STUDENT NAME: Sharath Shyamasunder: UOB NO:-09034024 Corporate Finance

STUDENT NAME : Sharath Shyamasunder
COURSE : M.B.A.
UOB NUMBER : 09034024
BATCH NUMBER : MBBD 51010A
SUBJECT : Corporate Finance
1
UOB NO:-09034024 Corporate Finance
CONTENTS
1. Executive summary…………………………………………………………………………...3
2. Chapter 1: About the company………………..…………………………………………...…3
3. Chapter 2 : Shareholder value creation……………………………………………………….4
2.1 Total Shareholder return………………………………………………………………….4
2.2 Economic value added…………………………………………………………………...5
2.3 Financial ratios……………………………………………………………………………6
4. Chapter 3: Performance of Infosys over past 12 months…………..…………………………9
5. Chapter 4: Current valuation of equity in Infosys…………………..……………………….15
4.1 Net Asset Value…………………………………………………………………….…...15
4.2 Price to earnings ratio………………………………………………………………..….16
4.3 Discounted cash flow……………………………………………………………………18
4.3.1 Dividend valuation model……………………………………………………………..19
4.3.2 Accounting ROE model……………………………………………………………….22
4.3.3 Capital asset pricing model……………………………………………………………25
6. Chapter 5: Reconciliation of differences in share price…………………………………….29
7. Chapter 6: Conclusion………………………………………………………………………29
8. Appendix A (Free cash flow calculation)…………………………………………………..30
9. Appendix B (Beta calculation)……………………………………………………………...32
10. Appendix C (Terminal value calculation)………………………………………………....34
11. SWOT analysis of Infosys………………………………………………………………...36
Consolidated Balance Sheet Infosys 2010
Consolidated Profit and Loss Statement Infosys 2010
Consolidated Cash Flow Statement Infosys 2010
2
EXECUTIVE SUMMARY
This paper will evaluate the financial performance of Infosys and analyze the reasons as to how the
company has been successful in creating value for its shareholders. Despite the challenging global
economic conditions over the past few years, Infosys has been able to achieve incredible operating
performance, generated good cash flows and expanded its diverse portfolio of products as well as
expanded geographically. This report comprises of analysis of some key ratios which are of prime
importance for shareholders. All the ratios have been calculated using Excel and inferences are thus
drawn. Further the report shows the share price movement for Infosys shares in the Bombay Stock
Exchange (BSE) over the last one year. All the major news and events that led to rise or fall in
prices have been taken into consideration. The report then evaluates various methods of valuation
and presents interpretation with reasoning on the appropriateness of the methods. Different values
have been used using the NPAT, P/E ratio, Dividend models and the closest value is taken. Finally,
reconciliation is carried to evaluate the differences and whether Infosys shares are under or
overvalued. This report estimates that Infosys shares are slightly undervalued. It is advised that the
potential investor to buy the stocks as the company is expected to do well in the final quarter as
well. For the investors who have invested in Infosys already it is advised to hold the stocks as good
returns can be expected.
CHAPTER 1: ABOUT THE COMPANY
Infosys Technologies Limited, incorporated in the year 1981 provides consulting and IT services.
Infosys has been a pioneer in offering innovative solutions to its clients. The company offers a wide
range of software services, namely application development and maintenance, corporate
performance management, independent validation services, infrastructure services, packaged
application services and product engineering and systems integration.
Source: Annual report (2010) http://www.infosys.com/investors/pages/index.aspx [Accessed on
26/11/2010]
3
CHAPTER 2: SHAREHOLDER VALUE CREATION
A company creates value for the shareholders when the shareholder return exceeds the required
return to equity. In other words, a company creates value in one year when it outperforms
expectations.
Source: Fernandez, P, 2001, A Definition of Shareholder Value Creation, Available at SSRN:
http://ssrn.com/abstract=268129 [Accessed on 26/11/2010]
Infosys promises to increase the value to its shareholders by increasing its sales growth and through
diligent investment of resources which has been the key factor for achieving superior financial
performance. Strong and sustainable financial performance has been the trademark of Infosys’s
success over the past years. As a result the company has been able to generate value to its
shareholders. Infosys is investing in capability building, Research & Development, IP-based
solutions and the new markets collectively brought about the robust performance of fiscal 2010.
(Source: Infosys annual report 2010)
2.1 TOTAL SHAREHOLDER RETURN
Infosys ranks among the top ten global technology companies in the 2010 Value Creators Report of
The Boston Consulting Group (BCG). The rankings are based on the weighted average annual Total
Shareholder Return (TSR) for five years, from 2005 to 2009.
Source: Infosys among top ten technology companies

http://www.bcg.com/documents/file59590.pdf [Accessed on 29/11/2010]
Year 2010 2009 2008 2007 2006

Total
101.65% -5.77% -27.09% -32.06% 32.67%
Shareholder
return
Market
96.39% -74.74% 24.25% 9.71% 65.17%
Index BSE
500
Source: Market index BSE 500 http://www.bseindia.com/ [Accessed on 17/11/2010]
4
Figure 1: Comparison of TSR value of Infosys and BSE 500 Market index
150
100
50
BSE 500
TSR Infosys
0
2010 2009 2008 2007 2006
-50
-100
Source: Created by Sharath Shyamasunder (2010)
When a company is profitable and has good future prospects, wealth has been created. Wealth could
be delivered in the form of annual dividends or further capital appreciation. Infosys has been able to
pay high annual dividends and maintain sufficient capital to finance future growth.
2.2 ECONOMIC VALUE ADDED
Economic value added (EVA) is a metric comparing a company’s operating profit against its cost of
capital. Generally it has been a measure to evaluate companies.
Source: Tully.S, The real key of creating wealth, Fortune, Vol. 128, No.6, 1993, pp.38-50.
In `. Crore unless otherwise stated
Year 2010 2009 2008 2007 2006

EVA 4173 3563 2286 2122 1540
EVA unlike Return on Equity and Return on Assets consider cost of capital. Increase in Economic
value added over the past 5 years shows that Infosys has Additional capital invested in businesses
earning more than the cost of capital. Companies which earn higher returns than cost of capital
5
create value for the shareholders. Thus we can say that Infosys is delivering value to the
shareholders.
2.3 FINANCIAL RATIOS
In practice a number of different ratios are often calculated in strategic planning endeavors and,
taken as a whole and with some caution, these ratios do provide some information about the relative
performance of an organization. In particular, a careful analysis of a combination of these ratios
will help us in our investment decisions.
Return on Equity: Measures the yield shareholders earn on their investment.
Year 2010 2009 2008
Infosys 26.98% 32.80% 33.77%

Industry 22.71% 28.17% 26.38%
This ratio is critical to shareholders since it shows the yield they earn for their investments. It allows
shareholders to judge whether the return made on their investment is worth the risk. This shows that
for every dollar that is invested by shareholders, they earn 26.88 cents. This is higher than the
industry average. An ROE of 27% is very good for any industry. Since the reserves and surplus has
gone up in the year 2010, the ROE has dropped by 6%. It is a conscious effort by Infosys to
maintain sufficient reserves to meet their strategic objectives.
Return on capital employed:
ROCE is a fundamental measure of profitability of a company. It is a popular indicator of

management efficiency; it demonstrates how well the management has utilized total assets.
Source: Elliott et al, 2006, Financial Accounting and reporting, 10th Edition, Prentice Hall.
Year 2010 2009 2008
Infosys 33.93% 37.84% 38.74%

Industry 24.01% 33.76% 31.31%
6
ROCE of Infosys has varied in the last three years but has always been above the industry average.
This shows that Infosys has been using their resources more efficiently than its competitors. This
also means that the profit margins of Infosys are higher. This shows that investing in Infosys gives
quick and steady return and hence it can be safe to invest in.
Dividend Payout ratio: Dividend payout ratio provides an idea of how well earnings support the
dividend payments.
Year 2010 2009 2008 2007 2006

Infosys 49.89 17.66 44.35 24.15 25.32
Industry 31.45 26.61 36.11 33.30 39.12
Mature companies have a good dividend payout ratio. Infosys has a very good dividend payout
ratio, which shows that Infosys pays dividend regularly. Infosys’s high dividend payout ratio can be
attributed to high profitability and subsequently high liquidity of Infosys.
Earnings per Share:
Year 2010 2009 2008 2007 2006

Infosys Earnings per Share 108.99 101.65 78.24 67.82 88.67
Earnings per share is generally considered to be the single most important variable in determining a
share's price. It is also a major component used to calculate the price-to-earnings valuation ratio
which is carried out later in the paper.
7
Figure 2: Earnings per share of Infosys from 2006-2010
EPS
120
108.99
100 101.65
88.67
80 78.24
67.82 EPS
60
40
20
0
2006 2007 2008 2009 2010
Created by Sharath Shyamasunder (2010).
8
CHAPTER 3: PERFORMANCE OF INFOSYS OVER THE PAST 12 MONTHS
Source: Share price movement of Infosys http://www.moneycontrol.com/stock-

charts/infosystechnologies/charts/IT [Accessed on 2/12/2010].
9
The above chart shows the share price movement of Infosys for a period between 1/12/2009 to
1/12/2010. Label D shows when the dividends were declared.
3.1 MARKET EFFICIENCY AND EFFICIENT MARKET HYPOTHESIS
Efficient Market Hypothesis (EMH) states that at any point in time asset prices should fully reflect
all available information (Damodaran, 2002). Since the price reflects all available information,
investors cannot expect to make abnormal profits. Eugene Fama’s (1970) influential survey article,
“Efficient Capital Markets.” It was generally believed that securities markets were extremely
efficient in reflecting information about individual stocks and about the stock market as a whole.
The accepted view was that when information arises, the news spreads very quickly and is
incorporated into the prices of securities without delay.
In semi-strong-form efficiency, it is implied that share prices adjust to publicly available new
information very rapidly and in an unbiased fashion, such that no excess returns can be earned by
trading on that information. Semi-strong-form efficiency implies that neither fundamental analysis
nor technical analysis techniques will be able to reliably produce excess returns. To test for semi-
strong-form efficiency, the adjustments to previously unknown news must be of a reasonable size
and must be instantaneous. To test for this, consistent upward or downward adjustments after the
initial change must be looked for.
The simple reason for a rise in price of share is “more buyers than sellers” and a fall in price is
because “there are more sellers than buyers”. But there is more to this, share prices can change due
to taking over other companies, technological innovations, declaration of quarterly results, new
contracts, share buy backs, speculations etc. Lets us examine the share price movements of Infosys
over the past year.
1/12/2009- Share price of Infosys was Rs. 2376.49.
Date News Previous Day %

price close change
14/12/200 Infosys announces launch of Flypp 2454.75 2498 +1.73
9
10
Explanation: Infosys announces launch of Flypp, an application which will empower mobile
service providers to delight customers through a host of ready to use experimental applications. The
share price increased by 1.73% due to the good news which is technological innovation.

price close change
15/12/200 Infosys Technologies Opens its First 2498 2506.55 +0.34%
9 Development Center in Brazil
Explanation: Infosys Technologies Opens its First Development Center in Brazil". Infosys
continues to invest and strengthen its position in Latin American market. The share price has
increased by 0.34% to Rs.2506.55. Share price has increased due to news of investment which will
bear profitable returns in the future.

price close change
12/1/201 Infosys has announced the following Audited 2488.55 2587.45 +3.82%
0 results for the quarter ended December 31,
2009
Explanation: The Company has posted a profit after tax of Rs 14710 million for the quarter ended
December 31, 2009 as compared to Rs 15980 million for the quarter ended December 31, 2008.
Total Income has increased from Rs 54770 million for the quarter ended December 31, 2008 to Rs
55580 million for the quarter ended December 31, 2009. The share price has increased to 2587.45
which is a 3.8% increase. This is because the investors believe that the company is making profits
and would do so in the future as well.
11
price close change
11/3/201 Infosys announces launching of Finacle 2659.85 2684.35 +0.91
0 Treasury in a box
Explanation: Infosys announces launching of Finacle Treasury in a box a rapid implementation
framework for a front, middle and back office treasury system. This enable banks to custom build
their treasury system with minimum effort and time. The share price increased by 0.91% as news
was of technological innovation.

price close change
13/4/201 Infosys has announced the following Audited 2683.25 2782.35 +3.56
0 Consolidated results for the quarter & year
ended March 31, 2010
Explanation: The Group has posted a net profit after tax & minority interest of Rs 16170 million
for the quarter ended March 31, 2010 as compared to Rs 16130 million for the quarter ended March
31, 2009. Total Income has increased from Rs 58870 million for the quarter ended March 31, 2009
to Rs 61420 million for the quarter ended March 31, 2010.
The consolidated results for the Year ended March 31, 2010:
The Group has posted a net profit after tax & minority interest of Rs 62660 million for the year
ended March 31, 2010 as compared to Rs 59880 million for the year ended March 31, 2009. Total
Income has increased from Rs 221680 million for the year ended March 31, 2009 to Rs 236760
million for the year ended March 31, 2010.The share price has increased by 3.56% as the company
has done remarkably well in the quarter and the announcement of dividend.
Board of Directors of the Company at its meeting held on April 13, 2010, has recommended a final
dividend of Rs 15 per share.
12
price close change
13/7/201 Infosys Technologies Ltd has announced the 2894.95 2795.3 -3.56
0 following Audited Consolidated results for the
quarter ended June 30, 2010
Explanation: The Group has posted a net profit of Rs 14880 million for the quarter ended June 30,
2010 as compared to Rs 15250 million for the quarter ended June 30, 2009. Total Income has
increased from Rs 57410 million for the quarter ended June 30, 2009 to Rs 64370 million for the
quarter ended June 30, 2010. The share price has decreased by 3.56% as the company’s profits have
come down in comparison to the previous year.

price close change
20/7/201 Turkland Bank, Turkey selects Finacle from 2764.143 2766.755 +0.094
0 Infosys to drive Innovation
Explanation: Infosys Technologies Ltd has informed BSE regarding a Press Release dated July 20,
2010 titled "Turkland Bank, Turkey selects Finacle from Infosys to drive Innovation. Turkland bank
to use Finacle Universal banking solution to strengthen operations across Turkey. The share price
has increased by 0.094% and is expected to increase more as the news of new business proposition
has been announced.
13
price close change
05/8/201 Infosys announced successful implementation 2867.8 2873.4 +0.194
0 of Finacle Universal banking solution across
HNB’s operations in Srilanka.
Explanation: Infosys Technologies Ltd has informed BSE regarding a Press Release dated August
05, 2010 titled "Finacle Powers Transformation at Hatton National Bank". They announced
successful implementation of Finacle Universal banking solution across HNB’s operations in
Srilanka. Share price has increased by 0.194% as the news of successful implementation has been
announced.

price close change
15/10/2010 Infosys Technologies Ltd has announced 3184.25 3076.15 -3.51
the following Audited Consolidated results
for the quarter ended September 30, 2010
Explanation: The Group has posted a net profit of Rs 17370 million for the quarter ended
September 30, 2010 as compared to Rs 15350 million for the quarter ended September 30, 2009.
Total Income has increased from Rs 58240 million for the quarter ended September 30, 2009 to Rs
72140 million for the quarter ended September 30, 2010.
Board of Directors of the Company at its meeting held on October 15, 2010, has declared an interim
dividend of Rs 10/- per equity share and a 30th year special dividend of Rs. 30/- per equity share.
The share price has decreased by 3.51 in spite of Infosys announcing their quarterly results which
have been very good. The reason for the decline in share price was due to the mega issue of Coal
India IPO. All the sectoral indices lost more or less.
14
CHAPTER 4: CURRENT VALUATION OF EQUITY IN INFOSYS
To undertake current valuation of the equity in Infosys, we use the following methods
4.1 NET ASSET VALUE (NAV)
The total value of a company's assets less the total value of its liabilities is its net asset value
(NAV). For valuation purposes it is common to divide net assets by the number of shares in issue to
give the net assets per share.NAV represents funds or a company’s value per share. It is calculated
as follows:
NAV= Total Assets-Total Liabilities

No of ordinary shares
Year 2010 2009 2008 2007 2006

Total Assets 27736 22126 17986 12986 9114
in Crores
Total 4687 3872 4191 1824 2217
Liabilities in
Crores
Number of 535335478 53283004 571995758 571209862 275554980
Ordinary 3
Shares
NAV 430.55 342.58 241.17 195.40 250.29
According to annual report of Infosys 2010, Total assets are valued at `.27736 Crores and Total
liabilities are valued at `.4687 Crores. NAV is calculated as 27736-4687 (Crores) / 535335478=
`.430.55. Infosys’s NAV is valued at `.430.55 which is very less than the market value of `.3123 as
on 3/12/2010. The NAV method has very less impact on the share price and is not considered very
useful due to the following limitations.
NAV method does not consider the benefits derived from the assets but rather considers the book
value of the company. It only views the company as a set of assets rather than an income generating
resource. Company’s earning power is completely ignored while using this method. In case of
Infosys the rising earnings are totally ignored. NAV method is more suitable for firms with heavy
tangible investments (e.g. equipment, land) not for a company like Infosys which is into Information
15
Technology. While NAV can be computed for any company it is of little relevance in service
industries because there is little
Moreover the goodwill of the company is not taken into consideration while valuing the NAV.
Infosys has tremendous amount of goodwill.
NAV is useful for the valuation of shares in sectors where the value of a company comes
from the assets it holds rather than the profit stream generated by the business. The most obvious
examples of these are investment trusts and property companies. Hence we will now check other
alternative methods to ascertain the true value of the company.
4.2 PRICE/ EARNINGS RATIO
Infosys Mar' 10 Mar' 09 Mar' 08 Mar' 07 Mar' 06

Earnings per
111.07 104.6 81.53 78.24 67.82
Share(a)
Market price per
2615.1 1324.1 1430.15 2012.05 2980.85
share(b)
P/E ratio (b/a) 23.54461 12.6587 17.5414 25.71639 43.95237
Figure 4: Comparison of EPS and P/E ratio from 2006-2010

120 50.00
111.07 43.95 45.00
104.6
100
40.00
81.53
78.24 35.00
80
67.82 30.00
25.72
60 23.54 25.00 P/E ratio
EPS
17.54 20.00
40
12.66 15.00
10.00
20
5.00
0 0.00
Mar' 10 Mar' 09 Mar' 08 Mar' 07 Mar' 06
16
P/E ratios of Infosys’s competitors for Mar’ 10
Company TCS Wipro Tech HCL Oracle

Mahindra
P/E ratio 26.57 21.28 11.01 31.65 22.56
PE ratio tells you whether the stock’s price is high or low compared to its forward earnings. This
will give us an insight on how well the company is expected to do in future. In general software
companies have high PE ratio and the ratios change rapidly as this industry is characterized by
phenomenal growth rate and constant changes. The PE ratio of Infosys has been fluctuating over the
years, but it March 2010 the P/E ratio of Infosys is `.23.54 which is higher than the industry
standard of `.22.61. Infosys’s PE ratio of `.23.54 suggests that investors in the stock are willing to
pay `.23.54 for every `.1 of earnings that the company generates. However PE ratio fails to take into
account the company’s growth prospects.
In order to calculate the current valuation we have chosen the annual growth rate of EPS. Since
Infosys’s EPS has been growing at a steady rate which may not be sustainable over the years hence
the compounded growth rate model is not chosen for valuation.
Projected EPS for 2011:

(108.99-101.65)/101.65+(101.65-78.24)/78.24+(78.24-67.82)/67.82+(67.82
88.67)/88.67=(0.0722+0.2292+0.1536-0.2351)/4=72.47*108.99=`.78.99.
PE Multiple calculation: V = PE Multiple * EPS
We take the PE ratios of 2010 for forecasting the fair price value as the PE ratio of 2010 looks
reasonable and are closer to the Industry average. Projected EPS is assumed to grow at the rate of
Inflation rate in India which is assumed to be at 11% for the years to come.
EPS=Projected EPS*(1+Inflation rate)
EPS=78.99(1+11%)
EPS=87.68
Fair value of the share price=PE Multiple*EPS=78.99*87.68=`.2103.89.
The fair value obtained is lesser than the market price of Infosys. PE ratio model does not give
reliable opinion as it does not take into consideration assets & liabilities of the company & the
earnings figure are an estimate by the company which can be distorted.
17
4.3 DISCOUNTED CASH FLOW METHOD
Discounted cash flow (DCF) valuation method used to estimate the attractiveness of an investment
opportunity. Discounted cash flow analysis uses future free cash flow projections and discounts
them to arrive at a present value, which is used to evaluate the potential for investment. If the value
arrived through DCF analysis is higher than the current cost of the investment, the investment is a
good one. (More in Appendix C).
DCF approach has the advantage of focusing on cash flows rather than profits. We will
evaluate Infosys on the above by using 3 methods namely Dividend Valuation Model (DVM),
Return on Equity Model (ROE) & Capital Asset Pricing Model (CAPM) as shown in Figure 5. All
these methods constitute cost of equity.
Figure 5: Computation of rate of return
Rate of return
(K)
Dividend Return on Capital Asset

Valuation Equity Model Pricing Model
Model (DVM) (ROE) (CAPM)
Source: Created by Sharath Shyamasunder (2010)
4.3.1 DIVIDEND VALUATION MODEL
The Dividend Valuation Model uses the present value of the stock, the expected future dividends,
and the growth rate. This model is similar to the Constant Growth Model accept it discounts the
18
dividends at the expected return instead of discounting the free cash flows at the weighted average
cost of capital.
We know that, V= D1
k-g
Where, D1 = Projected Dividend = Dividend announced during the past year *(1+g)
g = projected growth rate of dividend or Capital gain
V= Current market price of share
k = rate of return required by shareholders
Arranging the equation k=D1/V+g

g = 11%; projected growth rate of dividend is assumed to grow at the rate of Inflation in India.
D0= Dividend announced during the year 2010= `.23.50
D1=D0*(1+g) = 23.50*(1+0.08) = 25.38
V= Market price of Infosys share on 3rd December 2010, i.e. `.3123
k=25.38/3123+8%
k=11.008%
The expected rate of return is 11.008% is good for the investors and yields a value closer to the
market price.
Let us carry out free cash flow calculations and later discount them at the rate of k= 11.008% to get
the present value of the share. This allows us to make investment decisions.
Source: A Realistic Dividend Valuation Model William J. Hurley and Lewis D. Johnson
Financial Analysts Journal, Vol. 50, No. 4 (Jul. - Aug., 1994), pp. 50-54.
The Projected share price is `.3421.28 which is closer to the market price of `.3123 as on 3rd
December 2010. DVM is also known as Gordon’s growth model, this model is particularly useful
among companies or industries where cash flows are typically strong and relatively stable, and
where leverage patterns are also generally consistent.
Discounted cash flow for DVM
(Adj)
DESCRIPTION 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 ASSUMPTIONS
2010
19
26.28%
Average
growth rate
p.a for 2006-
2010 from
OPERATING 31165.7
7861 9983.47 12679.00 16102.33 20449.97 25971.46 37398.90 44878.68 53854.42 64625.30 2011 to 2015
PROFIT 5
and 20%
average
growth rate
from 2016 to
2020
Grow at
16.79% p.a
ADD
905 1056.95 1234.41 1441.66 1683.73 1966.42 2296.58 2682.18 3132.52 3658.47 4272.72 compounding
DEPRECIATION
growth for
2006-2009
11.28%
+/- IN Average
WORKING -580 -644.96 -717.19 -797.52 -886.84 -986.17 -1096.62 -1219.44 -1356.02 -1507.89 -1676.77 growth rate
CAPITAL p.a for 2008-
2009
LESS: INTEREST
0 0 0 0 0 0 0 0 0 0 0
PAYMENT
Growth rate
based on
LESS:TAX -902 -1207.78 -1617.21 -2165.45 -2899.53 -3882.48 -5198.64 -6960.98 -9320.75 -12480.49 -16711.38 Government
tax regulations
@ 33.99%
Growth rate
based on
inflation rate
LESS: CAP
-1434 -1591.74 -1766.83 -1961.18 -2176.91 -2416.37 -2682.17 -2977.21 -3304.70 -3668.22 -4071.72 from
EXPENDITURE
Government
and Trade
sources @ 11%
24484.9
=FCF 2427 7595.94 9812.17 12619.85 16170.4 20652.85 28923.44 34029.72 39856.28 46438.14
0
TERMINAL 75999.5 113117.7 138003.6 Growth rate @

23049 28119.78 34306.13 41853.48 51061.24 62294.72 92719.46 168364.45
VALUE 5 4 5 21.43%
CUMULATIVE
261240.74
FCF 2020
Discounted Cash Flow for DVM
6783.93535
2011 1/(1+11.96%)^1*FCF1= 4
20
7827.17324
2012 1/(1+11.96%)^2*FCF2= 1
8991.64521
2013 1/(1+11.96%)^3*FCF3= 5
2014 1/(1+11.96%)^4*FCF4= 10290.8428
11739.0852
2015 1/(1+11.96%)^5*FCF5= 8
2016 1/(1+11.96%)^6*FCF6= 12430.9841
13116.7834
2017 1/(1+11.96%)^7*FCF7= 4
13782.0376
2018 1/(1+11.96%)^8*FCF8= 3
14420.0026
2019 1/(1+11.96%)^9*FCF9= 4
1/ 84406.8830
2020 (1+11.96%)^10*FCF10= 9
Total DCF= 183789.3728
No of Ordinary Shares= 57, 38, 25,192 (Taken from Infosys annual report 2010)
Total DCF/ No of ordinary shares= Rs.3202.88
Current price as on 3rd Dec 2010= Rs.3123
21
4.3.2 RETURN ON EQUITY
The Return on Equity (ROE) ratio is perhaps the most important of all the financial ratios to
investors in the company. It measures the return on the money the investors have put into the
company. ROE of Infosys has been above industry standard in the past few years. In the year 2010
ROE of Infosys was 26.97% compared to the industry average of 22.71%.ROE is generally high
due to high profits, low equity & assets.
ROE= Net Profit after Tax

Equity + Minority Interest
Year 2010 2009 2008 2007 2006

Accounting ROE 0.2697 0.3280 0.3377 0.3427 0.3548
The ROE of Infosys in 2010 is due to the fact that they have a huge Reserve and Surplus to have
enough cash for strategic expansions. A ROE close to 27% is good in any industry.
Ke = 32.66% = Rate of return
Let us carry out free cash flow calculations and later discount them at the rate of k= 32.66% to get
the present value of the share. This allows us to make investment decisions. The Projected share
price is `.1007.78 which is very less compared to the market price of `.3123 as on 3rd December
2010. Thus suggesting that Infosys shares are overvalued.
22
Discounted cash flow for Accounting ROE
(Adj)
2010
26.28%
Average
growth rate
p.a for 2006-
2010 from
OPERATING 31165.7
7861 9983.47 12679.00 16102.33 20449.97 25971.46 37398.90 44878.68 53854.42 64625.30 2011 to 2015
PROFIT 5
and 20%
average
growth rate
from 2016 to
2020
Grow at
16.79% p.a
ADD
905 1056.95 1234.41 1441.66 1683.73 1966.42 2296.58 2682.18 3132.52 3658.47 4272.72 compounding
DEPRECIATION
growth for
2006-2009
11.28%
+/- IN Average
2009
LESS: INTEREST
0 0 0 0 0 0 0 0 0 0 0
PAYMENT
Growth rate
based on
tax regulations
@ 33.99%
Growth rate
based on
inflation rate
LESS: CAP
-1434 -1591.74 -1766.83 -1961.18 -2176.91 -2416.37 -2682.17 -2977.21 -3304.70 -3668.22 -4071.72 from
EXPENDITURE
Government
and Trade
sources @ 11%
24484.9
=FCF 2427 7595.94 9812.17 12619.85 16170.4 20652.85 28923.44 34029.72 39856.28 46438.14
0

23049 28119.78 34306.13 41853.48 51061.24 62294.72 92719.46 168364.45
VALUE 5 4 5 21.43%
CUMULATIVE
261240.74
FCF 2020
23
Discounted Cash Flow for Accounting ROE
5725.82070
2011 1/(1+32.66%)^1*FCF1= 3
2012 1/(1+32.66%)^2*FCF2= 5575.278721
2013 1/(1+32.66%)^3*FCF3= 5405.083011
2014 1/(1+32.66%)^4*FCF4= 5470.446447
2015 1/(1+32.66%)^5*FCF5= 5024.84069
2016 1/(1+32.66%)^6*FCF6= 4490.530794
2017 1/(1+32.66%)^7*FCF7= 3997.220444
2018 1/(1+32.66%)^8*FCF8= 3545.897088
2019 1/(1+32.66%)^9*FCF9= 3128.718097
1/
2020 (1+32.66%)^10*FCF10= 15465.45181
TOTAL DCF = 57829.2878
No of Ordinary Shares = 57, 38, 25,192 Taken from the Annual report
DCF/ No of ordinary shares= 1007.78
Current Price Rs.3123 as on 3rd Dec 2010
24
4.3.3 CAPITAL ASSET PRICING MODEL
Capital asset pricing model (CAPM) is used to determine a theoretically appropriate required rate
of return of an asset. The model takes into account the asset's sensitivity to non-diversifiable risk
(also known as systematic risk or market risk), often represented by the quantity beta (β) in the
financial industry, as well as the expected return of the market. This method uses the existing
Government bond rate and observes the variations in both stock & index over a period of time.
We consider the historical prices of Infosys and BSE index for the last 5 years to compute
(www.bseindia.com). The government bond rate of the last 10 years is taken for calculation
(www.tradingeconomics.com).
KC = KRF +  * (KM – KRF), where

KRF = Risk free return or Government bond rate
KC = Expected rate of return by shareholders
 = Beta or risk measurement
KM = Expected return on overall market
KRF= 8.01% is the Government bond rate in India
KM= Market return= BSE index 7/12/2010 –BSE index 7/12/2009

BSE index 7/12/2009
KM=0.1571
The value of KM is obtained from the BSE index. (Source: www.bseindia.com).
=0.5088 (Calculation in the appendix)
Beta is the overall risk in investing in a market. Each company has a beta value and the beta value
of a firm is the company’s risk compared to the overall risk of the market. For example, a beta value
of 1.5 indicates that the company is 1.5 times more risky than the overall market. Infosys’s beta
25
value is 0.5088; it says that Infosys is less volatile than the market. Hence it is less risky to invest in
Infosys.
KC= 0.0801 + 0.5088* (0.1571-0.0801) = 11.96%
Figure 6: Indian Government Bond rate for 10 years
The value obtained is close but slightly higher than the current market price. Both current &
potential investors must hold long onto Infosys shares and plan for long term returns. If the
company fails to meet the financial expectations or if Government bond rates change then the model
will not yield accurate results and valuation has to be calculated again.
Usefulness of the CAPM in Estimating the Cost of Equity Capital
Billingsle, S. R (2004) states that the primary usefulness of the CAPM is as a conceptual tool for
systematically relating expected returns to risk. The model requires market-based data inputs that
are largely objective and relatively easy to obtain. The shortcoming of the CAPM is that available
empirical evidence indicates that the beta coefficient may not fully capture all of the sources of
market risk. This implies that CAPM-based estimates of the cost of equity should be supplemented
with alternative approaches that use other measures of risk. For this reason, the cost of equity
analysis does not rely solely on the CAPM but also uses the DCF model to support the cost of
equity estimates for Infosys.
26
Discounted Cash Flow for CAPM
(Adj)
2010
26.28%
Average
growth rate
p.a for 2006-
2010 from
OPERATING 31165.7
7861 9983.47 12679.00 16102.33 20449.97 25971.46 37398.90 44878.68 53854.42 64625.30 2011 to 2015
PROFIT 5
and 20%
average
growth rate
from 2016 to
2020
Grow at
16.79% p.a
ADD
905 1056.95 1234.41 1441.66 1683.73 1966.42 2296.58 2682.18 3132.52 3658.47 4272.72 compounding
DEPRECIATION
growth for
2006-2009
11.28%
+/- IN Average
2009
LESS: INTEREST
0 0 0 0 0 0 0 0 0 0 0
PAYMENT
Growth rate
based on
tax regulations
@ 33.99%
Growth rate
based on
inflation rate
LESS: CAP
-1434 -1591.74 -1766.83 -1961.18 -2176.91 -2416.37 -2682.17 -2977.21 -3304.70 -3668.22 -4071.72 from
EXPENDITURE
Government
and Trade
sources @ 11%
24484.9
=FCF 2427 7595.94 9812.17 12619.85 16170.4 20652.85 28923.44 34029.72 39856.28 46438.14
0

23049 28119.78 34306.13 41853.48 51061.24 62294.72 92719.46 168364.45
VALUE 5 4 5 21.43%
27
CUMULATIVE
261240.74
FCF 2020
Discounted Cash Flow for CAPM
1/
(1+11.008%)^1*FCF 6843.
2011 1= 18
1/
(1+11.008%)^2*FCF 7963.
2012 2= 56
1/
(1+11.008%)^3*FCF 9227.
2013 3= 64
1/
(1+11.008%)^4*FCF 1065
2014 4= 1.4
1/
(1+11.008%)^5*FCF 1225
2015 5= 7.5
1/
(1+11.008%)^6*FCF 1309
2016 6= 2.1
1/
(1+11.008%)^7*FCF 1393
2017 7= 2.4
1/
(1+11.008%)^8*FCF 1476
2018 8= 5.5
1/
(1+11.008%)^9*FCF 1557
2019 9= 9.8
1/
(1+11.008%)^10*FC 9200
2020 F10= 9
Total DCF = 196322
No of Ordinary Share =57, 38, 25,192 (Taken from Infosys annual report 2010)
28
Total DCF/ No of ordinary shares = Rs.3202.88
Current price as on 3rd Dec 2010 = Rs.3123
CHAPTER 5: RECONCILIATION OF DIFFERENCES IN SHARE

PRICE
% Difference in
Ke (Rate of Market price and
Method return) Fair Value in Rs. Fair value
NAV 430.55 -86.21
P/E 2103.89 -32.63
DVM 11.01% 3421.28 9.54
Accounting ROE 32.66% 1007.78 -67.73
CAPM 11.96% 3202.88 2.55
* Market price is Rs.3123 as on 3rd Dec 2010
All the methods have certain advantages and disadvantages.

As mentioned earlier in the report NAV gives very low value as it only takes book value into
consideration and is based on historical cost of assets thus ignoring their current value completely.
29
PE method inculcates EPS and current market price of the stock but it does not give a true picture
though it gives low valuation for Infosys. DVM gives a slightly higher value than current market
price. DVM method is widely used to value stocks as the calculation can be easily performed with
easily estimated inputs. ROE gives a low value suggesting that Infosys is currently overvalued.
CAPM method gives a very close valuation for Infosys, but it shows Infosys shares are slightly
undervalued. CAPM is a popular method of calculating rate of return because it considers only
systematic risk, reflecting a reality in which most investors have diversified portfolios.
CHAPTER 6: CONCLUSION
Based on the above financial analysis, we infer that Infosys is a very good company to invest in as it
has a good rating in terms of its stock and market performance. With its strong underlying principles
in terms of delivering value to its shareholders and being socially responsible, Infosys is a good
stock to invest for potential investors and for the investors who have already invested in Infosys it is
advised that they hold their stocks as the company is expected to do well in the near future.
APPENDIX A
Free Cash flow calculation for the past 5 years
Description 2006 2007 2008 2009 2010

OPEARATING PROFIT in Crores 3091 4391 5238 7195 7861

+:DEPRECIATION in Crores 409 469 598 761 905

+/- WORKING CAPITAL in Crores -120 -607 -675 -460 -40

-: INTEREST PAYMENT in Crores 0 0 0 0 0

-:TAX PAYMENT in Crores 476 421 549 902 1753

-:CAPITAL EXPENDITURE in Crores -1532 -2138 -1642 -1417 -4546

=FREE CASH FLOW 2291 2463 2943 5325 2427
30
1) Compounded average method is used to find the Operating Profit percentage:
7861=3091(1+g) ^4
(1+g)^ 4=7861/3091
g=0.2628
Operating profit = 26.28%

Infosys may not be able to sustain the previous profit margins or levels of profitability. So
an operating profit of 20% is applied from 2015 to 2020, as the company is expected to
grow at the level of the IT industry.
2) Compounded average method is used to find the Depreciation percentage:
761=409(1+g) ^4
(1+g)^ 4=761/409
g=0.1679
Depreciation= 16.79%
Depreciation percentage of 16.79% growth rate per annum is applied to forecast

depreciation from 2011-2020.
3) Compounded average method is used to find the Working capital percentage:

675=607(1+g) ^4
(1+g)^ 4=675/607
g=0.1120
Working capital= 11.20%
Working capital percentage of 11.20% growth rate per annum is applied to forecast
depreciation from 2011-2020.
Working capital 2006 2007 2008 2009 2010

Sundry debtors -286 -878 -855 -375 -194
Loans and advances -96 -259 -230 -514 -438
Current liabilities and
provisions 262 530 410 429 204
Total -120 -607 -675 -40 -460
Source: Infosys annual report (2006-2010)
Since the working capital is varied in the past five years, a simple average of the past 5
years working capital is used as adjusted 2010 value.
4) Interest Payment=0 as Infosys is debt free company.

5) Tax Payment is growing at the rate of 33.99% which is the prevailing corporate tax
rate.
31
6) Capital expenditure is growing at the rate of 11% which is the current inflation rate in
India.
CAPITAL EXPENDITURE 2006 2007 2008 2009 2010

Purchases of fixed assets and change in capital
work-in-progress 1048 1443 1494 1327 675
Payment for acquisition of business, net of cash
acquired 0 0 101 10 173
Payment for acquisition of shared service center 0 0 0 6 0
Investments in / (disposal) of securities 484 695 47 72 3698
Proceeds from disposal of fixed assets 0 0 0 2 2
-
Total -1532 -2138 -1642 1417 -4546
Source: Infosys annual report (2006-2010)
Since Infosys has invested a huge amount in securities in the year 2010, it has
been an exceptional year and hence we neglect that value. Hence an adjusted capital
expenditure is used to forecast the free cash flow from 2011-2020.
APPENDIX B
Beta Calculation for Infosys
Slope (S: S, V: V) = 0.5088
Market
Date Stock price Return Return
Index

12/1/201
0 3167.75 0.038793881 19934.64 0.021176
11/1/201
0 3049.45 0.026889143 19521.25 -0.02551
10/1/201
0 2969.6 -0.023479119 20032.34 -0.00183
9/1/2010 3041 0.123342322 20069.12 0.116743
8/2/2010 2707.1 -0.029313158 17971.12 0.005755
7/1/2010 2788.85 0.000107583 17868.29 0.009457
6/1/2010 2788.55 0.04925404 17700.9 0.044632
5/3/2010 2657.65 -0.028689948 16944.63 -0.03497
4/1/2010 2736.15 0.046288861 17558.71 0.001765
3/2/2010 2615.1 0.005189114 17527.77 0.066844
32
2/1/2010 2601.6 0.050430008 16429.55 0.004376
1/4/2010 2476.7 -0.049342673 16357.96 -0.06338
12/1/200
9 2605.25 0.092829128 17464.81 0.03182
11/3/200
9 2383.95 0.08096037 16926.22 0.064791
10/1/200
9 2205.4 -0.04461965 15896.28 -0.07185
9/1/2009 2308.4 0.082586878 17126.84 0.093204
8/3/2009 2132.3 0.033141141 15666.64 -0.00023
7/1/2009 2063.9 0.161517249 15670.31 0.08117
6/1/2009 1776.9 0.10917603 14493.84 -0.00899
5/4/2009 1602 0.062827572 14625.25 0.282551
4/1/2009 1507.3 0.13835813 11403.25 0.174564
3/2/2009 1324.1 0.075367498 9708.5 0.091872
2/2/2009 1231.3 -0.056836461 8891.61 -0.05652
1/2/2009 1305.5 0.167866887 9424.24 -0.02312
12/1/200
8 1117.85 -0.098944059 9647.31 0.060993
11/3/200
8 1240.6 -0.102088083 9092.72 -0.07104
10/1/200
8 1381.65 -0.011377053 9788.06 -0.2389
9/1/2008 1397.55 -0.200714898 12860.43 -0.117
8/1/2008 1748.5 0.104339039 14564.53 0.014543
7/1/2008 1583.3 -0.087303646 14355.75 0.066422
6/2/2008 1734.75 -0.113815739 13461.6 -0.17995
5/2/2008 1957.55 0.116208125 16415.57 -0.05043
4/1/2008 1753.75 0.226269972 17287.31 0.105013
3/3/2008 1430.15 -0.075443644 15644.44 -0.11004
2/1/2008 1546.85 0.02855908 17578.72 -0.00397
1/2/2008 1503.9 -0.149570233 17648.71 -0.13005
12/3/200
7 1768.4 0.1024594 20286.99 0.047709
11/1/200
7 1604.05 -0.12780708 19363.19 -0.02393
10/1/200
7 1839.1 -0.030394095 19837.99 0.147295
9/3/2007 1896.75 0.022479178 17291.1 0.128765
8/1/2007 1855.05 -0.061803009 15318.6 -0.01494
7/2/2007 1977.25 0.024906697 15550.99 0.061464
6/1/2007 1929.2 0.004660851 14650.51 0.007291
5/3/2007 1920.25 -0.062995584 14544.46 0.048448
4/2/2007 2049.35 0.018259962 13872.37 0.06122
33
3/1/2007 2012.6 -0.031635673 13072.1 0.010358
2/1/2007 2078.35 -0.074004767 12938.09 -0.08181
1/2/2007 2244.45 0.001762999 14090.92 0.022051
12/8/200
6 2240.5 13786.91
Source: www.bseindia.com
APPENDIX C
(Adj)
2010
OPERATING 7861 9983.47 12679.00 16102.33 20449.97 25971.46 31165.7 37398.90 44878.68 53854.42 64625.30 26.28%
PROFIT 5 Average
growth rate
p.a for 2006-
2010 from
2011 to 2015
and 20%
average
growth rate
34
from 2016 to
2020
Grow at
16.79% p.a
ADD
905 1056.95 1234.41 1441.66 1683.73 1966.42 2296.58 2682.18 3132.52 3658.47 4272.72 compounding
DEPRECIATION
growth for
2006-2009
11.28%
+/- IN Average
2009
LESS: INTEREST
0 0 0 0 0 0 0 0 0 0 0
PAYMENT
Growth rate
based on
tax regulations
@ 33.99%
Growth rate
based on
inflation rate
LESS: CAP
-1434 -1591.74 -1766.83 -1961.18 -2176.91 -2416.37 -2682.17 -2977.21 -3304.70 -3668.22 -4071.72 from
EXPENDITURE
Government
and Trade
sources @ 11%
24484.9
=FCF 2427 7595.94 9812.17 12619.85 16170.4 20652.85 28923.44 34029.72 39856.28 46438.14
0
TERMINAL 75999.5 113117.7 138003.6

23049 28119.78 34306.13 41853.48 51061.24 62294.72 92719.46 168364.45
VALUE 5 4 5
Year 2010 2009 2008 2007 2006
Total Assets 27736 22126 17986 12986 9114
Total Liabilities 4687 3872 4191 1824 2217
Terminal value 23049 18254 13795 11162 6897
Terminal value growth percentage is calculated by taking a simple average of the terminal values of
last 5 years, i.e.21.43%.
35
APPENDIX D
SWOT analysis of Infosys
Strengths Weakness
 Infosys has an advantage of skilled  Infosys sometimes has struggled in

labor since it is based in Bangalore, the US markets, and has particular
India which is known as IT hub of problems in securing United States
36
the world. India is widely recognized Federal Government contracts in
as the premier destination for North America. Since these contracts
offshore technology services are highly profitable and tend to run
for long periods of time, Infosys is
 Low-cost, highly skilled labor gives missing out on lucrative business
Infosys a competitive advantage
 Its competitors do well in terms of
 Trained Indian personnel often speak securing the same Federal business
very good English and are sensitive
to Western culture  Despite being a huge IT company in
relation to its Indian competitors,
 Infosys is in a strong financial Infosys is much smaller than its
position. This means that it has the global competitors like HP, IBM ,
capital to expand, and also their Accenture
portfolio of products
 Infosys is considered weak when it
 Infosys has offices in 33 countries and comes to high-end management
more than 1,25,000 employees around consultancy, since it tends to work at
the globe the level of operational value
creation. Competitors such as IBM
and Accenture tend to dominate this
space
Opportunities Threats
 At a time of recession clients tend to  India is not the only country that is
focus upon cost reduction and undergoing rapid industrial expansion.
outsourcing - with are strategies that Competitors may come from countries
Infosys offers. So hard times could such as China or Korea where there are
be profitable for Infosys large pools of low-cost labor, and
developing infrastructures
37
 Emergence of Brazil and China
which could be a big market for  As with all global IT players, Infosys
Infosys has to compete for skilled labor and this
may have the effect of driving up wage
 The strategic alliance between levels, and making it more difficult to
Infosys and Schlumberger gives the recruit and retain staff
IT company access to lucrative
business in the gas and oil industries  Intense competition from domestic
IT firms in India
 There has been a trend over recent
years for European and North
American companies to base some
or all of their operation in India. This
is called an offshore service. Infosys
has expertise in offshore services
38

STUDENT NAME: Sharath Shyamasunder: UOB NO:-09034024 Corporate Finance

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STUDENT NAME : Sharath Shyamasunder

UOB NUMBER : 09034024

BATCH NUMBER : MBBD 51010A

SUBJECT : Corporate Finance

CHAPTER 1: ABOUT THE COMPANY

2.1 TOTAL SHAREHOLDER RETURN

Source: Infosys among top ten technology companies

Year 2010 2009 2008 2007 2006

Source: Market index BSE 500 http://www.bseindia.com/ [Accessed on 17/11/2010]

Source: Created by Sharath Shyamasunder (2010)

2.2 ECONOMIC VALUE ADDED

Year 2010 2009 2008 2007 2006

2.3 FINANCIAL RATIOS

Return on Equity: Measures the yield shareholders earn on their investment.

Year 2010 2009 2008

Infosys 26.98% 32.80% 33.77%

Return on capital employed:

ROCE is a fundamental measure of profitability of a company. It is a popular indicator of

Year 2010 2009 2008

Infosys 33.93% 37.84% 38.74%

Year 2010 2009 2008 2007 2006

Earnings per Share:

Year 2010 2009 2008 2007 2006

Created by Sharath Shyamasunder (2010).

Source: Share price movement of Infosys http://www.moneycontrol.com/stock-

3.1 MARKET EFFICIENCY AND EFFICIENT MARKET HYPOTHESIS

1/12/2009- Share price of Infosys was Rs. 2376.49.

Date News Previous Day %

Date News Previous Day %

Date News Previous Day %

Date News Previous Day %

Date News Previous Day %

Date News Previous Day %

Date News Previous Day %

Date News Previous Day %

4.1 NET ASSET VALUE (NAV)

NAV= Total Assets-Total Liabilities

Year 2010 2009 2008 2007 2006

4.2 PRICE/ EARNINGS RATIO

Infosys Mar' 10 Mar' 09 Mar' 08 Mar' 07 Mar' 06

Figure 4: Comparison of EPS and P/E ratio from 2006-2010

Company TCS Wipro Tech HCL Oracle

Projected EPS for 2011:

Dividend Return on Capital Asset

Source: Created by Sharath Shyamasunder (2010)

4.3.1 DIVIDEND VALUATION MODEL

Arranging the equation k=D1/V+g

Discounted cash flow for DVM

TERMINAL 75999.5 113117.7 138003.6 Growth rate @

Discounted Cash Flow for DVM

Total DCF= 183789.3728

Total DCF/ No of ordinary shares= Rs.3202.88

Current price as on 3rd Dec 2010= Rs.3123

ROE= Net Profit after Tax

Year 2010 2009 2008 2007 2006

Ke = 32.66% = Rate of return

TERMINAL 75999.5 113117.7 138003.6 Growth rate @

TOTAL DCF = 57829.2878

DCF/ No of ordinary shares= 1007.78

Current Price Rs.3123 as on 3rd Dec 2010

KC = KRF +  * (KM – KRF), where

KRF= 8.01% is the Government bond rate in India