project report sonam gupta

8/6/2019 Project Report Sonam Gupta

1/92

DIFFERENT STRATEGIES OF PORTFOILO MANAGEMENT

A PROJECT REPORT

SUBMITTED BY:

SONAM GUPTA

M.B.A

In partial fulfillment for the award of the degree

MASTER OF BUSINESS ADMINISTRATION

In

FINANCE

As Specialization

INDUSTRIAL GUIDE: COLLEGE GUIDE:

MISS RITIKA BALIYAN Mr. S.K MATTA

Sr. RELATIONSHIP MANAGER

RELIGARE SECURITTIES LIMITED

LLOYD INSTITUTE OF MANAGEMENT AND TECHNOLOGY

PLOT NO.11, KNOWLEDGE PARK-2 , GREATER NOIDA,U.P


2/92

Company Certificate

TO WHOMSOEVER IT MAY CONCERN

This is to certify that Ms Sonam Gupta, a student of

Lloyd Institute of Management and Technology Greater Noida,

Undertook a project on

RISK MANGEMENT IN EQUITY TRADING,

AND DIFFERENT STRATEGIES TO MANAGE THE PORTFOILO

OF ITS INVESTORS

At Religare Securities Limited from 27 June 2010 to 10 August 2010

Ms. Sonam Gupta has successfully completed the project under the guidance of

Ms Ritika Baliyan. He is a sincere and hard-working student with pleasant

manners.

We wish all success in him future endeavors.

Signature


3/92

CERTIFICATE OF ORIGIN

This is to certify that Ms. Sonam Gupta, a student of

Post Graduate Degree in Business Administration (Finance &Human

Resources), Lloyd Institute of Management and Technology,

Greater Noida has worked in the Religare Securities Limited, under the guidance

and supervision of Ms Ritika Baliyan, designation Senior

Relationship Manager, in Religare Securities Limited. The

period for which he was on training was from 27 June 2010 to 10 August

2010. This Summer Internship Report has the requisite standard for the partial

fulfillment the Post Graduate Degree in Management. To the best of our

knowledge no part of this report has been reproduced from any other report and

the contents are based on original research.

Signature Signature

(Faculty Guide) (Student)


4/92

ACKNOWLEDGEMENT

I express my sincere gratitude to my Industry Guide Ms Ritika Baliyan,

Senior Relationship Manager, Religare Securities Limited, for her able guidance,continuous support and cooperation throughout my project, without which the

present work would not have been possible.

I would also like to thank the entire team of us in Religare Securities Limited

especially:

y Mr Sandeep Kumar (Senior Relationship Manager)

y Mr Durgesh Diwedi (Senior Relationship Manager)

y Mr Abhishek Singh (Senior Relationship Manager)

y Mr Rashid Owais (Senior Relationship Manager)

y Mr Manav Khosla (Senior Relationship Manager)

y My Teammates

For their constant support and help in the successful completion of my

project.

Also, I am thankful to my Faculty Guide Mr. S.K Matta, of my Institute,

for his continued guidance and invaluable encouragement.

Signature

(Student)


5/92

Table of contents

Executive summary 1.

O bjective .

Rationale 3.

Brief History of Equity Market 4.

Trading Pattern of the Indian Stock Market 8.

OCTEI 10.

Formation of NSE 12.

Introduction Of the company 14-37

Analysis and Interpretation 38-44

Equity trading 45-50

Basis of managing Portfolio 51-61

Strategy followed in Religare 62-69

Steps followed in Portfolio Management 70-72

Hedging a tool in Portfolio Management 73-75

Research methodology 76-78

Scope 79

Findings and conclusions 80

Recommendations 81

References 82


6/92

EXECUTIVE SUMMARY

The project is based on the strategies followed by the company to manage the risk and give a

required return to the investors. It focuses on various tools and techniques followed while

managing the portfolio of the investor. It gives detailed information about:

y The trading pattern in the equity market

y The risk involved in various shares and to trade off between the risk and return

y The strategies to maintain the portfolio of the investor to give a required rate of return

Stock market is valuation and sentiment driven. It says economy will do better in near future.

It is a leading indicator and risk measure of how the economy is doing.When it goes up it

means that the Investment climate of the economy is good and expectations for future is

positive and people save more through this market. The development of investors is directly

linked to the development of the economy. Investors put their money in the equity market to

earn better returns. The up swings and downswings in the share market increase or decrease

the wealth of the investors.

Equity market is risk averse so proper management of the risk is of utmost requirement.For

tackling the risk various types of analysis is done.For managing the risk hedging emerges as

the most important tool to minimize the loss.


7/92

OBJECTIVE OF THE STUDY

y To study is to study the various strategies followed while trading in the equity market.

y To study the risk in the equity market and the various practices to trade off between risk

and return.

y To know basics and principles of managing the portfolio


8/92

RATIONALE OF THE PROJECT

y A plethora of functions makes portfolio management of the investors achallenging task. There are several things that should be kept in track and

of course, the variation in the prices of stocks, news in the national orinternational market, news about that company, dividend paid by the

company has to be kept in record.

y Earlier there was an open outcry system in which the shares were sold andpurchased by bidding through mouth. Now the portfolio managers depend

wholly on the online terminals. It helps in keeping all the records of the

stocks to yield a better return. Investors are investing in the equity market

and risk in the market is managed by the managers as they know how to

take the advantage of the persisting conditions.

y With lots of competition in the market t has become necessary forReligare to provide better facilities. It has become an important area as the

retail investors in the equity market are increasing day by day where most

of them are concentrating nowadays to make their functioning simpler

and quicker.


9/92

BRIEF HISTORY OF EQUITY MARKET

Evolution

Indian Equity Markets are one of the oldest in Asia. Its history dates back to nearly 200

years ago. The earliest records of security dealings in India are meager and obscure. The

East India Company was the dominant institution in those days and business in its loansecurities used to be transacted towards the close of the eighteenth century.

By 1830's business on corporate stocks and shares in Bank and Cotton presses took place in

Bombay. Though the trading list was broader in 1839, there were only half a dozen brokers

recognized by banks and merchants during 1840 and 1850.

The 1850's witnessed a rapid development of commercial enterprise and brokerage business

attracted many men into the field and by 1860 the number of brokers increased into 60.

In 1860-61 the American Civil War broke out and cotton supply from United States of Europe

was stopped; thus, the 'Share Mania' in India begun. The number of brokers increased to about

200 to 250. However, at the end of the American Civil War, in 1865, a disastrous slump began

(for example, Bank of Bombay Share which had touched Rs 2850 could only be sold at

Rs.87).At the end of the American Civil War, the brokers who thrived out of Civil War in

1874, found a place in a street (now appropriately called as Dalal Street) where they would

conveniently assemble and transact business. In 1887, they formally established in Bombay,

"Native Share and Stock Brokers' Association" (which is alternatively known as "The StockExchange "). In 1895, the Stock Exchange acquired a premise in the same street and it was

inaugurated in 1899. Thus, the Stock Exchange at Bombay was consolidated.

Other leading cities in stock market operations

Ahmadabad gained importance next to Bombay with respect to cotton textile industry. After

1880, many mills originated from Ahmadabad and rapidly forged ahead. As new mills were

floated, the need for a Stock Exchange at Ahmadabad was realized and in 1894 the brokers

formed "The Ahmadabad Share and Stock Brokers' Association".

What the cotton textile industry was to Bombay and Ahmadabad, the jute industry was to

Calcutta. Also tea and coal industries were the other major industrial groups in Calcutta. After

the Share Mania in 1861-65, in the 1870's there was a sharp boom in jute shares, which was

followed by a boom in tea shares in the 1880's and 1890's; and a coal boom between 1904 and

1908.On June 1908, some leading brokers formed "The Calcutta Stock Exchange

Association".


10/92

In the beginning of the twentieth century, the industrial revolution was on the way in India

with the Swadeshi Movement; and with the inauguration of the Tata Iron and Steel Company

Limited in 1907, an important stage in industrial advancement under Indian enterprise was

reached.

Indian cotton and jute textiles, steel, sugar, paper and flour mills and all companies generally

enjoyed phenomenal prosperity, due to the First World War.

In 1920, the then demure city of Madras had the maiden thrill of a stock exchange functioning

in its midst, under the name and style of "The Madras Stock Exchange" with 100 members.

However, when boom faded, the number of members stood reduced from 100 to 3, by 1923,

and so it went out of existence.

In 1935, the stock market activity improved, especially in South India where there was a rapidincrease in the number of textile mills and many plantation companies were floated. In 1937, a

stock exchange was once again organized in Madras - Madras Stock Exchange Association

(Pvt) Limited. (In 1957 the name was changed to Madras Stock Exchange Limited).

Lahore Stock Exchange was formed in 1934 and it had a brief life. It was merged with the

Punjab Stock Exchange Limited, which was incorporated in 1936.

Indian Stock Exchanges - An Umbrella Growth

The Second World War broke out in 1939. It gave a sharp boom which was followed by a

slump. But, in 1943, the situation changed radically, when India was fully mobilized as a

supply base.

On account of the restrictive controls on cotton, bullion, seeds and other commodities, those

dealing in them found in the stock market as the only outlet for their activities. They were

anxious to join the trade and their number was swelled by numerous others. Many new

associations were constituted for the purpose and Stock Exchanges in all parts of the country

were floated.

The Uttar Pradesh Stock Exchange Limited (1940), Nagpur Stock Exchange Limited (1940)

and Hyderabad Stock Exchange Limited (1944) were incorporated.

In Delhi two stock exchanges - Delhi Stock and Share Brokers' Association Limited and the

Delhi Stocks and Shares Exchange Limited - were floated and later in June 1947,

amalgamated into the Delhi Stock Exchange Association Limited.


11/92

Post-independence Scenario

Most of the exchanges suffered almost a total eclipse during depression.Lahore Exchange

was closed during partition of the country and later migrated to Delhi and merged with Delhi

Stock Exchange.

Bangalore Stock Exchange Limited was registered in 1957 and recognized in 1963.

Most of the other exchanges languished till 1957 when they applied to the Central

Government for recognition under the Securities Contracts (Regulation) Act,1956.Only

Bombay, Calcutta, Madras, Ahmadabad, Delhi, Hyderabad and Indore, the well established

exchanges, were recognized under the Act. Some of the members of the other Associations

were required to be admitted by the recognized stock exchanges on a concessional basis, but

acting on the principle of unitary control, all these pseudo stock exchanges were refused

recognition by the Government of India and they thereupon ceased to function.

Thus, during early sixties there were eight recognized stock exchanges in India (mentioned

above). The number virtually remained unchanged, for nearly two decades. During eighties,

however, many stock exchanges were established: Cochin Stock Exchange (1980), Uttar

Pradesh Stock Exchange Association Limited (at Kanpur,1982), and Pune Stock Exchange

Limited (1982),Ludhiana Stock Exchange Association Limited (1983), Gauhati Stock

Exchange Limited (1984), Kanara Stock Exchange Limited (at Mangalore,1985), Magadh

Stock Exchange Association (at Patna,1986), Jaipur Stock Exchange Limited (1989),

Bhubaneswar Stock Exchange Association Limited (1989), Saurashtra Kutch Stock ExchangeLimited (at Rajkot,1989), Vadodara Stock Exchange Limited (at Baroda,1990) and recently

established exchanges - Coimbatore and Meerut. Thus, at present, there are totally twenty one

recognized stock exchanges in India excluding the Over The Counter Exchange of India

Limited (OTCEI) and the National Stock Exchange of India Limited (NSEIL).

The Table given below portrays the overall growth pattern of Indian stock markets since

independence. It is quite evident from the Table that Indian stock markets have not only

grown just in number of exchanges, but also in number of listed companies and in capital of

listed companies. The remarkable growth after1985 can be clearly seen from the Table, and

this was due to the favoring government policies towards security market industry.


12/92

TABLE NO.1

Growth Pattern of the Indian Stock Market

Sl.No.As on 31st

December

1946 196119711975 1980 1985 1991 1995

1No. of

Stock Exchanges

7 7 8 8 9 14 20 22

2No. of

Listed Cos.

1125 1203 1599 1552 2265 4344 6229 8593

3No. of StockIssues of

Listed Cos.

1506 2111 2838 3230 3697 6174 8967 11784

4Capital ofListed

Cos. (Cr. Rs.)

270 753 1812 2614 3973 9723 32041 59583

5

Market value of

Capital ofListed

Cos. (Cr. Rs.)

971 1292 2675 3273 6750 25302 110279 478121

6

Capital per

Listed Cos. (4/2)

(Lakh Rs.)

24 63 113 168 175 224 514 693

7

Market Value of

Capital perListed

Cos. (Lakh Rs.)

(5/2)

86 107 167 211 298 582 1770 5564

8Appreciated valueof Capital per

Listed Cos. (Lakh Rs.)

358 170 148 126 170 260 344 803


13/92

Trading Pattern of the Indian Stock Market

Trading in Indian stock exchanges is limited to listed securities of public limited companies.They are broadly divided into two categories, namely, specified securities (forward list) and

non-specified securities (cash list). Equity shares of dividend paying, growth-oriented

companies with a paid-up capital of at least Rs.50 million and a market capitalization of at

least Rs.100 million and having more than 20,000 shareholders are, normally, put in the

specified group and the balance in non-specified group.

Two types of transactions can be carried out on the Indian stock exchanges: (a) spot delivery

transactions "for delivery and payment within the time or on the date stipulated when entering

into the contract which shall not be more than 14 days following the date of the contract" : and

(b) forward transactions "delivery and payment can be extended by further period of14 days

each so that the overall period does not exceed 90 days from the date of the contract". The

latter is permitted only in the case of specified shares. The brokers who carry over the

outstanding pay carry over charges (can tango or backwardation) which are usually

determined by the rates of interest prevailing.

A member broker in an Indian stock exchange can act as an agent, buy and sell securities for

his clients on a commission basis and also can act as a trader or dealer as a principal, buy andsell securities on his own account and risk, in contrast with the practice prevailing on New

York and London Stock Exchanges, where a member can act as a jobber or a broker only.

The nature of trading on Indian Stock Exchanges are that of age old conventional style of

face-to-face trading with bids and offers being made by open outcry. However, there is a great

amount of effort to modernize the Indian stock exchanges in the very recent times.


14/92

Over The Counter Exchange of India (OTCEI)

The traditional trading mechanism prevailed in the Indian stock markets gave way to many

functional inefficiencies, such as, absence of liquidity, lack of transparency, unduly long

settlement periods and benami transactions, which affected the small investors to a greatextent. To provide improved services to investors, the country's first ringless, scripless,

electronic stock exchange - OTCEI - was created in 1992 by country's premier financial

institutions - Unit Trust of India, Industrial Credit and Investment Corporation of India,

Industrial Development Bank of India, SBI Capital Markets, Industrial Finance Corporation of

India, General Insurance Corporation and its subsidiaries and CanBankFinancial Services.

Trading at OTCEI is done over the centers spread across the country. Securities traded on the

OTCEI are classified into:

y Listed Securities - The shares and debentures of the companies listed on the OTC can

be bought or sold at any OTC counter all over the country and they should not be listed

anywhere else

y Permitted Securities - Certain shares and debentures listed on other exchanges and units

of mutual funds are allowed to be traded

y Initiated debentures - Any equity holding at least one lakh debentures of particular scrip

can offer them for trading on the OTC.


15/92

OTC has a unique feature of trading compared to other traditional exchanges. That is,

certificates of listed securities and initiated debentures are not traded at OTC. The original

certificate will be safely with the custodian. But, a counter receipt is generated out at the

counter which substitutes the share certificate and is used for all transactions.

In the case of permitted securities, the system is similar to a traditional stock exchange. The

difference is that the delivery and payment procedure will be completed within 14 days.

Compared to the traditional Exchanges,OTC Exchange network has the following

advantages:

y OTCEI has widely dispersed trading mechanism across the country which provides

greater liquidity and lesser risk of intermediary charges.

y Greater transparency and accuracy of prices is obtained due to the screen-based

scripless trading.

y Since the exact price of the transaction is shown on the computer screen, the investor

gets to know the exact price at which s/he is trading.

y Faster settlement and transfer process compared to other exchanges.

y

In the case of an OTC issue (new issue), the allotment procedure is completed in amonth and trading commences after a month of the issue closure, whereas it takes a

longer period for the same with respect to other exchanges.

Thus, with the superior trading mechanism coupled with information transparency investors

are gradually becoming aware of the manifold advantages of the OTCEI.


16/92

FORMATION OF NSE

Capital market reforms in India and the launch of the Securities and Exchange Board of India

(SEBI) accelerated the incorporation of the second Indian stock exchange called the National

Stock Exchange (NSE) in 1992. After a few years of operations, the NSE has become thelargest stock exchange in India.

Three segments of the NSE trading platform were established one after another. The

Wholesale Debt Market (WDM) commenced operations in June 1994 and the Capital Market

(CM) segment was opened at the end of1994.Finally, the Futures and Options segment began

operating in 2000. Today the NSE takes the 14th position in the top 40 futures exchanges in

the world.

In 1996, the National Stock Exchange of India launched S&P CNX Nifty and CNX Junior

Indices that make up 100 most liquid stocks in India. CNX Nifty is a diversified index of 50

stocks from 25 different economy sectors. The Indices are owned and managed by India Index

Services and Products Ltd (IISL) that has a consulting and licensing agreement with Standard

& Poor's.

In 1998, the National Stock Exchange of India launched its web-site and was the first

exchange in India that started trading stock on the Internet in 2000. The NSE has also proved

its leadership in the Indian financial market by gaining many awards such as 'Best IT UsageAward' by Computer Society in India (in 1996 and 1997) and CHIP Web Award by CHIP

magazine (1999).

In the fast growing Indian financial market, there are 23 stock exchanges trading securities.

The National Stock Exchange of India (NSE) situated in Mumbai - is the largest and most

advanced exchange with 1016 companies listed and 726 trading members.

The NSE is owned by the group of leading financial institutions such as Indian Bank orLife

Insurance Corporation of India. However, in the totally de-mutualised Exchange, theownership as well as the management does not have a right to trade on the Exchange.Only

qualified traders can be involved in the securities trading.


17/92

The NSE is one of the few exchanges in the world trading all types of securities on a single

platform, which is divided into three segments: Wholesale Debt Market (WDM), Capital

Market (CM), and Futures & Options (F&O) Market. Each segment has experienced a

significant growth throughout a few years of their launch.While the WDM segment has

accumulated the annual growth of over 36% since its opening in 1994, the CM segment has

increased by even 61% during the same period.

The National Stock Exchange of India has stringent requirements and criteria for the

companies listed on the Exchange. Minimum capital requirements, project appraisal, and

company's track record are just a few of the criteria. In addition, listed companies pay variable

listing fees based on their corporate capital size.


18/92

INTRODUCTION OF THE COMPANY


19/92

Religare Enterprises Ltd.

Religare Enterprises ltd (REL), incorporated in 1984 and promoted by RANBAXY group, is

the holding company of11 subsidiaries. It is among the leading integrated financial services

group in the country today. Religare is a diversified financial services group of India offeringa multitude of investment options. Each of its subsidiaries is engaged in a wide spectrum of

financial products and services targeted at retail, high-net worth individuals, corporate and

institutional clients. The services offered by the group include share broking, financing loans

against shares, IPO financing, distribution of

Mutual funds, insurance broking, commodity broking, wealth management, advisory services,

private equity, merchant banking and trading in arts and art crafts. The major revenue drivers

for the company are its retail equity broking arm Religare Securities and Religare Finvest,

which finances loans against shares.

The diverse bouquet of financial services which Religare offers can be broadly clubbed across

three key verticals - Retail, Institutional and Wealth spectrums. The services extend from asset

management, Life Insurance, wealth management to equity broking, commodity broking,

investment banking, lending services, private equity and venture capital. Religare has also

ventured into the alternative investments sphere through its holistic arts initiative and Film

fund.With a view to expand, diversify and introduce offerings benchmarked against global

best practices, Religare operates in the life insurance space under 'AEGO N Religare LifeInsurance Company Limited' and wealth management under the brand name 'Religare

Macquarie Private Wealth'.(www.religare.in)

Religare has a pan India presence, 1837* locations across 498* cities and towns. It also

currently operates from nine international locations following its acquisition of London's

brokerage & investment firm, Hichens, Harrison & Co. plc. (Now Religare Hichens, Harrison

Plc).


20/92


21/92


22/92


23/92

THEIR AMBITION


24/92

THEIR DILIGENCE

THEIR TEAM WORK


25/92

EMPLOYEE VALUE FRAMEWORK


26/92

Vision - To build Religare as a globally trusted brand in the financial services domain.

Mission - Providing complete financial care driven by the core values of diligence and transparency.

Brand Essence - Core brand essence is Diligence and Religare is driven by ethical and dynamic processes for

wealth creation.

Religare is a Latin word that translates as 'to bind together'. This name has been chosen to reflect the

integrated nature of the financial services the company offers.

Symbol

The Religare name is paired with the symbol of a four-leaf clover. Traditionally, it is considered good fortune

to find a four-leaf clover as there is only one four-leaf clover for every 10,000 three-leaf clovers found.

For us, each leaf of the clover has a special meaning. It is a symbol of Hope. Trust. Care. Good Fortune.

For the world, it is the symbol of Religare.

The first leaf of the clover represents Hope. The aspirations to succeed. The dream of becoming.Of new

possibilities. It is the beginning of every step and the foundation on which a person reaches for the stars.

The second leaf of the clover represents Trust. The ability to place ones own faith in another. To have a

relationship as partners in a team. To accomplish a given goal with the balance that brings satisfaction to

all, not in the binding, but in the bond that is built.

The third leaf of the clover represents Care. The secret ingredient that is the cement in every relationship.

The truth of feeling that underlines sincerity and the triumph of diligence in every aspect.From it springs

true warmth of service and the ability to adapt to evolving environments with consideration to all.

The fourth and final leaf of the clover represents Good Fortune. Signifying that rare ability to meld

opportunity and planning with circumstance to generate those often looked for remunerative moments of

success.

Hope.Trust.Care.Good Fortune. All elements perfectly combine in the emblematic and

rare, four-leaf clover to visually symbolize the values that bind together and form the core

of the Religare vision.


27/92

Religare Enterprises Limited

Religare AMC Limited

Asset Management Business

Portfolio Management

AEGON Religare Life Insurance Co. Ltd.

Life Insurance Company, JV with

Aegon(26%),

Religare(44%), and Bennett & Coleman(30%)

Religare Macquarie Wealth Mgmt. Ltd.

JV with Macquarie forWealth ManagementBusiness

Religare Securities Limited

Retail Equity Broking

Online Investment Portal

Depository Services

Religare Commodities LimitedCommodity Broking Business

Religare Capital Markets Limited

PE and M&A Advisory

Institutional Broking

Investment Banking

Religare Finvest Limited

Lending and Distribution business

Religare Insurance Broking Limited

Life Insurance Broking Business

Non-Life Insurance Broking Business

Religare Arts Initiative Limited

Business of Art

Art Gallery

Art Advisory

Religare Venture Capital Limited

Private Equity and Investment Manager

Vistaar Religare Capital Advisors Ltd

JV with Vistaar Entertainment Ventures

for film fund

India's first ever film fund

Religare - Milestone

JV with Milestone Capital to manage a

healthcare and education fund

Religare Finance Ltd.

Capital Market Financing


28/92

The latest Three Shareholding Pattern for the Company Under Two

Broad Categories (Promoter & Non Promoters)

Share Holding

Pattern as on : 31/03/2010 31/12/2009

30/09/200

9

Face Value 10.00 10.00 10.00

No. Of

Shares

%

Holding

No. Of

Shares

%

Holdin

g

No. Of

Shares

%

Holding

PROMOTER'

S HOLDING

Indian

Promoters 2465800 60.47 2465800 60.47 2465800 60.47

Sub Total 2465800 60.47 2465800 60.47 2465800 60.47

Other Investors

Private Corporate

Bodies

18319

7 4.49 152461 3.74 138107 3.39

NRI's/OCB's/Foreig

n Others 24579 0.60 22429 0.55 26302 0.65

Others 11232 0.28 13761 0.34 17753 0.44

Sub Total21900

8 5.37 188651 4.63 182162 4.47

General Public

13927

92 34.16 1423149 34.90 1429638 35.06

GRAND TOTAL

40776

00.000

0 100.00

4077600.

0000 100.00

4077600

.0000 100.00


29/92


30/92


31/92

SWOTANALYSIS

OF

RELIGARE

STRENGTH

y One of the largest and fastest growing integrated financial service providers in

India.

y Global vision and Ambition: To be one of the leading global and financial

services brands in over the next 3-5 years with an AUM USD 50 bn.

y REL, publicly listed entity with its IPO oversubscribed a record 162 times, an

all-time high on the bourses.

y Diverse and integrated business model with innovative and pioneering

initiatives like Art,Film Fund etc.

y Launched Indias first Wealth Management Joint Venture with Macquarie

adjudged globally as the Most Exciting New Wealth Management Model.

y Operates Life Insurance Venture in India in partnership with global major

AEGON.

y One of the fastest growing Asset Management Companies in India- Religare

AMC.

WEAKNESS

y Religare is new in the field of Stock Broking Business.

y It has not enough Man-Power to compete with other competitors.

OPPORTUNITIES

Apart from Financial Services, brand Religare straddles multiple and diverse

businesses like:

y Diagnostics Super Religare Laboratories is the worlds leading diagnostics

network.


32/92

y Wellness Retail Religare Wellness Limited fastest growing chain in SAARC

Countries.

y Information Technology Products Religare Technova is a technology provider

for Capital Markets.

y Information Technology Solutions Religare Technologies possesses domain

expertise for financial services and the Healthcare Sector.y Air Charter and Travels Religare Voyages Limited has the top of the line

charter fleet in India and is an integrated player in Aviation and Travel.

y With group employee strength of over15,000 in India, REL also touches 40

million lives across the globe across various continents and geographies.

THREATS

y A tough competition with Indiabulls, India Infoline etc. Because the mentioned

Stock Broking Firms already captures the most of the Stock Broking Market.

y Many small unorganized Stock Broking Agency come into the market and

acquires clients. They give threat to Religare.

Lack of sufficient Branch offices for speedy delivery of services


33/92

RELIGARE SECURITIES LTD

Company Overview

Religare Securities Ltd. (RSL) is the wholly owned subsidiary of REL and a

securities firm in India.

Major activities and offerings of the company include equity broking both offline

and online, depository participant services, portfolio management services and

institutional brokerage.

Member of the NSE, BSE, depository participant with NSDL and CDSL, and SEBI

approved portfolio manager.

Businesses under Religare Securities Ltd. include:

Retail Equity Broking Priority Client Equity Services

Online Investment Portal

Institutional Equity Broking (To be shifted to RCML)

Portfolio Management Services

Depository Services

Empanelment with 81 institutions including 20 mutual funds, 10 insurance

companies, 35 banks and 11 FIIs. Has strong institutional research team covers

over185 companies in 16 sectors.

Aggressive ramp up of equity trading client accounts with market share increasing

to 3.8% in June 2008 from 2.7% in FY07 and online trading market share increased

to 8.7% in June 2008 from 7.2% in October, 2007.

Received in principal approval from SEBI to act as a sponsor of Asset Management

joint venture with AEGON.

Received P1 Credit Rating from CRISIL for its short term debt issuance program

for a sum of Rs. 7,000 million.


34/92

Religare Securities Limited (RSL) is a leading equity and securities firm in India. The

company currently handles sizeable volumes traded on NSE and in the realm of online

trading and investments it currently holds a reasonable share of the market. The major

activities and offerings of the company today are Equity broking, Depository Participant

Services, Portfolio Management Services, Institutional Brokerage & Research,

Investment Banking and Corporate Finance.

RSL is a member of the National Stock Exchange of India, Bombay Stock Exchange of

India, Depository Participant with National Securities Depository Limited and Central

Depository Services (I) Limited, and SEBI approved Portfolio Manager. Religare has

been constantly innovating in terms of product and services and to offer such incisive

services to specific user segments it has also started the NRI, FII, HNI and Corporate

Servicing groups. These groups take all the portfolio investment decisions dependingupon a clients risk / return parameter. Religare has a very credible Research and Analysis

division, which not only caters to the need of our Institutional clientele , but also gives

their valuable inputs to investment dealers. Religare is also providing in-house Depository

services to its clientele and is one of the leading depository service providers in the

country.

y


35/92

y Religare Commodities Limited (RCL)

A wholly owned subsidiary of Religare Enterprises Limited was

initiated to spearhead Exchange based Commodity Trading. As a

member of NCDEX, MCX and NMCE, RCL is a trade facilitator

providing the platform to trade in Commodities. Grounded in the

Religare philosophy, highly skilled and dedicated professionals strive to

offer the client best Investment solutions across the country.


36/92

OFFERINGS

OF

RELIGARESECURITY

INVESTMENT

BANKING

EQUITY

AND

DERIVATIVES

PMS

INTERNATIONAL

ADVISORY


37/92

Equity and Trading

Race andRally are the two products offered by Religare Securities ltd which come under

equity and derivatives.

While Rally deals with offline facilities,Race provides for complete online package and

facility. There is difference between both offline and online modes of trading. The

difference lies on account of its schemes, platforms and facilities provided. Initially the

clients used to go for offline modes of trading, but now with increasing use of internet

online mode has become the preference.

Rally

Race


38/92

Type of Account

R-ACE (Basic)

It's the basic online trading account provided by Religare. Investor can trade and accesstheir account information online and over the phone as well. This account comes with a

browser based online trading platform and no additional software installation needed.

This account also provides Lifetime free DP account with no annual maintenance charges.

R-ACE Lite (Advanced)

It's the advanced account option for the investor with Religare. This trading account

provides the entire feature of R-ACE (Basic) account. In addition it also provides real-

time streaming stock quotes and alerts.

This trading platform is also browser based and no software installation is needed.

R-ACE Pro (Professional)

As the name indicates this account is for high volume traders . Along with the features

from above 2 accounts, this account also comes with a Trading Terminal, software which

needs to install on your computer. This terminal directly connects the investor to stock

market and having all industry standard Treading terminal features including technical

charting (intra-day and EOD), multiple watch list, advanced hot-key functions for fastertrading, derivative chains, futures & options calculator. As in basic and advance account,

trading is available online through internet and offline though phone.


39/92

Brokerage and Account opening fees:

Religare offers three kinds of accounts as above. Below are detail about fees and

activation charges for each account:

1. R-ACE

Account activation charges Rs.299/-.

2. R-ACE LiteAccount activation charges Rs.500/-..

3. R-ACE ProAccount activation charges Rs.500/-.

4. All the account comes with free annual maintenance charge.

5. All account comes with free DP account.

6. Brokerage at ReligareOn the basis of volume and frequency of trading, Religare provide different options

for brokerages.On the broader way they divided into three categories:

o Classic AccountIntraday brokerage varies from 0.3% to 0.5%.

Delivery brokerage varies from 0.30% to 0.50%..

o Freedom Account

In this payment scheme, investor has to pay a fix amount in advance for

Annual Subscription (Rs 5000). This one time payment enable accountholder to trade for Rs. 3,00,000 intraday & derivative trading and Rs. 40,000

of delivery based trading for zero brokerage.

o Trump Account

Trump account has two payment options

1. Trump Plus has annual subscription fees of Rs 2,500, Brokerage on

Delivery Trades of 0.25% and Brokerage on Intraday Trades & F&O Trades

of 0.025%.

2. Trump Super has annual subscription fees of Rs.15,000, Brokerage on

Delivery Trades of 0.15% and Brokerage on Intraday Trades & F&O Trades

of 0.015%.


40/92

Advantages of Religare

y Religare gives interest on unutilized cash when investor is waiting to make nexttrade or online investment.

y Religare Allow their investor to trade without having to worry about cash margin.Investor can get exposure (on cash segment) as high as 10-20 times for intraday

trades.

y They provide intraday reports and historical charting.

y Lifetime free DP account.

y Varity of fee structure to fulfill need of different type of investors.

Equity Broking and Online Trading

Equity client base of over 4.6 lacs, recorded an increase of more than 11% in last

quarter

Total Equity brokerage of Rs. 749 mn for Q1FY 09

Equity market share increased from 3.46% to 3.84% in last quarter

Online client base of over 78,500 clients, recorded an increase of 20% in last

quarter

Online brokerage for the quarter accounted for Rs. 32 mn


41/92

Increased Client Coverage


42/92

Increased Online Trading and Portfolio Management Client

(Graphs-7 & 6)

Increased Income from Various Business Lines


43/92

(Graphs-8 & 9)

Analysis and interpretation

y The most challenging asset class:

a. Equity

b. Fixed Income

c. Real Estate

d. Gold

Analysis: equity is the most challenging asset class as it is guided by the sentiments.

y Amount of investment made by the investor

a. Below 5lac b.5-10 lac c.10-15 lac d. Above 15 lac

equity46%

fixedincome

8%

realestate

42%

gold

4% challenging assetclass


44/92

Analysis: An investment below Rs.5 lac is made by the investor as it is a highly

risky market

What return do you expect from investment in equity market

a. Below 5% b. 5-10 % c.10-15 % d. above 15%

Analysis: Return expected from the equity market is higher by the investor

Time of lock in

a.1-5 year b.5-10 year c.10-15 year d. above 15 year

60%

26%

6%8%

1

2

3

4

1

7%

2

46%

3

14%

4

33%

a. Below 5% b. 5-10% c. 10-

15% d. Above 15%


45/92

Analysis: Many of the investors are of the view that the return can be gained in 1-5 year.

So mangers have to plan accordingly.

Riskassociated withdifferenttypesofequityshares

Analysis: risk associated with the blue chip companies is quite high next is for speculative

share. So for an investor demanding for a lesser risk must have fewer stocks of such

companies

1st Qtr

58%

2nd Qtr

23%

3rd Qtr

10%

4th Qtr

9%

Timeoflock in

cyclical12%

defensive

18%

speculative

70%


46/92

y Decision of buying a particular stock depends on

a. Evidence

b. Hearsay

c. Tips

d. Share of familiar company

Number stocks placed in a portfolio

a.Less than 10 b.10-30 c. 30-50 d. above 50

Analysis: Less than 10 stocks in a particular portfolio helps in tracking them and square

off them at the right time

58%23%

10%

9%

1st Qtr

2nd Qtr

3rd Qtr

4th Qtr

lessthan 10

65%

10-30 shares

28%

30-50 shares

6%

above 50

1%

numberofstocks


47/92

y Role of different ratios while purchasing a stock

Ratios Low Average Good Very G

PE Ratio

EPS

Balance Sheet

ANALYSIS: equal weightage is given by to PE Ratio EPS and analysis ofFinancial

Statement as it is shows the performance of the company.

low

10%

average

9%

good

36%

very good

45%

effectofperatio

low

10% average

9%

good

36%

very good45%

effectofEPS

low

10%average

9%

good

36%

very good

45%

weightageto balancesheet


48/92

Rate the extrapolation of the past

a.Low b. average c. good d. very good

Analysis : Managers emphasize much on the past performance of the company whileselecting a particular share. Too much reliability on the past performance may lead to

fewer returns so care must be taken while relying on past performance.

low

10%

average

9%

good

36%

very good

45%

extrapolat

io

nof

the

past


49/92

y Return associated with different types of equity shares

Type of Share Poor Average Good V.Good

Blue Chip

Growth

Income

Cyclical

DefensiveSpeculative

Return with Bluechip companies

Growthshare

Income


50/92

Analysis: Return associated with share must be taken into account while managing the

portfolio.

Cyclical

defensive

speculative


51/92

EQUITY TRADING

What DoesEquity Mean?1. A stock or any other security representing an ownership interest.

2.On a company's balance sheet, the amount of the funds contributed by the owners (the

stockholders) plus the retained earnings (or losses). Also referred to as "shareholders'

equity".

3. In the context of margin trading, the value of securities in a margin account minus what

has been borrowed from the brokerage.

4. In the context of real estate, the difference between the current market value of the

property and the amount the owner still owes on the mortgage. It is the amount that the

owner would receive after selling a property and paying off the mortgage.

5. In terms of investment strategies, equity (stocks) is one of the principal asset classes.The other two are fixed-income (bonds) and cash/cash-equivalents. These are used in

asset allocation planning to structure a desired risk and return profile for an investor's

portfolio.


52/92

EQUITY MARKETS

INTRODUCTION Indian Financial System

Efficient transfer of resources from those having idle resources to others who have a

pressing need for them is achieved through financial markets. Stated formally, financial

markets provide channel for allocation of savings to investment. These provide a varietyof assets to savers as well as various forms in which the investors can raise funds and

thereby decouple the acts of saving and investment. The savers and investors are

constrained not by their individual abilities, but by the economys ability, to invest and

save respectively. The financial markets, thus, contribute to economic development to the

extent that the latter depends on the rates of savings and investment.

The financial markets have two major components:

y

Money markety Capital market

The Money Market refers to the market where borrowers and lenders exchange short

term funds to solve their liquidity needs. Money market instruments are generally

financial claims that have low default risk, maturities under one year and high

marketability.

The Capital market is a market for financial investments that are direct or indirect

claims to capital.

It is wider than the securities Market and embraces all forms of lendingand borrowings, whether or not evidenced by the creation of a negotiable financial

instrument.

The Capital Market comprises the complex of institutions and mechanisms through which

intermediate term funds and long term funds are pooled and made available to business,

governments and individuals. The Capital market also encompasses the process by which

securities already outstanding are transferred.

The Securities Market however refers to the markets for those financial instruments/

claims /obligations that are commonly and readily transferable by sale.

The Securities Market has two interdependent and inseparable segments, the new issues

(primary) market and the stock (secondary) market.


53/92

The Primary market provides the channel for sale of new securities. The issuer of

securities sells the securities in the primary market to raise funds for investments for to

discharge some obligation.

Primary market refers to the business done though Initial Public offerings (IPO) during

which shares are offered for the first time to public to existing shareholders on rights

basis. Secondary Market is for the first time to public or to existing shareholders on rights

basis. Secondary Market is for the existing shareholders either on priority or through a

private placement when shares are selectively sold to limited number of investors. The

Secondary market deals in securities previously issued. The secondary market enables

those who hold securities to adjust their holdings in response to charges in their

assessment o risk and return. They also sell securities for cash to meet their liquidityneeds.

The price signals, which subsume all information about the issuer and his business

including associated risk, generated in the secondary market, help the primary market in

allocation of funds.

This secondary market has further two components ;

SPOT MARKET where the securities are added for futures delivery and payment

FORWARDMARKET where the securities are traded for future delivery and payment.

This forward market is further divided into futures and options market.

In Futures Market the securities are traded for conditional future delivery whereas in

option market two type of options are traded

PUT OPTION : A put option gives right but not an obligation to the owner to sell a

security to the writer of the option at a predetermined rice during a specified period

CALL OPTION : A call option gives the right but not an obligation to the buyer topurchase a security from the writer of the option at a particular price during a specified

period


54/92


55/92

INVESTMENT ALTERNATIVE

NON MARKETABLE FINANCIAL ASSET

1. Bonds

2. Mutual fund schemes

3. Real estate

4. Equity shares

5. Money market instruments

6. Life insurance policies

7. Derivatives


56/92

Investment Attributes

For evaluating an investment avenue, the following attributes are relevant

y Rate of Return

y Risk

y Marketability

y Tax Shelter

y Convenience

Rate of Return = Annual income + (Ending price- Beginning Price)

Beginning Price

Risk: it refers to the variability of its rate of return

Measures used in risk are;

Variance : mean of square of deviations o f individual returns around their

average value

Standard Deviation : Square root of variance

Beta : How volatile the return from an investment is, in response to

market swings


57/92

FACTORS TO BE TAKEN INTO CONSIDERATION IN EQUITY

MARKET

Basisof Managing

portfolio

Analysisof

financial

Statement

DU PONT

Analysis

Ratio

analysis

Trend Ratios


58/92

FINANCIAL STATEMENT ANALYSIS

Published financial statement is the only source of information about the activities and affairs

of a business entity available to the public, shareholders, investors and creditors and the

governments. These various groups are interested in the progress, position and prospects of

such entity in various ways.According to Myers, financial statement analysis is largely a study of relationship among the

various financial factors in business as disclosed by a single set of statements and a study of

the trend of these factors as shown in a series of a statement.

Thus financial statements refer to the treatment of information contained in the financial

statement in a way so as to afford a full diagnosis of the profitability and financial position of

the firm concerned.

TYPES OF FINANCIAL STATEMENT ANALYSIS

The analysis of financial statements consists of a study of relationship and trends, to determine

whether or not the financial position and results of operations as well as the financial progress

of the company are satisfactory or unsatisfactory

Analytical methods and devices used in analyzing financial statement are as follows:

a) Comparative Statementsb)Common size Statementsc) Trend Ratiosd) Ratio Analysis


59/92

COMPARATIVE BALANCE SHEET

It shows the balance of accounts of assets and liabilities on different dates and also the extent

of their increases or decreases between these dates throwing light on the trends and directions

of changes in the position of changes in the position over the periods over the periods. This

helps in predicting about the position of the business in future

COMPARATIVE PROFIT AND LOSS ACCOUNT OR INCOME

STATEMENT

Comparative income statements shows the operating results for a number of accounting

periods and changes in the data significantly in absolute periods and changes in the data

significantly in absolute money terms as well as in relative percentage.


60/92

TREND RATIOS

Trend ratios can be defined as index numbers of the movements of the various financial items

in the financial statements to reveal the trend of the items with the passage of time. Trend

ratios show the nature and rate of movements in various financial factors. Trend ratios shot e

nature and rate of movements in various financial factors. They provide a horizontal analysis

of comparative statements and reflect the behavior of various items with the passage of time.

Trend ratios can be graphically presented for a better understanding by the management. They

are very useful in predicting the behavior of the various financial factors in future. However,

it should be noted that conclusions should not be drawn on the basis of a single trend. Trends

of related items should be carefully studied, before any meaningful conclusions are arrived at.

Since trends are sometimes affected by externalities, i.e. reasons extraneous to the

organizations, the analyst must give due weight age to such extraneous factors like

government policies, economic conditions, changes in income and its distribution, etc.

To gain an insight into which direction the company is moving, a trend analysis should beperformed. A tend analysis indicates a firms performance over time and reveals whether its

position is improving or deteriorating relative to other comparatives in the industry. A trend

analysis requires that a number of different ratios can be calculated over several years and

plotted to yield a graphic representation of the companys performance

LIMITATIONS OF TREND RATIOS

It should be noted that trend ratios are not calculated for all items. They are calculated only

for logically connected items enabling meaningful analysis.For example trend ratios becomemore revealing when compared with the trend ratios of fixed assets, cost of goods sold and

operating expenses. Trend ratios have the following limitations:

1. If the accounting practices have not been consistently followed year after year, these

ratios become incomparable and thus misleading.

2. Trend ratios do not take into consideration the price level changes. An increasing trend

in sales might not be the result of larger sales volume, but may e because of increased

sales price due to inflation. In order to avoid this limitation, figures of the first year

should be adjusted for price level changes from the base year and then the rend ratiosare calculated.

3. Trend ratios may be always read with absolute data on which they are based; otherwise

the calculations drawn may be misleading. It may e that a 100% change in trend ratios

may represent an absolute change of Rs.1,000 only in one item, while a 20% change in

another item may mean an absolute change of Rs.100,000

4. The trend ratios have to be interpreted in the light of certain non financial factors like

economic conditions, government policies, management policies etc.


61/92

RATIO ANALYSIS

An absolute figure often does not convey much meaning. Generally, it is the light of other

information that significance of a figure is realized. A companys profitability cannot be

known unless together with the amount of profit and the amount of capital employed. The

relationship between the two figures is called a ratio.

Accounting ratios are a very useful tool for grasping the true message of the financial

statements and understand them. Ratios naturally should be worked out between figures that

are significantly related to one another.Obviously, no purpose will be served out by working

out ratios between two entirely unrelated figures, such as discount on debentures and sales.

Ratios may be worked out on the basis of figures contained in the financial statements.

Ratios provide clues and symptoms of underlying conditions. They act as indicators of

financial soundness, strength, position, and status of an enterprise. Interpretation of ratios

forms the core part of ratio analysis. The computation of ratios is simply a clerical work but

the interpretation is a taste requiring art and skill. The usefulness of ratios is dependent on thejudicious interpretations .

USES OF RATIOS

y Reveals the profitability, liquidity, solvency as well as the overall financial position of

the enterprises.

y It helps to analyze and understand the financial health of the enterprises.

y Helps to understand trend of a business

y Past performance helps in forecasting the future state of affairs of the business

y Inter firm comparisons and intra firm comparisons become easier through the analysis.

y Past and future projections could be reviewed through ratio analysis easily.

y Management uses the ratio analysis in exercising control in various areas viz.

budgetary control, financial control.


62/92

CLASSIFICATION OF RATIOS

PROFITABILITY RATIO: A profitability ratio gives some yardstick to measure the profit

in relative terms with reference to sales, assets, or capital employed. These ratios highlight the

end result of business activities. The main objective is to judge the efficiency of the business.DEBT EQUITY RATIOS: It is the relation between borrowed funds and owners capital in

a firm; it is also known as external-internal equity ratio. The debt equity ratio is used to

ascertain the soundness of long term financial policies of the business. Debt means long-term

loans i.e. debentures or long term loans from financial institutions. Equity means

shareholders funds i.e. preference share capital, equity share capital, reserves less loss and

fictitious assets like preliminary expenses.

TOTAL DEBT (LONG TERM and SHORT TERM)DEBT EQUITY RATIO = NET WORTH + PREFERENCE CAPITAL

This helps to determine the relative stakes of outsiders and shareholders. Normally a debt

equity ratio of 2:1 if it is calculated as (i) above or 0.67:1 if calculated as (ii) above is

considered as ideal. This means that a company may borrow up to twice the amount of its

capital and reserves or it may rise two thirds of its long term funds by way of loans . Generally

loans are very profitable for shareholders since interest at a fixed rate only is payable whereas

the yield generally is much higher and income tax authorities allow interest as a deductibleexpenses, thus effectively reducing the interest burden of the company. A higher proportion

would be risky because loans carry the obligations to pay interest at a fixed rate which may

become difficult if profit is reduced. However a lower proportion of long term loans would

indicate an undue conservation and unwillingness to take every normal risk. But these affect

the image of the company and the value placed by the market on shares .

INTEREST COVRAGE RATIO: is a ratio that covers the company EBIT to its interest

expense. This ratio is important to the lending decisions made by the bank. If the company

has an IE of 3, this means that EBIT is enough to pay its interest expense 3 times over.

INTEREST COVERAGE RATIO = Earnings before interest and taxes

Interest Expenses


63/92

FIXED CHARGE RATIO = EBIT + Rent Expenses

Interest expense +Rent expense + preference dividend

1-tax rate

CASH FIXED CHARGE COVERAGE = EBITA+ Rent ExpensesCash interest+ Rent expenses+

Preference dividend/ (1- tax rate)

DEBT SERVICE COVERAGE = PAT+ DEPRECIATION+ other non cash expenses+

Interest on term loan

Interest on term loan

+repayment of term loan

RETURN ON INVESMENT: This ratio is also known as overall profitability ratio or

return on capital employed. The income (output) as compared to the capital employed (input)

indicates he return on investment. It shows how much the company is earning on its

investments. This ratio is calculated as follows:

RETURN on INVESTMENT = Earnings before interest and taxes

Capita employed

RETURN ON SHAREHOLDERs FUNDS: It is also referred to as return on net

worth return on capital employed. The income (output) as compared to the capital employed

(input) indicates the return on investment. It shows how much the company is earnings on its

investments. This ratio is calculated as follows:

RETURN ON EQUITY= profit after tax-preference dividends

Paid up equity capital+ reserves


64/92

PRICE EARNING RATIO: This ratio establishes relationship between the market price

of the per shares of a company and its earnings per share(EPS). It is calculated as under:

Price earnings ratio = Market price per share

Earning per share

This ratio helps in predicting the future market value of the shares within reasonable limits. It

also helps in ascertaining the extent of under and over valuation in the market price, thus

pointing the effect of factors generated by the companys financial position.

a) The high growth in earnings per share at these firms: Forward earnings per share can be

substantially higher than trailing earnings per share ,which in turn, can be significantly

different from current earnings per share.

b) Management Options: since technology firms are compared, it is difficult to ensure that

the earnings per shares, the difference between diluted and primary earnings per share tend

to be large.

PE RATIO AND EXPECTED EXTRAORDINARY GROWTH

The PE ratio of a higher growth firm is a function of the expected extraordinary growth rate-

the higher the expected growth, the higher that the PE ratio for a firm. In chart for instance,

the PE ratio that was estimated to be16 with a growth rate of earnings, will change as that

expected growth rate changes.

The PE ratio is much more sensitive to changes in expected growth rates when interest rates

are low than when they are high. The reason is simple. Growth produces cash flows in theconsequently the effects of changes in the growth rate on the present value tend to be smaller.

There is a possible link between this finding and how markets react to earnings surprises from

technology firms.When a firm reports earnings that are significantly higher than expected or

lower than expected, investors perceptions of the expected growth rate for this firm can

change concurrently, leading to a price effect. There is a much greater price reactions for a

given earnings surprise, positive or negative, in a low- interest rate environment than would in

a high interest rate environment.

The PE ratio is a function of perceived risk of affirms and its effects show up in the cost ofequity. A firm with higher cost of equity will trade at a lower multiple of earnings than a

similar firm with a lower cost of equity.


65/92

THE PEG RATIO

Portfolio managers and analysts sometimes compare PE ratios to the expected growth rate to

identify undervalued and overvalued stocks. In the simplest form of this approach, firms with

PE ratios less than their expected growth rate are viewed as undervalued. In its more general

form, the ratio of PE ratio to grow is used as a measure of relative value, with a lower value

believed to indicate that a firm is undervalued.For many analysts, especially those tracking

firms in high- growth sectors, these approaches offer the promise of a way of controlling for

differences in growth across firms, while preserving the inherent simplicity of a multiple.

Defining PEG Ratio

The PEG ratio is defined to be the price earnings ratio divided by the expected growth rate in

earnings per share.

PEG ratio = PE Ratio/ Expected growth rate

The price to earnings ratio, most popular ratio, considers profit and share price.One crucial

aspect is that P/E does not take into account the debt. Crucial aspect that P/E does not take

into account is debt. The enterprise value to earnings before interest, tax, depreciation and

amortization (EBITDA) or EV to EBDITA overcomes this drawback as it also adds one more

dimension to the market captilization: debt

Thus EV gives the better picture of the value of the company compared with the market

capitalization. This ratio is also known as EV multiple and known as tool for value investing

or pick value opportunities.

EARNINGS PER SHARE:

This ratio measures the profit available to the equity shareholders on a per share basis. This is

calculated as under:

What DoesEarnings Per Share - EPSMean?

The portion of a company's profit allocated to each outstanding share of common

stock. Earnings per share serve as an indicator of a company's profitability.

Calculated as:


66/92

When calculating, it is more accurate to use a weighted average number of shares outstanding

over the reporting term, because the number of shares outstanding can change over time.

However, data sources sometimes simplify the calculation by using the number of shares

outstanding at the end of the period.

Diluted EPS expands on basic EPS by including the shares of convertibles or warrants

outstanding in the outstanding shares number

It should be noted that net income here is the net income in income statement for the period,

after taking into consideration operating and non operating and other items like income tax. It

should be remembered that if any dividend is payable to the preference shareholders, it has to

be deducted before arriving at net incomefor this purpose

A low EPS means lower possible dividends and so lower market value, while a high EPS

has a favourable effect on the market value of the shares.

Dividend Yield

What Does Dividend YieldMean?A financial ratio that shows how much a company pays out in dividends each year relative to

its share price. In the absence of any capital gains, the dividend yield is the return on

investment for a stock. Dividend yield is calculated as follows:

The Dividend Yield Ratio compares the cash return from a stock to its current stock marketvalue.

This enables an investor to compare ratios for different companies and industries.

What does the Dividend Yield Ratio Mean to Industry and the Investor?

The Dividend Yield Ratio is possibly a useful indicator to the investor, since it allows the

investor to start making initial comparisons with other investment opportunities. The

Dividend Yield Ratio may also be compared to the rate being offered by the government onlow risk bonds (e.g. in the USA and UK).

What are the Key Problems with Dividend Yield Ratio Analysis of a Company or an Industry?One possible key problem with the Dividend Yield Ratio is that an investors personal

situation needs to be taken into account to calculate the ratio. This simply requires a little bit

more effort on the part of the investor.

It is also always worth noting that the ratio is only as good as the quality of the financialstatements that it is produced from.


67/92

Payout Ratio

What DoesPayout Ratio Mean?The amount of earnings paid out in dividends to shareholders. Investors can use the payout

ratio to determine what companies are doing with their earnings.

Calculated as:

This ratio expresses the relationship between what is available as earnings per share and what

is actually paid in the form of dividends out of available earnings. It is a good measure of the

dividend policy of the company. A higher payout ratio may mean lower retention and plough

back of profits, a deteriorating liquidity position and little or no increase in the profit- earning

capacity of the company.


68/92


69/92

FORECASTING THE AGGREGATE STOCK MARKET RETURN

While the stock market appears very complex and mysterious, its returns are determined by an

interaction of just two factors investment returns and speculative returns. Investment returns

are represented by the sum of dividend yield and earnings growth and speculative returns are

represented by the change in the price-earnings ratio. In formal terms:

SMRn = [DYN + EGN] + [(PEN/PEO)1/N

- 1]

Where SMRn = annual stock market return over a period of n years

DYn = annual dividend yield over a period o f n years

EGn = annual earnings growth over period of n years

PEn = price earnings ratio at the end of n years

PEo = price earnings ratio at the beginning of n years

Suppose you want to forecast the annual return from the stock market over the next five years

(n is equal to 5). You come up with the following estimates DYn=0.025(2.5%),

EG5=0.125%and PE5 =18. The current PE ratio, PEo is 15. The forecast of the annual return

from the stock market is determined as follows:SMR5= [0.025 + 0.0125] + [(18/15)1/5-1]

= [0.15]+ [0.037]

= 15 % + 3.7% = 18.7%

15% represents the investment return and 3.75 represent the speculative return


70/92

Risk is the integral par t of an equity portfolio.For earning returns investors have to almost

invariably bear some risk. In general risk and return go hand in hand.While investors like

returns they abhor risk. Investment decisions, therefore, involve a tradeoff between risk and

return. Risk and return are central to investment decisions.

RISK

It refers to the possibility that the actual outcome of an investment decisions invariably

involve a tradeoff between the two.

Risk refers to the possibility that the actual outcome. More specifically, most investors are

concerned about the actual outcome being less than the expected outcome. The wider the

range of possible outcomes, the greater the risk.

Sources of Risk

Risk emanates from several sources. The three major ones are:

y Business risk

y Interest rate risk

y Market risk

Business Risk

As a holder of corporate securities there is an exposure to the risk of poor performance of

business. This may be caused by a variety of factors like the heightened competition,

emergence of new technologies, development of substitute products, shifts in consumer

preferences, inadequate supply of essential inputs, changes in governmental policies, and so

on.Often, of course, the principal factor may be inept and incompetent management. The poor

business performance definitely affects the interest of equity shareholders, who have aresidual claim on the income and wealth of the firm. It can also affect the interest of debenture

holders if the ability of the firm to meet its interest and principal payment obligation is

impaired. In such a case, debenture holders face the prospect of default risk.


71/92

INTEREST RATE RISK

The changes in interest rate have a bearing on the welfare of investors. As the interest rate

goes u, the market price of existing fixed income securities falls, and vice versa. This happens

because the buyer of a fixed income security would not buy it at its par value or face value if

its fixed interest rate is lower than the prevailing interest rate on a similar security. The

changes in interest rate have a direct bearing on the fixed income securities, they affect equity

prices too, albeit somewhat indirectly. The changes in the relative yields of debentures and

equity shares influence equity prices

MARKET RISK

Even if the earning power of the corporate sector and the interest rate structure remain more or

less unchanged, prices of securities, equity shares in particular, tend to fluctuate.While there

can be several reasons for this fluctuation, a major cause appears to be the changing

psychology of the investors. These are periods when investors become bullish and their

investment horizons lengthen. Investors optimism, which may border on euphoria, during

such periods, drives share prices to great heights. The buoyancy created in the wake of this

development is pervasive, affecting almost all the shares.On the other hand, when a wave of

pessimism (which is an exaggerated response to so unfavorable political or economic

development) sweeps the market, investors turn bearish and myopic. Prices of almost allequity shares register declines as fear and uncertainty pervade the market.

The market tends to move in cycle. The cycles are caused by mass psychology.One could

expect large scale participation of institution to dampen the price g in other fluctuations in the

market.


72/92

TYPES OF RISK

Modern portfolio theory divides total risk as follows:

Total Risk = Unique Risk + Market Risk

UNIQUE RISK

The unique risk of security represents that portion of its total risk which stems from firm-

specific factors like the development of a new product, a labor strike, or the emergence of a

new competitor. Events of this nature primarily affect the specific firm and not all firms in

general. Hence, the unique risk of a stock can be washed away by combining it with other

stocks. In a diversified portfolio, unique risk of different stocks tends to cancel each other a

favorable development in one firm may offset an adverse happening and vice versa. Hence,

unique risk is also referred to as diversifiable risk or unsystematic risk.

MARKET RISK

The market risk of a stock represents that a portion of its risk which is attributable to

economy-wide factors like the growth rate of GDP, the level of government spending, money

supply, interest rate structure and inflation rate. Since these factors affect all firms to a greater

or lesser degree, investors cannot avoid the risk arising from them, however diversified their

portfolios may be. Hence it is also referred to as systematic risk (as it affects all securities) or

non diversifiable risk.


73/92

MEASURING HISTORICAL RETURN

Risk refers to variability or dispersion. If an assets return has no variability, it is riskless.

While analyzing the total return of an equity stock over a period of time risk that is the

variability in returns need to be analyzed

VARIANCE and STANDARD DEVIATION

The most commonly used measures of risk in finance are variances or its square root the

standard deviation. The variance and the standard deviation of a historical return series are

defined as follows:


74/92

RATIONALE OF STANDARD DEVIATION

Standard deviation is commonly employed in finance as measure of risk as:

If a variable is normally distributed, its mean and standard deviation contain all the

information about its probability distribution.

If the utility of money is represented by a quadratic function, then expected utility is a

function of mean and standard deviation.

Standard deviation is analytically more easily tractable.

RISK AVERSION AND REQUIRED RETURNS

The relationship of a persons certainty equivalent to the expected monetary value of a risky

investment defines his attitude toward risk. If the certainty equivalent is equal to the expected

value, the person is risk loving.

In general, investors are risk averse. This means that risky investments must offer higher

expected returns than less risky investments to induce people to invest in them. Remember,

however, that we are talking about expected returns: the actual return on a risky investment

may well turn out to be less than the actual return on a less risky investment. Put differently,

risk and return go hand in hand. This indeed is a well established empirical fact, particularly

over long periods of time.


75/92

RISK PREMIUMS

Investors assume risk so that they are rewarded in the form of higher return. Hence risk

premiums may be defined as the additional return investors expect to get, or investors earned

in the past, for assuming additional risk. Risk premium may be calculated between two classes

of securities that differ in their risk level.

There are three well known risk premiums

EQUITY RISK PREMIUM

This is the difference between the return on equity stocks as a class and the risk-free rate

represented commonly by the return on treasury bills.

BOND HORIZON PREMIUM

This is the difference between the return on long term government bonds and the return ontreasury bills.

Bond default Premium

This is the difference between the return on long term corporate bonds and the return on long

term government bonds.


76/92

STEPS FOLLOWED IN PORTFOLIO MANAGEMENT IN EQUITY

MARKET

1. Portfolio management is to understand the universe from which investments may be

selected.

2. Philosophical consideration is the analytical approach for the portfolio in question.

Firms or portfolios use a bottom-up approach, where investment decisions are madeprimarily by selecting stocks without consideration to sector selection or economic

forecasts.Other styles may be top-down oriented and portfolio managers pay primary

attention to analyzing entire sectors or macroeconomic trends as a starting point for

analysis and stock selection. Many styles use a combination of these approaches.

TAX SENSITIVITY

A lot of institutional equity portfolios, such as pension funds, are not taxable. This gives

portfolio managers more managerial flexibility than taxable portfolios. Non-taxable portfolios

may use greater exposure to dividend income and short-term capital gains than their taxable

counterparts. Managers of taxable portfolios may need to pay special attention to stock

holding periods, tax lots, capital losses, tax selling and dividend income generated by

portfolios. Taxable portfolios may be more effective with a lower portfolio turnover rate

relative to non-taxable portfolios. Understanding the tax consequences of - or lack thereof -

portfolio management activity is of primary importance in building and managing portfoliosover time.


77/92

BUILDING THE PORTFOLIO MODEL

Whether running one portfolio or a thousand portfolios in one equity investment product or

style, building and maintaining a portfolio model is a common aspect of equity portfoliomanagement. A portfolio model is a standard against which individual portfolios are matched.

Generally, portfolio managers will assign a percentage weighting to every stock in the

portfolio model and then individual portfolios are modified to match up against this weighting

mix. Portfolio models are usually computerized using software such as Microsoft Excel or

specific portfolio management software tools.

For example, after doing some mix of company analysis, sector analysis and macroeconomic

analysis, the portfolio manager may decide that he or she wants to own a relatively large

weight of a particular stock. Perhaps in the portfolio manager's style, a relatively large

weighting is 4% of the total portfolio value. By reducing the weighting of other stocks in the

portfolio model or by reducing the overall cash weighting, the portfolio manager would buy

enough stocks of a particular company in each portfolio to match up against the 4% model

weight. All of the portfolios will look like each other (and the portfolio model), at least in

terms of the 4% weighting on that particular stock.

In this way, the portfolio manager runs all portfolios in a similar or identical fashion given the

specific style mandated by that portfolio group. He or she would expect all portfolios in thegroup to generate returns in a standardized way relative to each other. All of the portfolios will

also be very similar to each other in terms of the risk/reward profile. In effect, all of the

analytical and security evaluation that the portfolio manager does is run on a model, and not

on the individual portfolios.

ACHIEVING PORTFOLIO EFFICIENCY

Running all of his or her portfolios in a similar way allows a portfolio manager to achieve a

remarkable analytical efficiency. The portfolio manager needs to only have an understanding

of perhaps 30 or 40 stocks owned in similar proportions in all portfolios, rather than 100 or

200 stocks owned in various proportions in 1,000 different portfolio accounts. Analysis on the

30 or 40 stocks can be applied to all portfolios easily by changing model weights in the

portfolio model over time. As the outlook on individual stocks changes over time, the

portfolio manager only needs to change his or her model weightings to reflect the investment

decision in all portfolios simultaneously.

The portfolio model can also be used to handle all day-to-day transactions at the individual


78/92

portfolio level. New accounts can be set up quickly and efficiently by simply "buying against

the model". Cash deposits and withdrawals can be handled in a similar way. If the portfolio is

large enough, the model only really needs to be applied to the change in asset size to build a

portfolio that looks just like the portfolio model. Smaller portfolios may be limited by stock

board lot constraints, which may affect the portfolio manager's ability to accurately buy or sell

to certain percentage weightings.

Portfolio modeling is a good way to apply analysis and evaluation of a key set of stocks -

those that the portfolio manager wants to own - to a set of portfolios in one group or style.

Portfolio modeling is an efficient link between equity analysis and portfolio management. As

the outlook for individual stocks improves or deteriorates over time, the portfolio manager

only needs to change the weightings of those stocks in the portfolio model to optimize the

return of all portfolios in the group or style. As long as the individual portfolio accounts are

traded efficiently, the group will perform as a homogeneous element


79/92

HEDGING A TOOL IN RISK MANGEMENT

WHAT DOES HEDGEMEAN?

Making an investment to reduce the risk of adverse price movements in an asset. Normally, a

hedge consists of taking an offsetting position in a related security, such as a futures contract.

WHY HEDGING

Investors studying the market often come across a security which they believe is intrinsically

undervalued. It may be the case that the profits and the quality of the company make it seem

worth a lot more than what the market thinks. A stock -picker carefully purchases securities

based on a sense that they are worth than the market price.When doing so, he faces two kinds

of risk.

His understanding can be wrong, and the company is really not worth more than the market

price

The entire market moves against him and generates losses even though the underlying idea

was correct.

The second outcome happens all the time. A person may buy Reliance at Rs.1700 thinkingthat it would announce good results and the security price would raise. A few days later, Nifty

drops, so he makes losses, even if his understanding of Reliance was correct.

There is a peculiar problem here. Every buy position on a security is simultaneously a buy

position in Nifty. This is because a LONG RELIANCE position is not focused play on the

valuation of Reliance. It carries a LONG NIFTY position along with it, as incidental baggage.

The stock-picker may be thinking he wants to be LONG RELIANCE, but a long position on

Re

project report sonam gupta

Documents