Equity Research Report

Equity Research Report

DAYALBAGH EDUCATIONAL INSTITUTE DAYALBAGH, AGRA

A PROJECT ON EQUITY RESEARCH FINANCIAL SERVICES SECTOR & PAIR STRATEGY

DATE OF SUBMISSION:

SUBMITTED BY:Shashank Sanwar 087633 MBA DEI

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Equity Research Report

ESCORTS MUTUAL FUNDS

A PROJECT ON EQUITY RESEARCH FINANCIAL SERVICES SECTOR & PAIR STRATEGY DATE OF SUBMISSION:

SUBMITTED BY:Shashank Sanwar 087633 MBA DEI

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Equity Research Report

AUTHORIZATION The project is submitted as partial fulfillment of the requirements of Master of Business Administration of DAYALBAGH EDUCATIONAL INSTITUTE DAYALBAGH, AGRA

I hereby declare that following projects “Equity Research, Valuation of Financial Services industry, Pair Trading are original and bon-a-fide work done by me. This report has been authorized by

Mr. Praveen Sevak, Equity Research Analyst Securities Ltd Escorts Mutual Funds as a part of evaluation for

the Summer Internship Program.

DATE:

Shashank Sanwar 087633

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Equity Research Report

ACKNOWLEDGEMENT Surpassing milestones towards a mission sometimes gives us such degree of jubilance that we tend to forfeit the precious guidance and help extended by the people to whom the success of mission is solely dedicated. Firstly, I would like express my gratitude to Mr. Lalit Khanna CEO and Dr. Ashok Aggarwal, COO for allowing me to do the Summer Internship Training at Escorts Mutual Funds My Special Thanks to Mrs. Manjeeta Mahajan who found me as the eligible student for training in Escorts Mutual Funds I deeply express my special heartfelt thanks to company guide Mr. Praveen Sevak, Equity Research Analyst who inspired me and guided me throughout the period of project work that enabled me to present the report on this topic. I extend my sincere thanks to

Mr. Ajay Kumar Gupta, Mr. Jagvir Fauzdar, Mr. Sanjeev Sharma, Mr. Vipul Kumar and all other members

of Equity Research Team for their continuous guidance, cooperation, and valuable suggestions to initiate & carry out the study. I would also like to thank my faculty guide Prof K. Shanti Swroop who has been a source of constant inspiration, stimulating me to learn and making my learning process an enlightening experience. Lastly, it gives me immense gratification to place on records my profound gratitude and sincere appreciation to each and every one of those who have helped me in this endeavor.

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Equity Research Report

TABLE OF CONTENTS 1. EXECUTIVE SUMMARY………………………………………………………..... 8 2. MAJOR PROJECTS………………………………………………………………….. 9 3. PURPOSE & BENEFITS……………………………………………………………10 4. OBJECTIVE………………………………………………………………………………11 5. Introduction to financial services industries in India…………….12 6. India - Strategic Map in financial services industries……………12 7. Financial services industries –Over View………………………….……13 1) Stock markets……………………………………………………………….14 2) Insurance……………………………………………………………………….14 3) Banking services……………………………………………………………15 4) Government Initiatives………………………………………………….15 8. Private Equity Outlook in India……………………………………………….16 1) Strong Macroeconomic Outlook…………………………………….16 2) Private Equity in India – The Story So Far……………………16 3) Private Equity in India – Future Outlook………………………17 4) India Lags the Developed Markets In PE Investment Levels…………………………………………………………………………….17 5) PE Investments in India Getting More Diversified ………18 6) Key Industry Groups’ to Look for…………………………………19 7) Risks and Opportunities in India………………………………….20 I. Risks……………………………………………………………….20 II. Opportunities in Public Sector Undertakings (PSUs)…………………………………………………………….20 III. Opportunities in Family-run Businesses……….21 9. PAIR TRADING……………………………………………………………………….22 1) What Is Pairs Trading?...........................................22 2) An Example Using Stocks ……………………………………23 3) An Example Using Futures Contracts ..............................25 4) An Example Using Options ………………………………….25 5) Evidence of Profitability……………………………………………….25

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Equity Research Report 10. Market-neutral strategy……………………………………………………….26 1) TYPES OF MARKET NEUTRALITY………………………………….26 I. Share Neutrality…………………………………………….26 II. Dollar neutrality…………………………………………….26 III. Sector neutrality…………………………………………….27 IV. Beta Neutrality……………………………………………….27 V. Market capitalization neutrality…………………….27 11. MARKET NEUTRAL INVESTMENT PROCESS ……………………….28 1) INITIAL SCREEN……………………………………………………………28 2) LIQUIDITY…………………………………………………………………….28 3) SHORT –SALE ABILITY…………………………………………………28 4) INVOLVEMENT IN CORPORATE ACTION………………………29 5) STOCK SELECTION……………………………………………………….29 12. FUNDAMENTAL TRADE………………………………………………………….30 13. CORRELATION BETWEEN PAIR…………………………………………….30 14. TECHNICAL TRADE……………………………………………………………….31 15. MARKET STRENGTH INDICATORS……………………………………….31 16. MOVING AVERAGE INDICATORS…………………………………………32 17. BOLLINGER BAND………………………………………………………………..32 18. RELATIVE STRENGTH INDEX……………………………………………….32 19. VOLUME AS INDICATOR………………………………………………………33 20. FINAL PORTFOLIO SELECTION……………………………………………34 21. Summary………………………………………………………………………………34 22. Other Pairs……………………………………………………………………………34 23. CONCLUSION…………………………………………………………………………35 24. REFERENCE……………………………………………………………………………36 25. ANNEXURE…………………………………………………………………………….37

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Equity Research Report

LIST OF FIGURES 1. India - Strategic Map…………………………………………………………….12 2. Private Equity in India – The Story So Far……………………………16 3. Private Equity in India – Future Outlook………………………………17 4. PE Investments in India Getting More Diversified 2000……..18 5. PE Investments in India Getting More Diversified 2008………18 6. Closing Price of AXIS BANK & ICICI BANK……………………………23 7. Bollinger Band…………………………………………………………………………24 8. Price Ratio and Mean Value of Pair…………………………………………31 9. BOLLINGER BAND AXIS Bank & ICICI Bank………………………….32 10. Price Ratio & Mean Value Of Axis Bank & ICICI Bank………..33 11. AXIS Bank/ ICICI Bank Volatility…………………………………………33

LIST OF TABLES 1. Private Equity Investments as a Percentage of GDP (2008) 17 2. Percentage by Number &Market Capitalization of the Hundred Companies Comprising BSE-100…………………………………21 3. Correlation between the pair…………………………………………………30 4. Summary Table………………………………………………………………………34 5. Other Pairs……………………………………………………………………………..34

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Equity Research Report

EXECUTIVE SUMMARY Equity Research is the area which deals with the live economy. Equity Research is a field that has evolved and transformed the Financial Sector over the Past few decades. With the Capital market in doldrums, sentiments and confidence reaching all time lows, investors are going back to fundamental and technical analysis which seems to have taken a back seat from past few years. Equity Research helps the investor to know about the value, risk & volatility of the covered security, and thus assist investors to decide whether to buy, hold, sell, sell short, or simply avoid the security in question. In the process of research, analysts require high level of real time as well as historical data, so as to evaluate and analyze different aspects of the covered security. With Technology, the availability of data is no matter today but there are tools and models needed to analyze the data. The project is divided into three parts. The first topic emphasizes on financial services industries in India. The main idea is to identify the Financial Services Industries Overview and analysis the working of different financial services. This topic also includes Geographical Spread and Service Quality of different financial companies. The second topic emphasizes on Private Equity Outlook in India. The main idea is to identify the trend of investment in Private Equity over a period of time. This part also includes forecasting of the trend of Private equity in next ten years. The third topic deals with “Long/Short Trading Strategies: Stock pairing ideas”. This is the new project that the company is working on. There are two components of this part. First is to Identifying the pairs and best trading rules that should lead to higher returns and lower volatility of returns. And second is for Opening a position when the ratio reaches two standard deviations away from the mean and closing it at one standard deviation or when the price ratio approach its mean value, this methodology has a reasonable balance between reward and risk.

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Equity Research Report

MAJOR PROJECTS The project is categorized under the following major topics.


The first topic emphasizes on Introduction to financial services industries in India. The main idea is to identify the Financial Services Industries Overview and analysis the working of different financial services. This topic also includes Geographical Spread and Service Quality of different financial companies.


The second topic emphasizes on Private Equity Outlook in India. The main idea is to identify the trend of investment in Private Equity over a period of time. This part also includes forecasting of the trend of Private equity in next ten years.


The third topic deals with “Long/Short Trading Strategies: Stock pairing ideas”. This is the new project that the company is working on. There are two components of the project – •

Identifying the pairs and best trading rules that should lead to higher returns and lower volatility of returns.

•

Opening a position when the ratio reaches two standard deviations away from the mean and closing it at one standard deviation or when the price ratio approach its mean value, this methodology has a reasonable balance between reward and risk.

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Equity Research Report

PURPOSE & BENEFITS The Purpose of the project is to have in-depth knowledge and understanding of Financial Sector in India. The project also intends to forecast and predict the future trend of financial sector in India. The Main Purpose of project is the exposure to market neutral strategies and to understand the derivative and stock market. As the aspect of this project is multidimensional so is its purpose. The project brought about value additions not only to the company but also benefited me academically. This project also helps in understanding the Trading Strategies used by Escorts Mutual Funds.

This project leads us to emphasize on Using Pair Trading Strategy in Stock Market.

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Equity Research Report

OBJECTIVE Introduction to financial services industries in India


To determine the present factors affecting the financial services industries in India


To determine the - Strategic Map of financial services companies with respect of Geographical spread & Service Quality.

Introduction to Private Equity in India
To study the performance of Private Equity So far in India.
To determine the future trend of Private Equity in India.
To analysis the factor affecting Private Equity in India.
To identify the Risk and Opportunities for Private Equity in India.

Stock Pair Trading
To study the meaning of Pair Trading Strategy.
To analysis the stocks which are appropriate for making Pair.
To build profitable long-short strategies with equal in investment in long & short. The return is not based on individual movement but relative movement reflected in the price ratio.

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Equity Research Report

Introduction to financial services industries in India

Financial Services Industries - Overview

Financial Services

Commercial Bank

• • • •

Private banking Investment Banks Bank cards Credit card machine services and networks

Investment Services

Insurance

•

Asset Management

•

Insurance Brokerage

•

Hedge Fund Managers

•

Insurance Underwriting

•

Custody services

•

Reinsurance

Advisory Services

•

Stock brokers (private client services) and discount brokers

India - Strategic Map High

Citibank Stan C ABN Amro HSBC

ICICI Bank HDFC AXIS Bank IndusInd Bank Vysya Bank

Service Quality

Karur Vysya

State Bank of India Bank of Baroda Bank of India PNB Andhra Bank Canara Bank

Low

Co-operative Bank Rural Banks

Rural

Regional

Urban

Geographical Spread

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Equity Research Report

With market sentiment turning positive due to the formation of a stable newly elected government, the ripple effect is likely to felt across all the financial services in India. The sectors, including banking and insurance, and mutual funds are all beginning to reap the benefits of a good closure for 2008-09. In 2008-09, the Indian economy is estimated to have grown by 6.7 per cent. According to the latest Central Statistical Organization (CSO) data, financial services and real estate sector rose by 9.5 per cent in the first quarter of 2009-10. The government has taken a number of steps in recent months to revive the economy, including slashing interest rates, lowering factory levies and more than doubling the limit on foreign investment in corporate bonds. The financial services space is a rapidly growing one in India. The country received US$ 45 billion in foreign currency remittances from non-resident Indians in 2008, the highest in the world. April-May 2009 saw increased inflow in to equity with investors steadily turning positive on equity according to mutual fund analysts. As per the Securities and Exchange Board of India (SEBI), on May 15, net investment of mutual funds in equity was around US$ 83.3 million lowering to US$ 20.5 million on May 21. As against this, net investment of mutual funds in debt has more than tripled from US$ 42.9 million on May 15 to US$ 134.2 million on May 31, 2009. There is optimism in the economy as funds are investing in corporate bonds, making liquidity available to enterprises. The total amount traded in corporate bonds tripled from US$ 17.8 million to US$ 55.7 million during May 15 to May 21, 2009. The largest fund house, Reliance Mutual Fund, registered 16 per cent growth in its average assets under management (AUM) to US$ 21.6 billion in May 2009 compared to April’s figure of US$ 18.6 billion. The second-largest fund house, HDFC Mutual Fund, grew 18 per cent to US$ 16 billion, compared with the previous month’s figure of US$ 13.4 billion. The Spice Group is now looking for a US$ 1-billion valuation in financial services business in the next three to five years. It has put US$ 105.2 million as seed money for the financial services business and is roping in a Singapore-based firm as a partner for the asset reconstruction business. India has increased its exposure to American debt securities by over three-fold to US$ 38.2 billion till March 2009 as against US$ 11.8 billion in March 2008, according to the data from the US Treasury Department.

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Equity Research Report Stock markets India’s market capitalization (m-cap) has touched US$ 1.04 trillion making it the ninth largest in the world. India’s share in the total world m-cap has risen to 2.79 per cent currently. The Indian stock market has currently responded to the optimism of reforms by the new stable government and its continuity in policies. Further, according to global consultancy firm, Deloitte Haskins & Sells, the Indian economy and capital markets are expected to witness a turnaround within six to nine months. Fund raising by India Inc through initial public offers (IPOs) rose by a whopping 62 per cent since the beginning of 2008 to May 29, 2008 to US$ 4.2 billion, against US$ 2.6 billion during the same period in 2006, according to global deal data provider, Dealogic. According to Goldman Sachs, Indian companies may raise US$ 4 billion-6 billion from IPOs in the fiscal year ending March 31, 2010 Insurance India is the fifth largest life insurance market in the emerging insurance economies globally and the segment is growing at a healthy 32–34 per cent annually. The insurance industry’s sales rose the fastest in two years since April 2007. The country’s 22 life insurance companies saw 29.5 per cent rise in premium collected through sale of new policies to US$ 758 million in April 2009, as against US$ 585 million in the corresponding period last year. In case of LIC, which recorded 69.33 per cent growth in first-year premium during April 2009, a bulk of the growth came from the group single premium segment and individual single premium rose to US$ 89.8 million from US$ 77 million in the corresponding period of last year. According to a report by research firm RNCOS—'Booming Insurance Market in India (2008–2011)'—the total life insurance premium in India is projected to grow to US$ 259.72 billion by 2010–11. Life Insurance Corporation (LIC) is bullish on growth and is targetting business in excess of US$ 59.14 billion by 2011–12. The government is planning to ease restrictions on foreign investments in insurance, banking and pensions, and allow foreign direct investment (FDI) of 49 per cent from the present 26 per cent. The ‘Mallassurance’ delivery channel is first of its kind in India's insurance sector, selling life and general insurance policies through all Future Group retail outlets across the country. For Future Generali Insurance, a sizeable chunk of their customers now comes through the Mallassurance route.

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Equity Research Report Online sales take place through two major channels through direct sales by the insurers and through online insurance portals which offer a range of products from various insurers. The most active insurers online are ICICI Lombard, Bajaj Allianz etc. Banking services During 2008-09, State Bank of India (SBI) and associate banks advanced US$ 16.8 billion for infrastructure projects such as power plants and petroleum refineries. The big-sized credits have made SBI and group one of the largest project financiers in the country. IDFC Mutual Fund and Bank of India have entered into a strategic alliance to distribute and market mutual fund products of IDFC through Bank of India's branches. Government Initiatives The Central Board of Direct Taxes (CBDT) has changed the investment pattern for recognised provident funds and superannuation trusts managed by the private sector under the income-tax rules to take a greater exposure in the stock market from April 1, 2009

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Equity Research Report

Private Equity Outlook in India India: Strong Macroeconomic Outlook Current Snapshot
Gross Domestic Product (GDP) of US $1,030 billion
12th largest economy in the world and 4th largest in PPP terms
Real GDP growth of 9.4% in 2006-07

Projections - 2020
GDP of $1,030 billion during calendar year 2007
Assuming real GDP growth rate of 8% per year and an average of 5.5% inflation:
GDP of $1.920 billion in 2012
GDP of $5,040 billion in 2020

Projections – 2020 – Comparison
Real GDP growth rate 8% per annum (13.5% including 5.5% annual inflation)
4th largest economy of the world after US, China and Japan
3rd largest economy in PPP terms behind China and the US

Private Equity in India – The Story So Far 400

8,000 7,460 7,000

350 300

6,000

280

250

5,000

200

4,000 146

150 100

0

250 5 20 18 80

110 311

1,160

60 50

3,000

107

500

71

56

1,650

591 937

2,183

Value of Deals (USD million)

Number of Deals

299

2,000 1,000

470 0

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Number of Deals

Value of Deals

(Source: Evalueserve, IVCA, Venture Intelligence India)
First started in 1975 by Risk Capital Foundation followed by other domestic financial institutions
After 1996, international VC and PE firms started investing in India
Investments started surging in 2004 16

Equity Research Report

400

8,000 7,460 7,000 299 6,000

Number of Deals

350 300

280

311

250

5,000

200

146

150

107

100 50 0

110

60 5

18

56 500

1,160 937591

71

2,183 1,650

3,000 2,000 1,000

470

250 80 20 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Number of Deals

4,000

Value of Deals (In US$ million)

Private Equity in India – Future Outlook

0

Value of Investments


PE Investments of US $13.5 billion in 2009 to increase to US $23 billion by 2012
366 PE firms currently operating in India and another 69 planning to start their operations soon
US $48 billion already earmarked for investment during the next three and a half years

India Lags the Developed Markets In PE Investment Levels:Private Equity Investments as a Percentage of GDP (2006) PE PE Investment/GDP Countries GDP Investment Ratio USA $13,245 billion $191 billion 1.44% UK $2,374 billion $42.3 billion 1.78% China $2,630 billion $13 billion 0.49% India $910 billion $7.5 billion 0.82%
PE investment/GDP ratio in US/UK is much higher than China/India
India already catching up fast, projected ratio of 1.3% in 2008
Indian economy can easily absorb US $60 billion during 2008-2010 and as much as US $490 billion during 2007-2020 including investments by hedge funds

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Equity Research Report

PE Investments in India Getting More Diversified 2000 IT & ITeS 66% Financial Services 4%

Manufacturi ng Others Medical & 3% 25% Healthcare 2%

IT & ITeS Manufacturing Others

Financial Services Medical & Healthcare

2008 IT & ITeS 28%

Financial Services 10%

Others 26%

IT & ITeS Manufacturing Engineering & Construction

Manufacturing 18%

Medical & Healthcare Engineering & 10% Construction 8%

Financial Services Medical & Healthcare Others


PE Investments in 2000 dominated by IT & ITES
Share of several other sectors esp. manufacturing, financial services, and healthcare increasing significantly
New areas of investment include Engineering & Construction, Textiles, Logistics, Food and Beverages, etc.

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Equity Research Report

‘Key Industry Groups’ to Look for…

Hi-tech Services and Products

Domestic Services Sector
Includes:


Includes: → IT/ITES → Drug Research → Clinical Research Outsourcing (CRO) → Engineering Services Outsourcing (ESO) → Telecom products and services
Expected to grow at approximately 22% per year during the next five years
Likely to contribute about 1.3% out of a total growth of 13% per year

→ → → → → →

Retail Travel and hospitality Health care Entertainment Private education Financial Services


Expected to grow at approximately 19% per year during the next five years
Likely to contribute about 2.7% out of a total growth of 13% per year

High-end Manufacturing and Infrastructure
Includes: → Auto/Autocomponents → Electrical/electronic goods → Specialty chemicals → Pharmaceuticals → Gems and Jewellery → Textiles → Construction/Real Estate
Expected to grow at approximately 19% per year during the next five years
Likely to contribute about 2.5% out of a total growth

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Equity Research Report

Risks and Opportunities in India Risks First...
High volatility in Indian stock markets → Heavy dependence on short-term Foreign Institutional Investment inflows → Rich valuations: P/E ratio of 25 for BSE-100 compared with 13 for emerging markets as a whole
Currency fluctuations, which are making India less competitive to China. For example, Indian Rupee has appreciated by 14.5% during Oct. 15, 2006 and Oct. 14, 2007 whereas the Chinese Yuan has only appreciated by 5.4% (during the same period).
Political risk: “Rules of the game” sometimes not clear
Shortage of skilled workers especially in IT/ITES leading to wage inflation
Indian economy heating up very quickly. For example, real costs have gone up by a factor of five in five years whereas wages have only doubled during last five years.

Opportunities in Public Sector Undertakings (PSUs)
Top 42 listed PSUs make up the BSE-PSU index and have a combined market cap exceeding US $210 billion
Impressive operational gains post liberalization (1991 to 2007) → Average revenue per employee up 10 times → Average profit per employee up 16 times
Room for further efficiency gains – up to 60 percent in BSE-PSU companies and perhaps more in other PSUs
Recent investments from Actis in Punjab Tractors andfrom Mittal Steel in HPCL refinery are recent examples of Private participation in state owned enterprises Key Challenge
Most PSUs are hierarchical and bureaucratic in nature, and do not like external advice

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Equity Research Report

Opportunities in Family-run Businesses Percentage by Number and Market Capitalization of The Hundred Companies Comprising BSE-100 Percentage by Percentage by Market As of June 30, 2009 Number Capitalization Public Sector 16 24 Undertakings Family run 47 46 companies Subsidiaries of 23 20 Multi-nationals Others 14 9 (Source: Bombay Stock Exchange Website)


Overall, less than 1/3rd of family run businesses survive 20 years. Issues include: → Corporate governance → Good management structure → Long-term vision
Can be a win-win for both parties if: → PE firm contributes strategy and operational expertise, not just capital

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Equity Research Report

PAIR TRADING What Is Pairs Trading? Pairs trading strategy is a market neutral strategy which enables traders to profit from virtually any market condition; uptrend, downtrend or sidewise movement. Although introduced in early 1980’s, the strategy became popular among retail traders only after the introduction of online trading through sophisticated trading systems. Opportunities of pairs trading usually last for only a short-period of time thus quick response to market movements is required, which can only be achieved by high degree of automation. Pair Trading refers to opposite positions in two different stocks or indices that is long position in one stock and short position in another stock. Pair Trading can be simple in concept, but can be one of the most complex types of trading in practices

The first and most important step in pairs trading strategy is to find pairs. Pairs are trading instruments (stocks, options, futures, currencies, bonds, etc.) which show great correlation that is the price of one move in same direction of the other. For stocks, pairs can be shares of two companies in same (or related) industry. For futures it can be mini and full-size contract or can be futures of related (same) industries. And for forex it can be currencies of countries having good trade relations. Traders should use various fundamental and technical analysis tools to find these pairs*.

Pair traders look for divergence of correlation between shares of a pair. When a divergence is noticed, traders take opposite positions in a pair. For stocks, currencies and futures, the trader takes long position for underperforming instrument and short position for over performing instrument; for options, the trader writes put option for outperforming stock and call option for underperforming stock. In most cases cost of taking one position is compensated by the revenue from the opposite position. Trader is profited when the divergence is corrected and the instruments are brought to original (mean) correlation by market forces.

*Handbook of Pair Trading by Douglas E Ehram

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Equity Research Report

An Example Using Stocks Traders can use either fundamental or technical data to construct a pairs trading style. Our example here is technical in nature, but some traders use a P/E ratio or other fundamental factors to measure correlation and divergence. The first step in designing a pairs trade is finding two stocks that are highly correlated. Usually that means that the businesses are in the same industry or sub-sector, but not always. For instance, index tracking stocks like the AXIS BANK (NSE) or the ICICI BANK (NSE) can offer excellent pairs trading opportunities. Two indices that generally trade together are the AXIS BANK and the ICICI BANK. This simple price plot of the two indices demonstrates their correlation:

For my example, I look at two businesses that are highly correlated: L&T and BHEL. Since both are INDIAN MANUFACTURERS, their stocks tend to move together.

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Equity Research Report Below is an annually chart of the price ratio between L&T and BHEL (calculated by dividing L&T’s stock price by BHEL’s stock price). This price ratio is sometimes called "relative performance" (not to be confused with the relative strength index, something completely different). The center Pink line represents the mean price ratio over the past One years. The Blue and Sky blue lines represent Plus(+tive) one and two standard deviations from the Mean ratio, respectively. The Red and Green lines represent Minus(-tive) one and two standard deviations from the Mean ratio, respectively. In the chart below, the potential for profit can be identified when the price ratio hits its first or second deviation. When these profitable divergences occur it is time to take a long position in the underperformer and a short position in the overachiever. The revenue from the short sale can help cover the cost of the long position, making the pairs trade inexpensive to put on. Position size of the pair should be matched by Rupees value rather than number of shares; this way a 5% move in one equals a 5% move in the other. As with all investments, there is a risk that the trades could move into the Blue & Green, so it is important to determine optimized stop-loss points before implementing the pairs trade.

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Equity Research Report

An Example Using Futures Contracts The pairs trading strategy works not only with stocks but also with currencies, commodities, and even options. In the futures market, "mini" contracts - smaller-sized contracts that represent a fraction of the value of the full-size position - enable smaller investors to trade in futures. A Pairs trade in the futures market might involve an arbitrage between the futures contract and the cash position of a given index. When the futures contract gets ahead of the cash position, a trader might try to profit by shorting the future and going long in the index tracking stock, expecting them to come together at some point. Often the moves between an index or commodity and its futures contract are so tight that profits are left only for the fastest of traders - often using computers to automatically execute enormous positions at the blink of an eye.

An Example Using Options Option traders use calls and puts to hedge risks and exploit volatility (or the lack thereof). A call is a commitment by the writer to buy shares of a stock at a given price sometime in the future. A put is a commitment by the writer to sell shares at a given price sometime in the future. A pairs trade in the options market might involve writing a call for a security that is outperforming its pair (another highly correlated security), and matching the position by writing a put for the pair (the underperforming security). As the two underlying positions revert to their mean again, the options become worthless allowing the trader to pocket the proceeds from one or both of the positions.

Evidence of Profitability In June of 1998, Yale School of Management released a paper written by Even G. Gatev, William Goetzmann, and K. Geert Rouwenhorst who attempted to prove that pairs trading is profitable. Using data from 1967 to 1997, the trio found that over a six-month trading period, the pairs trade averaged a 12% return. To distinguish profitable results from plain luck, their test included conservative estimates of transaction costs and randomly selected pairs. NOTE:The broad market is full of ups and downs that force out weak players and confound even the smartest prognosticators. Fortunately, using marketneutral strategies like the pairs trade, investors and traders can find profits in all market conditions. The beauty of the pairs trade is its simplicity. The long/short relationship of two correlated securities acts as a ballast for a portfolio caught in the choppy waters of the overall market. Good luck with your hunt for profit in pairs trading, and here's to your success in the markets.

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Equity Research Report

Market-neutral strategy Market-neutral strategy is a trading strategy that derives its returns from the relationship between the performance of its long positions and the performance of its short positions, regardless of whether this relationship functions on the security or portfolio level. A market-neutral strategy has three key features: the combination of long and short investing, the ability to use leverage, and the inclusion of an arbitrage situation. In market neutral strategy, the return on the portfolio is a function of the return differential between the securities that are held long and those that are held short. As the market appreciates, both the long and short positions appreciate in value, so the overall portfolio value remains constant.

TYPES OF MARKET NEUTRALITY There are several types of neutrality, each of which has a different impact on the portfolio and relates differently to pair trading. Understanding each and how to apply it appropriately will directly impact the portfolio construction process.

Share Neutrality Share neutrality refers to balancing a trade with an equal number of long shares and short shares. This is a very uncommon approach because in terms of relationship investing, the share price of either security is somewhat irrelevant. While it is usually a good idea to trade in similarly priced securities, because it is unlikely that the two securities in question will be priced identically, share neutrality results in a disproportionate amount of exposure between the two legs of the trade.

Dollar neutrality Dollar neutrality is the most common type of market neutrality and is usually considered a requirement for market-neutral investing in equity securities. Dollar neutrality refers to buying equal amounts of long and short investments so that the dollar risk is equal on each side of the portfolio. By employing dollar neutrality in a market-neutral strategy, an investor ensures that his net dollar exposure to market swings is zero.

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Equity Research Report

Sector neutrality Sector neutrality means that portfolios are long/short balanced within each sector of the market to insulate the overall portfolio against the possibility that one sector will perform very well while another performs poorly. Being sector neutral avoids the risk of market swings affecting some industries or sectors differently from others

Beta Neutrality Beta neutrality refers to balancing the beta of the long side of the portfolio against the beta of the short side of the portfolio. Beta is the measurement of a stock’s volatility relative to the market. A stock with a beta of 1 move historically in sync with the market, while a stock with a higher beta tends to be more volatile than the market and a stock with a lower beta can be expected to rise and fall more slowly than the market. Beta neutrality, therefore, refers to the practice of matching the beta of the long portfolio with the beta of the short portfolio to ensure that market swings affect each portfolio in a similar way.

Market capitalization neutrality Market capitalization neutrality refers to balancing the portfolio in such a way as to keep the market capitalization exposure of the long side of the portfolio similar to the market capitalization exposure of the short side of the portfolio. Stocks of different market capitalization can be affected by market forces in various ways; while large cap stocks tend to be more stable and liquid, they may fall out of favor in times of explosive growth. While there are exception that the stocks of similar market capitalization are more likely to react similarly to general economic conditions. For this reason, managers prefer to keep their portfolios relatively neutral to this type of exposure. It is important to remember that the ultimate goal of market neutral investing is to reduce systematic risk whenever possible.

“This strategy is used by Escorts securities in screening the stocks for pair trading:” (Escorts Securities policies)

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Equity Research Report

MARKET NEUTRAL INVESTMENT PROCESS The process describes the step involved to achieve a well constructed market neutral portfolio. The process is broken down into three basic steps:
Initial Screen
Stock selection process
Final Portfolio construction. In order to have an in-depth understanding of the market neutral investment process an example is taken. The entire concept will be explained taking this example into account. This example was also a part of the work done during my summer internship.

INITIAL SCREEN The most important step involves initial screening of stocks. By taking this step, we can quickly eliminate a large percentage of stocks that would not be included in the portfolio under any circumstances. There are usually four criteria used during the initial screen.

LIQUIDITY Market capitalization is most salient way to judge the liquidity of a stock. The greater the liquidity of a given security, the more assurance the fund manager can have that he will be able to quickly, easily and efficiently exit a position when time comes. As per the company policy all the stocks having market capitalization of more than 2 million averages are considered for the pair trading*

SHORT –SALE ABILITY Market-neutral investing involves shorting securities as well as buying them long. A manager must, therefore, be able to short the equities he is considering in order to build a portfolio. Many of the largest brokerage houses keep lists, called “hard-to-borrow” lists, of securities that are not always easy to short sell. Many managers will obtain these lists in advance of their initial screen and exclude any stock that is listed on the “hard-to-borrow” list.

“Escorts Securities have declared a list as “hard to borrow” stocks and are excluded from the initial screening of stocks”.

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Equity Research Report

INVOLVEMENT IN CORPORATE ACTION At any given time, there are many companies involved in some type of corporate action, ranging from mergers and acquisitions to secondary public offerings and stock repurchases. Such activities have a tendency to cause the price of the company’s stock to fluctuate in ways that it might not otherwise. The stock of a company being considered for acquisition is more likely to feel upward price pressure than that of a company considering making acquisition; such stocks are excluded from consideration.

STOCK SELECTION This is the most vital step because of its value added characteristics. Stock selection involves looking for quantifiable metrics that have strong predictive ability across a wide range of stocks. This metrics is based on fundamental and technical analysis of the stock.

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FUNDAMENTAL TRADE The two companies being considered for pair trading are AXIS BANK and ICICI BANK. These companies make an appropriate pair because they are not only in the same sector and industry, but they follow similar business plans.

CORRELATION BETWEEN PAIR In order to calculate the correlation and mean of the pair, first the price ratio is calculated which is defined as ratio of the closing price of the two stocks (figure ). Table below shows the correlation for 1 year, 6 months and 3 months. We observe that the correlation is quite healthy not only for short term but also for long term. As on 12th December 2008 the correlation between the pair comes to near about 97% which is calculated by Pair Trade finder software. Correlation between the pair

Period

1 Yr

6 months

3 months

MEAN(PR)

1.13467498

1.091353116

1.104409894

Correlation

0.904893798

0.970676362

0.969121659

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Equity Research Report Price Ratio and Mean Value of Pair

P Ric e Ra tio & M e a n V a lue

Price Ratio

Mean Value

5 /1 6/2 0 0 9

4 /1 6/2 0 0 9

3 /1 6/2 0 0 9

2 /1 6/2 0 0 9

DATE

1 /1 6/2 0 0 9

1 2 /1 6/2 0 0 8

1 1 /1 6/2 0 0 8

1 0 /1 6/2 0 0 8

9 /1 6/2 0 0 8

8 /1 6/2 0 0 8

7 /1 6/2 0 0 8

6 /1 6/2 0 0 8

2 1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0

TECHNICAL TRADE Technical analysis deals with three pieces of data: price, volume and sentiments while fundamental analysis uses huge amount of subjective data. There are thousands of indicators used worldwide however our study will be limited to those that are related to market neutral strategy. The indicators are broken down into three groups
Market Strength Indicators
Moving average indicators
Volume as indicators

MARKET STRENGTH INDICATORS There are two indicators which describes the strength of the market:-

RELATIVE STRENGTH INDEX RSI Measurement can be used to examine the relationship between the two stocks .The RSI formula is as follows: RSI=100-100/(1+RS) Where RS = Average for net up closing changes for N days divided by average of net down closing changes for N days. The trader selects the number of days to be used; 5, 9, and 14 are standards used by most traders and are included in most commercial software programs (Pair Trade Finder). However manual calculation is very difficult to calculate.

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Pair trading is only possible if the reading of RSI measurement is between 20 and 70. For AXIS BANK and ICICI BANK the RSI is 29.3% which is within the acceptable limits.

MOVING AVERAGE INDICATORS The moving average is a technical indicator that is widely used by almost all technical traders. In its simplest form, the moving average is calculated by finding the average price for a given stock or index over a set period of time. Traders use this information to determine how a stock is behaving today relative to how it has behaved in the past.

BOLLINGER BAND Bollinger Bands are envelopes that surround the means price bars on a chart. Bollinger Bands are plotted two standard deviations away from a simple moving average. Bollinger Bands can be used to evaluate the relationship between two stocks as well as to evaluate a single stock or index. Bollinger Bands also give us the time and position at which a trader should enter or exit the trade. As we observe in the figure, entry point of the trader should be at the point when the price ratio is away form mean value. The return would be higher in the case when the price ratio curve is close to two standard deviation as compared to when the curve is near mean value. As evident from the figure below, price ratio is close to two standard deviation, eventually with passage of time it would come back to its mean value; however the time taken the stock can be utilized by the trader to make profit.

2 1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0

Entry Point

Price Ratio MEAN(PR) SD(+1)

5 /1 6 /2 0 0 9

4 /1 6 /2 0 0 9

3 /1 6 /2 0 0 9

2 /1 6 /2 0 0 9

1 /1 6 /2 0 0 9

1 2 /1 6 /2 0 0 8

1 1 /1 6 /2 0 0 8

1 0 /1 6 /2 0 0 8

9 /1 6 /2 0 0 8

8 /1 6 /2 0 0 8

7 /1 6 /2 0 0 8

6 /1 6 /2 0 0 8

(SD+2) SD(-1) SD(-2)

DATE

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Equity Research Report

VOLUME AS INDICATOR If increasing volume is observed in a down-trending stock, the technician confirms the strength of that trend and believes it will continue. In simpler terms, volume should increase or expand in the direction of the prevailing price trend. When volume decreases in the direction of the prevailing price trend, this suggests that a reversal may occur in the near future. As we observe in the figure the price ratio of AXIS BANK/ ICICI BANK has decreased for the past 100 days. Since the volatility of the pair is also starting decreasing we can expect an inverse of the trend in future. This indicator gives a tentative confirmation that trading in this pair would be profitable. PRice Ratio & Mean Value

Price Ratio

Mean Value

AXIS Bank / ICICI Bank Volatility

1.4

5/16/2009

4/16/2009

3/16/2009

2/16/2009

DATE

1/16/2009

12/16/2008

11/16/2008

10/16/2008

9/16/2008

8/16/2008

7/16/2008

6/16/2008

2 1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0

Series1

1.2 1 0.8 0.6 0.4 0.2 0 1

15 29 43 57 71 85 99 113 127 141 155 169 183 197 211 225 239

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FINAL PORTFOLIO SELECTION This pair has passed all the test so can be considered in the final portfolio selection. The pair trading call for this pair can be summarized (Refer Annexure)

AXISBANK(Long) ICICI BANK(Short)

Summary Price Ratio Target Stop C.P(15Jun09) Ratio Loss 718.4 0.977747533 .50 .20 734.75

% Return 48.99

The same process was followed for the below mentioned pair. Depending upon the result, recommendation was given to Fund managers of the company. Table 21 below shows the summary of the work done by me. The stock highlighted as red signifies stock to be short (sell) while green signifies to long (buy). For all calculation please have a look at the excel sheet attached in the annexure

OTHER PAIRS S N

SD Stock1

Stock2

2

R POWER HDFC

TATA STEEL ICICI

3

AIRTEL

4

Correlation

Mean of Stock2)

1yr 0.80

6m 0.98

3m 0.97

.83

.96

.16

M&M

TATA COM MARUTI

5

L&T

6 7

1

Cur

PR

(Stock1 /

(PR)

SD (+1)

SD (+2)

SD (-1)

SD (-2)

1yr 0.44

6m 0.52

3m 0.48

0.13

0.93

1.05

0.67

0.80

.97

2.21

2.34

2.31

.35

1.18

1.52

.49

.83

.16

.36

1.58

1.41

1.38

.22

.38

.60

-.07

.16

.72

.96

.98

.66

.56

.60

.13

.84

.97

.59

.72

BHEL

.74

.58

.88

1.03

.52

.47

.47

1.50

1.97

.55

.08

WIPRO

INFOSYT ECH

.96

.94

.95

.22

.20

.22

.03

.98

1.0 1

.93

.96

RANBAX Y

CIPLA

.44

.09

.47

1.39

1.00

.90

.54

.98

1.52

-0.1

.44

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Equity Research Report

CONCLUSION This example has helped us to understand the factors that go into market neutral investing. Some of the advantages and risks associated with this type of investment strategy as well as the steps one takes to build a market-neutral portfolio have been explored. Large investment banks, institutions & hedge funds spend millions of dollars each year on developing pair trading programs and the application of them, they know it’s crucial to not only have the right information, but be able to view & analyze it in a timely manner. With the significant advances and development in technologies in recent years this has become possible for the average online trader to view and analyze the same information.

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Equity Research Report

REFERENCE Reading Material
NCFM module From National Stock Exchange • Derivative Module • Currency Module • Debt Market Module
Portfolio Management • Where Science Meets Business, Patrick Grogan, Sr. Director, Strategic Planning, BD Biosciences
The Hand Book Of Pairs Trading • Strategies Using Equities, Options, and Futures by DOUGLAS S. EHRMAN
Jefferies Pairs Trading Strategy
Economic Survey

Website
www.commodityonline.com
www.moneycontrol.com
http://capitalmarket.com/
www.mcxindia.com
http://www.appuonline.com
www.bseindia.com
http://www.nseindia.com/


www.commodityonline.com/FuturesWatch/commodityfuture.ph p
http://www.khelostocks.com/
www.anyoption.com


http://www.bseindia.com/histdata/hindices.asp#

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ANNEXURE Date

16-Jun-08 17-Jun-08 18-Jun-08 19-Jun-08 20-Jun-08 23-Jun-08 24-Jun-08 25-Jun-08 26-Jun-08 27-Jun-08 30-Jun-08 1-Jul-08 2-Jul-08 3-Jul-08 4-Jul-08 7-Jul-08 8-Jul-08 9-Jul-08 10-Jul-08 11-Jul-08 14-Jul-08 15-Jul-08 16-Jul-08 17-Jul-08 18-Jul-08 21-Jul-08 22-Jul-08 23-Jul-08 24-Jul-08 25-Jul-08 28-Jul-08 29-Jul-08 30-Jul-08 31-Jul-08 1-Aug-08 4-Aug-08 5-Aug-08 6-Aug-08 7-Aug-08 8-Aug-08 11-Aug-08 12-Aug-08 13-Aug-08 14-Aug-08 18-Aug-08 19-Aug-08 20-Aug-08 21-Aug-08 22-Aug-08 25-Aug-08 26-Aug-08

AXIS Bank

735.75 794.5 750.5 718.1 703.7 697.15 678.65 685.05 678.2 628.6 605.05 593.85 634.45 580.2 600.45 603.95 606.95 669.1 678.45 665.25 634.35 597.1 584.45 635.45 685.6 697.4 735.05 763.65 760.3 712.85 697.3 619.7 679.25 653.9 679.9 706.05 760.55 743.05 746.55 735.15 759.6 720.55 725.1 700 692.5 679.8 673.8 649.1 679.85 685.6 679.65

ICICI Bank

797.45 820.65 786.95 753.6 732.95 720.7 703.15 698.2 697.55 652.15 630.2 589.1 621.05 571.9 603.6 605.15 594.35 621.7 616.9 591.6 578.9 529.15 519.75 551.85 617.45 642.95 661.7 738.7 730.2 656.75 663.4 607.7 636.1 637.3 642.4 640.45 694.1 706.65 707.95 731.6 771.15 740.65 710.7 673.45 665 677.7 678.8 643.7 644.55 657.15 666.55

Price Ratio

0.92 0.97 0.95 0.95 0.96 0.97 0.97 0.98 0.97 0.96 0.96 1.01 1.02 1.01 0.99 1.00 1.02 1.08 1.10 1.12 1.10 1.13 1.12 1.15 1.11 1.08 1.11 1.03 1.04 1.09 1.05 1.02 1.07 1.03 1.06 1.10 1.10 1.05 1.05 1.00 0.99 0.97 1.02 1.04 1.04 1.00 0.99 1.01 1.05 1.04 1.02

MEAN(PR)

1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13

SD(+1)

1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02

(SD+2)

1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14

SD(-1)

0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79

SD(-2)

0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90

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Equity Research Report 27-Aug-08 28-Aug-08 29-Aug-08 1-Sep-08 2-Sep-08 4-Sep-08 5-Sep-08 8-Sep-08 9-Sep-08 10-Sep-08 11-Sep-08 12-Sep-08 15-Sep-08 16-Sep-08 17-Sep-08 18-Sep-08 19-Sep-08 22-Sep-08 23-Sep-08 24-Sep-08 25-Sep-08 26-Sep-08 29-Sep-08 30-Sep-08 1-Oct-08 3-Oct-08 6-Oct-08 7-Oct-08 8-Oct-08 10-Oct-08 13-Oct-08 14-Oct-08 15-Oct-08 16-Oct-08 17-Oct-08 20-Oct-08 21-Oct-08 22-Oct-08 23-Oct-08 24-Oct-08 27-Oct-08 28-Oct-08 29-Oct-08 31-Oct-08 3-Nov-08 4-Nov-08 5-Nov-08 6-Nov-08 7-Nov-08 10-Nov-08 11-Nov-08 12-Nov-08 14-Nov-08 17-Nov-08

677.35 670.55 723.4 722.9 759.85 734.2 687.25 711.25 710 710.45 704.15 692.55 656.9 695.8 666.45 678.6 708.55 704.9 683.35 710.2 721.4 705.1 671.55 720.25 734.6 702.3 678 682.9 647.75 552.6 659.95 639.05 618.8 626.25 620.35 617.9 656.5 631.2 622.4 538.85 534.55 570 526.85 562.95 602.2 640.45 604 582.7 581.6 608.9 564.05 525.3 492.95 456.65

649.95 632.55 671.9 665 714.05 716.65 686.75 720.45 712.1 701 686.6 652.8 627.5 591.65 560.05 577.15 627.5 635.75 599.15 600.1 596.2 560.4 493.3 535.55 550.9 504.35 490.05 485.05 453.75 363.65 425.15 449.55 414.15 416.15 391.25 411.35 431.05 396.7 365.8 308.5 316.1 335.5 345.35 398.75 430.7 457.8 450.85 433.4 432.3 471.85 434.35 397.3 395.9 386.45

1.04 1.06 1.08 1.09 1.06 1.02 1.00 0.99 1.00 1.01 1.03 1.06 1.05 1.18 1.19 1.18 1.13 1.11 1.14 1.18 1.21 1.26 1.36 1.34 1.33 1.39 1.38 1.41 1.43 1.52 1.55 1.42 1.49 1.50 1.59 1.50 1.52 1.59 1.70 1.75 1.69 1.70 1.53 1.41 1.40 1.40 1.34 1.34 1.35 1.29 1.30 1.32 1.25 1.18

1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13

1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02

1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14

0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79

0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90

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Equity Research Report 18-Nov-08 19-Nov-08 20-Nov-08 21-Nov-08 24-Nov-08 25-Nov-08 26-Nov-08 28-Nov-08 1-Dec-08 2-Dec-08 3-Dec-08 4-Dec-08 5-Dec-08 8-Dec-08 10-Dec-08 11-Dec-08 12-Dec-08 15-Dec-08 16-Dec-08 17-Dec-08 18-Dec-08 19-Dec-08 22-Dec-08 23-Dec-08 24-Dec-08 26-Dec-08 29-Dec-08 30-Dec-08 31-Dec-08 1-Jan-09 2-Jan-09 5-Jan-09 6-Jan-09 7-Jan-09 9-Jan-09 12-Jan-09 13-Jan-09 14-Jan-09 15-Jan-09 16-Jan-09 19-Jan-09 20-Jan-09 21-Jan-09 22-Jan-09 23-Jan-09 27-Jan-09 28-Jan-09 29-Jan-09 30-Jan-09 2-Feb-09 3-Feb-09 4-Feb-09 5-Feb-09 6-Feb-09

437.75 427.55 405.45 411.5 397.55 376.55 404.45 408.5 413.05 429.1 433.7 455.2 443.05 451.95 462.8 457 468.8 486.2 500.8 497.6 537.2 546 537.5 499.5 490.75 482.8 494.95 510.25 504.7 516.85 541.9 560.1 569.75 522.1 486.6 451.7 440.3 449.4 434.05 443.55 438.3 422.4 407.7 416.05 384.3 394.75 422.85 435.65 433.7 397.85 395.5 395.15 392.3 403

360.2 348.25 319.5 334.05 322.55 321.1 350.85 351.65 325.55 323.4 334.8 364 358.4 370 400.05 406.1 411 418.7 421 431.8 472 472.8 445.7 426.85 440.95 417.35 445 458.6 448.1 464.15 471.25 499.9 523.45 467.85 456.6 438 425.45 441.1 408.65 423.75 412.6 396.3 369.35 378.05 363.85 381.1 408.05 410.1 416.25 385.1 392 389.7 390.55 407.1

1.22 1.23 1.27 1.23 1.23 1.17 1.15 1.16 1.27 1.33 1.30 1.25 1.24 1.22 1.16 1.13 1.14 1.16 1.19 1.15 1.14 1.15 1.21 1.17 1.11 1.16 1.11 1.11 1.13 1.11 1.15 1.12 1.09 1.12 1.07 1.03 1.03 1.02 1.06 1.05 1.06 1.07 1.10 1.10 1.06 1.04 1.04 1.06 1.04 1.03 1.01 1.01 1.00 0.99

1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13

1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02

1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14

0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79

0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90

39

Equity Research Report 9-Feb-09 10-Feb-09 11-Feb-09 12-Feb-09 13-Feb-09 16-Feb-09 17-Feb-09 18-Feb-09 19-Feb-09 20-Feb-09 24-Feb-09 25-Feb-09 26-Feb-09 27-Feb-09 2-Mar-09 3-Mar-09 4-Mar-09 5-Mar-09 6-Mar-09 9-Mar-09 12-Mar-09 13-Mar-09 16-Mar-09 17-Mar-09 18-Mar-09 19-Mar-09 20-Mar-09 23-Mar-09 24-Mar-09 25-Mar-09 26-Mar-09 27-Mar-09 30-Mar-09 31-Mar-09 1-Apr-09 2-Apr-09 6-Apr-09 8-Apr-09 9-Apr-09 13-Apr-09 15-Apr-09 16-Apr-09 17-Apr-09 20-Apr-09 21-Apr-09 22-Apr-09 23-Apr-09 24-Apr-09 27-Apr-09 28-Apr-09 29-Apr-09 4-May-09 5-May-09 6-May-09

422.45 421 430.95 430.5 440.4 418.8 399.15 394.25 388.45 372.7 363.65 366.05 346.3 347.9 323.1 324.9 322.15 300.7 294.95 281.4 304.5 329.9 342.55 325.5 340.7 358 342.4 373.65 371.95 398.1 421.4 431.05 397 414.95 418.15 439.6 435.25 443.55 445.6 461.85 504.2 472.1 503.25 509.85 493.95 472.15 502.05 529.6 557.5 530.7 557.3 609.35 627.35 605.25

428.35 428.7 435.2 421.4 434.4 409 385.7 369.5 361.5 335.85 335.95 340.6 324.85 327.55 304.4 295.6 284.9 270.05 269.15 262.95 284.15 308.65 322.8 323.4 334.65 337.9 323.05 346.8 355.45 365.55 375.05 385.2 338.1 332.8 349.35 360.7 374.8 376.4 397.8 416.6 442.9 427.55 440.85 426.65 398.75 400.05 424.4 434.1 467.55 439.2 479.2 529.9 569.1 539.6

0.99 0.98 0.99 1.02 1.01 1.02 1.03 1.07 1.07 1.11 1.08 1.07 1.07 1.06 1.06 1.10 1.13 1.11 1.10 1.07 1.07 1.07 1.06 1.01 1.02 1.06 1.06 1.08 1.05 1.09 1.12 1.12 1.17 1.25 1.20 1.22 1.16 1.18 1.12 1.11 1.14 1.10 1.14 1.20 1.24 1.18 1.18 1.22 1.19 1.21 1.16 1.15 1.10 1.12

1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13

1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02

1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14

0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79

0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90

40

Equity Research Report 7-May-09 8-May-09 11-May-09 12-May-09 13-May-09 14-May-09 15-May-09 18-May-09 19-May-09 20-May-09 21-May-09 22-May-09 25-May-09 26-May-09 27-May-09 28-May-09 29-May-09 1-Jun-09 2-Jun-09 3-Jun-09 4-Jun-09 5-Jun-09 8-Jun-09 9-Jun-09 10-Jun-09 11-Jun-09 12-Jun-09 15-Jun-09

624.75 607.25 620.35 669 671.7 637.55 659.6 778.4 764.8 728.55 736.2 762.85 774 744.75 797.75 782.05 778.95 741.75 719.9 717 734.85 738.5 698.2 726.05 752.5 726.6 703.75 718.4

549.3 520.75 523.35 558.1 551.15 536.25 574.7 707.1 756.15 708.9 673.05 702.65 704.65 666 710.25 730.3 740.15 722.55 732.3 719.45 733.5 754.75 724.65 737.85 747.7 750.3 742.45 734.75

1.14 1.17 1.19 1.20 1.22 1.19 1.15 1.10 1.01 1.03 1.09 1.09 1.10 1.12 1.12 1.07 1.05 1.03 0.98 1.00 1.00 0.98 0.96 0.98 1.01 0.97 0.95 0.98

1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.13

1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02

1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14 1.14

0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79 0.79

0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90 0.90

41