A project report

on
A study on Equity Analysis
at
India-Infoline .
Submitted in partial fulfillment of the
Requirements for the award of the Degree
of
MASTER OF BUSINESS ADMINISTRATION

Submitted By
Elizebeth
13BK1E00

Under the Guidance of

DEPARTMENT OF BUSINESS ADMINISTRATION

ST PETERS ENGINEERING COLLEGE
(Affiliated to Jawaharlal Nehru Technological University Hyderabad)
Hyderabad
2013 2015

CHAPTER I
INTRODUCTION

INTRODUCTION
India is a developing country. Nowadays many people are interested to invest in financial
markets especially on equities to get high returns, and to save tax in honest way. Equities
are playing a major role in contribution of capital to the business from the beginning.
Since the introduction of shares concept, large numbers of investors are showing interest
to invest in stock market.
In an industry plagued with skepticism and a stock market increasingly difficult to predict
and contend with, if one looks hard enough there may still be a genuine aid for the Day
Trader and Short Term Investor.
The price of a security represents a consensus. It is the price at which one person agrees
to buy and another agrees to sell. The price at which an investor is willing to buy or sell
depends primarily on his expectations. If he expects the security's price to rise, he will
buy it; if the investor expects the price to fall, he will sell it. These simple statements are
the cause of a major challenge in forecasting security prices, because they refer to human
expectations. As we all know firsthand, humans expectations are neither easily
quantifiable nor predictable. If prices are based on investor expectations, then knowing
what a security should sell for (i.e., fundamental analysis) becomes less important than
knowing what other investors expect it to sell for. That's not to say that knowing what a
security should sell for isn't important--it is. But there is usually a fairly strong consensus
of a stock's future earnings that the average investor cannot disprove
Fundamental analysis and technical analysis can co-exist in peace and complement each
other. Since all the investors in the stock market want to make the maximum profits
possible, they just cannot afford to ignore either fundamental or technical analysis

LITERATURE
REVIEW

SECURITY ANALYSIS
Investment success is pretty much a matter of careful selection and timing of stock
purchases coupled with perfect matching to an individuals risk tolerance. In order to carry
out selection, timing and matching actions an investor must conduct deep security
analysis.
Investors purchase equity shares with two basic objectives;
1.

To make capital profits by selling shares at higher prices.

2.

To earn dividend income.

These two factors are affected by a host of factors. An investor has to carefully
understand and analyze all these factors. There are basically two approaches to study
security prices and valuation i.e. fundamental analysis and technical analysis
The value of common stock is determined in large measure by the performance of the
firm that issued the stock. If the company is healthy and can demonstrate strength and
growth, the value of the stock will increase. When values increase then prices follow and
returns on an investment will increase. However, just to keep the savvy investor on their
toes, the mix is complicated by the risk factors involved. Fundamental analysis examines
all the dimensions of risk exposure and the probabilities of return, and merges them with
broader economic analysis and greater industry analysis to formulate the valuation of a
stock.
FUNDAMENTAL ANALYSIS
Fundamental analysis is a method of forecasting the future price movements of a
financial instrument based on economic, political, environmental and other relevant
factors and statistics that will affect the basic supply and demand of whatever underlies
the financial instrument. It is the study of economic, industry and company conditions in
an effort to determine the value of a companys stock. Fundamental analysis typically
focuses on key statistics in companys financial statements to determine if the stock price
is correctly valued. The term simply refers to the analysis of the economic well-being of a
financial entity as opposed to only its price movements.

Fundamental analysis is the cornerstone of investing. The basic philosophy underlying

the fundamental analysis is that if an investor invests re.1 in buying a share of a company,
how much expected returns from this investment he has.
The fundamental analysis is to appraise the intrinsic value of a security. It insists that no
one should purchase or sell a share on the basis of tips and rumors. The fundamental
approach calls upon the investors to make his buy or sell decision on the basis of a
detailed analysis of the information about the company, about the industry, and the
economy. It is also known as top-down approach. This approach attempts to study the
economic scenario, industry position and the company expectations and is also known as
economic-industry-company approach (EIC approach).
Thus the EIC approach involves three steps:
1.

Economic analysis

2.

Industry analysis

3.

Company analysis

1. ECONOMIC ANALYSIS
The level of economic activity has an impact on investment in many ways. If the
economy grows rapidly, the industry can also be expected to show rapid growth and vice
versa. When the level of economic activity is low, stock prices are low, and when the

level of economic activity is high, stock prices are high reflecting the prosperous outlook
for sales and profits of the firms. The analysis of macro economic environment is
essential to understand the behavior of the stock prices.
The commonly analyzed macro economic factors are as follows:
Gross Domestic Product (GDP): GDP indicates the rate of growth of the economy. It
represents the aggregate value of the goods and services produced in the economy. It
consists of personal consumption expenditure, gross private domestic investment and
government expenditure on goods and services and net exports of goods and services.
The growth rate of economy points out the prospects for the industrial sector and the
return investors can expect from investment in shares. The higher growth rate is more
favorable to the stock market.
Savings and investment: It is obvious that growth requires investment which in turn
requires substantial amount of domestic savings. Stock market is a channel through
which the savings are made available to the corporate bodies. Savings are distributed over
various assets like equity shares, deposits, mutual funds, real estate and bullion. The
savings and investment patterns of the public affect the stock to a great extent.
Inflation: Along with the growth of GDP, if the inflation rate also increases, then the real
growth would be very little. The effects of inflation on capital markets are numerous. An
increase in the expected rate of inflation is expected to cause a nominal rise in interest
rates. Also, it increases uncertainty of future business and investment decisions. As
inflation increases, it results in extra costs to businesses, thereby squeezing their profit
margins and leading to real declines in profitability.
Interest rates: The interest rate affects the cost of financing to the firms. A decrease in
interest rate implies lower cost of finance for firms and more profitability. More money is
available at a lower interest rate for the brokers who are doing business with borrowed
money. Availability of cheap funds encourages speculation and rise in the price of shares.

Tax structure: Every year in March, the business community eagerly awaits the
Governments announcement regarding the tax policy. Concessions and incentives given
to a certain industry encourage investment in that particular industry. Tax reliefs given to
savings encourage savings. The type of tax exemption has impact on the profitability of
the industries.
Infrastructure facilities: Infrastructure facilities are essential for the growth of industrial
and agricultural sector. A wide network of communication system is a must for the
growth of the economy. Regular supply of power without any power cut would
boost the production. Banking and financial sectors also should be sound enough to
provide adequate support to the industry. Good infrastructure facilities affect the stock
market favorably.
2. INDUSTRY ANALYSIS
An industry is a group of firms that have similar technological structure of production
and produce similar products and Industry analysis is a type of business research that
focuses on the status of an industry or an industrial sector (a broad industry classification,
like "manufacturing").

Irrespective of specific economic situations, some industries might be expected to

perform better, and share prices in these industries may not decline as much as in other industries. This identification of
economic and industry specific factors influencing share prices will help investors to identify the shares that fit
individual expectations

Industry Life Cycle: The industry life cycle theory is generally attributed to Julius
Grodensky. The life cycle of the industry is separated into four well defined stages.

Pioneering stage: The prospective demand for the product is promising in this
stage and the technology of the product is low. The demand for the product
attracts many producers to produce the particular product. There would be severe
competition and only fittest companies survive this stage. The producers try to
develop brand name, differentiate the product and create a product image. In this

situation, it is difficult to select companies for investment because the survival

rate is unknown.

Rapid growth stage: This stage starts with the appearance of surviving firms from
the pioneering stage. The companies that have withstood the competition grow
strongly in market share and financial performance. The technology of the
production would have improved resulting in low cost of production and good
quality products. The companies have stable growth rate in this stage and they
declare dividend to the shareholders. It is advisable to invest in the shares of these
companies.

Maturity and stabilization stage: the growth rate tends to moderate and the rate
of growth would be more or less equal to the industrial growth rate or the gross
domestic product growth rate. Symptoms of obsolescence may appear in the
technology. To keep going, technological innovations in the production process
and products should be introduced. The investors have to closely monitor the
events that take place in the maturity stage of the industry.

Decline stage: demand for the particular product and the earnings of the
companies in the industry decline. It is better to avoid investing in the shares of
the low growth industry even in the boom period. Investment in the shares of
these types of companies leads to erosion of capital.

Growth of the industry: The historical performance of the industry in terms of growth
and profitability should be analyzed. The past variability in return and growth in reaction
to macro economic factors provide an insight into the future.

Nature of competition: Nature of competition is an essential factor that determines the

demand for the particular product, its profitability and the price of the concerned
company scrips. The companies' ability to withstand the local as well as the multinational
competition counts much. If too many firms are present in the organized sector, the
competition would be severe. The competition would lead to a decline in the price of the

product. The investor before investing in the scrip of a company should analyze the
market share of the particular company's product and should compare it with the top five
companies.
SWOT analysis: SWOT analysis represents the strength, weakness, opportunity and
threat for an industry. Every investor should carry out a SWOT analysis for the chosen
industry. Take for instance, increase in demand for the industrys product becomes its
strength, presence of numerous players in the market, i.e. competition becomes the threat
to a particular company. The progress in R & D in that industry is an opportunity and
entry of multinationals in the industry is a threat. In this way the factors are to be
arranged and analyzed.

3. COMPANY ANALYSIS
In the company analysis the investor assimilates the several bits of information related to
the company and evaluates the present and future values of the stock. The risk and return
associated with the purchase of the stock is analyzed to take better investment decisions.
The present and future values are affected by a number of factors.
Competitive edge of the company: Major industries in India are composed of hundreds
of individual companies. Though the number of companies is large, only few companies
control the major market share. The competitiveness of the company can be studied with
the help of the following;

Market share: The market share of the annual sales helps to determine a
companys relative competitive position within the industry. If the market share is
high, the company would be able to meet the competition successfully. The
companies in the market should be compared with like product groups otherwise,
the results will be misleading.

Growth of sales: The rapid growth in sales would keep the shareholder in a better
position than one with stagnant growth rate. Investors generally prefer size and
growth in sales because the larger size companies may be able to withstand the
business cycle rather than the company of smaller size.

Stability of sales: If a firm has stable sales revenue, it will have more stable
earnings. The fall in the market share indicates the declining trend of company,
even if the sales are stable. Hence the stability of sales should be compared with
its market share and the competitors market share.

Earnings of the company: Sales alone do not increase the earnings but the costs and
expenses of the company also influence the earnings. Further, earnings do not always
increase with increase in sales. The companys sales might have increased but its earnings
per share may decline due to rise in costs. Hence, the investor should not only depend on
the sales, but should analyze the earnings of the company.

Financial analysis: The best source of financial information about a company is its own
financial statements. This is a primary source of information for evaluating the
investment prospects in the particular companys stock. Financial statement analysis is
the study of a companys financial statement from various viewpoints. The statement
gives the historical and current information about the companys operations. Historical
financial statement helps to predict the future and the current information aids to analyze
the present status of the company. The two main statements used in the analysis are
Balance sheet and Profit and Loss Account.
The balance sheet is one of the financial statements that companies prepare every year for
their shareholders. It is like a financial snapshot, the company's financial situation at a
moment in time. It is prepared at the year end, listing the company's current assets and
liabilities. It helps to study the capital structure of the company. It is better for the
investor to avoid a company with excessive debt component in its capital structure. From
the balance sheet, liquidity position of the company can also be assessed with the
information on current assets and current liabilities.
Ratio analysis: Ratio is a relationship between two figures expressed mathematically.
Financial ratios provide numerical relationship between two relevant financial data.
Financial ratios are calculated from the balance sheet and profit and loss account. The
relationship can be either expressed as a percent or as a quotient. Ratios summarize the
data for easy understanding, comparison and interpretations.
Ratios for investment purposes can be classified into profitability ratios, turnover ratios,
and leverage ratios. Profitability ratios are the most popular ratios since investors prefer
to measure the present profit performance and use this information to forecast the future
strength of the company. The most often used profitability ratios are return on assets,
price earnings multiplier, price to book value, price to cash flow, and price to sales,
dividend yield, return on equity, present value of cash flows, and profit margins.
a) Return on Assets (ROA)

ROA is computed as the product of the net profit margin and the total asset turnover
ratios.
ROA = (Net Profit/Total income) x (Total income/Total Assets)
This ratio indicates the firm's strategic success. Companies can have one of two
strategies: cost leadership, or product differentiation. ROA should be rising or keeping
pace with the company's competitors if the company is successfully pursuing either of
these strategies, but how ROA rises will depend on the company's strategy. ROA should
rise with a successful cost leadership strategy because the companys increasing
operating efficiency. An example is an increasing, total asset, turnover ratio as the
company expands into new markets, increasing its market share. The company may
achieve leadership by using its assets more efficiently. With a successful product
differentiation strategy, ROA will rise because of a rising profit margin.
b) Return on Investment (ROI)
ROI is the return on capital invested in business, i.e., if an investment Rs 1 crore in men,
machines, land and material is made to generate Rs. 25 lakhs of net profit, then the ROI is
25%. The computation of return on investment is as follows:
Return on Investment (ROI) = (Net profit/Equity investments) x 100
As this ratio reveals how well the resources of a firm are being used, higher the ratio,
better are the results. The return on shareholders investment should be compared with
the return of other similar firms in the same industry. The inert-firm comparison of this
ratio determines whether the investments in the firm are attractive or not as the investors
would like to invest only where the return is higher.
c) Return on Equity
Return on equity measures how much an equity shareholder's investment is actually
earning. The return on equity tells the investor how much the invested rupee is earning

from the company. The higher the number, the better is the performance of the company
and suggests the usefulness of the projects the company has invested in.
The computation of return on equity is as follows:
Return on equity = (Net profit to owners/value of the specific owner's
Contribution to the business) x 100
The ratio is more meaningful to the equity shareholders who are invested to know profits
earned by the company and those profits which can be made available to pay dividend to
them.
d) Earnings per Share (EPS)
This ratio determines what the company is earning for every share. For many investors,
earnings are the most important tool. EPS is calculated by dividing the earnings (net
profit) by the total number of equity shares.
The computation of EPS is as follows:
Earnings per share = Net profit/Number of shares outstanding
The EPS is a good measure of profitability and when compared with EPS of similar other
companies, it gives a view of the comparative earnings or earnings power of a firm. EPS
calculated for a number of years indicates whether or not earning power of the company
has increased.
e) Dividend per Share (DPS)
The extent of payment of dividend to the shareholders is measured in the form of
dividend per share. The dividend per share gives the amount of cash flow from the
company to the owners and is calculated as follows:
Dividend per share = Total dividend payment / Number of shares outstanding

The payment of dividend can have several interpretations to the shareholder. The
distribution of dividend could be thought of as the distribution of excess profits/abnormal
profits by the company. On the other hand, it could also be negatively interpreted as lack
of investment opportunities. In all, dividend payout gives the extent of inflows to the
shareholders from the company.
f) Dividend Payout Ratio
From the profits of each company a cash flow called dividend is distributed among its
shareholders. This is the continuous stream of cash flow to the owners of shares, apart
from the price differentials (capital gains) in the market. The return to the shareholders, in
the form of dividend, out of the company's profit is measured through the payout ratio.
The payout ratio is computed as follows:
Payout Ratio = (Dividend per share / Earnings per share) * 100
The percentage of payout ratio can also be used to compute the percentage of retained
earnings. The profits available for distribution are either paid as dividends or retained
internally for business growth opportunities. Hence, when dividends are not declared, the
entire profit is ploughed back into the business for its future investments.
g) Dividend Yield
Dividend yield is computed by relating the dividend per share to the market price of the
share. The market place provides opportunities for the investor to buy the company's
share at any point of time. The price at which the share has been bought from the market
is the actual cost of the investment to the shareholder. The market price is to be taken as
the cum-dividend price. Dividend yield relates the actual cost to the cash flows received
from the company. The computation of dividend yield is as follows
Dividend yield = (Dividend per share / Market price per share) * 100
High dividend yield ratios are usually interpreted as undervalued companies in the
market. The market price is a measure of future discounted values, while the dividend per

share is the present return from the investment. Hence, a high dividend yield implies that
the share has been under priced in the market. On the other hand a low dividend yield
need not be interpreted as overvaluation of shares. A company that does not pay out
dividends will not have a dividend yield and the real measure of the market price will be
in terms of earnings per share and not through the dividend payments.

h) Price/Earnings Ratio (P/E)

The P/E multiplier or the price earnings ratio relates the current market price of the share
to the earnings per share. This is computed as follows:
Price/earnings ratio = Current market price / Earnings per share
This ratio is calculated to make an estimate of appreciation in the value of a share of a
company and is widely used by investors to decide whether or not to buy shares in a
particular company. Many investors prefer to buy the company's shares at a low P/E ratio
since the general interpretation is that the market is undervaluing the share and there will
be a correction in the market price sooner or later. A very high P/E ratio on the other hand
implies that the company's shares are overvalued and the investor can benefit by selling
the shares at this high market price.
i) Debt-to-Equity Ratio
Debt-Equity ratio is used to measure the claims of outsiders and the owners against the
firms assets.
Debt-to-equity ratio = Outsiders Funds / Shareholders Funds
The debt-equity ratio is calculated to measure the extent to which debt financing has been
used in a business. It indicates the proportionate claims of owners and the outsiders
against the firms assets. The purpose is to get an idea of the cushion available to
outsiders on the liquidation of the firm.

RESEARCH GAP
To start any business capital plays major role. Capital can be acquired in two ways by
issuing shares or by taking debt from financial institutions or borrowing money from
financial institutions. The owners of the company have to pay regular interest and
principal amount at the end.
Stock is ownership in a company, with each share of stock representing a tiny piece of
ownership. The more shares you own, the more of the company you own. The more
shares you own, the more dividends you earn when the company makes a profit. In the
financial world, ownership is called Equity.
Advantages of selling stock:

A company can raise more capital than it could borrow.

A company does not have to make periodic interest payments to creditors.

A company does not have to make principal payments

Stock/shares play a major role in acquiring capital to the business in return investors are
paid dividends to the shares they own. The more shares you own the more dividends you
receive.
The role of equity analysis is to provide information to the market. An efficient market
relies on information: a lack of information creates inefficiencies that result in stocks
being misrepresented (over or under valued). This is valuable because it fills information
gaps so that each individual investor does not need to analyze every stock thereby making
the markets more efficient.

OBJECTIVES OF THE STUDY

The objective of this project is to deeply analyze our Indian Automobile Industry for
investment purpose by monitoring the growth rate and performance on the basis of
historical data.

The main objectives of the Project study are:

Detailed analysis of Automobile industry which is gearing towards

international standards

Analyze the impact of qualitative factors on industrys and companys

prospects

Comparative analysis of three tough competitors TATA Motors, Maruti Suzuki

and Mahindra and Mahindra through fundamental analysis.

Suggesting as to which companys shares would be best for an investor to

invest.

HYPOTHESIS
Hypothesis 1
H0: The sample Equity of automobile industry may not influence the whole industry,
H1: The sample Equity of automobile industry will influence the whole industry
Hypothesis 2
H0: The risk and return of the Equity are not considered while investors making
decisions on their investment security,
H1: The risk and return of the Equity are considered while investors making decisions
on their investment
Hypothesis 3
The null hypothesis of the study assumes,
H0 : There is no significant impact of Equity analysis while investor investing in a
security,
H1: There is a significant impact of Equity analysis while investor investing in a
security,.
Hypothesis 4
H0: The sample Equity may not influence the whole industry,
H1: The sample Equity will influence the whole industry

SCOPE OF THE STUDY

The scope of the study is identified after and during the study is conducted. The
project is based on tools like fundamental analysis and ratio analysis. Further, the
study is based on information of last five years.

The analysis is made by taking into consideration five companies i.e. TATA
Motors, Maruti Suzuki and Mahindra and Mahindra.

The scope of the study is limited for a period of five years.

The scope is limited to only the fundamental analysis of the chosen stocks.

Period of the study

The duration of the project is 45days

METHODOLOGY
Research design or research methodology is the procedure of collecting, analyzing and
interpreting the data to diagnose the problem and react to the opportunity in such a way where
the costs can be minimized and the desired level of accuracy can be achieved to arrive at a
particular conclusion.
The methodology used in the study for the completion of the project and the fulfillment of the
project objectives.

The sample of the stocks for the purpose of collecting secondary data has been selected on the
basis of Random Sampling. The stocks are chosen in an unbiased manner and each stock is
chosen independent of the other stocks chosen. The stocks are chosen from the automobile
sector.

The sample size for the number of stocks is taken as 3 for fundamental analysis of stocks as
fundamental analysis is very exhaustive and requires detailed study.