a study onequity analysis at india infoline limited (1)

8/3/2019 A Study Onequity Analysis at India Infoline Limited (1)

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A STUDY

On

EQUITY or FUNDAMENTAL ANALYSIS (INDIA INFOLINE LIMITED)

Submitted To: Submitted By:

Prof. Sushi Mehta Saloni Sabharwal (2010MBA40)

Adyta Chuni (2010MBA04)


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SUMMARYThe automobile industry, one of the core sectors, has undergone metamorphosis with theadvent of new business and manufacturing practices in the light of liberalization andglobalization. The sector seems to be optimistic of posting strong sales in the couple of yearsin the view of a reasonable surge in demand. The Indian automobile market is gearingtowards international standards to meet the needs of the global automobile giant sand becomea global hub. A detailed analysis of Automobile industry has been covered in respect of pastgrowth and performance. Under this project to better understand the Industry I have usedFundamental tools to make it more authentic and meaningful. An economy-industry-company (E.I.C) approach has been followed under Fundamental Analysis which coverseffect of Recession, the impact of inflation, FDIs, Export, and GDP etc. on AutomobileIndustry. The Industry Analysis has been done with the help of SWOT analysis and industrylife cycle. For Company Analysis as a part of Fundamental tool we have undergone with thecomparative analysis of TATA Motors the leading company, Marti Suzuki Indias largest Car

manufacturer and Mahindra and Mahindra along with the help of ratio analysis. Thefundamental aspect consists of financial and Non-Financial analysis of these companies. Atthe end conclusion and recommendations have been specified so as to make the project work more meaningful and purposeful. Equity Analysis


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CH APTER I - INTRODU C TION (Equity Analysis)

INTRODU C TION

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

markets especially on equities to get high returns, and to save tax in honest way. Equities are playing a major role in contribution of capital to the business from the beginning. Since theintroduction of shares concept, large numbers of investors are showing interest to invest instock market. In an industry plagued with scepticism and a stock market increasingly difficultto predict and contend with, if one looks hard enough there may still be a genuine aid for theDay Trader and Short Term Investor. The price of a security represents a consensus. It is the

price at which one person agrees to buy and another agrees to sell. The price at which aninvestor is willing to buy or sell depends primarily on his expectations. If he expects thesecurity's price to rise, he will buy it; if the investor expects the price to fall, he will sell it.These simple statements are the cause of a major challenge in forecasting security prices,

because they refer to human expectations. As we all know firsthand, humans expectations areneither easily quantifiable nor predictable. If prices are based on investor expectations, thenknowing what a security should sell for (i.e., fundamental analysis) becomes less importantthan no wing what other investors expect it to sell for. That's not to say that knowing what asecurity should sell for isn't important--it is. But there is usually a fairly strong consensus of astock's future earnings that the average investor cannot disprove Fundamental analysis andtechnical analysis can co-exist in peace and complement each other. Since all the investors inthe stock market want to make the maximum profits possible, they just cannot afford toignore either fundamental or technical analysis. Equity Analysis


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NEED OF T H E STUDY

To start any business capital plays major role. Capital can be acquired in two ways by issuingshares or by taking debt from financial institutions or borrowing money from financialinstitutions. The owners of the company have to pay regular interest and principal amount atthe end. Stock is ownership in a company, with each share of stock representing a tiny pieceof ownership. The more shares you own, the more of the company you own. The more sharesyou own, the more dividends you earn when the company makes a profit. In the financialworld, ownership is called Equity.

Advantages of selling stock:

A company can raise more capital than it could borrow.

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

A company does not have to make principal payments Stock/shares play a major role inacquiring capital to the business in return investors are paid dividends to the shares they own.The more shares you own the more dividends you receive. The role of equity analysis is to

provide information to the market. An efficient market relies on information: a lack of information creates inefficiencies that result in stocks being misrepresented (over or under valued). This is valuable because it fills information gaps so that each individual investor does not need to analyze every stock thereby making the markets more efficient. EquityAnalysis


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OBJE C TIVES OF T H E STUDY

The objective of this project is to deeply analyze our Indian Automobile Industry for investment purpose by monitoring the growth rate and performance on the basis of historicaldata.

The main objectives of the Project study are:

Detailed analysis of Automobile industry which is gearing towards international standards

Analyze the impact of qualitative factors on industrys and companys prospects

Comparative analysis of three tough competitors TATA Motors, Marti Suzuki and Mahindraand Mahindra through fundamental analysis.

Suggesting as to which companys shares would be best for an investor to invest. EquityAnalysis


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SC OPE OF T H E STUDY

The scope of the study is identified after and during the study is conducted. The project is based on tools like fundamental analysis and ratio analysis. Further, the study is based oninformation of last five years.

The analysis is made by taking into consideration five companies i.e. TATA Motors, MartiSuzuki and Mahindra and Mahindra

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

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

MET H ODOLOGYResearch design or research methodology is the procedure of collecting, analyzing andinterpreting the data to diagnose the problem and react to the opportunity in such a waywhere the costs can be minimized and the desired level of accuracy can be achieved to arriveat a particular conclusion. The methodology used in the study for the completion of the

project and the fulfilment of the project objectives. The sample of the stocks for the purposeof collecting secondary data has been selected on the basis of Random Sampling. The stocksare chosen in an unbiased manner and each stock is chosen independent of the other stockschosen. The stock sari chosen from the automobile sector. The sample size for the number of stocks is taken as 3 for fundamental analysis of stocks as fundamental analysis is veryexhaustive and requires detailed study.

LIMITATIONS

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

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

The study is limited to the companies having equities.

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

There was a constraint with regard to time allocation for the research study i.e. for a periodof 45 days.

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


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CH APTER II - REVIEW OF LITERATURE

SE C URITY ANALYSIS

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

coupled with perfect matching to an individuals risk tolerance. In order to carryout selection,timing and matching actions an investor must conduct deep security analysis. Investors

purchase equity shares with two basic objectives;1.To make capital profits by selling sharesat higher prices.2.To earn dividend income. These two factors are affected by a host of factors. An investor has to carefully understand and analyze all these factors. There are

basically two approaches to study security prices and valuation i.e. fundamental analysis andtechnical analysis the value of common stock is determined in large measure by the

performance of the firm that issued the stock. If the company is healthy and can demonstratestrength and growth, the value of the stock will increase. When values increase then pricesfollow and returns on an investment will increase. However, just to keep the savvy investor

on their toes, the mix is complicated by the risk factors involved. Fundamental analysisexamines all the dimensions of risk exposure and the probabilities of return, and merges themwith broader economic analysis and greater industry analysis to formulate the valuation of astock.


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FUNDAMENTAL ANALYSIS

Fundamental analysis is a method of forecasting the future price movements of a financialinstrument based on economic, political, environmental and other relevant factors andstatistics that will affect the basic supply and demand of whatever underlies the financialinstrument. It is the study of economic, industry and company conditions in an effort todetermine the value of a companys stock. Fundamental analysis typically focuses on keystatistics in companys financial statements to determine if the stock price is correctly valued.The term simply refers to the analysis of the economic well-being of a financial entity asopposed to only its price movements. Fundamental analysis is the cornerstone of investing.The basic philosophy underlying the fundamental analysis is that if an investor invests re.1 in

buying a share of a company, how much expected returns from this investment he has. Thefundamental analysis is to appraise the intrinsic value of a security. It insists that no oneshould purchase or sell a share on the basis of tips and rumours. The fundamental approachcalls upon the investors to make his buy or sell decision on the basis of detailed analysis of the information about the company, about the industry, and the economy. It is also known astop-down approach . This approach attempts to study the economic scenario, industry

position and the company expectations and is also known as economic-industry-companyapproach (EIC approach).

Thus the EIC approach involves three steps:

1. Economic analysis

2. Industry analysis

3. Company analysis Equity Analysis

1. E C ONOMI C ANALYSIS

The level of economic activity has an impact on investment in many ways. If the economygrows rapidly, the industry can also be expected to show rapid growth and vice versa. Whenthe level of economic activity is low, stock prices are low, and when the level of economicactivity is high, stock prices are high reflecting the prosperous outlook for sales and profits of the firms. The analysis of macroeconomic environment is essential to understand the

behaviour of the stock prices. The commonly analyzed macro economic factors are as

follows: Gross Domestic Product (GDP): GDP indicates the rate of growth of the economy. Itrepresents the aggregate value of the goods and services produced in the economy. It consistsof personal consumption expenditure, gross private domestic investment and governmentexpenditure on goods and services and net exports of goods and services. The growth rate of economy points out the prospects for the industrial sector and the return investors can expectfrom investment in shares. The higher growth rate is morefavorable to the stock market.Savings and investment: It is obvious that growth requires investment which in turn requiressubstantial amount of domestic savings. Stock market is a channel through which the savings


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are made available to the corporate bodies. Savings are distributed over various assets likeequity shares, deposits, mutual funds, real estate and bullion. The savings and investment

patterns of the public affect the stock to a great extent. Equity Analysis

Inflation: Along with the growth of GDP, if the inflation rate also increases, then the realgrowth would be very little. The effects of inflation on capital markets are numerous. Anincrease in the expected rate of inflation is expected to cause a nominalise in interest rates.Also, it increases uncertainty of future business and investment decisions. As inflationincreases, it results in extra costs to businesses, thereby squeezing their profit margins andleading to real declines in profitability. Interest rates: The interest rate affects the cost of financing to the firms. A decrease in interest rate implies lower cost of finance for firms andmore profitability. More moneys available at a lower interest rate for the brokers who aredoing business with borrowed money. Availability of cheap funds encourages speculationand rise in the price of shares. Tax structure: Every year in March, the business communityeagerly awaits the Governments announcement regarding the tax policy. Concessions andincentives given to a certain industry encourage investment in that particular industry. Taxreliefs given to savings encourage savings. The type of tax exemption has impact on the

profitability of the industries. Infrastructure facilities: Infrastructure facilities are essential for the growth of industrial and agricultural sector. A wide network of communication system isa must for the growth of the economy. Regular supply of power without any power cut wouldEquity Analysis boost the production. Banking and financial sectors also should be soundenough to provide adequate support to the industry. Good infrastructure facilities affect thestock market favourably.

2. INDUSTRY ANALYSIS

An industry is a group of firms that have similar technological structure of production and produce similar products and Industry analysis is a type of business research that focuses onthe status of an industry or an industrial sector (a broad industry classification, like"manufacturing"). Irrespective of specific economic situations, some industries might beexpected to perform better, and share prices in these industries may not decline as much as inother industries. This identification of economic and industry specific factors influencingshare prices will help investors to identify the shares that fit individual expectations IndustryLife Cycle: The industry life cycle theory is generally attributed to JuliusGrodensky. The lifecycle of the industry is separated into four well defined stages.

Pioneering stage:

The prospective demand for the product is promising in this stage and the technology of the product is low. The demand for the product attracts many producers to produce the particular product. There would be severe competition and only fittest companies survive this stage.The producers try to develop brand name, differentiate the product and create a productimage. In this situation, it is difficult to select companies for investment because the survivalrate is unknown.


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Rapid growth stage:

This stage starts with the appearance of surviving firms from the pioneering stage. Thecompanies that have withstood the competition grow strongly in market share and financial

performance. The technology of the production would have improved resulting in low cost of production and good quality products. The companies have stable growth rate in this stageand they declare dividend to the shareholders. It is advisable to invest in the shares of thesecompanies.

Maturity and stabilization stage:

The growth rate tends to moderate and the rate of growth would be more or less equal to theindustrial growth rate or the gross domestic product growth rate. Symptoms of obsolescencemay appear in the technology. To keep going, technological innovations in the production

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

that take place in the maturity stage of the industry.

Decline stage: demand for the particular product and the earnings of the companies in theindustry decline. It is better to avoid investing in the shares of the low growth industry evenin the boom period. Investment in the shares of these types of companies leads to erosion of capital. Growth of the industry: The historical performance of the industry in terms of growthand profitability should be analyzed. The past variability in return and growth in reaction tomacro economic factors provide an insight into the future. Equity Analysis

Nature of competition: Nature of competition is an essential factor that determines thedemand for the particular product, its profitability and the price of the concerned company

scraps. The companies' ability to withstand the local as well as the multinational competitioncounts much. If too many firms are present in the organized sector, the competition would besevere. The competition would lead to a decline in the price of the product. The investor

before investing in the scrip of a company should analyze the market share of the particular company's product and should compare it with the top five companies.

SWOT analysis :

SWOT analysis represents the strength, weakness, opportunity and threat for an industry.Every investor should carry out a SWOT analysis for the chosen industry. Take for instance,increase in demand for the industrys product becomes its strength, presence of numerous

players in the market, i.e. competition becomes the threat to a particular company. The progress in R & D in that industry is an opportunity and entry of multinationals in theindustry is a threat. In this way the factors are to be arranged and analyzed. Equity Analysis


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3. C OMPANY ANALYSIS

In the company analysis the investor assimilates the several bits of information related to thecompany and evaluates the present and future values of the stock. The risk and returnassociated with the purchase of the stock is analyzed to take better investment decisions. The

present and future values are affected by a number of factors. Competitive edge of thecompany: Major industries in India are composed of hundreds of individual companies.Though the number of companies is large, only few companies control the major marketshare. The competitiveness of the company can be studied with the help of the following;

Market share:

The market share of the annual sales helps to determine companys relative competitive position within the industry. If the market shares high, the company would be able to meetthe competition successfully. The companies in the market should be compared with like

product groups otherwise, the results will be misleading. Growth of sales: The rapid growth

in sales would keep the shareholder in a better position than one with stagnant growth rate.Investors generally prefer size and growth in sales because the larger size companies may beable to withstand the business cycle rather than the company of smaller size.

Stability of sales: If a firm has stable sales revenue, it will have more stable earnings. Thefall in the market share indicates the declining trend of company, Even if the sales are stable.Hence the stability of sales should be compared with its market share and the competitorsmarket share. Earnings of the company: Sales alone do not increase the earnings but the costsand expenses of the company also influence the earnings. Further, earnings do not alwaysincrease with increase in sales. The companys sales might have increased but its earnings per share may decline due to rise in costs. Hence, the investor should not only depend on thesales, but should analyze the earnings of the company. Financial analysis: The best source of financial information about a company is its own financial statements. This is a primarysource of information for evaluating the investment prospects in the particular companysstock. Financial statement analysis is the study of a companys financial statement fromvarious viewpoints. The statement gives the historical and current information about thecompanys operations. Historical financial statement helps to predict the future and thecurrent information aids to analyze the present status of the company. The two mainstatements used in the analysis are Balance sheet and Profit and Loss Account. The balancesheet is one of the financial statements that companies prepare every year for their shareholders. It is like a financial snapshot, the company's financial situation ate moment in

time. It is prepared at the year end, listing the company's current assets and liabilities. It helpsto study the capital structure of the company. It is better for the investor to avoid a companywith excessive debt component in its capital structure.

From the balance sheet, liquidity position of the company can also be assessed with theinformation on current assets and current liabilities. Ratio analysis: Ratio is a relationship

between two figures expressed mathematically. Financial ratios provide numericalrelationship between two relevant financial data. Financial ratios are calculated from the


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balance sheet and profit and loss account. The relationship can be either expressed as a percent or as a quotient. Ratios summarize the data for easy understanding, comparison andinterpretations. Ratios for investment purposes can be classified into profitability ratios,turnover ratios, and leverage ratios. Profitability ratios are the most popular ratios sinceinvestors prefer to measure the present profit performance and use this information to

forecast the future strength of the company. The most often used profitability ratios are returnon assets, price earnings multiplier, price to book value, price to cash flow, and price to sales,dividend yield, return on equity, present value of cash flows, and profit margins. a) Return onAssets (ROA) ROA is computed as the product of the net profit margin and the total assetturnover ratios.ROA = (Net Profit/Total income) x (Total income/Total Assets) this ratioindicates the firm's strategic success. Companies can have one of two strategies: costleadership, or product differentiation. ROA should be rising or keeping pace with thecompany's competitors if the company is successfully pursuing either of these strategies, buthow ROA rises will depend on the company's strategy.

ROAshould rise with a successful cost leadership strategy because the companys increasingoperating efficiency. An example is an increasing, total asset, turnover ratio as the companyexpands into new markets, increasing its market share. The company may achieve leadership

by using its assets more efficiently. With a successful product differentiation strategy, ROAwill rise because of a rising profit margins) Return on Investment (ROI)ROI is the return oncapital invested in business, i.e., if an investment Rs 1 core in men, machines, land andmaterial is made to generate Rs. 25 laths of net profit, then the ROI is 25%. The computationof return on investment is as follows: Return on Investment (ROI) = (Net profit/Equityinvestments) x 100As this ratio reveals how well the resources of a firm are being used,higher the ratio, better are the results.

The return on shareholders investment should be compared with the return of other similar firms in the same industry. The inert-firm comparison of this ratio determines whether theinvestments in the firm are attractive or not as the investors would like to invest only wherethe return is higher) Return on Equity Return on equity measures how much an equityshareholder's investment is actually earning. The return on equity tells the investor how muchthe invested rupee is earning from the company.

The higher the number, the better is the performance of the company and suggests theusefulness of the projects the company has invested in. The computation of return on equityis as follows: Return on equity = (Net profit to owners/value of the specific ownersContribution to the business) x 100The ratio is more meaningful to the equity shareholders

who are invested to know profits earned by the company and those profits which can be madeavailable to pay dividend to themed) Earnings per Share (EPS)

This ratio determines what the company is earning for every share. For many investors,earnings are the most important tool. EPS is calculated by dividing the earnings (net profit)

by the total number of equity shares. The computation of EPS is as follows: Earnings per share = Net profit/Number of shares outstanding The EPS is a good measure of profitabilityand when compared with EPS of similar other companies, it gives a view of the comparative


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earnings or earnings power of affirms. EPS calculated for a number of years indicateswhether or not earning power of the company has increased.

e) Dividend per Share (DPS) The extent of payment of dividend to the shareholders ismeasured in the form of dividend per share. The dividend per share gives the amount of cashflow from the company to the owners and is calculated as follows: Dividend per share =Total dividend payment / Number of shares outstanding the payment of dividend can haveseveral interpretations to the shareholder. The distribution of dividend could be thought of asthe distribution of excess profits/abnormal profits by the company. On the other hand, itcould also be negatively interpreted as lack of investment opportunities. In all, dividend

payout gives the extent of inflows to the shareholders from the companys) Dividend PayoutRatio From the profits of each company a cash flow called dividend is distributed among itsshareholders.

This is the continuous stream of cash flow to the owners of shares, apart from the pricedifferentials (capital gains) in the market. The return to the shareholders, in the form of

dividend, out of the company's profit is measured through the payout ratio. The payout ratiois computed as follows: Payout Ratio = (Dividend per share / Earnings per share) * 100The

percentage of payout ratio can also be used to compute the percentage of retained earnings.The profits available for distribution are either paid as dividends or retained Internally for

business growth opportunities. Hence, when dividends are not declared, the entire profit is ploughed back into the business for its future investments) Dividend Yield Dividend yield iscomputed by relating the dividend per share to the market price of the share. The market

place provides opportunities for the investor to buy the companys share at any point of time.The price at which the share has been bought from the market is the actual cost of theinvestment to the shareholder. The market price is to be taken as the cum-dividend price.Dividend yield relates the actual cost to the cash flows received from the company.

The computation of dividend yield is as follows

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

* 100High dividend yield ratios are usually interpreted as undervalued companies in themarket. The market price is a measure of future discounted values, while the dividend per share is the present return from the investment. Hence, a high dividend yield implies that theshare has been under priced in the market. On the other hand a low dividend yield need not

be interpreted as overvaluation of shares. A company that does not pay out dividends will nothave a dividend yield and the real measure of the market price will be in terms of earnings

per share and not through the dividend payments.

Price/Earnings Ratio (P/E) the P/E multiplier or the price earnings ratio relates the currentmarket price of the share to the earnings per share. This is computed as follows:

Price/earnings ratio = C urrent market price / Earnings per share

This ratio is calculated to make an estimate of appreciation in the value of a share of accompany and is widely used by investors to decide whether or not to buy shares in a


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particular company. Many investors prefer to buy the company's shares at a low P/Ratio sincethe general interpretation is that the market is undervaluing the share and there will be acorrection in the market price sooner or later.

A very high P/E ratio on the other hand implies that the company's shares are overvalued andthe investor can benefit by selling the shares at this high market prices) Debt-to-Equity RatioDebt-Equity ratio is used to measure the claims of outsiders and the owners against the firmsassets.

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

Tthe debt-equity ratio is calculated to measure the extent to which debt financing has beenused in a business. It indicates the proportionate claims of owners and the outsiders againstthe firms assets. The purpose is to get an idea of the cushion available to outsiders on theliquidation of the firm.


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CH APTER III - INDUSTRY PROFILE Equity Analysis

FINAN C IAL MARKETS

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

the economic system. It is through financial markets and institutions that the financial systemof an economy works. Financial markets refer to the institutional arrangements for dealing infinancial assets and credit instruments of different types such as currency, cheques, bank deposits, bills, bonds, equities, etc.Financial market is a broad term describing anymarketplace where buyers and sellers participate in the trade of assets such as equities, bonds,currencies and derivatives. They are typically defined by having transparent pricing, basicregulations on trading, costs and fees and market forces determining the prices of securitiesthat trade. Generally, there is no specific place or location to indicate a financial market.Wherever a financial transaction takes place, it is deemed to have taken place in the financialmarket. Hence financial markets are pervasive in nature since financial transactions are

themselves very pervasive throughout the economic system. For instance, issue of equityshares, granting of loan by term lending institutions, deposit of money into a bank, purchaseof debentures, sale of shares and so on. In a nutshell, financial markets are the credit marketscatering to the various needs of the individuals, firms and institutions by facilitating buyingand selling of financial assets, claims and services.


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C LASSIFI C ATION OF FINAN C IAL MARKETS

Equity Analysis Financial markets organized markets unorganized markets Capital MarketsMoney Markets Industrial SecuritiesMarketGovernmentSecurities Market Long-termloanmarketPrimary Market Secondary market Call Money Market Commercial

BillMarketTreasury Bill Market Money Lenders, Indigenuos Bankers

Capital Market The capital market is a market for financial assets which have a long or indefinite maturity. Generally, it deals with long term securities which have a period of aboveone year. In the widest sense, it consists of a series of channels through which the savings of the community are made available for industrial and commercial enterprises and publicauthorities. As a whole, capital market facilitates rising of capital.

The major functions performed by a capital market are:

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

2. Securing the foreign capital and know-how to fill up deficit in the required resources for economic growth at a faster rate.

3. Effective allocation of the mobilized financial resources, by directing the same to projectsyielding highest yield or to the projects needed to promote balanced economic development.Capital market consists of primary market and secondary market.

Primary market: Primary market is a market for new issues or new financial claims. Hence itis also called as New Issue Market. It basically deals with those securities which are issued tothe public for the first time. The market, therefore, makes available new block of securitiesfor public subscription. In other words, it deals with rising of fresh capital by companieseither for cash or for consideration other than cash. The best example could be Initial PublicOffering (IPO) where a firm offers shares to the public for the first time. Equity Analysis

Secondary market: Secondary market is a market where existing securities are traded. Inother words, securities which have already passed through new issue market are traded in thismarket. Generally, such securities are quoted in the stock exchange and it provides acontinuous and regular market for buying and selling of securities. This market consists of allstock exchanges recognized by the government of India. Money Market Money markets arethe markets for short-term, highly liquid debt securities. Money market securities aregenerally very safe investments which return relatively low interest rate that is most

appropriate for temporary cash storage or short term time needs. It consists of a number of sub-markets which collectively constitute the money market namely call money market,commercial bills market, acceptance market, and Treasury bill market. Derivatives Marketthe derivatives market is the financial market for derivatives, financial instruments likefutures contracts or options, which are derived from other forms of assets. Derivatives asecurity whose price is dependent upon or derived from one or more underlying assets. Thederivative itself is merely a contract between two or more parties. Its values determined by


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fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes.

The important financial derivatives are the following:

Forwards: Forwards are the oldest of all the derivatives. A forward contract refers to an

agreement between two parties to exchange an agreed quantity of an asset for cash at acertain date in future at a predetermined price specified in that agreement. The promised assetmay be currency, commodity, instrument etc. Futures: Future contract is very similar to aforward contract in all respects excepting the fact that it is completely a standardized one. Itis nothing but standardized forward contract which is legally enforceable and always tradedon an organized exchange. Options: A financial derivative that represents a contract sold byone party (option writer) to another party (option holder). The contract offers the buyer theright, but not the obligation, to buy (call) or sell (put) a security or other financial asset at anagreed-upon price (the strike price) during a certain period of time or on a specific date(exercise date). Call options give the option to buy at certain price, so the buyer would want

the stock to go up. Put options give the option to sell at a certain price, so the buyer wouldwant the stock to go down. Swaps: It is yet another exciting trading instrument. Infect, it isthe combination of forwards by two counterparties. It is arranged to reap the benefits arisingfrom the fluctuations in the market either currency market or interest rate market or anyother market for that matter.

Foreign Exchange Market It is a market in which participants are able to buy, sell, exchangeand speculate concurrencies. Foreign exchange markets are made up of banks, commercialcompanies, central banks, investment management firms, hedge funds, and retail for brokersand investors. The fore market is considered to be the largest financial market in the world. Itis a worldwide decentralized over-the-counter financial market for the trading of currencies.Because the currency markets are large and liquid, they are believed to bathe most efficientfinancial markets. It is important to realize that the foreign exchange market is not a singleexchange, but is constructed of a global network of computers that connects participants fromall parts of the world. Commodities Market It is a physical or virtual marketplace for buying,selling and trading raw or primary products. For investors' purposes there are currently about50 major commodity markets worldwide that facilitate investment trade in nearly 100

primary commodities. Commodities are split into two types: hard and soft commodities. Hardcommodities are typically natural resources that must be mined or extracted (gold, rubber, oil,etc.), whereas soft commodities are agricultural products or livestock (corn, wheat, coffee,sugar, soybeans, pork, etc.)


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INDIAN FINAN C IAL MARKETS

India Financial market is one of the oldest in the world and is considered to be the fastestgrowing and best among all the markets of the emerging economies. The history of Indiancapital markets dates back 200 years toward the end of the18th century when India was under

the rule of the East India Company. The development of the capital market in Indiaconcentrated around Mumbai whereon less than 200 to 250 securities brokers were activeduring the second half of the 19th century. The financial market in India today is moredeveloped than many other sectors because it was organized long before with the securitiesexchanges of Mumbai, Ahmadabad and Kolkata were established as early as the 19thcentury. By the early 1960s the total number of securities exchanges in India rose to eight,including Mumbai, Ahmadabad and Kolkata apart from Madras, Kanpur, Delhi, Bangaloreand Pane. Today there are 21 regional securities exchanges in Indian addition to thecentralized NSE (National Stock Exchange) and OTCEI (Over the Counter Exchange of India).However the stock markets in India remained stagnant due to stringent controls on the

market economy that allowed only a handful of monopolies to dominate their respectivesectors. The corporate sector wasn't allowed into many industry segments, which weredominated by the state controlled public sector resulting in stagnation of Equity Analysis

The economy right up to the early 1990s. Thereafter when the Indian economy beganliberalizing and the controls began to be dismantled or eased out; the securities marketswitnessed a flurry of IPOs that were launched. This resulted in many new companies acrossdifferent industry segments to come up with newer products and services. A remarkablefeature of the growth of the Indian economy in recent years has been the role played by itssecurities markets in assisting and fuelling that growth with money rose within the economy.This was in marked contrast to the initial phase of growth in many of the fast growing

economies of East Asia that witnessed huge doses of FDI (Foreign Direct Investment)spurring growth in their initial days of market decontrol. During this phase in India much of the organized sector has been affected by high growth as the financial markets played an all-inclusive role in sustaining financial resource mobilization. Many PSUs (Public Sector Undertakings) that decided to offload part of their equity were also helped by the well-organized securities market in India. The launch of the NSE (National Stock Exchange) andthe OTCEI (Over the Counter Exchange of India) during the mid 1990s by the government of India was meant tougher in an easier and more transparent form of trading in securities. The

NSE was conceived as the market for trading in the securities of companies from the large-scale sector and the OTCEI for those from the small-scale sector. While the NSE has not just

done well to grow and evolve into the virtual backbone of capital markets in India theOTCEIstruggled and is yet to show any sign of growth and development. The integration of IT intothe capital market infrastructure has been particularly smooth in India due to the countrysworld class IT industry. This has pushed up the operational efficiency of the Indian stock market to global standards and as a result the country has been able to capitalize on its highgrowth and attract foreign capital like never before. The regulating authority for capitalmarkets in India is the SEBI (Securities and Exchange Board of India). SEBI came into

prominence in the 1990s after the capital markets experienced some turbulence. It had to take


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drastic measures to plug many loopholes that were exploited by certain market forces toadvance their vested interests. After this initial phase of struggle SEBI has grown in strengthas the regulator of Indias capital markets and as one of the countrys most importantinstitutions.


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FINAN C IAL MARKET REGULATIONS

Regulations are an absolute necessity in the face of the growing importance of capitalmarkets throughout the world. The development of a market economy is dependent on thedevelopment of the capital market. The regulation of a capital market involves the regulationof securities; these rules enable the capital market to function more efficiently andimpartially. A well regulated market has the potential to encourage additional investors to

partake, and contribute in, furthering the development of the economy. The chief capitalmarket regulatory authority is Securities and Exchange Board of India (SEBI).Sepias theregulator for the securities market in India. It is the apex body to develop and regulate thestock market in India It was formed officially by the Government of Indian 1992 withes Act1992being passed by the Indian Parliament. Chaired by B Behave, SEBI is headquartered inthe popular business district of Bandra-Kurla complexinMumbai, and has Northern, Eastern,Southern and Western regional offices in New Delhi, Kolkata, and ChennaiandAhmedabad.In place of Government Control, a statutory and autonomous regulatory board with definedresponsibilities, to cover both development & regulation of the market, and independent

powers has been set up.

The basic objectives of the Board were identified as:

to protect the interests of investors in securities;

to promote the development of Securities Market;

to regulate the securities market and For matters connected therewith or incidental thereto.

Since its inception SEBI has been working targeting the securities and is attending tithefulfilment of its objectives with commendable zeal and dexterity. The improvements in thesecurities markets like capitalization requirements, margining, establishment of clearingcorporations etc. reduced the risk of credit and also reduced the market.SEBI has introducedthe comprehensive regulatory measures, prescribed registration norms, the eligibility criteria,the code of obligations and the code of conduct for different intermediaries like, bankers toissue, merchant bankers, brokers and sub- brokers, registrars, portfolio managers, creditrating agencies, underwriters and others. It has framed bye-laws, risk identification and risk management systems for Clearinghouses of stock exchanges, surveillance system etc. whichhas made dealing insecurities both safe and transparent to the end investor. Another significant event is the approval of trading in stock indices (like S&P CNX Nifty & Sense) in2000.

Market Indexes a convenient and effective product because of the following reasons:

It acts as a barometer for market behaviour;

It is used to benchmark portfolio performance;

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


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It can be used for passive fund managements in case of Index Funds.

Two broad approaches of SEBI is to integrate the securities market at the national level, andalso to diversify the trading products, so that there is an increase in number of tradersincluding banks, financial institutions, insurance companies, mutual funds, primary dealersetc. to transact through the Exchanges. In this context the introduction of derivatives tradingthrough Indian Stock Exchanges permitted by SEBI in 2000 Addis a real landmark.SEBI hasenjoyed success as a regulator by pushing systemic reforms aggressively and successively(e.g. the quick movement towards making the markets electronic and paperless rollingsettlement on T+2 bases). SEBI has been active in setting up the regulations as requiredunder law.

STO C K EX CH ANGES IN INDIA

Stock Exchanges are an organized marketplace, either corporation or mutual organization,where members of the organization gather to trade company stocks or other securities. The

members may act either as agents for their customers, or as principals for their own accounts.As per the Securities Contracts Regulation Act, 1956 a stock exchange is an association,organization or body of individuals whether incorporated or not, established for the purposeof assisting, regulating and controlling business in buying, selling and dealing in securities.Equity Analysis Stock exchanges facilitate for the issue and redemption of securities andother financial instruments including the payment of income and dividends. The recordkeeping is central but trade is linked to such physical place because modern markets arecomputerized. The trade on an exchange is only by members and stock broker do have seaton the exchange.

List of Stock Exchanges in India Bombay Stock Exchange National Stock Exchange

OTC Exchange of India Regional Stock Exchanges

1.Ahmedabad2.Bangalore3.Bhubaneswar 4.Calcutta5.Cochin6.Coimbatore7.Delhi8.Guwahati9. Hyderabad10.Jaipur 11.Ludhiana12.Madhya Pradesh13.Madras14.Magadh15.Mangalore16. Meerut17.Pune18.Saurashtra Kutch19.Uttar Pradesh20.Vadodara Equity Analysis

BOMBAY STOCK EXCHANGE

A very common name for all traders in the stock market, BSE, stands for Bombay Stock Exchange. It is the oldest market not only in the country, but also in Asia. In the early days,BSE was known as "The Native Share & Stock Brokers Association."It was established in theyear 1875 and became the first stock exchange in the country to be recognized by thegovernment. In 1956, BSE obtained a permanent recognition from the Government of Indiaunder the Securities Contracts (Regulation) Act, 1956.In the past and even now; it plays a

pivotal role in the development of the countrys capital market. This is recognized worldwide


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and its index, SENSEX, is also tracked worldwide. Earlier it was an Association of Persons(AOP), but now it is demutualised and corporatized entity incorporated under the provisionsof the Companies Act, 1956, pursuant to the BSE (Corporatisation and Demutualization)Scheme, 2005 notified by the Securities and Exchange Board of India (SEBI).BSE VisionThe vision of the Bombay Stock Exchange is to "Emerge as the premier Indian stock

exchange by establishing global benchmarks."BSE Management Bombay Stock Exchange is managed professionally by Board of

Directors. It comprises of eminent professionals, representatives of Trading Members and theManaging Director. The Board is an inclusive one and is shaped to benefit from the marketintermediaries participation. The Board exercises complete control and formulates larger

policy issues. The day-to-day operations of BSE are managed by the Managing Director andits school of professional as a management team. BSE Network the Exchange reaches

physically to 417 cities and towns in the country. The framework of it has been designed tosafeguard market integrity and to operate with transparency. It provides an efficient marketfor the trading in equity, debt instruments and derivatives. Its online trading system,

popularly known as BOLT, is a proprietary system and it is BS 7799-2-2002 certified. TheBOLT network was expanded, nationwide, in 1997. The surveillance and clearing &settlement functions of the Exchange are ISO 9001:2000 certified.

BSE FactsBSE as a brand is synonymous with capital markets in India. The BSE SENSEXis the benchmark equity index that reflects the robustness of the economy and finance. It wasthe First in India to introduce Equity Derivatives First in India to launch a Free Float IndexFirst in India to launch US$ version of BSE Sensex First in India to launch ExchangeEnabled Internet Trading Platform First in India to obtain ISO certification for Surveillance,Clearing &Settlement 'BSE On-Line Trading System (BOLT) has been awarded the globallyrecognized the Information Security Management System standardBS7799-2:2002. First tohave an exclusive facility for financial training Moved from Open Outcry to ElectronicTrading within just 50 days

BSE with its long history of capital market development is fully geared to continue itscontributions to further the growth of the securities markets of the country, thus helping Indiaincreases its sphere of influence in international financial markets.

NATIONAL STOCK EXCHANGE OF INDIALIMITED

The National Stock Exchange of India Limited has genesis in the report of the High-poweredStudy Group on Establishment of New Stock Exchanges, which recommended promotion of a National Stock Exchange by financial institutions (FIs) to provide access to investors fromall across the country on an equal footing. Based on the recommendations, NSE was

promoted by leading Financial Institutions at the behest of the Government of India and wasincorporated in November 1992 as a tax- paying company unlike other stock Exchange in thecountry. On its recognition as a stock exchange under the Securities Contracts (Regulation)Act, 1956 in April 1993, NSE commenced operations in the Wholesale Debt Market (WDM)


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segment in June 1994. The Capital Market (Equities) segment commenced operations in November 1994 and operations in Derivatives segment commenced injure 2000.NSEGROUP National Securities Clearing Corporation Ltd. (NSCCL) it is a wholly ownedsubsidiary, which was incorporated in August 1995 and commenced clearing operations inApril 1996. It was formed to build confidence in clearing and settlement of securities, to

promote and maintain the short and consistent settlement cycles, to provide a counter-partyrisk guarantee and to operate a tight risk containment system.NSE.IT Ltd.It is also a whollyowned subsidiary of NSE and is its IT arm. This arm of the NSE is uniquely positioned to

provide products, services and solutions for the securities industry. NSE.IT primarily focuseson in the area of trading, broker front-end and back-office, clearing and settlement, web-

based, insurance, etc. Along with this, it also provides consultancy and implementationservices in Data Warehousing, Business Continuity Plans, Site Maintenance and Backups,Stratus Mainframe Facility Management, Real Time Market Analysis & Financial News.India Index Services & Products Ltd. (IISL) it is a joint venture between NSE and CRISILLtd. to provide a variety of indices and index related services and products for the IndianCapital markets. It was set up in May 1998. IISL has a consulting and licensing agreementwith the Standard and Poors (S&P), world's leading provider of investible equity indices, for co-branding equity indices. National Securities Depository Ltd. (NSDL) NSE joined handswith IDBI and UTI to promote dematerialization of securities. This step was taken to solve

problems related to trading in physical securities. It commenced operations in November 1996.

NSE Facts It uses satellite communication technology to energize participation from around400 cities in India. NSE can handle up to 1 million trades per day. It is one of the largestinteractive VSAT based stock exchanges in the world. The NSE- network is the largest

private wide area network in India and the first extended C- Band VSAT network in the

world. Presently more than 9000 users are trading on the real time-online NSEapplication.Today; NSE is one of the largest exchanges in the world and still forgingahead. At NSE, we are constantly working towards creating a more transparent, vibrant andinnovative capital market.

OVER THE COUNTER EXCHANGE OF INDIAOTCEI was incorporated in 1990 as asection 25 company under the companies Act1956 and is recognized as a stock exchangeunder section 4 of the securities Contracts Regulation Act, 1956. The exchange was set up toaid enterprising promotes in raising finance for new projects in a cost effective manner and to

provide investors with a transparent and efficient mode of trading Modelled along the lines of the NASDAQ market of USA, OTCEI introduced many novel concepts to the Indian capitalmarkets such as screen-based nationwide trading, sponsorship of companies, market makingand scrip less trading. As a measure of success of these efforts, the Exchange today has 115listings and has assisted in providing capital for enterprises that have gone on to buildsuccessful brands for themselves like VIP Advantage, Sonora Tiles & Brilliant mineral water,etc.Need for OTCEI:Studies by NASSCOM, software technology parks of India, the venturecapitals fundsand the governments IT tasks Force, as well as rising interest in IT,Pharmaceutical, Biotechnology and Media shares have repeatedly emphasized the need for a


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national stock market for innovation and high growth companies. Innovative companies arecritical to developing economics like India, which is undergoing a major technologicalrevolution. With their abilities to generate employment opportunities and contribute to theeconomy, it is essential that these companies not only expand existing operations but also setup new units. The key issue for these companies is raising timely, cost effective and long

term capital to sustain their operations and enhance growth. Such companies, particularlythose that have been in operation for a short time, are unable to raise funds through thetraditional financing methods, because they have not yet been evaluated by the financialworld

CH APTER IV - C OMPANY PROFILE

INDIA INFOLINE LIMITED

India Info line is a one-stop financial services shop, most respected for quality of itsinformation, personalized service and cutting-edge technology.VisionOur vision is to be themost respected company in the financial services space. India Info line Group The India Infoline group, comprising the holding company, India Info line Limited and its wholly-ownedsubsidiaries, include the entire financial services space with offerings ranging from Equityresearch, Equities and derivatives trading, Commodities trading, Portfolio ManagementServices, Mutual Funds, Life Insurance, Fixed deposits, Goo bonds and other small savingsinstruments to loan products and Investment banking. India Info line also owns and managesthe websites www.indiainfoline.com andwww.5paisa.com.The company has a network of over 2100 business locations (branches and sub-brokers) spread across more than 450 cities

and towns. The group caters to approximately a million customers. Founded in 1995 by Mr. Normal Jain (Chairman and Managing Director) as an independent business research andinformation provider, the company gradually evolved into a one-stop financial servicessolutions provider.

India Info line received registration for a housing finance company from the NationalHousing Bank and received the Fastest growing Equity Broking House - Large firms inIndia by Dun & Bradstreet in 2009. It also received the Insurance broking license fromIRDA; received the venture capital license; received in principle approval to sponsor amutual fund; received Best broker- India award from Finance Asia; Most ImprovedBrokerage- India award from Asia money.


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C OMPANY STRU C TURE

India Info line Limited is listed on both the leading stock exchanges in India, viz. the Stock Exchange, Mumbai (BSE) and the National Stock Exchange (NSE) and is also member of

both the exchanges. It is engaged in the businesses of Equities broking, Wealth Advisory

Services and Portfolio Management Services. It offers broking services in the Cash andDerivatives segments of the NSE as well as the Cash segment of the BSE. It is registered with

NSDL as well as CDSL as a depository participant, providing a one-stop solution for clientstrading in the equities market. It has recently launched its Investment banking andInstitutional Broking business. A SEBI authorized Portfolio Manager; it offers PortfolioManagement Services to clients. These services are offered to clients as different schemes,which are based on differing investment strategies made to reflect the varied risk-return

preferences of clients.

India Info line Media and Research Services limited the services represent a strong supportthat drives the broking, commodities, mutual fund and portfolio management services

businesses. It undertakes equities research which is acknowledged by none other than Forbesas 'Best of the Web' and 'a must-read for investors in Asia'. India Info lines research isavailable not just over the internet but also on international wire services like Bloomberg(Code: IILL),Thomson First Call and Internet Securities where India Info line is amongst themost read Indian brokers. India Info line Commodities Limited. India Info line CommoditiesPut Limited is engaged in the business of commodities broking. Their experience in securities

broking empowered them with the requisite

Skills and technologies to allow them to offer commodities broking as a contra-cyclicalalternative to equities broking. It enjoys memberships with the MCX and NCDEX, two

leading Indian commodities exchanges, and recently acquired membership of DGCX. It has amulti-channel delivery model, making it among the select few to offer online as well asoffline trading facilities. India Info line Marketing & Services India Info line Marketing andServices Limited is the holding company of IndiaInfoline Insurance Services Limited andIndia Info line Insurance Brokers Limited. India Info line Insurance Services Limited is aregistered Corporate Agent with the Insurance Regulatory and Development Authority(IRDA). It is the largest Corporate Agent for ICICI Prudential Life Insurance Co Limited,which is Indias largest private Life Insurance Company. India Info line was the firstcorporate agent to get licensed by IRDA in early 2001. India Info line Insurance BrokersLimited India Info line Insurance Brokers Limited is a newly formed subsidiary which willcarry out the business of Insurance broking. India Info line Investment Services LimitedConsolidated shareholdings of all the subsidiary companies engaged in loans and financingactivities under one subsidiary. Recently, Orient Global, a Singapore-based investmentinstitution invested USD 76.7 million for a 22.5% stake in India InfolineInvestment Services.This will help focused expansion and capital rising in the said subsidiaries for various lending

businesses like loans against securities, SMEfinancing, distribution of retail loan products,consumer finance business and housing finance business. India Info line Investment ServicesPrivate Limited consists of the following step-down subsidiaries. India Info line Distribution


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Company Limited (distribution of retail loan products) Money line Credit Limited (consumer finance) India Info line Housing Finance Limited (housing finance)IIFL (Asia) PrivateLimitedIIFL (Asia) Private Limited is wholly owned subsidiary which has been incorporatedin Singapore to pursue financial sector activities in other Asian markets. Further to obtainingthe necessary regulatory approvals, the company has been initially capitalized at 1 million

Singapore dollars.

IIFL MANAGEMENT T H E MANAGEMENT TEAM

Mr. Normal Jain, Chairman & Managing Director Normal Jain, MBA (IIM, Ahmadabad) anda Chartered and Cost Accountant, founded Indias leading financial services company IndiaInfo line Ltd. in 1995, providing globally acclaimed financial services in equities andcommodities broking, life insurance and mutual funds distribution, among others.Mr. R Venkataraman, Executive Director Venkataraman, co-promoter and Executive Director of IndiaInfoline Ltd., is a B. Tech (Electronics and Electrical Communications Engineering, IITKharagpur) and an MBA (IIM Bangalore). He joined the India Info line board in July 1999.

THE BOARD OF DIRECTORS Apart from Normal Jain and R Venkataraman, the Board of Directors of India InfolineLtd. Comprises: Mr. Niles Vikamsey, Independent Director.Vikamsey, Board member since February 2005 - a practicing Chartered Accountant and

partner (Himeji Kunverji & Co., Chartered Accountants), a member firm of HLBInternational, headed the audit department till 1990 and thereafter also handles financialservices, consultancy, investigations, mergers and acquisitions, valuations etym. Sat PalChatter, Non Executive Director Sat Pal Chatter, - Board member since April 2001 -Presidential Council of Minority Rights member, Chairman of the Board of Trustee of Singapore Business Federation, is also a life trustee of SINDA, a non profit body, helping the

under-privileged Indians in Singapore. He joined the IndiaInfoline board in April 2001.Mr Kristi Sinhala, Independent Director. Kristi Sinhala Board member since January 2005 completed his masters from the Agra University and started his career as a Class I officer with Life Insurance Corporation of Indium Arum K. Purvey, Independent Director. A.K.Purvey Board member since March 2008 completed his Masters degree in commercefrom Allahabad University in 1966 and diploma in Business Administration in 1967.

PRODUCTS & SERVICES

Equities India Info line provided the prospect of researched investing to its clients, which washitherto restricted only to the institutions. Research for the retail investor did not exist prior to

India Info line. India Info line leveraged technology to bring the convenience of trading to theinvestors location of preference (residence or office) through computerized access. IndiaInfo line made it possible for clients to view transaction costs and ledger updates in real time.The Company is among the few financial intermediaries in India to offer a complement of online and offline broking. The Companies network of branches also allows customers to

place orders on phone or visit our branches for trading.CommoditiesIndia Info linesextension into commodities trading reconciles its strategic intent to emerge as a one stopsolutions financial intermediary. Its experience in securities broking has empowered it with


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requisite skills and technologies. The Companies commodities business provides a contra-cyclical alternative to equities broking. The Company was among the first to offer the facilityof commodities trading in Indias young commodities market (the MCX commencedoperations in 2003). Average monthly turnover on the commodity exchanges increased fromRs 0.34 ban to Rs20.02 bn.

Insurance An entry into this segment helped complete the client's product basket;concurrently, it graduated the Company into a one stop retail financial solutions provider. Toensure maximum reach to customers across India, it has employed a multi pronged approachand reaches out to customers via our Network, Direct and Affiliate channels. IndiaInfolinewas the first corporate in India to get the agency license in early 2001.Invest Online IndiaInfo line has made investing in Mutual funds and primary market so effortless. Onlyregistration is needed. No paperwork no queues and No registration charges. India Info lineoffers a host of mutual fund choices under one roof, backed by in-depth research and advicefrom research house and tools configured as investor friendly. Wealth Management The keyto achieving a successful Investment Portfolio is to have a carefully planned financialstrategy based on a thorough understanding of the client's investment needs and risk appetite.The IIFL Private Wealth Management Team of financial experts will recommend anappropriate financial strategy to effectively meet customers investment requirements.

Asset Management India Info line is a leading pan-India mutual fund distribution houseassociated with leading asset management companies. It operates primarily in the retailsegment leveraging its existing distribution network to reach prospective clients. It hasreceived the in-principle approval to set up a mutual fund. Portfolio ManagementIIFLPortfolio Management Service is a product wherein an equity investment portfolio is createdto suit the investment objectives of a client. India Infolineinvests the clients resources intostocks from different sectors, depending on clients risk-return profile. This service is

particularly advisable for investors who cannot afford to give time or don't have that expertisefor day-to-day management of their equity portfolio.NewslettersAs a subscriber to the DailyMarket Strategy; clients get research reports of IndiaInfoline research team on a priority

basis. The Indiainfoline Weekly Newsletter is the flashback for the week gone by. A weeklyoutlook coupled with the best of the web stories from Indiainfoline and links to importantinvestment ideas, Leader Speak and features is delivered in the clients inbox every Fridayevening.


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CH APTER V

DATA ANALYSIS & INTERPRETATIONS

ANALYSIS OF AUTOMOBILE INDUSTRY

Over a period of more than two decades the Indian Automobile industry has been driving itsown growth through phases. With comparatively higher rate of economic growth rate indexagainst that of great global powers, India has become a hub of domestic and exports business.The automobile sector has been contributing its share to the shining economic performance of India in the recent years. To understand this industry for the purpose of investment we needto analyze it by the following approach:

Fundamental Analysis (E.I.C Approach)

a. Economy analysis. b. Industry analysis.c. Company analysis

Fundamental Analysis

Fundamental analysis is the study of economic, industry and company conditions inaneeffort to determine the value of a company s stock. Fundamental analysis typicallyfocuses on key statistics in company s financial statements to determine if the stock priceis correctly valued. Most fundamental information focuses on economic, industry andcompany statistics. The typical approach to analyzing a company involves three basic

steps:

1. Determine the condition of the general economy.

2. Determine the condition of the industry.

3. Determine the condition of the company.


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1 . E C ONOMY ANALYSIS

Economic analysis is the analysis of forces operating the overall economy a country.Economic analysis is a process whereby strengths and weaknesses of an economy areanalyzed. Economic analysis is important in order to understand exact condition of

aneconomy.GDP and Automobile Industry In absolute terms, India is 16th in the world intersof nominal factory output. The service sector is growing rapidly in the past few years. This isthe pie- chart showing contributions of different sectors in Indian economy.

Today, automobile sector in India is one of the key sectors of the economy in terms of theemployment. Directly and indirectly it employs more than 10 million people and if we addthe number of people employed in the auto-component and auto ancillary industry then thenumber goes even higher. As the world economy slipped into recession hitting the demandhard and the banking sector takes conservative approach towards lending to corporate sector,the GDPgrowth has downgraded it to 7.1 per cent for 2008-09 and it has increased to 8.6%in2010 by overcoming the setbacks of recession. Recession Auto industry in India had beenhit hard by ongoing global financial recession. But its in a good shape now. Much of thisoptimism resulted from renewed interest being shown in India auto industry by reputedoverseas car makers. Nissan Motors which Isa well known Japanese car making companyregarded India automobile market as global car manufacturing hub for future and investedhuge amount in our market. There are some other automobile companies of world who haveshown interest in India auto market. Major names among these are General Motors, SkodaAuto and Mercedes-Benz. These companies have major plans lined up for India autoindustry. These are few signs of the revolutionized auto industry after recession.

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

interest rates getting further hardened but also a drop in demand due to the squeeze in purchasing power. The effect of inflation has affected every sector which is related to car manufacturing and production. The increase in the price of fuel and the steel duet inflationhas led to a slower growth rate of the car industry in India. Foreign Direct Investment Theautomobile sector in the Indian industry is one of the high performing sectors of the Indianeconomy. This has contributed largely in making India a prime destination for manyinternational players in the automobile industry who wish to set up their businesses in India.Automatic approval for foreign equity investment up to 100 per cent of manufacture of automobiles and component is permitted.ExportsDespite recession; the Indian automobilemarket continues to perform better than most of the other industries in the economy incoming future; more and more MNCscoming in India to setup their ventures which clearlyshows the scope of expansion. During April-January 2010, overall automobile exportsregistered a growth rate of 13.24 percent.


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2. INDUSTRY ANALYSIS (AUTOMOBILE)

The automobile industry in India is the ninth largest in the world with an annual productionof over 2.3 million units in 2008. In 2009, India emerged as Asia's fourth largest exporter of automobiles, behind Japan, South Korea and Thailand. The Automobile Industry is one of the

fastest growing sectors in India. The increase in the demand for cars, and other vehicles, powered by the increase in the income is the primary growth driver of the automobileindustry in India. In 2009, estimated rate of growth of India Auto industry is going to be 9%.The Indian automobile sector is far from being saturated, leaving ample opportunity for volume growth. Segmentation of Automobile Industry The automobile industry comprises of Heavy vehicles (trucks, buses, tempos, tractors); passenger cars; Two-wheelers; CommercialVehicles; and Three-wheelers. Following is the segmentation that how much each sector comprises of whole Indian Automobile Industry.

Industry life cycle the industrial life cycle is a term used for classifying industry life over time. Industry life cycle classification generally groups industries into one of four stages:

pioneer, growth, maturity and decline. In the pioneer phase, the product has not been widelyaccepted or adopted. Business strategies are developing, and there is high risk of Failure.However, successful companies can grow at extraordinary rates. The Indian automobilesector has passed this stage quite successfully. The industry is growing rapidly, often at anaccelerating rate of sales and earnings growth. Indian Automotive Industry is booming with agrowth rate of around 15 % annually. The growth rate of the automobile industry in India isgreater than the GDP growth rate of the economy, so the automobile sector can be very well

be said to be in the growth phase. Swot analysis: A scan of the internal and externalenvironment is an important part of the strategic planning process. Environmental factorsinternal to the firm usually can be classifieds strengths (S) or weaknesses (W), and those

external to the firm can be classified as opportunities (O) or threats (T). Such an analysis of the strategic environment is referred to as a SWOT analysis.

SWOT analysis of the Indian automobile sector gives the following points:

1.Strengths

Large domestic market Sustainable labour cost advantage Competitive auto componentvendor base Government incentives for manufacturing plants Strong engineering skills indesign etc

2. Weaknesses Low labour productivity

High interest costs and high overheads make the production uncompetitive various forms of taxes push up the cost of production Low investment in Research and DevelopmentInfrastructure bottleneck

3. Opportunities

Increasing challenges in consumer demands, technology development, andglobalization.


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Heavy thrust on mining and construction activity Increase in the income level Cut in exciseduties

4.Threats

Ignorance of Research & development Rising interest rates Cut throat competition

3. C OMPANY ANALYSIS

The company analysis shows the long-term strength of the company that what is the financial position of the company in the market, where it stands among its competitors and who are thekey drivers of the company, what are the future plans of the company, what are the policiesof government towards the company and how the stake of the company divested amongdifferent groups of people. Here, I have taken three companies namely TATA Motors, MartiSuzuki and Mahindra and Mahindra for the purpose of fundamental analysis. Tata MotorsLimited is India's largest automobile company, with consolidated revenues of Rs. 92,519cores (USD 20 billion) in 2009-10. It is the leader in commercial vehicles in each segment,and among the top three in passenger vehicles with winning products in the compact, midsizecar and utility vehicle segments. The company is the world's fourth largest truck manufacturer, and the world's second largest bus manufacturer.Maruti Suzuki is a subsidiaryof Suzuki Motor Corporation Japan. More than half the numbers of cars sold in India wear Marti Suzuki badge. They offer a full range of cars from entry level Marti 800 & Alto tostylish hatchback Ritz, A star, Swift, Wagon R, Estelle and sedans Dire, SX4 and SportsUtility Vehicle Grand Vitara.Since inception, it has produced and sold over 7.5 millionvehicles in India and exported over 500,000 units to Europe and other countries. Its turnover

for the fiscal2008-09 stood at Rs. 203,583 Million & Profit after Tax at Rs. 12,187 Million.

The Mahindra Groups Automotive Sector is in the business of manufacturing andmarketing utility vehicles and light commercial vehicles, including three-wheelers. Its themarket leader in utility vehicles in India since inception, and currently accounts for about half of Indias market for utility vehicles. The Automotive Sector continues to be a leader in theutility vehicle segment with a diverse portfolio that includes mass transport as well as newgeneration vehicles like Scorpio, Bolero and the recently launched Xylem.


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%TATAMARUTIMAHINDRAInterpretationsThis ratio is widely used by investors to decidewhether or not to buy shares in a particular company. As per the graph, in 2008, the P/E ratio

of the three companies was the lowest compared to the previous years. TATA has the highestP/E ratio in2009 which indicates that it is overvalued, so the investors can benefit by sellingthe shares. An investor can go for Mahindra as its P/E ratio is the lowest in 2009 whichindicates that it is undervalued and there is a scope for growth in the future.


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CH APTER VI

FINDINGS, SUGGESTIONS & C ON C LUSION

FINDINGS

From the data analysis and interpretations of the ratios of three companies viz. Tata Motors,Marti Suzuki and Mahindra and Mahindra, the following findings have been given: The threecompanies were performing well till 2008 with a positive trend in the earnings per share. Butthere was a downward trend in 2009. Especially, TATA has witnessed a steep fall in the year 2009. The sales trend has been upward and positive in case of all the three companies. Thesales growth looks positive but in the year 2009, Tatas sales have declined whereas Martiand Mahindra have maintained the same upward positive trend. In case of dividend per share,there were fluctuations during the period 2005-2009. Due to recession, the dividends per share have declined in all the three companies. Tatas dividend has fallen drastically whileMarti sticks to below5 per share. Mahindra has made a slight reduction from rs.11.5 per sharein2008 to rs.10 per share this year. The return on investment has been fluctuating since 2005and the year 2009witnessed low returns in case of all the companies amongst which TATAhaste least rate of return. Compared to the three companies, Mahindra has the highest ROI in2009.

Marti had a stable dividend payout ratio since 2005. TATA and Mahindra have increased

their payout ratio in which Mahindra shows a higher payoutratio. The three companies havewitnessed a low price earnings ratio in 2008compared to the previous years. But the ratioincreased in 2009 in three companies. TATA has the highest P/E ratio in 2009 whichindicates that it is overvalued and Mahindras P/E ratio is the lowest in 2009 which indicatesthat it is undervalued and there is a scope for growth in the future. By analyzing the currenttrend of Indian Economy and Automobile Industry I have found that being a developingeconomy there is lot of scope for growth and this industry still has to cross many levels sothere are huge opportunities to invest in and this is being proved as more and more foreigncompanies are setting up there ventures in India. Increase in income level, increase inconsumer demand, technology development, globalization, foreign investments are few of theopportunities which the industry haste explore for developing the economy.

SUGGESTIONS

By analyzing the automobile industry with the help of fundamental analysis, it has beenrevealed that this industry has a lot of potential to grow. So recommending investing inAutomobile industry with no doubt is going to be a good and smart option because thisindustry is booming like never before not only in India but all over the world. The threegiants of Indian Automobile industry viz. TATA Motors, Marti Suzuki and Mahindra and


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Mahindra have outperformed in the industry. From the company analysis, we can know thatMahindra would be a better option for an investor compared to TATA and Marti. In view of the slump in the domestic and international market, TATA has recorded a slowdown insolesand income level. Its Earnings per share has also declined drastically. It has reduced itsdividend per share from rs.15 in the previous year to rs.6 in2009. The return on investment is

also very low. In view of all these, TATA is not a better option for an investor. The globalturmoil in financial markets has affected Marti also. The company is maintaining a stable

position. Its sales have grown over past five years. Inspire of the general economicslowdown, the sales of Marti Suzuki increased from Rs 21200 Core to Rs 23381 Core. As itis maintaining actable position, it can be recommended that for now Marti share price shows

That its a time to hold the position or buy more shares as there is scope of further rise inshare prices. Despite the challenging business environment, Mahindra has maintained itsupward sales level. Its Return on Investment is much higher compared to TATA and Marti.The dividend per share is rs.10 which is higher amongst the three companies. The companyhas potential to grow. It would be the best option for the investor. Investing in Marti Suzukifor long time could be a good option whereas in TATA motors there is a chance of gettingcorrection, as it already went on high side in a very short period of time and is experiencing adownfall from2008. Holding the shares for long time could be a wrong step and at this pointof time those who invested earlier can book their profits. As Mahindras sharewareundervalued, the investor can buy these shares. This is because a relatively lower P/E wouldsave investors from paying a very high price that does not justify the value of an investment.Few Suggestions for Right Stock Selection There are three factors which an investor mustconsider for selecting the right stocks. Business: An investor must look into what kind of

business the company is doing, visibility of the business, its past track record, capital needs of the company for expansion etc.

Balance Sheet: The investor must focus on its key financial ratios such as earnings per share, price-earnings ratio; debt-equity ratio, dividends per share and he must also check whether the company is generating cash flows. Bargaining: This is the most important factor which shows the true worth of the company. An investor needs to choose valuation

parameters which suit its business. Investment rules Invest for long term in equity marketsAlign your thought process with the business cycle of the company. Set the purpose for investment. Long term goals should be the objective of equity investment. Disciplinedinvestment during market volatility helps attains profits. Planning, Knowledge and Disciplineare very crucial for investment.


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C ON C LUSION

The Automobile industry inIndiais the seventh largest in the world with an annual productionof over 2.6 million units in 2009. In 2009, India emerged as Asias fourth largest exporter of automobiles, behind Japan, South Korea and Thailand. The collapse in market placewitnessed unprecedented turbulence in the wake of global financial meltdown. A runawayinflation touching a high point of 12% early in the year, the tight monetary policies followed

by the authorities for most of the year to control inflation with the consequent high interestrates and weak consumer demand, have collectively had a devastating effect on theautomotive sector.Maruti Suzuki India LTD. company has a trend of growth from till2008.During the financial year 2008-09 the there is downfall in the growth of the company.The main reason behind this downfall is because of the global recession. The downfall of net

profit during the financial year 2008-09 is 29.6% over the financial year 2007-2008.TATAMotors, which was trying to consolidate its leadership, position in the market, also had toface the impact of global meltdown. Amid the crippling economic crisis, Tata purchasedBritains Jaguar Land Rover (JLR) from Ford Motor Company. Acquiring JLR saddled Tatawith some tough losses. Dividends and earnings remain low.

Inspire of it being a tough year for all the companies across the globe and in India, Mahindrahas given a satisfactory performance. At present its shares are undervalued giving it a

potential for growth. Global recession had a dampener effect on the growth of automobileindustry but it was a short term phenomenon. The industry is bouncing back. One factor favoringthis point is that India has become a hot destination for companies of diverse nature

to invest in. Cut throat competition among top companies, lots of new car and vehicle modellaunches at regular intervals keeps the Indian auto sector moving. A continuous effort at costcutting and improving productivity will help the companies in making reasonable profitsdespite the impact of higher commodity prices and weaker rupee. The analysis gives anoptimistic view about the industry and its growth which recommends the investors to keep agood watch on the major players to benefit inters of returns on their investments.


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BIBLIOGRAPHY

Text BooksSecurity Analysis and Portfolio ManagementbyPunithavathy Pandean, VikasPublications.

Security analysis and portfolio managementbyV.A. Avadhani

Financial Markets and Servicesby Gordon and Natarajan, HimalayaPublications.

Financial Managementby Shahs K Gupta and R. K Sharma,KalyaniPublications.Newspapers

Economic times Business line

Websites

www.nseindia.com

www.bseindia.com www.investopedia.com

www.moneycontrol.com www.indiainfoline.com www.sebi.gov.inwww.tatamotors.com www.marutisuzuki.com www.mahindra.comwww.yahoofinance.com

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