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SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

INTRODUCTION TO THE STUDY

The automotive industry in India is one of the largest markets in the world with the
population of automobiles in India exceeding 110 million and growing at the rate of 12% p.a. the
automotive aftermarket business in India is poised for an immense growth, but is now seeing flat
or negative growth rates. India's passenger car and commercial vehicle manufacturing industry is
the sixth largest in the world.
In a situation of global slowdown, soaring salaries, there has been a spurt in the economic
activity of the people, especially the middle income group, investing in mutual funds, share
trading, borrowing loan for house, vehicle and so on. The media is flooded with attractive
advertisement by banks & non-banking financial institutions offering high returns for the
investments. It is not a secret that no other asset class evokes as much excitement as
stocks/equities.

Stock stimulates uncontrolled enthusiasm and intensity but all for wrong

reasons. Investments are the stepping stone towards achieving various goals that an investor set
for himself. This is one area where, what is right for one investor need not to be right to other
investor.
There are a lot of investment avenues available today in the financial market for an
investor with an investable surplus. He can invest in Bank Deposits, Corporate Debentures, and
Bonds where there is low risk but low return. He may invest in Stock of companies where the
risk is high and the returns are also proportionately high. The recent trends in the Stock Market
have shown that an average retail investor always lost with periodic bearish tends. People began
opting for portfolio managers with expertise in stock markets who would invest on their behalf.
Wealth management services are provided by many institutions.
Investors have an overabundance of options available to them ranging from mutual funds
to equities to fixes income instruments like bonds and bank deposits. An ideal portfolio should
have a judicious mix of all these instruments in the right proportion. Investors diverse risk
profiles should be mirrored in their portfolio as well. For short term investors, equities are most
risky. But for a long term investor they are one of the safe assets. Presently, given the continued
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SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

growth in the economy and corporate profits and low P/E multiples, investors should invest that
portion of wealth in equities where they have tolerance for volatility. This is so because, in short
run, there is always a possibility of depreciation in equities. Further money can be invested in
phases, so as to reduce volatility of wealth. Lastly in equity investments patience is a virtue and
the real gains accumulate only to long term investors. This is true in the current scenario where
the room for upward movement in the market is significant.
Investing in securities such as shares, debentures and bonds is profitable as well as
existing. It is indeed rewarding but involves a great deal of risk. Investing in financial securities
is considered to be one of the best avenues for investing ones saving while it is acknowledged to
be one of the most risky avenues for investment. Investment is the employment of funds with the
aim of earning additional income or capital appreciation. It has two attributes: time and risk. The
sacrifice that has to be made by the investor is certain but the return in the future is uncertain.
Every investor is exposed to risk of market price fluctuations.

SIGNIFICANCE OF THE STUDY


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SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

The study entitled SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT OF


FIVE PLAYERS IN AUTOMOBILE INDUSTRY is an attempt at analyzing the financial
strength and future investment prospective in the automobile sector.
The study throws light on the performance of fast emergent companies in India. The
performance of these companies is analyzed in terms of fundamental and technical analysis. The
fundamental analysis highlights the intrinsic value of the shares based on the current and future
earning capacity of the company. The technical analysis reveals that the all companies preferred
for the study are having what kind of trend that they are having. Rational investors always focus
on utmost return with bare minimum risk. The research also focuses on the portfolio analysis of
these swiftly-mounting companies.
A potential investor always focuses on the affluence of the key players from highly
optimistic sector of the economy. Hence, the study concerned with these companies would be
valuable for him. Since the fast budding companies are the spinal column of the Indian economy,
the study concerned with these would be positive for the society.

THE OBJECTIVES OF STUDY


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SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

The following are the objective of the project made: Security Analysis & Portfolio Management of five major players in Automobile sector.
To construct three portfolios with three different criteria and to perform risk return
analyse the performance of the portfolio using Sharpe Index and Treynor Index.

LIMITATION OF THE STUDY

The analysis was made by using past data which may not hold in the future.

Variation in data due to the use of different sources for secondary data.

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

REVIEW OF LITERATURE
PORTFOLIO MANAGEMENT
INTRODUCTION
Investing in securities such as shares, debentures, and bonds is profitable as well as
exiting. It is indeed rewarding, but involves a great deal of risk and calls for scientific knowledge
as well as artistic skill. In such investments, both rational as well as emotional responses are
involved. Investing in securities are now been considered by people for the purpose of making
their investment. It is rare to find investor investing their entire savings in a single security.
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Instead, they trend to invest in a group of securities. Such a group of securities is termed as
Portfolio. Creation of a portfolio helps to reduce risk without sacrificing returns. Portfolio
management deals with the analysis of individual securities into portfolios. The risk and return
characteristics of a portfolio differ from those of individual securities combining to form a
portfolio. The investor tries to choose the optimal portfolio taking into consideration the riskreturn characteristics of all possible portfolios.
Phases of Portfolio Management
There are five phases in portfolio management. They are as follows:
1. Security Analysis,
2. Portfolio Analysis,
3. Portfolio Selection,
4. Portfolio Revision,
5. Portfolio Evaluation
Each phase is an integral part of the whole process and the success of portfolio
management depends upon the efficiency in carrying out each of these phases.
SECURITY ANALYSIS
Security analysis refers to the analysis of trading securities from the point of view of their
prices, return and risk. All investment is risky and expected return is related to their risk.
Their analysis will help in understanding the behavior of security price and the market in
decision making for the investment. If it is an analysis of market of securities, it is referred to
as macro picture of the behavior of the market.
Security analysis consists of examining the risk-return characteristics of the individual
securities. A basic strategy in security investment is to buy underpriced securities and sell
overpriced securities. In short, security analysis is all about how to identify underpriced
securities and overpriced securities or in other words mispriced securities. This is what the
security analysis all about.
There are two approaches to security analysis;
1) Fundamental Analysis,
2) Technical Analysis.

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

Under fundamental analysis, the share value depends upon the intrinsic value worth of
shares. It is basically an economy-industry-company analysis. It considers external as well as
internal factors that determine a companys efficient functioning. In technical analysis the prices
move in a predictable manner and in waves and trends. The present prices are the result of past
trends and can accordingly be predicted. Thus security analysis forms the first step towards
devising an efficient portfolio of securities.
FUNDAMENTAL ANALYSIS
The intrinsic value of an equity share depends on a multitude of factors. The earnings of
the company, the growth rate and the risk exposure of the company have a direct bearing on
the price of the share. These factors in turn rely on the host of other factors like economic
environment in which they, the industry they belong to, and finally companies own
performance. The fundamental school of thought appraised the intrinsic value of shares
through,

Economic Analysis,

Industry Analysis,

Company Analysis

The level of economic activity has an impact on investment in many ways. If the
economy grows rapidly, the industry can also be expected to show rapid growth and viceversa.
Commonly analyzed macroeconomic factors are;
GDP, Savings, Investment, Inflation, Budget, Tax structure, Balance of payment,
Monsoon, & Agriculture, Infrastructural facilities, Demographic factors etc. The industry
analysis includes factors such as the industry life cycle, growth of the industry, cost structure
and profitability, nature of product, nature of competition, government policy, labor and
research & development.
The company analysis factor includes factors such as competitive edge of the company,
earnings, capital structure, management, operating efficiency, financial performance etc.
These factors affect the future price of the stock whereas the factors affecting the present
price of the stock are historic price of the stock, P/E ratio, economic condition, and stock
market condition.
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ECONOMIC ANALYSIS
Economic factors play a major role in an investment decision, which is made for a
gain and better return. Economic analysis and forecasting companys performance and return
is necessary for making investment. In the stock market parlance investment decision refers
to making a decisions regarding buy & sell order. Availability of money and flow of
information influence these decisions. What to buy or sell will also depend on the fair value
of share and the extent of overvaluation and undervaluation. For making such decision the
common investor may have to depend upon a study of fundamental and technical. Besides
even genuine investors have to guard against wrong timing regarding both buy and sell
decision, otherwise they will burn their fingers. Companies are a part of the industrial and
business sector, which in turn, is a part of the overall economy.
The financial performance of the corporate sector depends on the performance of
the economy in the first place. If the economy is in recession or stagnation, performance of
corporate sector will be adversely with some expectation on the other hand, if the economy is
booming, incomes are rising and aggregate demand is good, then the industries and the
companies in general may prosper.
The key economic factors that monitor as part of the economic analysis are:

Growth rates of national income,


Stage of economic life cycle,
Inflation,
Interest rate,
Government revenue, expenditure and deficit,
Exchange rate,
Infrastructure,
Monsoon,
Economic and political stability.

India is a mixed economy, where the public sector plays a major role, the government
being the biggest investor and spender, the trends, in public investment and expenditure affect
economic growth substantially.
Economic growth rate stood at around 6.5% for the 2011-12 and has been sharply
declining. India's large service industry accounts for 57.2% of the country's GDP while the
industrial and agricultural sectors contribute 28.6% and 14.6% respectively. Agriculture is the
predominant occupation in Rural India, accounting for about 52% of employment. The service
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sector makes up a further 34% and industrial sector around 14%. However, statistics from a
200910 government survey, which used a smaller sample size than earlier surveys, suggested
that the share of agriculture in employment had dropped to 45.5%.
Major industries include telecommunications, textiles, chemicals, food processing, steel,
transportation equipment, cement, mining, petroleum, machinery, software and pharmaceuticals.
The labor force totals 500 million workers. Major agricultural products include rice, wheat,
oilseed, cotton, jute, tea, sugarcane, potatoes, cattle, water buffalo, sheep, goats, poultry and fish.
India's trade and business sector has grown fast. India currently accounts for 1.5% of world trade
as of 2007 according to the World Trade Statistics of the WTO in 2006, which valued India's
total merchandise trade (counting exports and imports) at $294 billion and India's services trade
at $143 billion. Thus, India's global economic engagement in 2006 covering both merchandise
and services trade was of the order of $437 billion, up by a record 72% from a level of $253
billion in 2004. India's total trade in goods and services has reached a share of 43% of GDP in
200506, up from 16% in 199091. In the year 2010-11 India's total merchandise trade (counting
exports and imports) stands at $ 606.7 billion and is currently the 9th largest in the world. During
2011-12, India's foreign trade grew by an impressive 30.6% to reach $ 792.3 billion (Exports38.33% & Imports-61.67%).
At present with the gross domestic production (GDP) growth slowing to 6.9% in the
current fiscal (FY 2011-12) from 8.4% in the previous two fiscals, India has witnessed a
slowdown due to the weak industrial activity coupled with a contraction in investments. Factors
such as persistent & high inflation, monetary tightening, expansion of trade deficits, weakening
of the Rupee, negative global developments & domestic political uncertainty have also
contributed to it.
Sector-wise, agriculture & allied activities after growing at a healthy rate of 7.0% last
year grew by only 2.5% during the year. Despite good monsoon & healthy crop, the low growth
could be attributable to the base effect. As a result of high inflation & interest rates, industrial
growth slowed drastically to mere 3.9% as compared to 7.6% last year. Restriction on iron ore
production, weak coal output & decline in natural gas production during the year led to a
contraction in the mining & quarrying industry.
General business conditions in form of business cycles or the level of business activity do
influence the demand & consequently financial performance. Business cycles are difficult to
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clearly identify, in Indian business condition but output do fluctuate depending upon the state of
economy, performance of the agricultural sector, availability of power.
It is often said that stock market is the barometer of the economy and changes in
economic policies as well as politically significant events immediately affect the stock market.
All above factors of the economy influence corporate performance in significant ways. In any
investment analysis, a broad picture of these factors and a forecast of growth of economy and of
industry would be necessary to decide when to invest and what to invest in.
INDUSTRY ANALYSIS
An industry is group of firms that have a similar technological structure of production
and produce similar products. An investor ultimately invests his money in the securities of one or
more specific companies. Each company can be characterized as belongings to an industry. The
performance of companies would, therefore, be influenced by the fortunes of industry to which it
belongs. For this reason and industry, analysis has to be undertaken so as to study the
fundamental factors affecting the performance of different industries.
At any stage in the economy, some industries are fast growing while others are stagnating
or declining. If an industry is growing, the companies within the industry may also prosper. The
performance of the companies will depend, among other things, upon the state of the industry to
which they belong. Industry analysis refers to an evaluation of the relative strength and
weaknesses of particular industry.
While intending to make an investment in any industry, the investor has to analyze some
major factors like:

Growth of the industry,


Cost structure & profitability,
Nature of product,
Nature of competition,
Government policy,
Labor
Research & development

Each industry has a life cycle of its own. As per industry lifecycle theory three stages of
life can be discerned i.e., pioneering stage are cellular phone, wind energy, telecommunication
equipment, energy and power development etc. Generally industries in this stage may generate

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super profits and beat the market average. Diversified companies like ITC and Reliance generate
stable returns. At the other extreme some industries which have reached the saturation stage,
whose capacities are fully meeting the demand and the market for those products is saturated or
stale like a tea, coffee and soaps. In such industries investment opportunities may diminish and
although the dividend may be paid the growth prospects and capital appreciation may be poor.
Some of the units in these categories may be a sick also due to changes in habits, technological
growth, high labor costs, and stagnant demand.
COMPANY ANALYSIS
In this stage, the investor assimilates the several bit of information related to the company
and evaluated the present and the future values of the stock. The risk and the return associated
with the purchase of the stock are analyzed to take better investment decisions. The valuation
process depends upon the investors ability to elicit information from the relationship and interrelationship among company related variables.
In company analysis, the analysis tries to forecast the future earnings of the company
because there is strong evidence that those earnings have a direct and powerful effect upon the
share prices. The level, trend and stability of earnings of a company, however, depend upon a
number of factors concerning the operation of the company.
In case the company analysis, the balance sheet should be analyzed first for:

Efficient use of capital,


Leverage enjoyed in the use of capital,
Return on net worth,
Return on equity.

The capital structure and cost of different types of capital and problems of servicing the
borrowed funds are to be taken into account. For this purpose, the interest burden, tax and
depreciation provision are to be examined. The cash profits and the profit after depreciation
should be taken into consideration in relation to equity and net worth.
The sales turnover is an important indicator of the activity and assessments of gross profits
in relation to sales is to be made. Sales to equity employed in the business, profit margins,
earning per share and P/E ratios will indicate the earning potentials of the company for the equity
holders.

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A fair return on capital employed can be assumed to be 10 -15% as government and public
sector bond give a return around 13%. A provision for tax and depreciation has to be made
around 15%. Those together will account for about 30% as gross profit for a company eligible
for investment. The gross profit as well as net profit for a company analyzed has to be compared
with that of its competitors in industry under the following heads:1. Cost per unit,
2. Profit margins,
3. Earnings per share and P/E ratio,
4. Bonus payment,
5. Dividend distribution policy etc.
The variable to be studied for each company and the relative ratios are set below:1. Capacity efficiency,
2. Leverage employed,
3. Size of the company,
The growth of the company is to be judged by the net profits (PAT) or cash profits in
relation to sales, equity or net worth, dividend distribution etc. with a view to interpret the
financial statement it is necessary to analyze them with object of formation of an opinion with
respect to the financial condition of the company.
TECHNICAL ANALYSIS
Technical analysis is an alternative approach to Fundamental Analysis for the stock price
behavior. Technical Analyst believes that the share price movements are systematic and exhibit
certain consistent pattern. He studies past movements in the share price to identify the trend and
pattern, and then try to predict the future price movements. The current market price is compared
with the future predicted price to determine the extent of mispricing. Technical Analysis is an
approach which concentrates on price movements and ignores the fundamentals of the shares.
Share price are determined by the demand and supply forces operating in the market.
These demand and supply factors in turn are influenced by a number of fundamental factors as
well as psychological or emotional factors. Many of these factors cannot be quantified. The
combined impact of all these factors is reflected in the share price movement. The technical
analyst therefore concentrates on the movements of share prices and analyses the price volume of
movement of individual securities as well as market index.
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Steps in Technical Analysis


1. Study the past movement in the share prices and identify the trends and establish
patterns.
2. Look at the current share price and see if any of established patterns are applicable, if
yes;
o Make extrapolations to predict the future price movements.

The rationale behind the technical analysis is that the share price behavior repeats itself
overtime and analyst attempts to drive methods to predict this repetitions. The basic premises of
technical analysis are that the prices move in trends or waves which may be upward or
downward. It is believed that the present trends are influenced by the past trends. The Technical
Analyst, therefore analyses the price and volume movements of individual securities as well as
the market index. Thus, technical analysis is really a study of past or historical price and volume
movement so as to predict the future stock.

Basic Principles of Technical Analysis


The basic principles on which technical analysis is based may be summarized as
follows:1. The market value of a security is related to demand and supply factors operating in the
market.
2. There are both rational and irrational factors which surround supply and demand factors
of a security.
3. Security prices behave in a manner that their movement is continuous in a particular
direction for some length of time.
4. Trends in stock prices have been to change where there is a shift in the demand and
supply factors.
5. The shift in demand and supply can be detected through charts prepared specially to show
market action.

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6. Patterns which are projected by charts record price movements and these recorded
patterns are used by analyst to make forecast about the movements of prices in future.
TRENDS AND REVERSAL
Trend is the direction of movement of share prices in the market. When the price moves
upwards, it is a rising or uptrend. When the price is going downwards, we have a falling or
downward trend. We have a flat trend when the price moves within a narrow range.
Share prices seldom move in a straight line. The main trend is interrupted by short-term
counter movement known as secondary line. The result is a zigzag movement giving rise to
alternating tops and bottoms. The formation of higher bottoms and higher tops indicate a rising
trend, while the formation of lower tops and bottoms indicates a falling trend.
The change in direction of trend is referred to as trend reversal. A share that exhibits a
rising trend may start to fall after sometime. This change in the direction of movement represents
a trend reversal. The reversal from a rising trend to a falling trend is marketed by the formation
of a lower top and a lower bottom. In the same way, trend reversal from falling trend to a rising
trend is characterized by the formation of a higher bottom and a higher top.
A Technical Analyst tries to identify the trend reversal at early stage so as to trade
profitably in the market. When trend reverses and begins to raise the technical analyst would
recommend purchase of shares. When the trend begins to fall, sale is indicated. During a flat
trend the investor should stay away from the market.
1. TREND ANALYSIS
EXPONENTIAL MOVING AVERAGE (EMA)
An exponential moving provides a short cut method of weighting. This method
also provides more weightage to the recent data. The EMA provides a smooth base for analyzing
price trends. If it is found that the EMA is very sensitive, the time span can be extended.
Alternatively, the EMA can be further smoothened by constructing another EMA for the values
first obtained, using further exponent.
EMA= [(Current closing price- Previous EMA)Factor]+ previous EMA
Where, Factor=2/n

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2. MOMENTUM
RATE OF CHANGE INDICATOR (ROC)
It is very popular which measures the rate of change of the current price as
compared to the price a certain number of days or week back. Here we are using 50 day rate of
change. For calculating 50 days rate of change, each days price is divided by the price which
prevailed 50 days ago.
ROC=

Current price
Price n days ago

One of the simplest and widely used methods to measure momentum is to compute the
rate at which the price of a stock, or market index, changes over a certain period of time. The
ROC index is an index constructed to measure such price changes. Assume for instance that a
ROC index is to be constructed for measuring 50 days rate of changes in prices. The ROC value
is computed as the ratio of the index on that date and 50 days earlier. The resulting ratio is ROC
index value for that day.
A rising ROC indicates a growth in momentum a bullish factor and a falling index a loss
in momentum bearish factor. The line drawn at the level is above the reference line, the market
price is higher level than prevailing 50 days earlier. If the ROC line above the reference line is
also rising, the rate at which price increasing is growing. Any fall in ROC represent drop in
momentum. If the index is falling, but still above reference line, it indicates a slowdown in the
ratio of increase in price.
The rate of change index is widely used to measure momentum of price changes in order
to measure the momentum inherent in indicators of internal market strength, like volume and
breadth, oscillators are more widely accepted. The ROC index is also an oscillator in the sense
that it is interpreted in terms of oscillation around the reference line. But the ROC index cannot
be used to gauge breadth of the market, which is measured from arbitrary point, and we can
provide both positive and negative value. ROC measures the rate of change of the current price
as compared to the price on a certain number of days or week back.
3. OSCILLATORS
a. RELATIVE STRENTH INDEX (RSI)
This is a powerful indicator that signals buying and selling opportunities ahead of the
market. RSI for a share is calculated by using the formula.
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RSI = 100 - [100/ (1 + RS)]


Where,
RS = Average gain per day/ Average loss per day
The relative strength index is a popular oscillator used by commodity traders. It was developed
by wells wider. It is a powerful indicator used to identify the inherent strength and weakness of a
particular script or market. This is a powerful indicator that indicates buying and selling
opportunity ahead in the market.
INTERPREATION OF RSI
RSI values above 70 are considered to denote overbought condition and values below
30 are considered to denote oversold condition. When RSI has crossed the 70 line from above to
below and is falling, a sell signal is indicated.

b. MOVING AVERAGE CONVERGENCE AND DIVERGENCE (MACD)


MACD is an oscillator that measures the convergence and divergence between two
exponential moving averages. A short term exponential moving averages and a long term
exponential moving averages are calculated with the help of closing price data. A 12 day and 18
day exponential moving averages constitute a popular combination.
4. PERFORMANCE AGAINST THE MARKET
RELATIVE STRENGTH ANALYSIS (RSA)
Stock prices trend to move more or less in tandem with overall market trend, represented
by a market index. When the price chart of an industry or an individual stock diverts from the
course charted by an index, the concept of relative strength index can be used to study such
divergence. Relative Strength (RS) refers to the ability of an industry or stock to outperform the
market turning points. Relative strength is obtained by dividing the price of the stock by the
market index.
RSA= Closing price of Stock
Closing price of NIFTY
Stock price trend to move more or less in tandem with the overall market trend,
represented by a market index. Relative Strength (RS) refers to the ability of an industry or stock
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to over perform the market at turning pints. Relative Strength is obtained by dividing the price of
the stock by the market index. The divisor is always the measure of the trend that is expected to
be outperformed. When computed a rising RS index indicates that the stock is doing better and
vice-versa. It also follows trends, reversal of which signifies changes in the relative strength of
the stock. RS index are normally used in stock selection. When a stock and its relative strength
(in terms of the market) are plotted together on a graph the relative strength generally reverses
ahead of the stock prices.
Thus the relative strength of each stock with other stock with relative strength analysis is
to evaluate the inherent strength of the stock.

PORTFOLIO ANALYSIS

Individual securities have a risk and return characteristics of their own. The future return
expected from a security is variable and this variability of return is termed risk. It is rare to find
investors investing their entire wealth in a single security. It is hoped that if money is invested in
several securities simultaneously, the loss in one will be compensated by the gain in others.
Most investor thus trend to invest in a group of securities rather than a single security.
Such a group of securities held together as an investment is what known as a portfolio. The
process of creating such portfolio is called diversification. It is an attempt to spread and
minimize the risk in investment.
The efficiency of each portfolio can be evaluated only in terms of expected returns and
risk of the portfolio as such. Thus, determining the expected return and risk of different portfolio
is a primary step in portfolio management. This step is designated as portfolio analysis.

EXPECTED RETURN ON PORTFOLIO


As first step in portfolio analysis, an investor needs to specify the list of securities eligible
for selection or inclusion in the portfolio. Next he has to generate the risk return expectation of
these securities. These are typically expressed as the expected return (mean) and the variance or
standard deviation of the return. Each security in a portfolio contributes in the proportion of its
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investment in the security. Thus the portfolio expected return is the weights representing the
proportionate share of the security in the total investment.

RISK OF A PORTFOLIO
Risk is the uncertainty of the income/ capital appreciation or loss of both. The two major
type of risk are systematic risk or the market related risk and unsystematic risk or company
related risk. The systematic risk are the market problems, raw material availability, tax policy or
any government policy , inflation risk, interest rate risk and financial risk. The unsystematic risks
are mismanagement, increasing inventory, wrong financial policy, defective marketing etc.
Risk on a portfolio is different from risk on individual securities. The Risk is re elected in
the variability of the return from zero to infinity. The expected return depends on the profitability
of the return and their weighted contribution to the risk of the portfolio. The variance of return
and standard deviation of return are alternative statistical measures that are used for measuring
risk in the investment. These statistical measure the extent to which returns are expected to vary
around an average over time. The variance or standard deviation of individual security measures
the risk of a security, within the context of the overall portfolio has to be considered.

ALPHA
Alpha or is the distance between the horizontal axis and the line intersection with yaxis. It measures the unsystematic risk of the company. If is positive, then the scrip will have
higher return. If = 0, then the return depends upon the market return.
Alpha = Stock Returns (Beta Market Return)

= Ri ( Rm)

BETA
Beta describes the relationship between the stock return and the market index return. This
can be positive or negative. If beta is one, one percent change in market index returns exactly
one percent change in the stock return. It indicates that the stock moves in tandem with the
market. If the portfolio is efficient, the beta measures the systematic risk effectively.

= nxy - x y
nx2 (x)2
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Measuring Portfolio Return and Risk under Single Index Model


The expected return of a portfolio may be taken as portfolio alpha plus portfolio beta
times expected market return. Thus,
Portfolio Return, Rp = p + p x Rm

The portfolio alpha is a weighted average of the specific return (alpha) of the individual
securities. Thus,
p

= wii

Where,
wi = proportion of investment in an individual security
i = specific return of individual security
The portfolio beta is the weighted average of the beta coefficient of the individual
securities. Thus,
= Wii
Where
Wi= Proportion of investment in an security,
i

Beta coefficient of an individual security.

The risk of a portfolio is measured as the variance of the portfolio returns. The risk of a portfolio
is simply a weighted average of the market related risk of an individual securities plus a
weighted average of the specific risk of individual securities in the portfolio.
p2

= p2m2 + to be done

OPTIMAL PORTFOLIO SELECTION


OPTIMAL PORTFOLIO SELECTION USING SHARPES OPTIMISATION MODEL
In this selection, first we present the ranking criteria that can be used to order the stock
for selecting the optimal portfolio. Next, we present the technique for employing this ranking
device to form an optimal portfolio.

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SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

THE FORMATION OF OPTIMAL PORTFOLIO


The construction of the optimal portfolio would be greatly facilitated as the ability of the
portfolio managers and security analysis to relate to the construction of the optimal portfolio
would greatly simplified if a single number measures the desirability of the standard form of
single-index model as describing the co-movement between the securities, the justification of
any stock in the optimal portfolio is directly related to the excess return to beta ratio. Excess
return is the difference between the expected return on the stock and the risk free rate such as
return on government securities. The excess return to beta ratio holds measures the additional
return on a stock per unit of non-diversifiable risk. This ratio gets an easy interpretation and
acceptability by security analyst and portfolio managers, because they are interested to think in
terms of relationship between potential rewards and risk. The numerator of this ratio of excess
return to beta contains the extra return over the risk-free rate. The denominator is the
measurement of the non-diversifiable risk that we are subject to by holding risky asset rather
than riskless asset.
Excess return to-beta = Ri-Rf
i
Where, Ri= the expected return on stock,
Rf= the return on riskless asset,
i= the expected change in the rate of return on stock I associated with a 1% change in the
market return.
If the stock are ranked by excess return to beta (from highest to lowest) ranking represents the
desirability of any stocks inclusion in the portfolio. This implies that if a particular stock with a
specific ratio of Ri-Rf/ i is included in the portfolio, all the stock with higher ratio will also be
included. On the hand, stock with a lower ratio will be excluded. When the single index model is
assumed to represent the covariance structure of security returns, then a stock is included or
excluded, depending only on the size of its excess return-to-beta ratio. The number of stocks to
be selected depends on a unique cut-off rate which ensures that all stock with higher ratios will
be included and all stocks with lower ratios should be excluded. The following steps are
necessary for determining which stock to be included in the optimum portfolio:
1. Calculate the excess return-to-beta ratio for each stock under consideration and rank them

highest to lowest.
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SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

2. After ranking the securities, the next step is to find out a cut-off point.

PORTFOLIO EVALUATION
Portfolio evaluation refers to the evaluation of the performance of portfolio. It is the
process of comparing return earned on a portfolio with the actual return earned by the portfolio.
It includes performance measurement and performance evaluation in the context of the risk
associated with that portfolio.
RISK ADJUSTED RETURN
One method of adjusting for risk is to look at reward per unit of risk. The return earned
over and above the risk free rate is risk premium that is the reward for bearing risk. If the risk
premium is divided by a measure of risk, we get the risk premium per unit of risk. Thus the
reward per unit of risk from different portfolios may be calculated and funds may be ranked in
descending order of the ratio. A higher ratio indicates better performance.
SHARPE RATIO
The performance measured by William Sharpe is referred to as Sharpe Ratio or the reward to
variability ratio. It is the reward or the risk premium to the variability of the return or risk is
measured by the standard deviation of the return. If the portfolios are not well diversified then
the ratio is an appropriate measure of performance evaluation.
Sharpe Ratio (SR) = rp -rf
p
Where rp = realized return on the portfolio,
rf = risk free rate of return,
p= standard deviation of portfolio return
TREYNOR RATIO
The performance measure developed by Jack Treynor is referred to as Treynor ratio or reward to
volatility ratio. It is the ratio of reward or risk premium to volatility of return as measured by the
portfolio beta.
Treynor Ratio (TR) = =

rp -rf
p

Where,
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SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

rp = Realized return on portfolio,


rf = Risk free rate of return,
p = Portfolio beta
DIFFERENTIAL RETURN
Another type of risk adjusted performance measure has been developed by Michael
Jensen and is referred to as the Jensen measure or ratio. This ratio attempts to measure the
differential between the actual return earned on a portfolio and the return expected from the
portfolio given its level of risk.
Jensen measure, p = Rp - E(Rp)
Where,
p = differential return earned (Jensen Ratio),
Rp = actual return earned on portfolio,
E(Rp) = Expected return
Using CAPM model, expected return of the portfolio can be calculated as follows:
E(Rp) = Rf + p (Rm - Rf)
Where,
E(Rp) = expected portfolio return,
Rf= risk free rate,
Rm
= return on market index
p
= Systematic risk of the portfolio
The alpha value in Jensen measure can be treated for its degree of significance from a value of
zero by statistical methods. This means, an analyst can determine whether the differential return
could have occurred by chance or whether it is significantly from zero in a statistical sense.

COMPANY PROFILE
KARVY STOCK BROKING LIMITED
Brief history
Karvy was started by a group of five chartered accountants in 1979 at Hydrabad. At
initial stage it was very small in size. It was started with a capital of Rs. 1,50,000. In starting it
was only offering auditing and taxation services. Later, on The partners decided to offer, other
than the audit services, value added services like Financial Product Distribution, Investment
Advisory Services, Demat Services, Corporate Finance, Insurance etc to their clients.
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SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

The first firm in the group, Karvy Consultants Limited was incorporated on 23rd July,
1983. In a very short period, it became the largest Registrar and Transfer Agent in India. This
business was spun off to form a separate joint venture with Computershare of Australia, in 2005.
Karvys foray into stock broking began with marketing IPOs, in 1993. Within a few years, Karvy
began topping the IPO procurement league tables and it has consistently maintained its position
among the top 5. Karvy was among the first few members of National Stock Exchange, in 1994
and became a member of The Stock Exchange, Mumbai in 2001.In January 1998, Karvy became
first Depository Participant in Andhra Pradesh.
Today Karvy is among the top 5 Depositary Participant in India. While the registry
business is a 50:50 Joint Venture with Computershare of Australia, we have equity participation
by ICICI Ventures Limited and Barings Asia Limited, in Karvy Stock Broking Limited. For a
snapshot

of

our

organization

structure,

please

click

here.

Karvy has always believed in adding value to services it offers to clients. A top-notch research
team based in Mumbai and Hyderabad supports its employees to advise clients on their
investment needs. With the information overload today, Karvys team of analysts help investors
make the right calls, be it equities, mf, insurance.
On a typical working day Karvy:
Has more than 25,000 investors visiting our 575 offices.
Publishes / broadcasts at least 50 buy / sell calls
Attends to 10,000+ telephone calls
Mails 25,000 envelopes, containing Annual Reports, dividend cheques / advises,
allotment / refund advises.
Executes 150,000+ trades on NSE / BSE
Executes 50,000 debit / credit in the depositary accounts
Advises 3,000+ clients on the investments in mutual funds
KARVY Stock Broking Limited is a member of:
National Stock Exchange (NSE)
Bombay Stock Exchange (BSE)
Hyderabad Stock Exchange (HSE)
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SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

Mission Statement of Karvy


An organization exists to accomplish something or achieve something. The mission
statement indicates what an organization wants to achieve. The mission statement may be
changed periodically to take advantage of new opportunities or respond to new market
conditions. Karvys mission statement is To Bring Industry, Finance and People together.
Karvy is work as intermediary between industry and people. Karvy work as investment
advisor and helps people to invest their money same way Karvy helps industry in achieving
finance from people by issuing shares, debentures, bonds, mutual funds, fixed deposits etc.
Companys mission statement is clear and thoughtful which guide geographically
dispersed employees to work independently yet collectively towards achieving the organizations
goals.

Vision of Karvy
Companys vision is crystal clear and mind frame very directed. To be pioneering
financial services company. And continue to grow at a healthy pace, year after year, decade
after decade. Companys foray into IT-enabled services and internet business has provided an
opportunity to explore new frontiers and business solutions. To build a corporate that sets
benchmarks for others to follow.

1. Karvy Year Wise Developments

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SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

Fig No.1: Karvy year wise developments


Karvy Values:

Integrity
Responsibility
Reliability
Unity
Understanding
Excellence
Confidentiality
Karvy has started 2004 on a strong note with the realization to signal some of the

challenges it faced previous year. In a competitive market and a branded business, Karvy need to
carefully manage itself to avoid down trading or brand shifts by consumers.
For Karvy, Kanpur branch was truly exhilarating because of:
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SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

Successful implementation of a carefully crafted strategy.


Excellence in execution.
Immense learning enabling to set up a launch pad for revitalizing itself.

Some competitive advantages are long lasting. These are intangible, difficult to replicate and thus
more sustainable. Karvy has focused on some of these to gain competitive advantages. There
are:

Winning culture and a desire to excel in everything Karvy do.


Strong meaningful relationships with Customers along with Strategic Partners in which
Karvy operate and above all, its own staff.

Achievements

Among the top 5 stock brokers in India (4% of NSE volumes)


India's No. 1 Registrar & Securities Transfer Agents
Among the top 3 Depository Participants
Largest Network of Branches & Business Associates
Among top 10 Investment bankers
Largest Distributor of Financial Products
Adjudged as one of the top 50 IT uses in India by MIS Asia
Fully Fledged IT driven operations

Where karvy stand in the market?


KARVY is a legendary name in financial services, Karvys credit is defined by its
mission to succeed, passion for professionalism, excellent work ethics and customer centric
values. Today KARVY is well known as a premier financial services enterprise, offering a broad
spectrum of customized services to its clients, both corporate and retail. Services that KARVY
constantly upgrade and improve are because of companys skill in leveraging technology. Being
one of the most techno-savvy organizations around helps company to deliver even more cost
effective financial solutions in the shortest possible time.
What bears ample testimony to Karvys success is the faith reposed in company by
valued investors and customers, all across the country. Indeed, with Karvys wide network
touching every corner of the country, even the most remote investor can easily access Karvys
services and benefit from companys expert advice.

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SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

Karvy group

Karvy Consultants Limited


Karvy Investor Services Limited
Karvy Stock broking Limited
Karvy Computer Shares Pvt. Ltd.
Karvy realty (India) Pvt Ltd
Karvy globle services Ltd
Karvy data base management services
Karvy comtrade Ltd
Karvy Consultants Limited

Some key points about KARVY :

Every 50th Indian is serviced by karvy.

Every 20th trade in stock is done by Karvy.

Indians no.1 registrar and transfer agent.

Every 6th investor in India invest through karvy.

Every 10th Demat account is held at Karvy.

KARVYS PRODUCT & SERVICES


AN OVERVIEW
Services of Karvy

Stock broking

Demat services

Investment product distribution

Investment advisory services

Corporate finance & Merchant banking

Insurance Broking services

Mutual fund services

IT enabled services

Registrars & Transfer agents

Loans
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SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

Reality services

Portfolio management services

BPO & KPO services

Corporate advisor

Currency derivatives

Bonds and Deposits

Depository services

Commodities

Investment Banking

Advisory service

1. Stock Broking:
KARVY is working as Capital Market Intermediaries. Stockbrokers are regulated by
SEBI [Stock-brokers and Sub-brokers] Regulations, 1992. The stockbroker is a member of the
stock exchange. Stockbrokers are the intermediaries who are allowed to trade in securities on the
exchange of which they are members. They buy and sell on their own behalf as well as on behalf
of their clients. Stockbrokers expand their business by engaging sub-broker. Sub-brokers mean
any person not being a member of a stock exchange who acts on behalf of a stock broker as an
agent or otherwise for assisting the investors in buying, selling or dealing in securities through
such stock-brokers.

2. Demat Services:
Karvy is a depository participant with the National Securities Depository Limited
(NSDL) for trading and settlement of dematerialized shares. Depository Participants (DPs) are
described as an agent of the depository. They are intermediaries between the depository and the
investors. The relationship between the DPs and the depository is governed by an agreement
made between the two under Depositories Act. ADP can offer depository-related services only
after obtaining a certificate of registration from SEBI. Since Karvy is also in the broking

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SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

business, investors who use Karvys depository services get a dual benefit. They can use Karvys
brokerage services to execute transactions and Karvys depository services to settle them.
3. Investment Products Distribution:
Company is also concern with the distribution of investment products like
(a). Fixed Deposit
(b). Bonds
(c). IPO
KARVY is dealer of 34 fixed deposits of various types which includes fixed deposits of Public
Sector, Non-Banking Finance Companies, Housing Finance Companies and Manufacturing
Companies.
4. Investment Advisory Services:
This division provides portfolio management services to high net-worth individuals and
corporate. The expertise of Karvy in research and stock broking gives it the right perspective to
provide investment advisory services. Company provides advisory services to its clients.
Financial goal of each individual investor varies according to his dream, ambition and family
size and future financial planning for the children & old age pension for self and wife so does the
pathway to achieve it.
5. Corporate finance & Merchant banking:
Corporate finance is the financial activity of corporation. It deals with the firm's
operations with regard to investing and financing. It concerned with how firms raise capital and
the consequences of alternative methods of raising capital. Firms capital can be raised by raising
loans, issuing shares, and acquiring or merging with other businesses by public or private
companies.
Merchant banking is a financial intermediation that matches entities that need capital and
those that have capital. Hence they facilitate the flow of capital in the market. Karvy enjoys
SEBI category (I) authorization for Merchant Banking. Karvy offers the full spectrum of
Merchant Banking Services, beginning from identifying the best time for an issue to final stage
of marketing it, to harvest unparalleled success.
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SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

As a merchant banker Karvy offer following services:

Issue management
Instrument designing
Pricing of the issue
Registration process for the issue of shares
Marketing efforts
Final allotment to investors
Listing details on stock exchanges
Loan syndication
Lease financing
Corporate advisory services
Underwriting
Portfolio management

6. Mutual Fund Services:


Since its inception in 1982, Karvy has demonstrated a dedication coupled with dynamism
that has inspired trust from various segments corporate, government bodies and individuals.
Karvy has since been performing a pivotal role as the intermediary the interface between
these players. With Mutual Funds emerging as a distinct asset class, Karvy has made a strategic
choice to leverage the power of latest technology to provide a cutting edge to its services. Karvy,
today, service nearly 80% of the asset management companies (AMCs) across an extensive
network of service centers with assets under service in excess of Rs.10,000 crores.

List of Mutual Fund Clients of KARVY:


1

Alliance Mutual Fund

Birla Mutual Fund

Bank of Baroda Mutual Fund

Can Bank Mutual Fund

Chola Mutual Fund

Deutsche Mutual Fund

DSP Merrill Lynch Mutual Fund

Franklin Templeton Investments

GIC Mutual Fund


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SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

10

HDFC Mutual Fund

7. Income Tax enabled services:


Karvy has been started this service since March, 2004. Karvy is work as TIN Facilitation Centre
it provides following IT enabled services.
a. Distribution of PAN Card.
b. Distribution of TAN Card.
c. Services related to e-TDS.
Karvy work as an intermediary between NSDL and IT payers. Karvy provides various form for
different IT enabled services and guide people to fill that forms. It also solves queries of the tax
payers. It also distributes PAN and TAN card to the tax payers.
8. Registrars & Transfer agents:
In 1985, Karvy entered the Registrar and Share Transfer Business to create a market niche in the
competitive field of financial services. In 1994-95, it reached a milestone when it processed 104
Public Issues constituting 46 per cent market share. Now in its second decade of existence,
Karvy is the leader in the industry: In an opinion poll conducted by an independent market
research agency - MARG, Karvy has been rated as Indias Most Admired Registrar on various
parameters:

Overall Excellence.
Handling of Volumes
Timely Dispatch
Quality Management and Technological Up gradation.

A SEBI Category 1 Registrar, So far, Karvy has handled over 675 ISSUES as Registrars to
public issues processed over 52 million applications and is servicing over 16 million investors
from various locations spread over 205 clients.
9. Loan:
Karvy has recently started this service at selected branches of metro cities. This service has not
been started in Saurashtra-Kucch region. Karvy provides loans for following.

Vehicle Loan
Home Loan
Personal Loan
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SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

RESEARCH METHODOLOGY
4.1 RESEARCH DESIGN
The research design is the conceptual structure with in which research will be
conducted. Various calculations are made from the data collected out of websites.
CALCULATION OF INTRINSIC VALUE
The historical share prices are collected from the websites, with the data, Intrinsic Value
is calculated first. For Intrinsic Value calculation, Pay out policy, Return on Equity, Price
Earnings Ratio and rate of Growth for the year 2012 is calculated. Later Interpretation is made
on the current position of Share (Underpriced or Overpriced).

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SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

TECHNICAL ANALYSIS
Technical Analysis is done next, Charts of Exponential Moving Average, Rate of Change,
Relative Strength Index and Moving Average Convergence and Divergence is plotted and
interpretations are drawn from each one of it.
ALPHA, BETA AND SCRIP RETURN
With the collected historical data, the value of Alpha, Beta and Scrip return is calculated.
Index return is found out using the historical opening and closing price of Nifty for the period
2008-2012. The scrip return for five companies is found out using the calculated Alpha, Beta
values along with expected return of the scrip.
PORTFOLIO CONSTRUCTION AND EVALUATION
Values are compared after that and portfolio is constructed using the three criterias viz .
Based on Equal Weight, Based on PE Ration, Based on Market Capitalisation followed by
valuation of portfolio risk and return. Portfolio Evaluation comprises of measurement and
performance of the portfolio, it is evaluated through using Sharpe Ration and Treynor Ratio.

4.2 TYPE OF DATA


The source of data collection is secondary in nature. The secondary data are collected
from historical data of closing price of selected equities in equity linked websites and other links.
Data for the study was collected from the secondary sources. Company websites, books,
newspapers and periodicals were also referred to during the study.
4.3 POPULATION AND SAMPLE
The companies for the study are selected out of the list of companies in Automobile sector listed
in stock exchanges. Out of which five are selected based on Market Capitalisation.
4.4 PERIOD OF STUDY

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SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

The study was conducted for a period of two month. Extending from 1st November 2012
to 30th December 2012. The years taken for study are 2008 to 2012.

DATA PRESENTATION AND ANALYSIS


FUNDAMENTAL ANALYSIS
5.1 ECONOMIC ANALYSIS
The economy of India is the eleventh largest in the world by nominal GDP and the third
largest by purchasing power parity (PPP). The country is one of the G-20 major economies and a
member of BRICS. In 2011, the country's per capita income stood at$3,694 IMF, 129th in the
world, thus making a lower-middle income economy.
After the independence-era Indian economy (before and a little after 1947) was inspired by
the Soviet model of economic development, with a large public sector, high import duties
combined with interventionist policies, leading to massive inefficiencies and widespread
corruption. However, later on India adopted free market principles and liberalized its economy to
international trade under the guidance of Shri. Manmohan Singh, who then was the Finance

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SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

Minister of India under the leadership of Mr .P.V.Narasimha Rao, the then Prime Minister who
eliminated License Raj a pre- and post-British Era mechanism of strict government control on
setting up new industry. Following these strong economic reforms and a strong focus on
developing national infrastructure such as the Golden Quadrilateral project by Shri. AtalBihari
Vajpayee, the then Prime Minister the country's economic growth progressed at a rapid pace with
very high rates of growth and large increases in the incomes of people. India recorded the highest
growth rates in the mid-2000s, and is one of the fastest-growing economies in the world. The
growth was led primarily due to a huge increase in the size of the middle class consumer, a large
labor force and considerable foreign investments. India is the nineteenth largest exporter
and tenth largest importer in the world.
India's large service industry accounts for 57.2% of the country's GDP while the industrial and
agricultural sectors contribute 28.6% and 14.6% respectively. Agriculture is the predominant
occupation in Rural India, accounting for about 52% of employment. The service sector makes
up a further 34%, and industrial sector around 14%.
Previously a closed economy, India's trade and business sector has grown fast. India currently
accounts for 1.5% of world trade as of 2007 according to the World Trade Statistics of the WTO
in 2006, which valued India's total merchandise trade (counting exports and imports) at $294
billion and India's services trade at $143 billion. Thus, India's global economic engagement in
2006 covering both merchandise and services trade was of the order of $437 billion, up by a
record 72% from a level of $253 billion in 2004. India's total trade in goods and services has
reached a share of 43% of GDP in 200506, up from 16% in 199091. In the year 2010-11
India's total merchandise trade (counting exports and imports) stands at $ 606.7 billion and is
currently the 9th largest in the world. During 2011-12, India's foreign trade grew by an
impressive 30.6% to reach $ 792.3 billion (Exports-38.33% & Imports-61.67%).

INDUSTRY & SERVICES


Industry accounts for 28% of the GDP and employ 14% of the total workforce. In
absolute terms, India is 12th in the world in terms of nominal factory output. The Indian
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SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

industrial sector underwent significant changes as a result of the economic reforms of 1991,
which removed import restrictions, brought in foreign competition, led to privatization of certain
public sector industries, liberalized the FDI regime, improved infrastructure and led to an
expansion in the production of fast moving consumer goods. Post-liberalization, the Indian
private sector was faced with increasing domestic as well as foreign competition, including the
threat of cheaper Chinese imports. It has since handled the change by squeezing costs, revamping
management, and relying on cheap labor and new technology. However, this has also reduced
employment generation even by smaller manufacturers who earlier relied on relatively laborintensive processes.
Textile manufacturing is the second largest source of employment after agriculture and
accounts for 20% of manufacturing output, providing employment to over 20 million people. As
stated in late January, by the then Minister of Textiles, India, Shri.ShankersinghVaghela, the
transformation of the textile industry from a degrading to rapidly developing industry, has
become the biggest achievement of the central government. After freeing the industry in 2004
2005 from a number of limitations, primarily financial, the government gave the green signal to
the flow of massive investment both domestic and foreign. Ludhiana produces 90% of woolens
in India and is known as the Manchester of India. Tirupur has gained universal recognition as the
leading source of hosiery, knitted garments, casual wear and sportswear.
India is 13th in services output. The services sector provides employment to 23% of the
work force and is growing quickly, with a growth rate of 7.5% in 19912000, up from 4.5% in
195180. It has the largest share in the GDP, accounting for 55% in 2007, up from 15% in 1950.
Information technology and business process outsourcing are among the fastest growing sectors,
having a cumulative growth rate of revenue 33.6% between 199798 and 200203 and
contributing to 25% of the country's total exports in 200708. The growth in the IT sector is
attributed to increased specialization, and an availability of a large pool of low cost, highly
skilled, educated and fluent English-speaking workers, on the supply side, matched on the
demand side by increased demand from foreign consumers interested in India's service exports,
or those looking to outsource their operations. The share of the Indian IT industry in the country's
GDP increased from 4.8 % in 200506 to 7% in 2008. In 2009, seven Indian firms were listed
among the top 15 technology outsourcing companies in the world.
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SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

Mining forms an important segment of the Indian economy, with the country producing
79 different minerals (excluding fuel and atomic resources) in 200910, including iron ore,
manganese, mica, bauxite, chromite, limestone, asbestos, fluorite, gypsum, ochre, phosphate and
silica sand. Organized retail supermarkets accounts for 24% of the market as of 2008.
Regulations prevent most foreign investment in retailing. Moreover, thirty regulations such as
"signboard licenses" and "anti-hoarding measures" may have to be complied before a store can
open doors. There are taxes for moving goods from state to state, and even within states. Tourism
in India is relatively undeveloped, but growing at double digits.

INCOME & CONSUMPTION


India's gross national income per capita had experienced astonishing growth rates since
2002. India's Per Capita Income has tripled from Rs.19,040 in 200203 to Rs.53,331 in 201011,
averaging 13.7% growth over these eight years. It further grew by 14.3% to reach Rs.60,972
during 201112 fiscal. Indian official estimates of the extent of poverty have been subject to
debate, with concerns being raised about the methodology for the determination of the poverty
line. As of 2005, according to World Bank statistics, 75.6% of the population lived on less than
$2 a day (PPP), while 27.5% of the population was living below the new international poverty
line of $1.25 (PPP) per day. However, data released in 2009 by the Government of India
estimated that 37% of the population lived below the poverty line.
Housing is modest. According to The Times of India, a majority of Indians had a per
capita space equivalent to or less than a 100 square feet (9.3 m2) room for their basic living
needs, and one-third of urban Indians lived in "homes too cramped to exceed even the minimum
requirements of a prison cell in the US." The average is 103 sq ft (9.6 m2) per person in rural
areas and 117 sq ft (10.9 m2) per person in urban areas.
EMPLOYMENT
Agricultural and allied sectors accounted for about 52.1% of the total workforce in 2009
10. While agriculture has faced stagnation in growth, services have seen a steady growth. Of the
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SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

total workforce, 7% is in the organized sector, two-thirds of which are in the public sector. The
NSSO survey estimated that in 200405, 8.3% of the population was unemployed, an increase of
2.2% over 1993 levels, with unemployment uniformly higher in urban areas and among
women. Growth of labor stagnated at around 2% for the decade in 19942005, about the same as
that for the preceding decade. Avenues for employment generation have been identified in the IT
and travel and tourism sectors, which have been experiencing high annual growth rates of above
9%.
Unemployment in India is characterized by chronic (disguised) unemployment.
Government schemes that target eradication of both poverty and unemployment (which in recent
decades has sent millions of poor and unskilled people into urban areas in search of livelihoods)
attempt to solve the problem, by providing financial assistance for setting up businesses, skill
honing, setting up public sector enterprises, reservations in governments, etc. The decline in
organized employment due to the decreased role of the public sector after liberalization has
further underlined the need for focusing on better education and has also put political pressure on
further reforms. India's labor regulations are heavy even by developing country standards and
analysts have urged the government to abolish or modify them in order to make the environment
more conducive for employment generation. The 11th five-year plan has also identified the need
for a congenial environment to be created for employment generation, by reducing the number of
permissions and other bureaucratic clearances required. Further, inequalities and inadequacies in
the education system have been identified as an obstacle preventing the benefits of increased
employment opportunities from reaching all sectors of society.
Child labor in India is a complex problem that is basically rooted in poverty, coupled with
a failure of governmental policy, which has focused on subsidizing higher rather than elementary
education, as a result benefiting the privileged rather than the poorer sections of society. The
Indian government is implementing the world's largest child labor elimination program, with
primary education targeted for 250 million. Numerous non-governmental and voluntary
organizations are also involved. Special investigation cells have been set up in states to enforce
existing laws banning the employment of children under 14 in hazardous industries. The
allocation of the Government of India for the eradication of child labor was $21 million in

38

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

2007. Public campaigns, provision of meals in school and other incentives have proven
successful in increasing attendance rates in schools in some states.
In

200910, remittances from

Indian

migrants

overseas

stood

at

250,000 crore (US$49.88 billion), the highest in the world, but their share in FDI remained low
at around 1%.India ranked 133rd on the Ease of Doing Business Index 2010, behind countries
such as China (89th), Pakistan (85th), and Nigeria (125th).

5.2 INDUSTRY ANALYSIS


INDIAN AUTOMOBILE SECTOR
The automotive industry in India is one of the largest markets in the world with the
population of automobiles in India exceeding 110 million and growing at the rate of 12% p.a. the
39

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

automotive aftermarket business in India is poised for an immense growth, but is now seeing flat
or negative growth rates. India's passenger car and commercial vehicle manufacturing industry is
the sixth largest in the world.
The majority of India's car manufacturing industry is based around three clusters in the
south, west and north. The southern cluster near Chennai is the biggest with 40% of the revenue
share. The western hub near Maharashtra is 33% of the market. The northern cluster is
primarily Haryana with 32%. Chennai, is also referred to as the "Detroit of India" with the India
operations of Ford, Hyundai, Renault and Nissan headquartered in the city and BMW having an
assembly plant on the outskirts. Chennai accounts for 60% of the country's automotive
exports. Gurgaon and Manesar in Haryana from the northern cluster where the countrys largest
car manufacturer, Maruti Suzuki, is based. The Chakan corridor near Pune, Maharastra is
western cluster with companies like General Motors, Volkswagen, Skoda, Mahindra &
Mahindra, Tata Motors, Mercedes Benz, Land Rover, Fiat and Force motors are having assembly
unit in the area. Aurangabad with Audi, Skoda, & Volkswagen also forms part of the western
cluster. Another emerging cluster is in the state of Gujarat with manufacturing facility of General
Motors in Halol and further planned for Tata Nano in Sanand. Ford, Maruti Suzuki & PeugeotCitroen plants are also set to come of the other automotive manufacturing regions around the
country.
The Indian Automobile Industry manufactures over 11 million vehicles and exports about
1.5 million each year. The dominant products of the industry are two-wheelers with a market
share of over 75% and passenger cars with a market share of about 16%. Commercial vehicles
and three-wheelers share about 9% of the market between them. About 91% of the vehicles sold
are used by households and only about 9% for commercial purposes. The industry has a turnover
of more than USD $35 billion and provides direct and indirect employment to over 13 million
people.
The supply chain is similar to the supply chain of the automotive industry in Europe and
America. Interestingly, the level of trade exports in this sector in India has been medium and
imports have been low. However, this is rapidly changing and both exports and imports are
increasing. The demand determinants of the industry are factors like affordability, product
innovation, infrastructure and price of fuel. Also, the basis of competition in the sector is high

40

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

and increasing, and its life cycle stage is growth. With a rapidly growing middle class, all the
advantages of this sector in India are yet to be leveraged.
With a high cost of developing production facilities, limited accessibility to new
technology, and increasing competition, the barriers to enter the Indian Automotive sector are
high. On the other hand, India has a well-developed tax structure. The power to levy taxes and
duties is distributed among the three tiers of Government. The cost structure of the industry is
fairly traditional, but the profitability of motor vehicle manufacturers has been rising over the
past five years. Major players, like Tata Motors and Maruti Suzuki have material cost of about
80% but are recording profits after tax of about 6% to 11%.
The level of technology change in the Motor vehicle Industry has been high but, the rate
of change in technology has been medium. Investment in the technology by the producers has
been high. System-suppliers of integrated components and sub-systems have become the order of
the day. However, further investment in new technologies will help the industry be more
competitive. Over the past few years, the industry has been volatile. Currently, India's increasing
per capita disposable income which is expected to rise by 106% by 2015 and growth in exports is
playing a major role in the rise and competitiveness of the industry.
Tata Motors is leading the commercial vehicle segment with a market share of about
64%. Maruti Suzuki is leading the passenger vehicle segment with a market share of 46%.
Hyundai Motor India Limited and Mahindra and Mahindra are focusing expanding their footprint
in the overseas market. Hero MotoCorp is occupying over 41% and sharing 26% of the twowheeler market in India with Bajaj Auto. Bajaj Auto in itself is occupying about 58% of the
three-wheeler market.
Consumers are very important of the survival of the Motor Vehicle manufacturing
industry. In 2008-09, customer sentiment dropped, which burned on the augmentation in demand
of cars. Steel is the major input used by manufacturers and the rise in price of steel is putting a
cost
Pressure on manufacturers and cost is getting transferred to the end consumer. The price
of oil and petrol affect the driving habits of consumers and the type of car they buy.
The key to success in the industry is to improve labor productivity, labor flexibility, and
capital efficiency. Having quality manpower, infrastructure improvements, and raw material
availability also play a major role. Access to latest and most efficient technology and techniques
41

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

will bring competitive advantage to the major players. Utilizing manufacturing plants to
optimum level and understanding implications from the government policies are the essentials in
the Automotive Industry of India.
Both, Industry and Indian Government are obligated to intervene the Indian Automotive
industry. The Indian government should facilitate infrastructure creation, create favorable and
predictable business environment, attract investment and promote research and development.
The role of Industry will primarily be in designing and manufacturing products of world-class
quality establishing cost competitiveness and improving productivity in labor and in capital.
With a combined effort, the Indian Automotive industry will emerge as the destination of choice
in the world for design and manufacturing of automobiles. The Indian market offers endless
possibilities for investors.
Domestic Market Share for 2011-12

Passenger Vehicles

15.07

Commercial Vehicles4.66
Three Wheelers

2.95

Two Wheelers

77.32

Industry performance in 2011-12


Production
The cumulative production data for April-March 2012 shows production growth of 13.83 percent
over same period last year. In March 2012 as compared to March 2011, production grew at a
single digit rate of 6.83 percent. In 2011-12, the industry produced 20,366,432 vehicles of which
share of two wheelers, passenger vehicles, three wheelers and commercial vehicles were 76
percent, 15 percent, 4 percent and 4 percent respectively.
Domestic Sales

42

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

The growth rate for overall domestic sales for 2011-12 was 12.24 percent amounting to
17,376,624 vehicles. In the month of only March 2012, domestic sales grew at a rate of
10.11 percent as compared to March 2011.

Passenger Vehicles segment grew at 4.66 percent during April-March 2012 over same
period last year. Passenger Cars grew by 2.19 percent, Utility Vehicles grew by 16.47
percent and Vans by 10.01 percent during this period. In March 2012, domestic sales of
Passenger Cars grew by 19.66 percent over the same month last year. Also, sales growth
of total passenger vehicle in the month of March 2012 was at 20.59 percent (as compared
to March 2011). For the first time in history car sales crossed two million in a financial
year.

The overall Commercial Vehicles segment registered growth of 18.20 percent during
April-March 2012 as compared to the same period last year. While Medium & Heavy
Commercial Vehicles (M&HCVs) registered a growth of 7.94 percent, Light Commercial
Vehicles grew at 27.36 percent. In only March 2012, commercial vehicle sales registered
a growth of 14.82 percent over March 2011.

Three Wheelers sales recorded a decline of (-) 2.43 percent in April-March 2012 over
same period last year. While Goods Carriers grew by 6.31 percent during April-March
2012, Passenger Carriers registered decline by (-) 4.50 percent. In March 2012, total
Three Wheelers sales declined by (-) 9.11 percent over March 2011.

Total Two Wheelers sales registered a growth of 14.16 percent during April-March 2012.
Mopeds, Motorcycles and Scooters grew by 11.39 percent, 12.01 percent and 24.55
percent respectively. If we compare sales figures of March 2012 to March 2011, the
growth for two wheelers was 8.27 percent.

Exports
43

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

During April-March 2012, the industry exported 2,910,055 automobiles registering a


growth of 25.44 percent. Passenger Vehicles registered growth at 14.18 percent in this period.
Commercial Vehicles, Three Wheelers and Two Wheelers segments recorded growth of 25.15
percent, 34.41 percent and 27.13 percent respectively during April-March 2012. For the first time
in history car exports crossed half a million in a financial year.
In March 2012 compared to March 2011, overall automobile exports registered a growth of
17.81 percen
MAJOR INDIAN AUTOMOBILE COMPANIES

Hero Motocorp
Maruti Udyog
Ashok Leyland
Tata Motors
Bajaj Auto
Mahindra & Mahindra
Hindustan Motors
TVS
Force
Eicher Motors

FOREIGN AUTOMOBILE COMPANIES MANUFACTURING & ASSEMBLING IN INDIA

Audi

BMW

Renault

Fiat

General Motors

Honda

Hyundai

Mercedes-Benz

Mitsubishi

Nissan

Skoda

44

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

Suzuki

Toyota

Volkswagen

Volvo

Major factors that all influence a customer in Indian market are:

Market Size
The Indian Automotive Industry after de-licensing in July 1991 has grown at a

spectacular rate on an average of 17% for last few years. The industry has attained a turnover of
USD 35.8 billion, (INR 165,000 crores) and an investment of USD 10.9 billion. The industry has
provided direct and indirect employment to 13.1 million people. Automobile industry is currently
contributing about 5% of the total GDP of India. Indias current GDP is about USD 650 billion
and is expected to grow to USD 1,390 billion by 2016. The projected size in 2016 of the Indian
automotive industry varies between USD 122 billion and USD 159 billion including USD 35
billion in exports. This translates into a contribution of 10% to 11% towards Indias GDP by
2016, which is more than double the current contribution. (Source: Department of Heavy
Industry & Public Enterprises Government of India).

Demand Determinants
Determinants of demand for this industry include vehicle prices (which are determined

largely by wage, material and equipment costs) and exchange rates, preferences, the running cost
of a vehicle (mainly determined by the price of petrol), income, interest rates, scrapping rates,
and product innovation.

Exchange Rate
Movement in the value of Rupee determines the attractiveness of Indian products

overseas and the price of import for domestic consumption.

Affordability
Movement in income and interest rates determine the affordability of new motor vehicles.

Allowing unrestricted Foreign Direct Investment (FDI) led to increase in competition in the
domestic market hence, making better vehicles available at affordable prices.

45

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

Product Innovation
Product innovation is an important determinant as it allows better models to be available

each year and also encourages manufacturing of environmental friendly cars.

Demographics
It is evident that high population of India has been one of the major reasons for large size

of automobile industry in India. Factors that may be augment demand include rising population
and an increasing proportion of young persons in the population that will be more inclined to use
and replace cars. Also, increase in people with lesser dependency on traditional single family
income structure is likely to add value to vehicle demand.

Infrastructure
Longer-term determinants of demand include development in Indians infrastructure.

Indias banking giant State Bank of India and Australias Macquarie Group has launched an
infrastructure fund to rise up to USD 3 billion for infrastructure improvements. India needs
about $500 billion to repair its infrastructure such as ports, roads, and power units. These
investments are been made with an aim to generate long-term cash flow from automobile, power,
and telecom industries.

Price of Petrol
Movement in oil prices also has an impact on demand for large cars in India. During

periods of high fuel cost as experienced in 2007 and first half of 2008, demand for large cars
declined in favor of smaller, more fuel efficient vehicles. The changing patterns in customer
preferences for smaller more fuel efficient vehicles led to the launch of Tata Motors Nano one
of worlds smallest and cheapest cars.

International Markets Analysis


The Indian automotive industry embarked a new journey in 1991 with de-licensing of the

sector and subsequent opening up for 100% foreign direct investment (FDI). Since then almost
all global majors have set up their facilities in Indian taking the level of production from 2
million in 1991 to over 10 million in recent years. The exports in automotive sector have grown
on an average compound annual growth rate of 30% per year for the last seven years. The export
earnings from this sector are over USD 6 billion.

Basis of Competition
46

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

Competition in this industry is high and increasing. Automotive industry is a volume


driven industry and certain critical mass is a pre-requisite for attracting the much needed
investment in research and development and new product design and development. Research and
development investment is needed for innovations which is the lifeline for achieving and
retaining competitiveness in the industry. This competitiveness in turn depends on the capacity
and the speed of the industry to innovate and upgrade. The most important indices of
competitiveness are productivity of both labor and capital. The concept of attaining
competitiveness on the basis of low cost and abundant labor, favorable exchange rates, low
interest rates and concessional duty structure is becoming inadequate and therefore, not
sustainable. A greater emphasis is required on the development of the factors like innovation
which can ensure competitiveness on a long-term basis.

5.3 COMPANY ANALYSIS


HERO MOTOCORP

47

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

Hero

Motocorp

Ltd

formerly Hero

Honda is

an

Indian motorcycle and

scooter manufacturer based in New Delhi, India. Hero Honda started in 1984 as a joint venture
between Hero Cycles of India and Honda of Japan. The company is the largest two wheeler
manufacturer in India. The 2006 Forbes 200 Most Respected companies list has Hero Honda
Motors ranked at 108.
In 2010, When Honda decided to move out of the joint venture, Hero Group bought the
shares held by Honda. Subsequently, in August 2011 the company was renamed Hero MotoCorp
with a new corporate identity. On 4th June 2012,Hero Motocorp approved a proposal to merge
the investment arm of its parent-Hero Investment Pvt. Ltd. into the automaker. The decision
comes after 18 months of its split from Honda Motor.
Hero is the brand name used by the Munjal brothers for their flagship company Hero
Cycles Ltd. A joint venture between the Hero Group and Honda Motor Company was established
in 1984 as the Hero Honda Motors Limited At Dharuhera India,Munjal family and Honda group
both own 26% stake in the Company. In 2010, it was reported that Honda planned to sell its stake
in the venture to the Munjal family.
During the 1980s, the company introduced motorcycles that were popular in India for
their fuel economy and low cost. A popular advertising campaign based on the slogan 'Fill it Shut it - Forget it' that emphasized the motorcycle's fuel efficiency helped the company grow at a
double-digit pace since inception. The technology in the bikes of Hero Honda for almost 26
years (19842010) has come from the Japanese counterpart Honda
Hero MotoCorp has three manufacturing facilities based at Dharuhera, Gurgaon in
Haryana and at Haridwar in Uttarakhand. These plants together are capable of churning out 3
million bikes per year. Hero MotoCorp has a large sales and service network with over 3,000
dealerships and service points across India. Hero Honda has a customer loyalty program since
2000, called the Hero Honda Passport Program.
The company has a stated aim of achieving revenues of $10 billion and volumes of 10
million two-wheelers by 2016-17. This in conjunction with new countries where they can now
market their two-wheelers following the disengagement from Honda, Hero MotoCorp hopes to
achieve 10 per cent of their revenues from international markets, and they expected to launch
sales in Nigeria by end-2011 or early-2012. In addition, to cope with the new demand over the
coming half decade, the company was going to build their fourth factory in South India and their
fifth factory in Western India. There is no confirmation where the factories would be built.
48

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

Table 1
BOOK VALUE
Item
Mar-08
Book Value
149.55
Market High 898
Market Low 550
EPS
48.47
DPS
19
Source: Secondary

Mar-09
190.33
1808
751
64.19
20

Mar-10
173.52
2094
1495
111.77
110

Mar-11
148.03
2249.70
1375.75
96.55
105

Mar-12
214.83
2278.50
1702.6
119.09
45

Mar-11
96.55
105
1.08

Mar-12
119.09
45
.37

Table 2
Pay Out Policy
Item
Mar-08
EPS
48.47
DPS
19
Pay
Out .39
Ratio
Source: Secondary

Mar-09
64.19
20
.31

Mar-10
111.77
110
.98

Table 3
Return on Equity
Item
Share
Capital
Reserve
& surplus
Net worth

Mar-08
39.94

Mar-09
39.94

Mar-10
39.94

Mar-11
39.94

Mar-12
39.94

2946

3761

3425

2916

4249.89

2985.94

3800.94

3464.94

2955.94

4289.83

49

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

PAT
968
Return
on 32.41
equity
Source: Secondary

1282
33.72

2231.83
64.41

1927.90
65.21

2378.13
55.43

Mar-11
2249.70
1375.75
96.55
20

Mar-12
2278.50
1702.65
119.09
17.02

Mar-11
22.1
(13.61)
(13.61)
(4.5)

Mar-12
21.2
23.4
22.6
(57.14)

Table 4
Price Earnings Ratio
Item
Mar-08
Market High 898
Market Low 550
EPS
48.47
PE ratio
15.3
Source: Secondary

Mar-09
1808
751
64.19
17.6

Mar-10
2094
1495
111.77
20.9
Table 5

Rate of Growth
Item
Net Sales
PAT growth
EPS growth
DPS

Mar-08
4.4
12.82
12.82
11.96

Mar-09
19.2
32.43
32.43
5.26

Mar-10
27.9
74.08
111.77
450

INTRINSIC VALUE CALCULATION: Hero MotoCorp


Dividend Pay Out Ratio

Dividend per Share


Earnings per Share

Average DPOR for 5 years

= .37 + 1.08 + .98 +.31 +.39


5
=

3.13
5

Average Retention Ratio

Average Return on Equity

1 Average DPOR

1 0.626

0.626

= 0.374

55.43 + 65.21 + 64.41 + 33.72 + 32.41


50

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

5
=

251.18
5

50.236%

Long term growth in dividend & = Average Retention Ratio Average Return on Equity
Earning (g)
= .374 50.236
= 18.88%
Projected Earnings for 2011-12

= EPS of current year (1 + Growth rate)


= (119.09 1 + .18)

Normalized Average Price Earning

= 214.362

= 17.02 + 20 + 20.9 + 17.6 + 15.3

Ratio

5
= 90.82
5

Projected Dividend Per Share

= Dividend for the current year (1 + Growth rate)


= 45 (1 + .18)

Intrinsic Value

= 18.164%

= 53.10

= Projected Earnings Per share Normalized Price Earning


Ratio
= 214.362 18.164

ANALYSIS AND INTERPRETATION


Current Market Price

= 2054.85

Sector

= Automobile

Face value

=2

Intrinsic value

= 3893.67

51

= 3893.67

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

52 Week High / Low

= 2278.50 / 1702.65

The Intrinsic value of the share price is calculated to be Rs.3893.67 and Current Market Price is
Rs.2054.85, the scrip is underpriced. It is advised to buy the share.

TATA MOTORS

Tata Motors Limited formerly TELCO, is an Indian multinational automotive corporation


headquartered in Mumbai, India. It is the eighteenth largest motor vehicle manufacturing
company in the world by volume. Part of the Tata Group. Its products include passenger cars,

52

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

trucks, vans and coaches. Tata Motors has been ranked 314th in the Fortune Global 500 rankings
of the world's biggest corporations for the year 2012.
Tata Motors is South Asias largest automobile company; it is the leader in commercial
vehicles and among the top three in passenger vehicles. Worldwide it is the world's fourth-largest
truck manufacturer and second-largest bus manufacturer.] It has auto manufacturing and
assembly plants inJamshedpur, Pantnagar, Lucknow, Sanand, Dharwad and Pune, India, as well
as in Argentina, South Africa, Thailand and the United Kingdom. Tata Motors has produced and
sold over 6.5 million vehicles in India since 1954. Originally a manufacturer of locomotives, the
company manufactured its first commercial vehicle in 1954 in a collaboration with DaimlerBenz AG, which ended in 1969. In 2010, Tata Motors surpassed Reliance to win the coveted title
of 'India's most valuable brand' in an annual survey conducted by Brand Finance and The
Economic Times. Tata Motors was ranked as India's 3rd Most Reputed Car manufacturer in the
Reputation Benchmark Study - Auto (Cars) Sector, launched in April 2012.
Tata Motors is a cross-listed company; its stock trades on the Bombay Stock Exchange
and the New York Stock Exchange as TTM.Tata Motors is a part of the Tata Group manages its
share-holding through Tata Sons. The company expanded its operations to commercial vehicle
sector in 1954 after forming a joint venture with Daimler-Benz AG of Germany. Despite the
success of its commercial vehicles, Tata realized his company had to diversify and he began to
look at other products. Based on consumer demand, he decided that building a small car would
be the most practical new venture. So in 1998 it launched Tata Indica, India's first fully
indigenous passenger car. Designed to be inexpensive and simple to build and maintain, the
Indica became a hit in the Indian market. It was also exported to Europe, especially the UK. Tata
acquired Spanish bus and coach manufacturer Hispano Carrocera in 2009.[7] In 2006 it formed a
joint venture with Marcopolo S.A. of Brazil, and introduced low-floor buses in the Indian Market
under the name Tata Marcopolo Bus. Recently, it has acquired British Jaguar Land Rover (JLR),
which includes the Daimler and Lanchester brand names. Tata Motors Limited is Indias largest
automobile company, with revenues of 356.5148 billion (US$7.11 billion) in 200708. It is the
leader in commercial vehicles in each segment, and among the top three in passenger vehicles in
India with products in the compact, midsize car and utility vehicle segments. Tata vehicles are
sold primarily in India, and over 4 million Tata vehicles have been produced domestically since
53

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

the first Tata vehicle was assembled in 1954. The companys manufacturing base in India is
spread across Jamshedpur (Jharkhand), Pune (Maharashtra), Lucknow (Uttar Pradesh), Pantnagar
(Uttarakhand) and Dharwad (Karnataka). Following a strategic alliance with Fiat in 2005, Tata
set up an industrial joint venture with Fiat Group Automobiles at Ranjangaon (Maharashtra) to
produce both Fiat and Tata cars and Fiat powertrains. The company is establishing a new plant at
Sanand (Gujarat).

Table 1
BOOK VALUE
Item
Mar-08
Book Value
202.70
Market High 824
Market Low 124
EPS
52.63
DPS
15
Source: Secondary

Mar-09
240.64
799.6
128
19.48
6

Mar-10
259.03
1382
633.75
39.26
15

Mar-11
314.93
1335
137.55
28.55
20

Mar-12
60.95
320.60
178.65
19.64
4

Mar-11
28.55
20
.70

Mar-12
19.64
4
.20

Mar-11
634.650

Mar-12
634.75

Table 2
Pay Out Policy
Item
Mar-08
EPS
52.63
DPS
15
Pay
Out .28
Ratio
Source: Secondary

Mar-09
19.48
6
.30

Mar-10
39.26
15
.38

Table 3
Return on Equity
Item
Share
Capital

Mar-08
385.54

Mar-09
514.05

Mar-10
570.60

54

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

Reserve
7428.45
& surplus
Net worth
7813.99
PAT
2028.92
Return
on 25.98
equity
Source: Secondary

11855.15

14208.55

19351.40

18709.16

12369.2
1001.26
8.09

14779.15
2240.08
15.15

19986.05
1811.82
9.06

19343.91
1242
6.42

Mar-11
1335
137.55
28.55
48.9

Mar-12
320.60
178.65
19.64
35.6

Mar-11
36.39
(19.11)
(27.27)
33

Mar-12
13.05
(31.45)
(35.64)
86.83

Table 4
Price Earnings Ratio
Item
Mar-08
Market High 824
Market Low 124
EPS
52.63
PE ratio
12.3
Source: Secondary

Mar-09
799.6
128
19.48
9.6

Mar-10
1382
633.75
39.26
20.5
Table 5

Rate of Growth
Item
Net Sales
PAT growth
EPS growth
DPS

Mar-08
6.54
6.03
6
-

Mar-09
(13.84)
(50.65)
(62.98)
(60)

Mar-10
33.76
123.76
101.54
150

INTRINSIC VALUE CALCULATION: TATA MOTORS


Dividend Pay Out Ratio

Dividend per Share


Earnings per Share

Average DPOR for 5 years

= .28 + .30+ .38 +.70 + .20


5
=

1.86
5

Average Retention Ratio

= 0.373

1 Average DPOR
55

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

=
Average Return on Equity

1 0.373

= 0.626

25.98 + 8.09+ 15.15 + 9.06 + 6.42


5

41.39
5

= 8.278%

Long term growth in dividend &= Average Retention Ratio Average Return on Equity
Earning (g)
= 0.626 8.278
= 5.182%

Projected Earnings for 2011-12

= EPS of current year (1 + Growth rate)


= (19.64 1 + .05)

Normalized Average Price Earning


Ratio

= 20.62

= 12.3 + 9.6 +20.5 + 48.9 +35.63


5
= 126.93
5

Projected Dividend Per Share

= 25.386%

= Dividend for the current year (1 + Growth rate)


= 4 (1 + .05) = 4.20

Intrinsic Value

= Projected Earnings Per share Normalized Price Earning


Ratio
= 20.62 25.386

ANALYSIS AND INTERPRETATION


Current Market Price

= 275.70

Sector

= Automobile

Face value

= 10
56

= 522.923

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

Intrinsic value

= 522.92

52 Week High / Low

= 320.60/ 178.65

The Intrinsic value of the share price is calculated to be Rs.522.92 and Current Market Price is
Rs.275.70, the scrip is underpriced. It is advised to buy the share.

MAHINDRA & MAHINDRA

57

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

Mahindra & Mahindra is an Indian multinational automaker headquartered in Mumbai


Maharastra India. It is one of the largest automobile manufacturers by production in India and a
subsidiary of Mahindra Group conglomerate. The company was founded in 1945 in Ludhiana as
Mahindra & Mohammed by brothers K.C. Mahindra and J.C. Mahindra and Malik Ghulam
Mohammed. After India gained independence and Pakistan was formed, Mohammed immigrated
to Pakistan where he became the nation's first finance minister. The company changed its name
to Mahindra & Mahindra in 1948. It is ranked #21 in the list of top companies of India in Fortune
India 500 in 2011.
Mahindra & Mahindra was set up as a steel trading company in 1945. It soon expanded
into manufacturing general-purpose utility vehicles, starting with assembly under license of the
iconic Willys Jeep in India. Soon established as the Jeep manufacturers of India, M&M later
branched out into the manufacture of light commercial vehicles (LCVs) and agricultural tractors.
Today, M&M is the leader in the utility vehicle segment in India with its flagship UV Scorpio
and enjoys a growing global market presence in both the automotive and tractor businesses.
Over the past few years, M&M has expanded into new industries and geographies. They
entered into the two-wheeler segment by taking over Kinetic Motors in India. M&M also has
controlling stake in REVA Electric Car Company and acquired South Korea's SsangYong Motor
Company in 2011. The US based Reputation Institute recently ranked Mahindra among the top
10 Indian companies in its 'Global 200: The World's Best Corporate Reputations' list.Mahindra &
Mahindra is a major automobile manufacturer of utility vehicles, passenger cars, pickups,
commercial vehicles, and two wheelers. Its tractors are sold on six continents. It has acquired
plants in China and the United Kingdom, and has three assembly plants in the USA. M&M has
partnerships with international companies like Renault SA, France and International Truck and
Engine Corporation, USA. M&M has a global presence and its products are exported to several
countries. Its global subsidiaries include Mahindra Europe Srl. based in Italy, Mahindra USA
Inc., Mahindra South Africa and Mahindra (China) Tractor Co. Ltd.

Table 1
BOOK VALUE
Item
Book Value

Mar-08
181.43

Mar-09
191.91

Mar-10
138.02
58

Mar-11
174.85

Mar-12
205.32

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

Market High 873


Market Low 235
EPS
46.15
DPS
11.50
Source: Secondary

1094
258.60
30.69
10

1199
476.35
36.89
9.50

877.3
585
45.33
11.50

920.65
621.75
48.88
12.5

Mar-11
45.33
11.50
.253

Mar-12
48.88
12.5
.255

Table 2
Pay Out Policy
Item
Mar-08
EPS
46.15
DPS
11.50
Pay
Out .249
Ratio
Source: Secondary

Mar-09
30.69
10
.325

Mar-10
36.89
9.5
.257

Table 3
Return on Equity
Item
Mar-08
Share
239.07
Capital
Reserve
4098.53
& surplus
Net worth
4337.6
PAT
1103.37
Return
on 25.51
equity
Source: Secondary

Mar-09
272.62

Mar-10
282.95

Mar-11
293.62

Mar-12
294.52

4959.26

7527.60

9974.62

11799.26

5231.88
836.78
16.03

7810.55
2846.75
26.74

10268.24
2662.10
25.92

12093.78
2878.89
23.80

Mar-11
877.3
585
45.33
16

Mar-12
920.65
621.75
48.88
19.29

Table 4
Price Earnings Ratio
Item
Market High
Market Low
EPS
PE ratio

Mar-08
873
235
46.15
15.6

Mar-09
1094
258.60
30.69
12.5

Mar-10
1199
476.35
36.89
15.3
59

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

Source: Secondary
Table 5
Rate of Growth
Item
Net Sales
PAT growth
EPS growth
DPS

Mar-08
14.80
3.27
2.82
-

Mar-09
13.74
(24.23)
(33.49)
(13.04)

Mar-10
38.55
240.20
20.20
(5)

Mar-11
25.81
(6.48)
22.87
21.05

Mar-12
35.59
8.14
7.8
.008

INTRINSIC VALUE CALCULATION: Mahindra& Mahindra


Dividend Pay Out Ratio

Dividend per Share


Earnings per Share

Average DPOR for 5 years

= .255 + .253 + .257 + .325 + .249


5
=

1.339
5

Average Retention Ratio

Average Return on Equity

0.267

1 Average DPOR

1 0.267

= 0.732

25.43 + 15.99 + 26.74 + 25.92 +23.80


5

117.86
5

23.572%

Long term growth in dividend &= Average Retention Ratio Average Return on Equity
Earning (g)
= .0.732 23.572
= 17.254%
Projected Earnings for 2011-12

= EPS of current year (1 + Growth rate)

60

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

= (48.88 1 + .17)
Normalized Average Price Earning

= 57.18

= 19.29 + 16 + 15.33 + 12.5 + 15.6

Ratio

5
= 78.72
5

Projected Dividend Per Share

= Dividend for the current year (1 + Growth rate)


= 12.5 (1 + .17)

Intrinsic Value

= 15.74%

= 14.625

= Projected Earnings Per share Normalized Price Earning


Ratio
= 57.18 15.74

900.241

ANALYSIS AND INTERPRETATION


Current Market Price

= 696.90

Sector

= Automobile

Face value

= 10

Intrinsic value

= 900.241

52 Week High / Low

= 920.65 / 621.75

The Intrinsic value of the share price is calculated to be Rs.900.241 and Current Market Price is
Rs.696.90, the scrip is underpriced. It is advised to buy the share.

MARUTI SUZUKI

Maruti Suzuki India Limited, commonly referred to as Maruti, is a subsidiary company of


Japanese automaker Suzuki Motors Corporation. It has a market share of 44.9% of the Indian
61

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

passenger car market as of September 2011. Maruti Suzuki offers a complete range of cars from
entry level Maruti 800 and Alto to hatchback Ritz, A-Star, Swift, Wagon-R, Estillo& sedans
DZire, SX4, in the C segementMariuti Eco, Multi Purpose vehicle Ertiga and sports utility
vehicle Grand Vitara. It was the first company in India to mass-produce and sell more than a
million cars. It is largely credited for having brought in an automobile revolution in India. It is
the market leader in India, and on 17 September 2007, Maruti UdyogLimitedd was renamed as
Maruti Suzuki India Limited. The companys headquarters are located in New Delhi. In February
2012, the company sold its 10th million vehicle in India. Maruti Suzuki is India and Nepal's
leading automobile manufacturer and the market leader in the car segment, both in terms of
volume of vehicles sold and revenue earned. Until recently, 18.28% of the company was owned
by the Indian government, and 54.2% by Suzuki of Japan. The BJP-led government held an
initial public offering of 25% of the company in June 2003. As of 10 May 2007, the government
of India sold its complete share to Indian financial institutions and no longer has any stake in
Maruti Udyog.
Maruti Udyog Limited (MUL) was established in February 1981, though the actual
production commenced in 1983 with the Maruti 800, based on the Suzuki Alto kei car which at
the time was the only modern car available in India, its only competitors- the Hindustan
Ambassador and Premier Padmini were both around 25 years out of date at that point. Through
2004, Maruti Suzuki has produced over 5 Million vehicles. Maruti Suzukis are sold in India and
various several other countries, depending upon export orders. Models similar to Maruti Suzukis
(but not manufactured by Maruti Udyog) are sold by Suzuki Motor Corporation and
manufactured in Pakistan and other South Asian countries.The company exports more than
50,000 cars annually and has an extremely large domestic market in India selling over 730,000
cars annually. Maruti 800, till 2004, was the India's largest selling compact car ever since it was
launched in 1983. More than a million units of this car have been sold worldwide so far.
Currently, Maruti Suzuki Alto tops the sales charts but Maruti Suzuki's Swift has taken over this
titles by 19000 models in April 2012.Maruti Exports Limited is the subsidiary of Maruti Suzuki
with its major focus on exports and it does not operate in the domestic Indian market. The first
commercial consignment of 480 cars were sent to Hungary. By sending a consignment of 571
cars to the same country Maruti Suzuki crossed the benchmark of 300,000 cars. Since its

62

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

inception export was one of the aspects government was keen to encourage.[citation needed]
Every political party expected Maruti Suzuki to earn foreign currency. Angola, Benin, Djibouti,
Ethiopia, Europe, Kenya, Morocco, Nepal, Sri Lanka, Uganda, Chile, Guatemala, Costa Rica and
El Salvador are some of the markets served by Maruti Exports.

Table 1
BOOK VALUE
Item
Mar-08
Book Value
291.98
Market High 1055
Market Low 433
EPS
59.91
DPS
5
Source: Secondary

Mar-09
323.45
1737.30
502
42.18
3.5

Mar-10
409.65
1566.70
1126.85
86.45
6

Mar-11
479.99
1453.40
900
79.21
7.5

Mar-12
525.68
1514.95
916.85
56.60
7.50

Mar-11
79.21
7.5
.09

Mar-12
56.60
7.5
.13

Mar-11

Mar-12

Table 2
Pay Out Policy
Item
Mar-08
EPS
59.91
DPS
5
Pay
Out 0.08
Ratio
Source: Secondary

Mar-09
42.18
3.5
.08

Mar-10
86.45
6
.06

Table 3
Return on Equity
Item

Mar-08

Mar-09

Mar-10
63

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

Share
144.5
Capital
Reserve
8270.90
& surplus
Net worth
8415.4
PAT
1731.6
Return
on 20.56
equity
Source: Secondary

144.5

144.5

144.5

144.50

9200.40

11690.60

13723

15042.90

9344.5
1253.7
13.04

11835.1
2533.2
21.1

13867.5
2400.1
16.5

15187.4
1635.20
10.76

Mar-11
1453.40
900
79.21
16.2

Mar-12
1514.95
916.85
56.60
24.37

Mar-11
24.7
(9.1)
(9.4)
25

Mar-12
(2.74)
(28.55)
(28.54)
-

Table 4
Price Earnings Ratio
Item
Mar-08
Market High 1055
Market Low 433
EPS
59.91
PE ratio
14.1
Source: Secondary

Mar-09
1737.30
502
42.18
18.7

Mar-10
1566.70
1126.85
86.45
16.6
Table 5

Rate of Growth
Item
Net Sales
PAT growth
EPS growth
DPS

Mar-08
22.3
10.8
10.6
11.1

Mar-09
13.9
(42.02)
(29.49)
(30)

Mar-10
42.24
104.9
105.2
71.4

INTRINSIC VALUE CALCULATION: MARUTI SUZUKI


Dividend Pay Out Ratio

Dividend per Share


Earnings per Share

Average DPOR for 5 years

= 0.13 +0.08 + .08 + .06 + .09


5
=

.44

64

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

5
Average Retention Ratio

Average Return on Equity

= 0.088

1 Average DPOR

1 0.088

0.912

1.76 + 16.50 + 21.10 + 13.04 + 20.56


5

81.96
5

= 16.392%

Long term growth in dividend &= Average Retention Ratio Average Return on Equity
Earning (g)
= 0.912 16.392
= 14.95%
Projected Earnings for 2011-12

= EPS of current year (1 + Growth rate)


= (56.60 1 + .14)

Normalized Average Price Earning


Ratio

64.524

= 24.37 + 16.20 + 16.58 + 18.65 + 14.05


5
= 89.85
5

Projected Dividend Per Share

= 17.97%

= Dividend for the current year (1 + Growth rate)


= 7.5 (1 + .14) = 8.55

Intrinsic Value

= Projected Earnings Per share Normalized Price Earning


Ratio
= 64.524 17.97

ANALYSIS AND INTERPRETATION


Current Market Price

= 1349.10
65

= 1159.5

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

Sector

= Automobile

Face value

=5

Intrinsic value

= 1159.5

52 Week High / Low

= 1514 .95/ 916.85

The Intrinsic value of the share price is calculated to be Rs.1159.50 and Current Market Price is
Rs.1349.10, the scrip is overpriced. It is advised to sell/hold the share.

ASHOK LEYLAND

66

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

Ashok Leyland is an Indian automobile manufacturing company based in Chennai, India.


Founded in 1948, the company is one of India's leading manufacturers of commercial vehicles,
such as trucks and buses, as well as emergency and military vehicles. Operating six plants,
Ashok Leyland also makes spare parts and engines for industrial and marine applications. It sells
about 60,000 vehicles and about 7,000 engines annually. It is the second largest commercial
vehicle company in India in the medium and heavy commercial vehicle (M&HCV) segment with
a market share of 28% (200708). With passenger transportation options ranging from 19 seaters
to 80 seaters, Ashok Leyland is a market leader in the bus segment. The company claims to carry
over 60 million passengers a day, more people than the entire Indian rail network. In the trucks
segment Ashok Leyland primarily concentrates on the 16 ton to 25 ton range of trucks. However
Ashok Leyland has presence in the entire truck range starting from 7.5 tons to 49 tons. The joint
venture announced with Nissan Motors of Japan would improve its presence in the Light
Commercial Vehicle (LCV) segment (<7.5 tons).
Ashok Leyland is the second technology leader in the commercial vehicles sector of
India. The history of the company has been punctuated by a number of technological
innovations, which have since become industry norms. It was the first to introduce multi-axled
trucks, full air brakes and a host of innovations like the rear engine and articulated buses in India.
In 1997, the company launched the countrys first CNG bus and in 2002, developed the first
Hybrid Electric Vehicle.
The company has also maintained its profitable track record for 60 years. The annual
turnover of the company was USD 1.4 billion in 2008-09. Selling 54,431 medium and heavy
vehicles in 2008-09, Ashok Leyland is India's largest exporter of medium and heavy duty trucks.
67

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

It is also one of the largest private sector employers in India - with about 12,000 employees
working in 6 factories and offices spread over the length and breadth of India.

Table 1
BOOK VALUE
Item
Mar-08
Book Value
15.99
Market High 57.90
Market Low 12.45
EPS
3.53
DPS
1.5
Source: Secondary

Mar-09
15.85
55.85
13.40
1.43
1

Mar-10
17.46
81.9
45.9
3.18
1.5

Mar-11
19.97
68.7
20.05
4.75
2

Mar-12
10.89
32.9
20.25
2.13
1

Mar-11
4.75
2
.42

Mar-12
2.13
1
.46

Table 2
Pay Out Policy
Item
Mar-08
EPS
3.53
DPS
1.5
Pay
Out .42
Ratio
Source: Secondary

Mar-09
1.43
1
.699

Mar-10
3.18
1.5
.47

Table 3
Return on Equity
Item
Mar-08
Share
133.03
Capital
Reserve
1993.57
& surplus
Net worth
469.31
PAT
2126.6
Return
on 22.06
equity
Source: Secondary

Mar-09
133.03

Mar-10
133.03

Mar-11
133.03

Mar-12
266.07

1976

2190.10

2523.65

2632.34

190
2109.03
9

423.67
2323.13
18.23

631.30
2656.68
23.76

565.98
2898.41
19.52

68

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

Table 4
Price Earnings Ratio
Item
Mar-08
Market High 57.90
Market Low 12.45
EPS
3.53
PE ratio
10
Source: Secondary

Mar-09
55.85
13.40
1.43
11.2

Mar-10
81.9
45.9
3.18
12.4

Mar-11
68.7
20.05
4.75
15

Mar-12
32.9
20.25
2.13
17.5

Mar-11
11407.15
32.88
33.05
25

Mar-12
13309.59
(11.54)
(123)
-

Table 5
Rate of Growth
Item
Net Sales
PAT growth
EPS growth
DPS

Mar-08
7952.52
-

Mar-09
6168.99
(147)
(146.8)
(50.16)

Mar-10
7436.18
55.15
55.03
33.33

INTRINSIC VALUE CALCULATION: ASHOK LEYLAND


Dividend Pay Out Ratio

Dividend per Share


Earnings per Share

Average DPOR for 5 years

= .46 + .42 + .47 + .699 + .42


5
=

2.46
5

Average Retention Ratio

Average Return on Equity

= 0.492

1 Average DPOR

1 0.492 =

0.508

19.52 + 23.76 + 18.23 + 9 + 22.06


5

92.57
5

69

18.51%

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

Long term growth in dividend &= Average Retention Ratio Average Return on Equity
Earning (g)

= 0.508 18.51
= 9.403%

Projected Earnings for 2011-12

= EPS of current year (1 + Growth rate)


= (2.13 1 + .09)

Normalized Average Price Earning

= 2.321

= 17.5 + 15 + 12.4 + 11.2 + 10

Ratio

5
= 66.1
5

Projected Dividend Per Share

= 13.22%

= Dividend for the current year (1 + Growth rate)


= 1 (1 + .09)

Intrinsic Value

= 1.09

= Projected Earnings Per share Normalized Price Earning


Ratio
= 2.321 13.22

30.68

ANALYSIS AND INTERPRETATION


Current Market Price

= 30.30

Sector

= Automobile

Face value

=5

Intrinsic value

= 30.68

52 Week High / Low

= 32.9 / 20.25

The Intrinsic value of the share is Rs.30.68 and Current Market Price as on March 31 st is
Rs.30.30, the scrip is underpriced. It is advised to buy the share.

70

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

TECHNICAL ANALYSIS
6.1 HERO MOTOCORP
Exponential Moving Average (EMA)
--- 10 day EMA, --- 50 day EMA, --- 200day EMA

Exponential Moving Average (EMA)


Interpretation: 10 day EMA indicates the short term trend, 50 day EMA

indicates the medium term trend and 200 day EMA indicates the long term
trend. When a shorter-term EMA moves above a longer term EMA and both
EMAs are directed upwards, it can be considered a bullish (buy) signal. When
a shorter-term EMA moves along with long term EMA and both EMAs are
directed upwards, it can be considered a bullish (sell) signal. From the
beginning of year 2012 shorter-term EMA moves along with long term EMA
and both EMAs are directed upwards, it can be considered a bullish signal.

71

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

Rate of Change Indicator (ROC)


20 day ROC

Rate of Change Indicator (ROC)


Interpretation: From the above graph its clear that in March 2012 the stock is having a positive
momentum. The ROC line is moving towards the overbought zone, thereby indicating that the
stock is worth to hold on.

Relative Strength Index (RSI)


14 day RSI

Relative Strength Index (RSI)


Interpretation: From the above graph its understood that in March 2012
the RSI line has not moved above 70 so it has not reached a position of
overbought. The RSI signal towards the end of analysis shows that the
security is picking up, so the investors are advised to hold the security.

72

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

Moving Average Convergence and Divergence (MACD)

Moving Average Convergence and Divergence (MACD)


Interpretation:A crossing of the MACD line up through zero is interpreted as bullish, or down
through zero as bearish. In 2010-2011, the MACD line is near to the Zero line so the investors
should hold their shares. But for the period of Jan-March 2012, the MACD line is moving
towards zero line from below so it is having bullish or positive trend.

6.2 TATA MOTORS


Exponential Moving Average (EMA)
73

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

--- 10 day EMA, --- 50 day EMA, --- 200day EMA

Interpretation: 10 day EMA indicates the short term trend, 50 day EMA
indicates the medium term trend and 200 day EMA indicates the long term
trend. When a shorter-term EMA moves above a longer term EMA and both
EMAs are directed upwards, it can be considered a bullish (buy) signal.
When a shorter-term EMA moves below a longer term EMA and both EMAs
are directed downwards, it can be considered a bearish (sell) signal. By the
end of March 2012 shorter-term EMA moves above a longer term EMA and
both EMAs are directed upwards, it can be considered a bullish (buy) signal.

74

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

Rate of Change Indicator (ROC)


20 day ROC

Interpretation: From the above graph its clear that in March 2012 the
stock is having a positive momentum. The ROC line is moving towards the
overbought zone, thereby indicating that the stock is worth to hold on.

Relative Strength Index (RSI)


14 day RSI

Interpretation: From the above graph its understood that in March 2012
the RSI line has moved above 70 so it has reached a position of overbought.
The RSI signal towards the end of analysis shows that the security has picked
up, so the investors are advised to sell the security.

75

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

Moving Average Convergence and Divergence (MACD)

Interpretation: A crossing of the MACD line up through zero is interpreted


as bullish, or down through zero as bearish. But by the end of March 2012,
the MACD line has crossed zero line from below so it is having bearish or
negative trend.

76

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

6.3 MAHINDRA & MAHINDRA


Exponential Moving Average (EMA)
--- 10 day EMA, --- 50 day EMA, --- 200day EMA

Interpretation: 10 day EMA indicates the short term trend, 50 day EMA

indicates the medium term trend and 200 day EMA indicates the long term
trend. When a shorter-term EMA moves above a longer term EMA and both
EMAs are directed upwards, it can be considered a bullish (buy) signal. When
a shorter-term EMA moves below a longer term EMA and both EMAs are
directed downwards, it can be considered a bearish (sell) signal. From the
beginning of year 2012 shorter-term EMA moves below a longer term EMA
and both EMAs are directed downwards, it can be considered a bearish
signal.

77

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

Rate of Change Indicator (ROC)


20 day ROC

Interpretation: From the above graph its clear that in march 2012 the
stock is having a positive momentum. The ROC line is moving towards the
overbought zone, thereby indicating that the stock is worth to hold on.

Relative Strength Index (RSI)


14 day RSI

Interpretation: From the above graph its understood that in march 2012
the RSI line has crossed zero line but not moved above 70 mark so it has not
reached a position of overbought. The RSI signal towards the end of analysis
shows that the security is picking up, so the investors are advised to hold
the security.

78

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

Moving Average Convergence and Divergence (MACD)

Interpretation: A crossing of the MACD line up through zero is interpreted


as bullish, or down through zero as bearish. In the period Jan-March 2012,, it
is picking itself from below zero level to above and again falling back and
later recovering, it is better advised to hold on the stock.

79

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

6.4 MARUTI SUZUKI

Exponential Moving Average (EMA)


--- 10 day EMA, --- 50 day EMA, --- 200day EMA

Interpretation: 10 day EMA indicates the short term trend, 50 day EMA

indicates the medium term trend and 200 day EMA indicates the long term
trend. When a shorter-term EMA moves above a longer term EMA and both
EMAs are directed upwards, it can be considered a bullish (buy) signal. When
a shorter-term EMA moves below a longer term EMA and both EMAs are
directed downwards, it can be considered a bearish (sell) signal. From the
beginning of year 2012 shorter-term EMA moves above a longer term EMA
and both EMAs are directed upwards, it can be considered a bullish signal.

80

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

Rate of Change Indicator (ROC)


20 day ROC

Interpretation: From the above graph its clear that in March 2012 the
stock is having a negative momentum. At the end of March 2012 the ROC
line is inclining towards zero line, thereby indicating that the stock should be
sold..

Relative Strength Index (RSI)


14 day RSI

I
nterpretation: The above graph is a 14 day RSI chart. From the above
graph its understood that in March 2012 the RSI line has crossed the zero
line and moved above 70 mark so it has reached a position of overbought.
The RSI signal towards the end of analysis shows that the security is picking
up, so the investors are advised to sell the security.
81

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

Moving Average Convergence and Divergence (MACD)

Interpretation: A crossing of the MACD line up through zero is interpreted


as bullish, or down through zero as bearish. at the end of march 2012, the
MACD line is above zero line but moving downward so it is having bearish
trend.

82

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

6.5 ASHOK LEYLAND


Exponential Moving Average (EMA)
--- 10 day EMA, --- 50 day EMA, --- 200day EMA

Exponential Moving Average (EMA)


Interpretation: 10 day EMA indicates the short term trend, 50 day EMA
indicates the medium term trend and 200 day EMA indicates the long term
trend. When a shorter-term EMA moves above a longer term EMA and both
EMAs are directed upwards, it can be considered a bullish (buy) signal. When
a shorter-term EMA moves below a longer term EMA and both EMAs are
83

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

directed downwards, it can be considered a bearish (sell) signal. From the


beginning of year 2012 shorter-term EMA moves below a longer term EMA
and both EMAs are directed upwards, it can be considered a bullish (buy)
signal.

Rate of Change Indicator (ROC)


20 day ROC

Interpretation: From the above graph its clear that in March 2012 the
stock is having a positive momentum. The ROC line is moving towards the
overbought zone, thereby indicating that the stock is worth to hold on.
Relative Strength Index (RSI)
14 day RSI

84

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

Interpretation: The above graph is a 14 day RSI chart. From the above
graph its understood that in March 2012 the RSI line has moved above 70
so it has not reached a position of overbought. The RSI signal towards the
end of analysis shows that the security is picking up, so the investors are
advised to hold the security.

Moving Average Convergence and Divergence (MACD)

Interpretation: A crossing of the MACD line up through zero is interpreted


as bullish, or down through zero as bearish. For the period of Jan-March
2011, the MACD line is crossing zero line from below so it is having bullish or
positive trend. For the period of Jan-March 2012, the MACD line is above
zero line from so it is having bullish or positive trend.
ALPHA
-Alpha measures the unsystematic risk of the company. If alpha is positive, then that script will
have higher returns. If alpha is zero, then the return depends upon the market return.
Alpha = Stock Return (Beta Market Return)
BETA

85

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

-Beta describes the relationship between the stock return and the market index return. This
can be positive or negative. If beta is one, one percentage changes in the market index return
causes exactly one percent changes in the stock return. It indicates that the stock moves in
tandem with the market. If the portfolio is efficient, the beta measures the systematic risk
effectively.
= nXY(X) (Y)
nX2 (X)2

CALULATION OF ALPHA, BETA, & SCRIPT RETURN


INDEX RETURN
NSE Index Return for Five years
Year
Opening

2007-08
3821.55

2008-09
4735

2009-10
3020.95

2010-11
5249

2011-12
5145.95

Closing
Return

4735
23.9

3020.95
-36.2

5249
73.8

5803
10.5

5178.85
6.39

Return = Closing Value Opening Value


Opening Value
Rm (Total Return) = 23.9 36.2 + 73.8 + 10.5 + 6.39
5
= 10.99

86

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

1. HERO MOTOCORP
Script return for Hero MotoCorp (Y)
Year

2007-08

2008-09

2009-10

2010-11

2011-12

Opening

698

800

1739

2002

1600

Closing

805.10

1716.45

1946.45

1986.10

2054.85

Return

15.34

114.55

10.20

-.79

.28

Beta () Calculation
Beta calculation of Hero MotoCorp script
Year
2007-08
2008-09
2009-10
2010-11
2011-12
Total
=

X
23.9
-36.2
73.8
10.5
6.39
78.39

X2
571.21
1310.44
5446.44
110.25
40.83
7479.17

Y
15.34
114.55
10.20
-.79
.28
139.58

nXY(X) (Y)
nX2 (X)2

= 5 -3017.246 (78.39 139.58 )


5 7479.17 (78.39)2
= -15086.23 10941.6

87

XY
366.62
-4146.71
752.76
8.295
1.789
-3017.246

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

37395.85 - 6144.99
= -26027.83
31250.86
= -.832

Y = ( Sum of Y )
5
= 139.58
5

= 27.916

X = ( Sum of X )
5
= 78.39
5
= 15.678

= YX
=

27.916 ( -.832 15.678)

27.916 + 13.044

40.96

The expected return of Hero MotoCorp, when index moves by 10.99 is,
Ri = + R m
= 40.96 + (-.832 10.99 )
= 31.81

88

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

2. TATA MOTORS SCRIPT RETURN (Y)


Script Return for Five years
Year
Opening
Closing
Return

2007-08
132.81
31.81
-76.04

2008-09
31.60
158.52
401.64

2009-10
158.20
261.26
65.14

2010-11
264.20
178.40
-32.47

2011-12
248.80
275.70
0.108

Beta () Calculation
Year
2007-08
2008-09
2009-10
2010-11
2011-12
Total

X
23.9
-36.2
73.8
10.5
6.39
78.39

Y
-76.04
401.64
65.14
-32.47
.108
358.148

= nXY(X) (Y)
nX2 (X)2
=

5 -11889.41 (78.39 358.148)


5 7479.17 (78.39)2

= -59447.05 28075.22
37395.85 - 6144.99
= -87522.27
31250.86
89

X2
571.21
1310.44
5446.44
110.25
40.83
7479.17

XY
-1817.35
-14539.36
4807.33
-340.72
0.69012
-11889.41

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

= -2.80
Y = ( Sum of Y )
5
= 358.148
5
= 71.62
X = ( Sum of X )
5
= 78.39
5
= 15.678
= YX
=

71.62 ( -2.80 15.678)

71.62 + 43.898 = 115.518

The expected return of Maruti Suzuki, when index moves by 15.678 is,
Ri = + R m
=115.518 + (-2.80 15.678 )
=71.619

90

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

3. MAHINDRA & MAHINDRA


Script return for Mahindra & Mahindra (Y)
Year
Opening
Closing
Return

2007-08
431
137.43
-61.15

2008-09
139.50
540.40
287.38

2009-10
547.50
777.55
42.01

2010-11
792
683.05
-13.75

2011-12
701
696.90
-5.84

Beta () Calculation
Beta calculation for Mahindra & Mahindra Script
Year
2007-08
2008-09
2009-10
2010-11
2011-12
Total

X
23.9
-36.2
73.8
10.5
6.39
78.39

X2
571.21
1310.44
5446.44
110.25
40.83
7479.17

Y
-61.15
287.38
42.01
-13.75
-5.84
248.65

= nXY(X) (Y)
nX2 (X)2
=

5 -8945.97 (78.39 248.65)


37395.85 - 6144.99

= -44729.85 19491.67
31250.86
= -64221.52
91

XY
-1461.48
-10403.15
3100.33
-144.37
-37.31
-8945.97

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

31250.86
= -2.055

Y = ( Sum of Y )
5
= 248.65
5
= 49.73

X = ( Sum of X )
5
= 78.39
5
= 15.678

= YX
=

49.73 ( -2.055 15.678)

49.73 + 35.86 = 85.59

The expected return of Mahindra & Mahindra Ltd, when index moves by 15.678 is,
Ri = + R m
=85.59 + (-2.055 15.678)
= 53.37

92

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

4. MARUTI SUZUKI SCRIPT RETURN (Y)


Script Return for Five years
Year
Opening
Closing
Return

2007-08
1005
520.10
-48.24

2008-09
525
1559.65
197.07

2009-10
1584
1420.60
-10.31

2010-11
1430
920.05
-35.66

2011-12
1248
1350.50
0.082

Beta () Calculation
Year
2007-08
2008-09
2009-10
2010-11
2011-12
Total

X
23.9
-36.2
73.8
10.5
6.39
78.39

X2
571.21
1310.44
5446.44
110.25
40.83
7479.17

Y
-48.24
197.07
-10.31
-35.66
0.082
102.94

= nXY(X) (Y)
nX2 (X)2
=

5 -9421.57 (78.39 102.94)


5 7479.17 (78.39)2

= -47107.55 8069.46
31250.86
= -55177.01
31250.86
= -1.765
Y = ( Sum of Y )
5
93

XY
-1152.9
-7133.9
-760.87
-374.43
0.523
-9421.57

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

= 102.94
5
= 20.588

X = ( Sum of X )
5
= 78.39
5
= 15.678

= YX
=

20.588 ( -1.765 15.678)

20.588 + 27.671

= 48.259

The expected return of Maruti Suzuki, when index moves by 15.678 is,
Ri = + R m
=48.259 + (-1.765 15.678)
=20.582

94

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

5. ASHOK LEYLAND SCRIPT RETURN (Y)


Script return for Five years
Year
Opening
Closing
Return

2007-08
18.90
17.70
-0.63

2008-09
17.90
8.93
-.50

2009-10
9.13
27.10
0.66

2010-11
28.13
28.43
0.01

2011-12
28.68
30.35
0.06

Beta () Calculation
Year
2007-08
2008-09
2009-10
2010-11
2011-12
Total

X
23.9
-36.2
73.8
10.5
6.39
78.39

X2
571.21
1310.44
5446.44
110.25
40.83
7479.17

Y
-.63
-.50
.66
.01
.06
0.4

= nXY(X) (Y)
nX2 (X)2
= 5 52.806 - (78.39 .4)
5 7479.17 (78.39)2
= 264.03 31.35
31250.86
= -.007

Y = ( Sum of Y )
5
=

.4
5
95

XY
-14.49
18.1
48.708
.105
.383
52.806

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

= 0.08

X = ( Sum of X )
5
= 78.39
5
= 15.678

= YX
=

0.08 ( .007 15.678)

= 0.08 0.109

= -.029

The expected return of Ashok Leyland, when index moves by15.678 is,
Ri = + R m
= -.029 + (-.007 15.678 )
= - .029 - 0.109
= -.138

96

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

COMPARISON OF ALPHA, BETA AND SCRIPT RETURN OF FIVE


AUTOMOBILE COMPANIES
COMPANIES
HERO MOTO CORP
TATA MOTORS
MAHINDRA & MAHINDRA
MARUTI SUZUKI
ASHOK LEYLAND

ALPHA
40.96
85.59
48.259
115.518
-.029

BETA
-.832
-2.055
-1.765
-2.80
-.007

SCRIPT RETURN
31.81
53.37
20.582
71.619
-.138

The alpha () parameters indicate what the return of the security would be when the market
return is zero. The positive alpha thus represents a sort of bonus return and would be a highly
desirable aspect of a security; whereas a negative represents a penalty to the investor. Tata
motors have the highest value when compared to other four automobile companies. Systematic
risk or value indicates the variability in the security returns caused by changes in the market
return.

97

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

PORTFOLIO CONSTRUCTION
Portfolio construction refers to the allocation of funds among a variety of financial assets open
for investment. The objective of the portfolio construction is diversification of the risk. In order
to reduce the risk ideally a portfolio should be constructed with assets having opposite
characteristics or negative correlation of the return.

CRITERIA USED FOR THE CONSTRUCTION OF PORTFOLIO:


Portfolio are constructed using the following criteria,
The first portfolio is constructed with equal weights for all the securities in the portfolio.
The second portfolio is constructed according to the price earning ratio.
The third portfolio is constructed according to the excess of the average return of the
individual securities per unit of risk of individual securities.
Fourth portfolio is constructed with random weight.
After constructing portfolios with different criteria, an optimal portfolio is constructed
using Sharpes Optimization Model. This optimal portfolio is then tested for its
superiority by using different portfolio evaluation models.

Market Variance calculation(m2)


Market Variance (m2) = N X2 ( X )2
N2
= (5 x 7479.17) (78.39 )2
25
= 37395.856144.99
25
= 1250.03

PORTFOLIO 1 - BASED ON EQUAL WEIGHT


98

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

COMPANY

WEIGHTAGE

PERCENTAGE %

HERO MOTO CORP

0.20

20

TATA MOTORS

0.20

20

MAHINDRA & MAHINDRA


MARUTI SUZUKI

0.20
0.20

20
20

ASHOK LEYLAND

0.20

20

SUM

1.00

100

PORTFOLIO APLHA
COMPANY
HERO MOTO CORP
TATA MOTORS
MAHINDRA &
MAHINDRA
MARUTI SUZUKI
ASHOK LEYLAND
SUM

ALPHA (i)
40.96
115.518
85.59

WEIGHT (wi)
0.20
0.20
0.20
0.20
0.20

ALPHA WEIGHT
8.192
23.10
17.118

1.00

9.65
-.005
58.055

WEIGHT (wi)
0.20
0.20
0.20

BETA WEIGHT
-0.16
-0.56
-0.411

48.259
-.029

PORTFOLIO BETA
COMPANY
HERO MOTO CORP
TATA MOTORS
MAHINDRA &
MAHINDRA
MARUTI SUZUKI
ASHOK LEYLAND
SUM

BETA (i)
-0.832
-2.80
-2.055

0.20
0.20

-1.765
-.007
1.00

Portfolio Return
Rp=p +pRm
99

-0.353
-.001
-1.485

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

Rp = 58.055 + (-1.485 15.678)


= 58.055 - 23.281
= 34.77
Portfolio Risk
p2= p 2x 2 m
= (-1..852)2 1250.03
= 4287.48
= 65.47

PORTFOLIO 2 - BASED ON P/E RATIO

100

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

COMPANY
HERO MOTO CORP
TATA MOTORS
MAHINDRA &
MAHINDRA
MARUTI SUZUKI
ASHOK LEYLAND
SUM

P/E RATIO
18.18
15.5
16.2
21.36
13.22
84.46

WEIGHT (wi)
0.25
0.20
0.20

PERCENTAGE
25
20
20

0.25
0.10

25
10
100

1.00

PORTFOLIO ALPHA
SCRIP
HERO MOTO CORP
TATA MOTORS
MAHINDRA &
MAHINDRA
MARUTI SUZUKI
ASHOK LEYLAND
TOTAL

ALPHA

WEIGHT

40.96
115.518
85.59

0.25
0.20
0.20

48.259
-.029

0.25
0.10
1.00

ALPHA
*WEIGHT
10.24
23.10
17.118
12.06
-.002
62.516

PORTFOLIO BETA
SCRIP
HERO MOTO CORP
TATA MOTORS
MAHINDRA &
MAHINDRA
MARUTI SUZUKI
ASHOK LEYLAND
TOTAL

BETA
-0.832
-2.80
-2.055
-1.765
-.007
-0.832

WEIGHT
0.25
0.20
0.20
0.25
0.10
1.00

Portfolio Return
101

BETA*WEIGHT
-.208
-.56
-.411
-.441
-.0007
-1.620

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

Rp= p + pRm
=

62.516 + (-1.62 x 15.678)

= 37.11
Portfolio Risk
p2 = p2 m2

= (-1.62)2 x 1250.03
= 3280.57
= 57.27

PORTFOLIO 3 BASED ON MARKET CAPITALIZATION

102

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

SCRIP

MARKET
CAPITALIZATION
Cr)

WEIGHTAG
(In E

HERO MOTO CORP


TATA MOTORS
MAHINDRA &
MAHINDRA
MARUTI SUZUKI
ASHOK LEYLAND
TOTAL

33664.32
96772.12
60507.80

0.15
0.33
0.21

15
30
21

51637.57
6186.13
229540.8

0.20
0.11

20
14
100

1.00

PERCENTA
GE

PORTFOLIO ALPHA
SCRIP

ALPHA

HERO MOTO CORP


TATA MOTORS
MAHINDRA &
MAHINDRA
MARUTI SUZUKI
ASHOK LEYLAND
TOTAL

WEIGHT

40.96
115.518
85.59

0.15
0.33
0.21

ALPHA
*WEIGHT
6.144
38.12
17.97

48.259
-.029

0.20
0.11
1.00

9.65
.0003
71.88

PORTFOLIO BETA
SCRIP
HERO MOTO
CORP
TATA MOTORS
MAHINDRA &
MAHINDRA
MARUTI
SUZUKI
ASHOK LEYLAND
TOTAL

BETA
-0.832

WEIGHT
0.15

BETA*WEIGHT
-.12

-2.80
-2.055

0.33
0.21

-.924
-.431

-1.765

0.20

-.353

-.007

0.11
1.00

-.0007
--1.828

103

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

Portfolio Return
Rp= p + pRm
= 71.88+ (-1.828x 15.678)
= 43.21
Portfolio Risk
p2 = p2 m2

= (-1.828)2x 1250.03
=4177.08
= 64.63

104

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

PORTFOLIO EVALUATION
Portfolio evaluation is the last step in the process of portfolio management. Through portfolio
evaluation investors tries to find out how well the portfolio has performed.
Portfolio evaluation comprises of performance measurement and performance evaluation.
Sharpe ratio (S.R) and Treynor Ratio (TR) are the two statistical tools used in the performance
measurement
Sharpe Ratio

SR= Rp-Rf
p

Treynor Ratio,

TR = Rp-Rf
p

Here the risk free return means the return from fixed income bearing securities or the fixed rate
of return offered by the government. 8% has been fixed as the risk free return (R f) which is
equal to the repo rate for June 2012.

Portfolio 1 evaluation Based on equal weight


Rp = 34.77
Rf = 8.0
p= 65.47
p = 1.485
SR = ( Rp - Rf)/p
= (34.77 8.0) / 65.47
= 0.40
TR = (Rp-Rf) / p
= (57.98 8.0 ) / 2.77
= 18.04

Portfolio 2 evaluation Based on PE ratio


105

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

Rp = 37.11
Rf = 8.0
p= 57.27
p = 1.62
SR = ( Rp - Rf)/p
= (37.11-8.0) / 57.27
= 0.50
TR = (Rp-Rf) / p
= (37.11-8.0) / 1.62
= 17.96
Portfolio 3 evaluation Based on market capitalization
Rp = 43.21
Rf = 8.0
p= 64.63
p = 1.828
SR = ( Rp - Rf)/p
= (43.21-6.75) / 64.63
= 0.54
TR = (Rp-Rf) / p
= (43.21-6.75) / 1.828
= 19.26
Comparison of SR & TR
SR
PF1(Based on equal weight) 0.40
PF2(Based on PE ratio)
0.50
PF3(Based
on
mkt 0.54
capitalization)

TR
18.04
17.96
19.26

106

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

According to portfolio evaluation, the portfolio based on market capitalization has sharpes ratio
0.54 and treynors ratio 19.26. Sharpes ratio states that the portfolio is less diversified, the total
risk (systematic and unsystematic) is maximum in this case. At the same time, Treynors ratio
takes in to consideration only the systematic risk.

FINDINGS AND SUGGESTION


107

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

While analyzing the EMA chart of all the five automobile companies scrips it was found

that

four scrips is having bullish trend and only one scrip is having bearish trend by the end of march
2012. Maruti Suzuki, Tata Motors, Hero Motor Corp and Ashok Leyland are the scrips that
shows bullish trend whereas, Mahindra & Mahindra is the scrip that shows bearish trend.

While analyzing the ROC chart of all the five automobile companies scrips, it was found that all
the five scrips is in overbought zone by the end of march 2012. Hence all the five scrips are
worth not worth to invest.

While analyzing the RSI chart of all the five automobile companies scrips, it was found that
Bajaj Auto scrip is highly volatile and Hero Motor Corp scrip is low volatile. Hence Hero Motor
Corp scrip is less risky to invest compare to other four scrips.

The RSI line of all the five automobile companies scrips had neither crossed the 30 and 70 mark
by the end of March 2012. Hence all the five scrips are worth to hold on.

While analyzing the MACD chart of all the five automobile companies scrips, it was found that
except Maruti Suzuki scrip all the other four scrips is having bullish trend by the end of March
2012.
PORTFOLIO MANAGEMENT

Three portfolio are constructed using five automobile companies script and they are
portfolio based on equal weight (portfolio 1), portfolio based on PE ratio (portfolio 2) and

portfolio based on market capitalization (portfolio 3).


Portfolio return and risk of portfolio based on equal weight is 34.77 and 65.47

respectively.
Sharp ratio and treynor ratio of portfolio based on equal weight is 0.40 and 18.04

respectively.
Portfolio return and risk of portfolio based on PE Ratio is 37.11 and 57.27 respectively.
Sharp ratio and treynor ratio of portfolio PE Ratio is 0.50 and 17.96 respectively.
Portfolio return and risk of portfolio based on Market Capitalisation is 43.21 and 64.63
respectively.

108

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

Sharp ratio and treynor ratio of portfolio based on Market Capitalisation is 0.54 and 19.26
respectively.

Suggestions

The shares in the automobile industry are worth to invest up on. The diversified portfolio
will always fetch good returns.

The fundamental analysis (economic, industry and company) has proved that the
automobile industry is one of the best in the market, that has good fundamentals and can
influence the market to a great extend.

Based on the technical analysis, it can be stated that the companies are in the verge of
constant growth and the same is expected to continue in the coming years. Various market
forces contribute to the same which makes things easier for companies.

Based upon the study conducted, the diversified portfolio taken on the basis of Market
Capitalisation yields more return than all other portfolios containing the same shares
selected on the basis of PE Ratio and Equal Weight.

It is recommended to invest in the shares of automobile companies, as all of them are showing
positive growth over the years and despite the influence in other factors, the companies are
showing strong financials that increases the total value of the shares.

CONCLUSION
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SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

India has been one of the few markets globally to buck the recessionary trend and
recorded a strong growth. The various factors that contribute to this trend is the Increase in
population, Rise in the Income level of people (Purchasing Power), Increasing competition in the
market in which manufacturers are ready to provide value for money products etc. Despite the
increase in fuel price, the automobile sector is witnessing constant growth. The foreign
automobile majors are conquering the Indian market through high value and quality products.
Along with them, Indian majors are also playing a crucial role in this Market Growth. Indian
Auto majors are registering good growths are they are foraying in to all the markets (two
wheeler, three wheeler, four wheeler and heavy vehicle). Mergers and Acquistitions by the Indian
Companies are proving successful as the technological advancements and cash registers keeps
ringing for them. Now a days all the major international automobile players are seriously
considering the Indian market and we are able to see their presence here, even registering two
digit growth.
There exists healthy competition in the market due to which customers are able to enjoy
enormous benefits. Presales and after sales services are also been given due importance which
gives customers value for their money and satisfaction. Based on the Fundamental Analysis,
Technical Analysis conducted in the Automobile sector, it is recommended to invest in the
Automobile shares as it proves the worth to Investment.

BIBLIOGRAPHY
110

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

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111

&

Portfolio

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT : AUTOMOBILE SECTOR

WEB SITES
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www.geojitbnpparibas.com

2.

www.bse-inda.com

3.

www.capitaline.com

4.

www.indiabulls.com

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www.kotaksecurities.com

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www.siamindia.com

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www.nse-india.com

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