A Report On

The Changing Role Of Indian Equity Market

At

Prepared by Barvadia Dhavalkumar M. Submitted to AES PGIBM Ahmedabad

ACKNOWLEDGEMENT
It is my great pleasure that I had been given an opportunity to convey thanks to all of them who have helped me at any place directly or indirectly in this two months of practical learning experience. I would like to take this opportunity of expressing my profound and inevitable gratitude to my instructor at Karvy, Mr. Deven Chandarana and Mr. Dhilan Bhatha, Branch manager for their boundless knowledge, guidance and constant encouragement and all the employees of the Rajkot branch for their immense cooperation during project work. I would also like to thank all my colleagues, friends and family

members for their constant encouragement and support. Special thanks to faculties of my college (AESPGIBM) and college authorities, for giving me opportunity of pseudo-work experience before my entry into the real corporate world.

Barvadia Dhavalkumar M. AES PGIBM Ahmedabad

Preface

Stock exchanges are intricately inter-woven in the fabric of a nations economic life. Without a stock exchange, the saving of the community the sinews of economic progress and productive efficiency would remain underutilized. The task of mobilization and allocation of savings could be attempted in the old days by a much less specialized institution that the stock exchanges. But as business and industry expanded and the economy assumed more complex nature, the need for permanent finance arose. At present a large amount of money is invested by retail investors but they dont have the time and specialized knowledge neither they have the key information to understand the working of stock exchange because there are many factors which tend to effect the trends of stock exchange, so firms like Karvy Consultants ltd. using their specialized knowledge and expertise help retail investors in investing their hard earned money and help earn profit on their investments. At present Karvy Consultants provide services to about 300 corporate firms and 16 million retail investors, due to this reason they are among the top 5 consulting firms operating in Indian equity market. The stock exchanges are the exclusive centers for trading of securities. At present, there are 23 operative stock exchanges in India. Most of the stock exchanges in the country are incorporated as Association of persons of section 25 under the Companies Act. These are organized as mutuals and are considered beneficial under in terms of tax benefits and matters of compliance.

INDEX

Overview of Market

Introduction to Equity Market

13

Company Overview

27

Analytical Research of Equity Market.

36

Budget 2006-07 and the Stock Market..

84

Market Survey

86

Bibliography

100

Introduction

Stock exchanges are intricately inter-woven in the fabric of a nations economic life. Without a stock exchange, the saving of the community the sinews of economic progress and productive efficiency would remain underutilized. The task of mobilization and allocation of savings could be attempted in the old days by a much less specialized institution that the stock exchanges. But as business and industry expanded and the economy assumed more complex nature, the need for permanent finance arose. Entrepreneurs needed money for long term whereas investors demanded liquidity the facility to convert their investments into cash at any given time. The answer was a ready market for investment and this was how the stock exchange came into being. Stock exchange means anybody of individuals, whether incorporated or not, constituted for the purpose of regulating or controlling the business of buying, selling, or dealing in securities. These securities include:

Shares, Scrips, Stocks, Bonds, Debentures stock or other marketable securities of a like nature in or of any incorporated company or other body corporate;

Government securities; and

Rights or interest in securities.

Function

The stock exchanges in India have an important role to play in the building of a real shareholders democracy. Aim of the stock exchange authorities is to make it as nearly perfect in the social and ethical sense as it is in the economic.

To protect the interests of the investing public, the authorities of the stock exchanges have been increasingly subjecting not only its members to a high degree of discipline, but also those who use its facilities joint stock companies and the other bodies in whose stocks and shares it deals.

There are stringent regulations to ensure that directors of joint stock companies keep their shareholders fully informed of the affairs of the company.

In fact, some of the conditions that the stock exchange imposes upon companies before their shares are listed are more rigorous and wholesome than the statutory provisions such as those contained in the Companies Act.

Organization Structure of the Secondary Market

The stock exchanges are the exclusive centers for trading of securities. At present, there are 23 operative stock exchanges I India. Most of the stock exchanges in the country are incorporated as Association of Persons of section 25 companies under the Companies Act. These are organized as mutuals and are considered beneficial under in terms of ax benefits and matters of compliance. The trading members, who provide broking services also, own, control and manage the stock exchanges. They elect their representatives to regulate the funding of the exchange, including their own activities. Until recently, the area of operation/jurisdiction of an exchange was specified at the time of its recognition, which in effect precluded competition among the exchanges. These are called regional exchanges. In order to provide an opportunity to investors to invest/ trade in the securities of local companies, it is mandatory for the companies, wishing to list their securities, to list on the regional stock exchange nearest to their registered office If they so wish, they can seek listing on other exchange as well. Monopoly of the exchanges within their allocated area, regional aspirations of the people and mandatory listing on the 24 exchanges (The Capital Stock Exchange, the latest in the list, is yet to commence trading) in the country recognized over a period of time to enable investors across the length and breath of the country to access the market.

The three newly set up exchanges over the counter Exchange of India (OTCEI), National Stock Exchange of India (NSE) and Inter-connected Stock Exchange of India (ICSE) were permitted since their inception to have nationwide trading. Listing on these exchanges was considered adequate compliance with the requirement of listing on the regional exchange. SEBI recently allowed all exchange to set up trading terminals anywhere in country. Many of them have already expanded trading operations to different parts of the country. The trading platforms of a few exchanges are now accessible from many locations. Further, with extensive use of information technology, the trading platforms of a few exchanges are also accessible from anywhere through the internet and mobile devices; this made a huge difference in a geographically vast country like India. It significantly expanded the reach of the exchange to the homes of ordinary investors and assuaged the aspirations of people to have exchanges in their vicinity. The issuers/investors bow prefers to list/trade on exchanges providing nationwide network rather than on regional exchanges. Consequently, territorial jurisdiction of an exchange, opportunity to invest in securities of local companies through listing on regional exchanges, and convenience of trading from a nearby exchange lost relevance.

Regulatory Framework

The four main legislations governing the securities market are:

The SEBI Act, 1992 which establishes SEBI to protect investors and develop and regulate securities market;

The Companies Act, 1956, which sets out the code of conduct for the corporate sector in relation to issue, allotment and transfer of securities, and disclosures to be made in public issue;

The Securities Contracts (Regulation) Act, 1956, which provides for regulation of transaction in securities through control over stock exchanges; and

The Depositories Act, 1996 which provides for electronic maintenance and transfer of ownership of demat securities.

Stock Markets & Financial Development in India

The role of stock markets as a source of economic growth has been widely debated. It is well recognized that stock markets influence economic activity through the creation of liquidity. Liquid financial market was an important enabling factor behind most of the early innovations that characterized the early phases of the Industrial Revolution. Recent advances in this area that stock markets remain an important conduit for enhancing developments. Many profitable investments necessitate a long term commitment of capital, but investors might be reluctant to relinquish control of their savings for long periods. Liquid equity markets make investments less risky and more attractive. At the same time, companies enjoy permanent access to capital raised through equity issues. By facilitating longer term and more profitable investments, liquid markets improve the allocation of capital and enhance the prospects for long-term economic growth. Furthermore, by making investments relatively less risky, stock market liquidity can also lead to more savings and investments. Over the years, the stock market in India has become strong. The number of stock exchange increased from 8 in 1971 to 9 in 1980 to 21 in 1993 and further to 23 as at end march 2000. The number of listed companies also moved up over the same period from 1,599 to 2,265 and thereafter to 5,968 in 1990 and 9.871 in March, 2000. The market capitalization at BSE as a percentage of GDP at current market prices also improved considerably from around 28 per cent in the early nineties to over 45 per cent at the end of the nineties, after witnessing a fall in certain intervening years. In 1998, India ranked twenty-first in the world in terms of market capitalization, nineteenth in terms of total value traded and second in terms of number of listed domestic companies. Though the Indian Stock market was founded more than a century ago, it remained quite dormant from independence in 1947 up to the early eighties, with a capitalization ratio (market capitalization to GDP) of only 4 per cent.

10

However, the patterns of demand for capitalization have undergone significant changes during the last two decades and improved stock market activity. It may be recalled that till the 90s institutional term landing acted as the primary source of industrial finance in India. Financial institutions raised money through government guaranteed bonds at low rates of interests, in which, lent funds at connectional rate of interest. This system provided corporate a cushion to absorb the relatively high risk of implementing new projects. This, in turn, discouraged the corporate to raise risk capital from equity markets. On this account, the debt market segment, which is sensitive to economic information also remained underdeveloped an illiquid. With onset of reform process in the 90s institutions has to raise resources at market related rates. At the same time, the market has witnessed the introduction of several new customizes bonds at maturities tailored to suit investors need and with market driven coupons. Along with this development, a number of measures were initiated to reform the stock markets, which helped to improve the overall activity in the stock market significantly. The turnover ratio increase from low of 6.7 percent at the beginning of the 90s to reach 35.1 percent in 1999-2000, expecting certain years of relative in activity. The Indian capital market has experienced a significant structural transformation over the years. It now compels well with those in developed markets. This was deemed necessary because of the gradual opening of the economy and the need to promote transparency in alternative sources of financing. The regulatory and supervisory structure has being over valued with most of the powers for regulating the capital market having been vested with securities and exchange board of India (SEBI). Apart from changes in the fundamental factors information asymmetries and the associated constraints to efficient price discovery remain at the heart of the volatile movements in stock prices. The extant of stock price volatility is also influenced by the extant of integration between the domestic and international capital markets as well as the regulatory frame work governing the stock market. In India, two most important factors which has a significant bearing on the behaviour of the stock prices during the 90s were net investments by FIIs and trends in the international stock exchanges, specially NASDAQ. Stock market volatility has tended to decline in recent years, with the co-efficient variation in the BSE Sensex working out to 70.51 percent during 1995-96 to 1999-2000.

11

Asset price bubbles entail significant risks in the form of higher inflation when the bubble grows in size and in the form of financial instability and lost output when the bubble bursts. Monetary and fiscal authorities, therefore, closely watch the asset market developments. The positive wealth effect resulting from bull runs could impart a first round of risk to inflation. If the bull run is prolonged, a second round of pressure on prices may result from subsequent upward wage revisions. Since financial assets are used as collaterals, asset booms may also give rise to large credit expansion. When domestic supply fails to respond to the rising demand, it could give rise to higher external current account deficit. The asset price cycle may follow. When the asset prices collapse, firms may faced savior financing constraints as a result of declining value of their collaterals, making lenders reluctant to land at a scale they do when asset prices are rising. Recognizing this alternative complexities emanating from asset market bubbles, information on asset prices are being increasing used as a critical input for the conduct of the public policies.

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National Stock Exchange of India

Nation Stock Exchange was set up in 1993 to encourage the stock exchange reform through system modernization and competition. The reach of NSE has been extended to twenty-one cities of which six cities do not have stock exchanges of their own. By end 1996, NSE planned to extend its network cities across the country. It is an electronic screen based system where members have equal access and equal opportunity of trade irrespective of their location in different parts of the country as they are connected through a satellite network. The system helps to integrate the national market and provide a modem system with a complete audit trial of all transactions. Instantaneous matching of trades effectively prevents circular trading which has been one of the mechanisms of pre-rigging. A members office located anywhere in the country is connected to the central computer through very small aperture terminal (VASTs). Today, all stock exchanges in India follow screen-based trading system. NSE was the first stock exchange in the country to provide nation-wide order-driven, screen-based trading system. NSE model was gradually emulated by all other stock exchanges in the country. The trading system at NSE known as the National Exchange for Automated trading (NEAT) system is an anonymous order-driven system and operates on a strict price/time priority. It enables members from across the country to trade simultaneously with enormous ease and efficiency. NEAT has lent considerable depth in the market by enabling large numbers of members all over the country to trade simultaneously and consequently narrowed the spreads significantly.

13

INTRODUCTON TO EQUITY MARKET

The Capital Market

Indian Capital Market

The function of the financial market is to facilitate the transfer of funds from surplus sectors (lenders) to deficit sectors (borrowers). Normally, households have excess of funds or savings, which they lend to borrowers in the corporate and public sectors whose requirement of funds far exceeds their savings. A financial market consists of investors and buyers, sellers, dealers and does not refer to a physical location. Formal trading rules and communication networks for originating and trading financial securities link the participants in the market. As elsewhere in the world, the Indian financial system consists of: Money Market Capital Market The money market has two components. Organized Market Unorganized Market The organized market is dominated by commercial banks. The other major players are the Reserve Bank of India, Life Insurance Corporation, General Insurance Corporation, Unit Trust of India, Securities Trading Corporation of India, other primary dealers and the various mutual funds. Despite rapid expansion of the organized money through a large network of banking institutions that have extended their reach even to the rural areas, there is still an active unorganized money market. It consists of indigenous bankers and moneylenders. In the unorganized market, there is no clear demarcation between short-term and long-term finance and even between the purposes of finance. The unorganized sector continues to provide finance for trade as well as personal consumption. The inability of poor to meet the creditworthiness requirements of the banking sector makes them take recourse to the institutions that still remain outside the regulatory framework of banking. But this market is shrinking.

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INDIAN CAPITAL MARKET CLASSIFICATION

Indian capital market can be broadly classified, into the following:

I. MONEY MARKET: It is a market, which deals in short term securities such as treasury bills, certificate of deposits etc.

II. DEBT MARKET: It is a market dealing in debt securities such as debentures, bonds etc.

III. SECURITIES MARKET: It is a market dealing in equity and equity linked securities. This market comprises of primary market and second market.

The capital market provides the framework in which savings and investment take place. On the one hand it enables companies to raise resources from the investors and on the other, it facilitates households to invest their saving in industrial or commercial activities. Those saving instruments that can be bought or sold freely are called securities. These include a range of products debt and equity that can be traded. The market where such trades take place is the securities market or capital market and comprises the various exchanges, intermediaries and its regulatory institutions.

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The capital market consists of these segments. Primary Segments Secondary Segments The primary market deals with the issue of new instruments by the corporate sector such as equity shares, preference shares, and debentures. The public sector consisting of central and state governments, various public sector industrial units (PSUs) and statutory and other authorities such as state electricity boards and port trusts also issue bonds. The primary market in which public issue of securities is made through a prospectus is a retail market and there is no physical location. Direct mailing, advertisements and brokers reach the investors. Screen based trading eliminates the need trading floor. The Secondary Market Or Stock Exchange where existing securities are traded is an auction arena. It may have a physical location like a stock exchange or a trading floor. Since 1995, the trading in securities is screen-based. Screenbased training eliminates need for a trading floor. And, since the last few years Internet-based trading has also made an appearance in India. The Secondary Market consists of 23 stock exchanges including the National Stock Exchange (NSE) and the Over-the Counter Exchange Of India (OTCEI) and also Bombay Stock Exchange (BSE). The secondary market provides a trading place or terminals for the securities already issued to be bought and sold. It also provides liquidity to the initial buyers in the primary market to re-offer the securities to any interested buyer at any price, if mutually accepted. An active secondary market actually promotes the growth of the primary market and capital formation because investors in the primary market are assured of a continuous market and they can liquidate their investments in the stock exchange. There are several major players in the primary market. These include the merchant bankers, mutual funds, financial institutions, foreign institutional investors (FIIs) and individual investors. R & T agents, Custodians and Depositories are capital market intermediaries that provide important infrastructure services for both primary and secondary markets.

16

It is important to ensure a smooth working of this market, as it is the arena where the players in the economic growth of a country interact. Various laws have been passed from time to time to meet this objective. The financial market in India was highly segmented until the initiation of reforms in 1992-93 on account of a variety of regulations and administered prices include barriers to entry. The reform process was initiated with establishment of securities and exchange of India (SEBI).

Customers
(INVESTORS)

Intermediate (KARVY)

Companies (ICICI, RIL)

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CAPITAL MARKET INTERMEDIARIES

Merchant Bankers Merchant Bankers means any person who is engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing to securities or acting as manager, consultant, adviser or rendering corporate advisory service in relation to such issue management. Stock Brokers Stockbrokers are regulated by SEBI {Stock brokers and Sub brokers} Regulations, 1992. The stock broker is a member of the stock exchange. Stock brokers are the intermediaries who are allowed to trade in securities on the exchange of which they are members. They buy and sell on their own behalf as well as on behalf of their clients. Stock brokers expand their business by engaging sub broker. Sub brokers means any person not being a member of a stock exchange who acts on behalf of a stock broker as an agent or otherwise for assisting the investors in buying, selling or dealing in securities through such stock brokers. Custodians Custodians of securities mean any person who carries on or proposes to carry on the business of providing custodial services. Custodian services in relation to securities means safekeeping of securities of a client. SHCIL, Citibank N.A., Deutsche Bank, Standard Chartered Bank, HSBC Bank, IIT Corporate Services, HDFC Bank is among the few registered custodians in the country.

18

 R & T Agents Registrars to Issue R & T agents are governed by SEBI. R & T agents are intermediaries who provide services to shareholders on behalf of issuers. Issuers may engage share transfer agents for maintaining Register of Members {ROM}, managing corporate benefits like distribution of dividends, interest on debentures, bonus shares, right forms etc. R & T agents extend the depository connectivity services in the depository environment. More information of R & T agents is given in the business activities of Karvy. Mutual Funds: MFs are financial intermediaries, which collect the savings of small investors and invest them in a diversified portfolio of securities to minimize risk and maximize returns for their participants. MFs have given a major filliped to the capital market both primary as well as secondary. The units of MFs, in turn are also tradable securities. Their price is determined by their net asset value that is declared periodically. More information of mutual fund is given in the business activities of Karvy. Depositories: The principle function of a depository is to dematerialize securities, custody and trading in electronic book entry form. A depository established under the Depositories Act can provide any service connected with recording of allotment of securities or transfer of ownership of securities in the record of a depository. There are two depositories in India, which are given below. NSDL CDSL Depository participants (DPs): DPs are described as an agent of the depository. They are intermediaries between the depository and the investors. The relationship between the DPs and the depository is governed by an agreement made between the two under depositories Act. A DP is responsible for maintaining the securities account of the investor and handling it in accordance with the investors instructions. A DP can offer depository-related services only after obtaining a certificate of registration from SEBI.

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CAPITAL MARKET PROCESSES

There are various processes that issuers of securities follow or utilize in order to tap the savers for raising resources. Some of the commonly used processes and methods are described below: Private Placement: Method of raising funds directly from investors without issue of prospectus to the public is known as private placement. SEBI has prescribed the eligibility criteria for companies and instruments as well as procedures for private placement. Privately placed securities can also be listed if such placement fulfills all listing criteria. Preferential Offer/Right Issue: Companies can expand their capital b offering the new shares to their existing shareholders. Such offers for sale can be made to the existing shareholders by giving them a preferential treatment in allocation or the offer can be on a right basis i.e. the existing holders can get by the way of their right, allotment of new share in certain proportion to their earlier holding. If the shares are offered to a few of the existing shareholder instead to all shareholders or at a price different from the price at which they are issued to all, such issues are called preferential allotments. Preferential allotment requires shareholders approval in the general body meeting. Further, all such offers have also to e in compliance with criteria laid down by SEBI. Internet broking: With the Internet becoming ubiquitous, many institutions have set up securities trading agencies that provide online trading facilities to their clients from their homes. This has been possible since all the players in the securities market, viz. stockbrokers, stock exchange, clearing corporation, depositories, DPs etc are linked electronically. Thus information flows amongst them on a real time basis.

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Initial Public Offer (IPO): Companies, new as well as old, can offer their shares to the investors in the primary market. This kind of tapping the saving is called an IPO or Initial Public Offering. SEBI guidelines regulate various procedures involved in making a public issue but price of shares, size of the issue, timing of issue, listing of the issue is decided by the issuer. Issuers have to disclose all relevant facts and information in the prospectus. Prospectus also has to disclose risk factors and management perception about those risks. Stock trading: An investor in securities needs assurance that they can convert their security holding to cash to meet their cash requirements. The ability to convert value of securities into cash is called liquidity. The liquidity is provided by the stock exchange. Stock exchange is a platform where buyers and sellers of securities will match their bids and offer for securities and exchange securities with cash. The offers and bids are routed through members of the stock exchange, popularly known as a broker. Stock exchange regulates the transaction are conducted fairly and transparently with justice to both buyers and sellers.

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Equity Market

Equity represents an ownership position in a corporation. It is a residual claim, in the sense that creditors and preference shareholders must be paid as scheduled before equity shareholders can receive any payment. In bankruptcy equity holders are in principle entitled only to assets remaining after all prior claimants have been satisfied. Thus, risk is highest with equity shares and so must be its expected return. When investors buy equity shares, they receive certificates of ownership as proof of their being part owners of the company. The certificate state the number of states the number of shares purchased and their par value.

A Brief History of the rise of the Equity trading in India

July 9, 1875

: Native brokers from the Native share and Stock Brokers Association in Bombay. Membership fee is Re. 1. The association has 318 members. : Bombay stock Exchange acquires own premises. : Clearing houses are established for settlement of trades as volumes increase. : K R P Shroff becomes the honorary president of BSE. : Bombay Securities Contract control Act (BSCCA) comes into force. : Stock Exchange building is acquired. : Forward trading banned till 1946. Only ready to deliver and hand delivery contracts permitted.

1899 1921

1923 1925

Dec 1, 1939 1943

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1956

: Securities Contract Regulation Act drafted on the lines of BSCCA comes into force. : BSE becomes the first exchange in India to get the permanent recognition. : Unit Trust of India (UTI) is born. : K R P Shroff retires and Phiroze J Jeejeebhoy becomes chairman. : Morarji Desai bans forward trading. : Construction of P J Towers, named after late Phiroze Jamshedji Jeejeevhoy, starts. : BSE Sensesex launched as the first stock market index with1978-79 as the base year. : SBI Mutual Fund launches Magnum Regular Income Scheme.

1957

1964 Apr 1, 1966

Jun 29, 1969 1973

Jan, 2 1986

Nov 1987

Apr 1988 Jan 1992 May 1992 May 27, 1992 May 30, 1992

: Securities and Exchange Board of India (SEBI) set up. : SEBI had given statutory powers. : Harshad Mehta securities scam breaks. : Reliance is the first Indian company to make a GDR issue. : The capital Issues Control Act, 1947 is replaced.

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Sep 1992

: Foreign Institutional Investors are permitted to invest in the Indian securities market. : Finance Minister Manmohan Singh inaugurates Over the Counter Exchange of India. : The first private sector mutual fund, Kothari Pioneer Mutual fund, begins operations.

Nov 1992

Oct 30, 1993

1993 June 1994

: SEBI bans badla trading on BSE. : NSE commences operations in wholesale debt market segment. : The capital market segment of NSE goes o stream. Trading is screen based for the first time in India. : BSE online trading system (BOLT) replaces open outcry system. : The National Securities Cleaning Corporation Limited, Indias first clearing corporation is set up. : NSE overtakes BSE as the largest stock exchange in terms of volume of trading. : The National Securities Depository Limited is created. : SEBI releases norms for takeovers and acquisitions. : BSE introduces screen based trading. : SEBI recognized Interconnected Stock Exchange founded by 15 regional stock exchanges. This exchange starts functioning in Feb., 1999

Nov 1994

March1995

Apr 1995

Oct 1995

Apr 1996 Feb 1997 May 1997 Nov 1998

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Feb 1999

: Launch of automated lending and borrowing mechanism (ALBM) on NSE. : Infosys Technologies is the first company to be listed on NASDAQ through a public offering of American Depository Receipts. : Central Depository Services (India) promoted by BSE operations. : ICICI is the first India Company to be listed on the New York Stock Exchange (NYSE). : For the first time in BSEs history, the Sensex closes above the 5,000 mark at 5,031.78. : BSE creates a Z category of scrips in addition to A, B1, and B2 comprising scrips that breached or failed to comply with the listing agreement. : Internet trading commences on NSE. On Feb 14, 2000, BSE Sensex hits all-time high of 6150. On Feb. 21, NSE records peak market capitalization of Rs. 11, 94,282 crore. : The Sensex is revamped to include Dr. Reddys Lab, Reliance Petroleum, Satyam Computers and Zee Telefilms replacing Indian Hotels, Tata Chemicals, Tata power, and IDBI. : BSE and NSE introduce derivatives trading in the form of index futures. : BSE turns 125. : Wipro lists in the NYSE.

Mar 11, 1999

Mar 22, 1999

Sep 1999

Oct 11, 1999

Jan 2000

Feb 2000

Apr 10, 2000

June 2000

July 9, 2000 Oct 19, 2000

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Jan 22, 2001

: Borrowing and Lending Securities Scheme (BLESS) launched on BSE to promote securities lending and borrowing activities. : Ketan Parekh scam breaks. SEBI suspends all the broker directors of the BSE in relation to KP scam. : BSE advises compulsory demat for B2 scrips. : Index options start trading on NSE. : A SEBI directive bans carry forward. All major securities are moved to rolling settlement. Options of individual scrips start trading NSE. : BSE and NSE launch futures in individual stocks.

Mar 2001

May 2001 June 2001 July 2001

Nov 9, 2001

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Changing Attitude towards Equity Ownership

With a broadening of the corporate sector, volume of business on the exchange s in India is likely to increase. The greater interest shown in recent years by investors is partly reflected in the over-subscription of new issues. There has been great demand for growth issues. I.e. shares of companies with growth prospects. It has been observed that the wider the distribution of corporate securities among investors, the grater the reception accorded to new or additional issues of capital; the more mobile the additional issues of capital; the more mobile the market, the grater the participation of investors and traders in the raising of corporate capital. The available data about the share ownership in the country show that there is gradual widening if ownership. The increasing participation in stock market activities by financial and non financial intermediaries, particularly of institutions which are mainly investors has tended to create an orderly and stable market. Further, the various growth-permitting factors including regulatory measures, progressive spread of literacy and dissemination of investment information all tend to contribute to a healthy growth of the stock market. In the security market, equity shares are the most romantic of all the form of securities. Further more, equity analysis is more complicated than bond appraisal, and greater skill is required in selecting equity than fixed income securities. The attitude towards equity shares has varied from extreme pessimism to optimism from time to time. It is equity shares that entice most investors, and some investors have been known to feel grater sympathy for their equity than their spouses. Presence of market and business risks associated with such investments fails to keep the investing public and institution out of the market because of their confidence in the ultimate success of the equity shares, i.e. towards overshadow risks. In fact the advantages of equity shares ownership are enough to lure the investors and change their attitude towards securities.

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B. Company Overview.

1. Introduction to the Company 2. Company mission & core values 3. Organizational Hierarchy 4. Product & services 5. Benefits of the trading with the Karvy 6. SWOT Analysis

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ABOUT KARVY Overview

KARVY, is a premier integrated financial services provider, and ranked among the top five in the country in all its business segments, services over 16 million individual investors in various capacities, and provides investor services to over 300 corporate, comprising the who is who of Corporate India. KARVY covers the entire spectrum of financial services such as Stock broking, Depository Participants, Distribution of financial products - mutual funds, bonds, fixed deposit, equities, Insurance Broking, Commodities Broking, Personal Finance Advisory Services, Merchant Banking & Corporate Finance, placement of equity, IPOs, among others. Karvy has a professional management team and ranks among the best in technology, operations and research of various industrial segments.

Karvy Early Days

The birth of Karvy was on a modest scale in 1981. It began with the vision and enterprise of a small group of practicing Chartered Accountants who founded the flagship company Karvy Consultants Limited. It started with consulting and financial accounting automation, and carved inroads into the field of registry and share accounting by 1985.Thus over the last 20 years Karvy has traveled the success route, towards building a reputation as an integrated financial services provider, offering a wide spectrum of services. It values and vision of attaining total competence in our servicing has served as the building block for creating a great financial enterprise, which stands solid on our fortresses of financial strength - our various companies.

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Board of Directors Karvy Consultants Ltd.

Mr. C Parthasarathy Mr. M Yugandhar Mr. M S Ramakrishna Mr. Prasad V Potluri cparthasarathy@karvy.com yugandhar@karvy.com msrk@karvy.com pvpotluri@karvy.com

Board of Directors Karvy Securities Ltd.

Mr. C Parthasarathy Mr. M Yugandhar Mr. M S Ramakrishna Mr. Ajay Kumar K William Samuel cparthasarathy@karvy.com yugandhar@karvy.com msrk@karvy.com Ajay@karvy.com

Board of Directors Karvy Stock Broking Ltd.

Mr. C Parthasarathy Mr. M Yugandhar Mr. M S Ramakrishna Mr. Ajay Kumar K Kutumba Rao V Willaim Samuel Shastry P S shastry@karvy.com cparthasarathy@karvy.com yugandhar@karvy.com msrk@karvy.com Ajay@karvy.com vkutumbarao@karvy.com

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Key Contacts at Head Office

Gopalakrishnamacharyulu Ram Kidambi Ganesh V Mahesh V Sridhar K Gopichand S Ramaswamy J Ramanujam P B ggkr@karvy.com rkidambi@karvy.com vganesh@karvy.com vmahesh@karvy.com sridhark@karvy.com gopi@karvy.com jram@karvy.com pbr@karvy.com

Milestones Of Karvy

KARVY GROUPS

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Karvy Consultants Ltd. Karvy Stock Broking Ltd. Karvy Investors Services Ltd. Karvy Computer share Pvt. Ltd. Karvy Global Service Ltd. Karvy Commodities Broking Pvt. Ltd. Karvy Insurance Broking Pvt. Ltd.

KARVY ALLIANCES
Karvy Computershare Private Limited is a 50:50 joint venture of Karvy Consultants Limited and Computershare Limited, Australia. Computereshare Limited is world's largest -- and only global -- share registry, and a leading financial market services provider to the global securities industry. The joint venture with Computershare, reckoned as the largest registrar in the world, servicing over 60 million shareholder accounts for over 7,000 corporations across eleven countries spread across five continents. Karvy Computershare Private Limited, today, is India's largest Registrar and Share Transfer Agent servicing over 300 corporate and mutual funds and 16 million investors.

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REGISTERED OFFICE OF KARVY

KARVY HOUSE
46, Avenue 4, Street No.1, Banjara Hills, Hyderabad 500 034. Andhra Pradesh, India. Tel: 40-23312454 Email: mailmanager@karvy.com

ABOUT RAJKOT BRANCH

In Saurashtra there are five Branch Offices of Karvy: Rajkot Jamnagar Junagadh Bhavnagar Morbi

In Rajkot Karvy established itself on 21 June 2002. Karvy - Rajkot Branch is giving all services to the investors very efficiently than other branches of saurashtra and it is located in the heart of the city. Mr. Dhillen Bhata is the branch manager of Rajkot branch who is very supportive person and very effective personality & handles Karvy-Rajkot Branch very significantly. Karvy-Rajkot Branch has to give report of daily businesses such as mutual funds, fixed deposits, DP collection, equity IPO collection etc. to the Baroda region.

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Business Activities Of Karvy FINANCIAL PRODUCTS DISTRIBUTION REGISTARS & TRANSFER AGENTS MUTUAL FUND SERVICES STOCK BROKING DEPOSITORY PATICIPANT SERVICES PERSONAL ADVISORY SERVICES INSURANCE INCOME-TAX SERVICES

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SWOT Analysis of the company

During the project work with the organization, the strength, weaknesses, opportunities and the threats for the organization can be found out. The SWOT Analysis of the organization can be presented as:

Strength:
A Corporate Body. Wide product range to enable the clients to choose the best alternative. The best investment advice correct up to 70 -90 per cent through dedicated research & reports. Lower Brokerage and other charges with respect to other players. Dedicated, co operative and loyal staff.

A positive image in the existing clients.

Weakness:
Time consuming process of account opening, resolving the problems of the customers.

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Opportunities:
There is still large market to capture. Presently only 3% of the total investors invest into the equity market. So the great opportunities for the future. Attract the new clients and retention of the old one with better services and comparatively low charges. An indirect opportunity generated by the market from its bullishness. Derivatives and Commodities market are growing. So, there is a great potential in this field also. And to take this advantage company is coming in this field.

Threats:
Decreasing rates of the brokerage in the market. Increasing competition Some changes in the existing products. Indirect threat of instable stock market.

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C. ANALYTICAL RESEARCH

1. Introduction 2. Sectorial Analysis of the Indian Equity Market 3. Tables and figures 4. Budget and the stock market

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Introduction:

The report is mainly focused on the topic The Changing Role of the Indian Equity Market. Approaches to Security analysis; Fundamental Analysis Technical Analysis Random Walk Theory

And the Fundamental Analysis includes, Economy Analysis Industry Analysis Company Analysis

Here, we will focus on the study of the Industry Analysis with the helps of different sectors. The different sectors are having different performance in the growth of the economy. The contribution of each sector may be on the basis of the growth of the particular sector. So, to know about the equity market with respect to the Indian economy we should go for the analysis of the different sectors. Now, lets go for the Sectorial Analysis of the Indian Equity Market; The stock market is the combination of the different type of sectors such as, Auto, Aluminum, Abrasives, Finance banking, Bearings, Beverages, Cables, Castings, Cement, Chemicals, Compressors, Computers, Constructions, Consumer goods, Capital goods, Couriers, Domestic appliances, Electric equipments, Engineering, Entertainment, Fertilizers, Food processing, Hospital, Hotels, Industrial gas, Infrastructure, IT, Leather, Metal, Mining, Oil drilling, Pharma, Power, Petrochemical, Print, Refineries, Shipping, Steel, Sugar, Telecom, Textile, Transport, etc. From all these different sectors, we will study some of the sectors, such as, Auto, Capital goods, Consumer Goods, Food processing, Finance banking, IT, Infrastructure, Hotel, Power, Pharma, Steel.

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Auto Ancillaries

The fortunes of the auto ancillary sector are closely linked to those of the auto sector. Demand swings in any of the segments (cars, two-wheelers, commercial vehicles) have an impact on auto ancillary demand. Demand is derived from original equipment manufacturers (OEM) as well as the replacement market. Replacement demand accounts for close to 57% of total demand, while OEMs account for 27%, with exports accounting for the balance 16%.

The Indian auto component industry had an estimated 480 companies operating in this area in FY05, employing more than 250,000 people and the industry exported goods worth estimated at US$ 1.4 bn. Share of exports to output is estimated to have increased from 15% in FY04 to 16% in FY05.

Margins in the replacement market are higher than the OEM market. OEM's requirements increase or decrease, depending upon general demand scenario and launch of vehicles. This market is very competitive and component manufacturers have to compromise on margins to bag bulk orders. Moreover, delivery schedules and quality standards have to be adhered to very strictly.

Indian auto ancillary sector has traditionally suffered from poor quality. While this still holds true for the unorganized sector, the organized sector has been resorting to increased automation to reduce the defect levels. Defect rates in domestic auto ancillaries (including the popular suppliers) are in the range of 1,000 parts per million (ppm) against a global average of 200 ppm.

One area where domestic units compare favorably with their international peers is it terms of costs. Lower labor costs give Indian auto ancillary companies an absolute cost advantage. Just to put things in perspective, ACMA numbers suggest that wage cost accounts for 3%-15% of revenues for Indian manufacturers as compared to 20%-40% for US players. India's strength in exports lies in forgings, castings and plastics historically. But this is changing with more component manufactures investing in up gradation of technology in recent years.

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In the outsourcing space, the prospects for auto ancillary manufacturers are bright from the long-term perspective. But identifying the right stock from this sector becomes difficult on account of technical complexities involved and higher nature of fragmentation of the industry.

Profile

The Indian auto component industry is highly fragmented in nature and has 416 players, employing 250,000 people.

Since an auto assembly involves large number of parts, ACMA has classified sector companies on the basis of components that they supply to auto manufacturers. The following table lists the industry segmentation on the basis of components, their contribution to the overall industry revenues and some of the leading players in those segments.

Sub-groups Engine Parts

Products Pistons, piston rings, fuel injection pumps

% to total Leading companies products 24.0% 16.0% 12.0% 8.0% 7.0% 33.0% Ucal Fuel, MICO, Lucas Sona Kaya, ZF Steering Gabriel, Munjal Showa Exide, MICO, Motherson Sumi, Lumax Rico Auto, Sundram

Transmission & Transmission gears, axles and Steering parts wheels Suspension & Braking parts Electrical Equipment Others Leaf springs, shock absorbers Spark plugs, batteries, starter motors Dashboard instruments Fan belts, sheet metal parts

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Since auto ancillary companies mainly act as vendors, it is extremely important for them to remain competitive, both in terms of cost as well as quality. As a consequence, the profitability of the company at the operating level assumes great significance. Therefore, operating profits are considered as a good starting point in separating a good auto ancillary company from the rest.

Let us throw some light on the various operating parameters presented in the flow chart below:

There has to be a broad look at the parameters that determine the profitability of an auto ancillary company, now have a look at what kind of valuations an auto ancillary company command should.

Valuations:

The fortunes of auto ancillary companies are linked to the fortunes of the auto industry and as a result the bargaining power stands considerably reduced. Thus, these companies have little leeway in improving their top line performance by raising prices. The onus of improving profitability therefore falls on cost reduction measures and effective deployment of funds. Hence expertsfeel that P/E multiple is an important metric in evaluating the performance of a company from this sector. Companies that cater to domestic market deserve a lower P/E multiple as compared to a company that derives a significant share from export markets.

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Banking Sector

With the economic growth picking up pace and the investment cycle on the way to recovery, the banking sector has witnessed a transformation in its vital role of intermediating between the demand and supply of funds. The revived credit off take (both from the food and non food segments) and structural reforms have paved the way for a change in the dynamics of the sector itself. Besides gearing up for the compliance with Basel accord, the sector is also looking forward to consolidation and investments on the FDI front. Public sector banks have been very proactive in their restructuring initiatives be it in technology implementation or pruning their loss assets. Windfall treasury gains made in the falling interest rate regime were used for writing off the doubtful and loss assets. Incremental provisioning made for asset slippages have safeguarded the banks from witnessing a sudden impact on their bottom-line.

Retail lending (especially mortgage financing) formed a significant portion of the portfolio for most banks and the entities customized their products to cater to the diverse demands. With better penetration in the semi urban and rural areas the banks garnered a higher proportion of low cost deposits thereby economizing on the cost of funds.

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Apart from streamlining their processes through technology initiatives such as ATMs, telephone banking, online banking and web based products, banks also resorted to cross selling of financial products such as credit cards, mutual funds and insurance policies to augment their fee based income.

The stalwarts of the North Block are nowadays oft heard reiterating their confidence in the Indian economy and their faith in the economys potential to achieve 8% GDP growth targets. Understandably therefore, the banking and financial sectors remain one of their priorities when it comes to regulatory licensing and policy framework. In one such development, the central bank recently resolved one of the sectors biggest concerns about capital shortage.

Until recently, banks' capital adequacy ratio (CAR) was applicable only to the credit risk assumed by them. Subsequently, capital requirement for market risks for the held-for-trading (HFT) treasury portfolio was introduced during FY05.

In addition, banks are required to provide capital for market risk for the available-for-sale (AFS) portfolio by FY06. This would require banks to augment their capital funds to ensure continued compliance with the regulatory minimum CAR. With the transition to the new capital adequacy framework (Basel II) scheduled for March 2007, banks would need to further shore up their capital funds to meet the requirements under the revised framework. Under Basel II, the capital requirements are not only more sensitive to the level of risk but also apply to operational risks.

Banks would thus need to raise additional capital on account of market risk, Basel II requirements, as well as to support the expansion of their balance sheets. As per the erstwhile guidelines, the capital adequacy ratio comprised of only Tier-I and Tier-II capital and banks were not allowed to raise Tier-III capital.

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Taking into consideration the above and with a view to provide banks with additional options for raising capital funds, to meet both the increasing business requirements as well as Basel II compliance norms, the RBI has given banks the leeway to raise capital funds by issue of the following additional instruments.

Although the central bank has remained shy of giving the innovative capital instruments the nomenclature of 'Tier-III', the instruments complement the previous two tiers:

Perpetual debt instruments eligible for inclusion as Tier-I capital Debt capital instruments eligible for inclusion as upper Tier-II capital Perpetual non-cumulative preference shares eligible for inclusion as Tier-I capital, and Redeemable cumulative preference shares eligible for inclusion as Tier-II capital.

If the new instruments find takers, it would help PSU banks, left with little headroom for raising equity, to raise funds without diluting the government's stake in them. Significantly, FII and NRI investment limits in these securities have been fixed at 49%, as against the 20% foreign equity holding allowed in PSU banks.

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Banks like OBC and Dena Bank have already exhausted the option of going in for equity issues, as the government holding in these banks has touched the minimum permissible 51%. Others such as HDFC Bank and UTI Bank will also need to soon prop up their CAR to sustain the current levels of asset growth.

Also, although the likes of ICICI Bank (post the latest public issue) and Corporation Bank remain well capitalized, they may consider the innovative instruments to support their Tier II funding in the medium term.

Perpetual bonds will have no maturity date, i.e., these will not be redeemable but will pay interest forever. The interest payable to the investors may be either at a fixed rate or at a floating rate referenced to a market-determined rupee interest benchmark rate. However, in its guidelines, the RBI has put a caveat that such hybrid securities will cease to provide returns if the issuing bank's CAR falls below regulatory requirements (9%). This makes perpetual debt instruments a risky option for investors, particularly in those banks where the CAR is at lower levels.

What is thus, prima facie palpable is the fact that the 'innovative' instruments hold good only for those banks that have a high credit rating and good asset quality. Else, convincing investors about the security of their capital or garnering the perpetual debts at feasible interest rates will prove to be a complex barrier for banks' capital expansion. The RBI evidently has thus ensured that while deserving banks have sufficient leeway to fund their growth, the inept ones either shape up or ship out!

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Consumer goods

After four years of lackluster performance in both revenues and profits, the FMCG sector managed to get back on track in 2005. However, in 2005, smaller companies walked away with larger gains, as far as return on investment in these stocks is concerned. Also, their market shares have improved considerable, mainly at the cost of their larger peers and in some cases, regional players.

As can be seen from the graph below, after almost three years, the FMCG sector managed to outperform the benchmark index this year, indicating renewal of investors faith. Rs 100 invested in the FMCG index would have yielded 53% return by the end of the year, while the same investment would have fetched 9% lower if invested in the benchmark index, which is indeed a feat. At the start of the year, the outlook towards the FMCG sector in general was skeptical.

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What was different in 2005 as compared to 2004?

While 2004 was a difficult year owing to weaker demand and intense competition, this year, there was a reversal in trend and FMCG companies were able to get a larger share of the consumers wallet.

Also, monsoons that play a vital role in influencing FMCG demand have been favorable. In 2004, detergent and shampoo major, P&G, decided to up its market share in the Indian market and hence, halved prices and took the battle to the market leader HLL. But in 2005, due to input costs pressures and unviable margins, both companies raised prices of detergents twice (by around 8%). The encouraging aspect is that the demand has sustained.

The sector out performers FMCG: The show has just begun Price on Dec Price on Dec % Change 22, 2004 (Rs) 23, 2005 (Rs) 6,442 2,063 1,054 84 37 169 276 532 179 143 344 9,257 2,786 1,615 198 84 354 507 835 271 193 455 43.7% 35.1% 53.2% 137.4% 129.2% 109.6% 83.5% 56.9% 51.5% 34.9% 32.1%

Company BSE Sensex S&P CNX Nifty BSE FMCG Index Dabur Pidilite Marico Godrej Consumers P&G Colgate HLL Nirma

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As can be seen from the table above, Dabur and Pidilite were the sector performers in the FMCG space. As mentioned earlier in this article, the top four gainers are from the relatively smaller players in the FMCG sector. More so, these companies managed to outperform larger peers with the bottom-line growing by 46% and 25% respectively.

However, it must be noted that the latter had a stock split (face value of Rs 10 per share to Re 1), which increased investor interest in the stock. Godrej Consumers, the market leader in the hair color segment, also managed to outperform the benchmark indices considerably.

There were no laggards in the sector and even the bellwether, HLL, gained handsomely. Another development is that almost all FMCG companies (especially the smaller players) set up manufacturing units in backward areas, giving them excise and income tax breaks. This lowered the tax outgo and consequently, adding to the bottom-line growth. FOOD & Tobacco: its smoking! Price on Dec Price on Dec % Change 22, 2004 (Rs) 23, 2005 (Rs) 29 506 241 482 331 87 586 908 268 112 1,400 472 934 537 139 935 1,303 328 286.6% 176.6% 95.6% 93.9% 62.2% 60.4% 59.6% 43.5% 22.2%

Company GTC Ind. Godfrey Philips VST Industries Tata Tea GSK Cons. ITC Nestle Britannia Tata Coffee

As can be seen from the table, food stocks also followed the footsteps of FMCG stocks. The top three gainers outperformed the benchmark indices over two-fold (all from the tobacco sector).

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Despite health issues, a growing number of class-action lawsuits and higher prices, consumers still find tobacco products entirely seductive, all resulting in these companies making real fortunes. Tata Tea, the worlds second largest branded tea company, also outperformed the benchmark indices. The year saw the tea major dispose of its plantations business in the south, which was a big positive (plantations are typically high fixed cost affair). Also, the companys investment in other group companies (adding up to around Rs 200 per share at the current market price) was also an attraction.

What to expect in 2006?

Since the growth prospects of the sector is closely linked to economy growth and income levels, investing in FMCG stocks with a short-term horizon of one year may not yield desired results. This is because, even if the macro variables are positive, there is a lag effect on the FMCG sector. For example, good monsoon in one year is unlikely to drive FMCG sales in the same year in a significant manner.

Given this background, one has to remember that the FMCG sector is a play on Indias consumption potential, which in turn is a function of competition, emerging of organized retailing and more importantly, is based on the depth and breadth of the consumption.

By breadth, experts mean the number of people buying soaps (from the organized sector as well as from rural markets). By depth, expertsmean, higher consumption by the existing consumer base (both in terms of moving up the value chain and increased usage). These are typically long-term drivers and therefore, one needs to be patient to realize the potential.

In per the experts view, smaller companies will stand to benefit more from increased off take, as they follow a simple strategy, give the retailer higher incentives than those given by larger brand owners, thus encouraging the retail shop owner to push their products more.

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But the investor has to choose the right smaller company. Experts suggest choosing those smaller companies that have market leadership in at least one segment of the FMCG sector and are expanding into new categories or aiming to increase market share.

All said and done, the environment will no doubt be competitive, but the FMCG sector is a volume game. Market leaders like HLL realized the pitfalls of focusing only on profitability in the last two years. Recent statements from HLL clearly suggest that the focus on increasing market share, even if it at the cost of margins.

The implementation of VAT is another shot in the arm of the sectors. We understand that brands will become cheaper in the time to come, though the benefits will take a few years to filter in. Also, the smaller and unorganized players will lose the competitive edge, which in turn will benefit organized players.

FMCG companies need to understand that the top end of the pyramid is now deep enough to absorb expensive offerings. This creamy layer is affluent, equal to the western countries, and hence will require some kind of differentiation from the mass market.

Hence, product differentiation and innovation along with technology and processes will be the critical aspects for growth. Also, Indian companies have now started to spread their wings in the overseas market and there are several examples of this. This is another growth area tapped by players, which will bear fruits in time to come.

The bottom-line from an investors perspective is to have a balanced portfolio in the FMCG sector (large and niche players) to reap the benefits of the consumption story going forward. More importantly, the FMCG sector is not a high-return sector and to that extent, expectations have to be realistic.

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Cement

The Indian cement industry with a total capacity of about 152 m tonnes (excluding mini plants) in FY05, has surpassed developed nations like USA and Japan and has emerged as the second largest market after China. Although consolidation has taken place in the Indian cement industry with the top five players controlling almost 50% of the capacity, the remaining 50% of the capacity remains pretty fragmented.

Despite the fact that Indian cement industry has clocked a production of more than 100 m tonnes for the last four consecutive years, the per capita consumption of 115 kgs compares poorly with the world average of over 250 kgs and more than 450 kgs in China. This, more than anything underlines the tremendous scope for growth in the Indian cement industry in the long term.

Cement, being a bulk commodity, is a freight intensive industry and transporting cement over long distances can prove to be uneconomical. This has resulted in cement being largely a regional play with the industry divided into five main regions viz. north, south, west, east and the central region. While the southern region is excess is capacity owing to the availability of limestone, the western and northern region are the most lucrative markets on account of higher income levels.

Given the potential growth, quite a few foreign transnational have been eyeing the Indian markets and are planning to acquire domestic companies. While companies like Lafarge and Italicementi have made a couple of acquisitions, majors like Holcim managed to partner with, Gujarat Ambuja, and acquired a stake in ACC. However, it must be noted that the transnational will find the going tough since cement is a game of volumes and with the median capacity of fragmented players being just about 1 m tone, the transnational will have to acquire capacities in piecemeal.

First it was Gujarat Ambuja, then Grasim and now ACC. These companies that can easily be considered as the proxies for the Indian cement industry have all logged in impressive financial performances for FY04 (9mFY04 for Gujarat

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Ambuja). It would be not out of place to add that their performance until the December quarter 2003 was hardly inspiring. Things turned around during the March quarter and helped by a strong increase in both demand as well as prices, profitability improved significantly. During 2004, while the Sensex has witnessed a decline of 2%, the cement index, consisting of the top five cement companies has appreciated by almost 16%. Taking these results and the appreciation of stock prices into consideration, experts feel that based on very realistic demand prospects and a highly probable case for recovery in prices, the much talked about revival might just be around the corner. Let us delve a little deeper into the reasons.

As is seen from the graph below, 55% of the demand for cement comes from the housing sector. This sector has witnessed rapid growth over the past few years. Housing loan disbursals, which can be considered as good indicators of growth in the industry have grown at a CAGR of 30% over the last three years. With a shortfall of 19 m dwelling units in the country and disbursals expected to grow at a similar rate for at least the next 3 to 4 years, the demand for cement from this sector is likely to grow unabated.

It is no coincidence that China, which has emerged as the fastest growing nation in recent times, is also the largest consumer of cement. While the country accounted for 25% of world GDP growth in recent years, around 40% of the cement consumed in the world is accounted for by China, mainly to create world-class infrastructure and ensure rapid urbanization. Therefore, if the Indian policy makers have to put the country on a high GDP growth trajectory, sizeable investments in infrastructure will have to be made, thus boosting the demand for cement. With the government going in for 25% concretization of roads, the construction of highways and rural roads criss-crossing the country is likely to translate into higher demand for cement.

On account of the above-mentioned reasons, we believe that the industry is expected to grow at a healthy rate of 8%-9% over the medium to long term. While the demand has never been a problem for the industry, it is the supply side that has posed some problems. Lower realizations have prevented the industry from prospering.

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While the consumer price index has appreciated almost 55% over the last seven years, the cement prices in the country have in fact suffered a fall of around 6% in the same period. Thus, the reason why the industry was going through troubled times becomes evident. High level of fragmentation and increasing demand supply imbalance can be considered as two of the main reasons behind the same.

Simple economics tell that a large number of players are good for the industry so that no one can exert a control over prices. But it also adds one caveat that for this to happen the markets should be highly efficient. In other words, everyone should have an access to same resources and the laws should strictly be adhered to.

Unfortunately, this is not the case with the Indian cement industry where power thefts and tax evasions pervade the corporate system. As a result, the smaller players, which are not that much in the public eye, are in a position to under cut their bigger counterparts and thus keep the prices depressed.

Therefore in order to find a solution to such menace, consolidation, where bigger players have a certain degree of control over prices, becomes imperative. But how is the Indian cement industry placed on this front? Going by the spate of acquisitions by the bigger cement companies in recent times, (Grasims

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acquisition of Indian Rayon and L&Ts cement business, Gujarat Ambujas acquisition of DLF Cements and Modi Cement, ACCs acquisition of IDCOLs cement division, Lafarges acquisition of Tata Steel and Raymonds Cement business etc), we believe consolidation is well and truly underway. Top seven players accounted for nearly 52% of industry capacity in FY00, currently they account for 62%. As is evident from the trends in the developed markets, increased consolidation leads to healthy prices and therefore we believe that with further consolidation in the domestic market, prices are likely to turn remunerative in the coming years. Apart from low levels of consolidation, frequent capacity additions have also been responsible for sorry state of cement prices in the country. To make things a little clearer, the total capacity additions during FY01 and FY02 amounted to a huge 26 m tones, with 17 m tones accretion during FY02 itself. Contrast this with FY97-FY00 period, where a lesser 20 m tones of capacity was added, that too in a span of 4 years. Sales tax incentives given by some state government for a limited period were largely responsible for such rampant capacity additions. This led to a scenario where supply grew at a faster pace than demand and caused a downward pressure on the prices. However, things seem to be improving. No significant Greenfield capacity was added during FY03 and FY04. As a result while demand grew, supply almost remained constant and this helped in reducing the demand supply gap and eased off some pressure on the prices. In fact, prices have already improved by around 5% in the March quarter and are expected to rise further in the coming years. It is being believed that while the northern and eastern regions would achieve demand supply parity by 2005, the southern and the western region would achieve the same by 2007 on account of high demand supply parity prevailing in these regions. Thus an increase in demand coupled with recovery in prices is likely to result into higher profitability for the cement companies. Thus, while the overall scenario for the growth in the industry looks indeed promising, continued government apathy remains a cause of concern. The excise duty on cement at Rs 400 per tone is one of the highest in the industry and amounts to roughly around 20% of the ex-factory price of cement. Further, since the industry is freight intensive one, any increase in the prices of petroleum products is likely to put pressure on the margins. Not withstanding these minor glitches, the industry appears to be well positioned to put the era of depressed prices and reckless capacity additions behind it and grow profitably in the future. However, investors need to look at companies, which have a diversified geographical presence and have a track record of consistently high operating margins.

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Engineering

Engineering is a diverse industry with a number of segments. A company from this sector can be a power equipment manufacturer (like transformers and boilers), execution specialist or a niche player (like providing environment friendly solutions). It can be an electrical, non-electrical machinery and static equipment manufacturer too.

The sector is relatively less fragmented at the top, as competencies required are high. But the sector is highly fragmented at the lower end (like unbranded transformers etc for the retail segment) and is dominated by smaller players. The user industries in broad terms are power utilities (generation, transmission and distribution), industrial majors (refining, automotive and textiles), government (public investment) and retail consumers (pumps and motors).

Order book size determines the performance of the company in the short-term in this sector. In order to bag big contracts, the companies need to have a big balance sheet size. They need huge working capital in order to execute bigger contracts, as initially they receive only part payment and the remaining comes after the projects get executed.

Tariffs that earlier offered protection to Indian capital goods manufacturers, have been removed. Import duties on a range of equipment have also been reduced. This coupled with the high cost of capital in India puts Indian manufacturers at a disadvantage against overseas competition.

Power sector contributes the largest to the engineering companies' revenues. For instance, ABB and BHEL derive 60% and 69% of their revenues from supplying equipments to the power sector. And with the government clearing the blueprint for adding 100,000 MW in the tenth (2002-07) and eleventh (2007-12) five-year plans, the potential seems high for the engineering majors. This is because, apart from the investment of Rs 4,000 bn (or Rs 40 m per MW) in generation capacity buildup, an equivalent amount is likely to be spent in the transmission and distribution space as well.

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Infrastructure is another key area of operation for major Indian engineering companies. L&T, for example, garners around 35% of its sales from infrastructure activities like engineering, design and construction of industrial projects and social & physical projects like housing, hospitals, IT parks, expressways, bridges, ports, and water & effluent treatment projects. In the recent budget, the government had outlined an investment of Rs 100 bn (US$ 2.3 bn), through a special purpose vehicle, to finance infrastructure development in the country.

The high global crude prices on account of growing demand have led to increased activities in the exploration and development space. This has helped the engineering companies in this space. More importantly, this segment of the engineering business has relatively higher margins than infrastructure owing to more complex engineering tasks involved. Engineering is a diverse industry with a number of segments. A company from this sector can be a power equipment manufacturer (like transformers and boilers), execution specialist or a niche player (like providing environment friendly solutions). It can be an electrical, non-electrical machinery and static equipment manufacturer too.

The sector is relatively less fragmented at the top, as competencies required are high. But the sector is highly fragmented at the lower end (like unbranded transformers etc for the retail segment) and is dominated by smaller players. The user industries in broad terms are power utilities (generation, transmission and distribution), industrial majors (refining, automotive and textiles), government (public investment) and retail consumers (pumps and motors).

Order book size determines the performance of the company in the short-term in this sector. In order to bag big contracts, the companies need to have a big balance sheet size. They need huge working capital in order to execute bigger contracts, as initially they receive only part payment and the remaining comes after the projects get executed.

Tariffs that earlier offered protection to Indian capital goods manufacturers, have been removed. Import duties on a range of equipment have also been reduced. This coupled with the high cost of capital in India puts Indian manufacturers at a disadvantage against overseas competition.

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Power sector contributes the largest to the engineering companies' revenues. For instance, ABB and BHEL derive 60% and 69% of their revenues from supplying equipments to the power sector. And with the government clearing the blueprint for adding 100,000 MW in the tenth (2002-07) and eleventh (2007-12) five-year plans, the potential seems high for the engineering majors. This is because, apart from the investment of Rs 4,000 bn (or Rs 40 m per MW) in generation capacity buildup, an equivalent amount is likely to be spent in the transmission and distribution space as well.

Infrastructure is another key area of operation for major Indian engineering companies. L&T, for example, garners around 35% of its sales from infrastructure activities like engineering, design and construction of industrial projects and social & physical projects like housing, hospitals, IT parks, expressways, bridges, ports, and water & effluent treatment projects. In the recent budget, the government had outlined an investment of Rs 100 bn (US$ 2.3 bn), through a special purpose vehicle, to finance infrastructure development in the country.

The high global crude prices on account of growing demand have led to increased activities in the exploration and development space. This has helped the engineering companies in this space. More importantly, this segment of the engineering business has relatively higher margins than infrastructure owing to more complex engineering tasks involved.

If one were to consider one of the biggest beneficiaries from any countrys infrastructure sector development, engineering companies have a vital role to play. As in any other sector, choices for a retail investor are high for an equity investment. However, it does that mean each stock in the sector is a BUY? Here, we have tried to discuss the dynamics of this sector and the key aspects that one should look in, before selecting an engineering stock.

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Profile
Engineering, as a sector, has many facets. A company from this sector can be an equipment manufacturer (like transformers and boilers), execution specialist (say BHEL, L&T, Engineers India) or a niche player (like Thermax in environmental solutions, Voltas in electro-mechanical projects, ABB for automation technologies and so on). To define the user industries in broad terms are power utilities, industrial majors (refining, automotive and textiles), government (public investment) and retail consumers (pumps and motors). Thus, every company has a specific role to play in the industry and is looking forward to cater a specific target market. Given this backdrop, prospects of a particular company in the engineering sector have to be viewed with respect to the specific user industries. So, if the engineering sector does well, not all companies stand to benefit in equal proportion.

When will an engineering company grow?

It is highly dependent on the level of private and public sector investment in the economy. When investments in capacities and infrastructure gains momentum, more jobs are created and demand for goods in general increases. This in turn leads to higher economic growth. Historically, the growth of the engineering sector has been sensitive to economic performance (as is evident from the graph below). The industry is relatively less fragmented at higher end, as competencies required are high. It is therefore that the barriers to entry are also high. But in some cases, competition is also global in nature (like dam construction, roads, refineries and power plants).

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Energy

There are three stages in the process, upstream: exploration and downstream: refining and marketing. After extracting the crude oil from the reserves, it is processed in refinery to yield various petroleum products, which are further marketed. Petroleum products are obtained through a two-stage process: distillation and chemical processing.

Distillation involves breaking crude oil into light distillate, medium distillate and heavy distillate. Chemical processing is done to add value to products. ONGC and Oil India dominate the upstream segment. Together they contribute 87% of India's oil production.

In the downstream segment, major players include IOC, HPCL, BPCL and Reliance. Independent refineries have now become subsidiaries of these bigger players. As of July, 2005 there were a total of 18 refineries in the country comprising 17 in the public sector and one in the private sector with a combined refining capacity of 127 MMTPA. IOC dominates the refining capacity with a total share of nearly 32% of the current refining capacity.

Refining sector got deregulated in FY99 whereas marketing sector deregulation began to take shape on 1st April 2003. However, there is still political intervention in the pricing of certain petroleum products. For instance, subsidy on LPG and PDS kerosene still continues.

In case of natural gas, ONGC is the major producer. GAIL is the monopoly player in the transmission and distribution of natural gas, accounting for about 90% of the supplies. The user industries here are mainly power, petrochemicals, fertilizers, pharmaceuticals and utilities. Gujarat Gas is also another player in the regional domain and is present mainly in retail side. Power and fertilizer together contribute nearly 70% of the demand for natural gas. However, the country still witnesses shortage in supply of natural gas by around 86 MMSCMD (million metric standard cubic meters of gas) per day

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Oil accounts for about 30% of India's total energy consumption. The majority of India's roughly 5.4 billion barrels in oil reserves are located in the Mumbai High, Upper Assam, Cambay, Krishna-Godavari, and Cauvery basins. The offshore Mumbai High field is by far India's largest producing field, with current output of around 260,000 barrels per day (bbl/d).

The black crude is fed to the refineries and we get various clean fuels like petrol, diesel, etc. For a layman, it is hard to believe all this but science has gone to such an extent that we can separate the crude oil into various useful products. This is just one thing. The science does not stop here. It can further alter this product mix by other processes to get even more value added products.

In the world of investing, apart from the numbers, the income statements and projections, an investor also needs to understand the ins and outs of a specific industry that you are looking to invest in (i.e. what goes in and what comes out).

In the refinery sector, companies have made an optimum utilization of science to get more value added products. Various companies are trying to upgrade their refineries to get more value added fuels (light and middle distillates). Some refineries have done this before and others are continuously trying to upgrade their product mix. Here we take a look at the product mix of various refineries in India.

Before getting into specific companies we would first take a look at different products coming out from the refineries. These products are classified into various segments - light distillates, medium distillates and heavy distillates. Light distillates include mainly LPG, naphtha and petrol.

Major products in middle distillates are ATF, kerosene and diesel, while in case of heavy distillates, the same include furnace oil, bitumen and LSHS (low sulphur heavy stock). Products at the middle and light distillates end are more important to the companies as they are high margin products and find use directly. Generally, distillate yield is calculated on the basis of these products as a percentage of total products.

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What is the rationale for getting higher distillate yield? More the light and middle distillates, higher is the margin for the company. Heavy distillates do not find any major use in the industry and hence are not desired. Thus, we see why the companies are trying to continuously upgrade their refineries or use additional and advanced chemical processes to improve the distillate yields.

We see that HPCL has upgraded its distillate yield from 68% in FY99 to 71% in FY03. While its Visakh refinery has witnessed a decline in the distillate yield of about 1% during the same time, its yield is high as compared to the Mumbai refinery.

BPCLs Mumbai refinery has witnessed a decline in distillate yield though it remains at higher level as compared to that of HPCL. Distillate yield of Reliance refinery remains at the highest levels at about 84%. Reliance had got the benefit of having a refinery of high capacity at a single place. It can further process the heavy distillates and its technology is also superior as compared to other players, which result into higher distillate yield.

We have produced various products from the refinery and improved our product mix also. Do we stop there only? The companies have to sell these products through various measures. The major constituents of their business mix are retail and direct sale to the industries. We now have a look at how the companies sell these products to the end user.

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Is it that the company sells only what they produce through their refineries? No. There are only four players in the marketing segment (HPCL, BPCL, IOC and IBP) while we have a large number of standalone refineries. The marketing players enter into an agreement with the refineries to supply their products through the retail networks. For example, Reliance is into refining only and does not have its own retail outlets currently. Thus, they enter into an agreement with the retail players like HPCL and BPCL. For instance, both BPCL and HPCL sell about 1.5 MTPA of Reliance products.

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While marketing companies sell various petroleum products, it becomes imperative to look at their business mix of different products. The reason being margins, are different for different products.

For example, the more the products are sold through direct sales, the lower the margins, while the more the products are sold through the retail network the higher the margin. Thus companies like HPCL and BPCL, which have higher revenues coming from retail segment, are in an advantage as compared to IOC whose major chunk of revenues comes from direct sales.

The companies have realized this fact and are slowly increasing their capex towards the retail side in order to increase their profitability coming from retail segment. We can easily visualize this through new retail outlets. If we go back ten years from now, no one could have imagined a retail store chain, electronic card payment facility for petrol and diesel consumption.

However, increased competition and an attempt to increase their business mix more towards the retail side have driven companies to take up innovative steps in marketing. Thus we can now recognize the marketing jargon in this commodity business also that the consumer is (finally becoming) king.

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IT

The global IT services market is estimated to be in the region of around US$ 600 bn in 2004, as per analyst firms like Gartner and IDC. India's market share, with estimated exports of US$ 12 bn, stands at a mere 2%. As such, the growth potential for the sector continues to be immense. The strength of the Indian software industry is indicated by the fact that the Indian software and services exports have managed to grow by around 26%-28% over the past few years despite the economic downturn that swept worldwide markets.

It is estimated that global IT spending is expected to grow in the region of around 5% per annum till 2008. Major drivers will be Asia Pacific and Europe. Factors such as the need to remain cost competitive, streamline business processes, faster time to market and increased competition will drive IT budgets, going forward. In particular, the offshore outsourcing story is expected to continue to play out, as firms look for quality work done at optimum cost.

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While cost leadership has been the competitive edge of the Indian software sector over the last few years, this seems to be threatened now by MNCs who are replicating the Indian outsourcing model and setting up bases in the country. Going forward, the advantage of low employee costs could peter out and the sector could get commoditized. Besides, India has competition from the likes of China and South East Asia as other outsourcing destinations.

But it should also be noted that replicating the outsourcing 'global delivery model' is not going to be easy. It will require MNC firms to change not just processes, but also mindsets of their employees. Thorough process discipline and seamless execution of projects across geographies are the key features of this business model and changing this to suit the new paradigm of global service delivery is not going to be easy. In fact, the Indian majors are already ahead of the MNCs in this regard and Azim Premji, Wipro Chairman, has said that they are about 2 years ahead in this model.

Increasing competition, pressure on billing rates and increasing commoditization of lower-end application development and maintenance (ADM) services are among the key reasons forcing the Indian software industry to make a fast move up the software value chain, thereby providing high-value services to its clients. Recently, MNC IT majors, such as Accenture, EDS and IBM Global Services (IBM GS) have started hiring on a large scale in low-cost offshore destinations and India is a key part of their off shoring strategy.

In fact, they are also starting to venture into the lower-end ADM work, moving from the higher end of the value chain to the lower end, exactly the opposite of what the Indian IT majors are doing. Thus, this makes it even more imperative for Indian companies to move higher up the value chain.

With competition for talent intensifying, the need to retain key employees has increased manifold. While the average attrition rate in the Indian software industry is in the region of 16%-17%, that for the top tier companies is lower.

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Going forward, managing a huge employee base will be the key challenge faced by these companies. Infosys already employs nearly 40,000 professionals, while TCS employs nearly 50,000 and to keep attrition low amid tremendous competition for talent will be a priority.

The software services segment of the industry is growing by leaps and bounds. In fact, in FY05, it grew at its fastest rate since the dot-com bust in 2000. However, growth in the domestic market has been relatively staid.

Given that India is among the fastest-growing economies in the world and the burgeoning IT budgets of India Inc, focusing on the domestic market will definitely be an opportunity to take advantage of.

Stocks from the IT industry are considered to be a defensive play since companies in the sector are assumed to be insulated from the vagaries of inflation and rise in interest rates. However, there is a need to understand that all players in the technology space are not insulated from these uncertainties.

In order to arrive at any decision, one needs to understand the structure of the Indian software industry through a broad classification of all its constituents (companies). Based on respective size and abilities, software companies can broadly be categorized into the structure as mentioned in the chart below.

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Horizontal space

Large players like Infosys, TCS, Wipro, HCL Tech and Satyam occupy this space. These companies have offerings that span almost the entire value chain, or a major part of it and, as such, have the ability to cater to a diverse set of clientele. Another basic characteristic of this set of companies is their large scale large number of development centres, global sales offices and a large employee base. We believe that these companies are most likely to gain from the increased wave of outsourcing, as they have proven capabilities in areas like scalability and de-risked business models (offer end-to-end services). Though MphasiS do not have many services that match with the top rung players, the fact that it is a quality software service provider along with a BPO offering puts it in the horizontal space.

Vertical space: This category is further divided into three distinct parts

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Niche players:

These are players that have a focused presence in one particular area or domain. Prominent examples in this segment are i-flex (provides services and products in the banking and financial services industry), Hughes Software (provides solutions to the global telecom industry) and Geometric Software (provides solution for engineering and manufacturing companies). As compared to the large players, companies in this category are more prone to uncertainty. This is because they derive almost their entire revenues from a single domain, and any upheaval in that space causes volatility in their financial performance and valuations.

For instance, Hughes Software, which earlier provided services only to telecom OEMs (original equipment manufacturers) faced grim times in the years 2001, 2002 and 2003. This was because, facing pressure of unutilized capacities due to a decline in telecom spending during these years, these OEMs cut down on their outsourcing of telecom R&D services. And this proved ominous for Hughes Software. As a matter of fact, Hughes revenues grew at a CAGR of 5% during these three years, with 2003 actually witnessing a decline.

Captive centers of global MNCs:

These represent the bases established by global MNCs like IBM, EDS and CSC in India with a view of taking advantage of the low-cost Indian off shoring model. Now, these captives present the toughest challenge to the large Indian off shoring companies that occupy the horizontal space. This is because, backed by their high domain capabilities, these companies have been posing a grave threat to the large Indian players in key areas like client acquisition and talent retention. Relatively higher salaries paid by these captive companies have been one of the leading causes of the increase in attrition levels for Indian players, especially at the top level.

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Product companies:

As mentioned earlier, these are a rare species in the Indian context. This is vindicated from the fact that we have only a few globally recognized players in the product space. And the most prominent among these very few is i-flex solutions, the leading provider of core banking solutions.

The company, with its flagship product, Flex cube, has been at the forefront of bringing global recognition to the Made in India brand. Other key players in the products space are Hughes Software and Geometric Software, though both have only a minor part (16% and 11% respectively) of their revenues coming from this segment. Also, while i-flex has a product that spans the entire requirement of the client, the latter two companies largely cater to OEMs through small components like plug-ins and add-ons.

Being a successful product company has one key advantage attached to it. That is, after a point of time, once the company has established its presence through a quality product, revenues from the same follow straight to the bottom-line, as incremental expenses towards products are very minimal as compared to services. This is not true for a services player This is for the reason that a services company has to make continued initiatives towards moving up the value chain or it has to continuously invest in human resources if it wants earn higher revenues.

Coming back to our point that all players in the Indian technology space are not insulated from the turn of events outside their realm, we believe that going forward; demand for technology solution from global clients is likely to be concentrated among a few players. These could be any of those discussed above.

This is because the demand for technology is likely to be more guided by the Return on Investment factor, i.e., how much of cost saving or return on investment can be obtained by clients from their IT spending. And, in these circumstances, companies in the horizontal space are less risky as compared to focused (vertical) companies. Investing in vertical companies purely depends on the investors risk-return profile, as the risks are higher.

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Hotel

The travel and hospitality industry continues to be the sector, which has largely profited from the fast growing economy of India. This has largely been due to the 3.5 m tourist arrivals in FY05 (22% growth) over the previous period. Thus, posting a CAGR of around 7% from FY00-FY05. However, this growth figure could have been higher had it not been for the 2 adverse years (FY 02 and FY03) during this period, wherein the industry was hit by global and domestic geopolitical reasons.

This increase in the number of tourist arrivals in the country has not been able to uplift the country's standing in the world of tourist destinations. The country continues to languish in the 30s after reaching an all time high of 17 in 1992 on the global tourism chart.

This pitfall can be attributed to a few reasons, some of them being poor infrastructure. The country continues to be marred by poor infrastructure facilities like poor road management, rail, and air and sea connectivity. However, the present government in its endeavor has taken a few initiatives like opening of the partial sky policy. This allows private domestic airline operators to fly on the Indian skies. Some states continue to be in political uncertainties.

As per the 2004 findings, the total number of approved rooms by the Government of India stands at around 99,000 (estimated). These rooms are further classified into various segments out of which, Five star and Five star deluxe hotels account for around 27% of the total capacity, three star hotels (22%), four star (8%), two star (9%), one star and Heritage hotels (2% each) and the rest is divided between unclassified and unapproved hotels.

The five - star Hotel Segment has grown the fastest during the last five years at a CAGR of 12%. Further this segment is can be divided into 3 sub-segments Luxury, Business and Leisure. The growth in this segment indicates the genre of travelers coming into the country. Over the last few years the country has witnessed a large influx of business travelers in the country owing to relaxation of the government's stand on Foreign Direct Investments (FDI) for most of the sectors in the country.

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Pharma

The Indian Pharmaceutical industry is highly fragmented with about 24,000 players (around 330 in the organized sector). The top ten companies make up for more than a third of the market. The revenues generated by the industry are approximately US$ 5 bn and have grown at an average rate of 9% over last five years.

India manufactures over 400 bulk drugs and around 60,000 formulations, which are being distributed by 500,000 chemists all over the country. The Indian Pharma industry accounts for about 1% of the world's Pharma industry in value terms and 8% in volume terms. However, the annual per capita drug expenditure is still amongst the lowest in the world.

In the recent past, Indian companies have targeted international markets and have extended their presence there. While some companies are exporting bulk drugs, others have moved up the value chain and are exporting formulations and generic products. India also offers excellent exports opportunities for clinical trials, R&D, custom synthesis and technical services like Bioinformatics.

The fortunes of Indian Pharma industry are significantly influenced by regulations. Indian companies capitalized on the absence of product patents in the country and mastered the art of making generic versions of patented drugs at a very low cost.

However, by virtue of India being a member of the World Trade Organization (WTO) and a signatory to the General Agreement on Tariffs and Trade (GATT), it began to recognize product patents from January 1, 2005.

The drug price control order (DPCO) continues to be a menace for the industry. The pricing authority arbitrarily sets prices of drugs that fall within its ambit without giving due consideration even to the costs of production. There are three tiers of regulations - on bulk drugs, on formulations and on overall profitability.

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This has made the profitability of the sector susceptible to the whims and fancies of the pricing authority. Consequently, MNCs over the past have shown reluctance in launching patented drugs from their parent's product portfolio, thereby, affecting their market share.

However, off late, some MNCs have started making aggressive product launches. Although the government has brought down the DPCO cover from 74 to 25 drugs, the same has not been brought into effect due to impending litigation. However, once implemented, this could increase profitability of companies having relatively older portfolios, particularly MNCs.

While the average R&D spending in India as a whole is a meager 2% of sales, the spend of the top five companies is about 6% to 8%. Despite growing at a CAGR of 53% over the last four years, the ratio is still way below the global average of 15%-20% of sales.

However, despite the low R&D spending as comparison to global benchmarks, Indian companies are stepping up their research activities to make themselves more self sufficient in terms of product development, now that the product patent regime has come into force. Companies like Dr. Reddy's and Ranbaxy have already achieved reasonable measure of success in their R&D efforts.

Another peculiar feature of the domestic R&D initiative is a lack of facilities and resources to develop a molecule conduct trials and then launch the product. On an average it costs roughly US$ 800 m to US$ 1 bn in developing a molecule, conducting clinical trials and launching the drug.

Although Indian companies with their expertise in chemistry are able to synthesize molecules, the huge costs involved in conducting clinical trials and launching the drug has prompted them to depend on international peers to undertake the more expensive clinical trials and product launches in return for upfront and milestone payments (Ranbaxy is developing its anti-malarial molecule in conjunction with Medicines for Malaria Venture, Geneva and Dr. Reddy's has out licensed its anti-diabetic molecule to Rheoscience, Denmark). Indian companies are thus able to mitigate the risk involved in new drug discovery.

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Today's business environment is extremely competitive and in economics parlance where perfect competition exists, the profits of the firms operating in that industry will become zero in long run.

However, this is not possible because, firstly there is no perfect competition and no company is a passive price taker (i.e. no company will operate where profits are zero). Secondly, they strive to create a competitive advantage to thrive in the competitive scenario. Michael Porter, considered to be one of the foremost gurus of management, developed the famous five-force model, which influences an industry.

Pharma industry is one of the most competitive industries in the country with as many as 10,000 different players fighting for the same pie. The rivalry in the industry can be gauged from the fact that the top player in the country has only 6% market share, and the top five players together have about 18% market share. Thus, the concentration ratio for this industry is very low. High growth prospects make it attractive for new players to enter in the industry.

Another major factor that adds to the industry rivalry is the fact that the entry barriers to Pharma industry are very low. The fixed cost requirement is low but the need for working capital is high. The fixed asset turnover, which is one of the gauges of fixed cost requirements, tells us that in bigger companies this ratio is in the range of 3.5 to 4 times. For smaller companies, it would be even higher.

Many smaller players that are focused on a particular region have a better hang of the distribution channel, making it easier to succeed, albeit in a limited way. An important fact is that Pharma is a stable market and its growth rate generally tracks the economic growth of the country with some multiple (1.2 times average in India). Though volume growth has been consistent over a period of time, value growth has not followed in tandem.

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Power

When you think of digitizing India there will be a massive amount of power required and I pray to this government that you have to push and push and push to invest in infrastructure Mr. Jack Welch

With the coming of Electricity Act 2003, the power sector, which was highly regulated with lot of licensing requirements, is in the throes of a long awaited change. The licensing requirements have been reduced, as the generation company will be free to enter distribution business and vice-a-versa. Currently private sector accounts for 10% of the total power generation capacity. The remaining is divided between Center and the state owned companies in the ratio of 36:64.

The generating capacity in India at the end of FY05 stood at 1, 22,275 MW (excluding captive capacities of around 25,000 MW). Out of this, India utilizes a poor 66% due to inefficient transmission and distribution causing a lot of power shortage. As a result, it has become necessary to resort to power cuts and other regulatory measures to ration power supply.

Currently central institutions like National Thermal Power Corporation (NTPC) and the State Electricity Boards (SEBs) dominate the power scene in India. India has adopted a blend of thermal, hydel and nuclear sources with a view to increasing the availability of electricity. Thermal plants at present account for 70% (85,590 MW) of the total power generation, hydro-electricity plants contribute 26% and the rest come from nuclear and wind.

Average transmission and distribution losses (T&D) exceed 25% of total power generation compared to less than 15% for developing economies. The T&D losses are due to a variety of reasons, viz., substantial energy sold at low voltage, sparsely distributed loads over large rural areas, inadequate investment in distribution system, improper billing, and high pilferage.

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Further, the government plans to add 150,000 MW of generation capacity over the next decade (including 100,000 MW thermal capacities and 50,000 MW hydro capacities) in order to bridge the current demand-supply gap. This is almost 1.2 times the current generation capacity in the country. Also, if India has to achieve a consistent 7% GDP growth, then power generation has to grow by around 10% per annum.

The recent Electricity Act has proposed significant policy decisions that could reform the Indian power sector over the long term. Licensing norms for entering generation and T&D business of power have been eased. Under APDRP (Accelerated Power Development & Reform Program), as a one-time measure, the state electricity boards (SEBs) dues to the central utilities are to be converted into state backed bonds. In exchange, the states have to give an undertaking that SEB losses will not occur and T&D losses will be checked in a time bound manner

Profile
Power can be generated from water (hydro), thermal (coal or naphtha), wind and nuclear. Since the Indian power sector has not been opened up for private sector participation in its true sense, the centre and state governments has a major role to play. It is a politically sensitive sector i.e. tariffs cannot be hiked as the vote bank could be affected.

A power company can be a generator, a transmitter, a distributor or a combination of all three. Barriers to entry are high because it is capital intensive and regulated. While technology in state government undertakings is poor, it will play a big role in the future, as consumers will require good quality and uninterrupted supply of power. Currently, in India, we have 1,07,533 MW of generation capacity out of which private sector contributes 11%.

Total revenues =

Revenues from generation + transmission + distribution.

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Generation:

For a company involved in generation of power, revenues will be a function of electricity generated and tariffs applicable. Generation of electricity is a function of PLF (plant load factor) and the capacity installed. PLF, in simple words, is like capacity utilization. The level of PLF varies depending upon the kind of generation plant. Generally, a hydro power plant or a wind energy plant has low PLF (industry average 35%50%). Thermal and nuclear power plants have higher PLF (industry average 50%-65%), which ultimately results in higher production. Investment in capacity in the power sector depends on various factors like: demand-supply gap (in simpler words we can say deficiency), availability of funds, economic growth and regulatory framework. All these factors are interrelated to some extent.

Demand-supply:
One critical factor when it comes to analyzing a power company is the fact that demand expands as per supply. There is nothing like a market size per se. The level of the growth in the industrial sector, per capita consumption of consumer durable and electronic goods would indicate the growth potential. For instance, the penetration level of air conditioners in India is just 0.5%. If more people buy A/C or television or refrigerator, demand for power will increase. Therefore, as far as demand-supply gap for a developing economy like India is concerned, it is irrelevant. The country is power deficient.

Availability-of-funds:
As mentioned before, the sector is capital intensive. It costs almost Rs 40 m to Rs 45 m to set up one megawatt (MW) of capacity. If a company is planning to increase capacity by 1,000 MW, it requires Rs 40 bn. From a retail investor perspective, look at the cash balance and the current debt to equity ratio of the company from the balance sheet. This will give an idea whether the company really has the muscle power to expand the stated capacity in the time frame mentioned.

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Economic Growth will lead to increase the purchasing power of the people, which will raise the living standard and in turn increase electricity demand. So, the circle starts again.

Regulatory framework:
If a company is just into generation, it has to supply to a distributor for realizing value for the quantity of power sold. If the distributor is a SEB (i.e. state electricity board), the chances of delayed payment are high, as SEBs are in poor state. Failure to receive money from SEBs could hamper a companys capacity expansion plans.

Having looked at the capacity side, consider factors involved on the tariffs front.

For a generation company that supplies electricity to a SEB, the respective state governments fix tariffs. However, a power generation company can also supply to the national grid at a specific rate. The national grid say, Power Grid Corporation, in turn could take the onus of meeting SEB requirements.

While the advantage is lower risk of delayed payment and fewer losses on account of T&D, the disadvantage is that the tariffs are lower compared to a T&D player. To put things in simple terms, the generation company gets a specific rate on power supplied whereas it is not the case with a T&D player where there is differential tariff structure.

For a distribution company (like Tata Power or BSES in Mumbai), tariffs are different depending upon the customers. Usually, industrial units are charged higher as compared to households (cross-subsidization). Agricultural sector is a mixed bag.

While some states actually charge for power supplied (like Tamil Nadu), in most other states, it is free. The advantage for a generation and distribution company is that it can pass a rise in cost to customers in a deregulated market. However, power theft and default rates are high for a distribution major. Watch out for this as well.

Transmission

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There can be independent transmission companies as well (like backbone service providers in the telecom sector). The revenue model is similar. A transmission company buys power from a generation company and hands it over to SEBs or a distribution company.

When it comes to advantages, it is like less capital and technology intensive. But a transmission company faces the risks of default of payment by a distributor, high leakage losses and a cap on transmission charges. Approximately 30%-35% or power generated is lost in transmission currently.

Distribution
The distribution company can also generate electricity in-house, but the process remains same. Distribution Companies have pre-defined areas called circles where they can supply electricity. For a distribution company, metering plays a vital role.

Metered units = In house power generated (if any) + Power sourced from a generator to meet additional requirement T&D losses. A major concern for the Indian distribution companies is heavy T&D losses due to poor infrastructure. Due to weak anti-theft laws, 10%-15% of power supplied is lost in distribution.

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Steel

India is currently the ninth largest steel producing nation in the world with crude steel production of approximately 35 MT. However, it has a per capita consumption of steel of around 30 kgs as against 210 kgs in China and an average of over 400 kgs+ in the developed countries. This wide gap in relative steel consumption indicates that the potential ahead for India is good. Being a core sector, steel industry tracks the overall economic growth in the long-term. Also, steel demand, being derived from other sectors like automobiles, consumer durables and infrastructure, its fortune is dependent on the growth of these user industries. The Indian steel sector enjoys advantages of domestic availability of raw materials and cheap labour. Iron ore is also available in abundant quantities. This provides major cost advantage to the domestic steel industry, with companies like Tisco being one of the lowest cost producers in the world. However, Indian steel companies have to bear additional costs pertaining to capital equipment, power and inefficiencies (low per employee productivity). This has resulted in the erosion of the edge they would have otherwise enjoyed due to availability of cheap labor and raw materials. The basic import duty on steel has been consistently brought down. This has made the industry vulnerable to international competition. On the positive side, domestic prices now track the global prices more closely. One sector that has outperformed the benchmark indices by a huge margin in the current rally has been the steel sector. Steel stocks, of the likes of Tisco, Sail, Jindal Iron & Steel (Jisco) and Ispat Industries, have been significantly in favour on the bourses during FY04. The rally in steel stocks continued during the second quarter of the current fiscal also. Just to put things in perspective, Rs 100 invested in the Sensex at the end of the March quarter would have yielded Rs 136 by now. However, if the same amount had been invested in the above four stocks each, the amount would have now more than doubled in case of Tisco and Sail, while it would have increased to Rs 182 in the case of Jisco. However, the case is not the same with Ispat Industries (Rs 114), which actually underperformed the Sensex. But all this is not without reason! The performance of the stock price of a company is dependant to a large extent on the performance of the company. And this is precisely the reason for the euphoria seen towards steel stocks.To conclude, having provided extra-ordinary returns to investors over the last 7-8 months and much of the future performance of many of the companies already factored into their stock prices, it is now

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advisable to exercise utmost caution towards steel stocks and beware of any signs of a turn in the steel cycle

Textile

After Multi Fiber Arrangement (MFA) is phased out, the textile industry of developing economies like India will have a reason to be optimistic about the long-term growth opportunity. The textile manufacturers will have a chance to increase the share of exports to the European Union (EU) and US markets.

This development will have a positive impact not only on the textile sector of the country, but also on the economy as a whole. In this report, lets try to understand as to how MFA actually works and how will Indian textile companies benefit, post 2005.

Before going any further, the importance of the textile sector on the overall growth prospects of the economy over the long term cannot be understated. Currently, the textile industry is providing employment to 18% of the Indias work force and contributes to around 6% to the countrys GDP and around 22% of the Indias exports. So, is MFA a boon or a bane?

MFA is an agreement through which a particular country is restricted to export its textile products beyond a certain level to European and US markets. So, a particular quota is fixed for each country (in terms of quantity, say 1-m shirts etc.), and no country can exceed the quantity assigned.

Thus, the motive behind this agreement can be either to provide a window of opportunity for the under developed and developing economies or it can be to save the interest of the domestic textile industry of European Union (EU) and the US.

After a particular quota has been assigned, the interested exporters have to contact the textile ministry (in India, for example) and bid for the quantity to be exported. The government assigns the quantity that a particular company can export on the basis of certain parameters like past performance, new investor entitlement (in order to promote investments) on a first come first served basis.

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The selection criteria for different categories like garments, yarn and fabrics are different. For example, in garments, 70% of the quota is granted on the basis of past track record, 15% for new entrants, 10% on the first come first serve basis and only 5% as non-quota entitlement.

However, a company can buy a quota from another company in the market by paying some premium. For example, if a company X has a quota to export only 10 mm of cloth, it can buy the quota of company Y at a premium and increase the total quantity that can be exported. Just to put things in perspective, in spite of having capacity and capability, currently, Indias share in the international garment market is just 3%, due to quota restrictions. Lets have a look at the size of the opportunity post 2005.

Denim: The total denim production capacity of India is 220 million meters (mm), whereas the current global denim consumption is around 3.9 bn meters and is growing at 4% per annum. The consumption pattern chart given below shows that European and the US together constitute around 69% of the total global denim consumption.

So, we can say that there is a good Sectorial growth in the economy. The sectors are gaining good returns and in turn they are giving good returns to their investors also as they are capable for that. So, investing in all such sectors will be fruitful the investors.

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The Table and the figure:

Price and Volume Toppers Price and Volume toppers A Group Performers in 2006 Company Name NSE Close A group best performers in 2006 Volume In lakh

Gujarat State Petronet Company Name CMP Reliance Communication Venture 13/03/2006 GTL Alstom Proj 428.6 Reliance Cap. Venture India Cement 165.45 ITC Cumminsindia 259.6 MTNL Beml 1735.2 Reliance EnergyVenture Thermax 1483.4 Trivani Engineering and Industry Siemens 5684.8 Maysoor Cement Colgatepalmo 423.25 GHCL Abb 3008.95 IFCI Hind Zinc 380.7 Reliance Natural Resources Bhel 2119.55 Essar Oil Suzlon 1321.65 Gujarat Ambuja Cement Cesc 337.45 NTPC Ltd Orchid Chem 350.1 SAIL Acc 759.1 Jayprakash hydropower Aurobondophrm 581.4 Escorts Prism Cement Geetanjali Gems Bajaj Hindustan Reliance Industries Zee Telefilms Educomp Solutions Hughes Ispat Reliance Capital IDFC Himachal Futuristic Communications SBI Hindalco Industries Ashok Leyland Satyam Dabar India VSNL Nagarjun Construction Company TATA Steel

36.95 259.84 Price on % 318.25 205.21 00/12/2005 Change 132.2 155.48 216.75 97.73 25 112.81 100.4 64.79 175.1 107.12 158.6 63.68 165.35 105.05 1077.65 61.01 44.85 97.53 941.2 57.6 91.61 95.92 3610.95 57.43 38.4 84.23 269.35 57.13 152.8 82.84 1928.95 55.98 10.2 72.89 245.2 55.26 34.4 72.78 1386.25 52.26 40 61.8 894.4 47.76 97.85 60.97 228.45 47.71 139.4 59.18 241.2 45.14 66.4 59 534.2 42.1 30.9 57.54 409.95 41.82 90.2 55.72 26.6 52.07 168.5 51.48 482.05 48.36 735.35 46.5 190.85 46.18 445.4 45.66 25.6 41.25 516 40.55 69.55 38.88 22.7 36.9 928.1 36.27 159.5 36.23 40.6 35.62 829.55 34.66 117.65 34.34 393.75 34.07 389.55 32.26 460.25 32.22

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World Market

World Market Stock Exchange Name Period 13/03/2006 Mumbai 10765.16 National 5645.55 S & P CNX Nifty 3183.9 Dow Jones 11076.3 S & P CNX 500 2765.85 Nikkei Stock Average 16361.5 Hand Seng 15542.1 Straits Times 2512.14 Composite 922.03

Period 27/02/2006 10200.76 5354.03 3050.05 11061.8 2644.95 16101.9 15856 2453.67 924.91

Points Change 564.4 291.52 133.85 14.5 120.9 259.6 -313.9 58.47 -2.88

Budget 2006 07 and the stock market

The Indian Economy in the past has performed quite well and it is expected to do well going forward as well. Posting a constant growth of around 6 per cent over the years is quite commendable. The contribution of the industrial sector has been continuously increasing. The industrial growth as been a real boost to the GDP growth and we expect it to be major contributor to the GDP growth in FY06. The service sector has shown better performance in the past and we can see the sector doing better in future as well. We feel that GDP growth in the range of more than 7.6 per cent would be a good achievement for the economy. Along with the economys growth, corporate India has also put up a very good performance in FY06. For the nine-month period of FY06, barring the oil marketing companies, which have suffered due to the price mechanism of the government, overall growth has been quite substantial. In the Q3FY06, excluding the oil marketing companies results, the topline and bottomline has been over 20 per cent. The benefits of expansions made by the companies are yet to come to fruition. Experts are quite optimistic that India Inc is capable of achieving growth above 18 per cent.

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Budget View On the budget, the experts are positive that the budget this time around would be a good one. It would be a progressive. The entire team of finance minister, members of the planning commission, commerce ministry are clear about the focus of India for the next five to ten years. Their emphasis is on how to bring about continuous growth in the economy, so the experts think that there would be no negative impact on any of the segments that would hamper the growth. Budget is a big event in our country. Although the government has begun focusing on developing roads, the ports, which are a key factor in exports, have been still neglected. The up gradation of the ports all over the country needs immediate attention of the government, which will ensure hassle free exports from the country.

The other area to look out for is power. Apart from power generation, reforms in the power transmission and distribution have been totally overlooked. Stock market The rally in the stock market has reached interesting point where we have seen the market crossing 10000 -11000 mark. The market may not necessarily correct from these levels, but stocks whose prices are running ahead of their valuations have to come down to their realistic valuations. So the experts believe that certainly the stocks will need to catch up with their realistic valuations. Experts also feel that the market is not very expensive. One has to look at ones own portfolio rather than looking at the market as a whole.

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D. MARKET SURVEY

1. Introduction 2. Analysis & interpretation 3. Charts and tables 4. The Questionnaire

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Introduction

Apart from the analysis of different sectors of the economy, we have done the market survey also regarding The Changing Role of the Indian Equity Market

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At presently, what are the investors and general publics perception about the Indian Equity market, is the main purpose of this market survey.

For having the answer of the above mention question, we had prepared the questionnaire and got it filled by the investors and the general public.

And finally came to know that there is a positive attitude towards the equity investment and the present peak level is not the overvaluation of the stock but now only the stock gets its real and original status. Now it will be going still up. Thus its fundamentally sound market to invest in the equities.

Analysis & Interpretation

The Analysis and the interpretation from the questionnaire can be presented as under: The highest investment in the equity market has been done through the age group of 20 to 30 years.

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The investors who are highly active in the equity market are of the service of occupation.

The highest income group of the investors of the equity market is almost 1, 00,000 to 2, 00,000 yearly

Generally the people like to invest in the Shares, Mutual funds, Banks and Insurance more frequently.

The highest consideration for the investors of the equity market is the returns they get from the investments.

The investors do the investments in IPOS as well as Listed securities with almost same frequency.

More number of the investors is dealing though off line.

Again the degree of the pattern of the investment, i.e. delivery base, intraday, or F & O varies from investor to investor but generally more preferred pattern is the delivery based trading. The investment objective is mainly the midterm investments. Some are also go for the small term or long term investments.

The average return received by the investors is around 10 15% pa.

All the investors are having their own study of the equity market.

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The tool of the study of the equity market again varies from the investor to investor but the major tools are CNBC, Financial Magazines like Dalal Street, Capital market etc, Newspapers and the Internet.

Majority of the investors made the investment decision on their own research and study of the equity market. And there is a considerable per cent of the investors who follow the professional advice.

All the investors are the rational investors as more of them would like to invest in equity if there is favorable market condition.

All of the investors strongly believe that the booming equity market shows the sound and growing side of the economy.

The perception of the investors and the general public towards the equity market is steadily becoming positive. And the Indian Investors still can forecast the bullish trend for the Equity Market.

Charts and Tables:

1. Table : Age

Particulars 20 - 30

No. of Respondents 27

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31 - 40 41 - 50 51 0r above

15 06 12

Graphical Representation
30 No. of respondent 25 20 15 10 5 0 20 - 30 31 - 40 41 - 50 51 or more Age group no.

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2. Table : Occupation

Particulars Service Business Others

No. of Respondent 27 18 15

No. of Respondent 30 25 20 15 10 5 0 S e rvic e B u s in e s s O t h e rs 27 18 15 No. of Respondent

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3. Table: Investment Pattern

Particulars Shares Mutual funds Insurance Real Estate Others

investment area 20% 50% 15% 10% 05%

Graphical Presentation

5% 10% 20% Shares 15% Mutual funds Insurance Real Estate Others

50%

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4. Table: Return Pattern

Particular 5 to 10 10 to 15 15 to 20 More than 20

% 18 24 15 3

R e tu r n P a tte r n in %

3 15 18 5 to 1 0 1 0 to 1 5 1 5 to 2 0 M o re t h a n 2 0

24

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5. Table: Investors studying Equity Market

Particular YES NO

No of Respondents 54 6

In v e s to r s S tu d y in g E q u ity M a r k e t
60 50 40 No. of People 30 20 10 0 YES R e sp o n se 6 NO 54 N o o f R e s p o n d a n ts

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6. Table: does the recent decline in equity market shows the market correction or bear market? ( yes-correction, no- bear market)

Particular YES NO

No of Respondents 58 2

E q u it y M a r k e t a n d E c o n o m y
70 60 50 No. of People 40 30 20 10 0 YES 2 NO R e sp o n se 58 N o o f R e s p o n d a n ts

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7. Table: Investors perceptions towards the future of Indian Equity Market

No of Respondents 6 24 21 9

Particular Very Bullish Bullish Good Cant Say

P e r c e p tio n fo r th e fu tu r e o f E q u ity

6 V e ry B u llis h B u llis h G ood C ant S ay

21

24

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So, from the analysis of the questionnaire, we can conclude that the people are positive towards the equity market. They do the investments. Due to the increasing growth of the Indian economy, the Indian equity market is also in the sound stage. The present investment appropriation in the equity market is only 3 per cent, so there is a wide scope for the investment in the equity market. And if there is one per cent increase in the investment of the equity market, the market will be at the historical new highs and at that time the trend will be independent and there will be no impact of the other element. Thus the Indian equity market is at its fair valuation and based on the sound fundamentals of the economy. And considering the move of the India to the other countries, it can be said that India is developing like anything and still it will take twenty to twenty five years for coming with the line with the other developed countries. So there will be a wide development and the sectors related to the development such as, IT, Infrastructure, Capital goods, Power, Auto, Engineering, Hotel, Banking, Textile, Pharma etc. So all these sectors will be very good for the investment purpose. Thus the investment proportion will also increase.

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QUESTIONNAIR I. NAME :_______________________________________

II. ADDRESS:_______________________________________ III. PHNE NO.:_______________________________________ IV. PROFESSION VI. AGE :_______________________________________ :_______________________________________ V. DESIGNATION :_______________________________________

VII. Of this investment options, with which are you familiar an already invest in? Share Insurance Other VIII. How much you can get the return from this investment ? __________ IX. Are you Studying Equity Market ? Yes No Mutual Fund Real Estate

X. Does the recent decline in Equity Market shows the market correction or bear market? (yes- correction, no- bear market) Yes No

XI. Investors perceptions towards the future of Indian Equity Market ? Very Bullish Good Bullish Cant Say

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E. BIBLIOGRAPHY

www.karvy.com www.bseindia.com www.nseindia.com www.equitymater.com www.google.com

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