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 ITITES 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 ITITES 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 ITBPO 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 ITITES industry, and constitute about 77% of the total industry revenue. Though the ITITES 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 ITBPO 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 Mar '11 Sources Of Funds Total Share Capital Equity Share Capital Share Application Money Preference Share Capital Reserves Revaluation Reserves Networth 287 287 0 0 24,214.00 0 24,501.00

TCS Mar '11

Wipro Mar '11

295.72 195.72 0 100 19,283.77 0 19,579.49

490.8 490.8 0.7 0 20,829.40 0 21,320.90

Secured Loans Unsecured Loans Total Debt Total Liabilities

0 0 0 24,501.00

35.87 5.25 41.12 19,620.61

0 4,744.10 4,744.10 26,065.00

Application of Funds Gross Block 6,934.00 6,030.16 7,779.30

Less: Accum. Depreciation Net Block Capital Work in Progress Investments Inventories Sundry Debtors Cash and Bank Balance Total Current Assets Loans and Advances Fixed Deposits Total CA, Loans & Advances Deffered Credit Current Liabilities Provisions Total CL & Provisions

2,878.00 4,056.00 499 1,325.00 0 4,212.00 641 4,853.00 5,273.00 13,024.00 23,150.00 0 2,056.00 2,473.00 4,529.00

2,607.98 3,422.18 1,345.37 5,795.49 5.37 4,806.67 224.77 5,036.81 5,063.51 5,379.75 15,480.07 0 3,932.39 2,490.11 6,422.50

3,542.30 4,237.00 603.1 10,813.40 724.9 5,781.30 2,334.20 8,840.40 6,756.80 2,869.10 18,466.30 0 5,290.00 2,764.80 8,054.80

Net Current Assets Miscellaneous Expenses Total Assets

18,621.00 0

9,057.57 0

10,411.50 0

24,501.00

19,620.61

26,065.00

Contingent Liabilities Book Value (Rs)

1,013.00 426.73

3,938.76 99.53

707.3 86.86

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

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

PROFIT & LOSS

Infosys Mar '11

TCS Mar '11

Wipro Mar '11

Income Sales Turnover Excise Duty Net Sales Other Income Stock Adjustments Total Income Expenditure Raw Materials Power & Fuel Cost Employee Cost 23 0 12,464.00 17.75 240 3,805.60 199.7 25,385.00 0 25,385.00 1,147.00 0 26,532.00 29,275.41 26,401.20 0 100.7

29,275.41 26,300.50 486.44 -0.87 603.3 31.6

29,760.98 26,935.40

10,190.31 10,937.40

Other Manufacturing Expenses

2,613.00

8,135.57

2,780.20

Selling and Admin Expenses Miscellaneous Expenses

1,834.00 36

1,097.52 821.57

1,703.30 1,145.00

Preoperative Exp Capitalised Total Expenses OPERATING Profit

0 16,970.00

20,502.72 20,571.20

8,415.00 PBDIT Interest PBDT Depreciation Other Written Off Profit Before Tax Extra-ordinary items PBT (Post Extra-ordinary Items) Tax Reported Net Profit Total Value Addition Preference Dividend Equity Dividend Corporate Dividend Tax Per share data (annualised) 9,562.00 1 9,561.00 740 0 8,821.00 0 8,821.00 2,378.00 6,443.00 16,947.00 0 3,445.00 568

8,771.82 9,258.26 20.01 9,238.25 537.82 0 8,700.43 0 8,700.43 1,130.44 7,569.99

5,760.90 6,364.20 58.6 6,305.60 600.1 0 5,705.50 0 5,705.50 861.8 4,843.70

20,484.97 16,765.60 11 2,740.10 450.82 490.8 981.8 220.4

Shares in issue (lakhs) Earning Per Share (Rs) Equity Dividend (%) Book Value (Rs)

5,741.52 112.22 1,200.00 426.73

19,572.21 24,544.09 38.62 1,400.00 99.53 17.74 200 86.86

Bibliography:www.moneycontrol.com www.nasscom.in