A PROJECT REPORT

ON

INVESTMENT STRATEGY BASED ON SECURITY ANALYSIS FOR

(ANGEL BROKING LIMITED)

BY DEEKSHA SHRIVASTAVA PGPM SEMESTER III

Project Guide "PROF. VAISHAMPAYAM"

IN PARTIAL FULFILLEMENT OF REQUIREMENTOF THE TWO YEAR FULL – TIME POST GRADUATE PROGRAMME IN MANAGEMENT OF THE ST. MIRA’S VISHWAKARMA INSTITUTE OF MANAGEMENT (SMVIM)

PUNE

A.Y: 2007 - 2008

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ACKNOWLEDGEMENT
The project report “Investment Strategy Based on Security Analysis” is a combined effort of many peoples who help me during this project.

First of all I would like to thank Prof. VAISHAMPAYAN, my Project guide without his support source of motivation and valuable information this project is not possible.

I would like to take this opportunity to thanks Mr. IFTEKHAR CHOUHAN BRANCH MANAGER of ANGEL BROKING LIMITED, KALAYANI NAGAR BRANCH for giving me this opportunity to work under him on this topic. Above all, I express a great respect and affections for my parents just because of their blessings and encouragement I am standing here. Last but not least, I would like to thanks all my friends and well-wishers for giving me their support during this project knowingly or unknowingly.

DEEKSHA SHRIVASTAVA

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CONTENTS

INDEX
CHAPTER NO. TOPIC EXECUTIVE SUMMARY 9 - 10 INTRODUCTION OF THE STUDY PAGE NO. 8

1. Introduction. 2. Objectives & Scope of Study.

11 – 20 CHAPTER NO. I COMPANY PROFILE

1. Introduction of the company 2. Vision of company 3. Business Philosophy 4. Quality Assurance Policy. 5. CRM Policy. 6. Management of the company 7. Services of Angel Broking. i. ii. iii. E – Broking Services. Investment Advisory Portfolio Management Services

8. What differentiates angel DP from other DPs?

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CHAPTER NO. II

RESEARCH METHODOLOGY

21 - 22

CHAPTER NO. III

THEOREOTICAL BACKGROUND FINANCIAL SYSTEM OVERVIEW 1. Indian Financial System 2. Financial Markets. 3. Stock Exchanges – Features, Operations. 4. Reforms in Secondary Market. 5. Instruments in secondary Market. 6. Investment decisions.

23 - 34

CHAPTER NO. IV

DATA PRESENTATION, ANALYSIS & INTREPRETATION FUNDAMENTAL ANALYSIS BY EIC MODEL 1. ECONOMIC ANALYSIS Indian Economy Overview. Sectors Of Indian Economy. Growth rate of GDP Inflation in India Money Supply. Interest Rates. Fiscal Policy. Savings & Investment. BOP, FOREX & Exchange Rates. Capital Markets. Issues & Priorities.

35 – 106

35 - 53

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54 - 80 2. INDUSTRY ANALYSIS

Automobile Industry Analysis

Destination India

Economic Survey 2006 - 07

Size.

Indian Automobile Industry.

Porter’s Five Forces Model.

Domestic Performance

Government Initiatives.

Exports.

Current Scenario. a) Two – Wheelers. b) Three – Wheelers. c) Passenger Vehicles. d) Commercial Vehicles.

Market Share in Different Segments of Automobile Sector.

5

SWOT Analysis.

Future Outlook.

3. COMPANY ANALYSIS

81 - 106

3.1. Tata Motors - Business Profile.

3.2. Strategic Vision

3.3. Evaluation Of Management.

3.4. Shareholding Pattern.

3.5 Performance during 2006 – 07.

3.6 Tata Motor’s Subsidiaries.

3.5. Ratio Analysis.

3.6. Risk – Return Analysis of Tata Motors.

3.7. Valuations.

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CHAPTER NO. V

FINDINGS AND SUGGESTIONS

107

CHAPTER NO. VI

CONCLUSION

107 108

CHAPTER NO. VII BIBLIOGRAPHY

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EXECUTIVE SUMMARY
This project named Investment Strategy Based on Security Analysis was carried out at Angel Broking Ltd. In this project apart from the basics of stock market a comprehensive study was made to understand how the investment decision of investing in a particular security is taken. The focus area of the project is to analyze shares of Tata Motors by using fundamental Analysis & Studying Risk – Return Relationship. I have chosen Tata Motors as a security because it has the highest market share in Commercial Vehicles Segment & 2nd Largest in Passenger Car Vehicle Segment.

The purpose behind this project was to learn the operations of the stock market trading and to understand the basic difference between speculation in the stock market and some study based investments undertaken to derive value.

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Introduction
The strategy of selecting stocks that trade for less than their intrinsic value is called value investing. Value investors actively seek stocks of companies that they believe the market has undervalued. They believe the market overreacts to good and bad news, causing stock price movements that do not correspond with the company's long-term fundamentals. The result is an opportunity for value investors to profit by buying when the price is deflated. The very definition of value investing is subjective. Some value investors only look at present assets/earnings and don't place any value on future growth. Other value investors base strategies completely around the estimation of future growth and cash flows. Despite the different methodologies, it all comes back to trying to buy something for less than its worth.

The field of Security Analysis is very vast and one has to look into various aspects of the functioning of the company to get to any conclusion about the possible performance of the company in the market. Investors like warren buffet made a fortune out of investments in the stock market, which is quiet impossible without proper research about the companies. The field of Security Analysis is full of challenges. In Security Analysis anticipated growth, calculations are based on considered FACTS & not on HOPE. The subject of Equity analysis, i.e. the attempt to determine future share price movement & its reliability by references to historical data is a vast one,

The project is done Angel Broking Ltd. a very well known company in the field of stock broking and capital market services sector. This project gave me a chance to get valuable insights from a hoard of vastly experienced people in this field and to get various approaches each one adopts to evaluate various companies. The project was carried out in the Pune office of Angel Broking Ltd. which is located in Kalyani Nagar. The duration of the project was two months. These two months were not only limited to learning and devoting time towards equity research but it also provided an insight on

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what various services such broking houses provide and what efforts are required to manage such organizations. The main Objectives of Study were as follows:• • • To understand security market operations. To evaluate a stock on the basis of Fundamental Analysis. To undertake investment decisions on the basis of detailed study of Risk & Return Analysis.

Scope:• • The scope of the project is limited to only one company i.e. Tata Motors While conducting the research I was unable to collect data from primary source which I feel would have had a bearing on the outcome of the research. The research is conducted from secondary source of data.

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Chapter 1

COMPANY PROFILE

“ANGEL BROKING LTD”, PUNE”
About the Group: The Angel Group has emerged as one of the top 3 retail broking houses in India. Incorporated in 1987, it has memberships on BSE, NSE and the two leading commodity exchanges in India i.e. NCDEX & MCX. Angel is also registered as a depository participant with CDSL. Angel has always believed in offering the best of services to their customers. Be it in form of focussed research or state of the art technology or customized product offering or personalized touch to our services. Angel is the only 100% retail stock broking house offering a gamut of retail centric services. • • • • • E broking Investment Advisory Portfolio Management Services Wealth Management Services Commodities Trading

ANGEL GROUP COMPANIES Member on the BSE and Depository Participant with CDSL Membership on the NSE Cash and Futures & Options Segment

Angel Broking Ltd.

Angel Capital & Debt Market Ltd.

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Angel Commodities Broking Ltd. Angel Securities Ltd.

Member on the NCDEX & MCX Member on the BSE

Vision To Provide Best Value for Money to Investors Through Innovative Products, Trading / Investment Strategies, State-of-the-art Technology And Personalized Service.

Business Philosophy • • • • Ethical practices & transparency in all our dealings. Customer interest above our own. Always deliver what we promise. Effective cost management

Quality Assurance Policy They are committed to being the leader In providing World Class Product & Services Which exceed the expectations of their customers Achieved by teamwork and A process of continuous improvement.

CRM Policy A Customer is the most Important Visitor On the Premises He is not Dependent on us but We are dependant on him He is not interruption in our work, But is the Purpose of it We are not doing him a favour by serving He is doing us a favour by giving us an Opportunity to do so.

Management: - The senior management of Angel Broking Ltd. are as follows:1. Mr. Dinesh Thakkar, Chairman and Managing Director Mr. Dinesh Thakkar hails from a reputed business family with interest in textiles trading. His entrepreneurial spirit inspired him to explore an opportunity in retail broking, a much 12

ignored sector at that point in time, so far as the clients were concerned. Therefore, what began as a mere dabbling in stocks to make money for himself grew into as serious business venture that started 20 years ago. He was the first sub-broker and was amongst the early stock market participants to computerize his office. His opinions on the stock market are valued and he is often sought by the media for his comments on markets, investment strategies and the overall economy in general. He has also been quoted and published by the print media several times.

2. Mr. Lalit Thakkar, Director Mr. Lalit Thakkar has been closely associated with the group since its inception and has been instrumental in setting up the Operational and Risk Management Processes. Though not actively involved in the day-to-day operations, he is highly respected by the senior management and is often consulted on important decisions of the Group.

3. Mr. Amit Majumdar, Executive Director - Operations & Risk Management Mr. Amit Majumdar oversees the entire Operations and Risk Management functions of the group and is responsible for the corporate affairs of the group. He is a Chartered Accountant by qualification and has an experience of more than 10 years in the field of Finance, Consultancy & Advisory services. He has worked as a financial controller, treasury manager and an investment banker in the past

and been associated with Rabo India Finance, Ambit Corporate Finance and Ernst and Young prior to joining the Angel Group.

4. Mr. Rajiv Phadke, Executive Director - Business Development & HR Mr. Rajiv Phadke has industry experience of more than 31 years and has been associated with companies like Times Guaranty Financials, Nagarjuna Finance Ltd, Tata Exports Ltd, Mukand and Motilal Oswal in the past.

Educational qualifications include a MSC (Physics) and a MMS (Finance).At Angel, he 13

manages two key functions: Business Development and Human Resource Development.

5. Mr. Vinay Agarwal, Executive Director - E-Commerce He is A Chartered Accountant by qualification with 8 years of experience in the field of Financial Services. He began his career with Angel Group as a Business Consultant in the areas of Finance and Operations. He was promoted to the position of Vice-President (ECommerce) and thereafter to that of an Executive Director (E-Commerce).

He takes care of the E-Broking business, which comprises of Business Development, Product Development and Operations. He is also actively involved in the commercial aspect of technology.

6. Mr. Nikhil Daxini, Executive Director - Sales and Marketing Mr. Nilkhil Daxini is an MBA specializing in finance. He has an experience of more than 7 years in the field of finance and marketing of financial products.

He was instrumental in introducing the concept of professional marketing of broking services within the organization. His forte in Business Operations includes Business Development, Risk Management and Operations etc.He had earlier been associated with HDFC Bank Ltd 7. Mr. Ketan Shah, Associate Director - IT Mr. Ketan Shah is the Head of Technology for the Group. He has an industry experience of more than 18 years in various areas of Business Operations.

He is involved in the designing of IT Policies and Strategies. He also looks for Planning, Implementation, Budgeting of IT related services.

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Milestones December, 1997 Incorporation of Angel Broking Ltd. November, 1998 Incorporation of Angel Capital and Debt Market Ltd. March, 2002 Web-enabled Back Office software developed November, 2002 First ever Investor seminar of Angel Group April, 2003 Publication of first Research Report April, 2004 Incorporation of Commodities Broking division September, 2004 Launch of Online Trading Platform October, 2005 Received the prestigious "Major Volume Driver" award for FY05 March, 2005 Roll out of 25th branch March, 2006 Crossed the 100,000 mark in unique trading accounts and completes the roll out of 50th branch July, 2006 Formally launched the PMS function September, 2006 Commenced Mutual Fund and IPO distribution business October, 2006 Received "Major Volume Driver" award for FY06 December, 2006 Crossed the 2,500 mark in terms of business associates. March, 2007 Crossed the 200,000 mark in unique trading accounts Services of Angel Broking:-

E – Broking • E broking provides 4 different trading platforms suited to different individual needs • • • • Multiple exchanges on a single screen Historical Charts & Technical Tools Intraday Calls & News Flash 24 X 7 web-enabled Back office

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• •

Online Fund transfer facility Auto pay-in of shares.

Investment Advisory To derive optimum returns from equity as an asset class requires professional guidance and advice. Professional assistance will always be beneficial in wealth creation. Investment decisions without expert advice would be like treating ailment without the help of a doctor. Research Department Strong research has always been our forte. Our investment advisory department is backed by an experience research team. This team comprises of 12 sectorial special analysts and a Research Head. Their vast experience and expertise in spotting great investments opportunities has always been beneficial for our clients. Benefits @ Angel • Expert Advice: Our expert investment advisors are based at various branches across India to provide assistance in designing and monitoring portfolios. • Timely Entry & Exit: Our advisors will regularly monitor your investments and will guide you to book timely profits. They will also guide you in adopting switching techniques from one stock to another during various market conditions. • De-Risking Portfolio: A diversified portfolio of stocks is always better than concentration in a single stock. Based on our research, we diversify the portfolio in growth oriented sectors and stocks to minimize the risk and optimize the returns. Angel Gold: In a volatile market it is very difficult for an investor to pick up value stocks which will give decent returns in the long run. We at Angel Gold realize your need for a professional financial advisor and hence are here to assist you in making wise and profitable decisions.

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Angel strongly believe that right decisions taken at the right time are always beneficial and that's why our entire research team comprising of 12 sector specialists along with angels research head will understand clients need, return expectation, risk profile and time horizon to design their portfolio accordingly. This portfolio will be tracked regularly and angels efforts would be to optimize clients returns in the long run.

Features of the Angel Gold: • A premium service for clients who need professional guidance on long term investments. • Minimum fund / portfolio of Rs. 1 lac and maximum of Rs. 4 lac eligible for Angel Gold. • • • • Appropriate risk profiling before taking investment decisions Periodic group meetings and seminars in branches. Monthly Newsletter from the desk of “Angel Gold”. Browser based back-office software. Portfolio Management Services: Successful investing in Capital Markets demands ever more time and expertise. Investment Management is an art and a science in itself. Professional Investment Management Services are no longer the privilege of only large institutional investors. Portfolio Management Services (PMS) is one such service that is fast gaining eminence as an investment avenue of choice for High Net worth Investors like you. PMS is a sophisticated investment vehicle that offers a range of specialized investment strategies to capitalize on opportunities in the market. The Portfolio Management Service combined with competent fund management, dedicated research and technology, ensures a rewarding experience for its clients.

Angel PMS brings with it years of experience, expertise, research and the backing of India's leading stock broking house. At Angel, experienced portfolio management is the difference. You will enjoy a relationship with a portfolio 17

manager equipped to design and implement a portfolio around your unique needs. We will advise you on a suitable product based on factors such as your investment horizon, return expectations and risk tolerance. By entrusting the management of your Portfolios to Angel, you can enjoy convenience without compromising on quality. Private Client Group Angel offers personalized advisory services to affluent HNI investors and actively assists them in managing their portfolio. PCG can seek guidance on specific stocks in their portfolio and can get pro active advice for timely exit and fresh investments. Here we also design customized products and services for our clients based on there risk profile, returns need and time horizon. Our experienced research team, in-depth analysis and customized value added products and services give us an immense advantage in assisting you to generate wealth on a longer and consistent basis. Features 1. Minimum Portfolio size of Rs.1Cr. for residents and Rs.1.5Cr for NRIs is the eligibility for PCG. 2. Portfolios are customized after a due discussion with clients and our research team. 3. Deployment of funds can be among various investing avenues available with us including PMS, mutual fund, advisory. 4. Meetings and one to one discussion with our fund managers, chief investment officer and Research director. 5. Special Technical and Derivative strategies.

Angel offers trading opportunities in commodities market through its vast chain of branches spread across the country & state of the art trading platform. • • • Trading on MCX and NCDEX Application based trading software Web based trading platform

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• • • • • • • •

Online daily, weekly and monthly research reports Transparent and fair trade execution Individual client attention 24*7 online back office Training / education facilities / conduct of seminars Digital contract notes cum bill: View your accounts from anywhere, anytime Competitive brokerage rates Efficient risk management

Depository Participant Angel Broking Ltd has started its depository services by registering with CDSL. There are various benefits of holding client’s demat account with angel but the biggest advantage is that a client shall be ensured of a risk free, prompt and efficient depository process.

What differentiates angel DP from other DPs?

Since angel association is slated for a long time, angel are in a much better position to know your requirement regarding your holding and transfer of securities. No physical instructions are required for your sell obligations. Angel also offer to their clients the automated pay in facility for trade done through Angel Broking Ltd / Angel Capital and Dept Market Ltd. The transaction charges that are being levied by us are the lowest in the industry as angel believe in providing quality services at the most affordable costs.

Clients have an option of choosing the products offered by CDSL: 1. Easy facility: Client can view, download and print the updated holding of their demat account along with valuation of holding. 19

2.

Easiest facility: Client can, by using this facility, submit their own delivery instructions on the internet without the intervention of their DP. This is in addition to all the facilities provided under the ‘Easy’ facility.

Client will enjoy the following distinctive benefits by registering with Angel: No risk of loss, wrong transfer, mutilation or theft of share certificates. Hassle free automated payin of client sell obligations by their clearing members, ABL / ACDL • • • • • • • • •

Reduced paper work. Speedier settlement process. Because of faster transfer and registration of securities in your account, increased liquidity of client’s securities. Instant disbursement of non-cash benefits like bonus and rights into client’s account. Efficient pledge mechanism. Wide branch coverage. Personalized / attentive services of trained help desk. ‘Zero’ upfront payment. No charges for extra transaction statement & holding statement. All in one combined Monthly ‘Bill-cum-Transaction-cum-Holding-cum-ledger’ statement

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Chapter 2

RESARCH METHODOLOGY
Research is often described as an active, diligent and systematic process of inquiry aimed at discovering, interpreting and revising facts. This intellectual investigation produces a greater understanding of events, behaviours or theories and makes practical applications through laws and theories. The term research is also used to describe a collection of information about a particular subject, and is usually associated with science and scientific method. The purpose of research methodology is to describe the entire research procedure. In addition, it includes the problem, which is taken by researcher, setting research objective. The overall design, sampling procedure method of data collection, analysis, interpretation and presenting data in order to find out the solution to these problems.

METHOD OF DATA COLLECTION . Secondary Data: - The source of data for the Research Project is mainly secondary data which was collected from the websites, documents, which were in printed forms like annual reports, pamphlets, reference books based on Financial Management .

Methodology Used: In case of Security Analysis, there are following type of research methods that are

followed: Fundamental Analysis:A method of evaluating a security by attempting to measure its intrinsic value by examining related economic, financial and other qualitative and quantitative factors. Fundamental analysts attempt to study everything that can affect the security's value, including macroeconomic factors (like the overall economy and industry conditions) and individually specific factors (like the financial condition and management of companies). Financial statement analysis is the biggest part of Fundamental analysis

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also known as quantitative analysis; it involves looking at historical performance data to estimate the future performance of stocks.It also involves examining Valuation Ratios. Under Fundamental Analysis, Risk & Return Methodology was used to find that to estimate that at a given value of risk what is the expected & Actual Return in hopes of figuring out what sort of position to take with that security (undervalued= buy, overvalued = sell or short).

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CHAPTER NO. III THEOREOTICAL BACKGROUND

FINANCIAL SYSTEM OVERVIEW
Indian Financial System –

The Financial System is one of the most important inventions of the modern society. It is well known that certain sectors in any society have surplus funds, which are available for investment, while certain other sectors demand funds or have use for these funds in their activity. This fundamental forms the basis for the “financial system” anywhere in the world.

For example, there are always in any economy, seekers of funds, mainly, business firms and government and suppliers of funds, mainly households.

Seekers of Funds (mainly business, firms and government)

Suppliers of Funds (mainly households)

The Financial System Financial Markets: A Financial Market can be defined as the market in which financial assets are created of transferred. Financial assets represent “claims” to payment of a sum of money sometime in the future and/or periodic payment in the form of dividend or interest. Financial markets can be classified as primary and secondary markets. More often, they are also classified as money markets and capital markets. In fact, primary and secondary

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markets are integral part of capital markets, as money markets have a very limited secondary market. The financial markets can broadly be divided into money and capital market. Money Market: Money market is a market for debt securities that pay off in the short term usually less than one year, for example the market for 90-days treasury bills. This market encompasses the trading and issuance of short term non equity debt instruments including treasury bills, commercial papers, bankers acceptance, certificates of deposits, etc. Capital Market: Capital market is a market for long-term debt and equity shares. In this market, the capital funds comprising of both equity and debt are issued and traded. This also includes private placement sources of debt and equity as well as organized markets like stock exchanges. Capital market can be further divided into primary and secondary markets. Capital Markets is a place where‚Buyers and sellers of securities can enter into transactions to purchase and sell shares, bonds, debentures etc. Further, it performs an important role of enabling corporates, entrepreneurs to raise resources for their companies and business ventures through public issues. Transfer of resources from those having idle resources (investors) to others who have a need for them (corporates) is most efficiently achieved through the securities market. Stated formally, securities markets provide channels for reallocation of savings to investments and entrepreneurship. Savings are linked to investments by a variety of intermediaries, through a range of financial products, called ‘Securities’.

The primary market and the secondary market constitute the capital market and besides, the capital market has the share capital as well as debt capital instruments. The primary and secondary markets are inter-dependent on each other. They are closely linked to each other. In case there are many public issues in the primary market it automatically leads to the growth in the secondary market, as it provides easy liquidity to the existing investors by off-loading their investment either in capital or in debt instruments and unless the secondary market is active with transparency and efficiency, seekers of capital

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funds, i.e., corporate entities cannot hope to tap the primary market for further funds through public issues.

Primary market: The market for raising funds through share capital, debenture, bonds etc. wherein the funds directly flow from the households and other saving units in the economy to the users of these funds, namely, Government and Business Enterprises in the form of “Limited Companies”. The Issues in the primary market are:1. Types of issue: Public issue of equity shares, preference share, debentures etc. Rights issue Bonus issue Private placement and Bought-out deal

Secondary market: Secondary market refers to a market where securities are traded after being initially offered to the public in the primary market and/or listed on the Stock Exchange. Majority of the trading is done in the secondary market. Secondary market comprises of equity markets and the debt markets. For the general investor, the secondary market provides an efficient platform for trading of his securities. For the management of the company, Secondary equity markets serve as a monitoring and control conduit—by facilitating value-enhancing control activities, enabling implementation of incentive-based management contracts, and aggregating information (via price discovery) that guides management decisions. Secondary markets: 1) It operates through the medium of stock exchanges which regulate the trading activities in the market and ensure a measure of safety and fair dealing to the investors; 2) The number of stock exchanges in the country numbers 22, excluding the National Stock Exchange (N.S.E.) and the Over The Counter Exchange of India (OTCEI); 3) The number of listed companies in the country is upwards of 8000;

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4) The stock market in India is regulated by the Central Government under the Securities Contracts (Regulation) Act, 1956; Features of stock exchanges:- There are 22 recognised stock exchanges in India. Mangalore Stock Exchange was refused renewal of recognition vide SEBI order dated August 31, 2004. In terms of legal structure, the stock exchanges in India could be segregated into two broad groups – 19 stock exchanges which were set up as companies, either limited by guarantees or by shares, and the 3 stock exchanges which were associations of persons (AOP) viz. BSE, ASE and Madhya Pradesh Stock Exchange. The 19 stock exchanges which have been functioning as companies include: the stock exchanges of Bangalore, Bhubaneswar, Calcutta, Cochin, Coimbatore, Delhi, Gauhati, Hyderabad, Interconnected SE, Jaipur, Ludhiana, Madras, Magadh, NSE, Pune, OTCEI, Saurashtra-Kutch, Uttar Pradesh, and Vadodara. Apart from NSE, all stock exchanges whether established as corporate bodies or Association of Persons (AOPs), were non-profit making organizations. With the institution of the National Stock Exchange in 1993/94, the trading operations in the secondary market have undergone a reformative change, in the sense, slowly, all the stock exchanges have started slowly computerising their operations and the operations are known as “on line” trading;

The operations are through computer terminals provided to the stock brokers instead of by the conventional method, when the brokers used to call out the name of the share in which he is interested, by shouting openly in the ring;

Settlement is smoother with the exchange of securities taking place in less time and with much less hitch than in the past;

For facilitating exchange of securities in small and medium sized companies wherein the number of shares is less, “Over The Counter Exchange of India” (OTCEI) has

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been instituted which facilitates of exchange of securities over the counter without the elaborate functioning of the stock exchange. There are certain norms for listing a share in the OTCEI. These norms relate to the share capital size of the companies, whose shares are listed in the OTCEI with a prescribed minimum and a maximum.

Dematerializations of shares of blue chip companies has taken place and at present practically all the scrips are being sold in the secondary market only in the “demat” form. There is a national authority by the name “National Securities Depositories Limited (NSDL) which functions under SEBI. There is one more depository at the national level called "Central Depository Services Limited" (CDSL) promoted by the BSE. All the players at the retail level who maintain the electronic share accounts of investors who sell or buy demat shares in the secondary market, like savings or current accounts are called “Depository Participants (DPs)”. registration with NSDL as well as SEBI. They require

As per existing SEBI’s guidelines, all fresh public issues would be in demat form only.

About the stock exchanges: Form of organisation – now uniformly a limited company

Management – by the governing body in the form of a board, headed mostly by an Executive Director. Each stock exchange has its own byelaws, rules and regulations as per SEBI guidelines as well as the S.C.R.A.,1956. There is a managing committee also in some of the stock exchanges and the members of this committee are the share brokers operating in the stock exchange;

Some of the functions of stock exchanges – To facilitate trading in securities within the stock exchange both in listed securities and approved securities – there are two types of securities in any stock exchange, namely, those securities which are listed in

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the stock exchange by payment of “listing fees” by the concerned companies and those securities which are listed in other stock exchanges but which can be traded in this stock exchange on a reciprocal basis – It should be noted that in India, for any scrip to be traded in the secondary market, it is essential that the share is listed at least in one stock exchange which is recognised;

Ensuring that the companies whose share scrips are traded in the stock exchange do not resort to unfair means either for acquiring the shares for its promoters or for selling the shares also, thereby affecting the interests of the investing public at large; They have obtained giving permission to the brokers for underwriting once SEBI’s permission;

Providing a platform for launching of primary market issues by facilitating the holding of conferences of brokers especially by the “Manager/s to an Issue” before the issue opens etc.

About operations in the Stock Exchange:

Brokers commence their operations on line through the respective terminals in the stock exchange by entering into contracts with fellow-brokers for sale and purchase of securities of various companies, mentioning the name of the company, the number of shares, whether buy or sell and the agreed price for the transaction. Copies of contracts are provided to the Stock Exchange. Once the contract is entered into, a trade is supposed to have taken place. This is called “T”

Stock Exchange processes the data of the contracts and lists out all the transactions to ensure that there is no discrepancy, i.e., the net position is “squared”, i.e., the quantum of shares sold is equal to the quantum of shares purchased. In case there is any discrepancy, on the second day the brokers match the transaction and remove the discrepancy. For example, one broker by mistake could have contracted to sell more in scrip than the other broker to buy from him.

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On day 2, the buy broker gets money from his client and sell broker gets demat slip from his client. The third day is known as “pay-in and pay-out day”. Pay in day is the day when the brokers shall make payment or delivery of securities to the exchange. Pay out day is the day when the exchange makes payment or delivery of securities to the broker. Settlement cycle is on T+2 rolling settlement basis w.e.f. April 01, 2003. The exchanges have to ensure that the pay out of funds and securities to the clients is done by the broker within 24 hours of the payout. The Exchanges will have to issue press release immediately after pay out. In the morning at 11.30 a.m., the pay-in of money by the buy broker and demat slip by the sell broker take place. On the same day around 2.30 p.m. “pay out” by the Stock Exchange to the sell broker and demat slip to the buy broker take place. The sell broker then pays his client and demat account of the buyer gets credited through clearing institution known as “National Securities Clearing Corporation Limited (NSCCL)”. This is a subsidiary of NSE and similarly we have Clearing Corporation of India Limited (CCIL) a subsidiary of BSE. The above settlement is known as T+2 settlements. Further we have today T+2 rolling settlement. This means that everyday “Trade” can take place and the pay-in and pay-out will be on the third day. It was SEBI’s intention to commence T+1 from 1st of April 2004. Unfortunately it had to postpone this decision. If introduced, India will be on par with some of the developed countries who do settlement within 24 hours.

Nature of market prior to reforms As compared to other developing countries, the Indian stock markets have a fairly long history. However, the volume of transactions in these markets remained limited until the late 1970s, but grew rapidly during the 1980s as the corporate sector turned increasingly to the equity market. Although the volume of transactions increased, the market remained primitive, insulated from foreign investment and continued to suffer from several problems. Most importantly, to access capital markets, companies needed to have prior permission from the government, which had to approve the price at which new equity could be raised. The aim was ostensibly to control flow of funds to the private corporate

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sector in view of the requirements of public finance and also to provide a 'fair value' to investors. However, the practice effectively penalized firms raising capital from the market: the Initial Public Offerings (IPOs) of equity were typically under-priced in relation to the price upon listing, and the new issues by listed companies were at a substantial discount to the prevailing price. While the new issue market was overly regulated, there were inadequate regulations of secondary market activities. The domestic capital market had no global link. Information and transparency were limited, reflecting the individual, dealer-based trading system. All these contributed to high transaction costs. In addition, public sector financial institutions such as the Unit Trust of India (UTI), the insurance companies and the Development Financ“ÁInstitutions (DFIs) were dominant players in the stock market. This had two significant effects. First, the government had major influence on the domestic financial markets. Second, it allowed promoters of public companies to run their companies with relatively smallholdings of their own, because public sector financial institutions generally supported the status quo ownership and management position, unless something drastic happened.

Equity market reforms since 1992

As part of a broad set of reforms, the Securities and Exchange Board of India (SEBI) was given the legal powers in 1992 to regulate and reform the capital market, including new issues. The equity market reforms since then can be divided into two broad categories: one that increases the level of competition in the market and the other that deals with problems of information and transaction cost. The most important initiative to enhance competition was the free pricing of IPO and formulation of guidelines concerning new issues. The new regulatory framework sought to strengthen investor protection by ensuring disclosure and transparency rather than through direct control. Secondly, the National Stock Exchange (NSE) was set up, which competed with the Bombay Stock Exchange (BSE). The NSE introduced an automated screen-based trading system, known as the National Exchange for Automated Trading (NEAT) system, which allowed members from across the country to trade simultaneously with enormous ease and

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efficiency. Faced with stiff competition, the BSE adopted similar technology. Competition was also enhanced through an increased number of participants—foreign institutional investors (FIIs) were permitted to trade and private sector mutual funds came on the scene. To deal with market imperfection such as information asymmetry and high transaction costs, a number of measures were taken. At the trading level, transparency was facilitated by the new technology (NEAT system), which operated on a strict price/time priority. At the investor level, transparency was augmented by the regulation that required listed companies to increase the frequency of their account announcements. To ensure transferability of securities with speed, accuracy and security, the Depositories Act was passed in 1996, which provided for the establishment of securities depositories and allowed securities to be dematerialized. Following the legislation, National Securities Depository Limited—India’s first depository--was launched. Other measures to reduce transaction costs included: a) a movement toward electronic trading and settlement, and b) streamlining of procedures with respect to clearance of new issues.

Results

Following these measures, the Indian equity market has modernized rapidly and its ability to serve investors has increased considerably. Competition among stock exchanges has intensified. With all stock exchanges introducing screen-based trading, trading has become more transparent. With the option of settling through depository now available to investors in case of most of the liquid stocks, it is possible to eliminate risks of bad delivery and counterfeit shares. The two depositories that are in operation now ensure faster, cleaner and cheaper settlement. Dematerialized settlement now accounts for about 90 percent of settlement settled by delivery. Disclosure standards by companies and financial intermediaries are higher. Following the introduction of prudential regulations, stock exchanges have become safer and more dependable. One area where there has been only limited progress is in reducing the dominance of public sector financial institutions

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Instruments In Secondary Market:Following are the main financial products/instruments dealt in the Secondary market which may be divided broadly into Shares and Bonds: Shares: Equity Shares: An equity share, commonly referred to as ordinary share, represents the form of fractional ownership in a business venture.

Rights Issue/ Rights Shares: The issue of new securities to existing shareholders at a ratio to those already held, at a price. For e.g. a 2:3 rights issue at Rs. 125, would entitle a shareholder to receive 2 shares for every 3 shares held at a price of Rs. 125 per share.

Bonus Shares: Shares issued by the companies to their shareholders free of cost based on the number of shares the shareholder owns.

Preference shares: Owners of these kind of shares are entitled to a fixed dividend or dividend calculated at a fixed rate to be paid regularly before dividend can be paid in respect of equity share. They also enjoy priority over the equity shareholders in payment of surplus. But in the event of liquidation, their claims rank below the claims of the company’s creditors, bondholders/debenture holders.

Cumulative Preference Shares: A type of preference shares on which dividend accumulates if remained unpaid. All arrears of preference dividend have to be paid out before paying dividend on equity shares.

Cumulative Convertible Preference Shares: A type of preference shares where the dividend payable on the same accumulates, if not paid. After a specified date, these shares will be converted into equity capital of the company.

Bond: is a negotiable certificate evidencing indebtedness. It is normally unsecured. A debt security is generally issued by a company, municipality or government agency. A bond investor lends money to the issuer and in exchange, the issuer promises to repay the

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loan amount on a specified maturity date. The issuer usually pays the bond holder periodic interest payments over the life of the loan. The various types of Bonds are as follows: Zero Coupon Bond: Bond issued at a discount and repaid at a face value. No periodic interest is paid. The difference between the issue price and redemption price represents the return to the holder. The buyer of these bonds receives only one payment, at the maturity of the bond.

Convertible Bond: A bond giving the investor the option to convert the bond into equity at a fixed conversion price.

Treasury Bills: Short-term (up to one year) bearer discount security issued by government as a means of financing their cash requirements.

Equities have the potential to increase in value over time. It also provides portfolio with the growth necessary to reach long term investment goals. Research studies have proved that the equities have outperformed most other forms of investments in the long term. This may be illustrated with the help of following examples: a) Over a 15 year period between 1990 to 2005, Nifty has given an annualised return of 17%. b) Mr. Raju invests in Nifty on January 1, 2000 (index value 1592.90).The Nifty value as of end December 2005 was 2836.55. Holding this investment over this period Jan 2000 to Dec 2005 he gets a return of 78.07%. Investment in shares of ONGC Ltd for the same period gave a return of 465.86%, SBI 301.17% and Reliance 281.42%. Therefore, Equities are considered the most challenging and the rewarding, when compared to other investment options. Research studies have proved that investments in some shares with a longer tenure of investment have yielded far superior returns than any other investment. However, this does not mean all equity investments would guarantee similar high returns. Equities are high risk investments. One needs to study them carefully before investing.

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Since 1990 till date, Indian stock market has returned about 17% to investors on an average in terms of increase in share prices or capital appreciation annually. Besides that on average stocks have paid 1.5% dividend annually. Compared to most other forms of investments, investing in equity shares offers the highest rate of return, if invested over a longer duration.

Investment Decisions: - Investment decision for an individual is a very important & crucial decision. Fundamental analysis is the cornerstone of investing. In fact, some would say that you aren't really investing if you aren't performing fundamental analysis. Fundamental analysis is a technique that attempts to determine a security’s value by focusing on underlying factors that affect a company's actual business and its future prospects. Fundamental analysis is the analysis, wherein the investment decisions are taken on the basis of the financial strength of the company. There are two approaches to fundamental analysis, viz., E-I-C analysis or the Top Down approach to Fundamental analysis and C-I-E analysis or the Bottom up approach. The term simply refers to the analysis of the economic well-being of a financial entity as opposed to only its price movements. The various fundamental factors can be grouped into two categories: quantitative and qualitative. The financial meaning of these terms isn’t all that different from their regular definitions. • • Quantitative – capable of being measured or expressed in numerical terms. Qualitative – related to or based on the quality or character of something, often as opposed to its size or quantity. Quantitative fundamentals are numeric, measurable characteristics about a business. The biggest source of quantitative data is the financial statements. In this not only financial ratios but Risk – Return relationship of a company is also studied.

In case of qualitative fundamentals, not only the qualitative factors of company but industry specific factors & Economic Analysis is also done. These are the less tangible factors surrounding a business .The model for analyzing qualitative factor is EIC (Economy, Industry & Company)

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CHAPTER NO. IV DATA PRESENTATION, ANALYSIS & INTREPRETATION

Fundamental Analysis of Tata Motors(EIC Model):Economic Analysis: - In Fundamental Analysis, First of all the overall Economy is analyzed to judge the general direction, in which the economy is heading. The direction in which the economy is heading has a bearing on the performance of various industries. That’s why Economy analysis is important. The output of the Economy analysis is a list of industries, which should perform well, given the general trend of the economy and also an idea, whether to invest or not in the given economic conditions.

Indian Economy Overview Economics experts and various studies conducted across the globe envisage India and China to rule the world in the 21st century. For over a century the United States has been the largest economy in the world but major developments have taken place in the world economy since then, leading to the shift of focus from the US and the rich countries of Europe to the two Asian giants- India and China. The rich countries of Europe have seen the greatest decline in global GDP share by 4.9 percentage points, followed by the US and Japan with a decline of about 1 percentage point each. Within Asia, the rising share of China and India has more than made up the declining global share of Japan since 1990. During the seventies and the eighties, ASEAN countries and during the eighties South Korea, along with China and India, contributed to the rising share of Asia in world GDP.

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According to some experts, the share of the US in world GDP is expected to fall (from 21 per cent to 18 per cent) and that of India to rise (from 6 per cent to 11 per cent in 2025), and hence the latter will emerge as the third pole in the global economy after the US and China.

By 2025 the Indian economy is projected to be about 60 per cent the size of the US economy. The transformation into a tri-polar economy will be complete by 2035, with the Indian economy only a little smaller than the US economy but larger than that of Western Europe. By 2035, India is likely to be a larger growth driver than the six largest countries in the EU, though its impact will be a little over half that of the US. India, which is now the fourth largest economy in terms of purchasing power parity, will overtake Japan and become third major economic power within 10 years. India is the 2nd largest country in the world, measured by population and arable land. When measured in USD exchange-rate terms, it is the 10th largest in the world, with a GDP of US $1.0 trillion (2007). In terms of Purchasing Power Parity (PPP) it ranks 3rd in the world. It now expects to become the 3rd largest economy in the world (in US Dollar terms not PPP) by 2025, just behind US and China. In terms of growth it is the second fastest growing major economy in the world. GDP grew at 9.4% for the fiscal year 2006– 2007. The world is waking up to the fact that the Indian Economy will soon become a force to contend with. The economy has finally reaped the benefits of just over a decade of reforms. The Indian and Chinese economies will be the world's growth engines in the 36

21st Century, replacing the US which has dominated the world economy for 5 decades. Witness some of the following changes that have altered the economic landscape so dramatically in the past 12 years. Indian Economy Overview 1. The economy of India is the fourth largest in the world, with a GDP of $3.63 trillion at PPP, and is the tenth largest in the world with a $691.9 billion at 2004 USD exchange rates and has a real GDP growth rate of 6.2% at PPP.

2. Growth in the Indian economy has steadily increased since 1979, averaging 5.7% per year in the 23-year growth record.

3. Indian economy has posted an excellent average GDP growth of 6.8% since 1994 India, the fastest growing free-market democracy in the world, registered a growth rate of 8.2 percent in FY 2004.

4. India has emerged the global leader in software and business process outsourcing services, raking in revenues of US$12.5 billion in the year that ended March 2004.

5. Agriculture has fall to a drop because of a bad monsoon in 2005. There is a paramount need to bring more area under irrigation.

6. Export revenues from the sector are expected to grow from $8 billion in 2003 to $46 billion in 2007.

7. India’s foreign exchange reserves are over US$ 102 billion and exceed the forex reserves of USA, France, Russia and Germany. This has strengthened the Rupee and boosted investor confidence greatly.

8. A strong BOP position in recent years has resulted in a steady accumulation of foreign exchange reserves. The level of foreign exchange reserves crossed the US $100 billion

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mark on Dec 19, 2003 and was $142.13 billion on March 18, 2005.

9. Reserve money growth had doubled to 18.3% in 2003-04 from 9.2 in 2002-03, driven entirely by the increase in the net foreign exchange assets of the RBI.

10. Reserve money growth declined to 6.4% in the current year to January 28, 2005.

11. During the current financial year 2004-05, broad money stock (M3) (up to December 10, 2004) increased by 7.4 per cent (exclusive of conversion of non-banking entity into banking entity, 7.3 per cent).

12. Economics experts and various studies conducted across the globe envisage India and China to rule the world in the 21st century. Sectors of Indian Economy There are three major sectors of Indian Economy Agriculture Agriculture and allied sectors like forestry, logging and fishing accounts for 25% of the GDP. It employs almost 58% of the total work force. It is the largest economic sector and plays a significant role in the overall socio-economic development of India. Due to steady improvement in irrigation, technology, modern agricultural practices the yield per unit area of all crops has increased tremendously.

After an annual average of 3.0 per cent in the first five years of the new millennium starting 2001-02, growth of agriculture at only 2.7 per cent in 2006-07, on a base of 6.0 per cent growth in the previous year, is a cause of concern. Low investment, imbalance in fertilizer use , loseed replacement rate, a distorted incentive system and low post harvest value addition continued to be a drag on the sector’s performance. Given its low share, a mechanical calculation of the adverse impact of low growth in agriculture on overall GDP can be misleading. With more than half the population directly depending on this sector, low agricultural growth has serious implications for the ‘inclusiveness’ of growth. Furthermore, poor agricultural performance, as the current year has

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demonstrated, can complicate maintenance of price stability with supply-side problems in essential commodities of day-to-day consumption. The recent spurt of activity in food processing and integration of the supply chain from the farm gate to the consumer’s plate has the potential of redressing some of the root causes such as low investment, poor quality seeds, and little post-harvest processing. There is a paramount need to move Indian agriculture beyond its centuries’ old dependency on the monsoon by bringing more area under irrigation and by better water management. This has rightly been identified in the NCMP as one of the areas with the highest investment priority.

Industry . The three main sub sectors of industry viz Mining & quarrying, manufacturing, and electricity, gas & water supply recorded growths of 5%, 8.8% and 7.1% respectively. Index of industrial production which measures the overall industrial growth rate was 10.1% in October 2004 as compared to 6.2% in October 2003. The largest sector here holds the textile industry. Automobile sector has also demonstrated the inherent strength of Indian labour and capital.

Services As with any growing economy the sectoral composition of GDP has been changing with the services sectors showing an increased share and that of agriculture declining to nearly 20%. The fastest growing sector in the economy has been the Services Sector, which now accounts for over 50% of GDP. Business services, communication services, financial services, community services, hotels and restaurants and trade services are among the fastest growing sectors. Services sector growth has continued to be broad-based. Among the three sub sectors of services, ‘trade, hotels, transport and communication services’ has continued to boost the sector by growing at double-digit rates for the fourth successive year. Impressive progress in information technology (IT) and IT-enabled services, both rail and road traffic, and fast addition to existing stock of telephone connections, particularly mobiles, played a key role in such growth. The Information Technology industry

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currently accounts for 5.0 % of India's GDP. As per a Nasscom-McKinsey Study it will account for 7 % of India's GDP by March 2008.

Review of developments Macroeconomic overview

Vigorous growth with strong macroeconomic fundamentals has characterized developments in the Indian economy in 2006-07 so far. However, there are some genuine concerns on the inflation front. Growth of 9.0 per cent and 9.2 per cent in 2005-06 and 2006-07, respectively, by most accounts, surpassed expectations .While the up-and-down pattern in agriculture continued with growth estimated at 6.0 per cent and 2.7 per cent in the two recent years, and services maintained its vigorous growth performance, there were distinct signs of sustained improvements on the industrial front. Entrenchment of the higher growth trends, particularly in manufacturing, has boosted sentiments, both within the country and abroad. The overall macro economic fundamentals are robust, particularly with tangible progress towards fiscal consolidation and a strong balance of payments position. With an upsurge in investment, the outlook is distinctly upbeat.

Growth Rate of GDP For the year 2005-06, it was a revision made in the quick estimates where the growth rate for the agriculture sector was changed from 3.9 per cent to 6 per cent that propelled the overall growth to 9 per cent. However, as against 2006-07, only three sectors registered a double-digit growth in 2005-06. A sectoral decomposition shows that manufacturing registered a growth of 12.3 per cent in 2006-07 as against 9.1 per cent the previous fiscal; the trade, hotels, transport and communication sector recorded a growth of 13 per cent as against a growth of 10.4 per cent the previous year. While there is a dip in the growth of the construction, down from 14 per cent to 10 per cent in 2006-07 as well financial and real estate services sector, down from 10.9 per cent to 10.6 per cent — these sectors still registered double digit growth rates. In 2006-07, mining sector grew at 5.1 per cent (against 3.6 per cent) while electricity sector grew at 7.4 per cent (against 5.3 per cent).

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Even though the Finance Minister had a word of caution —- where he said “however unpalatable it may be, high growth leads to high demand... and high demand does put pressure on prices... and unless supply catches up with demand, there will be some pressure on prices” — he sent out a strong message on the government’s commitment make growth inclusive. He said “...because we have high growth, we can make bold claim that we will do everything possible to make the growth inclusive”.

The ratcheting up of growth observed in recent years is reflected in the Eleventh Five Year Plan target of an average annual growth of 9 per cent relative to 8 per cent targeted by the Tenth Plan (2002-03 to 2006-07). The shortfall in the annual average growth of 7.6 per cent from the target of 8 per cent in the five years of the Tenth Plan is attributable to the disappointing 3.8 per cent growth in the first year of the Plan and its subsequent surge to 8.6 per cent, on average, in the last four years. Services contributed as much as 68.6 per cent of the overall average growth in GDP in the last five years between 2002-03 and 2006-07. Practically, the entire residual contribution came from industry. As a result, in 2006-07, while the share of agriculture in GDP declined to 18.5 per cent, the share of industry and services improved to 26.4 percent and 55.1 per cent, respectively.

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Good News in Growth • The Indian economy grew at 9.4% in 2006-07, the 2ND-HIGHEST growth rate since Independence, exceeding projections of 9.2%. Only exception was 1988-89, when growth rate touched 10.5% • Figure impressive since the base rate for 2005-06 was 9% • Despite agriculture dampener, four out of eight sectors — manufacturing, construction, trade & hotels, business services — record double-digit growth • Indian economy has also swelled to trillion dollars — making it only the 12th nation to reach this milestone. At market prices, economy stands at Rs 41,25,724 cr at end of fiscal 2006-07, which equals $1,010 billion at current exchange rate for the rupee • World Bank, other experts, predict growth could slow down in coming years • Finance Minister P Chidambaram says need to strive to sustain growth rate for 10-15 years Inflation With a shortfall in domestic production vis-à-vis domestic demand and hardening of International prices, prices of primary commodities, mainly food, have been on the rise in 2006-07 so far. Wheat, pulses, edible oils, fruits and vegetables, and condiments and spices have been the major contributors to the higher inflation rate of primary articles .As much as 39.4 per cent of the overall inflation in WPI on February 3, 2007 came from the primary group of commodities. Within the primary group, the mineral subgroup recorded the highest year-on-year inflation at 18.2 per cent, followed by food articles at 12.2 per cent and non-food articles at 12.0 per cent. Food articles have a high weight of 15.4 percent in the WPI basket. Including manufactured products such as sugar and edible oils, food articles contributed as much as 27.2 per cent to overall inflation of 6.7 percent on February 3, 2007.

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Inflation (Annual Averages)

14 Wholesale Price Index 12 10 8 6 4 2 0
19 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 94- - 96 - 97 - 98 - 99 - 00 - 01 - 02 - 03 - 04 - 05 - 06 95 4.6 4.4 3.3 8.1 7.2 5.9 3.7 3.4 6.4 5.4 4.4 12.5

Year

Starting with a rate of 3.98 per cent, the inflation rate in 2006-07 has been on a general upward trend with intermittent decreases. However, average inflation in the 52 weeks ending on February 3, 2007 remained at 5 per cent. A spurt in inflation like in the current year has been observed in the recent past in 1997-98, 2000-01, 2003-04 and 2004-05.

Money Supply

Inflation, with its roots in supply-side factors, was accompanied by buoyant growth of money and credit in 2005-06 and 2006-07so far. While GDP growth accelerated from7.5 per cent to 9.0 per cent between 2004-05 and 2005-06, the corresponding acceleration in growth of broad money (M3) was from 12.3 per cent to 17.0 per cent. Year-on-year, M3 grew by 21.1 per cent on January 19, 2007.The industrial resurgence and upswing in investment was reflected in, and sustained by, growth of gross bank credit (as per data

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covering 90 per cent of credit by scheduled commercial banks), for example, to industry (medium and large) at 31.6 per cent and for housing loans at 38.0 per cent in 2005-06. It was also observed in year-on-year growth of gross bank credit at 32.0 per cent in September 2006, albeit marginally down from 37.1 per cent in 2005-06. Reconciling the twin needs of facilitating credit for growth on the one hand and containing liquidity to tame inflation on the other remained a challenge. RBI put a restraint on the rapid growth of personal loans, capital market exposures, residential housing beyond Rs. 20 lakh and commercial real estate loans by more than doubling the provisioning requirements for standard advances under these categories from 0.40 per cent to 1.0 per cent in April 2006.Simultaneously, it increased the risk weight on exposures to commercial real estate from125 per cent to 150 per cent.

Interest Rates:-

Liquidity conditions remained fairly comfortable up to early September 2006 with the unwinding of the Central Government surplus balances with the RBI and continued intervention in the foreign exchange market to maintain orderly conditions. During 2006-07, up to September 8, 2006, RBI had not received any bid for repo under Liquidity Adjustment Facility (LAF) and the continuous flow of funds under reverse-repo indicated a comfortable liquidity position. In 2005-06, the reverse repo rate had been raised by 25 basis points each time on April 29 and October 26, 2005, and on January 24, 2006 to reach 5.50 per cent. In 2006-07, it was raised again by 25 basis points each time on June 9 and July 25, 2006. There was some tightness with the onset of the festival season and due to high credit expansion and outflows on account of advance tax payment. From mid-September through October, 2006, while RBI had to provide accommodation to some banks through repo facility, with reverse repo operations simultaneously, in net terms, RBI absorbed liquidity from the system. With year-on-year inflation stubbornly above 5 per cent from earlyAugust 2006, on October 31, 2006, the RBI announced more measures to stem inflationary expectations and also to contain the credit off-take at the desired growth rate of 20.0 per cent. Unlike the previous four times, when both the repo and the reverse repo rates were raised by the same 25 basis points, thereby keeping their spread constant at

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100 basis points, on October 31, 2006, only the repo rate was raised by 25 basis points. With a repeat of this policy move on January 31, 2007, the repo rate reached 7.50 per cent with spread of150 basis points over the reverse repo rate. Since deposits are growing at a lower rate than credit, the higher repo rate signaled to the banks the higher price of accommodation they would have to pay in case of credit overextension. The cash reserve ratio (CRR) was hiked by 25 basis points each time on December 23, 2006 (5.25 per cent) and January 6, 2007 (5.50 per cent). While a further increase of CRR of 25 basis points was effected on February 17, another similar increase of 25 basis points was followed The change in the liquidity and inflation environment is reflected in the continuous hardening of interest rates in 2005-06 and in 2006-07 so far. With the high demand for credit not adequately matched by deposit growth, there was steady increase in the credit-deposit ratio and hardening of interest rates. For example, the yield on 10-year residual maturity Government securities, which had gone up by 84 basis points during2005-06 to 7.53 per cent at end-March 2006, hardened further to 8.08 per cent on February 14, 2007. Movements in the call money rates also reveal a similar picture. The hardening of rates was more pronounced at the shorter end of the yield curve, suggesting concern about inflation only in the short run.

BOP, FOREX & Exchange Rates.

India’s exports (in US dollar terms and customs basis) have been growing at a high rate of more than 20 per cent since 2002-03. During 2005-06, with growth of 23.4 per cent, India’s exports crossed the US$100 billion mark. During 2006-07, after a slow start, exports gained momentum to grow by an estimated 36.3 per cent in the first nine months to reach US$89.5 billion. Buoyancy of exports was driven by the resurgence in the manufacturing sector and sustained demand from major trading partners. Reserve accretion through the balance of payments was US$15.1 billion in 200506 and US$8.6 billion in the first six months of 2006-07. While the appreciation of the US dollar vis-à-vis other major currencies resulted in a valuation loss of US$5.0 billion in 2005-06, in the first half of the current year, the weakening US dollar resulted in valuation gain of a similar amount. Foreign exchange reserves grew from US$141.5 at

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end-March 2005 to US$151.6 billion at end-March 2006, and toUS$165.3 at endSeptember, 2006. Such reserves were US$185.1 billion on February9, 2007. In the balance of payments, in 2005- 06 and in the first half of 2006-07, capital flows more than made up for the current account deficits of US$9.2 billion and US$11.7 billion, respectively, and resulted in reserve accretion. The current account deficit reflected the large and growing trade deficit in the last two years. Exports grew fast, but imports grew even faster, reflecting in part the ongoing investment boom and the high international petroleum price. In 2005-06, imports (in US dollar terms and customs basis) had grown by 33.8 per cent. In the first nine months of the current year, imports grew by 36.3 per cent. While petroleum imports continued to grow rapidly, non-oil import growth decelerated to a moderate 18.7 per cent in the first nine months of the current year, primarily because of high bullion prices leading to a decline in import of gold and silver in the first few months of the year. The non-POL trade balance, after remaining in surplus till 2003-04, has turned negative since 2004-05. Overall, the external environment remained supportive with the invisible account remaining strong and stable capital flows seamlessly financing the moderate levels of current account deficit caused primarily by the rise in international oil prices. The trend in invisibles (net), comprising of non-factor services (like travel, transportation, software services and business services), investment income, and transfers, compensating to a large extent the trade deficit continued in 2005-06 and through the first half of 200607,and resulted in a moderate current account deficit of 1.1 per cent of GDP in 2005-06.

Fiscal Policy
The fiscal consolidation process underway in India, unlike the expenditure compression strategy in most other countries, has been essentially revenue-led and has involved reprioritisation of expenditure with a focus on outcomes. The tax-GDP ratio of the Centre has steadily risen from 8.8 per cent in 2002-03 to 10.3 per cent in 2005-06 and was budgeted at 11.2 per cent in 2006-07. After growing by 20.3 per cent and 22.7 per cent, respectively in 2005-06, corporate income tax and personal income tax have grown by 55.2 per cent and 30.3 per cent, respectively in April-December 2006 over AprilDecember 2005. Buoyant growth in direct taxes revenue has helped take its share in total

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revenue to 47.6 per cent in 2006-07 (BE). In the reduction of revenue and fiscal deficits, buoyant revenue growth has been complemented by a discernible shift in the composition of expenditure. While as a proportion of GDP, total expenditure of the Centre declined from 16.8 per cent in 2002-03 to 14.1 per cent in2005-06, gross budgetary support to the Plan increased on a like-to-like basis from Rs. 111,470 crore to (including disintermediated loans to States) to Rs.172,500 crore. The balance from current revenues, which had remained negative till 2003-04, turned positive in 2004-05 and has strengthened to Rs. 22,332 crore in 2005-06.With non-Plan expenditure as a proportion of total expenditure declining from 73.0 per cent in 2002-03 to 69.4 per cent in 2006-07 (BE), there have been distinct signs of reprioritisation of expenditure. With lower levels of borrowings of Government, the public sector draft on private savings has come down. The fiscal deficit declined to 4.1 per cent of GDP in 2005-06 and was budgeted at 3.8 per cent of GDP in 2006-07. With the implementation of the award of the Twelfth Finance Commission (TFC), which was calibrated to restructure public finances of both the Centre and States, the process gained momentum. In the current year, as a proportion of GDP, the budgeted fiscal deficit of the States has declined to less than the mandated 3 per cent two years ahead of schedule, and only a marginal revenue deficit remains to be eliminated. The decline in the deficit indicators of the Centre has been relatively slower with demands on its resources, inter alia, on account of the implementation of the TFC award and a ‘pause’ in fiscal consolidation in 2005-06. The resumption of the fiscal consolidation process in 2006-07, without compromising the National Common Minimum Programme (NCMP) objectives, indicates the commitment towards meeting the FRBMA targets.

Savings & Investment The economy traditionally enjoys a high savings rate primarily because of the
contribution of the household sector. Gross Domestic Savings are around 24 per cent of GDP. This can go up if public sector savings are pushed up. The process of privatization and reforms that has been launched for the public sector should facilitate the savings rate.

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Household financial saving approximates 10% of GDP. The savings rate in the country had overtaken the rate of investment in 2001-02 for the first time since 1975. Savings were 24 % of the GDP while domestic investment was 23.7 This confirms that investments had been subdued for many years. The last 2 years have seen a reversal of this trend. The increasing trend in gross domestic savings as a proportion of GDP observed since 2001-02 has continued with the savings ratio rising from 26.4 per cent in 2002-03 to 29.7 per cent in 2003-04, 31.1 per cent in 2004-05 and 32.4 per cent in 2005-06.The rise in the savings rate in 2005-06 was contributed by two of its three components: private corporate and the household sector, which as proportion of GDP, increased by 1.0 percentage point and 0.7 percentage point, respectively. The third component, namely public savings, declined by 0.4 percentage points, and made a negative contribution to the overall savings rate. However, a redeeming feature of recent years is that the savings of the public sector, which had been negative until 2002-03, was positive for the third successive year in 2005-06. The positive saving of Rs. 71,262 crore in 2005-06 (QE) is largely attributable to the higher savings of non-departmental as well as departmental enterprises. A notable feature of the current growth phase is the sharp rise in the rate of investment in the economy. Investment, in general being a forward looking variable reflects a high degree of business optimism. The revival in gross domestic capital formation (GDCF) that commenced in 2002-03 has been followed by a sharp rise in the rate of Investment in the economy for four consecutive years. The earlier estimates of GDCF for 2004-05 of 30.1 per cent, released by CSO in their advance estimates, now stand upgraded to 31.5 percent in the quick estimates. The rate of GDCF for 2005-06 as per the quick estimates released by CSO is 33.8 per cent. This sharp increase in the investment rate has sustained the industrial performance and reinforces the outlook for growth.

Capital Markets Capital markets had been subdued for a long time. The NSE-50 index, which was at
around at 1,000 in January 2003 has since surged. The index is 4500 in August 2007. A

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new found confidence in the Indian Economy and its growth prospects have seen inflows of USD 10 billion into the Indian Capital markets in the past 8 months. And India now aims at emerging as an economic superpower in the coming decades. But this will be a slow and steady elephants pace and not a tigers pace. India will grow and become a superpower in 2 decades but for various sectors and sections of the economy, the journey will be in fits and starts. The creaky bureaucracy and vested interests entrenched over the last five decades now seem to be India's biggest stumbling block and will be the last to reform. The buoyancy of foreign investment flows through the balance of payments, in part, reflected the bullish sentiments in the domestic capital markets. The BSE Sensex, the bell weather stock-index of the Bombay Stock Exchange (BSE), rallied from a low of 8,929on June 14, 2006 to an all-time intra-day high of 14,724 on February 9, 2007. The rally from the 13,000 mark to the 14,000 mark in only 26 trading sessions was the fastest ever climb of 1,000 points. India with a market capitalization of 91.5 per cent of GDP on January 12, 2007 compared favorably not only with emerging market economies but also with Japan (96 per cent) and South Korea (94.1 per cent). The strength of the market micro-structure from large retail participation continued. The positive sentiments were manifest also in most indicators such as resource mobilized through the primary market. Aggregate mobilization, especially through private placements and Initial Public Offerings (IPOs), grew by 30.5 per cent to Rs. 161,769crore in calendar year 2006, with about 6 IPOs every month, on average. Net mobilization of resources by mutual funds increased by more than four-fold from Rs. 25,454 crore in 2005 to Rs. 1,04,950 crore in 2006. The sharp rise in mobilisation by mutual funds was due to buoyant inflows under both income/debt oriented schemes and growth/equity oriented schemes. The negative inflows in 2004 turned positive for the public sector mutual funds in 2005 and accelerated in 2006. Other indicators of market sentiments, such as equity returns and price/earnings ratio also continued to be strong and supportive of growth.

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The upbeat mood of the capital markets, reflecting the improved growth prospects of the economy, was partly also a result of steady progress made on the infrastructure front. Overall index of six core industries — electricity, coal, steel, crude oil, petroleum refinery products, and cement, with a weight of 27 per cent in IIP — registered a growth of 8.3 per cent in April-December 2006 compared to 5.5 per cent in April-December 2005. The news of gas discoveries in the Krishna Godavari (KG) basin under New Exploration and Licensing Policy (NELP) in recent months was an encouraging development in the country’s pursuit of reduces import-dependence in hydrocarbons.

Issues and priorities
The Indian economy appears to have decidedly ‘taken off’ and moved from a phase of moderate growth to a new phase of high growth. Achieving the necessary escape velocity to move from tepid growth into a sustained high-growth trajectory requires careful consideration of two issues and three priorities. The two issues are: the sustainability of high growth with moderate inflation; and the inclusive nature of such high growth. The three priorities are: rising to the challenge of maintaining and managing high growth; bolstering the twin pillars of growth, namely fiscal prudence and high investment; and improving the effectiveness of Government intervention in critical areas such as education, health and support for the needy.

On the first issue of sustainability of high growth without running into high inflation, various indicators suggest that the current growth phase is sustainable.

First, higher growth together with the demographic dividend (from a growing proportion of the population in the working age group) is likely to lead to a rise in the savings rate to finance more and more investment.

Second, efficiency improvements in the economy since 1999-2000 reinforce the confidence in the high-growth phase. There is an encouraging and almost steady decline in the ratio of net capital stock to value added in industry.

Third, it is not only the sustained increase in savings and investment, availability of labour at reasonable wage rates, and efficiency increases, but also the opening up of new avenues in services, beyond the already well-known IT and ITES, that

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bolster confidence in the new high-growth phase. For example, Tourism contributes over10 per cent of global GDP whereas its contribution to Indian GDP is only 5.9% but it has potential in India, given the country’s enormous natural, human and technological resources, is well recognized. India has already emerged as among the fastest growing tourist destinations in the world.

Fourth, concerns have been expressed about whether the country is growing beyond its growth potential thereby straining its labour force and capital stock, and hence engendering inflationary instabilities. In India, with unemployment, both open and disguised, concerns about over-heating are connected more with capacity utilization and skill shortages.

Fifth, infrastructure, that constrained for years the growth performance of the economy, appears to be improving. There are signs of tangible progress in areas such as power, roads, ports, and airports. Infrastructural inadequacy constrains economic growth, particularly in the backward States and in the agriculture sector. The incipient investment boom in infrastructure, industry (including housing), and services will yield best results only if the enormous resource flows are successfully intermediated at a low cost.

The second issue is about the nature of this high growth in terms of inclusiveness. Putting more people in productive and sustainable jobs lies at the heart of inclusive growth. The results of the latest NSSO’s 61st Round clearly show how the annual growth rate of employment has not only accelerated from 1.6 per cent during 1993-2000 to 2.5 percent during 1999-2005, but crossed the 2.1 per cent rate recorded during 19831994.Unemployment has gone up not because of high growth, but because growth was not high enough. The inclusive nature of the growth itself will be conditioned by the progress that is made in the areas of education, health and physical infrastructure.

Among the priorities, first is rising to the challenge of maintaining and managing high

growth. Phase-transition invariably throws up new problems and challenges. It is
necessary to make the required adjustments in mindsets, economic behaviour, and policy making.

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The second priority is bolstering the twin pillars of high growth, namely, fiscal prudence and high investment. The growth resurgence observed in the economy is not an accident but the result of sound policies and several reform measures. The experience of the past few years has clearly demonstrated the benefits of fiscal prudence along the FRBMA lines. Reforms, along with the high growth, have brought about a surge in investment in the past few years. There is need for investment, public and private, domestic and foreign. India’s investment grade sovereign rating reflects not only the perceived strong economic prospects, strength of its balance of payments and the capital markets, but also its improving fiscal position. One of the challenges in fiscal reform will be reconciling the need for fiscal consolidation with appropriate tax reform. Indirect taxes not only affect efficiency of resource allocation but also the investment climate.

The third priority is improving the effectiveness of Government intervention in critical areas especially in the social sector. The goal of inclusive growth can be achieved only through effective government intervention in the areas of education, health and support to the needy Appropriate design of programmes and placing effective monitors over the programmes are critical in this regard. Improvement in the quality of social services is an urgent necessity for all social sector programmes. Subsidies are an important fiscal policy tool for correcting market failures, particularly under-consumption of basic essentials such as food. By the end of the Eleventh Five Year Plan, with the need to feed an estimated additional 150 million people, the system will confront new challenges. The inconclusive debate on subsidies needs to be resumed, and tangible progress made for cost-effective income transfers to the truly needy. Alternative mechanisms for the delivery of subsidy are available.

As India prepares herself for becoming an economic superpower, it must expedite socioeconomic reforms and take steps for overcoming institutional and infrastructure bottlenecks in the system. Steps are to be taken for improving pace and development. There are certain challenges that Indian Economy is facing today.

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There is a paramount need to move Indian agriculture beyond its centuries’ old dependency on the monsoon by bringing more area under irrigation and by better water management. This has rightly been identified in the NCMP as one of the areas with the highest investment priority.

• • •

Farmers and enterprises should have access to finance at competitive rates and for all maturities for their credit-worthy projects. Initiatives taken in a number of sectors like telecom, roads, ports and civil aviation have started yielding results. There is a need for higher foreign investment, in the form of foreign direct investment (FDI) and FII. Such investment triggers technology spillovers, assists human capital formation, contributes to international trade integration and particularly exports, helps create a more competitive business environment, enhances enterprise development, increases total factor productivity and, more generally, improves the efficiency of resource use.

• • •

Control of population is also a major reform that has to take place. Spreading of education is equally important in elevating the standards of Indian Economy. The eradication of poverty and unemployment is the abiding goal of India's development policies and programmes.

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Industry Analysis:Each industry has differences in terms of its customer base, market share among firms, industry-wide growth, competition, regulation and business cycles. Learning about how the industry works gives an investor a deeper understanding of a company's financial health.

Automobile Industry Analysis
The Indian auto industry has grown at an impressive 16.82 per cent over the last year with total sales of vehicles reaching around 10 million vehicles till November 2006 as against 8.5 million in 2005. Spurred by a huge demand from the market, the increase in production is set to improve further driven by a buoyant economy, with increasing purchasing power, new product launches, coupled with attractive finance schemes from automobile manufacturers and financial institutions

Destination India
India is on every major global automobile player's roadmap, and it isn't hard to see why:

• • • • •

India is the second largest two-wheeler market in the world
Largest three wheeler market in the world 5th largest commercial vehicle market in the world 4th largest tractor market in the world 4th largest passenger vehicle market in Asia &11th largest passenger car market in the world

Expected to be the seventh largest by 201

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Economic Survey 2006-07 says:

The installed capacity of the automotive industry has been growing at a compounded annual rate of over 16 per cent since 2001-02. It produced a wide variety of vehicles including 1.7 million four wheelers (passenger cars, light, medium and heavy commercial vehicles, multi-utility vehicles such as jeeps), and over 8 million two and three wheelers (scooters, motor-cycles, mopeds, and three wheelers) in 2005-06 The cumulative sales of the major players in the car industry for the fiscal ending March 2007 were up 20 per cent and stood at 0.674 million units as against 0.561 million units. Exports for the fiscal year stood at 39,295 units. Passenger car sales have also shown increasing rate of growth at the start of the new fiscal year. For example, Maruti, Honda and General Motors, which account for 60 per cent of the market, jumped 16 per cent in April, 2007 over the same month last year. Signs of economic development are becoming more visible both in rural and urban India with the number of households owning cars and motorcycles increasing significantly in recent years. The number of rural households possessing cars or jeeps has grown four times between 1993-94 and 2004-05, according to the 61st survey conducted by the National Sample Survey Organisation (NSSO). Similarly, motorcycle or scooter owners have increased from 11.6 per cent to 26.0 per cent. In urban areas, households possessing cars or jeeps have gone up from 1.2 per cent in 1993-94 to 4.6 per cent in 2004-05. Similarly, motorcycle or scooter owners have increased from 11.6 per cent to 26.0 per cent.

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Size

A $24 billion industry; Exports constitute 5% of revenues

The Auto Industry in India has witnessed very high growth rates: Over 15% CAGR in vehicle production in the last 4 years

8.6 million vehicles produced in India in 2004-05, of which

1.2 million Passenger Cars; 13.5% CAGR over the last 4 years

6.6 million Two-wheelers (motor cycles and scooters); 15% CAGR over the last 4 years

0.38 million Commercial Vehicles; 24% CAGR over the last 4 years

0.37 million Three-wheelers; 17% CAGR over the last 4 years

However, India still has low vehicle penetration

Only 3 cars, 50 two-wheelers per 1000 individuals

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Indian Automobile Industry has Tremendous potential to grow:

Automobile Contribution to Industrial Output
20% 15% 10% 5% 0% India Developing Economies Developed Economics 5% 10% 17%

• • •

Emergence of India as a manufacturing and design hub for automotive industry. Indian Automobile industry contribution to GDP expected to increase to 10% from 5% by 2016 Presently provides direct & indirect employment to 10.1 million people in the country. Expected to employ 25 million people by 2016.

Domestic Market Share for 2006-07(%)
CVs Total Passenger Vehicles Total Two Wheelers Three Wheelers 79 4 4 13

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Indian Automobile Industry
4% 13% 4%

79% Commercial vehicles 3 Wheelers Passenger Car 2 Wheelers

The India automotive sector has a presence across all vehicle segments and key components. In terms of volume, two wheelers dominate the sector, with nearly 80 per cent share, followed by passenger vehicles with 13 per cent. The industry had few players and was protected from global competition till the 1990s.

The automotive sector is growing strongly in both domestic and exports markets
Indian automobile industry has been performing well both in the domestic and the international markets.

Automobiles - Domestic Performance
The production and domestic sales of the automobiles in India have been growing strongly. While production increased from 4.8 million units in 2000-1 to 8.5 million units in 2004-05(a CAGR of over 15 per cent), domestic sales during the same period have gone up from 4.6 million to 7.9 million units(CAGR 14.2 per cent).

According to Society of Indian Automobile Manufacturers (SIAM), the number of total passenger cars produced during 2006-07 was 1544850 as against 1309300 in 2005-06, showing a growth of about 18 per cent over the previous year.

On the other hand, the number of total commercial vehicles produced was 520000 as against 391083 in 2005-06, showing a growth of nearly 33 per cent. For the same period, two wheeler sales grew by 11 per cent (from 7608697 in 2005-06 to 8444168 in 2006-07) 58

Domestic Sales •
Total sales of passenger cars during 2006-07 was 1379698 as against 1143076 in 2005-06, showing a growth of about 20.7 per cent over the previous year, says SIAM. In the current fiscal, domestic passenger car sales grew by 9.07 per cent in May at 96,922 units as against 88,863 units in the same month a year ago. Sales of passenger vehicles in India are likely to grow at 14.9 per cent each year to touch the 2.1 million mark by 2010.

On the other hand, the number of total commercial vehicles sold was 467882 as against 351041 in 2005-06, showing a growth of nearly 33.28 per cent. Domestic commercial vehicle sales during the month grew by 1.06 per cent at 33,262 units as against 32,914 units in the corresponding month a year ago.

For the same period, the number of two wheelers has shown a growth of 11.4 per cent (from 7052391 in 2005-06 to 7857548 in 2006-07). Domestic motorcycle sales during the month were at 4,77,901 units as against 5,71,367 units in May 2006, down by 16.36 per cent. Total two-wheelers sold in the country during May stood at 6,06,187 units, registering a dip of 9.88 per cent as compared to 6,72,671 units sold in the year-ago period.

. To grab a bigger pie of the Indian car market, auto players are eyeing the small car segment. Toyota, Ford, Honda, Mitsubishi and General Motors will launch their small cars in the next three years. This is expected to take Indian passenger vehicle sales to 2.1 million units by the end of March 31, 2010, says Frost & Sullivan. According to USbased consultancy Keystone, a subsidiary of LaSalle Consulting Associates, India will become the world's third largest automobile market by 2030, behind only China and the US.

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A positive trend in the domestic market is that the growth has not been driven by one or two segments, but is consistent across all key segments. Two wheelers, which constitute the majority of the industry volume, have been growing at a rate of 14.3 per cent, three wheelers at a rate of 14 per cent and passenger vehicles at a rate of 11.3 per cent. Commercial vehicles have been growing at a higher rate of nearly 23.5 per cent, although from a lower base. Since nearly all macro-economic indicators – GDP, infrastructure, population demographics, interest rates, etc. – are showing a favourable trend, the domestic market for automobiles in India is expected to continue on its growth trajectory.

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23.5

CAGR of last 4 years for different segments

20

15 CAGR 10

14.3 11.3

14

14.2

5

0 Commercial Vehicles Passenger Vehicles Two Wheelers Three Wheelers Total Automobiles Segments

Key Domestic & Foreign Players in Automobile Industry:Profile of Domestic Players

Name of the Company

Parent company

Output

Models

Plants

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Tata Motors Ltd

Largest commercial

Capacity 160,000 Sierra, Sumo, Safari, Indica, Indigo Pune (Maharashtra)

vehicle player units pa in the country Volumes -

and one of the 171,870 largest in the passenger vehicles segment. units in 2004 Operating incomeUS$ 3.8 billion in 2005

Mahindra & Mahindra Ltd Flagship company of the Mahindra Group; largest player in the tractor segment in India Capacity 125,000 units pa Volumes 69,737 units in 2004 Operating IncomeUS$ 1.47 billion in 2005 Armada, Bolero, Commander, Marshall, Maxx, Voyager, Scorpio Mumbai, Nashik (Maharashtra)

Hindustan Motors Ltd. A C.K Birla group flagship Capacity 64,000 units pa Lancer, Ambassador, Contessa, Trekker, RTV, Pushpak, Uttarpara (West Bengal),Pithampur (MadhyaPradesh), Trivellore (Tamil

and one of the Volumes -

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oldest auto companies in India

15,782 units Operating incomeUS$ 159.7 million in 2004

Pajero

Nadu)

Ashok Leyland

Hinduja group

Operating Income - US$ 952.9 million in 2005

Multiaxle vehicles, tractor, ecomet, engines, Viking BSI,Viking BS-II, Vestibule Bus, 222 CNG bus etc

Ennore, two plants at Hosur, the assembly plants at Alwar, Bhandara, castings plant at Hyderabad

TVS Motor

TVS Group

Operating Income - US$ 641.9 million in 2005

Mopeds - Excel, Champ, TVS 50Scooterettes ScootyMotorcycles - Max 100, Victor, Centra, Fiero

Hosur, Mysore

Bajaj Auto

Bajaj Group Capacity - 2.52 million units pa Operating Income - US$ 1.3 billion in 2005 Motorcycles Boxer, CT 100, Discover, Wind, Caliber, Pulsar, Eliminator Scooters - Spirit, Saffire

3 Plants at Akurdi, Waluj, Chakan ,

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Wave

LML

Lohioa Group Freedom, Graptor Kanpur

Profile of Overseas Players

Maruti Udyog Ltd

Suzuki of Japan holds a 54.2 per cent stake in the company.

Capacity 500,000 units Pa Volumes 472,122 units including exports in 2004Operating Income-US$ 2.4 billion in 2005

800, Omni, Alto, WagonR, Zen, Baleno, Esteem, Gypsy, Vitara, Versa

Gurgaon (Haryana)

Hyundai Motors India Ltd Wholly owned subsidiary of Hyundai Motor Company, S. Korea Capacity 150,000 units pa Volumes 171,905 units Santro, Accent, Sonata, Terracan Irrungattukottai (Tamil Nadu)

Daimler Chrysler 100 per cent Capacity10,000 E class, S class, Pune

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India

subsidiary of Chrysler group

units pa Volumes 1,640 units

C class

(Maharashtra)

Fiat Motors Subsidiary of Fiat Auto SpA Capacity 50,000 units pa Volumes 10,428 units Uno, Siena, Palio, Palio Adventure Mumbai (Maharashtra)

Ford Motors Ltd

Ford Motor

Capacity -

Ikon, Mondeo

Chengaipattu (Tamil Nadu)

Company, the 100,000 units world's second largest automaker pa Volumes 45,723 units

General Motors Ltd collaboration between General Motors Corporation and C.K. Birla Group of companies Capacity 25,000 units pa Volumes 17,986 units Astra, Corsa, Swing, Forrester, Vectra, Sail, Optra, Chevrolet Optra Halol (Gujarat)

Honda Siel

Established in

Capacity -

City, Accord,

Noida (UP)

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Cars India (HSCI)

1995, with Honda Motor Company, (Japan) and Siel

30,000 units pa Volumes 20,550

CR -V

Ltd (India)being units the key promoters.

Toyota Kirloskar

Joint venture between Kirloskar Group and Toyota Motor Corp. Capacity 50,000 units pa Volumes 42,549 units Qualis, Camry, Corolla Bidadi (Karnataka)

Skoda Auto India

Skoda Auto, based in Czech Republic, is a part of Volkswagen group

Capacity 10,000 units pa Volumes 3,712 units

Octavia, Laura

Aurangabad (Maharashtra)

Hero Honda

Joint venture between Hero Group, the world's largest bicycle manufacturers and Capacity - 2.8 million units pa Operating income - US$ 1.66 billion Motorcycles – CD Dawn, CD Deluxe, Splendour, Passion, Karizma, CBZ, 2 plants at Daruhera and Gurgaon

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the Honda Motor Company of Japan

in 2005

Ambition Step Through Street

Honda Motorcycle & Scooters India Pvt. Ltd (HMSI)

Wholly owned subsidiary of Honda Motor Company Ltd., Japan

Capacity200,000 vehicles per annum

Scooters Activa, Dio, Eterno Motorcycles Unicorn

1 plant at Manesar

Porter’s Five Forces Model of Competition Threat of New Entrants
The threat of new entrants is very low in the automotive industry. The industry is very mature and it has successfully reached economies of scale. In order to compete in this industry a manufacture must be able to achieve economies of scale. For this to occur, manufacturers must mass-produce the automotive so that they are affordable to the consumer. Another barrier to entry is that it takes an incredible amount of capital to manufacture the automotive. It takes an extreme amount of capital not only to be able to manufacture the products but also to keep up with the research and development that is necessary for the innovation requirements. Access to distribution channels is another high barrier to entry. A company must find a dealership to sell their automotive or have their own dealership. Space in the dealerships lots is very limited making it difficult to have a wider variety of inventory.

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Bargaining Power of Suppliers
The bargaining power of suppliers is very low in the automobile industry. There are so many parts that are used to produce an automobile, that it takes many suppliers to accomplish this. When there are many suppliers in an industry, they do not have much power. There are so many suppliers to this industry; manufactures can easily switch to another supplier if it is necessary.

Bargaining Power of Buyers
The bargaining power of the buyers is moderately high. The buyers being consumers purchase almost all of the industries output. The manufacturers depend on them to stay in business. The buyers also are a significant portion of the industries revenue. If they can not keep their buyers happy then they risk losing them to their competitors. The buyers have low switching cost if they are not happy. All the buyer has to do is sell the car they own and purchase a new one. The reasons why the power is not completely high is that the buyers are not large and few in number. The buyers do not have the ability to integrate backwards into the industry. If they want a car then they have to purchase it from a dealership.

Threat of Substitute Products
There are not many substitute products for automotive. And by using this spare parts automobile is produced ie car, 2 wheeler etc. Some of the substitutes are walking, riding bike or taking a train. Substitutes products all depend on the geographic location of the consumer. In some cities such as New York or Chicago, a car is not as necessary. In cities such as those, the subway is the most

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effective means of transportation. However, in most places a person must have access to an automobile in order to get around.

Intensity of Rivalry among Competitors
Rivalry among the competitors is very strong is this industry. The major competitors are so closely balanced that it increases the rivalry. In order to gain market share in the automotive must gain market share by taking it from their competitors. One of the other reasons there is such high rivalry is that there is a lack of differentiation opportunities. All the companies market steering knuckles, suspension and steering arms, CV joints, crankshaft assemblies for two wheelers, torque links, machined aluminium case components and a wide range of precision forgings . The competitors are compared to one another constantly. The price, quality, durability, and many other aspects of different manufacturers are greatly taken into consideration when deciding what type of vehicle to purchase. When the different manufacturers advertise they even compare their products to their competitors. For example, the commercials will focus on areas where the company outperforms its competitors.

Government initiatives
The Government of India (GoI) has identified the automotive sector as a key focus area for improving India’s global competitiveness and achieving high economic growth. The Government formulated the Auto Policy for India with a vision to establish a globally competitive industry in India and to double its contribution to the economy by 2010. It intends to promote Research & Development in automotive industry by strengthening the efforts of industry in this direction by providing suitable fiscal and financial incentives. Some of the policy initiatives include:

• Automatic approval for foreign equity investment upto 100 per cent of manufacture of automobiles and component is permitted.

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• The customs duty on inputs and raw materials has been reduced from 20 per cent to 15 per cent. The peak rate of customs duty on parts and components of battery-operated vehicles have been reduced from 20 per cent to 10 per cent. These new regulations would strengthen India’s commitment to globalisation. Apart from this, custom duty has been reduced from 105 per cent to 100 per cent on second hand cars and motorcycles.

• National Automotive Fuel Policy has been announced, which envisages a phased programme for introducing Euro emission and fuel regulations by 2010.

• Tractors of engine capacity more than 1800 cc for semi-trailers will now attract excise duty at the rate of16 per cent.

• Excise duty is being reduced on tyres, tubes and flaps from 24 per cent to 16 per cent. Customs duty on lead is 5 per cent.

• A package of fiscal incentives including benefits of double taxation treaty is now available. These government policies reflect the priority government accords to the automobile sector. A liberalised overall policy regime, with specific incentives, provides a very conducive environment for investments and exports in the sector.

The Government is planning to set up three dedicated corridors for automobile companies exporting to the rest of the world. Dedicated rail corridors are proposed between Gurgaon and Mumbai port, Pune and Mumbai including JNPT and Jamshedpur and Kolkata. A dedicated highway for automobile movement is also being considered between Gurgaon and Delhi. The proposal also includes creating the last-mile, road-port connectivity at all the four ports. The Government has approved setting up of five sector specific special economic zones (SEZ) for automobiles and automobile component manufacturing, envisaging an investment of US$ 877.7 million.

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Exports
While the domestic sales of automobiles have been increasing at a significant rate, exports have taken a quantum leap in recent years. The exports of automobiles from India have been growing at a CAGR of 39 per cent for the past four years. India is fast emerging as a manufacturing base for car exports. According to SIAM, overall automobile exports during 2006-07 grew by 25.4 per cent, with total passenger vehicles at 13 per cent, total commercial vehicles at 22.57 per cent, total two wheelers at 20.65 per cent, and three wheelers at 87.16 per cent.

Market Share of segments in exports 140% 120% 100% 58% 2004-05 1998-99 40% 20% 0%
CVs PVs Two Wheelers

Share

80% 60% 26% 18% 63% 11% 13%
Thr ee Wheeler s

5% 6%

Segments

Exports growth has been spearheaded by the passenger vehicle segment, which has grown at a rate of 57.4 per cent. As a result, the share of passenger vehicles in overall vehicle exports has increased from 18 per cent in 1998-99 to 26 per cent in 200405.Europe is the biggest importer of cars from the country while predominantly African nations import buses and trucks.The Association of South East Asian Nations (ASEAN) region is the prime concern for two – wheelers.

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Investments
The Indian automobile sector continues to witness a slew of investments in the first half of 2006, dominated by plans for new plants and ramped up capacities.

Honda Siel Cars India Ltd, the Indian unit of Japan's Honda Motor Co, has announced that it will invest up to US$ 485 million in a second plant and raise its capacity to more than 150,000 cars by 2010

Chery Automobiles, China's largest car-maker, is likely to team up with Delhibased International Cars & Motors Ltd (ICML), makers of Sonalika tractors, to introduce a small car in India next year

Mahindra -Renault, a 51:49 joint venture between Mahindra & Mahindra (M&M) and French carmaker Renault, has commissioned its Logan manufacturing plant. The total investment in the project is around US$ 171.3 million.

Piaggio Vehicles, the Indian arm of the US $1.3-billion Italian transportation giant Piaggio, is setting up a diesel engine manufacturing plant near Pune with an investment outlay of US$ 87.7 million.

Czech carmaker Skoda plans to launch its first small car 'Skodafabia' in the country.

Current Scenario
Indian automobile industry continued good show in FY2006-07. The overall volume is expanded by 14% to cross 10 million vehicles as compare to 89, 06,428 units in FY200506,where as the industry registered a CAGR of 14.11% between 2001-02 to 2006-07. The commercial vehicle is the fastest growing segment thanks to ban on overloading by Supreme Court last year, commercial vehicle sale clocked 33% growth to 467882 units as compare to351041 units in FY 2005-06. The passenger car segment led by Maruti registered the growth of 21% to cross 1.3 million vehicles in FY 2006-07, where as the two wheeler segment remain subdued up by 11% to 78,57,548 units as compare to 70,52,391 units in FY 2005-06.On the export front the industry is doing exceptionally well. The export sales registered a growth of25% to cross one million vehicles in a year

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where as the industry registered a growth of 41%CAGR in last 5 years. The volume for Q1FY08 is stands at 1736499 as compare to 1906275 units in Q1FY07

Two wheelers

Two wheelers segment constitutes 79% of overall pie of Indian automobile industry and two third of Indian population resides in rural, two wheelers are an important means of transporting rural area due to rough conditions of roads.

Segmental Breakup for Two Wheelers
1% 4% 11% 5%

79%
Moped Motor Cycle Step Thru Geared Scooter Ungeared Scooter

India is the second largest two wheeler market in the world, along with china both together they share 60% of two wheeler business of the world and both are the fastest growing economy in the world.

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World
India is one of the lowest per capita two wheelers per thousand populations in the world, behind even other Asian developing economy, which provides a greater scope to increase the low base
World Wide Two Wheeler Market

2% 3% 5% 4% 11% 18% 15% 42%

China Thailand

India USA

Indonesia Brazil

Vietnam Others

.

The productions of two wheelers in India increased from 3.76 million vehicles in 2001 to 6.53 million vehicles in 2005.The domestic sales have been increasing at a CAGR of 14.3 per cent for the past 4 years. Motorcycles constituted 79 per cent of the domestic sales of two wheelers in India and have been growing at nearly 24 per cent CAGR. In the scooter segment, overall domestic sales grew by 1per cent CAGR, driven primarily by ungeared scooters and scooters with automatic gears. The sales of mopeds have declined at a CAGR of 15.9 per cent for the past four years. The motorcycle segment clearly drives the growth of the two wheeler segment in India

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4 Year CAGR of Domestic Sales of different segments
30 25 20 15 10 5 0 -5 -10 -15 -20 23.7 14.3

CAGR (%)

1.3 Scooters Motor Cycles Mopeds Total Two Wheelers

-15.9 Segments

.

The two wheeler segment is being shaped by changing demographics and lifestyles. An increasing number of working women and greater affluence among college goers have led to an increase in demand for ungeared/auto geared scooters. As with the case of passenger vehicles, there is a rising demand for higher-end models that combine style and performance in this segment as well. In motorcycles, for example, models with higher engine capacities (125cc, 150cc or above) are proving very popular.

Three wheelers
The three wheeler segment in India is currently small in size, but growing rapidly. The production of three wheelers in India has increased from203, 234 vehicles in 2001 to 374,414 vehicles in 2005. The domestic sales have increased at a CAGR of 14 per cent for the past four years from 181,899 vehicles in 2001 to 307,887 vehicles in 2005. These vehicles find use as passenger vehicles (auto-rickshaws) as well as small capacity commercial vehicles (pick-up vehicles) The export has recorded a robust growth of 87% to 143896 units against 76881 units in FY06. Bajaj Auto is the market leader in the three wheelers segment with over 68% market share in passenger vehicle and 23% in Goods segment

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Passenger Cars
Passenger vehicles consist of passenger cars and utility vehicles. This segment has been growing at a CAGR of 11.3 per cent for the past four years.
4 year CAGR of different segments in Domestic Sales
12 10 8 6 4 2 0 Passenger cars Utility Vehicles 11.3 9.6 9.7

CAGR (%)

1.7

MPVs

Segments

Total Passenger Vehicles

A key trend in this segment is that with rising income levels and availability of better financing options, customers are increasingly aspiring for higher-end models. The rising household income coupled with easy availability of finance (80% of passenger car sales is financed by auto loan) even at higher rate in recent time has continued to support the volume growth There has been a gradual shift from entry-level models to higher-end models in each segment .For example, in passenger cars, till recently, the Maruti 800 used to define the entry level car, and had a predominant market share. Over the last 3-4 years, higher-end models such as Hyundai Santro, Maruti Wagon R, Alto and Tata Indica have overtaken the Maruti 800. Another development has been the blurring of the dividing line between utility vehicles and passenger cars, with models like Mahindra & Mahindra’s Scorpio attracting customers from both segments. Upper end sports utility vehicles (SUVs) attract potential luxury car buyers by offering the same level of comfort in the interiors, coupled with on-road performance capability.

.

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Per Capita Passenger Car (Per Thousand Population)
600 500 400 300 200 100
8.5 90 17 10 12 13 27 147 122 130 180 480 480 500 440

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India is still one of lowest car per thousand populations in the world, as the economy is growing at 8.5%+ there is huge opportunity to expand this market going forward.

Commercial Vehicles
India is 5th largest commercial vehicle market in the world, booming economic activities in mining, construction, roads, ports, airports, urban infrastructures, irrigation is continued to push the demand for commercial vehicles in the last mile distribution segment. The recent Supreme Court ban on overloading has fuel the demand. Going forward road infrastructure projects led by Bharat Nirman cover massive rural road networks with objects of all weather roads for habitation over 1000 people. The government has envisaged to spend over Rs480 billion for rural road connectivity.

The commercial vehicle production in India increased from 156,706 in 2001 to 350,033 in 2005. This segment can be divided into three categories – heavy commercial vehicles (HCVs), medium commercial vehicles MCVs) and light commercial vehicles (LCVs). Medium and heavy commercial vehicles formed about 62 per cent of the total domestic sales of CVs in 2004. These segments have also been driving growth, having grown at a

So

ut

M

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iL

M

76

CAGR of nearly 24.7 per cent over the past five years. The key trends facilitating growth in this sector are the development of ports and highways, increase in construction activities and agricultural output. With better roads and highway corridors linking major cities, the demand for larger, multi-axle trucks is increasing in India.

4 year CAGR of different segments in Domestic sales
25 24.5 24 23.5 23 22.5 22 21.5 21 20.5 20 24.7 23.5

CAGR

21.7

Medium & Heavy Commercial Vehicles

Light Commercial Vehicles Segments

Total Commercial Vehicles

Market Share in Different Segments of Automobile Sector

M arket share two wheelers

TVS Motors 9% 6% 18% 4% 39% 24% Yamaha Bajaj Auto Hero Honda Honda Motors Others

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M arket share two wheelers

TVS Motors 9% 6% 18% 4% 39% 24% Yamaha Bajaj Auto Hero Honda Honda Motors Others

Market share (%)-LCV
April - May 2007 3% 2% 4% 23% 0%

68%

Tata Motors

Mahindra

Eicher Motors

Sw araj Mazda

Force Motors

Others

Market share (%)- MHCV
April - May 2007

2% 28% 6% 0%

64%

Tata Motors

EML

All

SML

Others

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Overall Market share of Passenger Vehicles

16% 7%

15%

Tat a M otors M aruti Udyog Hyundai M otors

17% 45%

M ahindra & M ahindra Ot hers

Tata Motors continued to enjoy driving seat in LCV and M&HCV segment with market share of 68% and 64% respectively.

SWOT ANALYSIS OF AUTOMOBILE INDUSTRY:-

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Future Outlook:-The outlook for India’s automobile sector is highly promising. In view
of current growth trends and prospect of continuous economic growth of over 5 per cent, all segments of the auto industry are likely to see continued growth. Large infrastructure development projects underway in India combined with favorable government policies will also drive automotive growth in the next few years. Easy availability of finance and moderate cost of financing facilitated by double income families will drive sales in the next few years. India is also emerging as an outsourcing hub for global majors. Companies like GM, Ford, Toyota and Hyundai are implementing their expansion plans in the current year. While Ford and Toyota continue to leverage India as a source of components, Hyundai and Suzuki have identified India as a global source for specific small car models. At the same time, Indian players are likely to increasingly venture overseas, both for organic growth as well as acquisitions. The automobile sector in India is poised to become significant, both in the domestic market as well as globally.

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Company Analysis: - Company analysis seeks to determine the intrinsic value of a
company's stock by taking into consideration quantitative & qualitative factors. Qualitative factors, by definition, represent aspects of a company's business that are difficult or impossible to quantify, incorporating that kind of information into a pricing evaluation can be quite difficult whereas quantitative factors lets investors know how well the company’s business is performing - or, basically, whether or not the company is making money.

Tata Motors Analysis:Business Profile:- Tata Motors Limited is India's largest automobile company, with
revenues of Rs. 32,426 crores (USD 7.2 billion) in 2006-07. It is the leader by far in commercial vehicles in each segment, and the second largest in the passenger vehicles market with winning products in the compact, midsize car and utility vehicle segments. The company is the world's fifth largest medium and heavy commercial vehicle manufacturer, and the world's second largest medium and heavy bus manufacturer. Established in 1945, Tata Motors' presence indeed cuts across the length and breadth of India. Over 4 million Tata vehicles ply on Indian roads, since the first rolled out in 1954. The company's manufacturing base is spread across India - Jamshedpur (Jharkhand) in the east, Pune (Maharashtra) in the west, and in the north in Lucknow (Uttar Pradesh) and Pantnagar (Uttarakhand). A new plant is being set up in Singur (close to Kolkata in West Bengal) to manufacture the company's small car. The nationwide dealership, sales, services and spare parts network comprises over 2,000 touch points. The company also has a strong auto finance operation, TML Financial Services Limited, supporting customers to purchase Tata Motors vehicles. Tata Motors, the first company from India's engineering sector to be listed in the New York Stock Exchange (September 2004), has also emerged as an international automobile company. In 2004, it acquired the Daewoo Commercial Vehicles Company, Korea's second largest truck maker. The rechristened Tata Daewoo Commercial Vehicles Company has launched several new products in the Korean market, while also 81

exporting these products to several international markets. Today two-thirds of heavy commercial vehicle exports out of South Korea are from Tata Daewoo. In 2005, Tata Motors acquired a 21% stake in Hispano Carrocera, a reputed Spanish bus and coach manufacturer, with an option to acquire the remaining stake as well. Hispano's presence is being expanded in other markets. In 2006, it formed a joint venture with the Brazilbased Marcopolo, a global leader in body-building for buses and coaches to manufacture fully-built buses and coaches for India and select international markets. Tata Motors also entered into a joint venture in 2006 with Thonburi Automotive Assembly Plant Company of Thailand to manufacture and market the company's pickup vehicles in Thailand. In 2006, Tata Motors and Fiat Auto formed an industrial joint venture at Ranjangaon (near Pune in Maharashtra, India) to produce both Fiat and Tata cars and Fiat powertrains for the Indian and overseas markets; Tata Motors already distributes and markets Fiat branded cars in India. In 2007, Tata Motors and Fiat Auto entered into an agreement for a Tata license to build a pick-up vehicle bearing the Fiat nameplate at Fiat Group Automobiles' Plant at Córdoba, Argentina. The pick-up will be sold in South and Central America and select European markets. These linkages will further extend Tata Motors' international footprint, established through exports since 1961. While currently about 18% of its revenues are from international business, the company's objective is to expand its international business, both through organic and inorganic growth routes. The company's commercial and passenger vehicles are already being marketed in several countries in Europe, Africa, the Middle East, Australia, South East Asia and South Asia. It has assembly operations in Malaysia, Kenya, Bangladesh, Ukraine, Russia and Senegal. It was Tata Motors, which developed the first indigenously developed Light Commercial Vehicle, India's first Sports Utility Vehicle and, in 1998, the Tata Indica, India's first fully indigenous passenger car. Within two years of launch, Tata Indica became India's largest selling car in its segment. The ERC in Pune, among whose facilities are India's only certified crash-test facility and hemi-anechoic chamber for testing of noise and vibration, has received several awards from the Government of India. Some of the more prominent amongst them are the National Award for Research

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and Development Efforts in Industry in the Mechanical Engineering Industries sector in 1999, the National Award for Successful Commercialization of Indigenous Technology by an Industrial Concern in 2000, and the CSIR Diamond Jubilee Technology Award in 2004.

Evaluation of Management:Board of Directors:Mr. Ratan N Tata (Chairman):- Mr. Ratan N Tata holds a B.Sc. (Architecture) degree
from Cornell University, USA and has completed the Advanced Management Program at Harvard University, USA. He joined the Tata Group in 1962 and is the Chairman of the Tata Group of companies and Tata Sons Ltd., the holding company for majority of Tata Companies. As Chairman of Tata Industries Limited since 1981, he is responsible for transforming the company into a Group strategy think-tank and a promoter of new ventures in high technology businesses. Mr. Tata has been on the Company's Board since August 1981 and has spent more than 13 years in an executive capacity and is actively involved with product development and other business strategies pursued by the Company. One of his achievements include designing and developing India's first indigenous car - the "Indica" which has been recognized as one of the strongest brands to have been created of late.

Mr. N A Soonawala :- Mr. N A Soonawala is a Commerce graduate from the University
of Bombay and a Chartered Accountant from the Institute of Chartered Accountants of India. He has wide exposure in the field of Finance, having worked with ICICI, the World Bank and the International Finance Corporation, Washington. He joined Tata Sons Limited in 1968 and is on the Boards of various Tata Companies and committees as Director. Mr. Soonawala has been on the Board of the Company since May 1989.

Dr. J J Irani:- Dr. Jamshed Irani obtained a B.Sc. degree from Science College, Nagpur
in 1956 with a Gold Medal in Geology and a M.Sc. (Geology) degree from the Nagpur University in 1958, both with first class. He also obtained M.Met. and Ph.D. degrees

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from the University of Sheffield, UK, in 1960 and 1963 respectively, with a Gold Medal for the Ph.D. Thesis. In 1993, the University of Sheffield conferred upon him the Honorary Degree of “Doctor of Metallurgy”. In 1996, the Royal Academy of Engineering, London elected him as a foreign member and he is amongst the five Indians who have been bestowed with this honour. Dr. Irani was conferred honorary knighthood in 1997 by the Queen of England for his contribution towards strengthening the IndoBritish Partnership. He is also on the boards of various Tata companies and has been on the Company's Board as a Tata Steel Nominee since June 1993.

Mr. V R Mehta:- Mr. V R Mehta holds a Bachelor of Engineering (Honours) degree and
has considerable financial and project evaluation expertise, both at national and international levels. He worked as a senior expert for the Asian Development Bank, Manila and earlier held senior level positions in the Government of India in the federal Ministries of Railways and Shipping & Transport. He played a key role in financial revamping and rationalization of operations of major ports in India and participated in important diplomatic missions and represented the Government in international conferences. Mr. Mehta was the founder Managing Director of the Dredging Corporation of India . Mr. Mehta has been and continues to be also on the boards of a number of other companies in his individual capacity or representing financial institutions or foreign companies. Mr. Mehta has been on the Board of Company since June 1998 as a representative of a financial institution. He ceased to be an Institutional Director and was appointed as an Additional Director of the Company w.e.f. October 25, 2005

Mr. R Gopalakrishnan :- Mr. Gopalakrishnan holds a Bachelor's degree in Science and
a B.Tech (Electronics) degree from the IIT, Kharagpur. He is also an Executive Director of Tata Sons Limited and a member of the Group Executive Office of Tata Sons Limited, besides being on the Boards of various Tata companies. Prior to joining the Tatas in August 1998, Mr. Gopalakrishnan was the Vice Chairman of Hindustan Lever Limited. Mr. Gopalakrishnan has been a non-executive Director on the Board of the Company since December 22, 1998.

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Mr. Nusli N Wadia:- Educated in the UK, Mr. Wadia is the Chairman of Bombay
Dyeing & Manufacturing Company Limited and heads the Wadia Group. He is also the Chairman/Trustee of various charitable institutions and non-profit organizations. Mr. Wadia has been on the Company's Board since December 1998.

Mr. S M Palia: - Mr. S M Palia, a B.Com., LL.B., CAIIB and AIB ( London ) is a
Development Banker by profession. He was with IDBI from 1964-1989 during which period he held various responsible positions including that of an Executive Director. He has also acted as an advisor to Industrial Bank of Yeman, Saana (North Yeman) and Industrial Bank of Sudan, Khartoum (Sudan) under World Bank Assistance programmes. He was also the Managing Director of Kerala Industrial and Technical Consultancy Organisation Limited, set up to provide consultancy services to micro enterprises and small and medium enterprises. Mr. Palia is on the Boards of various companies in the industrial and financial service sectors and is also actively involved as a trustee in various NGOs and Trusts. He was appointed as a Director of the Company w.e.f. May 19, 2006.

Dr. R A Mashelkar:- Dr Mashelkar is an eminent chemical engineering scientist having
recently retired from the post of Director General from the CSIR, the largest chain of industrial research and development institutions in the world with about 38 laboratories and about 20,000 employees. During his tenure at CSIR for over 11 years, his leadership transformed CSIR into a user focused, performance driven and accountable organization. Dr Mashelkar is the President of Indian National Science Academy (INSA), National Innovation Foundation, Institution of Chemical Engineers, UK and Global Research Alliance, a network of 60,000 scientists from five continents and has been honored with honorary doctorates from 26 universities, including Universities of London, Salford, Pretoria, Wisconsin and Delhi. Dr. Mashelkar has also been elected as Fellow / Associate of Royal Society (FRS), London, National Academy of Science (USA) in 2005, US National Academy of Engineering (2003), Royal Academy of Engineering, U.K. (1996) and World Academy of Art & Science, USA (2000). Dr Mashelkar has won over 50

85

awards and medals at national and international levels, including the JRD Tata Corporate Leadership Award and the Stars of Asia Award (2005). In the post liberalized India, Dr Mashelkar through leadership of various organizations/ Government Committees has propagated a culture of innovation and balanced intellectual property rights regime and played a critical role in shaping India's S&T policies. The President of India honored Dr Mashelkar with the Padmashri (1991) and the Padmabhushan (2000).He was appointed as a Director of the Company w.e.f. August 28, 2007.

Mr. Ravi Kant: - Mr. Ravi Kant holds a Bachelor of Technology degree from the Indian
Institute of Technology, Kharagpur and a Masters in Science from the University of Aston, Birmingham, UK. Mr. Kant has wide and varied experience in the manufacturing and marketing field, particularly in the automobile industry. Prior to joining the Company, he was with Philips India Limited as Director of Consumers Electronics business and prior to which with LML Ltd. as Senior Executive Director (Marketing) and Titan Watches Limited as Vice President (Sales & Marketing). Mr. Kant was also employed with Kinetic Engineering Limited and Hawkins Cookers Limited. Mr. Kant has been with the Company since July 2000 as the Executive Director (Commercial Vehicle Business Unit) responsible for manufacturing & marketing of the Commercial Vehicle Business Unit. He has been appointed as Managing Director of the Company effective July 29, 2005.

Mr P M Telang: - Mr Prakash Telang holds a Bachelor's Degree in Mechanical
Engineering and is an MBA from IIM, Ahmedabad. Mr Telang has over three decades of functional expertise in the automotive industry and machinery manufacturing. After spending the first three years of his career with M/s Larsen & Toubro, he joined the House of Tatas through the prestigious TAS (Tata Administrative Service) cadre. Ever since he has been with the Company, he is responsible for product development, manufacturing, sales and marketing functions of the Strategic Business unit of Light & Small Commercial Vehicles. Mr Telang has been appointed as Executive Director (Commercial Vehicles) of the Company w.e.f. May 18, 2007

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Shareholding Pattern:-

Shareholding Pattern Promoters Institutional investors Indian Public Others

(%) 32.8 36.5 13.2 17.5

Performance of Tata Motors during 2006 - 07:-

The Company increased its overall market share in four wheelers to 27.7% by launching new products and variants, strengthening its marketing activities and expanding the distribution network.

Category (including Exports) (Nos.) Commercial Vehicles Passenger Vehicles

Industry sales 2006-07 2005-06 growth

Company sales 2006-07 2005-06 growth

Company share 2006-07 2005-06

517,648

391,641

32.2%

334,238 245,022 36.4%

64.6%

62.6%

1,578,176 1,318,648 19.7%

246,042 209,107 17.7%

15.6%

15.9%

Total

2095824 1,710,289 22.5%

580,280 454,129 27.8%

27.7%

26.6%

Commercial Vehicles
After witnessing a continuous decline in the growth rates in the last two fiscals, the commercial vehicle industry bounced back this year with a 33.3% growth in sales due to

87

robust economic growth, increased industrial activity and continued development of better road infrastructure. Restrictions on overloading and increased demand from construction and mining activity had a favourable impact on M&HCV segment which grew by 32.8%. The LCV segment recorded even a higher growth rate of 33.9% due to growth in goods redistribution segment, which was primarily led by the Company’s last mile goods’ distribution vehicle – TATA ACE. The industry performance during FY 2006-07 and the Company’s share is tabulated below:

Category (including Exports) (Nos.) M/HCVs

Industry sales 2006-07 growth 2005-06

Company sales 2006-07 2005-06 growth

Company share 2006-07 2005-06

275,600 207,472 32.8% 172,842

128,610

34.4%

62.7%

62.0%

LCVs

192,282 143,569 33.9% 125,744

86,226

45.8%

65.4% 60.1%

Total CVs

467,882 33.3%

351,041

298,586 39.0%

214,836

63.8%

61.2%

With a 39% growth this year, the Company achieved a sale of 298,586 commercial vehicles in the domestic market and increased its market share by 2.6% to 63.8%, the highest in the last 6 years. In the M&HCV segment, the Company achieved a sale of 172,842 units and increased its market share to 62.7%. In the LCV segment, continued impressive performance by the mini truck - TATA ACE helped the Company to outperform the industry, achieve the highest ever sale of 125,744 units and increased the market share by 5.3% to 65.4%.

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Passenger Vehicles
The Indian passenger vehicle industry grew by 20.7% to an all time high of nearly 1.38 million vehicles. The high growth could be attributed to the lowering of excise duty on ‘Small Cars’ in the previous year’s Union Budget, economic growth leading to sustained increase in disposable income and launch of new models/ variants. The hardening of the interest rates from the third quarter onwards had a slowing down impact on the industry towards the end of the year. The Industry performance and the Company’s performance in the segments that it is present, is tabulated below:-

Category (including Exports) (Nos.) Small Cars (Mini + Compact) Midsize cars Utility

Industry sales 2006-07 2005-06 growth

Company sales 2006-07 2005-06 growth

Company share 2006-07 2005-06

832,161

662,094 25.7%

146,018* 111,772* 30.6%

17.5%

16.9%

206,431

213,862 (3.5%)

34,310

39,388

(12.9%)

16.6%

18.4%

220,199

194,502

13.2%

47,892

37,910

26.3%

21.7%

19.5%

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Vehicle

Total Passenger Vehicles

1,379,698 1,143,076 20.7%

228,220

189,070

20.7%

16.5 %

16.5%

Despite increased competition, the Company has maintained its position as the second largest player in the Indian market with a share of 16.5%.Small cars, accounting for around 60% of the total industry, grew by nearly 26% to 832,000 vehicles and comprised of 10 competing models. The Company’s TATA Indica sales grew by nearly 31% and its market share grew from 16.9% in the previous year to 17.4%. Along with Fiat’s sales, the Company was able to achieve a joint market share of 17.5%. The Company grew its presence appreciably in the petrol segment and was able to defend its diesel segment leadership despite new offerings from competition. The entry mid size segment continued to decline for the second year running with a negative growth of 27%. Due to a lesser decline in the Company’s sales of the Indigo range, the Company increased its market share in the entry midsize segment to 38% this year from 33% in the previous year. Along with Fiat, the Company was able to achieve a joint market share of 38.2%. The Company opened a new niche with the launch of its long wheel base Indigo XL– that of a premium stretch sedan – with high end features previously available only in very premium executive saloons, while price positioning it in the upper midsize segment. The Utility Vehicle segment witnessed a 13.2% growth to over 220,000 units this year. The Company’s Utility Vehicle sales grew by 26.3% to 47,892 nos. and the Company increased its share in this segment to 21.7% from 19.5% in the previous year. TATA Safari sales grew by 237% to a record high of 15,816 nos. based on price re-positioning of the range effected mainly through a focused cost reduction effort on the platform.

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Subsidiary Companies
For the Financial Year ended March 31, 2007, the Performance of Subsidiaries of Tata Motors is as follows:-

Tata Daewoo Commercial Vehicle Company Limited (TDCV), Korea is a
100% subsidiary of Tata Motors. TDCV is in the business of manufacture and sale of heavy commercial vehicles. During the year under review, TDCV witnessed 46% growth in its total CV volumes to 8630 units and improved its market share by 8.5% to 26.1%, TDCV’s heavy vehicle exports were 2/3rd of South Korea’s total heavy commercial vehicle exports. TDCV recorded a turnover of KRW 493.66 billion (Rs.2, 248.81 crores at exchange rate prevailing in the year 2006-07)which was higher by 35% compared to KRW 364.94 billion (Rs.1, 646.66 crores at exchange rate prevailing in the year 2005-06) in 2005-06. The Profit before Tax at KRW 29.26 billion (Rs.133.31 crores) registered an increase of 63% compared to KRW 17.94 billion (Rs.80.97 crores) in 2005-06. After providing for tax, the profit was KRW 21.39 billion (Rs.97.46 crores) against KRW 13.46 billion (Rs.60.75 crores) in the previous year, an increase of 59%. TDCV declared a maiden dividend of 20% on Common Shares for the year 2006-07.

Telco Construction Equipment Company Limited (Telcon) is engaged in the
business of manufacturing and sale of construction equipment and allied services in which the Company has a 60% holding with the balance 40% being held by

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Hitachi Construction Machinery Company Limited, Japan. With the increase in economic activity especially in the infrastructure sector, Telcon recorded its best performance to date having sold 5360 machines (3674 machines in 2005-06) with a gross revenue of Rs.1814.16 crores (Previous Year: Rs.1,289.49 crores), a Profit After Tax of Rs.183.86 crores (Previous Year: Rs.86.84 crores), i.e. an increase of 112% and a dividend of Rs.4/- per share (Previous Year: Rs.2.50 per share).

Tata Technologies Limited (TTL) is a subsidiary of the Company and has a
holding 84.76% of TTL’s equity capital. Through its operating companies, INCAT and Tata Technologies iKS, the Tata Technologies group provides specialized Engineering & Design Services (E&D), Product Lifecycle Management (PLM) and product-centric IT services to leading manufacturers. It responds to customers’ needs through its 17 subsidiary companies having operations in 45 cities across 12 countries on three continents and through its offshore development centers in India and Thailand. Its customers are among the world’s premier automotive, aerospace and consumer durable manufacturers.

INCAT - founded in 1989 and acquired by Tata Technologies in October 2005,
is the world’s leading independent provider of E&D, Product & Information Lifecycle Management, Enterprise Solutions and Plant Automation.

Tata Technologies iKS is a global leader in engineering knowledge
transformation technology. For over 15 years, iKS has enabled engineering knowledge transformation through ‘i get it’, which is the only web application in the world offering 100,000 hours of engineering knowledge for AutoCAD, INVENTOR, Solid Works, Solid Edge, UG/NX, Teamcenter, COSMOS Works, and CATIA on a single delivery platform application.

TAL Manufacturing Solutions Limited (TAL) is a 100% subsidiary of the
Company engaged in the business of providing factory automation solutions and design and manufacture of a wide range of machine tools. During the year, TAL recorded a turnover and other income of Rs.167.06 crores (Previous Year: Rs.113.21 crores)and a Profit After Tax of Rs.8.31 crores (Previous Year: Rs.4.66 crores), growth of 78.3%.

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HV Transmissions Limited (HVTL) and HV Axles Limited (HVAL), 100%
subsidiary companies of the Company are engaged in the business of manufacture of gear boxes and axles for heavy & medium commercial vehicles, with production facilities and infrastructure based at Jamshedpur. With the rise in demand for medium and heavy commercial vehicle over the years. Both, HVTL and HVAL manufactured prototypes of gear boxes and axles for application in the Company’s new generation products. HVTL recorded an increase in turnover and other income to Rs.175.50 crores (an increase of 37.5%), increase in Profit After Tax to Rs.44.96 crores (an increase of 50%) and a dividend of Rs.5/- per share for FY 2006-07 (previous year Rs.3.50 per share). HVAL recorded a turnover of Rs.196.67 crores (an increase of 36.7%), a PAT of Rs.57.90 crores (an increase of 25.1%) and a dividend of Rs.5/- per share for the Financial Year 2006-07. (Previous Year: Rs.3.50 per share).

Sheba Properties Limited is a 100% owned investment Company. The income
of the company was Rs.18.43 crores (Previous Year: Rs.10.79 crores) and Profit after Tax was Rs.13.50 crores (Previous Year: Rs.7.14 crores).

Concorde Motors (India) Limited (CMIL), a 100% subsidiary of the Company,
recorded improvement in terms of business and overall performance. Retail sales crossed the 15,000 mark representing a growth of 35% and turnover at Rs.624.47 crores was higher by 34.5% over last year. The Profit after Tax grew by 59% from Rs.7.38 crores to Rs.11.76 crores and CMIL declared an interim dividend of Rs.7.50 per share on the enlarged Equity Share Capital of Rs.2.45 crores and a preference dividend of Rs.7 per share on the Cumulative Redeemable Preference Shares of Rs.100/- each.

Tata Motors Insurance Services Limited (TMISL), a 100% subsidiary of the
Company, proposes to undertake the business of direct and re-insurance broking. Pending the issue of license by the Insurance Regulatory and Development

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Authority (IRDA) and other formalities relating thereto, no business activity was carried out during the period October 2005 to March 2007. For the year under review, TMISL earned revenues of Rs.0.08 crores (2005-06:Rs.1.18 crores) and recorded a Loss / (Profit) After Tax of Rs.(0.16) crores (2005-06:Rs.0.80 crores).

Tata Motors European Technical Centre plc. (TMETC) a 100% subsidiary of
the Company is engaged in the business of design engineering and development of products for the automotive industry. Working synergistically with the Company, TMETC provides the former with design engineering support and development services, complementing and strengthening the former’s skill sets and providing European standards of delivery to the Company’s passenger vehicles. During the year ended March 31, 2007, TMETC earned gross revenues of Rs.60.33 crores (2005-06: Rs.9.62 crores) and an operating profit of Rs.7.07 crores (2005-06:Rs.0.60 crores).

TML Financial Services Limited (TMLFSL), a wholly owned subsidiary
company of Tata Motors Limited, was incorporated on June 1, 2006 with the objective of becoming a preferred financier for customers of Tata Motors Limited and its channel partners by capturing customer spending over the vehicle lifecycle, by extending value added products, combining financing offerings with insurance, fleet management, operating leases, re-finance and other products related to vehicles sold by Tata Motors. TMLFSL is registered with RBI as a Systemically Important Non-Deposit taking NBFC and is classified as an Asset Finance Company. TMLFSL commenced operations in September 2006 and for the period ended March 31, 2007, it made disbursements close to Rs.4,000 crores recording a PAT of Rs.12.79 crores. TMLFSL has a paid-up capital of Rs.450 crores and a net worth of Rs.560.54 crores.

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Before investing in a particular company, It is very important to analyze Financial Statements of a company because of the following objectives:

• • •

To know whether the enterprise is in profit or loss at the end of a given period or not. To know how much it owes to outsiders in the form of liabilities and how much it owns in the form of various assets. To know the sources for the money & use for this money.

The principal tool of analyzing Financial Statements is – Ratio analysis – i.e. to determine the relationship between any set of two parameters and
compare it with the past trend. In the statements of accounts, there are several such pairs of parameters and hence ratio analysis assumes great significance. The most important thing to remember in the case of ratio analysis is that one can compare two units in the same industry only and other factors like the relative ages of the units, the scales of operation etc. come into play. It is the most commonly used analysis to judge the financial strength of a company. A

lot of entities like research houses, investment bankers, financial institutions and investors make use of this analysis to judge the financial strength of any company.This analysis makes use of certain ratios to achieve the above-mentioned purpose. There are certain benchmarks fixed for each ratio and the actual ones are compared with these benchmarks to judge as to how sound the company is.

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Facts: - In the year 2005 – 06, EBIDTA margin at
13.7% was higher than 13.3% achieved in FY 2004-05. In spite of the significant cost increase pressures, the Company maintained its operating margin at 12.5% through its continuous cost reduction drive. The Profit before Tax was Rs.2, 053.38 crores, higher by 24% as against Rs.1, 651.90 crores in FY 2004-05. After providing for current and deferred taxes, the Profit after Tax was Rs.1, 528.88 crores (FY 2004-05 Rs.1, 236.95 crores), an increase of 24% over the previous year.

In the year 2006 -07, the EBIDTA at 12.9% were lower than 13.9% achieved in FY05-06, mainly due to input price increase which could not be fully absorbed from the market. The Profit before Tax at Rs.2, 573.18 crores was 25%higher than Rs.2, 053.38 crores in FY05-06. After providing for current and deferred taxes, the Profit after Tax wasRs.1, 913.46 crores (FY 2005-06: Rs.1, 528.88 crores), an increase of 25% over the previous year.

Interpretation: - It can be seen that in spite of
increasing Tata Motors’s profits year after year the EBITDA, PAT margins are declining due to increase in material cost( rising input prices e.g. steel, rubber aluminum, copper etc),excise duty, manufacturing expenses etc. However, the Company is doing this by its on going cost reduction programme It should improve its cost reduction programme which is very vital for increasing its margins & hence to face competitive market.

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Facts: - In the year 2005 – 06 total capital employed of the
Tata Motors increased to Rs 9096.45 crores in 2005-06 from Rs 7172.09 crores in 2004-05. However the shareholder’s equity also increased from 565.28 crores to 622.54 crores. In the year 2006 -07 total capital employed increased to Rs.11, 665.72 crores in FY 2006-07 from Rs.9, 096.45 crores in FY 2005-06. However the shareholder’s equity also increased from 622.54 crores to 786.83 crores

Interpretation: - The increase in capital employed &
shareholder’s equity is attributed to significant capital expenditure insured by the company for its New Product Introduction Programs and substantial increase in vehicle financing business. Due to increase in capital employed & no proportionate increase in profit margins, ROCE of Tata Motors has declined whereas the ROE has remained the same. However the company should improve its profit margins by reducing its cost so as to give appropriate return on its capital employed & equity which is one of the goal of any business.

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Book Value per Share

Facts:-In the year 2005 - 06, the book value per share increased
on account of increased net worth due to allotment of Ordinary Shares of the Company to the shareholders of the erstwhile Tata Finance Limited (TFL) consequent upon its amalgamation with the Company and the conversion of 1% Convertible Notes & Zero Coupon Convertible during the year. The reserves of the company also increased by 37.46%. In the year 2006 – 07 the book value per share increased on account of increased net worth which was on account of increased capital base due to conversion of Bonds / Convertible Debentures/Warrants / FCCN into shares. The reserves of the company also increased by 25.8%.

Interpretation: - This ratio indicates the net asset value of a
company’s share. A high book value indicates that the company has strong reserves, indicating scope for bonus shares, of course subject to necessary guidelines of the SEBI. Most stocks trade above book value because investors believe that the company will grow and the value of its shares will, too. When book value per share is higher than the current share price, a company's stock

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Facts:-In the year 2005 – 06, PAT increased by 23.6%
to Rs. 1,528.88 crores from Rs. 1,236.95 crores in 2004-

Earnings Per Share

05. Earning per share (EPS) increased by 18% to Rs. 40.57 as compared to Rs. 34.38 last year. The payout ratio of Tata Motors also increased from 125% to 130%. In the year 2006 – 07 the EPS of Tata Motors has increased by 22.7% because the PAT of the company has increased by 25.2% but the increase in EPS was not proportionate because t number of ordinary shares increased by 2.05% on increased capital base due to conversion of Bonds/Convertible Debentures/Warrants / FCCN into shares. The payout ratio of Tata Motors also increased from 130% to 150%

Interpretation: - One of the primary goal of any
business is to maximize shareholder’s wealth. The company has been able to fulfill this goal by maximizing EPS & hence by increasing dividend payout ratio on a y-o-y basis.

Facts:-In the year 2005 – 06, the debt – Equity ratio has
increased due to the fact that its total debt increased by 17.68 % whereas the equity has increased by 34.67 %. In the year 2006 – 07, the debt – Equity ratio has increased due to the fact that its total debt increased by 36.54% whereas the equity has increased by 24.06 %.

Interpretation:-Due to the capital expenditure plans of
Tata motors the Debt – Equity ratio of company has increased in 2005 – 06 but in the year 2006 – 07 in spite of significant increase in the Company’s capital expenditure spending on its new projects, at a Debt : Equity ratio of 0.53 . So, the company is taking advantages of leverage but at the same time is not risky for shareholders due to moderate debt – equity ratio. 99

Facts:-In the year 2005 – 06, the current ratio has
improved due to increase in net current Assets of Tata Motors by 366.83% This increase is on account of vehicle financing loans and advances increasing to Rs. 4582.80 crores in 2005-06 from Rs. 1583.80 crores in 2004-05 and increase in Inventories to Rs. 2012.24 crores in 2005-06 from Rs. 1601.36 crores in2004-05. In the year 2006 – 07, current ratio has improved marginally due to increase in net current assets of the Company by 9.35%. The increase in inventories of Rs.488.71 crores is partly off set by the decrease in vehicle financing loans and advances of Rs.192.12 crores.

Facts:-In the year 2005 – 06, Asset turnover ratio has
remained the same irrespective of % increase in turnover due to the fact that net block of assets have also increased by 13.82%. In the year 2006 – 07, Asset turnover ratio has declined irrespective of increase in turnover due to 13.82%.increase in net block of assets.

Interpretation: - The asset turnover ratio of any
company indicates in realising money by utilising its assets. The asset turnover ratio of Tata Motor’s has not shown a good performance (as in 2005-06 it has remained same whereas in 2006-07 it has declined).So, the company should make optimum utilisation of its assets & increase its turnover in order to improve this ratio.

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Facts:-In the year 2005 – 06, the cash generated from
operations before working capital changes and before considering the deployment in the vehicle financing business was Rs. 2,536.60 crores as compared to the previous year figures of Rs. 2,092.73 crores. After considering the impact of the working capital changes and the deployment in vehicle financing business, the net cash used in operations was Rs. 221.03 crores as compared to net cash generated from operations Rs. 1,250.49 crores in the previous year. During the year under review, the Company expanded its vehicle financing business significantly with the merger of Tata Finance Limited, effective April 1, 2005 and Rs.1,995.80 crores of cash generated from operations was used in this business. In the year 2006 – 07, the cash generated from operations before working capital changes and before considering the deployment in the vehicle financing business was Rs.3, 152.53 crores as compared to the previous year figures of Rs.2, 536.60 crores. After considering the impact of the working capital changes and the deployment in vehicle financing business, the net cash generated from operations was Rs.2, 210.13 crores as compared to net cash used in operationsRs.221.03 crores in the previous year.

Interpretation: - Tata motors have performed well if we
consider Net cash from operations from current year as it has made positive Net cash from operations.

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Inter – Firm Comparison:- Financial ratios of firms operating in the same industry can
be compared to assess their relative strengths and weaknesses. Obviously no two companies will be identical in all respects. However, if they are operating in the same industry, catering to the same type of customers, and selling the same class of goods and services, it is necessary to compare their financial performance so that a meaningful appraisal can be attempted. Such an exercise is called interfirm comparison.

Advantages
Interfirm comparison of key financial ratios alerts one as to what is happening in a company vis-a-vis its competitors. Companies seek to identify their strengths and build on them. Also, be on guard against their vulnerabilities to be forewarned is to be forearmed: interfirm comparison provides a business such a perspective in comparative terms

Ratio

Tata Motors

Ashok Leyland 0.41 21.96

Eicher

M&M

Debt – Equity Ratio Interest – Coverage Ratio Current - Ratio Inventory – Turnover Ratio Debtors – Turnover Ratio Gross Profit Margin Net Profit Margin Return on Capital Employed

0.5 7.98

0.44 7.36

0.39 72.64

1.38 13.95

1.34 8.59

0.84 13.47

1.29 12.4

42.02

17.9

14.48

16.27

13.5 6.9 30.52

8.91 5.21 27.77

5.78 2.76 16.5

14.95 9.81 32.25

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EPS

50

3.36

1.39

43.54

Interpretation:In case of Debt Equity ratio, Tata Motors has maximum leverage in its capital structure. At the same time the amount of leverage is optimum. So, it is able to take advantages of leverage. The interest – coverage ratio shows the ability to service debt. In this case, M&M has an edge over all its competitors. It has got profits which are 72 times of its interest. It’s due to the fact that it has lowest Debt – Equity ratio. However Tata Motors should improve its Debt – servicing capacity in order to be competitive in the industry. In case of Current – Ratio, Tata motors has outperformed all its competitors. It has got highest current ratio of 1.38:1 followed by Ashok Leyland & M&M. So, Tata Motors has got sound short – term liquid position & it will be able to meet it short – term

obligations. So, the Tata Motors is most attractive firm from creditor’s point of view. In case of Turnover Ratios, Tata Motors again has edge over its competitors. It has got the highest Inventory Turnover Ratios of 13.95 followed by Eicher & M&M. It shows that among its major competitors, Tata Motors is most efficient in turning its inventory into sales. Tata Motors has got highest Debtors Turnover Ratio of 42.02 followed by M&M & Eicher. It is evident from the highest Debtors Turnover Ratio that Tata Motors is not only efficient in turning its inventory into sales but also in realising money from its debtors. So, comparatively lesser amount of amount is invested in Debtors. In case of Profitability Ratios, M&M has got highest profit margins. It has got G.P Margin of 14.95% & N.P Margin of 9.81%followed by Tata Motors G.P Margin of 13.5% & N.P Margin of 6.9%. The profit margins of Tata Motors are declining due to input cost pressures. However it should improve on its profitability position in order to be competitive in the industry. In case of Return on Capital Employed, M&M again has outperformed all its competitors with ROCE of 32.25 which is due to its highest profit margins. It was followed by Tata Motor’s ROCE of 30.52. Tata Motors should improve on its

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profitability positions in order to provide the highest Return on Capital Employed in the industry. If we look at EPS, despite of declining profit margins Tata Motors has highest EPS in the industry. It is a very favorable factor for Tata Motors since shareholders mainly look at EPS to judge the performance of any company.

Risk inherent in equity investments
Equity investment is the most risky investment in all the financial markets. So one needs to have an understanding of risks associated with equity investments. Broadly, there are two types of risks associated with equity investments, viz., systematic risk and unsystematic risk.

Systematic risk: or the market risk, as it is called, this is the variation in the return on
any scrip due to market movements. For example, suppose the Government announces corporate taxes cut or rise across the board, it is going to effect all the stocks in the market in the same way. This is the systematic risk of scrip, which exists because of market movements. There is nothing much one can do about systematic risk of a security because it arises due to some extraneous variables. But there still exists some techniques, which help to hedge against the systematic risk of a security. A good measure of an asset’s systematic risk is its Beta. Beta is calculated by regressing the returns of a particular asset on market returns. It can be interpreted as, say the beta of a stock is 1.25, then whenever the market moves by 1%, the stock will move by 1.25%.

Unsystematic risk: is the variation in the return of scrip due to that scrip specific factors
or movements. For example, say the Government announces tax sops to companies in a particular sector; it is going to effect the prices of the stocks of companies which are operating in that sector and not all the stocks. This type of risk can be avoided with

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diversification in the portfolio.

Measuring risk The Systematic Risk (β) & Return (αa) Of Tata Motors is as follows:-

(Excel Sheet)

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Valuation of Tata Motors:-

Ratio

Tata Motors

Eicher

Ashok Leyland

M&M

P/E Ratio Price/ Book Value Ratio

14.6 4.1

16.85 2.61

11.2 2.7

11.4 5.15

Market Capitalisation

25293.84

1077.67

4810.62

16641.22

P/E Ratio:Industry Average P/E:- 9.7
Valuation ratios give an indication as to whether the stock is under priced or overpriced at any point of time. The P/E looks at the relationship between the stock price and the company’s earnings. The P/E is the most popular stock analysis ratio, although it is not the only one should consider. The P/E tells you what the market thinks of a stock . In case of automobile industry, it can be seen that Tata Motors has got the highest P/E ratio among its competitors & which is far greater than Industry P/E average. The high P/E ratio of Tata Motors reflects an overpriced stock. While there's no set rule as to what's a good P/E, a low P/E is generally considered good because it may mean that the stock price has not risen to reflect its earning power. A high P/E, on the other hand, may reflect an overpriced stock or decreasing earnings. As with all of these ratios, however, it's important to compare a company's ratio to the ratios of other companies in the same industry.

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P/BV Ratio:-

The P/BV ratio indicates the price the market is willing to pay for the real worth of the stock i.e. book value. Generally a lower PBV usually means a lower valuation whereas a higher PBV usually means overvalued stock. If we look at the P/BV ratios of companies in automobile industry it can be seen that generally Tata Motors & M&M are overvalued companies since their price is 4 – 5 times is of their book value .In case of Ashok Leyland it cannot be truly called as overvalued since its price is 2 times of its book value.

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Findings & Suggestions:1. Tata Motors is a fundamentally strong company with Highest Market Share in Commercial Vehicles Segment & 2nd highest market share in Passenger Vehicles Segment. However recent declining profit margins are a cause of concern for Tata Motors which are due to following factors:-

• • •

Increasing input prices (steel, rubber, aluminum) Rising oil prices poses a key threat to operator’s profitability and thus CV demand. Rising interest rate is a cause of concern as sales through financing accounts for 90% of trucks sold. All of these factors may affect the future performance of Tata Motors. So,a investor should consider all of these before taking any investment decision.

2. Despite strong fundamentals, it is not the right time to buy Tata Motors at current market price since its P/E & P/BV is overvalued. Its overvaluation can also be evident from the fact that its Expected return (0.11)is more than its actual return(-0.33)& hence it has negative alpha.

Conclusion: It can be concluded from this research project that Security Analysis is very
important for taking feasible investment decisions which does not discuss how to buy & sell shares, but does discuss a method which enables the investor to arrive at buying & selling decision. Fundamental analysis is a very vast field under security analysis which appraises the financial condition of a company, the well-being of the industry the company is part of, and the state of the overall economy to determine the growth potential in firm earnings and stock. In security analysis, Risk & Return analysis also plays a very important role since it determines at a particular risk level whether the stock has provided less than or more than expected returns. 108

Bibliography:Security Analysis & Portfolio Management – Prasanna Chandra
www.angeltrade.com www.icicidirect.com www.moneycontrol.com www.nseindia.com www.bseindia.com www.moneychimp.com www.ibef.org www.indiabudget.nic.in www.equitymaster.com www.capitalmarket.com www.myiris.com

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