Investment Strategy Based on Security Analysis for Angel Broking Ltd. by Deeksha Shrivastava

8/6/2019 Investment Strategy Based on Security Analysis for Angel Broking Ltd. by Deeksha Shrivastava

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A PROJECT REPORT

ON

INVESTMENT STRATEGY BASED ON SECURITY ANALYSIS

FOR

(ANGEL BROKING LIMITED)

BY

DEEKSHA SHRIVASTAVA

PGPM SEMESTER III

Project Guide

"PROF. VAISHAMPAYAM"

IN PARTIAL FULFILLEMENT OF REQUIREMENTOF THE TWO YEAR

FULL TIME POST GRADUATE PROGRAMME IN MANAGEMENT OF THE

ST. MIRAS VISHWAKARMA INSTITUTE OF MANAGEMENT (SMVIM)

PUNE

A.Y: 2007 - 2008


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ACKNOWLEDGEMENT

The project report Investment Strategy Based on Security Analysis is a combined

effort of many peoples who help me during this project.

First of all I would like to thank Prof. VAISHAMPAYAN, my Project guide

without his support source of motivation and valuable information this project is not

possible.

I would like to take this opportunity to thanks Mr. IFTEKHAR CHOUHAN

BRANCH MANAGER of ANGEL BROKING LIMITED, KALAYANI NAGARBRANCH for giving me this opportunity to work under him on this topic.

Above all, I express a great respect and affections for my parents just because of

their blessings and encouragement I am standing here.

Last but not least, I would like to thanks all my friends and well-wishers for giving

me their support during this project knowingly or unknowingly.

DEEKSHA SHRIVASTAVA


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CONTENTS

INDEX

CHAPTER NO. TOPIC PAGE NO.

EXECUTIVE SUMMARY8

INTRODUCTION OF THE STUDY

1. Introduction.

2. Objectives & Scope of Study.

9 - 10

CHAPTER NO. ICOMPANY PROFILE

1. Introduction of the company

2. Vision of company

3. Business Philosophy

4. Quality Assurance Policy.

5. CRM Policy.

6. Management of the company

7. Services of Angel Broking.

i. E Broking Services.

ii. Investment Advisory

iii. Portfolio Management Services

8. What differentiates angel DP from other

DPs?

11 20


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CHAPTER NO. II RESEARCH METHODOLOGY 21 - 22

CHAPTER NO. III THEOREOTICAL BACKGROUND

FINANCIAL SYSTEM OVERVIEW

1. Indian Financial System

2. Financial Markets.

3. Stock Exchanges Features,

Operations.

4. Reforms in Secondary Market.

5. Instruments in secondary Market.6. Investment decisions.

23 - 34

CHAPTER NO. IV DATA PRESENTATION, ANALYSIS &

INTREPRETATION

FUNDAMENTAL ANALYSIS BY EIC

MODEL

1. ECONOMIC ANALYSIS

Indian Economy Overview.

Sectors Of Indian Economy.

Growth rate of GDP

Inflation in India

Money Supply.

Interest Rates.

Fiscal Policy.

Savings & Investment.

BOP, FOREX & Exchange Rates.

Capital Markets.

Issues & Priorities.

35 106

35 - 53


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2. INDUSTRY ANALYSIS

Automobile Industry Analysis

Destination India

Economic Survey 2006 - 07

Size.

Indian Automobile Industry.

Porters Five Forces Model.

Domestic Performance

Government Initiatives.

Exports.

Current Scenario.

a) Two Wheelers.

b) Three Wheelers.

c) Passenger Vehicles.

d) Commercial Vehicles.

Market Share in Different Segments of

Automobile Sector.

54 - 80


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SWOT Analysis.

Future Outlook.

3. COMPANY ANALYSIS

3.1. Tata Motors - Business Profile.

3.2. Strategic Vision

3.3. Evaluation Of Management.

3.4. Shareholding Pattern.

3.5Performance during 2006 07.

3.6 Tata Motors Subsidiaries.

3.5. Ratio Analysis.

3.6. Risk Return Analysis of Tata

Motors.

3.7. Valuations.

81 - 106


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CHAPTER NO. V FINDINGS AND SUGGESTIONS 107

CHAPTER NO. VI CONCLUSION 107

CHAPTER NO. VII BIBLIOGRAPHY 108


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EXECUTIVE SUMMARY

This project named Investment Strategy Based on Security Analysis was carried out at Angel

Broking Ltd. In this project apart from the basics of stock market a comprehensive study was

made to understand how the investment decision of investing in a particular security is taken.

The focus area of the project is to analyze shares of Tata Motors by using fundamental

Analysis & Studying Risk Return Relationship. I have chosen Tata Motors as a security

because it has the highest market share in Commercial Vehicles Segment & 2nd Largest in

Passenger Car Vehicle Segment.

The purpose behind this project was to learn the operations of the stock

market trading and to understand the basic difference between speculation in the stock

market and some study based investments undertaken to derive value.


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Introduction

The strategy of selecting stocks that trade for less than their intrinsic value is calledvalue investing. Value investors actively seek stocks of companies that they believe the

market has undervalued. They believe the market overreacts to good and bad news,

causing stock price movements that do not correspond with the company's long-term

fundamentals. The result is an opportunity for value investors to profit by buying when

the price is deflated. The very definition of value investing is subjective. Some value

investors only look at present assets/earnings and don't place any value on future growth.

Other value investors base strategies completely around the estimation of future growth

and cash flows. Despite the different methodologies, it all comes back to trying to buy

something for less than its worth.

The field of Security Analysis is very vast and one has to look into various

aspects of the functioning of the company to get to any conclusion about the possible

performance of the company in the market. Investors like warren buffet made a fortune

out of investments in the stock market, which is quiet impossible without proper research

about the companies. The field of Security Analysis is full of challenges. In SecurityAnalysis anticipated growth, calculations are based on considered FACTS & not on

HOPE. The subject of Equity analysis, i.e. the attempt to determine future share price

movement & its reliability by references to historical data is a vast one,

The project is done Angel Broking Ltd. a very well known company in the field of

stock broking and capital market services sector. This project gave me a chance to get

valuable insights from a hoard of vastly experienced people in this field and to get

various approaches each one adopts to evaluate various companies. The project was

carried out in the Pune office of Angel Broking Ltd. which is located in Kalyani Nagar.

The duration of the project was two months. These two months were not only limited to

learning and devoting time towards equity research but it also provided an insight on


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what various services such broking houses provide and what efforts are required to

manage such organizations.

The main Objectives of Study were as follows:-

To understand security market operations.

To evaluate a stock on the basis of Fundamental Analysis.

To undertake investment decisions on the basis of detailed study of Risk & Return

Analysis.

Scope:-

The scope of the project is limited to only one company i.e. Tata Motors

While conducting the research I was unable to collect data from primary source

which I feel would have had a bearing on the outcome of the research. The

research is conducted from secondary source of data.


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Chapter 1

COMPANY PROFILE

ANGEL BROKING LTD, PUNE

About the Group:

The Angel Group has emerged as one of the top 3 retail broking houses in India.

Incorporated in 1987, it has memberships on BSE, NSE and the two leading commodity

exchanges in India i.e. NCDEX & MCX. Angel is also registered as a depository

participant with CDSL.

Angel has always believed in offering the best of services to their customers. Be it

in form of focussed research or state of the art technology or customized product offering

or personalized touch to our services. Angel is the only 100% retail stock broking house

offering a gamut of retail centric services.

E broking

Investment Advisory

Portfolio Management Services

Wealth Management Services

Commodities Trading

ANGEL GROUP COMPANIES

Angel Broking Ltd.Member on the BSE and Depository Participant with

CDSL

Angel Capital & Debt Market Ltd.Membership on the NSE Cash and Futures & Options

Segment


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Angel Commodities Broking Ltd. Member on the NCDEX & MCX

Angel Securities Ltd. Member on the BSE

Vision

To Provide Best Value for Money to Investors Through Innovative Products, Trading /

Investment Strategies, State-of-the-art Technology And Personalized Service.

Business Philosophy

Ethical practices & transparency in all our dealings. Customer interest above our own.

Always deliver what we promise.

Effective cost management

Quality Assurance Policy

They are committed to being the leader In providing World Class Product & Services

Which exceed the expectations of their customers Achieved by teamwork and A processof continuous improvement.

CRM Policy

A Customer is the most Important Visitor On the Premises He is not Dependent on us but

We are dependant on him He is not interruption in our work, But is the Purpose of it We

are not doing him a favour by serving He is doing us a favour by giving us an

Opportunity to do so.

Management:- The senior management of Angel Broking Ltd. are as follows:-

1. Mr. Dinesh Thakkar, Chairman and Managing Director

Mr. Dinesh Thakkar hails from a reputed business family with interest in textiles trading.

His entrepreneurial spirit inspired him to explore an opportunity in retail broking, a much


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ignored sector at that point in time, so far as the clients were concerned. Therefore, what

began as a mere dabbling in stocks to make money for himself grew into as serious

business venture that started 20 years ago.

He was the first sub-broker and was amongst the early stock market

participants to computerize his office. His opinions on the stock market are valued and he

is often sought by the media for his comments on markets, investment strategies and the

overall economy in general. He has also been quoted and published by the print media

several times.

2. Mr. Lalit Thakkar, Director

Mr. Lalit Thakkar has been closely associated with the group since its inception and hasbeen instrumental in setting up the Operational and Risk Management Processes. Though

not actively involved in the day-to-day operations, he is highly respected by the senior

management and is often consulted on important decisions of the Group.

3. Mr. Amit Majumdar, Executive Director - Operations & Risk Management

Mr. Amit Majumdar oversees the entire Operations and Risk Management functions of

the group and is responsible for the corporate affairs of the group. He is a Chartered

Accountant by qualification and has an experience of more than 10 years in the field of

Finance, Consultancy & Advisory services. He has worked as a financial controller,

treasury manager and an investment banker in the past

and been associated with Rabo India Finance, Ambit Corporate Finance and Ernst and

Young prior to joining the Angel Group.

4. Mr. Rajiv Phadke, Executive Director - Business Development & HR

Mr. Rajiv Phadke has industry experience of more than 31 years and has been associated

with companies like Times Guaranty Financials, Nagarjuna Finance Ltd, Tata Exports

Ltd, Mukand and Motilal Oswal in the past.

Educational qualifications include a MSC (Physics) and a MMS (Finance).At Angel, he


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manages two key functions: Business Development and Human Resource Development.

5. Mr. Vinay Agarwal, Executive Director - E-Commerce

He is A Chartered Accountant by qualification with 8 years of experience in the field of

Financial Services. He began his career with Angel Group as a Business Consultant in the

areas of Finance and Operations. He was promoted to the position of Vice-President (E-

Commerce) and thereafter to that of an Executive Director (E-Commerce).

He takes care of the E-Broking business, which comprises of Business Development,

Product Development and Operations. He is also actively involved in the commercial

aspect of technology.

6. Mr. Nikhil Daxini, Executive Director - Sales and Marketing

Mr. Nilkhil Daxini is an MBA specializing in finance. He has an experience of more than

7 years in the field of finance and marketing of financial products.

He was instrumental in introducing the concept of professional marketing of broking

services within the organization. His forte in Business Operations includes BusinessDevelopment, Risk Management and Operations etc.He had earlier been associated with

HDFC Bank Ltd

7. Mr. Ketan Shah, Associate Director - IT

Mr. Ketan Shah is the Head of Technology for the Group. He has an industry experience

of more than 18 years in various areas of Business Operations.

He is involved in the designing of IT Policies and Strategies. He also looks for Planning,

Implementation, Budgeting of IT related services.


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Milestones

December, 1997 Incorporation of Angel Broking Ltd.

November, 1998 Incorporation of Angel Capital and Debt Market Ltd.

March, 2002 Web-enabled Back Office software developed

November, 2002 First ever Investor seminar of Angel Group

April, 2003 Publication of first Research Report

April, 2004 Incorporation of Commodities Broking division

September, 2004 Launch of Online Trading Platform

October, 2005 Received the prestigious "Major Volume Driver" award for FY05 March,

2005 Roll out of 25th branch

March, 2006 Crossed the 100,000 mark in unique trading accounts and completes the

roll out of 50th branch

July, 2006 Formally launched the PMS function

September, 2006 Commenced Mutual Fund and IPO distribution business

October, 2006 Received "Major Volume Driver" award for FY06

December, 2006 Crossed the 2,500 mark in terms of business associates.March, 2007 Crossed the 200,000 mark in unique trading accounts

Services of Angel Broking:-

E Broking

E broking provides 4 different trading platforms suited to different individual

needs

Multiple exchanges on a single screen

Historical Charts & Technical Tools

Intraday Calls & News Flash

24 X 7 web-enabled Back office


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Online Fund transfer facility

Auto pay-in of shares.

Investment Advisory

To derive optimum returns from equity as an asset class requires professional guidance

and advice. Professional assistance will always be beneficial in wealth creation.

Investment decisions without expert advice would be like treating ailment without the

help of a doctor.

Research Department

Strong research has always been our forte. Our investment advisory department is backed

by an experience research team. This team comprises of 12 sectorial special analysts and

a Research Head. Their vast experience and expertise in spotting great investments

opportunities has always been beneficial for our clients.

Benefits @ Angel

Expert Advice: Our expert investment advisors are based at various branches

across India to provide assistance in designing and monitoring portfolios.

Timely Entry & Exit: Our advisors will regularly monitor your investments andwill guide you to book timely profits. They will also guide you in adopting

switching techniques from one stock to another during various market conditions.

De-Risking Portfolio: A diversified portfolio of stocks is always better than

concentration in a single stock. Based on our research, we diversify the portfolio

in growth oriented sectors and stocks to minimize the risk and optimize the

returns.

Angel Gold:

In a volatile market it is very difficult for an investor to pick up value stocks which will

give decent returns in the long run. We at Angel Gold realize your need for a

professional financial advisor and hence are here to assist you in making wise and

profitable decisions.


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Angel strongly believe that right decisions taken at the right time are always beneficial

and that's why our entire research team comprising of 12 sector specialists along with

angels research head will understand clients need, return expectation, risk profile and

time horizon to design their portfolio accordingly. This portfolio will be tracked regularly

and angels efforts would be to optimize clients returns in the long run.

Features of the Angel Gold:

A premium service for clients who need professional guidance on long term

investments.

Minimum fund / portfolio of Rs. 1 lac and maximum of Rs. 4 lac eligible for

Angel Gold.

Appropriate risk profiling before taking investment decisions

Periodic group meetings and seminars in branches.

Monthly Newsletter from the desk of Angel Gold.

Browser based back-office software.

Portfolio Management Services: Successful investing in Capital Markets

demands ever more time and expertise. Investment Management is an art and ascience in itself. Professional Investment Management Services are no longer the

privilege of only large institutional investors. Portfolio Management Services

(PMS) is one such service that is fast gaining eminence as an investment avenue

of choice for High Net worth Investors like you. PMS is a sophisticated

investment vehicle that offers a range of specialized investment strategies to

capitalize on opportunities in the market. The Portfolio Management Service

combined with competent fund management, dedicated research and technology,ensures a rewarding experience for its clients.

Angel PMS brings with it years of experience, expertise, research and the backing

of India's leading stock broking house. At Angel, experienced portfolio

management is the difference. You will enjoy a relationship with a portfolio


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manager equipped to design and implement a portfolio around your unique needs.

We will advise you on a suitable product based on factors such as your investment

horizon, return expectations and risk tolerance. By entrusting the management of

your Portfolios to Angel, you can enjoy convenience without compromising on

quality.

Private Client Group

Angel offers personalized advisory services to affluent HNI investors and actively

assists them in managing their portfolio. PCG can seek guidance on specific stocks in

their portfolio and can get pro active advice for timely exit and fresh investments. Here

we also design customized products and services for our clients based on there risk

profile, returns need and time horizon. Our experienced research team, in-depth analysis

and customized value added products and services give us an immense advantage in

assisting you to generate wealth on a longer and consistent basis. Features

1. Minimum Portfolio size of Rs.1Cr. for residents and Rs.1.5Cr for NRIs is the

eligibility for PCG.

2. Portfolios are customized after a due discussion with clients and our research

team.

3. Deployment of funds can be among various investing avenues available with usincluding PMS, mutual fund, advisory.

4. Meetings and one to one discussion with our fund managers, chief investment

officer and Research director.

5. Special Technical and Derivative strategies.

Angel offers trading opportunities in commodities market through its vast chain

of branches spread across the country & state of the art trading platform.

Trading on MCX and NCDEX

Application based trading software

Web based trading platform


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Online daily, weekly and monthly research reports

Transparent and fair trade execution

Individual client attention

24*7 online back office

Training / education facilities / conduct of seminars

Digital contract notes cum bill: View your accounts from anywhere, anytime

Competitive brokerage rates

Efficient risk management

Depository Participant

Angel Broking Ltd has started its depository services by registering with CDSL. There

are various benefits of holding clients demat account with angel but the biggest

advantage is that a client shall be ensured of a risk free, prompt and efficient depository

process.

What differentiates angel DP from other DPs?

Since angel association is slated for a long time, angel are in a much better position to

know your requirement regarding your holding and transfer of securities.

No physical instructions are required for your sell obligations. Angel also offer to their

clients the automated pay in facility for trade done through Angel Broking Ltd / Angel

Capital and Dept Market Ltd.

The transaction charges that are being levied by us are the lowest in the industry as angelbelieve in providing quality services at the most affordable costs.

Clients have an option of choosing the products offered by CDSL:

1. Easy facility: Client can view, download and print the updated holding of their

demat account along with valuation of holding.


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2. Easiest facility: Client can, by using this facility, submit their own delivery

instructions on the internet without the intervention of their DP. This is in addition

to all the facilities provided under the Easy facility.

Client will enjoy the following distinctive benefits by registering with Angel: No risk of

loss, wrong transfer, mutilation or theft of share certificates. Hassle free automated pay-

in of client sell obligations by their clearing members, ABL / ACDL

Reduced paper work.

Speedier settlement process. Because of faster transfer and registration of

securities in your account, increased liquidity of clients securities.

Instant disbursement of non-cash benefits like bonus and rights into clients

account.

Efficient pledge mechanism.

Wide branch coverage.

Personalized / attentive services of trained help desk.

Zero upfront payment.

No charges for extra transaction statement & holding statement.

All in one combined Monthly Bill-cum-Transaction-cum-Holding-cum-ledgerstatement


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Chapter 2

RESARCH METHODOLOGY

Research is often described as an active, diligent and systematic process of

inquiry aimed at discovering, interpreting and revising facts. This intellectualinvestigation produces a greater understanding of events, behaviours or theories and

makes practical applications through laws and theories. The term research is also used to

describe a collection of information about a particular subject, and is usually associated

with science and scientific method. The purpose of research methodology is to describe

the entire research procedure. In addition, it includes the problem, which is taken by

researcher, setting research objective. The overall design, sampling procedure method of

data collection, analysis, interpretation and presenting data in order to find out the

solution to these problems.

METHOD OF DATA COLLECTION

.

Secondary Data: - The source of data for the Research Project is mainly secondary data

which was collected from the websites, documents, which were in printed forms like

annual reports, pamphlets, reference books based on Financial Management .

Methodology Used:

In case of Security Analysis, there are following type of research methods that are

followed:

Fundamental Analysis:-

A method of evaluating a security by attempting to measure its intrinsic value by

examining related economic, financial and other qualitative and quantitative

factors. Fundamental analysts attempt to study everything that can affect the security's

value, including macroeconomic factors (like the overall economy and industry

conditions) and individually specific factors (like the financial condition and management

of companies). Financial statement analysis is the biggest part of Fundamental analysis


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also known as quantitative analysis; it involves looking at historical performance data to

estimate the future performance of stocks.It also involves examining Valuation Ratios.

Under Fundamental Analysis, Risk & Return Methodology was used to find that to

estimate that at a given value of risk what is the expected & Actual Return in hopes of

figuring out what sort of position to take with that security (undervalued= buy,

overvalued = sell or short).


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CHAPTER NO. III

THEOREOTICAL BACKGROUND

FINANCIAL SYSTEM OVERVIEW

Indian Financial System

The Financial System is one of the most important inventions of the modern society. It is

well known that certain sectors in any society have surplus funds, which are available for

investment, while certain other sectors demand funds or have use for these funds in their

activity. This fundamental forms the basis for the financial system anywhere in the

world.

For example, there are always in any economy, seekers of funds, mainly, business firms

and government and suppliers of funds, mainly households.

The Financial System

Financial Markets:

A Financial Market can be defined as the market in which financial assets are created of

transferred. Financial assets represent claims to payment of a sum of money sometime

in the future and/or periodic payment in the form of dividend or interest.

Financial markets can be classified as primary and secondary markets. More often, they

are also classified as money markets and capital markets. In fact, primary and secondary

Seekers of

Funds(mainly

business,

firms and

government)

Suppliers of

Funds

(mainly

households)


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markets are integral part of capital markets, as money markets have a very limited

secondary market.

The financial markets can broadly be divided into money and capital market.

Money Market: Money market is a market for debt securities that pay off in the short

term usually less than one year, for example the market for 90-days treasury bills. This

market encompasses the trading and issuance of short term non equity debt instruments

including treasury bills, commercial papers, bankers acceptance, certificates of deposits,

etc.

Capital Market: Capital market is a market for long-term debt and equity shares. In this

market, the capital funds comprising of both equity and debt are issued and traded. Thisalso includes private placement sources of debt and equity as well as organized markets

like stock exchanges. Capital market can be further divided into primary and secondary

markets. Capital Markets is a place whereBuyers and sellers of securities can enter

into transactions to purchase and sell shares, bonds, debentures etc. Further, it performs

an important role of enabling corporates, entrepreneurs to raise resources for their

companies and business ventures through public issues. Transfer of resources from those

having idle resources (investors) to others who have a need for them (corporates) is mostefficiently achieved through the securities market. Stated formally, securities markets

provide channels for reallocation of savings to investments and entrepreneurship. Savings

are linked to investments by a variety of intermediaries, through a range of financial

products, called Securities.

The primary market and the secondary market constitute the capital market and besides,

the capital market has the share capital as well as debt capital instruments. The primary

and secondary markets are inter-dependent on each other. They are closely linked to

each other. In case there are many public issues in the primary market it automatically

leads to the growth in the secondary market, as it provides easy liquidity to the existing

investors by off-loading their investment either in capital or in debt instruments and

unless the secondary market is active with transparency and efficiency, seekers of capital


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funds, i.e., corporate entities cannot hope to tap the primary market for further funds

through public issues.

Primary market: The market for raising funds through share capital, debenture, bonds etc.

wherein the funds directly flow from the households and other saving units in the

economy to the users of these funds, namely, Government and Business Enterprises in

the form of Limited Companies. The Issues in the primary market are:-

1. Types of issue:

Public issue of equity shares, preference share, debentures etc.

Rights issue

Bonus issue

Private placement and Bought-out deal

Secondary market:Secondary market refers to a market where securities are traded afterbeing initially offered to the public in the primary market and/or listed on the

Stock Exchange. Majority of the trading is done in the secondary market. Secondary

market comprises of equity markets and the debt markets. For the general investor, the

secondary market provides an efficient platform for trading of his securities. For the

management of the company, Secondary equity markets serve as a monitoring and

control conduitby facilitating value-enhancing control activities, enabling

implementation of incentive-based management contracts, and aggregating information

(via price discovery) that guides managementdecisions.

Secondary markets:

1) It operates through the medium of stock exchanges which regulate the trading

activities in the market and ensure a measure of safety and fair dealing to the

investors;

2) The number of stock exchanges in the country numbers 22, excluding the National

Stock Exchange (N.S.E.) and the Over The Counter Exchange of India (OTCEI);

3) The number of listed companies in the country is upwards of 8000;


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4) The stock market in India is regulated by the Central Government under the

Securities Contracts (Regulation) Act, 1956;

Features of stock exchanges:- There are 22 recognised stock exchanges in India.

Mangalore Stock Exchange was refused renewal of recognition vide SEBI order datedAugust 31, 2004.

In terms of legal structure, the stock exchanges in India could be segregated into two

broad groups 19 stock exchanges which were set up as companies, either limited by

guarantees or by shares, and the 3 stock exchanges which were associations of persons

(AOP) viz. BSE, ASE and Madhya Pradesh Stock Exchange. The 19 stock exchanges

which have been functioning as companies include: the stock exchanges of Bangalore,

Bhubaneswar, Calcutta, Cochin, Coimbatore, Delhi, Gauhati, Hyderabad, Interconnected

SE, Jaipur, Ludhiana, Madras, Magadh, NSE, Pune, OTCEI, Saurashtra-Kutch, Uttar

Pradesh, and Vadodara. Apart from NSE, all stock exchanges whether established as

corporate bodies or Association of Persons (AOPs), were non-profit making

organizations.

With the institution of the National Stock Exchange in 1993/94, the trading

operations in the secondary market have undergone a reformative change, in thesense, slowly, all the stock exchanges have started slowly computerising their

operations and the operations are known as on line trading;

The operations are through computer terminals provided to the stock brokers instead

of by the conventional method, when the brokers used to call out the name of the

share in which he is interested, by shouting openly in the ring;

Settlement is smoother with the exchange of securities taking place in less time and

with much less hitch than in the past;

For facilitating exchange of securities in small and medium sized companies wherein

the number of shares is less, Over The Counter Exchange of India (OTCEI) has


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been instituted which facilitates of exchange of securities over the counter without the

elaborate functioning of the stock exchange. There are certain norms for listing a

share in the OTCEI. These norms relate to the share capital size of the companies,

whose shares are listed in the OTCEI with a prescribed minimum and a maximum.

Dematerializations of shares of blue chip companies has taken place and at present

practically all the scrips are being sold in the secondary market only in the demat

form. There is a national authority by the name National Securities Depositories

Limited (NSDL) which functions under SEBI. There is one more depository at the

national level called "Central Depository Services Limited" (CDSL) promoted by the

BSE. All the players at the retail level who maintain the electronic share accounts of

investors who sell or buy demat shares in the secondary market, like savings orcurrent accounts are called Depository Participants (DPs). They require

registration with NSDL as well as SEBI.

As per existing SEBIs guidelines, all fresh public issues would be in demat form

only.

About the stock exchanges:

Form of organisation now uniformly a limited company

Management by the governing body in the form of a board, headed mostly by an

Executive Director. Each stock exchange has its own byelaws, rules and regulations

as per SEBI guidelines as well as the S.C.R.A.,1956. There is a managing committee

also in some of the stock exchanges and the members of this committee are the share

brokers operating in the stock exchange;

Some of the functions of stock exchanges To facilitate trading in securities within

the stock exchange both in listed securities and approved securities there are two

types of securities in any stock exchange, namely, those securities which are listed in


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the stock exchange by payment of listing fees by the concerned companies and

those securities which are listed in other stock exchanges but which can be traded in

this stock exchange on a reciprocal basis It should be noted that in India, for any

scrip to be traded in the secondary market, it is essential that the share is listed at least

in one stock exchange which is recognised;

Ensuring that the companies whose share scrips are traded in the stock exchange do

not resort to unfair means either for acquiring the shares for its promoters or for

selling the shares also, thereby affecting the interests of the investing public at large;

They have obtained giving permission to the brokers for underwriting once SEBIs

permission;

Providing a platform for launching of primary market issues by facilitating the

holding of conferences of brokers especially by the Manager/s to an Issue before

the issue opens etc.

About operations in the Stock Exchange:

Brokers commence their operations on line through the respective terminals in the

stock exchange by entering into contracts with fellow-brokers for sale and purchase

of securities of various companies, mentioning the name of the company, the number

of shares, whether buy or sell and the agreed price for the transaction. Copies of

contracts are provided to the Stock Exchange. Once the contract is entered into, a

trade is supposed to have taken place. This is called T

Stock Exchange processes the data of the contracts and lists out all the transactions to

ensure that there is no discrepancy, i.e., the net position is squared, i.e., the

quantum of shares sold is equal to the quantum of shares purchased. In case there is

any discrepancy, on the second day the brokers match the transaction and remove the

discrepancy. For example, one broker by mistake could have contracted to sell more

in scrip than the other broker to buy from him.


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On day 2, the buy broker gets money from his client and sell broker gets demat slip

from his client. The third day is known as pay-in and pay-out day. Pay in day is the

day when the brokers shall make payment or delivery of securities to the exchange.

Pay out day is the day when the exchange makes payment or delivery of securities to

the broker. Settlementcycle is on T+2 rolling settlement basis w.e.f. April 01, 2003.

The exchanges have to ensure that the pay out of funds and securities to the clients is

done by the broker within 24 hours of the payout. The Exchanges will have to issue

press release immediately after pay out.

In the morning at 11.30 a.m., the pay-in of money by the buy broker and demat slip

by the sell broker take place. On the same day around 2.30 p.m. pay out by the

Stock Exchange to the sell broker and demat slip to the buy broker take place. Thesell broker then pays his client and demat account of the buyer gets credited through

clearing institution known as National Securities Clearing Corporation Limited

(NSCCL). This is a subsidiary of NSE and similarly we have Clearing Corporation

of India Limited (CCIL) a subsidiary of BSE. The above settlement is known as T+2

settlements. Further we have today T+2 rolling settlement. This means that everyday

Trade can take place and the pay-in and pay-out will be on the third day. It was

SEBIs intention to commence T+1 from 1st of April 2004. Unfortunately it had to

postpone this decision. If introduced, India will be on par with some of the developed

countries who do settlement within 24 hours.

Nature of market prior to reforms

As compared to other developing countries, the Indian stock markets have a fairly long

history. However, the volume of transactions in these markets remained limited until the

late 1970s, but grew rapidly during the 1980s as the corporate sector turned increasingly

to the equity market. Although the volume of transactions increased, the market remained

primitive, insulated from foreign investment and continued to suffer from several

problems. Most importantly, to access capital markets, companies needed to have prior

permission from the government, which had to approve the price at which new equity

could be raised. The aim was ostensibly to control flow of funds to the private corporate


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sector in view of the requirements of public finance and also to provide a 'fair value' to

investors. However, the practice effectively penalized firms raising capital from the

market: the Initial Public Offerings (IPOs) of equity were typically under-priced in

relation to the price upon listing, and the new issues by listed companies were at a

substantial discount to the prevailing price. While the new issue market was overly

regulated, there were inadequate regulations of secondary market activities. The domestic

capital market had no global link. Information and transparency were limited, reflecting

the individual, dealer-based trading system. All these contributed to high transaction

costs.

In addition, public sector financial institutions such as the Unit Trust of India (UTI), the

insurance companies and the Development FinancInstitutions (DFIs) were dominant

players in the stock market. This had two significant effects. First, the government hadmajor influence on the domestic financial markets. Second, it allowed promoters of

public companies to run their companies with relatively smallholdings of their own,

because public sector financial institutions generally supported the status quo ownership

and management position, unless something drastic happened.

Equity market reforms since 1992

As part of a broad set of reforms, the Securities and Exchange Board of India (SEBI) was

given the legal powers in 1992 to regulate and reform the capital market, including new

issues. The equity market reforms since then can be divided into two broad categories:

one that increases the level of competition in the market and the other that deals with

problems of information and transaction cost. The most important initiative to enhance

competition was the free pricing of IPO and formulation of guidelines concerning new

issues. The new regulatory framework sought to strengthen investor protection by

ensuring disclosure and transparency rather than through direct control. Secondly, the

National Stock Exchange (NSE) was set up, which competed with the Bombay Stock

Exchange (BSE). The NSE introduced an automated screen-based trading system, known

as the National Exchange for Automated Trading (NEAT) system, which allowed

members from across the country to trade simultaneously with enormous ease and


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efficiency. Faced with stiff competition, the BSE adopted similar technology.

Competition was also enhanced through an increased number of participantsforeign

institutional investors (FIIs) were permitted to trade and private sector mutual funds came

on the scene. To deal with market imperfection such as information asymmetry and high

transaction costs, a number of measures were taken. At the trading level, transparency

was facilitated by the new technology (NEAT system), which operated on a strict

price/time priority. At the investor level, transparency was augmented by the regulation

that required listed companies to increase the frequency of their account announcements.

To ensure transferability of securities with speed, accuracy and security, the Depositories

Act was passed in 1996, which provided for the establishment of securities depositories

and allowed securities to be dematerialized. Following the legislation, National Securities

Depository LimitedIndias first depository--was launched. Other measures to reducetransaction costs included: a) a movement toward electronic trading and settlement, and

b) streamlining of procedures with respect to clearance of new issues.

Results

Following these measures, the Indian equity market has modernized rapidly and its

ability to serve investors has increased considerably. Competition among stock

exchanges has intensified. With all stock exchanges introducing screen-based trading,

trading has become more transparent. With the option of settling through depository now

available to investors in case of most of the liquid stocks, it is possible to eliminate risks

of bad delivery and counterfeit shares. The two depositories that are in operation now

ensure faster, cleaner and cheaper settlement. Dematerialized settlement now accounts for

about 90 percent of settlement settled by delivery. Disclosure standards by companies

and financial intermediaries are higher. Following the introduction of prudential

regulations, stock exchanges have become safer and more dependable. One area where

there has been only limited progress is in reducing the dominance of public sector

financial institutions


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Instruments In Secondary Market:-

Following are the main financial products/instruments dealt in the Secondary market

which may be divided broadly into Shares and Bonds:

Shares:

Equity Shares: An equity share, commonly referred to as ordinary share, represents the

form of fractional ownership in a business venture.

Rights Issue/ Rights Shares: The issue of new securities to existing shareholders at a ratio

to those already held, at a price. For e.g. a 2:3 rights issue at Rs. 125, would entitle a

shareholder to receive 2 shares for every 3 shares held at a price of Rs. 125 per share.

Bonus Shares: Shares issued by the companies to their shareholders free of cost based onthe number of shares the shareholder owns.

Preference shares: Owners of these kind of shares are entitled to a fixed dividend or

dividend calculated at a fixed rate to be paid regularly before dividend can be paid in

respect of equity share. They also enjoy priority over the equity shareholders in payment

of surplus. But in the event of liquidation, their claims rank below the claims of the

companys creditors, bondholders/debenture holders.

Cumulative Preference Shares: A type of preference shares on which dividend

accumulates if remained unpaid. All arrears of preference dividend have to be paid out

before paying dividend on equity shares.

Cumulative Convertible Preference Shares: A type of preference shares where the

dividend payable on the same accumulates, if not paid. After a specified date, these

shares will be converted into equity capital of the company.

Bond: is a negotiable certificate evidencing indebtedness. It is normally unsecured. A

debt security is generally issued by a company, municipality or government agency. A

bond investor lends money to the issuer and in exchange, the issuer promises to repay the


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loan amount on a specified maturity date. The issuer usually pays the bond holder

periodic interest payments over the life of the loan. The various types of Bonds are as

follows:

Zero Coupon Bond:Bond issued at a discount and repaid at a face value. No periodic

interest is paid. The difference between the issue price and redemption price represents

the return to the holder. The buyer of these bonds receives only one payment, at the

maturity of the bond.

Convertible Bond: A bond giving the investor the option to convert the bond into equity

at a fixed conversion price.

Treasury Bills:Short-term (up to one year) bearer discount security issued by governmentas a means of financing their cash requirements.

Equities have the potential to increase in value over time. It also provides portfolio with

the growth necessary to reach long term investment goals. Research studies have proved

that the equities have outperformed most other forms of investments in the long term.

This may be illustrated with the help of following examples:

a) Over a 15 year period between 1990 to 2005, Nifty has given an annualised return of

17%.

b) Mr. Raju invests in Nifty on January 1, 2000 (index value 1592.90).The Nifty value as

of end December 2005 was 2836.55. Holding this investment over this period Jan 2000 to

Dec 2005 he gets a return of 78.07%. Investment in shares of ONGC Ltd for the same

period gave a return of 465.86%, SBI 301.17% and Reliance 281.42%.

Therefore, Equities are considered the most challenging and the rewarding, when

compared to other investment options. Research studies have proved that investments in

some shares with a longer tenure of investment have yielded far superior returns than any

other investment. However, this does not mean all equity investments would guarantee

similar high returns. Equities are high risk investments. One needs to study them

carefully before investing.


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Since 1990 till date, Indian stock market has returned about 17% to investors on an

average in terms of increase in share prices or capital appreciation annually. Besides that

on average stocks have paid 1.5% dividend annually. Compared to most other forms of

investments, investing in equity shares offers the highest rate of return, if invested over a

longer duration.

Investment Decisions: - Investment decision for an individual is a very important &

crucial decision. 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.

Fundamental analysis is a technique that attempts to determine a securitys value by

focusing on underlying factors that affect a company's actual business and its future

prospects. Fundamental analysis is the analysis, wherein the investment decisions aretaken on the basis of the financial strength of the company. There are two approaches to

fundamental analysis, viz., E-I-C analysis or the Top Down approach to Fundamental

analysis and C-I-E analysis or the Bottom up approach.The term simply refers to theanalysis of the economic well-being of a financial entity as opposed to only its price

movements.

The various fundamental factors can be grouped into two categories: quantitative and

qualitative. The financial meaning of these terms isnt all that different from their regular

definitions.

Quantitative capable of being measured or expressed in numerical terms.

Qualitative related to or based on the quality or character of something, often as

opposed to its size or quantity.

Quantitative fundamentals are numeric, measurable characteristics about a business. The

biggest source of quantitative data is the financial statements. In this not only financial

ratios but Risk Return relationship of a company is also studied.

In case of qualitative fundamentals, not only the qualitative factors of company but

industry specific factors & Economic Analysis is also done. These are the less tangible

factors surrounding a business .The model for analyzing qualitative factor is EIC

(Economy, Industry & Company)


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CHAPTER NO. IV

DATA PRESENTATION, ANALYSIS & INTREPRETATION

Fundamental Analysis of Tata Motors(EIC Model):-

Economic Analysis: - In Fundamental Analysis, First of all the overall Economy is

analyzed to judge the general direction, in which the economy is heading. The direction

in which the economy is heading has a bearing on the performance of various industries.

Thats why Economy analysis is important. The output of the Economy analysis is a list

of industries, which should perform well, given the general trend of the economy and also

an idea, whether to invest or not in the given economic conditions.

Indian Economy Overview

Economics experts and various studies conducted across the globe envisage India and

China to rule the world in the 21st century. For over a century the United States has been

the largest economy in the world but major developments have taken place in the world

economy since then, leading to the shift of focus from the US and the rich countries of

Europe to the two Asian giants- India and China.The rich countries of Europe have seen the greatest decline in global GDP share by 4.9

percentage points, followed by the US and Japan with a decline of about 1 percentage

point each. Within Asia, the rising share of China and India has more than made up the

declining global share of Japan since 1990. During the seventies and the eighties,

ASEAN countries and during the eighties South Korea, along with China and India,

contributed to the rising share of Asia in world GDP.


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According to some experts, the share of the US in world GDP is expected to fall (from 21

per cent to 18 per cent) and that of India to rise (from 6 per cent to 11 per cent in 2025),and hence the latter will emerge as the third pole in the global economy after the US and

China.

By 2025 the Indian economy is projected to be about 60 per cent the size of the US

economy. The transformation into a tri-polar economy will be complete by 2035, with the

Indian economy only a little smaller than the US economy but larger than that of Western

Europe. By 2035, India is likely to be a larger growth driver than the six largest countries

in the EU, though its impact will be a little over half that of the US. India, which is now

the fourth largest economy in terms of purchasing power parity, will overtake Japan and

become third major economic power within 10 years.

India is the 2nd largest country in the world, measured by population and arable land.

When measured in USD exchange-rate terms, it is the 10th largest in the world, with a

GDP of US $1.0 trillion (2007). In terms of Purchasing Power Parity (PPP) it ranks 3rd in

the world. It now expects to become the 3rd largest economy in the world (in US Dollarterms not PPP) by 2025, just behind US and China. In terms of growth it is the second

fastest growing major economy in the world. GDP grew at 9.4% for the fiscal year 2006

2007. The world is waking up to the fact that the Indian Economy will soon become a

force to contend with. The economy has finally reaped the benefits of just over a decade

of reforms. The Indian and Chinese economies will be the world's growth engines in the


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21st Century, replacing the US which has dominated the world economy for 5 decades.

Witness some of the following changes that have altered the economic landscape so

dramatically in the past 12 years.

Indian Economy Overview

1. The economy of India is the fourth largest in the world, with a GDP of $3.63 trillion at

PPP, and is the tenth largest in the world with a $691.9 billion at 2004 USD exchange

rates and has a real GDP growth rate of 6.2% at PPP.

2. Growth in the Indian economy has steadily increased since 1979, averaging 5.7% per

year in the 23-year growth record.

3. Indian economy has posted an excellent average GDP growth of 6.8% since 1994

India, the fastest growing free-market democracy in the world, registered a growth rate of

8.2 percent in FY 2004.

4. India has emerged the global leader in software and business process outsourcing

services, raking in revenues of US$12.5 billion in the year that ended March 2004.

5. Agriculture has fall to a drop because of a bad monsoon in 2005. There is a paramount

need to bring more area under irrigation.

6. Export revenues from the sector are expected to grow from $8 billion in 2003 to $46

billion in 2007.

7. Indias foreign exchange reserves are over US$ 102 billion and exceed the forex

reserves of USA, France, Russia and Germany. This has strengthened the Rupee and

boosted investor confidence greatly.

8. A strong BOP position in recent years has resulted in a steady accumulation of foreign

exchange reserves. The level of foreign exchange reserves crossed the US $100 billion


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mark on Dec 19, 2003 and was $142.13 billion on March 18, 2005.

9. Reserve money growth had doubled to 18.3% in 2003-04 from 9.2 in 2002-03, driven

entirely by the increase in the net foreign exchange assets of the RBI.

10. Reserve money growth declined to 6.4% in the current year to January 28, 2005.

11. During the current financial year 2004-05, broad money stock (M3) (up to December

10, 2004) increased by 7.4 per cent (exclusive of conversion of non-banking entity into

banking entity, 7.3 per cent).

12. Economics experts and various studies conducted across the globe envisage India andChina to rule the world in the 21st century.

Sectors of Indian Economy

There are three major sectors of Indian Economy

Agriculture

Agriculture and allied sectors like forestry, logging and fishing accounts for 25% of the

GDP. It employs almost 58% of the total work force. It is the largest economic sector andplays a significant role in the overall socio-economic development of India. Due to steady

improvement in irrigation, technology, modern agricultural practices the yield per unit

area of all crops has increased tremendously.

After an annual average of 3.0 per cent in the first five years of the new

millennium starting 2001-02, growth of agriculture at only 2.7 per cent in 2006-07, on a

base of 6.0 per cent growth in the previous year, is a cause of concern. Low investment,

imbalance in fertilizer use , loseed replacement rate, a distorted incentive system and low

post harvest value addition continued to be a drag on the sectors performance. Given its

low share, a mechanical calculation of the adverse impact of low growth in agriculture on

overall GDP can be misleading. With more than half the population directly depending

on this sector, low agricultural growth has serious implications for the inclusiveness of

growth. Furthermore, poor agricultural performance, as the current year has


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demonstrated, can complicate maintenance of price stability with supply-side problems in

essential commodities of day-to-day consumption. The recent spurt of activity in food

processing and integration of the supply chain from the farm gate to the consumers plate

has the potential of redressing some of the root causes such as low investment, poor

quality seeds, and little post-harvest processing. There is a paramount need to move

Indian agriculture beyond its centuries old dependency on the monsoon by bringing

more area under irrigation and by better water management. This has rightly been

identified in the NCMP as one of the areas with the highest investment priority.

Industry

. The three main sub sectors of industry viz Mining & quarrying, manufacturing, andelectricity, gas & water supply recorded growths of 5%, 8.8% and 7.1% respectively.

Index of industrial production which measures the overall industrial growth rate was 10.1%

in October 2004 as compared to 6.2% in October 2003. The largest sector here holds the

textile industry. Automobile sector has also demonstrated the inherent strength of Indian

labour and capital.

Services

As with any growing economy the sectoral composition of GDP has been changing with

the services sectors showing an increased share and that of agriculture declining to nearly

20%. The fastest growing sector in the economy has been the Services Sector, which now

accounts for over 50% of GDP. Business services, communication services, financial

services, community services, hotels and restaurants and trade services are among the

fastest growing sectors.

Services sector growth has continued to be broad-based. Among the three sub

sectors of services, trade, hotels, transport and communication services has continued toboost the sector by growing at double-digit rates for the fourth successive year.

Impressive progress in information technology (IT) and IT-enabled services, both rail and

road traffic, and fast addition to existing stock of telephone connections, particularly

mobiles, played a key role in such growth. The Information Technology industry


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currently accounts for 5.0 % of India's GDP. As per a Nasscom-McKinsey Study it will

account for 7 % of India's GDP by March 2008.

Review of developments

Macroeconomic overview

Vigorous growth with strong macroeconomic fundamentals has characterized

developments in the Indian economy in 2006-07 so far. However, there are some genuine

concerns on the inflation front. Growth of 9.0 per cent and 9.2 per cent in 2005-06 and

2006-07, respectively, by most accounts, surpassed expectations .While the up-and-down

pattern in agriculture continued with growth estimated at 6.0 per cent and 2.7 per cent in

the two recent years, and services maintained its vigorous growth performance, therewere distinct signs of sustained improvements on the industrial front. Entrenchment of

the higher growth trends, particularly in manufacturing, has boosted sentiments, both

within the country and abroad. The overall macro economic fundamentals are robust,

particularly with tangible progress towards fiscal consolidation and a strong balance of

payments position. With an upsurge in investment, the outlook is distinctly upbeat.

Growth Rate of GDP

For the year 2005-06, it was a revision made in the quick estimates where the growth rate

for the agriculture sector was changed from 3.9 per cent to 6 per cent that propelled the

overall growth to 9 per cent. However, as against 2006-07, only three sectors registered a

double-digit growth in 2005-06. A sectoral decomposition shows that manufacturing

registered a growth of 12.3 per cent in 2006-07 as against 9.1 per cent the previous fiscal;

the trade, hotels, transport and communication sector recorded a growth of 13 per cent as

against a growth of 10.4 per cent the previous year.

While there is a dip in the growth of the construction, down from 14 per cent to 10 per

cent in 2006-07 as well financial and real estate services sector, down from 10.9 per cent

to 10.6 per cent these sectors still registered double digit growth rates. In 2006-07,

mining sector grew at 5.1 per cent (against 3.6 per cent) while electricity sector grew at

7.4 per cent (against 5.3 per cent).


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Even though the Finance Minister had a word of caution - where he said however

unpalatable it may be, high growth leads to high demand... and high demand does put

pressure on prices... and unless supply catches up with demand, there will be some

pressure on prices he sent out a strong message on the governments commitment

make growth inclusive. He said ...because we have high growth, we can make bold

claim that we will do everything possible to make the growth inclusive.

The ratcheting up of growth observed in recent years is reflected in the Eleventh Five

Year Plan target of an average annual growth of 9 per cent relative to 8 per cent targeted

by the Tenth Plan (2002-03 to 2006-07). The shortfall in the annual average growth of

7.6 per cent from the target of 8 per cent in the five years of the Tenth Plan is attributable

to the disappointing 3.8 per cent growth in the first year of the Plan and its subsequentsurge to 8.6 per cent, on average, in the last four years.

Services contributed as much as 68.6 per cent of the overall average growth

in GDP in the last five years between 2002-03 and 2006-07. Practically, the entire

residual contribution came from industry. As a result, in 2006-07, while the share of

agriculture in GDP declined to 18.5 per cent, the share of industry and services improved

to 26.4 percent and 55.1 per cent, respectively.


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Good News in Growth

The Indian economy grew at 9.4% in 2006-07, the 2ND-HIGHEST growth rate since

Independence, exceeding projections of 9.2%. Only exception was 1988-89, when growth

rate touched 10.5%

Figure impressive since the base rate for 2005-06 was 9%

Despite agriculture dampener, four out of eight sectors manufacturing, construction,

trade & hotels, business services record double-digit growth

Indian economy has also swelled to trillion dollars making it only the 12th nation to

reach this milestone. At market prices, economy stands at Rs 41,25,724 cr at end of fiscal

2006-07, which equals $1,010 billion at current exchange rate for the rupee

World Bank, other experts, predict growth could slow down in coming years

Finance Minister P Chidambaram says need to strive to sustain growth rate for 10-15years

Inflation

With a shortfall in domestic production vis--vis domestic demand and hardening of

International prices, prices of primary commodities, mainly food, have been on the rise in

2006-07 so far. Wheat, pulses, edible oils, fruits and vegetables, and condiments and

spices have been the major contributors to the higher inflation rate of primary articles .As

much as 39.4 per cent of the overall inflation in WPI on February 3, 2007 came from the

primary group of commodities. Within the primary group, the mineral subgroup recorded

the highest year-on-year inflation at 18.2 per cent, followed by food articles at 12.2 per

cent and non-food articles at 12.0 per cent. Food articles have a high weight of 15.4

percent in the WPI basket. Including manufactured products such as sugar and edible

oils, food articles contributed as much as 27.2 per cent to overall inflation of 6.7 percent

on February 3, 2007.


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Inflation (Annual Averages)

12.5

8.1

4.6 4.4

5.9

3.3

7.2

3.7 3.4

5.46.4

4.4

0

2

4

6

8

10

12

14

1994-

95

1995- 96

1996- 97

1997- 98

1998- 99

1999- 00

2000- 01

2001- 02

2002- 03

2003- 04

2004- 05

2005- 06

Year

WholesalePriceInde

Starting with a rate of 3.98 per cent, the inflation rate in 2006-07 has been on a

general upward trend with intermittent decreases. However, average inflation in the

52 weeks ending on February 3, 2007 remained at 5 per cent. A spurt in inflation like

in the current year has been observed in the recent past in 1997-98, 2000-01, 2003-04 and

2004-05.

Money Supply

Inflation, with its roots in supply-side factors, was accompanied by buoyant growth of

money and credit in 2005-06 and 2006-07so far. While GDP growth accelerated from7.5per cent to 9.0 per cent between 2004-05 and 2005-06, the corresponding acceleration

in growth of broad money (M3) was from 12.3 per cent to 17.0 per cent. Year-on-year,

M3 grew by 21.1 per cent on January 19, 2007.The industrial resurgence and upswing in

investment was reflected in, and sustained by, growth of gross bank credit (as per data


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covering 90 per cent of credit by scheduled commercial banks), for example, to industry

(medium and large) at 31.6 per cent and for housing loans at 38.0 per cent in 2005-06. It

was also observed in year-on-year growth of gross bank credit at 32.0 per cent in

September 2006, albeit marginally down from 37.1 per cent in 2005-06. Reconciling the

twin needs of facilitating credit for growth on the one hand and containing liquidity to

tame inflation on the other remained a challenge. RBI put a restraint on the rapid growth

of personal loans, capital market exposures, residential housing beyond Rs. 20 lakh and

commercial real estate loans by more than doubling the provisioning requirements for

standard advances under these categories from 0.40 per cent to 1.0 per cent in April

2006.Simultaneously, it increased the risk weight on exposures to commercial real estate

from125 per cent to 150 per cent.

Interest Rates:-

Liquidity conditions remained fairly comfortable up to early September 2006 with the

unwinding of the Central Government surplus balances with the RBI and continued

intervention in the foreign exchange market to maintain orderly conditions. During 2006-07,

up to September 8, 2006, RBI had not received any bid for repo under Liquidity Adjustment

Facility (LAF) and the continuous flow of funds under reverse-repo indicated a comfortable

liquidity position. In 2005-06, the reverse repo rate had been raised by 25 basis points each

time on April 29 and October 26, 2005, and on January 24, 2006 to reach 5.50 per cent. In

2006-07, it was raised again by 25 basis points each time on June 9 and July 25, 2006. There

was some tightness with the onset of the festival season and due to high credit expansion and

outflows on account of advance tax payment. From mid-September through October, 2006,

while RBI had to provide accommodation to some banks through repo facility, with reverse

repo operations simultaneously, in net terms, RBI absorbed liquidity from the system.

With year-on-year inflation stubbornly above 5 per cent from early-

August 2006, on October 31, 2006, the RBI announced more measures to stem

inflationary expectations and also to contain the credit off-take at the desired growth rate

of 20.0 per cent. Unlike the previous four times, when both the repo and the reverse repo

rates were raised by the same 25 basis points, thereby keeping their spread constant at


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100 basis points, on October 31, 2006, only the repo rate was raised by 25 basis points.

With a repeat of this policy move on January 31, 2007, the repo rate reached 7.50 per

cent with spread of150 basis points over the reverse repo rate. Since deposits are growing

at a lower rate than credit, the higher repo rate signaled to the banks the higher price of

accommodation they would have to pay in case of credit overextension.

The cash reserve ratio (CRR) was hiked by 25 basis points each time on

December 23, 2006 (5.25 per cent) and January 6, 2007 (5.50 per cent). While a further

increase of CRR of 25 basis points was effected on February 17, another similar increase

of 25 basis points was followed The change in the liquidity and inflation environment is

reflected in the continuous hardening of interest rates in 2005-06 and in 2006-07 so far.

With the high demand for credit not adequately matched by deposit growth, there was

steady increase in the credit-deposit ratio and hardening of interest rates. For example,the yield on 10-year residual maturity Government securities, which had gone up by 84

basis points during2005-06 to 7.53 per cent at end-March 2006, hardened further to 8.08

per cent on February 14, 2007. Movements in the call money rates also reveal a similar

picture. The hardening of rates was more pronounced at the shorter end of the yield

curve, suggesting concern about inflation only in the short run.

BOP, FOREX & Exchange Rates.

Indias exports (in US dollar terms and customs basis) have been growing at a high rate

of more than 20 per cent since 2002-03. During 2005-06, with growth of 23.4 per cent,

Indias exports crossed the US$100 billion mark. During 2006-07, after a slow start,

exports gained momentum to grow by an estimated 36.3 per cent in the first nine months

to reach US$89.5 billion. Buoyancy of exports was driven by the resurgence in the

manufacturing sector and sustained demand from major trading partners.

Reserve accretion through the balance of payments was US$15.1 billion in 2005-

06 and US$8.6 billion in the first six months of 2006-07. While the appreciation of the

US dollar vis--vis other major currencies resulted in a valuation loss of US$5.0 billion in

2005-06, in the first half of the current year, the weakening US dollar resulted in

valuation gain of a similar amount. Foreign exchange reserves grew from US$141.5 at


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end-March 2005 to US$151.6 billion at end-March 2006, and toUS$165.3 at end-

September, 2006. Such reserves were US$185.1 billion on February9, 2007. In the

balance of payments, in 2005- 06 and in the first half of 2006-07, capital flows more than

made up for the current account deficits of US$9.2 billion and US$11.7 billion,

respectively, and resulted in reserve accretion. The current account deficit reflected the

large and growing trade deficit in the last two years. Exports grew fast, but imports grew

even faster, reflecting in part the ongoing investment boom and the high international

petroleum price. In 2005-06, imports (in US dollar terms and customs basis) had grown

by 33.8 per cent. In the first nine months of the current year, imports grew by 36.3 per

cent. While petroleum imports continued to grow rapidly, non-oil import growth

decelerated to a moderate 18.7 per cent in the first nine months of the current year,

primarily because of high bullion prices leading to a decline in import of gold and silverin the first few months of the year. The non-POL trade balance, after remaining in surplus

till 2003-04, has turned negative since 2004-05.

Overall, the external environment remained supportive with the invisible

account remaining strong and stable capital flows seamlessly financing the moderate

levels of current account deficit caused primarily by the rise in international oil prices.

The trend in invisibles (net), comprising of non-factor services (like travel, transportation,

software services and business services), investment income, and transfers, compensating

to a large extent the trade deficit continued in 2005-06 and through the first half of 2006-

07,and resulted in a moderate current account deficit of 1.1 per cent of GDP in 2005-06.

Fiscal Policy

The fiscal consolidation process underway in India, unlike the expenditure compression

strategy in most other countries, has been essentially revenue-led and has involved

reprioritisation of expenditure with a focus on outcomes. The tax-GDP ratio of the Centre

has steadily risen from 8.8 per cent in 2002-03 to 10.3 per cent in 2005-06 and was

budgeted at 11.2 per cent in 2006-07. After growing by 20.3 per cent and 22.7 per cent,

respectively in 2005-06, corporate income tax and personal income tax have grown by

55.2 per cent and 30.3 per cent, respectively in April-December 2006 over April-

December 2005. Buoyant growth in direct taxes revenue has helped take its share in total


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revenue to 47.6 per cent in 2006-07 (BE). In the reduction of revenue and fiscal deficits,

buoyant revenue growth has been complemented by a discernible shift in the composition

of expenditure. While as a proportion of GDP, total expenditure of the Centre declined

from 16.8 per cent in 2002-03 to 14.1 per cent in2005-06, gross budgetary support to the

Plan increased on a like-to-like basis from Rs. 111,470 crore to (including

disintermediated loans to States) to Rs.172,500 crore. The balance from current revenues,

which had remained negative till 2003-04, turned positive in 2004-05 and has

strengthened to Rs. 22,332 crore in 2005-06.With non-Plan expenditure as a proportion

of total expenditure declining from 73.0 per cent in 2002-03 to 69.4 per cent in 2006-07

(BE), there have been distinct signs of reprioritisation of expenditure. With lower levels

of borrowings of Government, the public sector draft on private savings has come down.

The fiscal deficit declined to 4.1 per cent of GDP in 2005-06 and was budgeted at 3.8 percent of GDP in 2006-07. With the implementation of the award of the Twelfth Finance

Commission (TFC), which was calibrated to restructure public finances of both the

Centre and States, the process gained momentum. In the current year, as a proportion of

GDP, the budgeted fiscal deficit of the States has declined to less than the mandated 3 per

cent two years ahead of schedule, and only a marginal revenue deficit remains to be

eliminated. The decline in the deficit indicators of the Centre has been relatively slower

with demands on its resources, inter alia, on account of the implementation of the TFC

award and a pause in fiscal consolidation in 2005-06. The resumption of the fiscal

consolidation process in 2006-07, without compromising the National Common

Minimum Programme (NCMP) objectives, indicates the commitment towards meeting

the FRBMA targets.

Savings & Investment

The economy traditionally enjoys a high savings rate primarily because of the

contribution of the household sector. Gross Domestic Savings are around 24 per cent of

GDP. This can go up if public sector savings are pushed up. The process of privatization

and reforms that has been launched for the public sector should facilitate the savings rate.


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Household financial saving approximates 10% of GDP. The savings rate in the country

had overtaken the rate of investment in 2001-02 for the first time since 1975. Savings

were 24 % of the GDP while domestic investment was 23.7 This confirms that

investments had been subdued for many years. The last 2 years have seen a reversal of

this trend.

The increasing trend in gross domestic savings as a proportion of GDP observed since

2001-02 has continued with the savings ratio rising from 26.4 per cent in 2002-03 to 29.7

per cent in 2003-04, 31.1 per cent in 2004-05 and 32.4 per cent in 2005-06.The rise in the

savings rate in 2005-06 was contributed by two of its three components: private corporate

and the household sector, which as proportion of GDP, increased by 1.0 percentage point

and 0.7 percentage point, respectively. The third component, namely public savings,declined by 0.4 percentage points, and made a negative contribution to the overall

savings rate. However, a redeeming feature of recent years is that the savings of the

public sector, which had been negative until 2002-03, was positive for the third

successive year in 2005-06. The positive saving of Rs. 71,262 crore in 2005-06 (QE) is

largely attributable to the higher savings of non-departmental as well as departmental

enterprises. A notable feature of the current growth phase is the sharp rise in the rate of

investment in the economy. Investment, in general being a forward looking variable

reflects a high degree of business optimism. The revival in gross domestic capital

formation (GDCF) that commenced in 2002-03 has been followed by a sharp rise in the

rate of Investment in the economy for four consecutive years. The earlier estimates of

GDCF for 2004-05 of 30.1 per cent, released by CSO in their advance estimates, now

stand upgraded to 31.5 percent in the quick estimates. The rate of GDCF for 2005-06 as

per the quick estimates released by CSO is 33.8 per cent. This sharp increase in the

investment rate has sustained the industrial performance and reinforces the outlook for

growth.

Capital Markets

Capital markets had been subdued for a long time. The NSE-50 index, which was at

around at 1,000 in January 2003 has since surged. The index is 4500 in August 2007. A


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new found confidence in the Indian Economy and its growth prospects have seen inflows

of USD 10 billion into the Indian Capital markets in the past 8 months. And India now

aims at emerging as an economic superpower in the coming decades. But this will be a

slow and steady elephants pace and not a tigers pace. India will grow and become a

superpower in 2 decades but for various sectors and sections of the economy, the journey

will be in fits and starts. The creaky bureaucracy and vested interests entrenched over the

last five decades now seem to be India's biggest stumbling block and will be the last to

reform.

The buoyancy of foreign investment flows through the balance of payments, in part,

reflected the bullish sentiments in the domestic capital markets. The BSE Sensex, the bell

weather stock-index of the Bombay Stock Exchange (BSE), rallied from a low of8,929on June 14, 2006 to an all-time intra-day high of 14,724 on February 9, 2007. The

rally from the 13,000 mark to the 14,000 mark in only 26 trading sessions was the fastest

ever climb of 1,000 points. India with a market capitalization of 91.5 per cent of GDP on

January 12, 2007 compared favorably not only with emerging market economies but also

with Japan (96 per cent) and South Korea (94.1 per cent). The strength of the market

micro-structure from large retail participation continued.

The positive sentiments were manifest also in most indicators such as resourcemobilized through the primary market. Aggregate mobilization, especially through

private placements and Initial Public Offerings (IPOs), grew by 30.5 per cent to Rs.

161,769crore in calendar year 2006, with about 6 IPOs every month, on average. Net

mobilization of resources by mutual funds increased by more than four-fold from Rs.

25,454 crore in 2005 to Rs. 1,04,950 crore in 2006. The sharp rise in mobilisation by

mutual funds was due to buoyant inflows under both income/debt oriented schemes and

growth/equity oriented schemes. The negative inflows in 2004 turned positive for the

public sector mutual funds in 2005 and accelerated in 2006. Other indicators of market

sentiments, such as equity returns and price/earnings ratio also continued to be strong and

supportive of growth.


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The upbeat mood of the capital markets, reflecting the improved growth prospects of the

economy, was partly also a result of steady progress made on the infrastructure front.

Overall index of six core industries electricity, coal, steel, crude oil, petroleum refinery

products, and cement, with a weight of 27 per cent in IIP registered a growth of 8.3 per

cent in April-December 2006 compared to 5.5 per cent in April-December 2005. The news

of gas discoveries in the Krishna Godavari (KG) basin under New Exploration and

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Investment Strategy Based on Security Analysis for Angel Broking Ltd. by Deeksha Shrivastava