A DISSERTATION STUDY OF FUNDAMENTAL ANALYSIS

OF SELECTED IT COMPANIES IN INVESTMENT DECISION

WITH RESPECT TO HEDGE EQUITIES

INTRODUCTION

India is one of the top five economies in the world in terms of market potential and
ranked as the third biggest economy in Asia in terms of gross domestic product. All
these make investment in India a lucrative option for the investors across the world.
The capital market of India forms an important part of the development of the nation.
Nowadays people are showing more interest to invest in shares or derivatives.
Investors are more conscious about the fluctuations in the stock market. In order to
minimize the risk, the investors should know about the past performance of the
company, market fluctuations, reason for fluctuation, economic policy and inflation
etc., before making an investment in securities. Otherwise, the investors can be
applied security analysis. There are two alternative approaches for security analysis
such as technical and fundamental analysis. Technical analysis is a method of
evaluating securities by analysing the statistics generated by market activity, such as
past prices and volume.

The objective of Fundamental analysis is to appraise intrinsic value of a security.

The intrinsic value is the true economic worth of a financial asset. The fundamental
analyst has to estimate the intrinsic worth of a security by considering key economic
and financial variables and see whether the actual price is above or below its
intrinsic value. Finally, the investors take buy or sell decision depending upon the
result drawn from those analyses. The main purpose of this analysis is for long-term
perspective in nature.

IT Sector: An Overview

India is the world's largest sourcing destination for the information technology (IT)
industry, accounting for approximately 67 per cent of the US$ 124-130 billion market.
The industry employs about 10 million workforces. More importantly, the industry has
led the economic transformation of the country and altered the perception of India in
the global economy. India's cost competitiveness in providing IT services, which is
approximately 3-4 times cheaper than the US, continues to be the mainstay of its
Unique Selling Proposition (USP) in the global sourcing market. However, India is
also gaining prominence in terms of intellectual capital with several global IT firms
setting up their innovation centres in India.
The IT industry has also created significant demand in the Indian education sector,
especially for engineering and computer science. The Indian IT and ITeS industry is
divided into four major segments IT services, Business Process Management
(BPM), software products and engineering services, and hardware.
Market Size
The Indian IT sector is expected to grow at a rate of 12-14 per cent for FY2017-18 in
constant currency terms. The sector is also expected triple its current annual
revenue to reach US$ 350 billion by FY 2025.
Employees from 12 Indian start-ups, such as Flipkart, Snapdeal, Makemytrip, Naukri,
Ola, and others, have gone on to form 700 start-ups on their own, thus expanding
the Indian start-up ecosystem.! India ranks third among global start-up ecosystems
with more than 4,200 start-ups##.
Total spending on IT by banking and security firms in India is expected to grow 8.6
per cent year-on-year to US$ 7.8 billion by end of 2017.
Indias internet economy is expected to touch Rs 10 trillion (US$ 146.72 billion) by
2018, accounting for 5 per cent of the countrys GDP###.
The public cloud services market in India is slated to grow 35.9 per cent to reach
US$ 1.3 billion according to IT consultancy, Gartner. Increased penetration of
internet (including in rural areas) and rapid emergence of e-commerce are the main
drivers for continued growth of data centre co-location and hosting market in India.
The Indian Healthcare Information Technology (IT) market is valued at US$ 1 billion
currently and is expected to grow 1.5 times by 2020. India's business to business
(B2B) e-commerce market is expected to reach US$ 700 billion by 2020 whereas the
business to consumer (B2C) e-commerce market is expected to reach US$ 102
billion by 2020.
Cross-border online shopping by Indians is expected to increase 85 per cent in 2017,
and total online spending is projected to rise 31 per cent to Rs 8.75 lakh crore (US$
128 billion) by 2018.
Post the governments announcement of demonetisation of specific currency
denominations, digital payment platforms such as Paytm, MobiKwik, Oxigen
witnessed a sharp spike in user transactions, app downloads and merchant
enquiries, thereby indicating a greater demand towards digital payments by
consumers.
India ranks among the top five countries in terms of digitalisation maturity as per
Accentures Platform Readiness Index, and is expected to be among the top
countries with the opportunity to grow and scale up digital platforms by 2020.

REVIEW OF LITERATURE
Viyyanna Rao and Nirmala Daita (2012)
Fundamental Factors Influencing Investments in Mutual Funds the EIC
Approach: A Case Study of RCAMI the study focused on fundamental analysis
of mutual funds in India. The macro economic variables taken for this study, viz.,
RBI Bank Rate, Domestic savings, Gross Domestic Capital
Formation, Money Supply, Gross National Product, Wholesale Price Index, and
Forex Reserves. Descriptive Statistics, Correlation, Regression, Augmented
Dickey Fuller test and Granger test has been applied. The economic analysis
results found that all the variables were positively correlated with each other
except bank rate and Wholesale price index. The industry analysis shows that
Reliance, HDFC, ICICI Prudential, UTI and Birla Sun Life stood in the top five
positions and its contribution as 57.02 per cent of the total assets. The remaining
33 players shared the rest of the 42.98 per cent of the industry. The company
analysis results reveal that price earning ratio and price to book ratio, fund size,
market capitalization and Net assets value were found to be having a significant
influence on the return of the funds.

Sandip Mukherji, Manjeet, and Kim (1997)

A Fundamental Analysis of Korean Stock R stock return and fundamental variables

in Korean returns in their article examined about the relation between firms annual
stock returns during the period of 1982-83. The study found that stock returns are
positively related to book-market ratio, sales-price ratio and debt-equity ratio. It is
also found that return is negatively related to firm size and not significantly related to
earnings price ratio. They suggested that book-market and sales-price ratios are
more efficient indicators than the earnings-price and the debt-equity ratio.

Hence, the present study focused to fill the research gap of the previous study and
attempt to make a fundamental analysis on IT sector in India.

CONCEPTUAL FRAMEWORK

FUNDAMENTAL ANALYSIS

ECONOMIC COMPANY
ANALYSIS ANALYSIS
INDUSTRY
ANALYSIS

GNP, GDP, GDCF, GDS,

SAVINGS RATE EPS, DPS, DP RATIO,
INFLATION RATE PE RATIO, ROE
INTEREST RATE GROWTH RATE EARNINGS YIELD RATIO
EXCHANGE RATE AND SWOT DIVIDEND YIELD RATIO
FOREX RESERVES ANALYSIS PRICE TO BOOK VALUE
AGRI PRODUCTION RATIO
GOVT. RECEIPTS INTRINSIC VALUE
GOVT. EXPENDITURE BOP

OBJECTIVES OF THE STUDY

PRIMARY OBJECTIVE

To study the fundamentals, performance and growth of IT stocks listed at

National Stock Exchange and thereby identifying the best investment by
applying CAMEL analysis

SECONDARY OBJECTIVES
 To evaluate the financial performance of selected IT companies listed at
National Stock Exchange.
To analyze the IT industry based on long term potential.
To analyze which company does the investor should invest so has to get the
best return.
To evaluate the main attributes for investing in the selected IT companies
listed at National Stock Exchange.

SCOPE AND IMPORTANCE OF STUDY

This study provides a precise presentation of data and guidelines that will help a
fresh investor as well as a venture investor to know vital aspects of investing. This
study helps to the investors to choose a safe investment and to identify the growth
opportunities in the future. IT industry is one of the major and important industries in
the world. Large numbers of foreign investors are coming and investing in Indian IT
sector due to its large potential growth in future. The scope of the study is limited to
five selected IT companies in India, analyzing the financial statements and periodical
reports published by the company and the information from the journals and
websites. The significance of the study lies in the fact that it helps to make decision
as regard to whether it is wise to invest in IT Companies in India and in case of
investment which is already made in the IT companies whether it is wise to hold or to
sell the shares. The investment decision is made on the basis of analysis of general
trend on IT sector. The study helps to select securities which maximizes the yield
and minimizes risk.

RESEARCH METHODOLOGY

Research methodology is a scientific and systematic way to solve research

problems. Researcher has to design his methodology. It deals with and takes into
consideration the logic behind the method. An extensive literature survey is
undertaken to understand the concept of financial performance. It also deals with
objectives of research study, the method of defining the problem, the type of data
collected, method used for collecting and analyzing data.
TYPE OF RESEARCH

The purpose of research is to discover answer through the application of scientific

procedures. The main aim of it is to find out the truth which is hidden and which is to
be discovered. The type of research used in the study is Historical research. It is
based on historical data. It attempts to find out what happened in the past and to
reveal reasons for why and how things happened.

RESEARCH DESIGN

This study is based on analytical nature and Out of the ten companies which were
taken on the basis of the market capitalization from the NSE listing and ranked
accordingly, five were selected to conduct a detail study. Fundamental analysis
involves finding the intrinsic value of the selected banking shares. It provides
additional strength to the investor in choosing the option of buy / sell strategy.

SOURCES OF DATA

Data of the study was collected from secondary sources. Data was collected from
the websites, Company websites, PROWESS database of Centre for Monitoring
Indian Economy Private Limited (CMIE), newspapers and periodicals were also
referred which includes,

1. Observations of financial status of the company

2. Study of intrinsic value and extrinsic factors of a company

3. Interaction with stock broker in the stock market

4. Internet

SAMPLE SIZE, SAMPLE DESIGN AND SAMPLING METHOD

According to the Indian IT industry, there is a total of 33 IT companies listed in NSE.
These total 33 companies have been taken as the population for the study. On the
basis of the relative performance of the companies in the market, 10 companies
have been chosen from the population and 5 ranked according to their market
capitalization. Thus, convenient sampling is used for carrying out the study. The
companies selected for the study are:

TCS
Infosys
Wipro
HCL Tech
Tech Mahindra

TOOLS FOR DATA ANALYSIS

Tools used in Fundamental Analysis

Earnings per Share (EPS) = PAT / No. of Equity shares. (Profit After Tax:
PAT)
Dividend per Share (DPS) = Dividend % * Face value of a share
Dividend Pay out Ratio (DPOR) = DPS /EPS
Average DPOR = Sum of DPOR / No. of years taken
Average Retention Ratio = 1- Average DPOR
Return On Equity (ROE) = PAT / Net worth where N.W = Capital + Reserves
and Surplus
Average Return on Equity = Sum of ROE / No. of years
Growth Rate in Equity = Average Retention Ratio * Average Return on Equity
Price Earnings Ratio = Market Price of the Share i.e. MPS / EPS
Normalized average P/E ratio = Sum of Price earnings Ratio / No. of years
Projected EPS for next year = EPS for the current year * (1+ Growth rate /
100)
Intrinsic value = Projected EPS * Normalized Price Earnings Ratio

Financial Ratios
 Price Earnings Ratio
P / E Ratio = Marketing Price of the Share i.e. MPS / EPS
Price To Book Value
Price to book value = Market Price of the Share / Book Value of the Share
Dividend Pay Out Ratio Dividend Pay Out Ratio = Dividend Per Share /
Earnings
Per Share * 100
Dividend Per Share
DPS = Dividend Paid to Equity Shareholders / No. of Equity
Return On Equity
ROE = Net Profit after Tax / (Equity Capital + Reserves & Surplus) * 100
Earnings Per Share
EPS= Net profit available to Equity Shareholders / No. of Equity Shares
Net Profit Margin
Net Profit Margin = Net Profit After tax / Net Sales
Current Ratio
Current Ratio = Current Assets / Current Liabilities
Quick Ratio (Liquid Ratio)
Quick Ratio = Quick Assets / Current Liabilities Quick Assets = Total
Current Assets Stock
Debt Equity Ratio
Debt Equity Ratio = Long Term Debts / Equity (Shareholder's Fund)

Valuation Methods

Discounted cash flow (DCF) analysis

Comparable transactions method
Multiples method
Market valuation

LIMITATIONS OF THE STUDY

The study is confined only to the IT companies in National Stock
Exchange.
Only 5 widely traded securities of the IT sector were taken for study.
 The data collected is secondary in nature.
A detailed study was not possible due to shortage of time.
The discussion of the tools of analysis is restricted by the time available and
size considerations for the project.
The accuracy and correctness of the tools used depend on the accuracy of
the published accounts.
The interpretation of ratios and charts may vary from one analyst to another.