In this paper, we would like to answer the questions such as Is it worthwhile investing in such software companies? Will capital appreciation of software companies continue in the future? It is important to analyze whether investors will be benefitted by investing in this software industry or whether software companies’ outperformance over other industries is just the temporary phase. Finally, we would like to suggest our recommendations over software industries whether investors should buy/sell/hold the stock of these companies based on our analysis.

1. Stock Prices Valuation of IT Companies in India:
An Empirical Study
“An Empirical study Using
Dividend Discount Models for
Stock Prices Valuation of IT
Companies in India”
By -
Dr.Punit Kumar Dwivedi
By
Prestige Institute of
Preeti Rajpal
Management and Research
Prestige Institute of
Management Prof. Deepesh and Mamtani
Research
Prestige Institute of
Management Dr.Punit Kumar and Dwivedi
Research
Preeti Prestige Rajpal
Institute of
Management Prestige Institute and of
Research
Management and Research

2. Introduction
Introduction
Security analysis of software companies with specific emphasis on
fundamental analysis using dividend discount models is the focus of this
paper.
Security analysis of software companies with specific emphasis on fundamental
analysis using dividend discount models is the focus of this paper.
The basic idea of the dividend discount models is that the intrinsic value of an equity
share is a function of the earnings level, growth rate, and risk exposure of a company.
These in turn depend to a great extent on the prospects of the industry to which
company belongs.
Indian IT industry continues to strengthen their market value. Indian companies such
as with Tata Infotech, Infosys technologies, Cognizant etc. have outperformed the
market significantly, and it is projected that the industry will grow at a fast rate in next
few years. Therefore, the IT industry seems very attractive to investors.
In this paper, we would like to answer the questions such as (1) is it worthwhile
investing in such software companies?; and (2) will capital appreciation of software
companies continue in the future? It is important to analyze whether investors will be
benefitted by investing in this software industry or whether software companies’
outperformance over other industries is just the temporary phase. Finally, we would
like to suggest our recommendations over software industries whether investors
should buy/sell/hold the stock of these companies based on our analysis
The basic idea of the dividend discount models is that the intrinsic value
of an equity share is a function of the earnings level, growth rate, and
risk exposure of a company. These in turn depend to a great extent on the
prospects of the industry to which company belongs.
Indian IT industry continues to strengthen their market value. Indian
companies such as with TCS, Infosys technologies, Cognizant etc. have
outperformed the market significantly, and it is projected that the industry
will grow at a fast rate in next few years. Therefore, the IT industry seems
very attractive to investors.

3. Introduction
In this paper, we would like to answer the questions such as
(1) Is it worthwhile investing in such software companies?
(2) Will capital appreciation of software companies continue in the
Security analysis of software companies with specific emphasis on fundamental
analysis using dividend discount models is the focus of this paper.
The basic idea of the dividend discount models is that the intrinsic value of an equity
share is a function of the earnings level, growth rate, and risk exposure of a company.
These in turn depend to a great extent on the prospects of the industry to which
company belongs.
Indian IT industry continues to strengthen their market value. Indian companies such
as with Tata Infotech, Infosys technologies, Cognizant etc. have outperformed the
market significantly, and it is projected that the industry will grow at a fast rate in next
few years. Therefore, the IT industry seems very attractive to investors.
In this paper, we would like to answer the questions such as (1) is it worthwhile
investing in such software companies?; and (2) will capital appreciation of software
companies continue in the future? It is important to analyze whether investors will be
benefitted by investing in this software industry or whether software companies’
outperformance over other industries is just the temporary phase. Finally, we would
like to suggest our recommendations over software industries whether investors
should buy/sell/hold the stock of these companies based on our analysis
future?
It is important to analyze whether investors will be benefitted by
investing in this software industry or whether software companies’
outperformance over other industries is just the temporary phase.
Finally, we would like to suggest our recommendations over
software industries whether investors should buy/sell/hold the
stock of these companies based on our analysis

4. Multiple Year Holding Period
Dividend Discount Model
Multiple Year Holding Period Dividend
Discount Model
If investor plans to hold a stock for two years, the value of the stock is the present value of the
expected dividend in first year, plus the present value of the expected dividend in second year,
plus the present value of the expected selling price at the end of two years. For an n-periods
model, the value of a stock is the present value of the expected dividends for the n periods
plus the present value of the expected price in n periods.
If investor plans to hold a stock for two years, the value of the stock is the present value of
the expected dividend in first year, plus the present value of the expected dividend in second
year, plus the present value of the expected selling price at the end of two years. For an n-periods
the n periods plus the present value of the expected price in n periods.
Formula
model, the value of a stock is the present value of the expected dividends for
Formula:
Pο= Σ (d)(1+g)ⁿ + (p/e)(eₒ)(1+g)ᴺ+ˡ
Pο= Σ (d)(1+g)ⁿ + (p/e)(eₒ)(1+g)ᴺ+ˡ
( 1 +r)ⁿ (1+r)ᴺ
Where,
( 1 +r)ⁿ (1+r)ᴺ
Where,
d = recent dividend paid
g = annual expected growth in earnings
d = recent dividend paid
g = annual expected growth in earnings
dividends and price.
dividends and price.
eₒ = most recent earnings per share
p/e = price earning ratio
r = required rate of return
N = holding period in years
eₒ = most recent earnings per share
p/e = price earning ratio
r = required rate of return
N = holding period in years

5. Review Of Literature
Review Of Literature
Shiller (1981) found the volatility of stock prices to be six to twelve times its upper limit .The research
following this conclusion has been twofold.
Firstly, much research has been done that accept the results from the variance bounds framework and
set out to explain the excess volatility found. Most other research following the findings focused on the
viability of the variance bounds framework. The research that set out to explain the observed excess
volatility in stock prices found many different causes for this phenomenon.
DeBondt and Thaler (1985) and West (1987) attributed it to rational bubbles while Gutierrez and
Vazquez (2004) attributed it to regime-switching in the dividend process. DeLong et. al (1990) and
Campbell and Kyle (1993) attributed it to the presence of noise traders in the market. For a complete
review of the studies on stock price volatility, please refer to West (1988). None of these explanations,
however, has led to a valuation model that explains the data better than the dividend discount model.
The other strand of research has focused on the validity of the use of the variance bounds framework to
test for the aforementioned relation.
The frameworks used in both Shiller (1981) and Leroy and Porter’s (1981) have econometric problems
which are considered to invalidate the results. By altering the variance bounds framework, Kleidon
(1986) explicitly reject the framework used by Shiller (1981) that employs a time-series variance bounds
test. By replacing this framework by a cross-sectional variance bounds test, they find that the validity of
the traditional dividend discount model cannot be rejected. Flavin (1983) adopts a different point of
criticism on the variance bounds framework.
Shiller (1981) found the volatility of stock prices to be six to twelve times its upper
limit .The research following this conclusion has been twofold.
Firstly, much research has been done that accept the results from the variance bounds
framework and set out to explain the excess volatility found. Most other research
following the findings focused on the viability of the variance bounds framework.
The research that set out to explain the observed excess volatility in stock prices
found many different causes for this phenomenon.
DeBondt and Thaler (1985) and West (1987) attributed it to rational bubbles while
Gutierrez and Vazquez (2004) attributed it to regime-switching in the dividend
process. DeLong et. al (1990) and Campbell and Kyle (1993) attributed it to the
presence of noise traders in the market. For a complete review of the studies on stock
price volatility, please refer to West (1988). None of these explanations, however, has
led to a valuation model that explains the data better than the dividend discount
model.

6. Review Of Literature
Review Of Literature
Shiller (1981) found the volatility of stock prices to be six to twelve times its upper limit .The research
following this conclusion has been twofold.
Firstly, much research has been done that accept the results from the variance bounds framework and
set out to explain the excess volatility found. Most other research following the findings focused on the
viability of the variance bounds framework. The research that set out to explain the observed excess
volatility in stock prices found many different causes for this phenomenon.
DeBondt and Thaler (1985) and West (1987) attributed it to rational bubbles while Gutierrez and
Vazquez (2004) attributed it to regime-switching in the dividend process. DeLong et. al (1990) and
Campbell and Kyle (1993) attributed it to the presence of noise traders in the market. For a complete
review of the studies on stock price volatility, please refer to West (1988). None of these explanations,
however, has led to a valuation model that explains the data better than the dividend discount model.
The other strand of research has focused on the validity of the use of the variance bounds framework to
test for the aforementioned relation.
The frameworks used in both Shiller (1981) and Leroy and Porter’s (1981) have econometric problems
which are considered to invalidate the results. By altering the variance bounds framework, Kleidon
(1986) explicitly reject the framework used by Shiller (1981) that employs a time-series variance bounds
test. By replacing this framework by a cross-sectional variance bounds test, they find that the validity of
the traditional dividend discount model cannot be rejected. Flavin (1983) adopts a different point of
criticism on the variance bounds framework.
The other strand of research has focused on the validity of the use of the variance
bounds framework to test for the aforementioned relation.
The frameworks used in both Shiller (1981) and Leroy and Porter’s (1981) have
econometric problems which are considered to invalidate the results. By altering the
variance bounds framework, Kleidon (1986) explicitly reject the framework used
by Shiller (1981) that employs a time-series variance bounds test. By replacing this
framework by a cross-sectional variance bounds test, they find that the validity of
the traditional dividend discount model cannot be rejected. Flavin (1983) adopts a
different point of criticism on the variance bounds framework.

7. Objective of Study
•To Study the variation between Market Value and
Fundamental Value (interchangeably used as expected
present value) of the stock of Five I.T. Companies in India.
• Determining price fluctuations in the form of under-price
and over-price of share value.

8. Discussion
We performed a quantitative study to test the predictability of expected
present value of shares of five IT companies. Further, we analysed
whether the market price of shares of IT companies is overvalued or
undervalued as of 26th August 2013.
We selected the following five IT companies for our study:
Large scale companies: Tata Consultancy Services (TCS) and Infosys.
Medium scale companies: Infotech Enterprises, Polaris Financial
Technology and MindTree.
Assuming that the IT sector will replicate the past years performance
during the next 5 years we are analysing the profits prospects for the
worldwide investors.
Multiple Year Holding Period Dividend Discount Model therefore, this
has been chosen to evaluate the expected Present Value of shares of five
Indian IT companies.

9. Table1. Input Variables
Variables Definition
Growth Rate Annual expected growth of a company.
Earnings Per Share (EPS) Earnings after tax divided by number of shares
outstanding.
Dividend Per Share (DPS) Actual dividend paid to shareholders.
Price Earning Ratio (PER) Market price per share divided by earning per share.
Required Rate of Return Discounting factor or inflation rate.
Current Share Price Share price prevailing in the market.

10. Figure 1. Trend Analysis of Inflation Rates
between 2003 and 2017
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
Inflation Rates Trend Analysis
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

11. Findings And Results
Table 2. Input data required in calculating
expected present value of shares
Company Name G EPS
(Rs)
DPS
(Rs)
P/E Ratio R MP
(Rs)
TCS 8.65% 65.23 22.00 24.0970412 13.83% 1,571.85
Infosys 8.36% 158.75 42.00 18.2040945 13.83% 2,889.90
Infotech Enterprises 7.39% 16.52 4.50 10.2421308 13.83% 169.20
Polaris Financial
Technology
9.55% 16.79 5.00 6.63490173 13.83% 111.40
Mind Tree 12.79% 81.59 12.00 11.1735507 13.83% 911.65

12. Table 3. Expected present value
of shares and their valuation
Company
Name
MP Σ(d)(1+g)ⁿ
(1+r)ⁿ
Growth in
dividends
(1)
(p/e)(eₒ)(1+g)ᴺ+ˡ
(1+r)ᴺ
Growth in
earnings
(2)
Expected
Present
Value
(1+2)
Suggested
Position
VALUATION
TCS 1,571.85 95.86 1,353.02 1,448.89 Sell Over-Priced
Infosys 2,889.90 181.60 2,448.01 2,629.61 Sell Over-Priced
Infotech
Enterprises
169.20 18.96 135.79 154.75 Sell Over-Priced
Polaris
Financial
Technology
111.40 22.32 100.76 123.07 Buy Under-Priced
MindTree 911.65 58.37 981.92 1,040.29 Buy Under-Priced

13. Table 4. Market Value V/S Fundamental Value
Company Name Market
Value (Rs)
Fundamental
Value (Rs)
Variation (Rs)
TCS 1571.85 1448.89 (122.96)
Infosys 2889.90 2629.61 (260.29)
Infotech Enterprises 169.20 154.75 (14.45)
Polaris Financial
Technologies
111.40 123.07 11.67
MindTree 911.65 1040.29 128.64

14. Figure 3. Comparison between current
market value and expected present value
3,500
3,000
2,500
2,000
1,500
1,000
500
0
TCS Infosys Infotech Enterprises Polaris Financial
Technologies
MindTree
Current Market value Expected Present Value

15. Present value of shares of TCS is lower than current market price by Rs.122.96 so the
shares of TCS are overpriced. The market is doing really good job but internally the firm
may not succeed with the pace of the required rate of return over a period of five years.
Present value of shares of TCS is lower than current market price by
Rs.122.96 so the shares of TCS are overpriced. The market is doing
really good job but internally the firm may not succeed with the pace
of the required rate of return over a period of five years.
Next is Infosys, it is also overpriced, as the present value is lower by Rs.260.29 than
current share price. The variation is a little vast so it is guaranteed that the share value future will fall.
Next is Infosys, it is also overpriced, as the present value is lower by
Rs.260.29 than current share price. The variation is a little vast so it is
guaranteed that the share value in future will fall.
InfoTech Enterprises yet another company showing the sign of downfall in near future
but the difference is very low i.e. Rs 14.45. The investor can use futures and options for
trading purpose. Suggested trading options is selling of shares of this company at current
market price and buy them in future as prices are going to fall.
InfoTech Enterprises yet another company showing the sign of
downfall in near future but the difference is very low i.e. Rs 14.45.
The investor can use futures and options for trading purpose.
Suggested trading options is selling of shares of this company at
current market price and buy them in future as prices are going to fall.
Polaris Financial Technology is showing an upward trend, the present value of shares of
this company is more than the current price by Rs. 11.67.The shares are underpriced thus
buying of shares of this company will benefit the investor in future.
Finally the last company of study Mind Tree is the most profitable option to invest in as
the present value of shares is far more than the current market value (Rs.128.64). The
shares are undervalued therefore one must add this company in their portfolio.

16. Present value of shares of TCS is lower than current market price by Rs.122.96 so the
shares of TCS are overpriced. The market is doing really good job but internally the firm
may not succeed with the pace of the required rate of return over a period of five years.
Polaris Financial Technology is showing an upward trend, the
present value of shares this company is more than the current
price by Rs. 11.67.The shares are underpriced thus buying of shares
of this company will benefit the investor in future.
Next is Infosys, it is also overpriced, as the present value is lower by Rs.260.29 than
current share price. The variation is a little vast so it is guaranteed that the share value future will fall.
Finally the last company of study Mind Tree is the most profitable
option to invest in as the present value of shares is far more than the
current market value (Rs.128.64). The shares are undervalued
therefore one must add this company in their portfolio.
InfoTech Enterprises yet another company showing the sign of downfall in near future
but the difference is very low i.e. Rs 14.45. The investor can use futures and options for
trading purpose. Suggested trading options is selling of shares of this company at current
market price and buy them in future as prices are going to fall.
Polaris Financial Technology is showing an upward trend, the present value of shares of
this company is more than the current price by Rs. 11.67.The shares are underpriced thus
buying of shares of this company will benefit the investor in future.
Finally the last company of study Mind Tree is the most profitable option to invest in as
the present value of shares is far more than the current market value (Rs.128.64). The
shares are undervalued therefore one must add this company in their portfolio.

17. Implication of Study
For Investors: There are basically two types of investors, i.e., (1) individual
investors and (2) institutional investors. The portfolio is a combination of
securities such as stocks, bonds, money market instruments, they are chosen
on the basis of their level of risk and probability of higher returns, this study
helps the investor in selecting the most appropriate option available in IT
sector. This analysis is very helpful for investors in taking decision
regarding buying, selling or holding the shares of the companies in IT
sector.
For Researchers: This study helps researchers in conducting their research
projects of similar nature.
For Financial Analyst/Fund Manager: The major task of an analyst is to
help their clients in taking appropriate investment decision for optimum
allocation of funds. Therefore our study facilitates financial analysts in
taking correct decisions for their clients and maximizes client satisfaction
level.

18. Suggestions and Conclusion
The research has shown that, among five companies’ two companies namely,
Polaris Financial Technology and MindTree are undervalued and have promising
growth respects. It is suggested that the shares of these companies should be
bought.Some of the benefits are
(1) Higher dividends,
(2) Capital appreciation, and
(3) Minimization of portfolio risk.
Thus, it is found that the expected present value is more than the current share price
of these companies, this increased expected present value depicts that both the IT
Companies are fundamentally very strong and competent. As the fundamental
strength of both the companies is good, shareholders are suggested to include these
securities in their portfolio because risk is moderate and returns are reasonably high.
The shares of these companies should be bought and can be held for multiple years
as they have promising future ahead.

19. On the contrary, the other three companies: Tata Consultancy Services,
Infosys, Infotech Enterprises are overvalued therefore shares of these
companies should be sold, because, if an investor enters a future contract
for five years he/she has an opportunity to make profits by selling them
at current price prevailing in the market and buy the same at market
value on the date of maturity of contract (after 5 years). This will ensure
a profit despite of decreasing share value after five years.
In order to take investment decisions it is important to have an
appropriate foresight and so our study provides investors with a
direction heading towards profitable returns. This study is pervasive, as
the procedure of estimation can be applied to all the companies listed in
any Stock Exchange and their valuation can be examined quite easily.

20. References
• Moneycontrol [Online] http://www.moneycontrol.com (Accessed 26 August
2013)
• Shillers (1981) Siegel (1985) , Scott (1992) Review of literature [Online]
http://ceajournal.metro.inter.edu/fall06/torrezetal0202.pdf (Accessed 24 August
2013)
• Ohlson (1995), Feltham & Ohlson (1995/1999) Review of literature [Online]
http://research.rmutp.ac.th/research/An%20Investigation%20of%20Stock%20Valua
tion%20Models.pdf (Accessed 24 August 2013)
• C.R.J.M. Tilman (2009) ‘Explaining Equity Prices using a variable Equity Risk
Premium in a Three-Stage Dividend Discount Model’ Erasmus University [Online]
thesis.eur.nl/pub/6216/315207Tilmanma1009.pdf
• (Accessed September 30 2013)
• Stock-analysis-on.net [Online] http://www.stock-analysis-on.net (Accessed 31
October 2013)
• Iitk [Online] http://www.iitk.ac.in (Accessed 31 October 2013)
• Punithavathy Pandian (2005) Securities Analysis and Portfolio Management,
New Delhi, India.

21. References
•Sharpe, William F, (1964) ‘capital asset prices; a theory of market equilibrium
under conditions of risk.’ Journal of Finance. 19:3, pp. 425-442
•Lintner, John. (1965) ‘The valuation of risk assets and the selection of risky
investments in stock portfolios and capital budgets.’ Review of Economics and
Statistics. 47:1, pp. 13–37.
•Shiller, Robert J. (1981) ‘Do stock prices move too much to be justified by
subsequent changes in dividends?’ American Economic Review 71, pp. 421-436.
•Leroy. S.F., and Porter. R.D. (1981) ‘The present value relation: tests based on
implied variance Bounds’, Econometrica, 49 pp 555-574.
•Geykdajy Y. M. (1981) ‘Cost of equity capital and risk of 28 us multinational
corporations vs. 28 us domestic corporations: 1965-1978’, Management
International Review, 21(1), pp 89-94
•Flavin. M. (1983) ‘Excess volatility in the financial markets: a reassessment of
the empirical evidence’, Journal of Political Economy, pp. 89-111.

22. Thank You