mouni(equity analysis)

8/17/2019 Mouni(Equity Analysis)

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A project report

on

A study on Equity Analysis

at

India Bulls.

Submitted in partial fulfillment of the

Requirements for the award of the Degree

of

MASTER OF !S"#ESS ADM"#"STRAT"O#

Submitted $

D.Mounika

14BK1E0012

!nder the %uidance of

Mr. K.V.R.Satya kumar

HD ! Assistant "ro#$ssor

DE"AR%ME&% ' B(SI&ESS ADMI&IS%RA%I&

S% "E%ERS E&)I&EERI&) *++E)E

&Affiliated to 'awaharlal #ehru Technological !ni(ersit$ )$derabad*

)$derabad

+,-. / +,-0


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1)A2TER "

"#TROD!1T"O#


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I&%RD(*%I&

India is a developing country. Nowadays many people are interested to

invest in fnancial markets especially on equities to get high returns, and to

save tax in honest way. Equities are playing a major role in contribution

o capital to the business rom the beginning. !ince the introduction

o shares concept, large numbers o investors are showing interest to invest

in stock market. In an industry plagued with skepticism and a stock market

increasingly di"cult to predict t and contend with, i one looks hard

enough there may still be a genuine aid or the #ay $rader and !hort

$erm Investor.

$he price o a security represents a consensus. It is the price at which

one person agrees to buy and another agrees to sel l . $he price at

which an investor is willing to buy or sell depends primarily on his

expectations. I he expects the security%s price to rise, he will buy

it& i the investor expects the price to all, he will sell it. $hese simple

statements are the cause o a major challenge in orecasting security prices,

because they reer to human e x p e c t a t i o n s .

' s w e a l l k n o w f r s t h a n d , h u m a n s e x p e c t a t i o n s

a re n e i t h e r e a s i l y quantifable nor p redictable. I p rices a re

based on investor expectat ions, then knowingwhat a secur ity

should sell or (i.e., undamental analysis) becomes less important

thanknowing what other investors expect it to sell or. $hat%s not

to say that knowing what asecurity should sell or isn%t important**it is.

+ut there is usually a airly strong consensuso a stock%s uture earnings that

the average investor cannot disproveundamental analysis and technical

analysis can co*exist in peace and complement eachot he r. ! inc e a l l the

i n v e s t o r s i n t h e s t o c k m a r k e t w a n t t o m a k e t h e m a x i m u m


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prof t s possible, they just cannot a-ord to ignore either undamental or

technical analysis

3"TERAT!RE

RE4"E5


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SECURITY ANALYSIS

"n(estment success is prett$ much a matter of careful selection and timing of stoc6 purchases

coupled with perfect matching to an indi(iduals ris6 tolerance7 "n order to carr$ out selection8

timing and matching actions an in(estor must conduct deep securit$ anal$sis7

"n(estors purchase equit$ shares with two basic objecti(es9

-7 To ma6e capital profits b$ selling shares at higher prices7

+7 To earn di(idend income7

These two factors are affected b$ a host of factors7 An in(estor has to carefull$ understand and

anal$:e all these factors7 There are basicall$ two approaches to stud$ securit$ prices and

(aluation i7e7 fundamental anal$sis and technical anal$sis

The (alue of common stoc6 is determined in large measure b$ the performance of the firm that

issued the stoc67 "f the compan$ is health$ and can demonstrate strength and growth8 the (alue of

the stoc6 will increase7 5hen (alues increase then prices follow and returns on an in(estment

will increase7 )owe(er8 just to 6eep the sa(($ in(estor on their toes8 the mi; is complicated b$

the ris6 factors in(ol(ed7 Fundamental anal$sis e;amines all the dimensions of ris6 e;posure and

the probabilities of return8 and merges them with broader economic anal$sis and greater industr$

anal$sis to formulate the (aluation of a stoc67

'(&DAME&%A+ A&A+,SIS


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Fundamental anal$sis is a method of forecasting the future price mo(ements of a financial

instrument based on economic8 political8 en(ironmental and other rele(ant factors and statistics

that will affect the basic suppl$ and demand of whate(er underlies the financial instrument7 "t is

the stud$ of economic8 industr$ and compan$ conditions in an effort to determine the (alue of a

compan$top=

down approach?7 This approach attempts to stud$ the economic scenario8 industr$ position and

the compan$ e;pectations and is also 6nown as -$onomi/industry/omany aroa EI*

aroa37

Thus the EI* aroa in(ol(es three steps@

-7 Economic anal$sis

+7 "ndustr$ anal$sis

7 1ompan$ anal$sis

http://www.investopedia.com/terms/f/fundamentalanalysis.asphttp://www.investopedia.com/terms/f/fundamentalanalysis.asp


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-7 E*&MI* A&A+,SIS

The le(el of economic acti(it$ has an impact on in(estment in man$ wa$s7 "f the econom$ growsrapidl$8 the industr$ can also be e;pected to show rapid growth and (ice (ersa7 5hen the le(el of

economic acti(it$ is low8 stoc6 prices are low8 and when the le(el of economic acti(it$ is high8

stoc6 prices are high reflecting the prosperous outloo6 for sales and profits of the firms7 The

anal$sis of macro economic en(ironment is essential to understand the beha(ior of the stoc6

prices7

The commonl$ anal$:ed macro economic factors are as follows@

)ross Dom$sti "rodut )D"35 %D2 indicates the rate of growth of the econom$7 "t represents

the aggregate (alue of the goods and ser(ices produced in the econom$7 "t consists of personal

consumption e;penditure8 gross pri(ate domestic in(estment and go(ernment e;penditure on

goods and ser(ices and net e;ports of goods and ser(ices7 The growth rate of econom$ points out

the prospects for the industrial sector and the return in(estors can e;pect from in(estment in

shares7 The higher growth rate is more fa(orable to the stoc6 mar6et7

Sa6in7s and in6$stm$nt5 "t is ob(ious that growth requires in(estment which in turn requires

substantial amount of domestic sa(ings7 Stoc6 mar6et is a channel through which the sa(ings are

made a(ailable to the corporate bodies7 Sa(ings are distributed o(er (arious assets li6e equit$


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shares8 deposits8 mutual funds8 real estate and bullion7 The sa(ings and in(estment patterns of the

public affect the stoc6 to a great e;tent7

In#lation5 Along with the growth of %D28 if the inflation rate also increases8 then the real growth

would be (er$ little7 The effects of inflation on capital mar6ets are numerous7 An increase in the

e;pected rate of inflation is e;pected to cause a nominal rise in interest rates7 Also8 it increases

uncertaint$ of future business and in(estment decisions7 As inflation increases8 it results in e;tra

costs to businesses8 thereb$ squee:ing their profit margins and leading to real declines in

profitabilit$7

Int$r$st rat$s5 The interest rate affects the cost of financing to the firms7 A decrease in interest

rate implies lower cost of finance for firms and more profitabilit$7 More mone$ is a(ailable at a

lower interest rate for the bro6ers who are doing business with borrowed mone$7 A(ailabilit$ of

cheap funds encourages speculation and rise in the price of shares7

%a8 strutur$5 E(er$ $ear in March8 the business communit$ eagerl$ awaits the %o(ernment


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2. I&D(S%R, A&A+,SIS

An industr$ is a group of firms that ha(e similar technological structure of production and

produce similar products and "ndustr$ anal$sis is a t$pe of business research that focuses on the

status of an industr$ or an industrial sector &a broad industr$ classification8 li6e

BmanufacturingB*7 "rrespecti(e of specific economic situations8 some industries might be

e;pected to perform better8 and share prices in these industries ma$ not decline as much as in

other industries7 This identification of economic and industr$ specific factors influencing share

prices will help in(estors to identif$ the shares that fit indi(idual e;pectations

Industry +i#$ *yl$5 The industr$ life c$cle theor$ is generall$ attributed to 'ulius %rodens6$7

The life c$cle of the industr$ is separated into four well defined stages7

• Pioneering stage: The prospecti(e demand for the product is promising in this stage and

the technolog$ of the product is low7 The demand for the product attracts man$ producers

to produce the particular product7 There would be se(ere competition and onl$ fittest

companies sur(i(e this stage7 The producers tr$ to de(elop brand name8 differentiate the

product and create a product image7 "n this situation8 it is difficult to select companies for

in(estment because the sur(i(al rate is un6nown7

• Rapid growth stage: This stage starts with the appearance of sur(i(ing firms from the

pioneering stage7 The companies that ha(e withstood the competition grow strongl$ in

mar6et share and financial performance7 The technolog$ of the production would ha(e

impro(ed resulting in low cost of production and good qualit$ products7 The companies

ha(e stable growth rate in this stage and the$ declare di(idend to the shareholders7 "t is

ad(isable to in(est in the shares of these companies7

• Maturity and stabilization stage: the growth rate tends to moderate and the rate of

growth would be more or less equal to the industrial growth rate or the gross domestic

product growth rate7 S$mptoms of obsolescence ma$ appear in the technolog$7 To 6eep


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going8 technological inno(ations in the production process and products should be

introduced7 The in(estors ha(e to closel$ monitor the e(ents that ta6e place in the

maturit$ stage of the industr$7

• Decline stage: demand for the particular product and the earnings of the companies in the

industr$ decline7 "t is better to a(oid in(esting in the shares of the low growth industr$

e(en in the boom period7 "n(estment in the shares of these t$pes of companies leads to

erosion of capital7

)ro9t o# t$ industry5 The historical performance of the industr$ in terms of growth and

profitabilit$ should be anal$:ed7 The past (ariabilit$ in return and growth in reaction to macro

economic factors pro(ide an insight into the future7

&atur$ o# om$tition5 #ature of competition is an essential factor that determines the demand

for the particular product8 its profitabilit$ and the price of the concerned compan$ scrips7 The

companiesC abilit$ to withstand the local as well as the multinational competition counts much7 "f

too man$ firms are present in the organi:ed sector8 the competition would be se(ere7 The

competition would lead to a decline in the price of the product7 The in(estor before in(esting in

the scrip of a compan$ should anal$:e the mar6et share of the particular compan$Cs product and

should compare it with the top fi(e companies7

S:% analysis5 S5OT anal$sis represents the strength8 wea6ness8 opportunit$ and threat for an industr$7 E(er$ in(estor should carr$ out a S5OT anal$sis for the chosen industr$7 Ta6e for

instance8 increase in demand for the industr$


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7 *M"A&, A&A+,SIS

"n the compan$ anal$sis the in(estor assimilates the se(eral bits of information related to the

compan$ and e(aluates the present and future (alues of the stoc67 The ris6 and return associated

with the purchase of the stoc6 is anal$:ed to ta6e better in(estment decisions7 The present and

future (alues are affected b$ a number of factors7

*om$titi6$ $d7$ o# t$ omany5 Major industries in "ndia are composed of hundreds of

indi(idual companies7 Though the number of companies is large8 onl$ few companies control the

major mar6et share7 The competiti(eness of the compan$ can be studied with the help of the

following9

• Market share: The mar6et share of the annual sales helps to determine a compan$


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'inanial analysis5 The best source of financial information about a compan$ is its own

financial statements7 This is a primar$ source of information for e(aluating the in(estment

prospects in the particular compan$


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a3 R$turn on Ass$ts RA3

ROA is computed as the product of the net profit margin and the total asset turno(er ratios7

RA ; &$t "ro#it


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in(estments in the firm are attracti(e or not as the in(estors would li6e to in(est onl$ where the

return is higher7

3 R$turn on Equity

Return on equit$ measures how much an equit$ shareholderCs in(estment is actuall$ earning7 The

return on equit$ tells the in(estor how much the in(ested rupee is earning from the compan$7 The

higher the number8 the better is the performance of the compan$ and suggests the usefulness of

the projects the compan$ has in(ested in7

The computation of return on equit$ is as follows@

R$turn on $quity ; &$t ro#it to o9n$rss

*ontri=ution to t$ =usin$ss3 8 100

The ratio is more meaningful to the equit$ shareholders who are in(ested to 6now profits earned

b$ the compan$ and those profits which can be made a(ailable to pa$ di(idend to them7

d3 Earnin7s $r Sar$ E"S*

This ratio determines what the compan$ is earning for e(er$ share7 For man$ in(estors8 earnings

are the most important tool7 E2S is calculated b$ di(iding the earnings &net profit* b$ the total

number of equit$ shares7

The computation of E2S is as follows@

Earnin7s $r sar$ ; &$t ro#it


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The E2S is a good measure of profitabilit$ and when compared with E2S of similar other

companies8 it gi(es a (iew of the comparati(e earnings or earnings power of a firm7 E2S

calculated for a number of $ears indicates whether or not earning power of the compan$ has

increased7

$3 Di6id$nd $r Sar$ D"S3

The e;tent of pa$ment of di(idend to the shareholders is measured in the form of di(idend per

share7 The di(idend per share gi(es the amount of cash flow from the compan$ to the owners and

is calculated as follows@

Di6id$nd $r sar$ ; %otal di6id$nd aym$nt < &um=$r o# sar$s outstandin7

The pa$ment of di(idend can ha(e se(eral interpretations to the shareholder7 The distribution of

di(idend could be thought of as the distribution of e;cess profitsGabnormal profits b$ the

compan$7 On the other hand8 it could also be negati(el$ interpreted as lac6 of in(estment

opportunities7 "n all8 di(idend pa$out gi(es the e;tent of inflows to the shareholders from the

compan$7

#3 Di6id$nd "ayout Ratio

From the profits of each compan$ a cash flow called di(idend is distributed among its

shareholders7 This is the continuous stream of cash flow to the owners of shares8 apart from the

price differentials &capital gains* in the mar6et7 The return to the shareholders8 in the form of

di(idend8 out of the compan$Cs profit is measured through the pa$out ratio7 The pa$out ratio is

computed as follows@


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"ayout Ratio ; Di6id$nd $r sar$ < Earnin7s $r sar$3 ? 100

The percentage of pa$out ratio can also be used to compute the percentage of retained earnings7

The profits a(ailable for distribution are either paid as di(idends or retained internall$ for

business growth opportunities7 )ence8 when di(idends are not declared8 the entire profit is

ploughed bac6 into the business for its future in(estments7

73 Di6id$nd ,i$ld

Di(idend $ield is computed b$ relating the di(idend per share to the mar6et price of the share7

The mar6et place pro(ides opportunities for the in(estor to bu$ the compan$Cs share at an$ point

of time7 The price at which the share has been bought from the mar6et is the actual cost of the

in(estment to the shareholder7 The mar6et price is to be ta6en as the cum=di(idend price7

Di(idend $ield relates the actual cost to the cash flows recei(ed from the compan$7 The

computation of di(idend $ield is as follows

Di6id$nd yi$ld ; Di6id$nd $r sar$ < Mark$t ri$ $r sar$3 ? 100

)igh di(idend $ield ratios are usuall$ interpreted as under(alued companies in the mar6et7 The

mar6et price is a measure of future discounted (alues8 while the di(idend per share is the present

return from the in(estment7 )ence8 a high di(idend $ield implies that the share has been under

priced in the mar6et7 On the other hand a low di(idend $ield need not be interpreted as

o(er(aluation of shares7 A compan$ that does not pa$ out di(idends will not ha(e a di(idend

$ield and the real measure of the mar6et price will be in terms of earnings per share and not

through the di(idend pa$ments7


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3 "ri$


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R$s$ar )a5

"n(estment decisions are influenced b$ (arious moti(es7 Some people in(est in a business to

acquire control and enjo$ the prestige associated with it7 Some people in(est in e;pensi(e $achts

and famous (illas to displa$ their wealth7 Most in(estors howe(er are largel$ guided b$ the

pecuniar$ moti(e of earning a return on their in(estment7

Return is the primar$ moti(ating force that dri(es in(estment7 "t represents the reward for

underta6ing in(estment7 Since the game of in(esting is about returns &after allowing for ris6*8

measurement of reali:ed &historical* returns is necessar$ to access how well the in(estment

manager has done7 "n addition8 historical returns are often used as an important input in

estimating future &prospecti(e* returns7


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=@$ti6$s

-7 To calculate the ris6 and return of a particular stoc6 to estimate weather the compan$ is reliable

for the in(estor to in(est in the shares of the compan$7

+7 To anal$:e the (arious ris6s and returns patterns in shares7

7 To 6now the ris6 in(ol(ed with in(ests in equities7

.7 To anal$:e which is the best performance

7 To stud$ the in(estors reference in in(esting in Stoc6s7


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Hypothesis

Hypothesis 1

$he null hypothesis o the study assumes,

/ 0 $here is no signifcant impact o Equity analysis while investor investing in a

security,

10 $here is a signifcant impact o Equity analysis while investor investing in a

security,.

Hypothesis 2

/0 $he investment perormance o Equity are not done by the hedging,

10 $he investment perormance o Equity are done by the hedging

Hypothesis 3

/0 $he risk and return o the Equity are not considered while investors making

decisions on their investment security,

10 $he risk and return o the Equity are considered while investors making

decisions on their investment

Hypothesis 4

/0 $he risk and return o the Equity will not have major impact on the securities

10 $he risk and return o the Equity will have major impact on the securities.

Hypothesis 5

/0 $he sample Equity may not in2uence the whole industry,


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10 $he sample Equity will in2uence the whole industry

So$ o# t$ study5

The stud$ for ris6 return anal$sis is carried out b$ ta6ing -, different companies of different sectors (i:7

"T 8 Te;tile 8 Telecommunications 8 2arma and 2etroleum7 The present project wor6 has

been underta6en to pro(ide information regarding ris6 return on equities7 The following are the

limitations of the stud$7

The stud$ is based on the secondar$ data which is a(ailable from (arious websites7

The stud$ is limited to onl$ ten securities (i: 5ipro8 )138 Tata Motors8 Maruthi Su:u6i8 harti

Airtel8 Reliance 1ommunication8 iocon8 1ipla8 %ail8 O#%1 The time ta6en to underta6en the project wor6 is (er$ short9 hence onl$ ten securities were

chosen for the stud$7

"$riod o# t$ study

$he duration o the project is 34days only


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REASEAR*H ME%HD+),

R$s$ar D$si7n

The present stud$ is based on Secondar$ data7 The (arious source of secondar$ data include

• "nternet

• Share prices of different SE Sense; companies7

• "nformation pro(ide b$ networth stoc6 bro6ing

• Maga:ines

mouni(equity analysis)

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