Indian Capital Markets

INTRODUCTI ON TO CAPITAL MARKET INSTITUTE OF BUSINESS MANAGEMENT & RESEARCH, AHMEDABAD.

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INDIAN CAPITAL MARKET

✔ INTRODUCTION: Every business unit needs money to finance its activities. The money is invested in physical resources, i.e. land and building, machines and equipment, stock of raw material, etc., which are used by the enterprise in production. All these resources together constitute ‘capital’. Capital is often defined as “wealth used in the production of further wealth.” A business enterprise can raise capital from various sources. Longterm funds can be raised either through issue of securities or by borrowing from certain institutions. Short term funds can also be borrowed from various agencies. Thus business units can raise capital from issue of securities and borrowings (long-term and short-term). In addition to business units, public corporations and government are the other major borrowers of funds. The lenders of funds include the individual investors (the household sector), the institutional investors, banks, and special industrial financing institutions. together

through

financial

The borrowers and lenders brought

markets.

The

term

INSTITUTE OF BUSINESS MANAGEMENT & RESEARCH, AHMEDABAD.

“financial

market” Page 2

INDIAN CAPITAL MARKET

collectively refers to all those organizations and institutions which lend funds to business enterprise and public authorities. It is composed of two constituents – the money market and the capital market. While the former deals with the provision of short-term credit, the latter deals with the grant of medium-term and long-term credit.

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INDIAN CAPITAL MARKET

✔

CAPITAL MARKET: Capital Market is the backbone of any country’s economy. It

facilitates conversion of savings to investment. In India the common investors participating in the equity market is massive. The number of companies

offering

equity

through

primary

markets

increased

continuously in the post independence period. The capital market is actually reflecting what is happening in the economy and what is expected to happen in the next few years. Capital market facilitates the free trading (buy and sell) in all securities. It has two mutually supporting and indivisible segments: the primary market and the secondary market. In the primary market companies issue new securities to raise funds. Hence, it is also referred to the new issue market. The secondary market deals with the second-hand securities; viz., securities that have already been issued by companies that are listed in stock exchange. Since the securities are listed and traded in the stock exchange, the secondary market is also called the stock market. Investor’s confidence is necessary to make the securities market more efficient means of converting savings to investment. Economic transition in India is marked by changes in the market mechanism, institutional integration, market regulation, relocation of savings and investment and changes in inter sector relationships. These changes bring both negative and positive effects and thus investors’ confidence is shaken either way bringing in the volatility in the capital market. INSTITUTE OF BUSINESS MANAGEMENT & RESEARCH, AHMEDABAD.

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INDIAN CAPITAL MARKET

The stock market in India is witnessing high volatility. This volatility has significant impact on the investment management and the rate of return. The inadequacy of the system becomes obvious if the institutions in the system fail to withstand the pressures of market forces such as the volatility. The regulatory measures from SEBI, the main regulator in the Indian Financial System, have lent force to the supervisory norms and improved the standards of disclosure, bringing greater transparency in their wake. An important issue related to the Capital Markets is the fundamental philosophy that “Shape up the economy and the capital markets will reflect what is actually expected to happen.” The capital market is actually reflecting what is happening in the economy and what is expected to happen in the next few years. We should first address the problems in the economy and then the market will respond to that.

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INDIAN CAPITAL MARKET

✔ PROBLEM STATEMENT: In earlier times the investors are not so aware of the market in other way say that the investors are not too much knowledgeable. As they are not too much knowledgeable they invested in market without using any concept and skills. This study is also for enhancing the knowledge of various investors. Study also suggested that how genuine investors should react before and after investing in market. The Indian capital market is faced many problems and this study is firstly defined what is the problem in Indian capital market as of 1992. 1. As of 1992, the Bombay Stock Exchange (BSE) was a monopoly. It was an association of brokers, and imposed entry barriers, which led to elevated costs of intermediation. Membership was limited to individuals; limited liability firms could not become brokerage firms. 2. Trading took place by ‘open outcry’ on the trading floor, which was inaccessible to users. It was routine for brokers to charge the investor a price that was different from that actually transacted at. In fact, the normal market practice involved brokers charging user’s one single INSTITUTE OF BUSINESS MANAGEMENT & RESEARCH, AHMEDABAD.

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INDIAN CAPITAL MARKET

consolidated price, instead of unbundling the trade price and the brokerage fee. 3. As with all trading floors, there was no price–time priority, so users of the market were not assured that a trade was executed at the best possible price. 4. A variety of manipulative practices abounded, so that external users of a market often found themselves at the losing end of price movements. The BSE is run by brokers, which limits the quality of enforcement which can be undertaken against errant brokers. 5. Floor–based trading, the inefficiencies in clearing and settlement (described ahead), entry barriers into brokerage, and the low standards of technology and organizational complexity that accompanied the ban upon corporate membership of the BSE led to an environment where order execution was unreliable and costly. It was typical for below 50% of orders to obtain execution on a given day. 6. Retail investors and particularly users of the market outside Bombay, accessed market liquidity through a chain of intermediaries called “sub– brokers”. Each sub–broker in the chain introduced a mark-up in the price, in the absence of the unbundling of professional fees from the trade price. It was not uncommon for investors in small towns to face four intermediaries before their order reached the BSE floor, and to face markups in excess of 10% as compared with the actual trade price.

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INDIAN CAPITAL MARKET

8. A peculiar market practice called badla allowed brokers to carry positions across settlement periods. In other words, even open positions at the end of the fortnight did not always have to be settled. Above, all are the problems in the Indian capital market as of 1992 but time change and mostly these problems are solved.

OBJECTIVE

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INDIAN CAPITAL MARKET

OF THE STUDY

✔ OBJECTIVES OF THE STUDY: The sole effort behind carrying out this study is to provide guidance of India capital market. Also, defining the relationship of Indian capital markets with global capital markets.

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INDIAN CAPITAL MARKET 1.

To understand the practical & theoretical aspects of the CAPITAL

MARKET OF INDIA. 2.

To provide the information to the prospective investors about the

auto companies of auto segment. 3.

To understand the relation between stock market and Indian

economy in comparison with the world’s economy. 4.

To guide & help probable investors how to invest into a particular

sector and in which type of market conditions.

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INDIAN CAPITAL MARKET

RESEARCH METHODOLO GY

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INDIAN CAPITAL MARKET

✔ STUDY DESIGN: 1.

Data source Secondary Data:  Industry Reports  Internet  Books & Magazines

2. Analysis & Interpretation The various tools for analysis used are graphs, charts, percentage growth, secondary data.

✔

METHOD OF ANALYSIS: 1.

Fundamental Analysis Fundamental analysis done for studying the how future prices of the

company will perform. Fundamental analysis is useful to finding the right value of the company. Fundamental analysis includes the study of Economy, Industry and Company. For estimating any company’s share price not only the historical performance data of that company are very useful but also the quantitative analysis of the revenue, assets liquidity, expenditure, etc.

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INDIAN CAPITAL MARKET

INTRODUCTI ON TO ORGANIZATI ON

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INDIAN CAPITAL MARKET

✔ COMPANY PROFILE: Sharekhan is an equities focused organization tracing its lineage to SSKI (Shripal

Sevantilal

Kantilal

Ishwarlal),

a

veteran

equities

solutions

company with over 8 decades of experience in the Indian stock markets. Sharekhan is 80 years old company which is started online in the year 2000 & it is the first company who started online in 1984 they ventured into institutional broking& corporate finance. They having more then 80 branches, 400 franchises and also having 825+ shops in 280 cities. In Rajkot branch daily dealing Rs.16crore & 400crore daily dealing all over India. It has almost 4000 employees and 100000 trading customers. If you experience our language, presentation style, content or for that matter the online trading facility, you'll find a common thread; one that helps you make informed decisions and simplifies investing in stocks. The common thread of empowerment is what Share khan’s all about!

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INDIAN CAPITAL MARKET

Share khan is also about focus. Share khan does not claim expertise in too many things. Share khan’s expertise lies in stocks and that's what he talks about with authority. So when he says that investing in stocks should not be confused with trading in stocks or a portfolio-based strategy is better than betting on a single horse, it is something that is spoken with years of focused learning and experience in the stock markets. And these beliefs are reflected in everything Share khan does for you! To sum up, Share khan brings to you a user- friendly online trading facility, coupled with a wealth of content that will help you stalk the right shares.

Those of you who feel comfortable dealing with a human being and would rather visit a brick-and-mortar outlet than talk to a PC, you'd be glad to know that Share khan offers you the facility to visit (or talk to) any of our share shops across the country. In fact Share khan runs India's largest chain of share shops with over six hundred outlets in more than 100 cities! What's a share shop? How do you locate a share shop in your city?

To find the answers of these questions, you must visit Share khan. hi other words Share khan is a company that provides you an outstanding trading facility with a wide variety of products and acts as an investment consultant to manage your portfolio and secure a high rate of return on your investments in the securities market.

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INDIAN CAPITAL MARKET

SSKI has been voted the best domestic brokerage in India by Asia money Polls’ 2004. Also SSKI is being rated as No. 1 Financial Researcher by Business Today, in the Survey conducted on Lead Managers of all the Mutual Funds.

Basically, the company is a market leader in providing brokering services and has a top turnover in trading and the high turnover makes it the no. l in the market. The main difference is the services that they provide to the investors who really need it. The services are discussed in more detail in the marketing activities. The clients are managed with a friendly corporate culture to give him more benefited investment ideas and motivate him whenever he needs. The company is providing as many tips to the clients (pre-market, online and post-market) for more and more trading ideas and the manager helps each client to concentrate on a few scripts so that he can manage the profit/loss.

In short, Share khan is currently having a good position in the market with the highest no of transactions and also the highest turnover (buying & selling) in India and a leader in providing better services to the investors. Share khan, India's leading stock broker is the retail arm of SSKI, and offers you depository services and trade execution facilities for equities, derivatives and commodities backed with investment advice tempered by decades of broking experience. A research and analysis team is constantly working to track performance and trends. That's why Share khan has the

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INDIAN CAPITAL MARKET

trading products, which are having one of the highest success rates in the industry the largest chain.

✔

NATURE:

Sharekhan is basically a service providing firm. It is a stock broking firm which providing services of selling and purchases of stocks on behalf of one investor from another investor and then transfer stocks to respective dematerialized account. Sharekhan Limited is a retail financial services provider with a focus on equities, derivatives and commodities brokerage execution on the National Stock Exchange of India Ltd. (NSE), Bombay Stock Exchange Ltd. (BSE), National Commodity and Derivatives Exchange India (NCDEX) and Multi Commodity Exchange of India Ltd. (MCX). Sharekhan provides trade execution services through multiple channels - an Internet platform, telephone and retail outlets and is present in 225 cities through a network of 615 locations. The INSTITUTE OF BUSINESS MANAGEMENT & RESEARCH, AHMEDABAD.

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INDIAN CAPITAL MARKET

company was awarded the 2005 Most Preferred Stock Broking Brand by Aawaz Consumer Vote. ➢ SSKI named its online division as SHARE KHAN and it is into retail Broking. ➢ The business of the company overhauled 8 years ago on February 8, 2000 ➢ It acts as a discount brokerage house to a full service investment solutions provide ➢ It has specialized research product for the small investors and day traders. ➢

Largest chain of share shops which is 825+ share shops in 280 cities, 415 Franchisees & over 100 Branches across India.

➢ It has $25m/trades every day. ➢ Leading player today with 20% market share. ➢ Over 8000 online clients. ➢

The site was also launched on February 8, 2000 and named it as www.sharekhan.com.

➢ The Speed Trade account of share khan is the next generation technology product launched on April 17, 2002. ➢ SpeedTradePlus was launched on October 28, 2002 for trading in Derivatives. ➢ It offers its customers with the trade execution facilities on the NSE, for cash as well as derivatives, depositories.

✔ VISION: INSTITUTE OF BUSINESS MANAGEMENT & RESEARCH, AHMEDABAD.

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INDIAN CAPITAL MARKET

Punch line: Your guide to the financial jungle” Statement defines that Sharekhan is not just an stock broking firm which helps the investor to do trade on behalf of them but they also guide the investor to in which sector to invest, when to invest, how much amount to invest. Sharekhan do all these activities after understanding the particular investor’s needs, one investor’s need differs from another investor. So Sharekhan is more interested in guiding the new investor who want to start investment in stock market, for the investor who is new in stock market there is special guidance available on Sharekhan’s website i.e. on www.sharekhan.com topic called “first step” which is designed specially for the new investor. “As a retail brokering outfit, customer service ranks extremely high in our list of priorities. Effectively managing client expectations and offering them a high quality of customer service are key for us. “ Ketan Parekh, Chief Technology Officer, Sharekhan Limited

The above statement was given by Sharekhan’s chief technology officer which shows that when they had introduced online trading facility in the year 2000, they want to be it as customer-friendly as well as convenient also so that a new investor can also use it. To sum up, Sharekhan brings to you a user- friendly online trading facility, coupled with a wealth of content that will help you stalk the right shares.

SSKI Group - Corporate Structure INSTITUTE OF BUSINESS MANAGEMENT & RESEARCH, AHMEDABAD.

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INDIAN CAPITAL MARKET

SSKI SSKI Investor Corporate Services Owns 56% SSKI Securities Owns Finance Pvt. Pvt.Ltd. Ltd. of 50.5% Pvt. of Ltd.

Morakhia Family & Investment Retail broking Banking arm of the Associates groupof the group arm Shareholding pattern 50.5% 56% Morakhia SSKI Securities family Pvt. Ltd. (promoters) 49.5 %HSBC Morakhia family 18.5% Private Equity Management, Mauritius 18.5% First Carlyle Ventures, Mauritius 7% Intel Pacific Inc.

Integrated Equity Solutions Provider: ➢ Among the top 3 branded retail service providers ➢ Multi-channel access to clients ➢ Tailor made research and products ➢ Depository Services ➢ Derivatives ➢ Innovative products for enhanced performance Best research team in the world

✔ CORPORATE OFFICE

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INDIAN CAPITAL MARKET

HEAD OFFICE

:

SHAREKHAN LTD. A – 206, PHOENIH HOUSE, PHOENIH MILL COPUND, SENAPATI, BAPTA MARG, LOWER PAREL, MUMBAI – 400013

PHONE NO.

:

1800 - 22 7500, 3970 75 00

WEB SITE

:

www.sharekhan.com

CEO

:

TARUN SHAH

Total Share Shops

:

More than 825+ in more than 280 cities

Total Employees

:

More than 3000 across India

✔ HR POLICIES & PERFORMANCE APPRAISAL:

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INDIAN CAPITAL MARKET

HR policies & procedures

Conduct: Office time  The official timing are 9:30a.m to 6:oo p.m. Reporting even one minute after 9:30a.m shall be a late mark system. 3 such late marks in the month after be considered as 1day’s leave. Like wise employee attending office after 11:30a.m or leaving office before 3:30p.m will be marked absent for half day.  If any HOD decides on different work timing for his team, then timing has to be followed accordingly & the late coming will be as per the approval of the HOD

 Conduct - grooming

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INDIAN CAPITAL MARKET

Performance appraisal

Sharekhan believe in meritocracy. Therefore, promotion, increment, job movement, incentives, bonus reward and recognition all are based on performance appraisal of the employee .performance appraisal take place on quarterly basis & a detailed review is undertaken on an annual basis, there can be performance appraisal and monitoring on a monthly basis as well.

There employee can be broadly classified in two categories namely, sales and support. for staff the core job is to achieve their target and get volume of business which exeeds expectation. For support staff, the core job is to ensure completion of relevant activities with 100% accuracy and with no delays. Besides this all the employee are expected to demonstrate their behavior which shoud be in line with the following 4 key behavioral expectations from the employee.

 DISCIPLINE  INTEGRITY  INITIATIVE  TEAM WORK

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INDIAN CAPITAL MARKET

✔ ORGANIZATIONAL STRUCTURE:

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INDIAN CAPITAL MARKET

✔ PRODUCT PROFILE:

✔ Sharekhan Depositary Service INSTITUTE OF BUSINESS MANAGEMENT & RESEARCH, AHMEDABAD.

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INDIAN CAPITAL MARKET

Dematerialization and trading in the demat mode is the safer and faster alternative to the physical existence of securities. Demat as a parallel solution offers freedom from delays, thefts, forgeries, settlement risks and paper work. This system works through depository participants (DPs) who offer demat services and hold the securities in the electronic form for the investor Share khan Depository services offer dematerialization services to individual and corporate investors. We have a team of professionals and the latest technological expertise dedicated exclusively to our demat department, apart from a national network of franchisee, making our services quick, convenient and efficient. At Share khan, our commitment is to provide a complete demat solution which is simple, safe and secure.

Share khan is a registered Depository Participant (DP) with National Securities Depository Ltd. (NSDL). The participants are required to enter INSTITUTE OF BUSINESS MANAGEMENT & RESEARCH, AHMEDABAD.

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INDIAN CAPITAL MARKET

into an agreement with beneficial owners. It is required that separate accounts shall be opened by every participant in the name of each of the beneficial owner and the securities of each beneficial owner shall be segregated and shall not be mixed up with the securities of other beneficial owners or with the participant's own securities. The participants are obliged to reconcile the records with every depository on a daily basis. Participants are required to maintain the following records for a period of five years. Records of all the transactions entered into with a depository and with a beneficial owner.

✔ Portfolio Management system With the Share khan Team Managing Your Portfolio, you can be assured that your investments are in safe hands! We follow a multi-disciplined approach incorporating quantitative analysis, fundamental analysis and technical analysis. This multi-pronged approach enables us to provide risk-controlled returns for you. Right from choosing the combination of stocks most suitable for you based on your risk appetite to monitoring their movements and discussing them with you at special events. Click here to see how we manage your portfolio in a few easy steps. This is how we make investing completely hassle-free for you. There are mainly three types of PMS, Share khan provides. • Pro-tech (High Risk & Return) • Pro-prime (Moderate Risk & Return) •

Pro-Arbitrage (Low Risk & Fixed Return)

✔ MUTUAL FUND INSTITUTE OF BUSINESS MANAGEMENT & RESEARCH, AHMEDABAD.

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INDIAN CAPITAL MARKET

Everybody talks about mutual funds, but what exactly are they? Are they like shares in a company, or are they like bonds and fixed deposits? Will I lose all my money in funds or will I become an overnight millionaire? Big questions that get answered in just five minutes. Meaning A mutual fund is a pool of money that is invested according to a common investment objective by an asset management company (AMC). The AMC offers to invest the money of hundreds of investors according to a certain objective - to keep money liquid or give a regular income or grow the money long term. Investors buy a scheme if it fits in with their investment goals, like getting a regular income now or letting the money accumulate over the long term. Investors pay a small fraction of their total funds to the AMC each year as investment management fees. Mutual fund industry was started in India with establishment of UTI (1963), which is only player in the market of mutual fund up to 1987. During that time mutual fund market refers the unit link schemes like Master Share and Master Gain. Mutual fund provides varieties of schemes for different kind of customers to suit their goals. They have open-ended and close-ended schemes, children’s plan, diversified equity fund, balanced fund, liquid fund, income fund, short term fund, sector fund, ELSS (equity linked savings schemes) and pension plan.

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INDIAN CAPITAL MARKET

✔ Online IPO

Online IPO (Initial Public Offering) is a new service started by Share khan for providing the application form of any company’s issues of shares just like the TCS issue can be subscribed by filling an online form to reduce the paper work and the fund transfer facility is also provided to the clients for transferring the funds online. It is given on its web-site for helping the clients who are not able to collect the forms manually and the speed of filling and reducing the risk of misplacing of forms, not reaching in time, etc.

✔ Online Commodity Trading Online commodity trading offers a way for an open, many-to-many system, where every user has equal access to price quotes and trading functionality. It provides a level playing field for all, without favoritism or control by a chosen few, where any user can view all quotes posted by other users in real time, act or trade on quotes posted by others, post their own prices and quantities for others to trade. Liquidity, or trade activity, is perhaps the best measure of success of an online trading commodity trading system. With most online commodity trading systems, traders can be sure of finding an interesting market development or trading opportunity almost every time they log on. All quotes posted by users on any online commodity trading systems are live and firm. They can be acted on with full assurance of a completed transaction. INSTITUTE OF BUSINESS MANAGEMENT & RESEARCH, AHMEDABAD.

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INDIAN CAPITAL MARKET

The greatest advantage of an online system for trading is that just a click can be used to hit a bid or lift an offer.

The Online trading system operates almost continuously around the clock, 24 hours a day, seven days a week. This allows any user to extend the trading day, and easily pass the trading objectives to others in companies in different time’s zones.

The online commodity trading system in India is only an emerging segment yet. This is because the Internet boom in Indian is on the rise only now. The Internet charges are becoming minimal and the Internet is soon becoming a way of life in India. It is in this scenario that online trading is becoming more the way of trading in India. There are mainly two exchanges deals with commodity • MCX (Multi Commodity Exchange) • NCDEX (National Commodities And Derivatives Exchange) Commodity trading is also known as “Vayda Market”. In short Share khan also provides broking in commodities and the brokerage charges are 0.10% on total trade value and if carry forwarded an additional 0.02% charge on total trade. Items which are traded through commodity exchange are: • Spices : Peeper, Red Chilli, Jeera, Turmeric • Metal : Steel Long, Steel Flat, Copper, Nickel, Tin • Fibre : Kapas, Long Staple Cotton, Medium Staple Cotton INSTITUTE OF BUSINESS MANAGEMENT & RESEARCH, AHMEDABAD.

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INDIAN CAPITAL MARKET

• Pulses : Chana, Udad, Yello Peas •

Cereals : Rice, Basmati Rice, Wheat, Maize, Sarbati Rice Energy : Crude Oil

✔ OFFLINE TRADING ACCOUNT The Off-Line account is trading account through which one can buy and sell through his/her telephone or by personal visit at Sharekhan Shop. This a/c is for those who are not comfortable with computer and want to trade. ➢ Offline A/c is the A/c for the investors who are not familiar with the use of computer. ➢ The A/C opening charges Rs.460 which includes Rs.300 for Demat account and Rs. 160 for trading account (One time).

✔ ONLINE TRADING ACCOUNT ➢

A/C Opening Charges Rs.750 (onetime Charge).

➢

For 1st Year Demat A/C is Free, On 2nd Year AMC charge is applicable.

➢

Tie up with 12 banks through which one can transfer or withdraw his fund online. Which are as follows 1.

HDFC Bank

3.

UTI Bank

5.

CITI Bank

2. IDBI Bank 4. OBC Bank 6. IndusInd Bank

7.Union Bank of India

8. yes bank

9. Bank of Punjab

10. ICICI bank

11. Bank of India

12. centurion bank

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INDIAN CAPITAL MARKET

Any one who have A/C either of above banks they can use this facility. Otherwise one has to make fund transfer or withdraw by cheque. This account enables you to buy and sell shares through our website. You get features like a)

Streaming quotes (using the applet based system)

b)

Multiple watch lists

c)

Integrated Banking, demat and digital contracts

d)

Instant credit and transfer & instant order execution and confirmation

e)

Real-time portfolio tracking with price alert and, of course, the assurance of secure transactions.

f) Price alerts •

Online Trading Account includes two types of accounts: 1.

Classic Account or Fast Trade Account

2. Speed Trade Account

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✔ MARKET PROFILE: This report analyzes the Indian retail brokerage industry, taking into account the health of the capital markets and the intensity of competition among the brokerage companies. Michael Porters Five Forces Analysis has been employed to understand industry attractiveness. The report covers all important segments of the industry and also analyzes the prevailing market dynamics. The Indian retail brokerage industry consists of companies that primarily act as agents for the buying and selling of securities (e.g. stocks, shares, and similar financial instruments) on a commission or transaction fee basis. It has two main interdependent segments: Primary market and the Secondary market. Evolution of the Retail Brokerage Market It explains the evolution of the brokerage market in three phases: pre1990, 1990-2000, post 2000. The Indian retail brokerage market is showing phenomenal growth. The total trading volume of brokerage companies has increased from US$1239.1 billion in 2004 to US$1492.1 billion in 2005, and is expected to reach US$6535.7 billion by 2015.

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INDIAN CAPITAL MARKET

Some of the main characteristics of the brokerage industry include growth in e-broking, growing derivatives market, decline in brokerage fees etc. Following are the some companies in the retail brokerage industries : 1. ICICI Securities Ltd. (www.icicidirect.com) 2. Kotak Securities Ltd. (www.kotaksecurities.com) 3. Indiabulls Financial Services Limited (www.indiabulls.com) 4. India Infoline (www.5paisa.com) 5. IL&FS investmart Limited (www.investsmartindia.com) 6. SSKI Ltd. (www.sharekhan.com) 7. Motilal Oswal Securities (www.motilaloswal.com) 8. Fortis Securities (Religare) (www.fortissecurities.com) 9. Karvy (www.karvy.com) 10. Geojit Securities (www.geojit.com) 11.HDFC Securities (www.hdfcsec.com) 12.Reliance Money (www.reliancemoney.com)

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INDIAN CAPITAL MARKET

✔ COMPARISON WITH COMPETITORS:

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INDIAN CAPITAL MARKET Company SHAREKHA N

ICICI SECURITIE S

INDIA INFOLINE

KARVY STOCK BROKING

INDIABULL S SECURITIE S LTD.

Fees

LTD.

Account opening

NIL

NIL

NIL

NIL

NIL

Advance/deposit

NIL

NIL

NIL

NIL

NIL

Rs.300/- p.a

Rs.500/- p.a in advance

NIL

Rs 250/- p.a

1) NIL FOR POA ACCOUNT 2) Rs.250/- for NON-POA ACCOUNT

Rs. 5 per certificate Min Rs. 35

Rs.35/- per demat request form and Rs.2/- for each certificate

Rs 10/- per cert + Rs 40/- as postal charges

Rs 3/- per Certificate + Courier Charges Rs 25/-

1) Rs. 1 per certificate (max Rs. 250/-) +Rs.25 courier charges for POA A/c

Rs. 35 per certificate for every hundred securities

Rs.20/- for remat request form and depository charges extra

Rs 15/- as per cert + Rs 40/- as postal charges

a) a fee of Rs 20/- for every 100 securities or part thereof ; or b) a flat fee of Rs 20/per certificate whichever is higher.

A)Rs.15/per request or of every 100 securities or part thereof. B) A flat fee of Rs. 15/per certificate. Whichever is higher.

0.03 % of the value of Transaction. Min Rs. 30

0.04% of the transaction value subject to minimum of Rs.15/Rs.50/- per request

Rs 25/-

Upto Rs 50

Account Maintenance

Demat

Remat

Transaction (Debit)

Pledge Creation

0.02 % of the value of the Transaction. Min Rs. 50

NIL

000 - Rs 20/> Rs 50

depository NIL 000 - Rs charges & RESEARCH, AHMEDABAD. 50/INSTITUTE OF BUSINESS MANAGEMENT Pledge Creation

NIL

Rs.8/- Per Transaction.

Rs. 25/- Per Transaction.

Rs. 25/- Per

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INDIAN CAPITAL MARKET



As from the above given chart we can study that the fees charged but the Sharekhan is comparatively low with its competitors in the market. Sharekhan provides auto pay in-pay out facility which means investor do not have to pay for transferring his stocks from trading account to his respective demat account, it will itself will be transferred as per investor’s instructions without any charge. While few other players in market are charging for this facility.

Sharekhan believes in customer-friendly transactions which gives customer hassle free environment for trading, he do not has to worry about other charges that can be hidden charges. One of the key success factor for Sharekhan limited is “No Hidden Charges”, they are charge only which they mentioned while account opening. Other government charges will investor will pay which is mandatory.

✔ SWOT ANALYSIS: INSTITUTE OF BUSINESS MANAGEMENT & RESEARCH, AHMEDABAD.

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INDIAN CAPITAL MARKET

During this training at Sharekhan, we had come to know the Strengths – Weaknesses – Opportunities – Threats for the company and it is very useful for a company to analyze them. Therefore, the SWOT analysis is presented here and the suggestions for maintaining strengths and removing weaknesses are explained.

• Strengths:  Well-maintained infrastructure.  Dedicated, Intelligent and Loyal staff.  On-line Trading products.  Lowest brokerage and other charges w.r.t. Competitors.  The best investment advice correct up to 70-90 % through dedicated research and reports.  Wide product range to enable the clients to choose the best alternative.  One of the best DPs in India.  A positive image in the existing clients.

• Weaknesses:  Less awareness in the market.  Time consuming process for account opening, resolving the problems of the customers, etc.  Service quality is not maintained accordingly how they are promoted. INSTITUTE OF BUSINESS MANAGEMENT & RESEARCH, AHMEDABAD.

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INDIAN CAPITAL MARKET

Opportunities:  Large primary market to sit as a book runner for the other companies just like Kotak securities ltd.  That runs the books of share holdings for many companies  Slope of stock market towards delivery based transactions.  Large potential market for delivery and intra-day transactions.  Open interest of the people to enter in stock market for investing.  Attract the customers who are dissatisfied with other brokers & DPs.  An indirect opportunity generated by the market from its bullishness. 

Another opportunity for Sharekhan limited is that, if they can get success in promoting educational programme well for online trading system then they can attract large pool of investors and that will make work of Sharekhan also easy and more paper less work can be done, which will be cost saving in daily basis.

• Threats:  Decreasing rates of brokerage in the market.  Increasing competition against other brokers & DPs.  Poor marketing activities for making the company known among the customer.  A threat of loosing clients for any kind of weakness of the company.  Indirect threat from instable stock market, i.e., low/no profit of Sharekhan’s clients would lead them to go for other broker/DP. INSTITUTE OF BUSINESS MANAGEMENT & RESEARCH, AHMEDABAD.

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INDIAN CAPITAL MARKET

INDIAN CAPITAL MARKET INSTITUTE OF BUSINESS MANAGEMENT & RESEARCH, AHMEDABAD.

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INDIAN CAPITAL MARKET

✔ BACKGROUND: The securities market in India witnessed several policy initiatives since the year 2000, which further refined the market microstructure, modernized operations and broadened investment choices for the investors. The irregularities in the securities transaction in the last quarter of the previous financial year hastened the introduction and implementation of several reforms. While a Joint Parliamentary Committee

was

constituted

to

go

into

the irregularities

and

manipulations in all their ramifications in all transactions relating to securities,

decisions

were

taken

to

complete the process

of

demutualization and corporatisation of stock exchanges to implement the decision to separate ownership, management and operation of stock exchanges and to effect legislative changes for investor protection, and to enhance the effectiveness of SEBI as the capital market regulator. The mainly event is described with date below: Date 1876 27 Jun 1969

Event Birth of Bombay Stock Exchange (BSE). Notification issued by government under SC(R)A prohibiting forward or futures trading.

INSTITUTE OF BUSINESS MANAGEMENT & RESEARCH, AHMEDABAD.

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INDIAN CAPITAL MARKET

Jan 1983 Regulatory permissions obtained for badla trading, a mechanism to carry forward positions. 2 Jan 1986 12 Apr 1988 1992 30 Jun

Computation of BSE ’sensitive’ index commenced. SEBI created. Fixed income and equity markets scandal. Start of electronic debt trading at National Stock

1994

Exchange (NSE).

3 Nov

Start of electronic equity trading at NSE.

1994 13 Dec

Ban on badla.

1994 25 Jan

SC(R)A amended to lift the ban on options trading.

1995 14 Mar

Start of electronic trading on a few stocks at BSE.

1995 3 Jul

Electronic trading of all stocks on BSE.

1995 5 Oct

Ban on badla reversed.

1995 Apr

National Securities Clearing Corporation (NSCC)

1996 8 Nov

commenced operations. National Securities Depository Ltd (NSDL)

1996

commenced operations.

1999

Securities law modified to enable derivatives

12 Jun

trading. Start of equity index futures trading.

2000 4 Jun

Start of equity index options trading.

INSTITUTE OF BUSINESS MANAGEMENT & RESEARCH, AHMEDABAD.

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INDIAN CAPITAL MARKET

2001 2 Jul

Major stocks moved to rolling settlement; start of

2001

stock options market.

 After the above revolution the Rolling settlement on T+5 bases was introduced in respect of most active 251 securities from July 2, 2001. Rolling settlement on T+3 basis commenced for all listed securities from April 1, 2002 and subsequently on T+2 basis from April 1, 2003. Trading in index options commenced in June 2001 and trading in options on individual securities commenced in July 2001. Futures contracts on individual stock were launched in November 2001. Futures and options contracts on 49 individual securities were made available from August 2003. Interest rate futures contract was launched from June 2003. The year 2001-02 has been quiet eventful for debt markets in India, with implementation of several important decisions like setting up of a clearing corporation for government securities, a negotiated dealing system to facilitate transparent electronic bidding in auctions and secondary market transactions on a real time bases an dematerialization of debt instruments. These developments in the securities market, which support corporate initiatives, finance the exploitation of new ideas and facilitate management of financial risks, hold out necessary impetus for growth, development and strength of the emerging market economy of India.

INSTITUTE OF BUSINESS MANAGEMENT & RESEARCH, AHMEDABAD.

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INDIAN CAPITAL MARKET

 ✔ PRODUCTS, PARTICIPANTS AND FUNCTIONS  Transfer of resources from those with idle resources to others who have a productive need for them is perhaps most efficiently achieved through the securities markets. Securities markets provide channels for reallocation of savings to investments and entrepreneurship and thereby decouple these two activities.  Savings are linked to investments by a variety of intermediaries through a range of complex financial products called “securities” which is defined in the Securities Contracts (Regulation) Act, 1956 to include shares, bonds, scripts, stocks or other marketable securities of like nature in or of any incorporate company or body corporate, government securities, derivatives of securities, units of collective investment scheme, interest and rights in securities, security receipt or any other instruments so declared by the central government.  The amount of funds supplied by the supplier may not be the amount needed by the user. Similarly, the risk, liquidity and maturity characteristics of the securities issued by the issuer may not match preference of the supplier. In such cases, they incur substantial search costs to find each other. Search costs are minimized by the intermediaries who match and bring the suppliers and users of funds together. These intermediaries may act as agents to match the needs of users and suppliers of funds for a commission, help suppliers and INSTITUTE OF BUSINESS MANAGEMENT & RESEARCH, AHMEDABAD.

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INDIAN CAPITAL MARKET

users in creation and sale of securities for a fee or buy the securities issued by users and in turn, sell their own securities to suppliers to book profit. A large variety and number of intermediaries provide intermediation services in the Indian securities market as may be seen from table.

 The securities market, thus, has three categories of participants, namely the issuers of securities, investors in securities and the intermediaries and two categories of products, namely the services of the intermediaries, the securities, including derivatives. The issuers and investors are the consumers of services rendered by the intermediaries while the investors are consumers of securities issued by issuer. In pursuit of providing a product to meet the needs of each investors and issuer, the intermediaries churn out more and more complicated products. They educate and guide them in their dealings and bring them together. Those who receive funds in exchange for securities and those who receive securities in exchange for funds often need the reassurance that it is safe to do so. This reassurance is provided by the law and by custom, often enforced by the regulator. The regulator develops fair market practices so as to protect the interests of funds. The regulator ensures a high standard of service from intermediaries and supply of quality securities and non-manipulated demand for them in the market.

INSTITUTE OF BUSINESS MANAGEMENT & RESEARCH, AHMEDABAD.

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INDIAN CAPITAL MARKET

✔ SCENARIO IN CONTEXT WITH INDIAN ECONOMY: A logical starting point in assessing any equity market is to analyze the economic factors that affect stock prices. Understanding the current and future state of the economy is the first step in understanding what is happening and what is likely to happen to the market. A basic measure of the economy is Gross Domestic Product (GDP). It is a measure of the economic health and strength of the economy. Investors are concerned about whether the economy is experiencing good rate of growth or not. India’s GDP growth forecast for 2006 is next only to China. A 9.31% growth forecast will strengthen the equity market of India quite substantially. INDIA’S GDP GROWTH NEXT ONLY TO CHINA GDP GROWTH 2006

12.00%

10.30%

10.00%

9.31%

(Source : Merrill Lynch)

8.00% 6.00%

4.60%

4.50%

4.40%

4.20%

4.00%

3.80% 2.30%

2.00%

N JA PA

US

E R

G

G AP O

KO N

IA

NG

AL AY S

LA ND

TH AI

IN DI A

CH

IN

A

0.00%

SI N

HO

M

INSTITUTE OF BUSINESS MANAGEMENT & RESEARCH, AHMEDABAD.

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INDIAN CAPITAL MARKET

The favorable demographics of Indian economy in terms of working age of population, in terms of consuming/ producing age group as well as the growth of middle income level will strengthen the equity market.

Global Growth in Working Age Population (in mn) 375

400 350 300 250 200 150

80

100

75

55

45

50

42

21

18

US A

s ia tA es

A in La t

W

me ric a

s ia A th

So u

Ch in a

fri ca A

ia In d

W

or ld

0

Source: MSDW

Increasing Consuming/Producing Age Group 1400 92 1200 1000 49 800 811 598 600 400 200 380 365 0 INSTITUTE OF BUSINESS MANAGEMENT & RESEARCH, AHMEDABAD. 2001 2016 0-14

15-59

60&Above

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INDIAN CAPITAL MARKET

Source: BRIC’s Report by Goldmann Sachs

 REVOLUTION OF INDIAN ECONOMY

There has been a tremendous transformation of the Indian Economy with the government taking a holistic view of the factors impacting growth, foreign investment and integration of India with the World Economy. The infrastructure spending has been on a high. COMPARISON OF INFRASTRUCTURE SPENDING OF LAST SIX YEAR(IN $ BN.) 18.4 15.9 14.3

14.5

13.3 10.4 8.6

6.9

2001-04

om Te

le c

Ga s O il &

Po rts

8.1

3.4

/A

irp o

s Ra ilw ay

Ro a

rts

2

Po w er

7.1

ds

20 18 16 14 12 10 8 6 4 2 0

2004-07

Source: Merrill Lynch

Government too has lined up major infrastructure projects like the golden quadrilateral, new power plants, airports, ports etc. The total INSTITUTE OF BUSINESS MANAGEMENT & RESEARCH, AHMEDABAD.

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INDIAN CAPITAL MARKET

investment in the country is to increase from $ 120 billion (Rs. 5, 28, 000 crores) in 2004 to $ 208 billion (Rs. 9, 15, 200 crores) by 2007.

Investors rely heavily on the financial statements of a corporation, which provide the major financial data about companies. The balance sheet of the company is hence a basic statement about the financial health. If we analyze the corporate balance sheets over the years, we find that Indian corporate have more stronger balance sheet and this fuelling their aggression as they aim to increase their corporate acquisitions. With the recent budget there has been some more rationalization of corporate tax rate structure. With the introduction of further tax reforms related to equity market, the domestic investors continue to look at equities as a favorable investment avenue, both in terms of generating consistent returns and saving tax.

INSTITUTE OF BUSINESS MANAGEMENT & RESEARCH, AHMEDABAD.

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INDIAN CAPITAL MARKET

 PROBLEMS IN INDIAN CAPITAL MARKET The Indian stock market is suffering from many problems. Some of the important ones are the following:

Lack of Knowledge & Tendency In India, having very large amount of investors but mainly or mostly the investors keep away from the capital market due to lack of knowledge of capital market, fear of taking risk. Thus, Indian stock market suffering from many limitations: Absence of Genuine Investors As it is, speculative activities outplay the genuine trading activities. Very negligible fraction of transactions represents purchases or sales by genuine investors. Most of the transaction is carry forward transactions with a speculative motive of deriving benefit from short term price fluctuations. Speculators are only interested in taking a bet on the stock and profiting from its price swings. Almost 85 per cent of the total volume is contributed by speculators. Presence of Price-Rigging There is a tendency among companies issuing securities to artificially push up the prices before the issue of securities. This is generally done by buying and selling securities by a few groups of persons among themselves and thereby pushing the prices up. There is a strong bull movement in the market. INSTITUTE OF BUSINESS MANAGEMENT & RESEARCH, AHMEDABAD.

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INDIAN CAPITAL MARKET

Prevalence of Insider Trading Insider trading has been accepted as a routine practice in India. Insiders are those who have access to unpublished price sensitive information by virtue of their position in the company and who use such information in their best advantage. Hence it is an undesirable activity. High Volatility of Stock Market The Indian stock market is subject to high volatility in recent years. The All India Index number of security prices was steady at 60% between the period 1999 and 2000. However, it was subject to heavy fluctuations afterwards. This high rate of volatility is not conducive for the smooth functioning of the stock market. Dominance of Financial Institutions Few financial institutions like the Mutual Funds, LIC and GIC dominate the Indian stock market scene. Hence, the Indian stock market is significantly influenced by the actions of these few institutions. It actually reduces the level of competition in the stock market which is not a healthy trend for the growth of any stock market. FIIs Control over the Market Like the financial institutions the FIIs also lead the Indian stock market. As per the projection India will become one of the largest economy of the world based on its strong economic and demographic factor. As a result of this FIIs and other investors are attracted towards India. As a result the FIIs INSTITUTE OF BUSINESS MANAGEMENT & RESEARCH, AHMEDABAD.

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INDIAN CAPITAL MARKET

taking India’s market at a new high, but it is very important to know that how long they are investing in India because of a sudden change the Indian market collapsed.

✔ SCENARIO IN CONTEXT WITH GLOBAL ECONOMY: Reforms in the securities market, particularly the establishment and empowerment of SEBI, market determined allocation of resources, screen based nation wide trading, dematerialization and electronic transfer of securities, rolling settlement and ban on deferral products, sophisticated risk management and derivatives of trading and settlement. Indian market is now comparable to many developed markets in terms of a number of qualitative parameters. The next few decades the growth generated by the large developing countries, particularly the BRICs (Brazil, Russia, India and China) could become a much larger force in the world economy than it is now—and much larger than many investors currently expect. If things go right, the BRICs could become a very important source of new global spending in the not too distant future. INTERNATIONAL COMPARISON (End December 2006) Particular

USA

UK

Japan

German

Singapor

Hongkon

y

e

g

s No.

of

7,651

1945

2,470

933

355

695

China

950

India

9,871

listed Companies

INSTITUTE OF BUSINESS MANAGEMENT & RESEARCH, AHMEDABAD.

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INDIAN CAPITAL MARKET Market

16,635114

2,933,28

4,546,93

1,432,19

198,407

Cap. ($mn)

,

0

7

0

Market

210

232

111

66

208

Turnover

18,574,10

1,377,85

1,849,22

1,357,84

97,985

($mn)

0

9

8

1

Turnover

124

52

53

108

609,090

330,70

280,61

3

9

385

36

85

244,886

377,09

486,36

9

0

134.2

245

Cap.Ratio

67

51

Ratio (%)

As may be seen from table except USASS, no other country has higher turnover ration than India. At the end of December 2006, Standard and Poor’s (S&P) ranked India 19th in terms of market capitalization, 17th in terms of total value traded in stock exchanges and 7th in terms of turnover ratio.

COMPARISON LISTED COMPANIES IN PERCENTAGE

USA 30

UK JAPAN

41

GERMANY SINGAPORE 8 3 31 4

10

HONGKONG CHINA INDIA

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INDIAN CAPITAL MARKET

COMPARISON OF TURNOVER RATIO

19%

24%

USA UK JAPAN GERMANY

8%

SINGAPORE

5%

16%

4%

HONG KONG CHINA

16%

8%

INDIA

The table shows you the international comparison in various ways, the same thing are shown in below charts in percentage point of view, the first chart shows the round about 41% of listed companies in the India which is greater than USA. The next chart shows the turnover ratio of the various countries the chart shows the India’s turnover ratio 19% which is next only to USA.

INSTITUTE OF BUSINESS MANAGEMENT & RESEARCH, AHMEDABAD.

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INDIAN CAPITAL MARKET

 INDIAN STOCK MARKET AND GLOBALIZATION

Indian Stock market has witnessed drastic changes during the past decade due to the broad stock market liberalization measures. Dematerialization of shares and setting up clearing houses has virtually eliminated the risks involved in trading. Similarly rapid strides were made in settlement procedures, corporate governance standards, introduction of derivative products etc. GLOBALIZATION The Indian Stock Market though one of the oldest in Asia being in operation since 1875, remained largely outside the global integration process until the late 1980s. A number of developing countries in concert with the International Finance Corporation and the World Bank took steps in the 1980s to establish and revitalize their stock markets as an effective way of mobilization and allocation of finance. In line with the global trend, reform of the Indian Stock Market began with the establishment of Securities and Exchange of India in 1988. However, the reform process gained momentum only in the aftermath of the external payment crisis of 1991 followed by the Securities scam of 1992. Among the significant measures of integration, portfolio investment by FIIs allowed since September 1992, has been the turning point for Indian Stock Market. As of now, FIIs are allowed to invest in all categories of securities traded in the primary and secondary segments and also in the derivatives segment. Following the commissioning of the NSE in June 1994, INSTITUTE OF BUSINESS MANAGEMENT & RESEARCH, AHMEDABAD.

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INDIAN CAPITAL MARKET

National Securities Clearing Corporation in April 1996 and National Securities

Depository

in

November

1996,

a

screen

based,

anonymous, order driven online dematerialized trading has been the order of the day coupled with improved risk management practices for clearing and settlement. The process of integration received a major impetus when the Indian corporate was allowed to go global with GDR (Global Depository Receipt) /ADR(American Depository Receipt) issues. Starting with maiden issue of Infosys in March 1999, ADR issues has emerged as the star attraction due to its higher global visibility. Till date, around 12 Indian companies have taken advantage of the US market and 76 companies have captured the global market. In March 2001, two-way fungibility for Indian GDR/ADRs was introduced whereby converted local shares could be reconverted into GDR/ADR subject to sectoral caps. GLOBAL INVESTMENT India embarked on economic reforms to transform the controlled economy into market driven one. This included the financial liberalization strategies like dismantling of capital controls, reforms in trade and investment policies and so on to integrate the Indian Financial Markets with the global financial markets. All these reforms opened the floodgates to foreign capital flows into the country. The total net capital flows have risen to US $ 12.1 billion in 2005-06 from US $ 7.1 billion in 1990-91. The cross border flows are averaging around US $ 10 billion every year currently. Like elsewhere in the INSTITUTE OF BUSINESS MANAGEMENT & RESEARCH, AHMEDABAD.

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INDIAN CAPITAL MARKET

globe, the nature of capital flows has come to constitute a higher percentage of the total capital flows. The ratio of non-debt creating inflows to debt creating inflows was 1.5 to 83.3 in 1990-91 as against 44.6 to -6.6 in 2005-06.

COMPOSITION OF CAPITAL FLOWS TO INDIA (US $ Million) Debt

Total net Year

FDI

Portfolio

Creatin

Flow

Equity

g

Others*

as a

flows

Flows

As a % of

% of

As a % of

as a

TCF

TCF

TCF

% of

Capital flow

TCF 199091 199900 200001 200607

7056

1.4

0.1

83.3

15.2

10444

20.7

29.0

23.1

27.2

10018

40.2

27.6

59.4

-27.2

12638

36.9

7.7

-6.6

62.0

Source: Reserve Bank of India Annual Report 2006-07 INSTITUTE OF BUSINESS MANAGEMENT & RESEARCH, AHMEDABAD.

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INDIAN CAPITAL MARKET

The portfolio flows have been one of the major forces that have changed the quantum and nature of international capital flows to India. Portfolio flows include the investment in ADRs /GDRs and offshore funds in addition to investment by Foreign Institutional Investors (FIIs). Foreign portfolio investments have been allowed in India on the basis of the recommendations of the Narasimham committee.

Prior to 1992, only non-resident Indians (NRIs) and Overseas Corporate Bodies (OCBs) were allowed to undertake the portfolio investment in India. Only on September 14, 1992 the Government of India issued guidelines on FII investments in India which was followed by a notification by Securities and Exchange Board of India (SEBI) three years later in November 1995. Ever since the opening up of the market for FIIs, the net investments by FIIs have always been positive every year except in the year 199899 where the net investment was negative primarily because of the uncertainty that prevailed after India tested a series of nuclear bombs in May 1998 and the imposition of the economic sanctions by the United States, Japan and other industrialized countries. On an average India has received cross border portfolio investment around US $ 2.2 billion per year between 1992-93 and 2006-07 of which INSTITUTE OF BUSINESS MANAGEMENT & RESEARCH, AHMEDABAD.

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INDIAN CAPITAL MARKET

close to US $ 1.2 billion per year on an average is the share of FIIs. The cumulative FII investment in India is around US $ 19 billion and the FII investment in India account for over 10 percent of the total market capitalization of the Indian Stock market.

FII INVESTMENT IN INDIA (US $ million)

Year

199293 199900 2000-

GDRs

Total

FII

Portfolio

Investm

flows

ent

244

1

240

3

3026

2135

768

123

2760

1847

831

82

/ ADRs *

INSTITUTE OF BUSINESS MANAGEMENT & RESEARCH, AHMEDABAD.

Offsh ore funds

Page 59

INDIAN CAPITAL MARKET

01 200102 200607

2021

1505

477

39

979

377

600

2

Source: Reserve Bank of India Annual Report 2006-07

The investments by FIIs have been registering a steady growth since the opening of the Indian capital markets in September 1992. That this trend has come to stay is evident from the fact that the FIIs investments amounted to over $ 8 billion for the period of calendar 2008. The below table further based on the investment in total portfolio investment inflows have always have been the increase.

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INDIAN CAPITAL MARKET

TRENDS IN FII INVESTMENT Period

Gross Purcha

Gross Sales

ses

(Rs.cro

(Rs.cror

re)

e)

Net

Net

Cumulative

Investm

Investm

Net

ent

ent**

(Rs.cror

(US

e)

$million)

Investment ** (US $million)

1994

7631

2835

4796

1528

3167

1996

15554

6979

8575

2432

7634

1998

16115

17699

-1584

-386

8898

2000

74051

64116

9934

2160

13396

2004

47060

44371

2689

562

15804

2007

144858

99094

45765

9949

25754

Source: SEBI Annual Report 2006-07

The FIIs hold 8.12 per cent of the total outstanding shares of the 469 companies studied as of September 2006, emerging as the biggest institutional investor, ahead of the mutual funds, domestic financial institutions and the private corporate bodies. In an overall ranking they occupy the third position after the promoters and the Indian public holding higher levels of investment than FIIs.

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INDIAN CAPITAL MARKET

SHARE HOLDING PATTERN Category

Total Share

% of

Outstanding

Share Held

(in Rs.) Promoters

69220551

42.62

Mutual Funds

12365489

7.61

Domestic

Financial 25432703

15.66

30627991

18.86

Institution FIIs Private

Corporate 5642696

3.47

Bodies Indian Public

15205012

9.36

NRIs/OCBs

446293

0.28

Others

3475716

2.14

Total

162416441

100

The above table shows the FIIs holding over the Indian security market, which says that FIIs are the one of the large investors in Indian security market. The FIIs holding is the third highest in the overall holding in Indian security market.

ONE IN THREE FIRMS HAS FII STAKES INSTITUTE OF BUSINESS MANAGEMENT & RESEARCH, AHMEDABAD.

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INDIAN CAPITAL MARKET

FIIs hold stakes in a third of all listed companies in India. Data regarding holding pattern filed by 2,500 listed companies with the Bombay Stock Exchange shows a marked increase in the number of companies with FII investments. The FIIs have added 291 companies in their equity portfolio of which 127 companies were added during April-June 2007 quarter. The quantum that FIIs hold varies between 0.01 per cent and 64.26 per cent stake in these companies. During the year FIIs more than doubled their stakes in 164 companies and increased their stakes between 50 per cent and 100 per cent in another 40. In over a

100

companies, the FIIs are the second-largest shareholders after the promoters. In the first quarter of the current fiscal, FIIs held over 30 per cent stake each in 12 companies. In 41 firms, they hold stakes between 20 per cent and 30 per cent and in 55 companies, their holdings range between 15 per cent and 20 per cent. Finally, in 76 companies they hold between 10 per cent and 15 per cent stakes.

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INDIAN CAPITAL MARKET

The FIIs have been the largest shareholder in Housing Development Finance Corporation and followed by the others: 

Housing Development Finance Corporation



Satyam Computer Services



ICICI Bank



SB&T International



Infosys Technologies



Zee Telefilms

64.26% 53.90% 45.24% 40.34% 39.61% 38.96%

The list of companies in which they have acquired substantial stakes recently includes Grabal Alok Impex 27.21%, Goldstone Teleservices 20%, Vaibhav Gems 19.71% and Sabero Organics 13.77%, which had no FII presence a year back.

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INDIAN CAPITAL MARKET

EFFICIENT MARKET HYPOTHESIS INSTITUTE OF BUSINESS MANAGEMENT & RESEARCH, AHMEDABAD.

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INDIAN CAPITAL MARKET

✔ EFFICIENT MARKET HYPOTHESIS: A market is efficient with respect to a particular set of information if it is impossible to make abnormal profits (other than by chance) by using this set of information to formulate buying and selling decisions.

EMH has been the subject of intense debate among academics and financial professionals. It is a world in which (1) all investors have costless access to currently available information about the future, (2) all investors are capable analysts, and (3) all investors pay close attention to market prices and adjust their holdings appropriately. In such a market a security’s price is a good indicator of its investment value, fair value or intrinsic value, wherein it is the present value of the security’s future prospects, as estimated by well-informed and skillful analysts who use the information that is currently at hand. That is, an efficient market is one in which every security’s price equals its investment value at all times and is an unbiased estimate of its true value.

Contrary to popular view, market efficiency does not require that the market price be equal to the true value at every point of time. All it requires is that errors in the market price be unbiased, that is, prices can

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INDIAN CAPITAL MARKET

be greater than or less than true value as long as these deviations are random.

In an efficient market a set of information is fully and immediately reflected in market prices. However, the goal has always been to encourage the establishment of allocationally efficient markets in which an investor with the most promising investment opportunities has access to the needed funds. However, in order for markets to be allocationally efficient, they need to be both internally and externally efficient. In an externally efficient market, information is quickly and widely disseminated, which allows each security’s price to adjust rapidly in an unbiased manner to new information so that it reflects its investment value. In comparison, an internally efficient market is one in which market players compete fairly, making demand and supply equations, making the cost of transaction low and the speed of transacting high.

In an efficient market, investors should expect to make normal profits by earning a normal rate of return on their investments. However, most individuals who buy and sell securities do so under the assumption that the securities they are buying are worth more than the price they are paying, while securities that they are selling are worth less than the selling price. But if markets are efficient and current market prices fully reflect all information, buying and selling securities in an attempt to outperform the market will effectively be a game of chance rather than skill. INSTITUTE OF BUSINESS MANAGEMENT & RESEARCH, AHMEDABAD.

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EMH evolved in the early 1960s from the PhD dissertation of Eugene Fama. Fama persuasively made the argument that in an active market that includes many well-informed and intelligent investors, securities will be appropriately priced and reflect all available information. If a market is efficient, where large number of rational, profit maximisers actively compete, with each trying to predict the future market values of individual securities and where important current information is almost freely available to all participants, no information or analysis or perception can be expected to result in out-performance of an appropriate benchmark.

The arrival of new information to a competitive market can be linked to the meat chop. The instant the chop hits the water; there is turmoil as the fish devour the meat. Very soon the meat is gone, leaving the worthless bone behind, and the water returns to normal. Similarly, when new information reaches a competitive market there is much turmoil as investors buy and sell securities in response to the news, causing prices to change. Once prices adjust, all that is left of the information is the worthless bone. No amount of gnawing on the bone will yield any more meat, and no further study of old information will yield any more valuable intelligence.

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INDIAN CAPITAL MARKET

 (a)

Three Important Classifications of EMH

Weak Form:

Weak Form EMH states that previous prices of securities or historical data are used to make buying and selling decisions. The significant conclusion derived from weak-form hypothesis is that past rates of return and any other security/ market information should have no relationship with future stock prices or future rates of return. In other words, Technical Analysis is of no use.

Early tests of weak form market efficiency failed to find any evidence that abnormal profits could be earned trading on information related to past prices. More recent studies, however, have indicated that investors may under react to current types of information in the short term, but overreact in the long term, driving security prices away from this investment values. As a result, it may be possible to earn abnormal profits by buying either securities that have recently risen in price or those that have fallen in price over a longer time period. These two strategies are known as ‘momentum’ and ‘contrarians’ strategies respectively.

(b)

Semi Strong Form:

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Semi strong form EMH states that stock prices fully reflect all publicly available information at its best and quickest. Usually, when talked about efficient markets, semi strong form of efficient markets is meant, because of the strict laws governing the use of insider information (a form of private information) to make buying and selling decisions, as that involves restricting the analysis to the publicly available information that analysts use in making recommendations. However, public information also includes all non-market information such as news about the industry or various economies, the current political state abroad, etc. The implication of semi strong form EMH is that investors should not be able to derive above average rates of return from public information. In other words, fundamental analysis is of no use.

A number of tests have been conducted to verify the semi strong form of EMH with the majority of tests providing mixed evidence. Some of the notable exceptions include the January effect, in which stocks that experienced losses during the previous year tend to provide abnormal rates of return in the current January, the Friday effect, the size effect, the neglected firms effect and the book value to market value effect. For those who think all these anomalies are funny, here is a quote from Mark Twain: October, this is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February!

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(c) Strong Form:

Strong form EMH suggests that all information, both public and private has been discounted in the efficient markets, where it would be impossible to earn abnormal profits (other than by chance) by using information whatsoever. It encompasses both weak form and semi strong form and implies that no opportunities should exist for any investor to derive above average rates of return, even with the use of insider information. Like the semi strong version, tests of this hypothesis provided mixed results. However, the bulk of tests were supportive.

Two

glaring

anomalies

exist:

Corporate

insiders

and

market

specialists seem to be able to consistently earn above average rates of return which implies that they possess monopolistic access to important information. In addition, there is enough evidence to support the notion that superior security analysts could also consistently above average rates of return, although this group tends to be small. They manufacture their own private information through their research efforts and are able to discern mispricing. INSTITUTE OF BUSINESS MANAGEMENT & RESEARCH, AHMEDABAD.

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INDIAN CAPITAL MARKET

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INDIAN CAPITAL MARKET

Information and the Levels of Market Efficiency

Semi Strong: Strong All public Form: All Public & Weak Private Information Form: Information Past Prices

Security Price Changes are Random

New, meaning a Surprise. Anything that is not a surprise is predictable and should have been anticipated; hence it is old information. A security’s price should move upward by an amount that provides a reasonable return on capital, or dividend payments, but anything above or below such an amount would, in an efficient market, be unpredictable. What happens when new information arrives, such as an announcement that a company’s earnings have experienced a significant and unexpected decline? In an efficient market, the actions of investors will result in the new information’s being incorporated immediately and fully into security prices. Good surprises are as likely as bad ones and so the price changes in an efficient market are as likely to be positive as negative.

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INDIAN CAPITAL MARKET

Price changes are random in a perfectly efficient market, but this randomness does not mean that prices are irrational. As a flow of information arrives randomly, changes in prices that occur as a consequence of that flow will seem random, being sometimes positive and sometimes negative. However, price changes are simply the result of investors’ reassessing a security’s prospects and adjusting their buying and selling appropriately. Hence, price changes are random but rational.

In a developed and free market, major disparities between price and investment value are noted by alert analysts who seek to take advantage of their discoveries. Securities priced below investment value known as under priced or undervalued securities will be purchased, creating pressure for price increases caused by the increased demand to buy. Securities priced above investment value, known as overpriced or overvalued securities will be sold, creating pressure for price decreases caused by the increased supply to sell. As investors seek to take advantage of opportunities created by temporary inefficiencies, the inefficiencies are reduced, and the less alert and less informed have a less chance to obtain large abnormal profits.

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INDIAN CAPITAL MARKET

TESTING THE EMH

To determine if markets actually are perfectly efficient, reasonably efficient or not efficient at all, there are multitude of methodologies available, of which following three stand out:-

(A) Event Studies Event studies can be performed to determine how fast security prices actually react to the release of information. As an example, when the information arrives in the market about ACC raising its guidance for its bottom-line earnings from 20% to 34% for FY07 and its annual EPS of Rs. 62.70, on the 11th of July,’07, prices react instantaneously and, in doing so, immediately move to their new investment values from Rs.950 to Rs.1132. At this level, ACC quotes at 23x its earnings. Figure (1.1) shows what happens in such a market when good news arrives. Figure (1.2) shows what happens when bad news arrives. As an example, consider WIPRO Q1 FY07 results which show a decline of PAT from 720 lacks to 665 lacks Q-o-Q basis. Although within the sector, this company is quoted at its cheapest PE of 9x, as soon as the results were declared, the prices reacted immediately on the 19th July, ’07 to fall down to Rs. 545 from Rs. 505, nearly 8% down from its previous close.

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INDIAN CAPITAL MARKET

Note that in both the cases the horizontal axis is the time line and the vertical axis is the security’s price. Observe that shortly before the news arrived, prices were Rs. 950 and Rs.545 for Infosys and Visual Soft respectively. With the arrival of the information the prices immediately move intraday to their new equilibrium level of Rs. 1132 and Rs.505 respectively, where it stays until additional information arrives.

Various event studies can be conducted pertaining to the news like share repurchase program like in case of Reliance Energy, stock splits and dividends like in the cases of Infosys, Wipro, HLL, etc., stock listings and IPOs like in the cases of DLF ,VISHAL RETAIL, SPICE TELECOM, , etc., mergers and acquisitions like BSES with Reliance, de-mergers like L&T, bonus like Infosys & Wipro. Figure-1.1

INSTITUTE OF BUSINESS MANAGEMENT & RESEARCH, AHMEDABAD.

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INDIAN CAPITAL MARKET 950 T1132 Time = P rice 11th July, 2007 Figure 1.1: Arrival of Good News in Rs. about acc

Figure-1.2 TTime 545 505 = Price 19th July, 2007 Figure 1.2: Arrival of Bad News in Rs. about WIPRO

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INDIAN CAPITAL MARKET

(B) Looking for Patterns A second method to test for market efficiency is to investigate whether there are any patterns in security price movements attributable to something other than what one would expect. Various Time Series Properties of price changes like a short term price movement with a notion that today’s price change conveys information about tomorrow’s price change can be tested in financial markets. The serial correlation measures the correlation between price changes in consecutive time periods, whether hourly, daily, or weekly, and is a measure of how much the price change in any period depends upon the price change over previous time period. Long Term Price movements over a period of one year to five years can also be focused to find out ‘any deviation from the common rule’. Studies of market efficiency have uncovered numerous examples of market behavior that defy rational explanations. In recent years, many of these patterns have been identified and labeled as ‘market anomalies’.

For example, one of the most prominent market anomalies is the January effect. Security returns appear to be abnormally high in the month of January. Same is the case with the May effect. Security prices tend to fall down drastically each May. These patterns have a long and consistent track record, and no convincing explanations have been proposed.

(C) Examining Performance INSTITUTE OF BUSINESS MANAGEMENT & RESEARCH, AHMEDABAD.

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INDIAN CAPITAL MARKET

The third approach for testing market efficiency is to examine the investment records of professional investors, returns offered by various mutual funds, individual portfolio management and measurement, etc to know if earnings are abnormally higher than one would expect in a perfectly efficient market and if there is any consistency over a period of time. There are difficulties in conducting these tests because they require the determination of what constitute abnormal returns, which, in turn, requires determination of just what are ‘normal returns’. Moreover a fair amount of data is a limitation to this study.

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RESEARCH ANALYSIS AUTOMOBIL E INDUSTRY ✔ INDIAN AUTOMOBILE INDUSTRY INSTITUTE OF BUSINESS MANAGEMENT & RESEARCH, AHMEDABAD.

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INDIAN CAPITAL MARKET

The Indian automotive industry has been witnessing dynamic growth over the years.

•

The Indian two-wheeler Industry is one of the largest in the world,

and is expected to maintain robust growth in the future •

At the back of this phenomenal automotive growth is the success of

the Indian auto component industry. Presently a US$ 6.7 billion industry, it is expected to almost treble in less than five years time to US$ 17 billion by 2012 •

India offers a distinct technological and cost-competitive advantage,

which global Original Equipment Manufacturers (OEMs) and automotive suppliers are leveraging for both manufacturing and research facilities.

BENEFIT FOR INDIA Competitive Cost Advantage The

Indian

automotive

industry

has

a

significant

labor

cost

advantage. India’s automotive sector has the world’s second largest pool of skilled labor. The country with its high education levels also provides the world’s largest pool of qualified engineers.

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INDIAN CAPITAL MARKET

Global Comparisons: Availability of Skilled Manpower, 2006 375

400 Stock Population 2006

350 300 250 200

Series1

150 100 50 0

-3

20

0.04 13

83

73

56

41

38

JA W . E PA N U RO PE N. U AM SA ER L. AM ICA ER IC S. E. A AS IA CH IN AF A RI CA IN D W IA O R LD

-50

Additional Working Population by 2010

(Source: IMD Competitiveness Yearbook 2006)

8 6.6

7 6 5

7.1

7

7.4

7.3

7.2

7.1

5.7

5.3 4.3

4 3 2 1

e or Si ng ap

U SA

di a In

y an m Ge r

ng gk o

an H on

Ja p

iw an T

ea K or

ic o ex M

Ch in a

0

(Source: UN, Morgan Stanley)

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INDIAN CAPITAL MARKET

Global Comparisons: Availability of Qualified Engineers, 2006 10

8.9

9 8 7 6 5

6.7

6.4

5.8

6.7

7.9

7.3

6.9

3.9

4 3 2 1

In

di a

e or Si ng ap

U SA

ng H og ko

y an m Ge r

iw an T

ic o ex M

K or

Ch in a

ea

0

Scale of 1 to 10 with 1 = Low and 10 = High; ( Source: IMD Competitiveness Yearbook 2006)

Government Initiatives The Indian automobile regulatory policy has undergone progressive change over the last decade. •

In June 1993, the First Automobile Policy was announced. It abolished

the requirement of licenses to set up an auto manufacturing plant in India, which was the first step to allow private and foreign investment in the automobile industry. •

In

1995,

the

Government

introduced

a

company-specific

Memorandum of Understanding (MoU) route for manufacturers of cars and multi-utility vehicles. The •

Policy allowed investments in the automobile industry with a

capitalization restriction of at least US$ 50 million over a three-year period. INSTITUTE OF BUSINESS MANAGEMENT & RESEARCH, AHMEDABAD.

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INDIAN CAPITAL MARKET

•

With effect from April 1, 2001 Quantitative Restrictions (QRs) on

import of automobiles have been removed, thereby phasing out the MoU policy. With the removal. Attracted Numerous Players in the Passenger Car Segment The early 1990s witnessed several reforms initiated by the Indian Government aimed at encouraging private and foreign investment through de-Licensing, government-decontrol and deregulation of various sectors of the economy. In June 1993, a new automobile policy was formulated allowing foreign investment in the automobile sector, abolition of licenses and a reduction in duties across the board to enable the sector to become globally competitive. This resulted in several new players entering the Indian automobile industry, including General Motors, Ford, Hyundai, Honda, and several others. Market Shares of Players in the Domestic Passenger Car Market (April 2006 - March 2007) 3.0%

2.1%

2.6%

Honda

0.5% 1.5% 0.7%

15.5%

Ikoda T oyota Daimler Maruti Fiat India General Moters

18.6%

Hyundai

51.4% 2.6%

T ata Ford

1.5%

HM

Source: SIAM

Two-Wheelers Market, One of the Largest in the World and Still Growing INSTITUTE OF BUSINESS MANAGEMENT & RESEARCH, AHMEDABAD.

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INDIAN CAPITAL MARKET

India represents one of the largest two-wheeler markets in the world, with an estimated size of 5.4 million units a year. Two-wheelers are used extensively in the country, both at the rural and semi-urban level. India is the two-wheeler capital of Asia with an average of 27 two-wheelers per thousand people, compared to China’s 8 two-wheelers per thousand people . The Indian two-wheeler market in India is oligopolistic in nature, with the top three companies accounting for over 80 per cent of the total industry sales. Hero Honda Motors Limited, a joint venture between Honda Motors,

Japan

and

the

Indian-based

Hero

Group,

is

the

largest

manufacturer of two-wheelers in the world with a 38 per cent market share of the domestic 5.4 million units two-wheeler market. Bajaj Auto is the second largest player in the two-wheeler market with a 22.3 per cent share. The company uses indigenously developed technology for its twowheelers. TVS Motor Company is the third largest player with a 20.9 per cent market share, with a majority of its sales coming from the southern states of India. Market Shares of Players in the Domestic Two-Wheeler Market (April 2006 - March 2007)

Source: SIAM

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INDIAN CAPITAL MARKET

BAJAJ AUTO

 Company Description Bajaj Auto is the second largest two wheeler manufacturer in India. Its product portfolio includes scooters, mopeds, motorcycles and three wheelers. An erstwhile scooter company, Bajaj Auto has reinvented itself by innovate its product portfolio to become the second largest motorcycle manufacturer in India. With the opening up of the insurance sector, the company has entered into joint venture agreements with Allianz AG, Germany.

 Key Investment Arguments The company has significantly increased its market share in the motorcycle segment by 380bp in FY07. With a strong portfolio of motorcycles, we believe Bajaj Auto will continue to benefit from the volume growth in the motorcycle industry.  Key Investment Risks INSTITUTE OF BUSINESS MANAGEMENT & RESEARCH, AHMEDABAD.

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INDIAN CAPITAL MARKET

• Increasing competition in the executive segment where Bajaj Auto is trying to gain a foothold with the ‘Pulsar’.  Recent Developments •

Hero Honda has launched the Splendor NXG to compete with the

Bajaj Pulsar. •

BAL is planning to launch the ‘Pulsar 220cc’, a new entry level bike.

 Sector View •

Numerous

motorcycle

launches

will

lead

to

an

increase

in

competition. •

Despite a number of players, market share remains concentrated in

the hands of the top two.

SPECIFICATION OF THE COMPANY Registered

Mumbai

Office

Road, Akurdi Pune Maharashtra 411035

Web site

http://www.bajajauto.com

BSE

-

Pune

Script 500490

Code NSE

Script BAJAJAUTOEQ

Code Face Value of Rs 10 Share 52 week H/L

Rs 3375 / 2058

INSTITUTE OF BUSINESS MANAGEMENT & RESEARCH, AHMEDABAD.

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INDIAN CAPITAL MARKET

 Performance Graph of the Company 1200 1000 800 600 400 200 0 Apr-06 May- Jun-06 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 06

TIME Share Holding

%

Pattern Promoters

29.80

Institutional

25.92

 Share Holding Pattern

Investors Other Investor

17.36

General Public

26.92

 Financial Details

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Page 88

INDIAN CAPITAL MARKET NET YEAR

SALES

END

PAT

EPS

(Rs M)

(Rs)

11016

105

(Rs M) FY 07

74494

FY 08 E

92922

12380

122

EPS GROWTH (%) 6.5 16.2

• In 4QFY07, Bajaj Auto reported Net Profit of Rs 2.6b (3% increase YoY), largely driven by higher sales and higher other income.

• Sales grew by 28% YoY to Rs 16.5b led by better product mix. The realization per unit for Bajaj Auto at Rs 38,910 (up 5.2% YoY and 11.3% QoQ) was the highest in the last several quarters. However, higher other expenditure resulted in only a 10 bp increase QoQ in EBITDA margin.

• In FY07, the company grew its volumes by 42% in the motorcycles segment, resulting in a sales growth of 21% to Rs 59.3b. However, a significant fall in EBITDA margin and higher taxation led to a marginal 1% growth in PAT.

 Volume Growth: Riding on Motorcycles In 4QFY07, motorcycles continued to lead the growth. Overall volumes grew by 22% YoY, led by a 51% growth in motorcycle. Three wheelers witnessed the second consecutive quarter of de-growth, with

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INDIAN CAPITAL MARKET

sales dropping 11% YoY. Exports grew by 38% YoY, once again led by a 64% growth in motorcycles.

In FY07, motorcycles accounted for the entire gains in volumes with a 42% YoY growth. Despite strong gains in this segment, de-growth in the other segments led to a 20% increase in volumes for the year.

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INDIAN CAPITAL MARKET

SALES IN UNITS 4Q FY

4Q FY

GR

07

06

%

39610

26289

7

3

20418

49640

-59

4971

12039

-59

31084

-43

4391

8487

-48

19195

-41

42588

33305

7

9

53725

60437

FY 07

GR %

Total Sales Motorcycles Scooters geared Scooters ungeared Step Through Total Two Wheeler 3 Wheelers

Grand Total

479

39343 7

51

28

-11

22

14496 73 10276 2

16027 14 22198 5 18246 99

42

-42

24

-3

20

Exports Motorcycles Scooters 3 wheelers Total Exports

12395

41050

25054

64

2674

3157

-15

6995

-5

14814

14264

4

65747

0

42485

38

19692

20

54853 8

0

50

Source: Company

INSTITUTE OF BUSINESS MANAGEMENT & RESEARCH, AHMEDABAD.

Page 91

INDIAN CAPITAL MARKET

Motorcycles

In 4QFY07, motorcycles grew by 51% YoY at 396,000 units. Growth was driven by an over 100% YoY increase in sales of the 150cc and above 180cc category (which includes the Discover and Pulsar). In FY07, Bajaj Auto’s volumes have grown by 42% YoY in motorbikes, resulting in a market share gain of 380bp. Bajaj Auto ended the year with a market share of 27.1% in the motorcycle segment. The growth has been driven by pulsar 200cc and 220cc. Further growth will depend on the ramp up in volumes of the Pulsar, which currently accounts for only 8-10% of the executive level segment volumes. The executive level segment accounts for 55% of total sales; hence further growth will be determined by increased sales of this product.  Three Wheelers In 4QFY07, three wheelers de-grew by 11%. The company has attributed this slowdown in the passenger segment to non-availability of INSTITUTE OF BUSINESS MANAGEMENT & RESEARCH, AHMEDABAD.

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INDIAN CAPITAL MARKET

permits that are issued by transport authorities. In FY07, volumes dipped by 3% due to falling passenger segment sales, which constitutes 85% of 3 wheeler sales. Though the goods segment has grown at 30% YoY, Bajaj Auto is heavily dependent on the passenger segment.

MAHINDRA & MAHINDRA

 Company Description M&M is India’s leading UV and tractor manufacturer. Having successfully weathered the recent downturn in the tractor industry M&M is now well poised to benefit from the upturn. The company is now aspiring to be the leading Indian Utility Vehicle manufacturer providing high quality UVs at low costs.  Key Investment Arguments • The continued growth in the tractor sector will benefit M&M as it is the market leader. •

Increased focus by the government on rural spending in this budget will

benefit tractor INSTITUTE OF BUSINESS MANAGEMENT & RESEARCH, AHMEDABAD.

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INDIAN CAPITAL MARKET

manufacturers. • The company’s increased focus on exports and the well acceptance of the Scorpio, despite strong competition from MNC players.

 Key Investment Risks • Numerous launches in the UV segment has lead to an increase in the competitive scenario • Reports of increase in inventory pipeline in the current year are currently in line with increased sales, but need to be carefully watched.

 Recent Developments Mahindra has tied up with Renault for manufacturing the ‘Logan’ from FY07  Valuation and View • We expect M&M to see 11% volume growth in UVs over FY07-09 and a 12% volume growth in tractors. • M&M trades at a P/E of 10.6x and EV/EBITDA of 5x on standalone FY08 estimates. •

On a consolidated basis, the stock trades at 8.6x FY08. M&M remains the best bet in the sector, as valuations are at discount to its peers. We reiterate Buy with a target price of Rs 598.

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INDIAN CAPITAL MARKET

 Sector View •

We remain bullish on the macro growth picture for passenger cars in India

• We also believe that within passenger cars, UVs will increase their market share consistently over the next few years • Tractors are only in their first year of growth. We believe we are clearly in the early part of the cycle.

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INDIAN CAPITAL MARKET

SPECIFICATION OF THE COMPANY Registered Office

Gateway Building, Apollo Bunder Mumbai Maharashtra 400001

Web site

www.mahindraworld.com, www.mahindra.com

BSE Script Code

500520

NSE Script Code

M&MEQ

Face

Value

Share 52 week H/L

of

Rs 10 Rs 1001/ 494.60

 Performance Graph of the Company 600 500 400 300 200 100 0 Apr- May- Jun06 06 06

Jul06

Aug- Sep06 06

Oct06

Nov06

Dec06

Jan07

Feb- Mar07 07

. Time

 Share Holding Pattern INSTITUTE OF BUSINESS MANAGEMENT & RESEARCH, AHMEDABAD.

Page 96

INDIAN CAPITAL MARKET Share Holding

%

Pattern Promoters

23.98

Institutional

54.40

Investors Other Investor

11.17

General Public

10.45

 Financial Details

NET YEAR

SALES

END

PAT

EPS

(Rs M)

(Rs)

(Rs M)

EPS GROWTH (%)

FY 07

66606

4991

44.19

47.1

FY 08 E

76219

5876

48.1

16.6

Mahindra & Mahindra's (M&M) net sales, EBITDA and net profit grew 27%, 23% and 32% in 4QFY07 to Rs 19.1b, Rs 2.1b and Rs 1.5b respectively, in-line with our expectation. EBITDA margins were impacted because of higher other expenses. Margins declined 40bp YoY and 90bp QoQ to 11% in 4QFY07.

For FY07, M&M’s total income, EBITDA and net profit grew 45%, 42% and 52% to Rs 66.6b, Rs 7.7b and Rs 5b, respectively. All the subsidiaries INSTITUTE OF BUSINESS MANAGEMENT & RESEARCH, AHMEDABAD.

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INDIAN CAPITAL MARKET

of M&M showed good performance in FY07. Consolidated revenues, EBITDA and net profit grew 36%, 50% and 61% to Rs 95.7b, Rs 13.5b, and Rs 7.2b, respectively.

The business outlook for M&M remains positive. M&M, with its ruralcentric product line, will register a 12% YoY growth in tractor volumes over FY07-08E. We expect M&M to register 11% YoY volume growth in utility vehicles (UV) over FY07-08, following a strong 23% growth in FY07. Moreover, exports of UVs and tractors and rise in three wheeler sales will provide additional growth drivers to the company.

M&M’s net revenues increased 27% YoY to Rs 19.1b in 4QFY07 on the back of 19% volume growth. Tractors, UVs, and three-wheelers witnessed 12%, 17% and 35% YoY growth, respectively. LCVs saw a 6% decline over the same period. Net realization increased 5.5% on a YoY basis. SEGMENTAL BREAK UP OF REVENUES (Rs. in Mn)

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INDIAN CAPITAL MARKET Q4

Q4

%C

FY07

FY06

H

FY07

FY06

%C H

Automotive UV

32183

27474

17

1111

9142

38

9

22

LCVs

1910

2023

-6

7887

7003

13

Three Wh.

6951

5152

35

2294

1734

32

3

7

1419

1157

68

79

6000

4480

5

7

2019

1605

73

86

Total

41044

34649

18

Automo. Tractors

Total

15579

56623

13914

48563

12

17

23

34

26

Exports

3199

1761

82

8431

6375

32

Grand

59822

50324

19

2104

1669

26

04

61

Total Source: Company

 Strong Performance in FY07: M&M’s net revenues increased 34% YoY to Rs 66.6b in FY07 on the back of a 26% volume growth. Tractors, UVs, three wheelers and LCVs witnessed 32%, 23%, 13% and 32% YoY growth, respectively. Net realizations increased 9% YoY. EBITDA margin expanded 60bp to 11.6% driven by strong cost management, robust volume growth and savings in staff and other expenses. M&M witnessed margin expansion of 280bp over FY05-07 due to a 26% CAGR in volumes. We expect margins to expand by 60bp in FY08 on the back of a 15% volume growth.

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INDIAN CAPITAL MARKET

 Valuation and View Passenger Vehicles We expect the passenger vehicle demand to grow at a CAGR of 10% over FY07-09E driven by changing lifestyles, rapid growth in high-income earning households and vibrancy in the service sector. Lower vehicle prices resulting from cheaper finance rates, drop in excise duty and easy financing solutions will Continue to be the catalyst for demand growth. The UV segment may outperform the passenger vehicle segment on account of improvement in road infrastructure and low penetration. M&M is best positioned to derive benefit on account of overall ramp up in product offerings. Today, M&M provides the full utility vehicle platform and has offerings for all segments – taxi, semi urban, rural and urban. However, we believe the Innova, which was launched by Toyota, could put some pressure on Scorpio’s volumes in FY08. We expect M&M to register 11% YoY volume growth in utility vehicles (UV) over FY07-09, following a strong 23% growth in FY07.

TREND IN UTILITY VEHICLES FY0

FY0

FY07

FY08

5

6

Utility

688

930

1141

1284

Vehicles

58

43

84

57

Growth (%)

22.0

35.1

22.7

12.5

E

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Farm Equipment

The farm equipment segment (FES) is expected to continue its growth momentum in FY08. However, growth rates may slow down on account of higher base

effect.

Also,

sharp

correction

in

industry

inventories (from 65 days in FY04 to 35 days in FY07) will support growth going forward. We believe M&M, with its rural centric product line, will capitalize on these trends and register a 12% YoY growth in tractor volumes over FY07-09E.

TRACTORS DISPLAYING GROWTH FY0

FY0

FY0

5

6

7

470

495

653

08

54

90

Growth

-

5.4

32.0

(%)

19.0

Tractors

FY08E

74541

14.0

Source: Company

Entry in Cars with the Renault ‘Logan’ INSTITUTE OF BUSINESS MANAGEMENT & RESEARCH, AHMEDABAD.

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The Mahindra-Renault joint venture have launched Sedan Logan in India in the first half of 2007. The low-end sedan, which was launched in Europe in June 2004, sports a price tag of US$ 6,100 for the base model in Eastern Europe. The car is targeted to sell 1m units per year by 2010 in seven regions across Eastern and Central Europe, Russia, the Middle East, Latin America, North Africa and Asia. The Logan has launched in India with 50% localized components initially and have be marketed under the Mahindra-Renault badge. The companies USP would be “World class quality at an affordable price” – the car is expected to sell between Rs. 0.4- 0.5m which is comparable to its competitors – Maruti’s Esteem and Tata’s Indigo. The car is also expected to be available in the diesel version. Hence, Logan is expected to impress the market with its quality and affordability.

 Outlook The

business

outlook

for

M&M

remains

positive

given

the

government’s focus on the development of the rural economy. We remain positive on the demand scenario for tractors and UVs. We expect M&M, with its rural centric product line, to capitalize on these trends and register a 13% YoY growth in total volumes over FY07-09E.

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CONCLUSIO N

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CONCLUSION

•

After few years India would become the larger force in the world economy.

•

The growth of the Indian economy is becoming high, which leads to the higher returns in the capital market.

•

India’s constantly increasing growth is attracting the FII’s interest in the Indian markets.

•

There will be more and more capital flow from the developed countries in India through FIIs and FDI.

•

India has became very powerful in the automobile sector because of the high growth in the automobile sector.

•

From the suggestion the investors should be very cautious in terms of investing the money.

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FINDINGS

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✔ FINDINGS:  Workings and areas of Indian capital market  Workings, operations, dealings, etc. of a stock broking firm (SHAREKHAN LTD.)  Effects on Indian & Global economy due to various capital markets.  Based on fundamental analysis of auto mobile industry and particular company an investor can have an idea how to invest, when to invest & how much to invest.

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LIMITATIONS

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✔ LIMITATIONS:

 TIME CONTRAINT: As the period of the project was of only 45 days, the knowledge gained and information collected is limited to that extent. The report is made on the basis of information gathered from Rajkot branch of Sharekhan limited and not from H.O.  I have prepared this report only as a student of MBA. 

 Various data are collected from the secondary sources.

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SUGGESTION S

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✔ SUGGESTIONS: 1. Focus on Companies not on Stocks Many individual investors make the mistake of focusing on stocks and the stock market at the expense of focusing on the underlying companies. We know that sounds strange. But many people continue to ignore Mr. Buffet’s most important lesson: first analyze the business. The individual investor plays a dangerous game when he or she tries to divine whether a stock is going to go up or down next quarter. It’s tough to do well, and even tougher to do consistently. Our opinion is the market offers no magic bullet or money machine. If you are a buyer, the best you can do is finding a good company with strong fundamental prospects that is currently undervalued or otherwise under-recognized. This brings up an important point – there are many good companies, but not all are good investments. We’re looking for (1) good companies at (2) the right price. A good company can be too expensive; and a bad company is never cheap enough. The problem with investing in good companies at the right price is you need patience. If you are being told that picking stocks is easy, think again. However, with the right team in your corner, the market can be beaten and money can be made. INSTITUTE OF BUSINESS MANAGEMENT & RESEARCH, AHMEDABAD.

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2. Be Careful with the Power of the Market Even if investors bought a good company that has good potential, they may still have a dog on their hands. The market has an ability to paint entire sectors with the same brush. These prolonged “sector judgments” can be very costly to investors if they don’t account for them. Some reports suggest that selecting individual companies is barely important. In most cases, you are buying into a sector first and a company second. Context matters more than company particulars. For example, to have found Microsoft at its precious infancy, you would have had to first appreciate the enormous impact that the graphical user interface (GUI) was about to have on the world. (Remember when your computer was nothing more than a black screen and a command prompt?) When Microsoft was pushing Windows 3.0 over a decade ago, there were plenty of people in the industry who did not believe graphical user interfaces were going to amount to anything. If, at the time, you believed in the inevitable power of the GUI, Microsoft would have been a natural choice.

3. Know Your Time Limit Risk and return are really important, but your most important point might actually be this: I am investing for how long. Your time horizon will INSTITUTE OF BUSINESS MANAGEMENT & RESEARCH, AHMEDABAD.

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determine your style in a big way. Day traders have very short horizons they don’t use fundamental analysis (nor do they need to). Many individual investors, whether or not they admit it, get caught up in gaming the next quarter’s earning surprise, and are therefore investing for about three months.

Investing for the next quarterly surprise is a playable game, but investors should understand that they are competing against people who do it full time or who are very expert then them. Investor’s might be smarter, but they are trying to beat professionals who spend their whole week on a handful of stocks. They may move the market; they may know the people who move the market (for clarification institutions, not individuals, move the market). The short-term horizons are not bad, but an individual investor should realize they are playing a tough game. It may be wise to set a longer time frame and find good companies.

4. Avoid Big Mistakes and Losses At first glance, this is sound like common sense, but far too often investors simply do not practice the risk-mitigation tactic of avoiding big mistakes. Somewhat instinctively, investors seem to hunt for big game – defending against losses. But, if investors can manage to avoid losses, they will really do wonders for their average. So, the investors’ portfolio should very defensive so that losses avoided. INSTITUTE OF BUSINESS MANAGEMENT & RESEARCH, AHMEDABAD.

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5. Get the Proper Information Be very careful about daily news. Most of it is noise. So, be careful in daily news and avoid noises so, think that how does this impact the fundamental prospects of the business. So, don’t trust on that noise.

All public companies issue press releases that are understandably favorable; some of the news you get is repeat from the press release. Much of the daily commentary that pushes through the media onto your television or newspaper is highly trendy – commentators are finding patterns that do not really exist and turning tips into news flashes.

6. Recognize Your Limitations The talking heads on cable television can seem amazing as they travel from analyzing biotech to financials to transportation to technology. The televisions are not experts in all subjects. So, know your limit. Investors start to believe in fantasy when they think they really know their companies. All good investors want to know as much as possible about their investments, but a company is an onion you can never fully peel. Every piece of information is valuable and if investors have it, the odds are tilted a bit in their favor, enhancing the hedge against failure. But, investor making an educated investment based on incomplete information. INSTITUTE OF BUSINESS MANAGEMENT & RESEARCH, AHMEDABAD.

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So, since investor cannot know everything and much of the market commentary is suspect. Look elsewhere and trust real experts. See what true industry experts say, what industry associations say, what customers say, what competitors say and so on.

7. Be Different It has often been said that in order to make money investing investors need to be (1) correct and (2) contrary. Investors need to be correct no wonder some people think the market is efficient. In order to be contrary, investors have to embrace their uniqueness and play on a different field. This is not to say ignore fundamentals. Investors have to respect the foundation and the basic tools of analysis, but on top of that foundation, investors are better off approaching the market circumspectly. In other words, investors need to be somewhat suspicious of it. Anyone serious about research subscribes to industry journals. If investor interested in technology, read technology periodicals. If investor likes science, read up on science. This strategy means investor let the market turn on its endless recirculation of gossip while investor locate

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expertise that will help them find the growing companies worthy of their money.

8. Investor should invest in Bajaj Auto Company After done this fundamental analysis we can say that Bajaj Auto Company is better for investment compare to Mahindra & Mahindra. Because Bajaj Auto has different product portfolio and the profit of the company is also better than Mahindra & Mahindra.

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GLOSSARY

GLOSSARY



LIST of ABBREVIATIONS:

ADR

American Depository Receipts

BSE

Bombay Stock Exchange

CDSL

Central Depositories Services Ltd.

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CM

Capital Market

Co.

Company

DCA

Department of Company Affairs

DEA

Department of Economic Affairs

DP

Depository Participant

FDI

Foreign Direct Investment

FI

Financial Institution

FII

Foreign Institutional Investors

GDR

Global Depository Receipts

NSCCL

National Securities Clearing Corporation Limited

NSDL

National Securities Depository Ltd.

NSE

National Stock Exchange

OCB

Overseas Corporate Bodies

RBI

Reserve Bank of India

SEBI

Securities and Exchange Board of India

T+2

Second days from the trading day

T+3

Third days from the trading day

T+5

Fifth days from the trading day

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UTI

Unit Trust of India

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BIBLIOGRAP HY

BIBLIOGRAPHY  REFERECE BOOKS

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Donald R Cooper & Pamela S Schindler, “Business Research Methods”, Eighth Edition (2003), Tata McGraw-Hill, New York.

•

Gordon & Natrajan, “Financial Markets And Services ” Second Revised Edition Reprint (2005), Himalaya Publishing House.

•

Punithavathy Pandian, “Security Analysis & Portfolio Management” Edition 2007, Vikas Publishing Housing Pvt. Ltd.

• SHAREKHAN VALUE LINE.

 WEB SITES ➢

www.nseindia.com

➢

www.bseindia.com

➢

www.indinfoline.com

➢

www.moneycontrol.com

➢

www.business-standard.com

➢

www.rbi.org

➢

www.sebi.org

➢ www.sharekhan.com

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Disclaimer

This report is for the personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. I am not soliciting any action based upon it. This report is not for public distribution and has been furnished to you solely for department information and should not be reproduced or redistributed.

The report is based upon information that we consider reliable, but I do not represent that it is accurate or complete, and it should not be relied upon such. We shall not be in any way responsible for any loss or damage that may arise to any person from any in advertent error in the information contained in this report.

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