FUNDAMENTAL ANALYSIS

FINANCIAL TERMS

1. ADR: American Depository Receipt. It is an instrument traded at U.S. exchanges a fixed number of
shares of a foreign company that is traded in the foreign country. The ADR route enables companies to raise funds in the U.S. financial markets.

2. Asset Management Company ( AMC ): A company set up for floating and managing schemes of a
Mutual Fund.

3. Balance of payments: A statement that contains details of all the economic transactions of a country
with the rest of the world, for a given time period, usually one year. The statement has two parts: the Current Account & the Capital Account.

4. Bond: A long term debt instrument on which the issuer pays interest periodically, known as ‘Coupon’.
Bonds are secured by COLLATERAL in the form of immovable property. While generally, bonds have a definite MATURITY,.

5. Book Value: It is the amount of NET ASSETS that would be available per EQUITY SHARE, after a
company pays off all LIABILITIES including PREFERENCE SHARES from the sale of proceeds of all its ASSETS liquidated at BALANCE SHEET values.

6. Budget: A financial plan that projects receipts and payments of an entity covering a specific period of
time, usually one year. Its primary purpose is to achieve financial control. Budgets could be distinguished on the basis of time span, function and flexibility.

7. Call Money: A term used for funds borrowed and lent by banks for overnight use. This is a market
which banks access in shortfall in funds and the interest rate is determined by supply and demand conditions.

8. Cash Reserve Ratio ( CRR ) : A legal obligation on all Scheduled Commercial Banks excluding
Regional rural Banks to maintain certain reserves ion the form of cash with Reserve Bank of India. The reserves, to be maintained over a fortnight, are computed as a percentage of a bank’s net demand and time liabilities.

9. Central Bank: The premier bank in a country that discharges the responsibilities of issuing currency,
managing MONEY SUPPLY by appropriate measures in order to maintain price stability and economic growth. In India Reserve Bank of India (RBI) is the Central Bank.

10. Certificate of Deposit (CD): A negotiable interest bearing debt instrument of Specific Maturity issued
by banks. A CD represents the title to a TIME DEPOSIT with a bank, but is a liquid instrument since it can be traded in the SECONDARY MARKET. It is a money market

11. Commercial Paper (CP): A short term, unsecured PROMISSORY NOTE issued by BLUE CHIP
companies. Like other MONEY MARKET instrument, it is issued at a DISOCUNT on the FACE VALUE and is freely marketable.

12. Correction: A reaction in stock prices that reverses an excessive rise or decline posted earlier. 13. Credit rating: The exercise of assessing the credit record, integrity and capability of a prospective
borrower to meet debt obligations. Credit rating relates to companies, individuals and even countries.

14. Debentures: A debt security issued by companies, having a certain MATURITY and bearing a stated
COUPON RATE. Debentures may be unsecured or secured by ASSETS such as land and buildings of the issuing company. Debenture holder have a prior claim on the earnings ( Coupon ) and assets in the event of liquidation, as compared to Preference and equity shareholders.

15. D: E Ratio: This ratio is used to analyze FINANCIAL LEVERAGE. It is a structural ratio that gauges the
level of debt financing and is worked out by dividing total debt, short term and long term by Net Worth.

16. Demutualization: The process of separation of ownership, trading rights and management of stock
exchanges, previously operating as a mutual set-up. The objective of separating the right to trade from ownership and management is to lessen conflict of interest among trading members and thereby enhance investor protection.

17. Depository: A system of computerized book-entry of securities. This arrangement enables a transfer of
shares through a mere book-entry rather than the physical movement of certificates. This is because the scrips are ‘dematerialized’ under the system.

18. Direct Taxes: Taxes whose impact and incidence are on the same person. The taxes levied on income,
and wealth tax are instances of direct taxes.

19. Dividend: The payment made by a company to its shareholders. Legal and financial considerations
have a bearing on the level of dividend to be paid. For instance, dividends may be paid out of profits alone; so also a growing company needs funds to finance its expansion and hence may pay only modest dividend.

20. EPS: The net profits of a company expressed on per share basis. It is arrived at by dividing the figure of
profits after taxes and DIVIDENDS paid on PREFERENCE SHARES, if any, by the number of equity shares outstanding.

21. Equity Share: A security that represents ownership interest in a company. It is issued to those who
have contributed capital in setting up an enterprise. Apart from Public Issue, equity shares may originate through an issue of Bonus Shares, Convertible Securities, Warrants, GDRs, etc.

22. Escrow: Cash, securities or other valuable instruments that are held by a third party to ensure that the
obligations under a contract are discharged. The escrow mechanism is a technique of mitigating the risk to lenders and it is used typically in infrastructure projects such as power, roads or telecom.

23. Face Value: The nominal value of a security. The face value helps to know the share of ownership in a
company.

24. Financial Institutions: A non-banking financial intermediary carrying on any of the activities specified in
the relevant section of the RBI Act. These activities include lending , investing in shares and other securities, HIRE PURCHASE, insurance.

25. Fixed Exchange rate: The exchange rate of a currency which is pegged to a predetermined value of
another currency or to gold.

26. Floating Exchange rate: The exchange rate of a currency that is allowed to float, either within a narrow
specified band around a reference rate, or totally freely according to market forces.

27. FCCB: An unsecured debt instrument denominated in a foreign currency and issued by an Indian
Company which is convertible into shares or in some cases into GDRs at a predetermined rate. That is, the conversion price and the exchange rate are fixed.

28. GDR: An acronym for Global Depository Receipt, It is an instrument denominated in foreign currency
that enables foreign investors to trade in securities of alien companies not listed at their exchanges.

29. Govt. Securities: These are long term debt securities of varying maturities extending up to 30 years
issued by the central and state governments as well as municipal corporations, electricity boards certain financial institutions like IDBI and NABARD and other bodies.

30. GDP: This is a comprehensive measure of the economic activity that takes place in a country during a
certain period. It is a total value of final goods and services produced in an economy in a year.

31. Indirect Taxes: These are taxes levied on goods and services which enter into the basket of
consumption or use by individuals or organizations, such as sales tax and Excise duty.

32. Inflation: The phenomenon of rising prices of goods and services in general. It can come about due to
a scarcity of supplies in relation to demand; this is known as ‘demand pull inflation’.

33. LIBOR: An abbreviation for London Inter Bank Offer Rate, which is an average of the interest rates at
which leading international banks are prepared to offer term EURODOLLAR DEPOSITS to each other.

34. Listing: The grant of approval for dealing in certain security at a stock exchange. Consequently,
companies must pay their respective exchanges, an annual listing fee which is linked to the paid up capital.

35. Market Capitalization: The value of equity shares outstanding at prevailing market prices. Number of
shares X Market price of each share.

36. Merchant Banker: An intermediary who provides various financial services, other than lending money
such as managing PUBLIC ISSUE, UNDERWRITING new issues, arranging Loan and giving advice on Portfolio management., financial restructuring, mergers and acquisitions.

37. Money Market: The segment of financial markets wherein financial instruments having maturities of
less than one year are traded, e.g. T-Bills, CPs.

38. Mutual Funds: An organization that mobilizes the surpluses of savers and invests the same in different
securities.

39. National Index: AN index of 100 stocks quoted nationwide on different exchanges is computed by the
Statistics Department of the Bombay Stock Exchange: hence it is called as BSE National Index.

40. NBFC: A financial intermediary that is engaged in certain financing activities other than banking. These
activities are specified in Non Banking Financial Companies ( Reserve Bank ) Directions. They include

A public issue entails numerous tasks such as organizing the syndicate of UNDERWRITERS. 48. 54. An underwriting arrangement serves as a backup in the event of inadequate subscription to a PUBLIC ISSUE. The method of compilation is similar to the one used in Standard & Poor’s Indices. CHIT FUNDS. Rally: A brisk rise in stocks prices after a decline. housing finance. . Paid up Capital: The amounts actually paid by shareholders and also credited as paid up. T-Bill: A short term debt instrument of the government of India. 41. BROKERS. Proxy: A document that facilitates the transfer of shareholder’s right to vote in favor of another person why may represent and vote on his/her behalf at a general meeting of the company. 44. NPA: A credit facility which ceases to generate income for a bank. Stock Split: Adjustment effected in the FACE VALUE of shares and the number of shares outstanding. such that no change occurs in the total paid up capital. Redemption: The repayment of an obligation such as DEBENTURES or redeemable Preference share.equipment leasing. 53. preparation of the prospectus and fulfillment of several formalities. This security bears no Default Risk and has degree of Liquidity and low Interest Rate Risk. 43. Sensitive Index: A statistical measure of the prices of 30 selected stocks traded on Bombay Stock Exchange. RIGHTS OR BONUS SHARES as the case may be. Record date: The date on which an investor’s name must appear in the Register of members I order to receive DIVIDENDS. 47. 51. The term connotes a short surge in prices. 45. NIDHIS. 50. Public issue: An invitation to the public at large subscribe to shares or other securities of a company. rather than a sustained rise in the market. 42. 46. In April 2001. Private equity funds: The fund belonging to private investors that typically invests in the equity of upcoming companies by a negotiated deal. 49. This number is also known as the “Multiple’. Private placement: The sale. 55. The redemption usually takes place at Maturity. P/E ratio: The market price of a share divided by EARNINGS PER SHARE. of its securities to one or few FINANCIAL INSTITUIONS through a process of direct negotiations or to a limited number of individual investors. 52. Secondary Market: The segment of FINANCIAL MARKETS in which securities that have already been issued are traded. 56. however in some cases it could be earlier. Underwriter: It means to contractually guarantee subscription to shares or other securities. HIRE PURCHASE. Premium: The term usually refers to the increment of price over the FACE VALUE of a security or over the market price generally quoted. USA. Thus the secondary market comprises security exchanges and also transactions taking place elsewhere. by a company. PRIMARY DEALERS and investments in financial securities. it was decided that a loan should be classified as non-performing if the interest and / or installments of principal remain overdue for a period of over 90 days. is often used by investors and analysts to determine the upward potential of a share by comparing it multiplier to that of the particular industry as a whole.

Venture Capital: The long term financial assistance to projects being set up to introduce new products/inventions/innovations or to employ or commercialize new technologies. Yield: The return earned on an investment. luxury items.000 post offices spread all over the country as on March 31. 58. equities (or stocks) and cash equivalents(or money market instruments). 2001. popularly known as NSC. the maximum loss that an entity such as a bank could incur on its exposures at a point in time. usually expressed as a percentage. Warrant: An instrument issued by a company that carries a right to buy a specified number of shares at a stated price form the company within a stipulated period. Public Provident Fund . real estate. stocks. These time deposits are meant for those investors who want to deposit a lump sum for a fixed period. automobiles etc. and 5years National Savings Certificate National Savings Certificate. or cash. The three primary asset classes are bonds (or fixed income). Venture capital entails high risk but has the promise of attractive returns. • Postal Services India possesses the largest postal network in the world with 155. Period of maturity of a certificate is six years. Interest accrued on the certificates every year is liable to income tax but deemed to have been reinvested. Thus. treasured metals. The interest is compounded annually and is added to the principal amount. Post office time deposit account is just like the bank fixed deposit account. VaR: A measure of risk that indicates the maximum amount at stake.57. Bank Fixed Deposits Bank Fixed Deposits are also known as Term Deposits. Post Office Time Deposit Account. It is higher in case of longer maturity period. In a Fixed Deposit Account. determined at a certain confidence level. Some other asset class includes natural resources. Asset class can alternatively be defined as the collection of securities demonstrating similar behaviors based on same policies and regulations. 60. There is great flexibility in maturity period and it ranges from 7days to 10 years. is a time-tested tax saving instrument that combines adequate returns with high safety. stocks. 3year. 59. that is. The amount can be deposited for 1year. 2year. a certain sum of money is deposited in the bank for a specified time period with a fixed rate of interest. which includes bonds. foreign currency. The rate of interest for Bank Fixed Deposits depends on the maturity period. • ASSET CLASSES Asset class is a sort of investment. Post Office Recurring Deposit Account.

A mutual fund is a group of investors operating through a fund manager to purchase a diverse portfolio of stocks or bonds. Compared with government bonds. • Shares Shares are also known as equities. This is because companies can only stay in business as long as they're profitable. Interest credited every year is tax-free • Government Bonds These are issued by governments across the world to raise money for public spending.Public Provident Fund. they usually carry a higher rate of interest as they are more susceptible than the government to the economy. as in real terms the value of money decreases over a period of time. And like government bonds. is calculated and credited to the accounts at the end of each financial year. If a company cannot pay back the loan. Interest at the rate notified by the Central Government from time to time. Income Tax rebate is available "on the deposits made". It also serves as a retirement planning tool for many of those who do not have any structured pension plan covering them. the rate of interest is 8% per annum. Basically you lend money to a government and it aims to pay you back on a set maturity date. The account matures for closure after 15 years. • Corporate Bonds These are issued by large companies to raise money for different purposes. Presently. you could lose all your money. • Mutual Funds Mutual Fund is an instrument of investing money. You also have a share in the value of the company's assets. is a savings cum tax saving instrument. through its share price. popularly known as PPF. Therefore. • Property . prices move up and down with market conditions. Premature withdrawal is permissible every year after completion of 5 years from the end of the year of opening the account. keeping large amounts of money in bank is not a wise option. Government bond prices move up and down with market conditions and are often seen as a less risky investment option when markets are volatile. Owning shares in a company means you own a part of it. Corporate bonds are normally considered to be riskier than government bonds. as amended from time to time. under Section 88 of Income Tax Act. although this isn't true all of the time. while governments have a ready source of funds through taxes. It also means you can receive a share of the company's profits through dividends.

refurbishment. A major attraction of property investment is that the success of the venture depends on professional property management. retail developments.As an investment asset class. property usually means investing in commercial property such as: offices. Both the rental income and capital value of a property can be enhanced in this way. CLASSIFICATION OF CAPITAL MARKET CAPITAL MARKET DEBT MARKET STOCK MARKET DEBENTURES PRIMARY MKT CONVERTIBLE DEBENTURES NON CONVERTIBLE DEBENTURES IPO (INITIAL PUB OFFER) CALL MONEY MKT BONDS GOVERNMENT BONDS CORPORATE BONDS FCCB (FOREIGN CURRENCY CONVERTIBLE BONDS) SECONDARY MKT SHARES WARRANTS G-SEC ( GOVT SECURITIES ) T. and leisure and industrial developments.BILLS ( TREASURY BILLS ) CPs ( COMMERICAL PAPERS ) . Successful maintenance. repairs and tenancy arrangements can all add value.

But in case of the public issue the demand is known at the close of the issue. which are above or equal to the floor price. What is Book Building? SEBI guidelines defines Book Building as "a process undertaken by which a demand for the securities proposed to be issued by a body corporate is elicited and built-up and the price for such securities is assessed for the determination of the quantum of such securities to be issued by means of a notice. document or information memoranda or offer document". In case of Book Building. bids are collected from investors at various prices. However it is a common practice in most developed countries. The offer price is determined after the bid closing date. 2. An Initial Public Offer (IPO) is the selling of securities to the public in the primary market. rights issue or private placement. The NSE trading network spans various cities and towns across India. It is a mechanism where. The Fixed Price portion is conducted like a normal public issue after the Book Built portion. Book Building at NSE The NSE has set up nation-wide network for trading whereby members can trade remotely from their offices located all over the country. NSE decided to offer this infrastructure for conducting online IPOs through the Book Building process. the demand can be known everyday as the book is built. an issuer company can issue securities to the public though prospectus in the following manner: 1. circular. during the period for which the IPO is open. Difference between Book Building Issue and Fixed Price Issue In Book Building securities are offered at prices above or equal to the floor prices. advertisement. NSE operates a fully automated screen based bidding system called NEAT IPO that enables trading members to enter bids directly from their offices through a sophisticated telecommunication network. The concept of Book Building is relatively new in India. 100% of the net offer to the public through book building process 75% of the net offer to the public through book building process and 25% at the price determined through book building. It is the largest source of funds with long or indefinite maturity for the company. whereas securities are offered at a fixed price in case of a public issue. Book Building is basically a process used in Initial Public Offer (IPO) for efficient price discovery.CDs ( CERTIFICATE OF DEPOSITS ) IPO (INTIAL PUBLIC OFFERINGS) Initial Public Offerings (IPO) A corporate may raise capital in the primary market by way of an initial public offer. As per SEBI guidelines. during which the issue price is determined. Book Building through the NSE system offers several advantages: The NSE system offers a nation wide bidding facility in securities .

t he index expresses as: Aggregate market value of all the stocks in the sample / Average market value during the base period The base period if 1983 – 84. . which is computed by the statistics Department of the Bombay Stock Exchange. Adjustments are made to the weight and the base year average if a company included in index issues BONUS SHARES.m. the session timings can be further extended on specific request by the Book Running Lead Manager. For calculating the market value of any component share. Delhi & Kolkatta.m. On the last day of the IPO. of shares x Market price of each share. INDICES Market Capitalization The value of equity shares outstanding at prevailing market prices. to 5. National Index: An index of 100 stocks quoted nationwide on different stock exchanges such as those n Bombay. Free Float Market Cap: No. efficient & transparent method for collecting bids using latest electronic trading systems Costs involved in the issue are far less than those in a normal IPO The IPO market timings are from 10.00 a.00 p. Market Capitalization : No. The index was developed as a more representative PROXY Of the stock market since the SENSITIVE INDEX consists on only 30 stocks quoted on the BSE.• • It provides a fair. these 30 figure among the 100 comprising the National Index. the price of the share outstanding and hence. hence it is called the BSE National Index ( BSENI ). RIGHTS ETC. of shares traded in the market x Market price.

1. Over the decades. well-established and financially sound companies across key sectors. Introduction SENSEX. the stock market witnessed heightened activity in terms of various bull and bear runs. It is scientifically designed and is based on globally accepted construction and review methodology. Since September 1. FTSE. it is being calculated taking into consideration only the prices of stocks listed at BSE. real estate caught the fancy of the investors. Ahmedabad and Madras. trading frequency and other criteria. The launch of SENSEX in 1986 was later followed up in January 1989 by introduction of BSE National Index (Base: 1983-84 = 100). The growth of the equity market in India has been phenomenal in the present decade. Its base value is 1000 and its composition captures a high degree of MARKET CAPITALIZATION. The journey in the 20th century has not been an easy one. in 1986. 2003. all major index providers like MSCI. it provides .A welcome development has been recent contribution of 500 stock index by CRISIL. was calculated on a "Market Capitalization-Weighted" methodology of 30 component stocks representing large. SENSEX has captured all these happenings in the most judicious manner. the Indian market witnessed a huge frenzy in the 'TMT' sectors. More recently. The base year of SENSEX was taken as 1978-79. One can identify the booms and busts of the Indian equity market through SENSEX. As the oldest index in the country. Delhi. became members of what today is called Bombay Stock Exchange Limited (BSE).The Barometer of Indian Capital Markets For the premier stock exchange that pioneered the securities transaction business in India. over a century of experience is a proud achievement.Mumbai. Right from early nineties. the stock market in the country has passed through good and bad periods. there was no measure or scale that could precisely measure the various ups and downs in the Indian stock market. Calcutta. Till the decade of eighties. The BSE National Index was renamed BSE-100 Index from October 14. came out with a Stock Index-SENSEXthat subsequently became the barometer of the Indian stock market. SENSEX . SENSEX is being calculated on a free-float market capitalization methodology. 1996 and since then. S&P and Dow Jones use the free-float methodology. The "free-float market capitalization-weighted" methodology is a widely followed index construction methodology on which majority of global equity indices are based. In the late nineties. It comprised 100 stocks listed at five major stock exchanges in India . industry representation. BSE. first compiled in 1986. STOXX. SENSEX today is widely reported in both domestic and international markets through print as well as electronic media. A lot has changed since 1875 when 318 persons by paying a then princely amount of Re.

Small wonder. This market capitalization is further multiplied by the free-float factor to determine the free-float market capitalization. Free-float market capitalization takes into consideration only those shares issued by the company that . The base period of SENSEX is 1978-79 and the base value is 100 index points. 30 SENSEX Calculation Methodology SENSEX is calculated using the "Free-float Market Capitalization" methodology. the SENSEX has become one of the most prominent brands in the country. calculation method shifted to free-float market capitalization. at which latest trades are executed.the time series data over a fairly long period of time (from 1979 onwards). The Divisor is the only link to the original base period value of the SENSEX. This is often indicated by the notation 1978-79=100. replacement of scrips etc. Understanding Free-float Methodology Concept Free-float methodology refers to an index construction methodology that takes into consideration only the freefloat market capitalization of a company for the purpose of index calculation and assigning weight to stocks in the index. the level of index at any point of time reflects the free-float market value of 30 component stocks relative to a base period. The calculation of SENSEX involves dividing the free-float market capitalization of 30 companies in the Index by a number called the Index Divisor. Index Specification: Base Year Base Index Value Date of Launch Method of calculation Number of scrips 1978-79 100 01-01-1986 Launched on full market capitalization method and effective September 01. are used by the trading system to calculate SENSEX on a continuous basis. The market capitalization of a company is determined by multiplying the price of its stock by the number of shares issued by the company. 2003. During market hours. wherein. prices of the index scrips. It keeps the Index comparable over time and is the adjustment point for all Index adjustments arising out of corporate actions.

under the Free-float Methodology. companies with large market capitalization and low free-float cannot generally be included in the Index because they tend to distort the index by having an undue influence on the index movement. a Free-float adjusted index is best suited for the passive managers as it enables them to track the index with the least tracking error. under a Full-market capitalization methodology. In other words. S&P and STOXX have adopted the same. This improves market coverage and sector coverage of the index. • Globally. Being a perfectly replicable portfolio of stocks. FTSE.are readily available for trading in the market. • Free-float Methodology makes the index more broad-based by reducing the concentration of top few companies in Index. shifted all its indices to the Free-float Methodology in 2002. • Free-float Methodology improves index flexibility in terms of including any stock from the universe of listed stocks. It generally excludes promoters' holding. Subsequently all BSE indices with the exception of BSE-PSU index have adopted the free-float methodology. it becomes possible to include such closely-held companies in the index while at the same time preventing their undue influence on the index movement. However. It aids active managers by enabling them to benchmark their fund returns vis-Ã -vis an investible index.QQQ is based on the Free-float Methodology. • A Free-float index aids both active and passive investing styles. is also based on the Free-float Methodology. strategic holding and other locked-in shares that will not come to the market for trading in the normal course. Major advantages of Free-float Methodology • A Free-float index reflects the market trends more rationally as it takes into consideration only those shares that are available for trading in the market. which is followed by Foreign Institutional Investors (FIIs) to track Indian equities. This enables an appleto-apple comparison thereby facilitating better evaluation of performance of active managers. NASDAQ-100. the market capitalization of each company in a free-float index is reduced to the extent of its readily available shares in the market. government holding. For example. the Free-float Methodology of index construction is considered to be an industry best practice and all major index providers like MSCI. . since only the free-float market capitalization of each company is considered for index calculation. The MSCI India Standard Index. a leading global index provider. MSCI. the underlying index to the famous Exchange Traded Fund (ETF) .

IISL has a Marketing and licensing agreement with Standard & Poor's (S&P). . India Index Services & Products Ltd.Definition of Free-float Shareholding of investors that would not.34% of the total market capitalization as on Mar 31. S & P CNX NIFTY S&P CNX Nifty is a well diversified 50 stock index accounting for 21 sectors of the economy. The remaining shareholders fall under the Free-float category.68% of the traded value of all stocks on the NSE Nifty stocks represent about 65. IISL has been formed with the objective of providing a variety of indices and index related services and products for the capital markets. 2009. Specifically. It is used for a variety of purposes such as benchmarking fund portfolios. (IISL). (NSE) and CRISIL Ltd. • • • • The total traded value for the last six months of all Nifty stocks is approximately 65. (formerly the Credit Rating Information Services of India Limited). which is a joint venture between NSE and CRISIL. S&P CNX Nifty is owned and managed by India Index Services and Products Ltd. in the normal course come into the open market for trading are treated as 'Controlling/ Strategic Holdings' and hence not included in free-float. (IISL) India Index Services & Products Ltd. (IISL) is a joint venture between the National Stock Exchange of India Ltd. who are world leaders in index services. the following categories of holding are generally excluded from the definition of Free-float: • • • • • • • • Shares held by founders/directors/ acquirers which has control element Shares held by persons/ bodies with "Controlling Interest" Shares held by Government as promoter/acquirer Holdings through the FDI Route Strategic stakes by private corporate bodies/ individuals Equity held by associate/group companies (cross-holdings) Equity held by Employee Welfare Trusts Locked-in shares and shares which would not be sold in the open market in normal course. IISL is India's first specialised company focused upon the index as a core product. index based derivatives and index funds.

Consulting IISL provides consulting services in areas of Index Funds. determining how an investors portfolio is performing as compared to the market. the world's leading provider of investible equity indices.IISL has a licensing and marketing agreement with Standard and Poor's (S&P). 'C' stands for CRISIL. Licensing is also required for use of the name of IISL or S&P CNX or CNX or any IISL Index. This is a paid service. The customized indices can be sub-sets of existing indices or a completely new index viz. compiles and disseminates entire gamut of equity indices. understanding the performance of a company vis-a-vis the market. or for benchmarking NAV performance to customized indices. trading derivative products and most importantly for development of index based funds by mutual funds. We provide reliable. Customized Indices IISL undertakes development & maintenance of customized indices for clients for tracking the performance of the client portfolio of stocks vis-à-vis objectively defined benchmarks.e. The S&P prefix belongs to the US-based Standard & Poor's Financial Information Services. trading or research. Thus. CNX ensures common branding of indices. These indices can be used for tracking the markets. . Exchange-traded-fund. which may be used for benchmarking. for co-branding IISL's equity indices. 'N' stands for NSE . Industry Indices etc. i. • Financial products on IISL Indices IISL maintains. accurate and valuable data on indices and index related services to cater to the needs of various segments of users. to reflect the identities of both the promoters. NSE and CRISIL. Sector Indices. CNX indices are useful for fund managers. Fees for licensing would vary according to the type of the product and the period. Individual Business Group Indices. develops. alerting for rebalancing for index funds etc. Charges for this service vary depending on the activity performed by IISL. Index options. Our speciality is indices based on Indian equity markets. derivatives. brokers and all such enterprises connected with investments in the equity markets. corporates. • • Products & Services IISL offers a wide range of products and services which are key support tools for the equity markets. Licensing is mandatory for tracking the performance of an IISL Index.

This is particularly valuable when an index reflects highly up to date information (a central issue which is discussed in detail ahead) and the portfolio of an investor contains illiquid securities . This information aspect also figures in myriad applications of stock market indices in economic research. Index funds are funds which passively `invest in the index'. which will reliably get the same returns as the index. nuclear bombs. the index is a lead indicator of how the overall portfolio will fare. If we form a portfolio of the two stocks. Index derivatives allow people to cheaply alter their risk exposure to an index (this is called hedging) and to implement forecasts about index movements (this is called speculation). In a good index. etc. one with a market cap of Rs. When we take an average of returns on many stocks.75. the individual stock news tends to cancel out. Suppose an index is made of two stocks. there would be good stock-specific news for a few companies and bad stock-specific news for others. news about the country).g. the movements of the stock market as a whole (i. Hedging using index derivatives has become a central part of risk management in the modern economy. i.g. these will cancel out. Then the index portfolio will assign a weight of 25% to the first and 75% weight to the second. In recent years. These applications . So if you want to buy Rs. or a budget announcement.1 lakh of this two-stock index. or the closure of a factory. with a weight of 25% on the first and 75% on the second.).in this case.e.000 of the first and Rs. • What is the portfolio interpretation of index movements? It is easy to create a portfolio. indices have been used as information sources.) or news about the country (e.stock news and index news. this portfolio would exactly mimic the two-stock index. In addition.1000 crore and another with a market cap of Rs. etc. Each stock contains a mixture of these two elements . The news that is common to all stocks is news about India.000 of the second. A stock market index is hence just like other price indices in showing what is happening on the overall indices -. indices have come to the fore owing to direct applications in finance. and the only thing left will be news that is common to all stocks. The job of an index is to purely capture the second part. this portfolio will also go up by 4%.e.the wholesale price index is a comparable example. On any one day.3000 crore. the stock market index is attainable as a portfolio. a product launch. • Why are indices important? Traditionally. That is what the index will capture.What is the basic idea in an index? Every stock price moves for two possible reasons: news about the company (e. in the form of index funds and index derivatives. if the index goes up by 4%. then the portfolio returns will equal the index returns. This is achieved by averaging.25. By looking at an index we know how the market is faring. you would buy Rs.

An all-equity fund should obtain returns like the overall stock market index.www. and in what fashion. Ltd.com) and now at Indira Gandhi Institute of Development Research (IGIDR . Today.cmie. ( then at Centre for Monitoring Indian Economy Pvt. indices serve as a benchmark for measuring the performance of fund managers.ac. and they are critically linked up to market indices.gov) and led to the S&P CNX Nifty. By late 1995. S&P CNX Nifty is a contrast to the adhoc methods that have gone into index construction in the preceding years. This pools the index development efforts of CRISIL and NSE into a coordinated whole.are now a multi-trillion dollar industry worldwide. (b) stocks considered for the S&P CNX Nifty must be liquid by the `impact cost' criterion. The results of this work are remarkably simple: (a) the correct size to use is 50.. Ajay Shah and Dr. The research that led up to S&P CNX Nifty is wellrespected internationally as a pioneering effort in better understanding how to make a stock market index. • How does the S&P CNX Nifty work? S&P CNX Nifty is based upon solid economic research. It is a global phenomenon where an independent company calculates and maintains the index.in/~ajayshah • Where does IISL come in? In 1998. to conduct research on methods in index construction. India's first specialised company focussed upon the index as a core product. Susan Thomas. Some of their research is visible over the Internet at www. A trillion calculations were expended to evolve the rules inside the S&P CNX Nifty index.in). A 50:50 debt:equity fund should obtain returns close to those obtained by an investment of 50% in the index and 50% in fixed income. NSE became India's largest equity market and was looking for a market index to utilise this unique information source. (c) the largest 50 stocks that meet the criterion go into the index. • How did the S&P CNX Nifty come about? Equities trading at NSE began in November 1994. the S&P CNX Nifty is owned and operated by IISL. NSE also wanted to have a vehicle for the futures and options market. NSE and CRISIL launched a joint venture named IISL to focus on index management. where indices were made out of intuition and lacked a scientific basis. NSE approached the economists Dr.igidr. This work was funded by the USAID FIRE project (www. A wellspecified relationship between an investor and a fund manager should explicitly define the benchmark against which the fund manager will be compared. .usaid.CMIE (www.ac. Finally.igidr.

If the S&P CNX Defty rises by 2%. trading interest and financial performance. The base date for the index is the calendar year 1994 with the base index value being 1000.e. industry representation. measured in dollars. measured in dollars. i. which is the foundation of the largest index funds and most liquid index futures markets in the world. • What's S&P CNX Defty? S&P CNX Defty is S&P CNX Nifty. each of which has an index – The S&P CNX Industry Index. the S&P 500 index. NSE and CRISIL. When S&P came to India to look at market indices. 'C' stands for CRISIL. Thus. The S&P CNX 500 is a market capitalisation weighted index. banking stocks in the index would have an approx. They now stand behind the S&P CNX Nifty. The S&P CNX 500 companies are disaggregated into 72 industries. Industry weightages in the index dynamically reflect the industry weightages in the market. as is evidenced by the name "S&P CNX Nifty" This is a unique occasion.g. The S&P CNX 500 represents about 86% of total market capitalisation and about 78% of the total turnover on the NSE. The index is calculated and disseminated real-time. Companies in the index are selected based on their market capitalisation. The S&P prefix belongs to the US-based Standard & Poor's Financial Information Services. CNX ensures common branding of indices. to reflect the identities of both the promoters. If the S&P CNX Nifty rises by 2% it means that the Indian stock market rose by 2%. • What's CNX Nifty Junior? . representation of 5% in the index.• Who is Standard & Poor's. measured in rupees. • What's S&P CNX 500 ? The S&P CNX 500 is India’s first broadbased benchmark of the Indian capital market. S&P has never endorsed a market index before. if the banking sector has a 5% weightage among the universe of stocks on the NSE. So for e. and why does their name appear with the S&P CNX Nifty? S&P owns the most important index in the world. • What does 'CNX' in S&P CNX Nifty stand for? CNX stands for CRISIL NSE Indices. it means that the Indian stock market rose by 2%. 'N' stands for NSE and X stands for Exchange or Index. they focussed upon the S&P CNX Nifty as opposed to alternative indices.

liquid stocks in India. Blue-chip companies are known to weather downturns and operate profitably in the face of adverse economic conditions.S&P CNX Nifty is the first rung of the largest. S&P CNX Nifty is the front line blue-chips. CNX Nifty Junior is an index built out of the next 50 large. which are not as established as those in the S&P CNX Nifty. The CNX Nifty Junior is the second rung of growth stocks. As with the S&P CNX Nifty. The maintenance of the S&P CNX Nifty and the CNX Nifty Junior are synchronised so that the two indices will always be disjoint sets. The CNX MidCap Index is a market capitalisation weighted index with its base period of the index being the calendar year 2003 and base value as 1000. Buying and selling the entire CNX Nifty Junior as a portfolio is feasible. well-established and financially sound company. The primary objective of the CNX MidCap Index is to capture the movement and be a benchmark of the midcap segment of the market. It is not as liquid as the S&P CNX Nifty.e. stocks in the CNX Nifty Junior are filtered for liquidity. i. which implies that the information in the S&P CNX Nifty Junior is not as noise-free as that of the S&P CNX Nifty.The distribution of industries in the CNX MidCap Index represents the industry distribution in the MidCap segment of the market. Hence it is always meaningful to pool the S&P CNX Nifty and the CNX Nifty Junior into a composite 100 stock index or portfolio. 2. so they are the most liquid of the stocks excluded from the S&P CNX Nifty. a stock will never appear in both indices at the same time. CNX Nifty Junior can be viewed as an incubator where young growth stocks are found. • What is the CNX MidCap? The medium capitalised segment of the stock market is being increasingly perceived as an attractive investment segment with high growth potential. which recently graduated into the S&P CNX Nifty. A nationally recognized. large and highly liquid stocks. It may be useful to think of the S&P CNX Nifty and the CNX Nifty Junior as making up the 100 most liquid stocks in India. highly liquid stocks in India. . was in the CNX Nifty Junior for a long time prior to this. All companies are evaluated for trading interest and financial performance CHARACTERISTICS OF BLUE CHIP COMPANY 1. A stock like Satyam Computers. which helps to contribute to their long record of stable and reliable growth.

To compensate for slower growth. Even blue chips can take a nosedive. 7. the company is likely to have a long standing record of successful business. financially sound. and for their high-quality products and services. blue chip stocks pay investors dividends at regular intervals. the amount paid out in dividends increases over time. Often. It is easy for investors to track these companies and evaluate their advertising and marketing strategies for themselves. The return on blue chip stocks is close to a sure thing. The phrase (BLUE CHIP ) refers to a blue poker chip. Blue chip companies are industry leaders. . all while continuing to increase profits. A blue chip stock is one that is well-established. Blue chip companies are known for their strong executive management teams that make intelligent growth decisions. 8. the stocks tend to be very expensive and have a low dividend yield. they are a great tool for teaching kids about the stock market by using brand names they recognize. as every company makes a mistake at some point in its history. While there will always be some fluctuation in markets 5. 4. A blue chip stock is classified as the stock of a large company that is an industry leader and provides consistent. 11. and have a history of posting earnings and paying dividends. Blue chip stocks are traditionally thought to be a safe investment since the prices do not tend to vary wildly. steady investment returns. Finally. 6. and historically secure. 9.3. 10. which is the highest and most valuable piece.

74 836.17 2727. 13. Most industry leaders have low debts and healthy balance sheets.STEEL METALS .74 4130.95 1815.PVT BANKS .71 5819 4696.74 1236.13 1212.53 133.03 514.PSU BANKS .05 1113.2 6 187.12.59 141. BLUE CHIP COMPANIES PAID UP EQUIT Y Rs.PVT BANKS .88 2244.02 780.3 425.44 1272. and company mergers & acquisitions can all cause the price of a stock to fall.26 1218. industry news.88 315.38 359.27 5201. NO COMPANY NAME SECTOR METALS ALUMINIUM METALS ALUMINIUM METALS .05 644.STEEL METALS . In Cr FY 0809 NET PROFIT SR.ZINC AUTOMOBILES AUTOMOBILES AUTOMOBILES AUTOMOBILES AUTOMOBILES AUTOMOBILES BANKS .88 286.4 422.27 977. regardless of how well established the company behind it is.82 39.PSU BANKS .8 .43 6119.78 1402. which leads to consistent and increased dividends for shareholders.56 124.61 190 1001. The state of the economy.76 656.94 144.65 2973.49 133.48 9121.99 2079.31 730.78 1281.29 144.PVT CEMENT CEMENT CEMENT SOFTWARE SOFTWARE SOFTWARE SOFTWARE SOFTWARE SOFTWARE 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 HINDALCO INDUSTRIES NALCO ( NATIONAL ALUMINIUM CO ) TATA STEEL STERLITE INDUSTRIES SAIL ( STEEL AUTHORITY OF INDIA ) HINDUSTAN ZINC ASHOK LEYLAND TATA MOTORS MARUTI MAHINDRA & MAHINDRA HERO HONDA BAJAJ AUTO STATE BANK OF INDIA PUNJAB NATIONAL BANK HDFC BANK AXIS BANK ICICI BANK ACC AMBUJA CEMENT ULTRATECH CEMENT HCL TECHNOLOGY ORACLE FIN INFOSYST TECH TATA CONSULTANCY SERVICES TECH MAHINDRA WIPRO 170.46 278.68 634.24 3090.97 41.STEEL METALS .73 292.36 3758.86 121.68 304.21 986.65 695.41 97.

09 547.96 252.06 767.09 808.3 7 86.67 7743.05 397.23 210.45 82.21 1647.0 1 285 3100 91.75 8201.42 299.84 2352.63 284.8 1192.56 54.44 61.44 117.84 155.8 7 1573.59 159.46 593.72 8245.3 922.23 1066.27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 ABB BHEL CROMPTON GREAVES BHARAT ELECTRONICS SIEMENS LARSON & TOUBRO RELIANCE CAPITAL HDFC ONGC RELIANCE INDUSTRIES INDIAN OIL CORPN DABUR INDIA HINDUSTAN UNILEVER PROCTOR & GAMBLE ITC TATA TEA CIPLA DR REDDY'S LAB RANBAXY SUN PHARMA WOCKHARDT NTPC TATA POWER SUZLON RELIANC ENERGY SHIPPING CORPORATION BHARATI TELEVENTURES RELIANCE COMMUNICATIONS TATA COMMUNICATIONS IDEA CELLULAR GRASIM INDUSTRIES VOLTAS ELECTRICAL EQUIPM ELECTRICAL EQUIPM ELECTRICAL EQUIPM ELECTRICAL EQUIPM ELECTRICAL EQUIPM ELECTRICAL EQUIPM FINANCE & INV FINANCE & INV OIL DRILLING OIL DRILLING & REFINE REFINE & OIL MKT FMCG FMCG FMCG FMCG FMCG PHARMACEUTICALS PHARMACEUTICALS PHARMACEUTICALS PHARMACEUTICALS PHARMACEUTICALS POWER POWER POWER POWER SHIPPING TELECOMMUNICATI ONS TELECOMMUNICATI ONS TELECOMMUNICATI ONS TELECOMMUNICATI ONS DIVERSIFIED DIVERSIFIED 42.67 33.66 968.46 377.54 15572.41 3263.45 2138.66 226.2 -469.38 489.18 103.14 245.59 .42 423.33 1265.55 373.41 3061.29 15279 2949.29 -348.56 2496.01 32.45 1898.89 -1032.33 3481.4 6 221.45 131.93 515.31 80 67.02 2282.95 1008.54 940.83 560.52 73.2 4 1032.51 221.

Off & Factory or Plant ) Sector – ( Type of Business ) Share Holding Pattern Promoters Institutional Investors Other Investors General Public % % % % % Financial Data (Latest Financial Year Completed ) Equity (Paid UP) Sales Net Profit Dividend Share Price Face Value P/E Ratio ------------------------------------------------------------------------------------------------------------------------------------------------------------------ _________________________________________________________________________________________ Board of Directors: Chairman: __________________ ED: __________________ MD: __________________ Director: __________________ .EQUITY ANALYSIS _______________________________________________________ Name of the company Address: ( Regd.

Merger & Acquisition – if any? 6. Is there any growth in Top-Line ( Sales ) Y-O-Y? 2. Establishment year & History of the company 2. Diversification Financial Data Profit & Loss A/c ( Year – Wise – Latest 4 years ) Mar 08 Sales or (Operating Income) Other Income EBIDTA PBT PAT Debt : Equity Ratio Mar 07 Mar 06 Mar 05 Conclusions: 1. Is there any growth in Bottom –Line (PAT) Y-O-Y? . then how much % from the total sales & to which countries? 9. Expansion plans 7.About the company (Profile) 1. Order book position – Present & Future 5. If exports. Domestic Business or Exports? 8. Products or Types of services of the company 3. Specialized product or Brand in the market 4.

Case – I • Growth in Sales & Growth in Net Profit Case – II • Growth in Sales & No Growth in Net Profit Case – III • No Growth in Sales & Growth in Net Profit Case – IV • No Growth in Sales & No Growth in Net Profit Profit & Loss A/c (Quarterly – Latest 4 Quarters) Comparison June 09 Sales or (Operating Income) Other Income EBIDTA PBT PAT June 08 Mar 08 Dec08 Sep 08 Conclusions 1. Type of growth – Organic or Inorganic? Case – I . Type of growth – Organic or Inorganic? 4.3. Is there any growth in Bottom –Line (PAT) Q-O-Q? 3. Is there any growth in Top-Line ( Sales ) Q-O-Q? 2.

10 Cr 15. Find the stock – Undervalued OR Overvalued OR Fairly Priced 5.88 Cr 293 Cr 8.5 Crs PROMOTER'S % 58. What are the Forward Earnings? 7.04 28.03 74.49 67. Sector P/Ex 3.11 16. Current valuation of share price on the basis of P/Ex 2.64 24. Abnormal P/Ex: Too high OR Too Low 6.53 5.76 21.52 Cr 42.39 15. Comparison of share price P/E with Sector P/E 4. Stock Category – Growth Stock / Trading Stock / Dividend Yield Stock SHARE HOLDING PATTERNS AS ON 31-3-2009 LARGE CAP COMPANIES PAID UP SR.79 1.46 16.38 Cr 187.54 INSTITUTIONAL % 6.24 INSTITU % 25.• Growth in Sales & Growth in Net Profit Case – II • Growth in Sales & No Growth in Net Profit Case – III • No Growth in Sales & Growth in Net Profit Case – IV • No Growth in Sales & No Growth in Net Profit Valuation of the Share Price 1.42 46. NO 1 2 3 4 5 6 7 8 9 COMPANY NAME RELIANCE INDUSTRIES ONGC BHARATI TELEVENTURES INFOSYS TECH BHEL ABB ACC WIPRO HONEYWELL AUTOMATION EQUITY 1574 Cr 2138.01 12.76 OTHER INV % TOTAL % 100 100 100 .04 29.10 42.17 27.92 4.08 Cr TOTAL NO OF SHARES 14 Crs 8 Crs 8.21 79.03 3.87 Cr 1897.72 52.31 6.40 7.03 4.91 Cr 286 Cr 489.96 11.55 1.15 16.88 Crs PROMOTER'S % 49.55 GEN PUB % 10.29 15.21 12.32 81.33 OTHER INV % 15. NO 1 2 3 COMPANY NAME ERA CONSTRUCTION KPIT AMARA RAJA BATTERIES EQUITY 23.59 26.14 67.88 GEN PUB % 29.61 Cr 17.89 1.91 TOTAL % 100 100 100 100 100 100 100 100 100 MID CAP COMPANIES PAID UP SR.90 21.11 46.90 32.09 12.79 6.18 33.14 2.87 1.84 Cr TOTAL NO OF SHARES 157 Crs 214 Crs 190 Crs 57 Crs 49 Crs 21 Crs 19 Crs 146 Crs 0.08 6.03 21.

31 43.56 25.88 11.81 GROWTH PATTERNS FOR SALES & NET PROFIT (TOP LINE & BOTTOMLINE) ORGANIC GROWTH PATTERNS AVG GROWTH SR.48 139269 19458 110886 10908 89124 9069 73164 7572 2 TATA STEEL .52 4.87 8.09 9.32 14.42 8.48 Cr TOTAL NO OF SHARES 0.65 Crs 0. COMPANY NAME RATE % FY 0708 FY 0607 FY 0506 FY 0405 1 RELIANCE INDUSTRIES LTD SALES NET PROFIT 23.80 13.41 29.61 Cr 17.00 0.86 Crs 0.98 73.4 Crs 1.02 INSTITUTIONAL % 0.91 OTHER INV % 7.47 Crs PROMOTER'S % 55.58 Crs 1.3 Crs 2.00 59.35 Cr 3.59 41.74 22. NO.36 50.42 18.68 Cr 13.63 Cr 0.10 3.79 Cr 24.24 Cr 24.16 45.94 39.4 Crs 48.38 Cr 8.60 6.35 23.27 38.4 5 6 7 CEAT TYRES GWALIOR CHEMICALS KAMAT HOTELS KRBL 34.4 Crs 2.78 14.24 30.48 Cr 5.00 17.81 11.35 5. NO 1 2 3 4 5 COMPANY NAME BALAJI AMINES D & H WELDING DCM EL FORGE G G DANDEKAR IND EQUITY 6.60 23.52 GEN PUB % 100 100 100 100 SMALL CAP COMPANIES PAID UP SR.73 Crs 0.26 TOTAL % 100 100 100 100 100 37.02 56.39 5.54 34.

89 27.97 7. COMPANY NAME BHARTI TELEVENTURES SALES NET PROFIT 2 ICICI BANK SALES NET PROFIT 3 PRAJ INDUSTRIES SALES NET PROFIT 4 TULIP TELECOM SALES NET PROFIT RATE % FY 0708 FY 0607 FY 0506 FY 0405 1 48.78 4246 949 4152 444 3652 353 3123 340 INORGANIC GROWTH PATTERNS AVG GROWTH SR.33 73. NO.64 10.85 52. Though commonly used. Net Profit .79 19693 4687 19762 4222 17144 3506 15876 3474 8.96 47.96 60137 16314 56903 15642 48200 14523 46712 12980 10. How is P/E Calculated? It is calculated by dividing market price of stock by EPS ( Earnings Per Share ). EPS in turn is calculated by dividing the net profit of the company by the number of shares outstanding. it is also misunderstood for various reasons.SALES NET PROFIT 3 ONGC SALES NET PROFIT 4 TATA CHEMICALS SALES NET PROFIT 7.90 25703 6244 30788 4157 701 153 1216 187 17794 4033 22994 3110 607 86 840 94 11228 2012 14306 2540 267 25 508 49 7903 1210 9409 2005 233 22 342 13 P/E Ratio The most commonly used valuation metric by investors is the price to earnings ratio or commonly referred to as the P/E Ratio.47 111. Here is an attempt to simplify this valuation metric.85 48.60 52.88 155.

20. Stock prices reflect future earnings potential and not past performance. In the previous example.EPS = --------------------------------------Number of Shares Outstanding Market Price P/E Ratio = -------------------------------------EPS Lets assume a stock is trading at Rs. The P/E multiple is 5 ( 100 upon 20 ) Market Price = P/E multiple by EPS. EPS tends to grow at a faster rate when steel prices recovering or are at the peak and the EPS is likely to decline at a faster rate during downturns. we have assigned multiple of 15 times because EPS is expected to grow by 15% in the immediate year. the compounded growth in earnings is 17%. 2. However. the CAGR growth in the last three years was 193%. The sector characteristics – Margin profile. . the market price is calculated by multiplying Rs.750. whether it is asset intensive and intensity of competition. If Tata Steel’s EPS for the next year is expected at RS. Less asset intensive sectors ( say FMCG ) are considered defensive and therefore.100 and its EPS is Rs. could be trade a premium to the overall market.50 and the growth in EPS is around 15%.e. What is the “Right” P/E multiple for a stock? The answer to this question is not easy. the P/E multiple should be ideally much lower than 15 times. it is important to understand characteristics of the company. if we look at EPS growth of Tata Steel from 1994 to 2004. Here. Rs. the long term growth prospects for software companies could be much higher than commodities. Take hypothetical case. Is this right way? Not necessarily.50 with 15 times i. one does not discount earnings but multiply earnings. So. Similarly. This can be gauged if one looks at the last three to five years annual reports of a company. Historical performance – Why does Infosys trade at a higher P/E multiple compared to Satyam? By historical performance. Determining the P/E multiple for a stock / sector also depends on: 1. we mean. Discounting the current price with historical EPS is not right way to analyze companies. if one believes that steel demand is likely to trace long term economic growth and that 15% growth is sustainable. For a commodity stock like Tata Steel. To qualify this statement. When determining the stock price. focus of the management (without unrelated diversification) ability to outperform competitors in down / upturns and promise vs performance.

Not actively tracked: There are number of companies in the Indian Stock Market that are not actively tracked by the investors. cash generating ability and consistency in performance over the years to assign a value to a stock. Besides P/E. In the end. Economic cycle: In FY02. high depreciation costs suppress earnings.50 ). Means little a standalone number – P/E. the opportunity loss is as much as 350%. corporate invest in capacities. valuations could be depressed. High P/E also does not means a good stock to buy. as a standalone number. EPS will be low but P/E will be inflated and vise versa. P/E Ratio Across the sectors: Price Earnings Ratio can vary widely across the sectors and what comprises a low PE Ratio in one sector can be high PE in another. Was it expensive? Based on FY05 expected earnings. return on net worth. Expectations of significant growth opportunities post the 2005 quote regime phase out has resulted in up-gradation of P/E multiple of the textile sector. 3. P/E in this context. The sectors with the highest P/E offer higher expected growth & higher returns on equity. When P/E is not useful? 1. during expansionary phase. What are the reasons for the vast divergence in PE Ratio across the sectors? The sectors with the lowest P/E offer not only lowest expected growth. Expectations: On the downside. less attractive during these periods. 2. with more risk. Since equities are considered.5 times its FY02 earnings. 5. some stocks may be trading at a significant premium because earnings are higher. means little. A person X may assign a higher P/E to the stock as compared to person Y depending on the risk profile and growth expectations. Tata Steel is trading at a P/E multiple of 5 times its earnings ( at Rs. expectations. may mislead investors. but also have low returns on equity (ROE). In this case. valuations are likely to be below historical average or below earnings growth prospects. During downturn. What if the expectations are unrealistic? 4.3. Tata Steel was trading at P/E multiple of 20. And more importantly. 6. it all boils down to how the company is likely to perform. it is also important to look at margins. At the same time. analysts and institutions. To conclude valuations of stocks involves subjectively. . Take the case of Textile stocks. Is it cheap? If one ignored Tata Steel in FY02 on the basis that it was expensive stock. Market sentiment: During bear phase or when interest in stock is low. Business operate in cycles.

May Low P/E companies are immature business for which the potential for growth is minimal. you run the risk of holding stocks with anemic or even negative growth rates. the P/E based on earnings in the most recent four quarters ( Trailing P/E ) and the P/E based expected earnings in the next financial year ( forward P/E ). HIGH P/E 2. you have to consider whether the trade off of a Lower P/E Ratio for lower growth works in your favor. P/E Ratio Relationship Company ABC Industries Example: Formula Sector P/E Ratio . Therefore. Low Growth & P/E Ratios One reason for Low P/E Ratio for a stock would be low expected growth. NO P/E . If you invest in stocks with Low P/E Ratios.You have three measures of the P/E Ratio for each company. 15 – 10 ---------10 X 100 = 50% Apply to ABC Industries 100 X 50% = 50 100 + 50 = 150 Target Price can be 150 X 100 Share Price 100 Current P/E 10 Sector P/E 15  Interpretation of P/E Ratios 1. Each measure has its adherents & there is information in each. ABNORMAL P/E 4.Current P/E Ratio --------------------------------------------------Current P/E Ratio Therefore. LOW P/E 3. The P/E based earnings in the most recent financial year (Current P/E).

2  LOW P/E * Company is showing low growth in the business * Investors are not ready to buy the stocks as the future earnings are expected to be low. Scrip Allahabad Bank Share Price 113 P/E Ratio 4.9 22.3 30.8 .7 31. Scrip L&T BHEL HDFC BANK INFOSYS Share Price 1656 2217 1833 2446 P/E Ratio 20. HIGH P/E * Company is showing high growth in the business * Investors are ready to pay high for the earnings of the company.

Chambal Fertili. EPS goes down drastically. Scrip Bharat Forge GMR INFRA JINDAL COTEX JAYBHARAT TEL Share Price 269 72 102 398 P/E Ratio 102 157 66 497  NO P/E * There are no earnings to the company as on date * For a specific quarter company has declared loss Scrip Tata Steel Aditya Birla Nuvo Share Price 560 850 P/E Ratio --- .5 6.1 3. Asian Electronics GSFC 56 46 168 8. * The earnings are very low for the year or a particular quarter.6  ABNORMAL P/E * Generally after listing the share Profit remains the same & number of shares increase so.

10 X 100 = Dividend Yield % That means Rs.X 100 3000 = 0.Chennai Petro Jet Airways 225 563 --- Dividend Yield % • • Yield is the returns calculated on annualized basis.3000 Therefore.66% ( Dividend Yield % ) . 20 per share dividend HDFC Share Price is Rs. 20 ------. Dividend Yield is the returns from dividend calculated on annualized basis. Formula Dividend -----------Share Price Example: HDFC Pays dividend 200% for Face Value of Rs.

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