A project on equties

8/7/2019 A project on equties

1/94

Equity Analysis

A STUDY on

EQUITY ANALYSIS

AtINDIA INFOLINE LIMITED

(Report submitted to JNTU in partial fulfillment of the requirement for the

award of Master of Business Administration)

Submitted by

SHAMEEM BEGUM

Roll No: 08N31E0048

Under the guidance of

Mr. K Hari Krishna

Assoc. Professor Finance

MALLA REDDY COLLEGE OF ENGINEERING & TECHNOLOGY

(Affiliated to JNTU, Hyderabad)

Secunderabad - 14

2008- 2010


2/94

Equity Analysis

DECLARATION

I declare that this project report entitled EQUITY ANALYSIS is original and

bonafide work of my own in the partial fulfillment of the requirements for the award of

the Degree ofMASTER OF BUSINESS ADMINISTRATION and submitted to the

Department of Management, MALLAREDDY COLLEGE OF ENGINEERING AND

TECHNOLOGY, Secunderabad.

The data that has been collected by me is truly authentic and contains true and complete

information.

SHAMEEM BEGUM


3/94

Equity Analysis

SUMMARY

The automobile industry, one of the core sectors, has undergone metamorphosis with the

advent of new business and manufacturing practices in the light of liberalization and

globalization. The sector seems to be optimistic of posting strong sales in the couple of

years in the view of a reasonable surge in demand. The Indian automobile market is

gearing towards international standards to meet the needs of the global automobile giants

and become a global hub.

A detailed analysis of Automobile industry has been covered in respect of past growth

and performance. Under this project to better understand the Industry I have used

Fundamental tools to make it more authentic and meaningful.

An economy-industry-company (E.I.C) approach has been followed under Fundamental

Analysis which covers effect of Recession, the impact of inflation, FDIs, Export, and

GDP etc. on Automobile Industry. The Industry Analysis has been done with the help of

SWOT analysis and industry life cycle. For Company Analysis as a part of Fundamental

tool we have undergone with the comparative analysis of TATA Motors the leading

company, Maruti Suzuki Indias largest Car manufacturer and Mahindra and Mahindra

along with the help of ratio analysis. The fundamental aspect consists of financial and

Non-Financial analysis of these companies.

At the end conclusion and recommendations have been specified so as to make the

project work more meaningful and purposeful.


4/94

Equity Analysis

ACKNOWLEDGEMENT

Accomplishment of a task with desired success calls for dedication towards work and

prompting guidance, co-operation and deliberation from seniors.

At the outset, I would like to thank Mr. K. Hari Krishna, Associate Professor, Mallareddy

College of Engineering and Technology for his support and professional approach in

guiding me through the careful details of the project.

I am very grateful to my company guides, Mr. Subramaniam and Mr. Ashok who not

only helped me on this topic but also helped me to understand the nuances of capital

market. In spite of having a very busy schedule, they made sure in every way that we

acquire the best possible exposure and knowledge during our project.

I would be failing in my duty if I do no express my deep sense of gratitude to Sri K.R.K

Murthy, H.O.D. and all the faculty members for their valuable advice and guidance in

this project. I am also thankful to our college Principal, Dr.V.Siva Kumar Reddy.

SHAMEEM BEGUM


5/94

Equity Analysis

CONTENTS

Chapter No. Name of the concept Page No.

I

Introduction 1

Need of the study 2

Objectives of the study 3

Scope of the study 4

Methodology of the study 5

Limitations of the study 6

II Review of Literature 7-22

III Industry Profile 23-42

IV Company Profile 43-52

V Data analysis and interpretation 53-73

VI Findings, Suggestions and Conclusion 74-80

VII Bibliography 81


6/94

Equity Analysis

CHAPTER I - INTRODUCTION


7/94

Equity Analysis

INTRODUCTION

India is a developing country. Nowadays many people are interested to invest in financial

markets especially on equities to get high returns, and to save tax in honest way. Equities

are playing a major role in contribution of capital to the business from the beginning.

Since the introduction of shares concept, large numbers of investors are showing interest

to invest in stock market.

In an industry plagued with skepticism and a stock market increasingly difficult to predict

and contend with, if one looks hard enough there may still be a genuine aid for the Day

Trader and Short Term Investor.

The price of a security represents a consensus. It is the price at which one person agrees

to buy and another agrees to sell. The price at which an investor is willing to buy or sell

depends primarily on his expectations. If he expects the security's price to rise, he will

buy it; if the investor expects the price to fall, he will sell it. These simple statements are

the cause of a major challenge in forecasting security prices, because they refer to human

expectations. As we all know firsthand, humans expectations are neither easily

quantifiable nor predictable. If prices are based on investor expectations, then knowing

what a security should sell for (i.e., fundamental analysis) becomes less important than

knowing what other investors expect it to sell for. That's not to say that knowing what a

security should sell for isn't important--it is. But there is usually a fairly strong consensus

of a stock's future earnings that the average investor cannot disprove

Fundamental analysis and technical analysis can co-exist in peace and complement each

other. Since all the investors in the stock market want to make the maximum profits

possible, they just cannot afford to ignore either fundamental or technical analysis.


8/94

Equity Analysis

NEED OF THE STUDY

To start any business capital plays major role. Capital can be acquired in two ways by

issuing shares or by taking debt from financial institutions or borrowing money fromfinancial institutions. The owners of the company have to pay regular interest and

principal amount at the end.

Stock is ownership in a company, with each share of stock representing a tiny piece of

ownership. The more shares you own, the more of the company you own. The more

shares you own, the more dividends you earn when the company makes a profit. In the

financial world, ownership is called Equity.

Advantages of selling stock:

y A company can raise more capital than it could borrow.

y A company does not have to make periodic interest payments to creditors.

y A company does not have to make principal payments

Stock/shares play a major role in acquiring capital to the business in return investors are

paid dividends to the shares they own. The more shares you own the more dividends you

receive.

The role of equity analysis is to provide information to the market. An efficient market

relies on information: a lack of information creates inefficiencies that result in stocks

being misrepresented (over or under valued). This is valuable because it fills information

gaps so that each individual investor does not need to analyze every stock thereby making

the markets more efficient.


9/94

Equity Analysis

OBJECTIVES OF THE STUDY

The objective of this project is to deeply analyze our Indian Automobile Industry for

investment purpose by monitoring the growth rate and performance on the basis of

historical data.

The main objectives of the Project study are:

y Detailed analysis of Automobile industry which is gearing towards

international standards

y Analyze the impact of qualitative factors on industrys and companys

prospects

y Comparative analysis of three tough competitors TATA Motors, Maruti

Suzuki and Mahindra and Mahindra through fundamental analysis.

y Suggesting as to which companys shares would be best for an investor to

invest.


10/94

Equity Analysis

SCOPE OF THE STUDY

The scope of the study is identified after and during the study is conducted. The

project is based on tools like fundamental analysis and ratio analysis. Further, the

study is based on information of last five years.

y The analysis is made by taking into consideration five companies i.e. TATA

Motors, Maruti Suzuki and Mahindra and Mahindra.

y The scope of the study is limited for a period of five years.

y The scope is limited to only the fundamental analysis of the chosen stocks.


11/94

Equity Analysis

METHODOLOGY

Research design or research methodology is the procedure of collecting, analyzing

and interpreting the data to diagnose the problem and react to the opportunity in such

a way where the costs can be minimized and the desired level of accuracy can be

achieved to arrive at a particular conclusion.

The methodology used in the study for the completion of the project and the

fulfillment of the project objectives.

The sample of the stocks for the purpose of collecting secondary data has been

selected on the basis of Random Sampling. The stocks are chosen in an unbiased

manner and each stock is chosen independent of the other stocks chosen. The stocks

are chosen from the automobile sector.

The sample size for the number of stocks is taken as 3 for fundamental analysis of

stocks as fundamental analysis is very exhaustive and requires detailed study.


12/94

Equity Analysis

LIMITATIONS

y This study has been conducted purely to understand Equity analysis for investors.

y The study is restricted to three companies based on Fundamental analysis.

y The study is limited to the companies having equities.

y Detailed study of the topic was not possible due to limited size of the project.

y There was a constraint with regard to time allocation for the research study i.e. for

a period of 45 days.

y Suggestions and conclusions are based on the limited data of five years.


13/94

Equity Analysis

CHAPTER II - REVIEW OF LITERATURE


14/94

Equity Analysis

SECURITY ANALYSIS

Investment success is pretty much a matter of careful selection and timing of stock

purchases coupled with perfect matching to an individuals risk tolerance. In order to carry

out selection, timing and matching actions an investor must conduct deep security

analysis.

Investors purchase equity shares with two basic objectives;

1. To make capital profits by selling shares at higher prices.

2. To earn dividend income.

These two factors are affected by a host of factors. An investor has to carefully

understand and analyze all these factors. There are basically two approaches to study

security prices and valuation i.e. fundamental analysis and technical analysis

The value of common stock is determined in large measure by the performance of the

firm that issued the stock. If the company is healthy and can demonstrate strength and

growth, the value of the stock will increase. When values increase then prices follow and

returns on an investment will increase. However, just to keep the savvy investor on their

toes, the mix is complicated by the risk factors involved. Fundamental analysis examines

all the dimensions of risk exposure and the probabilities of return, and merges them with

broader economic analysis and greater industry analysis to formulate the valuation of a

stock.


15/94

Equity Analysis

FUNDAMENTAL ANALYSIS

Fundamental analysis is a method of forecasting the future price movements of a

financial instrument based on economic, political, environmental and other relevant

factors and statistics that will affect the basic supply and demand of whatever underlies

the financial instrument. It is the study of economic, industry and company conditions

in an effort to determine the value of a companys stock. Fundamental analysis

typically focuses on key statistics in companys financial statements to determine if the

stock price is correctly valued. The term simply refers to the analysis of the economic

well-being of a financial entity as opposed to only its price movements.

Fundamental analysis is the cornerstone of investing. The basic philosophy underlying

the fundamental analysis is that if an investor invests re.1 in buying a share of a

company, how much expected returns from this investment he has.

The fundamental analysis is to appraise the intrinsic value of a security. It insists that

no one should purchase or sell a share on the basis of tips and rumors. The fundamental

approach calls upon the investors to make his buy or sell decision on the basis of a

detailed analysis of the information about the company, about the industry, and the

economy. It is also known as top-down approach. This approach attempts to study the

economic scenario, industry position and the company expectations and is also known

as economic-industry-company approach (EIC approach).


16/94

Equity Analysis

Thus the EIC approach involves three steps:

1. Economic analysis

2. Industry analysis

3. Company analysis

COMPANY

ANALYSIS

INDUSTRY

ANALYSIS

ECONOMIC

ANALYSIS


17/94

Equity Analysis

1. ECONOMIC ANALYSIS

The level of economic activity has an impact on investment in many ways. If the

economy grows rapidly, the industry can also be expected to show rapid growth and

vice versa. When the level of economic activity is low, stock prices are low, and when

the level of economic activity is high, stock prices are high reflecting the prosperous

outlook for sales and profits of the firms. The analysis of macro economic environment

is essential to understand the behavior of the stock prices.

The commonly analyzed macro economic factors are as follows:

Gross Domestic Product (GDP): GDP indicates the rate of growth of the economy. It

represents the aggregate value of the goods and services produced in the economy. It

consists of personal consumption expenditure, gross private domestic investment and

government expenditure on goods and services and net exports of goods and services.

The growth rate of economy points out the prospects for the industrial sector and the

return investors can expect from investment in shares. The higher growth rate is more

favorable to the stock market.

Savings and investment: It is obvious that growth requires investment which in turn

requires substantial amount of domestic savings. Stock market is a channel through

which the savings are made available to the corporate bodies. Savings are distributed

over various assets like equity shares, deposits, mutual funds, real estate and bullion.

The savings and investment patterns of the public affectthe stock to a great extent.


18/94

Equity Analysis

Inflation: Along with the growth of GDP, if the inflation rate also increases, then the

real growth would be very little. The effects of inflation on capital markets are

numerous. An increase in the expected rate of inflation is expected to cause a nominal

rise in interest rates. Also, it increases uncertainty of future business and investment

decisions. As inflation increases, it results in extra costs to businesses, thereby

squeezing their profit margins and leading to real declines in profitability.

Interest rates: The interest rate affects the cost of financing to the firms. A decrease in

interest rate implies lower cost of finance for firms and more profitability. More money

is available at a lower interest rate for the brokers who are doing business with

borrowed money. Availability of cheap funds encourages speculation and rise in the

price of shares.

Tax structure: Every year in March, the business community eagerly awaits the

Governments announcement regarding the tax policy. Concessions and incentives

given to a certain industry encourage investment in that particular industry. Tax reliefs

given to savings encourage savings. The type of tax exemption has impact on the

profitability of the industries.

Infrastructure facilities: Infrastructure facilities are essential for the growth of

industrial and agricultural sector. A wide network of communication system is a must

for the growth of the economy. Regular supply of power without any power cut would


19/94

Equity Analysis

boost the production. Banking and financial sectors also should be sound enough to

provide adequate support to the industry. Good infrastructure facilities affect the stock

market favorably.

2.INDUSTRY ANALYSIS

An industry is a group of firms that have similar technological structure of production

and produce similar products and Industry analysis is a type of business research that

focuses on the status of an industry or an industrial sector (a broad industry

classification, like "manufacturing"). Irrespective of specific economic situations, some industries might

be expected to perform better, and share prices in these industries may not decline as much as in other industries.

This identification of economic and industry specific factors influencing share prices will help investors to identify

the shares that fit individual expectations

Industry Life Cycle: The industry life cycle theory is generally attributed to Julius

Grodensky. The life cycle of the industry is separated into four well defined stages.

y Pioneering stage: The prospective demand for the product is promising in this

stage and the technology of the product is low. The demand for the product

attracts many producers to produce the particular product. There would be

severe competition and only fittest companies survive this stage. The producers

try to develop brand name, differentiate the product and create a product image.

In this situation, it is difficult to select companies for investment because the

survival rate is unknown.


20/94

Equity Analysis

y Rapid growth stage: This stage starts with the appearance of surviving firms

from the pioneering stage. The companies that have withstood the competition

grow strongly in market share and financial performance. The technology of the

production would have improved resulting in low cost of production and good

quality products. The companies have stable growth rate in this stage and they

declare dividend to the shareholders. It is advisable to invest in the shares of

these companies.

y Maturity and stabilization stage: the growth rate tends to moderate and the rate

of growth would be more or less equal to the industrial growth rate or the gross

domestic product growth rate. Symptoms of obsolescence may appear in the

technology. To keep going, technological innovations in the production process

and products should be introduced. The investors have to closely monitor the

events that take place in the maturity stage of the industry.

y Decline stage: demand for the particular product and the earnings of the

companies in the industry decline. It is better to avoid investing in the shares of

the low growth industry even in the boom period. Investment in the shares of

these types of companies leads to erosion of capital.

Growth of the industry: The historical performance of the industry in terms of growth

and profitability should be analyzed. The past variability in return and growth in

reaction to macro economic factors provide an insight into the future.


21/94

Equity Analysis

Nature of competition:Nature of competition is an essential factor that determines the

demand for the particular product, its profitability and the price of the concerned

company scrips. The companies' ability to withstand the local as well as the

multinational competition counts much. If too many firms are present in the organized

sector, the competition would be severe. The competition would lead to a decline in the

price of the product. The investor before investing in the scrip of a company should

analyze the market share of the particular company's product and should compare it

with the top five companies.

SWOT analysis: SWOT analysis represents the strength, weakness, opportunity and

threat for an industry. Every investor should carry out a SWOT analysis for the chosen

industry. Take for instance, increase in demand for the industrys product becomes its

strength, presence of numerous players in the market, i.e. competition becomes the

threat to a particular company. The progress in R & D in that industry is an opportunity

and entry of multinationals in the industry is a threat. In this way the factors are to be

arranged and analyzed.


22/94

Equity Analysis

3. COMPANY ANALYSIS

In the company analysis the investor assimilates the several bits of information related

to the company and evaluates the present and future values of the stock. The risk and

return associated with the purchase of the stock is analyzed to take better investment

decisions. The present and future values are affected by a number of factors.

Competitive edge of the company: Major industries in India are composed of

hundreds of individual companies. Though the number of companies is large, only few

companies control the major market share. The competitiveness of the company can be

studied with the help of the following;

y Market share: The market share of the annual sales helps to determine a

companys relative competitive position within the industry. If the market share

is high, the company would be able to meet the competition successfully. The

companies in the market should be compared with like product groups

otherwise, the results will be misleading.

y Growth of sales: The rapid growth in sales would keep the shareholder in a

better position than one with stagnant growth rate. Investors generally prefer

size and growth in sales because the larger size companies may be able to

withstand the business cycle rather than the company of smaller size.

y Stability of sales: If a firm has stable sales revenue, it will have more stable

earnings. The fall in the market share indicates the declining trend of company,

even if the sales are stable. Hence the stability of sales should be compared with

its market share and the competitors market share.


23/94

Equity Analysis

Earnings of the company: Sales alone do not increase the earnings but the costs and

expenses of the company also influence the earnings. Further, earnings do not always

increase with increase in sales. The companys sales might have increased but its

earnings per share may decline due to rise in costs. Hence, the investor should not only

depend on the sales, but should analyze the earnings of the company.

Financial analysis: The best source of financial information about a company is its

own financial statements. This is a primary source of information for evaluating the

investment prospects in the particular companys stock. Financial statement analysis is

the study of a companys financial statement from various viewpoints. The statement

gives the historical and current information about the companys operations. Historical

financial statement helps to predict the future and the current information aids to

analyze the present status of the company. The two main statements used in the analysis

are Balance sheet and Profit and Loss Account.

The balance sheet is one of the financial statements that companies prepare every year

for their shareholders. It is like a financial snapshot, the company's financial situation at

a moment in time. It is prepared at the year end, listing the company's current assets and

liabilities. It helps to study the capital structure of the company. It is better for the

investor to avoid a company with excessive debt component in its capital structure.

From the balance sheet, liquidity position of the company can also be assessed with the

information on current assets and current liabilities.


24/94

Equity Analysis

Ratio analysis: Ratio is a relationship between two figures expressed mathematically.

Financial ratios provide numerical relationship between two relevant financial data.

Financial ratios are calculated from the balance sheet and profit and loss account. The

relationship can be either expressed as a percent or as a quotient. Ratios summarize the

data for easy understanding, comparison and interpretations.

Ratios for investment purposes can be classified into profitability ratios, turnover ratios,

and leverage ratios. Profitability ratios are the most popular ratios since investors prefer

to measure the present profit performance and use this information to forecast the future

strength of the company. The most often used profitability ratios are return on assets,

price earnings multiplier, price to book value, price to cash flow, and price to sales,

dividend yield, return on equity, present value of cash flows, and profit margins.

a) Return on Assets (ROA)

ROA is computed as the product of the net profit margin and the total asset turnover

ratios.

ROA = (Net Profit/Total income) x (Total income/Total Assets)

This ratio indicates the firm's strategic success. Companies can have one of two

strategies: cost leadership, or product differentiation. ROA should be rising or keeping

pace with the company's competitors if the company is successfully pursuing either of

these strategies, but how ROA rises will depend on the company's strategy. ROA

should rise with a successful cost leadership strategy because the companys increasing

operating efficiency. An example is an increasing, total asset, turnover ratio as the


25/94

Equity Analysis

company expands into new markets, increasing its market share. The company may

achieve leadership by using its assets more efficiently. With a successful product

differentiation strategy, ROA will rise because of a rising profit margin.

b) Return on Investment (ROI)

ROI is the return on capital invested in business, i.e., if an investment Rs 1 crore in

men, machines, land and material is made to generate Rs. 25 lakhs of net profit, then

the ROI is 25%. The computation of return on investment is as follows:

Return on Investment (ROI) = (Net profit/Equity investments) x 100

As this ratio reveals how well the resources of a firm are being used, higher the ratio,

better are the results. The return on shareholders investment should be compared with

the return of other similar firms in the same industry. The inert-firm comparison of this

ratio determines whether the investments in the firm are attractive or not as the

investors would like to invest only where the return is higher.

c) Return on Equity

Return on equity measures how much an equity shareholder's investment is actually

earning. The return on equity tells the investor how much the invested rupee is earning

from the company. The higher the number, the better is the performance of the

company and suggests the usefulness of the projects the company has invested in.

The computation of return on equity is as follows:


26/94

Equity Analysis

Return on equity = (Net profit to owners/value of the specific owner's

Contribution to the business) x 100

The ratio is more meaningful to the equity shareholders who are invested to know

profits earned by the company and those profits which can be made available to pay

dividend to them.

d) Earnings per Share (EPS)

This ratio determines what the company is earning for every share. For many investors,

earnings are the most important tool. EPS is calculated by dividing the earnings (net

profit) by the total number of equity shares.

The computation of EPS is as follows:

Earnings per share = Net profit/Number of shares outstanding

The EPS is a good measure of profitability and when compared with EPS of similar

other companies, it gives a view of the comparative earnings or earnings power of a

firm. EPS calculated for a number of years indicates whether or not earning power of

the company has increased.

e) Dividend per Share (DPS)

The extent of payment of dividend to the shareholders is measured in the form of

dividend per share. The dividend per share gives the amount of cash flow from the

company to the owners and is calculated as follows:


27/94

Equity Analysis

Dividend per share = Total dividend payment / Number of shares outstanding

The payment of dividend can have several interpretations to the shareholder. The

distribution of dividend could be thought of as the distribution of excess

profits/abnormal profits by the company. On the other hand, it could also be negatively

interpreted as lack of investment opportunities. In all, dividend payout gives the extent

of inflows to the shareholders from the company.

f) Dividend Payout Ratio

From the profits of each company a cash flow called dividend is distributed among its

shareholders. This is the continuous stream of cash flow to the owners of shares, apart

from the price differentials (capital gains) in the market. The return to the shareholders,

in the form of dividend, out of the company's profit is measured through the payout

ratio. The payout ratio is computed as follows:

Payout Ratio = (Dividend per share / Earnings per share) * 100

The percentage of payout ratio can also be used to compute the percentage of retained

earnings. The profits available for distribution are either paid as dividends or retained

internally for business growth opportunities. Hence, when dividends are not declared,

the entire profit is ploughed back into the business for its future investments.

g) Dividend Yield


28/94

Equity Analysis

Dividend yield is computed by relating the dividend per share to the market price of the

share. The market place provides opportunities for the investor to buy the company's

share at any point of time. The price at which the share has been bought from the

market is the actual cost of the investment to the shareholder. The market price is to be

taken as the cum-dividend price. Dividend yield relates the actual cost to the cash flows

received from the company. The computation of dividend yield is as follows

Dividend yield = (Dividend per share / Market price per share) * 100

High dividend yield ratios are usually interpreted as undervalued companies in the

market. The market price is a measure of future discounted values, while the dividend

per share is the present return from the investment. Hence, a high dividend yield

implies that the share has been under priced in the market. On the other hand a low

dividend yield need not be interpreted as overvaluation of shares. A company that does

not pay out dividends will not have a dividend yield and the real measure of the market

price will be in terms of earnings per share and not through the dividend payments.

h) Price/Earnings Ratio (P/E)

The P/E multiplier or the price earnings ratio relates the current market price of the

share to the earnings per share. This is computed as follows:


29/94

Equity Analysis

Price/earnings ratio = Current market price / Earnings per share

This ratio is calculated to make an estimate of appreciation in the value of a share of a

company and is widely used by investors to decide whether or not to buy shares in a

particular company. Many investors prefer to buy the company's shares at a low P/E

ratio since the general interpretation is that the market is undervaluing the share and

there will be a correction in the market price sooner or later. A very high P/E ratio on

the other hand implies that the company's shares are overvalued and the investor can

benefit by selling the shares at this high market price.

i) Debt-to-Equity Ratio

Debt-Equity ratio is used to measure the claims of outsiders and the owners against the

firms assets.

Debt-to-equity ratio = Outsiders Funds / Shareholders Funds

The debt-equity ratio is calculated to measure the extent to which debt financing has

been used in a business. It indicates the proportionate claims of owners and the

outsiders against the firms assets. The purpose is to get an idea of the cushion available

to outsiders on the liquidation of the firm.


30/94

Equity Analysis

CHAPTER III - INDUSTRY PROFILE


31/94

Equity Analysis

FINANCIAL MARKETS

Finance is the pre-requisite for modern business and financial institutions play a vital

role in the economic system. It is through financial markets and institutions that the

financial system of an economy works. Financial markets refer to the institutional

arrangements for dealing in financial assets and credit instruments of different types

such as currency, cheques, bank deposits, bills, bonds, equities, etc.

Financial market is a broad term describing any marketplace where buyers and sellers

participate in the trade of assets such as equities, bonds, currencies and derivatives.

They are typically defined by having transparent pricing, basic regulations on trading,

costs and fees and market forces determining the prices of securities that trade.

Generally, there is no specific place or location to indicate a financial market. Wherever

a financial transaction takes place, it is deemed to have taken place in the financial

market. Hence financial markets are pervasive in nature since financial transactions are

themselves very pervasive throughout the economic system. For instance, issue of

equity shares, granting of loan by term lending institutions, deposit of money into a

bank, purchase of debentures, sale of shares and so on.

In a nutshell, financial markets are the credit markets catering to the various needs of

the individuals, firms and institutions by facilitating buying and selling of financial

assets, claims and services.


32/94

Equity Analysis

CLASSIFICATION OF FINANCIAL MARKETS

Financialmarkets

Organized

markets

Capital Markets

IndustrialSecurities

Market

Primary Market

Secondarymarket

GovernmentSecurities

Market

Long-term loan

market

Money Markets

Call MoneyMarket

Commercial Bill

Market

Treasury BillMarket

Unorganized

markets

Money Lenders,

Indigenuos

Bankers


33/94

Equity Analysis

Capital Market

The capital market is a market for financial assets which have a long or indefinite

maturity. Generally, it deals with long term securities which have a period of above one

year. In the widest sense, it consists of a series of channels through which the savings

of the community are made available for industrial and commercial enterprises and

public authorities. As a whole, capital market facilitates raising of capital.

The major functions performed by a capital market are:

1. Mobilization of financial resources on a nation-wide scale.

2. Securing the foreign capital and know-how to fill up deficit in the required

resources for economic growth at a faster rate.

3. Effective allocation of the mobilized financial resources, by directing the same

to projects yielding highest yield or to the projects needed to promote balanced

economic development.

Capital market consists of primary market and secondary market.

Primary market: Primary market is a market for new issues or new financial claims.

Hence it is also called as New Issue Market. It basically deals with those securities

which are issued to the public for the first time. The market, therefore, makes available

a new block of securities for public subscription. In other words, it deals with raising of

fresh capital by companies either for cash or for consideration other than cash. The best

example could be Initial Public Offering (IPO) where a firm offers shares to the public

for the first time.


34/94

Equity Analysis

Secondary market: Secondary market is a market where existing securities are traded.

In other words, securities which have already passed through new issue market are

traded in this market. Generally, such securities are quoted in the stock exchange and it

provides a continuous and regular market for buying and selling of securities. This

market consists of all stock exchanges recognized by the government of India.

Money Market

Money markets are the markets for short-term, highly liquid debt securities. Money

market securities are generally very safe investments which return relatively low

interest rate that is most appropriate for temporary cash storage or short term time

needs. It consists of a number of sub-markets which collectively constitute the money

market namely call money market, commercial bills market, acceptance market, and

Treasury bill market.

Derivatives Market

The derivatives market is the financial market forderivatives, financial instruments like

futures contracts or options, which are derived from other forms ofassets. A derivative

is a security whose price is dependent upon or derived from one or more underlying

assets. The derivative itself is merely a contract between two or more parties. Its value

is determined by fluctuations in the underlying asset. The most common underlying

assets include stocks, bonds, commodities, currencies, interest rates and market

indexes. The important financial derivatives are the following:


35/94

Equity Analysis

y Forwards: Forwards are the oldest of all the derivatives. A forward contract

refers to an agreement between two parties to exchange an agreed quantity of an

asset for cash at a certain date in future at a predetermined price specified in that

agreement. The promised asset may be currency, commodity, instrument etc.

y Futures: Future contract is very similar to a forward contract in all respects

excepting the fact that it is completely a standardized one. It is nothing but a

standardized forward contract which is legally enforceable and always traded on

an organized exchange.

y Options: A financial derivative that represents a contract sold by one party

(option writer) to another party (option holder). The contract offers the buyer

the right, but not the obligation, to buy (call) or sell (put) a security or other

financial asset at an agreed-upon price (the strike price) during a certain period

of time or on a specific date (exercise date). Call options give the option to buy

at certain price, so the buyer would want the stock to go up. Put options give the

option to sell at a certain price, so the buyer would want the stock to go down.

y Swaps: It is yet another exciting trading instrument. Infact, it is the combination

of forwards by two counterparties. It is arranged to reap the benefits arising

from the fluctuations in the market either currency market or interest rate

market or any other market for that matter.


36/94

Equity Analysis

Foreign Exchange Market

It is a market in which participants are able to buy, sell, exchange and speculate on

currencies. Foreign exchange markets are made up of banks, commercial companies,

central banks, investment management firms, hedge funds, and retail forex brokers and

investors. The forex market is considered to be the largest financial market in the

world. It is a worldwide decentralized over-the-counter financial market for the trading

of currencies. Because the currency markets are large and liquid, they are believed to be

the most efficient financial markets. It is important to realize that the foreign exchange

market is not a single exchange, but is constructed of a global network of computers

that connects participants from all parts of the world.

Commodities Market

It is a physical or virtual marketplace for buying, selling and trading raw or primary

products. For investors' purposes there are currently about 50 major commodity

markets worldwide that facilitate investment trade in nearly 100 primary

commodities. Commodities are split into two types: hard and soft commodities. Hard

commodities are typically natural resources that must be mined or extracted (gold,

rubber, oil, etc.), whereas soft commodities are agricultural products or livestock (corn,

wheat, coffee, sugar, soybeans, pork, etc.)


37/94

Equity Analysis

INDIAN FINANCIAL MARKETS

India Financial market is one of the oldest in the world and is considered to be the

fastest growing and best among all the markets of the emerging economies.

The history of Indian capital markets dates back 200 years toward the end of the 18th

century when India was under the rule of the East India Company. The development of

the capital market in India concentrated around Mumbai where no less than 200 to 250

securities brokers were active during the second half of the 19th century.

The financial market in India today is more developed than many other sectors because

it was organized long before with the securities exchanges of Mumbai, Ahmadabad and

Kolkata were established as early as the 19th century.

By the early 1960s the total number of securities exchanges in India rose to eight,

including Mumbai, Ahmadabad and Kolkata apart from Madras, Kanpur, Delhi,

Bangalore and Pune. Today there are 21 regional securities exchanges in India in

addition to the centralized NSE (National Stock Exchange) and OTCEI (Over the

Counter Exchange of India).

However the stock markets in India remained stagnant due to stringent controls on the

market economy that allowed only a handful of monopolies to dominate their

respective sectors. The corporate sector wasn't allowed into many industry segments,

which were dominated by the state controlled public sector resulting in stagnation of

the economy right up to the early 1990s. Thereafter when the Indian economy began

liberalizing and the controls began to be dismantled or eased out; the securities markets


38/94

Equity Analysis

witnessed a flurry of IPOs that were launched. This resulted in many new companies

across different industry segments to come up with newer products and services.

A remarkable feature of the growth of the Indian economy in recent years has been the

role played by its securities markets in assisting and fuelling that growth with money

rose within the economy. This was in marked contrast to the initial phase of growth in

many of the fast growing economies of East Asia that witnessed huge doses of FDI

(Foreign Direct Investment) spurring growth in their initial days of market decontrol.

During this phase in India much of the organized sector has been affected by high

growth as the financial markets played an all-inclusive role in sustaining financial

resource mobilization. Many PSUs (Public Sector Undertakings) that decided to offload

part of their equity were also helped by the well-organized securities market in India.

The launch of the NSE (National Stock Exchange) and the OTCEI (Over the Counter

Exchange of India) during the mid 1990s by the government of India was meant to

usher in an easier and more transparent form of trading in securities. The NSE was

conceived as the market for trading in the securities of companies from the large-scale

sector and the OTCEI for those from the small-scale sector. While the NSE has not just

done well to grow and evolve into the virtual backbone of capital markets in India the

OTCEI struggled and is yet to show any sign of growth and development. The

integration of IT into the capital market infrastructure has been particularly smooth in

India due to the countrys world class IT industry. This has pushed up the operational

efficiency of the Indian stock market to global standards and as a result the country has


39/94

Equity Analysis

been able to capitalize on its high growth and attract foreign capital like never before.

The regulating authority for capital markets in India is the SEBI (Securities and

Exchange Board of India). SEBI came into prominence in the 1990s after the capital

markets experienced some turbulence. It had to take drastic measures to plug many

loopholes that were exploited by certain market forces to advance their vested interests.

After this initial phase of struggle SEBI has grown in strength as the regulator of

Indias capital markets and as one of the countrys most important institutions.


40/94

Equity Analysis

FINANCIAL MARKET REGULATIONS

Regulations are an absolute necessity in the face of the growing importance of capital

markets throughout the world. The development of a market economy is dependent on

the development of the capital market. The regulation of a capital market involves the

regulation of securities; these rules enable the capital market to function more

efficiently and impartially.

A well regulated market has the potential to encourage additional investors to partake,

and contribute in, furthering the development of the economy. The chief capital market

regulatory authority is Securities and Exchange Board of India (SEBI).

SEBI is the regulator for the securities market in India. It is the apex body to develop

and regulate the stock market in India It was formed officially by the Government of

India in 1992 with SEBI Act 1992 being passed by the Indian Parliament. Chaired by C

B Bhave, SEBI is headquartered in the popular business district of Bandra-Kurla

complex in Mumbai, and has Northern, Eastern, Southern and Western regional offices

in New Delhi, Kolkata, Chennai and Ahmedabad. In place of Government Control, a

statutory and autonomous regulatory board with defined responsibilities, to cover both

development & regulation of the market, and independent powers has been set up.

The basic objectives of the Board were identified as:

y to protect the interests of investors in securities;

y to promote the development of Securities Market;

y to regulate the securities market and

y For matters connected therewith or incidental thereto.


41/94

Equity Analysis

Since its inception SEBI has been working targeting the securities and is attending to

the fulfillment of its objectives with commendable zeal and dexterity. The

improvements in the securities markets like capitalization requirements, margining,

establishment of clearing corporations etc. reduced the risk of credit and also reduced

the market.

SEBI has introduced the comprehensive regulatory measures, prescribed registration

norms, the eligibility criteria, the code of obligations and the code of conduct for

different intermediaries like, bankers to issue, merchant bankers, brokers and sub-

brokers, registrars, portfolio managers, credit rating agencies, underwriters and others.

It has framed bye-laws, risk identification and risk management systems for Clearing

houses of stock exchanges, surveillance system etc. which has made dealing in

securities both safe and transparent to the end investor.

Another significant event is the approval of trading in stock indices (like S&P CNX

Nifty & Sensex) in 2000. A market Index is a convenient and effective product because

of the following reasons:

y It acts as a barometer for market behavior;

y It is used to benchmark portfolio performance;

y It is used in derivative instruments like index futures and index options;

y It can be used for passive fund management as in case of Index Funds.


42/94

Equity Analysis

Two broad approaches of SEBI is to integrate the securities market at the national level,

and also to diversify the trading products, so that there is an increase in number of

traders including banks, financial institutions, insurance companies, mutual funds,

primary dealers etc. to transact through the Exchanges. In this context the introduction

of derivatives trading through Indian Stock Exchanges permitted by SEBI in 2000 AD

is a real landmark.

SEBI has enjoyed success as a regulator by pushing systemic reforms aggressively and

successively (e.g. the quick movement towards making the markets electronic and

paperless rolling settlement on T+2 bases). SEBI has been active in setting up the

regulations as required under law.

STOCK EXCHANGES IN INDIA

Stock Exchanges are an organized marketplace, either corporation or mutual

organization, where members of the organization gather to trade company stocks or

other securities. The members may act either as agents for their customers, or as

principals for their own accounts.

As per the Securities Contracts Regulation Act, 1956 a stock exchange is an

association, organization or body of individuals whether incorporated or not,

established for the purpose of assisting, regulating and controlling business in buying,

selling and dealing in securities.


43/94

Equity Analysis

Stock exchanges facilitate for the issue and redemption of securities and other financial

instruments including the payment of income and dividends. The record keeping is

central but trade is linked to such physical place because modern markets are

computerized. The trade on an exchange is only by members and stock broker do have

a seat on the exchange.

List of Stock Exchanges in India

Bombay Stock Exchange

National Stock Exchange

OTC Exchange of India

Regional Stock Exchanges

1. Ahmedabad

2. Bangalore

3. Bhubaneswar

4. Calcutta

5. Cochin

6. Coimbatore

7. Delhi

8. Guwahati

9. Hyderabad

10. Jaipur

11. Ludhiana

12. Madhya Pradesh

13. Madras

14. Magadh

15. Mangalore

16. Meerut

17. Pune

18. Saurashtra Kutch

19. Uttar Pradesh

20. Vadodara


44/94

Equity Analysis

BOMBAY STOCK EXCHANGE

A very common name for all traders in the stock market, BSE, stands for Bombay

Stock Exchange. It is the oldest market not only in the country, but also in Asia. In

the early days, BSE was known as "The Native Share & Stock Brokers Association."

It was established in the year 1875 and became the first stock exchange in the country

to be recognized by the government. In 1956, BSE obtained a permanent recognition

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

In the past and even now, it plays a pivotal role in the development of the country's

capital market. This is recognized worldwide and its index, SENSEX, is also tracked

worldwide. Earlier it was an Association of Persons (AOP), but now it is a

demutualised and corporatised entity incorporated under the provisions of the

Companies Act, 1956, pursuant to the BSE (Corporatisation and Demutualization)

Scheme, 2005 notified by the Securities and Exchange Board of India (SEBI).

BSE Vision

The vision of the Bombay Stock Exchange is to "Emerge as the premier Indian stock

exchange by establishing global benchmarks."


45/94

Equity Analysis

BSE Management

Bombay Stock Exchange is managed professionally by Board of Directors. It

comprises of eminent professionals, representatives of Trading Members and the

Managing Director. The Board is an inclusive one and is shaped to benefit from the

market intermediaries participation.

The Board exercises complete control and formulates larger policy issues. The day-

to-day operations of BSE are managed by the Managing Director and its school of

professional as a management team.

BSE Network

The Exchange reaches physically to 417 cities and towns in the country. The

framework of it has been designed to safeguard market integrity and to operate with

transparency. It provides an efficient market for the trading in equity, debt

instruments and derivatives. Its online trading system, popularly known as BOLT, is a

proprietary system and it is BS 7799-2-2002 certified. The BOLT network was

expanded, nationwide, in 1997. The surveillance and clearing & settlement functions

of the Exchange are ISO 9001:2000 certified.


46/94

Equity Analysis

BSE Facts

BSE as a brand is synonymous with capital markets in India. The BSE SENSEX is

the benchmark equity index that reflects the robustness of the economy and finance. It

was the

y First in India to introduce Equity Derivatives

y First in India to launch a Free Float Index

y First in India to launch US$ version of BSE Sensex

y First in India to launch Exchange Enabled Internet Trading Platform

y First in India to obtain ISO certification for Surveillance, Clearing &

Settlement

y 'BSE On-Line Trading System (BOLT) has been awarded the globally

recognized the Information Security Management System standard

BS7799-2:2002.

y First to have an exclusive facility for financial training

y Moved from Open Outcry to Electronic Trading within just 50 days

BSE with its long history of capital market development is fully

geared to continue its contributions to further the growth of the

securities markets of the country, thus helping India increases its

sphere of influence in international financial markets.


47/94

Equity Analysis

NATIONAL STOCK EXCHANGE OF INDIA LIMITED

The National Stock Exchange of India Limited has genesis in the report of the High

Powered Study Group on Establishment of New Stock Exchanges, which

recommended promotion of a National Stock Exchange by financial institutions (FIs)

to provide access to investors from all across the country on an equal footing. Based

on the recommendations, NSE was promoted by leading Financial Institutions at the

behest of the Government of India and was incorporated in November 1992 as a tax-

paying company unlike other stock Exchange in the country.

On its recognition as a stock exchange under the Securities Contracts (Regulation)

Act, 1956 in April 1993, NSE commenced operations in the Wholesale Debt Market

(WDM) segment in June 1994. The Capital Market (Equities) segment commenced

operations in November 1994 and operations in Derivatives segment commenced in

June 2000.

NSE GROUP

National Securities Clearing Corporation Ltd. (NSCCL)

It is a wholly owned subsidiary, which was incorporated in August 1995 and

commenced clearing operations in April 1996. It was formed to build confidence in

clearing and settlement of securities, to promote and maintain the short and consistent

settlement cycles, to provide a counter-party risk guarantee and to operate a tight risk

containment system.


48/94

Equity Analysis

NSE.IT Ltd.

It is also a wholly owned subsidiary of NSE and is its IT arm. This arm of the NSE is

uniquely positioned to provide products, services and solutions for the securities

industry. NSE.IT primarily focuses on in the area of trading, broker front-end and

back-office, clearing and settlement, web-based, insurance, etc. Along with this, it

also provides consultancy and implementation services in Data Warehousing,

Business Continuity Plans, Site Maintenance and Backups, Stratus Mainframe

Facility Management, Real Time Market Analysis & Financial News.

India Index Services & Products Ltd. (IISL)

It is a joint venture between NSE and CRISIL Ltd. to provide a variety of indices and

index related services and products for the Indian Capital markets. It was set up in

May 1998. IISL has a consulting and licensing agreement with the Standard and

Poor's (S&P), world's leading provider of investible equity indices, for co-branding

equity indices.

National Securities Depository Ltd. (NSDL)

NSE joined hands with IDBI and UTI to promote dematerialization of securities. This

step was taken to solve problems related to trading in physical securities. It

commenced operations in November 1996.

NSE Facts


49/94

Equity Analysis

y It uses satellite communication technology to energize participation from

around 400 cities in India.

y NSE can handle up to 1 million trades per day.

y It is one of the largest interactive VSAT based stock exchanges in the world.

y The NSE- network is the largest private wide area network in India and the

first extended C- Band VSAT network in the world.

y Presently more than 9000 users are trading on the real time-online NSE

application.

Today, NSE is one of the largest exchanges in the world and still forging ahead. At

NSE, we are constantly working towards creating a more transparent, vibrant and

innovative capital market.

OVER THE COUNTER EXCHANGE OF INDIA

OTCEI was incorporated in 1990 as a section 25 company under the companies Act

1956 and is recognized as a stock exchange under section 4 of the securities Contracts

Regulation Act, 1956. The exchange was set up to aid enterprising promotes in

raising finance for new projects in a cost effective manner and to provide investors

with a transparent and efficient mode of trading Modeled along the lines of the

NASDAQ market of USA, OTCEI introduced many novel concepts to the Indian

capital markets such as screen-based nationwide trading, sponsorship of companies,

market making and scrip less trading. As a measure of success of these efforts, the

Exchange today has 115 listings and has assisted in providing capital for enterprises


50/94

Equity Analysis

that have gone on to build successful brands for themselves like VIP Advanta, Sonora

Tiles & Brilliant mineral water, etc.

Need for OTCEI:

Studies by NASSCOM, software technology parks of India, the venture capitals funds

and the governments IT tasks Force, as well as rising interest in IT, Pharmaceutical,

Biotechnology and Media shares have repeatedly emphasized the need for a national

stock market for innovation and high growth companies.

Innovative companies are critical to developing economics like India, which is

undergoing a major technological revolution. With their abilities to generate

employment opportunities and contribute to the economy, it is essential that these

companies not only expand existing operations but also set up new units. The key

issue for these companies is raising timely, cost effective and long term capital to

sustain their operations and enhance growth. Such companies, particularly those that

have been in operation for a short time, are unable to raise funds through the

traditional financing methods, because they have not yet been evaluated by the

financial world.


51/94

Equity Analysis

CHAPTER IV - COMPANY PROFILE


52/94

Equity Analysis

INDIA INFOLINE LIMITED

India Infoline is a one-stop financial services shop, most respected for quality of its

information, personalized service and cutting-edge technology.

Vision

Our vision is to be the most respected company in the financial services space.

India Infoline Group

The India Infoline group, comprising the holding company, India Infoline Limited

and its wholly-owned subsidiaries, include the entire financial services space with

offerings ranging from Equity research, Equities and derivatives trading,

Commodities trading, Portfolio Management Services, Mutual Funds, Life Insurance,

Fixed deposits, GoI bonds and other small savings instruments to loan products and

Investment banking.

India Infoline also owns and manages the websites www.indiainfoline.com and

www.5paisa.com. The company has a network of over 2100 business locations

(branches and sub-brokers) spread across more than 450 cities and towns. The group

caters to approximately a million customers.

Founded in 1995 by Mr. Nirmal Jain (Chairman and Managing Director) as an

independent business research and information provider, the company gradually

evolved into a one-stop financial services solutions provider.


53/94

Equity Analysis

India Infoline received registration for a housing finance company from the National

Housing Bank and received the Fastest growing Equity Broking House - Large

firms in India by Dun & Bradstreet in 2009. It also received the Insurance broking

license from IRDA; received the venture capital license; received in principle

approval to sponsor a mutual fund; received Best broker- India award from Finance

Asia; Most Improved Brokerage- India award from Asia money.

COMPANY STRUCTURE

India Infoline Limited is listed on both the leading stock exchanges in India, viz. the

Stock Exchange, Mumbai (BSE) and the National Stock Exchange (NSE) and is also

a member of both the exchanges. It is engaged in the businesses of Equities broking,

Wealth Advisory Services and Portfolio Management Services. It offers broking

services in the Cash and Derivatives segments of the NSE as well as the Cash

segment of the BSE. It is registered with NSDL as well as CDSL as a depository

participant, providing a one-stop solution for clients trading in the equities market. It

has recently launched its Investment banking and Institutional Broking business.

A SEBI authorized Portfolio Manager; it offers Portfolio Management Services to

clients. These services are offered to clients as different schemes, which are based on

differing investment strategies made to reflect the varied risk-return preferences of

clients.


54/94

Equity Analysis

India Infoline Media and Research Services Limited

The services represent a strong support that drives the broking, commodities, mutual

fund and portfolio management services businesses. It undertakes equities research

which is acknowledged by none other than Forbes as 'Best of the Web' and 'a must

read for investors in Asia'. India Infoline's research is available not just over the

internet but also on international wire services like Bloomberg (Code: IILL),

Thomson First Call and Internet Securities where India Infoline is amongst the most

read Indian brokers.

India Infoline Commodities Limited.

India Infoline Commodities Pvt Limited is engaged in the business of commodities

broking. Their experience in securities broking empowered them with the requisite


55/94

Equity Analysis

skills and technologies to allow them to offer commodities broking as a contra-

cyclical alternative to equities broking. It enjoys memberships with the MCX and

NCDEX, two leading Indian commodities exchanges, and recently acquired

membership of DGCX. It has a multi-channel delivery model, making it among the

select few to offer online as well as offline trading facilities.

India Infoline Marketing & Services

India Infoline Marketing and Services Limited is the holding company of India

Infoline Insurance Services Limited and India Infoline Insurance Brokers Limited.

y India Infoline Insurance Services Limited is a registered Corporate Agent with

the Insurance Regulatory and Development Authority (IRDA). It is the largest

Corporate Agent for ICICI Prudential Life Insurance Co Limited, which is

India's largest private Life Insurance Company. India Infoline was the first

corporate agent to get licensed by IRDA in early 2001.

y

India Infoline Insurance Brokers Limited India Infoline Insurance Brokers

Limited is a newly formed subsidiary which will carry out the business of

Insurance broking.

India Infoline Investment Services Limited

Consolidated shareholdings of all the subsidiary companies engaged in loans and

financing activities under one subsidiary. Recently, Orient Global, a Singapore-based

investment institution invested USD 76.7 million for a 22.5% stake in India Infoline

Investment Services. This will help focused expansion and capital raising in the said

subsidiaries for various lending businesses like loans against securities, SME


56/94

Equity Analysis

financing, distribution of retail loan products, consumer finance business and housing

finance business. India Infoline Investment Services Private Limited consists of the

following step-down subsidiaries.

y India Infoline Distribution Company Limited (distribution of retail loan

products)

y Moneyline Credit Limited (consumer finance)

y India Infoline Housing Finance Limited (housing finance)

IIFL (Asia) Private Limited

IIFL (Asia) Private Limited is wholly owned subsidiary which has been incorporated

in Singapore to pursue financial sector activities in other Asian markets. Further to

obtaining the necessary regulatory approvals, the company has been initially

capitalized at 1 million Singapore dollars.


57/94

Equity Analysis

IIFL MANAGEMENT

y THE MANAGEMENT TEAM

Mr. Nirmal Jain, Chairman & Managing Director

Nirmal Jain, MBA (IIM, Ahmadabad) and a Chartered and Cost Accountant, founded

Indias leading financial services company India Infoline Ltd. in 1995,

providing globally acclaimed financial services in equities and

commodities broking, life insurance and mutual funds distribution, among others.

Mr. R Venkataraman, Executive Director

R Venkataraman, co-promoter and Executive Director of India

Infoline Ltd., is a B. Tech (Electronics and Electrical Communications

Engineering, IIT Kharagpur) and an MBA (IIM Bangalore). He joined

the India Infoline board in July 1999.

y THE BOARD OF DIRECTORS

Apart from Nirmal Jain and R Venkataraman, the Board of Directors of India Infoline

Ltd. comprises:

Mr. Nilesh Vikamsey, Independent Director

Mr. Vikamsey, Board member since February 2005 - a practicing Chartered

Accountant and partner (Khimji Kunverji & Co., Chartered

Accountants), a member firm of HLB International, headed the audit


58/94

Equity Analysis

department till 1990 and thereafter also handles financial services, consultancy,

investigations, mergers and acquisitions, valuations etc

Mr Sat Pal Khattar, Non Executive Director

Mr Sat Pal Khattar, - Board member since April 2001 - Presidential Council of

Minority Rights member, Chairman of the Board of Trustee of

Singapore Business Federation, is also a life trustee of SINDA, a non

profit body, helping the under-privileged Indians in Singapore. He joined the India

Infoline board in April 2001.

Mr Kranti Sinha, Independent Director

Mr. Kranti Sinha Board member since January 2005 completed

his masters from the Agra University and started his career as a Class I

officer with Life Insurance Corporation of India.

Mr Arun K. Purvar, Independent Director

Mr. A.K. Purvar Board member since March 2008 completed his

Masters degree in commerce from Allahabad University in 1966 and a

diploma in Business Administration in 1967.


59/94

Equity Analysis

PRODUCTS & SERVICES

Equities

India Infoline provided the prospect of researched investing to its clients, which was

hitherto restricted only to the institutions. Research for the retail investor did not exist

prior to India Infoline. India Infoline leveraged technology to bring the convenience

of trading to the investors location of preference (residence or office) through

computerized access. India Infoline made it possible for clients to view transaction

costs and ledger updates in real time. The Company is among the few financial

intermediaries in India to offer a complement of online and offline broking. The

Companies network of branches also allows customers to place orders on phone or

visit our branches for trading.

Commodities

India Infolines extension into commodities trading reconciles its strategic intent to

emerge as a one stop solutions financial intermediary. Its experience in securities

broking has empowered it with requisite skills and technologies. The Companies

commodities business provides a contra-cyclical alternative to equities broking. The

Company was among the first to offer the facility of commodities trading in Indias

young commodities market (the MCX commenced operations in 2003). Average

monthly turnover on the commodity exchanges increased from Rs 0.34 bn to Rs

20.02 bn.


60/94

Equity Analysis

Insurance

An entry into this segment helped complete the client's product basket; concurrently,

it graduated the Company into a one stop retail financial solutions provider. To ensure

maximum reach to customers across India, it has employed a multi pronged approach

and reaches out to customers via our Network, Direct and Affiliate channels. India

Infoline was the first corporate in India to get the agency license in early 2001.

Invest Online

India Infoline has made investing in Mutual funds and primary market so effortless.

Only registration is needed. No paperwork no queues and No registration charges.

India Infoline offers a host of mutual fund choices under one roof, backed by in-depth

research and advice from research house and tools configured as investor friendly.

Wealth Management

The key to achieving a successful Investment Portfolio is to have a carefully planned

financial strategy based on a thorough understanding of the client's investment needs

and risk appetite. The IIFL Private Wealth Management Team of financial experts

will recommend an appropriate financial strategy to effectively meet customers

investment requirements.


61/94

Equity Analysis

Asset Management

India Infoline is a leading pan-India mutual fund distribution house associated with

leading asset management companies. It operates primarily in the retail segment

leveraging its existing distribution network to reach prospective clients. It has

received the in-principle approval to set up a mutual fund.

Portfolio Management

IIFL Portfolio Management Service is a product wherein an equity investment

portfolio is created to suit the investment objectives of a client. India Infoline invests

the clients resources into stocks from different sectors, depending on clients risk-

return profile. This service is particularly advisable for investors who cannot afford to

give time or don't have that expertise for day-to-day management of their equity

portfolio.

Newsletters

As a subscriber to the Daily Market Strategy, clients get research reports of India

Infoline research team on a priority basis. The Indiainfoline Weekly Newsletter is the

flashback for the week gone by. A weekly outlook coupled with the best of the web

stories from Indiainfoline and links to important investment ideas, Leader Speak and

features is delivered in the clients inbox every Friday evening.


62/94

Equity Analysis

CHAPTER V

DATA ANALYSIS & INTERPRETATIONS


63/94

Equity Analysis

ANALYSIS OF AUTOMOBILE INDUSTRY

Over a period of more than two decades the Indian Automobile industry has been

driving its own growth through phases. With comparatively higher rate of economic

growth rate index against that of great global powers, India has become a hub of

domestic and exports business. The automobile sector has been contributing its share

to the shining economic performance of India in the recent years.

To understand this industry for the purpose of investment we need to analyze it by the

following approach:

Fundamental Analysis (E.I.C Approach)

a. Economy analysis

b. Industry analysis

c. Company analysis

Fundamental Analysis

Fundamental analysis is the study of economic, industry and company conditions in

an effort to determine the value of a company s stock. Fundamental analysis typically

focuses on key statistics in company s financial statements to determine if the stock

price is correctly valued.

Most fundamental information focuses on economic, industry and company statistics.

The typical approach to analyzing a company involves three basic steps:


64/94

Equity Analysis

1. Determine the condition of the general economy.

2. Determine the condition of the industry.

3. Determine the condition of the company.

1. ECONOMY ANALYSIS

Economic analysis is the analysis of forces operating the overall economy a country.

Economic analysis is a process whereby strengths and weaknesses of an economy are

analyzed. Economic analysis is important in order to understand exact condition of an

economy.

GDP and Automobile Industry

In absolute terms, India is 16th in the world in

terms of nominal factory output. The service

sector is growing rapidly in the past few years.

This is the pie- chart showing contributions of

different sectors in Indian economy.


65/94

Equity Analysis

Today, automobile sector in India is one of the key sectors of the economy in terms of

the employment. Directly and indirectly it employs more than 10 million people and

if we add the number of people employed in the auto-component and auto ancillary

industry then the number goes even higher.

As the world economy slipped into recession hitting the demand hard and the banking

sector takes conservative approach towards lending to corporate sector, the GDP

growth has downgraded it to 7.1 per cent for 2008-09 and it has increased to 8.6% in

2010 by overcoming the setbacks of recession.

Recession

Auto industry in India had been hit hard by ongoing global financial recession. But it

is in a good shape now. Much of this optimism resulted from renewed interest being

shown in India auto industry by reputed overseas car makers. Nissan Motors which is

a well known Japanese car making company regarded India automobile market as a

global car manufacturing hub for future and invested huge amount in our market.

There are some other automobile companies of world who have shown interest in

India auto market. Major names among these are General Motors, Skoda Auto and

Mercedes-Benz. These companies have major plans lined up for India auto industry.

These are few signs of the revolutionized auto industry after recession.


66/94

Equity Analysis

Inflation

The rise in inflation will have adverse impact on the industry that will not only see

interest rates getting further hardened but also a drop in demand due to the squeeze in

purchasing power. The effect of inflation has affected every sector which is related to

car manufacturing and production. The increase in the price of fuel and the steel due

to inflation has led to a slower growth rate of the car industry in India.

Foreign Direct Investment

The automobile sector in the Indian industry is one of the high performing sectors of

the Indian economy. This has contributed largely in making India a prime destination

for many international players in the automobile industry who wish to set up their

businesses in India. Automatic approval for foreign equity investment up to 100 per

cent of manufacture of automobiles and component is permitted.

Exports

Despite recession, the Indian automobile market continues to perform better than

most of the other industries in the economy in coming future; more and more MNCs

coming in India to setup their ventures which clearly shows the scope of expansion.

During April-January 2010, overall automobile exports registered a growth rate of

13.24 percent.


67/94

Equity Analysis

2. INDUSTRY ANALYSIS (AUTOMOBILE)

The automobile industry in India is the ninth largest in the world with an annual

production of over 2.3 million units in 2008. In 2009, India emerged as Asia's fourth

largest exporter of automobiles, behind Japan, South Korea and Thailand. The

Automobile Industry is one of the fastest growing sectors in India. The increase in the

demand for cars, and other vehicles, powered by the increase in the income is the

primary growth driver of the automobile industry in India. In 2009, estimated rate of

growth of India Auto industry is going to be 9% .The Indian automobile sector is far

from being saturated, leaving ample opportunity for volume growth.

Segmentation of Automobile Industry

The automobile industry comprises of Heavy

vehicles (trucks, buses, tempos, tractors);

passenger cars; Two-wheelers; Commercial

Vehicles; and Three-wheelers. Following is the

segmentation that how much each sector

comprises of whole Indian Automobile Industry.

Industry life cycle

The industrial life cycle is a term used for classifying industry life over time. Industry

life cycle classification generally groups industries into one of four stages: pioneer,

growth, maturity and decline.In the pioneer phase, the product has not been widely

accepted or adopted. Business strategies are developing, and there is high risk of


68/94

Equity Analysis

failure. However, successful companies can grow at extraordinary rates. The Indian

automobile sector has passed this stage quite successfully. The industry is growing

rapidly, often at an accelerating rate of sales and earnings growth. Indian Automotive

Industry is booming with agrowth rateof around 15 % annually. The growth rate of

the automobile industry in India is greater than the GDP growth rate of the economy,

so the automobile sector can be very well be said to be in the growth phase.

Swot analysis:

A scan of the internal and external environment is an important part of the strategic

planning process. Environmental factors internal to the firm usually can be classified

as strengths (S) or weaknesses (W), and those external to the firm can be classified as

opportunities (O) or threats (T). Such an analysis of the strategic environment is

referred to as a SWOT analysis. SWOT analysis of the Indian automobile sector gives

the following points:

1. Strengthsy Large domestic market

y Sustainable labor cost advantage

y Competitive auto component vendor base

y Government incentives for manufacturing plants

y Strong engineering skills in design etc

2 . Weaknesses

y Low labor productivity


69/94

Equity Analysis

y High interest costs and high overheads make the production uncompetitive

y Various forms of taxes push up the cost of production

y Low investment in Research and Development

y Infrastructure bottleneck

3. Opportunities

y Increasing challenges in consumer demands, technology development, and

globalization.

y Heavy thrust on mining and construction activity

y Increase in the income level

y Cut in excise duties

4. Threats

y Ignorance of Research & development

y Rising interest rates

y Cut throat competition

3. COMPANY ANALYSIS

The company analysis shows the long-term strenght of the company that what is the

financial position of the company in the market, where it stands among its

competitors and who are the key drivers of the company, what are the future plans of

the company, what are the policies of government towards the company and how the

stake of the company divested among different groups of people.


70/94

Equity Analysis

Here, I have taken three companies namely TATA Motors, Maruti Suzuki and

Mahindra and Mahindra for the purpose of fundamental analysis.

Tata Motors Limited is India's largest automobile company, with consolidated

revenues of Rs. 92,519 crores (USD 20 billion) in 2009-10. It is the leader in

commercial vehicles in each segment, and among the top three in passenger vehicles

with winning products in the compact, midsize car and utility vehicle segments. The

company is the world's fourth largest truck manufacturer, and the world's second

largest bus manufacturer.

Maruti Suzuki is a subsidiary of Suzuki Motor Corporation Japan. More than half the

numbers of cars sold in India wear Maruti Suzuki badge. They offer a full range of

cars from entry level Maruti 800 & Alto to stylish hatchback Ritz, A star, Swift,

Wagon R, Estillo and sedans Dzire, SX4 and Sports Utility Vehicle Grand Vitara.

Since inception, it has produced and sold over 7.5 million vehicles in India and

exported over 500,000 units to Europe and other countries. Its turnover for the fiscal

2008-09 stood at Rs. 203,583 Million & Profit after Tax at Rs. 12,187 Million.


71/94

Equity Analysis

The Mahindra Groups Automotive Sector is in the business of manufacturing and

marketing utility vehicles and light commercial vehicles, including three-wheelers. It

is the market leader in utility vehicles in India since inception, and currently accounts

for about half of Indias market for utility vehicles. The Automotive Sector continues

to be a leader in the utility vehicle segment with a diverse portfolio that includes mass

transport as well as new generation vehicles like Scorpio, Bolero and the recently

launched Xylo.


72/94

Equity Analysis

TATA MOTORS - Balance sheet

Balance Sheet of Tata

MotorsMar '05 Mar '06 Mar '07 Mar '08 Mar '09

Sources of funds

Total Share Capital 361.79 382.87 385.41 385.54 514.05

Equity Share Capital 361.79 382.87 385.41 385.54 514.05

Share Application Money 0.00 0.00 0.00 0.00 0.00

Reserves 3,749.60 5,127.81 6,458.39 7,428.45 11,855.15

Revaluation Reserves 0.00 26.39 25.95 25.51 25.07

Networth 4,111.39 5,537.07 6,869.75 7,839.50 12,394.27

Secured Loans 489.81 822.76 2,022.04 2,461.99 5,251.65

Unsecured Loans 2,005.61 2,114.08 1,987.10 3,818.53 7,913.91

Total Debt 2,495.42 2,936.84 4,009.14 6,280.52 13,165.56

Total Liabilities 6,606.81 8,473.91 10,878.89 14,120.02 25,559.83

Application of funds

Gross Block 6,611.95 7,971.55 8,775.80 10,830.83 13,905.17

Le

A project on equties

Documents

Transcript of A project on equties