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INTRODUCTION

1.1 Fundamental Analysis:

Fundamental Analysis is the cornerstone of investing. It is a technique which helps in

determining a value of security by focusing on underlying factors that affect a company’s

actual business and its future prospects. The term simply refers to the analysis of the

economic well-being of a financial entity as opposed to only its price movements.

Fundamental analysis is performed on historical and present data, but with the goal of making

financial forecasts.

Main Objectives:

To conduct a company stock valuation and predict its probable price evolution,

To make a projection on its business performance,

To evaluate its management and make internal business decisions,

The project involves PEST Analysis of the economy as a whole (a common variant of the all

industries), Industry Analysis using SWOT & Porter’s Five Forces Model and Company

Analysis which involves calculation of the value of security using Discounted Cash Flow

(DCF) technique.

1.2 Technical Analysis:

Technical analysis attempts to understand the emotions in the market by studying the market

itself, as opposed to its components. Technicians using charts search for archetypal price

chart patterns, such as the well-known head and shoulders or double top/bottom reversal

patterns, study technical indicators, moving averages, and look for forms such as lines of

support, resistance, channels, and more obscure formations such as flags, pennants, balance

days and cup and handle patterns.

Technical analysts also widely use market indicators of many sorts, some of which are

mathematical transformations of price, often including up and down volume, advance/decline

data and other inputs. These indicators are used to help assess whether an asset is trending,

and if it is, the probability of its direction and of continuation. Technicians also look for

relationships between price/volume indices and market indicators. Examples include the

relative strength index, and MACD. Other avenues of study include correlations between

changes in options (implied volatility) and put/call ratios with price. Also important are

sentiment indicators such as Put/Call ratios, bull/bear ratios, short interest, Implied Volatility,

etc.

The project involves Support and Resistance, AROON, MACD (Moving Average

Convergence-Divergence) Analysis of the stock.

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1.3 PEST ANALYSIS

POLITICAL:

Foreign direct investment ~100%

Government pressure to increase the security levels, add sewage treatment plant etc.

Government promoting tourism

Government pressure is no longer required in hiring foreign technician

ECONOMIC:

High growth in tourism industry is expected

Export promotion capital goods scheme

Not given infrastructure industry status

GDP growth rate:

SOCIAL:

Increase in Disposable income

The Indian culture, social& life styles are changing drastically. changing lifestyle due

to exposure to global environment.

Urban middle class forms 40% of the total population

TECHNOLOGY:

Technology has been simplified and available in the industry

Computerization

Global distribution system

Real time access to inventory, transparency across multiple channels.

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2.0 Industry Analysis

2.1 Indian steel industry

Indian steel industry plays a significant role in the country’s economic growth. The major

contribution directs the attention that steel is having a stronghold in the traditional sectors,

such as infrastructure & constructions, automobile, transportation, industrial applications etc.

Moreover, steel variant stainless steel is finding innovative applications due to its corrosion

resistive property. India is the fifth largest steel producer at the global front and struggling to

become the second largest producer in the coming years.

The country has acquired a central position on the global steel map with its giant steel mills,

acquisition of global scale capacities by players, continuous modernization & up gradation of

old plants, improving energy efficiency, and backward integration into global raw material

sources. Global steel giants from across the world have shown interest in the industry due to

its phenomenal performance. For instance - the crude steel production in India registered a

year-on-year growth of 6.4% in 2010 and reached 66.8 Million Metric Tons.

Current market situation

• The Indian steel market is one of the fastest growing markets.

• The steel industry in India plays such a significant role that it has its own Ministry of Steel

(MoS)

• According to MoS and other recent sources, the Indian steel industry has emerged as the 5 th

largest in the world

1. China

2. Japan

3. Russia

4. United States

5. India

6. South Korea

• The Indian steel industry is expected to become the 2nd largest steel producing country by

2012 and 2nd largest producer of crude steel by 2015-16

• The Indian steel production grew with 8% in 2009-10 to 56.3 million tons. The Indian steel

production is expected to reach 124 million tons by 2012; 8-10% of this will be exported.

And the Indian steel production is expected to reach around 275 million tons by 2020.

Major players

SAIL(steel authority of India Ltd)

Tisco ( Tata Iron and Steel Corporation ltd)

Essar Steel

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Jindal Vijaynagar Steels Ltd

Jindal Strips Ltd

JISCO

Saw Pipes

Uttam Steels Ltd

Ispat Industries Ltd

SWOT Analysis

Strengths

Availability of iron ore and coal in bulk quantity

Low cost efficient and abundant labour

Strong managerial capabilities

Modern new plants and modernized old plants

Weaknesses

Dependence on imports for steel manufacturing Equipments and technology

Low R&D investments

Inadequate infrastructure

Slow statutory clearance for development of mines

Opportunities

Unexplored rural markets

Rapid urbanization

Growing domestic demand and increased level of exports

Indian steel producers looking for overseas

acquisitions in steel as well as raw materials

Strong growth in steel heavy industries e.g. the

automotive industry and within the infrastructure

Increasing interest of foreign steel producers in India

With the improvement in the economic recession in the

West, the potential for a growing demand is high

With high government focus on infrastructure sector the steel consumption is bound

to grow

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Threats

Slow growth in infrastructure development

Market fluctuation and increase in China’s export possibilities

Global economic slow down

Higher duties and taxes

CSR related issues: increased focus on the environment and labour conditions

Porter’s Five Forces Model

Steel as a industry has always been cyclical in nature. But for the past few years it has seen

tremendous growth.

Barriers to entry:

We believe that the barriers to entry are medium. Following are the factors that vindicate our

view.

1. Capital Requirement: Steel industry is a capital intensive business. It is estimated

that to set up 1 mtpa capacity of integrated steel plant, it requires between Rs 25 bn to

Rs 30 bn depending upon the location of the plant and technology used.

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2. Economies of scale: As far as the sector forces go, scale of operation does matter.

Benefits of economies of scale are derived in the form of lower costs, R& D expenses

and better bargaining power while sourcing raw materials. It may be noted that those

steel companies, which are integrated, have their own mines for key raw materials

such as iron ore and coal and this protects them for the potential threat for new

entrants to a significant extent.

3. Government Policy: The government has a favorable policy for steel manufacturers.

However, there are certain discrepancies involved in allocation of iron ore mines and

land acquisitions. Furthermore, the regulatory clearances and other issues are some of

the major problems for the new entrants.

Bargaining Power of Buyers:

Steel has very low barriers in terms of product differentiation as it doesn’t fall into the luxury

or specialty goods and thus does not have any substantial price difference. However, certain

companies like Tata Steel still enjoy a premium for their products because of its quality and

its brand value created more than 100 years back. Bargaining power of buyers: Unlike the

FMCG or retail sectors, the buyers have low bargaining powers because there are numerous

buyers spread across different sectors starting from automobiles to construction. Also these

buyers cannot integrate backwards to improve their bargaining power.

Consumption of Steel sector-wise

Bargaining power of suppliers:

The bargaining power of suppliers is low for the fully integrated steel plants as they have

their own mines of key raw material like iron ore coal for example Tata Steel. However,

those who are non- integrated or semi integrated has to depend on suppliers. An example

could be SAIL, which imports coking coal.

59%13%

11%

17%

2005-2010

construction & Infra

Manufacturing

Automobiles

Others

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Competition:

It is medium in the domestic steel industry as demand still exceeds the supply. India is a net

importer of steel. However, a threat from dumping of cheaper products does exist.

Finished Steel

Availability for domestic use (A) Import (B) Ratio of

(B)/(A)

2008-09 52.44 5.84 0.11

2009-10 56.17 7.38 0.13

Apr-Dec ‘10 46.44 (42.05) 5.36 (5.24) 0.12 (0.12)

Source: Joint Plant Committee

(In million tonne)

Threat of substitutes:

It is medium to low. Although usage of aluminium has been rising continuously in the

automobile and consumer durables sectors, it still does not pose any significant threat to steel

as the latter cannot be replaced completely and the cost differential is also very high.

Conclusion: After understanding all the above view points and the current global scenario,

we believe that the domestic steel industry will likely to maintain its momentum in the long

term. However, the growth may get affected in short run. Investors need to focus on

companies that are integrated, have economies of scale and sell premium quality products.

COMPANY ANALYSIS

DCF-Valuation

Valuations of TATA steel and JSW were carried out as per discounted cash flow.

Assumptions

Sales were projected to grow as per CAGR for the years 2012-16

Expenses were considered the average percentage of sales.

Capital expenditures for the next years are based on the projections made in the

annual reports.

For other details refer Excel sheet

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Price as per DCF

Rs crores (Except share price)

Company WACC

Enterprise Value

(Rs Crores)

Net

debt Value of Equity

Share

Price

Current

Price

Tata Steel 14.93% 82980 24160 58819.97 613 495

JSW 17.23% 65860 42274 23585.94 1057 719

The prices calculated were found to be higher than the current prevailing price in the market.

This indicates that the shares in the market are grossly undervalued and it can be purchased.

There are several reasons for the shares to be undervalued.

Reasons

1. The uncertain economic conditions worldwide have impacted the market and hence most

of the markets are underperforming

2. The recent Bellary mining ban will affect the ore availability which may impact the long

term growth prospects of the company. Since Tata steel has its own mines, the impact is

lesser and the drop in price is also less. But for JSW there price gap is huge because it is one

of the main consumers of ore mined in the Bellary region.

Dupont Analysis-TATA Steel (stand alone)

Tax

burden

Interest

burden Margin Turnover Leverage ROE ROA

Year PAT/PBT

PBT/

EBIT

EBIT/

SALES

SALES/

ASSETS

ASSETS/

EQUITY

2001 0.92 0.56 0.15 0.88 1.67 0.11 0.13

2002 0.81 0.38 0.09 0.47 3.62 0.05 0.04

2003 0.79 0.78 0.17 0.64 4.82 0.32 0.11

2004 0.65 0.92 0.24 0.80 3.29 0.39 0.20

2005 0.65 0.96 0.35 1.00 2.26 0.49 0.35

2006 0.67 0.97 0.32 0.89 1.97 0.36 0.28

2007 0.67 0.96 0.33 0.70 2.03 0.30 0.23

2008 0.66 0.88 0.36 0.43 1.89 0.17 0.15

For ROA even though margin is increasing but asset turnover is decreasing hence ROA went

down after initial increase. Similarly FOR ROE asset turnover is decreasing other things are

more or less constant hence ROE also went down. The reason is that Tata Steel has recently

embarked on a Brownfield expansion. So even though there are capital additions in terms of

fixed assets but revenue realizations are still to come.

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Tata Steel (consolidated)

Tax

Burden

Interest

Burden Margin Turnover Leverage ROE ROA

Year PAT/PBT

PBT/

EBIT

EBIT/

SALES

SALES/

ASSETS

ASSETS/

EQUITY

2002 0.80 0.35 0.08

2003 0.73 0.79 0.17 0.77 3.91 0.30 0.13

2004 0.65 0.94 0.23 0.86 3.63 0.45 0.20

2005 0.66 0.96 0.32 1.02 2.84 0.60 0.33

2006 0.67 0.96 0.26 1.00 2.52 0.42 0.26

2007 0.66 0.91 0.25 0.54 4.07 0.34 0.14

2008 0.75 0.78 0.16 1.20 4.60 0.51 0.19

To improve ROE and ROA Tata Steel went on acquisition spree. In 2005 it acquired Natsteel

followed by acquisition of millennium steel in 2006. Along with the acquisition the company

was able to improve asset turnover ratio hence ROE and ROA improved. Additionally to

fund these acquisitions the company went for more debt hence its leverage ratio also

increased.

JSW

Tax Burden

Interest

Burden Margin Turnover Leverage ROE ROA

Year PAT/PBT

PBT/

EBIT

EBIT/

SALES

SALES/

ASSETS

ASSETS/

EQUITY

2001 1.00 -0.34 0.11 0.30 4.04 -0.04 0.03

2002 1.00 -5.02 0.04 0.22 11.17 -0.44 0.01

2003 1.00 -0.27 0.15 0.31 11.95 -0.14 0.05

2004 0.77 0.64 0.30 0.37 6.48 0.35 0.11

2005 0.59 0.77 0.27 0.65 3.46 0.28 0.18

2006 0.62 0.80 0.25 0.53 2.94 0.20 0.13

2007 0.67 0.81 0.26 0.60 2.79 0.23 0.15

2008 0.71 0.81 0.24 0.60 2.70 0.23 0.15

It’s often said, that a company can increase its ROE with increasing leverage. But in this case

The Company was having negative ROE because of very high leverage and low turnover

ratio. Only when the leverage was decreased and turnover was improved ROE and ROA got

stabilized. Thus leverage can increase ROE only when the company can generate positive

cash flows.

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P/E Analysis

Price (In Rs.) Market Capitalization (in Rs. Crores) EPS (In Rs.) P/E

SAIL 116 481111 11 10.61

TATA

Steel 495 475840 105 4.69

JSW 719 160534 113 6.37

The above table shows the P/E ratios of three major steel producers in the country. In terms

of P/E ratio SAIl appears to be the best.

But if we break it down we will find that the high value is due to very low denominator value

of EPS. Thus even though the stock is worst performing still P/E projects it as the best one.

Technical Analysis

The dates are in US convention i.e mm/dd/yyyy

Support and Resistance

The above stock chart represents the share price of TATA Steel for the period Jan 2009 to

Sep-2011. Looking at the trend in stock prices few patterns indicating the support and

resistance prices can be seen.

During the initial period i.e. during the period 01/09/2009 to 30/10/2009 the support and

resistance were at Rs 400 and Rs 600. Range trading was done in between these prices.

After 24/12/2009 the resistance price was breached and the new resistance became Rs 600.

During the later period i.e. from 24/09/2010 to 09/03/2011 the resistance and support prices

were Rs 700 and Rs 600 respectively.

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TATASTEEL.NS(LineClose) Close

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Once again during 05/05/2011 the support price was breached and the initial support price

became the resistance price.

Additionally point 1 represents a flag formation in which subsequent lows are higher than the

previous lows. Point2 represents a cup and handle formation in which the bullish period is

suppressed for a period of time which is again attained.

Aroon

Aroon-Up and Aroon-Down. A 25-day Aroon-Up measures the number of days since a

25-day high. A 25-day Aroon-Down measures the number of days since a 25-day low.

At its most basic, the bulls have the edge when Aroon-Up is above 50 and Aroon-Down is

below 50.

As it is very much evident from the graph, in the initial period from 01/09/2010 to

01/10/2010 Aroon up was touching 100 while Aroon down was close to zero. This signifies

400.00

450.00

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650.00

700.00

Adj closing

Adj closing

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aroon up

aroon down

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that there should be a bullish trend. If we compare it with the stock movement we ca n

confirm that indeed during the period there was a bullish trend.

Also during the period close to 05/01/2011 when the Aroon up and Aroon down both were

close to 50 the stock price was consolidating. During the end months Aroon up is close to 100

so during the coming period stock prices are suppose to increase.

MACD Analysis

The above chart represents MACD analysis of TATA Steel

Signal line crossovers are the most common MACD signals. A bullish crossover occurs when

MACD turns up and crosses above the signal line. A bearish crossover occurs when MACD

turns down and crosses below the signal line.

Signal line crossover from bottom is happening at several places for eg durin Mar 09,July-

09,Aug-09,Dec-10 which indicates that the trend should be bullish and the same is confirmed

by the stock price movements during the same period.

Similarly signal line crossovers from top is occurring in periods like Aug-09,Aprl-10,Oct-10

which indicates that the following trend should be bearish which is confirmed by the stock

price movements.

During the end period the MACD is again crossing signal line thus during the coming weeks

the share price is suppose to increase.

(400.00)

(200.00)

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MACD

9-day of MACD(signal)Adj cls

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JSW

The above stock chart represents the share price of JSW Steel for the period

Jan 2009 to Sep-2011 Looking at the trend in stock prices few patterns indicating the support and resistance prices

can be seen.

Point 1 represents a flag formation in which the subsequent lows are higher than the previous

lows. Point 2 represents cup and handle shape in which the bullish trend is suppressed for a

period of time i.e from 26/05/2010 to 16/09/201 and it again follows the uptrend path.

Point-3 represents a head and shoulder shape such that with each head and shoulder the trend

is reversed.

Point 4 represents range trading. It shows that during the show period the resistance and

support levels were at Rs 1000 and Rs 800 approximately.

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AROON

AROON-UP and AROON-DOWN

A 25-day Aroon-Up measures the number of days since a 25-day high. A 25-day Aroon-

Down measures the number of days since a 25-day low.

At its most basic, the bulls have the edge when Aroon-Up is above 50 and Aroon-Down is

below 50.

As it is very much evident from the graph, in the initial period from 01/09/2010 to

01/10/2010 Aroon up was touching 100 while Aroon down was close to zero. This signifies

that there should be a bullish trend. If we compare it with the stock movement we can

confirm that indeed during the period there was a bullish trend.

Also during the period close to 05/01/2011 when the Aroon up and Aroon down both were

close to 50 the stock price was consolidating. Neither the bull nor the bear were dominant.

600.00

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1200.00

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Aroom down

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2.2 INDIAN HOTEL INDUSTRY

The Hotel Industry comprises a major part of the Tourism industry. Historically viewed as an

industry providing a luxury service valuable to the economy only as a foreign exchange

earner, the industry today contributes directly to employment (directly employing around

0.15 million people), and indirectly facilitates tourism and commerce.

WTO predicts India will receive 25 million tourists by year 2015.

India currently has over 200,000 hotel rooms spread across hotel categories and guest-houses

and is still facing a shortfall of over 100,000 rooms (source: FHRAI).

The country is witnessing an unprecedented growth in hotel constructions and will be adding

almost 114,000 hotel guest rooms to its inventory over the next five years. (source: HVS)

The Current Scenario:

Existing hotel rooms in India: 202,963(source FHRAI)

Revenue of the Indian hotel industry FY 2009-10: US$ 137.36 (INR 47,889.03 crore)

30% of this revenue i.e. US$ 41.2 million (INR 14,366.7 crore) went back into the

market in FY 2008-09 as operating expenses

India’s GDP already showed a strong growth rate of 8.2 percent year-on-year in the

third quarter of FY 2010-11. Although India’s GDP growth slowed in the final quarter

of 2010, it remained above 8 percent due to strong growth in key service sectors and a

recovery in agricultural output. Activity in the finance, insurance, real estate and

business services sector surged at a double-digit pace, while trade, hotel, transport and

communications activity recorded their sixth consecutive quarter of 8 percent year-on-

year growth.

According to hotel and hospitality consulting firm,HVS, the strong performance of

tourist arrival in India is contributed to strong sense of business and investment

confidence in India inspired by:

1. India’s strong GDP performance

2. Strengthening of India’s ties with developed world.

3. Opening of sectors of the economy to private sectors and foreign investments

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2004 2005 2006 2007 2008 2009 2010 2011

Real GDP Growth Rate% 8.3 6.2 8.4 9.2 9 7.4 7.15 8

SECTORIAL*GDP

CONTRIBUTION WRT

TOTAL GDP

26 26 27 28 29 27 27 27

FOREIGN TOURIST

(MILLION)ARRIVAL

3.48 3.92 4.45 5.08 5.37 5.05 4.62 5.21

Sector consists of trade, hotels, transport storage etc.

Number of hotels and restaurants in India :

Hotel category No. of Hotels No. of Rooms

5 star deluxe/5 star 165 43, 965

4 Star 134 20, 770

3 Star 505 30,100

2 Star 495 22,950

1 Star 260 10,900

Heritage 70 4,200

Uncategorised 7,078 -

Total 8,707 1,32,885

Restaurants 12,750

STRUCTURE OF THE INDUSTRY

Hotels in India are broadly classified into 7 categories (five star deluxe, five-star, four star,

and three star, two star, and one-star and heritage hotels) by the Ministry of Tourism,

Government of India, based on the general features and facilities offered. The ratings are

reviewed every five years.

Major players in the Indian Hotel Industry

Hotel Chains

They comprise major players including Indian Hotels Company Limited (the TajGroup) and

associate companies, EIH Limited (the Oberoi Group), ITC Hotels Limited(the ITC Welcome

Group), Indian Tourism Development Corporation (ITDC) and HotelCorporation of India

(HCI) (the latter two being under the Public Sector).

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Small Chains

They are companies that have come up after the tourism boom of the 1980s and1990s. Due to

lack of prior experience in the hotel industry, these players have preferred to opt for

operating/management arrangements with international players of repute.

Some of the companies in this category are Hotel Leela Venture (with Kempinski),Asian

Hotels (Hyatt International Corporation), Bharat Hotels (formerly with Holiday Innand

Hilton and now with Intercontinental).

Public Sector Chains

ITDC and HCI boast of some of the best locations in major cities but are relative

underperformers, as compared with their private sector counterparts International Hotel

Chains They are also looking at India as a major growth destination. These chains are

establishing themselves in the Indian market by entering into joint ventures with Indian

partners or by entering into management contracts or franchisee arrangements. Some of the

players who have already entered or plan to enter the Indian market include Marriott,

Starwood, Berggren Hotels, Emaar MGF. Most of these chains have ambitious expansion

plans especially with a strong focus on the budget segment and tier II cities.

Localized Hotel Companies

They are mainly comprise early entrants who have an established localized presence and who

preferred not to expand during the tourism boom but focus on building and catering to a loyal

customer base

SWOT ANALYSIS

STRENGTH:

A very wide variety of hotels is present in the country.

There are international players in the market such as Taj and Oberoi &

International Chains

A manpower cost in the Indian hotel industry is one of the lowest in the world.

India offers a readymade tourist destination with the resource

Natural and cultural diversity

Demand-supply gap

Government support

Increase in the market share

WEAKNESSES

The cost of land in India is high at 50% of total project cost as against 15 abroad.

The hotel industry in India is heavily staffed.

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High tax structure in the industry makes the industry worse off than its international.

Only 97,000 hotel rooms are available in India today.

Only limited value added services

Poor support infrastructure

Slow implementation

Susceptible to political events.

OPPORTUNITIES

Demand between the national and the inbound tourists can be easily managed due to

difference in the period of holidays.

In the long-term the hotel industry in India has latent potential for growth.

Unique experience in heritage hotels.

Rising income.

Open sky benefits

THREATS

Guest houses replace the hotels.

Political turbulence in the area reduces tourist traffic and thus the business of the

Hotels

Changing trends in the west demand similar changes in India

The economic conditions of a country have a direct impact on the earnings in hotel

industry.

Lack of training man power in the hotel industry.

Fluctuations in international tourist arrivals.

Increasing competition

PORTER’S FIVE FORCES MODEL

The framework for business strategy development and industry analysis is given by Porter’s

Five Forces model which in turn helps in determining the key factors for competitive success.

The five forces can be given as:

Bargaining power of Suppliers:

The number of suppliers is High as there are many real estate companies and reliable

technology providers for property.

The substitutes for property, employees, etc is High.

The industry has a Moderate threat of integrating backward to their own real estate

company along with their own training wing.

19 | P a g e

The property development, real estate companies, skilled labor and training add to the

quality, thus contribution to quality is High.

Suppliers play an indispensible role to the industry.

Verdict: The overall bargaining power of suppliers is Low.

Bargaining Power of Buyers:

The number of buyers is High, thus losing one customer would not make a difference.

The contribution to cost by the buyers is Moderate as Brand image leads to extra cost

but this leads to extra costs of training of staff, location rent, etc also.

Additional facilities such as spas, gyms etc. are used by hotels to improve the quality

of customer's stay, hence their contribution is High.

Verdict: The overall bargaining power in terms of services is Moderate.

Barriers to Entry:

Brand names and values are very important in attracting and retaining customers,

hence the product differentiation is High.

Brand identity is very important.

It is capital intensive and staff, decor, infrastructure etc. are very expensive.

Labor, land and other essentials can be obtained at a moderate rate.

Due to specialized assets and initial investment, the exit barriers are High.

Verdict: The overall barrier to entry is High.

Threat of Substitutes

As there can be corporate guest houses and video conferencing, holograms or air-

planes business travelers, the availability of close substitutes is Moderate.

Hotels have greater bargaining power, hence profitability of the producer of

substitutes is High.

Verdict: The overall threat of substitutes is Low.

20 | P a g e

Competitive power of Rivalry Players

The number of competitors is Large.

It’s a mature industry; hence its growth is High.

Strong brand image commands a very high premium, hence the differentiation is

Moderate.

Verdict: The competitive power of rivalry players is High.

SUMMARY:

PORTER’S FORCES

CURRENT SITUATION

Bargaining Power of Suppliers

LOW

Bargaining Power of Buyers

MODERATE

Barriers to Entry

HIGH

Threat of Substitutes

LOW

Competitive Power of Rivalry Players

HIGH

Hence the overall attractiveness of the industry is moderate as it demands huge initial

investment.

COMPANY ANALYSIS

DCF-Valuation

Valuations of Indian Hotel Co. Ltd. and Advani Hotels & Resorts (India) Ltd were carried

out as per discounted cash flow.

Assumptions

Sales were projected to grow as per CAGR for the years 2012-16

Expenses were considered based on average percentage of sales.

Capital expenditures for the next years are based on the projections made in the

annual reports.

For other details refer Excel sheet

21 | P a g e

Price Calculated as per DCF

Fig in Rs. crores (except share price in Rs.)

Company WACC Enterprise value

Net

debt

Value of

Equity share price Current price

Indian Hotel co.

Ltd. 12.87% 7269.96 2351.43 5013.84 66.02 72.90

Advani Hotels

& Resorts Ltd. 15.89% 153.40 7.60 147.80 31.98 35.60

The prices calculated using DCF was found to be lower than the current prevailing price in

the market. This indicates that the shares in the market are grossly overvalued.

There are several reasons for the shares to be overvalued. Hence, can be considered for

selling.

P/E analysis

Price(in

Rs.)

Market Capitalization

(in Billion)

EPS (In

Rs.) P/E

Indian Hotel co. Ltd. 72.90 54.76 1.70 42.88

Advani Hotels & Resorts Ltd. 35.60 1.65 0.63 56.51

The above table shows the P/E ratios of Hotel Industry. In terms of P/E ratio Indian Hotel Co.

Ltd. appears to be the best.

But if we break it down we will find that the high value is due to very low denominator value

of EPS. However, the companies have huge prospects and the perceived value is high

because of its business model.

22 | P a g e

TECHNICAL ANALYSIS:

Advani resorts and hotels

MACD

The above chart shows the stock trend and MACD analysis of Advani group from 2009-

2011. At position 1 we can observe head and shoulder pattern.

At position 2 we can observe penant formation.

The MACD line overtakes signal line from bottom during Jun-09.Sep-09,May-10 which

indicates a bullish trend which is also confirmed by the stock price movement.

The MACD line crosses signal line from the top during Feb-10,Nov-10 indicating a bearish

trend which is confirmed by the stock price movement.

Also for the last few weeks there hasn’t been much divergence between the two lines hence

the stock price will be more or less stable during the coming period.

-50

-30

-10

10

30

50

-20

0

20

40

60

80

100

MACD

Signal

Adj cls

1

2

23 | P a g e

Indian Hotels Co. Ltd.

Source: Yahoo Finance

Graph: Stock price movement

---- SMA (50)

-------SMA (15)

Source: Yahoo Finance

Graph: Volume

24 | P a g e

Source: Yahoo finance

Graph: ----MACD (26,12)

----EMA(9)

Simple Moving Average:

In the graph shown above orange line indicates simple moving average of stock prices over a

period of 50 days and second gray color line indicates simple moving average over a period

of 15 days.

As we can see from the graph that prices are moving below the moving average in late 2009

which suggests that bears are in control and asset are likely to move lower and indicates that

it’s time to go short. Whereas a cross above the moving average line in near about April

indicates that bulls and asset is likely to move higher. Therefore it signals a bullish trend and

analyst prefer to go for long position.

Also we can observe the crossing of long term and short term moving average lines to infer

long term trends compared to shorter term trend and thus helping in determining whether the

trend is gaining strength or about to reverse.

Here the cross of short term (15 day) moving average above the long term moving average

after the month of April indicates bullish trend and initiation of long position which is clearly

indicated in graph and supported by huge volume. Whereas the cross of short term moving

average line below the long term moving average in approximately February 2009 indicates

bearish trend its considered time to sell.

25 | P a g e

MACD indicator:

From the graph we can observe that MACD line is overtaking the signal line (EMA9) from

bottom signalling bullish trend during may2009 and September 2009 which is supported by

high volume and increase in stock price.

Also MACD line is crossing the signal line from top in 2009 signalling bearish trend as

indicated by stock price movement also.

26 | P a g e

2.3 INDIAN INFRASTRUCTURE SECTOR

Industry Analysis

The Indian economy is booming, with rates of Gross Domestic Product (GDP) growth

exceeding 8% every year since 2003/04. Construction is the second largest economic activity

in India after agriculture, and has been growing rapidly. The increasing flow of goods has

spurred increases in rail, road and port traffic, necessitating further infrastructure

improvements.

In India Construction has accounted for around 40 per cent of the development investment

during the past 50 years. Around 16 per cent of the nation's working population depends on

construction for its livelihood. The Indian construction industry employs over 3 crore people

and creates assets worth over 20,000 crore.

It contributes more than 5 per cent to the nation's GDP and 78 per cent to the gross capital

formation. Total capital expenditure of state and central govt. will be touching 8,02,087

crores in 2011-12 from 1,43,587 crores (1999-2000).

The share of the Indian construction sector in total gross capital formation (GCF) came down

from 60 per cent in 1970-71 to 34 per cent in 1990-91. Thereafter, it increased to 48 per cent

in 1993-94 and stood at 44 per cent in 1999-2000. In the 21st century, there has been an

increase in the share of the construction sector in GDP and capital formation.

Major Market Players in Infrastructure Sector

Larsen &Toubro Ltd

Punj Lloyd Group

Jaiprakash Associates Ltd

Lanco Infratech Limited

Gammon India

IVRCL Infrastructures & Projects Ltd

GVK Group

GMR Group

DLF

SWOT Analysis

STRENGTH

Employment and training opportunities in the field of construction

Private sector housing boom and commercial building demands

Construction of the multi building projects on the feasible locations in the country.

Good structured national network facilitates the boom of construction industry.

Low cost well- educated and skilled labor force is now widely available across the

27 | P a g e

WEAKNESS

Distance between construction projects reduces business efficiency.

Training itself has become a challenge.

Changing skills requirements and an ageing workforce may accentuate the skills gap.

Lack of clearly define processes and procedures for construction and its management.

OPPORTUNITIES

Continuous private sector housing boom will create more construction opportunities.

Public sector projects through Public Private Partnerships will bring further

opportunities.

Developing supply chain through involvement in large projects is likely to enhance

the chances in construction.

Renewable energy projects will offer opportunities to develop skills and capacity in

new markets.

THREAT

Long term market instability and uncertainty may damage the opportunities and

prevent the expansion of training and development facilities.

Political and security conditions in the region and Late legislative enforcement

measures are always threats to any industry in India.

Infrastructure safety is a challenging task in construction industry.

Lack of political willingness and support on promoting new strategies.

28 | P a g e

Company Analysis

DCF

Valuations of L & T and Gammon India were carried out as per discounted cash flow.

Assumptions

Sales were projected to grow as per CAGR for the years 2012-16

Expenses were considered as the average percentage of sales.

Capital expenditures for the next years are based on the projections made in the

annual reports.

For other details refer Excel sheet

DuPont Analysis

L&T

11-Mar 10-Mar 9-Mar 8-Mar 7-Mar 6-Mar

PBIDT/Sales(%) 16.33 18.85 15.95 13.92 12.83 11.08

Sales/Net Assets 1.52 1.49 1.8 1.93 2.29 2.47

PBDIT/Net Assets 0.25 0.28 0.29 0.27 0.29 0.27

PAT/PBDIT(%) 54.78 62.2 63.63 61.68 60.95 60.89

Net Assets/Net Worth 1.33 1.37 1.53 1.38 1.37 1.32

ROE(%) 19.73 21.48 23.96 28.47 27.11 21.27

The ROE has decreased during the last 2 years but has always remained positive. Hovering in

a range of 19% to 28%. The asset turnover to net worth has also decreased. This can because

the assets are not utilized to its full potential.

Gammon India

11-Mar 10-Mar 9-Mar 8-Mar 7-Mar 6-Mar

PBIDT/Sales(%) 9.5 10.38 11.64 10.4 12.2 14.68

Sales/Net Assets 1.33 1.43 1.45 1.47 1.22 1.34

PBDIT/Net Assets 0.13 0.15 0.17 0.15 0.15 0.2

PAT/PBITD(%) 22.05 26.1 32.57 35.14 19.61 48.36

Net Assets/Net Worth 2.26 1.9 2.08 1.64 1.7 1.28

ROE(%) 5.64 6.36 9.71 9.18 5.07 14.09

The company has seen a constant decrease in the ROE over the period

29 | P a g e

Technical Analysis

L&T

Market Data (As on Friday, September 09, 2011 )

Price (Rs) 1689.95 52 W H/L(Rs) 2212 / 1463.05

Lat. EPS(Rs) 62.07 Lat. P/E 27.2265

Mkt. Cap.(Rs Cr) 103281 Lat. Equity (Rs Cr) 122.23

Candle Stick Analysis

These candle stick patterns were formed for Larsen & Toubro Ltd.

Three white soldiers Candlestick pattern was formed by Larsen & Toubro Ltd. on

07/09/2011. Prior to pattern formation this share was in uptrend.

30 | P a g e

Three outside up Candlestick pattern was formed by Larsen & Toubro Ltd. on

06/09/2011

Bullish engulfing Candlestick pattern was formed by Larsen & Toubro Ltd. on

05/09/2011

31 | P a g e

Gammon India

Market Data (As on Friday, September 09, 2011 )

Price (Rs) 80.8 52 W H/L(Rs) 235.1 / 68

Lat. EPS(Rs) 9.06 Lat. P/E 8.91832

Mkt. Cap.(Rs Cr) 1102.52 Lat. Eqty (Rs Cr) 27.29

Candle stick Analysis

These candle stick patterns were formed for Gammon India Ltd.

Bearish engulfing Candlestick pattern was formed by Gammon India Ltd. on 09/09/2011.

Prior to pattern formation this share was in uptrend.

32 | P a g e

33 | P a g e

2.4 INDIAN AUTOMOBILE INDUSTRY

The automobile industry is one of the largest industries in India and plays a major role in the

growth of economy in India. The industry comprises automobiles and auto component

sectors, which encompass passenger cars, two-wheelers, three-wheelers, tractors, commercial

vehicles, multi- utility vehicles and components. Following India's growing openness, the

arrival of new and existing models, easy availability of finance at relatively low rate of

interest and price discounts offered by the dealers and manufacturers all have stirred the

demand for vehicles and a strong growth of the Indian automobile industry.

For the purpose of our study we have selected two companies from the Automobile sector

namely:

Hero Honda Motors Ltd.

TVS Motor Company

Hero Honda Motors Ltd. is the world's largest manufacturer of two – wheelers, based in

India. It is the torch-bearer of the two-wheeler industry and currently sells more two-wheelers

(specifically motorcycles) than the second, third and fourth placed two-wheeler company put

together. In 2001, the company achieved the coveted position of being the largest two-

wheeler manufacturing company in India and the ‘World No.1’ two-wheeler company in

terms of unit volume sales in a calendar year by a single company.

Hero Honda products:

Hero Honda Achiever

Hero Honda CD Dawn

Hero Honda CD Deluxe

Hero Honda Glamour

Hero Honda Karizma

Hero Honda Passion Plus

Hero Honda Splendor

Hero Honda Splendor NXG

Hero Honda CBZ X-Treme

Honda Eterno

Hero Honda Shareholding:

Indian Promoters : 54.96%

Non-promoters , FII : 36.59%

General public : 7.69%

Private corporate bodies/NRI : 0.76%

34 | P a g e

Milestone:

2010

New model Splendor Pro launched

Launch of new Super Splendor and New Hunk

2011

New licensing arrangement signed between Hero and Honda.

Launch of new refreshed versions of Glamour, Glamour FI, CBZ Xtreme,

Karizma.

Crosses the landmark figure of 5 million cumulative sales in a single year

TVS Motor Company is the third largest two-wheeler manufacturer in India and is among

the world's top ten. It is the flagship company of the parent TVS Group employing over

40,000 people with an estimated 15 million customers and manufactures motorcycles,

scooters, mopeds and auto rickshaws.

TVS Motor products:

TVS Scooty

TVS XL super

TVS Apache

TVS Apache RTR FI 160

TVS Centra

TVS Fiero FX

TVS Flame

TVS Star

TVS Victor

TVS Victor GLX 125

TVS 180 RTR Menace

TVS Jive

TVS Apache RTR 220

TVS Motors Shareholding:

Indian Promoters : 60.45%

Non-promoters , FII : 16.97%

General public : 17.13%

Private corporate bodies/NRI : 5.45%

35 | P a g e

Milestones:

2009

TVS Motor Company launched Scooty Streak, which is its latest scooterette targeted

at girls of 16 to 20 age group.

Tvs Motor Company Limited has appointed Mr. Prince Asirvatham as an additional

and independent director of the board of directors of the company effective April 21,

2009.

TVS Motor Company entered the 110 cc segment by unveiling 2 brand new products,

an auto-clutch motorcycle, and an automatic scooter.

2010

TVS Motor Company has launched India's first auto-clutch motorcycle- TVS Jive, in

Chandigarh.

Indonesia is the world's third largest 2 wheeler market by volume after China and India. And

TVS find it important for 2 wheeler market. And it has entered into Indonesia with a specially

made for Indonesia Step Thru model, the Neo 110. It has a mobile charger as a feature. After

that, just a couple of months back, launched the Neo X3i, in June 2010. It comes in spoke

wheels and alloy wheel variants with a Disc brake option as well.

In 2010, TVS Motors showed its presence in Jakarta Fair by current model Apache RTR 160

which is sold in Indonesia along with the Step thru models. There are debut models like RTR

180, the Qube 2.0 hybrid scooter along with the Wego scooter.

In future, motorcycle sales will perform positively and expected to exceed 10mn units by

2012-13.The value of auto component exports is likely to attain a double digit figure in 2012-

13 and the turnover of the Indian auto component industry is forecasted to surpass US$ 50bn

in 2014-15.

ANALYSIS:

Liquidity Ratio:

Hero Honda:

Since last two years (2009, 2010) current ratio has improved slightly it

means the liquidity position of the company has relatively improved. This also

36 | P a g e

signifies that it is able to meet its working capital requirements. Interval

Measure reflects firm’s ability to meet its daily cash expenses. Since last two

years it has improved substantially from 22.56 to 68.09. This means that it

now has sufficing liquid assets to finance its operations for 68 days, even if it

does not receive any cash.

TVS:

The current ratio of the company has decreased from 1.44 to 1.31 over the

two years this reflects the declining liquid assets of company. It could be

difficult to meet the working capital requirement. Its interval measure is

almost the same approximately 61 days. This means can finance its operations

for 61 days, even if it does not receive any cash from its existing operations.

Profitability Ratio:

Hero Honda:

The Net profit margin of it has improved compared to 2009 from 14%-17%

which is a good indication. This could be due to the improved operational

efficiency of the firm. ROE has improved considerably from 35% to 57%

over the last two years; therefore its shares may be purchased in near future.

Also it has to be noted that ROE has increased despite decrease in total debt

which reflects the company’s excellent performance. The dividend payout

ratio has improved substantially from 0.33 to 1.18 (i.e. 118%), that means not

just the retention of the net income of the company in 2010 is nil but also it

has even contributed to the dividend by paying out of its retained earnings.

TVS:

Net profit margin ratio, Gross profit margin ratio is same for the two years;

0.03 and 0.04 respectively ROA and ROE have also increased by just 1

percent. So, there is not much growth in terms of ROE. This doesn’t reflect

well on its year on year profitability growth. As a result company has become

conservative on its dividend payout and has actually reduced it from 59% to

34% for 2010.

Leverage Ratio:

Hero Honda:

Debt Equity Ratio and Debt asset ratio has remained same over the two

years that means over the last two years there is proportional change in the

debt and equity of capital structure. Its debt over assets has remained

unchanged.

37 | P a g e

TVS:

Debt Equity Ratio and Debt Asset Ratio for the last two years have

increased marginally by 3% and 1.8%. Interest Coverage Ratio has also

increased by 9.7% to 3.37% since 2009. But this small figure may result in

financial embarrassment when the EBIT declines; fortunately its EBIT has

shown a good growth over 2009.

DOL:

Here, DOL (2009-10) of TVS is 46.27% higher than HERO HONDA, which shows

that TVS has more volatile EBIT with respect to a given change in sales and higher

business risk than HERO HONDA. Moreover, its DOL is declining by 58.43%,

which represents that output increase because its fixed costs are decreasing in relative

importance and variable costs are increasing in relative importance as output rises.

DFL:

With the help of figure we can say that TVS has an increment of 143.44% in DFL

that tells there is also an increment in use of debt financing and shows increased

fluctuations in the return on equity, and increased in the interest rate on debts. While

there is 30.67% decrement in DFL of HERO HONDA.

TVS has gone for increasing debt(by 10.74%) in 2009-10 compare to the previous

year which has resulted in constantly increasing leverage causing increasing financial

risk for the concern. This reflects that the creditors for the organization are witnessing

more risk with subsequent year, which may result in decrease in credit worthiness.

Moreover it shows possible difficulties in paying interest and principal while

obtaining more funding.

DTL:

Here TVS has a high DOL and DFL compared to HERO HONDA, so if there is a

small change in TVS sales lead to a large change in its EPS. And when it comes to the

total effect of combined leverage we see that TVS (1.16 D/E) is quite heavily levered

than HERO HONDA (0.02 D/E). This can lead to a risky situation as it might not be

able to sustain these fixed charges over a longer period. Thus, it should reduce its

exposure to long term debt. And this can be done either by redeeming the debentures

or by issuing further equity.

Efficiency Ratio:

Hero Honda:

38 | P a g e

Its Inventory turnover and days in inventory ratios have almost remained

the same which means that its efficiency in manufacturing and selling the

bikes and the time it takes for the finished goods to be converted into sales has

not changed over the last two years. However it’s Debtors turnover ratio has

improved considerably from 55.07 to 122 which indicate it has achieved more

efficiency in terms of credit management of its debtors. Its Total asset

turnover ratio has decreased from 6.35 to 4.74 which follows that company

has been able to generate less sales from all financial resources related to total

assets.

TVS:

Its inventory turnover ratio has increased from 8.20 to 11.53. This reflects

that it is more efficient compared to 2009. However, high turnover ratio could

result because of low level of inventory (which actually, is the case in 2010

compared with that of 2009). This might result in stock outs. Time spent by

finished goods inventory as it has decreased from 44.49 to 31.67 days.

Debtor’s collection period has increased from 13 days to 17 days. Its Total

asset turnover ratio has decreased by 64.61% which follows that company

has not been able to generate more sales from all financial resources related to

total assets.

Valuation Ratio:

Hero Honda:

P/E ratio reflects the performance of the company; it reflects the expectations

about the growth in the firm’s earnings. It has increased from 17.60 to 20.85.

This reflects the improved performance of the industry. The dividend yield of

the company has also improved from 0.02 to 0.06, which reflects the growth in

shareholders return with regards to the market value of the share for the last

couple of years.

TVS:

P/E ratio has increased from 19.03 to 23.34; it reflects the expectations about

the growth in the firm’s earnings. Market to Book value has increased from

0.66 to 2.26. This means company has recovered and is giving efficient returns

(Rs 2.26 for every rupee invested) compared with that of last year (0.66 for

every rupee invested).

39 | P a g e

Company Valuation

Fundamental analysts seek to establish quantitative relationships between economic,

industrial and company indicators to forecast earnings and dividends. For this purpose,

following 3 analyses are undertaken:-

Economic Analysis (EA)

Industry Analysis (IA)

Company Analysis (CA)

ECONOMIC ANALYSIS

India is developing into an open-market economy. In 2010, the Indian economy recovered

from the global financial crisis mainly because of strong domestic demand and 8% growth

year on year in real terms.

In long term, India has to reduce the widespread poverty, to make adequate physical and

social infrastructure, to give opportunities to non-agricultural employment, to provide

sufficient access to quality basic and higher education, and to control rural-to-urban

migration.

INDUSTRIAL ANALYSIS

Indian Automotive Industry

Multi utility vehicles

Cars

Two wheelers

Scooters

Mopeds

motorcycles

Three wheelers

Tractors

India is the 2nd largest producer of two-wheelers in the world. The Indian two wheeler market size is

over Rs100bn. This segment is broadly categorized into scooters, motorcycles and mopeds. In which,

40 | P a g e

the motorcycle market cover the 76.5 % market of the total two-wheeler market in India. According to

the Society of Indian Automobile Manufacturers

(SIAM), in 2010

Vehicle segment sales grew 30%

Two wheeler sales rose 29%,

Motorcycle sales increasing 26%

Scooter sales rising 45% and

Commercial vehicle sales rose 58%

In Union budget 2011,

As far as the automobile industry is concerned the budget is on the expected lines and

proposed no hikes in excise duty as predicted.

The National Mission for Hybrid and Electric Vehicles is welcomed

Even if there is rising in inputs and fuel costs, automobiles sales have been continue

growing at the rate of 30%.

Announcement of change in income tax slab also impact positive on this industry

particular 2wheelers (the main reason behind it is increment in disposable income of

people).

The major players in Indian two wheeler automobile segments are namely, Hero Honda,

Bajaj Motors, TVS Motors, Yamaha Motors, Honda Motors and others.

36%

28%

16%

7%

4%9%

2 Wheelers

HeroHonda Bajaj Motors TVS Motors

Yamaha Motors Honda Motors Others

41 | P a g e

42 | P a g e

Technical Analysis

Analysis:

Gaps:

BreakAway Gap: last week of April and first week of September

Exhaustion Gap: end of April

Patterns:

Reverse Head and Shoulder: June-July

Exhaustion Gap

BreakAway Gap

BreakAway Gap

43 | P a g e

Gaps:

Runaway Gap: 5th September

Exhaustion Gap: 6th September

Common Gap: end of the first week of September

Flag

Flag Pole

Support

Cup

Patterns:

Flag: Starting of September

Down Cup: End of the first week of September

Exhausion Gap

RunAway Gap

Common Gap

44 | P a g e

2.5 COMPUTER SOFTWARE INDUSTRY

Computer software industry has undergone unprecedented changes since the internet bubble

burst. Some of the notable changes the industry has gone through in the last decade include –

dominance of high profit margin software and services business over the low-margin

hardware business, which are still prompting many companies to move towards software and

services segment and ditching their profitable hardware business; Asian companies pushing

away American firms from top tech companies league table; delivery of services through

cloud; and consolidation of industry, among others. The biggest turnaround is the emergence

of internet, a technology that has been inextricably integrated with peoples’ life.

Technology industry can be broadly categorized into IT Services, ITES-BPO, Hardware, and

Software.

Technology industry in India is currently valued at USD 76 billion and is poised to grow to

USD 225 billion by 2020.1 Some of the key data related to industry segment is given in the

table below –

Industry Segment Value

IT-BPO USD 17.35 Billion

Data Center Services USD 2.2 Billion

Internet Services 81 million users

Broadband Subscribers 10.29 million users

Internet users in rural areas 24 million users

Major Players –

# Company Name Ticker Market Cap (INR

Bn)

1 Infosys Ltd NSE:INFY 1330

2 Wipro Ltd BOM:507685 819.80

3 Patni Computer Systems Ltd BOM:532517 38.39

4 Tata Consultancy Services NSE:TCS 2000

5 Tech Mahindra Limited NSE:TECHM 80.68

6 HCL Technologies Limited BOM:532281 272.47

7 Mahindra Satyam NSE:SATYAMCOMP 77.24

8 Mphasis Limited BOM:526299 75.28

Global Players

# Company Name Countr

y

Sector Ticker Market Cap

(US$ Bn)

1 Apple US Computers, Peripherals NASDAQ:AAPL 346.78

2 Baidu.com China Internet Services NASDAQ:BIDU 49.01

3 Microsoft US Software NASDAQ:MSFT 216.16

4 Google US Internet Services, Software NASDAQ:GOO 169.46

1 NASSCOM Data

45 | P a g e

G

5 Facebook US Internet Services NA NA

6 Amazon US Internet, Catalog Retail NASDAQ:AMZ

N

95.33

7 Research in Motion Canada Communications Equipment NASDAQ:RIM

M

15.78

8 Hewlett-Packard US Computers, Peripherals NYSE:HPQ 50.48

9 Oracle US Software NASDAQ:ORCL 136.62

10 LinkedIn Corp. US Internet Services NYSE:LNKD 7.73

11 IBM US Software NYSE:IBM 199.42

12 Yahoo Inc. US Internet Services, Software NASDAQ:YHO

O

16.25

13 NTT Data Japan IT Services TYO:9613 8.89

Major M&A Global in Computer Software industry in recent past

Acquirer

(Country)

Target

(Country)

Acquirer (Ind.

Segment)

Target (Ind.

Segment)

Year of

Acquisition

Deal

Size

Microsoft

(US)

Skype

(Luxembourg)

Software Services VoIP 2011 $8.5

billion

Google

(US)

Motorola

Mobility (US)

Internet Services Telecommunications 2011 $12.5

billion

HP (US) Compaq Computer Hardware Computer Hardware 2001 $25

billion

HP (US) Autonomy

(UK)

Computer Hardware Software Services 2011 $10

billion

Oracle PeopleSoft Software Services Software Services 2005 $10.3

billion

Oracle Sun

Microsystems

Software Services Software Services 2010 $7.4

billion

Intel McAfee Software Services Anti-virus Software

Services

2011 $7.68

billion

AMD Inc. ATI

Technologies

Inc. (Canada)

Processor

Manufacturer

Graphics Card

Manufacturer

2006 $5.4

billion

Cisco

Systems

Scientific-

Atlanta

Telecommunications Digital Cable

Terminal

Manufacturer

2006 $6.5

billion

Sony, Nortel Various Telecommunications 2011 $45.5

46 | P a g e

Microsoft,

Apple, RIM

Networks

(Canada)

billion

SWOT Analysis of Indian Computer Software Industry

Strength

Government Favorable Policies: The macroeconomic factor pertaining to

government support is favorable for Indian Software Industry. The government has

shown favorable taxation policy with formation of special economic zones, export

rules, and immunity bank loans. The investment by government in the form of setting

up software technology park of India and strong legislation in terms of protecting

intellectual property rights has helped in creating positive environment for the

software industry.

Cost Advantage: The labor cost is comparatively cheap in India.

Talent Advantage: India still boasts of young and skilled people.

High Quality Assurance

Weaknesses

Less Developed Infrastructure

Less developed Hardware industry

Increasing Cost

Opportunities

Growing demand for software

Threats

Emergence of other low cost nations: Abundance of cheap and skilled labor in

emerging nations such as Singapore, Malaysia, and China has presented a major threat

to the Indian software companies.

Changing US Government Policy: The majority share of revenue of Indian software

companies come from the United States. Off late, the US Government has become

conservative to protect the interest of the US citizens. It presents a bigger challenge to

flourishing BPO industry in India.

Financial Crisis: The companies cut IT spending in cases of financial crises. The IT

companies are one of the biggest hit by financial crisis.

47 | P a g e

Fundamental Analysis

HCL Enterprise Limited

HCL was founded in 1976, and was incorporated in 1991 as ‘HCL Overseas Ltd.’, which

entered into a partnership with HP (Hewlett-Packard) to form HCL HP Ltd. In 1997 HCL

Technologies was formed from the Research and Development division of HCL HP to

harness the growing opportunities in global software services market. To finance its ongoing

capital expenditure program, meet working capital requirements and invest in joint ventures,

strategic alliances or acquisitions, HCL Technologies made an initial public offer in 1999.

It is a global IT player with annual revenue of USD 6 billion, operations spanning 31

countries and employs 85,000 people.

Currently, it has two divisions:

HCL Technologies (with global focus) – Product Engineering & R&D, Enterprise and

Custom Applications, Enterprise Transformation Services, Infrastructure Management

and BPO Services

HCL Infosystems (with Indian Market Focus) – Hardware, System Integration,

Networking Solution, Managed ISP services, Homeland Security, and ICT

Distribution

It has earlier formed product partnerships with Toshiba, Intel, Microsoft, AMD, and Nokia;

formed JV with companies like HP, Perot Systems, BT, Deutsche Bank, NEC, Celestica;

went into strategic alliances with Cisco, Nokia, IBM, Boeing; and made several strategic

acquisitions including Axon Group PLC, Capital Stream, Liberata Financial Services, and

Control Point Solutions, among others.

The financial summary of the company is shown below:

(in INR M) 2005 2006 2007 2008 2009 2010

Income 15300.3 31162.6 42080.4 47862.4 49415.9 52559.7

Expense 12007.6 24779.7 31062.8 40056 40314.4 41650.3

EBITDA 4120.5 8035.2 13671.4 11103.8 14688.2 15283.4

PAT 3292.7 6382.9 11017.6 7806.4 9971.6 10565.3

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Major Acquisitions by HCL

Target Company

(Country)

Year of Acquisition Deal Size, Type Target Sector

Axon Group PLC (UK) Dec, 2008 All-cash £ 440m SAP consulting firm

Capital Stream (US) Feb, 2008 All-cash US $ 40m Lending automation solution

Liberata Financial

Services (UK)

Jul, 2008 Undisclosed BPO Service provider

Control Point Solutions

(US)

Aug, 2008 US $ 20.8m Voice, data, and wireless

telecommunications expense

management

Infosys Limited

Infosys was started in 1981 with a mere capital of US $ 250. It got listed in 1993 in India, and

became first Software Company to be added to NASDAQ-100 index. It is now US $ 6.35

billion firm with 65 offices and 63 developed centers all around the world, and employs more

than 100,000 people. The major business verticals include business and technology

consulting, application services, systems integration, product engineering, custom software

development, maintenance, re-engineering, independent testing and validation services, IT

infrastructure services and business process outsourcing.

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The financial summary of the company is shown below:

(in INR M) 2006 2007 2008 2009 2010 2011

Income 92750 136550 166230 214780 224260 265320

Expense 68540 98730 121530 156590 166230 200890

EBITDA 31530 47280 59360 75160 86430 95610

PAT 24210 37820 44700 58190 58030 64430

The company did not have major acquisitions in recent times.

To reach to fair value of the company stock prices relative valuation method has been used.

Summary of the software industry players that have been used in the valuation is as below:

(TTM Data in

INR M except

Last Price)

Last Price Market Cap. Sales

Turnover

EBITDA Net Profit Total Assets

Infosys Ltd 2,283.10 1,310,000.00 278,570.00 99,510.00 66,660.00 245,010.00

Wipro Ltd 335.10 820,910.00 276,700.00 65,332.00 48,527.00 260,650.00

Patni Computer 284.10 37,890.00 21,359.40 7,744.30 6,024.60 29,683.00

TCS 1,019.00 2,000,000.00 314,780.20 125,081.10 80,760.10 196,206.10

Tech Mahindra 679.70 85,520.00 51,062.90 10,904.40 7,306.80 51,904.00

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HCL 410.00 279,850.00 67,944.70 17,544.20 11,982.50 6,332.50

Satyam 70.35 82,830.00 49,513.90 2,226.40 (14.40) 34,231.00

Mphasis Limited 349.80 73,340.00 35,448.40 11,260.70 9,129.10 29,094.40

The details of the valuation calculation are as follows:

TTM Data in INR Million Market Cap EV EV/ Sales EV/

EBITDA

PE

Infosys Ltd 1,310,000 1,303,590 4.68 13.10 19.65

Wipro Ltd 820,910 845,009 3.05 12.93 16.92

Patni Computer Systems 37,890 36,731 1.72 4.74 6.29

Tata Consultancy Services 2,000,000 1,998,164 6.35 15.97 24.76

Tech Mahindra Limited 85,520 101,646 1.99 9.32 11.70

HCL Technologies Limited 279,850 293,176 4.31 16.71 23.35

Mahindra Satyam 82,830 56,647 1.14 25.44 NA

Mphasis Limited 73,340 73,169 2.06 6.50 8.03

Median 2.6 13.0 16.9

Average 3.2 13.1 15.8

Removing outliers the median values for EV/Sales, EV/EBITDA and PE ratios are 4.31,

13.10, and 19.65 respectively.

(in million) HCL Infosys Ltd.

Net Sales 67944.70 278570.00

EBITDA 17544.20 99510.00

PAT 11982.50 66660.00

# Shares 685.73 571.35

EV/Sales 4.30 4.30

EV/EBITDA 13.10 13.10

PE 19.65 19.65

Cash 648.30 6410.00

51 | P a g e

Debt 13973.90 0.00

EPS 17.47 116.67

EV (Sales) 292162.21 1197851.00

EV (EBITDA) 229829.02 1303581.00

Equity Value (Sales) 278836.61 1204261.00

Equity Value (EBITDA) 216503.42 1309991.00

Actual Price 401.05 2274.30

Price (Sales) 406.63 2107.75

Price (EBITDA) 315.73 2292.80

Price (PE) 343.37 2292.59

A bird’s eye view of both the companies as below:

HCL Enterprise Limited Infosys Limited

Ticker BOM: 532281

NSE: HCLTECH

NASDAQ: INFY

NSE: INFY

Exports 98.8% of revenue

US – 56% of total revenue

Europe – 30% of total revenue

92.5% of revenue

US – 62% of total revenue

Europe – 28% of total revenue

Beta 0.898 0.451

Debt Equity Ratio 0.28 0

Shareholding Pattern

Categories HCL Enterprise Limited Infosys

Promoters 64.65% 16.04%

Indian Individuals & HUF NA 16.04%

Indian Corporate Bodies 47.12% NA

Foreign Corporate Bodies 17.54% NA

Non-Promoters 35.35% 66.36%

52 | P a g e

Institutions 27.45% 45.12%

FIIs 21.5% 36.12%

Non-institutions 7.9% 21.25%

Technical Analysis

HCL Technologies Limited

Line Chart displaying price movement with volume

The long term price trend is upwards.

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Analysis

1. Flag formation

2. Head and shoulder

3. Breaching the support price level and new down trend

3-m Candlestick Chart

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Infosys Limited

Line Chart displaying price movement with volume

Analysis

1. Long-term reversal pattern signaling a shift from a downward trend to an upward

trend

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55 | P a g e

2. Flag formation

3. Breaching the resistance price level and converting it to support price level

4. Head and shoulder

3-m Candlestick Chart

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REFERRENCES

Websites:

http://in.finance.yahoo.com/q/ks?s=INDHOTELS.BO

http://in.finance.yahoo.com/q?s=INFYSIXL.BO&ql=0

http://in.finance.yahoo.com/q/ks?s=ADVANIHO.BO

http://in.finance.yahoo.com/q?s=TATASTEEL.NS&ql=0

http://in.finance.yahoo.com/q?s=JSWSTEEL.NS&ql=0

http://in.finance.yahoo.com/q?s=LT.NS&ql=0

http://in.finance.yahoo.com/q?s=DLF.NS&ql=0

http://in.finance.yahoo.com/q?s=SAIL&ql=1

http://www.infinancialsanalytics.com/en/market%20valuation,Indian%20Hotels,3003

2FI.html

http://en.wikipedia.org/wiki/PEST_analysis

http://en.wikipedia.org/wiki/SWOT_analysis

http://en.wikipedia.org/wiki/Michael_Porter

Database:

Capital Line (http://www.capitaline.com/user/framepage.asp?id=1)

Prowess

Books:

Investment Banking by Joshua Rosenbaum & Joshua Pearl