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Cost of Equity

PROJECT REPORT
ON
“A STUDY ON THE COST OF EQUITY AND ITS GROWTH IN IT
SECTOR”
Submitted in partial fulfillment of the requirement for the award of

MASTER OF BUSINESS ADMINISTRATION


Of
Bangalore University

Submitted By:

Sphoorti M. Padmannavar

Reg. No: 06KXCM6026

Under the Guidance of

Dr. V. Prabhu Dev

SURANA COLLEGE P. G. CENTRE


CA#17, Kengeri Satellite Town
BANGALORE-560060
2008

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DECLARATION

I, Ms Sphoorti M. Padmannavar a bonafide student of the department of

management studies, SURANA COLLEGE PG CENTRE, BANGALORE, would

like to declare that the project work made on “A study on the cost of equity and its

growth in IT sector”, in partial fulfillment of MBA degree course of the Bangalore

University, is of my original work under the guidance of Dr. V. Prabhu Dev , this

has not been submitted earlier to any university or institution for the award of any

degree / diploma or certificate published anytime.

Date : Sphoorti M. Padmannavar


Place : Bangalore Reg No.06KXCM6026
4TH SEM MBA

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AKNOWLEGEMENT

Before we get into thickness of pages I would like to place on record my special
appreciation to many people for their guidance & support to the project in its
formative stage & for their valuable contribution in planning, monitoring &
providing information for the project.

I thank Dr. V. Prabhu Dev for reviewing the entire manuscript with painstaking
attention for detail, and more so for his ability to spot the spelling mistakes in
paragraphs & for his guidance & support.

I would like to add heartfelt appreciation to director Dr. V. Prabhu Dev & HOD of
Surana college PG centre Prof. Vijayendra S. for their guidance & support.

Sphoorti M. Padmannavar
(06KXCM6026)

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TABLE OF CONTENT
CHAPTER CONTENTS PAGE NO.

Chapter 1 Introduction 01-15


1.1 Introduction to the topic 01-04
1.2 An overview of IT industry 05-15

Chapter 2 Research Methodology 16-18


2.1 Statement of the problem 16
2.2 Need for the study 17
2.3 Objectives of the study 17
2.4 Scope of the study 17
2.5 Methodology 17
2.6 Operational definitions of concept 18
2.7 Limitations of the study 18

Chapter 3 Company Profile of 10 IT companies 19-39


3.1 Infosys Technologies Limited 20-21
3.2 Wipro Technologies 22-24
3.3 Tata Consultancy Services Limited 25-26
3.4 D-Link 27-28
3.5 Satyam Computer Services Ltd. 29-30
3.6 NIIT Technologies Ltd. 31-32
3.7 Aptech Limited 33-34
3.8 Sonata Software 35
3.9 Patni Computer Systems 36-37
3.10 Melstar Information Technologies Ltd. 38-39

Chapter 4 Analysis of Data 40-67


4.1 Table and graphical representation of cost of equity shares 41-65
4.2 Factors influencing the equity growth in IT sector 66-67

Summary of findings, suggestions and


Chapter 5 conclusion 68-72
Bibliography 73

LIST OF TABLES

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TABLE NO. CONTENTS PAGE


NO.
Table No. 1.1 India’s IT Industry (US$ bn) 07

Table No. 1.2 Emerging IT Services Dynamics 10

Table No. 1.3 Investment Plans of MNCs in India 12

Table No. 1.4 Key Positives & Negatives for the Indian IT Industry 15

Table no. 4.1 Table showing capital structure of Infosys Technologies Ltd. 41
Table no. 4.2 Table showing dividend paid in the year 2006-07 by Infosys Technologies Ltd. 42
Table no. 4.3 Table showing growth in percentage of Infosys Technologies Ltd. 42
Table no. 4.4 Table showing cost of equity for year 2007-08 of Infosys Technologies Ltd. 42
Table no. 4.5 Table showing capital structure of Wipro Technologies Ltd. 44
Table no. 4.6 Table showing dividend paid in the year 2006-07 by Wipro Technologies Ltd. 45
Table no. 4.7 Table showing growth in percentage of Wipro Technologies Ltd. 45
Table no. 4.8 Table showing cost of equity for year 2007-08 of Wipro Technologies Ltd. 45
Table no. 4.9 Table showing capital structure of Tata Consultancy services 47
Table no. 4.10 Table showing dividend paid in the year 2006-07 by TCS 47
Table no. 4.11 Table showing growth in percentage of TCS Ltd. 47
Table no. 4.12 Table showing cost of equity for year 2007-08 of TCS 48
Table no. 4.13 Table showing capital structure of D-Link (India) Ltd. 49
Table no. 4.14 Table showing dividend paid in the year 2006-07 by D-Link (India) Ltd. 49
Table no. 4.15 Table showing growth in percentage of D-Link (India) Ltd. 49
Table no. 4.16 Table showing cost of equity for year 2007-08 of D-Link (India) Ltd. 50
Table no. 4.17 Table showing capital structure of Satyam Computer Services 51
Table no. 4.18 Table showing dividend paid in the year 2006-07 by Satyam Computer 52
Services
Table no. 4.19 Table showing growth in percentage of Satyam Computer Services Ltd. 52
Table no. 4.20 Table showing cost of equity for year 2007-08 of Satyam Computer Services 52
Table no. 4.21 Table showing capital structure of NIIT Technologies 54
Table no. 4.22 Table showing dividend paid in the year 2006-07 by NIIT Technologies 54
Table no. 4.23 Table showing growth in percentage of NIIT Technologies 54

Table no. 4.24 Table showing cost of equity for year 2007-08 of NIIT Technologies 55

Table no. 4.25 Table showing capital structure of Aptech Ltd. 56


Table no. 4.26 Table showing dividend paid in the year 2006-07 by Aptech Ltd. 56
Table no. 4.27 Table showing growth in percentage of Aptech Ltd. 56
Table no. 4.28 Table showing cost of equity for year 2007-08 of Aptech Ltd. 57
Table no. 4.29 Table showing capital structure of Sonata Software 58

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Table no. 4.30 Table showing dividend paid in the year 2006-07 by Sonata Software 58
Table no. 4.31 Table showing growth in percentage of Sonata Software 58
Table no. 4.32 Table showing cost of equity for year 2007-08 of Sonata Software 59
Table no. 4.33 Table showing capital structure of Patni Computer Systems 60
Table no. 4.34 Table showing dividend paid in the year 2006-07 by Patni Computer Systems 60
Table no. 4.35 Table showing growth in percentage of Patni Computer Systems 60
Table no. 4.36 Table showing cost of equity for year 2007-08 of Patni Computer Systems 61
Table no. 4.37 Table showing capital structure of Melstar Infotech 62
Table no. 4.38 Table showing dividend paid in the year 2006-07 by Melstar Infotech 62
Table no. 4.39 Table showing growth in percentage of Melstar Infotech 62
Table no. 4.40 Table showing cost of equity for year 2007-08 of Melstar Infotech 63

LIST OF GRAPHS

PAGE
GRAPH NO. CONTENTS NO.

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Chart No.1.1 Chart showing India’s IT Exports 08


Chart no. 4.1 Chart showing the expected dividend of Infosys Technologies Ltd 43
Chart no. 4.2 Chart showing the expected dividend of Wipro Technologies Ltd. 46
Chart no. 4.3 Chart showing the expected dividend of TCS Ltd. 48
Chart no. 4.4 Chart showing the expected dividend of D-Link (India) Ltd. 50
Chart no. 4.5 Chart showing the expected dividend of Satyam Computer Services Ltd. 53
Chart no. 4.6 Chart showing the expected dividend of NIIT Technologies Ltd. 55
Chart no. 4.7 Chart showing the expected dividend of Aptech Ltd. 57
Chart no. 4.8 Chart showing the expected dividend of Sonata Software 59
Chart no. 4.9 Chart showing the expected dividend of Patni Computer Systems 61
Chart no. 4.10 Chart showing the expected dividend of Melstar Infotech 63
Chart no. 4.11 Chart showing the Cost of Equity of all 10 IT companies 64

EXECUTIVE SUMMARY

The cost of equity reflects the opportunity cost of investment for individual
shareholders. It will vary from company to company because of the differences in
the business risk and financial risk of different companies. The cost of equity is the

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minimum rate of return a firm must offer shareholders to compensate for waiting
for their returns, and for bearing some risk.

The cost of equity capital for a particular company is the rate of return on
investment that is required by the company's ordinary shareholders. The return
consists both of dividend and capital gains, e.g. increases in the share price.

Computation of the cost of equity shares is the most complex procedure. It is due
to the fact that unlike preference shares or debentures, equity shares do not have
either the interest or dividend to be paid at a fixed rate. The cost of equity shares
basically depends upon the expectation of the equity shares. The market value of
shares depends on the dividends paid and the rate of dividend depends on the
degree of financial and business risks.

The tables for main points are prepared and analyzed, graphs has been drawn
wherever necessary. Therefore, secondary data have been tabulated, graphically
depicted and analyzed. Based on this analysis the conclusions are drawn and
recommendations are made.

The following method is used for this analysis:


• The Constant Dividend Growth Model (Gordon’s Model)

The purpose of the study is to know that how factors influence equity growth in IT
sector and to know which IT Company is more financially sound for investors to
invest. The companies that are considered for this analysis are:-
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1. Infosys Technologies Limited


2. Wipro Technologies
3. Tata Consultancy Services Limited
4. D-Link
5. Satyam Computer Services Ltd.
6. NIIT Technologies Ltd.
7. Aptech Limited
8. Sonata Software
9. Patni Computer Systems
10.Melstar Information Technologies Ltd.

CHAPTER 1

INTRODUCTION:

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Equity capital is also known as ownership capital. Equity shareholders enjoy


the profit of the firm on one hand and bear the risk on the other hand. Analysis
refers to the examination and evaluation of the relevant information to select the
best course of action from among various alternatives.

A method of equity share valuation which involves examining the


company's financials and operations, especially sales, earnings, growth potential,
assets, management, and competition. Equity valuation takes into consideration
those variables that are directly related to the company and the overall market data.

The cost of equity reflects the opportunity cost of investment for individual
shareholders. It will vary from company to company because of the differences in
the business risk and financial or gearing risk of different companies.

The purpose of the study is to know that how factors influence equity growth
in IT sector and to determine the cost of equity in selected IT companies over two
years and to know which IT Company is more financially sound for investors to
invest.

COST OF CAPITAL
The cost of capital for a firm is a weighted sum of the cost of equity and the
cost of debt. Firms finance their operations by external financing, issuing stock
(equity) and issuing debt, and internal financing, reinvesting prior earnings.

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Capital (money) used to fund a business should earn returns for the capital
owner who risked their saved money. For an investment to be worthwhile the
projected return on capital must be greater than the cost of capital.

Cost of equity:

Cost of equity is more challenging to calculate as equity does not pay a set
return to its investors. The cost of equity is broadly defined as the risk-weighted
projected return required by investors, where the return is largely unknown. The
cost of equity is therefore inferred by comparing the investment to other
investments with similar risk profiles to determine the "market" cost of equity.

The cost of capital is often used as the discount rate, the rate at which
projected cash flow will be discounted to give a present value or net present value.
The cost of equity is the minimum rate of return a firm must offer shareholders to
compensate for waiting for their returns, and for bearing some risk.

The cost of equity capital for a particular company is the rate of return on
investment that is required by the company's ordinary shareholders. The return
consists both of dividend and capital gains, e.g. increases in the share price. The
returns are expected future returns, not historical returns, and so the returns on
equity can be expressed as the anticipated dividends on the shares every year in
perpetuity. The cost of equity is then the cost of capital which will equate the
current market price of the share with the discounted value of all future dividends
in perpetuity.

The cost of equity reflects the opportunity cost of investment for individual
shareholders. It will vary from company to company because of the differences in
the business risk and financial risk of different companies.

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The cost of equity is based on a firm's current rate of return. If one assumes
a perfect market, industry-specific costs of equity reflect the riskiness of particular
industries. A high cost of equity would then indicate a higher-risk industry that
should command a higher return to compensate for the higher risk.
The cost of equity capital is equal to the required rate of return on equity-
supplied capital. There are two categories of equity costs:
The cost of retained earnings, ks, is estimated with two models:

The Constant Dividend Growth Model (Gordon’s Model)

ks = (D1/Po) + g
where
D1 = the next expected dividend [Do (1+g)],
g = the constant growth rate of dividends,
Po = the current market price per share of the common stock,

Under this model, a common misconception is that retained earnings are a costless
source of finance. Although retained earnings do not have any servicing costs, they
have an opportunity cost equivalent to the ongoing cost of equity, since if these
funds were returned to investors they could have achieved an equivalent return
through re-investment at a personal level.

The CAPM (Capital Asset Pricing Model)

ks = kRF + (kM - kRF) *

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where:
kRF = the risk-free rate of interest,
kM = the expected return on the market,
= a measure of the sensitivity of the firm’s stock returns
relative to those of the market assuming the absence of
diversifiable risk.

The cost of newly-issued common stock, kn is estimated with the constant dividend
growth model so as to allow for flotation cost:
kn = D1/(Po-F)+g

THE INDIAN IT INDUSTRY

The Information Technology (IT) sector in India holds the distinction of


advancing the country into the new-age economy. The growth momentum attained
by the overall economy since the late 1990s to a great extent can be owed to the IT
sector, well supported by a liberalized policy regime with reduction in
telecommunication cost and import duties on hardware and software. Perceptible is

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the transformation since liberalization – India today is the world leader in


information technology and business outsourcing. Correspondingly, the industry’s
contribution to India’s GDP has grown significantly from 1.2% in 1999-2000 to
around 4.8% in FY06, and has been estimated to cross 5% in FY07. The sector has
been growing at an annual rate of 28% per annum since FY01.

Indian IT companies have globally established their superiority in terms of


cost advantage, availability of skilled manpower and the quality of services. They
have been enhancing their global service delivery capabilities through a
combination of organic and inorganic growth initiatives. Global giants like
Microsoft, SAP, Oracle, and Lenovo have already established their captive centers
in India. These companies recognize the advantage India offers and the fact that it
is among the fastest growing IT markets in the Asia-Pacific region.

INDUSTRY STRUCTURE

The size of the Indian IT industry, according to NASSCOM, has been


estimated to be around US$ 47.8 bn. The Indian IT industry can be broadly divided
into two markets:

1. Domestic market
2. Exports market.

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The exports market constitutes the largest segment accounting for 75% of the
total revenue generated by the Indian software industry.

The domestic IT market is broadly divided into the following four segments:

1. IT Services
2. Software segment which includes engineering and Research &
Development (R&D) services
3. IT-enabled Services and Business Process Outsourcing (ITES-BPO)
4. Hardware

The total revenue generated by the domestic market:-

• IT Services: 34%

• Engineering Services, R&D and Software Products segments: 10%

• ITES-BPO segment: 7%

• Hardware: 49%.

The exports market is dominated by the IT services market holding a share of


56.4% in the software and services exports in FY06, followed by the ITES-BPO
segment with 26.7% share and the software products and engineering services
segment with 16.9% share.

The Indian hardware industry is at present estimated to be in the proportion of


30% domestic, 1.25% exports and the remaining being imports. The domestic
market itself offers tremendous potential for hardware companies, thus having very
few companies venturing into hardware exports. Imports of IT hardware which
form a large component of the industry are mainly from Taiwan, China and Korea.

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Lately, however, MNCs in the hardware segment have been viewing India as a hub
for setting up hardware manufacturing facilities, for instance Dell.

Table No. 1.1

India’s IT Industry (US$ bn)

Source: NASSCOM

IT Services Exports

Indian IT Services exports grew from US$ 10 bn in FY05 to US$ 13.3 bn in


FY06, registering a growth of 33.4%, and is further expected to reach US$ 18.1 bn
in FY07, posting a growth of 36%. Revenue from ‘projects’ dominated the IT
Services exports with a share of 58%, with outsourcing and support & training
activities accounting for 33% and 9% respectively.

Chart No.1.1

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Source: D&B Research

Within the ITES-BPO segment, Customer Interaction Services (CIS) account for
nearly India’s IT Exports XIV 45-50% of the total ITES-BPO services exports
while finance & accounting contributes for the remaining 40-45%. Human
resource and other high-end knowledge-based processes account for 2% and 8-
10% respectively.

The Software product, Engineering services and R&D segment contributes


around 17% of the software and services exports. India is well positioned in the
engineering and R&D services segment. Apart from Indian companies offering
these services, several foreign companies (both captive and third party) are also
setting up base in India to provide these services. Overseas companies operating in
sectors like high–tech, telecommunications, automobile, aerospace, heavy
machinery, construction and industrial products are looking at off-shoring their
engineering and R&D related work to India.

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Few important characteristics of the Indian IT sector include:

• Export intensive: Ever since the industry’s evolution, exports has


been the major contributor to the industry.
• Concentration on Low-end services: Low-end services such as
customized software services and maintenance have been the key strength
of the Indian IT companies. These companies are now however moving up
the value chain offering end-to-end solutions to clients.
• Labour intensive industry: The very nature of the services offered by
the industry makes human resources a significant driver for the industry.
• Fragmented industry: D&B’s inhouse database has identified over
8,000 companies which operate in the IT space in India, offering a wide
range of software products and services. A large number of these
companies are unorganized players
• Skewed concentration: The revenues of the top four companies, TCS,
Infosys, Wipro and Satyam, including income of their subsidiaries, account
for around 22% of the overall industry. This skewness is all the more
pronounced in the case of software services.

Emerging Trends in the Indian IT Services Industry

While the global IT players are aggressively scaling up their operations in


India, due to the advantages that the Indian industry offers, the Indian IT
companies are also preparing to tap the global market. The companies are
witnessing significant change with regard to their service offerings and
geographical concentration. Today, companies are expanding their service
offerings from application development and maintenance to high end services like

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testing, consulting and engineering designing. The global delivery model has not
only facilitated the companies in delivering quality of work but also helped them to
control costs.

Table No. 1.2

Emerging IT Services Dynamics

Source: D&B Industry Research Service

Over the years, the Indian companies have positioned themselves well to reap
benefits of the emerging scenario in the IT sector.

New Service Offerings

The Indian IT companies are expanding their service offerings to provide a


complete basket of services to their clients. These new services include IT
consulting, testing, business process management and IT infrastructure services,
which in a way allows the IT companies to de-risk their business from pricing
pressures and enter into newer areas which provide them higher growth and
profitability.

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Larger Deal Size

Indian IT companies have successfully scaled up operations and made a


mark in the global outsourcing market, evident from the large deals bagged by the
Indian IT companies in the past one year, including the British Telecom-Tech
Mahindra deal which was worth US$ 1 bn, the Pearl Insurance-TCS deal (£ 486
mn), the Skandia-HCL Technologies deal (US$ 200 mn) and the Kimberly-Clark-
TCS deal (US$ 100 mn). Most of the deals bagged by the major companies were in
the Banking and Financial Service space which reiterates the growth in this
vertical. As per the data compiled by Technology Partners International (TPI), the
Asia Pacific region witnessed a significant increase in total deals amounting to
US$ 10 bn in 2006 from US$ 6.1 bn in 2005. Indian companies bagged contracts
(above US$ 25 mn) worth US$ 2.7 bn in 2006, with a market share of 25% in the
Asia Pacific region.

Growing presence of MNCs

Cost arbitrage and the availability of a large talent pool have attracted
several MNCs to India. Big players like IBM, Accenture, Capgemini and Oracle
among others have not only increased their headcounts in India but also
outperformed their global performance in terms of revenue growth. Their Indian
operations are witnessing strong growth as compared to their global business.
Some of the major global companies like Intel, IBM and CSC are cutting jobs
abroad and shifting their base to India.
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Table No. 1.3

Investment Plans of MNCs in India

Source: D&B Industry Research Service

Emerging Markets: In terms of geographical contribution, the US continues to


remain the key market for Indian IT companies, accounting for 67.2% of the
software and services (including BPO) exports from India. However, Europe is
also emerging as an important market for the Indian IT industry, considering the
fact that the share of exports to Europe from India increased from 22.2% in FY03
to 25.1% in FY06. After the US, Indian companies are looking at the European
region as a potential market for exports and also to expand their global presence.
Mergers and acquisitions has been one of the routes that the Indian companies have
adopted to enhance their presence in European markets.

Changing Growth Drivers: There has been a change in the revenue composition of
companies in recent years. The revenue contribution of high-growth segments such
as infrastructure management services, package implementation, testing and
consulting has witnessed a continuous increase. This is in sharp contrast to the

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earlier trend wherein almost all companies were largely dependant on the Custom
Application Development and Maintenance (CADM) services segment for their
revenues. Today, the share of CADM has decreased to 49% in FY06 from 80% in
FY01. Thus, newer service lines are not only enabling Indian companies to
increase their sales by cross-selling to their existing customers, but also improving
their average billing rates and recognition of being end-to-end service providers.

New End-users: In terms of user industries, the BFSI and hi-


tech/telecommunication industries remain the leading verticals for the Indian IT
companies. Together, these sectors account for 58% of the Indian IT-ITES exports.
Though these verticals have good growth potential, other sectors such as
manufacturing, retail, healthcare, utilities, etc., are also emerging as promising
segments for the Indian IT companies. While the BFSI sector has the potential to
provide large size contracts to the IT companies, the manufacturing sector can
provide large number of deals/assignments to the Indian players.

Presently, the Indian IT companies are on a hiring spree which indicates


their bullishness on their order flows. All the major players have increased their
manpower by 15-50%, and the trend is expected to continue further. As a result,
the companies are expected to scale up their operations. The Indian IT companies
are also vying for inorganic growth, with a quest for newer geographical areas,
service offerings, domain expertise, customers and markets.

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Concerns for the Indian IT Industry

Though demand conditions have been optimistic, the Indian IT sector is


exposed to certain risks which may deter growth. An appreciating rupee,
anticipated slowdown in the US economy, shortage of skilled manpower,
limitations in domestic infrastructure and competition from other global players
offering manpower at low cost like China, Philippines and Vietnam can have a
negative impact on the performance of the Indian IT companies.

Besides, increasing activities of global MNCs in India will make difficult


employee retention for Indian companies. NASSCOM opines that there will be a
shortage of half a million people in the IT and ITES segments by 2009. With an
industry attrition level hovering around 20-25% (often higher for smaller players),
companies are likely to offer an increase of 10-15% in salaries in the coming years.

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On the financial front, wage inflation of 10-15% and FOREX fluctuation can
reduce the top line as well as the bottom line of the companies. Unless the
Government defers the withdrawal of tax incentives which is due to expire after
2009, IT companies operating out of the Software Technology Parks of India
(STPIs) are likely to witness an increase in their tax liabilities, which may reduce
their profitability further.

Table No. 1.4


Key Positives & Negatives for the Indian IT Industry

CHAPTER 2
RESEARCH METHODOLOGY:-

1. Statement of the problem:-

The cost of equity reflects the opportunity cost of investment for individual
shareholders. Computation of cost of equity shares is the most complex
procedure. It is due to the fact that unlike preference shares or debentures,
equity shares do not have either the interest or dividend to be paid at fixed
rate. The cost of equity shares basically depends upon the expectation of
equity shares. The market value of shares depends on the dividend paid &
the rate of dividend depends on the degree of financial & business risks.

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Indian capital market is experiencing a tough situation by the various


economical & financial reforms involving the various sub markets in the
financial systems. As the stock market is highly volatile, it is very difficult
for the investor to predict the right opportunity cost of investment.

Many people want to invest in shares in order to make huge profits. In this
scenario many companies are available and the investors are in a dilemma to
choose a particular company for investing, which gives more returns with
less risk. Many times it is more important to be in the right industry than in
the right stock.

Topic:-

“A Study on the Cost of Equity and its Growth in IT Sector”

2. Need for the study:-

To find out cost of equity of listed 10 IT companies from various groups, by this an
investor can make investment decisions.

3. Objectives of the study:-

• The purpose of the study is to know that how factors influence equity
growth in IT sector.
• To determine the cost of equity in selected IT companies over two
years.

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• To understand the practical situation in stock market and to compare


the theoretical knowledge to that of practical knowledge.

4. Scope of the study:-

• The study was confined only to 10 IT companies listed under BSE IT


index.
• The 10 IT companies are selected from different group viz., Group A,
Group B1, & Group T.

5. Methodology:-

• Source of data: The study undertaken includes secondary data, which


is collected by using various text books, articles and web-sites

• Sample method: Random sampling method is used to collect the data.


• Sampling unit: IT sector
• Sampling size: 10 IT companies

6. Limitations of the study:-

• Valuations of equity shares are difficult since they neither have a well
defined cash flow streams nor limited value.
• The study is limited to IT sector only.

• Due to time constraints the sample size is restricted to 10 IT


companies only.

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7. Chapter scheme:-

Chapter 1: Introduction

Chapter 2: Research Methodology

Chapter 3: Company Profile of 10 IT companies

Chapter 4: Calculation of cost of equity

Chapter 5: Findings, Suggestions, and Conclusion

CHAPTER 3
COMPANY PROFILE OF 10 IT INDUSTRIES

The vision of Information Technology (IT) policy is to use IT as a tool for raising
the living standards of the common man and enriching their lives. Though, urban
India has a high internet density, the government also wants PC and Internet
penetration in the rural India. In Information technology (IT), India has built up
valuable brand equity in the global markets. India's most prized resource in today's
knowledge economy is its readily available technical work force. India has the

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second largest English-speaking scientific professionals in the world, second only


to the U.S.

The Indian software industry has grown from a mere US $ 150 million in 1991-92
to a staggering US $ 5.7 billion (including over $4 billion worth of software
exports) in 1999-2000. No other Indian industry has performed so well against the
global competition. The annual growth rate of India’s software exports has been
consistently over 50 percent since 1991.

Today, India exports software and services to nearly 95 countries around the
world. The share of North America (U.S. & Canada) in India’s software exports is
about 61 per cent. In 1999-2000, more than a third of Fortune 500 companies
outsourced their software requirements to India.

In this chapter the company profile of selected 10 IT industries is presented in brief


to understand each company’s growth with more ease.

Infosys Technologies Limited:-

Type : Public NASDAQ: INFY


BSE: 500209
Founded : July 2, 1981
Headquarters : Electronics City, Hosur Road, Bangalore, India
Key people : N. R. Narayana Murthy (Founder, Chairman and Chief
Mentor)
Nandan Nilekani (Co-founder and Co-Chairman)
Kris Gopalakrishnan (Co-founder, CEO and MD)
S. D. Shibulal (Co-founder and COO)
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Industry : Software services


Products : Finacle (a financial software package for the banking
industry)
Services : Information technology services and solutions
Revenue : ▲ $3.1 billion (in FY 2006-07)
Employees : 88,601 (As on December 31st, 2007)
Slogan : Powered by Intellect, Driven by Values

Infosys Technologies Limited is a multinational information technology Services


Company headquartered in Bangalore, India. It is one of India's largest IT
companies, with nine development centers in India and over 30 offices worldwide.
Infosys Technologies Limited was founded on July 2, 1981 in Pune by N. R.
Narayana Murthy and six others: Nandan Nilekani, N. S. Raghavan, Kris
Gopalakrishnan, S. D. Shibulal, K. Dinesh and Ashok Arora, with Raghavan
officially being the first employee of the company. Murthy started the company by
borrowing INR 10,000 from his wife Sudha Murthy. The company was
incorporated as "Infosys Consultants Pvt Ltd.", with Raghavan's house in Matunga,
north-central Mumbai as the registered office. In 1983 Infosys moved its
headquarters to Bangalore, the capital of Karnataka.

1987: First international office in the United States in Fremont, California, now its
US headquarters. ; Got its first foreign client, Data Basics Corporation from the
United States

1993: Became a public limited company in India with an initial public offering of
Rs. 13 crores.

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Cost of Equity

1999: Listed on NASDAQ; Attained a SEI-CMM Level 5 ranking and became the
first Indian company to be listed on NASDAQ

2006: Became the first Indian company to ring the NASDAQ Stock Market
Opening Bell; August 20, N. R. Narayana Murthy retired from his position as the
executive chairman; Acquired the 23% stake Citibank had in its BPO offshoot
Progeon, making it a wholly owned subsidiary of Infosys and changed the name to
Infosys BPO Ltd.; December, became the first Indian company to make it to
Nasdaq-100

During the 14-year period from 1993 to 2007, the issue price of an Infosys share

has increased three thousand fold. This is excluding the dividends that the
company has paid out over this duration.

Wipro Technologies:-
Type : Public (NYSE: WIT)
Founded : 1945 (Pre Independence)
Headquarters : Bangalore
Key people : Azim Premji, Chairman and Managing director
Industry : Information technology services
Revenue : ▲$3.47 billion USD
Net income : ▲$677 million USD

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Cost of Equity

Employees : 79,832+ (2007)


Slogan : Applying Thought

Wipro Tech is an information technology service company established in India in


1980. It is the global IT services arm of Wipro Limited (in operation since 1945,
incorporated 1946). It is headquartered in Bangalore and is the third largest IT
services company in India. Wipro Technologies has over 300 customers across
U.S., Europe and Japan including 50 of the Fortune 500 companies. It is listed on
the New York Stock Exchange and is part of its TMT (technology media telecom)
index testing.

It has dedicated development centers and offices across India, Europe, North
America, Latin America and Asia Pacific. The current Chairman, Managing
Director and majority stake owner is Azim Premji, who has headed the software
and hardware divisions since Wipro's inception.

Wipro was set up in 1945. Primarily an edible oil factory, the chief products were
Sunflower Vanaspati and 787 laundry soap (a by-product of the Vanaspati
operations). The company was called Western India Vegetable Products Limited;
it had a minor presence in Maharashtra and Madhya Pradesh. In the 1970s and
1980s, it began to expand and made forays into computing. In 1975, Wipro
marketed India's first homegrown PC.

Wipro was the sole representative for Sun Microsystems in India, before the Sun
liaison office was set up in India, in the early 1990s. Wipro is the highest-ranked
Indian IT provider by International Association of Outsourcing Professionals.

1947: An oil mill and hydrogenated cooking medium plant set up


1966: Azim Premji takes over leadership of Wipro at age 21
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Cost of Equity

1975: Wipro Fluid Power is set up to manufacture hydraulic and pneumatic


cylinders
1977: Company is renamed to Wipro Products Limited
1980: Information technology services for domestic market started
1981: Hardware company is launched
1982: Company is renamed to Wipro Limited
1984: Software products subsidiary Wipro Systems Ltd. is established
1985: Toilet soaps manufacture begins
1988: Wipro BioMed is launched. It is a new business unit to market and
service bio-analytical and diagnostic instruments
1989: Joint venture with GE for medical systems, Wipro GE Medical
Systems Ltd
1990: Product software business discontinued; software services begin
1992: Lighting business and finance arm is established
1994: Merger of subsidiaries Wipro Technologies Ltd. and Wipro Systems
Ltd. with Wipro Ltd.
1995: Received ISO 9001 quality certification

 1997: Received CMM level 3 certification from the Software Engineering


Institute of India
 1998: Wipro identity is relaunched with rainbow flower and positioning
statement, "Applying Thought".
 1998: Certified at CMMi level 5
 2000: Wipro Ltd.'s American depositary receipts are listed on New York
Stock Exchange; Six Sigma initiative begun.

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Cost of Equity

 2004: Becomes 4th largest company in the world in terms of market


capitalization in IT services.
 2006: Becomes the world's largest R&D service provider; Acquires
Saraware, Quantech, & Enabler; Joint venture Company WMNetServ with
Motorola.
 2007: Becomes SOX Compliant; Wipro-Biomed Division sold to Ranbaxy
Fine Chemicals; Wipro opens new development center in Monterrey,
Mexico; Acquires U S based Infocrossing.

Tata Consultancy Services Limited:-


Type : Public BSE: 532540
Founded : 1968
Headquarters : 11th floor, Air India Building, Nariman Point, Mumbai -
400 021
Key people : Ratan Tata, (Chairman of the Board, TATA Group)
S Ramadorai , (CEO & Managing Director)
S Mahalingam, (Executive Director and CFO)
N Chandrasekaran, (Executive Director and COO)
Phiroz Vandrevala,(Executive Director and Head, Global
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Cost of Equity

Corporate Affairs)
Ajoyendra Mukherjee, (Vice President and Head, Global
Human Resources)
Industry : Information Technology Consulting
Services : Information technology Services and Solutions
Revenue : ▲ $4.3 billion (in FY 2006-07)
Employees : ~110,000 (As on Jan 31st, 2008)
Slogan : Experience certainty

Tata Consultancy Services Limited (TCS Limited Company) is one of the world’s
largest providers of information technology, consulting, services and business-
process outsourcing which commenced operations in 1968. As of 2007, it is Asia's
largest and has the largest number of employees among the Indian IT companies
with strength of over 100,000 IT consultants in 47 countries. TCS is listed on the
National Stock Exchange and Bombay Stock Exchange in India.

TCS is part of one of Asia's largest conglomerates the Tata Group, which has
interests in areas such as energy, telecommunications, financial services,
manufacturing, chemicals, engineering and materials. TCS is the first company to
be rated at Level 5 maturity for both the CMMI and PCMM framework. It is also
the first Indian company to be certified AS 9100: Rev B for design of airframe
structures.

It began as a division of the Tata Group, Tata Computer Centre, whose main
business was to provide computer services to other group companies. However, the
potential of computerization and computer services was realized early on, and an
electrical engineer from the Tata Electric Companies, Fakir Chand Kohli, was

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Cost of Equity

brought in as the first General Manager. Soon after, the company was named Tata
Consultancy Services.

The early 1990s saw a tremendous surge in TCS's business, which also resulted in
a massive recruitment drive by the company. In early and mid-1990s, TCS re-
invented itself to become a software products company. In the late 1990s, to
accelerate its revenue growth, TCS decided to employ a three-pronged strategy –
developing new products with high revenue earning potential, tapping domestic
and other fast growing markets and focusing on inorganic growth through mergers
& acquisitions. In 2004, TCS became a public listed company. The Tata Research
Development and Design Centre were established in 1981. TRDDC is today one of
India’s premier R&D centers in software engineering and process engineering.
TCS currently has 19 labs spanning across 4 countries. Many of the labs are
located in India.

D-Link:-
Type : Public (TSE: 2332)

Founded : 1986

Headquarters : Taipei, Taiwan

Key people : Ken Kao, Chairman & CEO

Industry : Computer Networks

Products : Network hardware

Revenue : ▲US$400 million (2006)

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Cost of Equity

Employees : 1,800+(2006)

Slogan : Building Networks for People

D-Link Corporation is a Taiwanese company that manufactures wireless and


Ethernet computer networking products for both consumer and SOHO users. The
company was founded in 1986 by Ken Kao, Current CEO and Chairman. The
corporate headquarters are located in Taipei, Taiwan. As of 2006, the company has
offices in over 90 countries around the world. D-Link is the largest wireless LAN
provider in Europe and the People's Republic of China.

Datex Inc. was founded in 1986 by seven founders; of the seven founders, Ken
Kao remain as the CEO of D-Link Corporation, John Lee become the CEO of
Alpha Networks, the other five are either retired, or employed by D-Link or D-
Link group of companies.

Datex officially changed its name to D-Link Corporation in 1994, the same year
that it went public, the first networking company in Taiwan to do so. The name
change was due to hard time in explaining who Datex was and what Datex did, but
its D-Link brand was already popular before 1992.

D-Link the brand was already successful before venturing into the OEM business,
the first OEM customer in 1991 was IBM, and subsequently grew to include
Netgear, Intel and Nortel to name a few.

D-Link is a global provider of comprehensive networking solutions that include


switches, wireless, storage, IP Surveillance, Security, VoIP products and award-
winning service and support. A true Original Equipment Manufacturer (OEM), D-
Link develops products for the top names in the networking marketplace, and as a

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Cost of Equity

leading global IT company, we supply businesses -large and small-, government,


education and consumers with networking products under the D-Link brand. For
over 20 years, D-Link has designed, engineered and manufactured its products
with complete control of the supply chain, allowing the company to offer the best
quality, availability, support and value to customers in over 90 countries
worldwide.

Founded in 1986, D-Link® is a global leader in the design, manufacture and


marketing of advanced networking, storage, security, broadband, digital, voice and
data communications solutions. D-Link continually meets the global networking
and connectivity needs of digital home consumers, small office professionals, and
small to medium-sized businesses and enterprise environments. It has 100 offices
in over 90 countries globally.

Satyam Computer Services Ltd:-


Type : Public (NYSE: SAY)
Founded : 1987
Headquarters : Hyderabad, Andhra Pradesh, India
Key people : Ramalinga Raju, Founder & Chairman
Rama Raju, MD
Industry : Information Technology
Revenue : ▲ 2.1 billion USD (2007)
Employees : 49,200 (2007)
Slogan : What Business Demands

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Cost of Equity

Satyam Computer Services Ltd. is a consulting and information technology


Services Company based in Hyderabad, India. Satyam Computer Services Ltd. was
founded by B.Ramalinga Raju in 1987; Satyam means "truth" in Sanskrit. The
company offers a variety of information technology (IT) services spanning various
industry sectors, and is listed on the New York Stock Exchange.

Satyam's network spans 57 countries across six continents. It serves over 489
global companies, 156 of which are Fortune 500 corporations. Satyam has strategic
technology and marketing alliances with over 50 companies. Apart from
Hyderabad, it has development centers in India at Bangalore, Chennai, Pune,
Mumbai, Nagpur, Delhi, Kolkata, Bhubaneswar, and Visakhapatnam.

In October 2007, Satyam announced collaboration with Cisco to enhance Health


Management Solutions. In November 2007, Satyam is announced as the official
Information Technology Services Provider for the FIFA World Cups to be held in
2010 and 2014. Satyam partnered with arvato systems to provide innovative
solutions for medium-sized enterprise market in Germany, Austria and
Switzerland.

Satyam has been ranked consistently in the top Employers list released by surveys
done by leading groups such as Business India. The company has massive
expansion plans to penetrate across the globe especially Europe. Satyam is poised
to cross $2 billion in Annual Revenues for the year 2007-2008.

On Jan 21, 2008 Satyam announced the acquisition of an Illinois based boutique
consulting firm Bridge Strategy. This is yet another acquisition by Satyam after
Knowledge Dynamics and Citisoft. "Satyam has the largest overall ERP practice
and the heaviest commercial focus on packaged enterprise software" - Dana

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Cost of Equity

Stiffler, Research Director, AMR Research, “Indian Service Provider’s ERP


Practice Grow up,” January 26, 2007.

On February 23, 2008 Satyam completed 20 years of existence. It is considered as


India's youngest software consulting company to exceed $2 billion in annual
revenue.

NIIT Technologies Ltd:-


Type : Public Owned

Founded : 1981

Headquarters : New Delhi

Key people : Rajendra S. Pawar, Vijay Thadani,

Industry : Training & Information technology

Revenue : Rs 3,984 Million (2005)

Employees : around 3000 for NIIT Technologies Ltd.

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Cost of Equity

NIIT is a technology training and software solutions company that is spread all
over the world, originated from Mumbai, India. NIIT was formerly known as the
National Institute of Information Technology, the name derived from Indian
Institutes of Technology. NIIT was founded in 1981 by Indian entrepreneurs
Rajendra S. Pawar and Vijay K. Thadani to provide IT education in India. NIIT
claims to have trained one out of every three software professionals in the country.

NIIT has diversified into software services. In 2004, the company split into NIIT
Ltd and NIIT Technologies Ltd. While NIIT Ltd focuses on training, NIIT
Technologies focuses on software development and business process management.
In 2007, NIIT claimed to be among the Indian software exporters and have
operations in 42 countries. NIIT has recently tied up with Chinese universities for
training Chinese engineers. Most Indian engineering students are not industry
ready as they cannot afford courses from IT training majors.

NIIT Technologies is an IT and Business Process Management Services provider


present in 14 countries. NIIT Technologies focuses on well-defined industry
verticals of Finance, Transport, Retail and Manufacturing for its IT Solutions
business. The company offers services in Custom Software Development and
Maintenance, Legacy Maintenance and Modernization, and Enterprise Integration.

NIIT Technologies have received ISO 9001:2000 certification from KPMG for its
software development and been assessed at Level 5 of SEI-CMMi. The
organization has also been assessed at Level 5 of P-CMM.

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Cost of Equity

Aptech Limited:-
Type : Public NSE & BSE: 532475
Founded : 1986
Headquarters : Mumbai, India
Key people : Mr Jayant V Athavale, Vice President
Industry : Training & Computers - software

Services : Information technology services and solutions


Revenue : 208.75 million USD in 2006.

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Cost of Equity

Aptech Limited, a Global Learning Solutions Company with a presence across 5


continents, is playing a key role in helping individuals, organizations and nations
adapt to the changing requirements of a knowledge-driven world. Aptech
commenced its IT education & training business in 1986 and has trained over 4.5
million students – globally. Aptech is an ISO 9001:2000 organization and was the
first IT training and education organization in Asia to receive the ISO 9001 quality
certification for Education Support Services in 1993. Aptech's system wide
revenue was in excess of Rs. 9226.70 million (208.75 million USD) in 2006.
Aptech is listed on the Bombay Stock Exchange and National Stock Exchange,
India.

Aptech Vision: To be the preferred Learning Solutions partner globally, delivering


superior customer service for performance enhancement, through World-Class
processes.

Aptech Mission: “Empowerment through Technology”

IT is an empowering technology, when rightly employed leads to productivity


improvements and prosperity at individual, organizational, societal, National and
Global level. Aptech Beida Jadebird wins China's ‘Top 10 Outstanding Franchise
Brand’ Award, given by Ministry of Commerce, Govt. of China. Aptech is the only
education company to get this award. Aptech Vietnam wins ICT GOLD MEDAL
FOR HIGHEST TURNOVER (Category – Training) Declared No. 1 IT Training
company in Vietnam for 5 consecutive years (2002-2006).
Indian Franchising Awards for 2007 - Winner of the Indian Global Franchisor of
the Year award & Win-win Franchising Partnership of the Year Award. Arena
Multimedia bagged the Franchisee Growth Driver of the Year Award. Honored

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Cost of Equity

with The IT People Award for Leadership in IT Education – 2007; it was also
among the top 100 Electronic companies in 2002 & 2004 – Electronics for You.
Best IT Trainer Award – Franchising World 2003. CEO & MD, Aptech Limited
conferred the ‘Man of Franchising Award” – Franchising World 2003. Aptech
declared the No. 1 IT training company in Vietnam – 2003. Aptech declared the
No. 1 IT training company in China for three consecutive years – 2002, 2003 &
2004. Business Today’s listing of Top 100 India’s most valuable companies in
2001. First Indian Express Marketing Excellence Award for Brand Excellence in
IT Industry to Arena Multimedia in December 2001.

Sonata Software:-
Type : Public BSE: 532221

Founded : 1986

Headquarters : APS Trust Building, Bull Temple Road, Bangalore, India

Key people : B. Ramaswamy, President and Managing Director

P. Srikar Reddy (Chief Operating Officer)

Industry : Information technology services

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Cost of Equity

Slogan : Power of Partnership

Sonata Software Limited is an IT consulting and Software Services Company.


Sonata is headquartered in Bangalore, India, and offices in US, UK, Germany and
Singapore. Sonata has three development centers in Bangalore, Hyderabad (India)
and Hanover (Germany). Sonata's services include IT Consulting, Application
Development, Application Management, Managed Testing, Business Intelligence,
Infrastructure Management and Outsourced Product Development.

Sonata is SEI CMM Level 5 certified. Sonata's shares are publicly traded in Indian
Stock Exchanges. Sonata Software acquired 50.1% stake in TUI InfoTec in an all-
cash transaction in September 2006. InfoTec is the “captive” IT services arm of the
logistics and travel corporation TUI, whose applications and IT infrastructure
systems it develops, maintains and supports worldwide.

Patni Computer Systems:-


Type : Public

Founded : February 10, 1978

Headquarters : Mumbai, India

Key people : Narendra Patni (Chairman & CEO)

Industry : Information Technology

Services : Software Services & Outsourcing

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Cost of Equity

Revenue : $ 662.91 million (2007)

Employees : 14,000

Patni Computer Systems Ltd., is a provider of Information Technology services


and business solutions. The company employs over 14,000 people, and has 23
international offices across the Americas, Europe and Asia-Pacific,as well as
offshore development centers in 8 cities in India. Patni's clients include more than
200 Fortune 1000 companies. Patni has registered revenues of US$ 662.91 million
for the year 2007.

Patni Computer Systems Limited was incorporated as Patni Computer Systems


Private Limited on February 10, 1978 under the Companies Act, 1956. In 1988, by
virtue of Section 43A of the Companies Act, the Company became a "deemed
public company" and subsequently on April 15, 1991 it was then converted into a
private limited company. By virtue of its turnover exceeding prescribed limits
under the then-applicable Section 43A of the Companies Act, on July 1, 1995, the
Company became a deemed public company and consequent to the deletion of
Section 43A from the Companies Act, 1956, the Company was converted to a
private limited company on June 27, 2002. The Company was again converted to a
public limited company on September 18, 2003.

In 2004, Patni came out with an initial public offering (IPO) of 18,724,000 equity
shares in the price of Rs 230 per share for a face value of Rs 2 each. In the same
year, Patni acquired Fremont, California based Cymbal Corporation for a sum of
US$78 mn. Cymbal's acquisition allowed Patni to enter $60 billion IT services
market in the telecom vertical which was previously not available to Patni on their

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Cost of Equity

business landscape. This acquisition also allowed Patni to spread it's Non-GE
Business, and added a development center in Hyderabad, India.

In December 2005, Patni listed its ADRs on the New York Stock Exchange
(NYSE) under the ticker PTI.

Patni added 31 new clients taking the client number count to 293 and reported
revenues to US$ 169.5 million (Rs. 6,735.7 million) during Q3 2007.

April 2003: Acquired "The Reference Inc.," a company incorporated in


Massachusetts, USA for a consideration of about US$ 7.5 million
November 2004: Acquired "Cymbal Corporation" for a sum of US$78 million.
June 2006: Acquired "ZAiQ Technologies," a design and verification company, in
Woburn, Mass.
July 2007: Acquired Europe-based "Logan-Orviss International (LOI)", a leading
independent specialist telecommunications consulting Services Company;
Acquired N.J.-based "Taratec Development Corp." through Patni Computer
Systems Inc. a wholly owned subsidiary of the Company, for an aggregate price of
$27.2 million in cash including contingent consideration.

Melstar Information Technologies Ltd.:-


Type : BSE: 532307
Founded : 1986
Headquarters : Mumbai, India
Industry : Computers - Software
Services : Servicing the banking, Insurance & Information
Technology

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Cost of Equity

An Application Management Company


Established in 1986, we focus on servicing the Banking, Insurance, Government
and IT domains. We undertake systems and application management activities,
offer specialist technology centers and a highly cost-effective virtual development
environment as part of our offshore operations in Current Openings.
Headquartered in Mumbai with It Technology experts, professionals worldwide
and having 6 offices in Current Openings including 3 development centers. Melstar
is a complete provider of Application Management services and solutions.

“Everyday Melstar is helping its customers across the globe in building and
managing their business applications by virtue of its domain knowledge in
Banking, Insurance and Information Technology as well as its technical expertise
in IBM, Microsoft and Sun technologies.”

We believe in a philosophy of ethical and transparent business practices with all


customers, vendors and employees to build long-term relationships based on
mutual trust and benefit. We are proud to have global companies like IBM,
Citibank, Standard Chartered Bank, Birla Sunlife as our customers.

Melstar's software facilities are assessed at SEI-CMM Level III and ISO 9001
certification.
Melstar as a corporation practices certain specific principles while building a
relationship with its customers.
2000 - The Company has set up two development centres one at Bangalore and one
in Mumbai, taking the total number of centres to 11.

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Cost of Equity

- Melstar Information Technologies going in for a preferential issue of


shares to fund the recently announced acquisition of three foreign companies.
- The Company has acquired the US-based IT company Global System for
0.8 million in a part cash and stock deal.

CHAPTER 4

CALCULATION OF COST OF EQUITY

Cost of equity is more challenging to calculate as equity does not pay a set return
to its investors. The cost of equity is broadly defined as the risk-weighted projected
return required by investors, where the return is largely unknown. The cost of

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Cost of Equity

equity is therefore inferred by comparing the investment to other investments with


similar risk profiles to determine the "market" cost of equity.
The cost of equity capital for a particular company is the rate of return on
investment that is required by the company's ordinary shareholders. The return
consists both of dividend and capital gains, e.g. increases in the share price. The
returns are expected future returns, not historical returns, and so the returns on
equity can be expressed as the anticipated dividends on the shares every year in
perpetuity.
The cost of equity capital is equal to the required rate of return on equity-supplied
capital. The cost of retained earnings, ks, is estimated with this model:

The Constant Dividend Growth Model (Gordon’s Model)


ks = D1/Po + g
where:
D1 = the next expected dividend [Do (1+g)],
g = the constant growth rate of dividends,
Po = the current market price per share of the common stock.
All the calculations are based on the market price of the stock for the year 2007-
2008 and considering the growth factor which is calculated by percentage increase
or decrease in the net sales of the company over the years.

INFOSYS TECHNOLOGIES LTD.


Table no. 4.1:- Table showing capital structure of Infosys Technologies Ltd.
Capital Structure

Period Instrument Authorized Issued -PAIDUP-


From To Shares Face Value Capital
Capital Capital
(nos)
(cr) (cr)

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Cost of Equity

2006 2007 Equity Share 214.75 214.75 571209862 5 214.75


2005 2006 Equity Share 150 137.78 275554980 5 137.78
2004 2005 Equity Share 150 135.29 270570549 5 135.29
2003 2004 Equity Share 50 33.32 66641056 5 33.32
2002 2003 Equity Share 50 33.12 66243078 5 33.12
2001 2002 Equity Share 50 33.09 66186130 5 33.09
2000 2001 Equity Share 50 33.08 66158117 5 33.08
1999 2000 Equity Share 50 33.08 66150700 5 33.08
1998 1999 Equity Share 50 33.07 33069400 10 33.07
1997 1998 Equity Share 30 16.02 16017200 10 16.02
1996 1997 Equity Share 10 7.26 7259600 10 7.26
1995 1996 Equity Share 10 7.26 7258600 10 7.26
1994 1995 Equity Share 10 7.26 7258600 10 7.26
1993 1994 Equity Share 4 3.35 3352100 10 3.35
1992 1993 Equity Share 4 1.98 1976100 10 1.98

Table no. 4.2:- Table showing dividend paid in the year 2006-07 by Infosys Technologies Ltd.
Calculation of dividend paid in Rs. for the year 2006-07
Company name Face value Dividend (%) Dividend paid (Do)
Infosys Technologies Limited 5.00 230 11.50

Table no. 4.3:- Table showing growth in percentage of Infosys Technologies Ltd.
Growth calculation
Company name Net Sales of Net Sale of 2007 Increase/Decrease Growth
2006 in Rs. Cr. in Rs. Cr. of sales in Rs. Cr. in %
Infosys Technologies Limited 9,028.00 13,149.00 4,121.00 31.34

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Cost of Equity

Table no. 4.4:- Table showing cost of equity for year 2007-08 of Infosys Technologies Ltd.
Calculation of cost of equity for year 2007-08
Company name Dividend paid Expected dividend Mkt price Growth COE in
in Rs. (Do) in Rs.(D1) in Rs. %
Infosys Technologies 11.50 15.10 1440.80 0.31 32.39
Limited

Chart no. 4.1:- Chart showing the expected dividend of Infosys Technologies Ltd.

Interpretation:

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Cost of Equity

The above graph of Infosys technologies Ltd. indicates, dividend paid in the year
2006-07 is Rs 11.50 and the expected dividend for the year 2007-08 is Rs 15.10,
the calculation is based on dividend paid and the growth of the company in the
year 2006-07.
The above table of Infosys technologies Ltd. indicates market price as Rs 1440.80
and cost of equity as 32.39%, so it’s a good sign for the long term investors to
book their profits. The market price plays an important role for COE.

WIPRO TECHNOLOGIES LTD.


Table no. 4.5:- Table showing capital structure of Wipro Technologies Ltd.
Capital Structure
Period Instrument Authorized Issued -PAIDUP-
From To Shares Face Capital
Capital Capital
(nos) Value
(cr) (cr)
2005 2006 Equity Share 214.75 214.75 1425754267 2 214.75
2004 2005 Equity Share 150 140.71 703570522 2 140.71
2003 2004 Equity Share 75 46.55 232759152 2 46.55
2002 2003 Equity Share 75 46.51 232563992 2 46.51
2001 2002 Equity Share 75 46.49 232465689 2 46.49
2000 2001 Equity Share 75 46.49 232433019 2 46.49
1999 2000 Equity Share 47 45.83 229156350 2 45.83
1998 1999 Equity Share 46 45.83 45831270 10 45.83
1997 1998 Equity Share 46 45.83 45831270 10 45.83
1994 1997 Equity Share 16 15.28 15277090 10 15.28
1993 1994 Equity Share 8 7.37 7373440 10 7.37
1992 1993 Equity Share 8 7.37 7373440 10 7.37
1989 1992 Equity Share 4 3.69 3686720 10 3.69
1986 1989 Equity Share 2 1.84 1843360 10 1.84
1984 1985 Equity Share 2 0.92 92168 100 0.92

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1971 1980 Equity Share 0.5 0.45 45334 100 0.45


1947 1971 Equity Share 0.5 0.23 22667 100 0.23
1946 1947 Equity Share 0.5 0.17 17000 100 0.17

Table no. 4.6:- Table showing dividend paid in the year 2006-07 by Wipro Technologies Ltd.
Calculation of dividend paid in Rs. for the year 2006-07
Company name Face value Dividend (%) Dividend paid (Do)
Wipro Technologies 2.00 300 6.00

Table no. 4.7:- Table showing growth in percentage of Wipro Technologies Ltd.
Growth calculation
Company name Net Sales of Net Sale of 2007 Increase/Decrease Growth
2006 in Rs. Cr. in Rs. Cr. of sales in Rs. Cr. in %
Wipro Technologies 10,227.12 13,683.90 3,456.78 25.26

Table no. 4.8:- Table showing cost of equity for year 2007-08 of Wipro Technologies Ltd.
Calculation of cost of equity for year 2007-08
Company name Dividend paid Expected dividend Mkt price Growth COE in
in Rs. (Do) in Rs.(D1) in Rs. %
Wipro Technologies 6.00 7.52 430.10 0.25 27.01

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Chart no. 4.2:- Chart showing the expected dividend of Wipro Technologies Ltd.

Interpretation:
The above graph of Wipro technologies Ltd. indicates, dividend paid in the year
2006-07 is Rs 6.00 and the expected dividend for the year 2007-08 is Rs 7.52, the
calculation is based on dividend paid and the growth of the company in the year
2006-07.
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Cost of Equity

The above table of Wipro technologies Ltd. indicates market price as Rs 430.10
and cost of equity as 27.01%, so it’s a good sign for the long term investors to
book their profits.

TATA CONSULTANCY SERVICES


Table no. 4.9:- Table showing capital structure of Tata Consultancy services
Capital Structure
Period Instrument Authorized Issued -PAIDUP-
From To Shares Face Capital
Capital Capital
(nos) Value
(cr) (cr)
2006 2007 Equity Share 120 97.86 978610498 1 97.86
2005 2006 Equity Share 60 48.93 489305249 1 48.93
2004 2005 Equity Share 60 48.01 480114809 1 48.01
2003 2004 Equity Share 40 36.44 36440002 10 36.44

Table no. 4.10:- Table showing dividend paid in the year 2006-07 by TCS Ltd.
Calculation of dividend paid in Rs. for the year 2006-07
Company name Face value Dividend (%) Dividend paid (Do)
Tata Consultancy Services Limited 1.00 1150.00 11.50

Table no. 4.11:- Table showing growth in percentage of TCS Ltd.


Growth calculation
Company name Net Sales of Net Sale of Increase/Decrease Growth
2006 in Rs. Cr. 2007 in Rs. Cr of sales in Rs. Cr. in %
Tata Consultancy Services Ltd 11,230.50 14,939.97 3,709.47 24.83

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Cost of Equity

Table no. 4.12:- Table showing cost of equity for year 2007-08 of TCS Ltd.
Calculation of cost of equity for the year 2007-08
Company name Dividend paid Expected dividend Mkt price Growth COE in
in Rs. (Do) in Rs.(D1) in Rs. %
TCS Ltd 11.50 14.36 853.15 0.25 26.51

Chart no. 4.3:- Chart showing the expected dividend of TCS Ltd.

Interpretation:
The above graph of TCS indicates, dividend paid in the year 2006-07 is Rs 11.50
and the expected dividend for the year 2007-08 is Rs 14.36, the calculation is
based on dividend paid and the growth of the company in the year 2006-07.

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Cost of Equity

The above table of TCS indicates market price as Rs 853.15 and cost of equity as
26.51%, so it’s a good sign for the long term investors to book their profits, and the
expected dividend is bit high.

D-LINK (INDIA)
Table no. 4.13:- Table showing capital structure of D-Link (India) Ltd.
Capital Structure
Period Instrument Authorized Issued -PAIDUP-
From To Shares Face Capital
Capital Capital
(nos) Value
(cr) (cr)
2006 2007 Equity Share 7 6 30004850 2 6
2005 2006 Equity Share 7 6 30004850 2 6
2004 2005 Equity Share 7 6 30004850 2 6
2003 2004 Equity Share 7 6 30004850 2 6
2002 2003 Equity Share 7 6 30004850 2 6
2001 2002 Equity Share 7 6 30004850 2 6
2000 2001 Equity Share 7 6.09 4571220 10 4.57
1999 2000 Equity Share 6 4.36 300000 3 0.08

Table no. 4.14:- Table showing dividend paid in the year 2006-07 by D-Link (India) Ltd.
Calculation of dividend paid in Rs. for the year 2006-07
Company name Face value Dividend (%) Dividend paid (Do)
D-Link 2.00 100.00 2.00

Table no. 4.15:- Table showing growth in percentage of D-Link (India) Ltd.
Growth calculation
Company name Net Sales of Net Sale of 2007 Increase/Decrease Growth
2006 in Rs. Cr. in Rs. Cr. of sales in Rs. Cr. in %
D-Link 274.11 283.78 9.67 3.41

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Cost of Equity

Table no. 4.16:- Table showing cost of equity for year 2007-08 of D-Link (India) Ltd.
Calculation of cost of equity for the year 2007-08
Company name Dividend paid Expected dividend Mkt price Growth COE in
in Rs. (Do) in Rs.(D1) in Rs. %
D-Link 2.00 2.07 69.15 0.03 6.40

Chart no. 4.4:- Chart showing the expected dividend of D-Link (India) Ltd.

Interpretation:
The above graph of D-Link (India) indicates, dividend paid in the year 2006-07 is
Rs 2.00 and the expected dividend for the year 2007-08 is Rs 2.07, the calculation
is based on dividend paid and the growth of the company in the year 2006-07.
The above table of D-Link (India) indicates market price as Rs 69.15 and cost of
equity as 6.40%, so it’s not advisable for the long term investors to hold the shares,
and the growth is very slow.

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Cost of Equity

SATYAM COMPUTER SERVICES


Table no. 4.17:- Table showing capital structure of Satyam Computer Services
Capital Structure
Period Instrument Authorized Issued -PAIDUP-
From To Shares Face Capital
Capital Capital
(nos) Value
(cr) (cr)
2006 2007 Equity Share 160 133.44 667196009 2 133.44
2005 2006 Equity Share 75 64.89 324449539 2 64.89
2004 2005 Equity Share 75 63.85 319265291 2 63.85
2003 2004 Equity Share 75 63.25 316251710 2 63.25
2002 2003 Equity Share 75 62.91 314542800 2 62.91
2001 2002 Equity Share 75 62.91 314540000 2 62.91
2000 2001 Equity Share 75 56.24 281190000 2 56.24
1999 2000 Equity Share 75 56.24 56238000 10 56.24
1998 1999 Equity Share 30 26.02 26019000 10 26.02
1996 1998 Equity Share 30 26.02 26019000 10 26.02
1994 1995 Equity Share 30 18.59 18585000 10 18.59
1993 1994 Equity Share 20 18.59 18585000 10 18.59
1992 1993 Equity Share 20 18.59 18585000 10 18.59
1991 1992 Equity Share 20 0.3 300000 10 0.3

Table no. 4.18:- Table showing dividend paid in the year 2006-07 by Satyam Computer Services
Calculation of dividend paid in Rs. for the year 2006-07
Company name Face value Dividend (%) Dividend paid (Do)

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Satyam Computer Services Ltd. 2.00 175.00 3.50

Table no. 4.19:- Table showing growth in percentage of Satyam Computer Services Ltd.
Growth calculation
Company name Net Sales of Net Sale of 2007 Increase/Decrease Growth
2006 in Rs. Cr. in Rs. Cr. of sales in Rs. Cr. in %
Satyam Computer Services Ltd. 4,634.31 6,228.47 1,594.16 25.59

Table no. 4.20:- Table showing cost of equity for year 2007-08 of Satyam Computer Services
Calculation of cost of equity for the year 2007-08
Company name Dividend paid Expected dividend Mkt price Growth COE in
in Rs. (Do) in Rs.(D1) in Rs. %
Satyam Computer Services 3.50 4.40 395.05 0.26 26.71
Ltd.

Chart no. 4.5:- Chart showing the expected dividend of Satyam Computer Services Ltd.

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Cost of Equity

Interpretation:
The above graph of Satyam Computer Services indicates, dividend paid in the year
2006-07 is Rs 3.50 and the expected dividend for the year 2007-08 is Rs 4.40, the
calculation is based on dividend paid and the growth of the company in the year
2006-07.
The above table of Satyam Computer Services indicates market price as Rs 395.05
and cost of equity as 26.71%, so it’s a good sign for the long term investors to
book their profits. Growth and market price of shares aids COE to be in a form.

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NIIT TECHNOLOGIES
Table no. 4.21:- Table showing capital structure of NIIT Technologies
Capital Structure
Period Instrument Authorized Issued -PAIDUP-
From To Shares Face Capital
Capital Capital
(nos) Value
(cr) (cr)
2006 2007 Equity Share 45 39.1 39100530 10 39.1
2005 2006 Equity Share 45 38.65 38649280 10 38.65
2004 2005 Equity Share 45 38.65 38649280 10 38.65
2003 2004 Equity Share 15 9.66 9662320 10 9.66
2002 2003 Equity Share 0.25 0.25 25000 100 0.25

Table no. 4.22:- Table showing dividend paid in the year 2006-07 by NIIT Technologies
Calculation of dividend paid in Rs. for the year 2006-07
Company name Face value Dividend (%) Dividend paid (Do)
NIIT Technologies Ltd. 10.00 65.00 6.50

Table no. 4.23:- Table showing growth in percentage of NIIT Technologies


Growth calculation
Company name Net Sales of Net Sale of 2007 Increase/Decrease Growth
2006 in Rs. Cr. in Rs. Cr. of sales in Rs. Cr. in %
NIIT Technologies Ltd. 220.09 297.16 77.07 25.94

Table no. 4.24:- Table showing cost of equity for year 2007-08 of NIIT Technologies
Calculation of cost of equity for the year 2007-08
Company name Dividend paid Expected dividend Mkt price Growth COE in

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in Rs. (Do) in Rs.(D1) in Rs. %


NIIT Technologies Ltd. 6.50 8.19 100.80 0.26 34.06

Chart no. 4.6:- Chart showing the expected dividend of NIIT Technologies Ltd.

Interpretation:
The above graph of NIIT Technologies indicates, dividend paid in the year 2006-
07 is Rs 6.50 and the expected dividend for the year 2007-08 is Rs 8.19, the
calculation is based on dividend paid and the growth of the company in the year
2006-07.
The above table of NIIT Technologies indicates market price as Rs 100.80 and cost
of equity as 34.06%, it’s very high and it’s an excellent share for the long term
investors to book their profits and get huge returns.

APTECH LIMITED
Table no. 4.25:- Table showing capital structure of Aptech Ltd.
Capital Structure

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Cost of Equity

Period Instrument Authorized Issued -PAIDUP-


From To Shares Face Capital
Capital Capital
(nos) Value
(cr) (cr)
2006 2006 Equity Share 60 37.89 37887232 10 37.89
2005 2005 Equity Share 60 37.64 37635877 10 37.64
2004 2004 Equity Share 60 33.51 33509437 10 33.51
2003 2003 Equity Share 60 33.51 33509437 10 33.51
2002 2002 Equity Share 19.95 18.15 18149437 10 18.15
2001 2002 Equity Share 19.95 18.15 18149437 10 18.15
2000 2001 Equity Share 0 0 2000 10 0

Table no. 4.26:- Table showing dividend paid in the year 2006-07 by Aptech Ltd.
Calculation of dividend paid in Rs. for the year 2006-07
Company name Face value Dividend (%) Dividend paid (Do)
Aptech Limited 10.00 0.00 0.00

Table no. 4.27:- Table showing growth in percentage of Aptech Ltd.


Growth calculation
Company name Net Sales of Net Sale of 2007 Increase/Decrease Growth
2006 in Rs. Cr. in Rs. Cr. of sales in Rs. Cr. in %
Aptech Limited 100.28 81.21 -19.07 -23.48

Table no. 4.28:- Table showing cost of equity for year 2007-08 of Aptech Ltd.
Calculation of cost of equity for the year 2007-08
Company name Dividend paid Expected dividend Mkt price Growth COE in
in Rs. (Do) in Rs.(D1) in Rs. %
Aptech Limited 0.00 0.00 226.30 -0.23 -23.48

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Chart no. 4.7:- Chart showing the expected dividend of Aptech Ltd.

Interpretation:
The above graph of Aptech Ltd. indicates, dividend paid in the year 2006-07 is Rs
0.00 and the expected dividend for the year 2007-08 is Rs 0.00, the calculation is
based on dividend paid and the growth of the company in the year 2006-07.
The above table of Aptech Ltd. indicates market price as Rs 226.30 and cost of
equity as -23.48%. It’s a negative COE, so it’s not advisable for the investors to
buy the share or hold the position.

SONATA SOFTWARE
Table no. 4.29:- Table showing capital structure of Sonata Software
Capital Structure
Period Instrument Authorized Issued -PAIDUP-
From To Shares Face Capital
Capital Capital
(nos) Value
(cr) (cr)
2005 2006 Equity Share 15 10.52 105159306 1 10.52
2004 2005 Equity Share 15 10.52 105159306 1 10.52
2003 2004 Equity Share 15 10.52 105159306 1 10.52

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2002 2003 Equity Share 15 10.52 105159306 1 10.52


2001 2002 Equity Share 15 10.52 105159306 1 10.52
2000 2001 Equity Share 15 10 100006800 1 10
1999 2000 Equity Share 15 10 10000680 10 10
1998 1999 Equity Share 15 10 10000680 10 10
1996 1998 Equity Share 5 3.25 3251600 10 3.25

Table no. 4.30:- Table showing dividend paid in the year 2006-07 by Sonata Software
Calculation of dividend paid in Rs. for the year 2006-07
Company name Face value Dividend (%) Dividend paid (Do)
Sonata Software 1.00 110.00 1.10

Table no. 4.31:- Table showing growth in percentage of Sonata Software


Growth calculation
Company name Net Sales of Net Sale of 2007 Increase/Decrease Growth
2006 in Rs. Cr. in Rs. Cr. of sales in Rs. Cr. in %
Sonata Software 148.67 185.83 37.16 20.00

Table no. 4.32:- Table showing cost of equity for year 2007-08 of Sonata Software
Calculation of cost of equity for the year 2007-08
Company name Dividend paid Expected dividend Mkt price Growth COE in
in Rs. (Do) in Rs.(D1) in Rs. %
Sonata Software 1.10 1.32 31.85 0.20 24.14

Chart no. 4.8:- Chart showing the expected dividend of Sonata Software

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Interpretation:
The above graph of Sonata software indicates, dividend paid in the year 2006-07 is
Rs 1.10 and the expected dividend for the year 2007-08 is Rs 1.32, the calculation
is based on dividend paid and the growth of the company in the year 2006-07.
The above table of Sonata software indicates market price as Rs 31.85 and cost of
equity as 24.14%, so it’s an average situation for the long term investors to invest
and returns are moderate.

PATNI COMPUTER SYSTEMS


Table no. 4.33:- Table showing capital structure of Patni Computer Systems
Capital Structure
Period Instrument Authorized Issued -PAIDUP-
From To Shares Face Capital
Capital Capital
(nos) Value
(cr) (cr)
2006 2006 Equity Share 50 27.66 138281853 2 27.66
2005 2005 Equity Share 50 27.56 137798399 2 27.56

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Cost of Equity

2004 2004 Equity Share 50 25 124997009 2 25


2003 2003 Equity Share 50 22.28 111420849 2 22.28
2002 2002 Equity Share 25 14.86 74280566 2 14.86

Table no. 4.34:- Table showing dividend paid in the year 2006-07 by Patni Computer Systems
Calculation of dividend paid in Rs. for the year 2006-07
Company name Face value Dividend (%) Dividend paid (Do)
Patni Computer Systems 2.00 150.00 3.00

Table no. 4.35:- Table showing growth in percentage of Patni Computer Systems
Growth calculation
Company name Net Sales of Net Sale of 2007 Increase/Decrease Growth
2006 in Rs. Cr. in Rs. Cr. of sales in Rs. Cr. in %
Patni Computer Systems 875.60 997.83 122.23 12.25

Table no. 4.36:- Table showing cost of equity for year 2007-08 of Patni Computer Sytems
Calculation of cost of equity for the year 2007-08
Company name Dividend paid Expected dividend Mkt price Growth COE in
in Rs. (Do) in Rs.(D1) in Rs. %
Patni Computer Systems 3.00 3.37 208.85 0.12 13.86

Chart no. 4.9:- Chart showing the expected dividend of Patni Computer Systems

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Cost of Equity

Interpretation:
The above graph of Patni Computer Systems indicates, dividend paid in the year
2006-07 is Rs 3.00 and the expected dividend for the year 2007-08 is Rs 3.37, the
calculation is based on dividend paid and the growth of the company in the year
2006-07.
The above table of Patni Computer Systems indicates market price as Rs 208.85
and cost of equity as 13.86%, so it’s advisable for the long term investors to go for
any better option, like investor can investing in a bank with less risk.

MELSTAR INFOTECH
Table no. 4.37:- Table showing capital structure of Melstar Infotech
Capital Structure
Period Instrument Authorized Issued -PAIDUP-
From To Shares Face Capital
Capital Capital
(nos) Value
(cr) (cr)
2005 2006 Equity Share 20 14.28 14283139 10 14.28
2004 2005 Equity Share 20 14.28 14283139 10 14.28
2003 2004 Equity Share 20 14.28 14283139 10 14.28
2002 2003 Equity Share 20 14.28 14283139 10 14.28

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Cost of Equity

2000 2002 Equity Share 20 13.83 13826149 10 13.83


1999 2000 Equity Share 15 12.15 12150700 10 12.15
1998 1999 Equity Share 10 8.56 8558797 10 8.56
1997 1998 Equity Share 10 5.95 5952125 10 5.95
1995 1997 Equity Share 6 4.75 4750000 10 4.75

Table no. 4.38:- Table showing dividend paid in the year 2006-07 by Melstar Infotech
Calculation of dividend paid in Rs. for the year 2006-07
Company name Face value Dividend (%) Dividend paid (Do)
Melstar Information Technologies Ltd. 10.00 0.00 0.00

Table no. 4.39:- Table showing growth in percentage of Melstar Infotech


Growth calculation
Company name Net Sales of Net Sale of 2007 Increase/Decrease Growth
2006 in Rs. Cr. in Rs. Cr. of sales in Rs. Cr. in %
Melstar infotech 17.55 17.69 0.14 0.79

Table no. 4.40:- Table showing cost of equity for year 2007-08 of Melstar Infotech
Calculation of cost of equity for the year 2007-08
Company name Dividend paid Expected dividend Mkt price Growth COE in
in Rs. (Do) in Rs.(D1) in Rs. %
Melstar Information 0.00 0.00 7.96 0.01 0.79
Technologies Ltd.

Chart no. 4.10:- Chart showing the expected dividend of Melstar Infotech

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Interpretation:
The above graph of Melstar Infotech indicates, dividend paid in the year 2006-07
is Rs 0.00 and the expected dividend for the year 2007-08 is Rs 0.00, the
calculation is based on dividend paid and the growth of the company in the year
2006-07.
The above table of Melstar Infotech indicates market price as Rs 7.96 and cost of
equity as 0.79%, so it’s not advisable for the long term investors to invest in this
company as growth is very less and COE is less than 1.

Cost Of Equity Of 10 IT Companies:

Chart no. 4.11:- Chart showing the Cost of Equity of all 10 IT companies

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Cost of Equity

Interpretation:
The above table represents the Cost of Equity of 10 IT companies which have been
chosen from three different groups’ viz., Group A, Group B1 and Group T.

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The IT companies under Group A are performing consistently and they all are
having excellent cost of equity. Only D-Link is not performing as expected the
reason being not much change in sales compared to last year which has affected its
growth.
The IT companies under Group B1 are not sailing in the same boat i.e., they all
have different levels of cost of equity. NIIT Technologies is showing the best cost
of equity in the selected IT companies and Aptech Ltd. is showing negative
response. From Group T Melstar Ltd. is showing very low return on investment.
So, the Group A is best for long term investors to invest and earn huge returns.

FACTORS INFLUENCING THE EQUITY GROWTH IN


IT SECTOR

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Controllable Factors influencing the equity growth:-

These are the factors influencing the equity growth that the company has control
over:

1. Capital-structure policy
2. Dividend policy
3. Investment policy

1. Capital Structure Policy

As we have been discussing above, a firm has control over its capital structure,
targeting an optimal capital structure. As more debt is issued, the cost of debt
increases, and as more equity is issued, the cost of equity increases.

2. Dividend Policy

Given that the firm has control over its payout ratio, the breakpoint of the equity
cost can be changed. For example, as the payout ratio of the company increases
the breakpoint between lower-cost internally generated equity and newly issued
equity is lowered.

3. Investment Policy

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Cost of Equity

It is assumed that, when making investment decisions, the company is making


investments with similar degrees of risk. If a company changes its investment
policy relative to its risk, both the cost of debt and cost of equity change.

Uncontrollable Factors Influencing The Equity Growth:-

These are the factors influencing the equity growth that the company has no
control over:

1. Level of interest rates


2. Currency fluctuation

1. Level of Interest Rates

The level of interest rates will affect the cost of debt and, potentially, the cost of
equity. For example, when interest rates increases the cost of equity increases,
which ultimately increases the cost of capital.

2. Currency Fluctuation

The currency fluctuation will affect the cost of equity when the company is
exposed to foreign currency. If there is depreciation in the exposed currency
then it badly affects the company’s earnings which ultimately affects on the
returns of the investors.

CHAPTER 5

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FINDINGS
 Cost of equity is more challenging to calculate as equity does not pay a

set return to its investors.

 When a company has a high expected dividend and growth then the
returns expected from the company is also high. This shows high cost of
equity and attracts huge investments.

 The IT companies under Group A are performing consistently and they


all are having excellent cost of equity.

 D-Link is not performing as expected the reason being not much change
in sales compared to last year which has affected its growth.

 The IT companies under Group B1 are not sailing in the same boat i.e.,
they all have different levels of cost of equity.

 NIIT Technologies is showing the best cost of equity in the selected IT


companies.

 Aptech Ltd. is showing negative response the reason being decrease in


their net sales which has affected the growth of company.

 From Group T Melstar Ltd. is showing very low return on investment


reason being no dividend paid and very slow growth of the company.

 Group A is best for long term investors to invest and earn huge returns.

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 The currency fluctuation is affecting IT industries, as IT industries are

exposed to US$ or any other foreign currency. IT companies will be


beneficial if the US$ appreciate, but at present the US$ is depreciating
which is resulting in less profits and it affects the dividend payout ratio,
this has ultimately resulted in decrease in share price.

SUGGESTIONS

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Cost of Equity

 The long term investors have an opportunity to earn high returns if they
invest in the companies which are listed under Group A.

 The best among selected 10 IT companies’ investors can invest in NIIT


Technologies as it is giving high cost of equity, the growth and expected
dividend is also high so it’s a good company for investors to include it in
their portfolio.

 The companies listed under Group T is not a good choice for investor to
include in their portfolio as they give very low returns i.e., cost of equity.
No dividends are paid and growth is also very slow.

 As per observation Aptech Ltd. has negative growth there is a decrease in


their net sales which has resulted in negative cost of equity, so this share
is not advisable for investment.

 The long term investor can invest in such company’s share where the
growth is constantly going upwards and which pays dividend too.

CONCLUSION

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The cost of equity capital for a particular company is the rate of return on
investment that is required by the company's ordinary shareholders. The return
consists both of dividend and capital gains. The cost of equity reflects the
opportunity cost of investment for individual shareholders. It will vary from
company to company because of the differences in the business risk and
financial risk of different companies. The cost of equity is the minimum rate of
return a firm must offer shareholders to compensate for waiting for their
returns, and for bearing some risk. The cost of equity is based on a firm's
current rate of return. If one assumes a perfect market, industry-specific costs of
equity reflect the riskiness of particular industries. A high cost of equity would
then indicate a higher-risk industry that should command a higher return to
compensate for the higher risk.
The vision of Information Technology (IT) policy is to use IT as a tool for
raising the living standards of the common man and enriching their lives. In
Information technology (IT), India has built up valuable brand equity in the
global markets.
The 10 IT companies which have been chosen from three different groups’ viz.,
Group A, Group B1 and Group T perform differently. The groups are made as
per the companies’ performance; the companies which are listed under Group A
are providing excellent cost of equity which a long term investor expects.
The company which has high dividend payout ratio and high growth they show
higher cost of equity, and all the long term investors expects the same to
minimize their risk.
The risk averse always concentrates on the following factors before investment:
 Growth of the company

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Cost of Equity

 Dividend payout ratio or expected dividend

 Market price

Using the above data an investor calculates the cost of equity and invests
according to the results shown by the companies. This calculation helps them to
have a good portfolio.
The companies listed under Group T are not good choice of shares to invest for
long term investors.

BIBLIOGRAHY

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Text books:

1. Prasanna Chandra - Financial management, Tata McGraw-Hill


publishing company limited, fourth reprint: 1998

2. Paresh P. Shah - Financial management, published by Himal Impression,


reprint edition: 2007

Websites:

• www.google.com
• www.wikipedia.com
• www.moneycontrol.com
• www.answers.com
• www.infosys.com
• www.wipro.com
• www.niit.com
• www.aptech.com
• www.melstar.com
• www.dlink.com
• www.12managemanagementcommunities.com

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