A Project Report

Group Members: Pragnesh Rasania 4062 Hitesh Indrapuri 4018

Krupal Mistry Bhupendra Mod

K.S.SCHOOL OF BUSINESS MANAGEMENTGUJARAT UNIVERSITY AHMEDABAD-380013

SEMESTER-IIDIV.-A

PREFACEPREFACE

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Development Of A PortfolioDevelopment Of A Portfolio (Equity)(Equity)

By ApplyingBy Applying

E-I-C Model & PortfolioE-I-C Model & Portfolio TheoriesTheories

Practical training enhances the theoretical knowledge and concepts. To make it in practice, we have some project works in our syllabus of the M.B.A. program. To fulfil these academic requirements we undertook a study on the topic "Portfolio Development by using E-I-C framework and Portfolio Theories." in the subject 'Security Analysis And Portfolio Management'.

The subject initially deals with investment, rather efficient investment. The need to hold a portfolio is basically a risk diversification and optimum allocation of fund to generate a rich pool of returns in the future, with minimum possible risk.

Our analysis is totally based on the secondary data gathered from the different sources, like, newspaper, magazines, some corporate database, some web sites, the annual reports of the companies, and individual journals of the industries. There are several limitations too, because of the unavailability of data. We have also taken some assumptions wherever needed.

In our report we have first done the Economic Analysis. In Economic Analysis we have analysed some core and under laying facts of the Indian economy as well as the global economy. We have also analysed some emerging trends in the world economy and tried to demonstrate the effect of that trends on investment dimensions, because all the economies of the world are inter linked and have effects on each other, so it is necessary to analyse those all facts. After the economic analysis we have found out some sectors which are likely to perform better in the emerging economy.

The next step is Industry Analysis. We have used the format suggested by some of the authors in this field. We have even tried to customise the format according to the availability of the data and have used the customised format for the analysis. From the Economy Analysis we have found out some sectors and industry which are going to perform better in the emerging economy. Now from the Industry analysis we would be able to find out the core facts which have an effect on

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the profitability equations or the future of an industry. We have also tried to find out the most beneficial company in the sector or industry, from the analysis of the facts, patterns, structure, opportunities, and threats. Here also the scope of an analysis is limited because of the non-availability of the data. The next step is Company Analysis. Here We have applied several filters for the sake of sort listing the set of companies, which are there in the corporate database of CMIE (Prowess). These filters are,

(i) mutual fund stake must not be less than 3 per cent,

(ii) the company must have a profit of minimum 10 crore.

(iii) The company must have a growth rate of minimum 15 per cent.

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ACKNOWLEDGEMENTACKNOWLEDGEMENT on this project we got the opportunity to work under the sincere guidance of Mr. kaushik trivedi who has given us able guidance and constructive criticism at every stage of the work. He was always there to solve our doubts and guided us in the right direction. To him we owe the deepest debt of gratitude.

We acknowledge our indebtedness to our friends who have also helped in solving our queries and also the local Share brokers of Ahmedabad who have kindly co-operated and helped in collection of data and other information.

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CONTENTSCONTENTSPreface (II)Acknowledgement (V)Contents (VI)Bibliography (125)

No. Topic Page

(I) INTRODUCTION 011. Introduction to fundamental analysis 012. Introduction to technical analysis 043. introduction to portfolio theories 05

(II). ECONOMIC ANALYSIS 07A Indian economy 08

1.GDP growth 082.Agriculture 093.Insustry 105.Capital markets 156.Public Finance 207.Money Banking & interest rates 219.Balance of Payments 2310.Foreign Trade 2311.Gross Domestic Savings 2412.Gross Capital Formation 2613.Private Final Consumption 2614.Impact of 2000-01 budget on capital markets 27

B Global Economy 291.Global Economic indicators 292.Global Currency Markets 30

C Global Capital markets and interest Rates 34

D Summary of the analysis 36E Forecasting 40

(III). INDUSTRY ANALYSIS 431. Information Technology 462. Cement 573. Bio-technology 704. Pharmaceutical 725. Steel 83

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(IV) COMPANY ANALYSIS 891. The structure of the analysis 902. Competitive analysis of the industry majors 953. The sort l isted Companies 964. Aurobindo Pharma Ltd. 20035. Jindal Steel & Power 1036. P S I Data systems 1087. Nath seeds 1128. Indian Rayon and Industries Ltd. 114

(v) PORTFOLIO DEVELOPMENT 1181.Single Index Model 121

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INTRODUCTIONINTRODUCTION

The development of a portfol io deals with three questions:

(I). Which securit ies are best for investment, matching with our risk-return requirements?

(II). When should be invested in those securit ies? And

(III). What should be the proportion for each security in the bunch of investments?

This whole project is developed after doing the fundamental analysis and the technical analysis. Fundamental analysis guides an investor towards the available best direction for investment , while technical analysis deals with the timing of investment. A particular share is not good always. There has to be certain point at which the investment decision in that share is good, and that point could be identif ied by technical analysis.

After deciding on the asset selection and asset allocation t iming the next step is to decide the weight of individual security to optimize the risk and the return. Portfol io theories are used for this decision.

INTRODUCTION TO FUNDAMENTAL ANALYSIS

Fundamental Analysis focuses on certain basic factors relating to the company, the industry, and the economy and seeks to determine “what ought to be the price of the equity stock. The basic tents of this approach are as follows:

There is an intrinsic value for each stock and this value can be determined by a penetrating analysis of the fundamental factors relating to the company, industry, and economy.

At any given point of t ime due to temporary market disequil ibrium the current market price of a stock can be at variance with its intrinsic value. Therefore superior

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returns(abnormal profit) can be earned by buying undervalued securit ies(securit ies whose intrinsic value exceeds the market price) and sell ing over-valued securit ies(securit ies whose intrinsic value is less than the market price).

Intrinsic Value

The question is: How do we define and measure intrinsic value?. A more general definit ion of intrinsic value is offered by Graham and Dodd. They define the intrinsic value of a security as “that value which is justif ied by the facts e.g. assets, earnings, dividends, definite prospects, including the factor of management of the company”.

In practice the fundamental analyst determines the intrinsic value of an equity stock by discounting the prospective dividend stream using the rate of return required by the equity shareholders as the discount rate. As the prospective dividend stream depends upon the economic and industrial environment, relative important of the company within the industry, the company’s f inancial strength, quality of i ts assets, management, etc, the fundamental analyst f irst seeks to establish quantitative and qualitative relationships between the economic, industry and company (E I C) indicators. He then uses these relationships for forecasting earnings and dividends.

Economic Analysis

The preferred order for fundamental security analysis is

(1). The economy and market

(2). The industry and

(3). The company.

It is very important to assess the state of the economy and the outlook for primary variables such as corporate profits. If a recession is l ikely, or underway, stock prices wil l be heavily affected at certain t imes during the

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contraction. Conversely, i f a strong economic expansion is underway stock prices wil l be heavily affected, again at particular t imes during the expansion. Thus, the status of economic activity has a major impact on overall stock prices. It is, therefore, very important for investors to assess the state of the economy and its implications for the stock market.

In turn, the stock market has a definite impact on each individual investor. Investors cannot very well go against market trends. If the market goes up (or down) strongly, the majority of stocks are carried along. Thus, the impact of the overall market impact is the earnings of a particular company. Available evidence for developed economies suggests that from one-fourth to one half of the variabil i ty in a company’s annual earnings is attr ibutable to the overall economy. Thus, economy/market analysis is considered extremely important.

Industry Analysis

After completing an analysis of the economy and the overall market, an investor can decide if i t is favorable to invest in common stocks. If so, the next step should be industry analysis. In a semi controlled economy l ike India, changes in government policies generally affect al l companies in a given industry.

Company Analysis

After an analysis of economy, market and industries, the next step is to concentrate on specif ic companies. The bottom line is f inancial statements i.e., earnings per share is considered to have a powerful impact on the price of the share. While a number of factors are important in analysing a company, investors tend to focus on earnings

and dividends.

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INTRODUCTION TO TECHNICAL ANALYSIS

Technical analysis is the study of historical patterns of stock price behavior and volume of trading that takes place on the stock market. The term technical implies the study of market itself, and therefore, technical analysis is often referred to as the market analysis. The input to the technical analysis is the sum total of statistical information produced by the market most of which is in terms of volume of stock market transactions and levels of share prices over a historical period.

The technical analyst believe that we should study only the market movement and that the factors external to the market may affect the stock price which embodies all forces operating on the stock market. The technical analyst’s emphasis on price rather than on the underlying factors is not entirely inconsistent with the stock market eff iciency hypothesis which says that all news, good or bad, is instantly reflected in the market price.

INTRODUCTION TO PORTFOLIO THEORIES

To build and manage a portfol io that wil l meet the investment goals, the investor should f irst define these goals. The next step wil l be to identify the constraints which have a bearing on the achievement of these goals. Once the goals and the constraints are specif ied, he has to select the appropriate instruments of investments l ike government bonds, corporate debentures, equity stocks, etc., and combine them to obtain a portfol io with risk-return characteristics which are in conformity with his own risk-return preferences.

The most important benefit of forming a portfol io with diversif ied investment is the reduction of r isk. Investing all our funds in a single security is advisable only if we are absolutely sure that the security’s performance wil l be rewarding or if we are wil l ing to gamble all your funds on the success of a single security. It just means don’t put all your eggs in one basket.

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In the final analysis, construction of a portfol io boils down to a game of maintaining an optimum trade-off between risk and return.

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[A].INDIAN ECONOMY[A].INDIAN ECONOMY

[1]. GDP GROWTH

GDP growth rate

Year %Change

94-95 7.095-96 7.3

96-2003 7.52003-2004 5.02004-2005 6.8

2005-00 6.4

The graph shows that after the year 2003-2004 the real GDP growth rate has failed to grow substantial ly. There was a rise of 1.8% during 2004-2005 but it again started decline the gross domestic savings and gross domestic capital formation have also declined over last four years.

[2]. AGRICULTURE

Agriculture sector has remained volati le. Growth rate gyrate from sharp decline to equally sharp increase. There was 8.2% increase in year 2004-2005 but then the consecutive two years has recorded a poor crop. This was the normal but the worst monsoon. Yet the agriculture production is to increase by .9% which is not good but is better than the last year. The major area for concentration in agriculture is the export of wheat.

Agriculture production growth rate

Year % Change 94-95 4.595-96 -2.1

96-2003 9.52003-2004 -6.22004-2005 8.2

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2005-00

-1.9

00-01 0.9

[3]. INDUSTRY

Index of industrial Production (IIP) grew by 5.4 per cent in sept-2000, compared to 7.4 per cent growth in sept-2005.. The electricity sector grew at a much lower pace of 3.4 percent during Apri l-Sept.-2000 compared to 7.8 per cent in the same period of the previous year.

Industrial growth rate

In PercentageIndustry Weight Apr2005-

Sept2005Apr00-Sept00

Basic goods 35.51% 5.3% 5.5%Capital goods 9.69% 9.7% -1.2%Intermediate goods 26.44% 9.7% 5.7%Consumer Durable 5.12% 14.1% 21.6%Consumer non durable 23.25% 0.0% 3.4%

Total 100.00% 6.4% 5.5%

Source : CMIE

In the manufacturing segment, food products and metal products recorded substantial ly higher growth during Apri l-Sept00. In food products, sugar and chocolates fared very well recording high production growth of 21.9 per cent and 52.8 per cent respectively.

In the use based classif ication of the IIP, the capital goods index declined by 2.7 per cent in September-2000, indicated no revival in investment activity. The capital goods index declined by 1.2 per cent during Apri l-September 2000.The use-based classif ication shows up only the consumer goods sector in favorable l ight, with growth of 7.4 per cent in the first half of

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2000-01. Growth of the nondurable sector improves to 4.5 per cent in September-2000 compared to much lower growth in the preceding two months.

[5]. CAPITAL MARKETS

(I). Primary Markets

Total resources mobil ised during the current f iscal t i l l Nov-2000 was Rs. 56155.92 Crore of this 50 per cent was raised from the overseas market which included Rs. 25662 Cr. Raised by SBI’s India Mil lennium Deposit Scheme. The amount raised during the corresponding period of the previous fiscal was Rs. 39148 Cr.

Resource raised from capital market (Rs Cr.)

Year Total Domestic Public Rights PPI OverseasFoliation Foliation Foliation

April-Nov 2005

39148.4 37338.0 11189.5 969.0 25179.5 181042.0

April-Nov 00 56155.9 28150.5 5376.2 351.1 22432.2 28005.4

(II). Secondary Capital Markets

BOMBAY STOCK EXCHANGE

In November, the BSE sensex gave returns of f7.73 per cent after two consecutive months of negative returns. On 1 November the sensex opened at 2749.35, scaled to a high of 4046.15 on 29 november, before closing at 2003.2005 on 30 November. Cipla is going to be included in sensex in place of novartis.

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The major trend which is seen in the last two month is the erosion of the market capital ization of IT companies. Which was the because of the erosion in the NASDAQ and the us economy.

OTHER RELATED ISSUES

BSE Sectoral Index

Index Clsing as on 30 Nov. | Change over 31 OctBSE IT 3024.52 2.03BSE FMCG 20045.70 7.32BSE Consumer Durable 924.00 8.31BSE Capitale Goods 660.33 12.33BSE Health Care 1396.89 6.85

FOREIGN INSTITUTIONAL INVESTORS

The FIIs made a net investment of Rs. 20054.4 Cr.

SEBI decided to simplify the sub-account opening process by foreign institutional investors on behalf of their cl ients. The process wil l henceforth be automatic. By shift ing the due dil igence responsibil i ty on FIIs completely. SEBI said that henceforth when the process is completed the FIIs

need not wait for the formal registration process to be over before accepting client requests.

Fii Net Investment in the Secondary Market.

InvestmentsMonth Rs. In Crore

Nov-2005 1291.9Dec-2005 152005.2

Jan-00 362.6Feb-00 3025.5Mar-00 1651.2Apr-00 2417.8May-00 72.5Jun-00 -1036.2Jul-00 -1007.3Aug-00 1390.9

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Sep-00 -91.9Oct-00 -9.1Nov-00 20054

ROLLING SETTLEMENT

From 20 t h Nov, BSE introduced modified carry foreward in roll ing settlement in 15 stocks specif ied by SEBI. The settlement bagan on 21 November.

The threat of roll ing settlement had caused a big crash in sensex.

The technology meltdown was the market's biggest trend. An interesting trend that developed in November was the re emergence of old economy and PSUs. Old favorites l ike BHEL, L&T, and MTNL came back to l ight. At the beginning of 2000, many FIIs and local institutions jeld 50-60 per cent of their portfol io in trends. That came down to around 35 per cent by the end of the year.

Year 2000 looks interesting with the slowing domestic economy and pressure on the fiscal deficit. The government may have to come up with a reforms-mailed budget in Feb. privatization wil l be high on the l ist, including some strategic stake sales. Landmark deals are l ikely to be Air India and Maruti Udygh. India is seeing consolidation in many industries and this is hoped to be continued.

[6]. PUBLIC FINANCE

During the current f iscal year the union government's f iscal posit ion was in a better shape. Fiscal deficit was under control while non-debt receipts recorded a healthy growth, expenditure remained subdued.

Gross fiscal deficit t i l l October at Rs. 2005 Cr. Was 46 per cent of the projected deficit for the year. The proportion a year ago was 72 per cent.

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Central Government Expenditure

April-Oct Rs in Crore As % of budjetEstimation

2004 145806 51.4

2005 154006 45.5

Gross Tax Collection: Apri l-October

2004 2005 % ChangeDirect taxes 20917 29344 40.3Indirect Taxes 5912003 65366 10.4Total 80114 94704 18.2

Expenditure grew by six per cent t i l l October as against 11 per cent envisaged in the budget. Both plan and non-plan expenditure recorded lower than projected growth. Meanwhile tax ravenue recorded a healthy growth of 19 per cent, higher than the 16 per cent growth expected in the budget. Non tax revenue too, recorded higher growth during the Apri l-October-2000.

[7]. MONEY BANKING AND INTEREST RATES

Liquidity in banking system has shown signs of improvement during November 2004. Money supply recorded a growth of 14.2 per cent as on 3 Nov compared to 13.6 per cent growth recorded during the first six months of 2004-05 net bank credit to government recorded a higher growth of 13 per cent. Bank

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credit to commercial sector maintained a healthy growth of arround 18 per cent.

Commercial bank's total credit growth showed down to 21.8 per cent as on 17 Nov. from 22-23 per cent growth maintained since June 2000 onwards.

[11].GROSS DOMESTIC SAVINGS

The saving rate has steadily increased in the last three decades from an average rate of 17 per cent of GDP in the 2001, the rate cl imed to 19 per cent in 2002 and remained fractionally over 23 per cent in the 2003. In 2005-2006 the saving rate had reached an all t ime high of 25.5 per cent before declining to 22 per cent in 2004-2005.

Inspite of improvement in the saving rate over the past decades, India’s saving rate remained substantial ly lower than those in few major developing countries in Asia.

% Share in Domestic Savings

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[13].PRIVATE FINAL CONSUMPTION

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During the past three decades the composit ion op PFCE has experienced structural changes. The important of food item in total PFCE has been declining in 2003-04. It accounted for 54 per cent of the total PFCE. In 2004-2005 the share had come down to 46 per cent.

The major gain was noticed in transport and communication. The expenditure on this transport and communication grew by 11 per cent last decade.

[D]. SUMMARY OF THE ANALYSIS[D]. SUMMARY OF THE ANALYSIS

We are not unduly worried about earnings growth in the Indian IT sector. Valuations in this sectors are another story, and the market wil l swing back and forth deciding on the correct level the same as it did this year. What wil l l ikely see is a movement away from homogenous sector valuation variances to more discrimination leading to sub sectors valuation and more stock specif ic movements.

The economy wil l l ikely turn more protectionism in the coming year going by the strengthening demand for, more protection. On an annual basis this may be good for the bottom lines of the affected companies in the commodity and capital goods sectors but can’t sustain over the medium to longer term in a WTO world. Longer term investment in these sectors should take into account consolidation, i.e. M & A prospects leading to economies of scale. Similarly, longer term buys should include divestment prospects in oil and gas and metal sectors, we believe that the government wil l seriously pursue divestment in the coming year. Divestment tr ies the investors patience but with current valuations of most PSUs you can’t go very wrong.

For sectors dependent on rural demand l ike cement vehicles for rural use and consumer goods- both durable and fast moving types we do not see over bright prospects this is the second year of low agriculture production. Moreover support prices and government procurement have been week.

Areas where reforms have moved ahead in the past year are telecom and power. The telecom sector has been l iberalized and a number of power projects have been cleared. We expect

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to see more telecom companies in the market giving the investor a wider choice as state run monopolies struggle in the transit ion. The clearance of power projects should bring cheer to power equipment and commodity suppliers.

Economic growth

Agencies scale down growth estimates, GDP expected to grow by 5.9 per cent in 00-01

industry chambers suggest actions plans to f ight slowdown emphasis the need for structural reforms to move to a higher growth trajectory.

Industry Growth

Industrial growth continues decelerating, capital goods industries reports production decline

six core sectors record impressive 11.7 per cent growth in October, but other signals point towards the slowdown continuing in H2.

Money Supply

As on November 3, money supply expansion remains moderate at 14.2%

Thanks to the IMD, the YoY growth in aggregate bank deposits shoots up to 18.5%.

RBI governor says there is no need to change interest rates now.

Inflation

inflation rate at over 7 per cent for the third consecutive week continues to be driven by the fuels group.

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Manufactured products inflation starts creeping up, but it ’s sti l l too early to read a confirmed prices realization recovery.

Fiscal Deficit

During the first seven months, f iscal and revenue deficit dipped by 11.8% and 21.2% respectively.

Tight control on non-plan expenditure so far; but possible disinvestment shortfal l causes concern.

Trade Deficit

Trade deficit fel l from $ 5.9 bn to $ 5.3 bn during Apri l-October exports maintained momentum, grew by more then 20 per cent in the same period

Non-oil imports fai led to enthuse, dropping by about 3.5%.

Rupee

Rupee continues to drift moderately lost nearly 7% since March-end.

The IMD issue has built up forex reserves, which are at $ 38.3 bn depletion in H1 nearly wiped out, giving RBI greater armour to f ight speculation.

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WHY DO INDUSTRY ANALYSIS

Investment practit ioners perform industry analysis because they believe it helps them isolate investment opportunit ies that have favourable return-risk characteristic. We l ikewise have recommended it as part of our three-step, top-down plan for valuing individual companies and selecting stocks for inclusion in our portfol io. What exactly do we learn from an industry analysis? Can we spot trends in industry that make them good investments? Studies of these questions indicate unique patterns in the rates of return and risk measures over t ime in different industries.

THE MAP FOR ANALYSIS

All of f irst we have find out some industries, which are supposed to perform better in these emerging trends, both global and domestic. Those are,

Information Technology

Entertainment

Telecom

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Biotechnology

Pharmaceutical

Banking

Cement

Petroleum

For the purpose of analysis we have taken the model from the ICFAI study material and done the analysis as per our requirements, which is as shown bellow.

1. Past sales and earnings performance.

2. Permanence of the industry

3. Attitude of the government

4. Labor condit ion

5. Competit ive Condition

6. Industry Share prices relative to industry earnings.

Then we have done the structural analysis by applying the five force model. At last we have pick up some favorable industries in which investment would be of worth, and wil l give comparatively more returns.

[1]. INFORMATION TECHNOLOGY[1]. INFORMATION TECHNOLOGY

[1.1]. PROFITABILITY OF THE INDUSTRY MAJORS

2003 2004 2005 PAT/GROSS SALES(in %) 9.49 13.77 16.57 Pbdit / net sales 21.22 23.79 26.22 Pat / net sales 9.72 14.03 16.88 Pbdit/ total assets 27.55 31.32 30.84 Pat /total assets 12.62 18.46 19.85 Pbdit / gfa 64.2 73.51 81.91 Pat / gfa 29.42 43.33 52.72 Pbit / networth 46.74 46.63 40.11 Pat / networth 27.06 34.54 31.34 Pbit / capital employed 33.54 36.23 34.34No. Of companies 31 31 29

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As seen in the graph and the table, the industry has a very good rate of return in each expect. And these return ratios are yet improving.

If we compare these return ratios with other industries these are really attractive. And provide a handsome return on over investment.

The key profitabil i ty ratios has been improved a lot with t ime. And there are also some benefits from the point of view of cost. The industry majors have been successful in cutt ing down their costs, which has worked as a key factor for the profitabil i ty.

[1.2] GROWTH OF THE INDUSTRY

2003 2005 2004% Change over past year

Gross sales (Excl. internal transfer) 21.73 34.81 30.43Net sales (Excl. internal transfer) 22.75 35.66 30.27VOP 23.24 35.86 30.44Cost of production 20.92 29.51 25.7Selling & distribution costs 23.83 28.21 19.04Administrative costs 20.57 41.89 36.84Interest 6.27 -13.08 7.61Depreciation 100.48 48.76 23.91Tax 62.34 29.92 102.82

PBDIT (NNRT) 44.44 51.86 43.3PBDT (NNRT) 63.7 76.01 50.5PBIT (NNRT) 34.54 52.68 48.27PBT (NNRT) 52.54 86.88 58.91PAT (NNRT) 50.02 95.34 57.04Cash Profits (NNRT) 61.67 79.82 48.06

Total exports 57.92 65.59 37.77Total imports 16.79 32.64 54.51Imported raw material -7.2005 -2.62 82.78

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Gross fixed assets (Net of WIP) 39.27 27.86 29.56Net fixed assets (Net of WIP) 34.94 18.56 28.35Current assets 20.27 39.83 41.66 Inventories -4.82 -1.49 7.27 Sundry debtors 29 26.89 40.66

Total assets 25.02 40.38 46.88

No. of companies 31 31 29

The industry has a sales growth of around 30 per cent, and profit growth rate of around 50 per cent over the last three years, which too good for a industry. The major source of revenue for this industry or rather sector is export earnings. All the leading firms in this industry are big exporters. No doubt there are so many discussion about the growth of this industry. Some analysts also believe that the huge growth, which has been recorded by the industry, is hard to sustain. But sti l l the growth rate of even around 40 per cent could be considered as healthy growth, and this industry is expected to grow at the same rate at least for the next two years. And if prices support the earnings it wil l be a good investing in this sector.

[1.3]. INDUSTRY P/E RATIO

The industry Price to earnings ratio (P/E) is 30.4. which is abnormally high. The industry EPS is expected to be at 688 for the next year, and the P/E would be at 26.5 according to some experts. So the price next year wil l be 18232.

[1.4]. MAJOR COMPANIES IN THE SECTOR

(1.4.1). Infosys

The scrip has given a strong bearish signal as it breaks the support level of i ts trend l ine, which had provided support in the last six months. This trend l ine wil l provide resistance to the scrip at Rs. 6340.

The long term oscil lators of the scrip have further sl ipped into negative territory confirming the bearish

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mode of the wave count. The monthly stochastic, which is another important indicator of the medium term trend, is indicating that the bad days of the scrip are far from over. The extreme short-term indicator of the medium term trend, is indicating that the bad days if the scrip have moved into oversold territory but they have not given a buy signal from that territory.

Financials

Mar-2003 Mar-2004 Mar-2005Gross sales 258.67 508.89 884.35PAT (NNRT) 61.86 144.16 286.1Growth (%) Gross sales 84.49 96.73 73.78 Net sales 84.24 2003.13 73.2004 Cost of production 89.58 82.41 69.28 GFA 47.48 60.67 68.13 Total assets 61.12 238.65 47.57Margins (%) PBDIT (NNRT) / Sales 34.37 39.12 42.88 PBDT (NNRT) / Sales 34.26 39.04 42.83 PAT (NNRT) / Sales 23.91 28.33 32.35 PBDIT (NNRT) / Net sales 34.52 39.21 42.93 PBDT (NNRT) / Net sales 34.4 39.13 42.88 PAT (NNRT) / Net sales 24.02 28.39 32.39

Returns ratios (%) 43.29 38.58 40.65 PAT / Net worth 40.38 34.76 36.1 PAT / Total assets 58.02 48 47.85 PBDIT / Total assets 62.21 53.27 53.88

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[1.4.2]. SSI

Financials

Jun-2003 Jun-2004 Jun-2005Gross sales 23.11 41.89 83.82PAT (NNRT) 6.18 10.08 18.01Exports 0 0.85 1.28Imports 0.32 0.73 0.71Net worth 13.65 35.95 106.39Growth (%) Gross sales 74.02 81.26 100.1 Net sales 74.02 81.26 2005.86 Cost of production 79.46 89.37 178.96 GFA 2005.78 133.03 79.77 Total assets 72.31 140.09 94.15Margins (%) PBDIT (NNRT) / Sales 46.34 47.03 41.03 PBDT (NNRT) / Sales 41.37 39.22 34.23 PAT (NNRT) / Sales 26.74 24.06 21.49 PBDIT (NNRT) / Net sales 46.34 47.03 41.08 PBDT (NNRT) / Net sales 41.37 39.22 34.27 PAT (NNRT) / Net sales 26.74 24.06 21.51Returns ratios (%) PAT / Net worth 54.67 40.65 25.31 PAT / Total assets 28.76 21.8 18.76 PBDIT / Total assets 49.85 42.61 35.82 PBDIT / Capital employed 64.06 52.09 40.94

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[1.4 .3]. Satyam

Mar-2003 Mar-2004 Mar-2005Gross sales 178.49 378.13 677.07PAT (NNRT) 25.24 72.91 134.67Cash profit(NNRT) 50.63 115.86 205.69Exports 159.2005 321.76 577.49Imports 92.18 193.37 292.62Net worth 102.7 166.92 350.06Growth (%) Gross sales 2005.2003 111.85 79.06 Net sales 2005.82 111.91 79.2 Cost of production 146.89 2003.18 77.27 GFA 84.73 68.08 42.48 Total assets 71.88 85.38 59.26Margins (%) PBDIT (NNRT) / Sales 36.25 38.82 37.3 PBDT (NNRT) / Sales 29.54 31.83 31.27 PAT (NNRT) / Sales 14.14 19.28 19.89 PBDIT (NNRT) / Net sales 36.33 38.89 37.34 PBDT (NNRT) / Net sales 29.6 31.88 31.29 PAT (NNRT) / Net sales 14.17 19.31 19.91Returns ratios (%) PAT / Net worth 26.65 54.08 52.1 PAT / Total assets 13.07 20.93 22.96 PBDIT / Total assets 33.52 42.14 43.05 PBDIT / Capital employed 38.84 48.14 54.24

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[1.4 .4]. NIIT

Sep-2003 Sep-2004 Sep-2005Gross sales 325.54 449.68 577.2003PAT (NNRT) 67.89 108.11 142.66Exports 77.15 130.62 169.09Imports 24.8 22.48 28.33Net worth 193.63 292.42 413.94Growth (%) Gross sales 43.67 38.13 28.53 Net sales 43.76 38.1 28.53 Cost of production 66.08 51.18 53.8 GFA 33.86 10.68 20.57 Total assets 39.07 9.42 14.1Margins (%) PBDIT (NNRT) / Sales 36.6 37.32 37.36 PBDT (NNRT) / Sales 27.2 31.68 33.78 PAT (NNRT) / Sales 20.85 24.04 24.68 PBDIT (NNRT) / Net sales 36.63 37.36 37.4 PBDT (NNRT) / Net sales 27.23 31.72 33.82 PAT (NNRT) / Net sales 20.87 24.07 24.71Returns ratios (%) PAT / Net worth 40.71 44.49 40.39 PAT / Total assets 19.69 25.73 30.36 PBDIT / Total assets 34.55 39.95 45.95 PBDIT / Capital employed 47.33 52.5 55.66

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NIIT INFOSYS

SATYAM

[1.5].GOVERNMENT ATTITUDE

- Liberalised scenario for venture capital f irms should help the growth of new ventures

- FII l imit raised from 30% to 40% is l ikely to help all the software companies by increasing demand for stock

- Reduction in tax-free income is l ikely to impact the bottomlines of some of the software companies as a substantial chunk of the income for them is export income. This wil l amount to an effective tax of 7.7% of PBT (20% income taxed at 38.5% corporate tax rate) for the f irst year and wil l go on increasing by

31

the same amount every year for the next 5 years). However, companies wil l be insulated from this section if they are receiving deductions under the sections 10A and 10B of the Income Tax Act (10-year tax holiday). This effectively means that most Indian software exporters wil l not be hit by the new tax provisions (as most operate through Software Technology Parks or 100% EOUs) t i l l the t ime their 10-year tax holiday has not expired. This has a negative implication for new companies who are planning to set up development centres. Similarly, existing companies wil l not be avail of benefits under section 10 for their new units.

- Lowering of hardware prices provides benefits on the expenditure side. - An increase in the tax on dividend is l ikely to affect al l of these companies. However, the impact would be marginal given the low payout ratios of these companies.

[1.6]. LABOUR CONDITIONS

Since this is highly technology oriented sector, the impact of labour may bot be very high though the presone of personal trained in this sector may be felt. On the whole this sector doesn't suffer from any extra labour problems.

[1.7].CONCLUSION.

The IT index moved more or less in tandem with the BSE Sensex. As on 19 December 2000, the IT index has lost 22.85 per cent against a fal l of 22.74 per cent in the Sensex. Riding on global wave of wild investor optimism for tech stocks coupled with a more-than-impressive performance by frontl ine domestic IT companies l ike Infosys, Wipro and Satyam, the market capital ization of the sector doubled in the first two months of the year.

However the days of rejoicing was suddenly cut short by the global meltdown in the technology stocks triggered by the failure of some of the prominent Internet companies l ike Boo.com of the UK. Moreover the verdict to split the world’s biggest and most successful software company, Microsoft, prompted one of the biggest single day falls on the Nasdaq. The tremors could be felt across all the major markets of the world. India was no exception.

[2][2] CEMENTCEMENT

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[2.1].GENERAL OVERVIEW OF THE INDUSTRY

The Indian cement industry is the fourth largest in the world comprising 53 companies with 103 plants. The cement industry can be broadly segmented into Large Cement Plants (LCP) and Mini Cement Plants (MCP) with the former constituting about 94 per cent of the total production. The private sector accounted for about 90 per cent of the total production.

PRODUCT SEGMENTS

There are three major varieties of cement viz., Ordinary Portland Cement (OPC). Pozzalana Portland Cement (PPC) and Portland Blast Furnace Slag Cement (PBFSC). Currently besides these three varieties India manufactures Portland Blast Furnace Slag Cement (PBFSC), Rapid Setting Cement, Oil Well Cement, White Cement etc.

In the process of cement manufacture, cl inker is f irst produced in a ki ln mixing l imestone and coal, and then different materials are added to get f inished cement. OPC is 95% clinker and 5% gypsum, whereas PPC is 70%--84% clinker and 11%--25% pozzollanic materials and 4%--5% gypsum, PBFSC is got by mixing cl inker with slag which is a by-product of steel New types of cement l ike sulfate-resisting cement and high alumina cement etc. which have special applications are now being manufactured.

Cement can be manufactured by the wet, semi dry or dry process. The cost of production varies with the type of technology used. The dry process requlrcs more energy than the wet process but uses less coal and increases

OUTPUT.

The cement industry is presently in a state of disturbance. The prices of cement continue to fal l rapidly. It was in the range of Rs. 160 to 180 during the period of 2002-2003 but at present it is around Rs. 105 to 135.

33

The price drop varied from region to region. The westorn region has recorded the highest price drop, fol lowed by the northen region. In tamil nadu and kerala cement is usually sold at a higher price as compared to other regions. Even this markets has shown a price fall. The capicity expansion have worsen the situation.

The cost has been going up this industry is highly dependent on government policies and regulations. It comprises of the rates of power and custom duties.

PROFIT MARGINS

The rise in input cost can e attr ibuted to the 22 percent hike on the power tariffs. The amount of royalty paid on l imestone was also higher. The reduction of customs duty on coal and coke from 20% to 10% was offset by the 10% hike in the rail freight. The industry is excepted to pay Rs. 600 crore as a result of the hike in rail freight. Overall, the input costs of production of cement increased by Rs. 340 per tones during the last 1 year.

Increase in cost of cement during 120059-2000

Description Rs./Bag

Wages at minimum level 1.46Average cost of coal 1.10Freight on coal 0.61Power 4.14Railway freight on cement 2.37Other indirect impact on costs of Inputs 0.75

[2.2].STRATEGIC EVENTS FACED BY THE INDUSTRY.

If the situations continue it could lead to the restructuring of the industry. While the large companies are l ikely to withstand the lowering of their profitabil i ty posit ions, the smaller one may either closed down, merge with other players, or be takeover by the large companies. The main reason for the large companies to take over at this point of t ime is the build up cost factor. At present price level i t wil l take Rs. 300 to 400 to set up a one mil l ion tonnes plant. While the same can be Rs. 100 crores, since the companies are being valued that low.

DEMAND--SUPPLY

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Cement is an essential commodity and the demand for it is inelastic. In the past the industry has relied heavily on the Government off take which accounted for nearly 40% of the total demand. However, now the government consumes about 25%--30% with the private sector consuming the rest.

Supply of cement is characterized by regional imbalances. Cement plants in India are located in clusters based on l imestone availabil i ty. Of the 77 mil l ion tonnes of large cement capacity, almost 70 per cent is concentrated in seven states. This becomes a crit ical factor since it is not economical to transport raw material long distances. Factories also need to be close to consuming markets since cement too is costly to transport in large quantit ies over long distances. On an average, freight costs account for one-fifth of the sell ing price of cement and thus the market for cement is regional.

CAPACITY UTILIZATION Key Success Factors

The crit ical cost components of a cement unit, viz. power, coal and freight are controlled by the government. Therefore, the industry is highly depended on government policies.

With power generation expected to fal l short of requirement, availabil i ty of power is expected to continue to be a problem in the future. In this context companies with captive power generation facil i t ies stand at an

advantage.

Proximity to l imestone and coal deposits as well as end user markets are also crit ical success factors. Increasingly players wil l focus on bringing own power and coal consumption, and on developing local markets in an attempt to minimize transportation costs. Due to unavailabil i ty of wagons for transportation and high freight rates which add to the costs, the trend is now towards transportation of cement in bulk by the sea route. Though there are bottlenecks l ike lack of infrastructure at the ports, most port- based companies wil l stand to gain since they are in a posit ion to transport to high-demand neighbouring companies at a lower freight cost. Due to a fair ly high level of f ixed costs, high capacity uti l isation is also very important for profitabil i ty of cement manufacturing units.

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THE REASONS FOR DEMAND FALL

the cement industry was greatly affected by the state of the economy in the last year. The perception of a l iquidity crisis, the high cost of money, polit ical uncertainty, and the slowdown in gross capital formation had led to a fal l in the demand for cement.The economy growth was slugish during the year. The housing activit ies in the real estate prices. Another reason for the low demand is the inadequate expenditure on infrastructure. Not much of attention was given to roads, power, and ports. The polit icians seemed to be too busy deciding who should frame the policies, instead of concentrating on the implementation of the existing policies.

[2.3].INDUSTRY HIGHLITES

The indian cement industry yields high return on investments(ROI). There exists a large market, which has not yet been completely tapped. With the existing levels of supply and growing one, many players are attracted. Every year, new capacit ies are added, raising the supply levels. Price stabil i ty is thus maintained, and the new entrants absorb high profits.

The demand for cement is mainly driven by the industrial activity, real estate business, and investment in core sectors. The per capita consumption of infrastructure commodities l ike steel, power, and cement are indicators of the economics status of a country.

Nearly 47% of the total costs, most of which are administered prices, are beyond the control of cement units. The cost elements include l imestone, coal, transport freight, power consumption, and excise duty.

[2.4]. OTHER ISSUE IN THE INDUSTRY

INFRASTRUCTURE SUPPORT

Rail TransportCement is high volume-low price commodity. The industry depends a lot on rail transport, since it proves to be the most economical mode of transport. Sea transport is the cheapest. It costs nearly two-thirds of rail transport and almost 45 per cent of road transport. Transportation by road is not only costly, but also impractical. Sue to high costs of transport, sometimes it proves to be cheaper to export, than to transport wit j in the country.

36

As a major policy, cement plants with one mil l ion tonnes capacity or above have to transport by rail. However, of the total cement presently transported, only 40 per cent is by rail. The cement industry is one of the major customers for railways. It is also the fourth largest freight payer after coal, mineral oi ls, and iron and steel.

Power shortageThe cement industry is a continuous process industry. Hence the power supply is not only essential for production, but also for the protection of the refractory l ining of the rotary ki ln. The kiln cannot stand violent f luctuations in thermal loads.

The cement industry consumes nearly 3 to 4 per cent of the total power generation in the country. For the production of one tonne of cement, 120 units of power is required. There exists a problem of acute power shortage in the state of andhra pradesh, karnataka, madhya pradesh, tamilnadu and rajasthan. Most of the companies have their own captive generating diesel sets. But this supports only 40% of the requirements.

CoalCoal is used both as an energy source and as raw material for cement production. The per tonnes coal requirement for a dry process plant is approximately 250 kgs, and for a wet process plant 330 kgs. Of the total coal production in india, the cement industry consumes nearly 5 per cent. Coal accounts for nearly 20 per cent of the total cost of production of the cement industry.

RAW MATERIAL AVAILABILITY

limestone is the main raw material for the cement industry. For the production of one tonne of cement nearly 1.6 tonnes of l imestone is required. Cement plants are located in areas where l imestone deposits are found. The concentration is mainly in the state of andhra pradesh, gujarat, karnataka, himachal pradesh, rajastha, and madhya pradesh.

EXCISE DUTY

of the total excise revenue earned by the central government, nearly 5 to 6 per cent is contributed to Rs. 450 per tonne in 192004-120059. Thus the excise duty consists a big part of the total cost in the cement industry.

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CEMENT PACKGING

The most important point in the case of cement packaging is that the cement properties need to be maintained from the point of production to the point of use. Since cement is mostly used for dams, bridges, roads and buildings, the distance of transport is long. The packaging should protect i t from air and moisture, and should be cost effective and convenient in handling. Cement is packed in bags of 50 kg.s each. The sacks are made of jute, polythene, plastic and paper.

[2.5].LABOR CONDITION

This industry is highly labour intensive. So the risk of labour strike is high in this industry. The unionism can be a cause for revenue cut in this industry.

[2.6]CONCLUSION

The growth in cement production was rather poor at about 3.4 per cent in the first nine months of the year, sharply down from over 18 per cent in the corresponding period last year. Sluggish demand for cement for most of the year has been due to a drought situation in the western region of the country and the ‘base effect’ (demand in the first half of last f iscal grew by 20 per cent). Given these condit ions, the cement sector index declined by 43.5 per cent as against Sensex’s fal l of 22.74 per cent as on 19 December 2000.

.N.Srinivasan of India Cements Ltd taught the industry how to do the price management. The init iative was taken in the south by supplying as per demand and not over-feeding the market. The net result was that in Andhra Pradesh- a state that ruins prices for all southern states- the cement prices are ruling at Rs 150 per bag. This is despite the presence of more than 100 mini cement plants and a f lood l ike situation in the state. The impact is clearly evident in the impressive performance during the second quarter by the south based cement companies. The price mechanism had failed last year because of the clinker pile-up but the mistake was not repeated this year.

[3]. BIOTECHNOLOGY[3]. BIOTECHNOLOGY38

[3.1]. OVERVIEW

Biotechnology has been recognized has been recognised as the next big thing after IT, which wil l put India on the world map. The country has in fact started gearing up to meet this challenges. On December 14, 2000, the maharastra government announced that it was setting up a biotechnology taskforce to formulate a policy on the l ines of the IT policy to aggressively market the state as an ideal biotechnology destination. The state expects to tap major share of the $ 70 bil l ion revenue potential expected by 2005. In fact andhre Pradesh and Karnataka have attract investment in this sector. A number of companies have cropped up in these states to capital ize on the opportunity that wil l be provided by the expected boom.

[3.2]. PERMANENCE OF THE INDUSTRY

Indian biotech. companies especially those are l isted, are very different from their U.S. counterparts. U.S. biotech companies are predominantly research-base and many are sti l l to show posit ive bottomline numbers. In India, many research based biotech firms are unlisted, though some of them are considering tapping the market.

Research based biotech firms have existed in India form some time. Advanced Biochemicals Ltd., a Mumbai based firm has been operating since 1958 and has been a pioneer in industrial enzymes. UTI has already picked up to a 10 per cent stake in the Rs 20 crore company.

While the above mentioned companies are predominantly in the pharma sector, a number of biotechnology companies are involved in agriculture research too. Most indian companies that are getting into agri-based biotechnology have been associated with the sector for some time. A majority of them have been involved with producing hybrid seeds.

[3.3]. THE FUTURE OF THE INDUSTRY

The total market size for seeds in India is estimated at approximately Rs. 5,000 crores, comprising of seeds retained by the farmer( Rs.3,500 cr.), public bred seeds and research hybrid. Over the years, a steady shift in farmer preference has been observed, from public bred seeds to research hybrid. This has been largely due to a signif icant improvement in yield, duration and disease resistant characteristics, al l of which

39

translate into higher profits for the farmer. Companies which had been predominantly in hybrid seeds are now looking at transgenic technology as a tool to develop new varieties of seeds.

The other area of growth is expected in the biotechnology area is bio-informatics. The market for bio-information is big because the mining of biological database never seems to be enough. Margins too in this segment are much higher.

[4]. PHARMACEUTICAL[4]. PHARMACEUTICAL

[4.1] OVERVIEW

Pharmaceuticals is one of a few recession-free industries. As per reports, modern medicines reach only 30 per cent of the population in India, and the per capita consumption of drugs in India is only $3 per year, compared to $412 in Japan, $222 in Germany, $191 in the US, $7 in China and Pakistan, and $5 in Indonesia.

[4.2] INDUSTRY-STRUCTURE

Pharmaceutical industry can be broadly divided into four segments - the MNC associates, Major Indian companies, bulk drug companies and formulations companies.

The MNC associates

The MNC associates are basically into branded formulations. They can be in different stages of restructuring which involves closing down uncompetit ive bulk drug facil i t ies,offering VRS to shed excessive and high cost employees, shift ing or sett ing up new formulation plants in backward areas (to enjoy various tax benefits) by using the sale proceeds of their existing plants situated in metro cit ies, discontinuing products which are unprofitable because of DPCO or excessive competit ion from Indian brands and buying new brands which are synergetic to the existing brands. The MNC collaborator should also be in a posit ion to continuously provide its associate with new products as there is always a l imit to the growth which can be

40

achieved through more aggressive marketing of existing products. About new products it should be noted that due to lack of product patent protection currently none of the MNCs are introducing nor wil l they introduce their major patented products in India t i l l product patent protection is provided. Hence new products here means relatively new products but whose patents have expired. These new products are generally improved versions of older products or introduction of products from the MNC's stable in new therapeutic segments which are less competit ive or synergetic to the existing range. The patented products even if introduced wil l be introduced through the parent's 100% subsidiaries only. However in the l iberalized scenario we have to accept this fact.

100% subsidiaries phenomenon

Of late many MNCs have set up their 100% subsidiaries even when they have their other associates (with 40 to 60% stake). In fact al l the exports , R & D and new patented products can go to 100% subsidiaries (those which does not have may set up it sooner or latter- those which have less than 51% subsidiaries wil l set up them faster). However there wil l sti l l be a large and growing market for the MNC associate's existing brands and they can be expected to grow at the pharma industry average growth of about 14% pa and those with stronger marketing network can grow even faster. Notably the patented products which are l ikely to be introduced through 100% subsidiaries wil l be much costl ier. In fact, their prices wil l be mostly disproportionately higher than the addit ional value (faster recovery/less dosage/less side effects) that they can provide. Hence the older products wil l continue to grow. The transfer of existing brands to the parent's 100% subsidiaries is not possible as per current guidelines as these subsidiaries can not market the already existing products (t i l l now whatever brand transfers have taken place are related to cofectionery, personal care or healthcare products and not pharma products) - they can market only new hitech drugs and that too subject many times to sett ing up manufacturing facil i t ies from the basic stage for which not many MNCs are interested because of lack of volumes and product patent protection. However they can do charge royalty. Since royalty can be charged only upto only 5% (for domestic sales) on ex-factory price less imported raw materials, i t can effectively take away not more than 2 to

41

2. 5% from the current OPM(%). From past experience we can assume that the MNC associates wil l f irst improve OPMs by 5 to 10 basis points and then take away about 2 basis points by way of royalty.

The major threat however can come from new 51% subsidiaries. Those MNCs which have 40% subsidiaries and which are not able to raise their stake because of high market prices may set up new 51% subsidiaries to which some of the more profitable brands can be transferred or the new products introduced which may compete with the existing ones. These 51% subsidiaries wil l not suffer from the various operational restrictions to which the 100% subsidiaries are subject to and hence they can definitely impact the performance of the 40% subsidiaries. However in such cases also the 49% stake is l ikely to be controlled by the 40% subsidiaries and hence they also wil l enjoy the benefits of the progress of the 51% subsidiaries to the extent of dividend distribution (which can be l iberal) and in the long run the 40% subsidiaries can go for buyback and thus indirectly raise the parent's stake and ult imately merge the two companies.

In fact,the MNC pharma companies wil l be in the best posit ion to buy back shares-not only they have high cash accruals and low capital intensive business but their parent wil l also be interested in the buy back to help raise their stake indirectly.

Overall, exposure to the MNC pharma companies can act as a good hedge against cyclical downturns and can be included in the portfol io as good defensive stocks with possibil i ty of good growth also.

Indian Companies

The large companies with signif icant presence in branded formulations,bulk drugs and an aggressive approach towards export of both bulk drugs and formulations are also good bets in this industry. In fact, only these companies wil l be able to invest in R&D and survive and grow in the long run. Here it must be noted that the introduction of product patents wil l not adversely affect the prospects of the above mentioned large companies. First,Product patents wil l apply only to patents granted after 120055 ie new products. However the market for such new products which are essentialy the improved versions of the existing drugs wil l for many years remain l imited due to their exorbitant costs compared to the currently available drugs. In fact most of

42

the current drugs wil l go off-patent in the next couple of years thus keeping a very vast market open for Indian players. Secondly,Indian players have exceptional process reengineering capabil i t ies which wil l help them to produce the off-patent drugs in the most cost effective manner and capitalise on their vast market. Third,R&D in India wil l be much cheaper and focussig on tropical diseases wherein the MNCs are not much interested wil l yield rich dividends in the long run. In fact once product patent are introduced, the MNCs themselves wil l conduct R&D in India through their associates or through other joint ventures.

However there is no future for players focussing on common and mature(older generation) bulk drugs ( such as ampi/amoxi, salphamethoxazole etc) only or focussing on generic formulations (especially with the imposit ion of exice duty on bulk drugs) as these have become a pure commodity business with too much domestic and international competit ion with decreasing returns on capital employed. Exports of generic formulations is also a volume led business and can fetch substantial sales but not much profits though it can be used to get introduced in the export market and gradually move towards braded formulations in niche segments.

[4.3] INDUSTRY GROWTH AND RATIOS

Growth

2003 2004 2005Gross sales (Excl. internal transfer) 19.86 12.79 12.53Net sales (Excl. internal transfer) 19.86 12.59 12.44VOP 20.23 12.56 10.02Cost of production 18.45 12.76 11.13PBDIT (NNRT) 30.84 0.35 4.77PAT (NNRT) 15.39 -25 -31.51Total exports 23.03 13.29 23.41Total imports 18.77 9.48 10.37Imported raw material 11.47 7.46 10.01No. of companies 228 232 202

Source: CMIE(prowess)

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Ratios

2003 2004 2005Margin Ratio

As % of Gross sales PBDIT (NNRT) 15.74 13.72 13.65 PBDT (NNRT) 9.69 7.33 7.18 PBIT (NNRT) 13.22 11.22 10.85 PBT (NNRT) 7.16 4.83 4.38 PAT (NNRT) 5.32 3.2 2.79As % of Net sales PBDIT (NNRT) 16.200

514.87 14.77

PBDT (NNRT) 10.45 7.94 7.77 PBIT (NNRT) 14.27 12.16 11.74 PBT (NNRT) 7.73 5.23 4.74 PAT (NNRT) 5.74 3.47 3.01

Return RatioAs % of Total assets PBDIT (NNRT) 16.01 13.42 13.48 PBDT (NNRT) 9.85 7.17 7.09 PBIT (NNRT) 13.44 10.200

310.72

PAT (NNRT) 5.41 3.13 2.75As % of GFA PBDIT (NNRT) 38.75 30.5 29.87 PBDT (NNRT) 23.84 16.29 15.71 PBIT (NNRT) 32.53 24.94 23.74 PAT (NNRT) 13.09 7.11 6.1As % of Net worth PBIT (NNRT) 32.25 28.58 26.36 PAT (NNRT) 12.200

48.15 6.77

As % of Capital employed PBDIT (NNRT) 24.200

521.51 20.38

PBDT (NNRT) 15.38 11.49 10.72 PBIT (NNRT) 20.200

417.59 16.2

It is seen from the tables that the industry has a good and healthy growth rate and return ratios. This f igures are attractive enough to attract anyone. And the investment in this industry wil l be worth investing.

[4.4] GOVERNMENT ATTITUDE

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Increase in prices of formulations under DPCO coverage. But the prices increase on formulations outside the purview of DPCO would be difficult due to intense competition at the market place. MNCs will have further pressure on the margins, as they cannot compete at prices offered by small domes0tic players.

Major domestic companies such as Ranbaxy, Cipla, Aurobindo Pharma, Wockhardt, and Dr Reddy’s Labs, will be adversely affected by the taxation on the 20% of the export earnings. Typically the domestic players used to subsidize in the domestic market with the higher export realizations. Consequently this will further increase the competition in the domestic market.

Most of the MNCs import major portion of their raw materials (bulk drugs) from their global affiliates. The industry was expecting reduction in the custom duty, at least the abolition of special additional duty. With no change in the import duty, MNCs will continue to have higher input cost.

Pharmaceutical sector has maintained one of the highest dividend rates in the industry. The increase in the dividend tax from 10% to 20% will effectively reduce the dividend at the hands of the shareholders.

COMPANY IMPACT

Glaxo Negative Increase in excise duty on formulations, no relief on the import duty of bulk drugs, Ranbaxy Negative Tax on 20% of the export earnings will restrict subsidization of the domestic market. No initiative for domestic R&D efforts. Cipla Negative Tax on 20% of the export earnings will restrict subsidization of the domestic market. No initiative for domestic R&D efforts. Dr Reddy’s Labs Negative Tax on 20% of the export earnings will restrict subsidization of the domestic market. No initiative for domestic R&D efforts. Wockhardt Negative Tax on 20% of the export earnings will restrict subsidization of the domestic market. No initiative for domestic R&D efforts.

[4.5] CONCLUSION

As expected the year 2000 was a year of consolidation for the pharmaceuticals sector. Companies within the sector have experienced mergers, acquisit ion, brand transfers and division hive-offs. The same trend was witt iness in the global market, which had its repercussions in the Indian market too. In India the latest acquisit ion came in the form of an announcement by Nicholas Piramal, which said it had taken over 40 per cent stake in Rhone Poulene from Aventis. Aventis wil l be operating in India through its interests in Hoechst Marion Roussel; among others Dr Reddy’s completed its acquisation of American Remedies while also announcing that it would be merging its

45

subsidiary Cheminor Drugs. Apollo Hospital too, completed the merger of Deccan and Ital ian hospital. Lyka sold off three brands to Glenmark Pharma, while Recon sold off i ts formulation brands and distribution network to Zydus Cadila.

This year too the NPPA was active and has been changing prices of most of the formulations. As bulk drug prices were lower for the major part of the year formulation prices were cut down by NPPA across the board. In the latest series the authority cut down prices over 100 formulations. The industry as a whole saw a media core growth rate as far as top l ine was concerned. Bottom line growth across the board had been a result of cost cutt ing and restructuring, which has been the story for the year in this sector.

[5]. STEEL[5]. STEEL

[5.1] INDUSTRY STRUCTURE

Steel is an alloy of iron and carbon. It can be classif ied as mild steel, high carbon steel, and alloy steel on the basis of i ts chemical composit ion. Finished steel products are categorised into longs and f lats based on the process and end-use. The longs are used in construction, engineering, power transmission, and railways. The end-use for hotrolled f lats include cold-rolled products (whose applications include galvanised sheets, automobiles, consumer durables, and general engineering), tubes, automobiles, and heavy engineering. The GP/GC sheets are used in residential and industrial roofings.

[5.2] DEMAND DETERMINANTS

THE DEMAND FOR STEEL PRODUCTS is a function of the growth in GDP, level of industrial isation, infrastructure investments, and the development of the transport sector. India's per capita steel consumption, at 22 kg, is much below the world average of 150 kg.

The Indian steel industry is in the threshold of a new era. The departure from a regime of control to free market from protection to competit ion from public sector domination to large private investments and from an inward marketing policy to a global vision have all placed the industry in a course of development that has seen endless opportunit ies and also at the same time stiff challenges and a terrain of uncertainty.

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[5.3] STEEL MARKET IN INDIA

As per the Working Group on Iron and Steel for IXth Five Year Plan, steel demand in India is expected to touch 32.68 mil l ion tonnes by 2001-02 and 48.8 mil l ion tonnes by 2005-06. These estimates are based on the assumptions that the GDP growth of the country would be a l i t t le over 6 percent per annum. However, i f a 7 percent annual rate of growth of GDP and 12% rate of growth of industrial production for the years upto 2001-02 are achieved as per government projections, steel demand in India wil l reach an altogether new height - much above all these estimates.

[5.4] IMPORT COMPETITION

In the past, imports were mainly of i tems which were not produced in the country. Today, the imports include even those items where the domestic production capacit ies are in abundance and even relatively eff icient The process of lowering the tariff barrier has been so rapid that the industry is yet to gear itself up to meet that price competit ion which either are very low due to exceptional global market condit ions or are based on unfair practices. In the past few years, as import duty rates have been lowered, world prices have fallen and competit ion in the domestic market has increased, the nominal rates of protection (defined as the difference of landed costs of import and fair sell ing price estimated from costs of production plus a reasonable profit margin as a percentage of the fair sell ing price) have fallen signif icantly for almost all products.

On a sticky world market, i f there is further reduction in import duty rates. The Indian steel industry, particularly the new units wil l face tremendous diff iculty in facing upto competit ion from import. More so because, the country is yet to provide the needed infrastructure so that the Indian industry can compete in an open market on equal looting. The current restrictions on external commercial borrowings (ECBs) have also not allowed the Indian companies to take full benefit of the cheaper f inance available abroad. Therefore. in spite or the fact that the new units in particular are l ikely to have world class operational eff iciency and cost competit iveness, the external condit ions are yet not ful ly favourable to the Indian companies. Further, the fact that the competit ive world prices are determined not by ful l costs of

47

production but by compulsions to export, which mean at t imes sell ing even below operational costs by individual plants, the domestic industry again faces a disadvantage.

[5.5] GOVERNMENT ATTITUDE

There will be no changes in the excise and customs duty for steel companies. The rationalisation of the excise duty to a single central value added tax will have no impact on the steel industry. The current excise duty of 16% for steel products will remain. The customs duty for steel products will continue at the present rates. The move to tax the steel companies at factory prices rather than at the stockyards will have a positive impact on companies like SAIL and Tisco, which have very long lead distances. Induction furnaces and re rollers will now be covered under ad-valorem CENVAT at 16%(with modvat benefit). This will help the smaller players in the steel industry. The spending on rural housing is expected to move up, but as the correlation between steel usage and construction is low, we do not expect the move to have any major positive impact for the steel industry.

With the excise duty on scrap going up to 16%, the position of sponge iron players can be expected to improve.

COMPANY IMPACT

SAIL Positive The move to tax the goods at factory gates rather than at stock yards will have a positive impact on the company Tisco Positive The move to tax the goods at factory gates rather than at stock yards will have a positive impact on the company Essar Steel Neutral No change in ED JISCO Neutral No change in ED JVSL Neutral No change in ED

[5.6] CONCLUSION

Steel prices have been fall ing steadily for the past six months and are currently at close to their 20 years low. With production

48

cost of companies being higher than the ruling prices, some had chosen to cut production. Given this situation the 36.35 per cent fal l in the Iron & Steel index is not surprising at all. There are concerns regarding the domestic demand supply posit ion. Already the most of the players l ike Tata Steel, Essar Steel and others are experiencing a slowdown in demand for longs in view of the overall economic slowdown. Realizations in case of f lats are also l ikely to come under pressure. Unti l recently the export markets acted as a vent in such a situation. However in view of the developments pertaining to dumping duties imposed by some countries on select Indian steel products, a situation of domestic over-supply is l ikely to suppress realizations..

According to World Steel Dynamics (WSD), some easing of energy prices is possible in the future which wil l enable the producers to reduce the cost of production considerably. The future prices for oil and natural gas are bellow current levels. For example, the six-month futures price for crude oil is about $29 per barrel versus the current prices of about $33 per barrel. WSD also says that the global steel prices are prevail ing at their 20-year lows and are unsustainable at these levels. The steel prices should f irm up and any signs of upward movement wil l result in better revenue generation for the producers.

49

(III). COMPANY

ANALYSIS

Significance of Company Analysis

"The market is mostly a matter of psychology and emotion, and all that you find in balance-sheet is what you read into them, we’re all guessers to one extent or another, and when we guess wrong they say we’re crooks.”

L L B Angars

The company analysis is the step to identify the superior performers in the industry. The most immediately recognisable effect of economic and industry influence on a company is probably the impact on revenues. The sales

50

of some industry tend to move in tandem with the business cycle; others are relatively immune from the cycle.

.

From the view point of the individual company, adjustment to changes in the general business cycle can be different from those of the industry in general. Revenue changes in f irms in the same industry with identical product mix and pricing policies may lead to different relative changes in cost. The relationship of revenues and expenses to economies and industry changes, and the result ing earnings, is the focal point of the company analysis.

By applying various tools of analysis to the data, the investor formulates exceptions and judgements about the alternatives open to him.

THE STRUCTURE OF ANALYSIS

In our analysis we have f i rst taken the BSE 500 index as the sample. Than we have set cr i ter ia, and choose those companies whose PAT is greater than zero. From the above set we have def ine another cr i ter ion, and selected companies, in which mutual fund stack is more than zero. We have done further f inancial analysis on the selected set , and f ind out the most compet i t ive companies f rom that set . At last we have done detai led analysis of the companies lef t out in the set .

We have used two approaches for the development of the port fo l io. In our f i rst approach we have simply use the Sharpe’s “Single Index model” , and al l stat ist ical measures. We have used the port fo l io theor ies for diversi f icat ion, on our set of analysed companies.

In our second approach we have considerd only the present fundamentals, and the future growth opportuni t ies. And based

51

on that analysis we have developed our port fo l io. Because past doesn’ t represents al l the opportuni t ies, which the company has. And for f inding out that opportuni t ies, analysing the present and predict ing the future could be the best opt ion or the r ight way of making investment decis ion. We have of ten found that some companies have performed excel lent in the past but they are fai l to perform that much better at any given t ime of investment. I t may be possible that some industry have come out f rom a long recession, so their past record wi l l never direct anyone to invest in those scr ips. But somet imes investment in those companies real ly worth- invest ing.

Some sort listed companies as per above mentioned criteria(filter).

Company Name Mutual Fund

PAT

Share 2005 2004 Sterlite Industries (India) Ltd. 88.15 156.67 125.01 U T I Bank Ltd. 62.34 26.95 16.02 Hindustan Petroleum Corpn. Ltd. 24.61 879.3 701.15 Apollo Tyres Ltd. 23.91 31.08 40.68 Punjab Tractors Ltd. 22.79 125.83 96.63 Tata Investment Corpn. Ltd. 21.69 22.68 20.06 Smithkline Beecham Pharmaceuticals (India) Ltd. 20.82 33.26 33.19 B A S F India Ltd. 19.91 18.02 16.88 Bharat Petroleum Corpn. Ltd. 17.08 706.04 521.4 Satyam Computer Services Ltd. 16.94 72.8 19.21 Gujarat State Fertilizers & Chemicals Ltd. 16.63 132.23 169.95 Rallis India Ltd. 16.19 27.4 23.03 Morepen Laboratories Ltd. 15.96 34.37 23.24 Bharat Forge Ltd. 15.4 36.91 35.17 Smithkline Beecham Consumer Healthcare Ltd. 15.32 81.35 62.03 Pentamedia Graphics Ltd. 15.07 119.13 68.37 I T C Ltd. 14.89 623.42 526.2 L I C Housing Finance Ltd. 14.77 101.14 85.65 Finolex Cables Ltd. 14.5 62.02 48.61 M R F Ltd. 14.12 102.27 62.53 E I H Ltd. 13.81 96.42 123.25 Grasim Industries Ltd. 13.75 114.18 230.78 Hindalco Industries Ltd. 13.51 566.78 496.21 Hindustan Zinc Ltd. 12.71 76.32 73.76 Mahavir Spinning Mills Ltd. 12.67 50.53 54.31 Larsen & Toubro Ltd. 12.51 470.74 531.44 Gujarat Ambuja Cements Ltd. 12.23 130.18 132.11 Nestle India Ltd. 12.02 86.19 74.33 Reliance Industries Ltd. 11.89 1703.69 1567 Infosys Technologies Ltd. 11.88 135.26 60.36 B P L Ltd. 11.77 102.47 85.57 Oswal Chemicals & Fertilizers Ltd. 11.75 18.86 95.82 Madras Cements Ltd. 11.72 31.85 31.2003

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Mahindra & Mahindra Ltd. 11.58 225.91 251.47 Indo Gulf Corpn. Ltd. 11.4 164 141.18 Exide Industries Ltd. 11.31 39.87 23.36 Chambal Fertilisers & Chemicals Ltd. 11.27 145.47 133.09 Digital Equipment (India) Ltd. 11.17 27.38 25.24 Hoechst Marion Roussel Ltd. 11.11 20.43 32.11 Balrampur Chini Mills Ltd. 10.95 43.13 43.05 Carborundum Universal Ltd. 10.88 19.7 18.41 Housing Development Finance Corpn. Ltd. 10.61 333.9 268.37 Eicher Ltd. 10.4 31.79 22.2004 Tata Tea Ltd. 10.38 128.76 102.17 Bata India Ltd. 10.23 24.25 16.7 Novartis India Ltd. 10.13 74.66 38.34 Britannia Industries Ltd. 9.53 39.56 28.92 Aventis Crop Science India Ltd. 9.43 21.33 16.52 Deepak Fertilisers & Petrochemicals Corpn. Ltd. 9.33 54.36 51.15 Videocon Appliances Ltd. 9.3 32.17 27.66 Indian Hotels Co. Ltd. 9.29 119.14 137.96 Escorts Ltd. 9.21 84.17 129.84 Usha Beltron Ltd. 9.2 42.62 26.21 H E G Ltd. 9.07 36.16 30.51 Knoll Pharmaceuticals Ltd. 8.61 27.04 49.94 Tata Iron & Steel Co. Ltd. 8.5 282.23 322.08 E Merck (India) Ltd. 8.48 26.2005 19.48 German Remedies Ltd. 8.43 27.27 20.2003 Ahmedabad Electricity Co. Ltd. 8.36 45.12 29.2005 Vindhya Telelinks Ltd. 8.23 29.38 17.76 Essel Packaging Ltd. 8.14 24.63 25.08 Shipping Corpn. Of India Ltd. 8.09 201.33 246.24 Asian Paints (India) Ltd. 8.08 79.49 67.19 Bharat Heavy Electricals Ltd. 8.02 544.63 719.53 Ashima Ltd. 7.94 19.49 26.59 Himatsingka Seide Ltd. 7.93 28.2003 24.64 Asea Brown Boveri Ltd. 7.92 37.74 64.85 Marico Industries Ltd. 7.65 37.52 30.03 Asian Hotels Ltd. 7.46 46.69 70.29 I C I C I Ltd. 7.39 934.11 588.16 Hind Lever Chemicals Ltd. 7.38 42.4 24.75 Tata Engineering & Locomotive Co. Ltd. 7.37 2003.85 294.66 Tamilnadu Petroproducts Ltd. 7.35 45.84 37.28 India Cements Ltd. 7.19 83.89 58.26 I C I India Ltd. 7.09 61.38 50.51 Hindustan Lever Ltd. 7.08 805.93 566.7 Raymond Ltd. 7.03 80.77 45.02 Bharat Electronics Ltd. 7.02 53.63 53.4 Mahanagar Telephone Nigam Ltd. 6.93 122003.2

41130.13

National Aluminium Co. Ltd. 6.84 248.25 546.96 Cadbury India Ltd. 6.78 26.21 18.57 Goodlass Nerolac Paints Ltd. 6.7 25.53 31.2 Essar Shipping Ltd. 6.49 48.04 45.14 Cipla Ltd. 6.46 114.95 101.2003 Ingersoll-Rand (India) Ltd. 6.38 54.25 50.2004 Motor Industries Co. Ltd. 6.37 69.86 80.25 Tata Power Co. Ltd. 6.22 166.34 164.64 Great Eastern Shipping Co. Ltd. 6 127.68 166.89 Bajaj Auto Ltd. 5.89 552.84 462.58

53

Ajanta Pharma Ltd. 5.79 19.57 18.91 Ranbaxy Laboratories Ltd. 5.66 112.4 174.17 T V S Suzuki Ltd. 5.65 81.75 68.54 Indian Aluminium Co. Ltd. 5.58 76.36 71.37 I B P Co. Ltd. 5.43 35.3 31.57 Ruchi Soya Inds. Ltd. 5.11 17.74 17.23 Wyeth Lederle Ltd. 5.05 24.55 24.22 Cummins India Ltd. 4.2005 74.79 82.28 Torrent Pharmaceuticals Ltd. 4.92 36.36 40.7 State Bank Of India 4.78 1027.8 1861.2 Rashtriya Chemicals & Fertilizers Ltd. 4.72 105.64 189.37 Jay Shree Tea & Inds. Ltd. 4.67 27.65 36.93 Videocon International Ltd. 4.48 40.34 100.48 Industrial Development Bank Of India 4.44 1258.87 1501.28 Eskay K'N'It (India) Ltd. 4.4 48.91 56.32 Essar Oil Ltd. 4.3 18.92 20.24 Orchid Chemicals & Pharmaceuticals Ltd. 4.24 35.53 34.08 Videsh Sanchar Nigam Ltd. 4.24 1324.95 967.92 Tata Chemicals Ltd. 4.16 181.67 288.63 Ipca Laboratories Ltd. 4.06 21.42 19.46 H D F C Bank Ltd. 4.01 82.4 63.15 Bank Of Punjab Ltd. 3.96 32.42 32.35 Kochi Refineries Ltd. 3.72 338.23 220.41 Nicholas Piramal India Ltd. 3.39 43.2004 27.01 Neyveli Lignite Corpn. Ltd. 3.35 575.37 270.81 Glaxo India Ltd. 3.22 86.64 41.19 Dabur India Ltd. 3.19 50.13 43.54

From the above mentioned l ist we have found the following companies as the most competit ive companies after analysing their past sales and profit generating capabil i t ies. We have also done the ratio analysis of those companies. The companies profit growth, sales growth, operating eff iciency, and control over cost have also taken in to consideration. There are some companies which has incurred losses in the past but they are expected to perform better in the future, so we have also taken those companies.

The final l ist of the companies for analysis

Company Name Ra* Total Risk

Aurobindo Pharma Ltd. 10.44% 11.2005% 0.92

B F L Software Ltd. 11.30% 11.18% 1.96 B S E S Ltd. 2.00% 2.2005% 0.95 Britannia Industries Ltd. 2.59% 2.00% 0.22

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Cadbury India Ltd. 3.32% 1.61% 0.14 Electrosteel Castings Ltd. 6.00% 4.12% 0.69 Essel Packaging Ltd. 6.22% 4.73% 1.30 Finolex Cables Ltd. 3.52% 3.35% 1.02 Global Tele-Systems Ltd. 14.56% 14.70% 1.75 Gujarat Fluorochemicals Ltd. 5.00% 8.47% 0.63 H C L Infosystems Ltd. 14.89% 16.95% 1.84 H D F C Bank Ltd. 4.51% 2.43% 0.96 H E G Ltd. 3.39% 2.00% 0.06 Himachal Futuristic Communications Ltd. 20.69% 13.24% 2.08 Hindalco Industries Ltd. 1.11% 1.79% 0.61 I T C Ltd. 1.33% 1.26% 0.72 I T I Ltd. 7.31% 7.78% 1.06 Information Technologies (India) Ltd. 18.73% 25.82% 0.2004 Infosys Technologies Ltd. 8.2005% 5.86% 1.40 J K Industries Ltd. 2.61% 2.94% 0.70 Kothari Products Ltd. 2.03% 3.87% 0.37 Mastek Ltd. 12.83% 11.80% 1.28 Mcdowell & Co. Ltd. 9.78% 9.34% 1.13 Mirc Electronics Ltd. 9.37% 4.41% 1.13 Morepen Laboratories Ltd. 6.16% 4.90% 0.21 Moser Baer India Ltd. 14.90% 11.89% 1.93 N I I T Ltd. 5.02% 4.00% 0.89 Navneet Publications (India) Ltd. 6.01% 6.96% 1.05 Nestle India Ltd. 2.48% 2.02% 0.29 Nicholas Piramal India Ltd. 1.37% 1.62% 0.53 Novartis India Ltd. 3.60% 1.74% 0.38 Pentasoft Technologies Ltd. 12.2004% 13.59% 1.2003 Reliance Industries Ltd. 2.2005% 1.79% 0.80 Rolta India Ltd. 14.03% 11.63% 1.90 Satyam Computer Services Ltd. 11.22% 13.89% 1.84 Silverline Technologies Ltd. 13.12% 12.52% 1.51 S S I Ltd. 14.07% 10.44% 1.25 Sterlite Industries (India) Ltd. 7.81% 9.55% 1.74 Sun Pharmaceutical Inds. Ltd. 6.90% 6.58% 1.20TISCOGujarat Ambuja Cement Ltd.Reliance Petrochemicals Ltd.Naath seeds Ltd.

Now we are going to analysis the competit ive posit ion of some companies in the sectors mentioned in the industry analysis. Our criteria would be financial ratios, growth, cost structure, and leverage. Form this l ist we wil l select the second last l ist for investment and from that l ist we wil l f ind out the most valuable investment opportunit ies.

[1] COMPETITIVE ANALYSIS OF THE INDUSTRY MAJORS

[1.1] CEMENT

Company Name PAT Sales2005 2004 2003 2005 2004 2003

Gujarat Ambuja Cements Ltd. 427.85 130.18 132.11 1252.34 1145.78 930.63

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Madras Cements Ltd. 37.83 31.85 31.2003 517.94 522.25 488.56 Dalmia Cement (Bharat) Ltd. 21.05 20.12 26.19 373.36 322.39 292.13 India Cements Ltd. 20.18 83.89 58.26 1406.45 1347.66 905.83

Company Name EPS P/E P/B BV/share Market Cap NPM Gujarat Ambuja Cements Ltd. 27.40 5.79 1.66 95.60 2333.80 33.00% Madras Cements Ltd. 239.15 21.03 1.51 3333.47 602.59 7.00% Dalmia Cement (Bharat) Ltd. 27.45 6.63 0.58 316.38 139.26 6.00% India Cements Ltd. 2.57 20.14 0.91 57.12 722.85 1.00%

From the above data it is seen that, in cement industry, Gujarat Ambuja Cement has performed best. It has recorded a very good profit and sales growth in the past years and has a handsome net profit margin of 33%, and steel i t has a lower PE multiple of 5.79, compared to 21.03 of Madras cement, and 20.14 of India cement. About the EPS ratio Madras cement has the highest EPS of 239.15 and the EPS of Gujarat Ambuja cement is 27.40. Gujarat Ambuja cement has the net profit margin of 33% and Madras cement has NPM of 7%. From the point of view of book value per share madras cement has the highest book value of 3333.47, dalmia cements has 316 book value per share.

As the conclusion of the above analysis, Madras Cement And Gujarat Ambuja Cement looks good. But in the case of Madras Cement it ’s price is ful ly reacted by the fact of the companies and we can not afford this scrip at this current level. So we have selected Gujarat Ambuja Cement For investment.

We have analysed all the industries, mentioned earl ier in the industry analysis section by the above shown format and selected the companies for making investment which are l isted below. Than we have done the detailed analysis of those companies in this section.

THE SELECTED COMPANIES FROM THE ABOVE SET

1. Aurobindo Pharmaceutical Ltd.

2. Britania Industries Ltd.

3. Gujarat Ambuja Cement Ltd.

4. P S I Data System Ltd.

5. Indian Rayon & Industries Ltd.

6. ITC Ltd.

7. Bank Of Punjab Ltd.

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8. Nath Seeds Ltd.

9. NIIT Ltd.

10. Novartis India Ltd

11. Reliance Industries Ltd.

12. Jindal Steel & Power.

13. Reliance petroleum Ltd.

[1] AUROBINDO PHARMACEUTICAL LTD.

Group :Private (Indian)

Product :Drugs & Pharmaceutical

Industry :Pharmaceutical

Last Bonous :March 2000 (1:1)

P/E Ratio : 14.7

Mar-2005 Mar-00EPS 43.41 72.36Book Value Per Share

94.93 179.9

P/B 4.51 5.71

Back Ground

Aurobindo Pharma Ltd (APL) is amongst the largest manufacturers of semi-synthetic penici l l in bulk drugs. It makes SSP bulk drugs such as Ampicil l in and Amoxycil l in and 6TPA, an intermediate used in the manufacture of antibiotics. As of 192003-2004, bulk drugs constituted 59 per cent of sales and formulations accounted for 6 per cent. P.V.Ramaprasad Reddy and K.Nityananda Reddy promoted APL. The company came into prominence in 120054 when the Videocon group bought out shares in the company in a private deal at Rs 160 per share. In January 120055, the Videocon group made an offer for sale to the public at Rs 190 per share. The company has six manufacturing units, of which one is located at Pondicherry, four at Medak and one in Kukatpally, Hyderabad. APL has two subsidiaries located in the US and Hong Kong to enhance its presence in the international market. In the domestic market, the company has a f ield force of 350 for the promotion of branded formulations.

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Product and capacity details

Mar-2005 Capacity Production Sales

Capsules & tablets 1312 271.3 249.1 Million nos Million nos Million nos

Bulk Drugs & intermediates 4114 620035.66 5537.89 Tonnes Tonnes Tonnes

Syrups 0 75.06 55.69

CHANGES IN CAPICITY

Mar 2004 Mar2005

Capsules & tablets 400 400

Bulk Drugs & intermediates 2135 3954 Tonnes Tonnes

Over the past three years company is increasing it ’s plant capacity particularly in the bulk drugs segment this is indication for better future earning and revenue generation prospects.

Financial

(i). Perform Review

(Rs. Crore) Mar-2004 Mar-2005

Gross sales 295.78 550.35Other income 1 2.44Cost of production 210.27 414.45Selling cost 8.06 11.8PBDIT (NNRT) 42.23 82.74PBDT (NNRT) 28.1 61.64PBT (NNRT) 25.88 55.35PAT (NNRT) 23.9 50.16Cash profit(NNRT) 26.4 56.75Operating cash flow 13.81 18.32Gross value added 48.96 93.46

The company has been showing a very healthy growth in it ’s sales and net profit. In Mar-2004 the gross sales was 295 and in mar 00 it was 740 crore. The profit and the profit margin have also increased gradually.

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(i i). Key Ratios

Mar-2004

Mar-2005

Margin ratios (%) As % of Gross sales PBDIT (NNRT) 14.28 15.03 PAT (NNRT) 8.08 9.11 Operating cash flow 4.67 3.33Corporate tax as % of PBT 7.68 9.38Return Ratios (%)As % of Total assets PBDIT (NNRT) 25.04 30.88 PAT (NNRT) 14.17 18.72As % of GFA PBDIT (NNRT) 90.3 113.21 PAT (NNRT) 51.11 68.63As % of Net worth PBIT (NNRT) 68.47 78.86 PAT (NNRT) 40.9 51.74As % of Capital employed PBDIT (NNRT) 47.58 55.65 PBIT (NNRT) 45.08 51.42Appropriation of profits (as % of PAT) Dividends 11.06 7.9 Retained profits 88.94 92.1Retained profits as % of Gross fixed assets 40.27 56.93 Working capital 53.86 58.18 Capital employed 23.84 31.05 Total debt 34.25 50.79 Total assets 12.55 17.23 Net worth 36.21 47.62

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The company has been improving in its ratios in all aspects. The gross profit margin of the company, the return on net worth, the return on capital employed, and the highest uti l ization ratios are very healthy and have been improving.

The company is showing high retention ratio of around 85 to 90 per cent, which shows high growth opportunit ies for future company’s return on net worth is around 45 per cent which is very good. Company’s gross profit margin and net profit margin are 16 per cent and 10 per cent respectively. Which could be considered as good margins. Company’s return on assets is around 30 per cent.

Expansion programs and management

Aurbindo pharma has an international presence and it is emphasizing on the market expansion programs. As a part of i ts expansion program it has set up a holding company in USA - APL Holding Inc. Aurobindo also picked up 50 per cent and 65 per cent stakes, respectively, in US-based firms Med Pharmex Inc and Medgen Inc.

The company also formed a 50:50 JV with a Chinese firm, Shanxi Tongling Pharmaceutical. The venture, named Aurobindo Tongling Pharmaceutical wil l manufacture and market the company's products in China.

Aurobindo Pharma has inducted professionals on its board. Out of the nine directors at present, at least three wil l be asked to step down in order to make way for professionals. The company has appointed Ernst and Young International as its auditors.

This all things shows companies better future prospects and indicate that the company wil l grow at the same rate and pace in future and wil l be able to give superior returns to the investors. So investment in this scrip wil l be worth investing.

Valuations

(i) DDM Model

Year DPSMar-93 2Mar-94 2.5Mar-95 2.5Mar-96 2.5

Mar-2003 3Mar-2004 5

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Mar-2005 5

Growth Rate : 18.75%

Intrinsic value = Dividend for 2000-01/(cost of capital –

Growth rate

Discount Rate calculation

Ke = Rf + Rm – Rf )

‘Rf is the one year rate on fixed deposits

‘Rm is the CAGR of sensex points for three years

is the beta value of AFL

Rf = 9.5%

Rm = 13.40%

0.9250

e = 14.25%

Here Ke is less than the growth rate so DDM model can’t be

used.

(i i) PE Model

2001 2002 2003 2004 2005 PAT 12.73 23.79 50.13 74.60 120.00 Preference dividends 0.00 0.00 0.43 1.08 1.08Earnings Available toEquity Holder 12.73 23.79 49.70 73.52 118.92Outstanding Shares 472500

0472500

0945000

01000100

01000100

0EPS (Rs) 26.94 50.35 52.59 73.51 118.91

# Estimated

AFL’s PE Ratio is 14.7 and expected EPS is 118.91 so the price for the next year wil l be the compound value of EPS and PE, and it is Rs. 1747.95.

[2] JINDAL STEEL & POWER

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Group : Om Prakash Jindal Group

Product : Sponge iron

Industry :Steel

Last Bonous : ___

P/E Ratio : 3.49

Perform Review for the last 3 years

9 months 15 months(Rs. Crore) 2005-00 2004-2005

Net Sales 300.79 394.6Other Income 5.75 3.82Interest 34.94 62.08Depreciation 20.57 31.23Tax 1.32 _Net Profit 66.21 46.5Equity 12.71 12.71Reserves 317.17 263.72EPS (Rs) 69.46 29.26Book Value 259.54 217.49OPM (%) 38.2005 34.44GPM (%) 28.74 19.5NPM (%) 21.6 11.67

Background

Jindal Steel & Power was formed in 192004-2005 as a part of restructuring exercise undertake at Jindal Strips, in order to achieve a greater management focus. Jindal Steel is now focusing on spong iron, power, steel slab and rounds, ferro alloys, iron ore mine and coal mines. At raigarh, the company has 6.20 lakh tpa of coal-based sponge iron plant, 95 MW captive power plant, 2 lakh tpa steel slab, blooms and round capacity, 30000 tpa ferro chrome, coal mine and 15 lakh tpa coal washery. At raipur it has a 30000 tpa steel ingot and castings facil i ty and 11500 tpa machinery manufacturing capacity. It has an iron ore mine in orissa.

The company is a market leader in coal based sponge iron with 22 per cent market share. Main customers include small and midium induction furnace units and arc furnace units. In respect

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of steel slabs and ferro chrome, major production is being supplied to group companies JISCO and Jindal strips and Shah Alloys Ltd.

The major production of steel rounds is being supplied to Maharashtra Seamless Ltd. The entire surplus power is being supplied to Madhya Pradesh Electricity Board. It has already executed a power purchase agreement with the Board at a f ixed rate of Rs. 2.32 per unit. Besides, it is sett ing up another 55 MW power plant which is set to be commissioned by September 2001. With this, i t wil l have a total power capicity of 150 MW, on an equity of a mere Rs.12.7 crore. The power plant is being built at a total cost of Rs. 225 crore. The project has achieved financial closure following appraisal by ICICI and IDBI.

Industry

SPONGE Iron is used as a feedstock by induction furnace and electric arc furnace units and is a substitute for melting scrap.

The union budget for the current f iscal has allowed for CEVAT to the induction furnace units on the consumption of sponge iron. This has resulted in demand for sponge iron to be increased with the prices at an all t ime high. The demand for sponge iron is expected to further increase with reduced availabil i ty of melting scrap. The prices of sponge iron have seen an up trend since Jan 2005 from a price of Rs. 4100 per tonne to Rs. 5800 per tonne in June 2000. It is ruling at about Rs 5600 per tonne at present.

Operations

JSPL has a low cost of power generation as its specially designed boilers use waste gases of sponge iron kilns to generate steam and a mix of char, a by poroduct of sponge iron, washery rejects with ash contents of more than 26 per cent. The power generated from the power plant is uti l ised for captive consumption, cost of which is very low as compared to the cost from state electricity board. The surplus power is sold to the electricity board.

The iron ore production from captive mine is being increased to 5 lakh tpa from the current f iscal with the installation of addit ional crusher. From the next f iscal, entire iron ore requirement wil l be met from captive mines and long term supply contract. This would lead to substantial cost savings as the landed cost of captive iron ore is about Rs.425 per tonne as against market price of Rs. 835 per tonne. Besides, it would also result in substantial savings in inventory holding cost as

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the iron ore is being supplied from captive mines on a just-in-t ime basis.]

The coal mining has started at the captive mines since last year. The coal production is being increased to 15 lakh tpa in the current f iscal. This would also lead to substantial cost savings as the landed cost of captive coal is Rs 305 per tonne as against market price of Rs. 560 per tonne for the comparable grade of coal. Surplus coal produced would be sold in the market at an average realisation of Rs. 500 per tonne. Besides, it would also lead to substantial saving in inventory holding cost as the coal is being supplied from captive mines on just-in-t ime basis.

In the fiscal ending March 2000, JSPL earned a ravenue of Rs. 336 crore. The revenue mix shows that 51 per cent was contributed by sponge iron, about 17 per cent by power, 12 per cent by ferro chrome, 6 per cent by mild steel while 13 per cent was contributed by other miscellaneous items.

Cost per rupee of net sales

Mar-2004

Mar-2005

Manufacturing cost Raw materials and stores 74.54 71.67 Power and fuel 3.87 3.87 Wages and salaries 1.1 1.08 Other operating expenses 1.68 1.31 Depreciation 4.24 4.17Cost of production 85.41 82.1Change in stock of finished goods -0.03 1.08Selling costs 5.01 6.15Cost of sales 90.39 89.34Administrative and overhead costs 2.59 2.41Total cost 92.2004 91.74Operating profit 7.02 8.26Net sales 100 100

Outlook

Of the current equity of Rs. 12.71 crore, promoters hold 36 per cent while institutions, banks and mutual funds hold 3 per cent, FIIs, OCBs and NRIs hold 3 per cent while public holds 56 per cent.

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JSPL is expected to net a revenue of Rs. 440 crore in the current f iscal and earn a bottomline of Rs. 110 crore. This wil l result in earning per share of Rs. 86. The revenue growth in the next f iscal would be about 12 per cent while the bottomline is expected to grow at about 20 per cent.

The company intends to become globally competit ive by optmising operational eff iciencies, reduction in costs and achieve economies of scale. It has entrusted profit improvement review to Andersen consult ing for this purpose. The company intends to leverage existing assets for future growth.

The focus is currently on to use improved debt equity in the post restructuring scenario to refinance high cost debt.

It would carry out gradual reduction of long term debt. Despite a modest growth in top l ine and bottom line, the emphasis in case of JSPL would be that of continuity of profitable operations on a sustainable long term basis.

With an eqity basis small, the earnings per share would continue to increase at a higher rate. The return on equity is quite reasonable at 20 per cent, much higher than other old economy stocks.

With an EPS of Rs 100 per share in the next f iscal, the scrip is getting a discounting of less than two times and is quoting at less than its book value. While the peception about steel industry continues to be poor, the company is not signif icantly impacted by f luctuations in steel prices .

After analysing this all fact we found that this is a highly under valued scrip and a purchase with keeping in mind the long term perspective , i t is worth investing.

Valuations

(i). Dividend Discount Approach

The company’s growth rate is more than it ’s cost of capital therefore this model can not be used.

(ii).P/E Multiplier Approach

ASSUMPTIONS :

Company’s P/E Ratio wil l be same for the next year

Company wil l record 45% growth in it ’s Profit, due to excellent cost benefit and sales growth for the FY 2000-2001.

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2005 2004 PAT 46.5 94.28Preference dividends 2.77 6.33Total Earnings Availale to equity Holders 43.73 87.95No of Shares Outstanding (in crore) 1.27 1.27EPS 34.43 69.25# Estimated

The companies current PE is 2.33. Assuming that company wil l maintain this PE multiple for the next year, the company’s share price for the next year would be as follows

Price for the next year for JSIL could be calculated by multiplying it ’s PE and it ’s esteemed EPS. This wil l result in 241.68. and the current price of the share is around 170. So the share could be considered as under valued and could be purchased.

[3] PSI DATA SYSTEMS

Business activity

PSI Data System is a subsidiary of Group Bull of France, which holds a 50.35 per cent equity in the company. Bull, a global IT player, employs 18,400 people in 65 countries. Bull has expertise in three domains- servers, software and smart cards. Bull ’s chief products include GCOS enterprise servers, Escala multiprocessing servers, and infrastructure software l ike Openmasteer and CP8 smart cards.

PSI Data provides services in software development, net soluations, migration services, system integration, consult ing and sale of hardware and ATMs.

SOFTWARE DEVELOPMENT:

PSI offers a wide range of software solutions for the banking and financial securit ies market. Some of its products include net banking, retail banking solutions, electronic sett lement system for application/ trade finance, etc. i t also markets and supports Bull ’s range of personal transaction systems which include ATMs, cash dispensers, point0of sale terminals, card readers and smart card based solutions. PSI also undertakes offshore and on-site software development projects. Besides providing software development solutions for the banking and financial services sector, PSI also provides internet solutions.

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Business partners

Besides being the subsidiary of Bull, PSI has strategic partnerships with companies l ike Acclerex which has expertise in development framework and products, Forte (Sun Microsystem)m BEA Weblogic and Brokat. PSI holds 20 per cent equity in Accelerex Ltd, UK, as well as 9.5 per cent in Advisor Technologies Ltd., UK.

Strenghts

PSI draws in the experience and expertise of Bull and implements them for its cl ients. PDI’s relationship with Bull is not just that of a subsidiary and a holding company but Bull acts as a consortium partner, sub-contractor and a technology provider for PSI. This is evident from the fact that 25 per cent of PSI’s revenues come from Bull and this f igure is l ikely to go up to 40 per cent within the next two to three years.

Financials

software services account for around 77 per cent of the total income followed by 18 per cent from hardware/ATMs 5 per cent from other income. For calendar 120059, total income was Rs. 61.03 crore which was up 47.71 per cent over the previous year income of Rs. 41.32 crore. However, PAT for this period increased by 1414 per cent, primarily on account of a 43.48 per cent fal l in f inancial expenses. The off-shore/ on-site ratio of revenues is 48:52. On a region wise basis 73 per cent of total revenues comes from exports with USA contributing about 30 per cent and Europe 43 per cent and the balance 27 per cent comes from the indian operation. The company is divesting its low-margin ATM business to Diebold HMA Private Ltd. This wil l marginally affect revenues but definitely improve overall margins. PSI’s margins have improved over that of the previous year with gross margins going up from 13.75 in 192004 to 20.48 per cent in 120059, operating margins from 16.06 per cent to 21.82 per cent and net margins from 10.43 per cent to 17.05 per cent.

For the current year, PSI has maintained its growth rate for both topline as well as the bottomline. For the nine months ended September 2000, total income was Rs. 60.21 crore, up 52 per cent rise over the corresponding period last year. PAT was Rs. 12.54 crore against Rs. 7.17 crore earl ier, a rise of 75 per cent. However, growth in topline and bottomline in the second and third quarters current year has been flat. EPS for 120059 was Rs. 13.79 but for the nine months ended September, 2000, it was higher at Rs. 16.62

Growth strategy

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PSI’s growth strategy is to grow at a rate higher than industry average. For this, i t has identif ied the following areas:

CREAT A “BRANDED CONSULTING” ORGANISATION WITH IN PSI

The company is looking at providing IT consult ing services in different areas. Towards this end, it plans to set up a saperate SBU and wil l recruit a team of IT experts. PSI believes that there is a big market for such services. Init ial ly, revenues from this SBU would only be between Rs 3 to Rs 4 crore but within two to three years it wil l contribute substantial ly to the revenues.

ADD NEW TECHNOLOGY AREAS:

It is looking at new technology areas l ike embedded software, which again wil l be set up as a separate SBU. Expected revenue for 2001 would be around Rs. 5 crore as it wil l be in theintial stages but wil l r ise post-2002.

ADD NEW GEOGRAPHY:

Psi is also looking at expanding its customer base to the Asia Pacif ic region.

ADD NEW SEGMENTS:

Add new verticals l ike telecommunications and CRM. PSI has already started its e-broking software activity, a new line of work. It wil l start work in Smart Cards also with help from its parent.

Outlook

PSI Data’s topline has been growing at healthy rate of 50 per cent and bottomline at 80 to 90 per cent. Howveer, i t needs to improve its margins further, more than 75 per cent of i ts revenue come from software activit ies. With divestment of the ATM business, the share of software revenues would be even higher which would contribute favourably to the margins to the low margin ATM business. Majority of software activity comes from internet and e-commerce solutions contributing 33 per cent with systems integration/ banking solutions contributing 23 per cent. Both areas have tremendous potential but face stiff competit ion. The fact that Bull currently contributes 25 per cent of revenue and with this f igures l ikely to go up to 40 per cent in two to three years, puts PSI bon a very strong platform. PSI has benefited and wil l continue to benefit from Bull ’s reach and expertise.

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PSI has shown steady growth so far. Considering its present areas of operations, it is l ikely to sustain this growth rate, also its future growth strategy of adding new technology areas, foraying into the Asia Pacif ic region, adding new verticals and staring consultancy services wil l al l add to revenues but this wil l take some time for fruit ion. Revenue per employee for 120059 stood at Rs 13 lakh.

After this all analysis we found that this is an undervalued company and could perform better in future. Which wil l result in handsome return on the investments.

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We have used two approaches for the development of the portfol io. In our first approach we have not used any portfol io theory, and developed portfol io based on individual company’s fundamentals, and our f i l ter which we have discussed in the previous section, company analysis. For the first one our criteria was, to f ind out the best investment opportunit ies which can provide higher returns for a t ime period of 3 years, and could be act as defensive in the bearish market.

The l ist and the weight of the companies are shown bellow.

PORTFOLIO BY THE FIRST APPROACH(Without using portfolio theories)

COMPANY Weight Current Market Price

Reliance Industries Ltd. 11.50% 356.5 P S I Data System Ltd. 8.20% 280.0 ITC Ltd. 8.00% 868.0 Nath Seeds Ltd. 7.80% 51.7 Reliance Petroleum Ltd 7.50% 60.2 Britania Industries Ltd. 6.90% 787.3 Indian Rayon & Industries Ltd. 6.10% 90.2 Bank Of Punjab Ltd. 6.00% 16.0 NIIT Ltd. 6.00% 1641.8 Aurobindo Pharmaceutical Ltd. 6.00% 449.7 Novartis India Ltd 5.80% 452.7 Jindal Steel & Power ltd. 5.70% 213.0 Gujarat Ambuja Cement Ltd. 4.50% 152.7

Total investment 90.00%Cash 10.00%Total 100.00%

We have keep 10 per cent cash with us, and rest amount we have allocated in to 13 SCRIPS. Because we believe that lots of buying opportunit ies are yet to come, and by this cash we would be able to take benefit of that opportunit ies.

In our second approach we have developed portfol io by using portfol io theories. As discussed earl ier, we have set several f i l ters for sortl ist ing the final l ist of the best companies. The fi l ters are, (I). Company must have a mutual fund share of at least 3 per cent. ( i i). Company must have a profit of more than 10 crore.

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The list of final 45 companies (sorted from the set of 8000 companies).

No Company Name Ra* Total Risk 1 Aurobindo Pharma Ltd. 10.4431% 11.2005% 0.92502 B F L Software Ltd. 11.3028% 11.18% 1.96043 B S E S Ltd. 1.200554% 2.2005% 0.94614 Bank Of Punjab Ltd. 0.2257% 1.48% 0.40665 Britannia Industries Ltd. 2.5936% 2.00% 0.22216 Cadbury India Ltd. 3.3155% 1.61% 0.14447 Electrosteel Castings Ltd. 6.0027% 4.12% 0.69458 Global Tele-Systems Ltd. 14.5640% 14.70% 1.74759 Gujarat Ambuja Cements Ltd. 0.2661% 2.54% 0.8222

10 Gujarat Fluorochemicals Ltd. 5.0044% 8.47% 0.626611 H C L Infosystems Ltd. 14.8911% 16.95% 1.844612 H D F C Bank Ltd. 4.5102% 2.43% 0.959213 H E G Ltd. 3.3863% 2.00% 0.059314 Himachal Futuristic Communications Ltd. 20.6885% 13.24% 2.076915 Hindalco Industries Ltd. 1.1087% 1.79% 0.610316 I T C Ltd. 1.3289% 1.26% 0.716017 I T I Ltd. 7.3133% 7.78% 1.062518 India Cements Ltd. 0.1457% 4.08% 1.161719 Indian Petrochemicals Corpn. Ltd. 1.1052% 3.53% 1.365220 Industrial Development Bank Of India -2.3522% 1.41% 0.812221 Information Technologies (India) Ltd. 18.7262% 25.82% 0.20041

022 Infosys Technologies Ltd. 8.200471% 5.86% 1.32005

023 J K Industries Ltd. 2.6057% 2.94% 0.702924 Kothari Products Ltd. 2.0349% 3.87% 0.371725 Mastek Ltd. 12.8316% 11.80% 1.282926 Mcdowell & Co. Ltd. 9.7846% 9.34% 1.129427 Mirc Electronics Ltd. 9.3704% 4.41% 1.133328 Morepen Laboratories Ltd. 6.1571% 4.90% 0.206029 Moser Baer India Ltd. 14.9001% 11.89% 1.931630 N I I T Ltd. 5.0175% 4.00% 0.892331 Navneet Publications (India) Ltd. 6.0146% 6.96% 1.046832 Nestle India Ltd. 2.472003% 2.02% 0.292933 Nicholas Piramal India Ltd. 1.3686% 1.62% 0.534634 Nilkamal Plastics Ltd. 4.4658% 3.85% 0.358235 Nirma Ltd. 4.0214% 3.09% 0.727736 Novartis India Ltd. 3.6033% 1.74% 0.376937 Pentasoft Technologies Ltd. 12.200424

%13.59% 1.20031

838 Pentamedia Graphics Ltd. 8.9101% 11.88% 2.177939 Reliance Industries Ltd. 2.200455% 1.79% 0.72003

240 Rolta India Ltd. 14.0271% 11.63% 1.9013

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41 Satyam Computer Services Ltd. 11.2218% 13.89% 1.838042 Silverline Technologies Ltd. 13.1192% 12.52% 1.510343 S S I Ltd. 14.0745% 10.44% 1.248944 Sterlite Industries (India) Ltd. 7.8060% 9.55% 1.742545 Sun Pharmaceutical Inds. Ltd. 6.8961% 6.58% 1.1956

Now we wil l apply the single index model on this f inal l ist of the sort l isted companies and find out the optimum portfol io.

SINGLE INDEX MODEL

Ri = i iei

Systematic risk =2 + var(Rm)

=2 6I2

Un systemetic risk = total risk – sys.risk

Excess Return to beta ratio

=(Ri-Rf) / i

We have taken the rate of interest on 1 year f ixed deposit as the risk free rate of return (Rf), which is 9.5 % per annum, so it wil l be 0.79% per month.

STEP:1 Rank the securities on the basis of the excess return

Risk free rate of return, (Rf) =0.79% Per month.

Variance of the market, 6m =0.7801%Per month.

Company Excess Return Rank

H E G Ltd. 43.792% 1 Morepen Laboratories Ltd. 26.056% 2 Information Technologies (India) Ltd. 18.283% 3 Cadbury India Ltd. 17.494% 4 S S I Ltd. 10.637% 5 Aurobindo Pharma Ltd. 10.436% 6 Nilkamal Plastics Ltd. 10.261% 7 Himachal Futuristic Communications Ltd. 9.581% 8 Mastek Ltd. 9.386% 9 Silverline Technologies Ltd. 8.164% 10

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Britannia Industries Ltd. 8.121% 11 Mcdowell & Co. Ltd. 7.964% 12 Global Tele-Systems Ltd. 7.882% 13 H C L Infosystems Ltd. 7.645% 14 Mirc Electronics Ltd. 7.571% 15 Electrosteel Castings Ltd. 7.506% 16 Novartis India Ltd. 7.464% 17 Moser Baer India Ltd. 7.305% 18 Rolta India Ltd. 6.962% 19 Gujarat Fluorochemicals Ltd. 6.726% 20 Pentasoft Technologies Ltd. 6.183% 21 I T I Ltd. 6.140% 22 Infosys Technologies Ltd. 5.859% 23 Nestle India Ltd. 5.769% 24 Satyam Computer Services Ltd. 5.676% 25 B F L Software Ltd. 5.362% 26 Sun Pharmaceutical Inds. Ltd. 5.107% 27 Navneet Publications (India) Ltd. 4.20051% 28 N I I T Ltd. 4.738% 29 Nirma Ltd. 4.440% 30

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STEP:2 Compare the excess return ratio with the cut off rate.

Company i(Ri-Rf)/6ei2 Bi2/6i2 Ci

H E G Ltd. 0.08 0.08 0.18 0.18 0.000601 Morepen Laboratories Ltd. 0.11 0.19 0.43 0.61 0.001468 Information Technologies (India) Ltd. 11.74 11.93 64.19 64.80 0.061790 Cadbury India Ltd. 0.42 12.35 2.41 67.21 0.063186 S S I Ltd. 2.40 14.75 22.61 89.82 0.067664 Aurobindo Pharma Ltd. 2.95 17.70 28.24 118.06 0.071872 Nilkamal Plastics Ltd. 0.64 18.33 6.19 124.25 0.072626 Himachal Futuristic Communications Ltd. 46.11 64.44 481.23 605.48 0.087831

Mastek Ltd. 0.62 65.06 6.56 612.05 0.087884 Silverline Technologies Ltd. 4.29 69.35 52.59 664.64 0.087470

Britannia Industries Ltd. 0.16 69.51 1.93 666.56 0.087455 Mcdowell & Co. Ltd. 2.70 72.20 33.88 700.44 0.087135 Global Tele-Systems Ltd. 2.29 74.49 29.03 729.47 0.086854 H C L Infosystems Ltd. 3.12 77.61 40.79 770.26 0.086382 Mirc Electronics Ltd. 2.85 80.46 37.65 807.91 0.085952 Electrosteel Castings Ltd. 0.74 81.21 9.91 817.83 0.085838 Novartis India Ltd. 0.12 81.32 1.58 819.41 0.085820 Moser Baer India Ltd. 8.07 89.39 110.49 929.89 0.084486 Rolta India Ltd. 4.13 93.52 59.25 20049.15 0.08362004 Gujarat Fluorochemicals Ltd. 1.35 94.87 20.15 1009.29 0.083407 Pentasoft Technologies Ltd. 17.25 112.12 278.2003 1288.26 0.079158

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I T I Ltd. 1.85 113.2003 30.08 1318.35 0.078789 Infosys Technologies Ltd. 4.28 118.26 73.11 1391.45 0.077817 Nestle India Ltd. 0.30 118.56 5.28 1396.73 0.077747 Satyam Computer Services Ltd. 1.82 120.38 31.2005 1428.72 0.077316 B F L Software Ltd. 2.52 122.89 46.96 1475.68 0.076623 Sun Pharmaceutical Inds. Ltd. 5.63 128.52 110.24 1585.92 0.07420039 Navneet Publications (India) Ltd. 0.62 129.14 12.43 152004.36 0.07472005 N I I T Ltd. 0.34 129.48 7.07 1605.43 0.074687 Nirma Ltd. 0.22 129.70 4.93 1610.36 0.074601

STEP: 4 Include those securities whose excess return is greater than Ci.

1 H E G LTD. 2 MOREPEN LABORATORIES LTD. 3 INFORMATION TECHNOLOGIES (INDIA) LTD. 4 CADBURY INDIA LTD. 5 S S I LTD. 6 AUROBINDO PHARMA LTD. 7 NILKAMAL PLASTICS LTD. 8 HIMACHAL FUTURISTIC COMMUNICATIONS

LTD. 9 MASTEK LTD.

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STEP: 4 Finding out the proportion for each securities.

Company Ci Zi Weight

1 H E G Ltd. 0.000601 1.0421 8.55%2 Morepen Laboratories Ltd. 0.001468 0.3609 2.96%3 Information Technologies (India) Ltd. 0.061790 6.2401 51.20%4 Cadbury India Ltd. 0.063186 1.4612 11.2005

%5 S S I Ltd. 0.067664 0.3421 2.81%6 Aurobindo Pharma Ltd. 0.071872 0.5157 4.23%7 Nilkamal Plastics Ltd. 0.072626 0.2618 2.15%8 Himachal Futuristic Communications Ltd. 0.087831 1.9318 15.85%9 Mastek Ltd. 0.087884 0.0327 0.27%

Total 12.1884 100.00%

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Risk Return Calculation

Company Weight Ra* Total Risk b Ri*Wi BiWi1 H E G Ltd. 8.55% 3.39% 2.00% 0.0593 0.290% 0.00512 Morepen Laboratories Ltd. 2.96% 6.16% 4.90% 0.206 0.182% 0.00613 Information Technologies (India) Ltd. 51.20% 18.73% 25.82% 0.20041 9.588% 0.50234 Cadbury India Ltd. 11.2005% 3.32% 1.61% 0.1444 0.32004

%0.0173

5 S S I Ltd. 2.81% 14.07% 10.44% 1.2489 0.395% 0.03516 Aurobindo Pharma Ltd. 4.23% 10.44% 11.2005% 0.925 0.442% 0.03917 Nilkamal Plastics Ltd. 2.15% 4.47% 3.85% 0.3582 0.096% 0.00778 Himachal Futuristic Communications Ltd. 15.85% 20.69% 13.24% 2.0769 3.279% 0.32929 Mastek Ltd. 0.27% 12.83% 11.80% 1.2829 0.035% 0.0035

Expeted return of the portfolio(monthly)

14.704%

Beta of the portfolio 0.9453

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BIBLIOGRAPHY

Books referred

1. Security Analysis And Portfolio Management: Sixth Edit ion- Donald And Ronald

2. Essential Of Investment : Second Edit ion-ZVI Bodie, Alen Kane.

3. Investment Analysis And Portfolio Management: sixth edit ion-Frank K. Reil ly, Keith C. Brown.

4. Essential of Investment And Tax Planning: Study Material-ICFAI.

5. Personal Finance Management: Vol 2 and 3.

6. Financial Management -Pandey I.M. Page 331-376.

Periodicals

1. Economic Times

2. Business Standard

3. Intell igent Standard

4. Business World

5. Business Today

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