SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT OF FIVE MAJOR PLAYERS IN BANKING SECTOR MAJOR PROJECT REPORT Submitted by AZHAR K.P UNDER THE GUIDANCE OF Mr.BIJU M.K. Sr. Lecturer In partial fulfillment of the requirement for the Degree of MASTER OF BUSINESS ADMINISTRATION University of Calicut DEPARTMENT OF MANAGEMENT SCIENCE MES COLLEGE OF ENGINEERING (Affiliated to University of Calicut) KUTTIPURAM, KERALA, INDIA
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SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT OF FIVE MAJOR PLAYERS IN BANKING SECTOR
MAJOR PROJECT REPORT
Submitted by
AZHAR K.P
UNDER THE GUIDANCE OF
Mr.BIJU M.K.
Sr. Lecturer
In partial fulfillment
of the requirement for the Degree of
MASTER OF BUSINESS ADMINISTRATION
University of Calicut
DEPARTMENT OF MANAGEMENT SCIENCEMES COLLEGE OF ENGINEERING
(Affiliated to University of Calicut)KUTTIPURAM, KERALA, INDIA
2010
Project Report 2010 Cochin Stock Exchange
DEPARTMENT OF MANAGEMENT SCIENCE
MES COLLEGE OF ENGINEERING
KUTTIPPURAM, KERALA
PIN: 679573
(AFFILIATED TO UNIVERSITY OF CALICUT)
CERTIFICATE.
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Department of Management Science [2] MES College of Engineering
Project Report 2010 Cochin Stock Exchange
DECLARATION
I hereby declare that this project report titled “Security analysis and Portfolio
Management of Five major players in Banking Sector” is the original work
done by me under the guidance of BIJU M.K, faculty, MES College of
Engineering, Kuttipuram and submitted to the Calicut University in the partial
fulfilment of the requirement of the Master of Business administration degree.
I further declare that this report has not been submitted earlier either to this
institution or any other institution for the fulfilment of the requirement for any
course of studies. I also declare that no chapter of this manuscript in whole or
in part is lifted and incorporated in this report from any earlier work done by
others or me.
Date:
Place: Kuttipuram Azhar
K.P
Department of Management Science [3] MES College of Engineering
Project Report 2010 Cochin Stock Exchange
ACKNOWLEDGEMENT
“Behind every successful effort, there lies a contribution from numerous sources
irrespective of their magnitude. My project is no exception and I take this opportunity to
express my sincere thanks to those helping hands wholeheartedly”.
First and foremost I thank God for his almighty support and mercy drop of blessings upon
me to complete my project successfully.
The satisfaction that accompanying the successful completion of the task would be
incomplete without mentioning the people who made it possible with the constant guidance
and encouragement all through the period of study.
I am indebted to my Project Guide Mr. Biju M.K (Faculty Guide), and all other faculties
and staff members of Department Of Management science for their valuable suggestions
and sincere co-operation rendered to me during the academic period.
I am profoundly thankful to Shri. Thomas George M.A GDIM (UK) PhD (External
Guide), Cochin Stock Exchange who was generous with time and effort to explain the
theoretical and practical aspects of Security Analysis and Portfolio Management.
I wish to pay my gratitude to my parents without whose support and inspiration, this
project would have remained a dream. Last but not least; I take this opportunity to thank all
my friends and others who have helped me directly or indirectly for the successful
completion of the project.
AZHAR K.P
Department of Management Science [4] MES College of Engineering
Project Report 2010 Cochin Stock Exchange
TABLE OF CONTENTS
SERIAL NO
LIST OF CONTENTS PAGE NO
List of Tables
List of Charts
1 Chapter I – INTRODUCTION
Introduction to Study 2-3
Objective of the Study 3-4
Statement of the Problem 4
Significance of the Study 4
Scope of the Study 5
2 Chapter II Industry Profile 6-21
3 Chapter III Company Profile 22-27
4 Chapter IV Literature Review 28-31
5 Chapter V Research Methodology 32-43
6 Chapter VI Analysis and Interpretation 44-103
7 Chapter VII Findings, Suggestions and Conclusion 104-110
8 Chapter VIII Bibliography 111-112
9 Chapter IX Annexure 113-123
Department of Management Science [5] MES College of Engineering
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EXECUTIVE SUMMARY
This study was carried out at Cochin Stock Exchange during the month
of May 2010. The report is an outcome of a study undertaken in CSE on the
topic “Security Analysis and Portfolio Management of five major players in
Banking Sector”.
Out of the ten companies, which were taken on the basis of market
capitalization from the BSE list and ranked accordingly, five were selected to
conduct a detail study. The banks selected for the study are State Bank of
India, ICICI Bank, Punjab National Bank, AXIS Bank and HDFC Bank.
Indian banking companies is analyzed by taking up fundamental
analysis and technical analysis along with creating different mix of portfolio
within the selected securities. Fundamental analysis involves finding the
intrinsic value of the selected banking shares. It is also done to indentify the
misprice share there by assisting the prospective investor in making the buy or
sell decision.
Technical analysis was conducted to find the movement of stock price
over the period of time. Mathematical indicators used for Technical Analysis
are Exponential Moving Average, ROC and MACD.
It is rare to find investor investing their entire savings in a single
security. Instead, they tend to invest in a group of securities called portfolio.
Creation of portfolio helps to reduce risk without sacrificing returns. Portfolio
was constructed on the basis of Equal Weight, PE Ratio and Market
Capitalization. To find the optimal Portfolio Sharpe and Treynor Ratio were
used to evaluate the Portfolio.
Department of Management Science [6] MES College of Engineering
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All the data collected are secondary. The data were absorbed from
websites, magazines and books. For conducting Fundamental Analysis five
years data were taken. Technical analysis was conducted with eighteen
months of data. Portfolio was constructed on the basis of five years of data.
Fundamental Analysis revealed that all the banks have shown
consistently good performance and the performance is improving every year.
Therefore the performances of all these banks are likely to be much better in
the years to come. After analysing the Mathematical indicators it was found
that most of the companies are in bullish trend. After evaluating the three
portfolios which were constructed with the different proportions of the five
selected securities and measuring performance based on Sharpe and Treynor
Ratios, it has been found that, the portfolio based on P/E Ratio ranks highest.
From the overall study it is found that Banking Industry is booming in
India and it is the best time to invest in banking industry. It is viable for
investors to invest in the sector on a long term basis.
Department of Management Science [7] MES College of Engineering
Project Report 2010 Cochin Stock Exchange
CHAPTER I
INTRODUCTION
Department of Management Science [8] MES College of Engineering
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INTRODUCTION TO THE STUDY
The banking scenario has witnessed significant development in the
recent years with the entry of private banks and their focus on retail banking and
convergence of services. The ongoing reforms process, growing use of technology,
increased competition and product innovation has all put the banking sector on a high
growth trajectory. Advancement in communication and information technology has
facilitated growth in internet banking, ATM network, and Electronic transfer of funds and
quick dissemination of information. Structural reforms in the banking sector have improved
the health of the banking sector. The forms recently introduced include the enactment of the
Securitization Act to step up loan recoveries, establishment of asset reconstruction
companies, initiatives on improving recoveries from Non-performing Assets(NP As)and
change in the basis of income recognition has raised transparency and efficiency in the
banking system. Spurt in treasury income and improvement in loan recoveries has helped
Indian Banks to record better profitability.
In the year 2002, return on assets in Indian banking was higher
compared to many emerging economies and the Moody's Bank Financial strength Index
(2002) placed India at 27.5, which is much better than 16.7 of Korea, 15.8 of Thailand and
12.5 of Japan. Similar to experience in other rapidly growing countries, India is making
sizable gains in expanding into consumer credit with tightening of credit administration
procedures. Major policy actions that led to sharp fall in the interest rates enabled banks to
post significant rise in operational profits. For instance trading profits of the public sector
banks shot up by Rs.3749 crores taking their net profits to an all time high of Rs.8301
crores in FY02.The enactment of Securitization Bill offered great opportunities to set up
loan recoveries that could further enhance the scope of greater profitability. These
developments have impacted the performance of bank stocks significantly and the bank
stocks are emerging as a major segment in the equity market.
The project titled “Security Analysis and Portfolio Management of Five Major
Players in Banking Sector is an attempt to analyze the Indian banking companies by
taking up fundamental analysis and technical analysis along with creating different mix of
portfolio within the selected securities. Fundamental analysis involves finding the intrinsic
Department of Management Science [9] MES College of Engineering
Project Report 2010 Cochin Stock Exchange
value of the selected banking shares. It is also done to indentify the misprice share there by
assisting the prospective investor in making the buy or sell decision.
It is rare to find investor investing their entire savings in a single security. Instead,
they tend to invest in a group of securities called portfolio. Creation of portfolio helps to
reduce risk without sacrificing returns. The risk and return characteristics of portfolio differ
from those of individual securities combining to form a portfolio.
The project also examines the performance of various portfolio based on (1) Equal
Weight (2) P/E Ratio (3) Market Capitalization along with the performance evaluation by
Sharpe and Treynor Ratio.
Out of the ten companies, which were taken on the basis of market capitalization
from the BSE list and ranked accordingly, five were selected to conduct a detail study. Thus
the study is limited to five selected banking companies in India, they are;
STATE BANK OF INDIA
ICICI BANK
HDFC BANK
AXIS BANK
PUNJAB NATIONAL BANK
STATEMENT OF THE PROBLEM
A study on Security analysis, Portfolio construction and selection of securities from
the Indian banking Industry is undertaken to construct, analyze, select and evaluate a
portfolio consisting of five scrips from this sector to check whether the security analysis
and portfolio construction and selection helps an investor to reduce risk and achieve
efficiency in investment.
Department of Management Science [10] MES College of Engineering
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OBJECTIVES OF THE STUDY
To construct analyse, select and evaluate a portfolio consisting of five major selected
players in the Banking Industry.
To compute the intrinsic value of selected securities from Banking industry using
fundamental analysis and recommend for buy or sell option
To undertake the technical analysis of the securities and interpret them.
To recognize the suitability of the share for investment in long term.
SIGNIFICANCE OF THE STUDY
This demands the investors to be rational and scientific in his investment activity.
As such he needs to evaluate a lot of information about the past performance and the
expected future performance of the company, industry as a whole before taking the
investment decision. So the study will be helpful in finding the intrinsic value of the shares
and make decisions in their investments in Banking Sector. Optimal portfolio can be
selected using this study among the different portfolio basis in the Banking Sector. The
study will be a guide to other scholars and researchers in doing similar study in other
industries.
SCOPE OF THE STUDY
The scope of the study is limited to five selected banking companies in India. Investor
will be able to take right decision in case of investment which is already made in the
scrip of banking companies whether it is wise to hold on or to sell the shares.
The study helps the CSE in making assumptions regarding the performance of banking
industry in the stock market
The project will be helpful for other researchers and scholars in having a detailed study
regarding the performance of banking industry.
The study is done from April 18th to June 2nd 2010.
Department of Management Science [11] MES College of Engineering
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LIMITATIONS
The study was conducted only for a short period of 45 days.
Data collected were from secondary sources.
The effect of speculation, which has a direct bearing on security price is not considered.
The fundamental analysis considered the quantitative effects of company factors only,
even though the economy and industry factors significantly affect the share prices of the
shares.
The securities market, being a highly volatile one, the advice on investment options
based on this study is subject to changes.
Technical analysis was carried out using only the past eighteen month’s data.
Only five securities are used in the portfolio construction
Department of Management Science [12] MES College of Engineering
Project Report 2010 Cochin Stock Exchange
CHAPTER II
INDUSTRY PROFILE
Department of Management Science [13] MES College of Engineering
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ABOUT THE INDUSTRY
CAPITAL MARKET
CAPITAL MARKET INTRODUCTION
The capital market is a market for financial assets, which have longer or
indefinite maturity. Generally, it deals with long-term securities which have maturity
period of above one year. The capital market may be further divided into three namely.
1. Industrial securities market
2. Government securities market
3. Long-term loan market
The industrial market, which deals with shares and debentures, can further
be divided into:
1. Primary market
2. Secondary Market
NEW ISSUE MARKET (PRIMARY MARKET)
Stocks available for the first time are offers through new issue market. The
issuer may be new company or an existing company. These issues may be of new type or
the security used in the past. In the new issue market the issuer can be considered as a
manufacturer. The issuing houses, investment bankers’ and brokers act as the channel of
distribution for the new issue.
SECONDARY MARKET
Secondary Market refers to a market where securities are traded after being
initially offered to the public in the primary market and / or listed on the stock Exchange.
Majority of the trading is done in the secondary market. Secondary market comprises of
equity markets and the debt markets.
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STOCK EXCHANGE
Stock Exchange is an organized marketplace where securities are traded. These
securities are by the government, semi-government Bodies, Public sector undertakings and
companies for borrowing funds and raising resources. Securities are defined as monetary
claims and include stock, shares, debentures, bonds etc. If these securities are marketable
as in the case of Government stock, they are transferable by endorsement and are like
movable property. Under the securities Contract Regulation Act of 1956, securities trading
are regulated by the Central Government and such trading can take place only in Stock
Exchange recognized by the Government under this Act. At present there are 23 recognized
stock Exchanges in India. Of these major Stock Exchange, like Mumbai, Calcutta, Delhi,
Chennai, Hyderabad, Bangalore etc. are permanently recognized while a few are
temporarily recognized.
NATIONAL STOCK EXCHANGE (NSE)
With the liberalization of the Indian economy, it was found inevitable to lift the
Indian stock market trading system on par with the international standards. On the basis of
the recommendations of high powered Pherwani Committee, the National Stock Exchange
was incorporated in 1992 by Industrial Development Bank of India, Industrial Credit and
Investment Corporation of India, Industrial Finance Corporation of India, all Insurance
Corporations, selected commercial banks and others.
Trading at NSE can be classified under two broad categories:
(a) Wholesale debt market and
(b) Capital market.
Wholesale debt market operations are similar to money market operations -
institutions and corporate bodies enter into high value transactions in financial instruments
such as government securities, treasury bills, public sector unit bonds, commercial paper,
certificate of deposit, etc.
There are two kinds of players in NSE:
(a) Trading members
Department of Management Science [15] MES College of Engineering
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(b) Participants.
Recognized members of NSE are called trading members who trade on behalf of
themselves and their clients. Participants include trading members and large players like
banks who take direct settlement responsibility.
Trading at NSE takes place through a fully automated screen based trading
mechanism, which adopts the principle of an order driven market. Trading members can
stay at their offices and execute the trading, since they are linked through a communication
network. The prices at which the buyer and seller are willing to transact will appear on the
screen. When the prices match the transaction will be completed and a confirmation slip
will be printed at the office of the trading member.
OVER THE COUNTER EXCHANGE OF INDIA (OTCEI)
The traditional trading mechanism prevailed in the Indian stock markets gave way
to many functional inefficiencies, such as, absence of liquidity, lack of transparency,
unduly long settlement periods and binami transactions, which affected the small investors
to a great extent. To provide improved services to investors, the country's first ring less,
scrip less, electronic stock exchange OTCEI - was created in 1992 by country's premier
financial institutions – UTI, ICICI, and IDBI etc.
Trading at OTCEI is done over the centers spread across the country. Securities
traded on the OTCEI are classified into:
i. Listed Securities
The shares and debentures of the companies listed on the OTC can be bought or
sold at any OTC counter all over the country and they should not be listed anywhere else
ii. Permitted Securities
Certain shares and debentures listed on other exchanges and units of mutual funds
are allowed to be traded
iii. Initiated debentures
Department of Management Science [16] MES College of Engineering
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Any equity holding at least one lakh debentures of particular scrip can offer them
for trading on the OTC.
BOMBAY STOCK EXCHANGE (BSE)
The Stock Exchange, Mumbai, popularly known as "BSE" was established in 1875
as "The Native Share and Stock Brokers Association". It is the oldest one in Asia, even
older than the Tokyo Stock Exchange, which was established in 1878. It is a voluntary non-
profit making Association of Persons (AOP) and is currently engaged In the process of
converting itself into demutualised and corporate entity. It has evolved over the years into
its present status as the premier Stock Exchange in the country. It is the first Stock
Exchange in the Country to have obtained permanent recognition in 1956 from the Govt. of
India under the Securities Contracts (Regulation) Act, 1956.
The Exchange, while providing an efficient and transparent market for trading in
securities, debt and derivatives upholds the interests of the investors and ensures redresses
of their grievances whether against the companies or its own member- brokers. It also
strives to educate and enlighten the investors by conducting investor education
programmers and making available to them necessary informative inputs.
A Governing Board having 20 directors is the apex body, which decides the policies
and regulates the affairs of the Exchange. The Governing Board consists of 9 elected
directors, who are from the broking community (one third of them retire every year by
rotation), three SEBI nominees, six public representatives and an Executive Director &
Chief Executive officer and a Chief Operating Officer. The Executive Director as the Chief
Executive Officer is responsible for the day-to-day administration of the Exchange and he
is assisted by the Chief Operating Officer and other Heads of Departments.
BANKING IN INDIA
Banking in India originated in the last decades of the 18th century. The oldest bank
in existence in India is the State Bank of India, a government-owned bank that traces its
origins back to June 1806 and that is the largest commercial bank in the country. Central
Department of Management Science [17] MES College of Engineering
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banking is the responsibility of the Reserve Bank of India, which in 1935 formally took
over these responsibilities from the then Imperial Bank of India, relegating it to commercial
banking functions. After India's independence in 1947, the Reserve Bank was nationalized
and given broader powers. In 1969 the government nationalized the 14 largest commercial
banks; the government nationalized the six next largest in 1980.
Currently, India has 88 scheduled commercial banks (SCBs) - 27 public sector
banks (that is with the Government of India holding a stake), 31 private banks (these do not
have government stake; they may be publicly listed and traded on stock exchanges) and 38
foreign banks. They have a combined network of over 53,000 branches and 17,000 ATMs.
According to a report by ICRA Limited, a rating agency, the public sector banks hold over
75 percent of total assets of the banking industry, with the private and foreign banks
holding 18.2% and 6.5% respectively.
Currently (2007), banking in India is generally fairly mature in terms of supply, product
range and reach-even though reach in rural India still remains a challenge for the private
sector and foreign banks. In terms of quality of assets and capital adequacy, Indian banks
are considered to have clean, strong and transparent balance sheets relative to other banks
in comparable economies in its region. The Reserve Bank of India is an autonomous body,
with minimal pressure from the government. The stated policy of the Bank on the Indian
Rupee is to manage volatility but without any fixed exchange rate-and this has mostly been
true.
Department of Management Science [18] MES College of Engineering
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CHART No.1
STATE BANK OF INDIA (SBI)
SBI, started as Imperial Bank then named State Bank of India commenced
its operations from the year 1955, is the largest commercial bank in India in terms of
profits, assets, deposits, branches and employees. As of March 2008, the bank has had 21
subsidiaries and 10,000 branches. SBI offering the services of banking and as well as non-
banking services to their customers. It provides a whole range of financial services which
includes Life Insurance, Merchant Banking, Mutual Funds, Credit Cards, Factoring,
Security Trading & Primary dealership in the Money market. The Bank is actively involved
in non-profit activity called community services banking apart from its normal banking
activity.
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The bank also concentrate in agriculture, for that it took initiative spotlight kharif
and spotlight rabi campaigns for higher disbursement. It introduced Automated Teller
Machine with Kishan Credit Cards in all circles to assist agriculture peoples, cumulatively
the bank has credit linked 7.68 Lac. Self Help Groups and disbursed loans to the extent of
Rs 3,468 Crs. so far. In the year 2001 the SBI Life was started. SBI is the only Bank to
have been permitted a 74% stake in the insurance business. The Bank's insurance
subsidiary "SBI Life Insurance Company" is a joint venture with Cardif S.A holds 26%
stake. SBI Life enjoys the unique distinction of being the first private sector life insurance
company in India to make profits for two consecutive years.
During the year 2004-05 SBI was the only one bank in India to ranked among top
100 banks in the world and also among the top 20 banks in Asia in the annual survey by
"The Banker" as well as in the same year bank received two prestigious awards for
technology from the same The Banker magazine. In the year 2005-06 the bank introduced
"SBI e-tax" an online tax payments facility for direct and indirect tax payment, the
centralized pension processing center also launched during the year. SBI made a
partnership with Tata Consultancy Services for setup C-Edg Technologies and consulting
services to the banking, financial services and insurance industry. The bank noted as The
most preferred bank in a survey by TV 18 in association with AC Nielsen-ORG Marg
along with SBI voted as The most preferred housing loan provider in AWAAZ consumer
awards for 2006. In the customer loyalty survey 2006-07 conducted by "Business World",
SBI has been ranked number One in all parameters of customer satisfication, service
orientation, customer care/ call center, customer loyalty and home loans. SBI Funds
(SBIFMPL) was judged "Mutual fund of the year" by CNBC/TV-18/CRISL. SBI FMBL
Equity schemes won 11 awards and ranging of the AMC in terms of Assets under
management remained at 7th position during the year 2006-07. SBI cards is in 2nd position
in the country under market share. During the year 2006-07 14.81 lac additional cards were
issued by SBI and they crossed the landmark of 3 million cards totally.
The strategic initiatives that SBI have launched business groups in 2007 namely
rural and agri business; treasury and marketing; corporate strategy and new business; and
fourth mid corporate group is on the anvil. They also introduced new products and services
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such as web-based remittance, instant fund transfer, online-trading, comprehensive cash
management.
SBI opened its 10,000th branch in March 2008; it becomes only the second bank in
the world to have more than 10,000 branches after China's ICBC. SBI is pursuing
aggressive IT policy, where the Automated Teller Machines are now also enabled to pay
utility bills, college fees, book air-line tickets and accept donations, further bilateral sharing
of ATMs was extended to thirteen banks covering 15,700 Automated Teller Machines and
an Memorandum of Understanding has been signed with the Indian railways for installing
ATMs at 682 railway stations. Infrastructure fund, private equity, venture capital and
pension fund management are under in process to assist the customer in time. SBI is
targeting to emerge as the best rated bank among public, private, foreign and state -owned
banks by the end of the next fiscal. Employee Stock Option Scheme, where employees
have the option to pick up shares as per their needs is avail in SBI. SBI plans to implement
the mobile banking technology will soon with aim of customer will no be just "Branch
customers" but will be "Bank customer
ICICI BANK LTD.
ICICI Bank, a private sector bank under the house of ICICI was incorporated in the
year of 1994. It is a multi-specialist financial service provider with leadership position
across the spectrum of financial services in India. ICICI Bank is the 2nd largest bank in
India and Bank breaking into the top 100 financial institutions in the world, in terms of
market capitalization. It got this position in short time, because the bank doing what
customers want. ICICI running its business with six principal groups, such as Retail
Banking, Wholesale Banking, International Banking, Rural, Micro Banking and Agri-
Business, Government Banking and Corporate Centre. The Bank offers a wide spectrum of
domestic and international banking services to facilitate trade, investment
The period of study is conducted for a period of 45 days from April 18th to June 2nd 2010.
BASIS FOR SELECTION OF COMPANIES
Out of the ten companies which were taken on the basis of high market
capitalization, the top five were selected to perform the detailed study. The ten banking
companies and their market capitalizations in the order of their ranking are given in the
table below.
Table No.1
Banks and Market Capitalization Rate
SL.NO BANKING COMPANIESMARKET CAPITALISATION as
on 31st March 2010
1 STATE BANK OF INDIA 1,31.991.55
2 ICICI BANK 97,210.81
3 HDFC BANK 84,458.26
4 AXIS BANK 67,386.42
5 PUNJAB NATIONAL BANK 51,954.08
6 BANK OF INDIA 49,632.96
7 KOTAK MAHINDRA BANK 48,376.23
8 BANK OF BARODA 42,039.21
9 CANARA BANK 33,369.75
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10 UNION BANK 27,329.29
TOOLS OF ANALYSIS
Fundamental Analysis: Ratios Used
Earnings per share = Profit after tax No of Equity Shares
Dividend per share = Amount declared as dividendNo. Of equity shares
Payout Ratio = Dividend Per ShareEarnings per share
Return on equity = Profit after tax Net worth
Net worth = Share capital + Reserves and Surplus
Price earnings ratio = Market price of share Earning per share
Price Earning Average = Average of the price earning range
THE INTRINSIC VALUE CALCULATION
Dividend Pay Out Ratio [DPOR] = Dividend Per Share Earnings Per Share
Department of Management Science [47] MES College of Engineering
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Average DPOR for 5 years = Sum of DPOR for 5 years 5
Average Retention ratio = 1-Average DPOR
Average return on Equity = Sum of ROE for 5 years 5
Growth in equity [g] = Average Retention Ratio Average Return on Equity
Normalized Average Price Earnings ratio = Sum of PE ratios for 5 years 5
Long Term Growth Rate InDividends and Earnings = Normalized PE Ratio X Average Retention Ratio
Projected earnings per share
= Earnings per share for current year X (1+growth in equity[g])
Intrinsic value = Projected Earnings per Share Normalized Average Price Earnings RatioProjected Dividend per share = Dividend for the current year X (1+ growth in equity[g])
TECHNICAL TOOLS:
1. Mathematical Indicators:
a. Exponential Moving Average (MA):
EMA = [(current closing price – previous EMA)*factor] + previous EMA
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PORTFOLIO EVALUATION
It is the last step in the process of portfolio management. Through portfolio evaluation
investors tries to find out how well the portfolio has performed. Portfolio evaluation
comprises of performance measurement and performance evaluation. Sharpe ratio(S.R) and
Treynor ratio(TR) are the two statistical tools used in the performance measurement.
SHARPE RATIO
SR = Rp-Rf σpTREYNOR RATIO
TR = Rp-Rf Bp
RISK FREE (Rf) FACTORS
Rf value is taken as
Rf = 6.76
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SR CALCULATION
Based on Equal Weight
Rp=17.04
σp=29.91
Βp=0.869
S.R = 17.04-6.764 = 0.343 29.91
Based on PE Ratio
Rp=18.80
σp =30.57
βp=0.888
SR = 18.80-6.764 = 0.393 30.57
Based on Market Capitalization
Rp=17.04
σp =31.04
βp=0.926
SR = 17.04-6.764 = 0.331 31.04
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T R CALCULATION
Based on Equal Weight
TR = 17.04-6.764 = 11.82 0.869
Based on PE Ratio
TR = 18.80-6.764 = 13.55 0.888
Based on Market Capitalization
TR = 17.04-6.764 = 11.405 0.901
Comparison of SR & TR
SR RANK TR RANK
Bases on Equal Weight 0.343 II 11.82 II
Based on P/E Ratio 0.393 I 13.55 I
Based on Market Capitalization 0.331 III 11.405 III
(Source: Secondary Data)
INFERENCEFrom the portfolio evaluation using Treynor and Sharpe Ratio it is found that Portfolio based on PE Ratio is ranked best among the other types of portfolios.
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CHAPTER VII
FINDINGS, SUGGESTIONS
&
CONCLUSION
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FINDINGS
1. FUNDAMENTAL ANALYSIS
STATE BANK OF INDIA.
The stock is said to be over priced as the intrinsic value of the security is less than
market price.
This means that the investor should sell the share as the price of the security may
come down in future.
In the year 2009, the Net-profit margin, the Return on Equity (ROE) and Earnings
per Share (EPS) has slightly increased, and Average P/E ratio has decreased
slightly.
The projected Earnings per Share (EPS) and Dividend per Share (DPS) of the
security is estimated to be Rs. 150.68 and Rs. 24.325 respectively.
ICICI BANK.
The stock is said to be over priced as the intrinsic value of the security is less than
market price.
This means that the investor should sell the share as the price of the security may
come down in future.
In the year 2009, the Net-profit margin, Return on Equity (ROE) and Average P/E
ratio has slightly decreased.
Earnings per Share (EPS) have increased slightly.
The projected Earnings per Share (EPS) and the dividend per share (DPS) of the
security is estimated to be 38.96and 118.67 respectively
Department of Management Science [112] MES College of Engineering
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HDFC BANK
The stock is said to be under priced, as the intrinsic value of the security is higher
than market price.
This means that the investor should buy the share as the price of the security may
come up in future.
In the year 2009, the Net-profit margin has slightly increased, Earnings per Share
(EPS) and the Return on Equity (ROE) has increased slightly.
Average P/E ratio have decreased. .
The projected Earnings per Share (EPS) and the dividend per share (DPS) of the
security is estimated to be 57.29 and 96.1 respectively.
AXIS BANK
The stock is said to be over priced as the intrinsic value of the security is less than
market price.
This means that the investor should sell the share as the price of the security may
come less in future.
In the year 2009, the Net-profit margin has slightly increased, Earnings per Share
(EPS) and the Return on Equity (ROE) has increased.
Average P/E ratio have decreased..
The projected Earnings per Share (EPS) and Dividend per Share (DPS) of the
security is estimated to be Rs. 32.68 and Rs. 67.82 respectively.
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PUNJAB NATIONAL BANK
The stock is said to be over priced as the intrinsic value of the security is less than
market price.
This means that the investor should sell the share as the price of the security may
come down in future.
In the year 2009, the Net-profit margin has slightly increased, Earnings per Share
(EPS) and the Return on Equity (ROE) has increased.
Average P/E ratio has decreased.
The projected Earnings per Share (EPS) and Dividend per Share (DPS) of the
security is estimated to be Rs. 72.62 and Rs.150.41 respectively
2. TECHNICAL ANALYSES
The short term EMA 5 days gives a slightly bearish trend for all scrips except SBI
and PNB
The medium and long term EMA is bullish for all scrips.
ROC graphs give sell advice on SBI, PNB, ICICI and HDFC bank scrips and buy
for ICICI.
MACD graphs for all scrips indicate a bullish trend.
The long term and medium term predictions are bullish for all the selected banking
scrips. This means investor can hold the shares or new investor can buy the shares.
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3. PORTFOLIO CONSTRUCTION ANALYSIS AND SELECTION
After evaluating the three portfolios which were constructed with the different
proportions of the five selected securities and measuring performance based on Sharpe and
Treynor Ratios, it has been found that, the portfolio based on P/E Ratio ranks highest. This
has a Sharpe ratio of 0.393 and Treynor ratio of 13.55. This confirms investor’s trust in the
PE Ratio in buying a company’s scrip.
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SUGGESTIONS
STATE BANK OF INDIA
The present trend suggest the investors to sell the shares for long term investment, as the
intrinsic value of share is lesser than the market value.
ICICI BANK
As the market price of the share is overvalued when compared to the intrinsic value, it is
advisable for the investors to sell the shares for long term investment. Because the market
price of the shares may decrease in future.
HDFC BANK
There has been a significant difference between the market value and the intrinsic
value. Hence the present trend recommends the investors to buy the share for long term
investment.
AXIS BANK
Since the market price is higher than the intrinsic value, such a share is considered to be
over priced and it is suitable for the investment purpose. If necessary more shares can be
sold.
PUNJAB NATIONAL BANK
The stock price is said to be over priced as the intrinsic value of the security is lesser than
the market price. Here the investor cannot hold the existing shares.
Department of Management Science [116] MES College of Engineering
Project Report 2010 Cochin Stock Exchange
CONCLUSION
The focus of the study was construction of Portfolio and its evaluation to find the
optimal portfolio and Security analysis on the selected five securities in the banking sector.
Out of the ten companies, which were taken them on the basis of market capitalization
from the BSE (Bombay Stock Exchange) list, five companies were selected to perform the
detailed study. Data were selected from the secondary sources. The analysis was done with
five years data. Both relevant fundamental and technical analysis were used for the
analysis.
The fundamental analysis had shown the real position of the Indian economy,
which is in a booming stage and the stock market indicating the best buying and selling
opportunities. Selected banks have been analyzed for their performance in the last five
years. This analysis revealed that all the banks have shown consistently good performance
and the performance is improving every year. Therefore the performances of all these
banks are likely to be much better in the years to come.
This is the best time to invest money in shares, especially in banking sector. Now
the market is moving up from the financial crisis. So the investors recommended to buy the
shares. The intrinsic values of shares are higher than the current market price of shares. It
indicates the coming movement of shares. Based on three portfolios (PE ratio Market
Capitalization and Equal Weight), we invest on the basis of PE Ratio was more profitable.
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Project Report 2010 Cochin Stock Exchange
CHAPTER VIII
BIBLIOGRAPHY
Department of Management Science [118] MES College of Engineering
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BIBLIOGRAPHY
DONALD E. FISCHER AND RONALD J. JORDAN, Security Analysis and
portfolio Management New Delhi: Prentice-Hall of India Private Ltd. 1998.