NIILM-CMS

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT

PORTFOLIO CONSTRUCTION
11/9/2012

SUBMITTED TO DR. PUNEET DUBLISH

SUBMITTED BY ABBAD BHAT 2011002 ASHISH KUMAR 2011027 KULDEEP BENGANI 2011056 NIKIT GUPTA 2011079 PRATIK KAREL 2011086 SHIVA KANT JAISWAL 2011111

STRUCTURE OF THE PROJECT

We have divided our project report into different units. Unit 1 deals with the overview of economic analysis which comprises of global issues and our domestic issues. In unit 2, we have selected different industry and have done industry analysis which has further helped us in selecting the companies.

Contents
STRUCTURE OF THE PROJECT ................................................................................................................. 1 UNIT 1: ECONOMIC ANALYSIS ................................................................................................................. 3 1.1 Global Economic Factors ............................................................................................................... 3 1.2 Indian Economic Factors ............................................................................................................... 4 UNIT 2: INDUSTRY ANALYSIS ................................................................................................................... 6 2.1 Tobacco Industry ........................................................................................................................... 6 2.2 Oil and Gas Industry ...................................................................................................................... 7 2.3 Pharmaceuticals Industry.............................................................................................................. 8 2.4 IT-Software Industry ..................................................................................................................... 9 2.5 Electricity Industry ...................................................................................................................... 10 UNIT 3: COMPANY ANALYSIS ................................................................... Error! Bookmark not defined. UNIT 4: Sharpe Model, Risk, Return, Portfolios ....................................... Error! Bookmark not defined. Conclusions ........................................................................................................................................... 11

UNIT 1: ECONOMIC ANALYSIS

1.1 Global Economic Factors
Soon after the September 2011 World Economic Outlook went to press, the euro area went through another acute crisis. Market worries about fiscal sustainability in Italy and Spain led to a sharp increase in sovereign yields. With the value of some of the banks assets now in doubt, questions arose as to whether those banks would be able to convince investors to roll over their loans. Worried about funding, banks froze credit. Confidence decreased, and activity slumped. Strong policy responses turned things around. Elections in Spain and the appointment of a new prime minister in Italy gave some reassurance to investors. The adoption of a fiscal compact showed the commitment of EU members to dealing with their deficits and debt. Most important, the provision of liquidity by the European Central Bank (ECB) removed short-term bank rollover risk, which in turn decreased pressure on sovereign bonds. With the passing of the crisis, and some good news about the U.S. economy, some optimism has returned. It should remain tempered. Even absent another European crisis, most advanced economies still face major brakes on growth. And the risk of another crisis is still very much present and could well affect both advanced and emerging economies. Fiscal consolidation is in effect in most advanced economies. With an average de crease in the cyclically adjusted primary deficit slightly less than 1 percentage point of GDP this year, and a multiplier of 1, fiscal consolidation will be subtracting roughly 1 percentage point from advanced economy growth. Bank deleveraging is affecting primarily Europe. While such deleveraging does not necessarily imply lower credit to the private sector, the evidence suggests that it is contributing to a tighter credit supply. Our best estimates are that it may subtract another 1 percentage point from euro area growth this year. These effects are reflected in our forecasts. We forecast that growth will remain weak, especially in Europe, and unemployment will remain high for some time. Emerging economies are not immune to these developments. Low advanced economy growth has meant lower export growth. And financial uncertainty, together with sharp shifts in risk appetite, has led to volatile capital flows. For the most part, however, emerging economies have enough policy room to maintain solid growth. As is typically the case, such a statement masks heterogeneity across countries. Some countries need to watch overheating, while others still have a negative output gap and can use policy to sustain growth. Overall, while we have revised our forecast down somewhat from September, we still project sustained growth in emerging economies.

Turning to risks, geopolitical tension affecting the oil market is surely a risk. The main one, however, remains another acute crisis in Europe. The building of the firewalls, when it is completed, will represent major progress. If and when needed, funds can be mobilized to help some countries survive the effects of adverse shifts in investor sentiment and give them more time to implement fiscal consolidation and reforms. By themselves, however, firewalls cannot solve the difficult fiscal, competitiveness, and growth issue s some of these countries face. Bad news on the macroeconomic or political front still carries the risk of triggering the type of dynamics we saw last fall.

1.2 Indian Economic Factors

The overall growth of GDP at factor cost at constant prices, as per Revised Estimates, is estimated at 6.5 per cent in 2011-12 as compared to the growth of 8.4 per cent during 2010-11. The growth in real GDP is placed at 5.5 per cent in the first quarter of 2012-13. The cumulative rainfall received for the country as a whole, during the period 1 st June 12 September 2012, has been 8% below normal. Food grains (rice and wheat) stocks held by FCI and State agencies were 80.52 million tonnes as on July 1, 2012. Overall growth in the Index of Industrial Production (IIP) was 0.1 per cent during July 2012 as compared to 3.7 per cent in July 2011. During April-July 2012-13, IIP growth was (-) 0.1 per cent as compared to 6.1 per cent in April-July 2011-12. Eight core Infrastructure industries registered a growth of 1.8 per cent in July 2012 as compared to growth of 8.2 per cent in July 2011. During April-July 2012-13, these sectors grew by 3.2 per cent as compared to 6.0 per cent during April-July 2011-12. Broad money (M3) (up to August 24, 2012) increased by 5.9 per cent as compared to 5.4 per cent during the corresponding period of the last year. The year-on-year growth, as on August 24, 2012 was 13.7 per cent as compared to 17.1 per cent last year. Exports, in US dollar terms decreased by 14.8 per cent and imports decreased by 7.6 per cent, during July 2012 over July 2011. Foreign Currency Assets stood at US$ 258.4 billion in end August 2012 as compared to US$ 286.3 billion in end August 2011. Rupee depreciated against US dollar, Pound sterling, Japanese yen and Euro in the month of August 2012 over July 2012. And has appreciated in the month of September when the government announced some economic reforms

The WPI inflation for all commodities for the month of August 2012 was 7.55 per cent as compared to 6.87 per cent in the last month. Gross tax revenue stood at Rs. 230,370 crore during April-July 2012, registered a growth of 21 per cent as compared to the corresponding period in the previous year. Tax revenue (net to Centre) at Rs.142,789 crore during April- July 2012 registered a growth of 25.2 per cent. As a proportion of budget estimate, fiscal deficit during AprilJuly 2012 was 51.5 per cent and revenue deficit was 61.3 per cent. Based on the above factors, the 5 industry which we have selected are Tobacco industry Oil and Gas Pharmaceuticals IT-Software Electricity

UNIT 2: INDUSTRY ANALYSIS

2.1 Tobacco Industry
India is the worlds third largest producer of tobacco and a very large consumer of tobacco products. Over 40% of the tobacco consumed is in the form of bidis. Cigarettes accounts for 15%, while rest is divided between chewing tobacco, pan masala, hookah, snuff and other mixes. Cigarette is a highly concentrated sector with very few companies engaged in this business. ITC, the largest manufacturer alone controls about 82% of market share followed by other major companies like Godfrey Philips India, VST India and GTC industries. The industry is predominantly domestic, exports being a small proportion of production. Some important news for this sector Cigarette production is to rise by 2.4% at a healthy pace to 119.7 billion sticks during 2012-2014. Aggregate net sales of this industry rose by 14.2% in June and by 12.5% in Sept 2012 quarter as compared by a year ago quarter. Other information are shown in the table below

Table 1: Indicators of tobacco industry Annual Mar-08 15.4 13.8 12.8 20.6 Annual Mar-09 10.5 10.7 2.2 19.2 Annual Mar-10 17.8 14 23.7 20.2 Annual Mar-11 16.5 17.5 23.2 21.3 Annual Mar-12 17 15.6 23.8 22.4

Indicator Sales Growth Expenses Growth PAT Growth PAT Margin

Units Per cent Per cent Per cent Per cent

Companies selected from this sector are 1. ITC 2. Godfrey Philip

2.2 Oil and Gas Industry

The upstream companies like ONGC, Oil India and GAIL normally share 33% of the total under-recoveries incurred by the oil marketing companies on the sale of regulated petroproducts. The share of these companies shot up from around 33% in the first-half of 201112 to around 44% in the second-half due to sharp rise in the under-recoveries. The subsidy burden of upstream companies again dropped to 31.5% in June 2012 quarter despite under-recoveries remaining higher as hike in diesel prices by 3.5 rupee per litre and a cap on distribution of subsidised LPG cylinders to the household to 6 per year. This will help the companies to garner higher realisations as they will provide lower subsidies as compared to the year ago. Some important news for this sector The Oil and Natural Gas industrys sale is to grow by 22.8% in the second half of 2012-13. The growth is expected to be much faster than 2.1% rise expected in the first half of 2012-13. The international crude oil prices since July 2012 remained persistently high but in Sept and Oct, the prices remained stable. Domestic oil production is expected to grow by 3.1%. Oil imports to rise by 7.8%. On-going projects worth Rs. 10,054 crore are expected to be completed by 2nd half of 2012-2013. Lower subsidy burden is to improve the sales growth by 22.8% in 2 nd half of 2012-13. Other information are shown in the table below

Table 2: Indicators of Oil and Gas industry Annual Annual Annual Annual Annual Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 6.1 12 -4.2 9.9 10.7 7.1 18.2 -14.3 10.6 10.6 6 -7.8 12.6 10.3 16.8 31.3 26.2 32.9 32.8 34

Indicator Sales Growth Expenses Growth PAT Growth PAT Margin

Units Per cent Per cent Per cent Per cent

Companies selected from this sector are 1. ONGC 2. Cairn India

2.3 Pharmaceuticals Industry

The US is the largest market for generic drugs. It is most lucrative as it has a favourable regulatory environment as compared to the stringent regulations in UK and Japan. As entry in the US market is easier, the Indian Pharma companies are increasingly filing Abbreviated New Drug Approval (ANDAs) application for the approval by the US Food & Drug Administrations (FDA). Of the total bulk drug filings in the US, India accounted for 45% in 2009, 49% in 2010 and 51% in 2011. High demand for generics in the global market and a weak rupee had boosted growth in exports during the first half of 2012. However in the second half, exports have reduced slightly on account of rupee appreciation. Some important news for this sector In the 2nd half of 2012-13, exports are expected to rise by 32.2% Cost pressure is expected to ease as the rupee has appreciated and this will make the import of raw materials cheaper. 3 projects have been completed in Sept 2012 quarter which have added PFI capacity of 9,200 tonnes. Other information are shown in the table below

Table 3: Indicators of Pharma industry Annual Annual Annual Annual Annual Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 17.87 15.38 10.32 14.31 16.59 16.63 25.1 2.77 13.65 18.54 13.16 -52.24 204.16 3.22 -10.02 14.44 6.11 15.49 14.24 7.77

Indicator Sales Growth Expenses Growth PAT Growth PAT Margin

Units Per cent Per cent Per cent Per cent

Companies selected from this sector are 1. Wockhardt 2. Sunpharma

2.4 IT-Software Industry

The industry has established Indias credentials globally as a supplier of trained IT engineers, designers and consultants. The industry has become one of the top foreign exchange earners and a source of lucrative employment to a large pool of young Indians. Over 80% of software industrys revenue comes from the exports. America is the largest market for Indian software and service export accounting for 60% of total exports. Other countries that import services from India are UK, Germany, Singapore, Netherlands, Belgium, Canada, Australia and China. The Indian Software industry is concentrated in a few key cities with Bangalore leading the way. Other important centres of concentration include Hyderabad, Chennai, Mumbai, Pune, Delhi and Kolkata. Some important news for this sector Aggregate sales grew by a healthy 24.6% in the last quarter, June 2012 and this strong performance is expected to grow. Acc. to the data released by RBI, Indias net software exports grew by a strong 25.6% in the last quarter and is expected to grow. 3 new projects have been captured by this industry in Sept 2012 Other information are shown in the table below

Table 4: Indicators of IT-Software industry Annual Annual Annual Annual Annual Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 25 24 5.7 17 21.2 28.9 25.5 3 18.5 25.8 18.5 7.7 16.7 13.4 16.2 83 84 81.9 83 86.3 36942 43736 48237 53265 60957

Indicator Sales Growth Expenses Growth PAT Growth PAT Margin Net Exports

Units Per cent Per cent Per cent Per cent MN. US Dollar

Companies selected from this sector are 1. Infosys 2. TCS

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2.5 Electricity Industry

Net sales of power industry are expected to grow at a healthy pace of 18.2% in 2012-13. In 2012-13, international coal price are expected to fall by around 20%. The domestic coal prices on the other hand are expected to rise. In June 2012, Coal India increased the noncooking coal prices by 10-15% for coal mined from selected blocks. The coal prices from Coal Indias other coal blocks are also expected to increase in coming near months. The sales realisation has improved and is expected to increase more which will help in increasing the profits. Some important news for this sector Power sector is on a capex spree. In 2011-2012, power companies added new capacity of 23,170 mw. Total power generation in India is also expected to grow by 9.1%. Cabinet Committee on Economic Affairs (CCEA) approved the scheme to restructure the debts of state distribution companies. Other information are shown in the table below

Table 5: Indicators of Electricity industry Annual Annual Annual Annual Annual Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 18.2 23.58 11.64 12.2 16.93 15.15 20.69 8.39 19.51 19.86 13.37 16.05 19.95 -8.12 7.85 16.21 16.31 19.1 16.03 15.23

Indicator Sales Growth Expenses Growth PAT Growth PAT Margin

Units Per cent Per cent Per cent Per cent

Companies selected from this sector are 1. NTPC 2. PGCI (Power Grid Corporation of India)

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CONCLUSIONS
Among the different sectors, we could find that the 5 sectors Tobacco industry, Oil and Gas, Pharmaceuticals, IT-Software, Electricity have outperformed the others Portfolio 1 is considered as the best portfolio followed by portfolio 5 according to the Sharpe performance index. Though the return of portfolio 4 is higher, the risk in that portfolio is also greater so if any investor is willing to take risk, he should invest in that portfolio as he can gain more. An investor with less risk appetite should invest in portfolio 5. For finding the risk of portfolio, we should consider both the systematic risk and the unsystematic risk.

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REFERENCES
All the data have been collected from the different trusted sources. The sources include PROWESS PLANNING COMMISSION REPORT DEPARTMENT OF ECONOMIC AFFAIRS MONTHLY ECONOMIC REPORT IMF INDUSTRY ANALYSIS SOFTWARE WWW.MONEYCONTROL.COM AND DIFFERENT COMPANIES WEBSITES.