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A REPORT ON

STUDY OF FUNDAMENTAL& TECHNICAL ANALYSIS

Submitted by

PRANAV JOSHI 09-725

DEPARTMENT OF MANAGEMENT STUDIES

SUBMITTED TO

Vidyalankar Institute of Technology

Wadala (E), Mumbai 400 037

UNIVERSITY OF MUMBAI

*** 2010 2011 ***

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Title

This is a study report which basically focusses on investment philosophies adoptedby investors. There are two independent investment theories which investorstypically make use of while making investment decisions.

They are Fundamental analysis & Technical analysis.

This report studies these two theories in detail and applies them practically to

analyse the stocks of a few companies.

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Certificate

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Acknowledgement

I thank Prof. Hemant Joshi (Head of the Department, MMS, Vidyalankar

Institute of Technology) for the help extended to me for the project completion.

Also grateful thanks to Ms. Smita Mukherjee for her valuable help towards the

completion of this report.

I thank Mr. Nikesh Ruparel & Mr. Jitendra Baphna from Birla SunLife Insurancecompany Ltd. for all the training and guidance provided to me during the period

of my summer internship.

My foremost thanks to all staff members, non-teaching staff & all my colleagues

for giving me a helping hand.

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Table of Contents

Page No.

1. Company Profile 06

2. Executive Summary 08

3. Objective,Scope,Assumptions,Limitations 09

4. Literature Review 10

5. Fundamental Analysis 11

6. Technical Analysis 28

7. Sectoral Analysis 53

8. Conclusion 73

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Birla SunLife Insurance Company - Profile

Established in 2000, Birla Sun Life Insurance Company Limited (BSLI) is a joint

venture between the Aditya Birla Group, a well known and trusted name globally

amongst Indian conglomerates and Sun Life Financial Inc, leading international

financial services organization from Canada.

With an experience of over 9 years, BSLI has contributed significantly to the

growth and development of the life insurance industry in India.

Known for its innovation and creating industry benchmarks, BSLI has several

firsts to its credit. It was the first Indian Insurance Company to introduce FreeLook Period and the same was made mandatory by IRDA for all other life

insurance companies. Additionally, BSLI pioneered the launch of Unit Linked Life

Insurance plans amongst the private players in India. BSLI also enjoys the

prestige to be the originator of practice to disclose portfolio on monthly basis.

These category development initiatives have helped BSLI be closer to its policy

holders expectations, which gets further accentuated by the complete bouquet of

insurance products (viz. pure term plan, life stage products, health plan and

retirement plan) that the company offers.

It has an extensive reach through its network of 600 branches and 1,75,000

empanelled advisors. This impressive combination of domain expertise, product

range, reach and ears on ground, helped BSLI cover more than 2 million lives

since it commenced operations and establish a customer base spread across

more than 1500 towns and cities in India. Such services are well supported by

sound financials that the company has. As on March 31, 2009, the company has

a robust capital base ofRs. 2000 crs.

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Vision

To be a leader and role model in a broad based and integrated financial

services business.

Mission

To help people mitigate risks of life, accident, health, and money at all stages

and under all circumstances

Enhance the financial future ofcustomers including enterprises

A US $28 billion corporation, the Aditya Birla Group is in the league of Fortune

500 worldwide. It is anchored by an extraordinary force of 100,000 employees,

belonging to 25 different nationalities. The group operates in 25 countries acrosssix continents truly a multinational corporation.

Aditya Birla Group through Aditya Birla Financial Services Group

(ABFSG), has a strong presence across various financial services verticals that

include life insurance, fund management, distribution & wealth management,

security based lending, insurance broking, private equity and retail broking. The

seven companies representing ABFSG are Birla Sun Life Insurance Company,

Birla Sun Life Asset Management Company, Aditya Birla Money, Aditya Birla

Finance, Birla Insurance Advisory & Broking Services, Aditya Birla Capital

Advisors and Apollo Sindhoori Capital Investment. In FY 2008-09, the

consolidated revenues of ABFSG from these businesses crossed Rs. 4763

croresSun Life Financial is a leading international financial services organisation

providing a diverse range of protection and wealth accumulation products and

services to individuals and corporate customers. Chartered in 1865, Sun LifeFinancial and its partners today have operations in key markets worldwide,

including Canada, the United States, the United Kingdom, Ireland, Hong Kong,

the Philippines, Japan, Indonesia, India, China and Bermuda.

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Executive Summary

The Indian Economy, one of the emerging markets of the world, today has arecord rate of return which is substantially better when compared to the markets

of developed western economies. Thus Indian equity markets today are

attracting investors from around the world to take advantage of Indias growth

story.

However the participation of retail investors in the Indian markets is less than 5%,

which means that the Indian investor is not able to extract the maximum

advantage out of Indias growth, and thus is nor the centre point of Indias growthstory as far as investments in equity markets are concerned.

Investors can use investment route of secondary markets to hedge future risk of

inflation and create wealth in the long term.

The reason for this can be attributed to the image of Equity markets being

speculative in the eyes of the investors. This is because they are not adequately

educated to make their investment decisions in the equity market. Also, the

Indian investor on an average has a low to moderate risk appetite which is also

one of the reasons why the participation of retail investors in equities is relatively

less.

This report is meant to narrow down this gap between retail investors and equity

markets by simplifying the basic investment strategies and give a basic

understanding of how stocks are analysed for investment using the the theories

of fundamental and technical analysis.

Objective, Scope, Assumption and Limitations of the Project

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Objective :

The Objective of the project is to study and apply the two co-existing but

somewhat conflicting investment philosophies of Fundamental analysis and

Technical analysis adopted by retail investors for investing in Secondary Market

Scope :

The scope of project is limited to understanding the basics of Fundamental

analysis and Technical analysis and apply it to take a decision of investing in

stocks.

Assumptions :

The project assumes that the Indian investor of today would like to be a part of

Indias growth story and take its benefit through secondary markets and use his

investments to create wealth in the long term.

Limitations :

The project has been limited to investment analysis of stocks of pharmaceutical

and cement sectors only.

Literature Review

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The process of investment starts with analyzing a sector, understanding its

growth prospects, then analyzing companies in the chosen sector using

fundamental and technical analysis.

Sector analysis is done using the model of the Five Competitive Forces

developed by Michael E. Porter in his book Competitive Strategy: Techniques

for Analyzing Industries and Competitors

The Five Competitive Forces are typically described as follows:

1. Bargaining Power of Suppliers

2. Bargaining Power of Customers3. Threat of New Entrants

4. Threat of Substitutes

5. Competitive Rivalry between Existing Players

After deciding onto a sector, the companies in that sector are to be analyzed

using fundamental and technical analysis.

Fundamental Analysis

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Ratio Analysis:-Ratio analysis is the process of determining and presenting the relationship of

items and group of items in the statements. It is helpful to know about the

liquidity, solvency, capital structure and profitability of an organization. It is helpfultool to aid in applying judgement, otherwise complex situations.

ADVANTAGE OF RATIO ANALYSIS

1. Helpful in analysis of Financial Statements.

2. Helpful in comparative Study.

3. Helpful in locating the weak spots of the business.

4. Helpful in Forecasting.

5. Estimate about the trend of the business.

6. Fixation of ideal Standards.

7. Effective Control.

8. Study of Financial Soundness.

LIMITATIONS OF RATIO ANALYSIS

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1. Comparison not possible if different firms adopt different

accounting policies.

2. Ratio analysis becomes less effective due to price level

changes.

3. Ratio may be misleading in the absence of absolute data.

4. Limited use of a single data.

5. Lack of proper standards.

6. False accounting data gives false ratio.

7. Ratios alone are not adequate for proper conclusions.

8. Effect of personal ability and bias of the analyst.

CLASSIFICATION OF RATIOS

Ratio may be classified into the four categories as follows:

Liquidity Ratio

a. Current Ratio

b. Quick Ratio or Acid Test Ratio

Leverage or Capital Structure Ratio

a. Debt Equity Ratio

b. Debt to Total Fund Ratio

c. Proprietary Ratio

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d. Fixed Assets to Proprietors Fund Ratio

e. Capital Gearing Ratio

f. Interest Coverage Ratio

Profitability Ratio (Based on Investment) -

Return on Capital Employed (ROCE)

The Return on Capital Employed ratio (ROCE) tells us how much profit we

earn from the investments the shareholders have made in the company. It is

calculated as profit before interest and tax divided by the difference between total

assets and current liabilities. The resulting ratio represents the efficiency with

which capital is being utilized to generate revenue.

Return on Shareholders Funds :

a. Return on Total Shareholders Funds

b. Return on Equity Shareholders Funds

c. Earning Per Share

d. Dividend Per Share

e. Dividend Payout Ratio

f. Earning and Dividend Yield

g. Price Earning Ratio

.

LEVERAGE OR CAPITAL STRUCTURE RATIO

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Leverage or Capital Structure Ratio -This ratio discloses the firms ability to

meet the interest costs regularly and Long term indebtedness at maturity.

These ratio include the following ratios :

a. Debt Equity Ratio:- This ratio can be expressed as:

This ratio expresses the relationship between long term debts and

shareholders fund.

Formula -

Debt Equity Ratio = Long term Loans/Shareholders Funds or Net Worth

Long Term Loans:- These refer to long term liabilities which mature after one

year. These include Debentures, Mortgage Loan, Bank Loan, Loan from

Financial institutions and Public Deposits etc.

Shareholders Funds :-These include Equity Share Capital, Preference Share

Capital, Share Premium, General Reserve, Capital Reserve, Other Reserve and

Credit Balance of Profit & Loss Account.

b. Debt to Total Funds Ratio : This Ratio is a variation of the debt equity ratioand gives the same indication as the debt equity ratio. In the ratio, debt isexpressed in relation to total funds, i.e., both equity and debt.

Formula:

Debt to Total Funds Ratio = Long-term Loans/Shareholders funds + Long-termLoans

c. Proprietary Ratio:- This ratio indicates the proportion of total funds provide by

owners or shareholders.

Proprietary Ratio = Shareholders Funds/Shareholders Funds + Long term loans

Significance :-This ratio should be 33% or more than that. In other words,

the proportion of shareholders funds to total funds should be 33% or more.

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A higher proprietary ratio is generally treated an indicator of sound financial

position from long-term point of view, because it means that the firm is less

dependent on external sources of finance.

If the ratio is low it indicates that long-term loans are less secured and theyface the risk of losing their money.

d. Fixed Assets to Proprietors Fund Ratio :- This ratio is also know as

fixed assets to net worth ratio.

Fixed Asset to Proprietors Fund Ratio = Fixed Assets/Proprietors Funds

Significance - The ratio indicates the extent to which proprietors (Shareholders)

funds are sunk into fixed assets. Normally , the purchase of fixed assets should

be financed by proprietors funds. If this ratio is less than 100%, it would mean

that proprietors fund are more than fixed assets and a part of working capital is

provided by the proprietors. This will indicate the long-term financial soundness

of business.

e.Capital Gearing Ratio:-

This ratio establishes a relationship between equity capital (including all reserves

and undistributed profits) and fixed cost bearing capital.

Formula:

Capital Gearing Ratio = Equity Share Capital+ Reserves + P&L Balance/ Fixedcost Bearing Capital

Whereas, Fixed Cost Bearing Capital = Preference Share Capital + Debentures

+ Long Term Loan

Significance:- If the amount of fixed cost bearing capital is more than the equity

share capital including reserves an undistributed profits), it will be called highcapital gearing and if it is less, it will be called low capital gearing.

The high gearing will be beneficial to equity shareholders when the rate of

interest/dividend payable on fixed cost bearing capital is lower than the rate of

return on investment in business.

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Thus, the main objective of using fixed cost bearing capital is to maximize the

profits available to equity shareholders.

f.Interest Coverage Ratio:-

This ratio is also termed as Debt Service Ratio. This ratio is calculated as

follows:

Interest Coverage Ratio = Net Profit before charging interest and tax / FixedInterest Charges

Significance :- This ratio indicates how many times the interest charges are

covered by the profits available to pay interest charges.

This ratio measures the margin of safety for long-term lenders.

This higher the ratio, more secure the lenders is in respect of payment of interest

regularly. If profit just equals interest, it is an unsafe position for the lender as

well as for the company also , as nothing will be left for shareholders.

An interest coverage ratio of 6 or 7 times is considered appropriate.

ACTIVITY RATIO OR TURNOVER RATIO

Activity Ratio or Turnover Ratio :-

These ratio are calculated on the bases of cost of sales or sales, therefore,

these ratio are also called as Turnover Ratio. Turnover indicates the speed or

number of times the capital employed has been rotated in the process of doing

business. Higher turnover ratio indicates the better use of capital or resources

and in turn lead to higher profitability.

It includes the following :

a. Stock Turnover Ratio-

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This ratio indicates the relationship between the cost of goods during the year and

average stock kept during that year.

Stock Turnover Ratio = Cost of Goods Sold / Average Stock

Here, Cost of goods sold = Net Sales Gross Profit

Average Stock = Opening Stock + Closing Stock/2

Significance:-This ratio indicates whether stock has been used or not. It shows

the speed with which the stock is rotated into sales or the number of times the

stock is turned into sales during the year.

The higher the ratio, the better it is, since it indicates that stock is selling quickly. In

a business where stock turnover ratio is high, goods can be sold at a low margin of

profit and even than the profitability may be quit high.

b. Debtors Turnover Ratio :-This ratio indicates the relationship between credit

sales and average debtors during the year :

Debtor Turnover Ratio = Net Credit Sales / Average Debtors + Average B/R

While calculating this ratio, provision for bad and doubtful debts is not deducted

from the debtors, so that it may not give a false impression that debtors are

collected quickly.

Significance :-This ratio indicates the speed with which the amount is collected

from debtors. The higher the ratio, the better it is, since it indicates that amount

from debtors is being collected more quickly. The more quickly the debtors pay, the

less the risk from baddebts, and so the lower the expenses of collection and

increase in the liquidity of the firm.

By comparing the debtors turnover ratio of the current year with the previous year,

it may be assessed whether the sales policy of the management is efficient or not.

c. Average Collection Period :- This ratio indicates the time with in which the

amount is collected from debtors and bills receivables.

Average Collection Period = Debtors + Bills Receivable / Credit Sales per day

Here, Credit Sales per day = Net Credit Sales of the year / 365

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Second Formula :-

Average Collection Period = Average Debtors *365 / Net Credit Sales

Average collection period can also be calculated on the bases of DebtorsTurnover Ratio. The formula will be:

Average Collection Period = 12 months or 365 days / Debtors Turnover Ratio

Significance :-This ratio shows the time in which the customers are paying for

credit sales. A higher debt collection period is thus, an indicates of the

inefficiency and negligency on the part of management. On the other hand, if

there is decrease in debt collection period, it indicates prompt payment by

debtors which reduces the chance of bad debts.

d. Creditors Turnover Ratio :- This ratio indicates the relationshipbetween credit purchases and average creditors during the year .

Formula:-

Creditors Turnover Ratio = Net credit Purchases / Average Creditors + AverageB/P.

Significance :- This ratio indicates the speed with which the amount is being

paid to creditors. The higher the ratio, the better it is, since it will indicate that the

creditors are being paid more quickly which increases the credit worthiness of thefirm.

d. Average Payment Period :-This ratio indicates the period which is normally

taken by the firm to make payment to its creditors.

Formula:-

Average Payment Period = Creditors + B/P/ Credit Purchase per day

This ratio may also be calculated as follows :

Average Payment Period = 12 months or 365 days / Creditors Turnover Ratio

Significance :-The lower the ratio, the better it is, because a shorter payment

period implies that the creditors are being paid rapidly.

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d. Fixed Assets Turnover Ratio :-This ratio reveals how efficiently the fixed

assets are being utilized.

Formula:-

Fixed Assets Turnover Ratio = Cost of Goods Sold/ Net Fixed Assets

Here, Net Fixed Assets = Fixed Assets Depreciation

Significance:- This ratio is particular importance in manufacturing concerns

where the investment in fixed asset is quit high. Compared with the previous

year, if there is increase in this ratio, it will indicate that there is better utilization

of fixed assets. If there is a fall in this ratio, it will show that fixed assets have not

been used as efficiently, as they had been used in the previous year.

e. Working Capital Turnover Ratio :- This ratio reveals how efficiently

working capital has been utilized in making sales.

Formula :-

Working Capital Turnover Ratio = Cost of Goods Sold / Working Capital

Here, Cost of Goods Sold = Opening Stock + Purchases + Carriage + Wages +

Other Direct Expenses - Closing Stock

Working Capital = Current Assets Current Liabilities

Significance :- This ratio is of particular importance in non-manufacturing

concerns where current assets play a major role in generating sales. It shows the

number of times working capital has been rotated in producing sales.

A high working capital turnover ratio shows efficient use of working capital and

quick turnover of current assets like stock and debtors.

A low working capital turnover ratio indicates under-utilisation of working capital.

Profitability Ratios or Income Ratios:- The main object of every business

concern is to earn profits. A business must be able to earn adequate profits in

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relation to the risk and capital invested in it. The efficiency and the success of a

business can be measured with the help of profitability ratio.

Profitability ratios are calculated to provide answers to the following questions:

i. Is the firm earning adequate profits?

ii. What is the rate of gross profit and net profit on sales?

iii. What is the rate of return on capital employed in the firm?

iv. What is the rate of return on proprietors (shareholders) funds?

v. What is the earning per share?

Profitability ratio can be determined on the basis of either sales or investment

into business.

(A) Profitability Ratio Based on Sales :

a) Gross Profit Ratio : This ratio shows the relationship between gross profit

and sales.

Formula :

Gross Profit Ratio = Gross Profit / Net Sales * 100

Here, Net Sales = Sales Sales Return

Significance:-This ratio measures the margin of profit available on sales.

The higher the gross profit ratio, the better it is. No ideal standard is fixed for this

ratio, but the gross profit ratio should be adequate enough not only to cover the

operating expenses but also to provide for deprecation, interest on loans,

dividends and creation of reserves.

b) Net Profit Ratio:- This ratio shows the relationship between net profit and

sales. It may be calculated by two methods:

Formula:

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Net Profit Ratio = Net Profit / Net sales *100

Operating Net Profit = Operating Net Profit / Net Sales *100

Here, Operating Net Profit = Gross Profit Operating Expenses such as Officeand Administrative Expenses, Selling and Distribution Expenses, Discount, BadDebts, Interest on short-term debts etc.

Significance :- This ratio measures the rate of net profit earned on sales. Ithelps in determining the overall efficiency of the business operations. Anincrease in the ratio over the previous year shows improvement in the overallefficiency and profitability of the business.

(c) Operating Ratio:-This ratio measures the proportion of an enterprise cost ofsales and operating expenses in comparison to its sales.

Formula:

Operating Ratio = Cost of Goods Sold + Operating Expenses/ Net Sales *100

Where, Cost of Goods Sold = Opening Stock + Purchases + Carriage + Wages +

Other Direct Expenses - Closing Stock

Operating Expenses = Office and Administration Exp. + Selling and Distribution

Exp. + Discount + Bad Debts + Interest on Short- term loans.

Operating Ratio and Operating Net Profit Ratio are inter-related. Total of boththese ratios will be 100.

Significance:- Operating Ratio is a measurement of the efficiency and

profitability of the business enterprise. The ratio indicates the extent of sales that

is absorbed by the cost of goods sold and operating expenses. Lower the

operating ratio is better, because it will leave higher margin of profit on sales.

(d) Expenses Ratio:-These ratio indicate the relationship between expenses

and sales. Although the operating ratio reveals the ratio of total operating

expenses in relation to sales but some of the expenses include in operating ratiomay be increasing while some may be decreasing. Hence, specific expenses

ratio are computed by dividing each type of expense with the net sales to analyse

the causes of variation in each type of expense.

The ratio may be calculated as :

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(a) Material Consumed Ratio = Material Consumed/Net Sales*100

(b) Direct Labour cost Ratio = Direct labour cost / Net sales*100

(c) Factory Expenses Ratio = Factory Expenses / Net Sales *100

(a), (b) and (c) mentioned above will be jointly called cost of goods sold ratio.

It may be calculated as:

Cost of Goods Sold Ratio = Cost of Goods Sold / Net Sales*100

(d) Office and Administrative Expenses Ratio = Office and Administrative Exp./

Net Sales*100

(e) Selling Expenses Ratio = Selling Expenses / Net Sales *100

(f) Non- Operating Expenses Ratio = Non-Operating Exp./Net sales*100

Significance:- Various expenses ratio when compared with the same ratios of

the previous year give a very important indication whether these expenses in

relation to sales are increasing, decreasing or remain stationary. If the expenses

ratio is lower, the profitability will be greater and if the expenses ratio is higher,the profitability will be lower.

(B)Profitability Ratio Based on Investment in the Business -

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These ratio reflect the true capacity of the resources employed in the enterprise.Sometimes the profitability ratio based on sales are high whereas profitabilityratio based on investment are low. Since the capital is employed to earn profit,these ratios are the real measure of the success of the business and managerialefficiency.

These ratio may be calculated into two categories:

I. Return on Capital Employed

II. Return on Shareholders funds

I. Return on Capital Employed :-This ratio reflects the overall profitability of

the business. It is calculated by comparing the profit earned and the capital

employed to earn it. This ratio is usually in percentage and is also known as

Rate of Return or Yield on Capital.

Formula:

Return on Capital Employed = Profit before interest, tax and dividends/

Capital Employed *100

Where, Capital Employed = Equity Share Capital + Preference Share Capital +

All Reserves + P&L Balance +Long-Term Loans- Fictitious Assets (Such as

Preliminary Expenses OR etc.) Non-Operating Assets like Investment madeoutside the business.

Capital Employed = Fixed Assets + Working Capital

Advantages of Return on Capital Employed:-

Since profit is the overall objective of a business enterprise, this ratio is a

barometer of the overall performance of the enterprise. It measures how

efficiently the capital employed in the business is being used.

Even the performance of two dissimilar firms may be compared with the help

of this ratio.

The ratio can be used to judge the borrowing policy of the enterprise.

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This ratio helps in taking decisions regarding capital investment in new

projects. The new projects will be commenced only if the rate of return on

capital employed in such projects is expected to be more than the rate of

borrowing.

This ratio helps in affecting the necessary changes in the financial policies of

the firm.

Lenders like bankers and financial institution will be determine whether the

enterprise is viable for giving credit or extending loans or not.

With the help of this ratio, shareholders can also find out whether they will

receive regular and higher dividend or not.

II. Return on Shareholders Funds :-

Return on Capital Employed Shows the overall profitability of the funds suppliedby long term lenders and shareholders taken together. Whereas, Return onshareholders funds measures only the profitability of the funds invested byshareholders.

These are several measures to calculate the return on shareholders funds:

(a)Return on total Shareholders Funds :-

For calculating this ratio Net Profit after Interest and Tax is divided by totalshareholders funds.

Return on Total Shareholders Funds = Net Profit after Interest and Tax / TotalShareholders Funds

Where, Total Shareholders Funds = Equity Share Capital + Preference Share

Capital + All Reserves + P&L A/c Balance Fictitious Assets

Significance:- This ratio reveals how profitably the proprietors funds have been

utilized by the firm. A comparison of this ratio with that of similar firms will throwlight on the relative profitability and strength of the firm.

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(b) Return on Equity Shareholders Funds:-

Equity Shareholders of a company are more interested in knowing the earning

capacity of their funds in the business. As such, this ratio measures the

profitability of the funds belonging to the equity shareholders.

Formula:

Return on Equity Shareholders Funds = Net Profit (after int., tax & preferencedividend) / Equity Shareholders Funds *100

RATIO ANALYSIS

Where, Equity Shareholders Funds = Equity Share Capital + All Reserves +

P&L A/c

Balance Fictitious Assets

Significance:- This ratio measures how efficiently the equity shareholders

funds are being used in the business. It is a true measure of the efficiency of the

management since it shows what the earning capacity of the equity shareholders

funds. If the ratio is high, it is better, because in such a case equity shareholders

may be given a higher dividend.

(c) Earning Per Share (E.P.S.) :-This ratio measure the profit available to the

equity shareholders on a per share basis. All profit left after payment of tax andpreference dividend are available to equity shareholders.

Formula:

Earning Per Share = Net Profit Dividend on Preference Shares / No. of

Equity Shares

Significance:- This ratio helpful in the determining of the market price of the

equity share of the company. The ratio is also helpful in estimating the capacity

of the company to declare dividends on equity shares.

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(d) Dividend Per Share (D.P.S.):- Profits remaining after payment of tax and

preference dividend are available to equity shareholders.

But of these are not distributed among them as dividend . Out of these profits is

retained in the business and the remaining is distributed among equityshareholders as dividend. D.P.S. is the dividend distributed to equity

shareholders divided by the number of equity shares.

Formula:

D.P.S. = Dividend paid to Equity Shareholders / No. of Equity Shares *100

(e) Dividend Payout Ratio or D.P. :-It measures the relationship between the

earning available to equity shareholders and the dividend distributed among

them.

Formula:

D.P. = Dividend paid to Equity Shareholders/ Total

Net Profit belonging to Equity Shareholders*100

OR

D.P. = D.P.S. / E.P.S. *100

(f) Earning and Dividend Yield :- This ratio is closely related to E.P.S. and

D.P.S. While the E.P.S. and D.P.S. are calculated on the basis of the book value

of shares, this ratio is calculated on the basis of the market value of share

(g)Price Earning (P.E.) Ratio:- Price earning ratio is the ratio between marketprice per equity share & earnings per share. The ratio is calculatedto make an estimate of appreciation in the value of a share of acompany & is widely used by investors to decide whether or not tobuy shares in a particular company

Significance :- This ratio shows how much is to be invested in the market in thiscompanys shares to get each rupee of earning on its shares. Thisratio is used to measure whether the market price of a share is highor low.

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Technical Analysis

Technical analysis is a method of evaluating securities by analyzing the statistics

generated by market activity, such as past prices and volume. Technical analysts

measure a security's value, but instead use charts and other tools to

identify patterns that can suggest future activity.

Just as there are many investment styles on the fundamental side, there are also

many different types of technical traders. Some rely on chart patterns, others use

technical indicators and oscillators, and most use some combination of the two.

In any case, technical analysts' exclusive use of historical price and volume data

is what separates them from their fundamental counterparts. Unlike fundamental

analysts, technical analysts don't care whether a stock is undervalued - the only

thing that matters is a security's past trading data and what information this data

can provide about where the security might move in the future.

Technical Analysis: The Basic Assumptions

1. The market discounts everything.

2. Price moves in trends.

3. History tends to repeat itself.

1. The Market Discounts Everything

A major criticism of technical analysis is that it only considers price movement,

ignoring the fundamental factors of the company. However, technical analysis

assumes that, at any given time, a stock's price reflects everything that has or

could affect the company - including fundamental factors. Technical analysts

believe that the company's fundamentals, along with broader economic factorsand market psychology, are all priced into the stock, removing the need to

actually consider these factors separately. This only leaves the analysis of price

movement, which technical theory views as a product of the supply and demand

for a particular stock in the market.

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2. Price Moves in Trends

In technical analysis, price movements are believed to follow trends. This means

that after a trend has been established, the future price movement is more likely

to be in the same direction as the trend than to be against it. Most technical

trading strategies are based on this assumption.

3. History Tends To Repeat Itself

Another important idea in technical analysis is that history tends to repeat itself,

mainly in terms of price movement. The repetitive nature of price movements is

attributed to market psychology; in other words, market participants tend to

provide a consistent reaction to similar market stimuli over time. Technicalanalysis uses chart patterns to analyze market movements and understand

trends. Although many of these charts have been used for more than 100 years,

they are still believed to be relevant because they illustrate patterns in price

movements that often repeat themselves

The Use Of Trend

One of the most important concepts in technical analysis is that of trend. The

meaning in finance isn't all that different from the general definition of the term - a

trend is really nothing more than the general direction in which a security ormarket is headed.

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Figure 1

It isn't hard to see that the trend in Figure 1 is up. However, it's not always this

easy to see a trend:

Figure 2

There are lots of ups and downs in this chart, but there isn't a clear indication of

which direction this security is headed.

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In any given chart, mostly the prices do not tend to move in a straight line in any

direction, but rather in a series of highs and lows. In technical analysis, it is the

movement of the highs and lows that constitutes a trend. For example,

an uptrend is classified as a series of higher highs and higher lows, while adowntrend is one of lower lows and lower highs.

Figure 3

Figure 3 is an example of an uptrend. Point 2 in the chart is the first high, which

is determined after the price falls from this point. Point 3 is the low that is

established as the price falls from the high. For this to remain an uptrend, each

successive low must not fall below the previous lowest point or the trend is

deemed a reversal.

Types of Trend

There are three types of trend:

Uptrends

Downtrends

Sideways/Horizontal Trends As the names imply, when each

successive peak and trough is higher, it's referred to as an upward trend.

If the peaks and troughs are getting lower, it's a downtrend. When there is

little movement up or down in the peaks and troughs, it's a sideways or

horizontal trend. If you want to get really technical, you might even say

that a sideways trend is actually not a trend on its own, but a lack of a

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well-defined trend in either direction. In any case, the market can really

only trend in these three ways: up, down or nowhere.

Trend Lengths

Along with these three trend directions, there are three trend

classifications. A trend of any direction can be classified as a long-term

trend, intermediate trend or a short-term trend. In terms of the stock

market, a major trend is generally categorized as one lasting longer than a

year. An intermediate trend is considered to last between one and three

months and a near-term trend is anything less than a month. A long-term

trend is composed of several intermediate trends, which often moveagainst the direction of the major trend. If the major trend is upward and

there is a downward correction in price movement followed by a

continuation of the uptrend, the correction is considered to be an

intermediate trend. The short-term trends are components of both major

and intermediate trends. Take a look a Figure 4 to get a sense of how

these three trend lengths might look.

Figure 4

When analyzing trends, it is important that the chart is constructed to best reflect

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Figure 5

Channels

A channel, or channel lines, is the addition of two parallel trendlines that

act as strong areas of support and resistance. The upper trendline

connects a series of highs, while the lower trendline connects a series of

lows. A channel can slope upward, downward orsideways but, regardless

of the direction, the interpretation remains the same. Traders will expect a

given security to trade between the two levels of support and resistanceuntil it breaks beyond one of the levels, in which case traders can expect

a sharp move in the direction of the break. Along with clearly displaying

the trend, channels are mainly used to illustrate important areas of

support and resistance.

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Figure 6

Figure 6 illustrates a descending channel on a stock chart; the upper trendline

has been placed on the highs and the lower trendline is on the lows. The price

has bounced off of these lines several times, and has remained range-bound for

several months. As long as the price does not fall below the lower line or move

beyond the upper resistance, the range-bound downtrend is expected to

continue.

Support And Resistance

This is a major concept. The so-called battle between bulls & bears is revealed

by the prices a security seldom moves above (resistance) or below (support).

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Figure 1

As you can see in Figure 1, support is the price level through which a stock or

market seldom falls (illustrated by the blue arrows). Resistance, on the other

hand, is the price level that a stock or market seldom surpasses (illustrated by

the red arrows).

Why Does it Happen?

These support and resistance levels are seen as important in terms of market

psychology and supply and demand. Support and resistance levels are the levels

at which a lot of traders are willing to buy the stock (in the case of a support) or

sell it (in the case of resistance). When these trendlines are broken, the supply

and demand and the psychology behind the stock's movements is thought to

have shifted, in which case new levels of support and resistance will likely be

established.

Round Numbers and Support and Resistance

One type of universal support and resistance that tends to be seen across a

large number of securities is round numbers. Round numbers like 10, 20, 35, 50,

100 and 1,000 tend be important in support and resistance levels because they

often represent the major psychological turning points at which many traders willmake buy or sell decisions.

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The Importance of Support and Resistance

Support and resistance analysis is an important part of trends because it can be

used to make trading decisions and identify when a trend is reversing.

Support and resistance levels both test and confirm trends and need to bemonitored by anyone who uses technical analysis. As long as the price of the

share remains between these levels of support and resistance, the trend is likely

to continue. It is important to note, however, that a break beyond a level of

support or resistance does not always have to be a reversal. For example, if

prices moved above the resistance levels of an upward trending channel, the

trend has accelerated, not reversed. This means that the price appreciation is

expected to be faster than it was in the channel.

Being aware of these important support and resistance points should affect the

way that you trade a stock. This is because in many cases, the price never

actually reaches the whole number, but flirts with it instead. So if you're bullish on

a stock that is moving toward an important support level, do not place the trade

at the support level. Instead, place it above the support level, but within a few

points. On the other hand, if you are placing stops orshort selling, set up your

trade price at or below the level of support.

Volume

Volume is simply the number of shares or contracts that trade over a given

period of time, usually a day. The higher the volume, the more active the

security. To determine the movement of the volume (up or down), chartists look

at the volume bars that can usually be found at the bottom of any chart. Volume

bars illustrate how many shares have traded per period and show trends in the

same way that prices do.

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Importance of Volume

Volume is an important aspect of technical analysis because it is used to confirm

trends and chart patterns. Any price movement up or down with relatively high

volume is seen as a stronger, more relevant move than a similar move with weak

volume. Therefore, if you are looking at a large price movement, you should also

examine the volume to see whether it tells the same story.

If volume is high during the day relative to the average daily volume, it is a sign

that the reversal is probably for real. On the other hand, if the volume is below

average, there may not be enough conviction to support a true trend reversal.

Volume should move with the trend. If prices are moving in an upward trend,

volume should increase (and vice versa). If the previous relationship between

volume and price movements starts to deteriorate, it is usually a sign of

weakness in the trend. For example, if the stock is in an uptrend but the up

trading days are marked with lower volume, it is a sign that the trend is starting to

lose its legs and may soon end.

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Charts

In technical analysis, charts are similar to the charts that you see in any business

setting. A chart is simply a graphical representation of a series of prices over aset time frame. For example, a chart may show a stock's price movement over a

one-year period, where each point on the graph represents the closing price for

each day the stock is traded:

Figure 1

Figure 1 provides an example of a basic chart. It is a representation of the price

movements of a stock over a 1.5 year period. The bottom of the graph, running

horizontally (x-axis), is the date or time scale. On the right hand side, running

vertically (y-axis), the price of the security is shown

Technical Analysis: Chart Types

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There are four main types of charts that are used by investors and traders

depending on the information that they are seeking and their individual skill

levels. The chart types are: the line chart, the bar chart, the candlestick chart and

the point and figure chart. In the following sections, we will focus on the S&P 500Index during the period of January 2006 through May 2006. Notice how the data

used to create the charts is the same, but the way the data is plotted and shown

in the charts is different.

Line Chart

The most basic of the four charts is the line chart because it represents only the

closing prices over a set period of time. The line is formed by connecting the

closing prices over the time frame. Line charts do not provide visual information of

the trading range for the individual points such as the high, low and opening prices.

However, the closing price is often considered to be the most important price in

stock data compared to the high and low for the day and this is why it is the only

value used in line charts.

Figure 1: A line chart

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Bar Charts

The bar chart expands on the line chart by adding several more key pieces of

information to each data point. The chart is made up of a series of vertical

lines that represent each data point. This vertical line represents the high andlow for the trading period, along with the closing price. The close and open

are represented on the vertical line by a horizontal dash. The opening price

on a bar chart is illustrated by the dash that is located on the left side of the

vertical bar. Conversely, the close is represented by the dash on the right.

Generally, if the left dash (open) is lower than the right dash (close) then the

bar will be shaded black, representing an up period for the stock, which

means it has gained value. A bar that is colored red signals that the stock

has gone down in value over that period. When this is the case, the dash on

the right (close) is lower than the dash on the left (open).

Figure 2: A bar chart

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Point and Figure Charts

The point and figure chart is not well known or used by the average investor

but it has had a long history of use dating back to the first technical traders.

This type of chart reflects price movements and is not as concerned abouttime and volume in the formulation of the points. The point and figure chart

removes the noise, or insignificant price movements, in the stock, which can

distort traders' views of the price trends. These types of charts also try to

neutralize the skewing effect that time has on chart analysis.

Figure 4: A point and figure chart

When first looking at a point and figure chart, you will notice a series of Xs

and Os. The Xs represent upward price trends and the Os represent

downward price trends. There are also numbers and letters in the chart;

these represent months, and give investors an idea of the date. Each box on

the chart represents the price scale, which adjusts depending on the price of

the stock: the higher the stock's price the more each box represents.. The

other critical point of a point and figure chart is the reversal criteria. This is

usually set at three but it can also be set according to the chartist's

discretion. The reversal criteria set how much the price has to move away

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from the high or low in the price trend to create a new trend or, in other

words, how much the price has to move in order for a column of Xs to

become a column of Os, or vice versa. When the price trend has moved from

one trend to another, it shifts to the right, signaling a trend change.Thus charts are one of the most fundamental aspects of technical analysis. It

is important that you clearly understand what is being shown on a chart and

the information that it provides. Now that we have an idea of how charts are

constructed, we can move on to the different types of chart patterns.

Head and Shoulders

This is one of the most popular and reliable chart patterns in technicalanalysis. Head and shoulders is a reversal chart pattern that when formed,

signals that the security is likely to move against the previous trend. As you

can see in Figure 1, there are two versions of the head and shoulders chart

pattern. Head and shoulders top (shown on the left) is a chart pattern that is

formed at the high of an upward movement and signals that the upward trend

is about to end. Head and shoulders bottom, also known as inverse head and

shoulders (shown on the right) is the lesser known of the two, but is used to

signal a reversal in a downtrend.

Figure 1: Head and shoulders top is shown on the left. Head and shoulders

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bottom, or inverse head and shoulders, is on the right.Both of these head and shoulders patterns are similar in that there are four main

parts: two shoulders, a head and a neckline. Also, each individual head and

shoulder is comprised of a high and a low. For example, in the head and

shoulders top image shown on the left side in Figure 1, the left shoulder is made

up of a high followed by a low. In this pattern, the neckline is a level of support or

resistance. Remember that an upward trend is a period of successive rising

highs and rising lows. The head and shoulders chart pattern, therefore, illustrates

a weakening in a trend by showing the deterioration in the successive

movements of the highs and lows.

Cup and Handle

A cup and handle chart is a bullish continuation pattern in which the upward trend

has paused but will continue in an upward direction once the pattern is

confirmed.

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Figure 2As you can see in Figure 2, this price pattern forms what looks like a cup, which

is preceded by an upward trend. The handle follows the cup formation and is

formed by a generally downward/sideways movement in the security's price.

Once the price movement pushes above the resistance lines formed in the

handle, the upward trend can continue. There is a wide ranging time frame for

this type of pattern, with the span ranging from several months to more than a

year.

Double Tops and Bottoms

This chart pattern is another well-known pattern that signals a trend reversal - it

is considered to be one of the most reliable and is commonly used. These

patterns are formed after a sustained trend and signal to chartists that the trend

is about to reverse. The pattern is created when a price movement tests support

or resistance levels twice and is unable to break through. This pattern is often

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used to signal intermediate and long-term trend reversals.

Figure 3: A double top pattern is shown on the left, while a double bottom pattern is

shown on the right.

In the case of the double top pattern in Figure 3, the price movement has twice

tried to move above a certain price level. After two unsuccessful attempts at

pushing the price higher, the trend reverses and the price heads lower. In the

case of a double bottom (shown on the right), the price movement has tried to go

lower twice, but has found support each time. After the second bounce off of the

support, the security enters a new trend and heads upward.

Triangles

These are some of the most well-known chart patterns used in technical analysis.

The three types of triangles, which vary in construct and implication, arethe symmetrical triangle, ascending and descending triangle. These chart

patterns are considered to last anywhere from a couple of weeks to several

months.

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Figure 4

The symmetrical triangle in Figure 4 is a pattern in which two trendlines converge

toward each other. This pattern is neutral in that a breakout to the upside or

downside is a confirmation of a trend in that direction. In an ascending triangle,

the upper trendline is flat, while the bottom trendline is upward sloping. This is

generally thought of as a bullish pattern in which chartists look for an upside

breakout. In a descending triangle, the lower trendline is flat and the upper

trendline is descending. This is generally seen as a bearish pattern where

chartists look for a downside breakout.

Flag and Pennant

These two short-term chart patterns are continuation patterns that are formed

when there is a sharp price movement followed by a generally sideways price

movement. This pattern is then completed upon another sharp price movement

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in the same direction as the move that started the trend. The patterns are

generally thought to last from one to three weeks.

Figure 5

As you can see in Figure 5, there is little difference between a pennant and

a flag. The main difference between these price movements can be seen in the

middle section of the chart pattern. In a pennant, the middle section is

characterized by converging trendlines, much like what is seen in a symmetrical

triangle. The middle section on the flag pattern, on the other hand, shows a

channel pattern, with no convergence between the trendlines. In both cases, the

trend is expected to continue when the price moves above the upper trendline.

Wedge

The wedge chart pattern can be either a continuation or reversal pattern. It is

similar to a symmetrical triangle except that the wedge pattern slants in an

upward or downward direction, while the symmetrical triangle generally shows a

sideways movement. The other difference is that wedges tend to form over

longer periods, usually between three and six months.

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Figure 6

The fact that wedges are classified as both continuation and reversal patterns

can make reading signals confusing. However, at the most basic level, a falling

wedge is bullish and a rising wedge is bearish. In Figure 6, we have a falling

wedge in which two trendlines are converging in a downward direction. If the

price was to rise above the upper trendline, it would form a continuation pattern,

while a move below the lower trendline would signal a reversal pattern.

Gaps

A gap in a chart is an empty space between a trading period and the followingtrading period. This occurs when there is a large difference in prices between two

sequential trading periods. Gap price movements can be found on bar charts and

candlestick charts but will not be found on point and figure or basic line charts.

Gaps generally show that something of significance has happened in the

security, such as a better-than-expected earnings announcement.

Triple Tops and Bottoms

Triple tops and triple bottoms are another type of reversal chart pattern in chart

analysis. These are not as prevalent in charts as head and shoulders and double

tops and bottoms, but they act in a similar fashion. These two chart patterns are

formed when the price movement tests a level of support or resistance three

times and is unable to break through; this signals a reversal of the prior trend.

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Figure 7

Confusion can form with triple tops and bottoms during the formation of the

pattern because they can look similar to other chart patterns. After the first two

support/resistance tests are formed in the price movement, the pattern will look

like a double top or bottom, which could lead a chartist to enter a reversal

position too soon.

Rounding Bottom

A rounding bottom, also referred to as a saucer bottom, is a long-term reversal

pattern that signals a shift from a downward trend to an upward trend. This

pattern is traditionally thought to last anywhere from several months to several

years.

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Figure 8A rounding bottom chart pattern looks similar to a cup and handle pattern but

without the handle. The long-term nature of this pattern and the lack of a

confirmation trigger, such as the handle in the cup and handle, makes it a difficult

pattern to trade.

.

Indicators And Oscillators

Indicators are calculations based on the price and the volume of a security that

measure such things as money flow, trends, volatility and momentum. Indicatorsare used as a secondary measure to the actual price movements and add

additional information to the analysis of securities. Indicators are used in two

main ways: to confirm price movement and the quality of chart patterns, and to

form buy and sell signals.

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There are two main types of indicators: leading and lagging. A leading indicator

precedes price movements, giving them a predictive quality, while a lagging

indicator is a confirmation tool because it follows price movement. A leading

indicator is thought to be the strongest during periods of sideways or non-trending trading ranges, while the lagging indicators are still useful during

trending periods.

There are also two types of indicator constructions: those that fall in a

bounded range and those that do not. The ones that are bound within a range

are called oscillators - these are the most common type of indicators. Oscillator

indicators have a range, for example between zero and 100, and signal periods

where the security is overbought (near 100) or oversold (near zero). Non-

bounded indicators still form buy and sell signals along with displaying strength

or weakness, but they vary in the way they do this. The two main ways that

indicators are used to form buy and sell signals in technical analysis is

through crossovers and divergence. Crossovers are the most popular and are

reflected when either the price moves through the moving average, or when two

different moving averages cross over each other. The second way indicators are

used is through divergence, which happens when the direction of the price trend

and the direction of the indicator trend are moving in the opposite direction. This

signals to indicator users that the direction of the price trend is

weakening. Indicators that are used in technical analysis provide an extremely

useful source of additional information.

Sectoral Analysis

Indian Pharma Sector An Overview

The Indian pharma industry is instrumental in providing affordable health care for

the general Indian populace, and is generally considered a success story. One of

the biggest hallmarks of the Indian pharma sector is the affordability it has bought

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to move beyond mere reverse engineering. As a result, there is a renewed focus

on R&D, and discovery of new molecules. Admittedly, the trend is still in its

infancy, and only leading companies like Ranbaxy and Dr Reddys Labs are

making any progress on this front. Another positive effect has been the growth ofthe biotechnology sector in India, though the linkages between biotech and

pharma still remain very tenuous, as opposed to nations with highly evolved

pharmaceutical industries.

Key Points

Supply Higher for traditional therapeutic segments, which is typicalof a developing market. Relatively lower for lifestylesegment.

Demand Very high for certain therapeutic segments. Will change aslife expectancy, literacy increases.

Barriers to entry Licensing, distribution network, patents, plant approval byregulatory authority.

Bargaining powerof suppliers

Distributors are increasingly pushing generic products in abid to earn higher margins.

Bargaining powerof customers

High, a fragmented industry has ensured that there iswidespread competition in almost all product segments.

(Currently also protected by the DPCO).

Competition High. Very fragmented industry with the top 300 (of 24,000manufacturing units) players accounting for 85% of salesvalue. Consolidation is likely to intensify.

Indian Pharma Industry Future Scenario

The Indian pharma industry is still trying to come to terms with the new patent

regime. It is estimated that the Indian companies will lose close to USD 1 billion

in potential revenues, since many of the drugs currently produced will become

protected by patents. A curious phenomena has also resulted, with the industry

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clearly divided into two segments Indian manufacturers and MNCs. The Indian

companies continue to play to their traditional strengths in generic and bulk

drugs, and focus on the medium and lower ends of the consumer market. On the

other hand, the MNCs have chosen to maintain their focus on the high end of themarket.

Over the next five years, the Indian pharma industry will continue to grow by at

least twice the rate of global growth, which is close to 6%. With the rapid

economic growth and the rise of affluence in selected consumer segments, there

will be a greater movement towards formulation drugs, and this market is

expected to reach a figure of USD 14 billion by 2013. The generics segment,

however, will continue to dominate the scene.

The pharmacy retail segment will be the fastest growing segment in the overall

pharma industry, and will achieve high growth rates of almost 25% over the next

few years. The entry of corporate entities such as Apollo and Max into the field

has led to organization in the segment. Another notable trend will be forward

integration into retail by the manufacturers, such as Himalaya Drug Company.

There will be a significant increase in the clinical trials and diagnostics

outsourcing, and this segment will experience a grow of about 20%. Though R&D

will still remain sluggish, some lading players such as Ranbaxy and DRL will

remain at forefront of research for new formulations and molecules.

A significant window of opportunity will be available to the Indian pharma industry

by the expiring patents, which will create an opportunity worth USD 80 billion by

2013. It is estimated that the Indian pharma industry will attain a market size of

about USD 50 billion by 2020, and break into the Global Top 10.

Expenditure on Research & Development

The R&D spend of the top five companies is about 5% to 10% of revenues.

Despite growing at a CAGR of over 50% over the last four years, the ratio is still

way below the global average of 15% to 20% of sales. However, despite the

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relatively low R&D spending, Indian companies are stepping up their research

activities to make themselves more self sufficient in terms of product

development, now that the product patent regime has come into force.

Prospects of Pharmaceutical sector

The product patents regime heralds an era of innovation and research resulting

in the launch of new patented product launches. In the longer run, domestic

companies would face fresh competition from MNCs, as they would make

aggressive new launches. However, the latter would most likely be subject to

price negotiation. Drugs having estimated sales of over US$ 108 bn are expected

to go off patent between CY09 and CY13. With the governments in the

developed markets looking to cut down healthcare costs by facilitating a speedy

introduction of generic drugs into the market, domestic pharma companies willstand to benefit. However, despite this huge promise, intense competition and

consequent price erosion would continue to remain a cause for concern. The life

style segments such as cardiovascular, anti-diabetes and anti-depressants will

continue to be lucrative and fast growing owing to increased urbanisation and

change in lifestyles. Growth in domestic sales in the future will depend on the

ability of companies to align their product portfolio towards the chronic segment

Contract manufacturing and research (CRAMS) is expected to gain momentum

going forward. Indias competitive strengths in research services include English-

language competency, availability of low cost skilled doctors and scientists, largepatient population with diverse disease characteristics and adherence to

international quality standards. As for contract manufacturing, both global

innovators and generic majors are finding it profitable to outsource production.

Currently, India has the highest number of US FDA approved plants outside the

US at 75 plus..

Companies considered for Stock Analysis

AVENTIS PHARMA LTD.

Key ratios

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P/E 29.05

ROE (%) 18.2

ROCE (%) 27.9

Dividend Yield (%) 1.0

Shareholding Pattern

Particular no. of shares(Mn) %

Foreign 2.20 (9.6%)

Domestic 4.33 (18.8%)

Non Promoter Corporate

Holding1.25 (5.4%)

Promoters 13.91 (60.4%)

Public & others 1.34 (5.8%)

Total 23.03 (100%)

Technical Analysis

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Analysis

In this chart, a clear uptrend in the share price is seen. It indicates that the companyenjoys a good level of investor confidence.

Fundamental Analysis would reveal that this stock is over priced, given the P-E

ratio.The companys returns are also quite moderate.

Here there is a contrast in the results given by fundamental & technical analysis.

Though fundamental analysis will view this as an average stock for investment,thechart pattern shows that this stock has given remarkable results in the past year.

SUN PHARMA LTD.

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Key ratios

P/E 40.45

ROE (%) 27.0

ROCE (%) 27.4




Foreign 42.23 (20.4%)

Domestic 11.36 (5.5%)


Holding10.28 (5.0%)

Promoters 131.97 (63.7%)


Total 207.12 (100%)

Technical Analysis

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Analysis

This chart shows an overall uptrend, though occasional ups & downs areobserved.

An analysis of the company ratio reveals that the P-E ratio is quite high,indicatingthat the stock is over-priced & it may face market corrections.

With moderate values of ROE & ROCE, investing in this stock would not yieldoptimum returns.

An investment in this stock would be a relatively safe bet,with fairly moderatereturns.

Divis Laboratories

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Key ratios

P/E 29.89

ROE (%) 39.8

ROCE (%) 40.9



Particularno. of

shares(Mn)%

Foreign 21.79 (16.5%)

Domestic 18.50 (14.0%)


Holding 9.76 (7.4%)

Promoters 69.20 (52.4%)


Total 132.14 (100%)

Technical Analysis

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Analysis

Technically, this chart represents a Cup-and-Handle pattern. This stock is seen

to be quite volatile over the past one year.

Though, there is a possibility of this stock being overpriced due to its high P-E

ratio, the returns that the company is getting are quite good.as is evident from theratios. Hence, it is advisable for an investor to invest in this stock from the long

term perspective.

Indian Cement industry An Overview

The Indian cement industry has witnessed a phenomenal capacity addition to thetune of about 52 mn tonnes in the last two financial years which accounted for

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about 24% of the industrys capacity of 218 mn tonnes at the end of FY09. In thelast two financial years, the cement industry has registered a double-digit growthin capacity addition compared to moderate growth of 3-7% registered duringperiod FY 03-07. As a result, industrys capacity utilisation rate which showed arising trend upto FY07, has dropped to a level of 83% in FY09.

In FY09, the GDP growth slowed down to 6.7% compared to the 9% growthreported in FY08. However, cement consumption growth in FY09 at 8.4% hasbeen able to maintain its multiplier factor with GDP growth at 1.25 times.

In FY09, all the regions except the Western and the Northern region haveoutperformed the industry in consumption growth. The Eastern region continuedits buoyant performance and registered the highest cement consumption growthof 11.3% on yoy basis. The Southern and Central regions also reportedimpressive double-digit growth of 10.4% in cement consumption. But, theNorthern region has registered the lowest growth in the cement demand on yoy

basis. Comparatively, poor demand growth registered by the Western region wason account of high base of the last year and also slightly subdued demand.

With focus on capacity addition, many small/medium players have been able tocapture more market share and consolidate their position in the industry in thelast two years. Market share of top five individual companies taken together showa decline to a level of 44.3% in FY09 from 46.3% in FY08.

Eventhough the utilisation rate dropped, average cement prices in FY09 rose byabout 5% on yoy basis. But, the growth in cement prices remained slightlysubdued compared to 21% and 14%, registered in FY07 and FY08, respectively.

On the regional front, prices in the Southern region were firm and rulingconsistently at the highest level amongst all the regions in FY09. However, dueto slowdown in the cement offtake and relatively low operating rate, prices in theNorthern region remained at the lowest levels compared to other regions.

In FY09, the cement industry witnessed a fall in profitability. Eventhough,average realisation for the industry increased by about 4% on yoy basis, cost ofproduction has increased by 18.5% on yoy basis. Power and fuel cost for manycement companies increased in FY09 mainly on account of substantial increasein coal prices. As a result, the operating profit margin of the industry dropped byabout 8-9% in FY09. Also, higher interest rates and depreciation provided on

expanded capacities took its toll on the net profit margin of the industry whichwitnessed a decline by about 5% in FY09.

Key Points

Supply The demand-supply situation is tightly balanced with the latter

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being marginally higher than the former.

Demand Housing sector acts as the principal growth driver for cement.However, in recent times, industrial and infrastructure sectorhave also emerged as demand drivers for cement.

Barriers toentry

High capital costs and long gestation periods. Access tolimestone reserves (principal raw material for the manufactureof cement) also acts as a significant entry barrier.

Bargainingpower ofsuppliers

Licensing of coal and limestone reserves, supply of power fromthe state grid and availability of railways for transport are allcontrolled by a single entity, which is the government.However, nowadays producers are relying more on captivepower, but the shortage of coal and volatile fuel prices remain a

concern.

Bargainingpower ofcustomers

Cement is a commodity business and sales volumes mostlydepend upon the distribution reach of the company. However,things are changing and few brands have started commandinga premium on account of better quality perception.

Competition Due to large number of players in the industry and very littlebrand differentiation to speak of, the competition is intense withplayers resorting to expanding reach and achieving pan Indiapresence.

Financial Year '09

During FY09, the industry maintained volume growth of around 10% YoY. Theindustry added nearly 30 MT in FY09 over the previous year taking the totalcapacity to nearly 212 MTPA. India owing to its locational advantage has beencatering to the cement requirements of the Middle East and the South EastAsian nations. However, the exports were curtailed in FY09 in order to satisfythe domestic demand and contain inflation. While demand growth stood at10% YoY, average industry cement realisations (average of price per bag ofcement) were higher by about 5% YoY. The growth in realisations sloweddown as additional capacities coming on stream eased the supply pressures.

The overheated real estate sector has cooled off now. Considering thefinancial turmoil witnessed globally, financial institutions have tightened theircredit norms. This cautious stance has led to a credit crunch and the samehas impacted upcoming projects. On account of general economic slowdownand these issues, the demand for cement has moderated. However, stimulus

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packages announced by the government and agricultural income gave a fillipto the demand for the commodity.

The industry volumes and realisations were higher during FY09 that boostedtopline growth. However, cost of operation did also witnessed northwardmovement that exerted pressure on margins. The cement industry on anaverage maintains two months inventory of fuel and such costs. The crudeprices have only started cooling off November 2008 onwards, the benefit ofwhich should start flowing in starting quarter ended March 2009 onwards.Smooth supply of state grid power is another problem. To ensure smoothfunctioning of plants and lower costs, industry has opted to set up captivepower plants based on coal. This has resulted in increase in demand for coal.But coal linkages for the industry are poor. Recently the ratio has droppedbelow 50%. So the players either have to purchase it from open market orimport it. This has increased cost of operation. The industry had lined up hugecapex plans with that depreciation costs have moved up. All of this dented

profitability.

Prospects of cement industry

The industry is likely to maintain its growth momentum and continue growing at

around 8% to 9% in the medium to long term. Government initiatives in the

infrastructure sector and the housing sector are likely to be the main drivers of

growth for the industry.

In the recent past, demand has surpassed supply, resulting in healthy cement

prices across the country. However, this scenario is likely to reverse as the

industry has lined up huge capacity expansion plans. With the growth in the

sector and waning demand supply gap, cement producers have lined up capacity

expansion plans either by brownfield or greenfiled expansion route. The fresh

capacities announced till date will add up 60 MT to the existing capacity (200

MT), and are expected to go on stream by FY10. As the capacities become

operational, which has started taking place, supply may once again outstrip

demand putting downward pressure on margins. Having said that, temporary

relief may be provided if there are delays in any of the proposed expansion

plans.

While infrastructure spending has been a boon, there was also a strong cushion

from the steady growth of the construction sector (read housing). However,

recently the demand has slowed down as real estate and construction activities

in the urban areas have taken a back seat with economic slowdown. The

importance of the housing sector in cement demand can be gauged from the fact

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that it consumes almost 60%-70% of the countrys cement. If this support wanes,

it would impact the growth in consumption of cement, leading to demand supply

mismatch. Also, the hike in prices of coal and petroleum products could impact

cement companies margins.

In the budget, while the government refrained from cutting lowering the burden of

taxes and duties on cement, it imposed customs duty of 7.5% on RMC cement.

Imposition of 7.5% customs duty on concrete batching plants is likely to

negatively impact the ready mix concrete manufacturers. However, it wont have

a severe impact as RMC constitutes not more than 5% of total cement

consumption. The government has increased budgetary allocation for roads

under NHDP. Further, with more incentives being spelled out for the

infrastructure and housing sector, cement manufacturers will continue to benefit.

The budget measures such as increasing excise duties have proved to be futile

and in the future too, we believe that it is the market dynamics that will determinethese variables.

Good agricultural income has supported demand for the commodity despiteslowdown in real estate sector. Going forward, we believe the governmentsinitiatives in the infrastructure and housing sectors are likely to be the maindrivers of growth for the industry in the long run.

Companies considered for Stock Analysis

ACC Ltd.

Key ratios

P/E 10.13

ROE (%) 29.4

ROCE (%) 40.0



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Foreign 24.41 (13.0%)

Domestic 37.26 (19.8%)


Holding9.38 (5.0%)

Promoters 86.73 (46.2%)


Total 187.74 (100%)

Technical Analysis

Analysis

This chart is giving somewhat mixed signals regarding share price. Technically,

this is a double-top and bottom chart.

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Looking at the chart, it may be said that investing in this stock is advisable only

as long term investments.

The P-E ratios is around 10, which is good as far as the companys earnings &

stock valuation are concerned. ROE & ROCE values also are fairly adequate.

AMBUJA CEMENT

Key ratios

P/E 12.97

ROE (%) 20.0

ROCE (%)

F & T Analysis (2)

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