Emerging Markets Case Team:

1

• Emerging Markets Case Team
• Noelle Diederich, Lalit Khanna, Nandini Kini,
  Rakesh Mehta, Dan Sevall

2
Agenda

• Situation
• Company
• Industry
• Emerging Market Issues
• Valuation Risks
• Value at Risk (VaR)
• Results

3
Situation

• Best managed company in India - Asiamoney, 1996
  1997
• Growth CAGR gt 50, driven by Y2K, 82 of
  revenues from US
• Goal global player in IS products services
• Tactic diversify services, issue ADS
• CASE Issue ADS - valuation?

4

Company Porters 5 Forces
Customer Bargaining Power
Government and Regulatory Intervention
Technological Change
Pressure From Substitutes
Threat of Entrants
Bargaining Power of Suppliers
Growth and Volatility of Market Demand
5
IT Industry

• Unique advantages
• Large, low cost, English-speaking labor force
• World-class quality standards
• Government policy support
• Software exports - 10 bn by 2000

6
Emerging Market Issues
India is a quantitative investors nightmare and
a stock pickers dream.
Pros
Cons

• Inflation
• Currency convertibility
• Black market
• Government instability/ history of socialism

• Education/work force
• IT industry expected to continue growing
• Economic liberalization

7
The Equity Offer

• 50 million Equity Issue of ADS _at_55 p.s.
• American Depository Shares Equity
• Traded on NASDAQ
• Restricted convertibility into regular equity
• Company specific risks
• Y2K
• Managing Growth and Employee Related Issues

8
Beta estimates
9
Return on Equity estimates

• Beta based estimates

• E-H-V estimates

10
Value at Risk

• Equity Offering 50 million
• VaR 9.3 million (Using Normal Distribution
  Assumption)

11
Results

• DCF Analysis
• Base Case value - 48
• Optimistic Value - 157
• Pessimistic Value - 4
• Comparables Analysis - NOT USED
• Comps vary over time and across companies, e.g.
  - 1998 P/E range 27 -79
• Conclusion You tell us ???