FUNDAMENTAL ANALYSIS OF IT SECTOR

BOMBAY STOCK EXCHANGE

GROUP MEMBERS

Manasi Kalgutkar-A11030

Mayank Chaturvedi-A11031

Romit Jain-A11048

Sagar Parekh-A11051

Tusshar Arora-A11064

FACULTY: MEHUL RAITHATA

SUBJECT: CORPORATE FINANCE

Fundamental Analysis

Introduction

Fundamental analysis is used to determine the intrinsic value of the share by examining the
underlying forces that affect the well being of the economy, Industry groups and companies.
Fundamental analysis is to first analyze the economy, then the Industry and finally individual
companies. This is called as top down approach.

At the economy level, fundamental analysis focus on economic data (such as GDP, Foreign
exchange and Inflation etc.) to assess the present and future growth of the economy.
At the industry level, fundamental analysis examines the supply and demand forces for the
products offered.
At the company level, fundamental analysis examines the financial data (such as balance sheet,
income statement and cash flow statement etc.), management, business concept and competition.

In order to forecast the future share price, fundamental analysts combines the economic, industry
and company analysis. If the intrinsic value is lower than the current value, fundamental analysis
recommends buying the share and the vice versa is also true.

Economic analysis

Economic analysis occupies the first place in the financial analysis top down approach. When the
economy is having sustainable growth, then the industry group (Sectors) and companies will get
benefit and grow faster. The analysis of macro economic environment is essential to understand
the behavior of the stock prices. The commonly analyzed macro economic factors are as follows.

Gross domestic product (GDP): GDP indicates the rate of growth of the economy. GDP
represents the value of all the goods and services produced by a country in one year. The
higher the growth rate is more favorable to the share market.
Savings and investment: The economic growth results in substantial amount of domestic
savings. Stock market is a channel through which the savings of the investors are made
available to the industries. The savings and investment pattern of the public affect stock
market.
Inflation: Along with the growth of GDP, if the inflation rate also increases, then the real
rate of growth would be very little. The decreasing inflation is good for corporate sector.
Interest rates: The interest rate affects the cost of financing to the firms. A decrease in
interest rate implies lower cost of finance for firms and more profitability.
Budget: Budget is the annual financial statement of the government, which deals with
expected revenues and expenditures. A deficit budget may lead to high rate of inflation and
adversely affect the cost of production. Surplus budget may result in deflation. Hence,
balanced budget is highly favorable to the stock market.
The tax structure: The tax structure which provides incentives for savings and investments.
The balance of payment: The balance of payment is the systematic record of all money
 transfer between India and the rest of the world. The difference between receipts and
payments may be surplus or deficit. If the deficit increases, the rupee may depreciate against
other currencies. This would affect the industries, which are dealing with foreign exchange.
Monsoon and agriculture: India is primarily an agricultural country. The importance of
agricultural in Indian economy is evident. Agriculture is directly and indirectly linked with
the industries. For example, Sugar, Textile and Food processing industries depend upon
agriculture for raw material. Fertilizer and Tractor industries are supplying input to the
agriculture. A good monsoon leads better harvesting; this in turn improves the performance
of Indian economy.
Infrastructure: Infrastructure facilities are essential for growth of Industrial and agricultural
sector. Infrastructure facilities include transport, energy, banking and communication. In
India even though Infrastructure facilities have been developed, still they are not adequate.
Demographic factors: The demographic data provides details about the population by age,
occupation, literacy and geographic location. This is needed to forecast the demand for the
consumer goods.
Political stability: A stable political system would also be necessary for a good performance
of the economy. Political uncertainties and adverse change in government policy affect the
industrial growth.

Industry or Sector analysis

The second step in the fundamental analysis of securities is Industry analysis. An industry or
sector is a group of firms that have similar technological structure of production and produce
similar products. These industries are classified according to their reactions to the different
phases of the business cycle. They are classified into growth, cyclical, defensive and cyclical
growth industry. The industry analysis should take into account the following factors.

Characteristics of the industry: When the demand for industrial products is seasonal, their
problems may spoil the growth prospects. If it is consumer product, the scale of production
and width of the market will determine the selling and advertisement cost. The nature of
industry is also an important factor for determining the scale of operation and profitability.
 Demand and market: If the industry is to have good prospects of profitability, the demand
for the product should not be controlled by the government.
Government policy: The government policy is announced in the Industrial policy resolution
and subsequent announcements by the government from time to time. The government
policy with regard to granting of clearances, installed capacity, price, distribution of the
product and reservation of the products for small industry etc are also factors to be
considered for industrial analysis.
Labor and other industrial problems: The industry has to use labor of different categories
and expertise. The productivity of labor as much as the capital efficiency would determine
the progress of the industry. If there is a labor problem that industry should be neglected by
the investor. Similarly when the industries have the problems of marketing, investors have to
be careful when investing in such companies.
Management: In case of new industries, investors have to carefully assess the project
reports and the assessment of financial institutions in this regard. The capabilities of
management will depend upon tax planning, innovation of technology, modernization etc. A
good management will also insure that their shares are well distributed and liquidity of
shares is assured.
Future prospects: It is essential to have an overall picture of the industry and to study their
problems and prospects. After a study of the past, the future prospects of the industry are to
be assessed.

When the economy expands, the performance of the industries will be better. Similarly when the
economy contracts reverse will happen in the Industry. Each Industry is different from the other.
Cement Industry is entirely different from Software Industry or Textile Industry in its products
and process.

The Industry or Sector analysis is explained in more detail in Chapter 3.

Company or Corporate analysis

Company analysis is a study of variables that influence the future of a firm both qualitatively and
quantitatively. It is a method of assessing the competitive position of a firm, its earning and
profitability, the efficiency with which it operates its financial position and its future with respect
to earning of its shareholders.

The fundamental nature of the analysis is that each share of a company has an intrinsic value
which is dependent on the company's financial performance. If the market value of a share is
lower than intrinsic value as evaluated by fundamental analysis, then the share is supposed to be
undervalued. The basic approach is analyzed through the financial statements of an organization.

The company or corporate analysis is to be carried out to get answer for the following two
questions.

How has the company performed in comparison with the similar company in the same
Industry?
How has the company performed in comparison to the early years?

Before making investment decision, the business plan of the company, management, annual
report, financial statements, cash flow and ratios are to be examined for better returns.

Indian IT sector – outlook

The Information technology industry in India has gained a brand identity as a knowledge economy due to
its IT and ITES (IT-Enabled Services) sector. The IT–ITES industry has two major components, IT
Services and business process outsourcing (BPO). The growth in the service sector in India has been led
by the IT–ITES sector, contributing substantially to increase in GDP, employment, and exports. The
sector has increased its contribution to India's GDP from 6.1% in 2009-10 to 6.4% in 2010-11. According
to NASSCOM, the IT–BPO sector in India aggregated revenues of US$88.1 billion in FY2011. The top
seven cities that account for about 90% of this sectors exports are Bangalore, Chennai, Hyderabad,
Mumbai, Pune, Delhi, Kolkata, Coimbatore and Kochi. Export dominate the IT–ITES industry, and
constitute about 77% of the total industry revenue. Though the IT–ITES sector is export driven, the
domestic market is also significant with a robust revenue growth.

This sector has also led to employment generation. Direct employment in the IT services and BPO/ITES
segment was 2.3 million in 2009-10 and is estimated to reach nearly 2.5 million by the end of financial
year 2010-11[1]. Indirect employment of over 8.3 million job opportunities is also expected to be
generated due to the growth of this sector in 2010-11. Generally dominant player in the global
outsourcing sector. However, the sector continues to face challenges of competitiveness in the globalized
world, particularly from countries like China and Philippines.

Indian IT-BPO Industry

IT-BPO sector in India aggregated revenues of USD 88.1 billion in FY2011, generating direct
employment for over 2.5 million people, as the industry continued its journey on the core themes
identified for the next decade – Diversification, Transformation, Innovation and Inclusion. The
industry focused on emerging verticals, markets and customer segments, driving innovation-led
transformation in client organisations and transforming its internal operations. The domestic IT-
BPO market witnessed the Indian consumers going up the IT maturity curve, return of economic
growth, efforts by organisations and the government to increase technology adoption, and
emergence of new delivery platforms thus driving growth.

Key Highlights during FY2011

The IT-BPO sector in India is estimated to aggregate revenues of USD 88.1 billion in FY2011,
with the IT software and services sector (excluding hardware) accounting for USD 76.1 billion
of revenues. During FY 2011 direct employment is expected to reach nearly 2.5 million, an
addition of 240,000 employees, while indirect job creation is estimated at 8.3 million. As a
proportion of national GDP, the sector revenues have grown from 1.2 per cent in FY1998 to an
estimated 6.4 per cent in FY 2011. The share of IT-BPO industry in the total Indian exports
(merchandise plus services) increased from less than 4 per cent in FY1998 to 26 per cent in
FY2011. Export revenues (including Hardware) estimated to reach USD 59.4 billion in FY2011;
Domestic revenues (including Hardware) of about USD 28.8 billion; total industry estimated to
reach USD 88.1 billion. Software and services revenues (excluding Hardware), comprising over
86 per cent of the total industry revenues, expected to post USD 76.1 billion in FY2011;
estimated growth of about 19.1 per cent over FY2010. The upbeat domestic IT-BPO spending
trend will continue in FY2012 as the industry is expected to grow at 16 per cent to reach USD 20
billion. IT spending expected to significantly increase in verticals like automotive and healthcare
while the government, with its focus on e-go.

Combined Balance Sheet of Infosys, TCS & Wipro

-------------------
in Rs. Cr. -----
Balance Sheet --------------

Infosys TCS Wipro

Mar '11 Mar '11 Mar '11
Sources Of Funds

Total Share Capital 287 295.72 490.8

Equity Share Capital 287 195.72 490.8

Share Application Money 0 0 0.7

Preference Share Capital 0 100 0

Reserves 24,214.00 19,283.77 20,829.40

Revaluation Reserves 0 0 0
Networth 24,501.00 19,579.49 21,320.90
Secured Loans 0 35.87 0

Unsecured Loans 0 5.25 4,744.10

Total Debt 0 41.12 4,744.10

Total Liabilities 24,501.00 19,620.61 26,065.00

Application of Funds

Gross Block 6,934.00 6,030.16 7,779.30

Less: Accum. Depreciation 2,878.00 2,607.98 3,542.30

Net Block 4,056.00 3,422.18 4,237.00

Capital Work in Progress 499 1,345.37 603.1

Investments 1,325.00 5,795.49 10,813.40

Inventories 0 5.37 724.9

Sundry Debtors 4,212.00 4,806.67 5,781.30

Cash and Bank Balance 641 224.77 2,334.20

Total Current Assets 4,853.00 5,036.81 8,840.40

Loans and Advances 5,273.00 5,063.51 6,756.80

Fixed Deposits 13,024.00 5,379.75 2,869.10

Total CA, Loans & Advances 23,150.00 15,480.07 18,466.30

Deffered Credit 0 0 0

Current Liabilities 2,056.00 3,932.39 5,290.00

Provisions 2,473.00 2,490.11 2,764.80

Total CL & Provisions 4,529.00 6,422.50 8,054.80

Net Current Assets 18,621.00 9,057.57 10,411.50

Miscellaneous Expenses 0 0 0
Total Assets
24,501.00 19,620.61 26,065.00

Contingent Liabilities 1,013.00 3,938.76 707.3

Book Value (Rs) 426.73 99.53 86.86

Combined Profit & Loss A/c of Infosys, TCS & Wipro

-------------------
in Rs. Cr. -----
--------------

PROFIT & LOSS Infosys TCS Wipro

Mar '11 Mar '11 Mar '11
Income
Sales Turnover 25,385.00 29,275.41 26,401.20
Excise Duty 0 0 100.7
Net Sales 25,385.00 29,275.41 26,300.50
Other Income 1,147.00 486.44 603.3
Stock Adjustments 0 -0.87 31.6
Total Income 26,532.00 29,760.98 26,935.40
Expenditure
Raw Materials 23 17.75 3,805.60
Power & Fuel Cost 0 240 199.7
Employee Cost 12,464.00 10,190.31 10,937.40
Other Manufacturing Expenses 2,613.00 8,135.57 2,780.20

Selling and Admin Expenses 1,834.00 1,097.52 1,703.30

Miscellaneous Expenses 36 821.57 1,145.00

Preoperative Exp Capitalised 0 0 0

Total Expenses 16,970.00 20,502.72 20,571.20
OPERATING Profit
8,415.00 8,771.82 5,760.90
PBDIT 9,562.00 9,258.26 6,364.20
Interest 1 20.01 58.6
PBDT 9,561.00 9,238.25 6,305.60
Depreciation 740 537.82 600.1
Other Written Off 0 0 0

Profit Before Tax 8,821.00 8,700.43 5,705.50

Extra-ordinary items 0 0 0

PBT (Post Extra-ordinary Items) 8,821.00 8,700.43 5,705.50

Tax 2,378.00 1,130.44 861.8
Reported Net Profit 6,443.00 7,569.99 4,843.70

Total Value Addition 16,947.00 20,484.97 16,765.60

Preference Dividend 0 11 490.8

Equity Dividend 3,445.00 2,740.10 981.8

Corporate Dividend Tax 568 450.82 220.4

Per share data (annualised)
Shares in issue (lakhs) 5,741.52 19,572.21 24,544.09

Earning Per Share (Rs) 112.22 38.62 17.74

Equity Dividend (%) 1,200.00 1,400.00 200

Book Value (Rs) 426.73 99.53 86.86

Bibliography:-

www.moneycontrol.com

www.nasscom.in