costof equity

Cost of Equity

PROJECT REPORT

ON

“A STUDY ON THE COST OF EQUITY AND ITS GROWTH IN IT SECTOR”

Submitted in partial fulfillment of the requirement for the award of

MASTER OF BUSINESS ADMINISTRATION

Of

Bangalore University

Submitted By:

Sphoorti M. Padmannavar

Reg. No: 06KXCM6026

Under the Guidance of

Dr. V. Prabhu Dev

SURANA COLLEGE P. G. CENTRECA#17, Kengeri Satellite Town

BANGALORE-560060

2008

Surana College P.G. Centre 1

Cost of Equity

DECLARATION

I, Ms Sphoorti M. Padmannavar a bonafide student of the department of

management studies, SURANA COLLEGE PG CENTRE, BANGALORE, would

like to declare that the project work made on “A study on the cost of equity and its

growth in IT sector”, in partial fulfillment of MBA degree course of the Bangalore

University, is of my original work under the guidance of Dr. V. Prabhu Dev , this

has not been submitted earlier to any university or institution for the award of any

degree / diploma or certificate published anytime.

Date : Sphoorti M. Padmannavar

Place : Bangalore Reg No.06KXCM6026

4TH SEM MBA


Cost of Equity

AKNOWLEGEMENT

Before we get into thickness of pages I would like to place on record my special

appreciation to many people for their guidance & support to the project in its

formative stage & for their valuable contribution in planning, monitoring &

providing information for the project.

I thank Dr. V. Prabhu Dev for reviewing the entire manuscript with painstaking

attention for detail, and more so for his ability to spot the spelling mistakes in

paragraphs & for his guidance & support.

I would like to add heartfelt appreciation to director Dr. V. Prabhu Dev & HOD of

Surana college PG centre Prof. Vijayendra S. for their guidance & support.

Sphoorti M. Padmannavar (06KXCM6026)


Cost of Equity

TABLE OF CONTENTCHAPTER CONTENTS PAGE NO.

Chapter 1 Introduction 01-15

1.1 Introduction to the topic 01-04

1.2 An overview of IT industry 05-15

Chapter 2 Research Methodology 16-18

2.1 Statement of the problem 16

2.2 Need for the study 17

2.3 Objectives of the study 17

2.4 Scope of the study 17

2.5 Methodology 17

2.6 Operational definitions of concept 18

2.7 Limitations of the study 18

Chapter 3 Company Profile of 10 IT companies 19-39

3.1 Infosys Technologies Limited 20-21

3.2 Wipro Technologies 22-243.3 Tata Consultancy Services Limited 25-26

3.4 D-Link 27-28

3.5 Satyam Computer Services Ltd. 29-30

3.6 NIIT Technologies Ltd. 31-32

3.7 Aptech Limited 33-34

3.8 Sonata Software 35

3.9 Patni Computer Systems 36-37

3.10 Melstar Information Technologies Ltd. 38-39

Chapter 4 Analysis of Data 40-67

4.1 Table and graphical representation of cost of equity shares 41-65

4.2 Factors influencing the equity growth in IT sector 66-67

Chapter 5Summary of findings, suggestions and conclusion 68-72


Cost of Equity

Bibliography 73

LIST OF TABLES

TABLE NO. CONTENTS PAGE NO.

Table No. 1.1 India’s IT Industry (US$ bn) 07

Table No. 1.2 Emerging IT Services Dynamics 10

Table No. 1.3 Investment Plans of MNCs in India 12

Table No. 1.4 Key Positives & Negatives for the Indian IT Industry 15

Table no. 4.1 Table showing capital structure of Infosys Technologies Ltd. 41

Table no. 4.2 Table showing dividend paid in the year 2006-07 by Infosys Technologies Ltd. 42

Table no. 4.3 Table showing growth in percentage of Infosys Technologies Ltd. 42

Table no. 4.4 Table showing cost of equity for year 2007-08 of Infosys Technologies Ltd. 42

Table no. 4.5 Table showing capital structure of Wipro Technologies Ltd. 44

Table no. 4.6 Table showing dividend paid in the year 2006-07 by Wipro Technologies Ltd. 45

Table no. 4.7 Table showing growth in percentage of Wipro Technologies Ltd. 45

Table no. 4.8 Table showing cost of equity for year 2007-08 of Wipro Technologies Ltd. 45

Table no. 4.9 Table showing capital structure of Tata Consultancy services 47

Table no. 4.10 Table showing dividend paid in the year 2006-07 by TCS 47

Table no. 4.11 Table showing growth in percentage of TCS Ltd. 47

Table no. 4.12 Table showing cost of equity for year 2007-08 of TCS 48

Table no. 4.13 Table showing capital structure of D-Link (India) Ltd. 49Table no. 4.14 Table showing dividend paid in the year 2006-07 by D-Link (India) Ltd. 49Table no. 4.15 Table showing growth in percentage of D-Link (India) Ltd. 49Table no. 4.16 Table showing cost of equity for year 2007-08 of D-Link (India) Ltd. 50Table no. 4.17 Table showing capital structure of Satyam Computer Services 51Table no. 4.18 Table showing dividend paid in the year 2006-07 by Satyam Computer

Services52

Table no. 4.19 Table showing growth in percentage of Satyam Computer Services Ltd. 52Table no. 4.20 Table showing cost of equity for year 2007-08 of Satyam Computer Services 52Table no. 4.21 Table showing capital structure of NIIT Technologies 54Table no. 4.22 Table showing dividend paid in the year 2006-07 by NIIT Technologies 54Table no. 4.23 Table showing growth in percentage of NIIT Technologies 54


Cost of Equity

Table no. 4.24 Table showing cost of equity for year 2007-08 of NIIT Technologies 55

Table no. 4.25 Table showing capital structure of Aptech Ltd. 56Table no. 4.26 Table showing dividend paid in the year 2006-07 by Aptech Ltd. 56Table no. 4.27 Table showing growth in percentage of Aptech Ltd. 56Table no. 4.28 Table showing cost of equity for year 2007-08 of Aptech Ltd. 57Table no. 4.29 Table showing capital structure of Sonata Software 58Table no. 4.30 Table showing dividend paid in the year 2006-07 by Sonata Software 58Table no. 4.31 Table showing growth in percentage of Sonata Software 58Table no. 4.32 Table showing cost of equity for year 2007-08 of Sonata Software 59Table no. 4.33 Table showing capital structure of Patni Computer Systems 60Table no. 4.34 Table showing dividend paid in the year 2006-07 by Patni Computer Systems 60Table no. 4.35 Table showing growth in percentage of Patni Computer Systems 60Table no. 4.36 Table showing cost of equity for year 2007-08 of Patni Computer Systems 61Table no. 4.37 Table showing capital structure of Melstar Infotech 62Table no. 4.38 Table showing dividend paid in the year 2006-07 by Melstar Infotech 62Table no. 4.39 Table showing growth in percentage of Melstar Infotech 62Table no. 4.40 Table showing cost of equity for year 2007-08 of Melstar Infotech 63


Cost of Equity

LIST OF GRAPHS

GRAPH NO. CONTENTS

PAGE

NO.

Chart No.1.1 Chart showing India’s IT Exports 08

Chart no. 4.1 Chart showing the expected dividend of Infosys Technologies Ltd 43

Chart no. 4.2 Chart showing the expected dividend of Wipro Technologies Ltd. 46

Chart no. 4.3 Chart showing the expected dividend of TCS Ltd. 48

Chart no. 4.4 Chart showing the expected dividend of D-Link (India) Ltd. 50

Chart no. 4.5 Chart showing the expected dividend of Satyam Computer Services Ltd. 53

Chart no. 4.6 Chart showing the expected dividend of NIIT Technologies Ltd. 55

Chart no. 4.7 Chart showing the expected dividend of Aptech Ltd. 57

Chart no. 4.8 Chart showing the expected dividend of Sonata Software 59

Chart no. 4.9 Chart showing the expected dividend of Patni Computer Systems 61

Chart no. 4.10 Chart showing the expected dividend of Melstar Infotech 63

Chart no. 4.11 Chart showing the Cost of Equity of all 10 IT companies 64


Cost of Equity

EXECUTIVE SUMMARY

The cost of equity reflects the opportunity cost of investment for individual

shareholders. It will vary from company to company because of the differences in

the business risk and financial risk of different companies. The cost of equity is the

minimum rate of return a firm must offer shareholders to compensate for waiting

for their returns, and for bearing some risk.

The cost of equity capital for a particular company is the rate of return on

investment that is required by the company's ordinary shareholders. The return

consists both of dividend and capital gains, e.g. increases in the share price.

Computation of the cost of equity shares is the most complex procedure. It is due

to the fact that unlike preference shares or debentures, equity shares do not have

either the interest or dividend to be paid at a fixed rate. The cost of equity shares

basically depends upon the expectation of the equity shares. The market value of

shares depends on the dividends paid and the rate of dividend depends on the

degree of financial and business risks.

The tables for main points are prepared and analyzed, graphs has been drawn

wherever necessary. Therefore, secondary data have been tabulated, graphically

depicted and analyzed. Based on this analysis the conclusions are drawn and

recommendations are made.


Cost of Equity

The following method is used for this analysis:

The Constant Dividend Growth Model (Gordon’s Model)

The purpose of the study is to know that how factors influence equity growth in IT

sector and to know which IT Company is more financially sound for investors to

invest. The companies that are considered for this analysis are:-

1. Infosys Technologies Limited

2. Wipro Technologies

3. Tata Consultancy Services Limited

4. D-Link

5. Satyam Computer Services Ltd.

6. NIIT Technologies Ltd.

7. Aptech Limited

8. Sonata Software

9. Patni Computer Systems

10.Melstar Information Technologies Ltd.


Cost of Equity

CHAPTER 1

INTRODUCTION:

Equity capital is also known as ownership capital. Equity shareholders enjoy

the profit of the firm on one hand and bear the risk on the other hand. Analysis

refers to the examination and evaluation of the relevant information to select the

best course of action from among various alternatives.

A method of equity share valuation which involves examining the

company's financials and operations, especially sales, earnings, growth potential,

assets, management, and competition. Equity valuation takes into consideration

those variables that are directly related to the company and the overall market data.



the business risk and financial or gearing risk of different companies.

The purpose of the study is to know that how factors influence equity growth

in IT sector and to determine the cost of equity in selected IT companies over two

years and to know which IT Company is more financially sound for investors to

invest.


http://www.investorwords.com/273/assets.html

http://www.investorwords.com/4446/security.html

Cost of Equity

COST OF CAPITAL

The cost of capital for a firm is a weighted sum of the cost of equity and the

cost of debt. Firms finance their operations by external financing, issuing stock

(equity) and issuing debt, and internal financing, reinvesting prior earnings.

Capital (money) used to fund a business should earn returns for the capital

owner who risked their saved money. For an investment to be worthwhile the

projected return on capital must be greater than the cost of capital.

Cost of equity:

Cost of equity is more challenging to calculate as equity does not pay a set

return to its investors. The cost of equity is broadly defined as the risk-weighted

projected return required by investors, where the return is largely unknown. The

cost of equity is therefore inferred by comparing the investment to other

investments with similar risk profiles to determine the "market" cost of equity.

The cost of capital is often used as the discount rate, the rate at which

projected cash flow will be discounted to give a present value or net present value.

The cost of equity is the minimum rate of return a firm must offer shareholders to

compensate for waiting for their returns, and for bearing some risk.



consists both of dividend and capital gains, e.g. increases in the share price. The

returns are expected future returns, not historical returns, and so the returns on

equity can be expressed as the anticipated dividends on the shares every year in

perpetuity. The cost of equity is then the cost of capital which will equate the


Cost of Equity

current market price of the share with the discounted value of all future dividends

in perpetuity.



the business risk and financial risk of different companies.

The cost of equity is based on a firm's current rate of return. If one assumes

a perfect market, industry-specific costs of equity reflect the riskiness of particular

industries. A high cost of equity would then indicate a higher-risk industry that

should command a higher return to compensate for the higher risk.

The cost of equity capital is equal to the required rate of return on equity-

supplied capital. There are two categories of equity costs:

The cost of retained earnings, ks, is estimated with two models:

The Constant Dividend Growth Model (Gordon’s Model)

ks = (D1/Po) + g

where

D1 = the next expected dividend [Do (1+g)],

g = the constant growth rate of dividends,

Po = the current market price per share of the common stock,

Under this model, a common misconception is that retained earnings are a costless

source of finance. Although retained earnings do not have any servicing costs, they

have an opportunity cost equivalent to the ongoing cost of equity, since if these


Cost of Equity

funds were returned to investors they could have achieved an equivalent return

through re-investment at a personal level.

The CAPM (Capital Asset Pricing Model)

ks = kRF + (kM - kRF) *

where:

kRF = the risk-free rate of interest,

kM = the expected return on the market,

= a measure of the sensitivity of the firm’s stock returns

relative to those of the market assuming the absence of

diversifiable risk.

The cost of newly-issued common stock, kn is estimated with the constant dividend

growth model so as to allow for flotation cost:

kn = D1/(Po-F)+g

THE INDIAN IT INDUSTRY


Cost of Equity

The Information Technology (IT) sector in India holds the distinction of

advancing the country into the new-age economy. The growth momentum attained

by the overall economy since the late 1990s to a great extent can be owed to the IT

sector, well supported by a liberalized policy regime with reduction in

telecommunication cost and import duties on hardware and software. Perceptible is

the transformation since liberalization – India today is the world leader in

information technology and business outsourcing. Correspondingly, the industry’s

contribution to India’s GDP has grown significantly from 1.2% in 1999-2000 to

around 4.8% in FY06, and has been estimated to cross 5% in FY07. The sector has

been growing at an annual rate of 28% per annum since FY01.

Indian IT companies have globally established their superiority in terms of

cost advantage, availability of skilled manpower and the quality of services. They

have been enhancing their global service delivery capabilities through a

combination of organic and inorganic growth initiatives. Global giants like

Microsoft, SAP, Oracle, and Lenovo have already established their captive centers

in India. These companies recognize the advantage India offers and the fact that it

is among the fastest growing IT markets in the Asia-Pacific region.

INDUSTRY STRUCTURE


Cost of Equity

The size of the Indian IT industry, according to NASSCOM, has been

estimated to be around US$ 47.8 bn. The Indian IT industry can be broadly divided

into two markets:

1. Domestic market

2. Exports market.

The exports market constitutes the largest segment accounting for 75% of the

total revenue generated by the Indian software industry.

The domestic IT market is broadly divided into the following four segments:

1. IT Services

2. Software segment which includes engineering and Research &

Development (R&D) services

3. IT-enabled Services and Business Process Outsourcing (ITES-BPO)

4. Hardware

The total revenue generated by the domestic market:-

IT Services: 34%

Engineering Services, R&D and Software Products segments: 10%

ITES-BPO segment: 7%

Hardware: 49%.

The exports market is dominated by the IT services market holding a share of

56.4% in the software and services exports in FY06, followed by the ITES-BPO

segment with 26.7% share and the software products and engineering services

segment with 16.9% share.


Cost of Equity

The Indian hardware industry is at present estimated to be in the proportion of

30% domestic, 1.25% exports and the remaining being imports. The domestic

market itself offers tremendous potential for hardware companies, thus having very

few companies venturing into hardware exports. Imports of IT hardware which

form a large component of the industry are mainly from Taiwan, China and Korea.

Lately, however, MNCs in the hardware segment have been viewing India as a hub

for setting up hardware manufacturing facilities, for instance Dell.

Table No. 1.1

India’s IT Industry (US$ bn)

Source: NASSCOM

IT Services Exports

Indian IT Services exports grew from US$ 10 bn in FY05 to US$ 13.3 bn in

FY06, registering a growth of 33.4%, and is further expected to reach US$ 18.1 bn

in FY07, posting a growth of 36%. Revenue from ‘projects’ dominated the IT


Cost of Equity

Services exports with a share of 58%, with outsourcing and support & training

activities accounting for 33% and 9% respectively.

Chart No.1.1

Source: D&B Research

Within the ITES-BPO segment, Customer Interaction Services (CIS) account for

nearly India’s IT Exports XIV 45-50% of the total ITES-BPO services exports

while finance & accounting contributes for the remaining 40-45%. Human

resource and other high-end knowledge-based processes account for 2% and 8-

10% respectively.

The Software product, Engineering services and R&D segment contributes

around 17% of the software and services exports. India is well positioned in the

engineering and R&D services segment. Apart from Indian companies offering

these services, several foreign companies (both captive and third party) are also

setting up base in India to provide these services. Overseas companies operating in

sectors like high–tech, telecommunications, automobile, aerospace, heavy


Cost of Equity

machinery, construction and industrial products are looking at off-shoring their

engineering and R&D related work to India.

Few important characteristics of the Indian IT sector include:

Export intensive: Ever since the industry’s evolution, exports has been the

major contributor to the industry.

Concentration on Low-end services: Low-end services such as customized

software services and maintenance have been the key strength of the Indian

IT companies. These companies are now however moving up the value

chain offering end-to-end solutions to clients.

Labour intensive industry: The very nature of the services offered by the

industry makes human resources a significant driver for the industry.

Fragmented industry: D&B’s inhouse database has identified over 8,000

companies which operate in the IT space in India, offering a wide range of

software products and services. A large number of these companies are

unorganized players

Skewed concentration: The revenues of the top four companies, TCS,

Infosys, Wipro and Satyam, including income of their subsidiaries, account

for around 22% of the overall industry. This skewness is all the more

pronounced in the case of software services.

Emerging Trends in the Indian IT Services Industry

While the global IT players are aggressively scaling up their operations in

India, due to the advantages that the Indian industry offers, the Indian IT


Cost of Equity

companies are also preparing to tap the global market. The companies are

witnessing significant change with regard to their service offerings and

geographical concentration. Today, companies are expanding their service

offerings from application development and maintenance to high end services like

testing, consulting and engineering designing. The global delivery model has not

only facilitated the companies in delivering quality of work but also helped them to

control costs.

Table No. 1.2

Emerging IT Services Dynamics

Source: D&B Industry Research Service

Over the years, the Indian companies have positioned themselves well to reap

benefits of the emerging scenario in the IT sector.

New Service Offerings

The Indian IT companies are expanding their service offerings to provide a

complete basket of services to their clients. These new services include IT


Cost of Equity

consulting, testing, business process management and IT infrastructure services,

which in a way allows the IT companies to de-risk their business from pricing

pressures and enter into newer areas which provide them higher growth and

profitability.

Larger Deal Size

Indian IT companies have successfully scaled up operations and made a

mark in the global outsourcing market, evident from the large deals bagged by the

Indian IT companies in the past one year, including the British Telecom-Tech

Mahindra deal which was worth US$ 1 bn, the Pearl Insurance-TCS deal (£ 486

mn), the Skandia-HCL Technologies deal (US$ 200 mn) and the Kimberly-Clark-

TCS deal (US$ 100 mn). Most of the deals bagged by the major companies were in

the Banking and Financial Service space which reiterates the growth in this

vertical. As per the data compiled by Technology Partners International (TPI), the

Asia Pacific region witnessed a significant increase in total deals amounting to

US$ 10 bn in 2006 from US$ 6.1 bn in 2005. Indian companies bagged contracts

(above US$ 25 mn) worth US$ 2.7 bn in 2006, with a market share of 25% in the

Asia Pacific region.

Growing presence of MNCs

Cost arbitrage and the availability of a large talent pool have attracted

several MNCs to India. Big players like IBM, Accenture, Capgemini and Oracle


Cost of Equity

among others have not only increased their headcounts in India but also

outperformed their global performance in terms of revenue growth. Their Indian

operations are witnessing strong growth as compared to their global business.

Some of the major global companies like Intel, IBM and CSC are cutting jobs

abroad and shifting their base to India.

Table No. 1.3

Investment Plans of MNCs in India

Source: D&B Industry Research Service

Emerging Markets: In terms of geographical contribution, the US continues to

remain the key market for Indian IT companies, accounting for 67.2% of the

software and services (including BPO) exports from India. However, Europe is

also emerging as an important market for the Indian IT industry, considering the

fact that the share of exports to Europe from India increased from 22.2% in FY03

to 25.1% in FY06. After the US, Indian companies are looking at the European

region as a potential market for exports and also to expand their global presence.

Mergers and acquisitions has been one of the routes that the Indian companies have

adopted to enhance their presence in European markets.


Cost of Equity

Changing Growth Drivers: There has been a change in the revenue composition of

companies in recent years. The revenue contribution of high-growth segments such

as infrastructure management services, package implementation, testing and

consulting has witnessed a continuous increase. This is in sharp contrast to the

earlier trend wherein almost all companies were largely dependant on the Custom

Application Development and Maintenance (CADM) services segment for their

revenues. Today, the share of CADM has decreased to 49% in FY06 from 80% in

FY01. Thus, newer service lines are not only enabling Indian companies to

increase their sales by cross-selling to their existing customers, but also improving

their average billing rates and recognition of being end-to-end service providers.

New End-users: In terms of user industries, the BFSI and

hi-tech/telecommunication industries remain the leading verticals for the Indian IT

companies. Together, these sectors account for 58% of the Indian IT-ITES exports.

Though these verticals have good growth potential, other sectors such as

manufacturing, retail, healthcare, utilities, etc., are also emerging as promising

segments for the Indian IT companies. While the BFSI sector has the potential to

provide large size contracts to the IT companies, the manufacturing sector can

provide large number of deals/assignments to the Indian players.

Presently, the Indian IT companies are on a hiring spree which indicates

their bullishness on their order flows. All the major players have increased their

manpower by 15-50%, and the trend is expected to continue further. As a result,

the companies are expected to scale up their operations. The Indian IT companies


Cost of Equity

are also vying for inorganic growth, with a quest for newer geographical areas,

service offerings, domain expertise, customers and markets.

Concerns for the Indian IT Industry

Though demand conditions have been optimistic, the Indian IT sector is

exposed to certain risks which may deter growth. An appreciating rupee,

anticipated slowdown in the US economy, shortage of skilled manpower,

limitations in domestic infrastructure and competition from other global players


Cost of Equity

offering manpower at low cost like China, Philippines and Vietnam can have a

negative impact on the performance of the Indian IT companies.

Besides, increasing activities of global MNCs in India will make difficult

employee retention for Indian companies. NASSCOM opines that there will be a

shortage of half a million people in the IT and ITES segments by 2009. With an

industry attrition level hovering around 20-25% (often higher for smaller players),

companies are likely to offer an increase of 10-15% in salaries in the coming years.

On the financial front, wage inflation of 10-15% and FOREX fluctuation can

reduce the top line as well as the bottom line of the companies. Unless the

Government defers the withdrawal of tax incentives which is due to expire after

2009, IT companies operating out of the Software Technology Parks of India

(STPIs) are likely to witness an increase in their tax liabilities, which may reduce

their profitability further.

Table No. 1.4

Key Positives & Negatives for the Indian IT Industry

CHAPTER 2

RESEARCH METHODOLOGY:-

1. Statement of the problem:-


Cost of Equity


shareholders. Computation of cost of equity shares is the most complex

procedure. It is due to the fact that unlike preference shares or debentures,

equity shares do not have either the interest or dividend to be paid at fixed

rate. The cost of equity shares basically depends upon the expectation of

equity shares. The market value of shares depends on the dividend paid &

the rate of dividend depends on the degree of financial & business risks.

Indian capital market is experiencing a tough situation by the various

economical & financial reforms involving the various sub markets in the

financial systems. As the stock market is highly volatile, it is very difficult

for the investor to predict the right opportunity cost of investment.

Many people want to invest in shares in order to make huge profits. In this

scenario many companies are available and the investors are in a dilemma to

choose a particular company for investing, which gives more returns with

less risk. Many times it is more important to be in the right industry than in

the right stock.

Topic:-

“A Study on the Cost of Equity and its Growth in IT Sector”

2. Need for the study:-


Cost of Equity

To find out cost of equity of listed 10 IT companies from various groups, by this an

investor can make investment decisions.

3. Objectives of the study:-

The purpose of the study is to know that how factors influence equity

growth in IT sector.

To determine the cost of equity in selected IT companies over two

years.

To understand the practical situation in stock market and to compare

the theoretical knowledge to that of practical knowledge.

4. Scope of the study:-

The study was confined only to 10 IT companies listed under BSE IT

index.

The 10 IT companies are selected from different group viz., Group A,

Group B1, & Group T.

5. Methodology:-

Source of data: The study undertaken includes secondary data, which

is collected by using various text books, articles and web-sites

Sample method: Random sampling method is used to collect the data.

Sampling unit: IT sector


Cost of Equity

Sampling size: 10 IT companies

6. Limitations of the study:-

Valuations of equity shares are difficult since they neither have a well

defined cash flow streams nor limited value.

The study is limited to IT sector only.

Due to time constraints the sample size is restricted to 10 IT

companies only.

7. Chapter scheme:-

Chapter 1: Introduction

Chapter 2: Research Methodology

Chapter 3: Company Profile of 10 IT companies

Chapter 4: Calculation of cost of equity

Chapter 5: Findings, Suggestions, and Conclusion

CHAPTER 3


Cost of Equity

C OMPANY P ROFILE O F 10 IT I NDUSTRIES

The vision of Information Technology (IT) policy is to use IT as a tool for raising

the living standards of the common man and enriching their lives. Though, urban

India has a high internet density, the government also wants PC and Internet

penetration in the rural India. In Information technology (IT), India has built up

valuable brand equity in the global markets. India's most prized resource in today's

knowledge economy is its readily available technical work force. India has the

second largest English-speaking scientific professionals in the world, second only

to the U.S.

The Indian software industry has grown from a mere US $ 150 million in 1991-92

to a staggering US $ 5.7 billion (including over $4 billion worth of software

exports) in 1999-2000. No other Indian industry has performed so well against the

global competition. The annual growth rate of India’s software exports has been

consistently over 50 percent since 1991.

Today, India exports software and services to nearly 95 countries around the

world. The share of North America (U.S. & Canada) in India’s software exports is

about 61 per cent. In 1999-2000, more than a third of Fortune 500 companies

outsourced their software requirements to India.

In this chapter the company profile of selected 10 IT industries is presented in brief

to understand each company’s growth with more ease.

Infosys Technologies Limited:-


Cost of Equity

Type : Public NASDAQ: INFYBSE: 500209

Founded : July 2, 1981

Headquarters : Electronics City, Hosur Road, Bangalore, India

Key people : N. R. Narayana Murthy (Founder, Chairman and Chief Mentor)Nandan Nilekani (Co-founder and Co-Chairman)Kris Gopalakrishnan (Co-founder, CEO and MD)S. D. Shibulal (Co-founder and COO)

Industry : Software services

Products : Finacle (a financial software package for the banking industry)

Services : Information technology services and solutions

Revenue : ▲ $3.1 billion (in FY 2006-07)

Employees : 88,601 (As on December 31st, 2007)

Slogan : Powered by Intellect, Driven by Values

Infosys Technologies Limited is a multinational information technology Services

Company headquartered in Bangalore, India. It is one of India's largest IT

companies, with nine development centers in India and over 30 offices worldwide.

Infosys Technologies Limited was founded on July 2, 1981 in Pune by N. R.

Narayana Murthy and six others: Nandan Nilekani, N. S. Raghavan, Kris

Gopalakrishnan, S. D. Shibulal, K. Dinesh and Ashok Arora, with Raghavan

officially being the first employee of the company. Murthy started the company by

borrowing INR 10,000 from his wife Sudha Murthy. The company was

incorporated as "Infosys Consultants Pvt Ltd.", with Raghavan's house in Matunga,


http://en.wikipedia.org/wiki/1981

Cost of Equity

north-central Mumbai as the registered office. In 1983 Infosys moved its

headquarters to Bangalore, the capital of Karnataka.

1987: First international office in the United States in Fremont, California, now its

US headquarters. ; Got its first foreign client, Data Basics Corporation from the

United States

1993: Became a public limited company in India with an initial public offering of

Rs. 13 crores.

1999: Listed on NASDAQ; Attained a SEI-CMM Level 5 ranking and became the

first Indian company to be listed on NASDAQ

2006: Became the first Indian company to ring the NASDAQ Stock Market

Opening Bell; August 20, N. R. Narayana Murthy retired from his position as the

executive chairman; Acquired the 23% stake Citibank had in its BPO offshoot

Progeon, making it a wholly owned subsidiary of Infosys and changed the name to

Infosys BPO Ltd.; December, became the first Indian company to make it to

Nasdaq-100

During the 14-year period from 1993 to 2007, the issue price of an Infosys share

has increased three thousand fold. This is excluding the dividends that the

company has paid out over this duration.

Wipro Technologies:-Surana College P.G. Centre 30

http://en.wikipedia.org/wiki/Share_(finance)

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

Cost of Equity

Type : Public (NYSE: WIT)

Founded : 1945 (Pre Independence)

Headquarters : Bangalore

Key people : Azim Premji, Chairman and Managing director

Industry : Information technology services

Revenue : ▲$3.47 billion USD

Net income : ▲$677 million USD

Employees : 79,832+ (2007)

Slogan : Applying Thought

Wipro Tech is an information technology service company established in India in

1980. It is the global IT services arm of Wipro Limited (in operation since 1945,

incorporated 1946). It is headquartered in Bangalore and is the third largest IT

services company in India. Wipro Technologies has over 300 customers across

U.S., Europe and Japan including 50 of the Fortune 500 companies. It is listed on

the New York Stock Exchange and is part of its TMT (technology media telecom)

index testing.

It has dedicated development centers and offices across India, Europe, North

America, Latin America and Asia Pacific. The current Chairman, Managing

Director and majority stake owner is Azim Premji, who has headed the software

and hardware divisions since Wipro's inception.

Wipro was set up in 1945. Primarily an edible oil factory, the chief products were

Sunflower Vanaspati and 787 laundry soap (a by-product of the Vanaspati

operations). The company was called Western India Vegetable Products Limited;

it had a minor presence in Maharashtra and Madhya Pradesh. In the 1970s and


Cost of Equity

1980s, it began to expand and made forays into computing. In 1975, Wipro

marketed India's first homegrown PC.

Wipro was the sole representative for Sun Microsystems in India, before the Sun

liaison office was set up in India, in the early 1990s. Wipro is the highest-ranked

Indian IT provider by International Association of Outsourcing Professionals.

1947: An oil mill and hydrogenated cooking medium plant set up

1966: Azim Premji takes over leadership of Wipro at age 21

1975: Wipro Fluid Power is set up to manufacture hydraulic and pneumatic

cylinders

1977: Company is renamed to Wipro Products Limited

1980: Information technology services for domestic market started

1981: Hardware company is launched

1982: Company is renamed to Wipro Limited

1984: Software products subsidiary Wipro Systems Ltd. is established

1985: Toilet soaps manufacture begins

1988: Wipro BioMed is launched. It is a new business unit to market and

service bio-analytical and diagnostic instruments

1989: Joint venture with GE for medical systems, Wipro GE Medical

Systems Ltd

1990: Product software business discontinued; software services begin

1992: Lighting business and finance arm is established

1994: Merger of subsidiaries Wipro Technologies Ltd. and Wipro Systems

Ltd. with Wipro Ltd.

1995: Received ISO 9001 quality certification


Cost of Equity

1997: Received CMM level 3 certification from the Software Engineering

Institute of India

1998: Wipro identity is relaunched with rainbow flower and positioning

statement, "Applying Thought".

1998: Certified at CMMi level 5

2000: Wipro Ltd.'s American depositary receipts are listed on New York

Stock Exchange; Six Sigma initiative begun.

2004: Becomes 4th largest company in the world in terms of market

capitalization in IT services.

2006: Becomes the world's largest R&D service provider; Acquires

Saraware, Quantech, & Enabler; Joint venture Company WMNetServ with

Motorola.

2007: Becomes SOX Compliant; Wipro-Biomed Division sold to Ranbaxy

Fine Chemicals; Wipro opens new development center in Monterrey, Mexico;

Acquires U S based Infocrossing.

Tata Consultancy Services Limited :-


Cost of Equity

Type : Public BSE: 532540

Founded : 1968

Headquarters : 11th floor, Air India Building, Nariman Point, Mumbai - 400 021

Key people : Ratan Tata, (Chairman of the Board, TATA Group)S Ramadorai , (CEO & Managing Director)S Mahalingam, (Executive Director and CFO)N Chandrasekaran, (Executive Director and COO)Phiroz Vandrevala,(Executive Director and Head, Global Corporate Affairs)Ajoyendra Mukherjee, (Vice President and Head, Global Human Resources)

Industry : Information Technology Consulting

Services : Information technology Services and Solutions

Revenue : ▲ $4.3 billion (in FY 2006-07)

Employees : ~110,000 (As on Jan 31st, 2008)

Slogan : Experience certainty

Tata Consultancy Services Limited (TCS Limited Company) is one of the world’s

largest providers of information technology, consulting, services and business-

process outsourcing which commenced operations in 1968. As of 2007, it is Asia's

largest and has the largest number of employees among the Indian IT companies

with strength of over 100,000 IT consultants in 47 countries. TCS is listed on the

National Stock Exchange and Bombay Stock Exchange in India.

TCS is part of one of Asia's largest conglomerates the Tata Group, which has

interests in areas such as energy, telecommunications, financial services,

manufacturing, chemicals, engineering and materials. TCS is the first company to


Cost of Equity

be rated at Level 5 maturity for both the CMMI and PCMM framework. It is also

the first Indian company to be certified AS 9100: Rev B for design of airframe

structures.

It began as a division of the Tata Group, Tata Computer Centre, whose main

business was to provide computer services to other group companies. However, the

potential of computerization and computer services was realized early on, and an

electrical engineer from the Tata Electric Companies, Fakir Chand Kohli, was

brought in as the first General Manager. Soon after, the company was named Tata

Consultancy Services.

The early 1990s saw a tremendous surge in TCS's business, which also resulted in

a massive recruitment drive by the company. In early and mid-1990s, TCS re-

invented itself to become a software products company. In the late 1990s, to

accelerate its revenue growth, TCS decided to employ a three-pronged strategy –

developing new products with high revenue earning potential, tapping domestic

and other fast growing markets and focusing on inorganic growth through mergers

& acquisitions. In 2004, TCS became a public listed company. The Tata Research

Development and Design Centre were established in 1981. TRDDC is today one of

India’s premier R&D centers in software engineering and process engineering.

TCS currently has 19 labs spanning across 4 countries. Many of the labs are

located in India.

D-Link:-Type : Public (TSE: 2332)


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

http://en.wikipedia.org/wiki/Category:Types_of_companies

Cost of Equity

Founded : 1986

Headquarters : Taipei, Taiwan

Key people : Ken Kao, Chairman & CEO

Industry : Computer Networks

Products : Network hardware

Revenue : ▲US$400 million (2006)

Employees : 1,800+(2006)

Slogan : Building Networks for People

D-Link Corporation is a Taiwanese company that manufactures wireless and

Ethernet computer networking products for both consumer and SOHO users. The

company was founded in 1986 by Ken Kao, Current CEO and Chairman. The

corporate headquarters are located in Taipei, Taiwan. As of 2006, the company has

offices in over 90 countries around the world. D-Link is the largest wireless LAN

provider in Europe and the People's Republic of China.

Datex Inc. was founded in 1986 by seven founders; of the seven founders, Ken

Kao remain as the CEO of D-Link Corporation, John Lee become the CEO of

Alpha Networks, the other five are either retired, or employed by D-Link or D-

Link group of companies.

Datex officially changed its name to D-Link Corporation in 1994, the same year

that it went public, the first networking company in Taiwan to do so. The name

change was due to hard time in explaining who Datex was and what Datex did, but

its D-Link brand was already popular before 1992.


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

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

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

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


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

http://en.wikipedia.org/wiki/US$

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

http://en.wikipedia.org/wiki/Product_(business)

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

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


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

Cost of Equity

D-Link the brand was already successful before venturing into the OEM business,

the first OEM customer in 1991 was IBM, and subsequently grew to include

Netgear, Intel and Nortel to name a few.

D-Link is a global provider of comprehensive networking solutions that include

switches, wireless, storage, IP Surveillance, Security, VoIP products and award-

winning service and support. A true Original Equipment Manufacturer (OEM), D-

Link develops products for the top names in the networking marketplace, and as a

leading global IT company, we supply businesses -large and small-, government,

education and consumers with networking products under the D-Link brand. For

over 20 years, D-Link has designed, engineered and manufactured its products

with complete control of the supply chain, allowing the company to offer the best

quality, availability, support and value to customers in over 90 countries

worldwide.

Founded in 1986, D-Link® is a global leader in the design, manufacture and

marketing of advanced networking, storage, security, broadband, digital, voice and

data communications solutions. D-Link continually meets the global networking

and connectivity needs of digital home consumers, small office professionals, and

small to medium-sized businesses and enterprise environments. It has 100 offices

in over 90 countries globally.

Satyam Computer Services Ltd:-

Type : Public (NYSE: SAY)

Founded : 1987


Cost of Equity

Headquarters : Hyderabad, Andhra Pradesh, India

Key people : Ramalinga Raju, Founder & ChairmanRama Raju, MD

Industry : Information Technology

Revenue : ▲ 2.1 billion USD (2007)

Employees : 49,200 (2007)

Slogan : What Business Demands

Satyam Computer Services Ltd. is a consulting and information technology

Services Company based in Hyderabad, India. Satyam Computer Services Ltd. was

founded by B.Ramalinga Raju in 1987; Satyam means "truth" in Sanskrit. The

company offers a variety of information technology (IT) services spanning various

industry sectors, and is listed on the New York Stock Exchange.

Satyam's network spans 57 countries across six continents. It serves over 489

global companies, 156 of which are Fortune 500 corporations. Satyam has strategic

technology and marketing alliances with over 50 companies. Apart from

Hyderabad, it has development centers in India at Bangalore, Chennai, Pune,

Mumbai, Nagpur, Delhi, Kolkata, Bhubaneswar, and Visakhapatnam.

In October 2007, Satyam announced collaboration with Cisco to enhance Health

Management Solutions. In November 2007, Satyam is announced as the official

Information Technology Services Provider for the FIFA World Cups to be held in

2010 and 2014. Satyam partnered with arvato systems to provide innovative

solutions for medium-sized enterprise market in Germany, Austria and

Switzerland.


Cost of Equity

Satyam has been ranked consistently in the top Employers list released by surveys

done by leading groups such as Business India. The company has massive

expansion plans to penetrate across the globe especially Europe. Satyam is poised

to cross $2 billion in Annual Revenues for the year 2007-2008.

On Jan 21, 2008 Satyam announced the acquisition of an Illinois based boutique

consulting firm Bridge Strategy. This is yet another acquisition by Satyam after

Knowledge Dynamics and Citisoft. "Satyam has the largest overall ERP practice

and the heaviest commercial focus on packaged enterprise software" - Dana

Stiffler, Research Director, AMR Research, “Indian Service Provider’s ERP

Practice Grow up,” January 26, 2007.

On February 23, 2008 Satyam completed 20 years of existence. It is considered as

India's youngest software consulting company to exceed $2 billion in annual

revenue.

NIIT Technologies Ltd:-


Cost of Equity

Type : Public Owned

Founded : 1981

Headquarters : New Delhi

Key people : Rajendra S. Pawar, Vijay Thadani,

Industry : Training & Information technology

Revenue : Rs 3,984 Million (2005)

Employees : around 3000 for NIIT Technologies Ltd.

NIIT is a technology training and software solutions company that is spread all

over the world, originated from Mumbai, India. NIIT was formerly known as the

National Institute of Information Technology, the name derived from Indian

Institutes of Technology. NIIT was founded in 1981 by Indian entrepreneurs

Rajendra S. Pawar and Vijay K. Thadani to provide IT education in India. NIIT

claims to have trained one out of every three software professionals in the country.

NIIT has diversified into software services. In 2004, the company split into NIIT

Ltd and NIIT Technologies Ltd. While NIIT Ltd focuses on training, NIIT

Technologies focuses on software development and business process management.

In 2007, NIIT claimed to be among the Indian software exporters and have

operations in 42 countries. NIIT has recently tied up with Chinese universities for

training Chinese engineers. Most Indian engineering students are not industry

ready as they cannot afford courses from IT training majors.

NIIT Technologies is an IT and Business Process Management Services provider

present in 14 countries. NIIT Technologies focuses on well-defined industry


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

http://en.wikipedia.org/wiki/Vijay_K._Thadani

http://en.wikipedia.org/wiki/Rajendra_S._Pawar

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

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

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

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

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

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



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


Cost of Equity

verticals of Finance, Transport, Retail and Manufacturing for its IT Solutions

business. The company offers services in Custom Software Development and

Maintenance, Legacy Maintenance and Modernization, and Enterprise Integration.

NIIT Technologies have received ISO 9001:2000 certification from KPMG for its

software development and been assessed at Level 5 of SEI-CMMi. The

organization has also been assessed at Level 5 of P-CMM.

Aptech Limited:-


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

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

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

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

Cost of Equity

Type : Public NSE & BSE: 532475

Founded : 1986

Headquarters : Mumbai, India

Key people : Mr Jayant V Athavale, Vice President

Industry : Training & Computers - software

Services : Information technology services and solutions

Revenue : 208.75 million USD in 2006.

Aptech Limited, a Global Learning Solutions Company with a presence across 5

continents, is playing a key role in helping individuals, organizations and nations

adapt to the changing requirements of a knowledge-driven world. Aptech

commenced its IT education & training business in 1986 and has trained over 4.5

million students – globally. Aptech is an ISO 9001:2000 organization and was the

first IT training and education organization in Asia to receive the ISO 9001 quality

certification for Education Support Services in 1993. Aptech's system wide

revenue was in excess of Rs. 9226.70 million (208.75 million USD) in 2006.

Aptech is listed on the Bombay Stock Exchange and National Stock Exchange,

India.

Aptech Vision: To be the preferred Learning Solutions partner globally, delivering

superior customer service for performance enhancement, through World-Class

processes.

Aptech Mission: “Empowerment through Technology”

IT is an empowering technology, when rightly employed leads to productivity

improvements and prosperity at individual, organizational, societal, National and


Cost of Equity

Global level. Aptech Beida Jadebird wins China's ‘Top 10 Outstanding Franchise

Brand’ Award, given by Ministry of Commerce, Govt. of China. Aptech is the only

education company to get this award. Aptech Vietnam wins ICT GOLD MEDAL

FOR HIGHEST TURNOVER (Category – Training) Declared No. 1 IT Training

company in Vietnam for 5 consecutive years (2002-2006).

Indian Franchising Awards for 2007 - Winner of the Indian Global Franchisor of

the Year award & Win-win Franchising Partnership of the Year Award. Arena

Multimedia bagged the Franchisee Growth Driver of the Year Award. Honored

with The IT People Award for Leadership in IT Education – 2007; it was also

among the top 100 Electronic companies in 2002 & 2004 – Electronics for You.

Best IT Trainer Award – Franchising World 2003. CEO & MD, Aptech Limited

conferred the ‘Man of Franchising Award” – Franchising World 2003. Aptech

declared the No. 1 IT training company in Vietnam – 2003. Aptech declared the

No. 1 IT training company in China for three consecutive years – 2002, 2003 &

2004. Business Today’s listing of Top 100 India’s most valuable companies in

2001. First Indian Express Marketing Excellence Award for Brand Excellence in

IT Industry to Arena Multimedia in December 2001.


Cost of Equity

Sonata Software:-Type : Public BSE: 532221

Founded : 1986

Headquarters : APS Trust Building, Bull Temple Road, Bangalore, India

Key people : B. Ramaswamy, President and Managing Director

P. Srikar Reddy (Chief Operating Officer)

Industry : Information technology services

Slogan : Power of Partnership

Sonata Software Limited is an IT consulting and Software Services Company.

Sonata is headquartered in Bangalore, India, and offices in US, UK, Germany and

Singapore. Sonata has three development centers in Bangalore, Hyderabad (India)

and Hanover (Germany). Sonata's services include IT Consulting, Application

Development, Application Management, Managed Testing, Business Intelligence,

Infrastructure Management and Outsourced Product Development.

Sonata is SEI CMM Level 5 certified. Sonata's shares are publicly traded in Indian

Stock Exchanges. Sonata Software acquired 50.1% stake in TUI InfoTec in an all-

cash transaction in September 2006. InfoTec is the “captive” IT services arm of the

logistics and travel corporation TUI, whose applications and IT infrastructure

systems it develops, maintains and supports worldwide.


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

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

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

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

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


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


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

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


Cost of Equity

Patni Computer Systems:-Type : Public

Founded : February 10, 1978


Key people : Narendra Patni (Chairman & CEO)

Industry : Information Technology

Services : Software Services & Outsourcing

Revenue : $ 662.91 million (2007)

Employees : 14,000

Patni Computer Systems Ltd., is a provider of Information Technology services

and business solutions. The company employs over 14,000 people, and has 23

international offices across the Americas, Europe and Asia-Pacific,as well as

offshore development centers in 8 cities in India. Patni's clients include more than

200 Fortune 1000 companies. Patni has registered revenues of US$ 662.91 million

for the year 2007.

Patni Computer Systems Limited was incorporated as Patni Computer Systems

Private Limited on February 10, 1978 under the Companies Act, 1956. In 1988, by

virtue of Section 43A of the Companies Act, the Company became a "deemed

public company" and subsequently on April 15, 1991 it was then converted into a

private limited company. By virtue of its turnover exceeding prescribed limits

under the then-applicable Section 43A of the Companies Act, on July 1, 1995, the

Company became a deemed public company and consequent to the deletion of



http://en.wikipedia.org/wiki/July_1


http://en.wikipedia.org/wiki/April_15




http://en.wikipedia.org/wiki/February_10

http://en.wikipedia.org/wiki/Fortune_1000


http://en.wikipedia.org/wiki/Asia-Pacific

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

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

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


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

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

http://en.wikipedia.org/wiki/Service_(economics)

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


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


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


http://en.wikipedia.org/wiki/February_10

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


Cost of Equity

Section 43A from the Companies Act, 1956, the Company was converted to a

private limited company on June 27, 2002. The Company was again converted to a

public limited company on September 18, 2003.

In 2004, Patni came out with an initial public offering (IPO) of 18,724,000 equity

shares in the price of Rs 230 per share for a face value of Rs 2 each. In the same

year, Patni acquired Fremont, California based Cymbal Corporation for a sum of

US$78 mn. Cymbal's acquisition allowed Patni to enter $60 billion IT services

market in the telecom vertical which was previously not available to Patni on their

business landscape. This acquisition also allowed Patni to spread it's Non-GE

Business, and added a development center in Hyderabad, India.

In December 2005, Patni listed its ADRs on the New York Stock Exchange

(NYSE) under the ticker PTI.

Patni added 31 new clients taking the client number count to 293 and reported

revenues to US$ 169.5 million (Rs. 6,735.7 million) during Q3 2007.

April 2003: Acquired "The Reference Inc.," a company incorporated in

Massachusetts, USA for a consideration of about US$ 7.5 million

November 2004: Acquired "Cymbal Corporation" for a sum of US$78 million.

June 2006: Acquired "ZAiQ Technologies," a design and verification company, in

Woburn, Mass.

July 2007: Acquired Europe-based "Logan-Orviss International (LOI)", a leading

independent specialist telecommunications consulting Services Company;

Acquired N.J.-based "Taratec Development Corp." through Patni Computer

Systems Inc. a wholly owned subsidiary of the Company, for an aggregate price of

$27.2 million in cash including contingent consideration.


http://en.wikipedia.org/wiki/Woburn%2C_Massachusetts

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

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

http://en.wikipedia.org/wiki/Hyderabad%2C_India

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

http://en.wikipedia.org/wiki/Fremont%2C_California

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



http://en.wikipedia.org/wiki/September_18

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


http://en.wikipedia.org/wiki/June_27

Cost of Equity

Melstar Information Technologies Ltd.:-

Type : BSE: 532307

Founded : 1986


Industry : Computers - Software

Services : Servicing the banking, Insurance & Information Technology

An Application Management Company

Established in 1986, we focus on servicing the Banking, Insurance, Government

and IT domains. We undertake systems and application management activities,

offer specialist technology centers and a highly cost-effective virtual development

environment as part of our offshore operations in Current Openings.

Headquartered in Mumbai with It Technology experts, professionals worldwide

and having 6 offices in Current Openings including 3 development centers. Melstar

is a complete provider of Application Management services and solutions.

“Everyday Melstar is helping its customers across the globe in building and

managing their business applications by virtue of its domain knowledge in

Banking, Insurance and Information Technology as well as its technical expertise

in IBM, Microsoft and Sun technologies.”

We believe in a philosophy of ethical and transparent business practices with all

customers, vendors and employees to build long-term relationships based on

mutual trust and benefit. We are proud to have global companies like IBM,


Cost of Equity

Citibank, Standard Chartered Bank, Birla Sunlife as our customers.

Melstar's software facilities are assessed at SEI-CMM Level III and ISO 9001

certification.

Melstar as a corporation practices certain specific principles while building a

relationship with its customers.

2000 - The Company has set up two development centres one at Bangalore and one

in Mumbai, taking the total number of centres to 11.

- Melstar Information Technologies going in for a preferential issue of

shares to fund the recently announced acquisition of three foreign companies.

- The Company has acquired the US-based IT company Global System for

0.8 million in a part cash and stock deal.


Cost of Equity

CHAPTER 4

CALCULATION OF COST OF EQUITY

Cost of equity is more challenging to calculate as equity does not pay a set return

to its investors. The cost of equity is broadly defined as the risk-weighted projected

return required by investors, where the return is largely unknown. The cost of

equity is therefore inferred by comparing the investment to other investments with

similar risk profiles to determine the "market" cost of equity.



consists both of dividend and capital gains, e.g. increases in the share price. The

returns are expected future returns, not historical returns, and so the returns on

equity can be expressed as the anticipated dividends on the shares every year in

perpetuity.

The cost of equity capital is equal to the required rate of return on equity-supplied

capital. The cost of retained earnings, ks, is estimated with this model:

The Constant Dividend Growth Model (Gordon’s Model)ks = D1/Po + g

where:

D1 = the next expected dividend [Do (1+g)],

g = the constant growth rate of dividends,

Po = the current market price per share of the common stock.


Cost of Equity

All the calculations are based on the market price of the stock for the year 2007-

2008 and considering the growth factor which is calculated by percentage increase

or decrease in the net sales of the company over the years.

INFOSYS TECHNOLOGIES LTD.

Table no. 4.1:- Table showing capital structure of Infosys Technologies Ltd.

Capital Structure

Period Instrument Authorized

Capital

(cr)

Issued

Capital

(cr)

- P A I D U P -

From To Shares

(nos)

Face Value Capital

2006 2007 Equity Share 214.75 214.75 571209862 5 214.75

2005 2006 Equity Share 150 137.78 275554980 5 137.78

2004 2005 Equity Share 150 135.29 270570549 5 135.29

2003 2004 Equity Share 50 33.32 66641056 5 33.32

2002 2003 Equity Share 50 33.12 66243078 5 33.12

2001 2002 Equity Share 50 33.09 66186130 5 33.09

2000 2001 Equity Share 50 33.08 66158117 5 33.08

1999 2000 Equity Share 50 33.08 66150700 5 33.08

1998 1999 Equity Share 50 33.07 33069400 10 33.07

1997 1998 Equity Share 30 16.02 16017200 10 16.02

1996 1997 Equity Share 10 7.26 7259600 10 7.26

1995 1996 Equity Share 10 7.26 7258600 10 7.26

1994 1995 Equity Share 10 7.26 7258600 10 7.26

1993 1994 Equity Share 4 3.35 3352100 10 3.35

1992 1993 Equity Share 4 1.98 1976100 10 1.98


Cost of Equity

Table no. 4.2:- Table showing dividend paid in the year 2006-07 by Infosys

Technologies Ltd.

Calculation of dividend paid in Rs. for the year 2006-07

Company name Face value Dividend (%) Dividend paid (Do)

Infosys Technologies Limited 5.00 230 11.50

Table no. 4.3:- Table showing growth in percentage of Infosys Technologies Ltd.

Growth calculation

Company name Net Sales of

2006 in Rs. Cr.

Net Sale of 2007

in Rs. Cr.

Increase/Decrease

of sales in Rs. Cr.

Growth

in %

Infosys Technologies Limited 9,028.00 13,149.00 4,121.00 31.34

Table no. 4.4:- Table showing cost of equity for year 2007-08 of Infosys

Technologies Ltd.

Calculation of cost of equity for year 2007-08

Company name Dividend paid

in Rs. (Do)

Expected dividend

in Rs.(D1)

Mkt price

in Rs.

Growth COE in

%

Infosys Technologies

Limited

11.50 15.10 1440.80 0.31 32.39


Cost of Equity

Chart no. 4.1:- Chart showing the expected dividend of Infosys Technologies Ltd.

Interpretation:

The above graph of Infosys technologies Ltd. indicates, dividend paid in the year

2006-07 is Rs 11.50 and the expected dividend for the year 2007-08 is Rs 15.10,

the calculation is based on dividend paid and the growth of the company in the

year 2006-07.

The above table of Infosys technologies Ltd. indicates market price as Rs 1440.80

and cost of equity as 32.39%, so it’s a good sign for the long term investors to

book their profits. The market price plays an important role for COE.


Cost of Equity

WIPRO TECHNOLOGIES LTD.

Table no. 4.5:- Table showing capital structure of Wipro Technologies Ltd.

Capital Structure


Capital

(cr)

Issued

Capital

(cr)

- P A I D U P -

From To Shares

(nos)

Face

Value

Capital

2005 2006 Equity Share 214.75 214.75 1425754267 2 214.75

2004 2005 Equity Share 150 140.71 703570522 2 140.71

2003 2004 Equity Share 75 46.55 232759152 2 46.55

2002 2003 Equity Share 75 46.51 232563992 2 46.51

2001 2002 Equity Share 75 46.49 232465689 2 46.49

2000 2001 Equity Share 75 46.49 232433019 2 46.49

1999 2000 Equity Share 47 45.83 229156350 2 45.83

1998 1999 Equity Share 46 45.83 45831270 10 45.83

1997 1998 Equity Share 46 45.83 45831270 10 45.83

1994 1997 Equity Share 16 15.28 15277090 10 15.28

1993 1994 Equity Share 8 7.37 7373440 10 7.37

1992 1993 Equity Share 8 7.37 7373440 10 7.37

1989 1992 Equity Share 4 3.69 3686720 10 3.69

1986 1989 Equity Share 2 1.84 1843360 10 1.84

1984 1985 Equity Share 2 0.92 92168 100 0.92

1971 1980 Equity Share 0.5 0.45 45334 100 0.45

1947 1971 Equity Share 0.5 0.23 22667 100 0.23

1946 1947 Equity Share 0.5 0.17 17000 100 0.17


Cost of Equity

Table no. 4.6:- Table showing dividend paid in the year 2006-07 by Wipro

Technologies Ltd.



Wipro Technologies 2.00 300 6.00

Table no. 4.7:- Table showing growth in percentage of Wipro Technologies Ltd.

Growth calculation


2006 in Rs. Cr.

Net Sale of 2007

in Rs. Cr.

Increase/Decrease

of sales in Rs. Cr.

Growth

in %

Wipro Technologies 10,227.12 13,683.90 3,456.78 25.26

Table no. 4.8:- Table showing cost of equity for year 2007-08 of Wipro

Technologies Ltd.

Calculation of cost of equity for year 2007-08


in Rs. (Do)

Expected dividend

in Rs.(D1)

Mkt price

in Rs.

Growth COE in

%

Wipro Technologies 6.00 7.52 430.10 0.25 27.01


Cost of Equity

Chart no. 4.2:- Chart showing the expected dividend of Wipro Technologies Ltd.

Interpretation:

The above graph of Wipro technologies Ltd. indicates, dividend paid in the year

2006-07 is Rs 6.00 and the expected dividend for the year 2007-08 is Rs 7.52, the

calculation is based on dividend paid and the growth of the company in the year

2006-07.


Cost of Equity

The above table of Wipro technologies Ltd. indicates market price as Rs 430.10


book their profits.

TATA CONSULTANCY SERVICES

Table no. 4.9:- Table showing capital structure of Tata Consultancy services

Capital Structure


Capital

(cr)

Issued

Capital

(cr)

- P A I D U P -

From To Shares

(nos)

Face

Value

Capital

2006 2007 Equity Share 120 97.86 978610498 1 97.86

2005 2006 Equity Share 60 48.93 489305249 1 48.93

2004 2005 Equity Share 60 48.01 480114809 1 48.01

2003 2004 Equity Share 40 36.44 36440002 10 36.44

Table no. 4.10:- Table showing dividend paid in the year 2006-07 by TCS Ltd.



Tata Consultancy Services Limited 1.00 1150.00 11.50

Table no. 4.11:- Table showing growth in percentage of TCS Ltd.

Growth calculation


2006 in Rs. Cr.

Net Sale of

2007 in Rs. Cr

Increase/Decrease

of sales in Rs. Cr.

Growth

in %


Cost of Equity

Tata Consultancy Services Ltd 11,230.50 14,939.97 3,709.47 24.83

Table no. 4.12:- Table showing cost of equity for year 2007-08 of TCS Ltd.

Calculation of cost of equity for the year 2007-08


in Rs. (Do)

Expected dividend

in Rs.(D1)

Mkt price

in Rs.

Growth COE in

%

TCS Ltd 11.50 14.36 853.15 0.25 26.51

Chart no. 4.3:- Chart showing the expected dividend of TCS Ltd.

Interpretation:


Cost of Equity

The above graph of TCS indicates, dividend paid in the year 2006-07 is Rs 11.50

and the expected dividend for the year 2007-08 is Rs 14.36, the calculation is

based on dividend paid and the growth of the company in the year 2006-07.

The above table of TCS indicates market price as Rs 853.15 and cost of equity as

26.51%, so it’s a good sign for the long term investors to book their profits, and the

expected dividend is bit high.

D-LINK (INDIA)

Table no. 4.13:- Table showing capital structure of D-Link (India) Ltd.

Capital Structure


Capital

(cr)

Issued

Capital

(cr)

- P A I D U P -

From To Shares

(nos)

Face

Value

Capital

2006 2007 Equity Share 7 6 30004850 2 6

2005 2006 Equity Share 7 6 30004850 2 6

2004 2005 Equity Share 7 6 30004850 2 6

2003 2004 Equity Share 7 6 30004850 2 6

2002 2003 Equity Share 7 6 30004850 2 6

2001 2002 Equity Share 7 6 30004850 2 6

2000 2001 Equity Share 7 6.09 4571220 10 4.57

1999 2000 Equity Share 6 4.36 300000 3 0.08

Table no. 4.14:- Table showing dividend paid in the year 2006-07 by D-Link

(India) Ltd.



D-Link 2.00 100.00 2.00


Cost of Equity

Table no. 4.15:- Table showing growth in percentage of D-Link (India) Ltd.

Growth calculation


2006 in Rs. Cr.

Net Sale of 2007

in Rs. Cr.

Increase/Decrease

of sales in Rs. Cr.

Growth

in %

D-Link 274.11 283.78 9.67 3.41

Table no. 4.16:- Table showing cost of equity for year 2007-08 of D-Link (India)

Ltd.



in Rs. (Do)

Expected dividend

in Rs.(D1)

Mkt price

in Rs.

Growth COE in

%

D-Link 2.00 2.07 69.15 0.03 6.40

Chart no. 4.4:- Chart showing the expected dividend of D-Link (India) Ltd.


Cost of Equity

Interpretation:

The above graph of D-Link (India) indicates, dividend paid in the year 2006-07 is

Rs 2.00 and the expected dividend for the year 2007-08 is Rs 2.07, the calculation

is based on dividend paid and the growth of the company in the year 2006-07.

The above table of D-Link (India) indicates market price as Rs 69.15 and cost of

equity as 6.40%, so it’s not advisable for the long term investors to hold the shares,

and the growth is very slow.

SATYAM COMPUTER SERVICES

Table no. 4.17:- Table showing capital structure of Satyam Computer Services

Capital Structure


Capital

(cr)

Issued

Capital

(cr)

- P A I D U P -

From To Shares

(nos)

Face

Value

Capital

2006 2007 Equity Share 160 133.44 667196009 2 133.44

2005 2006 Equity Share 75 64.89 324449539 2 64.89

2004 2005 Equity Share 75 63.85 319265291 2 63.85


Cost of Equity

2003 2004 Equity Share 75 63.25 316251710 2 63.25

2002 2003 Equity Share 75 62.91 314542800 2 62.91

2001 2002 Equity Share 75 62.91 314540000 2 62.91

2000 2001 Equity Share 75 56.24 281190000 2 56.24

1999 2000 Equity Share 75 56.24 56238000 10 56.24

1998 1999 Equity Share 30 26.02 26019000 10 26.02

1996 1998 Equity Share 30 26.02 26019000 10 26.02

1994 1995 Equity Share 30 18.59 18585000 10 18.59

1993 1994 Equity Share 20 18.59 18585000 10 18.59

1992 1993 Equity Share 20 18.59 18585000 10 18.59

1991 1992 Equity Share 20 0.3 300000 10 0.3

Table no. 4.18:- Table showing dividend paid in the year 2006-07 by Satyam

Computer Services



Satyam Computer Services Ltd. 2.00 175.00 3.50


Cost of Equity

Table no. 4.19:- Table showing growth in percentage of Satyam Computer

Services Ltd.

Growth calculation


2006 in Rs. Cr.

Net Sale of 2007

in Rs. Cr.

Increase/Decrease

of sales in Rs. Cr.

Growth

in %

Satyam Computer Services Ltd. 4,634.31 6,228.47 1,594.16 25.59

Table no. 4.20:- Table showing cost of equity for year 2007-08 of Satyam

Computer Services



in Rs. (Do)

Expected dividend

in Rs.(D1)

Mkt price

in Rs.

Growth COE in

%

Satyam Computer Services

Ltd.

3.50 4.40 395.05 0.26 26.71

Chart no. 4.5:- Chart showing the expected dividend of Satyam Computer Services Ltd.


Cost of Equity

Interpretation:

The above graph of Satyam Computer Services indicates, dividend paid in the year



2006-07.

The above table of Satyam Computer Services indicates market price as Rs 395.05


book their profits. Growth and market price of shares aids COE to be in a form.


Cost of Equity

NIIT TECHNOLOGIES

Table no. 4.21:- Table showing capital structure of NIIT Technologies

Capital Structure


Capital

(cr)

Issued

Capital

(cr)

- P A I D U P -

From To Shares

(nos)

Face

Value

Capital

2006 2007 Equity Share 45 39.1 39100530 10 39.1

2005 2006 Equity Share 45 38.65 38649280 10 38.65

2004 2005 Equity Share 45 38.65 38649280 10 38.65

2003 2004 Equity Share 15 9.66 9662320 10 9.66

2002 2003 Equity Share 0.25 0.25 25000 100 0.25

Table no. 4.22:- Table showing dividend paid in the year 2006-07 by NIIT

Technologies



NIIT Technologies Ltd. 10.00 65.00 6.50

Table no. 4.23:- Table showing growth in percentage of NIIT Technologies

Growth calculation


2006 in Rs. Cr.

Net Sale of 2007

in Rs. Cr.

Increase/Decrease

of sales in Rs. Cr.

Growth

in %

NIIT Technologies Ltd. 220.09 297.16 77.07 25.94


Cost of Equity

Table no. 4.24:- Table showing cost of equity for year 2007-08 of NIIT

Technologies



in Rs. (Do)

Expected dividend

in Rs.(D1)

Mkt price

in Rs.

Growth COE in

%

NIIT Technologies Ltd. 6.50 8.19 100.80 0.26 34.06

Chart no. 4.6:- Chart showing the expected dividend of NIIT Technologies Ltd.

Interpretation:

The above graph of NIIT Technologies indicates, dividend paid in the year 2006-

07 is Rs 6.50 and the expected dividend for the year 2007-08 is Rs 8.19, the


2006-07.


Cost of Equity

The above table of NIIT Technologies indicates market price as Rs 100.80 and cost

of equity as 34.06%, it’s very high and it’s an excellent share for the long term

investors to book their profits and get huge returns.

APTECH LIMITED

Table no. 4.25:- Table showing capital structure of Aptech Ltd.

Capital Structure


Capital

(cr)

Issued

Capital

(cr)

- P A I D U P -

From To Shares

(nos)

Face

Value

Capital

2006 2006 Equity Share 60 37.89 37887232 10 37.89

2005 2005 Equity Share 60 37.64 37635877 10 37.64

2004 2004 Equity Share 60 33.51 33509437 10 33.51

2003 2003 Equity Share 60 33.51 33509437 10 33.51

2002 2002 Equity Share 19.95 18.15 18149437 10 18.15

2001 2002 Equity Share 19.95 18.15 18149437 10 18.15

2000 2001 Equity Share 0 0 2000 10 0

Table no. 4.26:- Table showing dividend paid in the year 2006-07 by Aptech Ltd.



Aptech Limited 10.00 0.00 0.00

Table no. 4.27:- Table showing growth in percentage of Aptech Ltd.

Growth calculation


2006 in Rs. Cr.

Net Sale of 2007

in Rs. Cr.

Increase/Decrease

of sales in Rs. Cr.

Growth

in %

Aptech Limited 100.28 81.21 -19.07 -23.48


Cost of Equity

Table no. 4.28:- Table showing cost of equity for year 2007-08 of Aptech Ltd.



in Rs. (Do)

Expected dividend

in Rs.(D1)

Mkt price

in Rs.

Growth COE in

%

Aptech Limited 0.00 0.00 226.30 -0.23 -23.48

Chart no. 4.7:- Chart showing the expected dividend of Aptech Ltd.

Interpretation:

The above graph of Aptech Ltd. indicates, dividend paid in the year 2006-07 is Rs

0.00 and the expected dividend for the year 2007-08 is Rs 0.00, the calculation is

based on dividend paid and the growth of the company in the year 2006-07.


Cost of Equity

The above table of Aptech Ltd. indicates market price as Rs 226.30 and cost of

equity as -23.48%. It’s a negative COE, so it’s not advisable for the investors to

buy the share or hold the position.

SONATA SOFTWARE

Table no. 4.29:- Table showing capital structure of Sonata Software

Capital Structure


Capital

(cr)

Issued

Capital

(cr)

- P A I D U P -

From To Shares

(nos)

Face

Value

Capital

2005 2006 Equity Share 15 10.52 105159306 1 10.52

2004 2005 Equity Share 15 10.52 105159306 1 10.52

2003 2004 Equity Share 15 10.52 105159306 1 10.52

2002 2003 Equity Share 15 10.52 105159306 1 10.52

2001 2002 Equity Share 15 10.52 105159306 1 10.52

2000 2001 Equity Share 15 10 100006800 1 10

1999 2000 Equity Share 15 10 10000680 10 10

1998 1999 Equity Share 15 10 10000680 10 10

1996 1998 Equity Share 5 3.25 3251600 10 3.25

Table no. 4.30:- Table showing dividend paid in the year 2006-07 by Sonata

Software



Sonata Software 1.00 110.00 1.10

Table no. 4.31:- Table showing growth in percentage of Sonata Software

Growth calculation


Cost of Equity


2006 in Rs. Cr.

Net Sale of 2007

in Rs. Cr.

Increase/Decrease

of sales in Rs. Cr.

Growth

in %

Sonata Software 148.67 185.83 37.16 20.00

Table no. 4.32:- Table showing cost of equity for year 2007-08 of Sonata Software



in Rs. (Do)

Expected dividend

in Rs.(D1)

Mkt price

in Rs.

Growth COE in

%

Sonata Software 1.10 1.32 31.85 0.20 24.14

Chart no. 4.8:- Chart showing the expected dividend of Sonata Software

Interpretation:

The above graph of Sonata software indicates, dividend paid in the year 2006-07 is

Rs 1.10 and the expected dividend for the year 2007-08 is Rs 1.32, the calculation

is based on dividend paid and the growth of the company in the year 2006-07.


Cost of Equity

The above table of Sonata software indicates market price as Rs 31.85 and cost of

equity as 24.14%, so it’s an average situation for the long term investors to invest

and returns are moderate.

PATNI COMPUTER SYSTEMS

Table no. 4.33:- Table showing capital structure of Patni Computer Systems

Capital Structure


Capital

(cr)

Issued

Capital

(cr)

- P A I D U P -

From To Shares

(nos)

Face

Value

Capital

2006 2006 Equity Share 50 27.66 138281853 2 27.66

2005 2005 Equity Share 50 27.56 137798399 2 27.56

2004 2004 Equity Share 50 25 124997009 2 25

2003 2003 Equity Share 50 22.28 111420849 2 22.28

2002 2002 Equity Share 25 14.86 74280566 2 14.86

Table no. 4.34:- Table showing dividend paid in the year 2006-07 by Patni

Computer Systems



Patni Computer Systems 2.00 150.00 3.00

Table no. 4.35:- Table showing growth in percentage of Patni Computer Systems

Growth calculation

Company name Net Sales of Net Sale of 2007 Increase/Decrease Growth


Cost of Equity

2006 in Rs. Cr. in Rs. Cr. of sales in Rs. Cr. in %

Patni Computer Systems 875.60 997.83 122.23 12.25

Table no. 4.36:- Table showing cost of equity for year 2007-08 of Patni Computer

Sytems



in Rs. (Do)

Expected dividend

in Rs.(D1)

Mkt price

in Rs.

Growth COE in

%

Patni Computer Systems 3.00 3.37 208.85 0.12 13.86

Chart no. 4.9:- Chart showing the expected dividend of Patni Computer Systems

Interpretation:


Cost of Equity

The above graph of Patni Computer Systems indicates, dividend paid in the year



2006-07.

The above table of Patni Computer Systems indicates market price as Rs 208.85

and cost of equity as 13.86%, so it’s advisable for the long term investors to go for

any better option, like investor can investing in a bank with less risk.

MELSTAR INFOTECH

Table no. 4.37:- Table showing capital structure of Melstar Infotech

Capital Structure


Capital

(cr)

Issued

Capital

(cr)

- P A I D U P -

From To Shares

(nos)

Face

Value

Capital

2005 2006 Equity Share 20 14.28 14283139 10 14.28

2004 2005 Equity Share 20 14.28 14283139 10 14.28

2003 2004 Equity Share 20 14.28 14283139 10 14.28

2002 2003 Equity Share 20 14.28 14283139 10 14.28

2000 2002 Equity Share 20 13.83 13826149 10 13.83

1999 2000 Equity Share 15 12.15 12150700 10 12.15

1998 1999 Equity Share 10 8.56 8558797 10 8.56

1997 1998 Equity Share 10 5.95 5952125 10 5.95

1995 1997 Equity Share 6 4.75 4750000 10 4.75

Table no. 4.38:- Table showing dividend paid in the year 2006-07 by Melstar

Infotech



Cost of Equity


Melstar Information Technologies Ltd. 10.00 0.00 0.00

Table no. 4.39:- Table showing growth in percentage of Melstar Infotech

Growth calculation


2006 in Rs. Cr.

Net Sale of 2007

in Rs. Cr.

Increase/Decrease

of sales in Rs. Cr.

Growth

in %

Melstar infotech 17.55 17.69 0.14 0.79

Table no. 4.40:- Table showing cost of equity for year 2007-08 of Melstar Infotech



in Rs. (Do)

Expected dividend

in Rs.(D1)

Mkt price

in Rs.

Growth COE in

%

Melstar Information

Technologies Ltd.

0.00 0.00 7.96 0.01 0.79

Chart no. 4.10:- Chart showing the expected dividend of Melstar Infotech


Cost of Equity

Interpretation:

The above graph of Melstar Infotech indicates, dividend paid in the year 2006-07

is Rs 0.00 and the expected dividend for the year 2007-08 is Rs 0.00, the


2006-07.

The above table of Melstar Infotech indicates market price as Rs 7.96 and cost of

equity as 0.79%, so it’s not advisable for the long term investors to invest in this

company as growth is very less and COE is less than 1.

Cost Of Equity Of 10 IT Companies:

Chart no. 4.11:- Chart showing the Cost of Equity of all 10 IT companies


Cost of Equity

Interpretation:

The above table represents the Cost of Equity of 10 IT companies which have been

chosen from three different groups’ viz., Group A, Group B1 and Group T.


Cost of Equity

The IT companies under Group A are performing consistently and they all are

having excellent cost of equity. Only D-Link is not performing as expected the

reason being not much change in sales compared to last year which has affected its

growth.

The IT companies under Group B1 are not sailing in the same boat i.e., they all

have different levels of cost of equity. NIIT Technologies is showing the best cost

of equity in the selected IT companies and Aptech Ltd. is showing negative

response. From Group T Melstar Ltd. is showing very low return on investment.

So, the Group A is best for long term investors to invest and earn huge returns.

FACTORS INFLUENCING THE EQUITY GROWTH IN

IT SECTOR


Cost of Equity

Controllable Factors influencing the equity growth :-

These are the factors influencing the equity growth that the company has control

over:

1. Capital-structure policy

2. Dividend policy

3. Investment policy

1. Capital Structure Policy

As we have been discussing above, a firm has control over its capital structure,

targeting an optimal capital structure. As more debt is issued, the cost of debt

increases, and as more equity is issued, the cost of equity increases.

2. Dividend Policy

Given that the firm has control over its payout ratio, the breakpoint of the equity

cost can be changed. For example, as the payout ratio of the company increases

the breakpoint between lower-cost internally generated equity and newly issued

equity is lowered.

3. Investment Policy


Cost of Equity

It is assumed that, when making investment decisions, the company is making

investments with similar degrees of risk. If a company changes its investment

policy relative to its risk, both the cost of debt and cost of equity change.

Uncontrollable Factors Influencing The Equity Growth:-

These are the factors influencing the equity growth that the company has no

control over:

1. Level of interest rates

2. Currency fluctuation

1. Level of Interest Rates

The level of interest rates will affect the cost of debt and, potentially, the cost of

equity. For example, when interest rates increases the cost of equity increases,

which ultimately increases the cost of capital.

2. Currency Fluctuation

The currency fluctuation will affect the cost of equity when the company is

exposed to foreign currency. If there is depreciation in the exposed currency

then it badly affects the company’s earnings which ultimately affects on the

returns of the investors.

CHAPTER 5


Cost of Equity

FINDINGS

Cost of equity is more challenging to calculate as equity does not pay a

set return to its investors.

When a company has a high expected dividend and growth then the

returns expected from the company is also high. This shows high cost of

equity and attracts huge investments.

The IT companies under Group A are performing consistently and they

all are having excellent cost of equity.

D-Link is not performing as expected the reason being not much change

in sales compared to last year which has affected its growth.

The IT companies under Group B1 are not sailing in the same boat i.e.,

they all have different levels of cost of equity.

NIIT Technologies is showing the best cost of equity in the selected IT

companies.

Aptech Ltd. is showing negative response the reason being decrease in

their net sales which has affected the growth of company.

From Group T Melstar Ltd. is showing very low return on investment

reason being no dividend paid and very slow growth of the company.


Cost of Equity

Group A is best for long term investors to invest and earn huge returns.

The currency fluctuation is affecting IT industries, as IT industries are

exposed to US$ or any other foreign currency. IT companies will be

beneficial if the US$ appreciate, but at present the US$ is depreciating

which is resulting in less profits and it affects the dividend payout ratio,

this has ultimately resulted in decrease in share price.

SUGGESTIONSSurana College P.G. Centre 80

Cost of Equity

The long term investors have an opportunity to earn high returns if they

invest in the companies which are listed under Group A.

The best among selected 10 IT companies’ investors can invest in NIIT

Technologies as it is giving high cost of equity, the growth and expected

dividend is also high so it’s a good company for investors to include it in

their portfolio.

The companies listed under Group T is not a good choice for investor to

include in their portfolio as they give very low returns i.e., cost of equity.

No dividends are paid and growth is also very slow.

As per observation Aptech Ltd. has negative growth there is a decrease in

their net sales which has resulted in negative cost of equity, so this share

is not advisable for investment.

The long term investor can invest in such company’s share where the

growth is constantly going upwards and which pays dividend too.

CONCLUSION


Cost of Equity



consists both of dividend and capital gains. The cost of equity reflects the

opportunity cost of investment for individual shareholders. It will vary from

company to company because of the differences in the business risk and

financial risk of different companies. The cost of equity is the minimum rate of

return a firm must offer shareholders to compensate for waiting for their

returns, and for bearing some risk. The cost of equity is based on a firm's

current rate of return. If one assumes a perfect market, industry-specific costs of

equity reflect the riskiness of particular industries. A high cost of equity would

then indicate a higher-risk industry that should command a higher return to

compensate for the higher risk.

The vision of Information Technology (IT) policy is to use IT as a tool for

raising the living standards of the common man and enriching their lives. In

Information technology (IT), India has built up valuable brand equity in the

global markets.

The 10 IT companies which have been chosen from three different groups’ viz.,

Group A, Group B1 and Group T perform differently. The groups are made as

per the companies’ performance; the companies which are listed under Group A

are providing excellent cost of equity which a long term investor expects.

The company which has high dividend payout ratio and high growth they show

higher cost of equity, and all the long term investors expects the same to

minimize their risk.

The risk averse always concentrates on the following factors before investment:

Growth of the company


Cost of Equity

Dividend payout ratio or expected dividend

Market price

Using the above data an investor calculates the cost of equity and invests

according to the results shown by the companies. This calculation helps them to

have a good portfolio.

The companies listed under Group T are not good choice of shares to invest for

long term investors.

BIBLIOGRAHY


Cost of Equity

Text books:

1. Prasanna Chandra - Financial management, Tata McGraw-Hill

publishing company limited, fourth reprint: 1998

2. Paresh P. Shah - Financial management, published by Himal Impression,

reprint edition: 2007

Websites:

www.google.com

www.wikipedia.com

www.moneycontrol.com

www.answers.com

www.infosys.com

www.wipro.com

www.niit.com

www.aptech.com

www.melstar.com

www.dlink.com

www.12managemanagementcommunities.com


http://www.dlink.com/

http://www.melstar.com/

http://www.aptech.com/

http://www.niit.com/

http://www.wipro.com/

http://www.infosys.com/

http://www.answers.com/

http://www.moneycontrol.com/

http://www.wikipedia.com/

http://www.google.com/

Cost of Equity

Surana College P.G. Centre

costof equity

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