This action might not be possible to undo. Are you sure you want to continue?
award of Master of Business Administration) Submitted by SHAMEEM BEGUM Roll No: 08N31E0048 Under the guidance of Mr. K Hari Krishna Assoc. Professor Finance
MALLA REDDY COLLEGE OF ENGINEERING & TECHNOLOGY (Affiliated to JNTU, Hyderabad) Secunderabad - 14 2008- 2010
I declare that this project report entitled “EQUITY ANALYSIS” is original and bonafide work of my own in the partial fulfillment of the requirements for the award of the Degree of MASTER OF BUSINESS ADMINISTRATION and submitted to the Department of Management, MALLAREDDY COLLEGE OF ENGINEERING AND TECHNOLOGY, Secunderabad.
The data that has been collected by me is truly authentic and contains true and complete information.
The automobile industry, one of the core sectors, has undergone metamorphosis with the advent of new business and manufacturing practices in the light of liberalization and globalization. The sector seems to be optimistic of posting strong sales in the couple of years in the view of a reasonable surge in demand. The Indian automobile market is gearing towards international standards to meet the needs of the global automobile giants and become a global hub.
A detailed analysis of Automobile industry has been covered in respect of past growth and performance. Under this project to better understand the Industry I have used Fundamental tools to make it more authentic and meaningful. An economy-industry-company (E.I.C) approach has been followed under Fundamental Analysis which covers effect of Recession, the impact of inflation, FDI’s, Export, and GDP etc. on Automobile Industry. The Industry Analysis has been done with the help of SWOT analysis and industry life cycle. For Company Analysis as a part of Fundamental tool we have undergone with the comparative analysis of TATA Motors the leading company, Maruti Suzuki India’s largest Car manufacturer and Mahindra and Mahindra along with the help of ratio analysis. The fundamental aspect consists of financial and Non-Financial analysis of these companies. At the end conclusion and recommendations have been specified so as to make the project work more meaningful and purposeful.
Accomplishment of a task with desired success calls for dedication towards work and prompting guidance, co-operation and deliberation from seniors. At the outset, I would like to thank Mr. K. Hari Krishna, Associate Professor, Mallareddy College of Engineering and Technology for his support and professional approach in guiding me through the careful details of the project. I am very grateful to my company guides, Mr. Subramaniam and Mr. Ashok who not only helped me on this topic but also helped me to understand the nuances of capital market. In spite of having a very busy schedule, they made sure in every way that we acquire the best possible exposure and knowledge during our project. I would be failing in my duty if I do no express my deep sense of gratitude to Sri K.R.K Murthy, H.O.D. and all the faculty members for their valuable advice and guidance in this project. I am also thankful to our college Principal, Dr.V.Siva Kumar Reddy.
Chapter No. Name of the concept Introduction Need of the study Objectives of the study I Scope of the study Methodology of the study Limitations of the study II III IV V VI VII Review of Literature Industry Profile Company Profile Data analysis and interpretation Findings, Suggestions and Conclusion Bibliography Page No. 1 2 3 4 5 6 7-22 23-42 43-52 53-73 74-80 81
CHAPTER I - INTRODUCTION
India is a developing country. Nowadays many people are interested to invest in financial markets especially on equities to get high returns, and to save tax in honest way. Equities are playing a major role in contribution of capital to the business from the beginning. Since the introduction of shares concept, large numbers of investors are showing interest to invest in stock market. In an industry plagued with skepticism and a stock market increasingly difficult to predict and contend with, if one looks hard enough there may still be a genuine aid for the Day Trader and Short Term Investor. The price of a security represents a consensus. It is the price at which one person agrees to buy and another agrees to sell. The price at which an investor is willing to buy or sell depends primarily on his expectations. If he expects the security's price to rise, he will buy it; if the investor expects the price to fall, he will sell it. These simple statements are the cause of a major challenge in forecasting security prices, because they refer to human expectations. As we all know firsthand, humans expectations are neither easily quantifiable nor predictable. If prices are based on investor expectations, then knowing what a security should sell for (i.e., fundamental analysis) becomes less important than knowing what other investors expect it to sell for. That's not to say that knowing what a security should sell for isn't important--it is. But there is usually a fairly strong consensus of a stock's future earnings that the average investor cannot disprove Fundamental analysis and technical analysis can co-exist in peace and complement each other. Since all the investors in the stock market want to make the maximum profits possible, they just cannot afford to ignore either fundamental or technical analysis.
NEED OF THE STUDY
To start any business capital plays major role. Capital can be acquired in two ways by issuing shares or by taking debt from financial institutions or borrowing money from financial institutions. The owners of the company have to pay regular interest and principal amount at the end. Stock is ownership in a company, with each share of stock representing a tiny piece of ownership. The more shares you own, the more of the company you own. The more shares you own, the more dividends you earn when the company makes a profit. In the financial world, ownership is called “Equity”. Advantages of selling stock: • • • A company can raise more capital than it could borrow. A company does not have to make periodic interest payments to creditors. A company does not have to make principal payments
Stock/shares play a major role in acquiring capital to the business in return investors are paid dividends to the shares they own. The more shares you own the more dividends you receive. The role of equity analysis is to provide information to the market. An efficient market relies on information: a lack of information creates inefficiencies that result in stocks being misrepresented (over or under valued). This is valuable because it fills information gaps so that each individual investor does not need to analyze every stock thereby making the markets more efficient.
OBJECTIVES OF THE STUDY
The objective of this project is to deeply analyze our Indian Automobile Industry for investment purpose by monitoring the growth rate and performance on the basis of historical data.
The main objectives of the Project study are:
Detailed analysis of Automobile industry which is gearing towards international standards
Analyze the impact of qualitative factors on industry’s and company’s prospects
Comparative analysis of three tough competitors TATA Motors, Maruti Suzuki and Mahindra and Mahindra through fundamental analysis.
Suggesting as to which company’s shares would be best for an investor to
SCOPE OF THE STUDY
The scope of the study is identified after and during the study is conducted. The project is based on tools like fundamental analysis and ratio analysis. Further, the study is based on information of last five years.
The analysis is made by taking into consideration five companies i.e. TATA Motors, Maruti Suzuki and Mahindra and Mahindra.
The scope of the study is limited for a period of five years. The scope is limited to only the fundamental analysis of the chosen stocks.
Research design or research methodology is the procedure of collecting, analyzing and interpreting the data to diagnose the problem and react to the opportunity in such a way where the costs can be minimized and the desired level of accuracy can be achieved to arrive at a particular conclusion. The methodology used in the study for the completion of the project and the fulfillment of the project objectives.
The sample of the stocks for the purpose of collecting secondary data has been selected on the basis of Random Sampling. The stocks are chosen in an unbiased manner and each stock is chosen independent of the other stocks chosen. The stocks are chosen from the automobile sector.
The sample size for the number of stocks is taken as 3 for fundamental analysis of stocks as fundamental analysis is very exhaustive and requires detailed study.
• • • • •
This study has been conducted purely to understand Equity analysis for investors. The study is restricted to three companies based on Fundamental analysis. The study is limited to the companies having equities. Detailed study of the topic was not possible due to limited size of the project. There was a constraint with regard to time allocation for the research study i.e. for a period of 45 days.
Suggestions and conclusions are based on the limited data of five years.
CHAPTER II - REVIEW OF LITERATURE
Investment success is pretty much a matter of careful selection and timing of stock purchases coupled with perfect matching to an individuals risk tolerance. In order to carry out selection, timing and matching actions an investor must conduct deep security analysis.
Investors purchase equity shares with two basic objectives; 1. To make capital profits by selling shares at higher prices. 2. To earn dividend income.
These two factors are affected by a host of factors. An investor has to carefully understand and analyze all these factors. There are basically two approaches to study security prices and valuation i.e. fundamental analysis and technical analysis
The value of common stock is determined in large measure by the performance of the firm that issued the stock. If the company is healthy and can demonstrate strength and growth, the value of the stock will increase. When values increase then prices follow and returns on an investment will increase. However, just to keep the savvy investor on their toes, the mix is complicated by the risk factors involved. Fundamental analysis examines all the dimensions of risk exposure and the probabilities of return, and merges them with broader economic analysis and greater industry analysis to formulate the valuation of a stock.
Fundamental analysis is a method of forecasting the future price movements of a financial instrument based on economic, political, environmental and other relevant factors and statistics that will affect the basic supply and demand of whatever underlies the financial instrument. It is the study of economic, industry and company conditions in an effort to determine the value of a company’s stock. Fundamental analysis typically focuses on key statistics in company’s financial statements to determine if the stock price is correctly valued. The term simply refers to the analysis of the economic well-being of a financial entity as opposed to only its price movements.
Fundamental analysis is the cornerstone of investing. The basic philosophy underlying the fundamental analysis is that if an investor invests re.1 in buying a share of a company, how much expected returns from this investment he has.
The fundamental analysis is to appraise the intrinsic value of a security. It insists that no one should purchase or sell a share on the basis of tips and rumors. The fundamental approach calls upon the investors to make his buy or sell decision on the basis of a detailed analysis of the information about the company, about the industry, and the economy. It is also known as “top-down approach”. This approach attempts to study the economic scenario, industry position and the company expectations and is also known as “economic-industry-company approach (EIC approach)”.
Thus the EIC approach involves three steps: 1. Economic analysis 2. Industry analysis 3. Company analysis
1. ECONOMIC ANALYSIS
The level of economic activity has an impact on investment in many ways. If the economy grows rapidly, the industry can also be expected to show rapid growth and vice versa. When the level of economic activity is low, stock prices are low, and when the level of economic activity is high, stock prices are high reflecting the prosperous outlook for sales and profits of the firms. The analysis of macro economic environment is essential to understand the behavior of the stock prices.
The commonly analyzed macro economic factors are as follows:
Gross Domestic Product (GDP): GDP indicates the rate of growth of the economy. It represents the aggregate value of the goods and services produced in the economy. It consists of personal consumption expenditure, gross private domestic investment and government expenditure on goods and services and net exports of goods and services. The growth rate of economy points out the prospects for the industrial sector and the return investors can expect from investment in shares. The higher growth rate is more favorable to the stock market.
Savings and investment: It is obvious that growth requires investment which in turn requires substantial amount of domestic savings. Stock market is a channel through which the savings are made available to the corporate bodies. Savings are distributed over various assets like equity shares, deposits, mutual funds, real estate and bullion. The savings and investment patterns of the public affect the stock to a great extent.
Inflation: Along with the growth of GDP, if the inflation rate also increases, then the real growth would be very little. The effects of inflation on capital markets are numerous. An increase in the expected rate of inflation is expected to cause a nominal rise in interest rates. Also, it increases uncertainty of future business and investment decisions. As inflation increases, it results in extra costs to businesses, thereby squeezing their profit margins and leading to real declines in profitability.
Interest rates: The interest rate affects the cost of financing to the firms. A decrease in interest rate implies lower cost of finance for firms and more profitability. More money is available at a lower interest rate for the brokers who are doing business with borrowed money. Availability of cheap funds encourages speculation and rise in the price of shares.
Tax structure: Every year in March, the business community eagerly awaits the Government’s announcement regarding the tax policy. Concessions and incentives given to a certain industry encourage investment in that particular industry. Tax relief’s given to savings encourage savings. The type of tax exemption has impact on the profitability of the industries.
Infrastructure facilities: Infrastructure facilities are essential for the growth of industrial and agricultural sector. A wide network of communication system is a must for the growth of the economy. Regular supply of power without any power cut would
boost the production. Banking and financial sectors also should be sound enough to provide adequate support to the industry. Good infrastructure facilities affect the stock market favorably.
2. INDUSTRY ANALYSIS An industry is a group of firms that have similar technological structure of production and produce similar products and Industry analysis is a type of business research that focuses on the status of an industry or an industrial sector (a broad industry classification, like "manufacturing"). Irrespective of specific economic situations, some industries might be expected to perform better, and share prices in these industries may not decline as much as in other industries. This identification of economic and industry specific factors influencing share prices will help investors to identify the shares that fit individual expectations
Industry Life Cycle: The industry life cycle theory is generally attributed to Julius Grodensky. The life cycle of the industry is separated into four well defined stages. • Pioneering stage: The prospective demand for the product is promising in this stage and the technology of the product is low. The demand for the product attracts many producers to produce the particular product. There would be severe competition and only fittest companies survive this stage. The producers try to develop brand name, differentiate the product and create a product image. In this situation, it is difficult to select companies for investment because the survival rate is unknown.
Rapid growth stage: This stage starts with the appearance of surviving firms from the pioneering stage. The companies that have withstood the competition grow strongly in market share and financial performance. The technology of the production would have improved resulting in low cost of production and good quality products. The companies have stable growth rate in this stage and they declare dividend to the shareholders. It is advisable to invest in the shares of these companies.
Maturity and stabilization stage: the growth rate tends to moderate and the rate of growth would be more or less equal to the industrial growth rate or the gross domestic product growth rate. Symptoms of obsolescence may appear in the technology. To keep going, technological innovations in the production process and products should be introduced. The investors have to closely monitor the events that take place in the maturity stage of the industry.
Decline stage: demand for the particular product and the earnings of the companies in the industry decline. It is better to avoid investing in the shares of the low growth industry even in the boom period. Investment in the shares of these types of companies leads to erosion of capital.
Growth of the industry: The historical performance of the industry in terms of growth and profitability should be analyzed. The past variability in return and growth in reaction to macro economic factors provide an insight into the future.
Nature of competition: Nature of competition is an essential factor that determines the demand for the particular product, its profitability and the price of the concerned company scrips. The companies' ability to withstand the local as well as the multinational competition counts much. If too many firms are present in the organized sector, the competition would be severe. The competition would lead to a decline in the price of the product. The investor before investing in the scrip of a company should analyze the market share of the particular company's product and should compare it with the top five companies.
SWOT analysis: SWOT analysis represents the strength, weakness, opportunity and threat for an industry. Every investor should carry out a SWOT analysis for the chosen industry. Take for instance, increase in demand for the industry’s product becomes its strength, presence of numerous players in the market, i.e. competition becomes the threat to a particular company. The progress in R & D in that industry is an opportunity and entry of multinationals in the industry is a threat. In this way the factors are to be arranged and analyzed.
3. COMPANY ANALYSIS
In the company analysis the investor assimilates the several bits of information related to the company and evaluates the present and future values of the stock. The risk and return associated with the purchase of the stock is analyzed to take better investment decisions. The present and future values are affected by a number of factors.
Competitive edge of the company: Major industries in India are composed of hundreds of individual companies. Though the number of companies is large, only few companies control the major market share. The competitiveness of the company can be studied with the help of the following; • Market share: The market share of the annual sales helps to determine a company’s relative competitive position within the industry. If the market share is high, the company would be able to meet the competition successfully. The companies in the market should be compared with like product groups otherwise, the results will be misleading. • Growth of sales: The rapid growth in sales would keep the shareholder in a better position than one with stagnant growth rate. Investors generally prefer size and growth in sales because the larger size companies may be able to withstand the business cycle rather than the company of smaller size. • Stability of sales: If a firm has stable sales revenue, it will have more stable earnings. The fall in the market share indicates the declining trend of company,
even if the sales are stable. Hence the stability of sales should be compared with its market share and the competitor’s market share.
Earnings of the company: Sales alone do not increase the earnings but the costs and expenses of the company also influence the earnings. Further, earnings do not always increase with increase in sales. The company’s sales might have increased but its earnings per share may decline due to rise in costs. Hence, the investor should not only depend on the sales, but should analyze the earnings of the company.
Financial analysis: The best source of financial information about a company is its own financial statements. This is a primary source of information for evaluating the investment prospects in the particular company’s stock. Financial statement analysis is the study of a company’s financial statement from various viewpoints. The statement gives the historical and current information about the company’s operations. Historical financial statement helps to predict the future and the current information aids to analyze the present status of the company. The two main statements used in the analysis are Balance sheet and Profit and Loss Account.
The balance sheet is one of the financial statements that companies prepare every year for their shareholders. It is like a financial snapshot, the company's financial situation at a moment in time. It is prepared at the year end, listing the company's current assets and liabilities. It helps to study the capital structure of the company. It is better for the investor to avoid a company with excessive debt component in its capital structure.
From the balance sheet, liquidity position of the company can also be assessed with the information on current assets and current liabilities.
Ratio analysis: Ratio is a relationship between two figures expressed mathematically. Financial ratios provide numerical relationship between two relevant financial data. Financial ratios are calculated from the balance sheet and profit and loss account. The relationship can be either expressed as a percent or as a quotient. Ratios summarize the data for easy understanding, comparison and interpretations.
Ratios for investment purposes can be classified into profitability ratios, turnover ratios, and leverage ratios. Profitability ratios are the most popular ratios since investors prefer to measure the present profit performance and use this information to forecast the future strength of the company. The most often used profitability ratios are return on assets, price earnings multiplier, price to book value, price to cash flow, and price to sales, dividend yield, return on equity, present value of cash flows, and profit margins.
a) Return on Assets (ROA) ROA is computed as the product of the net profit margin and the total asset turnover ratios. ROA = (Net Profit/Total income) x (Total income/Total Assets)
This ratio indicates the firm's strategic success. Companies can have one of two strategies: cost leadership, or product differentiation. ROA should be rising or keeping pace with the company's competitors if the company is successfully pursuing either of
these strategies, but how ROA rises will depend on the company's strategy. ROA should rise with a successful cost leadership strategy because the company’s increasing operating efficiency. An example is an increasing, total asset, turnover ratio as the company expands into new markets, increasing its market share. The company may achieve leadership by using its assets more efficiently. With a successful product differentiation strategy, ROA will rise because of a rising profit margin.
b) Return on Investment (ROI) ROI is the return on capital invested in business, i.e., if an investment Rs 1 crore in men, machines, land and material is made to generate Rs. 25 lakhs of net profit, then the ROI is 25%. The computation of return on investment is as follows:
Return on Investment (ROI) = (Net profit/Equity investments) x 100
As this ratio reveals how well the resources of a firm are being used, higher the ratio, better are the results. The return on shareholder’s investment should be compared with the return of other similar firms in the same industry. The inert-firm comparison of this ratio determines whether the investments in the firm are attractive or not as the investors would like to invest only where the return is higher.
c) Return on Equity Return on equity measures how much an equity shareholder's investment is actually earning. The return on equity tells the investor how much the invested rupee is earning
from the company. The higher the number, the better is the performance of the company and suggests the usefulness of the projects the company has invested in. The computation of return on equity is as follows:
Return on equity = (Net profit to owners/value of the specific owner's Contribution to the business) x 100
The ratio is more meaningful to the equity shareholders who are invested to know profits earned by the company and those profits which can be made available to pay dividend to them.
d) Earnings per Share (EPS) This ratio determines what the company is earning for every share. For many investors, earnings are the most important tool. EPS is calculated by dividing the earnings (net profit) by the total number of equity shares. The computation of EPS is as follows:
Earnings per share = Net profit/Number of shares outstanding
The EPS is a good measure of profitability and when compared with EPS of similar other companies, it gives a view of the comparative earnings or earnings power of a firm. EPS calculated for a number of years indicates whether or not earning power of the company has increased.
e) Dividend per Share (DPS) The extent of payment of dividend to the shareholders is measured in the form of dividend per share. The dividend per share gives the amount of cash flow from the company to the owners and is calculated as follows:
Dividend per share = Total dividend payment / Number of shares outstanding
The payment of dividend can have several interpretations to the shareholder. The distribution of dividend could be thought of as the distribution of excess profits/abnormal profits by the company. On the other hand, it could also be negatively interpreted as lack of investment opportunities. In all, dividend payout gives the extent of inflows to the shareholders from the company.
f) Dividend Payout Ratio From the profits of each company a cash flow called dividend is distributed among its shareholders. This is the continuous stream of cash flow to the owners of shares, apart from the price differentials (capital gains) in the market. The return to the shareholders, in the form of dividend, out of the company's profit is measured through the payout ratio. The payout ratio is computed as follows:
Payout Ratio = (Dividend per share / Earnings per share) * 100 The percentage of payout ratio can also be used to compute the percentage of retained earnings. The profits available for distribution are either paid as dividends or retained
internally for business growth opportunities. Hence, when dividends are not declared, the entire profit is ploughed back into the business for its future investments.
g) Dividend Yield Dividend yield is computed by relating the dividend per share to the market price of the share. The market place provides opportunities for the investor to buy the company's share at any point of time. The price at which the share has been bought from the market is the actual cost of the investment to the shareholder. The market price is to be taken as the cum-dividend price. Dividend yield relates the actual cost to the cash flows received from the company. The computation of dividend yield is as follows
Dividend yield = (Dividend per share / Market price per share) * 100
High dividend yield ratios are usually interpreted as undervalued companies in the market. The market price is a measure of future discounted values, while the dividend per share is the present return from the investment. Hence, a high dividend yield implies that the share has been under priced in the market. On the other hand a low dividend yield need not be interpreted as overvaluation of shares. A company that does not pay out dividends will not have a dividend yield and the real measure of the market price will be in terms of earnings per share and not through the dividend payments.
h) Price/Earnings Ratio (P/E) The P/E multiplier or the price earnings ratio relates the current market price of the share to the earnings per share. This is computed as follows:
Price/earnings ratio = Current market price / Earnings per share
This ratio is calculated to make an estimate of appreciation in the value of a share of a company and is widely used by investors to decide whether or not to buy shares in a particular company. Many investors prefer to buy the company's shares at a low P/E ratio since the general interpretation is that the market is undervaluing the share and there will be a correction in the market price sooner or later. A very high P/E ratio on the other hand implies that the company's shares are overvalued and the investor can benefit by selling the shares at this high market price.
i) Debt-to-Equity Ratio Debt-Equity ratio is used to measure the claims of outsiders and the owners against the firm’s assets. Debt-to-equity ratio = Outsiders Funds / Shareholders Funds
The debt-equity ratio is calculated to measure the extent to which debt financing has been used in a business. It indicates the proportionate claims of owners and the outsiders against the firm’s assets. The purpose is to get an idea of the cushion available to outsiders on the liquidation of the firm.
CHAPTER III - INDUSTRY PROFILE
Finance is the pre-requisite for modern business and financial institutions play a vital role in the economic system. It is through financial markets and institutions that the financial system of an economy works. Financial markets refer to the institutional arrangements for dealing in financial assets and credit instruments of different types such as currency, cheques, bank deposits, bills, bonds, equities, etc.
Financial market is a broad term describing any marketplace where buyers and sellers participate in the trade of assets such as equities, bonds, currencies and derivatives. They are typically defined by having transparent pricing, basic regulations on trading, costs and fees and market forces determining the prices of securities that trade.
Generally, there is no specific place or location to indicate a financial market. Wherever a financial transaction takes place, it is deemed to have taken place in the financial market. Hence financial markets are pervasive in nature since financial transactions are themselves very pervasive throughout the economic system. For instance, issue of equity shares, granting of loan by term lending institutions, deposit of money into a bank, purchase of debentures, sale of shares and so on.
In a nutshell, financial markets are the credit markets catering to the various needs of the individuals, firms and institutions by facilitating buying and selling of financial assets, claims and services.
CLASSIFICATION OF FINANCIAL MARKETS
Money Lenders, Indigenuos Bankers
Industrial Securities Market
Call Money Market
Commercial Bill Market
Treasury Bill Market
Government Securities Market Long-term loan market
Capital Market The capital market is a market for financial assets which have a long or indefinite maturity. Generally, it deals with long term securities which have a period of above one year. In the widest sense, it consists of a series of channels through which the savings of the community are made available for industrial and commercial enterprises and public authorities. As a whole, capital market facilitates raising of capital.
The major functions performed by a capital market are: 1. Mobilization of financial resources on a nation-wide scale. 2. Securing the foreign capital and know-how to fill up deficit in the required resources for economic growth at a faster rate. 3. Effective allocation of the mobilized financial resources, by directing the same to projects yielding highest yield or to the projects needed to promote balanced economic development.
Capital market consists of primary market and secondary market. Primary market: Primary market is a market for new issues or new financial claims. Hence it is also called as New Issue Market. It basically deals with those securities which are issued to the public for the first time. The market, therefore, makes available a new block of securities for public subscription. In other words, it deals with raising of fresh capital by companies either for cash or for consideration other than cash. The best example could be Initial Public Offering (IPO) where a firm offers shares to the public for the first time.
Secondary market: Secondary market is a market where existing securities are traded. In other words, securities which have already passed through new issue market are traded in this market. Generally, such securities are quoted in the stock exchange and it provides a continuous and regular market for buying and selling of securities. This market consists of all stock exchanges recognized by the government of India.
Money Market Money markets are the markets for short-term, highly liquid debt securities. Money market securities are generally very safe investments which return relatively low interest rate that is most appropriate for temporary cash storage or short term time needs. It consists of a number of sub-markets which collectively constitute the money market namely call money market, commercial bills market, acceptance market, and Treasury bill market.
Derivatives Market The derivatives market is the financial market for derivatives, financial instruments like futures contracts or options, which are derived from other forms of assets. A derivative is a security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. The important financial derivatives are the following:
Forwards: Forwards are the oldest of all the derivatives. A forward contract refers to an agreement between two parties to exchange an agreed quantity of an asset for cash at a certain date in future at a predetermined price specified in that agreement. The promised asset may be currency, commodity, instrument etc.
Futures: Future contract is very similar to a forward contract in all respects excepting the fact that it is completely a standardized one. It is nothing but a standardized forward contract which is legally enforceable and always traded on an organized exchange.
Options: A financial derivative that represents a contract sold by one party (option writer) to another party (option holder). The contract offers the buyer the right, but not the obligation, to buy (call) or sell (put) a security or other financial asset at an agreed-upon price (the strike price) during a certain period of time or on a specific date (exercise date). Call options give the option to buy at certain price, so the buyer would want the stock to go up. Put options give the option to sell at a certain price, so the buyer would want the stock to go down.
Swaps: It is yet another exciting trading instrument. Infact, it is the combination of forwards by two counterparties. It is arranged to reap the benefits arising from the fluctuations in the market – either currency market or interest rate market or any other market for that matter.
Foreign Exchange Market It is a market in which participants are able to buy, sell, exchange and speculate on currencies. Foreign exchange markets are made up of banks, commercial companies, central banks, investment management firms, hedge funds, and retail forex brokers and investors. The forex market is considered to be the largest financial market in the world. It is a worldwide decentralized over-the-counter financial market for the trading of currencies. Because the currency markets are large and liquid, they are believed to be the most efficient financial markets. It is important to realize that the foreign exchange market is not a single exchange, but is constructed of a global network of computers that connects participants from all parts of the world. Commodities Market It is a physical or virtual marketplace for buying, selling and trading raw or primary products. For investors' purposes there are currently about 50 major commodity markets worldwide that facilitate investment trade in nearly 100 primary commodities. Commodities are split into two types: hard and soft commodities. Hard commodities are typically natural resources that must be mined or extracted (gold, rubber, oil, etc.), whereas soft commodities are agricultural products or livestock (corn, wheat, coffee, sugar, soybeans, pork, etc.)
INDIAN FINANCIAL MARKETS
India Financial market is one of the oldest in the world and is considered to be the fastest growing and best among all the markets of the emerging economies.
The history of Indian capital markets dates back 200 years toward the end of the 18th century when India was under the rule of the East India Company. The development of the capital market in India concentrated around Mumbai where no less than 200 to 250 securities brokers were active during the second half of the 19th century. The financial market in India today is more developed than many other sectors because it was organized long before with the securities exchanges of Mumbai, Ahmadabad and Kolkata were established as early as the 19th century. By the early 1960s the total number of securities exchanges in India rose to eight, including Mumbai, Ahmadabad and Kolkata apart from Madras, Kanpur, Delhi, Bangalore and Pune. Today there are 21 regional securities exchanges in India in addition to the centralized NSE (National Stock Exchange) and OTCEI (Over the Counter Exchange of India). However the stock markets in India remained stagnant due to stringent controls on the market economy that allowed only a handful of monopolies to dominate their respective sectors. The corporate sector wasn't allowed into many industry segments, which were dominated by the state controlled public sector resulting in stagnation of
the economy right up to the early 1990s. Thereafter when the Indian economy began liberalizing and the controls began to be dismantled or eased out; the securities markets witnessed a flurry of IPO’s that were launched. This resulted in many new companies across different industry segments to come up with newer products and services.
A remarkable feature of the growth of the Indian economy in recent years has been the role played by its securities markets in assisting and fuelling that growth with money rose within the economy. This was in marked contrast to the initial phase of growth in many of the fast growing economies of East Asia that witnessed huge doses of FDI (Foreign Direct Investment) spurring growth in their initial days of market decontrol. During this phase in India much of the organized sector has been affected by high growth as the financial markets played an all-inclusive role in sustaining financial resource mobilization. Many PSUs (Public Sector Undertakings) that decided to offload part of their equity were also helped by the well-organized securities market in India.
The launch of the NSE (National Stock Exchange) and the OTCEI (Over the Counter Exchange of India) during the mid 1990s by the government of India was meant to usher in an easier and more transparent form of trading in securities. The NSE was conceived as the market for trading in the securities of companies from the large-scale sector and the OTCEI for those from the small-scale sector. While the NSE has not just done well to grow and evolve into the virtual backbone of capital markets in India the OTCEI struggled and is yet to show any sign of growth and development. The integration of IT into the capital market infrastructure has been particularly smooth in
India due to the country’s world class IT industry. This has pushed up the operational efficiency of the Indian stock market to global standards and as a result the country has been able to capitalize on its high growth and attract foreign capital like never before.
The regulating authority for capital markets in India is the SEBI (Securities and Exchange Board of India). SEBI came into prominence in the 1990s after the capital markets experienced some turbulence. It had to take drastic measures to plug many loopholes that were exploited by certain market forces to advance their vested interests. After this initial phase of struggle SEBI has grown in strength as the regulator of India’s capital markets and as one of the country’s most important institutions.
FINANCIAL MARKET REGULATIONS
Regulations are an absolute necessity in the face of the growing importance of capital markets throughout the world. The development of a market economy is dependent on the development of the capital market. The regulation of a capital market involves the regulation of securities; these rules enable the capital market to function more efficiently and impartially. A well regulated market has the potential to encourage additional investors to partake, and contribute in, furthering the development of the economy. The chief capital market regulatory authority is Securities and Exchange Board of India (SEBI). SEBI is the regulator for the securities market in India. It is the apex body to develop and regulate the stock market in India It was formed officially by the Government of India in 1992 with SEBI Act 1992 being passed by the Indian Parliament. Chaired by C B Bhave, SEBI is headquartered in the popular business district of Bandra-Kurla complex in Mumbai, and has Northern, Eastern, Southern and Western regional offices in New Delhi, Kolkata, Chennai and Ahmedabad. In place of Government Control, a statutory and autonomous regulatory board with defined responsibilities, to cover both development & regulation of the market, and independent powers has been set up.
The basic objectives of the Board were identified as:
• • •
to protect the interests of investors in securities; to promote the development of Securities Market; to regulate the securities market and
For matters connected therewith or incidental thereto.
Since its inception SEBI has been working targeting the securities and is attending to the fulfillment of its objectives with commendable zeal and dexterity. The improvements in the securities markets like capitalization requirements, margining, establishment of clearing corporations etc. reduced the risk of credit and also reduced the market.
SEBI has introduced the comprehensive regulatory measures, prescribed registration norms, the eligibility criteria, the code of obligations and the code of conduct for different intermediaries like, bankers to issue, merchant bankers, brokers and subbrokers, registrars, portfolio managers, credit rating agencies, underwriters and others. It has framed bye-laws, risk identification and risk management systems for Clearing houses of stock exchanges, surveillance system etc. which has made dealing in securities both safe and transparent to the end investor.
Another significant event is the approval of trading in stock indices (like S&P CNX Nifty & Sensex) in 2000. A market Index is a convenient and effective product because of the following reasons:
• • • •
It acts as a barometer for market behavior; It is used to benchmark portfolio performance; It is used in derivative instruments like index futures and index options; It can be used for passive fund management as in case of Index Funds. Equity Analysis
Two broad approaches of SEBI is to integrate the securities market at the national level, and also to diversify the trading products, so that there is an increase in number of traders including banks, financial institutions, insurance companies, mutual funds, primary dealers etc. to transact through the Exchanges. In this context the introduction of derivatives trading through Indian Stock Exchanges permitted by SEBI in 2000 AD is a real landmark. SEBI has enjoyed success as a regulator by pushing systemic reforms aggressively and successively (e.g. the quick movement towards making the markets electronic and paperless rolling settlement on T+2 bases). SEBI has been active in setting up the regulations as required under law.
STOCK EXCHANGES IN INDIA
Stock Exchanges are an organized marketplace, either corporation or mutual organization, where members of the organization gather to trade company stocks or other securities. The members may act either as agents for their customers, or as principals for their own accounts. As per the Securities Contracts Regulation Act, 1956 a stock exchange is an association, organization or body of individuals whether incorporated or not, established for the purpose of assisting, regulating and controlling business in buying, selling and dealing in securities.
Stock exchanges facilitate for the issue and redemption of securities and other financial instruments including the payment of income and dividends. The record keeping is central but trade is linked to such physical place because modern markets are computerized. The trade on an exchange is only by members and stock broker do have a seat on the exchange. List of Stock Exchanges in India Bombay Stock Exchange National Stock Exchange OTC Exchange of India Regional Stock Exchanges 1. Ahmedabad 2. Bangalore 3. Bhubaneswar 4. Calcutta 5. Cochin 6. Coimbatore 7. Delhi 8. Guwahati 9. Hyderabad 10. Jaipur 11. Ludhiana 12. Madhya Pradesh 13. Madras 14. Magadh 15. Mangalore 16. Meerut 17. Pune 18. Saurashtra Kutch 19. Uttar Pradesh 20. Vadodara
BOMBAY STOCK EXCHANGE
A very common name for all traders in the stock market, BSE, stands for Bombay Stock Exchange. It is the oldest market not only in the country, but also in Asia. In the early days, BSE was known as "The Native Share & Stock Brokers Association." It was established in the year 1875 and became the first stock exchange in the country to be recognized by the government. In 1956, BSE obtained a permanent recognition from the Government of India under the Securities Contracts (Regulation) Act, 1956.
In the past and even now, it plays a pivotal role in the development of the country's capital market. This is recognized worldwide and its index, SENSEX, is also tracked worldwide. Earlier it was an Association of Persons (AOP), but now it is a demutualised and corporatised entity incorporated under the provisions of the Companies Act, 1956, pursuant to the BSE (Corporatisation and Demutualization) Scheme, 2005 notified by the Securities and Exchange Board of India (SEBI).
BSE Vision The vision of the Bombay Stock Exchange is to "Emerge as the premier Indian stock exchange by establishing global benchmarks."
BSE Management Bombay Stock Exchange is managed professionally by Board of Directors. It comprises of eminent professionals, representatives of Trading Members and the Managing Director. The Board is an inclusive one and is shaped to benefit from the market intermediaries participation.
The Board exercises complete control and formulates larger policy issues. The dayto-day operations of BSE are managed by the Managing Director and its school of professional as a management team.
BSE Network The Exchange reaches physically to 417 cities and towns in the country. The framework of it has been designed to safeguard market integrity and to operate with transparency. It provides an efficient market for the trading in equity, debt instruments and derivatives. Its online trading system, popularly known as BOLT, is a proprietary system and it is BS 7799-2-2002 certified. The BOLT network was expanded, nationwide, in 1997. The surveillance and clearing & settlement functions of the Exchange are ISO 9001:2000 certified.
BSE Facts BSE as a brand is synonymous with capital markets in India. The BSE SENSEX is the benchmark equity index that reflects the robustness of the economy and finance. It was the – • • • • • First in India to introduce Equity Derivatives First in India to launch a Free Float Index First in India to launch US$ version of BSE Sensex First in India to launch Exchange Enabled Internet Trading Platform First in India to obtain ISO certification for Surveillance, Clearing & Settlement • 'BSE On-Line Trading System’ (BOLT) has been awarded the globally recognized the Information Security Management System standard BS7799-2:2002. • • First to have an exclusive facility for financial training Moved from Open Outcry to Electronic Trading within just 50 days
BSE with its long history of capital market development is fully geared to continue its contributions to further the growth of the securities markets of the country, thus helping India increases its sphere of influence in international financial markets.
The National Stock Exchange of India Limited has genesis in the report of the High Powered Study Group on Establishment of New Stock Exchanges, which recommended promotion of a National Stock Exchange by financial institutions (FI’s) to provide access to investors from all across the country on an equal footing. Based on the recommendations, NSE was promoted by leading Financial Institutions at the behest of the Government of India and was incorporated in November 1992 as a taxpaying company unlike other stock Exchange in the country. On its recognition as a stock exchange under the Securities Contracts (Regulation) Act, 1956 in April 1993, NSE commenced operations in the Wholesale Debt Market (WDM) segment in June 1994. The Capital Market (Equities) segment commenced operations in November 1994 and operations in Derivatives segment commenced in June 2000. NSE GROUP National Securities Clearing Corporation Ltd. (NSCCL) It is a wholly owned subsidiary, which was incorporated in August 1995 and commenced clearing operations in April 1996. It was formed to build confidence in clearing and settlement of securities, to promote and maintain the short and consistent
settlement cycles, to provide a counter-party risk guarantee and to operate a tight risk containment system.
NSE.IT Ltd. It is also a wholly owned subsidiary of NSE and is its IT arm. This arm of the NSE is uniquely positioned to provide products, services and solutions for the securities industry. NSE.IT primarily focuses on in the area of trading, broker front-end and back-office, clearing and settlement, web-based, insurance, etc. Along with this, it also provides consultancy and implementation services in Data Warehousing, Business Continuity Plans, Site Maintenance and Backups, Stratus Mainframe Facility Management, Real Time Market Analysis & Financial News.
India Index Services & Products Ltd. (IISL) It is a joint venture between NSE and CRISIL Ltd. to provide a variety of indices and index related services and products for the Indian Capital markets. It was set up in May 1998. IISL has a consulting and licensing agreement with the Standard and Poor's (S&P), world's leading provider of investible equity indices, for co-branding equity indices.
National Securities Depository Ltd. (NSDL) NSE joined hands with IDBI and UTI to promote dematerialization of securities. This step was taken to solve problems related to trading in physical securities. It commenced operations in November 1996.
NSE Facts • It uses satellite communication technology to energize participation from around 400 cities in India. • • • NSE can handle up to 1 million trades per day. It is one of the largest interactive VSAT based stock exchanges in the world. The NSE- network is the largest private wide area network in India and the first extended C- Band VSAT network in the world. • Presently more than 9000 users are trading on the real time-online NSE application. Today, NSE is one of the largest exchanges in the world and still forging ahead. At NSE, we are constantly working towards creating a more transparent, vibrant and innovative capital market.
OVER THE COUNTER EXCHANGE OF INDIA
OTCEI was incorporated in 1990 as a section 25 company under the companies Act 1956 and is recognized as a stock exchange under section 4 of the securities Contracts Regulation Act, 1956. The exchange was set up to aid enterprising promotes in raising finance for new projects in a cost effective manner and to provide investors with a transparent and efficient mode of trading Modeled along the lines of the NASDAQ market of USA, OTCEI introduced many novel concepts to the Indian capital markets such as screen-based nationwide trading, sponsorship of companies,
market making and scrip less trading. As a measure of success of these efforts, the Exchange today has 115 listings and has assisted in providing capital for enterprises that have gone on to build successful brands for themselves like VIP Advanta, Sonora Tiles & Brilliant mineral water, etc.
Need for OTCEI: Studies by NASSCOM, software technology parks of India, the venture capitals funds and the government’s IT tasks Force, as well as rising interest in IT, Pharmaceutical, Biotechnology and Media shares have repeatedly emphasized the need for a national stock market for innovation and high growth companies.
Innovative companies are critical to developing economics like India, which is undergoing a major technological revolution. With their abilities to generate employment opportunities and contribute to the economy, it is essential that these companies not only expand existing operations but also set up new units. The key issue for these companies is raising timely, cost effective and long term capital to sustain their operations and enhance growth. Such companies, particularly those that have been in operation for a short time, are unable to raise funds through the traditional financing methods, because they have not yet been evaluated by the financial world.
CHAPTER IV - COMPANY PROFILE
INDIA INFOLINE LIMITED
India Infoline is a one-stop financial services shop, most respected for quality of its information, personalized service and cutting-edge technology. Vision Our vision is to be the most respected company in the financial services space.
India Infoline Group The India Infoline group, comprising the holding company, India Infoline Limited and its wholly-owned subsidiaries, include the entire financial services space with offerings ranging from Equity research, Equities and derivatives trading, Commodities trading, Portfolio Management Services, Mutual Funds, Life Insurance, Fixed deposits, GoI bonds and other small savings instruments to loan products and Investment banking.
India Infoline also owns and manages the websites www.indiainfoline.com and www.5paisa.com. The company has a network of over 2100 business locations (branches and sub-brokers) spread across more than 450 cities and towns. The group caters to approximately a million customers.
Founded in 1995 by Mr. Nirmal Jain (Chairman and Managing Director) as an independent business research and information provider, the company gradually evolved into a one-stop financial services solutions provider.
India Infoline received registration for a housing finance company from the National Housing Bank and received the ‘Fastest growing Equity Broking House - Large firms’ in India by Dun & Bradstreet in 2009. It also received the Insurance broking license from IRDA; received the venture capital license; received in principle approval to sponsor a mutual fund; received ‘Best broker- India’ award from Finance Asia; ‘Most Improved Brokerage- India’ award from Asia money.
COMPANY STRUCTURE India Infoline Limited is listed on both the leading stock exchanges in India, viz. the Stock Exchange, Mumbai (BSE) and the National Stock Exchange (NSE) and is also a member of both the exchanges. It is engaged in the businesses of Equities broking, Wealth Advisory Services and Portfolio Management Services. It offers broking services in the Cash and Derivatives segments of the NSE as well as the Cash segment of the BSE. It is registered with NSDL as well as CDSL as a depository participant, providing a one-stop solution for clients trading in the equities market. It has recently launched its Investment banking and Institutional Broking business.
A SEBI authorized Portfolio Manager; it offers Portfolio Management Services to clients. These services are offered to clients as different schemes, which are based on differing investment strategies made to reflect the varied risk-return preferences of clients.
India Infoline Media and Research Services Limited The services represent a strong support that drives the broking, commodities, mutual fund and portfolio management services businesses. It undertakes equities research which is acknowledged by none other than Forbes as 'Best of the Web' and '…a must read for investors in Asia'. India Infoline's research is available not just over the internet but also on international wire services like Bloomberg (Code: IILL), Thomson First Call and Internet Securities where India Infoline is amongst the most read Indian brokers. India Infoline Commodities Limited. India Infoline Commodities Pvt Limited is engaged in the business of commodities broking. Their experience in securities broking empowered them with the requisite
skills and technologies to allow them to offer commodities broking as a contracyclical alternative to equities broking. It enjoys memberships with the MCX and NCDEX, two leading Indian commodities exchanges, and recently acquired membership of DGCX. It has a multi-channel delivery model, making it among the select few to offer online as well as offline trading facilities. India Infoline Marketing & Services India Infoline Marketing and Services Limited is the holding company of India Infoline Insurance Services Limited and India Infoline Insurance Brokers Limited. • India Infoline Insurance Services Limited is a registered Corporate Agent with the Insurance Regulatory and Development Authority (IRDA). It is the largest Corporate Agent for ICICI Prudential Life Insurance Co Limited, which is India's largest private Life Insurance Company. India Infoline was the first corporate agent to get licensed by IRDA in early 2001. • India Infoline Insurance Brokers Limited India Infoline Insurance Brokers Limited is a newly formed subsidiary which will carry out the business of Insurance broking.
India Infoline Investment Services Limited Consolidated shareholdings of all the subsidiary companies engaged in loans and financing activities under one subsidiary. Recently, Orient Global, a Singapore-based investment institution invested USD 76.7 million for a 22.5% stake in India Infoline Investment Services. This will help focused expansion and capital raising in the said
subsidiaries for various lending businesses like loans against securities, SME financing, distribution of retail loan products, consumer finance business and housing finance business. India Infoline Investment Services Private Limited consists of the following step-down subsidiaries. • India Infoline Distribution Company Limited (distribution of retail loan products) • • Moneyline Credit Limited (consumer finance) India Infoline Housing Finance Limited (housing finance)
IIFL (Asia) Private Limited IIFL (Asia) Private Limited is wholly owned subsidiary which has been incorporated in Singapore to pursue financial sector activities in other Asian markets. Further to obtaining the necessary regulatory approvals, the company has been initially capitalized at 1 million Singapore dollars.
IIFL MANAGEMENT • THE MANAGEMENT TEAM
Mr. Nirmal Jain, Chairman & Managing Director Nirmal Jain, MBA (IIM, Ahmadabad) and a Chartered and Cost Accountant, founded India’s leading financial services company India Infoline Ltd. in 1995, providing globally acclaimed financial services in equities and commodities broking, life insurance and mutual funds distribution, among others.
Mr. R Venkataraman, Executive Director R Venkataraman, co-promoter and Executive Director of India Infoline Ltd., is a B. Tech (Electronics and Electrical Communications Engineering, IIT Kharagpur) and an MBA (IIM Bangalore). He joined the India Infoline board in July 1999.
THE BOARD OF DIRECTORS
Apart from Nirmal Jain and R Venkataraman, the Board of Directors of India Infoline Ltd. comprises: Mr. Nilesh Vikamsey, Independent Director Mr. Vikamsey, Board member since February 2005 - a practicing Chartered Accountant and partner (Khimji Kunverji & Co., Chartered Accountants), a member firm of HLB International, headed the audit
department till 1990 and thereafter also handles financial services, consultancy, investigations, mergers and acquisitions, valuations etc Mr Sat Pal Khattar, Non Executive Director Mr Sat Pal Khattar, - Board member since April 2001 - Presidential Council of Minority Rights member, Chairman of the Board of Trustee of Singapore Business Federation, is also a life trustee of SINDA, a non profit body, helping the under-privileged Indians in Singapore. He joined the India Infoline board in April 2001. Mr Kranti Sinha, Independent Director Mr. Kranti Sinha — Board member since January 2005 — completed his masters from the Agra University and started his career as a Class I officer with Life Insurance Corporation of India. Mr Arun K. Purvar, Independent Director Mr. A.K. Purvar – Board member since March 2008 – completed his Masters degree in commerce from Allahabad University in 1966 and a diploma in Business Administration in 1967.
PRODUCTS & SERVICES Equities India Infoline provided the prospect of researched investing to its clients, which was hitherto restricted only to the institutions. Research for the retail investor did not exist prior to India Infoline. India Infoline leveraged technology to bring the convenience of trading to the investor’s location of preference (residence or office) through computerized access. India Infoline made it possible for clients to view transaction costs and ledger updates in real time. The Company is among the few financial intermediaries in India to offer a complement of online and offline broking. The Companies network of branches also allows customers to place orders on phone or visit our branches for trading. Commodities India Infoline’s extension into commodities trading reconciles its strategic intent to emerge as a one stop solutions financial intermediary. Its experience in securities broking has empowered it with requisite skills and technologies. The Companies commodities business provides a contra-cyclical alternative to equities broking. The Company was among the first to offer the facility of commodities trading in India’s young commodities market (the MCX commenced operations in 2003). Average monthly turnover on the commodity exchanges increased from Rs 0.34 bn to Rs 20.02 bn.
Insurance An entry into this segment helped complete the client's product basket; concurrently, it graduated the Company into a one stop retail financial solutions provider. To ensure maximum reach to customers across India, it has employed a multi pronged approach and reaches out to customers via our Network, Direct and Affiliate channels. India Infoline was the first corporate in India to get the agency license in early 2001. Invest Online India Infoline has made investing in Mutual funds and primary market so effortless. Only registration is needed. No paperwork no queues and No registration charges. India Infoline offers a host of mutual fund choices under one roof, backed by in-depth research and advice from research house and tools configured as investor friendly. Wealth Management The key to achieving a successful Investment Portfolio is to have a carefully planned financial strategy based on a thorough understanding of the client's investment needs and risk appetite. The IIFL Private Wealth Management Team of financial experts will recommend an appropriate financial strategy to effectively meet customer’s investment requirements.
Asset Management India Infoline is a leading pan-India mutual fund distribution house associated with leading asset management companies. It operates primarily in the retail segment leveraging its existing distribution network to reach prospective clients. It has received the in-principle approval to set up a mutual fund. Portfolio Management IIFL Portfolio Management Service is a product wherein an equity investment portfolio is created to suit the investment objectives of a client. India Infoline invests the client’s resources into stocks from different sectors, depending on client’s risk-return profile. This service is particularly advisable for investors who cannot afford to give time or don't have that expertise for day-to-day management of their equity portfolio. Newsletters As a subscriber to the Daily Market Strategy, client’s get research reports of India Infoline research team on a priority basis. The Indiainfoline Weekly Newsletter is the flashback for the week gone by. A weekly outlook coupled with the best of the web stories from Indiainfoline and links to important investment ideas, Leader Speak and features is delivered in the client’s inbox every Friday evening.
CHAPTER V DATA ANALYSIS & INTERPRETATIONS
ANALYSIS OF AUTOMOBILE INDUSTRY
Over a period of more than two decades the Indian Automobile industry has been driving its own growth through phases. With comparatively higher rate of economic growth rate index against that of great global powers, India has become a hub of domestic and exports business. The automobile sector has been contributing its share to the shining economic performance of India in the recent years. To understand this industry for the purpose of investment we need to analyze it by the following approach: Fundamental Analysis (E.I.C Approach) a. Economy analysis b. Industry analysis c. Company analysis
Fundamental analysis is the study of economic, industry and company conditions in an effort to determine the value of a company s stock. Fundamental analysis typically focuses on key statistics in company s financial statements to determine if the stock price is correctly valued.
Most fundamental information focuses on economic, industry and company statistics. The typical approach to analyzing a company involves three basic steps:
1. Determine the condition of the general economy. 2. Determine the condition of the industry. 3. Determine the condition of the company.
1. ECONOMY ANALYSIS
Economic analysis is the analysis of forces operating the overall economy a country. Economic analysis is a process whereby strengths and weaknesses of an economy are analyzed. Economic analysis is important in order to understand exact condition of an economy. GDP and Automobile Industry In absolute terms, India is 16th in the world in terms of nominal factory output. The service sector is growing rapidly in the past few years. This is the pie- chart showing contributions of different sectors in Indian economy.
Today, automobile sector in India is one of the key sectors of the economy in terms of the employment. Directly and indirectly it employs more than 10 million people and if we add the number of people employed in the auto-component and auto ancillary industry then the number goes even higher. As the world economy slipped into recession hitting the demand hard and the banking sector takes conservative approach towards lending to corporate sector, the GDP growth has downgraded it to 7.1 per cent for 2008-09 and it has increased to 8.6% in 2010 by overcoming the setbacks of recession. Recession Auto industry in India had been hit hard by ongoing global financial recession. But it is in a good shape now. Much of this optimism resulted from renewed interest being shown in India auto industry by reputed overseas car makers. Nissan Motors which is a well known Japanese car making company regarded India automobile market as a global car manufacturing hub for future and invested huge amount in our market. There are some other automobile companies of world who have shown interest in India auto market. Major names among these are General Motors, Skoda Auto and Mercedes-Benz. These companies have major plans lined up for India auto industry. These are few signs of the revolutionized auto industry after recession.
Inflation The rise in inflation will have adverse impact on the industry that will not only see interest rates getting further hardened but also a drop in demand due to the squeeze in purchasing power. The effect of inflation has affected every sector which is related to car manufacturing and production. The increase in the price of fuel and the steel due to inflation has led to a slower growth rate of the car industry in India. Foreign Direct Investment The automobile sector in the Indian industry is one of the high performing sectors of the Indian economy. This has contributed largely in making India a prime destination for many international players in the automobile industry who wish to set up their businesses in India. Automatic approval for foreign equity investment up to 100 per cent of manufacture of automobiles and component is permitted. Exports Despite recession, the Indian automobile market continues to perform better than most of the other industries in the economy in coming future; more and more MNC’s coming in India to setup their ventures which clearly shows the scope of expansion. During April-January 2010, overall automobile exports registered a growth rate of 13.24 percent.
2. INDUSTRY ANALYSIS (AUTOMOBILE)
The automobile industry in India is the ninth largest in the world with an annual production of over 2.3 million units in 2008. In 2009, India emerged as Asia's fourth largest exporter of automobiles, behind Japan, South Korea and Thailand. The Automobile Industry is one of the fastest growing sectors in India. The increase in the demand for cars, and other vehicles, powered by the increase in the income is the primary growth driver of the automobile industry in India. In 2009, estimated rate of growth of India Auto industry is going to be 9% .The Indian automobile sector is far from being saturated, leaving ample opportunity for volume growth.
Segmentation of Automobile Industry The automobile industry comprises of Heavy vehicles (trucks, buses, tempos, tractors);
passenger cars; Two-wheelers; Commercial Vehicles; and Three-wheelers. Following is the segmentation that how much each sector comprises of whole Indian Automobile Industry. Industry life cycle The industrial life cycle is a term used for classifying industry life over time. Industry life cycle classification generally groups industries into one of four stages: pioneer, growth, maturity and decline. In the pioneer phase, the product has not been widely accepted or adopted. Business strategies are developing, and there is high risk of
failure. However, successful companies can grow at extraordinary rates. The Indian automobile sector has passed this stage quite successfully. The industry is growing rapidly, often at an accelerating rate of sales and earnings growth. Indian Automotive Industry is booming with a growth rate of around 15 % annually. The growth rate of the automobile industry in India is greater than the GDP growth rate of the economy, so the automobile sector can be very well be said to be in the growth phase. Swot analysis: A scan of the internal and external environment is an important part of the strategic planning process. Environmental factors internal to the firm usually can be classified as strengths (S) or weaknesses (W), and those external to the firm can be classified as opportunities (O) or threats (T). Such an analysis of the strategic environment is referred to as a SWOT analysis. SWOT analysis of the Indian automobile sector gives the following points: 1. Strengths • Large domestic market • Sustainable labor cost advantage • Competitive auto component vendor base • Government incentives for manufacturing plants • Strong engineering skills in design etc 2. Weaknesses • Low labor productivity
• • • •
High interest costs and high overheads make the production uncompetitive Various forms of taxes push up the cost of production Low investment in Research and Development Infrastructure bottleneck
3. Opportunities • Increasing challenges in consumer demands, technology development, and globalization. • • • Heavy thrust on mining and construction activity Increase in the income level Cut in excise duties
4. Threats • • • Ignorance of Research & development Rising interest rates Cut throat competition
3. COMPANY ANALYSIS
The company analysis shows the long-term strenght of the company that what is the financial position of the company in the market, where it stands among its competitors and who are the key drivers of the company, what are the future plans of the company, what are the policies of government towards the company and how the stake of the company divested among different groups of people.
Here, I have taken three companies namely TATA Motors, Maruti Suzuki and Mahindra and Mahindra for the purpose of fundamental analysis.
Tata Motors Limited is India's largest automobile company, with consolidated revenues of Rs. 92,519 crores (USD 20 billion) in 2009-10. It is the leader in commercial vehicles in each segment, and among the top three in passenger vehicles with winning products in the compact, midsize car and utility vehicle segments. The company is the world's fourth largest truck manufacturer, and the world's second largest bus manufacturer.
Maruti Suzuki is a subsidiary of Suzuki Motor Corporation Japan. More than half the numbers of cars sold in India wear Maruti Suzuki badge. They offer a full range of cars – from entry level Maruti 800 & Alto to stylish hatchback Ritz, A star, Swift, Wagon R, Estillo and sedans Dzire, SX4 and Sports Utility Vehicle Grand Vitara. Since inception, it has produced and sold over 7.5 million vehicles in India and exported over 500,000 units to Europe and other countries. Its turnover for the fiscal 2008-09 stood at Rs. 203,583 Million & Profit after Tax at Rs. 12,187 Million.
The Mahindra Group’s Automotive Sector is in the business of manufacturing and marketing utility vehicles and light commercial vehicles, including three-wheelers. It is the market leader in utility vehicles in India since inception, and currently accounts for about half of India’s market for utility vehicles. The Automotive Sector continues to be a leader in the utility vehicle segment with a diverse portfolio that includes mass transport as well as new generation vehicles like Scorpio, Bolero and the recently launched Xylo.
TATA MOTORS - Balance sheet Balance Sheet of Tata Motors
Mar '05 Sources of funds Total Share Capital Equity Share Capital Share Application Money Reserves Revaluation Reserves Networth Secured Loans Unsecured Loans Total Debt Total Liabilities Application of funds Gross Block Less: Accum. Depreciation Net Block Capital Work in Progress Investments Inventories Sundry Debtors Cash and Bank Balance Total Current Assets Loans and Advances Fixed Deposits Total CA, Loans & Advances Deffered Credit Current Liabilities Provisions Total CL & Provisions Net Current Assets Total Assets Contingent Liabilities Book Value (Rs) 6,611.95 3,454.28 3,157.67 538.84 2,912.06 1,601.36 811.32 345.26 2,757.94 2,831.16 1,659.78 7,248.88 0.00 6,142.74 1,126.06 7,268.80 -19.92 6,606.81 1,450.32 113.65 7,971.55 4,401.51 3,570.04 951.19 2,015.15 2,012.24 715.78 327.66 3,055.68 5,964.61 791.77 9,812.06 0.00 6,673.61 1,215.04 7,888.65 1,923.41 8,473.91 2,185.63 143.94 8,775.80 4,894.54 3,881.26 2,513.32 2,477.00 2,500.95 782.18 535.78 3,818.91 6,208.53 290.98 10,318.42 0.00 6,956.88 1,364.32 8,321.20 1,997.22 10,878.89 5,196.07 177.59 10,830.83 5,443.52 5,387.31 5,064.96 4,910.27 2,421.83 1,130.73 750.14 4,302.70 4,831.36 1,647.17 10,781.23 0.00 10,040.37 1,989.43 12,029.80 -1,248.57 14,120.02 5,590.83 202.70 13,905.17 6,259.90 7,645.27 6,954.04 12,968.13 2,229.81 1,555.20 638.17 4,423.18 5,909.75 503.65 10,836.58 0.00 10,968.95 1,877.26 12,846.21 -2,009.63 25,559.83 5,433.07 240.64 361.79 361.79 0.00 3,749.60 0.00 4,111.39 489.81 2,005.61 2,495.42 6,606.81 382.87 382.87 0.00 5,127.81 26.39 5,537.07 822.76 2,114.08 2,936.84 8,473.91 385.41 385.41 0.00 6,458.39 25.95 6,869.75 2,022.04 1,987.10 4,009.14 10,878.89 385.54 385.54 0.00 7,428.45 25.51 7,839.50 2,461.99 3,818.53 6,280.52 14,120.02 514.05 514.05 0.00 11,855.15 25.07 12,394.27 5,251.65 7,913.91 13,165.56 25,559.83 Mar '06 Mar '07 Mar '08 Mar '09
TATA MOTORS – Profit & Loss account Profit & Loss account of Tata Motors
Mar '05 Income Sales Turnover Excise Duty Net Sales Other Income Stock Adjustments Total Income Expenditure Raw Materials Power & Fuel Cost Employee Cost Other Manufacturing Expenses Selling and Admin Expenses Miscellaneous Expenses Preoperative Exp Capitalised Total Expenses Operating Profit PBDIT Interest PBDT Depreciation Other Written Off Profit Before Tax Extra-ordinary items PBT (Post Extra-ord Items) Tax Reported Net Profit Total Value Addition Preference Dividend Equity Dividend Corporate Dividend Tax Per share data (annualised) Shares in issue (lakhs) Earning Per Share (Rs) Equity Dividend (%) Book Value (Rs) 12,245.28 237.81 1,039.34 592.64 890.21 620.27 -282.43 15,343.12 2,000.05 2,404.03 234.30 2,169.73 450.16 67.12 1,652.45 -1.54 1,650.91 415.50 1,236.95 3,097.84 0.00 452.19 63.42 3,617.52 34.19 125.00 113.65 14,633.02 258.51 1,143.13 671.31 1,061.07 740.99 -308.85 18,199.18 2,146.36 2,998.77 350.24 2,648.53 520.94 73.78 2,053.81 0.00 2,053.81 524.93 1,528.88 3,566.16 0.00 497.94 69.84 3,828.34 39.94 130.00 143.94 19,879.56 327.41 1,367.83 872.95 1,505.23 1,051.49 -577.05 24,427.42 2,586.51 3,700.89 455.75 3,245.14 586.29 85.02 2,573.83 -0.07 2,573.76 660.37 1,913.46 4,547.86 0.00 578.07 98.25 3,853.74 49.65 150.00 177.59 20,891.33 325.19 1,544.57 904.95 2,197.49 964.78 -1,131.40 25,696.91 3,030.52 3,764.69 471.56 3,293.13 652.31 64.35 2,576.47 0.00 2,576.47 547.55 2,028.92 4,805.58 0.00 578.43 81.25 3,855.04 52.63 150.00 202.70 18,801.37 304.94 1,551.39 866.65 1,652.31 1,438.89 -916.02 23,699.53 1,723.10 2,644.39 704.92 1,939.47 874.54 51.17 1,013.76 15.29 1,029.05 12.50 1,001.26 4,898.16 0.00 311.61 34.09 5,140.08 19.48 60.00 240.64 20,262.61 3,063.44 17,199.17 403.98 144.00 17,747.15 Mar '06 23,490.55 3,401.92 20,088.63 852.41 256.91 21,197.95 Mar '07 31,089.69 4,425.44 26,664.25 1,114.38 349.68 28,128.31 Mar '08 33,123.54 4,355.63 28,767.91 734.17 -40.48 29,461.60 Mar '09 28,538.20 2,877.53 25,660.67 921.29 -238.04 26,343.92
MARUTI SUZUKI – Balance Sheet
Balance Sheet of Maruti Suzuki India
Mar '05 Sources Of Funds Total Share Capital Equity Share Capital Share Application Money Reserves Revaluation Reserves Networth Secured Loans Unsecured Loans Total Debt Total Liabilities Application Of Funds Gross Block Less: Accum. Depreciation Net Block Capital Work in Progress Investments Inventories Sundry Debtors Cash and Bank Balance Total Current Assets Loans and Advances Fixed Deposits Total CA, Loans & Advances Deffered Credit Current Liabilities Provisions Total CL & Provisions Net Current Assets Miscellaneous Expenses Total Assets Contingent Liabilities Book Value (Rs) 5,053.10 3,179.40 1,873.70 42.10 1,516.60 666.60 599.50 79.40 1,345.50 801.90 950.00 3,097.40 0.00 1,454.20 389.20 1,843.40 1,254.00 0.00 4,686.40 893.60 151.56 4,954.60 3,259.40 1,695.20 92.00 2,051.20 881.20 654.80 51.60 1,587.60 933.10 1,350.00 3,870.70 0.00 1,704.80 480.00 2,184.80 1,685.90 0.00 5,524.30 1,289.70 188.73 6,146.80 3,487.10 2,659.70 238.90 3,409.20 713.20 747.40 114.80 1,575.40 1,072.60 1,308.00 3,956.00 0.00 2,288.60 490.50 2,779.10 1,176.90 0.00 7,484.70 2,094.60 237.23 7,285.30 3,988.80 3,296.50 736.30 5,180.70 1,038.00 655.50 324.00 2,017.50 1,173.00 0.00 3,190.50 0.00 2,718.90 369.50 3,088.40 102.10 0.00 9,315.60 2,734.20 291.28 8,720.60 4,649.80 4,070.80 861.30 3,173.30 902.30 918.90 239.00 2,060.20 1,809.80 1,700.00 5,570.00 0.00 3,250.90 380.70 3,631.60 1,938.40 0.00 10,043.80 1,901.70 323.45 144.50 144.50 0.00 4,234.30 0.00 4,378.80 307.60 0.00 307.60 4,686.40 Mar '06 144.50 144.50 0.00 5,308.10 0.00 5,452.60 71.70 0.00 71.70 5,524.30 Mar '07 144.50 144.50 0.00 6,709.40 0.00 6,853.90 63.50 567.30 630.80 7,484.70 Mar '08 144.50 144.50 0.00 8,270.90 0.00 8,415.40 0.10 900.10 900.20 9,315.60 Mar '09 144.50 144.50 0.00 9,200.40 0.00 9,344.90 0.10 698.80 698.90 10,043.80
MARUTI SUZUKI – Profit & Loss account Profit & Loss account of Maruti Suzuki
Mar '05 Income Sales Turnover Excise Duty Net Sales Other Income Stock Adjustments Total Income Expenditure Raw Materials Power & Fuel Cost Employee Cost Other Manufacturing Expenses Selling and Admin Expenses Miscellaneous Expenses Preoperative Exp Capitalized Total Expenses Operating Profit PBDIT Interest PBDT Depreciation Other Written Off Profit Before Tax Extra-ordinary items PBT (Post Extra-ord Items) Tax Reported Net Profit Total Value Addition Preference Dividend Equity Dividend Corporate Dividend Tax Per share data (annualized) Shares in issue (lakhs) Earning Per Share (Rs) Equity Dividend (%) Book Value (Rs) 2,889.10 29.55 40.00 151.56 2,889.10 41.16 70.00 188.73 2,889.10 54.07 90.00 237.23 2,889.10 59.91 100.00 291.28 2,889.10 42.18 70.00 323.45 13,458.20 2,411.90 11,046.30 187.50 141.70 11,375.50 8,650.20 58.10 196.00 215.70 374.27 121.73 -22.40 9,593.60 1,594.40 1,781.90 36.00 1,745.90 456.80 16.30 1,272.80 51.40 1,324.20 446.50 853.60 943.40 0.00 57.80 8.20 14,898.80 2,700.90 12,197.90 184.40 199.70 12,582.00 9,423.40 57.20 228.70 302.40 349.51 145.39 -6.70 10,499.90 1,897.70 2,082.10 20.40 2,061.70 285.40 0.00 1,776.30 5.40 1,781.70 560.90 1,189.10 1,076.50 0.00 101.10 14.20 17,358.40 2,552.00 14,806.40 338.10 -200.70 14,943.80 10,863.00 97.40 288.40 392.40 483.26 239.44 -14.30 12,349.60 2,256.10 2,594.20 37.60 2,556.60 271.40 0.00 2,285.20 33.40 2,318.60 705.30 1,562.00 1,486.60 0.00 130.00 21.90 21,200.40 3,133.60 18,066.80 494.00 336.30 18,897.10 13,958.30 147.30 356.20 523.30 521.48 287.62 -19.80 15,774.40 2,628.70 3,122.70 59.60 3,063.10 568.20 0.00 2,494.90 76.60 2,571.50 763.30 1,730.80 1,816.10 0.00 144.50 24.80 23,381.50 2,652.10 20,729.40 491.70 -356.60 20,864.50 15,983.20 193.60 471.10 716.10 751.06 303.44 -22.30 18,396.20 1,976.60 2,468.30 51.00 2,417.30 706.50 0.00 1,710.80 37.90 1,748.70 457.10 1,218.70 2,413.00 0.00 101.10 17.20 Mar '06 Mar '07 Mar '08 Mar '09
MAHINDRA & MAHINDRA – Balance Sheet Balance Sheet of Mahindra and Mahindra
Mar '05 Sources Of Funds Total Share Capital Equity Share Capital Share Application Money Preference Share Capital Reserves Revaluation Reserves Networth Secured Loans Unsecured Loans Total Debt Total Liabilities Application Of Funds Gross Block Less: Accum. Depreciation Net Block Capital Work in Progress Investments Inventories Sundry Debtors Cash and Bank Balance Total Current Assets Loans and Advances Fixed Deposits Total CA, Loans & Advances Deffered Credit Current Liabilities Provisions Total CL & Provisions Net Current Assets Miscellaneous Expenses Total Assets Contingent Liabilities Book Value (Rs) 116.01 116.01 0.00 0.00 1,881.93 14.32 2,012.26 336.82 715.80 1,052.62 3,064.88 2,676.51 1,335.56 1,340.95 133.93 1,189.79 759.83 511.53 198.07 1,469.43 461.07 425.91 2,356.41 0.00 1,480.87 499.71 1,980.58 375.83 24.38 3,064.88 758.14 178.95 Mar '06 233.40 233.40 0.00 0.00 2,662.14 13.33 2,908.87 216.68 666.71 883.39 3,792.26 2,859.25 1,510.27 1,348.98 205.46 1,669.09 878.74 637.97 258.39 1,775.10 558.02 471.92 2,805.04 0.00 1,711.23 543.14 2,254.37 550.67 18.05 3,792.25 946.36 124.06 Mar '07 238.03 238.03 0.00 0.00 3,302.01 12.86 3,552.90 106.65 1,529.35 1,636.00 5,188.90 3,180.57 1,639.12 1,541.45 329.72 2,237.46 878.48 700.89 415.89 1,995.26 1,011.50 910.18 3,916.94 0.00 2,138.77 715.43 2,854.20 1,062.74 17.55 5,188.92 1,008.27 148.72 Mar '08 239.07 239.07 0.00 0.00 4,098.53 12.47 4,350.07 617.26 1,969.80 2,587.06 6,937.13 3,552.64 1,841.68 1,710.96 649.94 4,215.06 1,084.11 1,004.88 310.58 2,399.57 866.19 550.65 3,816.41 0.00 2,525.31 943.46 3,468.77 347.64 13.53 6,937.13 985.35 181.43 Mar '09 272.62 272.62 0.00 0.00 4,959.26 12.09 5,243.97 981.00 3,071.76 4,052.76 9,296.73 4,893.89 2,326.29 2,567.60 646.73 5,786.41 1,060.67 1,043.65 635.61 2,739.93 1,402.45 938.82 5,081.20 0.00 3,520.20 1,277.56 4,797.76 283.44 12.55 9,296.73 1,220.39 191.91
MAHINDRA & MAHINDRA – Profit & Loss account Profit & Loss account of Mahindra and Mahindra
Mar '05 Income Sales Turnover Excise Duty Net Sales Other Income Stock Adjustments Total Income Expenditure Raw Materials Power & Fuel Cost Employee Cost Other Manufacturing Expenses Selling and Admin Expenses Miscellaneous Expenses Preoperative Exp Capitalized Total Expenses Operating Profit PBDIT Interest PBDT Depreciation Other Written Off Profit Before Tax Extra-ordinary items PBT (Post Extra-ord Items) Tax Reported Net Profit Total Value Addition Preference Dividend Equity Dividend Corporate Dividend Tax Per share data (annualized) Shares in issue (lakhs) Earning Per Share (Rs) Equity Dividend (%) Book Value (Rs) 1,116.48 45.92 130.00 178.95 2,334.00 36.72 100.00 124.06 2,380.33 44.88 115.00 148.72 2,390.73 46.15 115.00 181.43 2,726.16 30.69 100.00 191.91 7,649.51 1,054.82 6,594.69 209.74 174.05 6,978.48 4,829.29 52.64 464.25 48.01 545.57 141.95 -31.84 6,049.87 718.87 928.61 30.24 898.37 184.05 0.15 714.17 0.00 714.17 201.50 512.67 1,220.58 0.00 150.81 21.15 Mar '06 9,273.09 1,136.50 8,136.59 455.20 103.20 8,694.99 5,885.21 57.46 551.78 54.44 667.99 177.89 -26.53 7,368.24 871.55 1,326.75 26.96 1,299.79 200.01 0.28 1,099.50 0.00 1,099.50 242.40 857.10 1,483.04 0.00 243.97 34.22 Mar '07 11,231.99 1,310.65 9,921.34 531.17 6.41 10,458.92 6,937.16 65.19 666.15 68.80 891.29 210.03 -47.10 8,791.52 1,136.23 1,667.40 19.80 1,647.60 209.59 0.33 1,437.68 -19.19 1,418.49 350.10 1,068.39 1,854.37 0.00 282.23 42.50 Mar '08 12,894.94 1,584.57 11,310.37 575.96 149.11 12,035.44 7,963.82 91.33 853.65 73.35 1,108.33 257.84 -46.49 10,301.83 1,157.65 1,733.61 87.59 1,646.02 238.66 0.59 1,406.77 0.00 1,406.77 303.40 1,103.37 2,338.01 0.00 282.61 38.48 Mar '09 14,713.03 1,587.05 13,125.98 369.85 -156.29 13,339.54 9,208.71 98.69 1,024.61 75.36 954.83 558.07 -42.83 11,877.44 1,092.25 1,462.10 134.12 1,327.98 291.51 0.00 1,036.47 4.07 1,040.54 199.69 836.78 2,668.73 0.00 278.83 33.23
RATIO ANALYSIS OF TATA MOTORS, MARUTI SUZUKI AND MAHINDRA & MAHINDRA
EARNINGS PER SHARE
EARNINGS PER SHARE YEARS TATA MARUTI MAHINDRA Mar'05 34.19 29.55 45.92 Mar'06 39.94 41.16 36.72 Mar'07 49.65 54.07 44.88 Mar'08 52.63 59.91 46.15 Mar'09 19.48 42.18 30.69
EARNINGS PER SHARE
70 60 50 40 30 20 10 0 Mar'05 Mar'06 Mar'07 YEARS Mar'08 Mar'09
TATA MARUTI MAHINDRA
Interpretations EPS measures the profit available to the equity shareholders per share, that is, the amount that they can get on every share held. Till 2008 TATA and Maruti had a rising EPS but in 2009 both of them fall and the effect is more on Tata motors because of the slump in domestic and international markets and sharp fall in sales and net profits which resulted in low EPS. Mahindra is not much affected as its sales have increased from the previous year. But as trend shows Mahindra motors has potential so a shareholder can expect better in future.
SALES YEARS TATA MARUTI MAHINDRA Mar'05 20,262.61 13,458.20 7,649.51 Mar'06 23,490.55 14,898.80 9,273.09 Mar'07 31,089.69 17,358.40 11,231.99 Mar'08 33,123.54 21,200.40 12,894.94 Mar'09 28,538.20 23,381.50 14,713.03
35,000.00 30,000.00 25,000.00 20,000.00 15,000.00 10,000.00 5,000.00 0.00 Mar'05 Mar'06 Mar'07 YEARS Mar'08 Mar'09
Rs in Crores
TATA MARUTI MAHINDRA
Interpretations Maruti and Mahindra show a positive trend in sales over the past five years. Though slowdown in the economy brought hurdles but these companies have potential to grow in future as lots of products are still to add in their portfolio. Moreover increased demand in foreign market also seems to be a positive signal for better future. TATA has witnessed a decline in sales of each segment. Maruti and Mahindra are going swiftly.
DIVIDEND PER SHARE
DIVIDEND PER SHARE YEARS TATA MARUTI MAHINDRA Mar'05 12.5 2 13 Mar'06 13 3.5 10 Mar'07 15 4.5 11.5 Mar'08 15 5 11.5 Mar'09 6 3.5 10
DIVIDEND PER SHARE 20 15 Rs 10 5 0 Mar'05 Mar'06 Mar'07 YEARS Mar'08 Mar'09 TATA MARUTI MAHINDRA
Interpretations Tata motors and Maruti Suzuki both the companies showed a positive trend in paying dividends till 2008, but the scenario changed in 2009 as both the company’s dividend per share fell. According to graph Tata’s dividend has fallen drastically while Maruti stick to below 5 per share. Mahindra has made a slight reduction from rs.11.5 per share in 2008 to rs.10 per share this year. Therefore Mahindra would be the best option for an investor.
RETURN ON INVESTMENT (ROI)
Return on Investment YEARS TATA MARUTI MAHINDRA Mar'05 30.09 19.49 25.66 Mar'06 27.74 21.81 29.6 Mar'07 27.96 22.79 30.18 Mar'08 25.98 20.56 25.51 Mar'09 8.09 13.04 16.03
RETURN ON INVESTMENT
35 30 25 20 15 10 5 0 Mar'05 Mar'06 Mar'07 YEARS Mar'08 Mar'09
TATA MARUTI MAHINDRA
Interpretations ROI is one of the most important ratios used for measuring the overall efficiency of a firm and determines whether the investments in the firms are attractive or not. According the graph, ROI of TATA has declined to a large extent in 2009, making it a quite risky investment. Maruti’s ROI has also declined but Mahindra’s ROI is showing a higher rate compared to TATA and Maruti in 2009. As the investors would like to invest only where the return is higher, Mahindra would be attractive for investment.
DIVIDEND PAYOUT RATIO
DIVIDEND PAYOUT RATIO YEARS TATA MARUTI MAHINDRA Mar'05 41.68 7.73 33.54 Mar'06 37.13 9.69 32.45 Mar'07 35.34 9.72 30.39 Mar'08 32.51 9.78 29.1 Mar'09 34.52 9.7 37.29
DIVIDEND PAYOUT RATIO 50 40 % 30 20 10 0 Mar'05 Mar'06 Mar'07 YEARS Mar'08 Mar'09 TATA MARUTI MAHINDRA
Interpretations Dividend payout ratio is the percentage of earnings paid to shareholders in dividends. It provides an idea to an investor of how well earnings support the dividend payments. Maruti has maintained a stable payout ratio. Both TATA and Mahindra have increased their payout ratio in which Mahindra shows a higher payout ratio.
PRICE-EARNINGS RATIO (P/E RATIO)
PRICE-EARNINGS RATIO YEARS TATA MARUTI MAHINDRA Mar'05 19.09 21.5 11.1 Mar'06 22.5 22.5 24.6 Mar'07 14.9 18.3 19.1 Mar'08 3.02 8.6 5.9 Mar'09 40.6 36.9 35.2
PRICE EARNINGS RATIO 50 40 % 30 20 10 0 Mar'05 Mar'06 Mar'07 YEARS Mar'08 Mar'09 TATA MARUTI MAHINDRA
Interpretations This ratio is widely used by investors to decide whether or not to buy shares in a particular company. As per the graph, in 2008, the P/E ratio of the three companies was the lowest compared to the previous years. TATA has the highest P/E ratio in 2009 which indicates that it is overvalued, so the investors can benefit by selling the shares. An investor can go for Mahindra as its P/E ratio is the lowest in 2009 which indicates that it is undervalued and there is a scope for growth in the future.
CHAPTER VI FINDINGS, SUGGESTIONS & CONCLUSION
FINDINGS From the data analysis and interpretations of the ratios of three companies’ viz. Tata Motors, Maruti Suzuki and Mahindra and Mahindra, the following findings have been given:
The three companies were performing well till 2008 with a positive trend in the earnings per share. But there was a downward trend in 2009. Especially, TATA has witnessed a steep fall in the year 2009.
The sales trend has been upward and positive in case of all the three companies. The sales growth looks positive but in the year 2009, TATA’s sales have declined whereas Maruti and Mahindra have maintained the same upward positive trend.
In case of dividend per share, there were fluctuations during the period 20052009. Due to recession, the dividends per share have declined in all the three companies. Tata’s dividend has fallen drastically while Maruti stick to below 5 per share. Mahindra has made a slight reduction from rs.11.5 per share in 2008 to rs.10 per share this year.
The return on investment has been fluctuating since 2005 and the year 2009 witnessed low returns in case of all the companies amongst which TATA has the least rate of return. Compared to the three companies, Mahindra has the highest ROI in 2009.
Maruti had a stable dividend payout ratio since 2005. TATA and Mahindra have increased their payout ratio in which Mahindra shows a higher payout ratio.
The three companies have witnessed a low price earnings ratio in 2008 compared to the previous years. But the ratio increased in 2009 in three companies. TATA has the highest P/E ratio in 2009 which indicates that it is overvalued and Mahindra’s P/E ratio is the lowest in 2009 which indicates that it is undervalued and there is a scope for growth in the future.
By analyzing the current trend of Indian Economy and Automobile Industry I have found that being a developing economy there is lot of scope for growth and this industry still has to cross many levels so there are huge opportunities to invest in and this is being proved as more and more foreign companies are setting up there ventures in India. Increase in income level, increase in consumer demand, technology development, globalization, foreign investments are few of the opportunities which the industry has to explore for developing the economy.
SUGGESTIONS By analyzing the automobile industry with the help of fundamental analysis, it has been revealed that this industry has a lot of potential to grow. So recommending investing in Automobile industry with no doubt is going to be a good and smart option because this industry is booming like never before not only in India but all over the world. The three giants of Indian Automobile industry viz. TATA Motors, Maruti Suzuki and Mahindra and Mahindra have outperformed in the industry.
From the company analysis, we can know that Mahindra would be a better option for an investor compared to TATA and Maruti. In view of the slump in the domestic and international market, TATA has recorded a slowdown in sales and income level. Its Earnings per share has also declined drastically. It has reduced its dividend per share from rs.15 in the previous year to rs.6 in 2009. The return on investment is also very low. In view of all these, TATA is not a better option for an investor.
The global turmoil in financial markets has affected Maruti also. The company is maintaining a stable position. Its sales have grown over past five years. Inspite of the general economic slowdown, the sales of Maruti Suzuki increased from Rs 21200 Crore to Rs 23381 Crore. As it is maintaining a stable position, it can be recommended that for now Maruti share price shows
that it’s a time to hold the position or buy more shares as there is scope of further rise in share prices.
Despite the challenging business environment, Mahindra has maintained its upward sales level. Its Return on Investment is much higher compared to TATA and Maruti. The dividend per share is rs.10 which is higher amongst the three companies. The company has potential to grow. It would be the best option for the investor.
Investing in Maruti Suzuki for long time could be a good option whereas in TATA motors there is a chance of getting correction, as it already went on high side in a very short period of time and is experiencing a downfall from 2008.
Holding the shares for long time could be a wrong step and at this point of time those who invested earlier can book their profits. As Mahindra’s shares are undervalued, the investor can buy these shares. This is because a relatively lower P/E would save investors from paying a very high price that does not justify the value of an investment.
Few Suggestions for “Right Stock Selection” There are three factors which an investor must consider for selecting the right stocks.
Business: An investor must look into what kind of business the company is doing, visibility of the business, its past track record, capital needs of the company for expansion etc.
Balance Sheet: The investor must focus on its key financial ratios such as earnings per share, price-earning ratio; debt-equity ratio, dividends per share etc and he must also check whether the company is generating cash flows.
Bargaining: This is the most important factor which shows the true worth of the company. An investor needs to choose valuation parameters which suit its business.
• • • • • •
Invest for long term in equity markets Align your thought process with the business cycle of the company. Set the purpose for investment. Long term goals should be the objective of equity investment. Disciplined investment during market volatility helps attains profits. Planning, Knowledge and Discipline are very crucial for investment.
CONCLUSION The Automobile industry in India is the seventh largest in the world with an annual production of over 2.6 million units in 2009. In 2009, India emerged as Asia's fourth largest exporter of automobiles, behind Japan, South Korea and Thailand. The collapse in market place witnessed unprecedented turbulence in the wake of global financial meltdown. A runaway inflation touching a high point of 12% early in the year, the tight monetary policies followed by the authorities for most of the year to control inflation with the consequent high interest rates and weak consumer demand, have collectively had a devastating effect on the automotive sector. Maruti Suzuki India LTD. company has a trend of growth from till 2008.During the financial year 2008-09 the there is downfall in the growth of the company. The main reason behind this downfall is because of the global recession. The downfall of net profit during the financial year 2008-09 is 29.6% over the financial year 2007-2008. TATA Motors, which was trying to consolidate its leadership position in the market, also had to face the impact of global meltdown. Amid the crippling economic crisis, Tata purchased Britain’s Jaguar Land Rover (JLR) from Ford Motor Company. Acquiring JLR saddled Tata with some tough losses. Dividends and earnings remain low.
Inspite of it being a tough year for all the companies across the globe and in India, Mahindra has given a satisfactory performance. At present its shares are undervalued giving it a potential for growth. Global recession had a dampener effect on the growth of automobile industry but it was a short term phenomenon. The industry is bouncing back. One factor favoring this point is that India has become a hot destination for companies of diverse nature to invest in. Cut throat competition among top companies, lots of new car and vehicle model launches at regular intervals keeps the Indian auto sector moving. A continuous effort at cost cutting and improving productivity will help the companies in making reasonable profits despite the impact of higher commodity prices and weaker rupee.
The analysis gives an optimistic view about the industry and its growth which recommends the investors to keep a good watch on the major players to benefit in terms of returns on their investments.
BIBLIOGRAPHY Text Books
Security Analysis and Portfolio Management by Punithavathy Pandian, Vikas Publications.
♦ Security analysis and portfolio management by V.A. Avadhani
Financial Markets and Services by Gordon and Natarajan, Himalaya Publications. Financial Management by Shashi K Gupta and R. K Sharma, Kalyani Publications.
Economic times Business line Websites
♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ www.nseindia.com www.bseindia.com www.investopedia.com www.moneycontrol.com www.indiainfoline.com www.sebi.gov.in www.tatamotors.com www.marutisuzuki.com www.mahindra.com www.yahoofinance.com
CNBC TV18 – “The Informed Investor” supported by SEBI and presented by NSE
This action might not be possible to undo. Are you sure you want to continue?
We've moved you to where you read on your other device.
Get the full title to continue reading from where you left off, or restart the preview.