Fundamental and technical analysis @ kotak mahindra mba project report


Published on

Fundamental and technical analysis @ kotak mahindra mba project report

Published in: Economy & Finance, Business
  • Be the first to comment

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

Fundamental and technical analysis @ kotak mahindra mba project report

  1. 1. FUNDAMENTAL AND TECHNICAL ANALYSIS EXECUTIVE SUMMARY: In the recent past, the bank interest rates have been increased steadily. But therate of Inflation has also been increased. There is no big difference between theinterest rate and Inflation rate. Because of inflation, value of money has beendecreased and cost of living has been increased. This has created panic among lower,middle and upper middle class families who considered keeping their savings in banksas safe as well as remunerative. So, the invertors are searching for proper investmentavenues. Here, an attempt is made to predict the future movement of scrips. Thisstudy helps the investors to invest in shares. India has registered a growth rate of 8.6 percent in FY 2007-08 and isexpected to grow at the rate of 10% plus in this fiscal year, and is one of the fastestgrowing economies in the world. It is one of the major attractions for FI’s and FII’s.FII’s invest in India through secondary Markets. There is a great scope for India forbecoming member of G-8 nations committee. The stock exchange comes in the secondary market. Stock exchange performsactivities such as trading in share, securities, bonds, mutual fund & commodities.Stock Broking industry is growing at an enormous rate, as more and more people areattracted towards stock exchanges with the hope of making profits. But during this period the country also registered a fairly high industrialgrowth. The old industries and business establishments who wanted to expand theactivities as well as the new industries and the business establishments floated sharesin the market to raise capital for their activities. The companies, which registeredsteady growth, earned confidence of the people and their shares, were rated high inthe market.BSPATIL 1
  2. 2. FUNDAMENTAL AND TECHNICAL ANALYSIS This project report helps the reader to understand the techniques of investingin the stock market particularly in the secondary market. Some of the proventechniques have been used in this report to help the reader or investor. Fundamental Analysis is the study of everything from the overall economyand industry conditions, to the financial condition and management of specificcompanies (i.e., using real data to evaluate a stock’s value). Technical analysis is the examination of past price movements to forecastfuture price movements. Technical analysts are sometimes referred to as chartistsbecause they rely almost exclusively on charts for their analysis.Objectives of the study:To know the future movement of selected companies shares through fundamental andtechnical analysis.Sub objectiveso To predict the future price of the selected companies shares.o To study the strategies to be adopted by the retail investors based on the technical and fundamental analysis.o To know the floor and cap price of the stock.o To analyze individual company scrips by considering the factors relating to the economy, industry and the respective company.o To predict investor positions (Buy, sell & hold) based on historical price trends and the likely company prospects.BSPATIL 2
  3. 3. FUNDAMENTAL AND TECHNICAL ANALYSISFindings and suggestion:EXPECTED MARKET PRICE OF BHEL yearparticulars 2008 2009 2010FUNDAMENTAL ANALISIS 2132.30 2707.42 3429.62TECHNICAL ANALYSIS 2500 3750current market price(31-03-08) 2,061.35EXPECTED MARKET PRICE OF L&T yearParticulars 2008 2009 2010FUNDAMENTAL ANALISIS 2325.33 2451.38 2584.41TECHNICAL ANALYSIS 4450 5800current market price 3,024.80 INDIAN STOCK MARKETOVERVIEW OF EQUITY MARKET IN INDIABSPATIL 3
  4. 4. FUNDAMENTAL AND TECHNICAL ANALYSISBSE (Bombay Stock Exchange)SENSEX - THE BAROMETER OF INDIAN CAPITAL MARKETSIntroduction:For the premier Stock Exchange that pioneered the stock broking activity in India,128 years of experience seems to be a proud milestone. A lot has changed since 1875when 318 persons became members of what today is called "The Stock Exchange,Mumbai" by paying a princely amount of Re1.Since then, the countrys capital markets have passed through both good and badperiods. The journey in the 20th century has not been an easy one. Till the decade ofeighties, there was no scale to measure the ups and downs in the Indian stock market.The Stock Exchange, Mumbai (BSE) in 1986 came out with a stock index thatsubsequently became the barometer of the Indian stock market. SENSEX is not only scientifically designed but also based on globallyaccepted construction and review methodology. First compiled in 1986, SENSEX is abasket of 30 constituent stocks representing a sample of large, liquid andrepresentative companies. The base year of SENSEX is 1978-79 and the base value is100. The index is widely reported in both domestic and international markets throughprint as well as electronic media. The Index was initially calculated based on the "Full Market Capitalization"methodology but was shifted to the free-float methodology with effect fromSeptember 1, 2003. The "Free-float Market Capitalization" methodology of indexconstruction is regarded as an industry best practice globally. All major indexproviders like MSCI, FTSE, STOXX, S&P and Dow Jones use the Free-floatmethodology. Due to its wide acceptance amongst the Indian investors, SENSEX is regardedto be the pulse of the Indian stock market. As the oldest index in the country, itprovides the time series data over a fairly long period of time (From 1979 onwards).Small wonder, the SENSEX has over the years become one of the most prominentbrands in the country.BSPATIL 4
  5. 5. FUNDAMENTAL AND TECHNICAL ANALYSIS The growth of equity markets in India has been phenomenal in the decadegone by. Right from early nineties the stock market witnessed heightened activity interms of various bull and bear runs. The SENSEX captured all these events in themost judicial manner. One can identify the booms and busts of the Indian stockmarket through sensex.NSE (NATIONAL STOCK EXCHANGE)The Organization: The National Stock Exchange of India Limited has genesis in the report of theHigh Powered Study Group on Establishment of New Stock Exchanges, whichrecommended promotion of a National Stock Exchange by financial institutions (FIs)to provide access to investors from all across the country on an equal footing. Basedon the recommendations, NSE was promoted by leading Financial Institutions at thebehest of the Government of India and was incorporated in November 1992 as a tax-paying company unlike other stock exchanges in the country.On its recognition as a stock exchange under the Securities Contracts (Regulation)Act, 1956 in April 1993, NSE commenced operations in the Wholesale Debt Market(WDM) segment in June 1994. The Capital Market (Equities) segment commencedoperations in November 1994 and operations in Derivatives segment commenced inJune 2000.NIFTY: The Nifty is relatively a new comer in the Indian market. S&P CNX Nifty is a50 stock index accounting for 23 sectors of the economy. It is used for purposes suchas benchmarking fund portfolios; index based derivatives and index funds. The baseperiod selected for Nifty is the close of prices on November 3, 1995, which markedthe completion of one-year of operations of NSEs capital market segment. The basevalue of index was set at 1000. S&P CNX Nifty is owned and managed by IndiaIndex Services and Products Ltd. (IISL), which is a joint venture between NSE andCRISIL. IISL is a specialized company focused upon the index as a core product.BSPATIL 5
  6. 6. FUNDAMENTAL AND TECHNICAL ANALYSISIISL have a consulting and licensing agreement with Standard & Poors (S&P), whoare world leaders in index services.FII in Indian stock market As part of its initiative to liberalize its financial markets, India opened herdoors to foreign institutional investors in September, 1992. This event represents alandmark event since it resulted in effectively globalizing its financial servicesindustry.Year net investment by FII1992-93 4.271993-94 5444.61994-95 4776.61995-96 6720.91996-97 7386.21997-98 5908.45 -1998-99 729.111999-00 9765.132000-01 9682.522001-02 8272.92002-03 2668.92003-04 44000.032004-05 41416.452005-06 67432.342006-07 94327.87What does India Need - FDI or FII FDI usually is associated with export growth. It comes only when all thecriteria to set up an export industry are met. That includes, reduced taxes, favorablelabor law, freedom to move money in and out of country, government assistance toacquire land, full grown infrastructure, reduced bureaucratic involvement etc. IT,BPO, Auto Parts, Pharmaceuticals, unexplored service sectors including accounting;drug testing, medical care etc are key sectors for foreign investment. Manufacturingis a brick and mortar investment. It is permanent and stays in the country for a verylong time. Huge investments are needed to set this industry. It provides employmentpotential to semi skilled and skilled labor. On the other hand the service sectorrequires fewer but highly skilled workers. Both are needed in India. Conventionalwisdom is that China will have an upper hand in manufacturing for a long time. IfBSPATIL 6
  7. 7. FUNDAMENTAL AND TECHNICAL ANALYSISIndia plays its cards right India may be the hub for the service sector. Still high endmanufacturing in auto parts and pharmaceuticals should be India’s target. The FII (Foreign Institutional Investor) is monies, which chases the stocks inthe market place. It is not exactly brick and mortar money, but in the long run it maytranslate into brick and mortar. Sudden influx of this drives the stock market up as toomuch money chases too little stock. In last four months an influx of about $1.5 Billionhas driven the Indian stock market 20% higher. Where FDI is a bit of a permanent nature, the FII flies away at the shortestpolitical or economical disturbance. The late nineties economic disaster of AsianTigers is a key example of the latter. Once this money leaves, it leaves ruinedeconomy and ruined lives behind. Hence FII is to be welcomed with strict politicaland economical discipline.China receives mainly the FDI. They do not have instruments to receive the FII i.e.laws, institutions and political and judicial framework. On the contrary, India shouldwelcome both and work hard to retain both.INTRODUCTION TO KOTAK SECURITIESBSPATIL 7
  8. 8. FUNDAMENTAL AND TECHNICAL ANALYSISTHE KOTAK MAHINDRA GROUP: The Kotak Mahindra Group was born in 1985 as Kotak Capital ManagementFinance Limited. This company was promoted by Uday Kotak, Sidney A. A. Pintoand Kotak & Company. Industrialists Harish Mahindra and Anand Mahindra took astake in 1986, and thats when the company changed its name to Kotak MahindraFinance Limited. Kotak Mahindra is one of Indias leading financial institutions, offeringcomplete financial solutions that encompass every sphere of life. From commercialbanking, to stock broking, to mutual funds, to life insurance, to investment banking,the group caters to the financial needs of individuals and corporates. As on December 31, 2006, the group has a net worth of over Rs.3, 100 crore,and the AUM across the group is around Rs. 225 billion and employs over 9,600employees in its various businesses. With a presence in 282 cities in India and officesin New York, London, Dubai and Mauritius, it services a customer base of overaround 2.2 million. The group specializes in offering top class financial services, catering to everysegment of the industry. The various group companies include: 1. Kotak Mahindra Capital Company Limited 2. Kotak Mahindra Securities Limited 3. Kotak Mahindra Inc 4. Kotak Mahindra (International) Limited 5. Global Investments Opportunities Fund Limited 6. Kotak Mahindra (UK) Limited 7. Kotak Securities Limited 8. Kotak Mahindra Old Mutual Life Insurance Company Limited 9. Kotak Mahindra Asset Management Company Limited 10. Kotak Mahindra Trustee Company Limited 11. Kotak Mahindra Investments Limited 12. Kotak Forex Brokerage Limited 13. Kotak Mahindra Private-Equity Trustee Limited 14. Kotak Mahindra Prime LimitedBSPATIL 8
  9. 9. FUNDAMENTAL AND TECHNICAL ANALYSIS Kotak Mahindra has international partnerships with Goldman Sachs (one ofthe worlds largest investment banks and brokerage firms), Ford Credit (one of theworlds largest dedicated automobile financiers) and Old Mutual (a large insurance,banking and asset management conglomerate). Kotak Securities, an affiliate of Kotak Mahindra Bank, is the stock-brokingand distribution arm of the Kotak Mahindra Group. The institutional businessdivision, which provides AKSESS, primarily covers secondary market broking. Itcaters to the needs of foreign and Indian institutional investors in Indian equities (bothlocal shares and GDRs). The division also has a comprehensive research cell withsectoral analysts covering all the major areas of the Indian economy. Kotak Securities Ltd. is Indias leading stock broking house with a marketshare of around 8.5 % as on 31st March. Kotak Securities Ltd. has been the largest inIPO distribution.The accolades that Kotak Securities has been graced with include: 1. Prime Ranking Award (2003-04)- Largest Distributor of IPOs 2. Finance Asia Award (2004)- Indias best Equity House 3. Euro money Award (2005)-Best Equities House In India 4. Finance Asia Award (2005)-Best Broker In India 5. Finance Asia Award (2006)- Best Broker In India 6. Euro money Award (2006) - Best Provider of Portfolio Management: Equities The company has a full-fledged research division involved in MacroEconomic studies, Sectorial research and Company Specific Equity Researchcombined with a strong and well networked sales force which helps deliver currentand up to date market information and news. Kotak Securities Ltd is also a depository participant with National SecuritiesDepository Limited (NSDL) and Central Depository Services Limited (CDSL),providing dual benefit services wherein the investors can use the brokerage servicesof the company for executing the transactions and the depository services for settlingBSPATIL 9
  10. 10. FUNDAMENTAL AND TECHNICAL ANALYSISthem. Kotak Securities has 195 branches servicing more than 2,20,000 customersand a coverage of 231 Cities., the online division of KotakSecurities Limited offers Internet Broking services and also online IPO and MutualFund Investments. Kotak Securities Limited manages assets over 2500 crores of Assets UnderManagement (AUM) .The portfolio Management Services provides top class service,catering to the high end of the market. Portfolio Management from Kotak Securitiescomes as an answer to those who would like to grow exponentially on the crest of thestock market, with the backing of an expert. INTRODUCTION TO THE TOPICFUNDAMENTAL AND TECHNICAL ANALYSIS:BSPATIL 10
  11. 11. FUNDAMENTAL AND TECHNICAL ANALYSISFundamental analysis The basic purpose of buying a security is to earn dividends and ultimately sellit at higher price. An investor therefore is interested in obtaining estimates of futureprices of the share. These in turn will depend upon the performance of the industry towhich the company belongs and the general economic situation of the country. Themultitude of factors affecting a company’s profitability can be broadly classified as: 1. Economic wide factors: these includes the factors like growth rate of the economy, the rate of inflation, foreign exchange rates etc which affects profitability of all companies. 2. Industry wide factors: these include factors which are specific to industry to which the company belongs. For instance the demand supply gap in the industry, the emergence of substitutes, and changes in government policies towards industry affects the company belonging to an industry. 3. Company wide factor: these factors are specific to a firm. The firm specific factors like plant and machinery, the brand image of the product, and ability of the management to affect the profitability. Fundamental analysis considers the financial and economic data that mayinfluence the viability of a company. There are many flavors of fundamental analysiscentered on such concepts as value, growth and turnarounds. Technical analysis is thestudy of the price chart. It assumes that by looking at the progress of that littlesquiggly line you can forecast the future trend of a stock. Fundamental analysis isessential to most investors, and technical analysis is essential to most traders andspeculators. An investor with rational and scientific approach will therefore be interested inanalyzing the influence of the expected performance of the company, industry andBSPATIL 11
  12. 12. FUNDAMENTAL AND TECHNICAL ANALYSISeconomy as a whole on share prices, even before taking the investment decision suchanalysis is called fundamental analysis. Fundamental analysis is the method of evaluating securities by attempting tomeasure the intrinsic value of a particular stock. It is the study of everything from theoverall economy and industry conditions, to the financial condition and managementof specific companies (i.e., using real data to evaluate a stock’s value). The methodutilizes items such as revenues, earnings, return on equity and profit margins todetermine a company’s underlying value and potential for future growth. One of the major assumptions under fundamental analysis is that, even thoughthings get mis priced in the market from time to time, the price of an asset willeventually gravitate toward its true value. This seems to be a reasonable betconsidering the long upward march of quality stocks in general despite regularsetbacks and periods of irrational exuberance. The key strategy for the fundamentalistis to buy when prices are at or below this intrinsic value and sell when they gotoverpriced. TECHNICAL ANALYSIS: Technical analysis is the examination of past price movements to forecastfuture price movements. Technical analysts are sometimes referred to as chartistsbecause they rely almost exclusively on charts for their analysis.BSPATIL 12
  13. 13. FUNDAMENTAL AND TECHNICAL ANALYSISMoving Average: A Moving Average is an indicator that shows the average value of a securitysprice over a period of time. When calculating a moving average, a mathematicalanalysis of the securitys average value over a predetermined time period is made. Asthe securities price changes, its average price moves up or down. There are several popular ways to calculate a moving average. Meta Stock forJava calculates a "simple" moving average--meaning that equal weight is given toeach price over the calculation period.Interpretation: The most popular method of interpreting a moving average is to compare therelationship between moving averages of the securitys price with the securitys priceitself. A buy signal is generated when the securitys price rises above its movingaverage and a sell signal is generated when the securitys price falls below its movingaverage. This type of moving average trading system is not intended to get you in at theexact bottom nor out at the exact top. Rather, it is designed to keep you in line withthe securitys price trend by buying shortly after the securitys price bottoms andselling shortly after it tops. The critical element in a moving average is the number of time periods used incalculating the average. When using hindsight, you can always find a movingaverage that would have been profitable. The key is to find a moving average thatwill be consistently profitable. The most popular moving average is the 39-week (or200-day) moving average. This moving average has an excellent track record intiming the major (long-term) market cycles.Advantages:BSPATIL 13
  14. 14. FUNDAMENTAL AND TECHNICAL ANALYSIS The advantage of moving average system of this type (i.e., buying and sellingwhen prices break through their moving average) is that you will always be on the"right" side of the market: prices cannot rise very much without the price rising aboveits average price. The disadvantage is that you will always buy and sell some late. Ifthe trend does not last for a significant period of time, typically twice the length of themoving average, you will lose your money.Support and Resistance: Support and resistance represent key junctures where the forces of supply anddemand meet. In the financial markets, prices are driven by excessive supply (down)and demand (up). Supply is synonymous with bearish, bears and selling. Demand issynonymous with bullish, bulls and buying. These terms are used interchangeablythroughout this and other articles. As demand increases, prices advance and as supplyincreases, prices decline. When supply and demand are equal, prices move sidewaysas bulls and bears slug it out for control.What Is Support? Support is the price level at which demand is thought to be strong enough toprevent the price from declining further. The logic dictates that as the price declinestowards support and gets cheaper, buyers become more inclined to buy and sellersbecome less inclined to sell. By the time the price reaches the support level, it isbelieved that demand will overcome supply and prevent the price from falling belowsupport. Support does not always hold and a break below support signals that the bearshave won out over the bulls. A decline below support indicates a new willingness tosell and/or a lack of incentive to buy. Support breaks and new lows signal that sellershave reduced their expectations and are willing sell at even lower prices. In addition,buyers could not be coerced into buying until prices declined below support or belowthe previous low. Once support is broken, another support level will have to beestablished at a lower level.BSPATIL 14
  15. 15. FUNDAMENTAL AND TECHNICAL ANALYSISWhere Is Support Established? Support levels are usually below the current price, but it is not uncommon fora security to trade at or near support. Technical analysis is not an exact science and itis sometimes difficult to set exact support levels. In addition, price movements can bevolatile and dip below support briefly. Sometimes it does not seem logical to considera support level broken if the price closes 1/8 below the established support level. Forthis reason, some traders and investors establish support zones.What Is Resistance? Resistance is the price level at which selling is thought to be strong enough toprevent the price from rising further. The logic dictates that as the price advancestowards resistance, sellers become more inclined to sell and buyers become lessinclined to buy. By the time the price reaches the resistance level, it is believed thatsupply will overcome demand and prevent the price from rising above resistance. Resistance does not always hold and a break above resistance signals that thebulls have won out over the bears. A break above resistance shows a new willingnessto buy and/or a lack of incentive to sell. Resistance breaks and new highs indicatebuyers have increased their expectations and are willing to buy at even higher prices.In addition, sellers could not be coerced into selling until prices rose above resistanceor above the previous high. Once resistance is broken, another resistance level willhave to be established at a higher level.Where Is Resistance Established? Resistance levels are usually above the current price, but it is not uncommonfor a security to trade at or near resistance. In addition, price movements can bevolatile and rise above resistance briefly. Sometimes it does not seem logical toconsider a resistance level broken if the price closes 1/8 above the establishedresistance level. For this reason, some traders and investors establish resistance zones.BSPATIL 15
  16. 16. FUNDAMENTAL AND TECHNICAL ANALYSIS So, Here, Identification of key support and resistance levels is an essentialingredient to successful technical analysis. Even though it is sometimes difficult toestablish exact support and resistance levels, being aware of their existence andlocation can greatly enhance analysis and forecasting abilities. If a security isapproaching an important support level, it can serve as an alert to be extra vigilant inlooking for signs of increased buying pressure and a potential reversal. If a security isapproaching a resistance level, it can act as an alert to look for signs of increasedselling pressure and potential reversal. If a support or resistance level is broken, itsignals that the relationship between supply and demand has changed. A resistancebreakout signals that demand (bulls) has gained the upper hand and a support breaksignals that supply (bears) has won the battle.Price Oscillator: The Price Oscillator displays the difference between two moving averages of asecuritys price. The difference between the moving averages can be expressed ineither points or percentages. The Price Oscillator is almost identical to the MACD, except that the PriceOscillator can use any two user-specified moving averages. (The MACD always uses12 and 26-day moving averages, and always expresses the difference in points.)Interpretation: Moving average analysis typically generates buy signals when a short-termmoving average (or the securitys price) rises above a longer-term moving average.Conversely, sell signals are generated when a shorter-term moving average (or thesecuritys price) falls below a longer-term moving average. The Price Oscillatorillustrates the cyclical and often profitable signals generated by these one or twomoving average systems.Price Rate-Of-Change:BSPATIL 16
  17. 17. FUNDAMENTAL AND TECHNICAL ANALYSIS The Price Rate-of-Change ("ROC") indicator displays the difference betweenthe current price and the price x-time periods ago. The difference can be displayed ineither points or as a percentage. The Momentum indicator displays the sameinformation, but expresses it as a ratio.Interpretation: It is a well-recognized phenomenon that security prices surge ahead andretract in a cyclical wave-like motion. This cyclical action is the result of thechanging expectations as bulls and bears struggle to control prices. The ROC displays the wave-like motion in an oscillator format by measuringthe amount that prices have changed over a given time period. As prices increase, theROC rises; as prices fall, the ROC falls. The greater the change in prices, the greaterthe change in the ROC. The time period used to calculate the ROC may range from 1-day (whichresults in a volatile chart showing the daily price change) to 200-days (or longer).The most popular time periods are the 12- and 25-day ROC for short to intermediate-term trading. These time periods were popularized by Gerald Appel and FredHitschler in their book, Stock Market Trading Systems. The 12-day ROC is an excellent short- to intermediate-termoverbought/oversold indicator. The higher the ROC, the more overbought thesecurity; the lower the ROC, the more likely a rally. However, as with alloverbought/oversold indicators, it is prudent to wait for the market to begin to correct(i.e., turn up or down) before placing your trade. A market that appears overboughtmay remain overbought for some time. In fact, extremely overbought/oversoldreadings usually imply a continuation of the current trend. The 12-day ROC tends to be very cyclical, oscillating back and forth in afairly regular cycle. Often, price changes can be anticipated by studying the previouscycles of the ROC and relating the previous cycles to the current marketBSPATIL 17
  18. 18. FUNDAMENTAL AND TECHNICAL ANALYSISRelative Strength Index (RSI): The Relative Strength Index ("RSI") is a popular oscillator. It was firstintroduced by Welles Wilder in an article in Commodities (now known as Futures)Magazine in June, 1978. The name "Relative Strength Index" is slightly misleading as the RelativeStrength Index does not compare the relative strength of two securities, but rather theinternal strength of a single security. A more appropriate name might be "InternalStrength Index."Interpretation: When Wilder introduced the Relative Strength Index, he recommended usinga 14-day Relative Strength Index. Since then, the 9-day and 25-day Relative StrengthIndexs have also gained popularity. The fewer days used to calculate the RelativeStrength Index, the more volatile the indicator. The Relative Strength Index is a price-following oscillator that ranges between0 and 100. A popular method of analyzing the Relative Strength Index is to look for adivergence in which the security is making a new high, but the Relative StrengthIndex is failing to surpass its previous high. This divergence is an indication of animpending reversal. When the Relative Strength Index then turns down and fallsbelow its most recent trough, it is said to have completed a "failure swing." Thefailure swing is considered a confirmation of the impending reversal.In Mr. Wilders book, he discusses five uses of the Relative Strength Index: 1. Tops and Bottoms. The Relative Strength Index usually tops above 70 and bottoms below 30. It usually forms these tops and bottoms before the underlying price chart. 2. Chart Formations. The Relative Strength Index often forms chart patterns such as head and shoulders or triangles that may or may not be visible on the price chart.BSPATIL 18
  19. 19. FUNDAMENTAL AND TECHNICAL ANALYSIS 3. Failure Swings (also known as support or resistance penetrations or breakouts). This is where the Relative Strength Index surpasses a previous high (peak) or falls below a recent low (trough). 4. Support and Resistance. The Relative Strength Index shows, sometimes more clearly than price themselves, levels of support and resistance. 5. Divergences. As discussed above, divergences occur when the price makes a new high (or low) that is not confirmed by a new high (or low) in the Relative Strength Index. Prices usually correct and move in the direction of the Relative Strength Index.Trend lines: In the preceding section, we saw how support and resistance levels can bepenetrated by a change in investor expectations (which results in shifts of thesupply/demand lines). This type of a change is often abrupt and "news based." In this section, well review "trends." A trend represents a consistent changein prices (i.e., a change in investor expectations). Trends differ fromsupport/resistance levels in that trends represent change, whereas support/resistancelevels represent barriers to change.BSPATIL 19
  20. 20. FUNDAMENTAL AND TECHNICAL ANALYSIS As shown in the following chart, a rising trend is defined by successivelyhigher low-prices. A rising trend can be thought of as a rising support level--the bullsare in control and are pushing prices higher. As shown in the next chart, a falling trend is defined by successively lowerhigh-prices. A falling trend can be thought of as a falling resistance level--the bearsare in control and are pushing prices lower.The Bar Chart: The Bar chart is one of the most popular types of charts used in technicalanalysis. As illustrated on the left, the top of the vertical line indicates the highestprice at which a security traded during the day, and the bottom represents the lowestprice. The closing price is displayed on the right side of the bar and the opening priceis shown on the left side of the bar. A single bar like the one to the left represents oneday of trading.BSPATIL 20
  21. 21. FUNDAMENTAL AND TECHNICAL ANALYSISThe chart below is an example of a bar chart for AT&T (T): The advantage of using a bar chart over a straight-line graph is that it showsthe high, low, open and close for each particular day.Candle sticks Charting: Candlestick charts have been around for hundreds of years. They are oftenreferred to as "Japanese candles" because the Japanese would use them to analyze theprice of rice contracts. Similar to a bar chart, candlestick charts also display the open, close, dailyhigh and daily low. The difference is the use of color to show if the stock went up ordown over the day.BSPATIL 21
  22. 22. FUNDAMENTAL AND TECHNICAL ANALYSIS The chart below is an example of a candlestick chart for AT&T (T).Green bars indicate the stock price rose, red indicates a decline: Investors seem to have a "love/hate" relationship with candlestickcharts. People either love them and use them frequently or they arecompletely turned off by them. There are several patterns to look for withcandlestick charts - here are a few of the popular ones and what they mean. This is a bullish pattern - the stock opened at (or near) its low and closed near its high.BSPATIL 22
  23. 23. FUNDAMENTAL AND TECHNICAL ANALYSIS The opposite of the pattern above, this is a bearish pattern. It indicates that the stock opened at (or near) its high and dropped substantially to close near its low. Known as "the hammer", this is a bullish pattern only if it occurs after the stock price has dropped for several days. A small body along with a large range identifies a hammer. This pattern indicates that a reversal in the downtrend is in the works. Known as a "star”. For the most part, stars typically indicate a reversal and or indecision. There is a possibility that after seeing a star there will be a reversal or change in the current trend.Point and Figure Chart: The point & figure (P&F) chart is somewhat rare. In fact, most chartingservices do not even offer it. This chart plots day-to-day increases and declines inprice: increases are represented by a rising stack of "X"s, while decreases arerepresented by a declining stack of "O"s. This type of chart was traditionally used forintraday charting (a stock chart for just one day), mainly because it can be long andtedious to create a P&F chart manually over a longer period of time. The idea behind P&F charts is that they help you to filter out less significantprice movements and to focus on the most important trends. Below is an example of aP&F chart for AT&T (T):BSPATIL 23
  25. 25. FUNDAMENTAL AND TECHNICAL ANALYSIS Technical analysts often use proven successful price patterns from great stocksas tools to find new great stocks. Lets look at a few examples • Cup and Handle - This is a pattern on a bar chart that can be as short as seven weeks and as long as 65 weeks. The cup is in the shape of a "U". The handle has a slight downward drift. The right-hand side of the pattern has low trading volume. As the stock comes up to test the old highs, the stock will incur selling pressure by the people who bought at or near the old high. This selling pressure will make the stock price trade sideways with a tendency towards a downtrend for anywhere from four days to four weeks, then it will take off. This pattern looks like a pot with a handle. It is one of the easier patterns to detect; and investors have made a lot of money using it. • Head and Shoulders - This is a chart formation resembling an "M" in which a stocks price: - Rises to a peak and then declines, then - Rises above the former peak and again declines, and then - rises again but not to the second peak and again declines. The first and third peaks are shoulders, and the second peak forms the head. This pattern is considered a very bearish indicator.BSPATIL 25
  26. 26. FUNDAMENTAL AND TECHNICAL ANALYSIS • Double Bottom - This pattern resembles a "W" and occurs when a stock price drops to a similar price level twice within a few weeks or months. You should buy when the price passes the highest point in the handle. In a perfect double bottom, the second decline should normally go slightly lower than the first decline to create a shakeout of jittery investors. The middle point of the "W" should not go into new high ground. This is a very Bullish indicator. The belief is that, after two drops in the stock price, the jittery investors will be out and the long-term investors will still be holding on.BSPATIL 26
  27. 27. FUNDAMENTAL AND TECHNICAL ANALYSISImportance of project 1. The project gives thorough knowledge of fundamental and technical analysis 2. In this project report the Engineering sector is analyzed by considering budget and demand and supply of the industry. 3. In the project report the 2 companies have selected and analyzed the company’s future market price by two distinct theories. 4. Reader of this project comes to know the expected future market prices and can invest into the scripts. 5. This gives the full information of calculation of intrinsic value.BSPATIL 27
  28. 28. FUNDAMENTAL AND TECHNICAL ANALYSISObjective of the studyMain objective:To know the future movement of selected companies shares through fundamental andtechnical analysis.Sub objectiveso To predict the future price of the selected companies shares.o To study the strategies to be adopted by the retail investors based on the technical and fundamental analysis.o To know the floor and cap price of the stock.o To analyze individual company scrips by considering the factors relating to the economy, industry and the respective company.o To predict investor positions (Buy, sell & hold) based on historical price trends and the likely company prospects.Data collecting methodologyThe data collected for the study is secondary data. The data I have used for the studyis 1. Historical shares value of the stocks collected from ICICI DIRECT.COM. 2. The balance sheet and Income statement got from companies web site. 3. Some of the information about the industry is collected from other financial web site.BSPATIL 28
  29. 29. FUNDAMENTAL AND TECHNICAL ANALYSISTHE MEASUREMENT TECHNIQUEThe following techniques are used for the study.1. Simple moving average.5. Exponential moving average (EMA)6. The relative strength index (RSI)7. Value anchor.LIMITATIONS OF THE STUDY: 1. The study is limited only to these 2 sectors and 4 companies. 2. Here, an attempt is made to predict the future movement stock. It contains an element of guess work 3. Here, I have used only 3 Technical tools to predict the movement of ScripsBSPATIL 29
  30. 30. FUNDAMENTAL AND TECHNICAL ANALYSISTechnical analysis of selected sector socks is as fallows Here you can see the charts of BHEL, L&T and NIFTY which is designed(derived) by MS Excel sheet. For calculating of RSI, SMA and EMA 2 yearshistorical closing prices are used. The respective formulas of SMA, EMA and RSI isas followsSMA (Simple Moving Average)A simple moving average is formed by computing the average (mean) price of asecurity over a specified number of periods. While it is possible to create movingaverages from the Open, the High, and the Low data points, most moving averagesare created using the closing price. For example: a 5-day simple moving average iscalculated by adding the closing prices for the last 5 days and dividing the total by 5.Ex: if the closing prices are as follows: 10, 11, 12, 13, 14, 17, 12……………10+11+12+13+14=60(60/5)=12Here 12 is a first moving average obtained from the given closing prices, next movingaverage can be calculated by deducting first cl price i.e 10 and adding next cl. Price i.e 17 andagain dividing it by 5.Exponential Moving Average (EMA)In order to reduce the lag in SMA, technicians often use EMA. EMAs reduce the lag byapplying more weight to recent prices relative to older prices. The weighting applied to themost recent price depends on the specified period of the moving average. The shorter theEMAs period, the more weight that will be applied to the most recent price. For example: a10-period EMA weighs the most recent price 18.18% while a 20-period EMA weighs themost recent price 9.52%. As such, it will react quicker to recent price changes than a SMA.Heres the calculation formulaBSPATIL 30
  31. 31. FUNDAMENTAL AND TECHNICAL ANALYSISEMA (current) = ((price (current)-EMA (prev)) x multiplier+ EMA(prev)Where, Multiplier – 2/n+1n- Number of days for which EMA is calculatedIf we take the same example of SMA 5 day EMA is calculated as follows.EMA= (12-11) X 0.666 + 11 = 11.66Where multiplier = 2/ (5 +1) = 0.666For next EMA 11.66 acts as previous EMA and so onRelative Strength Index.Ans: Developed by J. Welles Wilder and introduced in his 1978 book, New Conceptsin Technical Trading Systems, the Relative Strength Index is an extremely useful andpopular momentum oscillator.CalculationBSPATIL 31
  33. 33. FUNDAMENTAL AND TECHNICAL ANALYSIS 1. Short term moving averages of BHEL Company. Short term Moving averages of BHEL 3,500.00 3,000.00 trendline violation 2,500.00 adjested 2,000.00 10 days ema resistan 1,500.00 ce 40 days ema 1,000.00 sell signals 10 days sma 500.00 Buy signals support 0.00 7/1/2006 9/1/2006 11/1/2006 1/1/2007 3/1/2007 5/1/2007 3/1/2008 1/1/2008 3/1/2006 5/1/2006 7/1/2007 9/1/2007 11/1/2007 2. Long-term moving averages of BHEL Company.BSPATIL 33
  34. 34. FUNDAMENTAL AND TECHNICAL ANALYSIS Long term moving averages for BHEL 3,500.00 3,000.00 Trend violation 2,500.00 adjested 2,000.00 25 days EMA 1,500.00 sell 125 days ema 1,000.00 25 days sma 500.00 Buy for long term 0.00 7/1/2006 9/1/2006 3/1/2007 5/1/2007 7/1/2007 1/1/2008 3/1/2008 3/1/2006 5/1/2006 1/1/2007 9/1/2007 11/1/2006 11/1/2007Interpretation for short term moving averages: 1. The above chart of BHEL is of short term analysis say for example 15 days to 60 days. 2. The above chart shows support and resistance level which is shown by arrow mark above. 3. The chart shows the buying and selling signals which is shown in red green and red arrow marks and circle is the point which specifies the exact price to buy or sell the stock. 4. And from above chart one can see the trend line violation which is shown by black arrow mark.Interpretation for long term moving averages: 1. As we can see from the above chart the buy and sell levels are Rs 1130 and Rs. 2100. 2. In the long term chart also we can see a trend violation at the stage of jan 2008.BSPATIL 34
  35. 35. FUNDAMENTAL AND TECHNICAL ANALYSIS 3. Here in long term moving average chart one can see that the 25 days SMA going upwards and 125 days EMA coming downwards. So if in future the 25 days SMA goes upwards and crosses the 125 days EMA then again the bull run rally start.Target price for BHEL according to Technical charts: 1. At the beginning of the chart the support level is around Rs. 900 in the month of June 2006 and resistance level is at Rs. 1100 in the month of August 2006. 2. after its resistance in august 2006 at Rs 1100 the stock has under gone for consolidation for 2 months 3. After breaking its resistance of Rs. 1100 the stock again under gone for consolidation up to Feb 2007. 4. On Fab 2007 the stock had resistance of Rs. 1200 and fell down in march id for Rs. 1000 there for the new support become Rs. 1000 and resistance again Rs. 1200. 5. On April 2007 end it crossed its resistance and started rally. 6. In the month of July 2007 it achieved 52 weeks high and created a new resistance of Rs. 1800 and new support become Rs. 1700 7. The stock was on its life time high of Rs. 2870 on November 2007. 8. In the November 2007 the stock had resistance of Rs. 2900 and support was Rs. 2100 in the year 2007 of October. 9. In the month of Jan 2008 it has broken its previous support and started a bearish run. 10. In the month of Dec mid 2007 the stock violated its trend line. 11. the present support is 1850 and previous resistance is 2200 Short term target Target prices for BHEL Support- 1800 Resistance- 2150 Target price- 2150-1800=350BSPATIL 35
  36. 36. FUNDAMENTAL AND TECHNICAL ANALYSIS There for = 350 + 2150= 2500 Long term target Support- 1850 Resistance- 2800 Target price- 2800-1850=950 There for = 950 + 2800= 3750BSPATIL 36
  37. 37. FUNDAMENTAL AND TECHNICAL ANALYSIS3. 14 days RSI OF BHEL COMPANYInterpretation: 1. Here we can see that the stock has gone for correction over a period and the present RSI is around 50 and which is very attractive. 2. From the above chart we can say that the stock is under consolidation and it is a best time to enter into this script at present market price.BSPATIL 37
  39. 39. FUNDAMENTAL AND TECHNICAL ANALYSIS 1. Short term moving average of L&T Company Short term moving averages for L&T 5,000.00 4,500.00 Trend line violation 4,000.00 3,500.00 adjested 3,000.00 Up w ord trend line 10 days ema 2,500.00 40 days ema 2,000.00 Sell 10 days sma 1,500.00 1,000.00 Buy 500.00 3/1/2006 5/1/2006 7/1/2006 9/1/2006 1/1/2007 3/1/2007 5/1/2007 7/1/2007 9/1/2007 1/1/2008 3/1/2008 11/1/2006 11/1/20072. Long term moving averages of L&TBSPATIL 39
  40. 40. FUNDAMENTAL AND TECHNICAL ANALYSIS Long term moving averages of L&T 5,000.00 4,500.00 phase - 3 4,000.00 3,500.00 phase -2 up word break out adjested 3,000.00 phase - 1 25 days ema 2,500.00 125 days ema 2,000.00 25 days sma 1,500.00 1,000.00 500.00 Accumulation 0.00 1/1/2007 3/1/2008 3/1/2006 5/1/2006 7/1/2006 9/1/2006 3/1/2007 5/1/2007 7/1/2007 9/1/2007 1/1/2008 11/1/2006 11/1/2007Interpretation for short term moving average: 1. The stock is showing upward trend line from Aug 2006 to June 2007. 2. There is a buy signal on March 2007 at Rs. 1500 level. 3. We can see the aggressive Bull Run from May 2007 to Nov 2007 the stock has almost double on Nov 2007. 4. There is a selling signal when 10 days SMA came below 40 days EMA. 5. From Jan 2008 to March 2008 there is a declining trend line. 6. At the end of 31.3 2008 it seems to be violation of trend line.Interpretation for long term moving average: 1. The long term moving average of L&T stock is bit attractive which is showing 3 phases of Bull Run. 2. The stock has shown a accumulation for the period from May 2006 to My 2007 and immediately the upward break out happened and the stock started rally.Target price for L&T according to Technical charts: Short term targetBSPATIL 40
  41. 41. FUNDAMENTAL AND TECHNICAL ANALYSIS Support- 2800 Resistance- 3650 Target price- 3650-2800=850 There for = 850+3650=4450 Long term target Support- 2800 Resistance- 4300 Target price- 4300-2800=1500 There for = 4300-1500=58003. 14 DAYS RSI OF L&TBSPATIL 41
  42. 42. FUNDAMENTAL AND TECHNICAL ANALYSISRSI of L&T Company 1. At present the L&T Company RSI is very reasonable and started rally so one should see the market condition and invest in the script. 2. The RSI going upward and at present the RSI is around 45 levels. So one should invest at current market price.BSPATIL 42
  44. 44. FUNDAMENTAL AND TECHNICAL ANALYSIS Nifty Charts 1. NIFTY moving averages Market M.A 6500 wait 6000 5500 5000 Close 4500 SMA 25 day 4000 3500 EMA 25day 3000 sell EMA 100day 2500 2000 Buy 1500 2/1/2006 4/1/2005 6/1/2005 8/1/2005 4/1/2006 6/1/2006 8/1/2006 2/1/2007 4/1/2007 6/1/2007 8/1/2007 2/1/2008 4/1/2008 10/1/2005 12/1/2005 10/1/2006 12/1/2006 10/1/2007 12/1/2007BSPATIL 44
  45. 45. FUNDAMENTAL AND TECHNICAL ANALYSIS2. RSI Calculation for NiftyAnalysis: (Short term or intermediate)1. If we look at 90 day EMA of Nifty chart, for the past one and half year the trend has been Bullish.2. From 20th Jan 2008 onwards there has been shift in the trend towards Bearish.3. The 18day EMA & SMA of Nifty has broken down below 90 day EMA. So this is one more conclusive evidence for reversal of trend from Bull to Bear.Immediate Future:As we can see from the graph it is clear that market is finding support at 4450 to4600(which is previous resistance for the market). At this level market is likely toconsolidate for the medium time period.Significance of Future Trend:In future unless and until market finds required strengths to come to the previous leveli.e. resistance at 5630 – 50, there will be no signs of market turning Bullish.BSPATIL 45
  46. 46. FUNDAMENTAL AND TECHNICAL ANALYSISAnd if in future market breaks the resistance level i.e. 5630-50 then it will rally up to6980-7020. (Target)Long term analysis1. Market is sentiment driven and swings and hypes in market are so strong that they prevail even for years that have happened at present.2. There has been shift in market trend and it has turned bearish though there is no clear sign of bear trend (it’s a long term correction not exactly bearish) but present situation is of complete chaos has left market in a state of volatility so we should wait and see market movement closely.3. Market’s long term support is at 3118-3130 and next support is at 4500 level so next rally from that level 4500 is 1380-1400(4500-3110) and we can see some 150-200 points abortive rally has been occurred and has reached 6050.4. At that level market was waiting for correction. Bad clues from US slow down had made market to take LT correction and market has turned to be volatile and has yet to settle down at previous support of 4500.Short term analysis: 1) Trend short term or intermediate trend for the scrip has been flat. Now turning in to bearish. 2) Key short term support and resistance levels for the scrip. As we can see from the 10 day EMA &SMA graph the scrip has established strong support at 130-140 price band. Price movement; the scrip has undergone major consolidation (sideway movement) phase. And it seems that the scrip has made abortive attempt to breach the flat trend and start rally, but in vain and the obvious reason for this failure is market crash. In the month Feb 2008 the scrip has broken the key support (130-140) and turned out to be bearishBSPATIL 46
  47. 47. FUNDAMENTAL AND TECHNICAL ANALYSIS Future; as the scrip has already broken the key support, the short term traders should sell it and the fresh buy signal for the stock is known only when scrip establishes support. If in case scrip regains the strength to come back to the level of 130-140, investors should still wait till it clearly breaches above that level but with expanding volume. Trading tactics for short term investors: As it can be clearly seen from the graph, the stock is purely a trading stock. So to trade in the scrip one should look for key support and also look for cue from RSI. If the stock is at support and selling pressure is high i.e. RSI value 30 and below, it should be bought and sold at high buying pressure i.e. at RSI value 70 & above. Here the identifying future target price (for the short term) is very difficult as scrip was undergoing phase of consolidation and has no established resistance level.Fundamental analysis of selected sector socks is as fallowsFundamental analysis The basic purpose of buying a security is to earn dividends and ultimately sellit at higher price. An investor therefore is interested in obtaining estimates of futureprices of the share. These in turn will depend upon the performance of the industry towhich the company belongs and the general economic situation of the country. Themultitude of factors affecting a company’s profitability can be broadly classified as: 1. Economic wide factors: these includes the factors like growth rate of the economy, the rate of inflation, foreign exchange rates etc which affects profitability of all companies.BSPATIL 47
  48. 48. FUNDAMENTAL AND TECHNICAL ANALYSIS 2. Industry wide factors: these include factors which are specific to industry to which the company belongs. For instance the demand supply gap in the industry, the emergence of substitutes, and changes in government policies towards industry affects the company belonging to an industry. 3. Company wide factor: these factors are specific to a firm. The firm specific factors like plant and machinery, the brand image of the product, and ability of the management to affect the profitability.Economic wide factorsThe following are the some of the important economic factors which influence theinvestment of investor over a period of time.Indian Economy Overview Indias economy is on the fulcrum of an ever increasing growth curve. Withpositive indicators such as a stable 8-9 per cent annual growth, rising foreignexchange reserves, a booming capital market and a rapidly expanding FDI inflows,India has emerged as the second fastest growing major economy in the world. The economy has been growing at an average growth rate of 8.8 per cent inthe last four fiscal years (2003-04 to 2006-07), with the 2006-07 growth rate of 9.6per cent being the highest in the last 18 years. Significantly, the industrial and serviceBSPATIL 48
  49. 49. FUNDAMENTAL AND TECHNICAL ANALYSISsectors have been contributing a major part of this growth, suggesting the structuraltransformation underway in the Indian economy. For example, industrial and services sectors have logged in a 10.63 and 11.18per cent growth rate in 2006-07 respectively, against 8.02 per and 11.01 cent in2005-06. Similarly, manufacturing grew by 8.98 per cent and 12 per cent in 2005-06and 2006-07 and transport, storage and communication recorded a growth of 14.65and per cent 16.64 per cent, respectively. Another significant feature of the growth process has been the consistentlyincreasing savings and investment rate. While the gross saving rate as a proportion ofGDP has increased from 23.5 per cent in 2001-02 to 34.8 per cent in 2006-07, theinvestment rate-reflected as the gross capital formation as a proportion of GDP-hasincreased from 22.8 per cent in 2001-02 to 35.9 per cent in 2006-07.The Current Fiscal YearThe process continues in the current fiscal year. On the back of 9.9 per cent growth inthe first half of 2006-07, GDP grew by 9.1 per cent during April-September 2007. • While overall industrial production grew by 9 per cent during April-December 2007, importantly capital goods production rose by 20.2 per cent compared to 18.6 per cent during same period in 2006. • Services grew by 10.5 per cent in April-September 2007, on the back of 11.6 per cent during the corresponding period in 2006-07. • Manufacturing grew by 9.6 per cent during April-December 2007, on the back of 12.2 per cent growth during same period in 2006-07. • Core infrastructure sector continued its growth rate recording 6 per cent growth in April-November 2007.BSPATIL 49
  50. 50. FUNDAMENTAL AND TECHNICAL ANALYSIS • While exports grew by 21.76 per cent during April-December 2007, imports increased by 25.97 per cent in the same period. • Money Supply (M3) has grown by a robust 22.8 per cent growth (year-on- year) as of December 21, 2007 compared to 19.3 per cent last year. • The annual inflation rate in terms of WPI was 3.5 per cent for the week ended December 29, 2007 as compared to 5.89 per cent a year ago. • Fiscal and revenue deficit decreased by 11 per cent and 17.2 per cent, respectively, during April-November 2007-08 over corresponding period last year.With such a robust growth rates, the advance estimates of the Central StatisticalOrganization (CSO) expects the economy to grow by 8.7 per cent in 2007-08.Per Capita IncomeAlong this significant acceleration in the growth rate of Indian economy, Indias percapita income has increased at a rapid pace, exceeding an earlier forecast made byGoldman Sachs BRIC report which estimated Indias per capita to touch US$ 800 by2010 and US$ 1149 by 2015.Per capita income has increased from US$ 460 in 2000-01 to almost double to US$797 by the end of 2006-07. In 2007-08, Indias per capita income is estimated to beover US$ 825.07, according to the advance estimates of the Central StatisticalOrganisation (CSO). Further, Indias per capita income is expected to increase to US$2000 by 2016-17 and US$ 4000 by 2025. This growth rate will, consequently, propelIndia into the middle-income category.Some HighlightsBSPATIL 50
  51. 51. FUNDAMENTAL AND TECHNICAL ANALYSISReflecting the favorable prospect of growth rate of Indian economy, the ordersreceived Indian companies have increased by a whopping 68.6 per cent to US$ 32.48billion during January-October 2007 compared to US$ 19.26 billion in the sameperiod last year. • India is among the five countries sharing 50 per cent of the world production (or GDP). • FDI inflows have jumped by almost three times to US$ 15.7 billion in 2006-07 as against US$ 5.5 billion in 2005-06. • The aggregate income of the top 500 companies rose by 28.4 per cent in 2006-07 to total US$ 469.51 billion. • Indias National Stock Exchange (NSE) ranks first in the stock futures and second in index futures trade in the world. • Twenty Indian firms have made it to the list of Boston Consulting Groups 100 New Global Challenger Giants list. • According to a study by the McKinsey Global Institute (MGI), Indias consumer market will be the worlds fifth largest (from twelfth) in the world by 2025. • The number of companies incorporated has increased at an annual average of 55,000 companies in the last two years to 865,000, from 712,000 companies at the end of 2005. • Four Indians and seven Indian microfinance companies make it to the Forbes list of Top10 worlds wealthiest CEOs Worlds Top 50 Microfinance Institutions, respectively. • India has the most number of private equity (PE) funds operating amongst the BRIC markets. • Mumbai has been ranked tenth among the worlds biggest centers of commerce in terms of the financial flow volumes by a survey compiled by MasterCard Worldwide.Another significant aspect has been the broad-based nature of the growth process.While new economy industries like Information Technology and biotechnology haveBSPATIL 51
  52. 52. FUNDAMENTAL AND TECHNICAL ANALYSISbeen growing around 30 per cent, significantly old economy sectors like steel havealso been major contributors in the Indian growth process. For example, India hasmoved up two places to become the fifth largest steel producer in the world.And with its manufacturing and service sectors on a searing growth path, LehmanBrothers Asia estimates India to grow by as much as 10 per cent every year in thenext decade.1. Growth rate of industrial sector: The growth of industrial sector is an important contributor to the growth ofnational income. The performance and the growth of industry is measured through anIndex of industrial product. The industrial growth rate is further disaggregated intogrowth rates of different sectors like electricity basic goods consumer goods and soIndustry IndustryYoY % change FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 Mining &Quarrying 1 3.7 0.5 5.8 5.3 4.4 1 5 Electricity 7.3 4 3.1 3.2 5 5.2 5.2 6.5 Manufacturing 7.2 5.4 2.9 6 7.4 9.1 9.1 10.7IIP 6.6 5.1 2.6 5.8 7 8.4 8.2 9.72. Inflation Inflation prevailing in the economy has considerable impact on theperformance of the companies high rates of inflation upsets business plans, results inhigh input costs and hence reduction in profit margins. On the other hand the inflationerodes purchasing power of buyer and results in reduction in demand for goods. Thedemand for consumer goods will particularly be affected adversely. Inflation is measured by sustainable price index number. The whole sale priceindex number is generally used for this purpose.BSPATIL 52
  53. 53. FUNDAMENTAL AND TECHNICAL ANALYSIS Year Inflation rate (consumer prices) Rank Percent Change Date of Information 2003 5.40 % 64 2002 est. 2004 3.80 % 92 -29.63 % 2003 est. 2005 4.20 % 134 10.53 % 2004 est. 2006 4.20 % 125 0.00 % 2005 est. 2007 5.30 % 139 26.19 % 2006 est. 3. Interest rates Interest rates reflect the cost and availability of credit to the companies operating in the economy. The interest rates and the volume as well as direction of the credit supply in the economy is influenced by monitory policy of the reserve bank of India (RBI). If the cheap money policy is pursued the interest rates are likely to be lower and larger volume of money supply is expected to be there in the economy. The lower rate of interest implies lower cost of financing the company’s operations and assures higher profitability, higher the rate of interest higher will be the costs of manufacturing and sale, which is expected to lead lower profit.Interest Rates(% per annum) 2-Apr 3-Apr 4-Apr 5-Apr 6-Apr 6-DecCash Reserve Ratio 5.5 4.8 4.5 5 5 5.3Bank Rate 6.5 6.3 6 6 6 6Reverse Repo rate(Absorption rate) 6 5 4.5 4.8 5.5 6Repo rate (Injection rate) 8 7 6 6 6.5 7.3IDBI MT lending rate 12.5 12.5 10.3 10.3 10.3 10.3PLR of 5 major banks 11.0-12.0 10.8-11.5 10.3-11.0 10.3-10.8 10.3-10.8 11.0-11.5Deposit rate of 5 majorbanks (maturity>1year) 7.0-8.5 5.3-6.2 5.0-5.5 5.3-6.3 6.0-7.0 6.8-8.0Average call money rate BSPATIL 3.6-7.5 2.0-5.1 2.1-4.5 3.3-5.5 4.2-6.2 53 5.4-12.0
  54. 54. FUNDAMENTAL AND TECHNICAL ANALYSIS4. Foreign exchange rates If company is major exporter or importer its performance and profitability arelikely to be affected considerably by the exchange rates of rupee against othercurrencies. A depreciation of rupee against US or other currency will make Indianproducts more competitive price wise. In the foreign markets, thereby stimulatingexport from India5. Government budget. The government budget provides detailed information on each of componentsof government spending and revenues. The deficit is essentially the excess ofgovernment spending on revenues. A budget deficit is often incurred for creatinginfrastructural facilities in the economy tends to create inflationary pressure. Due tothis there is a strong public opinion against the governments creating of deficitwithout expanding the revenue.6. Savings and investment. The capital market is channel through which the savings of households aremade available to corporate for investment. Therefor the trends in saving andinvestment are significant in studying their impact on capital market.Savings and Investment% to GDP at constantprices FY01 FY02 FY03 FY04 FY05 FY06By sectorHousehold Savings 21.3 21.2 22 23.1 23.5 22Private Corporate Sector 4.5 4.1 3.6 4.1 4.4 4.8Public Sector -0.9 -1.7 -2 -0.7 1 2.2By types of assetsPhysical Assets 10.7 11 11.2 12.7 12 11.7Financial Assets 10.5 10.2 10.8 10.4 11.5 10.3BSPATIL 54
  55. 55. FUNDAMENTAL AND TECHNICAL ANALYSISGross Domestic Savings 24.9 23.6 23.6 26.5 28.9 29.1Net Capital Inflow 1.1 0.6 0.2 -1.2 -1.6 1Gross Domestic Investment 24.3 24 24.8 25.3 27.2 30.1Errors and Omission 1 1.1 -2.1 0.1 1 1.6Gross Capital Formation 23.3 23.8 22.2 25 27.4 30.2 Industrial analysisEngineering: Engineering is a diverse industry with a number of segments. A company fromthis sector can be a power equipment manufacturer (like transformers and boilers),execution specialist or a niche player (like providing environment friendly solutions).It can be an electrical, non-electrical machinery and static equipment manufacturertoo The sector is relatively less fragmented at the top, as competencies requiredare high. But it is highly fragmented at the lower end (like unbranded transformers forthe retail segment) and is dominated by smaller players. The user industries in broadterms are power utilities (generation, transmission and distribution), industrial majors(refining, automotive and textiles), government (public investment) and retailconsumers (pumps and motors). Order book size determines the performance of the company in the short tomedium-term. In order to bag big contracts, companies need to have a big balancesheet size and proven execution capabilities. They need huge working capital in orderto execute bigger contracts, as initially they receive only part payment and theremaining comes as projects get executed.BSPATIL 55
  56. 56. FUNDAMENTAL AND TECHNICAL ANALYSIS Tariffs that earlier offered protection to Indian capital goods manufacturers,have been removed. Import duties on a range of equipments have also been reduced.This coupled with the high cost of capital in India puts Indian manufacturers at adisadvantage against overseas competition. Power sector contributes the largest to the engineering companies revenues.For instance, ABB and BHEL derive 60% and 72% of their revenues from supplyingequipments to the power sector. And with the government planning to add largegeneration capacities in the eleventh (2007-12) five-year plan, the potential seemshuge for the engineering majors. This is because, apart from the investment ingeneration capacity buildup, an equivalent amount is likely to be spent in thetransmission and distribution space as well. Infrastructure is another key area of operation for major Indian engineeringcompanies. L&T, for example, garners around 30% of its sales from infrastructureactivities like engineering, design and construction of industrial projects and social &physical projects like housing, hospitals, IT parks, expressways, bridges, ports, andwater & effluent treatment projects.The high global crude prices on account of growing demand has led to increasedactivities in the exploration and development space. This has helped the engineeringcompanies in this space. More importantly, this segment of the engineering businesshas relatively higher margins than infrastructure, owing to more complex tasksinvolved.Key PointsSupply: Abundant supplies available across most segments, except for technologyintensive executionsBSPATIL 56
  57. 57. FUNDAMENTAL AND TECHNICAL ANALYSISDemand: Demand growth in this sector is fuelled by expenditure in core sectors suchas power, railways, infrastructure development, private sector investments and thespeed at which the projects are implemented.Barriers to entry: Barriers to entry are high at upper end of the industry as skilledmanpower and technologies, and ability to fund large projects are a prerequisiteBargaining power of suppliers: Bargaining power of suppliers is low because ofintense competition. However, in technology driven high-end segments, suppliershave the upper hand.Bargaining power of customers: Bargaining power for technology driven segmentsis low.Competition: Majority of the companies compete in terms of pricing, experience inspecific field, product differentiation and timely completion of projects.Financial Year 07 FY07 proved to be yet another good year for the Indian engineering andcapital goods industry. Strong growth in industrial and manufacturing industriesreflected in the picking up of investment activities in areas like power, infrastructureand processes. The capital goods index recorded strong growth during the entire year,though with some blips during the months September and October 2006. The order books of almost all companies witnessed healthy growth. Forengineering majors like BHEL and L&T, at the end of March 2007, the value ofoutstanding orders stood at nearly 3 times and 2 times respective FY07 revenues. Ingeneral, the growth in order book came from both power and industrial businesses.The companies were able to bag international orders. The topline of the engineeringmajors witnessed double-digit growth during the fiscal.BSPATIL 57
  58. 58. FUNDAMENTAL AND TECHNICAL ANALYSIS While the industry continued the trend of cost cutting through reducing debtand restructuring operations and manpower rationalization, rising input costs dentedpared the improvement in profitability. Sharp rise in costs of steel and crude on theback of buoyant global demand and inadequate supplies, was the biggest dampener toprofit growth The fiscal also witnessed majors like Suzlon and Crompton Greaves chart outaggressive acquisitions in the international arena. The major focus area for thesecompanies was to fill in the niches by way of acquiring new technologies and clientsand having a diversified geographical presence.Budget 2008-09: World-class infrastructure has emerged as one of the most importantnecessities for unleashing high and sustained growth and alleviation of poverty in anyeconomy. And with poor infrastructure to support other growth initiatives, the Indianeconomy continues to be a laggard when compared to its developing peers. From apolicy perspective, however, there has been a growing consensus that a private-publicpartnership is required to remove difficulties concerning the development ofinfrastructure in the country. The realisation finally seems to be setting in. This makesthe future of the Indian engineering sector extremely bright. Apart from highwaydevelopment and construction and modernisation of airports, the potential for thesector lies in the oil and gas space, where high global demand has led to increasedaction in exploration and production activities. However, scale and executioncapabilities remain the mantras for successBudget Measures 1. Fourth UMPP at Tilaiya to be awarded shortly; Chhattisgarh, Karnataka, Maharashtra, Orissa and Tamilnadu urged to bring five more UMPPs to the bidding stage by extending the required supportBSPATIL 58
  59. 59. FUNDAMENTAL AND TECHNICAL ANALYSIS 2. Rajiv Gandhi Grameen Vidyutikaran Yojana to be continued during the Eleventh Plan period with a capital subsidy of Rs 280 bn; allocation of Rs 55 bn for FY09. 3. Rs 8 bn to be provided for Accelerated Power Development and Reforms Project (APDRP) in FY09 4. Proposal to set up a national fund for transmission and distribution (T&D) reform in the power sector 5. Exemption from 4% additional duty of customs has been withdrawn on power generation projects (other than mega power projects), transmission, sub transmission and distribution projects, and specified goods for high voltage transmission projects 6. Custom duty on project imports reduced from 7.5% to 5% 7. Initiatives like skill development programme and setting up of industrial training institutes to be taken 8. Defense allocation to be increased by 10% 9. Excise duty being exempted on end-use basis, on refrigeration equipment (consisting of compressor, condenser units, evaporator, etc) above 2 TR (tonne refrigeration) utilising power of 50 KW and above 10. Parent company allowed to set-off the dividend received from its subsidiary company against dividend distributed by the parent company; provided that the dividend received has suffered DDT and the parent company is not a subsidiary of another company.Budget Impact 1. Aggressiveness in allotting UMPPs to prospective bidders expected to be helpful for engineering companies providing equipments and EPC services for power plants. 2. Setting up of a national fund for T&D reforms to aid growth prospects of equipment suppliers and T&D project developers. 3. Removal of exemption from additional customs duty on power generation, transmission and distribution projects to increase cost for companies importingBSPATIL 59
  60. 60. FUNDAMENTAL AND TECHNICAL ANALYSIS such projects, which shall consequently be beneficial for domestic project developers. However, on the other hand, reduction in custom duty on project imports to nullify the impact. 4. Initiatives like skill development programme and setting up of industrial training institutes to reduce talent crunch for engineering companies, which are reporting high levels of attrition 5. Increase in defense allocation to aid prospect of companies providing defense equipments and technologiesCompany Impact: 1. Allocation of UMPPs to support growth if equipment and service providers like BHEL, L&T. 2. Greater focus on the T&D front to be beneficial for ABB, Siemens, Crompton Greaves, Emco, Bharat Bijlee. Also, companies providing T&D project services like Jyoti Structures and Kalpataru Transmission to benefit. 3. Removal of exemption from additional customs duty on power generation, transmission and distribution projects to benefit domestic companies i.e BHEL and L&T. 4. Skill development initiatives to pare pressure of attrition from companies like L&T and BHEL. 5. Increase in defense allocation to aid prospects of L&T and Bharat Electronics. Budget over the years:Budget 2005-06 Budget 2006-07 Budget 2007-08A special purpose vehicle Estimated outlay for Jawaharlal Hike in corpus of Rural(SPV) to be launched to Nehru National Urban Renewal Infrastructurefinance infrastructure Mission to be Rs 62.5 bn during Development Fund-XIIIprojects that are 2006-07, including a grant and Rajiv Gandhifinancially viable. component of Rs 45.9 bn. Grameen VidyutikaranInvestment limit for Through this mission, the Yojana (RGGVY)BSPATIL 60
  61. 61. FUNDAMENTAL AND TECHNICAL ANALYSIS2005-06 is fixed at Rs government intends to promote100 bn. establishment of new towns, preferably focused on a specific industry (IT) or a specific theme (education or health).NHDP-III to be launched Budget support for National Private sectorin FY06 to target selected Highway Development participation inhigh density highways Programme (NHDP) enhanced transmission projects andnot forming part of the from Rs 93.2 bn to Rs 99.5 bn in hike in budgetary supportGQ or the N-S, E-W 2006-07. for APDRPcorridor; Rs 14 bnprovided in FY06 tofour-lane 4,000 kms.BSPATIL 61
  62. 62. FUNDAMENTAL AND TECHNICAL ANALYSISExcise duty on A/Cs has Special accelerated road Reduction in customsbeen reduced from 24% development programme for the duty on imports ofto 16%. North Eastern region proposed medical equipments from at an estimated cost of Rs 46.2 12.5% to 7.5% bn approved with allocation of Rs 5.5 bn in 2006-07 1,000 kms of access-controlled Increase in allocation to Expressways to be developed on defense to Rs 960 bn, the Design, Build, Finance and including Rs 420 bn for Operate (DBFO) model. capital expenditure Capital expenditure on defense Concessions under proposed at Rs 375 bn. section 80IA for infrastructure facilities extended to cross country natural gas distribution network, including gas pipeline and storage facilities integrated to the network Peak rate of customs duty on Customs duty on non-agricultural products has sprinklers and drip been reduced from 15% to irrigation systems for 12.5% with a few exceptions. agricultural & horticultural purposes is reduced from 7.5% to 5% Exemption to specified goods Concessional customs for making capital goods for duty of 5% on specified setting up a unit with an plantation machinery investment of Rs 50 m or more extended by two years to withdrawn. April 2009 Resin binders used for Customs duty on food manufacture of rotor blades for processing machinery wind operated electricity and parts reduced from generators exempted from 7.5% to 5% excise duty. Under NELP VI, 55 blocks and Dividend distribution tax area of 355,000 sq kms offered. to be hiked from 12.5% Investment of Rs 220 bn to 15% expected in the refinery sector in the next few years. Five ultra mega power projects of Additional education cess of 4,000 MW each to be awarded before 1% to fund secondary and December 31, 2006 higher educaBSPATIL 62
  63. 63. FUNDAMENTAL AND TECHNICAL ANALYSISKey Positives of budget 2008-09:Power play: Since power utilities are one of the biggest consumers (generation,transmission and distribution) for engineering companies, reforms introduced in thepower sector like privatisation of SEBs will help in strengthening the order book size.Huge addition in power generation capacity, in order to meet the demand supply gapwill be a big positive for the sector.Infrastructure development: The government is focusing on development ofinfrastructure like housing, airports, roads and ports. This will be big positive forengineering and construction companiesIndustrial ‘act’: Industrial divisions of engineering companies are likely to benefitfrom the increased focus on automation and capacity addition plans drawn by theIndia Inc.Key Negatives of budget 2008-09Captive competition: Duty free import of T&D equipments by captive powergeneration units, if allowed by government, can have some impact on margins of theT&D majors because of competitionPeople problem: Engineering companies, across the board, are facing troubled timesretaining key employees. This is due to increased levels of competition for talent fromMNCs, who have deep pockets and thus better paying capabilities. As a result ofincreasing levels of attrition, some companies are facing execution issues.Prospects:World-class infrastructure has emerged as one of the most important necessities forunleashing high and sustained growth and alleviation of poverty in any economy. Andwith poor infrastructure to support other growth initiatives, the Indian economyBSPATIL 63