment Services (CIS), to become the partner to CIS in the development of its next generation Check Free EPL(TM) platform. Offshore outsourcing is being increasingly accepted as a strategic imperative by more organizations today
Lot of competition in this industry including pricing pressures and technological development. Changes in political, economic or other factors such as currency exchange rates, inflation rates affect the worldwide business in each of the companys Operations

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Current Ratio
Current Ratio 8

Number

6 4 2 0
Satyam Infosys Wipro Mar 2000 4.93 4.18 1.66 Mar 2001 3.44 2.9 2.98 Mar 2002 6.81 3.09 3.79 Mar 2003 4.51 3.16 3.29 Mar 2004 5.34 2.03 2.01 Mar 2005 5.74 3.2 2.53

Satyam Infosys Wipro

Year

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Net Profit Margin =

Profit after Tax --------------------Net Sales

Net profit margin ratio

0.5

0 Satyam Infosys Wipro

Mar 0.19 0.33 0.1

Mar 0.4 0.33 0.21

Mar 0.26 0.31 0.25 Year

Mar 0.15 0.26 0.2

Mar 0.22 0.26 0.18

Mar 0.22 0.28 0.21

Satyam

Infosys

Wipro
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Dr. Jitendra Mahakud

Debt Equity Ratio =

Debt ---------------Equity

1.00 0.80 0.60 0.40 0.20 0.00 Mar Mar Mar Mar Mar Mar Satyam 0.77 0.23 0.01 0.01 0.00 0.00 Infosys 0.00 0.00 0.00 0.00 0.00 0.00 Wipro 0.10 0.30 0.10 0.20 0.30 0.20
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Satyam Infosys Wipro

Debt Ratio =

Total Liabilities --------------------Total Assets

Debt Ratio

0.6

Number

0.4 0.2 0 Satyam 0.5 0.3 0.1 0.2 0.2 0.2 Infosys Wipro 0.2 0.2 0.2 0.2 0.4 0.2 0.4 0.2 0.2 0.2 0.3 0.3 Year

Satyam Infosys Wipro

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Return on Equity = Profit after Tax / Book Value of Equity

Return on Equity
20 10 0 Satyam Infosys Wipro

Mar 2.09 2.33 1.77

Mar 16.82 2.99 9.41

Mar 7.32 2.57 10.76

Mar 4.53 2.22 7.68

Mar 6.81 2.55 8.25

Mar 7.45 9.8 9.75

Year Satyam Infosys Wipro

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ROCE =

EBIT ------------------------------------------Total Assets Current Liabilities

Return on Capital Employed

0.6

Rs.

0.4 0.2 0 Satyam 0.28 0.57 0.27 0.19 0.27 0.29 Infosys Wipro 0.4 0.51 0.46 0.42 0.46 0.23 0.38 0.39 0.38 0.28 0.3 0.36 Year

Satyam Infosys Wipro

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EPS = Profit after Tax / No. of Outstanding Shares

Earning Per Share

Rs./Share

200.00 100.00 0.00

Mar

Mar

Mar

Mar

Mar

Mar

Satyam 23.11 17.29 14.29 9.77 17.57 23.50 Infosys 44.37 95.05 122.1 144.6 186.6 70.58 Wipro 43.22 23.38 27.54 25.85 28.93 46.82 Year

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Risk Analysis
RISK COMPOSURE (2003-4)
100%

RISK COMPOSURE (2004-5)

100% 50% 0%
Unsysystematic Risk Systematic Risk

50%

0%
Unsysystematic Risk Systematic Risk

SATYAM 53.47% 46.53%

INFOSYS 69.35% 30.65%

WIPRO 51.02% 48.98%

SATYAM 62.78% 37.22%

INFOSYS 53.31% 46.69%

WIPRO 43.27% 56.73%

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Beta Analysis
YEARLY BETA (2003-4)
2 1.5 1 0.5 0.5 0
SATYAM INFOSYS WIPRO

YEARLY BETA (2004-5)

1.31 1.5 1 0.81 0.8

1.65 1.26

1.45

0
SATYAM INFOSYS WIPRO

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Alpha Analysis: Alpha indicates the stock return when the market return is zero. A positive alpha indicates that the stock is under priced and negative alpha indicates that the stock is overpriced based on assets pricing model.

Alpha (2004-5)
25.00% 20.00% 15.00% 10.00% 5.00% 0.00% SATYAM INFOSYS WIPRO 9.84% 20.12% 10.42%

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Infosys technologies ltd.

Rs. Crore Actual Mar 2005 12 mths PAT
Appropriation of profits

Projected Mar 2006 12 mths 2765.09 Mar 2007 12 mths 3789.38 Mar 2008 12 mths 5168.40 Mar 2009 12 mths 6999.16 Mar 2010 12 mths 9376.59

1904.38

Dividends Retained earnings No.of Shareholders EPS

P/E Market Price

356.56 1547.82 270570549 70.38

31.91 2245.95

723.92 2041.17 270570549 102.19

31.91 3261.04

992.08 2797.30 270570549 140.05

31.91 4469.04

1353.12 3815.28 270570549 191.02

31.91 6095.40

1832.42 5166.74 270570549 258.68

31.91 8254.53

2454.85 6921.74 270570549 346.55

31.91 11058.38

Intrinsic Value = Market Price/ (1+ke)^n = (11058.38)/(1+.197)^5 = Rs 4500.08 From the above table, we can observe that projected market price of share after 5 years i.e. FY2010 is Rs 11060.68. After discounting it to present value, by taking cost on equity (ke) as 19.7%, we get the intrinsic value of Rs 4500.08. As it can be seen from the above table, the market price on March 2005 is comparatively less than the calculated intrinsic value. Thus, it can be analyzed that the market price of the share is highly undervalued in comparison with its intrinsic value.

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Wipro technologies ltd.

Rs. Crore Actual Mar05 PAT 12 mths 1494.82
Appropriation of profits Dividends Retained earnings No.of Shareholders EPS P/E Market Price 401.12 1093.70 703570522 21.25 29.73 670.95 363.37 1415.77 703570522 25.29 29.73 751.79 449.21 1750.22 703570522 31.26 29.73 929.39 555.34 2163.71 703570522 38.65 29.73 1148.96 686.55 2674.95 703570522 47.78 29.73 1420.43 848.79 3307.07 703570522 59.07 29.73 1756.09

Projected Mar06 12 mths 1779.14 Mar07 12 mths 2199.43 Mar08 12 mths 2719.05 Mar09 12 mths 3361.50 Mar10 12 mths 4155.86

Intrinsic Value = Market Price/ (1+ke)^n = (1756.09)/(1+.2928)^5 = Rs 486.29 From the above table, we can observe that projected market price of share after 5 years i.e. FY2010 is Rs 1756.09. After discounting it to present value, by taking cost on equity (ke) as 29.28%, we get the intrinsic value of Rs 486.29. From the above table, we can observe that market price of share on 31 st mach 2005 is 670.95 which is higher than its intrinsic value i.e. Rs 486.29. Thus it can be analyzed that the market price of the share is very much overvalued in comparison with its intrinsic value. This analysis proves that from the investor point of view, this share is looking weak for the near future.

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Satyam Computer Services Ltd.

Rs. Crore Actual Mar 2005 Mar 2006 Mar 2007 Projected Mar 2008 Mar 2009 Mar 2010

12 mths PAT Appropriation of profits Dividends Retained earnings No.of Shareholders EPS
P/E Market Price

12 mths 1190.08

12 mths 1601.21

12 mths 2147.28

12 mths 2873.76

12 mths 3842.15

750.26

180.49 569.77 319265291 23.50

17.38 408.5

214.75 975.34 319265291 37.28

17.38 647.85

288.94 1312.27 319265291 50.15

17.38 871.66

387.47 1759.80 319265291 67.26

17.38 1168.92

518.57 2355.20 319265291 90.01

17.38 1564.41

693.31 3148.84 319265291 120.34

17.38 2091.57

Intrinsic Value = Market Price/ (1+ke)^n= (1756.09)/(1+.1965)^5 = Rs 852.92 From the above table, we can observe that projected market price of share after 5 years i.e. FY2010 is Rs 2091.57. After discounting it to present value, by taking cost on equity (ke) as 16.7%, we get the intrinsic value of Rs 852.92. As it can be seen from the above table, the market price on March 2005 is comparatively less than the calculated intrinsic value. Thus it can be analyzed that the market price of the share is very much undervalued in comparison with its intrinsic value. This analysis proves that from the investor point of view, this share is a good buy for the near future.

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