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

1
 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

2
CONTENTS

INDEX
CHAPTER NO. TOPIC PAGE NO.

8
EXECUTIVE SUMMARY

9 - 10
INTRODUCTION OF THE STUDY

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

11 – 20
COMPANY PROFILE
CHAPTER NO. I

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. E – Broking Services.
ii. Investment Advisory
iii. Portfolio Management Services
8. What differentiates angel DP from other
DPs?

3
CHAPTER NO. II RESEARCH METHODOLOGY 21 - 22

CHAPTER NO. III THEOREOTICAL BACKGROUND 23 - 34

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.

CHAPTER NO. IV DATA PRESENTATION, ANALYSIS & 35 – 106

INTREPRETATION
FUNDAMENTAL ANALYSIS BY EIC 35 - 53
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.

4
 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.

6
CHAPTER NO. V FINDINGS AND SUGGESTIONS 107

CHAPTER NO. VI CONCLUSION 107

CHAPTER NO. VII BIBLIOGRAPHY 108

7
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.

8
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

9
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.

10
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

Angel Broking Ltd.
CDSL

Membership on the NSE Cash and Futures & Options

Angel Capital & Debt Market Ltd.
Segment

11
Angel Commodities Broking Ltd. Member on the NCDEX & MCX

Angel Securities Ltd. 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 (E-
Commerce) 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.

14
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

15
 • 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.

16
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

18
 • 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 pay-
in 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

20
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

21
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).

22
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 Suppliers of
business, Funds
firms and (mainly
government) 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

23
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

24
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;

25
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

26
 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)”. They require
registration with NSDL as well as SEBI.

 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

27
 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.

28
 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

29
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

30
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

31
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

32
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.

33
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)

34
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.

35
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

37
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

38
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

39
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).

40
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.

41
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.

42
 Inflation (Annual Averages)

14
12.5
12
Wholesale Price Index

10
8 8.1
7.2
6.4
6 5.9
5.4
4.6 4.4 4.4
4 3.3 3.7 3.4
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

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

43
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 early-
August 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

44
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 2005-
06 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

45
end-March 2005 to US$151.6 billion at end-March 2006, and toUS$165.3 at end-
September, 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 2006-
07,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 April-
December 2005. Buoyant growth in direct taxes revenue has helped take its share in total

46
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.

47
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

48
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.

49
 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

50
 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 1983-
1994.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.

51
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 socio-
economic 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.

52
• 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.

53
 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

54
 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.

55
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

56
Indian Automobile Industry has Tremendous potential to grow:

Automobile Contribution to Industrial

Output

20% 17%

15% 10%

10% 5%

5%

0%
India Developing Developed
Economies Economics

• 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 4

Total Passenger 13
Vehicles

Total Two Wheelers 79

Three Wheelers 4

57
 Indian Automobile Industry

4% 13%
4%

79%

Commercial vehicles Passenger Car

3 Wheelers 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 US-
based 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.

59
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.

CAGR of last 4 years for different segments

25 23.5

20

15
14.3 14 14.2
CAGR
11.3
10

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

Key Domestic & Foreign Players in Automobile Industry:-

Profile of Domestic Players

Name of Parent Output Models Plants

the company
Company

60
Tata Largest Capacity -
Motors Ltd commercial 160,000
vehicle player units pa Sierra, Sumo, Pune
in the country Volumes - Safari, Indica, (Maharashtra)
and one of the 171,870 Indigo
largest in the units in 2004
passenger Operating
vehicles income-
segment. US$ 3.8 billion
in
2005

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

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

61
 oldest auto 15,782 Pajero Nadu)
companies in units
India Operating
income-
US$ 159.7
million
in 2004

Ashok Hinduja Operating Multiaxle vehicles, Ennore, two plants

Leyland group Income tractor, ecomet, at Hosur, the
- US$ 952.9 engines, Viking assembly plants at
million in 2005 BSI,Viking BS-II, Alwar, Bhandara,
Vestibule Bus, 222 castings plant at
CNG bus etc Hyderabad

TVS Motor TVS Group Operating Mopeds - Excel, Hosur, Mysore

Income Champ, TVS
- US$ 641.9 50Scooterettes -
million in 2005 ScootyMotorcycles
- Max 100, Victor,
Centra, Fiero
Bajaj Auto Bajaj Group 3 Plants at Akurdi,
Capacity - 2.52 Motorcycles - Waluj, Chakan
million units pa Boxer, CT 100, ,
Operating Discover, Wind,
Income - US$ Caliber, Pulsar,
1.3 billion in Eliminator
2005 Scooters
- Spirit, Saffire

62
 Wave

LML Lohioa Group

Freedom, Kanpur
Graptor

Profile of Overseas Players

Maruti Suzuki of Capacity - 800, Omni, Alto, Gurgaon

Udyog Ltd Japan holds 500,000 units WagonR, Zen, (Haryana)
a 54.2 per Pa Volumes - Baleno, Esteem,
cent stake in 472,122 units Gypsy, Vitara,
the company. including Versa
exports in
2004Operating
Income-US$
2.4 billion
in 2005

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

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

63
India subsidiary of units pa C class (Maharashtra)
Chrysler Volumes -
group 1,640 units

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

Ford Ford Motor Capacity - Ikon, Mondeo Chengaipattu

Motors Company, the 100,000 units (Tamil Nadu)
Ltd world's pa
second Volumes -
largest 45,723 units
automaker

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

Honda Siel Established in Capacity - City, Accord, Noida (UP)

64
Cars India 1995, with 30,000 CR -V
(HSCI) Honda Motor units pa
Company, Volumes -
(Japan) and Siel 20,550
Ltd (India)being units
the key
promoters.

Toyota Joint venture

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

Skoda Auto Skoda Auto, Capacity - Octavia, Laura Aurangabad

India based in Czech 10,000 (Maharashtra)
Republic, is a units pa
part Volumes -
of Volkswagen 3,712 units
group

Hero Honda Joint venture

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

65
 the Honda in 2005 Ambition Step
Motor Company Through -
of Japan Street

Honda Wholly owned Capacity- Scooters - 1 plant at

Motorcycle & subsidiary of 200,000 Activa, Manesar
Scooters India Honda Motor vehicles per Dio, Eterno
Pvt. Ltd Company Ltd., annum Motorcycles -
(HMSI) Japan Unicorn

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.

66

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

67
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.

68
• 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.

69
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%
80%
Share

2004-05
60%
1998-99
40%
5% 26% 63%
20% 11%
6% 18% 13%
0%
CVs PVs Two Wheelers Thr ee Wheeler s

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 2004-
05.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.

70
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 Delhi-
based 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 FY2005-
06,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

71
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% 11% 5%
4%

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.

72
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%
15%
3%
42%
5%

4%
11%
18%

China India Indonesia Vietnam

Thailand USA Brazil 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

73
 4 Year CAGR of Domestic Sales of different
segments
30
23.7
25
20
14.3
15
CAGR (%)

10
5 1.3
0
-5 Scooters Motor Mopeds Total Two
-10 Cycles Wheelers
-15
-20 -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

74
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 11.3
9.6 9.7
10
CAGR (%)

8
6
4
1.7
2
0
Passenger Utility MPVs Total
cars Vehicles Passenger
Segments 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.

75
 Per Capita Passenger Car (Per Thousand Population)

600
480 480 500
500 440

400

300
180
200 147
122 130
90
100 27
8.5 17 10 12 13
0 il

UK
A
dia

n
ic o
ina

az
ka

ea
e

ia

y
sia
es

pa

US
an

an
or

ys
In

Br

ex
an
Ch

or
p in

Ja
ne

a il

ap

rm
a la

hK
iL

M
do

Th
il ip

ng

Ge
Sr

ut
M
In

Si
Ph

So

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

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 24.7
24.5
24 23.5
23.5
23
CAGR

22.5
22 21.7
21.5
21
20.5
20
Medium & Heavy Light Total
Commercial Commercial Commercial
Vehicles Vehicles Vehicles
Segments

Market Share in Different Segments of Automobile Sector

M arket share two wheelers

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

77
 M arket share two wheelers

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

Market share (%)-LCV

April - May 2007

3%
2%
4% 0%

23%

68%

Tata Motors Mahindra Eicher Motors Sw araj Mazda Force Motors Others

Market share (%)- MHCV

April - May 2007

2%
0%
28%

6% 64%

Tata Motors EML All SML Others

78
 Overall Market share of Passenger
Vehicles

16% 15% Tat a M otors

7%
M aruti Udyog

Hyundai M otors
17%
M ahindra &
45% 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:-

79
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.

80
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 nation-
wide 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 Brazil-
based 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

82
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

83
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 Indo-
British 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.

84
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

86
Shareholding Pattern:-

Shareholding Pattern (%)

Promoters 32.8
Institutional investors 36.5
Indian Public 13.2
Others 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 Industry sales Company sales Company share

(including
2006-07 2005-06 growth 2006-07 2005-06 growth 2006-07 2005-06
Exports)
(Nos.)
Commercial
Vehicles 517,648 391,641 32.2% 334,238 245,022 36.4% 64.6% 62.6%
Passenger
Vehicles 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 Industry sales Company sales Company share

(including
2006-07 2005-06 2006-07 2005-06 growth 2006-07 2005-06
Exports)
growth
(Nos.)
M/HCVs 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 467,882 351,041 298,586 214,836 63.8% 61.2%

33.3% 39.0%

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%.

88
 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 Industry sales Company sales Company share

(including
2006-07 2005-06 growth 2006-07 2005-06 growth 2006-07 2005-06
Exports)
(Nos.)
Small Cars 832,161 662,094 25.7% 146,018* 111,772* 30.6% 17.5% 16.9%
(Mini +
Compact)
Midsize 206,431 213,862 (3.5%) 34,310 39,388 (12.9%) 16.6% 18.4%
cars
Utility 220,199 194,502 13.2% 47,892 37,910 26.3% 21.7% 19.5%

89
Vehicle
Total 1,379,698 1,143,076 20.7% 228,220 189,070 20.7% 16.5 % 16.5%
Passenger
Vehicles

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%.

92

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

93
 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 life-
cycle, 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.

94
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.

95
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.

96
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.

97
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

98
 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.

100
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.

101
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 Ashok Eicher M&M

Motors Leyland
Debt – Equity Ratio 0.5 0.41 0.44 0.39

Interest – Coverage 7.98 21.96 7.36 72.64

Ratio
Current - Ratio 1.38 1.34 0.84 1.29

Inventory – Turnover 13.95 8.59 13.47 12.4

Ratio
Debtors – Turnover 42.02 17.9 14.48 16.27
Ratio
Gross Profit Margin 13.5 8.91 5.78 14.95
Net Profit Margin 6.9 5.21 2.76 9.81
Return on Capital 30.52 27.77 16.5 32.25
Employed

102
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

103
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

104
diversification in the portfolio.

Measuring risk

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

(Excel Sheet)

105
Valuation of Tata Motors:-

Ratio Tata Motors Eicher Ashok M&M

Leyland
P/E Ratio 14.6 16.85 11.2 11.4
Price/ Book 4.1 2.61 2.7 5.15
Value Ratio

Market 25293.84 1077.67 4810.62 16641.22

Capitalisation
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.

106
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.

107
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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