Acf - Assignment 2 (1)

7/29/2019 Acf - Assignment 2 (1)

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ACF GROUP ASSIGNMENT II

INFOSYS VALUATION USING EVA MODEL

GROUP MEMBERS:

Kuldeep Bansal

Paavni Sethi

Ankur Gupta

Shivangi Sood

Aroosh Mahipal

Prince Sahni

Surya Grover


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IT SECTOR OVERVIEW

Information technology (IT) is the use of computers and telecommunications equipment to store,

retrieve, transmit and manipulate data. The term is commonly used as a synonym for computers andcomputer networks, but it also encompasses other information distribution technologies such as

television and telephones. Several industries are associated with information technology, such as

computer hardware, software, electronics, semiconductors, internet, telecom equipment and computer

services.

The Information technology industry in India has gained a brand identity as a knowledge economy due

to its IT and ITES 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 1.2% in FY1998 to 7.5% in FY2012. According to NASSCOM, the ITBPOsector in India aggregated revenues of US$100 billion in FY2012, where export and domestic revenue

stood at US$69.1 billion and US$31.7 billion respectively, growing by over 9%. The major cities that

account for about nearly 90% of this sectors exports are Bangalore, Chennai, Delhi, Mumbai, Hyderabad,

Coimbatore, Pune and Kolkata. 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. The industrys share of total Indian exports (merchandise plus

services) increased from less than 4% in FY1998 to about 25% in FY2012. According to Gartner, the "Top

Five Indian IT Services Providers" are Tata Consultancy Services, Infosys, Cognizant, Wipro and HCL

Technologies.

This sector has also led to massive employment generation. The industry continues to be a net

employment generator - expected to add 230,000 jobs in FY2012, thus providing direct employment to

about 2.8 million, and indirectly employing 8.9 million people. 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.

India's growing stature in the Information Age enabled it to form close ties with both the United States

of America and the European Union. However, the recent global financial crises has deeply impacted the

Indian IT companies as well as global companies. As a result hiring has dropped sharply, and employees

are looking at different sectors like the financial service, telecommunications, and manufacturing

industries, which have been growing phenomenally over the last few years. India's IT Services industry

was born in Mumbai in 1967 with the establishment of Tata Group in partnership with Burroughs.The

first software export zone SEEPZ was set up here way back in 1973, the old avatar of the modern day IT

park. More than 80 percent of the country's software exports happened out of SEEPZ, Mumbai in 80s.


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RECENT DEVELOPMENTS

The economic effect of the technologically inclined services sector in Indiaaccounting for 40% of the

country's GDP and 30% of export earnings as of 2006, while employing only 25% of its workforce.

Today, Bangalore is known as the Silicon Valley of India and contributes 33% of Indian IT Exports. India's

second and third largest software companies are head-quartered in Bangalore, as are many of the global

SEI-CMM Level 5 Companies.

Mumbai too has its share of IT companies that are India's first and largest, like TCS and well established

like Reliance[disambiguation needed], Patni, LnT Infotech, i-Flex, WNS, Shine, Naukri, Jobspert etc. arehead-quartered in Mumbai. And these IT and dot com companies are ruling the roost of Mumbai's

relatively high octane industry of Information Technology.

Such is the growth in investment and outsourcing, it was revealed that Cap Gemini will soon have more

staff in India than it does in its home market of France with 21,000 personnel+ in India.


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INFOSYS

Infosys Limited (formerly Infosys Technologies Limited) is an Indian multinational provider of business

consulting, technology, engineering, and outsourcing services. It is headquartered in Bangalore,

Karnataka. Infosys is the third-largest India-based IT services company by 2012 revenues.

Infosys has a global footprint with 67 offices and 69 development centers in US, India, China, Australia,

Japan, Middle East, UK, Germany, France, Switzerland, Netherlands, Poland, Canada and many other

countries. Infosys and its subsidiaries have 155,629 employees as on Dec 31, 2012. The Company

provides business consulting, technology, engineering and outsourcing services to help clients

build tomorrow's enterprise. In addition, the Company offers software products for the banking

industry.

Infosys was co-founded in 1981 by N R Narayana Murthy, Nandan Nilekani, N. S. Raghavan, S.

Gopalakrishnan, S. D. Shibulal, K. Dinesh and Ashok Arora after they resigned from Patni

Computer Systems. The company was incorporated as "Infosys Consultants Pvt Ltd." in Model

Colony, Pune as the registered office and signed up its first client, Data Basics Corporation, in

New York. In 1983, Infosys corporate headquarters was relocated to Bangalore.

CURRENT SHAREHOLDING

Life Insurance Corporation of India has 6.28%. Oppenheimer Developing Markets Fund, Abu

Dhabi Investment Authority, a sovereign wealth fund owned by Abu Dhabi, and the

Government of Singapore also hold significant shareholdings as on June 30, 2012. The

remaining public shares are owned by financial institutions and individual investors.

Acquisitions In December 2003, Infosys had acquired Australia-based IT service provider Expert

Information Services for $23 million.

In September 2012, Infosys acquired Switzerland-based Lodestone Management Consultants

for about $345 million.


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Company Valuation

Economic Value Added or EVA is an estimate of a firm's economic profit being the value

created in excess of the required return of the company's investors (being shareholders and

debt holders). Quite simply, EVA is the profit earned by the firm less the cost of financing the

firm's capital. The idea is that value is created when the return on the firm's economic capital

employed is greater than the cost of that capital. This amount can be determined by making

adjustments to GAAP accounting. There are potentially over 160 adjustments that could be

made but in practice only five or seven key ones are made, depending on the company and the

industry it competes in.

For company valuation of Infosys we have choose ECONOMIC VALUE ADDED method as:

Information required for valuation is easily available Since Infosys do not have any debt it makes easier to calculate EVA.

Note: As of March 31 2012, the company has only one class of equity shares and has no debt.

Consequently to the above capital structure there are no externally imposed capital

requirements. Therefore we do not consider any amount of debt in calculation.


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Economic Value Added (EVA) statement

fig in crore

2012 2011 2010 2009 2008

Cost of capital

Return on risk free investment (%) 7.99 7.66 7.20 7.00 8.00

Market Premium (%) 5.00 5.00 5.00 7.00 7.00

Beta 0.71 0.71 0.68 0.74 0.76

Average debt - - - - -Cost of debt NA NA NA NA NA

Average weighted capital 30382 25688 21634 17431 12527

Cost of equity (%) 11.54 11.21 10.60 12.18 13.32

WACC (%) 11.54 11.21 10.60 12.18 13.32

Economic Value Added (EVA)

Operating profits 9779 8102 6910 6421 4640

Less: Tax 3367 2490 1681 919 685

WACC capital employed 3506 2880 2293 2123 1669

EVA 2906 2732 2936 3379 2286


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Through data analysis we can conclude that company EVA is although increasing but company

EVA over capital employed is decreasing.

0

500

1000

1500

2000

2500

3000

3500

4000

2008 2009 2010 2011 2012

ECONOMIC VALUE ADDED

ECONOMIC VALUE ADDED

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

2008 2009 2010 2011 2012

EVA / Average Capital Employyed

EVA / Average Capital

Employyed


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THANK YOU

Documents

Acf - Assignment 2 (1)