1

Indian Institute of Management, Lucknow

Noida Campus
CVR
Project Report



Submitted by: (Group 6)

Date: May 19, 2014


Background:
We have picked the following companies for the analysis.
Infosys
Hindustan Unilver
Reliance Power
We have used various tools taught in CVR sessions to analyze chosen companies and the sector to
which these companies belong and hence tried to value these businesses.
2


We have incorporated various valuation methods to arrive at the value for these entities.
Describing the Companies:
Infosys

Infosys (formerly Infosys Technologies) is an Indian multinational that provides business
consulting, technology, engineering and outsourcing services. It is headquartered
in Bengaluru, Karnataka. Infosys is the third-largest India-based IT services company by 2012
revenues, and the second largest employer of H-1B visa professionals in the United States, as of
2012. On 31 March 2014, its market capitalization was $30.95 billion, making it India's fifth
largest publicly traded company



Hindustan Unilver
Hindustan Unilever Limited (HUL) is an Indian consumer goods company based in Mumbai,
Maharashtra. It is owned by Anglo-Dutch company, Unilever which owns a 67% controlling
share in HUL. HUL's products include foods, beverages, cleaning agents and personal care
products.
HUL was established in 1933 as Lever Brothers India Limited and, in 1956, became known as
Hindustan Lever Limited, as a result of a merger between Lever Brothers, Hindustan Vanaspati
Mfg. Co. Ltd. and United Traders Ltd. It is headquartered in Mumbai, India and employs over
3


16,500 workers, whilst also indirectly helping to facilitate the employment of over 65,000 people.
The company was renamed in June 2007[dubious discuss] as "Hindustan Unilever Limited



Reliance Power
Reliance Power Limited is part of the Reliance Anil Dhirubhai Ambani Group. It was
established to develop, construct and operate power projects in the Indian and international
markets. Reliance Energy Limited, an Indian private sector power utility company and the Anil
Dhirubhai Ambani Group promote Reliance Power.
With its subsidiaries, it is developing 13 medium and large-sized power projects with a combined
planned installed capacity of 33,480 MW.

4




Based on the companies selected, we present the further analysis








5




1. Industry
Analysis









IT Industry Analysis
India is known as the major IT enabled service provider in the world. It all started with success story
of people with Indian origin in the United States of America. Their contribution was enormous in
the IT revolution in US. With the emergence of IT hubs like Bangalore, India has occupied the
dominant position in IT world. IT is playing a major role in Indian economic development.
While India still remains a poor country in terms of both Per Capita Income and Human
Development Index, IT sector acts as the major hope economic growth. Though the year 2009 was
tough due to Global financial meltdown Indian IT sector came back on track quickly and showed
6


growth in 2010. It is expected that 2011 will be even more promising. Indian IT sector is poised to
cross $70 billion-mark by the end of current fiscal.
Global IT scenario
Due to the presence of many players in the every sector, the environment has become extremely
competitive. In India only we can find so many close substitutes from each sector. Hence, to remain
competitive, the companies need to be operationally efficient and innovative. Value addition in the
form of quality, service or price is absolute necessity now. Innovation, however, is considered as the
best way to capture the global market. And to be innovative a company should focus on its core
competencies.
There are some tasks which can be more easily done by some contractors at a much lower cost.
These tasks are being outsourced. Outsourcing is a win-win situation where both the parties get
benefits. Since all the companies have switched to extensive use of information technology within a
very short period of time, most, if not all dont have the proper IT infrastructure. So it has become a
necessity for them to outsource all the IT related works. India is the favourite destination for all the
multinational companies because of various reasons discussed later in the report.
So we can see that changing global business scene is acting as the key demand driver for IT sector.
This change in global business is again driven by lots of other factors. As more and more people are
becoming computer literate throughout the world, need for IT enable services are increasing
everywhere. People find IT enabled service more convenient. Online banking, e-Commerce, Online
trading etc have become integral part of our daily lives. Demand for IT enabled services can only
increase unless some unexpected events take place.
Outsourcing jobs in India has become a major issue in US recently. As the works are being
outsourced in India local people are not able to get jobs. Since outsourcing jobs are profitable for
companies in every respect, US government is going for different strategies, like VISA restriction, to
restrict outsourcing. If US government sticks to these rules, Indian IT sector will definitely be
affected as the major revenues come from US.
The following factors have helped in raising the demand for IT industry:
There has been a tremendous improvement in computer technology. Evolution of high performing
personal computers has made it an integral part of the people of developed nation and urban people
of developing nation. Computer users prefer to use computer wherever possible.
Improvement of internet technology and internet speed has helped people to go for online method
for payment, ordering, banking etc.
Increased competition among the MNCs has forced them to focus on operational efficiency.
Enterprise Resource Planning or ERP has become an integral part of companies. A significant
number of IT projects are ERP based.
Banks, Retailers and many other service sectors consider use of IT as the most effective way of
customer care. Most, if not all, take the help of IT to remain competitive.
7


There are strong complementarities between IT and the rest of economy. IT can improve efficiency
and productivity. This complementary nature makes IT sector dependent on other sectors and
hence, the demand IT sector is hugely affected in case of any downturn of those sectors. Later well
see with the help of the incident of financial meltdown of 2008, how demand is dependent.
Value proposition of Indian IT sector
The reason for Indias success in IT sector can be attributed to various economic and socio-
economic factors. Some factors are explained below in brief:
Low cost of labour: Cost of labour gives the major advantage to the sector. Large MNCs can
outsource English proficient and technically competent workers from India at a very low cost. One
important reason for low cost is that value of rupee is much less than most of the western countries.
Employees also get the benefit of this especially when they get onsite.
Quality of service: Technical skill, high commitment towards job and language skill has helped IT
companies to provide high quality service. Growth in technical education sector has contributed to
the high skill of the labour pool. Indias colonial past naturally makes Indian people comfortable
with English. So in all Indian IT sector provides high quality service at a very low cost.
Global delivery models: With a new global delivery model Indian IT companies focused on quality
and innovation. Quality of service has now become the main reason overtaking the cost of service.
IT companies have also entered into long time customer engagement. Effective cost management is
another great tool for them.
Export and domestic market
Export accounts for almost 77% of total IT revenue. IT sector alone contributes 26% of total
Indian export. Export revenue is expected to be around US$59 billion in FY2011 according to a
research report published by NASSCOM. The Financial Service sector (Popularly known as BFSI),
accounts for the largest share of Indian IT export followed by Retail, Manufacturing and Telecom
sector. ITES-BPO segment has also become a major contributor of Indias export.
On the other hand domestic IT revenues are estimated to be US$17.35 billion for FY2011. The
estimated growth rate is almost 16%. Consistent economic development, rapid advancement in
technology, quick modernization of Indian organizations, incorporation of usage of computer
technology in government organization and development of various web based business models that
help provide IT to new customer segments are the key drivers for increased technology adoption in
India. Number of internet users in India will reach 237 million by 2015, from 81 million registered in
2010, according to a report by the Boston Consulting Group (BCG).
According to BCG Internet penetration rate in India is expected to reach 19 per cent by 2015. The
present penetration rate is only 7%. The penetration of the internet in rural areas will see an all time
high in 2011. In a survey conducted by IMRB international for the IAMAI, the number of internet
users in rural area will double by the end of 2011. Number of internet user was 12.1 million in
December 2010. It is expected to reach 24 million. The survey said that the claimed internet user
8


category is also set to grow by 96 per cent to reach 29.9 million by December 2011 from 15.2
million in December 2010.
So we can see that there has been a considerable change in domestic sector. Though export
outweighs the domestic market, IT majors have high expectation from this sector. After the
recession in 2008 and the present status of weak European economy, IT companies are
concentrating on more stable economy and emerging economies. IT has become a means to
improve the quality of service for many developing countries. IT can significantly reduce the high
overhead cost of operation.
However, many systems implementations have produced less than satisfactory results. These
implementations have not met expectations and in most of the cases have failed to perform the
required objectives. The lack of financial resources, the lack of computer literacy and improper
planning are some of causes that contribute to the failure of IT in the public sector. Lack of
employee motivation in working for domestic client is also a major concern. Employees working for
foreign client get an opportunity to earn in foreign currency. Having work experience in US, Europe
and other developed nation make their CV look better. This exposure is very lucrative for most of
the people. In fact many people are attracted to work in IT sector precisely for this reason.
A large proportion of IT workforce is young and hence they dont have any problem traveling
abroad and hence issue of traveling have never really been a major concern. So there are both
tangible and intangible benefits attached to it. In many cases we see that within a particular organize
also employees having experience of working for foreign clients get preference in terms getting
selected for a project. But with the declining economic scenario of these developed nations scope of
going abroad has reduced considerably. Restrictions over visa have further increased the
complication.
So focusing on government projects has become an absolute necessity. According to NASSCOM
report 2010-11 special attention to domestic IT market will be given. NASSCOM has partnered with
the government to facilitate greater public-private partnerships for e-governance programs. An e-
governance portal - `eGovReach' has been set up to create a one stop repository for e-governance
solutions in the country. So we can see that in spite of all the problems, IT sector has started playing
a major role in shaping modern India.

Impact of Global recession in 2008
Financial meltdown in 2008 had a huge impact on IT sector. In 2008, approximately 60% IT
revenues were from US Major revenue for IT companies come from Banking and Financial sectors.
The recession was a result of the collapse of financial sector in US. So, all such companies had to cut
back their IT spending. In all 43% western companies reduced their IT cost. Other sectors were
also affected and decided to go for reduction in IT spending. Since Indian IT sector has very high
dependency on export market had to go through some tough times. The following graph shows how
growth was affected:

9



The total impact can be divided in terms of the following segments:
Verticals: Major vertical is Banking, financial services and insurance popularly known as BFSI.
Other important verticals are retail, healthcare, manufacturing and telecom. Needless to say impact
was severe on BFSI. The table below shows the dependency of Indian IT companies on BFSI:



10


Companies with greater dependency on BFSI were more severely affected. The after-effect of this
was a shift of focus to other verticals. BFSI, however, remained the most important vertical.
Cost cutting: IT companies were forced to adopt various methods of cost cutting due to recession.
The implementation of this strategy was easy because of the flexibility that is present for the cost
model. Most of the cost cutting was done through reduction of annual increment or variable pay. In
some cases underperformers were asked to leave.
Recruitment: Employee recruitment declined drastically due to the effect of the meltdown. Fresher
recruitment was not as much affected as the lateral recruitment. In case of fresher recruitment
joining got delayed in most of the cases. The below chart shows the change in hiring trend as a result
of recession:

The above bar graph depicts the change in hiring trends in all the three sectors of IT. We can see
how the recruitment for domestic market got importance in 2009. This also reflects the shift in
focus from export to domestic market as a result of recession.
Future of IT industry in India
IT sector alone has the potential to take Indian economy to a higher level. IT has the ability to
increase efficiency and productivity of every sector of the country. The demand for IT sector is
likely to increase due to the following reasons:
Reduction in the price of semiconductor that in turn resulted in the reduction in price in
electronic equipment enabled more and more people to buy computers and use it wherever
possible.
There has been significant rise in the number of internet user and the number is likely to
increase in future. This happened due to the lowering of broadband services and availability of
large number of portable devices. The use of internet has definitely increased the number of
online users of various services. And this will surely increase in future.
Rapid urbanization of developing countries like India has made computer household equipment.
As a result computer literacy has increased. Since a large number of people still live in rural
areas, theres a high probability that the increase in the number of computer and internet user
will increase exponentially.
11


But there are also some risks associated with this sector:
There is uncertainty in Global economy due to the slow recovery in many major markets.
Moreover there is instability in major European nations. This could lead to cut in IT budget
which will ultimately result in declining demand.
Rules and regulations that are being implemented in major markets like US will surely lead to a
demand compression. The VISA restrictions in US are in fact targeted at the IT industry. This
step was taken to curb outsourcing and will directly affect the demand in future.
Increased competition could result in price competition. Indian IT majors like TCS, Infosys,
Wipro, CTS etc are close substitutes of each other. So there is increasing pressure on the IT
majors to make their service different from others. This, however, will not affect the overall
demand.
Wage inflation and overall increase in cost could reduce the profit margin. Appreciating rupee
will further add to this problem. To deal with this companies have to focus on increasing
productivity.





FMCG Industry Analysis


The Indian FMCG industry represents nearly 2.5% of the countrys GDP.
The industry has tripled in size in past 10 years and has grown at ~17%CAGR in the last 5 years
driven by rising income levels, increasing urbanisation, and strong rural demand and favourable
demographic trends.
The sector accounted for 1.9% of the nations total FDI inflows in April 2000- September 2012.
Cumulative FDI inflows into India from April 2000 to April 2013 in the food processing sector
stood at 9,000.3 crore, accounting for 0.96% of overall FDI inflows while the soaps, cosmetics and
toiletries, accounting for 0.32% of overall FDI at `3,115.5 crore.
Unilever Plc's $5.4 billion bid for a 23% stake in Hindustan Unilever is the largest Asia Pacific cross
border inbound merger and acquisition (M&A) deal so far in FY14 and is the fifth largest India
Inbound M&A transaction on record till date.
12



Major Segments in the Sector
Household Care
Personal Care
Food & Beverages
HUL holds the largest market share in the shampoo category with 46% while Marico holds the
largest share in hair oil, accounting for 42%
Colgate holds 50% of the market share in oral care with HUL holding 23% share.
HUL is the leader in Skin Care with 59% market share
*Data as on March 13

Urban segment the biggest contributor to the sectors revenue
The urban segment is the biggest contributor to the sector, accounting for two-thirds of total
FMCG sector revenue. The semi-urban and rural segments which are growing at a brisk pace,
currently account for 33.5% of revenues of the FMCG sector. FMCG products account for 53% of
total rural spending. During FY 11, over 80% of FMCG products grew at a faster pace in rural
markets as compared to urban ones with premium skin care brands growing twice as fast in rural
areas than urban brands. Lower priced packs have increased the penetration of the FMCG sector in
rural India. The sectors that are witnessing high growth include salty snacks, refined edible oil,
healthcare products, iodised salt, etc. Hair oils, toothpastes and shampoos have quite high
penetration in both urban and rural markets while the sales of instant noodles, floor cleaners and
hair dyes is increasing in rural markets due to higher awareness.

Growth in rural market bodes well for the FMCG sector
The rural market is currently worth approximately USD 9 billion in consumer spending in the
FMCG space annually. Rural India accounts for 700 million consumers or 70% of the countrys
population, accounting for one -third of the total FMCG market. According to a report by Nielsen,
the Indian rural market is tipped to grow more than ten-fold to USD 100 billion by 2025, presenting
a huge opportunity for leading FMCG brands. One of the key drivers of the rural FMCG market has
been the unprecedented growth of smaller packaging options. Lower priced packs have improved
accessibility and increased the pace of penetration of FMCG products in rural areas. According to
Nielsen, FMCG growth in the rural sector for the quarter ended March 2012, stood at 17.2%,
surpassing the urban segment at 16.5%. The purchasing power in rural areas has outpaced that of
13


urban areas as non-farm incomes improve, bolstering consumer spending on FMCG products. Rural
consumption growth has outpaced urban consumption with the percentage increase in monthly per
capita expenditure in rural markets surpassing its urban counterparts during the period 2009-2012.
Significant progress in literacy levels, higher government spending on welfare programs, growing
support to agricultural sector, which is the major occupation of rural India and better infrastructure
and DTH and mobile connections have also acted as a catalyst in bolstering rural demand for
FMCG products.

Demographic Analysis
Rural India Demography
The rural middle-class constitutes a potential market lying to be tapped by the corporate in the
business of fast-moving consumer goods (FMCG). It has been observed that rural India accounts
for more than 700 million consumers or 70% of the Indian population and 50% of the total FMCG
market. The working rural population is approximately 400 million. Average citizens in rural India
have less than half the purchasing power of their urban counterparts. Still, this market has immense
potential, enticing FMCG companies to take different steps to capture it.
Middle-Class household, the underlying factor for FMCG growth
The Indian middle class population is the most promising market for FMCG and give brand makers
the opportunity to convert them to branded products. As per McKinsey Global Institute (MGI),
middle class population in India is going to increase by about 12 times during 2005-2025; as a result,
spending is expected to increase by about 2025, fuelling consumption demand.
Disposable income
Per capita disposable income determines an individual's ability to purchase goods or services. As per
the BRICs report, India is likely to witness a rise in disposable income to USD 1,150 by 2015, from
the current USD 556 per annum, on account of growth in industrial and services sector. As a result,
spending will increase which will consequently boost the FMCG sector growth.

Porters Model
14



To determine industry attractiveness and long-run industry profitability of the Indian FMCG
Industry, we chose to apply the Porters five forces in our analysis. Porters five forces are: (1)
Barriers to Entry and exit, (2) Threat of substitutes, (3) Buyer bargaining power, (4) supplier
bargaining power, and (5) Industry Competition.

1. Barriers to Entry and exit: The Indian FMCG Industry is characterized with modest entry and exit
barriers. Integrated business model and increasing capital requirement in the industry restrict new
entrants. Huge investments in setting up distribution networks and promoting brands and
competition from established companies.
2. Threat of substitutes: Being an essential commodity the demand for consumer products is elastic.
Multiple brands positioned with narrow product differentiation. Companies entering a category
trying to gain market share compete on pricing which increases products substitution. Hence, threat
of substitute is high in the industry.
3. Buyer bargaining power: High brand loyalty for some products, thereby discouraging customers
product shift. But low switching cost and aggressive marketing strategies under intense competition
within the FMCG companies, induce Customers to switch between products, thereby driving value
for money deals for consumers.
4. Supplier bargaining power: Prices are generally governed by international commodity markets,
making most FMCG companies price takers. Due to the long term relationships with suppliers etc.,
FMCG companies negotiate better rates during times of high input cost inflation
5. Industry Competition: Competitiveness among the Indian FMCG players is high. With more
MNCs entering the country, the industry is highly fragmented. Advertising spends continue to grow
and marketing budgets as well as strategies are becoming more aggressive. Private labels offered by
15


retailers at a discount to mainframe brands act as competition to undifferentiated and weak brands.


SWOT Analysis for FMCG Sector

Strengths:
Low operational costs
Presence of established distribution networks in both urban and rural areas
Presence of well-known brands in FMCG sector


Weaknesses:
Lower scope of investing in technology and achieving economies of scale, especially in small
sectors
Low exports levels
"Me-too" products, which illegally mimic the labels of the established brands. These
products narrow the scope of FMCG products in rural and semi-urban market.

Opportunities:
Untapped rural market
16


India is one of the worlds biggest producers of a number of FMCG products but the
countrys exports account for a very small proportion of the overall output.
Food-processing Industry: With 200 million people expected to shift to processed and
packaged food, India needs around USD 30 billion of investment in the food processing
industry.
Focus on R&D
Increase the volume of production
Changing life style of people

Threats:
High inflation
Rising cost of inputs
Emergence of private labels
Counterfeits and pass-offs
Rupee depreciation may hit margins of companies
Infrastructure bottlenecks
Legislative effect
Political effects





Power Industry Analysis
Coal shortages, scams, hike in prices of imported coal, lack of land availability, shortage in supply of
equipments for new capacities and policy logjam have together paralyzed the prospects of power
sector in India in the recent past. So much so that the sector that cornered a bulk of the five-year
plan infrastructure outlays for decades, is now a forbidden one. Not just for investors but even for
bankers and financers that a sector like power heavily relies upon.
The key problems hindering the growth of the power sector are land, fuel, environment, and forest
clearances. Even the government is finding it very difficult to get the required land for allotting to
power projects. One of the key problems in getting land is Naxalism in the eastern and central
states, where a large number of projects are being planned owing to abundance of fuel resources.
Central institutions like National Thermal Power Corporation Limited (NTPC) and the State Electricity
Boards (SEBs) continue to dominate the power sector in India. India has adopted a blend of thermal,
hydel and nuclear sources with a view to increasing the availability of electricity. Thermal plants at
17


present account for 68% of the total power generation capacity in India. This is followed by hydro-
electricity (28% share). The rest comes from nuclear and wind energy.
Average transmission and distribution losses (T&D) exceed 25% of total power generation compared
to less than 15% for developing economies. The T&D losses are due to a variety of reasons, viz.,
substantial energy sold at low voltage, sparsely distributed loads over large rural areas, inadequate
investment in distribution system, improper billing and high pilferage.
Losses of Indias State Electricity Boards have once again assumed disproportionate levels, thus
coming full circle since the Electricity Act of 2003 which tried to make these entities more efficient.
The average cost of supply for most discoms has far exceeded the average revenue realized.

Key Points
Supply
Many projects have been planned but due to slow regulatory processes and inadequate equipments and
fuel, the supply is far lesser than demand. As per certain estimates, India needs to double its generation
capacity over the next decade or so to meet the potential demand.

Demand
The long-term average demand growth rate is expected to remain in the higher single digit growth levels
given the lower per capita power consumption in india as compared to the global average.

Barriers to entry
Barriers to entry are high, especially in the transmission and distribution segments, which are largely
state monopolies. Also, entering the power generation business requires heavy investment initially. The
other barriers are fuel linkages, payment guarantees from state governments that buy power and retail
distribution license.

Bargaining power of suppliers
Not very high since the tariff structure is mainly regulated.

Bargaining power of customers
Bargaining power of retail customers is low, as power is in short supply. However government is a big
buyer and payments from it can be erratic, as has been seen in the past.

Competition
Getting intense, but despite there being enough room for many players, shortage of inputs such as coal
and natural gas has dissuaded new entrants.

Financial Year '13

While average PLFs declined for all thermal power generation utilities across sectors, the Central Public
Sector Undertakings continued to be the best performers, followed by private sector. SEBs and IPPs
were the worst performers during FY13. Key reasons for the declining PLFs were shortage and poor
quality of coal coupled with backing down of units and shutting down of units due to low demand from
beneficiary states as well as delays in stabilization of new plants.

18


Energy deficit (difference between requirement and availability) numbers worsened during the year
with the same standing at 8.7% (8.5% in FY12). Peak deficit numbers however improved on a year on
year basis.

As far as T&D segments of the sector are concerned, there was little that actually happened in FY13. The
country continues to reel under the pressure of higher T&D losses (about 26%) and with the government
going very slow with the reforms process in these segments, due to which the long-term sustainable
growth of the sector seems doubtful.

After the massive grid collapse in August in 2012, the problems of the transmission segment have
resurfaced to governments attention. Investments in this segment have, however, moved rather slowly.
The existing inter-regional power transfer capacity stood at 27,750 MW at the end of the 11th Plan
period. The same is targeted to increase to 65,550 MW by the end of the 12th Plan. The challenges that
need to be addressed to meet this plan include right of way, flexibility in line loading and improvement
of operational efficiency, amongst others.

In order to ensure adequate supplies of coal and avoid stranded generating capacities in the country,
the government issued a Presidential directive to CIL to sign Fuel Supply Agreements (FSAs) with power
producers assuring them of at least 80% of the Annual Committed Quantity. However, CIL was unable to
honor the 80% commitment on account of production shortfall.


Prospects

Recognizing that electricity is one of the key drivers for rapid economic growth and poverty alleviation,
the industry has set itself the target of providing access to all households over the next few years. As per
government reports, about one third of the households do not have access to electricity. Hence,
meeting the target of providing universal access is a daunting task requiring significant addition to
generation capacity and expansion of the transmission and distribution network.

The target for power capacity addition during the 12th Plan period is 88,000 Mw. With about 60,000
Mw under execution, this 88 Gw should be achieved after hitting 55 Gw in the 11th Plan. The country
added nearly 20 GW in FY13 - the first year of the plan. However, a significant amount of capacity is
stranded owing to the non-availability of gas. Rising demand and falling domestic production has pushed
the share of imported gas to 40% of the current consumption in India. The US has turned into a net
energy exporter on the back of huge quantities of shale gas and oil becoming available commercially.

Import of coal in India is expected to rise up to 200 MMT (m metric tonnes) in the terminal year of the
12th Plan as availability of coal from domestic linkages would not suffice the requirements.

Restoration of the financial health of state electricity boards (SEBs) and improvement in their operating
performance continue to remain a critical issue for the sector. As such, effective implementation of the
restructuring package remains the key. While the power distribution has been loss-making business in
19


India on an overall basis, the investments in T&D are expected to improve with the privatization coming
in.



















20


2. FINANCIAL
STATEMENT
ANALYSIS










Infosys
Income Statement
21









Balance Sheet

22




Cash Flow
23











Financial Ratios
24















Hindustan Unilever
25



Income Statement











Balance Sheet
26










Cash Flow
27












Financial Ratios
28





Reliance Power

29


Income Statement

30





Balance Sheet


31






Cash Flow












32


Financial Ratios


33















34




3. Cash Flow
Projections and
Discount Rates












35








4. Valuation















36







THANK YOU