Technical and Fundamental Analysis of Selected Securities of Indian Stock Market

TECHNICAL AND FUNDAMENTAL ANALYSIS OF SECURITIES

END TERM PROJECT

“TECHNICAL AND FUNDAMENTAL ANALYSIS OF SELECTED SECURITIES OF INDIAN STOCK MARKET”

In partial fulfillment for the requirement of the MBA Programme

SUBMITTED BY

Under the guidance of :

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S.No.

TITLE

1.

CH 1 Introduction

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1.1 Rationale

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1.2 Objectives

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1.3 Research Methodology

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CH 2 TECHNICAL ANALYSIS A CONCEPTUAL OVERVIEW

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2.1 DOW THEORY

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2.2 ELLIOT WAVES BASICS

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2.3 MOVING AVERAGE

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CH 3 FUNDAMENTAL ANALYSIS A CONCEPTUAL OVERVIEW

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3.1 Economic Analysis

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3.2 Industry Analysis

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3.3 Company Analysis

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3.3.1 The Management

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3.3.2 The Company

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3.3.3 The Annual Report

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3.3.4 Ratios

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3.3.5 Cash Flow

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4.

CH 4 Analysis

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5.

CH 5 Limitations

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2.

3.

Pg.No.

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6.

CH 6 Conclusion

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Glossary

77

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References and Bibliography

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CHAPTER- 1 INTRODUCTION

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TECHNICAL AND FUNDAMENTAL ANALYSIS OF SECURITIES 1.1 INTRODUCTION Investing, like marriage, isn't something that should be entered into lightly. You wouldn't get married on a first date, would you? Ok, maybe some of us would, but that's not really very Foolish. Before we marry... er, I mean invest in a company, there are more than a few things we need to know about it. Securities Analysis An analysis of securities and the organization and operation of their markets. The determination of the risk reward structure of equity and debt securities and their valuation. Special emphasis on common stocks. Other topics include options, mutual fluids and technical analysis. Technical analysis is a method of predicting price movements and future market trends by studying charts of past market action which take into account price of instruments, volume of trading and, where applicable, open interest in the instruments. Fundamental analysis is a method of forecasting the future price movements of a financial instrument based on economic, political, environmental and other relevant factors and statistics that will affect the basic supply and demand of whatever underlies the financial instrument. Main differences between the two types of analysis: Fundamental analysis

Technical analysis

Focuses on what ought to Focuses on what happen in a market happens in a market

actually

Factors involved in price Charts are based on market analysis: action involving: 1. Supply and demand 1. Price 2. Seasonal cycles 2. Volume 3. Weather 3. Open interest (futures 4. Government policy only)

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TECHNICAL AND FUNDAMENTAL ANALYSIS OF SECURITIES 1.2 RATIONALE FOR THE STUDY In an industry plagued with skepticism and a stock market increasingly difficult to predict and contend with, if one looks hard enough there may still be a genuine aid for the Day Trader and Short Term Investor. The price of a security represents a consensus. It is the price at which one person agrees to buy and another agrees to sell. The price at which an investor is willing to buy or sell depends primarily on his expectations. If he expects the security's price to rise, he will buy it; if the investor expects the price to fall, he will sell it. These simple statements are the cause of a major challenge in forecasting security prices, because they refer to human expectations. As we all know firsthand, humans expectations are neither easily quantifiable nor predictable. If prices are based on investor expectations, then knowing what a security should sell for (i.e., fundamental analysis) becomes less important than knowing what other investors expect it to sell for. That's not to say that knowing what a security should sell for isn't important--it is. But there is usually a fairly strong consensus of a stock's future earnings that the average investor cannot disprove Fundamental analysis and technical analysis can co-exist in peace and complement each other. Since all the investors in the stock market want to make the maximum profits possible, they just cannot afford to ignore either fundamental or technical analysis.

1.3 OBJECTIVES OF THE STUDY

Primary Objective: a) To do technical and fundamental analysis of chosen securities Sub-Objectives: a) to study the various theories of technical analysis and fundamental analysis

b) understand the movement and performance of stocks

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c) understanding and analyzing the factors that affect the movement of stock prices in the Indian Stock Markets 1.4 RESEARCH METHODOLOGY & DESIGN TYPE OF STUDY The research has been based on secondary data analysis. The study has been exploratory as it aims at examining the secondary data for analyzing the previous researches that have been done in the area of technical and fundamental analysis of stocks. The knowledge thus gained from this preliminary study forms the basis for the further detailed Descriptive research. In the exploratory study, the various technical indicators that are important for analyzing stock were actually identified and important ones short listed. SAMPLE DESIGN The sample of the stocks for the purpose of collecting secondary data has been selected on the basis of Random Sampling. The stocks are chosen in an unbiased manner and each stock is chosen independent of the other stocks chosen. SAMPLE SIZE The sample size for the number of stocks is taken as 10 for technical analysis and 4 for fundamental analysis of stocks as fundamental analysis is very exhaustive and requires detailed study.

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CHAPTER- 2 TECHNICAL ANALYSIS A CONCEPTUAL OVERVIEW

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TECHNICAL ANALYSIS: Technical analysis can be conditionally divided into some main parts such as: • • • •

Types of charts Graphical methods Analytical methods Technical indicators

Technical analysis is concerned with predicting future price trends from historical price and volume data. The underlying axiom of technical analysis is that all fundamentals (including expectations) are factored into the market and are reflected in exchange rates. A technical analysis is based on three axioms: • • •

Movement of the market considers everything Movement of prices is purposeful History repeats itself

SUPPORT AND RESISTANCE Support is a level at which bulls (i.e., buyers) take control over the prices and prevent them from falling lower.

Resistance, on the other hand, is the point at which sellers (bears) take control of prices and prevent them from rising higher. The price at which a trade takes place is the price at which a bull and bear agree to do business. It represents the consensus of their expectations.

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Support levels indicate the price where the most of investors believe that prices will move higher. Resistance levels indicate the price at which the most of investors feel prices will move lower. Role Reversal When a resistance level is successfully broken through, that level becomes a support level. Similarly, when a support level is successfully broken through, that level becomes a resistance level.

3.1 DOW THEORY– TRENDS: The ideas of Charles Dow, the first editor of the Wall Street Journal, form the basis of technical analysis. The Dow theory is a method of interpreting and signaling changes in the stock market direction based on the monitoring of the Dow Jones Industrial and Transportation Averages. Dow created the Industrial Average, of top blue chip stocks, and a second average of top railroad stocks (now the Transport Average). He believed that the behavior of the averages reflected the hopes and fears of the entire market. The behavior patterns that he observed apply to markets throughout the world. Three Movements Markets fluctuate in more than one time frame at the same time: 10

TECHNICAL AND FUNDAMENTAL ANALYSIS OF SECURITIES Nothing is more certain than that the market has three well defined movements which fit into each other. •

The first is the daily variation due to local causes and the balance of buying and selling at that particular time.

•

The secondary movement covers a period ranging from ten days to sixty days, averaging probably between thirty and forty days.

•

The third move is the great swing covering from four to six years.

•

Bull markets are broad upward movements of the market that may last several years, interrupted by secondary reactions. Bear markets are long declines interrupted by secondary rallies. These movements are referred to as the primary trend.

•

Secondary movements normally retrace from one third to two thirds of the primary trend since the previous secondary movement.

•

Daily fluctuations are important for short-term trading, but are unimportant in analysis of broad market movements.

Various cycles have subsequently been identified within these broad categories. Primary Movements have Three Phases The general conditions in the market: Bull markets • Bull markets commence with reviving confidence as business conditions improve.

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TECHNICAL AND FUNDAMENTAL ANALYSIS OF SECURITIES •

Prices rise as the market responds to improved earnings

•

Rampant speculation dominates the market and price advances are based on hopes and expectations rather than actual results.

Bear markets • Bear markets start with abandonment of the hopes and expectations that sustained inflated prices. •

Prices decline in response to disappointing earnings.

•

Distress selling follows as speculators attempt to close out their positions and securities are sold without regard to their true value.

Ranging Markets A secondary reaction may take the form of a ‘line’ which may endure for several weeks. Price fluctuates within a narrow range of about five per cent.

Breakouts

from a range can occur in either direction.

•

Advances above the upper limit of the line signal accumulation and higher prices;

•

Declines below the lower limit indicate distribution and lower prices;

•

Volume is

used to confirm price breakouts.

Trends Bull Trends A bull trend is identified by a series of rallies where each rally exceeds the highest point of the previous rally. The decline, between rallies, ends above the lowest point of the previous decline.

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TECHNICAL AND FUNDAMENTAL ANALYSIS OF SECURITIES Successive higher highs and higher lows.

The start of an up trend is signaled when price makes a higher low (trough), followed by a rally above the previous high (peak): Start = higher Low + break above previous High. The end is signaled by a lower high (peak), followed by a decline below the previous low (trough): End = lower High + break below previous Low.

A bear trend starts at the end of a bull trend: when a rally ends with a lower peak and then retreats below the previous low. The end of a bear trend is identical to the start of a bull trend. Large Corrections A large correction occurs when price falls below the previous low (during a bull trend) or where price rises above the previous high (in a bear trend).

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•

A bull trend starts when price rallies above the previous high,

•

A bull trend ends when price declines below the previous low,

•

A bear trend starts at the end of a bull trend (and vice versa).

3.2 ELLIOT WAVES THEORY BASICS TRENDLINES

Breaking through support or resistance levels results in a change of traders’ expectations (which causes supply/demand lines to shift).

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TECHNICAL AND FUNDAMENTAL ANALYSIS OF SECURITIES An Uptrend is defined by successively higher low-prices. A rising trend can be thought of as a rising support level: the bulls are in control and are pushing prices higher. A Downtrend is defined by successively lower high-prices. A falling trend can be thought of as a falling resistance level: the bears are in control and are pushing prices lower.

3.3 MOVING AVERAGES Moving averages are one of the oldest and most popular technical analysis tools. A moving average is the average price of a financial instrument over a given time.

The moving average represents the consensus of investor’s expectations over the indicated period of time.

The classic interpretation of a moving average is to use it in observing changes in prices. Investors typically buy when the price of an instrument rises above its moving average and sell when the it falls below its moving average.

TECHNICAL INDICATORS

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TECHNICAL AND FUNDAMENTAL ANALYSIS OF SECURITIES There is a vast number of elaborated technical indicators: • MOVING AVERAGE –MA • RELATIVE STRENGTH INDEX — RSI :The Relative Strength Index Technical Indicator (RSI) is a price-following oscillator that ranges between 0 and 100. When Wilder introduced the Relative Strength Index, he recommended using a 14-day RSI.. Since then, the 9-day and 25-day Relative Strength Index indicators have also gained popularity. •

ADVANCE/DECLINE LINE: The “advance/decline line” shows, for some period, the cumulative difference between advancing and declining issues.

•

CLOSING TICK: “Closing tick” is the difference between the number of shares that closed on an uptick and those that closed on a downtick.

•

CLOSING ARMS: “Closing arms” or “trin” (trading index) is the ratio of average trading volume in declining issues to average trading volume in advancing issues.

•

Z-BLOCK TRADES: “zBlock trades” are trades in excess of 10,000 shares.

•

HI-LO-CLOSE CHART: A hi-lo-close chart is a bar chart showing, for each day, the high price, low price, and closing price.

•

CANDLESTICK CHART: A candlestick chart is an extended version of the hi-lo-close chart. It plots the high, low, open, and closing prices, and also shows whether the closing price was above or below the opening price.

•

POINT AND FIGURE CHARTS: Point-and-figure charts are a way of showing only major price moves and their direction. A “major” up move is marked with an “X,” while a “major” down move is marked with an “O.” A new column starts every time there is a change in direction

•

HEAD AND SHOULDERS FORMATION: Once a chart is drawn, analysts examine it for various formations or pattern types in an attempt to predict stock price or market direction in the case of head-and-shoulders formation. When the stock price “pierces the neckline” after the right shoulder is finished, it’s time to sell.

•

ODD-LOT: The “odd-lot” indicator looks at whether odd-lot purchases are up or down. HEMLINE: Followers of the “hemline” indicator claim that hemlines tend to rise in good times.

•

SUPER BOWL: The Super Bowl indicator forecasts the direction of the market based on whether the National Football Conference or the American Football Conference wins. A win by the National Football Conference is bullish.

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BETA: Beta is a risk measure comparing the volatility of a stock's price movement to the general market.

•

MOMENTUM: Momentum measures the speed of price change and provides a leading indicator of changes in trend.

•

UPSIDE/DOWNSIDE: Measures of Upside/Downside separate the volumes for rising markets from those in falling markets. Since volume is independent of price, it makes a valuable tool for measuring the quality of a price trend.

CHAPTER- 3 FUNDAMENTAL ANALYSIS A CONCEPTUAL OVERVIEW 17


Fundamental analysis refers to the study of the core underlying elements that influence the economy of a particular entity. It is a method of study that attempts to predict price action and market trends by analyzing economic indicators, government policy and societal factors (to name just a few elements) within a business cycle framework.

I. ECONOMIC ANALYSIS: POLITICO-ECONOMIC ANALYSIS: No industry or company can exist in isolation. It may have splendid managers and a tremendous product. However, its sales and its costs are affected by factors, some of which are beyond its control - the world economy, price inflation, taxes and a host of others. It is important, therefore, to have an appreciation of the politico-economic factors that affect an industry and a company. The political equation A stable political environment is necessary for steady, balanced growth. If a country is ruled by a stable government which takes decisions for the long-term development of the country, industry and companies will prosper. Foreign Exchange Reserves A country needs foreign exchange reserves to meet its commitments, pay for its imports and service foreign debts. Foreign Exchange Risk This is a real risk and one must be cognizant of the effect of a revaluation or devaluation of the currency either in the home country or in the country the company deals in. Restrictive Practices

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TECHNICAL AND FUNDAMENTAL ANALYSIS OF SECURITIES Restrictive practices or cartels imposed by countries can affect companies and industries. crystallizing the exposure. Foreign Debt and the Balance of Trade Foreign debt, especially if it is very large, can be a tremendous burden on an economy. India pays around $ 5 billion a year in principal repayments and interest payments. Inflation Inflation has an enormous effect in the economy. Within the country it erodes purchasing power. As a consequence, demand falls. If the rate of inflation in the country from which a company imports is high then the cost of production in that country will automatically go up. The Threat of Nationalization The threat of nationalization is a real threat in many countries – the fear that a company may become nationalized. Interest Rates A low interest rate stimulates investment and industry. Conversely, high interest rates result in higher cost of production and lower consumption. Taxation The level of taxation in a country has a direct effect on the economy. If tax rates are low, people have more disposable income. Government Policy Government policy has a direct impact on the economy. A government that is perceived to be proindustry will attract investment.

THE ECONOMIC CYCLE: It affects investment decisions, employment, demand and the profitability of companies. The four stages of an economic cycle are: Depression Recovery Boom Recession Depression At the time of depression, demand is low and falling. Inflation is high and so are interest rates. Companies, crippled by high borrowing and falling sales, are forced to curtail production, close down plants built at times of higher demand, and let workers go. Recovery

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TECHNICAL AND FUNDAMENTAL ANALYSIS OF SECURITIES During this phase, the economy begins to recover. Investment begins anew and the demand grows. Companies begin to post profits. Conspicuous spending begins once again. Boom In the boom phase, demand reaches an all time high. Investment is also high. Interest rates are low. Gradually as time goes on, supply begins to exceed the demand. Prices that had been rising begin to stabilize and even fall. There is an increase in demand. Then as the boom period matures prices begin to rise again. Recession The economy slowly begins to downturn. Demand starts falling.. Interest rates and inflation are high. Companies start finding it difficult to sell their goods. The economy slowly begins to downturn.

II. INDUSTRY ANALYSIS The importance of industry analysis is now dawning on the Indian investor as never before. Cycle The first step in industry is to determine the cycle it is in, or the stage of maturity of the industry. All industries evolve through the following stages: 1. Entrepreneurial, sunrise or nascent stage 2. Expansion or growth stage 3. Stabilization, stagnation or maturity stage, and 4. Decline or sunset stage to properly establish itself. In the early days, it may actually make losses.

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The Entrepreneurial or Nascent Stage At the first stage, the industry is new and it can take some time for it to properly establish itself. The Expansion or Growth Stage Once the industry has established itself it enters a growth stage. As the industry grows, many new companies enter the industry. The Stabilization or Maturity Stage After the halcyon days of growth, an industry matures and stabilizes. Rewards are low and so too is the risk. Growth is moderate. Though sales may increase, they do so at a slower rate than before. Products are more standardized and less innovative and there are several competitors. The Decline or Sunset Stage Finally, the industry declines. This occurs when its products are no longer popular. This may be on account of several factors such as a change in social habits The film and video industries. 1. BARRIER TO ENTRY New entrants increase the capacity in an industry and the inflow of funds. The question that arises is how easy is it to enter an industry ? There are some barriers to entry: a) Economies of scale b) Product differentiation c) Capital requirement d) Switching costs e) Access to distribution channels f) Cost disadvantages independent of scale g) Government policy h) Expected retaliation j) International cartels

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TECHNICAL AND FUNDAMENTAL ANALYSIS OF SECURITIES 2. THE THREAT OF SUBSTITUTION New inventions are always taking place and new and better products replace existing ones. An industry that can be replaced by substitutes or is threatened by substitutes is normally an industry one must be careful of investing in. An industry where this occurs constantly is the packaging industry -bottles replaced by cans, cans replaced by plastic bottles, and the like. To ward off the threat of substitution, companies often have to spend large sums of money in advertising and promotion. 3. BARGAINING POWER OF THE BUYERS In an industry where buyers have control, i.e. in a buyer's market, buyers are constantly forcing prices down, demanding better services or higher quality and this often erodes profitability. The factors one should check are whether: a) A particular buyer buys most of the products (large purchase volumes). If such buyers withdraw their patronage, they can destroy an industry. They can also force prices down. b) Buyers can play one company against another to bring prices down. 4. BARGAINING POWER FOR THE SUPPLIERS An industry unduly controlled by its suppliers is also under threat. This occurs when: a) The suppliers have a monopoly, or if there are few suppliers. b) Suppliers control an essential. c) Demand for the product exceeds. d) The supplier supplies to various industries. e) The switching costs are high. f) The supplier's product does not have a substitute. g) The supplier's product is an important input for the buyer's. h) The buyer is not important to the supplier. i) The supplier's product is unique. 5. RIVALRY AMONG COMPETITORS Rivalry among competitors can cause an industry great harm. This occurs mainly by price cuts, heavy advertising, additional high cost services or offers, and the like. This rivalry occurs mainly when: a) There are many competitors and supply exceeds demand. Companies resort to price cuts and advertise heavily in order to attract customers for their goods. b) The industry growth is slow and companies are competing with each other for a greater market share. c) The economy is in a recession and companies cut the price of their products and offer better service to stimulate demand. d) There is lack of differentiation between the product of one company and that of another. In such cases, the buyer makes his choice on the basis of price or service. e) In some industries economies of scale will necessitate large additions to existing capacities in a company. The increase in production could result in over capacity & price cutting. f) Competitors may have very different strategies in selling their goods and in competing they may be continuously trying to stay ahead

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III. COMPANY ANALYSIS: At the final stage of fundamental analysis, the investor analyzes the company. This analysis has two thrusts: How has the company performed vis-à-vis other similar companies and How has the company performed in comparison to earlier years It is imperative that one completes the politico economic analysis and the industry analysis before a company is analyzed because the company's performance at a period of time is to an extent a reflection of the economy, the political situation and the industry. What does one look at when analyzing a company? The different issues regarding a company that should be examined are: The Management The Company The Annual Report Ratios Cash flow

THE MANAGEMENT: The single most important factor one should consider when investing in a company and one often never considered is its management. In India management can be broadly divided in two types: Family Management Professional Management

THE COMPANY: An aspect not necessarily examined during an analysis of fundamentals is the company. A company may have made losses consecutively for two years or more and one may not wish to touch its shares - yet it may be a good company and worth purchasing into. There are several factors one should look at. 1. How a company is perceived by its competitors? One of the key factors to ascertain is how a company is perceived by its competitors. It is held in high regard. Its management may be known for its maturity, vision, competence and aggressiveness. The investor must ascertain the reason and then determine whether the reason will continue into the foreseeable future. 2. Whether the company is the market leader in its products or in its segment Another aspect that should be ascertained is whether the company is the market leader in its products or in its segment. When you invest in market leaders, the risk is less. The

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TECHNICAL AND FUNDAMENTAL ANALYSIS OF SECURITIES shares of market leaders do not fall as quickly as those of other companies. There is a magic to their name that would make individuals prefer to buy their products as opposed to others. 3. Company Policies The policy a company follows is also important. What is its plans for growth? What is its vision? Every company has a life. If it is allowed to live a normal life it will grow upto a point and then begin to level out and eventually die. It is at the point of leveling out that it must be given new life. This can give it renewed vigour and a new lease of life. 4. Labour Relations Labour relations are extremely important. A company that has motivated, industrious work force has high productivity and practically no disruption of work. On the other hand, a company that has bad industrial relations will lose several hundred mandays as a consequence of strikes and go slows. 5. Where the company is located and where its factories are? One must also consider where the companies Plants and Factories are located.. THE ANNUAL REPORT: The primary and most important source of information about a company is its Annual Report. By law, this is prepared every year and distributed to the shareholders. Annual Reports are usually very well presented. A tremendous amount of data is given about the performance of a company over a period of time. The Annual Report is broken down into the following specific parts: A) The Director's Report, B) The Auditor's Report, C) The Financial Statements, and D) The Schedules and Notes to the Accounts. A. The Director’s Report The Director’s Report is a report submitted by the directors of a company to its shareholders, advising them of the performance of the company under their stewardship. 1. It enunciates the opinion of the directors on the state of the economy and the political situation vis-à-vis the company. 2. Explains the performance and the financial results of the company in the period under review. This is an extremely important part. The results and operations of the various separate divisions are usually detailed and investors can determine the reasons for their good or bad performance. 3. The Director’s Report details the company's plans for modernization, expansion and diversification. Without these, a company will remain static and eventually decline. 4. Discusses the profit earned in the period under review and the dividend. Recommended by the directors. This paragraph should normally be read with some

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TECHNICAL AND FUNDAMENTAL ANALYSIS OF SECURITIES skepticism, as the directors will always argue that the performance was satisfactory. If adverse economic conditions are usually at fault. 5. Elaborates on the directors' views of the company's prospects in the future. 6. Discusses plans for new acquisition and investments. An investor must intelligently evaluate the issues raised in a Director’s Report. Industry conditions and the management's knowledge of the business must be considered. B. The Auditor's Report The auditor represents the shareholders and it is his duty to report to the shareholders and the general public on the stewardship of the company by its directors. Auditors are required to report whether the financial statements presented do, in fact, present a true and fair view of the state of the company. Investors must remember that the auditors are their representatives and that they are required by law to point out if the financial statements are not true and fair.. C.Financial Statements The published financial statements of a company in an Annual Report consist of its Balance Sheet as at the end of the accounting period detailing the financing condition of the company at that date, and the Profit and Loss Account or Income Statement summarizing the activities of the company for the accounting period. BALANCE SHEET The Balance Sheet details the financial position of a company on a particular date; of the company's assets (that which the company owns), and liabilities (that which the company owes), grouped logically under specific heads. It must however, be noted that the Balance Sheet details the financial position on a particular day and that the position can be materially different on the next day or the day after. SOURCES OF FUNDS SHAREHOLDERS FUNDS SHARE CAPITAL (i) Private Placement (ii) Public Issue iii) Rights issues RESERVES i) Capital Reserves ii) Revenue Reserves LOAN FUNDS i) Secured loans: ii) Unsecured loans FIXED ASSETS INVESTMENTS STOCK OR INVENTORIES i) Raw materials ii) Work in progress

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TECHNICAL AND FUNDAMENTAL ANALYSIS OF SECURITIES iii) Finished goods CASH AND BANK BALANCES LOANS AND ADVANCES PROFIT AND LOSS ACCOUNT The Profit and Loss account summarizes the activities of a company during an accounting period which may be a month, a quarter, six months, a year or longer, and the result achieved by the company. It details the income earned by the company, its cost and the resulting profit or loss. It is, in effect, the performance appraisal not only of the company but also of its management- its competence, foresight and ability to lead.

RATIOS: Ratios express mathematically the relationship between performance figures and/or assets/liabilities in a form that can be easily understood and interpreted. No single ratio tells the complete story Ratios can be broken down into four broad categories: (A) Profit and Loss Ratios These show the relationship between two items or groups of items in a profit and loss account or income statement. The more common of these ratios are: 1. Sales to cost of goods sold. 2. Selling expenses to sales. 3. Net profit to sales and 4. Gross profit to sales. (B) Balance Sheet Ratios These deal with the relationship in the balance sheet such as : 1. Shareholders equity to borrowed funds. 2. Current assets to current liabilities. 3. Liabilities to net worth. 4. Debt to assets and 5. Liabilities to assets. (C) Balance Sheet and Profit and Loss Account Ratios. These relate an item on the balance sheet to another in the profit and loss account such as: 1. Earnings to shareholder's funds. 2. Net income to assets employed. 3. Sales to stock. 4. Sales to debtors and 5. Cost of goods sold to creditors. (D) Financial Statements and Market Ratios These are normally known as market ratios and are arrived at by relative financial figures to market prices: 26

TECHNICAL AND FUNDAMENTAL ANALYSIS OF SECURITIES 1. Market value to earnings and 2. Book value to market value. (a) Market value (b) Earnings (c) Profitability (d) Liquidity (e) Leverage (f) Debt Service Capacity (g) Asset Management/Efficiency (h) Margins. The major ratios that are considered: (i) Market value (ii) Price- earnings ratio (iii) Market-to-book ratio (iv) Earnings (v) Earning per share (vi) Dividend per share (vii) Dividend payout ratio (viii) Leverage ratios (ix) Return on investments/total assets

CASH FLOW: A statement of sources and uses begins with the profit for the year to which are added the increases in liability accounts (sources) and from which are reduced the increases in asset accounts (uses). The net result shows whether there has been an excess or deficit of funds and how this was financed. Investors must examine a company's cash flow as it reveals exactly where the money came from how it was utilized. Investors must be concerned if a company is financing either its inventories or paying dividends from borrowings without real growth as that shows deterioration.

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CHAPTER-4 ANALYSIS

I FUNDAMENTAL ANALYSIS OF STOCKS Basically fundamental analysis is covered in 3 parts : 1. Market/ economy analysis 2. Industry Analysis 3. Company Analysis

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1) TATA MOTORS I Market/ Economy Analysis It covers the macro economy analysis and the various macro economic factors on the national level like GDP, Monetary policies of India, Fiscal Policies and Inflation and money supply etc.

GDP Real GDP growth accelerated from 7.5 per cent during 2004-05 to 8.4 per cent during 2005-06 on the back of buoyant manufacturing and services activity supported by a recovery in the agricultural sector. Real GDP growth has, thus, averaged over eight per cent during the last three years and over seven per cent in the first four years (2002-03 to 2005-06) of the Tenth Five Year Plan. Strengths of India today are: A well diversified industrial base which profits from self-reliance in all core industries .A large & sophisticated financial architecture - The robust capital Markets today have over 9000 listed companies and boast of a massive Market capitalization. A healthy GDP composition with agriculture contributing 22%, Industry 22% and services, which have gone strength to strength, accounting. For 56% of the GDP an acknowledged strength in knowledge driven industries like Information technology, biotechnology, entertainment Software etc India has Over 3 million scientific & technical manpower, Over 0.6 million S&T post graduates, Over 0.7 million graduate engineers, Over 3500 doctorates in sciences every year. Assuming trend growth in agriculture under normal monsoon conditions and barring domestic or external shocks, the Reserve Bank in its Annual Policy Statement for 200708 (April 2007) placed real GDP growth, for policy purposes, in the range of 7.5-8.0 per cent during 2007-08. Growth prospects are, however, subject to a number of downside

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TECHNICAL AND FUNDAMENTAL ANALYSIS OF SECURITIES risks. The risks emanating from the global economy are: potential escalation and volatility in international crude oil prices, firming up of overall inflationary pressures and expectations, and a hardening of international interest rates along with the withdrawal of monetary accommodation. India’s demographic advantage – In contrast to developed Countries, India will have a younger population for the next 50 years. Hence India would be the hub for R&D.

Inflation Inflation was contained to 6.3 per cent by end-March 2007 within the indicative trajectory of 5.0-5.5 per cent during 2007-08. The actual inflation was considerably lower than the indicative trajectory and this could be mainly attributed to the deferred pass-through of even the cognisable permanent component of international crude oil prices.

Money Supply Monetary and liquidity conditions remained largely comfortable during 200607reflecting proactive liquidity management operations by the Reserve Bank under the liquidity adjustment facility, flexible management of issuances under the market stabilisation scheme, and some private placement of Government securities In short, the Indian economy is exhibiting strong fundamentals and displaying considerable resilience. At the same time, there are continuing signs of demand pressures, especially high credit growth, that could exert upward pressure on prices when associated with supply shocks such as from oil. These pressures have the potential for impacting stability and inflation expectations. While domestic developments continue to dominate the economy, global factors tend to gain more attention now than before. The global outlook for growth is positive but downside risks in regard to inflation also RBI is applying new repo and reverse repo for the balance of inflation and monetary policies.

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TECHNICAL AND FUNDAMENTAL ANALYSIS OF SECURITIES The following are macroeconomic policies, generally found as part of governmentdirected industrial auto policies (a) Restrictions on domestic and foreign investment. (b) Domestic content requirements (c) High tariff walls (d) Auto export requirements (e) National production to sales ratios (f) Distribution controls (g) Quotas and licensing requirements that significantly restrict imports (h) Government approval for product related decisions, including vehicle make, body type, engine size, etc. (i) Special government categories for auto taxes

II INDUSTRY ANALYSIS Since, 1991 opening of the economy has changed the face of auto industry. Today, it is amongst the main drivers of growth of Indian economy with an output multiplier of 2.24(for every Re.1 invested, auto sector gives back Rs.2.24 to the economy). In recent years we have seen increasing number of global players entering Indian market by way of Joint ventures, collaborations or wholly owned subsidiary The automobile industry is torn between trying to reduce costs on the one hand and, on the other, dealing with the high price of performance-enhancing technology and environmental compliance. Key drivers in the automotive industry are: •

Reducing air pollution

•

Reduction of weight

•

Recyclability

•

Safety

•

Better performance and engine efficiency

•

Aesthetics

•

Longer service Life

32

TECHNICAL AND FUNDAMENTAL ANALYSIS OF SECURITIES INDUSTRY LIFE CYCLE: The automobile market is at the maturity stage of the life cycle, locally and globally, due to an increased number of competitors from domestic and foreign markets. The automobile market is characterized by a low potential for market growth, but high sales and profit potential as the products have still not saturated the market as a whole.

MAJOR COMPETITORS OF TATA MOTORS ARE Maruti Udyog Ltd. General Motors India Ford India Ltd. Eicher Motors Bajaj Auto Hero Motors Hindustan Motors Hyundai Motor India Ltd. Royal Enfield Motors Telco TVS Motors FINANCIALS

33


1 Day Price Market

Chang Cap e%

Description

P/E

ROE %

Net LongPrice Profit Term Price to Div. Free Debt to Book Margi Yield Equit Value n % Flow %

y

(mrq)

to

Cash

(mrq)

Sector: Consumer Goods

0.11

2517.8B 24.88 17.07 2.22 1.17

10.76 7.06

408.42

Industry: Auto Manufacturers - Major (More Info)

0.61

331.0B

30.00 7.50

1.71 1.81

1.55

1.60

-4.40

Daimlerchrysler AG (DCX) Ford Motor Co. (F)

0.21 1.21

53.9B 15.7B

3.50 2.17 1.16 2.40 11.07 1.15

4.69 -0.60

-3.54 -82.05

General Motors Corporation (GM)

-0.24

16.5B

3.40 3.90

1.42

-6.21

0.14

Honda Motor Co. Ltd. (HMC) Tata Motors Ltd. (TTM) Toyota Motor Corp. (TM)

0.83 -0.38 0.73

62.2B 7.1B 175.6B

10.72 11.19 NA -9.51 NA 62.85 11.52 16.54 18.64 NA 13.94 15.05

1.00 0.83 1.50 NA 1.20 1.03

1.73 5.35 1.97

5.52 5.64 6.59

207.48

Companies

Opportunities and Threats a) Opportunities ● Road Development: The ongoing road development program would improve connectivity to ports, cities and villages through a network of highways and interconnecting roads by 2010-11. Improved road network would help in faster movement of goods between various cities and towns. The Company launched TATA Novus range of vehicles in the heavy segment and TATA ACE for last mile distribution. ● Car penetration in India: Car penetration in India is 7 cars per 1,000 persons. ● International: In FY 2006-07, the Company increased share of its overseas vehicle sales from 7.6% last year to record high of 11.1% (as % of its total sales) and has planned further increase in this year. b) Threats ● Global Competition: India is increasingly attracting global players to set up manufacturing facility for producing cars, especially small cars. Global automobile

34

NA NA

TECHNICAL AND FUNDAMENTAL ANALYSIS OF SECURITIES manufacturers are also entering India in commercial vehicle segment to leverage India’s low cost production advantage to their favor. ● Fuel Prices: The continuing fuel price increase in the domestic market could significantly impact demand of commercial and passenger vehicles. ● Input costs: Commodity items particularly steel, non-ferrous metals, rubber and engineering plastics have witnessed huge price increases in the past. These prices are expected to increase further affecting the Company’s profitability. ● Interest rate hardening and other inflationary trends: With interest rates hardening and liquidity crunch in the system, growth in sales may be adversely impacted. ● Government Regulations: Stringent emission and safety requirements could bring new complexities for automotive and component manufacturers impacting the Company’s business.

Risks and Concerns: ● Interest Rates: FY 2007-08 started with increasing interest rate regime and tightening liquidity position in the economy. Increasing interest rates could further affect vehicle demand which could have an adverse impact on the Company’s revenues and profits. ● Exchange rates: The Company exports vehicles to many countries and exchange rate fluctuations in the order execution period could impact the Company’s business. ● Freight rates: In FY 2006-07, freight rates in road transport sector moved up mainly due to surge in construction activity, ongoing road development projects and severe restriction on over-loading. Demand for commercial vehicles could be impacted by further change in freight rates and change in fuel prices. ● Domestic market: The Company plans to reduce the impact of this cyclicality on its business, by strengthening its less cyclical businesses like buses, light trucks, small commercial vehicles. ● Overseas market: In overseas markets, the Company competes with global players which have multiple vehicle platforms, large financial capability and global branding. ● Manufacturing: The Company manufactures vehicles at multiple locations and given the geographical dispersion of its suppliers it faces Logistics Problems.

35

TECHNICAL AND FUNDAMENTAL ANALYSIS OF SECURITIES ● New Competition: Competitive activity is expected to increase in commercial vehicle and passenger vehicle domestic market in coming years. ● New projects: The Company currently is in midst of executing many new projects ranging from launch of new car platforms to development of new Truck models.

III Company Analysis Key Highlights Symbol: TTL Sector: Consumer Goods Industry: Auto Manufacturers Major Market Cap: Rs.29232 crores Data Since: 1945 Last close: Rs. 742.90

Brief Summary of the company Tata Motors is one of the largest companies in the Tata Group with a total income of US$ 2.35 billion*. More than 3 million Tata vehicles ply on Indian roads making Tata a dominant force in the Indian automobile industry.

Joint Venture with Fiat and Hitachi Tata Motors has decided to enter into a 50-50 JV with Fiat, at Pune, for manufacturing passenger vehicles, engines and transmissions for both, domestic and international markets.. The Company has also entered into a JV with Hitachi, to set up a new plant in Kharagpur

36


Product Mix Tata Motors is India's only fully integrated automobile manufacturer with a portfolio that covers trucks, buses, utility vehicles and passenger cars. It would be no exaggeration to say that Tata Motors provides the wheels for India's growth.

Segmental Overview Commercial Vehicle Segment The Company registered 69.6% volume growth in the domestic CV segment during 4QFY06, from 37,228 units in Q3FY05 to 63,082 units in Q3FY06. The market share in this segment was 65.8% in Q4FY06, as compared to 55.2% in Q1FY06. The M/HCV goods-carrier segment registered a 54.4% growth YoY, with sale of 33,515 units and a market share of 64.5%, up by around 410 bps, driven by infrastructure development and increase in international trade. Passenger Vehicle Segment The Company reported a growth of 21.2% YoY, to 49,907 vehicles, in the domestic passenger vehicle segment and a market share of 16.2% in the quarter. The passenger vehicle industry registered a volume growth of 20.4% during Q4FY06

Plants Tata Motors owes its leading position in the Indian automobile industry to its strong focus on indigenisation. Their manufacturing plants are situated at Jamshedpur in the East, Pune in the West and Lucknow in the North.

Charts showing Key Statistics of tata motors.

37


38


Share holding pattern as on 31-Mar shareholding pattern

10% 17%

34%

promotors MF Banks, Fis FIIs Others Public

25%

14%

Financial highlights 39


40


RATIO ANALYSIS

Ratios

2006

2005

2004

Debt/equity

0.56

0.49

0.44

Current ratio

1.08

0.87

0.76

Operating profit margin %

12.11

11.51

12.38

Gross profit margin

10.87

10.43

11.04

ROCE %

31.25

32.76

33.77

total assets turnover ratio

3.15

3.53

3.43

ROE %

27.61

30.09

22.57

Dividend-equity

497.94

453.73

282.11

Retention Ratio

67.43

63.32

65.19

DPS (Rs.)

13.01

12.5

7.99

EPS (Rs.)

25

34

41

Dividend Payout Ratio

0.39

0.42

0.37

CAGR of EPS

0.177

CAGR of Dividend Payout Ratio

-0.017

Average ROE

25.74

41


average retention

63.54

Growth % (g = Avg. RR × Avg. ROE )

16.36

Market return

14.54%

P/E ratio (on the basis of historical analysis) = 18.12 Therefore, the Weighted P/E ratio =(18.12+24.24)/2 = 21.181 Projected EPS = EPS OF 2006 + CAGR of EPS*EPS OF 2006 = Rs.48.271 Value of Share at the end of financial year 06-07 = Projected EPS * Weighted P/E Ratio = Rs.1022

2) HPCL

42


Globalization and the Indian Petroleum Industry Indian petroleum industry in the post independent period (1947-2001) it may be divided into three distinct phases •

(i) early phase (1947 to 1969)- when the government consolidated its control over the industry with Soviet assistance;

•

(ii) development phase (1970 to 1989)- in this period the US companies played dominant role replacing the Soviets and

•

(iii) the economic liberalisation phase of 1990s.

PORTER’S MODEL

SWOT ANALYSIS STRENGHS 43


Favourable production – sale mix.

•

Entry on petrochemicals and gas sector will reduce dependence on R&M sector.

•

Second largest refining capacity and pipeline infrastructure in the industry.

•

Good presence in high demand regions of west and north India.

WEAKNESSES •

Dependence on refining function high.

•

Moderate share in high profitable retail segment.

•

Diversifications in petrochemicals could trouble the company.

•

High burden of subsidy loss on cooking gas and kerosene.

OPPORTUNITIES •

Per capita energy consumption low in country.

•

Deficiency of coal will benefit oil and gas sector.

•

Growing domestic market for gas.

•

Overseas presence in upstream and downstream will determine growth.

THREATS •

Rising oil prices could dampen demand.

•

High regulatory risk.

•

Loss of market share to private players.

•

Entrance of private players in pipelines will take away monopoly of company in north India.

COMPANY ANALYSIS The Annual Report is broken down into the following specific parts: A) The Director's Report, B) The Auditor's Report, C) The Financial Statements, and

44

TECHNICAL AND FUNDAMENTAL ANALYSIS OF SECURITIES D) The Schedules and Notes to the Accounts. . A.THE DIRECTOR’S REPORT The Director’s Report is a report submitted by the directors of a company to its shareholders, advising them of the performance of the company under their stewardship. Fundamental Analysis B. THE AUDITOR'S REPORT The auditor represents the shareholders and it is his duty to report to the shareholders and the general public on the stewardship of the company by its directors C. FINANCIAL STATEMENTS It comprises of Balance Sheet, Profit and Loss account, Cash Flows. Its analysis would be discussed later. D.SCHEDULES The schedules detail pertinent information about the items of Balance Sheet and Profit & Loss Account. It also details information about sales, manufacturing costs, administration costs, interest, and other income and expenses

1. THE MANAGEMENT HPCL is a public sector undertaking. Thus it is a professionally managed company. There are some parameters of management on which a company is analysed : a. integrity of management b. past record of management c. how highly is the management rated by its peers in the same industry d. how the management fares in adversity e. the depth of the knowledge of management f. open and innovative management on all these parameters HPCL scores good. 2. COMPANY Many times a company has made losses in the previous years but that does not mean that the company is bad to invest. Thus many factors are studied while studying a company. a) perception of competitors

45

TECHNICAL AND FUNDAMENTAL ANALYSIS OF SECURITIES HPCL is the second largest petroleum company after IOCL. Thus it is a competitor of IOCL and it is trying hard to compete with IOCL on every front. That is why now it has decided to diversify itself in the oil exploration sector b) company policies As this is a PSU thus the policies are made by the government. The oil sector is one which is highly regulated by government. Thus from time to time it is required to watch out the various policies changed. 3. ANNUAL REPORT The most primary and most important source of information about a company is its Annual Report. This is prepared every year and distributed to its shareholders.

46


Ratio Analysis Evaluation of Intrinsic Value of the Security

stdev mkt stdev sec

0.011934 0.03831

correlation Beta Risk Free Rate Mkt Rate

0.485958 1.56765

k

18.26%

Average Retention Ratio ROE g

0.60504 0.19842 0.120052

6.50% 14%

Hence we see that here our g is less than k .Thus we see that as per Dividend Discount Model our Intrinsic value is div=22(1+.012)=24/.0626= 387 Price= Projected EPS + Weighted P/E ratio Using CAGR EPS = 43.468 Weighted P/E Ratio = 7.5+665/2=336.25 Price = 43.468+336.25 = 381

3) HDFC BANK

The Indian banking industry: sector overview With the economic growth picking up pace and the investment cycle on the way to recovery, the banking sector has witnessed a transformation in its vital role of intermediating between the demand and supply of funds Public sector banks have been very proactive in their restructuring initiatives be it in technology implementation or pruning their loss assets. Windfall treasury gains made in the falling interest rate regime were used for writing off the doubtful and loss assets.

47

TECHNICAL AND FUNDAMENTAL ANALYSIS OF SECURITIES Retail lending (especially mortgage financing) formed a significant portion of the portfolio for most banks and they customized their products to cater to the diverse demands. Apart from streamlining their processes through technology initiatives such as ATMs, telephone banking, online banking and web based products, banks also resorted to cross selling of financial products such as credit cards, mutual funds and insurance policies to augment their fee based income. PORTER’S FIVE FORCES MODEL FOR THE BANKING INDUSTRY 1) BARRIERS TO ENTRY: a. Economies of scale: Since the existing players in the market are well established and already have a customer base, they are able to bear the cost of using the advantages of technology to their maximum advantage. b. Capital requirement for entry: i. The Banking Regulation Act prescribes the minimum capital requirements for a bank Moreover, banks have to maintain a capital adequacy ratio of 9% under the Basel I norms. ii. Government has declared that the foreign banks will be permitted to establish their presence in India by way of setting up a wholly owned banking subsidiary (WOS) with a minimum capital of Rs.300 crore. c. Access to distribution channels: Since banks have to set up their own distribution channels, all the cost has to be directly born by them. d. Cost advantage independent of size: Existing banks have huge databases of customers which they use when they want to sell a new product launched by them. e. Legislation or Government action: Banks are governed by Banking Regulation Act, 1949 which specifies the rules and regulations applicable to banks. RBI is the governing body of banks in India. 2) BARGAINING POWER OF BUYERS: Due to increased competition, the services offered by banks to customers have improved considerably. 3) BARGAINING POWER OF THE SUPPLIERS:

48

TECHNICAL AND FUNDAMENTAL ANALYSIS OF SECURITIES Suppliers to banks can be both - the customers and RBI. a. Customers of banks provide money to banks in the form of deposits and in return earn some interest on that. b. RBI acts as a supplier to banks by selling govt. securities, treasury bills, govt. bonds, etc. c. Call money market: Banks sometimes have to borrow from other banks to meet CRR and SLR requirements, or other capital requirements as provided by RBI. 4) THREAT OF SUBSTITUTES: a. Product-for-product substitution: i. Banks provide interest on deposits made by people. Similar services are offered by post offices which may act as substitutes to the deposit schemes of banks. ii. Some banks offer locker services to customers for yearly rates. Similar services are provided by many post offices. b. Generic substitution: People who deposit their savings in banks can invest their money in other sources like mutual funds, shares and other securities and life insurance schemes. 5) COMPETITIVE RIVALRY: a. Extent of competitor balance: b. Market growth rates:. c. High Exit Barriers

PEST Analysis for Banking Industry. 1. Political factors-: The major factors affecting the banking sector are the following. Banking sector reforms – As per the RBI roadmap for reforms in the first stage from 2005 to 2009 foreign banks will be allowed to set up wholly owned subsidiaries as well as get greater freedom to set up new branches. Fulfilling the minimum priority sector credit -The government mandation of fulfilling the minimum priority sector credit (of which 18 per cent is food credit) has forced the domestic banks to cater to this segment despite the low profitability and vulnerability of asset quality. Banks have also been allowed to set up Offshore Banking Units in SEZ’s

49


2. Economic factors-: Basell II norms for the risk management in banking sector - The new Basel Accord has its foundation on three mutually reinforcing pillars. The first pillar is compatible with the credit risk, market risk and operational risk. The second pillar gives the bank responsibility to exercise the best ways to manage the risk specific to that bank. Concurrently, it also casts responsibility on the supervisors to review and validate banks’ risk measurement models. . Consolidation and merger and acquisitions in the banking sector-. HDFC bank also acquired TIMES BANK in 2001 which increased its customer base by 3 lakh customers. Universal Banking has been introduced. ICICI Bank ,HDFCs closest competitor is already into Universal Banking so HDFC is also getting into it as now it is providing retail banking and also depository facilities in the form of demat account.

3. Social factorsBig and growing middle class in India -: This has been a major factor in the growth of the retail loans like consumer loans in the form of home loans, car loans, education loans, auto loans etc. Retail loans have grown from 19% in FY’99 to 51% FY’06.Consumer credit accounts for a meager 28.6 per cent of the country's GDP and the buoyancy in the economy offers sufficient scope for it to grow. Geographical and Cultural diversity- This is leading to a greater demand for financial products and customization by the customers.

4. Technical factorsThe Indian Financial Network (INFINET) was inaugurated in June 1999. It is based on satellite communication using VSAT technology and would enable faster connectivity within the financial sector. Banks (All): No of players = 40 Sector statistics: We see the sector aggregates and make a financial comparison for the major banks

50


Top Players FY2006 Based on Total Income Total Income (Rs Mn) 63161.9 ICICI BANK

Based on OPBDT Change (%) 54.50

PUNJAB NATIONAL B

29218

14.91

27709.5

23.78

OPBDT (Rs Mn) 76352.8

Change (%) -1.29

37174

19.36

22205.2

39.36

23317 25.43 16882.5 CAN BANK 18550.8 60.24 14324 H D F C BANK H D F C BANK % change - indicates the change between current and corresponding quarter.

19.53 27.48

CAN BANK BANK OF INDIA

SBI ICICI BANK PUNJAB NATIONAL B

TOP FOREIGN REGIONAL BANKS COMPANIES BY MARKET CAP

51


HDFC Vs Industry Leaders

52


Interest Income Interest Expense Net Interest Income Other Income Net Revenues Operating costs Operating Result Provisions and Contingencies Profit before tax Provision for taxation Profit after tax Funds : Deposits Subordinated debt - Stockholders’ Equity Working Funds Loans Investments Key Ratios : Earnings per share (Rs) Return on Average Networth Tier 1 Capital Ratio Total Capital Ratio Dividend per share (Rs) Dividend payout ratio Book value per share as at March 31 (Rs) Market price per share as at March 31 (Rs) Price to Earnings Ratio

2002-03 2,013,61 1,191,96 821,65 465,55 1,287,20 577,05 710,15 139,30 570,85 18325 38760

2003-04 2,548,93 1,211,05 1,337,88 480,03 1,817,91 810,00 1,007,91 288,95 718,96 20946 50950

2004-05 3,093,49 1,315,56 1,777,93 651,34 2,429,27 1,085,40 1,343,87 364,93 978,94 31338 66556

2237607 20000 224483 3042408 1175486 1338808

3040886 60000 269188 4230699 1774451 1925679

3635425 50000 451985 5142900 2556630 1934981

13.75 18.10% 9.49% 11.12% 3 24.72% 79.6 234.55 17.06

17.95 20.14% 8.03% 11.66% 3.5 22.15% 94.52 378.75 21.1

22.92 20.44% 9.60% 12.16% 4.5 24.00% 145.86 573.64 25.03

53


FINANCIAL HIGLIGHTS FOR THE LAST THREE YEARS

(Source: HDFC bank Annual Report 2006-07)

54


4) JET AIRWAYS MARKET Currently the market scenario is as shown :

1) ACC LIMITED

55


AIRLINE Jet Airways Air Deccan Kingfisher Spice Jet GoAir

CURRENT ACQUISITION FLEET PLANS 53 30 by 2012 29 79 by 2010 11 100 by 2012 6 38 by 2010 4 33 by 2008

INVESTMENTS US $Bn 2 2.7 4.5 1.9 2.4

STATE OF THE INDUSTRY •

High growth potential due to economic boom and highly under penetration in the market • 0.02 trips per capita per annum • Long-term GDP growth at 8% annually

•

It is forecasted that India would be the second fastest growing travel and tourism economy in the world

•

ATF (Aviation Turbine Fuel) prices and airport charges in India are among the highest in the world

•

Regulatory and infrastructure bottlenecks have prevented accelerated growth in the industry

•

The government is proactively looking to address the bottlenecks

MACRO ENVIRONMENT Refers to the factors which influence an industry but are beyond its control.Main factors are: P OLITICAL E CONOMIC S OCIO-CULTURAL T ECHNOLOGICAL Other Factors DEMOGRAPHIC NATURAL ENVIRONMENT

56


POLITICAL OPEN SKY POLICY DEREGULATIONS IN DIFFERENT SPHERES LESS ENTRY BARRIERS REDUCTION IN FDI LIMIT: 49% for airlines 100% for airport

SOCIO-CULTURAL •

Growing Middle Class 1993 to 1999 : 39.5 million to 56.7m households 2005 : 300 million 2010 : 400 million estimates

•

Increase in leisure travel by tourists by 15% in 2004

57


3.2 million foreign tourists visited India last year ; tourism industry grew 8.8 per cent over 2003, the highest growth rate in the world.

SOCIAL

TECHNOLOGICAL MODERNISATION OF AIRPORTS ILS-INSTRUMENT LANDING SYSTEMS DEMOGRAPHIC CHANGING STRUCTURE OF CONSUMERS HIGHEST % PEOPLE IN 20-50 AGE GROUP

58

TECHNICAL AND FUNDAMENTAL ANALYSIS OF SECURITIES EDUCATIONAL GROUPS SHIFT TOWARDS NUCLEAR FAMILIES (Source NCAER) MIDDLE CLASS INCOME OVER RS. 90,000 P.A. NATURAL ENVIRONMENT HIGH ENERGY COSTS • • •

The cost of aviation turbine fuel ATF in india for domestic airlines is almost double for international market. Govt. increased prices by 7.5%. From 32.56 to 35/litre. ATF price in feb soared by 3.5% to the price in jan 06.

PORTERS FIVE FORCE ANALYSIS •

• •

THREAT OF NEW ENTRANTS • Easy entry but execution doubtful • The capital requirement-a min of 30cr capitalization before takeoff • Network & time slots of existing players • Expected retaliation • Legislation or government action: equity capital for floating an airline • Differentiation • Exit barriers Inadequate airport infrastructure, shortage of pilots, high fuel costs Compulsion to operate on uneconomical routes, no subsidy

•

POWER OF BUYERS • Large number of buyers: Business travelers sector intensified by GDP growth, leisure customer market too a huge growth opportunity • Alternative source- large number of options available • Cost of switching- Minimal • No differentiation among the players in the same segment

• •

POWER OF SUPPLIERS ATF AIRCRAFT MFG PILOT • Switching costs- options of switching is very limited • Brand value- high • Forward integration- no history in past but possible • Shortage of pilots • High fuel costs

•

AVAILABILITY OF SUBSTITUTE • Product for product substitution- consumers can choose between the various options such as road and rail.

59


Substitution for need- with technology the need to travel has reduced but it is not possible to totally do away with it. It is marginally possible.

COMPETITIVE RIVALRY Increased competitive pressures due to new entrants Growth rates- high projected to be 22% High fixed costs Extra capacity Acquisition of weaker companies High exit barriers Differentiation

S.W.O.T of The Industry • • • •

Key Attractions: Low entry barrier. Attraction of foreign shores. Foreign equity allowed. Rising income levels and demographic profile.

• • • •

Key Problems: Crippling “Oil Shock” . Absence to Institutionalized Funding. Acute shortage of trained Pilots, severely limiting growth prospects. Unplanned location of Airports.

• • • • • •

Key Developments that may Influence the future: Average growth of about 25%-30% Air Freight segment is growing faster than the Passengers segment. Duties slashed on ATF and IATT. Pilot license applications have tripled. Expecting investments - US $30 billion by 2012 and about US $50 billion by 2015. Expected Market Size is projected to be about 50 million by 2010.

4) JET AIRWAYS Market Share: 35% #Strengths

60

TECHNICAL AND FUNDAMENTAL ANALYSIS OF SECURITIES • • • •

Virtual monopoly on Corporate Accounts Membership of IATA One of the Youngest Fleets in the World Debt-Equity Ratio of almost one is to one

• • •

#Weaknesses Required 1000 pilots in next two years. Concentrates only most profitable routes. Failed attempts at Merger.

• • • •

#Opportunities Hugh untapped international sectors Increase in domestic flight density Expanding operations into Air Freight business Integrate more long haul aircrafts

• • • •

#Threats Stiff competition in the Economy class from Low Cost Carriers. Competition in the Business Class form newcomers like KingFisher Hugh investments locked in future fleet expansion plans Single source of revenue

• •

Growth Forecast World Passenger traffic grew to 52.12 million in the last fiscal, from 43.47 million in 2004-05, to register a growth of 19.9 percent. In the last fiscal, the Indian aviation industry logged a robust growth of 24 percent and experts say the sector will expand by at least 16 percent annually for the next five years, riding on the overall economic growth of eight percent.

The Positive Steps Greenfield airports –Bangalore/Hyderabad

61


• J/Vs for Ground Handling and MRO facilities • Highly advanced GPS aided Geo augmented navigation (GAGAN) system operational this year. • AAI set up more radar stations – to bring entire Indian airspace under radar monitoring. • Training more Pilots and Air Traffic Controllers. • Raising retirement age of pilots to 65 from 61. New Entrants The aviation sector is likely to see the launch of many new airlines, including: • • • • •

Premier Airways Star Air East West Airlines Indigo Jagson

II TECHNICAL ANALYSIS OF STOCKS 1) ACC

LIMITED

62


ANALYSIS: Trend:� The stock after correcting to 50% of the long bull run [Bottom 676 – Top 1197] prices reversed back and are now in intermediary upward trend. Moving Averages :The stock is currently trading above all the important trading moving averages. The moving average rossover of 13 days & 40 days is observed on 22nd Dec. 2006 triggering price trend reversal and buyat current levels. 13 days: = 1037.70 40 days: = 1060.84 30 days: = 1078.65 100 days: = 991.62 Moving Average Channels:� The stock on giving a close above 1070 levels has given a breakout above the moving averagechannel signaling buy at current levels. Relative Strength Index (RSI):� RSI on falling to 34 levels in the profit booking mode bounced back to bull zone at 53.46 showing synchronization with price movement.

Pitchfork:� The stock have broken the upper arms and moved out (at 1072) of the corrective trend pitchfork signaling positive trend & buy at current levels. � The stock is now moving towards the median of the major pitchfork which is around 1160 levels. Oscillators:� Osc (10,70) trading favorably in positive zone indicating presence of long term traders.

63

TECHNICAL AND FUNDAMENTAL ANALYSIS OF SECURITIES � Osc (5,35) are pulling back to zero from negative, indicating entry of short term traders. Volumes:The stock is trading with lack luster volumes. Volumes should ideally expand for the advance togather steam. 27 Dec. 2006 28 Dec. 2006 On the basis of above analysis price movement can be projected as follows :Target : --- 1167 Stop Loss: --- 1040 Support: --- 1066 – 1063 – 1057 – 1046 Resistance: --- 1087 – 1093 – 1115 – 1122 – 1156 2) INFOSYS TECHNOLOGIES LIMITED INFOSYS TECH Date

12th February 2007

Close

2351.25

Trend

Up

Support

2340

Resistance 2380 Stop loss

2317

The Trend refers to the daily trend of the stock and not intraday but one may trade intraday based on it. If you are a slightly longer term investor, you may go on holding the stock in long if trend is up or you may go on holding the stock in short position if trend is down. If you are a short term trader you may use the below paragraph information and play for small moves. How to trade according to the data mentioned above If an entry is made in front of support and the close is above the support, it means that ne can buy the stock intraday during market hours at support and put an appropriate stop loss mentioned below. Once you have bought the stock intraday, put the Stop Loss accordingly mentioned and sell it before the market closes. If an entry is made in front of resistance and the close is less then resistance, it means that one can short the stock intraday during market hours at resistance and put an appropriate stop loss mentioned below. At close one should cover if one is an intraday trader. If we do not find the stock giving clear signal for intraday trading, than we will leave the support or resistance field empty.

64


3) CIPLA LIMITED CIPLA Date

12th February 2007

Close

248.35

Trend

Not Clear

Support

220


205

How to trade according to the data mentioned above If an entry is made in front of support and the close is above the support, it means that one can buy the stock intraday during market hours at support and put an appropriate stop loss mentioned below. Once you have bought the stock intraday, put the Stop Loss accordingly mentioned and sell it before the market closes. If an entry is made in front of resistance and the close is less then resistance, it means that one can short the stock intraday during market hours at resistance and put an appropriate stop loss mentioned below. At close one should cover if one is an intraday trader. If we do not find the stock giving clear signal for intraday trading, than we will leave the support or resistance field empty. If you are a slightly longer term investor, you may go on holding the stock in long if trend is up or you may go on holding the stock in short position if trend is down. If you are a short term trader you may use the below paragraph information and play for small moves. 4) BHARAT PETROLEUM CORPORATION LIMITED BPCL Date

12th February 2007

Close

331.85

Trend

Down

Support

355

65

TECHNICAL AND FUNDAMENTAL ANALYSIS OF SECURITIES Resistance

390

Stop loss

347

How to trade according to the data mentioned above •

•

•

If an entry is made in front of support and the close is above the support, it means that one can buy the stock intraday during market hours at support and put an appropriate stop loss mentioned below. Once you have bought the stock intraday, put the Stop Loss accordingly mentioned and sell it before the market closes. If an entry is made in front of resistance and the close is less then resistance, it means that one can short the stock intraday during market hours at resistance and put an appropriate stop loss mentioned below. At close one should cover if one is an intraday trader. If we do not find the stock giving clear signal for intraday trading, than we will leave the support or resistance field empty.

5) RANBAXY LABORATORIES LIMITED RANBAXY Date

12th February 2007

Close

409.15

Trend

Not Clear

Support

360

Resistance

420

Stop loss

350


•

•


66


6) TATA MOTORS LIMITED TATAMOTORS Date

12th February 2007

Close

875.05

Trend

Down

Support

810


795


•

•


7) RELIANCE INDUSTRIES LIMITED

RELIANCE Date

12th February 2007

Close

1358.85

Trend

Not Clear

Support

1290


1280

How to trade according to the data mentioned above

67


•

•


8) MAHINDRA & MAHINDRA LIMITED M&M Date

12th February 2007

Close

880.80

Trend

Down

Support

930


918


•

•


9) STATE BANK OF INDIA

68

TECHNICAL AND FUNDAMENTAL ANALYSIS OF SECURITIES SBIN Date

12th February 2007

Close

1183.70

Trend

Not Clear

Support

1120


1105


•

•


10) MARUTI UDYOG LIMITED MARUTI Date

12th February 2007

Close

912

Trend

Down

Support

950

Resistance

990

Stop loss

940


•

If an entry is made in front of support and the close is above the support, it means that one can buy the stock intraday during market hours at support and put an appropriate stop loss mentioned below. Once you have bought the stock intraday, put the Stop Loss accordingly mentioned and sell it before the market closes. If an entry is made in front of resistance and the close is less then resistance, it means that one can short the stock intraday during market hours at resistance and

69


•

put an appropriate stop loss mentioned below. At close one should cover if one is an intraday trader. If we do not find the stock giving clear signal for intraday trading, than we will leave the support or resistance field empty.

CHAPTER-5 70


LIMITATIONS

LIMITATIONS Like all studies based on samples, this study also suffers from some limitations. 1. As the study depends on human perceptions so there are chances of study getting biased. 2 Error due to some oversight or misinterpretation. 3 The scope of study was limited due to some constraints. 4. Any other error which could have crept in the course of the Project.

71


72


CHAPTER-6 CONCLUSION

CONCLUSION RECOMMENDATIONS: 1) ACC- At current price it is not advisable to buy the stock. Reasons for not buying the stock: The stock is currently trading above all the important trading moving averages. The moving average crossover of 13 days & 40 days is observed on 22nd Dec. 2006 triggering price trend reversal and buy at current levels. The stock is trading with lack luster volumes. Volumes should ideally expand for the advance to gather steam.

73

TECHNICAL AND FUNDAMENTAL ANALYSIS OF SECURITIES 2) INFOSYS TECHNOLOGIES- At current market price ,its advisable to buy the share. Reasons: The stock is currently trading below all the important moving averages. The stock is trading with good volumes. Volumes are ideal and are set to gather further steam. 3) TATA MOTORS- At current market price , we should buy the share because of the following reasons: Since, 1991 opening of the economy has changed the face of auto industry. Today, it is amongst the main drivers of growth of Indian economy with an output multiplier of 2.24(for every Re.1 invested, auto sector gives back Rs.2.24 to the economy). Tremendous Growth -Tata Motors has decided to enter into a 50-50 JV with Fiat, at Pune, for manufacturing passenger vehicles, engines and transmissions for both, domestic and international markets.. The Company has also entered into a JV with Hitachi, to set up a new plant in Kharagpur

4) HPCL: Strengths: Favourable production – sale mix Entry on petrochemicals and gas sector will reduce dependence on R&M sector Second largest refining capacity and pipeline infrastructure in the industry Good presence in high demand regions of west and north India Growth potential: Per capita energy consumption low in country Deficiency of coal will benefit oil and gas sector Growing domestic market for gas 74

TECHNICAL AND FUNDAMENTAL ANALYSIS OF SECURITIES Overseas presence in upstream and downstream will determine growth

5) HDFC BANK: Growing stock and its advisable to invest in this stock for long term. HDFC bank acquired TIMES BANK in 2001 which increased its customer base by 3 lakh customers. Growth in net revenues of 42.2%. Net profit up by 32%. Total customer asset increased by 44.9% 6) JET AIRWAYS: We should not invest in the stock because of the following reasons: ATF (Aviation Turbine Fuel) prices and airport charges in India are among the highest in the world Regulatory and infrastructure bottlenecks have prevented accelerated growth in the industry 6) RELIANCE INDUSTRIES: Good stock for any Portfolio. Very high GRM thus it will continue to produce Positive Cash Flow. Charts show good volume with positive uptrend. 8) STATE BANK OF INDIA: Should be Sold. Due to tight monetary policies it will remain under pressure. Very low volumes plus twenty day moving average both indicate that it should not be held. 10)MARUTI UDYOG: Can be held. Being market leader it has best chances but high input costs are putting pressure on margins plus rising interest costs are going against the stock. It has taken a sharp run in the last rally and now there is a dip in the volumes in the past. 11)RANBAXY PHARMACEUTICALS: Should be bought. Due to latest permission from USFDA FOR 180 Day exclusive marketing rights for its Diabetees molecule. 75

TECHNICAL AND FUNDAMENTAL ANALYSIS OF SECURITIES Its participation in the last rally was not very significant but this USFDA news it appears is acting as a trigger. Volumes are increasing so it appears there is a upside left to this stock. 12)MAHINDRA & MAHINDRA: Should be held. In the auto pack it is one of the companies which can bear the rising input cost plus higher interest rates. Twenty day moving average plus it is around a very strong support so it seems that it can show a rally.

76


CHAPTER-7 GLOSSARY

GLOSSARY SECURITY ANALYSIS: stands for the proposition that a well-disciplined investor can determine a rough value for a company from all of its financial statements, make purchases when the market inevitably under-prices some of them, earn a satisfactory return, and never be in real danger of permanent loss. FUNDAMENTAL ANALYSIS: is the analysis of a stock on the basis of core financial and economic analysis to predict the movement of stocks price. 77

TECHNICAL AND FUNDAMENTAL ANALYSIS OF SECURITIES TECHNICAL ANALYSIS: is the study of prices and volume, for forecasting of future stock price or financial price movements. DOW JONES THEORY: The Dow theory is a method of interpreting and signaling changes in the stock market direction based on the monitoring of the Dow Jones Industrial and Transportation Averages. ELLIOT WAVES BASICS: Breaking through support or resistance levels results in a change of traders’ expectations SUPPORT: Support is a level at which bulls (i.e., buyers) take control over the prices and prevent them from falling lower. RESISTANCE: is the point at which sellers (bears) take control of prices and prevent them from rising higher ROLE REVERSAL: When a resistance level is successfully broken through, that level becomes a support level. Similarly, when a support level is successfully broken through, that level becomes a resistance level. BULL TREND: The start of an up trend is signaled when price makes a higher low (trough), followed by a rally above the previous high (peak) BEAR TREND: when a rally ends with a lower peak and then retreats below the previous low. The end of a bear trend is identical to the start of a bull trend. LARGE CORRECTION: A large correction occurs when price falls below the previous low (during a bull trend) or where price rises above the previous high (in a bear trend). MOVING AVERAGE: A moving average is the average price of a financial instrument over a given time. RELATIVE STRENGTH INDEX: The Relative Strength Index Technical Indicator (RSI) is a price-following oscillator that ranges between 0 and 100 ADVANCE/DECLINE LINE: The “advance/decline line” shows, for some period, the cumulative difference between advancing and declining issues. CLOSING TICK: “Closing tick” is the difference between the number of shares that closed on an uptick and those that closed on a downtick. CLOSING ARMS: “Closing arms” or “trin” (trading index) is the ratio of average trading volume in declining issues to average trading volume in advancing issues. Z-BLOCK TRADES: “zBlock trades” are trades in excess of 10,000 shares. HI-LO-CLOSE CHART: A hi-lo-close chart is a bar chart showing, for each day, the high price, low price, and closing price.

CANDESTICK CHART: A candlestick chart is an extended version of the hi-lo-close chart. It plots the high, low, open, and closing prices, and also shows whether the closing price was above or below the opening price POINT AND FIGURE CHARTS: Point-and-figure charts are a way of showing only major price moves and their direction. A “major” up move is marked with an “X,” while a “major” down move is marked with an “O.” A new column starts every time there is a change in direction HEAD AND SHOULDERS FORMATION: Once a chart is drawn, technical analysts examine it for various formations or pattern types in an attempt to predict stock price or market direction in the case of head-and-shoulders formation.

78

TECHNICAL AND FUNDAMENTAL ANALYSIS OF SECURITIES ODD-LOT: The “odd-lot” indicator looks at whether odd-lot purchases are up or down. HEMLINE: Followers of the “hemline” indicator claim that hemlines tend to rise in good times. SUPER BOWL: The Super Bowl indicator forecasts the direction of the market based on whether the National Football Conference or the American Football Conference wins. BETA: Beta is a risk measure comparing the volatility of a stock's price movement to the general market. MOMENTUM: Momentum measures the speed of price change and provides a leading indicator of changes in trend. UPSIDE/DOWNSIDE: Measures of Upside/Downside separate the volumes for rising markets from those in falling markets. Since volume is independent of price, it makes a valuable tool for measuring the quality of a price trend. SWING INDEX: Is a swing or wave system used to capitalize on breakout patterns. ASI is commonly used to confirm trend line breakouts on price charts. ARMS INDEX (TRIN): Short term breadth indicator showing whether volume is flowing into advancing or declining issues.

79


CHAPTER-8 BIBLIOGRAPHY

BIBLIOGRAPHY 1) John L. Person, “A Complete Guide to Technical Trading Tactics”, Ninth Edition (March 26, 2004) 2) Colby, Robert W. and Thomas A. Meyers, “The Encyclopedia of Technical Market Indicators” (Tenth Edition 2000) 3) Nison, Steve, “Beyond Candlesticks” (John Wiley & Sons, 1994), Fourth Edition 1998

80

TECHNICAL AND FUNDAMENTAL ANALYSIS OF SECURITIES 4) Edwards, Robert D., and John Magee, Technical Analysis of Stock Trends (John Magee, 1997; first edition, 1948). 4) Geoffrey Poitras, “Security Analysis and Investment Strategy” (2001) 5) Benjamin Graham and David Dodd, “Security Analysis” (November, 1999) 6) Erich A. Helfert, D.B.A., “Financial Analysis: Tools and Techniques” (2000) 7) Peter J. Klien, “Getting Started in Security Analysis” (April, 2002) 8) Richard A. Brealey, Stewart C. Myers, Alan J. Marcus ”Fundamentals of Corporate Finance” Third Edition, McGraw-Hill, Section A 9) Sharekhan, “Fundamental Analysis: Which Company?” (October, 2004)

WEBSITES: www.tradingday.com www.marketscreen.com www.icicidirect.com www.nseindia.com www.investopedia.com www.indiainfoline.com www.economictimes.com

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Technical and Fundamental Analysis of Selected Securities of Indian Stock Market

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