A Study on Security Analysis for selecting Appropriate security
EXECUTIVE SUMMARY 1.1
INVESTMENT SCENARIO An investment refers to the commitment of funds at present, in
anticipation of some positive rate of return in future. Today the spectrum of investment is indeed wide. An investor is confronted with array of investment avenues. Among all investment, investment in equity is best high proportion. This is because the history of stock market world over is booms and bursts over night millionaires an instant pauper.
An Indian stock market has been no different. Memories of its crash of December 1990 are still there in the minds of many. After record rise in proceeding few years the index fell precipitously and investor loss heavily. This phenomenon repeated every now and then. Though the equity cult is fast spreading among the investor the hard fact is majority of stocks continue to remain volatile to date. All these are pointers to the fact that the investor market is no longer holding an olive branch to investor in equity. Much of the danger associated with it can be avoided and it need not be such nerve raking experience, provided one approaches it as a rational decision making process. In short Security analysis and portfolio management are hard work, requiring deciplene and patience, and the work is not always rewarded with exceptional returns.
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A Study on Security Analysis for selecting Appropriate security
INTRODUCTION TO THE CONCEPT OF
1.1.1
SECURITY ANALYSIS An investment is a commitment of funds made in expectation of some positive rate of return in future. An investor makes some sacrifice in the present in the hope of desiring benefits in future. The motive behind investment varies from person to person. Some people invest in order to gain a sense of power or prestige. Often the control of corporate enterprises is a driving motive. For most investor however their interest in investment is largely pecuniary to earn a return on their money. But the return on stock market security is subject to risk. Risk incase refers to the uncertainty surrounding actual realization of the rate of return offered by an investment. The time element refers to period of waiting required to reap the return. Accordingly early investment decision has three key aspects. They are,
Return
Risk
Time
There fore, investment process must be considered in terms above aspects. One should approach any scheme of investment as a rational decision making process, in which he should attempt to select a package of portfolio securities that meets predetermined set of goals. These investors goal are usually expressed in terms of return. Almost all the cases, the hard fact is that return and risk are inseparable. Further the maximum higher the return the grater t6he risk. Therefore the ultimate decisions to be made in the investment are two. What securities to be held How many rupees should be allocated to each.
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A Study on Security Analysis for selecting Appropriate security
These decisions are made in three steps. 1. Security analysis 2. Security evaluation 3. Portfolio analysis, selections and management. Securities are marketable financial instruments that bestow on their owners the right to make specific claims on particular assets. An individual security provides evidence of their creditor ship or ownership depending on whether it is bond or stock, respectively. A bond is loan that is paid off with interest; the investor lends money to the borrowing company that issued bond. In contrast, stock ownership represents a cash investment a future of a corporation; the investor owns a part of a corporation and share in its profits.
SECURITY ANALYSIS (a)
Traditional investment analysis, when applied to securities, emphasizes
projection of prices and dividends. That is, the potential prices of a firm’s common stock and future dividend stream are forecast, then discounted back to the present. (b)
Basically modern security analysis deeply rooted in the fundamental
concept. But the more modern approach to common stock analysis emphasizes risks and return estimate rather than mere price and dividend estimates, ofcourse dependent on share price and accompanying the dividend stream.
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A Study on Security Analysis for selecting Appropriate security
SECURITY EVALUATION It refers to the act of assessing the true worth of security. Before committing the fund on stock exchange securities, the investor should make thorough comparison of the prices of the security with its true value. The price refers to the price quoted for the security at the stock exchange at a given movement of time. Value refers to the intrinsic worth. Only with the help of such evaluation the investor can decide as to buy hold or sell.
DIFFERENT APPROACHES TO EVALUATION There are essentially three approaches or school of thoughts on the matter of security price evaluation, classified as (a)
Fundamental Approach
The concept of time value of money is the business of this approach. Money has a time value. A rupee now is worth more than rupee a year from now. For different securities, future benefits may me received at different times. Even when the amount of future payment is the same, differences in the speed of their receipt may create differences in value. Time value of money suggests that earlier receipt is more desirable than later receipt, even when the both are equal in the amount of certainty. Because, earlier receipt can be re invested to generate additional returns before later receipt come in. The force operating is the principle of compound interest.
Framework: The proper order in which to proceed in Fundamental analysis is, first to analyze the overall economy and securities markets. Second, analyze the industry with in which a particular company operates. Finally, analysis of
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A Study on Security Analysis for selecting Appropriate security
the company should be considered. The above analysis involves making a careful estimate of expected stream of benefits and required return of common stock. The intrinsic value then can be obtained through the present value analysis – that is, the dividend discounts model. An alternative method of valuation is the P/E ratio or earning multiplier approach. Economic Analysis Industry Analysis Company Analysis Strategic considerations of economic, industry and company analyses are as follows (1)
Economic Analysis 1. A study of economic trends as indicated by rate of growth in gross national product, employment, aggregate corporate profits, interest rate, exchange rates, savings and investments, monsoon positions. 2. An analysis of the relationship between economic trends and economic policies and the stability of such relationships. 3. A study of world economic trends and their impact on Indian economy.
(2)
Industry Analysis 1. Implications of projected growth in gross national product for various industries. 2. Implications of plan priorities and plan expenditure for various industries. 3. Vulnerability of an industry for government regulations, and control of prices and production. 4. Implications of industrial and fiscal policies of government for an industry. 5. Analysis of competitive conditions as reflected in any barriers to entry.
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A Study on Security Analysis for selecting Appropriate security
(3)
Company Analysis 1. Trend analyses of company’s market share. 2. An analysis of turn over of assets, operating and production efficiencies through ratio analysis. 3. Leverage and coverage ratio analysis. 4. An analysis of book value per share. 5. An assessment of quality of management 6. An analysis of price –to –earning multiples. 7. An analysis of growth in sales and dividends.
The basis tenets of this approach are as follows: Each share has an intrinsic value. It can be determined by discounting the future stream of benefits that does accrue to the holder of the security. For instance if rupees 100 now is = rupees 100 + R after one year. Where R is the rate of return then the next question is if we get rupees hundred after one year how much is it worth now. Rupees 100 + R after one year = 100 now. Therefore rupees 100 after one year = 100/100 + R and if R = 12 % then 100/112 = .0893.
(b)
Technical Approach
Technical analysis is an alternative approach to predicting the stocks price behavior. Technical analysis is frequently used as a supplement to fundamental analysis rather than as a substitute for it. Thus technical analysis can frequently does, confirm findings based on fundamental analysis.
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A Study on Security Analysis for selecting Appropriate security
Technical analysis is viewed mainly through price and volume statistics. It helps in measuring price – volume, supply – demand relationship for overall market as well as for individual stocks. Technicians seldom rely upon a single indicator, as no one indicator is infallible; they place reliance upon reinforcement provided by groups of indicators.
(c)
Modern Approach
Markovitize led down the foundation for this approach in 1951. He studied capital market with the help of fairly sophisticated method of investigation and in general arrived at the following conclusions.
Stock markets are reasonably efficient in reacting quickly and rationally to the flow of information. Successive price changes are independent. As a result past price behavior cannot be used to predict future price behavior. In the capital market, there is a positive relation ship between the risk and return. This indicates, in general, investment in several securities would reduce the variability of return and hence the risk ness of a portfolio.
GROWTH VS VALUE Generally, investors follow two types of investing namely growth or value while they deal with investments. Fundamentally these two styles of investing are not alike and hence they take a different approaches.
(a)
GROWTH PERCEPTION
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A Study on Security Analysis for selecting Appropriate security
(i)
The general perception of growth investing is to invest in companies
that can grow earning at a faster rate than the overall market. The theory is that if you buy this companies securities, overtime, their stock prices will reflect earning growth and trade accordingly. The criterion in selecting companies boils down to three P’s. People Prospects Price (ii)
The most important thing is the business itself. Normally, companies that
command high profit margin and high return on invested capital is alone considered for investment under this style of investing. (iii)
Growth investors are almost agnostic about the economy. In theory, growth
company should be able to deliver strong earnings growth whether the economy is weak or strong. This ability highlights the inherent strength of companies. But growth is full of landmines as a companies disappoint.
(b)
VALUE PERCEPTION
The value perception is more focused on buying shares quoted low in the market. The appreciations potential for value investor come with the market realization the intrinsic value in a company. Accordingly investors buy shares that are quoted in the market and sell it the moment the market value cross the intrinsic value.
1.2
BACKGROUND OF THE STUDY Value investing is more quantitative than qualitative. It has more to do
with tangible numbers, balance sheets, and assets and near term earning power. All
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A Study on Security Analysis for selecting Appropriate security
available information about a company is subject to a thorough scrutiny before deciding about the intrinsic worth of the shares. Consequently there is less volatility in value. While macro economic theory has helped to develop risk factors like interest rate risk, purchasing power risk, market risk and such alike; the theory of the firm helped in delineating factors like firm’s cash dividend yield, beta coefficient as a numeric surrogates for security’s quality rating, This is the area where the present work focuses on. The security investment involves several type of risk diversifiable as well as non-diversifiable. While the risk of a security is nothing but the likelihood of the return turning out to be more or less than the expected, the total risk of an asset may be perceived as being the sum of several different contributing risk factors like interest rate fluctuations, market cyclical, purchasing power instability and so on. As mentioned Donald E. Fisher and Ronald J. Joeden.
1.2.1
BETA COEFFICIENT
(a)
Beta measures non-diversifiable risk. It shows how the price of a
security response to market forces. It is calculated by relating the returns on the security with returns for the market. Thus the beta coefficient or simply beta is a measure of sensitivity of a stock’s price relative to the fluctuations of some particular stock market index. A volatile has high beta, a low risk share price generally has beta. If the stock moves exactly in tandem with the market index such as the BSE index, it is said to have of a beta of one.
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A Study on Security Analysis for selecting Appropriate security
(b)
A stock with a beta higher than one is called an aggressive stock, if this
stock beta is less than one the stock is called a defensive one. Aggressive stock has more undiversifiable risk than average stocks and their price fluctuate with greater volatility than market.
SIGNIFICANCE
β>1 If the stocks have tripled than the market index has doubled the stock is considered to be highly sensitive and its beta could be greater than one.
β=1 If the stocks performance exactly matches with that of the index then the beta of the stock would be equal to one.
β<1 If the stocks appreciation is only 75% compared to 100% appreciation in the market index, the stocks is less sensitive and would be less than one. 1.2.2
LEVERAGES
The employment of assets or sources of funds for which the firm has to pay a fixed cost or fixed return may be termed as leverage. If earning before interest and taxes exceed the fixed return requirement the leverage is called favorable. When they do not the leverage is unfavorable. The Operating Leverage indicates how sensitive profits are to changes in sales. The Financial leverage measures how fixed financial charges used for magnifying the effects of changes in EBIT on earning per share.
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A Study on Security Analysis for selecting Appropriate security
2.1
STATEMENT OF THE PROBLEM If the investor says,“ I have to earn more profit in securities”, the
market says, “ I give same weight of risk”. However, in many instances, investor could reduce the risk associated with securities through proper analysis and by taking correct step of measurement activities for reducing the risk and increasing the profit in security investment. Many invest insecurities by their emotional forces and many invest with out analyzing economic conditions, budget decisions, industry growth rates and company factors. Finally, they end up with losses. Of course, no one can predict the uncertainty factors like September 11 attack in 2001. Despite these factors investors could reduce the risk associated with securities through analyzing the security properly. How much the economic factors could influence the stock market? whether positively or negatively have the relationship with the stock market movements. Answering these questions enables the investors to have the perspective about the overall economy and stock markets. If the economy prosperous, the industries with in the economy also may also be prosperous although few may be in the bad shape. Which industry is really having the potentiality for growth? Knowing these factors through comparing performances between the industry enables the investors to compare the industries and finally cam select the company which is having the opportunity for growth.
2.2 a)
SCOPE OF THE STUDY The security analysis starts from broad environmental factors to the industry,
which influences the share price and finally analyzing the company’s potentiality by considering possible risks associated with securities.
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A Study on Security Analysis for selecting Appropriate security
b)
Since share price of the company is empirically found to depend up to 50% on
the performance of the industry and the economy, studying those related field provide insights for selecting the securities. c)
Budget plays a significant role while selecting the industry, as it may create a
opportunity for one industry and may not for other, the analyzing impact of budget plan and its polices is important. d)
As research studies shows more than 35% of the share price movements
depend on the companyâ&#x20AC;&#x2122;s performance. So, analyzing the companiesâ&#x20AC;&#x2122; potential growth through ratio analysis provides the valuable insights. Comparability between the companies enables the investors selecting particular securities.
2.3 a)
NEED FOR THE STUDY Investment is the commitment of fund expectation of some positive rate of
return always associated with risk, may be diversifiable, non diversifiable or both. For reducing the risk & increasing the return, the analyzing the security is must. b)
Reducing the bias with the security investments through proper analyzing the
securities return that provides more weight only when analyzing through top down approachâ&#x20AC;&#x201C;economy, industry & company, which helps to select the potential growth industries. c)
As each investor has his own preferences & choice of investments for their
returns and risks associated with the securities he or she can adapt the suitable securities for them, security analysis that also enables for getting better portfolio
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A Study on Security Analysis for selecting Appropriate security
2.4
OBJECTIVE OF THE STUDY
The study was conducted with a view to, a)
The main purpose of this study is to comparatively analyze the deferent
industry performance and selecting the appropriate security by considering potentiality of the industry. b)
Arriving to the value of the securities through forecasting by considering factor
influence the securities. c)
Identify the returns of the securities in considering the risk, growth, and other
related variables. d)
Understand the factor influencing the security prices in different industries.
e)
Analyzing the environmental factors affects the security prices.
f)
Assess the future potential of the companies in the industry.
g)
And aid to investor in assessing the worth of the securities
2.5
REVIEW OF LITERATURE Non-current accounts and Bombay Stock Exchange Sensitive
(SENSEX) Index on month-to-month basis for the said period constituted the database. The company fundamentals and monthly share prices for 17 years of study period supported the conduct of the present study. Reports that industrial production, productivity, money supply and unemployment rates are consistently influencing the share returns, Chen et. al., (1996) proposes that the unexpected inflation, industrial production, changes in risk premiums, etc., are crucial in Asset pricing. In a recent study Chen and Jorden (2002) finds inflation, interest rates on government bonds, industrial production, oil prices, etc., are germanein asset prices. In Indian environment, the study conducted by Rajan
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A Study on Security Analysis for selecting Appropriate security
Mookerjee (1998) observes weak linkages between changes in GDP and stock prices, Malathy Prabhakaran, (1999), Rao and Bhole (2001), Choudhari (1998) and others studied the impact of agriculture on stock prices and report conflicting results. A comprehensive study on these Economic variables is awaited in Indian context.
2.6 a)
RESEARCH DESIGN Since the study is principally intended to examine the potential growth of
securities, which might be affected of different risk variables on security returns, a sample of 4 industries, and selecting the profitable scrip through selecting potential growth industries, whose scrips are actively traded during the period 1998 to 2003 has been considered. In order to identifying the influence of exogenous variables of economy and market in security prices information on different indicators like Gross domestic product, Monsoon, Money supplies, Fiscal deficit etc. And for the market observation Sensex has been used.
b)
For analyzing the relationship between economic indicators and stock market
movement, the correlation tools has been used, and selecting the industry by comparing their sales growth, dividend and its ratios has been comparatively analyzed. On the other hand, groups of 18 financial ratios capturing the Size, Dividend
Policy,
Leverage,
Productivity,
Liquidity,
Profitability,
Earnings
Variability, P/E ratios and Certain Growth Variables constituted the company specific fundamentals of financial risk variables. The estimation of â&#x20AC;&#x2DC;Accounting Betaâ&#x20AC;&#x2122; (the ratio of EPS of a firm in relation to the average EPS of all firms), Sales, and Earnings have been measured as linear growth rates the testing period of most recent five-year period. Administrative Management College
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2.7
SAMPLE DESIGN
2.7.1
Definitions of the Population
Since the study is mainly related to selecting the appropriate security, analyzing industries and comparison between those is necessary. Their potentiality for growth also to be consider for selecting particular industry, where the companies in that industry has to be analyzed through comparing between the companies considering their relative advantages over the others. 2.7.2
Sample Size
All the four industries under the study are randomly selected reconsidering differentialities in the way they do business and the product they produced has been considered as sample and the four companies in that particular industry has been considered as representative sample. 2.7.3
Sample Technique Adopted
Techniques for selecting industries is nothing but the way they doing business since the product they produce also different. However, for the companies, the out performing industry over the other out of the sample has been selected and the highest sales in the latest period in the Computer and Software industry has been selected for studying their performance.
2.8
SOURCES OF THE DATA
2.8.1
Secondary data
All the data has been collected through secondary sources only. These data are a) FiancĂŠ Ministry. b) Central Statistical Organization c) Indian Meteorological Organization
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A Study on Security Analysis for selecting Appropriate security
d) Various magazines books and journals and papers e) Library of the Bangalore stock exchange f) Web sites of the companies and indices has been collected from Bombay stock exchange 2.8.1
Primary data
Since the study is mainly based on the financial results of the industries and the company and the facts of the economic factors, no such primary data has been collected
2.9
FIELD WORK
Fieldwork of the study is related to connecting the data about economic, industry, and companies. The government policies and budgets towards the selected industries and companies also collected. The economic data has been collected through referring various magazines and paper and some data have been collected by the web sites of various ministries. Government policies and budgets affecting the business and industries has been collected through referring various budget documents and news papers released information relating as such and trade associations of related industries. The financial data has been collected in the library of the stock exchange. Information regarding the companies has been collected through related websites that is Bombay stock exchange of India and companies websites. The news released by the company in various magazines and papers also the part of fieldwork. The most of the financial result has been collected in the library of the stock exchange.
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2.10 OPERATIONAL DEFFINITIONS Economic Analysis Economic analysis refers to analyze the factors or indicators of the economy that affects the stock market. This is also called non-diversifiable risk analysis where the risk associated with the securities can not be diversified.
Industry analysis Industry analysis refers to analyze the plan, priorities and vulnerability of an industry for government regulations. The competitive conditions as reflected in any barriers to industry also taken in to consideration.
Company Analysis Company analysis includes analyze the company as potentiality for growth, present performance, risk associated with securities are considered as important.
Correlation Correlation is a statistical measure of the degree to which the security returns move together. The positive correlation means the variables move together. The negative correlation suggests that move in opposite direction and zero correlation shows that no tendency to very either positive or negative direction.
Leverage The employment of an asset or source of funds for which the firm has pay fixed cost or fixed return may be termed as leverage â&#x20AC;˘
Operating leverage is the firms ability to use fixed operating charges to magnify the effects of changes in sales units earning before interest and taxes.
â&#x20AC;˘
Financial leverages is the firms ability to use fixed financial charges to magnify the effects of changes in earning before interest and tax on the earning per share.
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A Study on Security Analysis for selecting Appropriate security
Beta It measures the sensitivity of the return of a security to changes in returns to the market portfolio. It may be positive or negative. The positive beta measures that if 1% changes market index, more than 1% in individual security and vice versa.
2.11 a)
LIMITATION OF THE STUDY The economy and industry are so wide and comprehensive that is difficult to
encompass all the likely factors influencing to be captured in any set of possible indicators. b) c)
Besides, the study has the limitation of the time and resources. Again the study has limited to four big industries and many other sub industries
within the industries and small units have been left out. Hence, the applicability of the study is limited to that extent. d)
Finally the study is not free from inherent limitation of collection and analysis
of the sources of the data.
2.12
OVERVIEW OF THE REPORT Chapter one started with the introduction of the concept of security
analysis, where the investment scenario in the security takes place. The introduction part explains about different approaches to the security that is the fundamental approach, modern approach and technical approach. And investorâ&#x20AC;&#x2122;s perception about the characteristics of growth and the value associated with securities. Then the second part explains the background of the study, where the different theories and tools like leverages and betas are supported for studying securities.
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A Study on Security Analysis for selecting Appropriate security
The second chapter starts with the statement of the problem for studying security and explains the areas of the analysis. And it covers source of the data literature review and operation definition of the study. The third chapter deals with the profile of the respondents. It highlights the economy of India, industries and the companies. In industries, it deals with growth rate of sales and dividend of four industries namely, Computer and Software, Pharmaceutical, Cement, and Automobile industries and also analysis of government policies that affects performances. The export performance and competitive positions of said industries provides the guidelines about the future of industries. And come to the companies, it provides overview of four companies in computer and software industry, namely Infosys, Satyam, Wipro and HCL. The share holding patterns of each company brief history sales growth and earning per share provides the overview of those companies. Then in analysis part it deals with primarily the global economy, especially the NASDAQ and NSE`s relationship of movements, where the Indian stock market no longer be limited to the Indian situation. It also deals with the analysis of the economic factor affect to the stock market. In the second part of analyzing, analyzing industries through comparison of different ratios, sales and dividend growth that helps to select the appropriate industry which out perform other industries. The third part emphasizes on the companies within the Computer and Software industry, where comparison between Infosys, Satyam, Wipro, and HCL which are all highly traded in that related industry in the stock market, guides the investor for selecting appropriate security which is really doing well than other selected companies.
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Finally, the conclusions and suggestions at the end provides the proper guidelines which is drawn after analyzing the economy, industries and company enables the investors getting perspective above overall better performance industry and company.
OVERVIEW OF THE ECONOMY
3.1
A top down analysis of the firmâ&#x20AC;&#x2122;s prospects must start with a global economy. The international economy might affect a firmâ&#x20AC;&#x2122;s export prospects, the price competition it faces from competitors, or profit it makes from abroad. Certainly, despite the fact that the economies of most countries are linked with global economy, there is considerable variation in the economic performance across countries at any time. Given the degree of openness to trade and investment, it is a well-accepted fact that the national markets are inter-related and increasingly global. When making decisions, traders incorporate information pertaining to price movements and volatility in the asset they are trading including information about related assets. The movement of markets in rhythm and chorus could nullify much of the gain out of diversification across borders, besides being vulnerable to the caprices of global capital. Companies are part of the industrial and business sector, which in turn is a part of the overall economy. Thus, the performance of the company depends of the performance of the economy in the first place. If the economy is in recession or stagnation, centeris paribus, the performance of the company will be bad in general or vise versa. Since India started deregulating its financial markets in the post-liberalization phase, her integration with the international financial markets has been proceeding rapidly. Based on the observations it has been concluded that in the post-liberalization
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era, international financial market integration has accelerated, though not yet complete. Indian stock markets have come of age where they have seamlessly joined themselves with other international stock markets and no longer the stock prices in India are governed only by the events of the local importance. As per research studies so far, nearly 50% of the stock prices changes can be attributed to market influences, which are general and caused by the economic, and industry factors. It is therefore important that any stock market investment is preceded by economic analysis and industry analysis.
Economic conditions are non-diversifiable risk. It applies to all the industries, But some industries are expanding while others are stagnant and some contracting depending on the demand and market conditions. The investor has to choose growth industry from industries, and then choose the scrip under valued and judged by study and analysis.
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14 12 10
Percentage
8 6 4 2 0 1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
20
-2 -4 Year
Fig. 3.1 Growth Rate of Different Sectors From 1995-96 to 2002-03
3.2
PROFILE OF THE INDUSTRIES
The forgoing section in this report had a perspective of overall Economy in India. The next step is to analyze particular industry and compare them for selecting potential growth industry. Once the economics analysis is over; getting the prospects of the likely trend in the economy, analyzing the industry would be taken importance, knowing which groups are promising in the coming year makes possible better entry into the company. There is however, no perfect correlation between the economy and the industry on one hand and of industries and companies on the other. India has mixed economy, where private and public sectors play a complementary role and promote a planned development. Since the initiation of the
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reforms in 1991, even foreign enterprises and MNCs given a due role to play in the development of the economy. As per the latest policy barring about 18 scheduled industrial groups, others are both open to public and private sector. But as the security market comprise only marketable securities
and they are mostly form private
corporate sector and pubic undertakings which are being shifted to the joint sector. Many financial services are thrown open to foreign sector now.
3.2.1
COMPUTER AND SOFTWARE INDUSTRY Indian software industry has a mix of a few large companies and
several small to medium sized companies. Currently 37 Indian companies have exports of more than Rs1billion. These few large companies would however be classified as small companies by US standards. First generation entrepreneurs, who had limited access to finance and low risk taking capability, operate most of these large companies. Smaller companies, which are also typically entrepreneur run companies, have a similar potential to strike it rich. (a)
Competitive Advantage- Low Cost and Location
Much of India's strong growth in software in the past is attributable to the low cost of Indian programmers. Indian programmers repaid only about 15-20% of his/ her counterpart in developed nations. Even among competing countries Indian software professionals were paid the least. India enjoys a location advantage. The advantage it enjoys over other countries is a 12-hour difference with the world's largest market the USA. This enables US companies to establish round the clock software factories by subcontracting to Indian companies.
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A Study on Security Analysis for selecting Appropriate security
(b)
Export Performance
The performance of the Indian software and service exports sector for the first three quarters, April to December 2002, FY 2002-03, the survey revealed that software and services exports from India generated revenues of Rs. 34,000 crores in April-Dec, 2002. This was up from Rs. 26,600 crores for the corresponding period in the previous year, and represented a growth of 28% over the same period last year. (c)
Government Policies
Government policies so far have been favorable to software companies. If tax exemption on exports is withdrawn it could affect software companies adversely. WTO regards tax exemptions on exports as an indirect subsidy and hence the government may phase out exemption in the near future. Software industry has enjoyed virtually unbridled liberty to conduct its business in the best possible manner. Government has also encouraged the industry by providing tax benefits to exporters.
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A Study on Security Analysis for selecting Appropriate security
18000 16000 14000 12000 10000 Rs in crors 8000 102.8 6000 28.6
4000
49.7
31.4
47.9 22.0
26.9
42.8
34.7 7.9
2000
-7 0 1991
1992
1993
1994
1995
1996
1997
1998
Year
Fig. 3.2.1-1 Growth rate of Sales of Computer and Software industry
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1999
2000
2001
2002 Sales
A Study on Security Analysis for selecting Appropriate security
," ,E ,h 123.9 ,Œ
103.8 87.5
,¯
57.5
56.6
,Ò Amount in Rs
24.4
,õ
29.1
20.1
28.3 dividend-5.5 inRS
, ,< 3 : V
‰
¼
ï
"
U
ˆ
»
î
!
Year
Fig. 3.2.1-2 Growth rate of Dividend of Computer and Software Industry
3.2.2
PHARMACEUTICAL INDUSTRY
The pharmaceutical industry is knowledge driven industry and is heavily dependent on Research and Development for new products and growth. However, basic research (discovering new molecules) is a time consuming and expensive process and is thus, dominated by large global multinationals. Global pharmaceutical market, western markets are the largest and fastest growing due to introduction of newer molecules at high prices. A well-established reimbursement and insurance system implies that per capita drug expenditure is a billion normally high in Western Countries as compared to the developing nations.
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T • •
‡
s³ ¡ Ã
A Study on Security Analysis for selecting Appropriate security
The Indian pharmaceutical industry is highly fragmented, but has grown rapidly due to the friendly patent regime and low cost manufacturing structure. Intense competition, high volumes and low prices characterize the Indian domestic market. Exports have been rising at around 30% over last five years. (a) Export Performance Indiaâ&#x20AC;&#x2122;s pharmaceutical exports are to the tune of Rs87bn, of which formulations contribute nearly 55% and the rest 45% comes from bulk drugs. In FY2001 exports grew by 21% year. Indiaâ&#x20AC;&#x2122;s pharmaceuticals imports were to the tune of Rs20.3bn in FY2001. Imports have registered a CAGR of only 2% in the past 5 years. Imports of bulk drugs have slowed down in the past 2-3 years. . Exports have been rising at around 30% CAGR over last five years. (b) Competitive Position and Advantage The Indian pharmaceutical industry is highly fragmented, but has grown rapidly due to the friendly patent regime and low cost manufacturing structure. Intense competition, high volumes and low prices characterize the Indian domestic market. Over 20,000 registered pharmaceutical manufacturers exist in the country. The market share of MNCs has fallen from 75% in 1971 to around 35% in the Indian pharmaceuticals market, while the share of Indian companies has increased from 20% in 1971 to nearly 65%. PSUs have almost lost out completely. The sector has undergone several policy as well as attitudinal changes over the past two years. Patents are the main competitive advantage. (c) Government policy All the benefits listed under health-care will also promote pharmaceutical industry. Besides, income tax concessions to pharmaceuticals at par. All drugs and materials
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A Study on Security Analysis for selecting Appropriate security
imported or produced domestically for clinical trials will be exempt from customs and excise duties. Customs duty on import of Reference Standards by the industry has been reduced from 25 per cent to 5 per cent.
5000 4500 96.1
4000 3500
73.6
3000 2500Rs in crors 38.9
2000
34.4
34.1
27.2 1500 15.5 8.9
1000
10.6 0.5
500 0
1991
1992
1993
1994
1995
1996
1997
Year
Fig. 3.2.2- 1 Growth Rate of Sales of Pharmaceutical Industry
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28
1998
1999
2000
2001
A Study on Security Analysis for selecting Appropriate security
80 152.3 70 60
118.9
50 Amount in Rs 40 66.2 30 20
39.9
37.4
10
18.9 1.4
0 1991
1992
1993
1994
1995
1996
20.6
14.4
1997
4.9 1998
1999
2000
Year
Fig. 3.2.2-2 Growth Rate of Dividend of Pharmaceutical Industry 3.2.3
CEMENT INDUSTRY The installed capacity of the industry reached 135mn tons in FY02.
The industry has added capacity of around 14mn tons during the year. India is the second largest producer of cement after China. But the present per capita cement consumption is around 82kgs as against the world average of 255kgs. This lower per capita consumption presents a good opportunity for growth of cement industry in future. The industry is expected to grow at a rate of 7-8% in FY03. The slowdown of industrial growth witnessed in FY 2000, continued in FY01. The growth in terms of Index of Industrial Production was 2.3% as compared to 5.8% in the previous year. Industrial slowdown hit all the major sectors.
Administrative Management College
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2001
D
A Study on Security Analysis for selecting Appropriate security
(a)Exports Performance The cement sector is relatively insulated from international markets. This is largely due to inadequate infrastructure to carry on international trade. This is amply borne out by the fact that cement accounts for not more than 0.20% of total world exports From a peak of 2.68mn tons in 1997-98, cement exports from India have slid down to 2.06mn tons in 1998-99. However the situation has improved gradually. In FY02 the exports were 2.77mn tons as against 2.37mn tons in FY01, an increase by 16.87%. (b)Competitive Position India is the worldâ&#x20AC;&#x2122;s second largest cement producing country after China. The industry is characterized by a high degree of fragmentation that has created intense competitive pressure on price realizations. Spread across the length and breadth of the country, there are 120 large plants belonging to 56 companies with an installed capacity of around 135mn tons as on March 2002. (c)Government Policy Given the role the government has in fixing key input costs, it is very difficult for a company to minimize costs beyond a point. The key driver of profitability is cement prices, which fluctuate depending on outlook on demand-supply gaps.
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12000 26.8 10000
24.7 21.4
8000 Rs in crors 6000 12.7 10.1
4000
8.6 2000
7.3
4.5 3.2
2.5
2
0 1991
1992
1993
1994
1995
1996 Year
Fig. 3.2.3-1 Growth Rate of Sales of Cement Industry
Administrative Management College
31
1997
1998
1999
2000
2001
2002
Sak
A Study on Security Analysis for selecting Appropriate security
160 49.3
48.4
140
48.5
120
100 18.3
19.6
16.3
Amount 80 in RS
9.7 0.7
60
40
20
-29.9
-30.3
0 1991
1992
1993
1994
1995
1996
1997
1998
1999
Year
Fig.3.2.3-2 Growth Rate of Dividend of Cement industry 3.2.4
AUTOMOBILE INDUSTRY Since commercial vehicles sales have a linkage with industrial growth
and diesel prices, the demand may fall on account purchase deferment due to prolonged uncertainties in respect of fuel prices and uniform sales taxes. The crude oil has grown by 0.6% in the current fiscal and the sustained increase in the global crude oil prices has led to a hefty increase in the diesel prices. (a)Government Policy After the rationalization of excise duty in the budget 2001-02; the special excise duty for CVs is levied at 16% and total duty is pegged at 32%. The differential in duty structure also affects the demand for respective segments e.g. differential duty Administrative Management College
32
2000
2001
Dvi
A Study on Security Analysis for selecting Appropriate security
provisions between 8-seater and 10-seater changed the demand for each of the segments. Over and above state governments charge sales tax and control to effect the final prices to customer. In the current year, uniform sales tax to the tune of 12% has been levied in all the states across India. (i)Policy
on Scrapping of Old Vehicles:
The recent notification by judicial body to ban commercial vehicles above 20 years in age in New Delhi will lead to a demand for at least 15,000 vehicles to be satisfied in short period of time. If similar measures are implemented in other parts of the country will boost demand for new vehicles.
6
50 43.6
<6
40
35.5
33.3
Z6 x6
30
24.7
24.4
20
17.9 –
Rs incrors -3.9
7.9
0.3
´ -8.0
Ò ð -24.4 /
Percentage 10
-5.4
0 -10 -20
-30 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Sales Grow th rate Year
Fig.3.2.4-1 Growth Rate of Sales of Automobile Industry
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A Study on Security Analysis for selecting Appropriate security
% 71.7 62.1
%]
56.4
35.4
%š
19.0 Amount %Ø in RS
5.3
%
-16.6
,
-41.7
-40.4
-52.0 3 P
…
¹
í
"
V
Š
¿
ó
'
Year
Fig. 3.2.4-2 Growth Rate of Dividend of Automobile Industry
3.3 3.3.1
PROFILE OF THE ORGANIZATIONS INFOSYS TECHNOLOGIES LTD
BSE Code : 500209 NSE Code : INFOSYSTCHEQ Face Value : 5 Market Lot : 1
Chart.3.3.1-1 Infosys Technologies- At a Glance Name of the company
Incorporation year
Industry
Infosys Technologies LTD Chairman
July 2nd 1981 Group
Computer and Software Auditors
Mr. N R Narayana Murthy Registered office
Not Applicable BSE group
Bharat S Raut & Co. Bankers
44, Electronics City Hosur Road
A
Bangalore Karnataka
Administrative Management College
Bank of America ICICI Bank Ltd.
34
\ ¢ ¢
A Study on Security Analysis for selecting Appropriate security
561229
Chart. 3.3.1-2 Share Holding Pattern of Infosys as on '31/03/2003â&#x20AC;&#x2122; Major Holder
Number Of share
Percentage
Promoters
18827595
28.42
Institutional Investors
32087484
48.44
Other Investors
8314859
12.55
General Public
7013140
10.59
BACKGROUND INFORMATION (a)On July 2nd 1981 the company was incorporated as Infosys Consultants Private Limited at Mumbai. The company is engaged in software development in the form of services, turnkey projects and products for the domestic and export market. The software
development
is
targeted
towards
the
distribution,
banking
telecommunication and manufacturing sectors worldwide. (b)On April 21st
1992 the name changed to Infosys Technologies Private Limited,
and the Registered office was moved to Bangalore. (c)On June 2nd 1992 company was converted into a Public Limited Company under the name Infosys Technologies Ltd. - The company provides software maintenance, re-engineering and downsizing of software applications in these market segments. It also markets internationally, two well-known packages, one for the distribution
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A Study on Security Analysis for selecting Appropriate security
industry (DMAP) and one for retail banking (Banks 2000). And Company turned up with ISO 9000 certification. (d)The Company has re-emerged as India's second most valuable company, replacing the FMCG heavy weight, HLL in the year 2000. (e)The company has a joint venture in USA with KSA (Kurt Salmon Associates). KSA is a $40 million management consultancy company operating in ten cities of the USA and also in eight different countries. The company also has an offshore software development center for General Electric USA. Yantra Corporation is an wholly owned subsidiary of the Company (f)Besides the company has many subsidiaries, and branches in India as well as abroad namely 22 in India, 15 in USA, and many countries like Germany, Japan, Hong Kong, Canada, Australia, Us and Europe etc.
40,000
140
35,000
120
118.5
100
25,000
80
70.9
20,000
60
15,000 39.3
37.0
10,000
40
5,000
20
-
0 1999
2000
2001
Year
2002
2003 Sales
Fig. 3.3.1-1 Growth Rate of Sales of Infosys Technology
Administrative Management College
36
Percentage
Rs in Miilion
30,000
Growth rate
A Study on Security Analysis for selecting Appropriate security
160
140
140
117.0
120
114.2
100
100
80
80 60
60
40
40
28.5 18.5
20 0
20 0
1999
2000
2001
2002
2003
Year
EPS
Fig. 3.3.1-2 Growth Rate of EPS of Infosys Technology
Fig.3.3.1-3 Co-movements â&#x20AC;&#x201C; Infosys Scirp and Sensex
3.3.2
Percentage
Amount in Rs
120
WIPRO LTD
Administrative Management College
37
Growth rate
A Study on Security Analysis for selecting Appropriate security
BSE Code : 507685 NSE Code : WIPROEQ
Face Value : 2 Market Lot : 1
Chart 3.3.2-1
Wipro LTD â&#x20AC;&#x201C; At a Glance
Name of the company
Incorporation
Industry
Wipro LTD
year
Computer and Software
Chairman
29th 1945 Group
Auditors
Mr. Azim H Premji Registered office
Wipro BSE group
N M Raiji & Co Bankers
Office Doddakannelli Sarjapur Road
A
Not Reported
Bangalore Karnataka 560035
Chart. 3.3.2-2.
Share Holding Pattern of Wipro as on '31/03/2003â&#x20AC;&#x2122;
Major Holder
Number Of share
Percentage
Promoters
195127110
83.90
Institutional Investors
10229524
4.40
Other Investors
10813853
4.65
General Public
16393505
7.05
BACKGROUND INFORMATION (a)
The Company was Incorporated on 29th 1945 December, at Mumbai.
The Company Manufacture vegetable ghee, vanaspati, and refined oils including salad oil, soap, waxs and tin containers for packing, crushing and oil milling trading in oils
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and oilseeds and manufacture of fluid power products. The Products trade names were "Kisan", "Sunflower" and "Camel". (b)
In 1997 the name of the Company was changed from Western India
Vegetable Products Ltd., to Wipro Products Ltd., with effect from 7th June. It was again changed to Wipro Ltd., with effect from 28th April 1984. (c)
The Company set up a joint venture company with General Electric of
U.S.A., in the name of Wipro GE Medical Systems Pvt. Ltd., for the manufacture, sale and service of diagnostic and imaging products. The Joint Venture has also an OEM sourcing arrangement with Elpro International Ltd., for locally made x-ray products. In 1990, the joint venture became a subsidiary of the Company. (d)
1n 1990 the Company undertook to set up a high technology plant and
R&D Center at Aurangabad with an investment of Rs 40 crores. The product range was to include incandescent lamps, linear and circular fluorescent lamps, accessories and luminaries. (e)
1n 2000 company has become the second largest company in terms of
market capitalization on the Bombay Stock Exchange. (f)
In 2002, the company has strong software engineering processes &
also achieved ISO 9000 certification. Wipro is the first software company to get SEI Level 5 & also implemented Six Sigma TQM practices to software projects and support functions. (g)
Besides the company has 34 branches in India 2 branches in USA, as
well as in other countries like Japan and United Kingdom.
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A Study on Security Analysis for selecting Appropriate security
45,000
40
40,000
35 30
30,000
25
25,000
20
20,000
15
15,000 10,000
10
5,000
5
-
0 1999
2000
2001
2002
Year
Percentage
Rs in million
35,000
2003 Sales
Growth rate
Fig. 3.3.2-1 Growth Rate of Sales of Wipro
40
140
35
120
119.0
100
25
80
76.6
20
60
15
40 29.7
10 5
Percentage
Amount in Rs
30
20 -6.1
0
0 -20
1999
2000
2001
Year
2003 EPS
Fig. 3.3.2-2 Growth Rate of EPS of Wipro
Administrative Management College
2002
40
Growth rate
A Study on Security Analysis for selecting Appropriate security
Fig. 3.3.2-3 Co-movements â&#x20AC;&#x201C; Wipro Scrip and Sensex
3.3.3 BSE Code NSE Code Face Value Market Lot
SATYAM COMPUTER SERVICE LTD : : : :
500376 SATYAMCOMPEQ 2 1
Chart. 3.3.3-1 Satyam Computers At a Glance Name of the company
Incorporation year
Industry
Satyam Computer Service LTD 24th June 1987 Chairman Group
Computer and Software Auditors
Mr. B. Ramalinga Raju Registered office
Price Waterhouse Bankers
Satyam BSE group
Mayfair Center 1 Floor 1-8-
Bank of Baroda BNP Paribas Citibank NA. HDFC Bank Ltd. Hongkong & Shanghai Banking Corporation Ltd. ICICI Bank Ltd. Vijaya Bank
303/36 Secunderabad Andhra Pradesh 500003
Administrative Management College
A
41
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Chart. 3.3.3- 2. Share Holding Pattern of Satyam as on '31/03/2003â&#x20AC;&#x2122; Major Holder
Number Of share
Percentage
Promoters
65243264
20.74
Institutional Investors
176995424
56.27
Other Investors
45663064
14.52
General Public
26641048
8.47
BACKGROUND INFORMATION (a)
On 24th June 1987 company was incorporated as a Private Limited
Co. for providing Software Development and Consultancy Services to large corporations. B Rama Raju and B Ramalinga Raju promoted the company. (b)
On 26th August 1991
it was converted into a Public Limited
Company. Satyam Computer has four subsidiaries: Satyam Spark Solutions, Satyam Infoways, Satyam enterprise Solutions and Satyam Renaissance, Consulting, Spark solutions focuses on software products, Infoways operates in the field of electronic commerce and electronic data interchange. Satyam Computer Services Ltd., one of the fastest growing IT companies in the country, has taken significant decisions recently including the merger of three of its subsidiaries with the parent company and a 1:1 bonus issue.
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(c)
The Company has formed a strategic alliance with Microsoft
Corporation to provide Web and enterprise integration application deployment solutions to US public sector customers utilizing Windows DNA 2000 technology. (d)
The Company has been rated as one of the 10 most well regarded
companies in the country in prestigious 2000/2001 Review 2000 Survey conducted by the Hong Kong-based Far Eastern Economic Review.
(e)
Company has 29 branches in India and 6 branches in USA. Besides it
has many branches other counters like Germany, Malaysia, United Kingdom and Singapore etc.
25000
90 80 70 60
15000
50 40
10000
30
Percentage
Rs in Million
20000
20
5000
10 0
0 1999
2000
2001
2002 Sales
Year
Fig. 3.3.3-1 Growth Rate of Sales of Satyam
Administrative Management College
43
2003 Growth rate of sales
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20
300 260.2
250
Amount in Rs
16 14
200
12
150
10 8
100
6
50
4 2
-14.3
0
-17.4
-31.6
0 1999
2000
2001
2002
EPS
Fig. 3.3.3-2 Growth Rate of EPS of Satyam
Fig. 3.3.3-3 Co-movements - Satyam Scrip and Sensex
BSE Code
HCL TECHNOLOGIES LTD : 532281
Administrative Management College
44
-50
2003
Year
3.34
Percentage
18
Geowth rate
A Study on Security Analysis for selecting Appropriate security NSE Code : HCLTECHEQ Face Value : 2 Market Lot : 1
Chart 3.3.4-1 HCL Technologies At-a Glance Name of the company
Incorporation year
Industry
HCL Technologies LTD
12th November 1991
Computer
Chairman
Group
software Auditors
Mr Shiv Nadar Registered office
HCL BSE group
BSR & Co. Bankers
806-808, Siddharth, 96, Nehru
A
Place New Delhi Delhi 110019
Citibank NA. Deutsche Bank AG ICICI Bank Ltd. Standard Chartered Grindlays Bank
Chart. 3.3.4-2. Share Holding Pattern of HCL as on '31/03/2003' Major Holder
Number Of share
Percentage
Promoters
222202376
77.04
Institutional Investors
30418444
10.55
Other Investors
21882229
7.59
General Public
13925689
4.83
BACKGROUND INFORMATION (a)
HCL Technologies Limited was originally incorporated on 12th
November 1991, as "HCL Overseas Limited". The certificate of commencement of business was received on 10th February, 1992. On July 14, 1994, the name of the
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Company was changed to "HCL Consulting Limited". The Company changed its name to "HCL Technologies Limited" on 6th October 1999 to better reflect the line of activities of the Company. HCL provides new technology development services to its clients. (b)
The Company has one of the largest software development
infrastructures in India. This state-of-the-art infrastructure, which comprises seven software factories, is designed to take advantage of the high productivity and scalability as well as the relatively lower cost of software development in India (c)
1n 1998 the company has a rich heritage in technologies like the
Internet and e-Commerce, networking and internetworking, Internet telephony, telecom, embedded software, ASIC/VLSI design and testing, satellite communication, wireless communication and component based object technologies like COM, DCOM and CORBA. (d)
In 1999, HCL Technologies has created wholly-owned subsidiaries to
cater to specific geographic regions. Its major subsidiary is HCL Technologies America, 100 per cent owned by the company.
(e)
HCL Technologies has entered into a strategic alliance with
NASDAQ-listed Vitesse Semiconductor to develop software solutions for global networking markets.2001
(f)
The company more than six branches in India and more than 9
branches in USA. Besides it has many branches in other countries.
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8000
90 81.3
7000
70
64.9
60
5000
50
44.9
4000
40 30
3000
20
2000
10
1000
-0.2
0
0 -10
1998
1999
2000
Sales
Year
Fig. 3.3.4-1 Growth Rate of Sales of HCL
Administrative Management College
2001
47
2002 Growth rate
Percentage
Rs in miilion
6000
80
A Study on Security Analysis for selecting Appropriate security
35
100 81.9
80 60
25
40
20
20 15
5.0 -6.7
10
0
Percentage
Amount in Rs
30
-20
5
-40 -53.1
0 1998
1999 2000 Year
-60 2001
EPS
Fig. 3.3.4-2 Growth Rate of EPS of HCL
Fig. 3.3.4-3 Co-movements â&#x20AC;&#x201C; HCL Scrip and Sensex
4.2.1 GLOBLE ECONOMY
Administrative Management College
2002
48
Growth rate
A Study on Security Analysis for selecting Appropriate security
In recent years, globalization of capital flows hassled to the growing relevance of emerging capital markets and India is one of the countries with an expanding stock market that is increasingly attracting funds from the FIIs. In particular, deregulation and market Liberalization measures, rapid developments in communication technology and computerized trading systems, and increasing activities of multi national corporations have accelerated the growth of Indian capital market. From 1999 onwards, Indian firms are raising capital from the US market by listing themselves in US exchanges.
The economic dailies as well as official publications have been full of stories of a newfound alliance between the NSE and the NASDAQ. Through these news reports, market regulators, traders, and the general investing public in India have become sensitized to the US stock market movements. Finally, a quick examination of stock market movements of these two markets suggests that there exists a substantial degree of inter dependence between the US and Indian stock market indices.
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Fig. 4.2.1-1 Co â&#x20AC;&#x201C;movements of Nifty and NASDAQ Stock Markets 4.2.2
INDIAN ECONOMY
TRENDS IN GROWTH RATE OF GDP Table. 4.2.2-1 Trends in Growth Rate of GDP Percentage change over the previous year Item Year I. Agriculture and allied sector II. Industry 1. Mining 2. Manufacturing 3. Electricity 4. Construction III. Service 5. Trade, Hotel and communication 6. Financial and real estate 7. Community social and personal
Administrative Management College
1998-99
1999-00
2000-01
6.2 3.7 2.8 2.7 7 6.2 8.4
0.3 4.8 3.3 4 5.2 8 10.1
-0.4 6.6 2.4 7.3 5 6.39 5.6
5.7 3.3 1 3.4 4.3 3.7 6.8
-3.1 6.1 14.8 6.1 5.2 7.1 7.1
7.7
8.5
6.9
8.7
7.8
7.4
10.6
3.5
4.5
6.5
10.4
12.2
5.6
5.6
6.4
50
2001-02 2002-03
A Study on Security Analysis for selecting Appropriate security
IV. Total GDP at factor cost Source: Central Statistical Organization (a)
6.5
6.1
4.4
5.6
Impact of Gross domestic product
Gross domestic product is the measure of economyâ&#x20AC;&#x2122;s total production of goods and services. Rapidly growing GDP indicates expanding economy with ample opportunity for a firm to increase the sales vise versa. Penetration of GDP provides the insights on the economy- agriculture, industry, and service sectors performance.
Correlation between Growth rates of GDP and Sensex Table.4.2.2-2 Correlation between Growth rates of GDP and Sensex Year 1998-99
Growth rate of GDP 6.5
Growth rate of Sensex 26.7
1999-00
6.1
7.7
2000-01
4.4
-22.8
2001-02
5.6
-4.5
2002-03
4.4
-3.8
Correlation
Administrative Management College
0.66
51
4.4
7
30
6
20
5
10
4
0
3
-10
2
-20
1 0
Growth Rate of Senesx
GRowth Rate of GDP
A Study on Security Analysis for selecting Appropriate security
-30 1998-99
1999-00
2000-01
2001-02
2002-03
Year
GDP
Sensex
Fig.4.2.2-1. Relationship Between GDP and Sensex (b)
Correlation
GDP has become most crucial variable affecting the stock market. As the graph shows, there has been positive correlation 0.66 between GDP and Sensex indicates that GDP has direct influence on stock market. Of course there are several other factor impact the movement of Sensex, like September 11 attacks in 2001. (c)
The government is expecting that the GDP growth would be higher
than last year The Center for Monitoring Indian Economy (CMIE) raised its forecast for GDP growth for the year ending March 31, 2004 to 6.5% from the earlier 4.3%.
TRENDS IN DEFICITS OF CENTRAL GOVERNMENT Table. 4.2.2-3 Trends in Deficits of Central Government (As percentage of GDP) Revenue Primary Year Fiscal deficit deficit deficit
Growth rate of Sensex
1997-98
3.1
0.5
4.8
---
1998-99
3.8
0.7
5.1
26.7
1999-00
3.5
0.7
4.4
7.7
2000-01
4.1
0.9
5.6
-22.8
2001-02
4.2
1.4
6.1
-4.5
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2002-03
3.9
0.7
5.9
Correlation
-3.8
-0.51
Source: Budget document (a)
Impact of Fiscal deficit
Fiscal deficit measure the difference between government spending and revenues. Since government borrowing must offset the budgetary shortfall, large amounts of government borrowing can force up the interest rate by increasing the total demand for credit in the economy.
7
30
6
20
5
10
4
0
3
-10
2
-20
1 0
-30 1998-99
1999-00
2000-01
Year
(b)
Sensex Growth Rate
Deficit Growth Rate
Fig. 4.2.2-2 Relationship between Fiscal Deficit and Sensex
2001-02
2002-03 Fiscal deficit
Sensex
Correlation
The table. 4.2.2. Shows there has been negative correlation (-.51 percent) between the fiscal deficit and Sensex, indicates that deficit does not have direct influence on
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Sensex. However the relationship is negative, the above variable may move in opposite direction. Currently the government estimate fiscal deficit for FY04 is 5.6 per cent of GDP, it affects positively in a very lees amount to the stock market.
TRENDS IN THE SAVINGS AND INVESTMENT Table. 4.2.2-3 Trends in the Savings and Investment Item 1997-98 1998-99 1999-2000 2000-01 2001-02 (As percent of GDP at current market prices) Gross domestic savings 23.1 21.5 24.1 23.4 24 1. Public 1.3 -1 -1 -2.3 -2.5 2. Private 21.8 22.5 25.1 25.7 26.5 3. Household 17.6 18.8 20.8 21.6 22.5 4. Financial 9.6 10.5 10.7 10.4 11.2 5. Physical 8 8.4 9.6 11.2 11.3 6. Private corporate 4.2 3.7 4.4 4.1 4 Gross domestic investment 24.6 22.6 25.2 24 23.7 7. Public 6.6 6.6 6.9 6.4 6.3 8. Private 16 14.8 16.7 16.1 16.1 Growth rate of Sensex 26.7 7.7 -22.8 -4.5 -3.8 Gross domestic investment 24.6 22.6 25.2 24 23.7 Gap between saving and investment -1.5 -1 -1.1 -0.6 0.2 Correlation -0.30 Source: Central Statistical Organization.
(a)
Impact of saving and investments
Saving and investment is the portion of amount that is saved and invested by the people and corporate. Moderate level of saving and high investment is favorable to
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stock market, but increase in savings rate
indicates little scope for further
improvement.
Fig.4.2.2-3 Relationship Between Investment Rate and Sensex 25.5
30 20
24.5 24
10
23.5
0
23 22.5
-10
22
-20
21.5 21
-30 1998-99
1999-00
2000-01
Year
(b)
Sensex Growth Rate
Investment Growth Rate
25
2001-02 2002-03 Investment
Sensex
Correlation
The graph shows the relation between investment and stock market was
(â&#x20AC;&#x201C;0.3
percent) moving in opposite way from 1999-00 onwards. Mainly because of the saving was increasing, on the same time the investment started decrease, seems to be the Sensex is rising.
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TRENDS IN THE INTEREST RATE Table.4.2.2-4 Trends in the Interest Rate Interest Rate
31-Mar-01
11-Jan-02
29-Mar-02
10-Jan-03
Bank rate
7.0
6.5
6.5
6.3
IDBI
12.5
12.5
12.5
12.5
PLR
11.0-12.0
11.0-12.0
11.0-12.1
10.75-11.5
8.5-10
7.5-8.5
7.5-8.5
5.5/6.5
6.8/13.5
4.54/7.3
5.0/19.0
3.5/7
CDs
6.3-11.5
6.7-9.5
5-10.03
4.71-6.5
CPs
8.75-11.25
7.4-9.75
7.41-10.25
7.5
8.5
6.8
6.1
5.4
7.0
6.2
5.4
Deposit rate Call money borrowing low/high
91 days T.bills
9.0 364 days T.bill Source: Monitory and credit policy (a)
Impact of interest rate
Interest rate is the cost of borrowing depends on nature of instruments, which will be decided by demand and supply of money and controlled by RBI. It indicates the attractiveness of future investment opportunity and it is key determinant of business expenditure. High interest rate reduces the value of future cash flow as well as opportunities for investment.
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(b)
Relationship between interest rate and stock market
As table shows interest rate declining over the period, it enables the investors to invest in securities instead of any other instrument. Investors also can borrow the money from other sources and could invest in stock avenues. In conclusion declining interest rate favorable to the market as well as to the companies, where their cost on borrowed fund reduces.
TRENDS IN MONEY SUPPLY Table.4.2.2-5 Trends in Money Supply Absolute value Year Percentage changes (Rs, 1000 Crore)
Growth rate of Sensex
1998-99
937.50
13.2
26.7
1999-00
1,124.20
14.6
7.7
2000-01
1,318.20
16.8
-22.8
2001-02
1,500.00
14.2
-4.5
2002-03
1,689.00
15.7
-3.8
Correlation
-.90
Source: Central statistical organization (a)
Impact of money supply
A rate of increase in money supply ensures inflation is with in the permissible limit. The table shows the correlation between money supply and Sensex was highly negative, which indicates increase in money supply makes adverts affect on stock market vise versa. So the money supply is also one of the crucial factor decides stock market movement.
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30
16
20
14 12
10
10
0
8 6
-10
4
-20
2 0
-30 1998-99
1999-00
2000-01
2001-02
2002-03
Money supply
Year
Sensex
Fig. 4.2.2-4 Relationship Between Money supply and Sensex (b)
Growth Rate of Sensex
Growth Rate of Money Supply
18
Correlation
Above graph shows there is the negative relationship between Money supply and Sensex as it moving in the opposite way during the year. So one should be careful before taking investment decision in any security about the present movement of money supply.
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TRENDS IN GROWTH RATE OF INFRASTRUCTURE Table.4.2-6 Trends in Growth Rate of Infrastructure Growth Rate Growth rat Transport and e of communication Se nse x
Year
Total
Energy
Steel
1998-99
2.96
3.85
1.4
1.7
26.7
1999-00
10.06
6.68
15
11.6
7.7
2000-01
6.12
4.65
6.5
8.3
-22.8
2001-02
-1.56
1.61
2.4
-5.8
-4.5
2002-03
7.5
2.1
9.7
83.2
-3.8
Correlation
-.07
Source: Ministry of commerce and industry, Railways, Shipping, Communication, Statistics and program implementation.
(a)
Impact of infrastructure
Investment in infrastructure developments indicates positive signal to the sectors in the economy, especially manufacturing companies related to transportation. In order to gain from the trade the transaction costs should be low. So the better facility reduces the cost of trade and enables the companies for making profit.
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30
10
20
8 10
6 4
0
2
-10
0 -2
1998-99
1999-00
2000-01
2001-02
2002-03
-4
-20 -30
nfrastructure
Year
Sensex
Fig.4.2.2-5 Relationship Between Infrastructure and Sensex
(b)
Correlation
The table.4.1.6 shows there has been negative correlation between infrastructure and Sensex, but in real sense growing infrastructure rate would show positive signal for the economy. (c)
Percentage of sensex
Infrastructure Growth Rate
12
In the budget 2003-04 there - 48 new road projects at an estimated
cost of around Rs.40, 000 Crore; with a quarter of them being made of cement concrete; showing opportunity for automobile companies as well as cement companies.
TRENDS IN MONSOON AND AGRICULTURAL GROWTH RATES
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Table. 4.2.2-7 Trends in Monsoon and Agricultural Growth Rates Percentage of district with Growth of Growth rate of Year Normal Excess Deficient normal/excess agricultural and Sensex rain fall allied sector 1
2
3
4
5
6
7
1998-99
20
13
2
81
6.2
26.7
1999-00
25
3
7
67
0.3
7.7
2000-01
23
5
7
66
-0.4
-22.8
2001-02
29
1
5
68
5.7
-4.5
2002-03
14
1
21
44
-3.1
-3.8
Correlatio n between 6&7 Correlatio n between 5&7 Source: Central statistical organization
(a)
0.53 0.50
Impact of agriculture and allied products growth rate
In the Indian economy the matters to be considered in the first place is the behavior of the monsoon and performance of agriculture. As agriculture is the main stay of 70% of the population and contributes nearly 35% of the out put of the economy. If the monsoon is good and agricultural income rise, the demand for industrial products and services will be good and industry prospers.
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8
30
6
20
4
10
2
0
0
-10 1998
1999
2000
2001
2002
2003
-2
-20
-4
-30
Year
Agreculture and allied products
Growth Rate of Sensex
Monsoon Performence
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Sensex
Fig. 4.2.2-6 Relationship between Monsoon and Sensex (b)
Correlation
The above figure shows the relationship between agriculture and Sensex was positive. As could be seen easily from the graph, the growth rate of both variables was moving in the same direction, indicates that the agriculture production has direct impact on stock market. In fact good growth in industrial and service sectors moved the Sensex higher in 2002-03. (c)
The economic think tank expects the agricultural sector to grow by
7.5% despite the delayed, but good start to the southwest monsoon, which is likely to lead to better food grain output this fiscal. Thus, there is a positive sign to the stock market.
TRENDS IN EXCHANGE RATE OF RUPEE Table.4.2.2-8 Trends in Exchange Rate of Rupee Percentage Exchange rate of Year change over the rupee/$ previous year 1998-99
42.07
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1999-00
43.33
-2.9
7.7
2000-01
45.68
-5.1
-22.8
2001-02
47.69
-4.2
-4.5
2002-03
48.54
-2.16
-3.8
2003 June
46.74
3.7
7.9
Correlation
0.33
Source: Reserve bank of India (a)
Impact of exchange rate
Exchange rate measures the value of the rupee over the foreign currency. Exchange rate decides international competitiveness of domestically produced goods and it can affect import export, import and the rate of inflation domestically.
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5
30
4 Grow th of Exchange Rate
2 10
1 0 -1
1998-99
1999-00
2000-01
2001-02
2002-03
2003-june
-2
0 -10
-3 -4
Grow th Rate of Sensex
20
3
-20
-5 -6
-30 Year
exchange rate
sensex
Fig.4.2.2 -7 Relationship between Exchange Rate and Sensex
(b)
Correlation
There has been positive relationship between exchange rate and Sensex. As above table indicates initially value of money was decreased and the Sensex also moved in the same way. In the year 2003 June the Sensex has gained, since the value of the rupee raised. In the above graph and table it has been taken a Dollar against Rupee.
4.2.3 COMPARATIVE ANALYSIS OF COMPUTER AND SOFTWARE, PHARMACEUTICAL, CEMENT AND AUTOMOBILE INDUSTRIES
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sales 400.0 350.0
Percentage Growth
300.0 250.0 200.0 150.0 100.0 50.0 0.0 1992
-50.0
1993
1994
1995
1996
1997
1998
1999
2000
-100.0 -150.0
Year Computer and software
Pharmaceutical
Cement
Fig. 4.2.3-1 Sales Growth Rate of Computer and Software, Pharmaceutical, Cement and Automobile industry.
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Automobile
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200.0
150.0
Percentage
100.0
50.0
0.0 1992
1993
1994
1995
1996
1997
1998
1999
2000
-50.0
-100.0 Year
Computer and Software
Pharmaceutical
Cement
Fig. 4.2.3-2 Dividend Growth Rate of Computer and Software, Pharmaceutical, Cement and Automobile industry INFERENCE The graph 4.2.3-1 and 4.2.3-2 shows the growth rate of sales and dividend of different industries respectively. When comparing between the different industries Computer and Software industry showing the positive signal in the last year where other industries are looking down in the dividend payment even though the sales shows bit increasing trend. All other industries except Computer and Software industries are down ward trend in the comming years. COMPARATIVE STATEMENT OF RATIOS OF FOUR INDUSTRIES
CURRENT RATIO Table.4.2.3-1
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Current Ratio Industry
1999
2000
2001
2002
2003
Computer and Software
3.52
3.61
3.42
3.18
2.66
Pharmaceutical
1.30
1.37
1.35
1.24
1.25
Cement
0.79
0.76
0.81
0.93
1.16
Automobile
1.08
1.07
1.15
1.28
1.48
Source: Financial Results of Computer and Software, Pharmaceutical, Cement and Automobile Industries INFERENCE Current ratio indicates the extent of current assets available to meet current liabilities. The satisfactory level is considered as 2:1. The above table shows current ratio for Computer and Software is the highest in all the years, followed by Pharmaceutical and Automobile industry and very less than the standard level in cement industry where it will face problem in meeting current obligation.
DEBT-EQUITY RATIO Table.4.2.3-2 Debt-Equity Ratios Industry
1999
2000
2001
2002
2003
Computer and Software
0.04
0.02
0.04
0.07
0.17
Pharmaceutical
1.13
1.04
0.9
1.08
1.31
Cement
2.22
2.2
1.99
1.73
1.65
Automobile
0.91
0.9
0.85
0.86
0.91
Source: Financial Results of Computer and Software, Pharmaceutical, Cement and Automobile Industries
INFERENCE Debt-equity ratio enables the investor to analyze the long-term solvency of the industry. In the above table solvency position of the Computer and Software industry is good, followed by automobile. On the other hand, Pharmaceutical industry showing not bad and Cement industry had worst case in 1999, but gradually recovering in
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coming years. This high ratio indicates that the profit will be eaten away by debt through payment of interest.
FIXED ASSETS TURNOVER RATIO Table.4.2.3-3 Fixed Asset Turnover Ratio (in times) Industry
1999
2000
2001
2002
2003
Computer and Software
2.24
0.86
2.22
2.54
2.65
Pharmaceutical
1.34
1.26
1.44
1.21
1.27
Cement
0.84
0.85
0.86
0.88
0.90
Automobile 1.61 1.61 1.56 1.83 1.58 Source: Financial Results of Computer and Software, Pharmaceutical, Cement and Automobile Industries
INFERENCE This ratio indicates efficiency in utilizing assets. Higher the turnover implies more efficient the industry in utilizing the assets. The above table shows the Computer and software industry is effectively utilizing the assets, followed by Automobile and pharmaceuticals. And the last place taken by cement industry, which is not doing well comparing to other industries
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INVENTORY TURNOVER RATIO Table. 4.2.3-4 Inventory Turnover Ratio in (days) Industry
1999
2000
2001
2002
2003
Computer and Software
49.54
34.12
51.13
38.12
25.64
Pharmaceutical
5.14
4.98
5.60
4.99
5.00
Cement
9.31
9.35
8.83
8.75
7.99
Automobile
6.93
7.00
6.65
7.79
5.54
Source: Financial Results of Computer and Software, Pharmaceutical, Cement and Automobile Industries INFERENCE This ratio indicates efficiency of the management in selling its product. The high ratio indicates the products are not being sold quickly. The above table indicates the holding period of inventory in Pharmaceutical industry was least compare to other industries, but in the Computer and Software industry, it has high stock for selling, however it can not be come to the conclusion that the industry can not sell the products, because the each product consists large some of money.
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DEBTORS TURNOVER RATIO Table. 4.2.3-5 Debtors turnover ratio (in times) Industry
1999
2000
2001
2002
2003
Computer and Software
4.34
1.88
4.22
4.49
4.78
Pharmaceutical
3.53
3.64
4.09
3.66
4.00
Cement
16.55
17.33
15.09
12.92
11.62
Auto
8.45
8.48
7.25
6.12
3.63
Source: Financial Results of Computer and Software, Pharmaceutical, Cement and Automobile Industries INFERENCE The debtor turnover ratio indicates the number of times the debtorsâ&#x20AC;&#x2122; turnover each year. Generally, the higher the value of debtors turnover the more efficient in the industry environment in the management of credit. In the above table, the Cement is doing well in managing the debtors, but other industries are slower in collecting debtors, in comparing Cement industry.
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INTEREST COVERAGE RATIO Table. 4.2.3-6 Interest Coverage Ratio Industry
1999
2000
2001
2002
2003
Computer and Software
42.77
46.24
52.21
34.8
13.12
Pharmaceutical
1.25
1.87
1.44
1.29
0.75
Cement
1.14
1.34
0.97
0.36
0.65
Automobile
1.16
1.19
0.41
0.86
0.97
Source: Financial Results of Computer and Software, Pharmaceutical, Cement and Automobile Industries
INFERENCE Interest coverage ratio indicates the number of times the interest charges are converted by funds that are ordinarily available for their payments. A higher ratio is desirable but too high ratio indicates that the firm may fallow conservative policy in using debts as the Computer and Software industry has. Remaining all fall more or less under same category which indicates excessive use of debts or insufficient operation in their coming years.
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PROFITABILITY RATIOS Table. 4.2.3-7 PBIDTM (%) Industry Computer and software Pharmaceutical
1999
2000
2001
2002
2003
33.58
37.23
33.5
33.23
31.23
15.63
18.41
15.05
16.66
14.23
Cement
15.12
15.3
14.62
9.77
11.66
Automobile
8.82
8.9
6.21
8.05
10.48
Profit Before Interest Tax Margin (%) Computer and software
26.95
32.01
26.65
27.93
25.22
Pharmaceutical
11.19
13.93
11.08
11.9
9.46
Cement
8.97
9.36
8.72
3.46
5.98
Automobile
5.03
5.1
2.22
4.3
6.2
After Profit After Tax Margin (%) Computer and software Pharmaceutical Cement
23.59
26.44
23.62
24.79
21.4
0.36
4.08
2.12
1.82
-3.55
0.43
1.68
-0.46
-6.23
-3.35
Automobile 0.7 0.82 -3.34 -0.84 -0.22 Source: Financial Results of Computer and Software, Pharmaceutical, Cement and Automobile Industries INFERENCE The above table indicates the profit margin ratios where the Computer and Software industry only was showing positive signal where as all remaining industries has a negative margin in the year 2003in After Profit After Tax Margin. The profit mainly eaten away by interest and tax for namely, Pharmaceutical, Cement and automobile industries, even though the said industries made profit during the year.
RETURN ON CAPITAL EMPLOYED Table. 4.2.3-8
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ROCE (%) Industry
1999
2000
2001
2002
2003
Computer and software
25.61
12.05
24.85
31.37
34.01
Pharmaceutical
0
11.75
10.28
9.8
0
Cement
0
8.26
0
0
0
Automobile
8.71
8.86
3.27
6.29
6.49
Source: Financial Results of Computer and Software, Pharmaceutical, Cement and Automobile Industries INFERENCE The return on capital employed ratio provides a test of profitability related to the source of long-term fund. The above table indicates that the Computer and Software industry has return over long term-fund than other industries. The ratios related to Computer and software industry are increasing over the years, where as the other industriesâ&#x20AC;&#x2122; ratio declining trend, indicates performance of these industries are declining trend.
RETURN ON NET WORTH RATIO Table. 4.2.3-9 RONW (%)
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Industry
1999
2000
2001
2002
2003
Computer and software
23.3
10.16
22.84
29.74
33.74
Pharmaceutical
0
8.07
4.26
3.64
0
Cement
0
4.09
0
0
0
Automobile
2.2
2.55
-8.22
-2.09
-0.41
Source: Financial Results of Computer and Software, Pharmaceutical, Cement and Automobile Industries INFERENCE This ratio is the most important to judge whether the industry has earned satisfactory return for its equity-holders or not. From the above table it can be clearly analyzed the profitability to the equity-holders increasing over the years, however the rate of increasing has been declining. But the profitability to the equity-holders declining over the years for other industries namely Pharmaceutical and Automobile, where as in Automobile industry it has been negative growth, indicates that dividend available to equity holders decreasing over the years, Cement industry also not for behind.
4.2.4
BUDGET: SECTORIAL IMPACT ANALYSIS
The Union Budget 2003-04 has been largely positive for the industry. The big gainer has been the Cement Industry, which should benefit from the thrust to infrastructure,
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especially the announcement of new road. The 12.5% distribution tax on dividends has been the other negative for corporate. Chart. 4.2.4 Quick analysis of what each industry wanted, what it got and the overall impact on each industry of budget 2003-04. What they wanted
What they got
Impact
Automobiles and Auto Components Reduction in excise duty on Passenger cars and MUV's from 32% to 16%
Reduction in excise duty on Passenger cars, MUV's and Tyres from 32% to 24%
Reduce duty on Tyres from 32% to Excise on Chassis hiked by Rs10000 16% per unit
↑
1% National Calamity Duty imposed on 2-Wheeler, Cars and MUV's Cement Reduce duty on non coking coal Maintain Specific Duty rates as computation of Ad Valorem duty Status Quo would be tedious Bring down gradually the high Excise burden increased by Rs 50 per average tax burden of Rs800 per ton on Cement and Clinker ton levied on cement Reduce excise duty on AC's to 16%
↑ Due to impetus provided to Infrastructure
Information technology Reduction in customs duties on computer components, sub-assemblies, Web Section 10A/10B continues, cameras, CPU cooler fans, speakers from extended for merged entities existing rates to 10% Abolish SAD or make it Convertible Pharmaceuticals
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Import duty exemption for equipment, consumables and clinical trial samples used for R&D Include all life saving medical equipment and diagnostic equipment in duty free list
4.2.5
Drugs and Materials for clinical trials exempted from customs duty Import Duty reduction/exemption for life saving equipments
COMPARATIVE ANALYSIS OF FOUR COMPANIES
140.0 120.0
Percentage
100.0 80.0 60.0 40.0 20.0 0.0 2000
-20.0
2001
Infosys
2002
Year Wipro
2003
Satyam
Fig. 4.2.5-1 Sales Growth Rate of Infosys, Wipro, Satyam and HCL
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300.0 250.0
Percentage
200.0 150.0 100.0 50.0 0.0 2000
2001
2002
2003
-50.0 -100.0 Infosys
Year Wipro
Satyam
HCL
Fig. 4.2.5-2 EPS Growth Rate of Infosys, Wipro, Satyam and HCL INFERENCE The figure 4.2.5-1 and 4.2.5-2 shows the sales and EPS of four companies in Computer and Software industry respectively. Growth rate of sales of Infosys and Wipro indicates the positive signal in the last year, but EPS of Infosys only showing positive signal. Satyam was doing well during the middle period but failed to provide good return to investors, HCL also far behind when comparing between these companies.
COMPARATIVE STATEMENT OF RATIOS OF FOUR
COMPANIES Category 1
MARKET VALUE RATIOS Table. 4.2.5-1 Market Value Ratios Name of the company Price Earning Ratio
Market to book
Infosys
9.4
28.3
Wipro
11.4
32.97
Satyam
3.1
12.43
HCL
2.1
10.86
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Source: Financial Results of Infosys, Wipro, Satyam and HCL INFERENCE (a)
P/E Ratio
The above table shows the P/E ratio for Wipro is the highest followed by Infosys. The general rule is P/E ratio of well-established companies is very high and low in case of weaker ones. Earning of Wipro and Infosys justifies its high P/E ratio.
(b)
Market to Book Ratio
In the table shows the Market Book Ratio of all the companies are high (market price is triple or quadruple to its book value) which indicates, investors having the tremendous confidence in the growth prospects of the company. Viewed in this scenes Wipro and Infosys seem to enjoy investorâ&#x20AC;&#x2122;s confidence. Remaining two companies also favorable in this
regard.
Category 2
EARNING RATIOS Table. 4.2.5-2 Earning Per Share Ratio Name of the company 1998-99 1999-00
2000-01
2001-02
2002-03
Infosys
40.90
43.23
95.05
122.07
144.61
Wipro
7.43
13.12
28.73
37.25
34.98
Satyam
5.60
4.80
17.29
14.29
9.77
14.97
13.77
HCL 16.72 30.42 14.26 Source: Financial Results of Infosys, Wipro, Satyam and HCL
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INFERENCE In this regard Infosys indicates more favorable than others followed by Wipro. Satyam and HCL stands poor in this regard. However to calculate the value of shares on the basis of this one needs the information on the normal rate of return expected by investor in the Computer and Software industry. As this can vary from investor to investor the same is not attempted.
Table. 4.2.5-3 Dividend per Share Ratio Name of the company 1998-99 1999-00
2000-01
2001-02
2002-03
Infosys
7.50
4.50
10.00
20.00
27.00
Wipro
1.50
1.50
0.30
0.50
1.00
Satyam
2.00
3.00
3.00
0.80
1.20
1.00
1.5
HCL 0.50 0.50 0.20 Source: Financial Results of Infosys, Wipro, Satyam and HCL
INFERENCE Dividend percentage is high in Infosys through out the period, Wipro and HCL is found to have consistency in this regard. However to ascertain the correct value of shares the correct value of share it is essential to include capital appreciation also. As
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it is not available it is concluded that Infosys is consistently increasing from the year 1999-00.
Table. 4.2.5-4 Dividend Pay out Ratio Name of the 1998-99 1999-00 company 8.95 11.55 Infosys
2000-01
2001-02
2002-03
11.90
17.00
19.95
Wipro
8.82
4.50
3.22
1.95
2.68
Satyam
13.31
10.72
9.47
5.35
7.92
7.36
10.89
3.28 1.80 1.71 HCL Source: Financial Results of Infosys, Wipro, Satyam and HCL INFERENCE
Infosys has an edge over others in this regard from 1999-00 onwards. Normally young aggressive growth companies have low dividend payout ratios. So it is inferred that all the companies including Wipro and Satyam is encouraging.
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Category 3
PROFITABILITY RATIOS Table.4.2.5-5 Profitability Ratios Return on Capital Employed Name of the company
1998-99
1999-00
2000-01
2001-02
2002-03
Infosys
42.44
47.40
63.17
54.42
46.94
Wipro
26.34
31.40
52.50
58.52
42.53
Satyam
25.69
32.50
33.44
45.55
33.83
HCL
24.52
30.83
42.25
46.73
38.26
Return on Investment Infosys
26.83
36.52
47.51
41.78
36.81
Wipro
35.48
37.24
45.5
38.81
31.4
Satyam
24.07
48.3
37.38
43.64
31.31
HCL
19.37
24.58
17.61
45.4
45.75
Return on Net Worth Infosys
36.20
41.70
56.57
46.57
38.78
Wipro
37.83
46.55
55.10
52.94
39.29
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Satyam
27.23
54.00
50.28
HCL 21.12 29.02 31.59 Source: Financial Results of Infosys, Wipro, Satyam and HCL
55.46
32.76
41.57
38.00
INFERENCE The profitability ratios related to investment are no doubt impressive for all four units over the years. However in the last year 2002-03 the ratios of all the companies are low compare to previous two years. So, all the companies indicating good sign in this regard.
Category 4
LIQUIDITY RATIOS Table. 4.2.5-6 Liquidity Ratios Current Ratio Name of the company
1998-99
1999-00
2000-01
2001-02
2002-03
Infosys
6.57
4.69
3.49
3.87
3.92
Wipro
2.36
2.11
1.30
3.33
3.42
Satyam
3.99
4.64
4.93
4.17
7.05
HCL
4.66
6.04
9.47
6.68
5.11
Quick Ratio Infosys
6.57
4.69
3.49
3.82
3.87
Wipro
1.73
1.66
1.08
3.11
3.26
Satyam
3.99
4.64
4.93
4.17
7.05
6.68
5.10
HCL 4.66 6.04 9.47 Source: Financial Results of Infosys, Wipro, Satyam and HCL INFERENCE
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From the point of view of liquidity all the concern is maintaining high liquidity position than standard norm (2:1) incase of current ratio and (1:1) incase of quick ratio, of course in software companies, lot of money associated with inventory only, which is the main variable in current ratio. The above table indicates, both Infosys and Wipro perform well compare to others.
Category 5
TURNOVER RATIOS Table. 4.2.5-7 Turnover Ratios Fixed assets Turnover Ratio Name of the company
1998-99
1999-00
2000-01
2001-02
2002-03
Infosys
3.71
3.90
4.15
3.27
3.24
Wipro
4.35
4.44
4.62
4.53
3.92
Satyam
1.33
1.61
1.89
2.53
2.70
HCL
4.13
4.39
4.98
5.40
3.40
Debtor Turnover Ratio Infosys
8.54
8.15
8.67
8.00
8.18
Wipro
5.50
5.89
6.19
6.07
5.54
Satyam
4.49
4.13
4.20
4.96
5.02
HCL
4.20
4.40
4.40
4.50
3.40
Average Collection Period (in days) Infosys
43
45
42
46
45
Wipro
66
62
59
60
66
Satyam
81
88
87
74
73
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HCL 86 82 83 Source: Financial Results of Infosys, Wipro, Satyam and HCL
80
106
INFERENCE Turnover ratios in general show a favorable trend. This is comes from financial performance of the companies.
However the collection for HCL is very slow,
followed by Satyam. But Infosys â&#x20AC;&#x2DC;s performance is encouraging where they manage the debtors also well.
Category 6
MARGIN RATIOS Table. 4.4-8 Margin Ratios Operating Profit Margin Name of the company
1998-99
1999-00
2000-01
2001-02
2002-03
Infosys
35.13
39.88
40.27
39.46
40.30
Wipro
28.20
25.96
18.28
13.81
13.13
Satyam
33.51
36.48
36.36
38.93
37.78
HCL
46.10
51.19
43.92
38.88
47.43
Gross Profit Margin Infosys
33.25
33.44
34.33
33.71
29.91
Wipro
10.17
10.18
15.22
22.76
24.06
Satyam
24.96
27.57
25.74
28.58
26.73
HCL
44.45
32.91
40.06
48.08
41.18
Net Profit Margin Infosys
26.38
31.37
32.41
30.41
25.85
Wipro
6.16
9.43
10.74
21.46
24.50
Satyam
21.85
19.23
20.10
39.75
28.03
HCL
43.18
36.16
41.80
54.15
46.97
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Source: Financial Results of Infosys, Wipro, Satyam and HCL INFERENCE Margin ratios speak in favor of HCL and of course it is impressive for others also. The ratios of Wipro were low in the initial years compare to others, but gradually improving in the coming years. During the year 2002-03 the ratios of all the companies shows good sign comparing the other industries. 4.2.6
COMPARISON BETWEEN COMPANIES THROUGH LEVERAGES
Table. 4.2.6-9 Leverages Name of the company
Operating
Financial
Combined
Infosys
0.51
0.90
0.46
Wipro
0.13
-3.00
-0.38
Satyam
0.35
-5.30
-1.86
HCL -0.87 0.53 -0.46 Source: Financial Results of Infosys, Wipro, Satyam and HCL INFERENCE The above table shows Infosysâ&#x20AC;&#x2122;s leverages are positive, it indicates that the changes in sales by 100 percent, the changes in profit by 46 percent. However the leverage less than one indicates the company has to bear fixed cost regardless of sales. As the leverages which is more than one is encouraging, the negative leverage indicated by remaining companies suggest not to invest on those expect in the Infosys. 4.2.7
COMPARISON BETWEEN COMPANIES THROUGH BETA
BETA ANALYSIS Table. 4.4-17 Correlation and Betas Name of the company Correlation Infosys
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Beta Values 1.88
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Wipro
0.40
2.13
Satyam
0.10
1.92
0.45
2.01
HCL Source: Bombay Stock Exchange INFERENCE
From the above table it can be perceived that the stocks of these companies are very aggressive and undiversifide risk for them is very high. Comparing between the companies, Infosys seems to be better as its beta is comparatively slow.
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The experts opinion on the utility of beta is not unanimous. The beta was very popular in the seventies. Of late the glamour of beta seems to have faded somewhat. It should also be noted that there is a third variable â&#x20AC;&#x201C;economy. Economic events cause systematic change in both security and market index prices. The most logical way to forecast beta is to quantify the relationship between market and security return and these factors.
Fig. 4.2.8-1 Comparison between Share movements of Sensex,
Infosys, Wipro, Satyam and HCL Companies
5.1
CONCLUSIONS
Now at the final the following facts emerge from the study security analysis for selecting appropriate security through analyzing economy and industry
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a)
When come to the economic factors the global economies are getting
interrelated, the Indian market will no longer be limited to domestic economic situation. It is from the evident that the NASDAQ and Nifty are getting correlated from the year 1996-97 onwards.
b)
As far as the Indian economy is concerned, the GDP is the primary factor,
has the positive correlation with the Sensex, which directly affects the overall market and followed by other factor. Where the GDP is forecasted at 6.5% for the present year as compared against 4.3%in the year 2002-03, showing good sign for the stock market.
c)
Agricultural growth rate and the monsoon both has direct influence on stock
market and responsible for the economy to become prospers. It has the correlation 0.50 with the Sensex indicates the stock market would be prospers only when the agriculture grow well.
d)
The exchange rate has the positive correlation with the Sensex. In the resent
trend the value of the rupee is going up, shows positive signs to stock market, as Sensex also associated with that movement. e)
When come to the Industrial Factors, in the year 2003-04 the overall
growth rate of different sector according to CMIE report would be: The growth of service sector would be 7%, same as it was in the previous year 2002-03. On the other hand, growth of industrial sector is forecasted at 4.5% in 2003-04 as against 5.8% in 2002-03. As the service sector is the main part of GDP in the present year 2003-04,
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the Computer and Software industry, which is part of the Service sector is given weight than other Industrial sectors.
f)
When compare the ratios of Computer and software, Cement, Automobile
and Pharmaceutical industries, the computer and software industry provides handsome return to the investors.
g)
Except the computer and software industry, all other industryâ&#x20AC;&#x2122;s short-term
solvency position is not good. Of course, the remaining ratios also far behind compared Computer and Software industry.
h)
Budgets in the year 2003-04 is more favorable to Cement and Automobile
industries, as infrastructure felicities talk more about road projects estimated to 40,000 crore, which would be made by cement only. But Computer and Software industry is given reasonably flat effect from the budget.
i)
As the main part of the sales in the Computer and Software industry takes
place through export only, it is sensitive to the global economy and has high risk. It is also from the fact that the September 11 attack in 2001, many software companies has been affected than any other industries. Even though the above factors Computer and Software industry is selected where it shows better opportunities for growth than other industries.
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j)
Then come to the companies, all the units under study are financially
sound and performance indicator reveals the same.
k)
Market potentials for growth of these units are quite encouraging.
l)
Fundamentals of those companies are quite strong. None of the
fundamental, signals for disinvestments for moving out of computer and software industry.
m)
When compare to the specific indicators like sales growth and EPS, the
Infosys will in the first place then followed by Wipro and remaining those Satyam and HCL could be left out because, the sales and EPS and other ratios are encouraging.
n)
The market to book ratio of all the companies are high indicates the existing
investors have an interest about the overall industry and think that still the opportunities exists for these companies.
o)
The leverages of all the companies shows negative mark except Infosys,
reveals the Infosys is only encouraging comparing to Wipro, Satyam and HCL companies.
p)
When comparing the betas between the companies Infosys is less volatile to
overall market which is having the beta1.88, followed by Wipro having the beta 1.92 and the remaining Satyam and Wipro crossed the beta value two.
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5.2 a)
SUGGESTIONS After a close scrutiny of economy industries and companies in considering
the risk, it may be recommended that international economy might affects the firms export prospects, the price competition it faces from competitors, or the profit it makes from abroad. Certainly, despite the fact that the economies of most countries are linked with the global economy, there is a considerable variation in the economic performance across the different countries at any time, investor should properly analyze both globally and domestically before taking investment decision.
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b)
The investor also should consider the budget decision and present years
forecast of different sectors. Comparisons between the different is also necessary because of companies perform well when potential opportunity exists for industry.
c)
Even though the industry may perform well, the companies in the that
particular industry may suffer form lack of ability or any other factor, one should scrutinize the performance of the company, in considering importantly, sales growth, leverages, betas, P/E ratio and market to book ratios
d)
It may be pointed out that to make out generalization in this regard is
not very easy. This is because of share do not always retaining their lustre. There are several instances of quite blue chip of yester years now languishing in a colorless state. It is the personal intuition, sensing patterns of behavior, there is always something unknown and undiscerned. So the points to be noted are â&#x2122;Ś No one should purchase on whim. â&#x2122;Ś Investment in shares is a serious business.
e)
However, there are such things as a final answer to security values, a dozens
experts arrive at twelve different conclusions. Market values are fixed only in part by balance sheet and income statement; much more by hopes and fears of humanity; by greed, by act of god, where the investor should carefully consider the emotional factors influence the market.
f)
Of all the systems, the researcher is of the view that fundamental analysis
even today holds good. It demands, may insist on information about the company. It
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requires subjecting a companyâ&#x20AC;&#x2122;s performance and its financial statements to in-depth scrutiny. It also calls for the company and industry in which the company operates
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BIBLIOGRAPHY A. TEXT BOOKS i)
Bodie, Kane, Marcus, “Investments”(5th ed.), Tata McGraw-Hill, New Delhi, 2002.
ii)
Donald, E. Fisher and Ronald, J. Jorden, “ Security Analysis and Portfolio Management”,( 6th ed.), New Delhi, Prentice Hall India, 2002.
iii)
M. Y. Khan and P. K. Jain, “Financial Management”(3rd ed.), Tata McGraw-Hill, New Delhi, 2002
B. NEWS PAPERS i)
Mangesh Soman and Arnav Pandya/ETIG, “Sensex Monsoon Correlation is Only Skin Deep”, Economics Times, June-10-2003.
ii)
Tushar, k. Mhanti/ETIG, “Lower Interest Cost Key to India Inc’s Net Profit Growth in 02-03”, Economics Times, May-15-2003.
iii)
“Economic Growth Projected 6.5%”, Vijay Times, July-12-2003
C. WEB DOCUMENTS i)
http:/www.bseindia/historicaldata/betavalues.html.
ii)
http:/www.bseindia/charts.
iii)
http:/www.finministry/unionbudjet/budgetglance.html
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