A PROJECT REPORT ON EQUITY RESEARCH (FUNDAMENTAL ANALYSIS) FOR INDIA INFOLINE LTD. SUBMITTED TO UNIVERSITY OF PUNE IN PARTIAL FULFILLMENT OF 2 YEARS FULL TIME COURSE MASTERS IN BUSINESS ADMINISTRATION (M.B.A.) SUBMITTED BY CHOTHANI HITESH HASMUKH ( BATCH - 2006-08 ) BRACT’s VISHWAKARMA INSTITUTE OF MANAGEMENT, KODHAWA PUNE- 411014. 1
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A
PROJECT REPORT
ON
EQUITY RESEARCH (FUNDAMENTAL ANALYSIS)
FORINDIA INFOLINE LTD.
SUBMITTED TO UNIVERSITY OF PUNE IN PARTIAL FULFILLMENT OF 2 YEARS FULL TIME COURSE
MASTERS IN BUSINESS ADMINISTRATION (M.B.A.)
SUBMITTED BYCHOTHANI HITESH HASMUKH
( BATCH - 2006-08 )
BRACT’sVISHWAKARMA INSTITUTE OF MANAGEMENT,
KODHAWA PUNE- 411014.
1
ACKNOWLEDGEMENT
This project bears imprint of all those who have directly or
indirectly helped and extended their kind support in completing this
project.
At the time of making this report I express my sincere gratitude to
all of them.
I must first express my gratitude to Ms. Reena Singh, Branch
Manager (Sohrab Hall Branch) and the staff members for having
accorded me the permission to undertake a project in India Infoline Ltd.
I also must show my deepest gratitude to Director Dr. Sharad
Joshi and Prof. Smita Sovani for their valuable suggestions, guidance
and advice in bringing out this project.
- Chothani Hitesh H.
2
INDEX
Sr. No. Title Page No.
1. EXECUTIVE SUMMARY 1
2. COMPANY PROFILE 4
3. OBJECTIVE OF THE STUDY 9
4. THEREOTICAL BACKGROUND 10
5. RESEARCH METHODOLOGY 18
6. DATA ANAYLSIS/FINDINGS 20
7. LIMITATIONS 55
8. CONCLUSION 57
9. RECOMMANDATION 60
10. BIBLIOGRAPHY 62
3
INTRODUCTION
The stock markets are the most volatile markets and are difficult to understand
as the weather. Though this does not mean that the markets cannot be predicted but
it only means that trends may change without warning, as with weather.
The stock markets are characterized by almost all factors, again starting right
from weather and ending at the political environment. Effects of one market also
causes a spillover into the other and an external cause in one market can lead to the
reaction in another market. For instance, it’s been proved that a delayed monsoon in
India will create the problems of flooding in the European countries, effecting
adversely economies of both the regions.
The pulse of the market also depends upon timely exit and entry. For arriving
at a correct conclusion reasonable data is required to understand the mechanics of
the stock and the industry – vis-à-vis global and local in which the company
operates. While a practical long-term view will help reduce risks, marrying the stock
on the other hand may totally increase risks.
By going through the Industry Reports, Financials the investor can arm
himself with reasonable information about the stocks, which are being tracked by
the investor. However, for consistent monitoring of stocks, it is imperative that the
investor has limited exposure to the stocks, which are being capable of being tracked
by him – a too big a portfolio will divert attention and ultimately harm investor
interests.
In the present project an attempt is made to study the importance of fundamental
analysis for investors.
Shares: -
4
The companies Act 1956 defines Shares as “a share in the capital of a company and
includes stock except where distinction between stock and share is expressed or
implied. A share is regarded as property, which can be bought and sold like any other
property. It also consists other rights given by Articles of Association of company.
Equity or ordinary shares: -
These are those shares, which do not enjoy any special rights in respect of payment of
dividend or repayment of capital. The return of capital to equity shareholders is not
guaranteed. Also when the company is wound up, capital of equity shareholders is
lastly paid, only after all other claims have been paid in full. That is why equity is also
called as “The Risk Bearing or Venture Capital.”
There are two sources of return on equity shares: -
1. Dividend : -When companies earn sufficient profit, then Board of Directors
declares for all shares.
2. Capital Gain : -Which arises from an increase in the market price of shares,
which is generally associated with growth in per share earning.
Benefits of Investments in Equity shares: -
1. You can earn good rate of dividend or can make better profit on market
fluctuation.
2. Bonus issue: - These are given as free gift to existing shareholders either fully
or partly paid up out of accumulated profits.
3. Existing shareholders can get “Right issue” in case of further issue of capital
by company.
4. Equity shareholders have “Right to vote” in annual general meeting and other
rights like call meeting, winding up of the company.
5. Shareholders get free copy of Annual Report in which details of all business
conducted in last year is mentioned.
5
6. A share is “Transferable Property”. It can be transferred or transmitted by
shareholder to any other person.
7. Tax Exemption: -As per Income Tax Act, Dividend is not taxable in the
hands of shareholders similarly Long Term Capital Gain on shares is
exempted up to March 2007.
8. Liquidity: -Because of large market for share investor can convert his
investments into liquid money easily.
What is Fundamental analysis?
Fundamental analysis is the examination of the underlying forces that affect
the well being of the economy, industry groups, and companies. As with most
analysis, the goal is to derive a forecast and profit from future price movements. At
the company level, fundamental analysis may involve examination of financial data,
management, business concept and competition. At the industry level, there might be
an examination of supply and demand forces for the products offered. For the national
economy, fundamental analysis might focus on economic data to assess the present
and future growth of the economy. To forecast future stock prices, fundamental
analysis combines economic, industry, and company analysis to derive a stock's
current fair value and forecast future value. If fair value is not equal to the current
stock price, fundamental analysts believe that the stock is either over or under valued
and the market price will ultimately gravitate towards fair value. Fundamentalists do
not heed the advice of the random walkers and believe that markets are weak-form
efficient. By believing that prices do not accurately reflect all available information,
fundamental analysts look to capitalize on perceived price discrepancies.
Fundamental analysis is a method used to determine the value of a stock by
analyzing the financial data that is 'fundamental' to the company. That means that
fundamental analysis takes into consideration only those variables that are directly
related to the company itself, such as its earnings, its dividends, and its sales.
Fundamental analysis does not look at the overall state of the market nor does it
include behavioral variables in its methodology. It focuses exclusively on the
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company's business in order to determine whether or not the stock should be bought
or sold.
7
EXECUTIVE SUMMARY
8
In India many traditional people are very risk averse. They are not aware of
the investment opportunities in the stock market. They consider stock market as a
game of gambling. But the original scenario is quite different. There is no doubt that
there are speculators who try to hike the price of a stock artificially. Investing in
equities involves high risk and the return on it totally depends on the companies
performance. But investing in the right stock at the right price and holding for a
longer time horizon would surely be a better investment.
The strategy of selecting stocks that trade for less than their intrinsic value is
called value investing. Value investors actively seek stocks of companies that they
believe the market has undervalued. They believe the market overreacts to good and
bad news, causing stock price movements that do not correspond with the company's
long-term fundamentals. The result is an opportunity for value investors to profit by
buying when the price is deflated. The very definition of value investing is subjective.
Some value investors only look at present assets/earnings and don't place any value on
future growth. Other value investors base strategies completely around the estimation
of future growth and cash flows. Despite the different methodologies, it all comes
back to trying to buy something for less than its worth. The purpose behind this
project was to learn the mannerisms of the stock market trading and analyzing a stock
for a good investment opportunity.
The reason behind choosing this project is that it provides hands on experience
with what goes on in the stock market on a day to day basis. The field of equity
research is very vast and one has to look into various aspects of the functioning of the
company to get to any conclusion about the possible performance of the company in
the market. Investors like warren buffet made a fortune out of investments in the stock
market, which is quiet impossible without proper research about the companies. The
field of equity research is full of challenges.
9
The project is done with India Infoline Securities Limited a very well known
company in the field of stock broking and capital market services sector. This project
gave me a chance to get valuable insights from a hoard of vastly experienced people
in this field and to get various approaches each one adopts to evaluate various
companies. The duration of the project was two months. These two months were not
only limited to learning and devoting time towards equity research but it also
provided an insight on what various services such broking houses provide and what
efforts are required to manage such organizations.
10
COMPANY PROFILE
11
INDIA INFOLINE LTD
India Infoline limited is listed on both the leading stock exchanges in India,
i.e. The Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). It is
engaged in the business of Equities broking, Wealth Advisory Services and Portfolio
Management Services. It offers broking services in the Cash and Derivatives
segments of the NSE as well as the Cash segment of the BSE. It is registered with the
National Securities Depository Ltd. (NSDL) as well as Central Depository Services
Ltd. (CDSL) as a depository participant, providing a one-stop solution for client
trading in the equities market. A SEBI authorized Portfolio Manager; it offers
Portfolio Management Services to clients.
COMPANY VISION:
The companies Vision is to be “the most respected company in the financial
services space”.
The box below elaborates how the company proposes to attain the vision of being the
most respected company in the space.
SHAREHOLDERS
Growth at above industry rate
with derisking
High ROCE, ROE
GENERAL PUBLIC
Corporate Governance
Transparency
CUSTOMERS
Cutting edge technology
High service standards
EMPLOYEES
Skill development by investments
in training
Empowerment and conducive
work environment
12
SLOGAN:
“IT’S ALL ABOUT MONEY, HONEY!”
PRODUCT AND SERVICES:
We are a one-stop financial services shop, most respected for quality of its advice,
personalised service and cutting-edge technology.
Equities Broking:
India Infoline provided the prospect of researched investing to its clients, which
was hitherto restricted only to the institutions. Research for the retail investor did not
exist prior to India Infoline. India Infoline leveraged technology to bring the
convenience of trading to the investor’s location of preference (residence or office)
through computerized access. India Infoline made it possible for clients to view
transaction costs and ledger updates in real time.
Portfolio Management Services:
Our Portfolio Management Service is a product wherein an equity investment
portfolio is created to suit the investment objectives of a client. We at Indiainfoline
invest your resources into stocks from different sectors, depending on your risk-return
profile. This service is particularly advisable for investors who cannot afford to give
time or don't have that expertise for day-to-day management of their equity portfolio.
Research:
Sound investment decisions depend upon reliable fundamental data and stock
selection techniques. India Infoline Equity Research is proud of its reputation for, and
we want you to find the facts that you need. Equity investment professionals routinely
use our research and models as integral tools in their work. They choose Ford Equity
Research when they can clear your doubts.
13
Commodities:
India Infoline’s extension into commodities trading reconciles its strategic intent
to emerge as a one-stop solutions financial intermediary. Its experience in securities
broking has empowered it with requisite skills and technologies. The Company’s
commodities business provides a contra-cyclical alternative to equities broking. The
Company was among the first to offer the facility of commodities trading in India’s
young commodities market (the MCX commenced operations only in 2003). Average
monthly turnover on the commodity exchanges increased from Rs 0.34 bn to Rs 20.02
bn. The commodities market has several products with different and non-correlated
cycles. On the whole, the business is fairly insulated against cyclical gyrations in the
business.
Insurance:
An entry into this segment helped complete the client’s product basket;
concurrently, it graduated the Company into a one-stop retail financial solutions
provider. To ensure maximum reach to customers across India, we have employed a
multi pronged approach and reach out to customers via our Network, Direct and
Affiliate channels. Following the opening of the sector in 1999-2000, a number of
private sector insurance service providers commenced operations aggressively and
helped grow the market.
The Company’s entry into the insurance sector derisked the Company from a
predominant dependence on broking and equity-linked revenues. The annuity based
income generated from insurance intermediation result in solid core revenues across
the tenure of the policy.
Invest In Mutual Fund
India Infoline offers you a host of mutual fund choices under one roof, backed by
in-depth research and advice from research house and tools configured as investor
friendly.
14
Wealth Management Services:
Imagine a financial firm with the heart and soul of a two-person organization. A
world-leading wealth management company that sits down with you to understand
your needs and goals. We offer you a dedicated group for giving you the most
personal attention at every level.
Mortgages:
During the year under review, Indiainfoline acquired a 75% stake in Moneytree
Consultancy Services to mark its foray into the business of mortgages and other loan
products distribution. The business is still in the investing phase and at the time of the
acquisition was present only in the cities of Mumbai and Pune. The Company brings
on board expertise in the loans business coupled with existing relationships across a
number of principals in the mortgage and personal loans businesses. Indiainfoline
now has plans to roll the business out across its pan-Indian network to provide it with
Total Liabilities 460,071.94 494,160.62 566,806.13ASSETSCash & Balance with RBI
16,810.33 21,652.70 29,076.43
Balance with Banks, Money at Call
22,511.77 22,907.30 22,892.26
Advances 202,374.45 261,800.94 337,336.49Investments 197,097.91 162,534.24 149,148.88Net Block 2,576.42 2,673.11 2,676.92Capital Work in Progress
121.27 79.82 141.95
Other Assets 18,579.79 22,512.51 25,533.20Total Assets 460,071.94 494,160.62 566,806.13
36
PROFIT AND LOSS ACCOUNT OF STATE BANK OF INDIA FOR THE LAST THREE YEARS.
Rs in Crore MARCH 2005 MARCH 2006 MARCH 2007INCOMEInterest Earned 32,428.00 35,979.57 39,491.03Other Income 7,121.73 7,528.16 7,498.94Total Income 39,549.73 43,507.73 46,989.97EXPENDITUREInterest expended 18,483.37 20,390.45 23,436.82Employee Cost 6,907.35 8,123.05 7,932.58Selling and Admin Expenses
Total Liabilities 95,004.42 112,286.22 141,667.01ASSETSCash & Balance with RBI
3,904.73 5,588.41 7,196.89
Balance with Banks, Money at Call
3,621.52 5,857.57 10,208.65
Advances 55,528.89 65,173.75 84,935.89Investments 28,686.32 31,781.75 35,492.76Net Block 791.58 799.29 777.89Capital Work in Progress
22.59 10.68 11.41
Other Assets 2,448.79 3,074.77 3,043.52Total Assets 95,004.42 112,286.22 141,667.01
43
PROFIT AND LOSS ACCOUNT OF BANK OF INDIA FOR THE LAST THREE YEARS.
Rs in Crore MARCH 2005 MARCH 2006 MARCH 2007INCOMEInterest Earned 6,031.53 7,028.70 9,180.33Other Income 1,155.79 1,184.38 1,562.95Total Income 7,187.32 8,213.08 10,743.28EXPENDITUREInterest expended 3,794.64 4,396.72 5,739.86Employee Cost 1,263.21 1,328.13 1,614.00Selling and Admin Expenses
Total Expenditure 6,847.27 7,511.64 9,620.11Net Profit for the Year
340.05 701.44 1,123.17
Profit brought forward
0.00 220.00 541.76
Total Profit 340.05 921.44 1,664.93Equity Dividend (%) 20.00 30.00 35.00No of Share 488140000 488140000 488140000
44
NET PROFIT GROWTH
340.05
921.44
1664.93
0
500
1000
1500
2000
Net Profit (Rs in Crores)
2005 2006 2007
Year
BOI
STOCK PRICE
BOI Price
103.65 103.5122.9 126.9 133.45
100.3
162
207.4
168
231.7
0
50
100
150
200
250
31/03
/05
30/06
/05
30/09
/05
31/12
/05
31/03
/06
30/06
/06
30/09
/06
31/12
/06
31/03
/07
31/06
/07
Date
Pri
ce
45
MARKET PRICE OF THE SHARE AS ON 31 ST MARCH:
(in Rs ) MARCH 2005 MARCH 2006 MARCH 2007Market price per share
103.65 133.45 167.8
KEY FINANCIAL RATIOS:
Particulars MARCH 2005 MARCH 2006 MARCH 2007ROE (%) 7.62 18.49 28.24EPS (Rs) 6.96 18.89 34.10Dividend Payout Ratio 28.73 15.88 10.26P/E Ratio 14.89 7.07 4.92Book Value Per Share (Rs)
91.47 102.09 120.77
INTERPRETATION:
Percentage wise the net profit of the bank is very favorable. The growth in
return on equity is also showing that the bank is earning sufficiently for the
shareholders. The growing profits are leading towards the growth of the EPS. The
price trend also shows that the share is not much volatile and also shows an upward
trend. Holders for long term are benefited from the capital appreciation.
The P/E ratio showing a down trend may be because of the price not
increasing to the proportion of the profit. A lower P/E ratio is considered one of the
most important criteria for investment purpose. The growing book value indicates that
the bank has huge reserves and can be a potential for bonus.
46
PUNJAB NATIONAL BANK
BSE: 532461 NSE: PNB
INDUSTRY: Banking PSU
47
BANK PROFILE:
Established in 1895 at Lahore, undivided India, Punjab National Bank (PNB)
has the distinction of being the first Indian bank to have been started solely with
Indian capital.The bank was nationalised in July 1969 along with 13 other banks.
From its modest beginning, the bank has grown in size and stature to become a front-
line banking institution in India at present.
Punjab National Bank is the fourth largest banking entity in the country (in
terms of asset size) with 4.2% share of the total credit disbursals at the end of FY07.
Given its geographic concentration in the northern regions, the bank was a laggard in
terms of credit growth until FY04, which led to it barely sustaining its share of non-
food credit at 4.5%. However, not able to keep up with its private sector peers in
incremental credit disbursements and low retail credit exposure resulted in a loss of
market share (from 4.5% in FY04 to 4% in FY06). Nevertheless, an operating
overhaul in terms of asset quality and retention of high margins has helped the bank
position itself favourably amongst its peers and marginally enhance its share in FY07.
Adequate capital, high NPA coverage and interest rate insulation pegs the bank
amongst the frontrunners in the public sector banking space.
A professionally managed bank with a successful track record of over 110
years. Largest branch network in India – 4525 offices including 432 Extension
counters spread throughout the country. Strategic business area covers the large Indo
– Gangetic belt and the metropolitan centers. Rupee drawing arrangements with M/s
UAE Exchange Centre, UAE, M/s Al Fardan Exchange Co. Doha, Qatar,M/s
Bahrain Exchange Co, Kuwait, M/s Bahrain Finance Co, Bahrain,M/s Thomas Cook
Al Rostamani Exchange Co. Dubai,UAE, and M/s Musandam Exchange, Ruwi,
Sultanate of Oman.
48
Share Holding Pattern
Indian Promoters 57.8%Foreign collaborators 0.0%Indian inst/Mut Fund 16.2%FIIs 20.1%ADR/GDR 0.0%Free float 6.0%Shareholders 240,135
Market related data as on 18/06/07
Market Capital 15434 (Rs Crore)
Face ValueRs. 10
52 Wks High/Low585/300
Market Price490
49
FINANCIAL ANALYSIS
BALANCE SHEET OF PUNJAB NATIONAL BANK FOR THE LAST THREE YEARS.
(Rs in Crore) MARCH 2005 MARCH 2006 MARCH 2007Capital and LiabilitiesEquity Share Capital
Total Liabilities 126,268.72 145,349.79 162,529.13ASSETSCash & Balance with RBI
9,460.20 23,394.55 12,372.03
Balance with Banks, Money at Call
1,628.83 1,397.14 3,273.49
Advances 60,412.75 74,627.37 96,596.52Investments 50,672.83 41,055.31 45,189.84Net Block 965.23 1,030.23 1,009.82Capital Work in Progress
0.00 0.00 0.00
Other Assets 3,128.88 3,845.19 4,087.43Total Assets 126,268.72 145,349.79 162,529.13
50
PROFIT AND LOSS ACCOUNT OF PUNJAB NATIONAL BANK FOR THE LAST THREE YEARS.
Rs in Crore MARCH 2005 MARCH 2006 MARCH 2007INCOMEInterest Earned 8,459.85 9,584.15 11,537.48Other Income 2,186.36 1,901.00 1,932.71Total Income 10,646.21 11,485.15 13,470.19EXPENDITUREInterest expended 4,453.11 4,917.39 6,022.91Employee Cost 2,121.23 2,114.98 2,352.45Selling and Admin Expenses
(in Rs ) MARCH 2005 MARCH 2006 MARCH 2007Market price per share
393.35 470.4 474.4
KEY FINANCIAL RATIOS:
MARCH 2005 MARCH 2006 MARCH 2007ROE (%) 17.28 15.35 16.40EPS (Rs) 44.72 45.64 54.24Dividend Payout Ratio 13.42 19.72 18.44Price Earning Ratio 8.80 10.30 8.30Book Value Per Share (Rs)
258.84 297.40 330.97
INTERPRETATION:
The trends of profits are leading the EPS; i. e. the profit has shown a small
growth in the year 2005 – 06 and shows an increase in the year 2006 – 07, similarly
the EPS follows the trend. The dividend payout ratio is increasing and the share
holders are enjoying the current inflow of cash.
The P/E ratio is volatile because of the price volatility. The company with the
help of the growing profit is retaining the profit which in turn is supporting to the
book value of the share.
The investor must look over the return on equity and the deviations of the
share price that is depicted in the price graph. Investor with low risk profile must be
careful if they have this stock in their portfolio.
53
BANK OF BARODA
BSE: 532134 NSE: BANKBARODA
INDUSTRY: Banking PSU
54
BANK PROFILE:
Bank of Baroda is the fifth largest banking entity in the country (in terms of
asset size) with 4% share of the total credit disbursals at the end of FY06. Given its
geographic concentration in the northern regions, the bank was a laggard in terms of
credit growth in the initial years of this decade, which resulted in a loss of market
share. However, brand and operating overhaul led to accelerated growth in the last
two fiscals, thus helping the bank stabilise its share and position itself favourably
amongst its peers.
Bank of Baroda (BSE: 532134) is a bank in India established on July 20, 1908
by Maharaja of Baroda Sir Sayajirao Gaekwad III in the princely state of Baroda, in
Gujarat. The bank, along with 13 other major commercial banks of India, was
nationalisd on 19th July, 1969, by the Government of India.
Bank of Baroda is the fifth largest bank in India. It has total assets in excess of
Rs. 1.78 lakh crores, or Rs. 1,780 bn., a network of over 2800 branches and offices,
and about 700 ATMs. Bank of Baroda offers a wide range of banking products and
financial services to corporate and retail customers through a variety of delivery
channels and through its specialised subsidiaries and affiliates in the areas of
investment banking, credit cards and asset management. In its international expansion
Bank of Baroda followed the Indian diaspora, and especially that of the Gujaratis. The
bank has received Reserve Bank of India approval to open offices in Australia, the
Maldives, and New Zealand. It is seeking approval for operatons in Bahrain,
Johannesburg, Kuwait, Mozambique, and Qatar, and is seeking to establish a joint
venture or subsidiary in Ghana and Trinidad and Tobago.
Total Liabilities 94,664.23 113,392.53 143,146.18ASSETSCash & Balance with RBI
2,712.32 3,333.43 6,413.52
Balance with Banks, Money at Call
6,541.88 10,121.21 11,866.85
Advances 43,400.38 59,911.78 83,620.87Investments 37,074.44 35,114.22 34,943.63Net Block 860.80 920.73 1,088.81Capital Work in Progress
0.00 0.00 0.00
Other Assets 4,074.41 3,991.16 5,212.50Total Assets 94,664.23 113,392.53 143,146.18
57
PROFIT AND LOSS ACCOUNT OF BANK OF BARODA FOR THE LAST THREE YEARS.
Rs in Crore MARCH 2005 MARCH 2006 MARCH 2007INCOMEInterest Earned 6,431.42 7,049.95 9,212.64Other Income 1,344.39 1,394.05 1,434.03Total Income 7,775.81 8,444.00 10,646.67EXPENDITUREInterest expended 3,452.15 3,875.09 5,426.56Employee Cost 1,381.05 1,523.79 1,644.07Selling and Admin Expenses
(in Rs ) MARCH 2005 MARCH 2006 MARCH 2007Market price per share
217.75 230.15 215.05
KEY FINANCIAL RATIOS:
MARCH 2005 MARCH 2006 MARCH 2007ROE (%) 12.02 10.54 11.87EPS (Rs) 25.59 22.62 28.03Dividend Payout Ratio 19.54 22.10 21.37Price Earning Ratio 8.51 10.17 7.67Book Value Per Share (Rs)
212.75 214.60 236.64
INTERPRETATION:
The profit for the bank has increase but the return on equity is showing a
downward trend in the earlier year and then again rising. The issue of additional
equity share may be the reason for such a trend. The bank is also giving good
dividend to the shareholder.
The volatility of the share price can be the reason for displaying such a P/E
trend. The dividend payout ratio shows a minor downtrend. The share is quit volatile.
We can say this because the price has almost not shown any movement over the