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fundamental analysis

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INTRODUCTION TO INDIAN CAPITAL MARKET

There are 22 stock exchanges in India, the first being the Bombay Stock Exchange (BSE), which began formal trading in 1875, making it one of the oldest in Asia. Over the last few years, there has been a rapid change in the Indian securities market, especially in the secondary market. Advanced technology and online-based transactions have modernized the stock exchanges. In terms of the number of companies listed and total market capitalization, the Indian equity market is considered large relative to the country’s stage of economic development. The number of listed companies increased from 5,968 in March 1990 to about 10,000 by May 1998 and market capitalization has grown almost 11 times during the same period.

The debt market, however, is almost nonexistent in India even though there has been a large volume of Government bonds traded. Banks and financial institutions have been holding a substantial part of these bonds as statutory liquidity requirement. The portfolio restrictions on financial institutions’ statutory liquidity requirement are still in place. A primary auction market for Government securities has been created and a primary dealer system was introduced in 1995. There are six authorized primary dealers. Currently, there are 31 mutual funds, out of which 21 are in the private sector. Mutual funds were opened to the private sector in 1992. Earlier, in 1987, banks were allowed to enter this business, breaking the monopoly of the Unit Trust of India (UTI), which maintains a dominant position. Before 1992, many factors obstructed the expansion of equity trading. Fresh capital issues were controlled through the Capital Issues Control Act. Trading practices were not transparent, and there was a large amount of insider trading. Recognizing the importance of increasing investor protection, several measures were enacted to improve the fairness of the capital market. The Securities and Exchange Board of India (SEBI) was established in 1988.

Despite the rules it set, problems continued to exist, including those relating to disclosure criteria, lack of broker capital adequacy, and poor regulation of merchant bankers and Page | 1

underwriters. There have been significant reforms in the regulation of the securities market since 1992 in conjunction with overall economic and financial reforms. In 1992, the SEBI Act was enacted giving SEBI statutory status as an apex regulatory body. And a series of reforms was introduced to improve investor protection, automation of stock trading, integration of national markets, and efficiency of market operations. India has seen a tremendous change in the secondary market for equity. Its equity market will most likely be comparable with the world’s most advanced secondary markets within a year or two. The key ingredients that underlie market quality in India’s equity market are: • Exchanges based on open electronic limit order book; • Nationwide integrated market with a large number of informed traders and fluency of short or long positions; and • No counterparty risk.

Among the processes that have already started and are soon to be fully implemented are electronic settlement trade and exchange-traded derivatives. Before 1995, markets in India used open outcry, a trading process in which traders shouted and hand signaled from within a pit. One major policy initiated by SEBI from 1993 involved the shift of all exchanges to screen-based trading, motivated primarily by the need for greater transparency. The first exchange to be based on an open electronic limit order book was the National Stock Exchange (NSE), which started trading debt instruments in June 1994 and equity in November 1994. In March 1995, BSE shifted from open outcry to a limit order book market. Currently, 17 of India’s stock exchanges have adopted open electronic limit order.

1.1 CAPITAL MARKET REFORMS AND DEVELOPMENTS

Over the last few years, SEBI has announced several far-reaching reforms to promote the capital market and protect investor interests. Reforms in the secondary market have focused on three main areas: structure and functioning of stock exchanges, automation of trading and post trade systems, and the introduction of surveillance and monitoring systems. Computerized online trading of securities, and setting up of clearing houses or settlement guarantee funds Page | 2

were made compulsory for stock exchanges. Stock exchanges were permitted to expand their trading to locations outside their jurisdiction through computer terminals. Thus, major stock exchanges in India have started locating computer terminals in far-flung areas, while smaller regional exchanges are planning to consolidate by using centralized trading under a federated structure. Online trading systems have been introduced in almost all stock exchanges. Trading is much more transparent and quicker than in the past. Until the early 1990s, the trading and settlement infrastructure of the Indian capital market was poor. Trading on all stock exchanges was through open outcry, settlement systems were paper-based, and market intermediaries were largely unregulated. The regulatory structure was fragmented and there was neither comprehensive registration nor an apex body of regulation of the securities market. Stock exchanges were run as “brokers clubs” as their management was largely composed of brokers. There was no prohibition on insider trading, or fraudulent and unfair trade practices. Since 1992, there has been intensified market reform, resulting in a big improvement in securities trading, especially in the secondary market for equity. Most stock exchanges have introduced online trading and set up clearing houses/corporations. A depository has become operational for scrip less trading and the regulatory structure has been overhauled with most of the powers for regulating the capital market vested with SEBI. The Indian capital market has experienced a process of structural transformation with operations conducted to standards equivalent to those in the developed markets. It was opened up for investment by foreign institutional investors (FIIs) in 1992 and Indian companies were allowed to raise resources abroad through Global Depository Receipts (GDRs) and Foreign Currency Convertible Bonds (FCCBs). The primary and secondary segments of the capital market expanded rapidly, with greater institutionalization and wider participation of individual investors accompanying this growth. However, many problems, including lack of confidence in stock investments, institutional overlaps, and other governance issues, remain as obstacles to the improvement of Indian capital market efficiency.

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2. MCX offers futures trading in Page | 4 . Few important ones are as follows: 1. 2.INTRODUCTION TO STOCK MARKET Stock Market is a place where the trading takes place.1 HOW TO INVEST? When an investor starts investing in the stocks or the commodity market he has some prominent exchanges to invest in. making it the largest stock exchange in South Asia and the 12th largest in the world. On 31 December 2007. with 4700 listed as of August 2007. It was established in 2003 and is based in Mumbai. how much to invest and win the game of investment. how to invest. MCX (Multi Commodity Exchange): MCX is an independent commodity exchange based in India. 01. But still for a trader it’s an everyday game. And in games there are certain rules and regulations to be followed then only you can’t make strategies and plans and play the game according to it and win it. 3. Here the trading in stocks takes place. It is located at Dalal Street. India. the equity market capitalization of the companies listed on the BSE was US$ 1. Some people go with profit and some people carries losses. For a new trader the first thing to know about is where to invest.923 crore (7 August 2009) and is expected to become the biggest stock exchange in India in terms of market capitalization by 2009 end.79 trillion. for both equities and derivative trading. NSE has a market capitalization of around Rs 47. A place where lots of money is invested to buy stocks and lots of money is earned while selling stocks. The turnover of the exchange for the period Apr-Dec 2008 was INR 32 Trillion. BSE (Bombay Stock Exchange): BSE is the oldest stock exchange in Asia and has the greatest number of listed companies in the world. Mumbai. NSE (National Stock Exchange): It is the largest stock exchange in India in terms of daily turnover and number of trades. BSE’s key index is sensex. NSE’s key index is Nifty.

It has commenced its operations on December 15. Pulses. It is a product that is the same no matter who produces it. 1956. these are basic resources and agricultural products such as iron ore. 2. When you buy the shares of a company you become one of the many owners of that much portion of a company.3 HOW TO TRADE IN STOCKS? An investor can open the required accounts (Demat and Trading) with a registered broker with NSE or BSE (whichever exchange he want to deal with) and start purchasing and selling the stock of his wish. but which is supplied without qualitative differentiation across a market. equity. Generally. 2003. Page | 5 . your ownership stake in the company becomes greater. Stock represents a claim on the company's assets and earnings. As you acquire more stock. 2003 under the Companies Act. Oils & Oilseeds. NCDEX is a closely held private company which is promoted by national level institutions and has an independent Board of Directors and professionals not having vested interest in commodity markets. It obtained its Certificate for Commencement of Business on May 9. Spices and other soft commodities 4. 2.4 WHAT ARE COMMODITIES? A commodity is some good for which there demand is. Ferrous & Nonferrous metals. stock is a share in the ownership of a company. or stock. NCDEX (National Commodity & Derivatives Exchange Limited): NCDEX is an online commodity exchange based in India. 2003. 2.Agricultural Commodities. it all means the same thing. Bullion. Plantations. It was incorporated as a private limited company incorporated on April 23.2 WHAT ARE STOCKS? Plain and simple. In other words you own a part of the company. Whether you say shares. Energy.

soybeans. analyze and then act. wheat. Cut Your Losses 2. copper. ethanol. They give you ideas about when and what to buy and when to sell. Keep Positions Small 7. salt. Let Your Profits Run 3. Don`t Overtrade 5. Follow the Trend 4. Without all these steps your money will go in waste and you may incur huge losses. silver and platinum in which trading is done throughout the Commodities of the world. Take tips and advises from proven experts.5 HOW TO TRADE IN COMMODITIES? For trading in commodities an investor have to open a commodity account with either MCX or NCDEX (whichever commodity exchange he wants to trade in) and start buying and selling commodities. There are many tips providing companies which are giving tips on how and where to invest your money in the share market. Don`t Buy Something Because it Looks Cheap 8. So if you are planning to invest in the stock and the commodity market then see. But dealing with the stock and the commodity market is nothing less than solving a complicated problem in mathematics. 2. Always Trade Liquid Stocks 6. Page | 6 . coal. Some of the basic tips for increasing profits and minimizing losses in the stock and the trading market are: 1. rice. gold. Follow the rules and you will surely be the winner. They tell you exactly which stock is beneficial to invest. You have to apply algorithms. coffee beans. use formulae. aluminium.crude oil. study trend and above all analyze the market properly before you actually start investing. sugar.

RESEARCH METHODOLOGY

3.1 OBJECTIVE:

PRIME OBJECTIVE: Our project objective is to do fundamental analysis of ten sectors of the Indian economy based on NSE. SUBSIDIARY OBJECTIVES: 1.To construct a portfolio on the bases of fundamental analysis of top 20 companies out of 60 selected companies representing 10 different sectors. 2.To measure performs of virtual portfolio with actual market price.

3.2 TYPE OF RESEARCH
A descriptive research design has been used for the study.

3.3 SAMPLE SIZE:
Sampling size will be primarily consisting of the top six companies listed in the BSE or NSE out of selected ten sectors.

3.4 SAMPLING UNIT:
Sample unit will be of two companies out of selected six companies of above

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3.5 SAMPLING METHOD:
The sampling method will be on the basis of the Fundamental Analysis of the companies.

3.6 DATA SOURCES:

PRIMARY DATA: 1. BSE 2. NSE

SECONDARY DATA: 1. Annual reports of the companies 2. Ratios 3. Library Research 4. Internet

3.7 EXPECTED CONTRIBUTION OF THE STUDY:

The Research will be useful to other students as reference. It will also be useful to Portfolio managers to see comparison and to know the current situation of the top Indian companies.

3.8 LIMITATIONS OF THE STUDY:
• • We have not included all the sectors and all industries of Indian stock exchanges. We can’t get all companies latest financial reports so we cannot calculate all the ratios in fundamental analysis.

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INTRODUCTION TO FUNDAMENTAL ANALYSIS
Fundamental analysis is the cornerstone of investing. In fact, some would say that you aren't really investing if you aren't performing fundamental analysis. Because the subject is so broad, however, it's tough to know where to start. There are an endless number of investment strategies that are very different from each other, yet almost all use the fundamentals. The goal of this tutorial is to provide a foundation for understanding fundamental analysis. It's geared primarily at new investors who don't know a balance sheet from an income statement. While you may not be a "stock-picker extraordinaire" by the end of this tutorial, you will have a much more solid grasp of the language and concepts behind security analysis and be able to use this to further your knowledge in other areas without feeling totally lost. The biggest part of fundamental analysis involves delving into the financial statements. Also known as quantitative analysis, this involves looking at revenue, expenses, assets, liabilities and all the other financial aspects of a company. Fundamental analysts look at this information to gain insight on a company's future performance. A good part of this tutorial will be spent learning about the balance sheet, income statement, cash flow statement and how they all fit together. But there is more than just number crunching when it comes to analyzing a company. This is where qualitative analysis comes in - the breakdown of all the intangible, difficult-to-measure aspects of a company.

4.1 WHAT IS FUNDAMENTAL ANALYSIS?

In this section we are going to review the basics of fundamental analysis, examine how it can be broken down into quantitative and qualitative factors, introduce the subject of intrinsic value and conclude with some of the downfalls of using this technique. The Very Basics When talking about stocks, fundamental analysis is a technique that attempts to determine a security’s value by focusing on underlying factors that affect a company's actual business and its future prospects. On a broader scope, you can perform fundamental analysis on industries

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Here is how the MSN Encarta dictionary defines the terms: • Quantitative – capable of being measured or expressed in numerical terms. the big problem with defining fundamentals is that it can include anything related to the economic well-being of a company. you are doing fundamental analysis. Note: The term fundamental analysis is used most often in the context of stocks. these are very involved questions. As long as you look at the economic fundamentals. from a bond to a derivative. such as: • Is the company’s revenue growing? • Is it actually making a profit? • Is it in a strong-enough position to beat out its competitors in the future? • Is it able to repay its debts? • Is management trying to "cook the books"? Of course. As we mentioned in the introduction.2 FUNDAMENTALS: QUANTITATIVE AND QUALITATIVE You could define fundamental analysis as “researching the fundamentals”. fundamental analysis always is referred to in the context of stocks.or the economy as a whole. 4. but fundamentals also include everything from a company’s market share to the quality of its management. The financial meaning of these terms isn’t all that different from their regular definitions. but you can perform fundamental analysis on any security. and there are literally hundreds of others you might have about a company. Page | 10 . The term simply refers to the analysis of the economic well-being of a financial entity as opposed to only its price movements. It all really boils down to one question: Is the company’s stock a good investment? Think of fundamental analysis as a toolbox to help you answer this question. Fundamental analysis serves to answer questions. The various fundamental factors can be grouped into two categories: quantitative and qualitative. For the purpose of this tutorial. Obvious items include things like revenue and profit. but that doesn’t tell you a whole lot unless you know what fundamentals are.

many analysts consider qualitative factors in conjunction with the hard. assets and more with great precision. patents or proprietary technology. It’s easy to see how the biggest source of quantitative data is the financial statements. why would you be doing price analysis if the stock market were always correct? In financial jargon. It’s tough to put your finger on exactly what the Coke brand is worth. but you can be sure that it’s an essential ingredient contributing to the company’s ongoing success. measurable characteristics about a business. After all. often as opposed to its size or quantity. Take the Coca-Cola Company. However.things such as the quality of a company’s board members and key executives. Turning to qualitative fundamentals. 4.• Qualitative – related to or based on the quality or character of something. In our context. earnings per share. we have to address the subject of intrinsic value. this true value is known as the intrinsic value. but few companies on earth are recognized by billions of people. for example.4 THE CONCEPT OF INTRINSIC VALUE Before we get any further. One of the primary assumptions of fundamental analysis is that the price on the stock market does not fully reflect a stock’s “real” value. profit. quantitative fundamentals are numeric. these are the less tangible factors surrounding a business . no analysis of Coca-Cola would be complete without taking into account its brand recognition. You can measure revenue. an analyst might look at the stock’s annual dividend payout. Page | 11 . Anybody can start a company that sells sugar and water. its brand-name recognition. quantitative factors.3 QUANTITATIVE MEETS QUALITATIVE Neither qualitative nor quantitative analysis is inherently better than the other. P/E ratio and many other quantitative factors. 4. Instead. When examining its stock.

Using charts and a number of other tools. one of the basic tenets of technical analysis is that the market discounts everything.20. While it is possible to use both techniques in combination.25. This is clearly relevant because an investor wants to buy stocks that are trading at prices significantly below their estimated intrinsic value. all news about a company already is priced into a stock. By focusing on a particular business. their trades) solely on the price and volume movements of securities. It could be days or years. In other words. Technical analysis is the other major form of security analysis. We’re not going to get into too much detail on the subject. There is no point in buying a stock based on intrinsic value if the price never reflected that value. an investor can estimate the intrinsic value of a firm and thus find opportunities where he or she can buy at a discount. the investment will pay off over time as the market catches up to the fundamentals.25. 4. not caring about the fundamentals. The big unknowns are: 1) You don’t know if your estimate of intrinsic value is correct.5 CRITICISMS OF FUNDAMENTAL ANALYSIS The biggest criticisms of fundamental analysis come primarily from two groups: proponents of technical analysis and believers of the “efficient market hypothesis”. let’s say that a company’s stock was trading at Rs. you determine that it really is worth Rs. more precisely. Accordingly. and 2) You don’t know how long it will take for the intrinsic value to be reflected in the marketplace. Put simply. After doing extensive homework on the company.For example. technical analysts base their investments (or. you determine the intrinsic value of the firm to be Rs. This leads us to one of the second major assumptions of fundamental analysis: in the long run. Nobody knows how long “the long run” really is. they trade on momentum. If all goes well. Page | 12 . the stock market will reflect the fundamentals. This is what fundamental analysis is all about.

we're going to take a look at some of the qualitative aspects of a company. incorporating that kind of information into a pricing evaluation can be quite difficult. however. The "Oracle of Omaha". Warren Buffett. On the flip side. The rationale for this argument is that. since the market efficiently prices all stocks on an ongoing basis. In this section we are going to highlight some of the company-specific qualitative factors that you should be aware of.and therefore a stock’s price movements give more insight than the underlying fundamental factors of the business itself. This is not to say the technology sector is bad. rarely invests in tech stocks because most of the time he doesn't understand them. you can't ignore the less tangible characteristics of a company.THE COMPANY Before diving into a company's financial statements. unless you understand a Page | 13 . as we've demonstrated. 4. 4. represent aspects of a company's business that are difficult or impossible to quantify. The efficient market hypothesis contends that it is essentially impossible to produce market-beating returns in the long run. by definition.6 QUALITATIVE FACTORS .6.1 BUSINESS MODEL You should understand the business model of any company you invest in. he doesn't feel comfortable investing in this area. Similarly. any opportunities for excess returns derived from fundamental (or technical) analysis would be almost immediately whittled away by the market’s many participants. Fundamental analysis seeks to determine the intrinsic value of a company's stock. making it impossible for anyone to meaningfully outperform the market over the long term. are usually in disagreement with both fundamental and technical analysts. But since qualitative factors. Followers of the efficient market hypothesis. but it's not Buffett's area of expertise. through either fundamental or technical analysis.

you don't know what the drivers are for future growth. Don't expect to find anything useful here. and no company is going to put negative information on its corporate website. So how does an average investor go about evaluating the management of a company? This is one of the areas in which individuals are truly at a disadvantage compared to professional investors. 4. if you are a fund manager interested in investing millions of dollars. its shareholders can be well rewarded for decades. there is a good chance you can schedule a face-to-face meeting with the upper brass of the firm. educational background and any applicable achievements. Some believe that management is the most important aspect for investing in a company. and you leave yourself vulnerable to being blindsided like shareholders of Boston Chicken were.company's business model. create a moat around a business allowing it to keep competitors at bay and enjoy growth and profits.6. A company's long-term success is driven largely by its ability to maintain a competitive advantage . Let's be honest: We're looking for dirt.2 COMPETITIVE ADVANTAGE Another business consideration for investors is competitive advantage. 4. On the other hand. Powerful competitive advantages. It makes sense . Usually there will be a quick biography on each executive with their employment history. Page | 14 .6. a company relies upon management to steer it towards financial success. Every public company has a corporate information section on its website. You can't set up a meeting with management if you want to invest a few thousand dollars.3 MANAGEMENT Just as an army needs a general to lead it to victory. such as Coca Cola's brand name and Microsoft's domination of the personal computer operating system.and keep it. When a company can achieve competitive advantage.even the best business model is doomed if the leaders of the company fail to properly execute the plan.

The fact that a company possesses an 85% market share tells you that it is the largest player in its market by far. 4.4 CORPORATE GOVERNANCE Corporate governance describes the policies in place within an organization denoting the relationships and responsibilities between management. In general. it's a red flag (a negative) if a business relies on a small number of customers for a large portion of its sales because the loss of each customer could dramatically affect revenues. Learning about how the industry works will give an investor a deeper understanding of a company's financial health. making it more difficult for anyone to conduct unethical and illegal activities. For example. 4. industry-wide growth.4. 4. regulation and business cycles.7.S. this could also suggest that the company possesses Page | 15 . companies will always disclose in their 10-K if any one customer accounts for a majority of revenues. These policies are defined and determined in the company charter and its bylaws. One change in government policy could potentially wipe out all of its sales. think of a military supplier who has 100% of its sales with the U.6.THE INDUSTRY Each industry has differences in terms of its customer base. government. while others serve millions. For this reason.2 MARKET SHARE Understanding a company's present market share can tell volumes about the company's business. competition.7 QUALITATIVE FACTORS .1 CUSTOMERS Some companies serve only a handful of customers. The purpose of corporate governance policies is to ensure that proper checks and balances are in place.7. directors and stakeholders. market share among firms. along with corporate laws and regulations. Furthermore.

Market share is important because of economies of scale. If you want to sell to Wal-Mart. that Wal-Mart practically sets the price for any of the suppliers wanting to do business with them. a manufacturing company dedicated solely to creating audio compact cassettes might have been very successful in the '70s. a competitive barrier serving to protect its current and future earnings. '80s and early '90s.3 INDUSTRY GROWTH One way of examining a company's growth potential is to first examine whether the amount of customers in the overall market will grow. Industries that have limited barriers to entry and a large number of competing firms create a difficult operating environment for firms.7. a company has to steal market share in order to grow." in other words. This is crucial because without new customers. However. pricing power. Page | 16 . 4. When the firm is bigger than the rest of its rivals. along with its market share. In some markets. The current market for audio compact cassettes is only a fraction of what it was during the peak of its popularity.4 COMPETITION Simply looking at the number of competitors goes a long way in understanding the competitive landscape for a company. A great example of this is Wal-Mart. For example. there is zero or negative growth.7. a factor demanding careful consideration. such as CDs and MP3s. it is in a better position to absorb the high fixed costs of a capital-intensive industry. that same company would probably have a rough time now due to the advent of newer technologies. One of the biggest risks within a highly competitive industry is pricing power. They are so dominant in the retailing business. you have little. 4. if any.some sort of "economic moat. Companies operating in industries with few alternatives have the ability to pass on costs to their customers. This refers to the ability of a supplier to increase prices and pass those costs on to customers.

they can drastically affect the attractiveness of a company for investment purposes. In industries where one or two companies represent the entire industry for a region (such as utility companies). they are limited due to regulation.7.4. while there is the potential for sizable profits. As important as some of these regulations are to the public. In these instances.5 REGULATION Certain industries are heavily regulated due to the importance or severity of the industry's products and/or services. governments usually specify how much profit each company can make. Page | 17 .

the economy begins to recover. Once the Page | 18 . All the well established companies’ turns from profitable trend to the loss making companies and the companies in the developing stage goes into the liquidation.ECONOMY ANALYSIS 5. close down plants built at times of higher demand. employment. RECOVERY During this phase. crippled by high borrowing and falling sales. Conspicuous spending begins once again. Inflation rate is high and so are interest rates in the market. The whole economy gets ruined during this period. The four stages of an economic cycle are: • • • • Depression Recovery Boom Recession DEPRESSION At the time of depression. are forced to curtail production. demand is low and falling.1 ECONOMIC CYCLE Countries go through the business or economic cycle and the stage of the cycle at which a country is in has a direct impact both on industry and individual companies. and let workers go. demand and the profitability of companies. Companies. Companies begin to post profits. Investment begins a new and the demand grows. It affects investment decisions.

Companies start finding it difficult to sell their goods. Slowly and gradually the market stabilizes and the boom phase matures and prices also get stabilized with the changing situations of the market. If this is the case in some particular industry than many new companies are also attracted towards this industry and the economy starts growing and this stage and achieves the targeted growth slowly and gradually. Interest rates are low. profits begin to grow at a higher proportionate rate. The well established companies also have to suffer a lot due to recession period. Page | 19 . gradually as time passes. There is a great demand of the stock in the market. No particular reason can be mentioned as such. Interest rates and inflation rate is too high. the company tries to increase the supply o the stock in the market. BOOM During this phase of economy the demand of the stock reaches at an all time high. The market price of all the goods of almost all the industries falls to a great extent. The overall industry suffers a lot during this phase of the economy. Companies which were well established and were earning losses starts making profits again and the economy starts regaining its position. So. The recession is due to various reasons. More and more new companies are floated to meet the increasing demand in the economy.recovery stage sets in fully. RECESSION In the recession phase the economy slowly begins to downturn. But. when supply begins to exceed the demand prices that had been rising begin to stabilize and even fall. Demand starts falling. Investment is also high.

2 GLOBAL ECONOMY The global economy refers to the increasing integration of fragmented national markets for goods and services into a single global market. In such a market. many of those debtors began to default. This uncertainty has resulted in the share prices of financial and non financial companies falling. the effects of financial turmoil on developing countries increased I step.9 percent in 2009. as risk aversion sent spreads soaring. and sells wherever there is existence of demand regardless of the customer’s nationality. the economic growth around the globe remained strong in 2008 despite the current credit crisis in the USA. GLOBAL ECONOMY SCENARIO According to the report of the Business Economics and Public Policy. financial markets that first emerged in the summer of 2007 transformed themselves into a full-blown global financial crisis in the fall of 2009. The IMF has projected the world economic growth to reach 4. and a movement of global growth from 2. while other institutions experienced increasingly large losses on their investments in the housing markets.5. As interest rates were increased in 2006 and 2007 in that country. companies may source from one country.8 percent in 2009.e. putting at risk the value of all the housing loans. exchange rates falling and capital flows into decline.S. China and India have an important role in the global economy. Banks purchased vast quantities of loans used for house purchases in the United States. growth prospects for both high income developing countries have deteriorated substantially. and investment banks failed. Financial institutions involved in property. affecting lending operations between the banks. The stresses in U. The emerging economies i. equity markets tumbling.5 percent in 2008 to 0. As the crisis intensified. Page | 20 . conduct research and development in another country and then takes orders in a third country. In this situation.

It is clear that rising food and oil prices are secondary risks for the world economy as they will be further inflated by the disruption in the global financial market. There are still global imbalances: between U. The fading impacts of unusually-high tech-driven productivity gains.The potential risk to the global economy is high oil prices. If foreign governments. Inflation: Years of reckless money creation by central banks. and has much further to go. POTENTIAL ECONOMIC AND FINANCIAL RISKS The potential risks to the global economy are high oil prices and high ratios of inflation. Housing collapse: The bubble in the residential property markets of the US and other rich countries has only just started to deflate. It is predicted that turmoil in the global financial markets affects the economic growth around the world. having an adverse impact on economic growth for years to come. budget and current account deficits and the accumulation of huge foreign currency reserves by Asian central banks remain the potential risks to the global economy in 2008. Weaker growth in the United States will have spill-over effects on trade and weaken the economies of its trading partners and especially the emerging and under developed countries. and shortages of high level skills in many sectors such as global mining and Chinese manufacturing. Some of the reasons due to which crisis can last for a longer period are as follows: The credit a squeeze: It is a slow-burning crisis that is going to take a long time to unfold.S. Currency instability: The US needs to attract an extra $3 billion in foreign capital every business day to finance its foreign trade deficit. It is predicted that turmoil in the global financial markets affects the economic growth around the world. supply/demand imbalances have driven up the prices of key resources such as oil. currency instability and high ratios of inflation. the dollar will remain under Page | 21 . are combining to bring back the inflation problem. institutions and private investors become less willing to provide that capital.

World trade: The progress of globalization would not cease because of lower growth in the world economy. In Japan the Central Bank offered credit to commercial banks at virtually no cost. even though progress will be slowed somewhat by rising protectionism in the developed nations. where whole swathes of job classes are under increasing pressure from foreign competition.0 percent respectively in November 2009. Further the classifications of the industrial production shows the manufacturing and mining sectors register growths of 12.3 INDIAN ECONOMY INDUSTRIAL PRODUCTION The data on the industrial production shows initial indications of improvement. 5. The overall index of industrial production after registering a growth of 10. Cheap money: The greater the risk of global recession and of deflation. Growth in the electricity sector was also seen to grow by 3. the more central banks will force down short-term interest rates to combat that risk.7 percent and 10.3 percent in October 2009 witnessed an even higher growth of 11.7 percent in November 2009. Page | 22 .pressure. continue falling in value in terms of other currencies which would be set back to many developing countries and emerging market economies in the world.3 percent compared to the growth recorded in the previous year.

3 percent in December 09. (Calculated from March end up to the December) Page | 23 .8 percent during April-December period of 2009 10.5 percent in November 09 to 7.9 percent. The growth in coal production was 2.3 percentages higher than the growth recorded in the same month of previous year. Monetary Indicators The broad money supply expanded by 10.CORE INFRASTRUCTURE The overall index of six core infrastructure industries registered a growth of 6.1 percent in December 09. with respective growths of 11. The rate of inflation was increased by almost 2 percentages.5 percent in December 09 much lower than the growth of 11. this continues to be a major concern. witnessed a growth of 1. 4. The growth during the first three quarters of 2008-09 was 11. Inflation The skyrocketing food prices resulted into flaring of overall inflation.4 percent.0 percent recorded in corresponding month of 08. In December 2009 the inflation rate for three broad segments – primary articles. This is changed from 5. Once again cement and finished steel segments were best performers. This was also higher than the inflation rate of 6. which was 5. The aggregate deposits increased by 9.6 percent. Similarly petroleum refinery segment registered 0.7 percent.9 percent during the April-December period of 2009-10.0 percent and 9.2 percent respectively. fuel lubricants and light and manufactured products was 14. The coal and petroleum sectors remained laggards.9 percent growth in December 2009 as against a high growth of 3.3 percent and 5. The corresponding growth during the previous fiscal was 12.2 percent recorded in December 2008. The crude oil production after registering negative growth for five consecutive months.0 percent in December 2009.2 percent in the same month of previous year.

on the other hand. 324 crore during the period April-December 2009-10 vis-à-vis same period last year.2 percent and in case of corporate tax it was 16. (-) 18.795 crore revenue collections over the same period last fiscal. 26.The bank credit went by 7.1 percent. excise duty and service tax collections. 89. The stock market remained bullish in the month of December 09 with BSE Sensex closing at over 17k points by month end. The growth recoded in December 2009 was relatively lower than the growth seen in the previous month.10.2 percent.8 percent. collections from indirect sources witnessed a fall. from Rs 3.5 percent. 09. i. With an additional expenditure of Rs 1.271 crore during the same period this financial year. Fiscal Trends The gross tax revenue collections during the period April-December 2009-10 amounted to Rs 4. Foreign Trade The growth in the merchandise exports sector turned positive in November 2009 after a thirteen-month period of decline.3 percent. April-December 2009-10 the growth in revenue from income tax was 12. The resultant fiscal deficit over the corresponding period was Rs 3. Stock Market Trends High investment activity was seen in the stock market after the economic fundamentals gained strength. 16.2 percent registered in November 2009.937 core in April.9 percent respectively. Over the period.December 2008-09 to Rs 3. 75. The revenue receipts of the government witnessed a marginal increase. as against the growth of 18. In December 2009 the exports registered a growth of 9.e.0 percent over the period April to December 2009-10. the total expenditure saw an increase of 18. while the growth in corresponding period of the last fiscal was 12. Page | 24 . Growth in the custom duty. While income from the direct sources of tax revenue. was negative 29.5 percent from Rs 4. 980 crore. income and corporate tax increased however. 094 crore a drop by 2.2 percent and (-) 5.

The imports grew by 27. The Rupee Dollar exchange rate which averaged Rs 46.1 billion. at the worst. as the economy is in recession stage.7 billion was received in November 2009 as against the inflows of USD 2. 5. The cumulative investment inflows over the period April-November 2009-10 amounted to USD 47. Foreign Exchange Reserves The forex reserves accumulated in November 2009 was USD 286. Last year the reserves had fallen to USD 247. They should invest at the end of a depression when the economy begins to recover.6/USD in the month of December 2009 was at Rs 45. or.6 billion in the same month.4 INVESTMENT DECISION Investors should attempt to determine the stage of the economic cycle of the country. Here. There was a decline in the portfolio investments as well in November 09 vis-à-vis inflows in the previous month.3 billion in the previous month. Page | 25 .8 percent. Exchange Rate The rupee witnessed slight appreciation in the month of January 2010 vis-à-vis the USD. Foreign Investments Foreign direct investment of USD 1. Investment and disinvestments made at these times will earn the investor greater benefits. Investors should disinvest either just before or during the boom. investors should disinvest their holdings in cyclical industries and switch to growth or evergreen industries.2 percent in December 2009.9/USD in January 2010.7 billion. while non-oil imports increased by 22.4 percent. Oil imports grew by 42.The imports also registered a positive growth after being in the negative territory for straight eleven months of 2009 since January. just after the boom.

The Z-score is a formula involving multiple variables that measures the financial health of a company.1. in 2009. with matching by industry and approximate size (assets). 6.1 EDWARD ALTMAN’S Z SCORE The Z-score formula for predicting bankruptcy was published in 1968 by Edward I. now as a long-tenured one. Altman. weighted by coefficients that were estimated by Altman's application of the statistical method of discriminate analysis to a dataset of publicly held manufacturers. He was then an Assistant Professor of Finance at New York University. and he then collected a matched sample of firms which had survived. Page | 26 . Zscores are still used occasionally as an easy-to-calculate control measure for the financial distress status of companies in academic studies about other topics. and.1 ESTIMATION OF THE FORMULA The Z-score is a linear combination of four or five common business ratios. The formula may be used to predict the probability that a firm will go into bankruptcy within two years. Altman first identified a set of firms which had declared bankruptcy. is still a professor at NYU.COMPANY ANALYSIS The company analysis is done on base of fundament analysis which is done on the bases of: • • • • • • Edward Altman’s Z score Ratios Earnings Per Share Book Value Market Capitalization Promoters’ Shareholding Pattern 6.

3T3 + . 6. It adds market dimension that can show up security price fluctuation as a possible red flag.25 avg.The estimation was originally based on data from publicly held manufacturers. It measures operating efficiency apart from tax and leveraging factors.3 PRECEDENTS Altman's work built upon research by accounting researcher William Beaver and others.2 THE ORIGINAL Z-SCORE FORMULA WAS AS FOLLOWS: Z = 1. T5 = Sales/ Total Assets. Where.4T2 + 3. but has since been re-estimated based on other datasets for private manufacturing. and for the nonbankrupt group at +4.2T1 + 1.1. T1 = Working Capital / Total Assets.6T4 + . T4 = Market Value of Equity / Book Value of Total Liabilities. Mervyn and others had collected matched samples and assessed that various accounting ratios appeared to be valuable in predicting bankruptcy. half of which had filed for bankruptcy under Chapter 7. 6. It measures profitability that reflects the company's age and earning power.1. The original data sample consisted of 66 firms. It is standard measure for turnover (varies greatly from industry to industry).999T5. In the 1930s and on. non-manufacturing and service companies. T3 = Earnings before Interest and Taxes / Total Assets.48 avg. All businesses in the database were manufacturers and small firms with assets of <$1 million were eliminated. It measures liquid assets in relation to the size of the company. It recognizes operating earnings as being important to long-term viability. Altman found that the ratio profile for the bankrupt group fell at -0. T2 = Retained Earnings / Total Assets. Page | 27 .

but these have limited predictive value because they rely on market data (fluctuations of share and options prices to imply fluctuations in asset values) to predict a market event (default. The formula's approach has been used in a variety of contexts and countries.1. 6. and because the sample itself is not randomly selected. Later variations by Altman take into account the book value of privately held shares.William Beaver's work. the Z-scores gained wide acceptance by auditors. There are market-based formulas used to predict the default of financial firms (such as the Merton Model). The Altman Z-Score model is not recommended for use with financial firms. discriminant analysis. Beaver applied this method to evaluate the importance of each of several accounting ratios based on univariate analysis.4 ACCURACY AND EFFECTIVENESS Some studies measuring the effectiveness of the Z-score have shown the model to be accurate with >70% reliability (Eidleman). because these firms often have off-balance sheet liabilities that aren't captured by the financial statement data used in the Altman Z-Score model. and database systems used for loan evaluation (Eidleman). management accountants. Page | 28 . it is not reasonable to project that the formula will achieve similar accuracy when applied for making predictions about other firms. t-tests to predict bankruptcy for a pair-matched sample of firms. Because the parameters of the model are estimated based on the same sample. using each accounting ratio one at a time. when the Z-score values for firms are translated into yes/no predictions for whether each turns out to be bankrupt. published in 1966 and 1968. i. and the fact that turnover ratios vary widely in non-manufacturing industries. courts. What is usually meant by accuracy is the percentage of firms that are classified correctly.. Altman's primary improvement was to apply a statistical method. From about 1985 onwards. although it was designed originally for publicly held manufacturing companies with assets of more than $1 million. the decline in asset values below the value of a firm's liabilities). was the first to apply a statistical method. which could take into account multiple variables simultaneously.e. within the estimation sample.

1.8 < Z < 2.4T2 + 3.998T5 Page | 29 .420T4 + .99 -“Safe” Zone 1.847T2 + 3.6T4 + .80 -“Distress” Zone 6.6.5 ORIGINAL Z-SCORE COMPONENT DEFINITIONS VARIABLE DEFINITION WEIGHTING FACTOR T1 = Working Capital / Total Assets T2 = Retained Earnings / Total Assets T3 = Earnings before Interest and Taxes / Total Assets T4 = Market Value of Equity / Total Liabilities T5 = Sales/ Total Assets Z Score Bankruptcy Model: Z = 1.3T3 + .6 Z-SCORE ESTIMATED FOR PRIVATE FIRMS T1 = (Current Assets-Current Liabilities) / Total Assets T2 = Retained Earnings / Total Assets T3 = Earnings before Interest and Taxes / Total Assets T4 = Book Value of Equity / Total Liabilities T5 = Sales/ Total Assets Z' Score Bankruptcy Model: Z' = .107T3 + .99 -“Grey” Zone Z < 1.1.999T5 Zones of Discrimination: Z > 2.717T1 + .2T1 + 1.

7 Z-SCORE ESTIMATED FOR NON-MANUFACTURER INDUSTRIALS & EMERGING MARKET CREDITS T1 = (Current Assets-Current Liabilities) / Total Assets T2 = Retained Earnings / Total Assets T3 = Earnings before Interest and Taxes / Total Assets T4 = Book Value of Equity / Total Liabilities Z-Score Bankruptcy Model: Z = 6.05T4 Zones of Discrimination: Z > 2. Page | 30 .1.6 -“Grey” Zone Z < 1.23 -“Distress” Zone 6.1 -“Distress” Zone Here we calculated Z score for 20 companies which were short listed through fundamental analysis of 60 companies and it is shown in below tables.1 < Z < 2.23 < Z’ < 2.26T2 + 6.9 -“Safe” Zone 1.6 -“Safe” Zone 1.56T1 + 3.72T3 + 1. 9 -“Grey” Zone Z' < 1.Zones of Discrimination: Z' > 2.

010 1.339 Table 6.328 4.357 0.872 5.476 0.197 0.077 11.254 0.6T4 + .232 Mar '08 0.191 0.2T1 + 1.061 0.945 Mar '06 0.119 0.394 Mar '08 -0.227 0.999T5 Mar '05 -0.010 1.864 8.4T2 + 3.009 0.310 3.007 0.448 3.319 5.228 0.565 2.063 0.384 9.243 0.2: Z score of Maruti Suzuki India Banking Sector (under category of Non-Manufacturing Industry) ICICI Bank Z score model T1 = (Current Assets-Current Liabilities) / Total Assets T2 = Retained Earnings / Total Assets T3 = Earnings Before Interest and Taxes / Total Assets T4 = Book Value of Equity / Total Liabilities Z = 6.325 4.118 Mar '06 -0.189 0.05T4 Mar '05 0.283 2.175 2.999T5 Mar '05 -0.748 0.075 0.572 2.650 8.261 0.463 5.457 4.72T3 + 1.027 0.2T1 + 1.761 Mar '07 -0.010 0.570 Mar '06 -0.060 0.6T4 + .026 Mar '09 -0.170 0.26T2 + 6.274 2.3T3 + .3T3 + .197 Mar '07 0.Automobile Sector (under category of Manufacturing Industry) Hero Honda Motors Z score model T1 = Working Capital / Total Assets T2 = Retained Earnings / Total Assets T3 = Earnings Before Interest and Taxes / Total Assets T4 = Market Value of Equity / Total Liabilities T5 = Sales/ Total Assets Z = 1.883 1.478 5.023 0.162 1.600 11.008 0.166 2.008 0.276 4.1: Z score of Hero Honda Motors Maruti Suzuki India Z score model T1 = Working Capital / Total Assets T2 = Retained Earnings / Total Assets T3 = Earnings Before Interest and Taxes / Total Assets T4 = Market Value of Equity / Total Liabilities T5 = Sales/ Total Assets Z = 1.3: Z score of ICICI Bank Page | 31 .865 Mar '09 -0.4T2 + 3.872 Table 6.010 0.125 Mar '08 -0.56T1 + 3.095 0.264 Table 6.597 2.243 2.197 0.021 0.100 4.111 0.538 Mar '07 -0.720 Mar '09 0.494 8.013 0.012 0.199 0.170 0.009 0.729 6.705 1.219 4.455 5.514 3.697 6.306 1.

017 0.757 4.059 0.863 1.108 0.879 1.999T5 Mar '05 -0.024 0.273 1.884 4.012 0.329 1.984 Mar '07 0.227 11.147 0.071 0.3T3 + .087 0.495 19.710 9.999T5 Mar '05 0.72T3 + 1.194 29.370 5.698 21.369 6.556 0.4T2 + 3.HDFC Bank Z score model T1 = (Current Assets-Current Liabilities) / Total Assets T2 = Retained Earnings / Total Assets T3 = Earnings Before Interest and Taxes / Total Assets T4 = Book Value of Equity / Total Liabilities Z = 6.337 4.705 1.726 15.243 0.721 1.347 5.679 Mar '06 0.069 0.015 0.6T4 + .100 Mar '09 0.346 1.2T1 + 1.144 0.671 6.109 0.818 Mar '09 0.134 0.990 16.089 0.749 7.982 1.021 0.056 0.015 0.413 0.355 7.800 1.452 0.092 0.029 0.2T1 + 1.631 0.835 6.732 Table 6.125 Mar '08 0.05T4 Mar '05 0.450 Table 6.307 Mar '07 0.174 0.641 3.545 Mar '09 -1.56T1 + 3.307 Mar '08 -1.024 0.334 1.4T2 + 3.4: Z score of HDFC Bank FMCG Sector (under category of Manufacturing Industry) ITC Z score model T1 = Working Capital / Total Assets T2 = Retained Earnings / Total Assets T3 = Earnings Before Interest and Taxes / Total Assets T4 = Market Value of Equity / Total Liabilities T5 = Sales/ Total Assets Z = 1.5: Z score of ITC Colgate Palmolive India Z score model T1 = Working Capital / Total Assets T2 = Retained Earnings / Total Assets T3 = Earnings Before Interest and Taxes / Total Assets T4 = Market Value of Equity / Total Liabilities T5 = Sales/ Total Assets Z = 1.26T2 + 6.671 31.129 0.305 Mar '06 0.022 0.3T3 + .029 0.6: Z score of Colgate Palmolive India Page | 32 .570 32.997 8.135 0.108 Mar '07 -0.768 7.114 Table 6.6T4 + .012 0.116 0.574 Mar '08 0.010 0.390 1.977 Mar '06 -0.175 9.378 0.544 28.015 1.

172 0.107 3.180 0.601 0.281 0.294 Mar '09 0.608 Mar '08 0.Infrastructure Sector (under category of Manufacturing Industry) Housing Development and Infrastructure Z score model T1 = Working Capital / Total Assets T2 = Retained Earnings / Total Assets T3 = Earnings Before Interest and Taxes / Total Assets T4 = Market Value of Equity / Total Liabilities T5 = Sales/ Total Assets Z = 1.704 Mar '09 0.269 0.182 0.56T1 + 3.2T1 + 1.129 1.623 0.261 0.371 1.162 0.823 Mar '08 0.132 0.262 0.356 Mar '05 Mar '06 Mar '07 Mar '08 Mar '09 Table 6.121 1.567 Mar '07 0.184 5.000 5.694 0.000 6.395 1.000 5.711 Mar '06 0.009 0.135 0.699 0.3T3 + .193 0.162 0.236 0.676 0.000 0.415 0.377 1.353 3.090 0.299 0.065 0.000 0.000 1.400 1.4T2 + 3.088 0.168 0.257 Mar '06 -0.000 0.000 0.304 0.000 5.4T2 + 3.188 0.493 0.405 0.062 0.291 0.119 Mar '07 0.378 0.3T3 + .209 0.190 0.550 0.6T4 + .852 Table 6.280 4.052 0.436 0.8: Z score of DLF IT Sector (under category of Non-Manufacturing Industry) Infosys Technologies Z score model T1 = (Current Assets-Current Liabilities) / Total Assets T2 = Retained Earnings / Total Assets T3 = Earnings Before Interest and Taxes / Total Assets T4 = Book Value of Equity / Total Liabilities Z = 6.26T2 + 6.665 Table 6.297 0.191 0.096 0.378 1.251 0.9: Z score of Infosys Technologies Page | 33 .491 0.092 4.000 5.293 0.6T4 + .612 0.999T5 Mar '05 -0.426 1.72T3 + 1.200 1.055 0.7: Z score of Housing Development and Infrastructure Ltd DLF Z score model T1 = Working Capital / Total Assets T2 = Retained Earnings / Total Assets T3 = Earnings Before Interest and Taxes / Total Assets T4 = Market Value of Equity / Total Liabilities T5 = Sales/ Total Assets Z = 1.149 0.000 1.128 0.2T1 + 1.148 0.999T5 Mar '05 0.262 1.05T4 0.

972 0.454 0.449 2.005 1.Tata Consultancy Services Z score model T1 = (Current Assets-Current Liabilities) / Total Assets T2 = Retained Earnings / Total Assets T3 = Earnings Before Interest and Taxes / Total Assets T4 = Book Value of Equity / Total Liabilities Z = 6.12: Z score of Tata Steel Ltd Page | 34 .515 0.152 Table 6.139 1.145 0.121 1.857 Mar '06 -0.270 Table 6.032 1.769 5.458 2.077 0.999T5 Mar '05 -0.155 0.372 2.124 0.05T4 -0.001 5.230 0.428 Mar '05 Mar '06 Mar '07 Mar '08 Mar '09 Table 6.625 2.556 2.408 Mar '06 0.286 Mar '07 -0.545 0.165 0.021 0.266 0.126 0.2T1 + 1.953 -0.020 0.619 4.227 0.004 1.56T1 + 3.931 1.119 0.109 0.189 0.144 0.437 2.389 3.176 1.4T2 + 3.624 1.617 0.941 4.071 0.078 0.26T2 + 6.008 1.490 1.093 0.054 0.396 Mar '09 0.11: Z score of SAIL Tata Steel Z score model T1 = Working Capital / Total Assets T2 = Retained Earnings / Total Assets T3 = Earnings Before Interest and Taxes / Total Assets T4 = Market Value of Equity / Total Liabilities T5 = Sales/ Total Assets Z = 1.999T5 Mar '05 -0.72T3 + 1.060 0.382 0.357 Mar '08 -0.180 -0.010 0.144 0.6T4 + .272 1.339 0.010 0.396 4.158 0.4T2 + 3.10: Z score of TCS Ltd Steel and other Alloy Sector (under category of Manufacturing Industry) Steel Authority of India Z score model T1 = Working Capital / Total Assets T2 = Retained Earnings / Total Assets T3 = Earnings Before Interest and Taxes / Total Assets T4 = Market Value of Equity / Total Liabilities T5 = Sales/ Total Assets Z = 1.011 0.832 2.021 0.3T3 + .766 Mar '09 -0.6T4 + .013 -0.3T3 + .848 5.272 0.474 1.196 1.229 0.010 0.2T1 + 1.281 0.675 Mar '07 0.005 1.020 0.071 0.138 0.002 1.068 Mar '08 0.056 0.082 0.

301 1.003 Mar '07 0.728 3.211 0.519 5.054 0.2T1 + 1.468 0.095 0.120 0.177 Table 6.184 0.128 0.408 4.2T1 + 1.337 1.4T2 + 3.786 Table 6.6T4 + .136 0.4T2 + 3.999T5 Mar '05 -0.182 0.755 1.126 0.466 0.122 0.478 1.385 1.Oil and Gas Sector (under category of Manufacturing Industry) Oil and Natural Gas Corporation Z score model T1 = Working Capital / Total Assets T2 = Retained Earnings / Total Assets T3 = Earnings Before Interest and Taxes / Total Assets T4 = Market Value of Equity / Total Liabilities T5 = Sales/ Total Assets Z = 1.117 0.266 5.862 5.033 6.296 3.399 0.742 3.2T1 + 1.218 7.058 0.558 5.365 2.092 5.358 Mar '08 -0.900 Mar '08 0.098 0.174 0.058 0.362 2.011 0.15: Z score of Cipla Page | 35 .729 4.233 1.022 0.036 0.372 0.085 Mar '06 -0.366 4.117 0.958 Mar '08 -0.423 0.159 0.146 1.728 3.001 4.014 0.083 0.13: Z score of ONGC Bharat Petroleum Corporation Z score model T1 = Working Capital / Total Assets T2 = Retained Earnings / Total Assets T3 = Earnings Before Interest and Taxes / Total Assets T4 = Market Value of Equity / Total Liabilities T5 = Sales/ Total Assets Z = 1.373 4.250 Mar '09 -0.446 0.14: Z score of BPCL Pharmaceutical Sector (under category of Manufacturing Industry) Cipla Z score model T1 = Working Capital / Total Assets T2 = Retained Earnings / Total Assets T3 = Earnings Before Interest and Taxes / Total Assets T4 = Market Value of Equity / Total Liabilities T5 = Sales/ Total Assets Z = 1.141 Mar '06 0.999T5 Mar '05 0.3T3 + .761 0.999T5 Mar '05 -0.196 0.153 0.186 Mar '06 0.088 5.457 Mar '07 -0.944 0.112 Mar '07 -0.173 0.244 5.239 Mar '09 -0.239 1.266 0.197 3.990 4.6T4 + .851 0.129 0.553 4.040 0.3T3 + .437 0.825 3.6T4 + .3T3 + .630 Mar '09 0.118 0.4T2 + 3.180 3.751 Table 6.408 1.679 2.119 0.

531 3.584 3.154 1.999T5 Mar '05 -0.3T3 + .023 0.639 0.891 3.876 Mar '07 -0.261 0.674 Mar '06 0.208 -0.453 0.120 1.188 1.304 2.456 0.215 0.803 3.093 0.462 0.372 1.057 0.194 Mar '08 0.585 0.627 Mar '07 0.2T1 + 1.381 1.007 0.6T4 + .007 0.3T3 + .126 1.6T4 + .680 0.009 Mar '08 0.4T2 + 3.012 0.032 0.054 0.004 0.131 0.990 0.171 2.6T4 + .973 Table 6.401 1.18: Z score of Suzlon Energy Page | 36 .252 1.861 0.200 4.Biocon Z score model T1 = Working Capital / Total Assets T2 = Retained Earnings / Total Assets T3 = Earnings Before Interest and Taxes / Total Assets T4 = Market Value of Equity / Total Liabilities T5 = Sales/ Total Assets Z = 1.132 1.040 0.822 3.451 1.486 0.169 Mar '07 0.522 0.603 Mar '06 0.3T3 + .245 Mar '09 -0.571 Mar '06 -0.4T2 + 3.304 0.320 0.525 0.122 0.351 1.109 3.604 2.126 0.162 0.087 Mar '09 0.686 0.119 0.180 2.501 Mar '08 0.301 Table 6.585 0.149 1.065 0.458 2.872 Table 6.16: Z score of Biocon Power Sector (under category of Manufacturing Industry) NTPC Z score model T1 = Working Capital / Total Assets T2 = Retained Earnings / Total Assets T3 = Earnings Before Interest and Taxes / Total Assets T4 = Market Value of Equity / Total Liabilities T5 = Sales/ Total Assets Z = 1.2T1 + 1.112 0.189 0.143 Mar '09 0.246 2.078 1.999T5 Mar '05 0.936 0.200 0.2T1 + 1.999T5 Mar '05 0.692 4.445 2.261 0.056 0.205 0.348 0.056 0.4T2 + 3.000 1.149 3.188 0.034 -0.17: Z score of NTPC Suzlon Energy Z score model T1 = Working Capital / Total Assets T2 = Retained Earnings / Total Assets T3 = Earnings Before Interest and Taxes / Total Assets T4 = Market Value of Equity / Total Liabilities T5 = Sales/ Total Assets Z = 1.

052 0.484 0.113 0.894 0.170 -0.189 0.233 0.102 0.144 0.557 -0.099 0.371 0.56T1 + 3.316 -0.984 1.000 1.681 0.72T3 + 1.071 0.753 1.Telecom Sector (under category of Non-Manufacturing Industry) Bharti Airtel Z score model T1 = (Current Assets-Current Liabilities) / Total Assets T2 = Retained Earnings / Total Assets T3 = Earnings Before Interest and Taxes / Total Assets T4 = Book Value of Equity / Total Liabilities Z = 6.202 -0.042 0.26T2 + 6.56T1 + 3.247 0.349 0.122 0.283 0.313 0.475 -1.970 1.26T2 + 6.136 -0.028 0.217 0.057 0.208 0.299 0.05T4 -0.102 0.155 0.604 -0.166 0.19: Z score of Bharti Airtel TATA COMM Z score model T1 = (Current Assets-Current Liabilities) / Total Assets T2 = Retained Earnings / Total Assets T3 = Earnings Before Interest and Taxes / Total Assets T4 = Book Value of Equity / Total Liabilities Z = 6.779 1.127 0.116 0.448 0.745 0.397 -0.290 -0.241 0.024 0.185 1.352 -0.112 Mar '05 Mar '06 Mar '07 Mar '08 Mar '09 Table 6.572 Mar '05 Mar '06 Mar '07 Mar '08 Mar '09 Table 6.72T3 + 1.05T4 -0.20: Z score of Tata Communication Ltd Page | 37 .

570 0.608 0.087 1.872 0.177 2.915 3.977 1.973 Rating 19 15 4 5 18 20 9 6 16 3 13 8 11 17 14 10 7 12 1 2 Table 6.357 3.711 0.945 1.761 1.356 1.109 5.704 5.294 4.857 3.239 5.917 1.186 3.823 5.009 3.396 1.013 5.571 3.307 7.567 5.545 3.293 1.397 Mar ‘06 11.629 5.358 5.763 2.720 1.141 4.751 4.108 3.100 32.301 1.21: Z score Ratings Page | 38 .501 0.934 2.143 2.257 6.232 1.316 1.526 1.457 5.215 21.082 1.264 1.675 4.170 0.538 6.270 1.852 1.394 1.884 3.169 1.290 1.112 0.305 11.148 4.428 3.493 1.766 3.052 1.136 Mar '08 8.876 4.872 1.112 5.352 1.114 29.125 6.603 5.180 5.732 1.197 1.973 1.250 4.779 3.574 16.865 1.307 4.371 1.572 Average 9.408 4.165 5.953 4.372 0.900 3.003 3.202 Mar '07 9.674 -1.068 2.152 2.665 5.627 -0.118 5.679 3.Combine Altman Z Score Model Rating Companies Hero Honda Maruti Suzuki ICICI HDFC ITC Colgate HDIL DLF Infosys TCS SAIL TATA Steel ONGC BPCL Cipla Biocon NTPC Suzlon Bharti Tata Comm Mar ‘05 11.718 4.476 6.245 4.450 6.958 5.603 1.818 7.205 0.125 5.026 4.393 1.194 2.339 4.085 7.630 3.436 0.984 19.786 4.557 Mar '09 8.286 3.119 0.

To do the fundamental analysis we had taken 12 ratios. Ratios can be classified into the following categories: Investment Valuation Ratios • • • Dividend per Share Net Operating Profit per Share Bonus in Equity Capital Profitability Ratios • • • • Net Profit Margin Return on Capital Employed Return on Assets Return on Long Term Funds Liquidity and Solvency Ratios • • • Current Ratio Quick Ratio Debt Equity Ratio Page | 39 . Ratios are relationships expressed in mathematical terms between the items of financial statements.2 RATIO ANALYSIS Ratio analysis involves establishing financial relationship between components of financial statements. Z Score Model. In total we fundamentally analyze 60 companies of 10 sectors of Indian Economy which divided top 6 companies from each sectors. books values.6. We are doing the fundamental analysis for the shareholders or investors’ perspectives so many other ratios described below will help them to get better investment ideas. earning per shares and market capitalization of the last 5 financial year starting from April 2005 to end on March 2009.

Investors should note that stock quotes record the per share dollar amount of a company's latest quarterly declared dividend. In short the return given or amount given to the shareholders or investors. dividend. This quarterly dollar amount is annualized and compared to the current stock price to generate the per annum dividend yield. This ratio help the investors to value the firm (returns) in terms of bonus.2. shown by this ratio. The dividend yield is found in the stock quotes of dividend-paying companies.1 INVESTMENT VALUATION RATIOS This analysis looks at a wide array of ratios that can be used by investors to estimate the attractiveness of a potential or existing investment and get an idea of its valuation. Page | 40 . which represents an expected return.Debt Coverage Ratios • Total Debt to Owners Fund Cash Flow Indicator Ratios • • • Dividend Payout Ratio Net Profit Earning Retention Ratio Adjusted Cash Flow Times 6. Dividend per Share or Dividend Yield Annual Dividend per Share Stock Price per Share Dividend Yield= A stock's dividend yield is expressed as an annual percentage and is calculated as the company's annual cash dividend per share divided by the current price of the stock. Net Profit per share their face values free reserves etc.

Income investors value a dividend-paying stock.8 7.94 14.7 15 0 2 23.000 in our Portfolio.1 3.5 3.5 2 2.8 5 0 4.5 11 10 3.5 10 7 3.5 8.2 24.8 Rating 18 9 14 11 13 15 2 8 19 16 4 17 20 12 3 6.79 10.5 5.7 16 32 4 2 5 3. Companies Hero Honda Maruti Suzuki ICICI HDFC ITC Colgate HDIL DLF Infosys TCS SAIL TATA Steel ONGC BPCL Cipla Biocon NTPC Suzlon Bharti Tata Comm Mar '05 20 2 8.5 2.5 31 7 0 4 11.4 1 3.6 0 2 4.4 4 0 6 Mar '06 20 3. Whatever your investing style.5 2 2.3 3.5 14 2.4 2.9 2. we take this ratio for the top 2 companies of each sector (20 companies in total) and the better or high ratio given company will give preference first for the investment of amount of 10.5 1 0 4.5 Average 19.5 2 13 45 2.000.5 6. it is a matter of historical record that dividend-paying stocks have performed better than nonpaying-dividend stocks over the long term Here.7 36 8.5 5 1 10 Table 6.5 0 2 11. preferring to capture large capital gains.95 12.25 14 3.5 11.5 3.7 9.5 3.1 8.2 5 0 4.4 4.5 Mar '09 20 3.2 3.5 4.5 3.5 31 16 2 3 3.5 13 5 4 33.6 16 32 7 2 3 3.1 3 0.5 Mar '08 19 5 11 8.65 7.5 2.5 Mar '07 17 4.22: Dividend Yield Page | 41 .1 15.5 0 4 45 13. while growth investors have little interest in dividends.1 9.5 11.3 13 40 12.

34 160.16 31.9 Mar '06 436.7 77.64 422.57 37.86 7.498 274.34 45.78 99.24 3.63 301.06 625.66 266.73 97.528 127.38 67.929.83 3.4 70.98 46.55 2.736 193.75 228.93 115.12 253.98 32.18 65.284 2774.Net Operating Profit per Share Net Operating Profit per Share = Net Operating Profit after Tax (NOPAT) Total Share Capital It shows the net profit which investors will going to earn on each shares they held in the company.07 512.77 464.38 135.52 261.71 131.45 259.43 98.71 348.49 316.28 273.822 102.59 353.2 Mar '09 617.69 120.07 38.638 84.74 62.94 296.258 88.23 111.21 50.69 111.738 287.43 Rating 18 19 13 12 6 7 4 16 15 11 5 14 17 20 2 3 1 9 8 10 Table 6.77 39.16 141.07 32.517.87 177.8 26.34 354.52 68.04 27.175.69 69.876 68. Companies Hero Honda Maruti Suzuki ICICI HDFC ITC Colgate HDIL DLF Infosys TCS SAIL TATA Steel ONGC BPCL Cipla Biocon NTPC Suzlon Bharti Tata Comm Mar '05 372 382.83 82.97 94.048.56 Average 488 531.39 96.95 66.71 1.4 336.28 54.4 44.53 167.11 300.93 1.74 269.4 179.670.09 2.92 106.27 299.8 323.57 189.23 717.22: Net Operating Profit per Share Page | 42 .2 196.45 327.974 274.54 39.72 287.70 64.43 252.5 343.73 115.08 83.91 48.67 Mar '07 496.708.45 132.63 229.04 333.41 16.82 Mar '08 518.91 126.42 84.2 152.7 128.17 306.37 220.24 273.76 59.37 69.02 280.42 69.37 131.69 45.67 83.2 230.58 186.09 84.25 75.6 43.

Investor is consider this news i. which display the amount of profit a company generates on its sales at the different stages of an income statement. Return on Equity and Return on Capital Employed . The long-term profitability of a company is vital for both the survivability of the company as well as the benefit received by shareholders. Bonus per share increase the number of share for the investor and it automatically increase their amount and profit out of that company. The companies give bonus out of their free reserves built out of the genuine profits or share premium collected in cash only. 6. These ratios.2 PROFITABILITY RATIOS This section of the tutorial discusses the different measures of corporate profitability and financial performance. In this section.e. give users a good understanding of how well the company utilized its resources in generating profit and shareholder value.Return on Assets. Page | 43 . we will look at four important profit margins. the company which gives more bonuses per share selected first by us and so on. So. declaration of bonus as the best news from the company. We'll also show you how to calculate the effective tax rate of a company.detail how effective a company is at generating income from its resources. The last three ratios covered in this section . much like the operational performance ratios.2. It is these ratios that can give insight into the all important “Profit”.Bonus per Share Bonus given by the company to their investor in the ratio of 1:1 or 1:2 means if it is 1:1 then they give same number of shares which already held by the share holder.

investors can easily see from a complete profit margin analysis that there are several income and expense operating elements in an income statement that determine a net profit margin. It behooves investors to take a comprehensive look at a company's profit margins on a systematic basis Return on Capital Employed (ROCE) Return on Capital Employed (ROCE) = Net Income Capital Employed Capital Employed = Average Debt Liabilities + Average Shareholders’ Equity The return on capital employed (ROCE) ratio. Page | 44 . the so-called bottom line is the most often mentioned when discussing a company's profitability. complements the return on equity (ROE) ratio by adding a company's debt liabilities. By comparing net income to the sum of a company's debt and equity capital. or funded debt. Financial analysts consider the ROCE measurement to be a more comprehensive profitability indicator because it gauges management's ability to generate earnings from a company's total pool of capital. to equity to reflect a company's total "capital employed". expressed as a percentage.Net Profit Margin (%) Net Profit Margin = Net Income Net Sales (Revenue) Often referred to simply as a company's profit margin. This measure narrows the focus to gain a better understanding of a company's ability to generate returns from its available capital base. While undeniably an important number. investors can get a clear picture of how the use of leverage impacts a company's profitability.

78 19.9 12.87 44.39 7.9 15.85 43.33 17.03 17.24 90.72 37.Companies Hero Honda Maruti Suzuki ICICI HDFC ITC Colgate HDIL DLF Infosys TCS SAIL TATA Steel ONGC BPCL Cipla Biocon NTPC Suzlon Bharti Tata Comm Mar '05 67. amounts to be received etc.99 33.12 28.06 10.37 18.01 34.62 11.978 25.74 11.21 12.162 27. Page | 45 .264 13.94 27.97 23.428 10.71 37.8 14.44 20.39 14.2 14.46 8.23 Average 51.03 16.61 15.084 9.29 56.142 35.9 0 43.56 111.92 44.67 18.15 16.46 4.83 0 67.504 22.25 61.37 20.5 0 55.15 35.05 36.02 18.902 0 51.7 35.4 6.3 11.13 0 42.744 31.194 12.93 24.594 32.41 Mar '06 60.48 30.17 37.69 25.194 Rating 18 12 3 4 15 20 14 7 1 19 17 13 16 5 10 8 6 9 11 2 Table 6.53 26.27 27.4 16.88 22.538 23.29 14.17 13.26 70.06 40.922 37.37 9.52 28. debtors.61 156. cash and bank.88 12.52 61.28 Mar '08 41.09 73.88 26.31 33.26 30.53 Mar '09 43.13 13.802 42.12 16.18 10.65 9.27 11.52 Mar '07 43.27 6.65 10.58 8.22 13.5 34.57 26.148 9.94 26.512 17.21 37.96 36.94 29.31 13.08 8.11 13. We take this ratio because we can study the half of the balance sheet of the companies.11 36.18 11.21 27.15 0 49.02 12.24: Return on Capital Employed Return on Total Asset = Return on Total Asset Profit after Tax Average Total Assets This ratio indicates the return from the asset means not only from selling of assets but also from the investments.95 6.6 167.

While each ratio includes current assets. scripts. shares. which goes into how the company turns its inventory into cash. The biggest difference between each ratio is the type of assets used in the calculation. those that can be easily converted to cash). the more conservative ratios will exclude some current assets as they aren’t as easily converted to cash. quick and cash ratios and we will also go over the cash conversion cycle. securities. its short-term liabilities. as well as meeting its obligations. a company with a low coverage rate should raise a red flag for investors as it may be a sign that the company will have difficulty meeting running its operations. 6. In general. Current Ratio: Current Ratio = Current Assets Current Liabilities Page | 46 .3 LIQUIDITY AND SOLVENCY RATIOS: Liquidity ratios attempt to measure a company's ability to pay off its short-term debt obligations. mutual funds which are for more than three years.2. The ratios that we'll look at are the current. On the other hand. the greater the coverage of liquid assets to short-term liabilities the better as it is a clear signal that a company can pay its debts that are coming due in the near future and still fund its ongoing operations. This is done by comparing a company's most liquid assets (or.Return on long term funds RETURN ON LONG TERM FUNDS = PROFIT AFTER TAX LONG TERM FUND This ratio indicates the returns of the company from its funds.

which are more difficult to turn into cash. The quick ratio is more conservative than the current ratio because it excludes inventory and other current assets. In theory. the higher the current ratio. receivables and inventory) are readily available to pay off its short-term liabilities (notes payable. Therefore. DEBT EQUITY RATIO: Debt Equity Ratio = Total Liabilities Shareholders′ Equity The debt-equity ratio is another leverage ratio that compares a company's total liabilities to its total shareholders' equity. This is a measurement of how much suppliers. creditors and obligors have committed to the company versus what the shareholders have committed. lenders. QUICK RATIO: Quick Ratio = Cash & 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 + 𝑆𝑆ℎ𝑜𝑜𝑜𝑜𝐸𝐸 𝐸𝐸𝐸𝐸𝑜𝑜𝑡𝑡 𝐼𝐼𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝑡𝑡𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 + 𝐴𝐴𝐴𝐴𝐴𝐴𝑜𝑜𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑅𝑅𝐸𝐸𝐴𝐴𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝑅𝑅𝐸𝐸𝐸𝐸 Current Liabilities The quick ratio . current portion of term debt. the better. cash equivalents. a higher ratio means a more liquid current position. marketable securities. The concept behind this ratio is to ascertain whether a company's short-term assets (cash.The current ratio is a popular financial ratio used to test a company's liquidity (also referred to as its current or working capital position) by deriving the proportion of current assets available to cover current liabilities.aka the quick assets ratio or the acid-test ratio . accrued expenses and taxes). payables.is a liquidity indicator that further refines the current ratio by measuring the amount of the most liquid current assets there are to cover current liabilities. Page | 47 .

as opposed to total assets in the debt ratio.4 DEBT COVERAGE RATIOS It shown the debt recovery every year by the company how much amount of debt is paid to creditors and banks and also received from the debtors are shown with the help of this ratio This ratio also indicates the debt of the company which is levied on the investors or the owner or the shareholder or three of all.Long Term Loans Total debt includes current liabilities and loans outstanding This ratio indicates the liabilities and outstanding on the share capital or share holder’s fund the more the ratio the less preference for investment is given by the share holders and portfolio manager. a lower the percentage means that a company is using less leverage and has a stronger equity position. So. the debt-equity ratio provides another vantage point on a company's leverage position. in this case. Total Debt to Owner’s fund Total Debt to Owner ′ s fund = Total Debt Owners Fund Owner’s fund = Total Assets . Similar to the debt ratio. 6.2. comparing total liabilities to shareholders' equity. we give the preference to the less debt to owners’ fund ratio having company at prior than the other and so on.Current Liabilities .To a large degree. Page | 48 .

27 8.54 1.52 10.37 0 0.01 0.74 0 0.13 0.11 0.01 0.11 0.156 0.86 0. which focus on the cash being generated in terms of how much is being generated and the safety net that it provides to the company.Companies Hero Honda Maruti Suzuki ICICI HDFC ITC Colgate HDIL DLF Infosys TCS SAIL TATA Steel ONGC BPCL Cipla Biocon NTPC Suzlon Bharti Tata Comm Mar '05 0.42 0.1 0 Mar '06 0.642 0 0.25: Debt Coverage Ratio 6.09 0.498 0.01 0.46 0.34 Average 0.13 1.24 1.34 0.116 0.02 0.09 9.56 0.2 1.02 0.5 CASH FLOW INDICATOR RATIOS This section of the financial ratio tutorial looks at cash flow indicators.69 0.124 0.21 0.28 0.47 0.24 0.02 1.07 4.45 10.566 0.65 0.03 Mar '08 0.02 0.13 0.01 0.65 0 0.67 0 0.93 0.44 0.29 0.61 0.33 0.932 3.75 0.15 0.04 0.214 1.022 0.12 0.03 0.5 10.13 0.07 0.18 1.76 0.02 1.01 7.62 0.02 Mar '07 0.06 4.42 9.018 0.78 0 0.08 0.752 0.22 0.31 0.016 0.12 Mar '09 0.308 0. These ratios can give users another look at the financial health and performance of a company.07 6.04 0.29 1.5 0.54 0.02 0.24 0.59 1.11 0.12 0.03 0.102 Rating 15 16 2 1 18 17 5 3 20 19 10 6 11 4 12 13 9 8 7 14 Table 6.01 0.52 0.01 0.07 7.04 0.05 0. Page | 49 .072 0.26 0.34 0.508 0.11 5.24 0.2.02 0.98 8.39 0.75 0.04 0.92 0.27 1.53 0.14 0.924 9.

For example. We will look at the operating cash flow/sales ratio. the amount of cash they are generating free and clear. However. The ratios in this section use cash flow compared to other company metrics to determine how much cash they are generating from their sales. they will look profitable but haven't actually received cash for the sales. through the magic of accounting and non-cash-based transactions.At this point. if a company makes a ton of sales on credit. and the amount of cash they have to cover obligations. Although if company did not give dividend it is the amount of investors keep by them but yet not given to them and used for the company. free cash flow/operating cash flow ratio and cash flow coverage ratios. More the dividend payout it is better for the investors. Dividend Payout Ratio Dividend Payout Ratio = Total Dividend Payment Net Profit This ratio shows the yearly dividend paid by the company out of their net profit. Page | 50 . we all know that profits are very important for a company. With the help of this ratio we can get the idea how much company keep the profit for their own expansion and how much they give it to their shareholders. which can hurt their financial health since they have obligations to pay. companies that appear very profitable can actually be at a financial risk if they are generating little cash from these profits. They get the money physically after giving dividend.

02 0 30.76 84.36 0 49.53 92.47 23.79 27.15 49.17 23.2 20.82 Mar '06 46. Tracking year-on-year earnings retention ratios is important to fundamental analysis to investigate whether a company is increasing or decreasing its rate of re-investment.12 22.45 9.48 34.41 29.174 11.71 29.808 25.146 33.41 33.27 13.28 Mar '09 36.16 49.72 33.89 22.03 34.71 23.324 34.23 20.64 49.864 31.754 48.32 27.45 45.05 0 23.99 40.6 22.998 20.02 Mar '08 45.15 48.73 29.61 29.85 34.228 22.55 50.49 11. Most earnings retained are re-invested into the company's operations.7 36.77 58.83 26.16 50.44 42.46 23.17 0 2.45 98.218 90.52 0 0.Companies Hero Honda Maruti Suzuki ICICI HDFC ITC Colgate HDIL DLF Infosys TCS SAIL TATA Steel ONGC BPCL Cipla Biocon NTPC Suzlon Bharti Tata Comm Mar '05 56.01 0 25.07 38.91 50.35 45.55 23.47 25.53 12.748 22.94 10.91 45.78 33.29 95.65 36.77 35.34 18.39 47.39 50.7 28.25 7.69 34.21 22.338 Rating 17 2 15 6 18 20 4 10 14 12 7 8 19 11 9 5 16 3 1 13 Table 6.72 23.88 9.06 82.3 19. The earnings retentions ratio is calculated thusly: Earning Retention Ratio = Net Income − Dividends Net Income Page | 51 .08 Average 46.09 27.346 9.41 34.32 27.11 15.32 30.49 Mar '07 46.47 0 98.29 9.894 43.944 49.5 0 32.69 33.238 34.05 23.08 22.17 21.16 44.85 45.92 13.86 9.99 49.22 22.26: Dividend Payout Ratio Earnings retention ratio It gives the percentage of a publicly-traded company's post-tax earnings that are not paid in dividends.778 1.73 36.31 0 5.15 26.24 59.69 11.

626 13.47 75.836 77.33 99.59 68.$200.27: Earning Retention Ratio Page | 52 .000 = $500.21 40.72 79.44 100 47.82 71.17 87.406 88.000 to make and the administrative and payroll expenses total $250.000 in total revenue.54 76.94 7.98 76 47.000 .56 69. Companies Hero Honda Maruti Suzuki ICICI HDFC ITC Colgate HDIL DLF Infosys TCS SAIL TATA Steel ONGC BPCL Cipla Biocon NTPC Suzlon Bharti Tata Comm Mar '05 36.51 90.42 54.000 in depreciation on the widget manufacturing equipment and pay $200.23 89.766 65.77 78.75 81.91 65.36 Average 47.$200.000.35 54.35 100 43.98 69.17 62.16 48.242 75. The widgets cost $200. interest paid.6 88.35 77.18 79.83 47.68 17.2 69.378 50.636 64.6 70.866 76.23 77.75 29.044 47.47 51.44 63. The manufacturer also must subtract $50.04 68.58 57.14 49.02 100 70.000.828 67.74 Mar '08 47.6 88.68 100 97.000 .82 77.79 48.21 64.000. The net income is stated as: $1.04 76.5 100 76.01 90.9 86.23 84.632 71.8 77.08 66. and taxes.67 46.87 65.88 100 1.64 71.99 Mar '09 60.000 $250.78 16.484 90.966 Rating 19 2 14 4 17 20 3 10 13 12 5 8 16 6 9 7 15 11 1 18 Table 6.000 .1 Mar '07 46.84 100 63. suppose a widget manufacturer earns $1.18 100 99.19 89.53 66.32 47.000 in taxes.48 73.3 75.000.298 52.$50.28 76.44 49.758 73.75 0 95.Net income: A company's total revenue less its operating expenses.09 92.88 55.66 74.62 90.22 14.09 63.99 71.858 68. depreciation.25 54.68 80.91 80.34 75.23 43.83 76.98 -4.64 Mar '06 47.91 64.93 65.11 48.416 75. For example.75 76.2 69.19 74.02 50.01 50.234 48.

55 2. Once a thorough analysis of the financial information has been completed.03 6.87 0.67 0.86 2.12 0.82 0.242 0.89 0.55 0. The Adjusted Cash Flow is equivalent to its earnings before interest.59 0.05 0.48 0.268 9.41 52. discretionary.81 0.99 0.61 3.25 0.02 0 0.83 0 0.98 0.02 2.88 Average 0.3 0 0.948 3.41 54.72 0.67 2.13 0.02 5.75 3.06 0.62 11.14 0.76 0.48 0.25 Mar '08 0.71 6.34 0.12 42.91 0.41 2.59 3. single occurrence.36 49.548 2.134 1.17 0.52 2.01 0.07 0.Adjust Cash Flow To determine the profitability value a business falls into.6 0.28: Adjusted Cash Flow Page | 53 .42 0.08 0.13 0 Mar '06 0.03 1.17 0 0 0.62 6.396 0 0.32 Mar '09 0.112 1.69 16.39 1.06 0. In general.282 51.21 8. or non-cash expenses. plus additions or subtractions for owner’s salary.164 0.98 4.95 0.05 52.8 5. the category of Market Value is defined.13 0.71 5.02 0.05 0.66 1.78 2.07 0.45 0.11 0.89 0.684 2.35 3.19 0.34 54.3 43. a privately owned single or small (1-3) multi-unit business will fall into one of the three profitability categories: Companies Hero Honda Maruti Suzuki ICICI HDFC ITC Colgate HDIL DLF Infosys TCS SAIL TATA Steel ONGC BPCL Cipla Biocon NTPC Suzlon Bharti Tata Comm Mar '05 0.81 0.24 38.12 Mar '07 0.024 3. and taxes (EBIDT in accounting terms).66 0 0.35 65.004 0.596 0.76 13.01 0.06 0. depreciation. and the Adjusted Cash Flow determined.67 2.43 36.56 1.018 0.228 0.41 0.114 Rating 5 6 20 19 4 3 16 18 1 2 9 13 10 17 8 7 14 15 11 12 Table 6.52 46.22 3.19 0.01 0. it is necessary to determine the Adjusted Cash Flow of that business.44 0.46 5.58 0.76 0.

concept. menu. The buyer is purchasing a combination of the historical cash flow. The Market Value for businesses in this category is based on a multiplier of the Adjusted Cash Flow.000 x 35% = $253. etc. E. A sophisticated buyer expects that the price they pay would net an annual return on investment between 20% and 50%.) and goodwill.75 = $243. that ranges between two (2) and five (5) times Adjusted Cash Flow. A second value is determined by using a multiplier of Gross Sales (net of sales tax) between 30% and 40%.Positive Adjusted Cash Flow. fixed assets.750 This business would have a value of approximately $250.000 x 3. Business value is generally somewhere within the range of these two numbers.g.750 Gross Sales 725. In this situation the business is profitable and established. -> Adjusted Cash Flow $ 65. operational assets (trade name. This category will generally represent the highest Market Value of an on-going business.000 Page | 54 .

57 192.15 16.66 17.47 10.83 60.86 66.35 9.55 27.98 70. So.55 88.304 20.06 8.79 30.29 44.53 26.212 14.4 20.19 9.12 11.13 40.02 13.1 Average 48.482 83.14 78.97 45.55 34.96 48.33 8. it is obvious that the more the Earning per share more investors are interested and better the company give to their shareholder.07 9.77 91.28 8.4 9.19 42.49 7.92 14.374 32.668 13.29: Earning per Share Mar '09 64.87 5.27 32.85 101.74 63.53 38.37 35.91 28.02 18.006 80.84 43.65 21.2 73.94 43.78 17.184 12.72 20.1 87.41 6.18 33.68 Table 6.64 42.83 16.95 69.23 78.58 47.54 Earnings per share shown the earning for the investor means per share how much profit is earned by the investor shown with the help of this indicator.95 -3.15 55.07 59.824 23.19 13.16 54.302 40.62 21.422 17.72 15.33 14.28 10.64 43.25 63.59 37.34 27.51 36.35 15.9 16.65 15. Page | 55 .35 72.062 8.72 49.09 9.22 2.82 9.99 10.718 Rating 16 15 12 13 9 3 11 17 19 14 4 18 20 10 2 6 1 8 7 5 Earning per Share = Companies Hero Honda Maruti Suzuki ICICI HDFC ITC Colgate HDIL DLF Infosys TCS SAIL TATA Steel ONGC BPCL Cipla Biocon NTPC Suzlon Bharti Tata Comm Mar '05 40.3 EARNINGS PER SHARE Profit after Tax Weighted Avg no of Equity Shares Mar '06 Mar '07 Mar '08 48.274 22.888 66.6.59 29.38 38.18 8.77 8.7 75.22 27.39 46.26 8.138 56. Profit of the company divided to each equity shares holder and how much part of the profit one share holder receives can be shown from Earning per Share.44 7.04 41.05 32.722 32.99 28.04 22.5 62.78 52.1 65.95 7.84 45.616 22.59 9.79 18.776 31.44 10.08 101.47 41.

4 BOOK VALUE Definition The value of an asset as it appears on a balance sheet. In personal finance. Book value is the accounting value of a firm. goodwill) and liabilities. What Does Book Value Mean? 1. It is the total value of the company's assets that shareholders would theoretically receive if a company were liquidated. To calculate.6. the book value can indicate whether a stock is under. 2. service charges and so on. calculated by total assets minus intangible assets (patents. It has two main uses: 1. The net asset value of a company. This number may be net or gross of expenses such as trading costs. 3. The initial outlay for an investment. take the cost of an asset minus the accumulated depreciation. 4. The value at which an asset is carried on a balance sheet. sales taxes. 2. When a stock is sold. the book value of an investment is the price paid for a security or debt investment. By being compared to the company's market value.or overpriced. It is also known as "net book value (NBV)". equal to cost minus accumulated depreciation. the selling price less the book value is the capital gain (or loss) from the investment. Page | 56 . 3.

31 289.81 46.94 129.56 170.16 41.71 212.44 200.45 310.24 15.95 127.55 43.02 60.43 193.38 31.17 24.75 331.97 48.34 229.83 80.86 68.352 96.01 238.6 65.97 19.73 249.12 335.616 237.53 Average 127.71 24.95 51.42 302.9 136.63 18.7 71.73 Mar '09 190.094.35 145.73 69.55 169.16 322.45 445.63 40.068 87.234 102.14 Mar '08 149.84 298.7 237.23 270.918 338.2 132.076 281.056 17.Companies Hero Honda Maruti Suzuki ICICI HDFC ITC Colgate HDIL DLF Infosys TCS SAIL TATA Steel ONGC BPCL Cipla Biocon NTPC Suzlon Bharti Tata Comm Mar '05 74.576 89.75 66.93 169.42 27.52 212.98 Mar '06 100.194 234.35 41.84 111.67 93.68 368.938 221.04 60.18 54.41 82.27 195.08 1.3 82.798 238.19 223.30: Book Value Page | 57 .1 235.52 94.33 323.794 44.86 315.17 72.38 67.01 Rating 11 16 19 14 7 1 9 17 15 10 2 13 20 18 3 8 4 6 5 12 Table 6.79 151.26 378.17 344.52 284.45 50.93 37 170.626 52.37 71.67 Mar '07 123.38 4.63 237.9 162.78 330.76 250.44 36.64 324.62 188.28 417.55 291.63 38.51 176.41 106.56 328.85 11.59 310.45 55.29 114.014 74.59 20.72 65.43 55.53 97.24 23.28 145.948 291.92 240.64 30.37 201.05 58.47 69.

20 days ). Page | 58 .6. So that we can get how much turnover is there daily for that particular shares.5 MARKET CAPITALIZATION Market Capitalization shown the amount of investment done every day in the share prices means every day’s turn over in the share prices in terms of values shown with the help of market capitalization. we rank the high turnover as favorable and give first preference to that company’s share over the others. We take the average of last month’s from 1st Jan 2010 to 29th Jan 2010 amount and divided by the number of days in that month (i. Its fluctuation is done on the basis of the buying and selling so the more buying and selling the more favorites and better stock than the others stocks for the investors.e. It is daily shown and changes as per the buying and selling of that particular shares. So.

the promoters will stop investing or holding their position in company. Also after the scam of Satyam Computer Services Ltd investors are keener to know about the shareholding pattern. Also they are eager to know the portion of promoters.6. As promoters are main owners or controllers of any company. And that thing can be understand by seeing reduction in shareholding pattern.6 PROMOTERS’ SHAREHOLDING PATTERN In this we take promoters’ portion in the shareholding. Page | 59 . So if company is not performing well. they have in-depth knowledge of every activity of the company.

272 82.254 0 51 56.5 65.26 16.8 60.82 32.83 67.96 54.92 89.5 88.38 60.96 54.15 76.69 76.29 0 51 48.402 75.83 67.18 74.93 38.33 85.426 Rating 9 8 1.96 54.93 39.96 54.38 Sep'09 54.13 85.08 67.82 31. Page | 60 .14 64.15 March'09 54.21 0 19.82 31.14 64.92 89.21 0 19.31: Promoters’ Shareholding So if promoters are holding their shares in company.15 76.21 0 20.55 16.84 82.15 June'09 54.39 0 51 62.64 16.12 60.96 54.5 59.96 54.49 76.194 85.55 16.14 54. investors should hold or buy the position in the company.14 54.06 74.5 53.65 16.662 38.82 33.21 Dec'08 54.87 0 51 48.5 59.26 39.38 60.Promoters’ shareholding (%) Companies Hero Honda Maruti Suzuki ICICI HDFC ITC Colgate HDIL DLF Infosys TCS SAIL TATA Steel ONGC BPCL Cipla Biocon NTPC Suzlon Bharti Tata Comm Dec'09 54.21 0 19.528 67.25 74.38 0 51 61.5 88.34 0 51 60.49 76.14 54.21 0 19.14 58.35 78.5 7 10 18 3 16 19 5 15 11 6 13 20 12 14 17 Table 6.21 85.95 74.856 74.08 67.82 67.5 4 1.21 0 23.95 74.49 75.65 16.92 89.38 60.92 89.21 85.31 78.92 89.82 33.5 65.82 33.09 85.612 60.93 36.41 76.48 74.24 Average 54.95 74.92 89.26 39.448 77.5 53.7 78.

5 20 1.000% 0.832% -2.301% -11.267% 0.000% -3.387% -0.000% -8.000% -23.32: Percentage Change in Promoters’ Shareholding This observation we noted in above table by giving the highest rating to positive change in percentage change of promoters’ shareholding pattern of last 5 quarter.000% 0.000% --0.181% Sep'09 0.083% -0.000% 0.000% 0.000% June'09 0.225% 0.000% -20.000% 0.000% 0.000% 0.000% -0.000% 0. Page | 61 .200% 0.000% -5.039% Dec'08 Average 0.000% 0.016% Rating 14 14 1.000% 0.463% 0. And we gave least to one which has no one as promoter.000% 0.000% -5.000% -14.000% 0.099% 0.000% 0. Because these companies are highest risky as FII’s plays major role in these companies and if they disinvest it is difficult to cover the reduction in market price.984% 0.000% -3.716% -0.000% 0.180% 0.652% -0.259% -0.415% 0.470% 0.000% --0.000% -1.000% -0.013% -2.666% 0.159% 0.079% March'09 0.000% 0.000% 0.000% 0.000% -11.222% 8.269% 0.000% -0.807% -0.000% 0.256% 2.000% 0.012% 0.052% -0.000% -1.000% 0.630% -1.346% 0.000% 0.000% -3.000% --0.Change in Promoters’ Shareholding (%) Companies Hero Honda Maruti Suzuki ICICI HDFC ITC Colgate HDIL DLF Infosys TCS SAIL TATA Steel ONGC BPCL Cipla Biocon NTPC Suzlon Bharti Tata Comm Dec'09 0.000% 0.600% 0.000% -9.000% 0.549% -0.743% -0.5 14 3 6 10 9 14 7 14 5 8 14 14 4 18 19 Table 6.000% 0.061% -1.130% 0.206% -0.000% 0.000% -1.000% 0.000% -5.688% 0.519% 0.000% 0.000% -1.329% 0.

I Page | 62 .5 6.FINDINGS Addition of first six ratios’ ratings Companies / Ratings Hero Honda Maruti Suzuki ICICI HDFC ITC Colgate HDIL DLF Infosys TCS SAIL TATA Steel ONGC BPCL Cipla Biocon NTPC Suzlon Bharti Tata Comm Dividend Per Share(Rs) 18 9 14 11 13 15 2 8 19 16 4 17 20 12 3 6.1: Addition of Ratios .5 5 1 10 Net Operating Profit Per Share (Rs) 18 19 13 12 6 7 4 16 15 11 5 14 17 20 2 3 1 9 8 10 Return On Capital Employed (%) 18 12 3 4 15 20 14 7 1 19 17 13 16 5 10 8 6 9 11 2 Debt To Owners Fund 15 16 2 1 18 17 5 3 20 19 10 6 11 4 12 13 9 8 7 14 Earning Retention Ratio 19 2 14 4 17 20 3 10 13 12 5 8 16 6 9 7 15 11 1 18 Dividend Payout Ratio (%) 17 2 15 6 18 20 4 10 14 12 7 8 19 11 9 5 16 3 1 13 Total 105 60 61 38 87 99 32 54 82 89 48 66 99 58 45 42.5 45 29 67 Table 7.5 53.

5 4 1.II Page | 63 .5 20 1.5 7 10 18 3 16 19 5 15 11 6 13 20 12 14 17 %Change In Shareholding Of Promoters 14 14 1.2: Addition of Ratios .Addition of last six ratios’ ratings Companies / Ratings Hero Honda Maruti Suzuki ICICI HDFC ITC Colgate HDIL DLF Infosys TCS SAIL TATA Steel ONGC BPCL Cipla Biocon NTPC Suzlon Bharti Tata Comm Adjusted Cash Flow Times 5 6 20 19 4 3 16 18 1 2 9 13 10 17 8 7 14 15 11 12 Book Value 11 16 EPS Z Score Model 19 15 Shareholding Pattern 9 8 1.5 14 3 6 10 9 14 7 14 5 8 14 14 4 18 19 Total 16 15 74 74 58 75 41 48 58 82 64 54 61 64 90 78 41 58 60 57 56 67 19 12 4 14 13 5 7 9 18 1 3 20 9 11 9 17 17 6 15 19 16 10 14 3 2 4 13 13 18 8 20 20 11 18 10 17 3 2 14 8 6 10 4 1 7 6 8 12 5 7 1 12 5 2 Table 7.

This is shown in below table.5 53.Overall ratings Companies / Ratings Hero Honda Maruti Suzuki ICICI HDFC ITC Colgate HDIL DLF Infosys TCS SAIL TATA Steel ONGC BPCL Cipla Biocon NTPC Suzlon Bharti Tata Comm Total Sum of first 6 Ratios 105 60 61 38 87 99 32 54 82 89 48 66 99 58 45 42.5 102 85 134 2520 Table 7.3: Overall Ratings Here the fund will be allocated on the basis of the percentage of the ratings the script has got. Page | 64 .5 113.5 45 29 67 Sum of last 6 Ratios 74 74 58 75 41 48 58 82 64 54 61 64 90 78 41 58 60 57 56 67 Total 179 134 119 113 128 147 90 136 146 143 109 130 189 136 86 100.

8.000. 3.00 1.00.32. As script ONGC got the highest rating.83 4.00 100.72.00 90 136 1.00.00.00.37% of the total fund.000.00.00 113 1.41.761.333.000.00.02 7.00 134 1.00.000.54 5. 301.00.00.460.59 which is 3.00.746.412. CONCLUSION Virtual Portfolio Companies / Ratings Hero Honda Maruti Suzuki ICICI HDFC ITC Colgate HDIL DLF Infosys TCS SAIL TATA Steel ONGC BPCL Cipla Biocon NTPC Suzlon Bharti Tata Comm Total Total Rating Total Fund Allocation of Fund 7.00.51 5.00 147 1.07.22 4.00.269.000.5 1.000.00.00. 37.746.52 4.000.000.00.00.00 113.936.15.222.04.00.00 86 1.00 102 1.00 85 1.5 1.682.03 1. it has the highest fund than any other script and vice versa.68 5.000.79.142.1.00.000. Page | 65 .00 1.70 5.00.00.54 3.000.809.365.46 5. The Bharti Airtel got lowest rating so it has got lowest fund of Rs.00 5.67.00.84 3.00.873.03 4.00.59 5.98.00.00.000.48.90 3.396.00.00 109 1.000.00.00.10.00 146 1.32 4.00.00 2520 Table 8.00 119 1.00 128 1.00 189 136 1.00.50.00 134 1.00.57.31.000.682.50.00 179 1.39.539.00 143 1.000.301.000.83.00.37.86 5.31.00 130 1.00.000.000.00.000.00.Virtual Portfolio The fund is allocated on the base of the rating.39.08 5.33 3.00.000.00.00.00.00.317.00.00.000.000.

73.57 4.25 5.98 1.095.00 7.20.58 2.23.117.89 1.00 858.849.19.11.4 66.95 2772.045.418.45 287.85 Return 9.85 391.55 316.74 4.92 5.2.039.11 5.62 3.04.55 212.428.492.24 5.11.3 370.76 3.97 3.102.476.61 6.17 1.21 5.00.35 4.809.63.428.10.79 4.53.3 956.5 281.7 254.9 293.349.901.502.643.54 4.56.25 2206.75 1403.3 714.904.166.19 6.6 333.75 Price 19 Mar 1968.18 4.17 1.29 4.933.8 511.40 401.064.38.461.32 1.52 7.Performs of Portfolio Companies Hero Honda Maruti Suzuki ICICI HDFC ITC Colgate HDIL DLF Infosys TCS SAIL TATA Steel ONGC BPCL Cipla Biocon NTPC Suzlon Bharti Tata Comm Total Fund Allocation 7.27 1.66 1.85 277.457.80.27.85 522.81 3.65.06 5.04.05.61 Table 8.55 471.55 669.932.32.55 1819.84.40.556.37 3.65.Performance of Portfolio Page | 66 .32 4.85 3.1 246.25 1056.79.424.91 281.34.14.42.110.6 202.29 883.85 292.05.62 3.8 1620.21 1.158.9 311.714.29.798.111.22 7.60 6.85 2.047.05.34.59 1.01 5.14.206.968.34 5.523.31.68 4.63.079.649.21.3 790.55 1131.8 700.682.6 312.31 6.21.55 299.219.2 1429.810.8 75.05 7.35 820.3 644.761.73 6.87 5.2 628.85 261.00 Price 30 Oct 1565.89 1.61 7.67.000.337.236.96 2.296.69.82 666.15.126.94 5.78 5.57 4.634.00.12.3 164.419.884.097.665.49.016.23.39.454.10.45 Shares 471.000.216.90 4.9 247.

They have pending projects like. Universal Service Interoperability etc.61-10000000)/10000000 = 10. So we have hope that in the next year this projects will generate some profit for company and investors will build faith in the company and will reinvest in the company and stock price will rise. It is just because of they are showing loss since last two quarters.Total Return = (11034454. This results shows profit of only 5 months which is 10% and it will increase in future. TNG Gulf Cable project.34 % As portfolio management is of long term process and it gives return in long run. As we can see that all scripts has performed well except Tata Communication. Page | 67 .

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