11-02-2013, 10:20 AM
ANALYSIS AND VALUATION OF EQUITY SECURITIES OF TATA CONSULTANCY SERVICES , INFOSYS AND WIPRO LTD
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INTRODUCTION
In today’s era every company needs cash or cash equivalents to run its day to day activities smoothly. The major sources through which companies can borrow money are:
• Bank Loans
• Debenture
• Preference Share
• Equity Share.
Bank Loan is the amount which companies receive after fulfilling all the required information which is mandate according to the rules of banks. Companies need to mortgage its assets as guarantee for the future repayment of its loan amt. on the loan bank charge interest which company has to pay irrespective of the fact that company is in profit or loss. Debentures are the instruments which are used to acknowledge the receipt of the debt form the debenture holders. Debenture Holders are sought lenders for the company. They are usually medium or long-term debts for the company. Debenture holders are also paid interest as per the contract between debenture holder and company. The interest has to be paid by the company whether company I shaving any profits or not. Preference share are kind of special equity. As they have both rights of equity shares and debt instruments. Preference shareholders are been paid dividend at a specified percentage of the share value. The dividend is been paid only when company have profits otherwise company have no obligation of paying dividends (depending upon the nature of preference share issued) to its preference shareholders.
RESEARCH METHODOLGY
This research would be mainly exploratory based and the data which will be used is somewhat secondary because for this we need balance sheet of the companies and those balance sheets would be available on the website of the company. This research would be primarily lab based as we would be observing the share prices of the IT stocks as well while we would be doing all the calculations which would be required to conduct our research appropriately. In this research we would be analyzing different valuation models on previous 5 years (2005-2010) financial reports of the companies mainly from IT sector. We have to understand method(FCFF) and our main aim is to find out the model which is most accurate to understand the company’s market price and from the average we get the smallest absolute variation error. We will analyze 3 companies of IT sector form 2010 to 2017Expected (E). The underlining rational through which we can understand and forecast the future pricing. This would help investors to arbitrage the gap and get the best of the investment plan. In this whole proposition we would have to take few assumptions which would help our model to be work successfully and we understand that through those assumptions the accuracy of our model would not be 100% but we need to take those assumptions which will not drastically change our research model. Through this we would be able to understand all the models and their impact on the IT Sector and their future implications.
PROPOSED LITERATURE REVIEW AND TENTATIVE HYPOYHESIS
In the report of Penman and Sougiannis (1998) they studied the payoff between different discount models using ex post payoff method. They made a portfolio of the stocks of NYSE, AMEX and NASDAQ and then used dividend, Cash Flow and Residual Income models on it to fine the best output model. The time period for which they examined was about 10 years and in the end they came to a conclusion that Residual Income Model was the best among all in comparison to others. Francis, Olsson and Oswald (2000) also did a research on the same topic which Penman and Sougiannis (1998) did. This time in place of individual data they used forecasted data which was highly unpredictable. Through their research they came to a conclusion that Residual Income model is still better than the other models i.e. Cash Flow and Dividend Model. Aswath Damodaran (2006) did a research using mainly three models in his paper and those models are: Discounted Cash Flow Valuation Liquidation and Accounting Valuation Relative Valuation Contingent Claim Valuation After analyzing these they were able to find few trends from there research. Firstly there has been a shift in models of valuation i.e. from dividend discount model to valuing business which represents models in which the price is been coded by the acquirer company. Secondly that all models are somewhat same but for that we need to take consistent assumptions which would help in getting précises results. As per the Modigliani and Miller (1961) who founded “Dividend Irrelevance Proposition” in which when the investment policy remains the same and company pays dividend but still the value of the firm remains the same as it was before. But in this case there are few assumptions which should be kept in mind while following this model and those are: The investors are rational, and have no effect form the earnings by capital gain or dividends.
DATA COLLECTION
All the derived prices are compared with the market price of that company. The market price isalso the adjusted closing price of that company.For the FCFF model we have taken Change In working Capital from Cash Flows Statement(CFS) generated by the company. For capital expenditure we have taken it from the Cash Bookvalue of the stock is been expressed by dividing the total equity value in the balance sheet by theno. of shares mentioned in the balance sheet and is used as an estimator for Bvt.Dividend is the amount which is been paid by the company to its investors. The dividend should bepaid to the same no. of investors which are mention in the balance sheet. Dividends per share areused as an estimator of Divt.The earnings per share are the amount of company´s profit in per share terms. Hence, the totalprofit divided by current outstanding shares of common stock. Earnings per share are used asan estimator for Xt.
ABOUT COMPANIES AND RESEARCH
Infosys
An Infosys technology LTD. was started by seven entrepreneurs Nagavara Ramarao, Narayana Murthy, Nandan Nilekani, Kris Gopalakrishnan, S. D. Shibulal, K Dinesh and with N. S. Raghavan. It is one of the oldest IT solutions Company in India which was established in the year 1981. It was officially begin with US $250. During the first two years of its existence it didn’t have a computer but still they are able to take the company to such a high level which we all couldn’t think off. Infosys is a global company and it has 64 offices and 68 developed centers in India, China, Australia, The Czech Republic, Poland, U.K, Canada and Japan with a global workforce 145,088 till 31st December 2010. Infosys was the first company to use Global Delivery Model (GDM) which is now been seen as most beneficial for the company in getting the offshore contracts for the company. GDM follows the principle of taking work to the best available talent which is economically sensible for the company’s growth.
Tata Consultancy Services
Tata Group is a very well-known name in the Indian context. Tata Group is the one of the oldest companies in the Indian market. It was started in the year 1868 by its founder Jamshedji Tata. Tata Group is a much diversified group as it has companies in steel, energy, retail, communication, information technology (IT), and many more. Tata Consultancy Services (TCS) is subsidiary of Tata Group in the field of information technology industry. TCS is raked at 20th spot in the list of Fortune India 500 magazine. It is the largest technology provider company in India.it was started in way back in 1969 and since then it has around 142 offices in 47 countries. It generates around 30% of the Indian IT exports revenue from its services.