finance captial market

DISSERTATION PROJECT REPORT

ON

“INDIAN CAPITAL MARKET & ITS EMPIRICAL STUDY”

Under the guidance of Submitted by:Mrs. Neha Zaidi Rakesh kumar Assistance professor (Enorllment No-1303101116) School of Business Galgotias university BBA 5th Semester

Submitted for

partial fulfillment of the award of degree of (BBA)

From

Date of Submission: 14th April, 2016

1


ON


ByRakesh Kumar

(Enrollment No: 1303101116)

A report submitted in partial fulfillment of the requirements of Bachelor of Business Administrion

2


ON


Under the guidance of submitted by:

Mrs Neha Zaidi Rakesh Kumar Assistance professor (Enrollment No-1303101116 School of Business BBA 5th Semester Galgotias university

Submitted for

partial fulfillment of the award of degree of (BBA)

From

Date of Submission: 14th April, 2016

3

CERTIFICATE

This is to certify that Mr Rakesh kumar has undertaken this project work entitled “HR

OUTSOURCING IN INDIA” as Dissertation Project Report for the partial fulfillment of the award of Bachelor of Business Administration degree for Galgotias University Greater Noida (utterpradesh)

As per best of my knowledge this Dissertation project work is an original piece of work and has not been submitted or published elsewhere.

I wish him/ her all the best for his bright future ahead.

4

DECLARATION

I, Rakesh kumar, hereby declare that this survey project report entitled “INDIAN

CAPITAL MARKET & ITS EMPIRICAL STUDY” has been prepared by me

on the basis of survey done during the course of my fifth semester of BBA

programme under the supervision of Mrs Neha zaidi , Assistant Professor,

Department of Business administration, GSOB, Greater Noida.

This survey project report is my bonafide work and has not been submitted

in any form to any University or Institute for the award of any degree prior to the

under mentioned date. I bear the entire responsibility of submission of this project

report.

Rakesh kumar

BBA 5th SEMESTER

Department of business administration

GSOB, Greater noida

5

ACKNOWLEDGEMENT

Completing the work assigned by a single hand is not always possible. The same was

here and this is an opportunity to thank all of them who directly or indirectly share their

efforts to complete task given to me.

Many thanks to the God, who has sent me on this earth and by mercy of him, I would

be able to accomplish this research

I express my deep sense of gratitude and regards to Mrs. Neha zaidi (Assistant

professor, Dept. of Business Administration, GSOB ) under whose guidance I

completed this project, I am thankful to his valuable guidance, gentle encouragement

and pains he took in guiding me throughout the study.

I would also like to thank the person who were a part of my survey and given their

valuable

Suggestions and advises.

I would like to express my heartfelt thank to my friends and family for making a

pleasant environment and for their encouragement and support throughout the duration

of research project which help me to complete my project.

Rakesh Kumar

6

CONTENTS

PREFACE………..……………………………………………….

INTRODUCTION…………………………………………………

OBJECTIVES OF THE STUDY.........................................................

SCOPE OF THE STUDY....................................................................

LITERATURE REVIEW....................................................................

IMPORTANCE OF THE STUDY.....................................................

RESEARCH METHODOLOGY.......................................................

ANALYSIS & FINDINGS.................................................................

THEORITICAL TOOLS FOR ANALYSIS......................................

RECOMMENDATIONS....................................................................

CONCLUSIONS................................................................................

LIMITATIONS..................................................................................

BIBLIOGRAPHY..............................................................................

PREFACE

7

The Project Study “Price Behavior of mid-cap stocks in the Indian Capital Market”

aims to analyze the mid-cap stocks market of India with special emphasis on pricing, to

study and understand the trading mechanism of stocks and to understand the mid-cap

stock price-behavior and find reasons for the recent mid-cap rally.

Midcap stocks are once again back to where they belong, in the limelight. Experts give

their top picks within the space and also explain the trading strategy one should adopt

in the current market scenario.

The inclination towards conducting this study was mainly because of the sudden

immense rise in the demand for mid-cap shares. It not only showed the increasing risk

– bearing capacity of investors but also reflected the interest of Foreign Institutional

Investors in our economy as they were one of the major buyers of these shares.

The understanding of the price behavior of an upcoming segment that has the future

potential to attract large number of investments contributing to a fast -paced

development.

In the initial portion of the report I have tried to understand the concept of mid-cap

stocks, collected different models through which the price determination takes place,

the evolution of the mid-cap segment, the CNX Midcap nifty index determination.

The later portion is more related to the application of the concepts in real life that is

acquiring information about the segment’s price behavior from professionals, what are

the tools they utilize in determining the prices while trading in the market.

This study is being conducted with the help of secondary and primary data. Secondary

data being collected from various books, journals, and websites and different articled

8

published in business newspapers and magazines. Primary data is being collected from

a sample size of 10 stock brokers in and around Delhi with the help of a structured and

undisguised questionnaire along with personal interview the study is being descriptive

in nature.

These stocks are highly risky and speculative and in a bullish phase though everyone

mints money depending on the stocks invested in, however the penny stocks and small

investors mostly suffer losses in case of a Bearish Phase. Also investment in this

particular segment requires a lot of in-depth knowledge about the segment, the

segment’s price behavior and especially a lot of experience which I could gather from

my personal interaction with the professionals.










development.

9












in nature.







10

Chapter 1

INTRODUCTION

As the research is about the study of the price – behavior of mid – cap stocks it would

revolve around the factors that affect the prices of these stocks and the reasons

11

behind the increase in the trade of the mid – cap stocks. Because of this it

becomes important for us to understand the trading mechanism of the mid – cap

stocks.

To recap, let’s remind ourselves of the stock market carnage of May 17, after which the

investors‘wealth in listed companies has swollen by close to Rs. 700,000 crore. During

the same period, the BSE 30-share sensex rallied smartly by around 2000 points, or

44%, to reach the record high of 6498 on Friday.

A group-wise trend analysis on the BSE shows that a total of 20.3 crore shares were

traded in the B1 group. This is the highest ever volume attracted by this group in the

history of the Indian stock market. The B1-group houses medium and small companies.

A total of 687 companies were traded in the group, including 367 gainers and 308

losers.

The B1-group shares accounted for a significant 55% of the total volume of 36.8 crore

shares traded on the exchange. In terms of turnover (value of shares traded), they

contributed Rs. 755 crore, or 34%, of the total turnover of Rs. 2,239 crore recorded on

Friday.

Since the previous Bull Run in January ’04, there has been a significant improvement

in the activity of mid-cap shares, thanks to their emergence as big favorites among

investors, including foreign institutional investors.

12

It was on January 9, ’04 when the Sensex had, for the first time, hit its then historic

high of 6250 during intra-day trading. On that day, the B1-group shares contributed

35% of the volumes and 10% of the turnover of the BSE.

Also the current market rally belongs to the old economy sectors of textile, trading,

logistics/shipping and manufacturing, as much as computer software and hardware.

Some mid-cap companies in these sectors have recorded a higher P/E, riding the fast-

paced capacity build-up. A few companies have posted sky-high P/Es on the back of

turnaround in their financial performances and the upturn in their respective markets.

And with the Sensex seemingly poised to create history by crossing the 20,000-mark,

there seems to be a gradual change in the composition of the top performing industries

comprising of a substantial number of mid – caps.










13





development.












in nature.





14



15

Chapter 2

OBJECTIVES

16

OBJECTIVE:

1. To understand the mid – cap stocks price behavior and the underlying reasons

for the mid – cap rally.

2. To study and understand the stock broker’s viewpoint of mid – cap stocks price

behavior.

3. To study the middle – capital stocks market of India with special emphasis on

pricing.

INVESTING in mid-cap stocks in a volatile market is always a perilous exercise. After

a dream run in 2007, the mid-cap stocks got hammered in the recent choppy market.

Nothing illustrates this better than the decline in the CNX Mid-Cap 200 Index, which

fell 12.4 per cent in the January-March quarter while the S&P CNX Nifty fell just 6.3

per cent.

Against this must be seen the fact that the mid-cap stocks appreciated 43.2 per cent in

October-December 2007.

Not even the savvier institutional investors have escaped the ill effects of a downturn in

the stock market for these stocks.

Mutual funds that had invested heavily in mid-cap stocks too suffered during January-

March 2007. An analysis of such funds has shown that:

17

Funds such as Franklin Prima and Sundaram Select Mid-Cap, which invested

exclusively in mid-cap stocks, sank to the bottom of the "returns" pile, their NAVs (net

asset values) plunging 13-16 per cent.

Diversified equity funds which invested substantially in mid-caps — Taurus

Discovery and PruICICI Tax Plan.

MID CAP, SMALL STOCK BLEED THE MOST, 2008

The stock prices of mid-cap and small-cap companies have fallen sharply on Thursday,

following the poor figures of industrial production for January 2008 on Wednesday,

underlining the impending slowdown in the manufacturing sector.

18

http://in.finance.yahoo.com/q?s=%5Ecrsmid&d=c&t=5d

However, market players feel that the performances of companies will not be as bad as

being made out from the industrial production figures. They hope that the consumption

will pick up soon and the companies' profitability would not be affected.

In the last two months since first week of January 2008, mid-cap index of Bombay

stock exchange (BSE) has fallen by 35% and small cap by 42%. In this period the

benchmark Sensex has fallen by 27%. But, in the last two weeks, fall in case of capital

goods manufacturing companies is the maximum. In March 2008 so far, the index for

the capital goods companies has fallen by 20.50%.

It seems that the market had the idea of a slowdown in the capital goods sector.

Industrial production figure for January showed that the production in capital goods

grew by only 2.1% as against over 16% in December 2007.

Many of the madcap companies like Amteck Auto, Ashahi India, Motilal Oswal and

Aventis Pharma are quoting at their 52-weeks low. Some well known companies like

Adlabs Films and Dish TV are quoting at around one third of the values at their peak in

January 2008. Educomp Solution also lost substantial valuation from its peak. The

company fell by 11.48% to close at Rs 3,238 on Thursday. It was quoting at Rs 5,650

on January 17. The real estate companies are the worst hit by the current round of

bearish trend. The realty companies' index of BSE fell by 46% from its peak. All the

companies have lost their valuations in January this year.

19

Such a fall has made many stocks attractive. However, as the institutional buyers are

absent from the market, because of turmoil in the US market due to sub-prime loan

crisis, experts feel that one should wait till the stocks bottom out. Even the mutual

funds are sitting on cash, which they have recently raised from market through public-

offerings.

On an average, mid-cap companies are quoting at around 16 times of their past

earnings. Small caps' price to earning ratio has fallen to 12.72 at present.

The market's climb to all-time high levels in recent past is partly because of the mid-

cap segment. Even the top-performing equity diversified funds have been growing on

mid-cap stocks to achieve their returns. Several funds have a mid-cap mandate. Even

otherwise, funds have preferred the higher risk-higher return formula in mid-cap stocks

in the past year. "Equity funds have gained tremendously from their exposure to mid-

cap stocks, which have done much better than large-caps in the past year or so," notes

Adenwala.

For example, the top-performing SBI Magnum Global Fund had a 63.54 per cent

exposure to the CNX Midcap 200 Index as of September, 2007. Other big gainers like

Tata Growth Fund (55.97 per cent), Reliance Growth (52.9 per cent), Alliance Equity

Fund (48.80 per cent) and Franklin India Prima Fund (68.72 per cent) also followed

suit.

20

http://timesofindia.indiatimes.com/Business/Mid-cap_small_stocks_bleed_most/rssarticleshow/2863588.cms


But the high exposure to mid-caps has not been without reason. Fund managers seem to

have realized early during the bull rally that the mid-cap segment is where the big gains

are going to come from. With most large-caps already running high and considering the

re-rating potential of many stocks in the midcap segment, their choice was but natural.

The benchmark index for the mid-cap segment, the CNX Midcap 200 Index was the

best performer among broader indices in the past year. The index gave a return of

128.60 per cent for the year ended September, 2007, much better than the 90.01

per cent managed by the Sensex and the 75.49 per cent by the Nifty.

In fact, the CNX Midcap 200 Index was the second best of all the indices (including

sectoral indices) behind the BSE Consumer Durable Index (182.20 per cent) for the

year. The former is in fact the best performing index for the past two-year period with

returns of 92.40 per cent.

Many mid-cap funds have assets as big as large-cap schemes. But liquidity in mid-caps

is only about 16-17 per cent of that in large-caps

The good run in the mid-cap segment has also given rise to a spate of new fund

launches in the segment. Tata Mutual Fund was the latest to launch a mid-cap fund,

while it was preceded in the previous months by new funds such as Kotak Midcap, SBI

Magnum Midcap, Sahara Midcap, Cholas Midcap, Sundaram SMILE, HSBC Midcap

and ING Vysya Midcap.

However, if recent trends are to be believed, the mid-cap mania seems to be coming to

an end - to an extent, at least. Fund managers are decreasing their exposure to the mid-

cap segment, keeping in mind rising valuations and lack of liquidity in many counters.

21

The CNX Midcap 200 Index has a P/E in the mid-20s compared to 15 for the Sensex.

This means that fund managers will be paying a higher price, and keeping in mind the

lack of liquidity that is a big risk to take on their books.

The problem is that liquidity in mid-caps is only about 26-32 per cent of that in large-

caps. The total market capitalization of large-caps (say, above Rs 1,900 crore) is around

Rs 19, 82,620 crore, while that of mid-caps (say, Rs 2000-Rs 2,500 crore) is about Rs

3, 81,771 crore. And only half of it is free float. "It is difficult to say at this point how

this boom in mid-caps is going to pan out," says a fund manager. "Let me put it this

way. These days the size (assets under management) of mid-cap funds is getting larger

and many of them have AUMs as big as large-cap funds (for example, Franklin Prima

Fund, a predominantly mid-cap fund, had an AUM of Rs 1,617 crore, while Franklin's

large-cap fund, Franklin India Bluechip Fund held a size of Rs 1,609 crore). So when a

mid-cap fund of a size of Rs 45,000 crore wants to invest 25 per cent in a mid-cap stock

of Rs 8,500 market cap, it owns nearly 5 per cent of the stock itself. The higher

exposure will mean that the fund will also be exposed to higher liquidity risk if the

market goes down," says the fund manager. Keeping in mind this risk, the recently

launched HSBC Midcap Fund kept an upper limit of Rs 2700 crore to its AUMs.

Another fund which has taken the same route is Reliance Growth Fund, which is

planning to suspend sales in the fund for three months. According to the fund, the move

was to protect the interest of existing investors in the fund in view of the increasing

fund size and to facilitate better performance. The Reliance Growth Fund currently has

a corpus of Rs 3,582 crore. The suspension will take effect when the fund's corpus

reaches Rs 3,200 crore or September, 2008, whichever is earlier.

22

FUTURE SCENARIO

These companies may appear to be volatile. But if one looks at them over a long period

of time, the profits, which may accrue, are far higher than the risk taken. Further, in the

last few years, companies have been performing in a tough economic environment. Mid

cap companies have been improving their performance. The changes in the bottomline

haven’t been significant enough to attract enough attention. All of a sudden, we now

have a favorable environment. Thus more attention would be paid to these companies.

We therefore see a bright future for mid cap sector too.

Also there is a lot of foreign money coming in through this route. However, FIIs deals

with volumes. The mid-caps usually suffer on account of illiquidity. Large caps would

always be the preferred routes of investments of FIIs because these counters are liquid.

23

Chapter 3

SCOPE

24

SCOPE:

The scope of research is restricted to the analysis of price fluctuations of the shares of

mid – sized companies in the share market. The analysis of the market prices is being

done to understand the price behavior, a price trend which could possibly emerge. From

an investor’s point of view it is this trend and understanding of prices that generates

investment as future trends and forecasts are made on the basis of these price behaviors.

Therefore the scope of the project is limited to the price aspect of the mid cap stocks.





per cent.







25










26





















27





offerings.









Adenwala.





suit.

28

























29
























30

FUTURE SCENARIO











As the research is about the study of the price – behavior of mid – cap stocks it would

revolve around the factors that affect the prices of these stocks and the reasons

behind the increase in the trade of the mid – cap stocks. Because of this it

becomes important for us to understand the trading mechanism of the mid – cap

stocks.

To recap, let’s remind ourselves of the stock market carnage of May 17, after which the

investors‘wealth in listed companies has swollen by close to Rs. 700,000 crore. During

the same period, the BSE 30-share sensex rallied smartly by around 2000 points, or

44%, to reach the record high of 6498 on Friday.

31

A group-wise trend analysis on the BSE shows that a total of 20.3 crore shares were

traded in the B1 group. This is the highest ever volume attracted by this group in the

history of the Indian stock market. The B1-group houses medium and small companies.

A total of 687 companies were traded in the group, including 367 gainers and 308

losers.

The B1-group shares accounted for a significant 55% of the total volume of 36.8 crore

shares traded on the exchange. In terms of turnover (value of shares traded), they

contributed Rs. 755 crore, or 34%, of the total turnover of Rs. 2,239 crore recorded on

Friday.

Since the previous Bull Run in January ’04, there has been a significant improvement

in the activity of mid-cap shares, thanks to their emergence as big favorites among

investors, including foreign institutional investors.

It was on January 9, ’04 when the Sensex had, for the first time, hit its then historic

high of 6250 during intra-day trading. On that day, the B1-group shares contributed

35% of the volumes and 10% of the turnover of the BSE.

Also the current market rally belongs to the old economy sectors of textile, trading,

logistics/shipping and manufacturing, as much as computer software and hardware.

Some mid-cap companies in these sectors have recorded a higher P/E, riding the fast-

paced capacity build-up. A few companies have posted sky-high P/Es on the back of

turnaround in their financial performances and the upturn in their respective markets.

32

And with the Sensex seemingly poised to create history by crossing the 20,000-mark,

there seems to be a gradual change in the composition of the top performing industries

comprising of a substantial number of mid – caps.














development.




33









in nature.












34











offerings.









Adenwala.

35







suit.


















36
























37





















offerings.

38











Adenwala.





suit.







39























40


















41

Chapter 4

LITERATURE REVIEW

42

As the economy is in a progressive state the FII’s and the domestic investors , both

institutional and retail are showing the red silk to the bull generating a rise in the

market that can even touch the 10K – point. Not only the large equity stocks, but also

the mid – cap & the penny stocks are a substantial part of this growth.

The mid – caps unlike before have a large part to contribute in the current market

scenario. Therefore, the future scope of study is quite relevant.

1. THE MARKET INDEX

To begin with, let’s take a look at the CNX Midcap 200 and the concepts related to it. It

is the market index that records the daily movements, (ups and downs) in the prices of

mid – cap stocks.

The medium capitalized segment of the stock market is being increasingly perceived as

an attractive investment segment with high growth potential. The primary objective of

the CNX Midcap index is to capture the movement and be a benchmark of the midcap

segment of the market.

43

a. Method of Computation

CNX Midcap is computed using market capitalization weighted method, wherein the

level of the index reflects the total market value of all the stocks in the index relative to

a particular base period. The method also takes into account constituent changes in the

index and importantly corporate actions such as stock splits, rights, etc without

affecting the index value.

b. Base Date and Value

The CNX Midcap Index has a base date of Jan 1, 2003 and a base value of 1000.

c. Criteria for Selection of Constituent Stocks

The constituents and the criteria for the selection judge the effectiveness of the index.

Selection of the index set is based on the following criteria:

All the stocks, which constitute more than 5% market capitalization of the

universe (after sorting the securities in descending order of market capitalization), shall

44

be excluded in order to reduce the skewness in the weightages of the stocks in the

universe.

After step (a), the weightages of the remaining stocks in the universe is

determined again.

After step (b), the cumulative weightage is calculated.

After step (c) companies which form part of the cumulative percentage in

ascending order unto first 75 percent (i.e. upto 74.99 percent) of the revised universe

shall be ignored.

After, step (d), all the constituents of S&P CNX Nifty shall be ignored.

From the universe of companies remaining after step (e) i.e. 75th percent and

above, first 100 companies in terms of highest market capitalization, shall constitute the

CNX Midcap Index subject to fulfillment of the criteria mentioned below.

d. Trading Interest

All constituents of the CNX Midcap Index must have a minimum listing record of 6

months. In addition, all candidates for the Index are also evaluated for trading interest,

in terms of volumes and trading frequency.

e. Financial Performance

All companies in the CNX Midcap Index have a minimum track record of three years of

operations with a positive net worth.

45

f. Others

A company which comes out with a IPO will be eligible for inclusion in the index, if it

fulfills the normal eligibility criteria for the index for a 3 month period instead of a 6

month period.

2. THE MARKET REGULATOR

The Securities And Exchange Board of India (SEBI) oversees and monitors the

performance of the mid – cap stocks .Like others , even mid – cap companies have to

follow SEBI guidelines , rules and norms for operating in the stock market.

These Guidelines are then changed depending upon the dynamics of the economy.

Amendments are made in the acts for making them more effective from time to time.

SEBI covers various areas relevant for the finances, such as :

Bankers to an issue.

Buyback of Securities.

Collective Investment Scheme.

Corporate Governance.

Credit Rating Agency.

Regulator to an Issue.

Securities Appellate Tribunal.

Circulars and Clarifications on Relevant Provisions of Companies Act.

46

4. TREND OVER THE PAST FEW MONTHS

Date Open High Low ClosePrice/

Earnings

Price/

Bookvalue

Dividend

Yield

January

2008 9,822.29 10,245.81 6,542.71 7,766.62 24.26 5.23 0.75

February

2008 7,813.61 8,119.08 7,012.72 7,594.41 18.75 4.37 0.89

Source BSE

The case with the Indian mid-caps (defined by NSE as scrips with average six months

market capitalization ranging between Rs. 750 m and Rs. 7,500 m), which continue to

defy gravity despite little fundamental backing. While their larger peers have shown

some moderation in valuations, the 'positive sentiment' on mid-caps shows no signs of

abating.

Cliché as it may sound, but mid-caps have time and again proven to be the worst hit at

the slightest sign of a rally sizzling out. While the larger entities have better resistance

to sectoral cyclicality’s, economic downturns and competitive pressures, the smaller

entities often succumb to the same. Concerns on factors like management quality,

earnings volatility and lack of operational transparency get further highlighted in

unfavorable times. While their larger counterparts get active media coverage, mid-caps

garner little interest and the lack of information on them puts investors at a

47

disadvantage. Also, by not disclosing information proactively, some companies

actually encourage the 'rumor mill' to work overtime.

Warren Buffet, in one of his letters to the shareholders of Berkshire Hathaway wrote,

"Management cannot determine market prices, although it can, by its disclosures and

policies, encourage rational behavior by market participants." Managements of

smaller companies, however, tend to shy away from such 'disclosures', thus keeping the

investors in the dark.

All said and done, it calls for some wisdom on the part of the investor to acknowledge

the fact that an incessant upswing in the prices of mid-cap stocks, which are devoid of

any fundamental backing, is not what they should get lured by. Especially at times

when even the best of the mid-cap 'stories' seem fully priced, the time is ripe for one to

contemplate on the longevity of their rally and mull on the correction rationales

4. THEORETICAL MODELS FOR DETERMINATION OF MID-CAP STOCKS

P/E Based Valuation

P/B Based Valuation

DCF Valuation

PEG Ratio

1. P/E BASED VALUATION

48

1. P/E is one of the more important fundamental valuation tools. P/E is a

ratio of the stocks price and the stocks earnings per share. To calculate a P/E, take the

price of the stock and divide it by it's earning per share.

Example: Stock Price $20, Earning Per share $2, gives a P/E 10.

Types of P/E, Individual and Collective

P/E can be calculated for an individual stock as well as for the overall market. To

calculate P/E for the overall market, investors typically use DJIA and the S&P 500.

To calculate the market P/E in the DJIA, the investor must use the value of the DJIA

divided by the earnings of its 30 components.

Trailing P/E

Trailing P/E, is when historical values are used, this does not give an indication of

future performance, but does give the investor an idea of the stocks historical value

which then can be compared to it's current P/E or projected P/E's. Trailing P/E ratio's

are commonly used in newspapers.

Projected P/E

Projected P/E uses the current stock price divided by the stocks projected earnings per

share. Projected earnings are generally provided in company research reports. Projected

P/E should be used with care, since it is based on estimated earnings.

Relative P/E

49

The relative P/E ratio is a ratio between the current P/E and historical P/E's. A relative

P/E has a numerical range of between 0-100%, representing the all time low (0%) to

the all time high (100%) P/E.

For example: if a stock has historically traded with a P/E range of 10-20, and the

current P/E is 20, than the relative P/E would be 100%. If the stock's P/E is 15, the

relative P/E would be 75% (15 / 20 = 0.75 or 75%. Some investors believe that trading

in the high range of a stock's relative P/E is not considered safe since it could be

considered overvalued.

Historical P/E's are not always accurate since they do not account for large events, like

in 1992, which followed a large recession, when a large portion of companies wrote off

assets and went into restructuring.

Forecasting with P/E

P/E by itself is not always a good predictor of future price movements; however it is

quite commonly used by investors to forecast future price level of stocks and the

market.

Forecasted price = Current P/E * project annual earnings per share.

Example:

Current projected annual earnings per share is $2/share, the assumption will be that it

will maintain it's P/E of 10, the estimated price at year end should be $20 ($2 X 10 =

20).

50

It is unlikely that the P/E should remain constant throughout the year since it is based

on a moving price. The P/E will either rise or fall by the year end based on, if it the P/E

is higher, than a higher price should have been reached, or it the P/E is lower at year

end, than the price should be lower than projected.

Forecasted market price is calculated in the same way as forecasted price.

Forecasted Market Price = Current market P/E X total projected annual earnings per

share of the market.

It should be understood by investors that forecasted prices are calculated from

assumptions made on company growth, and that they are not immune to

favorable/unfavorable news, competition, panic selling, business outlook and business

cycles, etc.

Tips:

Current P/E has little meaning on forecasted price.

Positive P/E conditions are that the company P/E is higher than the market P/E

at the beginning of an up-trend.

P/E's should be compared to similar companies in the same market as well as

historical P/E values.

If institutional ownership is low, P/E tends to be low.

Companies with low P/E tend to be safer.

51

Do Not buy low P/E stocks just because they are low, Do Not buy stocks just

because the P/E is at a historical low and Do Not use P/E's as the only mean of analysis.

If the P/E was less than 75% of the growth rate. (20 x 0.75 = 15, therefore the stock

must have a P/E less than 15)

Analyzing P/E's and projected growth rates can help give the investor an indication of

valuation. For example a P/E of 50 may be considered quite high, yet if the company's

growth rate is estimated at 50%, then this stock would be at a discount in comparison to

it's future earnings. On the other hand a stock with a P/E of 10 and a growth rate of 5%

is considered overvalued.

If the company has a high P/E, the reasoning would be that it would have high growth

expectations. If these expectations are not met, the higher the P/E, the higher the

potential price fall. However stocks with low P/E's should not be so quickly considered

based on the P/E alone. A low P/E may be results of competition, low growth, earnings

expectations and more.

Company's with low P/E's are generally considered more attractive because of two

main reasons, 1) the stock will rise in price if the P/E rises to that of the industry, and 2)

it can only go up. It is important when using a low P/E to always consider the

companies potential growth in earnings.

Forecasting with P/E

52

P/E by itself is not always a good predictor of future price movements; however it is

quite commonly used by investors to forecast future price level of stocks and the

market.

Forecasted price = Current P/E * project annual earnings per share.

Example:

Current projected annual earnings per share is $2/share, the assumption will be that it

will maintain it's P/E of 10, the estimated price at year end should be $20 ($2 X 10 =

20).

It is unlikely that the P/E should remain constant throughout the year since it is based

on a moving price. The P/E will either rise or fall by the year end based on, if it the P/E

is higher, than a higher price should have been reached, or it the P/E is lower at year

end, than the price should be lower than projected.

Forecasted market price is calculated in the same way as forecasted price.

Forecasted Market Price = Current market P/E X total projected annual earnings per

share of the market.

It should be understood by investors that forecasted prices are calculated from

assumptions made on company growth, and that they are not immune to

favorable/unfavorable news, competition, panic selling, business outlook and business

cycles, etc…

Tips:

Current P/E has little meaning on forecasted price.

53

Positive P/E conditions are that the company P/E is higher than the market P/E

at the beginning of an up-trend.

P/E's should be compared to similar companies in the same market as well as

historical P/E values.

If institutional ownership is low, P/E tends to be low.

Companies with low P/E tend to be safer.

Do Not buy low P/E stocks just because they are low, Do Not buy stocks just

because the P/E is at a historical low and Do Not use P/E's as the only mean of analysis.

2. P/B BASED VALUATIONS:

By focusing on the P/B ratio, an institution’s earning power may be ignored, while

excessive emphasis is placed on capital without any regard to the extent an institution

may be over (or under) capitalized. At the very least, comparisons based upon P/B

ratios should adjust capital ratios so that premiums to book value are based on core

equity with excess equity valued dollar-for-dollar.

Management should focus instead on the P/E multiple as a measure of relative strength

placed on the institution’s shares by investors. Acquirers (and investors in minority

interests in the public and private markets) are acquiring earning power and potential

earnings growth. Investors are not acquiring capital. In fact, many banks are plagued

with too much capital to generate an adequate return on equity, deemed to be at least

15% by many investors.

54

As shown in the P/B formula in Chart 1, the P/B multiple is a function of ROE and the

P/E multiple. ROE in turn can be broken into a leverage component and a profitability

component. Thus, the P/B multiple essentially consists of three variables: profitability,

leverage and the P/E multiple.

3. DCF VALUATIONS:

The purpose of DCF-Valuation is to determine the value of a company in terms of its

future cash flows. The cash flows are adjusted with certain items (e.g. those not related

to company’s core businesses or those with no cash effect) in order to make sure the

flows reflect the actually generated cash as good as possible.

This document describes DCF valuation in detail and in our valuation model.

The underlying idea of DCF-Valuation is to compute the fair value of a company i.e.

the intrinsic value of the company’s share. The potential of the share price (which the

investors are particularly interested in) is then computed by comparing the fair value

with the current market price of the company’s share.

55

The basic formulation of discounted cash flow valuation is as follows:

Free cash flow to firm is discounted with WACC to the Year 0 (the forecast year) in

order to get the present value of free cash flows.

Cumulative discounted free cash flow is a yearly item in which all the forecast years´

discounted cash flows are summed up. Hence, the first item is the sum of all forecast

years´ free cash flows at present value terms.

Value of equity FCFF is divided by the number of shares outstanding to get the fair

value of the company’s share.

56

http://www.valuatum.com/tutorials/keyfig.shtml#wacc

More detailed formulation of Discounted cash flow valuation is as follows:

EBIT is adjusted with with Taxes and Share of associated companies´ profit/loss in

order to get Operating cash flow - the figure that reflects the cash actually generated

by the company much better than the EBIT (accounting figure).

Operating cash flow is adjusted with Total depreciation to get Gross cash flow. This

has to be done because depreciation has no cash effect and thus does not really

reduce the cash generated.

Gross cash flow includes cash tied up in investments. Hence, Change in working

capital and Gross capital expenditure have to be subtracted from it and Increase in

non-interest bearing liabilities added to it in order to get Free operating cash flow.

57

Change in working capital appears in the calculation as minus-signed if more capital

is tied up in the business than in the previous year. Gross capital expenditure in turn

is the cash used for investments during the year. Increase in non-interest bearing

liabilities is plus-signed, since it has an opposite effect than Net working capital.

Other items include extraordinary items, which have a cash effect even though they

are not important in a operational business sense.

Interest bearing debt, Cash at bank and Investments' share price impact are to be

added/subtracted from the Cumulative discounted cash flow so that the result of the

valuation is Value of equity, not Value of firm.

All items except for EBIT, Share of associated companies´ profit/loss and Taxes on

continuing operations the model calculates automatically. Thus, you can freely change

EBIT, Share of associated companies´ profit/loss and Taxes on continuing operations

(and naturally all the sub-items which are blue).

2. PEG RATIO :

It is a ratio used to determine a stock’s value while taking into account earnings

growth. The calculation is as follows:

PEG Ratio = Price/Earnings Ratio

Annual EPS Growth

PEG is widely used as an indicator of a stock’s potential value. It is favored by many

over the P/E BASED VALUATIONS as it also accounts for the growth.

58

Similar to the P/E Ratio a lower PEG means that the stock has been undervalued.

Keep in mind that the numbers used are projected and, therefore, can be less accurate.

Also, there are many variations using earnings from different time periods (i.e. 1 year

vs 5 year). Be sure to know the exact definition your source is using.

The PEG ratio compares a stock's price/earnings ("P/E") ratio to its expected EPS

growth rate. If the PEG ratio is equal to one, it means that the market is pricing the

stock to fully reflect the stock's EPS growth. This is "normal" in theory because, in a

rational and efficient market, the P/E is supposed to reflect a stock's future earnings

growth.

If the PEG ratio is greater than one, it indicates that the stock is possibly overvalued or

that the market expects future EPS growth to be greater than what is currently in the

Street consensus number. Growth stocks typically have a PEG ratio greater than one

because investors are willing to pay more for a stock that is expected to grow rapidly

(otherwise known as "growth at any price"). It could also be that the earnings forecasts

have been lowered while the stock price remains relatively stable for other reasons.

If the PEG ratio is less than one, it is a sign of a possibly undervalued stock or that the

market does not expect the company to achieve the earnings growth that is reflected in

the Street estimates. Value stocks usually have a PEG ratio less than one because the

stock's earnings expectations have risen and the market has not yet recognized the

growth potential. On the other hand, it could also indicate that earnings expectations

have fallen faster than the Street could issue new forecasts.

59

http://www.investopedia.com/articles/analyst/

It is important to note that the PEG ratio cannot be used in isolation. As with all

financial ratios, investors using PEG ratios must also use additional information to get a

clear perspective of the investment potential of a company. Investors must understand

the company's operating trends, fundamentals and what the expected EPS growth rate

reflects. Additionally, to determine if the stock is overvalued or undervalued, investors

must analyze the company's P/E and PEG ratios in relation to its peer group and the

overall market.

60

Chapte5

IMPORTANCE

61





per cent.












62













63

















offerings.



64









Adenwala.





suit.











65
























66













FUTURE SCENARIO








67




As the economy is in a progressive state the FII’s and the domestic investors , both

institutional and retail are showing the red silk to the bull generating a rise in the

market that can even touch the 10K – point. Not only the large equity stocks, but also

the mid – cap & the penny stocks are a substantial part of this growth.

The mid – caps unlike before have a large part to contribute in the current market

scenario. Therefore, the future scope of study is quite relevant.

1. THE MARKET INDEX

To begin with, let’s take a look at the CNX Midcap 200 and the concepts related to it. It

is the market index that records the daily movements, (ups and downs) in the prices of

mid – cap stocks.

The medium capitalized segment of the stock market is being increasingly perceived as

an attractive investment segment with high growth potential. The primary objective of

the CNX Midcap index is to capture the movement and be a benchmark of the midcap

segment of the market.

68

g. Method of Computation

CNX Midcap is computed using market capitalization weighted method, wherein the

level of the index reflects the total market value of all the stocks in the index relative to

a particular base period. The method also takes into account constituent changes in the

index and importantly corporate actions such as stock splits, rights, etc without

affecting the index value.

h. Base Date and Value

The CNX Midcap Index has a base date of Jan 1, 2003 and a base value of 1000.

i. Criteria for Selection of Constituent Stocks

The constituents and the criteria for the selection judge the effectiveness of the index.

Selection of the index set is based on the following criteria:

All the stocks, which constitute more than 5% market capitalization of the

universe (after sorting the securities in descending order of market capitalization), shall

69

be excluded in order to reduce the skewness in the weightages of the stocks in the

universe.

After step (a), the weightages of the remaining stocks in the universe is

determined again.

After step (b), the cumulative weightage is calculated.

After step (c) companies which form part of the cumulative percentage in

ascending order unto first 75 percent (i.e. upto 74.99 percent) of the revised universe

shall be ignored.

After, step (d), all the constituents of S&P CNX Nifty shall be ignored.

From the universe of companies remaining after step (e) i.e. 75th percent and

above, first 100 companies in terms of highest market capitalization, shall constitute the

CNX Midcap Index subject to fulfillment of the criteria mentioned below.

j. Trading Interest

All constituents of the CNX Midcap Index must have a minimum listing record of 6

months. In addition, all candidates for the Index are also evaluated for trading interest,

in terms of volumes and trading frequency.

k. Financial Performance

All companies in the CNX Midcap Index have a minimum track record of three years of

operations with a positive net worth.

70

l. Others

A company which comes out with a IPO will be eligible for inclusion in the index, if it

fulfills the normal eligibility criteria for the index for a 3 month period instead of a 6

month period.

2. THE MARKET REGULATOR

The Securities And Exchange Board of India (SEBI) oversees and monitors the

performance of the mid – cap stocks .Like others , even mid – cap companies have to

follow SEBI guidelines , rules and norms for operating in the stock market.

These Guidelines are then changed depending upon the dynamics of the economy.

Amendments are made in the acts for making them more effective from time to time.

SEBI covers various areas relevant for the finances, such as :

Bankers to an issue.

Buyback of Securities.

Collective Investment Scheme.

Corporate Governance.

Credit Rating Agency.

Regulator to an Issue.

Securities Appellate Tribunal.

Circulars and Clarifications on Relevant Provisions of Companies Act.

71

5. TREND OVER THE PAST FEW MONTHS

Date Open High Low ClosePrice/

Earnings

Price/

Bookvalue

Dividend

Yield

January

2008 9,822.29 10,245.81 6,542.71 7,766.62 24.26 5.23 0.75

February

2008 7,813.61 8,119.08 7,012.72 7,594.41 18.75 4.37 0.89

Source BSE

The case with the Indian mid-caps (defined by NSE as scrips with average six months

market capitalization ranging between Rs. 750 m and Rs. 7,500 m), which continue to

defy gravity despite little fundamental backing. While their larger peers have shown

some moderation in valuations, the 'positive sentiment' on mid-caps shows no signs of

abating.

Cliché as it may sound, but mid-caps have time and again proven to be the worst hit at

the slightest sign of a rally sizzling out. While the larger entities have better resistance

to sectoral cyclicality’s, economic downturns and competitive pressures, the smaller

entities often succumb to the same. Concerns on factors like management quality,

earnings volatility and lack of operational transparency get further highlighted in

unfavorable times. While their larger counterparts get active media coverage, mid-caps

garner little interest and the lack of information on them puts investors at a

72

disadvantage. Also, by not disclosing information proactively, some companies

actually encourage the 'rumor mill' to work overtime.

Warren Buffet, in one of his letters to the shareholders of Berkshire Hathaway wrote,

"Management cannot determine market prices, although it can, by its disclosures and

policies, encourage rational behavior by market participants." Managements of

smaller companies, however, tend to shy away from such 'disclosures', thus keeping the

investors in the dark.

All said and done, it calls for some wisdom on the part of the investor to acknowledge

the fact that an incessant upswing in the prices of mid-cap stocks, which are devoid of

any fundamental backing, is not what they should get lured by. Especially at times

when even the best of the mid-cap 'stories' seem fully priced, the time is ripe for one to

contemplate on the longevity of their rally and mull on the correction rationales

Major Tools of Analysis for Mid – Cap Stocks:

1) BETA:

Beta is a risk metric employed primarily in the equity markets. It measures the

systematic risk of a single instrument or an entire portfolio. Beta describes the

sensitivity of an instrument or portfolio to broad market movements. The formula for

beta is.

Cov (Zp, Zm)

73

http://www.riskglossary.com/articles/capital_asset_pricing_model.htm

http://www.riskglossary.com/articles/common_stock.htm

http://www.riskglossary.com/articles/risk_metric_and_risk_measure.htm

where

is the covariance between the portfolio (or instrument) return and the

market return, and

is the variance of the market's return (volatility squared).

Both quantities are calculated using simple returns. Beta is generally estimated from

historical price time series. For example, 60 trading days of simple returns might be

used with sample estimators for covariance and variance.

It is possible to construct negative beta portfolios. Approaches include

Holding stocks (such as gold mining stocks) that tend to move against the market,

Shorting stocks, or

Putting on suitable options spreads.

Beta is sometimes used as a metric of a portfolio's market risk. This can be misleading

because beta does not capture specific risk. Because of specific risk, a portfolio can

have a low beta but still be highly volatile. Its price fluctuations will simply have a low

correlation with those of the overall market.

2) MACD:

A trend-following momentum indicator that shows the relationship between two

moving averages of prices. The MACD is calculated by subtracting the 26-

74

http://www.investopedia.com/terms/m/


http://www.riskglossary.com/articles/correlation.htm


http://www.riskglossary.com/articles/market_risk.htm

http://www.riskglossary.com/articles/options_spread.htm


http://www.riskglossary.com/articles/standard_deviation.htm


http://www.riskglossary.com/articles/time_series_stochastic_process.htm

http://www.riskglossary.com/articles/return.htm

http://www.riskglossary.com/articles/volatility.htm




day exponential moving average (EMA) from the 12-day EMA. A nine-day EMA of

the MACD, called the "signal line", is then plotted on top of the MACD, functioning as

a trigger of buy and sell signals.

There are three common methods used to interpret the MACD:

1. Crossovers

2. Divergence

3. Dramatic

4. Traders

3) BOLLINGER BANDS:

75


Developed by John Bollinger, Bollinger Bands are an indicator that allows users to

compare volatility and relative price levels over a period time. The indicator consists of

three bands designed to encompass the majority of a security's price action.

1. A simple moving average in the middle

2. An upper band (SMA plus 2 standard deviations)

3. A lower band (SMA minus 2 standard deviations)

Standard deviation is a statistical term that provides a good indication of volatility.

Using the standard deviation ensures that the bands will react quickly to price

movements and reflect periods of high and low volatility. Sharp price increases (or

decreases), and hence volatility, will lead to a widening of the bands.

4) VAR:

VAR summarizes the worst loss over a target horizon with a given confidence interval.

Ft = E*(e-r(T-t) F(St))

Where the asterisk is the reminder that the price path is under risk neutrality both

changing the expected return & the discount rate to be risk free rate. Instead VAR

measures variation in the value of the asset on the target date:

VAR(c, T ) = E(Ft) – Q(Ft, c)

Where Q (Ft, C) is the quartile corresponding to the confidence interval c. Valuation

models focus on the mean of distribution. VAR on the other hand describes the

potential variations in the payoffs.

76

http://www.stockcharts.com/education/GlossaryS.html#StandardDeviation

http://www.stockcharts.com/education/GlossaryM.html#MovingAverage

http://www.stockcharts.com/education/GlossaryV.html#Volatility

Perhaps the greatest advantage of VAR is that it summarizes in a single easy to

understand number the downside risk of an institution due to financial market variable.

Trading Signals

Different signals are used in trending and ranging markets. The most important signals

are taken from overbought and oversold levels, divergences and failure swings.

Use trailing buy- and sell-stops to time entry into trades.

Ranging Markets

Set the Overbought level at 70 and Oversold at 30Go long when RSI falls below

the 30 level and rises back above it or on a bullish divergence where the first trough is

below 30.

Go short when RSI rises above the 70 level and falls back below it

or on a bearish divergence where the first peak is above 70.

Failure swings strengthen other signals.

Trending Markets

Only take signals in the direction of the trend.

77

http://www.incrediblecharts.com/technical/indicator_basics.htm#Failure+Swings

http://www.incrediblecharts.com/technical/momentum_indicators.htm#Divergence


http://www.incrediblecharts.com/technical/trailing_stops.htm


http://www.incrediblecharts.com/technical/indicator_basics.htm#Divergence

http://www.incrediblecharts.com/technical/support_resistance.htm#Trading+Ranges

http://www.incrediblecharts.com/technical/dow_theory_trends.htm#Bull+Trends

Go long, in an up-trend, when RSI falls below 40 and rises back above

it.

Go short, in a down-trend, when RSI rises above 60 and falls back

below it.

Exit using a trend indicator.

Take profits on divergences. Unless confirmed by a trend indicator, Relative Strength

Index divergences are not strong enough signals to trade in a trending market.

7) PRICE OSCILLATOR:

The Price Oscillator displays the difference between two moving averages of a

security's price. The difference between the moving averages can be expressed in either

points or percentages.

The Price Oscillator is almost identical to the MACD, except that the Price Oscillator

can use any two user-specified moving averages. (The MACD always uses 12 and 26-

day moving averages, and always expresses the difference in points.)

78

http://www.marketscreen.com/help/AtoZ/default.asp?hideHF=&Num=59


Chapter 6

RESEARCH METHODOLOGY

79

RESEARCH METHODOLOGY

RESEARCH DESIGN

The research design to be adopted for this project will be an exploratory research

design .It would help us in assimilating and understanding better, the issues and

problems faced in the daily transactions in the emerging market for mid – Caps.

DATA COLLECTION

The Sources for collecting the data and information related to the project would be

partly primary and partly secondary.

Primary source: Questionnaire method with questions developed to assimilate the

understanding and attitude of stock brokers and analysts on the price behavior of

middle – capital stocks.

Secondary sources: Articles by Market Experts, Stock Analysts, Journals, and

Business Magazines and to some extent current information extracts from brokers and

traders are going to be the sources for data collection.

80

Chapter 7

ANALYSIS AND FINDINGS

81

ANALYSIS AND FINDINGS

1. How do you price the mid-cap stocks?

a) Fundamental Criteria b) Judgmental Criteria

82

Criteria for Pricing:Fundamental 85%

Judgmental 15%

1.1 If Fundamental then do you include the market criteria:

a) Potential Price Range

b) Stock Image

83

2. What factors do you think affect the pricing of mid-cap stocks?

a) Corporate Results

b) Other institutional investors

c) Management Quality

d) Speculative Interest

e) FII Investment

f) Market regulators(Sebi)

g) Any other…………………………………………

84

3. What all factors do you consider while advising your client for investing in a mid-

cap stock?

a) Management Quality

b) Turnaround Story

c) Sustained Growth

d) Any other ……………..

85

4. Which particular sectors would you like to invest in a mid-cap company?

a) Auto Ancilliaries

b) Pharmaceuticals

c) Banks

d) Construction

e) Textiles

f) Brokerages

g) Steel and steel products

h) Computer Software

i) Any other………………………………………………………..

86

Why would you like to invest in these sectors and what is your investment horizon?

The “OTHERS” Category consisted of four respondents interested in:

- Logistics and

- Financial Services.

The interest was primarily due to the booming industry and the consistency in good

corporate results. The investors believed that since more of foreign investors were

coming to India, it would lead to more of International Trade requiring more

investments and active trading of pre-existing stocks in logistics.

87

5. To what level the mid – cap prices correct during an intermediate bearish phase in a

bull run?

a) < 10%

b) 10 – 20%

c) 20 – 30%

d) > 30%

88

6. What were the reasons behind the sudden rise of investments in the mid – cap

stocks? ( kindly explain)

a) Price rigging

b) FII’s investment

c) Other institutional buying

d) Good corporate results

e) Any other, (please specify)------------------------------------

---------------------------------------------------------------------------------------------

89

7. What can be the possible longevity of this rise?

a) Less than 3 months

b) 3 – 6 months

c) 6 - 12 months

d) More than 1 year

e) Any other, (please specify)-------------------------------------

90

8. Will the price war be just like the dotcom bubble?

It will not be the same for companies which have a strong fundamental and a

managerial vision for growth. Since the mid-cap rally was not hype and infact was

supported by strong growth, therefore it will not end – up like the dotcom bubble.

9. Are you comfortable holding your mid – cap stocks after a deep correction?

5 of the respondents said that they are comfortable in such a scenario, condition they

are holding the right stocks with good growth prospects. Another 5 responded but

saying that they invest in stocks by keeping in mind, long – term horizon i.e. they

would still keep their investments irrespective of short-term fluctuations.

10. Do you use any theoretical models for determination of mid-cap stock prices?

91

a) P/E Based Valuations

b) P/B Based Valuations

c) DCF Valuations

d) Any other, (please specify)----

92

11. Are the following tools used in the Indian Capital Market for Analysis of Mid –

Cap Stocks?

a) Beta

b) MACD

c) Bollinger Bands

d) VAR

e) William’s percentage R

f) Relative Strength Index

g) Price Oscillator

h) Stochastic

i) Price return on capital

i) Any other (please specify) -----------------------------------

93

Chapter 8

THEORETICAL TOOLS FOR

ANALYSIS

95

Major Tools of Analysis for Mid – Cap Stocks:

3) BETA:

Beta is a risk metric employed primarily in the equity markets. It measures the

systematic risk of a single instrument or an entire portfolio. Beta describes the

sensitivity of an instrument or portfolio to broad market movements. The formula for

beta is.

Cov (Zp, Zm)

where

is the covariance between the portfolio (or instrument) return and the

market return, and

is the variance of the market's return (volatility squared).

Both quantities are calculated using simple returns. Beta is generally estimated from

historical price time series. For example, 60 trading days of simple returns might be

used with sample estimators for covariance and variance.

It is possible to construct negative beta portfolios. Approaches include

Holding stocks (such as gold mining stocks) that tend to move against the market,

96




http://www.riskglossary.com/articles/time_series_stochastic_process.htm


http://www.riskglossary.com/articles/volatility.htm






http://www.riskglossary.com/articles/risk_metric_and_risk_measure.htm

Shorting stocks, or

Putting on suitable options spreads.

Beta is sometimes used as a metric of a portfolio's market risk. This can be misleading

because beta does not capture specific risk. Because of specific risk, a portfolio can

have a low beta but still be highly volatile. Its price fluctuations will simply have a low

correlation with those of the overall market.

4) MACD:

A trend-following momentum indicator that shows the relationship between two

moving averages of prices. The MACD is calculated by subtracting the 26-

day exponential moving average (EMA) from the 12-day EMA. A nine-day EMA of

the MACD, called the "signal line", is then plotted on top of the MACD, functioning as

a trigger of buy and sell signals.

There are three common methods used to interpret the MACD:

1. Crossovers

2. Divergence

3. Dramatic

4. Traders

97






http://www.riskglossary.com/articles/market_risk.htm

http://www.riskglossary.com/articles/options_spread.htm

3) BOLLINGER BANDS:

Developed by John Bollinger, Bollinger Bands are an indicator that allows users to

compare volatility and relative price levels over a period time. The indicator consists of

three bands designed to encompass the majority of a security's price action.

4. A simple moving average in the middle

5. An upper band (SMA plus 2 standard deviations)

6. A lower band (SMA minus 2 standard deviations)

Standard deviation is a statistical term that provides a good indication of volatility.

Using the standard deviation ensures that the bands will react quickly to price

movements and reflect periods of high and low volatility. Sharp price increases (or

decreases), and hence volatility, will lead to a widening of the bands.

4) VAR:

VAR summarizes the worst loss over a target horizon with a given confidence interval.

Ft = E*(e-r(T-t) F(St))

Where the asterisk is the reminder that the price path is under risk neutrality both

changing the expected return & the discount rate to be risk free rate. Instead VAR

measures variation in the value of the asset on the target date:

VAR(c, T ) = E(Ft) – Q(Ft, c)

98

http://www.stockcharts.com/education/GlossaryS.html#StandardDeviation

http://www.stockcharts.com/education/GlossaryM.html#MovingAverage

http://www.stockcharts.com/education/GlossaryV.html#Volatility

Where Q (Ft, C) is the quartile corresponding to the confidence interval c. Valuation

models focus on the mean of distribution. VAR on the other hand describes the

potential variations in the payoffs.

Perhaps the greatest advantage of VAR is that it summarizes in a single easy to

understand number the downside risk of an institution due to financial market variable.

Trading Signals

Different signals are used in trending and ranging markets. The most important signals

are taken from overbought and oversold levels, divergences and failure swings.

Use trailing buy- and sell-stops to time entry into trades.

Ranging Markets

Set the Overbought level at 70 and Oversold at 30Go long when RSI falls below

the 30 level and rises back above it or on a bullish divergence where the first trough is

below 30.

Go short when RSI rises above the 70 level and falls back below it

or on a bearish divergence where the first peak is above 70.

Failure swings strengthen other signals.

Trending Markets

Only take signals in the direction of the trend.

99




http://www.incrediblecharts.com/technical/trailing_stops.htm



http://www.incrediblecharts.com/technical/support_resistance.htm#Trading+Ranges

http://www.incrediblecharts.com/technical/dow_theory_trends.htm#Bull+Trends

Go long, in an up-trend, when RSI falls below 40 and rises back above

it.

Go short, in a down-trend, when RSI rises above 60 and falls back

below it.

Exit using a trend indicator.

Take profits on divergences. Unless confirmed by a trend indicator, Relative Strength

Index divergences are not strong enough signals to trade in a trending market.

7) PRICE OSCILLATOR:

The Price Oscillator displays the difference between two moving averages of a

security's price. The difference between the moving averages can be expressed in either

points or percentages.

The Price Oscillator is almost identical to the MACD, except that the Price Oscillator

can use any two user-specified moving averages. (The MACD always uses 12 and 26-

day moving averages, and always expresses the difference in points.)

Interpretation

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http://www.marketscreen.com/help/AtoZ/default.asp?hideHF=&Num=59


Moving average analysis typically generates buy signals when a short-term moving

average (or the security's price) rises above a longer-term moving average. Conversely,

sell signals are generated when a shorter-term moving average (or the security's price)

falls below a longer-term moving average. The Price Oscillator illustrates the cyclical

and often profitable signals generated by these one or two moving average systems.

Example

The following chart shows Kellogg and a 10-day/30-day Price Oscillator.

In this example, the Price Oscillator shows the difference between the moving averages

as percentages.

I drew "buy" arrows when the Price Oscillator rose above zero and "sell" arrows when

the indicator fell below zero. This example is typical of the Price Oscillator's

effectiveness. Because the Price Oscillator is a trend following indicator, it does an

outstanding job of keeping you on the right side of the market during trending periods

(as shown by the arrows labeled "B," "E," and "F"). However, during less decisive

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periods, the Price Oscillator produces small losses (as shown by the arrows labeled

"A," "C," and "D").

Calculation

When the Price Oscillator displays the difference between the moving averages in

points, it subtracts the longer-term moving average from the shorter-term average:

When the Price Oscillator displays the difference between the moving averages in

percentages, it divides the difference between the averages by the shorter-term moving

average:

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Chapter 9

RECOMMENDATIONS

103

Recommendations:-

Depositors need to be converted into real investors. Kiosks of banks in rural areas can sell a wide variety of financial products.

To build the investor confidence, there is need to strictly implement the best corporate governance practices.

There is a need to teach investors how to rectify the mistakes and avoid the repetition of previous mistakes.

Companies should educate their employees on equity investments. Severe punishments be prescribed for wrong doers. Every listed company should appointOmbudsman to deal with investor

grievances. Investors’ Confidence need to be rebuilt through: Enhanced Investor Protection Better Transparency Market Integrity Market Efficiency Enhanced Quality of Supervision over market intermediaries.

104

Chapter 10

CONCLUSIONS

105

CONCLUSION

1. According to the analysis, Fundamental criteria emerged out to be the most

important criteria with potential price image as well as stock image being equally

important.

2. All the respondents gave FII’s as the most important reason for pricing of mid-

cap stocks. Secondly, Market regulators and thirdly Good corporate results affected

their prices. Some believed that all the factors affected the determination of prices.

3. For advising a client the most important factors found out were Management

quality, a turnaround story, sustained growth and some believed that even a good

momentum and marketability of the stock also help them in selling stocks to clients.

4. Most of the respondents were interested in Steel and steel product, software,

Auto ancillaries, Pharmaceuticals, construction and banks.

5. The other sectors in which investors are interested are logistics, financial

services; reason being that the economy is on a boom with an exhilarating.

6. A majority of the investors believe that in an intermediate bearish phase in a

bull run there can be a 10-20 % fall. The remaining believed that it can be > 30%.

7. FII’s and good corporate results were the top-notch reasons for sudden rise in

investments. Apart from these other institutional buying was also an important factor.

Another reason can be the mad rush considering the Bull Run and stretched

fundamentals along with strong growth.

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8. The longevity of the rise is taken to be > 1 year. Also the mid-cap rally being

backed by strong growth is believed to be by the respondents as not to burst like the

dotcom bubble.

9. The most important theoretical models for the determination of mid-cap stock

prices was said to be the P/E BASED VALUATION,DCF VALUATION and then the

P/B VALUATION. The other method suggested by the respondents was the PEG

RATIO.

10. Although most of the respondents, analysts and fund managers use a

combination of these models depending on their organization criteria and comfort

ability.

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Chapter 11

LIMITATIONS

108

LIMITATIONS

1. Analysis largely on the basis of secondary opinion which can be biased.

2. Analysis of a highly volatile market would be risky as the level of risk is high

especially for mid – cap stocks wherein buyers make quick entry & exit to earn profits

in the short run.

3. A sample size of 8 sectors cannot capture the scenario and the trend of the entire mid –

cap market.

4. Time is also a limitation as the analysis has to be conducted in a limited duration.

5. The respondents were reluctant to give information.

6. Surveyed brokers only reflect the opinion of individual investors as a result the project

lacks the opinion of corporate investors

7. The result may have been influenced by the composition of the sample and use of non-

probabilistic sampling technique.

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Chapter 12

BIBLIOGRAPHY

110

BIBLIOGRAPHY

BOOKS:

1) Pring’s Martin , 20001 , “Introduction to Technical Analysis”, Mc- Graw Hill

International Edition , Finance Series.

2) Hamilton Peter, 1998, “Stock Market Barometer” , John Wiley & Sons

3) Nelson Daniel, 1999, “Modelling Stock Market Volatility Changes,

Elsevier(Reprint Edition-1989)

ARTICLES:

1) Monga Rachna,Money in the Middle (COVER STORY), November 1 2004,

Businessworld.

2) Roy Pinto, .“Watch out fo r mid – cap pharma” (PORTFOLIO TALK),

September27-October10,2004,BusinessIndia.

3) Gombar Vandana,”Pharma’s Mid-Cap Mania”, August 3, 2003, Business Today

4) Nathan Narendra, “Mid-Cap Strategy”, November 21 , 2004, Business Today.

5) Mascarenhas Rajesh, “Back From The Beyond”, September 26,2005, ET Big

Bucks.

111

6) Gaurav Vijay & Joseph Anto, “Small & mid-cap companies steal the Show”,

September 05, 2005, Times News Network.

WEBSITES:

www.nse.com

www.investopedia.com

www.capitalonline.com

www.rbi.org

www.stockcharts.com

RBI BULLETIN

CNX Nifty Index 200

112

http://www.stockcharts.com/

http://www.rbi.org/

http://www.capitalonline.com/

http://www.investopedia.com/

http://www.nse.com/

APPENDICES

Respected Sir/ Ma’am, I am doing a project on ‘ Indian Capital Market’, which is a

part of our curriculum. For this, I require your help in filling the questionnaire. I assure

you that the information provided by you shall be used only for the project work and it

will be kept confidential.

1. How do you price the mid-cap stocks?

a) Fundamental criteria

b) Judgmental criteria

If Fundamental then do you include the market criteria i.e :

a) Potential price range

b) Stock image

2. What factors do you think affect the pricing of mid-cap stocks?

a) Corporate results

b) Other institutional investors

c) Management quality

113

d) Speculative interest

e) FII investment

f) Market regulators (SEBI)

g) Any other, (please specify) ---------------------------------------

--------------------------------------------------------------------------

3. What all factors do you consider while advising a client for investing in a mid – cap

stock?

a) Management quality

b) Turnaround story

c) Sustained growth

d) Any other , please specify------------------------------------------

-------------------------------------------------------------------

4. Which particular sector would you like to invest in a mid-cap company?

a) Auto ancillaries

b) Pharmaceuticals

c) Banks

d) Construction

114

e) Textiles

f) Brokerages

g) Steel and steel products

h) Computer Software

i) Any other , (please specify)

---------------------------------------------------------------------------------------------------------

------------------------------------------------------

4.1 Why would you like to invest in these sectors and what is your Investment

horizon?

--------------------------------------------------------------------------

--------------------------------------------------------------------------

--------------------------------------------------------------------------

5. To what level the mid – cap prices correct during an intermediate bearish phase

in a bull run?

a) < 10%

b) 10 – 20%

c) 20 – 30%

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d) > 30%

6. What were the reasons behind the sudden rise of investments in the mid – cap

stocks? ( kindly explain)

a) Price rigging

b) FII’s investment

c) Other institutional buying

d) Good corporate results

e) Any other, (please specify) -------------------------------------

----------------------------------------------------------------------

7. What can be the possible longevity of this rise?

a) less than 3 months

b) 3 – 6 months

c) 6 - 12 months

d) More than 1 year

e) Any other, (please specify) -------------------------------------

8. Will the price war be just like the dotcom bubble?

116

---------------------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------

9. Are you comfortable holding your mid – cap stocks after a deep correction?

---------------------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------

10. Do you use any theoretical models for determination of mid-cap stock prices?

a) P/E Based Valuations

b) P/B Based Valuations

c) DCF Valuations

d) Any other, (please specify) ----------------------------------------

11. Are the following tools used in the Indian Capital Market for Analysis of Mid – Cap

Stocks?

a) Beta

b) MACD

c) Bollinger Bands

d) VAR

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e) William’s percentage hour

f) Relative Strength Index

g) Price Oscillator

h) Stochastic

i) Price return on capital

i) Any other (please specify) -----------------------------------

THANK YOU!!

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finance captial market

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