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49 MMS II - Finance Batch : 2010-12
Topic : Factors Affecting Stock Market.
MEANING of Stock Market Volatility
Stock market volatility is a measure of how far and fast stock prices move. When the stock market goes up one day, and then goes down for the next five, then up again, and then down again, that’s what you call stock market volatility. Stock price volatility is an indicator that is most often used by option traders to find changes in trends in the market place. There are two main types of stock volatility including historical volatility and implied volatility that are used in the option markets. The increase or decrease in volatility results from changes in investors emotions in the market place. More specifically greed and fear in the market place are the two main factors that cause stock prices to change. Stock price volatility tends to rise when there is new information released in the markets however the extent to which it rises is determined by the relevance of that new information as well as to the degree in which the news surprises investors.
Stock market volatility is significant and understanding it is imperative to investing in stocks that suit your investment or trading style and risk tolerance level. Stock prices rarely move in a straight line. Most of the time they move up and down and, some of the time, they trend higher or lower. More volatile stocks tend to chop more intensively and have a larger high-low range than their less-volatile cousins. Some short-term traders prefer to trade volatile stocks because they can make an impressive profit quickly, while conservative longer-term investors usually like to stay away from volatile securities.
Stock market volatility is determined by calculating how far a particular stock or index has moved over a set period of time. The more a stock has moved, the more volatile it is. Stock market volatility is an especially critical statistic for option traders because volatility has a huge effect on the price of options. The more volatile a stock is, the more expensive its options are likely to be, and vice versa.
NEED FOR THE STUDY
Stock Markets are very volatile at times, and there are various factors which affect the price movement. So this project aims at understanding the reasons behind volatility in the Indian Stock Market.
OBJECTIVE OF THE STUDY
To study volatility in Indian Stock Markets. To study the factors which are making Indian stock market volatile. To study the sectors which are affected by individual factors affecting stock market.
Ho : There is no impact of external and internal environment on Stock Market. H1 : There is impact of external and internal environment on Stock Market.
The research methodology here includes: • Research design • Sampling design • Sampling technique • Data collection method RESEARCH DESIGN Exploratory Research Exploratory study will be conducted with an objective to gain familiarity with the phenomenon and to achieve new insight into it. This study aims at understanding the reasons behind volatility in the Indian Stock Market. SAMPLING DESIGN • Universe In this study the universe is finite and will take into the consideration related news and events that have happened in last 10 year. • Sampling Unit As this study revolves around the factors affecting Indian stock market. So for these sampling unit is confined only to the Indian stock market. SAMPLING TECHNIQUE Convenient Sampling: Study will be conducted on the basis of availability of the Data and requirement of the project. Study requires the events that have impact on the Indian stock market.
DATA COLLECTION METHOD Secondary data: For the secondary data various literatures, books, journals, magazines, web links are used. As there are not possibilities of collecting data personally so no questionnaire is made.
Monsoon does play an important role on the economy of a country. Economy of a country depends on Agricultural, Industrial sector especially in a country like India. In India, agriculture provides around 70% of employment either directly or indirectly. This is the major reason for the economic growth of India to depend on Monsoon season. Monsoon season in India starts from June and continue till September. If the monsoon is good, it boosts up the economy of the country and helps in maintaining GDP growth. But if monsoon rains get delayed even by 15 days, it becomes a cause of worry for the government to maintain GDP growth. But as per the estimates given by India Meteorological Department, rains this year in 2011 are expected to be normal as were in 2010, which could encourage government to ease curbs on export of wheat and rice, and good rainfall will boost output of grain and oil seeds, and help calm inflation. The monsoon accounts for more than two-thirds of the country’s requirements of rainfall. Although the rise of services has made the Indian economy progressively less dependent on agriculture, the state of the farm economy remains an important “balancing figure” driving GDP growth. This is particularly so this year when industrial growth has been sputtering in recent months and market watchers are looking to agricultural growth to fill the gap. A delay in the arrival of rains or a whimsical monsoon that alternates between deluges and dry spells could have a big impact on the production of food grains as well as cash crops, prices of which are now feeding the spiralling inflation numbers. With a global shortage of food crops such as rice, wheat and corn, the acreage planted under various food crops and the final harvests will be closely watched this year for cues on whether we’ll b able to feed all those hungry mouths. Any shortfall, could fuel high food prices, leading to a rise in the inflation index. It is therefore quite easy to explain why stocks of companies manufacturing FMCGs, two wheelers and a host of agricultural inputs dance to reports of a good or a bad monsoon.
SECTOR BENEFITTING FROM GOOD MONSOON
1.Fertilizer: A normal monsoon means the demand will be higher and the payment cycle will improve, which will be marginally positive for fertilizer companies.Aries Agro, which makes nutrient-based fertilizers that help improve crop yields, is looking at 25 per cent growth in turnover in 2010-11 to Rs 175 crore (Rs 1.75 billion). Companies like Coromondel Fertilizers generate almost 90 per cent of their revenues from the fertilizer segment. Deepak Fertilizers, which is largely into the chemical business, has a marginal exposure to fertilizers. Tata Chemicals and Chambal Fertilizers are among the most diversified players in this sector but still stand to gain. 2.Agri-inputs: Irrigation India's monsoon, the main source of irrigation for the nation's 235 million farmers. Companies like Jain Irrigation the largest company in the drip irrigation segment, should benefit. This is due to the fact that a normal monsoon will lead to improved demand and working capital cycle, as most of its units are sold on credit. 3.Tractors : Companies in the tractors segment like Mahindra & Mahindra will also benefit considering that the company's revenues from the segment are 30-35 per cent of its auto segment revenues. 4. Seed and crop protection segments: A normal monsoon will also mean good demand for companies in seed and crop protection segments. These are the leading companies in these two segments • Advanta India • Monsanto India • United Phosphorus • Excel Crop Care 5. Automobiles: While sales of larger vehicles may no longer be linked to the monsoon, two-wheeler sales could see an upside if the monsoon turns out to be normal. Companies like Bajaj, Hero Honda, and TVS Motor will benefit and possibly so, will their shares. Sometimes the positive effect is delayed and registered around the time of Diwali, the main shopping season. 6. Consumer goods: An ‘okay’ rainy season may mean that the rural populace will have higher disposable income. This will give a fillip to sales of FMCG products such as toothpaste, toothpowder, soaps and shampoos, which rely heavily on rural demand for growth. Companies that have substantial presence in semiurban and rural areas in this sector are Hindustan Unilever, Colgate, Dabur and Godrej Consumer.
a good monsoon may just further their cause even more. WHO CAN BENEFIT OUT OF NO RAIN Inadequate rains will fuel demand for pump sets. water shortage. Bharat Bijlee and Finolex Industries faster. A good production of sugar cane. consumer spending and overall economic growth. would benefit sugar producers such as Bajaj Hindustan Ltd. Even if the monsoon is delayed by few days. and Balrampur Chini Mills Ltd. 7. a below normal rainfall could spell disaster making food more expensive. SECTORS TO HAVE LEAST OR NO IMPACT OF MONSOON: 1. hitting industrial production which in turn will put more pressure on the government's kitty. inflation. Operators on the bourses betting on deficient rain are lapping up shares of KSB Pumps. Monsoon is a key to determine agricultural output. Jain Irrigation. Lower Input Cost: Many firms that use agricultural products as raw materials would also benefit from lower input costs.With the broader markets already paying more attention to FMCG stocks as defensive plays in times of stock slide. PVC pipes and drip irrigation systems fetching companies’ high returns. The monsoon accounts for 80 per cent of the rainfall in India.. Shree Renuka Sugars . Kirloskar Brothers. (though a normal rainfall was predicted) this year's 'normal' monsoon would help boost the agricultural output and bring down the rising inflation. aggravating the power. for example. (a) (b) IT Infosys Wipro POWER NTPC Tata Power CONCLUSION After last year's drought. it can have an adverse effect on the economy as about half of India's farm output comes from crops sown during the June-September rainy season. While a normal rainfall signals growth and prosperity. (a) (b) 2. .
117. 72 which till the end of September reached to a high of Rs. the stock in a mid June was at around Rs. Chambal fertilizer was in a bullish trend. EXAMPLE : HUL Good Monsoon has also help Consumer Goods Company HUL to flourish during and after monsoon period as rural people also will be having higher disposable income .EXAMPLE : CHAMBAL FERTILISER During monsoon period June to September.
Many times our spending decisions are also guided by the interest burden that we would be bearing. Inflation. As you can see from the diagram there are two sides of the economy a) The Business Side b) The Consumer Side.inflation) Even as consumers. interest rate is an integral part of our spending habit as we borrow from the bank for buying house. modernization etc. acquisitions. We as a country save more because we get higher interest rate on our savings than other countries like US.When the inflation in a country starts rising the central bank or the RBI responds by increasing the interest rate in the economy to reduce the money supply in the economy.When an economy goes into recession it does not come back by its own. Interest rate does not have a direct impact on stock prices but its indirect impact cannot be undermined. Over the last 1 year RBI has been tackling inflation by increasing the interest rate. It is the payment we make to the lender for the facility of using his money for our own purpose.INTEREST RATE Interest Rate in simple words means the cost of borrowing funds. For the business community interest rate is also very imp0rtant as they borrow money from bank for investment activities like capacity expansion. It is quite well established by now that interest rate is crucial for everyone in the economy but who controls this crucial macroeconomic variable? TWO MAIN REASONS FOR THE FLUCTUATION IN INTEREST RATE Government alters interest rate to affect the investments. cars. house old items etc. But.Interest Rate Linkage. . more than the returns we should be concentrating on real returns on our savings (real return = interest rate. setting up of plants. The US government during the recent downturn of 2008-09 lowered its interest rate to around 1-2% in order to propel private investment & for consumers to borrow and spend more.
• • • . look towards directing your investment in such sectors. So. any investment by you in these sectors must be taken with a lot of caution during the situation of high interest rates. high interest rate would have more sector specific impact. automobile and all the capital intensive industries. The sectors which are most impacted by high interest rate is the real estate. people tend to invest more in fixed deposits and bonds as it would be offering higher returns at very low risk. The Net Interest Margins (It is the difference between the interest they earn on the money they lend and the interest they pay to the depositors) for banks is likely to increase leading to growth in profits & the stock prices.A continuous rise in interest rate affects the stock price from both the investment and consumption side. Hence it moves funds out of stock market affecting the stock prices adversely. resulting into depleted stock price. IT etc are some of the least affected sector. Other sectors like pharmaceuticals. Thus there would be negative sentiments for such stock. Also. FMCG. Over a longer term. Banking sector is likely to benefit most due to high interest rates. Combining the effects from both the sides. at higher interest rate. The overall future revenue growth of the companies would be adversely effected which would lead to negative sentiments in the market leading to deflated stock prices. it spells a gloomy situation for the economy. SECTORAL IMPACT OF FLUCTUATION IN INTEREST RATE • In the short term: The immediate impact of rise in interest rate is on companies with high debt in their balance sheet .The interest payment made by them rises which reduces their EPS.
it becomes even more important to understand the impact of macro-economic variables like interest rate and make an informed decision by investing in fundamentally strong companies with good future prospects and at the right price. automobiles. This would leave the banks with much lower money to lend out to the borrowers. you would be obviously saving less and consuming more.• If interest rate continues to rise for a longer duration then it will have an all-round negative impact on the economy. Check your investment in such sectors and avoid it if interest rate keeps rising. and their profit margins would also be affected by lower interest rate. Thus there would be fall in consumption & investment activities in the economy. But during low interest rate the leveraged companies would stand to gain. Also. This would lead to inflationary situation in the country. When the interest rate is very low. FIIs and FDIs pace their decision on the basis of difference in interest rates between economies among other things. • • • • • • High interest rate usually leads to rise in Net interest Margins for the banks. and capital intensive industries would be most affected by high interest rates but when the interest rates are lower they would be gaining the most. look for some amount of your total investment in such sectors. Thus. EPS and stock prices rising. for a developing country like India. Sectors like Real estate. business community and the consumers happy which is very crucial for the smooth running of the economy. the right path would be maintaining a moderate inflation & interest rate over a period of time which keeps both the banks. • . The government in this situation would resort to printing of currency to infuse more money in the economy. At very low interest rate the inflows are likely to be reduced. Sectors like IT and pharmaceutical are less affected by interest rate change. But lower interest rate has an adverse impact on banking stocks. During high interest rates. avoid the companies with high debt situation as their interest cost on existing debt would go up affecting their EPS and ultimately the stock prices. Looking at the current situation. Look for companies with very low or zero debt situation as they won’t be affected by changes in interest rate. leading it into a recessionary mode.This is the time you could see their profits.
EXAMPLE : STATE BANK OF INDIA SBI has shown a tremendous growth in his stock prices during rise in interest rate (Jan 2010 – Dec 2010) from Rs. 3497 EXAMPLE : STATE BANK OF INDIA vs SENSEX . 1896 to a high of Rs.
Comparing SBI Stock (Blue) with BSE SENSEX (Orange) it can be seen that SENSEX has shown less response to hike in interest rate as compared to SBI EXAMPLE : STATE BANK OF INDIA vs BSE REALTY Also looking at the chart it can be seen that hike in interest rate in the year 2010 has shown a positive trend in Banking Sector Stock SBI (Blue) whereas BSE REALTY (Orange) has reacted negatively to the change. .
which as a result driven the crude oil prices to reach at its peak. every policy made by such countries related to the crude oil prices has their influence on crude oil prices. which generates lot of changing movement in Sensex.CRUDE OIL Crude oil is one of the most necessitated worldwide required commodity. Higher crude oil price implies to the higher price of energy. Any slightest fluctuation in crude oil prices can have both direct and indirect influence on the economy of the countries. Crude oil prices act like any other product cost with more variation taken place during shortage and excess supply. Any fluctuation in crude oil affects the other industrial segments also. • Inventory: In throughout the world. Therefore. Many times it has been recorded that prices of essential products like crude also acts as a prime driver in becoming reason of up and down movement of price. The volatility of crude oil prices drove many companies away and its impact the stock market also. India meets more than 80% of its requirement by importing process. Studies have conducted to analyze the impact of rise in crude oil price to the economic growth in the OPEC (Organization of Petroleum Exporting Countries) countries. Any decision taken by OPEC nations for increasing or decreasing production of crude oil impacts the price level of crude oil in international commodity markets. Therefore. global community have witnessed many events which in turns have volatility effects on the price level of crude oil. which in turns negatively affects other trading practices that are directly or indirectly depends on it. The stock exchanges of every country keep a close eye on any up and downward movement of the crude oil price. Crude Oil has been traded in throughout the world and there prices are behaving like any other commodity as swinging more during shortage and excessiveness In the short term. any upward and downward motions of prices are closely tracked in the domestic marketplace. Like hurricane katrina and other type of tropical cyclone have hit the major portion of globe. This gives rise to speculation on price expectations and sale chances in case any unexpected thing cracks during supply and demand equations. Any massive increase or decrease in crude oil has its impact on the condition of stock markets in throughout the world. which are summarized as below • Production: The OPEC nations are the major producer of world's crude oil. oil producers and consumers get stock their crude oil for their future requirements. • Natural Causes: In prevent years. . Any upward or downward movement in inventory level shoots up volatility in price index of crude oil. status of financial markets. India fulfills its major crude oil requirements by importing it from oil producing nations. whereas from medium tolong run it is influenced by the fundamentals of demand and supply whichthus results into self price correction mechanism The crude oil prices have been buffeted by many factors. price of crude oil is influenced by many factors like socioand political events.
stocks down. Here is what the authors found as to U. insurance. real estate. For the last few years it has been seen time and again that increase in the price of the crude oil had a direct impact on the stock market. banks.28 110. Month Jan 2008 Feb 2008 Mar 2008 Apr 2008 May 2008 Jun 2008 Jul 2008 Aug 2008 Sep 2008 Oct 2008 Nov 2008 Crude Price (US $ / Barrel) 91. life assurance. fuel cost. Third most negatively influenced: Financials.92 94. and transport. So you can expect oil to be the primary force driving the stock markets until further notice.• Demand & supply: With a sharp rise in economic demand. Cyclical Consumer Goods include household goods and textiles. leisure and hotels. however.06 72. Next most negatively influenced: Cyclical Consumer Goods. This is a one-way street. entertainment and media. All sectors are not affected equally. requirement of crude oil is increasing to manifold in context to the limited supply. and Indian Oil etc. it is quite natural that the profit margin of these companies will decrease. transportation cost of the companies. stock market returns do not drive crude oil prices. stocks up. sectors when oil prices rise: • • • Most negatively influenced: Cyclical Services. This uncertainty restricts the buyers to invest in these companies and as a result the price of the stocks falls that ultimately has a negative effect on the overall market scenario.44 123.90 113.S. Oil up.85 99. But the effects of oil prices are more subtle than that.94 133. support services. Increase in Oil prices will be positive for Oil Exploration Companies like Cairn India and Negative for Oil marketing companies like BPCL. Though it is hard to imagine but it is fact that a rise in the oil price has negative effect on the stock prices at the stock exchanges all over the world. The main reason behind this is the fear of the investors that the profit margin of the companies will decrease because of the increase in the oil price. the stock market tends to move in the opposite direction to oil prices.05 133. or at the same time. Oil down.84 53. Cyclical Services includes general retailers. Financials are investment companies. But this phase is temporary as the companies adjust in the price level to make up for the increased price in the oil and maintain the profit margin. As an increase in the oil price directly increases the operational cost.82 103.24 . In other words. automobiles and parts. HPCL. This is the reason that the buyers become susceptible about the future of the companies that are hugely dependent on oil. specialty and other finance.
EXAMPLE : BPCL Crude Oil price and BPCL Stock moves inversely to each other. As on july 2008 when crude oil price hiked till US $ 133.90 / Barrel the stock has hit a low of Rs. 211 in the year 2008 EXAMPLE : Cairn India Crude Oil price and Cairn India Stock has direct relationship. .
EXAMPLE : BPCL (Blue) vs Cairn India (Orange) EXCHANGE RATE .
If the demand for rupee is comparatively high. rate is around 7-8% experiences greater capital inflow as investors get better return than what they might get in US. the exchange rate of the two currencies would be $1 = Rs. services and currency would be higher than that for Zimbabwe’s. This results into rupee appreciation. we have a Managed Floating Exchange Rate System. rupee appreciates. This means that the Indian government intervenes only if the exchange rate seems to go out of hand by increasing or reducing the money supply as the situation demands. The fixed exchange rate doesn’t fluctuate because of government intervention. 45 = $1 10 months later. When rupee is said to be appreciating it means that our currency is gaining strength and its value is increasing with respect to dollar. The floating exchange rate on the other hand keeps on changing continuously just likes the stock market. • • . the exchange rate is Rs. when rupee depreciates it means our currency is getting weaker & its value is falling with respect to dollar. 11% and you end up paying more for a dollar. Export-Import: If a country is exporting more than its imports from other countries. it depreciates. causing appreciation of that currency against others. Rupee’s appreciation or depreciation against the dollar depends on the change in demand and supply for both the currencies. either of the following two cases can happen Case1: The exchange rate is say Rs. 46. Factors which drive the demand for a currency are: • Interest Rate: A demand for a currency is hugely dependent on the interest rate differential between two countries. However. 50 = $1. then this would mean higher demand for that currency. For instance if India’s inflation rate is lower than that of Zimbabwe then the demand for our goods. There are two types of exchange rate: Fixed and Floating. In India. if low. (With interest rates of 2-3%).Exchange rate means how much one currency is worth in terms of another currency. This means rupee has appreciated or gotten stronger by approx. 46. 11% and you would be paying less to for a dollar Case2: The exchange rate is at Rs. A country like India where int. Example: Suppose. This means rupee has depreciated or gotten weaker by approx. Inflation Rate: The demand for a country’s goods & services by the foreign buyers would be more if the inflation rate is lower in that country compared to other countries. Higher demand for goods & services would mean higher demand for that currency resulting in the appreciation of that currency. Thus the government intervention is almost negligible. 40 = $1. If we can buy $ 1 with Rs. Some countries have fixed exchange rate systems while some have floating. currently.
In a manage floating exchange rate system like India the government purchases rupee in exchange for the foreign currency to increase money supply in the economy which leads to depreciation of the home currency. Drugs & Pharma and Engineering Goods which have import inputs of as much as 77%. Suppose. So. 40 (Rupee appreciation) If the investor sells his investment and converts the currency. So. a continuously appreciating rupee would lead to greater investment by the FIIs. . he would earn $ 50. Rupee appreciation against US dollar is an indication of the strengthening of Indian economy with respect to US economy. the amount invested is $200. Though trading in Forex market causes fluctuations in the exchange rate. Impact on industry/companies Appreciation of the rupee makes imports cheaper and exports expensive. 50. he’ll earn profit if rupee appreciates and make a loss if it depreciates. in the Indian stock market and at an exchange rate of $1 = Rs. Conversely. 19% and 21% respectively would stand to gain the most if rupee appreciates.000. interest rate differential and the inflation rate existing in different countries. So.• Trading in currencies in the Forex market: The exchange rate fluctuates minute by minute because of speculative trading in the Forex market.000 as a profit thanks to a change in the exchange rate i. even if the value of investment doesn’t appreciate the foreign investor can earn a profit if the exchange rate has changed to $1 = Rs. They would have to pay less for the imported raw materials which would increase their profit margins. after 1 year. According to reports by Associated Chambers of Commerce and Industry of India (ASSOCHAM) sectors like Petro & Petro Products. it can spell good news for companies who rely on import of goods like heavy machinery.e. Example: Suppose an FII Invests Re. Impact on foreign investors: If a foreign investor invests in Indian stock market and even if its value doesn’t change in 1 year. he would get $ 250. technology. microchips etc. over a period the change is backed by the fundamental factors like the growth potential in the economy. rupee appreciation So. it purchases foreign currency in exchange for rupee to reduce the money supply in the economy leading to appreciation of the home currency.000. 1 Cr. Impact of rupee appreciation/ Depreciation Impact on economy: Exchange rate fluctuation has a significant impact on the overall economy of a country.
The foreign tourist would find it cheaper to come to India thus increasing the business of hotel. Textiles. a depreciating rupee makes exports cheaper and imports expensive.2%. from Rs. increased by 34. the fluctuation in the exchange rate can bring a considerable difference in the performance of a company. it is welcome news for sectors like IT. Hotel & Tourism etc.06 to Rs. The contracts with US clients are usually quoted in dollars term. for more than 70% of its revenue.Similarly. So.1% to $ 3912 million but because of rupee appreciation of 11. Example: Infosys results between 2007 and 2008 to understand the impact that the fluctuation in exchange rate can have on the performance of a company. 45. in rupee terms. its income increased only by 19%. Indian IT sector is dependent on foreign clients. 40. Rupee depreciation makes Indian goods & services cheaper for the foreign buyers thus leading to increase in demand and higher revenue generation. tours & travel companies. When an IT company gets a project from a client it pre-decides on the length of the contract and the cost of the project. especially US. So. which generates revenue mainly from exporting their products or services. “Every 1% movement in the Rupee against the US Dollar has an impact of approximately 50 basis points on operating margins” – Infosys Annual Report . The income of Infosys. in 2008.
It undertakes various measures like hedging exchange risks using forward and future contracts. 2870 within a month . In India. Looking at the direction of the funds flow from these investors. Institutional investors comprise both foreign institutional investors and the domestic institutions like (mutual funds. The role of these investors especially FIIs (also known as foreign portfolio investors) in Indian stock market has been a matter of debate. it has helped IT companies like Infosys from Rs. companies. Fluctuating exchange rate has a significant impact on the economy.However the IT sector does not just sit idle and let exchange rate play the spoil sport. An important feature of the development of stock market in India in the last 15 years has been the growing participation of Institutional Investors. 2660 to Rs. This helps them in mitigating some of the loss due to exchange rate fluctuation but none the less the impact is substantial. industries. EXAMPLE : INFOSYS Also on 15th dec 2011 when Re/Dollar has touched a high of 54. we can explain the market movement. insurance companies etc). these institutional investors manage large amount of funds which constitutes a significant share of the entire market capitalization. Textiles etc. foreign investors etc. Rupee appreciation is beneficial for industries which rely heavily on imported inputs while depreciation of rupee is good news for industries which are exporting majority of their production. Exchange rate is thus an important tool that can be used to analyze many key industries like IT. FII investments seem to have influenced the Indian stock market to a considerable extent.
India’s largest automobile manufacturer. but with workers and unions across states voicing support. was a wake-up call for the Indian corporate sector.000 vehicles annually but this was increased to 300. . For instance: Labour Strike at Maruti Suzuki India Ltd Manesar plant in Punjab Maruti Suzuki India Limited A partial subsidiary of Suzuki Motor Corporation of Japan.4 km2). is India's largest -passenger car company. SX4. when mass labour became important in factories and mines.000 vehicles annually. in the 'C' segment Maruti Eeco and Sports Utility vehicle Grand Vitara.STRIKES What are strikes? Strike action. accounting for over 45% of the domestic car market. The Manesar Plant produces the A-star. is a work stoppage caused by the mass refusal of employees to work. Swift DZire and SX4. WagonR. In most countries. Strikes became important during the industrial revolution.000 vehicles taking total production capacity to 550. Not only did it illustrate the unity among the company’s workers. The production capacity was further increased by 250.000 vehicles annually in October 2008. Situation: "In many ways. Initially it had a production capacity of 100. Estillo and sedans DZire. it threatened to flare up into a wider industrial dispute. on strike or simply strike. they were quickly made illegal. A strike usually takes place in response to employee grievances. It is largely credited for having brought in an automobile revolution to India Manesar Manufacturing Facility The Manesar Manufacturing Plant was inaugurated in February 2007 and is spread over 600 acres (2. Strikes are sometimes used to put pressure on governments to change policies. the 13-day strike at Maruti Suzuki India Ltd. as factory owners had far more political power than workers. giving strong signals of a resurgence of trade union activity in the country . to hatchback Ritz.Swift. Swift. The company offers a complete range of cars from entry level Maruti 800 and Alto. A-star. It was the first company in India to mass-produce and sell more than a million cars. also called Labour strike.
Sometimes companies come out with . “Managements do not want to have unions. Labour leaders contend the lack of union activity in the industrial sector is because of large-scale suppression of labour rights and union voices. RIGHTS & PUBLIC ISSUES RIGHTS ISSUE Rights issues are the shares issued by a company only to its existing shareholders which will be cheaper than the current market price of that company share.000 employees of Maruti’s Manesar plant in Haryana striking work on June 3. They want to make the unions subservient to their interests and compel the workers to be part of a union controlled by them. Stock Prices were showing a decreasing trend.” Although the strike at Maruti has been called off and the matter resolved for the time being. The plant workers wanted to register a new union—the Maruti Suzuki Employees Union (MSEU)—and had already applied for registration.It wasn’t a wage hike or improvement in working conditions but the right to form a union— something of a rarity in the new industrial ecosystem in India—which saw 3. During this period there were price fluctuations in Maruti Suzuki stock prices. something the management was opposed to. there are hushed discussions across companies on the way managements handle workers and trade union issues.
“The largest rights issue in the year was from Central Bank of India. the price will go up because investors now want to buy the shares so that they can benefit from the rights issue. Example .15 at Rs 171.80 and an intraday low of Rs 140. down Rs 25.a batch of new shares and may choose not go to the public (like IPO). Though the near term upside looks limited because of dilution of equity we are positive on its long term prospects. Rights Issue of Rs 2. only 24 companies used the rights route to mobilise resources as against 29 companies in 2009-10. Company may just approach only the existing shareholders (those who own the shares of that company). In other words. the company may offer the rights issue shares for Rs 180. FY12 to see more action.594 crore. It was trading with volumes of 495. On 17/03/2011 Central Bank goes to ex rights at 3:5. For instance: Before: Central Bank of India to raise Rs 2. These shares are called a rights issue. Rights issues were floated by State Bank of Bikaner and Jaipur for Rs780 crore. stock dips Central Bank of India touched an intraday high of Rs 153.30. Will the share prices go up? Normally. according to a primary capital market study done by a Delhi-based research house Prime Database.90. Right issue will need one to buy the shares. only the existing shareholders have a right to buy these shares . The amount raised by Indian companies during 2010-11 through rights issues increased 15% year-on-year to Rs 9. A Bonus share is offered free of cost like a gift(bonus).500 Cr to improve CAR significantly: Under Basel I and Basel II the bank CAR stands at 10% and 11% respectively. Rights Issues are not Free These shares do not come free like bonus shares.136 shares.13% on the NSE.” said Prithvi Haldea.500 Cr through rights issue which will boost the CAR of the bank substantially which will result in expansion of the business. In the previous trading session. State Bank of Mysore crore.20 Rights Issue: FY11 sees momentum. the share closed up 7. which raised Rs 2. We believe this will be a game changer for the bank.” for Rs 583 . At 09:21 hrs the share was quoting at Rs 145. CMD. Prime Database.64% or Rs 12.498 crore. So if you are an existing shareholder. However. nearly 50% of the mobilization was done by the banks. or 15. you get more shares at a cheaper rate than the market. If the rights issue gets fully subscribed the CAR will swell to 15% which will help the bank in expansion of business. Karur Vysya for Rs 458 crore and Karnataka Bank for Rs 457 crore. “Significantly.If the market price of the share is Rs 200.
The general perception about the foreign portfolio investments is that. After Central Bank of India rights issue opens 24/03/2011.179 ).587 shares. The company's rights issue has opened today. However.19% or Rs 1.245) and EIH(1.The other Rs 1000 crore plus issues were fromSuzlon Energy (1.30. reports CNBC-TV18 .97%.622 crore. In order to attract portfolio investments. the share closed down 1.65. At 09:46 hrs the share was quoting at Rs 134.308). stock up Central Bank of India touched an intraday high of Rs 135.35 FIIs Attracting foreign capital appears to be the main reason for opening up of the stock markets for FIIs.30. It was trading with volumes of 67. the amount still falls short of Rs 12. not only do they expand the .40 and an intraday low of Rs 129. it has been advocated to develop stock markets. up Rs 1. The manufacturing and services sector preferred increasingly to use the QIP and the preferential issues route. It is going to issue 3 rights share for every 5 held at Rs 103.60 at Rs 133. raised in 2008-09 and is much lower than Rs 32. or 0. REI Agro (1.519 crore that was mobilized in 2007-08 . In the previous trading session.
The company’s businesses include Document Management Services (DMS). .32. These investors incur heavy losses due to the sudden fall. 2008 onwards due to heavy selling by FIIs. The effect of FIIs fund movement on stock prices can be seen through the analysis of historical price and shareholding pattern of Vakrangee Software. a movement of funds can be seen by these FIIs. The fall of stock price started from September. Individual investors who jumped into the fray when market was rising feel the pinch most when these FIIs sell off their holdings. but they can also stabilize the market through investor diversification. Whenever there is a change in the expected return scenario (due to political situation. 2008. Impact on Share price Price discovery of stocks are results of the interaction between supply-demand forces. The stocks also take severe beatings as these stocks takes a long time to recover due to loss of confidence. their sudden movements of funds have been responsible for some of the biggest stock market crash in the history. a domestic mid-cap IT Company. Heavy buy and selling of stocks create a demand-supply gap situation for that particular stock and which ultimately result in the fall or rise in the price. restrictions etc) or availability of a better investment opportunity. 19 due to heavy sell off by FIIs. Printing Management Services (PMS) and IT & IT Enabled Services (ITes). Investment by FIIs is heavily dependent on the expected return. This is what happened when FIIs come into play. The sudden fall in stock price can be seen in historical price chart (between 23/07/08 to 20/04/09). Their stake in company has come down to zero in Dec. Example: The Company Vakrangee Software Vakrangee Software’s Ltd is a domestic IT company. This comes through heavy selling of the stock holdings in their portfolio. it is true that FIIs do help in formation of an efficient market. And due to this heavy selling massive falls in stock prices take place. Buying equities in huge chunks leads to a steep rise in the prices and heavy selling leads to a massive fall in the prices.291 to Rs. The company’s stock price has fallen from all time high of Rs.demand base of the stock market. General perception about FIIs that they bring good money and also their entry symbolizes a mature market. despite the companies’ good financial performance. Though. The company has a good business model and expected to grow with a rapid growth rate in future. The stock of the company is currently trading at Rs.
the company is available at a deep discount and with almost no risk. Conclusion By the analysis of Vakrangee Software. Currently. Here the result of this analysis also applies to the whole market. RECALLS & WINNING OR LOSING A CASE OF SUIT . Before September quarter. we can conclude that the companies in which FIIs have very large stake are more prone to have stock price crash than the companies in which FIIs has no or very low stake. FIIs had a major share (18%) in the company. Here no risk implies zero FIIs’ stake in the company. investors should always do some research and try to find out whether FIIs are dumping the stocks.These Pie-Charts explain the change in the share holding pattern of the company in last two quarters. A very large amount of fund under FIIs management without any restrictions on their movements can destabilize the market. FIIs share came down to zero due to their sudden exit which led to a massive fall in stock price. Their share was almost equals to the promoters share. In December quarter. Before investing in such companies.
such as an automobile manufacturer or a tire company.What is Recall? A recall occurs when a company issues a warning that a product is defective and must be returned. In the recovery period. a recall is always associated with a negative opinion of the company. For instance. This can actually cause a stock boost in the long term. companies will fix the problem or replace the product with a new version that does not have the same problems. investors will see that the company is responsible and knows how to take care of its mistakes. If one of the small manufacturers issues a recall on a product. Typically. although exact reactions vary. either positively or negatively depending on each company's reaction. Other businesses may take note of the issue and take steps to change it themselves. as occurred with Toyota in 2010. as long as no other recalls follow. If the recovery period is handled well. Recalls are common if the product's problem may be dangerous. The business admits that it made a product incorrectly. Recalls also have far-reaching effects on the stock of the company. Industry Changes b. 3. Negative Opinions First. . Sometimes products are changed to specifically treat the defect. However. which can impact stock throughout the industry. Association Not all recalls affect stock. then recalls can lower stock price as investors back away. a large company may own many different smaller manufacturers that produce goods for its shopping center. 1. which must spend time and funds making the problem right. Altogether. There is a period during a recall when the company has a chance to recover. since investors do not link the recall with the quality of the visible parent. the stock of the parent company may not suffer. the effects of a recall tend to lower stock price if they make any noticeable change to the market. One recall may also lead to others. and represent an enormous cost for the business. Recovery a. This leads to the reorganization of funds. Recalls. and investors know that the recall itself will cost the business money that could have been spent in project investment. especially in complex manufacturing fields. if a company is closely associated with the quality of its product. the company issues releases explaining what it will do to correct the problem and how it will treat the issue in future products. can lead to changes throughout the industry. Government regulation might solve the defect but require companies to meet new standards. The correlation appears to be in how investors view the company making the recall.
In trading on the Tokyo Stock Exchange. 2010 in Los Angeles federal court for failing to disclose to investors that there was a major design defect in the automaker's acceleration systems. which could cause unintended acceleration. 2. 3. The company or government issues a press release stating what products are affected. 21. alleges .1 billion) of the company's market capitalization there . Toyota's total U. and what consumers need to do next. Toyota shares also have lost nearly 17 percent of their value since Jan. filed in U. market capitalization has fallen 13 percent to $135. Toyota Motor Corp. millions of Toyotas were recalled for faulty accelerators. 19. That's wiped out about 2.78 per share on Jan. was sued on 8th Feb. why they are being recalled. sales for January 2010 had dropped by 16 percent from a year ago due to the recall and subsequent sales suspension of its most popular models. after the market closed." the lawsuit contends . The company tries to mend its reputation through public relations efforts. For instance: Toyota Corp. Although Toyota has since fixed the problem. filed by the firm Coughlin Stoia. The suit alleges that Toyota issued "materially false and misleading statements" regarding its operations and its business and financial results and outlook when the company knew it had a design problem. its reputation was damaged in the process. As a result of defendants' false statements. Toyota announced it would recall 2. or future discounts on the product. Toyota's securities traded at artificially inflated prices -reaching a high of $91. in late January.3 million vehicles in North America because of problems with the accelerator pedal sticking. "Defendants misled investors by failing to disclose that there was a major design defect in Toyota's acceleration system." the lawsuit. is a prominent example of how a recall can affect a company’s reputation.87 billion. accuses Toyota. In 20092010.27 trillion yen ($25. refunds. 2.A corporate recall is done in several steps: 1. On Jan. .S.S. Toyota reported that its U. On Feb.S. certain of its affiliates and certain of their officers and directors with violations of the Securities Exchange Act of 1934 . The proposed class action complaint. The company offers free repairs. District Court in downtown Los Angeles by a San Diego law firm on behalf of all purchasers of Toyota publicly traded securities. 21.
according to the complaint. Toyota's (stock price) fell $4.Toyota's North American sales offices are located in Torrance.Then. on Feb. IMPACT OF ANY ECONOMY US RECESSION WHAT IS RECESSION A recession is a decline in a country's gross domestic product (GDP) growth for two or more consecutive quarters of a year. before the market opened. . A recession is also preceded by several quarters of slowing down. Toyota's common stock also dropped approximately 6 percent. Toyota announced that it had received reports of brake problems in its 2010 model year Prius hybrid. As a result of this news. Most people foolishly borrowed money that they can't pay back to buy houses because of the housing market boom.69 per share. 3.49 per share on Feb. 3. CRISIS IN US The cause of this Recession and possible depression is the Subprime mortgage crisis and also the credit crisis.2010 on high volume. closing at $73. Subprime mortgage crisis happened few years ago when banks loan money to people for low interest rates for a set amount of time (usually 5 years) and when that 5 years is over the interest rates is raised.
recession was reflected on all markets around the globe. Japan’s Nikkei 225 was down by 3. On the other hand. people can't pay. the effect may not be as drastic as would have been the case in the 1980s. BSE IT . on march 13 2008 domestic Bombay Stock Exchange benchmark index (Sensex) fell sharply by 770. Thus. including Asian markets. Hindalco and Reliance Energy which lost in the range of 79 per cent followed DLF closely. people can't pay back loans which cause many investment banks to fail.63 points or 4. ICICI Bank and Reliance Industries also figured among the prominent losers.35. IMPACT ON INDIAN STOCK MARKET The United States accounts for one-fourth of the world GDP and any significant slowdown is bound to have reverberations elsewhere. Nasdaq Composite and S&P 500 are also showing strong downward trends.The impact of U. a lot of people are in the same position.S. They were down in the range of 4-6 per cent. NYSE Composite. Reliance Communications. Among U.S.33 per cent. The IT Enabled Services sector may be hit since a majority of Indian IT firms derive 75% or more of their revenues from the United States--a classic case of having put all eggs in one basket. interdependencies between the US economy and emerging economies like India and China has reduced considerably over the last two decades. Therefore there is a overload of houses on the market which caused the prices of houses to go down. Tata Steel. Other heavyweights such as L&T.With the prices of houses going down. stock indices.78 per cent to 15357. Many foreign investors also had a lot of money on these companies such as Lehman brothers which is why other countries are affected as well. they sell houses. Banking and IT sector are mostly affected.The result: Interest rates go up.
and all bankruptcy cases .BANKRUPTCY OF A COMPANY LEHMAN BROTHERS MEANING OF BANKCRUPTCY Bankruptcy is a legal proceeding in which people who cannot pay their bills can get a fresh financial start. The right to file for bankruptcy is provided by federal law.
Banking sector got affected more. Reality sector more. IVRCL Infra.. they had about $60 billion in toxic bad debts. ABOUT LEHMAN BROTHERS Lehman was the fourth largest investment bank in the USA (behind Goldman Sachs. Filing bankruptcy immediately stops all of your creditors from seeking to collect debts from you. which ultimately lead them to file for bankruptcy. private equity. AIG and many other banks. IMPACT ON INDIA While the collapse of the US-based Lehman Brothers may not have a direct impact on Indian banks. So. making it the largest investment bank to collapse since the 1990’s linked to the sub-prime mortgage market. 2008 has been proclaimed Wall Street’s worst day in seven years. and had assets of $639 billion against debts of $613 billion. some of them may face marginal losses due to their exposures to the US investment bank. doing business in investment banking. September 15. Morgan Stanley. which is the steepest fall since the day after the September 11th attacks. Spice Mobile. more than 4%. Treasury securities). at least until your debts are sorted out according to the law. who backed a majority of credit default swaps by Lehman Brothers. equity and fixed-income sales and trading (especially U. investment management. and Merrill Lynch). They lost $14 billion in the past 18 months after being forced to take huge write downs on the value of those investments. When Lehman Brothers collapsed. firms and individuals felt the pain. Bankruptcy of Lehman Brothers affected Indian IT. research. .are handled in federal court. and private banking.S. REASON AND EFFECT OF BANKRUPTCY Lehman Brothers were considered one of Wall Street’s biggest dealers in fixed-interest trading and were heavily invested in securities linked to the sub-prime mortgage market. Lehman has investments in Indian companies such as Spice Communications. when Lehman collapsed. One of the largest companies affected were AIG. The Dow Jones Industrial average lost more than 500 points. Edelweiss Cap.
but other Indian Banks have also been affected by the Lehman Brother Bankruptcy due to MTM losses or Mark to market losses. and suddenly in the month of September and October it started declining because of bankruptcy of Lehman brothers.Development Credit Bank. Not only the ICICI bank. On 15th Sept The Bombay Stock Exchange (BSE) benchmark Sensex fell by 772. Also BSE BANKEX is also showing downward trend in the month of September and October.375 Crore as ICICI Bank UK Plc holds 57 million euro of senior bonds of Lehman Brothers Inc. BSE BANKEX AND ICICI BANK The ICICI bank was trading at around 700 in the month of August.000-mark by falling 242. ICICI Bank lost around Rs. .40 points. As per the reports. Golden Tobacco and Emkay Global. Several IT companies that had got major outsourcing deal from Lehman.62 points and the Nifty of the National Stock Exchange also dipped below 4. Champagne Indage. The Indian banking sector has incurred Rs 4 billion mark-to-market losses due to their investment in instruments of bankrupt Lehman Brothers and AIG.
BSE BANKEX ICICI BANK .
86 8. people try to invest all their money in that particular stock or market.35 324.5 13.26 14. Bharati Shipyard OnMobile Global DLF BGR Energy Sys.5 196.45 4.COMPANY SPECIFIC NEWS AFFECTING COMPANY Sometimes stock prices of the particular company also get affected if that particular company has announced some important news.29 News / Events affecting change in change in stock price Rallies on settlement hopes Preferential issue to promoters at price of Rs 139 per warrant Board to consider buyback on September 3 IDFC mulling acquisition of DLF's stake in Noida IT park Bagged Rs 444-cr order from NPCIL Plans to open four new hospitals by 2013 To shut Mathura plant.73 -0.15 Price Rs 20. Company name Closing price Man Inds.89 0.5 306.32 6. Fortis Health.8 11.55 263.15 1. When there is positive news about a particular stock or company. So it is very important to know the overall news Following are some of the news which are announced recently.42 3. IOCL ONGC 146. Koyali units in Sept FPO may hit in second half of September Man Industries Man industries are a leading manufacturer and exporter of large diameter Carbon Steel Line Pipes for various high pressure transmission applications for Gas. If the news is good then stock prices may increase and viceversa.1 -2. Crude Oil.8 Price % 16. and that has affected stock prices of that company (30th August 2011). Petrochemical Products and . But there are many circumstances where news could also bring a negative effect where it could ruin the prospect of the particular stock.95 62.55 103. This leads to increase in the interest of buying the stock.3 152.85 12.45 -11.79 -4.
. EFFECT OF DIVIDEND Distribution of dividend does not come for free. Earlier in May 2011. C. C. misused powers and violated corporate governance practices. if Wal-Mart Stores Inc. Rameshchandra Mansukhani and Jhamaklal Mirchumal Mansukhani. Mansukhani had moved the Company Law Board (CLB) following his suspension by the company. First. 126. an act which scaled up the equity stake of the promoters beyond 55%. who is managing director and vice-chairman of Man Industries. a transaction allegedly routed through his friend and relatives. because. But recently Man Indus has rallied 16% at Rs 147 on hopes of an amicable settlement between the promoter siblings. J.10. This can happen because they are investors who want to receive the dividends but have no plan to hold the stock any further. the share price drops in the same value as the dividend paid after the ex-date. Meanwhile. he was alleged to have bought 1 lakh shares from the market on 17 June and 18 June 2010 without informing the company. The second charge was that he bought a further 2. And because of this The stock had fallen as much as 4. Mansukhani as the managing director of the company with effect from May 19 due to alleged fraudulent practices. For instance.14% at the day's low of Rs.3% stake on 24 September 2010. after the company received substantial orders from foreign clients The board of directors of the company had withdrawn the powers of management exercisable by J. Group chairman RC Mansukhani had alleged that his younger brother JC Mansukhani.Potable Water. The Company has state-of-the-art manufacturing facilities for LSAW & HSAW Line Pipes and also for various types of Anti-Corrosion Coating Systems.
00. its share price will generally drops from $49 to $48 per share after the ex-date.65 and closed at 334.so the prices declined after dividend. THE PERFORMANCE OF SECTOR The performance of the sector or industry that the company is in also plays in part in determining the stock price of the company.on 7 th July it opened at 330 Rs and On 8th July prices opened at 333. Most of the times.decided to distribute $1 per share as dividend to its shareholders. the stock price of the companies in the same .50 per share on 8th July 2011. Best dividend paying stock of 2011 • • • • • • • • Hero Honda India bulls Sec HCL Info GE Shipping etc TCS Indian oil corporation State bank of India Infosys HINDUSTAN UNILEVER Hindustan Unilever declared final dividend of 3. and on 11th July it opened at 332.
95 points as heavy-weight Reliance Industries and state-run oil companies stocks rallied. • • BSE METAL BSE POWER Some of the sectors which perform well are • • BSE FMCG BSE CONSUMER DURABLES BSE OIL AND GAS Performance of particular sector also affects the company. Sometimes.936. But in July and August prices also started declining because inflation is still not in control and diesel and kerosene prices have not yet been raised which adds to the subsidy burden.93 points. following a decline in crude oil prices in global market was the major factor behind run-up in oil sector stocks.(March 13 2011). and is in a bear market. there are exceptions to this.24%. which has broken sharply below a downwardsloping channel. . at 9. Easing pressure on the state-run oil companies. the stock price of a company will benefit from a piece of bad news in its competitor if the companies are competing for the same target market. The BSE oil and gas index emerged as the best performer among sectorial indices by rising 217.The question mark about the growth in the US and Eurozone economies have worsened the outlook of the BSE IT index. And Reliance may face investigation for inflating costs of the KG-D6 basin exploration to avoid paying taxes and sharing profits with the government Reliance industries got majorly affected. This is because market conditions will generally affects the companies in the same industry the same way.industry will move in tandem with each other. Of course. or 2. Some of the sectors which did not perform well in 2011 are • BSE IT.
. clothing and shelter).BSE OIL INDEX Reliance Industries INFLATION Economists define inflation as a rise in the general level of prices of goods and services in an economy over a period of time. For a layman it means a rise in prices of commodities of daily use and subsistence (food.
pulses. Inflation can be attributed to one of the following reasons: • Inflation via higher demand – It is the case of more money chasing few goods. In a developing country like India. To control inflation the RBI tries to lower demand by taking out the excess money supply from the economy. Real estate prices which have gone up due to the high demand over the years. inflation leads to higher cost of production which affects the profit margins to a certain extent. It increases various rates which eventually makes borrowing money expensive. So. you save your money so that you can use it at some future date. Thus lower supply in the economy leads to higher prices. They might even delay any investment activity (to be funded by borrowing) to a later period when the interest rates are lower to reduce their investment costs. Also. the real return on fixed income securities like bonds and fixed deposits decreases. Now.Every now and then we hear that poor monsoons have lead to lower harvests of food grains.g. E. The tool with which they control inflation is by controlling the interest rates in the economy.However. inflation reflects erosion in the purchasing power of money. when the general price level rises. For businesses.5%. Even if the demand is the same the prices may continue to rise due to lower supply. . (Real return = Rate of return from investments – Inflation rate). Thus. This leads to lesser borrowing by the people leading to lesser spending. also it can be better managed by the policy makers. The high demand is usually caused due to an increase in consumer & government spending. If the return on your savings goes down then you would be left with less cash to spend in future. inflation via higher demand is usually a favourable situation for the economy because it is instrumental in continuing the growth process. Even for business the cost of borrowing goes up which has an impact on their profit margins. a bond which pays say 7. The Government and the central bank of the country – RBI – is very wary about the inflation rate and is ready to jump in whenever it starts getting out of control. vegetables etc. the real return falls more. If the inflation increases further. This form of inflation is particularly detrimental for a growing economy like India and it is relatively difficult to manage. each unit of currency buys fewer goods and services.5% interest rate actually gives a real return of just 1% if the inflation is 6. • Inflation via lower Supply. This means that the demand for the goods is high which leads to higher prices of these goods. during the periods of high inflation.
the RBI takes action by lowering interest rate to boost domestic investment but this also leads to lower net inflows. Lower earnings by companies can make them less attractive for investors and hence the stock price may fall. But when there is dip in inflation rates we don’t go running for wage cuts!! Generally.e. it is not so easy to reduce the wage rates in an economy. Moderate inflation is necessary to act as a lubricant for the wheels of economy. At this point. For businesses higher inflation means that raw materials become expensive which leads to higher costs of production. How did this happen? The reason for this was the Net inflows brought by the FIIs and the FDIs.Very low inflation rates are also not good especially for a growing economy like India because it can happen due to a) Lower Demand and/or b) Oversupply Both these situations are detrimental to the growth process of the economy and hence not desirable. moderate inflation rate (usually 4%-6% for a developing economy like India). it leads to higher unemployment in the economy. i. It signifies healthy demand in the economy and also avoids RBI intervention which affects consumer and investment spending. Stock prices have risen considerably even while inflation was high and rising. Also. however invariably they have to absorb a fraction themselves. Thus. So. We have seen the crash of 2008-09 and also the recovery thereafter. The companies usually pass on a fraction of the price rise to its final consumers. Generally stock markets and inflation are believed to be inversely related. . While seeking for a wage hike from our bosses we usually quote high inflation rates as one of the reason’s. the company usually resorts to reduction in workforce. Thus in high inflationary periods the P/E ratio should be ideally lower and similarly at lower inflation rates P/E ratios would be higher. The investors will find better returns only when the P/E ratios are relatively lower. The preferred solution therefore is a middle path. Thus zero or very low inflation is not conducive for the growth process. On a macro level. during a high inflation period investors are looking for better rate of return on their investments in order to maintain or improve the purchasing power of their income. it adversely affects the earnings of the companies.
In other sectors the companies which are in expansion mode and need capital are going to suffer with credit availability becoming difficult. an investor must always look towards the trend of macro-economic indicator like inflation which affects the whole economy and hence the stock market SECTORAL IMPACT OF INFLATION These hikes are a clear signal for banks to increase their lending rates. autos. it is the X-Ray report of how the economy is performing. and loans for housing. while investing in stock market. So. real estate. GDP is the most crucial economic indicator which tells us about the health of our . in a growing economy like India.Thus. Most rate sensitive sectors in the stock market are banking. GDP GDP (Gross Domestic Product) is the sum total of value of all the goods and services produced in an economy during a given year. These suffer because loans become more expensive with higher EMI’s. even at double digit inflation rates investors might find it worthwhile investing in the stock market. In short. Bank stocks suffer the most a lending and borrowing becomes dearer. cars and personal purpose will be dearer.
CALCULATION OF GDP Usually in most countries GDP is computed via the expenditure method. change in stocks and net exports. contributes a large share to the GDP in India. construction etc. finance. Industry & Services. In the expenditure method GDP is calculated as the sum total of private consumption (C). . Similarly growth in Industry and its sub segments like manufacturing. The service sector which includes sub segments like transport. electricity etc are crucial for the growth of the GDP. government expenditure (G). Under this. communication. the GDP is taken as the total value of goods produced by three major sectors: Agriculture and allied activities.economy. the effectiveness of the steps and decisions they have undertaken. insurance. Another way of looking at GDP is by classifying it under sectoral contribution. The expenditure approach is based on the logic that all what is produced must be bought by somebody. gross investment(I) made in the country. mining. It can help companies decide on what strategies they should adopt as also indicate to the policy makers.
offices etc. India has seen higher employment opportunity for the people which have led to an increase in their disposable income. the impact of increasing and higher GDP growth rate. companies have seen a surge in their profits leading to a rise in their stock prices. Now a booming economy with consistent high GDP growth rates is what attracts foreign investment in the form of FDIs and FIIs. factories. India has also experienced one of the highest Net FII inflows in the world which has led to stock market surging from 6000 level in early 2000 to present level of 20000. With higher demand in place. WHAT SHOULD YOU LOOK AT IN THE GDP REPORT • Where is the consumer spending headed? The consumer spending or Pvt. You can see from the above diag. To cater to the increasing demand. With a growing economy. Consumption expenditure makes up 60% of the total GDP (expenditure side).IMPACT ON THE ECONOMY AND THE STOCK MARKET GDP has a massive impact on almost all the economic factors in a country. With one of the highest GDP growth rates over the last few years. This adds to the future expectation of revenue growth of the companies which if sustained can lead to further increase in the stock prices. Even a small change in GDP can have far reaching affects on the economy. You can also find out beforehand where the demand situation in the economy is headed by looking at a) Your own consumption pattern and the people around you b) changes in monthly auto sales . companies have also increased their investment activities adding new plants. Over the last 5-6 years the GDP of our country has been growing at a healthy rate of over 8% (average) annually.
15% to the GDP) is greatly affected by factors like rainfall.36%). investment etc which could prove beneficial in knowing which sectors or industry you should invest in.figures etc. fertilizer subsidy. It helps us to understand the general level of industrial activity in the economy. mining. manufacturing. In the monthly published bulletin on the official website of RBI you can check the IIP data and also the industry wise growth. services etc. it supports more than 50% of India’s population which forms a large chunk of the demand position in the economy. income. During the downturn the growth rate in investment came down from 12. Is the agriculture sector growing? The agriculture sector (contributing approx. quality of seeds. govt. • • • The GDP report can thus reveal all the facts about the economy.47%) . Also. Is the investment demand still strong? Long term growth of the economy is dependent on investment activities undertaken by both government and private sector. Mining & Quarrying (10. Lack of rain or untimely rain can lead to lower agricultural production which could lead to lower GDP growth.6% in Sep 2009. • Where is the IIP headed? IIP (Index of Industrial Production) is one of the leading indicators of the economy which is published by the government every month. banking etc the most. Lower consumption demand impacts sectors like real estate. If the interest rate is continuously increasing then you might witness a slowdown in investments. Unfavorable agriculture production can also have an indirect impact of pulling the overall demand in the economy down. auto. production. Investment demand has a 30% share in the GDP. Is the GDP growing on the backdrop of higher government spending? Government spending is essential for maintaining the socio-economic framework for the country. In 2008-09 when the economy was going through one of its worst phase. interest rate for marginal farmers etc. increased its spending by 56% in Dec 2008 so that the economy could revive and demand situation could pick up. The products included for calculation of IIP can be segregated into 3 major sectors – Manufacturing (79. IIP IIP (Index of Industrial Production) denotes the total production activity that happens in the country during a particular period as compared to a reference period. If the industrial production is rising then it is likely that the GDP numbers are going to be good. so the growth in GDP is sustainable when it is backed by growth in key sectors like infrastructure. Remember.5% in Sep 2008 to 1. govt. cannot continue high expenditure forever. saving.
Thus. ANALYSIS OF COMPOSITE INDUSTRIES . the negative sentiment leads to an adverse investment atmosphere for both institutional and retail investors. Another way of categorizing the items used in the calculation of IIP is a ‘Use based classification’ with categories like Basic Goods. Consumer durables and Non-consumer durables. Lower supply coupled with lower demand can have catastrophic impact on stock market and was one of the main reasons for drop in Sensex from 20000 to 8000 in 2008.and Electricity (10.17%). Thus. Capital goods. If we are not buying more then why would companies produce more!! This leads to lower growth or sometimes even de-growth in IIP. This has an adverse impact on future sales & profits of the companies. Intermediate goods. Negative sentiment about future demand further leads to reduction in investment activity & hence slows down the capital spending. Over the long term. Depleted consumer sentiment leads to a fall in consumer spending consequently leading to lower demand in the economy. lower IIP is bad news for the Stock Market as well as for the growth of the economy. Thus. usually the immediate impact of poor IIP figures is falling stock prices. RELATIONSHIP BETWEEN IIP AND STOCK MARKET The diagram given above shows how lower IIP – which usually results due to lower consumer spending – can lead to a drop in stock prices. continuous lower consumption leads to lower producer confidence.
For instance. However. A continuous increase in production can be a good indication of an improved performance by the major auto companies in the coming quarter. So.Monthly sales data would give you a good picture of where the industry is headed. WHAT SHOULD YOU LOOK AT IN THE IIP DATA In India IIP is released with a lag of 2 months. • Automobiles. So. • Chemical & Related Products. textiles. a slowdown can lead to an oversupply situation in the industry impacting their realizations and profits in the short run as well as the long run. Here are a few pointers to best utilize the knowledge of the IIP to profit in the Stock market. Manufacturing sector contributes approx. it is important to check whether the demand has been growing consistently or not. leather & paper was lower. Growth figures can tell us in advance about how mining companies (like MOIL. For example if the consumer non-durable goods segment has been growing remarkably in say past 5-6 months. • Cement Sector. check growth in user industries like Pharma. As mentioned before.Mining Sector contributes approx. there is also a ‘Use-based classification’ which can give you further insights about the growth in production of different sectors. The IIP does not include growth of banking sector. paper & leather. the chemical sector grew by 10% in April 2010 (annual growth in production) but the growth in user industry like textile. This would usually lead to FMCG companies posting impressive quarterly and annual performances.) are going to fare in coming quarters. . Thus it can be deduced that the growth is coming from Pharma sector which will likely be reflected in the next few quarters’ performance.The best way to analyze the IIP figure is to look at the various industries and their growth. 80% to the IIP that is why it has the most impact on stock market. SAIL etc.Growth in IIP is good news for the cement sector as it is hugely dependent on infrastructure & real estate for its demand. For instance the October 2010 IIP data is made available only in December 2010. the IIP data can give us much crucial information which can help us in our stock investments. Yet. 10% to the IIP. if industrial production & capital spending is increasing then it is likely to have a positive impact on the banking sector. • Mining Sector. Coal India). Also.Good growth in this sector means that companies producing chemicals are likely to perform well. steel companies like (Tata Steel. Usually the cement manufacturers ramp up their capacity during times of high demand. However increase in production & investment activity is usually financed through borrowings from banks.
. . lower IIP growth could impact the banking sector adversely.If good IIP data is backed by buoyant consumer demand then announcements like capacity expansion. This gives you the perfect opportunity to invest in fundamentally strong companies at discount price. . In more technical terms it is known as Private Final Consumption Expenditure (PFCE). by companies you are tracking indicate a good future flow of income and hence an upside to their stock prices.To give you an idea of how important consumer spending is. However.Check the industry wise growth.. we could actually bring down our economy!! Such is the power that we consumers have! . A sustained fall in growth in a specific industry could be a good time to exit that industry and allocate your funds in stocks of a better performing industry. CONSUMER SPENDING Consumer spending is the total expenditure that we as consumers make throughout the year. then banking sector is likely to experience good growth. if we all decided to reduce our spending.A continuous fall in overall IIP data may lead to many fundamentally strong stocks being undervalued.If growth in IIP is backed by higher investment activity and also lending by the banks. building of new factories etc.
This means looking at the consumer spending. Wonder how? It’s pretty simple. the effect of which shows in the corporate earnings in the next quarter. Thus. From the chart it is clear that the impact of a change in consumer spending happens on Net PAT of Sensex 30 companies with a lag of 1-2 quarter. But what drives the corporate earnings? Well a lot of things actually. we could get a pretty good idea in advance whether the economy is doing good or bad. One of the most important factors which drive the stock prices is the corporate earnings. one of the most crucial is consumer spending. But. consumer spending can help you know beforehand where the corporate earnings are headed!! Consumer spending does not get eroded by itself but it happens due to a certain chain of events. among these things. For instance in the 3rd quarter 2009-10 you can see consumer spending rising.Another reason why Consumer spending is important is because it is the leading indicator of the health of the economy. Take a look at the graph below to get a better idea. .
Predictably though. thus . Lower consumer spending leads to lower borrowing. bike etc. some sectors get affected more than others. If increased consumer spending is the hero for corporate profits.Buying a house.Above is a pictorial depiction of the vicious circle of crisis. • Banking Sector. Now if the production. • Pharma Sector. we hear people saying – “This time it’s different”. and even laying off people. During tough times. This further lowers the consumers’ confidence and the whole circle repeats again. then the villain is a Crisis (e. To overcome this. we even start cutting back on things like movies. It might actually be the start of a downturn! Consumer spending is the cornerstone of corporate profits. if you don’t feel like spending and borrowing. thus we ultimately see poor financial results from corporates. The Sub-Prime Crisis in 2008) which leads to reduction in the spending. In fact if things start getting worse.The Pharma sector would be relatively less impacted by lower consumer spending. More often than not poor financial results lead to depleted stock prices. you would most certainly be saving more. If you have a headache you don’t postpone the purchase of medicine to the next quarter.g. do you? Medicine and health care services is more of a necessity than luxury. So. We tend to postpone our big purchases like house. car. A crisis creates an environment where we don’t feel like going overboard with our spending. the banks lower their lending rates trying to attract borrowers. as an investor look out for such events which make you and people around you reluctant about spending money. Thus banks face a double impact a) Lowering of lending rates. pay-cuts. LCD TVs. Also. it is unlikely that we will borrow and spend and these purchases are the ones we most likely postpone. A fall in it has an overall negative impact on all the sectors of the economy & this is when you see the stock market tumbling. Whenever there is a downturn or a crisis. refrigerator. These sectors are usually most impacted by lower consumer spending. washing machine etc. restaurants etc. • Consumer Goods – Other things on which we tend to cut down expenditures on are luxury items like home theater. SECTORAL IMPACT OF FALL IN CONSUMER SPENDING • Real Estate & Automobile . The reduced consumer spending leads to lower demand situation. The producers respond by cutting down on the production.” The cycle seen above repeats with nearly every downturn or crisis. But more often than not the reality is – “Every time it’s more or less the same. sales & profits are down then the companies increasingly resort to cost cutting measures like no bonuses. usually requires us to borrow a large part of the money from the bank. car etc. This lowers their Net Interest Margins and the profitability for the banks. b) Higher Interest Outlay on deposits due to increase in savings. The companies producing such luxury items are impacted heavily during these times.The banking sector is highly affected by any loss in consumer confidence.
. • Infrastructure.Learn from your own consumption pattern and that of the people around you. then shipping industry faces the brunt of it as the lower export demand would seriously impact the shipping business. Thus poor performance by the shipping sector could be a good indicator of downturn already having settled in the economy.Lower consumer spending affects stock from real estate. govt.they are less impacted. Invest your money at the right time in the stocks and sectors which happen . Sectors like Pharma. The entire capital intensive sector would be impacted due to lower consumer spending but with a greater lag than compared to Real Estate or automobile sector. a car.Look for the monthly automobile sales figures in newspapers. TV. hair loss drugs) would be adversely affected. FMCG and Infrastructure are relatively less impacted by lower consumer spending. . banks etc. metros etc. thus making it difficult for us to exactly know the amount of consumer spending in advance. Companies involved in execution of infrastructure projects are relatively less impacted and with a lag they would stand to gain due to higher govt. Thus there is an increase in spending towards building roads. If the growth in sales is lower or is showing reducing trends continuously then surely one of the major causes is reduced consumer spending. expenditure. . there are various ways in which we can find out about the pattern of consumer spending. restaurants. In order to get out of a crisis situation. The recent European crisis had a major impact on IT and Textile sector due to lower export demand. Other industries like IT & textile sector would be more impacted by a global downturn than a domestic crisis as the majority of these companies depend on US & European clients. the most. A dip in footfall in shopping malls. If you and the people around you are delaying the decision to buy a house. weight loss drugs. the data for consumer spending comes approximately a quarter late. if this circle continues to persist. may also be a good way to identify lower consumer spending. TV channels etc. Consumer spending is the leading indicator of knowing how the stock market and the economy would be performing. WHAT SHOULD YOU LOOK AT IN THE CONSUMER SPENDING DATA Consumer spending thus seems to be a very good solution to find out where the stock market is headed. as these drugs are not dire necessities. However companies manufacturing life style drugs (eg. fridge etc. this might be your first cue to overall lower consumer spending. Also. spends more. railways. Look towards investment in such sectors. However. Unfortunately.Infrastructure investment is mostly a government activity. However you can look for investment in fundamentally strong companies of these sectors when they are available at discount during the downturn. markets etc. automobiles.
Government invests for the development of the country and the economy. upkeep of its numerous departments and the purchases required for them. health. education. A large part of the government’s expenditure is incurred on repayment of interest on loans. transport. Government incurs expenditure on economic and social activities like agriculture. it becomes the prerogative of the government to carry out social welfare projects like National Rural Employment Guarantee Scheme (NREGA). welfare of backward of classes etc. Such projects have helped create large scale rural employment which increases the disposable income and overall demand in the economy. In a developing economy like India which is marred by a wide gulf between haves and have-nots. . water supply.g. It spends heavily on developing the infrastructure of the country which propels the current and future growth for the economy. For e. To summaries. An investor – In the true sense. defense payments and maintaining the law & order situation in the country. providing subsidies to industries like petroleum.to gain the most with higher consumer spending and avoid sectors like real estate. The Government is a separate entity which can act as • • A Consumer – The government consumption expenditure involves its expenses on goods and services for collective consumption. there can be no substitute for government spending in a developing economy like India. agriculture and fertilizer etc. automobiles and banking etc during low spending times.9% of its GDP. GOVERNMENT SPENDING Government spending is the sum total of the total expenditure that a government makes in a financial year. rural development. India’s total Government Spending is 10.
The government has set aside $ 475 billion in its 11th Five Year Plan (2007-2012) for investment in infrastructure. During a crisis the government increases its spending to propel the demand in the economy and combat this exact situation. energy etc. The . the government increased its expenditure on key sectors like agriculture. 1. irrigation.7% of India’s industrial output) is the backbone of any economy and is necessary for the successful functioning of a country. Here is an analysis on some of the key industries of the economy. This was the timewhen the GDP was growing steadily and private investment was also on a high. transport.4%. With the increasing presence of private players in this sector. As seen in the chart above. companies like Reliance Infra.129 Cr. the growth in Government spending fell from 14.7%. A company or industry might be able to compete with rising prices.29.04. • Infrastructure . It also increased subsidy expenditure by approx 82% to Rs.5% in 2005-06. by approx 42% to Rs. highways. The government also looks to promote private investment in the economy. To combat this. aviation etc. let’s understand how it impacts particular industries or sectors. the first impact is on the consumer confidence which is beaten down. The government propels the growth in an industry by either increasing it’s spending in it or supporting it in the forms of subsidies. (much more than the average growth of 17.The above chart shows the GDP growth rate and Government spending during the period 20002010.243 Cr. 2.Infrastructure sector (accounts for 26. communication. railways. When the economy is going through a downturn. GMR Infra. The result is a fall in consumer demand and industrial production (Read more on Consumer Spending & IIP to find out its full impact). prompting the government to increase its overall spending in the economy by 26. But can the government continue to spending endlessly? Not really.4% on key sectors during 2000-2007). It is seen that during the year of 2008-09 the growth rate in GDP slowed down to 6. But be it crisis or no crisis the importance of government spending cannot be overlooked. During these times the government concentrates more on welfare activities. The government introduces projects for development of road. lower interest rate for investments etc. This in turn pulls down investor confidence too.02% in 2003-04 to 1. cut throat competition from domestic and international players but what it is unable to compete with is – Lack of Demand. A crisis is a situation when the government spending takes precedence over normal business activity. Punj Lloyd etc stand to gain from this. the government takes strong actions by increasing its spending on key sectors and also increasing its own consumption expenditure to revive the falling demand situation in the economy. SECTORAL IMPACT OF GOVERNMENT SPENDING Now that we know the importance of Government spending. This is exactly what happened in 2008-09.
the government has continued to increase its subsidy to the farmers. In fact. Over the last 10 years the government’s expenditure on transportation has increased from Rs. Due to large infrastructure requirements. HPCL. The rise in demand for engineering industry increases the demand for industries providing raw materials to them in turn.700 MW of power during 2007-2012. Power Grid Corporation etc. The power sector is largely dependent on the government plans & projects it undertakes. 7740 cr. HPCL. This makes it almost impossible for private players to compete with these state-owned companies. The total fertilizer subsidy has increased from Rs. Other sectors like Automobile. logistics. Expenditure on Power Sector not only augments the growth of power companies like NTPC. textile etc also gain from government spending. highways. ports etc. BPCL stand to gain from this move but in the long term they might face increased competition because private players would now be able to compete with them. copper. In the short term the oil companies like IOC. in 2000-01 to Rs. Container Corporation of India etc. it has already started the deregulation process and petrol has been deregulated. will continue. The impact of government spending has a spiral effect. By now it is quite evident . more than 50% of population is dependent on the agricultural sector. Government gives huge subsidies to Oil Marketing Companies like IOC. airports. it is expected that construction of roads. and BPCL for selling petroleum products at a subsidized rate.economy stands to gain from these projects irrespective of whether they are undertaken by govt. fertilizer industry is also highly dependent on the government subsidies. and the wheel of development starts rolling. • Sectors dependent on subsidies: Oil is a key raw material for most of the industries. Ashok Leyland. Similarly. 13800 cr. steel. in 1999-00 to Rs. in 2008-09. Fertilizer being the key raw material for agricultural sector. in 2009-10. Similarly. Companies like Tata Motors. L&T etc which provide inputs to companies from Power Sector. The chain does not stop here. But the government cannot continue to provide subsidy forever. but also gives impetus to heavy engineering industries like BHEL. That is the reason why Reliance had to close down all its petrol pumps in 2008. the textile sector has also benefitted since the introduction of schemes like Technology Upgradation Fund (TUF) Scheme. or given to the private sector because Infrastructure development is essential for the growth of the country & economy Industries like cement. The textile companies have availed the benefits and have started using advanced technology of production to increase their productivity. 75849 cr. have benefited heavily from this and have shown good growth in the commercial vehicle segment over the years. Even today. Sectors like automobiles and logistics business stands to gain from this. In the 11th Five Year Plan the target is to add 78. coal etc stand to gain from it as the product of these industries would act as a raw material for infrastructure activities • Power Sector – A growing economy and rising population has led to an exponential rise in demand for power in India. 31213 cr.
Investment in the power companies which are fundamentally strong and available at discount would be a best bet. Investment in Infrastructure companies could prove to be profitable in the short term as well as the long term because of the growing demand for it. WHAT SHOULD BE THE ACTION POINT Look for investment in the sectors which would be direct beneficiaries of a favorable government policy. But it is crucial that you invest in a fundamentally strong company when it is available at discount. A developing economy like India and a growing population ensures the ever increasing demand for electricity.that the government decision has a significant impact in the growth of the key sectors and the overall economy. .
Business news channels. as time allotted to project is of 6 months. • Time Constraint is also a major problem. this puts a question mark on the reliability and accuracy of this data. • The project includes study of maximum 2 companies in each sector as all companies cannot be covered. 1% change or 1% Standard deviation that can take place through various factors. • The data collected in research work was secondary data. Websites. Individual can also find out volatility in quantitative terms ie.LIMITATIONS The study is based on secondary data available from News papers. Magazines. So. • FUTURE SCOPE • Due to the dynamic nature of Stock market an individual can further analyse other important factor that will affect stock market. • Insufficient practical knowledge of stock market. • .
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