A Study on Fundamental Analysis of Top IT companies in India

Dr.Govindraj R Mane Muttavva Mudenagudi

Assistant Professor MBA Student
KLS Gogte Institute of Technology KLS Gogte Institute of Technology
Department of MBA Department of MBA
Udyambag, Belagavi, Karnataka, India Udyambag, Belagavi, Karnataka, India

Abstract:

Investment decisions should not be based on gossips and speculative motive. Rather, investors must think
rationally and wisely. The investor must go for thorough analysis of the economic factors affecting business
conditions. Investors must understand the investment analysis to earn good returns in relation to the risk
assumed. A careful and systematic investment analysis can give a sound framework for both the
management of wealth and increasing the wealth. There are two basic approaches to the in-depth analysis i.e.
Technical Analysis and Fundamental Analysis. For this research, the approach which has been adopted is
Top Down (Economic, Industry and Company Analysis) approach. In this paper we analyse the Indian IT
sector and calculate intrinsic value of major IT companies and compare with the market value. From the
study, we found the net profit ratio, current ratio, earning per share of IT companies.

Research analysis:
Objectives of the study:

 To study the future prospectus of the IT sector.

 To study the fundamental analysis of IT companies and analyze the several ratios.

Limitations of the study:

 We have taken only five IT companies for research purpose.

 We considered only six year data for the calculation of ratio.

Research Methodology

Secondary data is used for research. This study is based upon the information and data gathered from
multiple sources, including official website of the companies, NSE, money control.

We used Secondary Data for the period of (2017-2022). The selection of the period considered the two factors.
For the evaluation of the data was collected from the official website, Annual reports of the companies. For the
evaluation of the performance of the major IT Companies statistical tools is used such as Ratio, Table.
The companies of IT sector selected which listed on NSE on the basis of availability of data.

 TCS
 Infosys
 HCL
 Wipro
 Tech Mahindra ltd

Literature Review:

Pandya and Pandya (2013), found that analysis helps the investor in making investment decision but not
every investment is entirely depending up on the analysis alone. Fundamental analysis is a method of calculating
intrinsic value by examining the economic, financial, qualitative and quantitative factors and company specific
factors.

According to Hema and Ariram (2016) An investor should analyse the market before investing. Investment
analysis is highly important for the benefit of risk reduction and maximizes the gain. Stocks are unique
investment because they allow us to take partial ownership in company.

Reddy and Sowmya (2016), analysed that fundamental analysis reduces the risk of loss of investors by
examine the intrinsic value of the share price. An efficient investment requires both technical and fundamental
analysis.

According to Ambily et al. (2017), The conclusion of the study to know how to invest in a systematic
manner in the competitive world and importance of systematic investment decision. IT sector of India has been
significantly contributed to the growth of Indian economy in terms of GDP, employment generation, and foreign
earnings.

Sodhi, A. K., & Waraich, S. (2016): Fundamental analysis studies the various financial, economic and industrial
parameters that influence the risk-return of securities and helps in investment decision making. Banking
companies have a strong shareholding foothold in the Indian economy and the stock markets. Fundamental
analysis can help the shareholders by providing relevant information in terms of profitability and growth which
can, in turn, help them to take informed investment decisions. With the help of fundamental analysis, investors
can track the past performance, recent changes and future prospects of the banking sector. This research paper
analyses the fundamentals of selected banking companies using independent financial parameters..

Ou and Penman (1989),The result is a fundamental analysis that is very much grounded in the financial
statements; indeed, fundamental analysis is cast as a matter of appropriate financial statement analysis. The
structural approach contrasts to the purely empirical approach in Ou and Penman (1989).
Lev and Thiagarajan (1993) Paper identified ratios that predicted earnings changes in the data; no thought was
given to the identification. The approach also contrasts to that in Lev and Thiagarajan (1993) who defer to “expert
judgment” and identify ratios that analysts actually use in practice.

The whole endeavor of “capital markets research” deals with the “information content” of financial statements
for determining stock prices. The extensive “timeseries-of-earnings” literature summarized in Brown (1993)
focuses on forecasting earnings, often with valuation in mind.

Papers such as Lipe (1986), Ou and Penman (1989) and Fairfield, Sweeney and Yohn (1996), to name just a few,
have examined the role of particular financial statement components and ratios in forecasting. But it is fair to say
that the research has been conducted without much structure. Nor has it produced many innovations for practice.

Introduction:

Fundamental analysis:

Fundamental Analysis is a mathematical and fundamental way of looking at a company and its future
prospects. Analysis or valuation of any company can be done in 2 ways i.e. Fundamental analysis and
Technical analysis. This study uses Fundamental analysis for “analyzing the company with the help of
financial statements of the company which will be published annually and quarterly”. Stock investing
requires careful analysis of financial data to find out the company’s true worth. This is generally done
by examining “the company’s profit and loss account, balance sheet and cash flow statement”. This can
be a time consuming process. An easier way to find out about a company’s performance is to look at its
financial ratios. Fundamental Analysis covers the “area of research that studies economics, industry and
company information for the purpose of making an informed judgment on a stock's value and its growth
potential". The crux of Fundamental Analysis lies in its attempt to determine the economic value of a
security (a generic term for stocks and shares).

Focus of fundamental analysis:

 Economic analysis: Economic Analysis covers the study of the country's economic indicators such
as new orders, money supply, stock price indices, and stocks of unfinished goods, new business formations, and
consumer price index and unit labour costs.
 Company Analysis: Covers management analysis and financial analysis. Management analysis
would consider the business acumen of the CEO and top managers, the past record and performance of the CEO
and the corporate work ethic. Financial Analysis would consider revenue, costs, earnings of the company and the
company's capital structure as reflected by its debt to equity ratio.

Types of fundamental analysis:

  Macro-Fundamental Analysis focuses on broad economic factors that affect the stock market as a
whole or industry groups of securities. This approach is known as the Top down Approach of Macro
Fundamental Analysis.
 Micro-Fundamental Analysis starts by considering the current price of a stock and compares it to
measures of value.

Economic analysis:
Industry Analysis In the economic analysis, the direction for the change in capital market may be identified.
However, the analyst must realize that different industries respond differently in the capital market. Industry
analysis is relevant and important for the same reasons that the economic analysis is. As it is difficult for an
industry to perform well if the economy is ailing, it is also difficult for a firm to do well if the industry is in
troubled position. So, after an economic analysis, what is required is the industry analysis.

With reference to the Indian economy, important factors to be looked are:

 Gross Domestic Product (GDP)

 Inflation
 Unemployment

Gross Domestic Product

GDP Growth Rate

2017 6.8

2018 6.53

2019 4.04

-7.96 2020

2021 5.4

-10 -8 -6 -4 -2 0 2 4 6 8

Inflation rate:
 Inflation Rate
7 6.62
6 5.56
5
3.95 3.72
4 3.33
3
2
1
0
2017 2018 2019 2020 2021

Unemployment rate

Unemployment rate
9
7.97
8
7.11
7
6 5.41 5.33 5.27
5
4
3
2
1
0
2017 2018 2019 2020 2021

Industry Analysis
In the economic analysis, the direction for the change in capital market may be identified. However, the
analyst must realize that different industries respond differently in the capital market. Industry analysis is
relevant and important for the same reasons that the economic analysis is. As it is difficult for an industry to
perform well if the economy is ailing, it is also difficult for a firm to do well if the industry is in troubled
position. So, after an economic analysis, what is required is the industry analysis.

KEY FACTORS IN INDUSTRY ANALYSIS:

 Industry`s past performance SWOT analysis

 Product permanence and technology
  Government role
 Market Competitive conditions

An industry is a homogeneous group of firms which compete with one another with a similar type of products,
goods and services. After forecasting the state of the economy, it is important to identify the implications of that
forecast for the specific industry. It is already noted that not all industries are equally sensitive to the economic
conditions and business cycles. Some industries are virtually independent and some are highly sensitive to
business cycles.

Industry Analysis of IT Industry:

 The Indian IT sector has contributed to the country’s GDP of around 7.7% and estimated to contribute to
the India’s GDP TO AROUND 10% BY 2015.
 Indian IT firms is well expanded over verticals such as retail, telecom and has a global footprint all over
the world. Also Indian IT sector has a low-cost advantage and less expensive as compared to US market.
 At Rs.9,57,493 crores (US $137 billion) in 2018-19, It is estimated that India’s IT sector will reach Rs.
6,98,900 crores (US $100 billion) by 2025.
 IT industry employs nearly 3.97 million people in India of which 105,000 were added in financial year
2018.Hardware exports from India are expected to grow at 7-8% in FY 19.
 The Indian Government has extended tax holidays to the IT sector for software technology parks of India
(STPI) and Special Economic Zones(SEZ’S). As of May 2019, there were 273 approved SEZ’s across
the country where 136 are exporting SEZ’s.

SWOT Analysis:

Strengths:
 High quality and price performance.
 Large pool of knowledgeable IT professionals.
 Flexibility and adaptability
 Innovative and Reliable products
 High Growth and strong market share.
 Government encouragement
 Global and 24/7 delivery

b) Weaknesses

 Highly dependence on USA for revenues

 High rate of attrition
 More dependent on BFSI sector for revenue
c) Opportunities:

 Product innovation
 Govt policies

d) Threats:

 Increase Competition
 Global economic slowdown

Company Analysis
In company analysis firm’s profitability and valuation of intrinsic value are analysed for various selected
companies in order to check their financial performance. For the purpose of analysis various ratios such as
EPS, Book Value, P/E ratio, return on equity and Dividend pay-out ratio are used.

Current Ratio

The Current Ratio is a liquidity ratio that measures a company's ability to pay off their short-term dues with
their current assets. (Within a Financial Year) Current Ratio = Current Assets / Current Liabilities Ideal Ratio
is equal to 2:1 If the ratio is less than 1 it means company is not able to meet their short term liabilities.
Higher current ratio indicates the company has more funds which are not utilised efficiently and effectively.

Company 2018 2019 2020 2021 2022

TCS 4.56 4.17 3.33 2.91 2.56
Infosys 3.78 3.00 2.88 2.74 2.10
HCL 3.29 2.93 1.69 2.77 2.97
Wipro 2.86 2.96 2.78 2.50 2.23
Tech Mahindra LTD 2.85 2.28 3.16 3.36 2.56
 Current Ratio
4.5
4
3.5
3
2019
2.5
2020
2 2021
2022
1.5
1
0.5
0
TCS Infosys HCL Wipro Tech Mahindra
LTD

Net Profit Ratio

This ratio helps in determining the operational efficiency of the business

Net Profit Ratio = (Net Profit after Tax / Revenue from Operation) * 100

Company 2018 2019 2020 2021 2022

TCS 25.92 24.40 25.33 22.77 23.81
Infosys 26.08 20.11 19.66 21.00 20.43
HCL 33.35 31.46 27.50 24.50 26.75
Wipro 17.27 15.82 17.22 20.00 20.30
Tech Mahindra LTD 16.90 16.09 15.51 14.30 14.14

40
Net Profit Ratio
35
30
25 2018
2019
20 2020
15 2021
10 2022
5
0
TCS Infosys HCL Wipro Tech Mahindra
LTD
Valuation of share price of company:

Earnings per share:

Company 2018 2019 2020 2021 2022

TCS 132.15 80.17 88.69 83.68 104.34
Infosys 73.97 33.75 36.50 42.37 50.49
HCL 52.96 60.41 33.03 32.30 40.50
Wipro 17.07 12.62 15.19 18.36 22.14
Tech Mahindra 40.83 44.54 46.95 43.78 50.56
LTD

Earnings per Share

140

120

100
2018
80 2019
2020
60 2021
2022
40

20

0
TCS Infosys HCL Wipro Tech Mahindra
LTD

Dividend per share:

Company 2018 2019 2020 2021 2022

TCS 50.00 30.00 73.00 38.00 43.00
Infosys 43.50 21.50 17.50 27.00 31.00
HCL 12.00 8.00 10.00 10.00 42.00
Wipro 1.00 1.00 1.00 1.00 6.00
Tech Mahindra 14.00 14.00 15.00 45.00 45.00
LTD
 Dividend per Share
80

70

60

50 2018
2019
40 2020
2021
30
2022
20

10

0
TCS Infosys HCL Wipro Tech Mahindra
LTD

Return on Assets (ROA) ratio

Company 2018 2019 2020 2021 2022

TCS 27.72 30.21 31.68 28.30 31.49
Infosys 21.29 18.62 19.17 19.21 21.36
HCL 22.43 21.85 16.75 15.79 20.35
Wipro 13.16 11.36 11.36 13.29 15.30
Tech Mahindra 14.92 14.43 14.95 12.70 14.03
LTD

Return on Assets
35
30
25 2018
2019
20
2020
15 2021
10 2022
5
0
TCS Infosys HCL Wipro Tech Mahindra
LTD
Dividend payout ratio

Company 2018 2019 2020 2021 2022

TCS 36.78 33.54 95.89 35.04 34.78
Infosys 46.42 93.64 61.46 50.74 59.80
HCL 22.98 13.42 15.12 37.25 0
Wipro 7.05 7.16 7.93 5.44 0
Tech Mahindra 25.90 31.42 60.69 45.61 0
LTD

Dividend Payout Ratio

120

100

80 2018
2019
60 2020
2021
40 2022

20

0
TCS Infosys HCL Wipro Tech Mahindra
LTD

GAP Analysis:

 The GDP growth of India in the 2017,2018, 2019 was 6.8%, 6.53% and 4.04% respectively.
Later in the year 2020 it decreased to -7.96% due to pandemic, lockdown had been imposed
in India.
 The inflation rate also is increasing since from the year 2017 because rising price of
essential food items, covid-19 pandemic. Fluctuation in the exchange rate.
 By study, the current ratio of all IT companies was more than the ideal current ratio,
companies have enough liquid assets to cover their short term liabilities.
 Even though in covid -19 pandemic companies net profit ratio didn’t decrease.
 Dividend payout ratio, earning per share and dividend per share of Wipro company has been
decreased as compared to other IT company.
Conclusion:

Information Technology in India is a vast industry and emerged as one of the fastest growing sector
in the Indian economy, with a growth rate exceeding 50% in export and 40% in the total IT
industry over the last five years. Hence IT stock can be treated as one of the best sector for long
term investment in India. Companies like TCS, WIPRO, HCL , TECH Mahindra already have good
image created huge value for their shareholder.

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