A Report on Equity Research and Valuation
At KARVY
SUBMITTED TO
INSTITUTE OF PUBLIC ENTERPRISE
Survey No. 1266, Shamirpet (V&M), R.R.Dist., Hyderabad,
Telangana – 500078
In partial fulfillment of the requirements for the award of the Degree of
POST GRADUATE DIPLOMA IN MANAGEMENT
(2016 – 2018)
BY
RISHIRAJ RAMUDAY SHARMA
(1601136)
INSTITUTE OF PUBLIC ENTERPRISE
HYDERABAD
Under the esteemed guidance of
DR. SHAHEEN
ASSISTANT PROFESSOR
Quantitative Techniques & Information Technology
Capital is very important to the economic theory of production and distribution. Capital plays important role in the growth story of any particular countries’ economy. The demand of capital is very high when the individual, corporate or government wants to enhance their capacity of production or to carry out welfare scheme for the people of the country. This demand of capital is met by the capital market where the buyer and seller meet to trade securities under certain terms and condition. This securities market can further be classified under.
1) Primary Market
2) Secondary Market
Capital market means a place to trade all the financial instruments i.e. equity, commercial, industrial and government paper etc., It is a market where borrowing and lending of long term and short term funds takes place under specified condition. The governments both Central and State can raise money in the capital market through the issue of government securities. The government also raises capital from the capital market by selling its share to the public by the way of Offer for Sale route. It has been done in many cases such as PSU banks and many Public Sector manufacture companies.
The corporate also raise the capital from the capital market by issuing Bonds which are issued at discount price or at a premium, apart from this corporate can also raise money from the people by issuances of common shares to the public by Initial Public Offer (IPO).
The common people, Institutional Investors, Foreign Institutional Investors etc. are the active players of this market. They buy and sell the equity and bonds of the companies and governments in the secondary market and make profit. The secondary market provide tradable platform to the securities issued in Primary Market.
The important constituents of capital market are:
1. The Stock Exchanges
2. Banks
3. The Investment Trusts And Companies
4. Specialized Financial Institutions or Development Banks.
5. Mutual Funds
6. Post Office Saving Banks
7. Non Banking Financial Institutions
8. International Financial Investors and Institutions.
The supply in this market comes from saving from different sectors of the economy. These come from the following sources:
1. Individuals
2. Corporate
3. Governments
4. Foreign countries
5. Banks
6. Provident funds
7. Financial institutions.
The establishment of stock exchange has been the turning point for the capital market across the world.
In India National Stock Exchange and Bombay Stock Exchange are two major players in the stock market segment. Even though BSE is the oldest exchange in the country, the performance of NSE has been remarkable. NSE was started in the year 1994 and BSE in 1857. BSE trade for the top thirty companies in India and its Index is SENSEX where as NSE trades for top fifty companies in India and its Index is NIFTY. The establishment time, and number of companies traded differs so as their indices points and turnover. There has been considerable change in the percentage change that takes place in these exchanges. They never go parallel. The government has been always encouraging the people to participate in the capital market and has taken various steps towards E.g. Announcement of removal of income tax on dividend in the hands of the receiver and no capital gains tax on investments made in equity after 1-3-2003 that is held for one year and more.
Performance chart of Infosys stock from Jul 2016- Jun 2017
Fig3.3
The graph shows the movement of the price of the Infosys shares from July 2016 to June 2017. From the graph it can be inferred that the price of the share of the Infosys has been decreasing since last year. The major factor contributing to this is the uncertainty of contracts from the US after Donald Trump came to power in 2016. The other factor contributing to it is slowdown in the economies of the major developed countries including US the name of Infosys in the panama leaks which had impact on the share price of the Infosys Limited.
The company share capital form year 2012-13 to year 2016-17
Fig 3.5
The values are in Crore Rupees
The graph shows the share capital of the company. It can be seen from the chart that the bonus shares are issued in the year 2014-15 and year 2015-16 in the ratio of 1:1 where as in the year 2012, 2013 and 2017 no bonus shares were issued. The issue of the bonus share signifies that the company is making good money and it is rewarding its shareholder by issuing bonus share. As there were no issue of bonus share there has been dividend which was paid to share holders during the year 2012, 2013, 2017.
Return on Capital employed
Fig 3.6
It can be seen from the graph that there has been very less change in the return on capital employed except for the year 2016-17 when the return on capital employed was less than 30%. The return on capital employed which is almost 30% which signifies that the company has been quite cautious about their investment and expansion strategy.
Reserve and surplus
Fig 3.7
The figure above shows clearly that there has been increase in the reserve and surplus over the last five years i.e. from 2013 to 2017. The change is quite significant as reserve and surplus rose from 35772 Rs crores to Rs 66869 crores. This is the proof that the company is inclined towards earning for its share holders and maximizing their wealth.
Investment Chart
Fig 3.8 :Investment From 2013 To2017
The graph shows the investment pattern of Infosys. The figure shows that there has been increase in the investment over the last five year but the major change can be seen in the year 2017 where the investment rose from 9578 Crores to 25437 Crores. Investments have been made in plant and machinery, equipment and in many other fixed assets. Investment has also been made for the expansion of the business. This all effort contributes to the wealth maximization and profit maximization of the shareholders money.
Fig 3.9: Revenue chart for from year 2012-13 to year 2016-17
It can be seen from the above chart that there has been increase in the revenue of the company over the last five year, the increase in the revenue indicate the good health of the company. But it should be noted that the increase in the profit of the company during year 2017 is almost same as that of the year 2016 where as the increase in the profit from year 2014 to 2015 and from 2015 to 2016 has been significant. The slowdown in the profit growth during the year 2017 can be contributed to the economic uncertainty across the globe.
Fig 3.10 PAT from 2013 to 2017
The above graph shows the value of the PAT for the last five years it can be seen from the graph that there has been increase in the PAT from year 2013 to 2016, but there has been decrease in the PAT for the year 2017 this is due to the fact that there has been no income from the exceptional source. This is the reason behind the drop in the PAT for the year 2017.
Particulars 2016 2017 %Change
Net sales 56992 62315 0.093399
Expenses 39335 43413 0.103674
PBIT 17657 18938 0.072549
PAT 12750 13818 0.083765
EPS 55.51 60.16 0.083769
Fig 3.11: Estimation of next year income statement
Particulars 2017 2018
Net sales 62315 68135
Expenses 43413 47884
PBIT 18938 20320
PAT 13818 14978
EPS 60.16 65.21
Fig 3.12: Estimated Profit and Loss account for the next year
Average retention ratio=(60.96+59.83+59.65+67.97+75.86)/5
=65%
=0.65
Average payout ratio=1-0.65
=0.35
Required rate of return
Beta=0.56
Risk free rate=6.49
Market return on IT stock=10.68
Market risk premium=5.75
Required rate of return=0.0649+0.56*0.0575=9.71%
Expected Growth rate of Dividend
Value of stock=D1/K-g
984=25.75/0.0971-g
g=7.1%
P/E ratio as per constant dividend Model
P/E Ratio= Payout ratio/k-g
=13.46
Value anchor
Value anchor gives the expected price of share for next year.
Expected EPS * Expected P/E ratio
65.21 *13.46 = Rs.877
The value anchor here gives the expected price of the share of the Infosys for the next coming years but it should be noted that the factor deciding the price are Beta value of the share, EPS , Retention Ratio and expected rate of return and required rate of return the value will vary as the above mentioned factor vary.
Fig 3.13: Reliance industries share price movement
The graph shows the varying value of the share of the reliance industries ltd over the past one year i.e. from July 2016 to July 2017. From the graph it can be inferred that the price of the share has been increasing in spite of global economic turmoil, there has been decrease in the price of the crude oil but which has also contributed to the rise in the profit of the Reliance Industries Limited which can be seen reflected in the price the share of the company. Now as the price of the crude oil is increasing the margin in profit may decrease but the past data only suggest that there has no significant change in the profit when the crude oil price was even higher. This give optimistic picture of the firm.
The above mentioned balance sheet gives the clear picture of the financial health of the company it is very clear from the above statement that the reserve and surplus of the company has been increasing over the period of time and there is increase in the investment made by the company over the period of time which is good sign of for the company which can in turn increase the value of the money of the share holder. This augurs well for the company as well as its shareholder.
Fig 3.14: Shares capital
The share capital graph shows that there is no issue of bonus shares in the recent five years but there has been decrease in the share capital of reliance in year 2013 to 2014 and thereafter there has been modest increase in the share capital.
Fig 3.15: Reserve and surplus
The Reserves and Surplus of the company have increased over a period of time. The increase in Reserves and Surplus is due to increase in Profits of the company. This shows that there has been less unexpected expenditure which company has to bear. This also shows that the management of the company is quite efficient in carrying out its operation.
Fig 3.16: Investment
The investment has increased to a greater level from 54778 crores in 2013 to Rs.154049 crores in 2017, which is almost 3 times the amount in year 2013. This shows that the company has been doing regular invest in various fields. The recent launch of the Reliance jio proves that they are really aggressive when the investment opportunities are concerned. The recent launch of the Reliance jio has shaken the entire telecom industry and kept them at their toes. This in short shows their commitment towards excellence.
Fig 3.17: Growth in PAT
From the figure above it can be inferred that there has been significant increase in the PAT i.e. Profit after tax, which proves efficiency of the management of the company, it also shows the attitude of the management towards change and innovation. The continuous increase in the PAT is the sign that company is fundamentally strong and really takes care of the fund of the investors.
Fig 3.18: Equity Dividend Rate
Equity Dividend Rate shows the return on the money actually invested. From the graph mentioned above it is evident that there has been constant increase in the equity dividend rate which is a very good sing for the company. It clearly defines that the company is in the path of continuous progress. The investment in the company is good bet for any investor.
Source : Dion Global Solutions Limited
CAGR of sales:
= 〖(sales in 2016/sales in 2012)〗^((1/5))-1
=-0.058
=5.8%
CAGR of EPS:
〖(EPS in 2016/EPS in 2012)〗^((1/5))-1
=0.067
=6.7%
Particulars 2015 2016 %Change
Revenue 337797 240740 -0.28732
Expenditure 308329 205039 -0.335
PAT 22417 27417 0.223045
EPS 70.25 84.06 0.196584
Fig 3.19: Estimated income statement for next year
Particulars 2016 2017
Revenue 240740 170925
Expenditure 205039 131225
PAT 27417 33530
EPS 84.06 100.87
Fig 3.20: Estimated income statement for next year
Average retention ratio
=90.18+88.81+89.115+89.435+89.66/5
=89.44
=0.894
Average payout ratio
=1-0.8944
=0.1056
Required rate of return
Beta=0.69
Risk free rate=6.49
Market return on petrochemical stock=20.23
Market risk premium= 5.75
Required rate of return=0.0649+0.69*0.0575
=0.1045
=10.45
Expected growth rate of dividend:
Share price= Dividend/k-g
1622=11/0.1045-g
g = 9.85
P/E ratio as per constant dividend Model
= Payout ratio/k-g
= 17.6
Value anchor
Value anchor gives the expected price of share for next year.
Expected EPS * Expected P/E ratio
=100.5*17.6
=1760
The value anchor here gives the expected price of the share of the Infosys but it should be noted that the factor deciding the price are Beta value of the share, EPS , Retention Ratio and expected rate of return and required rate of return the value will vary as the above mentioned factor vary.
Equity Valuation Models
Equity valuation Models used for the study are as follows
1) Dividend Discount Model
2) Multi-period Model.
Dividend Discount Model
This model is used to calculate the expected price of share for the next year. The formula used for calculation is as follows.
Po = D1 + P1
(1+r) (1+r)
Where
Po = current Market Price
D1= Dividend per share in current year
R= expected rate of return on equity
The model is very useful in determining the market price of the share for the next year. The model is simple and easy to calculate as the data used are easily available and it is realistic as no assumptions are being made. The model can be applied to any company to know the expected future price of share.
Multi-Period Model
This is a higher version of Dividend Discount Model. The Dividend Discount Model was used in determining the future price of share for the very next year but this can be applied to know the price of share for N number of years. The formula is
Po = Dn + Pn
(1+r) n (1+r) n
The applicability of the model is similar to Dividend Discount Model.
Equity valuation of Infosys Ltd:
Dividend Discount Model:
Po = D1 + P1
(1+r) (1+r)
Where
Po = current Market Price
D1= Dividend per share in current year
R= expected rate of return on equity
930=14.75/1.1225+P1/1.1225
P1=1029.175
Multi period Discount Model
P0 = D + Pn
(1+r) n (1+r)n
Where
n= number of years
930=14.75/(1.1225)2 +P2/(1.1223)2
=1157.0558
Similarly for other years can be calculated
Equity valuation of Reliance Industries Ltd:
Dividend Discount Model:
Po = D1 + P1
(1+r) (1+r)
Where
Po = current Market Price
D1= Dividend per share in current year
R= expected rate of return on equity
1392=11+P1/1.18
=1631.56
Multi period Discount Model
P0 = D + Pn
(1+r) n (1+r)n
Where
n= number of years
=1934
Similarly for other years can be calculated
RECOMMENDATION
1) In spite of fall in the value of share prices of Infosys in the recent past, I would definitely recommend the investors to invest in this company. Reasons being the companies are financially very strong. And as far as the price of Reliance Industries Ltd it has been appreciating in the past and will appreciate as the profit has been increasing continuously basis.
2) The current volatility in the market is due to Rupee appreciation, and U.S. taking measures to control the immigration but the companies have taken several measures to see that these two problems are resolved. They have diversified their business and also they have hedged against the rupee appreciation. So investment in these stocks would not lead to loss. There has apprehension regarding the share price of the Reliance Industries Ltd. In recent past sue to fall in price of brent. But it has maintained the rise in price beating all apprehensions.
3) The recommendation would be to invest for a longer period of time. At least for 5 years as they would yield better returns.
4) As the intrinsic value of all the three stocks are lesser compared to their market price so the suggestion would be hold the stocks if they have bought or buy the shares as they will definitely give good returns in the future.
5) If a choice has to be made among the two then it would be better to choose Reliance Industries Ltd. as the option, as it is fundamentally very strong company and it has got higher value in market currently and it will also give better returns in the future compared to other stocks.
6) It is advisable for the investor to go through the fundamental of the companies before investing and avoid investing based on the market sentiments, as they would be misleading. Investing in a fundamentally strong company for longer period of time would be a worthy decision.
7) A better Strategy for any investor would be to invest in these companies and not to trade or speculate because share market is not a casino. And don’t panic if the values of shares are coming down, as it is only temporary.
8) The slowdown in share market is the part of the share market It comes and goes the investor who invest for longer term gain big as in the case of Infosys and Reliance Industries Ltd. As in the case of Infosys its trading started at Rs 145 in 1993 and at present its price is Rs1011. And in case of Reliance Industries Ltd. In 2008it price was 717 and today it is trading at Rs 1613
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