Dhaval Chaning Role of Equity Market

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Prepared by

Barvadia Dhavalkumar M.

Submitted to

AES PGIBM

Ahmedabad

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It is my great pleasure that I had been given an opportunity to convey

thanks to all of them who have helped me at any place directly or

indirectly in this two months of practical learning experience.

I would like to take this opportunity of expressing my profound and

inevitable gratitude to my instructor at Karvy, Mr. Deven Chandarana

and Mr. Dhilan Bhatha, Branch manager for their boundless knowledge,

guidance and constant encouragement and all the employees of the

Rajkot branch for their immense cooperation during project work.

I would also like to thank all my colleagues, friends and family

members for their constant encouragement and support.

Special thanks to faculties of my college (AESPGIBM) and college

authorities, for giving me opportunity of pseudo-work experience before

my entry into the real corporate world.

Barvadia Dhavalkumar M.

AES PGIBM

Ahmedabad

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Stock exchanges are intricately inter-woven in the fabric of a nationseconomic life. Without a stock exchange, the saving of the community the sinews of economic progress and productive efficiency wouldremain underutilized.

The task of mobilization and allocation of savings could be attempted inthe old days by a much less specialized institution that the stockexchanges. But as business and industry expanded and the economyassumed more complex nature, the need for permanent financearose.

At present a large amount of money is invested by retail investors butthey dont have the time and specialized knowledge neither they havethe key information to understand the working of stock exchangebecause there are many factors which tend to effect the trends of stock

exchange, so firms like Karvy Consultants ltd. using their specializedknowledge and expertise help retail investors in investing their hardearned money and help earn profit on their investments.

At present Karvy Consultants provide services to about 300 corporatefirms and 16 million retail investors, due to this reason they are amongthe top 5 consulting firms operating in Indian equity market.

The stock exchanges are the exclusive centers for trading of securities.

At present, there are 23 operative stock exchanges in India. Most ofthe stock exchanges in the country are incorporated as Association ofpersons of section 25 under the Companies Act. These are organizedas mutuals and are considered beneficial under in terms of tax benefitsand matters of compliance.

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INDEX

Overview of Market 4

Introduction to Equity Market 13

Company Overview 27

Analytical Research of Equity Market. 36

Budget 2006-07 and the Stock Market.. 84

Market Survey 86

Bibliography 100

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Introduction

Stock exchanges are intricately inter-woven in the fabric of a nations economiclife. Without a stock exchange, the saving of the community the sinews ofeconomic progress and productive efficiency would remain underutilized.

The task of mobilization and allocation of savings could be attempted in the olddays by a much less specialized institution that the stock exchanges. But as

business and industry expanded and the economy assumed more complex nature,the need for permanent finance arose.

Entrepreneurs needed money for long term whereas investors demandedliquidity the facility to convert their investments into cash at any given time.The answer was a ready market for investment and this was how the stockexchange 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.

These securities include:

Shares, Scrips, Stocks, Bonds, Debentures stock or other marketablesecurities of a like nature in or of any incorporated company or otherbody corporate;

Government securities; and

Rights or interest in securities.

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Function

The stock exchanges in India have an important role to play in the building of areal shareholders democracy. Aim of the stock exchange authorities is to makeit as nearly perfect in the social and ethical sense as it is in the economic.

To protect the interests of the investing public, the authorities of the stockexchanges have been increasingly subjecting not only its members to a highdegree of discipline, but also those who use its facilities joint stock companiesand the other bodies in whose stocks and shares it deals.

There are stringent regulations to ensure that directors of joint stock companieskeep their shareholders fully informed of the affairs of the company.

In fact, some of the conditions that the stock exchange imposes upon companiesbefore their shares are listed are more rigorous and wholesome than the statutory

provisions such as those contained in the Companies Act.

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Organization Structure of the Secondary

Market

The stock exchanges are the exclusive centers for trading of securities. Atpresent, there are 23 operative stock exchanges I India. Most of the stockexchanges in the country are incorporated as Association of Persons of section25 companies under the Companies Act. These are organized as mutuals andare considered beneficial under in terms of ax benefits and matters of

compliance.

The trading members, who provide broking services also, own, control andmanage the stock exchanges. They elect their representatives to regulate thefunding of the exchange, including their own activities.

Until recently, the area of operation/jurisdiction of an exchange was specified atthe time of its recognition, which in effect precluded competition among theexchanges. These are called regional exchanges.

In order to provide an opportunity to investors to invest/ trade in the securities oflocal companies, it is mandatory for the companies, wishing to list theirsecurities, to list on the regional stock exchange nearest to their registered office

If they so wish, they can seek listing on other exchange as well. Monopoly of theexchanges within their allocated area, regional aspirations of the people andmandatory listing on the 24 exchanges (The Capital Stock Exchange, the latest in

the list, is yet to commence trading) in the country recognized over a period oftime to enable investors across the length and breath of the country to access themarket.

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The three newly set up exchanges over the counter Exchange of India(OTCEI), National Stock Exchange of India (NSE) and Inter-connected StockExchange of India (ICSE) were permitted since their inception to have nation-

wide trading. Listing on these exchanges was considered adequate compliancewith the requirement of listing on the regional exchange.

SEBI recently allowed all exchange to set up trading terminals anywhere incountry. Many of them have already expanded trading operations to different

parts of the country.

The trading platforms of a few exchanges are now accessible from manylocations. Further, with extensive use of information technology, the trading

platforms of a few exchanges are also accessible from anywhere through theinternet and mobile devices; this made a huge difference in a geographically vastcountry like India.

It significantly expanded the reach of the exchange to the homes of ordinaryinvestors and assuaged the aspirations of people to have exchanges in theirvicinity. The issuers/investors bow prefers to list/trade on exchanges providingnationwide network rather than on regional exchanges.

Consequently, territorial jurisdiction of an exchange, opportunity to invest insecurities of local companies through listing on regional exchanges, andconvenience of trading from a nearby exchange lost relevance.

Regulatory Framework

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The four main legislations governing the securities market are:

The SEBI Act, 1992 which establishes SEBI to protect investors anddevelop and regulate securities market;

The Companies Act, 1956, which sets out the code of conduct forthe corporate sector in relation to issue, allotment and transfer ofsecurities, and disclosures to be made in public issue;

The Securities Contracts (Regulation) Act, 1956, which provides for

regulation of transaction in securities through control over stockexchanges; and

The Depositories Act, 1996 which provides for electronicmaintenance and transfer of ownership of demat securities.

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Stock Markets & Financial Development in India

The role of stock markets as a source of economic growth has been widelydebated. It is well recognized that stock markets influence economic activitythrough the creation of liquidity. Liquid financial market was an importantenabling factor behind most of the early innovations that characterized the early

phases of the Industrial Revolution.

Recent advances in this area that stock markets remain an important conduit forenhancing developments. Many profitable investments necessitate a long term

commitment of capital, but investors might be reluctant to relinquish control oftheir savings for long periods. Liquid equity markets make investments less riskyand more attractive.

At the same time, companies enjoy permanent access to capital raised throughequity issues. By facilitating longer term and more profitable investments,liquid markets improve the allocation of capital and enhance the prospects forlong-term economic growth. Furthermore, by making investments relatively lessrisky, stock market liquidity can also lead to more savings and investments.

Over the years, the stock market in India has become strong. The number ofstock exchange increased from 8 in 1971 to 9 in 1980 to 21 in 1993 and furtherto 23 as at end march 2000.

The number of listed companies also moved up over the same period from 1,599to 2,265 and thereafter to 5,968 in 1990 and 9.871 in March, 2000. The marketcapitalization at BSE as a percentage of GDP at current market prices alsoimproved considerably from around 28 per cent in the early nineties to over 45

per cent at the end of the nineties, after witnessing a fall in certain interveningyears.

In 1998, India ranked twenty-first in the world in terms of market capitalization,nineteenth in terms of total value traded and second in terms of number of listeddomestic companies.

Though the Indian Stock market was founded more than a century ago, itremained quite dormant from independence in 1947 up to the early eighties,

with a capitalization ratio (market capitalization to GDP) of only 4 per cent.

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However, the patterns of demand for capitalization have undergone significant

changes during the last two decades and improved stock market activity. It maybe recalled that till the 90s institutional term landing acted as the primarysource of industrial finance in India. Financial institutions raised money throughgovernment guaranteed bonds at low rates of interests, in which, lent funds atconnectional rate of interest.This system provided corporate a cushion to absorb the relatively high risk ofimplementing new projects. This, in turn, discouraged the corporate to raise riskcapital from equity markets. On this account, the debt market segment, which issensitive to economic information also remained underdeveloped an illiquid.With onset of reform process in the 90s institutions has to raise resources atmarket related rates.

At the same time, the market has witnessed the introduction of several newcustomizes bonds at maturities tailored to suit investors need and with marketdriven coupons. Along with this development, a number of measures wereinitiated to reform the stock markets, which helped to improve the overallactivity in the stock market significantly. The turnover ratio increase from low of6.7 percent at the beginning of the 90s to reach 35.1 percent in 1999-2000,expecting certain years of relative in activity.

The Indian capital market has experienced a significant structural transformationover the years. It now compels well with those in developed markets. This wasdeemed necessary because of the gradual opening of the economy and the needto promote transparency in alternative sources of financing.

The regulatory and supervisory structure has being over valued with most of thepowers for regulating the capital market having been vested with securities andexchange board of India (SEBI). Apart from changes in the fundamental factorsinformation asymmetries and the associated constraints to efficient price

discovery remain at the heart of the volatile movements in stock prices.

The extant of stock price volatility is also influenced by the extant of integrationbetween the domestic and international capital markets as well as the regulatoryframe work governing the stock market.

In India, two most important factors which has a significant bearing on thebehaviour of the stock prices during the 90s were net investments by FIIs andtrends in the international stock exchanges, specially NASDAQ. Stock marketvolatility has tended to decline in recent years, with the co-efficient variation in

the BSE Sensex working out to 70.51 percent during 1995-96 to 1999-2000.

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Asset price bubbles entail significant risks in the form of higher inflation when

the bubble grows in size and in the form of financial instability and lost outputwhen the bubble bursts. Monetary and fiscal authorities, therefore, closely watchthe asset market developments. The positive wealth effect resulting from bullruns could impart a first round of risk to inflation.

If the bull run is prolonged, a second round of pressure on prices may result fromsubsequent upward wage revisions. Since financial assets are used as collaterals,asset booms may also give rise to large credit expansion. When domestic supplyfails to respond to the rising demand, it could give rise to higher external currentaccount deficit. The asset price cycle may follow.

When the asset prices collapse, firms may faced savior financing constraints as aresult of declining value of their collaterals, making lenders reluctant to land at ascale they do when asset prices are rising. Recognizing this alternativecomplexities emanating from asset market bubbles, information on asset pricesare being increasing used as a critical input for the conduct of the public policies.

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National Stock Exchange of India

Nation Stock Exchange was set up in 1993 to encourage the stock exchangereform through system modernization and competition. The reach of NSE has

been extended to twenty-one cities of which six cities do not have stockexchanges of their own.

By end 1996, NSE planned to extend its network cities across the country. It isan electronic screen based system where members have equal access and equalopportunity of trade irrespective of their location in different parts of the country

as they are connected through a satellite network.

The system helps to integrate the national market and provide a modem systemwith a complete audit trial of all transactions. Instantaneous matching of tradeseffectively prevents circular trading which has been one of the mechanisms of

pre-rigging. A members office located anywhere in the country is connected tothe central computer through very small aperture terminal (VASTs).

Today, all stock exchanges in India follow screen-based trading system. NSE

was the first stock exchange in the country to provide nation-wide order-driven,screen-based trading system. NSE model was gradually emulated by all otherstock exchanges in the country.

The trading system at NSE known as the National Exchange for Automatedtrading (NEAT) system is an anonymous order-driven system and operates on astrict price/time priority.

It enables members from across the country to trade simultaneously withenormous ease and efficiency. NEAT has lent considerable depth in the market

by enabling large numbers of members all over the country to tradesimultaneously and consequently narrowed the spreads significantly.

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INTRODUCTON TO EQUITY MARKET

The Capital Market

Indian Capital Market

The function of the financial market is to facilitate the transfer of funds from

surplus sectors (lenders) to deficit sectors (borrowers). Normally, householdshave excess of funds or savings, which they lend to borrowers in the corporateand public sectors whose requirement of funds far exceeds their savings. Afinancial market consists of investors and buyers, sellers, dealers and does notrefer to a physical location. Formal trading rules and communication networksfor originating and trading financial securities link the participants in the market.

As elsewhere in the world, the Indian financial system consists of: -

Money Market

Capital Market

The money market has two components.

Organized Market

Unorganized Market

The organized market is dominated by commercial banks. The other majorplayers are the Reserve Bank of India, Life Insurance Corporation, GeneralInsurance Corporation, Unit Trust of India, Securities Trading Corporation ofIndia, other primary dealers and the various mutual funds. Despite rapidexpansion of the organized money through a large network of bankinginstitutions that have extended their reach even to the rural areas, there is still anactive unorganized money market. It consists of indigenous bankers andmoneylenders.

In the unorganized market, there is no clear demarcation between short-term andlong-term finance and even between the purposes of finance. The unorganizedsector continues to provide finance for trade as well as personal consumption.The inability of poor to meet the creditworthiness requirements of the bankingsector makes them take recourse to the institutions that still remain outside theregulatory framework of banking. But this market is shrinking.

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INDIAN CAPITAL MARKET CLASSIFICATION

Indian capital market can be broadly classified, into the following:

I. MONEY MARKET:

It is a market, which deals in short term securities such as treasurybills, certificate of deposits etc.

II. DEBT MARKET:

It is a market dealing in debt securities such as debentures, bondsetc.

III. SECURITIES MARKET:

It is a market dealing in equity and equity linked securities. Thismarket comprises of primary market and second market.

The capital market provides the framework in which savings and investment takeplace. On the one hand it enables companies to raise resources from the investors

and on the other, it facilitates households to invest their saving in industrial orcommercial activities. Those saving instruments that can be bought or sold freelyare called securities. These include a range of products debt and equity thatcan be traded. The market where such trades take place is the securities marketor capital market and comprises the various exchanges, intermediaries and itsregulatory institutions.

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The capital market consists of these segments.

Primary Segments

Secondary Segments

The primary market deals with the issue of new instruments by the corporatesector such as equity shares, preference shares, and debentures. The public sectorconsisting of central and state governments, various public sector industrial units(PSUs) and statutory and other authorities such as state electricity boards and

port trusts also issue bonds. The primary market in which public issue ofsecurities is made through a prospectus is a retail market and there is no physicallocation. Direct mailing, advertisements and brokers reach the investors. Screen

based trading eliminates the need trading floor.

The Secondary Market Or Stock Exchange where existing securities aretraded is an auction arena. It may have a physical location like a stock exchangeor a trading floor. Since 1995, the trading in securities is screen-based. Screen-

based training eliminates need for a trading floor. And, since the last few yearsInternet-based trading has also made an appearance in India.

The Secondary Market consists of 23 stock exchanges including the NationalStock Exchange (NSE) and the Over-the Counter Exchange Of India (OTCEI)and also Bombay Stock Exchange (BSE). The secondary market provides atrading place or terminals for the securities already issued to be bought and sold.It also provides liquidity to the initial buyers in the primary market to re-offerthe securities to any interested buyer at any price, if mutually accepted. Anactive secondary market actually promotes the growth of the primary market andcapital formation because investors in the primary market are assured of acontinuous market and they can liquidate their investments in the stock

exchange.

There are several major players in the primary market. These include themerchant bankers, mutual funds, financial institutions, foreign institutionalinvestors (FIIs) and individual investors. R & T agents, Custodians andDepositories are capital market intermediaries that provide importantinfrastructure services for both primary and secondary markets.

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It is important to ensure a smooth working of this market, as it is the arena wherethe players in the economic growth of a country interact. Various laws have been

passed from time to time to meet this objective. The financial market in Indiawas highly segmented until the initiation of reforms in 1992-93 on account of avariety of regulations and administered prices include barriers to entry. Thereform process was initiated with establishment of securities and exchange ofIndia (SEBI).

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Customers(INVESTORS)

Intermediate(KARVY)

Companies(ICICI, RIL)


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CAPITAL MARKET INTERMEDIARIES

Merchant Bankers

Merchant Bankers means any person who is engaged in the business ofissue management either by making arrangements regarding selling,

buying or subscribing to securities or acting as manager, consultant,adviser or rendering corporate advisory service in relation to such issuemanagement.

Stock Brokers

Stockbrokers are regulated by SEBI {Stock brokers and Sub brokers}Regulations, 1992. The stock broker is a member of the stockexchange. Stock brokers are the intermediaries who are allowed totrade in securities on the exchange of which they are members. They buyand sell on their own behalf as well as on behalf of their clients.

Stock brokers expand their business by engaging sub broker. Sub brokers means any person not being a member of a stock exchange whoacts on behalf of a stock broker as an agent or otherwise for assisting theinvestors in buying, selling or dealing in securities through such stock

brokers.

Custodians

Custodians of securities mean any person who carries on or proposes to

carry on the business of providing custodial services. Custodian servicesin relation to securities means safekeeping of securities of a client.SHCIL, Citibank N.A., Deutsche Bank, Standard Chartered Bank, HSBCBank, IIT Corporate Services, HDFC Bank is among the few registeredcustodians in the country.

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R & T Agents Registrars to Issue

R & T agents are governed by SEBI. R & T agents are intermediaries

who provide services to shareholders on behalf of issuers. Issuers mayengage share transfer agents for maintaining Register of Members{ROM}, managing corporate benefits like distribution of dividends,interest on debentures, bonus shares, right forms etc. R & T agentsextend the depository connectivity services in the depositoryenvironment. More information of R & T agents is given in the businessactivities of Karvy.

Mutual Funds :

MFs are financial intermediaries, which collect the savings of smallinvestors and invest them in a diversified portfolio of securities tominimize risk and maximize returns for their participants. MFs havegiven a major filliped to the capital market both primary as well assecondary. The units of MFs, in turn are also tradable securities. Their

price is determined by their net asset value that is declared periodically.More information of mutual fund is given in the business activities ofKarvy.

Depositories :

The principle function of a depository is to dematerialize securities,custody and trading in electronic book entry form. A depositoryestablished under the Depositories Act can provide any service connectedwith recording of allotment of securities or transfer of ownership ofsecurities in the record of a depository. There are two depositories inIndia, which are given below.

NSDL

CDSL

Depository participants (DPs):

DPs are described as an agent of the depository. They are intermediariesbetween the depository and the investors. The relationship between theDPs and the depository is governed by an agreement made between thetwo under depositories Act.

A DP is responsible for maintaining the securities account of the investorand handling it in accordance with the investors instructions. A DP canoffer depository-related services only after obtaining a certificate ofregistration from SEBI.

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CAPITAL MARKET PROCESSES

There are various processes that issuers of securities follow or utilize in order totap the savers for raising resources. Some of the commonly used processes andmethods are described below: -

Private Placement:

Method of raising funds directly from investors without issue ofprospectus to the public is known as private placement. SEBI has

prescribed the eligibility criteria for companies and instruments aswell as procedures for private placement. Privately placed securitiescan also be listed if such placement fulfills all listing criteria.

Preferential Offer/Right Issue :

Companies can expand their capital b offering the new shares to theirexisting shareholders. Such offers for sale can be made to the existing

shareholders by giving them a preferential treatment in allocation orthe offer can be on a right basis i.e. the existing holders can get bythe way of their right, allotment of new share in certain proportion totheir earlier holding. If the shares are offered to a few of the existingshareholder instead to all shareholders or at a price different from the

price at which they are issued to all, such issues are calledpreferential allotments. Preferential allotment requires shareholdersapproval in the general body meeting. Further, all such offers havealso to e in compliance with criteria laid down by SEBI.

Internet broking :

With the Internet becoming ubiquitous, many institutions have set upsecurities trading agencies that provide online trading facilities totheir clients from their homes. This has been possible since all the

players in the securities market, viz. stockbrokers, stock exchange,clearing corporation, depositories, DPs etc are linked electronically.Thus information flows amongst them on a real time basis.

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Initial Public Offer (IPO) :

Companies, new as well as old, can offer their shares to the investorsin the primary market. This kind of tapping the saving is called anIPO or Initial Public Offering. SEBI guidelines regulate various

procedures involved in making a public issue but price of shares, sizeof the issue, timing of issue, listing of the issue is decided by theissuer. Issuers have to disclose all relevant facts and information inthe prospectus. Prospectus also has to disclose risk factors andmanagement perception about those risks.

Stock trading :

An investor in securities needs assurance that they can convert theirsecurity holding to cash to meet their cash requirements. The abilityto convert value of securities into cash is called liquidity. Theliquidity is provided by the stock exchange. Stock exchange is a

platform where buyers and sellers of securities will match their bidsand offer for securities and exchange securities with cash. The offersand bids are routed through members of the stock exchange,

popularly known as a broker. Stock exchange regulates the

transaction are conducted fairly and transparently with justice to bothbuyers and sellers.

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Equity Market

Equity represents an ownership position in a corporation. It is a residual claim, inthe sense that creditors and preference shareholders must be paid as scheduled

before equity shareholders can receive any payment. In bankruptcy equityholders are in principle entitled only to assets remaining after all prior claimantshave been satisfied.

Thus, risk is highest with equity shares and so must be its expected return. Wheninvestors buy equity shares, they receive certificates of ownership as proof of

their being part owners of the company. The certificate state the number of statesthe number of shares purchased and their par value.

A Brief History of the rise of the Equity trading in India

July 9, 1875 : Native brokers from the Native share and Stock BrokersAssociation in Bombay. Membership fee is Re. 1. The

association has 318 members.

1899 : Bombay stock Exchange acquires own premises.

1921 : Clearing houses are established for settlement of trades asvolumes increase.

1923 : K R P Shroff becomes the honorary president of BSE.

1925 : Bombay Securities Contract control Act (BSCCA) comesinto force.

Dec 1, 1939 : Stock Exchange building is acquired.

1943 : Forward trading banned till 1946. Only ready to deliver andhand delivery contracts permitted.

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1956 : Securities Contract Regulation Act drafted on the lines ofBSCCA comes into force.

1957 : BSE becomes the first exchange in India to get thepermanent recognition.

1964 : Unit Trust of India (UTI) is born.

Apr 1, 1966 : K R P Shroff retires and Phiroze J Jeejeebhoy becomeschairman.

Jun 29, 1969 : Morarji Desai bans forward trading.

1973 : Construction of P J Towers, named after late PhirozeJamshedji Jeejeevhoy, starts.

Jan, 2 1986 : BSE Sensesex launched as the first stock market indexwith1978-79 as the base year.

Nov 1987 : SBI Mutual Fund launches Magnum Regular IncomeScheme.

Apr 1988 : Securities and Exchange Board of India (SEBI) set up.

Jan 1992 : SEBI had given statutory powers.

May 1992 : Harshad Mehta securities scam breaks.

May 27, 1992 : Reliance is the first Indian company to make a GDR issue.

May 30, 1992 : The capital Issues Control Act, 1947 is replaced.

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Sep 1992 : Foreign Institutional Investors are permitted to invest in theIndian securities market.

Nov 1992 : Finance Minister Manmohan Singh inaugurates Over theCounter Exchange of India.

Oct 30, 1993 : The first private sector mutual fund, Kothari PioneerMutual fund, begins operations.

1993 : SEBI bans badla trading on BSE.

June 1994 : NSE commences operations in wholesale debt marketsegment.

Nov 1994 : The capital market segment of NSE goes o stream. Tradingis screen based for the first time in India.

March1995 : BSE online trading system (BOLT) replaces open outcrysystem.

Apr 1995 : The National Securities Cleaning Corporation Limited,Indias first clearing corporation is set up.

Oct 1995 : NSE overtakes BSE as the largest stock exchange in termsof volume of trading.

Apr 1996 : The National Securities Depository Limited is created.

Feb 1997 : SEBI releases norms for takeovers and acquisitions.

May 1997 : BSE introduces screen based trading.

Nov 1998 : SEBI recognized Interconnected Stock Exchange foundedby 15 regional stock exchanges. This exchange startsfunctioning in Feb., 1999

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Feb 1999 : Launch of automated lending and borrowing mechanism(ALBM) on NSE.

Mar 11, 1999 : Infosys Technologies is the first company to be listed onNASDAQ through a public offering of AmericanDepository Receipts.

Mar 22, 1999 : Central Depository Services (India) promoted by BSEoperations.

Sep 1999 : ICICI is the first India Company to be listed on the NewYork Stock Exchange (NYSE).

Oct 11, 1999 : For the first time in BSEs history, the Sensex closes abovethe 5,000 mark at 5,031.78.

Jan 2000 : BSE creates a Z category of scrips in addition to A, B1,and B2 comprising scrips that breached or failed to complywith the listing agreement.

Feb 2000 : Internet trading commences on NSE. On Feb 14, 2000, BSESensex hits all-time high of 6150. On Feb. 21, NSE records

peak market capitalization of Rs. 11, 94,282 crore.

Apr 10, 2000 : The Sensex is revamped to include Dr. Reddys Lab,Reliance Petroleum, Satyam Computers and Zee Telefilmsreplacing Indian Hotels, Tata Chemicals, Tata power, and

IDBI.

June 2000 : BSE and NSE introduce derivatives trading in the form ofindex futures.

July 9, 2000 : BSE turns 125.

Oct 19, 2000 : Wipro lists in the NYSE.

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Jan 22, 2001 : Borrowing and Lending Securities Scheme (BLESS)launched on BSE to promote securities lending and

borrowing activities.

Mar 2001 : Ketan Parekh scam breaks. SEBI suspends all the brokerdirectors of the BSE in relation to KP scam.

May 2001 : BSE advises compulsory demat for B2 scrips.

June 2001 : Index options start trading on NSE.

July 2001 : A SEBI directive bans carry forward. All major securitiesare moved to rolling settlement. Options of individualscrips start trading NSE.

Nov 9, 2001 : BSE and NSE launch futures in individual stocks.

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Changing Attitude towards Equity Ownership

With a broadening of the corporate sector, volume of business on the exchange sin India is likely to increase. The greater interest shown in recent years byinvestors is partly reflected in the over-subscription of new issues.

There has been great demand for growth issues. I.e. shares of companies withgrowth prospects. It has been observed that the wider the distribution ofcorporate securities among investors, the grater the reception accorded to new oradditional issues of capital; the more mobile the additional issues of capital; themore mobile the market, the grater the participation of investors and traders inthe raising of corporate capital.

The available data about the share ownership in the country show that there isgradual widening if ownership. The increasing participation in stock marketactivities by financial and non financial intermediaries, particularly ofinstitutions which are mainly investors has tended to create an orderly and stablemarket.

Further, the various growth-permitting factors including regulatory measures,progressive spread of literacy and dissemination of investment information alltend to contribute to a healthy growth of the stock market. In the security market,equity shares are the most romantic of all the form of securities.

Further more, equity analysis is more complicated than bond appraisal, andgreater skill is required in selecting equity than fixed income securities. Theattitude towards equity shares has varied from extreme pessimism to optimismfrom time to time.

It is equity shares that entice most investors, and some investors have beenknown to feel grater sympathy for their equity than their spouses. Presence ofmarket and business risks associated with such investments fails to keep theinvesting public and institution out of the market because of their confidence in

the ultimate success of the equity shares, i.e. towards overshadow risks. In factthe advantages of equity shares ownership are enough to lure the investors andchange their attitude towards securities.

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B. Company Overview.

1. Introduction to the Company

2. Company mission & core values

3. Organizational Hierarchy

4. Product & services

5. Benefits of the trading with the Karvy

6. SWOT Analysis

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ABOUT KARVY

Overview

KARVY, is a premier integrated financial services provider, and ranked amongthe top five in the country in all its business segments, services over 16 millionindividual investors in various capacities, and provides investor services to over300 corporate, comprising the who is who of Corporate India. KARVY coversthe entire spectrum of financial services such as Stock broking, DepositoryParticipants, Distribution of financial products - mutual funds, bonds, fixeddeposit, equities, Insurance Broking, Commodities Broking, Personal FinanceAdvisory Services, Merchant Banking & Corporate Finance, placement ofequity, IPOs, among others. Karvy has a professional management team and

ranks among the best in technology, operations and research of various industrialsegments.

Karvy Early Days

The birth of Karvy was on a modest scale in 1981. It began with the vision andenterprise of a small group of practicing Chartered Accountants who founded theflagship company Karvy Consultants Limited. It started with consulting andfinancial accounting automation, and carved inroads into the field of registry andshare accounting by 1985.Thus over the last 20 years Karvy has traveled thesuccess route, towards building a reputation as an integrated financial services

provider, offering a wide spectrum of services.

It values and vision of attaining total competence in our servicing has served asthe building block for creating a great financial enterprise, which stands solid onour fortresses of financial strength - our various companies.

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Board of Directors Karvy Consultants Ltd.

Mr. C Parthasarathy [email protected]

Mr. M Yugandhar [email protected]

Mr. M S Ramakrishna [email protected]

Mr. Prasad V Potluri [email protected]

Board of Directors Karvy Securities Ltd.




Mr. Ajay Kumar K [email protected]

William Samuel

Board of Directors Karvy Stock Broking Ltd.




Mr. Ajay Kumar K [email protected]

Kutumba Rao V [email protected]

Willaim Samuel

Shastry P S [email protected]

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Key Contacts at Head Office

Gopalakrishnamacharyulu [email protected]

Ram Kidambi [email protected]

Ganesh V [email protected]

Mahesh V [email protected]

Sridhar K [email protected]

Gopichand S [email protected]

Ramaswamy J [email protected]

Ramanujam P B [email protected]

Milestones Of Karvy

KARVY GROUPS

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Karvy Consultants Ltd.

Karvy Stock Broking Ltd.

Karvy Investors Services Ltd.

Karvy Computer share Pvt. Ltd.

Karvy Global Service Ltd.

Karvy Commodities Broking Pvt. Ltd.

Karvy Insurance Broking Pvt. Ltd.

Karvy Computershare Private Limited is a 50:50 joint venture of KarvyConsultants Limited and Computershare Limited, Australia. ComputereshareLimited is world's largest -- and only global -- share registry, and a leadingfinancial market services provider to the global securities industry. The jointventure with Computershare, reckoned as the largest registrar in the world,servicing over 60 million shareholder accounts for over 7,000 corporationsacross eleven countries spread across five continents. Karvy Computershare

Private Limited, today, is India's largest Registrar and Share Transfer Agentservicing over 300 corporate and mutual funds and 16 million investors.

KARVY ALLIANCES

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KARVY HOUSE46, Avenue 4, Street No.1,Banjara Hills,Hyderabad 500 034.Andhra Pradesh, India.Tel: 40-23312454Email: [email protected]

In Saurashtra there are five Branch Offices of Karvy: -

Rajkot

Jamnagar

Junagadh

Bhavnagar

Morbi

In Rajkot Karvy established itself on 21 June 2002. Karvy - Rajkot Branch isgiving all services to the investors very efficiently than other branches ofsaurashtra and it is located in the heart of the city.

Mr. Dhillen Bhata is the branch manager of Rajkot branch who is very

supportive person and very effective personality & handles Karvy-Rajkot Branchvery significantly.

Karvy-Rajkot Branch has to give report of daily businesses such as mutualfunds, fixed deposits, DP collection, equity IPO collection etc. to the Barodaregion.

REGISTERED OFFICE OF KARVY

ABOUT RAJKOT BRANCH

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Business Activities Of Karvy

FINANCIAL PRODUCTS DISTRIBUTION

REGISTARS & TRANSFER AGENTS

MUTUAL FUND SERVICES

STOCK BROKING

DEPOSITORY PATICIPANT SERVICES

PERSONAL ADVISORY SERVICES

INSURANCE

INCOME-TAX SERVICES

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During the project work with the organization, the strength, weaknesses,opportunities and the threats for the organization can be found out. The SWOTAnalysis of the organization can be presented as:

Strength:

A Corporate Body.

Wide product range to enable the clients to choose the bestalternative.

The best investment advice correct up to 70 -90 per cent throughdedicated research & reports.

Lower Brokerage and other charges with respect to other players.

Dedicated, co operative and loyal staff.

A positive image in the existing clients.

Weakness:

Time consuming process of account opening, resolving the problemsof the customers.

SWOT Analysis of the company

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Opportunities:

There is still large market to capture. Presently only 3% of the totalinvestors invest into the equity market. So the great opportunities forthe future.

Attract the new clients and retention of the old one with betterservices and comparatively low charges.

An indirect opportunity generated by the market from its bullishness.

Derivatives and Commodities market are growing. So, there is agreat potential in this field also. And to take this advantage companyis coming in this field.

Threats:

Decreasing rates of the brokerage in the market.

Increasing competition

Some changes in the existing products.

Indirect threat of instable stock market.

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C. ANALYTICAL RESEARCH

1. Introduction

2. Sectorial Analysis of the Indian Equity Market

3. Tables and figures

4. Budget and the stock market

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Introduction:

The report is mainly focused on the topic The Changing Role of the IndianEquity Market.

Approaches to Security analysis;

Fundamental Analysis

Technical Analysis

Random Walk Theory

And the Fundamental Analysis includes,

Economy Analysis

Industry Analysis

Company Analysis

Here, we will focus on the study of the Industry Analysis with the helps ofdifferent sectors. The different sectors are having different performance in thegrowth of the economy. The contribution of each sector may be on the basis ofthe growth of the particular sector.

So, to know about the equity market with respect to the Indian economy weshould go for the analysis of the different sectors.

Now, lets go for the Sectorial Analysis of the Indian Equity Market;

The stock market is the combination of the different type of sectors such as,Auto, Aluminum, Abrasives, Finance banking, Bearings, Beverages, Cables,

Castings, Cement, Chemicals, Compressors, Computers, Constructions,Consumer goods, Capital goods, Couriers, Domestic appliances, Electricequipments, Engineering, Entertainment, Fertilizers, Food processing, Hospital,Hotels, Industrial gas, Infrastructure, IT, Leather, Metal, Mining, Oil drilling,Pharma, Power, Petrochemical, Print, Refineries, Shipping, Steel, Sugar,Telecom, Textile, Transport, etc.

From all these different sectors, we will study some of the sectors, such as,Auto, Capital goods, Consumer Goods, Food processing, Finance banking, IT,Infrastructure, Hotel, Power, Pharma, Steel.

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Auto Ancillaries

The fortunes of the auto ancillary sector are closely linked to those of the autosector. Demand swings in any of the segments (cars, two-wheelers, commercialvehicles) have an impact on auto ancillary demand. Demand is derived fromoriginal equipment manufacturers (OEM) as well as the replacement market.Replacement demand accounts for close to 57% of total demand, while OEMsaccount for 27%, with exports accounting for the balance 16%.

The Indian auto component industry had an estimated 480 companies operatingin this area in FY05, employing more than 250,000 people and the industryexported goods worth estimated at US$ 1.4 bn. Share of exports to output isestimated to have increased from 15% in FY04 to 16% in FY05.

Margins in the replacement market are higher than the OEM market. OEM'srequirements increase or decrease, depending upon general demand scenario andlaunch of vehicles. This market is very competitive and componentmanufacturers have to compromise on margins to bag bulk orders. Moreover,delivery schedules and quality standards have to be adhered to very strictly.

Indian auto ancillary sector has traditionally suffered from poor quality. Whilethis still holds true for the unorganized sector, the organized sector has beenresorting to increased automation to reduce the defect levels. Defect rates indomestic auto ancillaries (including the popular suppliers) are in the range of1,000 parts per million (ppm) against a global average of 200 ppm.

One area where domestic units compare favorably with their international peersis it terms of costs. Lower labor costs give Indian auto ancillary companies anabsolute cost advantage. Just to put things in perspective, ACMA numberssuggest that wage cost accounts for 3%-15% of revenues for Indianmanufacturers as compared to 20%-40% for US players. India's strength inexports lies in forgings, castings and plastics historically. But this is changingwith more component manufactures investing in up gradation of technology inrecent years.

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In the outsourcing space, the prospects for auto ancillary manufacturers arebright from the long-term perspective. But identifying the right stock from thissector becomes difficult on account of technical complexities involved and

higher nature of fragmentation of the industry.

Profile

The Indian auto component industry is highly fragmented in nature and has 416players, employing 250,000 people.

Since an auto assembly involves large number of parts, ACMA has classifiedsector companies on the basis of components that they supply to automanufacturers. The following table lists the industry segmentation on the basisof components, their contribution to the overall industry revenues and some ofthe leading players in those segments.

Sub-groups Products% to total

productsLeading companies

Engine PartsPistons, piston rings, fuelinjection pumps

24.0%Ucal Fuel, MICO,Lucas

Transmission &Steering parts

Transmission gears, axles andwheels

16.0%Sona Kaya, ZFSteering

Suspension &Braking parts

Leaf springs, shock absorbers 12.0%Gabriel, MunjalShowa

ElectricalSpark plugs, batteries, startermotors

8.0% Exide, MICO,

Equipment Dashboard instruments 7.0%Motherson Sumi,Lumax

Others Fan belts, sheet metal parts 33.0% Rico Auto, Sundram

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Since auto ancillary companies mainly act as vendors, it is extremely importantfor them to remain competitive, both in terms of cost as well as quality. As a

consequence, the profitability of the company at the operating level assumesgreat significance. Therefore, operating profits are considered as a good starting

point in separating a good auto ancillary company from the rest.

Let us throw some light on the various operating parameters presented in theflow chart below:

There has to be a broad look at the parameters that determine the profitability ofan auto ancillary company, now have a look at what kind of valuations an autoancillary company command should.

Valuations:

The fortunes of auto ancillary companies are linked to the fortunes of the auto

industry and as a result the bargaining power stands considerably reduced. Thus,these companies have little leeway in improving their top line performance byraising prices. The onus of improving profitability therefore falls on costreduction measures and effective deployment of funds. Hence expertsfeel thatP/E multiple is an important metric in evaluating the performance of a companyfrom this sector. Companies that cater to domestic market deserve a lower P/Emultiple as compared to a company that derives a significant share from exportmarkets.

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Banking Sector

With the economic growth picking up pace and the investment cycle on the wayto recovery, the banking sector has witnessed a transformation in its vital role ofintermediating between the demand and supply of funds. The revived credit offtake (both from the food and non food segments) and structural reforms have

paved the way for a change in the dynamics of the sector itself. Besides gearingup for the compliance with Basel accord, the sector is also looking forward toconsolidation and investments on the FDI front.

Public sector banks have been very proactive in their restructuring initiatives beit in technology implementation or pruning their loss assets. Windfall treasurygains made in the falling interest rate regime were used for writing off thedoubtful and loss assets. Incremental provisioning made for asset slippages havesafeguarded the banks from witnessing a sudden impact on their bottom-line.

Retail lending (especially mortgage financing) formed a significant portion ofthe portfolio for most banks and the entities customized their products to cater to

the diverse demands. With better penetration in the semi urban and rural areasthe banks garnered a higher proportion of low cost deposits thereby economizingon the cost of funds.

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Apart from streamlining their processes through technology initiatives such asATMs, telephone banking, online banking and web based products, banks also

resorted to cross selling of financial products such as credit cards, mutual fundsand insurance policies to augment their fee based income.

The stalwarts of the North Block are nowadays oft heard reiterating theirconfidence in the Indian economy and their faith in the economys potential toachieve 8% GDP growth targets. Understandably therefore, the banking andfinancial sectors remain one of their priorities when it comes to regulatorylicensing and policy framework. In one such development, the central bankrecently resolved one of the sectors biggest concerns about capital shortage.

Until recently, banks' capital adequacy ratio (CAR) was applicable only to thecredit risk assumed by them. Subsequently, capital requirement for market risksfor the held-for-trading (HFT) treasury portfolio was introduced during FY05.

In addition, banks are required to provide capital for market risk for theavailable-for-sale (AFS) portfolio by FY06. This would require banks toaugment their capital funds to ensure continued compliance with the regulatoryminimum CAR. With the transition to the new capital adequacy framework(Basel II) scheduled for March 2007, banks would need to further shore up theircapital funds to meet the requirements under the revised framework. UnderBasel II, the capital requirements are not only more sensitive to the level of risk

but also apply to operational risks.

Banks would thus need to raise additional capital on account of market risk,

Basel II requirements, as well as to support the expansion of their balance sheets.As per the erstwhile guidelines, the capital adequacy ratio comprised of onlyTier-I and Tier-II capital and banks were not allowed to raise Tier-III capital.

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Taking into consideration the above and with a view to provide banks withadditional options for raising capital funds, to meet both the increasing businessrequirements as well as Basel II compliance norms, the RBI has given banks theleeway to raise capital funds by issue of the following additional instruments.

Although the central bank has remained shy of giving the innovative capitalinstruments the nomenclature of 'Tier-III', the instruments complement the

previous two tiers:

Perpetual debt instruments eligible for inclusion as Tier-I capital

Debt capital instruments eligible for inclusion as upper Tier-IIcapital

Perpetual non-cumulative preference shares eligible for inclusion asTier-I capital, and

Redeemable cumulative preference shares eligible for inclusion as

Tier-II capital.

If the new instruments find takers, it would help PSU banks, left with littleheadroom for raising equity, to raise funds without diluting the government'sstake in them. Significantly, FII and NRI investment limits in these securitieshave been fixed at 49%, as against the 20% foreign equity holding allowed inPSU banks.

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Banks like OBC and Dena Bank have already exhausted the option of going infor equity issues, as the government holding in these banks has touched theminimum permissible 51%. Others such as HDFC Bank and UTI Bank will also

need to soon prop up their CAR to sustain the current levels of asset growth.

Also, although the likes of ICICI Bank (post the latest public issue) andCorporation Bank remain well capitalized, they may consider the innovativeinstruments to support their Tier II funding in the medium term.

Perpetual bonds will have no maturity date, i.e., these will not be redeemable but

will pay interest forever. The interest payable to the investors may be either at afixed rate or at a floating rate referenced to a market-determined rupee interest

benchmark rate. However, in its guidelines, the RBI has put a caveat that suchhybrid securities will cease to provide returns if the issuing bank's CAR falls

below regulatory requirements (9%). This makes perpetual debt instruments arisky option for investors, particularly in those banks where the CAR is at lowerlevels.

What is thus, prima facie palpable is the fact that the 'innovative' instrumentshold good only for those banks that have a high credit rating and good assetquality. Else, convincing investors about the security of their capital or garneringthe perpetual debts at feasible interest rates will prove to be a complex barrier for

banks' capital expansion. The RBI evidently has thus ensured that whiledeserving banks have sufficient leeway to fund their growth, the inept oneseither shape up or ship out!

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Consumer goods

After four years of lackluster performance in both revenues and profits, theFMCG sector managed to get back on track in 2005. However, in 2005, smallercompanies walked away with larger gains, as far as return on investment in thesestocks is concerned. Also, their market shares have improved considerable,mainly at the cost of their larger peers and in some cases, regional players.

As can be seen from the graph below, after almost three years, the FMCG sectormanaged to outperform the benchmark index this year, indicating renewal ofinvestors faith. Rs 100 invested in the FMCG index would have yielded 53%return by the end of the year, while the same investment would have fetched 9%lower if invested in the benchmark index, which is indeed a feat. At the start ofthe year, the outlook towards the FMCG sector in general was skeptical.

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What was different in 2005 as compared to 2004?

While 2004 was a difficult year owing to weaker demand and intensecompetition, this year, there was a reversal in trend and FMCG companies wereable to get a larger share of the consumers wallet.

Also, monsoons that play a vital role in influencing FMCG demand have beenfavorable. In 2004, detergent and shampoo major, P&G, decided to up its marketshare in the Indian market and hence, halved prices and took the battle to the

market leader HLL. But in 2005, due to input costs pressures and unviablemargins, both companies raised prices of detergents twice (by around 8%). Theencouraging aspect is that the demand has sustained.

The sector out performers

FMCG: The show has just begun

CompanyPrice on Dec

22, 2004 (Rs)

Price on Dec

23, 2005 (Rs)% Change

BSE Sensex 6,442 9,257 43.7%

S&P CNX Nifty 2,063 2,786 35.1%

BSE FMCG Index 1,054 1,615 53.2%

Dabur 84 198 137.4%

Pidilite 37 84 129.2%

Marico 169 354 109.6%

Godrej Consumers 276 507 83.5%

P&G 532 835 56.9%

Colgate 179 271 51.5%

HLL 143 193 34.9%

Nirma 344 455 32.1%

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As can be seen from the table above, Dabur and Pidilite were the sectorperformers in the FMCG space. As mentioned earlier in this article, the top four

gainers are from the relatively smaller players in the FMCG sector. More so,these companies managed to outperform larger peers with the bottom-linegrowing by 46% and 25% respectively.

However, it must be noted that the latter had a stock split (face value of Rs 10per share to Re 1), which increased investor interest in the stock. GodrejConsumers, the market leader in the hair color segment, also managed tooutperform the benchmark indices considerably.

There were no laggards in the sector and even the bellwether, HLL, gainedhandsomely. Another development is that almost all FMCG companies(especially the smaller players) set up manufacturing units in backward areas,giving them excise and income tax breaks. This lowered the tax outgo andconsequently, adding to the bottom-line growth.

FOOD & Tobacco: its smoking!

CompanyPrice on Dec

22, 2004 (Rs)

Price on Dec

23, 2005 (Rs)% Change

GTC Ind. 29 112 286.6%

Godfrey Philips 506 1,400 176.6%

VST Industries 241 472 95.6%

Tata Tea 482 934 93.9%

GSK Cons. 331 537 62.2%

ITC 87 139 60.4%

Nestle 586 935 59.6%

Britannia 908 1,303 43.5%

Tata Coffee 268 328 22.2%

As can be seen from the table, food stocks also followed the footsteps of FMCGstocks. The top three gainers outperformed the benchmark indices over two-fold(all from the tobacco sector).

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Despite health issues, a growing number of class-action lawsuits and higherprices, consumers still find tobacco products entirely seductive, all resulting in

these companies making real fortunes. Tata Tea, the worlds second largestbranded tea company, also outperformed the benchmark indices.

The year saw the tea major dispose of its plantations business in the south, whichwas a big positive (plantations are typically high fixed cost affair). Also, thecompanys investment in other group companies (adding up to around Rs 200

per share at the current market price) was also an attraction.

What to expect in 2006?

Since the growth prospects of the sector is closely linked to economy growth andincome levels, investing in FMCG stocks with a short-term horizon of one yearmay not yield desired results. This is because, even if the macro variables are

positive, there is a lag effect on the FMCG sector. For example, good monsoonin one year is unlikely to drive FMCG sales in the same year in a significantmanner.

Given this background, one has to remember that the FMCG sector is a play onIndias consumption potential, which in turn is a function of competition,emerging of organized retailing and more importantly, is based on the depth and

breadth of the consumption.

By breadth, experts mean the number of people buying soaps (from the

organized sector as well as from rural markets). By depth, expertsmean, higherconsumption by the existing consumer base (both in terms of moving up thevalue chain and increased usage). These are typically long-term drivers andtherefore, one needs to be patient to realize the potential.

In per the experts view, smaller companies will stand to benefit more fromincreased off take, as they follow a simple strategy, give the retailer higherincentives than those given by larger brand owners, thus encouraging the retailshop owner to push their products more.

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But the investor has to choose the right smaller company. Experts suggestchoosing those smaller companies that have market leadership in at least onesegment of the FMCG sector and are expanding into new categories or aiming to

increase market share.

All said and done, the environment will no doubt be competitive, but the FMCGsector is a volume game. Market leaders like HLL realized the pitfalls offocusing only on profitability in the last two years. Recent statements from HLLclearly suggest that the focus on increasing market share, even if it at the cost ofmargins.

The implementation of VAT is another shot in the arm of the sectors. Weunderstand that brands will become cheaper in the time to come, though the

benefits will take a few years to filter in. Also, the smaller and unorganizedplayers will lose the competitive edge, which in turn will benefit organizedplayers.

FMCG companies need to understand that the top end of the pyramid is nowdeep enough to absorb expensive offerings. This creamy layer is affluent, equalto the western countries, and hence will require some kind of differentiationfrom the mass market.

Hence, product differentiation and innovation along with technology andprocesses will be the critical aspects for growth. Also, Indian companies havenow started to spread their wings in the overseas market and there are severalexamples of this. This is another growth area tapped by players, which will bearfruits in time to come.

The bottom-line from an investors perspective is to have a balanced portfolio inthe FMCG sector (large and niche players) to reap the benefits of theconsumption story going forward. More importantly, the FMCG sector is not ahigh-return sector and to that extent, expectations have to be realistic.

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Cement

The Indian cement industry with a total capacity of about 152 m tonnes(excluding mini plants) in FY05, has surpassed developed nations like USA andJapan and has emerged as the second largest market after China. Althoughconsolidation has taken place in the Indian cement industry with the top five

players controlling almost 50% of the capacity, the remaining 50% of thecapacity remains pretty fragmented.

Despite the fact that Indian cement industry has clocked a production of morethan 100 m tonnes for the last four consecutive years, the per capita consumptionof 115 kgs compares poorly with the world average of over 250 kgs and morethan 450 kgs in China. This, more than anything underlines the tremendousscope for growth in the Indian cement industry in the long term.

Cement, being a bulk commodity, is a freight intensive industry and transportingcement over long distances can prove to be uneconomical. This has resulted in

cement being largely a regional play with the industry divided into five mainregions viz. north, south, west, east and the central region. While the southernregion is excess is capacity owing to the availability of limestone, the westernand northern region are the most lucrative markets on account of higher incomelevels.

Given the potential growth, quite a few foreign transnational have been eyeingthe Indian markets and are planning to acquire domestic companies. Whilecompanies like Lafarge and Italicementi have made a couple of acquisitions,

majors like Holcim managed to partner with, Gujarat Ambuja, and acquired astake in ACC. However, it must be noted that the transnational will find thegoing tough since cement is a game of volumes and with the median capacity offragmented players being just about 1 m tone, the transnational will have toacquire capacities in piecemeal.

First it was Gujarat Ambuja, then Grasim and now ACC. These companies thatcan easily be considered as the proxies for the Indian cement industry have alllogged in impressive financial performances for FY04 (9mFY04 for Gujarat

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Ambuja). It would be not out of place to add that their performance until theDecember quarter 2003 was hardly inspiring.

Things turned around during the March quarter and helped by a strong increasein both demand as well as prices, profitability improved significantly. During2004, while the Sensex has witnessed a decline of 2%, the cement index,consisting of the top five cement companies has appreciated by almost 16%.Taking these results and the appreciation of stock prices into consideration,experts feel that based on very realistic demand prospects and a highly probablecase for recovery in prices, the much talked about revival might just be aroundthe corner. Let us delve a little deeper into the reasons.

As is seen from the graph below, 55% of the demand for cement comes from thehousing sector. This sector has witnessed rapid growth over the past few years.Housing loan disbursals, which can be considered as good indicators of growthin the industry have grown at a CAGR of 30% over the last three years. With ashortfall of 19 m dwelling units in the country and disbursals expected to grow ata similar rate for at least the next 3 to 4 years, the demand for cement from thissector is likely to grow unabated.

It is no coincidence that China, which has emerged as the fastest growing nationin recent times, is also the largest consumer of cement. While the countryaccounted for 25% of world GDP growth in recent years, around 40% of thecement consumed in the world is accounted for by China, mainly to createworld-class infrastructure and ensure rapid urbanization. Therefore, if the Indian

policy makers have to put the country on a high GDP growth trajectory, sizeableinvestments in infrastructure will have to be made, thus boosting the demand forcement. With the government going in for 25% concretization of roads, theconstruction of highways and rural roads criss-crossing the country is likely totranslate into higher demand for cement.

On account of the above-mentioned reasons, we believe that the industry isexpected to grow at a healthy rate of 8%-9% over the medium to long term.While the demand has never been a problem for the industry, it is the supply sidethat has posed some problems. Lower realizations have prevented the industryfrom prospering.

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While the consumer price index has appreciated almost 55% over the last sevenyears, the cement prices in the country have in fact suffered a fall of around 6%in the same period. Thus, the reason why the industry was going throughtroubled times becomes evident. High level of fragmentation and increasingdemand supply imbalance can be considered as two of the main reasons behindthe same.

Simple economics tell that a large number of players are good for the industry sothat no one can exert a control over prices. But it also adds one caveat that forthis to happen the markets should be highly efficient. In other words, everyoneshould have an access to same resources and the laws should strictly be adheredto.

Unfortunately, this is not the case with the Indian cement industry where powerthefts and tax evasions pervade the corporate system. As a result, the smaller

players, which are not that much in the public eye, are in a position to under cuttheir bigger counterparts and thus keep the prices depressed.

Therefore in order to find a solution to such menace, consolidation, where biggerplayers have a certain degree of control over prices, becomes imperative. Buthow is the Indian cement industry placed on this front? Going by the spate of

acquisitions by the bigger cement companies in recent times, (Grasims

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acquisition of Indian Rayon and L&Ts cement business, Gujarat Ambujasacquisition of DLF Cements and Modi Cement, ACCs acquisition of IDCOLscement division, Lafarges acquisition of Tata Steel and Raymonds Cement

business etc), we believe consolidation is well and truly underway. Top sevenplayers accounted for nearly 52% of industry capacity in FY00, currently theyaccount for 62%. As is evident from the trends in the developed markets,increased consolidation leads to healthy prices and therefore we believe that withfurther consolidation in the domestic market, prices are likely to turnremunerative in the coming years.

Apart from low levels of consolidation, frequent capacity additions have alsobeen responsible for sorry state of cement prices in the country. To make thingsa little clearer, the total capacity additions during FY01 and FY02 amounted to ahuge 26 m tones, with 17 m tones accretion during FY02 itself. Contrast this

with FY97-FY00 period, where a lesser 20 m tones of capacity was added, thattoo in a span of 4 years. Sales tax incentives given by some state government fora limited period were largely responsible for such rampant capacity additions.This led to a scenario where supply grew at a faster pace than demand andcaused a downward pressure on the prices.

However, things seem to be improving. No significant Greenfield capacity wasadded during FY03 and FY04. As a result while demand grew, supply almostremained constant and this helped in reducing the demand supply gap and easedoff some pressure on the prices. In fact, prices have already improved by around5% in the March quarter and are expected to rise further in the coming years.

It is being believed that while the northern and eastern regions would achievedemand supply parity by 2005, the southern and the western region wouldachieve the same by 2007 on account of high demand supply parity prevailing inthese regions. Thus an increase in demand coupled with recovery in prices islikely to result into higher profitability for the cement companies.

Thus, while the overall scenario for the growth in the industry looks indeedpromising, continued government apathy remains a cause of concern. The exciseduty on cement at Rs 400 per tone is one of the highest in the industry and

amounts to roughly around 20% of the ex-factory price of cement. Further, sincethe industry is freight intensive one, any increase in the prices of petroleumproducts is likely to put pressure on the margins.

Not withstanding these minor glitches, the industry appears to be well positionedto put the era of depressed prices and reckless capacity additions behind it andgrow profitably in the future. However, investors need to look at companies,which have a diversified geographical presence and have a track record ofconsistently high operating margins.

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Engineering

Engineering is a diverse industry with a number of segments. A company fromthis sector can be a power equipment manufacturer (like transformers and

boilers), execution specialist or a niche player (like providing environmentfriendly solutions). It can be an electrical, non-electrical machinery and staticequipment manufacturer too.

The sector is relatively less fragmented at the top, as competencies required arehigh. But the sector is highly fragmented at the lower end (like unbrandedtransformers etc for the retail segment) and is dominated by smaller players. Theuser industries in broad terms are power utilities (generation, transmission anddistribution), industrial majors (refining, automotive and textiles), government(public investment) and retail consumers (pumps and motors).

Order book size determines the performance of the company in the short-term inthis sector. In order to bag big contracts, the companies need to have a big

balance sheet size. They need huge working capital in order to execute biggercontracts, as initially they receive only part payment and the remaining comes

after the projects get executed.

Tariffs that earlier offered protection to Indian capital goods manufacturers, havebeen removed. Import duties on a range of equipment have also been reduced.This coupled with the high cost of capital in India puts Indian manufacturers at adisadvantage against overseas competition.

Power sector contributes the largest to the engineering companies' revenues. Forinstance, ABB and BHEL derive 60% and 69% of their revenues from supplyingequipments to the power sector. And with the government clearing the blueprintfor adding 100,000 MW in the tenth (2002-07) and eleventh (2007-12) five-year

plans, the potential seems high for the engineering majors. This is because, apartfrom the investment of Rs 4,000 bn (or Rs 40 m per MW) in generation capacity

buildup, an equivalent amount is likely to be spent in the transmission anddistribution space as well.

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Infrastructure is another key area of operation for major Indian engineeringcompanies. L&T, for example, garners around 35% of its sales frominfrastructure activities like engineering, design and construction of industrial

projects and social & physical projects like housing, hospitals, IT parks,expressways, bridges, ports, and water & effluent treatment projects. In therecent budget, the government had outlined an investment of Rs 100 bn (US$ 2.3

bn), through a special purpose vehicle, to finance infrastructure development inthe country.

The high global crude prices on account of growing demand have led toincreased activities in the exploration and development space. This has helpedthe engineering companies in this space. More importantly, this segment of the

engineering business has relatively higher margins than infrastructure owing tomore complex engineering tasks involved.

Engineering is a diverse industry with a number of segments. A company fromthis sector can be a power equipment manufacturer (like transformers and

boilers), execution specialist or a niche player (like providing environmentfriendly solutions). It can be an electrical, non-electrical machinery and staticequipment manufacturer too.

The sector is relatively less fragmented at the top, as competencies required arehigh. But the sector is highly fragmented at the lower end (like unbrandedtransformers etc for the retail segment) and is dominated by smaller players. Theuser industries in broad terms are power utilities (generation, transmission anddistribution), industrial majors (refining, automotive and textiles), government(public investment) and retail consumers (pumps and motors).

Order book size determines the performance of the company in the short-term inthis sector. In order to bag big contracts, the companies need to have a big

balance sheet size. They need huge working capital in order to execute biggercontracts, as initially they receive only part payment and the remaining comesafter the projects get executed.

Tariffs that earlier offered protection to Indian capital goods manufacturers, havebeen removed. Import duties on a range of equipment have also been reduced.This coupled with the high cost of capital in India puts Indian manufacturers at a

disadvantage against overseas competition.

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Power sector contributes the largest to the engineering companies' revenues. Forinstance, ABB and BHEL derive 60% and 69% of their revenues from supplyingequipments to the power sector. And with the government clearing the blueprint

for adding 100,000 MW in the tenth (2002-07) and eleventh (2007-12) five-yearplans, the potential seems high for the engineering majors. This is because, apartfrom the investment of Rs 4,000 bn (or Rs 40 m per MW) in generation capacity

buildup, an equivalent amount is likely to be spent in the transmission anddistribution space as well.

Infrastructure is another key area of operation for major Indian engineeringcompanies. L&T, for example, garners around 35% of its sales frominfrastructure activities like engineering, design and construction of industrial

projects and social & physical projects like housing, hospitals, IT parks,expressways, bridges, ports, and water & effluent treatment projects. In therecent budget, the government had outlined an investment of Rs 100 bn (US$ 2.3

bn), through a special purpose vehicle, to finance infrastructure development inthe country.

The high global crude prices on account of growing demand have led toincreased activities in the exploration and development space. This has helpedthe engineering companies in this space. More importantly, this segment of theengineering business has relatively higher margins than infrastructure owing tomore complex engineering tasks involved.

If one were to consider one of the biggest beneficiaries from any countrysinfrastructure sector development, engineering companies have a vital role to

play. As in any other sector, choices for a retail investor are high for an equityinvestment. However, it does that mean each stock in the sector is a BUY? Here,we have tried to discuss the dynamics of this sector and the key aspects that one

should look in, before selecting an engineering stock.

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Profile

Engineering, as a sector, has many facets. A company from this sector can be anequipment manufacturer (like transformers and boilers), execution specialist (sayBHEL, L&T, Engineers India) or a niche player (like Thermax in environmentalsolutions, Voltas in electro-mechanical projects, ABB for automationtechnologies and so on). To define the user industries in broad terms are powerutilities, industrial majors (refining, automotive and textiles), government (publicinvestment) and retail consumers (pumps and motors). Thus, every company hasa specific role to play in the industry and is looking forward to cater a specifictarget market. Given this backdrop, prospects of a particular company in theengineering sector have to be viewed with respect to the specific user industries.So, if the engineering sector does well, not all companies stand to benefit inequal proportion.

When will an engineering company grow?

It is highly dependent on the level of private and public sector investment in the

economy. When investments in capacities and infrastructure gains momentum,more jobs are created and demand for goods in general increases. This in turnleads to higher economic growth. Historically, the growth of the engineeringsector has been sensitive to economic performance (as is evident from the graph

below). The industry is relatively less fragmented at higher end, as competenciesrequired are high. It is therefore that the barriers to entry are also high. But insome cases, competition is also global in nature (like dam construction, roads,refineries and power plants).

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Energy

There are three stages in the process, upstream: exploration and downstream:refining and marketing. After extracting the crude oil from the reserves, it is

processed in refinery to yield various petroleum products, which are furthermarketed. Petroleum products are obtained through a two-stage process:distillation and chemical processing.

Distillation involves breaking crude oil into light distillate, medium distillate andheavy distillate. Chemical processing is done to add value to products. ONGCand Oil India dominate the upstream segment. Together they contribute 87% ofIndia's oil production.

In the downstream segment, major players include IOC, HPCL, BPCL andReliance. Independent refineries have now become subsidiaries of these bigger

players. As of July, 2005 there were a total of 18 refineries in the countrycomprising 17 in the public sector and one in the private sector with a combinedrefining capacity of 127 MMTPA. IOC dominates the refining capacity with atotal share of nearly 32% of the current refining capacity.

Refining sector got deregulated in FY99 whereas marketing sector deregulationbegan to take shape on 1st April 2003. However, there is still politicalintervention in the pricing of certain petroleum products. For instance, subsidyon LPG and PDS kerosene still continues.

In case of natural gas, ONGC is the major producer. GAIL is the monopoly

player in the transmission and distribution of natural gas, accounting for about90% of the supplies. The user industries here are mainly power, petrochemicals,fertilizers, pharmaceuticals and utilities. Gujarat Gas is also another player in theregional domain and is present mainly in retail side. Power and fertilizer togethercontribute nearly 70% of the demand for natural gas. However, the country stillwitnesses shortage in supply of natural gas by around 86 MMSCMD (millionmetric standard cubic meters of gas) per day

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Oil accounts for about 30% of India's total energy consumption. The majority ofIndia's roughly 5.4 billion barrels in oil reserves are located in the Mumbai High,

Upper Assam, Cambay, Krishna-Godavari, and Cauvery basins. The offshoreMumbai High field is by far India's largest producing field, with current outputof around 260,000 barrels per day (bbl/d).

The black crude is fed to the refineries and we get various clean fuels like petrol,diesel, etc. For a layman, it is hard to believe all this but science has gone to suchan extent that we can separate the crude oil into various useful products. This is

just one thing. The science does not stop here. It can further alter this productmix by other processes to get even more value added products.

In the world of investing, apart from the numbers, the income statements andprojections, an investor also needs to understand the ins and outs of a specificindustry that you are looking to invest in (i.e. what goes in and what comes out).

In the refinery sector, companies have made an optimum utilization of science toget more value added products. Various companies are trying to upgrade theirrefineries to get more value added fuels (light and middle distillates). Somerefineries have done this before and others are continuously trying to upgradetheir product mix. Here we take a look at the product mix of various refineries inIndia.

Before getting into specific companies we would first take a look at differentproducts coming out from the refineries. These products are classified intovarious segments - light distillates, medium distillates and heavy distillates.

Light distillates include mainly LPG, naphtha and petrol.

Major products in middle distillates are ATF, kerosene and diesel, while in caseof heavy distillates, the same include furnace oil, bitumen and LSHS (lowsulphur heavy stock). Products at the middle and light distillates end are moreimportant to the companies as they are high margin products and find usedirectly. Generally, distillate yield is calculated on the basis of these products asa percentage of total products.

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Dhaval Chaning Role of Equity Market

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