A Project on “Comparative Analysis of Growth of Equity Sectors with respect to Indices” In Sharekhan

A report submitted to Delhi Business School, New Delhi As a part fulfillment of M.B.A.+ Post Graduate Program(Industry Integrated)in Entrepreneurship & Business.
Submitted to: by: Director Academics Student:Sumit Sharma Delhi Business School :DBS/0810/221 New Delhi :Winter 2008-10 Semester:1st University:Panjab Technical University Internal guide: Faculty:Mr. Ravi Prakash Delhi Business School, Batch Roll No Name of Submitted

New Delhi

Delhi Business School B-2/58,M.C.I.E.,Matura Road,New Delhi Website:www.dbs.edu.in

Acknowledgement
I take this opportunity to express my deep sense of gratitude to my superiors Mr Kapil Lakhera and Mr. Mannu Kumar guidance and for other members their organization project report. extending for their of the valuable

support and help in the preparation of this

I am also thankful to my friends for extending their co-operation in completion of this project report.

Date:

Signature

Declaration

I, Sumit Sharma, declare that this project report entitled “Comparative Analysis of Growth of Equity Sectors with respect to Indices” is an original piece of work done and submitted by me towards partial fulfillment of my Post Graduate Diploma in Business Administration, under the guidance of “Mr Kapil Lakhera and Mr. Mannu Kumar”.

Date:

Signature

CONTENTS

1.

CHAPTER - I

INTRODUCTION
- Scope of the Study - Objectives of the Study - Literature Review

2.

CHAPTER - II

ORGANISATIONAL PROFILE
- Industry Profile - Company Profile

3.

CHAPTER – III

METHODOLOGY AND LIMITATION
- Sources of Data - Tools and Techniques use

4. 5. 6.

CHAPTER – IV CHAPTER – V CHAPTER – VI

ANALYSIS OF DATA

INTERPRETATIONS AND FINDINGS RECOMENDATIONS

BIBLIOGRAPHY

CHAPTER-1

INTRODUCTION

Introduction

About Indian Economy

The government has rightly chosen more inclusive and faster growth as the goal of eleventh five year plan. The Union Budget for the next fiscal year is both forward looking and populist. But proactive policy can make the latter giveaways quite manageable, if economic growth momentum can be sustained into medium term and beyond. It has made constant effort to propel growth through increased investment and consumption expenditure in order to boost domestic demand by providing an extra disposable income in the common mans hand that wil prove conducive for propelling the economy at the expected 8.9% levels. Increased private sector participation should provide a fillip. In the current environment of stronger rupee precious metals is likely to continue their rising streak. In line with the expectation, precious metals like gold and silver have substantially risen. The macroeconomic fundamentals of Indian economy continue to inspire confidence. This is reflected in an average growth rate of 8.8 percent in the last three years. But the challenges for Indian growth story have become more complex due to global uncertainties. The drivers of economic growth continue to be ‘Services’ and ‘Manufacturing’ which are estimated to grow at 10.7 percent and 9.7 percent respectively, though a few segments of manufacturing sector pose a threat to the growth story. In the backdrop of moderate slowdown in the industrial sector, the finance minister delivered a growth oriented budget for 2008-09 by providing a boost to Investment and Consumption expenditure. The budget while providing an impetus to augment social infrastructure by focusing on health and education, has also provided tax sops and allocated resources to revive growth in the manufacturing sector which has been hit by a slowdown.

Industrial production has contracted in the last few months which has been attributed to slowdown in capital goods and some segments of consumer durables. But industrial production is expected to increase in coming years due to fiscal stimulus provided by the finance minister to individual tax payers and the corporate sector. In case of individual tax payers the increase of threshold limit of exemption of personal income tax has significantly increased the disposable income in the hands of consumers that in turn would stimulate production. The BSE Sensex rallied at the beginning of February ’08, but failed to maintain its momentum on global cues and increase in short term capital gains tax announces in the budget. On a fiscal front, buoyant growth of government revenues made it possible to maintain fiscal consolidation as mandated under the Fiscal Responsibility and Budget Management (FRBM) Act. Therefore it is of opinion that if the economy has to grow past 8.5% on sustainable basis, the government has to carry out structural reforms in the areas of insurance, retail, coal, mining, fertilizers and sugar as envisaged in the Economic Survey. This involves raising foreign equity in insurance to 49 percent, allowing 100 percent FDI in the privaterural agricultural banks, listing of all listed public sector enterprises and phasing our control on sugar and fertilizers.

Inflation
The Reserve Bank of India has effectively contained the inflation expectations in 2007 by managing the WPI inflation down from 6.6% in Feb 2007 to around 4% in Dec 2007. This is attributed to the moderation of prices of primary food articles and some manufactured products.

Today the inflation levels touch about approximately 8%. This increase is basically driven by prices of food as well as manufactured products. With this there is a increase of 6.28% in prices of primary articles, 5.64% in prices of fuel and 4.33% in prices of manufactured products. On a week – to – week basis, rise has been triggered by increase in prices of ‘Food articles’ group which rose by 1.7% due to higher prices of fish marine, mutton, fruits and vegetables etc.

Industry Production
Industrial production dropped sharply in the month of January 2008 owing to sluggish performance in the manufacturing sector. The general index for the month of January 2008 showed a growth of only 5.3% compared to growth of 11.6% in January 2007. This was the third successive month of low growth. In Dec ’07, the industrial production grew by 7.7%. The lower growth has been contributed by sluggishness in the manufacturing and mining sector. Cumulatively, industrial production showed a growth of 8.7% between April-January 2007-08, with 9.2% growth for manufacturing, 4.6% for mining and 6.3% for electricity. Lagged impact of interest rate increases and decrease in global demand have been affecting industrial growth in the last few months. Growth in the manufacturing sector declined to 5.9% in Jan’08 as against 12.3% in Jan’07, and growth in mining declined to 1.8% as against 7.7% in Jan’07. Electricity sector recorded a moderate growth of 3.3% as against 8.3% in Jan’07. Increases in interest rates over the last two years is impacting the consumer durable and capital goods sector as consumer durables production, including washing machine and television sets, fell 3.1% in January after increasing 5.3% a year earlier and output of capital goods

increased by a meager 2.1% compared with 16.3% a year ago. Also indices for machinery and equipment showed a sharp fall of 3.8% in Jan ’08 against 10.7% growth in Dec ’07.

Rupee Outlook
Massive FII inflows and slumping US dollar in 2007 led to significant appreciation of rupee. This led to curbing of inflows through external commercial borrowing and participatory notes measures and has led to stabilization of the rupee – US $ movement. The outlook for the US dollar is expected to be weak in an aggressive easing stance adopted by the US Fed. Fed easing cycle since September 2007 has led to ‘Hold/Softening’ stance across various Central Banks globally. Global uncertainties triggered by increase chances of US recession and increasing commodity prices have led to risk aversion among investors across the globe which has impacted India’s equity and debt market. In the first two months of 2008, net investment has been $2802mn in equity and $1103mn in debt respectively against $1173mn in equity and $268mn in debt respectively in the same period last year.

Trade Outlook
India’s merchandise exports showed a growth of 21.62% during the first ten months of period of April – January 2008 to US$ 124.19bn. Exports showed a growth of 20.47% for Jan ’08 to US$ 13.14bn compared to US$ 10.90bn Jan ’07. Exports have not performed well so far due to 12% rupee appreciation that has affected the competitiveness of the export focused industries.

Labour intensive sectors like textiles, leather, handicrafts and marine products have been hit the most in recent times.

Scope of Study
This analysis attempts to study the growth pattern of equity sectors, such as Banking and Information Technology when compared to its sectoral indices and the national index S&P CNX Nifty. The analysis hereby done attempts to prepare a report on the behavior of share prices of major companies Banking and Information Technology Sectors, so that a investor can prepare and well diversified portfolio and logically forecast about the behavior of the share market and invest in a manner so as to make a lucrative deal and earn a maximum possible capital gain from the market. Moreover the study also gives a comparative analysis of the above stated sectors with their respective sectoral index and the national index so that a investor wanting to invest in these sectors can check the past performance and behavior of major companies in these sectors and analyze their growth trends before investing making a investment in the stock market.

Objective of Study

 To study and analyze the growth trend of Banking and Information Technology sector over the period of Aug 2002 to April 2008.

 To study the relationship between the national index S&P CNX Nifty, Sectoral Index and the share prices of the major industries in this sector.

 To examine the major reasons of fluctuations in share prices in the stock market.

 Attempt to provide a direction to a investor to analyze and forecast the stock market so as to make the best possible lucrative deal by investing in stocks.

Literature Review
By utilizing the secondary data available for the analysis, this report attempts to analyze the growth trends of some equity sectors over the period of Aug 2002 to April 2008, in order to provide with the past information the growth trends of the share market in the past, thereby giving a direction to forecast the future in a logical manner.

CHAPTER-2

ORGANIZATION PROFILE

Industry Profile
The Indian financial sector is on a roll. Driven by a strong investor interest and an expanding market, the Indian stock market rose to record levels, with the popular sensex crossing 21,000 and Nifty crossing the 6,000 mark for the first time. The industry is also becoming more vibrant, with new types of products and services being offered to meet the needs of the booming economy. For example, in the derivatives market, the notional principal amount outstanding has more than trebled between March 2005 and June 2007 to US$ 24.09 billion from US$ 6.836 billion. The buoyancy in the economy is also estimated to lead to a four-fold increase in India's investable wealth from US$ 250 billion in 2007 to US$ 1 trillion. Simultaneously, according to a report by Celent, an international consultancy firm, India's wealth management will rise to an estimated 42 million by 2012 from about 13 million in 2007.

Clearly, there is huge potential in this segment. Significantly, wealth management revenues are expected to account for 32-37 per cent of the total full-service financial institutions by 2012. The market is also expected to undergo a structural transformation with organized players increasing their market share.

Stock Markets
The year 2007 saw Indian stock markets scaling new peaks. It has emerged as the third best performing market in the world with a dollar return of 71.23 per cent. The popular Bombay Stock Exchange (BSE) benchmark index, sensex, also posted its highest ever absolute gain of 6500 points in over two decades. This performance of Indian stock markets has led to the total investor wealth of Bombay Stock Exchange (BSE) surging to a record high of over US$ 1.7 trillion, with an average increase of over US$ 10.18 million in every minute of trading during 2007. At the end of 2006, the total market capitalisation stood at US$ 812 billion. Simultaneously, the National Stock Exchange (NSE) has climbed to the top spot in stock futures contracts and number-two slot in the index futures segment in the world. According to Ernst & Young, India was also the fifth largest market in terms of number of IPOs and seventh largest in terms of the proceeds for the year. Indian companies raised a whopping US$ 11.48 billion through public issues in 2007, which is 83 per cent higher than US$ 6.28 billion mobilized in 2006. The robust performance of the Indian stock markets can also be seen in the huge increase in the funds mobilised by the corporate India.

During 2007-08, India Inc mobilised a whopping US$ 8.13 billion through issue of shares on rights issue, which is almost an eight-fold increase over US$ 926.32 million raised in 2006-07. In fact, the mobilisation of the funds in 2007-08 was more than the combined mobilisation of the preceding 12 years. Simultaneously, a whopping US$ 13.07 billion has been raised through by India Inc through public issues, according to data compiled by Prime Database. This is almost twice that of US$ 6.25 billion mobilised in 2006-07 and the highest ever in the last six years. While initial public offerings mobilised US$ 10.34 billion (about 79.14 per cent), follow-on public issues mobilised US$ 2.53 billion. The flurry of fund raising activity by the companies on the Indian stock exchange is likely to continue in 2008-09. Already, 125 companies have filed their draft offer documents (including rights and follow-on issues) with the Securities and Exchange Board of India (SEBI), to jointly raise around US$ 5.14 billion. These include: JSW Energy, Jaiprakash Power Venture, Adani Power, Bharat Oman Refineries and Future Ventures India among others.

Private Equity
The year 2007 was a watershed for private equity market, which has emerged as the most preferred mode of fund mobilization for India Inc. The capital mobilised through this route was higher than the funds mobilized through IPOs, follow-on issues and qualified institutional placements put together. India, in fact, topped the Asia private equity chart for the first time in 2007 in terms of aggregate deal value. According to Grant Thornton, a total of US$ 17.14 billion was mobilised through 386 deals by India Inc

in

2007,

compared

to

US$

7.8

billion

in

2006.

Real

estate,

infrastructure, banking and financial services were the dominant sectors attracting about 55 per cent of the total private equity investments. The growth continues apace in 2008. During January-March 2008, private equity firms invested about US$ 3.3 billion across 97 billion, which was 22.22 per cent higher than the US$ 2.7 billion clocked in the corresponding period last year. A study by global consulting firm Boston Analytics, the average deal size has increased from US$ 8.4 billion in 2003 to US$ 36.8 billion in 2007. And driven by the robust economic growth and attractive market valuations, private equity investments are estimated to continue strongly through 2010.

Structured Finance
India has emerged as the fastest growing market in the Asia-Pacific region for structured finance, a process of arranging funds by banks and other entities through partly selling their loan books. It was also the second largest market for domestic issuance in the structured finance market. Within this market, Asset Backed Securities (ABS) market has been the dominant segment than Residentially Market Backed Securities (RMBS). This market has been growing at a frenetic pace ever since the RBI issued revised guidelines on securitisation in 2006. For example, according to Moody's Investors service, domestic structured finance transactions grew by a whopping 90 per cent during the first half of 2007 to US$ 5.5 billion compared to US$ 2.9 billion in

the corresponding period in 2006. While ABS accounted for 64 per cent of the total issuances, securitisation of single corporate loans accounted for 20 per cent.

Mutual Funds
India is also one of the fastest growing market for mutual funds industry attracting a host of global players. The combination of increasing number of fund houses (along with new schemes) and increase in the number of people parking their savings in mutual funds has resulted in total funds mobilisation increasing at a whopping 124.93 per cent during 2007-08 to stand at US$ 1.11 trillion as against US$ 485.13 billion in 2006-07. The average assets under management (AUM) of the mutual fund industry for March 2008 stood at US$ 134.76 billion as against US$ 89.86 billion at the end of 2006, representing a year on year growth of 49.96 per cent. With accelerating investor interest shown in mutual fund segment, the number of investor folios of the MFs increased to 43.7 million at the end of March 2008, from 27.9 million at the end of January 2007 (a growth rate of 54 per cent). Simultaneously, there has been an increase in the number of distributors to 72,108 (excluding 107 banks) till March 2008 from 54,000 in January 2007. In the new fiscal year (2008–09), the growth momentum of the mutual fund industry continues. Total fund mobilisation has increased by a whopping 84.08 per cent to US$ 221.73 billion during April–May 2008, compared to US$ 120.45 billion in April–May 2007. Consequently, average AUM of the mutual fund industry has increased to US$ 140.04

billion for May 2008, against US$ 90.1 billion in the corresponding period in 2007. Continuing the growth, the Indian mutual funds market is estimated to grow at a CAGR of 18 per cent in the next five years, with the country’s mutual funds assets expected to more than double to US$ 298.73 billion by 2012, according to a report by US-based financial services research and consulting firm Cerulli Associates. Consequently, there would be an entry of about 15 new fund houses, in addition to the 33 fund houses already in operation by the end of 2007.

Banking
The burgeoning economy, surging foreign investment, financial sector reforms and a favourable demographic profile has led to the Indian banking industry emerging as one of the fastest growing in the world. The industry's business grew at a CAGR of 20 per cent from US$ 471.11 billion as of March 2002 to US$ 1175.61 billion by March 2007. Significantly, the newly licensed private sector business has grown almost twice (1.75 times) as that of banking industry as a whole, leading to their share in total banking business increasing from 9 per cent in 2001-02 to 16 per cent in 2006-07. This boom in the banking industry has propelled nine Indian banks to the list of top 50 Asian Banks, as per this year's Asian Banker 300 report. Similarly, seven Indian microfinance institutions find place in Forbes list of World's Top 50 Microfinance Institutions. Despite such impressive performance, the potential for further growth is huge considering the fact that India has second largest financially excluded households (about 135 million) in the world. In fact,

according to Boston Consulting Group, India is the fastest growing incremental revenue pool in the world.

Debt Market
While the Indian financial sector was dominated by the stellar performance of the stock markets, the Indian debt market had its own share of excitement. India Inc increased its collections through the debt market by as much as 53.84 per cent to US$ 20 billion in 2007 from US$ 13 billion in 2006. According to a report by Goldman Sachs, with insurance, mutual funds and pension sector experiencing rapid growth, India's debt market is estimated to grow four fold, from about US$ 400 billion (45 per cent of GDP) in 2006 to about US$ 1.5 trillion (about 55 per cent of GDP) by 2016. Significantly, the non-government sector is expected to grow from US$ 100 billion in 2006 to US$ 575 billion in 2016, increasing its share in GDP from 10 per cent to 22 per cent.

Company Profile
Sharekhan is one of the leading retail brokerage of SSKI Group which was running successfully since 1922 in the country. It is the retail broking arm of the Mumbai-based SSKI Group, which has over eight decades of experience in the stock broking business. Sharekhan offers its customers a wide range of equity related services including trade execution on BSE, NSE, Derivatives, depository services, online trading, investment advice etc.

The firm’s online trading and investment site - www.sharekhan.com was launched on Feb 8, 2000. The site gives access to superior content and transaction facility to retail customers across the country. Known for its jargon-free, investor friendly language and high quality research, the site has a registered base of over one lakh customers. The number of trading members currently stands at over 6 Lacs. While online trading currently accounts for just over 2 per cent of the daily trading in stocks in India, Sharekhan alone accounts for 32 per cent of the volumes traded online. The content-rich and research oriented portal has stood out among its contemporaries because of its steadfast dedication to offering customers best-of-breed technology and superior market information. The objective has been to let customers make informed decisions and to simplify the process of investing in stocks. On April 17, 2002 Sharekhan launched Trade Tiger, a net-based executable application that emulates the broker terminals along with host of other information relevant to the Day Traders. This was for the first time that a net-based trading station of this caliber was offered to the traders. In the last six months SpeedTrade has become a de facto standard for the Day Trading community over the net. Sharekhan’s ground network includes over 588 centers in 148 cities in India, of which 32 are fully-owned branches. Sharekhan has always believed in investing in technology to build its business. The company has used some of the best-known names in the IT industry, like Sun Microsystems, Oracle, Microsoft, Cambridge Technologies, Nexgenix, Vignette, Verisign Financial Technologies India Ltd, Spider Software Pvt Ltd. to build its trading engine and content. The Morakhiya family holds a majority stake in the company. HSBC, Intel & Carlyle are the other investors. With a legacy of more than 80 years in the stock markets, the SSKI

group ventured into institutional broking and corporate finance 18 years ago. Presently SSKI is one of the leading players in institutional broking and corporate finance activities. SSKI holds a sizeable portion of the market in each of these segments. SSKI’s institutional broking arm accounts for 7% of the market for Foreign Institutional portfolio investment and 5% of all Domestic Institutional portfolio investment in the country. It has 60 institutional clients spread over India, Far East, UK and US. Foreign Institutional Investors generate about 65% of the organization’s revenue, with a daily turnover of over US$ 2 million. The Corporate Finance section has a list of very prestigious clients and has many ‘firsts’ to its credit, in terms of the size of deal, sector tapped etc. The group has placed over US$ 1 billion in private equity deals. Some of the clients include BPL Cellular Holding, Gujarat Pipavav, Essar, Hutchison, Planetasia, and Shopper’s Stop.

PRODUCTS OFFERED BY SHAREKHAN 1- BOLT for Online Trading. 2- NEAT for Online Trading. 3- Portfolio Management Services. 4- Online Trade in Commodities. 5- Mutual Fund Advisory.

6- Insurance.
REASONS TO CHOOSE SHAREKHAN LIMITED Experience SSKI has more than eight decades of trust and credibility in the Indian stock market. In the Asia Money broker's poll held recently, SSKI won the 'India's best broking house for 2004' award. Ever since it launched Sharekhan as its retail broking division in February 2000, it has been providing institutionallevel research and broking services to individual investors.

Technology With our online trading account you can buy and sell shares in an instant from any PC with an internet connection. You will get access to our powerful online trading tools that will help you take complete control over your investment in shares. Accessibility Sharekhan provides ADVICE, EDUCATION, TOOLS AND EXECUTION services for investors. These services are accessible through our centers across the country (Over 588 locations in 148 cities) over the internet (through the website www.sharekhan.com)as well as over the Voice Tool.

Knowledge In a business where the right information at the right time can translate into direct profits, you get access to a wide range of information on our contentrich portal, sharekhan. You will also get a useful set of knowledge-based tools that will empower you to take informed decisions. Convenience You can call our Dial-N-Trade number to get investment advice and execute your transactions. We have a dedicated call-centre to provide this service via a Toll Free Number 1800-22-7500 & 1800-22-7050 from anywhere in India. Customer Service Our customer service team will assist you for any help that you need relating to transactions, billing, demat and other queries. Our customer service can be contracted via a toll-free number, email or live chat on www.sharekhan.com. Investment Advice Sharekhan has dedicated research teams of more than 30 people for fundamental and technical researches. Our analysts constantly track the

pulse of the market and provide timely investment advice to you in the form of daily research emails, online chat, printed reports and SMS on your mobile phone. Benefits •Free Depository A/c •Secure Order by Voice Tool Dial-n-Trade. •Automated Portfolio to keep track of the value of your actual purchases. •24x7 Voice Tool access to your trading account. •Personalized Price and Account Alerts delivered instantly to your Cell Phone & E-mail address. •Special Personal Inbox for order and trade confirmations. •On-line Customer Service via Web Chat. •Anytime Ordering.

CHAPTER-3
RESEARCH METHODOLOGY

Methodology

SOURCE OF DATA
The following analysis is completely based on Secondary Data

Tools and Techniques
1) Research Design: Descriptive Design

2) Data Analysis: M.S. Excel with the help of Line Graphs, Moving Averages and Correlation.

Data Processing and Analysis
For a complete analysis on equities, there are basically two parts in which the total analysis is done. Fundamental Analysis Technical Analysis

Fundamental Analysis
Fundamental analysis attempts to find out the true value of the securities so that the investors can decide to buy or not to buy the securities at current market price. In order to find out the true value, what is required is the forecast and analysis of the dividends and earnings that can be expected from the firm. Therefore, the analysis of determinants of the fair value of security is called the fundamental analysis. Dividends, earnings and the market price of a share are determined by the performance of the company. The performance and success in turn, depend upon broader industry, economic, political and social factors. In fact the overall business environment in which a firm operate, determines the affect and performance of the company. Small investors can take a narrow approach to fundamental analysis. They may start with the company to focus and analyze only the basic information about the company. The earnings capacity of the company

is estimated in the view of the market share, competitive position, new product lines etc. Detailed financial analysis of the financial statements may be made to find out the long term growth prospects of the company and the expected earnings in future. This approach may be known as ‘bottom up approach’.

However a broader framework for fundamental analysis is known as ‘top down approach’. This approach attempts to study the economic scenario, industry position and the company expectations and is also known as ‘Economic-Industry-Company Approach’ (EIC) Economic Analysis Economic analysis deals with the analysis of forces operating in the overall economy. In the security analysis, the expected course of the economy may be enquired into because overall economic conditions and economic activities affect corporate profits and investors expectations and thereby affect the security prices in the capital market. Economic analysis has an important role to play in investment decisions. If the economic analysis shows a strong and vibrant economic conditions, investors will but shares in expectation of earning capital profits at a later stage. An expectation of sagging economic condition can lead to lower corporate profits and the security price will fall in are: 1. Inflation 2. Interest Rates 3. Fiscal Policy 4. Monetary Policy resulting from the selling pressure. With reference to national economy, important variables to be looked

5. Business Cycle

Industry Analysis In economic analysis the direction for the above change in capital market may be identified, however it must be realized that different companies respond differently in the capital market. Therefore industry analysis requires an insight into (i) the key sectors and (ii) the relative strength and weakness of a particular sector about the economic activities. Therefore the industries have been classified into different classes on the basis of sectors, such as Banking and Information Technology. It is already noted that not all industries are equally sensitive to the economic conditions and the business cycles. Some industries are virtually independent and some are highly sensitive to the business cycle. Moreover in an industry analysis, number of key factors and characteristics should be considered to identify the industries where investments can be made. Such as: 1. The past performance of the industry. 2. The permanence of the product and technology of the industry. 3. Role of government in the industry. 4. Labour conditions. 5. Competitive conditions in the market. 6. Industry life cycle.

Company Analysis

The third element to EIC approach to fundamental analysis is the company analysis. The basic objective of the company analysis is to identify specific companies or specific shares which are expected to perform well in future. The company analysis presupposes that the economic analysis and the industry analysis has already been made.

Therefore the basic objective of company analysis is to: 1. To find out the intrinsic value of the share. 2. To find out the expected earnings of the company.

The sources of information required for estimating the future earnings of a firm is primarily available in the annual financial statements. Such as: 1. Balance Sheet 2. Income Statement 3. Cash Flow Statement 4. Notes to Financial Statement

To analyze the companies earnings, in the annual reports, the company usually provide financial information for the last several years. This information is useful to analyze the 1. Profitability of the company 2. Liquidity of the company 3. Solvency of the company 4. Activity level of the company

The parameters on which a investor can judge and make its investment decisions are:

Return on Equity (ROE) : The ROE examines profitability form the perspective of the equity investors by relating profits available for the equity shareholders with the book value of the equity investments.

The ROE indicates as to how well the fund of the owner has been used by the firm. It also examines whether the firm has been able to earn satisfactory return for the owners or not.

Earnings Per Share (EPS) : The ROE measures the profitability in terms of total funds and explains the return as a percentage of funds. The profitability of the firm can also be measured in terms of number of equity shares. Therefore EPS is derived by dividing PAT by the number of equity shares.

Price Earning Ratio (PE Ratio) : This is the ratio which establishes a relationship between the EPS and the market price of a share.

The

PE ratio

indicated the expectations of the equity investors about the earnings of the firm. The investor expectations are reflected in the market price of the share and therefore the PE ratio gives an idea of investors’ perception of EPS. The PE ratio is one of the most widely used measure of financial analysis in practice. A high PE ratio may indicate that the share has low risk and therefore the investors are content with low prospective return or the investors expect high dividend growth and are ready to pay a higher price for the share at present.

Technical Analysis
Technical analysis is based on the proposition that the securities price and volume in past suggest their future price behavior. The technical analysis believe that the demand and supply of securities are reflected in their prices and volume and the past pattern of prices and volume can be used to predict whether prices would be moving higher or lower. Technical analysis is based on the concept that past information of prices and volume can give an idea of what lies ahead. It emphasizes that securities prices and changes therein can be forecast by studying the market data. A trend in prices is believed to continue unless there is some definite information leading to change, and this trend in prices can be used to predict the future. Technical analysis can also be called the market analysis because it uses the market record and market information to predict the volume

and prices. It is based on the principle that let the market narrate its own story. Technical analysis is a refection of the idea that the capital markets move in trends. It is already noted that in technical analysis, the basic motive is to identify the price trend on the basis of historical data. The trend is then used to forecast the future behavior. The price and volume data on securities are basic raw material used by a technical analyst and the charts and graphs are used as the basic tools to identify the trends in prices. Technical analysis can be used either for a specific share or for the market in general. In case of a specific share the past data of that security are used to show charts while in case of market, the aggregate data on prices and volumes are used to prepare charts. Dow Theory : The Dow Theory, named after its originator, Charter Dow, is considered to be first theory of technical analysis. Dow theory is based on the hypothesis that the stock market does not perform on a random basis. Rather, it is guided by some specified trends. The likely trend in future can be predicted by the following trends. Three types of specific trends have been named in Dow Theory.

a) Primary Trend : It is a long trend in price and may carry on even for number of years. It takes the entire market up or down. b) Secondary Trend : Secondary trend appear within the primary trend and may last for few days or few weeks or few months. Secondary trends show interruptions in primary trend and act as a restraining force on the primary trend. The secondary trend tend to correct deviations form the primary trend boundaries of price movements. c) Minor Trend : Minor trends refer to day to day trend or movements in prices over few days. The minor trends, being of very short duration, have little analytical value.

Bar Charts : This technique borrowed from the statistical theory, is popular technique of showing the price variation and accompanied volume on a particular day and then the comparative presentation over a period of one month or half year or so. In bar charts each days price boundaries (high and low) and the related volume are shown. The closing price on that day is shown on a horizontal tick on the high row

bar. The volume of transaction is also shown as the vertical bars in the lower position of the chart.

Bar charts are popular among technical analysts because these charts have a lot of visual presentation and moreover easy to draw. Support and Resistance Levels : These levels are determined on the basis of past data and help determine the level below which or above which the price may not fall or rise.

Support levels is the price below which the market is unlikely to fall. On the other hand, the resistance level is the one above which price level is unlikely to rise. These two levels are determined with the reference to recent history of prices and keep on changing from one value to another.

Point and Figure Chart : The technical analysts attempt to identify the future price behavior in terms of the past data for prices, timing and the volume. However, there are some analysts who consider only past prices and ignore the timing and volume. This is based on the proposition that future price behavior can be predicted on the basis of past prices only. The time dimension and volume are not useful. Rather, significant price changes and reversals should be noted to predict future price behavior. As the time dimension is ignored, the preparation of point to figure chart is a bit different than the bar chart.

Candlestick Chart : Candlestick chart can be considered as an extension of bar chart. In addition to price data, the candlestick chart also shows the trend in prices of the day. In candlestick chart, the price data for a day is shown by a vertical box with a vertical line drawn through the box. The top and bottom point of line passing through the box represents the high low price respectively.

Moving Averages : Moving average of share prices refers to the average level of share prices calculated on a continuous basis. The moving average helps in identifying the trend in prices as well as the quantum of change i.e. it can help in detecting the degree as well as the direction of change. It a smoothened presentation of the movement in prices.

When prices are rising, the moving average line will the below the Nifty line. When the moving average line breaks through the Nifty line from below, the prices are falling and it is a ‘sell’ signal for the investors. If the moving average breaks through the Nifty line from above, it is taken as a ‘buy’ signal as the prices are increasing. Moving averages gives a visual presentation of the price behavior.

Limitations
 In this analysis, for simplicity sake, only S&P CNX Nifty, one of the two major indices among Sensex and Nifty has been taken for the analysis.

 Due to lack of share price data, the analysis could only be done from the year 2002 till 2008.

 Lack of sectoral index data, restricts this analysis only to two sectors i.e. Banking and Information Technology.

 For simplicity sake not all companies listed in the sectors chosen has been taken. Only the major large cap companies of these sectors have been considered for the analysis.

CHAPTER-4

ANALYSIS OF DATA

IT Sector

About IT Sector
The Indian information technology sector has been instrumental in driving the nation's economy onto the rapid growth curve. According to the Nasscom-Deloitte study, the IT/ITES industry's contribution to the country's GDP has increased to a share of 5.2 per cent in 2007, as against 1.2 per cent in 1998. India's IT growth in the world is primarily dominated by IT software and services such as Custom Application Development and Maintenance (CADM), System Integration, IT Consulting, Application Management, Infrastructure Management Services, Software testing, Serviceoriented architecture and Web services.

CNX IT Index
Information Technology (IT) industry has played a major role in the Indian economy during the last few years. A number of large, profitable Indian companies today belong to the IT sector and a great deal of investment interest is now focused on the IT sector. In order to have a good benchmark of the Indian IT sector, IISL has developed the CNX IT sector index. CNX IT provides investors and market intermediaries with an appropriate benchmark that captures the performance of the IT segment of the market.

Companies in this index are those that have more than 50% of their turnover from IT related activities like software development, hardware

manufacture,

vending,

support

and

maintenance.

In order to have a good benchmark of the Indian IT sector, IISL has developed the CNX IT sector index. CNX IT provides investors and market intermediaries with an appropriate benchmark that captures the performance of the IT segment of the market. Companies in this index have more than 50% of their turnover from IT related activities like software development, hardware manufacture, vending, support and maintenance.

The index is a market capitalization weighted index with its base period being December 1995 and the base date and base value being January 1, 1996 and 100 respectively.

Fundamental Analysis
Economy

Information technology has been a promising sector for India, generating revenues both for the domestic as well as the global market. India's IT potential has attracted multinationals to grab a share of the pie and cash in on the IT boom. India offers a market with very high returns for multinationals flocking to invest in their India units. Also, the increase in purchasing power and the rapid business expansion of the small and medium enterprises (SMEs) holds promise for global information technology (IT) giants who look at a 100 per cent year-on-year growth in their small and medium businesses (SMBs) market in India. India's domestic market has also become a force to reckon, with the existing IT infrastructure evolving both in terms of technology and

depth of penetration. Global IT companies as well as domestic biggies like IBM, Accenture, HP, TCS, HCL and Wipro have witnessed a remarkable growth in their business. The domestic information technology business has become far too attractive to ignore. India Inc's demand for IT services and products has bolstered growth in the domestic sector with deal sizes going up remarkably and contracts worth US$ 50-100 million up for grabs. Therefore, the Indian information technology sector continues to be one of the sunshine sectors of the Indian economy showing rapid growth and promise. Though worldwide IT budgets are expected to increase by 3.3 per cent in 2008, slightly higher than 2007, the Indian firms would report stronger-than-average IT budget increases of around 13 per cent, according to Gartner.

Industry IT-ITeS one of the fastest growing sectors in India

Exports (USD Bn.) 20

10 9 0 2004

11

13

2005

2006 (Est)

 Revenues : 36 billion CAGR (FY 2004-06) – 30% Contribution to GDP up from 2% in 2000 to 5% in 2006

 Exports : 23.5 billion CAGR (FY 2004-06) – 35% Has nearly doubled in last 5 years

 Domestic Market - USD 13 billion

CAGR (FY 2004-06) - 22% Buoyed by an economy growing at nearly 8% per annum over the last 3 years
Exports contribute nearly 65 % of IT sector revenue

From the above graph it is clearly visible that the exports has increased manifold at a rate of 67.74% from the year 2004 till 2006.

India’s IT industry structure is vibrant and competitive

Category

No. of Share of export player s Revenue • • • • • • BPO 40-50 • 45% of IT Services

Revenue Performance > than USD 1 billion

Tier I

3-4

Tier II

7-10

4-5% of BPO USD 100 million-USD 1 billion 25% of IT Services 4-5% of BPO 10-15% of IT USD 10 million-USD 500 million Services 10-15% of 20% of BPO USD 10 million-USD 200 million (Excl. leader - USD 500 million)

Offshore operations of Global IT majors Pure play BPO

20-30

Captive BPO 150

50% of BPO USD 25 million-USD 150 million (top 10 units)

Emerging players

>3000 • •

10-15% of IT < USD 100 million (IT) Services 5% of BPO < USD 10 million (BPO)

Rising FDI is an indicative of India’s advantage and global interest

From the above graph we can see that the Foreign Direct Investment has also increased a big deal from the year 2003 to 2005 by 677.78%.

India’s IT exports to touch US$ 60 billion by 2010

 Global IT-ITES spending to cross USD 1198 billion by 2010

 The addressable market for offshore IT services and BPO industry is estimated at be USD 150-180 billion and USD 120-150 billion respectively.

 With USD 13 billion, India has less than 10% of the current addressable market.

 India expected to be well on track to achieve USD 60 billion by 2010.

Company

For my analysis to study the growth trend of IT sector, compared to its Indices, I have chosen three major companies in the IT sector of India. Those are TCS, Wipro and Infosys.

Tata Consultancy Services

Company Profile
Tata Consultancy Services (TCS) is one of the world's leading information technology consulting, services, and business process outsourcing organization with a presence in 34 countries across 6 continents. Their valued customers are Asian Development Bank, British Airways, Citibank, Compaq, Ford Motor Company, General Motors, Government of Sri Lanka, Hewlett Packard, HSBC, IBM, Nokia, Nike, Singapore Airlines & Standard Chartered Bank etc. TCS Division of Tata Sons Ltd was transferred to TCS with effect from 1st April 2004 for a consideration of Rs.2300 crores. Further during August2004 the company made an Initial Public Offer from which it realized Rs.1935.88 crores. Subsequent to the IPO the company's paid-up share capital increased to Rs.47.83 crores. TCS is not only the largest IT services company in India, it also has everything which one would like to look for. Comprehensive range of services, one of the best track records of executing large end-to-end mission critical projects, long-term client relationships, very extensive global footprint, strong Indian presence, R&D capabilities, one of lowest employee attrition levels, strong brand and of course strong management.

Growth Trend of TCS since 2002

TCS
2000.00 1500.00 Price 1000.00 500.00 0.00
‘0 Ja 2 n ‘0 Ju 3 n ‘0 3 N o v ‘0 3 A pr ‘0 S ep 4 t‘ 0 Fe 4 b ‘0 5 Ju l‘ 05 D e c ‘ M 05 ay ‘0 6 O ct ‘0 M 6 ar ‘0 7 A ug ‘0 Ja 7 n ‘0 8 ug A

Months

Financials
Particulars FY 02 Revenues Crores) Revenue Growth (%) Net Profit EPS
-0.03 0.42 2377.2 38.15 3272.9 55.53 4300.9 38.39 5020.1 46.07 39.9 37.8 19.7

FY 03
-

FY 04
-

FY 05
8027.5

FY 06

FY 07

FY 08E

(in

-

11230.5

15471.9

18533.7

EPS Growth (%) P/E Ratio

-

-

2123.3 9

8983.3 38.04

45.6 23.18

-30.9 27.07

20.0 N/A

Wipro

Company Profile
Wipro Limited, the successful company crossed six decade of years. Wipro though started as a edible oil producer way back in 1945 under the name Western India Vegetable Products, a private limited company has transformed itself into leading player in Fast Moving Consumer Goods and IT services & Products business. It was incorporated at Karnataka by Mr. Azim H Premji who is promoter and chairman of the company. Five of Wipro's manufacturing and development facilities secured the Indian Standard Organization (ISO) 9001 certification during 1994-95. Company provides the integrated business, technology and process solution on a global delivery platform to customers across Americas, Europe, Middle East and Asia Pacific, they offer business value to clients through process excellence and service delivery innovation such as Information Technology services, Product Engineering services, Technology Infrastructure services, Business Process Outsourcing services and consulting services. 23 subsidiaries running under in Wipro. This company is listed in BSE , NSE and Newyork .In February 2001, Wipro became the first software technology and services company in India to be certified for ISO 14001 certification for complying with the international standards for Environmental Management System (EMS) in three major software

development and technology centers in Bangalore and also achieved ISO 9000 certification and they are ISO 14000 certificate holder also for good citizenship. Wipro Technologies has won the 'Banker Technology Award' for the year 2004 Instituted by the Financial Times in the 'Risk Management Award' category.

Growth Trend of Wipro since 2002

WIPRO
1800.00 1600.00 1400.00 1200.00 1000.00 800.00 600.00 400.00 200.00 0.00
‘0 Ja 2 n ‘0 Ju 3 n ‘0 3 N ov ‘0 3 A pr ‘0 S ep 4 t‘ 0 Fe 4 b ‘0 Ju 5 l‘ D 05 ec ‘ M 05 ay ‘0 O 6 ct ‘0 M 6 ar ‘0 7 A ug ‘0 Ja 7 n ‘0 8 ug A

Price

Months

Financials
Particulars FY 02 Revenues (in Millions)
9 32301.3

FY 03
41250.1

FY 04
56446.0

FY 05

FY 06

FY 07

FY 08E

78671.77

102827.6

142368.5

185354

Revenue Growth (%) Net Profit EPS EPS Growth (%) P/E Ratio

-

27.7

36.8

39.4

30.7

38.5

30.2

8411.4 6.05 233.62

8476.6 6.10 0.8 193.40

9992.0 7.19 17.9 107.18

15832.7 11.29 57.0 46.35

26269.9 14.24 26.1 37.72

29129.9 20.17 41.6 24.11

32241 22.16 9.9 N/A

Infosys

Company Profile
Infosys technologies limited, is a public limited and India's second largest software exporter company incorporated in the year 1981 as Infosys consultants private limited by Mr.N.R.Narayana Murthy at karnataka, who is chairman and chief mentor of the company. It became public limited company in the year 1992. It has received CMM5 status and it functioning collaborated with ANALOG DEVICES INC of USA. Infosys is a groundbreaking company in the field of information technology and it enjoys the privilege of being a debt free company. It's only the company to be part of the major global index. Company

offers the services of consulting, process re-engineering, modular global sourcing and Business Process Outsourcing services. It has developed finacle, a universal banking solution to large and medium size banks across India and oversees. The company has entered in marketing and technical alliance with FileNet, IBM, Intel, Microsoft, Oracle and System Application Products. Infosys is listed in BSE, NSE and NASDAQ. Infosys, the country's second-biggest IT/ITES services companies, which was the first Indian company to be listed on the NASDAQ at the year 1999. Infosys also forms a part of the NASDAQ100 index. Continuously the year 2001, 2002 and 2003 company wins the National award for excellence in corporate governance conferred by the Govt of India.

Growth Trend of Infosys since 2002

INFOSYS
6000 5000 Price 4000 3000 2000 1000 Aug ‘02 Dec ‘02 Aug ‘03 Dec ‘03 Dec ‘04 Dec ‘06 Dec ‘07 Aug ‘04 Aug ‘05 Dec ‘05 Aug ‘06 Aug ‘07 Apr ‘03 Apr ‘04 Apr ‘05 Apr ‘06 Apr ‘07 Apr ‘08 0

Months

Financials
Particulars FY 02 Revenues Millions) Revenue Growth (%) Net Profit EPS EPS Growth (%) P/E Ratio
164.47 0.31 30.2 38.30 194.87 0.37 19.35 25.9 40.96 270.29 0.51 37.84 25.4 49.82 419.0 0.76 49.02 26.3 35.18 555.0 0.99 30.26 25.8 43.59 850.0 1.5 51.52 27.5 35.15 1155.0 2.02 34.67 27.7

FY 03
753.81

FY 04
1062.59

FY 05

FY 06

FY 07

FY 08E

(in

545.05

1592.0

2152.0

3090.0

4176.0

Technical Analysis

Tata Consultancy Services

Moving Averages : TCS
2000.00 1500.00 Price 1000.00 500.00 Nov ‘07 0.00 Aug ‘02 Dec ‘04 Mar ‘03 Oct ‘03 May Price Moving Averages

Jul ‘05

Feb ‘06

Months

From the above graph we can see the ‘12 monthly moving average’ and the ‘Growth Trend line’ of TCS. According to the moving average analysis TCS shows a highly positive trend with more of a ‘buy’ signal to the investor.
 Aug ’02 to Apr ’04 : In this period the moving average analysis

shows a almost constant signal, without a major ‘buy’ or ‘sell’ ones. This is because in this period according to the diagram, the moving average curve almost coincides with the price curve.
 May ’04 to Jun ’06 : In this period since the moving average curve is

below the price curve, this gives a ‘buy’ signal to the investors. In this period, even though the market crashed, TCS continued its upward trend. It also reached it all time high in Apr ’06 to Rs 1900.10.
 Jul ’06 to Apr ’08 : In this period TCS showed a almost constant

trend, and the share prices rose up by mere 0.02% in this period. There was a sharp decline in the share price in Jul ’06 to Rs 920.01 from Rs 1706.08 in Jun ’06, But as per moving average analysis this

Apr ‘07

Sept

gives a ‘sell’ signal to the investors, even though in this period the share prices rose up to Rs 1262.25 in Jan ’07.

Wipro
Moving Averages : Wipro
1800.00 1600.00 1400.00 1200.00 1000.00 800.00 600.00 400.00 200.00 0.00 Aug ‘02 Mar ‘03 Oct ‘03 Dec ‘04 Jul ‘05 Feb ‘06 Apr ‘07 Sept May

Prices

Price Moving Average

Months

From the above graph we can see the ‘12 monthly moving average’ and the ‘Growth Trend line’ of Wipro. According to the moving average analysis Wipro shows basically a negative pattern but with both ‘buy’ and ‘sell’ positions for the investor.
 Nov ’02 to Jul ’03 : In this period the Wipro stocks showed a down

trend, and therefore a fall of 43.71%. In this period the stock also fell drastically to Rs 766.10 in May ’03. Therefore giving a signal to sell off the shares of Wipro, because of such a drastic fall in the prices.
 Aug ’03 to May ’04 : In this period the share prices of Wipro were on

a constant rise and showed a increase of 45.17%. Here the share

Nov ‘07

also experienced a all time high in Dec ’03 at Rs 1651.55. Therefore in this period it was advisable to buy the shares of Wipro.
 May ’04 to Jul ’05 : In this period the share prices fell drastically to

the extent of 51.34%. In this period basically the share experienced a sharp fall in its prices in Jun ’04 to Rs 515.51 from Rs 1476.20 in May ’04. Though after Jun ’04, the share experienced a upward trend. Therefore in this period it was advisable to the investors to buy the shares of Wipro.
 Aug ’05 to Apr ’08 : In this period of almost two and a half years, the

share prices of Wipro showed a more or less constant trend, with slight variations. Over such a long period the share prices showed a increase of about 37.42%, which can be said constant in such a long period. Here the investor is advised to play with a mixed strategy of buy and sell, so as to gain profit from Wipro stocks.

Infosys
Moving Averages : Infosys
6000 5000 Price 4000 3000 2000 1000 0 Aug ‘02 Feb ‘03 Aug ‘03 Aug ‘05 Feb ‘06 Aug ‘06 Aug ‘04 Aug ‘07 Feb ‘08 Feb ‘04 Feb ‘05 Feb ‘07 Price Moving Average

Months

It is often said that “Don’t buy now as the price is too high” or “Buy on correction” or “Buy Low and Sell High”, but the experts advocate the

view of “buying high and selling higher” which to many people seems like going against the ‘conventional wisdom”. From the above graph we can see the ‘12 monthly moving average’ and the ‘Growth Trend line’ of Infosys. According to the moving average analysis Infosys shows a mixed pattern of both ‘buy’ and ‘sell’ positions for the investor.
 Feb ’03 to Jun ’03 : The share prices for Infosys fell slightly by

2.59%. This therefore gives a sell signal to the investors who already own shares of Infosys bought before Feb ’03.
 Jul ’03 to May ’04 : In this period the share prices increased

drastically giving a rise of 44.24%. The share price even went its all time high to Rs 5374.43. This therefore gives a buy signal to the investors in this period, because in this period the share prices of Infosys were on a rise.

 May ’04 to Apr ’05 : In this period the share prices dipped down to a

very low limit i.e. to Rs 1511.41 in Jul ’04. This period experienced a drastic fall in share price of Infosys to the extent of 59.14%, thereby giving the its investors a sell signal for the Infosys shares.
 May ’05 to May ’06 : In this period of one year, the stock prices of

Infosys showed a increase of 32.67%. This therefore gives a buy signal to the investors, as the stock is performing well in the market.
 Jun ’06 to Apr ’08 : In this period of past one and a half year, the

share prices of Infosys showed a more or less constant return, with

a slight increase of 13.54%. Therefore giving the investors a buy signal for Infosys shares, in order to hold it for a longer period so as to gain a high and profitable return.

Comparative Analysis

Comparative Analysis
Prices and Indices 25000.00 20000.00 15000.00 10000.00 5000.00 Aug ‘02 Feb ‘03 Aug ‘03 Feb ‘04 Aug ‘04 Feb ‘05 Aug ‘05 Feb ‘06 Aug ‘06 Feb ‘07 Aug ‘07 Feb ‘08 0.00 CNX IT NIFTY Infosys Wipro TCS

Months

The above graph depicts the growth rate of NIFTY, CNX IT Index, and the major three companies in this sector since Aug 2002 till Apr 2008. Therefore by observation we come to know that in this period both NIFTY and the CNX IT Index showed a upward trend, though Infosys and Wipro, the major leaders in this sector showed a sharp decline in Mar ’04. The major reason which was observed for the decline in the

major industries in this sector is due to the market crash which took place in Mar ’04. Moreover the decline which is being depicted by the CNX IT Index curve is basically due to the revision of base value from 1000 to 100 w.e.f 28th May 2004.

20022003 NIFTY CNX Index Wipro Infosys TCS -16.33 -0.32 -7.73 IT 21.45 -2.77

20032004 44.68 45.56

20042005 28.86 32.60

20052006 48.88 41.73

20062007 37.21 16.54

-17.98 -20.07 309.34

-41.04 -23.92 126.58

-6.24 0.87 4.46

-0.52 -22.31 -19.85

Inference
 The correlation coefficient between NIFTY and CNX IT Index comes

out to be r(NIFTY,CNX IT Index) = 0.88. This shows that there is a very close positive correlation between the S&P CNX NIFTY and CNX IT Index, as per depicted by the graph. Also from the yearly growth data we can see that except for the year 2002-03, there is more or less a consistent increase in the IT sector when compared to the NIFTY. This shows that the IT sector on the whole was a growing sector since 2002 to 2008.  The yearly growth data of Wipro depicts a consistent fall in the share prices of Wipro. The fall in 2004-05 is very sharp i.e. about 41.04%. This may be basically due to the market crash which took place in May ’04.

 Infosys also depicts a more or less negative yearly trend, with a huge fall in the year 2004-05, of about 23.92%. The reason for this may also be the same, i.e. the market crash of May ’04.  TCS shows a consistent rise in the share prices, with a huge jump of even 309.34% in the year 2003-04.

Banking Sector
About Banking Sector
A burgeoning economy, financial sector reforms, rising foreign investment, favorable regulatory climate and demographic profile has led to India becoming one of the fastest growing banking market in the world. The overall banking industry's business grew at a CAGR of about 20 per cent from US$ 469.4 billion as of March 2002, to US$ 1171.29 billion by March 2007. The industry has been growing faster than the real economy, resulting in the ratio of assets of commercial banks to GDP increasing to 92.5 per cent at end-March 2007. The Indian banks have also been doing exceptionally well in the financial sector with the price-to-book value being second only to china, according to a report by Boston Consultancy Group.

CNX Bank Index
The Indian banking Industry has been undergoing major changes, reflecting a number of underlying developments. Advancement in communication and information technology has facilitated growth in internet-banking, ATM Network, Electronic transfer of funds and quick dissemination of information. Structural reforms in the banking sector have improved the health of the banking sector. The reforms recently introduced include the enactment of the Securitization Act to step up loan recoveries, establishment of asset reconstruction companies, initiatives on improving recoveries from Non-performing Assets (NPAs) and change in the basis of income recognition has raised transparency and efficiency in the banking system. Spurt in treasury income and improvement in loan recoveries has helped Indian Banks to record better profitability. In order to have a good benchmark of the Indian banking sector, India Index Service and Product Limited (IISL) has developed the CNX Bank Index.

CNX Bank Index is an index comprised of the most liquid and large capitalised Indian Banking stocks. It about 79% provides investors and market intermediaries with a benchmark that captures the capital market performance of Indian Banks.The index will have 12 stocks from the banking sector which trade on the National Stock Exchange. The average total traded value for the last six months of CNX Bank Index stocks is approximately 74% of the traded value of the banking sector. CNX Bank Index stocks represent of the total market capitalization of the banking sector as on March 31, 2005.

The index is a market capitalization weighted index with base date of January 01, 2000, indexed to a base value of 1000.

Fundamental Analysis
Economy

With the Indian economy moving on to a high growth trajectory, consumption levels soaring and investment riding high, the Indian banking sector is at a watershed. Further, as Indian companies globalize and people of Indian origin increase their investment in India, several Indian banks are pursuing global strategies, Consequently, the degree of leverage enjoyed by the banking system, as reflected in the equity multiplier (measured as total assets divided by total equity), has increased from 15.2 per cent at end March 2006 to 15.8 per cent at the end of March 2007. Indian banks are one of the most technologically advanced with vast networks of branches empowered by strong banking systems, and their product and channel distribution capabilities are on par with those of the leading banks in the world, says a survey by McKinsey. It also reveals that IT effectiveness at the top Indian banks is world class. With the economy in overdrive and buoyancy in consumption and investment demand, nine Indian banks, led by HDFC Bank and ICICI bank, have made it to the top 50 Asian Banks list in Asian Bankers 300 report. Simultaneously, State Bank of India has become the top loan arranger in the Asia-Pacific region in 2007, according to UK based Project Finance International (PFI). Also, India emerged as the top provider of educational loans worth US$ 3.67 billion till September in 2007.

While this growth has been very impressive, the potential banking market waiting to be tapped in India is still fairly huge. Out of the 203 million Indian households, three-fourths, or 147 million, are in rural areas and 89 million are farmer households. In this segment, 51.4 per cent have no access to formal or informal sources of credit, while 73 per cent have no access to formal sources of credit. In fact, according to a report by Boston Consultancy Group, India has the second largest financially excluded households of about 135 million, which is next only to china. Also, about 60 million new households are expected to be added to India's bankable pool between 2005 and 2009. With such a large untapped market, the Indian banking industry is estimated to grow rapidly, faster than even china in the long run.

Industry India, the fastest growing banking market in the world.

Growth of Banking Industry
1400 1200 1000 800 600 400 200 0 2002 Year 2007 469.4 1171.29

India has become one of the fastest growing banking market in the world. The overall banking industry's business grew at a CAGR of about 20 per cent from US$ 469.4 billion as of March 2002, to US$ 1171.29 billion by March 2007.
Increasing bank deposits in the Indian Banking sector
Aggregate Bank Deposits
1000.00 800.00 600.00 400.00 200.00 0.00 2006 2007 Year 2008 584.89 714.15 865.55

Aggregate bank deposits of banks increased by US$ 129.26 billion (22.1 per cent) at the end of March 2007 over the corresponding in 2006. It further increased by 21.2 per cent or by US$ 151.40 billion as at end-March 2008 over the corresponding period in 2007. While aggregate demand deposits increased by 19.2 per cent, aggregate time deposits increased by 21.6 per cent in the same period, indicating migration from small savings schemes of the Government. Significantly, the asset quality of the banks has also improved over this period. The gross non-performing assets (NPA) as a per cent of total assets has declined from 4 per cent as of March 2002 to 1.46 per cent as of March 2006. Simultaneously, the capital adequacy ratio of all SCBs has improved from 11.1 per cent as of March 2002 to 12.3 per cent by March 2007. Also, the banking sector has been doing exceedingly well on the financial front. For example, in the quarter ended March 2008, while the interest income of the 18 public sector banks and seven private banks rose by 28.4 per cent, the net profit rose at much higher rate of 33.61 per cent.
Emergence and Growth of private sector

Growth of Private Sector
200 150 100 50 0 2002 Year 2007 41.63 186.71

Banking operations had been opened to the private sector in 1990s. The new private banks have been increasing its role in the Indian banking industry. Against the industry average growth of about 20 per
cent in the past five years, the new private sector banks registered a

growth of about 35 per cent per annum, growing from US$ 41.63 billion as of March 2002 to US$ 186.71 billion by March 2007.

Growth of Private Banks Market Share

Growth of Private Banks Market Share
16.00% 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% 14.00% 9.00%

2002 Year

2007

The new private banks market share has increased from about 9 per cent in 2001-02 to 16 per cent as of March 2006-07. Foreign banks, which totaled 29 in June 2007, have also been expanding at a rapid pace. For example, India was the fastest growing market for Global banking major HSBC in 2006-07, with a growth rate of 64 per cent.
Company

For my analysis to study the growth trend of Banking sector, compared to its Indices, I have chosen three major companies in the Banking sector of India. Those are SBI, ICICI and IDBI

State Bank of India
SBI, started as Imperial Bank then named State Bank of India commenced its operations from the year 1955, is the largest commercial bank in India in terms of profits, assets, deposits, branches and employees. As of March 2008, the bank has had 21 subsidiaries and 10,000 branches. SBI offers the services of banking and as well as

non- banking services to their customers. It provides a whole range of financial services which includes Life Insurance, Merchant Banking, Mutual Funds, Credit Cards, Factoring, Security Trading & Primary dealership in the Money market. The Bank is actively involved in nonprofit activity called community services banking apart from its normal banking activity. The bank also concentrate in agriculture, for that it took initiative spotlight kharif and spotlight rabi campaigns for higher disbursement. It introduced Automated Teller Machine with Kishan Credit Cards in all circles to assist agriculture peoples, cumulatively the bank has credit linked 7.68 lac Self Help Groups and disbursed loans to the extent of Rs 3,468 crs, so far.

Growth Trend of SBI since 2002

SBI
2500.00 2000.00 Price 1500.00 1000.00 500.00 0.00
‘0 Ja 2 n ‘0 Ju 3 n ‘0 3 N ov ‘0 3 A pr ‘0 S ep 4 t‘ 0 Fe 4 b ‘0 Ju 5 l‘ D 05 ec ‘ M 05 ay ‘0 O 6 ct ‘0 M 6 ar ‘0 7 A ug ‘0 Ja 7 n ‘0 8 ug A

Months

Financials
Particulars FY 02 Revenues Crores) Revenue Growth (%) Net Profit EPS EPS Growth (%) P/E Ratio
16587.0 69.94 7.38 17885.0 81.79 16.9 9.72 19676.7 83.73 2.4 11.87 25257.8 86.29 3.1 21.00 33673.0 106.56 23.5 N/A 6.5 10.4 10.3 24.3

FY 03
-

FY 04

FY 05

FY 06

FY 07

FY 08E

(in

-

30460.4

32428.0

35794.9

39491.0

48950.3

Industrial Credit and Investment Corporation of India
ICICI Bank is a commercial bank promoted by ICICI Ltd, an Indian Financial Institution. It was incorporated in Jan.'94 and received its banking license from Reserve Bank of India in May.'94. It is the 2nd largest bank in India. The bank has over 630 branches & extension counters across India and over 2200 ATMs across the country. The Bank offers a wide spectrum of domestic and international banking services to facilitate trade, investment banking ,Insurance, Venture Captial, asset management, cross border business & treasury and foreign exchange services besides providing a full range of deposit and ancillary services for both individuals and corporates through various

delivery Channels and specialized subsidiaries. All the branches are fully computerized with the state-of-the-art technology and systems, networked through VSAT technology. The bank is connected to the SWIFT International network. The bank has 14 subsidiaries across India and other countries like UK, Canada and Russia. To maintain the leadership status bank foray into internet banking by web- enable its existing products and services.

Growth Trend of ICICI since 2002
ICICI
1400.00 1200.00 1000.00 800.00 600.00 400.00 200.00 0.00
‘0 Ja 2 n ‘0 Ju 3 n ‘0 3 N ov ‘0 3 A pr ‘0 S ep 4 t‘ 0 Fe 4 b ‘0 Ju 5 l‘ D 05 ec ‘ M 05 ay ‘0 O 6 ct ‘0 M 6 ar ‘0 7 A ug ‘0 Ja 7 n ‘0 8 ug A

Price

Months

Financials
Particulars FY 02 FY 03 FY 04 FY 05 FY 06 FY 07 FY 08E

Revenues Crores) Revenue Growth (%) Net Profit EPS EPS Growth (%) P/E Ratio

(in

-

-

9002.3

9409.9

14306.1

22994.2

30788.34

-

-

4.53 52.03 7710.9 28.55 4.89 24.86 60.73 14077.3 34.48 20.77 29.64 33.90 19729.5 37.37 8.38 N/A

-

-

5852.5 26.56 11.16

5681.9 27.22 2.48 18.46

Industrial Development Bank of India
The concept of establishing IDBI BANK (IDBIBK) took place after RBI issued guidelines for entry of new private sector banks in 1993. Susequantly IDBI Bank was incorporated in 1994, With the main promoter being Industrial Development Bank of India (IDBI) & Small Industries Development Bank of India (SIDBI) the country's two premier financial institution. The strategy and business plans of bank were made in consultation with M/s KPMG Peat Marwick, world renowned consultants. In March 1999 the Bank came out with its maiden public issue of 4 crore equity shares of Rs. 10/- each at a premium of Rs. 8/per share aggregating Rs. 72 crores. The bank has maintained an uninterrupted track record of profitability since inspection, with focus on excellence of service, professional competence, state of art technology, utilization of the group's synergy and backing of its financially strong promoters, the bank is poised to become a front ranking banking force in India. While liberalization and reforms have thrown up a few challenges, it has also created opportunities for banks to increase revenues by diversifying into Investment banking, Insurance, Credit Cards, mortgage financing, depository services and

more. The bank is offering retail loan products like home finance, loans against shares, educational loans, car loans, etc. on very competitive terms. It has also entered into and arrangement with Standard Chartered Bank to offer a Co-branded Global Credit Card. The bank has informed that about conversion of its entire operating technology platform to 'Finacle', a core banking software provided by Infosys. The bank has also implemented Kondore +a treasury Front Office software from Reuters and ITMS-treasury back office software from Synergy Login. The Bank has implemented Finacle core Banking Software from Infosys Technologies Ltd. The bank had recommended a rights issue of equity shares in the ratio of 1:2 at a price of Rs.22 per share including a premium of Rs.12 per share.

Growth Trend of ICICI since 2002
IDBI
180.00 160.00 140.00 120.00 100.00 80.00 60.00 40.00 20.00 0.00
ug ‘0 Ja 2 n ‘0 Ju 3 n ‘0 3 N ov ‘0 3 A pr ‘0 S ep 4 t‘ 0 Fe 4 b ‘0 5 Ju l‘ D 05 ec ‘ M 05 ay ‘0 O 6 ct ‘0 M 6 ar ‘0 7 A ug ‘0 Ja 7 n ‘0 8

Price

A

Months

Financials
Particulars FY 02 FY 03 FY 04 FY 05 FY 06 FY 07 FY 08E

Revenues Crores)

(in

-

-

9,704.0 0 2,655.72 5,380.72 6,345.42 8,020.84

Revenue Growth (%) Net Profit

-

-

-72.63 102.61 17.93 26.40

-

-

7,573.0 0 2,129.22 4.26 81.92 21.48 4,308.72 7.75 12.26 9.57 5,342.93 8.7 15.63 14.36 6,551.64 10.06 -40.17 N/A

EPS EPS Growth (%) P/E Ratio

-

-

7.12 -40.17 10.55

Technical Analysis

State Bank of India

Moving Average : SBI
2500.00 2000.00 Price 1500.00 1000.00 500.00 0.00
M ‘02 ar ‘ O 03 ct M ‘03 ay D ‘ 04 ec ‘0 Ju 4 l Fe ‘05 b Se ‘06 pt ‘ Ap 06 r‘ N 07 ov ‘0 7 Au g

Prices Moving Average

Months

From the above graph we can see the ‘12 monthly moving average’ and the ‘Growth Trend line’ of SBI. According to the moving average analysis SBI shows a highly positive trend with more of a ‘buy’ signal to the investor. In our analysis form the year 2002 to 2007, the share price of SBI showed a consistent upward trend and a massive increase of 559.13%. Moreover by the moving average analysis, throughout the period of our analysis, the share of SBI shows a buy position for the investor. During this period it also has reached its all time high of Rs 2365.00 in Dec ’07.

Industrial Credit and Investment Corporation of India

Moving Average : ICICI
1400.00 1200.00 1000.00 800.00 600.00 400.00 200.00 0.00

Price

Price Moving Average

Aug ‘02

Mar ‘03

Dec ‘04

Feb ‘06

Months

From the above graph we can see the ‘12 monthly moving average’ and the ‘Growth Trend line’ of ICICI. According to the moving average analysis ICICI shows a highly positive trend with more of a ‘buy’ signal to the investor. In our analysis ICICI also shows a consistent upward trend, therefore a buy position for the investor. Though when compared to SBI, ICICI shows more fluctuations, while the upward trend of SBI was quite smooth. ICICI also reached its all time high in this period at Rs 1265.00 in Oct ’07.

Industrial Development Bank of India

Nov ‘07

Oct ‘03

Jul ‘05

Apr ‘07

Sept

May

Moving Average : IDBI
180.00 160.00 140.00 120.00 100.00 80.00 60.00 40.00 20.00 0.00 Aug ‘02

Price

Prices Moving Average

Mar ‘03

Dec ‘04

Feb ‘06

Months

From the above graph we can see the ‘12 monthly moving average’ and the ‘Growth Trend line’ of IDBI. According to the moving average analysis IDBI shows a mixed trend of both ‘buy’ and ‘sell’ position to the investor. From the above graph, we can observe that IDBI shows great fluctuations in its share price.

Aug ’02 to Sept ’05 : In this period though with fluctuations, the share price of IDBI was on a rise. In this period the share price of IDBI increased by about 585.87%, which is a great increase in a short span of about three years. The moving average analysis also shows a consistent ‘buy’ position for the investor during this period.

Oct ’05 to Sept ’06 : In this period the share price of IDBI showed a slight decline of about 3.12%. As the moving average curve lies above the share price curve, it also indicates a ‘sell’ position for the investor. The share price in this period also dipped down to Rs 55.20

Nov ‘07

Oct ‘03

Jul ‘05

May

Apr ‘07

Sept

in Jun ’06 from Rs 117.97 in Sept ’05, which is a very short span of time.

Oct ’06 to May ’08 : Over this span of time the share price of IDBI showed a slight increase of about 8.25% in about one and a half years. It also touched its all time high in this period to Rs 165.00 in Dec ’07. The moving average analysis here shows a ‘buy’ position for the investor.

Comparative Analysis

Comparative Analysis
12000.00 Prices and Index 10000.00 8000.00 6000.00 4000.00 2000.00 Aug ‘02 Aug ‘03 Aug ‘04 Feb ‘05 Aug ‘05 Aug ‘06 Feb ‘07 Aug ‘07 Feb ‘03 Feb ‘04 Feb ‘06 Feb ‘08 0.00 NIFTY Bank Nifty ICICI IDBI SBI

Months

The above graph depicts the growth rate of NIFTY, CNX Bank Index, and the major three companies in this sector since Aug 2002 till Apr 2008. By observation, we can see that the Bank Nifty and Nifty showed a continuous upward trend. The major company in this sector, i.e. ICICI, IDBI and SBI, also complies with Nifty and CNX Bank Nifty showing a upward trend.

The yearly growth rate of Nifty, CNX Bank Index and the three major companies is shown below in the table.
20022003 NIFTY CNX Nifty SBI ICICI IDBI 58.20 34.46 97.52 38.45 65.04 100.02 48.28 63.59 42.47 29.88 43.59 -22.99 66.41 54.36 63.73 21.45 Bank 60.25 20032004 44.68 54.66 20042005 28.86 45.83 20052006 48.88 22.95 20062007 37.21 45.03

Inference

 The correlation coefficient between NIFTY and CNX Bank Index comes out to be r(NIFTY,CNX Bank Index) = 0.98. Therefore this indicates that NIFTY and CNX Bank Index are very highly correlated in our period of analysis.

 Also, from the above table of yearly growth rate, we can observe that SBI and ICICI showed a consistent rise, whereas IDBI showed a more or less mixed trend, with a 100.02% rise in 2003-04, and a fall of -22.99% in 2005-06.

CHAPTER-5

INTERPRETATIONS AND FINDINGS

Following are the points which have been observed while doing this analysis

Though the IT sector showed a upward trend but with a very high degree of fluctuations with CNX IT Index as high as 5625.53 points in February 2007 from 2051.26 in June 2004. Though the IT sector showed a upward trend.

The correlation between CNX IT Index and S&P CNX Nifty comes out to be 0.88, which is indeed a very high degree of correlation.

 This shows that the IT sector was on a upward trend with a percentage increase of 410% in the observed period.

The banking sector also showed a consistent rise in the observed period with a maximum of 9906.63 points i.e. its all time high in January 2008.

 The correlation between Bank Nifty and S&P CNX Nifty comes out to be 0.98 in the observed period.

Therefore we can say that the banking sector showed a highly positive trend in the observed period.

CHAPTER-6

RECOMMENDATIONS AND SUGGESTIONS

Following is the recommendations that I would like to suggest after having done the above analysis

For a new investor who wants to invest his funds at minimum risk for a long term period should in Banking sector in companies like SBI or ICICI, because these companies show a consistent upward trend in the observed period.

For existing investor who wants to capitalize his funds is also suggested to prefer Banking sector as the correlation between S&P CNX Nifty and Bank Nifty shows a positive correlation of 0.98.

For investor who prefers to trade for maximum return at high risk is suggested to invest in IT Sector in companies like Infosys, whose share price touched a maximum of 5374.43 in May 2004, and also shows high fluctuations in the observed period.

 Therefore a individual is suggested to invest long term funds in banking sector whereas short term investment should be done in IT sector.

Bibliography
Text Books and Journals

“Investment Management Theory & Practice” by R P Rustagi (Equity Shares : Fundamental & Technical Analysis), pg 137 - 163

“Financial Management (Ninth Edition)” by I M Pandey (Risk and Return : An overview of Capital Market Theory), pg 70 – 77

“Research Methods (Second Edition)” by William M. K. Trochim (Analysis), pg 259 - 276

 N S E Fact book 2007  NCFM Securities Market (Basic) Module

The referred Websites
 www.nseindia.com  www.ibef.org  www.sharekhan.com

 www.yahoofinance.com  www.moneycentral.msn.com

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