Hi Trupti,

Hope you are enjoying the course!!

Later in the course you would learn how to make a Financial Model. During the DCF model, revenue forecasting is the critical part. Hence the better you understand the business of the company and Dynamics of Industry, more accurate your valuation is going to be.

EX- Lets just say we are doing revenue forecasting for Infosys. We break the revenue in several parts like Onsite and offshore headcount and billing Rate.



Business Understanding:

If you listen to the recent management commentary, they are shifting work from onsite to offshore to reduce the cost. Knowing this we need to make appropriate assumption in our model while forecasting revenue so that our model is close to reality.



Industry Understanding:

We need to understand what happens when you move the workforce from onsite to offshore. Yes you get less revenue as onsite billing rate is much higher than Offshore however there are higher margin in offshore work as you pay in local currency and wage is much lower than that of onsite. So when you shift the work offshore from onsite your cost decreases and profitability increases.

Also we need to understand if the company is doing good or bad compared to its peers we need to understand the industry. For example, in the quarter ending December 2013, Infosys management has given a 11.5-12% revenue growth guidance for the complete financial year. Now it is difficult to understand if this is a good growth number or a bad growth number compared to peers. However the moment we know the full year forces for IT industry, which is 12-14% by NASSCOM (IT Industry body), we can say that Infosys is lagging behind its peers in terms of revenue growth.


Hope this answers your question.


Priyank Jain