risk and return of equity investment (1)

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STUDY ON RISK AND RETURN OF EQUITY INVESTMENT IN IT SECTOR

CHAPTER-I

INTRODUCTION

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CHAPTER- I

INTRODUCTION

1.1 Background of the Study

The dissertation comprises of study and analysis of risk and return in the IT sector. The

intention of the project is to understand the volatility in the share market and how it is

going to affect the investors.

In early 1990s the main areas of investment were bank deposits, gold, property and other

such forms of tangible assets. But for the past few years we have been witnessing a lot of

investment opportunities coming up in the form of primary and secondary market. Since the

globalization which had its inception in 1992, foreign investments have been flowing to

India. New multinationals entered the market and a lot of investment opportunities were

opened to the people who kept their savings in bank and other kinds of fixed assets. For the

past few years India has been seeing drastic growth in the investment made in the primary

and secondary markets. There were also investment opportunities like mutual funds,

insurance etc.

The investors have to be aware of the risk involved in making the investment. So the

investors have to calculate the variance and the beta value to know the present condition of

the company to know whether there is any risk in investing in the particular company and

does the company offer good returns.

In todays scenario people are showing more interest in investment to get return on

investment to get return on investment by capital appreciation instead of keeping their

savings or surplus dead.

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1.2 STOCK MARKET

A stock market orequity marketis a public market (a loose network of economic transactions

not a physical facility or discrete entity) for the trading ofcompanystockand derivatives at an

agreed price; these are securities listed on a stock exchange as well as those only traded

privately.

The size of the world stock market was estimated at about $36.6 trillion US at the beginning of

October 2008. The totalworld derivatives market has been estimated at about $791 trillion face

or nominal value, 11 times the size of the entire world economy. The value of the derivatives

market, because it is stated in terms of notional values, cannot be directly compared to a stockor a fixed income security, which traditionally refers to an actual value. Moreover, the vast

majority of derivatives 'cancel' each other out (i.e., a derivative 'bet' on an event occurring is

offset by a comparable derivative 'bet' on the event not occurring.). Many such relatively

illiquid securities are valued as marked to model, rather than an actual market price.

The stocks are listed and traded on stock exchanges which are entities of a corporation or

mutual organization specialized in the business of bringing buyers and sellers of the

organizations to a listing of stocks and securities together. The stock market in the United

States isNYSE while in Canada; it is the Toronto Stock Exchange. Major European examples

of stock exchanges include the London Stock Exchange,Paris Bourse, and the Deutsche Brse.

Asian examples include the Tokyo Stock Exchange, the Hong Kong Stock Exchange, the

Bombay Stock Exchange and the Karachi Stock Exchange. In Latin America, there are such

exchanges as the BM&F Bovespa and the BMV.

1.2. a) Trading

Participants in the stock market range from small individual stock investors to large hedge fund

traders, who can be based anywhere. Their orders usually end up with a professional at a stock

exchange, who executes the order.

Some exchanges are physical locations where transactions are carried out on a trading floor, by

a method known as open outcry. This type of auction is used in stock exchanges and

commodity exchanges where traders may enter "verbal" bids and offers simultaneously. The

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other type of stock exchange is a virtual kind, composed of a network of computers where

trades are made electronically via traders.

Actual trades are based on an auction market model where a potential buyer bids a specific

price for a stock and a potential seller asks a specific price for the stock. (Buying or selling at

market means you will accept any ask price or bid price for the stock, respectively.) When the

bid and ask prices match, a sale takes place, on a first-come-first-served basis if there are

multiple bidders or askers at a given price.

The purpose of a stock exchange is to facilitate the exchange of securities between buyers and

sellers, thus providing a marketplace (virtual or real). The exchanges provide real-time trading

information on the listed securities, facilitating price discovery.

The New York Stock Exchange is a physical exchange, also referred to as a listed exchange

only stocks listed with the exchange may be traded. Orders enter by way of exchange members

and flow down to a floor broker, who goes to the floor trading post specialist for that stock to

trade the order. The specialist's job is to match buy and sell orders using open outcry. If a

spread exists, no trade immediately takes place--in this case the specialist should use his/her

own resources (money or stock) to close the difference after his/her judged time. Once a trade

has been made the details are reported on the "tape" and sent back to the brokerage firm, which

then notifies the investor who placed the order. Although there is a significant amount of

human contact in this process, computers play an important role, especially for so-called

"program trading".

The NASDAQ is a virtual listed exchange, where all of the trading is done over a computer

network. The process is similar to the New York Stock Exchange. However, buyers and sellers

are electronically matched. One or more NASDAQ market makers will always provide a bidand ask price at which they will always purchase or sell 'their' stock.

The Paris Bourse, now part ofEuro next, is an order-driven, electronic stock exchange. It was

automated in the late 1980s. Prior to the 1980s, it consisted of an open outcry exchange.

Stockbrokers met on the trading floor or the Palais Brongniart. In 1986, the CATS trading

system was introduced, and the order matching process was fully automated.

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From time to time, active trading (especially in large blocks of securities) has moved away

from the 'active' exchanges. Securities firms, led by UBS AG, Goldman Sachs Group Inc. and

Credit Suisse Group, already steer 12 percent of U.S. security trades away from the exchanges

to their internal systems. That share probably will increase to 18 percent by 2010 as more

investment banks bypass the NYSE and NASDAQ and pair buyers and sellers of securities

themselves, according to data compiled by Boston-based Aite Group LLC, a brokerage-

industry consultant.

Now that computers have eliminated the need for trading floors like the Big Board's, the

balance of power in equity markets is shifting. By bringing more orders in-house, where clients

can move big blocks of stock anonymously,brokers pay the exchanges less in fees and capture

a bigger share of the $11 billion a year that institutional investors pay in trading commissions

as well as the surplus of the century had taken place.

1.2. b) Market participants

A few decades ago, worldwide, buyers and sellers were individual investors, such as wealthy

businessmen, with long family histories (and emotional ties) to particular corporations. Over

time, markets have become more "institutionalized"; buyers and sellers are largely institutions

(e.g.,pension funds, insurance companies, mutual funds, index funds, exchange-traded funds,

hedge funds, investor groups, banks and various other financial institutions). The rise of the

institutional investorhas brought with it some improvements in market operations. Thus, the

government was responsible for "fixed" (and exorbitant) fees being markedly reduced for the

'small' investor, but only after the large institutions had managed to break the brokers' solid

front on fees. (They then went to 'negotiated' fees, but only for large institutions.)

However, corporate governance (at least in the West) has been very much adversely affected bythe rise of (largely 'absentee') institutional 'owners'.

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1.2. c) The stock market, individual investors, and financial risk

Riskier long-term saving requires that an individual possess the ability to manage theassociated increased risks. Stock prices fluctuate widely, in marked contrast to the stability of

(government insured) bank deposits or bonds. This is something that could affect not only the

individual investor or household, but also the economy on a large scale. The following deals

with some of the risks of the financial sector in general and the stock market in particular. This

is certainly more important now that so many newcomers have entered the stock market, or

have acquired other 'risky' investments (such as 'investment' property, i.e., real estate and

collectables).

1.2. d) Stock market index

The movements of the prices in a market or section of a market are captured in price indices

called stock market indices, of which there are many, e.g., the S&P, the FTSE and the Euronext

indices. Such indices are usually market capitalization weighted, with the weights reflecting the

contribution of the stock to the index. The constituents of the index are reviewed frequently to

include/exclude stocks in order to reflect the changing business environment.

History

In 12th century France the courratiers de change were concerned with managing and

regulating the debts of agricultural communities on behalf of the banks. Because these men also

traded with debts, they could be called the firstbrokers. A common misbelieve is that in late13th century Bruges commodity traders gathered inside the house of a man called Van der

Beurze, and in 1309 they became the "Brugse Beurse", institutionalizing what had been, until

then, an informal meeting, but actually, the family Van der Beurze had a building in Antwerp

where those gatherings occurred; the Van der Beurze had Antwerp, as most of the merchants of

that period, as their primary place for trading. The idea quickly spread around Flanders and

neighboring counties and "Beurzen" soon opened in Ghent and Amsterdam.

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In the middle of the 13th century, Venetian bankers began to trade in government securities. In

1351 the Venetian government outlawed spreading rumors intended to lower the price of

government funds. Bankers in Pisa, Verona, Genoa and Florence also began trading in

government securities during the 14th century. This was only possible because these were

independent city states not ruled by a duke but a council of influential citizens. The Dutch later

startedjoint stock companies, which let shareholders invest in business ventures and get a share

of their profits - or losses. In 1602, the Dutch East India Company issued the first share on the

Amsterdam Stock Exchange. It was the first company to issue stocks andbonds.

The Amsterdam Stock Exchange (or Amsterdam Beurs) is also said to have been the first stock

exchange to introduce continuous trade in the early 17th century. The Dutch "pioneered short

selling, option trading, debt-equity swaps, merchant banking, unit trusts and otherspeculative

instruments, much as we know them". There are now stock markets in virtually every

developed and most developing economies, with the world's biggest markets being in the

United States, United Kingdom, Japan, India, China, Canada, Germany, France, South Korea

and theNetherlands

IMPORTANCE OF STOCK MARKET

Function and purpose

The stock market is one of the most important sources for companies to raise money. This

allows businesses to be publicly traded, or raise additional capital for expansion by selling

shares of ownership of the company in a public market. The liquidity that an exchange provides

affords investors the ability to quickly and easily sell securities. This is an attractive feature ofinvesting in stocks, compared to other less liquid investments such as real estate.

History has shown that the price ofshares and other assets is an important part of the dynamics

of economic activity, and can influence or be an indicator of social mood. An economy where

the stock market is on the rise is considered to be an up and coming economy. In fact, the stock

market is often considered the primary indicator of a country's economic strength and

development. Rising share prices, for instance, tend to be associated with increased business

investment and vice versa. Share prices also affect the wealth of households and their

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consumption. Therefore, central banks tend to keep an eye on the control and behavior of the

stock market and, in general, on the smooth operation of financial system functions. Financial

stability is the raison d'tre of central banks.

Exchanges also act as the clearinghouse for each transaction, meaning that they collect and

deliver the shares, and guarantee payment to the seller of a security. This eliminates the risk to

an individual buyer or seller that the counterparty could default on the transaction.

The smooth functioning of all these activities facilitates economic growth in that lower costs

and enterprise risks promote the production of goods and services as well as employment. In

this way the financial system contributes to increased prosperity. An important aspect of

modern financial markets, however, including the stock markets, is absolute discretion. Forexample, American stock markets see more unrestrained acceptance of any firm than in smaller

markets. For example, Chinese firms that possesses little or no perceived value to American

society profit American bankers on Wall Street, as they reap large commissions from the

placement, as well as the Chinese company which yields funds to invest in China. However,

these companies accrue no intrinsic value to the long-term stability of the American economy,

but rather only short-term profits to American business men and the Chinese; although, when

the foreign company has a presence in the new market, this can benefit the market's citizens.

Conversely, there are very few large foreign corporations listed on the Toronto Stock Exchange

TSX, Canada's largest stock exchange. This discretion has insulated Canada to some degree to

worldwide financial conditions. In order for the stock markets to truly facilitate economic

growth via lower costs and better employment, great attention must be given to the foreign

participants being allowed in.

Relation of the stock market to the modern financial system

The financial systems in most western countries have undergone a remarkable transformation.

One feature of this development is disintermediation. A portion of the funds involved in saving

and financing, flows directly to the financial markets instead of being routed via the traditional

bank lending and deposit operations. The general public's heightened interest in investing in the

stock market, either directly or through mutual funds, has been an important component of this

process.

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Statistics show that in recent decades shares have made up an increasingly large proportion of

households' financial assets in many countries. In the 1970s, in Sweden, deposit accounts and

other very liquid assets with little risk made up almost 60 percent of households' financial

wealth, compared to less than 20 percent in the 2000s. The major part of this adjustment in

financial portfolios has gone directly to shares but a good deal now takes the form of various

kinds of institutional investment for groups of individuals, e.g., pension funds, mutual funds,

hedge funds, insurance investment of premiums, etc.

The trend towards forms of saving with a higher risk has been accentuated by new rules for

most funds and insurance, permitting a higher proportion of shares to bonds. Similar tendencies

are to be found in otherindustrialized countries. In all developed economic systems, such as the

European Union, the United States, Japan and other developed nations, the trend has been the

same: saving has moved away from traditional (government insured) bank deposits to more

risky securities of one sort or another.

Irrational behavior

Sometimes the market seems to react irrationally to economic or financial news, even if thatnews is likely to have no real effect on the technical value of securities itself. But this may be

more apparent than real, since often such news has been anticipated, and a counter reaction

may occur if the news is better (or worse) than expected. Therefore, the stock market may be

swayed in either direction by press releases, rumors, euphoria and mass panic; but generally

only briefly, as more experienced investors (especially the hedge funds) quickly rally to take

advantage of even the slightest, momentary hysteria.

Over the short-term, stocks and other securities can be battered or buoyed by any number of

fast market-changing events, making the stock market behavior difficult to predict. Emotions

can drive prices up and down, people are generally not as rational as they think, and the reasons

for buying and selling are generally obscure. Behaviorists argue that investors often behave

'irrationally' when making investment decisions thereby incorrectly pricing securities, which

causes market inefficiencies, which, in turn, are opportunities to make money. However, the

whole notion of EMH is that these non-rational reactions to information cancel out, leaving the

prices of stocks rationally determined.

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1.3 INDIAN STOCK MARKET

Without a stock exchange the saving of the community, economic progress andproductive efficiency would remain under utilized. Stock Exchanges are structured marketplace

where affiliates of the union gather to sell firm's shares and other securities. India Stock

Exchanges can either be a conglomerate/ firm or mutual group. The affiliates act as

intermediaries to their patrons or as key players for their own accounts. Stock Exchanges in

India also assist the issue and release of securities and other monetary tools incorporating the

fortification of revenues and dividends. The book keeping of the trade is centralized but the

buying and selling is associated to a particular place as advanced marketplaces are mechanized.The buying and selling on an exchange is only open to its affiliates and brokers.

The task of mobilization and allocation of savings could be attempted in the old days by

a much less specialized institution than the stock exchange but as business and industry

expanded and the economy assumed more complex nature. The need for permanent finance

arose when entrepreneurs needed money for long term. Where as investors demanded liquidity

the facility to convert their investments into cash at any given time. The answer was ready

market for investments and this was how the stock exchange came into being, stock exchange

means anybody of individuals, whether incorporated or not constituted for the purpose of

regulating or controlling the business of buying, selling or dealing in securities.

Investment is the employment of fund with the aim of achieving additional income or

growth in value. The essential quality of an investment is that it involves waiting for a

reward. It involves the commitment of resources which have been saved or put away from

current consumption in the hope that since benefit will accrue in future.

Investment is the allocation of monetary resources to assets that are expected to yield

some gain or positive return over a given period of time. These assets range from safe

investment to risky investments. Investment in this form is called as Financial Investments.

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1.3.1 INVESTMENT

MEANING AND CONCEPT OF INVESTMENT (according to Finance Term)

Investment means the investing of money or buying of Assets. For Examples

Buying stocks and bonds

Investing in real estate

Mortgages

These investments may then provide a future income and increase in value (i.e., investing inreal estate).

CHARACTERISTICS OF INVESTMENT

Investment refers to invest money in financial physical assets and Marketable assets. Majorinvestments feature such as risk, return, safety, liquidity, marketability conceal ability, capitalgrowth, purchasing power, stability and the benefits.

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The figure indicates that an important characteristic of investments is outlined as:

Risk

Return Safety

Liquidity

Marketability

Conceal ability

Capital growth

Purchasing power stability

Stability of income

Tax benefits.

Risk

Risk refers to the loss of principal amount of an investment. It is one of the major

characteristics of an investment. The risk depends on the following factors:

The investment maturity period is longer, in this case, investor will take larger risk.

Government or Semi Government bodies are issuing securities which have less risk.

In the case of the debt instrument or fixed deposit, the risk of above investment is less

due to their secured and fixed interest payable on them. For instance Debentures.

In the case of ownership instrument like equity or preference shares, the risk is more

due to their unsecured nature and variability of their return and ownership character.

The risk of degree of variability of returns is more in the case of ownership capital

compare to debt capital.

The tax provisions would influence the return of risk.

Return

Return refers to expected rate of return from an investment

Return is an important characteristic of investment. Return is the major factor which

influences the pattern of investment that is made by the investor. Investor always

prefers to high rate of return for his investment.

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Safety

Safety refers to the protection of investor principal amount and expected rate of return.

Safety is also one of the essential and crucial elements of investment. Investor prefers

safety about his capital. Capital is the certainty of return without loss of money or it will

take time to retain it. If investor prefers less risk securities, he chooses Government

bonds. In the case, investor prefers high rate of return investor will choose private

Securities and Safety of these securities is low.

Liquidity

Liquidity refers to an investment ready to convert into cash position. In other words, it

is available immediately in cash form. Liquidity means that investment is easily realizable,

saleable or marketable. When the liquidity is high, then the return may be low. For example,

UTI units.

An investor generally prefers liquidity for his investments, safety of funds through a minimum

risk and maximization of return from an investment.

Marketability

Marketability refers to buying and selling of Securities in market. Marketability means

transferability or salability of an asset. Securities are listed in a stock market which are more

easily marketable than which are not listed. Public Limited Companies shares are more easily

transferable than those of private limited companies.

Conceal ability

Conceal ability is another essential characteristic of the investment. Conceal ability

means investment to be safe from social disorders, government confiscations or unacceptable

levels of taxation, property must be concealable and leave no record of income received from

its use or sale. Gold and precious stones have long been esteemed for these purposes, because

they combine high value with small bulk and are readily transferable.

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Capital Growth

Capital Growth refers to appreciation of investment. Capital growth has today become

an important character of investment. It is recognizing in connection between corporation and

industry growth and very large capital growth. Investors and their advisers are constantly

seeking growth stock in the right industry and bought at the right time.

Purchasing Power Stability

It refers to the buying capacity of investment in market. Purchasing power stability has

become one of the import traits of investment. Investment always involves the commitment of

current funds with the objective of receiving greater amounts of future funds.

Stability of Income

It refers to constant return from an investment. Another major characteristic feature of

the Investment is the stability of income. Stability of income must look for different path just as

security of principal. Every investor always considers stability of monetary income and

stability of purchasing power of income.

Tax Benefits

Tax benefits are the last characteristic feature of the investment. Tax benefits refer to

plan an investment programmed without regard to ones status may be costly to the investor.

There are actually two problems:

One concerned with the amount of income paid by the investment.

Another is the burden of income tax upon that income.

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Reason for Investment

One needs to invest to:

Earn return on your idle resources,

Generate a specified sum of money for a specific goal in life

Make a provision for an uncertain future

One of the important reasons why one needs to invest wisely is to meet the cost of

Inflation. Inflation is the rate at which the cost of living increases. The cost of living is simplywhat it costs to buy the goods and services you need to live. Inflation causes money to lose

value because it will not buy the same amount of a good or a service in the future as it does

now or did in the past. The aim of investments should be to provide a return above the inflation

rate to ensure that the investment does not decrease in value.

Factors influencing investment

1. Increasing rate of taxation.

2. High interest rate.

3. High rate of inflation

Equity investment an overview

Equity investment generally refers to the buying and holding of shares of stocks on the

stock market by individual and funds in anticipation of income from dividend and capital gain

as the value of the stock rises. It also sometimes refers to the acquisition of equity participation

in a private company or a company being created or newly created. In simple terms, equity

share is the total equity capital of a company is divided into equal units of small denominations,

each called a share.

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Reason for issuing shares to the general public

Most companies are usually started privately by their promoter(s). However, the

promoters capital and the borrowings from banks and financial institutions may not be

sufficient for setting up or running the business over a long term. So companies invite the

public to contribute towards the equity and issue shares to individual investors. The way to

invite share capital from the public is through a Public Issue. Simply stated, a public issue is

an offer to the public to subscribe to the share capital of a company. Once this is done, the

company allots shares to the applicants as per the prescribed rules and regulations laid down by

SEBI.

Reason for investment in equities

When a person buys a share of a company he becomes a shareholder in that company.

Shares are also known as Equities. Equities have the potential to increase in value over time. It

also provides your portfolio with the growth necessary to reach your long term investment

goals. Research studies have proved that the equities have outperformed most other forms of

investments in the long term.

This may be illustrated with the help of following examples:

a) Over a 15 year period between 1990 to 2005, Nifty has given an annualized return of

17%.

b) In the last 15-20 years, the average return from equity was about 16 per cent pa.

c) Equities are considered the most challenging and the rewarding, when compared to

other investment options.

d) Research studies have proved that investments in some shares with a longer tenure of

investment have yielded far superior returns than any other investment.

However, this does not mean all equity investments would guarantee similar high

returns. Equities are high risk investments. The investor needs to study them carefullybefore investing.

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Factors influencing price of a stock

Broadly there are two factors:

(1) Stock specific and

(2) Market specific.

The stock-specific factor is related to peoples expectations about the company, its

future earnings capacity, financial health and management, level of technology and marketing

skills.

The market specific factor is influenced by the investors sentiment towards the stock

market as a whole. This factor depends on the environment rather than the performance of any

particular company. Events favorable to an economy, political or regulatory environment like

high economic growth, friendly budget, stable government etc. can fuel euphoria in the

investors, resulting in a boom in the market. On the other hand, unfavorable events like war,

economic crisis, communal riots, minority government etc. depress the market irrespective of

certain companies performing well. However, the effect of market-specific factor is generally

short-term. Despite ups and downs, price of a stock in the long run gets stabilized based on the

stock specific factors. Therefore, a prudent advice to all investors is to analyze and invest and

not speculate in shares.

Evolution of equity market in India

Bombay stock exchange is the oldest stock exchange in ASIA with a rich heritage.

Popularly known as BSE it was established as The Native Share & Stock Brokers

Association in 1875. It is the first stock exchange in the country to obtain permanent,

recognition in 1956from the Govt. Of India under the security contracts (regulation) Act 1956.

The exchange pivotal & prominent role in the development of Indian capital market is widely

recognized & its index. SENSEX is tracked worldwide. Earlier an association of person

(A.O.P) the exchange is now a demutualised & corporative entity incorporated under the

provision of the Companies Act 1956, pursuant to the BSE (corporation & demutualization)

scheme, 2005 notified by the security exchange board of India (SEBI). The exchange is

professionally managed under the overall direction of the board of director. The boardcomprises eminent professionals, representative of trading members & the managing director

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of exchange. The board is inclusive & is designed to benefit from the participation of members

intermediaries.

The exchange has national wide reach with a presence in 417 cities & towns of India.

During the year of 2004-2005 the trading volumes on the exchange showed robust growth. The

surveillance & clearing & settlement functions of the exchange are ISO 9001:2000 certified.

NSE started trading in equity segment (Capital Market Segment) on November 3, 1994

and within a short span of 1 year became the largest exchange in India in terms of volumes

transacted.

Trading volumes in the equity segment have grown rapidly with average daily turnover

increasing from Rs. 17 crores during the 1994-95 to Rs. 4328 crores during the 2003-04.

During the year 2004-05 NSE reported turnover of Rs.1099,535 crores in equity segment

accounting for 68.60%of the total Indian securities markets. Both BSE & NSE has reported a

turnover of more than 1600897.314 crores

The main advantages of equity shares are listed below:

1) Potential for profit: - The potential for profit is greater in equity shares then in any

other investment security. Current dividend yield may be low but potential of capital gain is

great. The total yield or yield to maturity may be substantial over a period of time.

2) Limited liability: - In corporate form of organization. Its owners have, generally

limited. Equity share is usually fully paid. Shareholders may lose their investment but no more.

They are not further liable for any failure on the part of the corporation to meet its obligation.

3) Hedge against inflation:- the equity share is a good hedge against inflation thought it

does not fully compensate for the declining purchasing power as it is subject to the money raterisk.

4) Free transferability:- the owners of shares have the right to transfer his interest to

someone else. The buyer should ensure that the issuing corporation transfer the ownership on

its books so that dividend. Voting rights & other privilege will accrue to the new owner.

5) Share in growth - the major advantage of investment in equity shares is its ability to

increase in value by sharing in growth of company profits over the long run.

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6) Tax advantage: - equity shares also offer tax advantage to the investor. The larger

yield on equity shares result from an increase in principal or capital gain, which are taxed at

lower rate than other incomes in most of the countries.

Sources of acquiring equity shares

The investor can acquire equity share either by the following two ways:

1. Primary market

2. Secondary market

You may subscribe to issues made by corporate in the primary market. In the primary market,

resources are mobilized by the corporate through fresh public issues (IPOs) or through private

placements. Alternately, you may purchase shares from the secondary market. To buy and sell

securities you should approach a SEBI registered trading member (broker) of a recognized

stock exchange.

Primary market

The primary market provides the channel for sale of new securities. Primary Market

provides opportunity to issuers of securities; Government as well as Corporate, to raise

resources to meet their requirements of investment and/or discharge some obligation. They mayissue the securities at face value, or at a discount/premium and these securities may take a

variety of forms such as equity, debt etc. They may issue the securities in domestic market

and/or international market.

Secondary market

Secondary market refers to a market where securities are traded after being initially

offered to the public in the primary market and/or listed on the Stock Exchange. Majority of the

trading is done in the secondary market. Secondary market comprises of equity markets and the

debt markets.

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TYPES OF ANALYSIS

The two main categories of analysis are fundamental analysis and technical analysis.

Fundamental Analysis

Fundamental analysis considers the financial and economic data that may influence the

viability of a company. There are many flavors of fundamental analysis centered on such

concepts as value, growth and turnarounds. Technical analysis is the study of the price chart. It

assumes that by looking at the progress of that little squiggly line you can forecast the future

trend of a stock. Fundamental analysis is essential to most investors, and technical analysis is

essential to most traders and speculators. Derision and scorn is poured down on tech methods

by hardcore fundamental investors who regard the whole business as flawed and nave, whereas

technical analysts or "chartists" hold that in today's well informed markets all possible data is

already reflected in the share price, and that fundamental analysis is futile, at least for everyday

people who's analysis skills are somewhat below those of the teams of analysts toiling away

around the clock for the major banks and funds, who seem to know everything anyway.

Technical Analysis

When skillfully applied, technical analysis can provide useful insights into the best time to buy,

perhaps because of some innate truth, but probably just because so many people believe in their

validity many technical signals are in fact very useful and reliable indicators of at least the very

short term future price movements. At any rate the fundamental basis of a good technical

analyst's trading method boils down to "run your profits and cut your losses", which usually

means hanging on to an up trending stock and ditching it when it starts to falter. Merely

following a trend can be a profitable and honorable profession, and sophisticated trading

methods frequently are little more than a few bells and whistles attached to a simple concept of

going with the trend. Those who completely ignore technical methods out of hand are often

proven right in the end, but aren't likely to have bought at the best possible time.

Likewise, you should not ignore fundamental analysis. While charting is useful, unless you

fully understand a company you really are doing nothing more than attempting to divine the

future by watching the past, and major underlying changes happen all the time when

management is changed, profits are made and lost and new products are introduced. Many of

the smaller companies are too thinly traded to show any useful technical signal, and oftenlarger funds won't touch them, your only way of analyzing them is through fundamental

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methods. Ideally you should concentrate on fundamental reasons for buying a stock, this is very

important, and try to fine tune your purchase timing with charting, if you want to do that.

Chartists are not investors, they are speculators, and frequently are the ones buying stocks right

at the top of the trend when fundamental investors have long since decided the stock was too

expensive, and sold out.

1.3.2 RISK

"Risk" is the investor's four-letter word. Everybody is risk-averse. Risk can be defined as

the chance that the expected or prospective advantage, gain, profit or return may not

materialize; that the actual outcome of investment may be less than the expected outcome. Riskis composed of demand that brings in variation in return of income. The main force

contributing to risk is price.

The variance and standard deviations of return serve as the alternative statistical

measures of the risk of the security in absolute sense. Similarly covariance measures the risk of

the security relative to the other securities in a portfolio.

Types of risk

1] Systematic risk

2] Unsystematic risk

CLASSIFICATION OF RISK

Systematic risk Unsystematic risk

Market risk or Economic risk Business risk

Interest rate risk Financial risk

Purchase power risk

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Systematic risk

Systematic risk is non-diversifiable and is associated with securities market as well as

the economy, sociological, political and legal considerations of the price of all securities in the

economy. The effect of these factors is to put pressure on all securities in such a way that theprice of all stocks will move in the same direction. The following are the factors that influence

systematic risk.

1. Market risk

Market risk is referred to as stock variable due to change in investors attitude and

expectations. The investors reaction towards tangible events is the chief cause affectingmarket risk.

Market risks cannot be eliminated while financial risk can be reduced. Market risk includes

such factors as business recessions, depressions and long-run changes in consumption in the

economy.

2. Interest rate risk

The price of all securities rise or fall depending on the change in interest rates, the

longer the maturity period of a security, the higher the yield on an investment and lower the

fluctuations in prices.

Interest rates continuously change for bond, preference stock and equity stocks.

Interest rate risk can be reduced by diversifying in various kinds of securities and also buying

securities of different maturity dates.

3. Purchase power risk

Purchasing power risk is also known as inflation risk. This risk arises out if change in the

prices if goods and services and technically it covers both inflation and deflation period.

Therefore, in India, purchasing power risk is associated with inflation and rising price in the

economy.

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Unsystematic risk

Unsystematic risk is unique to a firm of industry. It dose not affect an average investor.

Unsystematic risk is caused by factors like labour strike, irregular disorganized managementpolicies and consumer preference. These factors are independent of the price mechanism

operating in the securities market. The following are the factors that influence unsystematic

risk.

1. Business risk

Ever corporate organization has its own objectives and goals and aims at a particulargross profit and operating income and also expects to provide a certain level of dividend

income to its shareholders. It also hopes to plough back some profit.

Business risk is also associated with risks directly affecting the internal environment of

the firm and those if circumstance beyond its control. The former is classified as internal

business risk and the latter as external business risk, within these two broad categories of risk,the firm operations.

2. Financial risk:

Financial risk in a company is associated with the method through which it plans its

financial structure. If the capital structure of a company tends to make earnings unstable, the

company may fail financial. How a company rises funds to finance its needs and growth willhave an impact on its future earnings and consequently on the stability of earnings. Debt

financing provides a low cost source of funds to a company, at the same time providing

financial leverage for the common stock holders. As long as the earnings of the company are

higher than the cost of borrowed funds the earnings per share of common stock are increased.

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1.3.3 RETURN

A major purpose of investment is to set a return or income on the funds investment. On a

bond an investor expects to receive interest. On a stock, dividends may be anticipated. The

investor may expect capital gains from some investments and rental income from house

property.

Return is the amount or rate of produce, proceeds, gain, fruit and profit which accrues to

an economic agent from an undertaking or enterprise or investment. It is a reward for and a

motivating force behind investment, the objective of which is usually to maximize return.

Return on a typical investment has to components; the basic one which is the periodic

cash or income receipts, either inters toe dividend; and the other which is the appreciation ordepreciation in the price of value of the asset, called the capital gain or

the capital loss. The capital gain is the difference between the purchase price of the asset and

the price at which it can be or is sold. The income component is usually but not necessarily

received in cash viz., stock dividend. The total return on an investment thus can be defines as

income plus/minus appreciation/depreciation.

Types of return:

1. Internal rate of return

2. Expected return

3. Rate of return

4. Holding period return

Internal rate of return

The internal rate of return (IRR) is a capital budgeting method used by firms todecide whether they should make long-term investments. The IRR is the annualised effective

compounded return rate which can be earned on the invested capital, i.e. the yield on the

investment. A project is a good investment proposition if its IRR is greater than the rate of

return that could be earned by alternative investments (investing in other projects, buying

bonds, even putting the money in a bank account). The IRR should include an appropriate risk

premium. Mathematically the IRR is defined as any discount rate that results in a net present

value of zero of a series of cash flows. In general, if the IRR is cost of capital, or hurdle rate,the project will add value for the company greater than the project's.

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Expected return

The expected rate of return is the weighted average of all possible return multiplied bytheir respective probabilities. Expected return is the estimation of the value of an investment,

including the change in price and any payments or dividends, calculated from a probability

distribution curve of all possible rates of return. In general, if an asset is risky, the expected

return will be the risk-free rate of return plus a certain risk premium, also called expected value.

The average of a probability distribution of possible returns, calculated by using the following

formula:

Expected Return:

Rate of return :

In finance, rate of return (ROR) or return on investment (ROI) is the ratio of money

gained or lost on an investment relative to the amount of money invested. The amount of

money gained or lost may be referred to as interest, profit/loss, gain/loss, or net income/loss.

The money invested may be referred to as the asset, capital, principal, or the cost basis of the

investment.

ROI is also known as rate of profit, rate of return or return. ROI is the return on a past or

current investment, or the estimated return on a future investment. ROI is usually given as a

percent rather than decimal value... However, ROI is most often stated as an annual or

annualized rate of return, and it is most often stated for a calendar or fiscal year Rate of return

for the given period is calculated by using the formula,

Annual income + (Ending price Beginning price)

Rate of return = --------------------------------------------------------------

Beginning price

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Holding period return:

Holding period yield (HYP) measures the total return an investment during a given or

designing time period in which the asset is held by the investor. It is to be noted that HYP does

not mean that the security is actually sold and the gain or loss is actually realized by the

investor. The concept of HYP is applicable whether one is measuring the realized return or

estimated the future return.

1.3.4 INTRODUCTION TO BOMBAY STOCK EXCHANGE

Bombay Stock Exchange is the oldest stock exchange in Asia with a rich heritage, now

spanning three centuries in its 133 years of existence. What is now popularly known as BSE

was established as "The Native Share & Stock Brokers' Association" in 1875.

BSE is the first stock exchange in the country which obtained permanent recognition (in

1956) from the Government of India under the Securities Contracts (Regulation) Act 1956.

BSE's pivotal and pre-eminent role in the development of the Indian capital market is widely

recognized. It migrated from the open outcry system to an online screen-based order driven

trading system in 1995. Earlier an Association of Persons (AOP), BSE is now a corporatized

and demutualised entity incorporated under the provisions of the Companies Act, 1956,

pursuant to the BSE (Corporatisation and Demutualisation) Scheme, 2005 notified by the

Securities and Exchange Board of India (SEBI). With demutualisation, BSE has two of world's

best exchanges, Deutsche Brse and Singapore Exchange, as its strategic partners.

Over the past 133 years, BSE has facilitated the growth of the Indian corporate sector

by providing it with an efficient access to resources. There is perhaps no major corporate in

India which has not sourced BSE's services in raising resources from the capital market.

Today, BSE is the world's number 1 exchange in terms of the number of listed

companies and the world's 5th in transaction numbers. The market capitalization as on

December 31, 2007 stood at USD 1.79 trillion. An investor can choose from more than 4,700

listed companies, which for easy reference, are classified into A, B, S, T and Z groups.

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The BSE Index, SENSEX, is India's first stock market index that enjoys an iconic

stature, and is tracked worldwide. It is an index of 30 stocks representing 12 major sectors. The

SENSEX is constructed on a 'free-float' methodology, and is sensitive to market sentiments and

market realities. Apart from the SENSEX, BSE offers 21 indices, including 12 sectoral indices.

BSE has entered into an index cooperation agreement with Deutsche Brse. This agreement has

made SENSEX and other BSE indices available to investors in Europe and America. Moreover,

Barclays Global Investors (BGI), the global leader in ETFs through its iShares brand, has

created the 'iShares BSE SENSEX India Tracker' which tracks the SENSEX. The ETF

enables investors in Hong Kong to take an exposure to the Indian equity market.

The first Exchange Traded Fund (ETF) on SENSEX, called "SPICE" is listed on BSE.

It brings to the investors a trading tool that can be easily used for the purposes of investment,

trading, hedging and arbitrage. SPICE allows small investors to take a long term view of the

market.

BSE provides an efficient and transparent market for trading in equity, debt instruments and

derivatives. It has a nation-wide reach with a presence in more than 359 cities and towns of

India. BSE has always been at par with the international standards. The systems and processes

are designed to safeguard market integrity and enhance transparency in operations. BSE is thefirst exchange in India and the second in the world to obtain an ISO 9001:2000 certifications. It

is also the first exchange in the country and second in the world to receive Information Security

Management System Standard BS 7799-2-2002 certification for its BSE On-line Trading

System (BOLT).

BSE continues to innovate. In recent times, it has become the first national level stock

exchange to launch its website in Gujarati and Hindi to reach out to a larger number of

investors. It has successfully launched a reporting platform for corporate bonds in Indiachristened the ICDM or Indian Corporate Debt Market and a unique ticker-cum-screen aptly

named 'BSE Broadcast' which enables information dissemination to the common man on the

street.

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CHAPTER-II

RESEARCH DESIGN

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CHAPTER-II

RESEARCH DESIGN

2.1 Title of the study

Study of Risk and Return of Equity Investment in the Information Technology

sector

2.2 Statement of the Problem

This dissertation has been conducted on the Study of Risk and Return of Equity Investment in

the Information Technology sector. All the investors try to get maximum return with

minimum risk by investing in the shares. The investors continuously follow the market to findthe best stock to invest in. The investors are in the darkness of how to select an appropriate

company to invest in. This project helps in finding out how an investor can analyze the risk of

investing in particular securities.

2.3 Objectives of the Study

To analyze the risk and returns of the companies.

To find out the risk less companies to invest in share market by using Beta values.

To study the volatility of companies with the market.

2.4 Scope of the Study

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The Information Technology companies selected for the purpose of the study are:

HCL

TCS

WIPRO

INFOSYS

TECH MAHINDRA

2.5 Methods of Data Collection

Data collected are of Secondary Data source.

Secondary Data

These data already exists and are available from various sources like websites, journals, books,

company reports etc. The daily open and close prices of stocks and indices were taken from the

official website of Bombay Stock Exchange.

2.6 Tools of Analysis

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Basically whole data analysis has been performed using spreadsheet in excel. Statistical

function of Beta, Standard Deviation, Correlation Co-efficient and other similar techniques will

be used for data analysis. The main objectives are to calculate the beta and variance to help the

investors to arrive at a decision of investment in shares which offer maximum return with

minimum risk and also to gain knowledge of the stock market. Based on the findings

suggestions are given which will be a guide to the investors.

2.7 Limitations

The area of study is limited to few sectors.

The study is limited to the data of the past 2 years only.

The study is mainly based on secondary data and no field work is done because of time

constraint.

To analyze the risk and return only standard deviation and Beta is used and no other

statistical tools are used.

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2.8 Chapter Scheme

Chapter I: Introduction

This chapter explains comprehensive description about introduction to the study and

background of the topic.

Chapter II: Research Design

This chapter includes various aspects of study undergone like methodology used for

analysis and interpretation of data, major issue on which study has undergone, scope of study,

need of study, objective of study, research design, limitation of study, sampling data used for

study.

Chapter III: Profiles

It explains about the history of Information Technology industry. And the profiles of

companies which are used for study.

Chapter IV: Analysis and Interpretation

This chapter explains about detailed analysis and interpretation of the study using

various statistical techniques.

Chapter V: Findings, Conclusion & Suggestions

This chapter deals with findings, suggestions and conclusions drawn from the study

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CHAPTER-III

INDUSTRY & COMPANY PROFILES

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3.1 INDUSTRY PROFILE

The software industry comprises of businesses involved in the development, maintenance and

publication of computer software. The software industry started in the mid-1970s at the time of

the personal computer software. The industry also includes software services such as training

and consultancy. The Software Industry comprises of businesses related to the production and

maintenance of computer software. The roots of the industry lie in the IT phenomenon. The

largest and most profitable of software companies are located in the United States. As of 2006,

the software industry is dominated by Microsoft. Software Magazines 500 list in 2005 shows

the total amount of revenue brought in by software companies per locale, with the highest

being California due to silicon Valley and the amount of Fortune 500 software companies

residing in that area.

The IT industry is witnessing a rapid growth and offers lucrative job opportunities making IT a

premium career option for the youth. In fact, it is one of the fastest growing sectors of Indian

industry. The success can be attributed to factor advantage of high quality of software human

resources. The Software Industry has succeeded in converting this comparative advantage to

increasing exports. More and more companies are receiving the ISO 9000 certification and the

day is not far when India will have the highest number of ISO 9000 companies in the world.

INDIAN INFORMATION TECHNOLOGY SECTOR

Technological revolutions sometimes bring unexpected opportunities for countries. India, a

relative laggard among developing countries in terms of economic growth, seems to have found

such an opportunity in the information technology revolution as an increasingly favored

location for customized software development. Early success has led to speculation about how

long the Indian software industry can sustain its growth. It has also led to the hope that

software and information technology can be the engine of growth for poor, labor abundant

countries. The Electronics industry has emerged as the fastest growing segment of the Indian

industry both in terms of production and exports. This growth has had significant economic and

social impacts. Today the local and global impact of the electronics industry has been due to its

modern incarnation viz., the Information Technology (IT) Industry.

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The Indian IT industry has a prominent global presence today largely due to the software

sector. Promotion of the software industry and protection of the hardware industry from

external competition has resulted in this skewed growth. More recently however, policy

changes have led to a tremendous influx of leading multinational companies into India to set up

manufacturing facilities, R&D Centres and offshore software development facilities. The

domestic market for both software and hardware is getting revitalized. All these developments

have had a significant impact not only on the economy but also the environmental and social

milieu. A number of new policy initiatives are on the anvil to enhance and sustain the growth

of the IT industry this times the focus being both on hardware and software. More recently,

the software industry has begun slowly moving up the value chain from programming tosystems analysis and design. More offshore work is being carried out in India. R&D Centres

and manufacturing facilities are being set up in India by MNCs. New policies and plans with

fiscal incentives, modifications in export-import policies, support for infrastructure are now

promoting foreign investment and focusing on providing impetus to software and hardware

sectors of the IT industry both domestic and export. This is also creating changes in the grey

market.

THE INDIAN SOFTWARE INDUSTRY: STRUCTURE & PROSPECTS

1. THE CURRENT SITUATION: The Indian software industry specializes in the export of

low-end software development services, competing primarily on cost and availability of

software talent.

The Indian comparative advantage is based on cost and availability of software talent: the

ability to offer the services of a large number of software professionals at costs substantially

lower than those in the U.S. U.S. firms do not outsource requirement analysis, specification,

and high-level design, nor do they outsource larger scale system integration types of activities

to India. However, the leading Indian software firms do have the ability to provide these high-

end services. The industry is diffusing geographically. Although Bangalore is still home to

many of the leading firms, the industry is not confined to Bangalore and is diffusing to regions

other than Bangalore and Bombay, with a substantial presence in Hyderabad, Madras, and

Delhi, and a growing presence in Calcutta and Pune.

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The domestic market is still small. Although PCs are diffusing more rapidly, communication

bandwidth is still limited. The bandwidth problem is compounded because of the intransigent

attitude of the department of telecommunications as it tries to retain control over

telecommunications in India. The result is that Internet access in India is still slow and

expensive. In addition, various infrastructure constraints have combined to slow the adoption of

IT for business and government operations: Insufficient electricity and transportation system,

limited competition in the economy, and uncreative and less informed top managers.

Few software products of any significance have been developed, partly as a consequence of the

under-developed domestic market. However, Indian firms have had some success in other

developing countries and the Middle East with vertical products such as banking products,

accounting packages and ERP packages tailored to the developing country environment.

2. THE NEAR FUTURE IS BRIGHT: The Indian software industry is poised for continued

growth over the next 3-5 years. Demand should remain high. Despite the end of the Y2K work

and the slowdown in ERP projects, demand for maintenance, porting and application

development will still be substantial. New ERP-like sources of demand, such as e-commerce,

front office, and customer management tools will gain strength.

There are few alternatives to India. Although Ireland, Eastern Europe, China, and Philippines

are also alternative development sites, there are several factors that favor Indias position as a

leading source of customized offshore software development: First mover advantage; the size

of the talent pool; language skills; and availability of a legal & commercial system that is

similar to those in the West.

3. CHALLENGES TO LONG TERM GROWTH: Long run growth in Indian software services

exports requires better project management skills and better business strategies or managerial

capabilities. Project management expertise is scarce, because the industry is still young in India

and large scale projects where project managers are trained are still relatively rare. This

problem is exacerbated by a large number of experienced professionals who emigrate to the

U.S. Management capability is weak. It is likely that many of the existing firms will fail the

challenge of moving beyond low-end services. However, this should not be a major problem

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for the industry as a whole because some Indian firms are already looking outside of their

boundaries and even outside India to get the managers they need.

Software talent is still plentiful but experienced engineers and managers are not. Although

Indian software firms complain the shortage of engineers, many engineers working in the

industry are under-utilized: much of the work does not require extensive engineering

knowledge. Rather, it requires familiarity with standard platforms, software languages such as

VB, C++ and Java as well as familiarity with development environments and tools that can be

acquired on the job or through specialized courses (offered by private firms like NIIT and

Aptech). In addition, many of the existing engineering colleges have added IT and software

development courses to their curricula and there are both public and private initiatives to

increase the supply of skilled software engineers. However, as the industry continues to grow,the shortage of skilled and experienced software engineers and project managers will become

increasingly evident. The industry will have to tap new sources of supply and better utilize the

existing engineering talent.

The Indian software industry faces a number of challenges as the labor cost advantages

diminish and competition from other countries with supplies of educated and underutilizedworkers increases. However, even if the projected goals are only partially achieved, the Indian

software industry will still have achieved a substantial role in the world software industry,

especially in customized software and software services. If the projected trends in demand for

skilled workers hold, demographics alone should continue to ensure the survival and growth,

albeit perhaps at a reduced rate, of the Indian software services industry. The Indian success

story has been a combination of resource endowments (created in part by a policy of substantial

investments in higher education), good timing and exemption from a normally intrusive

government laws. Indias success also testifies to the abundant supply of entrepreneurs who

recognized and responded to the opportunity that the IT revolution in the West represented.

STRUCTURE AND COMPOSITION OF THE INDIAN SOFTWARE INDUSTRY

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Indias software sector displays many unusual features from an Indian perspective. The most

obvious one is its export orientation. Given Indias size and history of inward development,

most of industries tend to be driven by the domestic market. However, exports account for 65%

of the total software revenue. Not only that, software exports grown somewhat faster than the

domestic market, so that the share of exports has actually increased over time.

There are important qualitative differences between the export market and the domestic

market.

The first difference is the types of software developed. The domestic market has a higher

proportion of revenues from the sale of software packages and products. Whereas, these

products account for nearly 40% of the domestic market, and account for a little fewer than

10% of exports. Over 80% of exports are software services including custom software

development, consultancy, and professional services. Even though the bulk of the product

revenues in the domestic market are probably accounted for by imported software products,

\Indian firms have produced some moderately successful products, such as accounting

packages and word processing packages in Indian languages, for the domestic market. A

number of medium-sized firms make products for Indian and Middle East markets which are

much customized to the countrys own business culture, etc. In the area of ERP packages, a

couple of firms are trying to compete with global giants like SAP, BAAN and PeopleSoft in the

domestic market.

The second difference between the domestic and export sector relates to the stages of software

development as described earlier. Indian firms usually provide low-level design, coding, and

some types of testing services for export. For domestic clients, the industry provides a wider

range of services that usually spans the entire lifecycle of software development. Some of the

domestic projects are much larger and more challenging than export projects, with the screen

based trading system for the Bombay Stock Exchange and the Reservation System for

Railways, both by executed by CMC, an experienced public sector firm, being two recent

examples.

SECTOR STRUCTURE / MARKET SIZE

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The Indian information technology (IT) industry has played a key role in putting India on the

global map. Thanks to the success of the IT industry, India is now a power to reckon with.

According to the National Association of Software and Service Companies (NASSCOM), the

apex body for software services in India, the revenue of the information technology sector has

risen from 1.2 per cent of the gross domestic product (GDP) in FY 1997-98 to an estimated 5.8

per cent in FY 2009-10. Further, the industry body expects the sector to grow between 4 per

cent and 7 per cent during 2010-11 and return to over 10 per cent growth next year. India's IT

growth in the world is primarily dominated by IT software and services such as Custom

Application Development and Maintenance (CADM), System Integration, IT Consulting,

Application Management, Software testing, and Web services. As per NASSCOM's latest

findings:

Indian IT-BPO sector grew by 12 per cent in FY 2010 to reach US$ 71.7 billion in

aggregate revenue (including hardware). Of this, the software and services segment

accounted for US$ 59.6 billion.

IT-BPO exports (including hardware exports) grew by 16 per cent from US$ 40.9

billion in FY 2007-08 to US$ 47.3 billion in FY 2009-10.

Moreover, according to a study by Springboard Research, the Indian IT services market is

estimated to remain the fastest growing in the Asia-Pacific region with a compound annual

growth rate (CAGR) of 18.6 per cent. At present, there are 60 million Internet users in the

country. According to the Manufacturers Association of IT (MAIT), the number of active

Internet entities rose to 8.6 million by March 2009 from 7.2 million units in March 2008.

MAIT has outlined 'Goal 511', an ambitious target that talks about 500 million Internet users,

100 million broadband connections and 100 million connected devices by 2012. A study by

MAIT estimated that the total PC sale in India is likely to grow by 7 per cent in 2009-10, with

total sales expected to cross 7.3 million units. Moreover, software companies continued to

constitute the fastest growing firms in the Deloitte Technology Fast 50 India 2009 programme.

In 2009, the composition of software companies amounted to as much as 80 per cent. Despite

the slowdown and challenges for growth, the report stated that the average growth rate of the

top ten winners increased significantly to 1,003 per cent, compared with 845 per cent in the

previous year.

OUTSOURCING

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According to NASSCOM, software and services exports (including exports of IT services,

business process outsourcing (BPO), engineering services and research and development

(R&D) and software products) reached US$ 47 billion in FY 2008-09, contributing nearly 78

per cent to the total software and services revenue of US$ 59.6 billion.

India continues to be the most preferred destination for companies looking to offshore their IT

and back-office functions. It also retains its low-cost advantage and is among the most

financially attractive locations when viewed in combination with the business environment it

offers and the availability of skilled people, according to global management consultancy, AT

Kearney. Global IT giant, IBM, plans to scale up its business process outsourcing (BPO)

operations in the country and looks to recruit 5,000 people to support the expansion.

Some big deals in the outsourcing space include:

HCL Technologies has entered into a five-year deal with media conglomerate News

Corp for managing its data centers and IT across British newspapers. The deal is

pegged to be in the range of US$ 200-US$ 250 million, according to industry experts.

HCL Technologies has also received a contract worth US$ 50 million from UK-based

defence equipment maker Meggitt for providing engineering services.

Wal-Mart has selected three IT vendors in India Infosys Technologies, Cognizant

Technology Solutions and UST Global for multi-year contracts worth over US$ 600

million.

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