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Abstract

  1. 1. Summer Training Report<br />On<br />Equity Analysis of Infrastructure Firms<br />Under the Supervision of:<br />Mr. Naresh Gogia<br />Submitted By:<br />Gulzar Siraj <br />Contact no.: 07417274446<br />E-Mail: sirajgulzar@gmail.com<br />Equity Analysis of Infrastructure Firms<br />ABSTRACT<br />The time one talks about stock market, another word also clicks and that is risk. People have lost their millions in this stock market. This project has been initiated for the purpose of acquainting me, gaining in depth knowledge of all the issues concerning about finding out the potential firms to invest through shares by Fundamental & Technical Analysis of Shares.<br />This work is a detailed study of stock market and stocks. It’s about the ways in which investors can invest in stock market. I have tried to explain the entire stock market trading in detail with the help of live examples. All these calculations give a better insight to my work. This risk arises due to number of reasons, which I have tried to put across. The focus in this project is on Equity Analysis of five different firms from infrastructure Industry, viz. GMR, DLF, UNITECH, RIIL, and JP ASSOCIATE. The entire work has not been done till date. Application of these ways to analyze stocks is yet to be done, it’s in progress.<br />The project deals with Equity Analysis work which is, includes both fundamental analysis and technical analysis. I have used MACD, Williams R%, Relative Strength Index, EMA and WMA for technical Analysis and Discounted Cash Flow Technique for Fundamental Analysis. <br />At the same time I am trying to analyze some top notch companies to make sure that the companies selected for investing money are really worth to invest in a large amount. All this has been done with the help of Annual report, Quarterly results and daily news.<br />A comprehensive study is proposed with the following objectives.<br /><ul><li>To evaluate the performance of selected equity shares in terms of risk and future returns.
  2. 2. To evaluate the shares pattern on the basis of technical analysis.
  3. 3. To help suggest investment decision by suggesting buying and selling signals.</li></ul>For my understanding I referred to a book Fundamental and Technical Analysis of Equity Shares. This was that book that actually helps me understanding the analysis Part. For all the data collection www.moneycontrol.com, NSE’s site www.nseindia.com and www.icharts.in proved to be a great help for me. It helps me track all the historic information about companies and to track the current trends of the market and stocks. <br />TABLE OF CONTENTS<br />CHAPTER DESCRIPTION PAGE NO.<br /><ul><li>ACKNOWLEDGEMENT
  4. 4. INTRODUCTION 1
  5. 5. Introduction2
  6. 6. Introduction of Stock Market4
  7. 7. Understanding of Stock Market Risk13
  8. 8. COMPANY PROFILE15
  9. 9. Company Profile16
  10. 10. Vision & Approach18
  11. 11. Product and Services19
  12. 12. Achievements by SMC21
  13. 13. REVIW OF LITERATURE 23
  14. 14. RESEARCH METHODOLOGY26
  15. 15. Research Objectives27
  16. 16. Research Design28
  17. 17. Data Collection Method28
  18. 18. Sampling Technique28
  19. 19. THEORITICAL BACKGROUND OF EQUITY ANALYSIS29
  20. 20. Equity Analysis Tools30
  21. 21. Fundamental Analysis31
  22. 22. Technical Analysis39
  23. 23. ANALYSIS AND INTERPRETATION54
  24. 24. Virtual Future Trading55
  25. 25. Virtual Option Trading63
  26. 26. Technical Analysis of Shares by Charts66
  27. 27. Fundamental Analysis of Shares81
  28. 28. CONCLUSION & SUGGESTIONS 104
  29. 29. Conclusion110
  30. 30. Suggestion & Recommendation113
  31. 31. Limitation114</li></ul>REFERENCES & BIBLIOGRAPHY115<br />ANNEXURES118<br />COMPANY PROFILE<br />ABOUT SMC GLOABL SECURITIES<br />It's one of the leading firms in financial services in India. It basically deals in Mutual Fund, Fixed Deposit Schemes, Capital Gain Bonds, GOI Taxable Bonds, NABARD Bonds and Life and General Insurance. I am working for SMC Global Securities Limited which is one of the leading companies of financial services. So I would like you to have a look at the profile of the company<br />Review of Literature of Equity Research<br /><ul><li>Abnormal Returns to a Fundamental Analysis Strategy, by Jeffery S. Abarbanell and Brian J. Bushee American Accounting Association.
  32. 32. Short-sellers, fundamental analysis, and stock returns by Patricia M. Dechow, Amy P. Hutton, Lisa Meulbroek and Richard G. Sloan.
  33. 33. Fundamental Analysis of aggregate interlock by Joost C. Walraven, (Sr. Research Engr., Univ. of Technology, Delft, The Netherlands).
  34. 34. Contextual Fundamental Analysis Through the Prediction of Extreme Returns, by Messod D. Beneish, Charles M. C. Lee and Robin L. Tarpley.</li></ul>RESEARCH METHODOLOGY<br />RESEARCH OBJECTIVES<br /><ul><li>The present study includes different strategy of derivatives used in present scenario. In order to appraise the equity shares I have conducted a study of five different companies. A comprehensive study is proposed with the following objectives.</li></ul>EQUITY ANALYSIS<br />The objective of the equity analysis is to determine what stock to buy and at what price and for that investor may use one method out of two available methods or he can use both the methods at the same time.<br />Fundamental analysis maintains that markets may misprice a security in the short run but that the "correct" price will eventually be reached. Profits can be made by trading the mispriced security and then waiting for the market to recognize its "mistake" and re-price the security.<br />Technical analysis (also called Chart analysis) is the study of market action, using price charts, to forecast future price direction.<br />Analysis & Interpretation<br />Technical Analysis by Charts<br />Basic terms which are used for the purpose of Technical Analysis are: <br /><ul><li>EMA: Exponential Moving Average 
  35. 35. WMA: Weighted Moving Average
  36. 36. MACD: Moving Average Convergence and Divergence (Faster Moving average) (Red Line)
  37. 37. EXP: Slower Moving Average (Blue Line)
  38. 38. RSI: Relative Strength Index
  39. 39. EMA (Close, 20): 20 days EMA
  40. 40. Williams’ R%: 14Days</li></ul>DLF India Ltd: <br />Interpretation:<br />DLF has already crossed down the EMA & WMA level. Prices are looking for a new support and resistance level.<br />New Support Level Price: 287.8 – 286.9 <br />New Resistance Level Price: 300.0 – 305.8 <br />MACD: Currently red line is at 1.426 is above the blue line which is at 0.678 and creating a gap of 0.748 which is known as Positive Divergence.<br />Williams’ %R it is currently at a level of -7.342, which itself indicate positivity in stock price.<br />RSI (14) is currently at level of 59.89 and moving from 30 marks to 70 marks. <br />Currently the EMV is indicating 12.62, which is greater than zero, hence giving strong buy signal.<br />If DLF’s RSI touches the level of 70 marks it would probably the best time to sell the DLF’s share. <br />Rating of Companies on the basis of Technical Analysis<br />Company NameRating MeterShort TermMedium TermGMR Infrastructure LimitedJP Associate LimitedUnitech Limited Reliance Industrial Infrastructure limitedDLF India Ltd.<br />FUNDAMENTAL ANALYSIS<br />Company’s Basic Information:<br />Security NameSecurity Code**Face ValueSeriesISIN CodeSecurity Margin/VAR Margin*Extreme Loss *Applicable Margin RateGMR Infrastructure LimitedGMRINFRA1EQINE776C010397.5512.5Reliance Industrial Infrastructure LimitedRIIL10EQINE046A010159.2514.2Jaiprakash Associates LimitedJPASSOCIAT2EQINE455F010257.5514.24DLF LimitedDLF2EQINE271C010237.72512.72Unitech LimitedUNITECH2EQINE694A010209.24514.24<br />** Stock name given are of NSE and are different for BSE.<br />* VaR and ELR are of specific date and changes on daily basis.<br />Report Card:<br />GMR Ltd.Unitech Ltd.DLF Ltd.JP AssociateRIILAnnual results in briefMar ' 10Mar ' 10Mar ' 10Mar ' 10Mar ' 10Sales169.361,937.502,401.2910,316.0451.16Adjusted PBDIT69.33---31.06Adjusted PBT-2.51---24.93Net profit / loss13.45544.3769.611,708.3621.98EPS (Rs)0.042.234.538.0414.55P/E Ratio1532.5037.0570.7716.2464.47Equity dividend0101005435Total debt/equity0.442.690.772.1-Market Cap. :23860.63(Cr)20614.03(Cr)54418.85(Cr)27694.89(Cr) 1416.38(Cr)Face Value122210<br />Data Source: SMC Global Securities Ltd. Data Source: www.money.rediff.com<br />FUNDAMENTAL ANALYSIS:<br />DLF INDIA LTD:<br />Report Card of DLF Ltd. (Cr) Annual results in briefMar ' 10Mar ' 09Mar ' 08Mar ' 07Mar ' 06AverageSales2,401.292,827.905,532.841,133.48291.652437.432Adjusted PBDIT- 2,769.483,632.72986.11498.171971.62Adjusted PBT- 1,807.693,117.59620.42348.121473.455Net profit / loss769.611,547.772,574.59406.9126.71065.116EPS (Rs)4.539.1215.12.6615.219.324P/E Ratio70.7735.1521.23120.5321.0834.384Equity dividend%100100100100100- Total debt/equity0.770.7410.374.671.65- Market Cap. : 54418.85 -- - -- Face Value2 -- - - - Market Price320.6 - -- --<br />Data Source: SMC Global Securities Ltd. Source: Self Generated<br />STEP 1:Beta Value<br /><ul><li>Calculation of Beta Value is done using MS Excel: </li></ul>BETA VALUE1.673492<br /> <br />Calculation of 1 year returns of DLF: by dividing current close price by previous close price and then subtract the value from 1(one).<br />Calculating Benchmark Return: Here I have taken Cnx Nifty as benchmark. <br />Calculation of BETA: I have calculated DLF Beta by entering Slope function into MS Excel. <br />Beta =slope(Return of your stock, return for your benchmark)<br />STEP 2: WACC<br />Calculation of WACC is done using MS Excel:<br />Calculation of Weighted average Cost of Capital (DLF)Equity share capital339.48  Cost of debt12%  Risk free return7%Beta1.673Market return15%Required rate of return26.00%  Rate of Retained Earnings`13%Weight of debt0.437Weight of equity0.015Weight of Retained Earning0.547    weighted average cost of capital19.75%<br />Data Source: SMC Global Securities Ltd.<br />Source: Self Generated<br />Calculation of WACC:<br />Assigning Weights to all the component of Capital Structure of DLF.<br />Making Assumption about the rate of each component.<br />Calculation of the required rate of Return on Equity.<br />Summation of all the Rates with Risk Free Return. <br />STEP 3: Intrinsic Value<br />Discounted cash flowProjections of Company financialsDLF INDIA LIMITEDPeriods10E11E12E13E14EGrowth in Net Profit32.04%14.00%20.12%28.91%41.55%      Net Profits769.61877.371053.891358.601923.07Depreciation 126.06138.67152.53167.79184.56Other write offs37.8634.0730.6727.6024.84Net Change In working capital00000      Free cash Flows933.531050.111237.091553.992132.47Discount Rate19.75%          Discounted Cash Flow (Fair Market Capitalization)59033.91    Stocks Intrinsic Value347.79    No. of Shares Outstanding169.74    <br />Calculation of Intrinsic value is done using MS Excel:<br />Data Source: SMC Global Securities Ltd. Source: Self Generated<br />Calculation of Intrinsic Value:<br /><ul><li>Finding out the Internal Growth Rate of the Firm.
  41. 41. Average N/P Ratio
  42. 42. Average Annual Growth Rate</li></ul>2. Assumptions for Depreciation and other Write offs.<br /><ul><li>10% Annual Increment (forecasted)</li></ul>3. Summation of All Projected Cash Flows to calculate the Net Projected Cash Flow of a Particular Year.<br />4. Calculation of Present Value of Projected Cash Flows on the basis of WACC (19.75%).<br />5. Fair Marketing Capitalization.<br />6. Intrinsic Value of Stock<br />Interpretation<br /><ul><li>-35560294640DLF current sales have been declined by 15%, but its Operating Ratio has increased by 16%, which tells that the company has successfully controlling its operations.
  43. 43. The Company’s Earnings per Share at the end of Mar, 2010 is 4.53, which is the best among all the five companies after Jaiprakash Associate who has 8.04.
  44. 44. P/E Ratio comes to 70.77 that give an idea about the earning capacity to its market price.
  45. 45. The company has declaring 100% dividend throughout 5 years.
  46. 46. The Debt/Equity Ratio of the firm 0.077 which is far below the standards, it implies that the firm could not be able to take the benefits of leverage in the long run.
  47. 47. The Beta Value of DLF Stocks is 1.673, which is above than the Market Return.
  48. 48. The Difference between the Market Price of the share and its Intrinsic Value is 27.19, which tells that Market Price is still 8.48% down from its Intrinsic Value.</li></ul>HOLDSELLBUY<br />Suggestions & Recommendations<br /><ul><li>Discounted Cash Flow Technique should be used in doing the Fundamental Analysis.
  49. 49. While doing Equity Analysis other variables must also be taken into consideration like investor’s response, market sentiment and global market conditions.
  50. 50. For the purpose of equity research one must take 8 to 10 companies so that the actual trend of that sector can be determined and the comparison of the companies can be done correctly.
  51. 51. Companies should be taken of that sector in which one have good knowledge, for the purpose of research. </li></ul>Limitations<br /><ul><li>Data available for the purpose of research is not sufficient to carry out fundamental analysis of a company.
  52. 52. Time seems to be one of the biggest limitations.
  53. 53. Some of the research part which have been prepared using excel sheet cannot be added to this project.
  54. 54. For the Purpose of Equity Analysis I have chosen only 4-5 companies but there are more 20-25 companies in these sectors.
  55. 55. Company was unwilling to divulge information, which was a hindrance for the research process.

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