Professional Documents
Culture Documents
SAPM
1.
2.
3.
4.
5.
6.
7.
ASSET CLASSES
Asset class is a sort of investment, which includes bonds, stocks, real estate, or cash. Asset class
can alternatively be defined as the collection of securities demonstrating similar behaviors based on
same policies and regulations. The three primary asset classes are bonds (or fixed income), equities
(or stocks) and cash equivalents(or money market instruments). Some other asset class includes
natural resources, foreign currency, stocks, treasured metals, luxury items, automobiles etc.
Postal Services
India possesses the largest postal network in the world with 155,000 post offices spread all over the
country as on March 31, 2001. Post Office Recurring Deposit Account, Post Office Time Deposit
Account. Post office time deposit account is just like the bank fixed deposit account. These time
deposits are meant for those investors who want to deposit a lump sum for a fixed period. The amount
can be deposited for 1year, 2year, 3year, and 5years
Corporate Bonds
These are issued by large companies to raise money for different purposes. Compared with
government bonds, they usually carry a higher rate of interest as they are more susceptible than the
government to the economy. And like government bonds, prices move up and down with market
conditions. Corporate bonds are normally considered to be riskier than government bonds. This is
because companies can only stay in business as long as they're profitable, while governments have
a ready source of funds through taxes. If a company cannot pay back the loan, you could lose all
your money.
Shares
Shares are also known as equities. Owning shares in a company means you own a part of it. It also
means you can receive a share of the company's profits through dividends. You also have a share in
the value of the company's assets, through its share price.
Mutual Funds
Mutual Fund is an instrument of investing money. A mutual fund is a group of investors operating
through a fund manager to purchase a diverse portfolio of stocks or bonds. Therefore, keeping large
amounts of money in bank is not a wise option, as in real terms the value of money decreases over a
period of time.
Property
As an investment asset class, property usually means investing in commercial property such as:
offices; retail developments; and leisure and industrial developments.
A major attraction of property investment is that the success of the venture depends on professional
property management. Successful maintenance, refurbishment, repairs and tenancy arrangements
can all add value. Both the rental income and capital value of a property can be enhanced in this
way.
CAPITAL MARKET
DEBT MARKET
DEBENTURES
STOCK MARKET
PRIMARY MKT
CONVERTIBLE DEBENTURES
BONDS
GOVERNMENT BONDS
SECONDARY MKT
CORPORATE BONDS
SHARES
WARRANTS
Corporate Bonds
These are issued by large companies to raise money for different purposes. Compared with
government bonds, they usually carry a higher rate of interest as they are more susceptible than the
government to the economy. And like government bonds, prices move up and down with market
conditions. Corporate bonds are normally considered to be riskier than government bonds. This is
because companies can only stay in business as long as they're profitable, while governments have
a ready source of funds through taxes. If a company cannot pay back the loan, you could lose all
your money.
Shares
Shares are also known as equities. Owning shares in a company means you own a part of it. It also
means you can receive a share of the company's profits through dividends. You also have a share in
the value of the company's assets, through its share price.
Call / Notice Money Market & Short Term Deposits / Term Money Market
1. This component of the money market in India deals with ( borrowed & lent ) overnight / one
day ( Call Money ) & Notice Money for period up to 14 days.
2. It is a market for short term funds repayable on demand & with maturity period varying
between one day to a fortnight.
3. When money is borrowed / lent for a day, it is known as Call ( Overnight ) Money.
4. When money is borrowed / lent for more than a day & up to 14 days, it is known as
Notice Money. No collateral security is required to cover these transactions. It is basically an
OVER THE COUNTER ( OTC ) market without the intermediation of brokers.
5. Call Money is required by Banks to meet their CRR requirements. They borrow money from
other banks & non bank entities to cover any shortage of cash on a Reporting Friday.
6. As per RBI stipulations for the maintenance of CRR by Banks, to enable Banks to choose an
optimum strategy of holding CRR depending on their intra-period cash flows, banks are
allowed to maintain CRR on the basis of the last Friday of the second preceding fortnight.
7. Reduction in the minimum CRR requirement is for smooth adjustment of liquidity & better cash
management to avoid sudden increase in overnight call rates.
Call Rates:
1. The interest rate paid on call loans is known as the call rate. The call rate varies from day to
day & often from hour to hour. It is very sensitive to changes in demand for the supply of call
loans.
2. The call rates during 1989 were frees from administrative ceiling & freely determined by
market forces.
3. Call Rates are influenced by number of factors:
a) Easy / tight liquidity in the market affect call rate.
b) Demand side of liquidity position is dependent on tax outflows, Govt. Of India
borrowing programs.
c) Reserves requirement for maintenance of CRR affect call rate.
d) Asymmetrical nature of participants few lenders & large borrowers.
e) Volatile forex market conditions affect call rates.
-
4. The development of T-Bill market is at the heart of growth of money market. T-bills play a vital
role in the cash management of the Govt.
5. Being a risk free instrument, their yields at various maturities serve as a benchmark.
91 Day T- Bills:
1. RBI issued 91 day T-Bills on the basis of weekly auctions.
2. A scheme for the issue of 91 day T-bill was introduced in 1992-93 on the basis of auction
system with predetermined amount.
3. The major holders of auctioned 91 day T-bills are the RBI, State Govt., State run pension
funds & eligible provident funds.
Advantages:
1. It is s simple instrument as it hardly involves any documentation between issuer & the
investor.
2. It is additionally flexible in terms of maturities of the underlying promissory note, which can be
tailored to match the cash flows of the issuer.
3. CP provides investors with returns higher than what they obtain from the banking system.
4. There are no limitations on the end-use of the funds raised through CPs & instruments are
highly liquid.
5. The issue of CP is governed by guidelines issued by RBI.
6. All eligible participants should obtain the credit rating for issuance of CP from CRISIL, ICRA,
CARE, FITCH.
7. CP can be issued for maturities between a minimum of 7 days & maximum up to 1 year from
the date of issue.
8. CP can be issued in denominations of Rs.5 Lacs or multiples thereof. The amount invested by
a single investor should not be less than Rs.5 Lacs ( face value ).
5. Financial Institutions may issue together with other instruments namely Term Money,
Term Deposits, CPs & Inter-Corporate Deposits should not exceed 100% of its net
owned funds.
6. The minimum amount should be Rs.1 Lakh. CDs can be subscribed by Individuals /
Corporations / Companies / Trusts / Funds etc.
7. The maturity period of a CD issued by Banks should be between 7 days & 1 year maximum
8. The issuer is free to determine the discount rate. The interest rate on floating rate CDs should
be set periodically.
9. There is no locking period for CDs. CDs should be issued in De-mat form and can be
transferred.
Debentures:
1.
A debt security issued by companies, having a certain maturity and bearing a stated Coupon
rate.
2.
Debentures may be unsecured or secured by assets such as land & buildings of the issuing
company.
3.
Debenture holders have a prior claim on the earnings and assets in the event of liquidation as
compared
to
are
Preference
either
fully
&
4.
Debentures
convertible
5.
Equity
or
partially
Shareholders.
convertible.
INDICES
Market Capitalization
The value of equity shares outstanding at prevailing market prices.
Free Float Market Cap: (No. of shares traded in the market Other than Promoters Stake) x Market
price.
National Index: An index of 100 stocks quoted nationwide on different stock exchanges such as those n
Bombay, Delhi & Kolkatta, which is computed by the statistics Department of the Bombay Stock Exchange;
hence it is called the BSE National Index ( BSENI ). The index was developed as a more representative
PROXY
Of the stock market since the SENSITIVE INDEX consists on only 30 stocks quoted on the BSE; these 30
figure among the 100 comprising the National Index.
For calculating the market value of any component share, the price of the share outstanding and hence, t he
index expresses as:
Aggregate market value of all the stocks in the sample / Average market value during the base period
The base period if 1983 84. Adjustments are made to the weight and the base year average if a company
included in index issues BONUS SHARES, RIGHTS ETC.
A welcome development has been recent contribution of 500 stock index by CRISIL. Its base value is 1000
and its composition captures a high degree of MARKET CAPITALIZATION, industry representation, trading
frequency and other criteria.
Index-SENSEX-
that
subsequently
became
the
barometer
of
the
Indian
stock
market.
The launch of SENSEX in 1986 was later followed up in January 1989 by introduction of BSE National Index
(Base: 1983-84 = 100). It comprised 100 stocks listed at five major stock exchanges in India - Mumbai,
Calcutta, Delhi, Ahmedabad and Madras. The BSE National Index was renamed BSE-100 Index from October
14, 1996 and since then, it is being calculated taking into consideration only the prices of stocks listed at BSE.
Introduction
SENSEX, first compiled in 1986, was calculated on a "Market Capitalization-Weighted" methodology of 30
component stocks representing large, well-established and financially sound companies across key sectors.
The base year of SENSEX was taken as 1978-79. SENSEX today is widely reported in both domestic and
international markets through print as well as electronic media. It is scientifically designed and is based on
globally accepted construction and review methodology. Since September 1, 2003, SENSEX is being
calculated on a free-float market capitalization methodology. The "free-float market capitalization-weighted"
methodology is a widely followed index construction methodology on which majority of global equity indices
are based; all major index providers like MSCI, FTSE, STOXX, S&P and Dow Jones use the free-float
methodology.
The growth of the equity market in India has been phenomenal in the present decade. Right from early
nineties, the stock market witnessed heightened activity in terms of various bull and bear runs. In the late
nineties, the Indian market witnessed a huge frenzy in the 'TMT' sectors. More recently, real estate caught the
fancy of the investors. SENSEX has captured all these happenings in the most judicious manner. One can
identify the booms and busts of the Indian equity market through SENSEX. As the oldest index in the country,
it provides the time series data over a fairly long period of time (from 1979 onwards). Small wonder, the
SENSEX has become one of the most prominent brands in the country.
Index Specification:
Base Year
Base Index Value
Date of Launch
Method of
calculation
Number of
scrips
1978-79
100
01-01-1986
Launched on full market capitalization method and effective September 01, 2003, calculation
method shifted to free-float market capitalization.
30
A Free-float index reflects the market trends more rationally as it takes into consideration only those
shares that are available for trading in the market.
Free-float Methodology makes the index more broad-based by reducing the concentration of top few
companies in Index.
A Free-float index aids both active and passive investing styles. It aids active managers by enabling
them to benchmark their fund returns vis- -vis an investible index. This enables an apple-to-apple
comparison thereby facilitating better evaluation of performance of active managers. Being a
perfectly replicable portfolio of stocks, a Free-float adjusted index is best suited for the passive
managers as it enables them to track the index with the least tracking error.
Free-float Methodology improves index flexibility in terms of including any stock from the universe of
listed stocks. This improves market coverage and sector coverage of the index. For example, under
a Full-market capitalization methodology, companies with large market capitalization and low freefloat cannot generally be included in the Index because they tend to distort the index by having an
undue influence on the index movement. However, under the Free-float Methodology, since only the
free-float market capitalization of each company is considered for index calculation, it becomes
possible to include such closely-held companies in the index while at the same time preventing their
undue influence on the index movement.
Globally, the Free-float Methodology of index construction is considered to be an industry best practice
and all major index providers like MSCI, FTSE, S&P and STOXX have adopted the same. MSCI, a
leading global index provider, shifted all its indices to the Free-float Methodology in 2002. The MSCI
India Standard Index, which is followed by Foreign Institutional Investors (FIIs) to track Indian
equities, is also based on the Free-float Methodology. NASDAQ-100, the underlying index to the
famous Exchange Traded Fund (ETF) - QQQ is based on the Free-float Methodology.
Definition of Free-float
Shareholding of investors that would not, in the normal course come into the open market for trading are
treated as 'Controlling/ Strategic Holdings' and hence not included in free-float. Specifically, the following
categories of holding are generally excluded from the definition of Free-float:
Shares held by founders/directors/ acquirers which has control element
Shares held by persons/ bodies with "Controlling Interest"
The total traded value for the last six months of all Nifty stocks is approximately 65.68% of the traded
value of all stocks on the NSE
Nifty stocks represent about 65.34% of the total market capitalization as on Mar 31, 2009.
announcement, etc.). The job of an index is to purely capture the second part, the movements of the
stock market as a whole (i.e. news about the country). This is achieved by averaging. Each stock
contains a mixture of these two elements - stock news and index news. When we take an average of
returns on many stocks, the individual stock news tends to cancel out. On any one day, there would be
good stock-specific news for a few companies and bad stock-specific news for others. In a good index,
these will cancel out, and the only thing left will be news that is common to all stocks. The news that is
common to all stocks is news about India. That is what the index will capture.
Who is Standard & Poor's, and why does their name appear with the S&P CNX Nifty?
S&P owns the most important index in the world, the S&P 500 index, which is the foundation of the
largest index funds and most liquid index futures markets in the world.
When S&P came to India to look at market indices, they focused upon the S&P CNX Nifty as opposed
to alternative indices. They now stand behind the S&P CNX Nifty, as is evidenced by the name "S&P
CNX Nifty" This is a unique occasion; S&P has never endorsed a market index before.
the Indian stock market rose by 2%, measured in rupees. If the S&P CNX Defty rises by 2%, it means
that the Indian stock market rose by 2%, measured in dollars.
EQUITY ANALYSIS
______________________________________________________
_
Name of the company
Address: ( Regd. Off & Factory or Plant )
Sector ( Type of Business )
Share Holding Pattern
Promoters
------------------------
Institutional Investors
Sales
------------------------
Other Investors
Net Profit
------------------------
General Public
Dividend
------------------------
Share Price
------------------------
Face Value
------------------------
P/E Ratio
------------------------
________________________________________________________________________________________
_
Board of Directors:
Chairman: __________________
MD: __________________
ED: __________________
Director: __________________
Financial Data
Profit & Loss A/c ( Year Wise Latest 4 years )
Mar 08
Mar 07
Conclusions:
1. Is there any growth in Top-Line ( Sales ) Y-O-Y?
2. Is there any growth in Bottom Line (PAT) Y-O-Y?
3. Type of growth Organic or Inorganic?
4.
Case I
Case II
Case III
Mar 06
Mar 05
Case IV
June 08
Conclusions
1. Is there any growth in Top-Line ( Sales ) Q-O-Q?
2. Is there any growth in Bottom Line (PAT) Q-O-Q?
3. Type of growth Organic or Inorganic?
Case I
Case II
Case III
Case IV
Mar 08
Dec08
Sep 08
P/E Ratio
The most commonly used valuation metric by investors is the price to earnings ratio or commonly referred to
as the P/E Ratio. Though commonly used, it is also misunderstood for various reasons. Here is an attempt to
simplify this valuation metric.
How is P/E Calculated?
It is calculated by dividing market price of stock by EPS ( Earnings Per Share ). EPS in turn is calculated by
dividing the net profit of the company by the number of shares outstanding.
Net Profit
EPS
Market Price
P/E Ratio
-------------------------------------EPS
Lets assume a stock is trading at Rs.100 and its EPS is Rs.20. The P/E multiple is 5 ( 100 upon 20 )
Market Price = P/E multiple by EPS. Stock prices reflect future earnings potential and not past performance.
Discounting the current price with historical EPS is not right way to analyze companies.
Take hypothetical case. If Tata Steels EPS for the next year is expected at RS.50 and the growth in EPS is
around 15%, the market price is calculated by multiplying Rs.50 with 15 times i.e. Rs.750. When determining
the stock price, one does not discount earnings but multiply earnings.
What is the Right P/E multiple for a stock?
The answer to this question is not easy. In the previous example, we have assigned multiple of 15 times
because EPS is expected to grow by 15% in the immediate year. Is this right way? Not necessarily. Here, it is
important to understand characteristics of the company.
For a commodity stock like Tata Steel, EPS tends to grow at a faster rate when steel prices recovering or are
at the peak and the EPS is likely to decline at a faster rate during downturns. To qualify this statement, if we
look at EPS growth of Tata Steel from 1994 to 2004, the compounded growth in earnings is 17%. However, the
CAGR growth in the last three years was 193%. So, if one believes that steel demand is likely to trace long
term economic growth and that 15% growth is sustainable, the P/E multiple should be ideally much lower than
15 times. Similarly, the long term growth prospects for software companies could be much higher than
commodities.
Determining the P/E multiple for a stock / sector also depends on:
1. Historical performance Why does Infosys trade at a higher P/E multiple compared to Satyam?
By historical performance, we mean, focus of the management (without unrelated diversification)
ability to outperform competitors in down / upturns and promise vs performance. This can be gauged if
one looks at the last three to five years annual reports of a company.
2. The sector characteristics Margin profile, whether it is asset intensive and intensity of competition.
Less asset intensive sectors ( say FMCG ) are considered defensive and therefore, could be trade a
premium to the overall market.
3. And more importantly, expectations. Take the case of Textile stocks. Expectations of significant growth
opportunities post the 2005 quote regime phase out has resulted in up-gradation of P/E multiple of the
textile sector.
When P/E is not useful?
1. Economic cycle: In FY02, Tata Steel was trading at P/E multiple of 20.5 times its FY02 earnings. Was
it expensive? Based on FY05 expected earnings, Tata Steel is trading at a P/E multiple of 5 times its
earnings ( at Rs.50 ). Is it cheap? If one ignored Tata Steel in FY02 on the basis that it was expensive
stock, the opportunity loss is as much as 350%. Business operate in cycles. During downturn, EPS will
be low but P/E will be inflated and vise versa. At the same time, during expansionary phase, corporate
invest in capacities. In this case, high depreciation costs suppress earnings. P/E in this context, may
mislead investors.
2. Not actively tracked: There are number of companies in the Indian Stock Market that are not actively
tracked by the investors, analysts and institutions.
3. Expectations: On the downside, some stocks may be trading at a significant premium because
earnings are higher. High P/E also does not means a good stock to buy. What if the expectations are
unrealistic?
4. Means little a standalone number P/E, as a standalone number, means little. Besides P/E, it is also
important to look at margins, return on net worth, cash generating ability and consistency in
performance over the years to assign a value to a stock.
5. Market sentiment: During bear phase or when interest in stock is low, valuations could be depressed.
Since equities are considered, less attractive during these periods, valuations are likely to be below
historical average or below earnings growth prospects.
6. To conclude valuations of stocks involves subjectively. A person X may assign a higher P/E to the
stock as compared to person Y depending on the risk profile and growth expectations. In the end, it all
boils down to how the company is likely to perform.
P/E Ratio Across the sectors:
Price Earnings Ratio can vary widely across the sectors and what comprises a low PE Ratio in one sector can
be high PE in another.
What are the reasons for the vast divergence in PE Ratio across the sectors?
The sectors with the lowest P/E offer not only lowest expected growth, but also have low returns on equity
(ROE).
The sectors with the highest P/E offer higher expected growth & higher returns on equity, with more risk.
You have three measures of the P/E Ratio for each company. The P/E based earnings in the most recent
financial year (Current P/E), the P/E based on earnings in the most recent four quarters ( Trailing P/E ) and the
P/E based expected earnings in the next financial year ( forward P/E ). Each measure has its adherents &
there is information in each.
Low Growth & P/E Ratios
One reason for Low P/E Ratio for a stock would be low expected growth. May Low P/E companies are
immature business for which the potential for growth is minimal. If you invest in stocks with Low P/E Ratios,
you run the risk of holding stocks with anemic or even negative growth rates. Therefore, you have to consider
whether the trade off of a Lower P/E Ratio for lower growth works in your favor.
P/E Ratio Relationship
Company
Share Price
Current P/E
Sector P/E
ABC Industries
100
10
15
Example:
Formula
Sector P/E Ratio - Current P/E Ratio
---------------------------------------------------
X 100
Apply to
15 10
----------
ABC Industries
100 X 50% = 50
X 100 = 50%
10
100 + 50 = 150
Target Price can be 150
HIGH P/E
* Company is showing high growth in the business
* Investors are ready to pay high for the earnings of the company.
Scrip
Share Price
P/E Ratio
L&T
1656
20.7
BHEL
2217
31.3
HDFC BANK
1833
30.9
INFOSYS
2446
22.2
LOW P/E
* Company is showing low growth in the business
* Investors are not ready to buy the stocks as the future earnings are
expected to be low.
Scrip
Share Price
P/E Ratio
Allahabad Bank
113
4.8
Chambal Fertili.
56
8.5
Asian Electronics
46
6.1
GSFC
168
3.6
ABNORMAL P/E
* Generally after listing the share Profit remains the same & number
of shares increase so, EPS goes down drastically.
* The earnings are very low for the year or a particular quarter.
Scrip
Share Price
P/E Ratio
Bharat Forge
269
102
GMR INFRA
72
157
JINDAL COTEX
102
66
JAYBHARAT TEL
398
497
NO P/E
* There are no earnings to the company as on date
* For a specific quarter company has declared loss
Scrip
Share Price
P/E Ratio
Tata Steel
560
--
850
--
Chennai Petro
225
--
Jet Airways
563
--
Dividend Yield %
Formula
Dividend
------------
X 100
= Dividend Yield %
Share Price
Example:
HDFC