Equity Valuation Models for IT Sector

Equity Valuation: IT Sector

Submitted By: - Submitted To:-

Kushal Jain Dr. Brajesh Kumar
20100019

Dr. Prageet Aeron
A (confidential) dissertation submitted in partial fulfillment of the
requirement for the degree of Master in Business Administration at the
Jindal Global Business School

O.P. Jindal Global University

August, 2011

MEMORANDOM

DATE: April 17, 2012

TO: Dr. Brajesh Kumar and Dr. Prageet Aeron

FROM: Kushal Jain

SUBJECT: Dissertation Report on Equity Evaluation: IT Sector

Respected Sirs,
I have much pleasure in submitting the thesis on “Equity Valuation: IT Sector”
The report has been made per the guide lines that were specified in the Dissertation Handbook
that was given to us at the beginning of it. This dissertation comprises about the evaluation
model and valuation error. The dissertation discusses about the various methods of valuating a
firm’s equity and to value the firms share for the coming future.

This was nice experience in both studying the equity valuation and choosing the topic for the
dissertationalso. The intricacies in getting the data for the concerned companies in the desired
from, which I came to know only after working on it.

I thank you on my behalf for giving an opportunity to work on this topic.

Yours faithfully,

Kushal Jain

ACKNOWLEDGEMENT

Iam very thankful to Dr, Brajesh Kumar and Dr. Prageet Aeron for their continuous support in

carrying out this dissertation.I express my sincere thanks to Prof. ManipadmamDatta, who laid

the basic step for choosing this topic for dissertation. I would also be thankful to other faculty

members who helped in getting the data for the analysis.

We express our sincere gratitude to Mr. Ajay Tiwari for extending his helping hand in getting the

data from Prowess data base.

I would also take this opportunity to thank my classmates (Nitish Mishra, Ankur Saraswat, and

Gautam Saini) in to be there by me at my difficult times in this dissertation.

Finally I would like to thank my Parents for giving me the opportunity in studying in this college

and for their continuous support which helped me in completing this dissertation.

1. Introduction

In today’s era every company needs cash or cash equivalents to run its day to day activities
smoothly. The major sources through which companies can borrow money are:

Bank Loans
Debenture
PreferenceShare
Equity Share

Bank Loan is the amount which companies receive after fulfilling all the required information
which is mandate according to the rules of banks. Companies need to mortgage its assets as
guarantee for the future repayment of its loan amt. on the loan bank charge interest which
company has to pay irrespective of the fact that company is in profit or loss. Debentures are the
instruments which are used to acknowledge the receipt of the debt form the debenture holders.
Debenture Holdersare sought lenders for the company. They are usually medium or long-term
debts for the company. Debenture holders are also paid interest as per the contract between
debenture holder and company. The interest has to be paid by the company whether company is
having any profits or not. Preference share are kind of special equity. As they have both rights
of equity shares and debt instruments. Preference shareholders are been paid dividend at a
specified percentage of the share value. The dividend is been paid only when company have
profits otherwise company have no obligation of paying dividends (depending upon the nature of
preference share issued) to its preference shareholders. Equity Shares are the most risky
instruments in comparison to all the instruments discussed above. Equity share holders are the
owners of the company and they get only the residual dividends after all the interests are been
paid. To save their stake in the company we need to do equity evaluation which will help in
understanding the correct information about the value for their money. As equity is a very
important instrument for any company and the value of the stock itself justify it. Share value is
divided into two parts first the previous year’s profits and future expectation so share valuation is
a very important aspect to judge companies working.

All assets have certain value. If a company wants to be successful in the market so they need to
understand the importance of equity valuation for its main investor’s interest. Equity holders are
been paid in the very last at the time of liquidation so it is very important to get equity valuation
of a company. While calculating equity value determine the value of assets under uncertain
conditions is difficult, since value of assets can be ambiguous. Therefore every public listed
company must publish their financial statement on its website because it will help investors to
understand the value of the firm by themselves. The biggest problem faced by the investors to
understand which method to follow in calculating through which they would get the least
absolute valuation error (AVE).

IT sector is the most booming sector in the Indian market at this current era. It is the fastest
growing industry in India and it has also provided huge employment to in Indian population
either directly or indirectly. In the field of outsourcing Indian has become one of the most
renowned name in the world because of IT industry. Contribution of Service sector in India’s
GDP isaround: 53.7% in the year 2009 (Wikipedia). As the dependence of the Indian population
or investors are increasing in the IT sector in the same way the risk is also increasing. So to
understand the industry and evaluate the risk factors through which we would be able to explain
to the investors about the future prospects so that they can invest in this sector accordingly.

Through this research we would be able to explain to the investor that where they should invest
and where they need to be bit cautious. In equity valuation we would be comparing different
models and would be analyzing which model provides the best result i.e. least absolute valuation
error. In this we will consider all the external facts as well what isthe impact of the accounting
standards, Political, social impact and others.

2. Research Objectives
 To understand the different valuation models.
 To evaluate the equity of IT firms for the coming future using FCFF valuation model.

3. Proposed Literature Review and Tentative Hypothesis

In the report of Penman and Sougiannis (1998) they studied the payoff between different discount
models using ex post payoff method. They made a portfolio of the stocks of NYSE, AMEX and
NASDAQ and then used dividend, Cash Flow and Residual Income models on it to fine the best
output model. The time period for which they examined was about 10 years and in the end they came
to a conclusion that Residual Income Model was the best among all in comparison to others.

Francis, Olsson and Oswald (2000) also did a research on the same topic which Penman and
Sougiannis (1998) did. This time in place of individual data they used forecasted data which was
highly unpredictable. Through their research they came to a conclusion that Residual Income model
is still better than the other models i.e. Cash Flow and Dividend Model.

AswathDamodaran (2006) did a research using mainly three models in his paper and those
models are:

Discounted Cash Flow Valuation
Liquidation and Accounting Valuation
Relative Valuation
Contingent Claim Valuation

After analyzing these they were able to find few trends from there research.Firstly there has been
a shift in models of valuation i.e. from dividend discount model to valuing business which
represents models in which the price is been coded by the acquirer company. Secondly that all
models are somewhat same but for that we need to take consistent assumptions which would
help in getting précises results.

As per the Modigliani and Miller (1961) who founded “Dividend Irrelevance Proposition” in
which when the investment policy remains the same and company pays dividend but still the
value of the firm remains the same as it was before. But in this case there are few assumptions
which should be kept in mind while following this model and those are:

The investors are rational, and have no effect form the earnings by capital gain or
dividends.

The market in which investor are investing in a perfect market which means that no
investor can impact the prices of the stock.
There is no difference in the tax rates between income from dividend or income from
capital gains.
Perfect Insurance i.e. that there would be no difference between stock and bonds as being
the source of finance.

3.1 Valuation Models

A valuation model consists of different valuation model which were to take every aspect of
valuation under it. Through these approaches we would be able to find the best fit in relation to
the IT Sector.As per the report by Nathalie Söderlund (2006) there are six most important models
which need to be evaluated at the time of equity valuation process and all those models are:

Assets Valuation Method (AVM)
Present Value of Expected Dividends (PVED)
Residual Income Valuation (RIV)
Residual Income Valuation Terminal Value Constrained [RIV(TVC)]
Abnormal Earnings Growth (AEG)
Abnormal Earnings Growth Terminal Value Constrained [AEG(TVC)]
Free Cash Flow to Firm (FCFF)

Assets Valuation Method (AVM) is the way in which we consider that what will be the value
of assets if we liquidate it today. Through this we would get the current valuation of the investors
and if we will also be able to get the current market values of companies assets from
AswathDamodaran (2006).

Present Value of Expected Dividends (PVED) method was recognizes by Williams [(1938,
Cited in Nathalie Söderlund (2006)]. This model focuses upon the discounted value to the future
dividend and it is one of the simplest approaches to work upon.

Residual Income Valuation (RIV)and Abnormal Earnings Growth (AEG)models are part of
conservative accounting procedure. Unconstrained and two types of constrained model

specifications are evaluated regarding their ability to withstand biases in book values and
earnings due to accounting conservatism. As RIV and AEG both are part of “Clean Surplus
Relation” which is an important aspect of conservative accounting process. (Skogsvik&Juettner-
Nauroth, 2009)

Residual Income Valuation (RIV) is mainly derived from the book value and it is part of the
firm’s total growth in progression. The total value under this method is been calculated by just
adding the book value which there in owners book plus the residual amount which is been left
over this year (Skogsvik&Juettner-Nauroth, 2009).

Abnormal Earnings Growth (AEG)model was introduced by Ohlson and Juettner – Nauroth
(2005, in Nathalie Söderlund (2006)]. This model is mainly calculated by taking future profits
also into consideration till perpetuity.

Residual Income Valuation (RIV)and Abnormal Earnings Growth (AEG)parsimonious versions
where the terminal value is set to zero at the horizon point of time. Through this we would be able
to followconservative approach to take the steady growth of the company all this could be taken
under Residual Income Valuation Terminal Value Constrained [RIV (TVC)]and Abnormal
Earnings Growth Terminal Value Constrained [AEG (TVC)].

In FCFFmodel the future cash flow is been considered for the valuation in place of the dividend in
PEVD model. In this the value is taken into calculation is the amount which is been left over after
all the expenses and the money which is to be reinvested is kept aside.

In order to understand the differences between all the models we have bifurcated it into different
concepts. So these concepts are:

Conservative approach is process when company takes all the losses at the time of
expectation and profits at the time of occurrence.
Dividend Basedapproach means take the future dividend discounting into consideration
for its calculation.
Cash Based means when dividend in not been discounted but the future cash vales is
been taken into mind while valuation.

Terminal Value approach follows the final amount which is their in the hand of the
investor at the time of liquidation of the business.

Basis AVM PVED RIV RIV (TVC) AEG AEG (TVC) FCFF
Conservative     
Dividend based 
Cash based  
Terminal Value   

Table 1

3.2 Tentative Hypothesis

To make our research successful we need to work on few hypotheses which would prove our
research that what all we assume are valid or invalid and would help us to give thee answer for
our research. The hypotheses which we would be considering are:

Hypothesis:FCFF provides no significant difference in absolute errors results compared.

Penman and Sougiannis (1998) and Francis, Olsson andOswald´s (2000) results indicate the RIV
model provides less valuation bias compared to both FCFF and PVED. This will be investigated
further in hypotheses 8-11, including both the constrained and unconstrained versions of RIV and
AEG.

4. Aim of the Research

Through this research we are trying to understand the important equity valuations models. How
and what are the impacts of these valuation models. We are here to understand a best investment
model which would comprise of a portfolio of securities which would generate profits in the
coming future. As a best model has not yet been found but we will try to reach as close as
possible to it through our research by doing robust calculation and using appropriate models..

The main focus would be to value the equity of IT firms by using FCFF model through which we
would be able forecast the values in the coming future and which are very close to the market

value. Hence, the investment model will have the ability to withstand the factors causing
valuation error will be empirically evaluated. The primary idea behind this research is to
understand the results provided by the FCFF investment models to the market prices and observe
how large valuation errors occur.

We also want to study the effect of the accounting standards in at the time of valuation as it is also
one to the important aspect which should be taken into consideration while calculating and the
impact of it on any model. As there are there would be change in the Accounting Standards from
Accounting Standards to International Financial Reporting Standards (IFRS). So we what this
should also be taken into consideration and our model must consider inherit risks form the
variation of these standards.

The main idea for this research was to sundersatnddifferend valuation models and to predict the
pices of the equity of the IT firms using FCFF model. We want to reduce the risk of uncertainty for
the investors at the time of selecting an IT stock in our portfolio.

5. Investment Valuation Models

In a normal accounting process all the assets are been kept at book values and are been
depreciated at the prescribed rate by the Companies Act/ Income Tax Authorities of India. But in
the process of valuation models are considered as pro forma accounting methods with various
regulations for what to be valued in order to represent the value of equity. Different types of
valuation models use different ways of calculating present values like discount valuation model,
calculating future payoffs back to present value to deduce the equity price.

5.1. Basic Assumptions for valuation models are:
(a) Dividends and new issues are to be settled at the end of coming time period and on
the marked to market basis.
(b) Future risk of investments are been considered in either discount rates or as the part
of required rate of return over a certain equity/debt.
(c) Valuation of the companies will be done taken time to be zero.
5.2. Discount Rate

Every investor has its own risk appetite therefore their return over the investments also varies
with their risk profile. But for this paper we have taken a common required rate of return which
is been calculated using CAPM (Capital Asset Pricing Model). This model is considered to be a
good evaluator of the required rate of return for the investors. The Model is

rP= Risk Premium
βE = Beta of a particular stock
rF= Risk Free rate of return

5.3. Free Cash Flow to Firm, FCFF

Under this valuation model we need to take the firms free cash into consideration. To get to the
value of the firm we will discount it with the Weighted Average Cost of Capital (WACC) return
rate which will also be assumed as barrier rate over which a company had to pay to its investors.
The things we need to take out from a company’s balance sheet to calculate FCFF are
EBIT*(1-t)
+ Depreciation
-1Change in net working capital
-Capital expenditures .
=Free Cash Flows to Firm (FCFF)

Formulation of FCFF: V0FCFF= ∑ E0(FCFFt)/Rwacct+ [E0(FCFFT+1)/(rET+1-g)]/RwaccT

Formulation of WACC: rwacc = D/ (D+E)*rD*(1-T) + E/ (D+E)*rE

6. Research Methodology

This research would be mainly exploratory based and the data which will be used is somewhat
secondary because for this we need balance sheet of the companies and those balance sheets
would be available on the website of the company. This research would be primarily lab based as
we would be observing the share prices of the IT stocks as well while we would be doing all the
calculations which would be required to conduct our research appropriately. In this research we

would be analyzing different valuation models on previous 5 years (2005-2010) financial reports
of the companies mainly from IT sector. We have to understand method(FCFF) and our main
aim is to find out the model which is most accurate to understand the company’s market price
and from the average we get the smallest absolute variation error. We will analyze 3 companies
of IT sector form 2010 to 2017Expected (E). The underlining rational through which we can
understand and forecast the future pricing. This would help investors to arbitrage the gap and get
the best of the investment plan.

In this whole proposition we would have to take few assumptions which would help our model to
be work successfully and we understand that through those assumptions the accuracy of our
model would not be 100% but we need to take those assumptions which will not drastically
change our research model.

Through this we would be able to understand all the models and their impact on the IT Sector
and their future implications.

7. Valuation Methodology

All the derived prices are compared with the market price of that company. The market price is
also the adjusted closing price of that company.

For the FCFF model we have taken Change In working Capital from Cash Flows Statement
(CFS) generated by the company. For capital expenditure we have taken it from the Cash Book
value of the stock is been expressed by dividing the total equity value in the balance sheet by the
no. of shares mentioned in the balance sheet and is used as an estimator for Bvt.

Dividend is the amount which is been paid by the company to its investors. The dividend should be
paid to the same no. of investors which are mention in the balance sheet. Dividends per share are
used as an estimator of Divt.

The earnings per share are the amount of company´s profit in per share terms. Hence, the total
profit divided by current outstanding shares of common stock. Earnings per share are used as
an estimator for Xt.

The price per share represents the market price of the value of owner´s equity per common share.
Price per share is used as an estimator for Pt, calculated by taking the average share price of the
year.

Flows for Investing Activates in the cash flows statement generated by the companies itself. The
tax is been taken as the tax paid which is written in the CFS. Depreciation was been separately
given either in the Income and Expenditure Statement or in the Expenditure Schedules of the
Companies.

We have calculated discount rate, beta of the equity and growth rate by our own set of
calculations. AS all the mentioned information is not directly present in the balance sheets of the
companies tax rate is been taken as 30% as it is the corporate tax rate in the country

7.1. Tax Rate (t)

For all the calculations tax rate is been taken as 30% which is equivalent to the corporate tax rate
applied by Income Tax Authorities of India. We would require tax rate for calculating discount
rate, WACC, FCFF.

7.2. Discount rate

This section explains how the cost of equity and cost of debt´s inputs were calculated.

7.2.1 Risk Free Rate (rE)

Risk free return securities are the minimum risk return securities. It is used to calculate both the
cost of equity as well as cost of debt. It is been used in the formulas in calculating the before
mentioned. It is the rate at which RBI Bank tends to take money from the market. The current
rate sa on 30-3-2012 prevailing at 8.5%p.a

7.2.2 Cost of Equity (rE)

It is the cost which is somewhere equivalent to the expectations of the investors from the stocks
of the company. It also includes beta into its calculation which tells an investor the systematic

risk which investor is taking by buying a stock of a particular company. Beta value tell us the
responsiveness of the stock in comparison to market movement.

7.2.3 Cost of debt (rP)

It is the rate at which company is able to get its loan from the market. It is used to calculate Kd
in WACC. Cost of debt includes the cost of defaulting in addition to risk free return.

7.3. Growth rate (g)

It is very important to understand the growth rate of the IT sector. We have taken it to be above
the average of the growth rate from the years 2005 – 2010 to 35%p.a. As in this period the IT
companies have seen the best as well as the worst periods in the recent times so we assume that
this will be a good proxy for future projection for the coming 5 years, after that the IT sector
will also saturate and will grow at a rate of 25%p.a. till infinity.

7.4. Valuation Assumptions

 The companies will grow approx. 35%p.a by revenue till 2016

 After 2016 companies will grow at 25%p.a till perpetuity

 Expenditure rate will be same as it is of the average of (2005 to 2010) revenue

 CAPEX and Change in Working Capital is based on PAT (After Extraordinary Items)

 Deprecation is based on the increase and decrease in the CAPEX in the last year

 Betas of the firms are on the bases of the prevailing betas values in the financial years
2005 and 2006 for the calculation for the 2011E till perpetuity

 Debt to Equity ratios are based on the current years [2010] ratios

 Market return is been taken

2011E 2012E 2013E 2014E 2015E 2016E 2017E Till Perpetuity

43.5 42.5 41.5 41 41 41 36 36

 Risk Free rate is been considered as

2011E 2012E 2013E 2014E 2015E 2016E 2017E Till Perpetuity

8.5 7.5 6.5 6 6 6 6 6

 We have not taken year 2009 into calculations as that year’s data is very wearied and is
nowhere useable for the calculations purpose.

8. About Companies

8.1 Infosys

An Infosys technology LTD. was started by seven entrepreneurs Nagavara Ramarao, Narayana
Murthy, Nandan Nilekani, Kris Gopalakrishnan, S. D. Shibulal, K Dinesh and with N. S.
Raghavan. It is one of the oldest IT solutions Company in India which was established in the
year 1981. It was officially begin with US $250. During the first two years of its existence it
didn’t have a computer but still they are able to take the company to such a high level which we
all couldn’t think off.

Infosys is a global company and it has 64 offices and 68 developed centers in India, China,
Australia, The Czech Republic, Poland, U.K, Canada and Japan with a global workforce 145,088
till 31st December 2010. Infosys was the first company to use Global Delivery Model (GDM)
which is now been seen as most beneficial for the company in getting the offshore contracts for
the company. GDM follows the principle of taking work to the best available talent which is
economically sensible for the company’s growth.

8.2 Tata Consultancy Services

Tata Group is a very well-known name in the Indian context. Tata Group is the one of the oldest
companies in the Indian market. It was started in the year 1868 by its founder Jamshedji Tata.
Tata Group is a much diversified group as it has companies in steel, energy, retail,
communication, information technology (IT), and many more. Tata Consultancy Services (TCS)
is subsidiary of Tata Group in the field of information technology industry.

TCS is raked at 20th spot in the list of Fortune India 500 magazine. It is the largest technology
provider company in India.it was started in way back in 1969 and since then it has around 142

offices in 47 countries. It generates around 30% of the Indian IT exports revenue from its
services.

8.3 Wipro Ltd.

Wipro was started in the year 1945 by Mohamed HashamPremji. In the beginning Wipro
Limited was known as Western India Products Limited. Initially it was been setup as a vegetable
and oil manufacture company. As in the year 1966 the visionary AzimPremji became the
chairman of the company started doing changes and changed its business to IT outsourcing. In
today’s time Wipro is around 120,000 employees working for it. It is 9th most valuable brand as
per the survey done by Brand Finance and The Economics Times in the year 2010.

9. Research
As in the above section we have undertaken different valuation models for our understanding but
now we are trying to predict the future equity valuation of the companies which comes under the
IT sector. For this we have taken the previous data of the companies from their respective
websites and balance sheet. We have extrapolated it till the year 2017E. For this we have taken
the growth rate above the average of the growth rate form the year 2005 till 2010 to be 35%p.a.
As this was the period which has seen the worst and the best times in their business cycle
therefor it will be a good proxy for us to take in the coming future. Till 2016E we have taken the
average rate and after that we have considered 25%p.a to be the growth rate as we expect the
market to saturate a bit and few more to add in which will slow down the growing pace of the
undertaken companies. We have taken the expenditure to be the average of the % of revenue for
the future as well. By taking this we are able to come to a situation wherein we have the profits
of the companies till the year 2017E (Table 1 – Table 3). By using the WACC of the respective
companies we will discount it year wise to get a value for the firm.

Infosys Technologies `in Cr.
Particulars 2005 2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E

Revenue 6,860 9,028 13,149 15,648 21,693 22,742 30,702 41,447 55,954 75,538 101,976 137,667 172,084

less: Operating Exp. (4,535) (6,039) (8,924) (11,285) (14,498) (14,881) (22,105) (29,842) (40,287) (54,387) (73,423) (99,121) (123,901)

Less: Dep. (268) (409) (469) (546) (761) (905) (1,823) (2,354) (3,079) (4,065) (5,403) (7,216) (9,669)

EBIT 2,057 2,580 3,756 3,817 6,434 6,956 6,773 9,251 12,588 17,085 23,150 31,331 38,515

Less: interest - - - - - - - - - - - - -

PBT 2,057 2,580 3,756 3,817 6,434 6,956 6,773 9,251 12,588 17,085 23,150 31,331 38,515

Other Income (Net) 127 144 375 683 475 934 1,535 2,072 2,798 3,777 5,099 6,883 8,604

Less: Tax Paid (283) (548) (421) (483) (902) (1,753) (1,228) (1,658) (2,238) (3,022) (4,079) (5,507) (6,883)

PAT 1,901 2,176 3,710 4,017 6,007 6,137 7,080 9,665 13,147 17,841 24,170 32,708 40,235

Extraordinary Items 45 - 6 - - - - - - - - -
(Income)
PAT (After
Extraordinary 1,946 2,176 3,716 4,017 6,007 6,137 7,080 9,665 13,147 17,841 24,170 32,708 40,235
Items)
Add: Dep. 268 409 469 546 761 905 1,823 2,354 3,079 4,065 5,403 7,216 9,669

Less: CAPEX (940) (392) (1,091) (978) (213) (3,673) (2,124) (2,900) (3,944) (5,352) (7,251) (9,812) (12,071)

Less: Change in WC (676) (120) 607 (675) (460) (40) (354) (483) (657) (892) (1,208) (1,635) (2,012)

Free Cash Flow to 598 2,073 3,701 2,910 6,095 3,329 6,425 8,637 11,625 15,662 21,114 28,476 35,822
Firm
Table 1

TCS Technologies `in Cr.

Revenue 9,748 13,264 18,685 22,620 27,813 30,029 40,539 54,728 73,882 99,741 134,651 181,778 227,223


Less: Dep. (159) (282) (343) (564) (564) (661) (932) (1,219) (1,609) (2,136) (2,849) (3,812) (5,114)

EBIT 2,553 3,402 4,795 5,148 6,606 8,034 9,203 12,463 16,862 22,799 30,814 41,632 51,692

Less: interest (15) (9) (3) (30) (29) (16) (15) (20) (27) (36) (49) (66) (83)

PBT 2,538 3,393 4,792 5,118 6,577 8,018 9,188 12,443 16,835 22,763 30,765 41,566 51,609

Other Income (Net) 96 134 217 728 (427) 272 2,027 2,736 3,694 4,987 6,733 9,089 11,361

Less: Tax Paid (359) (597) (364) (1,090) (1,212) (1,907) (1,622) (2,189) (2,955) (3,990) (5,386) (7,271) (9,089)

PAT 2,275 2,930 4,644 4,756 4,938 6,382 9,594 12,990 17,573 23,760 32,111 43,384 53,881

Extraordinary Items - - - - - - - - - - - - -
(Income)
PAT (After
Extraordinary 2,275 2,930 4,644 4,756 4,938 6,382 9,594 12,990 17,573 23,760 32,111 43,384 53,881
Items)
Add: Dep. 159 282 343 564 564 661 932 1,219 1,609 2,136 2,849 3,812 5,114

Less: CAPEX (2,744) (1,434) (2,076) (2,519) (3,435) (5,413) (5,756) (7,794) (10,544) (14,256) (19,267) (26,030) (32,329)

Less: Change in WC (397) (561) (451) (1,328) 187 480 (672) (909) (1,230) (1,663) (2,248) (3,037) (3,772)

Free Cash Flows to (707) 1,217 2,460 1,472 2,255 2,110 4,098 5,506 7,408 9,977 13,446 18,129 22,895
Firm
Table 2

Wipro Ltd. `in Cr

Revenue 7,233 10,227 14,998 17,820 21,027 27,213 36,737 49,596 66,954 90,388 122,024 164,732 205,915


Less: Dep. (172) (278) (370) (456) (534) (754) (1,600) (2,736) (4,168) (6,019) (8,449) (11,673) (15,979)

EBIT 1,669 2,191 3,015 3,587 3,745 5,195 7,585 9,663 12,570 16,578 22,057 29,510 35,500

Less: interest (6) (3) (12) (117) (197) (123) (137) (185) (249) (337) (454) (613)x (767)

PBT 1,664 2,188 3,003 3,470 3,548 5,072 7,448 9,479 12,321 16,241 21,602 28,897 34,733

Other Income (Net) 94 152 296 46 (895) 438 145 195 264 356 481 649 812

Less: Tax Paid (224) (431) (425) (517) (698) (791) (1,102) (1,488) (2,009) (2,712) (3,661) (4,942) (6,177)

PAT 1,533 1,910 2,873 2,998 1,956 4,718 6,491 8,186 10,576 13,886 18,423 24,604 29,367

Extraordinary Items - - - - - - - - - - - - -
(Income)
PAT (After
Extraordinary 1,533 1,910 2,873 2,998 1,956 4,718 6,491 8,186 10,576 13,886 18,423 24,604 29,367
Items)
Add: Dep. 172 278 370 456 534 754 1,600 2,736 4,168 6,019 8,449 11,673 15,979

Less: CAPEX (869) (1,694) (1,953) (1,128) (3,663) (3,382) (4,543) (5,730) (7,403) (9,720) (12,896) (17,223) (20,557)

Less: Change in WC (1) (229) (361) (2,384) 1,149 (650) (519) (655) (846) (1,111) (1,474) (1,968) (2,349)

Free Cash Flows to 835 264 929 (58) (24) 1,441 3,028 4,536 6,495 9,074 12,502 17,086 22,439
Firm
Table 3

References

AswathDamodaran (2006) - http://people.stern.nyu.edu/adamodar/pdfiles/papers/valuesurvey.pdf

(Skogsvik&Juettner-Nauroth, 2009) - http://swoba.hhs.se/hastba/papers/hastba2009_011.pdf

Nathalie Söderlund - (PDF: Equity Valuation - An examination of which investment valuation method appears to attain the closest value to the
market price of a stock)

Penman and Sougiannis (1998) - http://www.allbusiness.com/accounting/methods-tandards/806056-1.html

GDP facts - http://business.mapsofindia.com/india-gdp/sectorwise/

Fisk free rate –http://indiastat.com/

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