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

Emerging Markets Case Team: Noelle Diederich, Lalit Khanna, Nandini Kini, Rakesh Mehta, Dan Sevall. Agenda. Situation Company Industry Emerging Market Issues Valuation & Risks Value at Risk (VaR) Results. Situation. “Best managed company in India” - Asiamoney , 1996 & 1997

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

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  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 > 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. Direct Rivalry Among Competitors Company: Porter’s 5 Forces Customer Bargaining Power Government and Regulatory Intervention Technological Change Threat of Entrants Pressure From Substitutes 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. Education/work force IT industry expected to continue growing Economic liberalization Inflation Currency convertibility Black market Government instability/ history of socialism Emerging Market Issues “India is a quantitative investor’s nightmare and a stock picker’s dream.” Pros Cons

  7. The Equity Offer • $50 million Equity Issue of ADS @$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 ???

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