5 Investment Analysis of Shares

Investment analysis of equity shares
A PROJECT REPORT ON
INVESTMENT ANALYSIS OF SHARES
WITH REFERANCE TO SHAREKHAN LTD. Submitted By,
ABHINAV SURYAKANT DESHMUKH Under the guidance of PROF. CHANDNI BHATNAGAR
In partial fulfillment for the requirements of the

Degree Of Masters in Management Studies
At SARASWATI COLLEGE OF ENGINEERING

(M.M.S. DEPARTMENT) KHARGHAR, NAVI MUMBAI. BATCH 2010-2012
DECLARATION
I, Abhinav Suryakant Deshmukh studying in the Final Year of Masters In Management Studies course in the academic year 2010-2012 at Saraswati College Of Engineering, New Mumbai, hereby declare that I have completed the project titled Investment Analysis of Shares as a part of the requirements of Masters in Management Studies in the University of Mumbai. I further declare that the information presented in this project is true and original to the best of my knowledge. Abhinav Suryakant Deshmukh.
ACKNOWLEDGEMENT
It is indeed a great moment of pleasure to express my senses of per found gratitude & ineptness to all the people who have been instrumental in making my tanning a rich experience. I got the opportunity to do a challenging project in Sharekhan Ltd. This project is an important part of our study and gives us a real practical exposure to the corporate world and it is almost impossible to do the same without the guidance of peoples in and around us. It gives me immense pleasure to acknowledge SHAREKHAN LTD. which has been nice enough to give me a chance to do my summer training and providing me wonderful support throughout my training period and afterward. I am thankful to Mr. Nilesh Kulkarni (Asst. Manager, Administration Dept.) and Mr.Bhushan for allowing me to do the project in the bank and also grateful to my mentor & for guiding and training me to do the project. I would like to thank to director of my college, Prof. Chandni Bhatnagar for giving me chance to get an industrial experience. Finally I am also grateful to all the other staff of the bank of various branches. The entire experience has been very encouraging and will certainly help me in Future. Abhinav Suryakant Deshmukh. (M.M.S.Finance)
EXECUTIVE SUMMARY
This project aims at studying the way of analysis before making the investment in to the shares. The study helps you make analysis and indentified the return of a security before putting it money into the market. This analysis gives the assurance about the investment decision making and also assure you the return as well as to protect the risk involved into market before investing. With the help of fundamental and technical analysis try to predict the future of market to reduce the risk, the balance sheet, along with the income and cash flow statements, is an important tool for investors to gain insight into a company and its operations. The balance sheet is a snapshot at a single point in time of the companys account covering its assets, liabilities, and shareholders equity. The purpose of balance sheet is to give user an idea of the companys financial position along with displaying what the company owns and owes. It is important that all investors should know how to use, analyze and read this document. Shareholders equity is the initial amount of money invested into a business. If, at the end of the fiscal year, a company decides to reinvest its net earning into the company (after taxes) these retained earnings will be transferred from the income statement on the balance sheet in to the share holders equity account. This account represents a companys total net worth. In order for balance sheet to balance, total assets on one side have to equal total liabilities plus shareholders equity on the other. The income statement is one of the three statements- the other two are the balance sheet and cash flow statement- with which stock investors need to become familiar. The purpose of this project is to provide the investor with an understanding of the income statement in order to simplify investment analysis and make it easier to apply it to your own investment decisions. While many fundamental investors tends to focus on the long haul, the odds are that they still want to obtain a favourable buy in price and/or a favourable selling price upon liquidating a position. Technical analysis can be hardly in this situation as well.
More specifically, when a stock punches through its 15 and/or 21-days moving average (either to the upside or the downside), it usually continues along that trend for a short period of a time. In other words it is largely an indicator of what to expect in the coming term. Incidentally, 50- and 200-days moving average are often used by charities and some fundamental investors to determine longer term break out pattern. For those looking to time a trade or to solidify a favourable entry or exit price in a given stock, these types of analyses are invaluable. People often ask if technical analysis can be used as an effective substitute for fundamental analysis. Although there is no definitive answer whether technical analysis can be used as a whole substitution for fundamental analysis, there is little doubt that combining the strength of both strategies can help investors better understand the market and gauge the direction in which their investment might be headed. Some technical analysis methods combine well with fundamental analysis to provide additional to investors.
Index
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Chapter No. 1 2 3 4 4.1 4.2 4.3 4.4 4.a) 4.b) 4.c) 4.d) 5 5.a) 5.b) 5.c) 5.d) 6 7 8 9
Title of the chapter Introduction to the broking industry Introduction to the Share khan Ltd. Introduction to the Project: Investment analysis of shares Literature Review: Investment analysis of shares Investment Security Analysis Definition of security analysis Fundamental Analysis Economic Analysis Industry Analysis Company Analysis Other Fundamental Analysis Technical Analysis Meaning of Technical Analysis Assumptions of Technical Analysis Tools of Technical Analysis Argument & Disagreement Fact & Findings: Technical analysis of Infosys Technology Data analysis &Interpretation, conclusion Bibliography & references Annexure
Page No.
(1) INTRODUCTION OF THE BROKING INDUSTRY.
Chapter: 1 Broking Industry The Indian broking industry consists of companies that primarily act as agent for the buying and selling securities (e.g. stocks, shares and similar financial instruments) on a commission or transaction fee basis. It has two main interdependent segments: Primary market and Secondary market. The broking market is showing rapid growth in India nowadays. The most essential features of broking industry include the introduction of Ebroking facilities and decline in the cost of brokerages fees. In India key players in Broking Industry are as follows: ICICI Securities Ltd. ( www.icicidirect.com)
Kotak Securities Ltd. (www.kotaksecurities.com) Indiabulls Financial Services Ltd. (www.indiabulls.com) India Infoline (www.5paisa.com) Sharekhan Ltd.(www.sharekhan.com)
Motilala Oswal Securities (www.motolaloswal.com)
HDFC Securities (www.hdfcsec.com)
(2) INTODUCTION TO THE SHAREKHAN LTD.
Chapter 2: Introduction of the Share khan ltd. Introduction: Share khan is one of the top retail brokerage houses in India with a strong online trading platform. The company provides equity based products (research, equities, derivatives, depository, margin funding, etc.). It has one of the largest networks in the country with 704 share shops in 280 cities and Indias premier online trading portal www.sharekhan.com. With their research expertise, customer commitment and superior technology, they provide investors with end-to-end solutions in investments. They provide trade execution services through multiple channels - an Internet platform, telephone and retail outlets. Share khan was established by Morakhia family in 1999-2000 and Morakhia family, continues to remain the largest shareholder. It is the retail broking arm of the Mumbai- based SSKI [SHANTILAL SHEWANTILAL KANTILAL ISWARNATH LIMITED] Group. SSKI which is established in 1930 is the parent company of Share khan ltd. With a legacy of more than 80 years in the stock markets, the SSKI group ventured into institutional broking and corporate finance over a decade ago. Presently SSKI is one of the leading players in institutional broking and corporate finance activities. Vision: To be the best retail brokering Brand in the retail business of stock market. Mission: To educate and empower the individual investor to make better investment decisions through quality advice and superior service Company hierarchy CHAIRMAN: Mr. Shripal Morakhia, who has worked with the president of the New York Stock Exchange as executive Assistant during 1979-1980. CEO: Mr. Tarun Shah. MD: Mr. Shripal Morakhia. VICE PRESIDENT: Mr. Kalyan Raman. Branch Incharge: Mr.Nilesh Kulkarni.
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(3) INRODUCTION TO THE PROJECT INVESTMENT ANALYSIS OF SHARES
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Investment analysis of equity shares 1.1 : Title of Project
Investment analysis of Shares with reference to Share khan Ltd.
1.2 : Objectives of the study 1. The objective of doing this project is to know basics of analysis of share
market. 2. The different types of ratios are being used to examine the balance sheet & income statement to know the position of the company returns & wealth of shareholders. 3. It also gives an indication to the investors of the stock at what trends it will be follow. 4. To understand concepts related with Share Market.
1.3: Scope of the study Investment analysis of shares helps to know the position of market through the difference analysis such as fundamental and technical. This project report will give you the guidelines about what aspect should we consider before investing.
1.4: Research Methodology Research Methodology means the data used for the analysis is gathered through various methods such as through the primary and secondary method.
1. Primary data collection : Primary data have been collected in the
organization where the Summer Internship Project conducted and through direct communication with Mr. Nilesh Kulkarni (Industry guide) during the Summer Internship Program & Mrs. Chandani Bhatnagar ( Institute Guide)
2. Secondary data collection: The secondary data is collected through internet
& various books.
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1.5: Limitations of study
1. Limited Time: The time available to conduct the study was only 2 months. It being a wide topic had a limited time. 2. Limited Resource: Limited resources are available to collect the information about the analysis. 3. Volatile: Share market is so much volatile and it is difficult to forecast anything about it whether you trade through online or offline 4. Aspect Coverage: Some of the aspects may not be covered in my study.
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(4) LITRETURE REVIEW INRODUCTION TO THE INVESTMENT

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1.1 Investment: Financial markets have the basic function of mobilizing the investments needed by corporate entities. They also act as marketplaces for investors who are attracted by the returns offered by the investment opportunities in the market. In this context there is a need to understand the meaning of investment and the motives of investment. Investment may be defined as an activity that commits funds in any financial/physical form in the present with an expectation of receiving additional return in the future. The expectation brings with it a probability that the quantum of return may vary from a minimum to a maximum. This possibility of variation in the actual return is known as investment risk. Thus every investment involves a return and risk. Investment is an activity that is undertaken by those who have savings. Savings can be defined as the excess of income over expenditure. However, all savers need not be investors. For example, an individual who sets aside some money in a box for a birthday present is a saver, but cannot be considered an investor. On the other hand, an individual who opens a savings bank account and deposits some money regularly for a birthday present would be called an investor. The motive of savings does not make a saver an investor. However, expectations distinguish the investor from a saver. The saver who puts aside money in a box does not expect excess returns from the savings. However, the saver who opens a savings bank account expects a return from the bank and hence is differentiated as an investor. The expectation of return is hence an essential characteristic of investment. An investor earns/expects to earn additional monetary value from the mode of investment that could be in the form of physical/financial assets. A bank deposit is a financial asset. The purchase of gold would be a physical asset. Investment activity is recognized when an asset is purchased with an intention to earn an expected fund flow or an appreciation in value. An individual may have purchased a house with an expectation of price appreciation and may consider it as an investment. However, investment need not necessarily represent purchase of a physical asset. If a bank has advanced some money to a customer, the loan can be considered as an investment for the bank. The loan instrument is expected to give back the money along with interest at a future date. The purchase of an insurance plan for its benefits such as protection against risk, tax benefits, and so on, indicates an expectation in the future and hence may be considered as an investment. From the above examples it can be seen that investment involves employment of funds with the aim of achieving additional income or growth in value. The essential quality of an investment is that it involves the expectation of a reward. Investment, hence, involves the commitment of resources at present that have been saved in the hope that some benefits will accrue from them in the future.
1.2 Security analysis
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Investment is commitment of funds in the expectation of some positive rate of return. These funds are to be used by another party, user of fund, for productive activity. It can be giving an advance or loan or contributing to the equity (ownership capital) or debt capital of a corporate or non-corporate business unit. In other words, investment means conversion of cash or money into a monetary asset or a claim on future money for a return. This return is for saving, parting with saving or liquidity and lastly for taking a risk involving the uncertainty about the actual return, time of waiting and cost of getting back funds, safety of funds, and risk of the variability of the return.
1.3 Definition of security analysis For making proper investment involving both risk and return, the investor has to make a study of the alternative avenues of investment their risk and return characteristics and make proper projection or expectation of the risk and return of the alternative investments under consideration. He has to tune the expectations to his preferences of the risk and return for making a proper investment choice. The process of analyzing the individual securities and the market as a whole and estimating the risk and return expected from each of the investments with a view to identifying undervalued securities for buying and overvalued securities for selling is both an art and a science and this is what is called security analysis.
1.4 Fundamental Analysis
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Security analysis is the basis for rational investment decisions. If a securitys estimated value is above its market price, the security analyst will recommend buying the stock. If the estimated value is below the market price, the security should be sold before its price drops. However, the values of the securities are continuously changing as news about the securities becomes known. The search for the security pricing involves the use of fundamental analysis. Under fundamental analysis, the security analysts studies the fundamental facts affecting a stocks values, such as companys earnings, their management, the economic outlook, the firms competition, market conditions etc. Fundamental analysis is primarily concerned with determining the intrinsic value or the true value of a security. For determining the securities intrinsic value the details of all major factors (GNP, industry sales, firm sales and expense etc) is collected or an estimates of earnings per share may be multiplied by a justified or normal prices earnings ratio. After making this determination, the intrinsic value is compared with the securitys current market price. If the market price is substantially greater than the intrinsic value the security is said to be overpriced. If the market price is substantially less than the intrinsic value, the security is said to be under priced. However, fundamental analysis comprises: 1. Economic Analysis 2. Industry Analysis 3. Company Analysis
1) ECONOMIC ANALYSIS
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For the security analyst or investor, the anticipated economic environment, and therefore the economic forecast, is important for making decisions concerning both the timings of an investment and the relative investment desirability among the various industries in the economy. The key for the analyst is that overall economic activities manifest itself in the behavior of the stocks in general. That is, the success of the economy will ultimately include the success of the overall market. For studying the Economic Analysis, the Macro Economic Factors and the Forecasting Techniques are studied in following paragraphs. A) MACRO ECONOMIC FACTORS The macro economy is the study of all the firms operates in economic environment. The key variables to describe the state of economy are explained as below: 1. Growth rate of Gross Domestic Product (GDP): GDP is a measure of the total production of final goods and services in the economy during a year. It is indicator of economic growth. It consists of personal consumption expenditure, gross private domestic investment, government expenditure on goods and services and net export of goods and services. The firm estimates of GDP growth rate are available with a time lag of one or two years. The expected rate of growth of GDP will be 7.5 percent in year 200506. Generally, GDP growth rate ranges from 6-8 percent. The growth rate of economy points out the prospects for the industrial sector and the returns investors can expect from investment in shares. The higher the growth rate of GDP, other things being equal, the more favorable it is for stock market. 2. Savings and investment: Growth of an economy requires proper amount of investments which in turn is dependent upon amount of domestic savings. The amount of savings is favorably related to investment in a country. The level of investment in the economy and the proportion of investment in capital market is major area of concern for investment analysts. The level of investment in the economy is equal to: Domestic savings + inflow of foreign capital - investment made abroad. Stock market is an important channel to mobilize savings, from the individuals who have excess of it, to the individual or corporate, who have deficit of it. Savings are distributed over various assets like equity shares, bonds, small savings schemes, bank deposits, mutual fund units, real estates, bullion etc. The demand for corporate securities has an important bearing on stock prices movements. Greater the allocation of equity in investment, favorable impact it have on stock prices.
3. Industry Growth rate: The GDP growth rate represents the average of the growth rate of agricultural sector, industrial sector and the service sector. The current contribution of industry sector in GDP in the year 2004-05 is 6.75 percent approximately. Publicly listed
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company play a major role in the industrial sector. The stock market analysts focus on the overall growth of different industries contributing in economic development. The higher the growth rate of the industrial sector, other things being equal, the more favorable it is for the stock market. 4. Price level and Inflation: If the inflation rate increases, then the growth rate would be very little. The increasingly inflation rate significantly affect the demand of consumer product industry. The inflation rate in the Indian economy has been around 7 percent till 1990s. In recent years, the inflation rate has fallen significantly. At present it ranges from 4-5 percent (2005). The industry which have a weak market and come under the purview of price control policy of the government may lose the market, like sugar industry. On the other hand the industry which enjoy a strong market for their product and which do not come under purview of price control may benefit from inflation. If there is a mild level of inflation, it is good to the stock market but high rate of inflation is harmful to the stock market. 5. Agriculture and monsoons: Agriculture is directly and indirectly linked with the industries. Hence increase or decrease in agricultural production has a significant impact on the industrial production and corporate performance. Companies using agricultural raw materials as inputs or supplying inputs to agriculture are directly affected by change in agriculture production. For example- Sugar, Cotton, Textile and Food processing industries depend upon agriculture for raw material. Fertilizer and insecticides industries are supplying inputs to agriculture. A good monsoon leads to higher demand for inputs and results in bumper crops. This would lead to buoyancy in stock market. If the monsoon is bad, agriculture production suffers and cast a shadow on the share market. 6. Interest Rate: Interest rates vary with maturity, default risk, inflation rate, productivity of capital etc. The interest rate on money market instruments like Treasury Bills are low, long dated government securities carry slightly higher interest rate and interest rate on corporate debenture is still higher. With the deregulation interest rates are softened, which were quite high in regulated environment. Interest rate affects the cost of financing to the firms. A decrease in interest rate implies lower cost of finance for firms and more profitability and it finally leads to decline in discount rate applied by the equity investors, both of which have a favorable impact on stock prices. At lower interest rates, more money at cheap cost is available to the persons who do business with borrowed money, this leads to speculation and rise in price of share. 7. Government budget and deficit: Government plays an important role in the growth of any economy. The government prepares a central budget which provides complete information on revenue, expenditure and deficit of the government for a given period. Government revenue come from various direct and indirect taxes and government made expenditure on various developmental activities. The excess of expenditure over revenue
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leads to budget deficit. For financing the deficit the government goes for external and internal borrowings. Thus, the deficit budget may lead to high rate of inflation and adversely affects the cost of production and surplus budget may results in deflation. Hence, balanced budget is highly favourable to the stock market. 8. The tax structure: The business community eagerly awaits the government announcements regarding the tax policy in March every year. The type of tax exemption has impact on the profitability of the industries. Concession and incentives given to certain industry encourages investment in that industry and have favourable impact on stock market. 9. Balance of payment, forex reserves and exchange rate: Balance of payment is the record of all the receipts and payment of a country with the rest of the world. This difference in receipt and payment may be surplus or deficit. Balance of payment is a measure of strength of rupee on external account. The surplus balance of payment augments forex reserves of the country and has a favourable impact on the exchange rates; on the other hand if deficit increases, the forex reserve depletes and has an adverse impact on the exchange rates. The industries involved in export and import are considerably affected by changes in foreign exchange rates. The volatility in foreign exchange rates affects the investment of foreign institutional investors in Indian Stock Market. Thus, favourable balance of payment renders favourable impact on stock market. 10. Infrastructural facilities and arrangements: Infrastructure facilities and arrangements play an important role in growth of industry and agriculture sector. A wide network of communication system, regular supply or power, a well developed transportation system (railways, transportation, road network, inland waterways, port facilities, air links and telecommunication system) boost the industrial production and improves the growth of the economy. Banking and financial sector should be sound enough to provide adequate support to industry and agriculture. The government has liberalized its policy regarding the communication, transport and power sector for foreign investment. Thus, good infrastructure facilities affect the stock market favourable
11. Demographic factors: The demographic data details about the population by age, occupation, literacy and geographic location. These factors are studied to forecast the demand for the consumer goods. The data related to population indicates the availability of work force. The cheap labour force in India has encouraged many multinationals to start their ventures. Population, by providing labour and demand for products, affects the industry and stock market.
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12. Sentiments: The sentiments of consumers and business can have an important bearing on economic performance. Higher consumer confidence leads to higher expenditure and higher business confidence leads to greater business investments. All this ultimately leads to economic growth. Thus, sentiments influence consumption and investment decisions and have a bearing on the aggregate demand for goods and services. B) ECONOMIC FORECASTING TECHNIQUES To estimate the stock price changes, an analyst has to analyze the macroeconomic environment. All the economic activities affect the corporate profits, investors attitudes and share price. For the purpose of economic analysis and in order to decide the right time to invest in securities some techniques are used. These are explained as below: 1. Anticipatory Surveys: Under this prominent people in government and industry are asked about their plans with respect to construction, plant and equipment expenditure, inventory adjustments and the consumers about their future spending plans. To the extent that these people plan and budget for expenditure in advance and adhere to their intentions, surveys of intentions constitute a valuable input in forecasting process. It is necessary that surveys of intentions be based on elaborate statistical sampling procedures, the greatest short coming of intentions, surveys is that the forecaster has no guarantee that the intention will be carried out. External shocks, such as strikes, political turmoil or government action can cause changes in intentions. 2. Barometric or Indicator approach: Barometric technique is based on the presumption that relationship can exist among various economic time series. For example, industrial production overtime and industrial loans by commercial banks over time may move in same direction. Historical data are examined in order to ascertain which economic variables have led, lagged after of moved together with the economy. A leading indicator may be leading because it measures something that overshadows a change in production activity. Examples of these indicators are highlighted in Figure-1. There are three kind of relationships among economic time series:
Figure-1 Components of Current Composite Indexes 1. Composite Index of Leading Indicators

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Average weekly hours of manufacturing/production workers. Average weekly initial unemployment claims. Manufacturers new orders for consumer goods and material industries.
Contracts and orders for plant and equipment. Number of new building permits issued. Index of S&P 500 stock prices/Index of BSE sensitive stock prices. Money supply. Change in sensitive material prices. Change in manufacturers unfilled orders, durable goods industries. Index of consumer expectations.
2. Composite Index of Coincident Indicators Employees on nonagricultural payrolls. Personal Income less transfer payments. Index of industrial production. Manufacturing and trade sales.
3. Composite Index of Lagging Indicators Average duration of unemployment. Ratio of manufacturing and trade inventories to sales. Average prime rate. Commercial and industrial loans outstanding. Ratio of consumer installment credit outstanding to personal income. Change in Index of labour cost per unit of manufacturing output. Change in consumer price index for services.
3. Diffusion Indexes: Some of the indicators appear in more than one class, and then the problem of choice may arise. Furthermore, it is not advisable to rely on just one of the indicators. This leads to the usage of what is referred to as the diffusion index. A diffusion
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index copes with the problem of differing signals given by the indicators. It is percentage of rising indicators. In this method a group of leading indicators is initially chosen. Then the percentage of the group of chosen indicators which have fallen (or, risen) over the last period is plotted against time to get the diffusion index. For example, if there are say 9 leading indicators for forecasting the construction activity of dwelling units and if by plotting we find that say, 6 indices show a rise, then we can calculate that diffusion index is (6/9*100) = 66.7 percent. When the index exceeds 50 percent, we can predict a rise in forecast variable. 4. Money and Stock Prices: Monetary theory in its simplest form states that fluctuations in the rate of growth of money supply are of utmost importance in determining GNP, corporate profits, interest rates, stock prices etc. Monetarists contend that changes in growth rate of money supply set off a complicated series of events that ultimately affects share prices. In addition, these monetary changes lead stock price changes. Thus, while making forecasts, changes in growth rate of money supply should be given due importance. Some thinkers states that stock market leads changes in money supply. However, sound monetary policy is a necessary ingredient for steady growth and stable prices. 5. Econometric Model Building: The econometric methods combine statistical tools with economic theories to estimate economic variables and to forecast the intended economic variables. The forecast made through econometric method are much more reliable than those made through any other method. For applying econometric technique, the user is to specify in a formal mathematical manner the precise relation between the dependent and independent variable. In using econometrics, the forecaster must quantify precisely the relationships and assumptions he is making. This not only gives him direction but also the magnitudes. An econometric model may be a single-equation regression model or it may consist of a system of simultaneous equations. Single equation regression serves the purpose of forecasting in many cases. But where the relationship between economic variables are complex and variable are so interrelated that unless one is determined, the other cannot be determined, a single-equation regression model does not serve the purpose. In that case, a system of simultaneous equations is used to estimate and forecast the target variable. 6. Opportunistic Model Building: Opportunistic model building or GNP model building or sectoral analysis is widely used forecasting method. Initially, the forecaster must hypothesize total demand and thus total income during the forecast period. Obviously, this will necessitate assuming certain environmental decisions, such as war or peace, political relationships among the level of interest rates. After, this work has been done, the forecaster begins building a forecast of the GNP figure by estimating the levels of the various component of GNP like the number of consumption expenditures, gross private domestic investment, government purchases of goods and services and net exports. After
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adding the four major categories the forecaster comes up with a GNP forecast. Now he tests this total for consistency with an independently arrived at a priori forecast of GNP.
2) INDUSTRY ANALYSIS The mediocre firm in the growth industry usually out performs the best stocks in a stagnant industry. Therefore, it is worthwhile for a security analyst to pinpoint growth industry, which has good investment prospects. The past performance of an industry is not a good predictor of the future- if one look very far into the future. Therefore, it is important to study industry analysis. For an industry analyst- industry life cycle analysis, characteristics and classification of industry is important. All these aspects are enlightened in following sections: A) INDUSTRY LIFE CYCLE ANALYSIS
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Many industrial economists believe that the development of almost every industry may be analyzed in terms of following stages 1. Pioneering stage: During this stage, the technology and product is relatively new. The prospective demand for the product is promising in this industry. The demand for the product attracts many producers to produce the particular product. This lead to severe competition and only fittest companies survive in this stage. The producers try to develop brand name, differentiate the product and create a product image. This would lead to non-price competition too. The severe competition often leads to change of position of the firms in terms of market share and profit. 2. Rapid growth stage: This stage starts with the appearance of surviving firms from the pioneering stage. The companies that beat the competition grow strongly in sales, market share and financial performance. The improved technology of production leads to low cost and good quality of products. Companies with rapid growth in this stage, declare dividends during this stage. It is always advisable to invest in these companies. 3. Maturity and stabilization stage: After enjoying above-average growth, the industry now enters in maturity and stabilization stage. The symptoms of technology obsolescence may appear. To keep going, technological innovation in the production process should be introduced. A close monitoring at industries events are necessary at this stage. 4. Decline stage: The industry enters the growth stage with satiation of demand, encroachment of new products, and change in consumer preferences. At this stage the earnings of the industry are started declining. In this stage the growth of industry is low even in boom period and decline at a higher rate during recession. It is always advisable not to invest in the share of low growth industry.
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B) CLASSIFICATION OF INDUSTRY Industry means a group of productive or profit making enterprises or organizations that have a similar technically substitute goods, services or source of income. Besides Standard Industry Classification (SIC), industries can be classified on the basis of products and business cycle i.e. classified according to their reactions to the different phases of the business cycle. These are classified as follows: 1. Growth Industries: These industries have special features of high rate of earnings and growth in expansion, independent of the business cycle. The expansion of the industry mainly depends on the technological change or an innovative way of doing or selling something. For example-in present scenario the information technology sector have higher growth rate. There is some growth in electronics, computers, cellular phones, engineering, petro-chemicals, telecommunication, energy etc. 2. Cyclical Industries: The growth and profitability of the industry move along with the business cycle. These are those industries which are most likely to benefit from a period of economic prosperity and most likely to suffer from a period of economic recession. These especially include consumer goods and durables whose purchase can be postponed until persona; financial or general business conditions improve. For exampleFast Moving Consumer Goods (FMCG) commands a good market in the boom period and demand for them slackens during the recession.
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3. Defensive Industries: Defensive industries are those, such as the food processing industry, which hurt least in the period of economic downswing. For example- the industries selling necessities of consumers withstands recession and depression. The stock of defensive industries can be held by the investor for income earning purpose. Consumer nondurable and services, which in large part are the items necessary for existence, such as food and shelter, are products of defensive industry. 4. Cyclical-growth Industries: These possess characteristics of both a cyclical industry and a growth industry. For example, the automobile industry experiences period of stagnation, decline but they grow tremendously. The change in technology and introduction of new models help the automobile industry to resume their growing path. C) TECHNIQUES FOR EVALUATING RELEVANT INDUSTRY FACTORS The techniques (long term and short term) for evaluating industry factors are explained in the following sections. These are: 1. End-Use and Regression Analysis: End-use analysis for product demand analysis refers to a process whereby the analyst attempts to diagnose the factors that determine the demand for output of the industry. In a single product firm, units demanded multiplied by price will equal sales revenue. The analyst frequently forecast the factors like disposable income, per capita consumption, price elasticity of demand etc. that influence the demand of the product. For studying the relationship between various variables simple linear regression analysis and correlation analysis is used. Industry sales against time, industry sales against macro economic variables like gross national product, personal income disposable income and industry earnings over time may be regressed. When two or more independent variables are better able to explain variability in the dependent variables, the multiple regression analysis is used. 2. Input-Output Analysis: It is a way of getting inside demand analysis or end use analysis. It reflects the flow of goods and services through the economy including intermediate steps in the production process as goods proceed from raw material stage to final consumption stage. Thus input-output analysis observes patterns of consumption at all stages in order to direct any changing patterns or trends that might indicate the growth or decline on industries. This technique is more appropriate for an intermediate or long term forecast than for short term forecast. 3. Growth Rate: The growth rate of different industry should be forecasted by considering historical data. Once the growth rate is estimated, future values of earnings or sales may be forecast. Since the growth rate is such an important factor in determining the stock prices, not only its size but its duration must be estimated. Sometimes, patents expire,
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competition with in an industry becomes more aggressive because foreign firms begin to compete, economically depressed periods occur or other factors cause growth rate to drop. 3) COMPANY ANALYSIS Fundamental analysis is the method of analyzing companies based on factors that affect their intrinsic value. There are two sides to this method: the quantitative and the qualitative. The quantitative side involves looking at factors that can be measured numerically, such as the companys assets, liabilities, cash flow, revenue and price to earnings ratio. The limitation of quantitative analysis, however, is that it does not capture the companys aspects or risks un measurable by a number - things like the value of an executive or the risks a company faces with legal issues. The analysis of these things is the other side of fundamental analysis: the qualitative side or non number side. Although relatively more difficult to analyze, the qualitative factors are an important part of a company. Since they are not measured by a number, they more represent an either negative or positive force affecting the company. But some of these qualitative factors will have more of an effect, and determining the extent of these effects is what is so challenging. To start, identify a set of qualitative factors and then decide which of these factors add value to the company, and which of these factors decrease value. Then determine their relative importance. The qualities one analyzes can be categorized as having a positive effect, negative effect or minimal effect. The best way to incorporate qualitative analysis into evaluation of a company is to do it once you have done the quantitative analysis. The conclusion come to on the qualitative side can put quantitative analysis into better perspective. If when looking at the company numbers one saw good reason to buy/invest in the company, but then found many negative qualities, he may want to think twice about buying/investing. Negative qualities might include potential litigations, poor R and D prospects or a board full of insiders. The conclusions of qualitative analysis either reconfirm or raise questions about the conclusions of quantitative analysis. Fundamental analysis is not as simple as looking at numbers and computing ratios; it is also important to look at influences and qualities that do not have a number value. The present and future values are affected by the following factors. 1) Competitive Edge: Many industries in India are composed of hundreds of individuals companies. The large companies are successful in meeting the competition and some companies rise to the position of eminence and dominance. The companies who have obtain the leadership position; have proven his ability to withstand competition and to have a sizable share in the market. The competitiveness of the company can be studied with the help of: a) Market share: The market share of the company helps to determine a companys relative position within the industry. If the market share is high, the company would be
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able to meet the competition successfully. The size of the company should also be considered while analyzing the market share, because the smaller companies may find it difficult to survive in the future. b) Growth of annual sales: Investor generally prefers to study the growth in sales because the larger size companies may be able to withstand the business cycle rather than the company of smaller size. The rapid growth keeps the investor in better position as growth in sales is followed by growth in profit. The growth in sales of the company is analyzed both in rupee terms and in physical terms. c) Stability of annual sales: If a firm has stable sales revenue, other things being remaining constant, will have more stable earnings. Wide variation in sales leads to variation in capacity utilization, financial planning and dividends. This affects the companys position and investors decision to invest. 2) Earnings: The earning of the company should also be analyzed along with the sales level. The income of the company is generated through the operating (in service industry like banks- interest on loans and investment) and non-operating income (ant company, rentals from lease, dividends from securities). The investor should analyze the sources of income properly. The investor should be well aware with the fact that the earnings of the company may vary due to following reasons: Change in sales. Change in costs. Depreciation method adopted. Inventory accounting method. Wages, salaries and fringe benefits. Income tax and other taxes.
3) Capital Structure: Capital structure is combination of owned capital and debt capital which enables to maximize the value of the firm. Under this, we determine the proportion in which the capital should be raised from the different securities. The capital structure decisions are related with the mutual proportion of the long term sources of capital. The owned capital includes share capital a) Preference shares: Preference shares are those shares which have preferential rights regarding the payment of dividend and repayment of capital over the equity shareholders.
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At present many companies resort to preference shares. The preference shares induct some degree of leverage in finance. The leverage effect of the preference shares is comparatively lesser than that the debt because the preference shares dividend are not tax deductible. If the portion of preference share in the capital is large, it tends to create instability in the earnings of equity shares when the earnings of the company fluctuate. b) Debt: It is an important source of finance as it has the specific benefit of low cost of capital because interest is tax deductible. The leverage effect of debt is highly advantageous to the equity shareholders. The limits of debt depend upon the firms earning capacity and its fixed assets. 4) Management: The basic objective of the company is to attain the stated objectives of the company for the good of the equity holders, the public and employees. If the objectives of the company are achieved, investor will have a profit. Good management results in high profit to investors. Management is responsible for planning, organizing, actuating and controlling the activities of the company. The good management depends upon the qualities of the manager. 5) Operating Efficiency: The operating efficiency of the company directly affects the earnings capacity of a company. An expanding company that maintains high operating efficiency with a low breakeven point earns more than the company with high breakeven point. If a firm has stable operating ratio, the revenues also would be stable. Efficient use of fixed assets with raw materials, labour and management would lead to more income from sales. This leads to internal fund generation for the expansion of the firm. 6) Financial Performance: A) Balance Sheet: The level, trends, and stability of earnings are powerful forces in the determination of security prices. Balance sheet shows the assets, liabilities and owners equity in a company. It is the analysts primary source of information on the financial strength of a company. Accounting principles dictate the basis for assigning values to assets. Liability values are set by contracts. When assets are reduced by liabilities, the book value of share holders equity can be ascertained. The book value differs from current value in the market place, since market value is dependent upon the earnings power of assets and not their cost of values in the accounts. B) Profit and Loss account: It is also called as income statement. It expresses the results of financial operations during an accounting year i.e. with the help of this statement we can find out how much profit or loss has taken place from the operation of the business during a period of time. It also helps to ascertain how the changes in the owners interest in a given period have taken place due to business operations. Last of all, for analyzing the financial position of any company following factors need to be
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considered for evaluating present situation and prospects of company. The questions that need to be answered for company analysis are: a) Availability and Cost of Inputs: Is the company well placed with respect to the availability of basic raw materials, power, fuel and other production inputs? What are the costs advantages/disadvantages of the company vis--vis its competitors? b) Order Position: What is the order position of the company? How many months or years of production does it represent? Is the order position improving or deteriorating? c) Regulatory Framework: What is the licensing policy applicable to the industry to which the firm belongs? Are there any price and/or distribution controls applicable to the company? If so, what are their implications for profitability? d) Technological and Production Capabilities: What is the technological competence of the firm? What is the state of its plant and machinery? Does the company have unutilized capacity to exploit favourable market developments? e) Marketing and Distribution: What is the image of the company in the marketplace? How strong is the loyalty of its customers/clients? What is the reach of the distribution network? f) Finance and Accounting: What are the internal accruals? How much access the companies have to external financing? What are the products in the portfolio of the company? How competitive is the position of the company in these products? g) Human Resource and Personnel: How competent and skilled is the workplace of the company? Is the company over-staffed or under-staffed? What is the extent of employee turnover and absenteeism? What is the level of employee motivation and morale? All information relating to these factors may be available from the annual reports and from the published sources also. The first hand information is also available from the official sources of the company.
7) COMPANY ANALYSIS: THE STUDY OF FINANCIALS STATEMENTS

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Financial statement means a statement or document which explains necessary financial information. Financial statements express the financial position of a business at the end of accounting period (Balance Sheet) and result of its operations performed during the year (Profit and Loss Account). In order to determine whether the financial or operational performance of company is satisfactory or not, the financial data are analyzed. Different methods are used for this purpose. The main techniques of financial analysis are: 1. Comparative Financial Statements 2. Trend Analysis 3. Common Size Statement 4. Fund Flow Statement 5. Cash Flow Statement 6. Ratio Analysis 7.1) Comparative Financial Statements: In comparative financial statement, the financial statements of two periods are kept by side so that they can be compared. By preparing comparative statement the nature and quantum of change in different items can be calculated and it also helps in future estimates. By comparing with the data of the previous years it can be ascertained what type of changes in the different items of current year have taken place and future trends of business can be estimated. 7.2) Trend Analysis: In order to compare the financial statements of various years trend percentages are significant. Trend analysis helps in future forecast of various items on the basis of the data of previous years. Under this method one year is taken as base year and on its basis the ratios in percentage for other years are calculated. From the study of these ratios the changes in that item are examined and trend is estimated. Sometimes sales may be increasing continuously and the inventories may also be rising. This would indicate the loss of market share of a particular companys product. Likewise sales may have an increasing trend but profit may remain the same. Here the investor has to look into the cost and management efficiency of the company. 7.3) Common Size Statement: Common size financial statements are such statements in which items of the financial statements are converted in percentage on the basis of common base. In common size Income Statement, net sales may be considered as 100 percent. Other items are converted as its proportion. Similarly, for the Balance sheet items total assets or total liabilities may be taken as 100 percent and proportion of other items to this total can be calculated in percentage.
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7.4) Fund Flow Statement: Income Statement or Profit or Loss Account helps in ascertainment of profit or loss for a fixed period. Balance Sheet shows the financial position of business on a particular date at the close of year. Income statement does not fully explain funds from operations of business because various non-fund items are shown in Profit or Loss Account. Balance Sheet shows only static financial position of business and financial changes occurred during a year cant be known from the financial statement of a particular date. Thus, Fund Flow Statement is prepared to find out financial changes between two dates. It is a technique of analyzing financial statements. With the help of this statement, the amount of change in the funds of a business between two dates and reasons thereof can be ascertained. The investor could see clearly the amount of funds generated or lost in operations. These reveal the real picture of the financial position of the company. 7.5) Cash Flow Statement: The investor is interested in knowing the cash inflow and outflow of the enterprise. The cash flow statement expresses the reasons of change in cash balances of company between two dates. It provides a summary of stocks of cash and uses of cash in the organization. It shows the cash inflows and outflows. Inflows (sources) of cash result from cash profit earned by the organization, issue of shares and debentures for cash, borrowings, sale of assets or investments, etc. The outflows (uses) of cash results from purchase of assets, investment redemption of debentures or preferences shares, repayment of loans, payment of tax, dividend, interest etc. With the help of cash flow statement the investor can review the cash movement over an operating cycle. The factors responsible for the reduction of cash balances in spite of increase in profits or vice versa can be found out. 7.6) Ratio Analysis: Ratio is a relationship between two figures expressed mathematically. It is quantitative relationship between two items for the purpose of comparison. Ratio analysis is a technique of analyzing financial statements. It helps in estimating financial soundness or weakness. Ratios present the relationships between items presented in profit and loss account and balance sheet. It summaries the data for easy understanding, comparison and interpretation. The ratios are divided in the following group. a) Liquidity Ratios: Liquidity rations means ability of the company to pay the short term debts in time. These ratios are calculated to analyze the short term financial position and short term financial solvency of firm. Commercial banks and short term creditors are interested in such analysis. These ratios are: i) Current Ratio = Current Assets / Current Liabilities This ratio is computed by dividing the current asset by the current liabilities. This ratio is usually expressed as a pure ratio e.g. 2:1. The objective of computing this ratio is to
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measure the ability of the firm to meet its short term obligations and to reflect the short term financial strength/solvency of a firm ii) Quick Ratio = Quick assets /Current Liabilities This ratio is computed by dividing the quick assets by the current liabilities. This ratio is usually expressed as a pure ratio i.e.1:1The objective of computing this ratio is to measure the ability of the firm to meet its short term obligation as and when due without relying upon the realization of stock. b) Turnover Ratios: These ratios show how well the assets are used and the extent of excess inventory. The different type of turnover ratios are as follows: i) Inventory turnover ratio = Net Sales / Inventory The objective of computing this ratio is to determine the efficiency with which the inventory is converted into sales. ii) Receivables turnover ratio = Net Sales / Receivables iii) Fixed assets turnover ratio = Net Sales / Fixed Assets The objective of computing this ratio is to determine the efficiency with which the fixed assets are utilized. iv)Total assets turnover ratio = Net Sales / Total Assets c) Profit Margin Ratios: Earning of more and more profit with the optimum use of available resources of business is called profitability. The investor is very particular in knowing net profit to sales, net profit to total assets and net profit to equity. The profitability ratio measures the overall efficiency and control of firm. Net Profit Margin = Profit after Tax / Sales d) FORECASTING EARNINGS There is strong evidence that earnings have a direct and powerful effect upon dividends and share prices. So the importance of forecasting earnings cannot be overstated. These ratios are generally known as Return on Investment Ratios. These ratio help in evaluating whether the business is earning adequate return on the capital invested or not. With the help of the following ratios the performance of the business can be measured. The earnings forecasting ratios are: Return on Total Assets: Changes in reported earnings can result from changes in methods of accounting, changes in the operations of the business and/or in financing of business, that is, changes in productivity or in resource base. This ratio represents the
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overall efficiency of capital invested in business. This ratio can also be called as gross capital employed ratio. The total assets here are combination of fixed assets and current assets. The Return on Total Assets is calculated as follows: Return on Assets = Net Income (EBIT) / Total Assets In general, the greater the return on assets, the higher the market value of the firm, other things being equal. Return on assets is the product of the turnover of assets and the margin of profits: Return on Assets = Sales / Assets * Earnings before interest and Tax / Sales Return on Equity: This ratio is calculated to evaluate the profitability of the business from the point of view of the ordinary shareholders. Return on Equity = Net Profit / Net Worth Or Return on Equity = Equity Earnings / Equity e) Earnings and Role of Financing: Borrowing of money at a fixed cost and the use of these funds to earn return on assets is known as employing leverage. If one can earn more on borrowed money than you have to pay for it, the leverage is to firms advantage. However, leverage should be used within reasonable limits because excessive use of debt relative to equity increases borrowing costs and also the cost of equity funds. The volatility of share holders returns increases with the expansion of the degree of financial leverage. The greater volatility of earnings owing to increased leverage can, at certain levels of debt financing, cause the market to pay less per rupee of earnings. Further with the use of more debts it may become progressively difficult to maintain (or improve) the rate of return on assets. One of the best ways of measuring the proportions of debt and equity financing is: Debt to asset ratio = Total Debt / Total Assets Debt to equity ratio = Total Debt / Net Worth Long term debt to equity = Long Term Debt / Net Worth f) Valuation Ratios: Earnings and Dividend Level Book value per share: This ratio indicates the share of equity shareholders after the company has paid all its liabilities, creditors, debenture holder and preference shareholders. It is calculated as follows:
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Book value per share = Paid up Equity share capital + Reserves & Surplus / Total number of equity shares outstanding Earnings per share (EPS): This ratio measures the earnings per share available to ordinary shareholders. Equity shareholders have the right to all profits left after payment of taxes and preference dividend. This ratio is calculated by dividing the profits available for equity shareholders by the number of equity shares issued. EPS = Equity Earnings or EAT / Number of equity shares outstanding This ratio is quite significant. EPS affects the market value of shares. It is an indicator of the dividend paying capacity of the firm. By comparing the EPS with other firms, management can know whether ordinary share capital is being utilized effectively or not. Dividend per Share (DPS): All the profits after tax and preference dividend available for equity shareholders are not distributed among them as dividend. Rather, a part of it is related in business. The balance of profits is distributed among equity shareholders. To calculate dividend per share, the profits distributed as dividend among equity shareholders is divided by number of equity shares. DPS = Profits distributed to Equity shareholders / Number of Equity shares Dividend Payout Ratio (D/P ratio): This ratio establishes the relationship between the earnings available for ordinary shareholders and the dividend paid to them. In other words, it explains what percentage of profit after tax and preference dividend has been paid to equity shareholders as dividend. It can be calculated as under: D/P ratio = Equity Dividends /Equity Earnings Dividend and Earnings Yield: These ratios are used to evaluate the profitability from the stand point of ordinary shareholders. Earning per share (EPS) and Dividend per Share (DPS) are calculated on the basis of book value of share but yield is always calculated on the basis of market value of shares. This ratio is called as Earnings Price ratio. Dividend Yield = Dividend per share /Market value per share Earnings Yield = Earnings per share /Market value per share Price to Earnings Ratio: This ratio is calculated by dividing the market price of a share by earnings per share. P/E ratio = Market Price of the share /EPS 8) OTHER FUNDAMEL ANALYSIS
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8.1) GOLD Analysis: The Gold Profiles provide very comprehensive information about the company. These reports include price history and charting, an extended business summary, the five year financial history and information on management, insiders and institutions. The Gold Profiles also successfully outline the strategic position of the company within the market and provide detailed information on the functioning of the company under various constraints. 8.2) Silver Analysis: The Silver Profiles are a scaled down version of the Gold Profiles that provide detailed information about the company. These include information on performance of the company, its strategy, joint ventures, key executives, new products, M&A etc. Timely, precise and up-to-date information presented in these reports allows decision makers to make successful strategic decisions. 8.3) PEST Analysis: PEST refers to all Political, Economic, Social and Technological factors affecting any industry. RocSearchs acclaimed team of industry analysts religiously follow industry trends and monitor any changes that occur in the business scenario. All reported information including insider titbits is examined and analysed to produce an original document that effectively mirrors the external business environment. 8.4)SWOT Analysis: Our industry analysts put into perspective all political, economic, social and technological factors affecting any industry to identify the emerging opportunities for any company operating in that industry. Strengths and weaknesses of the company are analyzed to establish whether it can take advantage of the emergent opportunities. Various threats that can hamper its progress are also examined and listed. The findings can be used to take advantage of opportunities and to make contingency plans for threats. 8.5) PORTER MODEL Michael Porter has argued that the profit potential of an industry depends on the combined strength of the following five components as explained below.These are: 1. Threat of New Entrants: New entrants add capacity, inflate costs, push prices down and reduce profitability. Hence, if an industry face threat of new entrants, its profit potential would be limited. The threat from new entrants is low if the entry barriers confer an advantage on existing firms and deter new entrants. Entry barriers are high when:
The new entrants have to invest substantial resources to enter the industry. Economics of scale are enjoyed by the industry. The government policy limits or even prevents new entrants.
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Existing firms control the distribution channels, benefit from product differentiation in the form of brand image and customer loyalty, and enjoy some kind of proprietary experience curve.
2. Rivalry among the Existing Firms: Firms in an industry compete on the basis of price, quality, promotion service, warranties etc. If the rivalry between the firms in an industry is strong, competitive moves and countermoves dampen the average profitability of the industry. The intensity of rivalry in an industry tends to be high when:

The number of competitors in the industry is large. At least a few firms are relatively balanced and capable of engaging in a sustained competitive battle. The industry growth is sluggish, prodding firms to strive for a higher market share. The industry confronts high exit barriers. The industrys product is regarded as a commodity or near-commodity, stimulating strong price and service competition.
3. Pressure from Substitute Products: All the firms in an industry face competition from industries producing substitute products. The substitute goods may limit the profit potential of the industry by imposing a ceiling on the prices that can be charged by the firms in the industry. The threat from substitute products is high when:
The price-performance trade off offered by the substitute products is attractive. The switching costs for prospective buyers are minimal. The substitute products are being produced by industries earning superior profits.
4. Bargaining Power of Buyers: Buyer is a competitive force. They can bargain for price cut, ask for superior quality and better services and induce rivalry among competitors. If they are powerful, they can depress the profitability of the supplier industry. The bargaining power of a buyer group is high when: Its purchases are large relative to the sales of the seller. Its switching costs are low. It poses a strong threat of backward integration.
5. Bargaining Power of Suppliers: Suppliers, like buyers, can exert a competitive force in an industry as they ca raise prices, lower quality and curtail the range of free services
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they provide. Powerful suppliers can hurt the profitability of the buyer industry. Suppliers have strong bargaining power when:

Few suppliers dominate and the supplier group is more concentrated than the buyer group. There are hardly any viable substitutes for the products supplied. The switching costs for the buyers are high. Suppliers do present a real threat of forward integration.
1.5 TECHNICAL ANALYSIS A) Meaning of Technical Analysis: Technical analysis involves a study of marketgenerated data like prices and volumes to determine the future direction of price movement. It is a process of identifying trend reversal at an earlier stage to formulate the buying and selling strategy. With the help of several indicators, the relationship between
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price volume and supply-demand is analyzed for the overall market and individual stocks. B) Assumptions: The basic premises, on which technical analysis is formulated, are as follows: 1. The market value of the scrip is determined by the interaction of demand and supply. 2. Supply and demand is governed by numerous factors, both rational and irrational. These factors include economic variables relied by the fundamental analysis as well as opinions, moods and guesses. 3. The market discounts everything. The price of the security quoted represents the hope, fears and inside information received by the market players. Insider information regarding the issuance of bonus shares and right issues may support the prices. The loss of earnings and information regarding the forthcoming labor problem may result in fall in price. These factors may cause a shift in demand and supply, changing the direction of trends. 4. The market always moves in the trends except for minor deviations. 5. It is known fact that history repeats itself. It is true to stock market also. In the rising market, investors psychology has upbeats and they purchase the shares in great volumes driving the prices higher. At the same time in the down trend, they may be very eager to get out of the market by selling them and thus plunging the share price further. The market technicians assume that past prices predict the future. 6. As the market always moves in trends, analysis of past market data can be used to predict future price behavior.
C) Tools of Technical Analysis Generally used technical tools to analyze the market data are as follows: 1. Dow Theory: Originally proposed in the late nineteenth century by Charles H Dow, the editor of Wall Street Journal, the Dow Theory is perhaps the oldest and best-known
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theory of technical analysis. Dow developed this theory on the basis of certain hypothesis, which are as follows: a. No single individual or buyer or buyer can influence the major trends in the market. However, an individual investor can affect the daily price movement by buying or selling huge quantum of particular scrip. b. The market discounts everything. Even natural calamities such as earth quake, plague and fire also get quickly discounted in the market. The world trade center blast affected the share market for a short while and then the market returned back to normalcy. c. The theory is not infallible and it is not a tool to beat the market but provides a way to understand the market. Explanation of the Theory Dow described stock prices as moving in trends analogous to the movement of water. He postulated three types of price movements over time: (1) Major trends that are like tide in ocean, (2) Intermediate trends that resemble waves, and (3) Short run movements that are like ripples. Followers of the Dow Theory hope to detect the direction of the major price trend (tide) known as primary trend, recognizing the intermediate movements (waves) or secondary trends that may occasionally move in the opposite direction. They recognize that a primary trend does not go straight up, but rather includes small price declines as some investors decide to take profits. It means share prices dont rise or fall in a straight t manner. Every rise or fall in price experiences a counter move. If a share price is increasing, the counter move will be a fall in price and vice-versa. The share prices move in a zigzag manner. The trend lines are straight lines drawn connecting either the top or bottoms of the share price movement. To draw a trend line, the analyst should have at least two tops or bottoms. The following figure shows the trend line.
2. Primary Trend: The price trend may be either increasing or decreasing. When the market exhibits the increasing trend, it is called bull market. The bull market shows three clear-cut peaks. Each peak is higher than the previous peak and this price rise is accompanied by heavy trading volume. Here, each profit taking reversal that is followed by an increased new peak has a trough above the prior trough, with relatively light trading volume during the reversals, indicating that there is limited interest in profit taking at these
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levels. And the phases leading to the three peaks are revival, improvement in corporate profit and speculation. The revival period encourages more and more investors to buy scrips, their expectations about the future being high. In the second phase, increased profits of corporate would result in further price rise. In the third phase, prices advance due to inflation and speculation. The figure shows the three phases of bull market. The reverse trend is true with the bear market. Here, first phase starts with the abandonment of hopes. The chances of prices moving back to the previous high level seemed to be low. This would result in the sale of shares. In the second phase, companies are reporting lower profits and dividends. This would lead to selling pressure. The final phase is characterized by the distress selling of shares. During the bear phase of 1996, in the Bombay Stock Exchange more than 2/3 of the stocks were inactive. Most of the scrips were sold below their par values. 3. Secondary Trend: The secondary trend moves against the main trends and leads to the correction. In the bull market, the secondary trend would result in the fall of about 3366 percent of the earlier rise. In the bear market, the secondary trend carries the price upward and corrects the main trend. Compared to the time taken for the primary trend, secondary trend is swift and quicker. The figure 4 shows the secondary trend. 4. Minor Trends: Minor trends are just like the ripples in the market. They are simply the daily price fluctuations. Minor trend tries to correct the secondary price movement. It is better for the investor to concentrate on the primary or secondary trends than on the minor trends. .
5. Support and Resistance Level: A support level is the price range at which technician would expect a substantial increase in the demand for a stock. Generally, a support level will develop after a stock has enjoyed a meaningful price increase and the stock has begun to experience profit taking. When the price reaches this support price, demand surges and price and volume begin to increase again. A resistance level is the price range at which the technician would expect an increase in the supply of stock and any price increase to reverse abruptly. A resistance
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level tends to develop after a stock has experienced a steady decline from a higher price level. It is reasoned that the decline in the price leads some investors who acquired the stock at a higher price to look for an opportunity to sell it near their break even points. Therefore, the supply of stocks owned by these investors is overhanging the market. When the price rebounds to the target price set by these investors, this overhanging supply of stock comes to the market and dramatically reverses the price increase on heavy volume.
6. Volume of Trade Dow gave special emphasis to volume. Technical analysts use volume as an excellent method of confirming the trend. Therefore, the analyst looks for a price increase on heavy volume relative to the stocks normal trading volume as an indication of bullish activity. Conversely, a price decline with heavy volume is bearish. A generally bullish pattern would be when price increase are accompanied by heavy volume and the small
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price increase reversals occur with the light trading volume, indicating limited interest in selling and taking profits and vice-versa. 7. Breadth of the market The breadth of the market is the term often used to study the advances and declines that have occurred in the stock market. Advances mean the number of shares whose prices have increased from the previous days trading. Decline indicates the number of shares whose prices have fallen from the previous days trading. This is easy to plot and watch indicator because data are available in all business dailies. The net difference between the number of stocks advanced and declined during the same period is the breadth of market. A cumulative index of net differences measures the net breadth. An illustrative calculation of the breadth of the market is shown in Table below Table 1: Breadth of the Market Day Tuesday Wednesday Thursday Friday Monday Tuesday Advance 630 690 746 492 366 404 Decline 527 475 424 630 701 698 Net Advances or Decline 103 215 322 -138 -335 -294 Breadth of the market 103 318 640 502 167 -127
(All figures are assumed)
To analyze the breadth of the market, it is compared with one or two market indices. Ordinarily, the breadth of the market is expected to move in tandem with market indices. However, if there is a divergence between the two, the technical analysts believe that it signals something. It means, if the market index is moving upwards whereas the breadth of the market is moving downwards, it indicates that the market is likely to turn bearish. Likewise, if the market index is moving downwards but the breadth of the market is moving upwards, then it signals that the market may turn bullish 8. Short Selling
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Short selling refers to the selling of shares that you dont have. The short sellers are those who sell now in the hope of purchasing at a lower price in the future to make a profit. A short seller behaves in this way because he feels that the price of the stock will fall. And it is must for short sellers to cover their positions, i.e. the purchase of shares. This buying activity increases the potential demand for the stock. Therefore, rising short sales foretell future demand for the security and increase the future prices. Monthly short selling for the month can be compared with average daily volume for the preceding month. This ratio shows how many days of trading it would take to use up total short sales. If the ratio is less than one, market is said to be weak or overbought and a decline can be expected. The value between 1 and 1.5 shows neutral conditions of the market. Values above 1.5 indicate bullish trend and if it is above 2 the market is said to be oversold. At market tops, short selling is high and at market bottoms short selling is low. 9. Odd Lot Trading Small investors quite often buy an odd lot (i.e. non tradable lot) and such buyers and sellers are known as odd lotters. If we relate odd lot purchases to odd lot sales, we get an odd lot index. The increase in odd lot purchase results in an increase in the index. Relatively more selling leads to fall in the index. It is generally considered that the professional investor is more informed and stronger than the odd lotters and they are less sensible to price change than retail investor. When the professional investors dominate the market, the stock market is technically strong. If the odd lotters dominate the market, the market is considered to be technically weak. The notion behind is that odd lot purchase is concentrated at the top of the market cycle and selling at the bottom. High odd lot purchase forecasts fall in the market price and low purchases/sales ratios are presumed to occur toward the end of bear market or at the beginning of bull market 10. Moving Average The market indices dont rise or fall in straight line. The upward and downward movements are interrupted by counter moves. The underlying trends can be studied by smoothening the data. To smooth the data, moving average is used. The word moving means the body of data moves ahead to include the recent observation. If it is the fiveday moving average, on the six day the body of data moves to include the sixth day observation eliminating the first day observation. A five-day moving average of daily closing prices is calculated as follows: Trading Day 1 Closing Price 25 Sum of five most recent closing prices Moving Averages
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2 3 4 5 6 7 8 9 10
26 25.5 24.5 26 26 26.5 26.5 26 27 127 128 128.5 129.5 131 132 25.4 25.6 25.7 29.9 26 26.4
(All figures are assumed) The moving averages are used to study the movement of the market as well as the individual security prices. These moving averages are used along with the price of a stock. The stock prices may intersect the moving average at a particular point and give the buy and sell signal.
10.1 The moving average analysis recommends buying a stock when 1. Stock prices line rises through the moving average line when graph of the moving average line is flattening out. 2. Stock price line falls below the moving average line, which is rising. 3. Stock price line, which is above the moving average line, falls but begins to rise again before reaching the moving average line. 10.2 Moving average analysis recommends selling a stock when
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1. Stock price lines falls through the moving average line when graph of the moving average line is flattening out. 2. Stock prices line rise above the moving average line, which is falling. 3. Stock price line, which is below the moving average line, rises but begins to fall again before reaching the moving average line. The buy and sell signals initiated by a moving average trading system vary with the length of time over which the moving average is calculated. 11. Charts Charts are the valuable and easiest tools in the technical analysis. The graphic presentation of the data helps the investor to find out the trend of the price without any difficulty. A large number of charts are used to analyze the trend of the market. The bar and line chart is the simplest and most commonly used tool of a technical analyst. Bar charts contain measures on both axis: price on the vertical axis and time on the horizontal axis. On bar charts, the analysts plot a vertical line to represent the range of prices of the stock during the period that may be a day, week or month etc. thus the top of the vertical line would represent the highest rice of the stock during the day and the bottom of the line would represent the low price of the stock during the same day. A small horizontal line is drawn across the bar to denote the closing price at the end of the time period. Line chartists have found key patterns to determine the most probable action of a stock
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a) Line Chart The most basic of the four charts is the line chart because it represents only the closing prices over a set period of time. The line is formed by connecting the closing prices over the time frame. Line charts do not provide visual information of the trading range for the individual points such as the high, low and opening prices. However, the closing price is often considered to be the most important price in stock data compared to the high and low for the day and this is why it is the only value used in line charts. b) Bar Charts The bar chart expands on the line chart by adding several more key pieces of information to each data point. The chart is made up of a series of vertical lines that represent each data point. This vertical line represents the high and low for the trading period, along with the closing price. The close and open are represented on the vertical line by a horizontal dash. The opening price on a bar chart is illustrated by the dash that is located on the left side of the vertical bar. Conversely, the close is represented by the dash on the right. Generally, if the left dash (open) is lower than the right dash (close) then the bar will be shaded black, representing an up period for the stock, which means it has gained value. A bar that is colored red signals that the stock has gone down in value over that period. When this is the case, the dash on the right (close) is lower than the dash on the left.
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c) Candlestick Charts The candlestick chart is similar to a bar chart, but it differs in the way that it is visually constructed. Similar to the bar chart, the candlestick also has a thin vertical line showing the period's trading range. The difference comes in the formation of a wide bar on the vertical line, which illustrates the difference between the open and close. And, like bar charts, candlesticks also rely heavily on the use of colors to explain what has happened during the trading period. A major problem with the candlestick color configuration, however, is that different sites use different standards; therefore, it is important to understand the candlestick configuration used at the chart site you are working with. There are two color constructs for days up and one for days that the price falls. When the price of the stock is up and closes above the opening trade, the candlestick will usually be white or clear. If the stock has traded down for the period, then the candlestick will usually be red or black, depending on the site. If the stock's price has closed above the previous days close but below the day's open, the candlestick will be black or filled with the color that is used to indicate an up day
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12. Chart Patterns There are two types of patterns within this area of technical analysis, reversal and continuation. A reversal pattern signals that a prior trend will reverse upon completion of the pattern. A continuation pattern, on the other hand, signals that a trend will continue once the pattern is complete. These patterns can be found over charts of any timeframe. In this section, we will review some of the more popular chart patterns. a) Head and Shoulders This is one of the most popular and reliable chart patterns in technical analysis. Head and shoulders is a reversal chart pattern that when formed, signals that the security is likely to move against the previous trend. As you can see in Figure 1, there are two versions of the head and shoulders chart pattern. Head and shoulders top (shown on the left) is a chart pattern that is formed at the high of an upward movement and signals that the upward trend is about to end. Head and shoulders bottom, also known as inverse head and shoulders (shown on the right) is the lesser known of the two, but is used to signal a reversal in a downtrend.
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Both of these head and shoulders patterns are similar in that there are four main parts: two shoulders, a head and a neckline. Also, each individual head and shoulder is comprised of a high and a low. For example, in the head and shoulders top image shown on the left side in Figure 1, the left shoulder is made up of a high followed by a low. In this pattern, the neckline is a level of support or resistance. Remember that an upward trend is a period of successive rising highs and rising lows. The head and shoulders chart pattern, therefore, illustrates a weakening in a trend by showing the deterioration in the successive movements of the highs and lows. b) Cup and Handle A cup and handle chart is a bullish continuation pattern in which the upward trend has paused but will continue in an upward direction once the pattern is confirmed.As you can see in Figure this price pattern forms what looks like a cup, which is preceded by an upward trend. The handle follows the cup formation and is formed by a generally downward/sideways movement in the security's price. Once the price movement pushes above the resistance lines formed in the handle, the upward trend can continue. There is a wide ranging time frame for this type of pattern, with the span ranging from several months to more than a year.
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c) Double Tops and Bottoms This chart pattern is another well-known pattern that signals a trend reversal - it is considered to be one of the most reliable and is commonly used. These patterns are formed after a sustained trend and signal to chartists that the trend is about to reverse. The pattern is created when a price movement tests support or resistance levels twice and is unable to break through. This pattern is often used to signal intermediate and longterm trend reversals. In the case of the double top pattern in Figure the price movement has twice tried to move above a certain price level. After two unsuccessful attempts at pushing the price higher, the trend reverses and the price heads lower. In the case of a double bottom (shown on the right), the price movement has tried to go lower twice, but has found support each time. After the second bounce off of the support, the security enters a new trend and heads upward.
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d) Triangles Triangles are some of the most well-known chart patterns used in technical analysis. The three types of triangles, which vary in construct and implication, are the symmetrical triangle, ascending and descending triangle. These chart patterns are considered to last anywhere from a couple of weeks to several months.
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The symmetrical triangle in Figur is a pattern in which two trend lines converge toward each other. This pattern is neutral in that a breakout to the upside or downside is a confirmation of a trend in that direction. In an ascending triangle, the upper trend line is flat, while the bottom trend line is upward sloping. This is generally thought of as a bullish pattern in which chartists look for an upside breakout. In a descending triangle, the lower trend line is flat and the upper trend line is descending. This is generally seen as a bearish pattern where chartists look for a downside breakout.
e) Flag and Pennant These two short-term chart patterns are continuation patterns that are formed when there
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is a sharp price movement followed by a generally sideways price movement. This pattern is then completed upon another sharp price movement in the same direction as the move that started the trend. The patterns are generally thought to last from one to three weeks. As you can see in Figure there is little difference between a pennant and a flag. The main difference between these price movements can be seen in the middle section of the chart pattern. In a pennant, the middle section is characterized by converging trend lines, much like what is seen in a symmetrical triangle. The middle section on the flag pattern, on the other hand, shows a channel pattern, with no convergence between the trend lines. In both cases, the trend is expected to continue when the price moves above the upper trend line
f)Wedge The wedge chart pattern can be either a continuation or reversal pattern. It is similar to a symmetrical triangle except that the wedge pattern slants in an upward or downward direction, while the symmetrical triangle generally shows a sideways movement. The other difference is that wedges tend to form over longer periods, usually between three and six months. The fact that wedges are classified as both continuation and reversal patterns can make reading signals confusing. However, at the most basic level, a falling wedge is bullish and a rising wedge is bearish. In Figure 6, we have a falling wedge in which two trend lines are converging in a downward direction. If the price was to rise above the upper trend line, it would form a continuation pattern, while a move below the lower trend line would signal a reversal pattern.
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g) Gaps A gap in a chart is an empty space between a trading period and the following trading period. This occurs when there is a large difference in prices between two sequential trading periods. For example, if the trading range in one period is between $25 and $30 and the next trading period opens at $40, there will be a large gap on the chart between these two periods. Gap price movements can be found on bar charts and candlestick charts but will not be found on point and figure or basic line charts. Gaps generally show that something of significance has happened in the security, such as a better-thanexpected earnings announcement. There are three main types of gaps, breakaway, runaway (measuring) and exhaustion. A breakaway gap forms at the start of a trend, a runaway gap forms during the middle of a trend and an exhaustion gap forms near the end of a trend. h) Triple Tops and Bottoms Triple tops and triple bottoms are another type of reversal chart pattern in chart analysis. These are not as prevalent in charts as head and shoulders and double tops and bottoms, but they act in a similar fashion. These two chart patterns are formed when the price movement tests a level of support or resistance three times and is unable to break through; this signals a reversal of the prior trend.
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Confusion can form with triple tops and bottoms during the formation of the pattern because they can look similar to other chart patterns. After the first two support/resistance tests are formed in the price movement, the pattern will look like a double top or bottom, which could lead a chartist to enter a reversal position too soon. i) Rounding Bottom A rounding bottom, also referred to as a saucer bottom, is a long-term reversal pattern that signals a shift from a downward trend to an upward trend. This pattern is traditionally thought to last anywhere from several months to several years. A rounding bottom chart pattern looks similar to a cup and handle pattern but without the handle. The long-term nature of this pattern and the lack of a confirmation trigger, such as the handle in the cup and handle, makes it a difficult pattern to trade.
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13. Evaluation of Technical Analysis Technical analysis appears to be a high controversial approach to security analysis. The analysts offer arguments as well as disagreements for this alternative of security analysis. Among them few are as follows: 13.1 Arguments 1. Under the influence of crowd psychology, trends persist for quite some time. Tools of technical analysis that help in identifying these trends early are helpful in investment decision-making. 2. Shifts in demand and supply are gradual rather than instantaneous. Technical analysis helps in detecting these shifts rather early and hence provides clues to future price movements, 3. Fundamental information about a company is absorbed and assimilated by the market over the period of time. Hence, the price movement tends to continue in more or less in the same direction till the information is fully assimilated in the market. 4. Charts provide a picture of what has happened in the past and hence give a sense of volatility that can be expected from the stock. Further, the information on trading volume, which is ordinarily provided at the bottom of a bar chart, gives a fair idea of the extent of public interest in the stock.
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13.2 Disagreements 1. Most technical analysts are not able to offer convincing explanations for the tools employed by them. 2. Empirical evidence in support of the random walk hypothesis casts its shadow over the usefulness of technical analysis. 3. By the time an uptrend or downtrend may have been signaled by the technical analysis, may already have taken place. 4. Ultimately, technical analysis must be a self-defeating proposition. As more and more people employ it, the value of such analysis tends to decline. 5. There is a great deal of ambiguity in the identification of configurations as well as trend lines and channels on the charts. The same chart can be interpreted differently. Despite these limitations, technical analysis is very popular. It is only in the rational, efficient and well ordered market where technical analysis has no use. But given the imperfections, inefficiencies and irrationalities that characterize real markets, technical analysis can be helpful. Hence, it can be concluded that technical analysis may be used, albeit to a limited extent, in conjunction with fundamental analysis to guide investment decision-making, as it is supplementary to fundamental analysis rather than substitute for it.
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(5) FACTS & FINDINGS CASE STUDY ON TECHNICAL ANLYSIS OF INFOSYS TECHNOLOGY
Introduction Of Infosys:
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Infosys Technologies Ltd was started in 1981 by seven people with $250. Today, the company boasts of revenues of over $ 4 billion and 94,379 employees. Under the leadership of N R Narayana Murthy, the company has become a global brand. The company is now headed by Kris Gopalakrishnan. The income for the quarter ended June 30 2008 was Rs 4,854 crore (Rs 48.54 billion). The net profit stood at Rs 1,302 crore (Rs 13.02 billion). Forbes magazine named Infosys in its list of Global High Performers. Waters magazine rated Infosys as the Best Outsourcing Partner. The Banker magazine conferred two Banker Technology Awards on Infosys to acclaim its work in wholesale and capital markets in two categories - Payments and Treasury Services, and Offshoring and Outsourcing. The International Association of Outsourcing Professionals (IAOP) ranked Infosys at No. 3 in its '2008 Global Outsourcing 100'. Company Profile: Sector Market Capitalization (Rs.Cr.) Face Value 52 weeks High 52 weeks Low NSE Volume I.T. Software Rs139,700 cr Rs. 5 Rs. 3494 Rs.2169 13.7 lac
A) Financials of Infosys
(In Rs. Cr.)*
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Income Statement Net Sales Other Income PBDIT Net Profit
(Jun '11) Quarterly 6905.00 415.00 2489.00 1654.00
(Mar '11) Annual 25385.00 1147.00 9561.00 6443.00
Balance Sheet Total Share Capital Net Worth Total Debt Net Block Investments Net Current Assets Total Assets
Mar11 287.00 24501.00 0.00 4056.00 1325.00 18621.00 24501.00
B) Historic Prices of Infosys Year 1 Open price High price Low price Last price Volume price 3000.00 3048.00 2942.25 3040.65 85941
(Data on 26th Sept.2011)* Current 2342.55 2366.00 2302.00 2355.15 144399 % Gain/loss -21.91 -22.37 -21.65 -22.54 68.02
High/Low prices for the period For the year 2009 Particulars Open High Low Close Price 1116.00 2614.00 1111.75 2601.10 Traded Quantity 932024 1156906 932024 1156906 Turnover in Lacs 10550.64 30078.88 10550.64 30078.88 Dates 01-Jan-2009 31-Dec-2009 01-Jan-2009 31-Dec-2009
Total Traded Quantity for this period Symbol Total Traded Quantity
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Turnover in Lacs
INFOSYSTCH For the year 2010 Particulars Open High Low Close Price 2610.00 3454.00 2329.00 3442.75
374594208
6516071.04
Traded Quantity 508658 1123961 1693109 732466
Turnover in Lacs 13320.21 38650.67 39921.67 25143.40
Dates 04-Jan-2010 30-Dec-2010 05-Feb-2010 31-Dec-2010
Total Traded Quantity for this period Symbol Total Traded Quantity INFOSYSTCH 245506257 For the year 2011 Particulars Open High Low Close Price 3444.00 3499.00 2161.50 2355.00 Traded Quantity 631068 1014911 3356719 818036 Turnover in Lacs 21760.74 35331.47 73681.67 19108.26
Turnover in Lacs 6891620.16
Dates 03-Jan-2011 04-Jan-2011 25-Aug-2011 26-Sep-2011
Total Traded Quantity for this period Symbol Total Traded Quantity INFY 232144002
Turnover in Lacs 6576627.30
Technical Charts NSE Chart from 1-09-2008 to 26-09-2011
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Market Advances & Decline Chart for last 3 years Month Advances Declines Advance/Decline Ratio Aug580 889 0.65
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2011 Jul2011 Jun2011 May2011 Apr2011 Mar2011 Feb2011 Jan2011 Dec2010 Nov2010 Oct2010 Sep2010 Aug2010 Jul2010 Jun2010 May2010 Apr2010 Mar2010 Feb2010 Jan2010 Dec2009 Nov2009 Oct65
689 648 610 729 715 611 526 727 604 642 693 624 645 693 559 698 646 591 598 673 671 518
756 1131 819 720 739 820 901 695 823 765 697 755 710 648 779 640 680 715 725 614 607 751
0.91 0.57 0.74 1.01 0.97 0.74 0.58 1.05 0.73 0.84 1.00 0.83 0.91 1.07 0.72 1.09 0.95 0.83 0.83 1.10 1.10 0.69
2009 Sep2009 Aug2009 Jul2009 Jun2009 May2009 Apr2009 Mar2009 Feb2009 Jan2009
632 667 650 576 775 732 604 502 533
630 582 588 675 431 495 588 676 663
1.00 1.15 1.11 0.85 1.80 1.48 1.03 0.74 0.80
Technical charts of Infosys: Period from 24-09-2010 to 26-09-2011(1 year)
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Period from 25-03-2011 to 28-09-2011(6 months)
Period from 24-06-2011 to 26-09-2011(3 month)
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Date
High Price
Low Price
Closed Price
Total Traded
Quantity Turnover(in Lacs) 19,108.26
26 Sept 2011
2,365.00
2,301.10
2,355.00
8,18,036
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(6) DATA ANALYSIS & INTERPRETTION CONCLUSION
Key Financial Consolidated

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Particular Net Sales Net Profit EPS
2010 21,140.00 5,803.00 101.13
2011 25,385.00 6,443.00 112.22
%change 20.08 11.02 10.96
Performance Highlights: A net sale in 2011 is Rs. 25,385.00 compare to last year it changes 20.08%. Net profit in 2011 is 6,443.00 which changed by 11.02%. EPS is 112.22 in 2011 Breadth of market indicates that, if it moves upward then it is bullish & if it moves downwards then it is bearish. In 2009 market almost move upwards which indicate bullish market, but in 2010 & 2011 it look bullish. Percentage change in net profit, net sales & EPS are positive which indicate status of company is sufficient. From historic prices of Infosys, Open price close price, highest & lowest price & volume of company indicates almost negative performance. With the company going through a transition phase of organisational restructuring coupled with it facing client specific issues, we expect Infosys growth trajectory to remain relatively weaker than TCS in the medium term. Nevertheless, we continue to remain positive on Infosys organic led growth model and industry leading margin profile. The companys premium priced offerings and non-linear solutions driven approach would provide long term sustenance to the business model. On the other hand, deployment of cash reserves in opportune inorganic initiatives would provide the much needed push to the revenue trajectory in the medium term. We expect Infosys earnings to grow at a compounded annual growth rate (CAGR) of 13% over FY2011-13; we downgrade our rating on the company from Buy to Hold with a reduced target price of Rs2,591. At our target price the stock would be valued at 17x FY2013 estimated earnings. Management interaction: Key highlights Impact of current macro uncertainty in the US and the euro zone The management has not experienced any budget cuts; however there have been instances of delays in decision making. Some clients are re-thinking their strategy on the back of the current volatile environment. The pricing environment remains stable; COLA increases in the last two quarters have been witnessed. The pricing remains stable. Benefit if any would be only from better utilisation in fixed price and a change in the mix. The current deals pipeline is looking stable. The management maintains a wait and watch for Europe (21.3% contribution) due to the sovereign debt crisis. It expects the US (64.2% contribution) to recover faster. In Europe the concerns remain on the banking sector. For Infosys, Europe contributes about 15% of the overall BFSI (35.4% contribution business).
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Industry verticals BFSI and manufacturing are seeing delays in decision making while the retail vertical remains stable. Telecom is slow for the company and it would likely remain so for the next two to three quarters. The company is investing in the wireless space but it would take time for the benefits to be seen. Regarding British Telecom (BT), the exposure has reduced. So the news of vendor restructuring would not have much of an impact. Recruitment plans The company added about 9,922 employees on a gross basis in Q1FY2012 and is likely to add about 12,000 employees in Q2FY2012. For FY2012, the management has earlier guided for an addition of approximately 45,000 employees, the balance of which is going to be added in H2FY2012. However, if there is drastic deterioration in the scenario, then there could be a delay in the additions. Currency movement The current rupee movement would have a mixed impact on the earnings. The rupee depreciation would lead to mark to market (MTM) losses on hedges but would have a positive impact on revenues and translation gains. However, there might be some negative impact owing to cross currency headwinds. Infosys has hedges for the next two quarters. At the end of June 2011 the total hedges stood at $745 million. Can we see a repeat of 2008-09? The clients are more prepared and resilient this time round than they were in the 2008-09 sub-prime crises. On Q2FY2012 Numbers are likely to be in line with the guidance; however there will be an impact of currency movements. The company has many levers to safeguard against fall in margins. Infosys targets an EBIT margin of 27-28%, though it was lower at 26.1% in Q1FY2012. The levers include utilisation and variable pay (accounts for 40-60% of total pay).
Bibliography
Internet: 1.www.investopedia.com
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2. www.nseindia.com 3.www.indiabulls.com 4.www.moneycontrol.com 5.www.wikipedia.com 6. www.google.com 7. www.mintlive.com 8. www.economistimes.com 9. www.rediff.com Books: 1. Security analysis & portfolio Management by Prasanna Chandra. 2. Financial Management by Prasanna Chandra. 3. Financial Management by Khan & Jain
Annexure:
Balance Sheet of Infosys
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------------------- in Rs. Cr. -------------------
Mar '11
Mar '10
Mar '09
12 mths Sources Of Funds Total Share Capital Equity Share Capital Share Application Money Preference Share Capital Reserves Revaluation Reserves Networth Secured Loans Unsecured Loans Total Debt Total Liabilities 287.00 287.00 0.00 0.00 24,214.00 0.00 24,501.00 0.00 0.00 0.00 24,501.00 Mar '11 12 mths Application Of Funds Gross Block Less: Accum. Depreciation Net Block Capital Work in Progress Investments Inventories Sundry Debtors Cash and Bank Balance Total Current Assets Loans and Advances Fixed Deposits Total CA, Loans & Advances Deffered Credit Current Liabilities Provisions Total CL & Provisions Net Current Assets Miscellaneous Expenses Total Assets Contingent Liabilities Book Value (Rs) 6,934.00 2,878.00 4,056.00 499.00 1,325.00 0.00 4,212.00 641.00 4,853.00 5,273.00 13,024.00 23,150.00 0.00 2,056.00 2,473.00 4,529.00 18,621.00 0.00 24,501.00 1,013.00 426.73
12 mths 287.00 287.00 0.00 0.00 21,749.00 0.00 22,036.00 0.00 0.00 0.00 22,036.00 Mar '10 12 mths 6,357.00 2,578.00 3,779.00 409.00 4,636.00 0.00 3,244.00 929.00 4,173.00 4,201.00 8,868.00 17,242.00 0.00 1,995.00 2,035.00 4,030.00 13,212.00 0.00 22,036.00 295.00 384.02
12 mths 286.00 286.00 0.00 0.00 17,523.00 0.00 17,809.00 0.00 0.00 0.00 17,809.00 Mar '09 12 mths 5,986.00 2,187.00 3,799.00 615.00 1,005.00 0.00 3,390.00 805.00 4,195.00 3,303.00 8,234.00 15,732.00 0.00 1,544.00 1,798.00 3,342.00 12,390.00 0.00 17,809.00 347.00 310.90
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Profit & Loss account of Infosys
------------------- in Rs. Cr. -------------------
Mar '11
Mar '10
Mar '09
12 mths
12 mths
12 mths
Income Sales Turnover Excise Duty Net Sales Other Income Stock Adjustments Total Income Expenditure Raw Materials Power & Fuel Cost Employee Cost Other Manufacturing Expenses Selling and Admin Expenses Miscellaneous Expenses Preoperative Exp Capitalised Total Expenses 23.00 0.00 12,464.00 2,613.00 1,834.00 36.00 0.00 16,970.00 Mar '11 22.00 0.00 10,356.00 1,993.00 992.00 415.00 0.00 13,778.00 Mar '10 20.00 125.00 9,975.00 1,697.00 1,367.00 172.00 0.00 13,356.00 Mar '09 25,385.00 0.00 25,385.00 1,147.00 0.00 26,532.00 21,140.00 0.00 21,140.00 967.00 0.00 22,107.00 20,264.00 0.00 20,264.00 502.00 0.00 20,766.00
12 mths
12 mths
12 mths
Operating Profit PBDIT

74
8,415.00 9,562.00
7,362.00 8,329.00
6,908.00 7,410.00
Interest PBDT Depreciation Other Written Off Profit Before Tax Extra-ordinary items PBT (Post Extra-ord Items) Tax Reported Net Profit Total Value Addition Preference Dividend Equity Dividend Corporate Dividend Tax Per share data (annualised) Shares in issue (lakhs) Earning Per Share (Rs) Equity Dividend (%) Book Value (Rs)
1.00 9,561.00 740.00 0.00 8,821.00 0.00 8,821.00 2,378.00 6,443.00 16,947.00 0.00 3,445.00 568.00 5,741.52 112.22 1,200.00 426.73
2.00 8,327.00 807.00 0.00 7,520.00 0.00 7,520.00 1,717.00 5,803.00 13,756.00 0.00 1,434.00 240.00 5,738.25 101.13 500.00 384.02
2.00 7,408.00 694.00 0.00 6,714.00 -1.00 6,713.00 895.00 5,819.00 13,336.00 0.00 1,345.00 228.00 5,728.30 101.58 470.00 310.90
Cash Flow of Infosys
------------------- in Rs. Cr. ------------------Mar '11 12 mths Mar '10 12 mths 7472.00 5876.00 -3314.00 -1486.00 1008.00 10289.00 Mar '09 12 mths 6714.00 5152.00 -195.00 -2430.00 2600.00 7689.00
Net Profit Before Tax Net Cash From Operating Activities Net Cash (used in)/from Investing Activities Net Cash (used in)/from Financing Activities Net (decrease)/increase In Cash and Cash Equivalents Opening Cash & Cash Equivalents
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8821.00 4270.00 3235.00 -3642.00 3868.00 11297.00
Closing Cash & Cash Equivalents
15165.00
11297.00
10289.00
Key Financial Ratios of Infosys
------------------- in Rs. Cr. -------------------
Mar '11
Mar '10
Mar '09
Investment Valuation Ratios Face Value

76
5.00
5.00
5.00
Dividend Per Share Operating Profit Per Share (Rs) Net Operating Profit Per Share (Rs) Free Reserves Per Share (Rs) Bonus in Equity Capital Profitability Ratios Operating Profit Margin(%) Profit Before Interest And Tax Margin(%) Gross Profit Margin(%) Cash Profit Margin(%) Adjusted Cash Margin(%) Net Profit Margin(%) Adjusted Net Profit Margin(%) Return On Capital Employed(%) Return On Net Worth(%) Adjusted Return on Net Worth(%) Return on Assets Excluding Revaluations Return on Assets Including Revaluations Return on Long Term Funds(%) Liquidity And Solvency Ratios Current Ratio Quick Ratio Debt Equity Ratio Long Term Debt Equity Ratio Debt Coverage Ratios Interest Cover Total Debt to Owners Fund Financial Charges Coverage Ratio
77
60.00 146.56 442.13 420.79 93.26 ----26.96 24.31 ---26.13 426.73 426.73 35.84 5.11 5.02 ----9,523.00
25.00 128.30 368.40 378.08 93.26 ----29.59 26.36 ---25.89 384.02 384.02 33.69 4.28 4.20 ----4,116.50
23.50 120.59 353.75 305.80 93.58 ----32.57 27.52 ---34.76 310.90 310.90 39.80 4.71 4.67 ----3,891.00
Financial Charges Coverage Ratio Post Tax Management Efficiency Ratios Inventory Turnover Ratio Debtors Turnover Ratio Investments Turnover Ratio Fixed Assets Turnover Ratio Total Assets Turnover Ratio Asset Turnover Ratio
7,184.00 -6.81 ---3.67
3,306.00 -6.37 ---3.33
3,257.50 -6.25 ---3.39
Average Raw Material Holding Average Finished Goods Held Number of Days In Working Capital Profit & Loss Account Ratios Material Cost Composition Imported Composition of Raw Materials Consumed Selling Distribution Cost Composition Expenses as Composition of Total Sales Cash Flow Indicator Ratios Dividend Payout Ratio Net Profit Dividend Payout Ratio Cash Profit Earning Retention Ratio Cash Earning Retention Ratio AdjustedCash Flow Times
--264.08 0.09 -0.12 94.38 62.28 55.86 37.34 43.83 --
--224.99 0.10 -0.41 99.69 28.84 25.32 70.67 74.31 --
--220.11 0.09 -0.40 97.88 27.03 24.15 74.60 77.16 --
Mar '11
Mar '10
Mar '09
Earnings Per Share Book Value

78
112.22 426.73
101.13 384.02
101.58 310.90
79

5 Investment Analysis of Shares

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Investment analysis of equity shares

ABHINAV SURYAKANT DESHMUKH Under the guidance of PROF. CHANDNI BHATNAGAR

In partial fulfillment for the requirements of the

At SARASWATI COLLEGE OF ENGINEERING

Investment analysis of equity shares

Investment analysis of equity shares

Investment analysis of equity shares

Investment analysis of equity shares

Investment analysis of equity shares

Investment analysis of equity shares

(1) INTRODUCTION OF THE BROKING INDUSTRY.

Investment analysis of equity shares

Motilala Oswal Securities (www.motolaloswal.com)

HDFC Securities (www.hdfcsec.com)

Investment analysis of equity shares

(2) INTODUCTION TO THE SHAREKHAN LTD.

Investment analysis of equity shares

Investment analysis of equity shares

(3) INRODUCTION TO THE PROJECT INVESTMENT ANALYSIS OF SHARES

Investment analysis of equity shares 1.1 : Title of Project

Investment analysis of Shares with reference to Share khan Ltd.

& various books.

Investment analysis of equity shares

1.5: Limitations of study

Investment analysis of equity shares

(4) LITRETURE REVIEW INRODUCTION TO THE INVESTMENT

Investment analysis of equity shares

Investment analysis of equity shares

1.2 Security analysis

Investment analysis of equity shares

1.4 Fundamental Analysis

Investment analysis of equity shares

Investment analysis of equity shares

Investment analysis of equity shares

Investment analysis of equity shares

Investment analysis of equity shares

Figure-1 Components of Current Composite Indexes 1. Composite Index of Leading Indicators

Investment analysis of equity shares

Investment analysis of equity shares

Investment analysis of equity shares

Investment analysis of equity shares

Investment analysis of equity shares

Investment analysis of equity shares

Investment analysis of equity shares

Investment analysis of equity shares

Investment analysis of equity shares

Investment analysis of equity shares

7) COMPANY ANALYSIS: THE STUDY OF FINANCIALS STATEMENTS

Investment analysis of equity shares

Investment analysis of equity shares

Investment analysis of equity shares

Investment analysis of equity shares

Investment analysis of equity shares

Investment analysis of equity shares

Investment analysis of equity shares

Investment analysis of equity shares

Investment analysis of equity shares

Investment analysis of equity shares

Investment analysis of equity shares

Investment analysis of equity shares

Investment analysis of equity shares

(All figures are assumed)

Investment analysis of equity shares