Corporate finance project on infosys

1. Presented by
Neelutpal Saha
Chandra Kant Rai
Ankita Sharma
Tarun Sharma
Shan Lal

2. Content
•About Infosys
•Business Strategy
•Capital Structure
•Calculation of Cost of Capital
•Analysis of last 5 years
•Effect of WACC on Stock Market Valuation
•Analysis of Dividend Payout for last 5 years
•Effect of Dividend Payout on Stock Market Valuation
•Working Capital Management

3. About Infosys
•Infosys Ltd is a global technology services firm that defines, designs and delivers information technology (IT)-enabled business solutions to their clients. The company provides end-to-end business solutions that leverage technology for their clients, including technical consulting, design, development, product engineering, maintenance, systems integration, package- enabled consulting, and implementation and infrastructure management services.
•Infosys Ltd is a public limited and India's second largest software exporter company was incorporated in the year 1981 as Infosys Consultants Pvt Ltd by Mr.N.R.Narayana Murthy at Karnataka. The company was started by seven people with the investment of USD 250. The company became a public limited company in the year 1992. The company was the first Indian company to be listed on the NASDAQ at the year 1999. Infosys also forms a part of the NASDAQ-100 index. Continuously in the year 2001, 2002 and 2003, the company wins the National award for excellence in corporate governance conferred by the Government of India.

4. Business Strategy
•Infosys Technologies has 47% of core business assets stagnating. The company scanning the markets of Europe and Japan for acquisitions in the price bands of USD 200 - USD 300 million to energies their non-linear business strategy as well as to expand its geographic reach.
•Infosys set up various Special Economic Zone that for the company has an additional tax benefit. They set up another Special Economic Zone unit in Chandigarh which will be eligible for 100 % deduction of profit from exports tax calculation for the first five years followed by 50% deduction for next five years.
•Infosys has been pursuing their expansion plans over the past few years. The future enhancement of the company is to emerge the developing economies changing the business landscape with help of accessible talent pools and the adoption of non-linear growth model, it is a long term strategy.

5. Capital Structure
(Rs in Crs)
Year Mar 2014 Mar 2013 Mar 2012 Mar 2011 Mar 2010 Mar 2009 Mar 2008 Mar 2007 Mar 2006 Mar 2005
Share Capital 286 287 287 287 287 286 286 286 138 135
Reserves Total 41,806.00 35,772.00 29,470.00 24,214.00 21,749.00 17,523.00 13,204.00 10,876.00 6,759.00 5,107.00
Equity Share Warrants 0 0 0 0 0 0 0 0 0 0
Equity Application Money 0 0 0 0 0 0 0 0 0 0
Total Shareholders Funds 42,092.00 36,059.00 29,757.00 24,501.00 22,036.00 17,809.00 13,490.00 11,162.00 6,897.00 5,242.00
Secured Loans 0 0 0 0 0 0 0 0 0 0
Unsecured Loans 0 0 0 0 0 0 0 0 0 0
Total Debt 0 0 0 0 0 0 0 0 0 0
Other Liabilities 364 120 21 25 0 0 0 0 0 0
Total Liabilities 42,456.00 36,179.00 29,778.00 24,526.00 22,036.00 17,809.00 13,490.00 11,162.00 6,897.00 5,242.00
SOURCES OF FUNDS :
Infosys is a wholly equity based company with zero debts. So its Weighted Average Cost of Capital
consists of Cost of Equity only

6. Weighted Average Cost of Capital

7. Calculation of Cost of Capital
•Step 1: Calculation of beta
•According to the excel sheet beta value is 0.43 approximately
•Average Sensex return is 20%
•Risk free return = RBI 91 day treasury bill at 8.63%
Therefore Cost of Equity: Ke = Rf + β(Rm- Rf)
= 8.63+0.43(20-8.63)
= 13.52 %
Here Weight of Equity We = 1
Thus Weighted Average Cost of Capital(WACC) of Infosys is (13.52*1)=13.52%

8. Analysis of last 5 years
•Infosys have never taken any debt from the market so it is zero in all cases
•Infosys have not done any stock split in the last 5 years
•From this data it is clear that Infosys bought back shares from the market, though it increased the number of shares in 2012-2013 through FPO. This was probably due to the falling share price in between and to increase the investor’s confidence in Infosys shares
Infosys Equity
Full Year
Full Year
Var(%)
Full Year
Full Year
Var(%)
March 2014
March 2013
March 2013
March 2012
Public Shareholding (No Of. Shares)
390,257,428.00
411,267,871.00
-5.11
411,267,871.00
404,781,601.00
1.6
Public Shareholding (% in Equity)
67.96
71.62
-5.11
71.62
70.49
1.6

9. Effect of WACC on Stock Price
•Economic Value-Added is the surplus generated by an entity after meeting an equitable charge towards providers of capital. It is the post-tax return on capital employed (adjusted for the tax shield on debt) less the cost of capital employed. Companies which earn higher returns than cost of capital create value, and companies which earn lower returns than cost of capital are deemed harmful for shareholder value.

11. •Infosys is registered its highest EVA in comparison to its competitors. Comparison among Infosys has been able to add value for its shareholders on a consistent basis. The ability to create value consistently shows the ability of the firms in earning economic profits in excess of the cost of capital

12. Dividend Policy

13. Analysis of Dividend Payout for last 5 years
Mar '14 (in Cr.)
Mar '13 (in Cr.)
Mar '12 (in Cr.)
Mar '11 (in Cr.)
Mar '10 (in Cr.)
12 mths
12 mths
12 mths
12 mths
12 mths
PBT
14,002.00
12,357.00
11,580.00
8,821.00
7,520.00
Tax
3,808.00
3,241.00
3,110.00
2,378.00
1,717.00
PAT
10,194.00
9,116.00
8,470.00
6,443.00
5,803.00
Equity Dividend
3,618.00
2,412.00
2,699.00
3,445.00
1,434.00
Dividend as % of PAT
35%
26%
32%
53%
25%
Dividend Policy
Infosys's earlier policy was to pay dividend of up to 30% of the PAT. At the board meeting held on April 15, 2014 the Board decided to increase the dividend pay-out ratio to up to 40% of the PAT effective fiscal year 2014.
The dividend policy is to distribute up to 30% of the consolidated Profit After Tax (PAT) of the Infosys group as dividend.
The dividend policy is to distribute up to 30% of the consolidated Profit After Tax (PAT) of the Infosys group as dividend.
The dividend policy is to distribute up to 30% of the consolidated Profit After Tax (PAT) of the Infosys group as dividend.
The dividend policy is to distribute not more than 25% of PAT as dividend. This is applicable to standalone Indian GAAP.
30th year special dividend- Rs. 1722 Crores
Dividend Paid as per Policy
1,723.00
Dividend as % of PAT
27%

14. Effect of Dividend Payout on Stock Market Valuation
When a dividend is paid, several things can happen. The first of these is changes to the price of the security and various items tied to it. On the ex-dividend date, the stock price is adjusted downward by the amount of the dividend by the exchange on which the stock trades. For most dividends this is usually not observed amidst the up and down movements of a normal day's trading. It becomes easily apparent, however, on the ex-dividend dates for larger dividends. The reason for the adjustment is that the amount paid out in dividends no longer belongs to the company and this is reflected by a reduction in the company’s market cap. Instead, it belongs to the individual shareholders. For those purchasing shares after the ex-dividend date, they no longer have a claim to the dividend, so the exchange adjusts the price downward to reflect this fact.

15. From the dividend announcement date till the record date, the share prices keep moving up since investors buy into such shares to get dividends. But, Share prices fall on the ex-date.
•Let’s assume that Infosys is currently trading in the market for Rs 3500 per share. And let’s further assume that the company decides to declare a dividend of 60 per cent with a record date of Monday, September 15.
•The face value of the stock of Infosys is Rs 10. This means the dividend works out to Rs 6 per share. Investors buy into the share to be entitled to the dividend. This could explain the spike in share price when a stock is cum-dividend (trading with dividend before the ex-date).
•However, the stock market sees the actual payout of dividends as the company giving up a part of its profits, thereby reducing its cash reserves.
•Also, since buyers on or after the ex-date are not entitled to the dividend, share prices drop by the amount equivalent to the dividend per share as a way of compensation. This is why Infosys’s share price will probably fall by Rs 6 when the stock goes ex-dividend (without dividend).
Effect of Dividend Payout on Stock Market Valuation (CONTD)

16. Working Capital Management

17. 'Debt/Equity Ratio‘ = A measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity. Here, it indicates that infosys have no proportion of equity and debt so as to use to finance its assets.

18. 'Current Ratio' A liquidity ratio that measures a company's ability to pay short-term obligations.
The trend shows that infosys have enough cash to recover from any short term obligation. Which in turn gives a sign of having good financial health.

19. 'Inventory Turnover' A ratio showing how many times a company's inventory is sold and replaced over a period. = SALES / INVENTORY Since Infosys being an IT company only makes (develops software) on order (when receives project) its inventory is zero in all cases and Inventory Turnover Ratio is zero

20. 'Receivables Turnover Ratio' An accounting measure used to quantify a firm's effectiveness in extending credit as well as collecting debts.
Infosys having high Debtor turnover ratio trend shows that By maintaining accounts receivable, firm is indirectly extending interest-free loans to their clients. A high ratio implies either that company operates on a cash basis or that its extension of credit and collection of accounts receivable is efficient.

21. 'Interest Coverage Ratio'
A ratio used to determine how easily a company can pay interest on outstanding debt.

22. Interest Coverage Any company that finds itself in jeopardy of defaulting on its interest payments is likely to encounter an escalating set of financial problems that are sure to affect the holdings of both shareholders and lenders. Interest coverage ratio indicates the comfort with which the company may be able to service the interest expense (i.e. finance charges) on its outstanding debt. Higher interest coverage ratio indicates that the company can easily meet the interest expense pertaining to its debt obligations. In our view, interest coverage ratio of below 1.5 should raise doubts about the company’s ability to meet the expenses on its borrowings. Interest coverage ratio below 1 indicates that the company is just not generating enough to service its debt obligations. INFY continued to be debt-free and has maintained sufficient cash to meet its strategic objectives which is a positive signal to the stockholders
Effect on stock price