Fundamental Analysis

INTRODUCTION TO INDIAN CAPITAL
MARKET
There are 22 stock exchanges in India, the first being the Bombay Stock Exchange (BSE),
which began formal trading in 1875, making it one of the oldest in Asia. Over the last few
years, there has been a rapid change in the Indian securities market, especially in the
secondary market. Advanced technology and online-based transactions have modernized the
stock exchanges. In terms of the number of companies listed and total market capitalization,
the Indian equity market is considered large relative to the country’s stage of economic
development. The number of listed companies increased from 5,968 in March 1990 to about
10,000 by May 1998 and market capitalization has grown almost 11 times during the same
period.
The debt market, however, is almost nonexistent in India even though there has been a large
volume of Government bonds traded. Banks and financial institutions have been holding a
substantial part of these bonds as statutory liquidity requirement. The portfolio restrictions on
financial institutions’ statutory liquidity requirement are still in place. A primary auction
market for Government securities has been created and a primary dealer system was
introduced in 1995. There are six authorized primary dealers. Currently, there are 31 mutual
funds, out of which 21 are in the private sector. Mutual funds were opened to the private
sector in 1992. Earlier, in 1987, banks were allowed to enter this business, breaking the
monopoly of the Unit Trust of India (UTI), which maintains a dominant position. Before 1992,
many factors obstructed the expansion of equity trading. Fresh capital issues were controlled
through the Capital Issues Control Act. Trading practices were not transparent, and there was a
large amount of insider trading. Recognizing the importance of increasing investor protection,
several measures were enacted to improve the fairness of the capital market. The Securities
and Exchange Board of India (SEBI) was established in 1988.
Despite the rules it set, problems continued to exist, including those relating to disclosure
criteria, lack of broker capital adequacy, and poor regulation of merchant bankers and
Page | 1
underwriters. There have been significant reforms in the regulation of the securities market
since 1992 in conjunction with overall economic and financial reforms. In 1992, the SEBI Act
was enacted giving SEBI statutory status as an apex regulatory body. And a series of reforms
was introduced to improve investor protection, automation of stock trading, integration of
national markets, and efficiency of market operations. India has seen a tremendous change in
the secondary market for equity. Its equity market will most likely be comparable with the
world’s most advanced secondary markets within a year or two. The key ingredients that
underlie market quality in India’s equity market are:
• Exchanges based on open electronic limit order book;

• Nationwide integrated market with a large number of informed traders and fluency of
short or long positions; and
• No counterparty risk.
Among the processes that have already started and are soon to be fully implemented are
electronic settlement trade and exchange-traded derivatives. Before 1995, markets in India
used open outcry, a trading process in which traders shouted and hand signaled from within a
pit. One major policy initiated by SEBI from 1993 involved the shift of all exchanges to
screen-based trading, motivated primarily by the need for greater transparency. The first
exchange to be based on an open electronic limit order book was the National Stock Exchange
(NSE), which started trading debt instruments in June 1994 and equity in November 1994. In
March 1995, BSE shifted from open outcry to a limit order book market. Currently, 17 of
India’s stock exchanges have adopted open electronic limit order.
1.1 CAPITAL MARKET REFORMS AND DEVELOPMENTS
Over the last few years, SEBI has announced several far-reaching reforms to promote the
capital market and protect investor interests. Reforms in the secondary market have focused on
three main areas: structure and functioning of stock exchanges, automation of trading and post
trade systems, and the introduction of surveillance and monitoring systems. Computerized
online trading of securities, and setting up of clearing houses or settlement guarantee funds
Page | 2
were made compulsory for stock exchanges. Stock exchanges were permitted to expand their
trading to locations outside their jurisdiction through computer terminals. Thus, major stock
exchanges in India have started locating computer terminals in far-flung areas, while smaller
regional exchanges are planning to consolidate by using centralized trading under a federated
structure. Online trading systems have been introduced in almost all stock exchanges. Trading
is much more transparent and quicker than in the past. Until the early 1990s, the trading and
settlement infrastructure of the Indian capital market was poor. Trading on all stock exchanges
was through open outcry, settlement systems were paper-based, and market intermediaries
were largely unregulated. The regulatory structure was fragmented and there was neither
comprehensive registration nor an apex body of regulation of the securities market. Stock
exchanges were run as “brokers clubs” as their management was largely composed of brokers.
There was no prohibition on insider trading, or fraudulent and unfair trade practices. Since
1992, there has been intensified market reform, resulting in a big improvement in securities
trading, especially in the secondary market for equity. Most stock exchanges have introduced
online trading and set up clearing houses/corporations. A depository has become operational
for scrip less trading and the regulatory structure has been overhauled with most of the powers
for regulating the capital market vested with SEBI. The Indian capital market has experienced
a process of structural transformation with operations conducted to standards equivalent to
those in the developed markets. It was opened up for investment by foreign institutional
investors (FIIs) in 1992 and Indian companies were allowed to raise resources abroad through
Global Depository Receipts (GDRs) and Foreign Currency Convertible Bonds (FCCBs). The
primary and secondary segments of the capital market expanded rapidly, with greater
institutionalization and wider participation of individual investors accompanying this growth.
However, many problems, including lack of confidence in stock investments, institutional
overlaps, and other governance issues, remain as obstacles to the improvement of Indian
capital market efficiency.
Page | 3
INTRODUCTION TO STOCK MARKET
Stock Market is a place where the trading takes place. A place where lots of money is
invested to buy stocks and lots of money is earned while selling stocks. Some people go with
profit and some people carries losses. But still for a trader it’s an everyday game. And in
games there are certain rules and regulations to be followed then only you can’t make
strategies and plans and play the game according to it and win it. For a new trader the first
thing to know about is where to invest, how to invest, how much to invest and win the game
of investment.
2.1 HOW TO INVEST?
When an investor starts investing in the stocks or the commodity market he has some
prominent exchanges to invest in. Few important ones are as follows:
1. BSE (Bombay Stock Exchange): BSE is the oldest stock exchange in Asia and has the
greatest number of listed companies in the world, with 4700 listed as of August 2007. Here
the trading in stocks takes place. It is located at Dalal Street, Mumbai, India. On 31
December 2007, the equity market capitalization of the companies listed on the BSE was
US$ 1.79 trillion, making it the largest stock exchange in South Asia and the 12th largest in
the world. BSE’s key index is sensex.
2. NSE (National Stock Exchange): It is the largest stock exchange in India in terms of daily
turnover and number of trades, for both equities and derivative trading. NSE has a market
capitalization of around Rs 47, 01,923 crore (7 August 2009) and is expected to become the
biggest stock exchange in India in terms of market capitalization by 2009 end. NSE’s key
index is Nifty.
3. MCX (Multi Commodity Exchange): MCX is an independent commodity exchange

based in India. It was established in 2003 and is based in Mumbai. The turnover of the
exchange for the period Apr-Dec 2008 was INR 32 Trillion. MCX offers futures trading in
Page | 4
Agricultural Commodities, Bullion, Ferrous & Nonferrous metals, Pulses, Oils & Oilseeds,
Energy, Plantations, Spices and other soft commodities
4. NCDEX (National Commodity & Derivatives Exchange Limited): NCDEX is an online

commodity exchange based in India. It was incorporated as a private limited company
incorporated on April 23, 2003 under the Companies Act, 1956. It obtained its Certificate for
Commencement of Business on May 9, 2003. It has commenced its operations on December
15, 2003. NCDEX is a closely held private company which is promoted by national level
institutions and has an independent Board of Directors and professionals not having vested
interest in commodity markets.
2.2 WHAT ARE STOCKS?
Plain and simple, stock is a share in the ownership of a company. Stock represents a claim on
the company's assets and earnings. As you acquire more stock, your ownership stake in the
company becomes greater. Whether you say shares, equity, or stock, it all means the same
thing. When you buy the shares of a company you become one of the many owners of that
much portion of a company. In other words you own a part of the company.
2.3 HOW TO TRADE IN STOCKS?
An investor can open the required accounts (Demat and Trading) with a registered broker
with NSE or BSE (whichever exchange he want to deal with) and start purchasing and selling
the stock of his wish.
2.4 WHAT ARE COMMODITIES?
A commodity is some good for which there demand is, but which is supplied without
qualitative differentiation across a market. It is a product that is the same no matter who
produces it. Generally, these are basic resources and agricultural products such as iron ore,
Page | 5
crude oil, coal, ethanol, salt, sugar, coffee beans, soybeans, aluminium, copper, rice, wheat,
gold, silver and platinum in which trading is done throughout the Commodities of the world.
2.5 HOW TO TRADE IN COMMODITIES?
For trading in commodities an investor have to open a commodity account with either MCX
or NCDEX (whichever commodity exchange he wants to trade in) and start buying and
selling commodities. But dealing with the stock and the commodity market is nothing less
than solving a complicated problem in mathematics. You have to apply algorithms, use
formulae, study trend and above all analyze the market properly before you actually start
investing. Without all these steps your money will go in waste and you may incur huge
losses. Some of the basic tips for increasing profits and minimizing losses in the stock and the
trading market are:
1. Cut Your Losses

2. Let Your Profits Run
3. Follow the Trend
4. Don`t Overtrade
5. Always Trade Liquid Stocks
6. Keep Positions Small
7. Don`t Buy Something Because it Looks Cheap
8. Take tips and advises from proven experts.
So if you are planning to invest in the stock and the commodity market then see, analyze and
then act. There are many tips providing companies which are giving tips on how and where to
invest your money in the share market. They tell you exactly which stock is beneficial to
invest. They give you ideas about when and what to buy and when to sell. Follow the rules
and you will surely be the winner.
Page | 6
RESEARCH METHODOLOGY
3.1 OBJECTIVE:
PRIME OBJECTIVE:
Our project objective is to do fundamental analysis of ten sectors of the Indian

economy based on NSE.
SUBSIDIARY OBJECTIVES:
1.To construct a portfolio on the bases of fundamental analysis of top 20 companies

out of 60 selected companies representing 10 different sectors.
2.To measure performs of virtual portfolio with actual market price.
3.2 TYPE OF RESEARCH
A descriptive research design has been used for the study.
3.3 SAMPLE SIZE:
Sampling size will be primarily consisting of the top six companies listed in the BSE
or NSE out of selected ten sectors.
3.4 SAMPLING UNIT:
Sample unit will be of two companies out of selected six companies of above
Page | 7
3.5 SAMPLING METHOD:
The sampling method will be on the basis of the Fundamental Analysis of the
companies.
3.6 DATA SOURCES:
PRIMARY DATA:
1. BSE
2. NSE
SECONDARY DATA:
1. Annual reports of the companies

2. Ratios
3. Library Research
4. Internet
3.7 EXPECTED CONTRIBUTION OF THE STUDY:
The Research will be useful to other students as reference. It will also be useful to Portfolio
managers to see comparison and to know the current situation of the top Indian companies.
3.8 LIMITATIONS OF THE STUDY:
• We have not included all the sectors and all industries of Indian stock exchanges.
• We can’t get all companies latest financial reports so we cannot calculate all the ratios
in fundamental analysis.
Page | 8
INTRODUCTION TO
FUNDAMENTAL ANALYSIS
Fundamental analysis is the cornerstone of investing. In fact, some would say that you aren't
really investing if you aren't performing fundamental analysis. Because the subject is so broad,
however, it's tough to know where to start. There are an endless number of investment
strategies that are very different from each other, yet almost all use the fundamentals. The goal
of this tutorial is to provide a foundation for understanding fundamental analysis. It's geared
primarily at new investors who don't know a balance sheet from an income statement. While
you may not be a "stock-picker extraordinaire" by the end of this tutorial, you will have a
much more solid grasp of the language and concepts behind security analysis and be able to
use this to further your knowledge in other areas without feeling totally lost. The biggest part
of fundamental analysis involves delving into the financial statements. Also known as
quantitative analysis, this involves looking at revenue, expenses, assets, liabilities and all the
other financial aspects of a company. Fundamental analysts look at this information to gain
insight on a company's future performance. A good part of this tutorial will be spent learning
about the balance sheet, income statement, cash flow statement and how they all fit together.
But there is more than just number crunching when it comes to analyzing a company. This is
where qualitative analysis comes in - the breakdown of all the intangible, difficult-to-measure
aspects of a company.
4.1 WHAT IS FUNDAMENTAL ANALYSIS?
In this section we are going to review the basics of fundamental analysis, examine how it can
be broken down into quantitative and qualitative factors, introduce the subject of intrinsic
value and conclude with some of the downfalls of using this technique. The Very Basics When
talking about stocks, fundamental analysis is a technique that attempts to determine a
security’s value by focusing on underlying factors that affect a company's actual business and
its future prospects. On a broader scope, you can perform fundamental analysis on industries
Page | 9
or the economy as a whole. 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 serves to
answer questions, such as:
• Is the company’s revenue growing?

• Is it actually making a profit?
• Is it in a strong-enough position to beat out its competitors in the future?
• Is it able to repay its debts?
• Is management trying to "cook the books"?
Of course, these are very involved questions, and there are literally hundreds of others you
might have about a company. It all really boils down to one question: Is the company’s stock a
good investment? Think of fundamental analysis as a toolbox to help you answer this
question. Note: The term fundamental analysis is used most often in the context of stocks, but
you can perform fundamental analysis on any security, from a bond to a derivative. As long as
you look at the economic fundamentals, you are doing fundamental analysis. For the purpose
of this tutorial, fundamental analysis always is referred to in the context of stocks.
4.2 FUNDAMENTALS: QUANTITATIVE AND QUALITATIVE
You could define fundamental analysis as “researching the fundamentals”, but that doesn’t tell
you a whole lot unless you know what fundamentals are. As we mentioned in the introduction,
the big problem with defining fundamentals is that it can include anything related to the
economic well-being of a company. Obvious items include things like revenue and profit, but
fundamentals also include everything from a company’s market share to the quality of its
management. The various fundamental factors can be grouped into two categories:
quantitative and qualitative. The financial meaning of these terms isn’t all that different from
their regular definitions. Here is how the MSN Encarta dictionary defines the terms:
• Quantitative – capable of being measured or expressed in numerical terms.
Page | 10
• Qualitative – related to or based on the quality or character of something, often as
opposed to its size or quantity.
In our context, quantitative fundamentals are numeric, measurable characteristics about a

business. It’s easy to see how the biggest source of quantitative data is the financial
statements. You can measure revenue, profit, assets and more with great precision. Turning to
qualitative fundamentals, these are the less tangible factors surrounding a business - things
such as the quality of a company’s board members and key executives, its brand-name
recognition, patents or proprietary technology.
4.3 QUANTITATIVE MEETS QUALITATIVE
Neither qualitative nor quantitative analysis is inherently better than the other. Instead, many
analysts consider qualitative factors in conjunction with the hard, quantitative factors. Take the
Coca-Cola Company, for example. When examining its stock, an analyst might look at the
stock’s annual dividend payout, earnings per share, P/E ratio and many other quantitative
factors. However, no analysis of Coca-Cola would be complete without taking into account its
brand recognition. Anybody can start a company that sells sugar and water, but few companies
on earth are recognized by billions of people. It’s tough to put your finger on exactly what the
Coke brand is worth, but you can be sure that it’s an essential ingredient contributing to the
company’s ongoing success.
4.4 THE CONCEPT OF INTRINSIC VALUE
Before we get any further, we have to address the subject of intrinsic value. One of the
primary assumptions of fundamental analysis is that the price on the stock market does not
fully reflect a stock’s “real” value. After all, why would you be doing price analysis if the
stock market were always correct? In financial jargon, this true value is known as the intrinsic
value.
Page | 11
For example, let’s say that a company’s stock was trading at Rs.20. After doing extensive
homework on the company, you determine that it really is worth Rs.25. In other words, you
determine the intrinsic value of the firm to be Rs.25. This is clearly relevant because an
investor wants to buy stocks that are trading at prices significantly below their estimated
intrinsic value. This leads us to one of the second major assumptions of fundamental analysis:
in the long run, the stock market will reflect the fundamentals. There is no point in buying a
stock based on intrinsic value if the price never reflected that value. Nobody knows how long
“the long run” really is. It could be days or years.
This is what fundamental analysis is all about. By focusing on a particular business, an

investor can estimate the intrinsic value of a firm and thus find opportunities where he or she
can buy at a discount. If all goes well, the investment will pay off over time as the market
catches up to the fundamentals.
The big unknowns are:
1) You don’t know if your estimate of intrinsic value is correct; and

2) You don’t know how long it will take for the intrinsic value to be reflected in the
marketplace.
4.5 CRITICISMS OF FUNDAMENTAL ANALYSIS
The biggest criticisms of fundamental analysis come primarily from two groups: proponents of
technical analysis and believers of the “efficient market hypothesis”. Technical analysis is the
other major form of security analysis. We’re not going to get into too much detail on the
subject.
Put simply, technical analysts base their investments (or, more precisely, their trades) solely
on the price and volume movements of securities. Using charts and a number of other tools,
they trade on momentum, not caring about the fundamentals. While it is possible to use both
techniques in combination, one of the basic tenets of technical analysis is that the market
discounts everything. Accordingly, all news about a company already is priced into a stock,
Page | 12
and therefore a stock’s price movements give more insight than the underlying fundamental
factors of the business itself.
Followers of the efficient market hypothesis, however, are usually in disagreement with both
fundamental and technical analysts. The efficient market hypothesis contends that it is
essentially impossible to produce market-beating returns in the long run, through either
fundamental or technical analysis. The rationale for this argument is that, since the market
efficiently prices all stocks on an ongoing basis, any opportunities for excess returns derived
from fundamental (or technical) analysis would be almost immediately whittled away by the
market’s many participants, making it impossible for anyone to meaningfully outperform the
market over the long term.
4.6 QUALITATIVE FACTORS - THE COMPANY
Before diving into a company's financial statements, we're going to take a look at some of the
qualitative aspects of a company.
Fundamental analysis seeks to determine the intrinsic value of a company's stock. But since
qualitative factors, by definition, represent aspects of a company's business that are difficult or
impossible to quantify, incorporating that kind of information into a pricing evaluation can be
quite difficult. On the flip side, as we've demonstrated, you can't ignore the less tangible
characteristics of a company.
In this section we are going to highlight some of the company-specific qualitative factors that
you should be aware of.
4.6.1 BUSINESS MODEL
You should understand the business model of any company you invest in. The "Oracle of
Omaha", Warren Buffett, rarely invests in tech stocks because most of the time he doesn't
understand them. This is not to say the technology sector is bad, but it's not Buffett's area of
expertise; he doesn't feel comfortable investing in this area. Similarly, unless you understand a
Page | 13
company's business model, you don't know what the drivers are for future growth, and you
leave yourself vulnerable to being blindsided like shareholders of Boston Chicken were.
4.6.2 COMPETITIVE ADVANTAGE
Another business consideration for investors is competitive advantage. A company's long-term

success is driven largely by its ability to maintain a competitive advantage - and keep it.
Powerful competitive advantages, such as Coca Cola's brand name and Microsoft's domination
of the personal computer operating system, create a moat around a business allowing it to keep
competitors at bay and enjoy growth and profits. When a company can achieve competitive
advantage, its shareholders can be well rewarded for decades.
4.6.3 MANAGEMENT
Just as an army needs a general to lead it to victory, a company relies upon management to
steer it towards financial success. Some believe that management is the most important aspect
for investing in a company. It makes sense - even the best business model is doomed if the
leaders of the company fail to properly execute the plan. So how does an average investor go
about evaluating the management of a company? This is one of the areas in which individuals
are truly at a disadvantage compared to professional investors. You can't set up a meeting with
management if you want to invest a few thousand dollars. On the other hand, if you are a fund
manager interested in investing millions of dollars, there is a good chance you can schedule a
face-to-face meeting with the upper brass of the firm. Every public company has a corporate
information section on its website. Usually there will be a quick biography on each executive
with their employment history, educational background and any applicable achievements.
Don't expect to find anything useful here. Let's be honest: We're looking for dirt, and no
company is going to put negative information on its corporate website.
Page | 14
4.6.4 CORPORATE GOVERNANCE
Corporate governance describes the policies in place within an organization denoting the
relationships and responsibilities between management, directors and stakeholders. These
policies are defined and determined in the company charter and its bylaws, along with
corporate laws and regulations. The purpose of corporate governance policies is to ensure that
proper checks and balances are in place, making it more difficult for anyone to conduct
unethical and illegal activities.
4.7 QUALITATIVE FACTORS - THE INDUSTRY
Each industry has differences in terms of its customer base, market share among firms,
industry-wide growth, competition, regulation and business cycles. Learning about how the
industry works will give an investor a deeper understanding of a company's financial health.
4.7.1 CUSTOMERS
Some companies serve only a handful of customers, while others serve millions. In general,
it's a red flag (a negative) if a business relies on a small number of customers for a large
portion of its sales because the loss of each customer could dramatically affect revenues. For
example, think of a military supplier who has 100% of its sales with the U.S. government. One
change in government policy could potentially wipe out all of its sales. For this reason,
companies will always disclose in their 10-K if any one customer accounts for a majority of
revenues.
4.7.2 MARKET SHARE
Understanding a company's present market share can tell volumes about the company's
business. The fact that a company possesses an 85% market share tells you that it is the largest
player in its market by far. Furthermore, this could also suggest that the company possesses
Page | 15
some sort of "economic moat," in other words, a competitive barrier serving to protect its
current and future earnings, along with its market share. Market share is important because of
economies of scale. When the firm is bigger than the rest of its rivals, it is in a better position
to absorb the high fixed costs of a capital-intensive industry.
4.7.3 INDUSTRY GROWTH
One way of examining a company's growth potential is to first examine whether the amount of
customers in the overall market will grow. This is crucial because without new customers, a
company has to steal market share in order to grow. In some markets, there is zero or negative
growth, a factor demanding careful consideration. For example, a manufacturing company
dedicated solely to creating audio compact cassettes might have been very successful in the
'70s, '80s and early '90s. However, that same company would probably have a rough time now
due to the advent of newer technologies, such as CDs and MP3s. The current market for audio
compact cassettes is only a fraction of what it was during the peak of its popularity.
4.7.4 COMPETITION
Simply looking at the number of competitors goes a long way in understanding the
competitive landscape for a company. Industries that have limited barriers to entry and a large
number of competing firms create a difficult operating environment for firms. One of the
biggest risks within a highly competitive industry is pricing power. This refers to the ability of
a supplier to increase prices and pass those costs on to customers. Companies operating in
industries with few alternatives have the ability to pass on costs to their customers. A great
example of this is Wal-Mart. They are so dominant in the retailing business, that Wal-Mart
practically sets the price for any of the suppliers wanting to do business with them. If you want
to sell to Wal-Mart, you have little, if any, pricing power.
Page | 16
4.7.5 REGULATION
Certain industries are heavily regulated due to the importance or severity of the industry's
products and/or services. As important as some of these regulations are to the public, they can
drastically affect the attractiveness of a company for investment purposes. In industries where
one or two companies represent the entire industry for a region (such as utility companies),
governments usually specify how much profit each company can make. In these instances,
while there is the potential for sizable profits, they are limited due to regulation.
Page | 17
ECONOMY ANALYSIS
5.1 ECONOMIC CYCLE
Countries go through the business or economic cycle and the stage of the cycle at which a
country is in has a direct impact both on industry and individual companies. It affects
investment decisions, employment, demand and the profitability of companies.
The four stages of an economic cycle are:
• Depression
• Recovery
• Boom
• Recession
DEPRESSION
At the time of depression, demand is low and falling. Inflation rate is high and so are interest
rates in the market. Companies, crippled by high borrowing and falling sales, are forced to
curtail production, close down plants built at times of higher demand, and let workers go. The
whole economy gets ruined during this period. All the well established companies’ turns from
profitable trend to the loss making companies and the companies in the developing stage goes
into the liquidation.
RECOVERY
During this phase, the economy begins to recover. Investment begins a new and the demand
grows. Companies begin to post profits. Conspicuous spending begins once again. Once the
Page | 18
recovery stage sets in fully, profits begin to grow at a higher proportionate rate. More and
more new companies are floated to meet the increasing demand in the economy. Companies
which were well established and were earning losses starts making profits again and the
economy starts regaining its position. If this is the case in some particular industry than many
new companies are also attracted towards this industry and the economy starts growing and
this stage and achieves the targeted growth slowly and gradually.
BOOM
During this phase of economy the demand of the stock reaches at an all time high. Investment
is also high. Interest rates are low. There is a great demand of the stock in the market. But,
gradually as time passes, the company tries to increase the supply o the stock in the market.
So, when supply begins to exceed the demand prices that had been rising begin to stabilize
and even fall. Slowly and gradually the market stabilizes and the boom phase matures and
prices also get stabilized with the changing situations of the market.
RECESSION
In the recession phase the economy slowly begins to downturn. Demand starts falling.
Interest rates and inflation rate is too high. Companies start finding it difficult to sell their
goods. The overall industry suffers a lot during this phase of the economy. The recession is
due to various reasons. No particular reason can be mentioned as such. The well established
companies also have to suffer a lot due to recession period. The market price of all the goods
of almost all the industries falls to a great extent.
Page | 19
5.2 GLOBAL ECONOMY
The global economy refers to the increasing integration of fragmented national markets for
goods and services into a single global market. In such a market, companies may source from
one country, conduct research and development in another country and then takes orders in a
third country, and sells wherever there is existence of demand regardless of the customer’s
nationality.
GLOBAL ECONOMY SCENARIO
According to the report of the Business Economics and Public Policy, the economic growth
around the globe remained strong in 2008 despite the current credit crisis in the USA. The
IMF has projected the world economic growth to reach 4.8 percent in 2009. The emerging
economies i.e. China and India have an important role in the global economy. The stresses in
U.S. financial markets that first emerged in the summer of 2007 transformed themselves into
a full-blown global financial crisis in the fall of 2009.
Banks purchased vast quantities of loans used for house purchases in the United States. As
interest rates were increased in 2006 and 2007 in that country, many of those debtors began
to default, putting at risk the value of all the housing loans. This uncertainty has resulted in
the share prices of financial and non financial companies falling, affecting lending operations
between the banks. Financial institutions involved in property, and investment banks failed,
while other institutions experienced increasingly large losses on their investments in the
housing markets.
As the crisis intensified, the effects of financial turmoil on developing countries increased I
step, as risk aversion sent spreads soaring, equity markets tumbling, exchange rates falling
and capital flows into decline. In this situation, growth prospects for both high income
developing countries have deteriorated substantially, and a movement of global growth from
2.5 percent in 2008 to 0.9 percent in 2009.
Page | 20
The potential risk to the global economy is high oil prices, currency instability and high ratios
of inflation. It is predicted that turmoil in the global financial markets affects the economic
growth around the world.
POTENTIAL ECONOMIC AND FINANCIAL RISKS
The potential risks to the global economy are high oil prices and high ratios of inflation. It is
predicted that turmoil in the global financial markets affects the economic growth around the
world. Weaker growth in the United States will have spill-over effects on trade and weaken
the economies of its trading partners and especially the emerging and under developed
countries. There are still global imbalances: between U.S. budget and current account deficits
and the accumulation of huge foreign currency reserves by Asian central banks remain the
potential risks to the global economy in 2008. It is clear that rising food and oil prices are
secondary risks for the world economy as they will be further inflated by the disruption in the
global financial market. Some of the reasons due to which crisis can last for a longer period
are as follows:
The credit a squeeze: It is a slow-burning crisis that is going to take a long time to unfold,
having an adverse impact on economic growth for years to come.
Housing collapse: The bubble in the residential property markets of the US and other rich
countries has only just started to deflate, and has much further to go.
Inflation: Years of reckless money creation by central banks, supply/demand imbalances

have driven up the prices of key resources such as oil. The fading impacts of unusually-high
tech-driven productivity gains, and shortages of high level skills in many sectors such as
global mining and Chinese manufacturing, are combining to bring back the inflation problem.
Currency instability: The US needs to attract an extra $3 billion in foreign capital every
business day to finance its foreign trade deficit. If foreign governments, institutions and
private investors become less willing to provide that capital, the dollar will remain under
Page | 21
pressure; continue falling in value in terms of other currencies which would be set back to
many developing countries and emerging market economies in the world.
Cheap money: The greater the risk of global recession and of deflation, the more central
banks will force down short-term interest rates to combat that risk. In Japan the Central Bank
offered credit to commercial banks at virtually no cost.
World trade: The progress of globalization would not cease because of lower growth in the
world economy, even though progress will be slowed somewhat by rising protectionism in
the developed nations, where whole swathes of job classes are under increasing pressure from
foreign competition.
5.3 INDIAN ECONOMY
INDUSTRIAL PRODUCTION
The data on the industrial production shows initial indications of improvement. The overall
index of industrial production after registering a growth of 10.3 percent in October 2009
witnessed an even higher growth of 11.7 percent in November 2009.
Further the classifications of the industrial production shows the manufacturing and mining
sectors register growths of 12.7 percent and 10.0 percent respectively in November 2009.
Growth in the electricity sector was also seen to grow by 3.3 percent compared to the growth
recorded in the previous year.
Page | 22
CORE INFRASTRUCTURE
The overall index of six core infrastructure industries registered a growth of 6.0 percent in
December 2009, which was 5.3 percentages higher than the growth recorded in the same
month of previous year.
The crude oil production after registering negative growth for five consecutive months,
witnessed a growth of 1.1 percent in December 09. Once again cement and finished steel
segments were best performers, with respective growths of 11.0 percent and 9.6 percent.
The coal and petroleum sectors remained laggards. The growth in coal production was 2.5
percent in December 09 much lower than the growth of 11.2 percent in the same month of
previous year. Similarly petroleum refinery segment registered 0.9 percent growth in
December 2009 as against a high growth of 3.0 percent recorded in corresponding month of
08.
Inflation
The skyrocketing food prices resulted into flaring of overall inflation; this continues to be a
major concern. The rate of inflation was increased by almost 2 percentages. This is changed
from 5.5 percent in November 09 to 7.3 percent in December 09. This was also higher than
the inflation rate of 6.2 percent recorded in December 2008.
In December 2009 the inflation rate for three broad segments – primary articles, fuel
lubricants and light and manufactured products was 14.9 percent, 4.3 percent and 5.2 percent
respectively.
Monetary Indicators
The broad money supply expanded by 10.9 percent during the April-December period of
2009-10. The corresponding growth during the previous fiscal was 12.4 percent.
The aggregate deposits increased by 9.8 percent during April-December period of 2009 10.
The growth during the first three quarters of 2008-09 was 11.7 percent. (Calculated from
March end up to the December)
Page | 23
The bank credit went by 7.0 percent over the period April to December 2009-10, while the
growth in corresponding period of the last fiscal was 12.1 percent.
Stock Market Trends
High investment activity was seen in the stock market after the economic fundamentals
gained strength. The stock market remained bullish in the month of December 09 with BSE
Sensex closing at over 17k points by month end.
Fiscal Trends
The gross tax revenue collections during the period April-December 2009-10 amounted to Rs
4, 16, 094 crore a drop by 2.5 percent from Rs 4, 26,795 crore revenue collections over the
same period last fiscal. While income from the direct sources of tax revenue, i.e. income and
corporate tax increased however, collections from indirect sources witnessed a fall. Over the
period, April-December 2009-10 the growth in revenue from income tax was 12.2 percent
and in case of corporate tax it was 16.8 percent.
Growth in the custom duty, excise duty and service tax collections, on the other hand, was
negative 29.2 percent, (-) 18.2 percent and (-) 5.9 percent respectively.
The revenue receipts of the government witnessed a marginal increase, from Rs 3, 75,937
core in April- December 2008-09 to Rs 3, 89,271 crore during the same period this financial
year. With an additional expenditure of Rs 1,10, 324 crore during the period April-December
2009-10 vis-à-vis same period last year, the total expenditure saw an increase of 18.5 percent.
The resultant fiscal deficit over the corresponding period was Rs 3, 09, 980 crore.
Foreign Trade
The growth in the merchandise exports sector turned positive in November 2009 after a
thirteen-month period of decline. The growth recoded in December 2009 was relatively lower
than the growth seen in the previous month. In December 2009 the exports registered a
growth of 9.3 percent, as against the growth of 18.2 percent registered in November 2009.
Page | 24
The imports also registered a positive growth after being in the negative territory for straight
eleven months of 2009 since January. The imports grew by 27.2 percent in December 2009.
Oil imports grew by 42.8 percent, while non-oil imports increased by 22.4 percent.
Foreign Investments
Foreign direct investment of USD 1.7 billion was received in November 2009 as against the
inflows of USD 2.3 billion in the previous month. There was a decline in the portfolio
investments as well in November 09 vis-à-vis inflows in the previous month. The cumulative
investment inflows over the period April-November 2009-10 amounted to USD 47.1 billion.
Foreign Exchange Reserves
The forex reserves accumulated in November 2009 was USD 286.7 billion. Last year the
reserves had fallen to USD 247.6 billion in the same month.
Exchange Rate
The rupee witnessed slight appreciation in the month of January 2010 vis-à-vis the USD. The
Rupee Dollar exchange rate which averaged Rs 46.6/USD in the month of December 2009
was at Rs 45.9/USD in January 2010.
5.4 INVESTMENT DECISION
Investors should attempt to determine the stage of the economic cycle of the country. They
should invest at the end of a depression when the economy begins to recover. Investors
should disinvest either just before or during the boom, or, at the worst, just after the boom.
Investment and disinvestments made at these times will earn the investor greater benefits.
Here, as the economy is in recession stage, investors should disinvest their holdings in
cyclical industries and switch to growth or evergreen industries.
Page | 25
COMPANY ANALYSIS
The company analysis is done on base of fundament analysis which is done on the bases of:
• Edward Altman’s Z score

• Ratios
• Earnings Per Share
• Book Value
• Market Capitalization
• Promoters’ Shareholding Pattern
6.1 EDWARD ALTMAN’S Z SCORE
The Z-score formula for predicting bankruptcy was published in 1968 by Edward I.
Altman. He was then an Assistant Professor of Finance at New York University, and, in
2009, is still a professor at NYU, now as a long-tenured one. The Z-score is a formula
involving multiple variables that measures the financial health of a company. The formula
may be used to predict the probability that a firm will go into bankruptcy within two years. Z-
scores are still used occasionally as an easy-to-calculate control measure for the financial
distress status of companies in academic studies about other topics.
6.1.1 ESTIMATION OF THE FORMULA
The Z-score is a linear combination of four or five common business ratios, weighted by
coefficients that were estimated by Altman's application of the statistical method of
discriminate analysis to a dataset of publicly held manufacturers. Altman first identified a set
of firms which had declared bankruptcy, and he then collected a matched sample of firms
which had survived, with matching by industry and approximate size (assets).
Page | 26
The estimation was originally based on data from publicly held manufacturers, but has since
been re-estimated based on other datasets for private manufacturing, non-manufacturing and
service companies.
The original data sample consisted of 66 firms, half of which had filed for bankruptcy under
Chapter 7. All businesses in the database were manufacturers and small firms with assets of
<$1 million were eliminated.
6.1.2 THE ORIGINAL Z-SCORE FORMULA WAS AS FOLLOWS:
Z = 1.2T1 + 1.4T2 + 3.3T3 + .6T4 + .999T5.

Where,
T1 = Working Capital / Total Assets.
It measures liquid assets in relation to the size of the company.
T2 = Retained Earnings / Total Assets.
It measures profitability that reflects the company's age and earning power.
T3 = Earnings before Interest and Taxes / Total Assets.
It measures operating efficiency apart from tax and leveraging factors. It recognizes
operating earnings as being important to long-term viability.
T4 = Market Value of Equity / Book Value of Total Liabilities.
It adds market dimension that can show up security price fluctuation as a possible red
flag.
T5 = Sales/ Total Assets.
It is standard measure for turnover (varies greatly from industry to industry).
Altman found that the ratio profile for the bankrupt group fell at -0.25 avg, and for the non-
bankrupt group at +4.48 avg.
6.1.3 PRECEDENTS
Altman's work built upon research by accounting researcher William Beaver and others. In
the 1930s and on, Mervyn and others had collected matched samples and assessed that
various accounting ratios appeared to be valuable in predicting bankruptcy.
Page | 27
William Beaver's work, published in 1966 and 1968, was the first to apply a statistical
method, t-tests to predict bankruptcy for a pair-matched sample of firms. Beaver applied this
method to evaluate the importance of each of several accounting ratios based on univariate
analysis, using each accounting ratio one at a time. Altman's primary improvement was to
apply a statistical method, discriminant analysis, which could take into account multiple
variables simultaneously.
6.1.4 ACCURACY AND EFFECTIVENESS
Some studies measuring the effectiveness of the Z-score have shown the model to be accurate
with >70% reliability (Eidleman). What is usually meant by accuracy is the percentage of
firms that are classified correctly, within the estimation sample, when the Z-score values for
firms are translated into yes/no predictions for whether each turns out to be bankrupt.
Because the parameters of the model are estimated based on the same sample, and because
the sample itself is not randomly selected, it is not reasonable to project that the formula will
achieve similar accuracy when applied for making predictions about other firms.
From about 1985 onwards, the Z-scores gained wide acceptance by auditors, management
accountants, courts, and database systems used for loan evaluation (Eidleman). The formula's
approach has been used in a variety of contexts and countries, although it was designed
originally for publicly held manufacturing companies with assets of more than $1 million.
Later variations by Altman take into account the book value of privately held shares, and the
fact that turnover ratios vary widely in non-manufacturing industries.
The Altman Z-Score model is not recommended for use with financial firms; because these
firms often have off-balance sheet liabilities that aren't captured by the financial statement
data used in the Altman Z-Score model. There are market-based formulas used to predict the
default of financial firms (such as the Merton Model), but these have limited predictive value
because they rely on market data (fluctuations of share and options prices to imply
fluctuations in asset values) to predict a market event (default, i.e., the decline in asset values
below the value of a firm's liabilities).
Page | 28
6.1.5 ORIGINAL Z-SCORE COMPONENT DEFINITIONS VARIABLE
DEFINITION WEIGHTING FACTOR
T1 = Working Capital / Total Assets

T2 = Retained Earnings / Total Assets
T3 = Earnings before Interest and Taxes / Total Assets
T4 = Market Value of Equity / Total Liabilities
T5 = Sales/ Total Assets
Z Score Bankruptcy Model:
Z = 1.2T1 + 1.4T2 + 3.3T3 + .6T4 + .999T5
Zones of Discrimination:
Z > 2.99 -“Safe” Zone

1.8 < Z < 2.99 -“Grey” Zone
Z < 1.80 -“Distress” Zone
6.1.6 Z-SCORE ESTIMATED FOR PRIVATE FIRMS
T1 = (Current Assets-Current Liabilities) / Total Assets

T4 = Book Value of Equity / Total Liabilities
T5 = Sales/ Total Assets
Z' Score Bankruptcy Model:
Z' = .717T1 + .847T2 + 3.107T3 + .420T4 + .998T5
Page | 29
Z' > 2.9 -“Safe” Zone

1.23 < Z’ < 2. 9 -“Grey” Zone
Z' < 1.23 -“Distress” Zone
6.1.7 Z-SCORE ESTIMATED FOR NON-MANUFACTURER INDUSTRIALS &

EMERGING MARKET CREDITS
T1 = (Current Assets-Current Liabilities) / Total Assets

T4 = Book Value of Equity / Total Liabilities
Z-Score Bankruptcy Model:
Z = 6.56T1 + 3.26T2 + 6.72T3 + 1.05T4
Z > 2.6 -“Safe” Zone

1.1 < Z < 2.6 -“Grey” Zone
Z < 1.1 -“Distress” Zone
Here we calculated Z score for 20 companies which were short listed through fundamental
analysis of 60 companies and it is shown in below tables.
Page | 30
Automobile Sector (under category of Manufacturing Industry)
Hero Honda Motors

Z score model Mar '05 Mar '06 Mar '07 Mar '08 Mar '09
T1 = Working Capital / Total Assets -0.476 -0.357 -0.199 -0.228 -0.254
T2 = Retained Earnings / Total Assets 0.243 0.261 0.197 0.189 0.227
T3 = Earnings Before Interest and Taxes / Total Assets 0.729 0.650 0.478 0.457 0.463
T4 = Market Value of Equity / Total Liabilities 6.455 8.100 5.219 4.448 5.514
T5 = Sales/ Total Assets 5.077 4.600 4.384 3.864 3.494
Z = 1.2T1 + 1.4T2 + 3.3T3 + .6T4 + .999T5 11.118 11.538 9.125 8.026 8.339
Table 6.1: Z score of Hero Honda Motors
Maruti Suzuki India

Z = 1.2T1 + 1.4T2 + 3.3T3 + .6T4 + .999T5 5.570 6.761 5.394 4.865 4.264
Table 6.2: Z score of Maruti Suzuki India
Banking Sector (under category of Non-Manufacturing Industry)
ICICI Bank
T1 = (Current Assets-Current Liabilities) / Total Assets 0.008 0.027 0.063 0.061 0.060
T4 = Book Value of Equity / Total Liabilities 0.748 0.883 0.705 1.162 1.306
Z = 6.56T1 + 3.26T2 + 6.72T3 + 1.05T4 0.945 1.197 1.232 1.720 1.872
Table 6.3: Z score of ICICI Bank
Page | 31
HDFC Bank
T1 = (Current Assets-Current Liabilities) / Total Assets 0.089 0.059 0.029 0.116 0.069
Z = 6.56T1 + 3.26T2 + 6.72T3 + 1.05T4 1.679 1.307 1.125 1.818 1.450
Table 6.4: Z score of HDFC Bank
FMCG Sector (under category of Manufacturing Industry)
ITC
T1 = Working Capital / Total Assets 0.010 0.056 0.092 0.108 0.087
Z = 1.2T1 + 1.4T2 + 3.3T3 + .6T4 + .999T5 3.305 7.984 6.574 7.100 6.114
Table 6.5: Z score of ITC
Colgate Palmolive India

Z = 1.2T1 + 1.4T2 + 3.3T3 + .6T4 + .999T5 11.977 19.108 16.307 32.545 29.732
Table 6.6: Z score of Colgate Palmolive India
Page | 32
Infrastructure Sector (under category of Manufacturing Industry)
Housing Development and Infrastructure

Z = 1.2T1 + 1.4T2 + 3.3T3 + .6T4 + .999T5 1.711 3.119 4.608 3.294 1.852
Table 6.7: Z score of Housing Development and Infrastructure Ltd
DLF
T1 = Working Capital / Total Assets -0.550 -0.188 0.191 0.269 0.236
Z = 1.2T1 + 1.4T2 + 3.3T3 + .6T4 + .999T5 0.257 0.567 0.823 4.704 1.665
Table 6.8: Z score of DLF
IT Sector (under category of Non-Manufacturing Industry)
Infosys Technologies
T1 = (Current Assets-Current Liabilities) / Total
Assets 0.180 0.182 0.162 0.168 0.149
Z = 6.56T1 + 3.26T2 + 6.72T3 + 1.05T4 6.052 5.436 5.493 5.293 5.356
Table 6.9: Z score of Infosys Technologies
Page | 33
Tata Consultancy Services
Assets -0.144 -0.145 -0.109 -0.056 0.021
Z = 6.56T1 + 3.26T2 + 6.72T3 + 1.05T4 1.180 0.953 1.013 1.165 1.428
Table 6.10: Z score of TCS Ltd
Steel and other Alloy Sector (under category of Manufacturing Industry)
Steel Authority of India

T1 = Working Capital / Total Assets -0.082 0.021 0.060 0.054 0.093
Z = 1.2T1 + 1.4T2 + 3.3T3 + .6T4 + .999T5 5.408 4.675 5.068 5.396 3.270
Table 6.11: Z score of SAIL
Tata Steel
Z = 1.2T1 + 1.4T2 + 3.3T3 + .6T4 + .999T5 4.857 4.286 2.357 1.766 1.152
Table 6.12: Z score of Tata Steel Ltd
Page | 34
Oil and Gas Sector (under category of Manufacturing Industry)
Oil and Natural Gas Corporation

Z = 1.2T1 + 1.4T2 + 3.3T3 + .6T4 + .999T5 3.085 3.112 3.358 3.239 2.751
Table 6.13: Z score of ONGC
Bharat Petroleum Corporation

T1 = Working Capital / Total Assets -0.211 0.022 -0.040 -0.083 -0.129
Z = 1.2T1 + 1.4T2 + 3.3T3 + .6T4 + .999T5 7.141 5.457 5.958 5.250 4.786
Table 6.14: Z score of BPCL
Pharmaceutical Sector (under category of Manufacturing Industry)
Cipla
Z = 1.2T1 + 1.4T2 + 3.3T3 + .6T4 + .999T5 4.186 5.003 5.900 4.630 4.177
Table 6.15: Z score of Cipla
Page | 35
Biocon
Z = 1.2T1 + 1.4T2 + 3.3T3 + .6T4 + .999T5 3.603 3.169 3.194 3.143 2.301
Table 6.16: Z score of Biocon
Power Sector (under category of Manufacturing Industry)
NTPC
T1 = Working Capital / Total Assets -0.040 -0.023 -0.012 0.007 -0.004
Z = 1.2T1 + 1.4T2 + 3.3T3 + .6T4 + .999T5 1.571 1.876 2.009 2.245 1.872
Table 6.17: Z score of NTPC
Suzlon Energy
T2 = Retained Earnings / Total Assets 0.261 0.215 0.189 0.126 -0.034
T3 = Earnings Before Interest and Taxes / Total Assets 0.348 0.304 0.252 0.149 -0.007
Z = 1.2T1 + 1.4T2 + 3.3T3 + .6T4 + .999T5 3.674 4.627 3.501 4.087 0.973
Table 6.18: Z score of Suzlon Energy
Page | 36
Telecom Sector (under category of Non-Manufacturing Industry)
Bharti Airtel
Assets -0.371 -0.448 -0.484 -0.349 -0.313
Z = 6.56T1 + 3.26T2 + 6.72T3 + 1.05T4 -1.316 -0.290 0.352 1.170 1.112
Table 6.19: Z score of Bharti Airtel
TATA COMM
Assets -0.189 -0.122 -0.113 -0.144 -0.155
Z = 6.56T1 + 3.26T2 + 6.72T3 + 1.05T4 1.397 1.202 1.136 0.557 0.572
Table 6.20: Z score of Tata Communication Ltd
Page | 37
Combine Altman Z Score Model Rating
Companies Mar ‘05 Mar ‘06 Mar '07 Mar '08 Mar '09 Average Rating
Hero Honda 11.118 11.538 9.125 8.026 8.339 9.629 19
Maruti Suzuki 5.570 6.761 5.394 4.865 4.264 5.371 15
ICICI 0.945 1.197 1.232 1.720 1.872 1.393 4
HDFC 1.679 1.307 1.125 1.818 1.450 1.476 5
ITC 3.305 7.984 6.574 7.100 6.114 6.215 18
Colgate 11.977 19.108 16.307 32.545 29.732 21.934 20
HDIL 1.711 3.119 4.608 3.294 1.852 2.917 9
DLF 0.257 0.567 0.823 4.704 1.665 1.603 6
Infosys 6.052 5.436 5.493 5.293 5.356 5.526 16
TCS 1.180 0.953 1.013 1.165 1.428 1.148 3
SAIL 5.408 4.675 5.068 5.396 3.270 4.763 13
TATA Steel 4.857 4.286 2.357 1.766 1.152 2.884 8
ONGC 3.085 3.112 3.358 3.239 2.751 3.109 11
BPCL 7.141 5.457 5.958 5.250 4.786 5.718 17
Cipla 4.186 5.003 5.900 4.630 4.177 4.779 14
Biocon 3.603 3.169 3.194 3.143 2.301 3.082 10
NTPC 1.571 1.876 2.009 2.245 1.872 1.915 7
Suzlon 3.674 4.627 3.501 4.087 0.973 3.372 12
Bharti -1.316 -0.290 0.352 1.170 1.112 0.205 1
Tata Comm 1.397 1.202 1.136 0.557 0.572 0.973 2
Table 6.21: Z score Ratings
Page | 38
6.2 RATIO ANALYSIS
Ratio analysis involves establishing financial relationship between components of financial

statements. Ratios are relationships expressed in mathematical terms between the items of
financial statements.
We are doing the fundamental analysis for the shareholders or investors’ perspectives so
many other ratios described below will help them to get better investment ideas.
To do the fundamental analysis we had taken 12 ratios, Z Score Model, books values, earning
per shares and market capitalization of the last 5 financial year starting from April 2005 to
end on March 2009. In total we fundamentally analyze 60 companies of 10 sectors of Indian
Economy which divided top 6 companies from each sectors.
Ratios can be classified into the following categories:
Investment Valuation Ratios

• Dividend per Share
• Net Operating Profit per Share
• Bonus in Equity Capital
Profitability Ratios
• Net Profit Margin

• Return on Capital Employed
• Return on Assets
• Return on Long Term Funds
Liquidity and Solvency Ratios
• Current Ratio
• Quick Ratio
• Debt Equity Ratio
Page | 39
Debt Coverage Ratios
• Total Debt to Owners Fund
Cash Flow Indicator Ratios
• Dividend Payout Ratio Net Profit

• Earning Retention Ratio
• Adjusted Cash Flow Times
6.2.1 INVESTMENT VALUATION RATIOS
This analysis looks at a wide array of ratios that can be used by investors to estimate the
attractiveness of a potential or existing investment and get an idea of its valuation.
This ratio help the investors to value the firm (returns) in terms of bonus, dividend, Net Profit
per share their face values free reserves etc. In short the return given or amount given to the
shareholders or investors, shown by this ratio.
Dividend per Share or Dividend Yield
Annual Dividend per Share

Dividend Yield=
Stock Price per Share
A stock's dividend yield is expressed as an annual percentage and is calculated as the

company's annual cash dividend per share divided by the current price of the stock. The
dividend yield is found in the stock quotes of dividend-paying companies. Investors should
note that stock quotes record the per share dollar amount of a company's latest quarterly
declared dividend. This quarterly dollar amount is annualized and compared to the current
stock price to generate the per annum dividend yield, which represents an expected return.
Page | 40
Income investors value a dividend-paying stock, while growth investors have little interest in
dividends, preferring to capture large capital gains. Whatever your investing style, it is a
matter of historical record that dividend-paying stocks have performed better than non-
paying-dividend stocks over the long term
Here, we take this ratio for the top 2 companies of each sector (20 companies in total) and the
better or high ratio given company will give preference first for the investment of amount of
10,000,000 in our Portfolio.
Companies Mar '05 Mar '06 Mar '07 Mar '08 Mar '09 Average Rating
Hero Honda 20 20 17 19 20 19.2 18
Maruti Suzuki 2 3.5 4.5 5 3.5 3.7 9
ICICI 8.5 8.5 10 11 11 9.8 14
HDFC 4.5 5.5 7 8.5 10 7.1 11
ITC 31 2.65 3.1 3.5 3.7 8.79 13
Colgate 7 7.5 9.5 13 15 10.4 15
HDIL 0 0 0 5 0 1 2
DLF 4 4 2 4 2 3.2 8
Infosys 11.5 45 11.5 33.25 23.5 24.95 19
TCS 11.5 13.5 11.5 14 14 12.9 16
SAIL 3.3 2 3.1 3.7 2.6 2.94 4
TATA Steel 13 13 15.5 16 16 14.7 17
ONGC 40 45 31 32 32 36 20
BPCL 12.5 2.5 16 4 7 8.4 12
Cipla 3.5 2 2 2 2 2.3 3
Biocon 2 2.5 3 5 3 3.1 6.5
NTPC 2.4 2.8 3.2 3.5 3.6 3.1 6.5
Suzlon 4 5 5 1 0 3 5
Bharti 0 0 0 0 2 0.4 1
Tata Comm 6 4.5 4.5 4.5 4.5 4.8 10
Table 6.22: Dividend Yield
Page | 41
Net Operating Profit per Share
Net Operating Profit after Tax (NOPAT)

Net Operating Profit per Share =
Total Share Capital
It shows the net profit which investors will going to earn on each shares they held in the
company.
Hero Honda 372 436.64 496.07 518.06 617.23 488 18
Maruti Suzuki 382.34 422.2 512.49 625.34 717.5 531.974 19
ICICI 160.69 196.87 316.45 354.71 343.77 274.498 13
HDFC 120.17 177.8 259.98 348.57 464.77 274.258 12
ITC 306.4 26.09 32.73 37.23 39.7 88.43 6
Colgate 70.70 84.42 97.95 111.69 128.74 98.7 7
HDIL 64.93 84.43 66.86 111.07 62.41 77.94 4
DLF 1,175.12 252.45 7.2 32.24 16.59 296.72 16
Infosys 253.53 327.63 230.2 273.57 353.75 287.736 15
TCS 167.69 229.52 152.67 189.39 228.92 193.638 11
SAIL 69.52 68.28 83.11 96.74 106.04 84.738 5
TATA Steel 261.8 273.4 300.66 269.02 333.27 287.63 14
ONGC 323.71 336.55 266.09 280.83 299.24 301.284 17
BPCL 1,929.25 2,517.78 2,670.69 3,048.28 3,708.38 2774.876 20
Cipla 75.18 99.42 45.83 54.08 67.34 68.37 2
Biocon 65.04 69.16 82.54 83.4 45.21 69.07 3
NTPC 27.37 31.71 39.58 44.98 50.91 38.91 1
Suzlon 220.6 131.76 186.97 46.38 48.4 126.822 9
Bharti 43.93 59.45 94.16 135.73 179.37 102.528 8
Tata Comm 115.9 132.67 141.82 115.2 131.56 127.43 10
Table 6.22: Net Operating Profit per Share
Page | 42
Bonus per Share
Bonus given by the company to their investor in the ratio of 1:1 or 1:2 means if it is 1:1 then
they give same number of shares which already held by the share holder. The companies give
bonus out of their free reserves built out of the genuine profits or share premium collected in
cash only.
Bonus per share increase the number of share for the investor and it automatically increase
their amount and profit out of that company. Investor is consider this news i.e. declaration of
bonus as the best news from the company. So, the company which gives more bonuses per
share selected first by us and so on.
6.2.2 PROFITABILITY RATIOS
This section of the tutorial discusses the different measures of corporate profitability and
financial performance. These ratios, much like the operational performance ratios, give users
a good understanding of how well the company utilized its resources in generating profit and
shareholder value.
The long-term profitability of a company is vital for both the survivability of the company as
well as the benefit received by shareholders. It is these ratios that can give insight into the all
important “Profit”.
In this section, we will look at four important profit margins, which display the amount of
profit a company generates on its sales at the different stages of an income statement. We'll
also show you how to calculate the effective tax rate of a company. The last three ratios
covered in this section - Return on Assets, Return on Equity and Return on Capital
Employed - detail how effective a company is at generating income from its resources.
Page | 43
Net Profit Margin (%)
Net Income
Net Profit Margin =
Net Sales (Revenue)
Often referred to simply as a company's profit margin, the so-called bottom line is the most
often mentioned when discussing a company's profitability. While undeniably an important
number, investors can easily see from a complete profit margin analysis that there are several
income and expense operating elements in an income statement that determine a net profit
margin. It behooves investors to take a comprehensive look at a company's profit margins on
a systematic basis
Return on Capital Employed (ROCE)
Net Income
Return on Capital Employed (ROCE) =
Capital Employed
Capital Employed = Average Debt Liabilities + Average Shareholders’ Equity
The return on capital employed (ROCE) ratio, expressed as a percentage, complements

the return on equity (ROE) ratio by adding a company's debt liabilities, or funded debt, to
equity to reflect a company's total "capital employed". This measure narrows the focus to
gain a better understanding of a company's ability to generate returns from its available
capital base. By comparing net income to the sum of a company's debt and equity capital,
investors can get a clear picture of how the use of leverage impacts a company's profitability.
Financial analysts consider the ROCE measurement to be a more comprehensive profitability
indicator because it gauges management's ability to generate earnings from a company's total
pool of capital.
Page | 44
Hero Honda 67.12 60.31 43.48 41.57 43.33 51.162 18
Maruti Suzuki 28.08 33.46 30.65 26.18 17.37 27.148 12
ICICI 8.39 8.58 9.65 10.62 9.9 9.428 3
HDFC 7.99 8.96 10.21 11.05 12.5 10.142 4
ITC 33.09 36.26 37.24 36.6 34.61 35.56 15
Colgate 73.37 70.17 90.52 167.88 156.03 111.594 20
HDIL 20.88 37.11 61.13 26.02 16.18 32.264 14
DLF 12.83 13.5 13.15 18.13 11.9 13.902 7
Infosys 0 0 0 0 0 0 1
TCS 67.25 55.7 49.87 42.92 43.27 51.802 19
SAIL 61.29 35.85 44.94 44.03 27.61 42.744 17
TATA Steel 56.06 43.72 27.71 17.11 15.01 31.922 13
ONGC 40.8 37.46 37.12 36.3 34.29 37.194 16
BPCL 14.94 4.53 16.97 11.37 14.88 12.538 5
Cipla 26.93 26.67 23.4 18.17 22.39 23.512 10
Biocon 24.22 18.02 16.2 13.9 14.21 17.31 8
NTPC 13.15 12.26 14.69 15.15 12.27 13.504 6
Suzlon 35.78 30.44 25.94 16.21 6.52 22.978 9
Bharti 19.27 20.74 29.06 27.95 28.4 25.084 11
Tata Comm 11.41 11.52 10.28 6.53 6.23 9.194 2
Table 6.24: Return on Capital Employed
Return on Total Asset

Profit after Tax
Return on Total Asset =
Average Total Assets
This ratio indicates the return from the asset means not only from selling of assets but also
from the investments, debtors, cash and bank, amounts to be received etc. We take this ratio
because we can study the half of the balance sheet of the companies.
Page | 45
Return on long term funds
PROFIT AFTER TAX

RETURN ON LONG TERM FUNDS =
LONG TERM FUND
This ratio indicates the returns of the company from its funds, securities, shares, scripts,
mutual funds which are for more than three years.
6.2.3 LIQUIDITY AND SOLVENCY RATIOS:
Liquidity ratios attempt to measure a company's ability to pay off its short-term debt
obligations. This is done by comparing a company's most liquid assets (or, those that can be
easily converted to cash), its short-term liabilities.
In general, the greater the coverage of liquid assets to short-term liabilities the better as it is a
clear signal that a company can pay its debts that are coming due in the near future and still
fund its ongoing operations. On the other hand, a company with a low coverage rate should
raise a red flag for investors as it may be a sign that the company will have difficulty meeting
running its operations, as well as meeting its obligations.
The biggest difference between each ratio is the type of assets used in the calculation. While
each ratio includes current assets, the more conservative ratios will exclude some current
assets as they aren’t as easily converted to cash.
The ratios that we'll look at are the current, quick and cash ratios and we will also go over
the cash conversion cycle, which goes into how the company turns its inventory into cash.
Current Ratio:
Current Assets
Current Ratio =
Current Liabilities
Page | 46
The current ratio is a popular financial ratio used to test a company's liquidity (also referred
to as its current or working capital position) by deriving the proportion of current assets
available to cover current liabilities.
The concept behind this ratio is to ascertain whether a company's short-term assets (cash,
cash equivalents, marketable securities, receivables and inventory) are readily available to
pay off its short-term liabilities (notes payable, current portion of term debt, payables,
accrued expenses and taxes). In theory, the higher the current ratio, the better.
QUICK RATIO:
Cash & 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 + 𝑆𝑆ℎ𝑜𝑜𝑜𝑜𝑜𝑜 𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 + 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅

Quick Ratio =
Current Liabilities
The quick ratio - aka the quick assets ratio or the acid-test ratio - is a liquidity indicator that
further refines the current ratio by measuring the amount of the most liquid current assets
there are to cover current liabilities. The quick ratio is more conservative than the current
ratio because it excludes inventory and other current assets, which are more difficult to turn
into cash. Therefore, a higher ratio means a more liquid current position.
DEBT EQUITY RATIO:
Total Liabilities
Debt Equity Ratio =
Shareholders′ Equity
The debt-equity ratio is another leverage ratio that compares a company's total liabilities to its
total shareholders' equity. This is a measurement of how much suppliers, lenders, creditors
and obligors have committed to the company versus what the shareholders have committed.
Page | 47
To a large degree, the debt-equity ratio provides another vantage point on a company's
leverage position, in this case, comparing total liabilities to shareholders' equity, as opposed
to total assets in the debt ratio. Similar to the debt ratio, a lower the percentage means that a
company is using less leverage and has a stronger equity position.
6.2.4 DEBT COVERAGE RATIOS
It shown the debt recovery every year by the company how much amount of debt is paid to
creditors and banks and also received from the debtors are shown with the help of this ratio
This ratio also indicates the debt of the company which is levied on the investors or the
owner or the shareholder or three of all.
Total Debt to Owner’s fund
Total Debt
Total Debt to Owner ′ s fund =
Owners Fund
Owner’s fund = Total Assets - Current Liabilities - Long Term Loans
Total debt includes current liabilities and loans outstanding
This ratio indicates the liabilities and outstanding on the share capital or share holder’s fund
the more the ratio the less preference for investment is given by the share holders and
portfolio manager.
So, we give the preference to the less debt to owners’ fund ratio having company at prior than
the other and so on.
Page | 48
Hero Honda 0.14 0.09 0.07 0.04 0.02 0.072 15
Maruti Suzuki 0.07 0.01 0.09 0.11 0.07 0.07 16
ICICI 7.98 7.45 9.5 5.27 4.42 6.924 2
HDFC 8.04 10.53 10.62 8.76 9.75 9.54 1
ITC 0.03 0.01 0.02 0.02 0.01 0.018 18
Colgate 0.02 0.02 0.02 0.03 0.02 0.022 17
HDIL 1.29 1.06 0.52 0.86 0.93 0.932 5
DLF 1.65 4.67 10.37 0.74 0.78 3.642 3
Infosys 0 0 0 0 0 0 20
TCS 0.04 0.01 0.01 0.01 0.01 0.016 19
SAIL 0.56 0.34 0.24 0.13 0.27 0.308 10
TATA Steel 0.39 0.26 0.69 1.08 1.34 0.752 6
ONGC 0.21 0.24 0.24 0.18 0.2 0.214 11
BPCL 0.61 0.92 1.05 1.29 1.75 1.124 4
Cipla 0.13 0.24 0.04 0.15 0.22 0.156 12
Biocon 0.11 0.13 0.11 0.11 0.12 0.116 13
NTPC 0.42 0.46 0.52 0.5 0.59 0.498 9
Suzlon 0.54 0.12 0.31 0.44 1.13 0.508 8
Bharti 1.1 0.65 0.47 0.33 0.28 0.566 7
Tata Comm 0 0.02 0.03 0.12 0.34 0.102 14
Table 6.25: Debt Coverage Ratio
6.2.5 CASH FLOW INDICATOR RATIOS
This section of the financial ratio tutorial looks at cash flow indicators, which focus on the
cash being generated in terms of how much is being generated and the safety net that it
provides to the company. These ratios can give users another look at the financial health and
performance of a company.
Page | 49
At this point, we all know that profits are very important for a company. However, through
the magic of accounting and non-cash-based transactions, companies that appear very
profitable can actually be at a financial risk if they are generating little cash from these
profits. For example, if a company makes a ton of sales on credit, they will look profitable
but haven't actually received cash for the sales, which can hurt their financial health since
they have obligations to pay.
The ratios in this section use cash flow compared to other company metrics to determine how
much cash they are generating from their sales, the amount of cash they are generating free
and clear, and the amount of cash they have to cover obligations. We will look at the
operating cash flow/sales ratio, free cash flow/operating cash flow ratio and cash flow
coverage ratios.
Dividend Payout Ratio
Total Dividend Payment

Dividend Payout Ratio =
Net Profit
This ratio shows the yearly dividend paid by the company out of their net profit. With the
help of this ratio we can get the idea how much company keep the profit for their own
expansion and how much they give it to their shareholders.
More the dividend payout it is better for the investors. They get the money physically after
giving dividend. Although if company did not give dividend it is the amount of investors
keep by them but yet not given to them and used for the company.
Page | 50
Hero Honda 56.25 46.88 46.29 45.86 36.45 46.346 17
Maruti Suzuki 7.73 9.69 9.72 9.78 9.7 9.324 2
ICICI 36.05 34.08 33.89 33.12 36.6 34.748 15
HDFC 23.99 22.55 22.91 22.16 22.16 22.754 6
ITC 40.29 50.76 50.53 49.45 50.06 48.218 18
Colgate 95.17 84.52 92.47 98.24 82.05 90.49 20
HDIL 0 0 0 59.32 0 11.864 4
DLF 2.34 0.77 98.3 30.99 23.79 31.238 10
Infosys 18.48 58.32 19.85 49.77 27.03 34.69 14
TCS 34.21 27.72 34.46 35.55 34.2 33.228 12
SAIL 22.71 23.47 23.83 23.71 20.32 22.808 7
TATA Steel 23.64 23.39 26.15 29.39 27.15 25.944 8
ONGC 49.91 50.7 48.85 47.94 49.65 49.41 19
BPCL 45.41 28.61 45.09 10.47 36.17 33.15 11
Cipla 29.27 29.17 27.22 25.92 23.41 26.998 9
Biocon 13.07 21.35 22.16 13.45 34.44 20.894 5
NTPC 38.69 45.23 44.11 45.53 42.31 43.174 16
Suzlon 11.01 20.02 15.5 12.36 0 11.778 3
Bharti 0 0 0 0 5.73 1.146 1
Tata Comm 25.82 30.49 32.02 49.28 29.08 33.338 13
Table 6.26: Dividend Payout Ratio
Earnings retention ratio
It gives the percentage of a publicly-traded company's post-tax earnings that are not paid in
dividends. Most earnings retained are re-invested into the company's operations. Tracking
year-on-year earnings retention ratios is important to fundamental analysis to investigate
whether a company is increasing or decreasing its rate of re-investment. The earnings
retentions ratio is calculated thusly:
Net Income − Dividends

Earning Retention Ratio =
Net Income
Page | 51
Net income: A company's total revenue less its operating expenses, interest paid,
depreciation, and taxes.
For example, suppose a widget manufacturer earns $1,000,000 in total revenue. The widgets
cost $200,000 to make and the administrative and payroll expenses total $250,000. The
manufacturer also must subtract $50,000 in depreciation on the widget manufacturing
equipment and pay $200,000 in taxes. The net income is stated as: $1,000,000 - $200,000 -
$250,000 - $50,000 - $200,000 = $500,000.
Hero Honda 36.09 47.51 46.62 47.19 60.01 47.484 19
Maruti Suzuki 92.09 90.91 90.21 89.53 90.44 90.636 2
ICICI 63.98 65.82 64.8 66.35 63.23 64.836 14
HDFC 76 77.44 77.11 77.83 77.79 77.234 4
ITC 47.94 49.78 48.75 47.98 48.68 48.626 17
Colgate 7.68 16.18 29.88 -4.21 17.5 13.406 20
HDIL 100 100 100 40.2 100 88.04 3
DLF 97.68 99.23 1.72 69.01 76.19 68.766 10
Infosys 80.98 43.48 79.91 50.17 74.6 65.828 13
TCS 69.04 73.3 64.34 62.47 70.18 67.866 12
SAIL 76.75 75.83 75.66 75.56 79.99 76.758 5
TATA Steel 76.14 76.32 74.25 69.02 71.16 73.378 8
ONGC 49.88 47.54 54.59 50.6 48.6 50.242 16
BPCL 55.87 76.08 68.82 88.64 88.75 75.632 6
Cipla 65.9 66.77 71.28 71.2 81.93 71.416 9
Biocon 86.58 78.67 76.42 69.35 65.47 75.298 7
NTPC 57.23 46.91 54.23 54.17 51.75 52.858 15
Suzlon 89.35 80.02 84.84 87.44 0 68.33 11
Bharti 100 100 100 100 95.22 99.044 1
Tata Comm 43.64 70.1 63.74 47.99 14.36 47.966 18
Table 6.27: Earning Retention Ratio
Page | 52
Adjust Cash Flow
To determine the profitability value a business falls into, it is necessary to determine the
Adjusted Cash Flow of that business. The Adjusted Cash Flow is equivalent to its earnings
before interest, depreciation, and taxes (EBIDT in accounting terms), plus additions or
subtractions for owner’s salary, discretionary, single occurrence, or non-cash expenses.
Once a thorough analysis of the financial information has been completed, and the Adjusted
Cash Flow determined, the category of Market Value is defined.
In general, a privately owned single or small (1-3) multi-unit business will fall into one of the
three profitability categories:
Hero Honda 0.25 0.19 0.19 0.13 0.06 0.164 5
Maruti Suzuki 0.24 0.05 0.35 0.41 0.36 0.282 6
ICICI 38.43 52.3 65.12 52.34 49.41 51.52 20
HDFC 36.45 43.11 42.6 54.14 54.91 46.242 19
ITC 0.12 0.05 0.07 0.06 0.05 0.07 4
Colgate 0.03 0.03 0.02 0.02 0.02 0.024 3
HDIL 6.21 1.76 0.69 2.22 5.46 3.268 16
DLF 8.83 13.02 16.3 3.17 5.66 9.396 18
Infosys 0 0 0 0 0 0 1
TCS 0.06 0.01 0.01 0 0.01 0.018 2
SAIL 0.72 0.81 0.56 0.35 0.98 0.684 9
TATA Steel 0.67 0.59 1.89 3.41 4.58 2.228 13
ONGC 0.67 0.71 0.75 0.62 0.8 0.71 10
BPCL 2.48 6.99 3.55 6.13 5.87 5.004 17
Cipla 0.48 0.76 0.17 0.76 0.81 0.596 8
Biocon 0.41 0.67 0.52 0.55 0.59 0.548 7
NTPC 2.42 2.95 2.89 2.86 3.62 2.948 14
Suzlon 0.78 0.39 0.98 2.08 11.44 3.134 15
Bharti 2.13 1.34 0.82 0.66 0.61 1.112 11
Tata Comm 0 0.12 0.25 1.32 3.88 1.114 12
Table 6.28: Adjusted Cash Flow
Page | 53
Positive Adjusted Cash Flow, This category will generally represent the highest Market
Value of an on-going business. In this situation the business is profitable and established. The
buyer is purchasing a combination of the historical cash flow, fixed assets, operational assets
(trade name, concept, menu, etc.) and goodwill.
The Market Value for businesses in this category is based on a multiplier of the Adjusted
Cash Flow, that ranges between two (2) and five (5) times Adjusted Cash Flow. A second
value is determined by using a multiplier of Gross Sales (net of sales tax) between 30% and
40%. Business value is generally somewhere within the range of these two numbers. A
sophisticated buyer expects that the price they pay would net an annual return on investment
between 20% and 50%.
E.g. -> Adjusted Cash Flow $ 65,000 x 3.75 = $243,750
Gross Sales 725,000 x 35% = $253,750
This business would have a value of approximately $250,000
Page | 54
6.3 EARNINGS PER SHARE
Profit after Tax

Earning per Share =
Weighted Avg no of Equity Shares
Hero Honda 40.59 48.64 42.96 48.47 64.19 48.97 16
Maruti Suzuki 29.55 41.16 54.07 59.91 42.18 45.374 15
ICICI 27.22 28.55 34.59 37.37 33.78 32.302 12
HDFC 27.55 35.64 43.29 44.87 52.77 40.824 13
ITC 88.28 5.95 7.18 8.28 8.65 23.668 9
Colgate 8.33 10.12 11.78 17.04 21.34 13.722 3
HDIL 14.57 22.79 30.1 65.83 27.4 32.138 11
DLF 192.98 60.22 2.65 15.1 9.08 56.006 17
Infosys 70.38 87.86 66.23 78.15 101.58 80.84 19
TCS 38.15 55.53 38.39 46.07 47.92 45.212 14
SAIL 16.5 9.72 15.02 18.25 14.95 14.888 4
TATA Steel 62.77 63.35 72.74 63.85 69.7 66.482 18
ONGC 91.05 101.2 73.14 78.09 75.4 83.776 20
BPCL 32.19 9.72 49.94 43.72 20.35 31.184 10
Cipla 13.66 20.26 8.59 9.02 9.99 12.304 2
Biocon 17.44 13.35 15.84 43.49 10.19 20.062 6
NTPC 7.04 7.06 8.33 8.99 9.95 8.274 1
Suzlon 41.41 28.51 36.82 9.47 -3.13 22.616 8
Bharti 6.53 10.62 21.27 32.9 40.79 22.422 7
Tata Comm 26.54 16.83 16.44 10.68 18.1 17.718 5
Table 6.29: Earning per Share
Earnings per share shown the earning for the investor means per share how much profit is
earned by the investor shown with the help of this indicator. Profit of the company divided to
each equity shares holder and how much part of the profit one share holder receives can be
shown from Earning per Share.
So, it is obvious that the more the Earning per share more investors are interested and better
the company give to their shareholder.
Page | 55
6.4 BOOK VALUE
Definition
The value of an asset as it appears on a balance sheet, equal to cost minus accumulated
depreciation.
What Does Book Value Mean?
1. The value at which an asset is carried on a balance sheet. To calculate, take the cost of
an asset minus the accumulated depreciation.
2. The net asset value of a company, calculated by total assets minus intangible assets
(patents, goodwill) and liabilities.
3. The initial outlay for an investment. This number may be net or gross of expenses
such as trading costs, sales taxes, service charges and so on.
4. It is also known as "net book value (NBV)".
Book value is the accounting value of a firm. It has two main uses:
1. It is the total value of the company's assets that shareholders would theoretically
receive if a company were liquidated.
2. By being compared to the company's market value, the book value can indicate
whether a stock is under- or overpriced.
3. In personal finance, the book value of an investment is the price paid for a security or
debt investment. When a stock is sold, the selling price less the book value is the
capital gain (or loss) from the investment.
Page | 56
Hero Honda 74.79 100.62 123.7 149.55 190.33 127.798 11
Maruti Suzuki 151.56 188.73 237.23 291.28 323.45 238.45 16
ICICI 170.35 249.55 270.37 417.64 445.17 310.616 19
HDFC 145.86 169.24 201.42 324.38 344.44 237.068 14
ITC 315.63 23.97 27.59 31.85 36.24 87.056 7
Colgate 18.37 19.93 20.63 11.93 15.9 17.352 1
HDIL 71.08 37 40.38 169.75 162.17 96.076 9
DLF 1,094.43 170.76 4.27 66.1 72.59 281.63 17
Infosys 193.73 250.29 195.41 235.84 310.9 237.234 15
TCS 69.17 114.64 82.35 111.43 136.38 102.794 10
SAIL 24.95 30.51 41.92 55.84 67.75 44.194 2
TATA Steel 127.56 176.26 240.31 298.78 331.68 234.918 13
ONGC 328.52 378.42 289.52 330.16 368.12 338.948 20
BPCL 212.95 302.6 284.16 322.97 335.45 291.626 18
Cipla 51.47 65.83 41.52 48.2 55.86 52.576 3
Biocon 69.45 80.18 94.05 132.72 68.7 89.02 8
NTPC 50.67 54.53 58.94 65.81 71.55 60.3 4
Suzlon 93.71 97.63 129.04 46.41 43.28 82.014 6
Bharti 24.44 38.71 60.19 106.34 145.01 74.938 5
Tata Comm 200.98 212.67 223.14 229.73 238.53 221.01 12

Table 6.30: Book Value
Page | 57
6.5 MARKET CAPITALIZATION
Market Capitalization shown the amount of investment done every day in the share prices
means every day’s turn over in the share prices in terms of values shown with the help of
market capitalization.
It is daily shown and changes as per the buying and selling of that particular shares. We take
the average of last month’s from 1st Jan 2010 to 29th Jan 2010 amount and divided by the
number of days in that month (i.e. 20 days ). So that we can get how much turnover is there
daily for that particular shares.
Its fluctuation is done on the basis of the buying and selling so the more buying and selling
the more favorites and better stock than the others stocks for the investors.
So, we rank the high turnover as favorable and give first preference to that company’s share
over the others.
Page | 58
6.6 PROMOTERS’ SHAREHOLDING PATTERN
In this we take promoters’ portion in the shareholding. As promoters are main owners or
controllers of any company, they have in-depth knowledge of every activity of the company.
Also after the scam of Satyam Computer Services Ltd investors are keener to know about the
shareholding pattern. Also they are eager to know the portion of promoters. So if company is
not performing well, the promoters will stop investing or holding their position in company.
And that thing can be understand by seeing reduction in shareholding pattern.
Page | 59
Promoters’ shareholding (%)
Companies Dec'09 Sep'09 June'09 March'09 Dec'08 Average Rating

Hero Honda 54.96 54.96 54.96 54.96 54.96 54.96 9
Maruti Suzuki 54.21 54.21 54.21 54.21 54.21 54.21 8
ICICI 0 0 0 0 0 0 1.5
HDFC 23.87 19.29 19.34 19.38 19.39 20.254 4
ITC 0 0 0 0 0 0 1.5
Colgate 51 51 51 51 51 51 7
HDIL 48.31 48.35 60.7 61.5 62.5 56.272 10
DLF 78.64 78.65 78.65 88.55 88.26 82.55 18
Infosys 16.06 16.48 16.49 16.49 16.49 16.402 3
TCS 74.13 74.33 75.09 76.21 76.21 75.194 16
SAIL 85.82 85.82 85.82 85.82 85.82 85.82 19
TATA Steel 31.25 31.18 33.95 33.95 33.95 32.856 5
ONGC 74.14 74.14 74.14 74.14 74.14 74.14 15
BPCL 54.93 54.93 54.93 64.26 64.26 58.662 11
Cipla 36.8 38.12 39.38 39.38 39.38 38.612 6
Biocon 60.92 60.92 60.92 60.92 60.92 60.92 13
NTPC 89.5 89.5 89.5 89.5 89.5 89.5 20
Suzlon 53.08 53.08 59.82 65.83 65.83 59.528 12
Bharti 67.84 67.69 67.41 67.15 67.15 67.448 14
Tata Comm 82.38 76.15 76.15 76.21 76.24 77.426 17
Table 6.31: Promoters’ Shareholding
So if promoters are holding their shares in company, investors should hold or buy the position
in the company.
Page | 60
Change in Promoters’ Shareholding (%)
Companies Dec'09 Sep'09 June'09 March'09 Dec'08 Average Rating

Hero Honda 0.000% 0.000% 0.000% 0.000% 0.000% 14
Maruti Suzuki 0.000% 0.000% 0.000% 0.000% 0.000% 14
ICICI -- -- -- -- -- 1.5
HDFC 23.743% -0.259% -0.206% -0.052% 5.807% 20
ITC -- -- -- -- -- 1.5
Colgate 0.000% 0.000% 0.000% 0.000% 0.000% 14
HDIL -0.083% -20.346% -1.301% -1.600% -5.832% 3
DLF -0.013% 0.000% -11.180% 0.329% -2.716% 6
Infosys -2.549% -0.061% 0.000% 0.000% -0.652% 10
TCS -0.269% -1.012% -1.470% 0.000% -0.688% 9
SAIL 0.000% 0.000% 0.000% 0.000% 0.000% 14
TATA Steel 0.225% -8.159% 0.000% 0.000% -1.984% 7
ONGC 0.000% 0.000% 0.000% 0.000% 0.000% 14
BPCL 0.000% 0.000% -14.519% 0.000% -3.630% 5
Cipla -3.463% -3.200% 0.000% 0.000% -1.666% 8
Biocon 0.000% 0.000% 0.000% 0.000% 0.000% 14
NTPC 0.000% 0.000% 0.000% 0.000% 0.000% 14
Suzlon 0.000% -11.267% -9.130% 0.000% -5.099% 4
Bharti 0.222% 0.415% 0.387% 0.000% 0.256% 18
Tata Comm 8.181% 0.000% -0.079% -0.039% 2.016% 19
Table 6.32: Percentage Change in Promoters’ Shareholding
This observation we noted in above table by giving the highest rating to positive change in
percentage change of promoters’ shareholding pattern of last 5 quarter. And we gave least to
one which has no one as promoter. Because these companies are highest risky as FII’s plays
major role in these companies and if they disinvest it is difficult to cover the reduction in
market price.
Page | 61
FINDINGS
Addition of first six ratios’ ratings
Net Return On
Dividend Debt To Earning Dividend
Companies / Operating Capital
Per Owners Retention Payout Total
Ratings Profit Per Employed
Share(Rs) Fund Ratio Ratio (%)
Share (Rs) (%)
Hero Honda 18 18 18 15 19 17 105
Maruti Suzuki 9 19 12 16 2 2 60
ICICI 14 13 3 2 14 15 61
HDFC 11 12 4 1 4 6 38
ITC 13 6 15 18 17 18 87
Colgate 15 7 20 17 20 20 99
HDIL 2 4 14 5 3 4 32
DLF 8 16 7 3 10 10 54
Infosys 19 15 1 20 13 14 82
TCS 16 11 19 19 12 12 89
SAIL 4 5 17 10 5 7 48
TATA Steel 17 14 13 6 8 8 66
ONGC 20 17 16 11 16 19 99
BPCL 12 20 5 4 6 11 58
Cipla 3 2 10 12 9 9 45
Biocon 6.5 3 8 13 7 5 42.5
NTPC 6.5 1 6 9 15 16 53.5
Suzlon 5 9 9 8 11 3 45
Bharti 1 8 11 7 1 1 29
Tata Comm 10 10 2 14 18 13 67
Table 7.1: Addition of Ratios - I
Page | 62
Addition of last six ratios’ ratings
Adjusted %Change In
Companies / Book Z Score Shareholding
Cash Flow EPS Shareholding Total
Ratings Value Model Pattern
Times Of Promoters
Hero Honda 5 11 16 19 9 14 74
Maruti
6 16 15 15 8 14 74
Suzuki
ICICI 20 19 12 4 1.5 1.5 58
HDFC 19 14 13 5 4 20 75
ITC 4 7 9 18 1.5 1.5 41
Colgate 3 1 3 20 7 14 48
HDIL 16 9 11 9 10 3 58
DLF 18 17 17 6 18 6 82
Infosys 1 15 19 16 3 10 64
TCS 2 10 14 3 16 9 54
SAIL 9 2 4 13 19 14 61
TATA Steel 13 13 18 8 5 7 64
ONGC 10 20 20 11 15 14 90
BPCL 17 18 10 17 11 5 78
Cipla 8 3 2 14 6 8 41
Biocon 7 8 6 10 13 14 58
NTPC 14 4 1 7 20 14 60
Suzlon 15 6 8 12 12 4 57
Bharti 11 5 7 1 14 18 56
Tata Comm 12 12 5 2 17 19 67
Table 7.2: Addition of Ratios - II
Page | 63
Overall ratings
Companies / Ratings Sum of first 6 Ratios Sum of last 6 Ratios Total

Hero Honda 105 74 179
Maruti Suzuki 60 74 134
ICICI 61 58 119
HDFC 38 75 113
ITC 87 41 128
Colgate 99 48 147
HDIL 32 58 90
DLF 54 82 136
Infosys 82 64 146
TCS 89 54 143
SAIL 48 61 109
TATA Steel 66 64 130
ONGC 99 90 189
BPCL 58 78 136
Cipla 45 41 86
Biocon 42.5 58 100.5
NTPC 53.5 60 113.5
Suzlon 45 57 102
Bharti 29 56 85
Tata Comm 67 67 134
Total 2520
Table 7.3: Overall Ratings
Here the fund will be allocated on the basis of the percentage of the ratings the script has got.
This is shown in below table.
Page | 64
8. CONCLUSION
Virtual Portfolio
Companies / Ratings Total Rating Total Fund Allocation of Fund
Hero Honda 179 1,00,00,000.00 7,10,317.46

Maruti Suzuki 134 1,00,00,000.00 5,31,746.03
ICICI 119 1,00,00,000.00 4,72,222.22
HDFC 113 1,00,00,000.00 4,48,412.70
ITC 128 1,00,00,000.00 5,07,936.51
Colgate 147 1,00,00,000.00 5,83,333.33
HDIL 90 1,00,00,000.00 3,57,142.86
DLF 136 1,00,00,000.00 5,39,682.54
Infosys 146 1,00,00,000.00 5,79,365.08
TCS 143 1,00,00,000.00 5,67,460.32
SAIL 109 1,00,00,000.00 4,32,539.68
TATA Steel 130 1,00,00,000.00 5,15,873.02
ONGC 189 1,00,00,000.00 7,50,000.00
BPCL 136 1,00,00,000.00 5,39,682.54
Cipla 86 1,00,00,000.00 3,41,269.84
Biocon 100.5 1,00,00,000.00 3,98,809.52
NTPC 113.5 1,00,00,000.00 4,50,396.83
Suzlon 102 1,00,00,000.00 4,04,761.90
Bharti 85 1,00,00,000.00 3,37,301.59
Tata Comm 134 1,00,00,000.00 5,31,746.03
Total 2520 1,00,00,000.00
Table 8.1- Virtual Portfolio
The fund is allocated on the base of the rating. As script ONGC got the highest rating, it has
the highest fund than any other script and vice versa. The Bharti Airtel got lowest rating so it
has got lowest fund of Rs. 3, 37, 301.59 which is 3.37% of the total fund.
Page | 65
Performs of Portfolio
Companies Fund Allocation Price 30 Oct Shares Price 19 Mar Return
Hero Honda 7,38,095.24 1565.75 471.40 1968.2 9,27,810.34
Maruti Suzuki 5,63,492.06 1403.3 401.55 1429.3 5,73,932.31
ICICI 5,29,761.90 790.8 669.91 956.55 6,40,798.87
HDFC 4,56,349.21 1620.7 281.58 1819.85 5,12,424.94
ITC 5,65,476.19 254.8 2,219.29 261.3 5,79,901.60
Colgate 6,19,047.62 700.55 883.66 714.55 6,31,418.85
HDIL 3,21,428.57 316.3 1,016.21 299.6 3,04,457.79
DLF 4,80,158.73 370.25 1,296.85 312.95 4,05,849.22
Infosys 6,11,111.11 2206.2 277.00 2772.35 7,67,933.05
TCS 5,39,682.54 628.3 858.96 820.9 7,05,117.61
SAIL 4,20,634.92 164.55 2,556.27 247.3 6,32,166.61
TATA Steel 5,23,809.52 471.55 1,110.82 644.25 7,15,649.00
ONGC 7,53,968.25 1131.8 666.17 1056.85 7,04,039.01
BPCL 5,11,904.76 511.45 1,000.89 522.6 5,23,064.68
Cipla 3,49,206.35 287.1 1,216.32 333.5 4,05,643.74
Biocon 4,10,714.29 246.55 1,665.85 281.6 4,69,102.18
NTPC 4,34,523.81 212.4 2,045.78 202.8 4,14,884.32
Suzlon 3,65,079.37 66.85 5,461.17 75.9 4,14,502.97
Bharti 3,21,428.57 292.85 1,097.59 311.9 3,42,337.62
Tata Comm 4,84,126.98 391.45 1,236.75 293.85 3,63,419.89
Total 1,00,00,000.00 1,10,34,454.61
Table 8.2- Performance of Portfolio
Page | 66
Total Return = (11034454.61-10000000)/10000000
= 10.34 %
As portfolio management is of long term process and it gives return in long run. This results
shows profit of only 5 months which is 10% and it will increase in future.
As we can see that all scripts has performed well except Tata Communication. It is just
because of they are showing loss since last two quarters. They have pending projects like,
TNG Gulf Cable project, Universal Service Interoperability etc.
So we have hope that in the next year this projects will generate some profit for company and
investors will build faith in the company and will reinvest in the company and stock price
will rise.
Page | 67

Fundamental Analysis

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Fundamental Analysis

Uploaded by

Copyright:

Available Formats

INTRODUCTION TO INDIAN CAPITAL

• Exchanges based on open electronic limit order book;

1.1 CAPITAL MARKET REFORMS AND DEVELOPMENTS

2.1 HOW TO INVEST?

3. MCX (Multi Commodity Exchange): MCX is an independent commodity exchange

4. NCDEX (National Commodity & Derivatives Exchange Limited): NCDEX is an online

2.2 WHAT ARE STOCKS?

2.3 HOW TO TRADE IN STOCKS?

2.4 WHAT ARE COMMODITIES?

2.5 HOW TO TRADE IN COMMODITIES?

1. Cut Your Losses

Our project objective is to do fundamental analysis of ten sectors of the Indian

1.To construct a portfolio on the bases of fundamental analysis of top 20 companies

3.2 TYPE OF RESEARCH

A descriptive research design has been used for the study.

3.3 SAMPLE SIZE:

3.4 SAMPLING UNIT:

3.6 DATA SOURCES:

1. Annual reports of the companies

3.7 EXPECTED CONTRIBUTION OF THE STUDY:

3.8 LIMITATIONS OF THE STUDY:

4.1 WHAT IS FUNDAMENTAL ANALYSIS?

• Is the company’s revenue growing?

4.2 FUNDAMENTALS: QUANTITATIVE AND QUALITATIVE

• Quantitative – capable of being measured or expressed in numerical terms.

In our context, quantitative fundamentals are numeric, measurable characteristics about a

4.3 QUANTITATIVE MEETS QUALITATIVE

4.4 THE CONCEPT OF INTRINSIC VALUE

This is what fundamental analysis is all about. By focusing on a particular business, an

1) You don’t know if your estimate of intrinsic value is correct; and

4.5 CRITICISMS OF FUNDAMENTAL ANALYSIS

4.6 QUALITATIVE FACTORS - THE COMPANY

4.6.1 BUSINESS MODEL

4.6.2 COMPETITIVE ADVANTAGE

Another business consideration for investors is competitive advantage. A company's long-term

4.7 QUALITATIVE FACTORS - THE INDUSTRY

4.7.2 MARKET SHARE

4.7.3 INDUSTRY GROWTH

5.1 ECONOMIC CYCLE

The four stages of an economic cycle are:

GLOBAL ECONOMY SCENARIO

POTENTIAL ECONOMIC AND FINANCIAL RISKS

Inflation: Years of reckless money creation by central banks, supply/demand imbalances

5.3 INDIAN ECONOMY

Stock Market Trends

Foreign Exchange Reserves

5.4 INVESTMENT DECISION

• Edward Altman’s Z score

6.1 EDWARD ALTMAN’S Z SCORE

6.1.1 ESTIMATION OF THE FORMULA

6.1.2 THE ORIGINAL Z-SCORE FORMULA WAS AS FOLLOWS:

Z = 1.2T1 + 1.4T2 + 3.3T3 + .6T4 + .999T5.

6.1.4 ACCURACY AND EFFECTIVENESS

T1 = Working Capital / Total Assets

Z Score Bankruptcy Model:

Z = 1.2T1 + 1.4T2 + 3.3T3 + .6T4 + .999T5

Z > 2.99 -“Safe” Zone

6.1.6 Z-SCORE ESTIMATED FOR PRIVATE FIRMS

T1 = (Current Assets-Current Liabilities) / Total Assets

Z' Score Bankruptcy Model:

Z' = .717T1 + .847T2 + 3.107T3 + .420T4 + .998T5

Z' > 2.9 -“Safe” Zone