Free Cash Flow

INTERNSHIP REPORT
ON
VALUING COMPANIES USING DIFFERENT VALUATION

MODELS IN THE WAKE OF RECESSION
Submitted in partial fulfillment of the requirements for

the MBA Degree Course of
Bangalore University
BY
Ms NEHA BAHETI
REG. NO. : 07XQCM6054
MBA Fourth Semester
Under the Guidance of - Prof. S. SANTHANAM
M.P. BIRLA INSTITUTE OF MANAGEMENT

Associate Bharatiya Vidya Bhavan
# 43, Race Course Road
Bangalore-560001
2007 - 2009
VALUING COMPANIES IN THE WAKE OF RECESSION USING DIFFERENT VALUATION MODELS
EXECUTIVE SUMMARY
Every asset, financial as well as real, has a value. The key to successfully investing in and
managing these assets lies in understanding not only what the value is but also the sources of
the value. This forms the basis of the concept of valuation. Valuation is useful in a wide
range of tasks. It is useful in portfolio management, acquisition analysis, corporate finance
and even for taxation purposes.
The goal of such a valuation is essentially to estimate a fair market value of a company.
The fair market value is the price at which the property would change hands between a
willing buyer and a willing seller when the former is not under any compulsion to buy and
the latter is not under any compulsion to sell, both parties having reasonable knowledge of
relevant facts.
Analysts use a wide spectrum of models, ranging from the simple to the sophisticated.
These models often make very different assumptions about the fundamentals that determine
value, but they do share some common characteristics and can be classified in broader terms.
There is uncertainty associated with valuation. Often that uncertainty comes from the asset
being valued, though the valuation model may add to that uncertainty.
In this research project three different models namely free cash flows to firm, dividend
discount model and PE multiplier model is applied and the drivers of each model are
calculated. Three industries namely large capitalization information technology (IT),
Pharmaceutical and Power are considered and four companies in each industry is analyzed
and the intrinsic value for these companies is calculated.
In each method the market value is compared with the intrinsic value for each company and
whether the share price is over valued or under valued is decided. Finally, t test is carried out
to ascertain whether the difference between the intrinsic value and the market value is
significant or not.
M P BIRLA INSTITUTE OF MANAGEMENT

2
DECLARATION
I hereby declare that the research work embodied in the dissertation entitled
“VALUING COMPANIES IN THE WAKE OF RECESSION USING
DIFFERENT VALUATION MODELS” is the result of research work carried
out by me, under the guidance and supervision of Prof. S. Santhanam,
M.P.Birla Institute of Management, Bangalore. I also declare that this
dissertation has not been submitted to any University/Institution for the award
of any Degree/Diploma.
PLACE: Bangalore Neha Baheti

DATE: REG. NO. 07XQCM6054

3
GUIDE’S CERTIFICATE
I hereby certify that this dissertation entitled “VALUING COMPANIES IN

THE WAKE OF RECESSION USING DIFFERENT VALUATION
MODELS” is the result of research work carried out by Ms Neha Baheti under
my guidance and supervision.
Place: Bangalore Prof. S. Santhanam

Date:

4
PRINCIPAL’S CERTIFICATE
This is to certify that this dissertation entitled ““VALUING COMPANIES

IN THE WAKE OF RECESSION USING DIFFERENT VALUATION
MODELS” is the result of the research work carried out by Ms Neha Baheti
under the guidance and supervision of Prof. S. Santhanam, M.P.Birla.
Institute of Management, Bangalore.
Place: Bangalore Principal
Date: Dr. N S Mallavali

5
ACKNOWLEDGEMENT
I take this opportunity to sincerely thank Prof S. Santhanam who introduced me

to the intriguing subject of valuing companies and sharing his encyclopedic
knowledge on the subject, which is going to be instrumental in shaping my
career in the area of finance. I also thank him for sharing his experience and
knowledge of research. I also thank Dr N.S. Malavalli (Principal) for giving me
the opportunity to explore my areas of interest by consistently lending support
in terms of his expertise and also supplying valuable inputs in terms of
resources every step of the way.
Lastly, I would like to express my heart-felt gratitude to my friends, family and
Mr. Sandeep, who stood by me, right throughout this project and have been a
constant source of support and strength.
Place: Bangalore Neha Baheti

Date: Reg. No. 7XQCM6054

6
CONTENTS
CHAPTER PARTICULARS Pg No
DECLARATIONS
ACKNOWLEDGEMENT
EXECUTIVE SUMMARY
1 INTRODUCTION
1.0 Introduction 2
1.1 An Overview 2
1.2 The Role of Valuation 3
1.3 Approaches to Valuation 4
1.3.1 Adjusted Book Value 5
1.3.2 Stock and Debt Approach 5
1.3.3 Relative Valuation 5
1.3.4 Discounted Cash Flow 9
1.4 Methods used for Valuation 15
1.4.1 Free Cash Flow to Firm Model 16
1.4.2 Dividend Discount Model 17
1.4.3 PE Multiplier Model 18
2 LITERATURE SURVEY 20
3 RESEARCH DESIGN

7
3.0 Research Methodology 25
3.1 Problem Statement 25
3.2 Objectives of the study 25
3.3 Hypothesis 25
3.4 Tool used to test the hypothesis 25
3.5 Scope of the study 26
3.6 Sampling 26
3.7 Sampling Technique 27
3.8 Data Collection 27
3.9 Sources of Data 27
3.10 Limitations of the Study 28
3.11 Chapter Scheme 28
4 INDUSTRY PROFILE
4.1 I.T Industry 31
4.2 Power Industry 32
4.3 Pharmaceutical Industry 33
5 ANALYSIS AND INTERPRETATION OF DATA
5.1 Free Cash Flows to the Firm 35
5.2 Dividend Discount Model 47
5.3 PE Multiplier Model 59

8
5.4 Testing of Hypothesis 60
6 FINDINGS 63
7 CONCLUSION 65
8 SUGGESTIONS 67
BIBLIOGRAPHY 68
ANNEXURES 69

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LIST OF TABLES AND FIGURES
CHAPTER PARTICULARS Pg No
TABLES
TABLE 1 Sampling 27
FREE CASH FLOW TO FIRM
Infosys Technologies Ltd.
TABLE 2 Free Cash Flows 35
TABLE 3 Terminal Value 35
Wipro Ltd
Hcl Technologies Ltd
Tata Consultancy Services Ltd
Dr Reddys Laboratories Ltd.
Cipla Ltd

10
Cadila Healthcare Ltd
Sun Pharmaceuticals Industries Ltd
NTPC Ltd.
3 Tata Power Company Ltd
Power Grid Corporation Of India Ltd
Neyveli Lignite Ltd.

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DIVIDEND DISCOUNT MODEL
TABLE 25 Infosys Technologies Ltd.

47
TABLE 26 Wipro Ltd 48
TABLE 27 Hcl Technologies Ltd 49
TABLE 28 Tata Consultancy Services Ltd 50
TABLE 29 Dr Reddys Laboratories Ltd. 51
TABLE 30 Cipla Ltd 52
TABLE 31 Cadila Healthcare Ltd 53
TABLE 32 Sun Pharmaceuticals Industries Ltd 54
TABLE 33 Ntpc Ltd 55
TABLE 34 Tata Power Company Ltd 56
TABLE 35 Power Grid Corporation Of India Ltd 57
TABLE 36 Neyveli Lignite Ltd. 58
TABLE 37 PE MULTIPLIER MODEL 59
TESTING OF HYPOTHESIS 60
38 Consolidated result of Free Cash Flow to Firm 60
39 Result of t-test 60
40 Consolidated result of Dividend Discount Model 61
41 Result of t-test 61
FIGURE 1 Growth of Indian Pharmaceutical Companies 33

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CHAPTER 1
INTRODUCTION

13
1.0 INTRODUCTION
In the wake of economic liberalization, companies are relying more on the capital market,
acquisitions and restructuring are becoming common place, strategic alliances are gaining
popularity, employee stock option plans are proliferating, and regulatory bodies are
struggling with tariff determination. In these exercises a crucial issue is: how should the value
of a company or a division thereof be appraised.
Every asset, financial as well as real, has a value. The key to successfully investing in and
managing these assets lies in understanding not only what the value is but also the sources of
the value. Any asset can be valued, but some assets are easier to value than others and the
details of valuation will vary from case to case. Thus, the valuation of a share of a real estate
property will require different information and follow a different format than the valuation of
a publicly traded stock. What is surprising; however, is not the difference in valuation
techniques across assets, but the degree of similarity in basic principles. There is undeniably
uncertainty associated with valuation. Often that uncertainty comes from the asset being
valued, though the valuation model may add to that uncertainty.
The goal of such an appraisal is essentially to estimate a fair market value of a company.
The fair market value is the price at which the property would change hands between a
willing buyer and a willing seller when the former is not under any compulsion to buy and
the latter is not under any compulsion to sell, both parties having reasonable knowledge of
relevant facts. When the asset being appraised is a company, the property the buyer and the
seller are trading consists of the claims of all the investors of the company; this includes
outstanding equity shares, preference shares, debentures and loans.
1.1 AN OVERVIEW:
Analysts use a wide spectrum of models, ranging from the simple to the sophisticated.
These models often make very different assumptions about the fundamentals that determine
value, but they do share some common characteristics and can be classified in broader terms.
There are several advantages to such a classification --it makes it is easier to understand
where individual models fit in to the big picture, why they provide different results and when
they have fundamental errors in logic. In general terms, there are four approaches to
valuation. The first, discounted cashflow valuation, relates the value of an asset to the present

14
value of expected future cash flows on that asset. The second, liquidation and accounting
valuation is built around valuing the existing assets of a firm, with accounting estimates of
value or book value often used as a starting point. The third, relative valuation, estimates the
value of an asset by looking at the pricing of 'comparable' assets relative to a common
variable like earnings, cash flows, book value or sales. The final approach, contingent claim
valuation, uses option pricing models to measure the value of assets that share option
characteristics. This is what generally falls under the rubric of real options.
1.2 THE ROLE OF VALUATION
Valuation is useful in a wide range of tasks. The role it plays however is different in
different arenas. The following lays out the relevance of valuation in portfolio management,
in acquisition analysis, in corporate finance and for tax purposes.
1. VALUATION AND PORTFOLIO MANAGEMENT

The role that valuation plays in portfolio management is determined in a large part by the
investment philosophy of the investor. Valuation plays a minimal role in portfolio
management for a passive investor, whereas it plays a larger role for an active investor. Even
among active investors, the nature and the role of valuation is different for different types of
active investment. Market timers use valuation much less than investors who pick stocks and
the focus is on market valuation rather than on firmspecific valuation. Among security
selectors, valuation plays a central role in portfolio management for fundamental analysts and
a peripheral role for technical analysts.
2. VALUATION IN ACQUISITION ANALYSIS

Valuation should play a central part in acquisition analysis. The bidding firm or individual
has to decide on a fair value for the target firm before making a bid, and the target firm has to
determine a reasonable value for itself before deciding to accept or reject the offer. The
effects of synergy on the combined value of the two firms (target plus bidding firm) have to
be considered before a decision is made on the bid. The effects on value of changing
management and restructuring the target firm will have to be taken into account in deciding
on a fair price. Target firms may be overoptimistic in estimating value, especially when the
takeover is hostile and they are trying to convince their shareholders that the offer price is too

15
low. Similarly if the bidding firm has decided, for strategic reasons, to do an acquisition,
there may be strong pressure on the analyst to come up with an estimate of value that backs
up the acquisition.
3. VALUATION IN CORPORATE FINANCE

In recent years, management consulting firms have started offering companies advice on how
to increase value. This has been possible because of the fear of hostile takeovers. Companies
have increasingly turned to value consultants to tell them how to restructure, increase value,
and avoid being taken over. The consultants suggestions have often provided the basis for the
restructuring of these firms. The value of a firm can be directly related to decisions that it
makes: on which projects it takes, on how it finances them, and on its dividend policy.
Understanding this relationship is key to making value increasing decisions and to sensible
financial restructuring.
4. VALUATION FOR LEGAL AND TAX PURPOSES
Mundane though it may seem, most valuations, especially of private companies, are done for
legal or tax reasons. A partnership has to be valued, whenever a new partner is taken on or an
old one retires, and businesses that are jointly owned have to be valued when the owners
decide to beak up. Businesses have to be valued for estate tax purposes when the owner dies,
and for divorce proceedings when couples break up. While the principles of valuation may
not be different when valuing a business for legal proceedings, the objective often becomes
providing a valuation that the court will accept rather than the “right” valuation.
1.3 APPROACHES TO VALUATION:
Analysts use a wide spectrum of models, ranging from the simple to the sophisticated. In
general terms there are four broad approaches to appraising the value of a company namely,
1. Adjusted book value approach
2. Stock and debt approach
3. Relative Valuation and
4. Discounted cash flow approach.

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1.31. ADJUSTED BOOK VALUE APPROACH

The simplest approach to valuing a firm is to rely on the information found on its balance
sheet. There are two equivalent ways of using the balance sheet information to appraise the
value of a firm. First, the book values of investor claims may be summed directly. Second,
the assets of a firm may be totaled and from this total non-investor claims (like accounts
payable and provisions) may be deducted.
1.3.2. STOCK AND DEBT APPROACH

When the securities of a firm are publicly traded, its value can be obtained by merely
adding the market value of all its outstanding securities. This simple approach is called the
stock and the debt approach by property tax appraisers. It is also referred to as the market
approach.
1.3.3 RELATIVE VALUATION

While we tend to focus most on discounted cash flow valuation, when discussing valuation,
the reality is that most valuations are relative valuations. The value of most assets, from the
house you buy to the stocks that you invest in, are based upon how similar assets are priced in
the market place.
In relative valuation, the value of an asset is derived from the pricing of 'comparable' assets,
standardized using a common variable such as earnings, cash flows, book value or revenues.
One illustration of this approach is the use of an industry-average price-earnings ratio to
value a firm. This assumes that the other firms in the industry are comparable to the firm
being valued and that the market, on average, prices these firms correctly. Another multiple
in wide use is the price to book value ratio, with firms selling at a discount on book value,
relative to comparable firms, being considered undervalued. The multiple of price to sales is
also used to value firms, with the average price-sales ratios of firms with similar
characteristics being used for comparison. While these three multiples are among the most
widely used, there are others that also play a role in analysis - price to cash flows, price to
dividends and market value to replacement value (Tobin's Q), to name a few.
Categorizing relative valuation models
Analysts and investors are endlessly inventive when it comes to using relative valuation.
Some compare multiples across companies, while others compare the multiple of a company

17
to the multiples it used to trade in the past. While most relative valuations are based upon
comparables, there are some relative valuations that are based upon fundamentals.
1. Using Fundamentals
The first approach relates multiples to fundamentals about the firm being valued – growth
rates in earnings and cashflows, payout ratios and risk. This approach to estimating multiples
is equivalent to using discounted cashflow models, requiring the same information and
yielding the same results. Its primary advantage is to show the relationship between multiples
and firm characteristics, and allows us to explore how multiples change as these
characteristics change. For instance, what will be the effect of changing profit margins on the
price/sales ratio? What will happen to price-earnings ratios as growth rates decrease? What is
the relationship between price-book value ratios and return on equity?
2. Using Comparables
The more common approach to using multiples is to compare how a firm is valued with
how similar firms are priced by the market, or in some cases, with how the firm was valued in
prior periods. As we will see in the later chapters, finding similar and comparable firms is
often a challenge and we have to often accept firms that are different from the firm being
valued on one dimension or the other. When this is the case, we have to either explicitly or
implicitly control for differences across firms on growth, risk and cash flow measures. In
practice, controlling for these variables can range from the naïve (using industry averages) to
the sopsticated (multivariate regression models where the relevant variables are identified and
we control for differences.).
3. Cross Sectional versus Time Series Comparisons

In most cases, analysts price stocks on a relative basis by comparing the multiple it is
trading to the multiple at which other firms in the same business are trading. In some cases,
however, especially for mature firms with long histories, the comparison is done across time.
a. Cross Sectional Comparisons
When we compare the price earnings ratio of a software firm to the average price earnings
ratio of other software firms, we are doing relative valuation and we are making cross
sectional comparisons. The conclusions can vary depending upon our assumptions about the
firm being valued and the comparable firms. For instance, if we assume that the firm we are

18
valuing is similar to the average firm in the industry, we would conclude that it is cheap if it
trades at a multiple that is lower than the average multiple. If, on the other hand, we assume
that the firm being valued is riskier than the average firm in the industry, we might conclude
that the firm should trade at a lower multiple than other firms in the business. In short, you
cannot compare firms without making assumptions about their fundamentals.
b. Comparisons across time
If you have a mature firm with a long history, you can compare the multiple it trades today to
the multiple it used to trade in the past. Thus, Ford Motor company may be viewed as cheap
because it trades at six times earnings, if it has historically traded at ten times earnings. To
make this comparison, however, you have to assume that your firm has not changed its
fundamentals over time. For instance, you would expect a high growth firm’s price earnings
ratio to drop and its expected growth rate to decrease over time as it becomes larger.
Comparing multiples across time can also be complicated by changes in the interest rates
over time and the behavior of the overall market. For instance, as interest rates fall below
historical norms and the overall market increases, you would expect most companies to trade
at much higher multiples of earnings and book value than they have historically.
Standardized Values and Multiples:

The price of a stock is a function both of the value of the equity in a company and the
number of shares outstanding in the firm. Thus, a stock split that doubles the number of units
will approximately halve the stock price. Since stock prices are determined by the number of
units of equity in a firm, stock prices cannot be compared across different firms. To compare
the values of “similar” firms in the market, you need to standardize the values in some way.
Values can be standardized relative to the earnings firms generate, to the book value or
replacement value of the firms themselves, to the revenues that firms generate or to measures
that are specific to firms in a sector.
1. Earnings Multiples
One of the more intuitive ways to think of the value of any asset is the multiple of the
earnings that asset generates. When buying a stock, it is common to look at the price paid as a
multiple of the earnings per share generated by the company. This price/earnings ratio can be
estimated using current earnings per share, yielding a current PE, earnings over the last 4

19
quarters, resulting in a trailing PE, or an expected earnings per share in the next year,
providing a forward PE.
When buying a business, as opposed to just the equity in the business, it is common to
examine the value of the firm as a multiple of the operating income or the earnings before
interest, taxes, depreciation and amortization (EBITDA). While, as a buyer of the equity or
the firm, a lower multiple is better than a higher one. These multiples will be affected by the
growth potential and risk of the business being acquired.
2. Book Value or Replacement Value Multiples

While markets provide one estimate of the value of a business, accountants often provide a
very different estimate of the same business. The accounting estimate of book value is
determined by accounting rules and is heavily influenced by the original price paid for assets
and any accounting adjustments (such as depreciation) made since. Investors often look at the
relationship between the price they pay for a stock and the book value of equity (or net
worth) as a measure of how over- or undervalued a stock is; the price/book value ratio that
emerges can vary widely across industries, depending again upon the growth potential and
the quality of the investments in each. When valuing businesses, you estimate this ratio using
the value of the firm and the book value of all assets (rather than just the equity). For those
who believe that book value is not a good measure of the true value of the assets, an
alternative is to use the replacement cost of the assets; the ratio of the value of the firm to
replacement cost is called Tobin’s Q.
3. Revenue Multiples
Both earnings and book value are accounting measures and are determined by accounting
rules and principles. An alternative approach, which is far less affected by accounting
choices, is to use the ratio of the value of an asset to the revenues it generates. For equity
investors, this ratio is the price/sales ratio (PS), where the market value per share is divided
by the revenues generated per share. For firm value, this ratio can be modified as the value
/sales ratio (VS), where the numerator becomes the total value of the firm. This ratio, again,
varies widely across sectors, largely as a function of the profit margins in each. The
advantage of using revenue multiples, however, is that it becomes far easier to compare firms
in different markets, with different accounting systems at work, than it is to compare earnings
or book value multiples.

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4. Sector-Specific Multiples
While earnings, book value and revenue multiples are multiples that can be computed for
firms in any sector and across the entire market, there are some multiples that are specific to a
sector. For instance, when Internet firms first appeared on the market in the later 1990s, they
had negative earnings and negligible revenues and book value. Analysts looking for a
multiple to value these firms divided the market value of each of these firms by the number
of hits generated by that firm’s web site. Firms with a low market value per customer hit were
viewed as more under valued. More recently, retailers have been judged by the market value
of equity per customer in the firm, regardless of the longevity and the profitably of the
customers.
While there are conditions under which sector-specific multiples can be justified, they are
dangerous for two reasons. First, since they cannot be computed for other sectors or for the
entire market, sector-specific multiples can result in persistent over or under valuations of
sectors relative to the rest of the market. Thus, investors who would never consider paying 80
times revenues for a firm might not have the same qualms about paying Rs 2000 for every
page hit (on the web site), largely because they have no sense of what high, low or average is
on this measure. Second, it is far more difficult to relate sector specific multiples to
fundamentals, which is an essential ingredient to using multiples well. For instance, does a
visitor to a company’s web site translate into higher revenues and profits? The answer will
not only vary from company to company, but will also be difficult to estimate looking
forward.
1.3.4. DISCOUNTED CASH FLOW VALUATION

This approach has its foundation in the present value rule, where the value of any asset is
the present value of expected future cash flows that the asset generates. The cashflows will
vary from asset to asset -- dividends for stocks, coupons (interest) and the face value for
bonds and after-tax cashflows for a real project. The discount rate will be a function of the
riskiness of the estimated cashflows, with higher rates for riskier assets and lower rates for
safer projects.
Basis for Discounted Cash flow Valuation

This approach has its foundation in the present value rule, where the value of any asset is the
present value of expected future cash flows that the asset generates.

21
Value =
Where,
n = Life of the asset
CFt = Cashflow in period t
r = Discount rate reflecting the riskiness of the estimated cashflows.
The cashflows will vary from asset to asset -- dividends for stocks, coupons (interest) and
the face value for bonds and after-tax cashflows for a real project. The discount rate will be a
function of the riskiness of the estimated cashflows, with higher rates for riskier assets and
lower rates for safer projects. You can in fact think of discounted cash flow valuation on a
continuum. At one end of the spectrum, you have the default-free zero coupon bond, with a
guaranteed cash flow in the future. Discounting this cash flow at the riskless rate should yield
the value of the bond. A little further up the spectrum are corporate bonds where the cash
flows take the form of coupons and there is default risk. These bonds can be valued by
discounting the expected cash flows at an interest rate that reflects the default risk. Moving
up the risk ladder, we get to equities, where there are expected cash flows with substantial
uncertainty around the expectation. The value here should be the present value of the
expected cash flows at a discount rate that reflects the uncertainty.
CATEGORIZING DISCOUNTED CASH FLOW MODELS

There are literally thousands of discounted cash flow models in existence. Oftentimes, we
hear claims made by investment banks or consulting firms that their valuation models are
better or more sophisticated than those used by their contemporaries. Ultimately, however,
discounted cash flow models can vary only a couple of dimensions and we will examine
these variations in this section.
TOTAL CASH FLOW VERSUS EXCESS CASH FLOW MODELS

The conventional discounted cash flow model values an asset by estimating the present value
of all cash flows generated by that asset at the appropriate discount rate. In excess return (and
excess cash flow) models, only cash flows earned in excess of the required return are viewed

22
as value creating, and the present value of these excess cash flows can be added on to the
amount invested in the asset to estimate its value.
Excess return = Cash flow earned – Cost of capital * Capital Invested in asset
FREE CASH FLOW TO EQUITY DISCOUNT MODELS

The dividend discount model is based upon the premise that the only cashflows received by
stockholders is dividends. Even if we use the modified version of the model and treat stock
buybacks as dividends, we may misvalue firms that consistently return less or more than they
can afford to their stockholders.
FREE CASH FLOWS TO EQUITY

To estimate how much cash a firm can afford to return to its stockholders, we begin with
the net income –– the accounting measure of the stockholders’ earnings during the period ––
and convert it to a cash flow by subtracting out a firm’s reinvestment needs.
First, any capital expenditures, defined broadly to include acquisitions, are subtracted from
the net income, since they represent cash outflows. Depreciation and amortization, on the
ther hand, are added back in because they are non-cash charges. The difference between
capital expenditures and depreciation is referred to as net capital expenditures and is usually
a function of the growth characteristics of the firm. High growth firms tend to have high net
capital expenditures relative to earnings, whereas low-growth firms may have low, and
sometimes even negative, net capital expenditures.
Second, increases in working capital drain a firm’s cash flows, while decreases in working
capital increase the cash flows available to equity investors. Firms that are growing fast, in
industries with high working capital requirements (retailing, for instance), typically have
large increases in working capital. Since we are interested in the cash flow effects, we
consider only changes in non-cash working capital in this analysis.
Finally, equity investors also have to consider the effect of changes in the levels of debt on
their cash flows. Repaying the principal on existing debt represents cash outflow; but the debt
repayment may be fully or partially financed by the issue of new debt, which is a cash inflow.
Again, netting the repayment of old debt against the new debt issues provides a measure of
the cash flow effects of changes in debt. Allowing for the cash flow effects of net capital
expenditures, changes in working capital and net changes in debt on equity investors, we can
define the cash flows left over after these changes as the free cash flow to equity (FCFE).

23
Free Cash Flow to Equity (FCFE) = Net Income - (Capital Expenditures - Depreciation) -
(Change in Non-cash Working Capital) + (New Debt Issued - Debt Repayments)
This is the cash flow available to be paid out as dividends or stock buybacks. This calculation
can be simplified if we assume that the net capital expenditures and working capital changes
are financed using a fixed mix of debt and equity.
THE FREE CASHFLOW TO THE FIRM

The free cashflow to the firm is the sum of the cashflows to all claim holders in the firm,
including stockholders, bondholders and preferred stockholders. There are two ways of
measuring the free cashflow to the firm (FCFF). One is to add up the cashflows to the claim
holders, which would include cash flows to equity (defined either as free cash flow to equity
or dividends), cashflows to lenders (which would include principal payments, interest
expenses and new debt issues) and cash flows to preferred stockholders (usually preferred
dividends).
FCFF = Free Cashflow to Equity + Interest Expense (1 - tax rate) + Principal Repayments -
New Debt Issues+ Preferred Dividends
We are reversing the process that we used to get to free cash flow to equity, where we
subtracted out payments to lenders and preferred stockholders to estimate the cash flow left
for stockholders. A simpler way of getting to free cash flow to the firm is to estimate the cash
flows prior to any of these claims. Thus, we could begin with the earnings before interest and
taxes, net out taxes and reinvestment needs and arrive at an estimate of the free cash flow to
the firm.
FCFF = EBIT (1 - tax rate) + Depreciation - Capital Expenditure - Δ Working Capital
Since this cash flow is prior to debt payments, it is often referred to as an unlevered cash
flow. Note that this free cash flow to the firm does not incorporate any of the tax benefits due
to interest payments. This is by design, because the use of the after-tax cost of debt in the cost
of capital already considers this benefit and including it in the cash flows would double count
it.

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The Model
The value of the firm, in the most general case, can be written as the present value of
expected free cashflows to the firm.
Value of Firm =
Where,
FCFFt = Free Cashflow to firm in year t.
WACC = Weighted average cost of capital.
DIVIDEND DISCOUNT MODELS

In the strictest sense, the only cash flow you receive from a firm when you buy publicly
traded stock is the dividend. The simplest model for valuing equity is the dividend discount
model -- the value of a stock is the present value of expected dividends on it. While many
analysts have turned away from the dividend discount model and viewed it as outmoded,
much of the intuition that drives discounted cash flow valuation is embedded in the model. In
fact, there are specific companies where the dividend discount model remains a useful took
for estimating value.
The General Model

When an investor buys stock, she generally expects to get two types of cashflows -
dividends during the period she holds the stock and an expected price at the end of the
holding period. Since this expected price is itself determined by future dividends, the value of
a stock is the present value of dividends through infinity.
Value per share of stock =
Where,
DPSt = Expected dividends per share
Ke = Cost of equity

25
There are two basic inputs to the model - expected dividends and the cost on equity. To
obtain the expected dividends, we make assumptions about expected future growth rates in
earnings and payout ratios. The required rate of return on a stock is determined by its
riskiness, measured differently in different models - the market beta in the CAPM, and the
factor betas in the arbitrage and multi-factor models. The model is flexible enough to allow
for time-varying discount rates, where the time variation is caused by expected changes in
interest rates or risk across time.
The Gordon Growth Model

The Gordon growth model can be used to value a firm that is in 'steady state' with dividends
growing at a rate that can be sustained forever.
The Model
The Gordon growth model relates the value of a stock to its expected dividends in the next
time period, the cost of equity and the expected growth rate in dividends.
Value of Stock =
Where,
DPS1 = Expected Dividends one year from now (next period)
Ke = Required rate of return for equity investors
G = Growth rate in dividends forever

26
1.4 METHODS USED FOR VALUATIONS:-
VALUATION PARAMETERS:-
The following parameters are used for valuing the companies:-

1. Net operating profit less adjusted taxes (NOPLAT)
2. Return on capital employed (ROCE)
3. Growth rate
4. Weighted average cost of capital
5. Free cash flow (FCFF)
As per the sample size four companies in three sectors are analyzed by three different
techniques. The techniques are:
1. Free cash flows to firm.

2. Dividend discount model.
3. PE ratio method.

27
1.4.1 FREE CASH FLOWS TO FIRM:-
Value of high - growth business =
Free cash flows to firm:

PARTICULARS AMOUNT
SALES XXX
LESS:-COGS XXX
EBIT XXX
LESS:-TAX XXX
EBIT (1-T) XXX
LESS: - CHANGE IN WORKING CAPITAL XXX
FCFF XXX
Assumption: -
1. In the long run both capital expenditure and depreciation with equal and cancel off
each other.
Free cash flow to firm (FCFF) is estimated for next 5 years and then terminal value of the
firm is calculated. These FCFF are discounted to present value by using weighted average
cost of capital (WACC).
TERMINAL VALUE:
The terminal value of a security is the present value at a future point of all future cash
flows. It allows for the inclusion of the value of future cash flows occurring beyond a several
year projection period while satisfactorily mitigating many of the problems of valuing such
cash flows. The terminal value is calculated in accordance with a stream of projected future
free cash flows in discounted cash flow analysis.
Terminal value = Final projected year cash flow / (WACC-growth rate)

28
Once the terminal values and operating cash flows have been estimated, they are discounted
back to the present to yield the value of the operating assets of the firm.
Fair value of equity = FCFF - Total Debt.
Value of each equity share = Fair value of equity / Total number of equity shares.
ESTIMATING SALES:-
The sales of last 4 years is considered and the growth rate of sales for 3 years is calculated
and weights of 0.4, 0.3 & 0.3 are given. 0.4 is given to the most recent year.
Average growth rate is calculated and taking this rate next 6 years sales is projected.
ESTIMATING EBIT:-
Earning before interest and tax (EBIT) is calculated for first 3 years using financial
statements for the next 6 years the EBIT is projected using the growth rate of EBIT.
Growth rate in EBIT = Reinvestment Rate*Return on capital employed
Reinvestment rate = (Capital expenditure – depreciation + change in non cash working
capital) / EBIT (1-Tax)
Return on capital employed = Net earnings / Capital employed
ESTIMATING TAX & CHANGE IN WORKING CAPITAL:-

For tax purpose standard value of 33.99% is taken which is the tax rate right now,
The change in working capital is estimated for the next 6 years using sales: that is the
working capital will change in proportion of sales.
1.4.2 DIVIDEND DISCOUNT MODEL:-

(The Gordon Growth Model)
The Gordon growth model can be used to value a firm that is in 'steady state' with dividends
growing at a rate that can be sustained forever. The Gordon growth model relates the value of
a stock to its expected dividends in the next time period, the cost of equity and the expected
growth rate in dividends.

29
Value of Stock = DPS1 / (Ke – g)

Where,
DPS1 = Expected Dividends one year from now (next period)
Ke = required rate of return for equity investors
g = Growth rate in dividends forever
g =Growth rate = ROC* b
Where,
Roc = Return on Equity & b = Retention Ratio.
DPS1 = DPS0 (1+g).
Here Ke is calculated using the capital asset pricing model. Roc & b are calculated for last 5
years using financial statements of those companies.
1.4.3 PE COMPARATIVE MODEL:
This model makes use of the Price/Earnings ratio. Here, the industry PE ratio is compared
with the weighted PE of the company PE ratio and thereby concluded whether the company
is undervalued or overvalued

30
CHAPTER 2
LITERATURE REVIEW

31
LITERATURE REVIEW
Review of literature means examining and analyzing the various literatures available in any
field either for references purposes or for further research. Further research can be done by
identifying the areas which have not been studied and in turn undertaking research to add
value to the existing literature. For the purpose of literature review various sources of
information have been used. Sources include books, journals as well as some literature
papers.
1. The valuation of cash flows forecasts: An Empirical Analysis

By: Steven N.Kaplan and Richard S. Ruback
The study provides evidence that discounted cash flow valuation methods provide reliable
estimates of market value. their median estimates of discounted cash flows for 51 highly
leveraged transactions (HLTS) are within 10 percent of the market values of the completed
transactions and perform at least as well as valuation approaches using companies in similar
industries and companies involved in similar transactions .the stress on estimates rely on a
number of ad hoc assumptions that should be able to improve on. the research expect such
improvements to bring the DCF valuations even closer to the transaction values. Three
CAPM-based approaches are use to estimate discount rate corresponding to firm-level,
industry-level, and market-level measures of risk. All three methods perform well compared
to those using comparable transactions and companies. They considered the most realistic
assumptions; the industry- and market-based approaches perform best.
2. Valuation approaches and metrics: a survey of the theory and evidence (November 2006)
Aswath Damodaran
Stern School of Business
Since almost everything in finance can be categorized as a subset of valuation and they run
the risk of ranging far from their mission, they kept a narrow focus in this paper. In particular,
they stressed away any work done on real options, since it merits its own survey article. In
addition, they kept their focus on papers that have examined the theory and practice of

32
valuation of companies and stocks, rather than on questions of assessing risk and estimating
discount rates that have consumed a great deal of attention in the literature.
Directions for future research:
As the survey, the research done on valuation in the last few decades, there are three key
trends that emerge from the research. First, the focus has shifted from valuing stocks through
models such as the dividend discount model to valuing businesses, representing the increased
use of valuation models in acquisitions and corporate restructuring (where the financing mix
is set by the acquirer) and the possibility that financial leverage can change quickly over time.
Second, the connections between corporate finance and valuation have become clearer as
value is linked to a firm’s actions. In particular, the excess return models link value directly
to the quality of investment decisions, whereas adjusted present value models make value a
function of financing choices. Third, the comforting conclusion is that all models lead to
equivalent values, with consistent assumptions, which should lead us to be suspicious of new
models that claim to be more sophisticated and yield more precise values than prior
iterations.
The challenges for valuation research in the future lie in the types of companies that we are
called upon to value. First, the shift of investments from developed markets to emerging
markets in Asia and Latin America has forced us to re-examine the assumptions we make
about value. In particular, the interrelationship between corporate governance and value, and
the question of how best to deal with the political and economic risk endemic to emerging
markets have emerged as key topics. Second, the entry of young companies into public
markets, often well before they have established revenue and profit streams, requires us to
turn our attention to estimation questions: How best do we estimate the revenues and margins
for a firm that has an interesting product idea but no commercial products? How do we
forecast the reinvestment needs and estimate discount rates for such a firm? Third, with both
emerging market and young companies, we need to reassess our dependence on current
financial statement values as the basis for valuation. For firms in transition, in markets that
are themselves changing, we need to be able to allow for significant changes in fundamentals,
be they risk parameters, debt ratios and growth rats, over time. In short, we need dynamic
valuation models rather than the static ones that we offer as the default currently. Fourth, as
the emphasis has shifted from growth to excess returns as the driver of value, the importance
of tying corporate strategy to value has also increased. After all, corporate strategy is all
about creating new barriers to entry and augmenting or preserving existing ones, and much

33
work needs to be done at the intersection of strategy and valuation. Understanding why a
company earns excess returns in the first place and why those excess returns may come under
assault is a pre-requisite for good valuation. Finally, while the increase in computing power
and easy access to statistical tools has opened the door to more sophisticated variations in
valuation, it has also increased the potential for misuse of these tools. Research on how best
to incorporate statistical tools into the conventional task of valuing a business is needed. In
particular, is there a place for simulations in valuation and if so, what is it? How about
scenario analysis or neural networks? The good news is that there is a great deal of interesting
work left to be done in valuation. The bad news is that it will require a mix of
interdisciplinary skills including accounting, corporate strategy, statistics and corporate
finance for this research to have a significant impact.
3. The cost of distress survival, truncation risk and valuation

Aswath Damodaran:
Stern School of Business
Traditional valuation techniques- both DCF and relative - short change the effects of
financial distress on value. In most valuations, we ignore distress entirely and make implicit
assumptions that are often unrealistic about the consequences of a firm being unable to meet
its financial obligations. Even those valuations that purport to consider the effect of distress
do so incompletely. In this paper, they begin by considering how distress is dealt with in
traditional discounted cash flow models, and when these models value distress correctly.
Then they look at ways in which they can incorporate the effects of distress into value in
discounted cash flow models. At last they conclude by looking at the effect of distress on
relative valuations, and ways of incorporating its effect into relative value.
4. Internationalization and the evolution of corporate valuation

Ross Levine, Sergio L. Schmukler
This paper provides evidence on the bonding, segmentation, and market timing theories of
internationalization by documenting the evolution of Tobin's (q) before, during, and after
firms internationalize. Using new data on 9,096 firms across 74 countries over the period

34
1989-2000, they find that Tobin's q does not rise after internationalization, even relative to
firms that do not internationalize.
5. FEVA: A Financial and Economic Approach to Valuation

Xavier Adsera and Pere Vi-nolas
Financial analysts face a fundamental problem: When different valuation models are
applied to the same company, they yield significantly different results. Because the three
main families of corporate valuation models-economic value added (EVA), discounted cash
flow (DCF), and Modigliani and Miller (MM)- share the same underlying assumptions, the
principle of one value states that when the same inputs are used, such models should yield
exactly the same result.
This article shows that all traditional valuation methods, when properly applied, are
mathematically equivalent; thus, the principle of one value should apply to the last decimal.
In addition, it demonstrates the adjustments required to produce consistent valuation results.
They also offer an approach ("financial and economic value added," or FEVA) that splits
corporate valuation into eight value drivers drawn from the MM and EVA approaches and
identifies the exact contribution of each driver. Thus, the principle of one value is maintained
in the new formula because it is mathematically consistent with previous methodologies.

35
CHAPTER 3
RESEARCH DESIGN

36
RESEARCH METHODOLOGY
3.1 PROBLEM STATEMENT

There are different methods to value a company and the inputs needed for each method is
different. So each method generates different intrinsic value of the company. The problem
lies in which value to choose, whether to take an average value or to ignore the value which
is widely different from other methods and to arrive at the value that best represents the
company.
3.2 OBJECTIVES OF THE STUDY

• To find a fair intrinsic value of the company using different methods.
• To compare the intrinsic value of the company with market value of the company
• To find whether the company is undervalued or overvalued.
3.3 HYPOTHESIS
To analyze whether there is significant difference between the intrinsic value and the market
value.
Null Hypothesis
Ho: There is no significant difference between the intrinsic value and the actual share price.
Alternative Hypothesis
Ha: There is significant difference between the intrinsic value and the actual share price.
3.4 TOOL USED TO TEST THE HYPOTHESIS

The above hypothesis is tested using the paired t- test
Paired t-test :
Paired t-test is a way to compare two related samples, involving small values of “n” that
does not require the variances of the two populations to be equal, but the assumption that the
two populations are normal must continue to apply.
For a paired t-test it is necessary that the observations in the two samples must be collected
in the form of what is called matched pairs i.e. each observation in one sample must be paired
with an observation in the other sample in such a manner that these observations are some
how matched or related, in an attempt to eliminate the extraneous factors which are not of

37
interest in test. Such a test is generally considered appropriate in a before-and-after treatment

study.
To apply this test we first work out the difference score for each matched pair, and then
find out the average of such differences, D, along with the sample variance of the score. If the
values from the two matched samples are denoted as X and Y, and the difference by D which
is (D =X - Y), then the mean of the difference is: d = ∑ D / n
The variance of the difference: ( S diff) = {∑D^2 – (d) ^2. n} / n-1
Assuming the said differences to be normally distributed and independent, we can apply the
paired t-test for judging the significance of mean of differences and work out the test statistic
t as under:
t = d – 0 / {S diff / sqrt n }
with (n-1) degrees of freedom
d = mean of difference
S diff = standard deviation of the differences
n = number of matched pairs
This calculated value of t is compared with its table value at a given level of significance for
testing the hypothesis.
3.5 SCOPE OF THE STUDY

The scope of the study is limited to the analysis of the intrinsic value of four companies
under each of the three industries and comparing them with the market value of the
companies.
3.6 SAMPLING
Three industries (I.T, Power, Pharmaceutical) under which four companies each is
analyzed. Table 1 shows the list of the sectors and the companies in it that have been taken.

38
INFORMATION TECHNOLOGY
INDUSTRY
1 Infosys Technologies Ltd
2 Tata Consultancy Services Ltd
3 Wipro Ltd
4 HCL Technologies Ltd
INDUSTRY PHARMACEUTICAL
1 Dr Reddys Laboratories Ltd
2 Cadila Healthcare Ltd
3 Cipla Ltd
4 Sun Pharmaceuticals Industries Ltd
INDUSTRY POWER GENERATION
1 NTPC Ltd
2 Power Grid Corporation of India Ltd
3 Tata Power Company Ltd
4 Neyveli Lignite Ltd.
TABLE 1
3.7 SAMPLING TECHNIQUE

Technique used for selection of samples is simple random sampling technique.
3.8 DATA COLLECTION

Secondary data:
Income statements of companies under study
Balance sheets
Historical stock prices
3.9 SOURCES OF DATA

The data relating to the study shall be taken from Capitaline Database.

39
3.10 LIMITATIONS OF THE STUDY

• Time has been a constraint in this research.
• Secondary data is relied upon for the study. Hence, the analysis and interpretations are
dependent upon the data that was considered from the capitaline database.
• The period of study is limited to the last five years
3.11 CHAPTER SCHEME

Chapter 1: Introduction
Chapter 2: Research Design
Chapter 3: Industry Profile
Chapter 4: Analysis and Interpretation of data
Chapter 5: Findings
Chapter 6: Conclusions
Chapter 7: Suggestions

40
CHAPTER 4
INDUSTRY PROFILE

41
3.1 I.T INDUSTRY:
The India Software Industry has brought about a tremendous success for the emerging
economy. The software industry is the main component of the Information technology in
India. India's pool of young aged manpower is the key behind this success story. Presently
there are more than 500 software firms in the country which shows the monumental
advancement that the India Software Industry has experienced.
PORTERS MODEL:
Supply: Abundant supply across segments, mainly lower-end, such as ADM. Lower in
higher-end areas like IT/business consulting, but competition is very tough.
Demand: IT is spending expected to grow at 6% CAGR over the next 3-4 years, and growth
is buoyant in fast-growing economies such as India and China. Europe also shows promise.
Demand largely depends upon the state of the global economy and willingness of
corporations to go in for new software services and greater discretionary spending rather than
consolidating existing systems.
Barriers to entry: Low in the ADM segment, which is prone to relatively easy
commoditisation. In high-end services like IT/business consulting, where domain expertise
creates a barrier. The size of a particular company/scalability also creates barriers to entry, as
these firms have built up long-term relationships with major clients and to take business away
from them is not easy.
Bargaining power of suppliers: Low, due to intense competition (oversupply), particularly

in the lower-end ADM space. Low differentiating power is also another reason. High, at the
higher end of the value chain.
Bargaining power of customers: High, mainly due to intense competition among

suppliers/vendors. However, it is lower in higher-end services like consulting and package
implementation.

42
Competition: Competition is global in nature and stretches across boundaries and

geographies. It is expected to intensify due to the attempted replication of the Indian
offshoring model by MNC IT majors.
3.2 POWER INDUSTRY:
The power sector has registered significant progress since the process of planned
development of the economy began in 1950. Hydro -power and coal based thermal power
have been the main sources of generating electricity. Nuclear power development is at slower
pace, which was introduced, in late sixties. The concept of operating power systems on a
regional basis crossing the political boundaries of states was introduced in the early sixties. In
spite of the overall development that has taken place, the power supply industry has been
under constant pressure to bridge the gap between supply and demand.
PORTERS MODEL:
Supply: Many projects have been planned but due to slow regulatory processes, especially in
the distribution segment, the supply is far lesser than demand. Currently, India needs to
double its generation capacity in the next 7 to 10 years to meet the potential demand.
Demand: The long-term average demand growth rate is 6% to 7% per annum and is expected
to grow at faster rate in the future.
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 as government controls tariff structure.
However, this may change in the future.
Bargaining power of customers: Bargaining power of retail customers is low, as power is in

short supply. However government is a big buyer and payment by government can be erratic,
as has been seen in the past.

43
Competition: Not high currently. The Electricity Act 2003 aims to encourage investments,
thereby increasing competition.
3.3 PHARMACEUTICAL INDUSTRY:
The highly fragmented Indian pharmaceutical industry has around 30,000 players, out of
which 330 are in organized sector. Accounting for two percent of the world's pharmaceutical
market, the Indian pharmaceutical sector has an estimated market value of about US $8
billion. It's at 4th rank in terms of total pharmaceutical production and 13th in terms of value.
As in the present scenario, only a few people can afford costly drugs, which have increased
price sensitivity in the pharmaceutical market. Now the companies are trying to capture the
market by introducing high quality and low price medicines and drugs.
With the Product Patent Act, which came into action in January 2005, this industry is able to
attract big MNCs to India. Earlier these big firms had apprehensions in launching new drugs
in the Indian market.
At present, a large number of Indian pharmaceuticals companies are looking for tie-ups with
foreign firms for in-license drugs. Contract research and pharmaceutical outsourcing are the
new avenues in the pharmaceutical market. Indian multinational companies like Dr.Reddy's
Lab, Cipla, Ranbaxy, etc have created awareness about the Indian market prospects in the
international pharmaceutical market. Approvals given by Foods and Drugs Administration
(FDA) and ANDA (Abbreviated New Drug Application)/DMF (Drug Master File) have
played an important role in making India a cost-effective and high quality product
manufacturer. Furthermore, the changes that took place in the patent law, change of process
patent to product patent, have helped in reducing the risk of loss for intellectual property.
PORTERS MODEL:
Supply: Higher for traditional therapeutic segments, which is typical of a developing market.
Relatively lower for lifestyle segment.
Demand: Very high for certain therapeutic segments. Will change as life expectancy, literacy
increases.

44
Barriers to entry: Licensing, distribution network, patents, plant approval by regulatory

authority.
Bargaining power of suppliers: Distributors are increasingly pushing generic products in a

bid to earn higher margins.
Bargaining power of customers: High, a fragmented industry has ensured that there is
widespread competition in almost all product segments. (Currently also protected by the
DPCO).
Competition: High. Very fragmented industry with the top 300 (of 24,000 manufacturing
units) players accounting for 85% of sales value. Consolidation is likely to intensify.
Growth of Indian Pharmaceutical Companies:
FIGURE 1

45
CHAPTER 5
ANALYSIS AND INTERPRETATION OF
DATA

46
4.1 FREE CASH FLOWS TO FIRM MODEL:
INFOSYS TECHNOLOGIES LTD:
Free Cash Flows:

YEAR 2006 2007 2008 2009 2010 2011 2012 2013 2014
SALES 9028 13149 15648 20464 26762 34999 45771 59858 78280
EBIT 2737 4153 5118 7966 12398 19297 30034 46746 72757
Less: Tax 930 1412 1740 2708 4214 6559 10209 15889 24730
EBIT(1-T) 1807 2741 3378 5258 8184 12738 19826 30857 48027
Change in
W.C 1197 392 1076 2073 2711 3546 4637 6064 7930
FCFF 610 2350 2303 3185 5473 9192 15189 24793 40097
Discount Rate 0.849 0.721 0.612 0.520 0.441 0.375
PV of FCFF 2704 3946 5627 7895 10943 15027
Total PV of
FCFF 31116.1
TABLE 2
Terminal Value:
At 5% At 8% At 10%
Present Value of
FCFF 31116.12 31116.12 31116.12
Terminal Value 138574.62 181120.54 227733.92
Long Term Debt 0 0 0
Value of Equity 169690.74 212236.65 258850.04
No. of Shares 572,641,503 572,641,503 572,641,503
Equity per share 2963.29 3706.27 4520.28
TABLE 3
INTERPRETATIONS:
The stock price of Infosys technologies ltd. as on 31.03 2009 is Rs. 1324 and the intrinsic
value according to the free cash flows to firm model is greater than the stock price. So the
investor who has an estimation of 5% or above terminal growth rate, can buy the stock
because the stock is under valued.

47
WIPRO LTD:
Free Cash Flows:

YEAR 2006 2007 2008 2009 2010 2011 2012 2013 2014
SALES 10264 13759 17658 23639 31645 42364 56712 75921 101635
EBIT 2343 3183 3587 6412 11462 20491 36633 65490 117078
Less: Tax 796 1082 1219 2179 3896 6965 12452 22260 39795
EBIT(1-T) 1546 2101 2367 4232 7566 13526 24182 43230 77283
Change in W.C 338 1282 4736 7263 9724 13017 17426 23328 31229
FCFF 1209 820 -2368 -3031 -2157 509 6756 19902 46054
Discount Rate 0.803 0.645 0.519 0.417 0.335 0.269
PV of FCFF -2435 -1392 264 2814 6660 12382
Total PV of
FCFF 5911.11
TABLE 4
Terminal Value:
At 5% At 8% At 10%
Present Value of
FCFF 5911.11 5911.11 5911.11
Terminal Value 79139.17 93550.19 106476.20
Long Term Debt 3822.40 3822.40 3822.40
Value of Equity 81227.88 95638.90 108564.91
No. of Shares 1463724838 1463724838 1463724838
Equity per share 554.94 653.39 741.70
TABLE 5
INTERPRETATIONS:
The stock price of Wipro as on 31.03 2009 is Rs. 246 and the intrinsic value according to the
free cash flows to firm model is greater than the stock price. So the investor who has an
estimation of 5% or above terminal growth rate, can buy the stock because the stock is under
valued.

48
HCL TECHNOLOGIES LTD:
Free Cash Flows:

YEAR 2006 2007 2008 2009 2010 2011 2012 2013 2014
SALES 3033 3769 4615 6884 10267 15312 22837 34060 50799
EBIT 667 1191 894 975 1062 1158 1262 1375 1498
Less: Tax 227 405 304 331 361 393 429 467 509
EBIT(1-T) 440 786 590 643 701 764 833 908 989
Change in W.C 112 590 -408 -1093 -1630 -2431 -3626 -5409 -8067
FCFF 328 196 998 1736 2331 3196 4459 6316 9056
Discount Rate 0.821 0.673 0.553 0.453 0.372 0.305
PV of FCFF 1425 1570 1766 2022 2350 2765
Total PV of
FCFF 9133.6
TABLE 6
Terminal Value:
At 5% At 8% At 10%
Present Value of
FCFF 9133.60 9133.60 9133.60
Terminal Value 19989.19 24316.14 28416.99
Long Term Debt 25.33 25.33 25.33
Value of Equity 29097.46 33424.41 37525.26
No. of Shares 978610498 978610498 978610498
Equity per share 297.33 341.55 383.45
TABLE 7
INTERPRETATIONS:
The stock price of Hcl technologies ltd. as on 31.03 2009 is Rs.102 and the intrinsic value
according to the free cash flows to firm model is greater than the stock price. So the investor
who has an estimation of 5% or above terminal growth rate, can buy the stock because the
stock is under valued.

49
TATA CONSULTANCY SERVICES LTD:
Free Cash Flows:

YEAR 2006 2007 2008 2009 2010 2011 2012 2013 2014
SALES 11236 14942 18537 24354 31998 42040 55235 72570 95347
EBIT 3079 4174 5007 7694 11821 18163 27907 42879 65883
Less: Tax 1046 1419 1702 2615 4018 6174 9486 14575 22394
EBIT(1-T) 2032 2755 3305 5079 7803 11989 18421 28304 43489
Change in W.C 1197 392 1076 1741 2288 3005 3949 5188 6816
FCFF 835 2364 2230 3337 5516 8984 14473 23116 36673
Discount Rate 0.841 0.707 0.595 0.501 0.421 0.354
PV of FCFF 2807 3902 5346 7244 9732 12986
Total PV of
FCFF 29031.2
TABLE 8
Terminal Value:
At 5% At 8% At 10%
Present Value of
FCFF 29031.23 29031.23 29031.23
Terminal Value 111155.40 141777.53 173674.52
Long Term Debt 18.25 18.25 18.25
Value of Equity 140168.38 170790.51 202687.50
No. of Shares 978610498 978610498 978610498
Equity per share 1432.32 1745.23 2071.18
TABLE 9
INTERPRETATIONS:
The stock price of TCS as on 31.03 2009 is Rs.540 and the intrinsic value according to the
valued.

50
DR REDDYS LABORATORIES LTD.:
Free Cash Flows:

YEAR 2006 2007 2008 2009 2010 2011 2012 2013 2014
SALES 2105 4045 3450 4505 5883 7682 10032 13100 17107
EBIT 288 1418 599 849 1203 1705 2416 3425 4854
Less: Tax 98 482 204 288 409 580 821 1164 1650
EBIT(1-T) 190 936 395 560 794 1125 1595 2261 3204
Change in W.C 355 1226 -771 1366 1783 2329 3041 3971 5186
FCFF -165 -290 1166 -805 -989 -1203 -1446 -1711 -1982
Discount Rate 0.899 0.808 0.726 0.653 0.587 0.527
PV of FCFF -724 -799 -874 -944 -1003 -1045
Total PV of
FCFF -4344.38
TABLE 10
INTERPRETATIONS:
Since the free cash flows of Dr. Reddys is negative, this model cannot be used to find out the
value of the company

51
CIPLA LTD :
Free Cash Flows:

YEAR 2006 2007 2008 2009 2010 2011 2012 2013 2014
SALES 3020 3533 4089 4919 5918 7120 8566 10305 12398
EBIT 726 819 856 1724 3469 6982 14051 28279 56914
Less: Tax 247 278 291 586 1179 2373 4776 9612 19345
EBIT(1-T) 479 541 565 1138 2290 4609 9275 18667 37569
Change in W.C 413 509 603 901 1084 1305 1569 1888 2272
FCFF 66 31 -38 236 1206 3304 7706 16779 35297
Discount Rate 0.814 0.662 0.539 0.439 0.357 0.291
PV of FCFF 192 799 1781 3382 5993 10262
Total PV of
FCFF 12147.3
TABLE 11
Terminal Value:
At 5% At 8% At 10%
Present Value of
FCFF 12147.31111 12147.31111 12147.31111
Terminal Value 70581.79771 84828.5527 98018.39376
Long Term Debt 580.53 580.53 580.53
Value of Equity 82148.57881 96395.3338 109585.1749
No. of Shares 777291357 777291357 777291357
Equity per share 1056.85697 1240.144161 1409.833956
TABLE 12
INTERPRETATIONS:
The stock price of Cipla as on 31.03 2009 is Rs.220 and the intrinsic value according to the
valued.

52
CADILA HEALTHCARE LTD :
Free Cash Flows:

YEAR 2006 2007 2008 2009 2010 2011 2012 2013 2014
SALES 1308 1501 1719 1979 2278 2622 3018 3474 3999
EBIT 216 262 317 540 919 1564 2663 4533 7716
Less: Tax 73 89 108 184 312 532 905 1541 2623
EBIT(1-T) 143 173 209 356 607 1033 1758 2992 5093
Change in W.C 125 7 236 281 324 373 429 494 568
FCFF 18 166 -26 75 283 660 1329 2498 4525
Discount Rate 0.859 0.738 0.634 0.544 0.467 0.401
PV of FCFF 65 209 418 723 1168 1817
Total PV of
FCFF 2582.43
TABLE 13
Terminal Value:
At 5% At 8% At 10%
Present Value of
FCFF 2582.43 2582.43 2582.43
Terminal Value 18507.51 25095.21 32903.04
Long Term Debt 738.90 738.90 738.90
Value of Equity 20351.04 26938.74 34746.57
No. of Shares 125613708 125613708 125613708
Equity per share 1620.13 2144.57 2766.14
TABLE 14
INTERPRETATIONS:
The stock price of Cadila Healthcare as on 31.03 2009 is Rs.272 and the intrinsic value

53
SUN PHARMACEUTICALS INDUSTRIES LTD :
Free Cash Flows:

YEAR 2006 2007 2008 2009 2010 2011 2012 2013 2014
SALES 1742 2303 3211 4402 6036 8277 11349 15561 21336
EBIT 500 649 1057 1444 1972 2693 3678 5023 6860
Less: Tax 170 221 359 491 670 915 1250 1707 2332
EBIT(1-T) 330 429 698 953 1302 1778 2428 3316 4528
Change in W.C 436 -20 -32 -42 -58 -80 -109 -150 -205
FCFF -106 449 730 995 1360 1857 2537 3465 4733
Discount Rate 0.896 0.802 0.719 0.644 0.577 0.517
PV of FCFF 892 1091 1335 1634 1999 2446
Total PV of
FCFF 6950.29
TABLE 15
Terminal Value:
At 5% At 8% At 10%
Present Value of
FCFF 6950.29 6950.29 6950.29
Terminal Value 41173.40 75189.36 167375.90
Long Term Debt 102.52 102.52 102.52
Value of Equity 48021.17 82037.13 174223.67
No. of Shares 207116391 207116391 207116391
Equity per share 2318.56 3960.92 8411.87
TABLE 16
INTERPRETATIONS:
The stock price of Sun Pharmaceuticals as on 31.03 2009 is Rs.1112 and the intrinsic value

54
NTPC LTD.:
Free Cash Flows:

YEAR 2006 2007 2008 2009 2010 2011 2012 2013 2014
SALES 26905 32817 37302 43855 51558 60615 71262 83780 98497
EBIT 8619 10890 12179 18852 29181 45171 69922 108235 167541
Less: Tax 2930 3701 4139 6408 9919 15354 23766 36789 56947
EBIT(1-T) 5689 7188 8039 12444 19263 29817 46155 71446 110594
Change in
W.C 3420 5572 2207 3224 3791 4457 5240 6160 7242
FCFF 2269 1616 5832 9220 15472 25361 40916 65286 103352
Discount Rate 0.831 0.691 0.574 0.477 0.397 0.330
PV of FCFF 7663 10689 14564 19531 25904 34086
Total PV of
FCFF 78351.8
TABLE 17
Terminal Value:
At 5% At 8% At 10%
Present Value of
FCFF 78351.82 78351.82 78351.82
Terminal Value 476386.01 665989.41 906522.19
Long Term Debt 27190.60 27190.60 27190.60
Value of Equity 527547.23 717150.62 957683.41
No. of Shares 8245464400 8245464400 8245464400
Equity per share 639.80 869.75 1161.47
TABLE 18
INTERPRETATIONS:
The stock price of NTPC as on 31.03 2009 is Rs.180 and the intrinsic value according to the
valued.

55
TATA POWER COMPANY LTD :
Free Cash Flows:

YEAR 2006 2007 2008 2009 2010 2011 2012 2013 2014
SALES 4569 4726 5937 6894 8005 9294 10792 12531 14549
EBIT 912 777 1143 1553 2111 2869 3899 5298 7200
Less: Tax 310 264 389 528 718 975 1325 1801 2447
EBIT(1-T) 602 513 755 1025 1394 1894 2574 3497 4753
Change in W.C 416 632 -309 -244 -284 -329 -382 -444 -515
FCFF 186 -120 1064 1270 1677 2223 2956 3941 5268
Discount Rate 0.858 0.737 0.632 0.543 0.466 0.400
PV of FCFF 1090 1235 1406 1604 1836 2106
Total PV of
FCFF 7170.42
TABLE 19
Terminal Value:
At 5% At 8% At 10%
Present Value of
FCFF 7170.42 7170.42 7170.42
Terminal Value 21315.43 28828.27 37682.69
Long Term Debt 3037.27 3037.27 3037.27
Value of Equity 25448.59 32961.42 41815.84
No. of Shares 221387734 221387734 221387734
Equity per share 1149.50 1488.85 1888.81
TABLE 20
INTERPRETATIONS:
The stock price of Tata Power as on 31.03 2009 is Rs.765 and the intrinsic value according to
the free cash flows to firm model is greater than the stock price. So the investor, who has
valued.

56
POWER GRID CORPORATION OF INDIA LTD :
Free Cash Flows:

YEAR 2006 2007 2008 2009 2010 2011 2012 2013 2014
SALES 3145 3590 4615 5686 7005 8631 10634 13102 16143
EBIT 2116 2622 3070 6973 15836 35965 81682 185510 421319
Less: Tax 719 891 1044 2370 5383 12225 27764 63055 143206
EBIT(1-T) 1397 1731 2027 4603 10453 23741 53918 122455 278113
-
Change in W.C 1167 -787 1220 1275 1571 1935 2385 2938 3620
FCFF 2564 2518 806 3328 8882 21805 51533 119517 274493
Discount Rate 0.882 0.778 0.686 0.605 0.533 0.470
PV of FCFF 2934 6906 14950 31154 63711 129024
Total PV of
FCFF 119655
TABLE 21
Terminal Value:
At 5% At 8% At 10%
Present Value of
FCFF 119654.72 119654.72 119654.72
Terminal Value 1740297.54 2705708.72 4293590.56
Long Term Debt 22263.48 22263.48 22263.48
Value of Equity 1837688.78 2803099.96 4390981.80
No. of Shares 4208841230 4208841230 4208841230
Equity per share 4366.26 6660.03 10432.76
TABLE 22
INTERPRETATIONS:
The stock price of Power Grid Corporation as on 31.03 2009 is Rs.96 and the intrinsic value

57
NEYVELI LIGNITE LTD.:
Free Cash Flows:

YEAR 2006 2007 2008 2009 2010 2011 2012 2013 2014
SALES 2201 2108 2987 3205 3440 3691 3961 4251 4562
EBIT 1042 918 1430 2334 3810 6218 10149 16564 27036
Less: Tax 354 312 486 793 1295 2113 3450 5630 9189
EBIT(1-T) 688 606 944 1541 2515 4104 6699 10934 17846
Change in W.C 259 869 305 76 81 87 94 101 108
FCFF 429 -263 639 1465 2433 4017 6605 10834 17738
Discount Rate 0.825 0.681 0.562 0.464 0.383 0.316
PV of FCFF 1209 1658 2260 3067 4152 5612
Total PV of
FCFF 12345.9
TABLE 23
Terminal Value:
At 5% At 8% At 10%
Present Value of
FCFF 12345.87 12345.87 12345.87
Terminal Value 42111.21 51722.80 61005.52
Long Term Debt 2790.68 2790.68 2790.68
Value of Equity 51666.41 61278.00 70560.72
No. of Shares 1677709600 1677709600 1677709600
Equity per share 307.96 365.25 420.58
TABLE 24
INTERPRETATIONS:
The stock price of Neyveli Lignite as on 31.03 2009 is Rs.84 and the intrinsic value

58
II. DIVIDEND DISCOUNT MODEL:
INFOSYS TECHNOLOGIES LTD:
YEAR 2004 2005 2006 2007 2008

Retention Ratio 0.2388 0.8335 0.4490 0.8226 0.5414 0.5771
RoE 0.3822 0.3632 0.3510 0.3389 0.3314 0.3533
Growth 0.2039
Cost of Equity 0.1777
Do 1902
Stock Price ----
TABLE 25
INTERPRETATIONS:
One of the basic assumptions for Gordon’s dividend discount model is that the required
rate of return of equity must be greater than the sustainable growth rate of dividend. As
this condition is not satisfactory Infosys Technologies Ltd, dividend discount model can not
be applicable in this case.

59
WIPRO LTD:
YEAR 2004 2005 2006 2007 2008

Retention Ratio 0.1852 0.7566 0.6288 0.6782 0.6993 0.5896
RoE 0.2608 0.3055 0.3146 0.3050 0.2651 0.2902
Growth 0.1711
Do 876.5
Stock Price 9046.32
TABLE 26
INTERPRETATIONS:
The stock price of Wipro Technologies as on 31.03.2009 is Rs.246 but the intrinsic value
according to dividend discount model is Rs.9046. So, Wipro Technologies share price is
highly under valued.
But there is a very large difference between the market share price and intrinsic value. So
this difference may be because of growth rate in dividends about 400 to 500% as we know
that dividend discount model is best for stable growth firms this intrinsic price may not be
acceptable.

60
HCL TECHNOLOGIES LTD:
YEAR 2004 2005 2006 2007 2008

Retention Ratio 0.1183 0.4848 0.0883 -0.9188 -0.0290 -0.0513
RoE 0.2430 0.3217 0.2478 0.1151 0.1422 0.2140
Growth -0.0110
Do 598.55
Stock Price 2603.63
TABLE 27
INTERPRETATIONS:
The stock price of HCL Technologies as on 31.03.2009 is Rs.102 but the intrinsic value
according to dividend discount model is Rs.2603. So, HCL Technologies share price is highly
under valued.

61
TATA CONSULTANCY SERVICES LTD:
YEAR 2004 2005 2006 2007 2008

Retention Ratio 0.6796 0.6863 0.7483 0.6857 0.7004 0.70006
RoE 0.3224 0.5515 0.4844 0.4662 0.4135 0.4476
Growth 0.3133
Do 1370.05
Stock Price ----
TABLE 28
INTERPRETATIONS:
One of the basic assumptions for Gordon’s dividend discount model is that the required
rate of return of equity must be greater than the sustainable growth rate of dividend. As
this condition is not satisfactory for TCS, dividend discount model can not be applicable in
this case.

62
DR REDDYS LABORATORIES LTD.:
YEAR 2004 2005 2006 2007 2008

Retention Ratio 0.8641 0.9460 0.8136 0.3634 0.8625 0.7699
RoE 0.0988 0.2691 0.0933 0.0316 0.1383 0.1262
Growth 0.0972
Do 63.06
Stock Price 2859.29
TABLE 29
INTERPRETATIONS:
The stock price of Dr. Reddys as on 31.03.2009 is Rs.489 but the intrinsic value according to
dividend discount model is Rs.2859. So, Dr. Reddys share price is highly under valued.

63
CIPLA LTD :
YEAR 2004 2005 2006 2007 2008

Retention Ratio 0.7697 0.7577 0.7346 0.7341 0.6952 0.7383
RoE 0.1872 0.2070 0.3078 0.2654 0.2446 0.2424
Growth 0.1790
Do 155.46
Stock Price 2239.47
TABLE 30
INTERPRETATIONS:
The stock price of Cipla Ltd. as on 31.03.2009 is Rs.220 but the intrinsic value according to
dividend discount model is Rs.2240. So Cipla Ltd.’s share price is highly under valued. But
there is a very large difference between the market share price and intrinsic value. So this
difference may be because of growth rate in dividends about 400 to 500%. Also as we know
that dividend discount model is best for stable growth firms, this intrinsic price may not be
acceptable.

64
CADILA HEALTHCARE LTD:
YEAR 2004 2005 2006 2007 2008

Retention Ratio 0.7507 0.7441 0.7638 0.7010 0.7270 0.7373
RoE 0.2241 0.2320 0.2240 0.2139 0.2649 0.2318
Growth 0.1709
Do 56.5
Stock Price 813.4
TABLE 31
INTERPRETATIONS:
The stock price of Cadila Healthcare as on 31.03.2009 is Rs.272 but the intrinsic value
according to dividend discount model is Rs.813. So, Cadila Healthcare share price is highly
under valued.

65
SUN PHARMACEUTICALS INDUSTRIES LTD:
YEAR 2004 2005 2006 2007 2008

Retention Ratio 0.7774 0.7871 0.7711 0.7647 0.7399 0.7680
RoE 0.2410 0.2569 0.3152 0.2769 0.2850 0.2750
Growth 0.2112
Do 217.47
Stock Price ----
TABLE 32
INTERPRETATIONS:
One of the basic assumptions for Gordon’s dividend discount model is that the required rate
of return of equity must be greater than the sustainable growth rate of dividend. As this
condition is not satisfactory for Sun Pharmaceutical, dividend discount model can not be
applicable in this case.

66
NTPC LTD.:
YEAR 2004 2005 2006 2007 2008

Retention Ratio 0.5832 0.5925 0.5800 0.6427 0.7887 0.6374
RoE 0.1373 0.1394 0.1282 0.1379 0.1458 0.1377
Growth 0.0878
Do 2885.90
Stock Price 16180.25
TABLE 33
INTERPRETATIONS:
The stock price of NTPC as on 31.03.2009 is Rs.180 but the intrinsic value according to
dividend discount model is Rs.16180. So, NTPC share price is highly under valued.

67
TATA POWER COMPANY LTD:
YEAR 2004 2005 2006 2007 2008

Retention Ratio 0.7142 0.7169 0.7131 0.7198 0.7276 0.7183
RoE 0.1082 0.1155 0.1099 0.1073 0.1043 0.1091
Growth 0.0783
Do 231.98
Stock Price 1854.46
TABLE 34
INTERPRETATIONS:
The stock price of Tata Power as on 31.03.2009 is Rs.765 but the intrinsic value according to
dividend discount model is Rs.1854. So, Tata Power share price is highly under valued.

68
POWER GRID CORPORATION OF INDIA LTD.:
YEAR 2004 2005 2006 2007 2008

Retention Ratio 0.6293 0.6848 0.6868 0.7580 0.8293 0.7176
RoE 0.1053 0.1125 0.1013 0.0874 0.0881 0.0989
Growth 0.0710
Do 505.08
Stock Price 2724.03
TABLE 35
INTERPRETATIONS:
The stock price of Power Grid as on 31.03.2009 is Rs.96 but the intrinsic value according to
dividend discount model is Rs.2724. So, Power Grid share price is highly under valued.

69
NEYVELI LIGNITE LTD.:
YEAR 2004 2005 2006 2007 2008

Retention Ratio 0.6788 0.6220 0.4880 0.7128 0.7890 0.6581
RoE 0.1219 0.0680 0.0878 0.1582 0.1670 0.1206
Growth 0.0794
Do 335.54
Stock Price 1841.17
TABLE 36
INTERPRETATIONS:
The stock price of Neyveli Lignite as on 31.03.2009 is Rs.84 but the intrinsic value according
to dividend discount model is Rs.1841. So, Neyveli Lignite share price is highly under
valued.

70
4.3. P/E MULTIPLIER MODEL:
INDUSTRY: INFORMATION TECHNOLOGY

Price on Market Weighted
Company EPS P/E Weight Value
31.03.09 Cap P/E
Infosys 1,324.10 72.50 19.73 74,205.55 0.4480 8.8384 Undervalued
HCL 101.75 10.19 24.60 6,998.89 0.0423 1.0394 Undervalued
Wipro 245.40 19.94 21.33 34,066.12 0.2057 4.3866 Undervalued
TCS 540.00 43.69 18.56 50,378.33 0.3041 5.6446 Undervalued

165,648.89 1.00 19.91
INDUSTRY: PHARMACEUTICAL
31.03.09 Cap P/E
Cipla 219.75 8.68 25.32 15307.94 0.3090 7.8251 Undervalued
Cadila 272.10 18.04 14.12 5761.03 0.1163 1.6423 Undervalued
Dr. Reddys 488.65 27.62 21.40 7335.53 0.1481 3.1692 Undervalued
SunPharma 1112.35 47.16 26.11 21128.31 0.4266 11.1373 Undervalued

49,532.81 1.00 23.77
INDUSTRY: POWER GENERATION

31.03.09 Cap P/E
NTPC 180.20 8.40 23.45 146645.50 0.6850 16.0627 Undervalued
Tata
765.30 38.26 30.63 14669.08 0.0685 2.0987 Undervalued
Power
Power
95.65 3.24 30.23 40425.91 0.1888 5.7083 Undervalued
Grid
Neyveli 83.75 6.23 19.25 12347.95 0.0577 1.1103 Undervalued
214088.44 1.00 24.98
TABLE 37
INTERPRETATIONS:
Here, the industry PE ratio is compared with that of the company PE ratio and hence
concluded whether the company is undervalued or overvalued
All the companies come up to be undervalued by comparing their weighted P/E ratio with
that of the industry.

71
4.4 TESTING OF HYPOTHESIS:
A. Consolidated result of Free Cash Flow to Firm Model:

Intrinsic
Company Actual Share Price
Value
Infosys Technologies Ltd 1324 2963

Wipro Ltd 246 555
HCL Technologies Ltd 102 297
Tata Consultancy Services Ltd 540 1432
Cipla Ltd 220 1057
Cadila Healthcare Ltd 272 1620
Sun Pharmaceuticals Industries Ltd 1112 2319
NTPC Ltd 180 640
Tata Power Company Ltd 765 1150
Power Grid Corporation of India Ltd 96 4366
Neyveli Lignite Ltd. 84 308
TABLE 38
Result of t-test:
Variable 1 Variable 2
Mean 449.1818182 1518.818182
Variance 188891.3636 1585966.164
Observations 11 11
Pearson Correlation 0.374633882
Hypothesized Mean Difference 0
Df 10
t Stat -3.036720321
P(T<=t) one-tail 0.006266269
t Critical one-tail 1.812461102
P(T<=t) two-tail 0.012532537
t Critical two-tail 2.228138842
TABLE 39
INTERPRETATIONS:
Since the value of t stat is greater than the value of t critical, the null hypothesis is rejected
and the alternate hypothesis is accepted. Hence, the differences between the intrinsic value
and the market price are significant when free cash flow to firm model is used.

72
B. Consolidated result of Dividend Discount Model:
Company Actual Share Price Intrinsic Value
Wipro Ltd 246 9046

HCL Technologies Ltd 102 2604
Dr Reddys Laboratories Ltd 489 2859
Cipla Ltd 220 2239
Cadila Healthcare Ltd 272 813
NTPC Ltd 180 16180
Tata Power Company Ltd 765 1854
Power Grid Corporation of India Ltd 96 2724
Neyveli Lignite Ltd. 84 1842
TABLE 40
Result of t-test:
Variable 1 Variable 2
Mean 272.6666667 4462.333333
Variance 49649.75 24911248.75
Observations 9 9
Pearson Correlation -0.179939657
Hypothesized Mean Difference 0
Df 8
t Stat -2.495838106
P(T<=t) one-tail 0.018591198
t Critical one-tail 1.859548033
P(T<=t) two-tail 0.037182396
t Critical two-tail 2.306004133
TABLE 41
INTERPRETATIONS:
Since the value of t stat is greater than the value of t critical, the null hypothesis is rejected
and the alternate hypothesis is accepted. Hence, the differences between the intrinsic value
and the market price are significant when dividend discount model is used.

73
CHAPTER 6
FINDINGS

74
FINDINGS
The following are the findings of this project:

• The free cash flows model has interpreted all the companies to be undervalued.
• Some companies like Cipla and Power Grid have shown high deviation from the
actual market price when the free cash flows to the firm model was used.
• The dividend discount model has also interpreted all the companies to be
undervalued.
• Some companies like Wipro, Dr. Reddys have shown high deviation from the actual
market price when the dividend discount model was used.
• The PE multiplier model has also interpreted all the companies actual market price to
be below their intrinsic value.
• There is significant difference between the actual market price and the intrinsic value.
This has been concluded statistically by running the paired t-test

75
CHAPTER 6
CONCLUSIONS

76
CONCLUSION
The goal of this research project was essentially to estimate a fair market value of the
company. All the models, namely: the free cash flows to firm, dividend discount model and
the P/E multiplier model, have interpreted all the companies to be undervalued. These models
often make very different assumptions about the fundamentals that determine value, but they
do share some common characteristics and can be classified in broader terms.
Some companies like Cipla and Power Grid have shown huge deviations from the market
price using the free cash flow to firm model. Companies like Wipro, Dr. Reddys showed
huge deviations from the market price using the dividend discount model. This may have
resulted due to the many limitations associated with each model, some companies have
shown high deviations from the market price of the stock. Statistical analysis has shown that
the differences between the intrinsic value and the market value are significant.
Having mentioned that, this research project would not be complete without the mention of
the effect of recession on the market price of stocks. The normal methods of valuation of
businesses don’t fit during such times because the stocks generally move to be on the cheap
side. Discounted cashflows, multiples of future revenues - nothing seems acceptable. That is
because business growth depends on resurgence of demand that depends on restoration of
economic normalcy that still eludes the horizon.
Further, in the PE model the weighted PE of each company was compared to the industry PE.
All the companies were interpreted as undervalued again because the PE of the industry was
greater than the weighted PE of each company that was analyzed.

77
CHAPTER 5
SUGGESTIONS

78
SUGGESTIONS
• An investor who finds that the actual market value is less than the intrinsic value of
the share can consider buying the share of that company.
• An investor who finds that the actual market value is more than the intrinsic value of
the share can consider selling the share of that company.
• Investors should not only rely on these models but consider other aspects also before
making an investment decision.

79
BIBLIOGRAPHY
BOOKS
• Ashwath Damodaran, Damodaran on valuation, Stern School of Business,(UK)
• Ashwath Damodaran, The dark side of valuation: Valuing old tech, new tech and
new economy companies, Stern School of Business,(UK)
• Tom Copeland, Tim Koller & Jack Murrin: Measuring and Managing the Value of
Companies Third Edition ,McKinsey & Company, Inc. (New York)
JOURNALS:
• Downs T W. (1991) .An alternative approach to fundamental analysis: The asset
side of the equation, journal of portfolio management, vol 17, No. 2.
• Dutta S K, (2004), .The share Price and its Valuation, The Management
Accountant, vol. 39, No. 4.
• Malkar B and Gupta R (2002),. Determinants of Share Price-A system
approach: The modified Model, finance India, vol. 16, No.4.
WEBSITES
1. www.equitymaster.com
2. www.nse-india.com
3. www.yahoo.com/finance
4. www.stern.nyu.edu/~adamodar
5. www.capitaline.com

80
ANNEXURES
INFOSYS TECHNOLOGIES LTD.
FINANCIAL OVERVIEW 200803 200703 200603 200503 200403 200303
Equity Paid Up 286 286 138 135 33.32 33.12
Networth 13490 11162 6897 5242 3253.43 2860.65
Capital Employed 13490 11162 6897 5242 3253.43 2860.65
Gross Block 4508 3889 2837 2183 1570.23 1273.31
Sales 15648 13149 9028 6860 4760.89 3622.69
PBIDT 5664 4622 3146 2498 1702.12 1348.63
PBDT 5663 4621 3145 2497 1701.37 1347.88
PBIT 5118 4153 2737 2230 1471.22 1159.68
PBT 5117 4152 2736 2229 1470.47 1158.93
PAT 4470 3783 2421 1904 1243.47 957.93
CP 5016 4252 2830 2172 1474.37 1146.88
Revenue earnings in forex 14490 12156 8655 6105 4532.56 3377.87
Revenue expenses in forex 6492 5395 3335 2772 1936.9 1540.27
Book Value (Unit Curr) 235.84 195.14 249.89 194.15 488.21 431.86
26762.9
Market Capitalisation 81804.58 112641.2 81830.29 60949.5 32907.83
5
CEPS (annualised) (Unit Curr) 82.05 72.55 96.23 78.89 204.66 171.28
EPS (annualised) (Unit Curr) 72.5 64.35 81.41 68.96 170.01 142.76
Dividend (annualised%) 665 230 900 230 2590 540
Payout (%) 45.86 17.74 55.1 16.65 76.12 18.91
Cash Flow From Operating Activities 3834 3263 2316 1363 1627.38 916.93
Cash Flow From Investing Activities -978 -1091 -392 -940 -1332.01 -153.41
Cash Flow From Financing Activities -777 -316 172 -580 -94.48 -151.97
Rate of Growth (%)

ROG-Net Worth (%) 20.86 61.84 31.57 61.12 13.73 37.51
ROG-Capital Employed (%) 20.86 61.84 31.57 61.12 13.73 37.51
ROG-Gross Block (%) 15.92 37.08 29.96 39.02 23.32 32.55
ROG-Sales (%) 19.01 45.65 31.6 44.09 31.42 39.14
ROG-PBIDT (%) 22.54 46.92 25.94 46.76 26.21 22.08
ROG-PBDT (%) 22.55 46.93 25.95 46.76 26.23 22.09
ROG-PBIT (%) 23.24 51.74 22.74 51.57 26.86 22.83
ROG-PBT (%) 23.24 51.75 22.75 51.58 26.88 22.85
ROG-PAT (%) 18.16 56.26 27.15 53.12 29.81 18.56
ROG-CP (%) 17.97 50.25 30.29 47.32 28.55 18.4
ROG-Revenue earnings in forex (%) 19.2 40.45 41.77 34.69 34.18 35.36
ROG-Revenue expenses in forex (%) 20.33 61.77 20.31 43.12 25.75 49.47
ROG-Market Capitalisation (%) -27.38 37.65 34.26 85.21 22.96 8.29
Key Ratios
Debt-Equity Ratio 0 0 0 0 0 0
Long Term Debt-Equity Ratio 0 0 0 0 0 0
Current Ratio 3.85 3.75 2.77 2.19 2.35 3.9
Turnover Ratios
Fixed Assets Ratio 3.73 3.91 3.6 3.66 3.35 3.24
Inventory Ratio 0 0 0 0 0 0
Debtors Ratio 5.81 6.9 6.52 7.28 8.32 8.54
Interest Cover Ratio 5118 4153 2737 2230 1961.63 1546.24
PBIDTM (%) 36.2 35.15 34.85 36.41 35.75 37.23
PBITM (%) 32.71 31.58 30.32 32.51 30.9 32.01
PBDTM (%) 36.19 35.14 34.84 36.4 35.74 37.21

81
CPM (%) 32.06 32.34 31.35 31.66 30.97 31.66

APATM (%) 28.57 28.77 26.82 27.76 26.12 26.44
ROCE (%) 41.52 45.99 45.09 52.5 48.13 46.94
FINANCIAL PERFORMANCE
Year End Mar 08 Mar 07 Mar 06 Mar 05 Mar 04
Equity 286.00 286.00 138.00 135.00 33.32
Networth 13,490.00 11,162.00 6,897.00 5,242.00 3,253.43
Enterprise Value 75,375.58 107,171.20 78,551.29 59,468.50 31,269.82
Capital Employed 13,490.00 11,162.00 6,897.00 5,242.00 3,253.43
Gross Block 4,508.00 3,889.00 2,837.00 2,183.00 1,570.23
Sales 15,648.00 13,149.00 9,028.00 6,860.00 4,760.89
Other Income 685.00 381.00 227.00 172.00 127.39
PBIDT 5,664.00 4,622.00 3,146.00 2,498.00 1,702.12
PBDT 5,663.00 4,621.00 3,145.00 2,497.00 1,701.37
PBIT 5,118.00 4,153.00 2,737.00 2,230.00 1,471.22
PBT 5,117.00 4,152.00 2,736.00 2,229.00 1,470.47
RPAT 4,470.00 3,783.00 2,421.00 1,904.00 1,243.47
APAT 4,469.86 3,776.89 2,421.00 1,859.00 1,243.44
CP 5,016.00 4,252.00 2,830.00 2,172.00 1,474.37
Rev. Earnings in FE 14,490.00 12,156.00 8,655.00 6,105.00 4,532.56
Rev. Expenses in FE 6,492.00 5,395.00 3,335.00 2,772.00 1,936.90
Book Value (Rs) 235.84 195.14 249.89 194.15 488.21
EPS (Rs.) 72.50 64.35 81.41 68.96 170.01
Dividend (%) 665.00 230.00 900.00 230.00 2,590.00
Payout (%) 45.86 17.74 55.10 16.65 76.12
Ratio Analysis
Debt-Equity 0.00 0.00 0.00 0.00 0.00 0.00
Current Ratio 3.85 3.75 2.77 2.19 2.35 3.90
Invtry Turnover 0.00 0.00 0.00 0.00 0.00 0.00
Debtors Turnover 5.81 6.90 6.52 7.28 8.32 8.54
Interest Cover 5,118.00 4,153.00 2,737.00 2,230.00 1,961.63 1,546.24
PBIDTM (%) 36.20 35.15 34.85 36.41 35.75 37.23
PBDTM (%) 36.19 35.14 34.84 36.40 35.74 37.21
APATM (%) 28.57 28.77 26.82 27.76 26.12 26.44
ROCE (%) 41.52 45.99 45.09 52.50 48.13 46.94
RONW (%) 36.26 41.90 39.89 44.82 40.68 38.78
EV/EBIDTA 13.31 23.19 24.97 23.81 18.37 18.85
Rate of Growth (%)
Net Worth 20.86 61.84 31.57 61.12 13.73 37.51
Sales 19.01 45.65 31.60 44.09 31.42 39.14
PAT 18.16 56.26 27.15 53.12 29.81 18.56
M Cap -27.38 37.65 34.26 85.21 22.96 8.29

82
BALANCE SHEET Mar 08 Mar 07 Mar 06 Mar 05 Mar 04 Mar 03

Year
SOURCES OF FUNDS :
Share Capital + 286.00 286.00 138.00 135.00 33.32 33.12
Reserves Total + 13,204.00 10,876.00 6,759.00 5,107.00 3,220.11 2,827.53
Total Shareholders Funds 13,490.00 11,162.00 6,897.00 5,242.00 3,253.43 2,860.65
Secured Loans + 0.00 0.00 0.00 0.00 0.00 0.00
Unsecured Loans + 0.00 0.00 0.00 0.00 0.00 0.00
Total Debt 0.00 0.00 0.00 0.00 0.00 0.00
Total Liabilities 13,490.00 11,162.00 6,897.00 5,242.00 3,253.43 2,860.65
APPLICATION OF FUNDS :
Gross Block + 4,508.00 3,889.00 2,837.00 2,183.00 1,570.23 1,273.31
Less:Accumulated Depreciation + 1,837.00 1,739.00 1,275.00 1,006.00 803.41 577.15
Net Block + 2,671.00 2,150.00 1,562.00 1,177.00 766.82 696.16
Lease Adjustment 0.00 0.00 0.00 0.00 0.00 0.00
Capital Work in Progress+ 1,260.00 957.00 571.00 318.00 203.48 76.56
Investments + 964.00 839.00 876.00 1,329.00 1,027.38 33.20
Current Assets, Loans & Advances
Inventories + 0.00 0.00 0.00 0.00 0.00 0.00
Sundry Debtors + 3,093.00 2,292.00 1,518.00 1,253.00 632.51 512.14
Cash and Bank+ 6,429.00 5,470.00 3,279.00 1,481.00 1,638.01 1,336.23
Loans and Advances + 2,705.00 1,199.00 1,252.00 996.00 693.22 872.78
Total Current Assets 12,227.00 8,961.00 6,049.00 3,730.00 2,963.74 2,721.15
Less : Current Liabilities and Provisions
Current Liabilities + 1,244.00 881.00 642.00 461.00 501.03 259.14
Provisions + 2,487.00 943.00 1,575.00 885.00 1,242.59 444.09
Total Current Liabilities 3,731.00 1,824.00 2,217.00 1,346.00 1,743.62 703.23
Net Current Assets 8,496.00 7,137.00 3,832.00 2,384.00 1,220.12 2,017.92
Miscellaneous Expenses not written off + 0.00 0.00 0.00 0.00 0.00 0.00
Deferred Tax Assets 99.00 79.00 56.00 34.00 35.63 36.81
Deferred Tax Liabilities 0.00 0.00 0.00 0.00 0.00 0.00
Net Deferred Tax 99.00 79.00 56.00 34.00 35.63 36.81
Total Assets 13,490.00 11,162.00 6,897.00 5,242.00 3,253.43 2,860.65
Contingent Liabilities+ 2,661.00 1,945.00 1,434.00 1,568.00 659.69 449.03

83
PROFIT AND LOSS ACCOUNT Mar Mar Mar Mar Mar Mar
Year 08(12) 07(12) 06(12) 05(12) 04(12) 03(12)
INCOME :
Operating Income + 15,648.00 13,149.00 9,028.00 6,860.00 4,760.89 3,622.69
Excise Duty 0.00 0.00 0.00 0.00 0.00 0.00
Net Operating Income 15,648.00 13,149.00 9,028.00 6,860.00 4,760.89 3,622.69
Other Income + 685.00 381.00 227.00 172.00 127.39 105.86
Stock Adjustments + 0.00 0.00 0.00 0.00 0.00 0.00
Total Income 16,333.00 13,530.00 9,255.00 7,032.00 4,888.28 3,728.55
EXPENDITURE :
Cost of Traded Software Packages 0.00 0.00 0.00 0.00 0.00 0.00
Operating Expenses + 1,295.37 1,163.40 717.46 527.00 256.19 194.50
Employere Cost + 7,784.93 6,293.00 4,257.00 3,177.00 2,362.64 1,671.00
Power/Electricity Charges + 106.00 88.00 62.00 40.00 28.72 22.60
Selling and Administration Exp. + 1,371.16 1,298.60 967.03 721.48 496.26 456.81
Miscellaneous Expenses + 111.54 65.00 105.51 68.52 42.35 35.01
Less : Pre-operative Expenses Capitalised + 0.00 0.00 0.00 0.00 0.00 0.00
Total Expenditure 10,669.00 8,908.00 6,109.00 4,534.00 3,186.16 2,379.92
Operating Profit 5,664.00 4,622.00 3,146.00 2,498.00 1,702.12 1,348.63
Interest + 1.00 1.00 1.00 1.00 0.75 0.75
Gross Profit 5,663.00 4,621.00 3,145.00 2,497.00 1,701.37 1,347.88
Depreciation+ 546.00 469.00 409.00 268.00 230.90 188.95
Profit Before Tax 5,117.00 4,152.00 2,736.00 2,229.00 1,470.47 1,158.93
Tax+ 650.00 375.00 325.00 327.00 225.82 213.59
Deferred Tax+ -20.00 -23.00 -22.00 -2.00 1.18 -12.59
Reported Net Profit 4,470.00 3,783.00 2,421.00 1,904.00 1,243.47 957.93
Extraordinary Items + 0.14 6.11 0.00 45.00 0.03 0.00
Adjusted Net Profit 4,469.86 3,776.89 2,421.00 1,859.00 1,243.44 957.93
Adjustment below Net Profit + 0.00 -1.00 0.00 -4.51 0.00 0.00
P & L Balance brought forward 4,844.00 2,195.00 1,428.00 70.51 0.00 0.00
Appropriations + 2,672.00 1,133.00 1,654.00 542.00 1,172.96 957.93
P & L Balance carried down 6,642.00 4,844.00 2,195.00 1,428.00 70.51 0.00
Dividend 1,902.00 649.00 1,238.00 310.00 862.46 178.81
Preference Dividend 0.00 0.00 0.00 0.00 0.00 0.00
Equity Dividend % 665.00 230.00 900.00 230.00 2,590.00 540.00
Earnings Per Share-Unit Curr 72.50 64.35 81.41 68.96 170.01 142.76
Book Value-Unit Curr 235.84 195.14 249.89 194.15 488.21 431.86

84
TATA POWER LTD.

FINANCIAL PERFORMANCE
Equity 220.72 197.92 197.92 197.92 197.92
Networth 8,037.92 6,033.11 5,555.64 5,136.47 5,050.34
Gross Block 6,481.99 6,229.71 5,924.74 5,465.84 5,534.70
Sales 5,937.36 4,725.92 4,568.67 3,935.63 4,237.05
Other Income 516.08 367.71 369.06 411.44 179.87
PBIDT 1,433.61 1,068.92 1,190.68 1,309.39 1,351.51
PBDT 1,259.74 877.33 1,025.40 1,117.95 1,067.79
PBIT 1,143.11 777.00 912.34 949.77 1,017.56
PBT 969.24 585.41 747.06 758.33 733.84
RPAT 869.90 696.80 610.54 551.36 526.85
APAT 571.09 663.24 464.94 375.17 500.02
CP 1,160.40 988.72 888.88 910.98 860.80
Rev. Earnings in FE 18.82 104.31 82.88 74.04 48.59
Rev. Expenses in FE 1,496.74 948.03 583.74 550.69 434.88
Book Value (Rs) 352.27 291.77 267.76 248.36 245.02
EPS (Rs.) 38.26 33.59 29.66 26.80 25.72
Dividend (%) 105.00 95.00 85.00 75.00 70.00
Payout (%) 28.58 28.31 28.69 28.02 27.24
Ratio Analysis
Debt-Equity 0.47 0.55 0.53 0.45 0.42 0.58 0.66 0.67 0.70 0.73
Current Ratio 1.81 1.90 2.00 1.66 1.52 1.72 1.94 1.85 1.55 1.68
Invtry Turnover 13.65 11.27 12.36 12.90 13.15 13.07 11.95 15.23 10.30 9.27
Debtors Turnover 4.11 3.73 5.21 5.56 5.27 5.19 5.69 7.86 6.23 7.35
Interest Cover 4.57 4.06 4.42 3.78 3.59 2.98 2.23 2.88 3.36 3.26
PBIDTM (%) 18.28 22.62 22.10 27.50 31.90 31.12 27.79 26.81 34.51 39.26
PBDTM (%) 15.35 18.56 18.48 22.64 25.20 23.17 18.65 19.58 26.39 29.76
APATM (%) 9.62 14.74 10.18 9.53 12.43 12.50 8.53 10.23 13.84 14.59
ROCE (%) 7.67 8.65 8.99 9.81 14.70 14.47 11.60 14.92 12.68 12.71
RONW (%) 8.12 12.03 8.70 7.37 10.78 11.98 8.02 12.19 10.93 10.37
EV/EBIDTA 20.14 11.55 11.11 6.84 6.76 3.38 3.63 3.59 3.68 4.30
Rate of Growth (%)
Net Worth 33.23 8.59 8.16 1.71 6.99 11.52 9.43 108.34 11.28 8.35
Sales 25.63 3.44 16.08 -7.11 -1.29 12.74 11.66 144.93 22.13 -3.76
PAT 24.84 14.13 10.73 4.65 -1.78 5.55 27.15 67.94 43.08 1.03
-
M Cap 156.53 -12.08 62.00 -5.19 233.29 -0.35 14.47 152.43 -6.14
40.19

85
FINANCIAL OVERVIEW
200803 200703 200603 200503 200403 200303 200203
Equity Paid Up 220.72 197.92 197.92 197.92 197.92 197.91 197.91
Networth 8037.92 6033.11 5555.64 5136.47 5050.34 4720.24 4232.64
Capital Employed 11075.19 9666.47 8310.64 7996.48 6771.76 7119.44 7021.57
Gross Block 6481.99 6229.71 5924.74 5465.84 5534.7 5370.79 4975.12
Sales 5937.36 4725.92 4568.67 3935.63 4237.05 4292.4 3807.24
PBIDT 1433.61 1068.92 1190.68 1309.39 1351.51 1335.79 1301.42
PBDT 1259.74 877.33 1025.4 1117.95 1067.79 994.58 953.14
PBIT 1143.11 777 912.34 949.77 1017.56 1017.75 1019.77
PBT 969.24 585.41 747.06 758.33 733.84 676.54 671.49
PAT 869.9 696.8 610.54 551.36 526.85 536.42 508.23
CP 1160.4 988.72 888.88 910.98 860.8 854.46 789.88
Revenue earnings in forex 18.82 104.31 82.88 74.04 48.59 67.82 132.69
Revenue expenses in forex 1496.74 948.03 583.74 550.69 434.88 671.56 756.77
Book Value (Unit Curr) 352.27 291.77 267.76 248.36 245.02 229.85 206.13
Market Capitalisation 25863.83 10082.02 11467.32 7078.66 7465.87 2240.06 2247.98
CEPS (annualised) (Unit Curr) 51.42 48.34 43.72 44.97 42.59 42.34 39.91
EPS (annualised) (Unit Curr) 38.26 33.59 29.66 26.8 25.72 26.27 25.68
Dividend (annualised%) 105 95 85 75 70 65 50
Payout (%) 28.58 28.31 28.69 28.02 27.24 24.77 19.49
Cash Flow From Operating Activities 1126.25 421.2 296.86 444.09 1085.19 1081.94 762.82
-
Cash Flow From Investing Activities -2541.14 -931.06 144.46 -308.08 -23.54 -413.4
1298.12
-
Cash Flow From Financing Activities 440.88 538.52 -453.76 798.58 -849.14 -217.62
1136.16
ROG-Net Worth (%) 33.23 8.59 8.16 1.71 6.99 11.52 9.43
ROG-Capital Employed (%) 14.57 16.31 3.93 18.09 -4.88 1.39 8.59
ROG-Gross Block (%) 4.05 5.15 8.4 -1.24 3.05 7.95 13.14
ROG-Sales (%) 25.63 3.44 16.08 -7.11 -1.29 12.74 11.66
ROG-PBIDT (%) 34.12 -10.23 -9.07 -3.12 1.18 2.64 32.67
ROG-PBDT (%) 43.59 -14.44 -8.28 4.7 7.36 4.35 29.79
ROG-PBIT (%) 47.12 -14.83 -3.94 -6.66 -0.02 -0.2 31.35
ROG-PBT (%) 65.57 -21.64 -1.49 3.34 8.47 0.75 26.73
ROG-PAT (%) 24.84 14.13 10.73 4.65 -1.78 5.55 27.15
ROG-CP (%) 17.36 11.23 -2.43 5.83 0.74 8.18 30.72
ROG-Revenue earnings in forex (%) -81.96 25.86 11.94 52.38 -28.35 -48.89 66.68
ROG-Revenue expenses in forex (%) 57.88 62.41 6 26.63 -35.24 -11.26 2.91
ROG-Market Capitalisation (%) 156.53 -12.08 62 -5.19 233.29 -0.35 14.47
Debt-Equity Ratio 0.47 0.55 0.53 0.45 0.42 0.58 0.66
Long Term Debt-Equity Ratio 0.43 0.5 0.52 0.45 0.42 0.57 0.66
Current Ratio 1.81 1.9 2 1.66 1.52 1.72 1.94
Fixed Assets Ratio 0.93 0.78 0.8 0.72 0.78 0.83 0.81
Inventory Ratio 13.65 11.27 12.36 12.9 13.15 13.07 11.95
Debtors Ratio 4.11 3.73 5.21 5.56 5.27 5.19 5.69
Interest Cover Ratio 4.57 4.06 4.42 3.78 3.59 2.98 2.23
PBIDTM (%) 18.28 22.62 22.1 27.5 31.9 31.12 27.79
PBITM (%) 13.39 16.44 16 18.37 24.02 23.71 20.4
PBDTM (%) 15.35 18.56 18.48 22.64 25.2 23.17 18.65
CPM (%) 14.51 20.92 16.27 18.67 20.32 19.91 15.93

86
BALANCE SHEET
Year Mar 08 Mar 07 Mar 06 Mar 05 Mar 04 Mar 03
SOURCES OF FUNDS :
Share Capital + 220.72 197.92 197.92 197.92 197.92 197.91
Reserves Total + 7,817.20 5,835.19 5,357.72 4,938.55 4,852.42 4,522.33
Secured Loans + 2,331.09 1,354.30 946.00 1,059.07 721.73 1,340.37
Unsecured Loans + 706.18 2,279.06 1,809.00 1,800.94 999.69 1,058.83
Service Line & Sec.Dep. from Cust. 0.00 0.00 0.00 0.00 0.00 0.00
Total Debt 3,037.27 3,633.36 2,755.00 2,860.01 1,721.42 2,399.20
Total Liabilities + 11,075.19 9,666.47 8,310.64 7,996.48 6,771.76 7,119.44
Gross Block + 6,481.99 6,229.71 5,924.74 5,465.84 5,534.70 5,370.79
Less: Accumulated Depreciation + 3,476.50 3,199.40 2,921.72 2,657.37 2,364.36 2,034.74
Net Block + 3,005.49 3,030.31 3,003.02 2,808.47 3,170.34 3,336.05
Capital Work in Progress+ 1,681.74 781.05 211.81 437.65 306.39 337.95
Investments + 4,430.00 3,570.15 3,412.17 3,502.92 2,728.83 2,451.83
Inventories + 473.61 396.42 442.26 297.03 313.22 330.98
Sundry Debtors + 1,414.52 1,476.63 1,058.23 696.63 718.21 889.01
Cash and Bank+ 28.70 1,367.72 990.55 979.60 51.90 126.41
Loans and Advances + 1,958.68 801.56 482.00 550.36 609.68 1,119.77
Less: Current Liabilities and Provisions
Current Liabilities + 1,314.86 1,126.26 731.81 706.87 907.21 1,067.22
Provisions + 585.44 631.58 589.20 580.70 272.45 454.43
Total Current Liabilities 1,900.30 1,757.84 1,321.01 1,287.57 1,179.66 1,521.65
Net Current Assets 1,975.21 2,284.49 1,652.03 1,236.05 513.35 944.52
Deferred Tax Liability 100.16 68.95 46.53 63.82 49.07 47.14
Net Deferred Tax -18.94 -5.70 16.15 -11.32 37.24 20.57
Total Assets 11,075.19 9,666.47 8,310.64 7,996.48 6,771.76 7,119.44
Contingent Liabilities+ 8,449.38 1,358.37 1,543.81 278.03 236.30 181.87

87
PROFIT AND LOSS STATEMENT

Mar Mar Mar Mar Mar Mar
Year
08(12) 07(12) 06(12) 05(12) 04(12) 03(12)
INCOME :
Operating Income + 5,937.36 4,725.92 4,568.67 3,935.63 4,237.05 4,292.40
Excise Duty 0.18 0.12 0.48 0.29 2.66 0.75
Net Operating Income 5,937.18 4,725.80 4,568.19 3,935.34 4,234.39 4,291.65
Other Income + 516.08 367.71 369.06 411.44 179.87 165.73
Stock Adjustment + -0.74 -8.32 8.95 -8.08 -10.49 -11.98
Total Income 6,452.52 5,085.19 4,946.20 4,338.70 4,403.77 4,445.40
EXPENDITURE :
Electricity & Fuel Expenses + 4,263.86 3,373.49 2,979.71 2,279.68 2,258.36 2,469.49
Operating Expenses+ 323.28 304.18 430.29 377.26 273.19 187.92
Employee Cost + 257.80 197.67 171.97 153.51 189.66 139.50
Selling & Administration expenses + 116.43 105.61 114.76 139.64 206.11 183.40
Miscellaneous Expenses+ 68.00 40.68 64.17 99.52 132.50 133.41
Less : Pre-operative Expenses Capitalised + 10.46 5.36 5.38 20.30 7.56 4.11
Total Expenditure 5,018.91 4,016.27 3,755.52 3,029.31 3,052.26 3,109.61
Operating Profit 1,433.61 1,068.92 1,190.68 1,309.39 1,351.51 1,335.79
Interest + 173.87 191.59 165.28 191.44 283.72 341.21
Gross Profit 1,259.74 877.33 1,025.40 1,117.95 1,067.79 994.58
Depreciation 290.50 291.92 278.34 359.62 333.95 318.04
Profit Before Tax 969.24 585.41 747.06 758.33 733.84 676.54
Tax+ 81.01 -137.12 157.05 158.42 223.66 198.37
Deferred Tax+ 13.24 21.85 -27.47 48.55 -16.67 -58.25
Reported Net Profit 869.90 696.80 610.54 551.36 526.85 536.42
Extraordinary Items + 298.81 33.56 145.60 176.19 26.83 25.19
Adjusted Net Profit 571.09 663.24 464.94 375.17 500.02 511.23
Adjustment below net profit + -1.60 0.00 0.00 -0.36 0.00 0.00
P & L Balance brought forward 1,963.66 1,666.15 1,432.83 1,197.64 1,019.41 897.87
Statutory Appropriations + 58.59 22.83 35.29 -3.73 42.16 69.91
Appropriations + 668.15 376.46 341.93 319.54 306.46 344.97
P & L Balance brought forward 2,105.22 1,963.66 1,666.15 1,432.83 1,197.64 1,019.41
Dividend 231.98 188.22 168.41 148.60 138.69 128.78
Preference Dividend 0.00 0.00 0.00 0.00 0.00 0.00
Equity Dividend % 105.00 95.00 85.00 75.00 70.00 65.00
Earnings Per Share-Unit Curr 38.26 33.59 29.66 26.80 25.72 26.27
Book Value-Unit Curr 352.27 291.77 267.76 248.36 245.02 229.85

88
DR. REDDYS
Financial Performance
Equity 84.09 83.96 38.35 38.26 38.26
Networth 4,811.81 4,373.36 2,262.14 2,074.08 2,047.02
Gross Block 1,750.21 1,291.19 1,052.89 1,004.22 810.95
Sales 3,449.71 4,045.32 2,104.57 1,626.78 1,740.20
Other Income 191.13 116.93 123.07 73.57 75.74
PBIDT 760.78 1,551.31 399.71 149.56 379.30
PBDT 746.09 1,499.35 375.09 136.82 375.07
PBIT 598.79 1,417.81 288.38 57.10 307.58
PBT 584.10 1,365.85 263.76 44.36 303.35
RPAT 475.22 1,176.86 211.12 65.46 283.20
APAT 466.23 1,172.83 185.91 57.09 288.97
CP 637.21 1,310.36 322.45 157.92 354.92
Rev. Earnings in FE 2,366.84 3,092.52 1,210.00 919.74 985.43
Rev. Expenses in FE 993.84 713.69 423.63 385.76 348.23
Book Value (Rs) 286.11 260.44 294.93 271.05 267.51
EPS (Rs.) 27.62 69.45 26.82 7.85 36.37
Dividend (%) 75.00 75.00 100.00 100.00 100.00
Payout (%) 13.59 5.40 18.64 63.66 13.75
Ratio Analysis
Debt-Equity 0.09 0.19 0.28 0.08 0.02 0.01 0.19 0.56 0.35 0.24
Current Ratio 2.37 2.21 1.85 2.49 3.73 4.86 3.09 1.69 2.03 2.63
Invtry Turnover 6.11 8.69 5.64 5.79 6.99 7.44 9.01 8.65 6.86 6.57
Debtors Turnover 3.53 4.94 4.21 3.78 3.97 3.64 4.29 4.76 3.65 3.28
Interest Cover 40.76 27.29 10.39 3.82 72.71 72.27 34.27 5.05 5.09 5.65
PBIDTM (%) 22.05 38.35 17.44 8.68 21.80 31.16 34.00 26.57 19.52 19.43
PBDTM (%) 21.63 37.06 16.27 7.90 21.55 30.78 33.10 22.16 16.20 16.42
APATM (%) 13.78 29.09 8.83 3.51 16.27 24.53 29.36 14.68 12.23 12.15
ROCE (%) 12.00 35.94 9.24 2.19 15.61 26.44 42.06 31.50 16.51 17.83
RONW (%) 10.35 35.47 8.57 2.77 14.70 24.02 45.71 29.23 14.73 14.28
EV/EBIDTA 12.96 7.15 27.94 33.68 18.73 12.76 14.89 16.43 45.95 28.70
Rate of Growth (%)
Net Worth 10.03 93.33 9.07 1.32 13.29 23.93 163.56 27.12 13.36 12.62
Sales -14.72 92.22 29.37 -6.52 8.88 2.08 59.10 99.61 15.77 28.42
-
PAT -59.62 457.44 222.52 -76.89 -27.77 218.16 139.51 16.54 5.98
14.70
-
M Cap -18.65 12.14 92.62 -24.11 6.25 113.21 -7.71 86.96 111.15
16.50

89
FINANCIAL OVERVIEW
200803 200703 200603 200503 200403 200303
Equity Paid Up 84.09 83.96 38.35 38.26 38.26 38.26
Networth 4811.81 4373.36 2262.14 2074.08 2047.02 1806.92
Capital Employed 5274.12 4703.26 3186.01 2347.32 2105.24 1835.68
Gross Block 1750.21 1291.19 1052.89 1004.22 810.95 685.12
Net Working Capital ( Incl. Def. Tax) 2110.37 2910.4 1689.49 1366.19 929.84 1231.87
Current Assets ( Incl. Def. Tax) 3348 4004.81 2398.87 2000.87 1343.7 1562.24
Current Liabilities and Provisions ( Incl. Def. Tax) 1237.63 1094.41 709.38 634.68 413.86 330.37
Total Assets/Liabilities (excl Reval & W.off) 6511.75 5797.67 3895.39 2982 2519.1 2166.05
Gross Sales 3449.71 4045.32 2104.57 1626.78 1740.2 1598.33
Net Sales 3365.2 3955.66 2005.85 1549.98 1661.22 1513.61
Other Income 191.13 116.93 123.07 73.57 75.74 46.46
Value Of Output 3459.07 3978.89 2042.57 1579.6 1670.88 1537.25
Cost of Production 2087.69 1810.68 1243.94 977.2 921.82 760
Selling Cost 375.37 323.39 243.15 182.12 173.53 147.48
PBIDT 760.78 1551.31 399.71 149.56 379.3 498.05
PBDT 746.09 1499.35 375.09 136.82 375.07 492
PBIT 598.79 1417.81 288.38 57.1 307.58 437.21
PBT 584.1 1365.85 263.76 44.36 303.35 431.16
PAT 475.22 1176.86 211.12 65.46 283.2 392.09
CP 637.21 1310.36 322.45 157.92 354.92 452.93
Revenue earnings in forex 2366.84 3092.52 1210 919.74 985.43 925.26
Revenue expenses in forex 993.84 713.69 423.63 385.76 348.23 244.58
Capital earnings in forex 0 0 0 0 0 0
Capital expenses in forex 77.18 68.63 41.34 38.34 33.54 21.64
Book Value (Unit Curr) 286.11 260.44 294.93 271.05 267.51 236.14
Market Capitalisation 9937.42 12216.18 10893.7 5655.59 7452.67 7014.59
CEPS (annualized) (Unit Curr) 37.25 77.4 41.34 19.94 45.74 58.55
EPS (annualised) (Unit Curr) 27.62 69.45 26.82 7.85 36.37 50.6
Dividend (annualised%) 75 75 100 100 100 100
Payout (%) 13.59 5.4 18.64 63.66 13.75 9.88
Cash Flow From Operating Activities 550.41 886.5 79.67 252.39 362.78 399.94
-
Cash Flow From Investing Activities -397.32 -913.44 69.35 -627.22 -178.79
1515.93
Cash Flow From Financing Activities 46.15 316.59 592.99 161.9 -15.88 -21.31
ROG-Net Worth (%) 10.03 93.33 9.07 1.32 13.29 23.93
ROG-Capital Employed (%) 12.14 47.62 35.73 11.5 14.68 24.72
ROG-Gross Block (%) 35.55 22.63 4.85 23.83 18.37 20.21
ROG-Gross Sales (%) -14.72 92.22 29.37 -6.52 8.88 2.08
ROG-Net Sales (%) -14.93 97.21 29.41 -6.7 9.75 1.81
ROG-Cost of Production (%) 16.71 46.67 30.17 3.32 23.71 12.48
ROG-Total Assets (%) 12.32 48.83 30.63 18.38 16.3 26
ROG-PBIDT (%) -50.96 288.11 167.26 -60.57 -23.84 -6.44
ROG-PBDT (%) -50.24 299.73 174.15 -63.52 -23.77 -5.05
ROG-PBIT (%) -57.77 391.65 405.04 -81.44 -29.65 -9.84
ROG-PBT (%) -57.24 417.84 494.59 -85.38 -29.64 -8.41
ROG-PAT (%) -59.62 457.44 222.52 -76.89 -27.77 -14.7
ROG-CP (%) -51.37 306.38 104.19 -55.51 -21.64 -10.68
ROG-Revenue earnings in forex (%) -23.47 155.58 31.56 -6.67 6.5 -5.22
ROG-Revenue expenses in forex (%) 39.25 68.47 9.82 10.78 42.38 40.22
ROG-Market Capitalisation (%) -18.65 12.14 92.62 -24.11 6.25 -16.5
Debt-Equity Ratio 0.09 0.19 0.28 0.08 0.02 0.01
Long Term Debt-Equity Ratio 0 0.02 0.04 0.01 0.01 0.01

90
Current Ratio 2.37 2.21 1.85 2.49 3.73 4.86

Fixed Assets Ratio 2.27 3.45 2.05 1.79 2.33 2.55
Inventory Ratio 6.11 8.69 5.64 5.79 6.99 7.44
Debtors Ratio 3.53 4.94 4.21 3.78 3.97 3.64
Interest Cover Ratio 40.76 27.29 10.39 3.82 72.71 72.27
PBIDTM (%) 22.05 38.35 17.44 8.68 21.8 31.16
PBITM (%) 17.36 35.05 12.15 3 17.67 27.35
PBDTM (%) 21.63 37.06 16.27 7.9 21.55 30.78
CPM (%) 18.47 32.39 14.12 9.19 20.4 28.34
APATM (%) 13.78 29.09 8.83 3.51 16.27 24.53
ROCE (%) 12 35.94 9.24 2.19 15.61 26.44
RONW (%) 10.35 35.47 8.57 2.77 14.7 24.02
Debtors Velocity (Days) 103 78 70 71 70 71
Creditors Velocity (Days) 89 84 71 66 60 56
Value of Output/Total Assets 0.56 0.66 0.73 0.77 0.8 0.84
Value of Output/Gross Block 2.27 2.47 2.51 2.7 2.84 2.98
BALANCE SHEET
Year Mar 08 Mar 07 Mar 06 Mar 05 Mar 04 Mar 03
SOURCES OF FUNDS :
Share Capital + 84.09 83.96 38.35 38.26 38.26 38.26
Reserves Total + 4,727.72 4,289.40 2,223.79 2,035.82 2,008.76 1,768.66
Secured Loans + 3.40 1.92 145.13 3.27 35.64 4.29
Unsecured Loans + 458.91 327.98 778.74 269.97 22.58 24.47
Total Debt 462.31 329.90 923.87 273.24 58.22 28.76
Total Liabilities 5,274.12 4,703.26 3,186.01 2,347.32 2,105.24 1,835.68
Gross Block + 1,750.21 1,291.19 1,052.89 1,004.22 810.95 685.12
Less : Accumulated Depreciation + 762.79 609.15 491.08 441.68 352.85 289.36
Net Block + 987.42 682.04 561.81 562.54 458.10 395.76
Capital Work in Progress+ 245.71 280.61 112.92 60.13 105.25 51.41
Investments + 1,930.62 830.21 821.79 358.46 612.05 156.64
Inventories + 640.93 487.58 443.10 303.81 258.01 240.11
Sundry Debtors + 897.71 1,055.70 581.21 417.64 444.05 432.45
Cash and Bank+ 537.34 1,456.71 650.94 891.72 408.08 688.40
Loans and Advances + 1,253.38 987.65 705.72 335.00 211.49 186.82
Less : Current Liabilities and Provisions
Current Liabilities + 680.85 633.42 553.26 377.65 291.40 218.34
Provisions + 451.28 386.08 85.14 183.17 58.13 55.23
Total Current Liabilities 1,132.13 1,019.50 638.40 560.82 349.53 273.57
Net Current Assets 2,197.23 2,968.14 1,742.57 1,387.35 972.10 1,274.21

91
Deferred Tax Liability 105.50 74.91 70.98 73.86 64.33 56.80

Net Deferred Tax -86.86 -57.74 -53.08 -21.16 -42.26 -42.34
Total Assets 5,274.12 4,703.26 3,186.01 2,347.32 2,105.24 1,835.68
Contingent Liabilities+ 1,815.70 1,839.17 2,368.98 209.58 214.33 166.70
PROFIT AND LOSS STATEMENT

Mar Mar Mar Mar Mar Mar Mar
Year
08(12) 07(12) 06(12) 05(12) 04(12) 03(12) 99(12)
INCOME :
Sales Turnover + 3,449.71 4,045.32 2,104.57 1,626.78 1,740.20 1,598.33 425.86
Excise Duty 84.51 89.66 98.72 76.80 78.98 84.72 46.44
Net Sales 3,365.20 3,955.66 2,005.85 1,549.98 1,661.22 1,513.61 379.42
Other Income + 191.13 116.93 123.07 73.57 75.74 46.46 5.68
Stock Adjustments + 93.87 23.23 36.72 29.62 9.66 23.64 8.71
Total Income 3,650.20 4,095.82 2,165.64 1,653.17 1,746.62 1,583.71 393.81
EXPENDITURE :
Raw Materials + 1,146.02 1,040.18 716.67 503.96 526.81 426.82 151.84
Power & Fuel Cost+ 77.12 57.83 48.23 43.20 40.27 38.12 9.40
Employee Cost + 347.90 261.61 199.54 177.13 153.83 126.63 29.62
Other Manufacturing Expenses + 376.52 297.19 172.05 142.22 131.28 105.39 28.67
Selling and Administration Expenses + 864.11 753.24 548.77 505.20 443.81 348.06 69.01
Miscellaneous Expenses + 77.75 134.46 80.67 131.90 71.32 40.64 22.51
Less: Pre-operative Expenses Capitalised+ 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Total Expenditure 2,889.42 2,544.51 1,765.93 1,503.61 1,367.32 1,085.66 311.05
Operating Profit 760.78 1,551.31 399.71 149.56 379.30 498.05 82.76
Interest + 14.69 51.96 24.62 12.74 4.23 6.05 12.84
Gross Profit 746.09 1,499.35 375.09 136.82 375.07 492.00 69.92
Depreciation+ 161.99 133.50 111.33 92.46 71.72 60.84 10.16
Profit Before Tax 584.10 1,365.85 263.76 44.36 303.35 431.16 59.76
Tax+ 62.05 173.00 13.83 0.00 20.24 40.22 8.00
Deferred Tax+ 29.12 9.00 31.93 -21.10 -0.09 -1.15 0.00
Reported Net Profit 475.22 1,176.86 211.12 65.46 283.20 392.09 51.76
Extraordinary Items + 8.99 4.03 25.21 8.37 -5.77 0.00 -0.23
Adjusted Net Profit 466.23 1,172.83 185.91 57.09 288.97 392.09 51.99
Adjst. below Net Profit + -1.49 -8.17 0.00 0.00 -0.26 0.00 0.00
P & L Balance brought forward 1,305.13 327.82 181.55 166.31 126.53 77.60 0.34
Statutory Appropriations + 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Appropriations + 121.36 191.38 64.85 50.22 243.16 343.16 51.74
P & L Balance carried down 1,657.50 1,305.13 327.82 181.55 166.31 126.53 0.36
Dividend 63.06 62.97 38.35 38.26 38.26 38.26 7.95
Preference Dividend 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Equity Dividend % 75.00 75.00 100.00 100.00 100.00 100.00 30.00
Earnings Per Share-Unit Curr 27.62 69.45 26.82 7.85 36.37 50.60 19.24
Book Value-Unit Curr 286.11 260.44 294.93 271.05 267.51 236.14 144.92

92

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INTERNSHIP REPORT

VALUING COMPANIES USING DIFFERENT VALUATION

Submitted in partial fulfillment of the requirements for

REG. NO. : 07XQCM6054

MBA Fourth Semester

Under the Guidance of - Prof. S. SANTHANAM

M.P. BIRLA INSTITUTE OF MANAGEMENT

M P BIRLA INSTITUTE OF MANAGEMENT

PLACE: Bangalore Neha Baheti

M P BIRLA INSTITUTE OF MANAGEMENT

I hereby certify that this dissertation entitled “VALUING COMPANIES IN

Place: Bangalore Prof. S. Santhanam

M P BIRLA INSTITUTE OF MANAGEMENT

This is to certify that this dissertation entitled ““VALUING COMPANIES

Place: Bangalore Principal

Date: Dr. N S Mallavali

M P BIRLA INSTITUTE OF MANAGEMENT

I take this opportunity to sincerely thank Prof S. Santhanam who introduced me

Place: Bangalore Neha Baheti

M P BIRLA INSTITUTE OF MANAGEMENT

1.2 The Role of Valuation 3

1.3 Approaches to Valuation 4

1.3.1 Adjusted Book Value 5

1.3.2 Stock and Debt Approach 5

1.3.3 Relative Valuation 5

1.3.4 Discounted Cash Flow 9

1.4 Methods used for Valuation 15

1.4.1 Free Cash Flow to Firm Model 16

1.4.2 Dividend Discount Model 17

1.4.3 PE Multiplier Model 18

M P BIRLA INSTITUTE OF MANAGEMENT

3.0 Research Methodology 25

3.1 Problem Statement 25

3.2 Objectives of the study 25

3.4 Tool used to test the hypothesis 25

3.5 Scope of the study 26

3.7 Sampling Technique 27

3.8 Data Collection 27

3.9 Sources of Data 27

3.10 Limitations of the Study 28

3.11 Chapter Scheme 28

4.1 I.T Industry 31

4.2 Power Industry 32

4.3 Pharmaceutical Industry 33

5 ANALYSIS AND INTERPRETATION OF DATA

5.1 Free Cash Flows to the Firm 35

5.2 Dividend Discount Model 47

5.3 PE Multiplier Model 59

M P BIRLA INSTITUTE OF MANAGEMENT

5.4 Testing of Hypothesis 60

M P BIRLA INSTITUTE OF MANAGEMENT

LIST OF TABLES AND FIGURES

FREE CASH FLOW TO FIRM

Infosys Technologies Ltd.

TABLE 2 Free Cash Flows 35

TABLE 3 Terminal Value 35

TABLE 4 Free Cash Flows 36

TABLE 5 Terminal Value 36

Hcl Technologies Ltd

TABLE 6 Free Cash Flows 37

TABLE 7 Terminal Value 37

Tata Consultancy Services Ltd

TABLE 8 Free Cash Flows 38